Argentina – Mercosur. Quo Vadis?

The Mercosur is going through a deep crisis that has led some of its members to question its relevance since the bloc has ceased to be functional and to respond to their strategic interests. This situation is the result of a combination of factors that include the decline of the original bloc model and structural changes in the domestic and international and domestic economic policies of its members, coupled with a vitually unprecedented juncture of governments with opposite political visions in the two major economies: Argentina and Brazil. In this scenario, Argentina must evaluate the alternatives and their consequences, and define a long-term course of action based on its strategic interests and with a strong national consensus.

The current crisis of the bloc may lead to three different scenarios. One option is that the ongoing process results in the eventual dissolution of Mercosur, probably due to its irrelevance, as was the case of other regional integration processes such as ALAC, ALADI and CAN-, since a formal termination has significant business and reputational costs. In fact, Mercosur is likely to become a free-trade zone and grant greater autonomy to its members in the definition of their foreign trade policy. Alternatively, the crisis may trigger a virtuous process of modernization and re-founding, with renewed affectio societatis, oriented towards greater integration with the world (under the terms and conditions agreed upon by its members), with its guiding principles in accordance with the new post-COVID-19 normality, the digital revolution, climate change and the bipolar order of the United States and China. A third option is for an impasse to occur, as was the case in the past, while differences persist between the political leaders of its members, and a positive dynamic is resumed with the return of intra-bloc political affinity. It will then be possible to maintain a certain status quo, as on other occasions, or to move towards the modernization of the bloc.

Both the current crisis and the options that lie ahead are the result of the convergence of a series of structural factors and junctures worth understanding and distinguishing in order to evaluate the conditions under which Argentina can influence the future of Mercosur and promote its national interests. Ironically, one of the main reasons why Mercosur has lost relevance is that the bloc has quite successfully fulfilled some of the main objectives that were established at the time of its formation: the creation of an expanded market that would allow, in accordance with the logic of both ECLAC and the Washington Consensus, to gain scale, efficiency and competitiveness to expedite the process of "economic development with social justice", as stated in the Asunción Treaty. Although Mercosur is far from being a European-style common market, even with exceptions and flaws, the bloc was instrumental in the successful internationalization of a significant number of companies from the region. Thus, by the late 1990s and early 2000s, Mercosur was the first or second largest international market for its members. Furthermore, Mercosur also succeeded in defusing the hypothesis of a military conflict between Argentina and Brazil, which was another of the main motivations behind the creation of the bloc. At the same time, Mercosur was also very successful in deepening the cooperation ties among its members in a wide range of issues including human rights, security, tourism, science and technology, and migration, as well as in the coordination of common positions in international forums, to mention just a few examples.

The Mercosur project as a platform for global insertion was nevertheless thwarted. The negotiations initiated upon its creation with the main economies of the Western world (the United States and the European Union) to create free trade areas that would allow to continue expanding markets - as well as internal competition - collapsed. Thus, Mercosur gradually came to a standstill, while in the rest of the world, given the failure of the Doha Round for greater trade liberalization at the multilateral level, there was a global proliferation of bilateral and regional trade agreements. At the same time, the technological revolution gave rise to a true "great transformation", in the words of Polanyi, as China became a global economic power, which in turn gave rise to a world economy that greatly differed from the one that existed at the time of Mercosur’s creation.

In this context, with the passing of time and even with no new trade agreements adopted by the bloc, the productive and business structures of Mercosur countries experienced profound changes, with diverging trajectories between Argentina and Brazil. This altered the political economy of Mercosur and that of its members and made the bloc increasingly irrelevant. Over the last two decades, Brazil has become one of the world's leading economies, and a significant number of Brazilian companies, both in the agro-industrial and manufacturing (and services) sectors, have undergone a strong process of internationalization, thus contributing to a significant change in Brazil's traditional foreign trade policy towards greater integration with the world. In contrast, Argentina followed a different path. In a context of macroeconomic instability and recurrent crises, the level of internationalization of Argentine companies has been minimal in the agro-industrial sector and practically inexistent in the manufacturing segment. As opposed to Brazil, the less competitive manufacturing sectors, which are generally opposed to greater integration, continue to have considerable influence in the domestic political economy.

Another key element in the change in the political economy of the region has been the declining relevance of the Argentine market and the emergence of China as the largest business partner of the bloc as a whole. Argentina, traditionally Brazil's second most important market (accounting for more than 10 per cent of its trade), has gradually lost its share, while China has become Brazil's main business partner. Today China accounts for around 30 per cent of Brazil's international trade, which leaves Argentina in the third place, after the United States, with only 4 %. In contrast, Brazil continues to be Argentina's main business partner (15 %), which in turn results in a sharp asymmetry in the bilateral relationship, as well as in the possibility to have an impact on the future of the bloc.

In addition to these structural changes, some contingent factors have contributed to the current crisis. It is the first time since the creation of Mercosur that the presidents of its main economies have had a different political orientation. Thus far, except for brief periods, there have always been political and ideological affinities between the governments of Argentina and Brazil (Carlos Menem/Fernando Henrique Cardoso, Néstor Kirchner/Lula da Silva, Cristina Fernández/Dilma Rousseff, and Mauricio Macri/Michel Temer and Jair Bolsonaro), which afforded a basic political understanding, with varying degrees of differences, but without reaching a breaking point. Today the situation is different - and foreseeably will remain so for the next couple of years - making it possible for the centripetal forces of the bloc to consolidate.

In this scenario, and beyond the current juncture, what are the alternatives for Argentina in its relationship with Brazil and Mercosur in the long term? How capable is Argentina of influencing the future of the bloc? Above all, what kind of integration does Argentina seek for its own future?

International integration processes entail long-term commitments, with high reputational and economic costs in the event of non-compliance, and therefore it is important for Argentina to engage in serious negotiations with Brazil on the future of Mercosur through a basic consensus among the main political forces and economic sectors of the country on the objectives of integration, a strategic roadmap for foreign trade policy, and realistic conditions under which Argentina is willing to become integrated with Brazil into the world. Although this exercise presents great challenges and may seem to be an almost impossible task in times of political polarization, there is a much more solid basis than is generally believed. On the other hand, it is imperative to build this consensus in the short term, as lack of definition constitutes a definition in itself and given the bloc's trajectory, it will have negative consequences for the country in the long term.

The starting point of the consensus is that isolation is not an option, but neither is moving towards deep unilateral integration in the Chilean style. There remains, then, a wide middle road, with multiple options, where points of convergence and common interests can be found both between Argentina and Brazil, as well as with the other Mercosur partners. Insofar as there are shared objectives and certain basic agreements, it is in Argentina's interest to seek its integration into the world together with Brazil and Mercosur, since it will be able to benefit from the strengths of the bloc (and the Brazilian market) and will be in a better position to influence the terms of its integration than in isolation - assuming that the benefits of joint integration outweigh the costs of the loss of autonomy. Otherwise, if Argentina decides to pursue integration individually - or, in other words, to allow Mercosur partners to negotiate bilateral agreements with third parties, as seems to be the current position - Argentina will lose its share of the Brazilian market as its tariff preferences are liquefied, it will lose competitiveness in third markets in the face of competition from its partners in the bloc ( which have an export offer similar to Argentina's), and it will lose internal competitiveness as it will not be able to supply inputs at lower costs.

Therefore, in light of Brazil's (and Uruguay's) determination to move decisively towards greater integration with the world, Argentina's best option is to seek to influence the terms and conditions under which the integration of the bloc will take place. This would require an active involvement on the part of Argentina, asserting its geopolitical weight for Brazil (since its value as a market has lost significance), and a disposition to make some commercial concessions if it wishes to influence the direction of the bloc. Although the final definition of a common foreign trade policy entails a difficult and complex negotiation, in recent years an important basis has been laid almost “unconsciously” that can shed light on the path to be taken. On the occasion of the Mercosur-EU agreement, Mercosur managed, after more than 20 years, to reach a common position on the terms of integration (90% of trade) with one of the largest economies in the world. More recently, and despite intra-bloc political and ideological differences, Mercosur members reached an agreement on 75% of the global tariff to move towards a unilateral reduction of the common external tariff. This clearly proves that there is much more common ground than differences - albeit not easy to settle - and that it is possible to build a renewed consensus on the future of Mercosur and its integration into the world.

Finally, recent discussions about Mercosur have focused almost exclusively on the more traditional aspects of integration (basically trade in goods and tariffs), and have overlooked other key dimensions of integration, such as trade in services or logistics and infrastructure, as well as other trade policy instruments, such as the mechanisms of regulatory convergence, and less formal modalities of cooperation and integration, such as the exchange of information and best practices. Of even greater concern is the virtual absence of strategic discussions on key issues of the economy of the future: digital economy and climate change. The recent intra-Mercosur agreement on e-commerce is only a tentative first step in the right and necessary direction. However, the agreement is far from laying the necessary foundations to make Mercosur a dynamic and robust ecosystem leading to "economic development with social justice" that fosters and takes advantage of the technological advances of the digital era. The discussion on the future of Mercosur needs to be expanded and enriched if the benefits of integration are to become a reality and its costs and risks minimized.

The challenges of addressing the problems of integration are enormous, but the cost of lack of definition is even greater. Argentinians, get down to business!

Shunko Rojas holds a PhD in Law from Harvard University and a MA in International Politics from the London School of Economics. He is a guest professor at the Institute for Global Law and Policy (IGLP), and co-founder and Managing Partner of Quipu, a law firm specialized in trade and public affairs.  Previously, he was Undersecretary of International Trade at the Ministry of Production of the Argentine Republic.