Canada: Uruguay’s potential North Star

In the face of MERCOSUR difficulties, Uruguay could find a valuable trading partner in Canada if it considers becoming a free trade zone.


Latin America is now the epicenter of the COVID-19 pandemic, accounting for almost half of the world’s deaths. Epidemiological models found that 21 million people were infected with the virus in South America in August alone. Uruguay has been spared with the lowest number of reported and estimated cases, as well as fatalities.

Uruguay’s success can be explained largely by President Luis Lacalle Pou’s crisis management. He quickly imposed social distancing measures, eschewing a costly lockdown; he assembled a panel of medical experts to guide the state’s response; his government encouraged the development of domestic testing capacity; and he imposed strict border controls to stem the spread on the country’s porous northern border with Brazil. As outbreaks in towns near the border emerged, the government responded with mass testing and tracing, and successfully isolated the spread. The country’s management of the crisis has enabled it to be among a select group of nations whose citizens may enter the European Union.

While other governments in the region are now opening their wallets, Mr. Lacalle Pou has not wavered from his pro-market outlook. His latest budget proposal places the country on a path towards fiscal rectitude. He has repeatedly emphasized that the country will not pay for its COVID-19 related outlays with tax increases. He has also relaxed residency requirements, leading to a number of high profile and wealthy Argentines relocating to Uruguay. It is little surprise that market forecasts and the government expect a V-shaped recovery.

Uruguay may seem like an oasis of stability, but its small size leaves it exceptionally vulnerable to the decisions made in neighboring Buenos Aires and Brasília. To ensure the country does not become a victim of the region’s chronic instability, Uruguay must focus on forging new economic and diplomatic relations with like-minded democracies, like Canada.

Los otros norteamericanos

I recently participated in an event with Canadian Ambassador to Uruguay, Joanne Frappier, to discuss bilateral relations between the two countries. As a citizen of both countries, I was familiar with the two countries’ shared values that distinguish them as the most secular and progressive societies in their respective regions. In a world beset by autocratization and protectionism, both countries have expressed a common interest in maintaining a strong multilateral system.

Uruguay, in particular, needs a reliable partner to sustain its economic vitality and remain a beacon of democracy in Latin America. The country, shackled by MERCOSUR, faces a serious challenge. In a recent conversation between Mr. Lacalle Pou, the temporary head of MERCOSUR, and German Chancellor Angela Merkel, it was made clear that the EU-MERCOSUR trade deal may not be ratified. This is due to Mr. Bolsonaro’s Amazon policy, the growing electoral weight of Green parties in Europe, as well as the EU’s clunky and easily vetoed ratification process that could stymie the trade deal.

This possibility is unfair to Uruguay, which has been a global leader in promoting renewable energy. The risk of an unsuccessful trade deal with the EU underscores the need for Uruguay to reevaluate its relationship with MERCOSUR and prioritize trade negotiations with less demanding middle powers, like Canada. Even without an all-encompassing free trade deal, Uruguay is uniquely placed to forge ties with Canada, as they are both global leaders in the budding cannabis trade.

Uruguay was the first country to fully legalize cannabis, with Canada following as the second. Uruguay has a keen interest in becoming a major exporter of cannabis, especially for medicinal use. Canadian firms have been major players in Uruguay’s cannabis industry, with a Canadian firm recently opening a processing facility in Uruguay. However, regulatory uncertainty has constrained Uruguay’s potential. Mr. Lacalle Pou passed two decrees that regulate the export of medicinal cannabis and the sale of hemp in an attempt to jumpstart the sector.

As the legalization of cannabis will almost certainly expand over the next decade, so will demand. Canada and Uruguay as key players share a common interest in the commercialization of the crop, as well as developing a common regulatory and quality assurance framework.

Closer ties with Canada are essential for Uruguay to receive large-scale investments to keep its vulnerable economy afloat. A strong economy is necessary to safeguard the country’s democracy and avoid the fate of other flagging democracies in the region.

A troubling regional context

Prior to the outbreak of COVID-19, the world was already seeing a disturbing wave of autocratization. By 2019, the number of people living in autocracies reached 34 percent of the global population, five times higher than the previous decade. Democratic backsliding has been particularly pronounced in Latin America; since 2010, the region has shown the steepest decline in its V-Dem democracy score compared to all subregions of the world.

Recent data shows that, apart from El Salvador, Latin America has so far avoided a serious erosion of democracy with the onset of the pandemic. The region should remain on high alert, as the causes of autocratization, such as economic distress, will be particularly pronounced as the lockdowns continue and the region’s economic prospects remain dark. Of particular concern is rising unemployment, which is expected to nearly double from last year to surpass 40 million.

The situation in Argentina is particularly severe, as the country faces a difficult path forward to recover from over a decade of economic stagnation coupled with the relentless expansion of the virus. The latest estimates suggest that the poverty rate in Argentina will surge to over 50 percent. President Alberto Fernández is financing COVID-19 spending with risky monetary emission. So far, his economic policies aim to increase taxes, threaten outright nationalizations, and impose sudden regulatory changes that have soured appetites for investment in the country. Though Argentina successfully renegotiated its debt with private creditors, negotiations with the International Monetary Fund will be tough, as the organization will likely demand unpopular austerity measures, a condition Argentina has preemptively rejected.

Argentina’s lockdown, economic crisis, and strict capital controls have put Uruguay’s tourism industry on red alert. Moreover, Argentina’s ongoing polarization regarding trade is a major threat to Uruguay’s economic prospects. Mr. Fernández’s suspension of Argentina’s participation in free trade negotiations between MERCOSUR, South Korea, and Canada has stalled the trade bloc. Additionally, Mr. Fernández’s hostile relations with his Brazilian counterpart, President Jair Bolsonaro, undermines regional coordination. These tensions place Uruguay in a complex geopolitical bind that, if not addressed, will harm its prospects for growth.

Uruguay cannot stand idly by as the region’s largest economies struggle to cooperate on issues as important as trade. Although leaving MERCOSUR is unwise, Uruguay should consider a downgrade of the customs union into a free trade zone, which will allow the country to sign trade agreements with the rest of the world. At the top of Uruguay’s list should be Canada. This is a propitious moment as next year will be the thirtieth anniversary of the last visit of a Uruguayan president to Canada, who, ironically, was Mr. Lacalle Pou’s father.

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