Latin America forges ahead on market integration

Latin America forges ahead on market integration

While Europe has just experienced its first disintegrating blow, Latin America might be on the opposite path towards regional integration, as Mercosur and the Pacific Alliance seek accord.

The Pacific Alliance, a trade bloc consisting of Colombia, Peru, Chile and Mexico, could well be described as the most exciting thing happening in the region. Amid the economic and political crisis in Brazil and the turbulent economic transformation in Argentina, the east side of the continent has been the source of economic growth. With the changing political dynamic in the region, prospects of renewed regional integration are re-emerging.

End of the Pink Tide bodes well for regionalism

The region is going through its final waves of the Pink Tide, with the socialist government in Venezuela at the brink of collapse and the leftist administrations that swept through Latin America in 2000s being substituted by centre-right parties. The post-liberal shift that was characterised by redistributionist policies, growing nationalism, anti-western rhetoric, and protectionist measures is over. But so is the commodity boom that allowed its undeniable economic achievement. So where do we go from here?

South America specifically, has always had many ideal traits for regional integration. Shared cultural and political experiences, commodity and export-based economies, and the fate of being in the global economic periphery. UNASUR, the South American Community of Nations, aimed to build on these shared characteristic; however, said project was based on the post-liberal principles of untethered sovereignty and protectionism.

In recent years, Pink Tide South American governments have defended protectionist measures as a necessary precaution from being constantly exploited by developed markets. Consequently, the Mercosur (the Southern Common Market) members sank down to the bottom of the world rating in trade tariffs and barriers.

Mercosur, a trade bloc integrating Argentina, Brazil, Paraguay, Uruguay and Venezuela, began as an EU-styled neo-functionalist integration project in the 1990s. But with the arrival of the above mentioned regional dynamics it has turned into an ideological and political club characterized by mutual rivalries and protectionism. For instance, The EU-Mercosur trade agreement stalled for almost 20 years due to Argentine fears of losing tts preferential access to Brazil’s market.

Changes afoot in Latin America

The attitudes of Brazil and Argentina have recently changed, with Brazil’s President Dilma Rousseff already restarting Mercosur-EU trade agreement talks last year amid the economic crisis. Rousseff even suggested splitting Mercosur into two blocs as Argentina’s previous government continued to uphold its protectionist policies. But newly-elect President Maurico Macri already mentioned he wants to move forward in the Mercosur’s negotiations with the EU and has rejected a two-speed Mercosur.

Furthermore, Argentina will officially become an observer state of the Pacific Alliance this July and Macri openly said he wants to work on integration of Mercosur and Pacific Alliance. Chilean president Michelle Bachelete has also promoted the idea.

Unlike stagnating Argentina and troubled Brazil, all Pacific Alliance countries have kept growing, posting stable economic outlooks despite the commodity crash and cyclical downturn. With commodity prices not expected to return to their bonanza in the 2000s, the main rationale behind the Pacific Alliance is to diversify their economies. With a combined population of 225 million, these countries in 2015 accounted for over 58% of Latin America’s total trade, 35% of its GDP ($1.9 trillion), 46% of exports, and 50% of imports.

The Pacific Alliance created the biggest Latin American stock exchange, the MILA (Mercado Integrado Latinoamericano), by integrating Mexican, Chilean and Colombian bourses. At least 92% of the trade within the Pacific Alliance is free of tariffs, yet none of the countries are major trade partners. After passing through the initial phases of economic integration it is now facing tougher steps.

One issue is that the MILA suffers from low liquidity: this could be solved by including fixed income security on the exchange and harmonising regulation or market compliance tests. Together with the integration of pension funds and insurance markets, as well as removing inter-alliance capital controls, the Pacific Alliance could shift into a higher gear.

Cooperation with Mercosur would provide diversification of export-based economies and decrease the reliance on external demand and resulting vulnerability to shocks. Labour mobility would address the lack of skilled workers and cross-border infrastructure projects could integrate regional supply chains; and the list goes on.

The commodity boom is gone and the region has to look for ways forward. Brexit offers many opportunities for Latin America. Mercosur might rather focus on integrating with the Pacific Alliance and with the TTIP; South American countries can also take advantage of a deal with the U.S. Moreover, the Pacific Alliance already mentioned they want to negotiate a trade agreement with the UK after Brexit. The connection between the Atlantic and Pacific oceans would be key for Brazil’s and Argentina’s massive trade with China as well as the participation of Chile, Mexico, and Peru in the Trans-Pacific Partnership.

Latin America has always been a peripheral economic area that never had the opportunity to fully develop and diversify due to the dependency on core economies and primary exports. With the commodity crash and general global economic malaise, the solution for the region seems to be finally moving forward with long-awaited regional integration.

Categories: Economics, Latin America

About Author

Petr Bohacek

Petr Bohacek is a Political and Security Risk Analyst for Latin America at Riskline, a travel risk management company. He is also a research fellow at the Association on International Affairs, a Czech think tank, where he publishes and comments on foreign policy in local media. He has previously worked as an analyst at the Czech Ministry of Defense. Petr holds an MA in Security studies from Charles University in Prague, a BA in Political Science from St. Norbert College and studied Latin American politics at Universidad de Buenos Aires and Universidade de Nova Lisboa.