MERCOSUL IN THE REGIONAL CONTEXT


Ambassador Rubens A. Barbosa

Looking back fifteen years, almost all South America was governed by authoritarian military regimes; suspicion and rivalry - even resorting to arms – were the common denominator, and intra-regional trade was in decline. Seven years ago, protectionism was the main instrument of foreign trade policy in the region.

Looking ahead, in three years' time, if everything goes according to plan, we shall have formed the world's fourth largest economic group in terms of size in the form of Mercosul, with more than 200 million people and a GDP in excess of 1.5 trillion dollars. In seven years we shall have started to implement the Free Trade Area of the Americas, the most important economic-commercial bloc alongside the European Union.

MERCOSUL IN THE CONTEXT OF THE WORLD AND THE REGIONAL POLITICAL AND ECONOMIC SITUATION
Mercosul was formally created in 1991 when Argentina, Brazil, Paraguay and Uruguay signed the Treaty of Asuncion. Today, this regional subgroup is as yet an incomplete customs union, with an average Common Foreign Tariff of 17% and an independent legal status.

Taking a seven-year overview, since the signing of the Treaty of Asunción, it can be seen that this exercise in regional integration has been a successful operation in terms of responding to trends towards the globalization of the world economy.

Compliance with the international trade system represented by the rules of GATT/OMT in the development of the sub-regional integration process, represented by Mercosul, has ensured consistency of the provisions of Clause 24 of GATT with the modifications introduced by Clause 5 of the new accord that created the OMT .

Since January 1st, 1994, Mercosul has become the first customs union to operate in the Southern Hemisphere and is second only to the European Union with almost all its dealings (95%) relating to free trade. It is an incomplete customs union because some products will only be included in the Common Foreign Tariff when the Adaptation Regime ends in 1998 and when the capital asset tariffs are unified in 2001 and those of the information technology and telecommunications sectors in 2006.

The following figures illustrate the importance of the regional subgroup within the context of the American continent: Mercosul represents more than 50% of Latin America's GDP, 46% of inter-regional trade (within the scope of the Latin American Integration and Development Association (ALADI), this would be 58% including Bolivia and Chile), it represents around 10% of Latin America's total trade with the rest of the world, 45% of the population, covering 59% of the land area and 80% of investment in South America.

The perception of Mercosul from the point of view of governments and private sectors abroad has come across as a positive one. The Customs Union has become established as a political and economic reality and a factor of stability and differentiation in relation to other emerging economies.

THE IMPLICATIONS OF MERCOSUL FOR SOUTH AMERICA
Since the setting up of Mercosul and its satisfactory progress, the process of economic integration and the political coming together of the countries of the South American subcontinent have acquired their own impetus, which to a certain extent had not been expected.

In this respect, taking a historical panorama of the last forty years since the Treaty of Montevideo and the emergence of the ALALC, it would be no exaggeration to consider Mercosul as a landmark: the regional integration process can be classified as being before or after the Treaty of Assunción.

Mercosul has played an important role as a promoter of economic, commercial and investment growth in relation to the four member countries. In 1997, South America turned in its best economic performance in recent decades: the growth-rate was at its highest for the last twenty years; inflation was the lowest for the last fifty years whilst the flow of investment was at an all-time high.

The rapid and dramatic upturn in trade within Mercosul, climbing from USS 4 billion in 1991 to US$ 18.8 billion in 1997, has contributed to the consolidation of the trade liberalization process throughout the region and has highlighted some limitations that exist in all countries, particularly in relation to competition and infrastructures areas.

The focus of intra-Mercosul trade is between Argentina and Brazil. Between 1990 and 1997 trade grew by around six-fold. Argentina's exports to Brazil increased by more than 360% whilst Brazilian exports to Argentina went up by more than 620%.

On the political front, the greater closeness and confidence generated have transformed the spirit of confrontation of the sixties and seventies into one of increasing cc-operation. Political stability has come to be seen as a valuable asset, leading naturally to the laying down of foundations for the consolidation of democracy.

The frontiers that previously separated and divided the nations have become poles of attraction for investment and co-operation. If NAFTA has changed the face of economics, Mercosul has changed the geo-politics of the region.

Physical integration (roads, bridges, ports and waterways improvements) and energy integration (natural gas, oil, water, electricity) are high on the region's current political and economic agenda as a direct result of advances in the process of trade integration accelerated by Mercosul. The hi-national and multi-national infrastructural projects linking the countries of Mercosul and the rest of South America are a pole of attraction for investment with the prospect of greater benefits for the countries and consumers of the region.

Mercosul's expanded market has become a magnet for Brazilian and foreign investment which is rapidly spreading throughout the other countries.

Increasing participation by the private sector made favorable by positive results from Mercosul is another relevant detail in the regional integration process. Until the mid eighties, there were no private business involvement and there was frequent opposition to regional integration. Nowadays, the expanded sub-regional market is included in the strategies of both Brazilian and foreign companies and intra-company trade is one of Mercosul's commercial levers.

Therefore, in just seven years, Mercosul has become the binding axis for recent integrationist developments in South America and the promoter of one of the most important principles of the 1980 Treaty of Montevideo: the co-ordination and the convergence of the regional subgroups in a gradual and ordered manner, by means of the inter-penetration of the sub-regional and bilateral agreements drawn up within the context of the Treaty.

From a more global angle, Mercosul has promoted the expansion of the region's relationship with the rest of the world, exemplified by the accords in progress with hemisphere partners (NAFTA and CARICOM), with the European Union, Australia and New Zealand, the Russian Federation, with ASEAN, China, Japan, South Africa, India, Canada and with Switzerland.

Taking into account Brazil's great economic weight within the context of Mercosul, the Brazilian market has become the anchor of the South American economy. Including Chile and Bolivia, Mercosul represents 80% of the South American GDP, which explains why the dynamism of the Brazilian economy has come to influence the performance of all the countries of the region.

MERCOSUL AND THE NEW HEMISPHERIC GEOGRAPHY
Following the signing of the NAFTA accord in 1994, which began to take shape in l991 with the Treaty of Asunción that created Mercosul, there was clear evidence from the economic-commercial point of view in general and Brazilian and multinational company strategy in particular, that the economic geography of the Hemisphere had acquired a new dimension.

The concept of Latin America, formulated within the context of nineteenth century Europe, had lost its meaning.

With immense force, there emerged on the American Continent, the sharp geographical delimitation of different regions as acknowledged in the Treaties and freely signed by the nations of the Continent.

In terms of actual economic and financial interests, unaccustomed to government rhetoric, what exists nowadays is North America (NAFTA), South America (Mercosul and the Andean Community of Nations), Central America (Central American Common Market) and CARICOM.

Within that new geographical configuration in South America, Mercosul is the first step and the most dynamic element, playing the role of stimulating agent for South American integration.

The free trade agreements with Chile and Bolivia have been the precursors in that direction. In the medium and long-term outlook, it is important to emphasize the strategic significance of the association of the two countries with Mercosul. Chile gives a two-ocean dimension to the customs union: the territory of the expanded market extends from the Atlantic to the Pacific, opening the Chilean ports to enable Mercosul's products to reach Asia. In the center of the continent, Bolivia acts as a bridge with the Andean Community and as a link for energy (natural gas) and transport (waterways).

With the support of its other Mercosul partners, Brazil has proposed the membership of the Andean Community of Nations and negotiations between the two regional groups are in progress. It is expected that agreements of free trade be negotiated until the end of 1999. If successful, these will establish a South America free trade area.

With the start of talks aimed at setting up a hemispheric free trade area, Mercosul and NAFTA have become the natural forces of attraction for the other countries and constitute building blocks for the construction of the ambitious project to integrate Alaska and Patagonia.

MERCOSUL: CHALLENGES AND OUTLOOK
Short term: 1998, a year of uncertainty

To make progress and become consolidated within a climate of political and economic uncertainty will be the main challenges facing Mercosul in 1998. On the one hand, the presidential elections in Paraguay and its repercussions, on the other, the implementation of the Common Foreign Tariff as the basis of the customs union, has suffered setbacks (a three percent increase at the suggestion of Argentina and the exclusion lists of Uruguay and Paraguay). The consideration of proposals such as the introduction of a common passport, the establishing of a peace zone within the territory of Mercosul and the start of research into a single currency are continued indications of the political will to move the integration process forward.

Medium term: 1998-2005, years of consolidation and solidification
The implementation of the Mercosul 2000 Plan is the great challenge faced by member countries in the medium term. Approved in 1995, in general terms this program provides for the consolidation and solidification of Mercosul

In the consolidation phase the primary aim is to extend the application of the Common Foreign Tariff to the entire tariff range, eliminating exclusion lists. In addition, it seeks to define agreements on common trading policy that will both encourage the adoption of common commercial defense mechanisms (safeguarding measures, special importation regimes) and also increased competition within the integrated area for the benefit of consumers (protection of competition, consumer protection).

Up to the present time, over a seven-year period, Mercosul has made advances principally in the free movement of goods. The free movement of services, capital and people is only just being addressed. In December 1997, the member countries approved a framework agreement on services, establishing their gradual introduction over ten years; in the financial area, increasing integration of the capital markets, common rules governing the banking systems (Basile Convention) and research aimed at the creation of a Mercosul Bank as well as a common currency, all presage new advances in years to come.

Economic integration within the context of Mercosul is bringing about new specializations or accentuating the regional division of pre-existing labor, in a scheme in which complementarity is becoming increasingly important. Finding niches in the Brazilian and Argentine markets for the production and export of manufactured products from Uruguay and Paraguay will be one of the major challenges in coming years within the field of the consolidation of Mercosul.

Mercosul is not only seeking to become consolidated internally as an economic bloc but is also looking to expand its foreign relations and enhance its importance on the international scene. In addition to continued negotiations with the Andean Group for the signature of the free trade agreements up until the end of 1999, in 1995 Mercosul signed the Framework Agreement for Economic and Commercial Co-operation with the European Union, a transition agreement for a future association between the parties having the basic objective of implementing a program of progressive liberalization of reciprocal trade. After a further three years of accords, it is envisaged that negotiations will start next April in Santiago de Chile aimed at establishing a continental free trade agreement.

On the three negotiating fronts (Andean Community of Nations, the EU and the FTAA), the prospects augur difficult negotiations because of the diverse and conflicting existing interests but depending on the development of the Brazilian economy in particular, the political will of governments and the specific interests of the Brazilian and international private sectors will operate so that a form of compromise will eventually be found that will enable all the agreements to move forwards. That at least is the intention of Brazil and the countries of Mercosul.

Long term: after 2005, the road to the Common Market
After complete customs union has been achieved with the unification of the Common Foreign Tariff, the political will of the members countries will be put to the test with the deepening of integration and the ability to retain its own identity in the future hemispheric free trade area.

According to the declaration made by the Presidents of Brazil and Argentina in November 1997, one of Mercosul's next developments will be the undertaking of studies that will enable the sub-regional group to enter into a new stage - as quickly as is wished by the people of the two countries - that transcends the economic and commercial sphere and reinforces its political dimension.

For the first time, specific reference was made by two member countries to the route towards an effective common market, as envisaged in Clause One of the Treaty of Asunción.

From 2005, having confirmed the political will of the four member countries to follow this direction, Mercosul must face this new challenge, focusing on delicate and sensitive areas such as the creation of supra-national institutions, a single currency, foreign policy and common defense.

Crossed paths: Mercosul and FTAA
Within the context of its consolidation, despite all its success in the commercial area - and perhaps because of the latter - Mercosul is currently going through a period of increasing complexity in negotiations and lack of definition in relation to its real priorities.

The complexity in terms of negotiations is the result of the acceleration and multiplication of the forums created by the FTAA: the agenda of Mercosul, the draftsmen and the availability of the negotiators were all shared between the needs of twelve work-groups and the FTAA's round of ministerial meetings.

The lack of definition in relation to the priorities is the result of the superimposing of negotiating agendas with the FTAA, the sometimes unclear co-ordination between national economic and commercial policies and those of Mercosul and the need for the putting forward the most important topics to reflect a balance of interest between the four.

The relationship between Mercosul and the FTAA, not only during negotiations but mainly after 2005, will perhaps be the greatest challenge to the identity of the customs union.

According to the decisions taken in the Ministerial Declaration of San Jose, confirmed by the Santiago Summit, Mercosul, as a customs union, will go beyond the FTAA and will continue to exist independently, but from an economic-commercial point of view, Mercosul will not be diluted with the creation of the FTAA from 2005, since in practice the Common Foreign Tariff would cease to be effective within the Continent. On the other hand, from a political-strategic stance, Mercosul is more than simply a commercial scheme because it encompasses areas such as culture, politics, security and education, being obliged to maintain its individuality within a hemispheric free trade area.

One of the specific effects of the FTAA's negotiations with Mercosul is the decision by the member countries (to avoid the diluting effect) to accelerate accords aimed at deeper forms of integration, exemplified in the agreements reached last December in the services and social welfare area (agreement on social security).

MERCOSUL WITHIN THE CONTEXT OF BRAZILIAN INVOLVEMENT ABROAD
From the Brazilian point of view, the setting up of Mercosul is not an isolated initiative. It forms part of a structured view of Brazil's role in the world today and a force that will ensure the nation's more positive involvement on the international stage.

Regional integration is a prominent element in a wider Brazilian scheme for commercial liberalization and the modernization and stabilization of the economy. The dismantling of economic borders between the four countries that comprise Mercosul has been a driving force in the distribution and production of wealth and consequently, the job creation.

On the other hand, Mercosul has contributed to consolidating the opening up of Brazilian trade abroad with increased competition in Brazilian production on the international markets. In this regard, the integration process has made an outstanding contribution to the reinforcement in Brazil of an open and dynamic view of company activity, centered on the technological renewal of Brazilian industry and the improvement in the quality of its products.

Brazil considers itself to be a global trader with its business reasonably balanced across the different regions (27.3% to Europe, 25.6% to South America, 17 7% to the USA and 14.5% to Asia).

As a central feature in foreign policy and overseas economic policy, Mercosul has become an important element since it occupies an increasing area of Brazilian foreign trade, climbing from around 4% in 1991 to 17% in 1997.

Since its creation, Mercosul has played an important part in relation to Brazilian business by demonstrating the market potential of the Southern Cone and by extension, that of South America. Because of Mercosul, Brazilian business has gone back to its neighbors and is becoming multinational (around 400 joint-ventures with Brazilian companies are operating in Argentina).

For Brazil, the success of Mercosul both in the political (the affirmation of democracy) and in the commercial areas (Mercosul can already boast a good name in trade and investment) represents a greater projection of South America in the international context and a reinforcement of the country's specific influence on nations as a whole.

By making better use of its regional position and with Mercosul as a platform for South America, Brazil is taking advantage of its geography and projecting its natural leadership talents in examining and debating the chief concerns of the region.

It remains to be seen how the Brazilian position will develop on the way to a deeper integration with its partners in Mercosul, as witnessed by recent steps in the political area in terms of services and social welfare matters.

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