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Latin America's great divide: Two trade blocs yielding dramatically different results

Latin America has a long history with economic and political alliances.

Latin America has a long history with economic and political alliances. Today, the two most prominent trade blocs in Latin America are the Southern Common Market (Mercosur) and the Pacific Alliance. These two blocs represent over 80 percent of regional trade and over 90 percent of Latin America’s gross domestic product.

The Mercosur customs union was created in 1991 by Argentina, Brazil, Paraguay and Uruguay (and joined by Venezuela in 2012) for the purpose of promoting business and encouraging the movement of people, goods and currency. The much younger Pacific Alliance trade group, established only recently in 2011, joins the economies of Chile, Colombia, Mexico and Peru through a free trade agreement with a goal to promote “deep integration” of economies through the free movement of goods, services, capital and labor and to strengthen ties with the world (the Asia-Pacific region in particular).  

These two blocs have approached trade and growth quite differently: protectionist Mercosur provides preferential trade access to less than 7 percent of the world economy, while the much more open Pacific Alliance represents countries having trade pacts representing nearly 75 percent of the global market. In its short history, the Pacific Alliance has established itself as a powerful economic alliance, while Mercosur has struggled since its founding to find success.

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Mercosur 

Inspired by the example of the European Union, Mercosur’s founders envisioned a trade bloc as a tool to strengthen democracy among members as they recovered from the oppressive dictatorships of the 1980’s. Mercosur’s protectionist attitude toward major financial centers and traditional world powers resulted from a combination of members’ shared histories of socio-economic inequality and Western support for oppressive 20th-century autocracies, as well as modern multinational corporations with poor human rights records in the region.  

Mercosur’s member countries include some of the world’s largest food producers and are home to Earth’s largest known mining and energy reserves. Brazil remains the regional economic giant by virtue of its abundant natural resources and large consumer market, while Venezuela commands some of the largest petroleum reserves in the world. While Mercosur was expected to be an economic powerhouse, growth in the Mercosur countries lagged significantly behind that of their neighbors, even during periods of cheap money and strong commodity prices in the region. In its 20 years of existence, Mercosur has failed to create deeply integrated economic structures, remaining barely more than a customs union which suffers from mistrust among members and a deficient legal framework for economic growth.

 

Pacific Alliance 

While the Pacific Alliance countries have similar political and social histories to their Mercosur counterparts, the manner in which they have approached economic policy marks a significant departure from the protectionist foundation of Mercosur. The Pacific Alliance has committed to free-market policies and sought to increase trade by lowering tariffs and actively pursuing new export markets. Unlike Mercosur, the goal of the Pacific Alliance is to deepen cooperation among members with the explicit purpose of forging closer relations with markets outside of Latin America – in particular, the Asia-Pacific region. 

In its short history, the Pacific Alliance has moved swiftly to create a model of economic and political integration aimed at attracting investment and creating export platforms for the global market. In 2013, members signed an agreement to abolish tariffs on 92 percent of merchandise traded, with the remainder to be abolished by 2020. Member countries have abolished tourist visa requirements for each other’s citizens and have opened shared embassies abroad. The Pacific Alliance created a joint regional stock exchange called MILA with market capitalization of MILA-listed companies now exceeding $950 billion. The Declaration of Paracas, signed in July of 2015 by the Pacific Alliance countries, provides further collaboration in citizen migration, public spending, attracting investment and the health care industry, among others. 

The Pacific Alliance model has worked. An ever-increasing share of foreign direct investment has landed in Pacific Alliance countries, and members have experienced increased trade with the United States, European Union and Asian countries. Companies doing business in Pacific Alliance countries have also reported significant business benefits. While Mercosur countries have grown at an average rate of less than 1 percent per year, Pacific Alliance members have experienced growth upwards of 4 percent annually during the bloc’s short history, and their economies are expected to continue growing at three or four times the rate of their Mercosur neighbors.

 

What the Future Holds

With dramatically different views on free trade, Mercosur and the Pacific Alliance are normally seen as being sharply divided. However, foreign ministers of the two blocs have recently begun to discuss regional integration. At a Pacific Alliance summit in July of 2015, Chilean president Michelle Bachelet insisted that a convergence with Mercosur is needed as the entire region faces dropping commodity prices and an international context of slow growth: “We can’t give the image that in this region the two coasts (Pacific and Atlantic) live back to back,” she argued.  Perhaps the success of the Pacific Alliance will put pressure on the struggling Mercosur economies to consider trade deals and abandon their protectionist measures in favor of more liberal policies and free trade. 

Disclaimer: This is for general information and is not intended to be and should not be taken as legal advice for any particular matter. It is not intended to and does not create any attorney-client relationship. The opinions expressed and any legal positions asserted in the article are those of the author and do not necessarily reflect the opinions or positions of Miles & Stockbridge P.C., its other lawyers or InsideCounsel.

Contributing Author

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Abbey Mansfield Ruby

Abbey Mansfield Ruby focuses her practice on the representation of lenders, private equity sponsors, private banks, trustees, and corporate borrowers in complex domestic and...

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Contributing Author

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Cynthia Collins Allner

Cynthia Collins Allner concentrates her practice on the representation of financial institutions and corporate borrowers in matters such as cross-border acquisition financings; letters of...

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