Mercosur role in international trade

In the last decades we have seen how many countries have been joining in blocs, and negotiating different trade agreements. In these decades we have seen the creation of the G8, G20, The Bric countries, the EU, ASEAN, NAFTA, the Pacific Alliance etc.; plus many other free trade agreements negotiated bilaterally. One of these blocs, which is usually not followed by western media, is Mercosur. Mercosur is an economic bloc formed by 5 countries: Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Under the bloc rules they have to significantly reduce tariffs within member states, and they have agreed to talk on whether to create a common currency for the bloc. Trade within the region has expanded substantially; they are now working on signing a free trade agreement with the European Union. This is a very important treaty because trade within the bloc only represents 16% of these 5 countries total exports. This tells us that they are very dependent on trading with countries outside the bloc, and the EU is one of the main markets to export goods to, and import goods from.

The negotiations with the EU started in 2000, and were briefly stopped during the WTO negotiations as they had too many differences on how to structure the agreement. These differences were mostly explained by European unwillingness to expose their farmers to competition from the Mercosur bloc and Mercosur countries desire to protect their industry from better quality manufactured European goods. The current economic environment has convinced both sides that countries are better off trading than by keeping the current protective environment for many reasons. The most important reason is that Europe now sees a new market for its manufacturers in the middle class in most of the Mercosur countries. Austerity measures all across EU make very hard to keep the current farmers, and foods subsidies to make them competitive. Most European countries have cut these subsidies, and have chosen to rely a little more on the international market for food imports but they still have some subsidies in place.  These subsidies still in place cost EU members around $70 billion a year, which are becoming more and more difficult to justify. Is also important to have in consideration that cheaper food, and raw material look very tempting to Politicians that are going to be blamed for the current lost of living standards in some European countries. For Mercosur countries is very important to export more, as they have received a lot of investment from foreign markets in the last decade, and are now in need of embracing globalization in order to keep their constant growth. This is why they are in need of placing their products in Europe with reduced prices given by reduced duties. This would also mean that they are in a much better position when it comes to competing with goods coming from Asia, which would represent Mercosur main competitor in the international market.

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                                             (Source: European Trade Commission)

Negotiations have not been easy as there is not central leadership in Mercosur, so decisions are based on consensus of the group.  This has affected the treaty with the EU since countries such as Argentina and Venezuela are against these talks. These countries are governed by leftist parties against free trade, and are in favor of protectionism. The other 3 members of Mercosur have decided to move forward with the talks, and have told Argentina that they can join the talks later, and Venezuela is not invited as they recently joined the bloc. It seems like even with the opposition presented by Argentina and Venezuela, there might be a treaty at some point in the near future.   It’s hard to now exactly when as negotiations are held secretly. It seems like they are not close to an agreement as spokesmen have said that they are now holding “technical meetings.” The Portuguese president has said that the EU wants to see whether “necessary conditions are in place for a formal exchange of offers and then that could take place very quickly afterwards.” This tells us that they are still not discussing the most important issues that need to be addressed in the agreement.  If these blocs do arrive to an agreement, it would be a very beneficial reduction in cost for both countries, and would help them improve their population living standards.

Sources:

http://ec.europa.eu/trade/policy/countries-and-regions/regions/mercosur/

http://www.economist.com/news/americas/21591629-last-brazil-keen-trade-deal-strategic-patience-runs-out

http://en.mercopress.com/2006/08/29/trade-common-currency-in-mercosur-s-agenda

http://uk.reuters.com/article/2014/02/25/uk-eu-mercosur-argentina-idUKBREA1O0Y820140225

http://www.bis.org/ifc/publ/ifcb32d.pdf

http://www.worldaffairsjournal.org/blog/juan-de-onis/protectionist-policies-stagnate-mercosur-countries

http://www.nytimes.com/2012/08/01/world/americas/mercosur-trade-bloc-admits-venezuela-as-full-member.html?action=click&module=Search&region=searchResults%230&version=&url=http%3A%2F%2Fquery.nytimes.com%2Fsearch%2Fsitesearch%2F%3Faction%3Dclick%26region%3DMasthead%26pgtype%3DHomepage%26module%3DSearchSubmit%26contentCollection%3DHomepage%26t%3Dqry264%23%2Fmercosur

http://online.wsj.com/article/BT-CO-20140224-704407.html

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