Mercosur: The Prison and the Spear

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In last week’s BWA, I discussed the price discovery process of Venezuelan oil assets, against the backdrop of ~$159 billion in sovereign debt, as private buyers have begun pricing oil assets while the licenses, signatures, and votes they need remain outstanding.

In this week's BWA, I discuss why Brazil and Argentina, the two anchor economies of Mercosur, want the same from the institution, and what the bloc's rotating chair says about its resilience.

Please note that, in an effort to preserve the nuance and essence of some quotes, I have kept them in the original Spanish, with the translation in the footnotes.

The Spear | The Prison | The Arithmetic | The Chair| The Exception | The Keys

Purpose—Is Mercosur protection or leverage? Milei says leverage. Washington's tariffs pushed Brasília to the same answer. The two anchors disagree only over who signs.

Enforcement—The bloc denied Bolivia the presidency over paperwork and holds Venezuela out on a democratic clause. Mercosur enforces its rules against its own members.

On 3 July 2025, in the Hall of Writers at the Argentine foreign ministry, Argentine President Javier Gerardo Milei waited to receive the presidents of the Mercosur states.

Brazilian President Luiz Inácio Lula da Silva arrived last, delayed at the door because of a problem with his photographer’s accreditation, wearing a tie in the green and yellow of the Brazilian flag. The two men greeted each other cordially, and minutes later Milei opened the LXVI Summit and handed over the bloc’s rotating presidency.

He used the occasion to express his view of Mercosur.

«Debemos —en definitiva— dejar de pensar al MERCOSUR como un escudo que nos proteja del mundo y comenzar a pensarlo como una lanza que nos permita penetrar de forma efectiva en los mercados globales, mercados de los cuales hasta ahora las barreras aduaneras nos han excluido^[1].»

That is not the line that ran. Ámbito, La Nación, Perfil and EFE all led with different sentences from the same address: «Emprenderemos el camino de la libertad y lo haremos acompañados o solos^[2].» The headline wrote itself. Amenazó con irse — he threatened to leave.

None of them carried what came next in the official transcript.

«Y por eso —como bloque— tenemos que entablar condiciones de comercio lógicas… No debemos dejar que nuestras diferencias en cuestiones accesorias nos dividan^[3].»

Restoring what he said puts the message into context. A prison is a place to escape from, and a spear is something you pick up. Argentina has spent the past two years arguing about the spear, and the reporting has been almost exclusively about the prison.

Seven months earlier, at the bloc’s headquarters on the Montevideo waterfront, Milei had provided the other half of the pair.

The occasion was the LXV Summit on 6 December 2024, and it was also a handover — Uruguay passing the pro tempore presidency to Argentina.

«El Mercosur, que nació con la idea de profundizar nuestros lazos comerciales, terminó convirtiéndose en una prisión que no permite que sus países miembros puedan aprovechar ni sus ventajas comparativas, ni su potencial exportador^[4].»

He was not speaking to a hostile room. Uruguay’s then-president, Luis Alberto Lacalle Pou — the outgoing chair, sitting beside him — had spent his presidency arguing that members should be free to negotiate with third countries, such as China in Uruguay’s case, and he welcomed the Argentine intervention from the podium. The flexibilization position had a second voice the moment it was stated aloud.

Milei also called the bloc a cepo — a trap, and the word Argentines use for the currency controls that fenced in their savings for the better part of two decades. During the handover address, he also proposed a drastic reduction in the Common External Tariff (CET) and made clear it was not Argentina’s intention to leave or dissolve Mercosur.

That should have ended the exit story eighteen months ago.

The CET is what makes Mercosur a customs union rather than a free trade area. Members apply a uniform tariff to goods entering from outside the bloc, which is why Decision 32/00 of the Common Market Council — the CMC, the bloc’s supreme decision-making body, composed of the members’ foreign and economy ministers — commits them to negotiate with third countries jointly rather than one at a time. The joint-negotiation rule exists to protect the uniform tariff. Remove the tariff, and the rule has nothing left to protect. This is the machinery Milei was proposing to adjust, from the chair, in the same speech in which he called the machinery a prison.

The tariff structure that determines whether Argentine lithium and Brazilian niobium leave the continent as concentrates or refined metals is set at the bloc level within the common tariff. Venezuela’s eventual reinstatement requires the consensus of all members. The EU–Mercosur interim Trade Agreement (iTA) required participation by every founding state. Mercosur is the instrument through which all of this operates.

Mercosur has been an unión aduanera imperfecta since its inception, with national exception lists, permanent carve-outs for automobiles and sugar, and periodic renegotiation of the tariff schedule. This is not drift. Gradualism, flexibility and balance are principles written into the Treaty’s own preamble — flexibility defined there as the recognition that no treaty can foresee every situation reality will present, and that the scheme must be able to adapt to them. The 150-product exception that Argentina now invokes to defend its American agreement — more on which shortly — was granted by the bloc, under its own rules, to a member that requested it.

Two capitals reached the same conclusion on trade diversification within eighteen months. Neither persuaded the other. One of them was pushed.

On 22 July 2026, an additional 25% American tariff on Brazilian goods took effect, announced a week earlier and covering farm machinery, wood products, ethanol and apparel. The action was taken under Section 301 of the Trade Act of 1974, and the stated justification was that Brazil had not adopted sufficient mechanisms to prevent the import of goods made with forced labour. The wider grievances ranged from Pix — Brazil’s free instant-payment system, run by Banco Central do Brasil, which has displaced card networks across the domestic economy — to social media regulation, environmental policy and anti-corruption enforcement. The unstated grievance, and the real one, was the Brazilian court’s prosecution of former president Jair Bolsonaro.

The Confederação Nacional da Indústria (CNI), Brazil’s national industry federation, reports that 3,985 Brazilian products now face a total U.S. tariff of 37.5% and calculates that 48.7% of all goods Brazil ships to the United States face some form of additional duty. The CNI’s position on the legal basis is blunt: the justifications offered by the United States Trade Representative do not describe Brazil.

The damage is measurable. Brazilian exports to the United States fell 13% in value in the first half of 2026 against the same period a year earlier, to $17.4 billion; by volume the drop was steeper, at 15.4%.

Brazil is nonetheless having the best trading year in its history. Total exports reached $184.8 billion in the first half of 2026, up 11.5%, producing a trade surplus of $42.4 billion — $12.2 billion more than the same period in 2025. Sales to China rose 21.9% to $58.3 billion, and to the European Union 12.8%. Asia’s share of Brazilian exports climbed from 42.7% to 46.3%. By the government’s own arithmetic, this year’s increase in exports to China, Europe and India is six times larger than the fall in exports to the United States. Secex — the foreign trade secretariat inside the development and industry ministry, which compiles Brazil’s trade statistics — attributes the offset to China and to higher crude prices.

One line in the same table runs the other way, and it belongs in this piece rather than outside it. Brazilian exports to Argentina fell 19.4% over those six months, to $7.4 billion. Secex attributes the decline to weaker Argentine demand rather than to policy. The two anchors are trading less with each other while both trade more with everyone else.

Brasília’s response has been calibrated rather than retaliatory — though the calibration has begun to move. Brazil has gone to the World Trade Organization, and the Planalto announced it would activate the Economic Reciprocity Law — Lei 15.122, sanctioned without vetoes in April 2025, which sets criteria for suspending trade concessions, investment commitments and intellectual property obligations in response to unilateral measures. Procedures under the law were opened in late July. No countermeasure has yet been imposed, and both industry and agriculture have urged caution, accepting the law’s legitimacy while pressing for a negotiated route. Gustavo Pessoa of the Fundação Getulio Vargas, who traveled to Washington to argue against the tariffs, locates the lasting damage in confidence rather than volume and says it runs in both directions: American buyers now fear that more Brazilian products will be targeted, and Brazilian exporters no longer see a reason to build supply chains aimed at the United States.