TRADE-MERCOSUR: Argentine Economy Chief Wins Brazil’s Backing

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Mar 23 2001 (IPS) - The Brazilian government of Fernando Henrique Cardoso announced its support Friday for Argentina’s new Economy Minister, Domingo Cavallo, and his emergency measures directed at halting the Argentine economic crisis.

Cavallo and Foreign Minister Adalberto Rodríguez Giavarini met Friday morning with their counterparts in Brasilia to explain the Argentine plan for “recovering competitiveness and economic growth.”

The measures include eliminating tariffs on capital goods imported from outside Mercosur (Southern Common Market – Argentina, Brazil, Paraguay and Uruguay), a proposal that got a cold reception from the Brazilian business community.

Such an exemption would eliminate the free trade advantage enjoyed by industry inside Mercosur, as Argentina plans to end the application of the common external tariff of 14 percent for machinery and equipment acquired outside the trade bloc.

Brazil, the largest partner within Mercosur, would be hardest hit by the measure. Its machinery and equipment industry last year exported 1.7 billion dollars worth of goods to Argentina alone.

Exporters in Europe and the United States provide lines of credit at five percent annual interest, while Brazilian financing costs 18 percent, which tips the balance of competition, explained Luiz Delben Leite, president of the Brazilian Association of the Machinery and Equipment Industry.

The quality of Brazilian products is confirmed by the fact that industrialised countries import them, but financing costs cut into their competitive edge, pointed out the business leader.

Argentina’s Cavallo assured that the changes, which also call for a 35-percent hike in tariffs on consumer goods, would be temporary and would not hurt trade between Brazil and Argentina, Mercosur’s two leading partners, in the long run.

But Brazil’s foreign minister, Celso Lafer, did not seem convinced. A thorough study is necessary in order to have an idea of the measures’ impacts, he said, announcing that this would be done at the Mercosur Council meeting next month in Buenos Aires.

“Time for international trade is slower that that of financial flows,” which constitute an immediate problem for Argentina, while trade questions can be analysed in detail in the future, Lafer commented.

Upon returning to Buenos Aires, Rodríguez Giavarini emphasised that Brazil is committed “to continue an in-depth analysis, within the Mercosur Council, of the announced measures.”

Brazil’s finance minister, Pedro Malán, took a more diplomatic stance, affirming his government’s support for Cavallo’s economic plan, because “it is in the interest of Brazil and Latin America” that Argentina overcome its difficulties as soon as possible.

Cavallo has repeatedly stated that “there will be no devaluation, no surprises,” his way of assuring that the parity of the Argentine peso and the US dollar would continue.

Such an immediate visit to Brasilia – Cavallo was sworn in only last Tuesday – demonstrates the importance the Argentine government of Fernando de la Rúa places on Mercosur, Malán indicated.

For his part, Rodríguez Giavarini maintained that Cavallo, in ratifying the peso pegged to the dollar, “sent a very forceful message to the markets, and to those who speculate against the peso, telling them that they are going to lose.”

The measures, included in a “law on competitiveness” that came up for vote in the Argentine Congress in Friday’s early hours, are an attempt to reduce production costs 20 percent for exportable products, he explained.

Rodríguez Giavarini considered the approval of the law so far shows “great support” for Cavallo’s plan, “and it is essential that the Senate sanction it as soon as possible.”

Low-cost imports of capital goods is an important part of the plan’s objectives.

A higher tariff on consumer goods, on the other hand, favours Brazilian exports of products such as textiles and footwear. This could compensate for losses in other areas, in domestic terms, but will not silence the complaints from the machinery and equipment industry.

Brazilian diplomats and trade analysts have expressed some fear, pointing out that in the past Cavallo has advocated an end to the customs union, that is, the regimen of common foreign tariffs, in order to turn Mercosur into a mere free trade zone.

The application of different tariffs by Argentina would represent the first step towards dismantling the system, they said.

The changes in the common external tariff proposed by Argentina violate the principles of Mercosur, asserted Horacio Piva, president of the Sao Paulo Federation of Industries, Brazil’s most powerful organisation in that sector.

In light of such charges, Alcides Tapias, minister of development, industry and trade, made it clear that Brazil’s support is for “temporary emergency measures.” A final date for the exceptions, however, was not defined, and it would have been impossible to do so.

For Brazil, as the major partner – and one that considers Mercosur to be a strategic matter -, there is no alternative but to support a member country during a difficult time, especially now that talks on the Free Trade Agreement of the Americas have entered a decisive phase.