Will Political Differences Split the Mercosur Trade Block?

Bickering between Argentina and Brazil, in face of the ratification of EU-Mercosur FTA, could be a turn for the worse for the trade block. Are Brazil’s worries about Argentina unfounded, or will the new president of Argentina threaten the stability of the whole region?

Argentina’s and Brazil’s relations improved markedly after the election of Mauricio Macri as the president of Argentina. The two presidents, elected for the first time, Macri and Jair Bolsonaro, were elected on similar political platforms and promises to their electors.

The status of presidents elected for the first time put the two politicians on equal footing based on experience as the leaders of their respective countries. Although the time both Bolsonaro and Macri were simultaneously was only a year-long, the relations between the two countries remained stable.

This productive partnership is changing with the election of Alberto Fernández as the president of Argentina.

It’s important to employ a wider look to understand why relations between Argentina and Brazil took a turn for the worse so suddenly. It’s easy to put blame solely on different political platforms of the current leaders of the two countries. However, worries about the growing power of Argentina or Brazil from either countries did not stop cooperation in the past.

The critique Bolsonaro directed at Fernandez came even before his inauguration as a president. This shows that political decisions are not the root cause of the disagreement.

Rather, it is important to look at the internal matters of the two countries.

Internal opposition to elected politicians often indirectly affects the foreign relations between different countries.

In the case of Brazil and Argentina, the Brazilian president’s low approval polls, and the growing opposition, is likely to be a major cause of negative attitudes to the newly elected leader of Argentina.

Evangelical voters, and those looking for an alternative for socialist parties and their past presidents, are a fast-growing group in Brazil.

To gain the support of the group before the fast-approaching elections in 2022, Bolsonaro is very likely taking a stance against a politician that holds ideological views this group doesn’t support.

Any political disputes between the leading member states of Mercosur are bound to destabilise the whole block. This situation has already been a reality in 2015 when Brazil and Argentina disagreed on the issue of trade, and the relevance of Mercosur.

The South American countries, two largest by GDP in the whole continent, are also the leading members of Mercosur. Out of the four current active members of the trade block, Argentina and Brazil are largest by territory, exports, and population.

Paraguay and Uruguay, don’t boast such statistics. However, the two countries have managed to influence Mercosur (most notably with Uruguay pushing for a relaxation of the ban on bilateral FTAs). Although less powerful than the leading members, if the two countries chose the optimal strategy according to economics research (threats to leave), they could negotiate for better conditions.

The powerful impact disagreements between the leading members is not only caused by the sizes of their economies. Argentina and Brazil have many common areas, where disagreements and even stalling negotiations, can negatively impact the Mercosur.

Using trade and political blocks to solve trade problems between members isn’t an unusual occurrence. However, trade problems solved through trade block framework, often concern all or the majority of members of them. This is not the case with Argentina, Brazil, and the Mercosur.

As previously mentioned, the bilateral disagreement has happened in 2015. A possible disagreement on trade between Argentina and Brazil has become a new challenge in 2019.

This time, it concerns the Common Export Tariff (placed on imports into the block). The previous president of Argentina, Mr. Macri, agreed with Brazil’s ideas about the tariff. However, the new president Mr. Fernandez does not support this step. This has caused threats from the side of Brazil to leave Mercosur. A disagreement between two members is now a cause of worry for the whole integrity of the block.

Different takes of Brazil and Argentina on where, and at what speed, should the block’s development be moving, is a problem. For each of the two countries, the block delivers different benefits. Brazil, for one, is said to be using the block as a step to gain more power on the worldwide level.

Argentina, in contrast, is argued to use Mercosur for its free trade market. The two different benefits to the leading member states then contribute to quick destabilisation of the whole block, in case any of the states’ benefits are threatened.

Mercosur’s internal trade delivers different benefits to the member states. This is only natural when the sizes of the members’ economies vary from Brazil’s GDP PPP of $3.37T to Uruguay’s of $81.16B.

For Argentina, Paraguay, Uruguay, free trade in the block is an important export opportunity. The three countries have seen a yearly average growth in exports of 4.14%, since free trade among the member countries became reality in 1995.

Gauging the full benefits of 23 years of free trade is difficult. That’s because for the same period, before free trade in the Mercosur, the average yearly growth in exports of the three countries stood at 9.12% – almost 5 percentage points higher.

For Brazil, the block delivers trade benefits. Nevertheless, other benefits have been prioritised by the country. These have been stronger positions in negotiations and growing political influence.

Mercosur’s external trade is just starting to take off. The signing of one of the most important FTAs, with the EU, happened in 2019. The FTA should contribute to increases in exports of all members of Mercosur – just at different quantities. Negotiating as a block, instead of each separate country, allowed the members to leverage the size of the Mercosur’s market in pursuit of better deal conditions.

As a political discussion and development platform, Mercosur has engaged in solving disputes between member states. Whether Mercosur can be stated to be a successful platform for conflict resolution, depends on the weight given to its successes and failures.

Successes, like the increasing role of the smaller states (a concern for Paraguay and Uruguay), are indicators of Mercosur functioning successfully as a platform for resolving a range of disputes.

The failures, such as the Argentina’s enactment of anti-dumping tariffs on Brazilian goods, if their impact is given weight, they would show the four-member block to be an ineffective and an inefficient platform for trade dispute resolution.

Since the members prioritise country-level concerns, then the platform, from an internal perspective, has been a successful aid.

Individual concerns, rather than block-wide problems are often given priority in Mercosur. Hence, it would seem that the trade block could easily fall apart given four different opinions. Even if the worries about other heads of states are often driven by internal political matters, rather than a genuine concern for foreign relations.

Since Mercosur delivers important benefits to each member, then even changing heads of state are unlikely to destabilise the foundation of the block.

Greater integration, and a movement towards supra-nationalism, could be the solution for any future country-level concerns destabilising the whole block. This solution would clash with the determination of each member to not give away individual political power. Yet, it would increase the confidence in the trade block and its members and would allow to avoid unnecessary political tension.