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An ominous step; Mercosur and Venezuela

From The Economist

December 10, 2005 | A trade group becomes an energy club | SÃO PAULO. "OUR destiny is Mercosur," declared Hugo Chávez, last month. It may be unwise to hold Venezuela's president to everything he says in his weekly four-hour television show, but in this case Mr Chávez seems to mean it. At a presidential meeting taking place on December 8th and 9th in Montevideo, the countries that make up South America's putative common market—Brazil, Argentina, Uruguay and Paraguay—were expected to welcome oil-rich Venezuela as a fifth full member, though it will take months if not years for declaration to become reality.

The admission of Mr Chávez's Venezuela is a challenge to Mercosur's identity. When it was founded, in 1991, Mercosur claimed to stand for open trade and regional integration led by the private sector; in 1996 it committed itself to "the full respect of democratic institutions". Mr Chávez is a fan of none of these principles.

"Theoretically, it makes sense to have a Latin American oil emirate inside Mercosur," says Alfredo Valladão of Sciences Po, a French university. Some of Venezuela's oil windfall is already flowing to southern neighbours. Venezuela could become the hub of a regional energy network. Petróleos de Venezuela, the state energy company, has teamed up with its Brazilian counterpart to build a $2.5 billion refinery in Brazil's north-east. Venezuelan shipments of diesel eased Argentina's energy crunch last year. Now the two countries are mulling over a pipeline network to deliver Venezuelan gas to Argentina.

All this could continue without Venezuela's full entry into Mercosur. Already Mercosur has agreed to free its trade with the five-nation Andean Community, to which Venezuela belongs. But tariffs are to fall slowly, with many exempt items. Full membership would speed up Venezuela's integration with Mercosur, argues José Francisco Marcondes of the Brazil-Venezuela Chamber of Commerce. Venezuela would participate in the borderless trade within the group and would accept its common external tariff.

At what price? Mr Chávez's interest in Mercosur is geopolitical. Venezuela's private sector has not been consulted. Already suffering price and credit controls and other harassments, Venezuelan businesses fear a flood of Brazilian imports.

Venezuela's arrival will rattle the balance of power within Mercosur and could complicate its relations with the world. Mr Chávez, whose oil does not attract any tariffs, is furiously opposed to any trade agreements with the United States, to which Brazil and Argentina are anyway lukewarm. The European Union already finds talking to Mercosur difficult.

Inside Mercosur, Venezuela may strengthen Argentina in its perennial rivalry with Brazil. Néstor Kirchner, Argentina's president, has the greater need for energy imports; his populist leftism chimes more closely with Mr Chávez's politics than the pragmatic moderation of Brazil's Luiz Inácio Lula da Silva.

The biggest potential cost is that Mr Chávez's constant grandstanding could distract Mercosur from the work needed to become the rules-based common market it aspires to be, but which is still a mirage. Trade within the group is recovering from years of recession (see chart), but in a lopsided way. Argentina's imports from its neighbours have surged, while Brazil's have fallen. That is odd, since Mr Kirchner has kept the peso weak, while the real trades close to its highest level since April 2001. Rather than try to make the economy more competitive, Argentina's government is insisting on a provision for safeguards against spikes in imports. Safeguards are "a second-best solution" compared with common policies on trade-distorting practices, such as export incentives, says Beatriz Nofal, a consultant in Buenos Aires.

Mr Chávez, like Mr Kirchner, has never been a man to stick to rules when they constrain him. Venezuela's entry, assuming it goes ahead, puts a question-mark over Mercosur's newly established dispute-resolution tribunal, as well as its plans for closer macro-economic co-ordination.

Supporters of Venezuela's entry claim that Mercosur's "democratic clause" will provide leverage over Mr Chávez. Perhaps. The risk is that by admitting a regime whose president is ambivalent towards democracy, Mercosur devalues one of its biggest assets, says Mr Valladão. A decade ago, there were high hopes that Mercosur marked a new seriousness in Latin American integration. Now the challenge is to avoid the welter of grandiloquence and rule-bending that undermined so many previous schemes.

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