Report Nº: 109808/12/2024
MERCOSUR is not fulfilling the objectives of its creation. Instead of being a tool to facilitate and promote international trade, it has been working as a factor that enhances protectionism. The best alternative is to return to the founding objectives.
The Southern Common Market (MERCOSUR) is a trade agreement between Argentina, Brazil, Uruguay and Paraguay. It provides for the free movement of goods, services and people, i.e., no tariffs or bureaucratic barriers to foreign trade among member countries and the joint negotiation of trade agreements with the rest of the world. It was signed on December 31, 1994, meaning it will soon be 30 years old. Its presidency rotates every 6 months. The current president of MERCOSUR is Luis Lacalle Pou, president of Uruguay, and in the next rotation, it will be the turn of the president of Argentina.
President Milei has been making public statements very critical of MERCOSUR, including the alternative of abandoning the agreement. Surely his opinion is influenced by political differences with the partners –the new president of Uruguay belongs to the Frente Amplio, a center-left party that joins President Lula of Brazil’s Partido de los Trabajadores– and a more general vision that emphatically proposes free trade with all countries without having to agree on strategies with other partners of the agreement.
The question is how relevant MERCOSUR is for Argentina. According to the Ministry of Economy, Argentine exports to the rest of the countries that make up MERCOSUR show the following behavior:
These data show that in the 30 years of MERCOSUR’s existence, Argentine exports to the countries of the common area show a clear decline in their participation. Thus, barely 1 out of every 5 dollars exported is destined for one of the partners of the agreement. This is very suggestive of the malfunction of the agreement, since while exports within MERCOSUR are –in theory– free of tariffs and obstacles, exports to outside countries pay tariffs and suffer entry barriers.
In its original conception, MERCOSUR was conceived as an instrument to dismantle protectionist barriers in its member countries. The strategy was not only to eliminate the obstacles between partners but, more importantly, to use the agreement to integrate jointly with the world. In practice, the opposite happened. It was used to enhance protectionism. The starting point was, as a general rule, zero tariffs among member countries and a variable tariff –averaging 14%– for countries outside the zone, i.e., a fairly high level of protection vis-à-vis the rest of the world. Then, due to the lack of macroeconomic policy coordination, non-tariff barriers were and still are very often applied between member countries in order to protect themselves from macroeconomic variability. High macroeconomic instability ended up legitimizing protectionism among partners.
The most conducive path is to return to the initial spirit that motivated MERCOSUR. This implies using it as a tool for integration into the world. The starting point is to guarantee macroeconomic stability in the region. Furthermore, the harmonization of other policies must be added, for example, tax and labor policies. In this regard, Brazil has already made progress in a labor reform that prioritizes individual and company-level agreements over collective agreements, and in tax reform, it is unifying federal VAT with state (provincial for Argentina) and municipal sales taxes. Argentina should follow in Brazil’s footsteps to strengthen MERCOSUR in order to once again take advantage of the opportunities of a common market with neighboring countries.
With Donald Trump as president of the United States, a more hostile environment for international trade will surely emerge. This does not imply that foreign trade will cease to be a source of economic growth and social development. Faced with this new scenario, MERCOSUR is the tool to reestablish active and vibrant trade among its partners and, most importantly, to jointly address integration with the rest of the world.
