A Mercosur in quarantine
Tomás Bontempo[1]
At the last meeting of the MERCOSUR External Relations Group, Argentina announced it would withdraw from trade negotiations for a free trade agreement with Korea, India, and Canada. This led to various reactions, including the following: fake news who announce their definitive departure as a member of the bloc.
Argentina's position appears to represent a strategy within a bloc where decisions are made by consensus and where Decision 32 of 2000 of the Common Market Council, the bloc's highest body, obliges members to negotiate collectively. The "empty chair" is a kind of implicit veto power, exercised even in other regions and contexts, such as, for example, France opposing the United Kingdom's entry into the European Economic Community in the 60s.
While some implications of the decision remain unclear, we will attempt to shed some light on the current situation. On the one hand, at the last MERCOSUR summit in December 2019, Brazil's proposal to move towards greater flexibility within the bloc was discussed. The proposal advocated for a reduction in the Common External Tariff (CET): a key feature of the customs union as a stage of economic integration, which entails coordinated trade policy with third countries by establishing a single tariff rate for imported goods. The new tariffs would take effect in less than four years and would focus on industrial goods such as auto parts (from 35% to 12%), steel and machinery (from 12% to 4%), and iron and steel products (from 12% to 3%), among others. A wide range of goods, such as toys, manufactured goods, and textiles, which are sensitive to competition from imported products, would be affected by the new tariff guidelines.
It should also be noted that the Brazilian market and the agreements that granted Argentina access to it since the 80s have become essential. Since then, Argentina has increased its trade with its vast neighbor sixfold. In fact, according to the Economic Commission for Latin America and the Caribbean (ECLAC), the trade relationship between the two is not only the most valuable in Latin America but also one of only two in which the Grubel-Lloyd Index (GLI) exceeds 0.33, classifying it as intra-industry trade (more than 40% of Argentina's industrial exports go to Mercosur). However, the bilateral relationship is not only important in this respect but also for agri-food value chains. Argentina supplied Brazil with 85% of its wheat imports in 2019, almost half of Argentina's wheat exports, a product with a Common External Tariff (CET) of 10%.
The timely liberalization of the customs union (albeit incomplete) proposed by Brazil would lead Argentina to lose the preferential treatment it enjoys in a market of 200 million people. This could result in a loss of tariff revenue, and imports could increase, generating a trade deficit that would consequently affect the already fragile balance of payments. Mercosur would be transformed into a mere free trade zone with no possibility of further industrialization.
These considerations had led the Argentine Industrial Union (UIA) and the National Confederation of Industry (CNI) to express their concern about the signing of a free trade agreement with the Republic of Korea that involved exchanging corn and soybean oil for electronics, vehicles, and auto parts. The Argentine decision would seem to align with these interests. But in Brazil, while pressure for liberalization began during Dilma Rousseff's second term, it intensified much more aggressively with Jair Bolsonaro's arrival at the Planalto Palace. Divergent and—to a certain extent—incompatible strategies.
One of the cornerstones of Bolsonaro's regional policy is the de-Americanization of Brazil and its distancing from the region. In this sense, two of the power blocs that structure his foreign policy—that of Foreign Minister Ernesto Araújo and that of Economy Minister Paulo Guedes—share a certain degree of coordination in their views on Mercosur. One considers it ideologically driven, while the other sees its need for flexibility and the opportunity it presents for Brazil to become more competitive and sign bilateral agreements with countries outside the region. In other words, they do not believe that Brazil needs its regional partners to play a role as a global player.
In 2004, the Andean Community of Nations approved Decision 598, which granted its members freedom of action in trade negotiations, repealing the regulations that prevented them from unilaterally altering the common external tariff. As a result, some members, such as Peru and Colombia, proceeded to sign free trade agreements with the United States. Is this a possible scenario in the case at hand? Furthermore, what will happen in Mercosur after Argentina's decision to withdraw from some international trade negotiations? Can Decision 32/00 be repealed? Will there be negotiations to redesign the customs union? Will the political situation in Brazil influence all of this?
What we can say is that the decision comes in a clearly adverse international context, marked by the global pandemic and a severe economic crisis of historic proportions that leaves little room for betting on exports. commodities with falling prices.
The regional scenario is also far from ideal, with Brazil pushing for liberalization within the bloc and facing an increasingly unstable and delicate situation domestically, not only due to the pandemic but also because of the renewed political and democratic tensions following the resignations of the health minister and Sergio Moro, the former star judge turned justice minister. Furthermore, economic growth projections for both Brazil and Argentina are negative.
If we add to this Argentina's internal economic situation, the decision made within the Mercosur bloc may be justified. It seeks to buy time rather than join the other members in a process of liberalization whose potential negative effects would be considerable after the economic performance of recent years and a severe debt accumulation process.
This is not the first time Mercosur has experienced significant turbulence. Even relations among its members have been strained throughout its history. Argentina has not yet announced its intention to leave the bloc, and it would be preferable if it never did, as happened in recent years with UNASUR. However, the truth is that this stance cannot remain in place indefinitely; it will need to refine its position and define it more clearly in negotiations with the other members. The Argentine Foreign Ministry (Palacio San Martín) must clarify its strategic decision before frictions with its partners begin to escalate.
Finally, Argentina's decision has sparked internal reactions. Argentina needs a national policy on its regional affairs. The oft-repeated dichotomy of living within our own borders or opening up to the world obscures the real issue of national and regional development. It's not about trade or treaties themselves, but about how we trade and how we are bound by the commitments we sign, and whether these commitments—like the terms of the agreement with the European Union—continue to perpetuate the historical inequalities that exist between developed and developing countries.
[1] Professor of Comparative Latin American Political Systems at USAL. Member of the Research Directorate of CLACSO. Article originally published in “Urgente 24”
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