Latin America Already Has the Trade Deal It Needs

If it weren't neglected, Mercosur could lift the region.

Their bond still matters.

Photographer: Juan Mabromata/AFP/Getty Images

Brazilian President Dilma Rousseff is having a lousy year. If economic recession, street protests and an insurgent Congress weren't headache enough, there's also the deadbeat South American trade bloc to carry.

After a brilliant start, when trade soared five-fold between founding members Argentina, Brazil, Paraguay and Uruguay through the 1990s, Mercosur has fallen back.

Not even oil-rich Venezuela, inducted with fanfare in 2012, has helped. Overall trade among the five-member block has stagnated: Total exports within Mercosur reached $52 billion in 2014, about the same as in 2010.

Bilateral commerce between Argentina and Brazil, which accounts for over 80 percent of the bloc's internal business, dropped 21 percent last year.

Economic slowdown, China's rise and a new wave of protectionism -- Mercosur's crisis has many makers, but this also is a story of a debacle foretold.

When it kicked off in 1991, Mercosur, the abbreviated name for the Mercado Comun del Sur, or the "South American Common Market," looked like a winner. Latin America had cashiered its dictators and begun to open its borders. Free trade winds were blowing, and the region's emerging democracies wanted to join forces to cash in on the global bonanza.

The stakes for Brazil were especially high. "One day, Brazil would enter the club of first-world countries, and Mercosur was embraced as the way to integrate its markets globally," Luiz Augusto Castro Neves, a former Brazilian diplomat, told me.

By the next decade, the wind had turned. The commodities wave was rolling, and Latin America rode the swell, sopping up export revenues without having to swallow the radical market reforms that "neoliberals" were pushing on developing nations.

Out went the Washington Consensus and its project for the Free Trade Area of the Americas, which a group of Latin nations led by Brazil had buried in a historic summit in 2005. Up went the banner of Latin solidarity and its alphabet soup -- Celac, Unasur, Alba -- of regional compacts.

A renewed Mercosur would lead the way. On paper, the trade bloc is a juggernaut. If it were a country, it would have the world's fifth-largest economy and a population of 295 million.

Solidarity made a good bumper sticker, but it didn't translate easily into good trade policy. As the raw materials boom subsided, markets retracted and protectionism returned. Governments raised non-tariff barriers and imposed import quotas against their neighbors.

The customs union announced in 1994 ought to have been completed by 2006. With luck, said Lia Valls, trade expert at the Getulio Vargas Foundation in Rio de Janeiro, "the agreement will be in place by 2018 or 2019."  

Meantime, just about anything goes. Some trade analysts estimate that up to half of the goods traded between Mercosur partners do not benefit from the reduced common tariff. "Uruguay does what it wants. Argentina doesn't want free trade, and Brazil doesn't lead," Mauro LaViola, head of Brazil's Export Association, told me.

While Mercosur partners quarrel, the Pacific Alliance, a new trade pact between Peru, Colombia, Chile and Mexico, has prospered. Last year Pacific Alliance nations grew by 2.8 percent, even as the Mercosur bloc shrank 0.5 percent.

Some critics have hinted that the bloc's time already has passed. "Uruguay must open up. Mercosur has failed," former Uruguayan foreign minister Ignacio de Posadas said in a recent interview with a radio station in Montevideo.

Uruguayans are especially upset over the rule that bars any member country from negotiating outside trade agreements without the approval of the entire bloc.

But not everyone has given up. Corralled at home, Rousseff is talking up regional trade with Mexico and Uruguay. She is slated for a state visit to the U.S. in September. Recently she spoke of reviving a languishing deal between Mercosur and the European Union, which could reap both blocs 9 billion euros in annual trade -- and remind the member states that Mercosur matters.

For that, Rousseff will have to get the insular Argentines on board. But for the besieged Brazilian leader who's facing a public insurrection at home, that might be the easy part.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Mac Margolis at mmargolis14@bloomberg.net

    To contact the editor on this story:
    Philip Gray at philipgray@bloomberg.net

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