Several weeks ago, a high-level delegation from Chile’s General Directorate of International Economic Relations traveled to Montevideo to begin negotiations for a potential free trade agreement (FTA) between Chile, a member of the Pacific Alliance, and Uruguay, a member of the Southern Cone Common Market, Mercosur. And last week a delegation from Uruguay’s Foreign Ministry traveled to Santiago for a second round of negotiations.
The deal opens the possibility of expanded market access for both Southern Cone countries. But beyond those bilateral benefits could this be a step toward convergence between the two trading blocs? What would that convergence look like: more like the small, closed, conflict-fraught Mercosur or the broader, more expansive and ambitious Pacific Alliance?
Closer economic ties between the two countries, though, aren’t entirely new. Uruguay and Chile are already under an Economic Complementation Agreement, which entered into force on October 1, 1996. The agreement–within the Latin American Integration Association–also includes Argentina, Brazil, and Paraguay, all members of Mercosur.
Since Mercosur is a customs union, members are prohibited from signing individual trade agreements. As with all customs unions—like the European Union, which, at one time Mercosur aspired to emulate—any trade agreement with one country has to be negotiated by Mercosur, on behalf of the entire bloc. However, Chile is already an observer member of Mercosur, and with the Economic Complementation Agreement already in place between the two countries, Mercosur is unlikely to raise objections or delay the conclusion of any agreement.
However, it’s clear that Chile and Uruguay are looking to use the FTA as more than a simple bilateral agreement. The likelihood is that this will become a diplomatic vehicle to continue advancing the notion of greater convergence between Mercosur and the Pacific Alliance.
As I highlighted in a previous article on this topic for Latin America Goes Global with Barbara Kotschwar, the first step toward further integration between the two blocs was announced by Chile in June 2014 during the summit of Pacific Alliance presidents in Mexico. At that moment, Chilean Foreign Minister Heraldo Muñoz revealed the possibility of a “two-speed” approach in which both blocs and their member countries could move toward convergence at their own pace. More specifically,
“if some countries can move faster toward integration and are willing to do so, they should be encouraged and be facilitated to move in that direction, while the rest can move at a slower pace but with a common horizon. You can argue that the Pacific Alliance will move faster and Mercosur has its own rhythm, in a way it meets its own commitments, but we must be aware that a convergence is needed, almost imperative for a strong regional architecture.”
Nice sentiments from the Chilean scholar-statesman, but is it possible or even desirable?
Why is Chile promoting the convergence between the two regional blocs?
From the beginning of her second presidency, President Michelle Bachelet has talked about the importance of the “convergence in diversity” for the region. Chile recognizes how difficult it is to imagine the two blocs working together. However, as Muñoz explains, a critical step is “to establish a road map that could lead to a convergence of the open market Pacific countries [of] Chile, Peru, Colombia and Mexico with [the] Mercosur [countries of] Argentina, Brazil, Paraguay, Uruguay and Venezuela” that allows for diversity and different paces.
Considering the diversity of Latin American economies, this convergence should focus on supply-chain trade integration, which occurs when “high-tech firms combine their know-how with low-wage labor in developing nations…” The region needs to rethink its economic and political integration agenda to harness this powerful dynamic and become a more active and potent actor in the global economy.
There are already a host of mega-regional plurilateral agreements being negotiated today around the world (TPP and TTIP the most obvious examples). The convergence of two regional blocs such as Mercosur and the Pacific Alliance make sense from an economic and trade perspective: it will give the region more negotiation power vis-á-vis the rest of the world in both current and future mega-regional agreements.
In that process the potential Chile-Uruguay FTA is a positive sign for a region that, when it comes to global trade, is a “continent divided.” Truly stitching together and deepening trade relationships between Mercosur and the Pacific Alliance—for all their flaws, the two most important trading blocs in the region—could help achieve this goal. But it will only be beneficial if it means ensuring that those governments are truly committed to the realities, costs and benefits of freer trade and accept their responsibilities, rather than searching for an easy but ultimately suboptimal lowest common denominator. Building on and expanding cross-border supply chains is a logical place to start.