MERCOSUL, the ambitious common market of the south, was created by the Treaty of Asuncion, signed on the 26th of March, 199l, among Argentina, Brazil, Paraguay and Uruguay, as a result of mostly a political agenda. Towards the end of the 80s, all of those countries had overcome years of disastrous military regimes and were in process of reinstating the rule of law and democratic values. The region´s new civilian and democratic leaders took the view that a common market in the area would be important in defusing traditional regional rivalries that kept alive the possibility of military confrontation as well as allowing for manipulation of third parties. In addition in these years, there was a great deal of frustration for developing countries in general with the multilateral trade regime of the General Agreement of Tariffs and Trade (GATT), perceived as an instrument of dominance by the traditional trade partners. This scenario had been aggravated by the acrimony surrounding the Uruguay Round of the GATT, whose negotiations had stalled, for the first time in history, as a result of the stubborn resistance put up by developing countries to the introduction of new areas (such as services, investments and intellectual property) into the multilateral system, whilst maintaining the traditional areas (such as agriculture and textiles) of commerce excluded thereof.
There was thus, at that moment in time, for developing countries, a generalised sentiment of despondency with the GATT and its perceived use as a tool for trade dominance unscrupulously used by the main powers. In no other moment in the history of multilateral trade, had there been such a mushrooming of regional trade pacts. Even the USA, hitherto undoubtedly the greatest champion of the GATT, and not surprisingly its main beneficiary, had a change of heart about the multilateral system, as it could no longer influence it to the same extent, and applied for an exception under article 24 of the GATT with a view to form what later became known as the North American Free Trade Agreement (NAFTA). Accordingly, it was perceived in South-America that a regional trade pact could also bring some commercial benefits, in addition to the general improvement of the geo-political atmosphere.
The extent to which commercial benefits would be reaped was not entirely known, only vaguely suspected, as the diplomatic agents of countries concerned conducted the negotiations from a great distance of their respective civil societies and business circles, unquestionably still very much under the influence of the deplorable old ruling habits inherited from the military dictatorships of the region. The consequently largely wistful objectives of the Treaty of Asuncion were determined as:
i) the free circulation of capital, goods, services and people;
ii. the creation of a common external tariff and trade policy; and
iii. the co-ordination of macro-economic policies.
The Brazilian government negotiated with a view to obtaining political leadership in the region, to what the Argentines agreed, at the price of major economic concessions from Brazil, none the least ample and unrestricted access to the latter´s huge internal markets. Such trade concessions, isolated or in combination with other macro-economic factors, contributed to a substantial distortion in the flow of foreign investments from Brazil to Argentina, particularly in the automotive sectors, with auto-makers establishing a commercial presence in Argentina to serve the Brazilian markets from there. Brazil also agreed to exclude from the trade bloc its sugar sector, the most competitive of its agriculture. The other countries of MERCOSUL, Paraguay and Uruguay, with much smaller economies, could not afford to be alienated from a trade pact by their much larger neighbours, had to accept whatever puny advantages they could possibly extract in the negotiations.
The creation of a regional trade bloc did not have the power to remove the daunting inherent problems of the signatories of the trade pact overnight. These included immature political institutions and macro-economic fragility in the member states. The former comprised a vast array of idiosyncratic laws inherited from the military regimes and the latter resulted from a historical chronic economic mismanagement, corruption and incompetence. The main, but by no means the only, corollary of the adverse macro-economic situation, in both Argentina and Brazil, was the monetary fragility in both countries. Brazil is still one of the few countries in the world administering exchange controls and Argentina adopted the extraordinary step of adopting the US dollar, the currency of its third trade partner, as national currency. The nature of the dramatic discrepancy of the adopted monetary policies did not augur well for the future of MERCOSUL.
Another major strategic error on the part of the MERCOSUL negotiators was the eschewing of the creation of a credible and efficient system for the resolution of controversies, an imperative instrument for the prevalence of the rule of law, which also brings the added benefit of defusing tensions among trade negotiators and politicians. This very serious fault can be undoubtedly attributed to Brazil, who did not wish to subject the power of the regional leader to the rule of law; a duplicitous stance, as well as a distorted view of what regional trade pacts should be. Accordingly, no private parties were allowed to utilise the dispute settlement mechanism without the concurrence of their respective governments, which institutionalised censorship and arbitrary control of the access to the jurisdictional system. No other trade pact in the world dared to have such a bizarre system.
Nevertheless, MERCOSUL became a major trade success practically from its inception. This success was more the result of the prevalent adverse conditions of access to regional products in the multilateral markets rather than from trade diversion. Accordingly, regional trade went from US$ 5 billion in 1991 to US$ 10 billion in 1993, US$ 14billion in 1995, US$ 20 billion in 1997 and in 1998, and back to US$ 19 billion in 1999, after the devaluation of the Brazilian currency. It is indeed worthwhile to note that 59% of MERCOSUL´s regional trade is comprised of agricultural commodities and products, which is clear and unmistakable evidence that the pact is a very sensible, if not the only, alternative to the exclusion of its agricultural products from the multilateral trade system. Brazil quickly became not only Argentina´s main trade partner and destination of 35% of its exports, but the buyer of 50% of Argentine manufactured products, many of which originated in brand new factories largely built to service the Brazilian markets, such as in the automotive sector. A common external tariff for the trade bloc was created and became effective in 1995, albeit with many exceptions, such as in the automotive sector, information technology, sugar, etc.
In early 1999, triggered by an international financial crisis, the intrinsic adverse macro-economic conditions in Argentina and Brazil took their toll, which was only exacerbated by the dramatically diverse monetary policies in the two countries. Argentina´s currency was, and still is, pegged to the US dollar. This policy is domestically very popular, even if it limits the expansion of the economy to foreign direct investment inflows and trade surpluses, which have been difficult to achieve, and takes competitiveness away from Argentine products in their main market, Brazil. In January of that year, Brazil was forced to devalue its currency, which had been set at 35% above its perceived value, as a means to make imports cheaper and thus help in the control of inflationary pressures, whilst the government was incapable of adjusting its fiscal policies. This development immediately altered not only the trade relations, but also affected diplomatic relations between the two countries. Argentina had taken for granted an overvalued Brazilian currency, which allowed for competitiveness of Argentine products not extant with any other countries.
Thus, the devaluation of the Real not only altered the trade conditions in favour of Brazil, but also affected the performance, if not the feasibility, of the many foreign investments in the form of new plants built to service the Brazilian markets. As a result, many of such operations were transferred from Argentina to Brazil. The Argentine government chose not to alter its monetary policy, which had become popular over the years. Accordingly, the only option available in Argentina was to sacrifice what there was of regional free trade in a desperate effort to maintain some degree of economic vitality. Therefore, Argentina established many restrictions, for the most part illegal, in sundry sectors of the economy, such as dairy products; shoes; steel; poultry; pork; automobiles; textiles; sugar; capital goods and information technology. The absence of an effective dispute resolution system put enormous strain on the bilateral relations. Such actions created acrimony in the relations with Brazil and the loss of diplomatic dialogue with the Menem administration, at the end of its term in office. Effectively, managed trade substituted free trade.
The advent of a new administration in Argentina and the clear perception by all of the member states of MERCOSUL of the implications of the failure of the launch of a new round of multilateral trade negotiations in Seattle, there was a renewed incentive to sort-out the internecine differences in the trade bloc. The agendas proposed for the new round of the World Trade Organisation (WTO) were perceived as not addressing the interests of developing countries and the failure to redress this situation within the multilateral system was seen as an encouragement for the development of regional trade agreements. The negotiations with a view to set up a Free Trade Area of the Americas (FTAA-ALCA), to be tentatively set in place by 2005, have made limited progress as a result of the lack of fast track authority in the USA and of the enormous resistance of business and public opinion to the initiative in Brazil. However, they are perceived as a strategic threat. Therefore, the member states of MERCOSUL decided on the 37th meeting of the Common Market Group, which took place in Buenos Aires on the 4th and 5th of April of this year to “re-launch” the trade bloc.
It was recognised that macro-economic co-ordination is of the essence for the future of MERCOSUL. It was thus agreed that until September of this year the harmonisation of economic data will be in place. On June 9th, the Economy Ministers and Presidents of the Central Banks of MERCOSUL established such criteria. From March of the year 2001 onwards, the member states will have joint fiscal targets. Brazil has agreed to re-formulate the system of dispute resolution of the trade bloc. The success of the policy of implementation of joint fiscal targets will of course, to a great degree, depend on the success of legislative reforms in a harmonised way. If this is difficult to achieve in each country individually, what to say of a supra-national initiative. However, in accordance with a recent poll, the business sector in MERCOSUL in general and in Brazil, in particular, want legislative reforms dealing with fiscal discipline, taxation, social security and curbing excessive government regulation.
At the same time the implementation of such measures is under way, expansion of MERCOSUL is being sought. Negotiations for full membership with Chile, presently an associated member of the trade bloc together with Bolivia, have been under way with renewed interest after the inauguration of the Lagos administration in Santiago, which sees this project as one of its major political objectives in international relations. However, there are difficulties in the sense that the average Chilean tariff is inferior to MERCOSUL´s Common External Tariff. Negotiations with the Republic of South Africa for adhesion to MERCOSUL have just started. Today, as I speak, there is a 15 strong negotiating team from South Africa´s Department of Trade and Industry in Brazil. President Mbeki will probably participate in the next meeting of MERCOSUL´s head of states later this year.
Such negotiations will probably require the reduction of the Common External Tariff of MERCOSUL. Brazilian business have taken the view to encourage the government to avoid errors of the past with unilateral trade liberalisation and only to implement further tariff reductions within a context of major regional or multilateral agreements. It is under this light that the current negotiations for a trade pact between MERCOSUL and the European Union taking place this week in Brussels should be seen. The finding of a common denominator is proving to be a daunting task, in view of the devastating effects of the Common Agricultural Policy of the EU. Agriculture accounts for 35% of the external trade of MERCOSUL countries. Accordingly, MERCOSUL should not hesitate to refuse a trade pact with the EU, which does not ensure a major facilitation of the access of its agricultural products in Europe. The EU´s position at the moment seems to be divided, with some countries, such as the United Kingdom and Holland, supporting the principle of greater access for agricultural products.
The private sector in MERCOSUL sees the regional prospects for the future with guarded optimism. There is optimism because the opportunities for business and economic development abound. The massive inflow of foreign investments in Brazil in the order of US$ 89 billion over the past three years, or 10% of the GDP, is a trenchant indication of this reality. The pressures for growth are enormous. Brazil will achieve by the end of this year the passenger car production threshold of 2 million units forecasted for 2003 only in November of last year, in the automotive summit organised by The Economist, in Dearborn. Electric consumption is up 8% this year and unemployment is down 5.4%. Industry grew 6.6% in the first quarter. The GDP is expected by some to grow by 6% this year, although the government target agreed with the IMF is only 4%. Economic expansion in Brazil will benefit the other MERCOSUL countries. On the other hand, there is reservation because major reforms are still necessary in order to align the macro-economic fundamentals, as well as the legislative structure and the costs of doing business, with those prevalent in our major trade partners. Elimination of exchange controls in Brazil is an absolute necessity.
In a important article published in The Financial Times on the 13th of June, the Prime Ministers of Britain and Spain indicated that “The modern role of government today is to create the conditions in which business can create jobs; to protect the vulnerable and fight social exclusion; to prepare our children for the new opportunities of the future; and help our workforces to adapt to change.” If this is valid for the EU, it is even more so for MERCOSUL. We hope our governments put this in practice. Alternatively, we can always try and convince Mr. Blair to stand for office in our part of the world.
Ladies and Gentlemen, thank you very much
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.