Mercosur: South America's Fractious Trade Bloc

Author: Danielle Renwick
Updated: October 5, 2016

Paulo Prado/Reuters
Introduction

Mercosur is an economic and political bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Created in 1991 as Argentina and Brazil sought to improve their diplomatic and economic relations, the bloc saw a fivefold increase in regional trade in the 1990s. However, many experts say Mercosur has failed to live up to its ambitions, and trade within the group has fallen relative to its members' total trade in the last twenty years. The political and economic crisis in Venezuela, which joined the group in 2012, has revealed fractures within the group. Members have threatened to suspend Caracas for failing to comply with the group's rules on trade and democracy.

Mercosur Then and Now

Mercosur was created in 1991 when Argentina, Brazil, Paraguay, and Uruguay signed the Treaty of Asunción (PDF). The accord called for the "free movement of goods, services, and factors of production between countries." It signatories agreed to eliminate customs duties, implement a common external tariff (CET) of 35 percent on certain imports from outside the bloc, and adopt a common trade policy toward outside countries and blocs. Mercosur residents may live and work anywhere within the bloc.

Mercosur went beyond simply coordinating trade policy, creating political institutions that aim to go deeper than most free trade agreements. The bloc’s highest decision-making body is the Common Market Council, which gathers the members’ foreign and economy ministers. The group’s presidency of the group rotates among its full members in alphabetical order every six months. Other governing bodies include the Common Market Group, which coordinates macroeconomic policies among members; a trade commission; a parliament, known as Parlasur; and the Structural Convergence Fund (FOCEM), which coordinates regional infrastructure projects.

Trade within the bloc grew from $4 billion in 1990 to $20 billion in 1997, and in its first decade Mercosur inked trade agreements with Bolivia, Chile, Israel, and Peru. The group began trade negotiations with the European Union in 1999; those talks are ongoing.

"[Mercosur] is less about opening up but actually about protecting Brazilian and Argentine industries from global competition."— Oliver Stuenkel

Regional integration slowed following Brazil's currency devaluation, in 1999, and Argentina's financial crisis, in 2001. Trade disputes proliferated between Argentina and Brazil. (In 2011 Argentina canceled automatic licensing for hundreds of imports, causing delays at ports and contributing to a 15 percent decline in Brazilian exports over the next year.) "Politically negotiated exceptions to the bloc’s rules became the norm," according to the Economist. Mercosur countries have also failed to coordinate their trade policies toward third countries, such as China, on whom Brazil has unilaterally imposed antidumping restrictions on steel imports. Experts say better coordination would increase the bloc's collective-bargaining power.

Trade among Mercosur members was roughly $108 billion in 2015, nearly three times what it had been in 2000, but it had dropped about 5 percent in that time as a share of members' total trade. Experts say this reflects a lag in integrating Mercosur economies to create value-added supply chains or regional production hubs. Instead, Latin America’s traditional reliance on low-value-added commodity exports, particularly to China, continued during the commodities price boom of the 2000s.

Mercosur's five full members have a combined GDP of roughly $2.8 trillion, making it one of the world's largest economic blocs. By contrast, Latin America's second-largest trade group, the Pacific Alliance, which comprises Chile, Colombia, Mexico, and Peru, has a combined GDP of about $1.9 trillion. Mercosur was created in large part to cement a rapprochement between longtime rivals Argentina and Brazil, and the two countries loom large over the group: in 2015, the countries had a combined GDP of $2.3 trillion, roughly 83 percent of the group's economy. Around 250 million of the bloc's roughly 292 million inhabitants live in Argentina or Brazil.

Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname are associate members. Bolivia was invited to join as a full member in 2012, but that process is still under negotiation. Associate members receive tariff reductions but do not enjoy full voting rights or complete access to the markets of Mercosur's full members. 

 
'Grand Ambitions'

Mercosur's founders had hoped to go beyond creating a free trade area to form a common market similar to the European Union, and even considered introducing a common currency. The Mercosur stamp is emblazoned on member countries' passports and, starting next year, license plates will display the Mercosur symbol. "Mercosur had grand ambitions," says CFR Senior Fellow Shannon K. O'Neil. "It was going to be a customs union with a political side, and those things haven't developed."

A central component of Mercosur is the external tariff imposed on certain goods from countries outside the bloc. Free trade agreements don't typically involve them, but customs unions like the EU do. Mercosur "is less about opening up but actually about protecting Brazilian and Argentine industries from global competition," says Oliver Stuenkel, an assistant professor at the Getúlio Vargas Foundation in São Paulo.

Membership and Democracy

One of Mercosur's early aims was to cement the region's return to democracy: all of its founding members had emerged from dictatorships in the 1980s, and in 1998 signed the Ushuaia Protocol on Democratic Commitment (PDF), stating that "the full force of democratic institutions is essential" to the integration of Mercosur states and that a "rupture in democratic order" would be cause for a member's suspension.

Mercosur members invoked the protocol for the first time in 2012 to suspend Paraguay after the impeachment of President Fernando Lugo. Mercosur leaders denounced Lugo's ouster, which was a response to his handling of a deadly clash between farmers and law enforcement, as antidemocratic. (Paraguay was readmitted in 2013.) Some experts say Paraguay's suspension was largely political: Brazil was seeking Venezuela's admission to the bloc, which Paraguay's new, center-right government opposed. Asunción's suspension from the group took away its ability to block Caracas.

Venezuela joined the bloc in 2012, despite criticism that its ascension ignored President Hugo Chávez's authoritarian behavior and violated the group's democratic principles. Brazil defended the oil-rich nation's admission, with its foreign ministry saying its inclusion would make Mercosur a "global energy power."

But by 2016, falling oil prices, economic mismanagement, and political instability had brought Venezuela's economy to a free fall, with inflation reaching 480 percent, according to the IMF. President Nicolás Maduro, facing calls for his removal, used the courts to undermine the opposition-led Congress and arrested several opposition leaders.

Venezuela joined the bloc in 2012, despite criticism that its ascension ignored President Hugo Chávez's authoritarian behavior and violated the group's democratic principles.

Meanwhile, former Buenos Aires mayor and businessman Mauricio Macri was elected Argentina’s president and Michel Temer became Brazil's president following Dilma Rousseff's impeachment. They have both been less sympathetic to Maduro's administration than their predecessors.

The Venezuelan government has also failed to comply with many of the group's trade regulations, which could hamper the bloc's efforts to forge trade agreements with other countries and blocs, most notably the EU.

"Trade is one of the few areas in which the governments of Argentina and Brazil, who face strong opposition to reform at home, think that they may be able to achieve meaningful progress. They've been extraordinarily frustrated by having to deal with a partner that is less than fully committed to this goal," says CFR Adjunct Senior Fellow Matthew M. Taylor.

In September 2016, Mercosur issued an ultimatum: Caracas would have until December 1 to meet its membership requirements by incorporating a joint economic agreement and committing to protecting human rights, or else be suspended. The threat came weeks after Argentina, Brazil, and Paraguay refused to recognize Venezuela's temporary leadership of the group. As of September 2016, Argentina, Brazil, Paraguay, and Uruguay were jointly leading the group; Argentina is slated to take the helm in early 2017.

Fractures and Relevance

Venezuela's possible suspension from Mercosur comes amid political turmoil in its largest economies. Falling commodity prices and what critics describe as economic mismanagement have contributed to negative growth in the region: Brazil's economy shrank by nearly 4 percent in 2015 and Venezuela's contracted by roughly 6 percent. Argentina, which for years had been accused of posting inaccurate economic data, confirmed in 2016 that its economy was in recession; economists projected a 1 percent contraction in its economy in 2016. Paraguay and Uruguay saw 3 and 1 percent growth, respectively.

New leadership in Argentina and Brazil and the prospect of Venezuela's suspension from the group could either revive Mercosur or make it irrelevant. In September 2016 the group issued a call to continue talks with the EU, with the goal of reaching a free trade agreement by 2018. (Some EU members' resistance to agriculture imports, fallout from Brexit, and growing anti-trade sentiment in Europe may hinder efforts on the EU side.) Meanwhile, Argentina became an official observer to the Pacific Alliance in June 2016, signaling an opening in the country's trade policies and possibly a willingness to look beyond Mercosur to increase trade.

Experts say Mercosur's future largely hinges on decisions made in Brasília and Buenos Aires. "Brazil and Argentina are two of each other's most important trading partners. But both countries—especially because they're going through a difficult economic time—would benefit from opening of their markets more generally," says O'Neil. "The challenge is whether they can do it together."

Additional Resources

CFR Senior Fellow Shannon K. O’Neil discusses about Argentina and Brazil trade relations in this Foreign Affairs article.

The Economist examines Mercosur’s trade opportunities with the European Union in this article.

CFR Adjunct Senior Fellow Matthew M. Taylor looks at how Venezuela’s economic and political crisis affect its Mercosur neighbors in this blog post.

The Americas Society and Council of the Americas charts Mercosur’s evolving trade dynamics in this interactive.

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