Latin American Integration

Recently, I have focused on domestic policy in Brazil, with an emphasis on the economy. I will now turn to the country’s foreign policy in a series of three posts. This text will focus on Brazil’s role in Latin American integration. The next two posts will highlight Brazil’s growing relationship with Africa and with major world powers.

Regional integration has become a major focus of international relations over the last few years. The major regional integration project is, of course, the European Union, which is dealing with a crisis whose resolution may determine the course of similar projects across the world. But there are numerous other examples of blocs of nations coming together to promote trade and security, such as NAFTA (North America), ASEAN (Southeast Asia), the Arab League (Middle East) and the African Union. Each of these organizations has unique objectives and structures, but they all reinforce a clear trend toward regional political arrangements.

Latin America is no exception to this trend. The longest-running regional political project has been the Organization of American States (OAS), meant to unite all the countries of the Western Hemisphere. For fifty years, the OAS has brought the leaders of the Americas together to discuss important issues such as human rights, peace and security, and economic development. Yet the OAS project may finally be reaching its end. Latin American leaders have increasingly been airing their frustration with the organization, due to its domination by the U.S. (the OAS is headquartered in Washington DC) and its exclusion of Cuba. At the OAS-sponsored Summit of the Americas this year in Cartagena, Colombia, the tension reached a fever pitch. Prominent moderate political leaders such as Ms. Rousseff and Juan Manuel Santos of Colombia challenged President Obama on a range of issues and publicly declared that they would no longer support OAS meetings without the participation of Cuba. The OAS has been eclipsed in recent years by new regional groupings that deliberately exclude the US and Canada, namely the Union of South American Nations (UNASUR, created in 2008) and the Community of Latin American and Caribbean States (CELAC, created in 2010). While the US once led the drive for regional integration through projects such as the Alliance for Progress and the Free Trade Area of the Americas, it is increasingly becoming a side player as Latin American leaders seek to create their own union free from the influence of Washington.

Will This Time be Different?

It is easy to look at the UNASUR and CELAC projects with skepticism. Latin American history is full of failed attempts at regional organization, such as the creation of the Rio Group and the Latin American Integration Association in the 1980s. There has been talk of creating a free trade area for decades, yet little to no progress has been made on this front. Even Mercosur, the most well-established project in the region, has been paralyzed by trade wars between Argentina and Brazil. If even this project has been such a failure, why would anyone expect a more ambitious initiative to be effective?

Look closer, however, and it is clear that the dynamic in the region is indeed changing quickly. UNASUR has made significant progress on several fronts. The most notable of these has been defense policy, where South American countries are increasingly coordinating their militaries to better police the Amazon and crack down on guerrilla groups and narcotraffickers in the region. The body has also promoted infrastructure cooperation, building roads, dams, and telecommunication networks across the continent to promote trade and link the region’s economies together. The group  has also established itself as an important mediator to resolve internal political disputes and threats to democracy, through intervention in 2008 in Bolivia and currently in Paraguay. Finally, there has been significant progress on immigration, as countries abolish visa requirements and create guest worker programs to promote the free movement of peoples and eventually establish a South American equivalent to the Schengen Area in Europe. These advances in security, infrastructure, political mediation and immigration cooperation all signal a new era in Latin American relations.

Yet the true test of progress in Latin American integration is the advancement of a free trade pact among the region’s countries. Establishing a common market is vital to move the Latin American project forward, and it is difficult to imagine increased integration without the creation of a unified trade bloc. This, after all, has been the basis of the European Union for the past fifty years.

Intra-regional Trade

To understand trade in Latin America, it is important to understand how the region’s geography shapes economic activity. The presence of the Amazon Rainforest and the Andes Mountains greatly limits the ability of South American countries to trade extensively with each other. A quick glance at a physical map of the continent makes this clear:

As Brazil’s population and economy is concentrated in the South, its natural geographic trade partners have been the neighboring economies of the Rio de la Plata river basin: Argentina, Uruguay and Paraguay. The Pacific countries of Chile, Peru, Ecuador and Colombia are highly concentrated on the coast and thus more able to trade with each other than with their distant neighbors on the Atlantic. Mexico, the second-largest country in the region, is in North America and is therefore bound more tightly to the U.S. This has led to the natural formation of separate trading blocs in the region.

Structural similarities form another obstacle to increasing trade among the region’s economies. As commodity exporters focused on agriculture, mining and hydrocarbons, Latin American nations tend to trade more with industrialized economies such as the U.S., China and Europe, than with each other. (Brazil does have a large industrial base, but its exports are rarely competitive with those coming from China and other Asian countries.) As a result, many Latin American countries tend to be more focused on trading partners outside the region. These geographic and structural barriers to intra-regional trade are major challenges to further integration efforts. Intra-regional exports make up only 25% of exports in Latin America, compared with 50% in Asia and 70% in Europe. Yet trade is clearly on the upswing in the region, reaching a record $160 billion in 2011. The growing importance of transportation and energy projects with Brazil in smaller countries such as Peru and Bolivia means that these nations understand the extent to which their futures are tied to the behemoth next door.

As negotiations for a regional free trade agreement continue to advance, it is clear that Latin America is splitting into two main camps. The outward-looking, pro-free trade nations of Chile, Peru, Colombia and Mexico recently came together to form the Pacific Alliance, which promotes low tariffs and enhanced ties with Asia and the U.S. Mercosur, led by Argentina and Brazil, has become increasingly protectionist and seems more keen on defending its internal markets than on building trade relations with overseas powers. These two groups appear to have fundamental and irreconcilable differences in their visions for future regional integration, and it seems difficult to imagine that any progress will happen toward this goal if the deadlock is not broken.

(Another obstacle to regional integration has been Venezuela’s Hugo Chavez, who has been trying to win converts to his Bolivarian Alliance, which emphasizes a socialist economic model, radical transformation of domestic political structures, confrontation with the United States and partnerships with international rogue regimes such as Iran and Syria. Mr. Chavez’s influence has been on the wane for some time and his only converts have been relatively small countries such as Nicaragua, Cuba, Ecuador and Bolivia. Yet his alternative project continues to undermine unity among the region’s countries.)

Brazil’s Role

Far and away the largest country in Latin America, Brazil has been the natural leader of integration efforts. With roughly 50% of South America’s population and GDP, Brazil holds unparalleled dominance over the continent. It thus holds the key to Latin American integration. Simply put, there can be no integration without Brazil’s support. Yet Brazil’s protectionism is precisely what has undermined efforts to form a common market. Things have been made worse by the growing recklessness of its principal regional partner, Argentina. As Argentine president Cristina Fernandez de Kirchner rapidly adopts a more aggressively nationalist posture (exemplified by the recent nationalization of the YPF oil company and criticism of British control of the Falkland Islands), Brazil has tried to appease this key ally by raising common tariffs for the Mercosur area. This chart, courtesy of the Globe and Mail, illustrates the recent dynamic:

These are clearly steps in the wrong direction. Until Brazil is willing to break from its protectionist tendencies and sign free trade agreements with the countries of the Pacific Alliance, the common market will remain on hold. However, this may be next to impossible given these countries’ bilateral agreements with the U.S., since Brazil has made it clear many times in the past that it is not interested in signing on to a U.S.-brokered deal.

What makes the Pacific Alliance a potential game changer is that it is composed of the two countries best equipped to challenge Brazil’s regional hegemony: Mexico and Chile. As the second largest country in the region, Mexico has long vied with its Portuguese-speaking counterparts for influence in Latin America. Chile, despite its tiny size (8% of Brazil’s population), has been the best success story in the region over the last two decades, enabling it to adopt a lead-by-example approach. Individually, these countries do not have the political clout to challenge Brazil’s leadership: Mexico is too distant geographically and Chile is far too small. But by joining together with several other allies (Panama and Costa Rica have also expressed interest in joining the Pacific Alliance), they may be able to exert greater pressure on the Brazilian government to change its present course.

Brazil has cemented its position as Latin America’s leader over the last decade through a clever mix of soft power and economic muscle. But Brasilia’s influence over the region may begin to wane if it cannot kick-start economic growth. After a decade of rapid expansion, Brazil has fallen to the back of the pack, registering a mere 0.8% annualized growth rate in the first quarter of 2012. The countries of the Pacific Alliance, by contrast, continue to surge ahead. Over the same period, Mexico grew by 4.6%, Chile by 5.6%, Colombia by 5.4%, and Peru by 6.0%. Unless it arrests these trends, Brazil may find its star diminishing across the region.