Mercosur Should Become a Free Trade Agreement

At the end of April, Argentina announced to its Mercosur partners, Brazil, Paraguay, and Uruguay, that it would withdraw from trade negotiations other than the ones already concluded with the European Union and the European Free Trade Association. This unilateral decision sent shockwaves through the Mercosur, as it implied a possible unraveling of the trade bloc. However, Argentina’s decision was later reversed, and Mercosur partners are now figuring out how to move forward in spite of each country’s competing priorities. Though Brazil, Uruguay, and Paraguay are keen on new trade deals with other countries such as Canada, South Korea, and Singapore, the Fernández administration has reversed Argentina´s liberalizing stance and has not been welcoming to the idea of new trade deals.

Mercosur is formally a Customs Union. While a Free Trade Agreement implies a commitment between countries to respect lower tariffs and other trading rules providing preferential market access, a Customs Union adds a common external tariff for imports into the bloc, and a commitment by its four members to negotiate trade agreements with non-member countries together. In theory, this means that each country benefits from preferential access to the other members´ markets and stronger negotiating power in trade agreements, not unlike the members of the European Union. In practice, intra-bloc trade is mired in red tape, non-tariff barriers, and private trade restriction agreements. Very few external negotiations have been completed, leaving Mercosur as the most closed region in the world, with an average tariff above 12 percent. The only full free trade agreements signed by Mercosur since its origins in 1994 have been with Egypt and Israel, and all of Mercosur’s trade agreements cover less than 10 percent (calculations based on the World Bank’s World Development Indicators) of global GDP.

When Mauricio Macri was elected president in 2015, there was a spark of hope that Mercosur would finally open up. Macri spearheaded the revitalization of external negotiations, which concluded with an agreement between Mercosur and the European Union after more than 20 years of stalled negotiations. This hope grew with the strong pro-trade stance of Paulo Guedes, the Brazilian finance minister under President Bolsonaro. However, Argentina´s decision under President Fernández to withdraw from Mercosur negotiations—though later reversed—has put a question mark on how Mercosur will continue to operate. Recent political instability in Brazil has further dampened expectations.

If Brazil, Paraguay, and Uruguay decide to continue with their ambitious trade negotiation agenda and sign new free trade agreements, but Argentina does not accompany them, there will inevitably come a point at which the three countries must decide whether to break Mercosur or make it more flexible. If, say, a trade agreement is reached with Canada, but Argentina stays out of it, this would mean that exports from Canada to Brazil would enter at preferential tariff rates, but Canadian exports to Argentina would still face the high Common External Tariff (CET) that all imports to Mercosur must pay today. The more trade agreements Mercosur signs that Argentina does not adhere to, the less sense the CET makes. De facto, the customs union would be broken. For this to happen, either Mercosur rules have to be made more flexible, allowing members to sign trade agreements without unanimity, or the founding Treaty of Asunción has to be broken, implying the end of Mercosur.

Either of these situations would spell disaster for the Argentine economy. One of the cornerstones of still inefficient industrial production is the possibility of selling to Brazil at zero tariffs, while competitors must pay the CET. If Brazil signs many trade agreements, Argentine companies will face stiff global competition in the Brazilian market, without the benefit of gaining access to new markets opened by the trade agreements for Brazilian firms.

A constructive way out of this conundrum—albeit an unlikely one, given the anti-trade stance of the Argentine government—would be to turn Mercosur into a free trade agreement instead of a customs union. A free trade agreement can maintain the current zero tariff for intra-bloc trade, and at the same time, provide flexibility to members to negotiate its own trade deals with other countries. The United States should accompany this path by actively seeking a free trade agreement with Brazil, which would have the additional benefit of diversifying its supply chains. Hopefully, a more open, more flexible bloc will ensue, providing the citizens of Argentina, Brazil, Paraguay, and Uruguay the hope of a more prosperous future.

Miguel Braun is a senior adviser (non-resident) with the Americas Program at the Center for Strategic and International Studies in Washington, D.C.

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