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Mercosur Turns 20

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Mercosur is still far away from its original goal of a customs union, experts say.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

This year marks the 20th anniversary of the founding of Mercosur. How successful has the customs union been at aiding the economies of Brazil, Paraguay, Uruguay and Argentina? Which countries and industries have benefitted the most? What have been the drawbacks? How would Venezuela's entry into Mercosur affect the trade bloc?  

Sergio Abreu, senator and former foreign minister of Uruguay: Currently, Mercosur is not a true customs union. The sugar and automobile industries are excluded from free trade and the rest are oriented at trade driven between Argentina and Brazil. The Paraguayan and Uruguayan economies are limited in their access to the market, with a disparate policy of investment incentives and a lack of flexibility to engage with third parties. Mercosur influenced mutual trade growth until 2000. The opening and trade between Mercosur countries demonstrates different trade structures and geographical distributions. Brazil has benefitted the most. Its industrial sector and production structure have been diversified and its agro-industrial network has been inserted in Mercosur, especially in Argentina and Uruguay. The common external tariff is the instrument that compensates for the output gap for extra-regional production. In the food, chemical and pharmaceutical, plastics, some machinery, electrical goods and automotive industries there has been an increase in diversion and trade creation. Industrial or traditionally primary goods have remained oriented at third countries. Mercosur's drawbacks include breaches of commitment to free trade, the bilateralism of Argentina and Brazil, the perversion of the customs union and inclusion of infrastructure, energy and communications in the proposed Initiative for the Integration of the Regional Infrastructure of South America (IIRSA), which is outside of Mercosur's agenda. The Venezuela issue is more political than commercial. Its entrance would limit free trade and hinder the improvement of the customs union.

Thomas O'Keefe, president of Mercosur Consulting Group in San Francisco: As a free trade area, Mercosur has been tremendously successful. Intra-regional trade among the four core member states has fully recovered from the nadir at the start of the 21st century, and has now more than doubled from the heights reached in the mid-1990s. At the same time, the region's global exports have also seen huge growth. So this represents genuine trade creation, and there is little evidence of the harmful trade diversion some feared at Mercosur's launch. On the other hand, the original common market goal appears ever more distant. The Common External Tariff is in shambles and the free movement of workers is paid lip service. Venezuela's incorporation as a full member state must be seen as a political move. It will not result in any greater trade access for Venezuela into Mercosur than it enjoys now as an associate member, nor will it significantly increase Mercosur exports to Venezuela either.

Diego Abente-Brun, deputy director of the International Forum for Democratic Studies at the National Endowment for Democracy in Washington: Mercosur was born mainly as a bilateral agreement between Brazil and Argentina, whose industries benefitted greatly from the free trade area. The smaller countries, Uruguay and Paraguay, joined soon thereafter but confronted repeated obstacles to access the markets of their neighbors. Lately, even the free flow of goods has been affected, as evidenced by the almost month-long boycott of Paraguay's maritime fleet in the port of Buenos Aires. Trade unionists justified the blockade by criticizing the working conditions of their Paraguayan counterparts, but many saw it as an attempt to benefit Argentine companies and prevent Paraguay, a landlocked country with 80 percent of its trade conducted via the Paraguay-Paraná River corridor, from handling its own cargo. The entry of Venezuela is expected to benefit Mercosur members not only because of its market but also because it is supposed to introduce a degree of equilibrium to Brazil's overpowering dominance. However, that advantage should not be overstated as it is Brazil's manufacturing sector, and to a lesser extent Argentina's, that are more likely to benefit from the opening of the Venezuelan market. It is much less clear what the commercial benefit will be for Uruguay and especially for Paraguay. For that same reason, the 'equilibrium' expectation may end up having very limited effect. Mercosur at 20 is facing challenges that go beyond the issue of becoming a larger bloc and have more to do with addressing long held grievances from its smaller members and 'deepening' the integration scheme.

Juan Francisco Facetti, partner at Paraguay Consulting Group Business Advisers: In all this time, the formation of the customs union has not been accomplished because the members have not respected the Treaty of Asunción, especially in respect to the coordination of macroeconomic policies. Paraguay did not have real and effective access to their natural markets, namely Brazil and Argentina. Brazil did not fully open its markets and was unwilling to give up some commercial sovereignty. It has also slowed the process of trade integration by proposing a parallel process of political integration (Mercosur Tribunal, Parliament, etc.). The smaller countries have benefited from access to markets such as India, Arabia, the South African Customs Union countries, with which it would have been difficult to negotiate as a country alone. The major drawbacks are trade barriers that have remained all these years. The great problem of Mercosur is that it was born as a commercial and economic agreement and today has become an economic and political mess. First of all, Venezuela is not a predictable market. There is no assurance of payment, there is no price system and there is only one real buyer (the state). Trade policy of the current Mercosur partners stands in the free market. As they sell mainly agricultural products, they have a more offensive position with regard to agriculture. Secondly, Venezuela imports much of the products, adopting ultra-protectionist policies in agriculture. I think that Venezuela, having a different trade economic vision than the Mercosur partners, will negatively affect the negotiations with the European Union, particularly on agriculture.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

 

 

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