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If Venezuela joins the Mercosur economic bloc, will it follow the rules?

Christian Science Monitor

If Venezuela joins the Mercosur economic bloc, will it follow the rules?

Venezuela could find its often renegade diplomacy reined in if and when it joins Mercosur. But the likely big winner would be Brazil.

By James Bosworth, Guest blogger

22 December 2011

Venezuelan President Hugo Chavez needs to wait a bit longer for his country’s entry into Mercosur, the Common Market of the South founded in 1991 by Argentina, Brazil, Paraguay, and Uruguay. Though the group feels they found a procedural move to get around the opposition of Paraguay’s legislature, the move will take additional time.

Much of the debate on Venezuela’s potential entry to Mercosur has focused on shallow political questions about whether or not President Chavez should be admitted. Paraguay’s opposition has used its legislative control to block approval of Venezuela’s entry on the grounds that Chavez’s Venezuela does not meet Mercosur’s standards on democracy. Meanwhile, Chavez and his supporters have treated Venezuela’s entry into Mercosur as an obvious step for South American integration.

For those who’ve forgotten, Mercosur actually has rules with an economic impact. It’s not one of those nominal integration organizations in which a group of presidents hang out and talk once or twice per year and then is forgotten. Mercosur rules, though sometimes poorly enforced, have an impact on its members’ trade agreements, customs, tariffs, monetary policies, and contractual law.

Let’s go over some of the potential impacts that will occur if/when Venezuela joins Mercosur, some of which are just as important even if Chavez is no longer president a year from now.

Free trade within Mercosur. Venezuela must allow the free transit of goods and services with Mercosur countries. It’s the basic foundation of the organization.

Free trade with Colombia. Mercosur signed and implemented a free trade agreement with Colombia a few years ago. The sudden implementation of a new free trade framework between Venezuela and Colombia via Mercosur could have a major impact on both economies. Specific to the current Chavez government, how would Mercosur’s regulations affect Venezuela the next time Chavez decides to shut down trade at the border over some random dispute, as he did when President Alvaro Uribe was in office?

Free trade agreement with Israel. Mercosur has a signed and fully implemented free trade agreement with Israel. Separately, they signed a deal with Palestine during this week’s meeting. Venezuela’s ascendance means they must abide by the Israel free trade rules. How will Chavez’s friends in Iran and Syria who cheered his breaking of diplomatic ties with Israel a few years ago take his sudden agreement to a free trade deal with the country?

Restrictions on unilateral trade agreements. With some leniency, all Mercosur members must negotiate trade agreements jointly. A few years ago, Mercosur prevented Uruguay from negotiating a free trade agreement with the United States. Could Chavez negotiate new trade deals with his ALBA partners without consulting Mercosur? Also, Venezuela would gain significant veto power over any potential new trade deals that Mercosur attempts to negotiate, which could significantly tie Brazil’s hands.

Common external tariff
. One of the biggest items agreed during this week’s meeting was a new common external tariff on a number of goods from Asia. This tariff targets about 100 goods, most from China, to protect Brazil’s and Argentina’s manufacturing sectors from dumping. How does China feel about the fact that Venezuela, to whom they just lent several billion more dollars, will be joining Mercosur and implementing a 35 percent tariff on certain Chinese goods? Additionally, Venezuela will be unable to enact new tariffs on many items without consulting its Mercosur allies.

Expropriation restrictions. Mercosur has some rather strict rules protecting member states from expropriating property of other member states. Joining Mercosur would restrict Chavez’s ability to take over Argentine or Brazilian companies operating in his country and would force a fair compensation if he did. Being that both Brazil and Argentina have had issues with Chavez’s sudden expropriations in the past, they likely want these new rules in place.

Currency transfers. Mercosur nations officially cannot adopt currency restrictions that would prevent the free transfer of funds across their borders. This is not the best enforced measure, but it’s possible that Brazil and Argentina could use these Mercosur regulations to get around Venezuela’s rather strict currency restrictions at the moment.

The likely big winner in this deal: Brazil. Many people have asked why Presidents Luiz Inácio Lula da Silva and Dilma Rousseff would allow Venezuela to join Mercosur given the volatile and undemocratic nature of its current government leadership. Look no further than those economic points above. Brazil will get a free trade deal with Venezuela that will provide a big open market, create new multilateral legal protections for their companies and investments, allow them to get around Venezuela’s currency restrictions, and place a huge set of tariffs on all Chinese goods in Venezuela, making Brazilian companies more competitive. Venezuela under the Mercosur regulations could become an economic windfall for Brazil, which already is making big money on Venezuela’s oil wealth and Chavez’s economic mismanagement.

If Venezuela joins, one of two things will occur. Either they will follow those Mercosur rules and regulations, which could have a major political, legal, and economic impact that few have foreseen and which will greatly benefit Brazil. Or, Venezuela will flaunt Mercosur’s rules, making a mockery of the organization and leading to other countries, particularly Paraguay and Uruguay, asking why they can’t also break some of the rules that would benefit them.

Mercosur has rules. Those rules aren’t just the democracy clause that so many analysts have brought up, but actual economic regulations with real impact. Analysts should get past the Chavez show and current democracy debate and ask how implementing those regulations will impact Venezuela’s and the region’s economy. This could be a big economic shift that nobody is prepared for, especially not Venezuela.

— - James Bosworth is a freelance writer and consultant who runs Bloggings by Boz.