MERCOSUR Common Market Falters

September 25, 2007

Supporters hail the Southern Cone
Common Market as a major step to-
ward the fulfillment of the age-old dream
of Latin American unity. Critics counter
that Mercosur, as it is known, is a
meager, hastily drawn reproduction
of the European Community that is
bound to fail. In either scenario,
Mercosur is an earnest attempt by the
governments of Brazil, Argentina, Uru-
guay and Paraguay to fit their increas-
ingly square economic pegs into ever-
more round international holes-as a
world of emerging trade blocs threat-
ens to relegate South America to the
sidelines.
"Mercosur is extremely ambitious,"
Canadian trade official Michael Hart
told a group of academics at the Univer-
sity of Sdo Paulo last year. The easy
part, roughly akin to the North Ameri-
can Free Trade Agreement, is disman-
tling trade barriers among member
countries. A June 1990 agreement be-
tween Brazil and Argentina consoli-
dated an earlier sector-by-sector inte-
gration process launched in 1986. In
January 1991, the first of regular pro-
gressive tariff readjustments took ef-
fect, with zero duties set for December
31, 1994. Following the same time-
line, a list of products exempt from the
process will be gradually reduced. A
four-part treaty signed in March 1991
awarded membership to Paraguay and
Uruguay. The two countries are slated
for complete inclusion by the end of
1995. By then, officials also hope to
have a unified set of external tariffs in
place.
The hard part-and, many observ-
ers believe, a prerequisite for success--
is macroeconomic "harmonization": the
coordination of exchange rate, mon-
etary, trade and other policies. What
took the European Community decades
of preparation to accomplish, Southern
Cone leaders hope to compress into a
Bill Hinchberger is a freelance jour-
nalist based in Sdo Paulo. He is associ-
ate editor of the alternative yearbook
Third World Guide 1991-1992.
few short years. On this front, discus-
sions have made little progress thus far.
Diplomats are beginning to admit that
the common market plan is too ambi-
tious in the short term; they now ac-
knowledge that a more realistic goal is
to forge a functional free-trade area.
The Southern Cone Common Mar-
ket is the only serious attempt to form a
trading bloc not anchored in one of the
world's leading economies. The
region's heavyweight, Brazil, pales in
comparison with the United States,
Germany orJapan. Indeed all fourcoun-
tries that make up Mercosur are in the
throes of the worst economic depres-
sions in their modern histories. Yet
regional statistics are not insignificant.
With a total area larger than that of the
United States and Mexico combined,
Mercosur's four members boast a popu-
lation of nearly 200 million and a com-
bined gross domestic product of close
to $400 billion. (The U.S. gross domes-
tic product is $5.7 trillion.)
Those numbers may grow. At the
July summit of Latin American presi-
dents in Guadalajara, Mexico last year,
the Bolivian government expressed in-
terest in joining. Meanwhile, Mercosur
is actively courting a reluctant Chile.
That country's long-standing trade lib-
eralization program and low inflation
rates transformed it, along with Mexico,
into a darling of the international busi-
ness community. Potential benefits from
joining Mercosur are tempered by
Chile's desire to parlay its goodwill
abroad into a bilateral trade deal with
the United States. (Chile signed a free
trade deal with Mexico last year.) With
its already cut-rate tariffs, Chile has
little to gain from participating in
Mercosur until custom duties are simi-
larly trimmed elsewhere in the region,
observes Andre Franco Montoro, a vet-
eran Brazilian politician and president
of the Latin American Institute in Sgo
Paulo. If that happens, he predicts, Chile
will sign on.
Diplomats are setting a stage they
hope will be filled by economic actors
-- entrepreneurs who, emboldened by
VOLUME XXV, NUMBER 4 (FEBRUARY 1992) 1Ifewer restrictions, will follow a script
of burgeoning trade and cross-border
joint ventures by "binational" firms.The
plan, say government officials, encour-
ages specialization where comparative
advantages already exist-Brazilian
capital goods, Argentine wheat, Uru-
guayan rice, and Paraguayan cotton--
thereby increasing efficiency and
strengthening the region's clout in world
trade. Officials admit the likelihood of
some short-term sectoral crises and a
round of business failures initially, but
Rene Dreifuss, a researcher with the
Southern Cone Alternative Policy In-
stitute in Rio de Janeiro, predicts that
business will profit from the advan-
tages of scale and rationalization, while
consumers will enjoy a wider selection
of higher quality, cheaper products.
Because no single country dominates
Mercosur like the United States does
the North American Free Trade Agree-
ment, benefits and losses will probably
be less regularly distributed, according
to country, locality and sector.
Down Side of the Deal
Skeptics point out that government
officials are bending over backwards to
facilitate business (including multina-
tional) input in negotiations, while fend-
ing off the handful of labor and other
activists who want places at the table.
They also note that the plan envisions a
capitalist utopia unfettered by guaran-
tees for working people. Social issues,
when addressed by Mercosur, are rel-
egated to the nebulous sphere of joint
government committees charged with
drawing up "technical norms." And
trickle-down benefits cited by Merco-
sur's advocates have long been prom-
ised by self-serving elites.
In 1987, Brazil's leading polling
firm, IBOPE, reported that 88% of those
questioned reacted positively to Latin
American regional integration. The
Demoskopia Research Institute in
Buenos Aires found four of five Argen-
tines to be pro-integration. But if wide-
spread, such support is slim-a poten-
tial weakness not lost on astute offi-
cials. "If citizens do not participate in
Mercosur's destiny, we are merely cre-
ating a bureaucratic animal," Marcos
Castriotto Azambuja, Brazilian secre-
tary general for foreign policy, told Ar-
gentine business leaders, the Brazilian
newspaper Gazeta Mercantil reported.
"And we are seeing evidence in Eastern
Europe of how bureaucratic animals
die of hardening of the arteries."
For researcher Rene Dreifuss, the
lack of popular dialogue distinguishes
Mercosur from the European Common
Market. "Mercosur was not born of
political necessity, with the support of
the people," he says. "In Europe, the
Common Market had the support of the
general population, that was anxious to
find mechanisms to avoid a return to the
dramatic conflicts of World War II. In
the Southern Cone, there is no ri-
valry."
Thus far, criticism from labor and
environmentalists remains muted, in
contrast to organized, if diffuse, oppo- sition to the North American Free Trade
Agreement among labor and other ac-
tivists. Consumer groups have prob-
ably been the most active, lobbying for
the adoption of legislation modeled on
Brazil's strict consumer protection code
in the other three countries.
In part, lack of opposition is rooted
in the pan-Latin American ideology
that most progressives, including labor
activists, share. This outlook, dating
from Sim6n Bolivar, was strengthened
by solidarity among Latin American
exiles who fled the dictatorships that
once dominated the region.
Progressive observers call integra-
tion a mixed bag, not without its posi-
tive aspects. "In general, the labor move-
ment was always sympathetic to the
idea," observes Silvia Portella, a soci-
ologist and coordinator of the union
policy section of the Unified Workers
Central (CUT). The net effect on em-
ployment remains unclear, since plant
closures could be offset or eclipsed by
new investment. "Workers won't nec-
essarily profit," Dreifuss says. "Inte-
gration will bring benefits for some
companies, and problems for others."
Dreifuss chides the Left for not
mobilizing around the integration is-
sue. "Unions and political parties have
been following the process from a dis-
tance," he says. "Political clout is some-
thing you earn, if you have the will."
Portella admits labor has paid scant
attention to the potential effects of
Mercosur-save for a handful of iso-
lated initiatives, notably by the Metal-
workers Union, representing auto work-
ers, and small farmers and farm work-
ers in the south of Brazil. But interest is
growing, she says. The CUT and its
Argentine counterpart, the General
Workers Confederation (CGT), elic-
ited the support of the European Labor
Confederation to help develop strate-
gies for participation. Their Uruguayan
colleagues have made tentative con-
tacts as well. But as Dreifuss puts it:
"There is no transnational labor union
structure in the region."
Opposition is more evident among
business sectors likely to suffer, such
as Brazilian agriculture and Argentine
REPORT ON THE AMERICASpaper products. In response to the recal-
citrance of many domestic businesses,
government and business leaders have
begun to call for Mercosur's "priva-
tization." The integration process has
been long on diplomatic accords and
short on private initiative, says Benedito
Pires de Almeida, foreign commerce
director for the SAo Paulo Industrial
Federation (FIESP). "Nothing is going
to happen unless people are aggres-
sive," he says. In early August, FIESP
and the Argentine Industrial Union
(UIA) made a joint pledge to stimulate
such aggressiveness. "Business people
have to change their closed mentality,"
says Manuel Herrera, head of UIA in-
ternational relations.
Multinationals React
By contrast, transnational compa-
nies have been quick to respond to
Mercosur. Automakers including
Autolatina (Ford and Volkswagen's
holding company in the region), Scania,
Mercedes-Benz and Fiat are leading the
charge to benefit from regional parts
sourcing and more flexible trade in a
sector long controlled by the govern-
ment in Brazil and Argentina. The phar-
maceutical company Pfizer announced
that, with the advent of Mercosur, it
plans to centralize production. As a
result, Pfizer postponed projected in-
vestments of $80 million in Brazil this
year. Du Pont, with factories in Brazil,
Argentina, Venezuela and Colombia,
has reduced its personnel by unifying
its continental management structure,
and plans to become even leaner as
borders are pried open. "Where there is
a redundancy of units, the least com-
petitive will be closed," Jorge Rosas,
chief executive officer of Du Pont's
South American operations, told the
Brazilian business magazine Exame.
Free trade may also attract other-
wise reticent investors. The Danish bio-
technology firm Novo Nordisk cited
Mercosur as the determining factor in
its decision to expand a plant in south-
ern Brazil. Even so, multinational inter-
est in the region stands at an all-time
low, a function of the region's floun-
dering, unstable economies. Disinvest-
ment is possible with or without free
trade.
Nevertheless, prospects for in-
creased regional trade look good. Trade
between Brazil and Argentina rose by
some 80% following the modest reduc-
tion of barriers in the late 1980s. And
with a 40% tariff reduction in January
1991, trade for the first six months of
last year leaped by 65% over 1990-Ar-
gentina sold $934.5 million worth of
goods to Brazil, and Brazil sent $450
million worth southward.
The Argentine business community
is buoyant. "Domestic companies are
focussing more than ever on Brazil,"
reports the specialized weekly Busi-
nessLatinAmerica. Brazilians, though,
seem occupied elsewhere-which
makes sense in light of overall trade
figures. While Argentina relied on intra-
regional purchases for 26% of its for-
eign sales in 1990, Brazil sent just 1%
of its exports to Mercosur neighbors.
Three-quarters of Brazilian trade is with
the developed world. Between 1970
and 1987, Argentina failed to break into
the list of Brazil's top 25 trading part-
ners. Even with the recent boom, Ar-
gentina just barely makes the top ten.
Brazilian executives maintain that
gradually diminishing tariffs and other
changes have not been able to over-
come differences in relative exchange
rates and growth cycles, elements that
traditionally govern the flow of goods
within the region. Moreover, even as
typically strong Brazilian products, such
as textiles and footwear, flow more
freely into the Argentine market, some
Brazilian industrialists complain that
Argentina's overall import liberaliza-
tion efforts are eroding advantages they
previously enjoyed under bilateral
agreements. Under the current economic
adjustment program, the Cavallo Plan,
Argentina established average tariffs of
9.6%-less than the 14% that Brazilian
imports are to face under Mercosur in
1994. Brazilian business leaders com-
plain they cannot compete with Euro-
pean producers under these terms. For
example, Argentina's zero tariff for pet-
rochemicals undercuts a previous bilat-
eral preference.
Mercosur countries are also shying
away from the harsh consequences of
economic rationalization on business
sectors long accustomed to protection
from outside competitors. When Ar-
gentine pulp and paper imports from
Brazil, subject to a low 5.7% tariff, shot
up 1,300% over 1990 levels, pushing
Argentine companies to the threshold
of bankruptcy, diplomats-worried
about the negative political fallout-
convinced Brazilian producers to "vol-
untarily" reduce exports by the end of
1991. Brazilian industry sources argue
that this artificial accord was doomed
to failure; their exports continue apace.
Meanwhile, the agreement encouraged
Brazilian producers of garlic, fish, on-
ions and other goods to lobby for pro-
tective measures for their sectors.
Such retrenchment is enough to pro-
voke a bout of indigestion in any free
trader's stomach. In the interim,
transnational corporations appear to be
the only sure winners.

Tags: Mercosur, Trade, investment, multinationals


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