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Explainer: What Is Mercosur?

(AP)

August 02, 2012

$3.5 trillion, 2.1 trillion = GDP of Mercosur and Pacific Alliance countries, respectively.
Who's set to become Mercosur's newest member? Bolivia, in 2017.
Venezuela's ousting from #Mercosur came after months of tension with member countries. Catch up on all the drama.

Updated December 6, 2016 — The Southern Common Market is one of the world’s leading economic blocs and its fifth-largest economy. Mercosur is made up of four member countries—Argentina, Brazil, Paraguay, and Uruguay—after Venezuela was notified it would be suspended from the trading bloc on December 1.  Founding member countries decided to remove Venezuela, which had joined Mercosur in 2012, for its failure to incorporate standards on trade and human rights into national laws, although the country could rejoin if it were to adopt the necessary norms.    

Bolivia is in the final stages of the accession to become the sixth member. Known as Mercosur in Spanish or Mercosul in Portuguese, the group encompasses 295 million people and has a combined GDP of nearly $3.5 trillion. One of Latin America’s largest regional integration projects, Mercosur also counts Chile, Colombia, Ecuador, Guyana, Peru, and Suriname serve as associate members.

Mercosur functions as a customs union and free-trade area, and has ambitions to become a common market along the lines of the European Union. However, more than 20 years after its founding, the group still struggles to achieve that goal. Some questioned the bloc’s feasibility in recent years following decisions to temporarily suspend Paraguay after its president was impeached, and then when it admitted Venezuela as a full member. Nevertheless, Mercosur remains an economic and political force in the region, uniting South America’s two largest economies and providing a potential springboard for Latin American integration. With the Pacific Alliance, Latin America’s newest economic bloc, the two blocs combined represent more than 80 percent of regional trade and over 90 percent of its GDP.

Below, we take a look at Mercosur’s origins, members, and goals.

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Vision and Background

Born out of a series of economic cooperation agreements between Argentina and Brazil after their diplomatic rapprochement in the 1980s, Mercosur was founded in 1991 with the signing of the Treaty of Asuncion. That accord brought Argentina, Brazil, Paraguay, and Uruguay into a customs union with the ultimate goal of a common market. The 1994 Protocol of Ouro Preto defined the body’s institutional structure.

Though it began with just four countries, members hoped the organization could be a possible springboard for the integration of all of South America. As envisioned at its founding, Mercosur would gradually achieve the steps to form a common market in the image of the European Union. Plans called for the creation of a common external tariff (CET) and the free movement of goods, services, currency, and people between members. The union even considered the creation of a common currency, the gaucho, though that idea was later discarded. In reality, however, the bloc’s reach has often fallen short of some goals, and the group has not yet formed a common market as planned.

After an initial period of success—with inter-bloc trade growing fivefold from $4 billion in 1990 to $20 billion in 1997—the bloc floundered amid crises wrought by the devaluation of the Brazilian real in 1999 and the Argentine economic meltdown of 2001. Throughout the following decade, a number of trade disputes between member countries regarding tariff barriers and development projects divided the bloc. While trade between members rose to $41 billion in 2010, “it represents a much smaller share of each member’s total exports than at its peak in 1997,” said The Economist in 2012.

Members decided to temporarily suspend Paraguay in 2012 after its senate impeached then-President Fernando Lugo after a string of incidents of civil unrest turned fatal. The rapid impeachment drew strong criticism from Argentina and Brazil, who qualified it as a coup d’état. The country was permitted to rejoin after presidential elections in April 2013. In the interim, however, the last impediment to Venezuela’s full adhesion to the bloc was removed, as the Paraguayan Senate had long refused to approve Venezuela’s entry. With Paraguay suspended, the remaining members voted to admit Venezuela to the bloc, and the Andean country’s membership became official on July 31, 2012. Mercosur lifted Paraguay’s suspension in August 2013 when a new president was sworn in, although the country did not rejoin until a few months later once its own congress finally approved Venezuela’s entry to the bloc.

The admission of Venezuela to Mercosur led some to question the bloc’s future. Then-Venezuelan President Hugo Chávez said he would give the group a “political Viagra” and “decontaminate it of neoliberalism.” Some wondered if Chávez would be willing to adhere to the union’s economic requirements, while others believed Venezuela’s entry could help to balance the scales between the bloc’s two giants, Argentina and Brazil, given Caracas’ energy reserves and ability to contribute to group funds. Due to Venezuela’s ongoing economic crisis, there are again doubts about Venezuela’s ability to benefit the bloc. José Augusto de Castro, president of Brazil’s Foreign Commerce Association, told BBC Brazil in January that if Venezuela’s economic crisis deepens, its membership in the Mercosur community would have to be called into question.

Bolivia has been in the process to become a full member since 2012, and the bloc signed the protocol for Bolivia’s accession, one of the final steps, at its presidential summit in July 2015. Bolivia will be fully integrated as a full member of Mercosur once Brazil, Paraguay, and Bolivia’s own legislatures grant approval. Its membership is expected in the first half of 2017. 

Membership and Its Benefits

Membership in Mercosur is dependent on meeting and maintaining a number of political and economic criteria. On the economic front, Mercosur members agree to the free movement of goods and services between member countries. Any change to Mercosur economic policy requires the consensus of the other members, but countries can ask that certain products be exempt to protect local industries. In recent years, Argentina and Brazil have taken advantage of this option. Some allege that Argentina’s application of non-automatic import licenses on imports from its neighbors is a violation of Mercosur policy. The group also subscribes to the CET, which dictates the tariff members apply to trade with non-member or associate countries. The CET is subject to change and is set by consensus, but has been a source of contention. Argentina and Brazil often favor higher duties to protect local industry, while Paraguay and Uruguay favor lower tariffs. During the 2009 global financial crisis and subsequent economic troubles in the Eurozone, Argentina and Brazil requested allowing a tariff increase of up to 35 percent on 200 products. The CET averages between 10 and 12 percent, but often fluctuates.

Mercosur members adhere to a number of agreements guiding currency exchange, investment, tax issues, and educational exchanges. The goal is to standardize regulations between member countries in order to ease commerce. The bloc also has a number of free-trade agreements (FTAs) with third parties, including Chile, Colombia, and Peru, as well as Israel and the Palestinian Authority. Negotiations for an FTA with the European Union began in 1995, were suspended in 2004, and continue to be of ongoing discussion

In 2002, Mercosur then-member countries, joined by then-associates Bolivia and Chile, agreed to form a “free residence area” which permits citizens of those countries to obtain residence and the right to work in the participating countries without a visa. Mercosur member countries also carry the organization’s emblem on their respective national passports. In addition to these economic requirements, the bloc also requires that members maintain democratic governance. Some analysts argue this “democracy clause” aided the consolidation of democracy in constituent countries after Mercosur’s founding in 1991, since members saw the end of military dictatorships in the 1980s. This clause served as the basis for Paraguay’s suspension from the group in June 2012 in the wake of Lugo’s impeachment.

In addition to the permanent members, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname serve as associate members. Associate members are not members of the customs union and do not have voting power in Mercosur’s political bodies, though they do have preferential trade access to the market. Mercosur’s observer countries are Mexico and New Zealand.

Organizational Institutions

Mercosur’s founding documents set up three decision-making bodies for Mercosur: the Common Market Council, the Common Market Group, and the Trade Commission. Two others, Parlasur and the Structural Convergence Fund, were developed later.

  • The Common Market Council is Mercosur’s highest decision-making body. It conducts Mercosur policy and assesses compliance with the bloc’s regulations. The foreign affairs and economy ministers of constituent members make up the council, which meets as often as need arises, but at least once a year. A six-month rotating president leads the council and is determined by the alphabetical order of member countries.
  • The Common Market Group is controlled by members’ ministries of foreign affairs, economy, and central banks’ presidents. The group coordinates macroeconomic policy between the members and negotiates trade with non-member countries. It also oversees the implementation of decisions made by the Common Market Council. The group has four representatives from each constituent member. The Common Market Group can convene as necessary, but must meet at least once each quarter. A number of working subgroups deal with issues such as agricultural policy, energy policy, and labor policy.
  • The Trade Commission deals with everyday trade matters between constituent countries. It consists of four members and four alternates from each country who meet monthly, and is coordinated by the respective ministries of foreign affairs. The group can propose changes to the common external tariff and other Mercosur guidelines for review by the higher bodies. The group can also refer any trade disputes to the higher bodies for resolution.
  • The Mercosur Parliament, alternatively known as Parlasur or Parlamento, was created in 2004 and first convened in Montevideo in 2007 as Mercosur’s unicameral, independent, and autonomous legislative body. Parlasur is meant to add a dimension of popular representation, based on the number of parliamentarians in each country, but the body has no enforcement powers and its conclusions are only meant to advise Mercosur’s decision-making bodies. The chamber currently has 188 members: 76 from Brazil, 43 from Argentina, 33 from Venezuela, 18 from Uruguay, and 18 from Paraguay. By 2020, all member countries are due to institute the popular election of Mercosur parliamentarians. In their August 9 primaries, Argentines voted for their Mercosur representatives for the first time.
  • In 2010, the bloc created the Structural Convergence Fund of Mercosur (FOCEM). The fund seeks to develop regional infrastructure projects to increase integration between Mercosur member countries. These investments also intend to promote lesser-developed regions and improve competitiveness, with the ultimate goal of strengthening the union. FOCEM is funded by member country contributions—with Brazil providing almost 70 percent—and has more than $1 billion in available resources. FOCEM was created in 2004 and was supposed to last until 2015, but Mercosur has extended the project until 2025. The 2011 budget allocated 48 percent of resources to Paraguay, 32 percent to Uruguay, and 10 percent each to Argentina and Brazil. In 2013, the most recent year for which a budget is publicly available, those figures were adjusted so that Paraguay now receives 46 percent of funds, Uruguay 31, and Brazil and Argentina 11 each.

Recent Developments

Tensions between Venezuela and other Mercosur members have been mounting for months, constricting the trading bloc as Latin America undergoes significant shifts—the ebb of the so-called "pink tide"— to more conservative, market-friendly leadership.  

Disagreements between Venezuela and other member countries came to a head as it was time for Venezuela to assume the trading bloc's presidency in August. The Mercosur presidency rotates alphabetically every six months and, on August 1, Uruguay was meant to hand the leadership role over to Venezuela, but the move faced strong opposition from the presidents of Argentina, Brazil, and Paraguay. 

As early as a December 2015 Mercosur presidential summit, Argentine President Mauricio Macri voiced concerns over the human rights and economic situation in Venezuela, and called on Venezuelan President Nicolás Maduro to release political prisoners. 

These conflicts caused Uruguay to postpone a subsequent presidential summit meant to be held in Montevideo in July 2017. Instead, a summit of foreign ministers was held, with the conversation largely focusing on Venezuela's political situation and whether the country should be allowed to lead the trading bloc, though no consensus was reached. 

When Uruguay's six-month leadership term ended in July, the trading bloc was further embroiled in conflict, as Maduro assumed a pro tempore presidency of Mercosur that Argentina, Brazil, and Paraguay refused to recognize. Brazil's Foreign Minister José Serra spoke out against Venezuela's presidency, criticizing the country's failure to comply with requirements outlined in the trading bloc's democracy clause. Paraguay's Foreign Minister Eladio Loizaga stressed Venezuela's need to ratify the Treaty of Asunción, a requirement of membership, and incorporate the trading bloc's regulations into its internal legislation. 

By September, Argentina, Brazil, and Uruguay decided to jointly lead Mercosur, and issued a warning to Maduro that he had until December 1 to restore human rights and press freedoms in his country or risk the country’s ouster from Mercosur altogether. Venezuela's Foreign Minister Delcy Rodríguez rejected this move, taking to Twitter to say the joint leadership of the three members violated the "legality of the organization." 

Come the December 1 deadline, Venezuela was notified it would indeed be stripped of its Mercosur membership rights. Rodríguez described her country's removal from Mercosur as a "coup" and denied accusations that Venezuela failed to comply with human rights norms. 

Maduro also defended Venezuela's behavior and has refused to observe his country's Mercosur suspension. The president called for a "face to face" sit down with Uruguayan President Tabaré Vázquez to ask that member countries reconsider their decision. Vázquez agreed to the request, adding that Venezuela's suspension was not "irreversible." Loizaga clarified Venezuela could rejoin Mercosur if it complied with the organization's legal framework. 

Looking Ahead

Although Mercosur played an important role in regional economic integration in the 1990s, throughout the 2010s, the bloc has run into decreasing inter-bloc trade and political disagreements that have stunted progress and trade liberalization. Compared to the Pacific Alliance—which comprises Chile, Colombia, Mexico, and Peru—Mercosur has a larger GDP: $3.5 trillion compared to the alliance's $2.1 trillion. That said, Mercosur has had much slower growth rate in recent years. It has experienced a decrease in internal trade to 3 percent below the pre-2008 crisis levels, and has seen an increase in annual real GDP of merely 1.5 percent since 2008.

Looking ahead, Mercosur members are continuing to push for an FTA with the European Union. Argentina is set to assume the organization's presidency in January, and has indicated it will prioritize negations with the EU, particularly in light of Donald Trump's presidency in the United States. Serra stressed that both Brexit and a Trump presidency presented opportunities for Mercosur, creating a vacuum as both the United Kingdom and United States adopt more protectionist stances.   

Celeste Castillejo and Nicki Fleischner contributed to this article.