Mercosur is on everyone’s lips. Wouldn’t the free trade agreement with several countries in Latin America be a golden opportunity to get one over on the USA? Couldn’t a new source of prosperity be tapped with the South Americans? But why has it taken over twenty years to seize this unique opportunity?

There are now loud complaints that the European Parliament is trying to postpone the agreement once again. The German Greens in particular, led by their Swabian leader Cem Özdemir, are appalled that European Greens also voted in favour of postponement and review by the European Court of Justice in Brussels.

But the whole debate misses the point when you consider the economic consequences of such an agreement. What do you hope to achieve when, as a reasonable person or institution, you conclude a ‘free trade agreement’ with another region? Well, the more than 200-year-old doctrine of international trade gives us hope that, in this case, both sides of the agreement will benefit in the form of higher real income over the years and decades to come, because production and consumption structures will become more efficient, as there will simply be more opportunities to replace inefficient structures on one side with more efficient ones on the other.

According to this doctrine, this could also be expected if the countries and regions involved are at different stages of development. With his theory of comparative advantage, David Ricardo showed at the beginning of the 19th century that, under certain circumstances, even less developed regions could benefit from free trade. The problem is that the circumstances needed to make this thesis work never exist (see Chapter 6 of my textbook). Consequently, there is no justification for the idea of a quasi-automatic gain in prosperity from a new free trade agreement.

This is all the more true given that the crucial prerequisite for both sides to benefit at all is not even desired by the North (in this case, Europe). Free trade that benefits both sides requires a balance of payments (as shown here). There must therefore be no deficits or surpluses, otherwise the entire theory (with or without comparative advantages) does not apply and it is pointless to even speculate about the positive effects of such an agreement.

This is where Roland Koch, chairman of the Ludwig Erhard Foundation, comes in. Under the title ‘Global markets create prosperity’, we learn from the veteran CDU politician what Mercosur is really about. He writes:

“Europe is currently under enormous economic pressure. Weak growth, high costs in industry and geopolitical uncertainties make every new source of growth valuable. If we do not want to lose the battle postulated by the US Secretary of Commerce, we must now make use of our own options. In this context, the free trade agreement with the Mercosur countries is more than a normal trade agreement. It offers the opportunity to relieve the burden on European industry, massively expand export opportunities and provide new impetus for growth. Contrary to what is often claimed in many debates, this is not a zero-sum game in which only certain sectors benefit and others lose out. On the contrary, exports from Europe are likely to increase more than imports because European industrial goods are competitive in many areas worldwide and the Mercosur countries have a great need for refined products, machinery, vehicles and industrial components.”

In other words, we will not allow anyone to prohibit our mercantilism. If the South Americans want free trade with us, they will find that we make the surpluses and they make the deficits. We will then export, to use a modern slogan, our unemployment, and the South Americans will import unemployment. After all, they have a great ‘need’ for refined products, and whether they can really pay for the imports or will once again find themselves hopelessly in debt is of no interest to us.

The whole thing is so outrageous that it is difficult to find the words to comment on it. To say explicitly that this is not a zero-sum game (which no reasonable person has ever claimed; serious criticism concerns the absence of balances, which by no means implies a zero-sum game) should immediately drive every economist in Latin America up the wall. Europe apparently has nothing else in mind but to replace the deficit country USA with new deficit countries. And of all countries, they have chosen those that have suffered more than any others in the world from foreign debt in recent decades. Bravo, that’s what you call audacity.

In reality, if Mercosur does come into force, it will not have much effect on the economy as a whole – unless it actually succeeds in cheating the Latin American countries for a few years. Sectorally, especially in agriculture, it could well have a major impact. There is no question that this could also have a massive negative effect on European agriculture. In return, Europe itself could probably gain a lot, even without global surpluses in its industrial sector.

No one knows whether the agreement will be worthwhile for both sides, even if large imbalances in the trade and current accounts can be avoided. However, the most likely scenario is Koch’s version, with major imbalances in Europe’s favour in the first round and much wailing and gnashing of teeth in the second. Since Latin America chronically makes the biggest macroeconomic mistakes imaginable (on both the political left and right), it will only realise how dangerous free trade with mercantilists is when it is already too late.