Last updated: February 20, 2019
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I. Intriduction

Regional integration, most notably represented in the European Union, has become a pervasive phenomenon. One of the regional economic blocs mushrooming in the previous decade has become Mercosul. It is one of the most important emerging markets in the world, offering fantastic possibilities for trade and investment. This organization represents an important stage of economic integration of Latin America. Mercosul is composed of four countries: Argentina, Brazil, Paraguay and Uruguay. It represents a total population of approximately 200 million individuals, living in an area covering more than 12 million square kilometers. It is considered to be the third-largest economic bloc of the world, lags behind only after FTAA and the EU.

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However, there are other countries that are considering the possibility of joining Mercosul, such countries as Bolivia, Colombia, Ecuador, Peru and Venezuela. Indeed, Chile and Bolivia have made progress on talks leading to an association with Mercosul. Besides this, Mercosul is carrying on trade negotiations with the European Union (EU).

II. History of the bloc

The Mercosur was created in March 1991 with the signing of the Treaty of Asuncion that sought “to promote intra-regional trade, to modernize the local economy and to promote the competitiveness of the region in the world economy”(Averbug, Andre). In fact, one of the hidden goals of Mercosul was to resist the increasing strength of US-dominated NAFTA and to offer a South American alternative. Although the 1990s were a tumultuous period for the South American economies, with recessions following booms and debt crises, Mercosul signified substantial progress in terms of cooperation and integration.

It was also important to create a common market between the participating countries on the basis of various forms of economic co-operation that had been taking place between Argentina and Brazil since 1986. The Treaty of Ouro Preto (1994) added much to the institutional structure of Mercosul. It initiated a new phase in the relationship between the countries of the region, when they decided to start the implementation of an idea of a common market. A transition phase was to begin in 1995 and to last until 2006 in odrer to constitute the common market.

In 1996, association agreements were signed with Chile and Bolivia establishing free trade areas with these countries on the basis of a “4 + 1” formula. During this period, Mercosur created a common mechanism for political consultations. It implied that the four countries plus Bolivia and Chile, all participate as full members of the so-called “Political Mercosul”.

The stated goals of the block were to eliminate trade tariffs on all internal trade operations, to coordinate economic policies, to fix common tariffs for external trade and harmonize legislation in related areas. Free flaw of people and capital was also included as one of the goals. Because of liberalisation efforts, by 1995 tariffs on most goods were either eliminated or significantly reduced. However, some restrictions that sought to protect domestic producers still applied resulting in lists of tariff-protected products “considered vulnerable to external competition”( Averbug 1998,3)

. The existence of these exceptions offered battleground for fights over tariffs on specific goods. 1995 was the year of transition to a partial customs union with common tariffs covering about 85% of Mercosul’s exports (Averbug 1998,3).

The efforts of the bloc to spearhead intra-regional trade have been successful. This is evidenced by the rise of intra-bloc exports as a percentage of the member states’ total exports that went up from 11.1% in 1991 to 24.7% in 1997 (Averbug 1998,3). A notable fact is that Brazil absorbs 90% of the Argentinean car exports, which has led to the appearance of the term “Brazilian dependency” (Averbug 1998, 3).

The path of the union has not been smooth ever since and was interrupted by “unilateral tariff adjustments in times of economic difficulty” (Mecham, Michael , 2005).

As for the history of the relationship between Mercosul and EU, it is necessary to say that the European Union has always favoured a strengthening of the process of regional integration in Mercosul and therefore, supported the Mercosul initiative from its very conception in 1991. The European Commission and the EU have supported Mercosur from the very beginning. In 1992 less than a year after its creation, the European Commission signed an Interinstitutional Agreement with Mercosur to provide technical and institutional support to the fledging structures of Mercosur.

III. Mercosul today

The major difficulties arrived in 2002 that was labelled at the time “Mercosul’s most critical year since its formation” (Mecham, 2002). As part of the crisis, Argentina defaulted on its “private debt of $146 billion – the largest debt default in history” (Coser, 2005). The Argentinean President Kirchner rejected the IMF restructuring plans and insisted that the Argentine will act on its own to resist the crisis. The collapse of the Argentinean economy was a decisive test for the integration project many expected to collapse throughout the crisis. Argentina blamed Brazil for the devaluation of their currency, which supposedly triggered overvaluation of the Argentinean currency and subsequent crisis. The US that could have been expected to help Argentina, refrained from action, with hidden desire to weaken to bloc behind the indifference. The progress on Mercosul can hamper the creation of Free Trade Agreement of the Americas (FTAA), as the union of the Latin American nations is to be an alternative to the effort to unite all of the Americas under the aegis of the US. However, the bloc withstood the crisis and even has accelerated its intra-regional trade since.

Although talks about the Mercosul crisis have intensified of late, nevertheless, the bloc’s executives continue to emanate optimism about the prospects of the bloc. Mercosul Secretariat director, Brazilian Reginaldo Braga Arcuri, reports, “Mercosul is solid, has advanced, and is taking advantage of this moment of macroeconomic stabilization and of advances in the contacts among private actors” (Bocchini, Bruno, 2005). To substantiate his optimism, he gives numbers that support his claim. Thus, the total exports of the four full members totalled $135.6 billion in 2004, a 13-year high and a 27% increase as compared to 2003 when exports were roughly $106 billion. The trade volumes between the four members reached $17 billion. Out of 2004 results, 71% was supplied by Mercosul’s largest member Brazil” (Bocchini, 2005). Arcuri is confident that the rise in exports was spurred by currency devaluation, liberalisation of the exchange rate and more rigorous fiscal mechanisms. Besides, the bloc’s firms have been able to benefit from programs supporting exports and to seize new markets for their products, in particular with joint promotions. However, part of this increase was fuelled by the general trends in the global economy, including the ongoing recovery in the US, a slight pickup in the Japanese purchase levels and the continuing economic boom in China.

The South American bloc continues with its own effort for political integration to support its economic endeavours. Thus, in December 2004 the combination with the CAN (Andean Community of Nations) led to the formation of the South American Community of Nations, close in structure to the European Union. The EU, by the way, is Mercosul’s most important trading partner and provides a potential ally that can serve as an alternative to the US dominance in the area. The guidelines for political cooperation were established in “Buenos Aires Consensus” reminiscent of the “Washington Consensus” signed by the Argentinean and Brazilian presidents that referred to the threat of “unprecedented concentration of wealth” caused by globalization” (Coser, 2005). As an option to counteract this inequality, they cited the strategic regional cooperation, thus underscoring their commitment to Mercosul that offers a different channel for cooperation. So far, the greatest advantage of Mercosul, apart from promotion of free trade, has been the influence its leaders were able to gain in international negotiations by presenting themselves as a coalition.

The problem for Mercosul unity has been the fact that cooperation often fails to exclude trade conflicts it was seeking to eliminate. A recent example is the trade war between Brazil and Argentina concerning the import of home appliances from Brazil to Argentina. The trade war was started with the imposition of an extra 21.5% tariff on Brazilian television sets in July 2004 in addition to the restrictions on imports of “white line” goods. The measures were a response to a stunning rise in Brazilian appliance imports to its neighbour in 2004 when “exports of washing machines climbed 176 percent, refrigerators 126 percent and stoves 121 percent” compared to the previous year (Pereiro, Leisio, 2005). The decision of the Argentinean government was motivated by the desire to resist a flood of goods from the neighbouring nation and was supported by the Argentine Industrial Union (UIA). The unilateral imposition of tariffs is largely out of consonance with Mercosul’s stated goal of promoting free flow of goods between its members and harmonizing the tariffs. The occurrence cast doubts over the future of the union that is unable to prevent its two major members from a trade skirmish.

The disagreements inside the bloc has given rise to talks of a crisis shown in the inclination of the member states to impose “non-tariff restrictions to slow down imports from their commercial partners” and numerous trade arguments the resolution of which demonstrated the weakness of negotiating mechanisms for Mercosul (Foxley, Alejandro, 2005). The inability of the member nations to adjust their economies to the outward capital flows that can flee from their economies in one swift movement, leaving the South American nations vulnerable to fluctuations in the global environment have been cited as one of the reasons for the crisis. Another is the failure to achieve harmonization of economic policies necessary for a sustainable cooperation project. Thus, the disparity between the Brazilian floating rate and the fixed Argentinean currency was largely responsible for the 2002 crisis in Argentina. Forced to withstand a massive departure of capitals, the nation was generating huge fiscal and trade deficits. To ward off the rise in commercial deficit, it responded by destroying common trade agreements of Mercosul and imposing restrictions on imports.

Nevertheless, despite the crisis and numerous problems we may talk about great progress in relationship with European Union. However, the impact of the US is undisputable Mercosul needs to gain new foreign partners. Among them is EU. Co-operation and technical assistance between the EU and Mercosur (as a common market) was already set up on the basis of the Interinstitutional Agreement (1992), but was further strengthened through the Framework Co-operation Agreement (1995). On 25 September 2002, the Commission adopted the Mercosur Regional Strategy Paper (€ 48), which covers the assistance for the completion of the Mercosur Internal Market, institution building and civil society.

IV. Conclusion

The strength of the bloc depends on its ability to attract new members. In this realm, Mercosul has not been doing spectacularly well of late.  Although Mercosul has potential additions from the associate members, their free trade agreements leave an opportunity for getting out at any time. Besides, the alternative project of the Central American Free Trade Agreement encompassing the U.S., El Salvador, Honduras, Guatemala, Nicaragua, and Costa Rica, plus the Dominican Republic has now taken precedence before Mercosul for the Brazilian leadership” (Coser, 2005).

The future of Mercosul will depend on several key factors. First, the fate of the global economy will determine where the world is heading and Mercosul nations as well. A positive trend will probably promote cooperation while a global recession will depress exports and promote the desire of each nation to survive on its own. Besides, the influence of other trade blocs and major international players such as the US will determine the prospects of expansion. Thus, Mercosul lost claim to encompass Chile when this state signed a free trade agreement with the US. The US foreign policy and diplomatic skills will either attract new allies among South American nations or repel them, in which case they will resort to Mercosul as an alternative centre of influence. Most importantly, the relationships between Mercosul members will matter. Thus, Argentina put most of the blame for its 2002 crisis on Brazil for its deregulation. The latest 2004 trade skirmish between Brazil and Argentina can be a hurdle for further integration. To make the bloc economically viable, member nations have to possess politically aligned governments that will promote integration even if they differ on certain aspects of their political agendas. Finally, economic trends and outlook for the nations included in the bloc are of great importance. Brazil is regarded as one of the most promising developing nations and enters the G3 along with South Africa and India, a club of emerging powers trying to pose themselves as counterweight to the G8 group of wealthy and powerful countries.

The realistic assessment of Mercosul’s prospects suggests that the bloc will survive its current problems. First, the need to counterbalance American influence will not go away in the near future. The provisions of the underlying document for the FTAA, the General Agreement on Trade in Services (GATS) “that would push for the privatization of essential services such as education, health care, and water” (Coser, 2005) are unacceptable for Latin American nations where a great part of the population live in dire poverty. Therefore, they should seek cooperation among themselves since member states are equal in terms of economic development. For Brazil, in particular, Mercosul integration would offer a way to promote its role as the regional leader without ceding its role to the US. Besides, evidence pointing to the rise of intra-regional trade in Mercosul suggests that the union has favourable economic consequences despite its shortcomings. Further efforts to do away with tariffs will contribute to increase in the overall competitiveness of the bloc on the international arena, further supporting the claim that Mercosul is a viable endeavour.

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Bibliography

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