Mercosur’s Flexibilization Dilemma

Ultimately, the bloc’s future depends on the politico-ideological orientation of those presiding over its member countries in the coming years and on the relative value they assign to the region in their respective development strategies.


Image: Argentine President Alberto Fernández hosts Uruguayan President Luis Lacalle Pou at the Olivos presidential residence in August 2021. Source: BA Times.

When leaders of the Southern Common Market (Mercosur) met at an online summit in March 2021, many observers expected leaders to commemorate the thirtieth anniversary of its founding document—the Treaty of Asunción. Instead, a public clash between Uruguayan President Luis Lacalle Pou and Argentine President Alberto Fernández dominated regional headlines. Lacalle Pou called on regional leaders to prevent Mercosur from becoming a “lastre” or burden on its members. In turn, Fernández replied that Mercosur was not intended to be a burden on any nation, but if that was the case for Uruguay, then the country was welcome to embark on a different path. Thus, the anniversary of Mercosur’s founding marked a critical juncture for regional leaders to reflect upon the general balance of integration in the Southern Cone and reopen the debate on Mercosur’s role in the national development strategies of its member states.

But how did we end up here? Mercosur, 30 years on

To begin with, Mercosur is a free trade area in which intraregional trade accounts for only a small portion of the region’s total trade. During the first two decades of its existence, the bloc saw a significant increase in intraregional trade, growing from 4 billion dollars in 1990 to 41 billion dollars in 2010. Intraregional trade reached its peak in 1997, when it accounted for 25 percent of the bloc’s total trade. Trade within the bloc has consistently declined throughout the last decade, with intraregional trade currently representing less than 11 percent of the area’s total trade. Mercosur’s intraregional trade figure is relatively small compared to the global average of 30 percent for internal trade in similar agreements, not to mention the 63 percent intraregional trade figure in the case of the European Union.

At the same time, Mercosur enforces relatively high levels of external tariffs, thus raising the costs of foreign trade, despite the bloc’s heavy dependence on extra-zonal trade. Indeed, Mercosur’s average Common External Tariff (CET) is 12.5 percent, and in some cases is as high as 35 percent. Comparatively, the global average tariff level is nine percent. Even though the bloc has substantially reduced its average CET from its original figure of 35 percent to less than 13 percent, it remains one of the highest CETs in the world. Moreover, Mercosur applies external tariffs asymmetrically with many exceptions, extensions, and breaches. In practice, these exceptions constitute a de facto flexibilization of the bloc’s trade policies. For example, the bloc’s regulation on transitory tariff reductions due to national shortage allows member states to apply an import tariff below the CET (usually at two percent) for a renewable 12-month period and on a limited amount of goods. Between 2015 and 2019, Brazil obtained 212 exemptions, Argentina received 80, Uruguay only implemented 17 such exemptions, and Paraguay has implemented zero. Mercosur’s current regulations on special import regimes explicitly make room for several hundreds of exemptions.

Finally, in recent years, Mercosur has experienced a notable trend of re-primarization of its exports, further accentuated by the growing importance of Asia, in general, and of China, in particular, for the bloc. Indeed, China is currently Mercosur’s leading trade partner, representing 29 percent of its exports and 25 percent of its imports. Furthermore, in 2020, natural resources and their derivatives accounted for almost 77 percent of the bloc’s total exports, which, in turn, represents the highest percentage of this category of export since Mercosur’s founding. Hence, even though general levels of trade with third parties have increased, a major part of this increase is represented by exporting commodities with little or no value-added.

The combination of low levels of intra-bloc trade, high levels of external tariffs, and re-primarization of the bloc’s exports has prompted the contemporary debate on the future direction of the bloc and the potential for its “flexibilization.”

Where to now? Mercosur’s flexibilization dilemma

The proposal in favor of a flexible Mercosur, put forward by Uruguay, would grant individual members greater room to maneuver with respect to trade agreements with third parties. More concretely, Uruguay is currently undertaking negotiations to sign a free trade agreement with the People’s Republic of China (PRC) and is interested in finalizing the agreement, either with or without the rest of Mercosur on board. Presently, however, Mercosur’s regulations specify that any agreement with a third party requires a unanimous vote from its members.

Closely related to the flexibilization issue is the proposal to lower the CET—as an alternative way to enhance the bloc’s commercial dynamism. In a bilateral summit held in Brasilia in October 2021, Argentina and Brazil agreed on a 10 percent reduction of the CET. At the time, the foreign ministers of the two countries—Argentina’s Santiago Cafiero and Brazil’s Carlos França—highlighted this measure as an important step toward increasing Mercosur’s economic competitiveness and promoting a successful integration of the bloc into global value chains. Moreover, the summit’s final communiqué emphasized that the measure preserved Mercosur’s “sense of unity” while also adapting the bloc to the “current conditions of regional and global trade.”

Notwithstanding, Mercosur’s Council of the Common Market (Consejo del Mercado Común del Mercosur) would have to approve the CET decision to allow for any reduction in tariffs rates. In the meantime, Brazil has already implemented this measure unilaterally, in a transitory manner, until the end of 2022. Uruguay has shown reticence to approve this measure, up to the point of refusing to sign the latest joint declaration of Mercosur from December 2021. By refusing to approve the joint declaration, Uruguay has blocked the present effort to lower the CET. Instead, Uruguay has argued for allowing individual members to negotiate trade deals with third parties. Indeed, during the last summit between Mercosur heads of state, in December 2021, Lacalle Pou claimed that Uruguayan interests had not been met so far by the bloc’s current modernization process. However, the Uruguayan president reassured leaders that his country maintained “the vocation of belonging to Mercosur,” thus making it clear that Uruguay would not seek to exit the bloc in the short term.

It is worth reflecting upon why the current debate over its flexibilization generates so much friction within the bloc. On this, it can be argued that the costs associated with abandoning the formal model of a customs union transcend the purely economic and commercial arguments to entail a redefinition of Mercosur’s symbolic and discursive identity as a regional integration project. In this vein, the transition towards a more flexible and individualistic approach would involve, to a certain extent, the abandonment of a project of common regional strategic vocation. Hence, breaking up with Mercosur’s status quo would be viewed as potentially entailing negative spillovers in other areas of regional cooperation, such as health, education, migration, tourism, and infrastructure, therefore jeopardizing some of the major regional achievements of the last thirty years.

Ultimately, the bloc’s future depends on the politico-ideological orientation of those presiding over its member countries in the coming years and on the relative value they assign to the region in their respective development strategies. Simply put, the future of Mercosur depends on whether member states can reach a consensus on why Mercosur is worth having.

Carolina Zaccato is a PhD Candidate and Postgraduate Tutor at the School of International Relations, as well as a Fellow at the Centre for Global Law and Governance, of the University of St. Andrews (United Kingdom). She is also a fellow at the Committee on Latin American Affairs of the Argentine Council for International Relations (CARI), and an associated researcher at the Regional Coordinator for Economic and Social Research (CRIES). Carolina also holds an MSc in International Relations, with Distinction, from the London School of Economics and Political Science (LSE). Twitter: @CaroZaccato.

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