Backgrounder

Mercosur: South
Mercosur: South America’s
America’s Fractious TradeFractious
Bloc Trade Bloc
Three decades after its founding, Latin America’s largest trade bloc faces multiple challenges, including
persistent internal division and the economic disruption caused by the COVID-19 pandemic.

WRITTEN BY
CFR.org Editors

UPDATED
Last updated December 17, 2021 11:34 am (EST)

Summary
Mercosur is an economic and political bloc consisting of Argentina, Brazil, Paraguay, and Uruguay.
Venezuela was suspended indefinitely in 2016.

Founded in 1991 to create a common market, spur development, and bolster democracy, Mercosur saw
early successes, including a tenfold increase in trade within the bloc in its first decade. 

Mercosur has signed trade deals with several countries, but bigger deals, including with the European
Union and the United States, remain elusive, and the COVID-19 crisis has battered the bloc’s
economies.

Introduction
Mercosur, or the Southern Common Market, is an economic and political bloc originally
comprising Argentina, Brazil, Paraguay, and Uruguay. Created during a period when
longtime rivals Argentina and Brazil were seeking to improve relations, the bloc saw some
early successes, including a tenfold increase in trade within the group in the 1990s. 

In recent years, however, Mercosur has struggled to open to other markets. The
implementation of a landmark draft trade deal it signed with the European Union (EU) in
2019 has been stalled over environmental concerns and European opposition. At the same
time, China’s influence in Latin America continues to grow. Some experts have also
questioned the bloc’s commitment to democracy. Additionally, it faces challenges
including the COVID-19 pandemic, increasing fragmentation among member countries,
and unstable trade relations with the United States.
Which countries are in Mercosur?
Argentina, Brazil,
Mercosur: Paraguay,
South and
America’s Uruguay—Mercosur’s
Fractious Trade Bloc founding countries—are full
members. Venezuela joined as a full member in 2012, but it was suspended indefinitely in
late 2016 for failing to comply with the bloc’s democratic principles. 

In 2020, the founding countries had a combined gross domestic product (GDP) of roughly
$1.9 trillion, according to World Bank data, making Mercosur one of the world’s largest
economic blocs. In comparison, Latin America’s second-largest trade group, the Pacific
Alliance, had a combined GDP of about $1.8 trillion. The onset of the COVID-19 pandemic
inflicted considerable economic damage on the bloc: That same year, Brazil’s economy
shrank about 4 percent; likewise, Argentina’s economy contracted nearly 10 percent, and
the country remains embroiled in a recession. 

Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname are associate members of
Mercosur. They receive tariff reductions when trading with the full members but do not
enjoy full voting rights or free access to their markets. Bolivia was invited to join as a full
member in 2012, but its accession has not yet received authorization from Brazil’s
Congress.

Mercosur’s Member Countries

Associate members Full members

Suspended
Venezuela was suspended from
the bloc in December 2016.
GUYANA
VENEZUELA SURINAME
FRENCH
COLOMBIA GUIANA

ECUADOR

PERU BRAZIL

BOLIVIA
 In progress
Bolivia is in the process of
becoming a full member. PARAGUAY
Mercosur: South America’s Fractious Trade Bloc

CHILE
ARGENTINA

URUGUAY

Source: 
Mercosur.

Why was Mercosur created?

Mercosur was created in 1991 when Argentina, Brazil, Paraguay, and Uruguay signed the
Treaty of Asuncion [PDF], an accord calling for the “free movement of goods, services, and
factors of production between countries.” The four countries agreed to eliminate customs
duties, implement a common external tariff of 35 percent on certain imports from outside
the bloc, and adopt a common trade policy toward outside countries and blocs. The
charter members hoped to form a common market similar to that of the EU to increase
business and investment opportunities for regional industries and encourage local
development. The bloc has even considered introducing a common currency. 

“Mercosur had grand ambitions,” says CFR’s Shannon K. O’Neil. “It was going to be a
customs union with a political side.” The Mercosur stamp is emblazoned on member
countries’ passports, and license plates display the Mercosur symbol. Residents of the bloc
are authorized to live and work anywhere within it. In 1994, the group signed the Protocol
of Ouro Preto, formalizing its status as a customs union.
Mercosur was created in large part to cement a rapprochement between Argentina and
Brazil, whose relationship had long been defined by rivalry. Together, the two countries
Mercosur: South America’s Fractious Trade Bloc
account for nearly 90 percent of the bloc’s GDP and 95 percent of its population. Some
critics say Argentina and Brazil wanted Mercosur simply as a trade shield. The bloc often
“is less about opening up but actually about protecting Brazilian and Argentine industries
from global competition,” says Oliver Stuenkel, an associate professor at the Getulio
Vargas Foundation in Sao Paulo.

How does Mercosur work?

The bloc’s highest decision-making body, the Common Market Council, provides a high-
level forum for coordinating foreign and economic policy. The group consists of the
foreign and economy ministers of each member state, or their equivalent, and decisions
are made by consensus. The group’s presidency rotates every six months among its full
members, following alphabetical order. Other bodies include the Common Market Group,
which coordinates macroeconomic policies; a trade commission; a parliament, known as
Parlasur, which serves an advisory role; and the Structural Convergence Fund (FOCEM),
which coordinates regional infrastructure projects.

FOCEM projects, such as building highways and bridges and developing waterways, are
funded by member-country contributions [PDF] determined by a formula that accounts for
each country’s GDP. Brazil, with a GDP of $1.4 trillion, contributes 60 percent, Argentina
30 percent, and Paraguay and Uruguay 5 percent each. More than $1 billion in
nonrefundable loans has been disbursed since the fund was created in 2004.

Has Mercosur spurred economic development?

Internal trade has grown rapidly, jumping from $4 billion in 1990 to more than $41 billion
by 2010. In October 2021, Argentina and Brazil agreed to a 10 percent reduction in the
bloc’s tariff to help bolster further economic growth among member countries.
Mercosur Trade Has Grown, Albeit Unevenly
Full Mercosur members’ trade in goods (current dollars)
Mercosur: South America’s Fractious Trade Bloc
Trade with each other Trade with the rest of the world

700B

600B

500B

400B

300B

200B

100B

0
1995 2000 2005 2010

Note: The full Mercosur members are Argentina, Brazil, Paraguay, and Uruguay.
Venezuela is not included, as it was suspended from the bloc in 2016.

Source: UN Comtrade Database.

However, trade relations with the rest of the world have been uneven. In its first decade,
Mercosur inked economic cooperation agreements with Bolivia, Chile, Israel, and Peru,
and in 2004, it signed a preferential trade agreement with India. But bigger deals have
proved elusive. While its most recent free trade agreement (FTA), with Egypt, took effect
in 2017, negotiations with Canada and South Korea remain underway, and a deal with the
EU has hit roadblocks. 

There are currently no trade deals between the United States and any Mercosur countries
or the bloc itself, and relations have at times been strained. In 1994, U.S. President Bill
Clinton proposed the Free Trade Area of the Americas (FTAA), which would have
eliminated or reduced trade barriers among the countries in the Western Hemisphere,
excluding Cuba. The FTAA was to be completed by 2005, but by 2004, negotiations had
stalled as several Latin American nations, including Mercosur members Argentina and
Brazil, opposed the deal [PDF], and it was never finalized. In 2019, U.S. President Donald
Trump imposed steel and aluminum tariffs on Argentina and Brazil, though he signed a
limited trade deal with Brazil the following year. Brazilian President Jair Bolsonaro later
expressed a desire for a broad FTA with the United States following U.S. President Joe
Biden’s inauguration.
Mercosur reached a comprehensive trade deal with the EU in 2019 after twenty years of
on-and-off negotiations. The deal would eliminate tariffs on roughly 90 percent of
Mercosur: South America’s Fractious Trade Bloc
Mercosur’s exports to the EU and allow companies in both blocs to bid for government
contracts. But its ratification has been thrown into doubt by opposition from several EU
members, who fear that wood exported from Brazil to the EU could be a result of illegal
logging in the Amazon Rainforest. They've called for the Bolsonaro government to commit
to curbing deforestation in the Amazon before the deal’s planned ratification in 2022.
European farmers are also decrying the deal, as they predict an influx of cheap
Argentinian and Brazilian beef exports that would hurt their profits.  

Within the bloc, regional integration began to slow following Brazil’s currency devaluation
in 1999 and Argentina’s financial crisis in 2001, and since then, trade disputes and other
tensions have flared between the two countries. Recent efforts by Uruguay to establish an
FTA with China have also been a source of tension between bloc members. While Brazil
supports pursuing an FTA with China, Argentina has publicly opposed it, citing concerns
that a trade deal could lead to an influx of cheap Chinese imports to the region.

Has Mercosur promoted democracy?

One of Mercosur’s early aims was to cement the region’s return to democracy, since all of
its founding members had emerged from dictatorships in the 1980s. In 1998, the group
signed the Ushuaia Protocol on Democratic Commitment [PDF], stating that “the full
force of democratic institutions is essential” to the integration of Mercosur states and that
a “rupture in democratic order” would be cause for a member’s suspension.

Mercosur members invoked the protocol for the first time in 2012 to suspend Paraguay,
claiming that President Fernando Lugo had been unfairly removed from power after his
domestic opponents accused him of mishandling a deadly clash between farmers and law
enforcement. Some experts say Paraguay’s suspension, which was lifted in 2013, was
politically motivated, since Brazil’s then left-wing government was seeking Venezuela’s
admission to the bloc and Paraguay’s new, center-right government opposed it.

Why was Venezuela suspended?

Venezuela joined the bloc in 2012, with Brazil arguing that including the oil-rich country
would make Mercosur a “global energy power.” But falling oil prices, economic
mismanagement, and an increasingly authoritarian government have pushed Venezuela
into an economic, political, and humanitarian crisis. As a result, more than five million
Venezuelans have fled to neighboring countries since 2014. 
Mercosur suspended Venezuela in late 2016, citing violations of human rights and the
bloc’s trade rules by President Nicolas Maduro’s government. In August 2017, the group
Mercosur: South America’s Fractious Trade Bloc
made Venezuela’s suspension indefinite (there are no provisions for permanent expulsion).
And in 2019, Argentina, Brazil, and Paraguay called on Maduro to cede power to the
Venezuelan opposition.

“A reformist desire to deepen trade within the bloc, as well as genuine horror at
Venezuela’s descent into an economically dysfunctional dictatorship, has helped galvanize
the four original members’ willingness to slowly inch Venezuela out of the bloc,” says
American University’s Matthew M. Taylor, an expert on Latin America’s political economy.

What other challenges is Mercosur facing?

In recent years, Mercosur countries have experienced political and economic turmoil.
Corruption probes launched in Brazil in 2014 have spread, implicating hundreds of the
region’s political and business elites. At the same time, falling commodity prices and what
critics describe as economic mismanagement have contributed to recessions in the region.
In 2020, Latin America’s GDP fell by 7 percent, the worst of any region in the world.

Meanwhile, Mercosur faces internal divisions. Bolsonaro has expressed a desire to

“modernize” the bloc, including by allowing for bilateral deals with third-party countries,
which Argentine President Alberto Fernandez has opposed. Further, Argentina has said it
will not participate in any future trade deals with Mercosur, though the bloc is continuing
to pursue FTAs with Canada and South Korea, among others. Experts say the bloc’s
protectionist policies [PDF] and reluctance toward creating value-added supply chains or
regional production hubs further stifle integration.

Managing the trade relationship with a rising China will also continue to test the bloc’s
unity. While there is no FTA between China and Mercosur, China has said it intends to
increase bilateral trade with South America by $500 billion by 2025. Additionally, Uruguay
is a participant in China’s Belt and Road Initiative, the world’s largest infrastructure
program, and talks of Argentina joining remain underway. 

Adding to the bloc’s challenges is the COVID-19 pandemic, which has brought further
economic hardship to Mercosur countries as they struggle to implement a joint response.
The pandemic has triggered the largest recession the countries have seen since 1930 and
has sharply increased poverty rates and inequality [PDF]. In early 2020, Mercosur allocated
$16 million through FOCEM to a project aimed at improving the bloc’s COVID-19 testing
capacity. But disagreement among members about the severity of the pandemic has
hindered further cooperation, including the sharing of information and medical
equipment. Bolsonaro, for instance, has faced criticism for not taking action to decrease
Mercosur: South America’s Fractious Trade Bloc
the staggering number of COVID-19 cases in Brazil and for playing down the threat of the
virus after Brazil became an epicenter of the pandemic.

Experts agree, however, that Mercosur’s future will hinge on decisions made in Buenos
Aires and Brasilia. “Brazil and Argentina are two of each other’s most important trading
partners. But both countries—especially because they’re going through a difficult
economic time—would benefit from opening their markets more generally,” says O’Neil.
“The challenge is whether they can do it together.”

Will Merrow created the graphics for this article.

Recommended Resources
At this Atlantic Council event, Mercosur foreign ministers examine how the bloc can rebuild from the
COVID-19 pandemic and deepen international investment.

This graphic by Geopolitical Futures shows changes in the bloc’s trading partners during the last three
decades.

Harvard University’s Steven Levitsky looks at the health of democracy in Latin American countries on
The President’s Inbox podcast.

The Institute for Sustainable Development and International Relations unpacks the EU-Mercosur
agreement. 

CFR Senior Fellow Shannon K. O’Neil discusses Argentina-Brazil trade relations in Foreign Affairs.

Creative Commons: Some rights reserved.

Claire Felter, Danielle Renwick, Andrew Chatzky, Anshu Siripurapu, Diana Roy, and Rocio Cara Labrador contributed to this
report.

For media inquiries on this topic, please reach out to communications@cfr.org.

Mercosur: South America’s Fractious Trade Bloc