Necessary Reforms in Mercosur

Mercosur was the main strategic initiative of Brazilian diplomacy in regional integration. Before Mercosur, there were only modest bilateral integration efforts with Argentina. More than three decades later, however, Mercosur reforms are still pending.

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The Treaty of Asunción, signed in 1991, set ambitious goals for trade liberalization and macroeconomic coordination. The treaty also planned the gradual construction of a true common market among member countries. Many of these goals, however, remain incomplete.

Recurring economic crises and low reform commitment from national governments blocked this agenda. In addition, the persistent protectionist bias of economic elites prevented more consistent progress. For this reason, reforms in the bloc are necessary so that it can meet its goals.

The Original Mercosur Project

Brazilian diplomacy devoted its best efforts to advance the substantive agenda of the Treaty of Asunción. Unfortunately, the limited reform ambition of later governments blocked this progress. External and internal crises made the situation worse. At the same time, the protectionist zeal of the same sector associations in the two largest members worked against integration.

The Four Tasks Listed in Article 1

As a result, the main tasks of Article 1 of the agreement were not achieved:

• Free movement of goods, services and productive factors among the countries. This includes the elimination of customs duties and non-tariff restrictions. [partially achieved]
• Creation of a common external tariff and of a common trade policy toward third States. It also includes the coordination of positions in economic and trade forums. [the common external tariff does not cover all imports, because national exceptions exist]
• Coordination of macroeconomic and sectoral policies among the States Parties. This covers foreign trade, agriculture, industry, fiscal policy, currency, exchange rates, capital, services, customs and transport. [this coordination is at the heart of a common market and was never seriously attempted; the failure belongs entirely to the governments of the two largest countries]
• Commitment of the States Parties to harmonize their laws in the relevant areas. The goal is to strengthen the integration process. [some partial efforts were made in technical working groups, but they were very limited]

Most of these goals were only partially implemented or simply abandoned over time. Macroeconomic coordination, for example, is a central element of any common market. Still, it was never effectively pursued by the two largest members of the bloc. Likewise, the efforts at regulatory and legal harmonization remained limited and fragmented.

Mercosur Reforms and International Insertion

The member countries, especially Brazil and Argentina, seem to have forgotten the opening words of the Treaty of Asunción. The text urged the signatories to consider the evolution of international events. It mentioned in particular the consolidation of large economic areas and the importance of adequate international insertion.

The only solution for these omissions is a preparatory process for a new diplomatic conference. This conference would bring together the current members of the bloc, that is, the four original countries plus Bolivia. The goal would be to negotiate a new founding treaty for a true common market. This path only makes sense if regional integration remains a strategic objective.

The countries could, as an alternative, explicitly reduce the ambitions of the bloc. In that case, Mercosur would become a simple free trade agreement. This format matches the predominant purpose of most agreements registered at the World Trade Organization.

Protectionism, the Common External Tariff and Economic Opening

Mercosur reforms, at the institutional level and at the operational level, are strongly connected to international economic opening. They also depend on the trade liberalization of the member countries, especially Brazil and Argentina. Both countries still show strong protectionist components. These components are rooted in important economic sectors, both industrial and agricultural.

Paraguay and Uruguay, by contrast, have relatively more open economies. Paraguay stands out on this point. In fact, the country has been receiving a significant volume of foreign investment, including investment from Brazil.

Even before any major institutional reform, the members should create a technical working group. This group would handle the gradual but substantive reform of the common external tariff. The goal would be to bring the tariff closer to current international trade requirements. In this way, the bloc would increase the external competitiveness of its economies.

The Agreement With the European Union as a Starting Point

The Mercosur-European Union agreement, because of its scope and complexity, offers an important starting point. In this sense, the central effort is to reduce the trade protectionism that still prevails in the Southern Cone. This protectionism appears above all in the trade defense mechanisms of the region.

Macroeconomic Coordination and Regulatory Convergence

The current difficulties of this process are connected in part to the political shifts of national governments. The Argentine case is the most visible one. Still, the Brazilian government, both the current one and future ones, should seek a high-level strategic understanding. The goal is to strengthen Mercosur as an instrument of broader international economic insertion.

This effort should not be limited to the reform of the common external tariff. In addition, it needs to advance on the other commitments listed in Article 1 of the Treaty of Asunción:

• Coordination of macroeconomic policies;
• Regulatory harmonization;
• Rax convergence;
• Reduction of legal incompatibilities among member countries.

The task is complex, but it is not new. During the Mercosur transition period (1991-1994), several technical groups had already started work. They compared and brought closer the national laws in technical, sanitary, metrological and regulatory areas.

The Most Sensitive Point of Tax Convergence

The most sensitive point of this process is probably the national fiscal and tax structures. These structures are marked by high complexity. In addition, they were often designed under a logic of national economic isolation.

The OECD, the European Union and the Modernization of Mercosur

In this sense, a process of consultation and technical cooperation with the European Union and the OECD would help. It would offer a neutral space for institutional discussion and comparative learning.

The European experience of building the single market serves as a reference. Likewise, the regulatory and economic standards developed at the OECD can contribute. Both would support a gradual process of modernization and strengthening of the bloc.

Brazil and Argentina are, in fact, candidates for OECD membership. Neither country intends to move toward European-style supranational integration in the near future. Still, closer contact with these institutional references would have a practical effect. It would make Mercosur more compatible with the challenges of globalization, productivity and economic integration.

What Mercosur Loses Without Reforms

As a “Mercosur version of Ortega y Gasset” would say, there is an unavoidable circumstance in the external relations of the bloc. That circumstance is the need for gradual deepening of integration among the nations of the Southern Cone. This applies beyond the economic field.

Mercosur will hardly remain in its current configuration for an indefinite period. It is ambitious in its formal goals, but limited in practical execution. The modernization of the bloc requires:

• Greater economic opening;
• Reduction of protectionism;
• Regulatory coordination;
• Institutional convergence;
• Effective political commitment to regional integration.

Without these changes, the bloc risks remaining far from a true common market. At the same time, it would stay outside the dynamic chains of the global economy of the 21st century.

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