Order Code RL33620
CRS Report for Congress
Received through the CRS Web
Mercosur: Evolution and
Implications for U.S. Trade Policy
August 23, 2006
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Mercosur: Evolution and Implications for U.S. Trade
Policy
Summary
Mercosur is the Common Market of the South established by Brazil, Argentina,
Uruguay, and Paraguay in 1991 to improve political and economic cooperation in the
region following a lengthy period of military rule and mutual distrust. On July 2,
2006, Venezuela acceded to the pact as its first new full member, making Mercosur
the undisputed economic counterweight to U.S. trade policy in the region, but raising
questions about how it may shift regional political and trade dynamics. Collectively,
the Mercosur countries have a diversified trade relationship with the world. The
United States is the largest trade partner, the European Union (EU) a close second,
with each claiming about 25% of total Mercosur trade. By contrast, the four
Mercosur countries together account for only 2% of total U.S. trade. Including U.S.
imports of Venezuelan oil, the “Mercosur 5” constitute 3.5% of total U.S. trade.
The Mercosur pact calls for an incremental path to a common market, but after
15 years only a limited customs union has been achieved. From the outset, Mercosur
struggled to reconcile a basic inconsistency in its goals for partial economic union:
how to achieve trade 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 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 new bilateral
safeguards, and a retreat from the commitment to deeper integration.
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. These are limited agreements and unlikely paths to continental
economic integration. Internal conflicts have highlighted Mercosur’s institutional
weaknesses and slowed the integration process. Uruguay has diversified its trade
more toward the United States, and is showing signs of reconsidering the benefits of
an “exclusive” Mercosur trade arrangement. Venezuela’s accession to the pact adds
a decidedly anti-American factor and may complicate both Mercosur’s internal
balance and regional trade relationships.
It appears Mercosur has opted for political cohesion over deeper economic
integration. Mercosur, especially with Venezuela, will likely continue to resist
movement toward a Free Trade Area of the Americas (FTAA), with Brazil in
particular viewing the World Trade Organization (WTO) as the preferred alternative
for achieving its trade policy goals. Given this impasse, it seems that the United
States and Mercosur may continue to expand their influence through smaller trade
agreements, presenting the possibility of two very different overlapping trading
systems emerging in the Western Hemisphere centered around the U.S. and Brazilian
economies. Few if any view this as an economically and administratively optimal
alternative, raising a number of questions regarding the future direction of U.S. trade
policy in Latin America.

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Contents
U.S.-Mercosur Trade Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Formation and Institutional Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Intra-Mercosur Trade and Internal Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Expanding Mercosur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Venezuelan Accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Mercosur Internal Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Implications for U.S. Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Appendix 1. U.S. Merchandise Trade with Mercosur . . . . . . . . . . . . . . . . . . . . 13
List of Figures
Figure 1. U.S.-“Mercosur-4” Balance of Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Intra-Mercosur Exports as Percent of Total, 1990-2005 . . . . . . . . . . . . 5

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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 economic and
political cooperation. Since then, Mercosur has struggled to achieve deep economic
integration, but has made strides toward political cohesion and emerged as an
influential voice in regional trade negotiations. In particular, Mercosur has been the
center of resistence to completing the proposed Free Trade Area of the Americas
(FTAA).1 On July 2, 2006, Venezuela acceded to the pact as its first new full
member, making Mercosur the undisputed economic counterweight to U.S. trade
policy in the region, and perhaps diminishing further expectations for a hemispheric-
wide trade agreement. This report examines the evolution of Mercosur’s policy
decisions and performance as important elements for understanding the challenges
to U.S. trade policy in Latin America. It will be updated periodically.
U.S.-Mercosur Trade Prospects
The Mercosur countries are experiencing a period of strong economic growth
in the aftermath of a deep recession caused by major financial crises in Brazil (1999)
and Argentina (2001). They currently have competitive exchange rates, stable
macroeconomic conditions, and improved terms of trade, which have opened the
door for significant export growth, spurred also by rising prices and demand for many
of their products, particularly primary goods. Strong economic growth at home has
also increased demand for imports. Brazil and Argentina are running sizable trade
surpluses, with the smaller economies, Uruguay and Paraguay, maintaining small
trade deficits.2
The Mercosur countries have a well-diversified trade relationship with the
world, but the United States still accounts for much of Mercosur’s rebound in trade.
It is Mercosur’s largest trade partner, with the European Union as a close second,
each claiming about 25% of total Mercosur trade, followed by Asia with 10%. It is
the largest market for Mercosur exports and a major source of its capital and
technology imports. By contrast, in 2005, the four Mercosur countries together
contributed to only 2.0% of total U.S. trade. With the recent addition of Venezuela,
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. Integration and Regional Programs Department.
MERCOSUR Report: 2004-2005. No. 10, February 2006. pp. 21-24.

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CRS-2
the “Mercosur 5” make up 3.5% of total U.S. trade, the increase accounted for almost
entirely by U.S. imports of Venezuelan oil. Collectively, the “Mercosur 4” would
rank 10th for U.S. exports and 15th for U.S. imports, just ahead of Brazil by itself, the
largest economy in South America, representing over three-quarters of total Mercosur
trade with the United States.3
Figure 1. U.S.-“Mercosur-4” Balance of Trade
$ millions
30000
25000
20000
15000
10000
5000
0
-5000
-10000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
U.S. Exports
U.S. Imports
U.S. Trade Balance
Data Source: U.S. Department of Commerce.
Trends in U.S. trade with the original “Mercosur-4” appear in Figure 1
(individual country data for all five appear in Appendix 1). As may be seen, U.S.
imports from Mercosur grew steadily over the past decade, paralleling U.S. economic
growth and the concomitant rise in U.S. demand for imports worldwide. Growth in
U.S. exports was flat from 1996 to 2001, and then fell precipitously because of deep
recessions in Brazil and Argentina. U.S. exports began to rebound in 2003 with
Mercosur’s economic recovery, but have just returned to levels attained ten years
ago. During Mercosur’s economic downturn, the U.S. trade balance shifted from a
net surplus to deficit. Although macroeconomic trends explain most of these trade
patterns, policies deterring trade liberalization remain an important issue for U.S.-
Mercosur trade relations given their mutual interest in reducing barriers to trade and
resolving, eventually, negotiations for a Free Trade Area of the Americas (FTAA).
The major U.S. exports to Mercosur include mostly capital and high technology
goods such as mechanical and electrical machinery (computers), vehicles, aircraft,
3 For details on U.S.-Brazil trade relations, see CRS Report RL33258, Brazilian Trade
Policy and the United States, by J. F. Hornbeck.

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CRS-3
medical equipment, and pharmaceuticals. The primary U.S. imports are components
for machinery and vehicles, agricultural products, and oil if Venezuela is included.
Despite being a relatively small U.S. trading partner, Mercosur contains the largest
South American economies, and so prospects for significant trade and investment
growth may be driving the ongoing interest in maintaining cordial and cooperative
relations, while also exploring avenues toward deeper Western Hemisphere
integration, including the FTAA.
Formation and Institutional Development
Mercosur evolved from a series of mid-1980s bilateral agreements between
Argentina and Brazil devised to foster new levels of political and economic openness
and cooperation following a lengthy period of military rule and mutual distrust. As
much as it may be considered a “political project,” regional integration was also a
response to economic stagnation, the 1980s debt crisis, and expanding regional trade
agreements in the European Union (EU) and North America. The Treaty of
Asunción called for the creation of a common market between Brazil, Argentina,
Uruguay, and Paraguay for the stated purpose of accelerating economic development
and social justice. It aims to improve living conditions in all member countries
through “balanced and managed growth in trade flows.”4
The treaty was made under guidelines of the Latin American Integration
Association (Asociación Latinoamericana de Integración — ALADI). ALADI is a
regional trade organization that provides a common, yet flexible framework for
establishing sub-regional trade pacts that encourages inclusiveness and minimizing
harm to non-members. This “umbrella” organization oversees integration pacts that
are both “regional and partial in scope,” in contrast to the U.S. free trade agreement
(FTA) model that tends to be more comprehensive. As emphasized by ALADI,
Mercosur adopted an approach based on “gradualism, flexibility, and balance,” and
allows for the negotiated accession of other ALADI member countries.5
Mercosur envisioned 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.6 It adopted a common
trade policy and a schedule of common external tariffs (CETs) that applied to 85%
4 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.
5 Porrata-Doria, MERCOSUR: The Common Market of the Southern Cone, p. 14-16.
6 A free trade agreement (FTA) eliminates tariffs on goods exchanged among participating
countries. In a customs union, the 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.

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CRS-4
of tariff line items, but with some very important exceptions for sensitive sectors
such as automobiles, capital goods, computers, and other technology products. The
exceptions were to be phased out by 2006, but many have been extended to 2011.7
The achievement of a full common market remains a distant, if not illusory goal.
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 a designed 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 remain a continuing challenge,
especially between Brazil and Argentina.
All parties were required to accept a common set of rights and obligations
(Article 2), with little allowance for special and differentiated 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.8
Intra-Mercosur Trade and Internal Dynamics
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, the decade’s lengthy global economic expansion, and
other economic reforms. There is, however, an equally evident and sudden collapse
of this trend, with intra-Mercosur exports falling from 25% of total trade in 1998 to
13% in 2005.9 This setback reflects 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 developed countries.10
7 IDB, MERCOSUR Report: 2004-2005, p. 70.
8 For details on the legal documents, see Porrata-Doria, Jr., Rafael A. MERCOSUR: The
Common Market of the Southern Cone. Durham: Carolina Academic Press. 2005.
9 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.
10 Phillips, Nicola. The Southern Cone Model: The Political Economy of Regional
Capitalist Development in Latin America. London: Routledge, Taylor & Francis Group.
2004. p. 94-95.

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CRS-5
From the outset, Mercosur struggled to reconcile a basic inconsistency of partial
economic union: how to achieve trade 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. At the heart of the
problem are “natural asymmetries” that exist among four economies with large
discrepancies in size, structure, resource endowment, and level of development. In
addition to the absolute differences in size, relative differences fluctuate widely over
time. For example, Argentina’s economy tends to be half that of Brazil’s, yet this
metric has ranged from 60% in 1992 to 22% in 2002 because of dramatic shifts in
relative economic performance, in this case due to financial crisis and recession in
Argentina.11
Figure 2. Intra-Mercosur Exports as Percent of Total, 1990-2005
Asia Financial Crisis
25
Brazilian Devaluation
Chile and Bolvia
Associate Members
20
Argentina’s Financial Crisis
15
Mercosur Formed
10
CAN and CSN Agreements
Venezuela Accession (2006)
5
1990
1992
1994
1996
1998
2000
2002
2004
Data Source: Inter-American Development Bank, MERCOSUR Report, February 2006, p. 21.
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, as seen
in Figure 2, causing large trade imbalances that can threaten the stability of intra-
Mercosur relations.12 When they operate in tandem, the Mercosur policy adjustment
framework has proven to be vulnerable, particularly at times when the countries face
external economic shocks.
11 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.
12 For details, see IDB, MERCOSUR Report: 2004-2005, pp. 39-41.

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CRS-6
Such a confluence of events occurred in the late 1990s following a series of
external shocks, beginning in July 1997 with the Asian financial crisis. It was
followed by the Russian default in summer 1998, which directly affected concerns
over sovereign financial vulnerability in Brazil, causing prolonged capital flight in
the fall of 1998, Brazil’s steep currency devaluation in January 1999, and resulting
loss of its fixed exchange rate 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. This was compounded by Argentina’s
lengthy recession that also began in 1998, leading to its own, far more serious,
financial crisis. The Brazilian devaluation further exacerbated Argentina’s crisis,
which ended with the loss of its fixed exchange rate in December 2001.
Mercosur’s leaders, aware of macroeconomic weaknesses exposed by these
crises, proposed a Mercosur Relaunch program in May 2000. It formally reaffirmed
a commitment to deeper integration and those policies that had so far proved elusive,
but were still necessary to reach the common market goal. The countries agreed to
take the first steps toward macroeconomic coordination by harmonizing their
statistics and establishing “convergence criteria” on fiscal policies, prices, and public
debt. They formally discouraged adoption of measures that would restrict reciprocal
trade and reinforced those that would limit recourse to antidumping investigation and
improve dispute settlement. This renewed enthusiasm soon faded, however, as it
proved unable to overcome the effects of financial crises, in particular, the fall in
trade between Argentina and Brazil, which accounts for 90% of intra-Mercosur
commercial exchange.13 Relations became increasingly strained, with Argentina
applying temporary restrictions on Brazilian imports, further reducing trade and
diminishing incentives for deeper economic integration.
Since 2002, intra-Mercosur trade has rebounded slightly with economic growth
and stability, but this did not alleviate problems with intra-Mercosur trade
imbalances. Argentina’s prolonged recession reduced demand for imports, and so
it was able to maintain a small trade surplus with Brazil even after the Brazilian
devaluation. With Argentina’s economic recovery in 2003, however, it began to run
large trade deficits with Brazil, mostly in industrial goods. Argentine exports fell
from 13% of Brazilian imports in 1998 to 8% in 2004. Brazilian exports, in contrast,
rose from 22% to 34% 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; and 3) Brazil’s export promotion policy emphasizing
greater use of domestic inputs.14
Mercosur was meant to achieve balanced gains for its members, but there was
no enforceable mechanism to guard against sudden large trade imbalances. In 2003,
Argentina once again called for a managed solution to the growing and, what some
13 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.
14 Inter-American Development Bank, MERCOSUR Report: 2004-2005, pp. 30-32.
Heymann and Ramos, MERCOSUR in Transition, p. 20.

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CRS-7
feared may be a structural bilateral trade imbalance with Brazil. By June 2004,
Argentina had raised trade barriers on Brazilian appliances to protect its domestic
production against what it considered to be its neighbor’s unfair industrial
development strategy. This was done in the context of Argentina’s decision to “re-
industrialize” its own economy, a policy that the sharp rise in Brazilian exports
threatened.15
By February 2006, over the objections of Brazilian industry, Brazil and
Argentina agreed to a Competitive Adaptation Mechanism (CAM). It allows for the
application of tariffs and quotas in cases where sudden increases in imports of one
country are deemed to hurt an industry of the other (safeguards). The CAM is a
major policy shift for Mercosur and raises multiple issues. First, it is a bilateral
arrangement between Brazil and Argentina established under the ALADI system and
not governed by Mercosur. Second, import restrictions represent a retreat from the
stated free trade philosophy of Mercosur, increasing doubts about its ability to
proceed toward a common market. Third, the CAM has no enforcement mechanism
under ALADI. In short, it presents serious institutional problems and may eventually
undermine the Mercosur agreement even as it attempts to restore balance to the
largest bilateral relationship within it.16
Expanding Mercosur
As Mercosur’s relaunch effort dwindled, it shifted emphasis to expanding
membership. To date, Mercosur has entered into “economic complementarity
agreements” with most of South America, under ALADI guidelines. Also referred
to as “associate membership,” this arrangement is limited largely to the long-term
pursuit of a free trade agreement, supported by sectoral 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. In 1996, Chile and Bolivia, following lengthy
negotiations, became the first additions as associate members.17 Peru followed in
2003 (not implemented) and Venezuela in 2004. Mexico has observer status.
In October 2004, after years of talks, Mercosur and the Andean Community of
Nations (Comunidad Andina de Naciones — CAN) signed a trade pact, giving all
Andean countries the equivalent of associate membership. This breakthrough led
directly to creation of the South American Community of Nations (Comunidad
Sudamericana de Naciones — CSN) two months later in a pact that included 12
countries (those in Mercosur, CAN, along with Chile, Guyana, and Suriname). The
CAN and CSN are limited trade arrangements and in many ways not true regional
15 IDB, MERCOSUR Report: 2004-05, p. 47.
16 Haskel, David. Bilateral Agreements: Argentina, Brazil Start Safeguard System To
Shield Industries from Mutual Imports. International Trade Reporter. February 7, 2006.
p. 247, and Inter-American Development Bank. Southern Common Market: New
Integration and Co-operation Agreements Between Argentina and Brazil.
[http://www.iadb.org/intal]
17 Porrata-Doria, MERCOSUR: The Common Market of the Southern Cone, pp. 123-124.

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agreements. Although they have common rules adopted by Mercosur and the CAN,
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 agreement would be completed.18 These
constraints limit prospects for deep continental integration. Nonetheless, sectoral
initiatives, such as the proposed South American gas pipeline, already reflect a
growing attitude of cooperation and collective self-determination that is taking hold
in the region, and which now has an institutional presence in the CSN.
Mercosur’s other negotiations have had mixed success. Trade talks with the
European Union 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 on market access for industrial goods, services trade, enforceable
intellectual property rights, and investment provisions. Speculation has also turned
to dwindling interest by the EU given the stalemated FTAA, the growing EU
perception of Mercosur as less than a credible collective negotiating authority, and
the desire by all parties for a “successful” conclusion to the Doha Round, although
this appears to be increasingly in doubt. South-South trade talks have advanced only
in limited form. 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.19
Venezuelan Accession
On July 4, 2006, Mercosur agreed to accept Venezuela as the first additional full
member of the pact. The accession process was accelerated in mid-2006 at the behest
of President Hugo Chávez as being consistent with his effort to unify South America
and advance his “Bolivarian agenda” that generally stands in opposition to U.S.
influence in the region. Chávez’s expedited approach was unhindered by any need
for consultation with legislative or businesses interests. The process was initially
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
dealt 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, 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 and
other obligations of the pact.20
18 Inter-American Development Bank, MERCOSUR Report No. 10, 2004-2005, p. 93.
19 Ibid., pp. 90 and 96-100.
20 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.

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CRS-9
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 now
represents three-quarters of South American GDP. Venezuela also promised
immediate selective duty-free treatment to 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.21
The political motivations for Venezuela’s accession may be even more
compelling. Venezuela is now a negotiating member of Mercosur, increasing
Mercosur’s influence in intra-pact and external trade negotiations, likely to the
detriment of U.S. interests. The marginal effect may be to strengthen resolve in some
countries to challenge U.S. influence in South America, although Brazil and others
may prove to be effective moderating influences. Uruguay and Paraguay may also
view Venezuela as having a diluting force on Brazil’s political dominance in the pact.
The accession, however, may have unintended regional consequences should
countries be forced 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 American countries, Panama, Colombia, Peru, and
Chile.22 This prospect is even further muddled by reports that Mexico may also seek
full membership in Mercosur.
Mercosur Internal Challenges
Mercosur must also deal with two important internal disagreements. The first
is Argentina’s ongoing dispute with Uruguay over the planned construction of two
foreign-financed pulp plants on the Uruguay River. Argentina alleges that they are
in violation of a bilateral environmental protocol the two countries signed in 1975.
Although a World Bank review concludes that the plants pose no long-term
environmental problems, the issue continues to spawn protests and diplomatic flare-
ups. Uruguay turned to the Mercosur system for dispute settlement, but Argentina,
which then held the Pro Tempore Presidency of Mercosur (a rotating assignment),
blocked the request, turning instead to the International Court of Justice (ICJ) at The
Hague for arbitration.23 The ICJ denied Argentina’s request for an injunction to
terminate construction and set January 15, 2007, as the final date for Argentina to
submit its case. The dispute remains a serious point of contention between the two
21 Ibid.
22 Chauvin, Lucien O. Peru Proposes New Trade Bloc of Hemisphere Nations on Pacific
Coast. International Trade Reporter. BNA, Inc. August 3, 2006. p. 1172.
23 This episode points to Mercosur’s observed highly politicized dispute settlement and
decision making processes that can allow for resolutions based on “political whim, unilateral
action, and non-observance of agreed policy commitments.” Phillips, op. cit., p. 99.

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countries and failure to address it within Mercosur raises a question about its
institutional capacity.24
A second recurring challenge to Mercosur concerns asymmetries in the exercise
of power and benefits from trade. Both Paraguay and Uruguay have complained that
Mercosur serves the interests of the larger countries disproportionally, including
doing little to encourage their export growth. In part, this is a structural element of
the Mercosur agreement that promises “balanced” benefits, but which gives little in
the way of special and differential treatment to the smaller economies and allows
Mercosur diplomacy to occur bilaterally through presidential summitry rather than
the formal Mercosur system.25 The safeguards mechanism adopted by Brazil and
Argentina is another example, pointing to asymmetrical arrangements despite the
Mercosur principle of reciprocity in rights and obligations.
Uruguay has expressed its dissatisfaction by threatening to expand its trade
agreement affiliations outside of Mercosur. It has a longstanding Trade and
Investment Framework Agreement with the United States and in 2006 ratified a
Bilateral Investment Treaty (still to be acted on by the full U.S. Senate). Uruguay has
made known its interest in discussing the possibility of an FTA with the United
States, but might not be able to retain its full membership in Mercosur should this
come about. Although Brazil and Argentina, at times, have been critical of
Uruguay’s threat to begin negotiating an FTA with the United States, the prospect has
convinced Brazil to acknowledge openly the need to address the growing concerns
of the smaller Mercosur members, although no corrective policies have been made.26
Implications for U.S. Trade Policy
The United States has historically supported Mercosur as a potential
complementary path to meeting its own goal of Western Hemisphere economic
integration. Mercosur, however, is evolving in ways that do not bode well for the
U.S.-driven FTAA by reemphasizing its political goals rooted in sub-regional
stability and cooperation. In fact, Mercosur has taken a step backward in the
commitment to its own common market by adopting a bilateral safeguards agreement
between Brazil and Argentina, failing to adjudicate internal bilateral economic
problems between Argentina and Uruguay, and ceasing any pretense that deeper
integration is feasible in the near future.
The recent addition of Venezuela reinforces this political imperative given that
Venezuela-Mercosur trade is relatively small. Venezuela has also been allowed four
24 One Year On, Small Dispute Threatens to Fracture Mercosur. Latin American Regional
Report. Brazil and Southern Cone. April 2006. p. 1 and Puentes, Alberto. Uruguay.
Emerging Markets Economics Daily. July 14, 2006. p. 4.
25 Phillips, op. cit., p. 99.
26 Haskel, David. Regional Agreements: Uruguay May End Full Mercosur Membership To
Halt Regional Dependence, President Says. International Trade Reporter. BNA, Inc. May
4, 2006. p. 692.

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CRS-11
years to adopt the CET, which further weakens Mercosur’s claim to be a functioning
customs union with all members adhering to a common set of rights and obligations.
The Venezuelan accession may also rebalance the internal Mercosur power structure
in unpredictable ways, raising questions over the possible effect on trade relations in
the region given Chávez’s open anti-Americanism and determination to create a
united South America in opposition to U.S. economic and political “imperialism.”27
Internal challenges may further continue to hinder Mercosur’s ability to advance
economic complementarity. Mercosur faces ongoing complaints from the smaller
partners, whose rising expectations for export growth may not be easily satisfied, and
who may be exhibiting lingering doubts about deeper economic integration in the
aftermath of major recessions caused by financial crises in the two larger countries.
Uruguay’s dispute with Argentina and export diversification away from Mercosur
toward the U.S. market, not to mention its stated interest in an FTA with the United
States, presents another challenge to Mercosur cohesiveness. Mercosur’s new
alignment with Venezuela may also point to a not-so-subtle shift in regional trade
dynamics. 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. With Venezuela’s new-found status as a voting member of Mercosur,
the United States may find it more difficult to isolate Chávez’s unabashedly negative
influence on the FTAA negotiations.
Given the apparent impasse in the FTAA talks, the United States and Mercosur
will likely continue to expand their influence through smaller trade arrangements,
presenting the possibility of two overlapping, if not competing trading systems
emerging in the Western Hemisphere centered around the U.S. and Brazilian
economies. In fact, Peru’s proposed Community of the Pacific points to such a
bifurcated trading system, with one group linked by U.S.-style FTAs (Canada,
Mexico, Chile, Central America, the Caribbean, Panama, Peru, and Colombia),
juxtaposed with a Mercosur customs union-based pact (Brazil, Argentina, Paraguay,
Uruguay, Venezuela, Bolivia, and Ecuador).
Any type of dual regional trading system would have awkward implications for
businesses trying to operate under decidedly different commercial rules and for
countries with multiple political and economic affiliations. For example, Chile has
an open trade policy and has announced it will accept formal associate membership
in the CAN in August 2006, while also continuing to encourage commercial relations
with both Mercosur and the United States. Talk of an Uruguay-U.S. FTA (a long
way off at best) may suggest that allegiances could change. Ecuador and Bolivia
appear unlikely to conclude an FTA with the United States, and key congressional
leaders have made clear that in light of recent nationalizations of energy firms, they
may oppose renewing preferential treatment for their exports through extension of
the expiring Andean Trade Preference Act, perhaps leading to a choice between a
U.S.-FTA or Mercosur membership.28
27 Obiko Pearson, Natalie. Chávez Hosts 6-Nation Trade Summit. Associated Press. July
5, 2006.
28 Brevetti, Rossella. Finance Panel Sends Administration Legislative Recommendations
(continued...)

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CRS-12
Finally, an important question for Mercosur’s future is whether Venezuela will
come to be a reliable and cooperative partner within the Mercosur system, or a
destabilizing influence on the intricate, yet enduring, political and economic balances
that have been the main reason for Mercosur’s existence. The problem with over-
politicizing a trade agreement is that political issues can be narrowly focused and
eventually run head on into economic priorities. For U.S.-Mercosur trade relations,
the issue may have to be recast from basic premises, suggesting perhaps that the
decision to continue pursuing a hemispheric trade agreement may not come down to
whether Mercosur or the United States need each other, but whether the two can
agree anew that closer commercial and economic ties are happening with or without
formal agreement between nations and should (or can) still be pursued as matter of
policy for their promise of long-term mutual benefits.
28 (...continued)
on Peru FTA. International Trade Reporter. August 3, 2006. p. 1170.

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CRS-13
Appendix 1. U.S. Merchandise Trade with Mercosur
($ millions)
% Change % Change
Country
2001
2002
2003
2004
2005
2004-05
2001-05
U.S. Exports
Brazil
15,879
12,376
11,211
13,897
15,372
10.6%
-3.2%
Argentina
3,920
1,586
2,437
3,388
4,122
21.7%
5.2%
Uruguay
406
209
327
326
357
9.5%
-12.1%
Paraguay
389
433
484
623
896
43.8%
130.3%
Mercosur 4
20,594
14,604
14,459
18,234
20,747
13.8%
0.7%
Venezuela
5,642
4,430
2,831
4,767
6,421
34.7%
13.8%
Mercosur 5
26,236
19,034
17,290
23,001
27,168
18.1%
3.6%
Mexico
101,296
97,470
97,412
110,834
120,365
8.6%
18.8%
LAC*
58,157
51,551
51,946
61,465
72,407
17.8%
24.5%
Latin America
159,453
149,021
149,358
172,299
192,772
11.9%
20.9%
World
729,100
693,103
724,771
818,775
905,978
10.7%
24.3%
U.S. Imports
Brazil
14,466
14,781
17,910
21,160
24,436
15.5%
68.9%
Argentina
3,013
3,187
3,170
3,745
4,584
22.4%
52.1%
Uruguay
228
193
256
580
732
26.2%
221.1%
Paraguay
33
44
53
59
52
-11.9%
57.6%
Mercosur 4
17,740
18,205
21,389
25,544
29,804
16.7%
68.0%
Venezuela 15,250
15,094
17,136
24,921
33,978
36.3%
122.8%
Mercosur 5
32,990
33,299
38,525
50,465
63,782
26.4%
93.3%
Mexico
131,338
134,616
138,060
155,902
170,109
9.1%
29.5%
LAC*
67,370
69,503
78,829
98,647
122,873
24.6%
82.4%
Latin America
198,708
204,119
216,889
254,549
292,982
15.1%
47.4%
World
1,140,999 1,161,366 1,257,121 1,469,704 1,673,455
13.9%
46.7%
U.S. Balance of Trade
Brazil
1,413
-2,405
-6,699
-7,263
-9,064
Argentina
907
-1,601
-733
-357
-462
Uruguay
178
16
71
-254
-375
Paraguay
356
389
431
564
844
Mercosur 4
2,854
-3,601
-6,930
-7,310
-9,057
Venezuela
-9,608
-10,664
-14,305
-20,154
-27,557
Mercosur 5
-6,754
-14,265
-21,235
-27,464
-36,614
Mexico
-30,042
-37,146
-40,648
-45,068
-49,744
LAC*
-9,213
-17,952
-26,883
-37,182
-50,466
Latin America
-39,256
-55,098
-67,531
-82,250
-100,210
World
-411,899
-468,263
-532,350
-650,929
-767,477
Source: Table created by CRS from U.S. Department of Commerce data.
* Latin America and the Caribbean, except Mexico.

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