By Kyle Castellanos
During the post-war era, it became customary for developed countries to opt into regional free trade agreements. These intergovernmental treaties offered citizens lower priced and higher quality goods while extending governments more exportation opportunities, critical for most countries hoping to recover from the recession. Gradually, these countries began to adopt similar trade agreements and establish intergovernmental organizations which encouraged market specialization through regional free trade.
By the late 20th century, regions with high concentrations of developed nations founded and further developed these intergovernmental organizations. Some intergovernmental organizations, such as the European Union (EU) and the Association of Southeast Asian Nations (ASEAN) further expanded the scope of their respective organizations to include political, military, and educational cooperation, among many other programs. Other trade agreements such as the North American Free Trade Agreement (NAFTA) chose to focus solely on trade.
More recently, developing nations—particularly in the Global South—have followed this trend, either joining existing trade agreements or forming their own. For instance, in 1989, leaders from Algeria, Libya, Mauritania, Morocco, and Tunisia established the Arab Maghreb Union (AMU). Similarly, in 2018, 44 African nations signed the African Continental Free Trade Agreement (AfCTFA), creating the “largest free trade area since the World Trade Organization (WTO) was established in 1995.” However, South American nations never realized their own comprehensive intergovernmental trade agreement, instead, engaging in bilateral trade agreements and smaller-scaled multilateral agreements within limited nations. This lack of harmonized trade policies and strategies in South America stunts the region’s potential for economic growth.
South America’s economic concerns closely mirror those of the African nations which formed AfCTFA, and a similar formation of an intergovernmental free trade area would especially benefit South America’s entrepreneurial development. Aside from the obvious goal of accelerating economic growth in the region, a primary impetus for the creation of AfCFTA was the intent to “increase continental integration and effectively resolve the continent’s issue of overlapping membership of [Regional Economic Communities],” two issues that South American nations currently struggle with.
Currently, Mercosur—a four-country common market—is the most prominent trade bloc in South America, with Argentina, Brazil, Paraguay, and Uruguay comprising its member states. Expanding Mercosur into a continental free trade area agreement would promote financial development, specifically within the technology sector due to the region’s relatively homogenous society, growing middle class, and incredible potential for investment and growth.
From 1991 to 1999, Mercosur’s institutional structure galvanized trade within its member states with remarkable success, laying the groundwork for a continental free trade agreement that would incentivize domestic entrepreneurship. In its first eight years, “Mercosur's total world trade went from 11% to almost 20%,” quantitatively the fourth largest economic bloc in the world. Intra-state trade also increased during this period, as total trade within Mercosur member
states rose from $11 billion to $20 billion, representing a change from 8.9% to over 25%. Before the economic crises in Argentina and Brazil from 1999 to 2001, Mercosur member nations nearly tripled intra-state trade. If Mercosur nations could revise, revitalize, and expand the current agreement to a continental free trade area with 13 total member states, intra-state commerce would surge, surpassing total trade from 1991 to 1999.
A continental free trade agreement would specifically support the development of the technology sector in South America. Free trade across the entire South American continent would not only make a variety of higher quality products available at a lower price but also incentivize collaboration and the diffusion of ideas between member states. During Mercosur’s most successful period, member states began sharing culture and language, noting a correlation between the flow of trade and information. Cultural integration became evident as “samba and capoeira schools flourished in Argentina, Spanish language classes became increasingly popular in Brazil.” As the cost of trade went down, the flow of trade and information between Mercosur members flourished.
Entrepreneurial opportunities in the technology sector would also become more financially feasible while simultaneously opening several other markets for home-grown businesses to expand into. South America’s markets can support expanding businesses in the technology sector, as its middle class continues to grow and increase their purchasing power. Ted Sarandos,
the head of programming for Netflix, noted the international success of “La Casa de Papel,” shot in Madrid, attributing its popularity to “‘pan-regional’ shows that attract viewers beyond their home bases.” Latin America is Netflix’s third-largest worldwide market behind North America and Europe, with Brazil accounting for the second-largest number of subscribers worldwide.
A continental free trade area in South America would also allow for entrepreneurs to collaborate and utilize the continent’s vast and diverse consumer bases to establish global companies. South America’s consumer base also functions as a great market to experiment with new projects and expansion. In 2018, Facebook launched the pilot project of their Facebook Dating experiment in Colombia, gauging how Facebook members in Bogotá and Medellín perceived and reacted to the service. Most entrepreneurial expansion attempts have been made by foreign companies, marking a clear need to lower the financial barriers of entry for entrepreneurs within South America through the creation of a continental free trade area.
Capitalizing off of South America’s diverse consumer base and an extensive history of pilot projects, Mercosur’s continental expansion could bring about continuous and sustainable foreign investment in the long-term. Despite its wide-ranging experiences with foreign corporations looking to expand their reach, most relations ended poorly, with local governments frequently left trampled by global corporations with more connections and resources. Oftentimes foregoing ethical practices, these corporations take advantage of the lack of regulation in underdeveloped technology industries, severely disrupting the job market and, in some cases, even physical infrastructure.
In 2019, a Colombian court ordered American ride-calling app Uber to cease operations in the country following a series of complaints regarding the company’s violations of Colombia’s competition rules. With over 2 million registered users, 88 thousand drivers, and, most notably,
an ongoing taxi war amid crime-ridden cities like Bogota and Medellin, Uber’s exit from Colombia seriously threatened the nation’s economy. Although in June of 2020 Colombian authorities dismissed the allegations brought against Uber and reinstated their ability to operate within the nation, a clear lack of regulation and interregional cooperation with neighboring nations is at fault for unsuccessful relations with foreign corporations.
Mercosur also operates as a legislative body, deciding interregional policies on economic issues. Continental expansion of Mercosur would encourage sustainable foreign investment and provide effective regulation preventing foreign entities from exploiting local government. In 2017, the European Union Court of Justice cracked down on Uber’s expansion to Europe, ruling that it qualified as a transportation company rather than a digital app, and thus was subject to the same regulation as taxi companies. Although this ruling was certainly a blow to Uber in terms of potential profits, the company maintained operations in Europe and continued to challenge these claims in other courts, showing that foreign investment can be regulated and given opportunities to sustainably expand in the long-term.
A unified South American trade bloc with legislative functions allows countries to collaborate to overcome larger issues prevalent in the continent that cannot be solved alone. In 2004, the Structural Convergence Fund (FOCEM) was created as a branch within Mercosur, funding infrastructural development projects for member nations, in turn, supporting economic growth. A study by the Economic Commission for Latin America and the Caribbean found that each truck crossing borders within Mercosur countries could bear an extra cost of up to $273 due to infrastructural and organizational problems.
This economic burden due to infrastructural issues may be even more costly for freight traveling across borders for countries that are not members of Mercosur. In August, Brazil pledged to strengthen ties with Mercosur member states in an attempt to create common goals and integrate infrastructural agendas. If Mercosur could be expanded into a continental trade bloc, FOCEM could receive the necessary funding and cooperative action to develop past transportation infrastructure and into communications infrastructure, power and energy infrastructure, water and waste management, and much more.
There are also several challenges evaluating the expansion of Mercosur into a continental free trade area agreement. Most notably, newly inducted member states would incur a loss of government revenue as free trade deals are established with all other members of Mercosur. However, no significant trade relations exist between Mercosur member states and other South American nations. Non-member states in South America have instead formed trade relations with China and Japan, utilizing trade routes through the Pacific Ocean. Many policy measures passed by Mercosur have taken into consideration South America’s relationship with China and Japan, both as trading partners and as markets for tourism. Thus, the initial loss of revenue can be overcome by harmonizing trade policies and through the increase in free trade between nations in a unified South American trade bloc.
Another notable challenge to the successful implementation of a unified South American trade bloc is convincing all 12 independent countries to accept a continental expansion of Mercosur. Although most South American countries maintain amicable relations with Mercosur,
non-member states enjoy their current relations with Mercosur, with most hesitant to independently join the trade bloc. Additionally, due to the complicated nature of interstate politics in South America and Mercosur’s “support for democracy as the legitimate system of rule and its encouragement to build citizenship and to respect human rights … in Latin America,” certain nations may not be welcomed as member states. In 2017, Mercosur member states voted to suspend Venezuela for its “rupture of the democratic order,” amid civil unrest and state retaliation, noting that “even if Venezuela meets all the requirements and agreements of Mercosur, if it has not re-established democracy, the country will remain suspended.”
Although many obstacles stand ahead of the successful implementation of Mercosur as a unified South American trade bloc, the region stands to benefit massively. Converging demographics in terms of consumer bases, growing purchasing power for members of the middle class, and the incredible potential for growth in the technology sector are all reasons for South American nations to adopt a continental free trade area. Continental adoption of Mercosur would resolve overlapping regional trade agreements, promote interstate trade amongst Mercosur members, and promote the expansion of businesses and ideas across borders. To compete with North American, European, and Asian markets, South American economies must evolve, and subsequently, converge through the continental adoption of Mercosur.