TRADE-LATAM: Latest Mercosur Squabble Explained by Recession

By Mario Osava Reprint | | Print |

Commentary - Mario Osava

RIO DE JANEIRO, Apr 13 1999 (IPS) - Brazil’s decision to negotiate with the Andean Community of Nations on its own shook South America’s Mercosur trade bloc, but more as a consequence of the economic recession squeezing the four partners than of the unilateral character of the initiative.

Brazil’s Foreign Ministry has clarified that its negotiations with the Andean Community, to conclude by late June, will not seek a free trade agreement, in the sense of a lifting of tariffs on a majority of products.

The aim, instead, is to unify the various bilateral accords Brazil has signed with the Andean nations Colombia, Ecuador, Peru and Venezuela, each of which now extends different preferences, explained Jose Alfredo Gracia Lima, under-secretary-general of Brazil’s Foreign Ministry.

That should give a boost to and “lay the groundwork” for a future free trade zone between Mercosur and the Andean Community – Latin America’s two largest trade blocs – rather than inhibit such a development, he added.

Mercosur – Argentina, Brazil, Paraguay and Uruguay – comprises a market of over 200 million inhabitants, and accounts for around 80 percent of South America’s combined gross domestic product (GDP).

A free trade agreement with the Andean Community – Colombia, Ecuador, Peru and Venezuela, along with Bolivia, which already has associate status in Mercosur – would create an even more formidable bloc of around 311 million inhabitants, with a combined GDP of some 1.2 trillion dollars.

In the minutes of the March meeting of the Common Market Group – the Mercosur executive organ – in Asuncion, Brazil made it clear that it would not discard any possibility to push ahead in the talks with the Andean Community, said another foreign ministry source on condition of anonymity.

Brazil also expressed its plans, if the bloc-to-bloc dialogue failed, to extend – for three months – its bilateral agreements with the Andean nations, which expired in March, during which time it would seek agreement on a “fixed preferential tariff.”

The tariff would not apply in the case of Mercosur associate Bolivia.

The big problem is the economic recession shaking the entire Mercosur bloc due to the crash of Brazil’s local currency, the real, since mid-January. A small increase in the openness of Brazil’s economy to non-bloc members thus deals a tough blow to its partners today.

In the first quarter of the year, Uruguayan exports to Brazil and Argentina were 45 and 28 percent down, respectively, from the same period in 1998, according to the Uruguayan Chamber of Industries.

And the 17 percent slump in the trade flow between the two largest members of Mercosur, Brazil and Argentina, in the first quarter of the year hit exports from Argentina harder than Brazil’s sales.

The more than 100 million-dollar average monthly trade surplus enjoyed by Argentina over the past four years has become a balanced trade flow, and in the next few months could turn into a deficit – which would mean the loss of Argentina’s only large trade surplus.

The boom in intra-bloc trade, which rose fourfold since Mercosur took shape in 1991, was largely due to the expansion of Brazil’s internal market, the result, in turn, of the stabilisation of its local currency in 1994.

The sharp rise in imports from Argentina and Uruguay even contributed to reducing inflation in Brazil.

But now that things have gotten tough in the Brazilian market – the world’s eighth largest economy, accounting for more than three- quarters of Mercosur – the fight for markets has become fierce.

With the recession, a greater opening of Brazil’s market to the Andean nations will not be covered by an expansion in domestic consumption, as occurred in the case of Mercosur. Today’s scarcity will just have to spread thinner.

For Brazil, increased access to Latin American markets is essential.

It is in this corner of the world where its industry has the greatest possibilities for exporting manufactured goods, unlike its commodities, which dispute markets in the industrialised North and Asia.

For that reason, closer ties with the Andean Community have been pressed for and closely followed by Brazil’s National Confederation of Industry (CNI).

There is a large gap between Brazil’s level of interest in a free trade agreement with the Andean Community and that of its Mercosur partners, said Maduro, a CNI economist who specialises in questions of integration.

Preferences contained in the agreements between Brazil and the Andean nations signed in the framework of the Latin American Integration Association (ALADI) are much broader than those entailed in the accords signed by Argentina, Paraguay and Uruguay. But “progress means levelling up, not down,” he argued.

Argentina is in no position to complain that Brazil is striking out on its own, said Brazil’s recently named Ambassador to Buenos Aires, Sebastiao do Rego Barros.

Argentina itself set a precedent for unilateral initiatives last year, when it signed a trade agreement with Mexico without taking into account either the position of Mercosur or Brazil.

Brazil, meanwhile, chose not to extend bilateral preferences, but to press instead for an understanding that favoured the entire bloc, he pointed out.