Mercosur: The Need for Reforms

By Luis Ferreira Alvarez

The Mercusur Building, Montevideo, Uruguay.

The Mercusur Building, Montevideo, Uruguay. (Photo by Jimmy Baikovicius)

As Brazil and Argentina continue in recession, the Southern Common Market (Mercosur/Mercosul) provides them with a regional mechanism to restore economic growth. However, Mercosur has abandoned its free trade vision, instead becoming a protectionist organization. Reforming Mercosur would provide momentum for economic recovery. However, two fundamental changes must occur: Mercosur’s common policy of trade negotiations needs to be eliminated, and the organization’s Secretariat needs more independence. Changing these two components would allow Mercosur to return to its original mission of promoting free trade and create a stronger body, capable of finding consensus within the member states.

Mercosur — a free trade and custom union formed in 1991 between Argentina, Brazil, Paraguay, and Uruguay (and later joined by Venezuela) — promotes the free movement of goods and people across the zone. Mercosur’s members have benefited from having integrated markets that expand their commerce. Argentina’s 2013 exports to Mercosur represented 26 percent of the country’s total exports, compared to 2.2 percent in 1991, while Argentine exports to the rest of Latin America (through the Latin American Integration Association, or Aladi) came a close second, representing 15 percent in 2013 (Fig 1). These figures show that Argentina’s trade is highly integrated with that of its neighbors, and closer cooperation between Mercosur and the rest of Latin America (especially the Pacific Alliance), is critical for Buenos Aires’ commerce.

Brazilian exports to Mercosur represented 11 percent of total exports, from 10 percent in 1991. When added with the rest of Latin America, Brazilian exports to the region reach 21 percent. However, Brazilian exports are more diverse than Argentina’s, with the European Union and China representing the largest shares of its exports, 20 percent and 19 percent respectively (Fig 2). Thus, while Brazil exports a tremendous amount to its Latin American neighbors, its largest markets are outside the region.

Figure 1: Argentine Exports 2009 to 2013 (Percentage of Participation)

Figure 1: Argentine Exports 2009 to 2013 (Percentage of Participation)

Source: National Institute of Statistics and Census (INDEC)

 Figure 2: Brazilian Exports 2009 to 2013 (Percentage of Participation)

Figure 2: Brazilian Exports 2009 to 2013 (Percentage of Participation)

Source: Ministry of Development, Industry, and Trade (MDIC)

However, further integration would expand growth by creating integrated value-added chains, making Mercosur goods more valuable. Examples of these chains can be seen in goods manufactured within the North American Free Trade Agreement (Nafta) zone, where American workers produce 40 percent of U.S. imports from Mexico and 25 percent of imports from Canada. Creating such value-added chains in Mercosur would push Brazilian and Argentine manufacturers to become more efficient as well as create jobs on both sides. Furthermore, these valued-added chains could expand to other sectors, such as energy. However, accomplishing this task would mean reforming Mercosur by ending the common trade policy and de-politicizing the organization through a more independent Secretariat.

Ending the common trade policy would allow members to negotiate their own bilateral trade agreements while maintaining Mercosur. While having a single trade policy works for likeminded countries, Mercosur member states are ideologically divided between free traders and protectionists. This in turn delays trade negotiations when member states are unable to find consensus. The Mercosur-European Union trade agreement, which has been in negotiations since 1999, illustrates this divide. Finally, ending the common trade policy could help end the statist tendencies in some member states. Nafta provides another example of this: although domestic players pushed Mexico’s economic liberalization, the country’s integration with Canada and the U.S. made a return to protectionism very costly.

Finally, Mercosur’s Secretariat needs complete independence to ensure that all members benefit from the organization. Domestic politics has paralyzed Mercosur, creating obstacles for the organization’s effectiveness. To ensure that the aforementioned reform creates results, the organization’s Secretariat needs to make decisions without interference from members. Mercosur’s High Representative (the equivalent of the president of the European Council) needs independence to enforce organizational decisions. By creating a more independent Secretariat, Mercosur can promote intra-organizational standards and expand trade.

Reforming Mercosur should be one of the priorities of its members. By modifying its trade policy and giving more independence to its Secretariat, Mercosur could better serve the interests of all members. A reformed Mercosur could become an effective institution for internal and external investment. Lastly, reforms would provide members with more flexibility, allowing them to advance their own interests while maintaining Mercosur. Argentina and Brazil, the organization’s founding members and its largest economies, should lead the charge for reform or risk seeing it become just another South American political club.

Luis FerreiraLuis Ferreira Alvarez is a research analyst for an energy consulting firm and a UC Berkeley alum.

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