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Mercosur: South America's Fractious Trade Bloc

Authors: Joanna Klonsky, Associate Editor, Stephanie Hanson, and Brianna Lee
Updated: July 31, 2012
This publication is now archived.

Introduction

Mercosur, the "Common Market of the South," is an economic and political agreement among Argentina, Brazil, Paraguay (which is currently suspended), and Uruguay to promote the free movement of goods, services and people among member states. Mercosur's primary interest has been eliminating obstacles to regional trade, such as high tariffs and income inequalities. Yet experts say Mercosur has become somewhat paralyzed in recent years, with its members divided over whether the organization should remain focused on regional trade or whether it should add political affairs to its mandate. In July 2012, Venezuela was admitted to the trade bloc as its fifth full member with complete access to the common market and voting rights, a move that some analysts say will primarily benefit Argentina and Brazil and further politicize the organization. The creation of a regional customs union in 2008, the Union of South American Nations (UNASUR), also has raised questions about Mercosur's utility. Moreover, Paraguay's 2012 suspension from the bloc has added fresh concerns about the bloc's future.

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What is Mercosur?

The Mercosur trade bloc's purpose, as stated in the 1991 Treaty of Asunción, is to allow for free trade between member states, with the ultimate goal of full South American economic integration. The trade bloc's "grand aspiration is to unify the Southern Cone and then all of South America in an economic bloc," says Katherine Hancy Wheeler, a research associate with the Council on Hemispheric Affairs. "It gives them more trading security." Brazil is the region's largest economy with a gross domestic product (GDP) of more than $2.2 trillion in 2012.

The population of Mercosur's full membership totaled more than 260 million people in 2011; including Venezuela, it has a collective GDP of $2.9 trillion and is the world's fourth-largest trading bloc after the European Union (EU), North American Free Trade Agreement (NAFTA), and the Association of South East Asian Nations (ASEAN). Whether any reduction in poverty can be linked directly to Mercosur trade policies is unclear.

What are associate members?

Mercosur has five associate members--Chile, Bolivia, Colombia, Ecuador, and Peru--that do not enjoy full voting rights or complete access to the markets of Mercosur's full members. They receive tariff reductions, but are not required to impose the common external tariff that applies to full Mercosur members. Of these countries, Bolivia is being considered for full membership. But the decision is complicated by Mercosur's history with Bolivia, as well as the common external tariff. Bolivian President Evo Morales has criticized Mercosur, saying, "What I've discovered is that the CAN [Andean Community of Nations] as well as Mercosur are tools that only benefit businessmen and wealthy people, instead of the poor people" (People's Daily).

Full membership for Bolivia may also prove problematic because Bolivia's tariffs are lower than those of Mercosur. "They'd have to increase those tariffs to join," which would have a significant impact on prices within Bolivia, says Financial Times' Latin America editor Richard Lapper. He says Mercosur may allow some exemptions to Bolivia to remedy this problem, as Brazil is interested in increased access to Bolivian gas.

Granting exemptions, however, would anger Uruguay and Paraguay, Mercosur's smallest full members, which have not been allowed similar exemptions. "Can Mercosur keep a straight face in exceptions to the common external tariff, but say it's not OK for Uruguay and Paraguay to negotiate a bilateral free trade agreement with the United States, since that would undermine the common tariff?," asks Agustin Cornejo of the Institute for International Economics in the Wall Street Journal in 2007. Uruguay, also angry over an ongoing dispute with Argentina over a paper pulp mill on their shared border, has gone so far as to sign a Trade and Investment Framework Agreement (PDF) (TIFA) with the United States.

The TIFA sets the stage for future trade liberalization and economic relations with the United States. But signing a Free Trade Agreement (FTA) with the United States would violate Mercosur's charter, which forbids bilateral agreements with nonmember countries. If the TIFA does eventually lead to the creation of an FTA with the United States, the leadership of Mercosur would either have to disbar Uruguay from the bloc for violating the charter, possibly causing Paraguay to resign as well, or it could choose to rewrite its charter altogether, thereby allowing members to sign bilateral agreements with nonmember countries.

Why was Paraguay suspended as a Mercosur member?

Paraguay's president, Fernando Lugo, was impeached and removed from office in June 2012 after seventeen people were killed in a clash between landless farmers and policemen who were trying to evict them. The Chamber of Deputies and the Senate cited this event, as well as insecurity, nepotism, and a controversial land purchase, to vote 76 to 1 to prosecute and dismiss Lugo within two days. Some sources consider that all this was taken as a pretext to expel Lugo.

But several Mercosur members rejected Lugo's removal, arguing that it was undemocratic, and suspended Paraguay from Mercosur until the next presidential elections take place in April 2013.

What are the implications of Venezuela joining as a full member?

Venezuela's entrance has caused tension within the trade bloc. The country first asked to join Mercosur in 2004. A part-membership agreement, the Protocol of Adhesion of Venezuela to Mercosur, was approved in 2006 by Argentina, Brazil, and Uruguay. Paraguay, citing a lack of democracy in Venezuela, refused to grant the country full membership. It was not until June 2012, when Paraguay was suspended from the bloc, that Venezuela became a full member of Mercosur. The move has been viewed by many observers as an institutional blow to the union. Uruguayan Vice President Danilo Astori said that the move "could have important consequences for the future, since the institutional framework of Mercosur is so weak that it becomes useless."

Venezuela is philosophically opposed to free trade, according to analysts. Since Venezuela signed the part- membership agreement with Mercosur in 2006, President Hugo Chávez advocated "a Mercosur that prioritizes social concerns," saying, "We need a Mercosur that every day moves farther away from the old elitist corporate models of integration that look for financial profits, but forgets about workers, children, life, and human dignity."

Oil-rich Venezuela can make significant economic contributions to Mercosur--its entry into the bloc adds Venezuela's $378.9 billion gross domestic product (GDP) to Mercosur's overall GDP. Yet Chávez has nationalized several industries in the country, affecting Mercosur member states. Chavez has touted Mercosur membership as a way to increase access to food through cheaper food imports, as Venezuela has faced shortages of basic goods. However, others doubt the country's ability to compete with other Mercosur nations. Alejandro Grisanti of Barclays argues that Venezuela's membership will benefit Mercosur overall, particularly Argentina and Brazil, to the detriment of Venezuela's domestic economy. "The number that Brazil is importing from Argentina is a similar number that Brazil is exporting to them. They do not have a very strong monopoly power over the other countries," he says. "This will not be the case against Venezuela."

Does Mercosur have a political agenda?

Mercosur made headlines in 2007 when its summit produced a heated debate about the future role of neoliberalism and free trade in South America. At the summit, which produced a communiqué in which Mercosur leaders pledged increased focus on human rights and democracy, Chávez called for Mercosur to be "decontaminated of neoliberalism," while Colombia's then-president Alvaro Uribe argued that free market capitalism is the region's best bet for eliminating inequality. Despite Mercosur's prominence and potential as an economic entity, some speculate that its agenda is becoming increasingly politicized, especially since Venezuela signed the Protocol of Adhesion in 2006. "Mercosur is no longer about trade," Johns Hopkins' Riordan Roett, told the Council on Hemispheric Affairs. "The organization is more and more political and to some degree anti-American." But the Financial Times' Lapper insists business remains its core interest: "It would be a mistake to characterize the Mercosur bloc as a kind of anti-American bloc." He says trade bloc heavyweights Argentina and Brazil continue to be focused on economic issues.

How does Mercosur affect other regional groups?

Because Mercosur's charter does not allow its member nations to have FTAs with non-member nations, Mercosur members are not permitted to be part of the Andean Community of Nations (CAN), a smaller trade bloc that includes Bolivia, Colombia, Ecuador, and Peru. When Venezuela signed the Protocol of Adhesion, it was required to resign from CAN, as Bolivia will have to do if it is admitted. Bolivia, however, has said it will not leave CAN. CAN and Mercosur leaders signed an agreement to form a third organization, UNASUR, in May 2008. UNASUR is meant to encompass trade, security, and political issues, much like the European Union. UNASUR has held meetings on regional defense issues, including a controversial planned U.S. military expansion into Colombia (AP). Some analysts believe that UNASUR could eventually replace Mercosur.

Mercosur played a key role in the failure of the Free Trade Agreement of the Americas (FTAA). Spearheaded by the United States, the FTAA was intended to unite Latin America and North America in one broad trade accord. Mercosur members and then-autonomous Venezuela rejected the agreement at the Summit of the Americas in November 2005 over concerns it would lead to increased inequality in the region (Guardian). Proponents of the FTAA have not been able to make progress in forging that deal since.

How has Mercosur stimulated cooperation among its members?

Agreements among Mercosur members range from debt relief (Brazil and Argentina renegotiated Paraguay's debt) to trade deals. Argentina and Venezuela, for example, signed a host of bilateral agreements in the energy, industrial, agriculture, and health sectors in January 2009. Chavez declared that Venezuela is ready "to supply Argentina with oil and later liquefied gas for the next 100 years."

The most controversial project is the Bank of the South, a monetary fund and lending organization established in September 2009 by Argentina, Brazil, Paraguay, Uruguay, Ecuador, Bolivia, and Venezuela with an initial capital of $20 billion. The intention of the bank is to allow member countries to fund projects and investments without World Bank or International Monetary Fund involvement. Though some see the bank as an important initiative toward South America's financial independence, many economists view the bank as a political move led by Chávez, aimed to build his influence in the region and carry out his crusade against Washington-based multilateral institutions.

What are the prospects for Mercosur's future?

Analysts note that Mercosur's economic momentum has slowed in recent years, particularly as trade disputes between Brazil and Argentina have flared. In a move aimed at protecting its trade surplus, Argentina has blocked and delayed imports from other Mercosur nations, and Brazil has retaliated by imposing barriers on imports from Argentina. Meanwhile, the Economist notes, although internal Mersocur trade has risen in absolute terms, it only represents a small percentage of members' total exports. The bloc "has not evolved into the seamless single market its founders dreamed of," the magazine says.

Mercosur has taken an overall turn toward protectionism in recent years, with members agreeing in May 2012 to raise the maximum common external tariff on imports to 35 percent. The Economist also notes that in the past decade, it has only successfully negotiated two free trade deals--with Israel and the Palestinian Authority. China—the bloc's second-largest buyer—has proposed the creation of a free trade zone with Mercosur. The country already has agreed to increase its annual trade with Mercosur by $200 billion by 2016. However, it would also complicate Mercosur's protectionist policies, some of which are aimed specifically at limiting the influx of cheap Chinese imports.

Meanwhile, Mercosur's blockage of the FTAA and its general disinterest in trade with the United States has discouraged warm relations between the two. While the United States has not overtly criticized Mercosur, Washington views the bloc as "an obstacle to the expansion of their trade in Latin America," according to Wheeler.

Mercosur's internal disputes, increased protectionism, and controversy over Venezuela's membership have prompted some observers to speculate about the union's demise. "In the long run, the end of Mercosur will be a good thing if it drives its members to open trade with the rest of the world," writes Mary Anastasia O'Grady for the Wall Street Journal. "But in the short run, with so many industries heavily invested in the rules of the Mercosur game, a breakup is certain to be disruptive."

Nieves Zuberbuhler contributed to this report.

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