MERCOSUR: a failure to impact the global economy

The quest towards economic integration in Latin America dates back to 1826 when the Libertador Simon Bolivar called the newly created Latin nations to form a Pan-American Union, from Mexico to Patagonia. However, the geographical and economic reality frustrates the Libertador’s dreams of a single Latin American nation. Many waves of integration have reached Latin American; the region has been fertile ground for the creation of integration mechanisms. However, none of them has been entirely successful in promoting integration among the country members.

A new wave of integration occurred while the Iron Curtain was falling in eastern Europe, and Latin America was experiencing a re-democratization process. Hence, the national elites of the southern continental region needed a regional structure to cement its return to democratic rule. [1] This political maneuver was first intended to solve the security dilemma between Brazil and Argentina, the two largest countries in the region. Besides, it was used as a pretext to advance in their domestic political and economic liberalization policies. During this initial time, the domestic political interest was always superior to an alleged share economic interest of promoting trade both intraregional and abroad.[2]

Meanwhile, the success of the European Union in keeping the peace, alongside economic progress correlated with its existence, established an example to emulate by the South American elites. Consequently, Mercosur was created with the Asuncion treaty (1991) aiming to establish a European-like common market, with the free flow of goods, people and capitals, within a common foreign trade policy and law and macroeconomic harmonization. Mercosur’s founding members were Argentina, Brazil, Paraguay, Uruguay. They were later joined by Venezuela, which remains suspended after violating the Democratic Clause of the organization in 2017.

Nowadays, Mercosur seems remote to the goals agreed in the Asuncion treaty. The protectionist nature of its two significant economies (Brazil and Argentina) has traditionally shifted the power balance to them over the two minor and more export-driven economies of Paraguay and Uruguay, halting the integration process. Additionally, the various domestic political wave in the region has continually altered the objectives of the organization. Besides, for almost two decades, never-ending negotiation has taken place with the European Union to establish a free trade agreement; every step forward seems to be followed by two backward. If agreed, this would be one of the few inter-regional trade agreements signed by Mercosur. Jointly Mercosur Nations would be the fifth world economy, with a GDP of over $3,3 billion.[3]However, only represent 25% of the global export of manufactured goods.[4] Therefore, while the regional trade blocks have consolidated worldwide, Mercosur continues struggling to create the bases for a common market and to increase its importance on the world’s economy.

TRADE, MERCOSUR’s WEAKNESS.

Today, the Regional Trade Agreements (RTA) account for over 60% of global exports of manufactured goods. More importantly, this figure had not stopped to grow since 2001 when it represented for 36%.[5] Furthermore, as shown in Graph 1 (see Annexes), there is a correlation between inter-RTA trade and the percentage of global exports. Therefore, the inter-RTA trade share helps in measuring the importance of a given RTA in the world’s economy.

According to the World Bank, Mercosur’s intra-regional trade share represents only 13% of its member’s total trade. [6]This figure showcased the decrease of the interregional trade, in correspondence with the 1990 figure of 21%. In parallel, the EU interregional trade has remained over 60% since 1990. [7] Mercosur, which was born emulating EU aspirations and policies, could not have a more different result. In this segment, we would examine the structural causes of Mercosur’s failures in improving trade among member states.

Mercosur’s institutional development is a product of intergovernmental theory and the history behind the organization. This theory, first presented by Stanley Hoffmann in his article “Obstinate or obsolete? The fate of the Nation-State and the Case of Western Europe” was a response of the immobility of the European Union as a result of the empty chair’s crisis. According to this theory, the process of economic integration should service the Nation-State, and not destroy it. [8] This theoretical formulation found fertile ground in South America. This intellectual development corresponded with the desires of the national elites of conceding as little as possible national sovereign to an economic integration institution.

The influence of intergovernmentalism thinking translated into a structure where consensus among Government is a prerequisite to making a decision. For instance, Article 16 of the Asuncion Treaty establishes “…decisions of the Council of the common market and the Common Market Group shall be taken by consensus, with all States Parties present.” Furthermore, Mercosur’s Decision 22/04, which was designed to speed up the process of incorporating Mercosur Law into effect domestically by country members, by creating “simultaneous coming into force.” [9] In theory, this formulations would promote gradualism and flexibility, which would allow the countries to partake in the process by taking firms to step towards integration. However, those have not been the consequences for Mercosur.

Gradualism, in this case, meant that the Institutional structures would be created as the integration process required them. This gradual approach to the creation of common institutions also reduced domestic budgetary strains. [10] On the other hand, flexibility will provide each state with guarantees that they would be able to preserve their national interest. At the being, these integration principles serve to foster and ampler the integration efforts. However, it then translates into an obstacle, when the Nation-States become more sensitive to domestic economic problems, and less focused on regional integration.

In practical terms, the effectiveness of the integration process should be evaluated by its ability to generate norms and to implement them, regardless of whether this was achieved via a supranational of intergovernmental bodies. In this regard, the failure of Mercosur could not be more evident. Mercosur has a law enforcement deficit. The organization has only been able to incorporate into effect 45% of the regulation into national law. [11] This deficit is a direct consequence of the preponderance of the States, and their domestic legal system, over Mercosur’s structure. For instance, article 40 of the Ouro Preto Protocol (1994) states that for a norm to enter into force simultaneously at the Regional level, “the States Parties shall take the necessary measures to incorporate it in their domestic legal system…” Knowing the applicable regulation is a fundamental part of the rule of law, which is a well-known promoter of international trade.

The influence of intergovernmentalism thinking in Mercosur is evident throughout its structural design. Nonetheless, it has been the lack of political will to correct its flaws, the primary cause for its failure as an organization. The lack of success can be measured, not only in the percentage of Mercosur’s regulation incorporated into effect by member states but also by the not reduction of trade barriers among member states that have created a reduction of interregional trade.

1.1) Extra regional trade engagement

In the hyper-globalization period that has characterized global relations during the post-cold war period, international trade has evolved toward the geographical specialization and fragmentation of production. As a result, the importance of the so-called Global Value Chains (GVCs), which refers to the set of intra-sectoral linkages between firms and other actors through which this geographical and organizational reconfiguration of global production is taking place.[12]

At first, Mercosur showed the interest to “facilitate its entry as a competitor into the global economy.”[13] This initial enthusiasm in Mercosur was fueled by the rapid increase in the flux of trade that reached more than $6 billion in 2011.[14] However, the structural context of Mercosur’s institutional development has done little to promote a supranational level of trade integration, limited the rise of regional value chains. The former is more evident when compared with ASEAN or the EU. [15]

For instance, the insertion of ASEAN in the Global Value Chains has translated in its export reaching $2,2 billion for 2017, while Mercosur only exported $512.000 million in goods. [16] When contrasted with the ASEAN trade block, the data reflects the limited international insignificance of Mercosur. Besides, Mercosur has signed few trade treaties with other regional blocks on extra-regional partners. Within this context, Mercosur’s countries with a higher dependency on exports are pursuing commercial agreements on their own.[17] Mercosur recently reached a consensus on this topic, allowing country members to pursuit bilateral trade agreement to ample Mercosur’s involvement with the world’s economy, weakening the common market aspirations.

IDENTITY CRISIS

The so-called institution identity refers to the quality of life of the institution and its ability to relate with other institutions. [18] A well-defined identity is fundamental for any institution to project itself not only domestically, but also to increase its relevance abroad. Regional institutions have clear-defined identities. For instance, ASEAN, with its “ASEAN way” approach, meant to guarantee the principles of consultation, consensus, flexibility, and non-interference in domestic affairs. This “ASEAN way” serves both to members states who can recognize themselves in the organization’s values and to external actors, who recognize these values in ASEAN, contributing to its predictability, hence credibility.

During its existence, Mercosur’s objectives have fluctuated. Since the promotion of democracy through economic integration, to support ideologic political policies to the region, and of course, the incomplete goal of being a common market. Mercosur does not seem to be a stable organization. Its lack of decisiveness to convert into reality what it is written in its foundational treaties makes the organization unreliable and perhaps indispensable both domestically and abroad.

Mercosur’s identity articulation has been formed along three central dimensions, each of them with its own central, enduring, distinguishing, and cohesive features. [19] First, a political dimension gravitated around the principle of democracy, which was later legally consolidated in the organization by the Usuaia Protocol (1996). Secondly, an economic dimension, voiced in the named but more importantly in the Asuncion Treaty (1991), the creation of a Common Market. Finally, an external dimension developed against the prospect of becoming insignificant in the international realm.

2.1) Political

In 1987 the first democratically elected President of Argentina, Raul Alfonsin, said: “The success of integration will be largely measured by its impact on democratization and regional cooperation.” [20] At that time, the Mercosur was in the negotiation tables, but the newly elected governments were seeking to protect the fragile democracies.

As Kaltenthaler and Mora explain it (2002), Brazil and Argentina rapprochement process and the subsequent Mercosur creation was a political maneuver to strengthen the fragile democratic regimes of the Southern continental cone after a long period of the authoritarian ruling. In this case, Mercosur was used to improve the domestic economy and gather popular support for the new regime. Additionally, it served as a mechanism to gain international legitimacy for the new democratic regimes. [21] Finally, Mercosur was relatively successful in spreading and cementing democracy throughout the region.

Nonetheless, in a more current issue, Mercosur suffered to stop Venezuelan degeneration into an authoritarian regime. It was not until August 2017 when the Democratic clause of the Ushuaia Protocol was activated; consequently, Venezuela remains suspended as a member of Mercosur. Whereas this act constituted a positive step toward strengthening Mercosur’s commitment to democracy, it also showed how Mercosur’s decision-making process relays on each State’s National political reality since the suspension was only approved when the majority of the governments made an ideological shift to the right.

2.2) Economic

As it was mentioned above, Mercosur’s assessment of the economic front is not a positive one. The reduction of internal trade and its difficulty in inserting in the international market have made this organization relatively irrelevant on the global scale. Divergent macroeconomic policies in the Mercosur’s two principal members during the first half of the 1990s and Argentina’s instability in the eve of the new Millenia halted the initial push of the integration process.

Mercosur, turbulent and short-lived history has seen several “refunding,” “relaunching,” and “reconstructions,” none of them has yet proved to be a turning point in the integration process. [22] Furthermore, in January 1994, Mercosur’s highest organ of decision the Common Market Council, voted to postpone the formation of the common market, settling for the more realist goal of building a common union. In recent times, the annexation of socialist-inspired Venezuela to the organization transformed its economic spirit to an anti-imperialist oriented organization, rather than a pro-free-trade institution, as was intended by its founders.

In sum, Mercosur not only has failed to accomplish its initial economic goal but also has abstained to made its name a reality, a common market. Besides, Mercosur’s sensitivity to domestic policies is a flaw in its economic identity because, with each new ideological wave in the region, the institution’s core structure changes.

2.3) External

The need to form a bloc to accomplish more significant international influence appeared early in Mercosur’s development. In the Iguazu Declaration (1985). “Agreed on the urgent necessity of Latin America to strengthen its bargaining power with the rest of the world, increasing its decision-making autonomy and avoiding that countries in the region continue to be vulnerable to the effects of policies adopted without their participation. Thus, they resolved to conjugate and coordinated their respective governments’ efforts for the revitalization of cooperation and integration policies among Latin American nations.” During this initial time, organized as a defensive type bloc (Oelsner, Andrea 2013).

However, the difficult economic period of the 1990s transformed the intentions of the national leaders, favoring a more open regionalism by promoting the influx of Foreign Direct Investment (FDI). During this period, engagement and cooperation with other regions and countries reached a total of 20 signed preferential trade agreements. [23] Nonetheless, Mercosur still fails short in connecting itself in the world economy, thus diminishing its external identity.

A symbolic case in this area is the state of the Free trade agreement with the European Union, which negotiations started 18 years ago and are yet to see a conclusion. However, after this period of on-off negotiations, Mercosur’s credibility has been affected, particularly by an undefinition of the agricultural policy, and how each domestic agenda has grown apart during this period. [24]

This “actorness” defines the capability to influence the external environment. [25] Hence, it is fundamental to explain the relevance or irrelevance of an organization. Mercosur was created under the influence of the intergovernmental approach of economic integration. Therefore its institutional design has never been set up to produce an identity different than its countries member, which would correspond more to and neo-functionalist approach in economic integration. Nonetheless, the lack of a clear definition of goals and the difficulties in accomplishing them has definitively diminished Mercosur’s credibility and relevance worldwide.

ASSESSMENT

The Mercosur has failed to increase its relevance in the world market. First, the intraregional trade has declined thanks to a domestic-centered institutional design, which has prevented it from enforcing its trade regulations, alongside the lack of political will from the Nationals Governments. Secondly, Mercosur has been ineffective to link itself in the international global values chains or to craft a cohesive common trade policy. As proof of that, national governments are willing to adventure in a bilateral trade deal to improve its international position, which constitutes a contradiction to the spirit of belonging to a common regional trade block. Lastly, Mercosur seems to have a severe problem of identity, thus creating mistrust and lack of credibility, both domestically and at the international level.

In few words, if continuing on this path, without a sincere effort to revive, Mercosur might be zoom dispensable. Even though improvements have been made, the above-explained aspects evidence Mercosur’s failure to make an impact on the global economy.

ANNEX

Graph 1[26]

[1] Felter, Clarie. Renwick, Danielle. Mercosur: South America Fractious Trade Bloc. Council on Foreign Relations. https://www.cfr.org/backgrounder/mercosur-south-americas-fractious-trade-bloc. Accessed Sep. 2018.

[2] Kaltenthaler, Karl, and Frank O. Mora. “Explaining Latin American economic integration: the case of Mercosur.” Review of International Political Economy 9.1 (2002): 72–97.

[3] MERCOSUR Overview. Itamaraty Palace, Brasil. http://www.itamaraty.gov.br/es/politica-externa/integracao-regional/6346-mercosur-es

[4] WTO. World Trade Statistical Review. Pag 74. 2018. https://www.wto.org/english/res_e/statis_e/wts2018_e/wts2018_e.pdf Accessed Nov. 2018.

[5]WTO. World Trade Statistical Review. 2002. https://www.wto.org/english/res_e/statis_e/its2002_e/its2002_e.pdf

[6] WTO. World Trade Statistical Review. Pag 74. 2018. https://www.wto.org/english/res_e/statis_e/wts2018_e/wts2018_e.pdf Accessed Nov. 2018.

[7]WTO. World Trade Statistical Review. Pag 11. 2002 https://www.wto.org/english/res_e/statis_e/its2002_e/its2002_e.pdf

[8] Paul, Taylor. Intergovermentalism in the European Communities in the 1970s: patters and perspectives. International organization, 36, 4 1982.

[9] Pena, Celina. Rozemberg, Ricardo. Mercosur: a different development of Institutional development. Focal Policy Paper, 05–06. https://www.focal.ca/pdf/mercosur_Pena-Rozemberg_different%20approach%20institutional%20development_March%202005_FPP-05-06_e.pdf . Accessed Oct. 2018.

[10] Pena, Celina. Rozemberg, Ricardo. Mercosur: a different development of Institutional development. Focal Policy Paper, 05–06. https://www.focal.ca/pdf/mercosur_Pena-Rozemberg_different%20approach%20institutional%20development_March%202005_FPP-05-06_e.pdf . Accessed Oct. 2018.

[11] Pena, Celina. Rozemberg, Ricardo. Mercosur: a different development of Institutional development. Focal Policy Paper, 05–06. https://www.focal.ca/pdf/mercosur_Pena-Rozemberg_different%20approach%20institutional%20development_March%202005_FPP-05-06_e.pdf . Accessed Oct. 2018.

[12]Gibbon, P., Bair, J. and Ponte, S. (2008) “Governing Global Value Chains: An Introduction,” Economy and Society, Vol. 37, №3, pp. 315–338. https://research-api.cbs.dk/ws/portalfiles/portal/46585232/stefano_ponte_governing_global_value_chains_postprint.pdf

[13] Jorge Schvarzer, Mercosur: The Prospects for Regional Integration. 2007. NACLA.https://nacla.org/article/mercosur-prospects-regional-integration

[14]Rozemberg, Ricardo. Integración productiva y cadenas de Valor en el Mercosur.Inter-American Development Bank. Working paper N 15. http://latn.org.ar/wp-content/uploads/2015/01/WP_157_Cadenas-de-valor_Rozemberg.pdf 6

[15] Ferraz et al (2014). Brazil and Argentina in the era of Global Value Chains, Mega Regionals and NTBs. Fundacao Getulio Vargas

[16] Frydman, Felipe. El fuerte contraste entre la Asean y el Mercosur (The evident contrast between Asean and Mercosur) . La Nación, Argentina.- URL: https://www.lanacion.com.ar/2047284-el-fuerte-contraste-entre-la-asean-y-el-mercosur . Accessed Sep. 2018.

[17] https://www.ambito.com/mercosur-paises-haran-acuerdos-su-cuenta-n3890624

[18] Oelsner, Andrea. Institutional identity of Regional Organizations or Mercosur Identity Crisis. International Studies Quarterly (2013) 57, 115–127. https://onlinelibrary.wiley.com/doi/epdf/10.1111/isqu.12033 . Accessed Oct. 2018.

[19] Oelsner, Andrea. Institutional identity of Regional Organizations or Mercosur Identity Crisis.

[20] Kaltenthaler, Karl, and Frank O. Mora. “Explaining Latin American economic integration: the case of Mercosur.” Review of International Political Economy 9.1 (2002): 72–97.

[21] Kaltenthaler, Karl, and Frank O. Mora( 2002)

[22] Oelsner, Andrea. Institutional identity of Regional Organizations or Mercosur Identity Crisis.

[23] Oelsner, Andrea. Institutional identity of Regional Organizations or Mercosur Identity Crisis. Pag 124

[24] The Economist Intelligence Unit. Mercosur and EU miss free-trade deadline. January 5th 2018. http://www.eiu.com/industry/article/1666296350/mercosur-and-eu-miss-free-trade-deadline/2018-01-05 (Accessed in Nov. 2018)

[25] Hettne, Bjo ̈rn. (2005) Beyond the ‘New’ Regionalism. New Political Econ- omy 10: 543–571.

[26] WTO. World Trade Statistical Review. Pag 18. 2018. https://www.wto.org/english/res_e/statis_e/wts2018_e/wts2018_e.pdf Accessed Nov. 2018.