If U.S. trade negotiators had their wish, the Western Hemisphere would be organized into a single, massive trading bloc, the Free Trade Area of the Americas (FTAA). But for years, the FTAA dream has been checked by the “Market of the South,” known in Spanish as Mercosur.

On paper, Mercosur is South America’s response to both NAFTA and the European Union. Like those groups, it is a common market, comprising Brazil, Argentina, Paraguay, Uruguay, and Venezuela, with five other continental neighbors as associate members.

It has four times the land area as the EU (though with 250 million people covered, about half the population.) And while its $1.1 trillion combined GDP pales in comparison with those of Europe and North America, it is growing fast, as is internal trade, reaching $26 billion in 2007—up from just $1 billion 17 years ago, before it was signed.

But what works on paper isn’t always so rosy in the harsh light of reality. Mercosur, most analysts conclude, is struggling—and may not last much longer. If recent events mean anything, U.S. trade negotiators should be sleeping a little better at night.

The trading bloc actually predates NAFTA, having been established in March 1991 under the Treaty of Asuncion. Another pact four years later, the Treaty of Ouro Prieto, formalized parts of the original deal and cemented a customs union, traditionally the first big step toward regional integration. Internal tariffs were to be reduced gradually, and the members would work toward longer-term goals like a common currency.

At the time, this seemed like a big deal—after all, not even NAFTA has a common customs union. But soon cracks began to appear.

Unlike Europe, where several large economies can balance each other, Brazil utterly dominates the Mercosur economy, making up $800 billion of its $1.1 trillion GDP. In many ways, Mercosur is actually a bilateral trade deal between Argentina and Brazil—they account for 90 percent of its internal trade—with a few minor players thrown in for fun.

Nor does Mercosur have the advantage that NAFTA does, in which three relatively advanced, integrated economies, representing three relatively harmonious governments, have been able to easily synchronize their trade policies.

On the contrary, Mercosur has been unable to revolve even basic trade issues between members, many of which derive from the vast differences in economic and political agendas among the member states. In 1999, when Brazil’s car industry was becoming internationally competitive, Argentina responded by slapping tariffs on its neighbor’s steel imports.

More recently, Argentina and Uruguay have seen bilateral relations plummet over the so-called “cellulose war,” in which Argentina demands that Uruguay shut down a dilapidated, Finnish-owned cellulose factory on the Uruguay River, which runs along the countries’ mutual border. The dispute has gotten so bad that Cristina Kirchner, the new Argentine president, attacked her country’s neighbor in her inaugural address.

Argentina has also raised import barriers to Paraguayan banana growers, whose fruit is cheaper than the domestic variety. But in a telling sign of Mercosur’s weakness, Paraguay decided not to fight it out using the trade pact’s dispute-resolution mechanism, but rather through the World Trade Organization.

As Uruguayan Economic Minister Danilo Astori said late last year, the pact can no longer “hide the existing difficulties. They are several and are being exacerbated because Mercosur is in its sixteenth years and we still have many problems to resolve.”

Unfortunately, his words, coming just before the most recent summit of Mercosur presidents, didn’t do much to clear the air—one observer called the meeting the “worst summit in years.”

Mercosur was born with sharp elbows; to be a member, a country cannot participate in any other free trade agreement. But that is a problem with it comes to expanding west and north. Chile, a Mercosur associate in negotiations to join as a full member in 2002, saw its application frozen when it inked a free trade deal with the United States.

And Bolivia, Colombia, Ecuador, and Peru are all members of the Andean Community of Nations, another free-trade area known by its Spanish acronym CAN. Venezuela left CAN to join Mercosur in 2006, but Bolivia, which is negotiating to join, has said it will not leave CAN, setting up a critical test of Mercosur’s principles.

But perhaps the biggest dilemma for Mercosur is Venezuela. There is a strong case for including the country in the group’s ranks: It is a leading global oil exporter, it has a strong domestic economy, and its Caribbean ports would give Mercosur easier access to U.S. and European shipping lanes.

On the other hand, Venezuela, led by the fiery Hugo Chavez, is hardly a normal negotiating partner, and many observers fear he wants to use Mercosur as a political stump. “Venezuela’s accession to the pact adds a decidedly anti-American factor and may complicate both Mercosur’s internal balance and regional trade relationships,” concluded a 2007 Congressional study.

Chavez’s interest in joining a free trade agreement seems philosophically out of sorts with his own socialist leanings. But it is clear he wants a new brand of Mercosur—he has already promised to “cleanse” Mercosur of “neoliberalism.”

 “We need a Mercosur that prioritizes social concerns,” he said. “We need a Mercosur that every day moves farther away from the old elitist corporate models of integration.”

Chavez has at times treated Mercosur with the petulance of an eight-year old, skipping one summit meeting—while still a candidate—to meet with Vladimir Putin, while demanding that his country’s application be fast-tracked within three months.

He did, however, later relent, and he is now resigned to a schedule that has his country receiving formal membership in 2008. Ultimately, he needs Mercosur more than it needs him—as he rocks relations with North America and Europe, he needs economically friendly neighbors on which he can fall back.

That’s not to say that Mercosur doesn’t need Venezuela. Expanding north is a critical step in its build-out as an effective counterweight to the economic and political power of the United States. It has already flexed its muscle in this regard: Mercosur played a critical role in the 2005 failure of the FTAA negotiations in Mar de la Plata, Argentina.

And the push to bring in Venezuela was made all the more important by U.S. efforts to complete a free trade agreement with Colombia, which would give it open access to yet another of the continent’s largest economies (that deal is, however, currently stalled in Congress).

The problem is that so far Mercosur has yet to make the convincing case that its members can exist without the United States, FTAA or not. Even though internal trade is booming, it is dwarfed by trade between each member and the rest of the world, including the United States and the EU, which each claim about 25 percent of the bloc’s total trade. As of 2005 internal trade accounted for a mere 13 percent of total Mercosur trade, a poor showing for a 17-year-old pact.

As a result, on the horizon loom negotiations to allow a wide variety of exemptions to the Mercosur rulebook. Uruguay has already signed a Trade and Investment Framework Agreement with the United States, the first step toward a full free trade agreement.

According to the rules, in that case Mercosur would have to expel Uruguay, not only an embarrassing move—the Mercosur headquarters are located in the Uruguayan capital of Montevideo—but also a risky one: Uruguay may not be the largest economy in Mercosur, but with only five members, every little bit counts.

In all likelihood, Uruguay will receive a pass, setting a precedent for other members to do the same. This would probably save Mercosur in the short term. But it would also render it a side show to the enormous trade flows that would open up with the United States.

Mercosur isn’t giving up yet, though. At happier moments, its members talk about establishing a $100 billion development bank, and even working toward a common currency. And Brazil has repeatedly floated the idea of “relaunching” the entire pact, presumably with more workable rules.

But this all may be beside the point. With or without formal trade deals, the United States and, to a lesser extent, Europe and Asia dominate Latin American trade, and so far Mercosur has been almost completely ineffectual at providing a counterbalance. wt