Mercosur’s Expansion Sows Seeds of Slow Decline
By João Augusto de Castro Neves, on
Over the past three decades, Brazil and Argentina’s rapprochement paved the way for the two largest economies in South America to end their economic and military rivalry and commence a promising effort to institutionalize the process of regional integration in South America.* The Common Market of the South, or Mercosur, was the chief creation of that initiative and was quick to embrace Uruguay and Paraguay. Last year Venezuela became Mercosur’s fifth member, and the bloc is expected to become even bigger as Ecuador and Bolivia seek membership in the near future. But bigger does not necessarily mean better or stronger. In the past decade, Mercosur has been bogged down by internal trade disputes and by members’ ongoing reluctance to implement the basic rules needed to fully bind their economies together in a customs union. Consequently, in relative terms, trade flows within the bloc are much lower than they were in the late-1990s. Instead of becoming an instrument for further trade liberalization, Mercosur today resembles a trade fortress, stalled by its members’ proclivities toward more-protectionist measures.
The good news is that those shortcomings do not undermine Mercosur’s success from a geopolitical perspective. Trade disputes aside, Brasilia and Buenos Aires agree more than they disagree on strategic issues—that is, nuclear and military cooperation. But the bad news is that shifting global trade dynamics, in particular U.S.-led global trade negotiations like the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP), may actually deepen Mercosur’s deficiencies as a trade bloc if member states do not react.
These emerging trade dynamics are set to have a twofold impact on Latin America. In broad terms, the TPP and TTIP negotiations will probably relegate existing multilateral trade negotiations at the World Trade Organization's (WTO) Doha Round to near irrelevance. By establishing new and more comprehensive rules for trade and investment—commonly referred to as WTO-plus obligations—the TPP and TTIP agreements will set a new standard for future global trade talks.
More directly, these U.S.-led global trade initiatives will exacerbate trends already underway in Latin America. Primarily, as the TPP advances it will draw the more business-friendly Pacific Alliance member countries—Mexico, Chile, Colombia and Peru—into its orbit. As negotiations pave the way for more trade and investment opportunities, other countries in the region may be encouraged to follow suit.
Against this background of shifting trade dynamics and a more challenging global environment, fissures within Mercosur will both deepen and become more visible, most obviously between Argentina and Brazil. Squabbles between the two countries have been frequent and even expected, but there are reasons to believe that bilateral trade relations may be approaching an inflection point.
Brazil's "strategic patience" with Argentina in the past decade has been largely sustained by favorable trade flows. The situation, however, has become less favorable to Brazil since late last year. In the last quarter of 2012 and the first quarter of 2013, Brazil logged its first trade deficit with Argentina since 2003.
While this alone may not be enough to undermine bilateral relations, it may well exacerbate Brasilia's growing concerns over the country's deteriorating trade balance. In the first seven months of this year Brazil registered a $5 billion trade deficit, mainly due to declining exports, a marked shift from the same period last year, when the country had a $9.21 billion surplus. Trade with other Mercosur countries still provides Brazil with a significant surplus, but the bloc’s overall importance for Brazil's exports has diminished consistently over the past several years, from accounting for a peak of 19 percent of Brazil’s total exports in 1998 to less than 12 percent in 2012. While much of this shift has to do with growing Chinese demand for Brazilian exports, Brazilian goods within Mercosur are also facing increased competition from countries outside the region, especially China.
With no signs of moderation coming from Buenos Aires anytime soon, Brasilia is showing a greater willingness to review its trade policy and past protectionist measures. The dissonance may eventually tip the balance of the bilateral relationship and drive Brazil to push for changes in Mercosur.
Despite these setbacks, Mercosur will remain coherent and, in fact, will likely grow in size in the near future. But instead of adding strength, new members will ultimately reduce Mercosur's negotiating capacity. Every decision made by the bloc, including free trade agreement (FTA) negotiations, requires unanimity from its members. Thus far, disputes between Brazil and Argentina have been enough to hamper Mercosur's negotiating capacity, as illustrated by the failure of Mercosur-European Union talks several years ago and the absence of any major trade deals—Mercosur has signed only three FTAs outside the region, with Israel, Egypt and the Palestinian Authority. With the addition of even more disparate economies such as Venezuela, Bolivia and Ecuador, the decision-making process will likely become more challenging, and interest asymmetries will surely intensify.
Eventually, these tensions will lead to either of two possible outcomes. The first is one of growing and unresolved tensions leading countries to opt out of the union and potentially join the TPP initiative. But the more likely outcome is a push for greater flexibility over the rules governing Mercosur, including the elimination of restrictions on member states to sign bilateral trade agreements.
A wholesale shift in trade strategy for Mercosur is unlikely in the medium term. But in the context of a more challenging economic environment and likely progress on the TPP and TTIP agreements, a more proactive trade policy will gain momentum. In fact, most Mercosur members seem keen on resuming FTA talks with the EU later this year. However, in an effort to avoid undermining trade negotiations once again, Brasilia will likely bend the bloc's rules to allow each member to negotiate at its own pace.
In theory, this would set a precedent that would facilitate trade negotiations with any other country outside Latin America. In practical terms, however, a deviation from the common trade policy would also mean the end of Mercosur as a customs union.
João Augusto de Castro Neves is a senior analyst at Eurasia Group and can be followed on Twitter at
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