By Mario Osava
RIO DE JANEIRO, Jan 24 2000 (IPS)

Trade tensions between Argentina and Brazil have reached another crucial point for regional integration, impacting the distribution of industries throughout the Southern Common Market (Mercosur), which also includes Paraguay and Uruguay.

Trade delegates were unable to reach an agreement on a common automobile industry regimen during the latest bilateral meeting last week, forcing a six-month suspension of the negotiating process.

Argentina and Brazil have decided to hire an independent auditor to compare the incentives and subsidies the two nations grant their auto industries that would be causing trade and industrial investment imbalances.

The industrial fate of each country is at stake, but particularly Argentina’s because it is suffering an exodus of its companies to Brazil. The departures intensifed last year after Brazil devalued its currency in January 1999.

Twenty transnational auto-parts manufacturers decided to close up shop in Argentina and move or consolidate their production in Brazil. The parts are sold within Mercosur, but also exported to other markets.

Several relocations involve major global companies, such as the US-based Delphi, which announced in December that it would close its electric cable plant in the Argentine province of Cordoba, threatening the jobs of 400 workers.

“The country’s economic picture” was the reason behind the decision, said Scott Graham, Delphi’s director of operations in South America. The factory requires a daily demand of assembly packages for 600 vehicles, but last year it dropped to 200.

The also US-based Dana-Thompson and Goodyear companies, as well as France’s Valeo, followed suit. And even the assembly plants are moving their operations to Brazil.

Cordoba is also threatened with losing the Iveco truck manufacturer, of the Fiat group, which is increasingly concentrating its activity in Betim, a city in the Brazilian state of Minas Gerais.

But such migration is not limited to the automobile industry. The Dutch giant Phillips chose Brazil as its lightbulb production centre for Mercosur. Several food companies have made the largest Mercosur country their regional production headquarters as well.

Large Argentine business conglomerates, such as Macri and SanCor, have also decided to invest in Brazil, acquiring firms and building factories to produce their goods – especially food products for export – in their neighbouring country.

The difference in exchange rates – with the Argentine peso maintaining parity with the dollar while Brazil devalued and is now floating its real – is just one of the reasons for this industrial departure from Argentina, say analysts.

The recession that hit Argentina hard last year, increasing inactivity and boosting prices, is the major factor behind the redistribtuion of industries in Mercosur, declared Paul Menmuir, South American director of the US-based A.T. Kearney consulting firm, in an interview with the Brazilian daily ‘Gazeta Mercantil.’

With a much larger market and cheaper labour costs, Brazil is a natural magnet for industry. A worker in the auto-parts sector costs a company four dollars per hour in Argentina, versus 1.4 dollars in Brazil, according to the Association of Argentine Component Manufacturers.

In addition to the low labour costs, Brazil’s state and local governments offer incentives to businesses, which is often the deciding factor in whether or not a company will make the move.

The competition for investment is causing conflicts not just between countries, but between Brazilian states as well. The so- called “fiscal war” led Mario Covas, governor of Sao Paulo state, to tax companies that purchase their copper in Bahia state.

The dispute between the two states began when Bahia offered several incentives to attract industries previously operating in Sao Paulo. After repeated criticisms of Bahia’s “disloyal competition” for investment, Covas decided to retaliate.

The governor of Rio Grande do Sul state, which lost a major Ford auto manufacturer last year when it relocated to Bahia, threatened to follow the Sao Paulo example and impose barriers for “imports” coming from other states where tax incentives are used to lure away investors.

Numerous footwear and furniture industries have already left Rio Grande do Sul for the Brazilian northeast, where labour costs are extremely low and the states impose fewer taxes.

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