Sadly, MERCOSUL has deteriorated in the past year to such an extent that it has become an exercise in managed trade rather than the consolidation of a promising common market, proudly heralded to the world from the shores of South America. Largely a political initiative with wistful economical integration aims, MERCOSUL came into being as a result of the Treaty of Asuncion, signed in 1991. Its ambitious objectives comprised the creation of a common market with the free circulation of capital, goods, services and people; the creation of a common external tariff and trade policy; as well as the co-ordination of the macro-economic policies of its member states.
Encouraging economic results in the first 8 years of existence were misleading, clearly resultant rather from artificial conditions than from intrinsic attributes, which could be relied upon as a foundation for solid economic growth. Such artificial conditions were two-fold: in the first place, a niche for trade in agricultural commodities otherwise excluded from multilateral commerce had been created, which accounted for 59% of the bloc´s internal trade; and, secondly, a policy of substantial over valuation of the Brazilian currency induced the exceptional creation of market access for otherwise un-competitive Argentine manufactured products to the Brazilian markets. That policy also contributed decidedly to the diversion of foreign investments into manufacturing plants from Brazil to Argentina, even if the substantial markets were in the former rather than the latter country.
The devaluation of the Real in the beginning of 1999 brought back to reality the demagogues who believed that a common market could be created only with political will, without the intrinsic macro-economic factors that allow for fiscal stability, efficient public governance and the resulting domestic and international credibility. The resulting crisis saw the development of acrimony in the political relations within the trade – bloc, as commerce became conflictive in key areas such as automotive; information technology; diary products; steel; shoes; pigs; paper and pulp; textile; sugar; capital goods, etc. Managed trade naturally ensued. Technically, the free trade bloc merited to be pronounced dead.
Both the ingredients of the crisis, the over-valuation of the currency, as well as its subsequent devaluation, were created by the mismanagement of Brazil´s fiscal policies, a deep-rooted tradition in the country´s republican governments. Such state of affairs has caused Brazil to be one of the few countries in the world to adopt a policy of exchange controls even today, with a fairly liberalised economy, vying to compete in the global markets. How can any statesman worth his salt dream of having free flow of currencies in a free trade zone or a common market with exchange controls. This is evidently impossible because the “sine qua non” condition for any free trade is that there is a currency of substance behind it. Without a credible fiscal policy, there is no reliable currency and without a reliable convertible currency, there is no free trade.
Therefore, MERCOSUL will undoubtedly have a bright future the day Brazil has a reliable convertible currency.
Lawyer admitted in Brazil, England and Wales and Portugal. GATT and WTO panelist. Brazilian government ad-hoc representative for the Uruguay Round of the GATT. Post-graduation professor of the law of international trade.