Chapter I

The Globalization of Free Trade Blocs: The

European Union, NAFTA, MERCOSUR, the
Visegrad countries (or CEFTA,) and The
Economic Cooperation in the Black Sea

Dr. Olga Lazin

Beginning in the 1980s, processes of creating economic globalization

through creation of free-trade blocs based upon the free flow instantly

of information, communication, and funds not only brought pressure

to bear on statism but made clear to the world that the failures of

excessive central power could no longer be hidden behind the rhetoric

that state ownership was being carried out in the name of the masses.

The opening of the world trade has broken down old barriers

and boosted development of global civic society to prevent or limit

dictatorships although many critics of globalization have argued that it

moves people into poverty. They failed to realize that there is a

positive side to it. The break down of trade barriers and the rise of

telecommunications has enabled the rise of civil society.

They are both against statist power. It is the rise against the

state that stunted civil society in the world.

In its expansive phase, the state rose against real nations who wanted

to associate against the amorphous system of state domination and

1
voluntary servitude, trying to create alternative cultures, independent

public spheres and attempting to change and confront official

structures.

The processes of economic globalization, which have

included pressures on countries to end protectionism and to adapt to

the information revolution, had highlighted the increasing crisis in

community life as the world's systems of state ownership proved to be

inefficient, corrupt and bankrupt. Ironically, many observers wrongly

see the decline of statism as being the cause of crisis in community

life, not the result, as I will show here.

One Romanian politician, Teodor Melescanu is rightfully arguing

that the globalization process benefits small, underdeveloped

countries, if these countries know how to tune into the globalism’s

benefits and profit from the recent possibilities and developments in

telecommunications and networking.1

Initially the weapon of Cold War rivalry, technology in its nascent

computer networking form, has actually propelled the digital industry

age and therefore one of the main forces of globalization, the

information technology. Ironically, the “Seattle Man” protesters were

called against IMF and World Bank policy, are sending “political

1 Teodor Melescanu, “Noua era a tarilor mici, ”Lumea Magazin, , 28

Jan, 2000http://www.lumeam.ro/nr4_2000/noua_era.html

2
information” via Internet using the most important major globalization

tool, that is the web, against corporate power.

Protesters in Seattle and Washington gave globalization and its

instrumental enforces – the World Bank, the International Monetary

Fund and the World Trade Organization – a bad name. 2

The impact of globalization, reflected in the numbers shows that

economic growth achieved through openness to trade is the most

effective, as reliance on trade grew.

New trade blocs have come to define themselves in terms of

inter -bloc trading, not intra -bloc as had dominated thinking from the

1950s through the 1970s.

I will take up here the following free trade blocs: European

Union, NAFTA, Mercosur, the Visegrad countries, and The Economic

Cooperation in the Black Sea.

The technology revolution made it possible to break isolation of

police states all over the world.

Marketization and privatization are preconditions of a mature

civil society.
As economic questions have come to dominate political ones,3

2 Joseph, Kahn, “Globalization: Unspeakable, Yes, but Is It Really Evil?”

The New York Times, May 9, 2000

3
the rejection of the old command economy in all East Central

European countries has taken place. The major alternatives today are

marketization and privatization. There is still widespread acceptance

of the interventionist role of the state, not only in the social, but also

in the economic areas, as the state is still perceived as the main

author of economic changes and not the enterprises themselves.

Contrary to the belief that the global economy ignores 'marginal'

countries serious strides have been made in the economic integration

in the region by the spread of global telecommunications.

Most (except for Albania) East Central European countries have

joined a free trade bloc.

In this thesis I will delve into the actual major free-trade blocs

namely: NAFTA and the European Union compared, MERCOSUR and

CEFTA (Central Eastern European Free Trade) also known as the

Visegrad countries.

Emerging World Trade Blocs: The North American Free Trade Area and

the European Union Compared

3 Iván, Berend, Central and Eastern Europe 1944-1993 Detour From

the Periphery to the periphery , Berkeley, University of California,

1993, p. 218

4
The European Union is becoming the blueprint for free trade in the

world. In the Europe of tomorrow, France intends to set an example of

social and political model in the necessary adaptation to the world as

it is by "deepening" and "widening" in the same time.

On EU institutions the real battle will be between small and big

countries, as Britain, France, Spain and Germany want to redress the

over-representation of the small countries.

The European single-currency, the euro is came into being as

scheduled by 1998. By 2002 the euro will be fully deployed in all

member countries.

There are signs that budget deficits will be a problem for

Germany and France for 1997 under the Maastrich criteria for entry of

3% of GDP.

Receiving millions from the Brussels pot are Greece, Portugal,

Ireland and parts of Spain and Southern Italy. The beneficiaries of the

Union grant system (any region of the EU where the income per head

of population is under 75% of the average has a claim on the grants

available) will than be Hungary, the Czech, Slovak Republic and

Poland.

If the number of countries will be big enough to make the euro

possible, Europe would be fit for globalization despite unsolved

problems with its social security systems.

As the world moves into large trade blocs, the two most

important to date are the North American Free Trade Area (NAFTA)

5
and the European Union (EU), formerly known as the European

Community. To begin, this study compares the key legal and policy

aspects of the two blocs and outlines the salient features of each. The

remainder of the essay presents quantitative data on NAFTA and the

EU as well as additional relevant data on Japan, Eastern Europe, and

other world trade units. The analysis focuses first on population, GNP,

GNP/C, and exports, as measured by export share of GNP. The EU and

NAFTA are then compared with respect to economic strength,

geographic coverage, and competitive potential.

In 1994 twelve countries belonged to the EU: Belgium, Denmark,

France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,

Portugal, Spain, and the United Kingdom. Joining January 1, 1995,

were Austria, Finland, and Sweden. In a nationwide vote Norway's

population rejected its government's late 1994 bid to become the

sixteenth member.

NAFTA comprises the United States, Mexico, and Canada.

Argentina, Costa Rica, Chile, Colombia, Venezuela, and other Western

Hemisphere countries are seeking membership.

Free Trade "Fever"

With the process of "globalization" in which national trade and

finance seek to form mutually beneficial alliances, free

Trade agreements among nations are reaching a fever pitch. The

magnets and models for free trade are NAFTA and the EU.

6
 Countries either seek to join NAFTA and the EU or follow these

models in forming their own free trade agreement (FTA) leading to a

free trade area (FTA, depending on the context).

The country with the most free-trade agreements to date

is Mexico.4 In the Western Hemisphere most countries want to

join NAFTA, except Brazil, which is leading a movement of its

partners in the misnamed Mercado Comun del Sur (Mercosur,)

mostly a closed customs union. As of January 1, 1995,

MERCOSUR became almost a full customs union, and seeks by

the year 2005 to create a SAFTA (South American Free Trade

Agreement,) such as NAFTA. MERCOSUR does not expect to

become a common market such as the EU until the first or second

decade of the twenty-first century. In the meantime, it might better

be called the "Mercado del Sur, " omitting the concept of "Comun."

A common market is much more ambitious than a FTA. It goes

beyond free trade and investment flows to require all member

countries to live under the same laws and regulations. The EU has

been successful in providing for educational and labor mobility among

its members. Yet the EU includes aspects that have yet to be

achieved: a common currency, foreign policy, military command, and

police activities (see Figure B:l).

Although there is much discussion of FTAS, comparative analysis

of the provisions that govern them is almost nonexistent.

Furthermore, there is little consistently comparable data on the size of

4
Arriaga, El Financiero, p.
7
FTAs in terms of their population, wealth, per capita wealth, and trade

flows among partner countries and with other FTAS.

This study presents baseline data essential for understanding

how the EU and NAFTA models differ in purpose and size.

The provisions of the EU and NAFTA are summarized in Figure

B:l. (insert B1) The NAFTA model mainly involves freeing trade and

investment flows, although it also provides, in a limited way, for the

movement of professionals among its three countries. Meanwhile,

the EU, knowing that it is losing markets in the member

countries of the North American Free Trade Area, now seeks to

recover access to these markets by signing free trade

agreements. In February 1995 the EU authorized negotiation

with Mexico to create an EU-Mexico FTA.5 (For details, see the

preceding chapter in this volume, "Mexico as Linchpin for Free

Trade in the Americas.")

Tables Bl, B2, and B3 present data on population, GDP, GDP/C,

and export share in GDP for the EU, Eastern Europe, and NAFTA.

Table B4 shows population, GDP, and GDP/C for major world trade

blocs. Table B5 indicates the relative importance of the major trade

blocs, using the United States as a reference point. Table B6 profiles

the economies of the United States, Japan, Germany, the United

Kingdom, Canada, and Mexico, according to selected indicators.

5
Gellner, S., “Mexico-European Union Pact Signed,” Baja Traveler,
2000, p. 42
8
One of the members of the EU, reunited Germany has the largest

population (81 million inhabitants). Italy and the United Kingdom

follow virtually tied at 58 million. Germany's population is 207 times

that of Luxembourg, the smallest European country, with a population

of 389,000. And Germany's GNP is 134 times that of Luxembourg

(Table Bl).

Given such disparities in population size, is it "fair" that voting

rights in the EU give undo weight to small countries? (For shares of

voting rights, see Appendix A.) Despite its small population,

Luxembourg has the highest GNP/C in the EU (US$ 35,260) and the

highest export share of GNP (94 percent). Spain, in contrast, has a

larger population (39 million) but the EU's lowest export share of GNP

(17 percent). Clearly, weighted voting rights are not as arbitrary as

first glance might have us believe. In any case, countries with the

largest populations together constitute a "qualified" (decisive)

majority. In 1994 it took 23 "minority"' votes to block the majority. It

now takes 26 votes to constitute a blocking minority.'

Six countries in Eastern Europe seek to join the EU: Bulgaria, the

Czech Republic, Hungary, Poland, Romania, and the Slovak Republic.

Among these, Poland has the highest GNP (US$ 75 billion), much

higher than EU member Ireland (US$ 42 billion). Poland, however, is

weak in exports, which amount to only 19 percent if its GNP.

Hungary's GNP/C is 54 percent higher than that of Poland, owing to its

9
previous leadership position among the former Communist countries

in carrying out economic reforms (Table B2).

The relationship of Poland to "smaller” countries is interesting.

Although Poland has four times the population of Bulgaria (9 million),

it has the lowest export share of GNP (19 percent). Bulgaria has the

second largest export share of GNP (45 percent), after the Czech

Republic, which leads both Poland and Bulgaria in export share of GNP

(58 percent) and also in GNP/C (US$2,440) compared with the rest of
the Eastern European countries.

With regard to Romania and the Slovak Republic, the two

poorest countries seeking to join the EU, the lackluster economic

performance of Romania is particularly noteworthy. Romania's GNP

(US$ 24.9 billion) is more than double that of the Slovak Republic (US$

10 billion), yet the two countries export the same percentage of GNP

(28 percent). Romania's trade with Eastern Europe collapsed in 1991

along with the Council of Economic Assistance for Eastern Europe

(COMECON) trading organization.

Subsequent growth in trade with the West has been slow, and

current-account deficits of more than US$ 1.2 billion have been

recorded each year from 1991 through 1994. Romania's population is

four times larger than that of the Slovak Republic (5.3 million).

The legacy of high inflation and modest growth accounts for the

Romanian currency's minimal purchasing power. It is unlikely that

10
Romania will become a full member of the EU within the next ten
years.6

How can the Slovak Republic, with its small population and weak

economy, hope to compete in an expanded EU? Although its

population is only 5 million and its GNP is only US$ 10 billion, the

Slovak Republic has the same high level of exports relative to GNP as

the Romania.

The Five Constituencies of the European Union

Given the disparities in population, GNP, GNP/C, and export

share of GNP, the countries of the EU form five "constituencies" (see

Figure B: 2).

1. The "Core": France and Germany. Belgium, the Netherlands,

and Luxembourg, too close geographically and too small

economically to avoid being drawn into the orbit of power, are

appendages of the Core. (In 1951 France and Germany founded

the European Coal and Steel Community, the precursor of the

EU, to rebuild war-torn Western Europe.)

2. The "Free Traders": Great Britain and Denmark (members of the

EU since the early 1970s). Britain is leading the way toward

establishing a common market for goods, services, capital, and

6
Lowry, Karen, Miller, “East Loves West,” Newsweek,

September 25, 2000, p. 22

11
 people while trying to prevent the rise in Europe of any

singularly powerful country.

3. Greece, Portugal, and Spain: These poorer, newly democratic

members seek to modernize their economies to protect against

a resurgence of authoritarian rule. The admission of these

countries into the EU in the 1980s widened the gap between

Rich and poor countries, the latter including Ireland and to some
extent Italy.

4. Eastern Europe: Poland, Hungary, the Czech Republic, and

Slovenia, may gain entrance in 2004. The countries of Eastern

Europe freed themselves from Russian rule after 1989 and view

initial membership then admission to the EU as insurance

against the resurgence of Russian authority in the region.7

5. European Free Trade Association (Austria, Finland, Norway, and

Sweden): These countries, except Norway, have realized that

they can not afford to be left out of an expanding EU. Austria

may even become part of the Core constituency. For at least

the next decade Norway has petroleum and fish for export to

7
Lowry, Karen, Miller, “East Loves West,” Newsweek,

September 25, 2000, p. 22

12
 non-EU countries, giving the country a feeling of confidence that

it does not need its neighbors as much as they need it.

Furthermore, the fact that Norwegians defeated by slightly more

than 50 percent the government initiative to join the EU can be

traced to the votes of the relatively large agricultural and fishing

populations, both fearful of submitting to common market policy

that would limit food production subsidies and open Norwegian

fishing beds to the EU. The urban sector, some of which also
voted against joining the EU for fear of losing social benefits, has

been disadvantaged by Norway's failure to join the EU, and

some large Norwegian manufacturing companies are relocating

their

main offices to the EU, thus weakening the drive to modernize

the economy.5

In view of the diversity of the five groups, disunity in the Union

comes as no surprise. Two coping models have emerged to manage

the divergent interests: (1) the British model seeks to give more or

less equal weight to the concentric circles depicted in Figure B:2,

encouraging cooperation among the diverse constituencies; (2) the

German-French model favors moving forward with monetary union

and a unified foreign policy focused on the center circle in Figure B:2,

the Core. The notion that Britain may resist France and Germany and

refuse to join the EU monetary union prompted this comment in The

Economist:

13
 If Britain stays out, only to change its mind later [as it did

about the EU], its leaders may seem as silly as Churchill now

seems, for this comment on the founding of the European Coal

and Steel Community 43 years ago: "I love France and Belgium

but we must not allow ourselves to be pulled down to that

level.” 8

Population totals (Table B4) for NAFTA and the EU are now about
the same: NAFTA, 363.3 million; EU (15 countries), 368.8 million (1992

data). Within the EU, Germany's economy is the strongest, followed by

France and Italy. Among all countries in the two trade blocs, the

United States has the highest GNP and

the highest GNP/C within NAFTA. Overall, Luxembourg has the highest

GNP/C.

With respect to export share of GNP, Mexico ranks lowest in

NAFTA (14 percent) and Greece places last in the EU, with 23 percent.

Even Romania and the Slovak Republic rank above Mexico, with 28

percent each.

The index calculated in Table B5 shows the relative economic

strength of major trading units. For example, Mexico has one third of

the population of the United States, but Mexico's export share of GNP

is only 5 percent of the U.S. export share of GNP. The table also

shows why Japan, a single country that has established a web of trade

dependency worldwide, is often seen as the economic "enemy" of

8
“The European Union Survey,” The Economist, October 22, 1994, p.23
14
both NAFTA and EU. Japan's GNP/C is 21 percent higher than that of

the United States. Many countries have formed implicit trade blocs to

compete with Japan and its accumulation of world trade capital.

NAFTA gives the United States, Canada, and Mexico the opportunity to

expand international trade at Japan's expense.

In the Western Hemisphere, the GNP of the United States far

exceeds that of other countries of the hemisphere, with the exception

of Canada, whose GNP is 84.3 percent of the U.S. total (Table B5).
Although the population of the EU is 48 percent larger than the U.S.

population, its GNP/C is only 89 percent of the U.S. figure.

Mexico has established itself as the linchpin for free trade in the

America S7 despite the fact that its population is only one-third that of

the United States, its GNP 5 is percent of the U.S. amount, and its

GNP/C 15.3 percent of the U.S. figure. The NAFTA framework, along

with the "defeat" of the Chiapas rebels in the August 1994 national

elections, has increased the attractiveness of Mexico for U.S.

investment.

Mexico's new free-trade pact with Nicaragua provided for new

jobs and investment. The pact provided Nicaragua access to 90 million

dollars in credit programs to promote trade between Mexico and

Central America, including expansion of Nicaragua's export beef

industry.9

9 “Nicaragua Signs Free Trade Agreement,” The News, September,

15
Most recently trading options with Italy and the European Union were

discussed. These will go into effect in 1998. The Mercosur free

trade bloc of South America also expects to sign a preferential

trade agreement with Mexico by 2001.

Mexico and Israel plan to sign a free trade agreement by early

1999.10

The index of population and economic strength in Table BS

shows that in relation to the GNP/C of the United States, Mexico ranks
higher than Mercosur by 3.5 percent, while Germany, with a

population about equal to the U.S. population, has 95.7 percent of the

U.S. GNP/C, raising the average for the EU to 80 percent of the U.S.

GNP/C. This analysis is carried a step further in Table B6, adapted

from a comparison published regularly by the New York Times of

NAFTA (Canada, Mexico, and the United States), the EU (represented

by Britain and Germany), and global competitors (represented by

Japan).

The bottom line for global competition is shown in the

manufacturing wage gap (Table B7). The Western European countries

1997, p. 7

10 "Mexico Pact Raises Nica Export Quotas", The News, September

21, 1997, p. 32

16
with the highest average hourly wage in manufacturing (1993 data)

are forced to complete under the burden of a wage of US$ 21.

In Japan and the United States the figure is $16. The Asian

"tigers" (Taiwan, Singapore, South Korea, and Hong Kong), however,

average about US$ 5 per hour. These data illustrate Mexico's status

as an attractive locale for the establishment of manufacturing plants,

with its US$ 2.41 hourly manufacturing wage. Likewise, Eastern

Europe, where the hourly manufacturing wage is US$ .90, is Mexico's

future counterpart for the EU. Germany has already moved important

manufacturing funds into Romania, for example, but the EU has yet to

establish a formal relationship with Eastern Europe comparable to

Mexico's position in NAFTA. In general, Eastern Europe (except the

Czech Republic) awaits the opening of its economies, which remain

largely nonmarket (see Appendix B).

NAFTA is more equitably positioned in terms of internal wage

gap between countries than is the EU. For NAFTA, the U.S.

manufacturing wage rate is 6.8 times higher than the Mexican rate.

For the EU, the present gap between the highest wage (Western

Germany) and the lowest one (Portugal) is 5.4 percent, but the

potential gap, once the EU expands into Eastern Europe, is 36.6-an

amount equal to the difference between Western Germany and

Bulgarian wages. Equity is not the only issue, however; in this case,

inequity may help Eastern Europe attract capital in the competition for

ever cheaper manufacturing sites in an era of globalization.

17
 Under the NAFTA model, the process of opening markets to free

trade will occur over 15 years (Table B8). Eastern Europe, in contrast,

faces a much more difficult mission of nearly immediate integration

into the EU. In keeping with the gradual removal of trade barriers,

Mexico has eliminated duties on all U.S. and Canadian products not

made in Mexico, that is, on 43 percent of its purchases from Canada

and the United States.

Although the data suggest that Mexico purchases most of its

goods from the United States (63.4 percent in 1992) and very little

from Canada (1.0 percent), the reality is that much of the Canada-

Mexico trade is "lost" statistically when it passes through the United

States, where the transactions become incorporated into U.S. trade

data. (See the preceding chapter in this volume.)

Under NAFTA the United States immediately eliminated duties

on nearly 50 percent of Mexican imports and Canada did away with

tariffs on 19 percent of its imports from Mexico, including a complete

opening to Mexican textiles (thread, cloth, and clothing) and

manufacturing exports, which in 1992 reached about US$ 17 million in

value. (Mexican textile exports to the United States were 56 times

greater.)

Conclusion

18
 When NAFTA and the EU are compared with respect to their

framework and policies, geographic scope, and leadership, three

significant points emerge.

1. Unlike NAFTA, the EU allows individuals, both workers and

students, to move about freely among the member countries. In

addition, a goal of the EU is eventual unification under one

currency, a common foreign policy, and military coordination.

2. NAFTA has the potential to expand beyond Mexico into Latin

America. The United States and Mexico have extensive trade

experience in the region, in comparison with the EU's lack

thereof in Europe. Also, Mexico has entered into several

multilateral and bilateral agreements that make expanded trade

possible, making serious breakthroughs around the globe.

Canada has far to go however, in establishing trade relations

beyond those with the United States. And both the United

States and Canada face formidable competition from Japan.

Under Mexico's leadership in bringing about the integration of

the Americas, however, NAFTA is well positioned to compete

with the EU, as it takes its first serious steps to develop relations

with MERCOSUR.

3. One country, the United States, functions as the "core" for

NAFTA, whereas France and Germany comprise the EU core.

19
 Meanwhile, expansion of the EU into Eastern Europe is

delayed not only by the slow process of creating market economies

with modern laws and credit systems but also by Russia's argument

that inclusion of former Warsaw Pact countries in NATO could signal a

new Cold War.

The European Union is becoming the blueprint for free trade in

the world. In the Europe of tomorrow, France intends to set an

example of social and political model in the necessary adaptation to

the world as it is by "deepening" and "widening" in the same time.

On EU institutions the real battle will be between small and big

countries, as Britain, France, Spain and Germany want to redress the

over-representation of the small countries.

The European single-currency, the euro is coming into being as

scheduled by 1998.

It has been decided in April 1998 how many member countries

would be included in the first round of the monetary union. Hungary

has been the first to be accepted. There are signs that budget deficits

will be a problem for Germany and France for 1997 under the

Maastricht criteria for entry of 3% of GDP.

Receiving millions from the Brussels pot are Greece, Portugal,

Ireland and parts of Spain and Southern Italy. The beneficiaries of the

Union grant system (any region of the EU where the income per head

of population is under 75% of the average has a claim on the grants

20
available) will than be the Czech, Slovak Republic, Poland and

Hungary.

If the number of countries will be big enough to make the euro

possible and that Europe would be fit for globalization despite

unsolved problems with its social security systems.

21
The Visegrad Countries (CEFTA.) New accessions

The Central European nations of the Czech and Slovak Republics,

Poland, Hungary and most recently Romania, are actively seeking

integration and generally viewed as leaders in the process of

transition from central planning to market-based economies. There

are prospects of the accession of the Visegrad countries to the

European Union in the long run. Having still not fully recovered from

forty years of socialist rule, Poland and Slovakia are the most likely to

first join the European Union. As a well functioning market economy is

the main entry condition, the biggest success. As competition heats up

between the member countries, the Czech government claims they

are better prepared for the accession than the rest and avoids using

the Visegrad label and considers the CEFTA label more appropriate,

But two World Bank economists say that while these nations have

come a long way, the four -- known as the Visegrad countries -- are

plagued by "weaknesses" in such critical areas as property rights and

contract enforcement.

Writing in the current issue of the World Bank/International

Monetary Fund magazine "Finance and Development," World Bank

Central European division chief Michel Noel and consultant/financial

analyst Michael Borish say that to ensure the continued growth of the

private sector all four "need to push forward with reforms."

22
State ownership is still significant in both the banking and industrial

sectors in all four countries, they say, and "Poland and the Slovak

Republic, in particular, need to accelerate privatization."

Without question, the two economists point out, these four countries

have led the entire region in opening up the private side.

The Czech Republic has seen its private sector increase from 11

percent of GDP (gross domestic product) in 1989 to about 60 percent

in 1995. Private sector employment jumped from 16 percent of the

workforce in 1989 to 65 percent in 1995, with the number of private

jobs estimated at about 3.2 million.

In Hungary, the private sector share of the economy climbed

from 20 percent in 1989 to 70 percent of GDP in 1995, with about two

thirds of the Hungarian labor force now working in the private sector.

In the Slovak Republic, the private sector share of GDP rose

from 27 percent in 1991 to 62 percent in 1995 while private sector

jobs nearly quintupled from 1990 to 1995, reaching 1.2 million.

And in Poland, the private sector share of GDP rose from 28 percent in

1989 -- the highest in the region at the time primarily because of

private agriculture under communism -- to just 59 percent in 1995,

with the private sector accounting for 66 percent of the country's

labor force in 1995, compared with 47 percent in 1989.

But even in these successes there are problems.

In Slovakia, for example, private sector growth has been

concentrated in one sector of the economy -- services -- and in just

23
one region --Bratislava. Economists say that private sector growth

since 1994 has been "slowed by policies that, despite the growth of

export industries, have encouraged a gradualist approach to

privatization."

In Hungary, the private sector growth is also primarily in the

service sector and financial, legal, consulting, tourism, entertainment

and other “nonmaterial” services generate nearly 75 percent of

Hungary’s GDP.
The economists say that private sector growth in Hungary has

been "stunted" by high tax rates, high inflation and heavy government

borrowing.

Overall, the economists say the Visegrad countries have made

progress in equalizing the status of private and public property and

improving protection of property rights. However, they mention,

"property rights continue to be undermined by tenancy laws that

restrict the rights of property owners, incomplete property registries

and weak legislation governing collateral." (add housing project)

They write that in all four, "tenancy laws distort rental markets and

make repossession of mortgaged property difficult." Title to urban and

agricultural property is "often uncertain because of incomplete and

inaccurate records, multiple pledges on the same property, and

unsettled claims arising from demands for restitution and from

transfers" among state entities.

Similarly, say the economists, all four countries have improved their

24
commercial codes, but that "institutional weaknesses" such as a

shortage of adequate courts and underdeveloped procedures for the

private resolution of contract disputes, are undermining contract

enforcement.

The flow of credit to the private sector has also been "mixed" within

the four nations, say the economists. New lending to the private

sector is growing, although public sector borrowing is growing faster

in all except the Czech Republic, where the private sector got 65
percent of total outstanding credit in 1995. In Hungary, Poland and the

Slovak Republic, on the other hand, private sector credit was at the

low end of the scale -- between 32 and 46 percent.

Instituted in 1992 and effective from 1993, CEFTA comprises the

following countries: Hungary, Poland, the Czech Republic, Slovakia,

and most recently Romania. Romania has signed in 12th of April

through the Central European free Trade Zone that is going to be a

complete free trade zone by 2000.11 For the industrial and agricultural

goods taxes will be gradually lowered by 1998 (Rudzieski, 1995).

Trying to catch up with the pulse of globalization of free trade markets

is Romania, which joined CEFTA in April 1997.

The issue causing the most anxiety for EU decision-makers is the

archaic agricultural structure in the region that would cost the Union a

substantial amount of money to bring to Western standards.

11
Mediafax, April, 1997
25
The cheap labor force is a mine gold for Westerners who are flooding

in with investment. As long-standing negotiations have begun in 1995

for admission of Hungary Poland, Czech and Slovak Republic in 1999.

The Economic Cooperation in the Black Sea

Besides the European Union, NAFTA, MERCOSUR, the

Visegrad countries, The Economic Cooperation in Black Sea area

(BSEC) was set up in 1992, at the initiative of Turkey, with the

participation of eleven countries: Albania, Armenia, Azerbaijan, the

Bulgaria, Georgia, Greece, Moldova, Romania, Russian Federation and

Ukraine. BSEC initiated fields of cooperation with Mercosur and

relations with the EU and problems concerning sea and river transport

and reorganization of commercial exchanges have been recently

discussed in Bucharest.12

Nowadays, only five members (Albania, Azerbaijan, , All

countries have to cope nowadays with the globalisation of free trade.

Flexibility is replacing the old immutable order, as adaptability is the

major value. The growing integration of the world economy has been

in general an engine of mutual enrichment in the form of access to

overseas markets and has hoisted wages. Yet some Western and East-

Central European countries are seeking to protect themselves from

12 Mircea, Daniciuc, Romania Libera, Bucharest, 1995, p. 5

26
the adverse consequences of change showing a particular propensity

for support on acquired rights and entitlements in the workplace, as

France, Sweden and almost all East Central Europeans. One symptom

is that the structure of welfare state damages job creation. Countries

with more flexible labor markets do better in their fight against

unemployment and lowering tariffs within continuously enlarging free

trade blocks is beneficent for their economies. Striking a balance

between state protection and freedom of action is the model for future
development in a globalized economy.

272

72727272727272727272727272727272727272727272727272727272

72727272727272727272727272727272727272727272727272727272

72727272727272727272727272727272727272727272727272727272

7272727272727Mercosur and The Integration of the South

27
 If the strongest example of Globalization to date is found in NAFTA and

the EU, which push standardization, the weakest example is that of

MERCOSUR. Although MERCOSUR claims implicitly to develop in the mold of

Globalization, in our view it represents Closed Globalization. Too many

Brazilian leaders are proposing to use Brazil's tariff-protected MERCOSUR

market to dominate an internally-oriented South American market that

inhibits world competition. Although those same Brazilian leaders claim that

they favor joining the U.S.-Mexico proposed Free Trade Association of the

America (FTAA), the realization that Mexico would be the bridge between

north and south.

In implicit opposition to MERCOSUR, Mexico is using bilateral

agreements with Latin American countries to lay the basis for the FTAA, a

basis that the USA can not help to build because it is trapped in petty

partisan political struggles between the Republic Party and Democratic Party.

In the meantime, Mexico has signed FTAs with Venezuela and Colombia,

Chile, Bolivia, Costa Rica, and is developing such a union with the Caribbean

and Central America.

The rise of Globalization is complicated by two major factors. First,

the nationalist antipathy to foreign direct investment and inflow of portfolio

funds has vanished almost everywhere at once and there is not enough

private capital to meet all the demands for it. The change of world

economies has been accelerated by the New Economy, generated by hi-

tech jobs.

28
As How the World Bank and the IMF had been building the

infrastructure in many poor countries around the world, has changed,

putting more into education, stopped building bridges, dams and

roads, which is very short sighted.

The process of economic integration between Brazil and

Argentina that began in the mid 1980s has become the most

successful attempt at regional integration in modern Latin America.

This process has contributed to a fundamental departure from

previous regional antagonisms and has foster higher levels of

economic interdependence. In 1991, Argentina and Brazil were joined

by the smaller neighbors of Uruguay and Paraguay establishing the

Southern Common Market or Mercosur.

Mercosur's members, with a population of more than 200

million people, represent over 55% of the total economic activity of

Latin America and its most industrialized region. Mercosur has a

diversified and modernized manufacturing industry and has excellent

prospects in the agribusiness and mining sectors. The consensus that

Mercosur's initial stages had been successful and the already high

levels of intraregional trade led Chile and Bolivia to join Mercosur as

associate members in 1996. Peru and the Andean Group, the other

29
south American trade group, have began talks on a formal agreement

to be negotiated with Mercosur, an event that would link South

American economies in an unprecedented manner.

Mercosur has survived the unpredictability of hyperinflation,

disci mil exchange rates, and sharp fluctuations in demand and

production. Moreover, institutional support continued despite drastic

changes of government and a profound turn in the strategy of

integration. The evolution of Mercosur can be divided in three stages:

the sectoral agreements of the 1986-89 period of bilateral protocols;

the transition to Mercosur from the Buenos Aires Act of 1990 until the

establishment of an imperfect custom union at the end of 1994; and

the period of consolidation and expansion initiated in 1995.

In reviewing the evolution of regional integration since 1986 we

also analyze the main tools implemented in this process. I begin by

placing the origins of regional integration in a Latin American and

global context, and then follow to evaluate the first phase of

integration under the Program of Integration and Economic

Cooperation (PICE). The second part focuses in the debate over which

strategy of integration to adopt and in the difficulties and imbalances

on the road to a custom union. Finally, I suggest some short and

medium term policy objectives for consolidating Mercosur and address

the dilemmas of expansion.

I - The Foundational Years

30
 Technocrats and policy makers alike have advocated economic

integration between Latin American countries since at least the 1950s.

The United Nations Economic Commission for Latin America (ECLA),

under the leadership of Raul Presbich, begun advocating the

expansion of intraregional trade together with policies of import

substitution industrialization. The creation of the Latin American Free

Trade Assosiation (LAFTA) in 1960, sought to foster greater economic

integration between South American countries and Mexico. The twenty

years that followed the creation of LAFTA, brought only modest

progress. Between 1960 and 1980, intraregional trade expanded from

7.9% of total trade to only 13.8% in 1980. In an effort to resuscitate

the integrationist project, LAFTA became the Latin American

Integration Association (LAIA) in 1980.

The debt crisis that erupted at the beginning of the 1980s

brought to an end an expansionary cycle propelled since the 1940s by

import substitution policies. Intraregional trade hit a bottom low in

1985 at 8% of world trade, and it was not until 1989 that the region

regained the levels achieved nine years earlier. The burden of the

foreign debt sharply decreased the ability of Latin American countries

to pay for imports, and although the recession allowed for a favorable

balance of trade, it also made extremely difficult to comply with the

necessary fiscal restrictions.

31
 During the second half of the 1980s, Latin American countries

seeking to overcome the crisis, begin to adopt adjustment policies

designed to stimulate the economy through an increase in exports. As

the pressures brought about by the foreign debt begin to ease and

governments experience moderate success in the implementation of

stabilization measures, intraregional trade began to grow again. This

process was also stimulated by an important return of capital that had

flown away during the debt crisis, which allowed for the financing of a
large deficit in the current account and an increase in international

reserves. In addition, a slowdown of the economies in the

industrialized nations at the end of the decade led to a reduction in

the demand for Latin American products and an increase in

protectionist measures from these markets. In 1994 intraregional

exports between LAIA was three times bigger than in 1985.

The Program of Integration and Economic Cooperation, 1986-1989

It is within the previously mentioned context of economic

uncertainty that the governments of Brazil and Argentina decide on

1986 to establish the Program of Integration and Economic

Cooperation (PIEC). The PIEC intended to establish a framework for

the emergence of a common market by promoting a gradual process

of integration based on a series of commercial agreements in selected

sectors of the economy. These agreements, established in the form of

32
protocols, demanded a low level of coordination required to define the

scope and exemptions to the process of trade liberalization, and to

agree on rules to avoid unfair competition and unwanted

triangulation’s. This selective and gradual process, lacking definite

timetables and specified objectives, sought to achieve intra-industry

arrangements and to modify the asymmetries present in bilateral

trade since the beginning of the 1980s.

In addition to an increase in the general level of bilateral trade,

which was very low before 1986, the PIEC also addressed Argentina's

concern of a continued trade deficit with Brazil, and the inter-sectoral

specialization of trade in which Argentina exported agricultural and

food products with little value added, and Brazil manufactures of

industrial origin. The PIEC chose to concentrate on the capital goods

sector, which members believed offered significant opportunities for

attracting investment and fostering cooperation. The primary

sector was thought to be unable to create intra-sectoral equilibrium

and growth. Additional benefits of the capital goods sector included

the stimulus that could have for the rest of the economy, and the high

degree of government autonomy over this sector, composed mainly of

small and medium size firms.

The PIEC originated under favorable macroeconomic conditions.

The 1986-87 period represents a moment of high compatibility in the

33
political and economic arenas. Both countries were new democracies

trying to implement stabilizing economic programs (the Austral Plan in

Argentina, and the Cruzado Plan in Brazil), and were seeking a

common policy in the GATT and ALADI rounds of negotiation. During

1986, Brazil experienced a strong GDP growth of 7.6% and Argentina

grew by 6.1%. Plans designed to curb inflation were also initially

successful. In Brazil inflation was reduced from 228% in 1985 to 58%

in 1986, while Argentina's inflation shrunk from 385% to 82% during

the same period.

The goals of the PIEC were severely constrained after failing

plans pushed the economies into a recession. By 1988, the economic

conditions under which the PIEC had to operate became very difficult.

The problems of the Cruzado Plan and the troubles with the level of

reserve deposits led to an increase in import restrictions in Brazil,

which undermined support for further integration. Between 1985 and

1990 GDP in Brazil grew by an average of only 1.7% a year, and in

Argentina by only 0.1% a year.

Rising inflation and exchange rate fluctuation compounded this.

Inflation in the 1985-89 period averages 444% for Argentina and

383% for Brazil, almost twice as bad as the 230% for the rest of Latin

America. The difficulties that aroused from the lack of continuity in

macroeconomic policy at the end of the Sarney and Alfonsin

presidencies also contributed to a loss of momentum. The economic

team of both countries gradually moved apart, divided primarily by

34
their approach to the foreign debt. While Brazil was declaring a

moratorium on debt services, Argentina was closing a deal on a stand-

by credit and a loan to cover for losses on export revenues.

Despite the severity of the economic problems in Argentina and

Brazil, the PIEC contributed to several important developments.

Bilateral contacts in many important sectors was originated. Between

1986 and 1989 agreements were negotiated in the areas of capital

goods, food production, wheat, iron and steel, energy, biotechnology,

nuclear energy, automobiles and transportation. A modest

liberalization of trade begun in the second half of the 1980s. Brazil

began to restructure its tariffs in 1988-89, and in 1990, the list of ban

imports was abolished. Local content rules for intermediate and

capital goods were still maintained, as it was a ban for 47 computer

related products. In Argentina, the value of industrial output subject to

restrictions was reduced from 62% to 18% during 1987-88. the

remaining licensing restrictions were eliminated between 1989 and

1990.

Total bilateral trade significantly increased and almost doubled

during this period. Most of this growth was from Argentine exports

that gained access to the Brazilian market for the first time. The

greatest progress in bilateral trade was achieved in the capital goods

sector, automobiles and food products. Although short from original

expectations and despite a lack of investment and different industrial

35
policies, the capital goods sector captured a greater share of trade at

13%. In the food sector, 500 products were added to a list of zero

tariff between 1986 and 1990, and in 1988 Brazil became Argentina's

most important export market for wheat, capturing over 26% of wheat

exports.

The PICE generated significant changes in the relationship

between the economies of Brazil and Argentina but fell short of

achieving a clear success. The project lacked the instruments and

policies to allow for a reconversion of the productive sectors and did

not go far in implementing industrial or technological programs of

complementation.

As the decade came to an end, presidential elections and

domestic conflict dominated the political agenda in both countries.

II - The Transition to MERCOSUR, 1990-94

The new coalitions that arrived to power after the Argentine and

Brazilian elections had to take on the major task of achieving

economic stability and renewed growth in a fast changing

international context. Changes in world politics significantly affected

policies for regional integration. After the end of the cold war, it

seemed that power competition between nations had shifted its center

of gravity from the political-ideological realm to the economic realm.

36
Two sets of events in particular affected Argentina and Brazil. On the

one hand, the competition for investment posed by the emergent

markets of Eastern Europe, protectionist policies in the agricultural

markets of the industrialized nations, and the rise of China and East

Asia in world trade, threatened the position of the South America in

world markets. On the other, the success of the European integration,

the proliferation of trade blocs, the United States Initiative for the

Americas, and Mexico's early moves towards a North American Free

Trade Agreement, gave support to regional integration as an

important tool to compete successfully in the world economy.

A crucial factor that distinguishes the process of integration in

this decade is the unilateral liberalization programs that began to be

implemented in South America. Argentina began to liberalize the

economy in 1987 and accelerated after Menem's arrival to power in

1989. Brazil began with a program of liberalization of trade under

Collor in 1990. Although there are differences between these

programs, unilateral liberalization helped to re-inforce the flow of

regional trade and to diffuse sectoral opposition to preferential

arrangements between both economies. The betterment of conditions

of access to regional markets induced by unilateral liberalization,

allowed for particular sectors to identify payoffs derived from the

integration process, and led to the formation of coalitions of support.

37
 The simultaneous implementation of preferential agreements

and market oriented policies of trade liberalization induced a revision

of the strategy of integration. Integration within the latter context has

been called open regionalism. Under this strategy, unilateral

liberalization and preferential agreements are seen as reinforcing

each other. This is opposite from previous attempts at preferential

agreements in protectionist regimes of import substitution

industrialization that permitted influential sectors of the economy to

block integrationist attempts. Moreover, as Bouzas noted import

substitution programs of regional scope demand the ability to

negotiate and coordinate policies to structure and redistribute costs

and benefits that exceeds the technical and political capacity of closed

economies.

The new strategy of open regionalism still allowed for different

interpretations. Integration in an open economy can be thought as an

intermediate step leading to the convergence between preferential

and general liberalization. Under this scenario, preferential treatment

to regional states acquires a temporary status to be followed by

general openness generated by ever growing free-trade areas. This

has been the traditional view from the United States regarding

integration in the western hemisphere and the most narrow

interpretation policy makers derived from orthodox economic theory.

This commercialist view of integration that concentrates on trade

38
growth, suggests that regional groupings can stabilize the region

helping to smooth the transition towards the globalization of the local

economies.

An alternative position to the previous view approaches

integration as a complex interaction between the benefits of

international competition and regional complementation. Greater

competition leading to improvements in quality, price and variety of

goods can be derived from a commercial policy towards third

countries. In an expanded regional market, economies of scale, better

resource allocation and the development of specialization should lead

to the benefits of complementation: employment growth and greater

income.

This strategy needs not only a precise and effective margin of

preference with low barriers to third countries, but should also avoid

frequent and sharp fluctuations between members currencies, while

seeking to harmonize policies for industrial and technological

development and for investment. The greatest source of certainty

regarding the margin of preference between members is the

establishment of a common external tariff (CET).

The latter understanding of integration as a development

strategy results in a preference for a custom union over a free trade

area. Three factors in particular, give support to this position. First,

the elimination of the diverse barriers for intraregional trade reduces

39
administrative and production costs and leads to better resource

allocation. Second, a custom union is better positioned to generate

intra-industry integration and gives greater certainty to access the

extended market and to the development of regional economic policy

and investment. And lastly, a customs union entails increased power

for members that can negotiate in world markets as a block. The

interplay of these elements, in principle, should lead to the creation of

trade, both intraregional and total trade, and not to trade diversions.
Therefore the Buenos Aires Act, signed in July of 1990,

established a new methodology of integration based on a general and

automatic liberalization of trade leading to zero tariffs to intraregional

trade by December 31st 1994. Although the Act allowed for the

sectoral agreements of the past, the process of integration was now

focused on the elimination of barriers to trade.

This new strategy was formalized in the 1991 Treaty of Asuncion

that incorporated Paraguay and Uruguay to the integration process

and legally created MERCOSUR. At Asuncion, MERCOSUR members

lunched the Program of Trade Liberalization that implemented a linear

and progressive reduction of intraregional tariffs and agreed on the

elimination of non-trade barriers. The implementation of the Treaty of

Asuncion resulted in four years in which intra-MERCOSUR tariffs were

lowered by 7% every six months. Instead of the positive lists of

goods that the PIEC had allowed to be liberalized, the new strategy

40
adopted negative listing that included temporary exemptions to the

rule.

This automatic and linear reduction of intra-MERCOSUR tariffs

made the evolution of the domestic economy of members increasingly

influential in determining the volume and direction of the flow of

regional trade. As a consequence, the politics that condition the

competitiveness of the different sectors of the economy became an

important part of the agenda of negotiations (Motta Veiga 95).

The coordination of macroeconomic variables and the level of

harmonization of microeconomics policies intended in the Asuncion

Treaty became difficult to implement. As countries become more

interdependent, the asymmetries between them demand attention to

coordinate policies of promotion and the national regulatory

framework. This is a complicated process considering there is a trade

off between the structural relationship of the economies that belong

to a preferential trade agreement and the necessity/capacity to

harmonize policies. Without high interdependence there is little

demand for coordination, and without harmonizing policies is difficult

to expand the structural relationship between the economies (Porta

96).

These elements became all the more important after the 1992

summit at Las Leoas, when Mercosur members decided on the

establishment of a custom union to begin in 1995. This move gave

less than three years for the four nations to agree on a CET.

41
 During the transition phase, the different development of the

economies of Argentina and Brazil made bilateral relations difficult

and threatened the consolidation of the custom union by the last day

of 1994. The Argentine economy grew almost four times faster than

that of Brazil. The cumulative real GDP growth between 1991 and

1994 was 10.5 % for Brazil and 40 % for Argentina. Inflation was

reduced drastically after the Convertibility Plan applied in Argentina

brought it down from 171.6 % in 1991 to 24.9 % the next year and

then kept falling to 4.1 % in 1994.

The opposite happened in Brazil were the average inflation

jumped from 440.9 % in 1991 to over 1,008 % in 1992 and then

doubled the next year to end at 2,244.5 for 1994, the year the Plan

real was lunched. In addition, the development of the exchange rate

between the Argentine and Brazilian currencies followed different

paths.

After convertibility, Argentina fixed the peso with the dollar and

experienced a reevaluation of the currency that had an important

effect on the flow of trade. Between September of 1991 until August

of 1994, Argentina accumulates a trade deficit with Brazil, partially

compensated at the end of 1992 with ad-hoc agreements over grains

and oil (Lavagna 96).

42
 Since the end of 1992, the automatic process of linear

liberalization was complemented by a parallel process of ad-hoc

intervention that sought to compensate for the asymmetries produced

by the lack of coordination. These ad-hoc interventions were

prominent in the automobile, machinery, electronics, pharmaceutical,

paper, iron and steel, and textile sectors.

The asymmetry of macroeconomic variables previously

mentioned resulted in an unbalanced distribution of costs and benefits

that led to sectoral dissatisfaction and unilateral restrictions in

Argentina.

The Treaty of Asuncion included a safeguard clause that could

be used until 1994 to temporarily lift the preferential treatment

negotiated if it was proved that a massive inflow of imports was

threatening to cause serious problems. Between 1991 and 1994

Argentina utilized this mechanism ten times against Brazilian imports.

Argentina also adopted non-tariff barriers such as the elevation of a

statistic tax to Brazilian products from 3% to 10% in October of 1992

and anti-dumping measures in 1994. After 1993, when the average

tariff for Argentina had surpassed that of Brazil, negotiations resulted

in concessions to facilitate the export of Argentine energy, wheat and

wheat flour. The vacuum provided by the lack of sectoral or regional

reconversion and adjustment designed to smooth the transition

towards a custom union was filled by these ad-hoc measures.

43
 During the transition period, the economic establishment of

Argentina had serious reservations about the future of the Brazilian

economy and voiced support for a Chilean strategy of multilateral

liberalization and preference for an association with the United States.

After President Clinton failed to received fast track authority to

negotiate Chile’s inclusion into NAFTA from a Congress reluctant to

approve further free trade agreements, Argentine preference for

NAFTA faded away.

At the same time that the NAFTA option became less probable,

Mercosur continued to make members’ economies more

interdependent and politically committed to the fulfillment of the

custom union.

Despite a context of divergent economic performance during the

transition phase, a series of factors contributed to diffuse the costs of

integration. The availability of abundant external financing until the

end of 1993 reduced the conflicts generated by the uneven flow of

trade. External financing and the simultaneous process of automatic

liberalization of trade with ad-hoc interventions, helped to improve the

management of sectoral pressures arising from the rapid growth of

intra-Mercosur trade (Bouzas 96).

Between 1990 and 1995, intraregional trade grew from 15% of

total trade to almost 19%. In 1994 Brazil became Argentina's number

one export market, capturing over 20% of total exports. Argentine

44
exports to Brazil increased at an annual rate of 32%, while Brazilian

exports to Argentina did so at 44% annual average. During this period

Argentina became Brazil's third market for exports and imports, after

the European Union and the United States. This rise in intraregional

trade has gone hand in hand with the growth of total trade. Mercosur's

exports to the rest of the world continued to grow. Also, total imports

for Mercosur have been greatly outstripping the growth of exports

(180% vs. 50% in 1990/95).

The markets open by intra-group liberalization helped the

exports of manufactures, specially cars, car parts and machinery. This

had been an important goal when the process of integration began in

1986. By 1995, the first year of the custom union, almost half of

Argentina exports to Brazil, and almost 85 % of goods sent in return

were manufactures. Much of this intra-industry trade resulted from a

methodology of integration that favored intra-sectoral

complementation in oligopoly industries.

The flow of trade within these sectors was characterized by

managed trade agreements fostered by the private sector. These

sectoral agreements provided firms with a way to lessen the effects of

preferential liberalization.

The extended market offered opportunities for rationalization

and specialization, particularly to large firms with better lobbying

capacity and in search for protection from the process of liberalization.

The Treaty of Asuncion already provided a special treatment to the

45
automotive industry. The agreement stipulated quotas for the free

trade of finished vehicles and car parts, together with additional

quotas for automobiles. Although the automotive sector was an

important part of the domestic industrial policies of Brazil and

Argentina, coordination was limited to the regulation of bilateral trade.

In fact, the only officially approved agreement on complementation

was in the iron and steel industry.

After the Real Plan was lunched in the second half of 1994,
Brazilian currency began to increase in value and Argentina again

experienced a trade surplus. The renewed growth experienced by the

Brazilian economy during 1994, and the appreciation of the currency

after the Real Plan of stabilization, exerted great influence and offered

incentives to other members to continue negotiations for the CET.

During the first year of the Plan Real (7/94 to 7/95), the peso

depreciated by 20% with respect to the real (Ferrer 96).

In summary, the different evolution of the economic programs

generated macroeconomic and sectoral imbalances leading to an

almost chaotic treatment of conflicts “as they surfaced”. Although the

Mercosur’s methodology in transition to a custom union came short of

achieving a high degree of complementation or harmonization

between members’ economies, it nevertheless deepened integration

commitments.

Intra-Mercosur trade grew six fold between 1985 and 1995, at

an average of 22% each year. During those ten years, intraregional

46
trade jumped from 5% to 20% of world trade. Presidential summits

and numerous contacts between high and medium level officials was

well under way by the time the CET was reached. The difficult

negotiations over a CET and the constitution of a custom union

demonstrate the importance that all Mercosur members assigned to

the fulfillment of the integration agreements.

III - Consolidation and Expansion

Mercosur began to function as a custom union on January 1st,

1995. The common external tariff (CET) applied covered 85% of goods

and had an average of 14% and a maximum of 20%. The other 15% of

trade has different national tariffs that range from 0% to 35%. The

exemptions to the norm were in capital goods, computer related

equipment and telecommunications. Tariffs on capital goods were to

converge at 14% in the year 2001, while computer and

telecommunications equipment should do the same at 16% on the

year 2006. There were also national lists that included some products

temporarily exempted from the CET.

Mercosur has led to the convergence of administrative norms

regarding product sanitation procedures and on the treatment of bi-

national companies. The opening of offices of representation, the

purchase of stocks, the establishment of subsidiaries and the creation

of joint ventures have incentive cooperation in the private sector. Net

47
foreign direct investment in Argentina and Brazil has been growing

since the beginning of the PIEC and total almost 40 billion dollars

between 1987 and 1996.

Brazilian companies, larger and with greater international

experience, have been more active in penetrating the extended

market. In addition, intraregional trade continued growing and by

1996, the Brazilian state of Sao Paulo had displaced the United States

as the largest single destination for Argentine exports.

Mercosur has also helped to consolidate the political gains of

military détente, denuclearization, and democratization. The

denuclearization agreements reached in the first half of the 1990s

represent a remarkable change in Southern Cone politics.

The Brazilian-Argentine Agency for Accounting and Control of

Nuclear Materials (ABACC), a bilateral institution to overview a joint

accounting and inspection regime, has been in effect since 1991.

Argentina and Brazil now conduct joint military exercises, something

unthinkable twenty years ago. Soon both militaries will begin

peacekeeping training.

Mercosur was a decisive force in preserving Paraguay from

returning to military rule after a rebellious general threatened

President Juan Carlos Wasmosey in 1996. In April of that year,

Mercosur’s foreign ministers arrived in Asuncion and threatened the

general with diplomatic and economic isolation. It is a prerequisite for

members of Mercosur to have democratically elected government.

48
 One of the first problems found by the Mercosur after the

establishment of the custom union was aftermath of the collapse of

the Mexican currency in December of 1994. The large amount of

capital pulled away from Latin America, hit the region hard. Argentina,

with the peso fixed by law at par with the dollar, was hit hardest,

experiencing a decline in GDP of -4.6%. Since 1996 both economies

have been in low gear, with a 3.5% GDP growth for Argentina and a

3% growth for Brazil.

The next objective for Mercosur will be to deepen the

commitment to the common market. Mercosur still needs to address

several important elements if it is to reach a true common market.

Some of its most immediate are: the harmonization of custom

procedures; standardizing and streamlining rules and regulations;

improving transport links; the non-tariff trade barriers that affect

intraregional competitiveness; and labor and tax regimes. Customs

procedures, including rules of origin, are easier issues to resolve. Non

tariff barriers to trade offer greater difficulty because these are

difficult to detect and because of the constant changes in legislation

and regulations demanding agreement (Bouzas 96.)

The need to promote a convergence of standards and

regulations will contribute to the practical implementation of

Mercosur’s objectives..

Brazil’s primacy in Mercosur is similar to that of the United

States over NAFTA. This structural situation has made Brazil the main

49
force behind the shaping of Mercosur. Brazil, reluctant to cede

sovereignty, wants a wider, rather than a deeper, union. Argentina, in

turn, favors a European Union style of integration and included the

authority of supranational institutions in the 1994 Constitution.

Recently, President Menem suggested, and President Cardoso

agreed, on the need to discuss the probability of a common Mercosur

currency. For the smaller countries of Paraguay and Uruguay, there is

little choice but to follow the steps of their main trading partners,
although they clearly prefer a deeper union with no rapid expansion

that can threatened their competitiveness. The first enlargement of

Mercosur came in 1996. Chile was the first country to be admitted as

an associate member on mid 1996. Bolivia soon followed and also

became an associate member that year. Peru and Canada have

requested association to Mercosur in 1997.

A crucial objective for Mercosur’s future will be to strike the right

balance between the sovereignty of the nation state and the need for

common market institutions. Brazil wants to see Mercosur’s

methodology of integration to continue with a minimal of

supranational institutions, and with decisions taken by consensus.

This is certainly an innovation from the previous Latin American

experiences of excessive bureaucratic apparatus and little ability to

generate real economic integration. But the lack of an stable and

effective mechanism for dispute settlement has high costs.

50
 So far, Mercosur’s decision making power rests with the inter-

governmental Common Market Council, made up of the foreign and

finance ministers of the four members. In reality, no Mercosur

bureaucracy exists, aside from a tiny secretariat in Montevideo. The

most important and controversial decision have been resolved by the

Presidents themselves in their twice a year meetings. The costs of this

choice for “presidential diplomacy” is that even smallest disputes

have tended to escalate and ended up being settle by the national

presidents.

The establishment of the custom union have not stopped Brazil

from acting unilaterally in several occasions. The costs of rapid trade

opening in Brazil, like earlier in Argentina, have led to intermittent

domestic pressure for selective protection. These decisions raised

serious concerns in other members of Mercosur. First, in 1995, Brazil

suddenly elevated tariffs on some car imports; the following year, it

required textile imports to be paid for within 30 days rather than 180;

and lastly in 1997 when Brazil, concerned with a mounting trade

deficit, limited credit to pay for imports. All Mercosur members were

eventually exempt from these measures, but only after difficult and

sometimes embarrassing negotiations.

Brazil has also shown flexibility. It did not insist on a weighted

voting system inside Mercosur and agreed to a lower CET than

originally thought. Since the 1995/96 recession in Argentina, Brazil has

had a trade deficit with the rest of Mercosur. The opening of the

51
Brazilian market to Argentine lubricants on May of 1997 was a

decision long-awaited for in Buenos Aires. This measures allows for

100 to 150 million dollars of exports, that would give Argentine

companies 10% market share in Brazil.

Brazil has powerful motives for wanting a strong and committed

Mercosur. While Brazil’s weight in world trade has been declining for

years, south American markets represent the fastest growing market

for Brazilian manufactures. Brazilian companies have been the best

suited to take advantage of the expanded market and to prepare

themselves for worldwide competition. It is also true that Mercosur

adds diplomatic weight to regional interests.

Mercosur members now negotiate their commercial relations to

third countries as a block. Mercosur’s diplomatic role has visibly

increased since the first years of integration. Mercosur signed an

agreement with the European Union in December of 1995 that sets a

tentative target for free trade by the year 2005. The EU is Mercosur’s

largest single source of external trade and investment.

The Free Trade Agreement for the Americas (FTAA), if such an

project is to be achieved, will be based on an agreement between

NAFTA and Mercosur. This means that a precondition for FTAA will be

an understanding between the United States and Brazil. Brazil is

interested in preserving an open, multilateral world trade. Brazilian

exports markets are well diversified, as the direction of trade in 1995

shows: 27% went to the EU; 21% went to NAFTA; and 18% to Asia.

52
 The discrepancies between the United States and Mercosur over

the steps to achieve a FTAA surfaced again in the 1997 meeting of

foreign ministers from the western hemisphere. The US pressure

Mercosur to open markets, without a compromise to reduce the

domestic agricultural subsidies the greatly affect Latin America.

Mercosur and private business associations from Latin America

proposed a modality of negotiation based on three steps: first, to

facilitate business transactions by eliminating non trade barriers;

second, the harmonization of technical standards; and finally a

reduction of tariffs.

The United States insisted on the opposite sequence of steps.

The United States, through Commerce Secretary, W. Daley,

conditioned the lifting of trade barriers for such products as textiles,

fruit juices, footwear and cigarettes, to Brazilian agreement on a

negotiation over tariff reductions for Mercosur. Brazil answered with a

call to gradual consensus. Finally, at this meeting no agreement was

reached.

IV - Conclusion

Mercosur’s first and foremost challenge will be to maintain

macroeconomic stability and growth while keeping an open trade

regime. Mercosur is still short of a full fledge custom union. The

effective implementation of the CET is still being worked out and free

53
access to intraregional markets continues to be affected by a number

of local regulations.

The discussion over trade in services and negotiations over the

mobility of labor have not even began.

Further implementation of the CET could give raise to discussions over

the redistribution of custom procedures. Notwithstanding its lack of

institutionalization, Mercosur is a success story in economic

integration between developing countries.

The future of Mercosur depends on the simultaneous

transformation of the economies of Argentina and Brazil, and on the

advancement around this progress, of Paraguay and Uruguay. The

formation of a homogeneous pole of industrial and technological

supremacy on Brazil threatens the prosperity of all members. The

managed trade agreements have had greater importance for

Argentina, particularly those in the wheat, oil and automobile industry.

Mercosur offers Argentina the possibility to re-industrialized, change

its traditional pattern of exports, and foster technological

improvements.

Mercosur’s consolidation will allow their members to become

more competitive in world markets. It will also give greater diplomatic

pulling to the region. This is already evident in the negotiations over a

FTAA. The enlargement of Mercosur to include other countries into

free trade agreements is already under way. The dynamic growth of

54
intraregional trade has persisted for the last twelve years and it will

probably continue for a few more.

Unlike the European Union, Mercosur has lacked a supranational

bureaucracy in charge of administrating the process of integration.

Mercosur’s reliance on contacts between high level officials and

presidential meetings, intended to avoid excessive demands on

national governments.

Nonetheless, the growth of interdependence between Mercosur

members demands attention to the establishment of a dispute

settlement mechanism and to the specification of members’ rights.

the eventual implementation of fair practice regulation and a

safeguard clause will demand the establishment of some sort of

supranational institution. this is a difficult arena of negotiations, where

Mercosur members have been particularly cautious.

The convergence of macroeconomic performance since 1994 did

not modify the divergent approach to fiscal and monetary policy in

Argentina and Brazil. The lack of mechanisms for coordination

demands attention to the exercise of better communication between

officials and to greater transparency in domestic objectives affecting

the union at large.

Although the parity between the Argentine and Brazilian

currencies appears to be an important determinant of the flow and

direction of trade, coordination over this issue seems unprobable in

the short-term.

55
 The harmonization procedures should try to eliminate the

distortions to competition created by public policies that influence the

advantage of particular sectors. The technical competence and judicial

objectivity of some kind of supranational institution should replace the

presidential ability to make political deals. Instead of regional funds or

a Mercosur parliament, what the union needs is an institution, such as

a regional tribunal, with powers of arbitration similar to those of the

World Trade Organization.

The progress achieved by the process of integration since 1986

has been unprecedented in Latin America. Mercosur’s

accomplishments extend beyond impressive growth of intraregional

trade, to include the formation of a custom union, the coming together

of private businesses, and a common external policy. The future

requires Mercosur to simultaneously deepen their commitment and

enlarge their membership. 13

Within the next twenty years, a free trade area in the western

hemisphere will probably be established. Mercosur’s new role as a

regional model for integration and as a global trader will give South

America greater diplomatic power to negotiate a favorable insertion of

the region in the international economy.

13 Richard Rosecrane, “The End of War Among Trading States,” New

Perspectives Quarterly, February, 1995, p. 9

56
 There is an unprecedented fever on the part of Brazil for

leadership and enlargement of the Sounthern cone free trade area till
January 2002.14 The implementation of the free trade accord between

CAN or Comunidad Andina de Naciones (Bolivia, Colombia, Ecuador,

Peru and Venezuela) and Mercosur (with Chile as incoming as partner)

is aiming at producing economic growth and deepening integration.

The vision is to connect all South America not only fluvially but also

technologically, by massive influx of fibrooptic cable and satellites.

Conclusion

The global economy links together the world community and

everybody is getting richer, as economic analysts prove in their recent

studies over the last decades.15 It is therefore obvious that

productivity-enhancing technological progress played an important

role in economy’s strong performance and improved the quality of our

lives.

14 La Opinión, “Sudamérica aspira a unirse”, 2 de septiembre,

2000, p. 3A

15 Postrel, Virginia, “The rich may get richer, but numbers suggest the

poor are doing better, too,” The new York Times, August 10, 2000

57
The flow of cross-border funds is private now - no government is

involved, therefore the bureaucracy is eliminated.

Movement of both investment and industry has been facilitated by

information technology.

Individual consumers are therefore more global in orientation

For the U.S., a prosperous European Union remains an important

nexus for growth. Trading partner, cooperation in major economic and

preservation of free trade regime.

All these four I's (integration, individuals, information, intra-regional

trade) work just fine on their own, nation states more often just get in

the way (given their own troubles) and state intervention is absent.

Region states are Hong Kong, or the Kansai region around Osaka, or

Catalonia - where real market flourishes - global solutions correspond

to the more focused geographical units. The rise of the superregions

as true natural business units in today's global economy.

In today's borderless world, lines of demarcation on the political

map are irrelevant as the currents of global economy (namely the new

knowledge-based economies) punishes hesitating countries by

diverting investment and information elsewhere.16
16Adrián de León Arias, “La dimension technológica en la
reestructuración económica,” Globalidad Y Region:
Algunas Dimensiones de la Reestructurción Económica en Jalisco
eds. Graciela López Méndez y Ana Rosa Moreno Pérez
(Guadalajara: University of Guadalajara, UCLA Program on Mexico,)
Juan Pablo Editores, 2000, p. 128
58
The question that arises is what are the consequences of the the

structural changes in the ontext of knowledge-based economic

globalization? What are the fissures it provokes?

Nobody argues more forcefully than Roderick that the world

economy faces a serious challenge in ensuring that international

economic integration does not contribute to domestic social

disintegration. The three major sources of tension between ultra

liberalism and social stability that pose a challenge to the architects of

the globalization remain: the transformation of the employment

relationship, conflicts between international trade and social norms,

and the pressures brought to bear on national governments in

maintaining domestic cohesion and social welfare systems.

Making a rightful distinction, a French writer, Viviane Forrester

contends that it is not globalization that some people are against, but

the malefic forces of ultraliberalism that confiscated/hijacked the

achievements of globalization that “is an historical phenomenon,

irreversable and irrevocable”. 17

17 Anne Marie Mergier, “El ultraliberalismo secuestró la globalización, e

impuse sus falcias: Viviane Forrester,” Proceso, March 12, 2000, p.45

59
 The globalization and ultraliberalism are not synonimous nin

absolute terms, the technoloy allowed the triumph of ultraliberalism

that actually manipulates, utilizes and depends on technology.

It is actually liberalization of trade, globalization that allows for

tremendous progress of technology and exchanges of information of

all types in real time.

At the first ever global conference in Europe, IMF President Horst

Koehler announced that the representatives are open to discussion

with the NGOs, on issues ranging from making loans to emerging

countries, cancelling the foreign debt of developing third world

countrie.18 Most of the NGOs, among which Rainbow Movement,

Summer of Mercy, CEE Bankwatch and Friends of the Earth, Jubilee

2000 have called for a coalition and announced months in advance

their plan to protest for the nine day event in Prague, Czechia.19

Reuters – Prague, “IMF’s Koehler open to discussion with NGOs,”

18

Turkish Daily News Business Report, August 1, 2000, p. 7

19
Richard, Stevenson, “Trade Support is Dwindling Fed Chief Says,” The New York
Times, August 26, 2000
60