Mercosur for total beginners

Mercosur is complex – so where do we start? Let’s bring it back to basics and see if it makes sense to UK and other exporters looking into South America.

Why do exporters start thinking about Mercosur?

From my experience, there are three main reasons why overseas exporters (from the UK, US, Canada, etc) start researching Mercosur. The first reason is when they know they want to export to South America but want to do it more strategically than just going into each country. They quickly realise that are certain “blocs” in the region and they want to see how they can use them to their advantage. For example, by exploiting Mercosur free trade zones.

The second reason is when exporters want to set up own manufacturing operations (or even joint ventures or other agreements) in the region. Mercosur then undoubtedly pops up in the research.

And the third reason is the most common of all, and I get asked this at least weekly: import duties are famously high (and that’s an understatement) in Brazil and Argentina, so can “something” within Mercosur provide a way round it?

So what is Mercosur?

Mercosur is a “regional integration process” set up in 1991 between Argentina, Brazil, Uruguay and Paraguay.

There’s quite a bit to take in from what seems like a very simple statement:

–          First of all, it’s a process. A 25-year old process.

–          I would personally define it loosely, for our purposes, as a “union of countries”. It’s not the European Union, by the way, but it’s kind of a trade bloc, and a bit beyond it. Basically, there are some trade agreements between the countries, but not just trade agreements (there are agreements also on the movement of people, education, etc)

–          The founding countries are Argentina, Brazil, Paraguay and Uruguay. Argentina and Brazil are the largest countries in South America. Paraguay and Uruguay are pretty small in comparison, so there are huge power imbalances within the bloc.

–          Since then, Venezuela has joined the group (sorry, the “process”), mainly because of its political alignment with the other then governments. And it’s causing a lot of headaches now that the alignment is lost and that Venezuela is pursuing an authoritarian regime.

So, as an exporter, why does it matter?

Good question.

First, let’s look at customs and duties.

Mercosur has an external common tariff known as the “Arancel Externo Común” in Spanish (remember Brazil is Portuguese speaking) and a common nomenclature known as the “Nomenclatura Común del Mercosur” or NCM. So you need to visit the NCM page to find out what import duty your goods will pay to get into any Mercosur country.

However, there are exceptions, so check carefully.

So one common external tariff, that’s good to know.

The second reason why Mercosur matters is that, in theory, all goods that have a Mercosur origin (manufactured in any of the Mercosur countries, with at least a certain percentage of “local” or “Mercosur” content) can be exported free of duty to the other Mercosur countries. So you could manufacture in a smaller, more manageable, stable and relatively simple country to do business in, such as Uruguay, and export to more “difficult” countries like Argentina and Brazil, free of duty. Wow.

Careful here.

First, note my “in theory”. There are written exceptions. And non-written exceptions. So checking rules and regulations won’t be enough. If you are thinking about manufacturing in a Mercosur country to export to another Mercosur country, check with local experts carefully if that will actually really work.

Second, note my vague “certain percentage” of local content… this is very hard to estimate and it’s done almost on a case-by-case basis, so seek in-country  legal advice, don’t rely just on a web search…

The other important point to remember is that your Mercosur-based competitors will have access to these markets without the extortionate duties that you (more likely than not) pay, so when you check pricing/competition, bear this in mind. These competitors can be local/regional firms or they can be companies from all over the world already manufacturing within the bloc.

Where’s Mercosur heading?

There is now a common consensus – even among members – that Mercosur, as it stands, isn’t working. It’s too slow and too rigid. It seems impossible to align all four

countries (even leaving Venezuela to a side for a bit) and push in the same direction – until last year, the Argentina government was very protectionist and wasn’t keen to open up Mercosur to the world, now that the new Argentina government is keen to move forward with negotiations, Brazil enters a huge internal political crisis that’s diverting it from focusing in Mercosur, and Paraguay and Uruguay are fed up of not being listened to.

So everything indicates that, while no-one is truly keen to “Mercoexit”, there is a bit more acceptance that each country might have to negotiate with other blocs or countries outside Mercosur. Uruguay did this with Chile last week, signing a free trade agreement, and has done it in the past, for example, with Mexico.

So, from your point of view, watch this space for a year or so and see what happens, whether countries open up, as part of Mercosur, or outside it.

In summary…

Mercosur groups Argentina, Brazil, Uruguay and Paraguay (and Venezuela). This group/process can impact your export strategy into South America in many ways, so research it carefully.

Currently, there is a common external tariff for Mercosur members, with some exceptions.

Technically, manufacturing in one Mercosur country would allow you to export to other Mercosur countries free of duty.

Remember that there are a lot of unwritten rules, so ask for local expert advice, don’t assume that what’s written is applied as it would in the EU, for example.

Watch this space – Mercosur is evolving.