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