Latin American trade and investment analyst Theodore Kahn on the future of Mercosur

Chaos is a ladder

Nicolás Maduro made his first major trip abroad as Venezuela’s President earlier this month, visiting Uruguay, Argentina, and Brazil.  Hugo Chávez’s successor picked an interesting moment to drop in on his new Mercosur partners. Intra-Mercosur relations have sunk to new lows recently, with recriminations flying back and forth between Brasilia, Buenos Aires, and Montevideo.

Any further economic and political destabilization of Venezuela, which joined Mercosur in July 2012, would be an additional blow to the regional bloc and, in particular, the suddenly sputtering Brazil. For his part, Maduro badly needs the political and economic support of Mercosur members, not to mention the clout of regional recognition.

All told, these circumstances create an opportunity for Brazil to reassert control over the troubled bloc and steer it to more stable ground.

Mercosur: A Messy Situation

Brazilian President Dilma Rousseff left Buenos Aires in a huff last month, cutting short what was supposed to be a two-day trip. Rousseff finally appears fed up with the maze of foreign currency and import controls that make it increasingly difficult for Brazilian companies to do business with Argentina. Brazilian exports to its neighbor declined by over 20 percent in 2012 and they have continued to fall through the first trimester of 2013, contributing to a general slump in Brazilian trade. The National Confederation of Industry (CNI) estimates that Brazilian firms have already lost out on US$6 billion worth of exports in 2013.

“Explain it to me as if I were…”

Rousseff resigned to leave, but not without getting a word in edgewise. Before truncating her stay in Buenos Aires, Rousseff reportedly raised concerns over increasing authoritarianism in Argentina. Power grabs by President Kirchner may not be new, but a Brazilian president objecting to it in Argentina certainly is.

What changed? Brazil’s own economy has been in a well-documented funk, having staggered through 2012 with 0.9 percent growth. The government has seemingly exhausted all its options, with fiscal stimuli, base rate cuts, and currency interventions all failing to revive growth. In this domestic context, Brazil can hardly afford a downturn in its external sector. At the moment, the last thing Brazil needs is to rely on unpredictable trade partners. 

Enter Venezuela

Venezuela’s accession to Mercosur was itself controversial, coming only after the bloc suspended Paraguay following the flash-impeachment of left-wing Paraguayan President Fernando Lugo in June 2012. Opposition from Paraguay’s conservative Senate had previously stymied Venezuela’s  efforts to join the club.

The presence of Venezuela as a full member adds additional political and economic complications to the already beleaguered bloc. President Maduro faces a political crisis at home where the opposition still disputes his narrow victory in April’s election. Following a series of early stumbles, and with Diosdado Cabello waiting in the wings, some analysts question if Maduro can maintain authority over the military and, by extension, the country.

The economic side is not much brighter. A partial list of woes—all  familiar but increasingly dire—includes high inflation, acute shortages of basic necessities, and flagging oil production (the source of over 90 percent of export revenue).

In a sense, Maduro has something in common with a certain former US president whom he has called the devil: It is easy to write him off as an incompetent buffoon, in way over his head. But Maduro sepnt over six years as Minister of Foreign Affairs under Chávez. He likely understands regional geopolitics, at least more than he lets on.

And he appears to appreciate how badly he needs Brazil.

Say what you will, the man can wave a flag

Maduro’s legitimacy hinges on political backing from Mercosur leaders and, in particular, from Rousseff. Venezuela’s opposition is not ceding any ground, sending a contingent to meet with opposition lawmakers in Uruguay and Argentina during Maduro’s visit. Peru’s foreign minister hosted members of the opposition earlier this month and has suggested that UNASUR, where Peru holds the rotating Chair, convene another meeting to discuss Venezuela’s political situation.

This push-back suggests Maduro will not enjoy the carte blanche his predecessor did with regards to domestic affairs, and he will need support from Mercosur in general, and Brasilia, in particular.

As important as diplomatic validation, Mercosur offers Maduro an economic lifeline. While Maduro was in Brazil, the Venezuelan Central Bank’s scarcity index, a measure of how much food is out of stock, hit an all-time high of 21.3. Maduro signed over fifty agreements during his trip, mainly in the agriculture energy sectors.

Plans have been hatched for large investments by Brazil and Argentina in Venezuela’s food production, where domestic production has lagged for years. The following week news broke that 760,000 tons of food would be arriving from Argentina, Brazil, and Uruguay.

The Brazil-Venezuela relationship has been good for Brazil

Thus, Brazil, and Brazilian led Mercosur, offer both a political and economic lifeline to Maduro’s inchoate Venezuelan presidency. But, as one would hope of any integration project, Venezuela offers Brazil something in return.

Brazil-Venezuela commerce boomed through the Chávez years. Trade grew from below US$800mn in 2003 to US$6 billion in 2012. Outside of oil, the trade balance favors Brazil by a ratio of 28 to 1. Brazilian multinationals, from the construction giant Odebrecht to chemicals producer Braskem to the steel-maker Gerdau, have major operations in Venezuela. At the peak of the pre-crisis boom, Brazilian business leaders made Venezuela sound like an investor’s paradise.

At the height of his influence, Chavez helped consolidate the two countries’ ties between 2005 and 2008. With unprecedented oil windfalls, the loyalty of an ascendant ALBA alliance, and a firm hold on the hearts and minds of the region’s left, Chavez was a force to be reckoned with.

Instead of openly vying with Venezuela for regional leadership, the Brazilians opted for cooperation. Chavez and Lula signed a strategic alliance in 2005 and in 2007 announced they would hold bilateral meetings every three months. For Lula, close ties with Chavez helped appease more radical elements in the Worker’s Party (PT) while his government pursued pragmatic policies.

But the Brazil-Venezuela alliance also ensured Mercosur would not advance on global trade and investment integration. Mercosur has always been torn between two identities: one as a mechanism for trade liberalization and another as an ideological project of South American solidarity. Chavez’s regional influence helped ensure the latter vision dominated, even as Paraguayan opposition kept Venezuela out of Mercosur. Brasilia privileged other initiatives such as UNASUR and CELAC that bore the Chavez imprimatur at the expense of Mercosur’s trade agenda.

But things are different now

The balance of power has changed, and it has changed definitively. President Maduro will be hard pressed to preserve his authority at home, much less project influence abroad. Stubborn oil prices will be less accommodating to petro-diplomacy in the foreseeable future. Perhaps most importantly, Maduro will never inspire the passion that Chávez did.

The upshot is that Brazil has an opportunity to steer Mercosur in a more pragmatic direction. It ought to start with the newest member. Brazil prevailed upon Maduro to accept an election audit, and Rousseff appears to have counseled Maduro to engage in dialogue with the opposition during their most recent meeting.

With its economic and diplomatic leverage and credibility as a long-standing ally, Brazil may be the only country that can steer Venezuela towards some semblance of stability. It is in Brazil’s interest to do so. Further deterioration in Venezuela—or in Argentina, for that matter—would be an economic blow at an inopportune time.

A tall order, to be sure, but if Brazil wants to be seen as a true global power, it should be able to clean up a mess in its own neighborhood.

Without Hugo? More like MercoBore

Theodore Kahn is a researcher and analyst on trade and investment in Latin America. He has consulted for several international organizations and NGOs in the region and in Washington DC