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South America Is a Few Legos Short of a Trading Bloc – Eduardo Porter/Bloomberg

  • Three decades after its creation, Mercosur, the so-called South American Common Market, is still groping for its identity and purpose.
It helps if you know what you’re building. Photographer: Cameron Spencer/Getty Images AsiaPac
It helps if you know what you’re building. (Cameron Spencer/Getty )

By Eduardo Porter

Might Mercosur find a purpose?

Brazil, which just took over the rotating presidency of the South American trading bloc, seems bullish. At its summit meeting earlier this month, President Luiz Inácio Lula da Silva urged on the group’s negotiations with Canada, South Korea and Singapore, which have been going on for years. He proposed exploring deals with China, Indonesia, Central America and beyond. He hoped Bolivia — currently an “associated state” — could soon become a full member.

But for all the enthusiasm in his delivery, Lula failed to answer a fundamental question, which remains unresolved three decades after Argentina, Brazil, Paraguay and Uruguay stitched together the so-called South American Common Market in the 1990s: What is it for?

Over the years, Chile, Colombia, Ecuador, Guyana, Peru and Suriname have become associates of the bloc. The group is — still — hoping to finalize a trade agreement with the European Union first proposed a quarter of a century ago. A few months ago Lula and his Argentine counterpart, Alberto Fernández, proposed creating a common currency for the gang.

But despite the buzz of activity, Mercosur has failed to make a point. As a regional integration effort intended to propel its members toward economic development, it has always been a dud. Before adding new bells and whistles, its leaders might want to give more thought to its purpose.

Customs unions like Mercosur and the European Union are first of all designed to expand trade between their members — which sit behind a common external tariff to trade freely with each other, encouraging economies of scale and specialization.

It didn’t happen. Intra-regional trade in the South American bloc peaked at just above $54 billion in 2011 before sliding to $29 billion in 2020. That year only 18% of Argentina’s exports and 5.9% of Brazil’s went to partners in the group. (By contrast 33% of US exports went to partners in the USMCA, as did 74% of Canada’s and a whopping 82% of Mexico’s.)

Mercosur Deflates:  Trade among Argentina, Brazil, Paraguay and Uruguay
Source: ECLAC

If joining the trade bloc was meant to expand its members’ competitiveness in the world’s markets, that doesn’t show either. Exports in 2022 accounted for just 20% of Brazil’s gross domestic product, and 17% of Argentina’s, well below the 31% share of exports in global GDP.

Indeed, Mercosur arguably hindered its members’ engagement with the rest of the world, even as globalization was reconfiguring economic activity, building value chains around the globe that relied on intense trade of intermediate goods.

Brazil and Argentina’s uncompetitive business lobbies demanded protection from the world, and got it. But Mercosur’s high tariffs — Brazil’s weighted average applied tariff is 8.4% and Argentina’s 6.9%, compared with China’s 2.5%, Chile’s 0.4% and South Korea’s 5.5% — made participation in globalization extra difficult, leaving them out of the main dynamic shaping the global economy.

Trade Wall. Applied tariff rate, weighted mean, 2020
Source: World Bank
Note: Mexico data for 2018, World data for 2017

As noted in a 2017 research paper by Eduardo Viola and Jean Santos Lima, then at the University of Brasilia, “the current Mercosur situation represents some threats to long-term integration, and its members are drifting even farther away from the manufacturing competitiveness of advanced economies.”

Maybe Mercosur did have a point. Some economists argue that without it, neither Brazil nor Argentina would have developed an auto industry: Bringing together the two markets was necessary to draw foreign carmakers. Machiavellian minds, on the other hand, suggest the bloc was mostly a protectionist deal: an attempt to stop President George H. W. Bush’s Enterprise for the Americas Initiative to liberalize trade throughout the Western Hemisphere.

These are slim, not to mention self-defeating, pickings. “What can they trade, other than in a little regional car supply chain?” asked Monica de Bolle from the Peterson Institute for International Economics. “Nothing.”

Brazil and Argentina, the main economies in the bloc, who call all the shots, are now mainly commodities exporters. Raw materials — which China started buying from them hand over fist in the early 2000s — account for more than half of Brazil’s merchandise exports and about one-third of Argentina’s.

Manufacturing value-added accounts for just 11% of Brazil’s gross domestic product, about half the share when Mercosur was launched in 1991. In Argentina it also slid from 24% to 15% of GDP over the period. And it’s not as if the region is a great exporter of advanced services either.

Today, their dependence on agricultural exports puts them in a box: The deal Mercosur and the European Union seemed to have reached in 2019 may not happen after all — bogged down by newfound disagreements over government procurement and, critically, agribusiness. Ostensibly, Europe has concerns over deforestation in the Amazon, largely due to cattle ranching. But these protestations are mostly cover for French agricultural protectionism.

Tiny Uruguay, the most open of the Mercosur economies, seems itching to get out — hoping to close its own free-trade deals, independent of the other three countries.

Maybe there is some hope in the future. The reconfiguration of global production motivated by climate change, rising tensions between the US and China and a re-evaluation of the risk inherent in far-flung value chains could feasibly offer an opportunity for the economies in the South American bloc to plug themselves into whatever comes next.

Managed with care, their natural resource endowments might even help. Vast reserves of lithium and other minerals essential for clean energy technologies, along with a generous endowment of energy from the wind and sun, could put them in a privileged position as the world scrambles to move away from fossil fuels.

Mercosur might even provide some heft to the four nations when negotiating with China or the United States. “Given the geopolitical landscape that we are facing and this whole transition, it is better to be a part of something where at least you are not completely alone and your interests are more or less aligned,” de Bolle argued.

But for any of the good stuff to happen, Mercosur must start behaving like a true integration project. Right now, squabbles between Brazil and Argentina over who gets the new lithium ion battery investment from China are all too likely to blow up the whole thing.

That means not just lowering tariff barriers but also aligning regulations, standards and government procurement practices to make the region a truly integrated market. Governments must learn how to stare down their business lobbies. They must accept that for integration to work, countries must assume some burdens in exchange for the opportunities.

As Viola and Santos Lima pointed out, “the strong reluctance of Brazil and Argentina to partially abdicate national sovereignty to the integration project” has long hamstrung the effort. If Brazil and Argentina can’t surrender anything to Mercosur, they might as well move on.


Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration. He is the author of “American Poison: How Racial Hostility Destroyed Our Promise” and “The Price of Everything: Finding Method in the Madness of What Things Cost.” Energiesnet.com does not necessarily share these views.

Editor’s Note: This article was originally published by Bloomberg Opinion, on July 18, 2023. All comments posted and published on EnergiesNet.com, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet.com or Petroleumworld.

Original article

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energiesnet.com  07 19 2022

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