Mercosur: The last tango in Washington?

Starting this week, Argentina’s rotating presidency of Mercosur officially begins its meetings. It will be an opportunity for partners to discern how President Javier Milei plans to lead the bloc.

Mr. Milei insists he is actively working on a trade agreement with the U.S., leveraging his ideological connection with President Donald Trump. On his part, Mr. Trump has expressed openness to advancing a trade deal with the “great leader” Mr. Milei.

For now, it’s all rhetoric with nothing concrete. Among Mercosur partners, some interlocutors believe Mr. Milei will adhere to Mercosur rules under pressure from parts of his private sector. Others point to his unpredictability, seeing him as potentially jeopardizing the neighboring market for Argentine products.

Mr. Milei’s statements vary a lot. He has suggested he might seek a 4+1 agreement (Argentina, Brazil, Paraguay, Uruguay, and Bolivia) with the U.S. Later, he indicated that, if it didn’t work out, Argentina would negotiate independently, which is illegal and violates Mercosur regulations. The bloc mandates its member countries to negotiate trade agreements jointly.

In the Argentine Congress, Mr. Milei stated that if he cannot achieve flexibility in agreement conditions, he is willing to exit Mercosur, arguing that the bloc has “only benefited Brazilian industrialists to the detriment of the Argentine economy.”

Mr. Milei could potentially open a Pandora’s box. Should Argentina exit Mercosur, the situation would be clear: there would be a two-year period during which Argentina would remain under the bloc’s rights and obligations. Afterwards, it would face tariffs from partners and raise barriers against former allies, causing wealth destruction on both sides.

In a scenario where Argentina negotiates with the U.S. but wishes to remain in Mercosur despite significantly violating basic rules, the bloc’s response is not automatic. Partners would need to initiate a procedure to assess Argentina’s violation and its foreseeable damages.

The Argentine president certainly could deal a blow to the already challenging economic integration of South America, similar to Mr. Trump’s tariff shocks against neighboring partners Canada and Mexico with “foolish” arguments in North America.

In Mercosur, as in NAFTA, the automotive sector would be among the most affected. Approximately 28% of Argentina’s exports to Brazil last year were vehicles in general. Meanwhile, 22% of Brazil’s exports to Argentina were vehicles, and 9.7% were parts and accessories.

Argentina would not be exporting cars to the U.S. that it could no longer sell to Brazil. A modest agreement could involve various industrial products currently suspended from the U.S. Generalized System of Preferences (GSP), but without significant value, according to sources.

This week, the bloc’s countries will officially review negotiations that already were underway.

The European Union has informed that its legal review of the agreement with Mercosur is nearly complete. Soon, translations of the texts will begin. Afterward, within a few months, it could attempt to ratify the agreement for implementation in a completely different geopolitical scenario. The Europeans seem even more eager to implement the agreement, which will provide European companies in Mercosur with a significant advantage (lower tariffs) in competing with China and the U.S.

There’s also the possibility that during Argentina’s presidency until July, Mercosur might conclude free trade agreement negotiations with the European Free Trade Association (EFTA), comprising Switzerland, Norway, Iceland, and Liechtenstein.

For EFTA countries, the agreement is crucial to ensure at least the same preferences as those obtained by EU countries’ companies. This provides a clear competitive advantage in business with a market of over 260 million people, like Mercosur. The EFTA countries are small but very wealthy.

China continues to push for a trade agreement with Mercosur. However, the bloc reacts with great caution towards Asians in general. The private sector considers such a move risky and complicated, especially in the context of industrial policy. In Brazil, some sectors believe it is unwise to lower trade defenses against Asian countries, particularly when everyone remains cautious about market liberalization.

Source: Valor International

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