Two members of the Mercosur trade bloc, Brazil and Argentina, recently announced a deal to reduce the bloc’s common external tariff. Mercosur’s headquarters in Montevideo is pictured above. // File Photo: Carlos Borroni via CC licenser

Brazilian Foreign Affairs Minister Carlos França and his Argentine counterpart, Santiago Cafiero, on Oct. 8 announced an agreement to reduce the Mercosur common external tariff (CET) by 10 percent. The external trade penalties currently paid by members of the regional organization average 13 percent. Both countries compromised in the agreement, as Brazil initially wanted a larger CET reduction, and Argentina wanted no reduction at all. What does this move say about the significance of Mercosur in the Southern Cone, as well as the organization’s survival in the region? How will the decision affect domestic economic competition, as well as the broader trade relationship between Argentina and Brazil? How might Mercosur’s other members, Uruguay and Paraguay, respond?

Allison Fedirka, director of analysis at Geopolitical Futures: “Mercosur’s significance should not be overstated. While some countries gain quite a bit through membership, others get minimal benefits at a high price. Brazil and Uruguay have made it clear they have trade interests beyond Mercosur, and the CET compromise does not undermine or change that vision. The compromise arose from the fact that Brazil is not in a position to risk Mercosur market access at this moment, and the CET was not a hill to die on. Argentina and Brazil’s bilateral trade goes through periodic tensions and disruptions. The revision in the CET will not change that pattern, and a lull in trade tensions should not be mistaken as a full or permanent resolution. Additionally, the current agreement on the CET could be revisited or renegotiated in the future. Uruguay and Brazil have discussed the matter and will coordinate their actions. Paraguay is inclined to engage in dialogue and support the Argentine side, in large part because Argentina’s river access has been the traditional route for Paraguayan exports. As for the bloc’s future, the Mercosur originally intended in the Treaty of Asunción will never come to fruition. Its role has grown increasingly less important to key member countries in the past 30 years, and there’s little hope for revival. Rather, the bloc will trend toward being marginalized, which means that outright departure from the bloc would not necessarily be needed. Instead, countries will conduct trade according to national interests with Mercosur as a secondary thought.”

Arturo Porzecanski, research fellow at the Center for Latin American & Latino Studies at American University: “The recently agreed marginal cut on most import tariffs from non-Mercosur countries, from 13 percent to 10.8 percent, is a meaningless compromise between Argentina and Brazil that does nothing to revive the fortunes of this floundering Southern Cone trade agreement. Mercosur was supposed to have become a seamlessly functioning customs union, in which intra-area commerce flowed freely, supplemented by a single trade regime vis-à-vis the rest of the world. However, despite the passage of three decades, there is neither unfettered trade among its four members nor do they apply equal treatment to trade with nonmember countries. Argentina has been a chronic violator of the letter and spirit of Mercosur, applying as it has a multitude of varying taxes, subsidies, restrictions and controls on its exports, imports and capital flows that have disrupted and distorted trade flows within Mercosur. Argentina has also blocked progress on a preferential trade agreement between Mercosur and the European Union, the negotiations for which have taken more than a decade. Paraguay and Uruguay have been on the losing end of Mercosur: their residents have been discouraged from buying cheaper and better-quality manufactured goods from Asia, Europe and the United States to support inefficient industries in Argentina and Brazil. Other than dissolving Mercosur and going their separate ways, the four countries would be best off by abandoning their quest for a common trade regime versus the rest of the world, while focusing all their efforts on eliminating barriers to trade among themselves.”

Thomas Andrew O’Keefe, president of Mercosur Consulting Group: “Mercosur’s common external tariff (CET) today is more of a myth as it is filled with national exceptions that should have long been eliminated but are retained for political expediency. When member states uniformly apply it, the CET ranges anywhere from zero to 20 percent. Brazil’s proposal to reduce the CET by half would have been a game changer, but the face-saving 10 percent compromise is insignificant and is unlikely to have much of an impact on the pocketbooks and wallets of Mercosur consumers. The CET in its current form is an instrument that primarily exists to protect obsolete Argentine and Brazilian industries from global competition. The fact that the current administration in Brasília acknowledges this is a welcome change. More significant reforms to Mercosur’s sclerotic trade policies may come from efforts led by Uruguay to unilaterally negotiate free trade agreements, a move Brazil supports and may soon emulate.”

Tatiana L. Palermo, president of Palermo Strategic Consulting and former Brazilian vice minister of agriculture and chief agricultural trade negotiator: “Since 2018, Brazil has been moving toward a ‘unilateral tariff disarmament’ to increase its competitiveness and break the cycle of low growth by raising the share of trade in its GDP (currently, it is half the global average of close to 60 percent). But it is limited in its options to do so without the other Mercosur countries. Mercosur was created as a customs union in 1991, and the founders, inspired by the E.U. model, wanted to transform it into a common market that would eventually include all Latin American countries. Mercosur, however, never became a common market and is imperfect as a customs union, with many exceptions and bureaucratic rules. It is currently a very difficult moment for Mercosur, marked by ideological and political polarization and economic hardship aggravated by the pandemic. While Argentina opposes changes, the others are actively seeking modernization and trade openness. It is symbolic that Argentina agreed to tariff reduction, even though it was half of what Brazil proposed (Uruguay and Paraguay will support the decision), but this does not bring significant changes. Mercosur’s tariffs will remain among the highest in the world. It is not uncommon to hear in Brazil that Mercosur has acted as a ‘drag’ on members’ intentions to negotiate free trade agreements. Recently, in a Brexit-like moment, Uruguay announced that it would seek trade deals alone, against the customs union’s rules. If Argentina continues opposing changes, it is possible that the others will propose to transform Mercosur into a free trade agreement.”

Renata Vargas Amaral, adjunct professor and co-director of the certificate program on the WTO and U.S. trade law at American University’s Washington College of Law: “The CET was established in January of 1995, by Decision 22/94 of the Common Market Council (CMC). Since it was created, there have not been significant changes in the CET import tariffs, although many exceptions were approved over the years for each of Mercosur’s members. Each member has its own lists of exceptions that are criticized in many instances because they allow for unilateral initiatives of members that pierce the CET, and they make it harder for Mercosur to implement a common trade policy. According to its guidelines, the CET should encourage the competitiveness of the members, and its tariff levels should help to avoid the formation of oligopolies or market reserves. But for the past 25 years there were no substantive changes in the CET, and no substantive modification or modernization was implemented. The average import tariff of Mercosur members is among highest in the world, and it made sense that Brazil and Argentina, the biggest economies in the bloc, took the first step for an agreement in this regard. Paraguay and Uruguay, also members with the same status in the bloc, would have to agree on the reduction, but it is very likely that they would welcome the decision to modify the CET. It is important to highlight that, although some sectors may be more affected than others in terms of competitiveness—notably the industrial sector—we are talking about one percentage point of reduction on import tariffs, which is not necessarily an aggressive change on the CET. Mercosur’s lack of flexibility has been a constant complaint of all the members over the past years, so maybe this agreement will pave the way for the much-needed modernization of the bloc.”

The Latin America Advisor features Q&A from leaders in politics, economics, and finance every business day. It is available to members of the Dialogue’s Corporate Program and others by subscription.