Last year, Mercosur was in the spotlight due to the agreement reached with the European Union to sign a free trade deal. Now, however, the bloc’s largest economy, Brazil, is in the spotlight for being one of the most badly-hit countries by COVID-19. Argentina, Mercosur’ second largest economy, is negotiating debt restructuring with its creditors for the ninth time in the history of the nation.
Meanwhile, sinking commodity prices have weighted heavily on these countries’ currency. Is there anything still to like about Mercosur?
What Is Mercosur
Mercosur is a customs union and trading bloc among Brazil, Argentina, Paraguay, and Uruguay, that was formed in 1991 with the idea of creating a single market similar to the European Economic Area, i.e. a strong customs union.
In addition to the four full members, there are other 7 associate countries: Chile, Bolivia (which is in the process of gaining full membership), Peru, Ecuador, Colombia, Guyana and Suriname.
These countries do not enjoy the benefits of the customs union but are allowed to participate in free trade agreements concluded by Mercosur.
Venezuela, once a full member, was suspended indefinitely in 2016 as its social and economic situation continued to deteriorate.
For some time, Mercosur was a success, and by the late 1990s intra-trade among member nations was 10 times higher than before.
The Problems With Mercosur
The idea behind Mercosur was to tie together the economies of Brazil and Argentina, which are the first and second largest in South America, with the aim to spur trade and economic activity within the continent.
However, Mercosur started to lose importance when the fates of its two largest members began to diverge. At the start of the 2000s, Argentina went through a severe financial crisis which threw the country in a deep recession and sparked social unrest. At the same time, Brazil was riding the commodity boom driven by China. Its growth was so impressive that the South American giant was included in the so-called BRICS, a group of large and fast-growing countries.
Given such stark differences, Argentina and Brazil, for different reasons, looked beyond the South American trading bloc to pursue their own autonomous trading goals.
As a result, Mercosur stalled.
Why Mercosur Still Matters
After the oil price crash of 2015-2016, on the wake of a wave of economic change in Brazil and Argentina, the two largest Latin American economies began to reconsider their priorities and focus again on trade between them and their neighbors.
The decision to sign a free-trade agreement with the European Union was a historic moment for both blocs, as the agreement would cover a combined market of more than 700 million people.
In fact, Mercosur is still home of the 8th (Brazil) and 28th (Argentina) largest economies in the world, and of among the largest exporters of natural resources, especially agricultural products.
Globartis Research
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