TRADE-MERCOSUR: Economic Crisis Feeds New Disputes

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jul 7 2001 (IPS) - The economic crisis in Argentina is causing a sustained decline in Brazil’s currency, and the two countries – the largest partners of Mercosur (Southern Common Market) – have once again entangled themselves in trade row.

The dollar reached an exchange of 2.56 Brazilian ‘reais’ here Friday morning, but later fell back to 2.43 reais. This represents a depreciation of more than 27 percent since January, in stark contrast to the fixed exchange rate in Argentina, where the peso is kept pegged to the US dollar.

Analysts agree that Argentina’s political and economic crises are the principal immediate cause of the real’s weakening, which has been sliding since March. Brazil’s dependence on foreign investment, the national energy crisis and the deceleration of the United States economy are among the other factors.

The depreciated Brazilian real, meanwhile, serves as a justification for the measures and declarations with which Argentina’s Economy minister, Domingo Cavallo, is perturbing Brazil and Mercosur, the trade bloc the two countries share with Paraguay and Uruguay.

Cavallo’s latest decision, announced Tuesday, grants a tariff discount for trucks, agricultural machinery and computer and telecommunications goods coming from outside Mercosur, an attempt to offset the 7.7-percent difference applied in the exporters’ transactions.

In response, Brazil suspended the bilateral negotiations that were underway, involving a reduction of Mercosur’s common external tariff, the trade regimen for automobiles and the standardisation of anti-dumping mechanisms.

The Argentine decision – taken unilaterally and without consulting Mercosur – hurts Brazilian exports because it erases the preferences granted to members of a bloc defined as a customs union, pointed out Brazil’s assistant foreign minister, Luis Felipe Seixas Correa, in explaining his country’s reaction.

Brazilian diplomacy thus reaffirmed that it will not agree to reverting Mercosur into a simple free trade zone, a change Cavallo has repeatedly indicated that he favours.

The customs union implies an exemption of tariffs in the trade between members of the bloc, but shared protection from imports from third countries in the form of uniform tariffs.

Since he took the reins of Argentina’s Economy portfolio three months ago, Cavallo has attempted to reduce the tariffs on all imports of heavy vehicles, farm equipment and computer and telecoms products, cutting into the advantage held by Brazilian industry in those sectors within Mercosur.

His initial bid to include them among capital goods, for which Mercosur authorised Argentina to abstain from applying the common external tariffs, met with firm opposition from Brasilia.

Cavallo backed off from the idea, and tensions dissipated, but they are returning now with Argentina’s new tariff policy. In practice it has the same objective of cutting the costs of acquiring the specified goods for Argentina’s economic actors, breaking its dependence on Brazilian supplies.

But this violates the agreements and the spirit of Mercosur, argues the Brazilian government.

The new conflict erupts amid the serious difficulties confronting the economies of both countries, reflected in the persistent depreciation of the real in Brazil and the three-year recession in Argentina, with a dramatic rise in bond interests, which deepens public debt.

In mid-June, when the dollar neared 2.48 reais, Brazil’s Central Bank pushed its interest rate up 1.5 percentage points and actively intervened in the exchange market with the sales of currency and debt titles indexed on the dollar.

The exchange reversed to 2.30 reais, but began to rise again this month. The Central Bank’s announcement Thursday, by international affairs director Daniel Gleizer, that it would sell 6.0 billion dollars by the end of the year did not calm the market, but made waves instead.

The Brazilian currency is “out of control” and runs the risk of “a speculative assault,” according to consultant Natan Blanche, a currency exchange market expert.

The announced sum, 6.0 billion dollars in six months, represent 50 million dollars a day, “almost nothing” in a market that negotiates 1.5 billion dollars a day, according to exchange operators.

Brazil’s cash reserves, 36.458 billion dollars as of Thursday, would also fail to satisfy the high demand.

This is why the government should also turn to public debt titles adjusted to the dollar, a rise in interest rates and a reduction of the market’s liquidity, Blanche suggested.

But these are measures that inhibit economic growth, which is already suffering the effects of the country’s prolonged energy crisis and the subsequent retraction in national and foreign investment.

According to Brazil’s former Treasury minister, Mailson da Nóbrega, the problem is that large national companies holding debt in dollars and foreign corporations fearing the uncertainty in both Argentina and Brazil are seeking protection, in other words, assets in strong foreign currencies.

The abrupt depreciation of the real increases inflation as well as Brazil’s internal and external debt, in addition to its damage to the real economy, particularly the companies that depend on imported inputs.

The deceleration of the Brazilian economy, alongside the depreciation of the real, represents further difficulties for Argentina because Brazil absorbs nearly 30 percent of its exports. It is against this backdrop that the differences within Mercosur are simmering.