Mercosur: South America’s Fractious Trade Bloc
Backgrounder

Mercosur: South America’s Fractious Trade Bloc

Three decades after its founding, Latin America’s largest trade bloc continues to deal with internal divisions, including over a stalled trade deal with the European Union. How could the return of Brazil’s Lula change the calculus?
A truck driver waits to unload his cargo of cereal grain at a rail terminal in Alto Araguaia, Brazil.
A truck driver waits to unload his cargo of cereal grain at a rail terminal in Alto Araguaia, Brazil. Nacho Doce/Reuters
Summary
  • Mercosur is an economic and political bloc consisting of Argentina, Brazil, Paraguay, and Uruguay. Venezuela was suspended indefinitely in 2016.
  • Founded in 1991 to create a common market, spur development, and bolster democracy, Mercosur saw early successes, including a tenfold increase in trade within the bloc in its first decade. 
  • While Mercosur has signed trade deals with several countries, bigger deals, including with the United States, China, and the European Union, remain elusive.

Introduction

Mercosur, or the Southern Common Market, is an economic and political bloc originally comprising Argentina, Brazil, Paraguay, and Uruguay. 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. 

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In recent years, however, Mercosur has struggled to open to other markets. The implementation of a landmark draft trade deal it signed with the European Union (EU) in 2019 has been stalled over environmental concerns and European opposition, but hopes have been revived after the election of Brazil’s President Luiz Inácio Lula da Silva, known as Lula. Meanwhile, other challenges persist, including China’s controversial influence in Latin America, concerns over the bloc’s commitment to democracy, and the ongoing economic repercussions of the COVID-19 pandemic.

Which countries are in Mercosur?

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Argentina, Brazil, Paraguay, and Uruguay—Mercosur’s founding countries—are full members. Venezuela joined as a full member in 2012, but was suspended indefinitely in late 2016 for failing to comply with the bloc’s democratic principles.

In 2021, the founding countries had a combined gross domestic product (GDP) of roughly $2.2 trillion, according to World Bank data, making Mercosur one of the world’s largest economic blocs. In comparison, Latin America’s second-largest trade group, the Pacific Alliance, had a slightly lower combined GDP of about $2.1 trillion. While the onset of the COVID-19 pandemic inflicted considerable economic damage on the bloc’s members, the group experienced cumulative economic growth of nearly 6 percent in 2021. 

Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname are associate members of Mercosur. They receive tariff reductions when trading with the full members but do not enjoy full voting rights or free access to members’ markets. Bolivia was invited to join as a full member in 2012, but its accession has not yet received authorization from Brazil’s Congress.

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Why was Mercosur created?

Mercosur was created in 1991 when Argentina, Brazil, Paraguay, and Uruguay signed the Treaty of Asunción, 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 EU, to increase business and investment opportunities for regional industries and encourage local development. Some members of the bloc have even proposed adopting a common currency to reduce dependence on the U.S. dollar, but some skeptics say member countries’ economies are too different to share a single monetary policy. 

“Mercosur had grand ambitions,” says CFR’s 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.

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Mercosur was created in large part to cement a rapprochement between Argentina and Brazil, whose relationship had long been defined by rivalry. Together, the two countries account for nearly 95 percent of the bloc’s GDP and 96 percent of its population. Some critics say Argentina and Brazil wanted Mercosur simply as a trade shield. The bloc often “is less about opening up but actually about protecting Brazilian and Argentine industries from global competition,” says Oliver Stuenkel, an associate professor at the Getulio Vargas Foundation in São Paulo.

How does Mercosur work?

The bloc’s highest decision-making body, the Common Market Council, provides a high-level forum for coordinating foreign and economic policy. The group consists of the foreign and economic ministers of each member state, or their equivalent, and decisions are made by consensus. The group’s presidency rotates every six months among its full members, following alphabetical order; Argentina currently occupies the position. 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.

FOCEM projects, such as building highways and bridges and developing waterways, are funded by member-country contributions [PDF] determined by a formula that accounts for each country’s GDP. Brazil, with a GDP of $1.6 trillion, contributes 60 percent, Argentina 30 percent, and Paraguay and Uruguay 5 percent each. More than $1 billion in nonrefundable loans has been disbursed since the fund was created in 2004.

Has Mercosur spurred economic development?

Internal trade has grown rapidly, jumping from $4 billion in 1990 to more than $41 billion by 2010. It has since fluctuated, dropping to a low of $29 billion in 2020 amid the COVID-19 pandemic before rising to nearly $41 billion in 2021, a 42 percent increase. Over the last decade, intra-Mercosur trade has averaged almost $39 billion. In October 2021, Argentina and Brazil agreed to a 10 percent reduction in the bloc’s tariff to help bolster further economic growth among member countries. The following September, the bloc modified the tariff to reduce import duties for some products by an additional 10 percent.

However, trade relations with the rest of the world have been uneven. In its first decade, Mercosur inked economic cooperation agreements with Bolivia, Chile, Israel, and Peru, and in 2004, it signed a preferential trade agreement with India. But bigger deals have proved elusive. While its most recent free trade agreement (FTA), with Egypt, took effect in 2017, negotiations with Canada and South Korea remain underway, and a deal with the EU has hit roadblocks. The bloc is also reportedly considering an FTA with Singapore, which could open up access to the Asia-Pacific region.

There are currently no trade deals between the United States and any Mercosur countries or the bloc itself, and relations have at times been strained. In 1994, U.S. President Bill Clinton proposed the Free Trade Area of the Americas (FTAA), which would have eliminated or reduced trade barriers among the countries in the Western Hemisphere, excluding Cuba. The FTAA was to be completed by 2005, but by 2004, negotiations had stalled as several Latin American nations, including Mercosur members Argentina and Brazil, opposed the deal [PDF], and it was never finalized. In 2019, U.S. President Donald Trump imposed steel and aluminum tariffs on Argentina and Brazil, though he signed a limited trade deal with Brazil the following year. Brazilian President Jair Bolsonaro later expressed a desire for a broad FTA with the United States following U.S. President Joe Biden’s inauguration, but some experts say such an agreement is unlikely to happen under Lula.

Mercosur reached a comprehensive trade deal with the EU in 2019 after twenty years of on-and-off negotiations. The deal would eliminate tariffs on roughly 90 percent of Mercosur’s exports to the EU and allow companies in both blocs to bid for government contracts. But its ratification has been thrown into doubt by opposition from several EU members, who fear that wood exported from Brazil to the EU could be a result of illegal logging in the Amazon Rainforest. European farmers have also decried a predicted influx of cheap Argentinian and Brazilian beef exports. However, Lula’s vows to combat deforestation of Brazil’s Amazon Rainforest have spurred some optimism, and European Commission Vice President Frans Timmermans has said the EU hopes to sign the deal in 2023.

Within the bloc, 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. Recent efforts by Uruguay to establish an FTA with China and join the Trans-Pacific Partnership have also been a source of tension between bloc members. While Brazil supports pursuing an FTA with China, Argentina has publicly opposed it, citing concerns that a trade deal could lead to an influx of cheap Chinese imports to the region.

Has Mercosur promoted democracy?

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], affirming that democratic institutions are 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, claiming that President Fernando Lugo had been unfairly removed from power 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’s then left-wing government was seeking Venezuela’s admission to the bloc and Paraguay’s new, center-right government opposed it.

Why was Venezuela suspended?

Venezuela joined the bloc in 2012, with Brazil arguing that including the oil-rich country would make Mercosur a “global energy power.” But falling oil prices, economic mismanagement, and an increasingly authoritarian government have pushed Venezuela into an economic, political, and humanitarian crisis. As a result, more than seven million Venezuelans have fled to neighboring countries and beyond since 2014. 

Mercosur suspended Venezuela in late 2016, citing violations of human rights and the bloc’s trade rules by President Nicolas Maduro’s government. In August 2017, the group made Venezuela’s suspension indefinite (there are no provisions for permanent expulsion). And in 2019, Argentina, Brazil, and Paraguay called on Maduro to cede power to the Venezuelan opposition.

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

What other challenges is Mercosur facing?

In recent years, Mercosur countries have experienced political and economic turmoil. Corruption probes launched in Brazil in 2014 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. In 2020, Latin America’s GDP fell by 7 percent, the worst of any region in the world. Return to growth has been slow, partially due to rising global interest rates.

Meanwhile, Mercosur continues to face internal division. Like his predecessor Bolsonaro, Lula has expressed a desire to “modernize” the bloc, including by allowing for bilateral deals with third-party countries, which Argentine President Alberto Fernández has previously opposed. Uruguay’s ongoing efforts to ink an FTA with China have likewise created tension. Meanwhile, experts say the bloc’s protectionist policies [PDF] and reluctance toward creating value-added supply chains or regional production hubs are stifling integration.

Managing the trade relationship with a rising China will also continue to test the bloc’s unity. While there is no FTA between China and Mercosur, China has said it intends to increase bilateral trade with South America by $500 billion by 2025, and Lula has said he supports eventually pursuing such a deal. Additionally, Argentina and Uruguay are participants in China’s Belt and Road Initiative, the world’s largest infrastructure program. 

Adding to the bloc’s challenges are the repercussions of the COVID-19 pandemic, which have brought further economic hardship to Mercosur countries. The onset of the pandemic triggered the largest recession the countries have seen since 1930 and sharply increased poverty rates and inequality [PDF]. In early 2020, Mercosur allocated $16 million through FOCEM to a project aimed at improving the bloc’s COVID-19 testing capacity. But disagreement among members about the severity of the pandemic hindered cooperation, including the sharing of information and medical equipment. Bolsonaro, for instance, faced criticism for downplaying the threat of the virus after Brazil became a pandemic hotspot, and Lula likened Bolsonaro’s stance to genocide.

Experts broadly agree, however, that Mercosur’s future will hinge on decisions made in Buenos Aires and Brasília. “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 their markets more generally,” says O’Neil. “The challenge is whether they can do it together.”

Recommended Resources

This In Brief discusses how Lula’s presidency will affect Brazil’s foreign relations.

The London-based nongovernmental organization Canning House explores the future of Mercosur in this 2023 report [PDF].

Politico’s Sarah Anne Aarup looks at the increasing likelihood of an EU-Mercosur trade deal.

For the Financial Times, Lucinda Elliott writes that Uruguay’s global ambitions are creating tension within the bloc.

This graphic by Geopolitical Futures shows changes in the bloc’s trading partners during the last three decades.

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William Rampe, Diana Roy, Claire Felter, Danielle Renwick, Andrew Chatzky, Anshu Siripurapu, and Rocio Cara Labrador contributed to this report. Will Merrow created the graphics.

 

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