Mercosur Evolution and Challenges in the Internal and External Agenda

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Mercosur Evolution and Challenges in the
Internal and External Agenda
Beatriz Nofal, Ph.D. Course Trade and
Development in South America A case Study of
Mercosur Faculty of Law, University of
Toronto February 2004 Toronto, Canada
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Mercosur is a regional trade association (RTA)
integrated by Argentina, Brazil, Paraguay and
Uruguay and constitutes an imperfect Customs
Union since 1995. Regional integration started in
1986 with the Argentina-Brazil Integration
Program.
Common Trade Policy
Free Movement of Factor of Production (Capital
Labour)
Free Movements of Goods and Service
Common Currency
FORMS OF REGIONAL INTEGRATION Free Trade Area
(NAFTA) Custom Union Common Market Monetary
Union (European Union)
MERCOSUR plus Chile and Bolivia
MERCOSUR (Imperfect Custom Union)
- Intraregional Trade is Freed from Tariff
Barriers and there is a Common External Tariff
(C.E.T.) on Third Country Imports. There are few
goods exempted from the C.E.T. and the automotive
and sugar sectors have trade administered
regimes. - In 1996 Mercosur signed Free Trade
Area Agreements with Chile and Bolivia
(associated members).
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MERCOSUR STRENGTHS AND CHALLENGES

• STRENGTHS
• Relative Size
• Performance
• Open Regionalism
• CHALLENGES
• - Consolidation of trade integration.
• Deepening of economic integration
• Macroeconomic Coordination.
• Economic Policy Harmonization.
• Widening and External Negotiations Free Trade
  Area negotiations under way with South America,
  FTAA, European Union (S-S RTAS?).
• Multilateral negotiation in the WTO Doha Dev.
  Round.

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MERCOSUR STRATEGIC RESPONSE TO GLOBALIZATION

• Economies of scale to compete internationally and
  large market size to expand trade, investment and
  technology flows.
• Strengthening of international negotiation power.
  Mercosur became a relevant political and
  economic international player.
• A market platform for local and international
  companies to regionalize and become key world
  players.
• AN OPPORTUNITY TO FACE INTERNATIONAL FINANCIAL
  VOLATILITY PROBLEMS THROUGH REGIONAL
  MACROECONOMIC COORDINATION AND DISCIPLINE

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MERCOSUR ACHIEVEMENTS AND CHALLENGES

• The balance of the Mercosur is positive from a
  political point of view and from an economic and
  international standpoint
• The Mercosur contributed to democratic
  consolidation, to the growth of the
  intra-regional and extra-regional trade and of
  the Foreign Direct Investment, and became
  recognized internationally as a relevant and
  credible player as well as a successful trademark
• Mercosur experienced in 2001/2, like in 1999, a
  deep crisis and now faces a dilemma regarding the
  strategic path to follow whether to deepen the
  Customs Union or to reformulate it as a Free
  Trade Area.
• The crisis was due, like in 1999, to
• Macroeconomic problems.
• Institutional problems .

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MERCOSUR SIZE
Mercosur had in 1998 a combined GDP of about
US 1 Trillion, a total population of about 210
Mill. inhabitants and a total amount of Exports
of around US 80 Bill.
JOINT DATA (1998)
(1), (2), (3) Y (4) US Million
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MERCOSUR SIZE
Mercosur has a market size comparable to that of
the Asian Tigers, but it has lower trade and
investment ratios in relation to GDP.
COMPARISON MERCOSUR, ASIAN TIGERS, EAST EUROPE
(1998)
(1) Hong Kong, Taiwan, Korea and Singapore (2)
Hungary, Poland, Czech Republic, Romania and
Bulgaria (3) 1997 Data. Weighted average for each
region. East Europe GDP Data 1997 Export and
Import 1996. Source ECO-AXIS based to World
Bank, Inter American Development Bank and CEPAL
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MERCOSUR MACROECONOMIC PERFORMANCE IN THE 90s

• Mercosur attractiveness in the 1990s came not
  only from its dimensions, but also from its
  performance.
• In spite of the 1998/99 regional slowdown and
  recession, there was in the 90s a trend of
  growth with stability and market oriented
  structural reforms in a framework of democratic
  consolidation.

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CAPITAL FLOWS TO EMERGING COUNTRIES Sudden Stop
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Mercosur/Performance
SINCE 1998 MERCOSUR MACROECONOMIC PERFORMANCE HAS
DETERIORATED

• In 1999 Brazil devalued its currency and this was
  the first year since integration begun (1986)
  that Brazil Argentina faced a recession at the
  same time.
• The devaluation of Brazil magnified
  competitiveness problems in Argentina, due to the
  overvaluation of the peso.
• Because of a combination of external shocks and
  policy mistakes, Argentina experienced a
  sustained recession since August 1998 which then
  turn into a depression and a financial crisis by
  2001.

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ARGENTINA 1998- 2003
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ARGENTINA IN 2001/2
Argentina, experienced a deep economic and
political crisis in 2002 . The restrictions set
on withdrawals of deposits, the abrupt
devaluation without a plan, the default, and the
asymmetric pesification, all led to a huge fall
in income per capita.
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ARGENTINA IN 2002/2003
Economic Activity GDP fell 10.9 in 2002 and
recovered 8.4 in 2003. Government estimates
that this year there will be a sustained growth
recovery of 5.5 of GDP.
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ARGENTINA 2003 MEDIUM TERM CHALLENGES

• Positive factors inherited by the Kirchner
  administration that took office on May 2003
• The fall of public expenditure in terms of GDP
  (consolidated primary public expenditure fell
  from 24,9 of GDP in 2001 to 21.9 in 2002 and
  to an estimated 21.8 in 2003).
• The productivity gains at the firm level due
  to technological modernization under
  convertibility in the 1990s.
• A competitive real exchange rate that
  stimulates exports and import substitution.
• An economy without indexation after 10 years of
  convertibility
• Economic challenges inherited
• Fiscal solvency.
• Renegotiation of the defaulted public debt.
• Liquidity and solvency problems in the
  financial system.
• Tariffs restructuring in the privatised public
  services.
• INVESTMENT RECOVERY AND EXPORT GROWTH.
• UNEMPLOYMENT AND POVERTY REDUCTION

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BRAZIL 2001/2003
Growth recovery and public debt-sustainability
are the main economic challenges.
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MERCOSURTRADE GROWTH MEASURED BY IMPORTS

• MERCOSUR is a case of open regionalism.
• Between 1990 and 2000 there was a high increase
  in intra-regional trade and also with the rest of
  the World.
• The contribution of imports from the rest of the
  World to total trade growth of Mercosur is of
  77, more than three times the contribution of
  intra-regional imports of 23.

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Mercosur/Performance/Trade
TRADE BETWEEN MERCOSUR MEMBERS
Intraregional Trade increased340 from US 4.2
billion in 1990 to US 18.5 billion in 2000, but
is has contracted thereafter
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Mercosur/Performance/Trade
ARGENTINA-BRAZIL BILATERAL TRADE, 1980-2000

• Argentina-Brazil bilateral trade experienced a
  remarkable growth during the 90s (316 between
  1990 and 1998), and contracted about 50 induring
  1999-2002.
• Trade balance had been determined in the first
  place by the GDP evolution of both countries and
  in the second place by the bilateral exchange
  rate parity.

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Argentine-Brazil Bilateral Trade 1998-2003
Brazils economic deceleration combined with
Argentinas economic crisis had a very negative
impact on bilateral trade. In 2003 bilateral
trade recovered 26 because of the recovery of
argentine import demand from Brazil, while
Argentinas exports to Brazil in continue to
fall. The exports most affected were mainly
exports from the automotive sector, cereals, oil,
and leather.
Consequently, Brazils share in total exports of
Argentina fell from 30 to 19.
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MERCOSUR FDI GROWTH
Up until 2000 FDI inflows in Mercosur grew
more than tenfold the value of 1990 and threefold
the value of 1995. FDI inflow to Mercosur
represented in 1998 about 61 of FDI flows to
Latin America and 22 of total FDI to developing
countries
US Million
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Mercosur/Exchange Rate
ARGENTINA-BRAZIL PARITY EXCHANGE RATE1984-2000
In 1999 there was a real devaluation of Brazils
Real in relation to the Argentinas Peso of about
30 compared with December 1998
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Real exchange rate of Argentinas Peso after the
devaluation in January 2001

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OPTIONS DEEPENING OR DILUTION

• Face to the current problems in Mercosur there
  are 3 options
• To keep the status quo, which implies the gradual
  dilution of the Mercosur
• To consolidate and to deepen the integration to
  reach a real common market
• To consolidate first a Free Trade Area as
  intermediate step towards an effective Customs
  Union
• The desirable option is to re-launch the Mercosur
  in its original sense to consolidate a deep
  integration within a framework of open
  regionalism, negotiating the widening of MERCOSUR
  to other markets (FTAA, E.U.) and multilateral
  liberalization in the Doha Dev. Round.
• To accomplish this and to build a credible
  Mercosur, a program must be formulated urgently
  with concrete goals and deadlines.

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PROGRAM FOR RE-LAUNCHING AND DEEPENING OF MERCOSUR

• Program for a Single Market with fair
  competition, eliminating non tariff barriers and
  distortions in intra-regional trade and
  maintaining open regionalism.
• Program for a binding Macroeconomic Coordination
  and Convergence Agreement, including mechanisms
  for Exchange Rate Coordination.
• Program of Institutional Strengthening, to
  improve and grant stability to the Dispute
  Resolution Mechanism and creation of an
  administrative body to manage the new regional
  reality.
• Strengthening the block's external policy in its
  negotiations of preferential free trade
  arrangements with FTAA/41 and the European
  Union, but assigning equal priority to
  multilateral negotiations (WTO).

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Re-Launching of Mercosur
TRADE POLICY

• To assure intraregional free trade flows trough
  the elimination of non tariff barriers and the
  banning of fiscal and financial export incentives
  on intraregional sales. A SINGLE MARKET
  initiative is needed.
• To reassure compliance with the Common External
  Tariff, eliminating special tariff deductions
  (e.g. on capital goods) as well as the use of
  export custom incentives on intraregional sales
  (drawback and temporary admission).
• To conduct in all instances trade negotiations as
  a block.
• To ensure the enforcement of the agreements by
  enforcing the internalization of agreements
  (attaching deadlines and penalties) and
  compliance.

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Re-Launching of Mercosur
HARMONIZATION OF INVESTMENT INCENTIVES

• In the short run there must be clear discipline
  signaling that the products receiving subsidies
  could be subject to compensating duties and
  therefore not traded freely.
• In the medium run common criteria must be set to
  assist less developed areas or those with high
  unemployment, in a consistent way with WTO
  agreements (i.e. levelling the playing field)

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Re-Launching of Mercosur
MACROECONOMIC COORDINATION

• In June 2000 Decision CMC 30 was agreed upon,
  establishing the following guidelines for
  macroeconomic coordination
• Elaboration of harmonized statistics for fiscal
  accounts and public debt.
• Quarterly publishing of fiscal indicators since
  September 2000.
• Establishing a high level Macroeconomic
  Monitoring Group.
• Establishing by March 2001 the convergence
  targets for fiscal variables, public debt and
  inflation.
• The March 2001 agenda was advanced on December 15
  in Florianopolis (Brazil), through a Presidents
  Declaration stating the following macroeconomic
  targets for MercosurChileBolivia 1) Fiscal
  Deficit of maximum 3 of GDP, with a 2002/3
  transition phase for Brazil of 3.5 2) A maximum
  public debt of 40 of GDP since 2010 3) Maximum
  inflation rate of 5 for the period 2002/5 and 4
  since 2006.
• To strengthen the credibility of the agreement it
  has to be passed into national laws, but
  previously agreed targets have to be reviewed,
  convergence schedules need to be designed for
  each country and enforcement mechanisms need to
  be created.

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Re-Launching of Mercosur
MACROECONOMIC CONVERGENCE

• 1 PHASE Macroeconomic Cooperation
• The regional Macroeconomic Coordination Agreement
  needs to be passed into national law
• Additionally, criteria should be set up to
  confront balance of payment crisis or serious
  macroeconomic unbalances in any Member State.
• Further progress is needed for harmonization of
  economic and statistical information.
• Creation of a consultative Economic Committee.
• 2PHASE Macroeconomic Coordination
• Comply with Macroeconomic convergence targets
  like in Maastricht.
• Move forward on harmonization or common criteria
  in indirect taxes and financial system regulation
  among others.

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Re-Launching of Mercosur
MERCOSUR VS. MAASTRICHT
It will be less difficult for Mercosur to comply
with the Maastricht criteria set for fiscal
deficit, but the convergence target for public
debt is tighter than in Maastricht (because of
higher interest rate and credit access
restrictions than in the European Union) and it
will have to be revised upwards given the high
levels of indebtness of some countries at present
(e.g. Argentina has a public debt ratio over GDP
well over 100 after devaluation)
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Re-Launching of Mercosur
INSTITUTIONAL FIELD

• Mercosur has a system of Ad Hoc Arbitral
  Tribunals for Dispute Resolution. It has been
  agreed in 2003 to create a stable Appeal Arbitral
  Tribunal. This is a positive decision because
• To promote the enforcement of the agreements.
• To increasingly settle trade conflicts by the
  rule of law.
• Trade conflicts could be progressively withdrawn
  from political negotiations
• To dissuade governments non compliance with the
  agreements (reputation incentives for governments)

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Re-Launching of Mercosur
MEDIUM AND LONG TERM ISSUES

• Open access to the public sector procurement and
  services markets of all the member countries.
• Infrastructure Development Program.
• Harmonization of investment incentives related to
  regional development.
• Cooperation Program in Science Technology.
• Strengthen the political alliance in foreign
  policy
• BUT MERCOSUR CAN ONLY COMPLEMENT AND NOT
• SUBSTITUTE FOR A SOUND DOMESTIC POLICY FRAMEWORK

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MERCOSUR AND FTAA DIFFERENCES IN THE MODELS OF
INTEGRATION

• The Mercosur seeks to constitute a Single Market
  (so called deep integration model) whereas the
  aim of FTAA (as in NAFTA) and of the Mercosur-EU
  agreement is the creation of a preferential Free
  Trade Area.
• The Mercosur is already an economic, commercial,
  geographical, juridical and political reality
  whereas the FTAA is for the present a project of
  preferential trade liberalization.
• The Mercosur is an Imperfect Customs Union and as
  such there exists the commitment of a common
  trade policy and of international negotiation as
  a block.
• In order for Mercosur to effectively negotiate as
  a block the widening of market access in the
  FTAA, with the European Union and WTO, it is
  necessary that it works properly.

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CHILE-USA FTA

• The Chile-US Free Trade Area Agreement (FTA)
  will delay its full membership in Mercosur.
  Although there will probably result some trade
  diversion costs affecting Mercosur exports to
  Chile and to the USA, the overall economic impact
  will not be very negative for Mercosur. This is
  so because
• . Mercosur has a FTA Agreement with Chile,
  which is not altered in any way by the Chile-USA
  FTA.
• Mercosur can gain a learning edge looking at the
  FTA agreement between Chile and USA , which may
  set a new or better standard for the FTAA or the
  Mercosur-USA Agreement.
• Chile is part of the Presidents Declaration made
  in Florianópolis in 2000 establishing a
  Macroeconomic Coordination Agreement in Mercosur.
  Chile can contribute significantly to its
  international credibility if it is finally passed
  into national laws and enforcement mechanisms are
  created.

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THE ASSOCIATION WITH THE FTAA AND THE EU ARE
COMPLEMENTARY PROJECTS TO THE MERCOSUR

• The FTAA, as well as the negotiation of a Free
  Trade Area with the European Union, are
  complementary projects with Mercosur because all
  entail preferential trade liberalization.
  Complementarity is accentuated intertemporarily.
• FTAA negotiations gained momentum with the Bush
  Administration and U.S. Congress approval of the
  TPA (Trade Promotion Authority).
• The static gains of trade creation for Argentina
  and Mercosur from tariff preferences in the FTAA
  can be modest
• Therefore, the FTAA must be more than an
  agreement of tariff preferences. The negotiations
  must include the elimination of non-tariff
  barriers, discipline on subsidies (including
  agricultural and agro-industrial sectors). If
  negotiations in open public procurement are
  undertaken should include not only at the federal
  but also the state level.
• The financing of development (e.g. for
  infrastructure and reallocation of resources)
  must be contemplated to facilitate the
  achievement of the dynamic benefits of
  integration to all Member States.
• The measure of the FTAA success will be its
  contribution to the convergence of income per
  capita levels among countries in the region and
  to the closing of the development gap

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Re-Launching of Mercosur
MERCOSUR AND THE STRENGTHENING OF CONFIDENCE AND
COMPETITIVENESS

• A major problem the region faces is that of
  investors confidence and credibility.
• This is due mainly to problems of fiscal solvency
  and competitiveness
• To help overcome them is necessary also to
  strengthen at the regional level the credibility
  of Mercosur, by implementing effectively a
  program for a single market (open to the rest of
  the world) and a macroeconomic coordination and
  convergence program.
• MERCOSUR MUST ACCELERATE ITS RE-LAUNCHING TO
  RE-GAIN COMPETITIVENESS AND CREDIBILITY FOR
  DOMESTIC AND FOREIGN INVESTORS, SO AS TO
  CONTRIBUTE TO PRODUCTIVITY GAINS AND LOWER
  INTEREST RATES AND THEREBY TO HIGHER INCOME
  LEVELS AND LIVING STANDARDS

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