Reform or Bust: Mercosur at 31

Reform or Bust: Mercosur at 31

A man walks past a graffiti that reads “Venezuela is Mercosur, Venezuela is respected and live long the homeland” in Caracas, Venezuela August 5, 2017. Source: REUTERS/Andres Martinez Casares

In February 2022, Mercosur celebrated its 31st anniversary, closing a year in which the bloc managed to agree on a framework to reduce tariffs, after almost a decade without any major advances economically. This may sound like integration in the South Cone is back on track, however, there is still bickering and disagreement over the future of the bloc that was once a promising organization but seems to have lost its momentum and sense of direction.

Mercosur, the customs union originally formed by Argentina, Brazil, Paraguay, and Uruguay in 1991, was born under ‘perfect; conditions. Firstly, there was a huge international appetite for regional and bilateral trade deals, especially as countries found it increasingly hard to close the Uruguay Round at the World Trade Organization. In 1990 alone, fifty trade agreements came into force. Secondly, there was an almost perfect convergence among like-minded governments, such as that of Menem in Argentina and Collor in Brazil. Thirdly, the South Cone finally replaced civil-military regimes with newly-established democratic governments, paving the way for less distrust and nationalistic mentalities among the to-be bloc members. 

Fast-forward thirty years and not many significant advances have been made. Despite the recent framework agreement to reduce the common external tariff (CET) by a tenth in almost 87 percent of the products traded to the bloc, Mercosur came to be seen during the past years as stagnant and dysfunctional so much so that fears of fracturing became palpable after president Lacalle Pou from Uruguay hinted at the possibility of his country pursuing a trade agreement with China on its own outside the Mercosur framework. Before that, Brasília was threatening to bypass the CET altogether by imposing a unilateral reduction of its tariffs.

Bearing in mind that the founders of Mercosur meant for it to become a common market as its name suggests, the increasing skeptical, outward-looking positions of its members suggested a dramatic fall from grace is imminent.

Three major factors can help explain how the bloc got here. The first is the stagnation of intra-bloc trade and the difficulties posed to the signing of new trade deals with new partners. The second is the existence of open wounds resulting from institutional crises in the last decade. The third and final is the lack of political alignment between state members.

ECONOMIC DEADLOCK, DWINDLING INTEREST IN INTRA-BLOC TRADE

Destination of Mercosul Exports– 2000-2013 (% of total exports).
Source: United Nations International Trade Statistics Database (2013).

Mercosur got off to a hot start. The creation of a free-market and customs union led to an impressive increase in intra-bloc trade. In 1991, trade among Mercosur members amounted to only US$ 9.11 billion. In 2011, when intra-bloc trade peaked, the figure was almost six times higher, at US$ 54.2 billion. Further, Mercosur negotiated important agreements with other regional arrangements, such as the Andean Community and the European Union, which supported the bloc’s unified front for brokering better deals with the outside world.

At the beginning of the last decade, Mercosur seemed to run out of fuel. From its peak in 2011, trade among members receded to $41.6 billion in 2018. Beyond absolute numbers, intra-bloc trade also lost importance in relative terms. Even when trade among member states increased, intra-Mercosur trade became less representative over the years. In 2000, exports within the bloc represented 21% of total exports for member states. In 2013, that ratio dropped to 14.8%. Simultaneously, trade with non-traditional partners, notably China, grew rapidly. As of 2021, exports to Asian countries represent 48% of Mercosur exports. As non-Mercosur exports grew in importance, so did the pressure from some member states, such as Brazil and Uruguay, for a more outward-looking Mercosur.

Unfortunately, however, the bloc has fared poorly in brokering deals with the outside world. Today, only three free-trade agreements have come into effect between the bloc and third parties: one with Egypt, one with Israel, and one with the Andean Community. Mercosur’s biggest bets are an agreement with the European Union and one with the European Free Trade Association, both signed in July 2019. Both are unlikely to come into effect soon because opposition to these deals remains intense among many European countries – mainly due to environmental issues related to Brazil’s inadequate protection of the Amazon rainforest. A survey by YouGov revealed that an average of 75% of Europeans oppose the deals.

Percentage of EU citizens in favor of trade agreements with the Mercosur (2021 YouGov survey)

25%

With little success in fostering trade with outside partners, it is no surprise that Mercosur came to be seen as an obstacle rather than a springboard for the integration of member states into the global trade system. Worryingly, the bloc has failed to even start meaningful negotiations with major Asian markets, which are currently the bloc’s leading trading partners.

UNHEALED WOUNDS: THE PARAGUAY SUSPENSION AND VENEZUELA’S ENTRANCE

Presidents Collor, Rodríguez, Menem e Lacalle celebrate the signing of the Treaty of Asunción in March 1991. Source: Agência Senado.

The biggest political crisis of Mercosur, and one that has left wounds not yet healed, was the suspension of Paraguay and the almost immediate ascension of Venezuela to full membership of the bloc. Mercosur suspended Paraguay after the dismissal of president Fernando Lugo in 2012, which was considered a breach of the bloc democratic clause: the Ushuaia Protocol. At that time, the country was the only member not to ratify Venezuela’s full entry to the bloc and as soon as Paraguay was suspended, the other three members rushed to announce the club’s new addition.

Not only was the decision harshly criticized for its motives and questionable procedure, but also paved the way for a new crisis: the Venezuelan suspension in 2017. By then, President Nicolás Maduro and his government faced several accusations of violating democratic order after he decided to strip the opposition-controlled National Assembly from its powers. On top of that, it was also criticized for human rights abuses in relation to its treatment of political dissent. 

Because of these two major institutional crises, there has been bad blood among member states. In particular, Paraguay resented the way it was forced into suspension and became, together with Brazil, one of the leading voices regarding Venezuela’s suspension. Furthermore, upon being reinstated in the bloc, Paraguay announced that it would be no longer bound by the Ushuaia II Protocol regarding sanctions for breaches of democratic order. The same will probably happen when, or if, Venezuela is reinstated, further undermining the institutional strength of the bloc.

PLANETS NO LONGER ALIGNED

Reunião de Cúpula do Mercosul no aniversário de 30 anos da criação do bloco
Meeting during the 58th Summit of Heads of State of Mercosur, in March 2021. Source: CNN.

Mercosur’s existence and progress were much easier under combinations of like-minded, or at least non-confrontational, governments at the helm in each member state. First with the reigning economically-orthodox governments from the 1990s, and later with the ascension of the so-called Pink Tide of left-leaning administrations. Such political alignment or, at the very least, lack of open opposition paved the way for understanding within the bloc.

That is no longer the case, and three examples indicate misalignment among state members. First is the fact that the Paraguayan government of Mario Abdo Benítez has had no diplomatic ties with Venezuela since 2019. The second is the increasing isolation of Alberto Fernandez’s government in Argentina within the bloc and its constant confrontations with Brazil, Paraguay, and Uruguay because of its protectionist stances. Such a stance even led to an open quarrel between Fernandez and Lacalle Pou in March of the current year during a discussion on reducing the CET. On that occasion, Fernandez took it personally when Lacalle Pou suggested that the Mercosur was becoming a burden and a heated debate ensued. The third example is the tense relationship between Brazil and Argentina due to Bolsonaro’s open support for Macri’s reelection attempt in 2019.

As long as misalignment persists, it will be difficult for a consensus-based organization such as the Mercosur to engage in any meaningful attempt to reform.

A CORPSE OR A PHOENIX?

It remains to be seen whether a miracle, economic or political, can save the bloc. Perhaps its member states are just too different in size and economic interests to work well together. Especially since Brazil and Argentina, Mercosur’s original paymasters, don’t appear very open to compromise at the moment. In this case, the bloc is living a “Weekend at Bernie” trajectory, cinematically speaking. It is dead, but it is useful to pretend that it is still alive. This is not to say that members will not occasionally find moments of convergence and consensus, just like in October 2021, when they agreed on a framework to reduce the bloc’s common external tariffs by as much as 10%. Nevertheless, it is unlikely that Mercosur will come back to deliver as many breakthroughs as it did during the first half of its existence.

Perhaps this could be an opportunity for a complete overhaul of the bloc. Just as NAFTA eventually had to morph into USMCA, Mercosur members could leave aside their pride just for a moment and admit that no one is happy with the current state of the bloc. Perhaps a war like that between Russia and Ukraine might just be the push Mercosur members need to reform the bloc and sell it as an alternative to other, less trustworthy, or geopolitically unstable, markets. It remains to be seen whether Mercosur’s members can once again find a way to thrive together.

  • Will a Mercosur member threaten to leave the bloc?
  • Could Mercosur abandon the Common External Tariff?
  • Is there still a chance for Mercosur to become a true common market?

Suggested Readings

Chodor, T. (2021). The Changing Face of Mercosur: Legitimacy and the Politics of Scale in South American Regionalism. JCMS: Journal of Common Market Studies59(2), 417-431

Gardini, G. L. (2011). MERCOSUR: What you see is not (always) what you get. European Law Journal17(5), 683-700.

Nolte, D., & Ribeiro Neto, C. C. (2021). Mercosur and the EU: The false Mirror. Lua Nova: Revista de Cultura e Política, 87-122

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Reform or Bust: Mercosur …

by Darli Magioni time to read: 7 min
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