TRADE-MERCOSUR: 10 Years Together, Through Good Times and Bad

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Mar 27 2001 (IPS) - Mercosur (Southern Common Market) reached its tenth anniversary Monday in a scenario occupied by the Argentine economic crisis, which could weaken the four-nation bloc just as negotiations are picking up speed toward the creation of the Free Trade Area of the Americas (FTAA).

Mercosur trade ministers meeting in the Argentine capital April 6-7 are to hammer out a unified position as far as conditions, agenda and timeframes for FTAA negotiations. The bloc’s unity will then be tested at the Summit of the Americas, in Quebec, Canada, April 20-22.

So far, Brazil has taken the lead in guiding Mercosur’s actions and attitudes related to the bi-continental trade area that is to extend from Alaska to Tierra del Fuego, covering 34 countries. Though tensions lie in the fact that Brazil has often acted without the consensus of its three partners.

Argentina’s economic crisis and fragile political situation pushed to the background any commemoration here of the tenth anniversary of this integration project, launched with a promise of prosperity, but which began to show signs of deterioration in January 1999 when Brazil devalued its currency.

The date passed unnoticed in most Buenos Aires offices of government officials and lawmakers, who are under pressure to halt the deep national economic crisis – which has strong repercussions for neighbouring Brazil, Paraguay and Uruguay, Argentina’s partners in Mercosur.

Argentina has been suffering a recession for nearly three years, and has gone through three Economy ministers in the last month. Now the country is on edge due to the threat of non-payment on its foreign debt – a spectre that keeps blowing in from the government and the financial markets.

The new Economy minister Domingo Cavallo made a lightning visit to Brazil last Thursday, demonstrating that just as Mercosur asserts itself as a vehicle for inserting its members into the larger world market, it can also turn out to be a protective network at critical moments.

For experts who are closely following this South American integration process, the current context does not mean exposing Mercosur to competition from other trade blocs, and much less fuelling conflicts among members, but rather it is a process of realising that the ideology behind the bloc suffers from its short- term outlook.

One thing for certain is that numerous undefined dreams of progress have been left by the wayside, and a range of obstacles – many of which were predictable – have arisen within the group since Mar 26, 1991, when Argentina, Brazil, Paraguay and Uruguay signed the Treaty of Asuncion.

In the years since, Bolivia and Chile have signed on as associate members, and the architecture of the bloc grew more politically solid in 1998, following the signing of the “democracy clause,” which states that all members must be governed under a state of law.

The promise of removing tariffs within the four-nation bloc was being kept, based on the agreed process, though common external tariffs – the foundations for the customs union – began to rise once again after a period of continual decline. Now, Argentina has said there must be another hike in external trade taxes.

Cavallo has called on the Mercosur partners for understanding in his proposal to advance toward a zero-tariff for capital goods coming from outside the bloc, a means of facilitating the entry of inexpensive machinery from other countries. But the Argentine minister also proposed a 35-percent boost to the tax levied on imports of mass-market consumer products.

The average tariff would not suffer any dramatic changes, but the proposal – resisted by the three other members – would slow down the process of integrating Chile as a full member, as it is subject to cuts in the bloc’s common external tariffs to levels in Chile, which is considered the most accessible market in the region.

Given this panorama, the four Mercosur partners do not seem to be in any condition to celebrate their 10-year anniversary with much enthusiasm.

As in nearly all marriages – an institution in which the parties commit themselves to upholding the union through good and bad times -, the early years of Mercosur were a veritable honeymoon, with a rise in trade within the bloc, greater foreign investment and overall economic growth.

In the 1990s, exchange among the four partners expanded from 4.0 billion to more than 20.0 billion dollars, and the combined gross domestic product (GDP) grew, even as Brazil overcame the effects of its currency devaluation in the context of a widespread crisis among emerging markets.

A period of stagnation then struck Mercosur. The slowdown particularly hurt ties between the two largest partners, Argentina and Brazil, which hold 96 percent of the sub-regional GDP and provide the bulk of the bloc’s combined market of 270 million people.

Argentina’s sales to Brazil fell from 33 to 21 percent of its total exports. This aggravated a negative process already underway in Argentina, which had a difficult time maintaining the rate of growth it had sustained until 1995-1996.

The further devaluation of the Brazilian ‘real’ against the continued parity of the Argentine peso and the US dollar meant a widening gap between the bloc’s two leading members. Conflict began when most of the foreign investors opted for Brazil because of its better conditions for profit.

The worst moments came in early 2000, when the news seemed to report the closing of a factory in Argentina and the opening of another in Brazil on a daily basis. There was a wide difference in costs between the two countries, which did not seem to respond to an integrated platform.

Producing an automobile today in Argentina costs 25 percent more than in Brazil.

For all of these reasons there was a time of rising doubts about the continuation of a strategic project that was too much influenced by the ups and downs of each member nation, according to statements this month by economist Roberto Frenkel, of the Latin American Social Sciences Faculty.

Not even Cavallo’s new measures for taking on the Argentine crisis should influence this four-nation strategic initiative, he said.

Cavallo announced that in order to compensate for the devaluation of the ‘real’ it would be necessary to lower production costs. This would neutralise the effects of the fixed peso-dollar exchange that in the last three years has caused a decline in production and exports, to the benefit of Argentina’s partner-competitor, Brazil.

The decision of the new Economy minister could mean a greater deceleration than the one that had already taken hold of the integration process. It does not necessarily imply, however, reversing direction on the path already taken, but rather vindicating the need of each partner to create better conditions for growth, thus improving the welfare of all.