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The Southern Cone’s Turbulence: Inequality and Democracy in Question

Protests, police repression, violence, and deaths marked October’s political scenario in South America. In Ecuador and Chile, hundreds of thousands of protestors took to the streets to call attention to the deterioration of living standards after announced hikes in fuel and public transportation prices. In Bolivia, voters went to the polls on 20 October to elect their next president with increasing mobilizations against the incumbent candidate Evo Morales despite 12 straight years of economic growth. Morales was already under criticism for his responses to the forest fires that swept through the country in recent months. After the presidential election, marked by significant irregularities and opposition allegations of fraud, thousands of anti-government protestors continued to challenge Morales and his announced electoral victory.

In these three countries, authorities declared states of emergency but protests did not recede. On the contrary, movements continue to challenge the incumbent presidents and law enforcement agencies now confront protestors on the streets. Ecuador's president, Lenín Moreno, revoked the planned fuel hikes and Chilean President Piñera also canceled public transportation fare increases along with carrying out a cabinet shuffle. However, these moves were not enough to pacify protestors as mobilizations continue to surge in the streets of major cities. These protests quickly transformed into broader attacks on government policies associated with increases in poverty and inequality. In Bolivia, Morales agreed to an election audit supervised by the Organization of American States (OAS) but his electoral opposition has refused to participate in a process it claims was designed to favor the incumbent. Sectors of the military and of the police forces started a movement to oust Morales, which included threats to his personal safety and that of his family. The president finally resigned and now is running the risk of being arrested, while a military junta is asserting itself as rulers of Bolivia for the time being. If civil government is not promptly reinstituted, Bolivia will be the first example of military coup in South America in the 21st century.

The Reaction of Brazil’s Government

In response, the Brazilian government braces itself for the possibility of similar protest movements, especially in light of Lula’s release from jail. This is especially pertinent given Economy Minister Paulo Guedes’ affinity for the Chilean economic policy model coupled to the recently approved social security reform that cuts benefits and increases worker contributions. Also, President Bolsonaro has refused to recognize the Bolivian election results and has remarked that the protest movements in Ecuador and Chile are lead by left-wing “terrorists.” He has also asserted his conservative nationalist ideology in the face of the recent Argentine presidential election that brought a center-left coalition back to power. Bolsonaro and his son Eduardo seem to be prompting the Brazilian Armed Forces to ready themselves for eventual responses to widespread protests and unrest.

The Brazilian government faces certain political challenges moving forward. While investors are encouraged by the country’s internal political stability and falling country risk profile, the lowest since 2013, the economy continues to disappoint and the specter of rising levels of protest and disruption is now palpable. The PSL’s internal crisis and division now weakens the executive’s influence within the National Congress. The recent allegation that links the president with paramilitary suspected of murdering Rio de Janeiro city’s counselor Marielle Franco last year, although refuted by state prosecutors, may also distance the executive from congressional leaders and undercut presidential approval in the near future. That, in turn, might further undermine congressional support for the president’s legislative reform efforts.

Argentine and Uruguayan Elections from the Brazilian Perspective

Aside from Bolivia, Argentina and Uruguay held presidential elections in October. Argentina faces an economic decline, monetary devaluation, high unemployment, significant increases in poverty and inflation while Uruguay maintains a positive rate of growth since 2003 despite the recent slowdown. In both cases and despite the differences between these two countries, the incumbent administrations face difficult economic and political challenges. Uruguay’s slowdown after 15 consecutive years of economic expansion threatens to unseat the center-left governing coalition. Daniel Martinez of the Frente Amplio seeks a second term against the more conservative challenger Luis Lacalle Pou of the National Party that leads a center-right coalition. Brazilian President Bolsonaro expressed his support for Lacalle which triggered the Uruguayan conservative presidential contender to criticize the Brazilian executive in response (possibly to avoid the electoral fate of the incumbent, center-right Argentine president).

In Argentina, winner contender Alberto Fernández and his vice-presidential running mate and former president Cristina Krichner beat incumbent Mauricio Macri who received the open support of Bolsonaro. Bolsonaro did not accept the electoral result in Bolivia, but accepted the Argentine results without extending a congratulations to Fernández. The Argentine president-elect’s open support for the release of Lula might have contributed to that outcome. Macri’s loss in Argentina may also frustrate Minister Guedes and the Brazilian government’s efforts to restructure partnerships in the region, including Mercosul, behind a liberal economic agenda and social conservatism. For this reason, Bolsonaro mentioned the possibility of Brazil’s withdrawal from the South American trade agreement or the expulsion of Argentina in the case of political disagreement between the two governments. Brazilian economic policymakers refused to endorse these possibilities, but President Bolsonaro’s remarks serve to inflame bilateral relations and disrupt cooperation between the two most important nations in Mercosul.

The Impact of Elections on Mercosul

Brazil, Argentina, Uruguay and Paraguay are member-states of Mercosul. Venezuela has been suspended since 2016 and Bolivia is an associate member in the process of obtaining full membership. Bolivia’s membership was ratified by all member-states with the exception of Brazil. The Brazilian legislature must adopt legislation (PDC 745/2017) to formally ratify Bolivia’s inclusion and counts on the support of Chamber of Deputies President Rodrigo Maia (DEM) but the Bolsonaro administration requested that the measure be withdrawn from active deliberation because of the ensuing tensions between the two governments. Also, the election of Fernández in Argentina and the possible re-election of Martinez in Uruguay, leaders that have little in common ideologically with the Bolsonaro administration, may lead to increased tensions with the Brazilian executive. Even with the possibility of Lacalle’s election in Uruguay, bilateral relations may become strained, especially given Bolsonaro’s willingness to break up Mercosul. Brazil wants to create more flexibility within Mercosul so that member-states are free to negotiate bilateral trade agreements, especially with the United States. This position may present an increasing risk that protectionist measures return to complicate trade relations within South America, especially with respect to Argentina. Also, Brazil’s position regarding the recently signed trade agreement between Mercosul and the European Union (EU) is unclear given the president’s interest in reforming the common market of South America and pending ratification of the trade agreement with the EU. Argentina’s Fernández has indicated his interest in revising the trade agreement despite the EU’s insistence that negotiations cannot be revisited.

Brazil’s Plans for Mercosul

Brazil’s proposes to simplify and cut down on the red tape regulating trade and institutional relations both within and outside the trading block. Since his 2018 campaign, Bolsonaro and his economic policy advisors have advocated the intensification of bilateral trade relations and increases in the number of trade partners outside the South-South economic cooperation approach advanced by previous administrations. According to the Secretary of Foreign Trade Lucas Ferraz, the government has indicated its intentions to establish trade pact negotiations with the U.S., Canada, Mexico, Japan, Vietnam, South Korea, and Singapore.

As the president pro-tempore of Mercosul, Brazil also seeks a 50% reduction in the common external tariff (TEC) — the tariff collected on all goods originating from outside the block’s member-states. This tariff was originally conceived to protect the national industries of the member-states. While Argentina, Uruguay and Paraguay had earlier supported the slash in the TEC, the election of Fernandez in Argentina calls into question the future of this proposal. Even within Brazil there are divergent perspectives regarding the proposal, that along with the expected position of the incoming Argentine government, could undermine support for the change. Brazil’s National Industry Confederation (CNI) fears that an abrupt reduction of the TEC could trigger contractions of particular segments of national manufacturing with the accompanying unemployment to thereby undermine a full economic recovery. Moreover, such a scenario may undercut Brazil’s negotiating power in trade talks around the world that promise to reduce external barriers to Brazilian agricultural commodity exports. While the Brazilian business community leadership favors trade liberalization, it prefers a gradual process that maximizes market openings for Brazilian exports while minimizing the flow of manufactured imports that pose a threat to national industry.

Tensions with Argentina: Risks, Perspectives and the Future of Mercosul

The recent tensions unfolding between Brazil and Argentina impose a critical risk to the future of Mercosul. The complete rupture and eventual dissolution of the South American Common Market is unlikely, despite Bolsonaro’s remarks. Currently, 40% of Brazilian manufactured goods exports go to Latin American and Caribbean nations (CEPAL 2018), with disproportionately high levels to Mercosul member-states. Brazil’s trade balance with Mercosul member-states generated a $8.3 billion USD surplus in the past three years, with Argentina the largest importer of Brazilian manufactured goods at 72% (MIDIC 2018). Argentina also depends on Brazil and sends 81% of its Mercosul destined exports to Brazilian markets. 54% of Brazilian municipalities that export goods rely on Mercosul member-state markets. Also, the improbable extinction of Mercosul would complicate Brazil’s trading relations with external partners, especially the EU that has historically preferred to sign bilateral agreements with South American nations.

The second risk of such an outcome is the possible transformation of the block from a common market to a more conventional trade agreement that would then eliminate the TEC, further contributing to tensions between Brazil and Argentina. Such a change would represent a setback for regional trade but would be seen by the Bolsonaro administration as a victory for trade liberalization, a result that might undermine a robust economic recovery and the revitalization of Brazilian manufacturing — at least in the short term. There is room for modifications to Mercosul trade disciplines and rules that could renew and stabilize the trading arrangement despite increasing tensions, especially those expected to brew between Brazil’s and Argentina’s presidents. Even without efforts to renew Mercosul, there is little hope of fortifying regional economic integration in the short term under Bolsonaro. To the contrary, the Brazilian government may impede progress and undermine the advancement of Mercosul renewal efforts in the name of what it deems to be Brazil’s national interest.

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