By Thomaz Favaro
SÃO PAULO – Members of South America’s largest trading bloc held its 48th summit earlier this month in Brasília. The meeting marked the long-due incorporation of Bolivia as the bloc’s sixth permanent member, together with Brazil, Argentina, Paraguay, Uruguay and Venezuela. But the summit may be more newsworthy for the promising developments over Mercosur’s long-stalled trade initiatives. After two decades of lethargy, Mercosur and the EU appear ready to exchange offers on tariffs before the end of the year. In addition, Uruguay, Paraguay and Brazil have also joined forces to find a legal solution to overcome Mercosur’s Resolution 32/2000, a longtime source of gridlock which requires consensus from all members in trade issues, including in bilateral agreements. While the Rousseff administration in Brazil was initially reluctant to leave Argentina out of this pact, the deterioration of the Brazilian economy over the past twelve months has convinced government officials of the urgent need to improve access to global markets.
Greater flexibility in trade agreements would have a remarkably positive impact on the business environment in member countries, potentially easing trade restrictions currently in place. While Mercosur played an important role in integrating the economies of Argentina, Uruguay, Paraguay and Brazil during the 1990s, trade within the bloc has stagnated over recent years. Even the entry of Venezuela in 2013 did little to improve its prospects. Last year, intra-bloc trade declined 13.1%. Bilateral commerce between the bloc’s two main trading partners, Argentina and Brazil, has been severely affected by non-tariff barriers, and declined 21% in 2014. Disagreements between member countries have left Mercosur lagging behind in trade liberalization – since its inception in 1991, it has only signed four trade deals, with Peru, Egypt, Israel and the Palestinian Authority.
Although much-welcomed, the change in direction is unlikely to bear significant results in the short term. Years of protectionism, particularly from Argentina and Brazil, have fostered a myriad of restrictions even in intra-bloc trade. Reversing these will take time. Negotiations with the EU remain at remarkably early stages, and across the Atlantic, plenty of questions linger over the real benefits of a partnership with the South American nations.
Furthermore, these changes are not particularly consensual. Although the agricultural sector in Mercosur is eager to improve access to foreign markets, large swathes of the business community in Brazil and Argentina – particularly in the manufacturing sector – remain inward-looking and unable to compete in international markets. Their support for trade liberalization is therefore lukewarm at best. Mercosur countries are conspicuously absent from the Information Technology Agreement currently being negotiated at the WTO, which aims to eliminate tariffs on hundreds of tech products.
Lack of supra-national institutions will continue to make economic integration subject to political winds – which, as recent history suggests, often blow against trade liberalization. The Mercosur Parliament, established in 2009, is still far from filling such gap: it held only two official meetings last year. Countries have until 2020 to hold direct elections for their representatives in the regional parliament.
This month’s meeting may have stirred some optimism, but such interpretation still relies more on new ideas and old promises as opposed to concrete changes. Mistrust over the benefits of trade liberalization remain deep-rooted and are likely to surface as new agreements are put on the table. Recent trends suggest the trade bloc’s return to international relevance remains far off.
Prospects of a break-up remain equally remote, at least for now; although the bloc has undoubtedly moved away from its initial raison d'être – trade integration – over the past decade its agenda has broadened to include integration of labor markets, education and sustainable development. Political support for Mercosur remains strong among member countries, though strongly influenced by ideological affinities between most politicians currently in power. But the ‘one step forward, two steps back’ in trade policy is proving to be an opportunity cost, as Mercosur countries lose out from integration efforts taking place elsewhere. In the long run, this could ultimately shift the balance in favor of those who feel they can do better outside.
Thomaz Favaro is a senior analyst at Control Risks, the global risk consultancy. For more analysis, sign up for a free trial of our risk monitoring services.
