Cooperation between rival Latin American trade blocs

Pacific Alliance and Mercosur represent contrasting approaches to trade When the Pacific Alliance--a South American trade bloc made up of Chile, Peru, Colombia and Mexico--held a summit earlier this year, one notable theme was a rapprochement with its Atlantic rival Mercosur. Chilean President Michelle Bachelet, in a speech before the summit, specifically urged stronger ties between the two organizations. Paraguay, a Mercosur member, was represented at the Pacific Alliance summit and is reportedly negotiating a free-trade deal with Chile, a Pacific Alliance member.  The Pacific Alliance and Mercosur are a study in contrasts. The Pacific Alliance, formed in 2011, is committed to free trade and concluding an agreement for the United States-led Transpacific Partnership. The Pacific Alliance actively cooperates with the U.S. on foreign policy. The customs union Mercosur--comprising Argentina, Brazil, Venezuela, Uruguay, and Paraguay--was formed in 1991 and is the third largest such organization in the world, behind the European Union and NAFTA. Mercosur is more committed to regional integration than free trade. Mercosur members, most notably Venezuela and Argentina, have been harshly critical of U.S. policies. “Nearly a decade after the idea of a Free Trade Area of the Americas died, one can sense renewed hope that, at least for some countries, trade liberalization is coming back,” said Michael Shifter president of the Inter-American Dialogue, a Washington-based think tank.

Meanwhile, Mercosur has still not concluded a free-trade agreement with the EU, despite 15 years of negotiations. In recent weeks, the Mercosur members agreed on an EU-Mercosur proposal, calling for an overall tariff reduction of 87 percent.  “This represented significant progress,” said Carl Meacham, director of the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C., “and unexpected flexibility from Argentina, which made substantial compromises in key sectors, including dairy, wheat, and autos.” But issues involving agricultural products and automobiles are still hanging up a Mercosur-EU deal, according to published reports. “What makes the Pacific Alliance seem especially attractive today is the contrast with some other countries in the region,” said Shifter. “Brazil’s economy is sluggish, and the government now seems ambivalent about any move towards greater opening. Most dramatic are Venezuela and Argentina, both in deep crisis and whose policies have been the antithesis of those embraced by the Pacific Alliance.” The combined Gross Domestic Product of the countries of the Pacific Alliance represent 37 percent of total in Latin America and the Caribbean, according to statistics posted by the organization. Its average growth rate is four percent. The countries of the Pacific Alliance also represent 42 percent of foreign direct investment in Latin America and the Caribbean and 47 percent of foreign trade in Latin America, with annual growth rates of five percent growth in exports and four percent in imports in 2013. The Alliance’s main exports are fuels, mining products, agricultural products, and manufactured goods, which makes it complementary with Asia-Pacific markets. The presence of Mercosur’s Paraguay at the recent Pacific Alliance summit could point to the greater attractiveness of the latter’s free-trade stance. But experts warn not to count Mercosur out just yet. Its deal with the EU may yet be consummated and regional instability may one again play its role in  South American economics. Paraguay is being pulled in different directions by South America’s two trading blocs. The tipping point came in 2012 when Mercosur suspended Paraguay’s membership following the removal of its president from office. It has since been readmitted but Paraguay has yet to actively rejoin the union. Given the contrasts in the foreign and economic policies of the member states of the two organizations, a change in Paraguay’s position could alter the continent’s political and economic orientation. Paraguay’s condition for its return to Mercosur is the authorization to negotiate bilateral trade agreements outside the organization’s framework, a policy currently forbidden by Mercosur. Paraguay would like to use a free-trade agreement with Chile to export soybeans and other products to Asia by way of the TPP.   Other Latin American countries are also eager to join the Pacific Alliance. The Costa Rican president was at the recent Pacific Alliance meeting and signed a declaration of intent to become a member.  Panama and Guatemala are also waiting in line.   But Meacham said it is too early to count Mercosur out. Critics of Mercosur complain that the organization has struggled to negotiate and implement external trade agreements. But Mercosur members showed increased interest in the EU agreement within the last year and both sides have made progress in finalizing their proposals.  “Argentina was initially a stumbling block,” said Meacham, “but through the negotiations, the four countries agreed to a proposal that would reduce total trade barriers with the European Union by 87 percent, with the goal of eventually reaching 90 percent reduction.” Brazil, the leading economy within Mercosur, is seeking a leadership role on the world stage as well and has recently been involved in bilateral trade talks with the European Union. This is what may have brought Argentina back to the table. Both Mercosur and the European Union have finalized their proposals at this point. “Formal negotiations will begin to hammer out the specifics of the full trade agreement,” said Meacham. “With the recent forward movement in the negotiations, the EU-Mercosur trade deal is much farther along than many believed possible. And with the exchange of proposals, it seems more likely than ever that a meaningful trade agreement could materialize in the near future.” At the same time, Shifter warns not to go overboard with enthusiasm for the Pacific Alliance. “The history of the ups and downs of other integration schemes is instructive,” he said. “Initial optimism and dynamism too often have given way to disappointment and stagnation. Concerns and risks on both external and internal fronts could affect the alliance’s continued advances. The global economy is uncertain, with signs of possibly greater turbulence. China’s economy is slowing down, with reduced demand for commodities. A decade marked by Latin America’s favorable terms of trade, which benefited export-driven alliance members, has ended.”