The South American free trade zone Mercosur -- comprised of Brazil, Argentina, Paraguay and Uruguay, with Venezuela set to join -- is often touted as a beacon of regional economic strength and a bulwark against the dominance of the U.S.-backed North American Free Trade Agreement. But a recent protectionist streak in Brazil, Mercosur's most powerful member, has provoked debate over whether the bloc is as egalitarian and beneficial to South America's emerging economies as it has long been cracked up to be.
The most recent incident is Brazil's announcement earlier this month that it intends to impose a 30 percent tax increase on cars imported into the country unless a minimum of 65 percent of their components were manufactured within Mercosur.
While it might make sense to hike taxes on imports from the United States, Asia or Europe, the
announcement raised significant concerns in Uruguay, whose auto industry depends on sales to Brazil, but also on parts imported from outside Mercosur.
The resulting tension between the two countries has exposed what Alexander Main at the
Center for Economic and Policy Research in Washington considers an intrinsic divide within the trade bloc. "This is a tension that has existed probably since the very beginning of Mercosur in 1992," Main, a Latin America specialist and the center's senior associate for international policy, told Trend Lines on Thursday. "Basically, the two smaller countries have to compete with the region's two real industrial powerhouses, and the big countries have tended to impose their agenda on the smaller countries. What Brazil has done here is, I think, just another example of that.
"If Brazil were to follow through and impose the tariff on Uruguay, the result would be devastating for Uruguay's auto industry. However, said Main, the posturing between the two likely won't amount to more than "a bump in the road" toward the wider scope of trade relations that continues to emerge under the Mercosur umbrella.
"They haven't really worked it out yet, but in principle, Brazil has agreed to continue allowing vehicles with less than 65 percent Mercosur components to come into Brazil from Uruguay on a lower tax rate," he said, adding that whatever agreement is ultimately reached between the two will likely involve some sort of compromise and "probably won't be entirely satisfactory to Uruguay.
"Overall, said Main, integration and regional interdependence has flourished under Mercorsur during the past two decades, and the organization is likely to grow in the coming years. "If Venezuela comes in, its GDP is the second biggest in South America, with Brazil's being the largest," he said. "At that point, you'll have a trade bloc that's pretty overwhelming in the region. And I think the attraction of that bloc is going to become increasingly irresistible for the rest of the countries in South America -- and perhaps beyond.
"However, such growth won't occur without tension, said Main, who asserted that Brazil's protectionist maneuvering is motivated by the country's declining domestic growth rate. "Cutting down on imports can [contribute] to boosting national production," he said. "National interest comes first, especially in hard economic times. And right now, Brazil is preparing for the next shock that may be coming from a meltdown in Europe, and trying to get their own growth rate further up."
