international analysis and commentary

A tale of two blocs in Latin America

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In the early 1990s, two trade blocs in the American continent sought to emulate the successes of the European Economic Community (EEC), which during those years was transitioning into the far more ambitious European Union (EU). One – Mercosur (Mercado Común del Sur) – was similarly more ambitious, aiming at the “economic integration” of (at least part of) the American continent in a landmark founding treaty. The other – NAFTA (North American Free Trade Agreement) – aimed at mainly economic liberalizations, with some secondary political arrangements.

Almost two decades on, NAFTA has achieved limited but very tangible economic success. The other, however, has suffered a far worse fate: these days it fights against the prospect of becoming irrelevant, forgotten by politicians that have avoided the tough choices that pave the way to successful regional integration.

The Treaty of Asunción, signed on March 26, 1991, was a far reaching and forward-looking text. Building upon the earlier Treaty of Buenos Aires between Argentina and Brazil – the two largest economies in South America – Asunción turned a bilateral trade deal into something much wider. Asunción aimed to create a Latin American single market to bind not only Argentina and Brazil, but also smaller regional economies like Paraguay and Uruguay. The idea was to expand far beyond that, emulating the European experience. That was the birth of Mercosur.

The context of such lofty ambitions for Mercosur matters a great deal: reformist governments in Buenos Aires and Brasilia were by then seeking to open up to the world, ending the vicious cycle between devaluation and inflation that had plagued the region throughout the 1970s and 1980s, privatizing loss-making state-owned businesses, and liberalizing their markets for better external competition. The goal was not merely economic: a more integrated Latin America was meant to avoid the ludicrous internal battles of the preceding decades, a time when undemocratic military regimes in the region collaborated only in their atrocities and never to improve the welfare of their peoples.

Over twenty years after the Treaty of Asunción, very little has been achieved. The single market remains unfinished to this very day. The change of government that came after the Argentine economic debacle in 2001-2002, as well as the rise of the “new Left” in Latin America further eroded the foundations of Mercosur, rendering it almost useless. Beginning in 2003, the Kirchner administration in Argentina rejected further liberalizations, essentially freezing the development of the single market. A dispute with Uruguay over a truly minor issue – a controversial paper plant on the border – became the perfect excuse to avoid deepening the process of integrating the regional economies. Under new leadership and in the midst of a commodities boom driven by Chinese demand, Brazil acquiesced.

The main stumbling block for Mercosur, however, was the admission of Venezuela in 2012. Brazil and Argentina took advantage of the temporary suspension of Paraguay – then suffering from a constitutional crisis emanating from the impeachment of President Lugo – to vote Hugo Chávez’s Venezuela in as a full member. The more liberal Uruguay found it hard to object, but its Vice President commented that the institutional blow “could have important consequences for the future, since the institutional framework of Mercosur is so weak that it becomes useless.” Paraguay protested, but Venezuela is now a member.

The great irony is that Venezuela is the most illiberal of all Latin American governments. It was the first to impose draconian controls on imports – from Mercosur itself and elsewhere – that violate all reasonable terms of trade but protect the government’s misguided economic policies. Argentina soon followed, imposing similar controls in 2011 that its Mercosur partners found hard to reject, much despite the lofty intentions of Asunción.

The additional final irony is that the original charter of Mercosur prevents its members from negotiating other arrangements, which has prevented Uruguay and Paraguay – far more eager to liberalize than Brazil, Argentina, and obviously Venezuela – from negotiating other freer trade arrangements, including a deal with the United States.

The destiny of the other trade bloc in our story could not be more different. The North American Free Trade Agreement (NAFTA) was the brainchild of a Democratic US president from a Southern State whose liberal credentials many doubted. Yet the promise of free trade between Mexico, the United States, and Canada became a reality in 1994 – almost precisely around the time when Mercosur was supposed to have dropped all internal trade barriers.

During its first few years of existence, the destiny of Mexico cast a long shadow on the success of NAFTA. Many doubted that the integration between two very developed markets – the US and Canada – would wreck havoc in the Mexican economy and prevent its further development. Yet the maxim that more trade yields benefits holds strong in the history of NAFTA: twenty years on, the voices that so criticized NAFTA have long gone silent.

Even proponents of the deal must recognize that Mexico underwent a very painful structural adjustment around the time when NAFTA was signed and the market became flooded with American manufactures (the Chinese liberalization also greatly affected Mexico in light of the direct competition between products from the two countries).

Yet the changes paid off. Today Mexico is a paragon of international competitiveness, with very low unemployment and a very open economy. Its growing middle class is the envy of other countries in Latin America, not least Brazil and Argentina. In the last year alone, and thanks to reforms enacted by President Enrique Peña Nieto, Mexico is doubling down on trade by joining the Trans-Pacific Partnership (TPP) that is meant to extend NAFTA’s principles across the Pacific.

In large part due to the thorny political issue of immigration to the United States, political agendas were largely left out of NAFTA. The negotiators focused on economics and got the deal done: in so doing, NAFTA followed closely the earliest European experience by which economics led politics on the way of integration.

There was once a hope to unite Mercosur and NAFTA: such was the main ambition behind the Free Trade Area of the Americas (FTAA), a liberal idea championed by the administration of George W. Bush. However, the weakness of the Bush administration by 2005 meant that the left-leaning governments of Chávez in Venezuela and Kirchner in Argentina blocked the initiative, preferring instead to found UNSAUR – yet another organization aiming to the “integration” of the region. This brand new acronym has done little in its half decade of existence beyond providing a platform for anti-American sentiments. The great failure of Latin American integration meanwhile continues: there are no less than fourteen different entities – with different membership configurations – that are meant to promote it, but little happens. The continent needs, and deserves, far more action and far less talk. Only then can it right the wrongs of Mercosur and extend the success of NAFTA all the way “to the end of the world.”