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Manuel Lucangeli MA International Business Political and Economical Environment of International Business London Metropolitan University May 2004
1. INTRODUCTION .............................................................................................4
2. MOTIVATIONS FOR THE INTEGRATION: A “NEW REGIONALISM”.........5
3. THE BLOC........................................................................................................6
3.1. THE REGIONAL INTEGRATION PROCESS ..............................................6
3.2. INSTITUTIONS AND BODIES .....................................................................7
3.3. TRADE AND INVESTMENTS FLOWS OUTLOOK.....................................7
4. THE CRISIS OF MERCOSUR: AN STRUCTURAL PROBLEM.....................8
5. FUTURE CHALLENGES...............................................................................10
5.1. THE INTERNAL AGENDA..........................................................................10
5.2. THE FOREIGN AGENDA...........................................................................11 MERCOSUR and the FTAA.......................................................................................11 MERCOSUR – EU Relations......................................................................................12
MERCOSUR (Southern Common Market) is a politic and economic bloc in South America, which includes Argentina, Brazil, Paraguay and Uruguay as full members, and Bolivia and Chile as associate members. The aim of the bloc is achieve a common market where the free movement of goods, services, capital and people is complemented by a common external tariff and policy co-operation among its member countries. The bloc is the 4th largest economy in the world coming after the EU, the NAFTA and Japan; it has a total GDP of around US$ 1 trillion and a population of 210 million1.
The MERCOSUR’s goals are not only economical but also include areas from macroeconomic co-ordination, harmonisation of social and labour policies, harmonisation of laws, political and security cooperation, environmental protection, military co-operation and regional guarantees for the preservation of democracy and respect of human rights.
The motivations for the integration are the result of a “new regionalism” in Latin America, which followed the region economic collapse of the 1980’s. Nevertheless, in the last years several economic and political crises within the region have affected the MERCOSUR development. Therefore the bloc still needs to make efforts in different areas in order to complete its integration. This implies to achieve the completion of the internal market, a stronger institutionalization and the integration into regional and international context.
Accordingly, this essay will describe the principal issues related to the MERCOSUR’s integration process, try to identify the causes of the crisis that has affected the bloc in the last years and at the same time, the future challenges facing MERCOSUR regarding to its integration process as well as its relation with other economic blocs, principally the NAFTA and its proposed extension, the FTAA, and the EU.
GDP (current US$) 2001. Source: World Bank Group. (2004). Available from http://www.worldbank.org/data/databytopic/gdp.html
2. Motivations for the Integration: a “New Regionalism”
The motivations for the creation of MERCOSUR are a result of a “new regionalism” in Latin America, which represent a major shift in Latin America’s development paradigm after the debt crisis and the region’s economic collapse of the 1980’s. The old regionalism had supported the idea of “import substitution industrialization (ICI) model of development” (Devlin and Estevadeordal, 2001, p. 3). The new regionalism surged within an international framework characterized by the consolidation of large economic blocs (EU, NAFTA) and it is viewed as having the main following objectives (Iglesias, 2000; Devlin and Estevadeordal, 2001):
Strengthening structural economic reforms: the motive of the new regionalism is to create a strategic policy tool to reinforce the structural economic reform process in a period of highly competitive globalization. Regional integration is viewed as an additional policy tool to complement and strengthen national reform processes.
Economic transformation: while liberalization and increased participation in the world economy are viewed as instrumental to modernizing the region, countries have serious vulnerabilities because of a low export base and insufficient competitiveness of much of the private sector’s export supply. The reciprocal openness, guarantees of market access, preferences and other aspects of a regional scheme can provide new opportunities for export experience and diversification
Attracting foreign direct investment: there is worldwide competition between developing countries to attract FDI because of its potential to improve export networks, and technological, know-how and institutional modernization. By creating a larger market with local advantages, a regional agreement can help countries compete for attracting FDI.
Geopolitic: a group of countries can use a regional agreement to establish a safety net for fragile democracies, promote disarmament and peace among neighbors, and enhance bargaining power in international forum. This last motive was behind the decisions of MERCOSUR to negotiate trade agreements cooperation to exploit more fully the advantages of a maturing regional market.
3. The Bloc 3.1. The Regional Integration Process
Following the elections of civil regimes in Brazil and Argentina, these countries agreed to set the stage for a common market between them within ten years, with the gradual elimination of all tariff barriers and harmonization of the macroeconomic policies of both nations. After the adhesion of Paraguay and Uruguay a new treaty was signed by all four countries the 26th of March of 1991 in Asunción, Paraguay, providing for the creation of a common market among the four participants, to be known as the Southern Common Market (MERCOSUR). The Treaty established the goals in order to create the common market, allowing for the free movement of goods, capital, labour, and services among the four countries. The formation of a common market was to go into force the 1st of January of 1995. The integration process followed by MERCOSUR to date has been inspired by the EU experience (particularly in opting for a common market and a common external tariff) (European Commission, 2002). The following table shows some of the principal facts related to the integration process: 1988 Treaty for Integration, Cooperation and Development (Argentina and Brazil). 1990 Brazil and Argentina signed the Act of Buenos Aires. It anticipated that the common market would come into effect in 1995. It contemplated the gradual elimination of all tariff barriers and the harmonization of the macroeconomic policies of both nations. 1991 Treaty of Asuncion. Uruguay and Paraguay joined. Southern Common Market (MERCOSUR) 1994 Treaty of Ouro Preto. It established an institutional structure for MERCOSUR, inspired by the EU example, and created the basis for the launching of the Customs Union 1995 1996 1997 The MERCOSUR CET (Common External Tariff) entered into force. Chile and Bolivia joined as associate members Montevideo Protocol on Trade in Services. Equal treatment for service
providers of all member countries. 2002 Olivos Protocol. The constitution of a Permanent Legal Tribunal (in Asuncion) was decided. 2006 Objective: complete liberalization of trade in services within the group.
Institutions and Bodies
“The Treaty of Ouro Preto (in 1994) established an institutional structure for MERCOSUR, which was inspired by the example of the EU”. “The institutions of MERCOSUR consist of a Common Market Council, a Common Market Group, a Commercial Commission and numerous Technical Committees, Working Groups and Ad Hoc Groups, which all deal with specific areas of policy such as industry, competition, the environment, co-operation, agriculture or customs”. “Other MERCOSUR institutions are the Joint Parliamentary Committee, the Economic and Social Consultative Forum and the Administrative Secretariat of MERCOSUR. Nevertheless, all these institutions are still at a low level of development, although MERCOSUR is trying to make an effort on institutionalisation” (European Commission, 2002, p.13).
Trade and Investments flows outlook
Trade has constituted the most dynamic growing factor of the MERCOSUR’s integration process. Within the MERCOSUR trade grew by 9,2% on average per year between 1990 and 1999, compared to a world average of 6,6% during the same period. However, the economic recession the block suffered between 1999-2002 has affected the performance of intra-regional trade, especially in 2001, in which the Argentinean crisis has strongly impacted the intra-regional trade (European Commission, 2002, p.13). Foreign Investment into MERCOSUR including Chile has grown rapidly over the last decades from a level of US$ 6,1 billon annual average in the period of 1990-94, to US$ 35,6 billon, annual average in the period of 1995-99, representing an almost six-fold increase. In 1999 FDI reached a record level of US$ 61,9 billon. The implementation of 7
market economic reforms and major privatisation has driven this development. However, the economic crisis that hit the whole region since 2000 has reduced the amount of FDI to of US$ 48,5 billon in 2000, US$ 30,7 billon in 2001, and US$ 19,4 billon in 2002, influenced by the Brazilian crisis of 1999 and the Argentinean crisis of 2001/02. Nevertheless, for the period 1990-2002 MERCOSUR including Chile FDI stocks totalise US$ 327,3 billon, which represent around 76% of all investment that has gone into the Latin American region (ECLAC, 2003).
4. The crisis of MERCOSUR: an structural problem
Although MERCOSUR has been a very successful initiative in the political sphere, generating a zone of peace and cooperation between countries in South America, the progress in trade liberalization suffered serious setbacks in the recent years. The problems facing the MERCOSUR’s integration are closely related to the economic crises that the Region has suffered in the recent years. The Region was particularly vulnerable to the volatility of capital flows and MERCOSUR economies have demonstrated a limited ability to adapt to these scenarios, either because of external shocks, excessive public indebtedness or because of wrong exchange rate policies. That situation has affected everything else, deteriorating the Balance of Payments, the fiscal balance and the previously agreed trade rules (Heymann, 2001; Inter-American Development Bank and INTAL, 2003). Additionally, capital flight forced the MERCOSUR countries to increase interest rates, which had an adverse impact on servicing public debt and forced a recessive fiscal adjustment. Together with the reduction in private economic activity associated with the increase in interest rates, this strongly reduced tax yields, generating a recessive budget adjustments that, in the Argentine case, ended in financial crisis, which affect the whole region (Heymann, 2001; Inter-American Development Bank and INTAL, 2003). As a result those crises, in practice, the countries did not respect the rules they had previously agreed, they resorted frequently to unilateral non-tariff restrictions to slow down imports from their commercial partners, and they became involved in multiple 8
trade disputes, in which the arbitration or conflict-resolution mechanisms were neither operative nor effective (Heymann, 2001; Inter-American Development Bank and INTAL, 2003). Accordingly, the crisis of MERCOSUR is related to “a lack of progress in implementation of key structural reforms necessary to ensure fiscal and monetary stability and to secure sustained economic growth” (European Commission, 2002, p.8). “At the regional level, the lack of real macro-economic convergence, differing monetary arrangements and lack of co-ordination of sector policies have blocked progress towards deeper economic integration”. As a result of that, the effective implementation of the customs union has been retarded. Additionally, the lack of appropriate supranational institutions has impeded progress towards deeper integration” (European Commission, 2002 p. 17). At the political level, the mentioned crisis has been a result of “the lack of a shared vision between the member countries”. “In particular, given the economic and political weight of the two larger countries, Argentina and Brazil, the process of integration is shaped by their respective national agendas. The strategic choices in their external policy have determined the direction and momentum of MERCOSUR integration. The fact is that their positions at times have tended to diverge in important ways have been an obstacle to closer integration”. Nevertheless, in spite of all these difficulties the new governments of Brazil and Argentina consider MERCOSUR as strategic by the fundamental fact that any alternative to MERCOSUR would be worse: MERCOSUR was created out of necessity. Therefore, as part of a strategy to provide a new impetus to the process of integration, MERCOSUR countries agreed to re-launch the process of integration in order to strengthen the bloc internally as well as externally. This strategy consists of the identification of the MERCOSUR main problems in order to provide proposals to solve these issues (European Commission, 2002, p. 17).
5. Future Challenges 5.1. The Internal Agenda
MERCOSUR’s primary objective has been intraregional trade liberalisation through the establishment of a customs union. In sense, the Treaty of Asunción defined the implementation of automatic tariff reductions among the member countries and the Common External Tariff (CET) entered into force in 1995. Nevertheless, the customs union should be fully implemented by 2006. Therefore, the MERCOSUR’s internal agenda priorities are the establishment of a complete and effective customs union and the coordination of policies towards the establishment of a common market. That implies the reformulation of the system of dispute settlements, identification and elimination of intra-regional barriers to trade and the elaboration of common trade disciplines to prevent the imposition of trade barrier measures (European Commission, 2002; Inter-American Development Bank and INTAL, 2003).
Completing the regional integration process also includes a deepening the regional physical integration efforts, progress in the integration of the services markets, labour and capital markets integration and labour, harmonization and adoption of key laws including in the fields of competition, intellectual and industrial property rights, public procurement, trade in services and investments should further foster the integration of MERCOSUR countries into a single market (European Commission, 2002; InterAmerican Development Bank and INTAL, 2003).
In order to strengthen the macroeconomic co-ordination and the dispute settlement mechanism, the Olivos Protocol (“Protocolo de Olivos”) in 2002 defined the constitution of a Permanent Legal Tribunal. Furthermore, the creation of a MERCOSUR’s Monetary Institute with the perspective of a future single currency is being considered (European Commission, 2002; Inter-American Development Bank and INTAL, 2003).
The Foreign Agenda
MERCOSUR's external covers processes of negotiation and consultation with individual countries and regional arrangements, across and beyond the hemisphere. Treaties creating free trade areas with Chile and Bolivia were signed in 1996, a framework agreement with the Andean Pact was signed in 1998, and a complementation agreement towards a free trade agreement with Mexico was signed in 2002. MERCOSUR is also currently engaged in negotiations with the European Union for the liberalisation of trade, and it is active force in the Free Trade Area of the Americas negotiating process. Other important consultations are being held with a variety of partners such as SADC (South African Development Community), CER (AustraliaNew Zealand Closer Economic Relations Trade Agreement), India, Korea, China and Israel (Inter-American Development Bank and INTAL, 2003).
MERCOSUR and the FTAA
One of the most important negotiations is related to the establishment of the Free Trade Area of the Americas (FTAA or ALCA). In December of 1994, in Miami, thirty-four democracies of the American Continent agreed to negotiate a region wide free trade area by the year 2005. This objective was reaffirmed in the Quebec meeting, in 2001. A major obstacle includes reaching a balanced agreement since the different economies are characterised by large disparities in size, structure, and level of development. MERCOSUR, members firmly support an agreement based on the principle of the “single undertaking”, which presumes that agreements are signed only after solutions have been arrived at in all the areas being negotiated. MERCOSUR and Mexico signed an Economic Complementation Agreement to progressively work towards an FTA in 2002. MERCOSUR countries also announced their objective of pursuing bilateral negotiations with Canada and the US based on 4+1 format (Rose Garden Agreement, 1991) (European Commission, 2002, p.14; Inter-American Development Bank and INTAL, 2003).
MERCOSUR – EU Relations “The main instrument of EU policy towards the MERCOSUR countries is to complete the negotiation of the Interregional Association Agreement between the EU and MERCOSUR”. “A key component of these negotiations is trade aiming at bilateral, gradual and reciprocal trade liberalisation, without excluding any sector, and in accordance with WTO rules”. “A key EU objective is that a EU-MERCOSUR agreement should assure an equivalent level of circulation of goods, services and capital within the respective markets. The ultimate objective will be to build up a Political and Economic Association Agreement between the EU and MERCOSUR”. Additionally “a definitive progress has been made and EU and MERCOSUR have agreed a democracy and human right clause, the reaffirmation of the political principle of good governance and a renewed political mechanism is conceived, including new areas such as foreign policy, security and terrorism” (European Commission, 2002, pp. 15-16).
MERCOSUR today is an economic reality of continental dimensions. It Comprises an area of around 12 million square kilometres, or more than four times the size of Europe, and represents a potential market of 210 million people and a joint GDP of around US$ 1 trillion, which places it among the four largest economies of the world after the European Union, NAFTA, and Japan.
The motivations for the creation of MERCOSUR can be found as a result of the “new regionalism” trend within Latin America, which represent a major shift in Latin America’s development paradigm after the debt crisis and the region’s economic collapse of the 1980’s. Among the main objectives of this new regionalism are strengthening structural economic reforms, achieving economic transformation, attracting foreign direct investment and a geopolitical objective, which comprises establishing a safety net for fragile democracies, and enhancing bargaining power in international forum. Accordingly, the commercial integration promoted by
MERCOSUR also favours the achieving of objectives in other areas such as education, justice, culture, transport, energy, the environment and agriculture.
The massive inflow of foreign investment into the MERCOSUR in the last decade, previous the crisis that affect the Latin American region shows its attractiveness in terms of growth potential. Nevertheless MERCOSUR has to make progress in the integration process in order to create a dynamic regional investment climate, since investment on a regional scale depends on free access to the whole MERCOSUR market. Therefore, in order to protect the investment environment and encourage investments based on a regional scale, there is need for the countries to move ahead with a stronger institutionalisation and the establishment of a single investment space, which guarantee a clear system of rules.
The MERCOSUR’s negotiations with countries and other economic bloc, such as the European Union and the unified participation of the group in the negotiations for the FTAA are a positive element of the regional integration process that should be reinforced as it strengthens the bloc’s bargaining position and its importance on the international context.
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