Paraguay’s ‘coup’ puts a dent in Australian-South American trade dreams

The political tumult in Paraguay will have significant ramifications for future economic engagement between South American countries and Australia. AAP

World Cup qualifiers in South America are renowned for their ferocity. For Uruguayans, there is more at stake than national pride. Even a “friendly” against Argentina or Brazil is a chance for revenge. If the aftermath of the recent presidential summit of the South American trade bloc Mercosur is any indication, Uruguay’s upcoming matches against its neighbours could reach new heights of viciousness. While these games will be little more than a spectacle of fan fervour and footy magic for Australians, the political back-story has serious implications for Australia’s trade policy.

A quick bit of context is needed. Mercosur is a moderately successful trade bloc composed of two big economies, Argentina and Brazil, and two small economies dependent on their neighbours, Paraguay and Uruguay. Venezuela has been waiting to join since 2006.

Politics and trade flows pointed to a fast-tracked Venezuelan accession to Mercosur until Hugo Chávez delivered a professional foul in 2006. Annoyed with delays in approval of Venezuela’s membership application, he branded the Brazilian and Paraguayan congresses toadies of US imperialism. Brazil gave him a yellow card, but eventually signed off on Venezuela’s membership. Paraguay’s congress was pricklier, giving Chávez a red card and thus effectively vetoing Venezuelan membership in Mercosur.

Fast-forward to June 2012 and a game-changing moment appears. Different factions in the Paraguayan congress had long wanted to get rid of president Fernando Lugo, who came from outside the dominant political parties to win a surprise victory in 2008. Lugo’s saving grace was that his opponents distrusted each other more than they hated him. This changed after a number of police and protesters were killed in a land ownership dispute last June. In an episode of breathtaking political cynicism, the Chamber of Deputies and Senate seized upon constitutional impeachment rules and took just two days to charge, try, and fire Lugo.

Although legal and in compliance with constitution processes, this episode seriously failed the democratic sniff test. Lugo was given only two hours to prepare his defence and an appeal to the Paraguayan Supreme Court was all-but summarily dismissed.

Argentine president Cristina Kirchner and Brazil’s Dilma Rousseff labeled events in Paraguay a coup. More importantly, they were quick to invoke provisions in the Mercosur treaties that immediately suspend any member judged to have broken the rules of democratic governance.

The idealism of Argentina’s and Brazil’s stance was almost immediately undermined by the announcement that only Paraguay’s political participation in the bloc would be suspended. There would be no economic sanctions imposed on the new government. The joint stance of the bloc’s two dominant members was further tarnished when it was announced that with Paraguay silenced Venezuela was free to join Mercosur. Argentina and Brazil had effectively imposed a nullification of Paraguay’s red card on Venezuela’s Mercosur membership. Venezuela is set to formally join Mercosur on July 31st.

This Machiavellian end-run around Mercosur procedures appears to have displeased Uruguay, and the country’s foreign minister and vice-president are speaking out forcefully against Argentine and Brazilian cynicism. Their complaint is that this opportunistic manipulation of political instability in Paraguay makes a mockery of already weak to non-existent institutional structures in Mercosur, which are tiny Uruguay’s only defence against its giant neighbours.

Retired Brazilian diplomats who built their careers breathing life into the economic bloc are effectively agreeing with Uruguay and throwing their hands up in despair. Brazil’s opposition politicians, who were in power when the bloc was formed, are warning that Mercosur has lost its economic raison d’être and become little more than a political plaything to assuage Dilma’s and Cristina’s leftist supporters.

It is this last aspect that particularly bothers Uruguay, a small country dependent on access to the Argentine and Brazilian markets, and which should also be of concern to Australia.

Uruguay’s and Australia’s problem is simple, but politically intractable. Mercosur rules forbid members from individually negotiating trade deals with other countries or regions. Any deal must be agreed en masse. The result has been no meaningful expansion of Mercosur’s external trade linkages since the bloc was formed in 1991. This leaves Uruguay trapped in a situation of dependence on Argentina and Brazil, neither of whom are particular concerned about their small neighbor’s interests.

Venezuela’s accession to Mercosur will almost certainly kill Uruguayan ambitions to sign trade deals with other countries. Hugo Chávez has been quite clear that he wants to “liberate” Mercosur from its slavish adherence to neoliberalism and return it to a socialist path of solidarity and fraternity. This is completely antithetical to the sort of globalized trade agenda Uruguay wants to pursue. In particular, it automatically eliminates virtually all of the countries on Uruguay’s ‘must-have’ list for free trade agreement partners, including Australia as well as the US and EU.

The implications are equally dire for Australia’s growing and very real South American engagement policy. Brazil’s enormous internal market and large economy is the real prize for Australian trade policy, with Uruguay being a pleasant addition. The catch is that any trade agreement with Brazil or Uruguay would have to come through a deal with the entirety of Mercosur.

Venezuela’s full membership in Mercosur makes a deal with Australia as likely as a 2014 repeat of Uruguay’s 1950 World Cup defeat of Brazil in Rio de Janeiro’s Maracanã stadium. Better odds than an Australian victory, but still highly unlikely. What remains to be seen is if Uruguay will finally give up on what it sees as a rigged game and downgrades its membership in Mercosur. This outcome has about the same odds as a Brazilian victory in 2014.

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