Mercosur: South America’s Fractious Trade Bloc

Introduction

Mercosur, the “Common Market of the South,” is the largest trading bloc in South America. Mercosur’s primary interest has been eliminating obstacles to internal trade, like high tariffs, income inequalities, or conflicting technical requirements for bringing products to market. Yet Venezuela’s recent addition to the group has experts wondering if Mercosur will reorient itself as a political force.

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.” Mercosur’s full members include Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Brazil is the region’s largest economy with a GDP of nearly $800 billion.

The population of Mercosur countries totals more than 250 million people and members have a collective output of $1.1 trillion, accounting for over 75 percent of South America’s GDP (PDF). It is now 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 or not any reduction in poverty can be linked directly to Mercosur trade policies is unclear. However, Brazil’s deputy UN envoy, Piragibe Tarragô, said in late 2006 that poverty reduction within Mercosur countries “has been remarkable.”

What are associate members?

Mercosur’s five associate members—Chile, Bolivia, Colombia, Ecuador, and Peru—do not enjoy full voting rights or complete access to markets of Mercosur’s full 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 rules for admission. 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). Brazil would like to see Bolivia accepted, in part because of their shared border, Brazilian Foreign Minister Celso Amorim said in an interview with the Financial Times.

The possibility of full membership for Bolivia may also prove problematic because Bolivia’s tariffs are actually 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 the Financial Times’ Latin America editor Richard Lapper. He says Mercosur may allow some exemptions to Bolivia to remedy this problem, as Brazil is very interested in having increased access to Bolivian gas.

Granting exemptions, however, would anger already disenchanted Uruguay and Paraguay, Mercosur’s smallest full members, who 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. 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 (TIFA) with the United States.

The TIFA sets the stage for future trade liberalization and economic relations with the United States. But the signature of a Free Trade Agreement (FTA) with the U.S. 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 non-member countries.

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

Venezuela’s entrance into Mercosur has caused tension within the trade bloc. Director of Western Hemispheric Studies at Johns Hopkins University Riordan Roett says the Brazilians “appear to be pandering to Venezuela,” through their leniency for the Chávez government with regard to many of the requirements for Mercosur membership, and by supporting Evo Morales’ bid for full membership. This has caused resentment for Uruguay and Paraguay. “Venezuela has taken an anti-Bush stand and is kind of philosophically opposed to free trade,” says Lapper. Since Venezuela signed a membership agreement with Mercosur in June 2006, Chávez has been advocating for a shift in focus of the bloc, saying, “We need a Mercosur that prioritizes social concerns. We need a Mercosur that every day moves farther way from the old elitist corporate models of integration that look for … financial profits, but forgets about workers, children, life, and human dignity.” Brazil and Paraguay have yet to ratify Venezuela’s entrance into the bloc, which has brought its membership status into question. In June 2007, Chavez failed to attend a Mercosur summit, instead traveling to Russia to meet with Russian President Vladimir Putin.

In fact, says Lapper, a general sentiment within Mercosur against free trade with the United States is not wholly driven by Chávez’s influence. Brazil and Argentina’s concerns about trade with the United States are rooted more in economic, than philosophical, reasons, he says. Brazil and Argentina, Lapper says, are attracted by access to Venezuela’s energy supplies and “they like the idea that they would have a Caribbean coast.”

From an economic standpoint, Venezuela can make a significant contribution to Mercosur. The oil-rich nation’s incorporation contributed $157.9 billion to Mercosur’s overall gross domestic product (GDP). Six months after its entry into Mercosur, however, Venezuela still has not presented its schedule for “enforcement of the common customs tariff and free transit of goods and services,” reports El Universal. In fact, says Roett, “Venezuela is a full member without having met the requirements for membership.”

Does Mercosur have a political agenda?

Mercosur made headlines in early 2007 when its summit provided an arena for heated debate as to what the future role of neoliberalism and free trade should be in South America. At the summit, which produced a communiqué in which Mercosur leaders pledged increased focus on human rights and democracy, Venezuelan President Hugo Chávez called for Mercosur to be “decontaminated of neoliberalism,” while Colombian 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’s acceptance as a full member in 2006. “Mercosur is no longer about trade,” Roett told the Council on Hemispheric Affairs. “The new joiners don’t have much to trade, they are opposed to free trade it seems. The organization is more and more political and to some degree anti-American.” But Lapper insistsbusiness remains its core reason to exist. “I think 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 trade pacts in the region?

Because Mercosur’s charter does not allow its member nations to have FTAs with non-member nations, Mercosur members are not permitted to join the Andean Community of Nations (CAN), a smaller trade bloc which includes Bolivia, Colombia, Ecuador, and Peru. When Venezuela joined Mercosur, it was required to resign from CAN, as Bolivia will have to do if it is admitted. Bolivia, however, has said that it will not leave CAN. CAN and Mercosur leaders have discussed the possibility of allying to form a South American Community of Nations, modeled on the European Union, but those talks have not progressed quickly.

Mercosur played a key role in the failure of the FTAA (Free Trade Agreement of the Americas). Spearheaded by the United States, the FTAA was intended to unite Latin America and North America in one broad trade accord. The 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 any significant progress in forging that deal since.

How has Mercosur stimulated cooperation among its members?

Agreements among Mercosur members range from debt relief (Brazil recently agreed to renegotiate Paraguay’s debt) to trade deals. Argentina has agreed to invest in Venezuelan powdered milk plants (Buenos Aires Herald) in exchange for financial aid to a faltering Argentine milk-producing cooperative, for example. Mercosur has been attempting to create a trade agreement with the European Union “since its creation,” says Wheeler, of the Council on Hemispheric Affairs. The deal appears to have stagnated, however. The problem is that with “so much internal division and internal disputes, [Mercosur] has lost some of its credibility abroad,” says Wheeler.

The most controversial proposal is for a Latin American development bank, dubbed “Banco del Sur,” or the Bank of the South. Such a bank would allow member countries to fund projects and investments without World Bank or International Monetary Fund involvement. The bank would be based in Caracas; with initial funding of roughly $7 billion, it could start operation as soon as 2008. First proposed by Chávez in early 2007 so that Mercosur members “would not depend on anyone,” the bank has garnered the support of Mercosur members Argentina, Brazil, Bolivia, Ecuador, Paraguay, and Uruguay, and even one nonmember, Colombia. Many aspects of how the bank would function remain unclear, including what its lending conditions would be and whether members would have equal voting rights.

What is the attitude of the United States toward Mercosur?

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 being an obstacle to the expansion of their trade in Latin America. They find it an annoyance,” according to Wheeler. Roett agrees. “It’s viewed here in Washington as an anti-American entity,” he says, “Clearly if you talk to people within the administration, they’re not happy.”

This may change, however, during Washington’s so-called “year of engagement” (LAT) with Latin America, which kicked off in early February 2007. The United States, Lapper says, “is trying to set up good relationship with Brazil. They recognize that Brazil is a stabilizing force in the region.” The Bush administration’s diplomatic campaign in Latin America included Bush’s tour of the region in March 2007, as well as efforts to push trade agreements with Colombia, Panama, and Peru through Congress. “It’s difficult for the United States to deal with Chávez,” says Lapper. “In that context, having good relations with other [Latin American] countries, especially the big and important ones, is really valuable.”