TRADE-LATAM: Fissures Appear in Mercosur Trade Bloc

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Sep 28 2001 (IPS) - Officials and business leaders in Argentina and Brazil admitted for the first time this week the possibility of suspending South America’s Mercosur customs union, due to the major disparities between the two biggest member countries.

A Big Mac costs 2.50 dollars at a McDonald’s in Argentina, compared to 1.33 dollars in Brazil, while supermarkets in Brazil charge one-third to one-half of what consumers in Argentina pay for the same products.

But analysts argue that the exchange rate asymmetries between the two Mercosur (Southern Cone Common Market) heavyweights would not be resolved by eliminating the common foreign tariff that governs the bloc’s trade relations with the rest of the world.

On the contrary, they warn that eliminating it would just bring new problems.

Mercosur, which is made up of Argentina, Brazil, Paraguay and Uruguay, emerged as a free trade zone in 1991, and became a customs union in 1995, when common import duties – which currently average 13.5 percent – went into effect for a list of products entering from outside the bloc.

Argentina sells goods to Brazil today under the protection of the common foreign tariff. If that customs union agreement is eliminated, Brazil, the bloc’s leading member, could turn to other suppliers, at lower prices.

Argentine Economy Minister Domingo Cavallo drew criticism even from within the government of Fernando de la Rúa when he proposed, a few months back, doing away with the Mercosur’s common foreign tariff.

But this week it was Brazil’s Minister of Development, Industry and Trade, Sergio Amaral, who admitted the possibility of “considering a temporary suspension of the common foreign tariff until a readjustment is found.”

Twenty-four hours later, the Argentine Industrial Union (UIA) went a step further, announcing that “we believe it is necessary to agree on a suspension of the Mercosur trade bloc in order to allow Argentina” to get back on its feet on the foreign trade front during the “transition” period.

In other words, move away from free trade – although the association of industrialists underlined that “a suspension is not the same as renouncing the bloc.”

The Argentine Chamber of Exporters approved the proposal of taking a break from the customs union, arguing that at any rate, the common foreign tariff was not functioning as an overall norm, because it provided for too many exceptions and underwent constant changes.

The UIA said the bloc’s two biggest partners should live up to their commitment to coordinate their macroeconomic policies. However, it added that such negotiations required “more time than is tolerable for Argentina’s productive apparatus” and labour market.

The business association proposed suspending the common foreign tariff and allowing Argentina to once again protect national production against imports, through instruments permitted by the World Trade Organisation.

The president of the UIA, Ignacio de Mendiguren, said the proposal had arisen from the “desperate” pressure applied by sectors like the food, textile, steel, metallurgical, footwear, apparel and lumber industries, which are concerned about cheap imports from Brazil that undercut local products.

Brazil’s local currency, the real, cost approximately the same as the Argentine peso – on par with the dollar – less than three years ago. But in January 1999, Brazil began to devalue the real, while Argentina held tight to its fixed exchange rate, and an enormous gap opened between the two.

Today, while one Argentine peso can still be exchanged for one dollar, the real stands at 2.71 to the dollar. The resulting disparity in prices stands in the way of Argentine exports to Brazil, its chief market, while it has led to an increase in imports of Brazilian goods.

However, economic analysts warn against backtracking in a strategic integration process like Mercosur, which at its peak in the early 1990s spawned a rise in trade within and outside the bloc, as well as an increase in investment flows.

Linking the debate on the common foreign tariff to the behaviour of the local currencies makes no sense, because the common duty does not influence trade within the bloc, which is the trade that is affected by the depreciation of the real, Roberto Frenkel, an economist at the Latin American Faculty of Social Sciences, told IPS.

Frenkel also underlined that abandoning the common foreign tariff would send out an extremely negative signal with regards to Mercosur’s credibility in its ongoing negotiations with other blocs, like the European Union.

“The tariff should not be dealt with on the basis of short- term criteria,” said the economist. “If the Argentine government has objections to the structure of the common foreign tariff as it now stands, it should formulate a proposal for modifying it that would be negotiated with its partners. But the problem is that the government is not clear on what it would prefer.”

Frenkel said the exchange rate gap between Argentina and Brazil was “a more pressing matter” than the common foreign tariff. He evaded questions, however, as to how the difference should be compensated for without falling into a depreciation of the peso, which Argentina wants to avoid at all costs.

The crisis that broke out in the bloc this week has been simmering for a long time. The value of the real first crashed in January 1999, when Argentina began to complain that many companies operating in its territory had picked up and moved to Brazil, where costs were lower due to the difference in exchange rates.

Meanwhile, Argentina is in the midst of a recession that has dragged on for 38 months, which only aggravates the tension within the bloc. “With no internal market and without prices that would allow our exports to compete in Brazil, our companies have to close up shop,” said De Mendiguren.

These issues are expected to be on the agenda of the Mercosur council of ministers when it meets in early October in Sao Paulo, Brazil.

Cavallo has already said he was pleased that Brazil had agreed to discuss a temporary suspension of the customs union.

However, the UIA clarified that its initiative had nothing to do with the economy minister’s ideas. Argentina’s industrialists believe Cavallo wants to dissolve Mercosur and negotiate a free trade accord with the United States.

They, on the other hand, merely want a temporary suspension of the common foreign tariff, in order to safeguard the bloc in the long-term. “It would be like putting it in the freezer before everything began to really go bad,” said the UIA’s De Mendiguren.