Mercosur: South America’s Fractious Trade Bloc
not yet received authorization from Brazil’s Congress.
Introduction
Mercosur, or the Southern Common Market, is an
economic and political bloc originally comprising
Argentina, Brazil, Paraguay, and Uruguay. Created
during a period when longtime rivals Argentina and
Brazil were seeking to improve relations, the bloc
saw some early successes, including a tenfold
increase in trade within the group in the 1990s.
In recent years, however, Mercosur has struggled to
open to other markets. The implementation of a
landmark draft trade deal it signed with the
European Union (EU) in 2019 has been stalled over
environmental concerns and European opposition,
but hopes have been revived after the election of
Brazil’s President Luiz Inácio Lula da Silva, known as
Lula. Meanwhile, other challenges persist, including
China’s controversial influence in Latin America,
concerns over the bloc’s commitment to democracy,
and the ongoing economic repercussions of the
COVID-19 pandemic.
Which countries are in Mercosur?
Argentina, Brazil, Paraguay, and Uruguay—
Mercosur’s founding countries—are full members.
Venezuela joined as a full member in 2012, but was
suspended indefinitely in late 2016 for failing to
comply with the bloc’s democratic principles.
In 2021, the founding countries had a combined
gross domestic product (GDP) of roughly $2.2 trillion,
according to World Bank data, making Mercosur one
of the world’s largest economic blocs. In comparison,
Latin America’s second-largest trade group, the
Pacific Alliance, had a slightly lower combined GDP
of about $2.1 trillion. While the onset of the COVID-
19 pandemic inflicted considerable economic
damage on the bloc’s members, the group
experienced cumulative economic growth of nearly 6
percent in 2021.
Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and
Suriname are associate members of Mercosur. They
receive tariff reductions when trading with the full
members but do not enjoy full voting rights or free
access to members’ markets. Bolivia was invited to
join as a full member in 2012, but its accession has
Why was Mercosur created?
Mercosur was created in 1991 when Argentina,
Brazil, Paraguay, and Uruguay signed the Treaty of
Asunción, an accord calling for the “free movement
of goods, services, and factors of production
between countries.” The four countries agreed to
eliminate customs duties, implement a common
external tariff (CET) of 35 percent on certain imports
from outside the bloc, and adopt a common trade
policy toward outside countries and blocs. The
charter members hoped to form a common market,
similar to that of the EU, to increase business and
investment opportunities for regional industries and
encourage local development. Some members of the
bloc have even proposed adopting a common
currency to reduce dependence on the U.S. dollar,
but some skeptics say member countries’ economies
are too different to share a single monetary policy.
“Mercosur had grand ambitions,” says CFR’s Shannon
K. O’Neil. “It was going to be a customs union with a
political side.” The Mercosur stamp is emblazoned on
member countries’ passports and license plates
display the Mercosur symbol. Residents of the bloc
are authorized to live and work anywhere within it.
In 1994, the group signed the Protocol of Ouro Preto,
formalizing its status as a customs union.
Mercosur was created in large part to cement a
rapprochement between Argentina and Brazil,
whose relationship had long been defined by rivalry.
Together, the two countries account for nearly 95
percent of the bloc’s GDP and 96 percent of its
population. Some critics say Argentina and Brazil
wanted Mercosur simply as a trade shield. The bloc
often “is less about opening up but actually about
protecting Brazilian and Argentine industries from
global competition,” says Oliver Stuenkel, an
associate professor at the Getulio Vargas Foundation
in São Paulo.
How does Mercosur work?
The bloc’s highest decision-making body, the
Common Market Council, provides a high-level
forum for coordinating foreign and economic policy.
The group consists of the foreign and economic
ministers of each member state, or their equivalent,
and decisions are made by consensus. The group’s
presidency rotates every six months among its full
members, following alphabetical order; Argentina
currently occupies the position. Other bodies include
the Common Market Group, which coordinates
macroeconomic policies; a trade commission; a
parliament, known as Parlasur, which serves an
advisory role; and the Structural Convergence Fund
(FOCEM), which coordinates regional infrastructure
projects.
FOCEM projects, such as building highways and
bridges and developing waterways, are funded by
member-country contributions [PDF] determined by
a formula that accounts for each country’s GDP.
Brazil, with a GDP of $1.6 trillion, contributes 60
percent, Argentina 30 percent, and Paraguay and
Uruguay 5 percent each. More than $1 billion in
nonrefundable loans has been disbursed since the
fund was created in 2004.
Has Mercosur spurred economic development?
Internal trade has grown rapidly, jumping from $4
billion in 1990 to more than $41 billion by 2010. It
has since fluctuated, dropping to a low of $29 billion
in 2020 amid the COVID-19 pandemic before rising
to nearly $41 billion in 2021, a 42 percent increase.
Over the last decade, intra-Mercosur trade has
averaged almost $39 billion. In October 2021,
Argentina and Brazil agreed to a 10 percent
reduction in the bloc’s tariff to help bolster further
economic growth among member countries. The
following September, the bloc modified the tariff to
reduce import duties for some products by an
additional 10 percent.
However, trade relations with the rest of the world
have been uneven. In its first decade, Mercosur
inked economic cooperation agreements with
Bolivia, Chile, Israel, and Peru, and in 2004, it signed
a preferential trade agreement with India. But bigger
deals have proved elusive. While its most recent free
trade agreement (FTA), with Egypt, took effect in
2017, negotiations with Canada and South Korea
remain underway, and a deal with the EU has hit
roadblocks. The bloc is also reportedly considering
an FTA with Singapore, which could open up access
to the Asia-Pacific region.
There are currently no trade deals between the
United States and any Mercosur countries or the bloc
itself, and relations have at times been strained. In
1994, U.S. President Bill Clinton proposed the Free
Trade Area of the Americas (FTAA), which would
have eliminated or reduced trade barriers among the
countries in the Western Hemisphere, excluding
Cuba. The FTAA was to be completed by 2005, but by
2004, negotiations had stalled as several Latin
American nations, including Mercosur members
Argentina and Brazil, opposed the deal [PDF], and it
was never finalized. In 2019, U.S. President Donald
Trump imposed steel and aluminum tariffs on
Argentina and Brazil, though he signed a limited
trade deal with Brazil the following year. Brazilian
President Jair Bolsonaro later expressed a desire for
a broad FTA with the United States following U.S.
President Joe Biden’s inauguration, but some experts
say such an agreement is unlikely to happen under
Lula.
Mercosur reached a comprehensive trade deal with
the EU in 2019 after twenty years of on-and-off
negotiations. The deal would eliminate tariffs on
roughly 90 percent of Mercosur’s exports to the EU
and allow companies in both blocs to bid for
government contracts. But its ratification has been
thrown into doubt by opposition from several EU
members, who fear that wood exported from Brazil
to the EU could be a result of illegal logging in the
Amazon Rainforest. European farmers have also
decried a predicted influx of cheap Argentinian and
Brazilian beef exports. However, Lula’s vows to
combat deforestation of Brazil’s Amazon Rainforest
have spurred some optimism, and European
Commission Vice President Frans Timmermans has
said the EU hopes to sign the deal in 2023.
What other challenges is Mercosur facing?
In recent years, Mercosur countries have
experienced political and economic turmoil.
Corruption probes launched in Brazil in 2014 have
spread, implicating hundreds of the region’s political
and business elites. At the same time, falling
commodity prices and what critics describe as
economic mismanagement have contributed to
recessions in the region. In 2020, Latin America’s
GDP fell by 7 percent, the worst of any region in the
world. Return to growth has been slow, partially due
to rising global interest rates.

Meanwhile, Mercosur continues to face internal

division. Like his predecessor Bolsonaro, Lula has
expressed a desire to “modernize” the bloc,
including by allowing for bilateral deals with third-
party countries, which Argentine President Alberto
Fernández has previously opposed. Uruguay’s
ongoing efforts to ink an FTA with China have
likewise created tension. Meanwhile, experts say the
bloc’s protectionist policies.

and reluctance toward creating value-added supply

chains or regional production hubs are stifling
integration. Managing the trade relationship with a
rising China will also continue to test the bloc’s unity.
While there is no FTA between China and Mercosur,
China has said it intends to increase bilateral trade
with South America by $500 billion by 2025, and Lula
has said he supports eventually pursuing such a deal.
Additionally, Argentina and Uruguay are participants
in China’s Belt and Road Initiative, the world’s largest
infrastructure program.

Experts broadly agree, however, that Mercosur’s

future will hinge on decisions made in Buenos Aires
and Brasília. “Brazil and Argentina are two of each
other’s most important trading partners. But both
countries—especially because they’re going through
a difficult economic time—would benefit from
opening their markets more generally,” says O’Neil.
“The challenge is whether they can do it together.”

Reference:

https://www.cfr.org/backgrounder/mercosur-south-
americas-fractious-trade-bloc