The Grinch Who Stole Free Trade

Tuesday, South American leaders did their best to mar what had so far been a pretty stellar year for free trade—but are they likely to achieve their aim?

If there have been a couple themes to 2011, one’s undoubtedly been volatility, which can be challenging for investors—a topic we’ve written on severaltimes. But the other, which should cheer investors (and capitalists) more, is free trade. We’ve also written frequently over the course of 2011 about the positives brought by free trade and the slew of new free trade agreements signed among several countries globally (like here, here, here or here). But while the global theme has predominantly been freer trade, there are exceptions—like some in South America who, unfortunately (mostly for them), seemingly disagree about the numerous benefits free trade redounds on its participants.

Tuesday, members of South America’s Mercosur trade bloc met in Montevideo, Uruguay to discuss trade policy. Formed in 1991, Mercosur currently includes Argentina, Brazil, Paraguay and Uruguay. Bolivia, Chile, Colombia, Ecuador and Peru are associate members. The stated aims are promoting free trade among member countries and coordinating policy with non-members.

But at Tuesday’s meeting, promoting free trade wasn’t much on the agenda. Instead, members cited fears of “dumping” stemming from Asian nations (think China) seeking to offset lackluster eurozone demand—and agreed to impose a stiff, 35% tariff on a list of 100 imports. Now, Mercosur already had an external tariff on a few hundred items—mostly lower-value goods typically imported from China—and this adds to that list, which in our view, is probably not the best idea.

And even beyond official tariffs, some Latin American countries have a history of informal, under-the-table nudging seeking to reduce imports. So that they’d increase tariffs isn’t good, but it doesn’t seemingly tip the global scales toward protectionism, given there’s been some level of protectionism for awhile.

Beyond the roster of member and associate member nations, Venezuela’s Hugo Chavez also attended the Mercosur summit in an attempt to further Venezuela’s efforts to join. Chavez has been trying to get Venezuela into Mercosur for years, to no avail—and in our view, that’s likely a good thing. The chances Venezuela’s a reliable participant in global interactions—trade, diplomacy, etc.—seem pretty slim until someone other than Chavez is in power. And whether that happens anytime soon is anyone’s guess.

Paraguay’s led the opposition to Venezuela’s entry, citing its failure to meet democratic standards—probably something of an understatement, to say the least. Though Paraguay’s President Fernando Lugo, along with all the other Mercosur leaders, supports Venezuela’s bid for membership, Paraguay’s senate must agree. Which they haven’t—even going so far as to warn Lugo they’ll initiate impeachment proceedings should he attempt to skirt required national legislative approval of any new Mercosur member. So Chavez seemingly continues to be foiled—for now.

Taken together, interesting developments in Montevideo and both certainly worthy of watching. And in what had thus far been a banner year for free trade, Mercosur’s seemingly taken a small step backward. But all in all, it’s unlikely the increased tariffs spark a trade war, so the chances it has a material impact seem small for now. The most impacted parties are likely South American consumers, who will in all likelihood face steeper prices for the newly taxed items. Higher prices ... gift-wrapped in protectionist rhetoric! And just in time for the holidays. (Shucks, Mercosur leaders—you shouldn’t have! Literally.) Well, we guess if it’s stealing Christmas Mercosur leaders had in mind, this seems a logical move. Maybe that’s why Chavez was at the meeting—after all, can you think of a better Grinch?

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.