One of the supposed topics on the agenda when Argentine President Mauricio Macri and Brazilian President Jair Bolsonaro in Brasilia was the modernization Mercosur. The topic will come up again when Bolsonaro travels to Buenos Aires in April in a follow-up meeting. The Southern Cone customs union trade rules have often been honored more in theory than in practice and have become increasingly out of step with the market-opening policies agreements pursued by the bloc’s neighbors such as Chile, Peru, and Colombia with Asian and North American economies.
So, what was said in the first meeting and how will that translate into concrete change?
Mercosur is more than a commercial agreement. Its normative framework reflects a long and complex shared history of its members with broader ambitions of forming a seamless customs union (similar to the EU), the defense of democracy and broader policy coordination. The challenge facing the organization, which is not limited to Mercosur but is plaguing many of the region’s multilateral bodies, is to use this framework as an opportunity for driving development rather than the obstacle to genuinely free trade among its members and becoming a formidable market—rather than a shackle—to negotiate trade deals with other countries and trade blocs.
We also need to be realistic. A 37-year-old institution is not easily dismantled or reformed, but to stay relevant Mercosur must evolve with the times.
As the bloc’s leaders identify and try to put in motion efforts, its leaders will need to outline a clear, predictable plan of action both to protect the export sectors of member countries and maintain the confidence of international investors. Floating potential changes without considering the ramifications will accomplish nothing other than inspiring a feeling of uncertainty in the already-turbulent export market.
Mercosur members need only look to the United Kingdom’s ongoing Brexit debacle for an example of how not to proceed. To avoid a Brexit effect during Mercosur reform, the foreign ministers of Argentina, Brazil, Paraguay and Uruguay must both plan in advance for each possible scenario and also work together to maintain transparency among member countries and for the world at large.
Let’s start by analyzing what can happen concretely if Macri and Bolsonaro want to sketch out a set of new ideas and attempt to pursue them. The first, best move for change would be allowing freedom of action for Mercosur member states, which would allow individual members to negotiate trade agreements bilaterally without losing the advantages already provided by the bloc. This reform would allow small sub-groups within Mercosur to negotiate at faster speeds than the bloc as a whole. But here the small economies (Uruguay and Paraguay) must tread carefully. For them, reform efforts could easily turn current partners into competitors.
Take, for example, the case of Uruguay. If it wanted to move toward the Mercosur that Macri and Bolsonaro envision, Uruguay will have to be both political and economically more dynamic and strategic than it has been in recent years. If Uruguay’s parliament takes two years to debate every new agreement (be it bilateral or as a bloc), as it did during a simple renegotiation of an existing agreement with Chile, the country will be left in Brazil and Argentina’s dust as they move quickly to seal new deals.
Yes to modernization. But how?
The first step in the modernization process should be the signing of an agreement in which the members ratify the consolidation and deepening of the existing free trade area. This would give certainty to all the economic actors of the member countries that the regional benefits of Mercosur will never be in doubt. This consolidation must be on paper, and not a simple verbal agreement, and with a commitment by member states to address all the loopholes and exceptions that have been used up until now to limit market access.
Once this crucial first step has been accomplished, members will need to amend the bloc’s founding language and processes to allow greater flexibility for the customs union and its members to negotiate international agreements with other countries or blocs.
In recent years, bloc-wide negotiations have been plagued by delays in the process between signing of agreements and their ratification. It’s become typical for agreements to be signed by governments, only for parliaments to spend years debating their ratification. If Mercosur is going to modernize, this tedious process needs to come to an end.
An example for reducing this institutional backlogging was included in the text of the renegotiated Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, formerly TPP). The revised agreement, signed by eleven countries, established that the agreement would come into force “60 days after the date on which at least six or at least 50 per cent of the number of signatories to this Agreement, whichever is smaller, have notified the Depositary in writing of the completion of their applicable legal procedures.” A similar mechanism for Mercosur would require that the agreement be ratified by two-member countries (one of which must be either Uruguay or Paraguay, to protect smaller members).
In terms of bilateral negotiations and negotiations between subgroups, each country should be free to negotiate bilaterally with countries outside of Mercosur. For this to be possible within a balanced and transparent framework, Chapter 32 of the new trade agreement between the United States, Mexico and Canada (USMCA) serves as a useful guideline. The chapter established that if one of the three partners wishes to start a commercial agreement with a country outside the bloc, it must notify the other two USMCA members three months before beginning negotiations.
Although this clause was widely criticized as a limitation on the sovereignty of member countries during the renegotiation of NAFTA, it is immensely more flexible than the existing framework within Mercosur, which states that members must “jointly negotiate agreements of a commercial nature with third [parties].”
A proper modernization of Mercosur should change these archaic mechanisms under a process of transparency rather than binding consultation or veto. To avoid indirect harm to the bloc’s domestic economies, it is essential for all member countries to know if another member is planning on undergoing bilateral negotiations with a non-Mercosur country.
For the benefit of all four-member countries as well as the survival of Mercosur, the meeting in Brasilia, the upcoming reunion in Buenos Aires, and any further discussions on modernization should be defined by transparency, efficacy and predictability. More than a millennium ago, in one of his letters to Lucilio, Seneca summed up what Argentina, Brazil, Paraguay, and Uruguay stand to lose if they lose sight of the importance of mutual transparency: “If one does not know to which port one is sailing, no wind is favorable.”