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. were Austria, Finland, and Sweden. Joining January 1, 1995,

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. magnets and models for free trade are NAFTA and the EU. 6 The

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.

Gellner, S., “Mexico-European Union Pact Signed,” Baja Traveler, 2000, p. 42 8
5

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

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. largest populations together In any case, countries with the a "qualified" (decisive)

constitute

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 "Mexico Pact Raises Nica Export Quotas", The News, September 21, 1997, p. 32

10

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 CanadaMexico 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 EastCentral 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 hitech 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.

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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 standby 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 binational 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.

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So far, Mercosur’s decision making power rests with the intergovernmental 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 Adrián 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,)
16

Juan Pablo Editores, 2000, p. 128

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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

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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,” Turkish Daily News Business Report, August 1, 2000, p. 7
18 19

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

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