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MERCOSUR’s Murky Future

Blog

MERCOSUR’s Murky Future

A brief note before we get down to business. You might have expected us to offer some deep, trenchant analysis on the current situation in North Korea, where Kim Jong Un is variously rumored to be dead, in a vegetative state, or simply recovering from recent heart surgery. The truth is literally no one knows what is going on inside North Korea, us included. Kim might be dead, or he might simply be binge-watching The Last Dance. (He is a huge Chicago Bulls fan after all.) All we can say is we are tracking the rumors, and that even if they are true, his sister Kim Yo Jong seems ready to fill in for big brother.

Also: we released a podcast last week. It is on the geopolitics of city-states and water scarcity. We’d love for you to listen, sign-up, and share widely if you are so inclined. You can do all that by clicking here.

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Without further ado, onto the main event: some spicy geopolitical developments in South America.

The Mercado Común del Sur (the Southern Common Market, or MERCOSUR for short) is in jeopardy. Argentina’s Ministry of Foreign Affairs announced last Friday that it will cease to participate in ongoing and future MERCOSUR trade negotiations with countries like South Korea, Singapore, Lebanon, Canada, and India. (According to reports, recent progress in negotiations with South Korea were the straw that broke this camel’s back.) Paraguay, which currently holds the presidency of MERCOSUR, said the bloc would “evaluate the most appropriate legal, institutional, and operational measures” to preserve MERCOSUR’s “community building process” without endangering current trade negotiations. (It is unclear how MERCOSUR can have one without the other.) The Brazilian government has not yet officially commented on Argentina’s decision, though a Brazilian diplomat did tell Reuters that Argentina had “abandoned ship.”

It is a striking about-face for MERCOSUR. As recently as last June, MERCOSUR’s future looked exceedingly bright, arguably brighter than at any other point in its 29-year history. Initial fears that Brazil’s commitment to the trade bloc might atrophy after the election of Brazilian President Jair Bolsonaro in 2018 turned out to be ill-founded. Almost immediately after assuming office in 2019, Bolsonaro and then-Argentine President Mauricio Macri agreed to work together on a range of issues, from restoring democracy in Venezuela to “perfecting” the trade bloc by pursuing further economic integration and new trade deals with external partners. The most impressive fruit of their joint labor was a landmark political agreement with the European Union on a comprehensive free trade deal, which had eluded MERCOSUR and the EU for almost twenty years.

MERCOSUR cannot function if Brazil and Argentina’s political leadership are not in lockstep. That is because since its inception, MERCOSUR has been a product of Brazilian-Argentine political cooperation. At the simplest level, this is because Brazil and Argentina account for 85 percent of MERCOSUR’s combined GDP and 96 percent of its population. Paraguay and Uruguay are full members of the bloc but their relative importance pales in comparison to that of MERCOSUR’s twin heavyweights. The importance of Brazilian-Argentine cooperation role in MERCOSUR however goes well beyond their combined economic heft. MERCOSUR emerged because two new presidents, Carlos Menem of Argentina (1989) and Fernando Collor de Mello of Brazil (1990) assumed office around the same time and pursued economic integration as a key component of their respect foreign policies. MERCOSUR’s existence is predicated not just on Brazil and Argentina seeing eye-to-eye – but on the ideological alignment of their respective political leaders.

In other words, MERCOSUR works when Buenos Aires and Brasília are on the same page – and right now, they are not even in the same book. Bolsonaro warned in August that if Alberto Fernández prevailed in Argentina’s October 2019 presidential elections and caused any problems, Brazil would simply “leave MERCOSUR.” Fernández of course won the contest for Argentina’s presidency – and now he is causing problems, in effect calling Bolsonaro’s bluff. It is ironic considering it was Bolsonaro himself who threatened to upend MERCOSUR during his own presidential campaign in 2018. Bolsonaro ultimately used those threats as a negotiating tactic to bend MERCOSUR priorities to his (and Brazil’s) liking. His protests were quickly put to rest when it became clear that Bolsonaro and Macri’s priorities were aligned, not unlike how Menem and de Mello were strategically and ideologically aligned in the early 1990s.

Fernández is playing the opposite game. Rhetorically, Fernández has actually been less critical of MERCOSUR than Bolsonaro was during his presidential campaign. Argentina’s Foreign Ministry statement on its decision to oppose current MERCOSUR free trade negotiations stated that Argentina’s position should not be read as a desire to see MERCOSUR deteriorate but was instead a product of “a vision on how to strengthen relations with the nations of the regional bloc.” Defending his government’s position, Fernández told El Destape Radio that he actually wants a “bigger MERCOSUR” – that his problem with MERCOSUR stems from the Macri and Bolsonaro governments diluting MERCOSUR’s collective power. To hear Fernández tell it, he is the truest supporter of regional integration, not his political opponents. El presidente doth protest too much, me thinks.

That said, Fernández does have a point. In January 2019, Bolsonaro and Macri discussed the possibility of easing MERCOSUR’s trade rules in such a way as to allow member states to negotiate individual agreements with other countries. These sorts of exceptions are precisely the reason MERCOSUR has never lived up to its economic potential and why its efficacy is still so dependent on strong, top-down political leadership in Argentina and Brazil. Brazil, for example, enjoys one hundred separate tariff code exceptions to MERCOSUR’s supposedly common external tariff regime. It is incredibly telling that MERCOSUR does not even describe itself as a free trade bloc, but as a “regional integration process.” That is nice in theory, but free trade agreements are only as effective as the institutions that enforce them. MERCOSUR’s institutions have never been very effective – nor have MERCOSUR’s member-states pursued sufficiently coordinated macroeconomic policies or a joint investment strategy to spur regional integration.

In Brazil’s case, the disconnect stems from Brazil’s economic interests having diverged from Argentina’s and because Brazil has serious ambitions to become more than a South American power. Consider that Brazil is Argentina’s most important trading partner by far. Argentina’s exports to Brazil in 2018 were roughly equivalent to Argentina’s exports to its next three largest trading partners combined: the US, China, and Chile. Argentine imports of Brazilian goods, meanwhile, were about 24 percent of total Argentine imports from the rest of the world. In contrast, Brazil’s largest trading partners are not South American. In 2019, the Netherlands surpassed Argentina as Brazil’s third largest export destination. China accounted for 28.1 percent of Brazilian exports and 20 percent of Brazilian imports in 2019. Argentina by comparison accounted for just 4.3 and 6 percent of Brazilian exports and imports, respectively. Argentina, in other words, is getting less out of MERCOSUR than Brazil is – and in Fernández’s worldview, that means Argentina and the MERCOSUR member states need more protection, not more free trade.

It is not as if the Fernández government is opposed to the idea of free trade on principle. After all, the Argentine Foreign Ministry made it clear that despite its announcement last Friday, it has no intention of obstructing progress on MERCOSUR’s European Free Trade Agreement (EFTA). Perhaps that is simply a reflection of the fact that the EFTA has run into European impediments, most notably from France, where President Emmanuel Macron has called Bolsonaro a liar and cast doubt on his willingness to accede to the deal under current conditions. Why expend precious political capital to scuttle a deal that is far from done, especially as Argentina needs all the global political good will it can get because of how the Fernández government is tip-toeing towards a potential government default after missing a $500 million bond interest payment last Wednesday. Or perhaps Argentina truly recognizes the EFTA could be a major boon not just for Argentina but for MERCOSUR in general and is only against any additional deals.

Whatever the case may be, the primary issue going forward is that Brazil and Argentina are moving in very different directions economically, politically, and ideologically. The ideological differences have become particularly crucial because they are precluding Fernández and Bolsonaro from working through their economic and political differences in a cooperative framework. As a result, Argentina suspending participation in future MERCOSUR free trade negotiations is potentially a watershed moment. It is not just a threat to MERCOSUR’s future viability but to the general spirit of integration and cooperation that has defined South American politics since 1991. There is still a long way to go before a point of no return: at this point, all it would take is a change in government in either Buenos Aires or Brasilia to put things back on track. Even so, it is not everyday that such a long-standing and overwhelming regional dynamic so clearly reverses itself.