Although not as politically volatile as Brexit, Brazilian President Jair Bolsonaro’s threat to leave MERCOSUR could prove to be almost as complicated and costly.
This move would be a considerable setback for the MERCOSUR trade bloc - comprised of Brazil, Argentina, Paraguay and Uruguay - just as it reached a trade deal
with the European Union after two decades of talks.
Bolsonaro has said that Brazil could leave MERCOSUR if Argentina– the second-largest economy in the customs union– has a political shift to the left in the upcoming presidential elections this October.
What is Brazil actually proposing?
Following Alberto Fernandez’s victory in last month’s primary elections in Argentina, the leftwing opposition candidate is on course to beat President Mauricio Macri in the upcoming presidential election. Bolsonaro has explicitly endorsed current President Macri, and has warned of a possible wave of Argentine migrants to Brazil in the event he is defeated.
Following the August 11 primary, Bolsonaro stated
that he does not believe that Fernandez wants to follow the principles of liberty and democracy.
“If he creates any problems, then Brazil will leave MERCOSUR,” Bolsonaro said, but has not offered any further details to his proposal.
How would Brazil leave MERCOSUR?
The severity of Bolsonaro’s threat is not yet clear. Similar to Brexit, there would be severe commercial, bureaucratic and political obstacles to leaving the trading bloc.
The process of exiting would be far from easy. Congress would have to approve a bill to end the free-trade agreement, meaning Brazil would have to give up the common external tariffs it shares with its neighbors as well as the visa and passport-free travel its citizens currently enjoy in the area.
Aloysio Nunes Ferreira
, Brazilian former foreign minister under President Michel Temer, who worked to boost the strength of the customs union, said that this move “would be a sign of a lack of seriousness and would affect Brazil’s relationship with the rest of the world.”
What would be the economic impact?
In the last decade, Brazil posted a trade surplus of $87 billion over the other three MERCOSUR countries, accounting for a higher amount than China or the European Union for the same period.
Brazil’s surplus with Argentina alone is around $8.5 billion a year. Roughly half of Brazil’s exports to its southern neighbor come from the automotive sector or from manufactured products. In other words, Argentina is one of the few countries that buys Brazil’s value-added products. For this reason alone, leaving MERCOSUR would be an economic blow to the Brazilian economy.
On the other hand, the Brazilian economy is dependent upon Argentine wheat. Half of the grain product consumed in Brazil comes from Argentina, free of duties and export taxes.
Argentina’s economic woes have a direct impact on Brazil. According to a study published this week by the Getulio Vargas Foundation
think-tank and business school, the current financial crisis in Buenos Aires could reduce Brazilian economic growth this year by up to 0.5%.
For Brazilian business owners, MERCOSUR represents the second-most attractive destination for future exports, behind the United States. In addition, the trade bloc generates nearly 31k jobs for every $1 Billion Reais in exports, according to a survey by the National Confederation of Industry
What are the chances of Brazil actually leaving?
Given the sheer complexity of completely leaving MERCOSUR, officials prefer discussions around making the trade bloc more flexible. This process would involve allowing member states to make their own bilateral tariff agreements, provided all MERCOSUR countries agree.
In a recent interview Brazil’s current foreign minister, Ernesto Araujo, struck a cautious tone when asked about Brazil’s possible exit from MERCOSUR.
“Perhaps we might need to think about an exit. MERCOSUR is a reality that’s part of the plan for our country, part of our economic recovery.”
Additionally, the South American customs union is far less politically problematic for Brazilians than the European Union is to the British. This is evident in the fact that none of Brazil’s major polling companies have bothered to ask the public’s opinion of the bloc.
With any withdrawal likely to have significant impact on both trade and jobs for the Brazilian economy, the downsides appear to outweigh the benefits.
Welber Barral, a former foreign secretary of Brazil’s Ministry of Industry and Commerce, said that reforming the bloc would be much better than abandoning it.
“We would have the same problem the U.K. has with Brexit today. We (Brazil) would lose trade deals,” he told Bloomberg.