Protectionist Policies Stagnate Mercosur Countries

Once upon a time, Brazil promoted a regional customs union called Mercosur, the Market of the South, that was envisioned as the foundation for South America to become a first-rate power in the global economy. Launched in 1994, Mercosur initially embraced Argentina, Uruguay, and Paraguay, Brazil’s “southern cone” neighbors, and in 2012 incorporated oil-rich Venezuela. With five member nations, this regional market has annual trade of more than $850 million in goods and services. But the problem is that trade within Mercosur is not growing, and the rules of the customs union are protectionist against imports from non-members and hostile to trade liberalization. As a result, Mercosur has come to a halt.

This is not to say that Mercosur is about to fall apart, but it is not the instrument of integration of South America into the global economy that the founders envisioned. Like a soufflé that has collapsed, the ingredients are still there but they lack the political recipe to be made into liberalizing arrangements of trade with other regions. Trade within Mercosur currently represents only 16 percent of the region’s total trade with the outside world, so economic growth depends heavily on expanding trade with developed countries, particularly the European Economic Community and the United States. China has also entered the scene forcefully, with its quest for raw materials and food supplies in South America opening a major new market.

The situation facing Brazil, by far the largest national economy in Mercosur, was summed up neatly by Roberto Abdenur, a career diplomat who was Brazil’s ambassador to the United States. In an interview with Exame, Brazil’s leading business journal, Abdenur said, “Mercosur is useful for Brazil, but it is not enough. The world is witnessing a global reorganization of productive forces. Without new commercial agreements, Brazil will remain outside the so-called productive chains created by multinational companies in different countries. This is what will define the future of international commerce. We should preserve Mercosur, but this must not prevent Brazil from making a tardy opening of its economy, particularly in the direction of countries that are sources of investment and technology, as is the case with Europe and the United States.”

The same line of thought on liberalizing Mercosur from its self-imposed restrictions was voiced even more forcefully by Danilo Astori, Uruguay’s vice president and former minister of
economy, who told a business forum in August that “it is essential that each Mercosur country should have a multiplicity of memberships in trade groups. Mercosur must have joint international policies, an agreement on moderate protection from third parties, and above all must have agreements with other trade blocs,” said Astori, who is credited by foreign investors with promoting sound economic policies in Uruguay.

But these voices of liberalization provoke hostile reactions within Mercosur from leftist ideological forces that see the protectionist customs union as a political body that should oppose free markets as a threat to South American unity. This is particularly true in Venezuela, the champion of 21st century socialism, and in Argentina, where the left-wing Peronist regime of President Cristina Kirchner is constantly violating trade agreements even with its Mercosur partners. Brazil, which is the principal exporter to both Argentina and Venezuela, provides weak leadership to Mercosur because it has put favored commercial access to its big neighbors ahead of the strategic interests of a dynamic South American economic bloc. It is noteworthy that both Argentina and Venezuela, under their populist governments, are experiencing critical domestic economic problems, with lack of investment in infrastructure and frequent shortages of consumer goods. These problems are attributable to errors in economic management that disrupt production of goods and services, dry up private financing, and generate growing fiscal deficits.

Against this political background, it is difficult to envision any progress in long-standing efforts by other regional trading blocs to reach agreements with Mercosur. So, some smaller members of Mercosur, particularly Paraguay and Uruguay, are rebelling against the restrictive rules of the customs union. Uruguay has signed a framework agreement with the United States to open negotiations on a bilateral free trade agreement. Paraguay has declared that it intends to seek membership in the Alliance of the Pacific, an alternative regional association made up of Mexico, Colombia, Peru, and Chile, which has created a free trade area and pursued trade ties with the United States and the South East Asian regional group ASEAN.

Even Brazil is showing signs of reconsidering its hard-line position on Mercosur. Negotiations with the European Union have produced a draft framework agreement that would create a bilateral Brazil-EU free trade area. Technically, the rules of the Mercosur customs union prevent any bilateral agreements with third parties, but Brazil is considering a diplomatic sleight of hand that would make the EU deal an agreement open to all Mercosur countries.

Argentina has been a constant opponent to any negotiations with other regional blocs, but this is a political posture by the Kirchner regime that could be influenced by political developments that weaken the present government. From all polls, President Kirchner’s political group is going to lose the legislative election on October 27th and thereby lose control of the Argentine Congress. The widow of President Néstor Kirchner, who was elected president after her husband died of a heart attack in 2010, has herself been stricken by a cerebral hemorrhage that requires lengthy confinement. With the economy in distress, a political change in Argentina seems likely to question all the policies of the Kirchner regime, including the extreme protectionism and legal insecurity that has led to the withdrawal of major investments from Brazil and Spain. If Brazil turns the corner toward a free trade agreement with the European Union, it will not be easy for Argentina and Venezuela to mount a veto in Mercosur.

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