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Latin America Runs Into the Limits of Economic Cooperation

6 MINS READJun 20, 2014 | 09:02 GMT
The Pacific Alliance presidential summit in Cali, Colombia, in May 2013.
(RAUL ARBOLEDA/AFP/Getty Images)
The Pacific Alliance presidential summit in Cali, Colombia, in May 2013.

As Latin American states vie for economic opportunities, the uncertain potential of regional economic blocs continues to draw attention. The ninth heads of state summit of the Pacific Alliance is being held June 19-20 in Mexico. For the first time, the gathering will feature Paraguay as an observing member of the alliance. The country is joining fellow observer Uruguay, but both are also full members of the Common Market of the South (better known as Mercosur), which Brazil and Argentina dominate. Their simultaneous participation in both blocs is a sign that some Mercosur members are not confident that Mercosur alone can provide enough openings for growth, largely due to tensions within the bloc caused by Argentina's domestic economic problems. As a result, Latin American members of Mercosur will continue to push for outside opportunities.

Latin America's history is rife with experiments in regional cooperation designed to encourage more local trade and investment, as opposed to being overly reliant on extraregional players such as Europe and the United States. For the most part, these regional groupings have emerged in a flurry of political excitement only to die as economic realities set in, or as the environment shifted. Except for Mexico and Brazil, Latin American countries are mostly small markets dominated by commodity exports with little industrialization and limited domestic consumer markets. As a result, export-oriented commodity industries generally find themselves stuck supplying the manufacturing and industrial hubs of the world, most prominently Europe, the United States and, more recently, China.

This limits compatibility among Latin American countries and in cases like Mercosur, where countries have attempted to form common markets with external tariff structures blocking foreign trade. The same dynamics that have characterized Latin America's trade patterns throughout history exist today. While Mexico and Brazil have been able to cultivate substantial industrial bases, Brazil remains reliant on iron and soybean exports for external revenue sources. Countries throughout Latin America continue to push for regional integration as a way to generate growth and avoid overexposure to foreign markets, but there are numerous hurdles.

Mercosur

Mercosur is the most dominant economic union in Latin America. Uniting the markets of Brazil, Argentina, Uruguay, Paraguay and, most recently, Venezuela behind a common external tariff barrier, Mercosur was initially designed as a South American equivalent to the European Union. In function, it has been a way for industries within Mercosur to periodically negotiate mutually beneficial trade arrangements while using heavy state intervention to shield themselves from outside competition. By contrast, the Pacific Alliance, which unites the countries of Chile, Colombia, Peru and Mexico in a free trade partnership, largely limits the role of government in multilateral trade by lowering tariff barriers and harmonizing regulations.

The two blocs represent the two very different economic management philosophies dominant in Latin America, and each comes with its own challenges. Mercosur is struggling to grow under the weight of increased trade protectionism spearheaded by Argentina, which has attempted to use trade restrictions to mitigate a growing balance-of-payments crisis fueled by rising energy imports and high levels of capital flight. As a result, Brazil and Argentina are in constant negotiations over trade restrictions. With growth slowing at home, Brazil is looking for export opportunities and is actively pushing Argentina to approve a free trade deal between Mercosur and the European Union, an agreement that will require unanimous consent from the Mercosur members.

Paraguay and Uruguay have much less economic and political weight in Mercosur but have been suffering some of the same challenges. Both have strongly criticized Argentina's protectionist policies. The bylaws of Mercosur prevent them from signing most bilateral free trade agreements without the unanimous approval of the rest of Mercosur. The exception is Mexico, with which Paraguay is actively negotiating a bilateral free trade agreement. Unfortunately for all involved, withdrawal from Mercosur would have serious political and economic repercussions. The industrial bases of Brazil and Argentina are intertwined, and all of the Mercosur states rely on lowered internal trade barriers for their export sectors. As a result, they are working within the bounds of Mercosur to create additional opportunities.

The Pacific Alliance

For the Pacific Alliance countries, the grouping is one of convenience and optimism. The goal is to both improve trade within the bloc and to give the bloc more negotiating power when approaching external markets, particularly Asia. However, there will be challenges ahead for the Pacific Alliance countries as well. In the wake of finalizing a free trade agreement with the United States, Colombia has already seen how increased competition from the U.S. agriculture sector has hurt its own less competitive agricultural sector, a dynamic that has generated significant protests over the past year and caused Colombian lawmakers to postpone a trade agreement with South Korea.

As the country with the largest manufacturing base and the closest integration with the United States, Mexico is best positioned to take advantage of the free trade bloc, both for sourcing inputs for its manufactured goods and in exporting finished goods to its Latin American partners. The United States will continue to dominate Mexico's foreign trade profile, however, despite Mexico's progress toward becoming more influential and economically involved in South America.

Within Latin America, the existence of the Pacific Alliance as both a quasi-political entity and an economic grouping enables countries such as Chile and Peru, which have longstanding interests in South America and the Southern Cone in particular, to exert influence within Mercosur. Chile championed an effort to bring Mercosur and the Pacific Alliance closer together in the late May ministerial meeting leading up to the June heads of state summit. Chile has also begun discussions with Paraguay to give the landlocked country access to a duty-free port in Chile. Peru, for its part, has taken steps toward improving its trade relationship with Brazil, completely dropping tariffs on 85 percent of its imports from Brazil and actively engaging Brazil in transcontinental transportation networks designed to give both countries land-based access to their respective coastlines.

The key challenge facing Latin American states is how to remain competitive in an environment where key global consumers in Europe and the United States have been suffering low or stagnant growth since the 2008-2009 financial crisis. Even China's growth has begun to slow, meaning that countries such as Brazil that have relied on strong demand for commodities are finding themselves looking ahead to a less optimistic future. While free trade agreements are not a panacea for local growth and welfare, as Colombia has learned, protectionist strategies also pose a serious challenge when it comes to fostering internationally competitive private sectors. Given the challenges facing regional groupings, these countries will continue to look outside of their blocs for answers.   

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