The Mercosur bloc of South American nations is one of the world's largest multilateral free trade agreements, covering almost 300 million people across five countries with a combined GDP of $2.2 trillion, making it the world’s fifth-largest economy according to the World Bank.
However, the bloc has been dealing with a range of challenges in recent years. Although the ascension of Bolivia as a full member in 2024 increased its size, stagnating economies and political disagreements have brought difficulties. So what is the current state of affairs in South America and what may the coming years hold for Mercosur?
The impact of Argentina
One of the biggest challenges facing the bloc in the past year has been the new government in Argentina. Led by populist Javier Milei, who had vowed to radically reform his country, there have been concerns that his approach to trade would put the bloc in peril. Indeed, Mr Milei skipped a Mercosur summit earlier this year and has a very different approach to trade than his Brazilian counterpart Lula da Silva.
While Mr Melei is a supporter of free trade, his view is that rules should be left to the market rather than defined by groups such as Mercosur. Mr Da Silva, on the other hand, has spoken of his desire to 'relaunch' the bloc and build closer integration between its members - a position in stark opposition to Mr Melei's.
The challenges of weak growth
A weak global economy has also created difficulties for Mercosur. According to the Economic Commission for Latin America and the Caribbean, exports from the bloc fell by 4.1 percent last year. Meanwhile, the value of imports also fell by 11.7 percent overall. This was partially blamed on weak economic growth around the world and drop in international prices for its key goods.
Trade within the bloc has also been subdued. Earlier this year, it was noted by the Associated Press (AP) that this only accounts for around 15 percent of member countries' total imports and exports. By comparison, figures in Europe for intra-EU trade in 2023 range from 22 percent for Cyprus to 81 percent for Czechia.
One reason for this is the fact that Mercosur members tend to have similar economies and produce many of the same goods, which limits demand for intra-bloc trade. Christopher Ecclestone, a strategist with investment bank Hallgarten & Company, told the AP: “It’s not the best idea for a free trade area if you’re all producing the same things at the same prices.”
What impact could outside trade deals have?
To deal with this issue, new markets outside South America will be increasingly important. However, a major issue for Mercosur has been its focus on protectionism and lack of outside trade deals. So far, it has just two FTAs outside of South America, with Egypt and Israel. However, a proposed deal with the EU could significantly change the landscape - if it can be agreed by all parties.
The deal, which would offer Mercosur expanded access to European markets in key sectors such as agriculture, has proven controversial in Europe, with France in particular expressing opposition. At the recent G20 summit in Brazil, president Emmanual Macron told Mr Milei that his country would not be signing the deal in its current form, although it does not appear France has enough support from its EU neighbors to block the agreement.
If it is ratified, the FTA aims to remove tariffs on 100 percent of industrial goods exported from Mercosur to the EU, while Mercosur would remove tariffs on 90 percent of items heading the other way, including cars, machinery, IT equipment, textiles, chocolate, spirits and wine.
This could help South American producers find new markets overseas .However, with political disagreements both within the bloc and with Europe still high, it remains to be seen whether it will help boost economies on the continent.
