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Contributions from
the Column
Focus
Regional integration in Africa
The price is not right yet
ACP countries need reforms
Mercosul dilemmas
ASEAN + 3
ECOWAS’ unfinished agenda
01/2007
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Mercosul dilemmas
Intra-regional trade is growing fast, particularly between Brazil and Argentina. However, the two largest members of South America’s trading block Mercosul (the Spanish name is Mercosur), are competing for dominance. Meanwhile, the smaller member countries have not yet benefited in similar ways as the region’s two giants from economic integration.
[ Fernando J. Cardim de Carvalho ]
Tensions arose lately among Mercosul members, after Uruguay announced it was engaged in talks with the US administration on a free trade agreement. Brazil and Argentina reacted strongly against the initiative, which they considered a serious threat to Mercosul. Their pressure caused Uruguay to retreat somewhat. Talks are still going on, but Uruguay has downgraded its expectations from signing a free trade agreement to reaching some bilateral understanding with the US.
This episode was just the latest of a series of tensions among Mercosul countries. Even though trade is growing fast in the group, mostly between Brazil and Argentina, the relationship between members has become increasingly difficult. No one expects the regional arrangement to collapse, but strong political leadership will be necessary to steer the participating countries towards common objectives.
Mercosul was born out of political necessity. In the 1980s, newly-installed civilian governments in Brazil and Argentina sought an alliance to reduce the enduring risk of military coups, as had been typical of the region since the 1950s. In the early 1990s, Uruguay and Paraguay joined Brazil and Argentina to create Mercosul. The former two countries depend directly on their much larger neighbours. Economic integration thus made sense to them, even though they tacitly accepted minor roles in the arrangement.
In the past 15 years, however, things did not evolve as expected. Uruguay and Paraguay have not benefited from integration in a proportional manner, as trade increased fast between Brazil and Argentina. In fact, the smaller members do not share the larger ones’ interests. The latter have diversified domestic productive sectors to preserve. Therefore, they exhibit an inclination to protect them, whereas the smaller countries would benefit from a more open common market.
Moreover, frictions between the leading members also remain irritating. Intra-regional trade has been growing, but it remains volatile because of diverging policies. In particular, changing exchange-rate regimes have altered comparative advantages within the block – and sometimes dramatically so.
Argentinean exports to Brazil suffered a deep shock in 1998, when Brazil decided to float its currency. Before, the real’s overvaluation had propelled Argentinean exports, which only gained momentum again after the 2001 crisis, when Argentina had to float the peso. Uruguay also suffered from Brazil’s macroeconomic change of course. Its exports to Brazil had climbed to about $ 1 billion annually, before dropping to a mere $ 350 million after the devaluation of the real in 1998.
Presently, Argentina practices a dirty float exchange-rate regime, that has allowed it to maintain the competitiveness of its exports, while Brazil has practiced a much more erratic exchange-rate policy, shifting from pure to dirty float and back frequently. Brazil still maintains a trade surplus against its Mercosul partners, but a recent move towards overvaluation is already taking its toll from exports, particularly of manufactured goods.
Conflicting macroeconomic policies are rooted in another, deeper problem. In the history of the EU, the political leadership of France and the economic leadership of Germany seem to have been accepted by all members. In the case of Mercosul, by contrast, the hierarchy of members is not clear. All members are developing countries, in similar stages of development, with the exception of Paraguay, which stands farther behind. Accordingly, economic structures are still emerging, even though Brazil and Argentina have already moved a long way towards defining profiles for their productive sectors. However, it is still being disputed how productive activities should be distributed within the block. Argentina and Brazil compete to attract industrial sectors, as their conflicts surrounding trade in automobiles show. Similar conflicts plague many other sectors.
A minimum of commercial integration is reached when member countries establish some common tariff to impose on imports from outside the block. In the case of Mercosul, the diversity of expectations is reflected in the large number of exceptions to common tariffs. This is particularly true of the capital-goods sector. Brazil built a large sector producing such goods decades ago, and now wants to impose common tariffs on imports high enough to protect its domestic firms and to give them an advantage in the regional market. Argentina, on the other hand, went through a protracted process of de-industrialisation, induced by the free-market policies adopted by the military regimes that ruled the country until the early 1980s. To resume the path of growth of its manufacturing sector, Argentina wants to keep tariffs on capital-good imports low.
In sum, the roles to be played by the leading members of Mercosul are still not clear. While economic leadership at the moment resides clearly with Brazil, Argentina has not accepted a more or less permanent second place. After all, Argentina’s per-capita income is still higher than Brazil’s. Matters are similar in the political arena. Under President Lula da Silva, Brazil has been asserting a measure of international influence, but Argentina hasn’t given up on competing.
The roles of the smaller member countries are even less well-defined. This group now also includes Venezuela, and may soon involve even more countries. As stated above, the smaller countries are interested in market access for their goods. Uruguay and Paraguay do not have large productive sectors to satisfy their domestic demand and which they might want to protect. The lower overall tariffs sink, the more commodities they will be able to sell, and the cheaper the goods they need to import will become. Their hopes for more exports within Mercosul, however, have been largely disappointed.
Unsurprisingly, Uruguay has been especially disappointed with the failure of Mercosul to establish commercial agreements with the European Union and the United States. Brazil and Argentina strongly resist such agreements, as they view the proposals promoted by the two global-trade giants as attempts to stifle their own development. For them, the insistence of the US and the EU on intellectual property rights, open government procurement and similar matters are non-starters. The differences between Brazil and Argentina on the division of labour pale in importance compared with their common disputes with rich countries. The position of Uruguay and Paraguay, however, is much softer on these matters.
Today, the Free Trade of the Americas initiative is all but dead. President Lula, during his re-election campaign, said as much. Even the US administration seems to have lost interest, and is now working on bilateral free trade agreements with individual countries. Talks of Mercosul with the European Union are still going on, but face similar difficulties. As long as the EU insists on similar demands as the US does, there is very little chance of progress. After all, the most serious disagreements within Mercosul do not concern cooperation with the global giants, but hinge on the roles to be played by each member within the block.
Prof. Dr. Fernando J. Cardim de Carvalho
teaches economics at the Federal University of Rio de Janeiro.
fjccarvalho@uol.com.br
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