Forecast
Análisis Stratfor Global Intelligence, 20.11.2015
- With many Common Market of the South — or Mercosur — member states weakening economically, the bloc will struggle to act cohesively in 2016.
- Despite hopes to the contrary, the outcome of Argentina's upcoming presidential election is unlikely to change the country's efforts to stall the bloc's free trade negotiations with the European Union.
- Argentina's ideas on trade policy -– which differ significantly from Brazil's, Uruguay's and Paraguay's -– will push Mercosur toward a "two-speed" system, under which some countries are allowed to move faster on trade deals than others.
- Because of strong economic and political links between member states, Mercosur is unlikely to collapse as a bloc, but its dynamics will change substantially in the coming year.
Analysis
The Common Market of the South, more commonly known by its Spanish acronym Mercosur, formed in 1991 as a customs union bloc that united its member countries — Brazil, Argentina, Uruguay, Paraguay and Venezuela — behind a common tariff barrier that promoted mutually beneficial economic and trade policies. But in 2016, the bloc will likely experience substantial changes, driven by the persistent economic slowdown throughout Latin America, which has hit South America and several of the Mercosur states particularly hard. As is the case with many economic and political blocs, the competing interests of member countries have and will continue to strain Mercosur's ability to function in its current form. Specifically, Argentina's economic woes conflict with Brazil, Paraguay and Uruguay's goal of signing a lucrative trade deal with the European Union. And while the economic bloc will not disintegrate, the deadlock will act to transform its legal framework to at least partially facilitate the many diverging needs of its members.
Falling global commodity prices brought down growth in Latin America to 1.3 percent in 2014 and a projected rate of -0.3 percent in 2015, with only a slight rebound of 0.8 percent growth predicted for 2016. Moreover, Latin America's three worst performing countries next year are projected to be Mercosur member states Venezuela, Brazil and Argentina. Venezuela's economy is estimated to contract by 3 percent, while Brazil's and Argentina's are expected to contract 1 percent and 0.7 percent respectively. Conversely, however, the smaller Mercosur states are predicted to fare better, with Uruguay's economy projected to grow by 2.2 percent and Paraguay's by 3.8 percent. Venezuela's and Brazil's volatile energy sectors and political systems and Argentina's persistent debt and structural economic issues contribute to this discrepancy. And Uruguay and Paraguay, because they are both net energy importers, have actually benefited from the very drop in global oil price that has undermined Venezuela and Brazil's exports and economy; the fall in prices has lowered costs for Uruguay and Paraguay and has improved their economic outlook. Paraguay in particular has benefited from a favorable business climate that has boosted investment into its low-end manufacturing sector.
The State of Trade
Mercosur member states diverge on trade policy too, and their growing differences are likely to become more apparent in the coming year. The common external tariff barrier, which Mercosur membership provides, serves industries within the bloc by periodically negotiating mutually beneficial trade arrangements while using state intervention to shield them from outside competition. As such, Mercosur law stipulates that its members must negotiate any free trade deals with countries outside of the bloc collectively rather than individually, with the sole exception of Mexico.
However, Mercosur has in recent years been subject to increased trade protectionism. Argentina has led these efforts, attempting to use trade restrictions to mitigate its own growing balance of payments crisis fueled by rising spending on energy imports and high levels of capital flight. Argentina has also helped thwart free trade negotiations between Mercosur and the European Union, which have been taking place since 2010 but which have been delayed numerous times over terms and restrictions. Argentina's obstruction of the EU free trade deal has strained its working relationship with Brazil, Uruguay and Paraguay, which all desire an EU trade agreement (in addition to expanding trade ties with other countries such as China and Japan) to promote export growth and to expand export markets.
In response, Uruguay has previously floated the concept of a "two-speed" track to negotiating free trade agreements, which would allow some Mercosur members to advance faster than others in trade deals with external entities such as the European Union. Brazil, the economic heavyweight of Mercosur, has until now been cautious about dramatically changing the custom bloc's legal framework to avoid aggravating ties with Argentina. Instead, Brazilian President Dilma Rousseff has acknowledged Argentina's politically sensitive and fast-approaching run-off presidential elections scheduled for Nov. 22. Yet she has also expressed hope that the post-election environment would allow the new Argentine leader replacing President Christina Fernandez de Kirchner to stop stalling on the EU trade deal.
Member States Diverge
Unfortunately, there is reason to believe that no matter which candidate emerges victorious from Argentina's elections — whether it is Kirchner ally Daniel Scioli or the more business-friendly candidate Mauricio Macri — the next president's position on EU trade negotiations is unlikely to differ from that of the current administration. Buenos Aires does not want to increase imports and go deeper into a negative balance of payments, which an EU trade agreement would likely prompt by opening the country's manufacturing sector to competition from Europe. The only way for Argentina to ease its balance of payments concerns is for foreign currency to start flowing back into the country, which would likely take several years. Next year the government will also prioritize negotiations with the country's bondholders to settle Argentina's state of default with foreign creditors. With Argentina's economy at risk, the country's next president will likely maintain its reservations over the EU trade agreement.
Mercosur member states have acknowledged this; Uruguayan Economy Minister Danilo Astori recently stated that Argentina is the "main obstacle" to realizing a free trade agreement with the European Union. Uruguayan Foreign Minister Rodolfo Nin Novoa has also stated that Montevideo will push for a multi-speed approach in the event that the new Argentine leader does not support the deal. Brazil, meanwhile, is taking a more careful approach to the two-track proposal, waiting for the new Argentine government to take shape. But following a recent exchange of proposals that European negotiators criticized, the country has pushed for Mercosur to offer the European Union a better deal. An upcoming Mercosur summit scheduled to take place Dec. 21 — nearly a month after Argentina's elections — in Asuncion, Paraguay, could give Brazil an opportunity to take a stronger stance against Argentina on advancing trade negotiations or else to more actively pursue the two-track approach that Uruguay has been advocating.
Such an approach would likely deepen the divisions in Mercosur that have been exposed over the past year as trade between its principal members — Argentina and Brazil — has declined considerably, particularly in the automobile and manufacturing sector. But while Brazil has been flexible with Argentina when it comes to the external trade issue, its economic slowdown has forced it to prioritize expanding export markets beyond Mercosur states, especially as its weak currency has made many of its exports more competitive. There will be legal hurdles to overcome in pursing a two-track trade process, assuming that Argentina remains hesitant on following through with external trade deals as a bloc. Still, Brazil and other Mercosur states will likely push the economic bloc closer to that option in the coming year. Mercosur will not fully collapse because of these changes; its members are too politically and economically integrated. But Mercosur will inevitably adjust its internal framework and the way it handles trade in the coming year.
