South America’s Political Rebalance: The Potential of a Mercosur-U.S. Free Trade Agreement

Argentina's president Mauricio Macri with the president of the United States Barack Obama, Source: Presidencia de la Nación Argentina

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On March 14, 2016, days before U.S. President Barack Obama’s visit to Argentina, Susana Malcorra, the Argentine foreign minister, said that there were discussions taking place within Mercosur, a South American trading bloc, of a possible free trade agreement (FTA) between the bloc and the United States.[1] The fact that Mercosur members have discussed the idea is a tremendous change from a decade ago, when the region rejected Washington’s Free Trade Area of the Americas (FTAA). The revelation also signals the political rebalance that has taken place in South America, where left wing governments have recently lost support or been voted out of office.

Mercosur — a free trade and custom union formed in 1991 between Argentina, Brazil, Paraguay, and Uruguay (and later joined by Venezuela) — promotes the free movement of goods and people across the zone. Mercosur’s members have benefited from having integrated markets that expand their commerce. The South American bloc, like the European Union, can sign free trade agreements only as a bloc.

This article examines the transforming relations between Mercosur and the United States and the potential of an FTA between them over the past decade. It discusses the left wing governments’ efforts in the early 2000s to fight U.S.-led trade policies, the return of pragmatic governance in South America, and the potential and obstacles of a Mercosur-U.S. FTA.

The Fight against Washington’s Trade Policy: FTAA

The early 2000s saw the election of various left wing leaders throughout Latin America, particularly in South America. Starting with the election in 1998 of Hugo Chavez in Venezuela, Latin American governments moved to the left in what many called the rise of Pink Tide.[2] All members of Mercosur were ruled by at least one left wing government between 2000 and 2015, with Argentina’s Nestor Kirchner, Brazil’s Luiz Inacio Lula Da Silva, and Venezuela’s Hugo Chavez being the primary leftist presidents in South America.

The rise of the South America’s leftist parties came at the same time the United States was promoting the creation of the FTAA that proposed to reduce trade barriers of goods and services throughout the Americas. Washington’s vision was to use the North American Free Trade Agreement (NAFTA) and the Chile-U.S. FTA as models for a FTA throughout the entire hemisphere.[3]

Despite multiple ministerial meetings and three drafts between 1994 and 2004, the FTAA felt apart during the 2005 IV Summit of the Americas in Mar de Plata, Argentina.[4] Venezuelan President Chavez, who intensely opposed the FTAA and viewed it as a tool of American imperialism, spoke passionately against the United States at a soccer stadium full of anti-trade, anti-U.S. protestors.[5] Meanwhile, Argentine President Kirchner lectured then-U.S. President George W. Bush about how previous trade and neoliberal policies promoted by Washington drove regional countries into poverty and misery.[6]

Over the next decade, Mercosur and the United States drifted apart. Mercosur members swiftly increased their economic and political integration, while global demand for commodities, driven largely by China’s economic rise, propelled the bloc’s members into prosperity.[7] In 2000, trade between China and Latin America was US$12 billion.[8] By 2013, bilateral trade reached US$289 billion, an increase of over 2,000% from 2000.[9] For its part, the United States moved towards a bilateral approach with its Latin American foreign policy and trade, focusing on more friendly regimes and signing FTAs with Colombia, Chile, Panama, Peru, the Central American countries and the Dominican Republic.[10] Interaction between Mercosur members and the United States fell by the wayside as ties with Argentina and Venezuela deteriorated, while relations with Brazil remain cordial yet reserved.

Figure 1: Mercosur and Mexico Trade with the United States, 2000-2015

The Beginning of Pragmatic Governance

The commodity bonanza, however, ended over the past two years, and countries throughout the region saw their economies slow down sharply. At the same time, corruption scandals erupted in numerous countries bringing down left wing governments that fell victims to one of the region’s century-old problems.[11] These circumstances began to change the political landscape as center right leaders were elected or left wing regimes began implementing economic reforms very similar to the neoliberal ones they fought against a decade ago. These changes profoundly affected Mercosur members, as the Brazilian Workers’ Party implemented economic reforms, the Venezuelan opposition won a supermajority in Congress, and Argentina elected a center-right president.[12] Uruguay and Paraguay, the smaller members of the group, have also moved to the political center.

The economic recessions affecting Argentina and Brazil have forced their governments to focus on trade as a solution. A primary example of the changes taking place in South America is the Mercosur-EU FTA. In the works since 1999, Argentina’s left wing leaders, as well as the ambivalence apparent in Brazil’s leadership, stalled the agreement. The two countries opposed the agreement for various reasons, from the Union’s agricultural subsidies, to the belief that the agreement would only benefit multinational businesses.[13] Similarly, as both countries enjoyed the rapid increase of commodity prices, both believed that their ties with China were more important, making the EU deal superfluous.

Yet when commodity prices fell and their economies slowed down, the deal rose to importance in Brazil, Uruguay and Paraguay while Argentina’s left wing government remained opposed to the deal. On June 10, 2015, Brazil, together with Uruguay, threatened to modify Mercosur’s treaty and end the collective trade negotiation section.[14] The move threatened to split Mercosur into two tracks, endangering the entire project. Following the election of Mauricio Macri as Argentina’s president, however, Buenos Aires swiftly changed its policy and joined its partners, and Mercosur is moving towards concluding the agreement with the EU this year.[15]

Mercosur’s change regarding the EU deal signals the beginning of pragmatic governance, particularly in the driving engines behind the organization – Argentina and Brazil. President Macri has moved rapidly to end Argentina’s international isolation while also working with the opposition in Congress, ending 12 years of Argentine opposition against an international system, particularly the International Monetary Fund (IMF) and the so called Washington Consensus, which the Kirchner governments felt was responsible for Argentina’s economic crisis of the 1990s and the 2001 default.[16][17] In Brazil, the economic slowdown and the Petrobras corruption scandal has driven President Dilma Rousseff, Lula’s handpicked successor, to pass economic reforms, but she faced tough opposition in Congress. At the same time, a political crisis developed that led to the suspension of President Rousseff.[18] Such steps have created the opportunity for a rapprochement between Mercosur and the United States.

The Potential of a Mercosur-U.S. FTA

Malcorra’s statements, combined with President Obama’s visit to Argentina in late March, signal the beginning of significant changes taking place within Mercosur. Such an accord would bring about a paramount shift in the Americas, connecting three of the largest economies (the U.S., Brazil and Argentina) in the hemisphere together.

Out of the five Mercosur members, Brazil is the only one that is currently among the United States’ top 15 trading partners in 2015.[19] As of last year, Brazilian exports amount to US$32 billion, while it bought US$27 billion worth of American goods. In contrast, Mexican exports and imports reached US$236 billion and US$295 billion, respectively. Argentina fared worse than Brazil, having exported and imported US$9 billion and US$4 billion, respectively, with the U.S. It is no small coincidence that during their joint press conference, President Mauricio Macri called for an increase in trade between both countries.[20]

President Macri is correct to believe that trade between the South American bloc and the United States. can increase. In 2015, the share of Mercosur in U.S. exports and imports reached 3% and 2%, respectively. For its part, Mexico made up 16% and 13%, respectively, of U.S. exports and imports last year. An FTA tying the United States to South America’s largest economies would boost commerce, eliminating bottlenecks that persist between the two sides.

However, discussions have only begun in Mercosur and it will take time to get the required consensus. Macri discussed the situation during Obama’s visit, saying that the first step is to consolidate Mercosur’s opinions, and then both sides can begin discussing an FTA.[21] Consolidating Mercosur’s opinions will take multiple steps, with the most critical one being the end of the political crisis in Brazil.[22] The interim Brazilian government has moved quickly on Mercosur as it viewed the trade agreement as a vehicle for economic recovery. Jose Serra, the new Brazilian foreign minister, traveled to Argentina to meet with Argentine Foreign Minister Susana Malcorra to discuss how to reform Mercosur, including the idea of allowing individual members to sign FTAs with third parties.[23] A second phase is to re-orientate Mercosur back towards trade after a decade in which it became a protectionist and political tool by left wing governments, a step Macri hinted at during the 49th Mercosur meeting in Asuncion, Paraguay, in December of 2015.[24] While the original four founding members are likely to move forward in this direction, Venezuela and Bolivia (which is in the process of becoming a full member) are likely to stall the process as both governments disapprove of trade agreements and particularly those with the United States.

Conclusion

The prospect of a Mercosur-U.S. free trade agreement would likely be beneficial for both sides, but it remains a future goal as both short and long term obstacles remain, with most of them falling on the Mercosur side. The current political crisis in Brazil, the deteriorating situation in Venezuela, as well as the economic recessions in most of the bloc are major hurdles that need solving before an FTA with Washington begins. Similarly, long-term animosities, particularly the historical mistrust between the two sides, will need resolving. The recent turn towards pragmatism in most Mercosur members is a positive sign of change in the right direction. On the U.S. side, the restoration of ties with Cuba lifted a large burden in U.S.-Latin American relations, while the rhetoric coming out of the 2016 presidential election is likely to add to the mistrust between both sides, and the next president will need to handle the fallout.[25]

The FTAA might have ended in 2005, but tying together South America’s largest economies, with the United States (and Mexico through NAFTA) could provide an immense prospect for hemispheric prosperity and affairs.

About the Author

Luis Ferreira Alvarez is a Houston-based energy and political analyst focusing on Latin America. He has an MPA from Cornell University and a BA from the University of California, Berkeley.

[1] “Malcorra reveals free-trade deal talks,” Buenos Aires Herald, March 15, 2016, http://buenosairesherald.com/article/210699/malcorra-reveals-freetrade-deal-talks

[2] “Pink Tide,” Wikipedia, Accessed March 22, 2016, https://en.wikipedia.org/wiki/Pink_tide

[3] United States Trade Representative, “Trade Facts: Free Trade Area of the Americas,” OAS Foreign Trade Information System, Accessed March 21, 2016, http://www.sice.oas.org/tpd/ftaa/Offers/USA/USA_e.pdf

[4] “4th Summit of the Americas,” Wikipedia, Accessed March 22, 2016, https://en.wikipedia.org/wiki/4th_Summit_of_the_Americas

[5] Monte Reel and Michael A. Fletcher, “Anti-U.S. Protests Flare at Summit,” The Washington Post, November 5, 2005, http://www.washingtonpost.com/wp-dyn/content/article/2005/11/04/AR2005110401724.html

[6] Dado Galdieri, “Summit of the Americas protesters battle police,” USA Today sourcing Associated Press, November 5, 2005, http://usatoday30.usatoday.com/news/world/2005-11-04-bush-abroad-image_x.htm

[7] “South America nations found union,” BBC, May 23, 2008, http://news.bbc.co.uk/2/hi/americas/7417896.stm

[8] Latin America is all nations where romance languages (Spanish, Portuguese and French) are spoken, while South America is the geographical continent starting in Colombia/Venezuela to Argentina/Chile, and Central America includes the countries between Mexico and Colombia.

[9] Katy Watson, “What will China’s investment do for Latin America?” BBC, July 7, 2015, http://www.bbc.com/news/world-33424532

[10] “Free Trade Agreements,” Office of the United States Trade Representative, accessed March 22, 2016, https://ustr.gov/trade-agreements/free-trade-agreements

[11] Jorge G. Castañeda, “The Death of the Latin American Left,” New York Times, March 22, 2016, http://www.nytimes.com/2016/03/23/opinion/the-death-of-the-latin-american-left.html?smid=fb-share&_r=0

[12] The ebbing of Latin America’s ‘pink tide’,” The Financial Times, March 24, 2016, https://next.ft.com/content/72b63996-a282-11e5-bc70-7ff6d4fd203a

[13] Michael Paczkowski, “A Potential Accord: An EU-Mercosur Free Trade Agreement,” Council on Hemispheric Affairs, June 29, 2015, http://www.coha.org/a-potential-accord-an-eu-mercosur-free-trade-agreement/

[14] “Brazil Threatens to Leave Mercosur Behind in EU Trade Deal,” Panam Post, June 10, 2015, https://panampost.com/panam-staff/2015/06/10/brazil-threatens-to-leave-mercosur-behind-in-eu-trade-deal/

[15] “Argentina President Macri seeks ‘pragmatic’ relationship with U.S.,” Reuters, January 22, 2016, http://www.reuters.com/article/argentina-politics-idUSL2N1560NW

[16] Jeff Manson and Richard Lough, “Obama praises argentina’s ‘man in a hurry’ Macri for reforms,” Reuters, March 24, 2016, http://www.reuters.com/article/us-usa-argentina-idUSKCN0WP0B3

[17] “1998-2002 Argentine great depression,” Wikipedia, Accessed March 22, 2016, https://en.wikipedia.org/wiki/1998%E2%80%932002_Argentine_great_depression

[18] “Brazil’s Dilma Rousseff to face impeachment trial,” BBC, May 12, 2016, http://www.bbc.com/news/world-latin-america-36273916

[19] U.S. Census Bureau of Economic Analysis, “U.S. International Trade in Goods and Services December 2015,” U.S. Department of Commerce, February 5, 2016, https://www.census.gov/foreign-trade/Press-Release/2015pr/12/ft900.pdf

[20] Office of the Press Secretary, “Remarks by President Obama and President Macri of Argentina in Joint Press Conference,” The White House, March 23, 2016, https://www.whitehouse.gov/the-press-office/2016/03/23/remarks-president-obama-and-president-macri-argentina-joint-press

[21] “Conferencia de Presa de Mauricio Macri y Barack Obama,” Argentine Presidential Palace – Casa Rosada, March 23, 2016, https://youtu.be/gMgC4xhmlsc?t=1089

[22] “Dilma Rousseff’s chances of remaining in office are diminishing by the day,” The Economist, March 26, 2016, http://www.economist.com/news/americas/21695577-dilma-rousseffs-chances-remaining-office-are-diminishing-day-tick-tock

[23] “Argentina suggests countries may still go their different ways on trade,” Buenos Aires Herald, May 24, 2016, http://www.buenosairesherald.com/article/214905/argentina-suggests-countries-may-still-go-their-different-ways-on-trade

[24] “Mauricio Macri expuso en la 49a Cumbre de Jefes y Jefas de Estado del Mercosur,” Argentine Presidential Palace – Casa Rosada, December 21, 2015, https://www.youtube.com/watch?v=TUc9Pyqi484

[25] Teresa Welsh, “Renewed U.S.-Cuba Ties Will Benefit Larger Relations with Latin America,” U.S. News, December 18, 2014, http://www.usnews.com/news/articles/2014/12/18/renewed-us-cuba-ties-will-benefit-relations-with-latin-america

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