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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