Mercosur: South America’s Fractious Trade Bloc

Political shifts and economic challenges in Latin America could either boost Latin America’s largest trade bloc or lead to its obsolescence.

Last updated September 13, 2017

A truck driver waits to unload his cargo of cereal grain at a rail terminal in Alto Araguaia, Brazil. Nacho Doce/Reuters
Backgrounder
Current political and economic issues succinctly explained.

More on:

Trade

Americas

Emerging Markets

Venezuela

Introduction

Mercosur is an economic and political bloc comprising Argentina, Brazil, Paraguay, and Uruguay, and Venezuela. Created during a period when longtime rivals Argentina and Brazil were seeking to improve relations, the bloc saw some early successes, including a tenfold increase in trade within the group in the 1990s. However, many experts say Mercosur has since failed to live up to its ambitions of integrating the region.

In recent years, other experts have questioned the bloc’s commitment to democracy. Mercosur’s one-year suspension of Paraguay in 2012 and indefinite suspension of Venezuela in 2016 for violating its rules on democracy have revealed fractures within the group.

How Mercosur Works

Mercosur was created in 1991 when Argentina, Brazil, Paraguay, and Uruguay signed the Treaty of Asuncion [PDF], an accord calling for the “free movement of goods, services, and factors of production between countries.” The four countries 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. The charter members hoped to form a common market similar to that of the European Union, and even considered introducing a common currency.

“Mercosur had grand ambitions,” says CFR Senior Fellow Shannon K. O’Neil. “It was going to be a customs union with a political side.” The Mercosur stamp is emblazoned on member countries’ passports, and license plates display the Mercosur symbol. Residents of the bloc are authorized to live and work anywhere within it. In 1994, the group signed the Protocol of Ouro Preto, formalizing its status as a customs union.

Trade within the bloc jumped from $4 billion in 1990 to more than $40 billion in 2000.

The bloc’s highest decision-making body, the Common Market Council, provides a high-level forum for coordinating foreign and economic policy. The group’s presidency rotates every six months among its full members, following alphabetical order. Other bodies include the Common Market Group, which coordinates macroeconomic policies; a trade commission; a parliament, known as Parlasur, which serves an advisory role; and the Structural Convergence Fund (FOCEM), which coordinates regional infrastructure projects.

Membership

Venezuela joined Mercosur’s four founding countries as a full member in 2012, but it was suspended in late 2016. The four have a combined gross domestic product (GDP) of roughly $2.4 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 $1.8 trillion.

Mercosur member countries

Mercosur was created in large part to cement a rapprochement between Argentina and Brazil, whose relationship had suffered early on from a competition for regional dominance and mutual distrust of their economic and diplomatic agendas. The pair still loom large over Mercosur: together they account for about 95 percent of both the bloc’s GDP and population. Some critics say Argentina and Brazil wanted Mercosur simply as a trade shield. The bloc “is less about opening up but actually about protecting Brazilian and Argentine industries from global competition,” says Oliver Stuenkel, an assistant professor at the Getulio Vargas Foundation in Sao Paulo.

Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname are associate members. They receive tariff reductions when trading with the full members but do not enjoy full voting rights or free access to their markets. Bolivia was invited to join as a full member in 2012, but its accession is still under negotiation.

Democratic Ideals

One of Mercosur’s early aims was to cement the region’s return to democracy, since all of its founding members had emerged from dictatorships in the 1980s. In 1998, the group 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.

One of Mercosur’s early aims was to cement the region’s return to democracy.

Mercosur members invoked the protocol for the first time in 2012 to suspend Paraguay, claiming that President Fernando Lugo had been removed from power unfairly after his domestic opponents accused him of mishandling a deadly clash between farmers and law enforcement. Some experts say Paraguay’s suspension, which was lifted in 2013, was politically motivated, since Brazil was seeking Venezuela’s admission to the bloc and Paraguay’s new, center-right government opposed it. Asuncion’s suspension took away its ability to block Caracas.

Flagging Integration

Mercosur inked trade agreements with Bolivia, Chile, Israel, and Peru in its first decade, while trade within the bloc jumped from $4 billion in 1990 to more than $40 billion in 2000. The group also began trade negotiations with the European Union in 1999. Those talks stalled for many years, but regained momentum in 2016.

Regional integration began to slow following Brazil’s currency devaluation in 1999 and Argentina’s financial crisis in 2001, and since then trade disputes and other tensions have flared between the two countries. 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.

Mercosur countries have also failed to coordinate their trade policies toward third countries. For instance, Brazil unilaterally imposed antidumping restrictions on steel imports from China in 2011. “Politically negotiated exceptions to the bloc’s rules became the norm,” the Economist wrote.

Source: UNCTAD

Experts say integration has been further stifled as Mercosur economies continue to fall back on protectionist policies [PDF] and show reluctance toward creating 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. Many economists argue that this has contributed to the disappointing growth of trade within the bloc, which has fallen since 1998 as a share of members’ total trade.

Political and Economic Fractures

Brazil defended Venezuela’s admission into the bloc in 2012, saying inclusion of the oil-rich country would make Mercosur a “global energy power.” But by 2016, falling oil prices, economic mismanagement, and an increasingly authoritarian government were pushing Venezuela toward a humanitarian crisis. President Nicolas Maduro, facing calls for his removal, arrested opposition leaders and used the courts to undermine the opposition-led congress.

Since its admission to Mercosur, Venezuela had failed to comply with many of the group’s trade regulations, and members feared the country’s impending turn as chair of the bloc would complicate efforts to forge international trade agreements, most notably with the European Union. Mercosur suspended Venezuela in late 2016, citing the Maduro government’s violation of human rights and the bloc’s trade rules. The group made Venezuela’s suspension indefinite in August 2017.

“A reformist desire to deepen trade within the bloc, as well as genuine horror at Venezuela’s descent into an economically dysfunctional dictatorship, have helped galvanize the four original members’ willingness to slowly inch Venezuela out of the bloc,” says Matthew M. Taylor, an associate professor at American University.

The move against Venezuela came amid political turmoil across the bloc. Corruption probes launched in 2014 in Brazil have spread, implicating hundreds of the region’s political and business elites. At the same time, falling commodity prices and what critics describe as economic mismanagement have contributed to recessions in the region: Brazil’s economy shrank by 4 percent in 2016 while Venezuela’s contracted by 19 percent, according to central bank figures. Argentina, which for years had been accused of posting inaccurate economic data, confirmed in 2016 that it too was in recession, posting a 2 percent contraction for the year. Paraguay and Uruguay, the smallest Mercosur economies, saw 4 and 2 percent growth, respectively.

The Future of the Bloc

New leadership in Argentina and Brazil, as well as Venezuela’s suspension, offer Mercosur an opportunity to revive its early objectives, analysts say. The bloc resumed negotiations with the European Commission in 2017, with the goal of reaching a free trade agreement by the end of the year. However, some EU members’ resistance to agricultural imports, Brexit, and growing opposition to trade in Europe pose obstacles.

Meanwhile, Argentina has become an observer to the Pacific Alliance, signaling that it is willing to look beyond Mercosur to increase its trade. Experts say Mercosur’s future will largely hinge on decisions made in Buenos Aires as well as Brasilia. “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.”

Up
Close

Resources Up

CFR Senior Fellow Shannon K. O’Neil discusses Argentina-Brazil trade relations in Foreign Affairs.

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

Former CFR Adjunct Senior Fellow Matthew M. Taylor looks at the effects of Venezuela’s economic and political crisis on its Mercosur neighbors.

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

Explore More on CFR

Trump Foreign Policy

Ambassador Nicholas Burns joins CFR's James M. Lindsay to discuss the state of U.S. diplomacy under the Donald J. Trump administration.

Russia

Russia's information warfare operations, aimed to weaken adversaries' social cohesion and political systems, are complex and adaptive, but Western governments can take steps to guard against them.

Zimbabwe