Mercosur RIP? Mounting protectionism and the rule-breaking admission of Venezuela have fatally undermined a once-promising trade block

The Economist, 07/14/2012

IT WAS such a good idea. In 1991 Brazil and Argentina set aside decades of rivalry and, together with smaller Uruguay and Paraguay, founded Mercosur as a would-be common market. The project went hand-in-hand with a broader opening of inward-looking economies. Diplomats got to work on harmonising trade rules. Cross-border trade and investment boomed.

Yet Mercosur, like the European Union (EU) on which it was modelled, ran into difficulties. Brazil’s devaluation in 1999 caused Argentina to seek, and obtain, emergency restraints on imports from there. Politically negotiated exceptions to the block’s rules became the norm. Nevertheless, a dispute-settlement body and a small secretariat were eventually set up. In 2010 the presidents finally agreed on a common customs code, to avoid outside goods having to pay tariffs more than once.

But under left-wing governments, Brazil and—especially—Argentina have become more protectionist. They have come to see Mercosur as a fortress, rather than a bridge: outside South America, the only trade deals concluded by the block in the past decade were with Israel and the Palestinian Authority. Negotiations with the EU, begun in 1999, have languished. Although intra-Mercosur trade has continued to rise in absolute terms, it represents a much smaller share of each member’s total exports than at its peak in 1997 (see chart). That is partly because the commodity boom has lifted the group’s exports to the rest of the world. But it also because Mercosur has not evolved into the seamless single market its founders dreamed of.

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