Founded 32 years ago, the Southern Common Market, or Mercosur—a customs union and free trade area consisting of Argentina, Brazil, Uruguay, Paraguay, and now Bolivia—has for some time been stagnant, unable to advance on major policy initiatives.
Then came Argentine presidential candidate Javier Milei. The libertarian, who was inaugurated as Argentina’s president on Dec. 10, declared in August that Mercosur was “defective” and harmful to Argentina. He pledged to withdraw the country and dissolve the bloc.
What a candidate says in the campaign is one thing. “But once you have the responsibility of running the country,” said Juan Cruz Díaz, a managing director of Cefeidas Group, a Buenos Aires-based political risk consultancy, “there are many other factors that you need to consider.” Can Milei make good on his promise to leave Mercosur? And what would happen if he did?
For Argentina, Latin America’s third-largest economy, leaving Mercosur would come with destabilizing political and economic costs. Perhaps that was why, a week after Milei’s election victory in November, his soon-to-be foreign minister, Diana Mondino, exhibited a stark change in tone. While visiting Brazil, she reportedly professed to her Brazilian counterparts Argentina’s desire to be a part of a “bigger, improved Mercosur.”
At its founding, Mercosur had a mission to integrate its member states both with one another and with the world. The bloc sought to harness the collective negotiating power of its member states, giving them greater leverage in trade negotiations with external actors. Mercosur also largely eliminated import and export tariffs on trade among its constituent countries. That, combined with its common external tariff designed to create a level internal playing field, has deepened trade among Mercosur’s member states.
As a result of Mercosur, 14 percent of Argentine exports go to Brazil, making it Argentina’s largest export market by a comfortable margin. (China, at 9 percent, is a distant second.) Losing competitive, tariff-free access to Brazil would be devastating for the Argentine economy.
Local industries, such as steel, would struggle to survive on the size of Argentina’s internal market alone. The auto sector, which makes up roughly 10 percent of Argentina’s exports, would be cut off from its principal market, Brazil, in which it faces little competition. Many of the sector’s companies would fold. Unemployment, particularly in Argentina’s more industrialized urban areas, would spike.
Governability is already a concern for the incoming administration. Milei’s allies do not have a majority in either the upper or lower house of Argentina’s Congress. His Liberty Advances coalition controls no provincial governorships. A marked uptick in unemployment would not help matters. Inflation exceeds 160 percent annually, and drastic fiscal and monetary changes—such as the recent decision to devalue the Argentine peso by a record 54 percent and the slashing of transport and utilities subsidies—abound. All this, at a moment when the government’s legislative initiatives will be slow-going. At least for now, it looks as if leaving Mercosur is a political non-starter.
And that’s fortunate for Mercosur. “There’s no Mercosur without Argentina or Brazil,” Cruz Díaz said. Yet persistent frustrations remain—and not just Milei’s or in Argentina. All of Mercosur’s member states are, in one way or another, dissatisfied with one another and with the bloc on the whole.
Uruguay has sparred repeatedly with Brazil and Argentina over flexibilization—that is, allowing countries, particularly the two smaller states, Uruguay and Paraguay, to strike their own trade deals with non-Mercosur members. While proponents argue that loosening the bloc’s restrictions would allow member states to pursue beneficial trade deals, opponents contend that it would weaken Mercosur’s unity (and therefore its leverage in trade negotiations) and could create unfair intra-bloc competition.
Uruguay—a country whose internal market is a fraction of the size of Argentina’s and Brazil’s—is keen to strike out on its own to unilaterally forge trade deals and gain access to foreign markets. Uruguay argues that Mercosur’s rigid, consensus-based decision-making process is overly burdensome for its small economy, which is eager to further integrate with the world. Uruguayan President Luis Lacalle Pou said in March that his country can no longer remain “hostage to Mercosur’s immobility.” Lacalle Pou’s was a stark rebuke of the bloc’s apparent inability to bridge policy disagreements among its members.
“Mercosur’s total paralysis puts Uruguay in an uncomfortable position,” said Federico Lavopa, the director of international trade at the advisory firm Quipu and a former undersecretary of foreign trade during former Argentine President Mauricio Macri’s administration from 2015 to 2019. “Uruguay has decided to keep advancing its goal of integrating with the world, but it’s part of Mercosur, which blocks that possibility.”
Paraguay, meanwhile, is incensed at the tolls that Argentina has unilaterally leveled on cargo traffic on their shared sections of the Paraná River and has sought Mercosur arbitration to resolve the dispute. And everyone is upset at Brazil’s attempts to safeguard its dairy industry by curbing dairy imports from other Mercosur countries.
Adding to those frustrations is the slow simmer of tensions bubbling within the bloc about its vaunted free trade agreement with the European Union. Initiated more than 20 years ago, both parties have been variously hot and cold on the deal. After more than a decade of stagnation, the ideologically aligned right-wing governments of Macri in Argentina and Michel Temer in Brazil reinvigorated the accord in 2016. Three years later, the two unions reached a preliminary deal. But after much fanfare and celebration, the agreement was scuttled by European (primarily French) misgivings with then-Brazilian President Jair Bolsonaro’s climate and deforestation policies. Bolsonaro’s administration had a history of climate change denial and routinely prioritized developing the Amazon rainforest over preserving it.
Most recently, Milei’s predecessor, Alberto Fernández, was the roadblock, citing deindustrialization concerns. But alleged protectionist inclinations out of Europe—France in particular—as well as disagreements over environmental protections have proved sticky. “I appealed to [French President Emmanuel] Macron to stop being so protectionist. … All of them [French presidents] are protectionist about their agricultural products,” Brazilian President Luiz Inácio Lula da Silva said at a Mercosur summit in Rio de Janeiro this month.
Such stagnancy is not out of the ordinary for the bloc, which has proved unable to leverage the collective bargaining power of its member states to gain access to external markets, one of its raisons d’être. Mercosur’s golden age came just after its inception, in the 1990s. “There was great ideological alignment among the governments that created it—liberal governments with a vision of Mercosur as a platform for integrating the countries that formed it with the world,” Lavopa said. Since the turn of the millennium, however, things have moved sluggishly. A lack of political synchrony, particularly between Argentina and Brazil, has seen a once-shared vision for the bloc splinter.
“Their governments have not had the same vision about the role that their countries have to play in the world, so Mercosur has been blocked,” Lavopa said. And given its consensus-based decision-making apparatus—blocwide policies are agreed on unanimously—those differences have ground Mercosur to a halt.
Most of Mercosur’s more recent problems boil down to differing values among its member states. While it is an economic alliance, a customs union (and an imperfect one at that), it’s “above all a political platform,” according to Cruz Díaz, in that member states’ political leaders use Mercosur as a vehicle to actualize their ideas of what their country’s relationship with the world should be. This has manifested in swings between economic liberalism and protectionism, geopolitical balancing, and oscillations between preferences for regional versus global integration.
While at face value Milei’s radical, antagonizing campaign rhetoric suggests that he will do little to bridge political divides, he does potentially spell something different for the bloc—a pivot toward global integration and free trade. Milei’s foreign minister backed the Mercosur-EU deal in its current form, suggesting the incoming administration will work to approve it (even though Fernández, the outgoing president, shot it down just days before leaving office).
This pivot could create new and unexpected alliances. Milei and Lula are far from friends; the Brazilian president snubbed an invitation to his Argentine counterpart’s inauguration. But they both seem to back the Mercosur-EU deal in its current form, potentially giving that agreement new life.
Obviously, it will still need to jump a number of hurdles in Europe. EU leaders could take issue with Milei’s stances on climate change, which he has described as a “socialist hoax,” pausing the deal as they did in response to Bolsonaro’s climate policies.
But an Argentina refocused on pursuing free trade agreements could tip Mercosur toward global integration, signs of which are already showing. At the recent Mercosur summit in Rio, bloc leaders hailed the signing of a free trade deal with Singapore. And Paraguayan President Santiago Peña, the new president pro tempore of Mercosur, intends to forge new agreements with, among others, South Korea and India.
That push—paired with a renewed Argentine effort to strike trade deals, a drive from Lula to deepen south-south economic ties, and everyone’s desire to skirt U.S.-China geopolitical tensions—could give Mercosur’s leaders some common objectives, potentially breathing energy into the bloc.
But that’s only if Mercosur’s leaders choose to lean into those shared goals. Tensions surrounding flexibilization persist. Members will continue to squabble over the speed at which to reduce the common external tariff (CET), which averages roughly 12 percent—markedly higher than, say, the global weighted average of 1.7 percent. Disputes over member states’ pursuing extra-bloc trade deals will also remain.
On these issues, at least from the Brazilian perspective, Milei could play a spoiler role. “Milei’s victory gives some hope to Uruguayan President Lacalle Pou and maybe Santiago Peña in Paraguay,” Cruz Díaz said. “We can assume that he would map much more to a more flexible Mercosur” that Brazil would likely oppose, furthering the bloc’s stagnation.
Whether Mercosur’s leaders can muster the energy to pull the bloc out of its funk will depend on politics. Their ability to do so could decide Mercosur’s future.