Venezuelan entry into MERCOSUR set to have strategic and business impact
By James Lockhart-Smith
On 31 July, Venezuela formally joined the Common Southern Market (MERCOSUR), a South American trade bloc comprising Brazil, Argentina, Uruguay and until recently Paraguay. The presidents of Argentina, Brazil and Uruguay had agreed to admit Venezuela at a summit on 28-29 June, at which they also suspended Paraguayan membership pending upcoming presidential elections in that country in April 2013. Indeed, Venezuela’s entry into the regional trading bloc may prove to be the most significant consequence of the event that prompted Paraguay’s suspension in June – the rapid impeachment and removal from office of left-wing president Fernando Lugo earlier in the same month. This had been provoked by concern over his failure to manage escalating violence over land rights, and was seen by fellow MERCOSUR states as an unacceptable breach of democratic process. In this context, Venezuela’s move from associate to full member of the trade bloc, which had been blocked by the Paraguayan legislature, fulfils a long-held ambition of Venezuelan president Hugo Chavez. Lugo’s loss therefore became Chavez’s gain.
Yet the move does not bode well for Venezuela’s economy. Venezuela’s oil export dependence is matched by inefficient farming and industry, which are increasingly unable to satisfy domestic demand for food and basic goods. In this context, Brazilian and Argentine imports into the country will increase, with the impact on domestic producers exacerbated by a significantly overvalued currency, as will the country’s exposure to international oil price volatility. In the medium term, moreover, the possibility of a major economic shock associated with abrupt currency devaluation cannot be discounted. If opposition candidate Henrique Capriles wins the Venezuelan presidential election in October – current poll data varies but largely favours Chavez – he is likely to promote market-oriented reforms and seek to position Venezuela as a subordinate partner of Brazil. Over the medium term, such changes would address the formidable economic challenges faced by the country and herald a significant improvement in the business environment. Should Chavez win or refuse to accept an opposition victory, however, Venezuela’s membership in MERCOSUR is likely to exacerbate the risks to foreign businesses operating in the country or otherwise exposed to Venezuelan economic volatility. In this respect, with Venezuela in MERCOSUR, investors in Brazilian multinationals with operations in Venezuela will be exposed to less risk of arbitrary nationalisation of their assets. Nevertheless, the financial risks associated with any major economic shock or political crisis in Venezuela will be undiminished.
Venezuela’s accession is also unlikely to benefit MERCOSUR objectives overall. Conversely, even though Brazil and Argentina are set to gain economically in the short term from Venezuela’s entry, in accepting Chavez’s overtures they have welcomed a counterpart opposed to MERCOSUR’s goals of regional trade integration. The Bolivarian Alliance for the Americas (ALBA), Chavez’s own regional organisation formed in partnership with Cuba in 2004, has promoted heterodox forms of energy cooperation as a deliberate counterpoint to free trade models. The integrationist founding principles of MERCOSUR have already been under significant strain through 2011 and 2012 amidst trade disputes among members and the unilateral imposition of tariffs on third parties, provoked by ongoing global economic uncertainty. In this context, Chavez is also likely to exert considerable personal influence on the trade policy of the government of President Fernandez in Argentina in particular. Following Venezuelan accession, business risks associated with protectionism and import restrictions may grow further, particularly in the case of Argentina.
Moving from economics to geopolitics, the longer-term impact of Venezuelan accession to MERCOSUR on Latin American relations is less certain. It may signal increasing separation between the MERCOSUR countries and right-wing governments in Colombia and Chile, as well as Peru, impacting on the multilateral development at a pan-continental level of any new bilateral trade or investment initiatives. In this respect, Colombia, Peru and Chile are engaged in their own Pacific trade initiatives and progressive integration of their financial services sectors. It is also clear that the implications for the Chavez government are at best mixed. Venezuelan absorption into MERCOSUR is likely to attenuate Chavez’s remaining regional influence, undermining his ability to compete with Brazil for prominence on both regional and global stages. This is particularly the case given that some of Chavez’s regional allies are also now likely to seek membership of MERCOSUR. Indeed, Ecuador commenced negotiations in this respect in August, immediately after Venezuela’s membership was confirmed. In all these respects, Brazil is likely to gain where Venezuela loses.
Greater Brazilian influence, fostered both by Venezuela’s accession to MERCOSUR and Brazil’s growing economic and political prominence, is likely to be favourable for investors in the long term. Although Brazil and Venezuela both have mixed economies, Brazil has promoted the development of a stable regime which maximises foreign investment even where the state maintains control of strategic sectors. Chavez, in contrast, has adopted a markedly more heterodox approach in which the property rights of foreign investors are not respected and fiscal and exchange rate policies generate considerable distortions. Although companies will remain at substantial risk of nationalisation or asset expropriation in several key Latin American jurisdictions, including Argentina, in the long term Brazilian influence may mitigate these risks. Indeed, the cross-border contagion of nationalisations is already extremely limited.
By Senior Latin America Analyst James Lockhart-Smith
