Uruguay, a small country that rarely makes headlines even in its own region, irritated its partners in the Mercosur trade bloc when it announced in July, ahead of the group’s semi-annual summit, that it had completed a joint feasibility study with China. of a bilateral free trade agreement and that both countries will begin negotiations. Given that Uruguay’s population of 3.5 million is only a quarter of 1 percent of China’s, such a deal, if reached, would hardly shake the foundations of world trade.
But it raises dilemmas for Mercosur, the Southern Common Market with four active members (Brazil, Argentina, Uruguay and Paraguay), as its rules require all members to agree to each sign a trade deal with a third country. . Such consent is not likely to be imminent; however, Uruguay still wants to move forward with negotiations, hopefully together with its Mercosur partners, but in any case, it is “not willing to remain silent.” But however this diplomatic game plays out, the issue highlights the frustration that Mercosur has been since it began with great fanfare over thirty years ago, and the obstacles to serious regional integration within Latin America.
In happier times
Mercosur has its origins in an optimistic era that seems so distant now. Growth through increased international trade was the watchword of the “Washington Consensus” of international financial institutions. Regional trade groups were beginning to coalesce. The United States had entered into a free trade agreement with Canada and was negotiating with Mexico, while other Latin American countries sought similar relations with the world’s largest economy. At the same time, clusters in Africa and Asia were also emerging.
The word often heard was “open regionalism” – groups of countries would engage in deep integration among themselves and jointly negotiate agreements with other countries. A particularly attractive model was the European Community, which had begun as a relatively loose, trade-oriented grouping and was going to add new countries after the collapse of the Soviet Union and would further consolidate within as the European Union.
The prospect of forming a regional bloc had a particular appeal for the countries that would join Mercosur. All had suffered during the “lost decade” of the 1980s, when they were mired in the debt crisis. They also saw a political dimension to regional integration, having returned to democratic governance after long periods under military regimes that were both harshly repressive and incapable of ensuring sustainable prosperity. They also sought to overcome their history of mutual suspicion and friction.
Political and economic elites in Brazil and Argentina, with Uruguay and Paraguay far behind them, saw Europe as a potential model, as demonstrated by its remarkable economic and political progress after the horrors of World War II. A series of summits paved the way for the creation of Mercosur, which was officially announced in 1991. Mercosur initially showed positive results as shown by a significant increase during the 1990s in intra-regional trade. However, the initial momentum began to fade in the 2000s and currently, less than 10 percent of member states’ trade is within the bloc, compared to 60 percent within the European Union.
Are you flawed from the start?
Some of the causes of Mercosur’s collapse were beyond the control of the member countries. China’s rise as an exporter of a full range of products destroyed domestic sectors such as Brazil’s once strong shoe manufacturing industry. But many of Mercosur’s problems were internal and represented a failure to complete both the internal free trade area and the common external tariff, as its European model had been able to do. Mercosur’s efforts to reduce tariffs were riddled with exceptions and lengthy phases, which continue today.
But these failures were themselves consequences of larger systemic issues within the bloc dating back to its origins. The European Community began as a relatively small, successful agreement on trade in coal and steel, which then became a wider bloc consisting of three relatively large countries – Germany, France and Italy – and three more small but advanced – Belgium, Netherlands. , and Luxembourg. Thus, there has always been a fairly wide distribution of power among members.
In contrast, Mercosur consisted of one large member state, Brazil, along with another medium-sized one, Argentina, and two extremely small countries, Uruguay and Paraguay, which had no choice but to join given the dependency their from the largest members for trade. , investments, energy, tourism, etc. And while Argentina’s relatively more developed status partially compensated for its smaller economy compared to Brazil, its long-term economic decline has left it less and less able to serve as a counterweight.
These asymmetries are exacerbated by the lack of effective institutions across Mercosur, particularly in dispute resolution, where there is nothing like the European judicial system, or the dispute settlement panels that play a role in the US-Mexico-Canada Agreement (formerly NAFTA). . . While there is a small Mercosur secretariat based in Montevideo, it has at best a coordinating function rather than real power. While there are entities throughout Mercosur, such as an arbitration court that is available for use by businesses, there is no state-to-state dispute resolution mechanism.
As a result, usually when one of the two largest members (Paraguay and Uruguay often have to take what they get) finds one of its domestic industries under pressure, the default position is to first act unilaterally and then negotiate the issue later, at a ministerial conference or eventually at Mercosur’s semi-annual presidential summits. This ad hoc approach inevitably causes uncertainty and limits the benefits that the common market offers.
And, of course, the tendency for trade disputes within Mercosur is exacerbated by the unstable macroeconomic situation of its members, with varying deficits and inflation rates, and accompanying devaluations, meaning that at any moment one industry of one country or another is requires relief from imports. Of course, macroeconomic convergence has also been a challenge for Europe, as shown by the crises in some of its member states, notably Greece and Portugal, despite agreed deficit targets and a common currency.
But Mercosur countries have varying levels of economic health, as indicated by their inflation rates – with Argentina the most outlier as it currently spirals towards an annual rate of 90 percent, compared to 12 percent in Brazil, 11 percent in Paraguay and 9 percent in Uruguay. Periodically, the idea of a Mercosur common currency has been floated, most recently by Brazilian President Jair Bolsonaro, but it has never been more than a politician’s talking point.
Politics Trumps Economics
Although Mercosur’s progress in trade integration slowed, its political ambitions grew dramatically, fueled by Brazil, which saw it as a means of organizing South America under its leadership. This included successfully opposing an effort by the United States to create a Free Trade Area of the Americas by expanding its network of agreements with countries in North America, Central America, and the Andes to the Southern Cone and integrating them in a single network.
Venezuela and Bolivia were invited to join Mercosur. These invitations had an ideological and geopolitical element as leftist governments in Brazil and Argentina saw common ground with Hugo Chávez and Evo Morales, despite their authoritarianism. However, these politically motivated expansion efforts did not progress. As Venezuela, which never made an effort to meet the economic commitments of Mercosur membership, sank further into dictatorship and economic chaos, it was suspended from Mercosur in 2016, while Bolivia’s entry into the bloc is still pending.
Uruguay: “We are different!”
Uruguay’s attempt to escape the cage of its disappointing Mercosur membership without simply leaving it has been going on for several years. The take-it-or-leave-it approach that Brazil and Argentina have often shown to the bloc’s smaller members has always been grating. And Uruguay’s relations with its neighbors on other issues, especially with Argentina on issues such as the pollution of the Rio de la Plata basin, are the cause of periodic friction.
But more broadly, Uruguayans feel with considerable fairness that they have done better on both the political and economic fronts than their neighbors. Since the return to democracy, governments of both the Left and the Right have pursued moderate courses in both content and style. A recent example: Argentine media shockingly reported that Uruguayan President Luis Lacalle, who is seeking to pass a pension reform bill, actually went to the headquarters of the main labor confederation to explain his position – a gesture completely unthinkable in Argentina’s frenetic political culture. .
But perhaps more importantly, Uruguay has managed its economy better than Brazil or Argentina, even as it has benefited from the strength of its agriculture-led export sector. Uruguayan beef and wool are exported to both Europe and Asia, with China alone accounting for 30 percent of its total exports now). Also, new industries such as wine and pulp and paper have been developed. Uruguayan political and business leaders are interested in pursuing free trade agreements to close export markets and are frustrated by Brazilian and Argentine reluctance to move forward.
