Mercosur trade bloc on the verge of breaking apart

30th April 2020

By Fermín Koop

Mercosur trade bloc on the verge of breaking apart

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The South American trade bloc Mercosur is on the verge of its biggest change since its foundation in 1994, when it was founded by Brazil, Uruguay, Paraguay and Argentina. The decision by Alberto Fernández’s Foreign Minister Felipe Solá to withdraw from ongoing trade negotiations has opened the door for the first three countries to seal deals on their own, and could even be the first step towards bilateral trade agreements between individual members and economic powerhouses such as the US and China.

The conflict began to unravel after Argentina announced it will no longer participate in the talks between Mercosur and South Korea, Singapore, Lebanon, Canada and India, among others. The country will still remain engaged in finishing up the already signed deals with the European Union and the European Free Trade Association, but the decision to step down from other roundtables was a turning point, as the pro-market governments in Brazil, Uruguay and Paraguay are eager to continue without Argentina.

Argentina’s foreign office said it was concerned over the fast-tracking of the new free-trade agreements, claiming that the “international uncertainty” due to the coronavirus pandemic and the state of the economy “suggested halting progress” on the negotiations, according to a statement by the ministry.

The move marks yet another setback for the four-nation common market, which had already been altered by political squabbling and government changeovers. Now, with Argentina taking a more protectionist stand over its economy, these could be the last days of the bloc as we know it.

“The move is highly relevant. Since the bloc was created, there had never been such a strong dissidence of one member with the rest,” Marcelo Elizondo, head of DNI consultancy said. “Brazil, Uruguay and Paraguay want the bloc to be more connected with the rest of the world, while Argentina doesn’t.”

Political differences

Argentina’s decision comes at a time of stark contrast with other Mercosur bloc members. The political tide has turned in Latin America with the victories of Luis Lacalle Pou in Uruguay and Jair Bolsonaro in Brazil, and this is showing its first effects for the trade bloc.

Uruguay, Paraguay and Brazil have joined forces since the beginning of the year, seeking to speed up ongoing negotiations over new free-trade agreements – following the one agreed with the EU last year. But Argentina was expressing doubts long before the coronavirus crisis was on the horizon.

While several deals are on the table, the one that most hit a nerve on the Fernández administration was the one with South Korea, which Mercosur hopes to sign by the end of the year. Negotiations started in 2019 and are now on their fourth round, moving fast despite the coronavirus context.

The Korean trigger

South Korea has positioned itself on the last few decades as one of the economic powerhouses of Asia, and has 15 free-trade agreements with 52 countries. It’s the sole country that managed to sign deals with China, EU and the United States simultaneously.

“This is the deal that could have the most severe consequences for the industrial sectors of Mercosur countries. All the manufacturers that depend on state protection, such as vehicles, would be hit,” said Julieta Zelicovich, international relations expert and CONICET researcher.

Similar concerns where highlighted by the Argentine Industrial Union (UIA) and Brazil’s Industrial Confederation (CNI). In a joint statement, both lobby groups said they were worried over the impact that an agreement with South Korea could have, questioning the lack of transparency over it.

“Korea’s industry has a larger capacity to compete, with a dominant position in sectors such as vehicles, electronics, steel and chemicals. This could provoke serious effects on Mercosur’s industry,” the statement reads. “We don’t know the benefits the Mercosur would get by signing this deal.”

Road to liberalization

Paraguay’s Foreign Ministry, which currently holds the Mercosur presidency, said in a statement it will jointly evaluate with Brazil and Uruguay “the most appropriate legal, institutional and operational” measures to Argentina’s decision – which “won’t be an obstacle for the other states to continue with their negotiations.”

The move by the Fernández administration could accelerate discussions to reduce the Common External Tariff (TEC) of the bloc. Tariffs currently average 14 percent and those levels haven’t been changed in 25 years. Last year, Argentina’s former president Mauricio Macri, joined forces with Brazil and pushed to lower them to five percent in the long term, as a way to improve trade with the rest of the world. But that tide has turned in Argentina since Macri’s presidential loss last year.

But the exclusion of Argentina from negotiations could open the door to changes on the rules of the Mercosur bloc, allowing for example individual trade agreements by its members, now banned by what’s known as “Decision 32” — agreed at a summit in Buenos Aires 20 years ago. Changing the rule would transform the bloc from a customs union to a free-trade zone.

“Argentina had always supported the idea of a customs union, rejecting changing the rules of the bloc. But this new move suggests differently and that’s why it’s so surprising,” Zelicovich said. “The ideological differences between the member countries are now affecting the trade and productive structures.”

In a virtual presentation before the Senate yesterday, Argentine Foreign Minister Felipe Solá tried to play down the significance of the move, saying that “we will be in talks (today) with all (Mercosur) participants to continue talking about that legal and institutional formula they can use to move forward with certain agreements.” President Fernández is also looking to tone down the incident by giving a more prominent role to adviser Gustavo Béliz over the last few hours, as Béliz is seen as less critical of international agreements.

Bilateral deals?

Bolsonaro and Lacalle Pou have expressed their desire for bilateral deals outside the Mercosur. Uruguay has repeatedly called over the last few years for a trade deal with China but hasn’t been able to move forward due to the current rules. Meanwhile, Brazil said last year negotiations with China were already underway.

At the same time, US President Donald Trump said last year that his country “will pursue a free trade agreement with Brazil,” describing the country as a “big trading partner” that currently hits the US “with a lot of tariffs.” Both countries exchange more than USD 100 billion in goods and services every year.

“Mercosur is moving forward to a more flexible model. The customs union will be severely affected and the bloc members will likely have different status from now on,” Álvarez said. “Brazil, Paraguay and Uruguay will remain as full members, while Argentina will participate only on some aspects.”

Fermín Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires. He is editor at Diálogo Chino and co-founder of Claves 21.