Mercosur, the Spanish contraction for the "Common Market of the South", has mystified politicians and scholars alike since its inception in 1991. Is it merely a Free Trade Agreement (FTA) or is it a more robust customs union and common market?

Part of the confusion stems from the difficulty in understanding the realties that influence the working of this unique trade bloc. In general terms, a trade bloc is a large free trade zone or near-free trade zone formed by one or more commerce, tariff and tax agreements. In the case of Mercosur, its founding members set out to achieve a customs union leading to a common market, but the degree of market integration that has really taken place since the bloc's inception is not clear. Much of this ambiguity stems from the proliferation of exceptions and violations of the bloc's original accords.

Nonetheless, Mercosur has spurred trade, it continues to expand and its member countries remain committed to the bloc despite the imperfect implementation of its accords.

Intentions, Agreements and Expectations

Mercosur was created by Argentina, Brazil, Paraguay and Uruguay in March of 1991 and is now the fourth largest economic bloc in the world after the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Asia-Pacific Economic Cooperation (APEC). Mercosur was established with the primary goal of creating a customs union and common market, much like the EU. According to its founding treaty signed in Asunción, Paraguay, the core objective of Mercosur is coordinating trade policy and facilitating the free movement of goods, services and factors of production by means of the complete elimination of customs duties and non-tariff barriers between members. These core member countries have also committed to the following: a common external tariff (CET) which is an agreed upon tariff that members impose on the imports to the bloc by non-members; coordinated macro-economic policies including but not limited to foreign trade, industry, agricultural, fiscal and monetary matters; and harmonization of national legislation to help ensure coordinated domestic policies regarding trade competition and other relevant issues.

A former Argentine trade minister explained that just as there is a prolific black market in the region, there is a parallel informal legal system that impacts all contractual relations including Mercosur accords.

Mercosur is an open and expanding trade bloc. To date, Mercosur has established "associate" free trade agreements with Chile (1996), Bolivia (1997), Peru (2004), and Venezuela (2004), and has given Mexico "observer status" with the expectation of achieving an associate agreement with this country in the near future. The bloc has also signed an associate accord with the countries of the Andean Community. These associate agreements are tailored to the interests of the parties involved but in general terms they extend the benefits of free trade within Mercosur to outside affiliated countries without binding them to the other integration policies such as the CET or economic policy coordination. Mercosur has also signed what are called "framework associate agreements" with countries outside Latin America with the intention of setting the conditions that will enable full interregional association to be created in the future. The most important of these is the framework agreement that the bloc has had with the EU since 1995 and, more recent, agreements signed in 2004 with the countries of India and Egypt. As part of its continual expansion, Mercosur also signed a preferential trade act with the Southern African Customs Union (SACU) with an agreement to setting some fixed tariffs as the first step in creating the conditions needed for a future free trade area.

Although it has not shown the same level of success as other trade agreements, it appears that Mercosur has brought tangible benefits for its member countries. For example, there has been an overall positive growth trend for member countries including a 122 percent increase in trade with the rest of the world since Mercosur's inception.

Imperfect Implementation and Wonderment

For the Mercosur core member countries of Argentina, Brazil, Paraguay and Uruguay, gradual tariff reduction began immediately after the signing of the Treaty of Asunción in 1991. However, it soon became apparent that complete tariff elimination was too ambitious of an aim as it created political backlash as certain industries sought special protections. Therefore, in the 1994 drafting of the Ouro Preto Protocol which laid out Mercosur's institutional and decision-making framework, the member countries agreed to exceptions protecting sensitive national industries like the automotive and sugar industries, which today remain subject to special accords. More exceptions followed Brazil's financial crisis and subsequent devaluation in 1999 and Argentina's default and devaluation in 2001/02 as the countries attempted to protect multiple fledgling industries. Today, there are around 800 exceptions to the CET. Moreover, informal non-tariff barriers such as administrative delays at customs and side deals between private businesses tend to further impede the free flow of goods between member countries.

Nevertheless, the implementation of the CET has taken place and despite the exceptions it is estimated that about 85 percent of goods and services are traded free of restrictions throughout Mercosur. This number, however, is difficult to substantiate as many of the barriers to trade take place outside of the established regulations. A unique, culturally based system of reciprocity exists within Mercosur whereby business people and government administrators informally allow for circumvention of the law with expectation of the returned favor. A former Argentine trade minister explained that just as there is a prolific black market in the region, there is a parallel informal legal system that impacts all contractual relations including Mercosur accords.

In an article written in 1997 for the New York Times, Larry Rohter described Mercosur as having "a definition of free trade somewhat different from Washington's." In its present form, it does not look like the common market it set out to be, and there is the question whether it is a customs union or a glorified free trade area. Mercosur does not fit neatly into any textbook definition of a common market, custom union or free trade zone. It is better described as a diluted mix of all three. This has left journalists from The Economist referring to it as an "embryonic customs union" or an "incipient customs union." "Imperfect customs union" is the term most widely used today among Mercosur specialists.

The Record

While Mercosur may be an imperfect trading bloc, it has brought tangible benefits for its member countries. WTO figures show an overall positive growth trend for member countries since the bloc's inception. According to the latest WTO numbers, Mercosur member countries' intra-regional trade in 1990 was $4.1 billion while external trade with the rest of the world was $42 billion. In 2003, Mercosur intra-regional trade increased to $12.2 billion and the bloc's trade with the rest of the world reached $93.3 billion. This represents a 207 percent rise in intra-regional trade and a 122 percent increase in trade with the rest of the world since Mercosur's inception. For purpose of comparison, NAFTA experienced a smaller 172 percent increase in intra-regional trade and a 107 percent rise in trade with the world for the same time period. However, a closer review of the numbers shows less impressive GDP growth for Mercosur member countries. For example, average GDP growth in member countries from Mercosur's inception in 1991 to 2003 is well below the world average of 3.3. percent. According to data from the Argentine International Economic Center (CEI), Argentina's average GDP growth since signing the Mercosur agreement is 1.1. percent while that of Brazil's is 2 percent, Uruguay's 1 percent and Paraguay's 2.4 percent. By comparison, NAFTA trade partners have experienced more positive growth since its inception in 1993 with an annual average GDP increase of 3.2 percent in the United States, 3.4 percent in Canada and 2.7 percent in Mexico.

Conclusion

There is a tendency to judge Mercosur harshly when comparing it with other seemingly more successful trading blocs, but that is not fair as the economic, political and cultural realities in the less developed South American countries are unique. It's also a mistake to measure the bloc's success solely on economic indicators alone. A trade lawyer in Buenos Aires points out that Mercosur's success should not be judged by its numbers as the economic success of Mercosur is very much dependent on external factors such as commodity prices, exchange rates and the general well-being of the world economy.

Perhaps the most telling sign of Mercosur's success is that its core member countries remain part of the bloc and other countries and regional blocs want to associate with it despite its many imperfections. The benefits of unity and expansion, at present, outweigh the costs of disintegration.




Janie Hulse is a Rotary World Peace Fellow in Buenos Aires, Argentina. She has a Masters degree in Politics of Development in Latin America from the London School of Economics (1998) and has worked extensively with and in the region in both the public and private sectors.

To read another Global Envision article about trade in Latin America, see Free Trade and Poverty.



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