# Mercosur: Evolution and Implications for U.S. Trade Policy

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/crs%3ARL33620

## Record

- **Collection:** Congressional research report
- **Document type:** CRS Report
- **Published:** March 26, 2008
- **Citation:** RL33620

## Text

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Prepared for Members and Committees of Congress

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Mercosur is the Common Market of the South established by Brazil, Argentina, Uruguay, and
Paraguay in 1991 to promote economic integration and political cooperation among the four
countries. Since then, Mercosur has struggled to achieve deep economic integration, but has
maintained a cooperative economic and political framework, which has also become an
influential voice in determining the fate of the hemisphere’s regional integration initiatives. In
particular, the U.S. vision for hemispheric integration, the Free Trade Area of the Americas
(FTAA), has stalled largely because of opposition from within Mercosur, which in turn has
focused on its own, albeit limited, expansion.
The Mercosur pact calls for an incremental path to a full integration, but after 15 years, only a
limited customs union has been achieved. From the outset, Mercosur struggled to reconcile a
basic inconsistency in a pact of partial economic union: how to achieve economic integration,
while also ensuring that the benefits would be balanced among members and that each country
would retain some control over its trade, production, and consumption structure. This delicate
balance faced overcoming serious structural and policy asymmetries that became clear when
Brazil and Argentina experienced financial crises and deep recessions. These economic setbacks
disrupted trade flows among members, causing friction, the adoption of protectionist measures,
and a retreat from the commitment to deeper economic integration.
For now, Mercosur has turned to expanding rather than deepening the agreement. Many South
American countries have been added as “associate members” and Mercosur has reached out for
other South-South arrangements in Africa and Asia – all limited agreements and unlikely paths to
continental economic integration. Internal conflicts have highlighted Mercosur’s institutional
weaknesses and slowed the integration process. On July 4, 2006, Venezuela signed an accession
agreement to become its first new full member, making Mercosur the undisputed economic
counterweight to United States in the region, but raising questions about how Venezuela’s
membership may shift regional political and trade dynamics.
It appears that Mercosur has opted to emphasize its expansion both in the region and with other
developing countries over agreements with its largest developed country trade partners, looking
to the World Trade Organization (WTO) as the preferred alternative for achieving many of its
trade policy goals. Nonetheless, U.S.-Mercosur commercial and economic ties are expanding and
the United States is pursuing deeper bilateral trade relations with Uruguay that could provide new
ideas for a broader integration commitment. The alternative may be for Mercosur and the United
States to expand their mutually exclusive bilateral agreements, increasing the potential for
overlapping trading systems, which few, if any, view as either economically or administratively
optimal.

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U.S.-Mercosur Trade Prospects....................................................................................................... 1
Formation and Institutional Development....................................................................................... 3
Intra-Mercosur Trade and Internal Dynamics ................................................................................. 5
Intra-Mercosur Trade Trends..................................................................................................... 6
Asymmetries: Country Perspectives ......................................................................................... 8
Argentina............................................................................................................................. 8
Paraguay and Uruguay........................................................................................................ 9
The “Pulp Mill” Conflict......................................................................................................... 10
Mercosur External Issues ...............................................................................................................11
Mercosur Outreach...................................................................................................................11
Venezuelan Accession ............................................................................................................. 12
Mercosur and the Doha Round ............................................................................................... 14
The Mercosur-Israel Free Trade Agreement ........................................................................... 15
China-Mercosur Trade ............................................................................................................ 15
Implications for U.S. Trade Policy ................................................................................................ 15

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Figure 1. U.S.-“Mercosur-4” Balance of Merchandise Trade ......................................................... 2
Figure 2. Intra-Mercosur Exports as Percent of Total Mercosur Exports, 1990-2007 .................... 6

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Table A-1. U.S. Merchandise Trade with Mercosur ...................................................................... 17
Table A-1. Intra- and Extra-Mercosur Merchandise Trade by Country......................................... 19

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Appendix A.................................................................................................................................... 19

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Author Contact Information .......................................................................................................... 20

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n March 26, 1991, Brazil, Argentina, Uruguay, and Paraguay signed the Treaty of
Asunción, establishing the Common Market of the South (Mercado Común del Sur—
Mercosur) with the intention of strengthening sub-regional development and cooperation
through economic integration. Since then, Mercosur has struggled to achieve deep economic
integration, but has maintained a cooperative economic and political framework, which has also
become an influential voice in determining the fate of the hemisphere’s regional integration
initiatives. In particular, the U.S. vision for hemispheric integration, the Free Trade Area of the
Americas (FTAA), has stalled largely because of opposition from within Mercosur.1 Venezuela’s
July 2006 signing of an accession agreement only reinforces Mercosur as the undisputed
economic counterweight to the United States in the region and raises further doubts over the
prospects for a hemispheric-wide trade agreement. This report examines the evolution of
Mercosur as it relates to U.S. trade policy in Latin America. It will be updated periodically.

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The Mercosur countries are experiencing an extended period of strong economic growth after a
deep recession caused by financial crises in Brazil (1999) and Argentina (2001). They currently
have competitive exchange rates, stable macroeconomic conditions, and strong growth in exports
and foreign direct investment largely because of the global commodity price boom. Commodity
prices, however, cut two ways. Although strong agricultural prices have fueled export growth, the
rising price of oil has offset some of these gains for the net oil importers (Venezuela being the
exception), contributing to deteriorating current account balances over the past year. Within
Mercosur, Brazil dominates the trade relationship, running a sizable and growing trade surplus
with the rest of the pact.2
Mercosur has a well-diversified trade relationship with the world. In 2006, the European Union
(EU) was Mercosur’s largest trade partner, capturing 25% of total trade, followed by Asia with
22%, and the United States with 19%. By contrast, the four Mercosur countries together
accounted for only 3.0% of total U.S. trade. With the recent addition of Venezuela, the “Mercosur
5” make up 3.6% of total U.S. trade, the increase accounted for almost entirely by U.S. imports of
Venezuelan oil. Collectively, the “Mercosur 4” would rank 9th for U.S. exports and 14th for U.S.
imports, slightly ahead of Brazil by itself, the largest economy in South America, responsible for
80% of total Mercosur trade with the United States.3

1

For more on the FTAA, see CRS Report RS20864, A Free Trade Area of the Americas: Major Policy Issues and
Status of Negotiations, by (name redacted).
2
Inter-American Development Bank (IDB). Integration and Regional Programs Department. Mercosur Report No. 12:
2006-2007. Washington, D.C. February 2008. pp. 4-6.
3
U.S. Department of Commerce data as presented in the World Trade Atlas.

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Figure 1. U.S.-“Mercosur-4” Balance of Merchandise Trade

Source:

U.S. Department of Commerce.

Patterns in U.S. merchandise trade with the “Mercosur-4” appear in Figure 1 (country data for all
five appear in Table A-1). Note that trends are heavily skewed by Brazil’s large economy. U.S.
imports of Mercosur goods rose steadily from 1996 to 2006, paralleling growth in the U.S.
economy. Expansion of U.S. exports, by contrast, was flat from 1996 to 2001 and then fell as
import demand collapsed around deep recessions in Brazil and Argentina. U.S. exports rebounded
in 2004 as the Mercosur economies recovered, and by 2007, the U.S. trade balance turned from
deficit to surplus for the first time since 2001. The U.S. trade surplus reflects growth in demand in
all four Mercosur countries. For Brazil, U.S. imports actually declined slightly in 2007, as U.S.
exports rose by 28%. U.S. exports have been helped by Brazil’s strong economic growth resulting
in increased demand for U.S. inputs such as aircraft engines and parts, as well as the strong
appreciation of Brazil’s currency relative to the U.S. dollar.
Major U.S. exports to Mercosur include mostly capital and high technology goods such as
mechanical and electrical machinery (computers, vehicles, aircraft, medical equipment, and
pharmaceuticals). The primary U.S. imports are components for machinery and vehicles,
agricultural products, and oil if Venezuela is included. Specifically, the United States imports
primarily machinery and mineral fuel from Brazil, mineral fuel and processed foods from
Argentina, sugars and woods from Paraguay, and meat and woods from Uruguay. Despite being a
relatively small U.S. trade partner, Mercosur contains two of South America’s largest economies,
and so prospects for growth in trade and investment drive, in part, ongoing U.S. interest in
maintaining cordial and cooperative relations, as does the expectation for deeper Western
Hemisphere integration, perhaps including, at some point, the FTAA.

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Mercosur evolved from a series of 1980s bilateral agreements between Brazil and Argentina. It
was conceived as a way to foster new levels of political and economic openness and cooperation
following a prolonged period of mutual distrust, much of it taking place under military
dictatorships in both countries. In addition, as the South American economies moved away from
an import substitution model of development to one based increasingly on trade openness, a
regional trade agreement made sense given the four countries were “natural trade partners,”
sharing geographical, cultural, and economic complementarities.4 In fact, Uruguay and Paraguay
pressed hard to expand the arrangement to a four-country common market to improve their trade
prospects, or at the least, ensure that they would not be isolated by a bilateral economic pact
between their two largest neighbors.5
Mercosur, therefore, evolved from economic and political circumstances that emphasized the
need to preserve and enhance the Brazil-Argentine bilateral relationship, while fostering cautious
ambitions for sub-regional economic integration that could also serve as a platform for the four
countries’ insertion into the global economy. Ultimately, as one scholar has observed, meeting
expectations is critical, and Mercosur’s success rests on the provision of consistent reciprocal
market access and a “framework for cooperation” that promotes mutual economic growth and
development.6 It is the difficulty in achieving this standard, as shall be seen, that has been at the
root of persistent discontent within Mercosur.
Formally, the Treaty of Asunción established Mercosur as a common market among Brazil,
Argentina, Uruguay, and Paraguay for the stated purpose of accelerating economic development
and social justice. The goal envisioned improved living conditions for all member countries
through “balanced and managed growth in trade flows.”7 The treaty followed guidelines
compatible with the Latin American Integration Association (Asociación Latinoamericana de
Integración—ALADI), a regional trade organization that provides a common, yet flexible
framework for establishing sub-regional trade pacts that encourages inclusiveness and minimal
harm to non-members. These pacts may be both “regional and partial in scope,” in contrast to the
U.S. free trade agreement (FTA) model that tends to be comprehensive. For example, Mercosur
adopted as basic tenets “gradualism, flexibility, and balance,” and allows for the negotiated
accession of other countries.8

4

Vaillant, Marcel. Mercosur: Southern Integration Under Construction. IPG. February 2005. p. 53.
The addition of Uruguay and Paraguay raised a fundamental debate about Mercosur’s purpose. Despite the charter
having well-defined integration and development goals, Brazil and Argentina have viewed Mercosur as a political
project as well. Paraguay and Uruguay, by contrast, have emphasized its economic priority, with some observers
insisting that Mercosur gets off track when it operates from a political agenda. See Lacalle de Herrera, Luis Alberto.
Mercosur: Project and Perspectives. Diplomacy, Strategy & Politics Review. Brasilia: April/June 2007, pp. 186-193.
(Note, Mr. Lacalle was president of Uruguay 1990-1995 and played an instrumental role in the negotiation and creation
of Mercosur.)
6
Vaillant, op.cit., pp. 53-54.
7
Costa Vaz, Alcides. Trade Strategies in the Context of Economic Regionalism: The Case of MERCOSUR. In:
Aggarwal, Vinod K., Ralph Espach, and Joseph S. Tulchin, eds. The Strategic Dynamics of Latin American Trade.
Washington, DC. Woodrow Wilson Center Press. 2004. pp. 234-35.
8
Porrata-Doria, Jr., Rafael A. MERCOSUR: The Common Market of the Southern Cone. Durham: Carolina Academic
Press. 2005. pp. 14-16.
5

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Mercosur followed an incremental path to a common market, beginning with a transition period
(1991-95) in which it operated as an increasingly comprehensive free trade agreement (FTA)
based on a schedule of automatic tariff reductions. The formal jump to a common market was
made on January 1, 1995, but in reality, Mercosur became (and remains) only a partial customs
union.9 It adopted a common trade policy and a schedule of common external tariffs (CETs) that
applies to 80% of tariff line items, but with some very important exceptions for sensitive sectors
such as sugar, automobiles, capital goods, computers, and other technology products. The
exceptions were to be phased out by 2006, but many have been extended to 2011, requiring a set
of complex rules of origin.10
In addition, there are weaknesses with the CET, a core requirement of a true customs union. The
CET can be levied twice, first when a good initially enters a Mercosur country, and again if it
crosses into another member country. Between the double taxation and multiple exceptions
problems, resolving application and uniform enforcement of the CET remains an important
unaddressed issue. The double taxation issue is a particular problem for Paraguay, which will
suffer significant revenue losses without some type of comprehensive customs revenue sharing
plan because most goods enter the Mercosur area through one of the other three countries.11 The
incompleteness of the customs union fosters asymmetry issues (discussed below) that are at the
root of Mercosur discontent, and that also suggest that the achievement of a full common market
remains a distant, if not illusory goal.
The Treaty of Asunción also provided for macroeconomic policy coordination and harmonization
of policy legislation at the sectoral level (e.g. energy, agriculture, industry, technology). Some
macroeconomic policies, such as exchange rates, have been forced toward complementarity by
economic events, but differences remain significant and full coordination of policy is not
currently feasible. The rationale for sectoral cooperation rests on inter-country factor mobility
being pursued gradually, allowing comparative advantage to work, while easing the integration
adjustment process. Nonetheless, sectoral issues and disputes remain a continuing challenge,
especially between Brazil and Argentina, as does cross-border movement of goods both within
Mercosur and to third country markets.
All parties were required to accept a common set of rights and obligations (Article 2), with little
allowance for special and differential treatment for smaller economies. There were many followon protocols. Among the most important was the December 17, 1994 Protocol of Ouro Preto,
which formally established the common market and extended the institutional framework
accordingly. Mercosur adopted a democratic commitment clause in 1996, and there were two
protocols that clarified and expanded the dispute settlement process, the last being the Olivos
Protocol signed on February 18, 2002, and implemented two years later.12 Dispute settlement,
however, is largely unenforceable and reflects a continuing problem of Mercosur’s institutional
effectiveness.

9

A free trade agreement (FTA) eliminates tariffs on goods exchanged among participating countries. In a customs
union, members also adopt a common external tariff (CET) and common trade policy toward third-party countries. A
common market takes the next step of allowing for the free flow of all factors of production (capital and labor) among
members.
10
IDB. MERCOSUR Report No. 10: 2004-2005. February 2006. Washington, D.C. p. 70 and Vaillant, op. cit. p. 55.
11
IDB. MERCOSUR Report No. 11: 2005-2006. February 2007. Washington, D.C. pp. 45-47.
12
For details on the legal documents, see Porrata-Doria, MERCOSUR: The Common Market of the Southern Cone.

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Three more recent developments call into question Mercosur’s functional institutional capacity.
First is the expansion of its membership. Venezuela signed an accession agreement on July 4,
2006 (discussed in detail below), but has been reticent to take on all commitments of the customs
union, especially the CET. In December 2006, Bolivia also requested to upgrade its status from
associate to full member, although it is reluctant to relinquish its membership in the Andean
Community of Nations (Comunidad Andina de Naciones—CAN), as would be required under
Mercosur rules.
Second is the new Mercosur Parliament established in December 2006 and headquartered in
Montevideo. It comprises 18 representatives from each full member country and has as its
primary goal to work toward harmonization of national laws and policies, but it has no authority
over national government bodies.13 Already a point of contention, it has come under criticism for
being either too weak to be meaningful, or risking unequal national representation relative to the
participating countries’ population. In either case, it is viewed by some as raising even more
questions over the institutional strength of Mercosur.14
Third is creation in 2006 of a $100 million Structural Convergence Fund, financed mostly by
Brazil and Argentina, effectively amounting to a transfer of resources to the smaller countries to
help ameliorate the inequalities of Mercosur. It provides funding for development and
infrastructure projects, destined primarily for Uruguay and Paraguay, but may not be a sufficient
response as a compensatory mechanism for acknowledged trade asymmetries within the pact.15

—›ŠȬŽ›Œ˜œž›ȱ›ŠŽȱŠ—ȱ —Ž›—Š•ȱ¢—Š–’Œœȱ
Intra-Mercosur trade relations have had an uneven and at times troubled history. A combination of
internal policy contradictions, diminishing expectations, and a hostile external economic
environment in the late 1990s resulted in uneven trade benefits and recurring recriminations
against the incomplete customs union. The return of a highly beneficial global economic
environment has alleviated some friction, but has not eliminated the need to make policy
adjustments or to address concerns raised by the two smallest members of Mercosur. These issues
again collectively point to a consistent criticism of Mercosur: its weak institutions and incomplete
integration. Too frequently, decision making is the product of political agreement, often on a
bilateral basis rather than a rules-based bloc-wide determination. This ad hoc approach to process
generates much of the conflict within the customs union, raising questions about the level of
commitment to completing the quadrilateral economic integration scheme.16

13

Latin American Weekly Report. Mercosur Meeting Ends on Sour Note. December 19, 2006. p. 7.
The Argentine Chamber of Exporter, for one, has raised concerns over the inherent weaknesses of the Mercosur
Parliament. Camara de Exportadores. Instituto de Estrategia Internacional. Parlamento del Mercosur: ¿La Voz de los
Ciudadanos en la Integración? Buenos Aires, July 2006. pp. 6-7 and 27-28. See also: Lacalle, op. cit., p. 190.
15
IDB, MERCOSUR Report No. 12, pp. 40-41.
16
Phillips, Nicola. The Southern Cone Model: The Political Economy of Regional Capitalist Development in Latin
America. London: Routledge, Taylor & Francis Group. 2004. p. 96.
14

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As Mercosur lowered tariffs, intra-Mercosur trade was expected to grow relative to trade with
third-party countries. As seen in Figure 2, this was the initial response from 1991 to 1998, with
the jump in intra-Mercosur exports also due to its growth from an initially small base, other
economic reforms, and the decade’s lengthy global economic expansion. There is, however, an
equally evident sudden collapse of intra-Mercosur exports, which fell from 25% of total trade in
1998 to 11% in 2002, before renewing an upward climb to 15% by 2007.17 This setback reflects a
fall in aggregate demand linked to the region’s economic crises, intra-Mercosur tariff increases in
response to internal Mercosur problems, and Argentina’s pressure to lower the CET on capital
goods, demonstrating a still strong dependence on trade with developed countries for products not
available in the region.18
Figure 2. Intra-Mercosur Exports as Percent of Total Mercosur Exports, 1990-2007

Source:

Inter-American Development Bank. Mercosur Report No. 12, p. 20.

From the outset, Mercosur struggled to reconcile a basic inconsistency of partial economic union:
how to balance trade integration and equity of member benefits, while retaining some semblance
of national control over trade, production, and consumption structure. Natural or structural
17

By comparison exports are 60% of intra-EU trade. Intra-Mercosur trade dependence varies by country. In 2005,
Mercosur captured 9.8% of Brazil’s total trade (exports plus imports) compared to 26.7% for Argentina, 38.8% for
Uruguay, and 50.8% for Paraguay.
18
Phillips, op. cit., pp. 89 and 94-95.

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asymmetries are at the heart of the problem given the pact integrates four economies with huge
discrepancies in size, structure, resource endowment, and level of development. In addition to the
absolute differences in size, relative differences can fluctuate widely over time. For example, the
size of Argentina’s economy (GDP) tends to be half that of Brazil’s, yet this metric has ranged
from a high of 60% in 1992 to a low of 22% in 2002 because of dramatic shifts in relative
economic performance, in this case punctuated by the prolonged recession and financial crisis in
Argentina.19
These structural differences can be compounded by “policy asymmetries” that arise from
incongruities in fiscal, monetary, industrial, exchange rate, and other policies. Either type of
asymmetry can dramatically alter commercial flows, causing large trade imbalances that can
threaten the stability of intra-Mercosur relations as seen in Figure 2. When they operate in
tandem, the Mercosur policy adjustment framework has proven to be vulnerable, particularly at
times when the countries face external economic shocks.20
Such a confluence of events occurred in the 1990s following a series of global shocks that spilled
over into Mercosur. The July 1997 Asian financial crisis was the first shock, followed by the
Russian default in the summer of 1998. These crises directly affected investor confidence in
Brazil, causing extensive capital flight in the fall of 1998, which in turn led to Brazil’s steep
currency devaluation in January 1999 and the abandonment of its fixed exchange rate
stabilization program. With Argentina’s strict dollar convertibility regime still in place at the time,
the two countries faced a significant “exchange rate policy asymmetry” that altered trade patterns.
The sudden trade imbalance was compounded by Argentina’s lengthy recession that also began in
1998, leading to its own, far more serious, financial crisis. Argentina’s crisis led to the
abandonment of its fixed exchange rate regime in December 2001 and subsequent sovereign debt
default.
Mercosur’s leaders, aware of macroeconomic weaknesses exposed by these crises, proposed a
Mercosur Relaunch program as early as May 2000. It formally reaffirmed a commitment to
deeper integration, but the Relaunch enthusiasm soon faded as it proved unable to overcome the
effects of the financial crises, including the spread of recession to Uruguay and Paraguay and the
dramatic fall in trade between Argentina and Brazil (90% of intra-Mercosur commercial
exchange).21 Intra-Mercosur relations became increasingly strained, with Argentina applying
temporary restrictions on Brazilian imports, further reducing trade and diminishing incentives for
deeper economic integration.
By 2002, the Mercosur economies had all hit bottom and began to rebound, as reflected in intraMercosur trade. Problems with intra-bloc trade imbalances, however, remained. As the data in
Table A-1 demonstrate, all four countries show a linear increase in intra- and extra-Mercosur
trade and, with the exception of Paraguay, expanding trade surpluses in their extra-Mercosur trade
relations. A core issue remaining is the persistent and growing trade deficits that each country
runs with Brazil. A related concern involves the accumulating trade deficits that Paraguay and
Uruguay have with Argentina.
19

Heymann, Daniel and Adrián Ramos. MERCOSUR in Transition: Macroeconomic Perspectives. United Nations.
Economic Commission for Latin America and the Caribbean (ECLAC). Santiago, Chile. December 2005. p. 17.
20
For details, see IDB, MERCOSUR Report No. 10, pp. 39-41.
21
Bouzas, Roberto. Mercosur After Ten Years. In: Tulchin, Joseph S. And Ralph H. Espach, eds. Paths to Regional
Integration: The Case of Mercosur. Woodrow Wilson International Center for Scholars. Washington, DC. 2002. p. 120.

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Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

œ¢––Ž›’ŽœDZȱ˜ž—›¢ȱŽ›œ™ŽŒ’ŸŽœȱ
The specific asymmetry issues discussed above manifest differently for each country. Two
commonly cited threads are the expanding trade deficit with Brazil, particularly since the region
began its economic recovery (see Table A-1), and unequal investment and trade in industrial
goods. Brazil is seen as the undisputed winner on both counts and is the most ardent supporter of
Mercosur for political as well as economic reasons. Interestingly, it is also the least trade
dependent member of Mercosur, with total Mercosur trade amounting to no more than 10% of its
world trade. By contrast, intra-Mercosur trade accounts for 25%-30% of Argentine trade. The two
smaller countries are even more dependent on their larger neighbor’s markets, but Mercosur has
fallen to only 38% of their total exports, down from recent highs of 59% for Uruguay and 41%
for Paraguay. This trend may suggest that both countries are reacting to perceived inequalities and
structural impediments by diversifying their trade outside of Mercosur.
Both Paraguay and Uruguay have made numerous formal proposals to solve the asymmetry issue.
To date, some changes in rules and other technical requirements have been made to improve trade
opportunities for the small countries.22 The most salient development was creation of the
Structural Convergence Fund, which has been slow in becoming operational and has only
approved its first projects in 2007. So far the asymmetries issue has not been resolved and
remains a major challenge to the long-term success of Mercosur.

›Ž—’—Šȱ
Argentina has numerous trade disputes with Brazil, heightened since the post-crisis period when
it began to run large trade deficits with Brazil (see data in Table A-1). The structure of these
deficits were a particular problem because they were weighted toward high value-added industrial
goods, competing directly with Argentina’s plans to restart its own industrial sector.23 The
imbalance became increasingly severe; Argentine exports fell from 14% of Brazilian imports in
1998 to 9% in 2007. Brazilian exports, in contrast, rose from 22% to 33% of Argentine imports.
The growing imbalance resulted from numerous factors: 1) new exchange rate equilibriums that
favored Brazilian goods in the Argentine market over U.S. and European products; 2) a postrecession jump in Argentine aggregate demand; 3) Brazil’s export promotion policy emphasizing
greater use of domestic inputs, and structural factors in the trade composition of the Mercosur
countries.24
An analysis of Mercosur trade composition suggests that Brazil’s trade surplus is driven
considerably by falling import shares of the smaller Mercosur economies, presenting two
structural problems not easily addressed. First, the export supply produced by the Mercosur
countries does not correspond strongly with Brazil’s import demand. Second, Argentine and
Uruguayan exports may be less competitive relative to those from countries outside the Mercosur
bloc. They also compete closely with one another in the Brazilian market. Together these trends
suggest that a natural correction in the Mercosur trade flows may not be likely, leading to

22

See IDB, Mercosur Report No. 12, p. 37 for a discussion of the specific rule changes.
IDB, MERCOSUR Report No. 11, pp. 30-32, Heymann and Ramos, MERCOSUR in Transition, p. 20, and World
Trade Atlas.
24
Ibid.
23

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

Şȱ

ȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

Argentina’s continued demand for administered remedies to address certain chronic sectoral trade
imbalances (e.g. appliances, textiles, paper).
Current administered agreements include the use of voluntary export restraints, quotas, and export
taxes.25 One important example is the Competitive Adaptation Mechanism (CAM) agreed to by
Brazil and Argentina in February 2006, over the strong objections of Brazilian industry. It permits
protective measures in cases where imports “cause or threaten to cause damage” to a domestic
product or industry (safeguards). A convoluted process, it allows for both voluntary export
restraints and tariff rate quotas. The CAM was a major policy shift for Mercosur and raises
multiple issues. First, it is a bilateral arrangement established under the ALADI system and so not
governed by Mercosur. Second, import restrictions represent a retreat from the stated free trade
philosophy of Mercosur. Third, the CAM has no enforcement mechanism under ALADI. In short,
it compounds existing institutional problems and may undermine the Mercosur agreement even as
it attempts, so far unsuccessfully, to restore balance to the largest bilateral relationship within it.26

Š›ŠžŠ¢ȱŠ—ȱ›žžŠ¢ȱ
The two smaller Mercosur partners face similar trade asymmetries, but also react against the
uneven exercise of power. Linked to Mercosur by a natural trade relationship, both Paraguay and
Uruguay have still had to respond to structural impediments to their exports. In part, trade
asymmetry is a function of their relatively small economies, but the major issue is the disparity
between Mercosur’s stated intent to help all members attain their development goals and the
actual functioning of the agreement itself. The treaty’s incomplete integration can impede
Paraguay’s and Uruguay’s exports, does not provide special and differentiated treatment, and
often allows bilateral “diplomacy” to circumvent formal decision-making mechanisms.27 The
safeguards mechanism adopted by Brazil and Argentina is one example, which appears to
contradict the principle of reciprocity in rights and obligations. Ad hoc restrictions on trade are
another major area of complaint.
Paraguay and Uruguay are not in identical situations and so each has advocated different
remedies. Historically Paraguay’s economy has been the most dependent on Mercosur. As a small
agricultural economy, geographically remote and landlocked, it depends on its neighbors for
export routes to third countries, particularly when river access is seasonally limited. Paraguay is
also the poorest and least developed Mercosur member, and so relies on the Mercosur’s promises
of market access, enforceable obligations, and integration for its fledgling manufacturing
industries. Paraguay’s exports have at times been blocked by bureaucratic restrictions in both
Brazil and Argentina and private sector complaints have had little success in resolving what they
believe amounts to protectionist non-tariff barriers (NTBs). Paraguay has expressed interest in
exploring the possibility of receiving trade preferences within Mercosur as one remedy, but
cannot envision leaving Mercosur.28
25

IDB, MERCOSUR Report No. 10, p. 47 and MERCOSUR Report No. 11, pp. 35-39, 128.
Haskel, David. Bilateral Agreements: Argentina, Brazil Start Safeguard System To Shield Industries from Mutual
Imports. International Trade Reporter. February 7, 2006. p. 247, Inter-American Development Bank. Southern
Common Market: New Integration and Co-operation Agreements Between Argentina and Brazil. http://www.iadb.org/
intal, and IDB, MERCOSUR Report No. 11, pp. 52-58.
27
Phillips, op. cit., p. 99.
28
Osava, Mario. Latin America: Mill Conflict Continues to Delay Integration. Inter Press Service. January 4, 2008, and
author’s interviews with public and private officials in Asunción, November 2007.
26

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

şȱ

ȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

Uruguay faces many of the same NTB problems as Paraguay, but with a higher per capita income,
developed port network (direct access to third countries), and more diversified economy, its
options for trade expansion both within and outside of Mercosur are greater. It too looks to the
Mercosur agreement to fulfill its promises of market access and enforceable obligations. Finding
a balance both within and outside Mercosur, including exploring deeper bilateral relationships
with the EU and the United States is the challenge for Uruguay. Frustrated by past vulnerability to
Argentina’s financial crisis and Brazil’s periodic barriers to trade, Uruguay has opted to diversify
its trade with the world where possible, but its policy options are hindered because it cannot
change or ensure enforcement of the Mercosur agreement, it cannot leave Mercosur, nor can it
formally negotiate outside it.29
The asymmetry issue suggests a certain implicit political hold that Brazil has over the Mercosur
derived from its disproportional economic power. By presiding over an incomplete customs
union, it can selectively limit the free movement of imports to suit its sectoral needs (at a cost to
the other countries equal to the high tariff on capital goods or forgone trade for example), and can
also inhibit movement of goods from the smaller countries bound for countries within Mercosur
or outside it. Brazil’s dominant economic and political-institutional control over the Mercosur has
therefore at times fostered a resentment among the smaller countries, increasing their interest in
pursuing third country trade arrangements.
Uruguay has responded in part by exploring deeper trade affiliations outside the pact. On
November 4, 2006, following U.S. Senate approval, a Bilateral Investment Treaty (BIT) between
the United States and Uruguay went into force. Uruguay also sought and received permission
from Brazil to explore an FTA with the United States. It subsequently decided to pursue a Trade
and Investment Framework Agreement (TIFA) with the United States, which was signed on
January 25, 2007. A Joint Commission on Trade and Investment provides the means for ongoing
U.S.-Uruguay discussions regarding opportunities for specific trade deals.
The TIFA approach is flexible and allows Uruguay to deepen trade relations with the United
States without compromising its Mercosur commitments. Uruguay has linked its desire to
develop closer U.S. trade ties with its concern over increasing “bilateralism” between Argentina
and Brazil. In December 2006, Argentina responded by criticizing Uruguay for attempting to
circumvent Mercosur in its quest to diversify its trade relations, again pointing to an internal strife
based on a trade pact that does not appear to operate as promised.30 Many in Uruguay are not
indifferent to this viewpoint and in an ideal world would like to pursue an FTA with the United
States in a way that would not compromise its standing with Mercosur.

‘Žȱȃž•™ȱ’••Ȅȱ˜—•’Œȱ
Uruguay’s construction of a pulp mill opposed bitterly by Argentina is another conflict within
Mercosur. Constructed by a Finnish firm on the Uruguay River, the mill represents the largest
single foreign investment project in Uruguay and is expected to provide significant long-term
employment opportunities.31 Argentina alleges that Uruguay is in violation of a bilateral
29

Ibid and IDB, Mercosur Report No. 12, p. 40.
Haskel, David. Uruguayan President Turns Down Offer to Negotiate Free Trade Agreement with U.S. International
Trade Reporter. BNA, Inc. October 5, 2006, p. 1440 and Argentina Blasts Uruguay’s Pursuit of Free Trade with NonMercosur Nations. International Trade Reporter. BNA. Inc. January 4, 2007, p. 22.
31
Latin American Weekly Report. Pressure Builds Over Pulp Mill. August 9, 2007. Originally, the dispute involved a
(continued...)
30

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗŖȱ

ȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

environmental protocol the two countries signed in 1975 and that the plant presents potentially
harmful environmental effects that could negatively affect Argentina’s national territory,
including a resort area across the river from the construction site.
A World Bank review concluded that the plant poses no serious environmental problems, but did
suggest that construction and production design changes could reduce the risk of environmental
hazard even further. The World Bank’s International Finance Corporation provided $100 million
to finance the project and the issue continues to spawn protests and diplomatic flare-ups.
Periodically, Argentine protesters continue to block bridges over the Uruguay River, disrupting
trade and tourist traffic between the two countries. Uruguay has responded at times by closing the
border. It also turned to the Mercosur system for dispute settlement. A September 2006 ruling by
the Mercosur Ad-Hoc Arbitration Tribunal found that Argentina had failed to live up to its
commitment to ensure the free movement of people, goods, and services under the pact, but no
award was made.32
Argentina also filed a petition for arbitration with the International Court of Justice (ICJ) at The
Hague. The ICJ denied Argentina’s request for an injunction to terminate construction. It also
declined to require that Argentina take actions to remove protesters. Uruguay subsequently filed a
counter claim, arguing that Argentina has failed to take such action. Additional mediation efforts
in Madrid and New York ameliorated the conflict temporarily, but the pulp mill began operations
in November 2007 even as the parties awaited a final ruling from the ICJ. Brazil has chosen not
to mediate and the ongoing dispute highlights the lack of an effective dispute settlement system
within Mercosur.33

Ž›Œ˜œž›ȱ¡Ž›—Š•ȱ œœžŽœȱ
Although Mercosur began strictly as a four-party integration plan, changing internal and external
circumstances led the customs union to consider expanding its membership in various ways and
to consider the merits of seeking trade arrangements with third party countries and trade groups.
As part of its charter, Mercosur remains formally open to the addition of new members.

Ž›Œ˜œž›ȱž›ŽŠŒ‘ȱ
In 1996, Chile and Bolivia joined as the first “associate members.” Since then, Mercosur has
continued to enter into “economic complementarity agreements” with most of South America,
under ALADI guidelines. Associate membership is a limited arrangement, largely focused on the
long-term pursuit of a free trade agreement, often emphasizing sector-specific agreements and
(...continued)
second plant to be built by a Spanish firm. This plant has been relocated, defusing it as an issue.
32
Inter-American Development Bank. Institute for the Integration of Latin America and the Caribbean. Dispute
Between Argentina and Uruguay: Arbitration Tribunal Award. INTAL Monthly Letter. September 2006 and Latin
American Weekly Report. November 15, 2007. This episode points to what one scholar observes to be Mercosur’s
highly politicized dispute settlement and decision-making processes, which can allow for resolutions based on
“political whim, unilateral action, and non-observance of agreed policy commitments.” Phillips, op. cit., p. 99.
33
One Year On, Small Dispute Threatens to Fracture Mercosur. Latin American Regional Report. Brazil and Southern
Cone. April 2006. p. 1 and Osava, Mario. Latin America’s Mill Conflict Continues to Delay Integration. Inter Press.
January 4, 2008.

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗŗȱ

ȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

cooperation. It does not convey membership status per se, and while members may attend
meetings, they have no voting rights, do not participate in the internal functions of Mercosur, and
are not required to adopt the CET.34
In October 2004, after years of talks, Mercosur and the Andean Community signed a trade pact,
giving all Andean countries the equivalent of associate membership. Two months later, this
breakthrough led directly to creation of the South American Community of Nations, later
renamed the Union of South American Nations (UNASUR), a loosely-conceived pact including
12 countries (those in Mercosur, CAN, along with Chile, Guyana, and Suriname). The CAN and
UNASUR in many ways are not true regional agreements; they have some common rules, but
details on market access and other specific provisions are bilateral arrangements between each
Mercosur country and the CAN. Brazil also granted numerous unilateral concessions to ensure
the UNASUR agreement would be completed.35 These constraints limit prospects for deep
continental integration. Nonetheless, sectoral initiatives, such as the proposed South American
gas pipeline, already reflect increased cooperation and collective self-determination in the region,
which is also now alive in the institutional presence of the CSN.
Mercosur’s other negotiations have experienced mixed success. Trade talks with the EU for a
joint Mercosur-EU FTA and the Western Hemisphere countries for a proposed Free Trade Area of
the Americas (FTAA) have both come to an impasse over the inability to reach an agricultural
agreement acceptable to Brazil. Brazil has also declined U.S. and EU overtures for “WTO-plus”
arrangements on market access for industrial goods, services trade, enforceable intellectual
property rights, and investment provisions. Continuing interest will depend in part on the
outcome of the Doha Round.36 South-South trade talks have advanced only in limited form.
Mercosur has begun preliminary discussions with a host of countries that include China, India,
SACU, Canada, the Russian Federation, Korea, Egypt, Morocco, and Pakistan. None has moved
beyond a simple framework agreement.37

Ž—Ž£žŽ•Š—ȱŒŒŽœœ’˜—ȱ
On July 4, 2006, Mercosur agreed to accept Venezuela as the first additional full member of the
pact. The accession protocol was accelerated in mid-2006 at the behest of President Hugo
Chávez, who viewed it as supportive of his effort to unify South America and advance his
“Bolivarian agenda” that generally stands in opposition to U.S. influence in the region. The
accession takes full effect only after formal parliamentary approval by all four Mercosur
countries. To date, only Argentina and Uruguay have voted to approve.38
The early stages of the accession process was expected to be longer and more involved because of
two significant hurdles: Venezuela’s membership in the CAN, which would not have been
allowed under Mercosur protocols; and the requirement to adopt the Mercosur CET. Venezuela
dispensed with the first issue by defiantly withdrawing from the Andean trade pact in April 2006.
34

Porrata-Doria, MERCOSUR: The Common Market of the Southern Cone, pp. 123-124.
IDB, MERCOSUR Report No. 10, p. 93.
36
Unlike the United States, which will consider engaging the Mercosur countries in bilateral talks, the EU prefers to
negotiate bloc-to-bloc, which would reinforce rather than diminish Mercosur’s functioning as a customs union.
37
IDB, MERCOSUR Report No. 10, pp. 90 and 96-100.
38
United Nations. Economic Commission on Latin America (ECLAC). Latin America and the Caribbean in the World
Economy 2006. Santiago, August 2007. p. 132.
35

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗŘȱ

ȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

Citing Peru and Colombia’s negotiations for FTAs with the United States as contrary to CAN’s
and Latin America’s best interests, President Chávez left the pact specifically to join Mercosur. To
address the second issue, Mercosur, under Brazil’s leadership, negotiated to give Venezuela four
years to comply with the CET, with other obligations of the pact not completely phased in until
2014.39
Mercosur may have many incentives to bring Venezuela into the fold. The addition of a fifth
member adds to the economic strength of the bloc, which would comprise three-quarters of South
American GDP. Venezuela also promised immediate selective duty-free treatment for imports
from Paraguay and Uruguay, with no requirement for reciprocal treatment until 2013. Venezuela
may increase the potential for intra-Mercosur trade as a relatively large Latin American market
that also offers sectoral complementarity and energy security with its vast oil reserves and plans
for a regional pipeline.
A more thorough analysis of the potential trade effects, however, suggests that the trade and
economic benefits for Mercosur may be easily overstated. Currently, Mercosur trades little with
Venezuela and estimates of trade growth are modest at best, given limitations in the accession
protocol (exemptions and other restrictions) and current tariff preferences that already apply to a
high proportion of goods expected to benefit from the agreement. Trade between Mercosur and
Venezuela averages no more than 3% of the pacts total world trade, with the exception of
Uruguay where crude oil constitutes 12% of total imports. The energy sector promises the
greatest benefit through deeper cooperation in energy supply, but which could also be achieved
without Venezuela’s full integration into Mercosur. In addition, Venezuela’s access will
complicate trade policy coordination within the expanded bloc, both regionally and
multilaterally.40
The political motivations and ramifications for Venezuela’s accession may be even more of an
issue. Concern has grown, for example, over certain of President Chávez’s policies that may be
construed as hindering democracy, which in turn could be considered a direct challenge to
Mercosur’s democratic clause. Brazilian Foreign Minister Celso Amorim has reaffirmed his view
that Mercosur’s primary goal from the start has been to consolidate democracy in South America.
Chávez’s decision to close a key radio station (viewed by some as suppressing freedom of
speech) and his one-time plan to alter the Venezuelan Constitution to abolish presidential term
limits (viewed by some as a direct assault on the democratic process) raised concern over real and
perceived undemocratic behavior in Venezuela. This issue has escalated with some members of
the Brazilian Senate continuing to argue for postponement of a vote to consider Venezuela’s
accession.41
39
Mercosur. Protocolo de Adhesión de la República Bolivariana de Venezuela al Mercosur. Articulo 4. July 4, 2006.
Haskel, David. Mercosur, Venezuela Agree on Protocol for Caracas Accession to Trading Bloc. International Trade
Reporter. BNA, Inc. June 1, 2006. p. 837. The accession process has been criticized by, among others, former Brazilian
Ambassador to the United States Rubens Barbosa, who stated that “In the European Union they negotiate the terms of
entry, and then the country joins. Here, we’re doing it the other way around, which is craziness...” Rohter, Larry.
Venezuela Wants Trade Group to Embrace Anti-Imperialism. The New York Times. January 18, 2007.
40
A detailed analysis of the potential trade effects of Venezuela’s access may be found in: IDB, Mercosur Report No.
11, pp. 99-117and see also, ECLAC, Latin America and the Caribbean in the World Economy, pp. 132-134.
41
See Magalhaes, Luciana and Katia Cortes. Brazil Senator Says Venezuela Deadline on Mercosur ‘Unfeasible.’
Bloomberg. July 4, 2007, Haskel, David. Venezuela’s Mercosur Partners Downplay President Chávez’s Nationalization
Pledges. International Trade Reporter. January 18, 2007, and Wheatley, Jonathan and Richard Lapper. Left Turn
Ahead? How Lula’s Plan Could Condemn Brazil to Mediocrity. Wall Street Journal. February 21, 2007.

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗřȱ

ȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

Although Venezuela remains a non-voting member until the accession is ratified, it does have a
voice in Mercosur affairs, increasing its influence on intra-pact and external trade negotiations.
The marginal effect may be to strengthen resolve by some countries to challenge U.S. influence in
South America, although there are also moderating influences in all countries. Uruguay and
Paraguay could also view Venezuela as having a diluting force on Brazil’s political dominance in
the pact, but opinions seem divided at present in both countries.
Venezuela’s accession, however, may have unintended regional consequences should countries
outside Mercosur be put in a position of having to choose between a U.S. or Mercosur trade
agreement. Peru has even suggested forming a new trade bloc, the Community of the Pacific,
which would include countries with complementary trade arrangements: the United States,
Canada, Mexico, the Central American countries, Panama, Colombia, Peru, and Chile.42 This
prospect may be further reinforced by Bolivia’s request to become a full member of Mercosur,
although it appears reluctant to give up its membership in the CAN and accept the tariff
convergence challenge inherent in adapting to the Mercosur CET.43

Ž›Œ˜œž›ȱŠ—ȱ‘Žȱ˜‘Šȱ˜ž—ȱ
The current, and now long-extended, WTO multilateral round of trade negotiation highlights
other interesting institutional constraints within Mercosur. As a customs union with a supposed
common external trade policy and CET, Mercosur would theoretically need to approach the Doha
Development Round with some common, if not identical, trade negotiation objectives, or risk
differing country policies undermining the integration scheme. Mercosur has responded by
creating an ad hoc consultation and coordination group to address the Doha negotiations. The
bloc, however, does not approach the WTO as a united voice, but Doha negotiations are exploring
the possibility of a more flexible approach to address the interests of the customs union.44
Brazil has taken the negotiating lead and perhaps has the most to gain from the Doha Round on
both political and economic grounds, but it is not clear that positions benefitting Brazil will
always be those supported by the other Mercosur countries.45 Although there has been broad
agreement in the realm of agricultural issues, as part of the broader developing country
consolidated response to developed country WTO positions, there is less agreement in the areas
of nonagricultural market access and services. The most sensitive areas with respect to
maintaining a cohesive customs union are in setting tariff levels and determining sensitive
product lists that each country may elect to receive special treatment under a WTO agreement.
Given there will be limits on the number of tariff lines permitted, large differences in both these
areas among Mercosur countries could lead to either a breech of the customs union rules, or those
of the Doha agreement. Balancing these goals in the WTO negotiations is a challenge for the four

42

Chauvin, Lucien O. Peru Proposes New Trade Bloc of Hemisphere Nations on Pacific Coast. International Trade
Reporter. BNA, Inc. August 3, 2006. p. 1172. For a detailed summary of the environmental, legal, and economic
issues, see IDB, MERCOSUR Report No. 11, pp. 69-76.
43
ECLAC, Latin American and the Caribbean in the World Economy, p. 132.
44
IDB, MERCOSUR Report No. 11, p. 94 and Costa Vaz, Trade Strategies in the Context of Economic Regionalism:
The Case of MERCOSUR, p. 256 and Washington Trade Daily. US, EU Brazil on ‘Flexibilities.’ March 11, 2008.
45
On Brazilian trade strategy and the WTO, see CRS Report RL33258, Brazilian Trade Policy and the United States,
by (name redacted), pp. 5-6 and 15.

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗŚȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

ȱ

Mercosur countries and should the Doha Round stall indefinitely, it is possible that alternative
paths to global integration may take on renewed emphasis.46

‘ŽȱŽ›Œ˜œž›Ȭ œ›ŠŽ•ȱ›ŽŽȱ›ŠŽȱ›ŽŽ–Ž—ȱ
On December 18, 2007, after four years of negotiations, Israel signed a free trade agreement at
the Mercosur Summit with the four member countries, the first such agreement with a country
outside the Western Hemisphere. The agreement is limited largely to market access for
merchandise trade, allowing for full free trade to be phased in within 10 years. Mercosur and
Israel have a near even balance of trade in their $1 billion commercial relationship. Mercosur
exports mostly agricultural products and imports technology goods. Although this arrangement is
highly complementary, treatment of agricultural exports and capital goods imports has been a
stumbling block for the Mercosur countries, and particularly Brazil, in trade negotiations with the
EU, the United States, and at the Doha Round. Safeguards and other restrictions will apply during
the transition period to full free trade.47

‘’—ŠȬŽ›Œ˜œž›ȱ›ŠŽȱ
Mercosur and China have no formal trade agreement in effect, but bilateral trade has grown
tremendously in recent years. In 2007, Mercosur exported $16.1 billion of goods to China,
importing $19.7 billion. China represented 7.2% of Mercosur’s exports and 11.2% of its imports.
Total trade between China and the four Mercosur countries ranges from a low of 11% of total
foreign trade for Uruguay to 18% for Argentina and Brazil, and a high of 28% for Paraguay
(importing mostly computer and other electronic equipment).48 Mercosur’s commodity exports
and imports of labor-intensive goods explain most of the recent strong growth in this
relationship.49 Such strong trade growth also presents problems for Mercosur because
manufactured imports displace local products. China’s expanding trade surplus would be even
bigger were it not for the world prices of agricultural commodities currently driving Mercosur’s
export values, suggesting that as China becomes a larger trade partner, the deficit could widen.
The prospect for a deteriorating bilateral trade balance has led both Brazil and Argentina to
pursue anti-dumping cases and resort to use of import licenses, voluntary export restraints, and
higher tariffs.50

–™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ
Mercosur came to life as both a Brazilian-Argentine political project and a broader economic
integration scheme among four contiguous, but highly differentiated countries. Mercosur has
fostered a prolonged period of cooperation in a region with a long history of conflict, an
important achievement in both political and economic terms. Still, it is a limited customs union
46

IDB, MERCOSUR Report No. 11, p. 94-97.
Global Insight. Mercosur Signs Deal with Israel. December 19, 2007 and Haskel, David. Mercosur Concludes FTA
with Israel. International Trade Reporter. December 20, 2007.
48
World Trade Atlas.
49
IDB, Mercosur Report No. 12, pp. 23-24
50
Ibid., pp. 24 and 45-46.
47

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗśȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

ȱ

and remains intact despite its “incompleteness” in part because: 1) there is no simple alternative
for its members; 2) there is an unknown, but perceived serious downside risk to its dissolution,
and; 3) there is always the vague hope that promises of institutional improvements will produce
more equitable outcomes. The result remains an uncomfortable status quo in which form (e.g. the
new Parliament) often supersedes function (e.g. deeper integration).
Economic integration based on mutual growth in trade and development is at the heart of the
Mercosur charter, but given shortfalls in achieving this goal, it is likely that a persistent
dissatisfaction among the smaller partners may continue, particularly given Brazil’s political and
economic dominance and Mercosur’s inability to address institutional disagreements. Deeper
economic integration promises to resolve some problems, but there appears to be little chance for
movement in that direction in the near future.
Instead Mercosur has opted to pursue new institutional bureaucracies (the Parliament) and
outreach to third countries, albeit on a very limited basis. The Parliament is in its infancy and
Mercosur has not been able to consummate a trade agreement with its most important trade
partners, the United States and the EU. South-South agreements and expansion of associate
membership to South American countries has progressed, but only as limited market access
arrangements. The big, but questionable move is the accession invitation to Venezuela, which has
also had problems. Venezuela has been given leeway in adopting Mercosur commitments, which
has undermined the pact’s cohesiveness,51 and could end up shifting the political orientation of
Mercosur, while providing only relatively small trade effects.
Historically, the United States has supported Mercosur as a potential complementary path to
meeting its own goal of Western Hemisphere economic integration, but U.S.-Mercosur trade is
small and Mercosur has shown little enthusiasm for supporting U.S. initiatives for a hemisphericwide trade agreement. The addition of Venezuela would likely solidify this position. Although
Mercosur has resisted the FTAA as envisioned by the United States, Venezuela is the only country
in Latin America to reject the idea unequivocally.
It appears that Mercosur has opted to emphasize its expansion both in the region and with other
developing countries over agreements with its largest developed country trade partners, looking
to the World Trade Organization (WTO) as the preferred alternative for achieving many of its
trade policy goals. Nonetheless, U.S.-Mercosur commercial and economic ties are expanding and
the United States is pursuing deeper bilateral trade relations with Uruguay that could provide new
ideas for a broader integration commitment. The alternative may be for Mercosur and the United
States to expand their mutually exclusive bilateral agreements, increasing the potential for
overlapping trading systems, which few, if any, view as either economically or administratively
optimal.

51

Obiko Pearson, Natalie. Chávez Hosts 6-Nation Trade Summit. Associated Press. July 5, 2006.

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗŜȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

ȱ

Table A-1. U.S. Merchandise Trade with Mercosur
($ millions)

Country

2003

2004

2005

2006

2007

% Change

% Change

2006-07

2003-07

U.S. Exports

Brazil
Argentina
Uruguay
Paraguay
Mercosur 4
Venezuela
Mercosur 5
Mexico
LACa
Latin America
World

11,211
2,437
327
484
14,459
2,831
17,290
97,412
51,946
149,358
724,771

13,897
3,388
326
623
18,234
4,767
23,001
110,834
61,465
172,299
818,775

Brazil
Argentina
Uruguay
Paraguay
Mercosur 4
Venezuela
Mercosur 5
Mexico
LACa
Latin America
World

17,910
3,170
256
53
21,389
17,136
38,525
138,060
78,829
216,889
1,257,121

21,160
3,745
580
59
25,544
24,921
50,465
155,902
98,647
254,549
1,469,704

15,372
4,122
357
896
20,747
6,421
27,168
120,365
72,407
192,772
905,978

19,231
4,776
482
911
25,400
9,002
34,402
133,979
88,969
222,948
1,036,635

24,628
5,855
640
1,237
32,360
10,199
42,559
136,541
107,528
244,070
1,162,708

60.2%
42.0%
79.3%
38.1%
56.0%
58.8%
56.7%
13.4%
48.5%
26.6%
28.3%

119.7%
140.3%
95.7%
155.6%
123.8%
260.3%
146.1%
40.2%
107.0%
63.4%
60.4%

24,436
4,584
732
52
29,804
33,978
63,782
170,109
122,873
292,982
1,673,455

26,367
3,979
512
58
30,916
37,134
68,050
198,253
133,676
331,929
1,853,939

25,636
4,495
492
68
30,691
39,897
70,588
210,799
134,773
345,572
1,953,699

4.9%
-1.9%
-32.8%
30.8%
3.0%
17.4%
10.7%
23.9%
9.7%
18.0%
16.7%

43.1%
41.8%
92.2%
28.3%
43.5%
132.8%
83.2%
52.7%
71.0%
59.3%
55.4%

U.S. Imports

U.S. Balance of Trade

Brazil
Argentina
Uruguay
Paraguay
Mercosur 4
Venezuela
Mercosur 5
Mexico
LACa
Latin America

-6,699
-733
71
431
-6,930
-14,305
-21,235
-40,648
-26,883
-67,531

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

-7,263
-357
-254
564
-7,310
-20,154
-27,464
-45,068
-37,182
-82,250

-9,064
-462
-375
844
-9,057
-27,557
-36,614
-49,744
-50,466
-100,210

-7,136
797
-30
853
-5,516
-28,132
-33,648
-64,274
-44,707
-108,981

-1,008
1,360
148
1,169
1,669
-29,698
-28,029
-74,258
-27,245
-101,502

ŗŝȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

ȱ
Country

2003

2004

2005

2006

2007

World

-532,350

-650,929

-767,477

-817,304

-790,991

% Change

% Change

2006-07

2003-07

Table created by CRS from U.S. Department of Commerce data.
Latin America and the Caribbean, except Mexico.

Source:

a.

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŗŞȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

ȱ

™™Ž—’¡ȱǯ ȱ
Table A-1. Intra- and Extra-Mercosur Merchandise Trade by Country
(in U.S. $ millions)

Argentina
Mercosur Total Trade:
– Brazil
– Paraguay
– Uruguay
Mercosur Trade Balance:

– Brazil
– Paraguay
– Uruguay
Extra-Mercosur Total Trade
Extra-Mercosur Trade Balance
Mercosur as % of Total Trade

2002

2003

2004

2005

2006

8,628
7,345
596
665
2,792
2,310
86
419
26,071
9,927
24.9%

10,845
9,366
741
718
469
-33
151
372
32,945
15,619
24.8%

15,451
13,331
905
1,214
-1,829
-2,121
139
154
41,570
13,959
27.1%

19,348
16,770
964
1,614
-3,929
-4,100
54
306
49,726
15,630
28.0%

23,540
20,395
1,129
2,016
-3,642
-4,131
113
376
57,066
15,948
29.2%

Brazil

Mercosur Total Trade:

– Argentina
– Paraguay
– Uruguay
Mercosur Trade Balance:

– Argentina
– Paraguay
– Uruguay
Extra-Mercosur Total Trade
Extra-Mercosur Trade Balance
Mercosur as % of Total Trade

2002

2003

2004

2005

2006

8,981
7,090
942
896
-2,359
-2,405
176
-74
98,611
15,490
8.4%

11,477
9,234
1,182
942
-133
-112
232
-134
109,867
24,957
9.5%

15,425
12,945
1,170
1,190
2,399
1,801
574
114
143,832
31,294
9.7%

18,162
16,154
1,280
1,344
4,590
3,676
642
356
173,697
40,167
9.5%

23,000
19,771
1,527
1,624
4,901
3,657
935
927
205,865
41,173
10.1%

2002

2003

2004

2005

2006

Paraguay
Mercosur Total Trade:

– Argentina
– Brazil
– Uruguay
Mercosur Trade Balance:

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

1,398
344
831
223
-292

1,817
469
1,043
302
-349

2,388
722
1,134
513
-656

2,472
739
1,172
535
-652

2,779
903
1,385
481
-933

ŗşȱ

Ž›Œ˜œž›DZȱŸ˜•ž’˜—ȱŠ—ȱ –™•’ŒŠ’˜—œȱ˜›ȱǯǯȱ›ŠŽȱ˜•’Œ¢ȱ

ȱ

2002

– Argentina
– Brazil
– Uruguay
Extra-Mercosur Total Trade
Extra-Mercosur Trade Balance
Mercosur as % of Total Trade

2003

-274
-125
107
1,063
-267
56.8%

-337
-193
184
1,290
-274
58.5%

2004

-518
-508
389
1,890
-370
55.8%

2005

-525
-530
429
2,396
-872
50.8%

2006

-565
-631
363
4,404
-2,410
38.7%

Uruguay
2002
Mercosur Total Trade:

– Argentina
– Brazil
– Paraguay
Mercosur Trade Balance:

– Argentina
– Brazil
– Paraguay
Extra-Mercosur Total Trade
Extra-Mercosur Trade Balance
Mercosur as % of Total Trade

2003

1,576
654
822
76
-345
-428
42
48
2,249
215
41.2%

1,752
728
1,752
59
-336
-418
12
37
2,636
344
40.0%

2004

2,229
911
1,162
75
-538
-202
-192
43
3,805
341
36.9%

2005

2,630
1,172
1,281
76
-876
-638
-369
36
4,591
339
36.4%

2006

3,308
1,380
1,659
84
-1,062
-778
-493
32
5,400
226
38.0%

Total trade = exports + imports. Trade balance = exports - imports.
Source:

World Trade Atlas, reporting national account data.

ž‘˜›ȱ˜—ŠŒȱ —˜›–Š’˜—ȱ
(name redacted)
Specialist in International Trade and Finance
/redacted/@crs.loc.gov, 7-....

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

ŘŖȱ

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3ARL33620. Public record. Not legal advice.