South American trade between Mercosur and the Pacific Alliance

Any conversation about free trade in South America inevitably includes some comment on Mercosur, a South American regional group constituted in 1991 and once hailed as the “next European Union” – clearly in a time when comparison with the EU was still seen as a symbol of hope and success! Yet today despite the economic success of Brazil and more generally of other emerging market economies in South America, Mercosur is widely considered to have stagnated and failed its primary mission of fostering a common market in South America.

Brazil, Argentina, Paraguay and Uruguay first drafted an ambitious plan for Mercosur which not only promoted intra-regional trade through common tariffs, but also incorporated aspects of democratic governance including the idea of Parlasur, the parliament of Mercosur. Some consider that politics eventually took over from the primary economic aims and led Mercosur into a series of crises which have eroded the quality of its policy-making. The suspension of Paraguay in 2012 after the controversial impeachment of former president Fernando Lugo, followed by the hasty admission of Venezuela as a full member, despite resistance from those who saw the country’s drift into authoritarianism as problematic, was the very last straw. Meanwhile, the enactment of increasingly protectionist measures in Brazil and Argentina defeated the very purpose of the organization.

The Mercosur building in Montevideo, Uruguay. CC-BY 2.0. Photo taken by Vince Alongi on Wikicommons.

Crystallizing tensions within the regional block, Paraguay looked to the West. Last week, the country became an observer member of a rising regional group, the Pacific Alliance. Launched in 2012 by Chile, Colombia, Mexico and Peru, this new entity states that its goals are to promote free trade and economic integration, not only in South America but also in the strategic markets of East Asia. Besides Paraguay, others countries said to be pondering membership with the Pacific Alliance include Uruguay, Costa Rica and Ecuador. Unlike Mercosur, the Pacific Alliance does not aim at constituting a political entity or promoting any kind of deeper integration, but rather at focusing its policies on creating economic prosperity through trade. Articulated by some of the most economically liberal countries in Latin America, this Alliance is also seen as the comeback of the U.S. in the South American trade arena after its isolation by the more left-leaning countries in Mercosur. Specialists concur that, given their different objectives, Mercosur and the Pacific Alliance should not be seen as rival regional blocks

The port of Callao in Peru. CC-BY-SA 3.0. Photo taken by Quado678 on Wikicommons.

At least for the moment Brazil is remaining silent about its next move – in what is interpreted by many as a missed opportunity. This comes at a time when the country’s revenues from exports are falling vis-à-vis all of its major target markets in South America and abroad, due to its poor logistics and the low competitiveness of its manufactured goods – to cite only the two main reasons. Losses related to this dip in trade are said to be of over USD 3 billion for China alone in comparison with last year. If countries in the Pacific Alliance push together for a stronger commercial relationship with East Asia, Brazil is doomed to lose even more of its international trade revenue – while remaining trapped in the political and economic inefficiencies of the present Mercosur setup.

Brazil has adopted international trade as one of its key flags in the world’s policy environment, from agreements with African countries to a successful campaign for the nomination of Brazilian diplomat Roberto Azevêdo as head of the World Trade Organization. Brazil should view a dialogue with the Pacific Alliance as the path to restore faith in markets, trade and solid economic policy. It may well now be time to take our eyes off Geneva and look to the Pacific.