An Alternative to a Failed MercoSur

(International Relations and Security Network, 09/08/2006)


By the time this year's Common Market of the South (MercoSur) summit came to a conclusion at the end of July, Venezuela had been recognized as a full member, joining the ranks of Brazil, Argentina, Paraguay and Uruguay, but little more by way of solid institution building happened.


The summit cemented the fact that MercoSur is an organization that does more to highlight the region's inability to integrate than actually work as a foundation upon which further integration can be built. At the same time, it opened the possibility of Chile's most natural leadership role as a regional promoter of free trade agreements (FTAs) and access to markets across the Pacific. Chile presents an alternative to MercoSur, which is now little more than a failed customs union used for politics, not business.


Venezuela's membership in MercoSur crystallized two important realities. The South American customs union has become a platform for political rants, not an organization of trade promotion. During the summit, which was held in Cordoba, Argentina, Fidel Castro gave a three-hour speech promoting a political ideology contrary to the ideology of democracy and trade promotion worded in MercoSur's founding documentation.


Secondly, MercoSur member countries acknowledged that the Free Trade Agreement of the Americas (FTAA) had been defeated, which was no surprise. The United States has been forced to abandon all efforts to bring the region's countries together around a negotiating table due largely to the efforts of MercoSur member states Brazil and Argentina.


Neither Castro nor the leadership in Brazil and Argentina have put forward ideas and actionable plans to improve upon what is perceived in the region as a failed venture in trade integration. Venezuela's entrance into the customs union has brought with it little more potential for trade ideas and a maximum of political rhetoric that opposes any possibility of promoting the only trade agreements in the region that seem to work - free trade agreements with the United States.


Free trade in South America


The idea of a free trade agreement with the United States, as a foreign policy supported by leaders in South America, is often divisive. Generally speaking, if a leader wants to approach an FTA with the United States, he is seen by the regional leftists as the latest in a long line of politicians that supplicate themselves to dependence upon the United States. An FTA with the United States has been unpopular among leftist leaders in a time when the "Washington consensus" seemed to dictate the policies of Latin American economies through their puppet organizations, the World Bank and the International Monetary Fund (IMF). Yet as the influence of the IMF wanes and pursuits of efforts to integrate, such as with MercoSur and the Andean Community of Nations (CAN) appear to fail, eyes have begun to turn north again. Countries that have traditionally pursued FTAs, such as Chile, are no longer considered regional pariahs for having done so.


The US-supported FTAA is clearly no longer a possibility, but as free trade agreements with the United States prove to promote business in countries such as Chile, Peru and Colombia, other South American countries may realize that the best option is not a region-wide economic union, a vision offered by Hugo Chavez, but a well-negotiated free trade agreement.


Already MercoSur member states Paraguay and Uruguay have indicated interest in an FTA with the United States. Both countries have taken opportunity presented at regional summits to proclaim their problems with MercoSur, which has subjected their smaller economies to the rollercoaster ride that both the Brazilian and Argentine economies have taken since MercoSur reduced member country's tariffs in the mid 1990s.


Uruguayan president Tabare Vasquez appeared on Uruguayan television in a speech broadcasted from Washington DC on 1 May where he announced that his administration would begin to work to relegate Uruguay from a full member of MercoSur to an associate member. He has also indicated that if not allowed to pursue an FTA with the United States as a MercoSur member, the country will leave the customs union all together.


Paraguay has not threatened to leave the union, but the country's leaders have been very vocal about how MercoSur damages the Paraguayan economy. When US Secretary of Defense Donald Rumsfeld visited Paraguay in September 2005, media in Brazil and Argentina decried that a US military base in Paraguay would soon follow.


While such worries may have some truth to them, what is clear is that Paraguay has sought to appease the United States' need for a military presence in the region in exchange for preferential trade status. Paraguayan vice-president, Luis Alberto Castiglioni, said last year that MercoSur "proclaims integration but works very slowly toward achieving it." He knows that Paraguay would like access for its meat, cloth and organic sugar in the US market. It is why he wants MercoSur to give Paraguay a "waiver" to negotiate an FTA with the United States.


MercoSur's dodgy future


It is clear that Argentina will never stoop to such lows. The country's president, Nestor Kirchner, has proven that his country is tied to MercoSur, for better or worse. Yet he has no problem with acting unilaterally to temporarily raise tariffs in Argentina, a practice that has exacerbated the disputed environment among MercoSur's member states.


Kirchner's public support for Chavez is solid, and with the entrance of Venezuela, Kirchner appears prepared to follow Chavez into his regional utopia, using MercoSur as the starting block. Yet economists working in Buenos Aires disagree. "Venezuela's entrance into MercoSur marks the transformation of MercoSur into an entity much more political than economical," independent economist Augustin Monteverde told ISN Security Watch. "I believe that [MercoSur] does not even constitute a Free Trade Zone [...] there are permanent disputes between Argentina and Brazil, as well as disputes between these two countries and Paraguay and Uruguay," he added.


Meanwhile, Brazil, the traditional leader of MercoSur, has seen its influence overshadowed by the big words and deep pockets of Venezuelan president Hugo Chavez. During the summit Chavez proclaimed that MercoSur would be the rock upon which a region-wide economic union with a single currency should be built. His proclamation of a region-wide military, something even the European Union has not worked out, took his vision to levels of absurdity.


Brazil's well known industrial lobby, the Federation of Sao Paulo Industries (FIESP), made clear in a public statement that was concerned with the "politicization of MercoSur." The group's foreign trade director, Rubens Barbosa outlined Brazil's general reaction to the Cordoba summit in an interview with the AFP news service. "We are worried about the course of [MercoSur] following Venezuela's incorporation," Barbosa said before asking, "What if MercoSur becomes political or social?"


He was referring to Castro's speech where the idea of a "Socialist MercoSur" was buoyed. It is an idea supported by Castro and Chavez that sees MercoSur transformed into a regional model for integration based on the political aspirations of member states with socialist, leftist or progressive leadership.


The FIESP's reaction to the summit represents the worries of the real Brazilian businesses that will benefit or suffer according to MercoSur's direction. Their warning was clear: MercoSur has become a political organization. It serves not for the purposes of trade but for political proclamation, which is not good for business.


The Chilean alternative


Chile is clearly the region's free trade agreement expert. The country has made FTAs a cornerstone of its foreign policy. From one administration to the next, FTAs have been a top agenda item. Under Chile's new president, Michelle Bachelet, it appears there will be no delineation from this practice.


Chilean foreign minister, Alejandro Foxley, announced on 28 July that his country had signed a free trade agreement with Panama. The FTA will eliminate close to all tariffs between the countries over the next ten years. Foxley has also announced that Chile will pursue an FTA with Peru. The start of negotiations will certainly be facilitated by Peru's president-elect Alan Garcia, who has stated he plans to work to bring the two countries closer together.


Chile's alternative for the region lies upon its ability to entice country after country into free trade agreements. Such leadership in the arena of one-on-one free trade agreements is based upon many years of trade negotiations, creating a level of FTA negotiation expertise that places Chile on par with the United States and the European Union.


Chile has not joined MercoSur as a full member, despite repeated invitations, because Chilean leaders have taken a much more serious approach to trade agreements, Chile's former FTA head negotiator, Mario Matus, told ISN Security Watch in a recent interview about Chile's FTA with China. Chile sees MercoSur as a hollow institution, one that exists more on paper than not. Matus and other Chilean trade negotiators point out that MercoSur's layer upon layer of disputes is proof that the organizational commitment at an institutional level is just not present.


As an observer of MercoSur, Chile has likely learned from mistakes made by the custom union's members. Alejandro Foxley has already tabled Chile's alternative to MercoSur, although the announcement didn't make it much farther than Chilean daily newspapers. The idea embodies using Chile as the region's access to the Pacific and the markets beyond.


Chile has signed FTAs with China, South Korea and New Zealand. Already it has initiated negotiations with Japan. Chile's relationships with some of the world's largest markets may be leveraged to give other South American countries preferential access. Chile would act as a broker, opening South American countries to markets much more lucrative than any regional trade integration could create.