Although many observers are optimistic about its future, tensions among national constituencies as well as those between Mercosur and other countries could intensify as the trading bloc develops. The October 1997 visit of U.S. President Bill Clinton to Argentina and Brazil worried both countries' presidents, who feared that Clinton would insist on the dissolution of their regional trade bloc into the U.S.-dominated hemispheric project, the Free Trade Area of the Americas (FTAA). When the U.S. President finally announced his support for Mercosur, the Common Market of the Southern Cone, those in the region who see the bloc as a source of eco- nomic growth and relatively autonomous development breathed a sigh of relief. Clinton's visit, however, did not resolve any of the fundamental problems facing Mercosur. Although many observers are optimistic about the future of the agreement, there are a series of tensions, ranging from conflicts between national con- stituencies within Mercosur countries to relations between the bloc and other countries in the region, which will likely become more acute as the trading bloc develops. While Mercosur's origins can be traced back to a 1986 integration agreement between Argentina and Brazil, its formal birth was marked by the Treaty of Asunci6n signed in Paraguay on March 26, 1991 by the governments of Argentina, Brazil, Paraguay and Uruguay. The four signatories agreed to establish a "common market with free circulation of goods, ser- vices and productive means among its members," and at the same time to "facilitate Mercosur's entry as a competitor into the global economy." The bloc has now signed cooperation agreements with Chile and Bolivia in order to broaden its base in the future. The results have exceeded all expectations. In a de- cade, Mercosur is well on the way to becoming an autonomous economic actor. It has become Latin America's most successful mechanism of economic integration, and is now the fourth-largest commercial bloc in the world. With an area of over 4.5 million square miles, more than 200 million inhabitants and an 25 Jorge Schvarzer heads the Center of Economic Studies of Business and Development (CEEED) at the University of Buenos Aires, where he teaches economics. Translated from Spanish by Jess Kincaid. 25 VOL XXXI, NO 6 MAY/JUNE 1998REPORT ON ARGENTINA annual output valued at nearly $1 billion dollars, the region is well placed to accelerate its economic growth.' Argentina and Brazil remain the backbone of the regional agreement, representing more than 90% of the bloc's population, output, industrial activity and exports. While its presence marks a significant change in the history of the region, Mercosur is really a child of hap- Political leaders sought to establish mechanisms which would prevent the return of military regimes by directly linking their countries' economic future to the endurance of democratic rule. penstance. Just 15 years ago, Argentina and Brazil were largely isolated from each other. Connections between the countries were rare and trade was minimal. Despite the rhetoric of regional brotherhood, each of them traded primarily with the core capitalist countries, a strategy that was perceived as the only possible road to development. They primarily sold raw materials to the industrialized countries in exchange for manufactured goods and credit. Moreover, both Brazil and Argentina had adopted the model of import-substitution industri- alization (ISI) in an effort to develop their own manu- facturing sectors, with little or no regard for regional economic integration. In the mid-1980s, a number of factors converged to change these official policies. The external debt crisis strongly called into question the borrower-lender rela- tionship with the core economic powers. Regional inte- gration, it was thought, could help in the renegotiation of the debt and create a new dynamic between the southern periphery and the global powers. The debt cri- sis also highlighted the difficulty of building a solid industrial economy within the bounds of a single coun- try. Regional integration, it was hoped, could create a solid base for a modern and viable industrial economy, and a common market would allow production to take place on a scale large enough to accelerate the process of development. Once the agreements were signed, each country's business sector immediately began doing business in neighboring countries, both through exports and direct investment. These activities, in turn, helped create economic structures that were broader, more complex and more competitive than those which had previously existed in the member nations. But economic incentives were not the only factors behind the creation of Mercosur. What made the crucial difference was the political reality of the period. In the 1980s, both Argentina and Brazil underwent democra- tic transitions after long periods of military dictator- ship. Through integration agreements, political leaders sought to establish mechanisms which would prevent the return of military regimes by linking their countries' economic future to the endurance of democratic rule. To this end, Mercosur negotiations looked to address the problems that had generated support for military solutions in the past and sought to facilitate a reduction of military power on both sides. An agreement on nuclear cooperation, signed by Argentina and Brazil in the mid-1980s, was the first step towards building mutual trust and reducing historical disagreements between the two nations. Later, the Treaty of Asunci6n explicitly established democracy as a basic condition for membership in Mercosur. rgentina's trade with its Mercosur partners grew from around 8% of its total trade in 1986 to A25% ten years later. For Brazil, that same figure increased from 5% to 14%. Paraguay and Uruguay, as smaller nations, buy and sell nearly half their imports and exports to Mercosur countries. 2 This increase of intra-bloc commerce generated a doubling of the total international trade in all four countries between 1990 and 1996.3 Although the figures for Brazil and Argentina are still low (compared, for example, to the European Union), the current dynamics of the bloc sug- gest that a high level of mutual dependence will develop within the next few years. The increase in trade has occurred both in manufac- turing and in agriculture and raw materials, where nat- ural comparative advantages that were ignored in the past due to the pressures of other interests are now being exploited. Argentina exports oil, wheat and dairy products-goods for which there is a strong demand in Brazil. Despite the advantage of low transportation costs, however, Argentina won the Brazilian market only after the Mercosur accords. Before the treaty, Brazil bought these goods from other countries, either because it could obtain them with preferential credits or because it could pay in kind with its own products. By transforming that market, integration has thus con- tributed to increased production in Argentina. Argentina's dairy production expanded by about 60% during the 1990s. This would not have taken place were it not for the Brazilian demand for those goods. 4 Economies of scale have grown and costs of production have been reduced, thus consolidating local develop- ment as well as the development of the entire bloc. The same process occurred with Argentina's purchases of Brazilian iron, coffee and other raw materials, which 26 NACIA REPORT ON THE AMERICASREPORT ON ARGENTINA are generating a continuous flow of goods between both the Europea nations. ian policy t The expansion of manufacturing trade has been even interests an more dynamic than that of primary exports, especially bling block in the automotive sector, iron and steel manufacturing, The role A worker assembles a car door at Chrysler's new Jeep Grand Cherokee factory in C6rdoba, Argentina. Most of its products are exported to Brazil. and the chemical and petrochemical industries. In all of groups are these sectors, there is a visible process of industrial spe- tinue to chi cialization in each country which has been brought ways to org about by growth in the economies of scale made possi- At the sai ble by Mercosur. The clearest example is the automo- integration, tive industry, in which companies have set up plants on than those both sides of the Argentina-Brazil border which assem- and current ble cars with components made in all four member tinue to b countries. This process has generated strong competi- national mi tion among the auto companies. Mercosur consumers national p already purchase two million vehicles a year-a market regional pai that has not gone unnoticed by multinationals. 5 more coop could still p D espite its promising performance, however, tries. A cu Mercosur faces a series of challenges that are could advei likely to intensify even as it consolidates. Some its partners of these challenges are external, such as the demand by a nondemo northern powers that Latin America open its economy cal crisis co to a degree which is incompatible with effective and thus th regional integration. Local champions of neoliberalism The diver support such measures because they are more interested with pruden in their contacts with northern industrial and financial reconcile th sectors than in the development of the regional market. for concert Other challenges are internal, such as resistance to much to str Mercosur from producers in regions adversely affected Southern C by the agreement. The protests of sugar-producers in independen Argentina in 1997, for example, who feared the sudden activity, off competition of their more powerful Brazilian neigh- countries ir bors, suggest the need to reconcile local interests with insufficient the interests of the market as a whole. Here, Mercosur relations, bl will have to pursue a long-term solution in the style of in the medii VOL XXXI, No 6 MAY/JUNE 1998 in Union, which adopted an equitable agrar- that took decades to develop. Ignoring the d proposals of local sectors could be a stum- to the integration process. of the labor movement is another challenge that Mercosur must address. Labor feels, rightly, that Mercosur is a project of other social groups and that economic integration could be detrimental to its short-term inter- ests. The possibility that Mercosur could force organized workers to compete with workers in countries with lower wages was an element that mobilized the labor movement against the trade bloc during its early stages. Today, Mercosur has contributed to the creation of the first regional labor networks in the Southern Cone, a development that will certainly affect its evolution. Union leaders, small and medium business owners and representa- tives of other special interest currently debating whether they should con- allenge the integration strategy or look for anize within it. ne time, in spite of the progress of regional national interests continue to be stronger generated by integration. Taxation, finance cy-exchange policies in each country con- e focused around the problems of each arket. The growing recognition that these )licies can be divisive and harm other rtners has not yet been sufficient to assure a erative approach, and internal pressures rovoke a rupture among the Mercosur coun- rency devaluation in Brazil, for example, rsely affect the relative competitiveness of and provoke a negative reaction. Similarly, cratic outcome of Paraguay's current politi- uld potentially threaten the unity of the bloc e Treaty itself. se challenges facing Mercosur must be met at political and social policies that are able to e interests in question and provide direction ed national interests. Such policies will do lengthen this new pole of development in the ione. Mercosur could become relatively t and, by promoting productive economic er a better life to the citizens of its member the foreseeable future. This is of course in terms of transforming social and political ut it represents a viable and worthwhile goal in the medium-term. Mercosur: The Prospects for Regional Intergration 1.See Adolfo Buscaglia, "Argentina: Paridad internacional en d61ares del producto interno y tasas reales de cambio," Paper presented at the National Academy of Economic Sciences, Buenos Aires (December 4, 1996), Mimeograph; and Jorge Schvarzer, La evolu- ci6n de la producci6n argentina en la d~cada de los noventa (Buenos Aires: CEEED/University of Buenos Aires, 1997). 2. See the International Economy Center of the Argentine Ministry of Foreign Relations, Boletin de Comercio Exterior Argentino, Vol. 5, No. 7 (July 1997). 3.Institute for European-Latin American Relations (IRELA), El Mercosur: Perspectivas de un bloque emergente (Madrid: IRELA, August 1997). 4. See Agricultural, Livestock and Nutrition Ministry (SEAG), Informe estadistico de leche y productos IActeos (Buenos Aires: Subministry of Nutrition, 1996). 5. Center for Social Research on the State and Bureaucracy (CISEA), El desaflo del Mercosur para la industria argentina. Evaluacibn de un proceso cambiante (Buenos Aires: CISEA, November 1992).
