Since its very inception by the Treaty of Assunción of March 26, 1991, MERCOSUL, the projected common market between Argentina, Brazil, Paraguay and Uruguay, was an immediate success in the area of trade in goods. Internal trade rose from US$ 4 billion in 1990 in a constantly ascending curve to US$ 14 billion in 1995 and US$ 18 billion in 1996. This trenchant tendency was accompanied by extraregional trade expansion as well. Extraregional imports rose from US$ 25 billion in 1990 to US$ 55 billion in 1995. Brazil´s average import tariff fell from 58% in 1989 to 12.6% today, as a consequence of the adoption of Mercosul´s Common External Tariff (CET) on January 1, 1995.

MERCOSUL´s objectives, as defined by the Treaty of Assunción were quite ambitious and comprehend a) the free movement of capital, people, goods and services; b) the creation of a common external tariff and a common external trade policy; and c) the coordination of a common external trade policy.

The free movement of goods, with some exceptions to be discontinued by the years 2001 and 2006, has been already largely accomplished. The Common External Tariff (CET) has been in force since 1995. The coordination of a common external trade

policy has become a reality with both multilateral (within the WTO) and hemispheric initiatives, such as in the negotiations for the Free Trade Area for the Americas, in the latter of which the MERCOSUL countries appear as a block. Problems, however, remain on the objectives for free movement of capital, goods and services.

In spite of the importance of the services sector for both the Argentine and the Brazilian economies, where it accounts for, approximately, 55% of the GDP, the area has yet to be formally regulated by MERCOSUL. By means of the Protocol of Ouro Preto, signed by the heads of state of the four member countries on December 17, 1994, an “ad-hoc” group on trade in services was created with a view to preparing a framework agreement for the liberalisation of services within MERCOSUL.

The “ad-hoc” group has been quite active in the formation of this agreement. Taking into consideration the regional specificities in accordance with the guidelines of the General Agreement on Trade in Services (GATS) within such negotiations, it was deemed apposite by the representatives of the member states to prepare additional agreements in three areas of services which were not concluded during the Uruguay Round of the GATT, namely a) financial services including banking, insurance and reinsurance; b) telecommunications; and c) air transportation. Such agreements have been drafted with the view of liberalizing the internal rendering of services, rather than creating barriers to third countries.

Concomitantly with the negotiations for the framework agreement on services, some initiatives have already been taken by the MERCOSUL member states in connection with some very specific areas in the financial sector. For instance, Resolution 10/93 of MERCOSUL adopted the minimum capital and equity requirements established by the Basel Committee. Similarly, Decision 8/93 of MERCOSUL established the minimum regulation of the capital markets to be in force in the member states, as well as a common terminology. In addition, the same Decision revoked the existing limitations on intraregional capital movements by citizens of MERCOSUL. At this point, it must be emphasized that, at present, of all MERCOSUL countries, Brazil is the only one with exchange controls.

On the other hand, Decision 12/94 established basic principles of consolidated banking supervision as well as defined accepted practices and criteria, with a view towards the preservation of the solvency and liquidity of the financial sector within MERCOSUL.

The Colonia Protocol for the Promotion and Regional Protection of Investments within MERCOSUL was signed on January 17, 1994 and established most favoured nation privileges, in addition to regulating in detail monetary transfers.

Such must be effected in convertible currencies, in accordance with the regulations adopted by the recipient country of the respective investment. The Colonia Protocol further assures convertible currency cover for remittances of repatriation of capital; profits; interest; repayment of loans; royalties and fees, indemnification and other limited purposes.

Investments by Brazilian citizens abroad in MERCOSUL´s stock exchanges are limited to operations liquidated at sight and in MERCOSUL´s futures and option markets are limited to hedging operations for trade transactions.

In addition to such internal initiatives, MERCOSUL countries have been liberalizing their financial markets before third countries. This tendency started sooner in Argentina, which eliminated the state reinsurance monopoly and opened its banking sector to foreign capital, to such an extent that today, out of the five largest private banks in that country, four are controlled by foreign banks. Nowadays, insurance companies in Argentina tend to belong to banking groups, whereas in the past they were largely independent, many of which controlled by trade unions.

The same situation can be verified in Brazil. On August 25, 1995, the Brazilian Official Gazette published an administrative act by which the President eliminated the restrictions imposed by the 1988 Constitution by formally recognising the country´s interest in the increased participation of foreign financial institutions in the local banking market. Less than two years later, there are approximately 70 banks controlled by foreign capital in Brazil, including the country´s 4th largest bank, in addition to some 70 representative offices of foreign banks. Similarly, Constitutional Amendment number 13 of August 21, 1996 lifted the reinsurance monopoly which existed in favour of the National Institute of Reinsurance, soon to be privatised.

Uruguay has long had an international banking center which is quite liberalised and relies extensively on off-shore activities. Paraguay´s banking sector is at present the least developed of the four member states of MERCOSUL and faces at the moment the challenges of a major restructuring effort on the part of the country´s government. With the recent liquidation of the two largest national capital banks, now the five largest banks in operation in Paraguay are controlled by foreign capital.

It remains indisputable that the single most important obstacle to the full consolidation of MERCOSUL, as well as to the liberalisation of its services markets, is the anachronic existence of exchange controls in Brazil. One of the pillars of the Brazilian economic stabilization programme successfully created three years ago by the then Finance Minister, Mr. Fernando Henrique Cardoso, who is today the country´s president, was to have an overvalued local currency (the “Real”).

This was done with a view to check inflation via relatively cheap imports, whilst the structural reforms introduced before Congress were not approved and the major privatizations had not taken place. The other pillar of the economic stabilization plan is of course the policy of very high interest rates, which prevents the economy from overheating.

This situation is seen both in Brazil as well as within MERCOSUL in general with mixed feelings. On the upperside, there are, of course, the enormous benefits of a stabilised economy. On the downside, however for the Brazilian private sector, such policies have been considerably detrimental to its trade competitiveness in local as well as in the international markets. For Brazil´s MERCOSUL partners, the existence of exchange controls is seen as an obstacle for further integration and for market access. Accordingly, MERCOSUL´s Decision 8/93 not only recognises that restrictions on capital transfers impose serious tension on the financial markets, but also establishes an annual review of the objective of free movement of capital.

On the other hand, there are strong pressures from Brazilian business lobbies, such as the powerful São Paulo Federation of Industries (FIESP) and the influential Federation of Industries of Rio de Janeiro (FIRJAN), for increased speed in the structural reforms presently with Congress, as well as in the privatizations. Once those are achieved, the Brazilian government with be able to forgo both initial pillars of its economic stabilisation plan, eliminate exchange controls, float the Real and practice interest rates more compatible with those prevailing in the international financial markets.

Without those actions, MERCOSUL´s objectives will become seriously compromised.