- Brazil's Lula promises to revive the Mercosur economic bloc as he comes back into power.
- He and his Argentinean counterpart, Alberto Fernández, have taken many aback when they proposed the introduction of a common currency.
- More realistically, Lula is putting political weight behind the ratification of a Mercosur-EU free trade deal, which could give the bloc new momentum.
With talk of a single currency and a new push to secure a landmark trade deal with the EU, the Southern Common Market (Mercosur) — South America’s giant, but sclerotic trade bloc — is showing some sign of life.
After years of irrelevance and stillness, the comeback of Luiz Inácio Lula da Silva (Lula) to Brazil’s presidency is shaping up as the catalyst for the bloc to regroup and finally live up to initial expectations — from boosting regional trade to streamlining opportunities with major economic blocs the world over.
Encompassing 300 million people and the largest economic area in the Southern Hemisphere, Mercosur was created in 1991 as the North American Free Trade Agreement — now the United States–Mexico–Canada Agreement (USMCA) — and the Maastricht Treaty (that formed the EU) were being negotiated.
Its founding members, Argentina, Brazil, Paraguay and Uruguay, set themselves lofty goals of becoming a South American equivalent of the EU with a customs union, unhindered movement of people, goods and capital, and a regional parliament.
Three decades later, Mercosur’s results have been far from perfect. Free trade between members is hobbled by dozens of exceptions, including for major sectors such as carmaking and sugar, and little effort has been made to remove non-tariff barriers. Although citizens can move across borders easily, there has been little attempt to facilitate trade in services or investment.
“The initial plans were very ambitious, but they achieved much less than they could have … it does not really deserve the [title of] customs union,” says Romina Gayá, a Buenos Aires-based economist.
[Mercosur's] initial plans were very ambitious, but they achieved much less than they could have … it does not really deserve the [title of] customs union
Rather a straitjacket now
Trade within Mercosur still represents less than a fifth of its members’ total external trade, compared to 50% to 60% in the EU or USMCA.
And rather than facilitating their entry into a more globalised world, Mercosur has acted as a straitjacket on its members, with a 12% common external tariff and a chronic inability to negotiate any significant trade deals.
“Mercosur products pay high import tariffs in third countries and, as a result, the bloc has stagnated over the past decade,” says Marcelo Elizondo, a business consultant and director of the International Chamber of Commerce in Argentina.
More global-minded Uruguay has unilaterally sought deals with China and Turkey, as well as membership of the Trans-Pacific Partnership, as it has grown more frustrated with Mercosur over the years. Uruguay’s incumbent president, Luis Lacalle Pou, even called Mercosur a ‘corset’. That did not go down well with the other members, with Argentina’s president Alberto Fernández accusing him of seeking to break up the bloc.
Lula tries to revive the bloc
Mercosur’s time appeared to be inevitably running down until Lula staged a long announced, but equally surprising comeback.
Returning triumphantly to office in January after spending 580 days in prison and only to be rehabilitated by the Supreme Court in 2021, Lula has promised to revitalise the bloc, agreeing with Mr Fernández a long to-do list focused on regional integration.
The item that has garnered the most attention — and merciless skewering on social media and opinion pages — has been a proposed common currency between Brazil and Argentina. But rather than a euro-style single currency, the two governments will study a common unit to settle operations between the two countries without involving the US dollar.
The aim is laudable, says Leonardo Paz of Brazil’s Fundação Gertulio Vargas, but given the bureaucracy and costs it would require, “why not use another global currency, like the euro?”, he wonders.
“They are playing to the gallery, but only to show they are serious about integrating,” says Ms Gayá.
Time for a Mercosur–EU deal
A more promising initiative is the implementation of the EU-Mercosur Economic Association agreement. Although negotiations were completed in 2019, after two decades of talks, ratification has been delayed. While this is largely a result of the Covid-19 pandemic, issues have also stemmed from resistance in the European agriculture sector, and concerns over Brazil’s environmental policy after Lula’s predecessor, Jair Bolsonaro, threatened to open the Amazon rainforest to drilling.
But with the right-wing ex-president officially on “holidays” in Florida and Lula’s return sparking rapprochements with both Brussels and Buenos Aires, the path looks open to push the deal over the line.
Speaking to the European Parliament in January, the European Commission president Ursula von der Leyen said there was now “a unique window of opportunity to finally take forward the EU–Mercosur agreement”. Lula would like an updated deal to come through within six months of taking office, presumably before elections in Argentina limit Mr Fernandez’s room to manoeuvre.
Either way, the new realities of global trade are making the deal more attractive for both sides.
As the US and the EU look to subsidise key industries to keep up with China, Mercosur risks losing out in “a web of unfair competition”, Emily Rees, a senior fellow at the European Centre for International Political Economy, and managing director at Trade Strategies, a trade and regulatory advisory consultancy, told a recent webinar organised by London-based Canning House. However, as the war in Ukraine rages, Brussels now sees Mercosur as restoring some security to ravaged food and energy supplies, with South America’s Atlantic seaboard offering not just oil, beef and grains in vast quantities, but also biofuels, green hydrogen and critical minerals.
There are still significant obstacles to overcome. European farmers and environmentalists will want to see firm steps by the Brazilian administration to stop deforestation, while Argentina will demand guarantees to shield its manufacturing sector. Any of these could hinder ratification.
“[The Argentineans] won’t be open about this, but they will push for the deal to be renegotiated. And renegotiate means cracking open Pandora’s box,” says Ms Gayá.
But with Lula and Ms von der Leyen firmly behind the agreement, there should be a way forward.
“Political will can resolve many of these issues which negotiators cannot fix because they don’t have the power,” says Paulina Nazal, Chile’s former top trade negotiator and now a consultant with Washington-based ProAmérica.
Reports suggest Lula has already persuaded Mr Lacalle Pou to pause his pursuit of bilateral deals until the EU agreement is ratified. Persuading Mr Fernández to make compromises could be harder. But things could become easier if a more trade-friendly administration is elected in Argentina in October 2023.
If the agreement finally falls into place, it could provide the impetus Mercosur leaders long to pursue more agreements. Negotiations for a free-trade agreement with South Korea, which began in 2018, are already into their seventh round and informal discussions have been held with Singapore, Canada and Japan.
Lula’s next target might be China, which already is the region’s main trading partner and a major source of investment.
“Deals with China and other Asian countries should be simpler to reach,” notes Mr Elizondo.
But Mercosur’s members will not be able to take full advantage of the opportunities available around the world if they cannot smooth out problems closer to home. From reducing exceptions to the customs union, to lowering the common external tariff and unifying trade standards, there are still huge opportunities to deepen integration within the bloc as well as with the rest of South America.
Before the onset of the pandemic, Mercosur had already agreed to a plan of action with the more economically liberal Pacific Alliance (Chile, Colombia, Mexico and Peru) to advance in areas of integration unaffected by ideology, including infrastructure, e-commerce and trade facilitation. The time has come to follow up on those intentions.
This article first appeared in the February/March 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.