Mercosur, the “Common Market of the South,” has become a symbol of the resilience and struggle of the Global South against the exploitative and undemocratic nature of the current economic order. Mercosur is composed of Brazil, Argentina, Uruguay and Paraguay as full members, and Chile, Bolivia, and most recently Venezuela, Colombia and Ecuador, as “associate members.”

Together, these countries represent a population of 200 million people and a joint GDP of more than US$ 1 trillion, making Mercosur the third largest trading bloc in the world, after the North American Free Trade Agreement (NAFTA, comprising the U.S., Canada, and Mexico) and the European Union (EU). Furthermore, it has the largest reserve of natural resources in the world and its energy reserves, chiefly oil and hydroelectric, are among the most important in the world.
Led by Brazil, Mercosur provides strong critiques of the neoliberal model of economic growth as embodied in IMF/World Bank structural adjustment and bailout loan conditions. It has also criticized the undemocratic nature of the international financial institutions (although it remained oddly quiet about the process that saw Paul Wolfowitz chosen as World Bank President – perhaps because Brazil wants U.S. support for its bid for a U.N. Security Council seat) and attacked unfair “ free trade” agreements promoted by the United States and European Union (EU). But if Mercosur is to use its power to achieve significant change, it will have to achieve deeper integration, demonstrate its capacity and will to maintain itself as a cohesive unified front, and continue to pursue alternatives to current models of neoliberal globalization.

Strategic Beginnings, Economic Crisis and Neoliberalism Under Fire

The initiative that created Mercosur was begun in 1985, primarily by the new democratically-elected presidents of Argentina and a strategic move to strengthen their position in the region and in the international arena. Paraguay and Uruguay joined the agreements to avoid isolation in their own region and on 26 March, 1991, the signing of the Treaty of Asuncion created Mercosur. Chile and Bolivia became associate members in 1996 and 1997 respectively, and Venezuela, Ecuador and Colombia in 2004.

Mercosur was established with the aim of creating a common market, modeled on the EU – a full-fledged customs union with a common external tariff, a common series of import tariffs applied to products from outside the regionthe free movement of people and capital; and a common trade policy that includes the coordination of macroeconomic policies and harmonization of legislation. Beginning in 1995, Mercosur became a partial customs union, with a common external tariff covering over 85% of its trade products. Mercosur is a supranational entity with legal existence under international law, giving it authority to negotiate agreements with third party countries, groups of countries and international organizations. This status ensures its position as an important economic actor in the international arena.

After the establishment of Mercosur, trade among the member countries increased fourfold, from US$5.2 billion in 1991 to $20.3 billion in 1997. Exports within Mercosur and those to Chile and Bolivia were increasing at a rate of 10% annually. But the Asian crisis of 1998-99 was a blow to the member countries. Brazil was forced to devalue its currency in January 1999. Most significantly, the 1998-2002 economic recession in Argentina caused a severe reduction in regional trade and investment, which had already felt the impact of Brazil’s devaluation. Brazilian exports to Argentina fell by 60% and imports from Argentina to Brazil fell by 26%.

While the crisis placed Mercosur on hold, it led to positive political impacts. The neo-liberal model of development became more and more discredited not only in the eyes of the people of Mercosur countries, who began to actively demand a solution to the growing poverty in their countries but also for their leaders. This resulted in a political shift in the region including the rise to power of left-leaning presidents: Hugo Chavez in Venezuela in 1998; Luiz Inacio Lula da Silva (Lula) in 2002; Peronist Nestor Kirchner in Argentina in 2002; and most recently, Tabarez Vasquez in 2004, the first non-conservative president in Uruguay in 170 years.

Argentina, Brazil, and the IMF

Argentina, just before its financial crisis, had been praised as a success story by multilateral financial institutions, especially the IMF, and rewarded with loans and credits. Argentina’s crash demonstrated that the policies of these institutions, which it had been following meticulously, were unsustainable and incompatible with growth and development. The crisis created a major impetus to strengthen Mercosur to decrease the region’s vulnerability to the policies of the IMF and World Bank.

In December 2001, the Argentine crisis had become so acute that the government was forced to defy its economic masters and announce that it would default on its private debt of $146 billion – the largest debt default in history. The government publicly announced that it would use the $26.5 billion it was scheduled to pay that year to create jobs and fortify social programs to alleviate the poverty created by the crisis. Most remarkably, in 2003, rather than accept IMF debt restructuring plans, President Kirchner presented his own terms to restructure the country’s debt and stated that Argentina would not accept any neoliberal policies that would further hurt the Argentines who had been forced into poverty by the crisis.

Rather than supporting Argentina, Brazil’s President, Lula, who before his election was a vigorous critic of the IMF- took a more reformist and cautious route. Under Lula, who inherited a huge $30 billion “stand-by arrangement” loan made just before he took office, Brazil has adhered closely to IMF policies. The IMF agreement limits government spending on development programs that generate jobs and other public spending. However, the unpopularity of his spending cuts and orthodox fiscal policy has led Lula, who will be seeking re-election in 2006, to announce that Brazil will not renew its “stand-by arrangement,” which expired on March 31.

Brazil has, nonetheless, challenged the IMF in more modest ways. Brazil and Argentina, which together account for roughly half of the IMF’s outstanding loans, have been campaigning to change IMF accounting rules. They aim to allow governments to increase public spending in more job-generating projects such as sewers, dams, and roads to alleviate the high rates of unemployment in their countries. They want to encourage such investment in infrastructure by reclassifying it so it does not count against IMF limits on government spending.

The IMF has rejected this idea in the past as incompatible with fiscal austerity. But in February 2005, the pressure from the two Mercosur powers forced the IMF to accept Brazil’s plan to spend up an additional $1 billion per year, through 2007, on infrastructure investments. This victory in forcing the IMF to change its policy is tempered by the observation that the Brazilian strategy for development is not sustainable, focusing on rapid growth while neglecting the environment and the poor. Among the most egregious examples of this problem are the Belo Monte Dam, and the BR-163 highway, both in the heart of the Amazon.

The Buenos Aires Consensus and the Growth of South-South Cooperation

In the past two years, Mercosur has experienced a revival. Argentina was able to recover some economic growth; during the same period intra- Mercosur trade grew by almost 25%. The image of the bloc has consequently improved, putting it in a stronger political position. In October 2003, Presidents Kirchner and Lula jointly outlined their goals and principles for a shared future. They chose to call their statement the “Buenos Aires Consensus,” in contrast to the well-known package of neoliberal policies referred to as the “Washington Consensus” – the same the structural adjustment and bailout conditions that Lula and Kirchner have criticized.

The declaration criticizes the “unprecedented concentration of wealth” caused by globalization and argues that the consolidation of political democracy and the active participation of civil society are crucial to development in the region. In the declaration, both countries commit to further growth and development, and give absolute priority to education. In addressing Mercosur, the declaration notes that “regional integration constitutes a strategic option,” and gives the countries making clear their intention of building more clout in multilateral institutions such as the World Bank, World Trade Organization (WTO), and IMF.

Mercosur has pioneered a new era of South-South cooperation as a means to create alternatives, reduce dependency on former colonial powers, strengthen national economies, and form international strategic alliances that would allow developing countries to negotiate on an equal footing with rich countries. The bloc has been courting diverse trading partners in the region and globally as a clear strategy to lessen dependency on the US and EU, which currently account for almost half of the bloc’s exports.

In January 2004, India and Mercosur signed a preferential trade agreement that is expected to increase bilateral trade from $1.04 billion in 2003, to $5 billion in 2008. India, Brazil and South Africa, which have called themselves the G3 as opposed to the rich countries’ G7 wish to strengthen trade cooperation. They aim to create free trade agreements between the five-member Southern African Customs Union (SACU), Mercosur, and India.

In addition, the rise of China as a leading world consumer is already beginning to displace the influence the US has traditionally had in the region. In 2003, China became the world’s second largest consumer of oil, after the US, and invested almost $19 billion in Latin America. This presence is welcomed by countries like Argentina, Brazil and oil-rich Venezuela, all of whom wish to see the end of US domination in South America.

Mercosur and the Failure of the FTAA

Mercosur, under the strong leadership of Brazil, has become a leading player in international trade politics. Mercosur has made strong opposition to the Free Trade Agreement of the Americas (FTAA) a cornerstone of its trade policy. Since Brazil and Argentina comprise more than 40% of the economy of Latin America, without them there can be no meaningful agreement. In the face of their opposition, January 1, 2005 – the original deadline for signing the agreement – passed with the FTAA still far from complete.

Mercosur was firmly against the controversial wide-ranging services agreement of the FTAA based on the General Agreement on Trade in Services (GATS) that would push for the privatization of essential services such as education, health care, and water. Given that 43.4% of Latin Americans live beneath the poverty line, and that the region has one of the highest levels of income inequality in the world, further trade liberalization without the guarantee of service provision to the poorest would only worsen the already critical situation. In the June 2004 talks at the WTO, Brazil emphasized that it would not negotiate essential services.

One of Mercosur’s most important priorities in trade negotiations has been to eliminate agriculture subsidies, and especially those of the US and the EU, which are large markets for its agricultural products. During FTAA negotiations, the bloc wanted the issue of farm subsidies to be addressed within the agreements, but the Bush Administration insisted that these matters should be taken to the WTO, where the EU also stands guilty of subsidizing its farm industry.

In 2003, during the WTO’s fifth ministerial conference in Cancún, Brazil, India and China formed and led an alliance of developing countries - including Mercosur countries - calling themselves the G20. The talks in Cancún collapsed in part because the G20 refused to continue negotiations without first addressing the huge agricultural subsidies which give an unfair advantage to developed countries’ agricultural products, and bankrupt farmers all over the developing world.

Obstacles to Expansion

In an attempt to continue to strengthen itself, and to repel the US’ attempt to revive the FTAA through a series of regional trade agreements, Mercosur has taken significant steps towards expanding the process of integration. Last year, the bloc accepted the countries of the Community of Andean Nations (CAN) - Venezuela, Colombia, and Ecuador - as associate members. However, negotiations on the proposed the Central American Free Trade Agreement (CAFTA) – between the U.S., El Salvador, Honduras, Guatemala, Nicaragua, and Costa Rica, plus the Dominican Republic – has led Lula to put aside, at least for the time being, the creation of a trading bloc that would encompass all of Latin America.

However, adding new associate members through free trade agreements does not necessarily strengthen Mercosur nor deepen integration, because agreements on production and external relations are not binding on associate members. The weakness of the strategy was evident in 2003, when Chile - which had been negotiating to become a full member just a year before - signed a free trade agreement with the US, shattering any hope of the country’s full membership. Colombia and Ecuador are currently negotiating a free trade agreement with the United States under the US-Andean Free Trade Agreement (AFTA). If the AFTA is established, it would be another blow to the ambitions of Mercosur.

Similarly, the founding of the Mercosur-sponsored Community of South American Nations (NASA) last January to foster political, economic and infrastructure integration as well as counter U.S. influence in the region may prove mostly symbolic. NASA would consist of a common market modeled on the EU, comprised of the country members of CAN and Mercosur, plus Chile, Suriname and Guyana. But countries like Peru and Colombia are close allies of the US, a relationship incompatible with the kind of integration that NASA, and Mercosur, strive for.

As it now stands, Mercosur represents a hope for Latin American integration, and for alternatives to neoliberal globalization. Its fate, however, will depend on the willingness of governments to continue to work together in a consistent and unified manner; increasing full membership in Mercosur would be an important step in this direction. The alliance between Argentina, Brazil, and Venezuela has been especially strategic in strengthening integration and making demands in the international arena. Unfortunately, at a trilateral presidential summit in early March, the three presidents rejected the idea of a bloc negotiation with international institutions such as the IMF.

However, most intriguing has been increasing cooperation between the three countries’ state-owned oil companies, as well as Chavez’s desire to create Petrosur, a transnational oil company that would be owned by the three countries plus Bolivia. If such a project should become a reality, there is no telling what further impact South American integration could have on the current international political and economic order.