TRADE-MERCOSUR: Argentina Backs Down, to Defuse Crisis

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jul 30 1999 (IPS) - Argentinian President Carlos Menem yielded to Brazil’s pressure and agreed to exempt fellow Southern Common Market (Mercosur) members from the restrictions on imports announced by his government, thus paving the way to a solution to the crisis jolting the South American trade bloc.

In exchange, Menem obtained a pledge by the government of Fernando Henrique Cardoso late Thursday in Brasilia to discuss mechanisms to curb the imbalances caused in Mercosur by the devaluation of Brazil’s currency, the real.

Cardoso and Menem also agreed to work on overcoming other conflicts, and move forward in the area of macroeconomic coordination.

All of these questions will be discussed in Montevideo Wednesday by the Common Market Group, the bloc’s executive organ, and subsequently by the Mercosur Council, comprised of the ministers of the economy and foreign relations of the bloc’s member nations.

Menem earned the merit of defusing what has been labelled the worst crisis faced by Mercosur since its creation in 1991.

The decisions, announced in the early hours of Friday morning by foreign ministers Guido Di Tella of Argentina and Luiz Felipe Lampreia of Brazil, will also benefit Paraguay and Uruguay – the bloc’s smallest members – as well as Bolivia and Chile, which enjoy associate status in Mercosur.

Menem insisted on direct dialogue with Cardoso, stopping over in the Brazilian capital on his way back from the U.S. city of New Orleans, Louisiana, even though Lampreia had warned that the climate was not ripe for such a meeting.

Just a few hours earlier, the Brazilian government had warned that Mercosur – which accounts for 80 percent of South America’s combined gross domestic product – would be “fatally injured” if Argentina maintained the quotas announced Jul 23 on imports from Mercosur.

At that time, Jose Alfredo Graca Lima, the Brazilian Foreign Ministry’s head of economy and foreign commerce, described Argentina’s protectionist measure as “an attack” on integration, because “there is no coexistence possible between (protectionist) safeguards and a free trade area.”

Argentina had based its decision to apply quotas on imports of cotton textiles from throughout the region, including Brazil, on provisions of the Latin American Integration Association (ALADI). It later threatened to adopt safeguards against footwear, paper, cellulose and electronic appliances imported from Brazil.

“The only possible solution” was for Argentina to overturn the decision, said Graca Lima, who added that Brazil refused to discuss the case within the framework of Mercosur’s dispute resolution forums.

Brazil was considering whether to respond to Argentina’s decision by suspending negotiations on a transitional regime of trade rules to govern the automotive sector during the 2000-2003 period, and moving the deadline for free trade in vehicles up to January 2000.

That decision would have been catastrophic for Argentina’s carmaking industry, because the devaluation of the real slashed the cost of Brazilian production in dollars.

Vehicles and car parts are the largest area of trade between Argentina and Brazil, posting a 15 billion-dollar annual turnover.

Mercosur’s two largest members now plan to focus on negotiations over a series of unilateral, protectionist decisions that have had an effect on bilateral trade and relations.

Trade between Argentina and Brazil, which has grown steadily since the founding of Mercosur, was indirectly hit last year by the financial crises in Asia and Russia, which had a heavy impact on the Brazilian economy, the eighth largest in the world.

The January devaluation and subsequent slide of the Brazilian real altered the terms of competitiveness between the two partners, and is the underlying cause of the current conflict.

However, the flood of low-priced Brazilian products so much feared by Argentina has not occurred. Bilateral trade fell by 29 percent from January to May, while Argentina maintained a trade surplus of 254 million dollars.

The quotas imposed on cotton textiles came on top of earlier anti-dumping measures adopted by Argentina against Brazilian steel. But it was the threat of safeguards against a broad range of imports that finally triggered Brazil’s heated reaction.

The differences between the two countries also extended to the area of foreign policy, when Argentina sought admission to the North Atlantic Treaty Organisation (NATO).

The Cardoso administration, meanwhile, once more offered tax breaks to ensure the installation of a Ford factory in the northeastern state of Bahia in the country’s poorest region. That decision ignored a prior commitment by Brazil to refrain from providing incentives designed to attract capital to its car industry.