The three new challenges of the Southern Common Market (Mercosur)

Matías Mongan, PhD student, UAM and researcher at the Gate Center

Mercosur, created in 1991 by Argentina, Brazil, Paraguay and Uruguay, faces three challenges for the future: the closing of a quarter of a century of negotiations with the European Union (EU), the entry of Bolivia into the bloc, and the divergences between the presidents of Argentina and Brazil. This article focuses on analyzing whether these three challenges will make the South American bloc more dynamic after years of uncertainty and repeated political-institutional crises.

No progress with the EU

Little or no progress was made at the meeting in early September between Mercosur and the EU, which stated that it is “not yet ready” to finalize the last details of the inter-bloc association, including free trade, with Mercosur, with which it signed an “agreement in principle” five years ago. While Brazilian President Lula da Silva announced that Mercosur “is ready”, agriculture remains the main obstacle to finalizing the very long negotiation process that began at the first Summit between Latin America, the Caribbean and the EU, held in 1999 in Rio de Janeiro.

A non-agreement harms Mercosur’s interests, as its member states will need financial and technical assistance from the EU to avoid negative impacts of changes in the energy matrix (electric cars) on the automotive sector (ECLAC, 2024), which has historically been considered the basis of Mercosur. Apart from China, the EU takes an active role in this field through the regional cooperation program EUROCLIMA¹ and others. However, the EU’s efforts have been focused on promoting “vehicle consumption changes” and not on accompanying the process of productive, ecological and energy transformation of the countries that would allow them to conform to the stricter environmental requirements that prevail in the international trade system.

For example, the Paraguayan transport system conversion project is being carried out with the financial support of the European Union, through its EUROCLIMA program. Although these agreements are important, as they contribute to promoting the energy transition, they are insufficient, as they only aim to modify mobility standards in the countries of the region, but do not have a direct impact on the economies themselves, which need to operate through sustainable production systems to ensure the external accessibility of their products.

It is therefore essential for the EU, Mercosur’s second largest trading partner, to increase cooperation in this area and provide it with a multidimensional approach that addresses the multiple challenges involved in the energy transition (UNCTAD, 2023). This stance would not only be beneficial in environmental terms, but would also allow the organization to recover some of its influence or soft power in the region and lay the foundations for an incipient consensus between the two blocs on sustainable development. Among other things, this issue has not yet led to progress in the implementation of the EU-Mercosur Association Agreement, despite the fact that five years have passed since its formalization.

Bolivia in Mercosur: addition or subtraction?

A second challenge is the insertion of Bolivia, governed by Evo Morales’ former Minister of Finance, Luis Arce, in economic and political terms. The Mercosur Summit, held on July 8, was held for the first time with the participation of Bolivia as a full member represented by its President Luis Arce whose presence contrasted with the absence of his Argentine counterpart, Javier Milei.

Bolivia’s full incorporation into Mercosur had been made official at the end of 2023. The Andean country will have four years to adapt to Mercosur’s regulatory acquis, which includes the adoption of the Mercosur Common Nomenclature and the Common External Tariff (CET), among other tariff measures.

In his speech, the Bolivian president considered that the inclusion of his country in Mercosur will increase trade with the other member countries and strengthen the productive complementarities of the economies. However, it should be noted that, as stated by ECLAC (2024), Bolivia’s entry does not modify the trade exchange that the country already had with Mercosur members within the framework of the Economic Complementation Agreement, signed in 1996.

Undoubtedly, the main objective of the Bolivian government is to recover the trade exchange levels of the first decade of the 21st century when the bloc became the destination of more than 50% of Bolivian exports and the origin of more than 40% of its imports, while in 2023 sales to Mercosur represented only 24% of the total and purchases 30% (ECLAC, 2024:38).

What is less clear is Bolivia’s contribution to Mercosur. In his speech, Arce remarked that his government can act as a “hinge of integration” and reconcile the interests of Mercosur and the Andean Community of Nations, of which Bolivia is also a member, together with Colombia, Ecuador and Peru, taking up the initial project of uniting both blocs. He also urged to work for the industrialization of the strategic natural resources that his country and the region possess, among which he highlighted lithium (Arce 2024).

Natural gas has historically been one of the main commodities exported by the Bolivian state and currently represents 18.8% of total exports to Argentina and Brazil (ECLAC, 2024:39). But the sharp drop in gas production in the last three years, from 16,969 million cubic meters in 2021 to 13,390 million cubic meters in 2023 (Bnamericas 2024), threatens to dilute the main economic attraction that a priori Bolivia’s inclusion in Mercosur would bring.

The Bolivian President was optimistic about the future of the bloc and emphasized the need to work together, beyond any ideological differences that may exist, for the collective benefit: “We must be able to carry out integration in the region based on respect for the political system and the type of government that the peoples sovereignly elect” (Arce, 2024).

Divergences between Lula and Milei

The third challenge is to address the political disagreements between Argentina and Brazil. Preventing the political noise between the governments of Argentina and Brazil from contributing to a new paralysis of Mercosur that would put an end to the relative institutional dynamism of the bloc after Lula da Silva’s return to power is undoubtedly a difficult challenge to solve.

Although Lula da Silva’s return to power contributed to the perception that Mercosur could become a tool capable of deepening economic integration and cooperation among member states, ideological disagreements between the governments of Brazil and Argentina threaten to prolong the bloc’s paralysis at a time when it is essential to build “minimum” consensus in order to face the multiple challenges of the current regional and international scenario. One of these challenges is the energy transition which, according to the Economic Commission for Latin America and the Caribbean (ECLAC), threatens the viability of the integration process.

The Brazilian president gave clear signs of his intention to “relaunch” Mercosur. In addition to facilitating Bolivia’s accession, he regularized the payments owed by his predecessor Jair Bolsonaro for the financing of key organizations such as the Mercosur Structural Convergence Fund (FOCEM), as well as entities such as PARLASUR, the Mercosur Secretariat and the Mercosur Social Institute. However, this dynamic seems to be in crisis after the rise to power of Milei in Argentina in December 2023, a president who has little inclination to deepen South American integration and who has been characterized by a polarizing and skeptical discourse regarding phenomena such as climate change.

The problem lies in the fact that Lula and Milei have a completely different vision of the functioning of the international trade system -and therefore of Mercosur-. While Lula gives the bloc a central role in Brazil’s model of international insertion and stresses the need for Mercosur to be inserted in value chains without deprotecting strategic productive sectors, Javier Milei considers that trade rules should be established by the market itself and not by States or groups such as Mercosur. Hence his decision not to attend the presidential summit in Paraguay and instead to send his foreign minister, Diana Mondino, a gesture that was criticized even by leaders more in line with his economic thinking,

The political disputes between Lula and Milei have not harmed Mercosur’s external trade dynamics for the time being, as evidenced by the fact that, according to ECLAC (2024:6), in the first quarter of 2024 member countries’ exports grew by 4%. As for intra-bloc trade, the greatest negative effects have been registered in the Brazilian economy, since Argentine exports (of which 82% are directed to Brazil) have grown by 7.25% in 2024, while imports (almost 74% come from Brazil) have fallen by 31.4% according to the Mercosur Foreign Trade Statistics System (SECEM). In contrast, Brazilian exports to the bloc have fallen by 29.38% in 2024 (65% are destined for Argentina) and imports have grown by 7.21%.

Other challenges and perspectives

In addition to the political dissonance between Argentina and Brazil, Mercosur faces other challenges of a more structural nature that threaten the viability of the integration process. These include weak economic growth and the reprimarization of its productive matrix, a phenomenon generated as a result of closer trade links with China, the bloc’s main trading partner and the destination of around 29% of its exports, according to SECEM.

The problem is that the bloc not only sells less, but has also deepened its profile as a net exporter of raw materials, being immersed in a new type of international division of labor in which China and other Asian countries appear as suppliers of industrial products to Mercosur, displacing the members of the bloc themselves from that role.

Despite relatively high levels of “extra-zone” protection, South American countries became mainly exporters of agricultural, mineral and energy raw materials (ECLAC, 2024: 20): “In 2023, exports of goods based on natural resources reached 78.4% of the bloc’s total sales and 46.7% of exports to MERCOSUR itself. In 2011, the latter represented 35.2%, even with international prices of raw materials at higher levels”.

Reprimarization has captured the attention of academia (Busso Zelicovich 2021, Bianculli 2024, Teubal and Palmisano 2015) and political elites who, for decades, have been emphasizing the need to diversify the productive matrix, despite not having adopted concrete measures to face this challenge. This leads to overlook other complex challenges facing Mercosur, such as the energy transition, a challenge in the face of which governments need to act as soon as possible to prevent it from generating negative impacts on the automotive sector (ECLAC 2024), which has historically been considered the basis of the integrationist process.

One of the main initiatives promoted by the international community has been the replacement of internal combustion vehicles with electric vehicles. This dynamic generates new external vulnerabilities in Mercosur, insofar as the production of electric vehicles requires the development of new productive capacities and financial resources that the countries of the region currently lack, and threatens to do away with several existing production links involving around half a million people (ECLAC, 2024:47).

Hence the need for Mercosur governments to put aside political differences and ideological prejudices (especially the Argentine president, Javier Milei, who during the election campaign promoted a climate change denialist discourse) to design public policies that promote the energy transition, taking advantage of the comparative advantages that the South American bloc possesses. Mercosur has one of the largest reserves of lithium in the world, a key mineral for the production of batteries used in electric cars, but this commodity ends up being exported to countries such as China, Korea and Japan, contributing to generate new trade dependencies.

On the other hand, some Mercosur member states have initiated incipient industrialization experiences of regional scope (ECLAC 2024). The most advanced initiative is taking place in Brazil, where the Lula government launched, in 2024, the National Program for Green Mobility and Innovation (Mover) to mitigate carbon emissions by granting tax incentives (Agência Brasil 2024). Similar measures have been promoted in Uruguay and Paraguay, which in May 2023 announced the implementation of its Electric Mobility Master Plan to electrify 100% of the public transport vehicle fleet and 50% of logistics transport vehicles (ECLAC, 2024:48). The only country that, according to ECLAC, has not yet delineated any type of policy to promote the electrification of public transport and logistics vehicles (ECLAC, 2024:48).

In the face of all these challenges and internal problems of the bloc, it will not be easy to enter into a new positive dynamic of Mercosur, whose 33 years of life indicate, nevertheless, its resilience and constant capacity to reinvent itself. A definitive agreement with the EU, the enlargement to Bolivia and a basic understanding between Argentina and Brazil, leaving aside their ideological differences, would contribute to consolidate one of the most important integration and political agreement processes in Latin America.

[1] More information on the program can be found at: https://www.euroclima.org/.