Mercosur: South America’s Fractious Trade Bloc

A truck driver waits to unload his cargo of cereal grain at a rail terminal in Alto Araguaia, Brazil. Nacho Doce/Reuters

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 10, 2018

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

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Introduction

Mercosur is an economic and political bloc comprising Argentina, Brazil, Paraguay, 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 have revealed fractures within the group.

Mercosur revived long-stalled trade talks with the European Union in 2017, and there was hope in late 2018 that they could reach a landmark deal.

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.

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 was suspended in late 2016. The four have a combined gross domestic product (GDP) of roughly $2.9 trillion, making it one of the world’s largest economic blocs [PDF]. 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 pending authorization from Brazil’s congress.

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 they have regained momentum in recent years.

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.

CFR Editorial. UN Conference on Trade and Development.

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 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 two million Venezuelans have fled to neighboring countries since 2014.

Since its admission to Mercosur, Venezuela had failed to comply with many of the group’s trade regulations. 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. Argentine President Mauricio Macri has called on Venezuela to release political prisoners and guarantee free and fair elections as necessary precursors to reconciliation.  

“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 and an expert on Latin America’s political economy.

The move against Venezuela came amid political and economic 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: in 2018, Brazil’s economy is forecast to grow less than 1.5 percent after two years of contraction, and Argentina requested a $50 billion rescue package from the International Monetary Fund after years of recession. Mired in crisis, Venezuela’s economy has shrunk by half since 2013.

The Future of the Bloc

Experts say Mercosur’s future will largely hinge on decisions made in Buenos Aires and Brasilia.

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 trade negotiations with the European Commission in 2017, and officials felt a historic deal was within reach in 2018, despite some lingering challenges over agricultural products. If the parties can’t settle their differences soon, analysts warn that upcoming elections on both sides of the Atlantic could put off an accord for years or even decades.

Experts say Mercosur’s future will largely hinge on decisions made in Buenos Aires and 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.”

Rocio Cara Labrador contributed to this report.

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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.

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