1.1. – I was asked by the young lawyers and trainees of Noronha – Advogados to give a lecture concerning the future of MERCOSUR, certainly inspired by the distressing crisis, affecting not only MERCOSUR as an institution, but all the countries involved within this commercial bloc and consequently the inhabitant´s standard of living. I am certain that this concern is shared by the responsible citizens of every member state within the regional pact and in particular, our Argentinean colleagues at Noronha – Advogados, Buenos Aires.

1.2. – I have divided today´s presentation in the following form:

i) This introduction;

ii) Historical considerations;

iii) Mercosur as an institution and its experiences;

iv) Future scenarios.2.1. – The historical development of Brazil differs from that of other South America countries, not only due to the Portuguese language and colonisation as opposed to Spanish, yet also due to the great ethnical and cultural diversity, as a result of its vast territory and its multiple and heterogeneous components. Here in the 19th century, as well as the Portuguese Language, “Tupi-Guarani”, or “Nhenhengatú”, “Iorubá”, in the state of Bahia, “Quimbundo”, in Rio de Janeiro and Pernambuco, were the languages that were spoken along with the pockets of Veneto and German in the south of the country. In this specific part of the Brazilian territory, which consists of the area between the state of São Paulo and Rio Grande do Sul, owing to the extensive number of peninsular immigrants, which exceeded the population of Portuguese origin, Italian did not become the common language due to the fact that it did not exist as such.

2.2. – For the Portuguese in Brazil, mating with the native population became an official policy, which was indeed against the natives tradition of choosing a mate within their own social group (cunhadismo[1]). This resulted in large scale multiracial interbreeding and the preservation of numerous native values and customs, including approximately 17,000 lexical items of Tupi-Guarani, included in the spoken Portuguese language. In turn the systematic import of African slaves for almost 400 years resulted in Brazil having the highest African population outside the continent. In Argentina on the other hand, there is greater ethnic and cultural homogeneity, owing to stronger European influence, especially Italian immigrants, and very little influence for the traffic of African slaves. In proportion to Brazil, there were fewer Native Indians in Argentina yet they still suffered the military campaign of genocide under Rosas military leadership. Paraguay has a greater ethnic and cultural homogeneity due to the predominance of the Native Indian element and the situation in Uruguay stands between that of Argentina and the Brazilian state, Rio Grande do Sul.

2.3. – The Spanish and the Portuguese brought their traditional Iberian Peninsular political rivalry to South America, which extended to the respective colonies not only as a result of their position but also as a result of their idiosyncrasies. Such was the case in the majority of conflicts within the “Mar Del Plata” a region so strongly influenced by the Paulistas´ slavery excursions that they became copper coloured or “caboclos,” descendants of a Portuguese and native Indian mix that used the Tupi – Guarani language. With the exact objective of preying on the natives, the Paulistas advanced through the southwestern territory, systematically attacking the Jesuit missions controlled by the Spanish religious authorities. As they were covering such a great distance, the Paulistas established housing centres in order to replenish all their stocks, which later became actual towns and villages. As a result of their predatory daring they almost managed to occupy Buenos Aires[2], but were defeated by the Tupis and Guaranis led by the Jesuits during the Battle of Mbororé in 1641.

2.4. – For more than a hundred years after the Portuguese arrival, Brazil was without a working judicial authority. Curiously, it was only during the period in which the Portuguese crown was together with the King of Spain, perhaps courtesy of the fact that it had been a Brazilian colony, harshly developed during the true first world conflict, The Thirty Year War[3], which, frequently unsuccessful, attempted to apply law in Brazil, after such a long period of absence of any laws or norms. The first judges arrived in Salvador, the colonial capital of Brazil, in 1609 in order to establish a judicial body. Afterwards an order by Felipe II of Spain was promulgated prohibiting indigenous slavery. It was the first law that “did not work” in Brazil. The Paulistas simply did not take it seriously, until the first judge arrived in the city to enforce it. The magistrate Manuel Jacomé Bravo, bid a strategic retreat. Then in 1611, the King himself would revoke the measure[4]. The Portuguese in Brazil introduced the Inland Revenue Service only in 1647. Commenting on the lawlessness of the time, Father Viera in one of his unforgettable sermons preached “Laws are not good because they are well ordered, rather because they are well kept.”[5]

2.5. – As the economy at the time was mercantile or based on a system of exchange, the Portuguese felt the need to officially occupy the region of the La Plata river, where in 1680 the Sacramento colony, in Uruguay´s present territory, was founded, in order to facilitate the purchase of silver smuggled from the Spanish possessions in Potosi, where Bolivia is now located. The silver gave the main export goods the liquidity that they did not previously have. From then on, the hegemonic presence in the La Plata region became the official policy of Portugal and in turn, Brazil. It is interesting to note that the La Plata River was the only existing access to the western province of Mato Grosso, without which the territory would doubtless have been lost. Uruguay only became independent after a rebellion in the former Cisplatina province and a war against Argentina, by right of the Rio de Janeiro Treaty of 1824, which also assured the international character of the waters of La Plata River.

2.6. Nevertheless, the Brazilian interventions in Uruguay and Argentina[6]
continued, that resulted in the overthrow of military leader Juan Manuel de Rosas in 1852 and the Triple Alliance war[7] in Paraguay in 1864 when the majority of the male population of that area was wiped out. The proclamation of the Republic in Brazil in 1889 launched the country into a period of great internal conflicts and consequently economic, social and political instability. This situation relieved the existing tensions in the La Plata basin, yet did not eliminate them. Rivalry was still as strong and the memories still living. The possibility of an armed conflict seems great and as the Brazilian and Argentinean armed forces prepared themselves for this, despite the empty rhetoric of Latin American fraternity. The state of things affected South American geo politics, with alliances between Brazil and Chile on one side and Argentina and Peru on the other.

2.7. – Both Brazil and Argentina, have suffered serious violations of state law and democratic order in the last one hundred years, which has not only prevented their full development but also increased the risk of a military conflict between them. The most recent military dictatorship period in Brazil, 1964 to 1986, was practically contemporary to a similar infamous regime in Argentina. When democracy was re-established in both countries, their democratic leaders tried to define the bases of a strategic partnership for the future and, in 1987, signed a Co-operation Agreement.[8] This agreement was further motivated by despair of both countries in the multilateral economic order, in crises during the introduction of the Uruguay Round of GATT in 1986.

2.8. – Uruguay Round of GATT was the first negotiation round of a multilateral trade system that was requested by a country other than the United States of America (USA) – Japan, which was tired of such formalistic application of the mock legal order established by the General Agreement of Trade Tariffs, signed in 1947 under American inspiration. GATT was being administered in such a way as to maintain the hegemonic advantage of the USA in international trade, excluding the most important sectors for general developing economies in Brazil and Argentina, in particular, the agricultural and textile sectors. Taking advantage of the Japanese initiative of a new round, the USA, backed by the European Union[9], intended to include new areas in which they considered themselves more competitive, such as services, investments and intellectual property, at the same time refusing the more traditional areas.[10]

2.9. – Such a situation drove the multilateral trade system into a corner that increased the lack of confidence in GATT, both on the part of developed countries because they were unable to impose their will, as well as of developing countries, poor victims of an iniquitous order. As a consequence, the number of developed countries´ arbitrators increased, especially in the USA, against developing countries. Brazil, in particular, was a systematic target of the USA´s commercial pressures and destabilising actions due to the fact that it had led the group of 11, together with India, which opposed the North American´s intentions[11]. Another consequence was the proliferation of regional trade pacts – some pacts aiming at asserting captive markets and managing hegemonic advantages as was the case with the North America Free Trade Agreement, NAFTA; and others, such as MERCOSUR, with the ambitious and strategic aim of cooling down tensions by means of regional integration, and at the same time creating alternative markets for its products, denied by the multilateral order.3.1. – The Asuncion Convention on March 26, 1991, that created a common Market between Argentina, Brazil, Paraguay and Uruguay (MERCOSUL) had the following as its explicit objectives:

i) Free movement of capital, goods, services and people;

ii) Creation of an external common trade tariff and the establishment of an external trade policy; and

iii) The co-ordination of macro-economic policies.

3.2. – For Brazilian negotiators, who are traditionally removed from the national economic reality, the political regional leadership agenda was way ahead of concrete commercial interests. The Brazilians, contrary to the Argentineans, practically negotiated the Asuncion Treaty without co-ordination with private enterprise. On the other hand, the Argentinean negotiators, being more realistic, opted for concrete commercial advantages with MERCOSUR, especially access to the huge Brazilian internal market for their product, which would take them up to a higher and previously non-existent dimension and, as a result, would attract greater foreign capital inversion. This position made Brazil open its internal market to Argentinean wheat, while it allowed Argentina to maintain its barriers of Brazilian sugar, the most competitive in the world for over four hundred years and which employs 1.2 million rural workers. Likewise, this arrangement allowed Argentina to attract large investments, for the automobile industry, which it would certainly not have attracted before, aimed at serving the Brazilian market. Although without an internal market, Argentina offered a better internal institutional atmosphere to foreign investors.

3.3. – This framework of negotiation unfavourable to Brazil and favourable to Argentina in exchange relations, was maximised by the unfortunate Brazilian political incompetence in stabilising the economy through fiscal balance, and led the Brazilian government to launch a short-term economic plan the constituted in the overvaluation of the national currency in order to reduce the price of imports and combat inflation. With the same goal, interest rates were increased to levels without comparison in the international market, and imports were liberalised to the lowest level in history. This unfortunate recipe for disaster was called the “Real Plan”, implemented in July of 1994. As a result of the “Real Plan”, the Brazilian currency was overvalued by about 35% in relation to the Peso, causing Argentinean products to be more competitive in the Brazilian market[12]. On the fifth anniversary of the “Real Plan”, in July of 1999, Argentina had accrued a surplus in commercial exchange with Brazil of US$ 6 billion[13].

3.4. – Since the beginning of Menem´s government, Argentina has adopted through national law, the system of fixed parity between the Peso and the American dollar. This measure, though radical and malicious, was very well received by the Argentinean people, tired of the monetary instability that accounted for the total loss of credibility in the local monetary authority, and for a solid and generalised flight of capital, which reached even the lowest income population. The fixed parity with the American dollar created for Argentina´s Central Bank the impossible task of exercising monetary policy, subjected the country to fluctuations of the dollar in relation to its main economic partners´ currency, and still the USA´s monetary policies were always carried out for their own benefit[14].
3.5. – In the interim, the combination of the Treaty of Asuncions´ advantages together with the overvalued Brazilian exchange rate gave the weakened Argentinean productive sector a great competitiveness in relation to the internal Brazilian market, with the constant generation of surpluses in the bilateral commercial balance, at the same time that Brazil would become Argentina´s major trading partner, absorbing approximately one third of Argentinean exports and nearly half of manufactured goods. But still, Brazil became the only country with which Argentina had trade surpluses, which is quite indicative of their reciprocal distortions. While the Argentineans deluded themselves believing in the sustainability of the Brazilian internal policy of monetary overvaluation, the impracticality of Brazilian private initiative brought about by such institutional folly, coupled with traditional incompetence, lack of public spirit and corruption within the Brazilian public sector, prevented the economic stabilisation of the country and took the “Real Plan” to its implacable decline. In mid January 1999, the Brazilian government devalued the currency, neutralising a large number of the previously existing advantages. As a result of this, Argentina, Brazil, Paraguay and Uruguay submerged into a grave social and economic crises and believed not only MERCOSUR to be under threat but also the legal order in the region.

BRAZILIAN SURPLUSES IN EXTERNAL TRADE WITH ARGENTINA

SINCE THE TREATY OF ASUNCION

Remarks		US$ Million
Treaty signed in March	1991	(138,510)
	1992	1,308,358
	1993	941,513
July (Real Plan)	1994	473,898
	1995	(1,550,257)
	1996	(1,635,435)
	1997	(1,174,254)
	1998	(1,285,731)
January to June	1999	(300,367)

Total since 1991	(3,360,785)
Real Plan Total	(6,396,044)

3.6. – The crisis triggered off very serious trade conflicts between Brazil and Argentina in various economic fields as a result of Argentina´s desperate attempts at preserving at most the “status quo ante”, thus avoiding the collapse of its monetary policy. In order to offset the increased competitiveness of Brazilian products in its markets brought about by currency devaluation, Argentina resorted to various measures, both legal and illegal, with a view to restricting access of Brazilian exports in mutually important sectors, such as steel, textile, paper, electronic products, chicken and shoes. By this token, Argentina managed, within the first six months of 1999, to keep a small trade balance surplus with Brazil, despite some car assembly lines having moved to the latter country. Argentina´s adoption of several measures incompatible with a common market was not well received by Brazil, generating similar inappropriate retaliatory measures and the resorting to WTO dispute-settlement mechanism.

3.7. It is worth noticing that the incapacity of both Argentina and Brazil to deal more efficiently with their institutional problems led to the impossibility of complying with most of the objectives of the Treaty of Assuncion. Brazil as well as Argentina set as priorities institutional reforms of the tax system, National Insurance, judiciary and labour relations. Both countries aimed at fiscal balance in a climate favourable to private enterprise. It is a major regional tragedy of historic proportions and with potentially extremely dire consequences that Brazil and Argentina failed, totally and utterly, in the pursuit of those objectives. This failure jeopardised almost all of the Treaty of Assuncion´ goals.

3.8. Let us see. The free flow of capital does not exist, because Brazil is still a signatory to the transitory clause of the Bretton Woods agreement[15], therefore it still exercises currency control. Likewise, the free flow of goods does not exist at the moment. Whereas previously there were exceptions, currently with bilateral trade conflicts, no other regional arrangement has the same number of voluntary containment agreements as MERCOSUR. The end of such agreements had been a priority of developing countries during the GATT´s Uruguay round. Similarly, the free flow of people and services is non-existent. A common external trade tariff was created, which is now highly affected by exceptions within the rules. The establishment of a common trade policy is topical and incipient. Previously, both Argentina and Brazil established trade agreements outside the bounds of MERCOSUR, the former with Mexico and the latter with the Andean Community. Negotiations on the so-called FTAA (Free Trade Area of the Americas), however have been led in a co-ordinated fashion. It remains to be seen until what point. Finally, co-ordination of macro-economic policies has been unsuccessful, as Brazil´s currency devaluation amply demonstrated.4.1. – The reversal of such a scenario seems problematic because it depends on the success of institutional reforms, mainly in Brazil but also in Argentina. Such reforms should ensure macro-economic rationalisation and fiscal stabilisation and, consequently, monetary stability in Brazil. They should also bring about a better economic climate with a lessening of political and social tension. Further still they would enable the restructuring of the tax, national insurance, labour , judiciary and political systems. This framework would allow for general deepening of MERCOSUR through the convergence of macro-economic policies, leading in turn to a credible regional common currency and reducing trade disputes and artificial imbalances. This is not the most likely scenario – in Brazil there is neither the competence nor the political will to resolve this grave and endemic national problem, considering also that the reforms would diminish the impact of corrupt practices.

4.2. In the absence of a more stable economic situation in Brazil, there is likely to be increasing governmental instability, a deepening of the country´s crisis and, as a consequence, of MERCOSUR as well. Argentina will seek to conduct separate negotiations within FTAA, opting for a situation of relative prosperity as a neo-colony instead of sovereign partnership with Brazilian chaos. Brazil will continue, like Sierra Leone, to look for a national consensus, which will allow for national reconstruction. It is incumbent upon us to prevent, within the democratic state, the possible materialisation of this worst scenario.