Marcos Falcone
Thirty-five years after the creation of Mercosur—the South American trade bloc founded by Brazil, Argentina, Paraguay and Uruguay—it is clear that the strategy of collective integration into the global economy has failed. Instead of turning relatively protectionist countries into free-trade countries, Mercosur has simply become a large protectionist bloc itself, systematically blocking liberalization efforts by its members through high tariffs. For Argentina, whose president, Javier Milei, has advanced a pro-trade agenda, this is a problem. Since Mercosur stands in the way, Argentina should leave the bloc and unilaterally open its economy to the world, just as Chile did 50 years ago.
The Argentine president has already taken important steps toward normalizing trade. Export taxes and import tariffs have been reduced, multiple exchange rates have been eliminated, nonautomatic import licenses have been scrapped, and expired antidumping measures have not been renewed. Yet as long as Mercosur continues to function as a cage, this kind of trade liberalization has a hard ceiling. With very few exceptions, Argentina is not allowed to reduce tariffs beyond what Mercosur allows.
According to the BACI database, Mercosur’s nominal average tariff currently stands at around 12 percent—twice Chile’s level, three times that of the European Union, and four times that of Peru, among other examples. Effective tariff rates tell an even worse story: As of 2022, Argentina’s effective average tariff was over 10 times higher than those of either Chile or Peru, even as it fell by half during the Mercosur years. In fact, the world has moved so much faster in liberalizing trade that the country has become markedly less open than others. In 1990, Argentina ranked 68th in freedom to trade internationally. In 2023, it was the 161st most open economy out of 165.
As if this policy failure were not enough, progress in achieving other forms of liberal integration has been minimal or nonexistent. Astonishingly, 35 years after Mercosur’s founding, there is still no Schengen-style area for the free movement of people—as is the case in the European Union—despite this having been a goal of Mercosur for a long time. Anyone who has tried to cross from Argentina into Brazil, Uruguay, or Paraguay by land, air, or water knows how exasperating the process can be. Meanwhile, Mercosur spends money on bureaucratic, taxpayer-funded structures including a “parliament” (Parlasur) that issues no laws, only recommendations.
For a long time, Mercosur’s last hope for opening the economies of its members was the much-touted free-trade agreement (FTA) with the European Union, negotiations for which began in 1999. The Mercosur–EU agreement is full of good intentions on the part of free traders, but it has been announced so many times (for example in 2019 and 2024) that it is hard to keep count, as obstacles keep arising and opposition seems insurmountable.
Just last week, the European Parliament voted to send the agreement to the European Court of Justice, an unexpected move that could delay the treaty for years. Even if the European Parliament does vote in favor in the future, ratification problems in several national parliaments are already expected, as opposition to the FTA encompasses parties and politicians as different as center-right French President Emmanuel Macron, Spain’s far-right Vox, and Germany’s far-right Alternative for Germany (AfD) and far-left Die Linke. The European Commission may decide to implement a provisional agreement anyway, but legal uncertainty will remain, which will minimize the effects of a treaty that fails to impress to begin with.
Indeed, even if the Mercosur–EU FTA were to enter into force, full implementation would be slow—it would remove most tariffs over a period of 12 years and in some cases even longer. Its impact would also be limited. The agreement not only includes generous safeguard clauses that could potentially suspend the elimination of tariffs for “sensitive” agricultural products, but it also establishes import quotas for the European Union that, in some cases, amount to less than 2 percent of its current production. If all goes well, Mercosur is expected to see a 17 percent increase in export values to the EU by 2040. The tariff reduction that would bring this about would certainly be better than nothing, but for an agreement that has been in the making for over a quarter of a century, it is, as The Economist wrote, “hardly a free-trade revolution.”
There is no point for Argentina—or previously Uruguay, whose former President Luis Lacalle Pou called Mercosur “a corset” a few years ago—to continue hoping that Brazil or France will abandon the protectionist policies that they have spent decades defending. If there is one idea with which economists tend to agree, it is that free trade is good. That is why Argentina, which in 2023 ranked among the five most closed economies in the world but now has a libertarian administration, should leave Mercosur. Specifically, Argentina should follow Milton Friedman’s advice to implement free trade unilaterally, even if other countries resist or fail to reciprocate tariff reductions.
There is a powerful precedent: Chile. Amid a crisis of public spending, an unbalanced budget, and inflation similar to what Argentina has recently endured, Chile had an average effective tariff rate close to 100 percent at the end of 1973. As has been the case in Argentina since December 2023, trade protectionism began to decrease through initial tariff reductions, the elimination of nontariff barriers, and macroeconomic stabilization. By 1976, Chile’s average effective tariff rate had fallen to 33 percent. To continue opening its economy, however, Chile faced opposition from the Andean Pact—a common market that included Bolivia, Colombia, Ecuador and Peru—that was even more protectionist than Mercosur is today and sought to maintain a tariff level double that desired by the Chilean authorities.
Thus, Chile’s strategy to open its economy was to leave the Andean Pact, a decision that was announced in 1976, and set clear liberalization targets. In 1977, once it achieved macroeconomic stability, Chile announced the goal of a 10 percent average tariff within two years. Trade liberalization was a total success: Not only did imports rise, but exports also tripled by 1980. Since the beginning of those reforms, Chile has signed 35 trade agreements, some of them with the world’s largest economies. It is now the most open economy in South America. As of 2022, the latest year for which World Bank data are available, Chile’s effective tariff rate stood at just 0.5 percent. It is no coincidence that Chile has become Argentines’ top destination for shopping: Trade openness means more, better, and cheaper products.
Chile managed to escape its protectionist prison; Argentina can do the same. If Mercosur insists on remaining closed, there is no reason for Argentina to stay trapped inside it. President Milei has hinted at the possibility of exiting Mercosur in the past. To do that, he needs the support of the Congress, where his party is still a minority. But insofar as it becomes possible to secure a legislative majority, which Milei has been able to do multiple times during his presidency, he would do well to formally propose leaving Mercosur so as to unilaterally integrate Argentina into the world economy.
At a time when protectionism is on the rise around the world, Argentina has the opportunity to become a global leader in favor of free trade. Exiting Mercosur would be a good first step.