Authors name: Eric Fowler

Location: Arcata, California

Title of essay: The Core Countries' Hindrance of Mercosur: Policy Divergence and Disputes
between Brazil and Argentina
University affiliation: Humboldt State University
Contact information:
Email: ehf9@humboldt.edu
Phone: 503-957-5842
Address: 1092 10th street. Arcata, CA. 95521

The Core Countries' Hindrance of Mercosur:

Policy Divergence and Disputes between Brazil and Argentina
Topic
The economic development and regionalization of Latin America has largely been
viewed as a "story of unfulfilled promise"and the establishment of Mercosur has proven to be
no exception (s.9, pg.1). Though the 1991 creation of the Mercosur trade alliance was initially
successful in opening up the traditionally inward-oriented economies of its original member
states (Argentina, Brazil, Paraguay, and Uruguay), the alliance's evolution into a common market
has been hampered by both rivalrous tendencies and divergent macroeconomic policies between
its participating states. Exacerbated by 150 years of bilateral rivalry and driven by crises
provoked by the Brazilian currency devaluations (1999, 2001) and the collapse of the
Argentinean economy (2001), Argentina-Brazil relations have played a particularly central role
in Mercosur's most prominent trade disputes to date. That said, how have divergent economic
policies and diplomatic animosities lacing Argentina-Brazil relations influenced Mercosur? This
paper therein presents an argument that the domestic affairs and international relations of

Argentina and Brazil have represented a barrier to the successful construction of Mercosur as an
economically sustainable common market and as a viable means of regionalization within Latin
America due to these states' overwhelming lack of coordination of domestic macroeconomic
policy, opportunistic behaviors, and continued protectionist measures. In this, the writing
analyzes two vital eras of Mercosur's existence which have effectively illustrated Argentina and
Brazil's conjoint hindrance of the bloc's initially proposed common market: Mercosur's early
years of 1991-1998 and the later Argentine economic collapse and Brazilian devaluation crises
spanning the years of 1999-2002. These sections are titled "Analysis of Early Years (19911998)" and "Analysis of Crises Spanning 1999-2002", respectively. The third section titled
"Mercosur as a Feedback System" provides an alternate analytical take on Mercosur, as it
evaluates the blocs attempts to become a regional vehicle of economic integration through the
lens of a feedback loop. This section concludes that the Mercosur's aims can be interpreted as a
negative feedback loop because, faced with the hindrances of Argentine-Brazilian divergences
and said crises, the trade blocs evolution has not resulted in the achievement of a South
American common market.
1. Analysis of Early Years (1991-1998)
1.1. Mercosur Origins and Early Success
Known as the "Common Market of the South" or "Mercado Comn del Sur", the
Mercosur trade bloc of Argentina, Brazil, Paraguay and Uruguay was created in 1991 with the
signing of the Asuncion Treaty (s.1). The five associate member states of Peru, Bolivia,
Columbia, Chile, and Ecuador vary from the full member states in that they do not enjoy full
voting rights or complete access to markets (s.1). As a response to challenges brought about by
both national developmental problems and globalization, the establishment of the Mercosur

alliance was collectively viewed by its original member states as a strategic means of ensuring a
successful Latin American integration into the global economy. As an initiative spearheaded by
Argentina and Brazil, the initial aims of Mercosur were to implement a common market and to
"occupy an appropriate place in the international community" in the face of the neoliberal
economic model personified by the International Monetary Fund's "Washington Consensus" (a
series of policies pushed by the IMG regarding open markets, trade liberalization, deregulation,
etc.) (s.1, s.6). The Mercosur bloc's purpose, as stated in the original Asuncion Treaty, is to
become a common market by allowing for free trade and "the fluid movement of goods, people,
and currency" between its member stateswith the ultimate goal being South American
economic integration (s.1).
Mercosur's relative successes in its earliest days were threefold: the bloc expanded
international visibilities, increased cross-border trade/investment flows, and set an overarching
agenda of "open regionalism" for its member stateswhich was in direct contrast to the
immensely inward-oriented model driving Latin American regionalization in the 1960s and
1970s (s.1, s.6). Undergirded by these open regionalism-based reforms (which are often
presented under the broad agenda of the Washington Consensu"), the stated increase in trade
flows can be best observed in the rise of total intra-Mercosur exports from 9 to 25% and from
US$4 billion to 21 billion within the period of 1990 through 1998 (s.10).
1.2. Inhibitors Underlying Early Success; The Divergence of Brazil and Argentina
As a whole, the initial successes of Mercosur were met not with overwhelming optimism,
but rather with a salient sense of doubtespecially in regards to the bloc's core countries of
Argentina and Brazil. This is because various economists and scholars alike maintained a shared
skepticism that a combination of excessive overreliance on presidential leadership and

asymmetries in domestic macroeconomic policies on the sides of Argentina and Brazil could
potentially lead to Mercosur's demise (s.11).
Brazil under President Itamar Franco (from 1992-1994) favored domestic industry and
long-term industrial policy, while Argentina under President Carlos Menem (from 1989-1999)
favored a policy of deindustrialization and anti-hyperinflation policy aimed at lowering the
common external tariff (CET) through what was referred to as "destructive restructuring" (s.6,
s.12). In the eyes of many experts, these early disagreements between Argentina and Brazil on
the level of the CET (Argentina desired a lower CET) exemplify a divergence that rendered an
achievement of a common market and customs union to be "virtually impossible" (s.15). In the
early 1990s, a scholar named Luigi Manzetti keenly argued that relative gains problems arising
from asymmetries in domestic macroeconomic policies and "excessive dependence on strong
presidential leadership" could undo Mercosur, which would become "vulnerable to domestic
political agendas" (s.6). The overreliance on presidential diplomacy in solving disputes caused
by diverging policies pushed by the aforementioned presidents revealed structural flaws in that
there was, in contrast to the European Union, a stark deficiency of supranational institutions and
monitoring mechanisms within Mercosur (s.21). This conveys that, in effect, the central
presidential role in formulating solutions to early disputes were quite ad hoc. Furthermore, the
accelerating Brazilian inflation rate and declining Argentinean inflation rate from 1991-1994
were not to be overlooked by said experts of this era (s.6). Rather, the differing inflation rates
were clear indicators of Mercosur's most persistent hindrance to date; the often clashing
economic policies and domestic affairs that have ultimately defined the past and present
Argentina-Brazil relationship and have predominantly prevented Mercosur from actualizing its
initial 1991 agenda of implementing a common market via regional/economic integration.

The aforesaid "early success" of increased intra-Mercosur exports can therein be

interpreted as a detriment to the existence of Mercosur because it exacerbated problems plaguing
bloc's unstable foundationthe intra-Mercosur trade flow increase of this era occurred while
wildly contrasting macroeconomic policies were instituted by Argentina and Brazil (s.14). The
regionalizing agenda of Mercosur was wholly threatened because the domestic policies pursued
by Argentina and Brazil were substantially different and concurrently directed towards achieving
macroeconomic stability, as opposed to achieving trade integration with the rest of the member
states (s.14). Reverberations of this policy divergence were, in effect, a reversal of past progress
made in the bloc's seemingly concrete recession from the era of 1960-1970, when inwardlooking models of regional integration within Latin America like LAFTA (Latin American Free
Trade Association) and ALADI (Asociacin Latinoamericana de Integracin) reigned supreme
(s.1). If the bloc's early successes are to be critically evaluated through a lens focused on the two
key states of the trade alliance's core, one can easily conclude that the structural flaws of
Mercosur were realistically quite clear from the 1991 Asuncion treaty signing. This conclusion is
supported by the dire implications of Brazil and Argentina's excessive dependence on
presidential leadership and the states' subsequently diverging domestic macroeconomic policies
within the 1990san era that has demarcated the extent of Mercosur's structural weaknesses and
foreshadowed future problems to arise for this highly fractious trade bloc.
2. Analysis of Crises Spanning 1999-2002
2.1. Sources and Impacts of Crises: Argentina-Brazil Relations
With Brazil and Argentina accounting for roughly 90 percent of Mercosur's collective
gross domestic product, the direction of this proposed common market is clearly dependent
largely upon these two core countries' varying interests, desires, and policies (s.16). Given that

the successes of Mercosur in its early years exposed a divergence of domestic macroeconomic
between Brazil and Argentina underscoring Mercosur's structural flaws, to what degree have
these issues persisted and materialized within later crises?
En masse, the "Analysis of Crises Spanning 1999-2002" section argues that devaluations of
Brazilian currency in 1999 and 2001 and the collapse of the Argentine economy in 2001 had a
jointly devastating impact on the development of Mercosur as a vehicle of economic and
regional integration. First, Mercosur experienced what is arguably its worst crisis following
Brazil's currency devaluation in January 1999, as the event sparked a series of trade disputes
laced with clashing Argentine-Brazilian protectionist measures which hampered economic
integration within the region and underscored Mercosur's structural weaknesses (s.16). Second,
the 2001 Argentine economic crisis and the steady devaluation of the Brazilian Real marked
violations of Mercosur's CET, sparked a new round of trade disputes, spurred implementations of
protectionist policies, and produced a further reduction in Argentine-Brazilian bilateral
trade/investment (s.6, s.7). Whether it be this Argentine economic collapse or the Real currency
devaluations occurring at the turn of the century, the Argentine and Brazilian economic crises
have conjointly served to undermine Mercosur's effectiveness as a commercially sustainable
common market and as a viable means of regionalization within Latin America.
2.2. 1999 Brazilian Currency Devaluation
Sparking conflict within Mercosur over issues and the aforementioned prior inhibitors
that had been simmering for some time, the 1999 devaluation of the Brazilian currency marked
the beginning of a highly conflictive period in Argentine-Brazilian relations (s.6). How did this
period hinder Mercosur's progression towards regional and economic integration? Ranging from
January 1999 to June 2000, Mercosur was victim to recurrent trade disputes that were triggered

by successive unilateral measures that were in direct violation of regional commitments (s.16).
With the Argentine Peso pegged to the US dollar and the Brazilian Real losing as much as 42
percent of its value as a result of the January devaluation, such immediate outcomes of this event
within the context of its effects on Mercosur included increased prices of Argentine exports in
Brazil and a lowering of prices of Brazilian exports in Argentina (s.6, s.13). The disparity
resulting from Brazilian currency devaluations had an adverse effect on Mercosur in that it
undergirded the implementation of a series of protectionist policies on the sides of Argentina and
Brazil, it led to a stark decline in the bloc's most sensitive sector of trade (automotive sector), and
it revealed prominent structural weaknesses of the fractious trade bloc (s.13).
Following the devaluation, numerous Argentine firms filed complaints stating that they
were essentially unable to compete with the influx of inexpensive Brazilian imports and proceed
to request government protection (s.18). Observing "a much-feared flood of cheap Brazilian
imports to Argentina, from chickens to footwear", the Argentine government under the Menem
administration was compelled to take action (s.6). Herein lies the instigation of numerous
protection policies driving what are referred to as the Argentine-Brazilian "trade wars" of 1999
(s.6, s.18). The Argentine government responded to these firms' requests by imposing a series of
import restrictions on Brazilian imports including such products as "Brazilian footwear, paper,
pulp and textiles" (s.16). To counter this, the Brazilian government protested the Argentine
measures and implemented protectionist policies of their own. Such Brazilian countermeasures
included the requirement of licenses for foodstuffs, border sanitary controls of Argentine
products, and the establishment of a strict import licensing system for manufactured goods (s.6).
The import licensing system had a particularly negative impact on Argentine manufacturers due
to the fact that more than half of Argentine exports to Brazil are manufactured goods (s.6). En

masse, these said protectionist measures and countermeasures had an adverse effect on
Argentine-Brazil relations and hampered Mercosur's attempts at economic/regional integration.
Accounting for 30 percent of Argentine-Brazilian bilateral trade flows and widely
regarded as Mercosur's most sensitive trade sector, the automobile sector was hit quite hard by
the 1999 Real devaluation (s.16). Spurring from a decline in exports of automobile parts to
Brazil, Argentine auto exports subsequently saw a devastating drop of 58 percent (s.16). In
effect, numerous Argentine firms began to relocate their production to Brazil in order to take
advantage of their neighbor's significantly lower production costs at the beck and call of
numerous Brazilian states' "incentive packages" created to attract said firms (s.16). In whole, the
disputes surrounding this highly sensitive automobile trade sector caused further tension within
Mercosur and iterated an urgency for these two core countries to come to an agreement.
The 1999 devaluation exacerbated diplomatic animosity between Brazil and Argentina by
further instigating the implementation of protectionist policies and also underscored the trade
alliance's primary structural weaknesses. Most notably, tensions that emerged within Mercosur
during the 1999 devaluation and its ensuing protectionist policies revealed that Mercosur lacked
an adequate institutional framework or monitoring mechanisms to take action on trade disputes
between its individual member states (s.6). This is in contrast to the European Union (EU),
which has effectively achieved its aims of becoming a common market and operates through a
system of supranational institutions and intergovernmental negotiated decisions by its member
states (s.21). The EU maintains such important monitoring mechanisms as the European
Commission, the Council of the European Union, the Central Bank, and the Court of the Justice
to stabilize its operations (s.21). When Brazil reached a deadlock with Argentina regarding
restrictions on textiles, this major emerging economy took the dispute to the World Trade

Organization because the Mercosur bloc itself did not have the institutional framework or
structural "means" to the "ends" of solving such an issue (s.16). An additional structural
weakness underscored by the 1999 devaluation is that it iterates the aforesaid policy obstacle that
hindered Mercosur's existence in its "early years", which is the fractious trade bloc's general
failure to harmonize macroeconomic policies between its core countries of Argentina and Brazil.
As a whole, a persistent domestic macroeconomic policy divergence has proven to be a serious
obstacle to regional integration processes within Mercosur. Asymmetries in macroeconomic
policies exemplified in the disagreement over the CET level first hindered Mercosur in the early
1990s and, similarly, assymetries in macroeconomic policies exemplified in disparate exchange
rate policies adversely affected trade relations surrounding the 1999 devaluation event.
2.3. 2001 Argentine Crisis and Continued Brazilian Currency Devaluation
Tendencies of Mercosurs two largest members to behave in an opportunistic manner,
shown in the protectionist policies driving trade disputes during the 1999 Brazilian current
devaluation, were wholly illustrated yet again in the 2001 Argentine economic collapse. In
March of 2001, the Argentine government was unable to meet its debt payments, social unrest
was rife throughout the nation, and the economy as a whole was effectively sitting at a
vulnerable position on the verge of collapse (s.6). Aggravated by the past Brazilian devaluations,
this collapse spurred another round of Brazil-Argentine trade disputes that wholly undermined
the initial goals of Mercosur to become a common market, as it led to violations of Mercosur's
CET, implementations of protectionist policies, and further reductions in Argentine-Brazilian
bilateral trade/investment(s.6, s.13).
A first major consequence of the 2001 Argentine economic crisis was a reduction in
Argentine bilateral trade and investment undergirded by the Argentine government's

macroeconomic policy decision to alter tariff levels in response to its deepening recession. In
March 2001, the Argentine government was in a financially vulnerable position and
subsequently raised a tariff of 35 percent on imports of consumer goods from outside of
Mercosur as part of its "emergency package" to both protect domestic industry (by encouraging
domestic investment) and boost the economy (s.6). This revision by the Argentine government
which increased the tariffs on a number of consumer goods ranging from textiles, paints,
varnishes, and foodstuffswas in direct violation of the bloc's CET code (s.13). The Brazilian
government's initial response to this action was moderate, as the government was wholly aware
of the "fragile economic and financial position of its neighbor"(s.13). Though with Argentina
proceeding to reduce tariffs on imports of informatics and telecommunication goods (cell
phones, computers, etc), this moderation soon turned to backlash as Brazil suspended
negotiations over the common automobile regime (which contained investment incentives in the
automobile sector for Brazil and Argentina) and threatened with retaliatory measures to restrict
Argentine imports such as petroleum and wheat (s.13). As a result of these back-and-forth
protectionist and retaliatory measures, Argentine-Brazilian trade was reduced significantly, with
Argentine exports to Brazil falling 26.7 percent and imports of Brazilian products in Argentina
falling 39.2 percent (s.6).
Another aspect of the 2001 economic crisis involving Argentine-Brazilian relations that
undermined the Mercosur's effectiveness in terms of economic/regional integration was the
continued currency devaluations on the side of Brazil. As Brazil continued to devalue its
currency in 2001, the vulnerability of Mercosur's viability as a customs union became
increasingly clear (s.6). Defined as "a type of trade bloc which is composed of a free trade area
with a common external tariff", a customs union forms a truly vital aspect of Mercosur's

proposed common market (s.19). The harrowing reverberations of these continued currency
devaluations were iterated upon when Argentina's economy minister Domingo Cavallo publicly
accused Brazil of "deliberately devaluing its currency while betting on the collapse of
Argentina's currency board system" (s.6, s.20). Brazil's president aggressively responded to this
by canceling a visit to Argentina (s.20).
This said, Argentina's emergency CET-alteration measures to alleviate its 2001 crisis
combined with the continued depreciation of Brazilian currency threatened the "very survival" of
Mercosur and the resulting protectionist measures operated to expose the weaknesses of
Mercosur's political survival mechanisms in the face of an Argentine-Brazilian trade dispute
(s.6). Thus the event revealed that Mercosur was greatly lacking in an effective mechanism for
solving trade disputes between Argentina and Brazil and, furthermore, the event emphasized the
bloc's stringency upon these two core countries' interests, economies, and diplomatic policies.
3. Mercosur as a Feedback System
3.1. Mercosur: A Negative Feedback Loop?
Referred to as a "process in which information about the past or the present influences the
same phenomenon in the present or future", a feedback system or "loop" is essentially a causeand-effect circuit utilized to evaluate the effectiveness of a parameter of interest (s.22). In
looking at Mercosur as a parameter of interest, one can evaluate this fractious trade bloc's
attempts to become a vehicle of regional/economic integration through the lens of a feedback
loop. In doing so, it can be interpreted that Mercosur has proven to meet the criteria of a negative
feedback systemmeaning that it has failed to achieve the effective change of becoming a
common market. This is well in line with the definition of a "negative feedback", which is a
feedback that occurs when the "output of a system acts to oppose changes to the input of the

system"(s.22). The "input" direction of Mercosur's objectives in the 1991 Asuncion treaty has not
resulted in the "output" direction of it achieving a common market because of the two major eras
of its existence covered in previous sections. Conjointly, these periods of time have revealed
problematic asymmetries in domestic macroeconomic policy, instigated trade-hindering
protectionist measures, and emphasized tensions and structural weaknesses within the bloc. To
clarify, these said eras are defined as follows: the "early years" of 1991-1998 and the era marking
the Argentina-Brazilian crises, spanning the years of 1999-2002.
In "Part A", following the Asuncion Treaty of 1991, the trade bloc saw a number of
relative (a key word to emphasize here is relative) early successes but simultaneously
problematic inhibitors were revealed that would prove to be crucial factors underscoring its
attempts to transform into common market. This first era spanned from 1991-1998 and
undergirded the highly conflictive period in Mercosurs history: 1999-2002. Rather than
continuing on in the direction of a European Union-esque common market output, the
direction of Mercosur takes a sharp turn into the conflict-ridden 1999-2002 era, which has been
deemed as "Part B". This is where the devastating Argentine economic collapse of 2001 and the
Brazilian devaluation crises of 1999 and 2001 both occurredwhich, as noted in previous
sections, yielded such consequences as the formation of a second round of Brazilian-Argentine
trade wars, Brazilian-Argentine macroeconomic divergence in the form of CET violations and
protectionist measures, and a further reduction in Brazilian-Argentine bilateral trade and
investment.
3.2. Annotated Feedback Diagram: Mercosur

As expressed through the lens of a negative feedback diagram, the words of Mercosur's
initial mandate of becoming common market similar to the European Union have progressively
tended to wander far from the deeds necessary to actually making it happen. It has fallen short in
actualizing its purpose to become a common market by allowing for "free trade" and "the fluid
movement of goods, people, and currency" between its member states because of the hindrances
of the devastating Argentinean collapse and Brazilian currency crises and the varying problems
that these events revealed in terms of structural weaknesses and policy divergences (s.1).
Conclusion
Undergirded by issues of domestic macroeconomic policy divergence and overreliance on
presidential leadership within Brazil and Argentina during Mercosur's early years of 1991-1998,
the adverse effects of the Argentinean collapse (2001) and Brazilian currency crises (1999, 2001)
have collectively been both far-reaching and withstanding. Spurring a series of trade disputes and
ensuing protectionist policies within Latin America, the crises have emphasized the extreme

power imbalance present within Mercosur (where larger members such as Brazil and Argentina
are bestowed with greater power and benefits) and iterate the notion that domestic politics are
highly influential in a regional sense (s.6, s.17). The crises and ensuing protectionist policies
have additionally caused considerable strains on export sectors, exacerbated problems associated
with existing trade imbalances, lessened credibility of financial institutions, and effectively
exposed the asymmetries and the prominent economic/political weaknesses of the proposed
Mercosur common market. In this, Mercosur can be interpreted as a negative feedback loop
because the initial input direction of the blocs objectives in its 1991 treaty has not resulted in the
output direction of it achieving a common market due to the aforesaid hindrances. Largely driven
by both the continued divergent domestic macroeconomic policies spanning from the bloc's
origins and the countries' implementations of rivalrous protectionist policies spurring from the
stated economic crises at the turn of the 21st century, my central argument is that volatile
Argentine-Brazil relations have represented an overall barrier to the successful construction of
Mercosur as a Latin American common market where it is possible for regional and economic
integration to thrive unhindered.
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s.1
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[Rienners account of the origins and development of Mercosur provides an in-depth
glance in to how and why Mercosur came to beincluding a brief discussion on prior attempts
at regional economic integration undergirding the 1991 Treaty of Asuncion signing and an
overview description of the concepts of both trade blocs and common markets. The historical
context that this writing provides is both necessary and highly relevant to the arguments posed in
my central thesis, as Rienner emphasizes the direct causal connection between past and present
conflicts plaguing Argentina-Brazil relations.]
s.2

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[In providing an in-depth analysis of regionalism within Latin America, this text
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identity that provides its member countries with the only way to survive in the face of a
globalized world (p.169). This writing is greatly relevant to my research in that it touches on the
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[Bouzas juxtaposes the European Union with the Mercosur and NAFTA trade blocs, with
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(p.81). This detailed comparison effectively outlines the role that trade blocs play in the western
hemisphere and, in doing so, evaluates Mercosurs increasingly vital agenda as a key player in
the world's system of trade. This writing is a tremendous supplement to my research in that it
touches on key elements that define a trade bloc and how trade blocs from different regions of
the world compare with one another. This reading provided information to support the facet of
my argument regarding Mercosurs failure to become a European Union-esque common market
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s. 4
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[In a discussion of the profound regional impacts of past and present financial crises
related to Mercosur within South America, Carranza touches on the provocation of renewed
bilateral trade disputes between Brazil and Argentina. This is a helpful text because it not only
provides a historical summary of Mercosur and the roots of past regional and global financial
crises, but it also provides a concise, striking analysis of Mercosurs response to said crises and
the specific barriers that the trade bloc is faced with in regards to the volatility of ArgentinaBrazil relations in the context of trade flow.]
s.5
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[Though it delves into the failure of Mercosurs attempts to create a wholly common
market, this text conveys somewhat of an optimistic appraisal of Mercosur in its recognition of

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member states. In noting the relative successes of Mercosur from a reconciliatory and historicalinstitutionalist perspective, Gardinis writing frames the context of my argument that ArgentinaBrazil relations have partially impeded the progress of Mercosur as a force of regional
integration within South America in that it allows me to clearly demarcate the bounds of
Mercosurs varying flaws and strengths.]
s.6
Carranza, M. (2003). Can mercosur survive? domestic and international constraints on
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Mercosur: the 2001 Argentine economic crisis, the 1999 Brazilian currency devaluation, and the
subsequent Argentine-Brazilian trade wars. This writing also discusses the implications and
influences of the continued protectionist policies that both Brazil and Argentina have
implemented in their approaches to regional trade.]
s.7
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varying issues surrounding Mercosurs seeming inability to achieve a truly common market.
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a historical sense of interregional rivalry is not carried out, Brazil and Argentina will be forced to
simply abandon any attempt to form Mercosur into a European Union-esque common market.]
s.8
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significant event in that it effectively cemented the growing general consensus at that time that,
as a whole, the prospects of transforming Mercosur into a truly common market (similar to EU)
were bleak and rife with obstacles.]
s.9

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