Trading blows: How the Lula-Milei feud threatens business and investment

The strained relationship between Brazil and Argentina, due to political conflict between President Luiz Inácio Lula da Silva and his Argentine counterpart Javier Milei, could affect a range of projects and investment decisions in various sectors of the economy, such as energy and oil and gas. 

In addition to the clash of political ideologies between Brazil's left-leaning president and Argentina's right-wing libertarian and self-described anarcho-capitalist Milei, there has been a growing rift between the two since the campaign for the 2023 presidential election in Argentina, with Lula openly expressing support for government candidate Sergio Massa. 

In response to Lula backing his opponent, Milei attacked the Brazilian president during the campaign, calling him corrupt and labeling him a communist. As a consequence, and despite Milei's apparent attempts to smooth relations after his victory, Lula reportedly felt sufficiently offended to snub the invite to the inauguration ceremony of the Argentine president. 

Welber Barral, who was Brazil's trade secretary from 2007 to 2011, a former arbitrator of the Mercosur permanent review court and a member of the Brazilian delegation to the World Trade Organization, and is a founding partner of consultancy BMJ Associados, talks with BNamericas about the main risks posed by the poor relationship between the two leaders.

BNamericas: What are the main concerns of Brazilian and Argentine business leaders regarding the tensions between the presidents of the two countries?

Barral: I'm in Argentina this week where I've already had meetings with members of the government and businesspeople and there's great concern about the reciprocal provocations between Lula and Milei.

Of course, this concern is associated with the impacts on trade and diplomatic and business relations between the two countries.

There is a major fear at the moment due to the fact that Milei will participate this weekend in an event in Santa Catarina state [in Brazil] along with former president Jair Bolsonaro, and there is concern that Milei will say lots of things against the Lula administration, further affecting the relations between the countries and impacting the Brazilian government's initiatives in Argentina.

Editor's note: Allies of Brazil's former president Jair Bolsonaro plan to participate in the Conservative Political Action Conference (CPAC) on July 7-8. The event, a platform for many right-wing populists, is being organized by lawmaker Eduardo Bolsonaro, son of the ex-president.

BNamericas: There was also antagonism between the leaders of Brazil and Argentina during the terms of Bolsonaro and Milei's predecessor, Alberto Fernández. Do you see the current tense relationship between Lula and Milei as being a similar scenario or are there different impacts?

Barral: Brazil and Argentina have had other moments of tense relations during the administrations of Bolsonaro and Fernández, as you say, but that didn't affect the countries' trade relationship or investments at the time.

But of course, at some point, the tense relations end up hindering the institutional evolution of Mercosur, although there were no significant direct impacts then.

BNamericas: Which business sectors are most exposed to the negative impacts of these tensions? 

Barral: The sectors that might be affected by the poor relationship between the governments are those that depend to some extent on the regulations in the two countries.

We're talking about possible impacts on investments in the areas of renewable energy, gas, oil and defense, since these are sectors that essentially depend on some level of political relations.

BNamericas: If the deterioration in relations leads to a drop in trade and worse investment, could other nations take up the slack?

Barral: It's difficult to make an assessment because the relationship between the two countries is historically very intense. We're talking about countries that are neighbors and are the two largest countries in South America. 

It's difficult for both countries with such common interests to replace those relations with other nations.

BNamericas: In the midst of these tensions, what are the chances of making progress in the trade negotiations between Mercosur and the European Union?

Barral: The proposal from the Mercosur side has been delivered and is ready.

The main difficulty at the moment is for European countries to move forward in these negotiations and the recent elections we've seen in Europe could hinder that, with political groups less favorable to the opening of trade. 

The difficulty in reaching an agreement between the two commercial blocs now is much more closely related to European issues than with problems in the relationship between Brazil and Argentina.

BNamericas: Lula's administration is trying to move forward with proposals for the regional integration of South America. How do you see that agenda progressing?

Barral: As the largest country in the region, both in terms of population and territory, it's natural for Brazil to exercise leadership in the region.

But at the same time, it's also important to highlight that for Brazil it's important to have Argentina by its side, since it's also a big country in the region and could help Brazil advance issues in other forums.

Understanding this, Brazil tried to include Argentina in the BRICS, but with the election of Milei, Argentina rejected the invitation, so that's an example of how the lack of alignment can damage both countries.