With Edward Snowden on the run and Mercosur countries stumbling over themselves to criticize U.S. spying and the European detainment of Evo Morales, many are asking: what is Mercosur and what does it do?
My friend and current Latin Business Chronicle editor Mark Keller last year wrote the most comprehensive overview piece I’ve seen in English on the group (reposted in full below), and it’s worth reading as background while Mercosur makes headlines in the English-language media for the first time in many years.
Still, despite high hopes for trade integration leading to an EU-style ever closer union, Mercosur, as shown by this latest action, has devolved into what many feared it would be, a self-aggrandizing tool for nationalist Latin governments. With Paraguay’s politically-motivated suspension from the group last year and Bolivia’s pending entrance, it is unlikely this will change in the near term.
Also, with increased trade relationships with Asia, increasing bilateral agreements with other countries, and the bulk of relevant trade occurring in many sectors exempted from the group’s common-tariff language, this integrated market is looking less and less viable or relevant.
Explainer: What Is Mercosur?
by Mark Keller
The Southern Common Market economic bloc became the world’s fifth-largest economy on July 31 when Venezuela joined Argentina, Brazil, Paraguay, and Uruguay to become the group’s fifth member. Known as Mercosur in Spanish or Mercosul in Portuguese, the group encompasses 240 million people and has a combined GDP of nearly $3 trillion. One of Latin America’s largest regional integration projects and its leading trade bloc, Mercosur also counts Bolivia, Chile, Colombia, Ecuador, and Peru as associate members.
Mercosur functions as a customs union and free trade area, and has ambitions of becoming a common market along the lines of the European Union. However, 20 years after its founding, the group still struggles to achieve that goal. Some questioned the bloc’s feasibility following two decisions in June 2012: first, to temporarily suspend Paraguay after President Fernando Lugo’s impeachment, and then to admit Venezuela as a full member. Nevertheless, Mercosur remains an economic and political force in the region, uniting South America’s two largest economies and providing a potential springboard for Latin American integration.
Vision and Background
Born out of a series of economic cooperation agreements between Argentina and Brazil after their diplomatic rapprochement in the 1980s, Mercosur was founded in 1991 with the signing of the Treaty of Asuncion. That accord brought Argentina, Brazil, Paraguay, and Uruguay into a customs union with the ultimate goal of a common market. The 1994 Protocol of Ouro Preto defined the body’s institutional structure.
Though it began with just four countries, members hoped the organization could be a possible springboard for the integration of all of South America. As envisioned at its founding, Mercosur would gradually achieve the steps to form a common market in the image of the European Union. Plans called for the creation of a common external tariff (CET) and the free movement of goods, services, currency, and people between members. The union even considered the creation of a common currency, the gaucho, though that idea has since been discarded. In reality, however, the bloc’s reach has often fallen short of some goals. Twenty years after its creation, the group has not yet formed a common market as planned.
After an initial period of success—with inter-bloc trade growing fivefold from $4 billion in 1990 to $20 billion in 1997—the bloc foundered amid crises wrought by the devaluation of the Brazilian real in 1999 and the Argentine economic meltdown of 2001. Throughout the following decade, a number oftrade disputes between member countries regarding tariff barriers and development projects divided the bloc. While trade between members rose to $41 billion in 2010, “it represents a much smaller share of each member’s total exports than at its peak in 1997,” says The Economist.
Membership and Its Benefits
Mercosur is currently comprised of five member countries: Argentina, Brazil, Uruguay, and Venezuela (Paraguay’s membership is temporarily suspended). Membership in Mercosur is dependent on meeting and maintaining a number of political and economic criteria. As a new member, Venezuela has yet to enact any of Mercosur’s economic requirements, but has until 2014 to do so. Any change to Mercosur economic policy requires the consensus of the other members.
On the economic front, Mercosur members agree to the free movement of goods and services between member countries. However, countries can ask that certain products be exempt to protect local industries. In recent years, Argentina and Brazil have taken advantage of this option. Some allege that Argentina’s application of non-automatic import licenses on imports from its neighbors is a violation of Mercosur policy. The group also subscribes to the CET, or common external tariff, which dictates the tariff members apply to trade with non-member or associate countries. The CET is subject to change and is set by consensus, but has been a source of contention. Argentina and Brazil often favor higher duties to protect local industry, while Paraguay and Uruguay favor lower tariffs. In light of the 2009 global financial crisis and ongoing economic troubles in the eurozone, Argentina and Brazil requested allowing a tariff increase of up to 35 percent on 200 products. In 2012, the CET has stood between 10 and 12 percent, but often fluctuates.
Mercosur members adhere to a number of agreements guiding currency exchange, investment, tax issues, and educational exchanges. The goal is to standardize regulations between member countries in order to ease commerce. The bloc also has a number of free trade agreements with third parties, including Bolivia, Chile, Colombia, and Peru, as well as Israel and the Palestinian Authority. Negotiations for a free-trade agreement with the European Union began in 1995, were suspended in 2004, but resumed in 2010.
In 2002, Mercosur countries, joined by Bolivia and Chile, agreed to form a “free residence area” which permits citizens of those countries to obtain residence and the right to work in the participating countries without a visa. In addition, Mercosur member countries carry the organization’s emblem on their respective national passports.
In addition to these economic requirements, the bloc also requires that members maintain democratic governance. Some analysts argue this “democracy clause” aided the consolidation of democracy in constituent countries after Mercosur’s founding in 1991, since members saw the end of military dictatorships in the 1980s. This clause also served as the basis for Paraguay’s suspension from the group in June 2012 after Lugo’s impeachment.
In addition to the five permanent members, Bolivia, Chile, Colombia, Ecuador, and Peru serve as associate members. Associate members are not members of the customs union and do not have voting power in Mercosur’s political bodies, though they do have preferential trade access to the market.
Mercosur’s founding documents set up three decision-making bodies for Mercosur: the Common Market Council, the Common Market Group, and the Trade Commission. Parlasur and the Structural Convergence Fund were developed later.
- The Common Market Council is Mercosur’s highest decision-making body. It conducts Mercosur policy and assesses compliance with the bloc’s regulations. The foreign affairs and economy ministers of constituent members comprise the Council, which meets as often as need arises, but at least once a year. A six-month rotating president leads the Council and is determined by the alphabetical order of member countries.
- The Common Market Group is controlled by members’ ministries of foreign affairs, economy, and Central Banks’ presidents. The group coordinates macroeconomic policy between the members and negotiates trade with non-member countries. It also oversees the implementation of decisions made by the Common Market Council. The Group is composed of 20 representatives, with four from each constituent member. The Common Market Group can convene as necessary, but must meet at least once each quarter. A number of working subgroups deal with issues such as agricultural policy, energy policy, and labor policy.
- The Trade Commission deals with everyday trade matters between constituent countries. Five members from each country meet monthly. The group can propose changes to the common external tariff and other Mersosur guidelines for review by the higher bodies. The group can also refer any trade disputes to the higher bodies for resolution.
- The Mercosur Parliament (Parlasur) was created in 2004 and first convened in Montevideo in 2007. The parliament consists of 18 representatives from each member country (Venezuela had nine representatives until its full adhesion). Parlasur is meant to add a dimension of popular representation to Mercosur, but the body has no enforcement powers and its conclusions are only meant to advise Mercosur’s decision-making bodies. The first parliamentarians were chosen by member country legislatures. By 2015, all member countries are due to institute the popular election of Mercosur parliamentarians.
- In 2010, the bloc created the Structural Convergence Fund of Mercosur (FOCEM). The fund seeks to develop regional infrastructure projects to increase integration between Mercosur member countries. These investments also intend to promote lesser-developed regions and improve competitiveness, with the ultimate goal of strengthening the union. FOCEM is funded by member country contributions—with Brazil providing almost 70 percent— and currently has $1 billion in available resources. The 2011 budget gave 48 percent of resources to Paraguay, 32 percent to Uruguay, and 10 percent each to Argentina and Brazil.
Recent Developments: Paraguay Suspended and Venezuela Admitted
Mercosur has seen a number of major changes recently. Members decided to temporarily suspend Paraguay after the Paraguayan Senate impeached the president on June 22, 2012. The rapid impeachment drew strong criticism from Argentina and Brazil, who qualified it as a coup d’état. The country may be permitted to rejoin after presidential elections in April 2013. Paraguay’s suspension removed the last impediment to Venezuela’s full adhesion to the bloc, as the Paraguayan Senate long refused to approve Venezuela’s entry. The remaining members voted to admit Venezuela to the bloc, and the Andean country’s membership became official on July 31, 2012.
The admission of Venezuela to Mercosur leads some to question the bloc’s future. Venezuelan President Hugo Chávez said he would give the group a “political Viagra” and “decontaminate it of neoliberalism.” Some wonder if Chávez will be willing to adhere to the union’s economic requirements. Others believe Venezuela’s entry could help to balance the scales between the bloc’s two giants, Argentina and Brazil. Venezuela’s energy reserves and ability to donate to FOCEM are also considered positives.