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Mercosur: Evolution and Implications for U.S. Trade Policy

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Abstract:

Mercosur is the Common Market of the South established by Brazil, Argentina, Uruguay, and Paraguay in 1991 to improve political and economic cooperation in the region following a lengthy period of military rule and mutual distrust. On July 2, 2006, Venezuela acceded to the pact as its first new full member, making Mercosur the undisputed economic counterweight to U.S. trade policy in the region, but raising questions about how it may shift regional political and trade dynamics. Collectively, the Mercosur countries have a diversified trade relationship with the world. The United States is the largest trade partner, the European Union (EU) a close second, with each claiming about 25% of total Mercosur trade. By contrast, the four Mercosur countries together account for only 2% of total U.S. trade. Including U.S. imports of Venezuelan oil, the "Mercosur 5" constitute 3.5% of total U.S. trade.

The Mercosur pact calls for an incremental path to a common market, but after 15 years only a limited customs union has been achieved. From the outset, Mercosur struggled to reconcile a basic inconsistency in its goals for partial economic union: how to achieve trade integration, while also ensuring that the benefits would be balanced among members and that each country would retain some control over its trade, production, and consumption structure. This delicate balance faced serious structural and policy asymmetries that became clear when Brazil and Argentina experienced financial crises and deep recessions. These economic setbacks disrupted trade flows among members, causing friction, the adoption of new bilateral safeguards, and a retreat from the commitment to deeper integration.

For now, Mercosur has turned to expanding rather than deepening the agreement. Many South American countries have been added as "associate members" and Mercosur has reached out for other South-South arrangements in Africa and Asia. These are limited agreements and unlikely paths to continental economic integration. Internal conflicts have highlighted Mercosur's institutional weaknesses and slowed the integration process. Uruguay has diversified its trade more toward the United States, and is showing signs of reconsidering the benefits of an "exclusive" Mercosur trade arrangement. Venezuela's accession to the pact adds a decidedly anti-American factor and may complicate both Mercosur's internal balance and regional trade relationships.

It appears Mercosur has opted for political cohesion over deeper economic integration. Mercosur, especially with Venezuela, will likely continue to resist movement toward a Free Trade Area of the Americas (FTAA), with Brazil in particular viewing the World Trade Organization (WTO) as the preferred alternative for achieving its trade policy goals. Given this impasse, it seems that the United States and Mercosur may continue to expand their influence through smaller trade agreements, presenting the possibility of two very different overlapping trading systems emerging in the Western Hemisphere centered around the U.S. and Brazilian economies. Few, if any, view this as an economically and administratively optimal alternative, presenting a formidable challenge to the future direction of U.S. trade policy in Latin America.

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