Mercosur: Evolution and Implications for U.S. Trade Policy

Mercosur: Evolution and
Implications for U.S. Trade Policy
Updated March 26, 2008
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Mercosur: Evolution and Implications for U.S. Trade
Mercosur is the Common Market of the South established by Brazil, Argentina,
Uruguay, and Paraguay in 1991 to promote economic integration and political
cooperation among the four countries. Since then, Mercosur has struggled to achieve
deep economic integration, but has maintained a cooperative economic and political
framework, which has also become an influential voice in determining the fate of the
hemisphere’s regional integration initiatives. In particular, the U.S. vision for
hemispheric integration, the Free Trade Area of the Americas (FTAA), has stalled
largely because of opposition from within Mercosur, which in turn has focused on
its own, albeit limited, expansion.
The Mercosur pact calls for an incremental path to a full integration, but after
15 years, only a limited customs union has been achieved. From the outset, Mercosur
struggled to reconcile a basic inconsistency in a pact of partial economic union: how
to achieve economic integration, while also ensuring that the benefits would be
balanced among members and that each country would retain some control over its
trade, production, and consumption structure. This delicate balance faced
overcoming serious structural and policy asymmetries that became clear when Brazil
and Argentina experienced financial crises and deep recessions. These economic
setbacks disrupted trade flows among members, causing friction, the adoption of
protectionist measures, and a retreat from the commitment to deeper economic
For now, Mercosur has turned to expanding rather than deepening the
agreement. Many South American countries have been added as “associate
members” and Mercosur has reached out for other South-South arrangements in
Africa and Asia – all limited agreements and unlikely paths to continental economic
integration. Internal conflicts have highlighted Mercosur’s institutional weaknesses
and slowed the integration process. On July 4, 2006, Venezuela signed an accession
agreement to become its first new full member, making Mercosur the undisputed
economic counterweight to United States in the region, but raising questions about
how Venezuela’s membership may shift regional political and trade dynamics.
It appears that Mercosur has opted to emphasize its expansion both in the region
and with other developing countries over agreements with its largest developed
country trade partners, looking to the World Trade Organization (WTO) as the
preferred alternative for achieving many of its trade policy goals. Nonetheless, U.S.-
Mercosur commercial and economic ties are expanding and the United States is
pursuing deeper bilateral trade relations with Uruguay that could provide new ideas
for a broader integration commitment. The alternative may be for Mercosur and the
United States to expand their mutually exclusive bilateral agreements, increasing the
potential for overlapping trading systems, which few, if any, view as either
economically or administratively optimal.

U.S.-Mercosur Trade Prospects.......................................1
Formation and Institutional Development...............................3
Intra-Mercosur Trade and Internal Dynamics............................6
Intra-Mercosur Trade Trends.....................................6
Asymmetries: Country Perspectives...............................8
Argentina ................................................9
Paraguay and Uruguay.....................................10
The “Pulp Mill” Conflict.......................................12
Mercosur External Issues...........................................13
Mercosur Outreach............................................13
Venezuelan Accession.........................................14
Mercosur and the Doha Round..................................16
The Mercosur-Israel Free Trade Agreement........................17
China-Mercosur Trade.........................................17
Implications for U.S. Trade Policy...................................17
Appendix A. U.S. Merchandise Trade with Mercosur....................19
Appendix B. Intra- and Extra-Mercosur Merchandise Trade by Country......20
List of Figures
Figure 1. U.S.-“Mercosur-4” Balance of Merchandise Trade................2
Figure 2. Intra-Mercosur Exports as Percent of Total Mercosur Exports,

1990-2007 ...................................................7

Mercosur: Evolution and Implications for
U.S. Trade Policy
On March 26, 1991, Brazil, Argentina, Uruguay, and Paraguay signed the Treaty
of Asunción, establishing the Common Market of the South (Mercado Común del
Sur — Mercosur) with the intention of strengthening sub-regional development and
cooperation through economic integration. Since then, Mercosur has struggled to
achieve deep economic integration, but has maintained a cooperative economic and
political framework, which has also become an influential voice in determining the
fate of the hemisphere’s regional integration initiatives. In particular, the U.S. vision
for hemispheric integration, the Free Trade Area of the Americas (FTAA), has stalled
largely because of opposition from within Mercosur.1 Venezuela’s July 2006 signing
of an accession agreement only reinforces Mercosur as the undisputed economic
counterweight to the United States in the region and raises further doubts over the
prospects for a hemispheric-wide trade agreement. This report examines the
evolution of Mercosur as it relates to U.S. trade policy in Latin America. It will be
updated periodically.
U.S.-Mercosur Trade Prospects
The Mercosur countries are experiencing an extended period of strong economic
growth after a deep recession caused by financial crises in Brazil (1999) and
Argentina (2001). They currently have competitive exchange rates, stable
macroeconomic conditions, and strong growth in exports and foreign direct
investment largely because of the global commodity price boom. Commodity prices,
however, cut two ways. Although strong agricultural prices have fueled export
growth, the rising price of oil has offset some of these gains for the net oil importers
(Venezuela being the exception), contributing to deteriorating current account
balances over the past year. Within Mercosur, Brazil dominates the trade
relationship, running a sizable and growing trade surplus with the rest of the pact.2
Mercosur has a well-diversified trade relationship with the world. In 2006, the
European Union (EU) was Mercosur’s largest trade partner, capturing 25% of total
trade, followed by Asia with 22%, and the United States with 19%. By contrast, the
four Mercosur countries together accounted for only 3.0% of total U.S. trade. With
the recent addition of Venezuela, the “Mercosur 5” make up 3.6% of total U.S. trade,

1 For more on the FTAA, see CRS Report RS20864, A Free Trade Area of the Americas:
Status of Negotiations and Major Issues, by J. F. Hornbeck.
2 Inter-American Development Bank (IDB). Integration and Regional Programs Department.
Mercosur Report No. 12: 2006-2007. Washington, D.C. February 2008. pp. 4-6.

the increase accounted for almost entirely by U.S. imports of Venezuelan oil.
Collectively, the “Mercosur 4” would rank 9th for U.S. exports and 14th for U.S.
imports, slightly ahead of Brazil by itself, the largest economy in South America,
responsible for 80% of total Mercosur trade with the United States.3
Figure 1. U.S.-“Mercosur-4” Balance of Merchandise Trade

$ millions
199 7 199 9 200 1 200 3 20 0 5 200 7
199 6 199 8 20 0 0 200 2 200 4 200 6
U.S. ExportsU.S. Imports
U.S. Trade Balance
Data Source: U.S. Department of Commerce.
Patterns in U.S. merchandise trade with the “Mercosur-4” appear in Figure 1
(country data for all five appear in Appendix 1). Note that trends are heavily skewed
by Brazil’s large economy. U.S. imports of Mercosur goods rose steadily from 1996
to 2006, paralleling growth in the U.S. economy. Expansion of U.S. exports, by
contrast, was flat from 1996 to 2001 and then fell as import demand collapsed around
deep recessions in Brazil and Argentina. U.S. exports rebounded in 2004 as the
Mercosur economies recovered, and by 2007, the U.S. trade balance turned from
deficit to surplus for the first time since 2001. The U.S. trade surplus reflects growth
in demand in all four Mercosur countries. For Brazil, U.S. imports actually declined
slightly in 2007, as U.S. exports rose by 28%. U.S. exports have been helped by
Brazil’s strong economic growth resulting in increased demand for U.S. inputs such
as aircraft engines and parts, as well as the strong appreciation of Brazil’s currency
relative to the U.S. dollar.
Major U.S. exports to Mercosur include mostly capital and high technology
goods such as mechanical and electrical machinery (computers, vehicles, aircraft,
3 U.S. Department of Commerce data as presented in the World Trade Atlas.

medical equipment, and pharmaceuticals). The primary U.S. imports are components
for machinery and vehicles, agricultural products, and oil if Venezuela is included.
Specifically, the United States imports primarily machinery and mineral fuel from
Brazil, mineral fuel and processed foods from Argentina, sugars and woods from
Paraguay, and meat and woods from Uruguay. Despite being a relatively small U.S.
trade partner, Mercosur contains two of South America’s largest economies, and so
prospects for growth in trade and investment drive, in part, ongoing U.S. interest in
maintaining cordial and cooperative relations, as does the expectation for deeper
Western Hemisphere integration, perhaps including, at some point, the FTAA.
Formation and Institutional Development
Mercosur evolved from a series of 1980s bilateral agreements between Brazil
and Argentina. It was conceived as a way to foster new levels of political and
economic openness and cooperation following a prolonged period of mutual distrust,
much of it taking place under military dictatorships in both countries. In addition,
as the South American economies moved away from an import substitution model
of development to one based increasingly on trade openness, a regional trade
agreement made sense given the four countries were “natural trade partners,” sharing
geographical, cultural, and economic complementarities.4 In fact, Uruguay and
Paraguay pressed hard to expand the arrangement to a four-country common market
to improve their trade prospects, or at the least, ensure that they would not be isolated5
by a bilateral economic pact between their two largest neighbors.
Mercosur, therefore, evolved from economic and political circumstances that
emphasized the need to preserve and enhance the Brazil-Argentine bilateral
relationship, while fostering cautious ambitions for sub-regional economic
integration that could also serve as a platform for the four countries’ insertion into
the global economy. Ultimately, as one scholar has observed, meeting expectations
is critical, and Mercosur’s success rests on the provision of consistent reciprocal
market access and a “framework for cooperation” that promotes mutual economic
growth and development.6 It is the difficulty in achieving this standard, as shall be
seen, that has been at the root of persistent discontent within Mercosur.
Formally, the Treaty of Asunción established Mercosur as a common market
among Brazil, Argentina, Uruguay, and Paraguay for the stated purpose of

4 Vaillant, Marcel. Mercosur: Southern Integration Under Construction. IPG. February

2005. p. 53.

5 The addition of Uruguay and Paraguay raised a fundamental debate about Mercosur’s
purpose. Despite the charter having well-defined integration and development goals, Brazil
and Argentina have viewed Mercosur as a political project as well. Paraguay and Uruguay,
by contrast, have emphasized its economic priority, with some observers insisting that
Mercosur gets off track when it operates from a political agenda. See Lacalle de Herrera,
Luis Alberto. Mercosur: Project and Perspectives. Diplomacy, Strategy & Politics Review.
Brasilia: April/June 2007, pp. 186-193. (Note, Mr. Lacalle was president of Uruguay 1990-

1995 and played an instrumental role in the negotiation and creation of Mercosur.)

6 Vaillant, op.cit., pp. 53-54.

accelerating economic development and social justice. The goal envisioned
improved living conditions for all member countries through “balanced and managed
growth in trade flows.”7 The treaty followed guidelines compatible with the Latin
American Integration Association (Asociación Latinoamericana de Integración —
ALADI), a regional trade organization that provides a common, yet flexible
framework for establishing sub-regional trade pacts that encourages inclusiveness
and minimal harm to non-members. These pacts may be both “regional and partial
in scope,” in contrast to the U.S. free trade agreement (FTA) model that tends to be
comprehensive. For example, Mercosur adopted as basic tenets “gradualism,
flexibility, and balance,” and allows for the negotiated accession of other countries.8
Mercosur followed an incremental path to a common market, beginning with a
transition period (1991-95) in which it operated as an increasingly comprehensive
free trade agreement (FTA) based on a schedule of automatic tariff reductions. The
formal jump to a common market was made on January 1, 1995, but in reality,
Mercosur became (and remains) only a partial customs union.9 It adopted a common
trade policy and a schedule of common external tariffs (CETs) that applies to 80%
of tariff line items, but with some very important exceptions for sensitive sectors
such as sugar, automobiles, capital goods, computers, and other technology products.
The exceptions were to be phased out by 2006, but many have been extended to

2011, requiring a set of complex rules of origin.10

In addition, there are weaknesses with the CET, a core requirement of a true
customs union. The CET can be levied twice, first when a good initially enters a
Mercosur country, and again if it crosses into another member country. Between the
double taxation and multiple exceptions problems, resolving application and uniform
enforcement of the CET remains an important unaddressed issue. The double
taxation issue is a particular problem for Paraguay, which will suffer significant
revenue losses without some type of comprehensive customs revenue sharing plan
because most goods enter the Mercosur area through one of the other three
countries.11 The incompleteness of the customs union fosters asymmetry issues
(discussed below) that are at the root of Mercosur discontent, and that also suggest
that the achievement of a full common market remains a distant, if not illusory goal.

7 Costa Vaz, Alcides. Trade Strategies in the Context of Economic Regionalism: The Case
of MERCOSUR. In: Aggarwal, Vinod K., Ralph Espach, and Joseph S. Tulchin, eds. The
Strategic Dynamics of Latin American Trade. Washington, DC. Woodrow Wilson Center
Press. 2004. pp. 234-35.
8 Porrata-Doria, Jr., Rafael A. MERCOSUR: The Common Market of the Southern Cone.
Durham: Carolina Academic Press. 2005. pp. 14-16.
9 A free trade agreement (FTA) eliminates tariffs on goods exchanged among participating
countries. In a customs union, members also adopt a common external tariff (CET) and
common trade policy toward third-party countries. A common market takes the next step
of allowing for the free flow of all factors of production (capital and labor) among members.
10 IDB. MERCOSUR Report No. 10: 2004-2005. February 2006. Washington, D.C. p.

70 and Vaillant, op. cit. p. 55.

11 IDB. MERCOSUR Report No. 11: 2005-2006. February 2007. Washington, D.C. pp. 45-


The Treaty of Asunción also provided for macroeconomic policy coordination
and harmonization of policy legislation at the sectoral level (e.g. energy, agriculture,
industry, technology). Some macroeconomic policies, such as exchange rates, have
been forced toward complementarity by economic events, but differences remain
significant and full coordination of policy is not currently feasible. The rationale for
sectoral cooperation rests on inter-country factor mobility being pursued gradually,
allowing comparative advantage to work, while easing the integration adjustment
process. Nonetheless, sectoral issues and disputes remain a continuing challenge,
especially between Brazil and Argentina, as does cross-border movement of goods
both within Mercosur and to third country markets.
All parties were required to accept a common set of rights and obligations
(Article 2), with little allowance for special and differential treatment for smaller
economies. There were many follow-on protocols. Among the most important was
the December 17, 1994 Protocol of Ouro Preto, which formally established the
common market and extended the institutional framework accordingly. Mercosur
adopted a democratic commitment clause in 1996, and there were two protocols that
clarified and expanded the dispute settlement process, the last being the Olivos
Protocol signed on February 18, 2002, and implemented two years later.12 Dispute
settlement, however, is largely unenforceable and reflects a continuing problem of
Mercosur’s institutional effectiveness.
Three more recent developments call into question Mercosur’s functional
institutional capacity. First is the expansion of its membership. Venezuela signed
an accession agreement on July 4, 2006 (discussed in detail below), but has been
reticent to take on all commitments of the customs union, especially the CET. In
December 2006, Bolivia also requested to upgrade its status from associate to full
member, although it is reluctant to relinquish its membership in the Andean
Community of Nations (Comunidad Andina de Naciones — CAN), as would be
required under Mercosur rules.
Second is the new Mercosur Parliament established in December 2006 and
headquartered in Montevideo. It comprises 18 representatives from each full
member country and has as its primary goal to work toward harmonization of
national laws and policies, but it has no authority over national government bodies.13
Already a point of contention, it has come under criticism for being either too weak
to be meaningful, or risking unequal national representation relative to the
participating countries’ population. In either case, it is viewed by some as raising
even more questions over the institutional strength of Mercosur.14

12 For details on the legal documents, see Porrata-Doria, MERCOSUR: The Common Market
of the Southern Cone.
13 Latin American Weekly Report. Mercosur Meeting Ends on Sour Note. December 19,

2006. p. 7.

14 The Argentine Chamber of Exporter, for one, has raised concerns over the inherent
weaknesses of the Mercosur Parliament. Camara de Exportadores. Instituto de Estrategia
Internacional. Parlamento del Mercosur: ¿La Voz de los Ciudadanos en la Integración?
Buenos Aires, July 2006. pp. 6-7 and 27-28. See also: Lacalle, op. cit., p. 190.

Third is creation in 2006 of a $100 million Structural Convergence Fund,
financed mostly by Brazil and Argentina, effectively amounting to a transfer of
resources to the smaller countries to help ameliorate the inequalities of Mercosur.
It provides funding for development and infrastructure projects, destined primarily
for Uruguay and Paraguay, but may not be a sufficient response as a compensatory
mechanism for acknowledged trade asymmetries within the pact.15
Intra-Mercosur Trade and Internal Dynamics
Intra-Mercosur trade relations have had an uneven and at times troubled history.
A combination of internal policy contradictions, diminishing expectations, and a
hostile external economic environment in the late 1990s resulted in uneven trade
benefits and recurring recriminations against the incomplete customs union. The
return of a highly beneficial global economic environment has alleviated some
friction, but has not eliminated the need to make policy adjustments or to address
concerns raised by the two smallest members of Mercosur. These issues again
collectively point to a consistent criticism of Mercosur: its weak institutions and
incomplete integration. Too frequently, decision making is the product of political
agreement, often on a bilateral basis rather than a rules-based bloc-wide
determination. This ad hoc approach to process generates much of the conflict within
the customs union, raising questions about the level of commitment to completing
the quadrilateral economic integration scheme.16
Intra-Mercosur Trade Trends
As Mercosur lowered tariffs, intra-Mercosur trade was expected to grow relative
to trade with third-party countries. As seen in Figure 2, this was the initial response
from 1991 to 1998, with the jump in intra-Mercosur exports also due to its growth
from an initially small base, other economic reforms, and the decade’s lengthy global
economic expansion. There is, however, an equally evident sudden collapse of intra-
Mercosur exports, which fell from 25% of total trade in 1998 to 11% in 2002, before17
renewing an upward climb to 15% by 2007. This setback reflects a fall in aggregate
demand linked to the region’s economic crises, intra-Mercosur tariff increases in
response to internal Mercosur problems, and Argentina’s pressure to lower the CET
on capital goods, demonstrating a still strong dependence on trade with developed18

countries for products not available in the region.
15 IDB, MERCOSUR Report No. 12, pp. 40-41.
16 Phillips, Nicola. The Southern Cone Model: The Political Economy of Regional
Capitalist Development in Latin America. London: Routledge, Taylor & Francis Group.

2004. p. 96.

17 By comparison exports are 60% of intra-EU trade. Intra-Mercosur trade dependence
varies by country. In 2005, Mercosur captured 9.8% of Brazil’s total trade (exports plus
imports) compared to 26.7% for Argentina, 38.8% for Uruguay, and 50.8% for Paraguay.
18 Phillips, op. cit., pp. 89 and 94-95.

Figure 2. Intra-Mercosur Exports as Percent of Total Mercosur
Exports, 1990-2007

Per ce n t

25Brazilian Devaluation

Asia Financial Crisis BeginsArgentinas 4-year Recession Begins
Argentina Defaults
Mercosur Formed

10Venezuela Accession

1991 1993 1995 1997 1999 2001 200 3 200 5 200 7
1990 1992 1994 1996 1998 200 0 200 2 2004 2006
Source: Inter-American Development Bank. Mercosur Report No. 12., p. 20
From the outset, Mercosur struggled to reconcile a basic inconsistency of partial
economic union: how to balance trade integration and equity of member benefits,
while retaining some semblance of national control over trade, production, and
consumption structure. Natural or structural asymmetries are at the heart of the
problem given the pact integrates four economies with huge discrepancies in size,
structure, resource endowment, and level of development. In addition to the absolute
differences in size, relative differences can fluctuate widely over time. For example,
the size of Argentina’s economy (GDP) tends to be half that of Brazil’s, yet this
metric has ranged from a high of 60% in 1992 to a low of 22% in 2002 because of
dramatic shifts in relative economic performance, in this case punctuated by the
prolonged recession and financial crisis in Argentina.19
These structural differences can be compounded by “policy asymmetries” that
arise from incongruities in fiscal, monetary, industrial, exchange rate, and other
policies. Either type of asymmetry can dramatically alter commercial flows, causing
large trade imbalances that can threaten the stability of intra-Mercosur relations as
seen in Figure 2. When they operate in tandem, the Mercosur policy adjustment
19 Heymann, Daniel and Adrián Ramos. MERCOSUR in Transition: Macroeconomic
Perspectives. United Nations. Economic Commission for Latin America and the Caribbean
(ECLAC). Santiago, Chile. December 2005. p. 17.

framework has proven to be vulnerable, particularly at times when the countries face
external economic shocks.20
Such a confluence of events occurred in the 1990s following a series of global
shocks that spilled over into Mercosur. The July 1997 Asian financial crisis was the
first shock, followed by the Russian default in the summer of 1998. These crises
directly affected investor confidence in Brazil, causing extensive capital flight in the
fall of 1998, which in turn led to Brazil’s steep currency devaluation in January 1999
and the abandonment of its fixed exchange rate stabilization program. With
Argentina’s strict dollar convertibility regime still in place at the time, the two
countries faced a significant “exchange rate policy asymmetry” that altered trade
patterns. The sudden trade imbalance was compounded by Argentina’s lengthy
recession that also began in 1998, leading to its own, far more serious, financial
crisis. Argentina’s crisis led to the abandonment of its fixed exchange rate regime
in December 2001 and subsequent sovereign debt default.
Mercosur’s leaders, aware of macroeconomic weaknesses exposed by these
crises, proposed a Mercosur Relaunch program as early as May 2000. It formally
reaffirmed a commitment to deeper integration, but the Relaunch enthusiasm soon
faded as it proved unable to overcome the effects of the financial crises, including the
spread of recession to Uruguay and Paraguay and the dramatic fall in trade between
Argentina and Brazil (90% of intra-Mercosur commercial exchange).21 Intra-
Mercosur relations became increasingly strained, with Argentina applying temporary
restrictions on Brazilian imports, further reducing trade and diminishing incentives
for deeper economic integration.
By 2002, the Mercosur economies had all hit bottom and began to rebound, as
reflected in intra-Mercosur trade. Problems with intra-bloc trade imbalances,
however, remained. As the data in Appendix 2 demonstrate, all four countries show
a linear increase in intra- and extra-Mercosur trade and, with the exception of
Paraguay, expanding trade surpluses in their extra-Mercosur trade relations. A core
issue remaining is the persistent and growing trade deficits that each country runs
with Brazil. A related concern involves the accumulating trade deficits that Paraguay
and Uruguay have with Argentina.
Asymmetries: Country Perspectives
The specific asymmetry issues discussed above manifest differently for each
country. Two commonly cited threads are the expanding trade deficit with Brazil,
particularly since the region began its economic recovery (see Appendix 2), and
unequal investment and trade in industrial goods. Brazil is seen as the undisputed
winner on both counts and is the most ardent supporter of Mercosur for political as
well as economic reasons. Interestingly, it is also the least trade dependent member
of Mercosur, with total Mercosur trade amounting to no more than 10% of its world

20 For details, see IDB, MERCOSUR Report No. 10, pp. 39-41.
21 Bouzas, Roberto. Mercosur After Ten Years. In: Tulchin, Joseph S. And Ralph H.
Espach, eds. Paths to Regional Integration: The Case of Mercosur. Woodrow Wilson
International Center for Scholars. Washington, DC. 2002. p. 120.

trade. By contrast, intra-Mercosur trade accounts for 25%-30% of Argentine trade.
The two smaller countries are even more dependent on their larger neighbor’s
markets, but Mercosur has fallen to only 38% of their total exports, down from recent
highs of 59% for Uruguay and 41% for Paraguay. This trend may suggest that both
countries are reacting to perceived inequalities and structural impediments by
diversifying their trade outside of Mercosur.
Both Paraguay and Uruguay have made numerous formal proposals to solve the
asymmetry issue. To date, some changes in rules and other technical requirements
have been made to improve trade opportunities for the small countries.22 The most
salient development was creation of the Structural Convergence Fund, which has
been slow in becoming operational and has only approved its first projects in 2007.
So far the asymmetries issue has not been resolved and remains a major challenge to
the long-term success of Mercosur.
Argentina. Argentina has numerous trade disputes with Brazil, heightened
since the post-crisis period when it began to run large trade deficits with Brazil (see
data in Appendix 2). The structure of these deficits were a particular problem
because they were weighted toward high value-added industrial goods, competing
directly with Argentina’s plans to restart its own industrial sector.23 The imbalance
became increasingly severe; Argentine exports fell from 14% of Brazilian imports
in 1998 to 9% in 2007. Brazilian exports, in contrast, rose from 22% to 33% of
Argentine imports. The growing imbalance resulted from numerous factors: 1) new
exchange rate equilibriums that favored Brazilian goods in the Argentine market over
U.S. and European products; 2) a post-recession jump in Argentine aggregate
demand; 3) Brazil’s export promotion policy emphasizing greater use of domestic
inputs, and structural factors in the trade composition of the Mercosur countries.24
An analysis of Mercosur trade composition suggests that Brazil’s trade surplus
is driven considerably by falling import shares of the smaller Mercosur economies,
presenting two structural problems not easily addressed. First, the export supply
produced by the Mercosur countries does not correspond strongly with Brazil’s
import demand. Second, Argentine and Uruguayan exports may be less competitive
relative to those from countries outside the Mercosur bloc. They also compete
closely with one another in the Brazilian market. Together these trends suggest that
a natural correction in the Mercosur trade flows may not be likely, leading to
Argentina’s continued demand for administered remedies to address certain chronic
sectoral trade imbalances (e.g. appliances, textiles, paper).
Current administered agreements include the use of voluntary export restraints,
quotas, and export taxes.25 One important example is the Competitive Adaptation
Mechanism (CAM) agreed to by Brazil and Argentina in February 2006, over the

22 See IDB, Mercosur Report No. 12, p. 37 for a discussion of the specific rule changes.
23 IDB, MERCOSUR Report No. 11, pp. 30-32, Heymann and Ramos, MERCOSUR in
Transition, p. 20, and World Trade Atlas.
24 Ibid.
25 IDB, MERCOSUR Report No. 10, p. 47 and MERCOSUR Report No. 11, pp. 35-39, 128.

strong objections of Brazilian industry. It permits protective measures in cases where
imports “cause or threaten to cause damage” to a domestic product or industry
(safeguards). A convoluted process, it allows for both voluntary export restraints and
tariff rate quotas. The CAM was a major policy shift for Mercosur and raises
multiple issues. First, it is a bilateral arrangement established under the ALADI
system and so not governed by Mercosur. Second, import restrictions represent a
retreat from the stated free trade philosophy of Mercosur. Third, the CAM has no
enforcement mechanism under ALADI. In short, it compounds existing institutional
problems and may undermine the Mercosur agreement even as it attempts, so far
unsuccessfully, to restore balance to the largest bilateral relationship within it.26
Paraguay and Uruguay. The two smaller Mercosur partners face similar
trade asymmetries, but also react against the uneven exercise of power. Linked to
Mercosur by a natural trade relationship, both Paraguay and Uruguay have still had
to respond to structural impediments to their exports. In part, trade asymmetry is a
function of their relatively small economies, but the major issue is the disparity
between Mercosur’s stated intent to help all members attain their development goals
and the actual functioning of the agreement itself. The treaty’s incomplete
integration can impede Paraguay’s and Uruguay’s exports, does not provide special
and differentiated treatment, and often allows bilateral “diplomacy” to circumvent27
formal decision-making mechanisms. The safeguards mechanism adopted by Brazil
and Argentina is one example, which appears to contradict the principle of
reciprocity in rights and obligations. Ad hoc restrictions on trade are another major
area of complaint.
Paraguay and Uruguay are not in identical situations and so each has advocated
different remedies. Historically Paraguay’s economy has been the most dependent
on Mercosur. As a small agricultural economy, geographically remote and
landlocked, it depends on its neighbors for export routes to third countries,
particularly when river access is seasonally limited. Paraguay is also the poorest and
least developed Mercosur member, and so relies on the Mercosur’s promises of
market access, enforceable obligations, and integration for its fledgling
manufacturing industries. Paraguay’s exports have at times been blocked by
bureaucratic restrictions in both Brazil and Argentina and private sector complaints
have had little success in resolving what they believe amounts to protectionist non-
tariff barriers (NTBs). Paraguay has expressed interest in exploring the possibility
of receiving trade preferences within Mercosur as one remedy, but cannot envision
leaving Mercosur.28

26 Haskel, David. Bilateral Agreements: Argentina, Brazil Start Safeguard System To
Shield Industries from Mutual Imports. International Trade Reporter. February 7, 2006.
p. 247, Inter-American Development Bank. Southern Common Market: New Integration
and Co-operation Agreements Between Argentina and Brazil. [],
and IDB, MERCOSUR Report No. 11, pp. 52-58.
27 Phillips, op. cit., p. 99.
28 Osava, Mario. Latin America: Mill Conflict Continues to Delay Integration. Inter Press
Service. January 4, 2008 and author’s interviews with public and private officials in
Asunción, November 2007.

Uruguay faces many of the same NTB problems as Paraguay, but with a higher
per capita income, developed port network (direct access to third countries), and
more diversified economy, its options for trade expansion both within and outside of
Mercosur are greater. It too looks to the Mercosur agreement to fulfill its promises
of market access and enforceable obligations. Finding a balance both within and
outside Mercosur, including exploring deeper bilateral relationships with the EU and
the United States is the challenge for Uruguay. Frustrated by past vulnerability to
Argentina’s financial crisis and Brazil’s periodic barriers to trade, Uruguay has opted
to diversify its trade with the world where possible, but its policy options are
hindered because it cannot change or ensure enforcement of the Mercosur agreement,
it cannot leave Mercosur, nor can it formally negotiate outside it.29
The asymmetry issue suggests a certain implicit political hold that Brazil has
over the Mercosur derived from its disproportional economic power. By presiding
over an incomplete customs union, it can selectively limit the free movement of
imports to suit its sectoral needs (at a cost to the other countries equal to the high
tariff on capital goods or forgone trade for example), and can also inhibit movement
of goods from the smaller countries bound for countries within Mercosur or outside
it. Brazil’s dominant economic and political-institutional control over the Mercosur
has therefore at times fostered a resentment among the smaller countries, increasing
their interest in pursuing third country trade arrangements.
Uruguay has responded in part by exploring deeper trade affiliations outside the
pact. On November 4, 2006, following U.S. Senate approval, a Bilateral Investment
Treaty (BIT) between the United States and Uruguay went into force. Uruguay also
sought and received permission from Brazil to explore an FTA with the United
States. It subsequently decided to pursue a Trade and Investment Framework
Agreement (TIFA) with the United States, which was signed on January 25, 2007.
A Joint Commission on Trade and Investment provides the means for ongoing U.S.-
Uruguay discussions regarding opportunities for specific trade deals.
The TIFA approach is flexible and allows Uruguay to deepen trade relations
with the United States without compromising its Mercosur commitments. Uruguay
has linked its desire to develop closer U.S. trade ties with its concern over increasing
“bilateralism” between Argentina and Brazil. In December 2006, Argentina
responded by criticizing Uruguay for attempting to circumvent Mercosur in its quest
to diversify its trade relations, again pointing to an internal strife based on a trade
pact that does not appear to operate as promised.30 Many in Uruguay are not
indifferent to this viewpoint and in an ideal world would like to pursue an FTA with
the United States in a way that would not compromise its standing with Mercosur.

29 Ibid and IDB, Mercosur Report No. 12, p. 40.
30 Haskel, David. Uruguayan President Turns Down Offer to Negotiate Free Trade
Agreement with U.S. International Trade Reporter. BNA, Inc. October 5, 2006. p. 1440
and Argentina Blasts Uruguay’s Pursuit of Free Trade with Non-Mercosur Nations.
International Trade Reporter. BNA. Inc. January 4, 2007. p. 22.

The “Pulp Mill” Conflict
Uruguay’s construction of a pulp mill opposed bitterly by Argentina is another
conflict within Mercosur. Constructed by a Finnish firm on the Uruguay River, the
mill represents the largest single foreign investment project in Uruguay and is
expected to provide significant long-term employment opportunities.31 Argentina
alleges that Uruguay is in violation of a bilateral environmental protocol the two
countries signed in 1975 and that the plant presents potentially harmful
environmental effects that could negatively affect Argentina’s national territory,
including a resort area across the river from the construction site.
A World Bank review concluded that the plant poses no serious environmental
problems, but did suggest that construction and production design changes could
reduce the risk of environmental hazard even further. The World Bank’s
International Finance Corporation provided $100 million to finance the project and
the issue continues to spawn protests and diplomatic flare-ups. Periodically,
Argentine protesters continue to block bridges over the Uruguay River, disrupting
trade and tourist traffic between the two countries. Uruguay has responded at times
by closing the border. It also turned to the Mercosur system for dispute settlement.
A September 2006 ruling by the Mercosur Ad-Hoc Arbitration Tribunal found that
Argentina had failed to live up to its commitment to ensure the free movement of
people, goods, and services under the pact, but no award was made.32
Argentina also filed a petition for arbitration with the International Court of
Justice (ICJ) at The Hague. The ICJ denied Argentina’s request for an injunction to
terminate construction. It also declined to require that Argentina take actions to
remove protesters. Uruguay subsequently filed a counter claim, arguing that
Argentina has failed to take such action. Additional mediation efforts in Madrid and
New York ameliorated the the conflict temporarily, but the pulp mill began
operations in November 2007 even as the parties awaited a final ruling from the ICJ.
Brazil has chosen not to mediate and the ongoing dispute highlights the lack of an
effective dispute settlement system within Mercosur.33

31 Latin American Weekly Report. Pressure Builds Over Pulp Mill. August 9, 2007.
Originally, the dispute involved a second plant to be built by a Spanish firm. This plant has
been relocated, defusing it as an issue.
32 Inter-American Development Bank. Institute for the Integration of Latin America and the
Caribbean. Dispute Between Argentina and Uruguay: Arbitration Tribunal Award. INTAL
Monthly Letter. September 2006 and Latin American Weekly Report. November 15, 2007.
This episode points to what one scholar observes to be Mercosur’s highly politicized dispute
settlement and decision-making processes, which can allow for resolutions based on
“political whim, unilateral action, and non-observance of agreed policy commitments.”
Phillips, op. cit., p. 99.
33 One Year On, Small Dispute Threatens to Fracture Mercosur. Latin American Regional
Report. Brazil and Southern Cone. April 2006. p. 1 and Osava, Mario. Latin America’s
Mill Conflict Continues to Delay Integration. Inter Press. January 4, 2008.

Mercosur External Issues
Although Mercosur began strictly as a four-party integration plan, changing
internal and external circumstances led the customs union to consider expanding its
membership in various ways and to consider the merits of seeking trade arrangements
with third party countries and trade groups. As part of its charter, Mercosur remains
formally open to the addition of new members.
Mercosur Outreach
In 1996, Chile and Bolivia joined as the first “associate members.” Since then,
Mercosur has continued to enter into “economic complementarity agreements” with
most of South America, under ALADI guidelines. Associate membership is a limited
arrangement, largely focused on the long-term pursuit of a free trade agreement, often
emphasizing sector-specific agreements and cooperation. It does not convey
membership status per se, and while members may attend meetings, they have no
voting rights, do not participate in the internal functions of Mercosur, and are not
required to adopt the CET.34
In October 2004, after years of talks, Mercosur and the Andean Community
signed a trade pact, giving all Andean countries the equivalent of associate
membership. Two months later, this breakthrough led directly to creation of the
South American Community of Nations, later renamed the Union of South American
Nations (UNASUR), a loosely-conceived pact including 12 countries (those in
Mercosur, CAN, along with Chile, Guyana, and Suriname). The CAN and UNASUR
in many ways are not true regional agreements; they have some common rules, but
details on market access and other specific provisions are bilateral arrangements
between each Mercosur country and the CAN. Brazil also granted numerous
unilateral concessions to ensure the UNASUR agreement would be completed.35
These constraints limit prospects for deep continental integration. Nonetheless,
sectoral initiatives, such as the proposed South American gas pipeline, already reflect
increased cooperation and collective self-determination in the region, which is also
now alive in the institutional presence of the CSN.
Mercosur’s other negotiations have experienced mixed success. Trade talks
with the EU for a joint Mercosur-EU FTA and the Western Hemisphere countries for
a proposed Free Trade Area of the Americas (FTAA) have both come to an impasse
over the inability to reach an agricultural agreement acceptable to Brazil. Brazil has
also declined U.S. and EU overtures for “WTO-plus” arrangements on market access
for industrial goods, services trade, enforceable intellectual property rights, and
investment provisions. Continuing interest will depend in part on the outcome of the
Doha Round.36 South-South trade talks have advanced only in limited form.

34 Porrata-Doria, MERCOSUR: The Common Market of the Southern Cone, pp. 123-124.
35 IDB, MERCOSUR Report No. 10, p. 93.
36 Unlike the United States, which will consider engaging the Mercosur countries in bilateral
talks, the EU prefers to negotiate bloc-to-bloc, which would reinforce rather than diminish

Mercosur has begun preliminary discussions with a host of countries that include
China, India, SACU, Canada, the Russian Federation, Korea, Egypt, Morocco, and
Pakistan. None has moved beyond a simple framework agreement.37
Venezuelan Accession
On July 4, 2006, Mercosur agreed to accept Venezuela as the first additional full
member of the pact. The accession protocol was accelerated in mid-2006 at the
behest of President Hugo Chávez, who viewed it as supportive of his effort to unify
South America and advance his “Bolivarian agenda” that generally stands in
opposition to U.S. influence in the region. The accession takes full effect only after
formal parliamentary approval by all four Mercosur countries. To date, only
Argentina and Uruguay have voted to approve.38
The early stages of the accession process was expected to be longer and more
involved because of two significant hurdles: Venezuela’s membership in the CAN,
which would not have been allowed under Mercosur protocols; and the requirement
to adopt the Mercosur CET. Venezuela dispensed with the first issue by defiantly
withdrawing from the Andean trade pact in April 2006. Citing Peru and Colombia’s
negotiations for FTAs with the United States as contrary to CAN’s and Latin
America’s best interests, President Chávez left the pact specifically to join Mercosur.
To address the second issue, Mercosur, under Brazil’s leadership, negotiated to give
Venezuela four years to comply with the CET, with other obligations of the pact not
completely phased in until 2014.39
Mercosur may have many incentives to bring Venezuela into the fold. The
addition of a fifth member adds to the economic strength of the bloc, which would
comprise three-quarters of South American GDP. Venezuela also promised
immediate selective duty-free treatment for imports from Paraguay and Uruguay,
with no requirement for reciprocal treatment until 2013. Venezuela may increase the
potential for intra-Mercosur trade as a relatively large Latin American market that
also offers sectoral complementarity and energy security with its vast oil reserves and
plans for a regional pipeline.

36 (...continued)
Mercosur’s functioning as a customs union.
37 IDB, MERCOSUR Report No. 10, pp. 90 and 96-100.
38 United Nations. Economic Commission on Latin America (ECLAC). Latin America and
the Caribbean in the World Economy 2006. Santiago, August 2007. p. 132.
39 Mercosur. Protocolo de Adhesión de la República Bolivariana de Venezuela al Mercosur.
Articulo 4. July 4, 2006. Haskel, David. Mercosur, Venezuela Agree on Protocol for
Caracas Accession to Trading Bloc. International Trade Reporter. BNA, Inc. June 1,
2006. p. 837. The accession process has been criticized by, among others, former Brazilian
Ambassador to the United States Rubens Barbosa, who stated that “In the European Union
they negotiate the terms of entry, and then the country joins. Here, we’re doing it the other
way around, which is craziness...” Rohter, Larry. Venezuela Wants Trade Group to
Embrace Anti-Imperialism. The New York Times. January 18, 2007.

A more thorough analysis of the potential trade effects, however, suggests that
the trade and economic benefits for Mercosur may be easily overstated. Currently,
Mercosur trades little with Venezuela and estimates of trade growth are modest at
best, given limitations in the accession protocol (exemptions and other restrictions)
and current tariff preferences that already apply to a high proportion of goods
expected to benefit from the agreement. Trade between Mercosur and Venezuela
averages no more than 3% of the pacts total world trade, with the exception of
Uruguay where crude oil constitutes 12% of total imports. The energy sector
promises the greatest benefit through deeper cooperation in energy supply, but which
could also be achieved without Venezuela’s full integration into Mercosur. In
addition, Venezuela’s access will complicate trade policy coordination within the
expanded bloc, both regionally and multilaterally.40
The political motivations and ramifications for Venezuela’s accession may be
even more of an issue. Concern has grown, for example, over certain of President
Chávez’s policies that may be construed as hindering democracy, which in turn could
be considered a direct challenge to Mercosur’s democratic clause. Brazilian Foreign
Minister Celso Amorim has reaffirmed his view that Mercosur’s primary goal from
the start has been to consolidate democracy in South America. Chávez’s decision to
close a key radio station (viewed by some as suppressing freedom of speech) and his
one-time plan to alter the Venezuelan Constitution to abolish presidential term limits
(viewed by some as a direct assault on the democratic process) raised concern over
real and perceived undemocratic behavior in Venezuela. This issue has escalated
with some members of the Brazilian Senate continuing to argue for postponement of
a vote to consider Venezuela’s accession.41
Although Venezuela remains a non-voting member until the accession is
ratified, it does have a voice in Mercosur affairs, increasing its influence on intra-pact
and external trade negotiations. The marginal effect may be to strengthen resolve by
some countries to challenge U.S. influence in South America, although there are also
moderating influences in all countries. Uruguay and Paraguay could also view
Venezuela as having a diluting force on Brazil’s political dominance in the pact, but
opinions seem divided at present in both countries.
Venezuela’s accession, however, may have unintended regional consequences
should countries outside Mercosur be put in a position of having to choose between
a U.S. or Mercosur trade agreement. Peru has even suggested forming a new trade
bloc, the Community of the Pacific, which would include countries with
complementary trade arrangements: the United States, Canada, Mexico, the Central

40 A detailed analysis of the potential trade effects of Venezuela’s access may be found in:
IDB, Mercosur Report No. 11, pp. 99-117and see also, ECLAC, Latin America and the
Caribbean in the World Economy, pp. 132-134.
41 See Magalhaes, Luciana and Katia Cortes. Brazil Senator Says Venezuela Deadline on
Mercosur ‘Unfeasible.’ Bloomberg. July 4, 2007, Haskel, David. Venezuela’s Mercosur
Partners Downplay President Chávez’s Nationalization Pledges. International Trade
Reporter. January 18, 2007, and Wheatley, Jonathan and Richard Lapper. Left Turn
Ahead? How Lula’s Plan Could Condemn Brazil to Mediocrity. Wall Street Journal.
February 21, 2007.

American countries, Panama, Colombia, Peru, and Chile.42 This prospect may be
further reinforced by Bolivia’s request to become a full member of Mercosur,
although it appears reluctant to give up its membership in the CAN and accept the
tariff convergence challenge inherent in adapting to the Mercosur CET.43
Mercosur and the Doha Round
The current, and now long-extended, WTO multilateral round of trade
negotiation highlights other interesting institutional constraints within Mercosur. As
a customs union with a supposed common external trade policy and CET, Mercosur
would theoretically need to approach the Doha Development Round with some
common, if not identical, trade negotiation objectives, or risk differing country
policies undermining the integration scheme. Mercosur has responded by creating
an ad hoc consultation and coordination group to address the Doha negotiations. The
bloc, however, does not approach the WTO as a united voice, but Doha negotiations
are exploring the possibility of a more flexible approach to address the interests of
the customs union.44
Brazil has taken the negotiating lead and perhaps has the most to gain from the
Doha Round on both political and economic grounds, but it is not clear that positions
benefitting Brazil will always be those supported by the other Mercosur countries.45
Although there has been broad agreement in the realm of agricultural issues, as part
of the broader developing country consolidated response to developed country WTO
positions, there is less agreement in the areas of nonagricultural market access and
services. The most sensitive areas with respect to maintaining a cohesive customs
union are in setting tariff levels and determining sensitive product lists that each
country may elect to receive special treatment under a WTO agreement. Given there
will be limits on the number of tariff lines permitted, large differences in both these
areas among Mercosur countries could lead to either a breech of the customs union
rules, or those of the Doha agreement. Balancing these goals in the WTO
negotiations is a challenge for the four Mercosur countries and should the Doha
Round stall indefinitely, it is possible that alternative paths to global integration may
take on renewed emphasis.46

42 Chauvin, Lucien O. Peru Proposes New Trade Bloc of Hemisphere Nations on Pacific
Coast. International Trade Reporter. BNA, Inc. August 3, 2006. p. 1172. For a detailed
summary of the environmental, legal, and economic issues, see IDB, MERCOSUR Report
No. 11, pp. 69-76.
43 ECLAC, Latin American and the Caribbean in the World Economy, p. 132.
44 IDB, MERCOSUR Report No. 11, p. 94 and Costa Vaz, Trade Strategies in the Context
of Economic Regionalism: The Case of MERCOSUR, p. 256 and Washington Trade Daily.
US, EU Brazil on ‘Flexibilities.’ March 11, 2008.
45 On Brazilian trade strategy and the WTO, see CRS Report RL33258, Brazilian Trade
Policy and the United States, pp. 5-6 and 15.
46 IDB, MERCOSUR Report No. 11, p. 94-97.

The Mercosur-Israel Free Trade Agreement
On December 18, 2007, after four years of negotiations, Israel signed a free
trade agreement at the Mercosur Summit with the four member countries, the first
such agreement with a country outside the Western Hemisphere. The agreement is
limited largely to market access for merchandise trade, allowing for full free trade to
be phased in within 10 years. Mercosur and Israel have a near even balance of trade
in their $1 billion commercial relationship. Mercosur exports mostly agricultural
products and imports technology goods. Although this arrangement is highly
complementary, treatment of agricultural exports and capital goods imports has been
a stumbling block for the Mercosur countries, and particularly Brazil, in trade
negotiations with the EU, the United States, and at the Doha Round. Safeguards and
other restrictions will apply during the transition period to full free trade.47
China-Mercosur Trade
Mercosur and China have no formal trade agreement in effect, but bilateral trade
has grown tremendously in recent years. In 2007, Mercosur exported $16.1 billion
of goods to China, importing $19.7 billion. China represented 7.2% of Mercosur’s
exports and 11.2% of its imports. Total trade between China and the four Mercosur
countries ranges from a low of 11% of total foreign trade for Uruguay to 18% for
Argentina and Brazil, and a high of 28% for Paraguay (importing mostly computer
and other electronic equipment).48 Mercosur’s commodity exports and imports of49
labor-intensive goods explain most of the recent strong growth in this relationship.
Such strong trade growth also presents problems for Mercosur because manufactured
imports displace local products. China’s expanding trade surplus would be even
bigger were it not for the world prices of agricultural commodities currently driving
Mercosur’s export values, suggesting that as China becomes a larger trade partner,
the deficit could widen. The prospect for a deteriorating bilateral trade balance has
led both Brazil and Argentina to pursue anti-dumping cases and resort to use of
import licenses, voluntary export restraints, and higher tariffs.50
Implications for U.S. Trade Policy
Mercosur came to life as both a Brazilian-Argentine political project and a
broader economic integration scheme among four contiguous, but highly
differentiated countries. Mercosur has fostered a prolonged period of cooperation in
a region with a long history of conflict, an important achievement in both political
and economic terms. Still, it is a limited customs union and remains intact despite
its “incompleteness” in part because: 1) there is no simple alternative for its

47 Global Insight. Mercosur Signs Deal with Israel. December 19, 2007 and Haskel, David.
Mercosur Concludes FTA with Israel. International Trade Reporter. December 20, 2007.
48 World Trade Atlas.
49 IDB, Mercosur Report No. 12, pp. 23-24
50 Ibid., pp. 24 and 45-46.

members; 2) there is an unknown, but perceived serious downside risk to its
dissolution, and; 3) there is always the vague hope that promises of institutional
improvements will produce more equitable outcomes. The result remains an
uncomfortable status quo in which form (e.g. the new Parliament) often supercedes
function (e.g. deeper integration).
Economic integration based on mutual growth in trade and development is at
the heart of the Mercosur charter, but given shortfalls in achieving this goal, it is
likely that a persistent dissatisfaction among the smaller partners may continue,
particularly given Brazil’s political and economic dominance and Mercosur’s
inability to address institutional disagreements. Deeper economic integration
promises to resolve some problems, but there appears to be little chance for
movement in that direction in the near future.
Instead Mercosur has opted to pursue new institutional bureaucracies (the
Parliament) and outreach to third countries, albeit on a very limited basis. The
Parliament is in its infancy and Mercosur has not been able to consummate a trade
agreement with its most important trade partners, the United States and the EU.
South-South agreements and expansion of associate membership to South American
countries has progressed, but only as limited market access arrangements. The big,
but questionable move is the accession invitation to Venezuela, which has also had
problems. Venezuela has been given leeway in adopting Mercosur commitments,
which has undermined the pact’s cohesiveness,51 and could end up shifting the
political orientation of Mercosur, while providing only relatively small trade effects.
Historically, the United States has supported Mercosur as a potential
complementary path to meeting its own goal of Western Hemisphere economic
integration, but U.S.-Mercosur trade is small and Mercosur has shown little
enthusiasm for supporting U.S. initiatives for a hemispheric-wide trade agreement.
The addition of Venezuela would likely solidify this position. Although Mercosur
has resisted the FTAA as envisioned by the United States, Venezuela is the only
country in Latin America to reject the idea unequivocally.
It appears that Mercosur has opted to emphasize its expansion both in the region
and with other developing countries over agreements with its largest developed
country trade partners, looking to the World Trade Organization (WTO) as the
preferred alternative for achieving many of its trade policy goals. Nonetheless, U.S.-
Mercosur commercial and economic ties are expanding and the United States is
pursuing deeper bilateral trade relations with Uruguay that could provide new ideas
for a broader integration commitment. The alternative may be for Mercosur and the
United States to expand their mutually exclusive bilateral agreements, increasing the
potential for overlapping trading systems, which few, if any, view as either
economically or administratively optimal.

51 Obiko Pearson, Natalie. Chávez Hosts 6-Nation Trade Summit. Associated Press. July

5, 2006.

Appendix A. U.S. Merchandise Trade with Mercosur
($ millions)
% %
Co untry 2003 2004 2005 2006 2007 Change Change
2006-07 2003-07
U.S. Exports
Brazil 11,211 13,897 15,372 19,231 24,628 60.2% 119.7%
Argentina 2 ,437 3,388 4,122 4,776 5,855 42.0% 140.3%
U r ugua y 3 2 7 3 2 6 3 5 7 4 8 2 6 4 0 7 9 . 3 % 9 5 . 7 %
Paraguay 484 623 896 911 1,237 38.1% 155.6%
Mercosur 414,45918,23420,74725,40032,36056.0%123.8%
Venezuela 2 ,831 4,767 6,421 9,002 10,199 58.8% 260.3%
Mercosur 517,29023,00127,16834,40242,55956.7%146.1%
Mexico 97,412 110,834 120,365 133,979 136,541 13.4% 40.2%
LAC* 51,946 61,465 72,407 88,969 107,528 48.5% 107.0%
Latin America149,358172,299192,772222,948244,07026.6%63.4%
World 724,771 818,775 905,978 1, 036,635 1,162,708 28.3% 60.4%
U.S. Imports
Brazil 17,910 21,160 24,436 26,367 25,636 4.9% 43.1%
Argentina 3 ,170 3,745 4,584 3,979 4,495 -1 .9% 41.8%
U r ugua y 2 5 6 5 8 0 7 3 2 5 1 2 4 9 2 -3 2 . 8 % 9 2 . 2 %
Paraguay 5 3 5 9 5 2 5 8 6 8 30.8% 28.3%
Mercosur 421,38925,54429,80430,91630,6913.0%43.5%
Venezuela 17,13624,92133,97837,13439,89717.4%132.8%
Mercosur 538,52550,46563,78268,05070,58810.7%83.2%
Mexico 138,060 155,902 170,109 198,253 210,799 23.9% 52.7%
LAC* 78,829 98,647 122,873 133,676 134,773 9.7% 71.0%
Latin America216,889254,549292,982331,929345,57218.0%59.3%
World 1 ,257,121 1,469,704 1,673,455 1,853,939 1,953,699 16.7% 55.4%
U.S. Balance of Trade
Brazil -6,699 -7 ,263 -9 ,064 -7 ,136 -1 ,008
Argentina -733 -357 -462 797 1,360
U r ugua y 7 1 -2 5 4 -3 7 5 -3 0 1 4 8
Paraguay 431 564 844 853 1,169
Mercosur 4-6,930-7,310-9,057-5,5161,669
Venezuela -14,305 -20,154 -27,557 -28,132 -29,698
Mercosur 5-21,235-27,464-36,614-33,648-28,029
Mexico -40,648 -45,068 -49,744 -64,274 -74,258
LAC* -26,883 -37,182 -50,466 -44,707 -27,245
Latin America-67,531-82,250-100,210-108,981-101,502
World -532,350 -650,929 -767,477 -817,304 -790,991
Source: Table created by CRS from U.S. Department of Commerce data.
* Latin America and the Caribbean, except Mexico.

Appendix B. Intra- and Extra-Mercosur
Merchandise Trade by Country
(in U.S. $ millions)
2002 2003 2004 2005 2006
Mercosur Total Trade:8,62810,84515,45119,34823,540
– Brazil7,3459,36613,33116,77020,395
– Paraguay5967419059641,129
– Uruguay6657181,2141,6142,016
Mercosur Trade Balance:2,792469-1,829-3,929-3,642
– Brazil2,310-33-2,121-4,100-4,131
– Paraguay8615113954113
– Uruguay419372154306376
Extra-Mercosur Total Trade26,07132,94541,57049,72657,066
Extra-Mercosur Trade Balance9,92715,61913,95915,63015,948
Mercosur as % of Total Trade24.9%24.8%27.1%28.0%29.2%
2002 2003 2004 2005 2006
Mercosur Total Trade:8,98111,47715,42518,16223,000
– Argentina7,0909,23412,94516,15419,771
– Paraguay9421,1821,1701,2801,527
– Uruguay8969421,1901,3441,624
Mercosur Trade Balance:-2,359-1332,3994,5904,901
– Argentina-2,405-1121,8013,6763,657
– Paraguay176232574642935
– Uruguay-74-134114356927
Extra-Mercosur Total Trade98,611109,867143,832173,697205,865
Extra-Mercosur Trade Balance15,49024,95731,29440,16741,173
Mercosur as % of Total Trade8.4%9.5%9.7%9.5%10.1%
Total trade = exports + imports. Trade balance = exports - imports.
Source: World Trade Atlas, reporting national account data.

Appendix B. Intra- and Extra-Mercosur Merchandise Trade by Country
(in U.S. $ millions)
2002 2003 2004 2005 2006
Mercosur Total Trade:1,3981,8172,3882,4722,779
– Argentina344469722739903
– Brazil8311,0431,1341,1721,385
– Uruguay223302513535481
Mercosur Trade Balance:-292-349-656-652-933
– Argentina-274-337-518-525-565
– Brazil-125-193-508-530-631
– Uruguay107184389429363
Extra-Mercosur Total Trade1,0631,2901,8902,3964,404
Extra-Mercosur Trade Balance-267-274-370-872-2,410
Mercosur as % of Total Trade56.8%58.5%55.8%50.8%38.7%
2002 2003 2004 2005 2006
Mercosur Total Trade:1,5761,7522,2292,6303,308
– Argentina6547289111,1721,380
– Brazil8221,7521,1621,2811,659
– Paraguay7659757684
Mercosur Trade Balance:-345-336-538-876-1,062
– Argentina-428-418-202-638-778
– Brazil4212-192-369-493
– Paraguay4837433632
Extra-Mercosur Total Trade2,2492,6363,8054,5915,400
Extra-Mercosur Trade Balance215344341339226
Mercosur as % of Total Trade41.2%40.0%36.9%36.4%38.0%
Total trade = exports + imports. Trade balance = exports - imports.
Source: World Trade Atlas, reporting national account data.