Traditional rivals in the Southern Cone of Latin America, Argentina and Brazil first explored economic collaboration in the early 1980s. For the first time in centuries, the moment was right. Both countries underwent political transitions in the mid 1980s from military rule to civilian regimes, Argentina in 1983 and Brazil in 1985. The reestablishment of democratic governments provided an opportunity to seek policies that would consolidate the democratic process and limit the sphere of influence of the armed forces. In November 1985, newly elected democratic presidents met to inaugurate a new bridge at Iguacu Falls on the border between the two states. They agreed to create a binational commission to study the possibilities of increased economic cooperation and integration. In 1986, the Argentine–Brazilian Program for Integration and Cooperation (PICAB) was announced. In 1986, the two presidents signed the Act of Brazil–Argentine Friendship in Brasilia. It was also announced that the two countries would pursue a policy of peaceful nuclear development.
In July 1990, the heads of state of Argentina and Brazil signed the Act of Buenos Aires. The document called for the creation of a common market by 1995, instead of by the previously announced date of 1999. The Treaty of Asuncion, signed in March 1991, brought Paraguay and Uruguay into the common market process, and marked the creation of a “Common Market of the South,” or Mercosur. This new organization’s principal goal was to have a free trade area in place among all four countries and a Common External Tariff (CET) by 1995. The Protocol of Ouro Preto came into effect in December 1995 and established a new institutional framework for Mercosur. In addition to the Administrative Secretariat located in Montevideo, Uruguay, and the Common Market Council and Common Market Group, set up in 1991, it was decided to add a Joint Parliamentary Commission, a Trade Commission, and a Socio-Economic Advisory Forum. A new date of 2006 was established for the creation of a full common market. As the institutional structure evolved, Chile (1996), Bolivia (1997), Peru (2003), Colombia (2004), and Ecuador (2004) were added as associate members (associate members enjoy tariff reductions but are not subject to the CET system). In December 2004, Mercosur signed a cooperation agreement with the Andean Community trade bloc (CAN) and they published a joint letter of intention for a future negotiation toward integrating all of South America. A year later, President Alvaro Uribe of Colombia signed a law that ratified a Free Trade Agreement (FTA) with Mercosur. In June 2006, Mercosur began the process of incorporating Venezuela as a full member. A number of political obstacles intervened and full membership had not been completed by the beginning of 2010.
Tariffs among the four Mercosur member countries were gradually eliminated in the 1990s, and the common market was essentially completed by 1995 with the reduction of 85 percent of tariffs and non-tariff trade barriers. Trade expanded rapidly between the Mercosur countries, especially between the two largest members. According to the International Monetary Fund (IMF)’s Trade Statistics Yearbook, Argentina’s exports to Brazil climbed from $3.6 billion to $5.3 billion from 1995 to 1996 and Brazil’s exports to Argentina grew from $4.0 billion to $5.2 billion in the same period.
In retrospect, the late 1990s were the high point of Southern Cone integration. A maxi-devaluation of the Brazilian currency in January 1999 was the first shock to slow Mercosur consolidation. Argentina experienced an institutional and economic crisis in 2001–2002 that led to the resignation of President Fernando de la Rua. His departure was followed by the collapse of the convertibility plan that had linked the peso to the dollar (one to one) and a massive default on the country’s outstanding debt. As a result of the crisis in Argentina, Uruguay’s economy stalled, growth rates plummeted, and only revived a few years later.
The increasingly political nature of Mercosur was made clear during the Fourth Summit of the Americas in November 2005, held in Mar del Plata, Argentina. At the meeting, the 34 member countries of the Organization of American States (OAS) failed to reach a consensus to move ahead with negotiations to conclude the Free Trade Area of the Americas (FTAA). Although 29 states voted to continue the dialog, with strong backing from the US delegation led by President George W. Bush, the five dissenting votes, cast by the then four full members of Mercosur plus Venezuela, were sufficient to destroy the already-foundering process.
The next few years saw little institutional development within Mercosur. Chile decided that its development goals were best served by negotiating bilateral trade agreements, and did so successfully with the United States and China. In 2006, preliminary efforts to negotiate an FTA between the European Union (EU) and Mercosur were unsuccessful and further discussions were postponed indefinitely. For many countries the Pacific Basin, especially China, became a more interesting trade and investment option.
In an effort to reinvigorate the organization, the heads of state convened the 30th Presidential Summit, held in Cordoba, Argentina in July 2006. The formal agenda included discussions of pending trade agreements with external allies, a common customs code, the appointment of members to the Administrative Labor Court, and the establishment of a consistent Mercosur negotiating position for the all-but-collapsed World Trade Organization (WTO) Doha trade round.
For many observers, the Cordoba meeting may have been the end of Mercosur as it was conceived in 1991. By the time of adjournment of the two-day meeting, Mercosur appeared to be more of a political organization than a trade facilitating mechanism. The Summit addressed the growing importance of political and social integration in addition to strengthening the common market, but there were no concrete plans announced to move that agenda forward. There were two dramatic political aspects to the get-together: the nomination of Venezuela as a full member and the attendance of President Fidel Castro of Cuba. The participation of President Hugo Chavez of Venezuela spoke to the increasingly political nature and societal orientation of Mercosur. His public calls to destroy neoliberalism and fight for social justice revealed his ambitions to expand Mercosur’s political scope. However, the noncommittal responses from the other members suggested internal divisions within Mercosur itself.
In a surprise decision, member states addressed the issue of a pending trade agreement between Cuba and Mercosur that would dictate the reduction of tariffs on a number of goods traded between the two entities. While nominally for economic purposes, the trade agreement emphasized a growing political solidarity between South America and Cuba that could be interpreted as less than friendly to the United States.
While the growing political nature of the common market is notable, there are other economic realities that threaten the future development and consolidation of the entity. Paraguay and Uruguay believe they benefit the least from the current structure of Mercosur; and the reality is that Brazil and Argentina, with more developed and sophisticated industrial agricultural sectors, have benefited disproportionately when compared to the two smaller member states.
A recent conflict (2006–2007) between Argentina and Uruguay highlights the inherent conflict between the two large states and the two smaller partners. Uruguay successfully concluded negotiations to have Spanish and Finnish companies construct two paper mills along the Uruguay River, which forms a natural border between the two states. The mills, estimated at a cost of $1.6 billion, would represent the largest foreign investment in Uruguay’s history. Argentina objected strenuously to the project, arguing that the mills would destroy the river’s environment and threaten the fishing and tourism industries. The issue was taken to the International Court of Justice (ICJ) in The Hague; the tribunal’s decision favored Uruguay but the government of Argentina continued to express its opposition to the decision.
There has been talk in both Paraguay and Uruguay of leaving Mercosur and negotiating trade agreements directly with the United States. Under current rules, Mercosur does not allow bilateral trade agreements outside of the common market. Whether or not either or both countries will decide to proceed is an important pending issue for the future of the organization. And with the growing prominence of the now stabilized Brazilian economy, there is concern that Mercosur will be used by Brazil to serve its interests, and not the interests of the entity.
Succeeding summit meetings were inconclusive. The group met in Rio de Janeiro, Brazil in January 2007; Tucuman, Argentina in June 2008; and Asuncion, Paraguay in July 2009. The latter meeting was dominated by the political crisis in Honduras surrounding the return to power of ousted President Manuel Zelaya. There was little substantive progress made on the long-pending issues of economic coordination and integration.
The institutionalization of Mercosur has been difficult and little has been achieved. In this regard, structures are broad but not very deep. The heads of state make all major decisions in periodic summits. The technical staff in Montevideo is small and marginal. The reluctance to give up national sovereignty plagues the organization – it is impossible to develop dispute resolution mechanisms, for example, unless member states are willing to cede decision-making authority to supranational tribunals.
There is a growing impression that Mercosur is most valuable to its members as a political counterweight to the United States. That raises doubts about its future. The group dashed the hopes of the United States for a revival of FTAA talks in Mar del Plata. Recent US efforts to revive the WTO Doha Round discussions have met strong resistance from the Mercosur countries, acting within the broader structure of the Group of Twenty (G-20), created in 2003 in Cancun, Mexico as a means of protesting against agricultural protection in the EU and the United States.
The decision in May 2008 to create the Union of South American Nations (UNASUR) in Brasilia was the latest effort to define a future for Mercosur. The treaty proposed to combine Mercosur with the Andean Community (created in 1969 and known as the Andean Pact until 1996) into a single bloc. There are plans for an UNASUR parliament to be located in Cochabamba, Bolivia. The executive leadership rotates among the member states every six months, modeled on the EU presidency. Combining the two entities will be a very slow process that, if successful, will take a number of years.
Similar to the fate of other regional trade movements like the stalled FTAA, Mercosur’s viability has been called into question, and the organization will need to prove it can provide benefits for all member countries to stay intact. As member countries grow disillusioned and increasingly court bilateral trade agreements, Mercosur’s unity, influence, and economic potential have diminished. Thus, the original goals of Mercosur set forth in the early 1990s have not been achieved, and the organization has taken a polemical turn that de-emphasizes integration and gives preference to regional and hemispheric politics. It remains to be seen whether the creation of UNASUR will replace Mercosur eventually or if the two organizations will exist uneasily, side by side, for the foreseeable future.
SEE ALSO: Free Trade; Free Trade Area of the Americas (FTAA); Regionalism; World Trade Organization.
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