Though many Americans have yet to hear of it, Mercosur (Mercosul in Portuguese) is a customs union created more than a decade ago among Argentina, Brazil, Uruguay, and Paraguay. If fully successful, it will create a politico-economic area rivaling NAFTA; if it chooses to become a component of NAFTA—as the Argentine foreign minister suggested on the morning after it was launched—it will tilt the balance in that organization decisively toward the Latin side. Some observers see it as the kernel of a South American common market that might or might not become part of the Free Trade Area of the Americas. Whether it does or does not obviously has important implications for the United States.
The Political Background
The date of Mercosur’s inception, 1990, is by no means a coincidence. After the collapse of the Soviet Union and the end of the cold war, both Argentina and Brazil—like many middle-level Third World powers—found themselves suddenly deprived of valuable leverage against the industrial West, and particularly the United States. With "nonalignment" no longer a possibility, diplomats in both countries sought to redesign their relations one with the other.
The significance of this Argentine-Brazilian rapprochement can hardly be exaggerated. For decades both countries engaged in fierce international rivalries, and a war between the two was the principal "hypothesis of conflict" taught at their military schools. During the early part of the twentieth century, Brazil had intentionally opted for an unwritten alliance with the United States as a means of counterbalancing Argentina, whose economic relations with Great Britain were then extremely intense. Brazil’s pro-U.S. tilt reached something of an apex in World War II, when in contrast to Argentina—which styled itself neutral—it even dispatched an expeditionary force to fight alongside allied troops in Italy. As a reward, among other things it received U.S. economic and technical assistance to build Volta Redonda, South America’s first steel mill. As late as 1964, when the Brazilian military overthrew leftist president João Goulart, the relationship between Washington and Brasilia was exceptionally intense.
Meanwhile, Argentina found itself paying the price of having bet on the wrong horse in World War II and, what was worse, suffering the unexpected loss of many of its traditional markets, both through the decline of the British economy and the creation of new agricultural alternatives with the European Union. Indeed, by the 1980s Argentina’s principal trading partner had become—faute de mieux—the Soviet Union, which often took as much as sixty percent of its grain exports, paid for in hard currency hoarded from the sale of oil, diamonds, and other precious raw materials. This curious relation with Moscow added a subtle political edge to U.S.-Argentine relations, even under military governments that advertised themselves as anticommunist.
The immediate origins of Mercosur can be found in a drastic shift in traditional Brazilian foreign policy. Although supposedly installed by U.S. intelligence operatives in 1964, the military government of Brazil eventually began to reconsider its relationship with Washington and to diverge from it in many areas, most notably in its policy toward Africa and the Middle East. Whereas in the earlier part of the twentieth century Brazilian diplomats regarded the alliance with the United States as the most expeditious means of advancing their national interests, by the late 1960s they decided that the opposite was nearer to the truth. The end of the cold war merely accelerated a process that was already well underway.
Paradoxically, the end of the cold war pushed Argentina as well into a reversal of its traditional foreign policies—in this case, however, away from nonalignment and toward rapprochement with the United States. The change was evident particularly at the United Nations and the Organization of American States, where Argentina’s voting record, even under all but one of its "right wing" military governments, had more nearly resembled that of Cuba than almost any Latin American country. However, the new alliance with the United States will remain incomplete as long as the latter continues to be unwilling or unable to take a significant share of Argentina’s agricultural exports. It was precisely the lack of economic complementarity, combined with a consistently negative Argentine trade balance with the United States, that opened the door for Brazil, which meanwhile had taken the place of the Soviet Union as Argentina’s principal client for foodstuffs, both raw and processed.
Mercosur therefore represented the convergence of two very different agendas—a Brazilian political agenda (to leverage Argentina’s economic dependence in Brazil’s geopolitical favor) and an Argentine economic agenda (to gratify the geopolitical aspirations of the country’s most important export market, presumably on a temporary basis—until the Free Trade of the Americas arrived to expand the available export options). The adscription of Uruguay and Paraguay to Mercosur was inevitable; both countries have long dwelled within the sphere of Argentine and Brazilian economic influence.
Mercosur and NAFTA
Theoretically Mercosur might be regarded as a building block toward the Free Trade Area of the Americas (FTAA), to which the leaders of the Americas committed themselves at the 1994 Miami summit. Indeed, Argentine foreign minister Guido di Tella described Mercosur exactly that way the morning after its creation. For its part, the FTAA is supposed to come into existence in 2005, and indeed conferences at the ministerial and functional levels are being held regularly throughout the hemisphere to prepare the way. Nonetheless, no one can be sure that when this ambitious project is unveiled less than four years from now the U.S. public and political community will be of a mind to embrace it. The case of the Panama Canal treaties comes to mind; although they were the product of decades of painstaking negotiations, the failure of U.S. political leaders to prepare the public for their ratification resulted in a near disaster.
Nor is it at all clear that Brazil shares Argentina’s vision of Mercosur as a building block to a larger NAFTA. Quite the contrary, in fact. Brazil was the last Latin American country to sign a framework agreement with the United States on hemispheric trade liberalization, and probably did so only to avoid isolation within its own region. (All of the other Latin American republics had hastened to accept Washington’s invitation.) Moreover, Brazil’s own trade disputes with the United States have been longstanding, and they reflect a strong—even belligerent—sense of rivalry with this country. In no way do I intend the mention of this as criticism; Brazil, like every other country, has the right to pursue its own interests as it sees fit, and it may indeed be that a free trade agreement with the United States runs contrary to these. To the extent, however, that it succeeds in controlling Mercosur, Brazil forces Argentina, to some extent Uruguay, and perhaps Paraguay as well, in directions they well might prefer not to go. This may explain why Chile—in spite of many political factors that might otherwise incline it toward a regional bloc—has chosen to limit itself to "associate" membership in Mercosur.
A Problematic Alliance
To be sure, Mercosur pretends to be something far more ambitious than a customs union. A complex secretariat has been established in Montevideo, the Uruguayan capital, mimicking the Brussels bureaucracy of the European Union. Uniform passports of all four countries now say Mercosur (or Mercosul) before they list the name of the respective republic, and a map of the contiguous four states is stamped on the cover with the individual member picked out in gold. Military planners are regularly meeting to rationalize acquisitions, training, and budgets. Political leaders consult frequently. Soon there will probably be jointly approved school curricula and perhaps even a Mercosong contest as fearsome as its European equivalent.
On the other hand, the reality that Brazil is first among equals, and rather more first than equal, continues to raise disturbing questions about the future of the project. In February 1999, Brazil chose to devalue its currency, the real, without so much as consulting its partners; Argentina’s peso, based on the U.S. dollar, remained stable, but in the process Argentine exports suddenly became significantly more expensive in Brazil. Indeed, the cost differentials became so great that many Argentine plants chose to relocate in Brazil. As Argentine economist Pablo E. Guidotti recently wrote in the Wall Street Journal (July 19), this chain of events "opened a debate on the extent to which the exchange rate of any one Mercosur member could be left floating freely without damaging other members."[1]
Guidotti also raises the question of whether Mercosur’s common external tariff does not mask a significant amount of interregional trade in uncompetitive products. This would explain, he writes, why some sectors—like Argentina’s automobile industry—are "extremely vulnerable to changes in the bilateral exchange rate between Argentina and Brazil." His point is important, because nowadays the principal economic debate between Argentina and Brazil is whether the former’s quasidollarized economy is responsible for the drop in exports to third parties, or whether in fact the level of protection Mercosur grants to its own (read, mainly Brazilian) industries is shielding inefficient producers. "Unfortunately," he concludes, "there is overwhelming evidence . . . that openness is associated with faster economic growth," but Mercosur seems headed in the other direction, increasing both tariff and nontariff barriers to outsiders. Again, from the point of view of Brazilian nationalism, one can hardly find fault with this strategy; whether it serves Argentine interests over time—as opposed to the next fiscal year—is another matter. Indeed, the issue has become sufficiently pointed that in recent weeks Brazil has suspended bilateral negotiations with Argentina because the latter has chosen to give preference to some imports from outside Mercosur.[2]
Speculating on the Future
Even one of the most optimistic of recent commentators on Mercosur, Argentine economist Felipe A. M. de la Balze, admits that obstacles to perfect union among its member states remain significant.[3] He specifically singles out weak resolution machinery, the tendency of Mercosur members to negotiate individual trade agreements with nonmember countries, and the extensive (and unilateral) use of nontariff barriers and subsidies to protect direct foreign investment. He concedes as well that there is a lack of common institutions and rules to define trade policy, much less resolve trade disputes. And he admits that, with the partial exception of Chile, no South American economy has fully succeeded in becoming a steady and diversified exporter to world markets.
De la Balze might well have added that growing antiglobalization tendencies in Latin America, but particularly in Brazil, may well consolidate the inefficiencies of industries protected by the common external tariff by giving protectionism a more explicit ideological coloration. At this writing the leading candidate for the presidency of Brazil is, once again, Luiz Inácio Lula da Silva, whose negative views on free trade, deregulation, and foreign investment are a matter of record. While it is true that Lula’s leftism would not introduce anything into Brazilian trade policy that is not already substantially there, other elements of his program might well provoke massive flight of human and financial capital and a collapse of the Brazilian economy—the world’s tenth largest. This in turn could provoke catastrophic consequences for Brazil’s Mercosur partners. At a minimum, one could be reasonably certain that a Brazil governed by Lula would refuse to sign the final FTAA accords in 2005, even assuming that they appear on schedule. To be sure, Lula has led the polls before, only to be turned back by the end of the electoral season. This would be his fourth try at the presidency. On the other hand, it was on the fourth time around that Salvador Allende finally achieved the presidency of Chile, to his and his country’s subsequent misfortune.
Whether Mercosur turns out to be a building block toward a hemispheric-wide trade zone or whether it remains essentially a regional project depends almost entirely on what happens in Brazil, both in political and economic terms. As long as the United States cannot offer Brazil’s neighbors anything better, an economic alliance with the local economic powerhouse is their best—indeed, their only—current option. Whether Mercosur as presently constituted will be adequate to fully satisfy the economic needs and aspirations of Argentina, Uruguay, and Paraguay remains to be seen. All three countries have good reason to hope that the FTAA moves ahead with all deliberate speed, thus enriching their currently limited menu of choices and possibilities.
Notes
1. At the time, Argentine President Carlos Menem went so far as to suggest that the U.S. dollar be made the official currency of Mercosur. (In many ways it already was in Argentina.) There are various ways of interpreting this comment, but many who heard it—including many Brazilians—assumed that it was a veiled attack on the whole concept of Brazil-dependency and was purposely intended to break up Mercosur. Certainly it is difficult to see how Brazil could ever accept such a suggestion. For Argentina, of course, it would be one small step down a road already well traveled, since its economy is virtually dollarized anyway.
2. O Globo (Rio de Janeiro), July 6, 2001.
3. "Finding Allies in the Back Yard," Foreign Affairs, July-August 2001.
Mark Falcoff is a resident scholar at the American Enterprise Institute.
