TRADE/POLITICS-LATAM: Mercosur Partners’ Crises Check Integration

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jun 21 2001 (IPS) - Presidents and cabinet ministers of South America’s Southern Common Market (Mercosur) trade bloc are meeting Thursday and Friday in Asuncion to undertake a nearly impossible task – moving forward on integration amidst a spate of crises.

The 20th biannual meeting of Mercosur leaders is taking place six days after Argentina announced a modification of its currency board exchange rate scheme for foreign trade, which makes exports cheaper while driving up the cost of imports.

Argentina’s partners in the Mercosur – Brazil, Uruguay and Paraguay, as well as associates Chile and Bolivia – are not exempt from the new exchange rate.

The measure was adopted to tackle a severe recession that has plagued Argentina for nearly three years. Statistics revealed Thursday in Buenos Aires indicate that the country’s Gross Domestic Product (GDP) was 2.1 percent down in the first quarter of the year on the same period last year – despite the fact that the 2000 figure was already low.

In Brazil, meanwhile, an energy rationing plan adopted this month will curb growth of the bloc’s leading economy, whose vulnerability has been reflected in a nearly 25 percent devaluation of the local currency, the real, against the dollar so far this year.

To check the depreciation of the real, the Central Bank decided late Wednesday to raise its basic interest rate from 16.75 to 18.25 percent – a measure that could accentuate the Brazilian market’s tendency towards stagnation.

The steady slide of the real since January 1999 also contributed to a strong recession in Uruguay, due to the fall in exports to Brazil, its chief market, especially for farm goods like dairy products and rice.

Paraguay is also facing serious troubles, with the government brought to bay by corruption accusations, and calls that it step down from sectors at odds with the administration’s economic policy.

Unfortunately, “it is very difficult to negotiate” against a backdrop of macroeconomic crisis, said Lucia Maduro, an economist who advises Brazil’s National Confederation of Industry on questions of international integration.

One example of that is the difficulty the bloc has run into with respect to negotiations on its common foreign tariff, the reduction of which was to be decided at this week’s summit, attended by presidents Fernando de la Rúa of Argentina, Fernando Henrique Cardoso of Brazil, Luis González Macchi of Paraguay, and Jorge Batlle of Uruguay.

Presidents Ricardo Lagos of Chile and Hugo Banzer of Bolivia, the bloc’s associate members, are taking part as well.

Also invited were President Hugo Chávez of Venezuela, who will seek associate status in the bloc for his country, and Joaquim Alberto Chissano of Mozambique.

Maduro told IPS that the common foreign tariff was “an instrument of industrial policy, which cannot be used to compensate exchange rate problems.”

Decisions on the degree of protection needed to allow national industry to develop in the bloc must look to the long-term, instead of being applied simply to overcome passing trade, fiscal or financial imbalances, for which other instruments exist, she insisted.

Maduro added that industrial investment was a gradual process, and thus required “farsightedness and a permanent structure of tariff protections” that cannot just be modified at any moment in an attempt to resolve problems in other areas.

Furthermore, the timing is wrong for discussing the slashing of duties in the Mercosur, because a new round of negotiations on the Free Trade Area of the Americas will soon begin, in which the bloc will need bargaining chips to obtain something in return, said Maduro, reflecting the position of Brazil’s industrialists.

The economist said she hoped the announced creation of a high- level group to study the bloc’s common foreign tariff would be confirmed in Asuncion, in order to put off a decision on the question and pave the way for broader debate, with private sector participation.

The Brazilian government’s approval of Argentina’s proposal to hasten the cutting of the common foreign tariff on information technology and telecommunications goods, originally slated for 2006, drew fire from business in Sao Paulo, Brazil’s economic capital.

The chairman of the Federation of Sao Paulo industries, Horacio Lafer, accused the government of caving in to Argentina without listening to the views of industry, which would be hit hardest by the decision.

But Brazil’s authorities are themselves divided – a fact that will stand in the way of a decision being reached this week. Reducing tariff protection is not easy for a country that has failed to eliminate its trade deficit despite a huge crash of its currency since 1999.

Imports of electronic inputs are the main cause of Brazil’s imbalance in foreign trade, outstripping even the impact of oil.

That will make it impossible to reach agreement in Asuncion on a proposed 2.5 percent reduction of the common foreign tariff.

At the bloc’s previous summit last December in southern Brazil, the members agreed to move towards eliminating an additional peak of three percent added to the common foreign tariff two years earlier in order to face up to the difficulties triggered by the Asian and Russian financial meltdowns.

However, in the face of Brazilian resistance, a reduction of just 0.5 percent was agreed, and the remaining 2.5 percent was left to be decided on at this week’s meeting.

The problems of seeing eye to eye in the Mercosur are currently concentrated above all in industry.

Another thorny issue involves the common automotive regime, which has been under negotiation for over three years. The Brazilian government hoped the scheme would be formalised this week, but the accord expired before it even went into full effect.

Argentina wants to review the agreement to eliminate a clause according to which each country can only export up to 10 percent more than it imports from the other country – a limit that has already been exceeded by Argentine exports, due to the recession gripping its domestic market.

Buenos Aires is also demanding that trucks, tractors and other farm machinery, and information technology be exempted from the common foreign tariff as capital goods, the cheaper importation of which favours investment and production in the country.

Argentina’s demands could receive the backing of Paraguay and Uruguay, but not Brazil, which has local industry to defend in both sectors, and is a big exporter of heavy vehicles.