344) Mercosur is not for beginners...

Minha contribuição ao relatório do World Economic Forum que reuniu seu "capítulo" latino-americano nos dias 5 e 6 de abril em São Paulo:

ESSAY 2.7
Mercosur’s Identity Crisis
Paulo Roberto de Almeida, University Centre of Brasilia
In The Latin America Competitiveness Review (Geneva: World Economic Forum, 2006, p. 63-65)

After decades of well-intentioned, but relatively fruitless attempts to form an integrated economic space spanning the whole region, the integration process in Latin America adopted a more limited geographical focus. Turning away from the rigidities of the past, countries adopted more flexible and gradual schemes, with a sectoral focus and shift away from the main axes of integration.
These are the features which characterize Mercosur, the most successful integration project of the 1990s. Strangely enough, Mercosur’s origins can be traced to the rather dirigiste bilateral schemes adopted by Argentina and Brazil in the mid-1980s, and in the successive 1988 bilateral integration treaty, which aimed to establish a common market over a ten year period by means of sectoral agreements and complementary protocols of integration. In March 1991, the Asuncion Treaty expanded the bilateral treaty into a quartet, involving Uruguay and Paraguay.1
Integration was made automatic, comprehensive in scope, and essentially market-based, reflecting the prevailing new liberal paradigm. The time frame was also more ambitious— in order to reach the “common market” stage by 1995—and tariff reduction became automatic and market driven, instead of being led, as it had been previously, by a gradual process of specialization and product complementarity.
Despite the serious problems plaguing macroeconomic stabilization in Brazil and Argentina—the former still struggling to eliminate the generalized indexation of its economy, the latter recovering from two runaway inflationary outbreaks—reciprocal trade liberalization advanced rapidly, leading to a powerful surge in bilateral trade. This occurred in the context of increased trade flows with, and openness toward, the rest of the world, entailing very little trade diversion.
During the initial period, increased inflows of foreign direct investment (FDI), buttressed by the privatization processes underway in both economies, allowed Brazil and Argentina to deepen economic integration and raise intraarea FDI. Favorable terms of trade2 also encouraged trade flows, with the result that Brazil became one of the few countries with which Argentina ran a trade surplus.3
However, Argentina’s trade surplus did not last for long. By the late 1990s, it had turned into a deficit as Argentina entered a phase of low growth, compounded by larger budget deficits and a diminished level of FDI, all of which prompted the need for bond emissions on international financial markets. This finally provoked the subsequent serious financial crisis, which had a dramatic impact on Brazil as well. The concurrent devaluation of the real in 1999 heralded a new critical stage for Mercosur, which has lasted to the present.
Despite spreading pessimism regarding its capacity to recover and face increasingly competitive Brazilian exports, Argentina struggled on for two more years, under the fiction of its convertibility plan, and the shadow of substantial external liabilities, the result of successive IMF support interventions which failed to provide a long-term solution. The crisis finally broke out at the end of 2001, forcing Brazil to negotiate yet another agreement with the IMF, with essentially preventive effects. From this stage onward, Brazil started to attract more FDI to the industrial and service sectors, leaving
Argentina in the position of “minor partner.”
Structural asymmetries between Argentina and Brazil were exacerbated, as the latter set out to pursue increasing industrial specialization and sophistication, while the former remained confined to industries linked to primary products.
Attempts at unilateral “macroeconomic coordination” and Argentinean threats to introduce full dollarization of its economy, did not solve the problems of Mercosur, which sank into a profound identity crisis, characterized by a sharp decrease in intra-regional trade flows.
Thus, a common market could not be established, nor even a less ambitious customs union, which had effectively been in place since 1995, but which had been hindered by too many exceptions to the Common External Tariff (CET).4
The Ouro Preto Protocol, signed in December of 1994 to “complete” the treaty of Asuncion, failed to create new institutions to manage integration. Nor did it establish mechanisms to facilitate the coordination of macroeconomic policies or deepen microeconomic integration. Despite Chile’s and Bolivia’s loose association to Mercosur as partners to the “free trade zone” since 1996, the integration of the Andean Community of Nations proved elusive.
On the other hand, the perceived “threat” of the Free Trade Area of the Americas (FTAA), proposed by the United States in 1994, triggered a defensive reaction in Mercosur countries, establishing new trade liberalization commitments to counterbalance generalized opening by some of their extra-regional partners. The electoral campaign in Brazil in 2002 coincided with an additional record US$30 billion package from the IMF. This, coupled with concomitant political upheaval in Argentina, did not help to mitigate the crisis in Mercosur, despite promises from the new Lula da Silva administration to give priority to the special relationship with Argentina.
Argentina resorted to unilateral protectionist measures, notably unilateral safeguards and antidumping actions, in sectors supposedly threatened by “deindustrialization,” such as the automotive sector, critically important for bilateral trade and a powerful engine of growth owing to its many external linkages. In 2002, a turbulent financial crisis in Uruguay and political troubles in Paraguay gave Mercosur a further blow. Despite a resurgence of intra-regional trade from 2003 onward, trade imbalances in favor of Brazil remained, arousing protectionist sentiment in Argentinean industry circles that were strongly backed by the new Kirchner administration. Moreover, structural asymmetries between the two countries persisted in major sectors, due to the successful modernization drive by Brazilian industry during the 1990s.While Argentinean authorities alleged that Brazil was using unfair fiscal incentives to attract FDI, especially in the automotive sector, most of the trade imbalances were more probably the result of the failure of Argentinean industry to modernize. In 2004, Argentina responded by adopting automatic safeguards to block spikes in imports.
The doubling of Brazilian foreign trade between 1995 and 2005 diminished Mercosur’s importance as a trading partner. Peru’s association agreement with Mercosur, combined with new trade agreements with other countries of the Andean Community of Nations in 2004, further increased Brazil’s trade expansion in South America.
At the political level, both the Brazilian and Argentinean governments remained suspicious of the alleged benefits of free trade, and returned—more than once—to the old sectoral integration approach based on reciprocity. However, Brazil finally made some concessions toward its Mercosur partners. In 2006, both countries reached an agreement which allowed Argentina to apply automatic safeguards against Brazilian imports. Moreover, Brazil became the major financial contributor to an “adjustment fund for structural asymmetries,” created mainly for the two smaller Mercosur partners, and a Mercosur “parliament” was established.
Under political pressure from the Brazilian government, the continent’s integration efforts were given new impetus.With the support of Venezuela, Lula da Silva’s administration created the “South American Community of Nations,” thus furthering a similar endeavor by former President Cardoso, known as “South American Regional Integration Initiative.”

In December 2005, a political decision was taken to fully incorporate Venezuela into the bloc. Now that the “threat” of the FTAA has been diminished—a joint maneuver in 2005 by Argentina, Brazil, and Venezuela— the South American countries are finally striving to set up a new integration agenda for the region—albeit with diverse strategies and objectives—driven by political cooperation and more focused on the establishment of physical connections than on trade liberalization.
In so doing, they hope to attract enough FDI to realize much needed infrastructure projects in energy, communications, and transportation. It is not yet clear whether this can be achieved, considering that the United States remains the main pole of attraction for the region. Another major stumbling block is the political volatility of the region, as demonstrated by developments in the Andean region over the last five years.
Despite the relatively modest size of its economy, Chile has confirmed its adherence to stability and growth and is moving toward a gradual reduction of social inequalities and increased participation in the international trading system.While many other leaders in the region still insist on maintaining a defiant stance toward global interdependence, making resounding anti-imperialist speeches at international fora, Chile is furthering its liberal agenda
and increasingly adopting an OECD-like profile. It seems to be the sole “Asian tiger” in a region that, with some exceptions, still continues to exhibit the typical features of old Latin America: maintaining poverty, social inequalities, political instability, and specializing in primary goods.
South America continues to move forward too slowly on the international scene.

Notes
1 At the time, Chile also expressed interest in joining Mercosur. However, the main obstacle to closer association with Mercosur was, and continued to be, the linear structure of the single Chilean tariff, which at 11 percent and decreasing, was already lower than the common external tariff (CET) Brazil and Argentina intended to establish.
2 The Cavallo Plan of convertibility imposed a fixed exchange rate parity of the peso against the dollar, thereby reducing Argentinean competitiveness in world markets. The overvalued real of those years— resulting from the then-prevailing exchange rate policy which kept the real in a rather tight band, aligned to the dollar-favored Argentinean exports to Brazil and led to one of the few positive balances Argentina had vis-à-vis its trading partners.
3 By then, Brazil accounted for one third of Argentina’s external trade, giving rise to a concern in Argentina about the country’s “Brazildependency.”
4 Indeed, some goods, such as sugar and the entire automobile industry, were kept outside the free trade zone, accounting for a large part of the bilateral trade; other commodities, such as wheat and oil, were subjected to managed trade.