TRADE-LATAM: Mercosur – Still a Long Way to Go

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jan 12 2000 (IPS) - The integration of South America’s leading free trade bloc, the Southern Common Market (Mercosur), has turned out to be a much more complex process than negotiators envisioned in the mid-1990s, when things were moving full steam ahead.

Today, at the dawn of the new century, the integration process is facing a number of pending hurdles.

The new common automotive regime, which was to have gone into effect Jan 1, is one of the biggest unresolved issues. And given the inflexible positions held by Argentina and Brazil, agreement does not look likely in the near future.

Despite the breathing room that the Dec 10 inauguration of Argentine President Fernando de la Rúa – who succeeded Carlos Menem – gave the strained relations between Buenos Aires and Brasilia, so many trade disputes have accumulated that negotiators have their job cut out for them.

Argentina and Brazil, the biggest members of the bloc also comprised of Paraguay and Uruguay, are determined to dedicate the coming year to macroeconomic coordination, the harmonisation of statistical systems, and common standards for measuring fiscal deficit and unemployment.

But the new medium to long-term strategy of convergence, while backed by the private sector, is felt as much less pressing than the disputes over concrete issues, such as trade in sugar, chickens or dairy products.

Although the technical meetings set to start in February to hammer out a single yardstick for measuring unemployment will not be held in vain, neither will they stem the ongoing diversion of investment from Argentina to Brazil, as has already occurred in the case of 17 manufacturers of car parts.

Brazil’s Secretary of Industrial Policy, Helio Mattar, admitted that the lower costs of production in his country and the depreciation of the local currency, the real, drew investment away from Argentina, which he said had an overvalued currency, pegged to the dollar.

He added, however, that Brasilia was not planning on intervening in the process.

The decision by the Dutch company Philips to close its lamp factory in Buenos Aires left 140 people out of a job this month. But even worse for Argentina is the fact that the company’s executives are planning on moving to Brazil.

The secretary of the Argentine Industrial Union, Ignacio de Mendiguren, pointed out that other companies had taken the same route as Philips, and warned that the process would continue. “We are certain that this will continue until measures are taken to neutralise the assymetries between the two countries,” he said.

Brazil, the world’s eighth largest economy, is Latin America’s giant, with a population of around 161 million. Argentina has roughly 35 million inhabitants, while Mercosur’s two smallest partners, Paraguay and Uruguay, are home to nearly six million and 3.2 million people respectively.

One example of the problems generated by the enormous differences within Mercosur is the plight of farm equipment manufacturers in the province of Santa Fe, in central Argentina, which has been hit hard by one of the worst crises in the history of Argentina’s farms due to the plunge in international commodity prices and competition from Brazil.

Due to the lower prices caused by the 1999 crash of the real, imports of Brazilian farm equipment climbed from 15 percent of total sales of farm machinery in Argentina in 1993 to 35 percent in 1998.

The nearly 6,000 workers employed by farm equipment manufacturers in Argentina are pleading with Mercosur negotiators today to review the clauses governing integration in the bloc, while businesses are considering closing up shop and moving to neighbouring Brazil.

“There is absolute incompatibility between the two countries, our industrial policies are diametrically opposed, but nevertheless the Menem administration was confident that the market would solve everything in the medium-term,” one executive complained.

Mercosur, created by the Asuncion Treaty in March 1991, took shape with the idea of making the Southern Cone region of the Americas more competitive in the globalised economy and more attractive to foreign capital, which would be seduced by the combined market of more than 200 million potential consumers.

The bloc later granted associate status to Chile and Bolivia.

The four members of Mercosur account for over 70 percent of South America’s combined gross domestic product (GDP) and 64 percent of the total population. Trade between the four full members shot up from four billion dollars at the start of the 1990s to 20 billion at the end of the decade, although it has remained stationary in the past 12 months.

The contraction in trade which began in late 1998 was compounded in early 1999 by the devaluation of the Brazilian real, which diminished the competitiveness of products from the rest of the bloc. From 1998 to 1999, Argentina’s sales to Brazil fell from 33 to 21 percent of its total exports.

That setback led the partners to take measures to close their borders to trade, rather than continuing to move towards a complete customs union.

Hikes in duties have given rise to a long list of sectoral conflicts, such as the standoff between chicken farmers in Argentina and Brazil.

Argentine chicken farmers accuse their Brazilian counterparts of dumping – or exporting products at prices deemed artificially low – and have taken their case to court to curb the entry of chicken from Brazil.

Brazil responded by threatening to block imports of Argentine dairy products, the prices of which it says were slashed by 30 percent in 1999 in order to compete in the Brazilian market.

Producers of sugar, a sector that is exempt from Mercosur free trade accords on the reduction of duties, were hoping an agreement would be reached this year.

But those hopes are fading, because Brazil still refuses to cut the indirect subsidies it extends to sugar cane growers to stimulate the production of fuel alcohol, while global talks on the liberalisation of trade in fuel alcohol have failed.

The “fiasco” of the World Trade Organisation’s third ministerial conference late last year in Seattle, the United States will undoubtedly lead to delays in the timeframes for the liberalisation of global trade set for the next few years.

Those delays are expected to affect the plan for beginning to reduce duties protecting sugar as of next year.

With respect to the free circulation of people within Mercosur, there have been no substantial changes. However, given the large accumulation of pending conflicts, that issue seems to be the least serious and the easiest on which to make progress, once trade disputes are ironed out and new macroeconomic guidelines are coordinated.

In short, if a complete customs union and a common market are considered the last steps in any integration process, Mercosur, which remains a free trade zone with a long list of exceptions to the common foreign tariff, still has a long way to go.