Political Controversy in Paraguay Prompts Reshuffling of Mercosur Membership

4 July 2012

South American customs bloc Mercosur will see Venezuela join as a full member by the end of this month, and has temporarily suspended current member Paraguay from the grouping in the wake of President Fernando Lugo's impeachment in late June. During their presidential summit last week, the bloc also decided against raising its common external tariff, while declaring - together with Beijing - a goal to double Mercosur-China trade by 2016.

Paraguay suspended; Venezuela welcomed in

The rapid impeachment of Paraguayan President Fernando Lugo by his country's Senate topped the agenda during last week's gathering of Mercosur leaders, with the three other members of the bloc - Argentina, Brazil, and Uruguay - voting unanimously to suspend the membership of their Southern Cone neighbor.

Asunción's suspension will remain in effect until the next presidential election, according to the final summit declaration; elections are scheduled for April of next year.

Though the political controversy in Paraguay has created waves among its Latin American trading partners, who have raised questions about the removal of a democratically elected leader, Mercosur will not be imposing economic sanctions on Asunción.

"We are not in any way applying economic sanctions because our aim is to improve our people's quality of life," Argentine President Cristina Kirchner explained at the end of the summit, held in the Argentine province of Mendoza. "[But we cannot] tolerate these ‘gentle coups' or movements that - under a veneer of institutional correctness - shatter the constitutional order."

In Paraguay's absence, Venezuela will officially become a full member of Mercosur on 31 July, Argentine President Cristina Kirchner announced during the presidential summit. Venezuela's membership had already been approved by Buenos Aires, Brasilia, and Montevideo, with ratification by Paraguay's Congress being the last impediment to entry.

Following the summit, however, Uruguayan officials noted that the decision to invite Venezuela in the absence of Paraguay had not originally been planned. "For us it wasn't the time and it shouldn't have been implemented under these circumstances," Uruguayan Foreign Minister Luis Almagro said, explaining that the 31 July date is a reflection of these doubts.

"For me, this isn't the last word on the matter," he noted, adding that Brazil played a major role in bringing about the decision. However, Brazilian officials have disputed that claim, arguing that it was Uruguayan President José Mujica who suggested the move.

Caracas' newly-announced full membership in the grouping has also sparked a mixed response among some private sector leaders in Venezuela, who argue that the country might struggle to compete with regional heavyweights Argentina and Brazil. Others, however have noted that the decision could be a boon to Venezuela's economy by allowing the direct exchange of products of mass consumption and providing opportunities for joint co-operation on major projects.

Tariff hike proposed

Also on the high-level meeting's agenda was an Argentine proposal to increase its common external tariff on all imports to the maximum level permitted by WTO rules. The proposal, however, was ultimately rejected by Buenos Aires' Mercosur partners, according to the government of Uruguay.

However, leaders agreed to allow members of the trading bloc to increase tariffs on up to 200 tariff lines on a unilateral basis - an increase from the 100 lines originally agreed upon in December following a proposal made by Brazil. Both Argentina and Brazil have been struggling against a wave of imports, which has been credited for both countries' controversial decisions to take measures to protect their domestic industries.

"What we have here [in the agreements reached in Mendoza] is a very limited flexibility for each member state to be able to take the decision to increase or not increase their national tariff," Álvaro Ons, Director for Integration and Mercosur at the Uruguayan Foreign Ministry, explained. "This now becomes an individual decision for each country with regard to its own interest."

Brazil, Argentina trade ties

Trade officials from Brasilia and Buenos Aires - the two largest economies of Mercosur - also met on the sidelines of the high-level gathering, inking a deal aimed at helping their respective automotive industries.

According to the Brazilian industry ministry, Brasilia will begin instituting a local content requirement for car part producers that receive certain incentives. However, Argentina will be among the regional partners to be exempt from part of this requirement, which is set to take effect next year.

"We will exclude from the calculation all regional content that does not have a direct relationship with production," the ministry said.

The two sides have engaged in a series of trade spats over the years, with rows centring on import restrictions imposed by both sides on each other's products. At their meeting, officials also agreed to lift some of the barriers at their shared border, a recurring source of disagreement on both sides. Brazil will stop slowing imports of Argentine dairy goods, grapes, olive oil, wheat flour, candies, frozen potatoes, olives, wine, and jams, according to Dow Jones Newswires; in return, Argentina will speed up imports of Brazilian textiles, shoes, furniture, appliances, auto parts, tires, pork, and farm machinery.

Mercosur, China aim to double trade by 2016

The South American custom bloc's relationship with China also featured during the high-level talks, with trade observers watching to see whether Beijing's recent proposal that the two sides negotiate a free trade agreement might be addressed at the summit. The FTA idea was raised during Chinese Premier Wen Jiabao's recent trip through the region.

However, no mention of the FTA suggestion was included in the final Mercosur summit declaration, with leaders instead noting the importance of China-Mercosur relations and their joint pledge to increase economic and trade co-operation and double China-Mercosur trade to US$200 billion by 2016. Beijing is currently Mercosur's second-largest trading partner.

ICTSD reporting; "El sector privado en Venezuela critica su ingreso al Mercosur," CLARÍN, 1 July 2012; "Empresarios de Brasil salieron a cuestionar las trabas del Gobierno a las importaciones," CLARÍN, 30 June 2012; "El canciller uruguayo cuestionó el ingreso de Venezuela al Mercosur," CLARÍN, 3 July 2012; "Brasil niega presiones a los socios del bloque," CLARÍN, 3 July 2012; "China commits $15 billion in development funds for Latin America," LOS ANGELES TIMES, 27 June 2012; "Mercosur welcomes Venezuela, suspends Paraguay," REUTERS, 29 June 2012; "Argentina, Brazil Sign Car Deal, Ease Trade Tension," WALL STREET JOURNAL, 29 June 2012.

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