Mercosur At 30: The Challenges Of A Post-Pandemic World

Introduction: Mercosur and the pandemic

On 25 March of 1991, Brazil, Argentina, Paraguay, and Uruguay signed the Treaty of Asunción creating the Southern Common Market (“Mercosur”). At the time, the intention was only to establish a mutual economic relationship within a free trade zone.

Mercosur has just turned 30 and it now faces one of its biggest challenges: the economic recovery of internal markets after the Coronavirus Pandemic. The strength and union of the Block is of key importance in achieving this goal. For instance, after both World Wars, the fortification of international and economic relations between States was essential to reestablish some sense of normality after a big crisis.

Recent data shows that the economy of the Block is recovering from the Pandemic, and it is succeeding in maintaining a favorable trade balance. In 2020, the exports of goods from Mercosur amounted to US$ 250.348,5 million, which represents a decrease from the total exports of US$ 268.318,9 million in 2019. However, in 2020 the total amount of imports to Mercosur also decreased, enabling the Block to maintain a favorable balance of trade. In the first quarter of 2021, the balance of trade as well as the total exports is higher than it has ever been in this quarter, indicating the economic recovery of the Block.

The maintenance of this growth depends on the pace of the opening of economies once the effects of the Pandemic are controlled. However, there is a fear that the globalization of the Block could suffer from protectionist movements, which jeopardize the development of commerce inside and outside of the Block. To address this, Brazil proposed a reduction to the common external tariff by 20%, but this was blocked by Argentina. The differences in governments’ ideologies are taking a toll on the relationship of the member nations.

The Block is likely to survive despite internal differences. Yet for the Block to do so and prosper, it is important to focus on the opening of the markets to international trade, and consequently, to develop, standardize and consolidate its dispute resolution methods. International arbitration of commercial issues is a robust mechanism inside the Block, given any disputes between member states must be solved by arbitration under the Olivos and Ouro Preto Protocols. Also, disputes between private parties can be addressed by international commercial arbitration in any of the jurisdictions within the Block. Brazil has shown itself to be one of the most recommended seats of arbitration, due to its wide recognition as an arbitration global player having many reputed institutions, with a legal environment upheld by local courts, institutions, and policies.

In this post, I discuss some of the current challenges facing MERCOSUR. Looking ahead, and in addition to preventing national protectionism, Mercosur may need to turn its attention to efforts to implement environmental and equality standards since they are of increasing importance to attract foreign investors and facilitate negotiations.

Current issues being discussed by Mercosur

Mercosur is continuing to discuss this proposed reduction of the Common External Tariff, aimed at avoiding protectionism and assuring economic growth, which could strengthen free trade and the business environment of the Block. This measure would also bring the Block closer to one of its original goals: to become an actual Common Market.

Nevertheless, to reach an agreement about the Common External Tariff member states will need to improve their dialogue towards seeking a consensus. The Block’s main economies, Brazil and Argentina, will need to set aside their conflicts and renew their relationship.

A reduction in the Common External Tariff will also be an important step for the Block to become a free circulation area, as was intended in the original Treaty. Free movement could come about with the recognition of diplomas, leading to higher exchange of technology and professionals. Those measures would enable Mercosur to not only succeed in economic trade, but also in knowledge exchange.

Another issue being discussed by Mercosur is the agreement with the European Union, which was signed in June 2019 and represents a highlight of the Block’s 30 years. Mercosur, together with the European Union, represents 25% of the world’s economy. However, the Agreement has not entered into force yet, as it needs to be ratified by the European Council and the European Parliament. France and Austria, in particular, have taken a stand against the terms, mainly because of the requirement for environmental preservation commitments, with special regard to the Amazonian Rain Forest, and a rough stance of the Brazilian Government as there is a widespread biased impression on the international community that the current Brazilian policy is detrimental to the environment.

During negotiations, the Brazilian government disclosed that the EU-Mercosur Trade Agreement would represent an increase of R$ 333 billion over 15 years to the Brazilian GDP. Nevertheless, to achieve this economic growth Brazil will need to cooperate with other Mercosur member states to establish and follow common environmental goals.

Brazilian role in Mercosur during the pandemic

Mercosur is a historic opportunity to make Brazil a geographic, political, economic, and diplomatic asset in the post-pandemic world. To do so, Brazil, the largest economy, population, and territory, of the Block, needs to position itself, overcoming short-terms barriers. For instance, the current mishandling of the pandemic and the rivalry created by both the Brazilian and the Argentinian governments impair the functioning of the Block. While Brazil is rapidly recovering from the Pandemic with good economic results and heavy vaccination undergoing the same cannot be said about Argentina, still suffering from one of the hardest hit lockout and lack of mass vaccination.

When Jair Bolsonaro took over the Presidency of Brazil, there was a threat that the State would leave Mercosur because of declarations made by Paulo Guedes, Minister of Economy. Statements by both Fernandes and Bolsonaro created momentary diplomatic entanglements. However, in December 2020, the Brazilian President stated that the conflicts were over, and that the moment required pragmatism. The underlying point is that Mercosur, even with its flaws, is good for everyone in the region.

In this complex situation, there have not been moves to strengthen nor to break the union between the member states. Currently, the internal politics of Brazil dominates the external market. The Federal Government would need to undertake more efforts to stabilize and strengthen the Block with financial and political investments, to make Mercosur relevant again on an internal analysis.

Mercosur does not have political nor macroeconomic characteristics (nor ambitions), being essentially a Trade Block. However, because of its relevance, its decisions always lead to important political developments that were not considered by Bolsonaro or Fernandes when articulating their strategies, taking along Uruguay, Paraguay, Venezuela (as well as Bolivia, in its final stages of incorporation to the Block).

I strongly believe that is not the time to isolate nor limit partnerships, especially while the Mercosur-European Union Trade Agreement is in the process of being considered by the European Parliament. If Brazil refuses to meet the demands of developing a clearer environmental policy and thus strengthening Mercosur, the State may lose more than the cooperation of its neighbors.

A further threat to this institution is Brazil’s willingness to negotiate bilateral agreements without the involvement of Mercosur countries. The internal conflicts between the member states limit the chances of approval of free trade agreements that meet the neoliberal agenda of Brazil’s Minister of Economy. The unlikely possibility of a bilateral treaty with the EU not moving forward would be devasting for Mercosur.

Given the current situation, there is a need to find common economic grounds needing fostering and prioritize the interests of the State, that is, the long-term public interest, instead of the momentary interests of the present Government, to achieve Mercosur goals and expand the possibilities of further agreements. Operating bilaterality, at this moment, would not be a positive alternative for Brazil or its neighbours.

The relationship between Brazil and Argentina is crucial for Mercosur. When there was convergence between the two countries, Mercosur moved forward, as happened in the recent administrations of Michael Temer and Mauricio Macri. It is hoped that Brazilian external politics may change to a more optimistic note with Carlos Alberto Franco França replacing Ernesto Araújo as Foreign Minister. Although Carlos França is not known in the political world and has instead enjoyed a modest diplomatic career, his discrete profile could be a positive in reestablishing relationships with other States, as well as in avoiding unnecessary conflicts.

Some final thoughts

As it stands it is important for Mercosur to focus on avoiding protectionism by reducing the Common External Tariff, as well as establishing environmental goals to enable the Trade Agreement with the European Union to enter into force. To do that, it is of key importance that the major economies of the Block, Brazil and Argentina, reestablish their dialogues. The Brazilian cooperation to the achievement of these goals, it is hoped, is likely to occur in the second half of 2021 given some positive declarations by top Brazilian Officials. The current Brazilian Foreign Ministry has a more moderate profile and as of July 2021 Brazil is exercising the ‘pro tempore’ presidency of Mercosur.