Trends in Latin American
and Caribbean Integration
Edition No. 49
January - March 1997
Title MERCOSUR: Evaluation and Perspectives
Author Armando Di Filippo
Regional Advisor on Economic Integration and Cooperation, ECLAC
The opinions expressed in this article are solely of the author and do not reflect the Permanent Secretariat's position.
I. Introduction
The following article presents MERCOSUR's main characteristics and features. It examines the origins of the process whereby Argentina and Brazil were able to overcome their mutual disaccord and frictions in order to approve the Bilateral Common Market, and Paraguay's and Uruguay's later adherence to create MERCOSUR.
A brief description of MERCOSUR's institutional framework follows. The principle behind this framework is to avoid the creation of rigid and excessively bureaucratic bodies that do not originate from MERCOSUR's «real» growth.
The impressive strides made towards reciprocal trade liberalization, which culminated with the establishment of a common tariff, are then summarized.
The new position on foreign direct investment is considered with some detail. This is based on very liberal open policies even though an attempt is being made to reserve some preferential areas for intra-regional investments.
The fact that the Agreement, which favors economic issues, initially disregarded social matters is pointed out. However, the firm commitment to create a common market and an understanding of its effects on labor's international mobility, has resulted in an acknowledgment of the importance of social and labor issues and in the later revision of the Treaty.
Finally, MERCOSUR's position vis-à-vis the rest of ALADI member countries is examined, together with the strategic role it may play in the creation of a South American free trade area. Similarly, the importance of MERCOSUR's economic links with the European Union, its main trade and direct investment partner, is highlighted, together with the apparently favorable perspectives for the establishment of a free trade area between both integration schemes. This section concludes with a reference to the negotiating strategies followed in the USA's initiative to create a hemispheric free trade area and to MERCOSUR's initial positions on this issue.
In the general conclusions, a small intellectual exercise is attempted with a view to stimulating the debate. A distinction is made between unidimensional or strictly economic integration and multidimensional or deep integration. The first is represented by NAFTA, or its more ambitious version aimed at creating a hemispheric free trade area. Deep integration, which includes market liberalization between its members, is represented by the European Union and its enormous efforts and achievements. The strictly economic hemispheric integration heralded by the United States is an option compatible with some far-reaching integration efforts being attempted in South America.
MERCOSUR appears to be on its way towards a multidimensional and profound type of integration which, in the long term, could spread to South America as a whole.
II. MERCOSUR'S Origins
During Latin America's period of authoritarian military governments national security was the prevailing ideology. This hindered efforts to overcome distrust and frictions among bordering countries.
Argentina and Brazil have been rivals throughout history because of competing geopolitical and geoeconomic interests. Both countries aspired to become South America's leading power and attempted to consolidate their military supremacy in, for example, the nuclear energy field. However, already during the military regimes important steps were taken to deflate some conflicts. For example, on the issue of who was to have access to the Paraná River's hydroelectric power Argentina objected to the signing, in 1973, of the Itaipú Agreement between Brazil and Paraguay. The controversy was settled in 1979 with the signing of the Tripartite Corpus-Itaipú Agreement.
This greater cooperation mode intensified when constitutionally elected civil governments came into power in Argentina (1983) and Brazil (1985), and a new disposition toward peace and cooperation began to emerge. In 1985, Argentina's President Alfonsín and Brazil's President Sarney signed the Foz de Iguazú's Declaration in which they agreed to speed up bilateral integration efforts through the creation of a High Level Joint Commission.
Shortly thereafter, on July 1986 in Buenos Aires, the same two Presidents signed the Argentine-Brazilian Integration Act, which establishes the Economic Integration and Cooperation Program between Argentina and Brazil (known as EICP or ICPAB). During its first phase ICPAB approved twelve sectoral protocols. The Program placed much emphasis on the capital goods sector (Protocol 1), exploring the possibilities for within- industries complementation and for achieving balanced trade. Important agreements were also underwritten concerning wheat (Protocol 2, which improved Argentina's position in the Brazilian market), the iron and steel industry (Protocol 3) and foodstuffs (Protocol 23, which envisioned complementation efforts) and, above all, the automotive sector (Protocol 21, aimed at favoring reciprocal trade). With Protocol 13, ICPAB strengthened the existing cooperation on nuclear issues, a fact that had deep geopolitical meaning considering that these two countries had competed for hegemony in South America. In total, 24 protocols were signed.
In 1987 the implementation of the economic stabilization programs adopted by the two countries faced enormous difficulties, thereby increasing disagreements over the application of economic policies. In 1988 the growth rates of Argentina and Brazil reached -3% and 0% respectively. Nevertheless, in 1988 in Buenos Aires, both countries' Governments signed the Integration, Cooperation and Development Agreement aimed at creating a common market between the two countries. A period of ten years was agreed for the elimination of all trade and non-trade barriers between the two countries. The Treaty's second phase envisioned the gradual harmonization of policies needed to create a common market. In spite of the difficulties both countries faced, in 1988 bilateral trade grew by almost 20% sustaining a positive tendency the following three years.
With the change of government in both countries, Argentina's President Menem and Brazil's Collor de Mello signed in 1990 the Buenos Aires Act, aimed at moving the date for the creation of the common market to December 1994. During this period greater emphasis was placed on the use of trade liberalization mechanisms based on general tariff reductions, with limited exemptions' lists and stricter adherence to timetables. At the same time, government intervention in the sectoral agreements was scaled down. The neoliberal, open market approach began to take shape, particularly in Argentina.
At this point in the bilateral relation, it became evident that it was necessary to open up the agreement to two countries whose economic connection with Argentina and Brazil were of paramount importance: Uruguay and Paraguay. Uruguay's trade links with Argentina dated to 1974, when the Argentina-Uruguay Economic Complementation Agreement (AUECA) was signed; and its relations with Brazil to 1975, through the Trade Expansion Protocol (PEE) . Both countries had closely followed developments in Argentina-Brazil relations.
On September 1990, representatives from Argentina, Brazil, Paraguay and Uruguay met in Buenos Aires and agreed to undertake the necessary steps to negotiate a four-party agreement to replace the bilateral one. Finally, after further contacts, on March 26,1991, the Asunción Treaty was signed in Paraguay «for the creation of a common market between the Republic of Argentina, the Federal Republic of Brazil, the Republic of Paraguay and the Eastern Republic of Uruguay».
MERCOSUR encompasses a 200 million people market, that is, 44% of Latin America's population. Its Gross National Product is approximately $700 billion, 51% of the region's total. Its territory represents 59% of the regional area.
As the Treaty explicitly states, MERCOSUR's aim is to achieve deep integration through the free circulation of goods, services and production factors; the establishment of common external tariffs and a common trade policy, together with the coordination of positions in regional and international economic and trade fora; the coordination of macroeconomic and sectoral policies in the foreign trade, agricultural, industrial, fiscal, monetary, exchange rate and capital, services, customs, transportation and communications' fields; and the commitment by member states to harmonize their legislatures in relevant areas.
On the other hand, social and labor issues are not treated satisfactorily in the Treaty's regulations. Nevertheless, by stating its commitment to create a common market where all productive factors would enjoy free mobility and right of establishment, the treaty implicitly includes all social and labor issues. Similarly, the agenda approved in the Working Sub-Group No. 11, whose work it is to analyze labor relations, employment and social security, encompasses these issues. Even so, the Treaty's fundamentally economic character is highlighted by the fact that the Working Sub-Group No.11 was created in mid -1992, as a later addition to the other ten sub-groups established in 1991. Presently, this has been replaced by the Working Sub-Group No.10 which has similar responsibilities.
The Asunción Treaty was only the first step in the transition towards the establishment of the Common Market. Such transition ended on December 31, 1994. In order to ease the transition the Member States adopted a General Rule of Origins, a Disputes' Settlement Mechanism and a Safeguards Mechanism.
The transition phase concluded reasonably well and with the Ouro Preto Protocol, signed in 1994, a common external tariff that created an imperfect or flexible customs union was established thus mapping the road toward a better customs union. To this end, a so-called «adaptation regime» has been established to phase out some reciprocal tariffs still in force between the four countries. A timetable was also agreed for the elimination of some lists of exceptions to the common external tariff .
III. The Institutional Structure
The philosophy behind MERCOSUR's original institutional structure was to keep to the minimum the Treaty's rules and its constituent bodies. As opposed to the cumbersome institutional structures of other integration schemes such as ALADI or the Andean Pact, the idea was that the growth and complexity of the institutions would be determined by the «real» MERCOSUR's objective expansion . Such real MERCOSUR would emerge from the volume and intensity of reciprocal economic ties.
The four countries' Congresses ratified the Treaty within a very short period of time and practically without objections. The Treaty was then homologated before ALADI through the Economic Complementation Agreement No. 18, of January 21, 1992.
The Asunción Treaty established that, during the transition period, MERCOSUR's governing bodies were to be the following:
The Council (MC) is MERCOSUR's main body. It is responsible for providing political guidance and insuring that objectives are met. It meets at the Presidential level and at the level of Ministers of Economic and Foreign Affairs.
The Common Market Group (CMG) is the Agreement's executive body. Its members are ministerial representatives (Economy, Central Bank and Foreign Affairs) coordinated by each country's Foreign Ministry. It meets every three months while coordinators meet once a month. It operates in a simple and cost-effective manner, but it has proven to be very effective.
The Common Market Group's Administrative Secretariat has its headquarters in the city of Montevideo.
During the transition period, eleven Working Sub-Groups were also operating. These were in charge of studying trade and customs issues, technical rules, fiscal and monetary policies related to trade, land and maritime transportation, industrial and technology policies, agricultural policies, energy policies and the coordination of macroeconomic policies. As mentioned above, another sub-group in charge of studying labor relations, employment and social security was later added to these ten sub-groups. All of them mobilized hundreds of officials from diverse public administration bodies. Multiple actors from the academic and business world, as well as union representatives, technical experts from international and non-governmental organizations, all interrelate with the above groups.
After the Ouro Preto meeting the working groups were restructured and the following were created: Communications, Mining, Technical Reglamentations, Financial Issues, Transportation and Infrastructure, Environment, Industry, Agriculture, Energy, Labor Issues, Employment and Social Security. Additionally, meetings will be held on the issues of tourism and science and technology.
MERCOSUR also relies on a joint Parliamentary Commission comprised of representatives from the four national parliaments.
MERCOSUR's Industrial Council was created during the organization's first operational phase. Its members are Argentina's Industrial Union, Brazil's National Confederation of Industries, Paraguay's Industrial Union and Uruguay's Industrial Chamber. The Council's objective was to guide the dialogue between representatives of the business sector on integration issues of common interest, with emphasis on the issue of industrial competition. After the Ouro Preto meeting, this Council was replaced by the Economic and Social Consultation Forum.
Strictly speaking, a judicial body does not exist. Should controversies arise on the interpretation of the Asunción Treaty or on the fulfillment of its obligations, the system calls for obligatory ad-hoc arbitration. The rulings are also of a compulsory nature. It also protects the private sector from breach of legal commitments entered upon by MERCOSUR's Member States.
After the Ouro Preto meeting, MERCOSUR's Trade Commission (MTC)) and the Economic and Social Consultation Forum (ESCF) were added.
The Trade Commission covers the implementation of common trade policy mechanisms within MERCOSUR and vis-à-vis third countries. It has the power to establish technical committees which may gradually absorb the tasks assigned to the trade working groups. Also, the Disputes Settlement System falls under its jurisdiction.
The fact that such significant responsibilities have been assigned to the MTC reveals the importance of internal and external trade relations, particularly the consolidation of the common external tariff, during this stage of MERCOSUR's development.
On the other hand, activities related to the promotion of the common market, particularly the social issues this involves, have only began to be institutionalized through the creation of the Economic and Social Consultation Forum which engulfs MERCOSUR's Industrial Council. This consulting body represents the social and economic sectors and it will issue recommendations to be considered by the Common Market Group.
MERCOSUR's Administrative Secretariat (MAS), with headquarters in Montevideo, began operations on January 1, 1997. It is an international body within MERCOSUR, with structure and budget drawn from the four member countries and a Director appointed by the Common Market Council for a period of two years. MAS is MERCOSUR's official archives' depositary. It publishes MERCOSUR's Newsletter and takes care of the official translations into Spanish and Portuguese.
IV. Trade
A brief description of the boom in Latin America's reciprocal trade during the nineties will enable us to define South America's importance, particularly MERCOSUR's position within this process. Between 1990 and 1994 , total exports from Latin America and the Caribbean increased from $123 billion to $181 billion, approximately a 47% surge. During the same period, exports between Latin American and Caribbean countries went from $16 to $35 billion, increasing by approximately 118%.
Total exports from ALADI member countries escalated, during this period, from $ 111 to $ 207 billion, an 86% increase, while reciprocal exports increased by 130%. Their participation within total trade figures surged from 11% in 1990 to 17% in 1994.
Excluding Mexico, in 1994 South America's inter-regional exports as a percentage of total exports increased from 19% to 28%, while its exports to the USA decreased from 47% to 25% (ALADI figures). This discrepancy reflects the importance of Mexico's economy on global figures, and the fact that in 1994 only 4% of Mexican exports went to Latin American countries while 85% targeted the USA market. During the same period, the Central American Common Market's total exports grew by 75%, while exports to the region increased by 87%. Like Mexico, even though not quite, Central America's foreign trade is heavily dependent on the USA market, especially through the processing plants' areas and the maquiladoras that operate there. Mexico's trade dynamics, as well as that of Central American countries and the Caribbean, are very much dependent on the United States. Therefore, the intra-Latin American trade boom has occurred , basically, in South America.
Intra-South American trade depends, on the one hand, from the Andean countries' and MERCOSUR's performance and, on the other, from Chile who is not a full member of either integration scheme. During the 1991-1995 five year period, Andean Group countries' total exports increased from $27 to $40 billion, a 68% surge, while reciprocal exports grew by 167%. In 1991, the sub-region's reciprocal exports represented 6% of total exports and by 1995 they reached 12%. During the same period MERCOSUR's total exports grew from $46 to $72 billion, a 56% increase. Reciprocal trade flows, on the other hand, increased 210%. In 1991, exports between countries of the sub-region represented 11% of total exports and in 1995 they grew to 22%.
Therefore, the boom in intra-regional trade has occurred, basically, among MERCOSUR and Andean Group countries, with the addition of Chile whose contacts with MERCOSUR become closer by the day. Indeed, 22% of Chile's exports are to Latin America (1994) and during 1990-1994 these grew at a 22% annual rate (ECLAC, May 1996, Statistical Annex).
In view of these volumes, it is convenient to review briefly MERCOSUR's trade aspects during the transition period which began with the Asunción Treaty, and to glance at the new phase ushered in by the Ouro Preto Protocol.
Concerning the Treaty's trade clauses during the transition period, special reference should be made to the general system of rules of origins and to the trade liberalization program to which the signatory countries committed themselves firmly from the beginning .Other issues, such as the common external tariff, the coordination of macroeconomic policies and the approval of sectoral agreements required further negotiations.
The trade liberalization program was particularly broad and comprehensive. It established progressive, lineal and automatic tariff reductions, together with the removal of any other type of non-tariff barrier or similar measure. The commitment to end 1994 with a zero tariff and full trade liberalization has been reasonably met. The lists of exceptions were also subjected to a calendar of automatic, 20% annual reduction of tariffs , beginning December 31,1990.
The safeguard clauses on trade issues were designed to enter into force should imports surge greatly over a very short period of time. Such clauses do not limit the volume of total imports but only the quota subject to tariff preferences; the remainder may be imported subject to regular tariffs.
Sectoral agreements tend to strengthen intra-sectoral industrial trade within the integration process, but cannot invalidate any existing trade liberalization clause. At present their extension to Paraguay and Uruguay is being considered.
On the other hand, it should be mentioned that all trade preferences agreed upon between MERCOSUR's member states and other non-member countries were to cease after December 31, 1994. However, that date has been postponed several times in order to grant MERCOSUR more time for the new negotiations in which it participates as a bloc.
As of January 1995, the common external tariff was approved with a 0 to 20% range and an 11% average. It includes the lists of national exceptions and the basic convergence lists for the capital and informatics and telecommunication sectors. Exceptions represent 12% of the tariff system.
A 14% maximum tariff was established for capital goods, with ascending and descending convergencies (depending on whether previous tariffs were below or above such limit), with a 2001 time limit for Argentina and Brazil and 2006 for Paraguay and Uruguay. The common external tariff for informatics and telecommunications goods was set at a 16% maximum, with convergencies to be met by the year 2006.
Regarding the free trade internal area among member countries, lists of products subject to import tariffs during a definite period of time were agreed upon. Tariffs on the products included in these lists, less than 10% of total trade, will be reduced annually until their complete elimination . The time span is four years for Argentina and Brazil and five years for Uruguay and Paraguay. This system is called System of Final Adaptation to the Tariff Union, and annual reductions start from the nominal rate in force in each country on August 5, 1994.
It should be pointed out that the adaptation system does not authorize levying higher tariffs on products from MERCOSUR than those levied on products from other countries. On this issue, the common external tariff operates as a ceiling.
The future of MERCOSUR's trade will depend on the strengthening of trade between industries. This will afford the group's smaller and economically weaker countries the opportunity to participate in a more balanced fashion. In trade between Argentina and Brazil, the manufacturing goods that have registered the most dynamic growth rate are: foodstuffs, chemical products and machinery and transportation equipments.
Between 60% and 70% of transnational firms' investments in Argentina and Brazil are in these products' industries. Therefore, trade in these goods has three major characteristics: it is the most dynamic; it occurs, to a great extent, between industries, and it receives a very high percentage of all foreign investments in Argentina and Brazil (Di Filippo,1994).
V. Foreign Direct Investment
During the 1990-1994 period MERCOSUR received a total of $20.4 billion in direct investment flows. This represents 44.3% of the $46 billion Latin America received from Europe, the United States and Japan (IDB-IRELA, 1996). If we exclude Mexico, the percentage of foreign investment that entered MERCOSUR increases to 63.1% of total flows.
Of MERCOSUR's foreign direct investment flows during this period 24.8%originated from Europe (23.5% from the European Union), 71.4% from the United States and 3.8% from Japan.
As for intra-regional investments within Latin America as a whole, figures indicate that they represent from less than 1% to more than 10% of total foreign direct investment flows. The importance of such investments within the total received is illustrated by Argentina's and Brazil's case. In 1992, 12.2% of Argentina's total foreign investment flows originated from the region, reaching a total of $1.8 billion. In 1994, Brazil received from the region $0.3 billion in foreign investments, with half a percentage point of total stock entered on that date.
We will now summarize briefly MERCOSUR's guidelines regulating foreign direct investment flows. Two protocols regulate the treatment of foreign investment. The first refers to investments originating in non-MERCOSUR countries, the second to member states.
The Protocol on the Promotion and Protection of Investments originating in non-MERCOSUR countries states that these capital flows will not receive a treatment more favorable than that established by such protocol. Therefore, each party will not grant third countries more benefits or rights than those established by the Protocol's regulations.
In its substantive section the Protocol states that each member state will grant such investments full protection and a treatment no less favorable than that granted to local investments (national treatment) or to investments originating from other countries (most favored nation treatment).
However, investors from third countries will not benefit from any preferential treatment or privilege resulting from MERCOSUR member countries' participation in or association to a free trade area, customs union, common market or any similar regional agreement. Thus, a global preferential environment is created for any type of integration agreement in which MERCOSUR member countries participate either individually or as a group. Investors from non-MERCOSUR countries will also be excluded from international taxation agreements of which they are not signatories.
In summary, this Protocol addresses two major preoccupations. The first is to insure that no member state grants preferences that discriminate against other MERCOSUR members' rights or interests, in its eagerness to attract direct foreign investment. The second is to reserve for MERCOSUR members an area of special preferences granted within the framework of MERCOSUR's integration agreements as well as other agreements in which it participates. Third countries are not to have access to these preferences. To insure that these objectives are met, Article Three of the Protocol provides that «Member States agree to exchange information on future and ongoing negotiations on investments' promotion and reciprocal protection agreements with third countries, and will consult with each other before introducing any substantial modification to the general treatment agreed in Article Two of the present Protocol».
On the other hand, the Protocol for the Promotion and Reciprocal Protection of Investments in MERCOSUR states that «each Contracting Party will promote investments from other Contracting Parties and will allow them into its territory under conditions no less favorable than those granted to their own investors ( national treatment) or to third countries' investments (most favored nation treatment). This will not curtail each Party's right to temporarily retain limited exceptions on some of the sectors included in this Protocol's Annex».
As opposed to the Protocol on Investments Originating from Non-Member Countries, this one authorizes and, in a certain way, encourages member countries to grant more favorable preferential treatments. Indeed, Article 7 states that «when a Contracting Party's legal provisions or the international law obligations that are currently in force or may be established in the future, or an agreement between a Contracting Party's investor and the receiving Contracting Party, contain guidelines which grant investments a more favorable treatment that that established by the present Protocol, these guidelines will prevail over the present Protocol to the extent that they are more favorable».
In summary, the guidelines that regulate investments from outside MERCOSUR grant maximum preferences that may not be exceeded by member countries. On the other hand, the guidelines on investments from within the area grant minimum preferences that may be extended by each member country.
Also, MERCOSUR has a preferential system concerning joint enterprises. It was established by the Statute on Bi-National Enterprises signed on June 6, 1990 by Argentina and Brazil. Bi-national enterprises are those in which : i ) 80% of the capital and votes belong to national investors from Brazil or Argentina, thereby granting them real and effective control over the firm; ii) each national investor holds at least 30% of the capital ; and iii) national investors from each country have the right to elect at least one member of each of the firm's administrative and inspecting bodies.
Bi-national firms may engage in any economic activity allowed by the receiving country's laws and will adopt any of the legal formats approved by that country's legislations.
Amongst other preferences, bi-national firms will be granted: i) the same treatment granted or that may be granted to national capital firms, even if the majority of the social capital should belong to investors from the other country; ii) the above-mentioned «national treatment», which will cover local taxes; access to local credit; access to national, regional or sectoral promotion incentives; and access to public sector's purchases; iii) priority treatment for the goods and services they produce. This will be equal to that granted to local firms in the implementation by both governments of bilateral initiatives introduced during the economic integration and cooperation process; iv) the same treatment for their branches and subsidiaries; and v) the right to freely transfer profits from their investment to their country of origin, after due payment of taxes, and to repatriate their share of social capital in accordance with each country's legal regulations . The same holds true for their branches and subsidiaries.
Another set of rules favors business agreements within the sub-region. This is Decision 3, approved on December 1991 by MERCOSUR's Council, regarding the terms of reference for sectoral agreements. As for the Decision's legal standing, suffice to point out that the Council is MERCOSUR's supreme body. Its role is to guide the Agreements' policies for the fulfillment of the objectives set forth in the Treaty of Asunción.
The said Decision regulates sectoral agreements. Its main objective is to facilitate integration among each country's sectors by promoting rationalization and complementation between markets and associations in order to compete efficiently within MERCOSUR and in other markets. The Decision also deals with environment's conservation and improvement issues, as well as with research and development in the field of products' and processing technology. The Decision'regulations cover different types of business associations, such as consortia, mergers and acquisitions, mixed ventures and others. (COSTA, 1993).
VI. The Social-Labor Dimension
As already mentioned, the Asunción Treaty did not fully incorporate social and labor issues into its guidelines. The issues of migrations and other labor issues were incorporated only by implication, as offshoots of future labor mobilizations resulting from the strengthening of the common market. However, very soon this situation was corrected and these issues began to be incorporated in the Treaty's guidelines.
On May 1991, just three months after the signing of the Asunción Treaty, the Labor Ministers from MERCOSUR member countries met in Montevideo. In the Declaration issued, they acknowledged the need to pay attention to MERCOSUR's labor and social issues in order for integration to improve labor conditions within the Treaty's signatory countries. On the same date, the creation of Working Sub-Group Nº 11 was announced. This began operations by mid-1992.
The Ministers also accepted the possibility of studying the endorsement, within the Asunción Treaty, of «an instrument dealing with the unavoidable labor and social issues that will derive from the implementation of the Common Market of the South» Finally, they agreed to lend each other «all the cooperation needed in order to exchange information on each other's rules concerning employment, social security, professional training and individual and collective labor relations». Within the context of these commitments, on June 26, 1992, the Working Sub-Group Nº 11 for the Study of Labor Relations, Employment and Social Security, was formally established in Las Leñas. Following the Ouro Preto meeting, this sub-group became No. 10 and was restructured as to the issues it would cover.
Given the stage of integration within MERCOSUR , the labor issues that have received privileged attention so far are those stemming from the establishment of a free trade area or a customs union. Of particular concern is how labor costs (salaries plus additional benefits) bear on the relative competitivity of member countries, at the national, sectoral and business levels. This issue, by the way, has also been a cause of concern among developed countries in their trade agreements with developing countries. Witness, for example, the protocols on labor and the environment promoted by the United Stated within NAFTA.
Labor and social security problems will be detected with greater precision only as MERCOSUR's economic integration strengthens. The issues of adaptation, coordination and harmonization of labor, and social security policies will gain greater momentum as progress toward the common market brings them naturally to the negotiating table. The same thing will happen with the review of migration policies or the comparative study of employment structures, recognition of academic degrees or the right to practice liberal professions in another member country.
As progress is made toward the creation of a free market where production factors and people circulate freely, the need will be felt, increasingly, for the establishment of a «social space» in which a minimum platform of rights and guarantees for MERCOSUR's peoples is honored. On this issue, the adoption of a Multilateral Agreement on Social Security, the drafting of which is well advanced, is being put on the fast track.
VII. Relations with Countries from Outside the Sub-Region
Let us review briefly MERCOSUR's relations with countries from outside the sub-region, differentiating between those from Latin America, the hemisphere and outside the region .
The South American countries with the most dynamic and important ties with MERCOSUR are Chile and Bolivia. During the current nineties, Chile's and Argentina's trade, investment and physical integration ties have grown enormously. MERCOSUR countries have indicated to Chile that it would be welcomed into the group. However, MERCOSUR's common external tariff, which fluctuates between 0% and 20% with an 11.3% average, is an important obstacle to Chile's full membership. This country's common external tariff is set at the single 11% level . Another obstacle has been the Chilean economy's greater stability compared with that of its neighbors who are still struggling to achieve internal stability. Nevertheless, de facto integration between Argentina and Chile has reached such a high level that fluctuations in the first country's economy are felt in that of the second. Chile's investments in MERCOSUR and its physical integration with Argentina ( highways, tunnels, railways, gas pipes, etc.), are increasingly strong. Chile's geographical position as transit route for MERCOSUR's economic relations with the Asia Pacific countries grant it strategic importance within the group. Therefore, even though it has not decided whether to join fully or not, Chile did decide to negotiate with MERCOSUR to preserve the trade preferences it had obtained and to work toward a comprehensive agreement covering services, investments and physical integration.
On June 1996, the Chile-MERCOSUR Agreement was signed, in spite of opposition from some internal sectors. Businessmen from the traditional agricultural sectors (wheat, corn, rice, etc.), in particular, have protested vehemently against the terms of the negotiations which set a definite timetable for them to improve their competitivity in these products or reconvert. In spite of protests, the Chilean Government stood by its decision, with the support of the industrial chambers of commerce. Chile's decision to associate itself with MERCOSUR (even if not fully) gained momentum following the delays and doubts regarding its participation in the North American Free Trade Area.
Even though Bolivia is an Andean Group member, its trade relations with MERCOSUR, particularly with Argentina and Brazil, are very important. On December 1995, Bolivia signed its first agreement with MERCOSUR, on the so-called «historical heritage» (previously granted concessions). Presently, the second negotiating round on a Free Trade Agreement with MERCOSUR has been concluded. Even though Bolivia is a full member of the Andean Community its trade and investment interests are very much divided, at the regional level, between the Andean Community and MERCOSUR. This poses keen strategic dilemmas for the Bolivian Government as to how to reconcile its position as an Andean country with its economic interests with MERCOSUR.
Bolivia's signing of the Free Trade Agreement renders its full membership within the Andean Community compatible with a preferential access to MERCOSUR. If Bolivia were to become a full member of MERCOSUR, it would have to renounce its affiliation with the Andean Community since MERCOSUR prohibits its members from belonging to any other sub-regional agreement. .
In the Ouro Preto Protocol reference is made to resuming the negotiations on the partial agreements signed by MERCOSUR countries with other ALADI members. The aim is to progress toward the articulation and convergence of existing agreements.
As a way toward convergence, MERCOSUR suggests an approximation to the rest of South American countries based on Brazil's 1993 proposal to create a South American Free Trade Area. At the same time, negotiations are under way between MERCOSUR and the Andean Community to create a free trade area between both integration schemes. Should this second alternative come to fruition, a decisive step will have been taken in the network of negotiations needed to create a South American free trade area.
Reference must also be made to hemispheric relations. Following the December 1994 Miami Summit Meeting, the Denver Ministerial Meeting took place in mid- 1995. Its objective was to initiate the process toward the creation of a hemispheric free trade area by the year 2005.
On that occasion, MERCOSUR proposed the creation of five working groups in those areas where the beginnings of an agreement were underway (market access, investments, trade measures, customs procedures and technical guidelines). The United States, on the other hand, proposed the creation of eleven working groups including environmental and social issues. Finally, seven working groups were created dealing with: market access, investments, subsidies and trade sanctions, customs procedures and rules of origin, sanitary and phyto-sanitary measures and technical guidelines.
On March 21,1996, the Second Ministerial Meeting on Trade took place in Cartagena de Indias. The mood at the meeting was less enthusiastic than on previous occasions. This was due, in part, to some frictions or stumbling blocks in the United States' relations with several Latin American and Caribbean nations (to which we will return later) and, partly, to the hardening of MERCOSUR's negotiating position under the leadership, in this case, of Brazil.
One of the Ministerial Meeting's few concrete results was the creation of four more working groups: Government Procurement, Intellectual Property Rights, Trade in Services and Competition Policies. Nevertheless, the Meeting did not succeed in defining a minimum framework of terms of reference to initiate negotiations, at least in some sectors, toward the 1997 Ministerial Meeting to be held in Brazil. It was precisely Brazil's representation who pointed out the danger of taking «shortcuts» that might unduly speed up the creation of a Free Trade Area for the Americas , to the detriment of other commitments included in the timetables adopted by subregional integration agreements or the World Trade Organization. In summary, it is Brazil's position, supported by other MERCOSUR members, that hemispheric integration must be achieved through the strengthening and convergence of sub-regional agreements, and not through the adoption of new commitments which supersede those already approved at the sub-regional level and at the WTO level.
The increasing incorporation of new countries to NAFTA met with serious stumbling blocks during 1995, when the USA Congress denied the Executive the approval of the fast track for the negotiation of new trade agreements. This thwarted (or, to the least, postponed ) Chile's joining of NAFTA. Also, throughout 1995 and 1996, several frictions and difficulties arose in United States' relations with NAFTA members and other Latin American countries. Mexico's economic crisis following the devaluation of the Peso (tequilazo) created uncertainty and friction between this country and the USA. Moreover, the tightening of the United States' embargo on Cuba was criticized not only by other Latin American countries but also by Canada, a member of NAFTA and an important investor in that Caribbean country. Finally, the so-called «de-certification» of Colombia also caused frictions with this country. These developments, together with the strengthening of isolationist tendencies opposed to Latinos' migration to the USA, have altered the environment of hemispheric relations, to the detriment of the objectives set forth at the Denver Summit. However, lately the Democratic Administration has began to voice an interest in strengthening hemispheric integration efforts. Be that as it may, this political option still meets with strong internal political opposition.
It should be pointed out that NAFTA's participation in total MERCOSUR exports has decreased from 23.6% in 1990, to 16.9% in 1995 (IDB,1995).
MERCOSUR's relations with the European Union have strengthened considerably. Relations between both blocs began in April 1991, when MERCOSUR's Ministers of Foreign Affairs formally notified the European Commission of the creation of the new Sub-Regional Agreement. On May 1991, a Join Consultation Committee was established to provide technical assistance and institutional support from the EU to MERCOSUR. The idea of creating a free trade area between both blocs began to develop between 1994 and 1995. On December 1994, a memorandum of understanding was signed, aimed at liberalizing reciprocal trade, intensifying social and economic ties between both regions and bolstering European Union's technical and financial support to MERCOSUR.
The Inter-Regional European Union-MERCOSUR Trade and Economic Cooperation Framework Agreement was signed on December 15,1995, in Madrid. It is the first inter-regional agreement signed by two customs unions based on the principle of reciprocity. This covers a wide range of commitments on trade and other economic issues as well as cultural and political issues.
The Agreement is based on the signatory parties' respect for democratic principles and for the fundamental human rights embodied in the Universal Declaration on Human Rights. Among other issues, the parties agree to: i) increase and diversify their trade flows; ii) promote economic cooperation in order to strengthen their international competitiveness and stimulate technological and scientific development; iii) support MERCOSUR's integration objectives; iv) seek closer cooperation between their respective institutional structures; v) strengthen cooperation ties on the issues of training, education and culture ; fight drug traffic, etc.
As for the institutional structure, the Agreement creates a Cooperation Council responsible for supervising its developments. It is formed by members of the European Union' Council and Commission, on the one hand, and by members of MERCOSUR's Council and Common Market Group, on the other. This Cooperation Council will be assisted by a Joint Committee which will meet at least once a year, in Brussels and, alternatingly, one of MERCOSUR's member countries. The Joint Committee met for the first time in Brussels and was presided by President Carlos Menem, as Argentina held MERCOSUR's pro-tempore presidency at the time.
A process has thus began aimed at creating a free trade area by the beginning of the next century. To this end, a Joint Trade Sub-Commission was established in order to single out, with the assistance of several working groups, «sensible» products and prepare the agenda for the creation of the future free trade area. On November 1996, the Joint Trade Sub-Committee met for the first time in Brazil. The European Union' Common Agricultural Policy is the main difficulty that will have to be faced on the subject of trade liberalization.
It must be pointed out that the EU is MERCOSUR's main trade partner. MERCOSUR's trade relations with the EU are more important than its relations with the United States. Approximately 27% of MERCOSUR's trade is with the EU, compared with 17% with the USA. Similarly, MERCOSUR is the recipient of approximately 70% of European Union's investments in Latin America. Also the majority of MERCOSUR's direct investment stock, 36%, originates from the EU, compared with 32% from the USA. These numbers differ from those for Latin America as a whole. The region's trade data indicate a closer relationship with the USA due, partly, to Mexico's and Venezuela's (to a lesser extent) close trade links with their Northern neighbor. However, the volume of investment originating from the USA during the nineties is much higher than that of investment from the European Union, which would seem to indicate a relative weakening of economic ties with the EU, compared with the United States.
VIII. Conclusions
The growing liberalization of hemispheric trade may possibly lead to «economic» Pan-American integration under USA leadership. Similarly, and much more probable, that integration process will occur between the United States and its immediate sphere of influence in Latin America, that is, Mexico, Central America and the Caribbean.
On the other hand, the profound integration process between Latin American and Caribbean countries will probably polarize them into two regions: South America on the hand and Central America, Mexico and the Caribbean on the other. The first such deep integration area would take shape around Brazil, the second around Mexico. The latter, however, would be subordinated to the United States market and, probably, would join NAFTA.
Finally, MERCOSUR's strategic role in South America's future integration explains the interest in an analysis of this integration scheme. The Argentina-Brazil axis generates a gravitational force which will pull along other South American countries. Brazil is the strategically decisive actor in South America's socioeconomic integration.
An economic integration agreement between Brazil and its South American neighbors -only Chile and Ecuador do not share a border with Brazil- through MERCOSUR requires the latters' full participation in order to balance Brazil's productive and negotiating power and to avoid creating a market area that mirrors the center-periphery type of relationship. Such scenario, improbable yet not impossible, would spoil the opportunity to turn South America's integration into an adventure amongst equals, the aim of which is shared development.
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