TRADE-MERCOSUR: When Competition is Stronger than Convergence

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Mar 23 2000 (IPS) - A lack of coordination of policies on exchange rates and investment has raised serious problems of competition among the members of the Southern Common Market (Mercosur) trade bloc, warn observers of the subregional integration process.

Brazil and Argentina – the largest members of the bloc also made up of Uruguay and Paraguay – have been caught up over the past two months in an escalating dispute for investment flows into the bloc and over Argentina’s loss of competitiveness since Brazil’s January 1999 devaluation of its local currency, the real.

Conflicts between the members of South America’s largest trade bloc have coexisted with the boom in intra-bloc trade since Mercosur was created in 1991. In the 1990s, Argentina’s sales to Brazil soared from 500 million to nine billion dollars, and currently account for 30 percent of Argentina’s total exports.

“Mercosur was poorly designed due to the lack of formal commitments on investment and the lack of a common exchange policy, two questions on which the European Union had already reached agreement in 1957,” expert in foreign trade Alberto de las Carreras told IPS.

“In 1995, when the Ouro Preto accord (which established the formal legal framework to govern Mercosur) was signed, the government of (then-president Carlos) Menem was extraordinarily obliging towards Brazil, at a time when intra-bloc trade was at its peak,” said the analyst.

“But with the crisis, the bloc’s weaknesses have been cropping up,” he added.

According to De las Carreras, Argentina did not pay enough attention to developing Mercosur’s institutional framework, and ignored Brazil’s failure to comply with agreed-upon rules and commitments.

And when the real was devalued, the bloc’s weaknesses and inconsistencies – especially in terms of exchange policies – were revealed, he said.

In 1991, Argentina implemented a “covertibility” plan entailing a currency board which reined in hyperinflation and pegged the peso to the dollar. Brazil, meanwhile, has a flexible exchange policy, and the value of the local currency is corrected when necessary.

After the crash of the real in early 1999, the gap in prices between Argentina and Brazil widened to a nearly 60 percent difference, which then shrunk with the partial recovery of the real and the rise in the index of wholesale prices.

The lack of a common exchange policy has been a potential problem since the creation of Mercosur in 1991. But Argentina does not dare give up the fixed exchange rate with which it stabilised the economy, nor is Brazil willing to stop using its exchange policy as an economic tool.

Argentina is thus concerned about the possibility of a new devaluation in Brazil. This week, discussions between the two countries have focused on fears of a further depreciation of the real – rumours that although denied by Brazilian officials have triggered reactions from the Argentine government.

Governor Carlos Ruckauf of the Argentine province of Buenos Aires, the leading critic of the incentives offered by Brazilian states to draw investment, proposed a clause involving compensations by Brazil to be immediately applied in case the real slides once again.

The head of Argentina’s cabinet of ministers, Rodolfo Terragno, agreed on the need for such a mechanism, although Foreign Minister Adalberto Rodriguez Giavarini flatly rejected the possibility.

Brazil’s ambassador to Argentina, José Botafogo Goncalves, described Terragno’s suggestion as an “unacceptable step backwards.”

Goncalves, who reached Buenos Aires this week, said the bloc’s problems would not be resolved by new tariffs, but by addressing trade disputes on a sector by sector basis.

He also criticised what he called the lack of solidarity of Argentine officials who propose precautionary measures in case of an eventual drop in the value of the real, rather than rejecting such rumours and solidly backing Argentina’s trading partner.

Another touchy issue these days is the competition between the two countries for investment, with Governor Ruckauf on one side at the vanguard of a movement involving the Argentine Industrial Union (UIA) business association, and the Foreign Ministry, which is more in line with Brazil’s position, on the other.

Ruckauf and the UIA complain that a large number of companies have closed up shop in Argentina to head to Brazil, drawn by tax breaks, cheap loans and easy access to real estate.

Their complaints seem to have found an echo in Argentina’s most widely-read newspaper ‘Clarín,’ which has repeatedly referred to the “exodus” of businesses.

But Argentine and Brazilian officials say there is no such exodus.

The UIA’s initial claim that 280 companies had moved across the border shrunk to 50, meanwhile, and the list later disappeared altogether when a number of firms whose names had been mentioned protested that they had never even considered leaving, the daily ‘La Nación’ – Argentina’s second-most popular newspaper – reported this week.

A local manufacturer of disposable syringes, presented as the only company of its kind in the country, was even favoured by the government of the province of Buenos Aires in a public tendering, to prevent it from moving to Brazil.

But this week, ‘La Nación’ published interviews with executives of two other local syringe-makers who went to court to get an explanation of why the business that threatened – through the press – to leave the country was benefited, and why that benefit was not extended to the rest of the syringe factories, which are facing the same serious difficulties competing.

De las Carreras said the government of President Fernando De la Rúa, which took office in December, was following a different diplomatic tack than the two administrations of Menem (1989-99).

“Although its position vis-a-vis Brazil may look weak, the government is trying to negotiate tools to prevent imbalances and introduce some other changes,” he said.

But there is still a long way to go before the laws and standards of Mercosur members are brought into line, and for that reason warnings heard years ago still ring true.

At a 1995 seminar on Mercosur, then-minister of the economy Aldo Ferrer pointed to the risks of fomenting competition rather than convergence, the force that gave rise to the bloc in the first place.

“We have to start forging a path that not only focuses on social development, but on the coordination of macroeconomic and financial policies and exchange rates,” Ferrer recommended at that time.

Ferrer also argued that it would be “fatal for the bloc to start competing by offering special incentives to attract foreign investment, instead of presenting itself as a group of countries with a combined market of more than 200 million potential consumers.”