The irrelevance of Mercosur

It was an especially pointed snub. Skipping the twice-yearly get-together of the presidents of Mercosur, Javier Milei, Argentina’s president since December, chose instead to speak to the hard right at a Conservative Political Action Conference in Brazil. “If Mercosur is so important, all presidents should be here,” huffed Luis Lacalle Pou, Uruguay’s centrist leader, at the summit in Asunción, Paraguay’s capital.

The reality is that Mercosur, a trade bloc that includes Paraguay, Uruguay and now Bolivia (formally admitted in Asunción) as well as Brazil, is no longer so important. Even the host, Santiago Peña of Paraguay, admitted that “Mercosur is clearly not going through its best moment.” Mr Milei has never formally met Luiz Inácio Lula da Silva, Brazil’s president, whom he slags off as “corrupt” and a “communist” (Brazil’s supreme court quashed Lula’s conviction—and he is a socialist). But political incompatibilities go back further: Jair Bolsonaro, Brazil’s former leader, and Alberto Fernández, Mr Milei’s Peronist predecessor, similarly shunned each other.

Created in 1991 as a free-trade area and customs union, Mercosur once promised much. Trade between members surged, in real terms, from $9bn in 1990 to over $31bn in 1996. Two things killed the promise. The first was macroeconomic volatility. Brazil devalued its currency in 1999; Argentina suffered a financial collapse in 2001-02. Second, widening trumped deepening, as political leaders including Lula and Argentina’s Peronists sought to use Mercosur to attract ideological allies (such as Bolivia’s leaders) rather than as a tool of economic policy. Protectionism grew: since the financial crisis of 2008, members have imposed over 400 non-tariff measures against each other.

Intra-Mercosur trade peaked in 2011 at $72bn (see chart). Though they have recently picked up thanks to the post-pandemic economic recovery, intra-block exports have fallen as a share of members’ total exports from a peak of 24% in 1998 to around 11% in 2023. Farm exports to China have boomed in Brazil and Argentina. Managed trade in their car industries used to be at the heart of Mercosur, but in both countries manufacturing’s relative importance has declined.

Further afield, Mercosur has only managed to conclude free-trade deals with Egypt, Israel and Singapore, though it is talking to others. Negotiations for a trade pact with the EU were at last concluded in 2019, 20 years after they began. But in an increasingly protectionist world, the agreement looks unlikely to be ratified by EU member countries. European leaders face pressure from farm lobbies, which oppose the accord. In turn, Brazil’s government has doubts, especially about opening public procurement.

“What is the purpose of Mercosur if you can’t expand market access?” asks Shannon O’Neil of the Council on Foreign Relations, a think-tank in New York. Mr Lacalle’s answer is to seek bilateral deals. Uruguay is talking to China and Turkey and wants to join the CPTPP, an 11-member Pacific group. Mr Milei threatens to leave Mercosur, though Argentina’s trade has received the biggest boost from the bloc. Mercosur was supposed to be a tool for its members’ economic development and a way for them to carry more weight in the world. The bloc’s decline conspires against achieving both those goals. ■

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