Mercosur, modelled after the EU, is a South American economic and trading block formed by Argentina, Brazil, Paraguay and Uruguay through the Treaty of Asunición in 1991 which stood for “free movement of goods, services, and factors of production between countries” and the Protocol of Ouro Preto in 1994, which then formalised its status as a customs union. Failing to comply with bloc’s democratic principles Venezuela, a full member was suspended indefinitely since 1st Dec, 2016. It is the third largest integrated market after the European Union (EU) and North America Free Trade Agreement (NAFTA) and one of the world’s largest economic blocks. According to the World Bank, the combined GDP of the founding 4 countries is roughly $2.2 trillion, making it Latin America’s second-largest trade group after the Pacific Alliance. Since its formation, the bloc saw a tenfold increase in internal trade.
Mercosur bloc has a population of 284 million. Brazil and Argentina account for 95% of their population and 95% of the bloc’s GDP. Historically these two countries are characterised by rivalry, one of the reasons for the creation of Mercosur was to improve and solidify the relationship of these two countries. The four nations reached an agreement to abolish customs tariffs, establish a uniform tariff (UET) set at 35% for specific imports from non-member countries, and embrace a unified trade approach towards external nations and groups.
A uniform tariff is a simple concept where all goods and services entering a country are subject to the same rate of tariff. This means that regardless of the product or its country of origin, the tariff imposed on it will be the same.
Mercosur trade with the rest of the world increased to $477 billion in 2020 from $112 in 1994. Trade among the members increased to $29 billion in 2020 from $13 billion in 1994.
A Preferential Trade Agreement was signed between Mercosur and India in 2004, which came into operation in 2009. The aim was to provide free movement of goods, services, capital and people, in short, enhance economic partnerships and foster mutual growth. After exchanging the list of products for increased tariff concessions and exploring expansion modalities, the agreement granted tariff concessions on over 452 and 450 tariff lines to India and Mercosur respectively.
Mercosur exports to India in 2021 was $10.7B and imports from India was $9.94B. There is 62% growth in exports and 67.2% growth in imports over last year (2020).
In 2021, Mercosur's exports went primarily to China ($134B), the United States ($50.7B), Brazil ($21.1B), Argentina ($15.9B), and the Netherlands ($14.3B). In the same year, MERCOSUR imported primarily from China ($99.3B), the United States ($63.9B), Brazil ($24.2B), Germany ($19B), and Argentina ($17.5B).
Mercosur is facing multiple key challenges. One major issue is their effort to expand into new markets. Another concern is the pending ratification of a trade agreement with the European Union (negotiated over two decades). Argentina, determined to shield national industry from competition both internal and external, seem to have no intention of ratifying the trade deal. Uruguay, frustrated by slow progress, seeks independent trade deals with other nations (including China). Uruguay's actions violate the group's rules and jeopardise its future. Regardless of the disagreement, the other member countries are handling it.
However, the problem does not end here. China has extended its interest in trading with the Mercosur and has urged Brazil to join in improving regional trade. Mercosur also has agreements with countries like Singapore, and Korea and is exploring deals with other nations, but the disagreement over tariffs and admitting new members like Bolivia and Venezuela makes it difficult and highlights the lack of unity within the group. Uruguay stopped a plan to reduce these tariffs, wanting more control over its own deals. Brazil also tried to lower the tariffs independently.
The talks about letting industries like cars and sugar be part of the group could help bring the nations together and work better. It could enhance economic interdependence, trade diversification, and shared goals among member nations. This would also align policies, attract investment, promote supply chain integration, and advance technology, fostering stronger ties and cooperation. Mercosur has many challenges, however, it’s a mix of problems and opportunities. Amid these dynamics, the group must find common grounds, and look for opportunities collaboratively to navigate its path forwards.
Over the years trade and economic ties between Latin America (including Mexico), and India have become significant. Historically seen as distant, the total trade volume between the two regions has reached $50 billion today. Export to Brazil accounts for $ 6.48 billion, Mexico for $4.43 billion and the Dominican Republic for $329 million. Overall export to Latin America increased by 18% from $15 billion in 2021-22 to $17.8 billion in April- March 2022-23. Mexico which is categorised as North American, if included in the list, the export to Latin America becomes $22 billion.
The success of fostering trade ties between the two regions can be attributed to the manufacturing and services of the private sector which led the government to recognise the potential of the Latin American market. Automobiles attribute to a significant portion of India’s export to Latin America. About one-third of India’s motorcycle and car exports, worth $924 million and $2.14 billion respectively, are shipped to the region. Columbia is the top motorcycle trade destination at $308 million, and Mexico is the 2nd biggest market for Indian Cars.
$ 1.5 billion worth of pharmaceuticals and $3 billion of chemicals are exported from India to these regions. Latin America’s digital transformation further opens the possibilities for collaborations, especially in electronics and electronic hardware manufacturing. The digital transformation market size of the region is projected to grow to $207.87 billion by 2032.
With the enormous opportunity, there are some challenges that need to be addressed in order to trap the full potential of the trade deals. Exporting goods to the region could be an expensive deal compared to the US and UK not only because of the distance but also because of logistic complexities and stringent as well as time-consuming certification norms and bureaucratic processes that only add to the operational complexities of the exporters. Other challenges include political and economic instability in countries like Venezuela and Argentina. Language and different business cultures remain another hurdle while building relationships with business counterparts in Latin America.
However, despite these challenges, India- Latin America trade relations offer opportunities for cross-pollination of ideas and innovation, shaping the technological and economic landscape. The partnership can offer India access to valuable resources that can further contribute to the nation’s vision of “Make in India” and green technology ambitions. Latin America has around 60% of the world’s lithium reserves, a component critical for the manufacturing of rechargeable batteries and renewable energy storage systems. The cooperation would allow India to secure a stable supply of lithium, cobalt, graphite and other rare earth minerals. India’s green technology mission and aspirations to emerge as the global manufacturing hub for electric vehicles and renewable energy technologies and expertise in innovation would contribute to Latin America’s economy.
Joint Ventures between the software and IT sector firms of India and Latin America can lead to the creation of novel, innovative technologies, and co-created solutions, tailored to meet the unique demands of both markets. This can foster a rich IP landscape of joint patents and other intellectual properties. The partnership would further solidify India’s position as an emerging technology leader.
Both regions can explore opportunities for collaboration in pharmaceuticals and chemicals by pooling resources and manufacturing capabilities. The collaborations would not only lead to the development of affordable, high-quality medical drugs but also new products and processes catered not only to benefit both regions but to also address global health concerns.
Despite an existing Preferential Trade Agreement between India and Mercosur, it has a limited impact on trade. India needs to pursue more Free Trade Agreements (FTA) as Latin America due to which Indian products are not competitively priced in these markets. Mexico benefits from NAFTA, Peru, and Colombia, have a similar FTA with the EU. Hence, the existing Preferential Trade Agreement needs to be improved in order to trap India’s trade potential with Latin America.
The collaboration between India and the Latin American region would not only offer trade and economic benefits but would also open up a whole avenue for knowledge and technology sharing, which would eventually lead to more innovation and the generation of intellectual property. Both countries offer an opportunity for the convergence of expertise, resources and creativity, the sharing of IP, combined with the strength of both regions can lead to the creation of cutting-edge technology and innovative solutions that would not only foster economic growth in the bilateral trade but contribute to global advancement on a broader scale.