Mercosur: South America’s Version of NAFTA

Firms doing business in South America or considering doing future business will be heavily influenced by Mercosur. Frequently referred to as “the NAFTA of South America”, Mercosur aims to open borders across South America to the tariff- and duty-free flow of goods.

Originally composed of Argentina, Paraguay, Brazil, and Uruguay, the Southern Common Market (in Spanish Mercosur) united several of the continent’s largest economies into a single market. Many other nations are have expressed interest in joining the reciprocal trade agreement, including members of the Andean community.

The main objectives of the trade pact are to lift restrictive taxes on goods among member nations, create a common external tariff, coordinate macro-economic policies to foster increased competition, and allow for further market unification. Each of these objectives is designed to integrate the economies of South America to further enhance the region’s economic development.

Mercosur also calls for the creation of institutional structure to adjudicate trade disputes. Aside from the judicial needs, this administrative body pools some of the top economic minds on the continent and gives them a platform to use their talents in a unified purpose.

Moves are also being made to consolidate the function of the continent’s various financial markets. Education equivalents are being created to improve the mobility and equality of the workforce to allow for improved utilization of technical workers. A unilateral tax structure was created to avoid double taxation of investment gains and encourage transnational investment.

Original members of the pact eliminated internal tariffs as of January 1, 1995, but there continues to be a 23% external tariff. Companies looking to do business in South America are given heavy incentives to locate production facilities within Mercosur boundaries to avoid the stiff tariff. Goods with over sixty percent of their final value contributed in a Mercosur country are produced there, placing soft limits on component parts use.

Mercosur will continue to open up South America’s borders to the free flow of goods. Movements to create a single distribution system will improve efficiency and allow for countries to begin the process of specialization. Ultimately this means that consumers in South America will have access to better goods and services, improving their standard of living and promoting the overall development of the continent. Instead of looking for modes of entry into numerous countries with varying economic environments, Mercosur will allow companies to begin to examine South America as a whole market and strategize accordingly as Mercosur extends its reach.