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Mercosur, the "Common Market of the South," is the largest trading bloc in South America. Mercosur's primary interest has been eliminating obstacles to regional trade, like high tariffs, income inequalities, or conflicting technical requirements for bringing products to market. Yet experts say Mercosur has become somewhat paralyzed in recent years, with its members divided over the future of the organization. Some countries, like Brazil, want to keep Mercosur focused on regional trade. Other countries, like Venezuela, which has yet to attain full membership in the bloc, would like to expand the group's mandate to political affairs. The creation of a new regional organization in 2008, the Union of South American Nations (Unasur), has raised further questions about Mercosur's utility.

What is Mercosur?

The Mercosur trade bloc's purpose, as stated in the 1991 Treaty of Asunción, is to allow for free trade between member states, with the ultimate goal of full South American economic integration. The trade bloc's "grand aspiration is to unify the Southern Cone and then all of South America in an economic bloc," says Katherine Hancy Wheeler, a research associate with the Council on Hemispheric Affairs. "It gives them more trading security." Mercosur's full members include Argentina, Brazil, Paraguay, and Uruguay. Venezuela's entry as a full member is still pending ratification by Brazil and Paraguay. Brazil is the region's largest economy with a gross domestic product (GDP) of over $1.6 trillion in 2008.

The population of Mercosur's full members totals more than 270 million people. That group, including Venezuela, has a collective GDP of $2.4 trillion. It is now the world's fourth-largest trading bloc after the European Union (EU), North American Free Trade Agreement (NAFTA), and the Association of South East Asian Nations (ASEAN). Whether any reduction in poverty can be linked directly to Mercosur trade policies is unclear. However, Brazil's deputy UN envoy, Piragibe Tarragô, said in late 2006 that poverty reduction within Mercosur countries "has been remarkable."

What are associate members?

Mercosur's five associate members -- Chile, Bolivia, Colombia, Ecuador, and Peru -- do not enjoy full voting rights or complete access to the markets of Mercosur's full members. They receive tariff reductions, but are not required to impose the common external tariff that applies to full Mercosur members. Of these countries, Bolivia is being considered for full membership. But the decision is complicated by Mercosur's history with Bolivia, as well as the common external tariff. Bolivian President Evo Morales has criticized Mercosur, saying, "What I've discovered is that the CAN [Andean Community of Nations] as well as Mercosur are tools that only benefit businessmen and wealthy people, instead of the poor people" (People's Daily). Brazil would like to see Bolivia accepted, in part because of their shared border, Brazilian Foreign Minister Celso Amorim said in a 2007 interview with the Financial Times.

The possibility of full membership for Bolivia may also prove problematic because Bolivia's tariffs are actually lower than those of Mercosur. "They'd have to increase those tariffs to join," which would have a significant impact on prices within Bolivia, says the Financial Times' Latin America editor Richard Lapper. He says Mercosur may allow some exemptions to Bolivia to remedy this problem, as Brazil is very interested in having increased access to Bolivian gas.

Granting exemptions, however, would anger already disenchanted Uruguay and Paraguay, Mercosur's smallest full members, which have not been allowed similar exemptions. "Can Mercosur keep a straight face in exceptions to the common external tariff, but say it's not OK for Uruguay and Paraguay to negotiate a bilateral free trade agreement with the United States, since that would undermine the common tariff?," asks Agustin Cornejo of the Institute for International Economics in the Wall Street Journal in 2007. Uruguay, also angry over an ongoing dispute with Argentina over a paper pulp mill on their shared border, has gone so far as to sign a Trade and Investment Framework Agreement (PDF) (TIFA) with the United States.

The TIFA sets the stage for future trade liberalization and economic relations with the United States. But signing a Free Trade Agreement (FTA) with the United States would violate Mercosur's charter, which forbids bilateral agreements with nonmember countries. If the TIFA does eventually lead to the creation of an FTA with the United States, the leadership of Mercosur would either have to disbar Uruguay from the bloc for violating the charter, possibly causing Paraguay to resign as well, or it could choose to rewrite its charter altogether, thereby allowing members to sign bilateral agreements with nonmember countries.

What are the implications of Venezuela joining as a full member?

Venezuela's entrance into Mercosur has caused tension within the trade bloc. Venezuela is philosophically opposed to free trade (Politico), according to analysts. Since Venezuela signed a membership agreement with Mercosur in June 2006, President Hugo Chávez has been advocating for a shift in focus of the bloc, saying, "We need a Mercosur that prioritizes social concerns. We need a Mercosur that every day moves farther away from the old elitist corporate models of integration that look for ... financial profits, but forgets about workers, children, life, and human dignity."

In fact, says Lapper, a general sentiment within Mercosur against free trade with the United States is not wholly driven by Chávez's influence. Brazil and Argentina's concerns about trade with the United States are rooted more in economic, than philosophical, reasons. Moreover, Brazil and Argentina, are attracted by access to Venezuela's energy supplies and "they like the idea that they would have a Caribbean coast," says Lapper.

Brazil has yet to ratify Venezuela's membership in the bloc. As of August 2009, the lower chamber of Brazil's parliament had approved membership, but it awaited action by the Senate. The issue is the subject of a robust debate within Brazilian policy circles. According to Matias Spektor, senior research fellow at CPDOC, a Brazilian research center, one group argues that the "reason we need to bring Venezuela into Mercosur is because we believe in regional integration. If we don't bring [Chavez] in, he is even more dangerous. Better have him inside than outside the tent." Spektor notes that the current Brazilian administration supports Venezuela's membership in Mercosur, but the opposition party does not.

From an economic standpoint, Venezuela can make a significant contribution to Mercosur. The oil-rich nation's incorporation contributed $331.8 billion to Mercosur's overall gross domestic product (GDP) in 2008. Yet Chavez has nationalized several industries (El Universal) in the country, affecting Mercosur member states, and he seems to oppose free trade. In fact, says Roett, "Venezuela is a full member without having met the requirements for membership."

Does Mercosur have a political agenda?

Mercosur made headlines in early 2007 when its summit provided an arena for heated debate as to what the future role of neoliberalism and free trade should be in South America. At the summit, which produced a communiqué in which Mercosur leaders pledged increased focus on human rights and democracy, Chávez called for Mercosur to be "decontaminated of neoliberalism," while Colombian President Alvaro Uribe argued that free market capitalism is the region's best bet for eliminating inequality. Despite Mercosur's prominence and potential as an economic entity, some speculate that its agenda is becoming increasingly politicized, especially since Venezuela's acceptance as a full member in 2006. "Mercosur is no longer about trade," Roett told the Council on Hemispheric Affairs. "The new joiners don't have much to trade, they are opposed to free trade it seems. The organization is more and more political and to some degree anti-American." But Lapper insists business remains its core reason to exist. "I think it would be a mistake to characterize the Mercosur bloc as a kind of anti-American bloc." He says trade-bloc heavyweights Argentina and Brazil continue to be focused on economic issues.

How does Mercosur affect other regional groups?

Because Mercosur's charter does not allow its member nations to have FTAs with nonmember nations, Mercosur members are not permitted to be part of the Andean Community of Nations (CAN), a smaller trade bloc which includes Bolivia, Colombia, Ecuador, and Peru. When Venezuela joined Mercosur, it was required to resign from CAN, as Bolivia will have to do if it is admitted. Bolivia, however, has said that it will not leave CAN. CAN and Mercosur leaders signed an agreement to form a third organization, Unasur, in May 2008. Unasur is meant to encompass trade, security, and political issues, much like the European Union. Though the agreement must still be ratified by each signing nation, Unasur has held meetings on regional defense issues, including a controversial planned U.S. military expansion into Colombia (AP). Some analysts believe that Unasur could eventually replace Mercosur.

Mercosur, however, played a key role in the failure of the FTAA (Free Trade Agreement of the Americas). Spearheaded by the United States, the FTAA was intended to unite Latin America and North America in one broad trade accord. The Mercosur members and then-autonomous Venezuela rejected the agreement at the Summit of the Americas in November 2005 over concerns it would lead to increased inequality in the region (Guardian). Proponents of the FTAA have not been able to make any significant progress in forging that deal since.

How has Mercosur stimulated cooperation among its members?

Agreements among Mercosur members range from debt relief (Brazil recently agreed to renegotiate Paraguay's debt) to trade deals. Argentina and Venezuela, for example, signed a host of bilateral agreements in the energy, industrial, agriculture, and health sectors in January 2009. Chavez declared that Venezuela is ready "to supply Argentina with oil and later liquefied gas for the next 100 years."

The most controversial proposal is for a Latin American development bank, dubbed "Banco del Sur," or the Bank of the South. Such a bank - proposed by Chávez in early 2007 and to be based in Caracas - will allow member countries to fund projects and investments without World Bank or International Monetary Fund involvement. Launched in December 2007, the bank will begin operating in the second half of 2009, with initial funding of roughly $7 billion. In May 2009 its members - Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay, and Venezuela - reached a final agreement (Mercopress) regarding the bank's functions, including its lending conditions and voting rights. The agreement is now pending parliamentary approval by the seven founding countries. Though some see the bank as an important initiative toward South America's financial independence, many economists and analysts doubt its validity (NYT). They view the bank as a political move led by Chávez, aimed to build up his influence in the region and carry out his crusade against Washington-based multilateral institutions like the World Bank and the Inter-American Development Bank.

What is the attitude of the United States toward Mercosur?

Mercosur's blockage of the FTAA and its general disinterest in trade with the United States has discouraged warm relations between the two. While the United States has not overtly criticized Mercosur, Washington views the bloc "as being an obstacle to the expansion of their trade in Latin America. They find it an annoyance," according to Wheeler. Roett agrees. "It's viewed here in Washington as an anti-American entity," he says.

Washington would prefer to focus on shoring up its bilateral relations in the region. The United States, Lapper says, "is trying to set up good relationship with Brazil. They recognize that Brazil is a stabilizing force in the region." Lula was the first Latin American leader to visit U.S. President Barack Obama at the White House, and the two leaders have since met several times. At the Organization of the Americas summit in April 2009, Obama reinforced the U.S. commitment to work jointly to advance Western Hemispheric goals. However, a clear U.S. policy toward Latin America (PDF), including Mercosur, has not been yet defined.

Joanna Klonsky, is an asociated editor at Council on Foreign Relations'(CFR), Stephanie Hanson is a writer and copy editor for CFR'S website. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by the Council on Foreign Relations on 08/20/2009. Petroleumworld reprint this article in the interest of our readers .

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Petroleumworld News 11/21/09

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