Power and Regionalism in Latin America: The Politics of MERCOSUR (ND Kellogg Inst Int'l Studies) (Kellogg Institute Series on Democracy and Development) [1 ed.] 0268029857, 9780268029852

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P o w er a nd R eg io na li s m in Latin Ameri ca

RECE NT T IT LE S F ROM T HE HE L EN K EL LO G G I N S T I T UT E F OR INT E R NAT ION A L S T UD I ES Scott Mainwaring, series editor The University of Notre Dame Press gratefully thanks the Helen Kellogg Institute for International Studies for its support in the publication of titles in this series. Leah Anne Carroll Violent Democratization: Social Movements, Elites, and Politics in Colombia’s Rural War Zones, 1984–2008 (2011) Timothy J. Power and Matthew M. Taylor, eds. Corruption and Democracy in Brazil: The Strug gle for Accountability (2011) Ana María Bejarano Precarious Democracies: Understanding Regime Stability and Change in Colombia and Venezuela (2011) Carlos Guevara Mann Political Careers, Corruption, and Impunity: Panama’s Assembly, 1984–2009 (2011) Gabriela Ippolito-O’Donnell The Right to the City: Popular Contention in Contemporary Buenos Aires (2012) Susan Fitzpatrick-Behrens The Maryknoll Catholic Mission in Peru, 1943–1989: Transnational Faith and Transformation (2012) Barry S. Levitt Power in the Balance: Presidents, Parties, and Legislatures in Peru and Beyond (2012) Sérgio Buarque de Holanda Roots of Brazil (2012) José Murilo de Carvalho The Formation of Souls: Imagery of the Republic in Brazil (2012) Douglas Chalmers and Scott Mainwaring, eds. Problems Confronting Contemporary Democracies: Essays in Honor of Alfred Stepan (2012) Peter K. Spink, Peter M. Ward, and Robert H. Wilson, eds. Metropolitan Governance in the Federalist Americas: Strategies for Equitable and Integrated Development (2012) Natasha Borges Sugiyama Diffusion of Good Government: Social Sector Reforms in Brazil (2012) Ignacio Walker; translated by Krystin Krause, Holly Bird, and Scott Mainwaring Democracy in Latin America: Between Hope and Despair (2013) For a complete list of titles from the Helen Kellogg Institute for International Studies, see http://www.undpress.nd.edu

P o w e r an d R e g ion al ism in L at in A me ric a T he Po l i t ics of MERCOS U R

L au r a G ó m e z - ­M e r a

University of Notre Dame Press Notre Dame, Indiana

Copyright © 2013 by the University of Notre Dame Press Notre Dame, Indiana 46556 www.undpress.nd.edu All Rights Reserved Manufactured in the United States of America Library of Congress Cataloging-in-Publication Data Gómez Mera, Maria Laura, 1975– Power and regionalism in Latin America : the politics of MERCOSUR / Laura Gómez-Mera. pages cm. — (From the Helen Kellogg Institute for International Studies) Includes bibliographical references and index. ISBN-13: 978-0-268-02985-2 (pbk. : alk. paper) ISBN-10: 0-268-02985-7 (pbk. : alk. paper) ISBN: 978-0-268-08074-7 (web pdf) 1. Southern Cone of South America—Economic integration 2. MERCOSUR (Organization) 3. South America—Economic integration. I. Title. HC167.S67G66 2013 337.1'8—dc23 2013000466 ∞

durability of the Committee on Production Guidelines for Book Longevity of the Council on Library Resources.

To my parents, Isabel and Juan

Contents



List of Tables

ix



List of Figures

xi



List of Abbreviations

xiii



Acknowledgments

xvii

one

Introduction 1

two

Patterns of Conflict and Cooperation in the Southern Cone 13

three

Systemic Incentives, Domestic Constraints, and Regional Cooperation: A Neoclassical Realist Approach 36

four

The Automobile Sector Crisis 61

five

The Footwear Industry Dispute 95

six

Failure to Relaunch: The 2001 Conflict 125

seven

A Narrow Escape: Toward a More Flexible MERCOSUR 157

eight

Conclusions: Power, Domestic Politics, and Regional Order 197



Appendix A. Interviews

225



Appendix B. Chronology of Patterns of Cooperation and Conflict in MERCOSUR, 1991–2010

229

Notes

233



256

Works Cited

Index

276

Tables

2.1

Unilateral and Negotiated Measures Restricting Argentina-­Brazil Trade, 1991–2009 17

2.2

Evolution of the Quality of Cooperation in MERCOSUR, 1991–2009 22

2.3

Evolution of Hegemonic Leadership in MERCOSUR (Brazil), 1991–2008 28

3.1

Summary of Research Design 59

4.1

Brazilian Imports of Automobiles, 1991–95 71

4.2

Measures of Economic Power and Interdependence, 1995 83

4.3

Argentine Automobile Exports, 1990–95 84

4.4

Explaining the Automobile Sector Crisis 91

5.1

Evolution of the Argentine Footwear Sector, 1991–2000 101

5.2

Argentina: Import Penetration of Brazilian Footwear, 1991–99 104

5.3

Argentina: Selected Macroeconomic Indicators, 1991–99 107

5.4

Brazilian Footwear Exports by Main Destinations, 1998–2000 111

5.5

Brazil: Main Footwear-­Producing States, 1998 113

5.6

Asymmetries in Economic Power, 1998 119 ix

x Tables 5.7

Export Interdependence between Argentina and Brazil, 1995–98 119

5.8

Export Interdependence between Argentina and Brazil in the Footwear Sector, 1995–98 120

5.9

Explaining the Footwear Industry Dispute 122

6.1

Argentina-­Brazil Bilateral Trade Balance in Manufactured Goods, 1991–2003 133

6.2

Argentina: Selected Macroeconomic Indicators, 1998–2001 136

6.3

MERCOSUR: Economic Asymmetries, 1991–2002 150

6.4

MERCOSUR: Export Dependence on Regional Market, 1991–2002 151

6.5

Explaining the 2001 Crisis 154

7.1

Negotiated Restrictions in Sensitive Sectors, 2004–9 160

7.2

Argentina’s Textile Imports by Product, 2004–6 169

7.3

Explaining Patterns of Conflict and Cooperation after the Argentine Crisis 194

Figures

2.1

Trade Encapsulation in MERCOSUR, 1991–2011 16

2.2

Crisis Index for MERCOSUR, 1991–2009 20

3.1

Analytical Framework 46

3.2

Hypothetical Scenarios 48

5.1

Argentina’s Footwear Imports from Brazil, 1991–99 103

7.1

Argentina’s Textile Imports from Brazil, 1998–2007 168

7.2

Argentina’s Imports of Home Appliances from Brazil, 1996–2005 171

7.3

Brazilian Imports of Wine from Argentina, 1998–2004 175

8.1

Domestic Factors and Regional Cooperation in MERCOSUR 207

xi

Abbreviations

ABICALÇADOS Associação Brasileira das Indústrias de Calçados ABIMAQ

Associação Brasileira da Indústria de Máquinas e Equipamentos

ABINEE

Associação Brasileira da Indústria Elétrica e Eletrônica

ABIT

Associação Brasileira da Indústria Têxtil e de Confecção

ACARA

Asociación de Concesionarios de la República Argentina

ADEBIM

Associação de Empresas Brasileiras para a Integração de Mercados

ADEFA

Asociación de Fábricas de Automotores

AFTA

ASEAN Free Trade Area (see ASEAN below)

ALADI

Asociación Latinoamericana de Integración

ALBA

Alternativa Bolivariana para América Latina

ANFAVEA

Associação Nacional dos Fabricantes de Veículos Automotores

APEC

Asia-­Pacific Economic Cooperation

ARF

ASEAN Regional Forum (see ASEAN below)

ASEAN

Association of Southeast Asian Nations

ASSINTECAL

Associação Brasileira de Empresas de Componentes para Couro, Calçados e Artefatos xiii

xiv Abbreviations CAFAEMEH

Cámara de Fabricantes de Aparatos Eléctricos y Mecánicos para el Hogar

CAFAGAS

Cámara de Fabricantes de Artefactos de Gas

CAIA

Cámara Argentina de la Industria Autopartista

CAIRAA

Cámara Argentina de Industrias de Refrigeración y Aire Acondicionado

CAM

Competitive Adaptation Mechanism

CAMEX

Câmara de Comércio Exterior

CAPCICA

Cámara de Producción y Comercio Internacional de Calzado

CEAL

Consejo Empresarial de América Latina

CEI

Centro de Economía Internacional

CEP

Centro de Estudios para la Producción

CET

common external tariff

CGT

Confederación General del Trabajo

CIC

Cámara de la Industria del Calzado

CICB

Centro das Industrias de Curtumes de Brasil

CIESP

Centro das Indústrias do Estado de São Paulo

CIFARA

Cámara Industrial de Fabricantes de Automotores, Repuestos y Afines

CMC

Consejo del Mercado Común

GMC

Grupo del Mercado Común

CNCE

Comisión Nacional de Comercio Exterior

CNI

Confederação Nacional da Indústria

ELETROS

Associação Nacional de Fabricantes de Produtos Eletroeletrônicos

EU

European Union

FEDEHOGAR Federación de Cámaras Industriales de Artefactos para el Hogar FIESP

Federação das Indústrias do Estado de São Paulo

FIRJAN

Federação das Indústrias do Estado de Rio de Janeiro

Abbreviations xv FITA

Federación Argentina de Industrias Textiles

FTAA

Free Trade Area of the Americas

G-­20

Group of 20

GCC

Gulf Cooperation Council

IBRAVIN

Instituto Brasileiro do Vinho

IEDI

Instituto de Estudos para o Desenvolvimento Industrial

IDB

Inter-­American Development Bank

IIRSA

Iniciativa para la Integración de la Infrastructura Regional Sudamericana

INTAL

Instituto para la Integración de América Latina y el Caribe

MERCOSUR

Mercado Común del Sur (Southern Common Market)

NAFTA

North American Free Trade Agreement

PICE

Programa de Integración y Cooperación Económica

SAARC

South Asian Association for Regional Cooperation

SACN

South American Community of Nations

SACU

South African Customs Union

SADC

Southern Africa Development Community

SADCC

Southern Africa Development Coordinating Conference

SECEX

Secretaria de Comércio Exterior

SINDIPEÇAS

Sindicato Nacional da Indústria de Componentes para Veículos Automotores

SMATA

Sindicato de Mecánicos y Afines del Transporte Automotor

TRIMS

trade-­related investment measures

UIA

Unión Industrial Argentina

UN

United Nations

UNCTAD

United Nations Conference on Trade and Development

UNASUR

Unión de Naciones Suramericanas (Union of South American Nations)

UOM

Unión de Obreros Metalúrgicos

USTR

United States Trade Representative

xvi Abbreviations UVA

Unión Vitivinícola Argentina

UVIBRA

União Brasileira de Vitivinicultura

VER

voluntary export restraint

WTO

World Trade Organization

Acknowledgments

This book is the culmination of almost a decade of research and work on the political economy of MERCOSUR and Argentine-­Brazilian relations. Over the course of this project, I have benefited from the support of a large number of people and academic institutions in the United Kingdom, the United States, Argentina, and Brazil. I am particularly grateful to Andrew Hurrell, my dissertation advisor at Oxford University, for his intellectual guidance and generosity in the early stages of this project. His work inspired my interest in International Relations theory and influenced not only this book but also my long-­term development as a scholar and as a teacher. St. Antony’s College and the Latin American Center at Oxford provided a stimulating environment as well as funding for field research in Argentina and Brazil. I am also grateful to the Institute of Latin American Studies at Columbia University, for welcoming me as a visiting scholar during my years in New York City. Many earlier drafts of the empirical chapters were written in the second floor of the Butler library, one of my favorite spots in the world to work. In Brazil, I am indebted to Carlos Pio, for hosting me at the Universidade de Brasília and for his valuable guidance while I conducted my first round of interviews with Brazilian policy makers. I was also very fortunate to have my dear friend Flavia Fiorucci hosting me in São Paulo during my several research trips. Both in Brazil and in Argentina, I conducted almost a hundred interviews with diplomats, policy makers, xvii

xviii Acknowledgments

business and labor representatives, and academics, many of which are cited or listed in this book. Their contribution to this project is invaluable. I thank them for taking the time to share their knowledge and views with me. I am also grateful to my colleagues and graduate students at the University of Miami (UM). This book would not have materialized without the constant encouragement and support of my academic mentor and good friend Bill Smith, who read and commented on countless drafts of the entire manuscript. I don’t have enough words to thank him for his excellent feedback, his great generosity, and for believing in me and in my project. I want to also thank my former colleague at UM, Felipe Agüero, who also read several drafts of the manuscript and offered brilliant suggestions and kind words of encouragement. In addition, I have been very fortunate to receive invaluable feedback from colleagues and scholars who read parts of the manuscript at its different stages, including Andrés Malamud, Andrea Oelsner, Sean Burges, Richard Feinberg, Carol Wise, and Mario Carranza. My biggest debt of gratitude is with my family and my wonderful friends in Buenos Aires, Miami, New York, Oxford, and London, for their everlasting support and encouragement during this long process. Jason P. was by my side at almost every step of this long journey, ensuring I never got bored or considered giving up. Special thanks go to my parents, Isabel and Juan, and to my brother Pablo. Apart from their patience and love, the three of them provided research and logistical support at various times during the project. I dedicate this book to my parents, whose kindness and dedication has been and will always be my main source of inspiration.

  Chapter 2 incorporates some material from my “Domestic Constraints on Regional Cooperation: Explaining Trade Conflict in MERCOSUR,” Review of International Political Economy 16 (5) (2009): 746–77, used by permission of Taylor and Francis. Chapter 4 incorporates some material from my “Macroeconomic Concerns and Intrastate Bargains: Explaining Illiberal Policies in the Brazilian Automobile Sector,” Latin American Politics and Society 49 (1) (2007): 113–40, used by permission of John Wiley & Sons.

Chapter one

Introduction

How should we think about world politics after the end of the cold war, after the breakup of the Soviet Union, after the September 11 attacks, with the onset of the War on terror? My answer is simple: ours is a world of regions.  —­Katzenstein 2005

Regions have gained centrality in the post–September 11 international system. As a result, students of international and comparative politics have turned to the growing role of emerging regional powers, such as Russia, China, India, and Brazil, in the face of the alleged decline in American hegemony. But what exactly is the role of these regional powers and emerging global players in the construction and maintenance of international and regional orders? To what extent and in what ways does the still preponderant role of the United States affect the prospects for cooperation at the regional level? And how relevant are domestic 1

2  Power and Regionalism in Latin America

political factors in shaping regional dynamics in a context of pervasive power asymmetries? This book addresses these theoretical questions by focusing on the dilemmas of conflict and cooperation facing Brazil and Argentina in the Southern Common Market (MERCOSUR), the fourth largest trade bloc in the world. MERCOSUR presents a fascinating case to probe the links between regional orders and global and rising regional powers, like the United States and Brazil. In contrast to other regional cooperation schemes, such as the European Union or the North American Free Trade Agreement (NAFTA), stable collaboration in the Southern Cone has been elusive. After a promising start in the early 1990s, MERCOSUR’s economic and institutional relevance has been eroding. Toward the end of the decade, the recurrence of commercial and diplomatic conflict within the bloc led many to predict its demise. Contrary to these pessimistic forecasts, however, partners intervened repeatedly to ensure the bloc’s survival. In the early 2000s, MERCOSUR was “relaunched” several times, as member states reaffirmed their strategic and political commitment to the regional project. In addition, in the past few years intrabloc conflict has noticeably declined in frequency and intensity and intraregional trade has recovered considerably. And yet a closer look at recent developments in the Southern Cone suggests that the problems that undermined the quality and stability of cooperation in the 1990s persist. As trade friction has continued in the last decade, diplomatic tension among MERCOSUR partners has deepened, and strategic dissonance has grown. Even though a regional parliament was created and the dispute settlement mechanism was strengthened, the effectiveness and relevance of these regional bodies remains dubious. For some, MERCOSUR is currently little more than a “fractious” and “unsteady” political alliance.1 These perceptions were reinforced by the recent and controversial admission of Venezuela into the bloc as a full member, made possible by the suspension of Paraguay.2 Nevertheless, the twenty-­year-­old bloc continues to feature prominently in the foreign policy agendas and discourse of governments in the region, particularly of Brazil and Argentina.3 The erratic nature of regional dynamics in South America holds considerable interest for International Relations (IR) scholars focusing on

Introduction 3

regionalism and interstate cooperation. Indeed, MERCOSUR’s on­going problems have generated a lively debate on the prospects for its survival.4 So-­called Merco-­pessimists emphasize the cyclical nature of the crisis within the bloc and its declining economic and strategic rationale, questioning its long-­term sustainability.5 “Merco-­optimists,” in contrast, point to the significant progress partners have made in liberalizing trade and coordinating positions in international negotiations. From this perspective, despite periodic commercial friction, MERCOSUR’s endurance is guaranteed by a convergence of strategic and economic interests among member states.6 Both positions shed light on different aspects of MERCOSUR’s evolution. However, by conceptualizing outcomes in such narrow terms—­ failure and collapse versus success and resilience—­this literature provides an oversimplified account of the dynamics of cooperation in the Southern Cone. This book, therefore, adopts a broader perspective to argue that the main puzzle lies in the contradictory mix of conflict and cooperation that can be observed in MERCOSUR almost since its inception. What explains these unstable patterns of conflict and cooperation? What are the main constraints on the stability and depth of South American economic and political integration? And what explains the survival of the bloc, despite its decreasing economic and institutional relevance? Conventional accounts of the disappointing evolution of South American regionalism typically focus on the pervasiveness of economic asymmetries among countries in the region, the weakness of regional institutions, and/or Brazil’s unwillingness to act as an underwriter of regional cooperation. In this book, I offer an alternative explanation that, in line with neoclassical realist approaches in IR, emphasizes the tension and interplay between interstate power asymmetries, on the one hand, and domestic politics, on the other. I argue that while external vulnerability and overlapping power asymmetries have provided strong and consistent incentives for regional cooperation in the Southern Cone, the impact of these systemic forces on regional outcomes has been crucially mediated by domestic political dynamics. In the short and medium term, domestic political forces intervene to weaken systemic incentives for cooperation. In the longer term, however, these domestic-­level constraints have been

4  Power and Regionalism in Latin America

offset by systemic incentives for cooperation, thus ensuring the survival of MERCOSUR. My argument is illustrated with case studies of four instances of “crisis” or heightened tension in commercial and political relations between the bloc’s two main partners, Argentina and Brazil: the 1995 automobile crisis; the 1999 footwear industry dispute; the 2001 conflict over the external tariff on capital goods; and the post-­2003 attempts to deal with trade in three of the so-­called sensitive sectors, namely, textiles, home appliances, and wine. The first three conflicts were triggered by unilateral restrictions, imposed by either Brazil or Argentina. In contrast, more recent friction over the sensitive sectors led to the negotiation of “voluntary” restrictions. The structured analytical narrative comparing bilateral tensions in these sectors is particularly useful for understanding the complex ways in which international and domestic political dynamics have interacted to shape patterns of conflict and cooperation in the Southern Cone over the last two decades.

Regions and Regionalism in World Politics

This book draws on and contributes to a rich body of literature that focuses on the politics of economic regionalism.7 The revival of regional economic cooperation in the aftermath of the Second World War generated considerable scholarly interest in the causes and consequences of this cooperation. Much of the early research, however, concentrated solely on the economic aspects of this phenomenon, neglecting its crucial political implications. Although the emerging literature on European integration did acknowledge the centrality of political and security considerations driving this process, it paid little attention to the various cases of regional economic integration in the developing world. In contrast, in the last two decades there has emerged an extensive body of work on the political economy of regionalism in Europe and beyond (e.g., Fawcett and Hurrell 1995; Mansfield and Milner 1997; Solingen 1998; Acharya and Johnston 2007; Duina 2006). Fueled by the impressive proliferation of regional trade agreements since end of the Cold War, this more recent literature implicitly and explicitly

Introduction 5

acknowledges that “economic factors alone are insufficient to explain regionalism’s causes and consequences and that political factors are centrally important” (Mansfield and Solingen 2010, 145). Indeed, recent research by scholars of IR and comparative politics has shed considerable light on the complex ways in which international and domestic political dynamics shape patterns of regional economic cooperation in the post–Cold War international system. Two specific literatures within this broader research program are particularly relevant for the present study of MERCOSUR: IR work on powers and regions and political economy analyses of regional trade agreements. Realist IR scholars have emphasized the multifaceted links between interstate power dynamics and the construction and evolution of regional economic and security institutions. One argument focuses on the role of regional powers. Some view the existence of a preponderant state that is willing and able to act as an underwriter of regional norms and institutions as a necessary condition for successful cooperation (Mattli 1999; Pedersen 2002; Kupchan 1998). A second group of scholars have challenged these claims, arguing that a highly asymmetric distribution of intraregional power could result in weak regional institutions that fail to restrain opportunistic behavior by the strongest players. Another group of scholars have pointed to the importance of considering the role of both regional and extra-­regional powers. Katzenstein (2005), for example, argues that the power and preferences of the United States critically influenced the timing and nature of regionalism in Europe and East Asia.8 The core powers in each region, namely Germany and Japan, played an important role in reflecting and translating American power and purpose at the regional level. Alternatively, powerful actors outside a region may also create incentives for weaker states to create “defensive” regional groupings aimed at counterbalancing the preponderance and influence of more powerful states (Acharya 2007). A third, alternative line of research has paid greater attention to the role of domestic political and economic factors in regional cooperation, focusing primarily on preferential trading arrangements. Drawing on more general arguments on the domestic sources of foreign economic policy, this literature has examined the ways in which domestic interests and institutions influence the decision by states to join regional

6  Power and Regionalism in Latin America

trade agreements. This work typically highlights the domestic distributional implications of regional trade liberalization strategies, explaining national preferences and choices for commercial integration in reference to the demands of domestic interest groups (Grossman and Helpman 1995; Milner 1997b; Moravcsik 1998; etc.). This literature has also examined the role of state preferences and institutions in mediating and aggregating societal interests into policy outcomes (Haggard 1997; Mansfield, Milner, and Pevehouse 2007). Solingen (1998; 1999), for example, emphasizes the role of political leaders in brokering state-­society coalitions that support or oppose internationalization and regional cooperation. Though the IR and political economy literatures have offered important theoretical insights into the politics of regionalism, they have been quite limited in their empirical focus. Indeed, much of this work has concentrated on the European integration process and, to a lesser extent, on the North American and East Asian cases. Other regional cooperation initiatives in the developing world have received surprisingly limited attention. There is also a conspicuous dearth of research on comparative regionalism, with much of the empirical work seeking to explain why states choose to follow regional trade strategies and to create regional institutions, with little attention paid to the uneven performance of many of these initiatives.9 This book contributes to filling this lacuna in the extant literature. By focusing on the unstable and underexamined case of MERCOSUR, it not only broadens the empirical focus of the existing literature on comparative regionalism, but also adds to our understanding of the factors conditioning the evolution and durability of regional cooperation. Concomitantly, this study of the political economy of South American regionalism is meant to help fill a void in the predominantly economic literature on MERCOSUR.

Central Arguments

To account for the unstable evolution of regional cooperation in the Southern Cone, this book advances an explanation that emphasizes the tension between systemic imperatives and domestic political constraints

Introduction 7

faced by the bloc’s two largest partners, Argentina and Brazil. The central argument is twofold. First, the overlapping dynamics of asymmetric power at the regional, hemispheric, and global levels have fundamentally shaped patterns of regional cooperation among Southern Cone countries. The creation and maintenance of MERCOSUR has been to a great extent a defensive strategic response by South American countries confronted by the highly asymmetric distribution of power in the international system. A shared sense of external vulnerability among countries in the region has facilitated the converging of their interests in preserving MERCOSUR as a vehicle for increasing leverage in the international system. Indeed, the book illuminates the important role that extraregional threats have played in directly and indirectly fostering regional cooperation in the Southern Cone. The evolution of South American regionalism has simultaneously been conditioned by the large disparities of power within the region, and particularly, by Brazil’s preponderance. Brazil’s posture toward MERCOSUR has been marked by an ongoing tension between offensive incentives for cooperation and ambivalence about assuming a leadership role. On the one hand, Brazil has consistently viewed MERCOSUR as a key instrument for consolidating its position as a regional power and as a rele­vant global player. These power-­related interests have underpinned Brazilian foreign policy elites’ concern with defusing diplomatic tension and ensuring the maintenance of regional integration. On the other hand, Brazil has been reluctant to play a more active role in the construction and maintenance of regional institutions, thus breeding mistrust and distributional conflict within the bloc. Brazil’s strategic ambivalence about its role as regional power has had a complex effect on MERCOSUR, ultimately contributing to its inertial survival. External vulnerability and power considerations are thus central factors in the analysis of South American regionalism. However, an exclusive focus on systemic imperatives is insufficient to account for the contradictory patterns of conflict and cooperation observed since the 1990s. My second central contention is that the impact of these external pressures on regional dynamics has been crucially mediated by domestic political factors. In the short and medium terms, domestic interests and institutions have constrained and undermined cooperation in MERCOSUR

8  Power and Regionalism in Latin America

in different ways. The somewhat unexpected survival of MERCOSUR suggests that, so far, enduring systemic incentives for cooperation have prevailed over these domestic-­level constraints. Yet a careful examination of the process of domestic decision making through which these international pressures are filtered and transmitted into regional policy choices and outcomes is crucial to understand the erratic nature of regional cooperation in the Southern Cone. Beyond merely claiming that both international and domestic political factors matter in MERCOSUR, I investigate the specific mechanisms through which these forces interact to shape regional outcomes. In line with neoclassical realist approaches in IR, the book’s analytical framework illuminates the various processes through which domestic politics block, deflect, or attenuate systemic incentives for cooperation. Specifically, my neoclassical realist explanation emphasizes three principal domestic constraints on collaboration. Societal pressures and the economic and political calculations of national policy makers, the first two constraints, explain the recurrence of unilateral defection and conflict within the bloc. The third constraint, stemming from the lack of coordination among different actors within the state sharing power over regional cooperation issues, further undermines the coherence of member states’ regional commitments. Contrary to prevailing interpretations of the origins of conflict and opportunistic behavior, my argument gives pride of place to the preferences and coalition-­building efforts of state actors and to the role that domestic political institutions play in conditioning decisions over regional trade cooperation. The balance among these systemic and domestic-­level influences has fluctuated significantly over time and across member states. Indeed, in the last half-­decade international and regional distributions of power have change in important ways, with a significant increase in the regional and global salience of Brazil, and a relative decline in US influence in South America. Venezuela’s decision to join the bloc as a full member, while not yet fully implemented, has also affected interbloc dynamics of power. In addition, constellations of institutions and domestic interests within each country have evolved in consequential ways. The book explores how these shifts in systemic and domestic-­level factors have influenced patterns of conflict and cooperation in MERCOSUR.

Introduction 9

The focus on Argentine-­Brazilian relations in explaining patterns of conflict and cooperation in the four-­(and soon to be five-­) member MERCOSUR project needs justification. It is in no way intended to suggest that the smaller partners, Uruguay and Paraguay, are irrelevant in the dynamics of conflict and cooperation within the Southern Cone. Clearly, an erosion of their support and commitment to the bloc would endanger its sustainability and seriously modify the trade-­offs faced by the largest members. Consequently, the argument here is not that Argentine and Brazilian preferences and choices have completely determined the nature of regionalism in the Southern Cone, but that they constitute a central element. The two larger countries not only have played the fundamental role in the establishment of MERCOSUR, but also were the main protagonists of the most salient instances of commercial and diplomatic conflict in the history of the bloc. Indeed, despite the increasing rele­ vance of tension between smaller and larger partners, the recurring spats between Argentina and Brazil have undoubtedly constituted the main source of uncertainty regarding the bloc’s sustainability. Similarly, the two largest partners led initiatives to “relaunch” the regional project in 2000, 2001, and 2003. In this sense, focusing on their bilateral strategic and commercial relation illuminates central aspects of the functioning and survival of institutionalized cooperation in the Southern Cone.

Analytical Framework

The analytical framework developed in this book to explain specific instances of conflict and cooperation in the Southern Cone combines insights from power-­centric (or realist) IR theories and domestic political economy approaches to trade policy making. In emphasizing the articulation of systemic incentives and domestic political factors, this approach is consistent with recent “neoclassical realist” approaches to foreign policy (Sterling-­Folker 1997; Rose 1998; Schweller 2006; Lobell, Ripsman, and Taliaferro 2009). Neoclassical realism shares the neorealist emphasis on the centrality of the distribution of international power in explaining the foreign policy behavior of states. For neoclassical realists, however, the impact of relative power capabilities on foreign policy choices is not as

10  Power and Regionalism in Latin America

direct and straightforward as structural realists tend to assume. Instead, the effect of power asymmetries is “complex and indirect because systemic pressures must be translated through intervening variables at the unit level” (Rose 1998, 146). Thus, understanding the ways in which states respond to the constraints and opportunities of the international system requires looking at how these are mediated by domestic politics. The diplomatic, military, and international economic policies that leaders pursue result from a process of bargaining and contestation among domestic state and nonstate actors (Lobell, Ripsman, and Taliaferro 2009). While all neoclassical realists agree that domestic factors filter and refract systemic pressures in shaping policy outcomes, they diverge with regard to the specific internal factors that they emphasize. Some scholars, such as Wohlforth (1993), focus on policy makers’ perceptions and interpretations of the relative power position of their countries. Others, such as Zakaria (1998), Schweller (1998; 2006), and Lobell (2009), examine the impact of domestic political institutions and state-­society relations on the capacity of states to respond to systemic incentives. Schweller (2006), for example, argues that three domestic-­level intervening variables—­degree of elite consensus, social cohesion, and regime vulnerability—­condition the extent to which states act in accordance with balance-­of-­power theory predictions. More specifically, he contends that seemingly incoherent states “often cannot balance against threats . . . because they are constrained by domestic political considerations” (Schweller 2006, 68).10 The book’s analytical framework incorporates some of the fundamental insights of this literature and applies them to the study of international economic cooperation. Consistent with neoclassical realist explanations, I argue that external vulnerability and relative power considerations have played a central role in driving cooperation among MERCOSUR partners. However, in the short term, domestic political factors frequently intervene to block or weaken external incentives for cooperation, causing recurring conflict. To identify and illuminate which domestic political dynamics have been more relevant in MERCOSUR countries, I draw on the political economy literature on trade policy making. Borrowing from some of this work (e.g., Moravcsik 1998; Lake 1988; Krasner 1978), I propose a framework that disaggregates the state

Introduction 11

and explains national preferences and choices for regional integration as the result of the interaction and balance of power in the executive branch of the state, focusing specifically on the foreign policy executive, the economic team, and the relevant sectoral agencies. I assume that systemic pressures and power considerations critically shape the preferences of the foreign policy executive for cooperation. These state actors thus act as crucial links between the international and domestic levels of analysis. By contrast, the positions of other state actors regarding cooperation are shaped primarily by domestic political and economic considerations. Applying this framework to the study of four moments of conflict in a number of different sectors in MERCOSUR, I demonstrate that the recurrent instances of conflict in the bloc have reflected not only societal pressure but also the macroeconomic and political calculations of national policy makers. Tension among different state agencies sharing power over regional policy making has further undermined the coherence of member states’ behavior toward their regional commitments. Nevertheless, the ability of the pro-­cooperation foreign policy elite to prevail in intrabureaucratic discussions, as well as strong presidential commitment to the regional cooperation project, has consistently resulted in the successful management of political and diplomatic, if not commercial, tension between partners. Thus, in the longer run systemic imperatives prevail over domestic political considerations, thus ensuring the maintenance of political—­if not economic—­cooperation.

Plan of the Book

The book is organized as follows. Chapter 2 provides an overview of the evolution of regional cooperation in the Southern Cone since the early 1990s, showing that there has been considerable instability in trade and diplomatic relations among MERCOSUR partners. This chapter then discusses the usefulness of existing theoretical approaches to the study of international cooperation and argues that none is by itself sufficient to account for the erratic patterns observed in MERCOSUR. Chapter 3 elaborates an analytical framework based on neoclassical realism. This model combines insights from neorealism and domestic political

12  Power and Regionalism in Latin America

economy explanations. It disaggregates the process of regional cooperation into two sequential stages: (1) the formation of national preferences for/against cooperation, and (2) the distributional outcome of the negotiations among member states. Chapters 4 to 7 deploy this framework in the analysis of the origins, management, and resolution of trade disputes between Argentina and Brazil between 1995 and 2011. Chapters 4, 5, and 6 examine bilateral disputes over automobiles, footwear products, and the common external tariff. Chapter 7 focuses on the more recent and ongoing attempts by Argentina and Brazil to deal with three “sensitive sectors”—­textiles, home appliances, and wine—­that have been a primary source of bilateral frictions since the late 1990s. Each case study provides a brief overview of the conflict and analyzes the process through which international and domestic political factors interact to shape national preferences and positions during the dispute, as well as the distributional outcome of the conflict. Finally, chapter 8 summarizes the book’s main empirical findings and discusses their broader implications for ongoing debates on the prospects for the survival of MERCOSUR, and on Brazil’s role as a regional and global power.

Chapter two

Patterns of Conflict and Cooperation in the Southern Cone

A puzzling combination of conflict and cooperation has characterized Argentine-­ Brazilian commercial and diplomatic relations since the 1990s. What explains these erratic and unsteady dynamics of regional cooperation? In answering this question, we will consider four competing theoretical approaches to regional cooperation, which focus, respectively, on the role of international institutions, the role of interstate power asymmetries, the role of globalization, and the role of domestic politics. I argue that none of these explanations is, by itself, sufficient to account for the unstable patterns of conflict and cooperation in MERCOSUR, nor for the bloc’s current inertia. Understanding regional cooperation dynamics in the Southern Cone, I argue, requires a two-­level approach that integrates insights from both systemic and domestic explanations. This analytical framework is developed in chapter 3. 13

14  Power and Regionalism in Latin America Origins and Evolution of Regionalism in South America

The origins of regional trade cooperation in the Southern Cone can be traced back to the Argentine-­Brazilian rapprochement initiated in the late 1970s. The signing of a number of nuclear nonproliferation agreements and the successful resolution of the dispute over the Itapú and Corpus dams in 1979 marked a significant shift away from historical mistrust and rivalry.1 However, the two nations did not effectively begin to institutionalize security and economic links between them until democracy was reestablished in both countries in the mid-­1980s. In 1986 Argentine president Raúl Alfonsín and his Brazilian counterpart, José Sarney, signed the Argentine-­Brazilian Integration Act, which established the Economic Integration and Cooperation Program (PICE). The agreement consisted of a number of bilateral protocols aimed at promoting balanced trade integration between the two countries in a number of key sectors. The PICE was followed by the Treaty of Integration and Cooperation in 1988 and by the Treaty of Integration, Cooperation, and Development in 1989, which envisaged the creation of a free-­trade area between the two countries. A series of confidence-­building measures aimed at further reducing nuclear and military tensions were also introduced during this period. However, further progress in the integration process was hindered by the domestic economic crises confronted by the two partners. The reinvigoration of bilateral cooperation, after its stagnation in the late 1980s, was led by the administrations of Carlos Menem (1989–99) in Argentina and Fernando Collor de Mello (1990–92) in Brazil. The two new presidents introduced substantive methodological changes in the integration, broadening its scope and accelerating its pace (Rozemberg and Svarzman 2002). In July 1990 they signed the Buenos Aires Act, which called for the establishment of a common market by the end of 1994. Collor and Menem also took significant steps toward strengthening security cooperation, explicitly agreeing to give up nuclear weapons in the Declaration on Common Nuclear Policy and establishing mutual verification and inspection procedures (Solingen 1998; Lafer 2000). In 1991, the two partners invited smaller neighbors Uruguay and Paraguay to join them in the creation of MERCOSUR. The Treaty of Asunción, which formally gave birth to the South American trade bloc, constituted a major shift away from the sector-­by-­sector approach of the PICE in favor

Patterns of Conflict and Cooperation in the Southern Cone   15

of a program of automatic tariff reduction (Manzetti 1994). Under this trade liberalization program, tariffs were progressively reduced, according to a predetermined schedule. The unprecedented commitment of members to the implementation of this tariff reduction program resulted in a dramatic increase in levels of trade interdependence within the bloc. By January 1995, MERCOSUR partners had also managed to agree on a common external tariff, turning the bloc into a customs union.2 However, this momentum proved hard to sustain. The second half of the decade saw a progressive deterioration in the quality of economic and political cooperation within the bloc. The increasing difficulties confronted by MERCOSUR are clear in light of the evolution of three indicators: (1) levels of economic interdependence within the bloc, and in particular, patterns of intraregional trade; (2) the extent of partners’ compliance with the agreements they signed; and (3) levels of commercial and diplomatic tension among members. First, both intra-­and extra-­MERCOSUR trade grew rapidly between 1991 and 1997, as partners embarked in a simultaneous unilateral and regional trade liberalization. Moreover, during the first half of the decade, partners began trading more among themselves than with the rest of the world. This resulted in an impressive increase in levels of “trade encapsulation,” which is measured in terms of the value of intrabloc trade as a percentage of the value of total trade conducted by all members (Figure 2.1).3 Indeed, both exports and imports among members continued to grow, albeit at a lower rate, until 1998. Trade encapsulation declined markedly between 1998 and 1999 and continued to contract until reaching a low of 11.7 percent in 2002. After 2003, however, regional trade recovered steadily, with intrabloc trade flows more than doubling in 2003–5 (IDB 2007). Nevertheless, in 2007 intrabloc exports as a proportion of total exports (trade encapsulation) remained well below its value in the late 1990s (IDB 2008). Intrabloc and extrabloc exports continued to expand until the outbreak of the international financial crisis in September 2008. MERCOSUR’s exports slowed rapidly in the last quarter of 2008 and contracted during the first half of 2009 (IDB 2009; 2010). Trade flows in the bloc nevertheless recovered significantly in 2010, with trade encapsulation reaching 15.7 percent. As levels of commercial interdependence declined in the late 1990s and early 2000s, the gap in compliance and implementation of regional

Chapter 2

16  Power and Regionalism in Latin America Figure 2.1. Trade Encapsulation in MERCOSUR, 1991–2011* Figure 2.1.  Trade Encapsulation in MERCOSUR, 1991–2011* 30  

25   20   15   10  

2011

2010

2009

2008

2006

2007

2005

2004

2003

2002

2001

2000

1999

1998

1996

1997

1995

1994

1993

1992

1991

0  

1990

5  

*Intrabloc exports as a percentage of total exports. Data for 2011 is for first semester. Source: Author’s calculations based on data from the Centro de Economía Internacional (CEI) *Intrabloc exports as a percentage of total exports. Data for 2011 is for first semester. and IDB.

Source: Author’s calculations based on data from the Centro de Economía Internacional (CEI) and IDB.

agreements widened, and commercial and diplomatic friction among partners increased markedly (Bouzas 2001). With increasing frequency during this period, national governments defected from regional commitments by imposing restrictions on intraregional trade and/or introducing unilateral changes in the common external tariff. While some of these unilateral violations were largely inconsequential, several of the measures established after 1995 triggered intense commercial and diplomatic crises. Table 2.1 presents the most consequential unilateral measures by the bloc’s two main partners, Argentina and Brazil, between 1991 and 2009. The fifth column of the table provides a measure of the level of tension generated by each of these violations.4 I then used this tension coefficient to construct a simple “crisis index,” which aggregates the number of tension-­weighted unilateral measures for each year, thus capturing the evolution in these two dimensions of cooperation—­compliance and tension.5 Figure 2.2 shows that the crisis reached a high point in 1995, after Brazil defected from automobile

Sector and Product

All Paper IT, telecom. & capital goods Dairy – milk Automobiles Various Automobiles Sugar Pork meat Textiles Iron & steel Various Footwear Rice Garlic Paper Various Sugar Poultry Rice

Year

1992 1993 1993 1995 1995 1997 1997 1997 1998 1999 1999 1999 1999 1999 1999 1999 2000 2000 2000 2001

Increase in statistical tax Quotas Change in external tariff Change in external tariff Quotas, incentives, etc. Import financing requirements Subsidies Tariff Subsidies Quotas Antidumping duty Safeguards system Labeling requirements Technical restrictions Technical regulations and licenses Quotas Nonautomatic licenses Extension of special regime Antidumping measures Import ban

Measures

Table 2.1.  Unilateral and Negotiated Measures Restricting Argentina-­Brazil Trade, 1991–2009

Argentina Argentina Argentina Brazil Brazil Brazil Brazil Argentina Brazil Argentina Argentina Argentina Argentina Brazil Brazil Argentina Brazil Argentina Argentina Brazil

Adopted by 1 1 1 0.5 6 1.5 2 2 3 4 2 4 4 2 1.5 0.5 2 4 4 1

Tension

VA VA VA VB− VB− VB− VB VA VB VB CA VB VB− CB VB VA VB VA VA VA

Distributional Outcome*

Sector and Product

Capital goods IT goods Dairy – powdered milk Wheat Various Household appliances (white line) TV sets Household appliances Textiles – cotton & denim fabrics Textiles – acrylic yarns Footwear Footwear Textiles – household linen Polyethylene terephthalate resin Household appliances – washing machines TV sets Wooden panels Wine Dairy – powdered milk Wheat – flour

Year

2001 2001 2001 2002 2003 2004 2004 2004 2004 2004 2004 2005 2005 2005 2005 2005 2005 2005 2005 2005

Change in CET Change in CET Minimum price Distortive export taxes Domestic taxes Nonautomatic licenses Tariffs Quotas – VER Quotas – VER Quotas – VER Quotas – VER Quotas – VER Floor prices and quotas – VER Antidumping duty Quotas – VER Quotas – VER Quotas – VER Floor prices – VER Floor prices – VER Export tax – VER

Measures Argentina Argentina Brazil Argentina Brazil Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Brazil Argentina Argentina Argentina Brazil Brazil Brazil

Adopted by

Table 2.1.  Unilateral and Negotiated Measures Restricting Argentina-­Brazil Trade, 1991–2009 (continued )

4 3 0.5 1 1 1.5 1.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Tension

VA− VB VB VA VB CA CA VA− VA− VA− VA− VA− VA VB VA VA VB VB VB VB

Distributional Outcome*

Wheat – premixed wheat Wheat – flour Textiles – clothing Textiles – cotton & denim fabrics Textiles – household linen Paper Iron & steel tubes Tires Tractors Textiles – acrylic yarns Textiles – clothing Wooden furniture Wooden furniture Footwear Footwear Perishable fruit (apples & pears) Garlic Wheat flour Dairy – powdered milk Dairy – powdered milk

Export tax – VER Technical requirements Nonautomatic licenses Quotas – VER Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Quota – VER Nonautomatic licenses Quota – VER Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Nonautomatic licenses Quota – VER

Brazil Brazil Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Brazil Brazil Brazil Brazil Brazil

0.5 0.5 1 0.5 0.5 1 0.5 0.5 0.5 0.5 0.5 0.5 0.5 1 0.5 0.5 0.5 0.5 1 0.5

VB VB VA VA− VA VA VA VA VA VA VA VA VA− VA VA− VB VB VB VB VB−

*VB = Outcome unambiguously favored Brazil; VB− = Outcome favored Brazil, but Argentina was granted compensatory concessions; VA = Outcome unambiguously favored Argentina; VA− = Outcome favored Argentina, but Brazil was granted compensatory concessions; CA = Compromise in which Argentina received greater concessions; CB = Compromise in which Brazil received greater concessions. Sources: IDB (2000); Rozemberg and Svarzman (2002); IDB (2007); official documents; reports from the MERCOSUR Secretariat; systematic examination of press reports (from main newspapers in Argentina and Brazil); and interviews with policy makers and business representatives from both countries.

2005 2006 2007 2008 2008 2008 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009

20  Power and Regionalism in Latin America

Figure 2.2. Crisis Index for MERCOSUR, 1991–2009 Figure 2.2.  Crisis Index for MERCOSUR, 1991–2009 18 16

Restrictions

14

Crisis index

12 10 8 6 4 2 0 1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Source: Author’s calculations based on data from Table 2.1.

Source: Author’s calculations based on data from Table 2.1.

agreements signed with Argentina in December 1994, and that the crisis increased progressively after 1996 to a peak in 1999, following the Brazilian currency devaluation. From January 1999 to June 2000 bilateral conflict was almost constant. Attempts to defuse tension and to “relaunch” the project in July 2000 would prove short-­lived, as Argentina defected again in 2001, triggering another peak in tension. The crisis remained intense until 2002, when the severity of the Argentine financial collapse led the Brazilian government to grant its weakened partner a number of temporary concessions. Despite repeated efforts by both governments to emphasize their enduring commitment to the regional project, during 2003 the economic integration came to a virtual standstill. The recovery in regional trade levels following the rebound of the Argentine economy led in 2004 to renewed sectoral friction. Yet these more recent controversies can be characterized as “qualitatively low-­ intensity, with weak media and political repercussion” (IDB 2008, 61). Despite persisting trade imbalances, partners managed to contain commercial and diplomatic tension through bilateral consultations within the Bilateral Trade Monitoring Commission, which resulted in

Patterns of Conflict and Cooperation in the Southern Cone   21

the negotiation of a number of voluntary export restraint agreements. Although, in practice, these measures also were incompatible with regional agreements, they can be seen as more cooperative solutions than the imposition of unilateral restrictions that were so frequent in previous years. Although partners agreed in 2006 to the establishment of a safeguards mechanism of sorts—­the Competitive Adaptation Mechanism (CAM)—­this instrument was never implemented. After a period of relative harmony, trade tensions between the two countries resurfaced in 2009 in the context of the international economic crisis. Once again, Argentina relied quite heavily on import control measures, including minimum prices for imports and nonautomatic licenses. In some sensitive sectors, such as footwear, textiles, and household appliances, the practice of negotiating private-­level voluntary agreements continued. The last column of Table 2.1 focuses on a different dimension of international conflict: its distributional aspect. Even while sharing convergent interests in the resolution of regional controversies, states may be affected in uneven ways by the terms of their settlement. In other words, the outcomes of international negotiations often have distributional considerations among participants. In order to capture the distributional outcome of the different disputes triggered by the measures listed in Table 2.1 I use a scale that classifies each outcome relative to the initial positions of the two states.6 I assume that a dispute may end in a diplomatic victory for one country and a defeat for the other, or in a compromise. Compromises may be balanced, reflecting both partners’ interests, or they may be unbalanced and biased toward one of the two sides. I code each outcome as a “strong victory” for one state (VA for Argentina and VB for Brazil) and a defeat for the other in two situations: either if this state is able to maintain its unilateral violation without making any type of concession or side-­payment to the other side, or if this state is able to persuade the defecting state to reverse the unilateral measure triggering the dispute and offers no concessions in return. Weak victories (VA− and VB−) are those situations in which the partner dominating the settlement is forced to grant compensation to the defeated partner in order to maintain its unilateral measure (or to get the other side to reverse a violation). Compromises are those outcomes that involve an exchange of concessions among partners, allowing both sides to achieve at least part

22  Power and Regionalism in Latin America

of their initial goals. They typically involve significant compensation of the less favored partner.7 Based on the evolution of these indicators, we can identify four different phases in the regional cooperation in the Southern Cone. The first phase, between 1991 and 1994, was characterized by growing trade interdependence, few significant unilateral violations, and very low levels of diplomatic tension among partners. In the second period, 1995 to 1998, trade interdependence was still growing but at a slower rate, and there was a decline in compliance, as evidenced by an increasing number of unilateral measures by both partners. In addition, some of these measures resulted in severe disputes, as evidenced by the significant increase in the crisis indicator (see Table 2.2). In contrast, the third phase was characterized by a marked deterioration in all indicators: an erosion of regional trade interdependence and a significant increase in the number of unilateral measures, which, in turn, resulted in recurrent and higher levels of bilateral tension. Finally, after 2003 cooperation improved, as is shown by all of the indicators. During this period, trade interdependence recovered within the bloc, and, despite the increase in negotiated trade restrictions, the overall number and scale of controversies remained modest. A slightly more conflictive phase, coinciding with the deterioration in international economic conditions in 2008–9, proved short-­lived, with more recent reports highlighting an “easing of tensions and the creation of a more positive atmosphere between partners” (IDB 2010). In sum, the empirical evidence presented in this section shows that regionalism in the Southern Cone has been markedly unstable, with Table 2.2.  Evolution of the Quality of Cooperation in MERCOSUR, 1991–2009 Period

Trade Encapsulation (Average)

Average Crisis Index

1991–1994

16.0

0.75

1995–1998

23.3

3.75

1999–2002

17.6

9.25

2003–2009

13.7

3.07

Sources: Data from Centro de Economía Internacional and IDB.

Patterns of Conflict and Cooperation in the Southern Cone   23

recurrent commercial conflict between Argentina and Brazil. The examination of several indicators also suggests that the stability and quality of economic and political cooperation deteriorated considerably toward the end of the 1990s and in the early 2000s and improved somewhat after 2003.

Theoretical Explanations of Regional Cooperation

What explains these erratic patterns of conflict and cooperation in MERCOSUR? The International Relations (IR) and International and Comparative Political Economy literatures on regionalism provide several potential answers to this question.8 This section considers four competing approaches: liberal explanations emphasizing the role of interdependence and institutions; realist and neorealist arguments focusing on interstate power asymmetries; the “new regionalism” literature stressing the links between globalization and regionalism; and domestic political economy explanations.9 As I argue below, none of these approaches is, by itself, sufficient to account for the observed regional dynamics in the Southern Cone. Neoliberal Institutionalism

The early work on European integration was dominated by functionalist and neofunctionalist arguments, according to which governments created international or supranational institutions in order to meet various functional needs and address the problems that could no longer be solved effectively at the nation-­state level (Mitrany 1943; Deutsch et al. 1957; Haas 1958). Once a cooperative agreement was established, according to these theories, integration became self-­sustaining, through “spill-­over” mechanisms (Haas 1958). Functional and political spillover led to deepened and self-­perpetuating integration, as success and integration in one area increased demands for integration in another. Several decades later, neoliberal institutionalist scholars emphasized a similar functionalist logic in their analyses of regional trade cooperation. From this perspective, the establishment of regional institutions

24  Power and Regionalism in Latin America

can be interpreted as joint response by states to the challenges arising from increased interdependence. Regional regimes perform valuable functions—­ they provide information, reduce uncertainty, monitor behavior, and permit issue linkage—­that allow states to manage the externalities resulting from interdependence and thus facilitate further intraregional linkages (Keohane 1984). This literature has also pointed to the importance of institutional design in influencing the quality and stability of cooperation. In trade relations, for example, where incentives for cheating tend to be strong, durable and stable cooperation depends on the strength of enforcement and commitment mechanisms, such as automatic and binding dispute settlement mechanisms (e.g., Downs, Rocke, and Barsoom 1996; Yarbrough and Yarbrough 1997; Smith 2000). The observable implications of these theories are clear. Greater interdependence within a region is expected to lead states to create regional institutions. The stronger these institutions, the more durable and stable the observed levels of economic and political cooperation. The case of MERCOSUR, however, does not conform to these theoretical expectations. First, as Hurrell (1995a) has noted, the trade bloc was created in the early 1990s in response to declining, not increasing, levels of trade interdependence among South American countries. Second, these explanations cannot account for partners’ reluctance to create more effective enforcement mechanisms as the level of regional interdependence increased in the mid-­1990s, or for their attempts to introduce some institutional reforms in the more recent period, despite the decrease in intraregional trade and investment levels.10 Rational institutionalist arguments are more useful in pointing to the negative consequences that weak commitment mechanisms have had in MERCOSUR. Indeed, several analysts have blamed the thinness of the bloc’s institutions for the recurrence of conflict among member states (e.g., Peña 2001). Criticism has concentrated on the absence of supranational institutions and on the ad hoc nature of the dispute settlement mechanism, which has failed to deter cheating and individualistic behavior by member states (Redrado 1999; 2000). Yet, by taking preferences as given, neoliberal institutionalist theories cannot explain why MERCOSUR partners have been so reluctant to establish stronger institutional mechanisms. These theories provide limited insights into why

Patterns of Conflict and Cooperation in the Southern Cone   25

members would sign ineffective and largely symbolic agreements, seemingly ignoring the reputational costs of recurrent violations and implementation failures. Realism/Neorealism

Drawing on insights from realist and neorealist approaches, several scholars have explored the multifaceted links between power dynamics and regionalism. One body of work has examined the role of powerful actors outside a region in directly and indirectly fostering regional cooperation. Katzenstein (2005), for example, examines the ways in which the US “imperium” has influenced regionalism in world politics. He argues that the power and preferences of the United States have critically influenced the nature and shape of regional orders throughout the world, and particu­larly in Europe and East Asia.11 Others note instead that the emergence of regional economic cooperation in several areas of the world since the end of the Second World War “has developed . . . in opposition to US preferences” (Acharya 2007, 640).12 In this view, regionalism is a defensive response by weaker states, ultimately “aimed at challenging the domi­ nance of great powers and/or socializing them through norm setting” (Acharya 2007, 642).13 These arguments are consistent with realist-­based external balancing hypotheses, according to which interstate cooperation must be understood as a defensive response to threatening external developments. From this perspective, small or relatively weak states may create a regional trade bloc to increase their market and bargaining power and thus increase their influence in the international system. Consistent with these claims, the literature on MERCOSUR has underscored the strategic and geopolitical defensive rationale for the bloc’s creation and persistence. In particular, regionalism in the Southern Cone has been interpreted as a joint attempt by relatively weak states to balance US power and influence in the region. In the mid-­1980s, Argentine-­Brazilian rapprochement sought to increase the two countries’ bargaining power in international negotiations over debt, investment, and trade issues.14 The signing of the Treaty of Asunción has also been explained as a defensive response to the launch of the Enterprise of the Americas Initiative by the Bush administration in 1990, the approval of

26  Power and Regionalism in Latin America

the North American Free Trade Area (NAFTA) in 1993, fears of marginalization after the end of the Cold War, and frustration with the multilateral trade negotiations (Campbell, Rozemberg, and Svarzman 1999; Da Motta Veiga 2001; Albuquerque 2001). The evidence presented in subsequent chapters confirms the importance of defensive considerations in explaining partners’ enduring support for MERCOSUR in the more recent period, thus lending further support to external-­balancing arguments. However, given that the structure of hemispheric power varied little during the period of analysis, balance-­of-­power explanations shed limited light on the instability in regional outcomes. Specifically, this approach has difficulties explaining the occurrence and recurrence of conflict within the bloc and, in particular, the deep deterioration in the quality of cooperation toward the end of the 1990s and in the early 2000s. A series of “threatening” extraregional developments during the third phase—­namely, the decreasing relevance of the region after September 11, 2001, and the disappointing outcome of multilateral trade negotiations for developing countries—­increased the relevance of bloc bargaining for South American countries. Therefore, balance-­of-­threat arguments are useful for explaining the survival of cooperation in the Southern Cone, but they clearly are insufficient to account for its decreasing quality after 1997, or for the unstable patterns observed since 1995. A second group of scholars have focused on the distribution of power within the region, examining whether the existence of a regional hegemon or preponderant power fosters or hinders regional cooperation. Building on hegemonic stability theory, Mattli (1999, 42) argues that the existence of a benevolent, but undisputed, leading country in the region that “serves as a focal point” and eases distributional tension is a necessary condition for successful integration.15 Along similar lines, Kupchan (1998) underscores the potential benefits of asymmetric and hierarchical regional orders, pointing to the role of regional cores in underwriting regional institutions and norms. In his view, the construction and maintenance of “benign unipolarity” at the regional level crucially contributes to international order. By contrast, others view a highly asymmetric distribution of intraregional power as an obstacle to stable and durable cooperation. They argue that unequal power typically results in weak regional

Patterns of Conflict and Cooperation in the Southern Cone   27

institutions that are unable to prevent powerful members from acting in a self-­interested, opportunistic manner (Grieco 1997). This argument emphasizing intraregional asymmetries of power has also been used repeatedly to account for the recurring problems in MERCOSUR. In particular, analysts highlight Brazil’s unwillingness to constrain its autonomy through the establishment of stronger institutions and its tendency to take advantage of its relative strength to dictate the pace and scope of the integration (Da Motta Veiga 1999; Cason 2000; Bouzas 2001). From this perspective, Brazil’s individualistic behavior and its reluctance to take on a responsible leadership role are at the root of recurring conflict and instability in the bloc. Moreover, because of its clear advantages in material capabilities, such as market and population size, and in industrial capacity, Brazil has been successful in shaping the terms of regional negotiations and agreements in accordance with its preferences. This has contributed to raising distributional tension within the bloc. While providing illuminating insights on the sources of MERCOSUR’s weak institutional structure, regional-­ preponderance and leadership-­gap arguments face a number of shortcomings. First, these accounts are insufficient to explain the unstable patterns observed in the evolution of MERCOSUR or the marked deterioration in the quality of cooperation observed in phase 3 (1999–2002). The empirical examination of the evolution of power disparities within the bloc, measured in terms of economic size asymmetries and of the concentration of regional income (see Table 2.3),16 shows that Brazil’s economic predominance was relatively stable during the period under analysis. Arguments emphasizing Brazilian hegemonic opportunism are also unable to account for the fact that Argentina has been responsible for a higher number of unilateral violations of the MERCOSUR treaty than Brazil. Moreover, the empirical evidence does not seem to support this theory’s prediction that stronger states always prevail over weaker partners in situations of conflict. Indeed, Table 2.1 shows that in many instances of conflict, Brazil had to reach a compromise with its smaller partner in order to restore cooperation. Finally, and perhaps more importantly, the realist-­inspired literature on MERCOSUR tends to paint an excessively negative and perhaps

28  Power and Regionalism in Latin America Table 2.3.  Evolution of Hegemonic Leadership in MERCOSUR (Brazil), 1991–2008 Period

Overall Capabilities Method: Brazil’s GDP/Regional GDP (%)*

Concentration Ratio

1991–1994

64.12

0.60

1995–1998

71.27

0.65

1999–2002

68.01

0.63

2003–2008

78.20

0.72

*Averages for the period. Sources: Data from Centro de Economía Internacional and IDB.

simplistic picture of Brazil’s role in MERCOSUR, overlooking the complex effect that Brazilian power calculations have had on the evolution and shape of regional cooperation. It is clear that Brazil has not behaved as a regional leader and that it has been reluctant to absorb the costs of collective action at the regional level. However, since the early 1990s, Brazil has had a strong and consistent strategic interest in preserving South American unity. This position has reflected the power-­related calculations of Brazilian foreign policy elites, who have viewed Brazil’s leadership in MERCOSUR and in South America as essential for enhancing Brazil’s prestige and legitimacy in global affairs (Soares de Lima 1996; Bernal-­ Meza 2000; Bulmer-­Thomas and Page 1999; Hirst and Soares de Lima 2002).17 As the rest of the book will argue, the tension between Brazil’s offensive incentives and its self-­interested resistance to stronger regional institutions has been critical in explaining the survival of MERCOSUR in its current, anemic form. Globalization and the “New Regionalism”

An alternative set of systemic-­level hypotheses on the evolution of regional cooperation can be derived from so-­called New Regionalism literature, which emphasizes the intimate and multifaceted links between globalization and regionalism (Hettne 1999; Söderbaum and Shaw 2003; etc.). One group of scholars within this group explains regionalism as a defensive response to the economic and competitive pressures posed by global

Patterns of Conflict and Cooperation in the Southern Cone   29

economic interdependence and by the spread of neoliberal policies in the 1990s (Breslin and Higgott 2000; Bowles 2002; Phillips 2002; etc.). In some cases, regional integration is perceived as an intermediate step to full participation in the global economy—­for example as an attempt to improve competitiveness within a protected extended market before facing global competition. Alternatively, regionalism among developing countries has been interpreted as a strategy to improve their market access in a context of “dysfunctional” multilateralism or to provide these sometimes marginalized states with a viable alternative to the multilateral level (Phillips 2000; Mistry 2003; Tussie 2003; etc.). In this sense, this literature sees a symbiotic relationship between globalization and regionalization, in which globalization leads to regionalism and regionalism, by facilitating weaker countries’ insertion into the world economy, further promotes globalization. Research on MERCOSUR has shown that the economic defensive incentives highlighted by New Regionalism scholars played an important role in the Argentine and Brazilian governments’ decision to institutionalize regional cooperation (Devlin and Estevadeordal 2001). In contrast to previous regional initiatives in Latin America, regionalism in the 1990s was conceived of as a complement rather than substitute for global integration and international economic institutions. Yet, as some scholars have argued, the dynamic and at times unstable logic of global capitalism could also undermine the stability and sustainability of regional cooperation initiatives, particularly in the developing world. Economists, in particular, have maintained that the international financial and macroeconomic turmoil triggered by the Asian and Russian financial crises in the late 1990s exacerbated commercial rivalry and disrupted cooperative relations among MERCOSUR partners (Perales 2000; Bermúdez 1999; Ffrench-­Davis 2001). According to Higgott and Phillips, for example, (1999, 28), “the exigencies of short-­term survival” faced by South American countries in the late 1990s led to an inevitable relegation of regional issues and a temporary fragmentation of regional cooperation. These arguments shed light on the important and at times conflicting sets of incentives that an increasingly globalized economy creates for Southern Cone countries. The impact of such market-­led forces is largely ignored by neorealist explanations. Yet New Regionalism approaches

30  Power and Regionalism in Latin America

suffer from at least three shortcomings, which seriously undermine their explanatory leverage in a consideration of patterns of conflict and co­op­ era­tion in MERCOSUR. First, this literature has “underestimated the resilience of the state” and the impact of formal institutions in the regional cooperation (Acharya and Johnston 2007, 11). As the case studies show, whereas nonstate actors, and particularly business groups, became more actively involved in the second half of the 1990s, the preferences and decisions of state actors continue to drive the integration in the Southern Cone. Second, the New Regionalism literature, by its tendency to downplay the geopolitical and strategic dimension of economic regionalism, provides a distorted picture of MERCOSUR in which patterns of economic cooperation have been greatly influenced by the asymmetric distribution of interstate power both at the regional and at the hemispheric levels (Hurrell 2005). Third, while acknowledging the increasing relevance of domestic-­level factors in regionalism and regionalization processes, these approaches provide no explicit theory linking domestic interests and institutions to regional outcomes. But the impact of global economic forces on regional cooperation is indirect and depends on the nature of the domestic political process. Domestic Politics

If systemic explanations focusing on regimes, power asymmetries, and globalization are insufficient to account for patterns of cooperation and conflict in MERCOSUR, can domestic-­level approaches take us any further? Both neoliberal institutionalist and neorealist theories take the national interest as given, typically treating the state as a “black box” that acts like a rational and unitary actor. By contrast, domestic explanations reject the unitary-­state assumption, unpacking and looking within the black box. Along these lines, domestic-­political-­economy explanations of regionalism emphasize the ways in which domestic interests and political institutions interact to shape national preferences and choices regarding regional trade cooperation. One set of arguments focuses on the demands of societal actors. Preferential trade agreements have domestic distributional implications. They therefore create winners and losers, who may become supporters and/or opponents of these policies.

Patterns of Conflict and Cooperation in the Southern Cone   31

Consumers, exporters, and other firms that can exploit economies of scale and production sharing across borders when gaining access to an enlarged regional market are expected to benefit from and hence to support regional trade agreements (Moravcsik 1998; Solingen 1998; Milner 1997a; Manger 2009). In customs unions, domestic industries that are protected from third-­country competitors by the common external tariff are also likely to support regional integration. By contrast, less competitive import-­competing sectors will typically oppose trade integration, particularly in those sectors in which import penetration is high. The stronger and better organized these groups are relative to internationally oriented coalitions and consumers, the less likely a government will be to sign and implement regional liberalization agreements.18 Implicit in these interest-­based accounts is the assumption that state actors are “passive registers” of group preferences and play little autonomous role in the policy-­making process. State-­centric approaches challenge these premises, asserting that policy makers not only have independent policy objectives, but also can influence the mobilization and configuration of interest groups in society (Ikenberry, Lake, and Mastanduno 1988). While government officials cannot completely ignore societal demands if they want to remain in office, they can rely on various mechanisms to construct coalitions that support their preferred policies.19 When signing regional trade agreements, for example, governments may use exemptions to gain the support of adversely affected sectors, thus increasing the political viability of the agreement (Grossman and Helpman 1995). This perspective, thus, shifts the attention to the preferences of governments. The literature on regionalism has highlighted several types of domestic economic and political motivations for electorally motivated government officials to sign regional trade agreements (Mansfield and Milner 1999; Hurrell 1995b). Yet governments also face costs from participating in these agreements. Specifically, when signing on to regional trade agreements, political leaders confront the loss of unilateral control over trade policy instruments (Milner 1997b). The value of relinquishing trade policy autonomy depends on a number of factors, particularly, the economic and political contexts that policy makers face. For leaders confronting unemployment and recession in an electoral year, for example,

32  Power and Regionalism in Latin America

this opportunity cost might be higher. The greater the domestic usefulness of trade policy instruments, the lower the willingness of national leaders to give them up in a cooperative agreement (Milner 1997b). Another variant of domestic-­politics explanations focuses not on the preferences of state actors, but on the role of domestic political institutions in aggregating societal and state interests and translating them into policy outcomes.20 Domestic institutions condition the access of different actors into the policy process, thus critically influencing the formation of the national interest. Apart from influencing the relative autonomy of state actors from societal pressures, institutional structures determine the distribution of decision-­making authority among different governmental actors. Institutional arrangements that empower those actors in state and society who benefit from trade cooperation are more likely to result in cooperative policy choices. Conversely, when domestic institutions favor those groups that stand to lose from integration, cooperation is less likely (Goldstein and Martin 2000). In addition, scholars have emphasized the difficulties that may arise when several governmental actors share power over the same policy instrument, particularly if their preferences diverge. Drawing on insights from the rational-­choice institutionalist literature (e.g., Tsebelis 1995), some studies have shown that a high number of “veto players” at the domestic level tends to make cooperation less likely (Mansfield, Milner, and Pevehouse 2007). How useful are these domestic-­level explanations in accounting for patterns of conflict and cooperation in the Southern Cone? There is widespread agreement that arguments focusing on societal pressures have limited analytical leverage in a consideration of the onset of regional cooperation in the Southern Cone. Indeed, an extensive body of literature has emphasized the centrality of the Argentine and Brazilian executives in launching and moving this integration forward and the limited participation of societal groups in MERCOSUR. Yet several scholars have highlighted the role that the private sector has played in moderating the pace and extent of integration in the Southern Cone. Indeed, the conventional explanation for conflict between Argentina and Brazil in the late 1990s tends to highlight protectionist pressures in the face of competitiveness asymmetries resulting from the absence of macroeconomic coordination. According to Carranza (2003, 82), for example, “domestic politics gained center-­stage” in MERCOSUR after the Brazilian currency

Patterns of Conflict and Cooperation in the Southern Cone   33

devaluation in January 1999. The vulnerability of Argentine industries to Brazilian competition after the devaluation led to the emergence of a new multisectoral group, which pressed strongly for a revision of Argentina’s position in MERCOSUR. From this perspective, increased conflict was a direct consequence of the ability of industrial lobbies in Argentina to “seize control of trade agendas” following the Brazilian devaluation.21 At first glance, the empirical evidence presented in this book supports such interest-­based explanations, showing that the marked deterioration in the quality of cooperation in the late 1990s coincided with a period of increasing private sector discontent and activism in all MERCOSUR member states, and particularly in Argentina and Brazil. Yet a closer look at the specific cases reveals several shortcomings in a purely interest-­based account of regional dynamics in the Southern Cone. First, the implicit assumption that the Argentine and Brazilian governments behaved as “passive registers” of this sectoral activity is problematic. The case studies show that state actors shared an interest in defecting and that they sometimes engaged in unilateral violations in strategic ways, as part of their attempts to prevent the unraveling of their domestic support coalitions. Toward the end of the 1990s, a series of external and domestic contextual developments increased the domestic macroeconomic and political usefulness of trade policy measures, thus eroding economic policy makers’ commitment to regional cooperation and increasing their willingness to defect from regional agreements. Indeed, the evidence suggests that while not completely irrelevant, societal pressures were never a determining factor in explaining defection from regional commitments. Second, the empirical analysis highlights the important mediating role that the institutional configuration played within each country in aggregating and translating divergent domestic interests into regional cooperation policy choices. In particular, as the cases illustrate, in the late 1990s there were important divisions within the Brazilian and particularly the Argentine governments regarding MERCOSUR. Cleavages and poor coordination between the foreign policy executive and economic policy makers further undermined the stability of partners’ positions toward their regional commitments. Third, and most importantly, these explanations overestimate the ability of interest groups to dominate outcomes. They downplay the fact that, despite the recurrent unilateral measures, governments were

34  Power and Regionalism in Latin America

consistently more committed to the strategy of regional cooperation than to sectoral lobbies. At critical times, governments chose to defend and ensure the sustainability of MERCOSUR, even at the risk of upsetting the important groups within their domestic constituencies. These qualifications suggest that state-­centric explanations underlining the primacy of state preferences and institutions over societal interests provide a more accurate account of the origins of trade disputes and the prospects for regional cooperation in the Southern Cone. In sum, domestic-­level explanations are particularly helpful in highlighting the ways in which domestic interests and institutions constrain the ability of states to observe regional commitments. Yet by focusing exclusively on the domestic-­level determinants of national preferences and neglecting the important role of systemic considerations, these approaches provide a less compelling explanation for partners’ strong determination to restore cooperation after each conflict. To understand why at critical times governments chose to defend and ensure the sustainability of MERCOSUR, even at the risk of upsetting important domestic groups, it is necessary to consider the ways in which intra-­and extra­ regional power considerations shape national preferences for cooperation. Understanding patterns of conflict and cooperation in MERCOSUR thus requires a framework that integrates insights from domestic political economy and neorealist explanations.

Conclusions

An empirical examination of the quality of regional cooperation for the period 1991–2009, since the creation of MERCOSUR, shows that regionalism in the Southern Cone has been characterized by marked instability and recurrent conflict between Argentina and Brazil. In addition, the empirical evidence suggests that regional cooperation deteri­ orated considerably toward the end of the 1990s and in the early 2000s and then improved from 2003 to the present. Moreover, contrary to conventional wisdom, the evidence demonstrates that Brazil has been far from dominating distributional outcomes within the bloc and that Argentina’s positions frequently have prevailed in regional conflicts.

Patterns of Conflict and Cooperation in the Southern Cone   35

Of the four competing theoretical approaches I have evaluated, none is sufficient to explain the erratic dynamics of regionalism observed in South America. While a focus on systemic incentives and power-­related considerations is useful for explaining the survival of cooperation in MERCOSUR, domestic-­level approaches shed light on the factors that frequently trigger conflicts and undermine the sustainability of cooperative policies by member states. Societal, statist, and institutionalist explanations of foreign economic policy identify the specific mechanisms through which domestic political factors can impede cooperation. All of these have been relevant in MERCOSUR.

Chapter three

Systemic Incentives, Domestic Constraints, and Regional Cooperation A Neoclassical Realist Approach

This chapter presents a theoretical framework that explains the erratic patterns of conflict and cooperation characterizing the evolution of regionalism in the Southern Cone. In line with neoclassical realist explanations in International Relations (IR), the approach developed here emphasizes the complex ways in which systemic incentives and domestic political factors interact to shape regional policy choices and outcomes. Based on this framework, I argue that while external vulnerability and overlapping power asymmetries have provided strong and consistent incentives for regional cooperation in the Southern Cone, the impact of these systemic forces has been crucially mediated by domestic political dynamics. In the short and medium term, domestic politics intervene to weaken systemic pressures for cooperation. In this chapter, I first survey the neoclassical realist literature, particularly emphasizing the conception of the state adopted by scholars 36

Incentives, Domestic Constraints, and Regional Cooperation  37

working in this tradition. I then develop the book’s analytical framework and explain why it provides a more complete and satisfactory account of patterns of conflict and cooperation in the Southern Cone than the single-­level approaches discussed in chapter 2. The third section discusses the book’s research strategy and methodological approach.

Neoclassical Realism: An Overview

In a seminal review article, Gideon Rose (1998) identifies an emerging “neoclassical realist” school of foreign policy analysis, which he distinguishes from both domestic-­level explanations and defensive/offensive realist explanations. Like neorealists, these scholars believe that the scope and longer-­term direction of a country’s foreign policy is driven primarily by systemic imperatives, and in particular, by its relative power position. Yet, while setting the broad parameters of foreign policy behavior, the anarchic international system and the relative distribution of power do not directly and unambiguously determine states’ specific policy choices. Instead, these systemic pressures are mediated and filtered by unit-­level factors, including the character of domestic political institutions and the nature of state-­society relations, as well as policy makers’ ideology and perceptions of relative power. Neoclassical realists posit a more complex causal chain between a country’s relative power (the main independent variable), the domestic transmission mechanisms through which these systemic pressures are translated (the intervening variables), and the dependent variable, a country’s foreign policy choice. In the short and medium terms, intervening domestic political dynamics condition the ways in which states respond to their external environment. The first generation of neoclassical realists, which included Snyder (1991), Christensen (1996), Schweller (1998), Zakaria (1998), and Wohlforth (1993) among others, sought to explain the grand strategy of great powers at particular moments in history. A more recent body of work by self-­declared neoclassical realists has somewhat broadened the scope of the early literature to focus on the security, military, and foreign economic policies of not only great powers but also second-­tier states (Schweller 2006; Lobell 2009). In addition, these scholars have

38  Power and Regionalism in Latin America

addressed criticisms by neorealists that their approach tends to incorporate domestic-­level variables “in an ad-­hoc manner,” offering no testable explanatory hypotheses. While focusing on a number of unit-­level variables, the more recent neoclassical realist work concentrates on the ways in which domestic political institutions and state-­society relations influence the ability of states to mobilize resources to respond to shifts in the external environment (Caverley 2010). In this way, as Rathbun (2008, 301) argues, neoclassical realists stress “how domestic politics and ideas can contribute to (or detract from) power.” It is important to clarify the particular conception of the state on which neoclassical realists rely, and how it differs from competing liberal and domestic political explanations in IR. Like most realists, neoclassical realists see the state as a set of political institutions with a monopoly on legitimate rule within a geographically bounded territory (Lobell, Ripsman, and Taliaferro 2009). To advance their “top-­down” conception of the state, neoclassical realists typically rely on the figure of a “foreign policy executive” (FPE), comprising the head of the government as well as the ministers and other officials in charge of foreign and national security policies. The FPE, which sits at the intersection of the international and domestic political systems and has access to privileged intelligence information on foreign and national security affairs, is committed to advancing the security and power of the nation, according to the “national interest.” In contrast to liberal explanations, which explain policy choices in reference to the demands of interest groups, in neoclassical realist explanations the FPE plays a crucial role in determining the national interest based on its reading of systemic constraints and opportunities. However, unlike neorealists, neoclassical realists recognize that executives may vary significantly in their degree of autonomy vis-­à-­vis society and other domestic political actors. In trying to implement policies that are consistent with this national interest, less autonomous FPEs may confront important domestic constraints, which may undermine their ability to adjust to shifts in their external environment. Two central and distinctive features of neoclassical realism follow from this conception of the state. First, neoclassical realism recognizes that, in the short term, foreign policy choices may not directly reflect systemic imperatives but may be the “product of state-­society coordination

Incentives, Domestic Constraints, and Regional Cooperation  39

and, at times, struggle” (Lobell, Ripsman, and Taliaferro 2009). Particular attention must be paid to the domestic decision making through which these external pressures are translated into actual policy choices. Second, neoclassical realists tend to treat domestic political factors as “constraints” or obstacles that cause states to deviate from the requirements of systemic imperatives and therefore behave in ways that, ultimately, are strategically suboptimal or inefficient. In Lobell’s (2009) words, “Unit-­level obstacles can impede states from behaving in the rational manner that balance of power and balance of threat theory suppose. . . . The result is the pursuit of grand strategies that appear anomalous from the standpoint of neorealist theories.” Indeed, as Rathbun (2008) explains, neoclassical realism shows how domestic political and ideational factors “are generally to blame when the system’s imperatives are not met.” It is in this sense that neoclassical realism has been referred to as a “theory of mistakes” (Schweller 2006). To show the ways in which domestic factors distort the influence of structural constraints and lead to misperception and error, neoclassical realists typically adopt an implicit or explicit unitary-­actor baseline of the “optimal” foreign policy choices given a particular set of structural conditions. According to Schweller (2006), for example, “incoherent” states, characterized by high levels of elite strife, social fragmentation, and regime vulnerability, not only tend to underestimate and discount external threats, but may be unable to mobilize resources to counterbalance these pressures. By contrast, states in which there is elite consensus on the nature of external threats, and in which elite and social cohesion are high—­which more closely conform to the unitary-­baseline assumption—­ generally act in accordance with balance-­of-­power predictions. Along similar lines, Snyder (1991) argues that the greater the pene­tration of the state by parochial interest groups, the more likely it will be to “overbalance” and to pursue policies of overexpansion and “imperial stretching.” Lobell (2009), in turn, contends that divisions among members of the FPE and key societal elites can harm the process through which the state assesses external threats as well as its strategic responses. Similarly, Dueck (2009, 146) argues that domestic political constraints can significantly influence patterns of military intervention, “shaping or skewing foreign policy choices in ways that are surprising from a neorealist perspective.”

40  Power and Regionalism in Latin America

Neoclassical realism research has grown significantly in the past decade, leading some to conclude that “[it] is where the action is” within contemporary realism literature (Tang 2009, 799). Yet the vast majority of this work has focused on security and defense policies, paying little attention to the ways in which structural and domestic factors interact to shape foreign economic policies, and particularly in the developing world. Moreover, as Tang (2009, 799) notes, the “most glaring omission” of the neoclassical realist research program has been international cooperation. This book contributes to filling this gap in the neoclassical realist literature by providing the first application of this framework to a case of regional economic cooperation. It also constitutes one of the few examples of neoclassical realist analysis beyond great and medium-­sized powers.

Analytical Framework

Systemic Incentives for Cooperation

As discussed in chapter 2, neorealist explanations emphasizing the role of extra-­and intraregional balances of power and/or threat in MERCOSUR offer significant analytical purchase. In line with balance-­of-­threat arguments, the onset of regional cooperation in the Southern Cone in the late 1980s and early 1990s could be viewed as a joint strategic response to a number of extraregional economic threats, including the increasing centrality of the United States in the region following the debt crisis, the launch of the single European market, the creation of NAFTA, and the acceleration in multilateral trade negotiations after the Uruguay Round (Hurrell 1995a). Similarly, and as I have argued elsewhere (Gómez-­Mera 2005), the survival of cooperation despite the recurrence of crisis in the late 1990s and early 2000s can be explained with reference to defensive strategic considerations. Argentine and Brazilian attempts to prevent the collapse of the bloc were to a significant extent a joint response to a series of threatening trends in the international political economy, including the consolidation of the United States–led hemispheric trade negotiations,

Incentives, Domestic Constraints, and Regional Cooperation  41

the reversal of international capital flows to emerging markets, and the slow progress delivered by multilateral trade negotiations. In 2001, the external environment was further complicated by the economic and geopolitical uncertainty brought about by the September 11 terrorist attacks on the United States. Given the Argentine and Brazilian governments’ perceptions of their relative weakness within the international system, these trends underlined the relative costs of a “go-­it-­alone” strategy and provided incentives for deepening regional integration in order to create a stronger and more influential regional bloc with greater leverage in external negotiations. Ultimately, a shared sense of vulnerability generated a convergence of defensive incentives for preserving MERCOSUR. Structural realist explanations are also useful in highlighting the role of “subsystemic” incentives or threats deriving from interstate competition within a particular region. Regions, as Lobell (2009) notes, “have their own dynamic, which is semi-­autonomous but not independent of the global great power system and domestic politics.” The Southern Cone is characterized by marked asymmetries of power, with Brazil accounting for almost two thirds of production and population in the bloc. The asymmetric distribution of power within the region inevitably results in competition for leadership and hegemony among the major regional powers. In this context of asymmetric power and interstate competition, states face different constraints and opportunities that shape their preferences and strategies toward regional cooperation. As argued above, since the 1990s, Brazil has viewed regional cooperation as a vehicle for consolidating its position as a regional power and enhancing its status in the broader international system. Brazil’s commitment to MERCOSUR, like its efforts to promote broader South American integration, has had a strong offensive element reflecting deep-­rooted Brazilian goals and awareness that beyond its potential to occupy a pivotal position among its neighbors, Brazil is large enough to play a salient role in the international order. Brazil’s smaller partners, however, confront a different set of structural incentives. Given their small size, Uruguay and Paraguay have had little option but to pursue a strategy of bandwagoning with their two larger neighbors. Argentina, in contrast, has been relatively less constrained, at times flirting with the possibility of balancing against Brazil by trying to strengthen ties with the United States.

42  Power and Regionalism in Latin America

Neorealist-­inspired explanations stressing the role of balances of economic and political power and strategic considerations, therefore, shed much light on the rationale for MERCOSUR’s existence and survival. However, focusing exclusively on systemic constraints and opportunities is insufficient to account for the erratic behavior of the bloc’s two main partners toward their regional commitments. As neoclassical realists remind us, the international and regional structures provide constraints and opportunities for action, but they do not alone determine a state’s specific choices. In the short run, domestic political factors may intervene to block or attenuate systemic pressures for cooperation, resulting in seemingly suboptimal choices. Moreover, the case of Argentina also illustrates that, to fully understand why a medium-­sized power chooses to bandwagon or balance against a larger regional power, it is necessary to examine the ways in which national policy makers assess external threats and how they interpret their potential strategic options. The framework presented in the next section is useful for examining the ways in which domestic-­level variables channel and mediate systemic and subsystemic pressures for cooperation in the Southern Cone. During the period under analysis, external vulnerability and the asymmetric nature of the distribution of power within and beyond the region created strategic incentives for regional cooperation for both Argentina and Brazil. Yet the extent to which these systemic forces actually resulted in cooperative policy choices ultimately depended on the nature of the domestic political process. Domestic Transmission Mechanisms

In line with neoclassical realists, I open the black box of the state, treating the state as a central intervening variable. I disaggregate the state into functionally differentiated elements with distinct, and potentially divergent, policy preferences and varying levels of autonomy from societal actors.1 National preferences and choices regarding MERCOSUR can thus be explained as the outcome of interaction and bargaining among three state agencies that are involved in the formulation, implementation, and negotiation of international trade policy: (1) the foreign policy executive; (2) the sectoral agencies; and (3) the economic team.

Incentives, Domestic Constraints, and Regional Cooperation  43

The position of each of these agencies toward regional cooperation varies according to their institutional mandate and to their varying degrees of sensitivity to domestic political and systemic pressures. The foreign policy executive, including the president, his or her immediate advisors, and high-­level diplomats and officials at the ministry of foreign affairs, is in charge of designing and implementing the nation’s foreign policy and its international and regional strategy of insertion. Put differently, these actors have the task of defining and advancing the national interest and enhancing the state’s ability to control and shape their external environment. Given this role, officials from the ministry of foreign affairs are sensitive to the constraints and opportunities of the international system and thus act as the main link between the international system and the domestic political process. Although they are not completely impermeable to societal pressures, their policy preferences are generally determined primarily by systemic imperatives and, in particular, by the distribution of power at the regional, hemispheric, and global levels. Moreover, and in line with neoclassical realism, I assume that the strategic beliefs and perceptions of these actors, and specifically the way in which they interpret systemic constraints and opportunities, matter.2 These perceptions shape their assessments of external threats and opportunities and thus also shape their foreign policy preferences and hence their position toward MERCOSUR. The foreign policy executive will support regional cooperation to the extent that it sees this strategy as contributing to enhancing the power position and national interest of the state. During the period under analysis, power considerations within and beyond the region created strong strategic incentives for the Argentine and Brazilian foreign policy executives to support regional cooperation. For both countries, defensive considerations reflecting a sense of vulnerability vis-­à-­vis a highly asymmetric external environment provided the main motivation to strengthen and preserve MERCOSUR. At the same time, Brazilian foreign policy elites viewed the regional cooperation process as an instrument for consolidating Brazil’s regional hegemonic position and thus contributing to its larger aspiration to become an intermediate power in the international system. The Brazilian and Argentine foreign policy executives thus shared a common strategic interest in ensuring the survival of MERCOSUR.

44  Power and Regionalism in Latin America

While playing a central role in the formulation and negotiation of regional integration policy, foreign policy officials and diplomats share decision-­making authority with other actors within the government that are involved in trade policy making. This dispersal of power in regard to regional trade integration is inevitable, given the complex economic, political, and strategic nature of the issue. Sectoral agencies include those bodies and actors within the state charged with promoting the interests and well-­being of specific groups in society, such as industry, agriculture, and labor. Given their close connections to these societal groups, these government actors can be viewed as “transmission belts” between society and the government.3 Scholars of American foreign policy typically assume that Congress plays this representative role. In Argentina and Brazil, however, executive agencies such as the Argentine Under-­Secretariat of Foreign Trade and Ministry of Production and the Brazilian Ministries of Planning and the Budget, Agriculture, and Development and Industry have played a greater role than the legislature in aggregating and channeling societal interests into the trade policy-­making process. Foreign policy executives also share decision-­making power over regional integration issues with members of the economic team. Economic agencies, such as the Ministry of Finance and the Central Bank, are concerned primarily with macroeconomic outcomes, such as growth, inflation, and employment levels, but also participate actively both in the formulation of trade policy and in the negotiation of international and regional trade agreements. Economic policy makers are significantly more autonomous from societal pressures than sectoral agencies. Yet, because they must also ensure that their preferred macroeconomic policies enjoy domestic political support, they cannot completely ignore the preferences and demands of societal groups and of their allies within the government. Given their macroeconomic priorities, these actors support MERCOSUR when the expected economic benefits of integration (for example, in terms of foreign direct investment attraction, expansion of exports, improved industrial competitiveness, etc.) outweigh the costs of giving up autonomy over trade policy instruments. The greater the perceived domestic macroeconomic and political usefulness of trade policy instruments the stronger the incentives to defect from regional commitments, and the more likely are economic policy makers to diverge from the foreign policy element regarding regional cooperation.

Incentives, Domestic Constraints, and Regional Cooperation  45

The policy choices of member states regarding cooperation emerge from interaction and bargaining among these different groups within the executive, which participate in the formulation, implementation, and negotiation of regional trade policy (see Figure 3.1). The outcome of this process is, first of all, crucially influenced by formal domestic and regional institutions, which determine the ways in which decision-­ making authority is distributed and shared among different state actors. According to formal rules in both countries, for example, while sectoral agencies and members of the economic team are responsible for formulating and implementing trade policy measures, the foreign ministries are typically in charge of negotiating international agreements as well as promoting exports. MERCOSUR’s institutional framework, moreover, gives ministers of both economy and foreign affairs a central role in the regional decision making. Both sets of actors are part of the Common Market Council, which is MERCOSUR’s top executive body. Another institutional factor conditions the outcome of the decision making regarding MERCOSUR. Although jointly participating in this process despite their different mandates, the various actors within the executive are “hierarchically arranged” (Lake 1988). In other words, these bureaucratic actors are responsible to the chief executive or president, who ultimately has the last word in regional and foreign policy making, and thus may act as an arbiter among potentially conflicting positions.4 While chief executives can be persuaded and influenced by bureaucratic agents, their leadership style and their own strategic beliefs will also certainly influence the outcome of the policy-­making process. In this sense, while, consistent with neoclassical realist scholars, I treat the presidents as important members of the FPE, I also recognize their potential role as arbiters among competing positions. Apart from the institutional structure at the domestic and regional levels, other contextual factors may also affect the dispersal of power within the government and hence the policy choices and negotiating positions adopted by MERCOSUR partners. Under conditions of severe economic crisis, for example, members of the economic team may acquire special importance within the government, permitting them to make decisions over regional integration issues without taking into account the position of foreign policy makers. Similarly, in situations of heightened diplomatic and commercial tension, the foreign policy

Power asymmetries

Markets/Institution s

International economic pressures

Systemic Level

Figure 3.1.  Analytical Framework

President Foreign Policy Executive

Economic Team

Sectoral Agencies

Sector

Private Sector

Domestic Level

Policy choices

Regional Level

Conflict

Cooperation

Incentives, Domestic Constraints, and Regional Cooperation  47

executive may adopt a leading role in regional or bilateral negotiations. Indeed, both economic and diplomatic crises may influence the chief executive’s perceived priorities and hence his or her willingness to concentrate decision-­making authority in specific bureaucratic actors. As the case studies will show, in both Argentina and Brazil, the distribution of intraexecutive power regarding regional cooperation in the 1990s and early 2000s was influenced in important ways by international and domestic contextual developments. By focusing on the interaction of the FPE and the domestic-­oriented agencies within the state, this framework captures the interplay of systemic and domestic political factors in shaping the regional policy choices of Argentina and Brazil. In line with neoclassical realist explanations, the FPE’s position primarily reflects systemic imperatives, thus providing strong incentives for cooperation among South American countries. If the FPE were the only relevant actor within the government, or if it had complete control over foreign and regional policy making as neorealist explanations would assume, national policy choices would reflect primarily these power-­related calculations. However, in practice foreign policy elites share responsibility and decision-­making authority over regional integration policy with other actors within the executive. When decision making over regional cooperation is dispersed and shared among several bureaucratic actors with different mandates, national policy choices result from internal bargaining and compromising among them. In this context, the extent to which the FPE is able to follow systemic pressures for cooperation will depend on its ability to bargain with the domestic-­ oriented actors within the government (and their allies in society). The greater the weight of economic and sectoral agencies within the government, the more relevant their preferences and position toward regional cooperation become in shaping national policy choices. In sum, the framework developed here emphasizes the role of two main intervening variables at the domestic level: the distribution of power within the state and the preferences of domestic state and societal actors. To further examine the complex ways in which these two domestic-­level factors interact to channel or filter structural imperatives, we can think about four hypothetical scenarios (see Figure 3.2). The first possible scenario (Quadrant A) corresponds to the neorealist, unitary-­actor baseline, in which there are no domestic constraints

Figure 3.2. Scenarios 48  Power and Hypothetical Regionalism in Latin America

Figure 3.2.  Hypothetical Scenarios Distribution of Authority over Cooperation Centralized (in FPE) B Domestic Cost of Cooperation *

High

Potentially unstable cooperation, given domestic cleavages; latent domestic constraints A

Low

Shared D Unstable cooperation/ conflict likely; severe domestic constraints C

Stable cooperation, based on domestic consensus

Potentially unstable cooperation, given dispersed authority

*Includes both the direct costs to societal actors (domestic distributional cost of integration) and the opportunity cost of sacrificing unilateral control of economic tools for policy makers.both the direct costs to societal actors (domestic distributional cost of integration) and *Includes

the opportunity cost of sacrificing unilateral control of economic tools for policy makers.

on state behavior. When decision-­making power over regional integration is concentrated in the presidents and their foreign policy advisors (the FPE), policy choices will reflect primarily systemic considerations. For these actors, the strategic rationale of MERCOSUR is given priority over domestic political factors, and the FPE is able to implement its systemically derived position—­of promoting cooperation—­without having to worry about domestic constraints. Moreover, concentration of power in a single, pro-­cooperation actor ensures consistency and coherence in the regional behavior of member states, particularly in the context of a stable international environment. Quadrant A also represents a situation in which the perceived costs of regional cooperation to societal actors and economic policy makers are low. Because decision making is based on a broad domestic consensus, we would expect cooperation to be significantly stable. In an alternative scenario (Quadrant B), while decision-­making authority is concentrated in the FPE, the domestic costs of cooperation are high, suggesting that there is some significant degree of discontent and opposition by domestic societal and/or state actors. If we assume total autonomy of the FPE from domestic societal and political actors (as a neorealist explanation would), strategic incentives will prevail over

Incentives, Domestic Constraints, and Regional Cooperation  49

domestic constraints and cooperation will be maintained. However, the existence of domestic cleavages could lead to instability in the government’s overall position, particularly if economic officials join forces with sectoral agencies and their societal allies to press the FPE for less cooperative policies. We could therefore think of scenario B as a less stable situation than A, characterized by “latent” domestic constraints. Quadrants C and D both represent even less stable equilibria, with more significant domestic constraints impinging upon cooperation. Indeed, when authority over regional cooperation is dispersed and the FPE shares power with other state agencies, domestic considerations loom large as central factors conditioning the coherence and stability of regional cooperation. In Quadrant C, although decision-­making authority over cooperation is shared, the balance between the expected benefits and costs of cooperation to domestic actors is positive. Like A, this scenario depicts a situation of domestic consensus in support for cooperation. Nonetheless, because the support of societal actors and economic agencies for integration is sensitive to shifts in external and domestic contextual factors, this internal convergence in favor of MERCOSUR is less stable than the cohesive support expected under conditions of concentrated power (Quadrant A). Moreover, even in the presence of internal consensus in favor of cooperation, poor coordination among state agencies could potentially undermine the coherence and stability of national positions during regional negotiations. Finally, Quadrant D depicts a situation in which domestic constraints on cooperation are more severe. In this hypothetical scenario, authority over regional integration issues is dispersed and the FPE must bargain and compromise with sectoral agencies and economic officials. In contrast to C, however, in D the domestic-­level costs of cooperation for societal actors and/or economic officials outweigh the expected benefits. Given the distributional implications of regional trade agreements, there will always be domestic economic sectors and groups that will resist and oppose cooperation. Changes in international and domestic economic conditions may increase the costs of integration to the private sector, triggering a backlash against regional cooperation. An alternative source of domestic opposition to cooperation may result from the economic agencies’ calculations. Given the instrumental nature of their support

50  Power and Regionalism in Latin America

for regional cooperation, members of the economic team may at times converge with the sectoral agencies and societal actors in favoring defection. For example, in the early 1990s, economic teams saw regional trade liberalization as contributing to their broader strategy of macroeconomic stabilization and thus shared the enthusiasm of the foreign policy elite in pushing regional cooperation forward. As the external and domestic economic situation deteriorated in the second half of the decade, the opportunity cost of surrendering control over trade policy instruments increased, thus weakening these actors’ support for MERCOSUR. Because of their prominence within the government during this period, economic policy makers repeatedly implemented measures violating regional rules, sometimes despite opposition from the foreign policy executive. In this context, therefore, the FPE may face two potential domestic constraints: opposition from societal actors and their allies within the sectoral agencies, and pressure from the economic team, which may confront incentives for defection. In a worst-­case scenario, these constraints may reinforce one another. The greater the influence of the economic team and the sectoral agencies in the policy-­making process, the more likely the government will be to default on its regional commitments, despite opposition from the foreign policy executive. A third constraint emerges from the problems of coordination that may emerge among the agencies sharing decision-­making authority over regional cooperation, which are much more daunting in this scenario than in scenario C. Indeed, the sharper the cleavage between the foreign policy executive and the domestic-­oriented agencies in the government, the harder it will be for them to coordinate positions, and the more erratic and unstable the regional behavior of a member state is expected to be. Based on this framework, we can identify three types of domestic constraints that may intervene to block or attenuate systemic incentives for cooperation. The first two are useful for explaining the decision to defect from regional agreements and to initiate a dispute. The third illuminates the sources of the seemingly ambivalent and unstable position of partners at the regional level. While the three types of constraints are not mutually exclusive, the empirical analysis suggests they varied in rele­ vance across country, sector, and time period.

Incentives, Domestic Constraints, and Regional Cooperation  51

 1. Societal pressures: When the domestic distributional costs of cooperation are high, societal actors will mobilize against the maintenance of regional integration agreements. They will attempt to influence policy-­making outcomes through their links with sectoral agencies in the government. Changes in domestic and international economic conditions may result in important backlash against regional trade cooperation.  2. State actors’ incentives for defection: A more relevant set of domestic-­level constraints, as will be shown by the case studies, are the incentives by national economic policy makers to defect from regional agreements. These actors’ preferences regarding regional cooperation reflect an instrumental calculus that takes into account the macroeconomic and the political implications of relinquishing control over trade policy instruments. The higher the perceived domestic usefulness of these instruments, the greater the incentives to defect from regional commitments.  3. Power-­sharing and bargaining among state actors: Divergences in preferences and poor coordination among those state actors sharing decision-­making power over regional cooperation policy affect the consistency and stability of partners’ positions and choices. Indeed, we would expect the number of actors sharing power over regional integration, the extent of preference divergence, and the degree of coordination among them all to affect the coherence and consistency of partners’ trade policy choices, and hence the nature of regional cooperation. The analytical framework developed in this chapter points to the main relevant actors and the domestic-­and international-­level factors that must be considered when analyzing the preference formation and decision making in particular cases of trade conflict between Argentina and Brazil. While this framework does not pretend to offer specific predictions about policy choices and outcomes by highlighting the main factors constraining and promoting cooperation in MERCOSUR, it does offer insight regarding how the balance between these forces has shaped patterns of cooperation and conflict over time. Based on this framework, we would expect the more conflictive period in MERCOSUR’s

52  Power and Regionalism in Latin America

history (the third stage, 1999–2002) to correspond to a period during which domestic constraints were particularly strong. This could be the result of intensification of pressure by domestic interest groups, or of an increase in the opportunity cost of relinquishing control over trade policy instruments by economic teams (and hence an increase in incentives for defection) and/or the growing tension and divergences among different state actors sharing decision-­making authority over regional cooperation policy. Conversely, the relative decline in tension and conflict in the most recent phase should correspond to a decline in societal pressure for unilateral measures, weakening state incentives for defection, and/or greater concentration of decision-­making authority in pro-­cooperation foreign policy executives. Interstate Negotiations: Explaining Distributional Outcomes

My neoclassical realist framework sheds light on the ways in which systemic and domestic political factors interact to shape Argentine and Brazilian national preferences and choices regarding regional cooperation. Yet patterns of regional cooperation and conflict are influenced not only by the national preferences and choices of member states but also by the ensuing negotiations and strategic bargaining that takes place among them (Aggarwal, Espach, and Tulchin 2004; Moravcsik 1998). Indeed, following Moravcsik’s (1998) work on European integration, we can assume, for analytical purposes, that the regional cooperation process can be disaggregated into two distinct but sequential stages: (1) the national preference formation and decision making leading to specific policy choices,5 and (2) interstate bargaining over the terms of cooperation.6 According to Moravcsik (1998), after formulating preferences regarding regional cooperation, states “bargain with one another to reach substantive agreements that realize those national preferences more efficiently than do unilateral actions.” These negotiations over the specific terms of mutually beneficial cooperation can be understood as “coordination games with distributional consequences.” In other words, while it is safe to assume that both partners are better off by reaching an agreement and restoring cooperation, it is also clear that in most cases, some partners gain more than others from the specific terms of the agreement reached.

Incentives, Domestic Constraints, and Regional Cooperation  53

In the case of the trade conflicts examined in this book, the restoration and maintenance of cooperation after partners’ defection from regional commitments generally required intense negotiations and were surrounded by significant distributional tension. A comprehensive account of the determinants of patterns of conflict and cooperation in the Southern Cone requires examining the negotiation leading to the resolution of the different conflicts and the ways in which partners bargain over the distribution of gains from cooperation. At least two central questions emerge: What are the distributional implications of the agreements reached? What explains these particular outcomes? I argue that the distributional implications of interstate negotiations in MERCOSUR can also be explained in reference to relative power asymmetries and domestic political factors. Yet, to fully account for the observed distribution of benefits from restoring cooperation in the bloc, it is necessary to rely on a broader conception of the determinants of bargaining power. While I do not deny the relevance of asymmetries in material capabilities and size in determining the outcome of interstate bargaining, I also consider the role of patterns of “asymmetrical policy interdependence,” linking the intensity of state preferences for cooperation in specific issue areas to relative power (Moravcsik 1998). In focusing on asymmetrical interdependence as a source of interstate bargaining leverage, I draw on two important qualifications on realist approaches. First, in line with the liberal approaches, I recognize the links between dependence and vulnerability and potential influence. According to the interdependence literature, it is not the possession of capabilities per se that determines relative influence and leverage, but rather the possession of those capabilities and resources that the other partner needs and depends on. A state or actor is dependent on another when the opportunity cost of disrupting or giving up their relationship is relatively higher for that state or actor than it is for the state or actor’s partner. As a result of this greater opportunity cost, the more dependent partner will be willing to make greater concessions to reach an agreement and avoid disruptions in the relationship. From this perspective, thus, “asymmetries in interdependence” are a fundamental source of bargaining influence in international interactions (Keohane and Nye 1977; Moravcsik 1998).

54  Power and Regionalism in Latin America

A second liberal qualification to realist conceptions of power concerns the multidimensional nature of power relations. Indeed, an actor can be simultaneously strong and weak, “powerful with respect to some actors, and weak with respect to other scopes of other actors” (Baldwin 1980, 34). Similarly, states can be dependent on some actors with respect to some matters, but completely independent in other areas. In other words, patterns of asymmetric interdependence, and hence the distribution of bargaining power, can be issue-­specific. Drawing on these insights, I argue that, apart from reflecting asymmetries in market size, the outcome of interstate bargaining between Argentina and Brazil reflected patterns of issue-­specific asymmetrical interdependence. Like Moravcsik (1998, 62), I assume that a state’s bargaining power is inversely proportional to its preference intensity, defined as “the relative value that it places on an agreement compared to the outcome of its best alternative policy.” Thus, the more intensely a government favors—­or the more it “depends on”—­reaching an agreement, the greater its willingness to offer concessions and compromise in order to restore cooperation. This preference intensity, in turn, is influenced by the value of alternative strategies. Governments with limited unilateral and/or multilateral alternatives generally tend to be more vulnerable to the possibility of a collapse in negotiations and will thus be more willing to make concessions and compromises in order to achieve a cooperative deal. Conversely, states that can make credible threats to exit or veto due to attractive unilateral and multilateral policy value cooperative agreements are thus less likely to make concessions. In this sense, the availability of extraregional strategic options, such as, for example, the signing of a preferential trade agreement with the United States or other countries outside MERCOSUR, can be seen as directly increasing the bargaining leverage of partners during regional negotiations. The greater the strategic and/or economic alternatives that a country has, the stronger its bargaining power, and the more likely that power will be to shape the terms of cooperative agreements. This approach, linking bargaining influence and power to the nature and intensity of state preferences in specific issue-­areas, is more useful than realist arguments in explaining the outcome of interstate bargaining and distributional conflict in MERCOSUR. Argentina’s commercial

Incentives, Domestic Constraints, and Regional Cooperation  55

dependence on the Brazilian market has granted Brazil significant leverage over Argentina. However, during the 1990s and early 2000s, the nature of interdependence in other issue areas, such as external foreign policy or strategic issues, favored Argentina. In fact, during this period Brazil significantly increased its strategic reliance on MERCOSUR, as an instrument for augmenting its bargaining power vis-­à-­vis developed countries, especially the United States. The divergent ways in which Brazil and Argentina interpreted and responded to US preponderance in the Western hemisphere in the 1990s, and especially to US-­led efforts at hemispheric integration, resulted in increased bargaining power for Buenos Aires. In this sense, strategic divergences, and in particular, Brazil’s stronger and more stable strategic reliance on MERCOSUR, have contributed to a more balanced distribution of the costs and benefits of cooperation, mitigating the effects of Brazilian preponderance in the Southern Cone. Finally, and in line with the neoclassical realist framework developed in this chapter, domestic political factors also can mediate the impact of relative power considerations on distributional outcomes. In fact, two domestic-­level factors may play a relevant role in the interstate bargaining over distributional outcomes—­ the power perceptions of foreign policy executives and the degree of cohesion and coordination among different state actors participating in regional negotiations. Particularly relevant to Argentina, self-­confidence and inflated assessments of a country’s power position may mitigate the impact of actual asymmetries in material capabilities and/or asymmetric interdependence. Similarly, the greater the convergence and coordination among different actors within the government, the more likely a country will be to influence the outcome of interstate bargaining. However, greater participation of hawkish, domestic-­oriented agencies in regional negotiations may enhance the state’s bargaining power in such dealings.

Research Design

My goal in this book is not to develop or test a general theory of regional cooperation, but rather to study the process through which international

56  Power and Regionalism in Latin America

and domestic political factors interact to shape the origins, dynamics, and management of conflict in MERCOSUR. Case study methods and process-­tracing techniques are particularly useful to study causal mechanisms and complex interaction between explanatory factors in the context of individualized cases. Process-­tracing is useful for capturing the complex causal pathways through which different factors interact to shape outcomes (George and Bennett 2005; Gerring 2007). Moreover, this technique permits a careful investigation of the motivations, beliefs, and perceptions of national policy makers, and is thus particularly well suited to the empirical application of a neoclassical realist theoretical approach (Rose 1998). More specifically, I apply what has been referred to as “theory-­guided process tracing” (Falleti 2006), developing theoretically informed narratives that explore the mechanisms through which potential causal factors contribute (or not) to the outcomes of interest. The empirical analysis is presented in the form of “historical narratives” of four instances of conflict and cooperation in MERCOSUR.7 The theoretical framework developed in the previous section structures the historical narrative of the different conflicts, emphasizing the main actors and sequential processes that need to be examined empirically (see Table 3.1.). I focus on instances of commercial and diplomatic tension between Argentina and Brazil in six different sectors, namely, the automobile, footwear, capital goods, textile, household electrical appliances, and wine industries. In all of these sectors, there were significant trade imbalances and hence commercial and political tension between the two countries. In the first three cases (automobiles, footwear, and capital goods) bilateral commercial tension led to the establishment of unilateral restrictions that triggered severe diplomatic conflicts. In the other three sectors, by contrast, commercial tension was contained and managed through bilateral consultations involving private sector actors. Instead of imposing unilateral trade measures in response to bilateral trade imbalances, Argentina and Brazil succeeded in negotiating “voluntary” export restraint agreements (VERs). The cases include examples of unilateral restrictions and VERs imposed and requested by both Argentina and Brazil. The first three case studies of unilateral defection enable us to identify the domestic mechanisms leading to uncooperative behavior, in a

Incentives, Domestic Constraints, and Regional Cooperation  57

context of unchanging systemic constraints and opportunities. Although making the three cases fall within Quadrant D (dispersed decision-­ authority and high domestic costs), they present some variation in the nature and strength of these domestic constraints across countries and sectors. The comparison of the three more conflictive disputes with the more recent cases examined in chapter 7 enables us to see how more substantial changes in systemic imperatives and domestic intervening variables resulted in more cooperative outcomes. In this sense, the selection of cases enables us to compare the relevance of the different domestic constraints and structural incentives across different sectors, countries, and time periods. While all the conflicts studied were successfully managed from a political or diplomatic perspective, partners were less successful in addressing the underlying commercial source of friction. In this sense, the different conflicts varied in terms of the distributional implications of the agreements reached. The outcome of the automobile crisis in 1995 clearly favored Brazil. In the conflict over the footwear industry, Brazil also benefited from the short-­term effects of an unofficial private sector agreement on exports. However, relative to the 1995 crisis, the Brazilian government exhibited a greater willingness to take Argentina’s position into account. While the agreement ultimately did not have great significance, the willingness of Brazil to even consider negotiating such an arrangement must be seen as at least a symbolic concession to Argentina. The outcome of the 2001 crisis over the common external tariff resulted in even greater concessions from Brazil to Argentina. The Brazilian government finally agreed to consider the establishment of a safeguards mechanism, which was formally created in response to Argentina’s threats to restrict trade in the 2004–7 period. Apart from constituting important cases in their own right because of their weight in bilateral trade and/or the domestic economy of each country, some of the sectors selected, such as automobiles, capital goods, footwear, and textiles, can be seen as “hard” cases for my state-­centric explanation of patterns of regional conflict and cooperation. In both countries, the constellations of societal interests tied to these sectors are politically powerful and well organized. Consequently, by demonstrating that even in these most-­likely cases for societal explanations of trade

58  Power and Regionalism in Latin America

policy, interest group pressures and demands were not the main determining factor explaining noncooperative behavior, we thus strengthen empirical support for the book’s neoclassical realist framework, which gives pride of place to state preferences and intrastate bargaining in explaining regional choices and outcomes. In the case studies, I disaggregate the analysis of each conflict in two sequential stages: the decision-­making process in Argentina and Brazil leading to specific policy choices and negotiating positions, and the interstate bargaining leading to the resolution of the conflict. I therefore concentrate on two distinct but interrelated aspects of the dependent variables (conflict or cooperation): the national preferences and choices of each country leading to the outbreak of the dispute, and the distributional outcome of the interstate bargaining through which the conflict was settled. In the first stage of the analysis, I assess the causal relevance of the domestic constraints identified by my framework—­societal pressures, state actors’ incentives for defection given macroeconomic and political calculations, and power-­sharing and bargaining among state actors—­and the mechanisms through which these factors shaped the decision of each country to defect or not from regional commitments and their positions during the conflict. I also consider the ways in which different types of systemic considerations—­offensive and defensive strategic incentives—­ shaped the two partners’ positions and behaviors. In the second part of each empirical chapter, I turn to the interstate bargaining shaping the resolution of the disputes. In analyzing the distributional outcome of the conflict, I describe the negotiations and then examine the specific terms of the agreement reached. I also identify the initial position of each government and compare it to the terms of the settlement to see whose preferences prevail in the outcome. I then consider the role of material capabilities, strategic interdependence, and domestic political factors in accounting for the observed outcome. While I devote a separate chapter to each of the three cases of tension in which partners actually defected from regional commitments, I examine the cases of nondefection (or “negotiated” restrictions) in a single chapter. The data and empirical evidence utilized in this study come from a variety of sources. The analysis relies heavily on extensive semistructured interviews with both state and business actors. In order to confirm the

2004

IV

Argentina threatens to impose licenses on home appliances Argentina threatens to impose licenses on textiles Brazil demands restrictions on wine imports from Argentina

Argentina modifies CET

VA− VA− VA− CB

Brazil agrees to negotiate VER Brazil agrees to negotiate VER Argentina agrees to negotiate VER

CA

VB

VB

(2) Distributional Outcomes*

Brazil accommodates

Brazil resists measures but agrees to VER

Brazil resists

Argentina first resists, then accommodates

Response

*VB = Outcome unambiguously favored Brazil; VB− = Outcome favored Brazil, but Argentina was granted compensatory concessions; VA = Outcome unambiguously favored Argentina; VA− = Outcome favored Argentina, but Brazil was granted compensatory concessions; CA = Compromise in which Argentina received greater concessions; CB = Compromise in which Brazil received greater concessions.

2006

2004

2001

Argentine NTBs on footwear products

1999

III

Argentina attempts to use LAIA safeguards

1999

II

Brazilian automobile regime

1995

I

Uncooperative Move

Case

(1) National Preferences and Choices

Dependent Variables: Conflict and Cooperation

Time Period

Table 3.1.  Summary of Research Design

60  Power and Regionalism in Latin America

reliability of these interview data, I consulted a variety of other sources, including memoirs, private and public statements, newspaper editorials and opinion pieces, and, when available, academic works. Finally, in seeking to reconstruct and understand the process and outcome of interstate negotiations, I relied on official documents, media stories, and secondary academic sources.

Chapter four

The Automobile Sector Crisis

The automobile sector has been a recurrent source of commercial friction between Argentina and Brazil since the creation of MERCOSUR. In 1991, the car industry was excluded from the program of automatic tariff liberalization established by the Treaty of Asunción and placed under a special regime of managed trade. Four years later, when MERCOSUR was launched as a customs union, Argentina and Brazil agreed to postpone the inclusion of the automobile sector until January 2000. In an agreement signed at the Ouro Preto Summit in December 1994, the partners committed themselves not to modify prevailing national regulations and bilateral agreements regarding the automobile sector. In June 1995, however, Brazil introduced a new automobile regime containing quantitative restrictions on automobile imports from all destinations, including MERCOSUR countries. This unilateral measure, which effectively violated the bilateral agreements signed at Ouro Preto, triggered one of 61

62  Power and Regionalism in Latin America

the most serious commercial conflicts in the history of MERCOSUR. This chapter examines the origins, evolution, and resolution of this crisis. The case study of the automobile sector dispute is particularly useful to illustrate how the interplay between domestic political constraints and systemic incentives shaped Brazil’s and Argentina’s national preferences and choices for regional cooperation in the mid-­1990s.

The Crisis

The automobile industry has played a central role in economic integration among Southern Cone countries. Bilateral cooperation in the sector began in 1986 with the signing of Protocol 21, a sectoral complemen­ tarity agreement within the framework of the Economic Integration and Cooperation Program (PICE). The agreement sought to promote rationalization of the productive structures of the two countries’ automobile sectors through increased trade and investment (Vigevani and Cândia Veiga 1997; Comin 1998). While Protocol 21 stimulated exchange between foreign assemblers with subsidiaries in both countries, its overall impact on bilateral trade flows was limited. Nevertheless, governments were reluctant to promote faster liberalization. Thus, when the Treaty of Asunción was signed in 1991, Argentina and Brazil decided to exclude the automobile industry from the program of automatic tariff liberalization and to place it under a special regime of managed trade.1 Almost four years later, when MERCOSUR partners negotiated the launching of the customs union, the automobile sector was again granted preferential treatment. A separate agreement regulating bilateral trade and exempting the sector from the customs union was signed at the Ouro Preto Summit in December 1994. Decision 29/94 called for the implementation of a common automobile regime for MERCOSUR no later than January 1, 2000. A special technical committee was created and given the task of designing the proposal for a common automobile policy. This common automobile policy was supposed to establish complete intraregional free trade for all products in the automobile sector and a common external tariff on automobile imports from outside the region. It would also eliminate all national incentives distorting intraregional

The Automobile Sector Crisis  63

competition. In addition, the agreement required Argentina and Brazil to submit specific information on their respective national automobile regimes to MERCOSUR’s Pro-­Tempore Presidency and, very importantly, committed both parties “not to introduce unilateral modifications in their prevailing national regimes that might restrict intra-­regional trade.”2 Less than six months after the signing of the Ouro Preto Agreements, however, the Brazilian government announced the establishment of a new set of rules and regulations for the automobile sector. The new Brazilian automobile regime consisted of a series of explicit incentives to investments and exports, benefiting specifically the foreign assemblers installed in Brazil. In addition, the regime established quantitative restrictions on automobile imports from any destination, including MERCOSUR countries (Meira Zauli 2000). The Argentine government reacted immediately, claiming the measure violated Decision 29/94 and demanding its reversal. Brazilian officials refused, offering instead to begin negotiations on the common automobile policy. They claimed the Ouro Preto agreements had established an unfair situation that needed to be addressed. The new Brazilian policy, in their view, constituted a step toward leveling the regional playing field. Argentina rejected these claims, emphasizing the importance of honoring MERCOSUR commitments. In response to Brazil’s inflexible stance, the Argentine Foreign Affairs Ministry instructed Argentine diplomats in Montevideo, at MERCOSUR’s Secretariat, to return to Buenos Aires.3 Tension escalated further when President Carlos Menem (1989–99) threatened to boycott a MERCOSUR Summit scheduled for the following week in Brazil.4 In response, Brazilian president Fernando Henrique Cardoso (1994–2002) agreed to suspend the quotas on auto imports from Argentina for a period of thirty days, while a solution to the problem was negotiated. To the disappointment of Argentine officials, however, Cardoso announced that the new automobile regime was nonnegotiable.5 The crisis was resolved through negotiations among top national officials from the two countries. The chief executives played a particularly important role in defusing tension and facilitating the restoration of cooperation. In an agreement reached on June 20, 1995, Argentina

64  Power and Regionalism in Latin America

accepted the Brazilian regime and agreed to begin negotiations over a common automobile regime. This agreement was viewed as formally ending the automobile sector crisis. However, bilateral negotiations over the common policy continued during the second half of the year. In January 1996, an agreement signed by Argentine secretary of industry Carlos Magariños and Brazilian minister of trade and industry Dorothea Werneck outlined the provisions for a transitional regime. Yet divergences over a number of key issues persisted. In fact, protracted negotiations over the shape of the common regime would continue for the next ten years. Although the partners had agreed to liberalize automobile trade by 2006, in July that year they decided to postpone the opening of borders until June 2008 (IDB, 2007).6 In May 2008, Argentina and Brazil agreed to extend the temporary agreement until 2013.7

Explaining National Preferences and Policy Choices

The Brazilian Automobile Regime

The decision by the Brazilian government to launch a new automobile regime in June contravened the Ouro Preto agreements signed in December 1994. What explains this uncooperative behavior? Why did Brazil break from regional commitments signed only six months earlier? This section traces the process through which domestic political factors interacted to produce Brazil’s unilateral decision. It also considers the ways in which power considerations shaped Brazil’s position during the automobile crisis. Societal Constraints: The Role of the Automobile Sector

How relevant were societal constraints in influencing Brazil’s decision to defect from the Ouro Preto agreements? Conventional accounts of the origins of the automobile crisis generally emphasize the role of the prominent and well-­organized Brazilian automobile industry. Indeed, a complete understanding of Brazil’s automobile policy during the 1990s requires close attention to the preferences and behavior of this influential interest group, as well as to the nature of state-­business relations in the sector.

The Automobile Sector Crisis  65

Established in the mid-­ 1950s by the government of Juscelino Kubitschek, the automobile industry played a critical role in Brazil’s economic development.8 The promotion of the Brazilian automobile industry in the 1950s and 1960s relied on the typical instruments of a strategy of import substitution industrialization: fiscal and financial incentives, high national content requirements that required firms to obtain 95 percent of parts and components in Brazil, and closed markets (Galperín 1995; Addis 1997).9 As a result of these policies, some of the most powerful multinational corporations initiated production in Brazil. These foreign-­owned companies soon constituted themselves in a cohesive and well-­organized sectoral association, the National Association of Automobile Assemblers (ANFAVEA). Relations between this group and the state agency in charge of the implantation of the industry, the Automobile Industry Executive Group (GEIA), were close and cooperative. The GEIA not only coordinated all investment and production decisions but also promoted and supervised cooperative relations between assemblers and national auto parts suppliers (Addis 1999).10 These cooperative relations between state and business actors critically contributed to the success of the automobile program. Between 1968 and 1974, automobile production in Brazil grew at an annual rate of 22 percent, reaching 905,000 vehicles. Growth continued until 1980, when production exceeded a million units, making Brazil’s automobile industry the most important consumer durables industry in Latin America and the developing world (Vigevani and Cândia Veiga 1997; Mericle 1984). This unprecedented expansion, however, came to an end in the early 1980s, when the internal market contracted severely as a result of the general weakness in the Brazilian economy. However, and in contrast to the expectations of purely societal explanations of Brazil’s automobile policy, the alliance between the government and the car industry weakened considerably toward the end of the 1980s. In fact, policy toward the sector was radically altered in the early 1990s during the presidency of Fernando Collor de Mello (1990–92). Collor’s trade liberalization policies deepened the crisis in the sector (Arbix 1997; Galperín 1995). Nevertheless, the Collor government recognized the importance of helping the Brazilian automobile industry to adjust to the new competitive environment. Apart from excluding the sector from the regional trade integration, the government used tax exemptions

66  Power and Regionalism in Latin America

and fiscal incentives to promote the industry’s development. These were negotiated and implemented through the Sectoral Chambers, a novel arrangement aimed at achieving a cooperative understanding between labor, business, and state actors (Comin 1998; Bedê 1996; Arbix 1997). The 1992 and 1993 sectoral agreements resulted in a significant reduction in domestic tax rates, thus allowing for a marked decline in the price of finished vehicles.11 They were also very successful in reversing the downward trend in the industry.12 However, the automobile sector strongly resented Collor’s neoliberal policies and insulated decision-­ making style. Consequently, the industry welcomed his impeachment and replacement by Itamar Franco in 1992. As president, Franco was significantly more sensitive to the demands of the automobile lobby than Collor. In response to increased pressure, he agreed to further reductions in the tax on small cars. In 1993, he introduced the so-­called Carro Popular (popular car) regime, which promoted the mass production of small cars through generous tax incentives. The popular car regime was very successful in increasing domestic demand and boosting production. It was also strongly supported both by ANFAVEA and by SINDIPEÇAS, the National Union for the Auto Parts Industry, which frequently complained about the high domestic tax burden.13 The appointment of a new team of orthodox economists to top positions within the government in 1993 marked another radical shift in policy toward the automobile industry. Confronted with deepening political turmoil and escalating inflation, Itamar Franco appointed Fernando Henrique Cardoso as finance minister in May 1993. Cardoso rapidly assembled a team of economists, many of them from the prestigious Catholic University in Rio de Janeiro (PUC–Rio). Given the widespread consensus that price stability was an economic and political priority, the economic team enjoyed unusual autonomy in the design and implementation of economic policy. In 1994, Cardoso’s team implemented the “Real Plan” to control inflation and stabilize the economy by introducing a new Brazilian currency pegged to the US dollar.14 While the exchange rate anchor was successful in containing inflation, the prices of automobiles continued to increase. By the second half of 1994, the boom in the demand for small cars began putting pressure on prices. The “ágio,” or premium at which small cars were sold, became a major issue of contention between the economic team and the

The Automobile Sector Crisis  67

automobile sector. Given their strong commitment to the market, the economists at the Ministry of Finance and the Central Bank regarded the special incentives enjoyed by the automobile industry with suspicion (Franco 1999; Diniz 2000).15 ANFAVEA, however, called for a further reduction in internal taxes as a solution to the ágio problem.16 The sector justified this request by emphasizing the adverse effects that the increasing appreciation of the currency had on its efforts to increase produc­tivity. Tension between the automobile lobby and the government increased after Ciro Gomes replaced Cardoso as finance minister in 1994, given his alleged contempt for “Paulista industrialists” in general, and for the automobile sector in particular (Kingstone 1999, 198).17 Confronted with the reluctance of automobile assemblers to lower prices of small cars, the economic team decided in September 1994 to anticipate the implementation of the MERCOSUR common external tariff, initially envisaged for January 1995. This led to an effective reduction of the tariff on automobile products from 35 to 20 percent (Galperín 1995). The measure took national producers by surprise, provoking from them loud complaints and threats to reconsider planned investment.18 They also sought to exploit their links with President Franco, who agreed in October 1994 to extend the scope of the popular car regime to eight new models (Buarque de Hollanda 1996). However, this measure was not enough to compensate for the blow that the abrupt tariff reduction constituted for the automobile sector.19 Despite their aggressive pressure campaign, ANFAVEA and SINDIPEÇAS saw their interests ignored once again in December 1994, when Brazilian negotiators agreed to sign Decision 29/94. For the economic team, as for the foreign policy elite, the agreement on automobiles was a concession to Argentina in exchange for Argentina’s support for the establishment of the common external tariff. Economists at the Central Bank and at the Ministry of Finance viewed the external tariff as a crucial disciplining instrument, which would “lock in” trade liberalization reforms and thus contribute to the maintenance of price stability. Thus, members of the economic team involved in the negotiations, such as Ciro Gomes and Winston Fritsch, claimed the Ouro Preto agreements were “a success” (Fritsch 1995). The automobile lobby of course strongly disagreed. Both assemblers and auto parts producers claimed the agreements harmed their

68  Power and Regionalism in Latin America

competitive position within the regional market (Vigevani and Cândia Veiga 1997). First, the Argentine automobile regime granted assemblers installed in the country extensive benefits and incentives. Second, and fundamental from the Brazilian private sector’s perspective, the import-­ export compensation mechanism included in the Argentine policy restricted Brazilian access to the Argentine automobile-­products market.20 Finally, auto parts producers accused Brazilian negotiators of bene­ fiting the Argentine industry at their expense, claiming the agreement would deepen the crisis in the subsector.21 The economic team initially dismissed these complaints. However, in the first half of 1995 automobile policy again shifted dramatically. In February 1995, the tariff on automobile products was restored to its previous level of 32 percent. One month later, it was raised to 70 percent. On June 13, the Brazilian government announced the establishment of a new set of rules and regulations for the automobile industry. The “New Automobile Regime” relied on a combination of investment incentives and export promotion measures to stimulate production of vehicles within Brazil (Tavares de Araújo Jr. 1998; Mori 1998; Meira Zauli 2000). To attract foreign direct investment, the policy also granted special benefits to newcomers and to established firms wishing to enlarge their facilities in the country. Finally, the regime included quantitative restrictions on imports of finished vehicles and parts and components from every destination, including MERCOSUR countries.22 In sum, the empirical evidence suggests that the intensification of pressure from the politically prominent and well-­organized automobile lobby contributed to the shift in automobile policy and hence to the breakup of Argentine-­Brazilian cooperation in 1995. However, the evolution of Brazilian policy toward the automobile sector in the 1990s also shows that, despite intense lobbying, the automobile sector had been largely unable to shape policy outcomes. Indeed, pressure by national producers failed to prevent the lowering of tariffs on automobile imports and the signing of the Ouro Preto agreements in 1994. To understand why this group’s efforts finally paid off in June 1995, it is essential to consider the ways in which private sector demands interacted with, and were mediated by, the preferences of different state actors sharing power over foreign economic policy making in Brazil during this period.

The Automobile Sector Crisis  69 Intrastate Cleavages and State Incentives for Defection

The success of the Real Plan in reducing inflation further increased the salience and power of the economists at the Ministry of Finance and the Central Bank within the Brazilian cabinet. Because price stability was central to Cardoso’s success in the 1994 presidential elections, he made few changes in the economic team when coming to office. The creation of the Foreign Trade Chamber (CAMEX) in February 1995 was aimed at increasing the voice of other agencies in the process of making trade policy,23 yet in practice, orthodox economists such as Finance Minister Pedro Malan and Central Bank Director of External Affairs Gustavo Franco continued to dominate economic decision making. As a result, trade policy remained largely subordinated to the imperatives of macroeconomic stabilization (Pio 1998; Diniz 2000). Nevertheless, being part of a political coalition, Cardoso had to yield to his political allies’ demands for positions in the government (Kingstone 1999). His decision to appoint José Serra, an economist and leading political figure from the state of São Paulo in the Brazilian Social Democratic Party (PSDB), as minister of planning resulted in important divisions within the economic team. Unlike the technocrats in the economic team, Serra had a long career as a politician from the state of São Paulo (Loureiro 1997). His developmentalist ideas were also at odds with the orthodox views of the “PUC-­boys” in the cabinet (Araujo 1998). As a result of both his political aspirations and his developmentalist orientation, Serra was significantly more responsive to the demands of the private sector. Together with his allies within the government, who included key officials such as Minister of Trade and Industry Dorothea Werneck and Secretary of Economic Policy José Roberto Mendonça de Barros, Serra became the private sector’s main channel of access to the policy-­making process.24 Indeed, Serra soon became the spokesman for a broad state-­society coalition that rejected the orthodox policies followed by the economic team and, in particular, the priority given to macroeconomic stabilization imperatives over trade, industrial, and social objectives.25 This group rejected the economic team’s policies of high interest rates and overvalued currency, strongly advocating for a devaluation to boost exports. Serra was also critical of MERCOSUR,26 and particularly of the Ouro

70  Power and Regionalism in Latin America

Preto automobile agreements, claiming they established “a crazy asymmetry,” which “had to be corrected.”27 To address this unfair outcome, he led an interministerial team that worked closely with ANFAVEA representatives in the design of the new automobile policy established in June 1995.28 Serra and his developmentalist allies within the government thus played a key role in the design of the automobile regime. Their strengthening relative to the more liberal members of the economic team after 1995 certainly contributed to the greater success of the automobile lobby in influencing policy outcomes. And yet, despite the higher dispersion of decision-­making authority during this period, economic policy makers continued to occupy a central role within the executive. The economic team initially rejected the highly interventionist policy proposed by Serra and the automobile sector.29 Their decision to endorse it eventually reflected their independent macroeconomic and political calculations. Specifically, a combination of external and domestic developments in 1995 increased the economic and political utility of trade policy autonomy, thus raising the costs of observing regional commitments. First, the deterioration in the external financial environment following the December 1994 Mexican devaluation created independent macroeconomic incentives for the economic team to support the interventionist automobile policy. The combination of aggressive trade liberalization and overvalued exchange rate resulted in a deepening of the current account deficit toward the end of 1994. As Table 4.1 indicates, automobile imports experienced a particularly marked increase, given the reduction in tariff levels in September 1994, and accounted for a significant proportion of the trade deficit (Bedê 1996; Vigevani and Cândia Veiga 1997). During the first quarter of 1994, automobile imports more than tripled relative to the same quarter a year earlier. It was in response to these macroeconomic pressures that the economic team decided to increase the tariff on automobiles in February and March 1995. However, these measures proved insufficient to contain the deepening trade deficit. The reversal in capital flows triggered by the Mexican peso crisis in 1995 put additional pressure on the balance of payments and threatened the sustainability of the exchange rate anchor. In response, the government devalued the exchange rate 6 percent and allowed the

The Automobile Sector Crisis  71 Table 4.1.  Brazilian Imports of Automobiles, 1991–95 Year

Imports (thousands of units)

Share of Total Sales in Internal Market (%)

1991

23.2

2.9

1992

32.2

4.2

1993

79.9

7.0

1994

193.1

13.8

1995

411.6

23.2

Source: Bedê (1996).

real to float in a band of 5 percent (Bonomo and Terra 2001). Given their concerns with external credibility and inflationary pressures, policy makers were reluctant to further adjust the exchange rate. In this context, the regime proposed by Serra’s team appeared to provide a viable and less costly policy alternative. The investment incentives imposed in the regime would attract much-­needed foreign capital into the Brazilian economy. More important, in the shorter run, the quantitative restrictions would not only help ease the mounting pressure on the trade balance but also generate fiscal resources. From the economic team’s orthodox perspective, the automobile regime had a second, domestic political rationale. The members of the economic team viewed the measure as a strategic concession to Serra’s coalition, through which they sought to neutralize their growing criticism of macroeconomic management, and in particular, of the exchange rate anchor. Growing domestic discontent with the overvaluation of the currency threatened to undermine both the domestic political legitimacy and the external credibility of the macroeconomic stabilization program. Given their concerns with maintaining price stability, members of the economic team feared the collapse of the exchange rate peg.30 In this context, the automobile policy was an attempt to partly compensate a powerful group within the private sector for the costs of the policy of strong currency and high interest rates so that, in the words of Gustavo Franco, “our internal opposition would be weakened by the fact that the auto industry would be happy with our tariff policies. And then they would not fight for a change in the exchange rate.”31

72  Power and Regionalism in Latin America Systemic Incentives: The Strategic Logic of Regional Cooperation

Brazil’s violation of MERCOSUR commitments in 1995 was driven primarily by domestic political and economic considerations. The establishment of the new automobile regime reflected a convergence of preferences among the private sector and the two main domestic-­oriented agencies sharing power over economic policy making in Brazil at that time. Both neoliberal economists and members of the sectoral agencies within the government were prepared to risk a deterioration of cooperative relations with Argentina for their domestic political and economic priorities. In contrast, officials at the Ministry of Foreign Relations faced a more delicate trade-­off. Because their institutional mandate was to represent Brazil’s national interest in international negotiations, Brazilian diplomats were more concerned than members of the other two groups about the effects that the move would have on the stability of regional cooperation. As the “founding fathers” of MERCOSUR, Itamaraty officials had a special stake in ensuring the project’s success (Soares de Lima 1996).32 Indeed, according to the then Brazilian foreign minister, Luiz Felipe Lampreia, the foreign policy elite initially resisted the automobile proposal because of its protectionist nature. However, after protracted internal negotiations, the three groups “ended up reaching a consensus.”33 The foreign policy executive’s support for the regime, however, should not be interpreted as reflecting an erosion of its commitment to the strategy of regional integration. In fact, Itamaraty had been one of the most vigorous proponents of launching the customs union in January 1995. Brazil’s willingness to accept an unbalanced deal on automobiles at the Ouro Preto negotiations reflected not only the economic team’s urgency to lock in trade liberalization reforms, but also Itamaraty’s strong strategic interest in finalizing the deal on the customs union. Unlike the position of the members of the economic team, that of the foreign policy elite toward MERCOSUR was shaped by systemic imperatives, and in particular, by power-­political considerations. First, it was influenced by concerns with Argentina’s enthusiastic embrace of strategic alignment—­ known as “carnal relations”—­with the United States in the early 1990s. These fears were accentuated by the speculation within the Argentine government in 1993–94 that Buenos Aires might be invited to join the North American Free Trade Agreement (NAFTA). Uncertainty about the

The Automobile Sector Crisis  73

extent of Argentina’s strategic commitment to MERCOSUR increased the willingness of Brazilian diplomats to compromise on commercial issues, such as in the automobile sector, in exchange for Argentina’s support for the establishment of the common external tariff. The latter would prevent partners from unilaterally pursuing preferential agreements with third parties. Second, like previous moves to strengthen ties with Argentina, attempts to deepen and consolidate the bloc in 1994 must be interpreted as a defensive response to a series of extraregional geopolitical threats. Two events were of particular relevance: the approval of NAFTA by the US Congress in 1993, and the 1994 Summit of the Americas in Miami, where the heads of state of thirty-­four countries agreed to begin negotiations for the establishment of a free trade area of the Americas (Bouzas 2002; Albuquerque 2001). As a customs union, MERCOSUR would act as a bloc in external negotiations. This would significantly increase members’ leverage in hemispheric talks, thus serving as a counterweight to US influence in the region (Bouzas 2001). Bloc bargaining would also help members as they more actively participated in multilateral trade negotiations within the context of the WTO (Barbosa and César 1994, 301). Brazil’s focus on improving its bargaining position at the international level must be understood in reference to two main persistent themes in Brazilian foreign policy: its emphasis on national autonomy and the goal of diversifying international links in order to balance US power in the Western hemisphere (Da Motta Veiga 2000b; 2001). According to the “globalist” paradigm guiding Brazil’s foreign behavior since the 1960s, a central goal of Brazilian foreign policy was to contribute to the country’s industrial development. This was, in turn, considered to be a crucial condition for a more autonomous Brazilian role in the international system (Da Motta Veiga 2001; Pinheiro 2000). During the Cold War, and while import substitution industrialization was economically viable, Brazil’s foreign policy sought “autonomy from a distance, [with the] goal of achieving emancipation through development” (Lafer 2001, 105).34 Yet, following the end of the Cold War, the Brazilian foreign policy elite had come to realize that Brazil’s goals of national autonomy and development called for active participation in the construction of the rules

74  Power and Regionalism in Latin America

and norms governing international relations. The previous strategy of autonomy from a distance was thus replaced by one of autonomy through participation, through which Brazil sought to increase its ability to influence international decision-­making processes (Fonseca 1998; Lampreia 1998). From this perspective, negotiating jointly with MERCOSUR partners would be crucial in enhancing Brazil’s ability to shape international outcomes. A similar defensive rationale underlay the initiative for a South American Free Trade Area (SAFTA), launched in 1993 by President Itamar Franco. Yet the interest of the Brazilian foreign policy executive in promoting South American unity also reflected offensive incentives. Itamaraty’s awareness of the relative power advantages derived from Brazil’s size within South America had historically fueled political ambitions of regional leadership (Grugel and Medeiros 1999). According to Lafer (2000, 215), therefore, the emphasis of the official discourse on “union and friendship among South American countries hides deeply rooted aspirations to regional hegemony.” MERCOSUR was a key component in this broader international strategy, whereby the country would not only gradually gain recognition as a regional power in South America, but also achieve “intermediate” power status at the global level (Soares de Lima 1996; Bernal-­Meza 2000; Bulmer-­Thomas and Page 1999; Hirst and Soares de Lima 2002).35 In this context, therefore, Itamaraty’s position in the 1995 crisis reflected both of these central aspects of Brazil’s foreign policy. On the one hand, the strong strategic commitment to MERCOSUR, a fundamental element in Brazil’s attempts to balance US influence in the Western hemisphere and to increase its influence in international forums, made Brazilian diplomats eager to restore regional cooperation. On the other hand, awareness of the position of relative strength that Brazil occupied at the regional level resulted in a self-­confident, forceful stance in regional negotiations. As Cardoso would put it, “Brazil . . . cannot be arrogant, it cannot seek hegemony. But Brazil is key given its size.”36 Thus, the foreign policy executive’s endorsement of the automobile regime, even when it would obviously undermine regional cooperation, reflected its conviction that, given the importance of the Brazilian market to Argentina, the latter would have no option but to accept the measure.

The Automobile Sector Crisis  75

In sum, in 1995 the Brazilian foreign policy elite remained strongly committed to the strategy of regional cooperation. Brazilian diplomats, consequently, supported the establishment of the automobile regime not because they did not care about the consequences that this uncooperative move would have on relations with Argentina. Rather, they were confident that, given the pervasive power asymmetries between the two countries, the measure would not have significant consequences on the regional status quo. Argentina: From Resistance to Accommodation

The Argentine government initially reacted very strongly to Brazil’s unilateral decision to change its national automobile regime. Claiming that the move was incompatible with the Ouro Preto agreements, Argentina demanded its immediate reversal and threatened to suspend bilateral negotiations on other issues. However, Argentine officials soon softened their stance. Indeed, less than a week after the announcement of the measure, they accommodated to Brazil’s position and accepted its new automobile regime. What explains the shift in Argentina’s negotiating position? Below, I explore the role of societal pressures, intrastate cleavages, and systemic incentives in shaping Argentina’s behavior during the automobile crisis. The Influence of the Automobile Sector

The Argentine automobile sector, like the Brazilian industry, reached the 1980s in a state of profound crisis (Catalano and Novick 1998).37 In response, the Argentine government launched a highly interventionist program that sought to stimulate both production of and internal demand for automobiles.38 The Argentine Automobile Regime, implemented in 1991, consisted of a series of regulations aimed at promoting the restructuring and modernization of the industry, in a context of protection from international competition (Vigevani and Cândia Veiga 1997; Amato 1999). Although it was designed mainly by state actors, the final draft of the policy was negotiated in March 1991 among the multiple actors in the automobile sector: the Association of Argentine Automobile Assemblers (ADEFA); the Argentine Association of Automobile

76  Power and Regionalism in Latin America

Sellers (ACARA); the two chambers representing the auto parts industry, the Argentine Chamber of the Auto Parts Industry (CAIA) and the Industrial Chamber of Argentine Auto Parts Producers (CIFARA); and the sector’s labor unions.39 This Automobile Reactivation Agreement had impressive results. Apart from dramatically increasing production and employment levels in the sector, the negotiations between state and societal actors led to a marked reduction in the price of automobiles.40 However, the Argentine automobile regime had intrasectoral distributional consequences, benefiting foreign-­owned assemblers at the expense of national auto parts producers. Automobile assemblers clearly stood to gain from the various financial and fiscal incentives included in the regime as well as from preferential tariffs on the imports of auto parts and components. In fact, ADEFA had played an important role in the design and establishment of the regime. This well-­organized associ­ ation had actively pressed the government for a program to address the crisis in the sector, even submitting specific proposals for its consideration. Unlike other sectoral associations in Argentina, ADEFA had a fluent dialogue with the government and frequently expressed its demands independently of other industry-­wide associations such as the Argentine Industrial Union (UIA).41 By contrast, the automobile regime imposed direct costs on producers of auto parts and components. These nationally owned firms were particularly harmed by the preferential tariffs on imports of auto parts and inputs, which were aimed at improving the competitiveness position of local assemblers. In addition, auto parts producers were excluded from many of the financial and investment incentives extended to the assemblers. Indeed, the regime exacerbated the crisis in the auto parts industry, triggering an important concentration and denationalization (Catalano and Novick 1998). Yet those firms that survived this process supported the automobile regime, which they viewed as a superior alternative to the abrupt unilateral opening experienced by other domestic sectors.42 Both assemblers and auto parts producers supported the strategy of phased regional integration negotiated in 1991 by the Argentine and Brazilian governments. From their perspective, given the limited size of the national market, regional integration was crucial for the success of the regime. The enlarged regional market allowed firms to specialize in

The Automobile Sector Crisis  77

fewer models and to produce these at a larger scale and lower cost.43 Similarly, the success of the regime in attracting investment to Argentina depended crucially on the perceived benefits for foreign firms of access to the enlarged regional market (ADEFA 1997). Thus, in 1994, as the end of the transition period envisaged by the Treaty of Asunción approached, the automobile industry pressured the government for an extension of the sector’s preferential treatment. In this sense, players in the sector viewed the outcome of the Ouro Preto negotiations as a resounding success. By the same token, Argentine assemblers and auto parts makers vigorously opposed the establishment of the new Brazilian automobile regime announced in June 1995.44 Indeed, the Brazilian measure adversely affected the Argentine private sector in a number of ways. First, the quantitative restrictions included in the Brazilian regime threatened Argentine automobile sales to Brazil, at a time when they confronted a significant collapse in internal demand, triggered by the Mexican financial crisis.45 Second, the auto sector feared that the various incentives offered by the Brazilian regime would exacerbate already significant structural asymmetries between the two markets. The generous incentives that the Brazilian regime offered newcomers further added to the attractiveness of the larger Brazilian market. Finally, the Brazilian regime also harmed the interests of Argentine auto parts firms. By reducing Brazil’s external tariff on imports of auto parts and components to 2 percent, the Brazilian policy eroded the regional preferences that Argentine producers of parts and components had enjoyed until 1995.46 Consequently, representatives from the Argentine automobile sector demanded a vigorous response from the Carlos Menem government.47 This strong pressure undoubtedly influenced the government’s position during the crisis. However, to fully account for Argentina’s behavior during the negotiations it is essential to examine the preferences of state actors. The Economic Team’s Calculus

The Ministry of Economy also favored adopting a tough stance against Brazil. Indeed economic officials maintained the most “hawkish” position during the conflict. Their position was crucially influenced by macro­economic considerations. In particular, the economic team shared

78  Power and Regionalism in Latin America

the auto industry’s concerns about the effects of the quotas on Argentine exports. In the context of deteriorated external and domestic economic conditions, they had expected automobile exports to help reverse Argentina’s growing current account deficit (ADEFA 1996). In addition, like the automobile sector, the economic team feared that the Brazilian measure would result in a redirection of investment flows toward Brazil.48 A diversion of investment flows seemed particularly threatening in 1995, as Argentina confronted a dramatic outflow of foreign capital as a result of the Mexican currency crisis (Heymann 2000). More importantly, Argentine minister of economy Domingo Cavallo’s hawkish position during the crisis reflected a growing perception among members of the economic team that further integration in MERCOSUR had become a costly and constraining policy alternative. However, notwithstanding the limitations those regional trade liberali­ zation agreements imposed on national policy autonomy, at the time Cavallo saw the project of integration as directly contributing to the sustainability of the market-­oriented reforms introduced in Argentina in the early 1990s. The enlarged market provided an outlet for Argentine exports and a magnet for foreign investment. Moreover, the signing of regional commitments helped the economic team lock in politically controversial tariff reductions. In addition, the various exemptions and exceptions included in the Treaty of Asunción mitigated the domestic political costs of relinquishing unilateral control over trade policy instruments. However, most of these exemptions were only temporary. As they began to be phased out, and, more fundamentally, as the deadline for the establishment of the customs union approached, the domestic costs of giving up unilateral control over trade instruments increased. Trade policy autonomy was especially valuable for Argentine economic officials in the 1990s, given the rigidity imposed by the fixed exchange-­rate regime. The economic team was thus less enthusiastic about the negotiation and establishment of a common external tariff, which further constrained their room to maneuver (Campbell, Rozemberg, and Svarzman 1999). In addition, the transformation of MERCOSUR into a customs union would seriously limit Argentina’s freedom to negotiate commercial agreements with other countries. In 1993, several members of the Ministry of Economy publicly expressed their doubts about MERCOSUR, suggesting that Argentina would be better off pursuing a Chilean-­like strategy,

The Automobile Sector Crisis  79

lowering tariffs further and pursuing a bilateral free trade agreement with the United States. The Foreign Policy Executive: Defensive Incentives for Cooperation

The hawkish stance adopted by Argentine economic officials in 1995 was at least in part offset by the more conciliatory position of the foreign policy executive. Although President Menem initially also reacted forcefully to the Brazilian measure, he soon moderated his stance and agreed to participate in bilateral talks to resolve the conflict. Other prominent members of the foreign policy elite, such as Foreign Affairs Minister Guido Di Tella and Secretary of International Economic Relations Jorge Campbell also sought to downplay perceptions of crisis and to emphasize their enduring commitment to MERCOSUR.49 For them, MERCOSUR was a political and strategic priority. Despite the domestic political and economic costs of Brazil’s unilateral measure, they favored a quick resolution of the crisis. This strong commitment to the regional cooperative project primarily reflected systemic factors. In particular, this position was informed by defensive considerations. Much like their Brazilian counterparts, Argentine diplomats viewed MERCOSUR as a vehicle for strengthening the standing and bargaining power of members within a highly asymmetrical international system. Nevertheless, there were important differences between the foreign policy strategies of Brazil and Argentina during this period. In the early 1990s, the Menem administration introduced unprecedented changes in Argentina’s foreign policy priorities. The new strategy, which redefined Argentina’s national interest in economic terms, entailed a historical shift away from antagonism toward political and strategic alignment with Washington. This policy was built on the premise that a “dependent, vulnerable, impoverished and marginally strategic country” such as Argentina had few options but to align with the lead power in the international system (Escudé 1992; 1997). To redefine the country’s international image as a “normal” and reliable country, the Menem government launched a strategy of “grand gestures,” which included sending Argentine troops to the Persian Gulf in 1991, a distancing from the so-­called Third World and from the nonaligned movement, and a dramatic change in voting patterns in international forums (Bernal-Meza 2000). Thus, while Brazil sought to balance

80  Power and Regionalism in Latin America

US power and influence in the region, Argentina’s strategy under Menem was to bandwagon with the global hegemon. In the early 1990s, top Argentine foreign policy makers saw the consolidation of the strategic and commercial partnership with Brazil as complementary to the goal of developing “carnal relations” with the United States (Escudé 1992; Bonfili and Di Chiaro 1997). However, speculation in 1993 about the possibility that Argentina might be invited to sign a preferential agreement with the United States triggered an intense debate within the Argentine government (Campbell, Rozemberg, and Svarzman 1999). While key members of the economic bureaucracy favored this alternative over MERCOSUR, the foreign policy executive maintained a cautious outlook regarding the NAFTA option (Russell 1992). The Foreign Ministry was also skeptical about the benefits of hemispheric integration and believed it was in Argentina’s interest to engage in FTAA negotiations through MERCOSUR. Apart from reflecting their vastly different institutional mandates and priorities, the divergences between the foreign policy elite and the economic team regarding Argentina’s strategic options can be explained as a function of conflicting assessments of the country’s position and relevance within the international system. The economic team’s hopes for closer, preferential commercial relations with the United States relied on an inflated assessment of Argentina’s role and relevance within the regional and hemispheric systems (Tulchin 1999; Lavagna 1999).50 By contrast, the stance of foreign policy officials reflected a more realistic interpretation of the country’s power resources and of the constraints that the limitations of those resources placed on the country’s bargaining power. In the words of Jorge Campbell (1999a, 15), Argentine secretary of international economic relations, “[in] international negotiations . . . what is at stake are political and material interests. . . . If countries like Argentina ignore this reality or think that it can be reversed by the will or ability of our negotiators, they head toward failure.” These perceptions of relative weakness informed the foreign policy executive’s position during the 1995 crisis. The Argentine foreign policy executive was also aware of the asymmetric nature of its relations with Brazil. As a result, President Menem and top officials at the Foreign Ministry believed that it was in Argentina’s long-­term interest to yield to Brazil on the automobile issue for the sake of restoring cooperation.51

The Automobile Sector Crisis  81

The eventual softening of Argentina’s position—­crucial in the resolution of the crisis—­reflected the predominance of these views and the importance of long-­term strategic priorities in explaining the survival of MERCOSUR.52

Bilateral Negotiations and the Resolution of the Conflict

The evidence presented above demonstrates that, despite intense domestic political pressures, Argentina and Brazil shared an interest in overcoming the automobile crisis and restoring cooperation. This convergence reflected shared perceptions of external vulnerability in the context of a highly asymmetric international system. Nevertheless, the resolution of the automobile conflict had significant distributional implications. The June 1995 Agreement

Following the heated public exchange triggered by the announcement of the new Brazilian automobile policy, representatives of the two governments met in São Paulo in June to explore solutions to the conflict. Both negotiating teams included high-­level economic and foreign policy officials, such as Cavallo, Carlos Magariños, Jorge Campbell, and Guido Di Tella on the Argentine side, and Pedro Malan, José Serra, Dorothea Werneck, and Luiz Felipe Lampreia on the Brazilian team. Significant tension prevailed during this first meeting, given the seemingly incompatible positions of the two countries. Brazilian negotiators strongly defended the new automobile regime and refused to exempt Argentina from the reach of the quotas. Nevertheless, participation by Presidents Cardoso and Menem during the second day of negotiations contributed to defusing tension. Both chief executives adopted a conciliatory stance, reaffirming their objective to define “mutually acceptable rules for automobile exchange between the two countries.”53 At the end of the second day of talks, the two presidents announced that a deal had been reached. In a reversal of their earlier stance, Argentine negotiators agreed to recognize the new Brazilian automobile program. The two governments also pledged to begin negotiations over the terms of a common automobile regime for the region. Specifically, the

82  Power and Regionalism in Latin America

agreement contained three main provisions. First, it established that the quotas on automobile imports included in the Brazilian regime would be suspended for a period of thirty days. During this period, the two countries would negotiate alternative mechanisms to deal with bilateral trade imbalances in the automobile sector. Second, Brazil would maintain its newly established regime until a transitional common automobile regime was implemented. Third, partners agreed to begin negotiations over the shape of a transitional regime, with the objective of launching it by January 1996.54 What were the distributional implications of the agreement? A comparison of the terms of the agreement with the initial positions defended by each country suggests that the deal clearly favored Brazil. Despite acting in contravention of regional commitments, Brazil succeeded in maintaining the new automobile regime, and Argentina clearly had to compromise and back down from its initial position in order to restore cooperation.55 While essential for the resolution of the crisis, Argentina’s concession had important domestic political and economic costs. The agreement not only was opposed by the Argentine private sector but also, by allowing Brazil to maintain extensive investment incentives, threatened to divert foreign investment flows away from Argentina. In exchange, Brazil agreed to suspend temporarily the quotas on automobile products from Argentina, which would have certainly been harmful for the Argentine industry (ADEFA 1996). From Brazil’s perspective, however, the value of this concession was marginal. Because purchases from Argentina represented less than 10 percent of total Brazilian car imports, the concession would not have a significant impact of Brazil’s trade deficit.56 As Serra himself would recognize, the decision to exclude Argentina from the quotas “actually did not change much.”57 The agreement thus clearly involved an unbalanced exchange of concessions. Several factors contributed to this result. First, the unbalanced terms of the agreement reflected the asymmetries in economic size and power between the two partners. Brazil’s preponderance within MERCOSUR inevitably increased its leverage in regional negotiations. Moreover, patterns of asymmetrical economic interdependence clearly favored Brazil. As Table 4.2 illustrates, Argentina’s commercial dependence on MERCOSUR in 1995 was significantly stronger than Brazil’s.

33.0

151.0 243.2

705.4

b

Population in millions; data from 1990. Participation in total MERCOSUR exports. c Participation in total MERCOSUR imports. Sources: IDB/INTAL, MERCOSUR Report, various issues.

a

Argentina

Brazil

Populationa

GDP (US$ billions)

27.4

70.0

Share of MERCOSUR GDP (%)

Table 4.2.  Measures of Economic Power and Interdependence, 1995

20,961.9 (32.9%)b

46,503.4 (13.2%)b

Exports to MERCOSUR (US$ millions)

20,067.5 (23.6%)c

49,581.6 (13.7%)c

Imports from MERCOSUR (US$ millions)

84  Power and Regionalism in Latin America

More importantly, the Brazilian market had become an increasingly central outlet for Argentine automobile exports (see Table 4.3). In 1995, 90 percent of Argentine automobile exports were purchased by Brazil. Reaching a cooperative agreement was therefore more important for Argentina than for Brazil. As a result, and in line with explanations emphasizing the role of patterns of asymmetrical interdependence, Brazil enjoyed significant bargaining advantages during the negotiations. However, a different picture emerges when considering other aspects of the Argentine-­Brazilian relationship. As the discussion of both countries’ foreign policy priorities in the previous section suggested, during this period, Argentina’s political and strategic commitment to MERCOSUR was more ambivalent than Brazil’s. An influential group within the government favored closer bilateral relations with the United States and other countries outside the bloc. Cavallo’s decision to send Sánchez to Chile when the crisis broke out, for example, was partly aimed at stressing his openness to other options. The discussions in Buenos Aires regarding the possibility of joining NAFTA had certainly raised concerns among Brazilian foreign policy makers, who remained committed to the establishment of a customs union. In this sense, it could be argued that asymmetries in patterns of strategic interdependence favored Argentina. Yet, during the automobile conflict negotiations, the Argentine government was unable to capitalize on this potential source of bargaining power. Two factors undermined Argentina’s ability to achieve a more balanced distributional outcome. First, the collapse of the NAFTA Table 4.3.  Argentine Automobile Exports, 1990–95 (US$ millions) Total Exports (US$ millions) 1990

Exports to Brazil (US$ millions)

Exports to Brazil as Share of Total Exports (%)

33.6

1.8

5.3

1991

71.7

36.6

51.0

1992

113.3

78.7

69.4

1993

299.9

225.2

75.1

1994

447.8

324.2

72.4

1995

733.9

661.2

90.0

Source: ADEFA (1996).

The Automobile Sector Crisis  85

alternative in 1993 undermined the credibility of Argentina’s exit threats, thus weakening Argentina’s position. In addition, domestic political factors hindered Argentina’s ability to exploit more fully the potential leverage granted by patterns of asymmetrical interdependence. Argentina’s bargaining position suffered not only from self-­perceptions of relative weakness of the foreign policy executive, but also from the lack of internal cohesion among Argentine negotiators. Despite the divergences within the Brazilian government, all major players converged on the importance of defending the new automobile regime. In contrast, the divergences and lack of coordination between the Argentine economic team and foreign policy elite significantly undermined the consistency and strength of Argentina’s position during the negotiations. The Werneck-­Magariños Agreement

As agreed in June 1995, Argentine and Brazilian government representatives met several times during the second half of the year to discuss the harmonization of the national automobile regimes. Their objective was to agree on the main provisions of a “transitional” automobile regime, which would regulate exchange and production decisions within the regional market until the definitive common policy was launched in January 2000. While both partners had an interest in reaching an agreement over the transitional regime, their underlying motivations were quite different. Argentina was primarily interested in harmonizing investment incentives, so as to mitigate the structural and competitiveness asymmetries between the Argentine and Brazilian markets. The Brazilian government, instead, was increasingly concerned about the potential incompatibility of the new automobile regime with World Trade Organization (WTO) rules. In October 1995, the WTO had rejected the system of quotas included in the automobile policy, claiming they were discriminatory. Although the expected economic benefits of the quotas were limited, the WTO’s ruling had raised concerns that the regime’s investment and financial incentives could also be deemed discriminatory and incompat­ible with multilateral trade regulations.58 Because the automobile program had been introduced in June 1995, Brazil had missed the March

86  Power and Regionalism in Latin America

1995 deadline for notifying the WTO and applying for an exemption from the trade-­related investment measures (TRIMs) agreement. In contrast, Argentina had notified the WTO about its automobile regime and had received authorization to maintain it until 1999. In this context, Brazil’s strategy was to try to “free ride” on the waiver granted to Argentina, by claiming that the launching of MERCOSUR as a customs union in 1994 required the establishment of a common automobile policy (De Paiva Abreu 1996). In other words, the prompt negotiation and agreement on a transitional regional automobile regime was seen as the only possible way in which Brazil could get the investment incentives included in its national program approved by the WTO.59 Negotiations over the specific provisions of the regime proceeded rather smoothly during the second half of 1995. According to Decision 29/94, the establishment of a common automobile regime required addressing at least four issues: (1) the elimination of tariff and nontariff barriers to trade of both finished vehicles and auto parts and components; (2) the harmonization of tariffs on automobile products imported from third countries; (3) the negotiation of a regional content index for vehicles produced in Argentina and/or Brazil; and (4) the elimination of investment incentives distorting regional competition (Haar and O’Keefe 2001). Some of these issues were more contentious than others. Both countries favored postponing the establishment of free intraregional trade of finished vehicles and agreed on the importance of maintaining a system of compensated exchange. The partners also agreed on the bene­ fits of further delaying the definition of a common external tariff.60 In contrast, partners had conflicting positions regarding the liberalization of trade in auto parts and components. Argentina was more reluctant than Brazil to establish free trade in auto parts, given the significant differences in size between their auto parts sectors. In addition, Argentina and Brazil diverged on requirements for regional and national content for automobiles produced within the bloc.61 Yet the most contentious issue in the negotiations was undoubtedly the harmonization of investment incentives. There were two main points of divergence. First, the Brazilian regime offered assemblers and auto parts firms producing in Brazil a preferential tariff (of 2 percent) on imports of raw materials and inputs from third countries.62 By contrast, according

The Automobile Sector Crisis  87

to the Argentine regime, local assemblers and auto parts producers had to pay the common external tariff (18 percent) for their imports of raw materials and inputs from extrazone countries.63 Thus, Argentine producers were at a competitive disadvantage vis-­à-­vis their Brazilian counterparts. A second point of divergence concerned the bonus on capital investments offered by the two regimes.64 In a meeting held in Punta del Este, Uruguay, in December 1995, Brazilian minister of trade and industry Dorothea Werneck and Argentine secretary of industry Carlos Magariños reached an agreement on the outline of a transitional regime. While excluding the most controversial issues, the agreement constituted an important step toward the establishment of a common automobile policy in MERCOSUR. This transitional framework was ratified by the Common Market Group and the Council of Ministers and came into effect in January 1996. Moreover, the new understanding can be seen as marking the end of the controversy triggered in June 1995 with the unilateral establishment of the Brazilian regime.65 The Werneck-­Magariños deal established, first of all, free intra­ regional trade of finished vehicles and auto parts, while maintaining the export compensation requirements for the two types of products (Haar and O’Keefe 2001).66 However, Brazil agreed to grant Argentina an import quota of 85,000 cars that would not be subject to the compensation requirement, in recognition of the deficit accumulated by Argentine assemblers between 1991 and 1994.67 In addition, Argentina and Brazil agreed on a 60 percent national content requirement, which could be met with inputs from either country. For newcomers, in turn, this requirement was established at 50 percent for a period of up to three years.68 Finally, while failing to reach an agreement on the level of the external tariff on raw materials and inputs, negotiators reached a middle ground regarding the bonus on capital investments.69 What were the distributional implications of the Werneck-­Magariños Agreement? Once again, the terms of the deal clearly favored Brazil. First, the agreement on the transitional regional regime would allow Brazil to take advantage of the special extension that Argentina had obtained from the WTO to phase out domestic incentives to investment, even if complete harmonization of investment incentives had yet to be achieved.

88  Power and Regionalism in Latin America

Second, Brazil had successfully resisted Argentine pressures for an immediate reduction of the capital investment bonus and for an increase in the tariff rate on inputs and raw materials. Third, and more consequentially, the establishment of intraregional free trade in auto parts benefited the Brazilian sector at the expense of Argentine auto parts producers. In exchange for these concessions, Brazil agreed to grant Argentina the requested compensation for the negative trade balance accumulated until the signing of Decision 29/94. In addition, the regional content requirement index established by the transitional regime was closer to Argentina’s preferences. However, from the Argentine perspective, these concessions were insufficient to compensate for the impact of the Werneck-­Magariños agreement on the auto parts sector. In fact, according to Argentine negotiators, opening the local market to Brazilian auto parts was a very costly “mistake,” given that the Brazilian auto parts sector was “eight to ten times the size of the Argentine sector.”70 The competitive position of Argentine auto parts firms was harmed further by the asymmetries in the incentives offered by the Brazilian and Argentine regimes to auto parts producers. By making it more attractive for firms to produce auto parts in Brazil than in Argentina, the agreement led to a significant relocation of these firms to the larger partner.71 Distributional outcomes in this second round of negotiations were thus also shaped primarily by disparities in economic size and trade interdependence. Argentina was clearly unable to take advantage of the fact that Brazil had a greater sense of urgency in defining a common automobile policy that could be used to legitimate its national automobile regulations at the WTO. This outcome contradicts the expectations of arguments emphasizing the importance of issue-­specific asymmetries in interdependence. In addition to the role of asymmetries in material capabilities, Brazil’s success can also be explained with reference to the greater cohesion and skills of Brazilian negotiators. Aftermath

According to the agreements reached in 1996, a MERCOSUR Automobile Policy would be launched by January 2000. Despite protracted negotiations between 1996 and 1999, divergences regarding investment incentives and national content requirements prevented Argentina and

The Automobile Sector Crisis  89

Brazil from meeting this deadline. As a consequence, the two countries decided to push back this deadline to January 1, 2006. Thus, a formal agreement over the automobile sector was not reached before the end of the Menem administration. Moreover, tension between the two countries reemerged in 1997, as a result of the decision by the Brazilian government to grant special incentives to companies establishing new facilities in the north and northeast of the country (Arza and López 2008). Negotiations continued after Fernando de la Rúa (1999–2001) became president in December 1999. In June 2000, Argentina and Brazil reached an agreement regarding a transitional regime (IDB 2001).72 The new agreement presented limited progress relative to previous understandings and failed to do away with prevailing divergences regarding subsidies and trade of auto parts.73 In contrast to previous negotiations, however, Argentina obtained several concessions from Brazil. First, Brazil yielded to Argentina’s demands for a “local” content percentage within the regional content index (Avellaneda et al. 2006). Second, in response to Argentina’s complaints against the incentives offered by the Brazilian federal and state governments, vehicles produced under such benefits would be treated as extraregional products. The agreement also increased the external tariff on finished vehicles and auto parts and components to 35 and 18 percent, respectively.74 A definitive common regime establishing completely free trade of automobile products within the region should have been implemented in 2006. However, Argentina and Brazil once again claimed they were not ready to establish free intraregional trade in the automobile sector. A June 2006 agreement postponed the launch of the final regime to June 2008. This understanding also introduced a number of changes in the regulations for intraregional trade of vehicles and auto parts (Arza and López 2008). In May 2008, the partners agreed again to postpone the establishment of free trade in automobiles until 2013.

Conclusions

The automobile crisis was the first serious commercial and diplomatic falling-­out between Argentina and Brazil since the creation of MERCOSUR in 1991. In line with the theoretical approach developed

90  Power and Regionalism in Latin America

in chapter 3, we have seen that Brazil’s uncooperative behavior was driven primarily by domestic political considerations. Apart from reflecting increased pressure from the powerful automobile lobby, the abrupt shift in the direction of automobile policy resulted from a slight dispersal of decision-­making power over economic affairs within the government and, in particular, from the strengthening of sectoral agencies channeling the demands of the auto sector. In addition, Brazil’s unilateralism reflected the political and macroeconomic calculations of the economists at the Ministry of Finance and the Central Bank. In 1995, a combination of external and domestic developments increased the domestic political and economic usefulness of trade policy instruments, thus raising the costs of observing regional commitments. Thus, as summarized in Table 4.4, the three domestic constraints identified by the model presented in chapter 3 played a relevant role in explaining Brazil’s unilateral defection in the automobile crisis. The evidence suggests, however, that the preferences of national policy makers (constraint II) had a stronger role in shaping outcomes than the other two constraints, namely, pressure from society and intrastate cleavages (I and III, respectively). The intensification of private sector pressure following the signing of the much-­criticized Ouro Preto agreements in December 1994, and the strengthening of the developmentalist group within the cabinet, certainly contributed to the decision by the Brazilian government to defect from these commitments. Yet had external and domestic economic circumstances not shifted to deepen Brazil’s balance-­ of-­trade problems and to threaten the sustainability of the macroeconomic stabilization policy, the demands of the automobile sector would have probably been ignored, as they had been since the introduction of the Real Plan. The third constraint (intrastate cleavages) also played an indirect role in Brazil’s position toward its regional commitments. Despite the tension between the economic team and the sectoral agencies within the Brazilian government, the launch of the automobile regime ultimately reflected a consensus among these state actors. Moreover, the controversial move was also supported by the foreign policy executive. Itamaraty’s endorsement of the measure, however, did not reflect an erosion of its strategic interest in MERCOSUR. Indeed, in June 1995, the Brazilian foreign

Argentina’s initially uncompromising position also reflected the macroeconomic concerns of the economic team.

The establishment of the regime also reflected the political and economic calculations of economic policy makers, who viewed the policy as contributing to their macroeconomic stabilization goals.

The main cleavage was between the more orthodox and the more developmentalist members of the economic team. Divergences were resolved through compromise in the shape of the automobile regime and had no substantive impact on Brazil’s position in MERCOSUR.

State Actors’ Incentives for Defection

Intrastate Cleavages and Bargaining among State Actors

Tension between FPE and economic team explains the seemingly unstable position by Argentina during the crisis.

Spurred by vigorous opposition to the Brazilian regime from the automobile sector, the Argentine government issued a strong diplomatic reaction.

Argentina

The automobile sector’s increased demands for protection, channeled through Minister of Planning José Serra, contributed to but did not completely account for Brazil’s defection. Pressure from the automobile lobby crucially influenced the shape of the regime.

Brazil

Societal Pressures

Domestic Constraints

Table 4.4.  Explaining the Automobile Sector Crisis

The FPE had a strong interest in consolidating MERCOSUR as a customs union (and hence in defusing commercial tension with Argentina), as a defensive strategy against extraregional threats (NAFTA creation, launch of US-led negotiations for an FTAA, etc.).

The FPE also viewed Brazil as contributing to the broader project of South American cooperation, launched in 1993. In addition, the FPE’s support for the establishment of the automobile regime did not reflect an erosion of strategic commitment to MERCOSUR, but rather awareness of its relative power and Argentina’s limited options.

Offensive

Brazil

Defensive

Systemic Incentives

Table 4.4.  Explaining the Automobile Sector Crisis (continued )

The FPE’s conciliatory position reflected defensive considerations and increasing awareness of the limits of the strategy of bandwagoning with the United States.

Argentina

The Automobile Sector Crisis  93

policy elite remained as committed to the consolidation of the bloc as a customs union as they had been six months earlier. Rather, their support for the automobile regime reflected their power calculus. Aware of the pervasive asymmetries in size, Brazilian foreign policy makers expected Argentina to yield to Brazil’s pressure. Argentina’s response to Brazil’s uncooperative measure was also critically shaped by domestic political factors. Argentina’s forceful initial reaction was not driven solely by the demands of the politically prominent automobile lobby. It also reflected the macroeconomic concerns and strategic views of economic policy makers, who resented the constraints that the establishment of the customs union placed on national policy autonomy. The sudden shift in Argentina’s stance during the crisis can be explained only in reference to the divergences and contestation among the different government actors involved in international trade negotiations. In contrast to the hawkish stance adopted by Cavallo and the economic team, the foreign policy executive remained significantly committed to MERCOSUR and favored accommodating Brazil’s position. This conciliatory position must be understood in reference to diplomats’ perceptions about the relatively weak position that Argentina occupied in the regional and global distributions of power. Thus, in the short term, domestic political dynamics within each country undermined the stability of regional cooperation. Yet, as the case study shows, these domestic constraints were more than offset by the shared strategic commitment of the Brazilian and Argentine foreign policy executives to the regional cooperation project. This convergence of strategic interests reflected shared perceptions of external vul­nerability in the context of a highly asymmetric international system. In line with neorealist-­ inspired arguments about external balancing, the Argentine and Brazilian foreign policy elites saw MERCOSUR as a vehicle for enhancing their countries’ standing and influence within a highly unequal international system. The swiftness with which the crisis was resolved underscored the determination of the Argentine and Brazilian chief executives to ensure the sustainability of MERCOSUR, despite important domestic political costs. In the analysis in the second part of the chapter we saw that the ability of partners to resolve the diplomatic crisis rested on their convergent

94  Power and Regionalism in Latin America

strategic commitment to regional cooperation. Yet, as the case study shows, the agreements signed in June 1995 and December 1996 had important distributional implications. The two agreements clearly bene­ fited the Brazilian government, which was able to maintain its unilateral measure, thus successfully redefining the regional status quo to its advantage. In line with conventional interpretations of power dynamics in MERCOSUR, the terms of the agreement were crucially shaped by Brazil’s power preponderance and by Argentina’s deepening export dependence on the Brazilian market. The analysis suggests, however, that Argentina could perhaps have exploited patterns of asymmetrical interdependence to a greater extent than it actually did, given its strategic ambivalence about MERCOSUR and the FTAA. However, Argentine foreign policy elites’ perception of their nation as weaker than Brazil prevented them from pressing their Brazilian counterparts harder.

Chapter five

The Footwear Industry Dispute

The devaluation of the Brazilian currency in January 1999 marked the beginning of a highly conflictive period in the Southern Cone. For the next year and a half, Argentina and Brazil were almost continuously involved in commercial disputes, triggered by recurrent unilateral restrictions on intraregional trade. The highest peak of tension between the two countries during this period occurred during the footwear industry dispute, triggered by Argentina’s decision to impose nontariff barriers on footwear imports from Brazil in August 1999. Brazil threatened to retaliate by imposing nonautomatic import licenses on over four hundred agricultural products from Argentina. Diplomatic conflict escalated as commercial friction spilled over to other sectors. Despite the confrontational stances adopted initially by the Argentine and Brazilian governments, both were soon eager to defuse tension and restore cooperation. Applying the framework developed in chapter 3, we will trace the process through which domestic interests and institutions interacted to 95

96  Power and Regionalism in Latin America

undermine the stability of regional cooperation in the late 1990s. Like the case of the automobile crisis, the footwear industry dispute highlights the tension between domestic and systemic imperatives in the determination of national preferences and choices regarding MERCOSUR. Yet, as the analysis demonstrates, Argentina and Brazil continued to face strong strategic incentives to overcome domestic political constraints and ensure the survival and sustainability of the regional project.

The Conflict

The devaluation of the Brazilian currency in January 1999 severely disrupted the stability of cooperation in the Southern Cone. The abrupt shift in relative prices triggered by the devaluation raised fears in the Argentine private and public sectors that an “avalanche” of cheap Brazilian products would flood the Argentine market. Despite the almost immediate calls for protection from national producers, the Argentine government initially adopted a conciliatory position. In a meeting held in Brazil in January 1999, Presidents Carlos Menem and Fernando Henrique Cardoso agreed to create a special commission to monitor bilateral trade flows and to propose solutions for imbalances (IDB 2000). However, Argentina’s flexible stance did not last long. Argentine economic officials soon called for the establishment of “mechanisms of compensation” for those sectors that were most severely hit by the effects of the Brazilian devaluation. In Brazil, these demands were immediately dismissed. Brazilian state and private actors believed that Argentina’s competitiveness problems were a consequence not of the shift in macroeconomic conditions in the region, but rather of the Argentine government’s “obstinate” commitment to the exchange-­ rate anchor. Tension rose further when, in April 1999, the Argentine economy minister applied antidumping duties on steel imports from Brazil (IDB 2000). The Brazilian government rejected the measure, claiming it violated regional trade commitments. In July, the focus of tension shifted to the textile sector. The Argentine Foreign Trade Commission established quotas on cotton textiles from Pakistan, Brazil, and China, claiming that imports from these countries were harming the Argentine textile

The Footwear Industry Dispute  97

industry. In response, Brazil threatened to take legal action against Argentina.1 Bilateral relations further deteriorated during the second half of the year. At the end of July, Argentina passed a resolution regulating the application of the safeguards mechanism included in the ALADI within MERCOSUR.2 ALADI Resolution N. 70/87 authorized the use of safeguards measures in trade between ALADI partners when the “quantity or conditions of imports of one or several products from the region causes or threatens to cause serious damage to national producers of similar products.”3 Although Argentina’s move did not have immediate consequences, it set the stage for the future implementation of safeguards on intraregional trade, a possibility that Brazil had consistently opposed since the beginning of MERCOSUR negotiations. Consequently, the Brazilian government reacted strongly, threatening to suspend participation in all regional negotiations and “postponing” a meeting between Presidents Menem and Cardoso scheduled to take place in Brazil in August.4 Despite Brazil’s vigorous response, the Argentine economic team defended the measure and its applicability within the bloc.5 Nonetheless, only a few days after the measure was announced, Menem traveled to Brasília and, in bilateral talks with Cardoso, agreed to exempt Brazil from the scope of the measure.6 A few weeks later, however, Argentina imposed unilateral trade restrictions on imports of footwear products. On August 9, the Ministry of Economy issued a new technical rule (Resolution 508/99) requiring all footwear products entering the country to include a label with information on the manufacturing materials and on the identity of the manufacturer and importer. The Ministry also introduced a system of nonautomatic import licenses (Resolution 977/99) with the aim of certifying compliance with these labeling requirements. These unilateral measures resulted in one of the most serious commercial and diplomatic controversies between Argentina and Brazil since the establishment of MERCOSUR (Graça Lima 1999). Brasília swiftly repudiated the measures, emphasizing the incompati­ bility of nontariff barriers with regional commitments.7 The Brazilian footwear sector also rejected the move and urged the Foreign Affairs Ministry to file a formal complaint against Argentina at the regional

98  Power and Regionalism in Latin America

and/or multilateral level. An urgent Brazilian mission to Buenos Aires failed to find a way out of the conflict. Brazilian negotiators demanded that either the labeling and certification requirements be postponed for ninety days so that Brazilian producers had sufficient time to comply with the new requirements, or that those products that had been shipped before the requirements were announced be exempted. Argentina refused to consider either alternative, claiming the technical requirements were designed “to defend the interests of the Argentine consumer.”8 Moreover, Argentine officials maintained that the measures were compatible with regional rules, which allowed the application of nonautomatic licenses until January 1, 2000. In response, Brazil first threatened to initiate a dispute against Argentina at the WTO level.9 A few days later, Brasília announced the decision to retaliate by reimposing licensing requirements on the imports of more than four hundred Argentine products, requirements that had been eliminated at the beginning of the year. In addition, agricultural imports from Argentina would be subjected to an inspection by the Health Protection Secretariat (IDB 2001). Brazilian officials declared that the new restrictions on Argentine exports would be effective until the shoe issue was resolved. The alleged goal was not to retaliate but “to act with reciprocity,” using the nonautomatic licenses as a trade administration instrument.10 Diplomatic tension peaked soon after Brazil’s retaliatory threats, however, and both governments seemed suddenly eager to restore cooperative relations. Unable to reach a mutually beneficial solution at the political level, Argentine and Brazilian leaders encouraged private sector actors to negotiate an export restraint arrangement agreement. By the end of September, the Argentine Footwear Industry Chamber (CIC) and the Brazilian Footwear Industries Association (ABICALÇADOS) announced that a deal had been reached. In response, the Argentine government agreed to simplify the process of certification and license application for footwear imports from Brazil. In exchange for this concession, Brazil suspended the licensing requirements on Argentine imports. While the private sector agreement contributed to the normalization of diplomatic relations in the short run, because of the lack of adequate oversight of commitments it failed to eliminate commercial friction in the sector (IDB 2007).

The Footwear Industry Dispute  99 Explaining National Preferences and Policy Choices

Argentina’s Unilateral Measures

This section investigates the domestic-­and international-­level factors informing the Argentine government’s decision to defect from regional commitments. What explains the attempt to introduce safeguards mechanisms in July and the decision to withdraw them only a few days later? And why did the government defect from regional commitments again after reversing the ALADI safeguards measure? Societal Pressure: The Role of the Footwear Industry

How relevant were societal pressures in influencing Argentina’s position in MERCOSUR in 1999? The empirical evidence suggests that aggressive lobbying by the Argentine industrial lobby preceded the establishment of the restrictions on Brazilian imports. As early as January 1999, the Argentine Industrial Union (UIA) called for the establishment of safeguards mechanisms to protect national producers from the abrupt shift in relative prices resulting from the Brazilian devaluation.11 The UIA also criticized the government for failing to adopt a more assertive stance in negotiations with Brazil and, in particular, for yielding to Brazil’s pressure on the issue of the ALADI safeguards. In a public statement released after Menem decided to reverse the measure, the industrialists claimed that “MERCOSUR no longer serves the national interest.”12 There is also evidence that the footwear industry association, the CIC, was one of the sectoral lobbies that most vigorously called for import relief and compensation mechanisms.13 In fact, according to footwear producers interviewed, in 1999 CIC technical staff had approached the Argentine Secretariat of Industry with the proposal of introducing ALADI safeguards mechanisms within MERCOSUR. The decision by Menem to suspend this measure intensified the demands of the footwear industry. In July 1999, labor and business actors from the footwear and leather industries organized a demonstration outside the Secretariat of Industry and called for urgent measures of relief.14 Footwear and leather producers also made heavy use of the media in their attempt to influence public opinion. They emphasized the adverse implications of the “invasion” of Brazilian shoes for the footwear industry and warned that unless

100  Power and Regionalism in Latin America

the government intervened, “the local industry will keep shutting down factories and sacking workers.”15 The devaluation of the Brazilian currency certainly harmed the Argentine footwear sector. By exacerbating the competitiveness asymmetries between the two countries, the devaluation raised the costs of economic cooperation for Argentine producers of footwear, as well as other manufacturing products. But in addition to these concerns about the effects of the Brazilian devaluation, three factors explain the aggressive campaign that the Argentine footwear industry launched in 1999: the critical economic and financial situation of the sector in the late 1990s; the fact that 1999 marked the end of the special regime of exemptions that had protected the sector since 1991; and the internal fragmentation of interests within the footwear sector. First, despite a relatively strong performance in the 1980s, the footwear sector was negatively affected by the liberal economic reforms introduced in Argentina in the early 1990s (INTAL 1998). Absence of economies of scale, poor access to financing facilities, and limited investment in technology left local producers at a serious disadvantage vis-­à-­vis competitors from Brazil, South East Asia, and China. These disadvantages were exacerbated by the overvaluation of the Argentine currency during the 1990s. As a result, as Table 5.1 illustrates, imports grew significantly faster than exports for much of the decade. In addition, the number of people employed in the sector fell by 20 percent between 1988 and 1998 (Bekerman and Sirlin 2000). The new competitiveness scenario in the 1990s had uneven effects among the highly heterogeneous players in the Argentine footwear sector (CEP 2001).16 Small and medium-­sized enterprises were severely hit, with a large number of firms being forced out of the market (INTAL 1998). In contrast, larger sports footwear firms managed to maintain their market share by obtaining or renewing foreign brands licenses. They adopted aggressive strategies of modernization, which included technological and organizational transformations and resulted in higher productive speciali­zation (Bekerman and Sirlin 2000). While partly successful, these strategies resulted in growing indebtedness of the main players in the sector. The financial situation of the two largest footwear companies in Argentina, Gatic and Alpargatas, was particularly delicate toward the end of the

Source: CEP (2001).

1011

44.4

Imports

Consumption

966

35.8

1002

Internal Market

Exports

Production

1991

1060

110.8

950

26.2

976

1992

966

128.7

838

30.7

868

1993

904

141.4

762

33.6

796

1994

862

114.2

747

70.5

818

1995

916

116.6

799

50.5

849

1996

Table 5.1.  Evolution of the Argentine Footwear Sector, 1991–2000 (US$ millions)

966

156.7

809

82.6

892

1997

1034

176

858

42

900

1998

897

151

746

17

763

1999

856

176

680

8

688

2000

102  Power and Regionalism in Latin America

decade, forcing both firms to rationalize their operations and to close several factories throughout the country.17 The 1999 Brazilian devaluation exacerbated these financial problems, indirectly increasing the perceived costs of participating in MERCOSUR.18 Representatives from Gatic and Alpargatas thus participated actively in CIC’s attempts to obtain protection from Brazilian imports. A second factor influenced the sector’s active mobilization in 1999. The timing of the Brazilian devaluation coincided with the end of the period of preferential treatment that the footwear industry had enjoyed since the early 1990s. Indeed, despite frequent complaints from businesses in other sectors, during the 1990s national footwear producers benefited from significant protection from intra-­and extraregional trade (Ablin and Lucángeli 2000). Since 1994, the government had imposed specific duties and quotas on imports from extraregional partners, including Indonesia, the United States, and the European Union (IDB 2001).19 Moreover, when signing the Asunción Treaty in 1991, Argentina chose to place the footwear industry on its list of exceptions to intraregional trade liberalization. At the Ouro Preto negotiations in December 1994, the sector was again exempted from the free trade area. It was placed under the so-­called adaptation regime, which set a 27 percent tariff for intrabloc trade, with a gradual reduction timetable that ended in 1999. As a result of this preferential treatment, the Argentine footwear industry did not feel the impact of integration until 1996, when Brazilian footwear products started taking advantage of the progressive decline in intraregional tariffs. Brazilian exporters also benefited from the increasing trade diversion resulting from Argentina’s restrictions on imports from third countries. These measures deepened regional preferences and led Argentina to replace footwear imports from more efficient third countries—­South East Asia, Chile, and the United States—­with purchases from Brazil.20 Thus, as Figure 5.1 illustrates, the share of imports from Brazil grew steadily after 1995, reaching almost 60 percent in 1999. Moreover, as a result of the competitiveness asymmetries between the Argentine and Brazilian sectors, imports from Brazil accounted for a progressively higher share of the internal market. As Table 5.2 illustrates, the Brazilian devaluation deepened further the Brazilian penetration of the Argentine market (CEP 2001).

Chapter 5

The Footwear Industry Dispute  103 Figure 5.1.

Argentina’s Footwear Imports from Brazil, 1991–99

Figure 5.1.  Argentina’s Footwear Imports from Brazil, 1991–99 100

70%

90 60% 80 50%

70 60

40%

50 30%

40 30

20%

20 10% 10 0

1991

1992

1993

1994

Share in Total Imports

1995

1996

1997

1998

1999

0%

Imports from Brazil (US$ millions)

Source: Elaborated by author with data from Anderson (2001) and CEP (2001). Source: Elaborated by author with data from Anderson (2001) and CEP (2001).

Finally, the aggressive mobilization of the footwear sector against regional trade integration was also influenced by the deep cleavages between import-­competing national producers and the internationally oriented firms in the sector. These internal divisions in the footwear sector were partly the result of the Menem government’s reliance on selective and temporary concessions to protect the sector from external and regional competition. In the early 1990s, as national producers began to face the adverse effects of the trade liberalization reforms, a number of firms shifted to international trade activities. Many of these firms became importers of foreign-­made footwear or acquired the licenses of foreign brands. These firms constituted themselves in a well-­organized and vocal group, the Chamber for the Foreign Trade of Footwear (CAPCICA).21 Tension between CAPCICA and CIC members was from the start quite high, as both entities typically found themselves lobbying the government for conflicting policy moves. In the 1990s, for instance, local manufacturers aggressively lobbied the government for the establishment of specific duties and other protectionist measures. Yet these measures harmed the importing activities of CAPCICA members, who vigorously

0.25

Import Penetration* (%)

1.25

11.95

1992

1.12

9.44

1993

2.09

15.93

1994

2.60

19.42

1995

in US$ millions *Import penetration = Imports from Brazil / (Total Argentine Production – Argentine Exports). Source: Calculated by author with data from Anderson (2001) and CEP (2001).

a

2.42

Imports from Brazila

1991

Table 5.2.  Argentina: Import Penetration of Brazilian Footwear, 1991–99

4.21

33.62

1996

6.77

54.87

1997

8.67

74.38

1998

11.79

87.96

1999

The Footwear Industry Dispute  105

opposed them.22 The Brazilian devaluation also had differentiated effects on members of CIC and CAPCICA. While harming national producers, the devaluation benefited importers with business interests in Brazil. Thus, CAPCICA opposed the protectionist measures demanded by CIC and the UIA and publicly accused local producers of using the Brazilian devaluation to cover their own competitiveness problems.23 CAPCICA’s lobbying against trade restrictions meant that, despite their closer connections with government officials, the local producers had to press harder themselves if they were to influence the government’s choices. State Preferences: Macroeconomic and Political Incentives for Defection

The strong societal pressure faced by the Argentine government in 1999 undoubtedly influenced the decision by Buenos Aires to establish the unilateral restrictions on footwear products. Nevertheless, a complete account of Argentina’s behavior can be obtained only by examining the role and preferences of different actors within the government. It is important to consider the role of state actors in channeling the pressure of the private sector into the policy-­making process. In 1999, the Under-­Secretariat of Foreign Trade (Secretariat of Industry), which was charged with the implementation of trade policy, was the main depository of private sector complaints and demands. Given its institutional mandate, this sectoral agency participated actively in the design of several of the unilateral measures established in 1999 by Argentina. Indeed, according to Under-Secretary of Foreign Trade Felix Peña, following the “concrete proposal made by a sectoral chamber,” a technical team from the Under-­Secretariat studied the technical and legal feasi­ bility of the using ALADI Resolution 70 at the subregional level. In their view, this measure was both legally and technically justified because it filled an institutional gap in MERCOSUR’s legislation (Peña 1999).24 The Under-­Secretariat of Foreign Trade had also designed the technical restrictions imposed after Menem agreed to reverse the safeguards measure. According to Peña, these measures sought to curb the rapidly increasing imports of Brazilian footwear, but without openly breaking regional rules.25 Officials from the Under-­ Secretariat of Foreign Trade played an important role in the design and implementation of trade policy

106  Power and Regionalism in Latin America

instruments, but their proposals needed to be approved by higher-­level officials within the Ministry of Economy. Ultimately, their proposals for the use of ALADI Resolution 70 had to be endorsed by the economy minister, Roque Fernández. Given his well-­known commitment to free-­ trade policies, Fernández’s support for the protectionist measures was unforeseen.26 His position reflected a reassessment of the costs and bene­ fits of observing regional commitments, in light of shifting domestic and international pressures. First, the deterioration of external and domestic economic conditions in the late 1990s temporarily increased the economic costs of relinquishing unilateral control over trade policy instruments. The Brazilian devaluation coincided with a number of adverse external trends, including the decline in the prices of commodities and the contraction of foreign capital to developing countries, following the East Asian and Russian crises (IDB 2001). These international-­level developments exacerbated the delicate situation that the Argentine economy faced in the late 1990s: deepening recession, rising unemployment, and a growing current account deficit (see Table 5.3). In this context, the Argentine economic team shared the concern of the foreign trade officials and the private sector with the consequences of the “avalanche” of Brazilian footwear products. By September, it was clear that the footwear sector was severely hit by the increase in imports from Brazil. This competitive pressure not only contributed to Argentina’s balance-­of-­payments deficit. In addition, it deepened the financial and economic problems faced by footwear firms and threatened to worsen unemployment levels. Second, economic policy makers were concerned about the financial effects of the Brazilian devaluation on the stability of the Argentine currency, which had come under increasing speculative attacks after the international financial crises in Asia and Russia. Rumors that Argentina would follow Brazil in abandoning the anchor intensified in the second half of 1999, resulting in a marked increase in country risk and exacerbating Argentina’s delicate debt position. In this context, the unilateral measures should also be interpreted as an attempt by Argentina to signal its commitment to international markets, and to differentiate itself from its troubled partner (Higgott and Phillips 1999). Along similar lines, according to Fernández, the measures were also designed to remind

The Footwear Industry Dispute  107 Table 5.3.  Argentina: Selected Macroeconomic Indicators, 1991–99

Year

GDP Growth

Unemployment Rate

Current Account (% GDP)

Government Deficit (% GDP)

Debt (% Exports)

1991

8.5

6

−0.9

−0.5

405.4

1992

8.3

7

−3.1

0

385.3

1993

5.9

9

−3.3

−0.6

341.1

1994

6.4

12

−4.1

−0.7

327.9

1995

−3.6

16

−2.0

−0.6

336

1996

5.4

16.6

−2.5

−1.9

338.9

1997

7.8

13.4

−4.2

−1.5

352.2

1998

3.8

12.1

−4.9

−1.4

379.4

1999

−3.4

13.5

−4.2

−2.9

426.6

Source: IDB (2001).

Brazil of the importance of coordinating macroeconomic policies and jointly addressing the financial effects of the Brazilian devaluation.27 Finally, Argentina’s unilateral measures also reflected the political calculations of Argentine economic decision makers. Both the attempts to establish safeguards measures and the footwear restrictions were used to appease the increasing discontent of the industrial sector with the government’s macroeconomic policies. Indeed, frustration with the costs imposed by the convertibility regime on the competitiveness of domestic producers led to the gradual emergence in the late 1990s of a nationalist “producers” coalition, which intensified its protests after the Brazilian devaluation (Gaggero and Wainer 2004). In April 1999 there was a shift in the leadership of the UIA, with the “Duhaldist”28 Osvaldo Rial replacing the more “liberal” and Menemist Alvarez Gaiani at the presidency. In contrast to Brazil’s developmentalist coalition, this group of national producers did not directly demand a devaluation. Instead, they openly criticized the currency board and its effects on the industrial sector and then demanded “compensatory” measures, such as reduced employment retentions, subsidies, and import restrictions. They also sought to exploit the fact that 1999 was an electoral year. In response to the government’s initial reluctance to give in to demands for compensation, the producers’

108  Power and Regionalism in Latin America

coalition forged links with the Peronist candidate, Eduardo Duhalde, thus managing to place their demands on the electoral debate.29 In sum, as the economic crisis deepened in Argentina and as domestic political support for the convertibility regime weakened, trade policy measures became useful economic and political tools. From the economic team’s perspective, therefore, the benefits of using import relief measures to curb the rising trade deficit and to compensate domestic producers for the overvaluation of the currency outweighed the costs of defecting from regional commitments. Systemic Incentives: Strategic Adaptation to Shifting External Conditions

Nevertheless, as in 1995, there were significant divergences between the Ministry of Economy and the Ministry of Foreign Relations. The latter publicly opposed the unilateral approach proposed by the economic team. In their view, the measures were not only “of doubtful effectiveness in attacking the existing problems, but they also seriously risked the progress achieved in different terrain during the last few years” (Campbell 1999a, 649).30 This group advocated instead for a negotiated solution to the problem, so as to avoid disruptions in regional cooperation. Given the prominent role that the economic team played in trade policy making in 1999, officials from the Ministry of Foreign Affairs were unable to block the establishment of the unilateral measures. Unlike the members of the economic team, the foreign policy execu­ tive continued to view MERCOSUR as a “fundamental” element in Argentina’s foreign policy (Campbell 1999a). In fact, in 1999 Argentine foreign policy makers and diplomats seemed even more determined than in the past to defend and ensure the survival of the regional project. Consistent with the neoclassical realist argument developed in chapter 3, their position resulted from the specific ways in which these state actors interpret the constraints and opportunities of the international systems. In other words, Argentina’s stronger and unqualified commitment to the strategy of regional cooperation in the late 1990s must be seen as a strategic adaptation to shifting external and internal conditions. First, the limited success of Argentina’s attempts to establish a strategic partnership with the United States highlighted the country’s limited range of strategic options. In this context, strengthening relations with

The Footwear Industry Dispute  109

Brazil and moving toward a policy of joint balancing was considered a safer alternative for the country’s strategic international insertion (Rapoport 2003). Second, Argentine negotiators were increasingly aware of the risks associated with participating in hemispheric negotiations. Toward the end of the Menem administration, FTAA had come to be regarded with significant skepticism. In particular, questions emerged about the actual economic benefits to Argentina of preferential trading relations with the United States (Carrera, Lacunza, and Redrado 2002). Finally, it was also increasingly clear to the Argentine foreign policy executive that, given its economic size and relevance, Brazil had come to occupy a pivotal role in South America. In spite of Argentina’s efforts, it was Brazil that seemed to generate greater attention from the United States. As a consequence, the foreign policy elite believed MERCOSUR was Argentina’s safest alternative. As Peña (2001, 13) put it, “No one seems to put in question the need of facing together the challenges and opportunities of a globalized world.” The ambivalent behavior of Argentina toward its regional commitments during 1999 reflected the tension and lack of coordination between economic and foreign policy makers. The balance of influence among these competing sets of preferences was inevitably altered by Presi­ dent Menem’s own position. Like the Foreign Ministry, Menem favored a swift resolution of the sectoral conflicts with Brazil. Given his strong support for the strategy of regional integration, the Argentine president did not want to end his mandate with the burden of leaving “an open wound in MERCOSUR.”31 Thus, the foreign policy executive pressured the footwear sector to reach an agreement with their Brazilian counterparts. The establishment of a voluntary export restraint (VER) agreement allowed the government to balance domestic political pressures and strategic considerations. The agreement was expected to provide some relief to the footwear industry but without directly violating regional trade agreements. Brazil’s Response: From Retaliation to Relaunch

While initially expressing its willingness to cooperate with Argentina in containing the regional spillover effects of the 1999 currency devaluation,

110  Power and Regionalism in Latin America

Brazil categorically rejected its partners’ demands for the establishment of “compensation” mechanisms. The Brazilian government reacted strongly to the unilateral measures imposed by Argentina in 1999 and threatened to retaliate by blocking imports of a large number of Argentine products. However, toward the end of 1999, the Brazilian government softened its position and actively sought to restore cooperation. Although refusing to accommodate fully to Argentina’s demands for safeguards mechanisms, Brazil agreed to the negotiation of VER agreements. As we will see, systemic incentives and domestic interests and institutions interacted to shape Brazil’s position during the 1999 crisis. The Role of the Footwear Sector

Brazil’s reaction and negotiating position during the conflict reflected the pressures and demands of the national footwear industry. Brazilian footwear producers were directly harmed by Argentina’s unilateral measures. The Argentine regulations introduced in August 1999 required all footwear products entering the Argentine market to include labels with specific information on their production process. In addition, according to the measures, nonautomatic licenses would be required as of November 1. Yet granting of these licenses was contingent on certification that the products met the new labeling requirements, a process that could take up to three months. Not only would these technical measures hinder future sales of Brazilian footwear products; they also threatened to block entry of those shoes that had been shipped before the new regulations were announced. According to ABICALÇADOS, national producers would incur losses of more than US$80 million.32 Argentina’s restrictions would have a limited impact on the largest firms in the Brazilian industry.33 In fact, unlike their Argentine counterparts, Brazilian footwear producers had successfully consolidated their competitiveness in international markets, expanding their trading ties with North American and European countries (Bekerman and Sirlin 2000). Yet the new technical regulations would be extremely harmful for the small and medium-­sized Brazilian producers, which had become highly dependent on the Argentine market as the barriers in intraregional trade converged to zero. Between 1995 and 1998, the value of exports to Argentina—­by far the main market in MERCOSUR for Brazilian

The Footwear Industry Dispute  111

shoes—­increased by 221 percent (Kume, Anderson, and de Oliveira Jr. 2001). In 1999, Argentina was the third destination for Brazilian footwear products, after the United States and the United Kingdom (see Table 5.4).34 Smaller Brazilian firms had gradually begun seeing Argentina as an extension of the domestic market, a development that was aided by the fact that the two countries shared a similar climate and culture, which allowed the same goods to be sold easily in both sides of the border. In addition, the restrictions came at a time when Brazilian producers were expecting to benefit from an exporting boom to Argentina, as a result not only of the end of the transition regime but also of the shift in relative prices following the devaluation of the Brazilian currency.35 Thus, Argentina’s unilateralism generated significant discontent among members of ABICALÇADOS. Apart from interrupting talks with the Argentine national chamber over the possibility of a cooperative agreement on bilateral exchange levels, Brazilian producers pressed the government to resort to MERCOSUR dispute settlement procedures to challenge Argentina’s policies.36 Like the government, the Brazilian footwear sector blamed Argentine producers for failing to improve their efficiency and competitiveness during the years they had been exempted from the process of regional liberalization.37 Yet officials in Brasília initially seemed reluctant to get involved in the footwear conflict. Instead, they encouraged national producers to seek an agreement on traded quantities with their Argentine counterparts.38 When it emerged that Argentine customs officials had confiscated a Brazilian firm’s merchandise in order to Table 5.4.  Brazilian Footwear Exports by Main Destinations, 1998–2000* 1998

1999

2000

Destination

Total

%

Total

%

Total

%

United States

914.8

68.8

875.9

68.6

1,078.8

69.7

United Kingdom

103.4

7.8

106.5

8.3

100.7

6.5

Argentina

74.4

5.6

87.9

6.9

124.4

8.0

Bolivia

30.3

2.3

19.1

2.0

1.6

1.1

*Millions of US$. Source: ABICALÇADOS (2002).

112  Power and Regionalism in Latin America

guarantee the payment of the storage it was occupying, ABICALÇADOS strongly intensified its demands. In response, the Brazilian government announced its decision to impose nonautomatic licenses on Argentine products.39 The Government’s Domestic Calculus: Exports vs. Stabilization

The demands of the Brazilian footwear sector were channeled through two agencies within the government, the Secretariat of Foreign Trade (SECEX), within the Ministry of Development, Industry, and Trade, and the Ministry of Agriculture. These two bodies played a central role in the decision to threaten retaliation by imposing nonautomatic licenses on a large number of Argentine goods.40 What explains their support for the footwear sector’s demands for action against Argentina? First, given its institutional mandate, the Ministry of Development, and the SECEX in particular, were the natural interlocutors of the private sector and the main target of industrial demands. Trade policy decisions were made by an interministerial team within the Foreign Trade Chamber (CAMEX). However, the Ministry of Development was responsible for the implementation of industrial and export promotion programs. A historically powerful actor within the Brazilian state bureaucracy, this agency was severely weakened during the 1990s. To signal renewed commitment to development during his second term, in 1999 President Cardoso gave this agency a central role in the restoration of industrial growth. Given Brazil’s new favorable competitiveness position after the devaluation, the agency’s priority during the second Cardoso government was to promote and support the expansion of exports. However, these efforts initially proved futile in the face of the stringent monetary policies maintained by the economic team. This situation increased frustration among industrial groups, which had expected the devaluation to reverse a decade of poor export performance. According to Mário Marconini, then secretary of trade, “I was asked every fifteen minutes why exports were not growing. . . . The impression was that the government was incompetent.” In this context, it was “politically unfeasible” for Development officials to accommodate Argentina’s demands for compensatory mechanisms.41

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Indeed, the position of the Ministry of Development toward Argentina toughened during the second half of 1999, as the pro-­MERCOSUR minister Celso Lafer was replaced by Clóvis Carvalho. The new team not only had a stronger developmentalist orientation, but also faced increasing pressure from the private sector, given the recurrence of Argentina’s protectionist measures. For Carvalho, expanding exports was crucial not just to take advantage of the favorable exchange rate, but also to promote economic activity and create employment.42 Because Argentina’s measures were a serious obstacle to these efforts, officials from the Ministry of Development favored acting with reciprocity by restricting Argentina’s imports. Perhaps unexpectedly, the second channel of access into the policy-­ making process for the footwear sector was the Ministry of Agriculture. The minister of agriculture in 1999, Marcus Pratini de Moraes, was a politician from the state of Rio Grande do Sul, where most of the footwear industry is concentrated (see Table 5.5).43 Because of his close connections to the footwear sector, Pratini de Moraes was informally referred to as the “Minister of Footwear.” According to ABICALÇADOS, the minister of agriculture (and footwear) had actively supported the retaliatory threats “because he had a very good relationship with us for forty or fifty years.”44 Besides helping an important group in his local constituency, the minister of agriculture had other incentives to restrict imports from Table 5.5.  Brazil: Main Footwear-Producing States, 1998 Number of Firms

Employment

Rio Grande do Sul

1,924

95,525

52

São Paulo

1,908

34,468

19

149

20,240

12

1,135

14,156

76

7,297

4

225

2,842

1.5

Ceará Minas Gerais Paraíba Santa Catarina Source: Abicalçados (2002).

Proportion of total employment (%)

7.6

114  Power and Regionalism in Latin America

Argentina. While Brazilian manufacturing sectors tended to be more competitive than their Argentine counterparts, this asymmetry was reversed in the case of agriculture. Brazilian agricultural producers tended to be at a competitive disadvantage vis-­à-­vis their Argentine counterparts and thus faced greater incentives than the manufacturing sector to lobby for protection from intraregional trade. The system of nonautomatic licenses that the government threatened to retaliate with had in fact been implemented in 1998 for agricultural, chemical, food, and pharmaceutical products but had later on been contested by a panel decision. The footwear conflict thus presented an opportunity for protectionist interests to restore these mechanisms. A Strategic Rationale for Rethinking MERCOSUR

The Brazilian footwear sector’s discontent, channeled through the Ministries of Agriculture and Development, converged with Itamaraty’s own forceful reaction to Argentina’s uncooperative behavior. However, the uncompromising position adopted by the Brazilian foreign policy executive at the beginning of the conflict was not directly influenced by private sector pressure or by concerns about the economic consequences of Argentina’s restrictions. Rather, Itamaraty’s stance reflected power considerations and strategic calculations.45 To a great extent, the retaliatory threats were aimed at signaling to Argentina that Brazil’s patience with its recurrent unilateralisms was running out.46 But at the same time, Brazil’s playing hardball also hid a degree of ambivalence about MERCOSUR (Hirst and Soares de Lima, 2002). Indeed, the 1999 crisis had forced Brazil to rethink its strategic interest in the bloc. As Marconini would point out, “Brazil is not clear about what it wants from MERCOSUR. At a high political level, President Cardoso knows he wants a bloc where Brazil plays an important role and has a strong alliance with Argentina. But when that has to be translated into a strategy at the lower, technical levels, no one is clear about what the priorities are.”47 To shed greater light on the nature and extent of Brazil’s interest in MERCOSUR, in July 1999 Foreign Minister Luiz Felipe Lampreia initiated consultations among the main actors within the executive.48 This exercise sought to assess the costs and benefits to Brazil of three alternatives: to maintain MERCOSUR as an imperfect

The Footwear Industry Dispute  115

and conflict-­ridden customs union; to reverse it into a free trade area; or to move toward the establishment of a genuine customs union. Brazilian policy makers favored the third option, even though it would clearly require not only the full implementation of the common external tariff and regional liberalization commitments, but also the strengthening of regional institutions. The Foreign Ministry then launched a series of technical studies aimed at identifying the areas in which concrete action was needed for the completion of the customs union. The so-­called relaunch agenda, which Brazil would promote during the first half of the year 2000, was the outcome of this rethinking within the Brazilian government. Defensive incentives continued to play a key role in explaining Brazil’s determination to restore and strengthen regional cooperation. During this period, strategic incentives for defusing tension and relaunching the bloc came from the evolution and interplay of three trends in the international system: the seemingly irreversible momentum acquired by the FTAA negotiations after 1997; the stagnation in multilateral trade negotiations toward the end of the 1990s; and renewed steps toward an EU-­MERCOSUR preferential agreement (Lafer 2003; Aggarwal and Espach 2004). First, the renewed momentum in the FTAA process after the Third Ministerial Meeting of Belo Horizonte in 1997 critically influenced Brazil’s position toward regional cooperation in the late 1990s (Da Motta Veiga 2001; Baptista 2002; Albuquerque 2000; Bernal-­Meza 2002b). The launching of the negotiations in April 1998 was interpreted as a clear sign that hemispheric integration was closer to becoming a reality (Bouzas and Svarzmanm 2001). Given the potentially high costs of exclusion, Brazil had little option but to abandon its previous “obstructionist” stance and begin defining its negotiating position (Rattner 2002).49 The strengthening of MERCOSUR and the coordination of a joint position with Argentina became a central element of Brazil’s new strategy of hemispheric integration (Barbosa 2001). A second factor that influenced Brazil’s position regarding MERCOSUR in 1999 was the stagnation in multilateral trade talks (Medeiros 2000). The collapse of the WTO negotiations in December 1999 in Seattle was a significant setback for Brazil, at a time when negotiating

116  Power and Regionalism in Latin America

market access for Brazilian exports had become a national economic priority. The Seattle fiasco also deepened motivations for developing countries such as Brazil and Argentina to join forces so as to improve their chances of influencing the content and pace of future negotiations. In this sense, the disappointing developments in the multilateral trading system deepened Brazil’s determination to promote a “relaunch” of the regional integration project during the year 2000. In the words of prominent Brazilian diplomat Sebastián Do Rego Barros, in the context of the Seattle collapse “recovering a vision of the project and designing consistent and realistic strategies for deepening integration . . . is something we need to do with urgency.”50 Finally, a strengthened MERCOSUR would also increase Brazil’s leverage in negotiations with the EU.51 Discussions between the two blocs had proceeded extremely slowly since they were initiated in 1995. However, progress in the FTAA process after 1997 had renewed European incentives for signing an agreement with South American countries (Fauriol and Weintraub 2001). In a summit meeting held in Rio de Janeiro in June 1999, therefore, heads of state from the EU and MERCOSUR agreed on the methodology and calendar for the interbloc negotiations. In November, negotiations were formally launched (Laens and Osimani 2001). The EU’s interest in strengthening ties with South American countries has been explained as an attempt by European countries to counter US influence in Latin America (Bartholomew 2001; Rattner 2002). Similarly, both the Brazilian and Argentine foreign policy elites viewed a potential MERCOSUR-­EU preferential trade agreement as expanding their countries’ commercial and strategic options (Roett 2001). From Itamaraty’s perspective, the strengthening of commercial ties with European countries would further enhance MERCOSUR’s le-­ ver­age vis-­à-­vis the United States in hemispheric negotiations (Da Motta Veiga 2004). In sum, the uncertainty surrounding the recurrent commercial friction in 1999 brought Brazil’s position toward MERCOSUR into sharper focus.52 In light of the various external challenges faced by Brazil in the late 1990s, the foreign policy elite viewed a reinvigoration and strengthening of MERCOSUR as the best strategic option. From Itamaraty’s perspective, the ongoing friction with Argentina undermined the cohesion

The Footwear Industry Dispute  117

of the bloc just when coordinating a joint position of strength was essential. Yet, as Brazilian policy makers soon came to realize, despite its rhetoric of unconditional commitment to MERCOSUR, the administration of Argentine president Carlos Menem lacked the political will to take more concrete steps in that direction.53 It was thus clear that plans to relaunch the bloc would have to wait until the new Argentine government took over in December 1999.54 In the meantime, Itamaraty had no option but to adopt a cooperative stance and accept the establishment of private sector agreements limiting Brazilian exports to Argentina. While far from ideal, these agreements were deemed necessary for the sake of ensuring MERCOSUR’s permanence.

Bilateral Negotiations and Conflict Resolution

The evidence discussed in the previous section suggests that Argentina and Brazil shared a strategic and political interest in ensuring the continuity of cooperation. However, the negotiations between the two governments in August 1999 failed to produce a mutually beneficial solution for the footwear conflict. Claiming that the official negotiations had been “exhausted,” Argentine and Brazilian leaders pushed CIC and ABICALÇADOS to negotiate an agreement on bilateral trade flows. Given their shared interest in overcoming the crisis, government officials put significant pressure on private sector actors to reach a cooperative agreement.55 At the end of September, the two chambers finally reached a compromise. According to the agreement, Brazil would restrict its footwear exports to Argentina to 1.7 million pairs until the end of 1999, and to 4.4 million during the first semester of 2000 (IDB 2002).56 Argentina, in turn, suspended the technical measures introduced earlier in the month, thus liberating the thousands pairs of Brazilian shoes that had been stranded at the border since the beginning of the conflict. In exchange for these concessions, Brazil agreed to reconsider the application of retali­ atory restrictions on Argentine products. While government representatives had closely followed the private sector negotiations, they refused to enforce the deal formally. Instead,

118  Power and Regionalism in Latin America

the quotas were to be administered by ABICALÇADOS, which was in charge of issuing export certificates, subject to previous authorization from the Argentine Consulate in Porto Alegre.57 What were the distributional implications of this deal? At first glance, it would seem that, in contrast to the outcome of the automobile negotiations, the agreement reached in September 1999 entailed a more balanced distribution of the benefits of restoring cooperation. While in the 1995 automobile negotiations Brazil had remained firm behind the new controversial regime, in 1999 Brazilian negotiators were unable to maintain their initially uncompromising position rejecting compensation measures or managed trade arrangements. From Argentina’s perspective, the VER was certainly an inferior solution to its preferred outcome, namely, the creation and application of safeguards mechanisms within MERCOSUR. However, the deal was an improvement over the status quo of free trade of footwear products. Indeed, with the establishment of the quotas, Argentina succeeded in at least temporarily restricting access of Brazilian shoes to the local market. However, the extent of Brazil’s concession and willingness to compromise should not be overstated. The fact that the agreement was unofficial and that responsibility for its enforcement and implementation remained with the private sector greatly undermined its relevance. This had been a sticky point during the negotiations, and despite pressure by the Argentine government and private sector, Brazil had refused to concede. In fact, by agreeing to the establishment of the agreement but not to its enforcement, Brazilian negotiators succeeded in defusing tension in the short term and persuading Argentina to withdraw its unilateral measures. This was particularly important for the small footwear producers in the South of Brazil, which had become highly dependent on the Argentine market. These small and medium-­sized enterprises were especially harmed by the Argentine footwear restrictions, which had effectively blocked access of millions of Brazilian shoes that had reached the border before the measures were announced. It was essential for the Brazilian producers to negotiate an agreement guaranteeing market access of this merchandise before the end of the Argentine summer season, and preferably before the Christmas period, because it would be impossible to sell these products during the winter season.

The Footwear Industry Dispute  119

While slightly more balanced than the outcome of the automobile dispute—­in which Brazil played hardball and refused even to consider the possibility of withdrawing the unilateral measure—­overall, the resolution of the footwear conflict favored Brazil. This outcome continued to reflect the important economic asymmetries between the two countries. In fact, Brazil’s economic preponderance within MERCOSUR increased between 1995 and 1999. Not only did Argentina’s progressive decline after 1998 accentuate the disparity in economic resources between the two countries, but, in addition, Argentina’s “Brazil-­dependence” significantly deepened after 1995. This is clear in Tables 5.6, 5.7, and 5.8. In addition, evidence from interviews conducted with government officials participating in the 1999 negotiations indicates that power perceptions also remained unchanged. Brazilian negotiators, in particular, Table 5.6.  Asymmetries in Economic Power, 1998 GDP (US$ billions)

Proportion of Bloc’s GDP (%)

Trade (US$ billions)*

Proportion of Bloc’s Trade (%)

Brazil

761.0

71

97.2

63.1

Argentina

281.9

26.3

48.8

31.6

*Exports + Imports. Source: Calculated by the author based on data from INTAL and INDEC.

Table 5.7.  Export Interdependence between Argentina and Brazil, 1995–98* 1995

1996

1997

1998

Change, 1995–98

MERCOSUR

32.3

33.3

36.3

35.6

3.3

Brazil

25.9

27.5

30.7

30.1

4.2

13.5

15.4

16.4

16.8

3.3

9.9

11.8

13.1

13.6

3.5

Argentina

Brazil MERCOSUR Argentina

*Total exports by trading partner (as a percentage of total trade). Source: Calculated by the author based on data from INTAL and INDEC.

120  Power and Regionalism in Latin America

continued to be aware of the important advantages that Brazil enjoyed over its smaller partners. For example, according to Pedro Parente, chief of staff of President Cardoso during this period, “In a common market, what matters is the size of the market, and where is the main market in MERCOSUR? In Brazil.”58 Along similar lines, another Brazilian official commented on the difficulties that Brazil faced when negotiating with its smaller partners, particularly with Uruguay and Paraguay. In his words: “Brazil and Argentina are big . . . but have to accommodate to the pressures of two other countries that [while being much smaller] have the same voice. The big question is not why Brazil and Argentina are together, but why the four of us are together.”59 Despite Brazil’s objective and subjective advantages in terms of material capabilities, the government clearly adopted a more flexible and conciliatory stance during this conflict. This greater willingness to compromise, at least marginally or symbolically, can be explained with reference to broader patterns of asymmetries in strategic interdependence. Argentina’s unstable behavior toward MERCOSUR during 1999 deepened Brazil’s insecurities about its partner’s commitment to the bloc. In the early 1990s, Argentina’s open flirtation with the idea of joining NAFTA and/or negotiating access to the FTAA at the bilateral level had seemed a remote option. In 1999, given the momentum acquired by hemispheric negotiations, Argentina’s strategic ambivalence raised greater concerns among the Brazilian foreign policy elite. Brazil’s greater willingness to accommodate Argentina’s demand for compensation for bilateral exchange-­rate imbalances must be interpreted as an attempt to neutralize Table 5.8.  Export Interdependence between Argentina and Brazil in the Footwear Sector, 1995–98*

Argentine Exports to Brazil Brazilian Exports to Argentina

1995

1996

1997

1998

Change 1995–98

40.5

39

57.5

52.7

12.2

5.6

4.3

1.3

2.32

3.72

*Footwear exports (% of total trade). Sources: Calculated by the author based on data from INDEC, INTAL, the Brazilian Ministry of Foreign Relations.

The Footwear Industry Dispute  121

Argentina’s discontent with the functioning of the bloc, ultimately aiming to prevent a potential strategic defection.

Conclusions

Like the 1995 automobile sector crisis, the footwear conflict had domestic political roots. The uncooperative measures imposed by Argentina in 1999 reflected a marked increase in the domestic political and economic costs of observing regional trade commitments for both societal and state actors. The evidence presented in this chapter (and summarized in Table 5.9) demonstrates that the unilateral measures were, first of all, a response to intensified pressure by Argentine industrial lobbies, in the face of the sharp depreciation of the Brazilian currency (constraint I). In addition, the empirical analysis demonstrates that noncompliance also reflected the independent macroeconomic and political motivations of national policy makers (constraint II). Finally, in order to fully understand Argentina’s ambivalent and seemingly inconsistent behavior during 1999, it is essential to consider the divergences and poor coordination between the two government agencies sharing power over regional cooperation, namely, the Ministries of Economy and Foreign Affairs (constraint III). Brazil’s assertive reaction to the Argentine measures can also be partly explained in reference to domestic political constraints. Given increasing frustration among business groups regarding Brazil’s tight macroeconomic policies, the Brazilian government had little political room to yield to Argentina’s demands for compensatory measures. Furthermore, Brazil’s retaliatory threats reflected a degree of uncertainty within the Brazilian foreign policy elite regarding the balance of costs and benefits for Brazil of participating in MERCOSUR. Ultimately, however, the crisis led to a “rethinking” and reassessing of Brazil’s strategic interest in cooperation, which reaffirmed the potential benefits of the regional project. This case study further confirms my claim that short-­term domestic-­ level constraints on cooperation have been consistently offset by the convergent strategic interests of the Argentine and Brazilian foreign policy

Unilateral measures also reflected the macroeconomic Brazil’s forceful position was also influenced by the and political economy incentives of economic policy Ministry of Development’s concerns with export expansion in the aftermath of the devaluation. makers, given changes in the international and domestic conditions that increased the opportunity cost of complying with regional trade agreements. Trade restrictions contributed directly to containing imports and easing the trade deficit and, indirectly, to sustaining the fixed exchange rate.

State Actors’ Incentives for Defection

The Brazilian footwear sector complained loudly about Argentina’s unilateral measures and demanded a forceful reaction by the government. They were able to take advantage of their close ties with the Ministries of Development and Agriculture.

Brazil

The Argentine industrial sector increased its demands for protection in the aftermath of the Brazilian devaluation. The footwear sector was particularly vocal and pushed for the establishment of a safeguard mechanism.

Argentina

Societal Pressures

Domestic Constraints

Table 5.9.  Explaining the Footwear Industry Dispute

Defensive

Systemic Incentives

Intrastate Cleavages and Bargaining among State Actors

Domestic Constraints

Strengthened commitment to MERCOSUR by the FPE constituted a rational strategic adaptation to perceived changes in systemic incentives in the late 1990s.

There were important cleavages between foreign policy makers and the economic team regarding the best way to respond to the Brazilian devaluation. Despite the centrality of the economists within the cabinet, the escalation of tension resulting from the unilateral measures altered the domestic balance of power, allowing the foreign policy executive to take a pivotal role in defining Argentina’s negotiating position.

Argentina

Despite some initial uncertainty, the Brazilian FPE continued to view MERCOSUR as a crucial instrument to enhance members’ leverage in external asymmetric negotiations. In 1999, three important processes influenced Brazil’s strategic support for the project: progress in the FTAA negotiations, the stalemate in the WTO after Seattle, and the resumption of EU-MERCOSUR talks.

There were some disagreements between the Ministries of Development and Finance regarding the negotiation of VERs, but ultimately these were deemed the most appropriate way to resolve the crisis, albeit temporarily. This position was also supported by Itamaraty.

Brazil

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executives in ensuring the survival of the regional regime. Indeed, the primacy of systemic imperatives over domestic political considerations is clearer in the footwear industry conflict than in the automobile sector crisis. In contrast to their attempts to negotiate a separate set of rules for the auto industry, Argentine and Brazilian foreign policy elites were eager to disengage themselves from the footwear dispute and to leave its resolution in the hands of private sector actors. Their unwillingness to formally enforce the agreement reached between the Argentine and Brazilian footwear associations underscores the limited commitment of the two governments to these societal groups. While Brazil ended up accepting the establishment of a private sector agreement, it rejected Argentine demands for the agreement to become official. The fact that implementation and enforcement of the deal remained with the private sectors seriously undermined its relevance and hence the value of Brazil’s concession to Argentina. Nonetheless, in comparison with the automobile agreements in 1995 and 1996, this agreement exhibited at least some willingness on Brazil’s part to take Argentina’s concerns into account. This more conciliatory stance can be explained in reference to Brazil’s growing strategic concerns as the US-­led hemispheric negotiations gained momentum in the late 1990s. Specifically, the FTAA negotiations seemed to present a potential unilateral strategic alternative for the smaller MERCOSUR partners, thus enhancing their bargaining leverage.

Chapter six

Failure to Relaunch The 2001 Conflict

After more than a year of ongoing tension, Brazil and Argentina agreed in 2000 to “relaunch” MERCOSUR. Together with their two smaller partners, Uruguay and Paraguay, they pledged to work jointly in the resolution of sectoral disputes and in the completion of the customs union. Yet in the first quarter of 2001 commercial and diplomatic friction reemerged between Brasília and Buenos Aires, triggered by Argentina’s decision to introduce unilateral changes in its tariff levels, which clearly violated common external tariff (CET) agreements. The controversial public statements against Brazil and MERCOSUR made by the recently reappointed economy minister Domingo Cavallo further exacerbated bilateral tension. In contrast to its conduct in the previous conflicts we have examined, Brazil’s response to this new instance of Argentine unilateralism was cooperative. In April, Brazilian officials agreed to grant Argentina a temporary “waiver” to apply the new CET exceptions until the end 125

126  Power and Regionalism in Latin America

of 2002. More importantly, toward the end of the year, Brazil formally agreed to consider the establishment of a system of temporary safeguards to compensate for economic asymmetries within the bloc. The onset of the Argentine crisis in December 2001 interrupted negotiations over the design of this mechanism. However, the two partners made significant progress in identifying common positions regarding the need for greater flexibility in the process of integration. We begin by examining the determinants of each partners’ position during the conflict. As in previous case studies, we will evaluate the empirical relevance of the different types of domestic constraints and systemic incentives identified by the framework developed in chapter 3. A fundamental goal of our analysis will be to shed light on the factors accounting for the shift in Brazil’s position that resulted in a preliminary agreement on safeguards mechanisms within the bloc and a more balanced distributional outcome.

The Conflict

The “Relaunch” of MERCOSUR

The unrelenting tension between Argentina and Brazil during 1999 raised serious concerns regarding the bloc’s economic and political sustainability. Indeed, the crisis led to a rethinking and reassessment of the strategy of regional cooperation and its implications for each country. As discussed in chapter 5, in Brazil this exercise focused national preferences for integration. It also shed light on the issues that needed to be addressed in order to make the bloc functional to Brazil’s economic and political interests. Aware of the political constraints faced by the weakened administration of Argentine president Menem, the Brazilian government decided to delay any new initiatives until the new president, Fernando de la Rúa, came to office in December 1999.1 From the onset, the new administration in Buenos Aires pledged its support for MERCOSUR (Vizentini 2001; Medeiros 2000). In fact, Argentine officials initially tried to distance themselves from the previous government’s emphasis on sectoral

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compensation and emphasized instead the importance of macroeconomic coordination.2 The new economy minister, José Luis Machinea, supported regional cooperation significantly more than his predecessors. In his view, however, successful integration depended on the ability of partners to coordinate their macroeconomic policies. During the first half of 2000, Argentine and Brazilian negotiators met repeatedly to discuss the issues to be included in the relaunch agenda. At a regional summit held in April 2000 in Buenos Aires, smaller partners Uruguay and Paraguay formally stated their support for the initiative. The four countries thus agreed to work together to harmonize macroeconomic indicators and establish specific targets for macroeconomic coordination. The establishment of this “Little Maastricht” arrangement had a strong political and strategic rationale. With it, the governments of Argentina and Brazil sought to signal their strategic commitment to the strengthening of the bloc and to mobilize diplomatic efforts away from their current focus on commercial friction and toward the goal of consolidating MERCOSUR (Azambuja 1999). As would soon become clear, however, the two partners lacked the political will to make real progress in implementing commercial commitments. Despite the enthusiasm surrounding the relaunch negotiations, Argentina and Brazil maintained incompatible positions on several of the issues included in the new agenda (Rattner 2002). To Brazil’s disappointment, the change in administrations in Argentina had not resulted in a significant shift in that country’s position toward cooperation. Like their predecessors, economic officials in the de la Rúa government soon began demanding compensation mechanisms to manage competitiveness asymmetries within the bloc. They also questioned the Brazilian government’s extensive use of financial and fiscal incentives and demanded stronger regional institutions.3 Brazil was uncompromising on all of these issues. By mid-­2000, very scant progress had been made in negotiating the items on the regional agenda. However, the meetings of the Common Market Group and Council at the end of June 2000 led to renewed political momentum. After a series of bilateral meetings between technical officials, the four presidents announced the formal “relaunch of MERCOSUR.” In typical MERCOSUR fashion, national leaders made overoptimistic public declarations, claiming that the crisis triggered by

128  Power and Regionalism in Latin America

the Brazilian devaluation was finally over (Maduro 2000). A closer look at the actual agreements signed in June 2000 suggests, however, that these declarations were no more than an “inventory of pending issues.” The relaunch package conveniently excluded the most controversial and urgent issues on the regional agenda, such as the implementation of the common external tariff (CET), the coordination of negotiating positions in external negotiations, and the strengthening of regional institutions (Bouzas 2002). While seeking to signal partners’ determination and commitment to the bloc, the disappointing results of the relaunch exercise contributed to undermining further the bloc’s credibility (Bouzas 2002). Crisis Again

The deteriorating economic and political situation in Argentina during 2001 prevented the relaunch negotiations from having much more than a rhetorical effect. In March 2001, Economy Minister José Luis Machinea was replaced with the less-­MERCOSUR-­friendly Ricardo López Murphy. This move raised concerns in Brazil, particularly after members of López Murphy’s team expressed their intention to begin commercial negotiations with the United States. To dispel Brazilian fears, Argentine foreign minister Adalberto Rodríguez Giavarini assured his counterpart Celso Lafer that the ministerial change would in no way alter the priority accorded by Argentina to MERCOSUR.4 From Brazil’s perspective, however, a much more worrying development was the sudden replacement of López Murphy with Domingo Cavallo at the end of the month. Not long after his reappointment, Cavallo announced a comprehensive package of economic measures aimed at reversing the severe recession that had taken hold of the Argentine economy. Cavallo’s program included a number of controversial trade policy reforms that sought to improve the competitiveness of his nation’s industry. The new measures, which affected 2,700 tariff items, increased customs tariffs for consumer goods from 12–30 percent to 35 percent and eliminated duties on capital goods (Baracat and Nogués 2005). By unilaterally modifying Argentina’s external tariff levels, the move clearly violated MERCOSUR CET rules.

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Aware of the turbulent economic situation confronted by Argentina, Brazil initially reacted with moderation. Yet Brazilian officials immediately rejected Cavallo’s attempt to treat information technology and telecommunications products as “capital goods,” on which tariffs were slashed. To put pressure on the Argentine government, President Fernando Henrique Cardoso postponed an official visit to Buenos Aires scheduled for the following week. After a series of bilateral meetings, Argentina agreed to remove information technology and telecommunication products from the list of capital goods that faced an elimination of external tariffs. In exchange, Brazil granted its neighbor a temporary “waiver,” which allowed Buenos Aires to maintain the measures until the end of 2002.5 Less than two weeks later, however, Cavallo’s provocative declarations triggered a new diplomatic rift between the two countries. The Argentine minister criticized Brazil’s commitment to the customs union, claiming that the CET was “a joke.” More importantly, he recognized that, in his view, Argentina would be better off negotiating preferential trade agreements with the United States and the European Union on a bilateral basis than through MERCOSUR. These remarks irritated the Brazilian government, which responded with a statement that emphasized the strategic importance of the CET. In addition, Cardoso claimed that “this is not what President de la Rúa has frequently told me. . . . I will ask him directly which opinion prevails in Argentina, his or the minister’s.”6 In a bilateral meeting held during the Third Summit of the Americas in Quebec, de la Rúa reassured his Brazilian counterpart of Argentina’s strategic commitment to preserving the customs union.7 In spite of these pledges, in July 2001 Cavallo announced a new set of unilateral trade reforms, which revived bilateral tension. Resolution 258/01 reduced tariffs on imports of automobiles, information technology, and telecommunications products from non-­MERCOSUR countries. In addition, the measure gave exporters from third countries the right to claim the refund of the “convergence factor” established by Cavallo’s competitiveness program for foreign trade operations.8 According to Brazil, the new regulations discriminated in favor of Argentine imports from third countries, eroding the preference margin for products manufactured in Brazil and the region (Kume and Piani 2001). This time,

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therefore, Itamaraty responded more assertively, suspending all bilateral negotiations and threatening to interrupt purchases of Argentine wheat and petroleum. In an uncharacteristically harsh tone, Cardoso expressed his concerns about the “institutional crisis” in Argentina and criticized the government’s inability to make consistent policy decisions.9 Yet this hawkish response was not maintained for long. A few days later, both the Brazilian president and other prominent members of the foreign policy executive sought to defuse tension and signaled their soli­darity with Argentina. In recognition of the delicate situation confronting its neighbor, Itamaraty announced that no economic sanctions would be taken in response to Argentina’s unilateral move. As Argentina’s economic and financial situations deteriorated during the second half of 2001, it became clear that the maintenance of MERCOSUR depended on Brazil’s ability and willingness to grant Argentina the flexibility it needed to confront its domestic economic and political troubles. In an emergency meeting held in October 2001, the Brazilian government agreed to negotiate the creation of a compensation mechanism to manage the difficulties derived from the exchange rate asymmetries between the two countries (IDB 2001). Brazilian negotiators continued to reject Argentina’s preferred outcome, namely, the creation of an exchange rate trigger that would be automatically activated in cases of exchange rate asymmetries. However, they were willing to consider the establishment of a mechanism of temporary safeguards based on WTO rules. This system would allow Argentine sectors to obtain protection from competitive imbalances between the two countries. Discussions over the design of the safeguards system continued during the month of October. Although Argentine negotiators insisted on the importance of addressing the exchange rate asymmetries, Brazil remained firm on its position that only temporary, WTO-­like safeguards clauses would be acceptable.10 Cavallo’s aggressive criticism of Brazil’s exchange rate policy during the course of the negotiations complicated matters further. In an interview with the Brazilian press, the Argentine minister suggested that relations with Brazil were “exhausted.” Once again, his hostile remarks angered Brazilian officials.11 In response, Itamaraty withdrew its diplomats from the negotiations of the safeguards mechanism and demanded an apology from the Argentine government. As in

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previous instances of diplomatic tension, the Argentine Foreign Ministry quickly sought to downplay Cavallo’s remarks. In a desperate attempt to mitigate Brazil’s frustration, Argentine president de la Rúa issued another statement confirming that MERCOSUR was a strategic priority for Argentina. In response, Brazil agreed to continue negotiations.12 Toward the end of the year, Argentina and Brazil seemed to be making progress in coordinating their positions on the issue of compensatory mechanisms. Partners expected to finalize an agreement during the Common Market Group and Common Market Council meetings in December 2001 (IDB 2001). The outbreak of the economic and political crisis in Argentina cut these negotiations short. In this context, and given the end of the convertibility system in Argentina, the discussion of compensatory measures seemed largely irrelevant.

Explaining National Preferences and Policy Choices

Argentina’s Unilateralism

The unilateral measures introduced by the Argentine economic team in 2001 revived diplomatic tension between Argentina and Brazil and undermined joint efforts to relaunch the bloc. As in previous cases, Argentina’s unilateralism can be explained in reference to domestic politi­ cal and economic constraints. In this section, I first trace the influence of domestic political factors on Argentina’s position toward regional cooperation in 2001. I then examine the role of systemic forces in offsetting the impact of these domestic constraints. Industrial Lobbying against Cooperation

As in the previous cases of trade conflict examined in this book, the initiation of the CET dispute was preceded by intense private sector mobilization. In fact, at first glance, it would seem that societal pressures were more relevant in this case than in the other two. The evidence suggests that in 2001, national industry issued stronger and more specific demands for the suspension and/or reversal of regional integration than in the past. This erosion of societal support for MERCOSUR reflected

132  Power and Regionalism in Latin America

the increasing costs of regional integration to national producers, given the widening exchange rate asymmetries between the two countries (Ablin and Bouzas 2004). Argentine businesses were significantly hit by the progressive depreciation of the Brazilian real (Lucángeli 2001). Traditional light industry, and in particular those sectors with significant small business representation, were the most adversely affected by Brazilian competition (IDB 2001). In addition, because Argentine firms held large amounts of dollar-­denominated debts, they supported the government’s decision to protect the convertibility regime. This meant that they focused their demands and pressure on trade policy.13 However, a closer look at the empirical evidence suggests that, while certainly shaping Argentina’s position during the crisis, intensified private sector mobilization against MERCOSUR cannot, by itself, account for Argentina’s uncooperative behavior. First, the measures introduced by Cavallo as part of the competitiveness program did not directly address the industrial lobby’s main demands. Far from providing import relief, the increase in the external tariff on consumer products deepened the preferences enjoyed by Brazilian products vis-­à-­vis imports from third countries. Indeed, both importers and national producers expressed concerns about the measures. Representatives from some of the industries that would supposedly benefit from higher external tariffs, such as the textile sector, complained that the measures would increase the competitive advantage of Brazilian imports.14 The Argentine Chamber of Importers, in turn, recognized the importance of lowering tariffs on capital goods and other inputs to increase industrial competitiveness, but warned about the fiscal impact of such measures. Complaints by industrial lobbies actually intensified after the tariff changes were introduced. In May, the Argentine Industrial Union (UIA) called for the restoration of the regional trade adaptation regime, which would imply a suspension of intraregional free trade. In the absence of macroeconomic coordination, it was argued, new exemptions were essential to protect the most sensitive sectors. As the exchange rate asymmetries between the two countries widened during the second half of 2001, Argentine industrialists once again demanded the “suspension” of MERCOSUR.15 Industrial leaders claimed that integration had exacerbated the structural asymmetries between the manufacturing industries

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in Argentina and Brazil. The data in Table 6.1, which shows the evolution of bilateral trade imbalances by sector since 1991, reveal that, indeed, in several sectors the trade deficit with Brazil had deepened. In September, the UIA leaders presented the government with a proposal that called for specific measures to offset the impact of the progressive devaluation of the Brazilian currency on the performance of Argentine producers. Furthermore, the industrial sector was critical of the agreement reached between the Argentine and Brazilian governments in early October. While welcoming Brazil’s willingness to accommodate to Argentina’s calls for the establishment of compensation mechanisms, UIA representatives rejected the establishment of a system of safeguards. Instead, the industrialists favored proposals for the creation of an automatic exchange Table 6.1.  Argentina-Brazil Bilateral Trade Balance in Manufactured Goods,* 1991–2003 Sector Vehicles

1991–94

1995–98 1999–2003

−201

698

314

36

208

148

104

316

140

14

52

65

Plastic products

−30

−14

−14

Fibers and knitting

−11

10

−21

−175

−300

−50

−42

−45

−52

60

49

−64

−41

−80

−68

Auto parts

−205

−308

−87

Iron and steel

−217

−246

−124

Electric goods and home appliances

−139

−166

−129

Paper

−142

−169

−138

Special machinery

−233

−318

−145

−50

−129

−333

Dairy products Meat, fish, fruits, and vegetables Beverages

Basic chemical products Wood and furniture Attire, leathers and footwear Textile materials

Electronic and telecommunication goods

*Evolution of annual average for each period, in US$ millions (percentage of total). Source: Crespo et al. (2004).

134  Power and Regionalism in Latin America

rate trigger system. UIA leaders claimed that safeguard-­type measures were insufficient to compensate for the effects of the 70 percent depreci­ ation of the Brazilian currency that had taken place between January 1999 and July 2000.16 In a written statement published in all local newspapers ten days after the announcement of the safeguards agreement, industrial leaders demanded a faster and automatic mechanism to address exchange rate asymmetries: In these conditions, there can be no customs union. If the macroeconomic asymmetries are not eliminated—­as the Treaty of Asunción envisages—­they must be offset. . . . Argentina is seeking to correct the exchange asymmetry through implementation of a system of safeguards, which is absolutely inappropriate. Safeguards . . . do not solve the problems of Argentine producers exporting to Brazil nor those of Argentine industry in general, which must compete on clearly unequal terms. . . . To prevent sharp distortions in trade flows and investment allocation, the exchange problem should be attacked directly with an automatic measure that addresses the cause of the distortion itself: the ongoing devaluation of the real. . . . Without a system that automatically corrects exchange asymmetry within MERCOSUR, the injury to industry will be irreparable and the effect on employment devastating.17 Together with other private sector associations, such as the Argentine Chamber of Construction and the Argentine Rural Confederation, the UIA also sought support from Peronist legislators. To intensify pressure on the government, UIA leader José de Mendiguren stated, “If existing asymmetries continue to be ignored, there will be more factory closures, more relocations to Brazil and more unemployment.”18 The government responded with a “buy Argentine” campaign, aimed at discouraging businesses from relocating to Brazil (Rattner 2002). However, this move had limited effects and only added to the private sector’s frustration with MERCOSUR and with the government’s inability to defend national production (Schorr and Wainer 2005). Increasing discontent was evident among members of the footwear industry, one of the sectors in which penetration of Brazilian imports was higher. To express their disapproval

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of the government’s “complacent” position in bilateral negotiations, business and labor representatives in the sector organized a massive demonstration and threw pairs of shoes outside the building of the Foreign Ministry in Buenos Aires (IDB 2002). Economic Officials and the Increasing Costs of Cooperation

The private sector’s emphasis on the detrimental effects of the depreciation of the Brazilian currency converged with the position of Economy Minister Domingo Cavallo. Like UIA representatives, Cavallo favored the introduction of macroeconomic mechanisms that would be triggered automatically when the bilateral exchange rate moved beyond a preestablished band. Yet it would be inaccurate to explain Cavallo’s position as reflecting solely the demands and preferences of private sector actors. As in previous instances of conflict, economic policy makers faced independent macroeconomic and political motivations to defect from regional commitments. First, the unilateral measures established in 2001 had a clear macroeconomic rationale. They were part of a broader package of policies—­the so-­called competitiveness program—­introduced by Cavallo in response to the deepening recession plaguing the Argentine economy since 1998 (see Table 6.2).19 Both the increase in consumer goods tariffs and the elimi­nation of duties on capital goods sought to improve the competitiveness of the Argentine industry, without directly altering the nominal exchange rate (Ablin and Bouzas 2004). The sustainability of the convertibility system was a priority for Cavallo in 2001. He was therefore perfectly willing to sacrifice Argentina’s regional commitments for the sake of defending the exchange rate anchor. In this sense, and as in the other conflicts, the uncooperative measures taken by Argentina in 2001 must be interpreted as reflecting the increased opportunity cost of relinquishing control over trade policy instruments. In the words of Ablin and Bouzas (2004), once again, “trade policy became hostage to short-­term policy objectives rather than part of a long-­term consistent strategy.” The dire internal and external economic situation confronted by Argentina underscored the importance of regaining autonomy in the management of trade policy instruments, thus diminishing incentives for cooperation. This is fundamental to understand Cavallo’s hawkish

136  Power and Regionalism in Latin America Table 6.2.  Argentina: Selected Macroeconomic Indicators, 1998–2001 1998 GDP total (US$ billion)

1999

2000

2001

299.1 283.4

285.0

268.7

GDP total (% annual variation)

3.9

−3.4

−0.8

−4.5

Industrial production (% annual variation)

2.1

−6.5

−0.3

−7.6

Gross fixed domestic investment (% GDP)

19.9

18.0

16.2

14.2

Unemployment rate (%)

12.8

14.2

15.1

17.4

Public sector deficit (−) (% GDP)

−1.4

−1.7

−2.4

−3.0

7.9

9.4

9.4

17.2

−5.0

−2.2

1.2

6.3

−14.5 −11.9

−8.8

−4.4

Borrowing rate (average annual nominal %) Trade balance (US$ billion) Current account (% GDP) Foreign direct investment (US$ billion) Total gross external debt (US$ billion) Reserves (US$ billion)

22.6

10.7

3.3

141.9 145.3

5.0

146.3

139.8

26.9

14.9

26.2

27.3

Source: IDB (2002).

position toward MERCOSUR and, in particular, his frequent criticism of the CET. From his perspective, it was in Argentina’s interest to reverse MERCOSUR to a free trade area. According to Cavallo, the elimination of the CET would allow Argentina to recover the freedom to eliminate tariffs on capital goods and other restrictions on investment. In his view, the CET constrained Argentina’s growth and investment opportunities (Cavallo 2001). In this context of increased domestic and external constraints, trade policy instruments not only acquired special macroeconomic importance, but also had increasing domestic political value. The unilateral violations also had a broader political economy rationale. With trade policy measures Argentine economic leaders tried to neutralize growing private sector discontent with prevailing macroeconomic policies. Because a significant number of Argentine firms held large dollar-­denominated debts, they continued to share the government’s stubborn determination to avoid the collapse of the convertibility regime. As a result, not only the UIA but also the associations representing the agricultural and construction sectors—­the so-­called Grupo Productivo—­supported

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the competitiveness program and the rest of the reforms introduced by Domingo Cavallo.20 The economic crisis led to a strengthening and broadening of this coalition, resulting in the emergence of an unprecedented alliance between industrialists, bankers, and labor unions. This cohesive group called for economic and institutional reforms aimed at promoting the reactivation of national production. They also criticized the political weakness and indecisiveness of the de la Rúa administration and sought support for their initiative of strengthening the “national bourgeoisie” among prominent Peronist politicians.21 Toward the end of the year, key members of this backlash coalition had become openly critical of the costs that the overvaluation of the currency and the maintenance of the convertibility regime had for the private sector (Schorr and Wainer 2005; Basualdo 2006). Although few business actors actively called for devaluation before the collapse of the government in December, their complaints did promote public debate on the exchange rate. This raised the economic team’s concerns about the economic and political sustainability of the convertibility regime (Gaggero and Wainer 2004). In his determination to prevent a further erosion of domestic political support for the fixed exchange rate, Cavallo relied on other types of economic policies, such as trade and fiscal measures, to offset at least partially the burden of the private sector. His proposal for an automatic exchange rate trigger during negotiations with Brazil must also be understood in reference to his growing concerns about the effects of the exchange rate asymmetries on domestic support for the convertibility regime. There was a further point of convergence between the leaders of the Grupo Productivo and Cavallo’s team. Like these technocrats, the members of the nationalist private sector coalition bitterly opposed the proposal put forward by former president Menem and defended by some orthodox economists of a dollarization of the economy. Officials from the Menem administration, such as former economy minister Roque Fernández, repeatedly criticized the attempts by Cavallo to save the convertibility regime from collapsing at all costs. From the perspective of national producers, however, proposals for dollarizing the economy ultimately reflected the interests of the internationalized financial sector and privatized enterprises (Schorr and Wainer 2005). In a joint statement,

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the UIA and the General Confederation of Labor (CGT) emphasized the loss of “national sovereignty and dignity” that such an option would entail.22 Unlike Cavallo, however, these actors gradually began supporting the shift to a more flexible exchange rate mechanism. A final factor influenced the economic team’s hostile position toward Brazil and MERCOSUR. By heightening concerns about the sustainability of the convertibility system, the progressive depreciation of the Brazilian currency further eroded Argentina’s external credibility (Ablin and Bouzas 2004). During the second half of 2001, this financial uncertainty led to an unprecedented increase in Argentina’s country risk, and hence in interest payments on the foreign debt.23 After his return to the government, Cavallo struggled to restore confidence in the financial system and to discourage perceptions that a devaluation was imminent.24 He thus strongly resented the frequent statements in Brazil about the sustainability of the currency board and about Argentina’s alleged “stubbornness” in trying to stick to it (Rozemberg and Svarzman 2002, 54). This also explains the Argentine minister’s recurrent criticism of Brazil’s exchange rate management. Indeed, Cavallo went so far as accusing Brazil of deliberately devaluing its currency while “betting on the collapse of Argentina’s currency board system.”25 From his perspective, a bilateral agreement with the United States would be more appropriate than the “protectionist” and “unstable” MERCOSUR in contributing to macroeconomic stability and external credibility (Ablin and Bouzas 2004). Intrastate Cleavages and Argentina’s Strategic Alternatives

A third domestic-­level constraint shaped Argentina’s position toward MERCOSUR in 2001. As in the previous conflicts, there were important cleavages among economic policy makers and the foreign policy executive regarding Argentina’s strategic alternatives in general, and MERCOSUR in particular. These divergences were deepened by the return of Cavallo to the government. The economy minister’s critical stance on the CET and his support for transforming the bloc into a free trade area clashed with the foreign policy executive’s strong commitment to the strategy of regional integration. Given the emergency situation confronted by the Argentine economy, Cavallo enjoyed an unusual concentration of decision-­making power over economic policy issues, including trade

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policy.26 He thus played a central role in setting the agenda and in conducting negotiations with other MERCOSUR partners. As a result, representatives from the Foreign Affairs Ministry could do little to block his anti-­MERCOSUR statements and actions. Nevertheless, at critical moments, the conciliatory position defended by the foreign policy executive prevailed over Cavallo’s defiant stance. President de la Rúa, who also participated actively in regional negotiations, shared the foreign policy elite’s perspective on the importance of preserving the strategic partnership with Brazil.27 From the beginning of his mandate, the chief executive had made it clear that he believed that “MERCOSUR is the only option for Argentina.”28 Indeed, as the discussion above illustrated, on several occasions the president sought to defuse bilateral tension and to ensure the continuity of the regional project, even when this obliged him to openly contradict his economy minister. After Cavallo’s comments in May about his preference for negotiating bilaterally with the European Union and the United States, for example, de la Rúa quickly reassured his Brazilian counterpart that Argentina would participate in FTAA talks “through MERCOSUR” and not individually (Fundación Invertir 2001). Similarly, in October, the Argentine president released a statement reassuring the Brazilian government of the strategic importance of MERCOSUR for Argentina and emphasizing the central role of the foreign policy executive in the formulation of the country’s negotiating position.29 Despite attempts by the Argentine executive to maintain a unified and cohesive position, the divergences between the technocrats of the economic team and diplomats were evident to most observers. These internal disagreements eroded the coherence of Argentina’s posture toward MERCOSUR (Bouzas and Pagnotta 2003). Moreover, the public disagreements between the president and Cavallo eroded the consistency of the government’s position in regional negotiations, thus weakening its bargaining leverage vis-­à-­vis Brazil (Bouzas 2002; Ablin and Bouzas 2004). But what were the roots of these intrastate cleavages regarding regional cooperation? Cavallo’s hawkish position toward MERCOSUR was more than just a reflection of a domestic-­oriented political and economic calculus. It was also informed by strategic considerations and,

140  Power and Regionalism in Latin America

more specifically, by the minister’s particular reading of the constraints and opportunities that the international system presented for Argentina. From Cavallo’s perspective, the maintenance of the CET entailed important domestic economic and political costs in terms of constrained autonomy. In addition, it set important limits to Argentina’s international strategic and commercial options. In his view, reversing MERCOSUR into a free trade area would allow Argentina to engage in bilateral preferential negotiations with the United States and the European Union. Moreover, the elimination of the CET would grant Argentina the freedom to pursue a trade deal with NAFTA countries, were this opportunity to arise. In 2001 many liberal economists and trade experts in Argentina believed the Bush administration stood a better chance than the Clinton government of winning authority from the US Congress to make fast-­track decisions regarding trade agreements. As in the early 1990s, this perception led to much speculation about the possibility that Washington could invite Argentina to join NAFTA.30 In contrast, Foreign Ministry officials continued to see the consolidation of MERCOSUR as a “political, strategic, military, defensive, cultural, and economic and commercial” priority (Rodríguez Giavarini 2000). Being particularly sensitive to the asymmetries of power characterizing the international system, the foreign policy executive saw MERCOSUR as a vehicle for enhancing members’ leverage vis-­à-­vis third countries, particularly the United States and the European Union.31 In contrast to Cavallo, therefore, Argentine diplomats viewed the bloc as a necessary intermediate step toward the creation of the FTAA. More generally, they also agreed with their Brazilian counterparts on the importance of maintaining a unified front during external negotiations with developed countries. While Cavallo defended the potential benefits of a bilateral agreement between Argentina and the United States, the Foreign Ministry supported instead the alternative of a “4+1” agreement with the whole bloc (Laens and Osimani 2001). This explains why Argentine diplomats adopted a more dovish stance toward Brazil during the 2001 crisis, intervening repeatedly to neutralize the effects of Cavallo’s frequent abrupt statements against Brazil and MERCOSUR. Their position was in line with the more moderate style and objectives of Argentine diplomacy and foreign policy during the de la Rúa administration.32

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A second and related factor informing the divergences between the economic team and the foreign policy elite in regard to Argentina’s strategic options concerned their uneven assessment of external threats and opportunities, and in particular, of Argentina’s position in the international system. The 2001 economic crisis resulted in a weakening of Argentina’s position within the hemispheric and in the larger global arenas, leading to a downward revision in the Foreign Ministry’s perceptions of Argentina’s international relevance. This reassessment of their country’s status underlined incentives for bandwagoning with Brazil in order to increase Argentina’s leverage in external negotiations (Rodríguez Giavarini 2000). In a related vein, and as discussed in chapter 5, toward the end of the 1990s Argentine trade experts had became increasingly aware of the risks that hemispheric integration entailed for their country (Rapoport 2002; Musacchio 2001). From their perspective, it was essential that hemispheric negotiations go beyond tariffs to include agricultural subsidies and nontariff barriers (Bouzas, Gosis, Soltz, and Pagnotta 2002). These experts also increasingly emphasized the importance of ensuring reciprocity in order to preserve and maximize Argentina’s commercial interests. Aware of the tough bargaining skills of the US Trade Representative (USTR), Argentine foreign policy makers believed that the only way to ensure reciprocity in those sectors that mattered most to Argentina was to participate in hemispheric negotiations through MERCOSUR (Kume and Piani 2001; Bouzas and Pagnotta 2003). From the foreign policy executive’s perspective, the bloc was a “powerful instrument to fight trade protectionism in all the fora in which it participates.”33 Indeed, for Argentine foreign policy makers, the bloc was crucial to enhance Argentina’s leverage not only in the process of hemispheric integration, but also in negotiations with the European Union. According to some, a trade agreement with the European Union would have greater economic bene­ fits than the FTAA, given the high barriers that Argentine exports faced in Europe (CEI 2002). The September 11 terrorist attacks on the United States deepened defensive incentives for regional cooperation in the Southern Cone. In the short term, this incident and the aggressive response of the United States increased economic and political uncertainty, contributing to a

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marked deceleration in the world economy. This, in turn, exacerbated commercial rivalry and appreciably slowed the pace of negotiations in the different international forums in which South American countries participated (Tussie 2003). In light of these increasingly threatening external conditions, Argentina had little option but to work on the long-­ term consolidation of MERCOSUR in order to play a relevant role in the global trade and investment systems.34 Perceptions of the declining strategic relevance of Latin American countries, given the complexity of the new security threats confronted by the United States, also increased the rationale for strengthening MERCOSUR. Brazil’s Response: Qualified Accommodation

In 2001, Brazil faced a delicate balance. On the one hand, it was clear to Brazilian officials that, in light of the severity of the Argentine crisis, the survival of the project of regional cooperation would require significant flexibility on their part. On the other hand, the Brazilian government faced significant domestic political and economic pressures, which constrained the extent to which they could yield to Argentina’s demands. Brazil’s qualified accommodation constituted an attempt to balance these domestic-­level pressures while ensuring the continuity of the bloc. Domestic Political Constraints: The Private Sector’s Position

The measures imposed by the Argentine government in April 2001 had uneven effects across the Brazilian industrial community. The increase in Argentina’s external tariffs on consumer goods deepened regional preferences and worked to the advantage of more competitive Brazilian producers of these goods, including electronic domestic appliances, textiles, and footwear.35 By contrast, Cavallo’s decision to eliminate the external tariff on capital goods directly harmed the Brazilian capital goods industry, which saw an erosion of its preferential access to the Argentine market. The Brazilian Association of Machinery and Equipment Industries (ABIMAQ) therefore criticized the measures, claiming they would result in heavy losses for Brazilian producers.36 The Argentine minister’s decision to treat information technology and telecommunication products as capital goods, in turn, threatened sales of Brazilian-­made

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cellular telephones, computers, and ink jet printers in Argentina. It thus triggered a negative reaction from the Brazilian Electric and Electronic Industry Association (ABINEE). ABINEE representatives expressed their discontent and warned the government that the move would lead those foreign corporations planning to invest in Brazil in order to take advantage of the protected regional market to revise their strategic planning. Cavallo’s measures also triggered criticism from broader industrial associations, such as IEDI and FIESP. According to IEDI’s executive director, Júlio Gomes de Almeida, reducing the CET on information technology and telecommunications goods was an “imbecile” decision that would prevent Brazil from becoming an important supplier of these products.37 Beyond the specific distributional implications of the Argentine measures, Brazilian capitalists resented Cavallo’s aggressive statements against Brazil and MERCOSUR.38 In contrast to many of their less competitive Argentine counterparts, the main industrial associations in Brazil supported regional integration and agreed with the government on the importance of ensuring its maintenance.39 Moreover, several Brazilian sectors feared the competitiveness implications of external negotiations. They therefore favored the continuity of the CET and the customs union, which, in their view, would increase the bargaining leverage of MERCOSUR countries in negotiations with the United States and the European Union.40 At the same time, according to Kume and Piani (2001), the reversal of the bloc from a customs union into a free trade area would also have adverse economic consequences for Brazilian industry. Thus, both CNI and FIESP eventually adopted a cooperative position and supported the government’s decision to grant Argentina temporary flexibility in the management of its trade policy instruments, as long as this implied the maintenance of the CET. Brazilian industrialists were less enthusiastic about the establishment of institutionalized mechanisms of compensation for the Argentine private sector. Industrial representatives initially reacted cautiously to the news that the Brazilian government had finally agreed to consider the use of safeguards measures within the bloc. While restating their support for MERCOSUR, the private sector criticized Brazilian negotiators for not being sufficiently clear about the design and nature of the mechanisms that were being considered. In particular, FIESP and CNI leaders

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pledged to defend the interests of Brazilian industrialists from disadvantageous agreements with Argentina.41 They demanded to participate in the discussions over the shape of the compensatory measures and vigorously opposed Cavallo’s proposal for an automatic exchange rate trigger mechanism. Taking advantage of their close ties with the Ministry of Development, Industry, and Commerce, national producers also emphasized the importance of reciprocity in the use of safeguards measures and called for a tougher stance from Brazilian negotiators. Representatives from the Development Ministry, in turn, shared the private sector’s concerns about the establishment of the safeguards mechanisms, which they viewed as an obstacle to their efforts to promote and expand Brazilian exports.42 Economic Incentives for Differentiation

Economic policy makers in the Finance Ministry were less sensitive to pressure from the private sector than their counterparts in the Development Ministry, and were more inclined to privilege cooperation with Argentina. At least two factors explain the conciliatory stance of members of the economic team. First, during the early months of 2001 they recognized the risks that Argentina’s collapse would have for the region as a whole and for Brazil in particular. Indeed, the tumultuous circumstances under which Cavallo was reappointed to the Ministry of Economy in March severely undermined the stability of the Brazilian currency. During the first week of April, the real depreciated significantly against the dollar. Thus, from the economic team’s perspective, Brazil had little choice but to support Argentina’s efforts to stimulate its economy and restore its credibility in international capital markets.43 Second, economic policy makers were particularly keen on ensuring the maintenance of the CET for domestic economic policy-­making reasons. The economic team viewed the CET as a critical instrument for locking in trade liberalization measures and promoting domestic discipline of firms in the industrial sector.44 Economists thus favored granting Argentina the flexibility it required in the short term as a way of ensuring the continuity of the customs union.45 However, during the second half of the year, the economists at Brazil’s Ministry of Finance and the Central Bank hardened their stance. As

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the crisis in Argentina deepened, economic officials became increasingly worried about regional contagion and spillover effects. This translated into deliberate attempts by these policy makers to emphasize the differences between Argentina and Brazil in the eyes of foreign investors. This is clear, for example, in the statement by Finance Minister Pedro Malan that “the only similarity between the two countries is that we are part of the same world.”46 As an illustration of Brazil’s ability to distance itself from Argentina and to maintain external credibility, he pointed to the strengthening of the Brazilian currency, even as Argentina’s country risk deteriorated toward the end of the year. Moreover, concerns about external credibility and the sustainability of trade liberalization reforms led the Brazilian economic team to oppose the creation of an escape clause at the regional level. As in 1999, they worried about the longer-­term implications of institutionalizing contingent protectionist mechanisms within the bloc. Nevertheless, economic officials saw the sectoral safeguards as a lesser evil than Cavallo’s proposal for an exchange rate trigger.47 Strategic Incentives for Moderation

By contrast, the Brazilian Foreign Ministry’s main concerns were the strategic and political implications of Argentina’s uncooperative behavior. From the perspective of Brazil’s top diplomats, Cavallo’s unilateral measures weakened MERCOSUR as a customs union and undermined its ability to sustain a consistent position in external negotiations. Indeed, as discussed in previous chapters, Brazilian foreign policy elites attached an important symbolic and strategic value to the CET (Ablin and Bouzas 2004).48 In this sense, the Argentine violations came at a critical time: only weeks before the Third Summit of the Americas opened in Quebec, Canada. From Brazil’s perspective, it was essential for MERCOSUR partners to overcome their differences and to maintain a coordinated and cohesive front during the upcoming hemispheric and interbloc negotiations (Fundación Invertir 2001). Negotiating from a consolidated and unified position was expected to yield a more advantageous outcome for all members of the Southern Cone trade bloc (Aggarwal and Espach 2004; Da Motta Veiga 2004). As far as the FTAA was concerned, Itamaraty hoped to block US attempts to accelerate the time frame of

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negotiations (Lafer 2003). The maintenance of the CET was also viewed as a precondition for achieving a successful outcome in negotiations with the European Union. Brazil thus faced strong incentives to soften its position so as to prevent an escalation of diplomatic conflict within the bloc. The decision to accept the institutionalization of a regional system of safeguards must be understood as a calculated attempt to ensure the survival of the bloc. After two years of recurring bilateral tension, Brazil was willing to sacrifice one of the underlying objectives of the customs union, the maintenance of intraregional free trade, for the sake of preserving its geopolitical and strategic dimension. In the words of Brazilian foreign minister Celso Lafer (2003): “MERCOSUR for us is destiny. . . . In 2001, we tried to calibrate [our policy] in order to preserve the functioning of this strategic project.” At least three factors explain why the Brazilian foreign policy executive was more willing to compromise and accommodate to Argentina’s position in 2001 than it had been in 1999 or even during the relaunch negotiations in 2000. First, Brazil’s greater willingness to pursue accommodation reflected increasing concerns in Brasília about the severity of the Argentine economic and financial crisis and its potential spillover effects (Lafer 2002).49 The delicate situation in Argentina inevitably contributed to MERCOSUR’s fragility, thus threatening Brazil’s plans for effectively counterbalancing US hegemony in the Western hemisphere. Second, the shift was a response to the perceived threat posed by Cavallo’s hawkish and defiant stance. The Brazilian foreign policy elite genuinely feared that, like Chile, Argentina could defect from MERCOSUR and choose to pursue a bilateral agreement with the United States (Rattner 2002). Chile’s decision to pursue a free trade agreement with the United States instead of becoming a full member of MERCOSUR had been a blow for Brazil. Brazilian diplomats worried also about Uruguay’s attempts to expand and deepen bilateral relations with the United States. In May 2001, Uruguay’s president, Jorge Batlle, announced his plans to move forward with the FTAA, “if not through MERCOSUR, then through our own means.”50 Apart from constituting a threat to Brazilian efforts to balance US influence in hemispheric negotiations, defection by smaller partners

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would undermine Brazil’s plans for leadership within the region. To reinvigorate the offensive dimension of Brazil’s regional policy, President Cardoso had convened a meeting of South American presidents in Brasília in August 2000 (Laens and Osimani 2001). This move highlighted Brazil’s aspirations to become a spokesman for South America in hemispheric and multilateral trade negotiations (Roett 2001). The launching of the Initiative for the Integration of Regional Infrastructure in South America (IIRSA) during this summit also signaled Brazil’s willingness to take a more active role in the provision of regional public goods. The materialization of these objectives, however, depended on the endurance and consolidation of MERCOSUR. In sum, as in previous crises, Brazil’s cooperative stance was also shaped by offensive strategic considerations. Finally, Brazil’s more flexible stance must be understood in reference to the shifting external economic and political conditions following the September 11 terrorist attacks in the United States. On the one hand, the attacks raised doubts about the long-­term sustainability of US commitment to hemispheric integration. At the same time, however, this dramatic incident created great financial, economic, and political uncertainty in the international system, leading many to predict a global economic downturn (Peña 2001; Lafer 2003). This new threatening external environment heightened incentives for developing countries to strengthen regional cooperation efforts. From Brazil’s perspective, September 11 constituted a point of inflection in the international order, resulting in a reassertion of US hegemony in global affairs and a diminishing of other states’ scope of choice (Lafer 2002; 2003). The importance of preserving MERCOSUR in this increasingly adverse international context was highlighted by Brazilian officials after the agreement on the establishment of safeguards was signed. Trying to appease domestic critics, President Cardoso also presented the concession as part of the burden of Brazil’s greater size and its aspirations for hegemonic leadership.51

Bilateral Negotiations and the Resolution of the Conflict

The management and resolution of the CET conflict had significant consequences for the future evolution and institutional design of

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MERCOSUR. Ironically, a year after pledging to move toward a complete implementation of the customs union and the free trade area, Argentina and Brazil took several steps in the opposite direction. The decision to grant Argentina a temporary waiver on CET commitments and, a few months later, the institutionalization of an escape clause within the bloc clearly departed from the goals of intraregional free trade and a common external tariff policy. But, once again, these moves reflected the enduring strategic and political commitment of the Argentine and Brazilian governments to keeping the bloc alive. By increasing the bloc’s institutional flexibility, they tried to bolster its political sustainability. Argentine and Brazilian negotiators met repeatedly during 2001, trying to manage the diplomatic and political effects of ongoing commercial friction. The first round of bilateral talks took place in April following the announcement of Argentina’s unilateral measures. In June, the Common Market Council formally authorized Argentina to maintain changes on external tariffs until December 31, 2002. In addition, the council established a high-­level group to conduct a comprehensive review of the structure of the CET. Argentina was therefore granted temporary flexibility to respond to its domestic political and economic constraints. Unsatisfied with this concession, the Argentine government continued to push for the establishment of compensation mechanisms for trade imbalances resulting from exchange rate asymmetries. In a meeting held in October in Montevideo, Argentine officials presented their Brazilian counterparts with two alternative proposals for such mechanisms. The first proposed solution envisaged the introduction of corrective tariff measures on bilateral trade flows when the bilateral exchange rate exceeded a previously agreed-­upon exchange rate band. This “exchange rate trigger” mechanism was strongly supported by Cavallo, as well as by Argentine industrialists. The second mechanism entailed the application of corrective measures, such as import quotas or duties, for specific sectors experiencing a significant surge in import competition. These safeguard measures could be invoked in the presence of direct injury to the national import-­competing sector.52 Brazilian negotiators quickly rejected the exchange rate trigger option. They agreed instead to consider a temporary bilateral safeguard mechanism based on WTO safeguard clauses (Oliveira 2007). In typical

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MERCOSUR fashion, the two governments announced that a “landmark” agreement had been reached and also agreed to move swiftly to finalize the details regarding the design and procedural aspects of the new mechanism. In Argentina, however, this deal generated significant discontent. The private sector complained that safeguards mechanisms were not only too slow but also too costly for small and medium-­sized enterprises and continued to demand the establishment of a more automatic exchange rate trigger mechanism.53 The Argentine economic team also resented Brazil’s reluctance to manage bilateral exchange rate asymmetries, which were viewed as adding pressure to the already threatened convertibility program. In this context of escalating tension, Cavallo’s controversial statements that the process of integration within MERCOSUR was “exhausted” triggered a strong reaction from the Brazilian government, leading to the suspension of bilateral negotiations. Bilateral discussions over the design of the safeguards mechanism were reinitiated in late October 2001. Despite important disagreements over its main features and procedural details,54 toward the end of November, partners’ positions seemed to be coming closer together. Although the economic situation in Argentina was rapidly deteriorating, there were some expectations that a deal over the safeguards mechanisms would be finalized and formally announced during the meetings of the Common Market Council and Common Market Group in December 2001 (Oliveira 2007). The outbreak of the Argentine political and economic crisis would of course frustrate these plans. The tumultuous conditions prevailing in Argentina during 2002 resulted in a near paralysis in regional negotiations and decision making (Secretaria do Tesouro Nacional 2006). The debate over safeguards mechanisms would not be revisited until 2003 (Oliveira 2007). What does the management and resolution of this third instance of conflict tell us about the evolving balance of power within MERCOSUR? It is clear that, compared to the two earlier conflicts examined in this book, in this case, Argentina exerted significantly greater levels of control over distributional outcomes. In contrast to previous disputes, Argentina was also able to maintain the unilateral changes it introduced in the CET, obtaining a formal “waiver” from MERCOSUR partners. While failing to achieve fully its preferred outcome, namely, the institutionalization

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of an automatic compensation mechanism for macroeconomic imbalances, Argentina came unprecedentedly close to that solution. Indeed, the collapse and suspension of the negotiations were not caused by Brazil’s resistance but by conjunctural factors. Had the crisis in Argentina not erupted in December 2001, the agreement over safeguards would have probably been finalized during the regional summit at the end of the month. What explains the greater ability of Argentina to shape distributional outcomes in 2001? Realist explanations focusing on asymmetries in material capabilities are insufficient to account for the observed outcome of the CET crisis. Even though, as Table 6.3 illustrates, there was a relative increase in Argentina’s share of regional GDP during 1995–98 and 1999–2002, Brazil continued to account for almost 70 percent of regional product and exports. The data in Table 6.4, in turn, suggest that Argentina continued to depend to a greater extent on the continuity of MERCOSUR than Brazil, with intraregional exports accounting for almost 30 percent of total exports. The exchange rate imbalances prevailing since the Brazilian devaluation in 1999 had led to a reduction in Argentine exports to Brazil and other countries in the bloc. However, this reduction was relatively small and is insufficient to explain the greater leverage that Argentina obtained during the 2001 negotiations.

Table 6.3.  MERCOSUR: Economic Asymmetries, 1991–2002 1991–94 GDP* Exports**

1995–98

1999–2002

GDP* Exports**

GDP* Exports**

Argentina

32.8

24.2

26.0

31.5

30.1

30.4

Brazil

64.2

71.2

71.2

64.0

66.7

66.0

Paraguay

1.0

1.4

0.9

1.3

0.9

1.1

Uruguay

2.0

3.2

1.9

3.2

2.3

2.5

Total 694,403 52,626 (US$ million)

1,078,976 77,528

*National GDP as % of total MERCOSUR GDP, in current prices. **National exports as a % of total MERCOSUR exports. Source: Crespo et al. (2004).

779,819 83,629

Failure to Relaunch  151 Table 6.4.  MERCOSUR: Export Dependence on Regional Market, 1991–2002* 1991–94

1995–98

1999–2002

Argentina

24

35

28

Brazil

12

16

11

Paraguay

41

56

54

Uruguay

40

51

41

MERCOSUR

16

23

17

*Share of intraregional exports on total national exports (annual average %). Source: Crespo et al. (2004).

Nevertheless, explanations emphasizing asymmetric interdependence can be useful not only when focusing on trade relations but also when examining the increasingly salient dimension of financial interdependence and spillovers. In a context of financial globalization and unconstrained capital mobility, macroeconomic turmoil rapidly spills over and spreads at the regional level. Thus, market sizes and trade interdependence asymmetries aside, Brazil was significantly vulnerable to the economic situation in Argentina. In this context, supporting its neighbor through the storm was in Brazil’s immediate economic interest. Because of the high levels of financial interdependence between the two countries, a tougher stance insisting on the observance of regional trade commitments would have threatened Brazil’s macroeconomic stability. In this sense, the worsening of the crisis in Argentina, with the related increase in Brazil’s vulnerability must be seen as a fundamental factor in explaining Brazil’s greater flexibility in bilateral negotiations. Two additional factors combined to produce a more favorable distributional outcome for Argentina in this third case of conflict. First, patterns of strategic asymmetric interdependence once again favored Argentina, and were more successfully exploited in 2001 by the assertive leadership of Domingo Cavallo. According to liberal approaches to power, the more intensely a state favors (or depends on) a cooperative agreement, the more inclined it will be to offer concessions in order to secure it. By the same token, the greater a state’s perceived unilateral alternatives, the lower the incentives to make concessions in order to

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achieve cooperation. In 2001, Argentina’s perceived alternative strategic options to MERCOSUR were more concrete than they had been in 1999. Cavallo and his team at the Economy Ministry interpreted the momentum gained through hemispheric negotiations as an opportunity, not as a threat. From Brazil’s perspective, prospects that the US executive could obtain fast-­track authority widened Argentina’s unilateral and coalitional options, making Cavallo’s veiled exit threats seem more credible (Laens and Osimani 2001). Soon after taking over as economy minister in April 2001, Cavallo met with US Trade Representative Robert Zoellick to discuss the possible relaunch of the so-­called Rose Garden Agreement, signed in 1991 between MERCOSUR governments and the administration of the first President Bush (IDB 2003). Argentina’s enthusiasm regarding an agreement with the United States made Brazil extremely nervous. Moreover, as discussed above, a negative shift in external conditions, such as the uncertainty triggered by the September 11 attacks, the continued stalemate in multilateral trade negotiations, and the limited success of Brazil’s attempts to promote South American unity, also worked in Argentina’s favor. It is also important to consider the ways in which domestic-­level variables mediated the impact of these systemic dynamics on regional outcomes. On the one hand, the poor coordination between the foreign policy diplomats and the economic team and between the government and the private sector continued to undermine Argentina’s standing in regional negotiations, offsetting the potential advantages derived from asymmetric strategic interdependence. However, the strengthening of the hawkish elements within the cabinet during 2001 worked to Argentina’s advantage in interstate negotiations. While frequently irritating to Brazilian public and private actors alike, Cavallo’s aggressive style increased Argentina’s leverage and ability to shape the distribution of benefits from cooperation, albeit temporarily. Cavallo’s defiant stance reflected his perceptions of Argentina’s power position. As noted in previous chapters, Cavallo and his team of liberal-­oriented economists subscribed to a somewhat inflated assessment of Argentina’s capabilities and position within the international system. Their interpretation of Argentina’s strategic rele­vance within the Western hemisphere was certainly much more optimistic than that of their counterparts within the foreign policy elite. In

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sum, the strengthening of those actors within the Argentine government whose foreign policy views were grounded in a more optimistic assessment of Argentina’s strategic relevance and power potential improved the country’s performance in bilateral negotiations. While willing to compromise for the sake of ensuring the bloc’s continuity, the Brazilian government’s flexibility was not unlimited. When, less than two weeks after the agreement was signed, Cavallo again attacked Brazil’s exchange rate management, the Brazilian foreign policy makers reacted more vigorously. Itamaraty suspended negotiations over the design of the safeguards mechanism and announced that talks would be reinitiated only after the Argentine government clarified its position toward MERCOSUR. After the incident, Brazilian negotiators adopted a tougher stance, setting the terms and conditions under which the negotiations would be continued.

Conclusions

In line with the theoretical framework developed in chapter 3 (and as summarized in Table 6.5), we have seen that Argentina’s unilateral behavior reflected domestic political constraints. As in the situations in the two previous conflicts, societal demands (constraint I) may not have played a critical role, but they were not completely irrelevant either. The unprecedented mobilization of the Argentine private sector in 2001, and in particular, persistent demands for the establishment of safeguards clauses, influenced the position of the Argentine government during the crisis. However, as in earlier conflicts, preferences and dynamics within the state (constraints II and III) played a much more fundamental role in shaping Argentina’s choices and negotiating position in 2001. The decision to defect from regional commitments reflected the political and economic calculations of the economists in whom decision-­making power was concentrated in the Argentine executive during this period. Yet, as in the two earlier crises, the Economy Ministry’s hawkish position was moderated by the foreign policy establishment’s strategic commitment to MERCOSUR. This cooperative position continued to reflect defensive calculations of Argentine diplomatic elites, given their

Members of the economic team initially adopted a cooperative stance but hardened it toward the end of 2001. Concerned about the potential spillover effects of the Argentine crisis, they sought to differentiate Brazil from Argentina in the eyes of foreign investors. Like the Ministry of Development and the private sector, economic policy makers were not enthusiastic about the creation of safeguards mechanisms.

Unilateral changes in the CET had a clear macroeconomic rationale. The increase in tariff levels was not only aimed at containing trade deficit but also intended to be a side payment to the increasingly vocal and influential group of national producers, which favored moving away from convertibility.

Between the foreign policy executive and the economic team there emerged important cleavages, which undermined the consistency of Argentina’s position toward MERCOSUR during the crisis.

State Actors’ Incentives for Defection

Intrastate Cleavages and Bargaining among State Actors

While Itamaraty adopted a more conciliatory position than other agencies within the government, there was general agreement that Brazil needed to be flexible in light of the delicate Argentine situation.

Brazilian sectors affected by the Argentine measures complained loudly and demanded a firm response by the government. The private sector opposed the creation of compensation mechanisms.

Brazil

The private sector was increasingly dissatisfied with MERCOSUR and increased its demands for safeguards and other mechanisms of protection and compensation. This pressure, however, seemed to have little connection to the decision to modify the CET in 2001.

Argentina

Societal Pressures

Domestic Constraints

Table 6.5.  Explaining the 2001 Crisis

Offensive

Defensive

Systemic Incentives

The Argentine FPE continued to view MERCOSUR as a vehicle for enhancing the country’s leverage in asymmetric negotiations. The economic crisis led to downward revision of Argentina’s position and relevance in the international system, accentuating defensive incentives for regional cooperation.

Argentina

MERCOSUR was also viewed as a central element of Brazil’s offensive South American integration strategy, revived in 2000 with the launching of IIRSA.

From Itamaraty’s perspective, the maintenance of the CET, which would allow MERCOSUR to act as a bloc in external negotiations, was crucial for obtaining advantageous outcomes in FTAA and EU talks.

Brazil

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more moderate assessment of Argentina’s position and opportunities in the international and hemispheric distribution of power. Finally, intrastate cleavages, in particular the divergences between the economic minister and the foreign policy executive, harmed the coherence and stability of Argentina’s position during the conflict. The shift in Brazil’s position regarding intraregional safeguards must be understood as a strategic attempt to ensure the continuity of the customs union. As in the 1990s, Brazil faced both offensive and defensive incentives to prevent the demise of the CET, which had strong strategic and political value for the foreign policy executive. Defensive considerations were indeed deepened toward the end of the year, given the commercial and political uncertainty brought about by the September 11 terrorist attacks. Thus, partly because Brazil acted on these incentives, Argentina was more successful in 2001 than in 1999 and 1995 in exploiting patterns of asymmetric strategic interdependence. Domestic political factors also contributed to the smaller nation’s success by mediating forces that might otherwise have caused it to fail. In particular, the evidence indicates that Argentina’s bargaining leverage was enhanced by the increasing centrality of the economic team, which was more hawkish than the foreign policy executive, in the process of negotiations. These officials’ optimistic assessment of Argentina’s strategic alternatives increased their assertiveness and leverage in regional negotiations.

Chapter seven

A Narrow Escape Toward a More Flexible MERCOSUR

Despite seemingly improved prospects for regional cooperation, commercial tension between Argentina and Brazil resurfaced after 2003, in the aftermath of the Argentine crisis. During this period, however, MERCOSUR partners adopted a more diplomatic and cooperative approach in dealing with trade friction. Instead of automatically resorting to unilateral measures as frequently as they did in the 1990s, they relied on bilateral consultations, typically encouraging private sector actors to negotiate “voluntary” export restraint agreements. In October 2003, a bilateral Trade Monitoring Commission was created to observe the evolution of bilateral trade flows in “sensitive sectors” and to promote negotiated solutions to trade imbalances. More importantly, in 2006, Brazil agreed to the institutionalization of an “escape clause” within the bloc. The establishment of the Competitive Adaptation Mechanism constituted an unprecedented move toward increased flexibility in the design of regional institutions.1 157

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In this chapter we address three main questions. First, what explains the revival of commercial tension despite the ideological convergence of the new Argentine and Brazilian administrations and the enhanced compatibility of their exchange rate policies? Second, what accounts for the more cooperative approach adopted to manage and resolve commercial friction during this period? And finally, why did Brazil agree to the establishment of safeguards measures after opposing this move for over half a decade? The evidence presented below suggests that, consistent with our neoclassical realist framework, this more recent phase saw an overall weakening of domestic constraints in a context of enduring systemic incentives for cooperation. This new balance of external and domestic political considerations contributed to less conflictive dynamics within the bloc.

Patterns of Conflict and Cooperation after the Argentine Crisis

The collapse of the Argentine economy at the end of 2001 brought the economic integration in the Southern Cone to a virtual standstill. The crisis in Argentina and the financial instability it triggered in the whole region resulted in a sharp contraction of intraregional trade. By April 2002, Argentina had fallen from second to fourth in the ranking of destinations for Brazilian export products, and Brazil was losing its position as the principal buyer of Argentine goods (IDB 2001). The moderate improvement in regional conditions after 2003 provided an opening for the reinvigoration of regional cooperation. In June 2003, Presidents Luiz Inácio Lula da Silva (Brazil) and Néstor Kirchner (Argentina) asserted their commitment to the integration project and pledged to work together in revitalizing the “strategic bilateral alliance.”2 A few months later, the two presidents announced plans to “re-­relaunch” the bloc, by establishing a permanent dispute settlement tribunal and moving toward the goal of macroeconomic coordination. Lula and Kirchner also signed the “Buenos Aires Consensus,” pledging to give priority to social concerns and poverty alleviation over external financial commitments.3

A Narrow Escape  159

As diplomatic and commercial relations between the two countries revived, the issues of trade defense and compensatory mechanisms were reintroduced into the regional agenda. Brazil continued to reject Argentina’s demand for safeguards, claiming that the devaluation of the Argentine currency made these instruments unnecessary. In October 2003, however, the Brazilian government agreed to the creation of the Argentine-­Brazilian Trade Monitoring Commission, with the aim of following bilateral trade flows in sensitive sectors. This intergovernmental body served as a forum of consultation among private and government actors in both countries, facilitating the negotiation of quantitative restrictions (Secretaria do Tesouro Nacional 2006). The establishment of this commission changed patterns of trade conflict and cooperation, leading the two nations to shift from the overreliance on unilateral trade measures observed in the 1990s to the increasing use of negotiated restrictions on bilateral trade. Between 2004 and 2008, about twenty “voluntary” agreements establishing quotas, floor prices, and other types of voluntary restrictions were signed (see Table 7.1). Moreover, in some sectors such as footwear, white goods, and paper, partners continued to apply nonautomatic licenses in addition to the negotiated restrictions. But in general these measures were lifted once an agreement between private sector actors was reached. The creation of a bilateral trade monitoring system thus resulted in a “privatization” of protectionism, allowing governments to concentrate on other, more constructive aspects of the regional agenda. While welcoming Brazil’s increased flexibility in dealing with trade imbalances, the Argentine government insisted on establishing a more formal system of safeguards within MERCOSUR.4 In September 2004, Economy Minister Roberto Lavagna presented the Brazilian government with a formal proposal, which included two types of instruments for addressing regional imbalances and structural asymmetries: a temporary safeguards mechanism and the so-­called competitive adaptation mecha­ nism (Oliveira 2007). Much like in the program proposed in 2001, the first instrument envisaged the application of safeguards measures for sensitive sectors suffering from a substantial and potentially damaging increase in import competition, as a result of a shift in macroeconomic conditions. In the second proposal, sectors benefiting from safeguards

Table 7.1.  Negotiated Restrictions in Sensitive Sectors, 2004–9 Sector & Product

Negotiated Measures

Year/Period

Requested by

Textiles Cotton & denim fabrics Quotas

2004–7

Argentina

Quotas

2008

Argentina

Acrylic yarns

Quotas

2004–5

Argentina

Corduroys

Floor prices/quotas

2004–6

Argentina

Household linen

Floor prices/quotas

2005–6

Argentina

Carpeting & rugs

Floor prices

2006

Argentina

Quotas

2004

Argentina

Quotas

2009

Argentina

Quotas

1999–2007 Argentina

Refrigerators

Quotas

2004–6

Argentina

Gas stoves

Quotas

2004–6

Argentina

Washing machines

Quotas

2005–6

Argentina

TV sets

Quotas

2005–6

Argentina

Wood panels

Quotas

2005

Argentina

Wooden furniture

Quotas

2009

Argentina

Floor prices

2005–6

Brazil

Floor prices

2005–7

Brazil

Quotas

2009

Brazil

Export tax

2005

Brazil

Export tax

2006

Brazil

Export tax

2005

Brazil

Footwear Paper Domestic appliances

Wooden products

Wines Dairy products Powdered milk Wheat products Wheat flour Premixed wheat

A Narrow Escape  161

measures would commit to a program of competitive adaptation, aimed at facilitating adjustment and promoting competitiveness. In a meeting held in Buenos Aires in December 2004, Brazilian diplomats rejected the two mechanisms proposed by Argentina. Instead, they defended the merits of the ad hoc export restraint agreements negotiated under the aegis of the Trade Monitoring Commission (Secretaria do Tesouro Nacional 2006). However, Brazil’s position gradually softened during the first half of 2005.5 In January, Itamaraty put forward a counterproposal, which diverged from Argentina’s in a number of important respects.6 In response, Argentina submitted a second proposal in May. Toward the end of 2005, the partners’ positions were converging.7 An agreement establishing the Competitive Adaptation Mechanism (CAM) was finally signed in February 2006. Although it did not contain the term “safeguard” in its text, the CAM’s stated objective was to impose restrictive measures in response to increases in imports that harm (or threaten to harm) a domestic industry (Oliveira 2007; Secretaria do Tesouro Nacional 2006). Because the ultimate goal of this mechanism is to promote the competitiveness of national producers, beneficiaries are required to undertake a plan for investment and productive integration. The mechanism would be implemented in two stages. In the first stage, private sector actors from both countries hold consultations under the guidance of the Trade Monitoring Commission, with the goal of negotiating voluntary restrictions. If an agreement is not reached during the consultation stage, the importing country (or complainant) has the option of initiating an investigation, aimed at determining the existence of “significant damage,” or threat of it, to the national production as a result of an increase in imports from the exporting partner (or defendant). If the inquiry concludes that such a harmful increase in imports occurred, the complainant can adopt a safeguards measure, while also committing to a competitive adaptation program (IDB 2008). By 2007 a combination of factors, including higher rates of economic growth, the relative appreciation of the Brazilian currency, and the expansion of Brazilian investment in Argentina, contributed to easing commercial tensions further (IDB 2008). Many of the agreements negotiated during the 2004–6 period were not renewed, and partners

162  Power and Regionalism in Latin America

shifted their concerns to the impact of rapidly growing Chinese imports. Nevertheless, the outbreak of the international financial crisis in September 2008 put an end to this period of relative harmony in bilateral trade relations. The global economic crisis, by adversely affecting employment and trade levels in MERCOSUR, reignited tension between Argentina and Brazil. Both partners, but especially Argentina, turned once again to nonautomatic licenses, which led to the negotiation of new private sector agreements in various sectors, including footwear, wooden furniture, and milk (see Table 7.1). This new impasse proved significantly shorter than previous crises within the bloc, in no small part because of the rapid recovery of the region’s countries since 2010 (IDB 2008; 2009; 2010). Dealing with Sensitive Sectors: From Unilateral to Negotiated Restrictions

Developments in three particularly conflictive sectors merit attention: household appliances, textiles, and wine. These were part of a longer list of so-­called sensitive sectors, which have from the start of the integration received some kind of special treatment. In contrast to the conflicts examined in previous chapters, tension in these sectors was successfully contained through bilateral negotiations involving both government officials and business actors. Textiles

The textile industry has been a source of bilateral tension since the creation of MERCOSUR in the early 1990s. During the first phase of integration the sector was initially exempted from the automatic tariff liberalization. The end of the transition period led to renewed demands for protection, especially in Argentina. In 1999 the Argentine government introduced quotas on textile imports, claiming that an investigation launched by the National Commission of Foreign Trade (CNCE) had found that harm had been caused to the local industry by imports from Brazil, Pakistan, and China. The MERCOSUR Arbitration Tribunal later challenged the measure. In 2000, the two governments began promoting negotiations between the Argentine Federation of the Textile Industry (FITA) and its Brazilian counterpart, the Brazilian Association for the Textile Industry (ABIT). Representatives from the two chambers

A Narrow Escape  163

met several times during 2000 and 2001 but were unable to reach a cooperative agreement (IDB 2001). The two chambers reinitiated negotiations during the second half of 2003 under the monitoring eye of the Trade Monitoring Commission. Argentine producers claimed that an “invasion” of Brazilian textile products into the Argentine market was harming national production.8 In response to ABIT’s reluctance to restrain exports, the Argentine Ministry of Economy announced in January 2004 the introduction of a system of nonautomatic import licenses on textile products. To prevent the escalation of tension, the Brazilian government encouraged national producers to accept the proposal put forward by their Argentine counterparts.9 By the end of January, private sector actors announced that a deal had been reached. Between March and June 2004, representatives from the Argentine and Brazilian textile sectors signed agreements over denim fabrics, acrylic yarns, corduroys, and cotton fabrics.10 An agreement on towels was signed in 2005.11 Coordination over carpets and rugs, however, proved elusive. As a result of this failure of private sectors to close an agreement, the Argentine government decided to apply import tariffs in response to alleged noncompliance by Brazilian producers with rule-­of-­ origin requirements. An agreement was finally reached in the second half of 2006. Relations in the textile sector improved noticeably in 2007, as Argentine and Brazilian producers became more worried about the impact of Chinese textile imports in the region. Tension resurfaced in 2009 when Argentina decided to apply nonautomatic licenses to 116 items in textile products and 83 items in yarns and fabrics (IDB 2010). Since 2010, the improvement in macroeconomic conditions in the region, as well as growing Brazilian investment in the Argentine textile sector, has contributed to a greater collaboration. Household Appliances

The large household appliance sector also caused significant commercial friction after 2003. This tension reflected the pronounced asymmetry in competitiveness and scale between the Argentine and Brazilian industries, which had deepened during the 1990s. The Argentine crisis forced many international companies in the sector out of the country,

164  Power and Regionalism in Latin America

leading some to relocate their investments to Brazil. Yet as the Argentine economy recovered beginning in 2003, purchases of Brazilian appliances expanded significantly. Brazilian products captured an increasing share of the Argentine market, leading the government to encourage negotiations in the framework of the Trade Monitoring Commission. In light of the failure of the negotiations among private sector associations, Buenos Aires adopted a tougher stance. As in the textile sector, Economy Minister Lavagna used the threat of unilateral restrictions to pressure Brazilian producers. In July 2004, he announced the establishment of a system of nonautomatic licenses on imports of refrigerators, stoves, and washing machines (the so-­called white line products) from Brazil.12 In addition, he introduced a tariff of 21 percent on imports of television sets from the free zone of Manaus. In response, the Brazilian government encouraged national producers of appliances to reach a voluntary agreement with the Argentine industry. Argentina then agreed to postpone the implementation of the measures and to engage in a new round of bilateral talks.13 Once again, Lavagna’s tactic was successful. Brazilian producers preferred negotiated to unilateral restrictions (Oliveira 2007). The gas stoves subsector was the first to reach a deal.14 The agreement between the Argentine Chamber of Gas Appliance Manufacturers (CAFAGAS) and the Brazilian Association of Producers of Electronic Appliances (ELETROS) was renewed for 2006. In contrast, coordination in refrigerators proved more difficult to reach, given the important structural asymmetries between the two markets and the high level of penetration of Brazilian products.15 ELETROS and the Argentine Chamber of Refrigerators and Air Conditioning Industries (CAIRAA) finally closed an agreement in November 2004, according to which Brazilian producers would reduce their share of the Argentine market from 65 to 50 percent. This agreement expired in September 2006 and was not renewed because of opposition by ELETROS (IDB 2008). Negotiations were less successful in the case of washing machines. Brazilian producers were reluctant to compromise, given the importance of the Argentine market to their overall level of exports.16 Failure to reach an agreement in 2004 led to the Argentine government’s application of nonautomatic licenses (Oliveira 2007). The severe impact that these

A Narrow Escape  165

measures had on bilateral trade flows increased the flexibility of Brazilian producers. ELETROS and the Argentine Chamber of Electrical and Mechanical Household Appliances (CAFAEMEH) finally reached an agreement in 2005.17 As in the textile sector, bilateral relations among producers of “white line” goods improved significantly after 2006. However, toward the end of 2008, the Argentine government tightened requirements in the application of the nonautomatic licenses introduced in 2004. These measures, when combined with a fall in Argentine consumption levels, led to a sharp decline in imports in 2009 and triggered complaints from Brazilian producers. A new round of negotiations between private sector actors began in 2009 but failed to produce a viable agreement (IDB 2009; 2010). Wines

In contrast to the two other sectors, the wine industry was marked by asymmetries that favored Argentina, not Brazil. The Argentine wine industry is in fact highly competitive, with an annual production of over 1.2 billion liters. Supportive geographical and climatic conditions, combined with modernization and a large inflow of foreign investment in the 1990s, had made Argentina the world’s fifth largest wine producer. Consequently, after the devaluation of the Argentine currency in 2002, exports of wine to Brazil expanded considerably. By 2004, Argentina had become the main foreign supplier of wine to the Brazilian market. By contrast, Brazilian vineyards, mainly concentrated in the states of Rio Grande do Sul, tend to be much smaller and of a lower quality, producing less than 230 million liters of wine per year (Ribeiro de Mello 2005). The bulk of this production is sold domestically at relatively low prices. The Brazilian wine industry had experienced important transformations during the 1990s, as a result of increasing import competition and marked shifts in consumer tastes. Still, the sector could not compete with Argentine imports (Silveira da Rosa and Martins Simões 2004). In 2004, Brazilian wine producers complained that Argentine wines of dubious quality were entering the Brazilian market with very low prices, thus harming the local industry (Secretaria do Tesouro Nacional 2006). This was particularly worrying for the Brazilian wine sector, which has traditionally targeted the low-­cost segment of the domestic market

166  Power and Regionalism in Latin America

(Carvalho Campos and Brigatte 2008). To put pressure on Argentina, the Brazilian government temporarily stopped granting import licenses. In response, Argentine producers agreed to begin bilateral discussions to find a negotiated solution to the problem. After a series of meetings, both parties compromised on the establishment of minimum prices for Argentine wines.18 The deal, which also included joint commitments to monitor the evolution of bilateral trade flows, expired in January 2006 and was not renewed. The 2005 agreement had significant consequences, allowing Chile to regain its position as the main source of Brazilian wine imports (IDB 2009). In 2008, as the Brazilian currency appreciated relative to the Argentine peso, Brazilian producers proposed that Argentina adopt a new VER with a higher minimum price. Argentine producers rejected this proposal but agreed to a regional development program for the sector, which included collaboration among Argentine, Brazilian, and Uruguayan producers.

Domestic Constraints

In spite of a confluence of supportive external and domestic conditions, then, commercial friction between Argentina and Brazil resurfaced after 2003. However, in contrast to the previous decades, the partners relied on more diplomatic means to manage this tension. Instead of resorting to unilateral measures, they chose bilateral consultations and encouraged negotiated arrangements among private sector actors. What explains these changing patterns of cooperation in the Southern Cone? The three types of domestic constraints we have been observing throughout the book—­societal pressures, state actors’ preferences, and bargaining among state actors—­have all shaped the more cooperative stances adopted by the Argentine and Brazilian governments during this period. Constraint I: Societal Pressures

How relevant were demands from domestic interest groups in explaining the revival of commercial tension after 2003? Did the more collaborative

A Narrow Escape  167

approach to dealing with trade disputes reflect a weakening of societal demands for protectionism since previous disputes? Argentina

Business opposition to MERCOSUR in Argentina was perhaps somewhat less intense during this period than in the late 1990s and early 2000s. This is not surprising, given the improvement in domestic and international economic conditions. The devaluation of the currency and the maintenance of a more flexible exchange rate regime since 2002 had clearly eased the competitive burden of the industrial sector (CEP 2004). Renewed international economic growth and higher commodity prices also contributed to a strong recovery in export levels (Bouzas 2007). Nevertheless, after 2003, industries in both countries, particularly the “sensitive sectors,” revived their demands for import relief. In most of these sectors, differences in efficiency and scale clearly favored Brazil, not only because of structural factors (such as market size) but also because of differences in business strategies between the two countries, including the low levels of investment in the Argentine private sector and the important increase in productivity in the Brazilian private sector (Bouzas and Kosacoff 2009). Once again, therefore, as the share of imports from Brazil grew, Argentine industrialists’ support for MERCOSUR weakened. Industrial demands for protection intensified toward the end of the year, when, after nine years of surplus, Argentina’s trade balance with Brazil became negative. In November 2003, the UIA again called for reversing MERCOSUR into a free trade area. Industrial leaders denounced Brazil’s aggressive policy of industrial support and “implicit” export subsidies and called for the establishment of compensation mecha­nisms in order to achieve a more leveled field.19 They were concerned about the relocation of industrial facilities to Brazil, perceiving this as deepening the inter­industrial pattern of Argentina’s specialization vis-­à-­vis Brazil (Bouzas and Kosacoff 2009).20 The establishment of the bilateral Trade Monitoring Commission in late 2003 did little to mitigate their complaints. The textile sector was particularly vocal, claiming that an invasion of Brazilian products was threatening the development of the national industry.21 Members of the textile productive chain, including producers

168  Power and Regionalism in Latin America

of natural fibers, manufactured fabrics, and clothing, had benefited extensively from the devaluation of the Argentine currency in 2002, with significant expansions in production and employment levels (CEP 2004). Yet the devaluation of the peso had not limited external competition as much as textile producers had expected. Textile leaders claimed that the exchange rate had stopped being an effective barrier.22 According to textile representatives, Brazilian exports of certain products, such as acrylic yarns and denim fabrics, exceeded demand in the Argentine market. Claiming that Brazil was determined to “take over” the Argentine market and to become “the China of Latin America,”23 they demanded mechanisms of trade administration. Figure 7.1 confirms that Brazil’s share of Argentina’s total textile imports did indeed increase markedly after 2001, and particularly between 2002 and 2003.24 Yet, as depicted in Table 7.2, the only product for which Brazil’s share in total Argentine imports increased from 2004 to 2006 was cotton fabrics. Moreover, this expansion of Brazil’s share in Chapter 7 Argentine imports took place in a context of rapidly increasing domestic production and consumption. Thus, claims by Argentine producers that   Figure 7.1.

Argentina’s Textile Imports from Brazil, 1998–2007

Figure 7.1.  Argentina’s Textile Imports from Brazil, 1998–2007 60

600

50

500

40

400

30

300

20

200

10

100 0

0 1998

1999

2000

2001

2002

Share in Total Imports (%)

2003

2004

2005

2006

2007

Imports from Brazil (US$ millions)

Source: Prepared by author with data from IDB (2009).

Source: Prepared by author with data from IDB (2009).

   

A Narrow Escape  169 Table 7.2.  Argentina’s Textile Imports by Product, 2004–6 Total Argentine Imports (US$ millions)

Brazilian Market Share in Argentine Imports (%)

Product

2004

2005

2006*

2004

2005

2006*

Denim fabrics

30.4

36.1

23.9

99.1

99.6

99.1

Acrylic yarns

28.4

35.8

14.7

79.1

65.8

73.7

Corduroys

12.9

18.5

11.2

58.2

46.7

26.4

Cotton fabrics

12.2

18.1

9.9

87.3

87.2

88.8

0.4

0.2

0.6

14.5

5.6

0.6

Carpeting & rugs *First half of the year. Source: IDB (2007).

the invasion of Brazilian products directly harmed their recovery prospects were largely unfounded. Nevertheless, textile representatives persuaded the government that restrictions were necessary. Their success reflected the significant strengthening of textile producers within the UIA since the end of convertibility. The head of one of the largest firms in the sector, Alpargatas, led the opposition faction within the UIA, the “Grupo Industriales,” which had close relations with officials in the Kirchner government. In June 2003, the Pro-­Tejer organization, composed of several associations in the sector, was created to “assist, develop and integrate Argentine industry and thus to promote its growth.”25 This entity had close relations with Minister of Planning Julio De Vido as well as with Secretary of Industry Alberto Dumont.26 In October, Pro-­Tejer met with government officials and demanded import quotas on Brazilian textile products. When Lavagna announced his decision to restrict imports from Brazil unilaterally in January 2004, both Pro-­Tejer and the UIA expressed their support.27 Another industrial group that received special treatment from the Kirchner government was the home appliances industry. This sector was also characterized by important asymmetries in the productive structure of the Southern Cone economies. In addition to the differences in market size, since the late 1990s Brazil had captured most foreign investment in the region. Several multinational companies specializing in home appliances had concentrated production in Brazil, from which

170  Power and Regionalism in Latin America

they supplied the regional market.28 In Argentina, production was concentrated in a series of smaller national and regional firms. Although these firms benefited significantly from the post-­2003 rapid expansion in domestic consumption, they complained about the rapid rise in imports from Brazil. Like the textile producers, they claimed that the invasion of Brazilian products was harming investment and production levels in Argentina. The data in Figure 7.2 show that for the three products that benefited from the establishment of restrictions on Brazilian exports—refrigerators, washing machines, and gas stoves—­imports from Brazil surged markedly after 2003. Moreover, because of favorable trade diversion, Brazil progressively increased its position as the main source of Argentina’s white line imports, accounting for an average of 79 percent of sales during the period 2003–7 (CEP 2008). However, on closer inspection the empirical data suggest that sales of domestically produced goods also expanded rapidly after 2003 (Oliveira 2007). Moreover, the increase in Brazilian participation in the internal market varied significantly across the three sectors. In refrigerators, where asymmetries between the two countries were more pronounced, import penetration, measured as the share of internal consumption accounted for by Brazilian imports, jumped from 24 percent in 2002 to almost 65 percent in 2003. Figure 7.2.a also shows that the relative share of Brazilian refrigerators in the Argentine market was also considerably higher between 2003 and 2005 than during the last years of convertibility (Oliveira 2007). Yet the competitive pressure from Brazilian imports was more moderate in the cases of washing machines and gas stoves. As Figures 7.2.b and 7.2.c illustrate, imports of domestic appliances in 2003 and 2004 were still below the peak levels reached in the late 1990s and early 2000s, particularly for gas stoves. As in the textile case, therefore, the success of white line producers in obtaining restrictions from the government did not solely reflect sectoral market conditions but also was shaped by political considerations. While perhaps not as cohesive and coordinated as the textile sector, producers of home appliances benefited from the effective representation of several chambers, such as CAFAGAS, CAIRAA, CAFAEMEH and FEDEHOGAR. The UIA also played an important coordinating role. In addition, household producers benefited from the active support and

 

  Figure 7.2. Argentina’s Imports of Home Appliances from Brazil, 1996–2005 Figure Argentina’s Imports Home Appliances from Brazil, 1996–2005 Figure7.2. 7.2.  Argentina’s Imports of of Home Appliances from Brazil, 1996–2005 a. Refrigerators a. Refrigerators Refrigerators 350,000 350,000

70

300,000 300,000

60

250,000 250,000

50

200,000 200,000

40

150,000 150,000

30

100,000 100,000

20

50,000 50,000

10

0

0 01996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Imports from Brazil (Units) Import Penetration (%) Imports from Brazil (Units) Import Penetration (%)

70 60 50 40 30 20 10 0

b. Washing Washing Machines Machines b. Washing Machines 25

180,000 180,000 160,000 160,000 140,000 140,000 120,000 120,000 100,000 100,000 80,000

25 20

20 15

15 10

80,000 60,000

10

60,000 40,000

5

40,000 20,000

5

20,000 0

0 2000 2001 2002 2003 2004 2005 0 1999 1999 2000 2001 2002 2003 2004 2005 Imports from Brazil (Units) Import Penetration (%)

Imports from Brazil (Units)

Import Penetration (%)

0

 

 

172  Power and Regionalism in Latin America Figure 7.2.  Argentina’s Imports of Home Appliances from Brazil, 1996–2005 (continued ) Gas Stoves Gasc.Stoves 60

250,000

50

200,000

40 150,000 30 100,000 20 50,000

10

0

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Imports from Brazil (Units)

Import Penetration (%)

 

Note: Import Penetration = Imports from Brazil / [National Production + Total Imports − Exports]. Note: Import Penetration = Imports from Brazil / [National Production + Total Imports Source: Elaborated by author with data from Oliveira (2007).

Exports]. Source: Elaborated by author with data from Oliveira (2007).

political connections of their powerful main supplier, the national steel and iron company Techint. Techint had a clear vested interest in limiting imports of Brazilian home appliances since these products accounted for a large proportion of its internal demand.29 This economic group enjoyed a strong political position and fluid relations with Presidents Duhalde and Kirchner.30 While welcoming the supportive stance adopted by Lavagna and Kirchner, the Argentine industrial lobby remained dissatisfied with the actual concessions obtained from Brazil. Members of the textile industry, in particular, complained that Brazilian producers were failing to comply with the 2004 voluntary restraint agreement. In this context, calls for the establishment of safeguards mechanisms continued.31 Industrial leaders

−  

A Narrow Escape  173

reacted with enthusiasm to the announcement that an agreement on the CAM had been reached in February 2006, claiming it constituted “a strategic decision in favor of the reindustrialization of our country.”32 Brazil

Brazilian industrial interests had consistently opposed the implementation of safeguards measures at the regional level.33 They also reacted negatively to their government’s attempts to persuade them to sign “voluntary” restraint agreements with their Argentine counterparts. In their view, the complaints of Argentine industrialists were largely unfounded. Asymmetries in competitiveness were less the result of Brazil’s reliance on fiscal and financial incentives than the natural consequence of poor investment and productive decisions by Argentine capitalists. The Brazilian association ABIT, for example, initially rejected the proposals put forward by the Argentine textile association. However, when confronted with the threat of facing unilateral nontariff restrictions, Brazilian textile representatives softened their position and agreed to sign a formal deal.34 ELETROS also was initially reluctant to accept restrictions on their exports to Argentina and warned about the adverse consequences that the negotiation of voluntary export restraint (VER) agreements would have on foreign investment decisions.35 Once again, Brazilian business leaders were obliged to reach a compromise in order to avoid the introduction of unilateral measures by the Argentine government. Nevertheless, given the consolidated position of Brazil as a world-­class producer and exporter of appliances, the negotiated restrictions ended up being less of a burden than was initially anticipated. Indeed, the Argentine market had decreasing relevance for Brazilian exporters, particularly for producers of ovens and refrigerators. This facilitated a cooperative agreement in these two subsectors. In contrast, cooperation was more elusive in the washing machines sector, mainly because of the significant importance of the Argentine market in overall Brazilian exports of these products. Brazilian industrialists repeatedly expressed frustration at Brasília’s tendency to give in to Argentina’s demands. São Paulo industrial lobbies, such as IEDI, FIESP, and CIESP, were particularly critical, claiming that the restrictive arrangements negotiated with the Argentine private sector resulted in a marked expansion of imports from third countries, as a

174  Power and Regionalism in Latin America

result of trade diversion. They thus complained about the high cost that “maintaining fraternal relations with Argentina” would have for Brazilian workers and businesses.36 Discontent surged in 2005 as Brazilian leaders softened their position and agreed to the establishment of safeguards. The industrial community reacted strongly to the signing of the CAM agreement in February 2006. Despite their initial hostile reaction, Brazilian business groups eventually used the CAM as an excuse to avoid the renewal of the VERs they had been obliged to sign in 2004 and 2005. In contrast to industrial interests, Brazil’s agricultural sector benefited from the existence of mechanisms to manage trade imbalances (Paikin 2006). Producers of foodstuffs faced important competitive disadvantages relative to their Argentine counterparts. Since 2003, Brazilian producers of a number of products, including wheat, flour, rice, and wine, had been complaining about growing Argentine competition in their domestic market (IDB 2006). As in the 1990s, the Brazilian agricultural sector strategically used Argentina’s restrictions on industrial imports as an opportunity to push through with its own protectionist demands. Thus, facing strong pressure from agricultural producers, CAMEX threatened in 2004 to impose barriers on Argentine foodstuffs in retali­ ation for the textile and white line measures adopted by Argentina.37 Wine producers were among the most vocal and effective in having their demands heard. Since 1999, Brazilian wine makers faced increasing import competition (Ribeiro de Mello 2005). In 2004, they claimed that an “invasion of cheap Argentine wines” was threatening the survival of the Brazilian sector.38 Indeed, as Figure 7.3 illustrates, there was a marked increase in wine imports from Argentina between 2001 and 2004. Argentina became in 2003 the second main source of Brazil’s foreign purchases after Chile, displacing the previous lead supplier, Italy. According to estimates presented by the Chamber of Wine Producers, domestic sales of Brazilian wines were expected to fall by 30 percent in 2004 alone as a result of the increasing penetration of low-­priced wines from Argentina. Several groups in the sector, such as the Brazilian Viniculture Union (UVIBRA) and the Brazilian Wine Institute (IBRAVIN), thus pressed for the establishment of quotas and floor prices to contain Argentine imports.39 They rejected claims by the Argentine Viniculture Union (UVA) that the expansion of sales reflected an improvement in the

A Narrow Escape  175  

Figure Brazilian WineArgentina, from Argentina, 1998–2005 Figure 7.3.  7.3. Brazilian ImportsImports of Wineoffrom 1998–2004 12,000,000

30

10,000,000

25

8,000,000

20

6,000,000

15

4,000,000

10

2,000,000

5

0

0 1998

1999

2000

2001

Imports from Argentina (Liters)

2002

2003

2004

Share of Total Imports (%)

Source: Elaborated by author based on data from UVIBRA.

Source: Elaborated by author based on data from UVIBRA.

productivity of Argentine producers. Instead, they accused Argentina of exporting wines of “dubious quality” to the Brazilian market.40 To prevent these low-­quality wines from entering Brazil, the wine lobby called for the establishment of technical certifications on Argentine products. The Brazilian government responded favorably to these requests, adding wines to the list of sensitive sectors to be monitored by the bilateral Trade Monitoring Commission. The Commission agreed to launch an investigation to determine whether these trade flows were indeed causing harm to Brazilian production. Faced with increasing pressure from their government, Argentine wine producers had little choice but to agree to the negotiation of price floors in 2005. In sum, the evidence presented suggests that both the Argentine and Brazilian governments faced persistent demands for protectionist measures from those domestic interests harmed by the regional integration. Focusing on the intensification of private sector pressure since 2003 helps illuminate the resurgence of trade conflict within the bloc. However, concentrating on the persistence of societal constraints is less useful in explaining the more cooperative approach adopted by the government in managing sectoral frictions. To account for this, it is necessary

176  Power and Regionalism in Latin America

to consider the role of two other domestic factors, state preferences and institutional dynamics. Constraint II: State Actors’ Incentives for Defection

The examination of the calculations and preferences of national leaders sheds greater light on this puzzle. The resurgence of commercial friction between Argentina and Brazil and the subsequent adoption of negotiated restrictions to intraregional trade reflected not only increased demands by domestic interest groups, but also the macroeconomic priorities of national policy makers. To a great extent, therefore, regional trade policy choices continued to be subordinated to the logic of macroeconomic considerations. Yet, for at least two reasons, states’ incentives for defecting had declined since early periods, leading both nations to adopt more flexible stances. First, the improvement in external economic conditions, when combined with the shift in both countries toward more flexible exchange rate regimes, made relinquishing control over trade policy measures less costly. Flexible exchange rate regimes allowed national leaders to respond to external imbalances and domestic redistributive pressures via currency policy, thus increasing their degrees of freedom compared to the 1990s. In this context, from the perspective of policy makers, the costs of breaking regional commitments and initiating a dispute were higher than the expected macroeconomic and political benefits of protectionist trade measures. Second, the convergence in the political and ideological orientations of the Lula and Kirchner governments facilitated bilateral communication and collaboration, allowing for a more constructive approach in dealing with commercial friction. Both countries clearly shifted away from the orthodox focus on free trade and external credibility that had characterized economic policy in the 1990s, and they more strongly emphasized national development and industrialization. Thus, Lula and Kirchner sought to strengthen MERCOSUR’s autonomous and developmental dimension and to reconfigure it as a vehicle for resisting the US-­led hemispheric integration (Carranza 2006).

A Narrow Escape  177 Argentina

As in the 1990s, Argentina’s posture vis-­à-­vis MERCOSUR was shaped not only by societal pressures but also by the macroeconomic calculations of national economic elites. After the 2002 crisis, however, Argentine policy makers dramatically shifted their macroeconomic goals and priorities. During the Duhalde and Kirchner administrations, they deliberately promoted “re-­industrialization,” growth, and employment even at the expense of free market policies (Bouzas 2007). This shift away from the “evil neoliberalism” and the “industrial genocide” of the 1990s reflected the further strengthening of the nationalist state-­society coalition that had contributed to the collapse of the previous economic model.41 The election of Peronist candidate Néstor Kirchner in May 2003 consolidated the power of these actors within both the public and private sectors. Kirchner’s economic team, led by Lavagna, combined a strong technocratic commitment to industrialization and national capitalism with fluid links to the private sector. Lavagna and his team were staunch supporters of MERCOSUR. Indeed, as Raúl Alfonsín’s secretary of industry and trade in 1986, Lavagna had participated in the early stages of negotiating economic cooperation with Brazil. However, his vision of the role and goals of the regional integration project for Argentina differed markedly from that of economic elites in the 1990s. Neoliberal-­minded policy makers in the Menem administration had viewed MERCOSUR primarily as an instrument to promote competitiveness, openness, and higher levels of foreign investment. By contrast, Lavagna believed the bloc’s fundamental, long-­ term objective was to promote balanced industrial development across member states. The expansion of Brazilian imports in 2003 was a major obstacle to the achievement of this objective. This explains the strong position that the economy minister adopted in support of national producers in 2003–4. To some extent, Argentina’s defensive trade policy thus also reflected attempts to maximize the gains from the economic growth that the country was beginning to experience (IDB 2009). However, when compared to the situation in the 1990s, that faced by economic elites in 2003–4 offered significantly weaker incentives to establish unilateral restrictions and engage in diplomatic conflict with Brazil. First, as discussed above, the actual impact of Brazilian imports on

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national production was not as significant as industrial lobbies claimed. Second, in a context of improved external economic conditions and exchange rate flexibility, economic officials were able to use currency policy to attenuate both macroeconomic imbalances and distributional tensions. Thus, in 2004, the domestic economic and political opportunity cost of giving up control over trade policy instruments was not as substantial as it had been during previous periods. Consequently, incentives to defect from regional commitments were weaker than in earlier conflicts. Indeed, given the importance of the Brazilian market as a destination of Argentine exports, the cost of unilateral defection and dispute initiation clearly surpassed the expected macroeconomic and political benefits of protectionist trade measures. In this context, Argentina’s reliance on threats to force Brazilian business and government actors to agree to voluntary restrictions should be understood as a strategic move by national policy makers to reap the domestic political benefits of protecting special interests from regional competition without bearing the political and diplomatic costs of defection. The establishment of VERs and escape clauses, in turn, neutralized the perceived costs of integration faced by societal actors, thus increasing the domestic political sustainability of the regional integration strategy. As discussed above, in 2009, Argentina once again engaged heavily in unilateral behavior, imposing nonautomatic licenses on an extensive list of items in sensitive sectors. This more defensive trade policy move was undoubtedly influenced by a new surge in private sector pressure in response to the adverse impact that the international financial crisis had on domestic levels of economic activity. But at the same time, and much like in the 1990s, this move must be understood as reflecting an increase in the opportunity cost of relinquishing control over trade policy instruments. In contrast to the previous decade, however, it was Argentina’s marginalization from international financial markets—­and not its constraining exchange rate policy—­that made the maintenance of a balance-­ of-­trade surplus a macroeconomic priority. Brazil

Macroeconomic considerations were also a key factor shaping Brazilian regional trade policy (Marconini 2005). However, despite the greater

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emphasis President Lula placed on social issues and income distribution compared to the Cardoso administration, before him, his government changed macroeconomic policy little. To restore the Brazilian economy’s credibility with other nations, Lula appointed two orthodox technocrats, Antonio Palocci and Henrique Meirelles, to the positions of finance minister and Central Bank governor, respectively. Like their predecessors in the Cardoso administration, Palocci and Meirelles implemented tight monetary policies, using high interest rates to target inflation and to maintain external confidence. These stringent macroeconomic policies were responsible for the poor performance of the Brazilian economy during the first few years of the Lula administration (Cândia Veiga 2005). Yet, at the same time, the government continued to strongly emphasize the promotion of autonomous industrialization through the expansion and diversification of the country’s trading links (Burges 2007). Maintaining a flexible exchange rate regime and a competitive currency were crucial in this respect, contributing to the consolidation of Brazil as a major exporter of manufactured goods (Rios and Iglesias 2007). The structural adjustments undergone by many industrial sectors in the 1990s translated into significant advantages in competitiveness relative to regional partners. After 2003, therefore, Brazilian exports to other countries in the bloc expanded rapidly, resulting in increasing trade surpluses. In addition, during this period Brazil consolidated its position as a “global trader,” with a progressive diversification of trade in terms both of markets of origin and destination and also products exchanged (Da Motta Veiga 2007a). The country developed stronger ties with South American and Asian countries and increasingly exported value-­added products of higher value. Brazil’s exporting success facilitated the adoption of a more cooperative position in MERCOSUR in two related ways. First, export expansion had important macroeconomic implications. The accumulation of trade surpluses allowed the government to build up foreign exchange reserves and to reduce external debt (Armijo and Kearney 2008). The easing of macroeconomic constraints reduced the tension between development and stabilization that had characterized policy making under Cardoso in the mid-­1990s. This allowed economic leaders to maintain greater autonomy from external constraints while also actively promoting Brazil’s

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autonomous development (Marconini 2005). In this context, and as in Argentina, the costs of adjusting trade policy to observe regional commitments were certainly lower than in the previous decade. Second, Brazil’s strong exporting performance increased the willingness and ability of Brazilian economic elites to create mechanisms to compensate weaker regional partners in order to promote a more balanced distribution of gains from integration. Constraint III: Power-­Sharing and Bargaining among State Actors

A third domestic constraint also shifted in ways that help explain the more cooperative approach adopted by Argentina and Brazil in dealing with commercial friction during this phase. In particular, the foreign ministries acquired greater authority over regional trade policy making, and finance ministers became less central in international trade negoti­ ations. The more competitive exchange rates maintained in both countries also strengthened those agencies in control of export promotion and market access negotiations—­ agencies typically located institutionally within the foreign ministries. Thus, diplomats and foreign policy makers regained centrality in the formulating, negotiating, and implementing policy toward MERCOSUR. Greater concentration of decision-­making authority and less bureaucratic fragmentation over integration increased the consistency of partners’ behavior toward their regional commitments. Argentina

As in the 1990s, the quality of trade policy making in Argentina continued to be impaired by coordination failures and competition among the different executive actors involved. Limited participation by legislative and societal actors, when combined with unstructured patterns of interaction among rival agencies within the executive branch, resulted in what Bouzas (2007) has referred to as “uncoordinated activism.”42 Nevertheless, two important changes in the regional trade decision making in Argentina moderated the impact of these coordination failures in this country’s regional policy choices. First, the departure of Cavallo, Roque Fernández, and other neoliberal-­minded economists and technocrats from the government

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lessened the cleavage within the Argentine executive. For much of the 1990s and early 2000s, divergences and clashes between the Ministry of Economy and the Foreign Relations Ministry had dominated regional trade policy making in Argentina. In contrast, during the Kirchner administration, the two ministries converged toward a common vision of the role and goals of economic integration. These convergent preferences translated into a more coherent stance in regional negotiations. Second, during this period, the Foreign Ministry regained centrality in the trade policy making. In the 1990s, Argentina’s position toward MERCOSUR was crucially shaped by the preferences and priorities of the economy minister. Economic teams also participated actively in regional and international trade negotiations. In 2004, Lavagna also played a highly salient role in the trade policy making and in the conduct of negotiations with Brazil. Yet his autonomy and room for maneuver were more limited than those enjoyed by his predecessors in the 1990s and early 2000s (Pérez Llana 2007). The Foreign Ministry became increasingly active in promoting exports and conducting international trade negotiations. Moreover, during the Kirchner administration it was the chief executive himself who increasingly played a central role in foreign and domestic economic policy decisions, including issues related to MERCOSUR (Pérez Llana 2007). It is true that presidents have traditionally had a central role in MERCOSUR and that the partners have consistently relied on presidential diplomacy to overcome stalemates and deadlocks in negotiations. However, this was taken to an extreme under Kirchner. His centralizing and autocratic style at times led to a significant marginalization of other executive actors, including the heads of Economy and Foreign Affairs Ministries.43 Whereas in the 1990s strong figures with independent positions and preferences occupied these posts, after his election in 2003 Kirchner appointed weaker personalities that were more likely to follow his mandates. The president surrounded himself with a closed circle of loyal political allies, such as Minister of Planning Julio De Vido and cabinet chief Alberto Fernández, who had limited experience and interest in foreign policy matters. In fact, as Pérez Llana (2007) notes, foreign policy was significantly neglected during the Kirchner administration.

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During Lula’s first administration, the tension between orthodox and developmentalist actors within the executive that had characterized the Cardoso government reemerged. As in the 1990s, divergences between the orthodox economists in the cabinet and those policy makers who emphasized development and income distribution more revolved around the interest rate and inflation levels. While Finance Minister Palocci and Central Bank President Meirelles favored tight monetary policies to ensure price and exchange rate stability, other prominent figures within the government, such as Vice President Alencar and Minister of Development Luis Furlan, consistently called for a reduction in interest rates in order to stimulate consumption and production.44 Much like in the previous decade, clashes over macroeconomic management translated into divergent positions regarding regional cooperation. Developmentalist actors, with closer ties to the private sector, maintained a more hawkish stance in response to Argentina’s demands for compensation mechanisms. For example, Furlan openly opposed the establishment of safeguards mechanisms in MERCOSUR,45 threatening to resign in 2005 if the Brazilian government yielded to Argentina’s pressures. By contrast, Finance Minister Palocci agreed with Itamaraty officials on the importance of ensuring a “more balanced” MERCOSUR.46 However, in a context of greater exchange rate flexibility and supportive external conditions, these cleavages were less severe and consequential than in the mid-­1990s. Moreover, and as in Argentina, the impact of intracabinet divergences was moderated by the marked centralization of decision-­making authority over international trade policy that took place under Lula. In contrast to Kirchner, however, Lula was more prepared to delegate power over foreign trade issues to the Ministry of Foreign Relations. He appointed two prestigious diplomats with strong ideas that converged with his own, namely Celso Amorim and Samuel Pinheiro Guimarães, to the top positions in Itamaraty. The appointment of Pinheiro Guimarães, who had been sacked by Cardoso from his position as head of the Brazilian Institute of International Relations at the Foreign Ministry for publicly opposing the FTAA project, was particularly controversial and signaled his intention to adopt a more assertive position in hemispheric negotiations. In November 2003, the

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Brazilian president met with all executive officials participating in trade policy and announced that Itamaraty would be formally in charge of all trade negotiations and related matters, “effectively bringing that ministry back to the center of the trade policy making in Brazil” (Marconini 2005).

Power-­Related Incentives

Thus we see that the revival of tension between Argentina and Brazil after 2003 reflected domestic political considerations. The marked expansion of Brazil’s share in Argentine imports not only triggered intense demands by the Argentine private sector for protection but also threatened the Brazilian economic team’s goal of promoting growth and industrial development. At the same time, however, the moderate improvement in the quality and stability of cooperation during this more recent period can be explained in reference to a weakening of domestic constraints—­ and particularly of state actors’ incentives for defection and intrastate cleavages—­relative to the previous decade. Yet the more stable and cooperative dynamics within the bloc also reflected shifting systemic constraints and opportunities. Indeed, the post-­2003 evolution of conflict and cooperation in MERCOSUR continued to be crucially shaped by overlapping dynamics of asymmetric power within and beyond the region. As in previous instances of conflict, both defensive and offensive strategic incentives contributed to the survival of cooperation in the Southern Cone after the Argentine crisis. Since 2004, however, the relative waning of joint defensive incentives has been offset by the increasingly relevant offensive element in Brazil’s foreign policy. As the analysis below shows, however, the more assertive and aggressive pursuit of Brazilian hegemony has affected regional order in the Southern Cone ambiguously. External Vulnerability and Joint Defensive Incentives

As in the 1990s, patterns of conflict and cooperation in the post-­2003 period were critically conditioned by extraregional developments and, in

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particular, by the highly asymmetric distribution of power characterizing the post–September 11 international order. To a significant extent, the attempts by Lula and Kirchner to re-­relaunch cooperation in 2003 can be understood as a joint response to what was perceived as an increasingly threatening international environment. The consolidation of US global power and unipolarity, which became clear with the Afghanistan and Iraq campaigns, created a heightened sense of political and economic uncertainty and insecurity in the international system (Ikenberry 2003). Apart from raising concerns about the aggressive unilateralism of the Bush administration, the war in Iraq also had adverse economic implications. In a context of global economic downturn, growing protectionism, and exacerbated commercial competition, Argentina and Brazil faced renewed incentives to join forces and maintain a unified front within the international system. In light of these seemingly threatening external trends, and much like their predecessors, Lula and Kirchner saw the strengthening of MERCOSUR as crucial to improving their countries’ leverage in hemispheric, multilateral, and interregional commercial negotiations. The “reconstruction” of MERCOSUR was central to Lula’s goal of achieving a greater balance of power in world politics and moving toward a “real multipolar system.”47 Similarly, Argentine president Kirchner signaled early on in his mandate his intention to give priority to the strategy of South American cooperation, leaving behind the strategic ambivalence that had characterized Argentina’s position toward MERCOSUR during the Menem and de la Rúa governments. Given Argentina’s beleaguered international position in the aftermath of the 2001–2 crisis, there was no question that it was in the country’s interest to approach external negotiations via MERCOSUR (Christensen 2007). In the words of then secretary of foreign economic relations Martín Redrado, “Even regarding the FTAA there are no more differences. . . . From the Argentine side, it is not an issue anymore; Argentina approaches the FTAA through MERCOSUR.”48 A strong MERCOSUR was also expected to improve Argentina’s position in negotiations with the European Union, as well as in multilateral trade talks in the WTO. Asymmetric external negotiations thus continued to provide incentives for coordination and close cooperation between Argentina and

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Brazil. Yet, in contrast to the 1990s, during this period MERCOSUR partners attempted more actively to collaborate in extraregional forums in order to enhance their leverage and obtain more balanced outcomes. Under Brazil’s more assertive leadership, MERCOSUR countries were successful in resisting US attempts to push through an unbalanced hemispheric integration agenda, which left agricultural subsidies off the negotiating table. In 2003, the hardening of MERCOSUR’s stance led first to a polarization of positions and then an impasse in negotiations (Da Motta Veiga 2005). At the Mar del Plata Summit in November 2005, governments failed to find common ground and missed the targeted deadline for implementing the agreement. In the midst of intense anti-­ Bush demonstrations, Venezuelan president Hugo Chávez pronounced the FTAA dead.49 Argentina and Brazil also participated jointly in the so-­called Group of 20 (G-­20) in the 2003 WTO Ministerial in Cancun, Mexico. Led by Brazil, this coalition of more than twenty developing countries maintained a firm stance against developed countries, avoiding the emergence of another unbalanced outcome. While less controversial and politicized, EU-­MERCOSUR negotiations also reached an impasse in 2004, after an exchange of revised offers failed to satisfy either of the parties. After a six-­year stalemate, EU and MERCOSUR leaders announced in May 2010 their intention of reinitiating negotiations (IDB 2010).50 In this sense, under Brazil’s more assertive leadership, MERCOSUR countries succeeded in acting jointly to defend their interests in asymmetric external negotiations. However, this moderate success had an unintended, perhaps paradoxical, effect. As preferential negotiations with developed countries lost relevance, an important external source of incentives for intrabloc coordination and convergence eroded. The weakening of joint defensive incentives resulted in some degree of strategic dissonance within the bloc, as partners adopted divergent responses to the constraints and opportunities posed by the international system, and in particular to US preponderance. Divergence between Argentine and Brazilian positions in subsequent multilateral trade negotiations illustrates this point. Yet ultimately the decline of MERCOSUR’s defensive rationale in general was offset by its enduring centrality in Brazil’s more aggressive pursuit of regional and international prominence. These

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offensive incentives in Brazil’s agenda contributed to the maintenance of regional cooperation. Brazil’s Power and Regional Order in the Southern Cone

Lula introduced a number of important innovations in Brazil’s foreign policy. While maintaining the traditional emphasis on national autonomy, Lula’s strategy differed from Cardoso’s in the specific means through which this goal was to be achieved. Under Cardoso, Brazil sought to play a more influential international role by engaging in multilateral institutions and participating actively in the construction of global governance. As discussed in earlier chapters, this approach of cautious but active engagement in global governance has been referred to as “autonomy through participation.” In contrast, the Lula administration implemented a more assertive strategy, which envisioned a central role for Brazil in the transformation of an excessively asymmetric international system. Combining both defensive and offensive elements, this approach emphasized the need for Brazil to undertake collective action with other developing countries and to play a leading role in the construction of regional poles of power, with the goal of contributing to a more balanced distribution of global power (Soares de Lima 2007; Pinheiro Guimarães 2006).51 In this sense, Lula’s strategy resembles what Ikenberry (2003) has referred to as a strategy of “buffering,” which seeks to counterweight the role of lead states by developing alternative regional spheres of influence.52 In practice, this buffering strategy translated, first of all, into a shift in the focus of attention away from preferential negotiations with developed countries, and toward commercial and political initiatives with other large developing countries (Da Motta Veiga 2007a; Soares de Lima and Hirst 2006; Soares de Lima 2007). These were approached both bilaterally and through MERCOSUR. Apart from its ongoing role coordinating the G-­20, Brazil signed in 2004 a commercial agreement with India and South Africa, the so-­called IBSA Initiative, and began negotiating a preferential deal with countries in the Andean Community. Brazil also pursued closer relations with the other so-­called “BRIC” countries, namely, China and Russia, as well as India. While the economic rationale of these initiatives is suspect, the promotion of South-­South

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cooperation has been aimed at expanding the influence of developing countries in the construction of international norms and institutions. Thus, according to Brazilian foreign minister Celso Amorim, collaboration with other BRICs is aimed at consolidating a bloc “that will help to balance and democratize the international order in the beginning of this century.”53 Brazil’s buffering strategy also included efforts to increase its salience in multilateral issues, including trade, environmental issues, and security. Brazil’s campaign for a permanent seat in the United Nations (UN) Security Council illustrated the new assertiveness of Brazilian foreign policy under Lula. Moreover, the Lula government showed a strong determination to expand Brazil’s responsibilities in the international system (Soares de Lima and Hirst 2006). Examples of this quest for greater international prominence include the Brazilian decision to lead the UN peacekeeping mission in Haiti and the promotion of Brazilian candidates to leadership positions in the WTO and in the Inter-­American Development Bank (Hurrell 2010). Brazil also actively sought to raise its international profile by competing (successfully) to host the football World Cup in 2014 and the Olympic Games in 2016. What are the implications of this more assertive and ambitious Brazilian foreign policy agenda for the stability and durability of regional cooperation in the Southern Cone? On the one hand, Lula’s foreign policy strategy located the region at the center of Brazil’s foreign policy efforts and priorities. Like their predecessors in the Cardoso administration, the foreign policy elite under Lula continued to view the goal of regional leadership as a precondition for acquiring global stature. From their perspective, by achieving international recognition as the leading country in South America, Brazil would further increase its global weight. Behind this position, there was an underlying strategic belief that aspiring global powers that lack sufficient material capabilities or soft power to achieve international recognition must first gain regional legitimization (Soares de Lima 2008). Indeed, and in contrast to his predecessor, Lula seemed more willing to acknowledge his country’s responsibility to assume a position of leadership in the region: “All countries in South America see in Brazil a natural leadership for the continent. Only Brazil has for five hundred years refused to [occupy this role]. Brazil needs to . . . finally

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accept its greatness and to make the contribution it has to make to South America and to the world.”54 Consistent with this mandate, the Lula government launched a more aggressive strategy to promote South American unity. In 2004, Brazil led the creation of a South American Community of Nations (SACN), which essentially joined MERCOSUR and Andean Community countries in a single economic and politico-­institutional framework. Participants especially emphasized the development of regional infrastructure, a project that was first put forward by the Cardoso government. Much like these earlier attempts to stimulate South American cooperation, the SACN initiative had limited concrete results. More recently, these plans were refloated with the creation of the Union of South American Nations (UNASUR), which stresses the goal of achieving political integration. Brazil has also proposed the creation of a South American Defense Council (SADC) to preserve peace and stability in the region. The foreign policy discourse of the Lula administration consistently emphasized the commitment to MERCOSUR, and especially to the partnership with Argentina. Indeed, according to Foreign Minister Amorim (2004, 159), the bilateral relation with Argentina continued to be “the cornerstone of Brazil’s regional integration efforts.” For the Brazilian foreign policy elites, the strategic partnership with Argentina remains essential in order to coordinate collective action in South America, which is seen as a vital precondition for achieving global power status (Soares de Lima 2008). Despite the widening disparities, Argentina can be seen as a regional power within South America (Tokatlián 2008). Brazilian plans to strengthen political cooperation in the region by means of UNASUR would be futile without Argentine support. As Soares de Lima (2008) puts it, the alliance with Argentina is instrumental for Brazil in overcoming the “global-­regional dilemma common to all regional powers that aspire to become global protagonists.” At the same time, however, in a number of ways Brazil’s rise has worked against the deepening and stability of cooperation in the Southern Cone. First of all, as Brazil’s national interest shifted and acquired an increasingly global scope, MERCOSUR has lost the former strategic and commercial relevance it once had in Brazilian foreign policy. Brazil’s intrinsic interest and reliance on the bloc are objectively weaker than in

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the 1990s. Moreover, the deepening power asymmetries in the Southern Cone have resulted in increasing divergences in the foreign policies of Argentina and Brazil. Mounting strategic dissonance in the region must also be understood in connection with a second implication of Brazil’s rising position in the Western hemisphere. The more aggressive pursuit of regional leadership by the Brazilian president has triggered fears of “Brazilian expansionism” from smaller partners (Soares de Lima 2008). It has also fueled significant resentment from Argentina, which has responded by launching a “multipolar” strategy of international insertion, aimed at increasing the access of Argentine products in world markets by engaging simultaneously in several processes of commercial negotiations (Redrado 2003).55 Unlike Brazil, however, Argentina was not very successful in diversifying its trading relations. Instead, the Kirchner government expanded its commercial, financial, and political ties considerably with Hugo Chávez’s Venezuela. Chávez’s ideological and confrontational policy of resistance against the United States resonated with Kirchner’s increasingly nationalistic and opportunistic anti-­American discourse (Pérez Llana 2007). But, in addition, Argentina’s gravitation toward Venezuela clearly sought to counterweight Brazil’s rising preponderance at the regional level (Pérez Llana 2008). Smaller MERCOSUR partners have also tried to take advantage of Chavez’s greater activism in South America, with the intention of balancing not only Brazil but also Argentina within MERCOSUR. Both partners, but Uruguay especially, have been particularly critical of the asymmetries of power within the bloc. Uruguay has hence fully supported Venezuela’s incorporation to the bloc as a full member, which it has viewed as contributing “to [mitigating] the notorious asymmetries existent in MERCOSUR because of the size of its members.”56 Uruguay has also sought to balance its regional partners by seeking closer ties with the United States. The signing in January 2007 of a Trade and Investment Framework with the United States was clearly aimed at pressuring Argentina and Brazil (Brown 2010; Wheeler 2007). Interestingly, Uruguay seemed to take advantage of the overlapping dynamics of asymmetric power within the Americas by also benefiting from US competition with Venezuela in the Western hemisphere.57 Paraguay, by contrast, has

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been more constrained in its strategic choices. Nevertheless, and despite the domestic opposition to Venezuela’s entry into MERCOSUR, the Para­guayan executive has repeatedly expressed its support for the initiative, which would “help dilute Brazil-­Argentine hegemony” in the bloc.58 Brazil’s reaction to Venezuela’s growing participation and protagonism in South America has been ambiguous. On the one hand, Lula actively supported Venezuela’s application for full membership in MERCOSUR in December 2005. This endorsement, which received significant domestic criticism, reflected geopolitical calculations. The partnership with Venezuela would clearly contribute to increasing the political and economic weight of the region at the hemispheric and global levels. It would also facilitate physical and energy integration (Da Motta Veiga 2007a). These were key aspects of Brazil’s plan for the construction of the SACN. Yet Chávez’s and Lula’s visions of the goals and nature of regional integration were clearly incompatible.59 Moreover, and despite the stated joint goals, Lula and Chávez were competing for regional leadership in South America. As Burges (2007) explains, their contrasting approaches to building a southern coalition both emphasized the necessity for regional leadership. This exacerbated rivalry between the two countries, indirectly deepening strategic divergences within the bloc. In its resentment toward Brazil’s rise, Argentina has not only tried to take advantage of the Brazilian-­Venezuelan rivalry—­by, as Burges (2007, 1343) puts it, “play[ing] off contending would-­be leaders”—­but also stopped short of fully supporting several of Brazil’s regional and international initiatives. The Kirchner government was indeed highly critical of Brazil’s efforts to obtain a permanent seat on the UN Security Council. Argentine officials also publicly expressed dissatisfaction with the way Brazil handled the 2005 political crisis in Ecuador, claiming that it highlighted Brazil’s attempts to become the enforcer and guarantor of stability in the region.60 More importantly, the Kirchner administration did not conceal its exasperation with Brazil’s attempt to use the SACN as a basis for regional hegemony. From Argentina’s perspective, Brazil’s determined pursuit of the project of broader South American integration was detrimental to the sustainability of MERCOSUR. Thus, Argentine foreign minister Rafael Bielsa announced in May 2005 that Argentina

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would oppose further progress in the institutionalization of the SACN until MERCOSUR’s “institutional deficit” was addressed.61 Buenos Aires also took this opportunity to reinvigorate demands for the establishment of institutional mechanisms to deal with economic asymmetries within the bloc. In fact, as Brazilian assertiveness grows, and as the power disparities within MERCOSUR widen, Brazil has been expected to play a more constructive and active role in the provision of regional and bilateral public goods (Soares de Lima 2008). For instance, Argentine officials adopted a tougher stance in the negotiations over safeguards, claiming that Brazil needed to “pay a price in terms of economic, commercial, and political support” for its ascendancy over other countries in the region.62 In contrast to the Cardoso administration, however, the Lula government has taken these demands more seriously. Foreign Minister Celso Amorim, for instance, recognized that “Brazil should do much more than it has done for Argentina,”63 and that strengthening MERCOSUR would require “affirmative action” in favor of weaker partners.64 From his perspective, both the consolidation of Brazil’s position as a regional power and successful South American cooperation would not be feasible unless Brazil exhibits the political will to bear the costs of regional leadership. This requires Brazil to take concrete and effective steps to ensure a more balanced distribution of gains within MERCOSUR, so as to neutralize the discontent and frustration of its smaller partners, particularly Argentina (Christensen 2007). In this respect, a number of initiatives aimed at reducing asymmetries between Brazil and smaller MERCOSUR partners were introduced by Brazil following Lula’s 2006 reelection. In addition to the establishment of the CAM, Brazil led the creation of a European-­style Structural Convergence Fund aimed at promoting development of Uruguay and Paraguay. Brazil also signed a bilateral agreement with Uruguay, including a package of measures to promote Uruguayan exports to Brazil and to expand Brazilian investments and financing by the National Development Bank (BNDES) in Uruguay. Moreover, as Da Motta Veiga (2007a) notes, in negotiations with Andean countries, Brazil has adopted an approach based on the concept of “asymmetric reciprocity,” according to which smaller countries receive greater concessions.65 More recently, the

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Brazilian government pledged to take actions aimed at reducing the Brazilian trade surplus with South American countries (Christensen 2007). Finally, Brazil has also exhibited some willingness to strengthen the bloc’s institutional structure, agreeing to the creation of the MERCOSUR Parliament in 2004, and more recently, to the establishment of the position of high representative general.66 In sum, given the increasingly relevant offensive dimension in its foreign policy, the Brazilian foreign policy executive faced important strategic incentives to make concessions to weaker MERCOSUR partners in order to ensure the sustainability of cooperation. Indeed, Brazil seemed more prepared in 2003–7 to incur the domestic political costs of yielding to Argentina’s demands than during the 1990s. However, apart from reflecting the independent power-­related calculations of Brazilian foreign policy makers, this position of “strategic patience”67 must also be interpreted as a response to the strategic choices of its smaller partners during this period, and in particular, to their attempt to bandwagon with external powers—­as in the case of Uruguay’s rapprochement with the United States—­to counterweight Brazil’s rising preponderance. In the case of Argentina, Brazil’s “strategic patience” was a response to President Kirchner’s attempt to use Argentina’s alliance with Chavez’s Venezuela as a counterweight to Brazilian hegemony in the region.

Conclusions

The revival of commercial friction between Argentina and Brazil after 2003 reflected primarily domestic political considerations. In contrast to previous disputes, however, societal pressures were more relevant than the other types of domestic political dynamics that have typically hindered cooperation in the Southern Cone. In fact, the evidence shows that the other two types of constraints weakened. Not only did the costs of cooperation for state actors decline; decision-­making authority became centralized in the hands of procooperation foreign policy elites. The weakening of these domestic constraints contributed to a moderate improvement in the quality and stability of cooperation in the Southern Cone. At the same time, the establishment of escape clauses within the

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bloc increased the discretion and flexibility of national policy makers, allowing them to compensate the domestic parties that suffered loss from regional cooperation without violating their agreements and/or engaging in bilateral conflict. The examination of domestic political dynamics sheds significant light on more recent patterns in conflict and cooperation between Argentina and Brazil. Yet to understand both the revival of tension and the way it was managed, it is crucial to look at the role of systemic incentives. Consistent with the neoclassical explanation deployed in this book, the endurance of cooperation can still be explained in reference to strategic considerations and overlapping dynamics of asymmetric power in the Western hemisphere. The examination of the more recent evolution of foreign policy and strategic priorities in Argentina and Brazil, however, suggests that since 2003 strategic dissonance increased in MERCOSUR. The decreasing relevance of external asymmetric negotiations during this period has eroded joint defensive incentives for cooperation. At the same time, however, the incentives for Brazil to pursue a more offensive strategy have deepened, thus coming to play a greater role in explaining the survival of cooperation. In this sense, Brazil’s more accommodating position toward Argentina during this period, which permitted the emergence of a more balanced distributional outcome than in previous conflicts, must be understood as part of Brazil’s greater willingness to bear the costs of exercising a constructive role in the region (Da Motta Veiga 2007a). Like other initiatives launched during this period, the decision to yield to Argentina’s demands for the institutionalization of escape mechanisms sought to reduce economic asymmetries within MERCOSUR and to promote a more balanced integration. Moreover, Brazil agreed to the creation of a MERCOSUR Parliament, which has the potential to democratize the bloc’s decision-­making process (Dabène 2009). Apart from reflecting the Lula government’s normative concerns with fairness and income distribution, Brazil’s concessions to weaker partners had a clear strategic rationale. They were aimed at promoting South American unity and at consolidating Brazilian leadership in the region. Both goals were part of Brazil’s broader strategy to strengthen its geopolitical position while increasing its salience and status in world affairs.

As in Argentina, greater exchange rate flexibility and more competitive currency alleviated opportunity costs of observing regional trade agreements. In addition, Brazil’s exporting success and macroeconomic stability gave economic policy makers more room to be flexible with smaller partners.

The opportunity cost of observing trade commitments (and relinquishing control over trade policy instruments) was lower than in previous conflicts (1995, 1999, 2001), given the more competitive currency value and flexible exchange rate regime. However, Brazilian imports threatened the Argentine government’s new focus on promoting growth, industrial development, and increased employment.

Agencies sharing power over MERCOSUR policy converged more. In formulating and negotiating regional integration strategy, economic policy makers were less salient and influential than in the 1990s and early 2000s, and the FPE was more central.

State Actors’ Incentives for Defection

Intrastate Cleavages and Bargaining among State Actors

Tension between orthodox and developmentalist economic officials revived, but overall the two converged more. Decision-making authority over MERCOSUR was centralized in Itamaraty.

The industrial sector continued to oppose the creation of escape mechanisms and reluctantly agreed to negotiate VERs. The agricultural sector demanded protection from Argentina’s more competitive producers.

Brazil

After 2003, industry, particularly in “sensitive sectors,” revived its demands for import relief, as the share of imports from Brazil in the domestic market grew. Argentine industry continued to demand a safeguards mechanism.

Argentina

Societal Pressures

Domestic Constraints

Table 7.3.  Explaining Patterns of Conflict and Cooperation after the Argentine Crisis

Offensive

Defensive

Systemic Incentives

The Argentine FPE continued to view the strengthening of MERCOSUR as crucial to improving the countries’ leverage in hemispheric, multilateral, and interregional commercial negotiations. However, decreasing relevance of these external asymmetric negotiations over this period somewhat weakened defensive motivations for cooperation. Argentina perceived greater incentives for diversifying economic and strategic ties and relied on Venezuela to counterbalance Brazil’s rising power in the bloc.

Argentina

MERCOSUR was also crucial to Brazil’s efforts to consolidate its leadership role in South America, a role it viewed as instrumental for achieving international salience and global power status. During this period, Brazil showed greater willingness to act as a regional leader and to bear the costs of providing regional public goods (e.g., compensation mechanisms) within MERCOSUR.

MERCOSUR was a central element in Brazil’s “buffering” strategy, whereby it sought to create a more balanced distribution of global power through constructing regional spheres of influence. This strategy, however, also broadened Brazil’s focus to collaboration with other developing countries and thus could be seen as diverting some attention from the subregional level.

Brazil

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The extent of Brazil’s willingness to become a focal point in the cooperation, however, must not be overstated. Brazil remains far from the role of benign leader and underwriter of regional order in the Southern Cone. Indeed, while agreeing to the creation of compensation mechanisms in order to “keep MERCOSUR going,” the Brazilian foreign policy elite has refused to take more concrete steps toward revitalizing the bloc. This is clear in Brazil’s reluctance to accept stronger and more autonomous regional institutions. At the same time, as the attempts by weaker partners in the region to balance Brazilian power show, the prospects for Brazilian benign leadership in the region remain constrained by other states’ ambivalence. Thus, the materialization of Brazil’s role as a pivotal regional power would also require overcoming followership obstacles.

Chapter eight

Conclusions Power, Domestic Politics, and Regional Order

In previous chapters, I have argued that the erratic and unstable patterns of regional cooperation in the Southern Cone have reflected the tension and interaction between systemic power-­related incentives and domestic political factors. MERCOSUR’s evolution and survival have been shaped in important ways by overlapping asymmetries of power within and beyond the region. Defensive considerations, reflecting a shared sense of external vulnerability, have created strong incentives for Southern Cone countries to maintain their regional partnership so as to enhance their leverage in asymmetric external negotiations. At the same time, Brazil’s instrumental view of MERCOSUR as a vehicle for consolidating its role as a regional power and, increasingly, as a global player has contributed to the survival of the regime, but also to its endemic weakness. Although systemic approaches focusing on power considerations and strategic calculations shed significant light on the broad contours and longer-­term survival of MERCOSUR, they are less useful to account 197

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for the recurrence of conflict within the bloc. Understanding the tendency of partners to violate regional agreements requires closer attention to the ways in which domestic political factors shape national preferences and choices regarding cooperation. To this end, the analytical framework developed in this book integrates insights from systemic and domestic political-­economy approaches to foreign policy making. In this concluding chapter, I first summarize the book’s main empirical findings regarding the role of domestic political factors and interstate power asymmetries in MERCOSUR. I then discuss the implications of these findings for debates about the bloc’s prospects as well as for more general discussions about the role of regional powers in the global order and about regionalism in world politics.

Domestic Constraints on Regional Cooperation

The empirical analyses have highlighted three main pathways through which domestic politics undermined cooperation in MERCOSUR during the period under analysis: via pressure from those societal groups that face the domestic distributional costs of cooperation; through the macroeconomic and political calculations of national policy makers; and through divergence of preferences among executive actors sharing power over regional cooperation policy. The evidence presented in the case studies suggests that these mechanisms influenced the policy choices and negotiating positions of both Argentina and Brazil in MERCOSUR. However, their relative weight varied across countries and time periods. Moreover, each constraint had distinct, but ultimately negative, effects on the ability and willingness of the partners to observe regional commitments. Constraint I: Societal Pressures

Interest-­group explanations of international cooperation typically predict that the higher the extent of societal mobilization against trade agreements, the more likely governments would be to contravene them. At first glance, the evidence presented in the case studies seems to support

Conclusions 199

these claims. In the first three disputes examined, unilateral defection by Argentina or Brazil was preceded by intensified pressure by the national private sectors. Moreover, and in line with societal explanations, the most conflictive phase in MERCOSUR (1999–2002) coincided with a significant deterioration in domestic and external conditions, which gave way to more vigorous societal demands for compensation and a marked erosion of societal support for regional cooperation in both Argentina and Brazil. However, the analysis in the case studies highlights three qualifications to societal explanations of trade conflict in MERCOSUR. First, the process tracing evidence demonstrates that state preferences and institutions crucially mediated the influence of societal pressure on actual policy choices. In order to influence outcomes, societal actors depended on their links to sectoral agencies within the government and on the power of these bodies relative to other executive agencies involved in trade policy making. In Brazil, two main agencies played a key role in channeling the input of business actors into the policy process: the Ministry of Planning and the Ministry of Development, Trade, and Industry. In Argentina, in turn, the Secretariat of Industry and the Under-­Secretariat of Foreign Trade acted as the main links between the state and society. Second, and most important, the evidence indicates that societal pressure against cooperation was neither a necessary nor a sufficient condition for states to defect from regional commitments. In the first three cases, in addition to increased societal demands for import relief, national economic teams faced independent macroeconomic and political incentives to support the imposition of unilateral protectionist measures. The interests of societal and state actors converged in the nation’s violating regional agreements, and there is no indication that there would have been such an outcome if state actors had not been motivated to defect. The findings of the most recent period, analyzed in chapter 7, confirm this point. In the conflicts over sensitive sectors, uncompetitive national producers also exerted strong pressure. In contrast to the earlier disputes, national leaders had less clear macroeconomic and political motivations for resisting cooperation. Under such circumstances, state actors were less willing to face the diplomatic costs of unilateral defection and dispute

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initiation, and thus sought to deal with trade imbalances more cooperatively, by negotiation. Third, even in those cases in which national governments were most sensitive to sectoral pressure, the actual relevance of societal constraints should not be overestimated. Despite active societal mobilization against cooperation, in all cases governments were more sensitive to systemic imperatives, ultimately prioritizing the strategy of regional cooperation over domestic lobbies. Several examples from the case studies illustrate this argument. In 1999, given the upcoming presidential elections, the government of Argentine president Carlos Menem was particularly vulnerable to industrial pressures for protection. While initially giving in to these pressures and adopting unilateral trade restrictions, the Argentine government eventually disengaged from the footwear conflict, forcing private sector groups to negotiate voluntary export restraint (VER) agreements with their Brazilian counterparts. Similarly, Brazil’s decision to yield to Argentina’s insistent demands for the establishment of safeguards caused significant discontent among Brazilian industrial interests. Yet Brasília preferred to confront these domestic political costs rather than to risk the continuity of the strategic project. The comparative analysis suggests, however, that the economic and political weight of the different sectors conditioned their effectiveness in shaping national choices and regional outcomes. In each case, the ability of business groups to secure concessions from the government was not necessarily related to the actual damage caused by import penetration. Thus, in both countries, the automobile sector succeeded in securing preferential treatment since the onset of cooperation in the mid-­1980s. This reflects not only the enormous economic ramifications of national automobile production but also the ability of the industry to attract high levels of foreign investment. By contrast, labor-­intensive sectors such as the footwear and textile industries benefited from more limited and only temporary concessions. The case study of the automobile crisis also illustrates a tendency to favor large and internationalized market players over nationally owned labor-­intensive firms. As discussed in chapter 4, the Brazilian automobile regime had important internal distributional consequences, benefiting the foreign-­owned assemblers at the expense of the local auto parts producers. Nevertheless, as chapter 7 showed, in the last

Conclusions 201

half-­decade the two countries, particularly Argentina, have tried more explicitly to defend the interests of labor-­intensive sectors. These three qualifications suggest that, while interest group pressure may have contributed in shaping national preferences and choices regarding cooperation, focusing exclusively on societal constraints provides an incomplete picture of the domestic sources of conflict in MERCOSUR. State actors, by their role and preferences, contributed as well. Constraint II: State Actors’ Incentives for Defection

A second, and more determining domestic-­level constraint on cooperation resulted from the political and economic calculations of national economic policy makers. According to my analytical framework, these actors’ support for MERCOSUR depends on the extent to which they view the regional trade strategy as contributing to their broader macroeconomic objectives. Members of the economic teams are more likely to favor defection when the macroeconomic and political costs of relinquishing unilateral control over trade policy instruments, as perceived by domestic economic elites, outweigh the expected benefits of cooperation. Along these lines, in the first three cases, the evidence suggested that external and domestic conditions combined to increase the domestic opportunity cost of relinquishing unilateral control over trade policy measures, thus creating incentives for unilateral defection. As discussed extensively in the case studies, the unilateral measures introduced by economic officials were not simply concessions to the private sector but had a broader macroeconomic and/or political-­economy rationale. In these cases, the relevance of macroeconomic factors was particularly visible and clearly connected to the rigidities associated with the maintenance of fixed exchange rate regimes. Moreover, the measures were used strategically to appease growing domestic opposition to the maintenance of overvalued exchange rates. Indeed, in both countries state actors’ incentives for defection were more relevant than societal pressure in explaining the outbreak of conflict. As mentioned above, the ability of business actors to shape outcomes was contingent on a convergence of preferences between them and state actors. Thus, of the three types of domestic obstacles, the instrumental

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calculus of state actors was clearly the most important in explaining the breakup of cooperation in MERCOSUR. Focusing on the preferences of state actors and, more specifically, on changing incentives for defection from economic policy makers also helps us make sense of the longer-­term evolution of regional cooperation in South America. The most conflictive period in Argentine-­Brazilian relations (1999–2002) coincided with a marked weakening of support for regional cooperation on the part of economic policy makers. In the early 1990s, for the orthodox economists dominating trade policy making in Argentina and Brazil, the perceived economic and political-­ economy benefits of integration significantly surpassed the expected costs. In particular, they viewed regional trade liberalization as contributing to the success and sustainability of the exchange-­rate-­based stabilization programs introduced in Argentina and Brazil in the early 1990s. Yet the balance of benefits and costs from cooperation shifted toward the end of the decade, as international and domestic circumstances changed and the perceived domestic usefulness of trade policy instruments increased. In a context of deepening domestic and external crisis, and given the rigidities created by the exchange rate anchors, trade policy instruments acquired special macroeconomic and political value. The moderate improvement in the quality of cooperation in the 2003–8 period can also be explained in reference to changes in the preferences of economic policy makers. In particular, the shift in both countries to more flexible exchange rate regimes, which allows them to respond to external imbalances and domestic redistributive pressures via currency policy, has made relinquishing control over trade policy measures less costly. This is clearer in Argentina, where significant economic growth and the maintenance of a competitive currency have alleviated the distributional burden and hence have facilitated the political sustainability of regional trade liberalization. As discussed in chapter 7, the novel emphasis that the Kirchner and Lula administrations placed on the promotion of national production and employment resulted in renewed commercial friction. However, in contrast to conflict under previous administrations, the Argentine and Brazilian governments refrained from establishing unilateral restrictions and sought negotiated solutions for trade imbalances. In this sense, the use of VERs and escape clauses must

Conclusions 203

be understood as attempts by national leaders to respond to domestic demands without undermining the continuity and stability of regional cooperation. Since 2009, unilateral measures and trade friction between Argentina and Brazil have reappeared, clearly coinciding with the international economic and financial crisis. Although Latin American countries were not as severely hit as in previous international crises, the global turmoil inevitably affected levels of economic activity and trade in the region. Argentina, in addition, was marginalized by international financial markets, an experience that underscored the importance of maintaining a positive trade balance. This combination of factors increased the cost of observing regional commitments, leading the Argentine and Brazilian governments to impose new unilateral restrictions on imports and once again disrupting trade and diplomatic relations within the bloc. A focus on the instrumental calculus underlying the policy preferences and choices of economic policy makers also partly illuminates the differences in the stance of Argentina and Brazil toward their regional commitments, particularly in the late 1990s and early 2000s. In particular, the strong constraints that the convertibility system placed on the policy autonomy of Argentine policy makers, when combined with the deterioration of the country’s economic and financial situation in the late 1990s, help explain the greater tendency of Argentina to violate regional commitments. The shift to a more flexible exchange rate regime in 1999 gave Brazilian policy makers a wider room of action, making regional cooperation a less costly alternative than for their Argentine counterparts. Constraint III: Power-­Sharing and Bargaining among State Actors

Argentine and Brazilian preferences and choices concerning cooperation were also shaped by the distribution of decision-­making power among governmental actors, which, as the cases demonstrate, was determined not only by institutional rules but also by contextual factors at the international and domestic levels. The empirical analysis suggests that the number of actors sharing power over regional integration, the extent of preference divergence, and the degree of coordination among them all affected the stability and coherence of partners’ trade policy choices.

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While the interaction of constraints I and II is crucial to explain partners’ decisions to defect from regional commitments, and hence the outbreak of conflict, attention to the third type of domestic constraint helps make sense of the unstable and erratic nature of regional dynamics observed in MERCOSUR. Executives in both countries have played a central role in formulating, negotiating, and implementing regional integration policy, with very limited participation by the legislatures and political parties. In the mid-­1980s, when Argentina and Brazil took the first steps in the process of institutionalized cooperation, decision-­making authority over regional integration decisions was concentrated in the foreign policy executives. The decision to embark on bilateral economic cooperation reflected the strategic and domestic-­level preferences of presidents and their foreign ministers. This centralization of power allowed the foreign policy elites to push forward with the gradual integration agenda, despite the limited support from private sector actors. However, since the 1990s, foreign policy elites have shared power more evenly with high-­level officials at the ministries of finance and the central banks. This shift in the balance of intrabureaucratic power cannot be explained solely in terms of institutional developments. It also reflected an underlying and more general strengthening of economic technocrats—­typically educated in the United States and with strong commitment to market orthodoxy—­in Latin American governments, resulting from broader ideational and material changes in the international political economy. While sectoral agencies also slightly increased their influence in the policy-­making process—especially in Brazil—­it was the foreign ministries and the economic teams that ultimately took decisions regarding MERCOSUR. Both sets of actors formally participated in regional negotiations, through their roles in the Common Market Group and the Common Market Council. As foreign policy elites came to share decision-­making authority over regional trade policy with economists and other agencies, coordination between the two sets of actors became an essential yet elusive goal, particularly in Argentina. Despite deficient coordination, in the early 1990s the foreign policy executives and the economic agencies in both countries shared an interest in promoting and deepening regional cooperation. Yet this convergence

Conclusions 205

of interests in support of MERCOSUR eroded significantly after 1995. This resulted in an internal cleavage between economic agencies and foreign policy officials, who continued to strongly support regional cooperation. Because of their centrality within the Argentine and Brazilian cabinets, economic technocrats were able to introduce unilateral measures that contravened regional commitments, even when foreign ministries and diplomats opposed such moves. This was clear in Argentina during the 1999 and 2001 conflicts. However, the 1999 and 2001 disputes show that, while they were unable to prevent these uncooperative moves, foreign policy elites ultimately played a central role in shaping both countries’ positions in regional negotiations. The unilateral measures introduced by economic teams typically resulted in bilateral diplomatic tension, the resolution of which required protracted negotiations among high-­level Argentine and Brazilian diplomats, and in some cases, direct presidential intervention. As the case studies illustrate, the escalation of tension and growing concerns over the sustainability of the project also affected the dispersal of intrabureaucratic power in important ways. Specifically, perceptions of crisis and concerns over the future of MERCOSUR shifted the balance of power toward the foreign policy elites, who, backed by the chief executives, pushed for the resolution of the crises and the preservation of the MERCOSUR regime. The shifting configuration in domestic interests and institutional dynamics in both countries since 2003 has contributed to the reduction in the frequency and intensity of bilateral trade and diplomatic conflict, thus resulting in more stable and predictable patterns of regional cooperation. The strengthening of nationalist state-­society coalitions that place greater emphasis on domestic production and employment than on stabilization and liberalization has had implications for the formal and informal distribution of power among different state agencies involved in regional integration issues. In particular, the shift in domestic economic and political priorities resulted in a weakening of finance ministers within national cabinets, particularly in Argentina. The more competitive exchange rates in both countries have also led to a strengthening of those sectoral agencies charged with promoting exports and negotiating market access—­agencies located within the foreign ministries. Thus,

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these agencies have regained centrality in formulating, negotiating, and implementing policy toward MERCOSUR. The greater concentration of decision-­making authority and the lower levels of bureaucratic fragmentation over integration have increased the coherence of partners’ behavior toward their regional commitments.1 Again, shifts in the balance and dispersal of decision-­making authority within the state also help explain the differences in the degree of stability of national preferences for cooperation over time in both Argentina and Brazil, as well as differences between the two countries. The high level of fragmentation and the deficient coordination between the Argentine Ministries of Economy and Foreign Relations and International Trade severely affected the implementation and coherence of international trade policy. In Brazil, by contrast, the executive branch agencies involved in regional cooperation—­the Ministries of Foreign Relations; Finance; Development, Industry, and Trade; and Planning—­were better coordinated and less fragmentated. In addition, despite distinct underlying motivations, Itamaraty and the economic team converged regarding the importance of ensuring MERCOSUR’s survival. In fact, in Brazil, intrastate cleavages were more often found between, on the one hand, officials in sectoral agencies—­such as the officials from the Ministries of Planning, Trade and Industry (currently, Development), and Agriculture—­which have advocated a more “hawkish” stance toward Argentina, and, on the other hand, the economic team and foreign policy executive. Moreover, open confrontation among these different actors sharing power over regional policy making was rare. And on those occasions when there was conflict, as in the 1995 dispute, Brazilian government elites were more successful than their Argentine counterparts in managing their differences and presenting a unified front in regional negotiations. In sum, the evidence derived from our case studies suggests that two main domestic-­level variables conditioned patterns of conflict and cooperation in MERCOSUR during the period of analysis: (1) the preferences of national economic policy makers, and more specifically, the perceived opportunity costs of giving up unilateral control over trade policy instruments; and (2) the dispersal of decision-­making power over regional integration issues. The empirical analysis indeed suggests that the most

Conclusions 207

conflictive and unstable period in Argentine-­Brazilian commercial and diplomatic relations (1999–2002) coincided with a significant increase in the perceived costs of cooperation for economic policy makers, given the prevailing exchange rate regimes and the deteriorating international economic conditions. During this period, economists, in general, were strengthened within the Argentine and Brazilian governments, which resulted in greater dispersal of authority regarding MERCOSUR. As illustrated in Figure 8.1, domestic factors were less constraining in other phases in MERCOSUR’s history. When economic cooperation between Argentina and Brazil was launched in the mid-­1980s (phase 0), the FPEs were almost entirely in control of designing, implementing, and negotiating the integration strategy. Given the gradual and sectoral Chapter 8 approach to integration, the opportunity costs of cooperation from the perspective of economic policy makers were significantly low. Things were significantly different when MERCOSUR was established in 1991. During the 1991–94 period (phase 1), despite the marked changes in Figure 8.1

Domestic Factors and Regional Cooperation in MERCOSUR

Figure 8.1.  Domestic Factors and Regional Cooperation in MERCOSUR Domestic Opportunity Costs of Cooperation High

B

D Phase 5: 2009–11

A

Low

Phase 4: 2003–8 Phase 0: 1985–90

Phase 3: 1999–2002

Phase 2: 1995–98

C

Phase 1: 1991–94

Centralized Distribution of Decision-Making Power

Dispersed

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the strategy of integration, the domestic economic and political costs of cooperation were still relatively low because of the auspicious international economic environment and the moderate process of economic expansion in the region. In contrast to the previous phase, however, in the early 1990s FPEs shared decision-­making and negotiation au­thority over MERCOSUR with economic policy makers. Toward the end of the 1990s, as economic policy makers gained salience within both countries’ executives and as they saw the opportunity cost of observing regional commitments increase, conflicts grew in scale and intensity. Finally, while it might be too soon to assess fully the consequences of the latest international economic crisis for cooperation in the Southern Cone, the evidence seems to indicate that the period 2009–11 could perhaps be located within Quadrant B—­while the FPEs continue to centralize decision-­making power in both countries, the economic crisis has increased the domestic costs of trade cooperation.

Overlapping Power Asymmetries and Regional Cooperation in the Southern Cone

Domestic politics have undoubtedly conditioned regional dynamics in the Southern Cone. However, as we have seen, systemic considerations explain more of the long-­term evolution and shape of MERCOSUR. In important ways, interstate power asymmetries within and beyond the region have helped the regional regime survive. External Vulnerability and Defensive Incentives for Cooperation

First, defensive considerations, reflecting partners’ shared sense of external vulnerability, have effectively promoted and sustained cooperation. As an extensive literature has demonstrated, the onset of cooperation in the region in the mid-­1980s and early 1990s had clear defensive roots. To a great extent, by regional integration nations were responding jointly to a series of threatening external developments, and in particular, to growing US centrality in the Western hemisphere. In the late 1990s and early 2000s, Argentine and Brazilian foreign policy elites continued to view

Conclusions 209

MERCOSUR as the most effective strategy to confront an increasingly asymmetric international system. In particular, Southern Cone states shared an interest in maintaining regional unity so as to enhance their leverage in hemispheric, multilateral, and interregional negotiations with developed countries. Despite this overall convergence on the benefits of regional cooperation, the position of each country toward MERCOSUR was conditioned by its relative position within the international and regional systems, and by the ways in which domestic-­level actors interpreted and acted on these systemic conditions. Historically, Brazilian foreign policy elites have emphasized strengthening national autonomy and balancing US influence in South America. Defensive incentives to consolidate MERCOSUR accentuated toward the end of the 1990s, as the US-­led process of hemispheric integration and EU-­MERCOSUR negotiations gathered momentum. As the case studies show, these external-­balancing concerns crucially shaped Brazil’s position in MERCOSUR. While Brazil’s strategic commitment to MERCOSUR was quite stable during the bloc’s first decade, Argentina’s posture was more ambiguous and internally contested. Argentina’s foreign policy in the early 1990s emphasized strategic alignment with the global hegemon. Throughout the decade, speculation that the United States might be interested in pursuing a preferential agreement with Argentina increased the government’s strategic ambivalence and indecision toward MERCOSUR. The shift toward a more unqualified support for regional cooperation toward the end of the 1990s must be understood as a process of rational adaptation to shifts in the international system. It was also at least in part triggered by a more realistic assessment by national policy makers of their country’s weakened international position and limited strategic options. During the post-­2003 period the structure of the international and regional systems changed significantly, and so did the ways such change was interpreted by national foreign policy elites. On the one hand, the United States’ more assertive pursuit of global power preponderance and the declining strategic relevance of the region further underscored the defensive rationale of the regional partnership. However, the decreasing relevance of the three main processes of asymmetrical external negotiations in which MERCOSUR partners took part during the

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previous phases—­ namely, the FTAA, EU-­ MERCOSUR, and WTO eroded joint defensive motivations for cooperation. negotiations—­ Indeed, since 2007 strategic divergence between Argentina and Brazil has reappeared. Thus, as discussed in chapter 7, the shift to a more flexible and seemingly less conflictive MERCOSUR may be masking a growing degree of strategic dissonance between Argentina and Brazil. Nevertheless, recent events point to the ongoing defensive rationale that both countries see in the regional project. The 2008 international financial crisis underscored the importance of maintaining a unified front against external threats. In contrast to other instances of international crisis, in this one MERCOSUR countries relied on financial cooperation to reduce volatility in local markets (IDB 2010). In response to the uncertainty of financial markets in 2011 due to the crisis in the eurozone, both the Argentine and Brazilian governments emphasized their strategic partnership. According to Brazilian officials, for example, “MERCOSUR is a priority, almost a sanctuary,” in the context of the global crisis.2 Similarly, Argentine policy makers stressed the role of Brazil as a “decisive” political partner, acknowledging that in the current international scenario South American integration and close relations with Brazil were the only option.3 These statements suggest that a strong convergence of strategic defensive interests continues to underpin the survival of regional cooperation in the Southern Cone. The controversial move to admit Venezuela in June 2012, on the other hand, points to the enduring centrality of power and politico-­strategic considerations in the evolution of MERCOSUR.4 Intraregional Power and Brazil’s Offensive Incentives

A second type of strategic motivation for regional cooperation resulted from the overlapping dynamics of asymmetric power at the regional and hemispheric levels. Brazilian foreign policy elites have considered the consolidation of MERCOSUR as a precondition for a stronger Brazil-­led South American union. In addition, from their perspective, leadership in MERCOSUR could enhance Brazil’s legitimacy and status within and beyond South America. These offensive calculations have created further incentives for Brazilian foreign policy makers to defuse diplomatic tension in the recurrent commercial fallouts with Argentina

Conclusions 211

and, more broadly, to ensure the survival of MERCOSUR as a customs union. Under President Luiz Inácio Lula da Silva, Brazil’s foreign policy more assertively pursued regional hegemony and global salience. As in the 1990s, however, Brazil’s aspirations for a more pivotal role in South America and beyond have converged with the maintenance and strengthening of MERCOSUR. Indeed, as argued in chapter 7, Lula’s foreign policy strategically emphasized the bloc and regarded it as a platform for constructing and exercising Brazilian leadership. The establishment of mechanisms aimed at promoting a balanced distribution of gains within the bloc could be interpreted as indicating Brazil’s readiness to bear the costs of exercising more constructive regional leadership. However, the extent of Brazil’s constructive leadership and its willingness to front the costs of collective action should not be overstated. Brazil remains far from the role of benign leader and underwriter of regional order in the Southern Cone. Many of the initiatives introduced in the past few years with the goal of mitigating distributional tension within MERCOSUR have yet to be fully implemented. Indeed, while agreeing to create compensation mechanisms in order to “keep MERCOSUR going,” the Brazilian foreign policy elite has only reluctantly agreed to allow regional institutions to become more autonomous or to take more concrete steps toward revitalizing the bloc. Brazil has maintained quite a self-­serving position toward MERCOSUR, seeking to benefit from the reputational and legitimacy effects of being recognized as a regional power, but refusing to face the costs of a more active leadership in constructing and maintaining regional order. In this sense, Brazil’s self-­interested project of regional leadership has had an ambiguous impact on the MERCOSUR regime, contributing to its survival, but also to its ineffective and weak form. It is important to consider the critical impact that Venezuela’s entry to MERCOSUR may have on intraregional dynamics of power. From the perspective of smaller members Uruguay and Paraguay, a larger bloc including not only Venezuela but also Bolivia and Ecuador as full members would dilute the effect of Brazilian and Argentine preponderance.5 Both countries, and especially Uruguay, have been quite critical of their larger partners and their opportunistic behavior within the bloc.6 Argentina has also viewed its political and economic alliance with Venezuela as directly contributing to counterweight Brazil’s role within the bloc

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and more broadly in South America. On the other hand, several analysts have stressed the growing competition between Brazil and Venezuela for South American hegemony (see, e.g., Burges 2007). Brazil, however, has emphasized more strongly the benefits of Venezuela’s ascension for MERCOSUR’s external balancing prospects. For the Brazilian FPE, an enlarged and strengthened MERCOSUR would allow South American countries to obtain “better terms and conditions to fight for a more fair and balanced trade with other regions.”7 These strategic concerns were behind Brazilian president Dilma Rousseff’s strong determination to accept Venezuela’s bid for full membership.8 Indeed, the way in which Venezuela was admitted into MERCOSUR reflects power dynamics within the bloc and confirms “the influence wielded by Brazil, the region’s powerhouse.”9 Distributional Outcomes

The convergence of strategic interests between Argentina and Brazil helped to ensure the continuity of cooperation despite recurring bouts of diplomatic and commercial friction. But strategic convergence alone was insufficient to overcome commercial and distributional tension within the bloc. All the disputes examined, even those that were quickly resolved in diplomatic terms, required intense negotiations over underlying commercial issues. The outcomes of these negotiations had important distributional consequences. Against prevailing interpretations of power dynamics in MERCOSUR, Brazil failed to dominate the terms of the negotiated agreements in all cases. While it did prevail in the automobile conflict, Brazil had to compromise slightly in the footwear dispute in 1999 and was obliged to make even further concessions in 2001. Moreover, in the more recent conflict over sensitive sectors, Brazil finally gave in to Argentina’s long-­standing demands for the establishment of safeguards mechanisms within MERCOSUR. To understand Brazil’s willingness to compromise for the sake of restoring and/or ensuring the persistence of regional cooperation, I relied on the concept of “asymmetrical strategic interdependence,” which links the intensity of preferences with bargaining leverage and influence. While most analysts have focused on the asymmetries in economic interdependence in the Southern Cone, they tend to overlook the fact that

Conclusions 213

Brazil’s strategic commitment to MERCOSUR has been stronger and more consistent than Argentina’s. In the 1990s, the asymmetries in the ways in which the two partners interpreted the process of US-­led hemispheric integration, and the divergent ways in which this affected their preferences toward MERCOSUR, contributed to enhancing Argentina’s bargaining position in regional and bilateral negotiations. In the more recent period, and given the 2005 collapse in the FTAA negotiations, Argentina pursued a number of unilateral and multilateral options designed to decrease its strategic and commercial dependence on Brazil. The opportunistic friendship between Argentine president Néstor Kirchner and his wife and successor, Cristina Fernández de Kirchner, and Chávez presented the clearest strategic alternative to the partnership with Brazil. This, when combined with Kirchner’s reluctance to support Brazil’s more assertive role in the region and beyond, may have increased Argentina’s bargaining leverage. Domestic political factors also mediated the impact of relative power considerations on distributional outcomes. In contrast to patterns of asymmetrical strategic interdependence, domestic factors, our evidence shows, contributed to increasing Brazil’s bargaining leverage. First, Brazil’s influence in negotiations was enhanced by the perceptions of its foreign policy elites and negotiators that Brazil’s role in the region was central to the success of MERCOSUR and, more broadly, that within the regional distribution of power, their country was the strongest. In addition, despite some divergences among executive actors sharing power over regional trade policy, the Brazilian government was significantly successful in aggregating diverging views into a unified, consistent negotiating position at the regional level. By contrast, the Argentine government oscillated between inflated assessments of their country’s relevance in the international system and a deep sense of insecurity and weakness vis-­à-­vis Brazil. Finally, intrastate fragmentation further undermined Argentina’s bargaining position during regional negotiations.

On MERCOSUR’s Future

This book has argued that the survival of MERCOSUR despite its ongoing problems has reflected a convergence of power-­related interests of

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the bloc’s two main partners, Argentina and Brazil. The strategic convergence between the bloc’s two main partners has consistently worked to offset domestic-­level incentives for defection, thus ensuring the endurance of the regime. Against many pessimistic forecasts, MERCOSUR has not collapsed and continues to be viewed as one of the most durable examples of regional integration in the developing world. Indeed, during the last decade, members have taken important steps to strengthen the bloc’s institutional framework. Apart from establishing the Structural Convergence Fund and the Permanent Review Tribunal in 2004, the union created a MERCOSUR Parliament (Parlasur) in 2006 to reinforce the integration process and deepen democracy within the bloc. In addition, in 2011, the position of MERCOSUR high representative general was established to facilitate and promote consensus within the bloc and to represent it in external affairs. Yet it is worth reflecting on the actual implications of this apparent institutional deepening and, more generally, of MERCOSUR’s “survival.” While it would be inaccurate to dismiss the progress made toward integration in the Southern Cone in the past two decades, one should be careful not to equate survival with successful economic integration or cooperation. MERCOSUR still exists, but on several dimensions, the process of economic and political integration has stagnated. Not only has economic interdependence within the region expanded very slowly. In addition, and despite the new institutions referred to above, in the last few years some institutions have actually gone backwards, with the establishment of mechanisms, such as the CAM, that make it easier for members to deviate from their regional trade obligations. In 2011, there was a new commercial spat in the bloc, as Argentina and Brazil applied restrictions that disrupted bilateral trade flows.10 Beyond the specific details of this latest conflict, the pattern continues to be the same: both countries taking advantage of a weak institutional framework that gives them sufficient room to respond to domestic political and economic imperatives as they see fit. It is unlikely that the recurrent commercial conflicts will threaten MERCOSUR’s continuity, which seems to be guaranteed for political and strategic reasons. But it is also clear that while political strategic considerations may continue to ensure the survival of the bloc, they will always be insufficient to promote partners’ support for a stronger and

Conclusions 215

more autonomous regional regime or to increase its domestic economic and political sustainability. But what are the prospects for MERCOSUR’s future in the context of the important changes in the global and regional distributions of power that have occurred in recent years? Will Brazil’s impressive rise in world politics enhance or further undermine cooperation in the Southern Cone? As Brazil’s material capabilities and preponderance expand, can we expect it to finally become the responsible regional leader that its partners have called for? It seems quite unlikely. Chapter 7 argued that, as joint defensive incentives for regional cooperation somewhat weakened after 2003, Brazil’s offensive agenda became more relevant in ensuring the survival of MERCOSUR. Nonetheless, as discussed above, and despite the emphasis placed on South America by the Lula government’s foreign policy discourse, Brazil has shown little readiness to be the underwriter and manager of regional institutions in the Southern Cone. Indeed, it is still not clear whether Brazil’s rise and its increasing self-­confidence in the international system will deepen or erode its commitment to South American unity. The premise until now has been that a strong MERCOSUR would be instrumental to Brazil’s consolidation as a regional power and global player. However, recently, scholars and policy makers have begun to call this assumption into question (e.g., Malamud 2011; Smith 2010). Indeed, some have even claimed that South America is perhaps “too small” for Brazilian ambitions and that the country should therefore “leapfrog” over regional concerns to focus on its global agenda. As Brazil’s strategic interests shift and it adopts a foreign policy of a more global scope, MERCOSUR (and South America) may come to be seen as a burden that constrains the country’s ability to take full advantage of other extraregional and multilateral opportunities.11 A second and related point is that, unless it is managed and used to promote shared norms and joint gains, it is possible that Brazil’s preponderant power could destabilize regional cooperation. As the IR literature highlights, regional powers can end up destabilizing their regions if their claims for hegemony are challenged or not accepted as legitimate by other regional actors (Ayoob 1999). Chapter 7 showed that Brazil’s assertive behavior since 2003 has triggered balancing efforts by smaller

216  Power and Regionalism in Latin America

partners. While Uruguay has tried to exploit closer links with the United States, Argentina grew closer to Venezuela. The increasing salience of Venezuelan president Hugo Chávez in South America has also led to growing rivalry between Brazil and Venezuela. Indeed, Brazil has failed to secure South American support for several of its global foreign policy goals, such as gaining a permanent seat in the United Nations Security Council and placing Brazilian diplomats in top positions in the WTO and the Inter-­American Development Bank (Malamud 2011; Schirm 2010). Thus, even if Brazil’s foreign policy elite continued to see the bloc as instrumental to its broader global strategy, the materialization of its role as a pivotal regional power that underwrites cooperation will require overcoming important followership obstacles. Nevertheless, even if other prominent states in the region were to accept the legitimacy of Brazil’s preponderance—­perhaps in exchange for stronger institutions and other mechanisms allowing for a more balanced distribution of gains—­another obstacle to the success and stability of cooperation in the region would remain. Brazil’s project of regional leadership is ultimately based on instrumental considerations. It is very much focused on promoting international influence while preserving national autonomy within its region. As Acharya (2007, 633) points out when comparing the origins of European and Asian regionalism, the former “consummated the declining legitimacy of nationalism—­blamed for two world wars. In Asia, however, regionalism was founded on national crosscurrents.” The emphasis that Brazil, and to a lesser extent Argentina, places on sovereignty and autonomy may well set limits to deeper and more comprehensive economic and political integration in the Southern Cone. Finally, when considering the prospects for regional cooperation in South America, it is essential to examine the ways in which recent shifts in the regional and global distribution of power are interpreted by national policy makers, particularly in Argentina and Brazil. In Brazil, for example, a victory by José Serra in the October 2010 elections would have done little to enhance the domestic sustainability of regional cooperation, given his long-­standing mistrust of MERCOSUR and his closeness to industrial interests. Even with the victory of Dilma Rousseff (Partido dos Trabalhadores), it is important to consider how the foreign

Conclusions 217

policy elites will respond to the constraints and opportunities that the emerging global order offers Brazil. How foreign policy makers resolve the tension between Brazil’s regional responsibilities and its increasing salience in global governance will be crucial to MERCOSUR’s future. At present, Brazilian foreign policy elites seem slightly uneasy and undecided about the role their country is to occupy in the context of the ongoing power transition in the international system. This indecision is inevitably affecting the stability of regional order in the Southern Cone.

Other Implications

This study of Argentina and Brazil in MERCOSUR has implications for a series of debates in International Relations and International and Comparative Political Economy. First, the analysis of Brazil’s ambivalent and self-­serving position toward MERCOSUR has relevance for current debates on the role of emerging powers in global governance. Second, the book’s findings regarding the factors driving and impeding cooperation in the Southern Cone have empirical and theoretical implications for the literature on regionalism. Emerging Powers and Global Order

Brazil’s ambivalence toward MERCOSUR and, in particular, its unwillingness to act as a focal point or leader in the construction and maintenance of regional order also has implications for our understanding of emerging powers and their role in global governance. The impressive rise of Brazil and other middle-­level regional powers, such as Russia, China, India, and to a lesser extent South Africa, Indonesia, and Turkey, has arguably transformed the geopolitical and economic landscape (Stewart 2010). At the same time, the emergence of these new powers raises important questions about the reorganization and management of the new international order. It is today widely recognized that, given the important changes in the distribution of power that have taken place in the past decade, these emerging and regional powers are central players in the global order. As Hurrell (2010, 66) has put it, “It is impossible to

218  Power and Regionalism in Latin America

conceive of managing climate change, nuclear proliferation or economic globalization without institutions that include China, India, and Brazil.” Yet many have questioned the extent to which these rising new powers can be expected to become responsible stakeholders and effective leaders in the global order, given their relative failure as regional leaders. Like Brazil, India and South Africa have maintained ambivalent positions toward their regions, promoting political cooperation but refusing to behave as “benign hegemons” (Ayoob 1999; Burgess 2004). Indonesia has also been largely unable and unwilling to convert its significant material preponderance over ASEAN partners into effective leadership. The question that arises, then, is can these countries become real global powers when they are unable (or unwilling) to play a more responsible leadership role in their own regions? How can they justify their claim to global status if they are incapable of exercising regional leadership? How we answer this question depends on how we define “global power” and whether we consider the material or nonmaterial aspects of status and power. One way to think about this issue is to ask, from the perspective of these countries, to what extent can they expect to achieve their global goals of playing a more influential role in the design and management of international order, despite their failures at the regional level? Some analysts and policy makers believe that regional leadership is not a necessary condition for achieving global influence and recognition. Malamud (2011), for example, highlights the growing divergence between the regional and global performance of Brazil’s foreign policy. He argues that despite Brazil’s failure to gain acceptance as a regional leader, it “has been increasingly recognized as an emergent global power by the established world powers” (Malamud 2011, 2). Similarly, policy makers from emerging powers tend to challenge the idea that their countries cannot play a leadership role in the international system because they face unresolved problems in their neighborhoods (Stuenkel 2010). They emphasize the increasingly relevant roles that these countries have come to play in the G-­20, the WTO Doha Round negotiations, and the recent climate change talks in Copenhagen. Yet, in contrast, others see effective regional leadership as a precondition for the successful achievement of rising powers’ global strategic objectives. Schirm (2010), for example, argues that “followership by

Conclusions 219

neighboring countries is a necessary condition to give these countries the power base for both regional and global power projection.” According to him, lack of support by neighboring countries has precluded emerging powers from pursuing many of their broader international goals, therefore leading to an important gap between their aspiration for power and their actual influence over outcomes. His empirical analysis focuses on two instances in which Brazil’s leadership projects failed, in large part because of absence of support from Argentina and other MERCOSUR countries: Brazil’s attempt to secure a permanent seat in the Security Council, and its bid for directorship of the WTO. In South Asia, Pakistan has also actively resisted India’s aspirations to be a permanent member of the Security Council. Indeed, Stuenkel (2010) claims that Argentina and Pakistan have been “the most formidable” obstacles to Brazil’s and India’s power projects. A related issue concerns the legitimacy of rising powers’ claims to global power status. As Hurrell (2010) notes, all major powers face the challenge of converting their material capabilities and coercive capacity into legitimate authority. This of course implies support from smaller states, but also from established international powers. Apart from failing to secure a regional followership, emerging powers have also confronted legitimacy issues at the global level. Some emerging powers, regardless of their regional performance, are not yet ready to be included “at the helm” of international institutions because of their weak commitment to some of the central international norms, including respect for democracy and human rights, nuclear nonproliferation, and environmental protection (Casteñeda 2010). Because of their competing global visions, it has been argued, rising powers tend to behave as “irresponsible stakeholders” (Stewart 2010). From this perspective, allowing these countries to play a greater role in global governance—­for example by expanding the Security Council—­would undermine the international order. These perceptions are not only informed by the contradictory position sometimes adopted by these countries as both leaders of the developing world and members of the West. In addition, the ways the new powers relate to their regions affect wider views on their leadership potential. Their poor performance at the regional level reinforces perceptions that rising powers are unwilling to accept a certain degree of

220  Power and Regionalism in Latin America

free-­riding by other states in order to maintain cooperation, as benevo­ lent leaders would (Schirm 2010). Instead, rising powers like Brazil, India, and China are increasingly seen as “free-­riders” that seek to “enjoy the privileges of power without assuming its obligations” (Stewart 2010, 5). By shedding light on a similar self-­serving stance at the regional level, the present study of Brazil in MERCOSUR seems to provide further evidence to back these concerns about the capacity of rising powers to contribute to the costs of collective action at the global level. Power, States, and Regionalism

This research also has a number of implications for scholarly debates on regionalism. The IR literature on regional economic cooperation tends to focus primarily on power asymmetries within a region, emphasizing the role of regional powers in promoting or impeding cooperation. This book has confirmed the usefulness of focusing on preponderant powers at the regional level, further highlighting how their ambivalent and self-­ serving interests could contribute to the endurance of weak, even anemic regional regimes. At the same time, however, we have seen the importance of also considering the role of extraregional powers when studying regionalism in the developing world. Indeed, many regional initiatives among developing countries have been crucially influenced by external power considerations. In some cases, powerful actors from beyond the region have contributed to the emergence of regional cooperation indirectly, by fostering defensive reactions. As this book has argued, US preponderance in the Western hemisphere has played a key role in the emergence and endurance of cooperation in South America. Defensive considerations also informed the decision by South East Asian countries to launch several post–Cold War regional initiatives, such as the ASEAN Free Trade Area (AFTA) in 1992 and the ASEAN Regional Forum (ARF) in 1994 (Foot 1995; Narine 2003; Khong and Nesadurai 2007). In Africa, in turn, the Southern African Development Coordinating Conference (SADCC, now the South African Development Community or SADC) was created in the 1970s with the express purpose of countering the influence of the apartheid government of South Africa in the region (Herbst 2007; Qobo

Conclusions 221

2008).12 In other cases, external powers have deliberately constructed and/or promoted regional and bilateral initiatives for strategic reasons, as the United States did in Western Europe and East Asia during the Cold War. Since the end of the Cold War, the United States has maintained security ties with ASEAN countries, thus acting as an “external output” for the maintenance of the regional balance of power (Acharya 1992, 17). Similarly, key members of the Gulf Cooperation Council (GCC), such as Saudi Arabia and Oman, maintain close security ties with the United States. But in addition, we have learned about the ways in which overlapping power dynamics at the regional and extraregional levels influence the nature of cooperation. In the Southern Cone, as explained here, the asymmetric distributions of power at the hemispheric and regional levels create divergent and sometimes conflicting constraints and opportunities. In particular, the divergent ways in which Brazil and its smaller neighbors have interpreted and responded to US preponderance in the Western hemisphere, and especially to US-­led efforts at hemispheric integration, have at times undermined regional cohesion. Second, these strategic divergences, and in particular, Brazil’s more stable strategic reliance on MERCOSUR, worked to improve the leverage of weaker partners in regional negotiations, thus resulting in a more balanced distribution of the costs and benefits of cooperation. In this sense, by bringing attention to the complex ways in which the hegemonic position of the United States in the Western hemisphere and Brazil’s relative preponderance in South America interact to shape patterns of conflict and cooperation in MERCOSUR, the book contributes to recent discussions on the relationship between “regions and powerful actors from outside and within” (Acharya 2007). Anecdotal evidence suggests that the overlap between regional and extraregional powers has influenced cooperation dynamics in other cases, thus deserving further scholarly attention. Like Brazil in MERCOSUR, India has played an ambiguous role in the South Asian Asso­ciation for Regional Cooperation (SAARC). According to Ayoob (1999), since the 1990s, India has used its large market and other economic resources to offer concessions to smaller partners, with the aim of mitigating their suspicions and increasing its regional legitimacy. However, like Brazil,

222  Power and Regionalism in Latin America

India has been largely unable to convert its overwhelming material preponderance into effective regional leadership. India’s legitimacy and efficacy as a regional leader have been significantly constrained and challenged by its rivalry with Pakistan. Despite the pervasive power asymmetries between the two countries, Pakistan has managed to “borrow” power from abroad, especially from the United States and China, in its attempt to balance Indian preponderance. Examining overlapping dynamics of power is also important in the case of East Asian regionalism. While extensive research has examined the central role that major external and internal powers played in the launch of the Association of South East Asian Nations (ASEAN) Free Trade Area of the ASEAN Regional Forum in the 1990s,13 greater attention must be paid to the consequences of China’s rise for the overlapping balances of power in the region. Finally, the state-­centric neoclassical realist explanation of MERCOSUR offered in this book qualifies the influential body of literature on the “New Regionalism.” Emerging in the 1990s to explain the revival of regional initiatives in the post–Cold War period, this work emphasized the qualitative differences between the more recent wave of regional integration agreements and those emerging in the 1950s and 1960s. Scholars argued that, in contrast to the introverted, unidimensional, and state-­ centric regionalism of the post–Second World War era, the new regional schemes were part of a broader process of global economic transformation, in which regionalization and globalization were “intimately intertwined” (Söderbaum and Hettne 2005, 4). They placed special emphasis on the multilevel and heterogeneous nature of the “New Regionalism,” which, in their view, was no longer confined to formal interstate organizations. Rather, these new “regionalisms” were driven by the interaction of both state and nonstate actors, who often formed national and transnational coalitions and worked together to create formal and/or informal associations (Bøås, Marchand, and Shaw 1999; Hettne and Inotai 1998). Finally, some authors claimed that while regional cooperation in the 1950s and 1960s was influenced by Cold War politics and was in many cases driven by outside superpowers, the new regionalism is characterized by having its own internal logic and developing “from within the regions” (Söderbaum and Hettne 2005).

Conclusions 223

These perspectives provide illuminating insights, particularly by pointing to the connections between globalization and regionalism, which mainstream IR perspectives tend to downplay. While my analysis of MERCOSUR has emphasized the role of state actors and power dynamics, it does recognize the importance of external economic pressures, particularly in conditioning the preferences of domestic economic and political actors regarding regional cooperation. Indeed, as discussed in this book, regional cooperation in the Southern Cone was not only a strategic project of the foreign policy elites in Argentina and Brazil. It also fit into the broader strategy of domestic and foreign economic policy reform launched by the two countries in the early 1990s. Yet the story of MERCOSUR told here suggests that we should not overstate how “new” or different the more recent wave of regionalism really is. The bloc remains a states-­led, increasingly political initiative, and its evolution and sustainability have been fundamentally linked to strategic factors and power configurations at the global and hemispheric levels. Indeed, our evidence confirms claims that this literature has “underestimated the resilience of the state” and the impact of formal institutions on the process of regional cooperation (Acharya and Johnston 2007, 11). As the case studies show, whereas in the second half of the 1990s nonstate actors, and particularly business groups, became more actively involved, the preferences and decisions of state actors continue to drive integration in the Southern Cone. A cursory look at other regional integration schemes in the developing world reveals a similar centrality of state actors. In Africa, national leaders have been the key actors pushing for regional or continental integration agreements “in order to enhance their domestic standing and to cement their state’s sovereignty” (Herbst 2007, 129; Fiorentino, Verdeja, and Toqueboeuf 2007). Regional and domestic political considerations underlay the establishment of the Common Market for Eastern and Southern Africa (COMESA) as well as the efforts to revitalize the Southern African Development Community (SADC) and the East African Community (EAC) in the early and mid-­1990s. Similarly, the creation and maintenance of several regional organizations in the Middle East, including the Gulf Cooperation Council (GCC) and the Arab Maghreb Union (AMU), have also been linked to the domestic and

224  Power and Regionalism in Latin America

regional security concerns of Middle Eastern governments (Tripp 1995; Barnett and Solingen 2007). Therefore, despite the increasing centrality of autonomous, market-­driven processes of economic globalization and regionalization, states remain safely in control of their regional cooperation alternatives.

Appendix A

Interviews

Argentina Avogadro, Marcelo (under-­secretary of international commercial relations, 1991–99), Buenos Aires, November 6, 2002. Campbell, Jorge (secretary of international economic relations, 1991–99), Buenos Aires, August 29, 2000, and May 8, 2003. Cavallo, Domingo (finance minister, 1991–97), New York, October 31, 2002. Cuervo, Miguel Angel (under-­secretary of industry, 1995–99), Buenos Aires, August 29, 2000. Di Tella, Guido (foreign minister, 1991–99), Oxford, several meetings during 2000. Estevez, Eduardo (executive director, Industrial Union of Buenos Aires Province), Buenos Aires, November 15, 2002. Fernández, Roque (finance minister, 1997–99), Buenos Aires, October 8, 2002. Garicoitis, Luis (member of CIFARA), Buenos Aires, August 22, 2000. Giorgi, Debora (secretary of industry, 1999), Buenos Aires, October 9, 2002. Ianelli, Norberto (under-­secretary of inter-­American economic integration 1999–2001), Buenos Aires, November 12, 2002. 225

226  Appendix A Katz, Luis (economist at ADEFA), Buenos Aires, August 28, 2000. Litzman, Carlos (manager of CIC), Buenos Aires, October 6, 2002. Losoviz, Horacio (president of ADEFA,1993–99), Buenos Aires, August 31, 2000. Machinea, José Luis (finance minister, 1999–2001), Washington, DC, October 31, 2002. Melhem, Gustavo (founding member of CAPCICA), Buenos Aires, October 19, 2002. Peña, Felix (under-­secretary of foreign trade, 1998–99), Buenos Aires, November 5, 2002. Pons, Roberto (head of the MERCOSUR Department, UIA), Buenos Aires, November 15, 2002. Rodríguez, Carlos (vice minister of finance, 1997–99), Buenos Aires, September 17, 2002. Salanova, Juan (Marketing Department, Alpargatas SA), Buenos Aires, November 10, 2002. Subiza, Héctor (former ambassador to Brazil and under-­secretary of foreign affairs), Buenos Aires, April 25, 2003. Zappia, Juan Raúl (international business manager, Gatic), Buenos Aires, November 11, 2002.

Brazil Alaby, Michel (president, ADEBIM), São Paulo, November 21, 2002. Auler Pereira, Luiz Carlos (member of SINDIPEÇAS), São Paulo, September 27, 2000. Baptista, Rosaria (director of the international negotiations division, SECEX), Brasília, November 26, 2002. Bicalho Cozendey, Carlos (director of the MERCOSUR Division, Foreign Ministry), Brasília, November 27, 2002. Caramuru de Paiva, Marcos (secretary of international affairs, Ministry of Finance, 1996–2002), Brasília, November 29, 2002.

Appendix A  227 Coelho Fernandes, José Augusto (executive director, CNI), Rio de Janeiro, November 18, 2002. de Paula, Nestor (president of ABICALÇADOS, 1999–2001), Novo Hamburgo, November 25, 2002. Fraga, Arminio (president of Central Bank, 1999–2002), Brasília, November 28, 2002. Franco, Gustavo (Central Bank governor, 1993–99), Rio de Janeiro, October 2, 2000. Gomes de Almeida, Júlio Sérgio (executive director, IEDI), São Paulo, November 21, 2002. Gouvêa Vieira, Eugênio (president of FIRJAN), Rio de Janeiro, November 18, 2002. Graça Lima, Alfredo (economic and trade advisor to the foreign minister, 1995–96; director-­general of the Economic Department at the Foreign Ministry, 1996–98; under-­secretary-­general for integration and trade, 1998–2002), Brasília, September 26, 2000. Guimarães, Ilse Maria (member of ASSINTECAL), Novo Hamburgo, November 25, 2002. Klein, Heitor (director, Programa Calçado Brasil, ABICALÇADOS), Novo Hamburgo, November 25, 2002. Lampreia, Luiz Felipe (foreign minister, 1995–2001), Rio de Janeiro, December 2, 2002. Lohbauer, Christian (head of international negotiations, FIESP), São Paulo, November 20, 2002. Maduro, Lucia (director of economic integration area, CNI), Rio de Janeiro, September 29, 2000. Marconini, Mario (secretary of foreign trade, Ministry of Development, 1999), Rio de Janeiro, November 19, 2002. Monteira Considera, Claudio (secretary of economic monitoring, Ministry of Finance, 2001–2), Rio de Janeiro, November 18, 2002. Mosca, Domingos (coordinator, international area, ABIT), São Paulo, November 21, 2002. Mugnaini, Mario (vice president of ABIMAQ), São Paulo, November 20, 2002.

228  Appendix A Oliveira Silva, Roberio (executive secretary of CAMEX, June–December 2002), Brasília, November 26, 2002. Parente, Pedro (president’s chief of staff, August 1999–2002), Brasília, November 29, 2002. Pinheiro Guimarães, Samuel (director of institute of research in international relations, 1995–2001), Brasília, September 21, 2000. Serra, José (minister of planning, 1995–97; minister of health, 1997–2001), Brasília, September 14, 2000. Siqueira Bittencourt, Luiz (executive secretary, CICB), Brasília, November 29, 2002. Teruel, Pablo (economist, ANFAVEA), São Paulo, September 28, 2000. Valentino, Silvano (president of ANFAVEA, 1995–98), telephone interview, September 15, 2000. Villena, Carlos (member of ABEIVA), São Paulo, September 28, 2000.

Appendix B

Chronology of Patterns of Cooperation and Conflict in MERCOSUR, 1991–2010

July 1986

Nov. 1988 July 1990 Mar. 1991 Oct. 1992 Aug. 1993 Sept.1994 Dec. 1994

Mar. 1995 June 1995 Jan. 1996

Presidents Alfonsín (Argentina) and Sarney (Brazil) sign the Argentine-­Brazilian Integration Act, establishing the Program of Integration and Economic Cooperation (PICE). Alfonsín and Sarney sign the Treaty of Integration, Cooperation, and Development. Presidents Menem (Argentina) and Collor de Mello (Brazil) sign the Buenos Aires Act. Argentina, Brazil, Paraguay, and Uruguay sign the Treaty of Asunción, creating MERCOSUR. Argentina increases statistical taxes on imports. Argentina reduces CET on capital goods. Brazil reduces tariff levels on a number of products, including automobiles, toys, and capital goods, to 20%. MERCOSUR partners sign the Protocol of Ouro Preto, launching the customs union. A preliminary automobile agreement (Decision 29/94) is signed by Argentina and Brazil. Brazil increases tariff levels on automobiles to 70%. Brazil introduces a new automobile regime. Argentina and Brazil sign the Werneck-­Magariños Agreement over trade in automobile products. 229

230  Appendix B Mar. 1997 Sept. 1997 Jan. 1999 Feb. 1999

July 13, 1999 July 26, 1999

July 29, 1999 Aug. 1999 Aug. 1999

Sept. 1999

Mar. 2000 Mar. 2000 June 2000 Aug. 2000

Dec. 2000 Mar. 2001

Brazil introduces restrictions on import financing to contain balance-­of-­payments pressures. Argentina increases the tariffs on intraregional imports of sugar. Brazil floats its currency, leading to a significant devaluation of the real. Presidents Menem (Argentina) and Cardoso (Brazil) agree to create a special commission to monitor bilateral trade flows and to propose solutions for imbalances. Argentina introduces safeguards measures on textile imports from China, Pakistan, and Brazil. Argentina introduces a resolution (Res. 911) permitting the use of the LAIA safeguards regime within MERCOSUR. Brazil reacts to Argentina’s violations by suspending all regional negotiations and calling for an emergency GMC meeting. Argentina withdraws Res. 911 and bilateral negotiations are restored. Brazil files a WTO complaint against Argentina over textile restrictions. Argentina introduces restrictions (Res. 508/99 and 977/99) on imports of Brazilian footwear products. In response, Brazil announces the decision to retaliate by reimposing licensing requirements on the imports of more than four hundred Argentine products. Argentine and Brazilian footwear producers (CIC and ABICALÇADOS) begin negotiations for the establishment of a VER. They reach an agreement by the end of the month. WTO rules in favor of Brazil, requesting Argentina to withdraw safeguards measures. Argentina and Brazil reach a provisional agreement over the common automobile policy. Argentina and Brazil sign an agreement “relaunching” MERCOSUR. Argentina changes local content requirements for vehicles produced in Argentina, leading Brazil to suspend provisional automobile agreements signed in June. Argentina and Brazil reach a new automobile agreement. Argentine president de la Rúa appoints Domingo Cavallo as finance minister. Cavallo introduces unilateral changes in

Appendix B  231 Argentina’s CET, increasing the external tariff on consumer goods to 35% and reducing the external tariff of capital goods to 0%. Apr. 2001 Argentina agrees to remove IT and telecommunication products from the list of capital goods that face an elimination of external tariffs. Brazil agrees to grant its neighbor a temporary “waiver,” which allows Buenos Aires to maintain the measures until the end of 2002. July 2001 Argentina introduces Resolution 258/01, which reduces tariffs on imports of automobiles, IT products, and telecommunications products from non-­MERCOSUR countries. Brazil initially threatens to suspend commercial negotiations with Argentina but eventually adopts a conciliatory stance. Sept. 2001 Cavallo’s public statements criticizing the devaluation of the Brazilian currency trigger a new diplomatic crisis between Argentina and Brazil. Oct. 2001 In an emergency meeting, Argentina and Brazil agree to negotiate the establishment of a compensation mechanism to manage the difficulties derived from the exchange rate asymmetries between the two countries. Dec. 2001 Argentine president de la Rúa resigns and is replaced by Adolfo Rodríguez Saá. President Rodríguez Saá announces Argentina will suspend payments on its external debt. Jan. 2002 Eduardo Duhalde replaces Rodríguez Saá as Argentine president. Argentina officially abandons the convertibility regime and adopts a floating exchange rate regime. The peso suffers a 30% depreciation. Feb. 19, 2002 The Olivos Protocol, changing MERCOSUR’s dispute settlement procedures and establishing a Permanent Review Tribunal, is signed. Mar. 2003 Argentina and Brazil reinitiate negotiations over the common automobile regime. June 2003 Presidents Néstor Kirchner (Argentina) and Lula da Silva (Brazil) agree at a MERCOSUR Summit to work together to revitalize (or re-­relaunch) the bloc. Oct. 2003 Kirchner and Lula sign the Buenos Aires Consensus, emphasizing their commitment to MERCOSUR and their intention of incorporating social issues into the regional agenda.

232  Appendix B Oct. 2003 Jan. 2004

July 2004 Sept. 2004

Dec. 2004 Dec. 2004 Dec. 2005 Feb. 2006 Apr. 2007 May 2008 2010

Argentina and Brazil agree to create a Bilateral Trade Monitoring Commission. Argentina announces a system of nonautomatic import licenses on textile products. Negotiations between private sector groups are launched. Argentina introduces nonautomatic licenses on household appliances. Argentina presents Brazil with a formal proposal for compensation mechanisms, including a temporary safeguards mechanism and the so-­called competitive adaptation mechanism. The MERCOSUR Structural Convergence Fund (FOCEM) is created by the CMC. At the Third South American Summit, the South American Community of Nations (SACN) is created. The MERCOSUR Parliament is created. Argentina and Brazil sign an agreement establishing the Competitive Adaptation Mechanism (CAM). SACN name is changed to UNASUR. UNASUR’s Constitutive Treaty is signed. The position of high representative of MERCOSUR is created.

Notes

Chapter 1. Introduction 1.  See, for example, Hanson and Klonsky (2007) and Wall Street Journal, January 1, 2007. 2.  In June 2012, MERCOSUR members suspended Paraguay for a year, claiming a violation of the bloc’s democratic clause after President Fernando Lugo was abruptly impeached and replaced by Vice President Federico Franco. Paraguay was the only member that had not fully accepted Venezuela’s application to enter MERCOSUR because of opposition by the Senate. In a legally questionable move, leaders then proceeded to formally accept Venezuela as a full member. See “Chavez: Into Mercosur by a Side Door,” Financial Times, July 3, 2012. 3. Following Venezuela’s admission, Brazilian and Argentine leaders emphasized the “historic” implications of this move, which would make MERCOSUR the “fifth largest economy in the world” and “a new pole of power.” Brazilian President Dilma Rousseff, quoted in “Mercosur ampliado: Fracaso o la quinta potencia del mundo?” Perfil, August 8, 2012; and Argentine President Cristina Kirchner, “With Venezuela Mercosur Has Become a New Pole of World Power,” MercoPress.com, August 6, 2012. http://en.mercopress .com/2012/07/31/with-­venezuela-­mercosur-­has-­become-­a-­new-­pole-­of-­world -­power. Recently, there have been rumors that indicate that Ecuador may be the sixth partner joining the bloc. See “Quito puja por ingresar al Mercosur con tratamiento diferenciado,” Ambito Financiero, August 19, 2012.

233

234  Notes to Pages 3–16 4.  For an excellent overview, see Carranza (2006). 5. See, for example, “Mercosur: Dead in the Water,” Financial Times, May 15, 2002; and Llach (2012). Speculation about the bloc’s demise deepened recently with the suspension of Paraguay and admission of Venezuela. According to some, Venezuela’s entry confirms that “Mercosur increasingly adopts a clearer politico-­ strategic sense and functionality, rather than an economic-­ commercial one.” Roberto Bouzas, quoted in “Mercosur ampliado: Fracaso o la quinta potencia del mundo?” Perfil, August 8, 2012. See also “Mercosur: RIP?” Economist, July 14, 2012; and “Uruguay industries lobby questions the growing political predominance in Mercosur,” MercoPress.com, August 2, 2012. http://en.mercopress.com/2012/08/02/uruguay-­industries-­lobby-­questions -­the-­growing-­political-­predominance-­in-­mercosur. 6.  For examples of “Merco-­pessimism,” see Cammack (2002) and Richards (1997). More optimistic accounts can be found in Cason (2000) and Phillips (2003). 7.  For a discussion on the controversies surrounding the definition of these two terms (“regions” and “regionalism”), see Mansfield and Milner (1999) and Hurrell (1995b). 8.  Other scholars emphasizing the role of the United States in the construction of regional orders throughout the world include Ikenberry (2000) and Buzan and Wæver (2003). 9.  Exceptions include Duina (2006) and Acharya and Johnston (2007). 10.  Along similar lines, Lobell (2009) argues that the ability of foreign policy executives to pursue balancing strategies depends on the degree of consensus and support they can obtain from key societal supporters.

Chapter 2. Patterns of Conflict and Cooperation in the Southern Cone 1.  For a comprehensive account of both the features of and the factors accounting for this rapprochement in the late 1970s, see Hurrell (1998) and Campbell, Rozemberg, and Svarzman (1999). 2.  For a more detailed account of the origins and early stages of MERCOSUR, see Hurrell (1995a; 1998) and Manzetti (1994). 3.  See Grieco (1997). 4.  I use a seven-­point ordinal scale to measure and compare the intensity and degree of tension generated by each of these measures. This “tension coefficient” takes into account whether a formal complaint was presented and the media coverage that the incident received, as well as the level of confrontation it triggered among partners, including the extent to which the dispute seemed to escalate to the point that the bloc’s longer-­term continuity came to be doubted.

Notes to Pages 16–33  235 5.  Crisis Index for year j = ∑ [vi ti] , where vi = each violation in year j and ti = the tension coefficient for the dispute triggered by that particular unilateral measure. 6. This five-­category nominal scale is similar to the one used by Odell (1985). 7.  I use CB for compromises favoring Brazil, and CA for compromises favoring Argentina. A perfectly balanced agreement would hypothetically be represented as CC. 8.  In applying mainstream International Relations (IR) and International and Comparative Political Economy theories to the study of regional dynamics in South America, I depart from the early literature on regional integration, which was dramatically influenced by the European experience. In line with the literature discussed in chapter 1 (e.g., Moravcsik 1998; Milner 1997b; Solingen 1998; etc.), I assume that regional integration decisions and outcomes are specific cases of international cooperation. As a result, these regional cooperation dynamics are best explained through the lens of mainstream IR and International Political Economy approaches. 9.  The discussion below draws on Gómez-­Mera (2005; 2008; and 2009). 10.  Only in 2002, with the signing of the Protocol of Olivos, did MERCOSUR members agree to the creation of a permanent review tribunal, which was first used in 2004. 11.  See also Ikenberry (2000). 12.  Emphasis added. 13.  See also Hurrell (1995a) and Falk and Mittleman (2001). 14.  See, for example, Costa Vaz (2002) and Hurrell (1995a; 1998). 15.  See also Kupchan (1998) and Pedersen (2002). 16.  The “concentration ratio” (Smith 2000; Haftel and Thompson 2006) takes into consideration the relative weight of all members. A higher index (between 0 and 1) would indicate a greater asymmetry of economic capabilities within the bloc. 17.  For example, according to former foreign minister Luiz Felipe Lampreia: “We do not expect to influence the destiny of the world. But we need to . . . define Brazil’s international presence with a realistic awareness of our regional and global influence.” See Lampreia (1998). 18.  The literature tends to assume that the “strength” of domestic interest groups is determined by their ability to control or influence key variables and resources in the economy, such as employment levels and investment. 19.  An extensive literature looks at coalition building by state elites in Latin America. See, for example, Etchemendy (2001), Corrales (1998), and Kingstone (1999). 20.  For a good overview of this literature, see Milner (2002). 21. “Becalmed,” Economist, December 11, 1999.

236  Notes to Pages 42–63 Chapter 3. Systemic Incentives, Domestic Constraints, and Regional Cooperation 1. A similar approach can be found in Lake (1988). See also Krasner (1978) and Christensen (1996). 2.  See Rose (1998). 3.  See Christensen (1996, 15). 4.  As the cases will show, however, bureaucratic actors may also influence and inform presidents’ preferences and positions regarding cooperation. Hence it would be insufficient to focus solely on the presidents’ preferences without examining the process through which bureaucratic actors’ preferences and choices are shaped. 5.  Moravcsik (1998, 24) defines national preferences as “an ordered and weighted set of values placed on future substantive outcomes [or] ‘states of the world,’ that might result from international political interaction.” They can be thought of as the “tastes” of states and actors, which inform the strategies or policies followed by states to achieve these goals. 6.  It should be noted that Moravcsik (1998) disaggregates the process of cooperation into three, not two, sequential stages: national preference formation, interstate bargaining, and institutional choice. According to Moravcsik (1998), this multistage framework has several advantages. First, by disaggregating regional integration outcomes, it permits us to investigate two distinct but interconnected aspects of this phenomenon: policy choices and distributional outcomes. Second, by treating each of these elements as a separate set of outcomes or “dependent variables,” it is possible to rely on different explanatory factors to explain each of them. 7.  Historical narratives give “information about actors, institutions, events, and relationships in a single coherent story . . . to provide empirical support for a theoretical argument” (Büthe 2002, 482).

Chapter 4. The Automobile Sector Crisis 1.  Exchange in the automobile sector became regulated formally by the ALADI Economic Complementarity Agreement N. 14 (ACE-­14). 2.  See Decision 29/94, article 3 (b). Other specific features of the agreement included the following: (1) Argentina would extend national treatment to auto parts from Brazil, thus considering them in the calculation of the national content requirement established by the Argentine automobile regime; (2) Argentine assemblers had to compensate each $1.00 in auto parts imports with $1.20 exports to Brazil, which stimulated Argentine production of auto parts; (3) in exchange, Brazilian auto parts for the Argentine repository market could be imported without export compensation requirements; and (4) intraregional tariffs on finished vehicles were eliminated. See Vigevani and Cândia Veiga (1997).

Notes to Pages 63–67  237 3.  “Crisis entre la Argentina y el Brasil por los autos,” Clarín, June 15, 1995. 4. “Preocupación y enojo de Menem,” La Nación, June 15, 1995; and author interviews with Luiz Felipe Lampreia, December 2002, Rio de Janeiro, Brazil; and with Guido Di Tella, July 2000, Oxford, United Kingdom. 5.  See “Crisis entre la Argentina y el Brasil por los autos,” Clarín, June 15, 1995. 6.  In the meantime, exchange in the sector will be regulated by the 35th Additional Protocol to Economic Complementarity Agreement 14, signed in 2006. See IDB (2007). 7. See, for example, “Más que socios, copilotos,” Página/12, May 31, 2008. 8.  It has been regarded not only as an “engine of growth” and lead sector in the Brazilian miracle (Shapiro, 1994), but also as the “epitome of successful import substitution industrialization” (Mericle 1984, 1). 9.  This strategy sought not only to attract direct investment from the main foreign automobile corporations, but also to protect the nascent local parts sector that had been developing in Brazil since the Second World War (Mericle 1984). 10.  See Addis (1999) for a more detailed account of the history of the auto parts sector in Brazil. 11.  For a detailed discussion of the agreement see Bedê (1997, 365–71). 12. Automobile production increased from 914,598 units in 1990 to 1,074,478 units in 1992 and to 1,391,366 in 1993 (Galperín 1995). 13. Author telephone interview with Silvano Valentino, former head of ANFAVEA, September 2000, Brasília. 14.  This exchange rate–based stabilization strategy differed markedly from previous heterodox attempts at reducing inflation in Brazil, most of which had relied on price controls and wage freezes. In addition, the Real Plan relied on trade liberalization and import competition as mechanisms of domestic price containment. For a more detailed overview of the Real Plan, see Amann and Baer (2003) and Franco (1995). 15. Author interview with Gustavo Franco, September 2000, Rio de Janeiro. 16.  “O ágio perverso,” Jornal de Brasília, September 3, 1994; “Empresas pedem menos IPI para luxuosos,” O Estado de São Paulo, September 3, 1994. 17.  See, for example, “Escolha de Ciro Gomes pode afetar negociações da indústria automobilística,” Gazeta Mercantil, September 6, 1994. 18.  In response to the tariff reduction, representatives from General Motors threatened to halt plans to build a new factory to produce the Corsa model in Brazil. See “Montadoras têm dificultade para competir,” Folha de São Paulo, October 28, 1994. See also “Montadoras criticam falta de una política industrial,” Correio Braziliense, October 24, 1994.

238  Notes to Pages 67–75 19.  “Governo amplia lei do popular e montadoras anunciam novos modelos,” Jornal de Brasília, October 15, 1994. 20.  Author interview with representatives from ANFAVEA and SINDIPE­ ÇAS, September 2000, São Paulo. 21.  See, for example, “Indústria de autopeças diz que saiu perdendo,” O Globo, December 17, 1994, and “Setor de autopeças critica o acerto liberal,” O Estado de São Paulo, December 17, 1994. Indeed, the Brazilian auto parts sector had been deeply affected by the liberal reforms introduced in the early 1990s. See Bedê (1996) and Kingstone (1999). 22.  See Meira Zauli (2000) for more details on the regime. 23. CAMEX was at the time composed of the ministers of agriculture, finance, planning, and trade and industry, as well as the Central Bank president. 24.  Author interview with Silvano Valentino. 25. Confidential author interviews with officials from the Ministry of Finance, November 2002, Brasília. 26.  See “Fratura exposta,” Folha de São Paulo, June 10, 1995. 27. Author interview with José Serra, August 2000, Brasília. See also “Acusações de Serra são ‘canalhas e irresponsáveis,’ ” O Estado de São Paulo, June 22, 1995, in which Ciro Gomes defends the Ouro Preto agreements in response to Serra’s criticisms. 28. Author interview with Alfredo Graça Lima, August 2000, Brasília. Despite their active campaign of protest following the Ouro Preto agreements, members of the auto parts sector were excluded from this process (Author interview with representative from SINDIPEÇAS, August 2000, São Paulo). 29.  “Restrição a importação acirra debate,” Gazeta Mercantil, June 9, 1995. 30.  “Déficit comercial põe em xeque política de câmbio,” Gazeta Mercantil, June 6, 1995. 31.  Author interview with Gustavo Franco. 32.  The Ministry of Foreign Relations is commonly referred to as “Itamaraty” in Brazilian media and political circles, after the building where it is hosted, the Palacio Itamaraty. 33.  Author interview with Luiz Felipe Lampreia. 34.  Emphasis added. 35.  For example, according to former Foreign Minister Lampreia: “We do not expect to influence the destiny of the world. But we need to . . . define Brazil’s international presence with a realistic awareness of our regional and global influence.” See Lampreia (1998). 36.  Quoted in Pompeu de Toledo (1998, 123). 37.  The Argentine automobile industry also began as a state-­led project. The sector played a central role in the developmentalist program launched by President Arturo Frondizi (1958–62) in the late 1950s. This plan was successful in

Notes to Pages 75–77  239 attracting foreign investment, leading to an unprecedented expansion in vehicle production in the early 1960s (Evans, Hoeffel, and James 1984). By the mid-­ 1960s, the industry had consolidated its position and was dominated by large foreign producers. In addition, a large network of other industries developed to service the assembling plants (Catalano and Novick 1998). Despite this initial success, the Argentine automobile industry confronted serious problems during the 1970s. The high cost of locally produced vehicles, which translated into Argentine cars being sold for more than twice their price internationally, added to the sector’s difficulties and led several multinational corporations to exit the Argentine market (Amato 1999). 38. Author interview with Miguel Angel Cuervo, August 2000, Buenos Aires. 39. As in Brazil, the Argentine automobile sector was organized according to two separate activities: assembly and auto parts production. ADEFA represented the assemblers, mostly local subsidiaries of multinational automobile corporations. Auto parts firms, which at least in the early 1990s were dominated instead by local capital, were divided into two associations: while CAIA concentrated the largest firms, CIFARA represented the smaller players. There are two main labor unions in the sector: Union of Mechanics and Automobile Workers (SMATA) and Steel Labor Union (UOM). 40. Between 1990 and 1994, production grew by around 310 percent, while employment increased by 48 percent. In addition, consumers enjoyed a drop of approximately 35 percent in automobile prices. Furthermore, the automobile sector accounted for half of the 23 percent increase in industrial production between 1991 and 1994. See “La Estabilidad del Régimen Automotriz,” Formula XXI, 2(14), September 1997. 41. Author interviews with Jorge Katz, member of ADEFA’s economic research staff, and with Horacio Losoviz, August 2000, Buenos Aires. On the relative strength of ADEFA vis-­à-­vis the UIA, see Schneider (2001). 42.  Author interview with representative from CIFARA, August 2000, Buenos Aires. 43.  Author interview with Jorge Katz. 44.  Author interview with Losoviz. 45.  National producers had expected to compensate for this deterioration of conditions in the Argentine market with sales to Brazil. See “Limitó Brasil la importación de autos argentinos,” Clarín, June 14, 1995; “Prevén las terminales un fuerte perjuicio,” La Nación, June 15, 1995. 46. In addition, because the Argentine regime included a significantly higher tariff on extrazone inputs (18 percent), the new Brazilian regulations provided a competitive advantage to Brazilian auto parts producers relative to their Argentine counterparts. See “Inversiones extranjeras en el ojo de la tormenta,” Clarín, June 15, 1995.

240  Notes to Pages 77–86 47.  “Piden los empresarios que se respeten los acuerdos,” La Nación, June 16, 1995. 48.  A total of US$7.5 billion in foreign investment had been announced between January and June 1995 by multinational corporations seeking to take advantage of the benefits offered by the Argentine automobile policy. See “Mirando al Mercosur: inversiones proyectadas en la Argentina,” Clarín, June 16, 1995. 49.  “Argentina flexibiliza su posición en el conflict por los autos,” Clarín, June 21, 1995. 50.  According to Tulchin (1999), Argentine elites’ perceptions of the promi­ nent role their country was destined to play in world affairs since the nineteenth century continued to influence the formulation of foreign policy in the 1990s. Indeed, a largely unfounded sense of grandiosity appeared to inform claims by Cavallo (1996) that the new foreign policy had “achieved the historical mission of situating our country in the position that it was bound to occupy within the international system.” 51.  Author interview with Jorge Campbell, August 2000, Buenos Aires. 52.  According to Cuervo, “the (Presidential) instruction was ‘Look for a way out.’ . . . Nothing we proposed was accepted by the Brazilians, and everything was taken to the point of rupture and the Argentine government did not want to confront that situation. . . . Not the Economy Ministry, we would have wanted to break with MERCOSUR many times. But the problem was at the Presidency and the Foreign Ministry.” Author interview with Miguel Angel Cuervo. 53.  “Declaración Conjunta,” Clarín, June 20, 1995; “Fernando Henrique descarta o retrocesso,” Folha de São Paulo, June 21, 1995. 54.  See Cason (2000); and “No habrá límites para exportar autos a Brasil,” La Nación, June 21, 1995. 55.  Author interview with Jorge Campbell. 56. Vehicle imports coming from Argentina grew from 34,899 units in 1994, to 37, 895 in 1995. In turn, total Brazilian imports of automobiles, which were 188,580 in 1994, reached 369,048 in 1995. See ANFAVEA (1995). 57.  Author interview with José Serra. 58.  “Governo teme novo confronto com Argentina,” Jornal do Brasil, October 11, 1995. 59.  See, for example, “Acerto para carros no Mercosul,” Gazeta Mercantil, December 7, 1995. 60.  Brazil favored maintaining its 70 percent tariff on vehicles coming from outside the region. In contrast, Argentina favored a much lower external tariff of 35 percent. 61.  Brazil favored a national content index of 70 percent for vehicles to be considered “made in MERCOSUR” and hence traded duty-­free. To promote new investment in the industry, however, the Brazilian government proposed

Notes to Pages 86–89  241 that this proportion be reduced to 50 percent in the case of newcomers for a period of up to three years. Argentina instead favored a 60 percent national (or regional) content requirement. The two countries also disagreed on the specific way in which this percentage was calculated. 62. See “Brasil disputa montadoras com Argentina,” Correio Braziliense, December 9, 1995. 63.  Author interview with Miguel Angel Cuervo. 64.  To promote the local capital goods industry, the Brazilian regime established a bonus of 1.4—­­that is, for each dollar spent on national machinery and equipment, automobile producers earned a $1.40 credit toward imports. By contrast, the bonus on capital goods established by the Argentine regime was only 40 cents of imports per dollar invested in machinery and equipment. See “MP estimula a indústria automobilística,” Jornal do Brasil, December 8, 1995; “Se acordó un nuevo régimen automotor común,” La Nación, December 7, 1995. 65.  For the complete text of the agreement, see “Carros em marcha lenta,” Gazeta Mercantil, January 23, 1996. 66.  In other words, vehicles made in Argentina and Brazil could be traded free of tariffs as long as the amount imported by each country was compensated with exports to any destination. 67.  Companies installed in only one of the two countries were granted a smaller, fixed quota of 20,000 vehicles. These included Sevel and Ciadea (which had the licenses for Fiat/Peugeot and Renault, respectively) in Argentina, and Honda, Hyundai, and Chrysler in Brazil. See “Montadoras argentinas criticam pacto,” Correio Braziliense, January 23, 1996. 68.  Divergences regarding the way this percentage was to be measured persisted, however. 69.  Thus, Argentina would begin with a bonus of 0.4 (meaning that for every US$100 that a firm invested in capital goods it could import US$40 in automobile products), which would increase to 0.7 by 2000, and Brazil’s would gradually converge downwards from 1.4 in 1996 to 0.7 in 2000 (Haar and O’Keefe 2001). 70.  Author interview with Miguel Angel Cuervo. 71.  To compensate the national auto parts producers for the adverse consequences of the agreement, the Argentine government launched in March 1996 the so-­called auto parts regime. The latter basically extended to auto parts producers most of the benefits granted to the assemblers by the Argentine automobile regime (Arza and López 2008). 72.  The agreement became the 31st Additional Protocol to ACE N. 14. 73.  The agreement was rejected by smaller partners Uruguay and Paraguay, which criticized the “pernicious bilateralism” of the bigger members, claiming the agreement needed to be ratified by Uruguay and Paraguay (IDB 2001).

242  Notes to Pages 89–99 74. The agreement also established a “flex” coefficient of intraregional trade of 1.6. In 2002, and given the dramatic deterioration of production and investment levels in the Argentine industry, partners agreed to a renegotiation of certain aspects of the transitional regime. In particular, they agreed to lower the Argentine national content requirement from 30 and to 20 percent (which would converge to 5 percent by 2005). In addition, the “flex” was increased from 1.06 to 2.

Chapter 5. The Footwear Industry Dispute 1.  See “Brasil reage à restrição da Argentina a têxteis,” Folha de São Paulo, July 24, 1999; and “Brasil suspende negociações com a Argentina,” Gazeta Mercantil, July 27, 1999. 2.  The Latin American Integration Agreement (ALADI in Spanish; also abbreviated LAIA) was created by the Treaty of Montevideo, signed in 1980 by Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela. 3.  ALADI Resolution 70/87. 4.  See “Itamaraty teme pelo Mercosul,” Jornal do Brasil, July 26, 1999. 5.  In their view, because MERCOSUR treaties did not contain provisions on safeguards mechanisms, ALADI Resolution 70/87 could be used to fill in that “legal gap.” Author interview with Felix Peña, November 2002, Buenos Aires, Argentina. 6.  See “Mercosur: Se logró supercar la peor crisis,” La Nación, July 30, 1999. 7.  “Argentina impõe nova licença para sapatos vendidos no país,” O Estado de São Paulo, August 10, 1999. See also “Los argentinos no hicieron los deberes,” La Nación, August 12, 1999. 8.  Alieto Guadagni, Argentine secretary of industry, quoted in “Siguen las diferencias por el calzado en el Mercosur,” La Nación, September 17, 1999. 9.  “Brasil ameaça ir à OMC contra a Argentina,” O Estado de São Paulo, September 16, 1999. 10.  See “Decisão surpreende as autoridades em Buenos Aires,” O Estado de São Paulo, September 18, 1999. 11.  “Mercosur: proponen acuerdos transitorios,” Clarín, August 8, 1999. 12. The statement also maintained that “Argentina confirmed with the reversal of the measure that it is the minor partner, willing to accept impositions and threats.” See “Pelea en el Mercosur: Critican la debilidad frente a Brazil,” Clarín, July 31, 1999. 13.  Author interview with representative from Gatic (one of the two largest footwear companies in Argentina; the other is Alpargatas), November 2002,

Notes to Pages 99–103  243 Buenos Aires. This can also be inferred from statements made by Guillermo Gotelli, manager of Alpargatas: “Argentina has the right to use safeguards as a mechanism to protect damages in its industries. We started investigating the different tools that the WTO provides its members. We had to help the government with the different regulations that needed to be applied to work within the WTO. The problem is that the Argentine government did not know how to use these” (quoted in “Interview with Guillermo A. Gotelli,” Special Country Report on Argentina, Forbes Global, October 15, 2001). See also “Calzado: piden salvaguardias,” La Nación, May 13, 1999, according to which members of the footwear sector “requested the immediate application” of the safeguards contained in clause 70 of ALADI agreements. 14. See “La Argentina suma aliados contra Brasil,” La Nación, July 30, 1999. 15.  See “Pelea en el Mercosur: Critican la debilidad frente a Brazil,” Clarín, July 31, 1999. 16.  The Argentine footwear market is divided in two clearly defined segments: nonsport shoes and sport footwear. The latter is strongly concentrated, with two big firms (Alpargatas Calzado S.A. and Gatic S.A.) accounting for 95 percent of total national production. During the 1990s these two companies held the licenses of the main international brands. A few small and medium-­ sized enterprises have managed to survive in the sports segment by specializing in lower cost brands at the regional level. The non-­sport segment, in turn, is divided according to consumers’ segments (men, women, children) and levels of quality and price. There are a single leading company (Grimoldi S.A.), a few medium-­sized firms, and many small companies. See Bekerman and Sirlin (2000). 17.  “Las empresas en crisis: Operación salvataje para Alpargatas,” Clarín, October 17, 1999. 18.  Fabián Bakchellián, owner of Gatic, quoted in “Gatic y sus Tres Tiras,” Revista Apertura, April 1999. See also “Interview with Guillermo A. Gotelli,” Forbes Global, October 15, 2001. 19. In 1994 specific duties for a series of footwear products were introduced, following complaints from companies affected by competition from East Asia (IDB 2001). These duties were increased in 1995, leading to complaints by the United States and the European Union at the WTO. In 1998, moreover, the government introduced a system of quotas on imports from Indonesia, the European Union, and the United States, claiming the lower-­priced products from these countries were having a harmful effect on local production. 20. Between 1992 and 1997 imports from the rest of the world fell by US$24 million, while imports from Brazil increased by US$33 million. 21.  Among the main companies belonging to the group were the importers of Nike and Reebok, as well as national firms like Grimoldi and Fitalse.

244  Notes to Pages 105–110 22.  Author interview with Gustavo Melhem, founding member of CAPCICA, October 2002, Buenos Aires, Argentina. 23.  According to Grimoldi, “The devaluation per se affected us to a very small extent—­shoes today have a very large imported component. . . . For us, what complicated matters was CIC’s behavior.” Quoted in “La Argentina debe ser coherente en materia de comercio exterior para dejar de equivocarse,” La Nación, January 9, 2000. 24. Author interview with Felix Peña. Moreover, Foreign Trade officials claimed that most preferential agreements included “escape clauses,” which granted members some flexibility and thus increased the agreements’ long-­term viability. Thus, while aware that the measure could strain relations with Brazil, Argentine trade officials believed the measure was the “only instrument available” to contain intensified domestic political pressures. 25.  Author interview with Peña. 26.  Author interview with Roque Fernández, October 2002, Buenos Aires, Argentina. 27.  Author interview with Roque Fernández. In his words: “We had several meetings . . . to explore how we could prevent the volatility of the real exchange rate generated by the Brazilian devaluation from having an impact on the other countries in the bloc. . . . Unfortunately, Brazil had a totally negative position regarding the need to coordinate macroeconomic policies, and that is why I decided to impose Res. 70.” 28.  Rial was so called in reference to his alleged connections to the then governor of the Province of Buenos Aires, Eduardo Duhalde, who in January 2002 became president of Argentina. 29.  See “Codo a codo, más que dos,” Clarín, September 3, 1999. 30.  Author interview with Marcelo Avogadro, under-­secretary of international commercial relations, 1991–99, November 2002, Buenos Aires. 31. See “Como ‘relançar’ o Mercosul,” Folha de São Paulo, October 19, 1999. 32.  “Brasil ameaça ir à OMC contra a Argentina,” O Estado de São Paulo, August 6, 1999. 33.  The structure of the Brazilian footwear industry has a pyramidal shape. Like the Argentine industry, it is divided into three main groups. The first one, composed of the largest firms (more than 450 workers) operates mainly in the domestic market and has a strong presence in the sports shoes market. The medium-­sized firms (50–450 people) specialize in leather shoes and are oriented to the international market. The third group represents 90 percent of total firms (up to 49 people) and targets the Brazilian consumer. While the first group is concentrated in Franca, in São Paulo state, the other two groups can be mainly found in Vale dos Sinos, in Rio Grande do Sul. See Kume, Anderson, and de Oliveira Jr. (2001).

Notes to Pages 111–116  245 34.  Although in 1999 Argentina was still the third main destination of Brazilian footwear exports (6.9 percent or 12,203,886 pairs) after the United States (68.6 percent) and the United Kingdom (8.3 percent), by 2000 Argentina had become the second largest destination with 8 percent or 18,945,737 pairs. See ABICALÇADOS (2002). 35.  The Brazilian sector expected that, by mid-­1999, exports to Argentina would reach 17 million pairs during the second half of the year, against 10.9 million the year before (an expansion of 74.3 percent) (Kume, Anderson, and de Oliveira Jr. 2001). 36.  “Brasil retarda entrada de produtos argentinos,” O Estado de São Paulo, September 22, 1999. 37.  According to Néstor de Paula, president of ABICALÇADOS, “Argentina had four years to make its industry competitive and wasted that chance.” Author interview with de Paula, November 2002, Novo Hamburgo, Brazil. 38.  Author interview with de Paula. 39.  The Brazilian shoes on the trucks that had been stopped at the border on September 7 had been unloaded and placed in storage there, on the Argentine side. 40.  See “Brasil retarda entrada de produtos argentinos,” O Estado de São Paulo, September 22, 1999. 41.  Author interview with Mário Marconini, October 2002, Rio de Janeiro, Brazil. 42.  “Demissão de Clóvis dá fôlego a Malan,” Folha de São Paulo, September 5, 1999. 43.  Pratini de Moraes was a federal deputy for Rio Grande do Sul in 1983– 87 and 1991–94. In 1999, he still had political aspirations, as his decision to compete for the Brazilian Popular Party (PPB) presidential candidacy in 2001 suggests. 44.  Author interview with Heitor Klein, November 25, 2002, Novo Hamburgo, Brazil. 45.  According to Medeiros (2000, 201), Itamaraty’s inflexible position was an illustration of Brazil’s “de facto hegemony.” 46.  Author interview with Lampreia. 47.  Author interview with Marconini. 48. Author interview with Márcio Cozendey, November 2002, Brasília, Brazil. 49.  For a discussion of the shift in Brazil’s position and strategy in the FTAA negotiations, see Albuquerque (2002). 50.  Sebastián Do Rego Barros, quoted in “Mercosul: Quo vadis?” O Estado de São Paulo, December 13, 1999. 51.  See “FH pede Mercosul forte,” Jornal de Brasil, December 11, 1999. 52. See, for example, “O ‘relançamento’ do Mercosul,” O Estado de São Paulo, October 18, 1999.

246  Notes to Pages 117–130 53.  “Negociadores querem ‘relançar’ Mercosul,” Gazeta Mercantil, September 27, 1999; “Como ‘relançar’ Mercosul,” Folha de São Paulo, October 19, 1999. 54.  According to “Tensa tregua con Brasil,” Clarín, September 24, 1999, “[The two governments] know that official negotiations have been exhausted: they will be resumed in December, after the new Argentine government takes over.” See also “Solução para conflito passa pelo setor privado,” O Estado de São Paulo, September 24, 1999. 55.  Author interview with Néstor de Paula, November 2002, Novo Hamburgo, Brazil. 56. For more details on the agreement, see “Brasil e Argentina fecham acordo sobre cotas de calçados exportados,” O Estado de São Paulo, September 29, 1999. 57.  “Os sapatos e o futuro do Mercosul,” Correio Econômico, September 30, 1999. 58.  Author interview with Pedro Parente, November 2002, Brasília, Brazil. 59.  Author interview with Roberio Oliveira Silva, former executive secretary, CAMEX, November 2002, Brasília, Brazil.

Chapter 6. Failure to Relaunch 1. “Barreira ao calçado brasileiro continua,” O Estado de São Paulo, March 22, 2000. 2.  See, for example, “Rumbo Convergente,” La Nación, January 9, 2000. 3. Author interview with Debora Giorgi, former secretary of industry, October 2002, Buenos Aires, Argentina. 4.  See “Brasil enciende luces amarillas,” Página/12, March 7, 2001. 5.  “Cavallo recua e se derrete em elogios ao Brasil,” Folha de São Paulo, April 7, 2001. 6.  “Pipa de la paz entre los Fernandos,” Página/12, April 20, 2001. 7.  The Argentine president also reassured Brazil of his pivotal role in the formulation of his country’s foreign policy. See “Presidente cobra de la Rúa sobre fala de Cavallo,” Folha de São Paulo, April 21, 2001. 8. This meant that products from third countries paid the CET but received a discount corresponding to the exchange rate variation of the peso equivalent to the average rate between the dollar and the euro of about 8 percent. 9.  “Brasil suspendería las importaciones de trigo y petróleo argentinos,” Clarín, July 10, 2001. 10.  “Negocian con Brasil una protección limitada por la devaluación del real,” Clarín, October 26, 2001. 11. “Suspenden negociación con Argentina por dichos de Cavallo,” Página/12, October 27, 2001.

Notes to Pages 131–139  247 12. “Brasil não aceita mais negociar com Cavallo,” Folha de São Paulo, October 29, 2001. 13.  According to Jorge Campbell, former Argentine secretary of international economic relations, speaking in the early 2000s, “many sectors criticized MERCOSUR when it was really an indirect way of criticizing the convertibility regime” (author interview with Campbell, April 2003, Buenos Aires, Argentina). 14. See “Importadores y productores dudan del cambio arancelario,” La Nación, March 27, 2001. 15.  “La Unión Industrial pidió que se suspenda la vigencia del Mercosur,” Clarín, September 27, 2001. 16.  José de Mendiguren, head of the UIA, quoted in “UIA pide compensación por devaluación en Brasil,” Clarín, October 18, 2001. 17.  See “Las salvaguardias no alcanzan para resolver la asimetría cambiaria en el Mercosur,” Página/12, October 18, 2001. 18.  Quoted in “UIA busca apoyo de los políticos en su enfrentamiento con Brasil,” Clarín, October 19, 2001. 19.  Other measures taken by Cavallo included reforms in the tax system and the introduction of the “new convertibility” system, which tied the value of the peso to both the US dollar and the euro. 20.  See, for example, “Documento de UIA-­ABAPPRA para la reactivación: Ayuda para sobrevivientes,” Página/12, June 8, 2001. 21. “Industriales y banqueros piden medidas para reactivar,” Clarín, November 26, 2001. 22. “El Grupo Productivo y la CGT, contra una posible dolarización,” Clarín, December 9, 2001. 23. On October 10, 2001, Argentina’s country risk reached 1.859 basis points, the highest in the world. See “La Argentina tuvo ayer el mayor riesgo país del mundo,” Clarín, October 11, 2001. 24.  For example, when introducing his plans for the “new convertibility” in April, Cavallo emphatically denied that the move constituted a hidden devaluation: “Quite to the contrary. . . . This has nothing to do with a devaluation.” Cavallo, quoted in “París bien vale una canasta con euro,” Página/12, April 12, 2001. 25.  “Sticking-­plaster for Mercosur,”Economist, October 13, 2001. 26.  In 2001, Congress granted Cavallo special legislative powers for a year, which allowed him to modify taxes and introduce other reforms without legislative oversight. 27.  For example, before the October 9 meeting with Brazil, de la Rúa met with Ministers Cavallo and Rodríguez Giavarini to attempt to “unify” positions regarding MERCOSUR. See “Colombo, Rodríguez Giavarini y Cavallo definen la estrategia del Mercosur,” La Nación, September 27, 2001. 28.  Fernando de la Rúa, quoted in Clarín, “Mercosur: El Gobierno intenta bajar la tensión con Brasil,” September 28, 2001.

248  Notes to Pages 139–145 29.  “De la Rúa: Mensaje conciliador a Brasil,” Clarín, October 28, 2001. 30.  See, for example, Fundación Invertir (2001). 31.  Author interview with Norberto Ianelli, October 2002, Buenos Aires, Argentina. 32.  Foreign Minister Adalberto Rodríguez Giavarini spoke of the objective of maintaining “mature” (not carnal) relations with Washington, and Argentina belonging to the “second world” (Tokatlián 2000). 33.  Horacio Chighizola, Argentine vice minister of foreign relations, quoted in “Brasil condiciona el ALCA a que se contemplen sus intereses,” La Nación, April 7, 2001. 34. “Brasil condiciona el ALCA a que se contemplen sus intereses,” La Nación, April 7, 2001. 35.  “Imposto argentino para importados ajuda a alguns produtos,” Folha de São Paulo, April 8, 2001. 36. “Sectores favorecidos por los aranceles: Textiles, calzado y electrodomésticos,” La Nación, March 25, 2001. 37.  “Reduzir tarifa para informática é ‘imbecil’, diz empresário,” Folha de São Paulo, May 4, 2001. 38.  Author interviews with FIESP, IEDI, and CNI representatives, November 2002, São Paulo and Rio de Janeiro, Brazil. 39.  See, for example, statements by Osvaldo Moreira Douat, coordinator of the Brazilian Business Coalition (CEB), in “Coalizão empresarial aceita flexibilização,” Gazeta Mercantil, October 9, 2001. 40.  In the words of Horácio Lafer Piva, president of FIESP, “In order to perform well in negotiations with other blocs, such as the FTAA or the EU, we first need to come together as a bloc in order to confront others in a more balanced manner.” Lafer Piva, quoted in “Para empresários, reunião Brasil-­Argentina foi decepcionante,” Folha de São Paulo, October 10, 2001. 41.  “Fiesp diz que novas regras do Mercosul são una incógnita,” Folha de São Paulo, October 9, 2001. 42.  Author interview with Rosária Baptista, October 2002, Brasília, Brazil. 43.  See, for example, “Pipa de la paz entre los dos Fernandos,” Página/12, April 21, 2001. 44.  Author interview with Marcos Caramuru de Paiva, November 2002, Brasília, Brazil. 45.  See Malan’s statements in “Mercosul retrocede para beneficiar Argentina,” Folha de São Paulo, October 10, 2001. 46.  Quoted in “Brasil vuelve a tomar distancia de la crisis económica argentina,” Clarín, November 13, 2001. 47.  Author interview with Caramuru. 48.  See, for example, Argentine president Cardoso’s claims that “the CET is a symbol of MERCOSUR” (quoted in “Mecanismo de salvaguarda será temporário,” Gazeta Mercantil, October 8, 2001).

Notes to Pages 146–159  249 49.  In the words of Brazilian finance minister Pedro Malan, “Brazil is interested in helping Argentina to overcome its problems. . . . It is with this cooperative spirit that we are willing to revise our positions” (quoted in “Mercosul: Salvaguardas ainda serão definidas,” Gazeta Mercantil, October 9, 2001). 50. Jorge Batlle, quoted in “Acordo EUA e Uruguai ameaça Mercosul,” Folha de São Paulo, May 8, 2001. 51. According to Cardoso, “Because Brazil is stronger than Argentina, sometimes we have to yield in some issues to have an integrated South America” (quoted in “FHC defende adesão do Brasil à Alca,” Folha de São Paulo, October 24, 2001). 52.  “Quejas a dos voces,” Página/12, October 12, 2001. 53.  “Brasil patea el tablero,” Página/12, October 17, 2001; “La UIA presiona para renegociar el Mercosur,” La Nación, October 17, 2001. 54.  Brazilian negotiators wanted to make sure the system included requirements of demonstration of injury before the application of compensatory measures was authorized. Argentina resisted the requirement of demonstration of injury, claiming it would increase the cost of using the instrument. There were also disagreements regarding the scope and type of the corrective measures to be applied. While Brazil favored a broader scope, Argentina preferred exempting some sectors from the reach of the mechanism. As far as compensatory measures were concerned, Brazil preferred the use of ad valorem tariffs that were lower than the CET or quotas with no tariffs. In contrast, Argentina favored the application of ad valorem tariffs in a first stage and their replacement by specific imports or ad valorem tariffs that might exceed the level of extraregional tariffs in a second stage. Finally, Argentine and Brazilian negotiators had different positions regarding the duration of the mechanism and the effectiveness period of the measures. Argentina naturally pushed for a longer time span for the mechanism’s implementation, demanding that it be maintained until the end of 2004. By contrast, Brazil preferred a temporary regime, to be eliminated by the end of 2002 (IDB 2003).

Chapter 7. A Narrow Escape 1. Additional Protocol to Economic Complementation Agreement 14, Competitive Adaptation, Productive Integration and Balanced and Dynamic Trade Expansion. 2.  “Mercosul é prioridade, reafirman Lula e Kirchner,” O Estado de São Paulo, June 12, 2003. 3.  “Una alianza estratégica: Cordial encuentro entre Kirchner y Lula,” La Nación, October 16, 2003. 4.  See, for example, “Más curitas en la herida estructural del Mercosur,” Página/12, September 10, 2004.

250  Notes to Pages 161–167 5.  See “Brasil e Argentina caminham para um consenso sobre as salvaguardas,” Valor Econômico, February 1, 2005. 6.  Brazil rejected the trigger mechanism proposed by Argentina, according to which restrictions on bilateral trade would be established automatically and unilaterally without prior consultation with the exporting country. In the Brazilian proposal, in contrast, the final decision over the application of safeguards measures had to be taken jointly by the importing and exporting countries. Moreover, Brazil’s proposal insisted on the importance of requiring confirmation of serious injury to the domestic industry and of evidence that this was caused by an increase in imports from the partner country (Oliveira 2007). 7.  See, for example, “Palocci confirma que recebeu proposta da Argentina,” Folha de São Paulo, May 11, 2005. 8.  “Los textiles temen que Brasil frene su alza de producción,” La Nación, July 9, 2003. 9. “Aplicarían restricciones a los textiles brasileños,” La Nación, January 19, 2004; “Após impasse, indústria têxtil fecha acordo com Argentina,” Folha de São Paulo, January 26, 2004. 10.  “El gobierno brasileño destrabó el conflicto textil,” La Nación, January 31, 2004. These agreements were renewed for another year in May 2005. See “Argentinos e brasileiros renovam acordo no setor têxtil,” Folha de São Paulo, May 15, 2005. 11.  On the specific details of the agreement, see IDB (2006). 12.  See “Suban los puentes, que Brasil ataca,” Página/12, July 6, 2004. 13.  “Electrodomésticos: Buscamos abrir un canal de discusión,” La Nación, July 7, 2004; “La línea blanca separa a los empresarios de Brasil y Argentina,” Página/12, July 14, 2004. 14. “Acuerdo con Brasil en material de cocinas y heladeras,” La Nación, July 16, 2004. 15.  In 2004, Brazilian refrigerators accounted for 65 percent of the internal market in Argentina. See “Son leves las trabas al ingreso de cocinas y heladeras brasileñas,” Clarín, July 10, 2004. 16. “Electrodomésticos: Argentina y Brasil avanzan en un acuerdo,” La Nación, July 15, 2004. 17.  According to the deal, Brazilian exports of washing machines would not exceed 180,000 units per year. 18.  Brazilian producers proposed a minimum price of US$15 per box, while the Argentine sector favored a floor of US$6. Both sides then compromised and settled at a minimum price of US$8 per box of 12 750-­ml bottles (approx. US$0.90 per liter). 19.  See also, for example, statements by Alvarez Gaiani, head of UIA, in “Electrodomésticos: dudas acerca de qué puede pasar con los precios,” Clarín, July 7, 2004, and complaints by UIA representatives in “Podrían trabar productos brasileños,” Clarín, June 24, 2004.

Notes to Pages 167–173  251 20.  Since the 1980s, there has been an interindustrial pattern of specialization in Argentine-­Brazilian trade relations, by which primary products represent more than 60 percent of Argentine exports to Brazil, and manufactured goods account for over 70 percent of Brazilian exports to Argentina. 21.  See statements by textile businessman Aldo Karagozián, head of Pro-­ Tejer, in “Los textiles temen que Brasil frene su alza de producción,” La Nación, July 9, 2003. 22.  See, for example, “El miedo a Brasil,” Página/12, December 7, 2003. 23.  See “Para los textiles, Brasil es una amenaza,” La Nación, October 27, 2003. 24.  Indeed, between 2001 and 2002, Brazil’s share in Argentine imports increased (from 37.3 to 47.1 percent) despite a decrease in total Argentine imports from Brazil (from US$ 303.33 millions in 2001 to US$ 119.15 in 2002) because of the marked collapse in total Argentine imports in 2002. 25.  See http://www.fundacionprotejer.com/en-­fundacion.php. 26.  As an illustration, the head of Alpargatas, Guillermo Gotelli, praised the government for listening to the proposals of the business sector and for “wanting an industrialized Argentina.” See “Lavagna se reúne con industriales,” La Nación, November 6, 2003. 27.  “La UIA expresó su apoyo a la medida,” La Nación, January 23, 2004. UIA leaders released a statement welcoming the resolution and claiming that it was “an explicit proof that the textile industry is considered, for the first time in history of our country, a strategic factor for the development of national production.” 28.  In 2003, Whirlpool shut down its plant in San Luis, Argentina, and relocated to Brazil (Oliveira 2007). 29.  In the late 1990s, Techint benefited from the negotiation of a VER with its main Brazilian counterparts. However, this agreement did little to curb downstream competition. Brazilian producers of household appliances had access to cheaper inputs and thus had a competitive advantage over Argentine producers. See “La solución resultó ser un problema,” Página/12, June 27, 2004. 30.  “Suban los puentes, que Brasil ataca,” Página/12, July 6, 2004. 31.  In the words of Héctor Méndez, head of the UIA, “We need to come up with a mechanism that allows both countries to maintain their industrial structures” (quoted in “Ministro Furlan é o que mais preocupa, diz dirigente industrial argentino,” Folha de São Paulo, May 10, 2005). 32. “Argentina logró un acuerdo con Brasil que permitirá fortalecer la indústria,” Infobae, February 2, 2006. 33.  “Salvaguarda volta a causar polêmica no Mercosul,” Valor Econômico, November 30, 2004. 34. See “Indústria têxtil pára de negociar com Argentina,” Folha de São Paulo, January 30, 2004. According to Paulo Skaf, president of ABIT, textile

252  Notes to Pages 173–185 producers decided to yield because they “preferred to have a voluntary agreement because in the long run measures like licenses are very harmful.” 35.  “Empresário só aceita cotas sem salvaguardas,” Gazeta Mercantil, January 27, 2005; “Disputas dominam Mercosul,” Correio Braziliense, December 12, 2004. 36.  “Brasil e Argentina caminham para um consenso sobre as salvaguardas,” Valor Econômico, February 1, 2005. 37.  “Acordo empresarial argentino-­brasileiro suaviza atrito comercial,” Folha de São Paulo, July 31, 2004; “Brasil pode adotar salvaguardas contra Argentina,” Folha de São Paulo, December 13, 2004. 38. “Argentinos ameaçam com novas restrições,” O Estado de São Paulo, July 21, 2004. 39.  According to leaders of this group, “they declared the refrigerators war, we will declare the wine war” (quoted in “Argentinos ameaçam com novas restrições,” O Estado de São Paulo, July 21, 2004). 40.  “Brasil se queja por los vinos,” La Nación, August 25, 2004; “Preocupa en Brasil la importación de vinos,” Infobae, September 1, 2004. 41. See “Nuevo Modelo,” Página/12, July 27, 2003; and criticisms by Argentine secretary of industry Miguel Peirano of the economic policies followed in the 1990s in “Inviables resultaron ellos,” Página/12, August 9, 2005. 42.  See also Sáez (2005). 43.  See, for example, “Intenciones,” Página/12, November 21, 2004, which discusses the “marginalization” of the Ministries of Economy and Foreign Relations in economic negotiations with China. 44.  “Disputa en el gobierno de Lula por las tasas,” La Nación, June 3, 2003. 45.  See “Brasil aceita acordo temporário sobre cotas,” Folha de São Paulo, December 17, 2004. 46.  “Kirchner surpreende a Lula e antecipa retorno,” Folha de São Paulo, May 11, 2005. 47.  Lula, quoted in “El Mercosur de Lula,” La Nación, November 18, 2002. See also Christensen (2007) and Da Motta Veiga (2007a). 48. “Consensos en la primera cita con el PT,” La Nación, November 7, 2002. 49.  See “Hemisphere Summit Marred by Violent Anti-­Bush Protests,” New York Times, November 5, 2005. 50. At the Sixth Latin America–European Union Summit in Madrid in May 2010, EU and MERCOSUR representatives signed the Madrid Declaration, which established Plan of Action 2010–12, to be implemented between then and the 2012 Summit in Santiago, Chile (Gentile 2011). Given the shift in economic conditions in the global economy during this period and, in particular, the severe economic crisis in Europe and moderate growth in Brazil and Argentina, representatives of the two blocs seemed more committed to

Notes to Pages 186–191  253 the finalization of an agreement than in the past. Four rounds of negotiations were held in 2010 and 2011. In November 2011, the parties agreed to submit their new proposals by June 2012, after the French presidential elections. EU and MERCOSUR representatives expressed optimism that they would reach a deal before the end of 2012. See, for example, “La UE Quiere un Acuerdo con MERCOSUR en Diciembre de 2012,” El País (blog), November 16, 2011, http://blogs.elpais.com/eco-­americano/2011/11/la-­ue-­quiere-­un-­acuerdo-­con -­mercosur-­en-­diciembre-­de–2012.html; “Ashton confía en que este año se cierre el acuerdo comercial con el MERCOSUR,” El Mercurio, February 11, 2012. 51.  Soares de Lima (2007) terms this approach “autonomy through change in order.” 52.  Ikenberry (2003) distinguishes between “structural” and “limited” buffering. Structural buffering consists of distancing from the dominant state and constructing an alternative order based on competing visions. A more limited type of buffering would entail creating “regional infrastructure and independent capacity” that increases the leverage and standing of weaker states vis-­à-­vis the preponderant power. See also Tokatlián (2008). 53.  Celso Amorim, quoted in Soares de Lima (2008). 54.  “Mercosul vai à Alca com propostas individuais,” O Estado de São Paulo, January 22, 2003. 55.  See also “La Argentina se va a sentar en todas las mesas posibles,” Clarín, September 21, 2003. 56.  Uruguayan president Jose Mujica, quoted in “Mujica: We Need Venezuela in Mercosur to Help Balance the Group,” Mercopress.com, April 1, 2011. http://en.mercopress.com/2011/04/01/mujica-­we-­need-venezuela-­in-­mercosur -­to-­help-­balance-­the-­group. 57.  See “Uruguay at Center of Lively U.S.-­Venezuela Chess Game,” New York Times, September 12, 2006. 58.  Paraguayan foreign affairs minister Hector Lacognata, quoted in “Vene­ zuela’s Mercosur Incorporation Will Help Dilute Brazilian Hegemony,” Merco Press.com, December 31, 2009. http://en.mercopress.com/2009/12/30/vene zuelas-­mercosur-­incorporation-­will-­help-­dilute-­brazilian-­hegemony. 59.  According to Lampreia, “It was a tremendous error to allow Chávez into Mercosur, not only because he wants to control it, but also because he is Lula’s biggest rival,” quoted in “Venezuela Wants Trade Group to Embrace Anti-­ Imperialism,” New York Times, January 19, 2007. 60.  “Nueva advertencia en la relación con Brasil,” La Nación, May 3, 2005. 61.  “Bielsa dijo que esperan respuestas de Brasil,” La Nación, May 2, 2005. 62.  See “Brazil’s Foreign Policy: The Samba Beat, with Missteps,” Economist, December 18, 2008. 63.  Celso Amorim, quoted in “Lula minimizó la tensión con la Argentina,” La Nación, May 4, 2005.

254  Notes to Pages 191–211 64.  “Interview: Celso Amorim, Brazil’s Foreign Minister,” Financial Times, February 22, 2007. 65.  See “Contra EUA, Brasil oferece ‘pacote’ a Uruguai,” Folha de São Paulo, February 24, 2007. 66.  The post of high representative general, which replaced that of the president of the commission of permanent representatives of MERCOSUR, was created in 2010 to “contribute to the development and functioning of the process of integration, through the strengthening of proposals for regional policies in various fundamental issues” (MERCOSUR/CMC/DEC. N. 01/11). The Brazilian diplomat Samuel Pinheiro Guimarães, a staunch supporter of regional integration, was appointed to be the first high representative general in 2011. 67.  See Da Motta Veiga (2007a).

Chapter 8. Conclusions 1.  This, however, appears to be changing in the more recent time period, which is not covered in this book. See, for example, “Brazil’s Bungled Diplomacy Infuriates President Rousseff,” MercoPress.com, July 4, 2012. http://en .mercopress.com/2012/07/04/brazil-­s-­bungled-­diplomacy-­infuriates-­president -­rousseff. 2. Brazilian foreign affairs minister Antonio Patriota, quoted in “Mercosur a ‘Priority’ Almost a ‘Sanctuary’ for Brazilian Trade and Diplomacy,” MercoPress.com, October 11, 2011. http://en.mercopress.com/2011/10/11 /mercosur-­a-­priority-­almost-­a-­sanctuary-­for-­brazilian-­trade-­and-­diplomacy. 3.  Argentine deputy economy minister Roberto Feletti, quoted in “Brazil Is a ‘Decisive Partner’ for Argentina in the Event of a Major Crisis,” MercoPress .com, October 11, 2011. http://en.mercopress.com/2011/10/11/brazil-­is-­a-­de cisive-­partner-­for-­argentina-­in-­the-­event-­of-­a-­major-­crisis. 4.  In particular, claims by Argentine President Cristina Kirchner that Vene­ zuela’s entry “strengthens the entire region” and “creates a new pole of power” at the international level underscore the persistence of strategic defensive incentives for the bloc’s enlargement. Cristina Kirchner, quoted in “With Venezuela, MERCOSUR Has Become a New Pole of World Power,” MercoPress.com, July 31, 2012. http://en.mercopress.com/2012/07/31/with-­venezuela-­mercosur -­has-­become-­a-­new-­pole-­of-­world-­power. Some analysts have indeed linked the expansion of the bloc with Argentine-­Brazilian concerns about the creation in 2012 of the Pacific Alliance, comprising Mexico, Chile, Peru, and Colombia. See, for example, “Desencantado del Mercosur, Uruguay mira a la Alianza del Pacifico,” Perfil, August 16, 2012. 5.  See, for example, “Ex-­president says inclusion of Venezuela in Mercosur is favorable for Uruguay,” MercoPress.com, August 6, 2012. http://en.merco

Notes to Pages 211–222  255 press.com/2012/08/06/ex-­president-­says-­inclusion-­of-­venezuela-­in-­mercosur-­is -­favourable-­for-­uruguay. 6.  See, for example, the statement by the Paraguayan delegation to the MERCOSUR Parliament on September 15, accusing Argentina of “systematically and permanently ignoring the Asunción Treaty” (“Paraguay Accuses Argentina of ‘Systematically Ignoring’ Mercosur,” MercoPress.com, September 15, 2011. http://en.mercopress.com/2011/09/15/paraguay-­accuses-­argentina-­of-­sys tematically-­ignoring-­mercosur). 7.  See Luiz Inácio Lula da Silva, quoted in “Lula da Silva Calls for an En larged Mercosur to Better Defend the Region’s Interests,” MercoPress.com, December 20, 2010. http://en.mercopress.com/2010/12/20/lula-­da-­silva-­calls -­for-­an-­enlarged-­mercosur-­to-­better-­defend-­the-­region-­s-­interests. 8.  See claims by Rousseff that Venezuela’s entry as a full member “will turn the bloc into the fifth largest economy in the world.” See “Mercosur ampliado: fracaso o la quinta potencia del mundo?” Perfil, August 4, 2012. 9.  “With Brazil as Advocate, Venezuela Joins Trade Bloc,” New York Times, July 31, 2012. See “Mujica: Mercosur esta en crisis y debe cambiar,” El Tiempo, August 16, 2012. http://eltiempo.com.ve/mundo/organismo/mujica-­mercosur -­esta-­en-­crisis-­y-­debe-­cambiar/62078. 10.  See, for example, “Trade Problems between Brazil and Argentina ‘Persist,’ but Can Be Managed,” MercoPress.com, June 30, 2011. http://en.merco press.com/2011/06/30/trade-­problems-­between-­brazil-­and-­argentina-­persist -­but-­can-­be-­managed. And “Protectionism in Argentina: Keep Out,” Economist, September 24, 2011. 11.  This view was expressed publicly by former presidential candidate José Serra, who claimed that MERCOSUR is an “obstacle” that prevented Brazil from signing preferential trade agreements with extraregional partners. See, for example, “Serra vê Mercosul como ‘barreira,’ ” Valor Econômico, April 20, 2010. 12.  South Africa did not join SADC until 1994, so from the perspective of SADCC members in the 1980s, it can be considered an “external” power. 13.  See, for example, Foot (1995); Narine (2003); and Khong and Nesadurai (2007).

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Index

Ablin, Eduardo, 135 Acharya, Amitav, 216 agriculture in Brazil, 114, 174 subsidies for, 141, 185 Alencar, José, 182 Alfonsín, Raúl, 14 Alvarez Gaiani, Alberto, 107 Amorim, Celso, 182, 187, 188, 191 Arab Maghreb Union (AMU), 223–24 Argentina in automobile dispute, 62–64 —aftermath of, 88–89 —negotiations over, 81–88 —power sharing and bargaining among state actors, 79–81, 85, 91, 93 —societal pressures, 75–77, 91 —state actors’ incentives for defection, 77–79 —systemic incentives for cooperation, 79–81, 92 automobile industry in, 68, 75–77, 238n37, 239nn39–40 bandwagoning by, 79–80, 141

Brazilian penetration of market in, 102, 110–11, 245nn34–35 commercial dependence of, 54–55, 82, 94 convertibility system, 107–8, 131, 132, 135–38, 149, 169, 203, 247n24 country risk, 138, 247n23 currency devaluation in, 167, 168 debt, 106, 136, 138 defensive trade policy, 21, 141, 177 economic and trade liberalization in, 103, 177, 245n37 economic crisis (2001), 20, 149, 158 economic policy makers —in automobile dispute, 77–79, 80 —in footwear dispute, 105–8 —in post-2003 disputes, 177–78, 181 —in 2001 relaunch dispute, 135–42, 152 economy after 2003, 162, 202 European Union and, 139, 140, 141, 184 exchange rate regime in, 130, 135, 145, 148, 153, 167

276

Index 277



exports to Brazil, 82, 84, 240n56 in footwear dispute, 96–98 —negotiations over, 117–21 —power sharing and bargaining among state actors, 108–9, 121, 122 —societal pressures, 99–105, 122 —state actors’ incentives for defection, 105–8 —systemic incentives for cooperation, 108–9, 121, 123, 124 footwear industry in, 99–105, 134, 243n16, 244n23 foreign investments in, 78, 136, 240n48 foreign policy executive, 43, 206 —in automobile dispute, 79–81 —in footwear dispute, 105–6, 108–9, 124 —in post-2003 disputes, 181 —in 2001 relaunch dispute, 138–42, 152 foreign policy of, 79–80, 108–9, 240n50 Free Trade Area of the Americas and, 109, 120, 140, 184 household appliance industry in, 169–70, 251n28 imports by, 82, 102, 105, 106, 168–69, 177–78, 240n56, 243n20 Kirchner government policy in, 158, 176, 177, 184–85, 190–91, 202 list of disputes with Brazil, 16–20 MERCOSUR creation and, 14 NAFTA and, 72, 84, 120, 140 in post-2003 disputes —power sharing and bargaining among state actors, 180–81, 194 —societal pressures, 167–73, 194 —state actors’ incentives for defection, 177–78, 194 —systemic incentives for cooperation, 183–84, 192, 195

in 2001 relaunch dispute, 126–31, 158–62 —negotiations over, 147–53, 241nn66–71, 249n54 —power sharing and bargaining among state actors, 138–42, 153, 154, 156 —societal pressures, 131–35, 154, 247n13 —state actors’ incentives for defection, 135–38, 154 —systemic incentives for cooperation, 140–42, 155 sectoral agencies in, 44 strategic commitment to MERCOSUR, 72–73, 79, 82, 84, 108, 131, 140, 141–42, 148, 212–13 tariffs and duties, 86–87, 125, 135, 141, 142, 164, 239n46, 240nn60–61 textile industry in, 167–69 trade balance with Brazil, 88, 133, 136, 167, 251n20 United States and, 41, 55, 80, 84, 108–9, 128, 139, 140, 209 Venezuela and, 189, 192, 213, 216 Argentine Association of Automobile Sellers (ACARA), 75–76 Argentine-Brazilian Trade Monitoring Commission, 20–21, 157, 159, 161, 163, 164 Argentine Chamber of Electrical and Mechanical Household Appliances (CAFAEMEH), 165 Argentine Chamber of Gas Appliance Manufacturers (CAFAGAS), 164, 170 Argentine Chamber of Refrigerators and Air Conditioning Industries (CAIRAA), 164, 170 Argentine Chamber of the Auto Parts Industry (CAIA), 76

278 Index Argentine Federation of the Textile Industry (FITA), 162–63 Argentine Footwear Industry Chamber (CIC), 98, 105, 117 Argentine Industrial Union (UIA), 76, 99, 132, 134, 138, 167, 169, 170, 172 Argentine Viniculture Union (UVA), 174–75 ASEAN Free Trade Area (AFTA), 220 ASEAN Regional Forum (ARF), 220 Association of Argentine Automobile Assemblers (ADEFA), 75–76, 239n39 Association of South East Asian Nations (ASEAN), 221, 222 asymmetrical strategic interdependence, 212–13 Automobile Industry Executive Group (GEIA, Brazil), 65 automobile sector dispute, 57, 61–94 about, 62–64 aftermath of, 88–89 bilateral negotiations and resolution —June 1995 agreement, 81–85 —Werneck-Magariños Agreement, 85–88, 241nn66–73, 242n74 conclusions about, 89–94 domestic constraints on Argentina in —power sharing and bargaining among state actors, 79–81, 85, 91, 93 —societal pressures, 75–77, 91 —state actors’ incentives for defection, 77–79 domestic constraints on Brazil in —power sharing and bargaining among state actors, 70–71, 72, 91 —societal pressures, 64–68, 91 —state actors’ incentives for defection, 69–71, 91 systemic incentives for cooperation in —for Argentina, 79–81, 92 —for Brazil, 72–75, 92 Ayoob, Mohammed, 221

bandwagoning, 79–80, 141 Batlle, Jorge, 146 Bielsa, Rafael, 190–91 Bolivia, 211 Bouzas, Roberto, 135, 180 Brazil agriculture in, 114, 174 in automobile dispute, 62–64 —aftermath of, 88–89 —negotiations over, 81–88 —power sharing and bargaining among state actors, 70–71, 72, 91 —societal pressures, 64–68, 91 —state actors’ incentives for defection, 69–71, 91 —systemic incentives for cooperation, 72–75, 92 automobile industry in, 64–75, 77, 200, 237nn8–9, 238n21, 239nn45–46 common external tariff (CET) agreements and, 143, 144, 145–46, 156 compensation mechanisms and, 110, 130, 133, 182, 196, 211 currency devaluation in, 20, 95, 100, 102, 105, 107, 111, 244n23, 244n27 currency value in, 132, 138, 145 domestic discontent in, 71, 174 economic policy makers —in automobile dispute, 69–71 —in footwear dispute, 112–14 —in post-2003 disputes, 178–80, 182 —in 2001 relaunch dispute, 144–45, 153 as emerging power, 217–20 exchange rate regime in, 70–71, 130 exports by, 110–11, 112–14, 117–18, 245nn34–35 in footwear dispute, 96–98 —negotiations over, 117–21 —power sharing and bargaining among state actors, 112–15, 121, 122

Index 279 —societal pressures, 110–12, 122 —state actors’ incentives for defection, 112–14 —systemic incentives for cooperation, 114–17, 121, 123, 124 footwear industry in, 110–14, 244n33 foreign investments in, 65, 68, 71 foreign policy executive, 7, 43, 206, 209, 210, 216–17 —in automobile dispute, 72–73, 75, 90, 93 —in footwear dispute, 114, 116–17, 124, 245n45 —in post-2003 disputes, 182–83, 192 —in 2001 relaunch dispute, 145–47 foreign policy of, 73–74, 186–88, 210–11, 215 household appliance industry in, 169, 170, 173, 251n29 imports from Argentina, 82, 240n56 leverage over Argentina, 54–55 list of disputes with Argentina, 16–20 MERCOSUR creation and, 14 in post-2003 disputes —power sharing and bargaining among state actors, 182–83, 194 —societal pressures, 173–76, 194 —state actors’ incentives for defection, 178–80, 194 —systemic incentives for cooperation, 186–92, 195 preponderance within MERCOSUR, 7, 82, 94 pursuit of global influence, 28, 197, 210–12, 215, 235n17, 238n35 regional leadership as goal, 28, 74, 186–92, 193, 196, 197, 210–12, 215–16, 218, 235n17, 238n35 in 2001 relaunch dispute, 126–31, 158–62 —negotiations over, 147–53, 241nn66–71, 249n54 —power sharing and bargaining among state actors, 145–47, 154

—societal pressures, 142–44, 154 —state actors’ incentives for defection, 144–45, 154 —systemic incentives for cooperation, 145–47, 155 sectoral agencies in, 44 strategic commitment to MERCOSUR, 7, 28, 41, 55, 72–75, 114–17, 124, 148, 188–89, 193, 197, 209, 210, 212–13, 215, 221, 235n17 trade balance with Argentina, 88, 133, 167, 251n20 trade liberalization measures, 65, 66, 70, 237n14, 238n21 United States and, 73, 176 in UN peacekeeping missions, 187 UN Security Council seat quest by, 187, 190, 216 Venezuela and, 190, 253n59 willingness to compromise by, 27, 73, 118, 120, 146, 153, 173, 212–13 wine industry in, 174–75 World Trade Organization and, 85–86, 187, 216, 219 Brazilian Association for the Textile Industry (ABIT), 162–63 Brazilian Association of Machinery and Equipment Industries (ABIMAQ), 142 Brazilian Association of Producers of Electronic Appliances (ELETROS), 164, 165, 173 Brazilian Electric and Electronic Industry Association (ABINEE), 143 Brazilian Footwear Industries Association (ABICALÇADOS), 98, 110, 112, 113, 117–18 Buenos Aires Consensus (2003), 158 buffering strategy, 186–87, 253n52 Burges, Sean, 190 Bush, George H. W., 152 Bush, George W., 140

280 Index Campbell, Jorge, 79, 80, 81, 247n13 capital goods, 128, 129, 132, 135–36, 142–43 Cardoso, Fernando Henrique, 69, 74, 147, 186, 249n51 and automobile industry dispute, 63, 81 and dispute of 2001, 129 economic policy of, 66, 179 and footwear industry dispute, 96, 112, 114 Carranza, Mario, 32 Carvalho, Clóvis, 113 Cavallo, Domingo, 81, 128–31, 135–38, 142, 144, 180, 247nn24–27 competitiveness program of, in 2001, 135, 137, 247n19 convertibility proposal of, 138, 247n24 decision-making power of, 138–39, 247n26 on exchange rate, 130, 135, 145, 148, 153 on foreign policy, 240n50 hawkish and aggressive attitude of, 78, 93, 125, 135–36, 139–40, 149, 152 Chamber for the Foreign Trade of Footwear (CAPICICA, Argentina), 103, 105, 243n21 Chávez, Hugo, 185, 189, 190, 216 Chighizola, Horacio, 141 Chile, 146 China, 186, 217, 220, 222 Clinton, Bill, 140 Cold War, 73, 222 Collor de Mello, Fernando, 14, 65 common external tariff (CET) agreements, 128 Argentina and, 125, 128, 129, 136, 140, 148, 149 Brazil and, 143, 144, 145–46, 156 Common Market for Eastern and Southern Africa (COMESA), 223

compensation mechanisms Argentina push for, 68, 99, 127, 148, 149–50, 167 Brazil agreement to create, 130, 133, 196, 211 Brazil resistance to, 110, 182 and triggers, 130, 135, 145, 148–49, 250n6 Competitive Adaptation Mechanism (CAM), 21, 157, 161, 173, 191, 214 convergence factor, 129, 246n8 convertibility system, 107–8, 135, 136 end of, 131, 169 pressures on Argentina of, 149, 203 support in Argentina for, 132, 137–38 Cuervo, Miguel Angel, 240n52 Da Motta Veiga, Pedro, 191 Declaration on Common Nuclear Policy, 14 de la Rúa, Fernando, 89, 126 and 2001 relaunch dispute, 129, 131, 139, 140, 247n27 de Mendiguren, José, 134 de Paula, Néstor, 245n37 De Vido, Julio, 169, 181 Di Tella, Guido, 79, 81 dollarization, 137 domestic constraints on cooperation, 3–4, 8, 39, 183, 198, 199–200, 213 hypothetical scenarios of, 49–51 power sharing and bargaining among state actors, 51, 203–8 —in automobile dispute, 69–71, 72, 85, 91, 93 —in footwear dispute, 108–9, 112–15, 116–17, 121, 122 —in post-2003 disputes, 180–83, 194 —in 2001 relaunch dispute, 138–42, 145–47, 153, 154, 156 societal pressures, 51, 198–201

Index 281 —in automobile dispute, 64–68, 72, 75–77, 91 —in footwear dispute, 99–105, 110–14, 122 —in post-2003 disputes, 166–76, 194 —in 2001 relaunch dispute, 131–35, 142–44, 154, 247n13 state actors’ incentives for defection, 51, 201–3, 214 —in automobile dispute, 69–71, 90, 91, 93 —in footwear dispute, 105–8, 122 —in post-2003 disputes, 176–80, 194 —in 2001 relaunch dispute, 135–38, 144–45, 154 domestic transmission mechanisms, 42–52 Do Rego Barros, Sebastián, 116 Dueck, Colin, 39 Duhalde, Eduardo, 107, 108, 172, 177, 244n28 Dumont, Alberto, 169 East African Community (EAC), 223 Economic Integration and Cooperation Program (PICE), 14, 62 economic policy makers, 204–8 Argentina —in automobile dispute, 77–79, 80 —in footwear dispute, 105–8 —in post-2003 disputes, 177–78, 181 —in 2001 relaunch dispute, 135–42, 152 Brazil —in automobile dispute, 69–71 —in footwear dispute, 112–14 —in post-2003 disputes, 178–80, 182 —in 2001 relaunch dispute, 144–45, 153 as domestic transmission mechanism, 44, 45, 50 Ecuador, 190, 211, 233n3 emerging powers, 217–20 Enterprise of the Americas Initiative, 25

European Union (EU) Argentina and, 139, 140, 141, 184 MERCOSUR and, 116, 185, 209, 210, 252n50 exchange rates, 201 asymmetries in, 130, 134, 137, 148, 150 competitive, 180, 205 flexibility in, 176, 179, 182 and trigger mechanisms, 135, 145, 148–49, 250n6 extraregional powers, 220–22 Feletti, Roberto, 210 Fernández, Alberto, 181 Fernández, Roque, 106–7, 137, 180, 244n27 financial crisis of 2008, 162, 210 footwear sector dispute, 57, 93, 95–124 about, 96–98 conclusions from, 121–24 domestic constraints on Argentina in —power sharing and bargaining among state actors, 108–9, 121, 122 —societal pressures, 99–105, 122 —state actors’ incentives for defection, 105–8 domestic constraints on Brazil in —power sharing and bargaining among state actors, 112–15, 121, 122 —societal pressures, 110–12, 122 —state actors’ incentives for defection, 112–14 negotiations and conflict resolution, 117–21 systemic incentives for cooperation in —Argentina, 108–9, 121, 123, 124 —Brazil, 114–17, 121, 123, 124 foreign policy executive (FPE), 55, 93, 204–5, 208–9 Argentina, 43, 206 —in automobile dispute, 79–81 —in footwear dispute, 105–6, 108–9, 124

282 Index foreign policy executive (FPE) (continued ) —in post-2003 disputes, 181 —in 2001 relaunch dispute, 138–42, 152 Brazil, 7, 43, 206, 209, 210, 216–17 —in automobile dispute, 72–73, 75, 90, 93 —in footwear dispute, 114, 116–17, 124, 245n45 —in post-2003 disputes, 182–83, 192 —in 2001 relaunch dispute, 145–47 as domestic transmission mechanism, 43, 45, 47, 48–49, 50 neoclassical realism, on 38 Foreign Trade Chamber (CAMEX, Brazil), 69, 112, 238n23 Franco, Federico, 233n2 Franco, Gustavo, 69, 71 Franco, Itamar, 66 Free Trade Area of the Americas (FTAA), 146, 185, 213 Argentina and, 109, 120, 140, 184 Brazil and, 145–46, 182, 184 negotiations over, 115, 116, 210 Fritsch, Winston, 67 Frondizi, Arturo, 238n37 Furlan, Luis, 182 General Confederation of Labor (CGT, Argentina), 138 Germany, 5 globalization emerging powers and, 217–20 global power and, 218 regionalism and, 28–29, 222, 223 Gomes, Ciro, 67 Gomes de Almeida, Júlio, 143 Gotelli, Guillermo, 251n26 Gulf Cooperation Council (GCC), 221, 223–24 Haiti, 187 Higgott, Richard, 29

household appliances, 163–65, 169–72, 173, 250n17, 251nn28–29 Hurrell, Andrew, 24, 217–18, 219 IBSA Initiative, 186 Ikenberry, John, 186, 253n52 India, 186, 217, 219, 220, 221–22 Indonesia, 217, 218 Industrial Chamber of Argentine Auto Parts Producers (CIFARA), 76, 239n39 information technology and telecommunications, 129, 143 Initiative for the Integration of Regional Infrastructure in South America (IIRSA), 147 Inter-American Development Bank, 187, 216 International Relations (IR), 5, 9, 36, 235n8 regionalism and, 2–3, 6, 23, 223 interstate negotiations in automobile dispute, 64, 81–88, 241nn66–73, 242n74 in footwear dispute, 117–21 neoclassical realism on, 52–55 power asymmetries in, 53–54 in 2001 relaunch dispute, 147–53, 241nn66–71, 249n54 United States and, 128, 139, 140 Japan, 5 Katzenstein, Peter, 5, 25 Kirchner, Cristina, 213, 233n3, 254n4 Kirchner, Néstor, 172, 176, 177, 202 autocratic style of, 181 support for regional integration, 158, 176, 184 ties with Venezuela, 189, 213 Kubitschek, Juscelino, 65 Kume, Honorio, 143 Kupchan, Charles, 26

Index 283 Lacognata, Hector, 190 Lafer, Celso, 113, 128, 146 Lafer Piva, Horácio, 248n40 Lampreia, Luiz Felipe, 114–15, 253n59 and automobile dispute, 72, 81 on Brazil’s global influence, 235n17, 238n35 Latin American Integration Agreement (ALADI), 97, 99, 105, 106, 242n2 Lavagna, Roberto, 159, 164, 169, 172, 177, 181 Lobell, Steven, 10, 39, 41, 234n10 López Murphy, Ricardo, 128 Lugo, Fernando, 233n2 Lula da Silva, Luiz Inácio, 176, 182 foreign policy of, 186–88, 211, 215 macroeconomic policy of, 179, 202 regional integration as goal of, 158, 176, 184, 190 Machinea, José Luis, 127, 128 Magariños, Carlos, 64, 81, 87 Malamud, Andrés, 218 Malan, Pedro, 69, 81, 145, 249n49 Marconini, Mário, 112, 114 Mattli, Walter, 26 Medeiros, Marcelo de Almeida, 245n45 Meirelles, Henrique, 179, 182 Méndez, Héctor, 251n31 Mendonça de Barros, José Roberto, 69 Menem, Carlos, 14, 117, 137, 200 and automobile dispute, 63, 77, 79–80, 81 and footwear dispute, 96, 99, 109 MERCOSUR and ALADI safeguard mechanisms, 97, 99, 105, 106 Argentina’s strategic commitment to, 72–73, 79, 82, 84, 108, 131, 140, 141–42, 148, 212–13 Belo Horizonte ministerial meeting (1997), 115 Brazil’s preponderance in, 7, 82, 94

Brazil’s strategic commitment to, 7, 28, 41, 55, 72–75, 114–17, 124, 148, 188–89, 193, 197, 209, 210, 212–13, 215, 221, 235n17 Common Market Council of, 45, 127, 131 creation of, 14–15, 25–26 as customs union, 73, 78, 86 Decision 29/94 of, 62, 63, 67, 86, 88 defensive incentives for preserving, 10, 26, 40, 41, 115, 141, 183–86, 193, 209, 215 European Union and, 116, 185, 209, 210, 252n50 foreign policy executive and, 208–9 fragility of, 146 future of, 213–17 high representative general of, 192, 254n66 household appliances and, 163–65 literature on, 6, 25, 27–28 Paraguay and, 41, 125, 127, 189–90, 211, 233n2, 253n58 Parliament of, 192, 214 Permanent Review Tribunal of, 214, 235n10 power asymmetries within, 7, 27, 41, 53, 189, 191, 193, 198 relaunching of (2001), 126–28 role of presidents in, 181 speculation on demise of, 2, 234n5 textiles and, 162–63, 250n10 trade balances and, 15–16 Trade Monitoring Commission in, 20–21, 157, 159, 161, 163, 164 Uruguay and, 41, 125, 127, 189, 211 Venezuela and, 8, 190, 210, 211–12, 233n3, 254n4, 255n8 See also regionalism and regional cooperation; specific disputes Mexico, 70 Moravcsik, Andrew, 52, 236nn5–6

284 Index National Association of Automobile Assemblers (ANFAVEA, Brazil), 65, 67, 70 National Commission of Foreign Trade (CNCE, Argentina), 162 National Development Bank (BNDES), 191 nationalism, 216 national preferences, 42 domestic determinants of, 30, 34 interstate negotiations and, 52, 54–55, 236n5 neoclassical realism, 36, 222 analytical framework of, 9–10, 40–55 overview of, 37–40 neoliberalism, 23–25, 177 New Regionalism, 28–30, 222 North American Free Trade Area (NAFTA), 25–26, 40, 73 Argentina and, 72, 84, 120, 140 nuclear weapons, 14 Oman, 221 Ouro Preto Summit and agreements, 61, 62–63, 67–68, 69–70, 86, 88, 90, 102, 236n2 Pakistan, 219, 222 Palocci, Antonio, 179, 182 Paraguay, 191, 241n73, 255n6 MERCOSUR and, 41, 125, 127, 189–90, 211, 233n2, 253n58 Parente, Pedro, 120 Patriota, Antonio, 210 Peña, Alejandro, 109 Peña, Felix, 105 Pérez Llana, Carlos, 181 Phillips, Nicola, 29 Piani, Guida, 143 Pinheiro, Guimaráes, Samuel, 182, 254n66 power asymmetries, 10, 46, 173, 221, 222

between Argentina and Brazil, 75, 132–33, 189 as incentive for regional cooperation, 36, 208 International Relations literature on, 3, 220 interstate negotiations and, 53–54 within MERCOSUR, 7, 27, 41, 53, 189, 191, 193, 198 Pratini de Morales, Marcus, 113, 245n43 process-tracing, 56 protectionism, 32, 159, 175, 200 Rathbun, Brian, 38, 39 rational-choice theory, 32 realism and neorealism, 25–28, 42 Redrado, Martín, 184 regionalism and regional cooperation, 3, 22–23, 34, 42, 188, 223–24 defensive considerations in, 26 domestic politics as explanation for, 5–6, 30–34 emerging powers and, 217–20 extraregional powers and, 220–22 globalization and, 28–30, 222, 223 International Relations and, 2–3, 6, 23, 223 interstate negotiations and, 52–55 neoliberal institutionalist explanations of, 23–25 New Regionalism and, 28–30, 222 political economy of, 5–6, 23 power asymmetries and, 36, 208 power relations and, 5, 26–27, 220–24 realist and neorealist explanations for, 25–28 scholarly attention to, 4–6, 23, 31 See also domestic constraints on cooperation; MERCOSUR; systemic incentives for cooperation relaunch dispute (2001), 57, 125–56 about, 128–31 bilateral negotiations and agreement, 147–53, 241nn66–71, 249n54

Index 285 conclusions from, 153–56 domestic constraints on Argentina in —power sharing and bargaining among state actors, 138–42, 153, 154, 156 —societal pressures, 131–35, 154, 247n13 —state actors’ incentives for defection, 135–38, 154 domestic constraints on Brazil in —power sharing and bargaining among state actors, 145–47, 154 —societal pressures, 142–44, 154 —state actors’ incentives for defection, 144–45, 154 systemic incentives for cooperation in, 140–42, 145–47, 155 —for Argentina, 140–42, 155 —for Brazil, 145–47, 155 Rial, Osvaldo, 107, 244n28 Rodríguez Giavarini, Adalberto, 128, 248n32 Rose, Gideon, 37 Rose Garden Agreement (1991), 152 Rousseff, Dilma, 212, 216–17, 233n3, 255n8 Russia, 186, 217 Sarney, José, 14 Saudi Arabia, 221 Schirm, Stefan, 218–19 Schweller, Randall, 10, 37, 39 Secretariat of Foreign Trade (SECEX, Brazil), 112 September 11 terrorist attacks, 41, 141–42, 147, 152, 156 Serra, José, 69–70, 81, 82, 216, 255n11 SINDIPEÇAS (National Union for the Auto Parts Industry, Brazil), 66, 67 Skaf, Paulo, 251n34 Snyder, Jack, 37, 39 Soares de Lima, Maria Regina, 188, 253n51 South Africa, 186, 217, 220–21

South African Development Community (SADC), 220, 223, 255n12 South American Community of Nations (SACN), 188, 190–91 South American Defense Council (SADC), 188 South American Free Trade Area (SAFTA), 74 South Asian Association for Regional Cooperation (SAARC), 221 South-South cooperation, 186–87 Structural Convergence Fund, 191, 214 structural realism, 9–10, 41 Stuenkel, Oliver, 219 Summits of the Americas in 1994, 73 in 2001, 145 in 2005, 185 systemic incentives for cooperation, 40–42 in automobile dispute, 93–94 —for Argentina, 79–81, 92 —for Brazil, 72–75, 92 defensive, 79–81, 92, 115, 123, 155, 183–86, 195, 208–10 in footwear dispute —for Argentina, 108–9, 121, 123, 124 —for Brazil, 114–17, 121, 123, 124 offensive, 92, 155, 183, 195, 210–12 in post-2003 disputes —for Argentina, 183–84, 192, 195 —for Brazil, 186–92, 195 in 2001 relaunch dispute —for Argentina, 140–42, 155 —for Brazil, 145–47, 155 Tang, Shiping, 40 tariffs and duties, 15 on automobiles, 67, 68, 86–87, 237n18, 240nn60–61 on capital goods, 128, 129, 132, 135–36, 142–43 CET and, 125, 128–29, 136, 140, 143–46, 148–49, 156

286 Index tariffs and duties (continued) on footwear products, 102, 243n19 on household appliances, 164 textiles, 96–97, 162–63, 172–73, 200, 250n10, 251n34 Argentine industry, 167–69 trade balance, 71, 203 Argentina-Brazil, 88, 133, 167, 251n20 MERCOSUR and, 15–16 Treaty of Asunción, 14–15, 25–26, 62, 77, 78, 102 Treaty of Integration, Cooperation, and Development, 14 Tulchin, Joseph, 240n50 Turkey, 217 Union of South American Nations (UNASUR), 188 United Nations Security Council, 187, 190, 216 United States, 5, 25, 140, 152, 209, 221 Argentina and, 41, 55, 80, 84, 108–9, 128, 139, 140, 209 Brazil and, 73, 176 Uruguay and, 189, 192, 216 Western Hemisphere centrality of, 40, 221 Uruguay, 146, 191, 241n73 MERCOSUR and, 41, 125, 127, 189, 211 United States and, 189, 192, 216

Uruguay Round, 40 US Trade Representative (USTR), 141 Venezuela Argentina and, 189, 192, 213, 216 Brazil and, 190, 253n59 MERCOSUR and, 8, 190, 210, 211–12, 233n3, 253n59, 254n4, 255n8 voluntary export restraint (VER), 109, 118, 173, 178, 200, 202–3 voluntary restrictions, 4, 159–60, 250n6 vulnerability, 33, 39, 151 dependence and, 53 as incentive for regional cooperation, 3, 7, 10, 36, 41, 42–43, 81, 93, 183–86, 197, 208–10 Werneck, Dorothea, 64, 69, 81, 87 Werneck-Magariños Agreement, 85–88, 241nn66–73, 242n74 wine industry, 165–66, 174–75, 250n18, 252n39 Wohlforth, William Curti, 10, 37 World Trade Organization (WTO), 73, 115–16, 210, 218 Argentina and, 87, 184, 243n13 Brazil and, 85–86, 187, 216, 219 Zakaria, Fareed, 10, 37 Zoellick, Robert, 152

Laura Gómez-Mera is assistant professor in the Department of International Studies at the University of Miami.