Mercosur: South America’s Fractious Trade Bloc

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.

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.

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 theFinancial 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.