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Net Assessment of Latin American’s Main Trade Blocs

Jan. 29, 2016 Calls for convergence between the two major groups in the region have been growing, as more countries see the benefits of cooperation.

Net Assessment

|September 20, 2017

Latin America’s two major trade blocs – Mercosur and Pacific Alliance – will actively pursue convergence efforts in 2016, marking a continuation of a noticeable uptick in political will and activity from governments in the region to increase trade between member states. Together, the blocs’ members account for nearly 90 percent of the region’s total GDP. On paper, the groups initially appear to be incompatible; regional scholars and analysts have pointed out the contrast between the Pacific Alliance’s open market policies and Mercosur’s pursuit of protectionist measures. However, recent changes in the region’s political and economic landscape, including a move towards market-friendly policies, suggest that increased convergence between the blocs is not only desired but feasible.

Moreover, Geopolitical Futures’ model views the Western Hemisphere as an area of relative stability, in contrast to the chaos we are witnessing in parts of the Eastern Hemisphere. One expected byproduct of this general stability is growing investment and business activity in Latin American countries, which increasingly view regional integration as the path towards economic development and a way to mitigate the effects of the slowdown in parts of Europe and Asia. The lack of continental crises along with a general shift in the political environment are contributing to the potential for cooperation between the trade groups and their members.

Evolution of the Two Blocs

Established in 1991, Mercosur currently has five members – Argentina, Brazil, Paraguay, Uruguay and, most recently, Venezuela – that boast a combined GDP of about $3.35 trillion. Bolivia has been accepted as a full member but is still in the ratification process. Nearly 25 years after its foundation, the bloc has yet to achieve its initial goal of full free trade between members. Particularly in the last decade, populist-aligned political agendas, especially from Argentina and Brazil, actually supported trade barriers within the group. Over time, Mercosur began to act as a political body rather than an economic or trade bloc. In the last three years, 65 percent of the norms approved by Mercosur’s Common Market Council addressed political and institutional matters. Declarations and communications from the most recent Mercosur Summit in Asuncion, Paraguay on Dec. 21, 2015, did address economic issues, such as talks with the Pacific Alliance on common interests, finally signing a free trade agreement with the European Union and general interest in negotiating more trade agreements. However, the bloc also made statements regarding human rights, British activity in the Falkland Islands, migration issues, gender equality, natural disaster relief, FARC-Colombia peace agreements and U.S.-Cuba relations. Despite straying from its initial purpose, there has been a recent renewed effort to focus more on trade and economic issues, including regional cooperation, within the bloc.

Mercosur and Pacific Alliance Trade Blocs

In contrast, the Pacific Alliance has followed a less politically motivated path. It was founded in 2011 by Chile, Colombia, Mexico and Peru, which have a combined GDP of $2.13 trillion. Costa Rica and Panama are currently in the process of becoming full members. The bloc seeks to improve economic growth, competitiveness and development among its members. A fundamental requirement for membership within this group is that a prospective member must have free trade agreements in place with all existing member states. Members have already officially ratified legislation, which will take effect in the first quarter of this year, eliminating tariffs on 92 percent of the goods traded within the bloc. In addition to free trade, this group has also managed to integrate their respective stock exchanges into the Latin American Integrated Market (MILA). The bloc also seeks to use its size to become more active in global markets, particularly those in East Asia. Its global reach is confirmed by the fact that 31 countries outside Latin America are official observers of the alliance, while Mercosur only has one extra-regional observer. On the whole, the Pacific Alliance has proven to be much more open to free-market policies than Mercosur and has kept its focus on economic and trade issues, rather than incorporating ideological or political ones.

A Push Towards Intraregional Trade

We expect to see the protectionist, populist governments in the region start adopting more market-friendly, open economy policies in 2016 and this includes an increased emphasis on trade. However, lower Chinese demand, falling commodity prices and a weak economy in Europe and Russia have prompted all Latin American countries to explore more options for diversifying trade – both in terms of trade partners and the types of goods exported. Although most already had strong trading relationships with Mexico and Brazil, countries began looking to other markets within the region as attractive alternatives to those in Europe and Asia. Brazil’s current economic crisis has forced the government to use trade with other Latin American countries as one way to make its economy more dynamic and increase the number of potential markets for Brazilian manufactured goods. In Argentina, President Mauricio Macri is pursuing sweeping economic reforms that will help to usher in a much more market-friendly economic model. On numerous occasions, he has expressed interest in seeing more convergence between Mercosur and the Pacific Alliance. Paraguay and Uruguay also became very vocal about their desires for more diversified and dynamic trade, which had been constrained by their membership in Mercosur shortly after the region began to feel the delayed impacts of the 2008 financial crisis.

The call for convergence between the groups is not synonymous with a call for immediate integration. Rather, the idea is to try to increase economic cooperation and trade at the bilateral level between members of the two blocs in areas where cooperation is more feasible. This is a piecemeal process that allows the countries to enjoy small successes upon which they can build more complex agreements at a later date. It also, for now, allows countries to avoid confrontation over incompatible policies. Therefore, governments will not be forced to admit failure of any previous policies, nor will they be forced to make any major concessions.

The pre-existing framework of the Latin American Integration Association (ALADI) will facilitate economic convergence efforts between countries. ALADI was established in 1980, though its roots date back to the Latin America Free Trade Association, which was founded in 1960. ALADI provides a flexible framework for the development of both bilateral and multilateral economic agreements involving its member countries, which include all Mercosur and Pacific Alliance countries. It has helped establish partnerships between members through the Economic Complementation Agreement (ACE) mechanism, which essentially allows signatories to draft trade agreements that grant tariff preferences on a specified number of goods. ALADI also allows countries to build on existing ACEs so that they develop into more sophisticated agreements that gradually eliminate tariffs and include elements like services, investments and intellectual property rights. Over time, through expansion efforts, an ACE can evolve into a formal and more wide-ranging free trade agreement between two countries. For example, Mexico and Uruguay were able to establish a free trade agreement in 2004, which grew out of an ACE that was first signed in 1999. The ACE tool also served as a foundation for the development of Mercosur. In November 1990, founding members Brazil, Argentina, Paraguay and Uruguay sought to deepen trade ties by signing a multilateral ACE agreement. A year later, Mercosur – whose membership is open to all ALADI members – was formed.

Integration Through Bilateral Cooperation

Although official convergence between the two trade blocs has been slow, member governments are opening the doors to this possibility by strengthening bilateral ties. In the last quarter of 2015, many bilateral meetings were held across the region, aimed at expanding ACEs, which are individually designated with a number, between Mercosur and Pacific Alliance members. In October, Brazilian President Dilma Rousseff paid an official visit to her Colombian counterpart, Juan Manuel Santos, and they agreed to expand their cooperation under ACE 59, a 2005 agreement that also included Mercosur, Venezuela and Ecuador. This expanded agreement would gradually eliminate all tariffs, ideally by 2018. In November, Brazil’s and Chile’s governments agreed to remove bureaucratic barriers for businesses, mitigate risk, prevent disputes and improve governance for investors. Brazilian Minister of Development, Industry and Foreign Trade Armando Monteiro attributed the large expansion of the deal to the success of ACE 35 between Mercosur and Chile and noted that more integration between the regional trade blocs will strengthen the groups’ positions in global trade. In addition, Brazil and Mexico have finished the first round of negotiations for expanding ACE 53. In December, the countries agreed to exchange a list of items that will be included in the agreement, such as agricultural and industrial goods, and they will hold a second meeting in February. Negotiators from Brazil and Peru also held their first face-to-face meeting on the expansion of bilateral trade and investments in December and are expected to create a timeline for reducing the tariffs on goods in ACE 58.

Additionally, Paraguay is a key example of a country that has led the charge towards strengthening ties with regional partners. It has reiterated its ongoing interest in closer trade relations with the Pacific Alliance, in which it already has observer status and has hinted it may be interested in joining. President Horacio Cartes expressed his desire for Mercosur to integrate more with Pacific Alliance in the not-too-distant future, a significant statement considering he was the president of Mercosur at the time. Vice Foreign Minister Oscar Cabello also revealed that having more high-level Pacific Alliance-Mercosur meetings was discussed at the latest Mercosur summit. In November, Cabello headed the Paraguayan delegation during a round of talks with Peru that, among other things, focused on strengthening trade and investments. In the same month, Paraguay hosted Chilean officials to discuss the advancement of bilateral trade ties through ACE 35. The country will also hold another meeting with Mexico for ongoing ACE expansion negotiations, with the possibility of Cartes visiting Mexico in the first half of 2016. These talks show that more countries have a desire for increased cooperation on trade in the region.

Ultimately, this bilateral approach to deepening trade ties between Mercosur and Pacific Alliance members will not result in unification of the two groups. But what the approach will allow is expanded trade between these Latin American countries at a time when raw material exports are less valuable and major markets like the EU and China are experiencing slower growth. In the long term, this approach will expand and solidify common ground that the two groups can use as a base for deeper economic cooperation, and maybe even some day integration.

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