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Mercosur trade bloc turns its back on Adam Smith

Venezuela's President Hugo Chavez and Brazil's President Dilma Rousseff chat during the Mercosur trade block summit in Montevideo, Uruguay, Dec. 20, 2011.


With its new targeted tariffs, Latin trade bloc Mercosur still appears to be searching for alternatives to Adam Smith's free-trade economics. Since the group's members are all led by left-of-centre politicians, this isn't wholly surprising. But because Mercosur nations have oodles of commodities and relatively uncompetitive manufacturing, the risk of economic experimentation is a backslide toward poverty.

Mercosur's current leaders are all economically to the left, with candidate member Venezuela's Hugo Chavez and Argentina's Cristina Fernandez the most unorthodox. So the bloc's decision last week to impose a 35-per-cent common external tariff on 100 imported products was true to form. Brazil had already imposed a 30-per-cent tariff surcharge on cars containing less than 65-per-cent Mercosur-produced content.

With the new impediments to trade, Mercosur will differ fundamentally from blocs such as NAFTA and the European Economic Area which permit goods to flow freely between them but impose a modest tariff on third-party goods. The higher tax will effectively block imports. With this Mercosur seems to be attempting a form of self-sufficiency.

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At the moment, Mercosur is in a strong position, with Venezuela's oil, Argentina's agricultural sector and Brazil's iron ore and other minerals. Indeed the rise in global commodity and energy prices has allowed Mercosur countries to pursue unorthodox economic policies and expand government spending without the worries that constrain Europe and the United States.

But the spending is catching up, particularly in Argentina and Venezuela. With new sources coming on-stream, especially in the energy sector, commodity prices must decline some time, allowing manufacturing and services to enjoy more of the world's wealth. That could spell trouble for Mercosur.

Even Brazil's manufacturing and service sectors are barely competitive, as the Taiwanese iPad manufacturer Foxconn recently found with its investment there. High tariffs will raise domestic costs further, making Mercosur producers more dependent on the Mercosur market, with GDP of only $2.9-trillion (U.S.), 4.5 per cent of the world's total.

In The Wealth of Nations, Adam Smith viewed such economic isolationism as suboptimal. And previous attempts at self-sufficiency proved him right – for example in Latin America and India until their liberalization after 1990. Cutting an economy off from the full flow of global innovation and cheaper goods ultimately impoverishes its inhabitants. Mercosur may prove him correct again.

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