Economic Ties Between Brazil and Argentina: A Strategic Partnership

by | Jan 25, 2025 | FDI Latin America

Updates Confirm Brazil as Argentina’s Top Trading Partner for Over Three Decades

Brazil has remained Argentina’s leading trade partner uninterruptedly since 1991. No other country in the world maintains such a strong bilateral trade relationship with Argentina as Brazil. The economic ties between Brazil and Argentina can be traced back to the early days of the young Argentine and Brazilian nations. Argentina was the first country to recognize Brazil’s independence.

The formal establishment of diplomatic relations over 200 years ago paved the way for multiple areas of cooperation. The most prominent recent project has been Mercosur, the customs union that includes both countries, Uruguay and Paraguay. This union implements policies such as a standard external tariff (CET) for goods originating from non-member countries, promoting intraregional trade. Within this framework, the economic ties between Brazil and Argentina have flourished, with trade between the two nations becoming a cornerstone of Mercosur’s success.

In 2024, Argentina sent 17% of its exports to Brazil and sourced 23% of its imports from there, percentages consistent with averages over the past decade. Brazil is the primary export destination for Argentina’s automotive and wheat sectors, the country’s fourth and fifth-largest export industries. Over the past decade, the automotive sector has been the largest exporter to Brazil, accounting for 40% of trade with the neighboring country. Brazil is also one of the leading destinations for Argentina’s manufactured industrial products (MOI), with approximately 38% of MOI exports heading to Brazil.

Beyond the automotive and industrial sectors, the wheat sector accounts for nearly 10% of trade with Brazil. Preliminary shipping data shows that 53% of the wheat exported by Argentina in 2024 was destined for Brazil. In addition to grain, Brazil is the primary destination for Argentina’s wheat flour exports. These examples underscore the strength of the economic ties between Brazil and Argentina, which extend beyond manufacturing to include essential agricultural products.

In the agribusiness and regional economies sector, Brazil is a significant market for products such as dairy, wine, olive oil, pears, apples, vegetables, and others. For this essential role, and despite the historic drought, Brazil was the leading trading partner for six Argentine provinces in 2023. Furthermore, agriculture represented nearly 30% of shipments to Brazil when considering exports from the agribusiness sector.

Additionally, Brazil is the second most important destination for Argentina’s service exports, with over USD 1.9 billion in services exported in 2023. Brazil is also Argentina’s fourth-largest foreign direct investment (FDI) source, with a stock of over USD 13.5 billion as of the second half of 2024. Thus, over 8% of FDI in Argentina comes from Brazilian capital. This robust investment flow further highlights the enduring economic ties between Brazil and Argentina, with Brazilian capital playing a vital role in Argentina’s economic landscape.

Brazil’s Role Amid Argentina’s Recent Export and Currency Context

At the end of 2023, approximately 4.9 Brazilian reais were required to buy one US dollar. A year later, at the close of 2024, more than six reais were needed to purchase a dollar. As highlighted last week, the real was the most depreciated currency in 2024. As of December, Brazil’s consumer price index stood at 4.27% for the first 11 months of the year. Consequently, a devaluation of over 24% alongside inflation well below that rate implies a gain in price competitiveness for Brazil, albeit within a challenging context for Argentina’s principal trading partner.

Amid an even more challenging domestic economic environment, Argentina’s necessary and sustained reduction in inflation rates during 2024 led to an appreciation of the peso. This occurred partly due to real devaluations undertaken by Argentina’s main trading partners and domestic price increases outpacing monthly devaluation rates.

As a result, Argentina’s real exchange rate with Brazil was at its lowest level in nine years at the end of 2024. This directly impacts Argentina’s export costs, making its products relatively more expensive globally, particularly in Brazil. Even so, the economic ties between Brazil and Argentina remain strong in critical sectors such as wheat, with Argentina accounting for 65% of Brazil’s wheat imports last year.

However, recent developments have seen Brazil increasingly sourcing wheat from Russia. Although Russian wheat imports to Brazil began in 2018, significant volumes were not recorded until 2022, surpassing USD 116 million that year.

Due to Argentina’s drought in 2022/23, Russian wheat imports rose to nearly 0.9 million tons and over USD 270 million in 2023. Despite Argentina’s recovery, Russian wheat imports remained at 0.7 million tons, valued at USD 188 million in 2024.

While Russian wheat does not dominate Brazil’s wheat imports, it accounted for 11% in 2024. The high quality of Argentine wheat, the Mercosur external tariff for non-bloc wheat, and freight costs limit Russia’s share in this market. However, rising costs in Argentina, the weakened Brazilian real, and falling global FOB prices could complicate Argentina’s wheat export conditions in Brazil. Since May 2024, wheat prices from Argentina dropped 24%, compared to only 6% for Russian wheat, following both countries’ harvests.

Competition Between Argentina and Brazil Goes Beyond Football

Brazil is a strategic market for Argentina and a competitor in key export sectors. While Argentina is the world’s top soybean meal and oil exporter, Brazil leads in soybean exports, beef, and corn. Despite the historic drought, these sectors accounted for approximately 44% of Argentina’s exports in 2022 and over 35% in 2023.

Amid a scenario of the peso strengthening against the real, Brazil gains a broader margin to operate with better premiums than other countries when placing goods on the international market. This could favor Brazilian soybean meal exports over Argentina’s in markets such as the European Union, the world’s top importer and the primary buyer for both countries. The EU’s soybean meal imports are divided into thirds between Argentina, Brazil, and other origins.

A similar situation could arise for beef exports to China and soybean oil exports to India. Both countries are the largest buyers of these products from Argentina and Brazil. The economic ties between Brazil and Argentina remain vital in these markets, but competition poses challenges for Argentina as Brazil leverages its cost advantages.

Historically, Brazil has also been a more attractive destination for foreign direct investment than Argentina. While Brazil captures 57% of South America’s FDI and is the world’s fifth-largest FDI recipient, Argentina receives just 10%. Although Argentina’s share of South American FDI increased to 18% in 2023, reaching USD 23.87 billion, this growth was primarily driven by restrictions on capital movement, intercompany loans, and profit reinvestment, as noted in ECLAC’s latest FDI report. New capital contributions accounted for only 8% of investment in Argentina in 2023, compared to 49% in Brazil.

The significant and necessary reduction of Argentina’s country risk positively enhances the investment climate. However, rising corporate costs in dollar terms could complicate the investment landscape compared to Brazil, where costs are relatively lower in exchange terms. If this trend continues, Brazil could attract more FDI at Argentina’s expense.