Some 35 years ago, at a time of economic and political turmoil in South America, a group of farsighted countries signed the Treaty of Asunción, establishing a common market to promote economic development and social justice through economic integration. Since then, the Southern Common Market, or Mercosur, has increased regional trade and delivered an integrated industrial core that has survived to the benefit of its members, comprising Argentina, Brazil, Paraguay, and Uruguay.
To be sure, the Mercosur bloc has suffered many shortcomings and problems. Although intra-Mercosur trade increased more than tenfold between 1991 and 2024, the agreement has underdelivered on growth because of the many economic difficulties member countries faced over the past 35 years. Today Mercosur's survival is critical to member countries' abilities to negotiate trade deals with the rest of the world, but it is imperiled by growing strains between its two largest members, Brazil and Argentina, partly because of the Trump administration's meddling in the region.
Not that these two countries' relationship has been harmonious. But the combined pressure of politics and tariffs, particularly from President Donald Trump, and the competition for influence from China and the United States pose a potential implosion, endangering member countries' trade diversification aspirations, at a time when expanding the bloc's reach has become economically and geopolitically critical.
Relations between the two largest Mercosur members has been deteriorating
The politics have been deteriorating visibly since at least 2024. During his first Mercosur summit in December 2024, right-wing libertarian President Javier Milei of Argentina said the bloc had become a prison. Months later, when he handed the bloc's rotating presidency to left-wing President Luiz Inácio Lula da Silva, Milei announced that Argentina would pursue liberalization accompanied or alone. Only hours after that handover, Lula paid an ill-advised visit to former president Cristina Fernández de Kirchner, newly under house arrest, in a gesture the Argentine government would later cite as interference in its politics.
Milei then skipped the June 2026 summit of Mercosur leaders in Asunción after receiving Lula's opponent, Flávio Bolsonaro, son of convicted former President Jair Bolsonaro, at the presidential residence the day before. One month later, during Bolsonaro's presidential campaign launch in São Paulo, Milei engaged in conduct supporting Bolsonaro that Brazil's foreign ministry denounced, saying: "[There is] no precedent of a foreign president using national territory to offend the head of state, democratic institutions and the Brazilian people."
Brazil's withdrawal of its ambassador followed within days, and Argentina's foreign minister, Pablo Quirno, has said no apology will come. Indeed, Lula and Milei have never held a bilateral meeting or a telephone call since Milei took office in December 2023.
Trump administration policies have favored Argentina and punished Brazil
The bloc's economic underpinnings have also been deteriorating, in part because of US policies in the region. In early 2026, Argentina and the Trump administration signed a bilateral trade agreement. The United States removed tariffs on 1,675 Argentine tariff lines and raised the quota on Argentine beef to 100,000 tons, a boon to Argentina. In exchange, Argentina granted preferential access to roughly 200 tariff lines of American goods. The agreement has not been submitted to Argentina's Congress.
Meanwhile, Brazil received the opposite treatment from Trump. Its goods faced a 50 percent tariff in 2025, imposed explicitly as punishment over the trial of former president Jair Bolsonaro, on charges that he tried to engineer a coup after losing the election in 2022. After the US Supreme Court struck down the tariff in February, the United States imposed a 25 percent tariff on Brazilian goods under a different rationale, Section 301 of the Trade Act of 1974, and immediately followed it with an additional 12.5 percent tariff under forced labor investigations covering 60 countries. This investigation covered Argentina as well. Under this second Section 301 investigation, the United States imposed a lower tariff of 10 percent on Argentina, while granting exemptions that cover all tariff concessions under the new agreement between the two countries.
In addition to trade, US asymmetric treatment of Mercosur's largest members has a financial dimension. In October 2025, the US Treasury extended Argentina a $20 billion swap line to backstop a looming dollar shortage ahead of midterm elections, a gesture explicitly intended to support Milei. Financial assistance of this scale is usually reserved for countries whose troubles spill over onto others, which Argentina's do not. Milei's political survival, with Argentine elections due in 2027, depends on that support continuing, and his incentives inside Mercosur follow from that dependence.
US-Argentina agreement strains Mercosur's common external tariff and undermines the bloc's attractiveness to potential trade partners
Mercosur is a customs union, which means it has a common external tariff designed to make shipping goods across borders relatively costless: When every member charges third countries the same rate, a good that has entered the bloc anywhere can circulate without anyone asking where it came from. Now, under the new agreement, Argentina is admitting some 200 tariff lines of American goods at preferential rates while Brazil taxes the same goods at 25 percent. Hence, an American product can enter through Argentina and cross into Brazil at the lower rate unless Brazil monitors their origin at the internal border, with certificates and inspections. Brazil has already registered this concern formally.
Mercosur's common tariff was always problematic and difficult to enforce. The bloc's own decisions authorize national lists of exceptions, enlarged in 2025, and automotive trade between the two largest members runs under a managed regime dating to 1990, outside the common tariff altogether.
For three decades, Mercosur has functioned with these kinds of leaks. But the large-scale trade deals between Argentina and the United States create problems for Mercosur that it has not previously endured. Past exceptions to the customs union have generally been limited in number and jointly authorized, not unilaterally adopted by one country over objections by another.
The deal with the United States adopted unilaterally by Argentina, and not limited by any list Mercosur members have approved, is a major issue. It could even result in Mercosur countries triangulating their US bound exports through Argentina to evade Trump's tariffs. The exceptions perforate the common tariff, but the agreement between Argentina and the United States represents a wholesale replacement of it.
A second problem raised by the US-Argentina agreement is that it undermines the attractiveness of Mercosur to the rest of the world. In 2000, Mercosur members committed themselves, by decision of the bloc's council, to negotiate trade agreements with third countries jointly, which is what makes the bloc's combined market worth a long negotiation process. Argentina has now breached the joint negotiations rule, and a rule breached without consequence stops disciplining anyone at a critical juncture in global trade. Mercosur's agreement with the European Union, concluded in December 2024 and signed in January 2026, has been applied provisionally since May 1, 2026, while the European Parliament has suspended its consent and asked the Court of Justice of the European Union for an opinion on the agreement's legal architecture. The agreement with the European Free Trade Association (EFTA) was signed in September 2025 and awaits ratification. Negotiations with Canada are targeted for conclusion this year, and negotiations with Japan were launched in July 2026. Each of these was opened with the bloc as the counterpart, and every bilateral deal a member pursues on its own reduces Mercosur's leverage. Uncertainties regarding the future of Mercosur could hamper ratification of existing agreements and the negotiations over prospective ones.
Brazil's presidential elections in the fall offer no solution
Mercosur's problems will be further compounded by Brazil's October elections regardless of who wins. If Lula is reelected, tensions with both Argentina and the United States will continue and possibly escalate. If Flávio Bolsonaro wins, Mercosur may be irrevocably doomed. In a letter sent to the United States Trade Representative (USTR) in July 2026, during the Section 301 hearings, Flávio Bolsonaro argued that Brazil should "free itself from the shackles of Mercosur" in order to negotiate bilaterally with the United States, citing Milei's agreement as the example to pursue.
In other words, a government led by Flávio Bolsonaro would very likely join Milei's government in pushing for greater Mercosur flexibility, which would put the two largest members on the same side against the arrangement they both anchor. A reelected Lula would defend the bloc in an increasingly hostile environment, and opposite an Argentine government that is now organizing a gathering of the region's right-leaning presidents in Buenos Aires.
For Brazil, the trade and market diversification aspirations championed by both Brazilian industry and the government alike depend on agreements that only a functioning Mercosur can deliver. Preserving the customs union would require its institutions to decide what the US-Argentina agreement means for the common tariff, a question no summit has yet addressed. That question should be treated with urgency and belongs in Brazil's electoral debate, alongside the tariffs themselves.
Milei has called Mercosur a prison, and Flávio Bolsonaro's letter called it a shackle. Mercosur's ultimate demise does not require either of them to officially walk away from the bloc. All it takes is complete subservience to the United States.
Data Disclosure
This publication does not include a replication package.
