MERCOSUR Economic Integration: Lessons for ASEAN 9789812309174

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MERCOSUR ECONOMIC INTEGRATION

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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Report No. 5

MERCOSUR ECONOMIC INTEGRATION Lessons for

INSTITUTE OF SOUTHEAST ASIAN STUDIES Singapore

First published in Singapore in 2009 by ISEAS Publishing Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2009 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters. ISEAS Library Cataloguing-in-Publication Data MERCOSUR economic integration : lessons for ASEAN. (ASEAN Studies Centre report ; no. 5) 1. ASEAN. 2. MERCOSUR (Organization). 3. Southern Cone of South America—Economic integration. 4. Southeast Asia—Economic integration. I. Institute of Southeast Asian Studies. ASEAN Studies Centre. II. Series. JZ5333.5 A9A85 no. 5 2009 ISBN 978-981-230-916-7 (soft cover) ISBN 978-981-230-917-4 (PDF) Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Seng Lee Press Pte Ltd

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CONTENTS

vii

Preface I.

The MERCOSUR Experience ECLAC, International Trade and Integration Division

1

Executive Summary

3

Introduction

7

1. 2. 3. 4. II.

Integration within MERCOSUR Trade Integration Rule of Law and Legislation Conclusion

9 38 55 71

MERCOSUR: The Elusive Quest for Regional Integration 87 Eul-Soo Pang and Laura Jarnagin Executive Summary

89

Introduction

92

1. 2.

93

3. 4. 5. 6. 7. 8.

Genesis and Evolution: An Overview A Snapshot of MERCOSUR and ASEAN in Numbers Defining Membership in MERCOSUR The Structure of MERCOSUR Structural Issues Undermining Integration The Problems of Different Economic Systems Trade Asymmetry as Catalyst for Disunity State Subsidies and Special Zones of Industrial Promotion

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Contents

9.

Members’ Pursuit of Diverse Foreign Economic and Security Policies 10. Future Prospects and Lessons Learned

131

About the Authors

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PREFACE

In January 1992, the leaders of the Association of Southeast Asian Nations (ASEAN) gathered for their fourth summit meeting. On that occasion, the ASEAN economic ministers signed an agreement called the Common Effective Preferential Tariff for the creation of the ASEAN Free Trade Area. That agreement committed the ASEAN countries to the reduction of tariffs on intra-ASEAN trade to minimal levels in agreed tranches within a specific timeframe and to the removal of non-tariff barriers to that trade. It was the first concrete step in ASEAN’s march towards the integration of the regional economy. The significance of that step arose notably from the fact that it formally marked the shift of the ASEAN economic enterprise from one of economic cooperation to one towards economic integration, a word and concept hitherto taboo in ASEAN circles. Indeed, some leaders of ASEAN, then with six members, had been signalling such a shift for at least the past year. Among the spurs that goaded ASEAN to undertake the shift was, in addition to the surge of economic globalization, the rise of economic regionalism in several other parts of the world. One of those regions was the southern cone of Latin America, where the Treaty of Asunción had been signed in 1991 to create the Mercado Común del Sur (MERCOSUR), or Common Market of the South. Since then, ASEAN personages have held up MERCOSUR as a threat to Southeast Asia in the competition for markets and investments or as a model to be emulated or as a regional experiment the mistakes and shortcomings of which ASEAN needs to avoid, or all three at once.

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Preface

Recently, ASEAN has sought political and economic linkages not only with Latin America as a whole through the Rio Group at the United Nations or through the Forum for East Asian and Latin Americal Cooperation (FEALAC), but also, more narrowly and directly, with MERCOSUR. At their July 2008 meeting, the ASEAN foreign ministers announced the decision to hold the inaugural ASEAN-MERCOSUR Ministerial Meeting in Brasilia on 24 November 2008. It is in this light that the ASEAN Studies Centre of the Institute of Southeast Asian Studies in Singapore requested the United Nations Economic Commission for Latin America and the Caribbean and Dr Pang Eul-Soo and Dr Laura Jarnagin, professors in Colorado School of Mines in the United States, to do two separate studies from two different viewpoints on the experience of MERCOSUR and on the lessons that experience may hold for ASEAN. The ASEAN Studies Centre takes pleasure in publishing those studies.

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The MERCOSUR Experience

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I THE MERCOSUR EXPERIENCE

ECLAC International Trade and Integration Division November 2008

This document was prepared by the International Trade and Integration Division of the United Nations Economic Commission for Latin American and the Caribbean (ECLAC) for the ASEAN Studies Centre of the Institute of Southeast Asian Studies (ISEAS).

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Executive Summary

The Southern Common Market (MERCOSUR in Spanish) is the largest trading bloc in Latin America and the Caribbean, created in 1991. Four countries are currently full members — Argentina, Brazil, Paraguay and Uruguay — while Venezuela is in the process of attaining full membership. MERCOSUR (four members) encompasses about half of Latin America’s gross domestic product (GDP) and one-third of its foreign trade. This study reviews the main achievements and challenges of the integration experience of MERCOSUR. The first part examines its economic and institutional development, in particular trends in economic growth and international trade, institution building, and cooperation to reduce asymmetries. During its seventeen years, MERCOSUR’s regional integration advanced most during economic expansions. The group’s economic and trade performance went through three different stages: an expansion between 1991 and 1997, an economic crisis and stagnant exports between 1998 and 2002, and a recovery in both trade and exports from 2003 onwards. From 2003 to 2007, some progress was also made in the area of macroeconomic convergence (fiscal balance, public debt and inflation). Nevertheless, it seems difficult to institutionalize a greater convergence of policies, in part due to the lack of incentives for complementarities and interdependence among member states. The product structures of intra-regional and extra-regional exports are very different. Whereas exports to the rest of the world are dominated by commodities, intra-regional

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exports are intensive in manufactures, especially in the cases of Argentina and Brazil. MERCOSUR institutions were built gradually over time. Under the founding Asunción Treaty (1991), four mechanisms were set up to move towards a common market (trade liberalization, common external tariffs, macroeconomic policy coordination and sector agreements). In 1998, the Protocol of Ushuaia reinforced the commitment to democracy. Another achievement was the Permanent Review Court, established by the Olivos Protocol in 2002, to interpret MERCOSUR regulations and settle trade disputes. The present institutional set-up consists of a complex structure of a multitude of groups and bodies covering most fields of integration. In recent years, the participation of civil society and private sectors in the decision-making process of MERCOSUR has substantially increased. The main institutional characteristic of MERCOSUR, different from the European Union and the Andean Community, is the lack of automatic imposition of decisions, resolutions and directives originating from its main MERCOSUR organs into national laws. MERCOSUR members cooperate in many areas (infrastructure, environment, water management, democracy and human rights, education, social development and labour policy) with common decisions and joint statements that establish common plans, programmes, and ad hoc working groups. However, most cooperation remains at the level of discussion and declaration of common goals and priorities and rarely translate into concrete joint actions and projects. One exception is the Fund for Structural Convergence (FOCEM), which may contribute to overcoming asymmetry problems. The second part reviews in detail the trade integration process of MERCOSUR, including the creation of a free trade area, a

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customs union, the treatment of foreign investment, and external trade policies. Although on paper MERCOSUR is a customs union, many perforations of the Common External Tariff (CET) remain. At the moment, only 10 per cent of all imports enter the bloc under the CET, while for another 25 per cent a zero tariff is applied. Intra-MERCOSUR trade has been mostly liberalized, although numerous non-tariff barriers (NTBs) remain, including regulated prices, import licenses, quotas, technical standards, and voluntary export restraints. In the early 1990s MERCOSUR countries removed many significant obstacles to the establishment of foreign firms. This helped to attract considerable amounts of FDI, especially in Argentina and Brazil. In terms of external trade policies, MERCOSUR has engaged in trade negotiations with other countries in and outside South America since 1995, with limited results. A difficult issue in external trade negotiations has always been whether agreements should be negotiated collectively or individually. As a result, out of the twenty-two negotiated agreements, only three qualify as a common agreement (the ones with Bolivia, Chile and Israel). MERCOSUR signed multiple framework agreements, but these do not have specific commitments for trade liberalization. Most trade agreements between the MERCOSUR countries and third parties are with the South countries. The third part describes institutional aspects of MERCOSUR, including the rule of law, dispute settlement and democracy. Currently, inter-governmental and supranational legislation dispute the supremacy in MERCOSUR, which is creating many difficulties. However, there is some progress towards a supranational mechanism, including the establishment of a MERCOSUR Parliament, aiming to obtain better coordination among domestic regulations and increase certainty in law enforcement. Another

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important legal institution is MERCOSUR’s dispute-settlement mechanism, which has provisions similar to the one of the World Trade Organization (WTO). Parties in dispute may choose at which institution to resolve their controversies, but once the selection is made they cannot change. A problematic issue is the lack of a clear binding mechanism mandate, which prevents the MERCOSUR dispute-settlement system to play an effective role in solving controversies among parties. Finally, the third part describes the commitment of MERCOSUR members and associates to a democratic clause, aimed to guarantee democratic values. This clause has been effectively used, for example, in the case of Paraguay in 1999. To conclude, the experience of MERCOSUR may prove useful for ASEAN’s own process of integration in several respects. Some positive aspects include a commitment to democracy, attempts to reduce regional asymmetries, the comprehensive development of participatory mechanisms, and actions to promote convergence on key issues in the group as well as with other projects in Latin America at large. Some negative aspects of the MERCOSUR experience are the difficulty of transferring decision-making processes from sovereign states to the supranational level of trade integration schemes, the limited private sector participation in decision-making, multiple cases of non-compliance with judicial institutions and decisions, a lack of effective implementation of some cooperation projects, and multiple bilateral conflicts among members which harm group confidence.

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INTRODUCTION

The Southern Common Market (MERCOSUR in Spanish) is the largest trading bloc in Latin America and the Caribbean. Four countries are currently full members — Argentina, Brazil, Paraguay and Uruguay while Venezuela is in the process of attaining full membership. MERCOSUR (four members) encompasses 50 per cent of Latin America’s GDP, 43 per cent of its population, 59 per cent of its total land area, 50 per cent of its industrial production and 33 per cent of foreign trade. The main goals of the bloc are the elimination of obstacles to internal trade (tariffs and non-tariff barriers) and the reduction of structural differences among the members and income inequality. During its first seven years of its existence (1991–97), the socalled MERCOSUR golden age, MERCOSUR established the institutions currently in place, and attracted large amounts of foreign direct investment. Expectations for what was considered the biggest Customs Union in Latin America and the Caribbean were high. Bolivia and Chile have been associate members since 1996 and 1997, respectively. In this period, the European Union began trade negotiations with MERCOSUR (1995). Moreover, the group was active in pursuing trade negotiations with other Latin American and Caribbean countries, Canada and the United States, with a view to establishing a Free Trade Area of the Americas (FTAA). The initial phase of prosperity was interrupted in 1998 by the effects of the international financial crises in East Asia and Russia, which led to a devaluation of the exchange rate in Brazil, the debt crisis in Argentina, and enormous economic difficulties in other

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countries of the continent. In this turbulent context, trade disputes within MERCOSUR became persistent and the bloc as an entity stagnated. There were even talks that MERCOSUR should regress to a free trade zone, which would have reduced its ability for political coordination, and redirected its focus to a purely economic one. The Asian crisis, coupled with financial turbulences in Brazil and Argentina, and the slowdown in world trade, caused the trade and investment flows within the bloc to falter in the period 1998– 2002. Trade conflicts between member countries worsened, with a great increase in the number and magnitude of reciprocal complaints, especially among the two bigger countries of the group. Nevertheless, the countries advanced in the development of the group’s institutions, including the establishment of political commitments to protect democracy. With this purpose the countries signed the Ushuaia Protocol, through which they committed to secure democracy and stability in the sub-region. Another relevant step was the creation of the Permanent Tribunal of Review which reformed the dispute settlement mechanism of MERCOSUR. Between 2003 and 2008, intra-group trade recovered, countries increased commercial ties and began negotiations both with third countries in Latin America — a cooperation agreement was recently reached with the Andean Community — and with countries outside the region — Egypt, Morocco, India, Israel, Turkey, Jordan and the Southern African Customs Union (SACU). In this period the negotiations with the European Union progressed very slowly, and those towards FTAA collapsed due to irresolvable differences between the major partners of the group, namely Brazil and Argentina, with the United States. After seventeen years, MERCOSUR faces numerous challenges. These include (i) progress towards supranationality in the three

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most important areas of integration: the executive, judicial, and legislative processes, with the aim of improving the quality of the institutions; (ii) addressing the recurrent problem of structural asymmetries between countries and regions within the group; (iii) achieving adequate level of macroeconomic coordination to guarantee monetary stability in the sub-regional field; (iv) achieving full implementation of all the agreements between member states in all fields; and (v) coming up with a mechanism that would allow flexibility in bilateral negotiations with third countries. These issues, analysed in detail in this document, are holding back the potential of MERCOSUR as an efficient customs union, which in turn impairs the competitiveness of the private sector in the member countries. The study has four sections. The first part reviews the longterm evolution of integration, since the bloc’s inception in the eighties until the years of most progress in integration (1991– 2008). It presents an analysis of the progress in economic, social and institutional integration, showing enough evidence to underline the importance of taking advantage of the expansive economic cycles to support the integration process. Section two analyses trade integration in its internal and external aspects. The third section summarizes the evolution of the juridical system for establishment of the rule of law within the community, including an analysis of the institutional set-up for dispute settlement, and a review of the Ushuaia Protocol on democratic commitment in the common market. Finally, the fourth section concludes with some lessons learned that are considered relevant for ASEAN countries.

1. Integration within MERCOSUR During the mid-1990s, MERCOSUR was hailed for the spectacular boom in trade among its members and for the ability to attract foreign direct investment. Stimulated by the tariff reductions, the

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commitment of the four members to completely eliminate tariffs and non-tariff barriers (NTBs), as well as the intention to form a customs union with a common external tariff, the conditions for economic expansion were viewed as highly favourable. In this period, numerous studies praised the substantial progress in regional integration in MERCOSUR, when the bloc was on-track to becoming the largest customs union among developing countries. These advances took place during the period of trade and economic expansion. Most of the bloc’s institutional development took place in this period. Unfortunately, between 1998 and 2002, similar to other developing regions, MERCOSUR felt the repercussions of the Asian crisis, culminating in financial turbulences in Brazil and a sovereign debt default and end of the Convertibility Plan in Argentina. These events were further exacerbated by the 2001 collapse of the information technology (IT) bubble in the United States. During the 2003–07 period, the bloc managed to make up for the lost progress and initiated significant institutional reforms. This chapter analyses in more detail the factors mentioned above, in particular the advances in economic and institutional integration of MERCOSUR, including the joint efforts to address the asymmetries within the group. This will help to illustrate the complex issues and to explain the trends of reversal observed in MERCOSUR institutions during the periods of crisis and monetary turbulences.

1.1. Economic Trends a) Main Economic Indicators Between the inception of MERCOSUR and 2007 the average annual GDP growth rate in the bloc was 3.1 per cent, which is close to that of Latin America and the Caribbean region as a whole. During these seventeen years, the macroeconomic performance of the

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four countries went through three different stages: a continuous expansion between 1991 and 1997, a period of negative GDP growth between 1998 and 2002, and a recovery period from 2003 onwards. In the first period, the average annual GDP growth of the group was 3.9 per cent. In the same period, the weighted inflation rate of the group decreased from 366 per cent to 4.8 per cent, and exports within the bloc expanded at an annual rate of 26 per cent, a growth rate four times higher than exports to the rest of the world, which increased only 6 per cent yearly (see Figures 1.1 and 1.2). Unfortunately, internal economic problems (recession in Brazil, collapse in convertibility), as well as international turbulences (financial crisis in Southeast Asia and Russia and decline in global trade in 2001) slowed down the economic growth FIGURE 1.1 Evolution of Intra-regional Exports, 1990–2007 (share in total exports) 80% Mercosur

70%

Argentina

Brasil

Paraguay

Uruguay

60% 50% 40% 30% 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on COMTRADE database.

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FIGURE 1.2 Share of Primary and Natural Resource-based Manufactures in Total Exports, 2006

Paraguay

Share of PP in total exports

Argentina

Share of NRBM in total exports Share of PP in GDP

Uruguay

Share of NRBM in GDP Brazil 0%

20%

40%

60%

80%

100%

Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on COMTRADE database.

and the countries went into recession, averaging –0.1 per cent in annual growth in the period 1998–2002. At the same time, exports contracted abruptly, which worsened the current account balance. In 1997 the bloc registered a current account deficit of more than 3 per cent of the GDP (see Table 1.1). Despite this, the countries were able to stabilize prices. From 2003 to 2007, GDP growth picked up and the economies grew at an average annual growth rate of 5.7 per cent. During the same period intra-regional exports grew 27 per cent, showing a higher dynamism than in exports to the rest of the world, which grew 19 per cent. In the first semester of 2008, intra-regional exports also increased notably (see Table 1.2). In 2007 MERCOSUR comprised a population of 241 million and a GDP of US$1,208 billion, or US$5,000 per capita. The bloc’s average external tariff rate was 6.7 per cent. The share of intra-

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3.3 3.3 4.5

Paraguay

Uruguay

Source: ECLAC, based on official country data.

5.3

Argentina

3.9

–4.8

–0.7

2.1

–4.9

–0.1

1998–2002

8.2

4.2

4.4

8.8

5.7

2003–07

Annual average GDP grow rate, 1991–2007 1991–97

Brazil

MERCOSUR

Countries

variables

102.0

23.9

475.0

171.5

366.2

1991

19.9

6.9

6.1

0.5

4.8

1997

8.6

7.4

4.2

8.5

5.4

2007

Inflation rate (in percentage)

TABLE 1.1 Main Macroeconomic Indicators, 1991–2007

0.4

1.5

–0.3

–0.4

–0.3

1991

–1.3

–7.3

–3.5

–4.1

–3.6

1997

–3.0

4.5

0.4

3.2

0.8

2007

Current Account Balance (in percentage of GDP)

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25.6

14.5

16.0

Brazil

Paraguay

Uruguay –20.7

1.0

–21.8

–11.8

–15.9

1998–2002

16.6

28.2

32.2

22.0

26.9

2003–07

Source: ECLAC, based on official country data.

26.2

30.1

Argentina

1991–97

Intra-regional trade exports

MERCOSUR

Countries

variables

4.6

3.7

6.6

7.6

6.8

1991–97

0.7

–8.3

7.3

3.1

6.1

1998–2002

20.5

–1.0

19.8

16.1

18.9

2003–07

Extra-regional trade exports

9.6

7.6

9.0

14.1

10.4

1991–97

TABLE 1.2 Growth of Exports (% annual change), 1991–2007

–9.5

–1.6

4.3

–0.7

2.3

1998–2002

Total Exports

19.6

23.2

21.7

16.9

20.4

2003–07

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24,192

Uruguay 3,332

6,120

192,645

39,356

241,453

7,260

1,446

4,179

9,392

5,002

GDP per capita (US$)

3.2

3.2

6.7

5.0

6.7

27.7

66.4

10.8

22.3

14.8

Applied Share of intra-regional tariff (2006) exports in total (%) (%)

21.7

45.7

12.7

21.3

14.5

Exports of goods/GDP (2007)

Source: ECLAC, based on official country data and TRAINS database for applied tariff, calculated as weighted average for agricultural products and manufactures.

8,853

Paraguay

805,074

369,618

Argentina

Brazil

1,207,736

MERCOSUR

GDP Population (US$ million) (thousand)

TABLE 1.3 Economic Indicators in 2007 (or most recent)

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regional trade in total exports was approximately 15 per cent, and trade openness (measured as the share of exports in GDP) was 14.5 per cent (see Table 1.3).

b) Trends in Intra-regional Trade Between 1991 and 2007, MERCOSUR’s intra-regional exports grew 12 per cent annually on average, above the annual rate of growth of total exports. Uruguay is the only country of the group that registered lower rates of growth of intra-regional exports than the rate of total exports. As a result, the share of intra-regional exports in Uruguay’s total exports has declined in 2007 as compared to 1991 (see Figure 1.1). During the period of high growth (1991–97), intra-regional trade expanded at an annual rate of 22 per cent. The growth rate in 1998 was 25 per cent, almost triple the rate in 1990 (9 per cent). During the second period (1998–2002) intra-regional trade grew at more modest annual rates (9.3 per cent on average). It is important to emphasize the higher relevance of intra-regional trade for the small countries in the group, Paraguay and Uruguay. Brazil also plays an important role as a major market for Argentine exports. As can be noted from Figure 1.1, the share of intraregional exports in total MERCOSUR exports reached its maximum in 1997, when it was 25 per cent, and fell dramatically to only 11 per cent in 2002. Since then intra-regional exports have been expanding as the share in total, although they have not yet reached the levels of 1997 and 1998 (see Figure 1.1).

c) Macroeconomic Convergence The history of MERCOSUR offers rich examples of how lack of macroeconomic coordination can adversely affect the integration process. Brazil’s abandonment of its policy of exchange-rate bands in 1999 and the collapse of Argentina’s Convertibility Plan in

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2001–02 characterized a period of great turbulence in intraMERCOSUR exchanges. Macroeconomic imbalances of this magnitude can undermine the efforts towards greater regional integration, even when the political will is present, since they unleash reactions that accentuate latent asymmetries between the countries or cause abrupt changes in trade flows, aggravating the vulnerability of the sectors sensitive to competition. One of the principal challenges is therefore macroeconomic coordination — and later convergence — in defining and implementing exchange rate, monetary and fiscal policies. A greater convergence of these policies would result in increased flows of trade at the sub-regional level, reducing volatility and bilateral imbalances. This, in turn, would provide an impetus to development and consolidation of sub-regional institutions.1 The core question is whether macroeconomic coordination is necessary as a complement to trade integration. The answer is not entirely obvious in the short run, although in the medium to long term it seems to be affirmative. Some analysts advocate macroeconomic policy convergence that goes as far as the establishment of a monetary union with the U.S. dollar as the common currency (Lafer 2000).2 Unlike the European Union, which has both solid institutions to support the coordination of the member states’ macroeconomic policies and redistributive policies to help the accession of new members, MERCOSUR is currently not in a position where greater convergence of policies would be feasible. In particular, the large variability of exchange rates and volatility of financial flows constitute serious obstacles for convergence (Fanelli 2004). The lack of macroeconomic coordination in MERCOSUR is first and foremost the result of absence of proper incentives for complementarity and interdependence among the member states.

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Given these difficulties and especially due to the high volatility of the exchange rates by the end of the 1990s and beginning of 2000, the progress in achieving macroeconomic convergence has been limited. However in 2001 specific macroeconomic targets were agreed upon, and the Macroeconomic Monitoring Group Goals (GMM) began its work, charged with a specific task, among others, of harmonizing the economic statistics agreed upon in Florianópolis 2000. In Florianópolis, agreements were reached on three indicators with the following targets: (i) fiscal deficit (3 per cent of GDP); (ii) public debt (decreasing trend until reaching 40 per cent of GDP in 2010); and (iii) inflation (5 per cent beginning 2006). Subsequently, in 2003 the Common Market Group (GMC) issued a decision on the treatment of fiscal statistics of public entities and put forward a proposal on common methodology for the calculation of inflation. In 2008, MERCOSUR countries have achieved some convergence with respect to economic growth, exchange rate regimes, fiscal outcomes, inflation, and public debt as a percentage of GDP (see Table 1.4). The recent figures reflect a noteworthy period in the region’s macroeconomic accounts, which show significant progress in controlling inflation and budget deficits. The favourable external environment during 2004–07 explains much of this success, but the governments have failed to take advantage of the positive circumstances to move forward with macroeconomic coordination schemes that would help contain the impact of future external shocks or prevent the bloc itself from generating macroeconomic turbulence. Despite numerous efforts towards monetary integration, all initiatives remained at project level, and the convergence process is still a long way from being strong and completed (Bichara, Cunha, and Lélis 2008). The macroeconomic crises in the larger economies complicated the economic environment of the smaller

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TABLE 1.4 Comparison of Selected Macroeconomic Convergence Indicators, 2006 and 2007 Indicator Inflation

Country

Currentaccount Public deficit Public debt balance (% of GDP) (% of GDP) (% of GDP)

2002 2007 2002 2007 2002 2007 2002 2007 5% in 2006

(MERCOSUR)a Argentina Brazil Paraguay Uruguay

11.6 25.9 8.4 10.5 14.0

4.9 8.8 3.6 8.1 8.1

— 0.5 8.9 –1.5 1.8 3.2

0.4 1.1 0.3 1.5 –0.8

–3% of PIB

40% in 2010

1.1 0.6 1.2 3.2 4.9

67.1 145.9 37.9 59.2 98.7

1.1 –0.6 2.0 –1.0 0.7

39.6 55.8 32.2 17.3 50.7

Note: a. Averages weighted by each country’s GDP. Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on official country data.

ones. The collapse of the financial markets sparked by the crisis of subprime mortgages, the high volatility in commodity prices, and failures in investment banks in the United Status call for the countries in the group to look for mechanisms of higher coordination in order to avoid that isolated measures taken in response to the crisis may disrupt the markets of neighbouring countries. Taking advantage of the period with less volatility and higher degree of macroeconomic convergence (2003–07), the countries should continue to increase the coordination and harmonization, beginning with the ratification of the Florianópolis targets, and to focus on lowering current levels of inflation, improve the payment systems, and above all strengthen the sub-regional institutions with the aim of giving credibility to the agreement. This will be even more crucial in a period when the regional economy will

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face a period of high volatility, due to the turbulence in the international financial markets. At the moment, the four MERCOSUR countries were facing the dilemma of how to respond in a coordinated way to the international financial crisis. As of 24 October 2008, the regional stock markets had fallen approximately between 40 per cent and 60 per cent from their one-year highs, and economic growth is slowing down.

d) Product Composition of Exports Since the origins of MERCOSUR the structure of intra-regional and extra regional export flows has changed dramatically. The trend is towards intra-regional trade with higher concentration of products with greater value added, especially in agricultural manufacturing and light manufacturing. However, the smaller countries of MERCOSUR-Paraguay and Uruguay — continue to rely heavily on exports of primary products, which represent 71 per cent and 50 per cent of global exports, respectively (see Figure 1.2). The main export products from the bloc are maize, wheat (exported predominantly by Argentina), soybeans, sugar and coffee (both exported by Brazil only), bovine meat, natural gas (Argentina), aluminum, iron and steel (all three exported by Brazil only). In contrast with exports to the rest of the world, dominated by commodities, intra-regional exports are intensive in manufacturing (see Figure 1.3). This is especially pronounced in the trade between Argentina and Brazil. Between 1991 and 2006, intra-industry trade greatly increased between all countries, but especially between the two big countries (see Table 1.5).

1.2. The Institutional Structure A characteristic peculiar to the institutionalism of MERCOSUR which differentiates it from other integration initiatives such as

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FIGURE 1.3 Evolution of Exports According to Technological Intensity, 1991–2006 (as a % of total) 100% 80% 60% 40% 20% 0%

37.2

34.3

34.2

Intra 1991

Extra 1991

17.9

Intra-regional 2006

Productos Primarios Tecnología baja Tecnología alta

Extra-regional 2006

Manufacturas basadas en RR.N Tecnología media

Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on COMTRADE database.

TABLE 1.5 Intra-industry Trade Relations, 1990 and 2006 (Grubel & Lloyd Index) Partners

2006

1990

Countries

Argentina

Brazil

Brazil

0.30

Paraguay

0.05

0.02

Uruguay

0.31

0.20

Brazil

0.51

Paraguay

0.13

0.12

Uruguay

0.31

0.21

Paraguay

0.02

0.23

GLL > 0.33 GLL > 0.10 < 0.33 GLL < 0.10 Source: ECLAC/ITID based on United Nations Commodity Trade Database (COMTRADE).

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the European Union and the Andean Community in Latin America is the lack of automatic imposition of decisions, resolutions and directives originating from its main organs into national laws, as will be discussed in Section 3. In this section we summarize the shaping process of MERCOSUR from its pre-conception phase to the emergence of a complex set of institutions that define the current structure of the group.

a) History of Regional Integration The first important landmark in the cooperation among the countries of the Southern Cone dates back to 1979, when the Tripartite Agreement was signed among Argentina, Brazil and Paraguay for sharing of the hydroelectric dams Itaipú and Corpus Cristo (Bauman et al. 2004). It is important to note that the two biggest countries of the group (Argentina and Brazil) were involved in geopolitical conflicts during the periods of their respective military dictatorship, especially concerning the use of the water resources of the South Cone for the generation of hydroelectric power. Integration was one of the mechanisms to guarantee peace in the sub-region, and also a mechanism designed to counterbalance the relative isolation from the financial centres in the United States and Europe, triggered by the 1982 moratorium.3 MERCOSUR was created in 1991, with the signature of The Asuncion Treaty, but its origins trace back to the 1980s, recorded in a series of agreement for economical and political cooperation between Argentina, Brazil and Uruguay as well as bilaterally between Argentina and Brazil. Only between 1984 and 1989 both countries signed twenty-four bilateral protocols. In that period the most relevant agreements were those of Economic Association. These juridical instruments were exactly those that marked the process of creation of the group in the 1990s.

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The process received a boost in July of 1990s with the signing of the Buenos Aires Act. The act adopted a progressively linear and automatic schedule of tariff reductions. According to the agreed schedule, by the end of 1994 Argentina and Brazil would eliminate tariff rates on a reciprocal basis. The Asunción Treaty of 1991 extended these commitments to Paraguay and Uruguay and marked the creation of MERCOSUR. Table 1.6 summarizes the institutional landmarks in MERCOSUR’s integration. The Asunción Treaty set up four mechanisms to move towards a common market, namely: (i) the Trade Liberalization Programme (TLP) to be concluded by 31 December 1994; (ii) adoption of a common external tariff (CET) as of 1 January 1995; (iii) coordination of macroeconomic and sector policies; and (iv) sector agreements to deepen and speed up the liberalization of intra-regional trade flows. However, only the TLP included detailed enforcement mechanisms. All member states undertook essentially the same commitments, except for a larger number of transitory exemptions and one additional transition year to reach 100 per cent preference over MFN tariff rates for Paraguay and Uruguay (Bouzas, Veiga, and Torrent 2002). In 1998, The Protocol of Ushuaia was signed, making the commitment to democracy a fundamental principle of the bloc and outlining measures that could be taken in case of a breakdown of democracy in one of the member states. Such measures ranged from suspension of the right to participate in various bodies of the respective integration processes to suspension of the rights and obligations deriving from those processes.4 Another important achievement was the Permanent Review Court, established by the Olivos Protocol in 2002 to interpret MERCOSUR regulations and in particular to settle trade disputes. This is the first “supranational-like” institution of the bloc, an

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1986 1990

Argentina-Brazil (ECA No. 14) “Buenos Aires Act” Acta de Buenos Aires

1985

Argentina-Brazil

Argentina-Brazil (ECA No. 7)

1982

1980

1979

Date

Argentina-Uruguay (Economic Complementation Agreement ECA No. 1) Brazil-Uruguay (ECA No. 2)

Argentina-Brazil

Tripartite Treaty among Argentina, Brazil and Paraguay

Agreement

LAIA framework (From partial to total tariff elimination with some exceptions: sugars and vehicles with special regimens.)

LAIA framework (Partial tariff reduction and Economic Cooperation Agreement).

Foz de Iguazú Declaration created a High Level Mixed Commission for Integration

LAIA framework (Partial tariff reduction and cooperation agreement).

Nuclear cooperation agreement

End of long dispute over the water resources of the river Paraná.

Decisions

TABLE 1.6 Institutional Landmarks in MERCOSUR History

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I Stage (Pre-MERCOSUR)

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II Stage (MERCOSUR Constitution and Institutionalism conformation)

2002

2006

The Protocol of Olivos

The Caracas Protocol

Decisions

The Venezuela Adhesion Acceptation. Only ratified by Argentina and Uruguay.

Establishment of the Permanent Review Court, dedicated to settling commercial disputes, the first “supranational” institution of the bloc.

Adoption of the clause on democracy

Constitutive Protocol of the MERCOSUR Parliament. The main objectives: Harmonization of national laws and speeding up the approval of Communitarian Decision in the respective National Congress.

Gives MERCOSUR an international legal personality, so that it can negotiate agreements as a bloc.

MERCOSUR Dispute Settlements Mechanism, following the approach “peace through law” and “avoid the use of force as a means to solving disputes”.

MERCOSUR is created, with its commercial rules and inter-governmental institutions.

Source: ECLAC, basis on The MERCOSUR Administrative Secretariat .

1998

1995

The Protocol of Montevideo

The Protocol of Ushuaia

1994

1991

The Protocol of Brasilia

The Protocol of Ouro Preto

1991

Date

The Asuncion Treaty

Agreement

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international judicial body whose decisions are binding for the member states. Traditionally, Brazil had opposed to this type of arrangement, and preferred to exercise its hegemonic position to achieve its objectives through inter-governmental institutions. The institutional structure of MERCOSUR is very diverse and covers practically all fields relevant to the development of the integration scheme; however it should be noted that it slowly transformed into a complex structure consisting of a multitude of groups and bodies. By 2007 the structure of MERCOSUR consisted of approximately 280 negotiation forums (Vaillant 2007). Figure 1.4 shows the current institutional set-up of MERCOSUR. The most important organs within MERCOSUR are: the Common Market Council (CMC), the Common Market Group (GMC), the Trade Commission of MERCOSUR (CCM), the Parliament of MERCOSUR (PM), formerly Parliamentary Commission, the Permanent Tribunal of Review (TPR), and the Secretariat of MERCOSUR. The Common Market Council (CMC) is responsible for political leadership of the group. It is composed of the ministers of foreign and economic affairs of the member countries, with a pro-tempore presidency rotating every six months among the members. The CMC meets every six months, together with the presidents of the member states in the presidential summits. The result of its deliberations is expressed through “decisions”, which constitute MERCOSUR law and are binding. The Common Market Group (GMC) is the executive organ of MERCOSUR. It has four permanent members and four substitutes, one for each member country, who have to be representatives of the ministry of foreign affairs and economics and of the central banks. Its ordinary meetings take place every three months, and the outcomes are articulated through resolutions, which are mandatory.

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Commission of Permanent Representatives (7 groups)

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The Common Market Group

The EconomicSocial Consultative Group (4 areas, 1 mixed committee)

The Mercosur Administrative Secretariat

Commissions, Ad-hoc groups, Forums and Councils (37)

Work sub-groups (14)

Permanent Tribunal of Review

Committee of commercial defense and safeguards

Technical Committees (7)

Technical Subcommittees (6)

Specialized meetings (15)

Meetings of authorities in Human Rights. (5 groups)

Council of the Common Market (10 Minister meetings)

Source: ECLAC/ITID, based on official MERCOSUR website .

Consultative Forum of Municipalities, Federal States, Provinces and Departments

Forum of consultation and political harmonization (4 groups)

MERCOSUR Parliament

FIGURE 1.4 Current MERCOSUR Institutional Structure (September 2008)

MERCOSUR Center for the Promotion of the Rule of Law

Administrativeemployment Tribunal of MERCOSUR

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The Trade Commission of MERCOSUR (CCM), a support body to GMC, is made up of four permanent and four substitute members, one for each member country, and meets once a month in the city of Montevideo. Its proceedings are stated through the “Directives” and “Proposals”, the first being mandatory (see CMC Decision no. 09/94). In addition to these three bodies, MERCOSUR counts with the Secretariat of Mercosur (SM), which is a body of assistance, consultancy and technical and administrative support to all MERCOSUR organs. Its headquarters are in Montevideo, and it works on a permanent basis. It is headed by a director (assisted by a coordinator), supported by a team of experts in different areas: administration, support, economic and legal advisory, technical and normative consulting, production and distribution of documents. Other important bodies within the group are the Social and Economic Consultative Forum, the MERCOSUR Parliament, the Ad-hoc Tribunals, and the Permanent Tribunal of Review (TPR). A more thorough review of the legislative and judicial bodies will be undertaken in the third chapter in which the topics of the rule of law and the state of legislation in the group will be analysed.

b) NGOs Participation It is worth noting that in recent years (especially since 2003 and 2006) the participation of civil society and private sectors in the decision-making process of MERCOSUR has increased. The social and popular movements and the NGOs began to play a bigger role in MERCOSUR during the First Meeting of the Social Umbrella of MERCOSUR, which took place in Brasilia in 2006. This activity was summoned by the Economic and Social Consultative Forum, the Joint Parliamentary Commission and the Commission of Permanent Representatives. Among the main conclusions of the

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forum stood out the need to strengthen the democratic objectives and of citizen participation within MERCOSUR. As a means to achieve the proposed goals, a more active participation of nongovernmental organizations (NGOs) as observers in the Group of the Common Market, and in the Council of the Common Market, was encouraged. The NGOs present in MERCOSUR operate in very diverse fields, such as the environment, culture, leisure and youth, social activities, fight against poverty and exclusion, international cooperation, etc. Currently the NGOs are an important actor for the resolution of the problems in the region. An example is the creation of the MERCOSUR Cultural Network, which includes more than 400 members, and works for the diffusion and regional circulation of cultural and artistic products in MERCOSUR and its associate members. Another network is the Coordination of Trade Union Centres of the Cono Sur, which has a constant presence in the official meetings of MERCOSUR, trying to raise the needs of workers and of the civil society. Moreover, the MERCOSUR social and common programme, other network of NGOs which operates in the region, raises a more active participation of the citizens in the building of the bloc. This programme is co-financed by the European Union and the CCFD (Catholic Committee against Hunger and for Development). Even though the data on the number of active NGOs are limited, information from various sources allow them to establish a certain degree of magnitude, and it seems clear that those based in Brazil are by far those with larger presence (IBGE 2008). Another additional element is that activities of the NGOs are concentrated in urban areas, in activities of education and research, community and habitat development, and social promotion and assistance (see Table 1.7).

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TABLE 1.7 Number of Non-Governmental Organizations Operating in MERCOSUR (latest information available) Country

Number of entities

Percentage of total

Year

Argentina Brazil Paraguay Uruguay Total

32,321 338,162 7,568 3,566 381,617

8.47 88.61 1.98 0.93 100.00

2001 2005 2000 1997

Source: Authors’ elaboration with data from Piñar Mañas, José Luis; Sánchez Rivera, Ricardo (2001) and IBGE (2008).

c) Disputes Between January 1993 and December 2007, Uruguay and Paraguay have filed 107 consultations regarding Argentina and Brazil to the Common Market Group. This is 20 per cent of all the cases initiated in GMC. The number of disputes involving mutual complaints between Argentina and Brazil reached 294, which is almost three times the number of cases brought up by smaller countries against the bigger ones. It is important to note that the smallest number of cases is initiated between Paraguay and Uruguay (less than twenty in total) (see Saez 2008, Table 3, p. 24). This will be discussed in more detail in Section 3 where the characteristics of these disputes are analysed.

1.3. Social Development As in other integration schemes, inequalities and socioeconomic problems are a central theme in the agenda of member countries. The clearest display of these inequalities is found in the different asymmetries between and among the countries in the group.

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During all the periods of validity of the integration initiative, the theme referred to development was not adequately considered, which had as a consequence the worsening of territorial disparities. The following sub-sections will detail the advances and developments in such field.

a) Asymmetries MERCOSUR is characterized by major demographical, economic and developmental asymmetries. Brazil occupies more than twothirds of the MERCOSUR territory and accounts for 80 per cent of the bloc’s population and income (see Table 1.8). Argentina has the highest income per capita, at US$9,357 more than twice that of Brazil and six times higher than that of Paraguay, the least developed country of the bloc. Between 2003 and 2007, Paraguay’s economy grew at an average of 4.5 per cent annually, far below the rates in Argentina and Uruguay, which means that there has not been any convergence between the poorest and the richest members during that period. Paraguay is lagging behind the other countries of the bloc in both human development index and urban poverty headcount ratio, but Uruguay has the highest level of equality among the urban population. In addition to being the smallest and least developed economy of MERCOSUR, Paraguay is also the only landlocked country of the bloc and has much higher transport costs than the other countries in the bloc that all have abundant access to the Atlantic Ocean. In ASEAN, on the other hand, the differences between the countries are even more pronounced. In terms of population and land area, Indonesia is by far the largest country of the bloc, while Brunei Darussalam and Singapore are the smallest. But the latter two countries have the highest level of income per capita in

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81.0 0.8 1.5

Argentina

Brazil

Paraguay

Uruguay 1.4

2.5

79.8

16.3

1.5

3.4

71.9

23.3

7,497

1,456

4,212

9,357

2000 US$

10,609

4,089

9,034

12,502

PPP 2005 US$

GDP per capita (2007)

Sources: ECLAC official data, UN Human Development Report and World Bank, WDI.

16.8

Countries

Population Land (%) area (%)

2007 Distribution of: GDP (%)

Indicators

0.852

0.755

0.800

0.869

Human Dev. Index

18.8

55.0

32.8

26.0

Urban poverty

0.452

0.504

0.604

0.526

Urban Gini coeff.

Social indicators (2005)

TABLE 1.8 Asymmetries among MERCOSUR Countries

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ASEAN, surpassing a number of European countries. GDP per capita in Cambodia and Laos PDR, on the other hand, is extremely low, at US$445 and US$438, respectively, which places them among the poorest countries in the world. They are also rank very low in human development and are the only two LDCs of the bloc. As such, the gap between the richest and the poorest members of ASEAN is enormous, and the challenges associated with asymmetry exceed those of MERCOSUR.

b) Addressing Asymmetries The principle of differential treatment in the Latin American integration process was introduced by the Montevideo Treaty of 1980 establishing ALADI, and, in the MERCOSUR context, is reflected in the Ouro Preto Protocol of 1994 that recognized the need to give special consideration to less developed countries and regions of the bloc. Although Paraguay is by far the poorest member of MERCOSUR, addressing asymmetries in MERCOSUR usually refers to both Paraguay and Uruguay, as the smallest markets of the bloc. Thus, by a Common Market Council (CMC) decision in 2006 the countries have adopted a plan for overcoming asymmetries that affect these two countries. To implement the plan, the countries have set up an ad hoc working group at the level of vice-ministers that was given the mandate to examine the specific country proposals that were presented. The most significant initiative for promoting economic convergence within the bloc was the establishment of MERCOSUR’s Fund for Structural Convergence (FOCEM). The fund was established by a CMC decision in December 2004 to tackle regional asymmetries and promote competitiveness, convergence in infrastructure and social cohesion. To achieve the objectives of FOCEM, four programmes are to be developed:

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(i) structural convergence programme with a special focus on less developed economies and regions; (ii) competitiveness programme that would strengthen the productive process and promote integration of production chains; (iii) social cohesion programme focusing on social development, in particular poverty reduction, health and employment; (iv) programme for strengthening the institutional structure and the integration process that would target improvement of MERCOSUR institutions. The fund’s annual budget is set to reach US$100 million within three years, starting in 2006 with 50 per cent of the amount and growing to 75 per cent and 100 per cent in 2007 and 2008, respectively. This initiative is the first MERCOSUR instrument that envisages systematic net transfers of resources from the bigger to the smaller economies in the bloc. To this end it was decided that Brazil would provide 70 per cent of the fund resources, Argentina 27 per cent, Uruguay 2 per cent and Paraguay 1 per cent. The main beneficiaries of these funds will be Paraguay and Uruguay. It was agreed at inception that Paraguay would receive 48 per cent of the fund’s resources, Uruguay 32 per cent and Argentina and Brazil 10 per cent each. In 2007, eleven projects were approved for US$70 million to finance infrastructure and social development initiatives. The main beneficiaries are Paraguay (US$34 million) and Uruguay (US$8.4 million). A US$16 million regional project to control foot-and-mouth disease was also approved (ECLAC 2007, 2008).

1.4. Cooperation In recent years MERCOSUR has emphasized cooperation as a means to promote economic integration and convergence and as a complement to trade. During the Montevideo summit in December 2003, the countries adopted a work programme for

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2004–06 that included a number of areas for cooperation, including macro-economic cooperation, environment, education and infrastructure. As reflected in this work programme, the bloc has embraced a “new integration agenda” which calls for closer cooperation in science and technology and integration of physical infrastructure and energy. The cooperation is carried out through various ad hoc working groups at sector level, mostly reflected in knowledge sharing and development of networks. As part of economic cooperation, special attention is given to production integration, as reflected in the Official Joint Statement by the Heads of State in July 2006, which emphasized “regional production integration with social development and with an emphasis on the promotion of regional production enterprises that include integrated networks, especially for SMEs and Cooperatives”. In November 2007 Brazil submitted a guideline proposal for the MERCOSUR Production Integration and Development Plan that covers six measures: regional human resources training programme; financial support for production integration; coordination of trade facilitation measures; coordination of various MERCOSUR working groups and committees to produce joint projects and develop regional production chains; coordination of national policies for SME development and monitoring regional production integration through better statistics and indicators. Recognizing the importance of integration of infrastructure and electricity networks for intra-regional trade and global competitiveness, MERCOSUR has been active in pursuing joint initiatives in physical integration, chiefly through the Initiative for the Integration of Regional Infrastructure in South America (IIRSA), launched in 2000 by the South American presidents. IIRSA develops projects for the development of transport, energy

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and telecommunications infrastructure at the regional level. The 2004–06 work programme called for the establishment of a special MERCOSUR fund for infrastructure and development of an investment programme for infrastructure. Research and Development cooperation is carried out through RECyT, the Specialized Meeting for Science and Technology formed in 1992. It tackles such tasks as the establishment of a company incubator to help set up businesses, coordinated efforts to promote information society and biotechnology in MERCOSUR, and enables the parties to form common positions with regard to external cooperation. Coordinated action in environmental protection has been a declared priority on MERCOSUR’s agenda since its inception, as reflected in the Asunción Treaty, however, this is mostly manifested in the coordination of the countries’ positions on environmental issues prior to international conferences. A number of ad hoc working groups meet regularly to discuss environmental issues and a MERCOSUR work programme is adopted each year. A Framework Agreement on the Environment, adopted in 2001 and ratified in 2004, commits the parties to cooperating on environmental protection and on actions to ensure the sustainable use of natural resources, followed-up by the establishment of the Specialized Meeting of Environmental Ministers. In 2004 CMC adopted Decision 14/04 for cooperation and assistance in the event of environmental emergencies. Shared water resources between Argentina, Brazil and Uruguay require coordinated management; however it has not always been possible to come up with joint solutions to common environmental problems. In fact, there have been some serious disputes between member countries on environmental issues, such as the conflict between Argentina and Uruguay regarding the pulp mill constructed on the banks of the Uruguay River. On

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the other hand there have been a few successful joint actions, such as the recent initiative concerning the Guaraní Aquifier, one of the most important water reserves shared by all four countries. Other areas of cooperation in MERCOSUR include democracy and human rights, education, social development and labour policy. A new Human Rights Protocol was adopted in December 2005 at the Montevideo summit, allowing the option of suspending a member state where there is evidence of “systematic and massive” acts of violence. This was complemented by the decisions to set up a democracy observatory (Observatorio de la Democracia del MERCOSUR, ODM), with the view to consolidate democracy and strengthen the electoral processes in the member states. In the area of education, the Regional Strategic Plan for the MERCOSUR Education Sector (SEM) 2001–05 defines objectives and strategies for basic, technical and higher education. The two important elements of the plan are free circulation of knowledge and free circulation of educators within MERCOSUR. The follow-up plan for 2006–10 establishes strategic outlines and expected outcomes for the promotion of quality education, closer cooperation to improve the bloc’s education systems, enhance the mobility of students and lecturers within the bloc and to develop policies that would link education with the integration process. A labour working group is functioning since 1991 and labour ministers meet frequently. The Social Forum was established by the Ouro Preto Protocol with a view to promoting common agenda on social and labour themes. The Biannual Plan for Social MERCOSUR 2005–07 contained numerous activities for social development and poverty reduction at the regional level. The proposed 2007–09 plan outlines actions for institutional development in the social area, including establishment of the MERCOSUR Social Institute (ISM), development of a strategic plan for social development in MERCOSUR, production of studies

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and information dissemination. Moreover, a declaration in June 2005 established a high-level group for the study of employment strategy and mandated it to draft a Social and Labour Protocol for MERCOSUR. While the areas of cooperation within MERCOSUR are vastly diverse as reflected in a CMC decisions and joint statements that establish common plans and programmes, and there are a growing number of ad hoc working groups, the cooperation for the most part remains at the level of discussion and declaration of common goals and priorities. These priorities rarely translate into concrete joint actions and projects. One notable exception is the establishment of FOCEM, which has a potential for producing tangible outcomes with respect to overcoming the problems of asymmetry and strengthening of regional institutions and economic infrastructure.

2. Trade Integration MERCOSUR was conceived as an integration process where trade liberalization plays the leading role. The bloc members created a free trade zone and adopted a common external tariff (CET) visà-vis third parties that can be as high as 20 per cent. MERCOSUR is therefore essentially a customs union, although the objective is to achieve a deeper integration with common market in which labour and capital circulate freely, supported by macroeconomic policy coordination. Adoption of a common currency has also been discussed, following the example of the European Union.

2.1. Free Trade Zone and Customs Union a) Free Trade Zone Intra-MERCOSUR trade has been to a great extent liberalized, although notable exceptions remain. In 2004, 89 per cent of total

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intra-MERCOSUR trade and 93 per cent of bilateral trade between Argentina and Brazil were tariff-free. Since the end of the 1990s, all goods pay zero tariff rates except for motor vehicles and sugar, which are subject to special transitory regimes. However, numerous non-tariff barriers (NTBs) remain in intraMERCOSUR trade, in part related to important sectoral trade imbalances. NTBs include regulated prices, import licences, quotas, technical standards, and voluntary export restraints. One example is the Competition Safeguard Mechanism mentioned earlier, which allows the use of trade defence measures, such as voluntary export restraints and tariff rate quotas, when imports cause or threaten to damage a domestic product or industry. Most agreements have been in the areas of footwear, textiles, televisions and white goods. A database on NTB-related complaints filed by export firms in the MERCOSUR Trade Commission shows that between 1995 and 2005 the most frequent types of NTBs were technical standards, customs barriers and tariff preferences (Berlinsky and others 2006). NTBs are most frequently applied to agricultural products (39 per cent of the total), metal-mechanics, raw materials and chemical products (Vaillant 2001). Recently, special efforts have been undertaken to reduce NTBs.5

b) Customs Union MERCOSUR is a partial customs union, as in practice many perforations of the Common External Tariff (CET) exist. Although the CET was formally adopted in 1994, the implementation by member states has only been partial, and to date many exceptions prevail. Moreover, the CET on goods can be levied twice: once when they enter the bloc and again when they are re-exported to another bloc member, despite already having paid the levy at their

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first entry.6 This imperfection is due to the fact that external tariffs are still not fully harmonized among members, the slow interconnection of customs’ houses computer systems, the prevalence of several legal obstacles, as well as the absence of a distribution mechanism of custom revenues among members in the case of single CET levy. The current official CET has eleven levels varying from 0 to 20 per cent and increasing in steps of 2 per cent. In general, products with a higher value-added content are subject to higher tariffs. By the end of 2007, tariffs were increased to 26 per cent for textiles, and to 35 per cent for clothing and footwear. Paraguay and Uruguay, however, may maintain previous tariffs. According to the technical secretariat of MERCOSUR, national tariffs and CETs match in 70 per cent of all tariff lines, corresponding to about 50 per cent of all extra-bloc imports. The difference between the two is explained by transitory national and sectoral exemptions, including capital goods, hardware and telecom equipment, and national lists. However, the effective application of the CET is limited to only about 35 per cent of total extra-regional imports. This second gap corresponds to the existence of special import regimes, bilateral preferential trade agreements with non-members, and the lack of common rules for the implementation of safeguards and anti-dumping measures. Of the 35 per cent, about 25 percentage points apply to goods with a zero tariff. In total, only 10 per cent of all imports enter the bloc under the CET (Motta Veiga and Rios 2007). The adoption of the CET and the elimination of the double CET levying are done in a two-step process. In 2004, MERCOSUR members established the principle of free circulation, which stipulates that imports from third countries entering the zone under the CET, when circulating within the bloc, will receive the

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same treatment as the goods originating in MERCOSUR. The application of the free circulation rule is limited to goods that enter the region with a 0 per cent CET or with 100 per cent preference. In order to extend free circulation to all other goods three conditions should be in place in MERCOSUR: a MERCOSUR customs code, online interconnection of the customs administration systems and adoption of a distribution mechanism for custom revenues. Only the second of these three conditions have been met so far. As of mid-2008, free circulation of goods had not yet been implemented, in part due to technical difficulties for the implementation of the CET, but also to the legal requirements including constitutional amendments that would be required in some cases. Currently, the number of national exceptions equals 100 for Argentina and Brazil, 225 for Uruguay and 649 for Paraguay. These exceptions are planned to be phased out by end-2010 for Argentina and Brazil and end-2015 for Paraguay and Uruguay. Special rules also continue to apply to the imports of capital goods, information and telecommunication equipment and motor vehicles: •

•

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Capital goods: After previously being postponed, a Common Regime for Non-Produced Capital Goods is to be introduced in January 2009. Under this regime, a commonly agreed group of capital goods will be subject to a 0 per cent common tariff, with national exceptions to which a 2 per cent tariff will apply. Moreover, other national exceptions such as a special 2 per cent levy by Paraguay and Uruguay will also remain in place until end-2010; Information processing and telecommunications goods: Until end-2008, members are allowed to levy tariffs different from the CET, except for Paraguay and Uruguay who can

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maintain their 2 per cent levy until end-2015. At the moment, Brazil applies different tariffs for seventy-seven items. The imperfect CET system explains why free circulation is not functional and why rules of origin are still required for goods traded within the region. The goods not complying with the rules of origin have to pay the CET once or twice. Under the current rule of origin regime, a product is eligible for preferential MERCOSUR tariff rates when it is fully produced within MERCOSUR, or if the good meets the “regional value test”, meaning that 60 per cent of the export value of the good should be originated in MERCOSUR. In 2007, Paraguay and Uruguay were allowed to increase the proportion of value added produced overseas from 40 per cent to 60 per cent — thus expanding the pool of merchandise qualifying for the lower duties.7

c) Foreign Investment In the early 1990s, MERCOSUR countries implemented structural reforms and removed many significant obstacles to the establishment of foreign firms. In the same period, the four countries, especially Argentina and Brazil, managed to attract considerable amounts of FDI, foreign stock soared, and the degree of internationalization of the economies rapidly increased (see Figure 1.5). This process had visible impacts on the reorganization of many industrial and service sectors and on the trade pattern within and outside the region. Even though the flow decreased at the end of the decade, it started increasing again in 2003, and reached a record high of 40 billion dollars in 2007 (see Figure 1.5). The presence of MNCs in the region continues to be high, and keeps playing an important role in the insertion of MERCOSUR in the world economy.

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FIGURE 1.5 Inward Foreign Direct Investment, 1980–2007 45,000 Uruguay

40,000 35,000 30,000

Paraguay Brazil Argentina MERCOSUR

25,000 20,000 15,000 10,000 5,000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

Sources: ECLAC official data.

The inflow of FDI brought about a significant technological upgrade in the activities of national firms in MERCOSUR countries and it played a dynamic role in increasing the manufacturing content of exports. However, FDI did not help in the creation of intra-regional value chains, except for very few sectors, in which technological spillovers were very limited, and the overall level of insertion of local SMEs in global value chains of MNCs has been very low. There is evidence that FDI in MERCOSUR countries has been more market-seeking rather than efficiency- or resourceseeking with a high component of imports, rather than being complementary to a strategy of using MERCOSUR as a regional platform to export goods outside the region. The presence of

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MNCs in MERCOSUR countries generates a great opportunity to increase the efficiency of national firms, but the possibility to exploit this opportunity depends on the intensity of the technological and productive ties that these companies establish in the territory, and are influenced by the degree of technological advance reached by the local firms. The growth of FDI originating from developing countries and the consequent international expansion of developing countries’ firms has been one of the most striking features of the process of internationalization of capital markets in the current decade. Latin America has also been affected by this process, and many firms have aggressively pursued international expansion within their region, giving rise to new, “trans-Latin” corporations. In MERCOSUR Brazil generates over 60 per cent of total intra-regional FDI, while Argentina receives over 60 per cent of it, with most of the intra-MERCOSUR FDI going from Brazil to Argentina (ECLAC 2008). Table 1.9 shows some of the most significant mergers and acquisitions undertaken by Brazilian companies in the countries neighbouring the group. An example of regional integration can be seen in the auto industry, where regional parts producers tend to feed final assembly plants producing largely for regional markets. For both political and technical reasons, production was driven close to end markets everywhere in the world. With the special automotive regime, there is a lack of a common automotive policy in MERCOSUR. A missed opportunity, as MERCOSUR could be converted in a platform of production for export to supply the Latin American market or to produce in market niches where regional subsidiaries can compete globally.

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Quilmes Industrial SA Pecom BankBoston Chile y Uruguay Pecom Loma Negra BankBoston Chile y Uruguay Quinsa Quickfood Petrolera Santa Fe Finexcor Acindar Alpargatas Argentina Pecom Sinectis Paysandú Sipar Cerveceria Internacional

Ambev Petrobras Banco Itaú SA Petrobras Camargo Correa Banco Itaú SA Ambev Marfrig Petrobras Cargill Brazil Belgo Mineiro Sao Paulo Alpargatas Petrobras Universo Online Ambev Gerdau Ambev Argentina Argentina Chile/Uruguay Argentina Argentina Chile/Uruguay Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Uruguay Argentina Paraguay

Country

Sources: ECLAC, bases on financial sources and Brazilian firms official figures.

Acquired firm

Acquiring firm Beer Energy Financial Energy Cement Financial Beer Frigorific Energy Agriculture Steel Shoes Energy Internet Beer Smelting Beer

Sector 1,200 1,125 1,100 1,028 1,020 650 346 141 89 70 60 52 50 50 45 41 12

Amount

TABLE 1.9 Mergers and Acquisitions Involving Trans-Latin Brazilian Companies, 2000–07 (in millions of dollars)

2006 2002 2007 2003 2005 2006 2002 2007 2002 2004 2004 2007 2002 2001 2000 2005 2001

Year

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2.2. Common External Trade Policies Since 1995 MERCOSUR has been engaging in trade negotiations with other countries in South America, with limited results. A difficult issue in external trade negotiations has always been whether agreements should be negotiated collectively or individually. As a result, out of the twenty-two negotiated agreements, only three qualify as a common agreement (the ones with Bolivia, Chile and Israel). MERCOSUR signed multiple framework agreements, but these do not have specific commitments for trade liberalization. Most trade agreements between the MERCOSUR countries and third parties are with the South countries.

a) Latin American Regional Agreements In the second half of the 1990s, preferential trade agreements were negotiated with Chile (1996) and Bolivia (1997). Both were “simple” and universal agreements with relatively few exceptions aimed at trade liberalization within a decade. In addition to the lowering of trade barriers, these agreements included other goals such as integration of physical infrastructure and political cooperation. In the case of Chile, more than 90 per cent of all tariff lines were liberalized between 1996 and 2004, while tariffs should be reduced to zero for the other 10 per cent no later than 2014. This remaining 10 per cent refers mostly to agricultural products and motor vehicles. With regard to services, an agreement was reached in July 2007 defining market access conditions, national treatment for transport, tourism, distribution, professional services, engineering services and other business services. This is the first extra-regional agreement on services. In 2002, framework agreements were signed with Mexico and the Andean Community. In the case of Mexico, four bilateral

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FTAs for the motor vehicle sector were negotiated. Later on, two wider agreements were reached between Mexico and Brazil, on the one hand, and Mexico and Uruguay, on the other. Only the latter has the character of a FTA with some exceptions (13 per cent of tariff lines) (see Table 1.10). Negotiations with the members of the Andean Community were concluded only in 2004. In total, three different preferential trade agreements were negotiated: one with Bolivia, another with Peru and finally bilateral agreements between MERCOSUR members and Ecuador, Colombia and Venezuela. The latter consist of twelve separate bilateral arrangements. Bilateral preferences will be “multilateralized” at the end of the bilaterally negotiated phase-out periods, which in some cases stretches out as far as 2018. In the meanwhile, these bilateral agreements introduce new perforations to MERCOSUR’s CET. These agreements give the countries the status of associate members.8 MERCOSUR initiated its first enlargement with the Bolivarian Republic of Venezuela in July 2006. However, as Brazil and Paraguay have still not ratified the protocol of adherence, Venezuela’s membership has not yet been formalized. In the meanwhile, MERCOSUR and Venezuela are negotiating timeframes and conditions for the implementation of the common external tariff, internal trade liberalization and the incorporation of the MERCOSUR rules into Venezuela’s national legislation. The protocol of adherence has established a four-year time-frame for the adoption of the CET and “bilateral” (MERCOSUR and Venezuela) free trade, with differentiated time-frames for individual countries. The enlargement process is taking more time than foreseen, but the presidents reconfirmed that Venezuela’s entry to the bloc is fundamental to maintain its strength (ECLAC 2007; LAIA 2008).

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European Union Chile (Economic Complementation Agreement ECA-35) Bolivia (ECA-36) South Africa Cuba-Brazil (ECA-43) Cuba-Uruguay (ECA-44) Cuba-Argentina (ECA-45) Cuba-Paraguay (ECA-52) Mexico-Brazil (ECA-53) Mexico (ECA-54) Mexico (ECA-55) Only implemented by Brazil. Mexico-Uruguay (ECA-60) Andean Community (ECA-56) Ecuador, Colombia and Venezuela (R.B.) (ECA-59)

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Bilateral FTAs

Motor vehicles FTA

FTA FTA PA PA PA PA Rules & Disciplines

1997 2000 2000 2000 2000 2001 2003 2003 2003 2004 2003a 2005

— FTA

FA (FTA)

FA (FTA)

15 years

10 years

10 years

Preferential Framework Phase-out period Agreement (PA) Agreement (FA) or (95% of all or Free Trade in negotiation study tariff lines) Agreement (FTA) to be FTA or PA

1995 1996

Year of implementation

TABLE 1.10 MERCOSUR: Concluded Trade Agreements and Trade in Study with Third Parties, 1995–2008

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2005 2008 2004 2004 2004 2003 2004 2005 2007 2008 2008 2008 2008 2008 2008 2008 2008 2008

Note: a = Cover only 90 per cent of all tariff lines. Source: ECLAC, updated version of Barbosa, ed. (2007).

Peru (ECA-58) Chile (Service agreement) Egypt Morocco South African Customs Union India India Israel Israel Turkey Jordan CARICOM The Gulf Cooperation ASEAN Republic of Korea Panama Central American Common Markets Russia PA

PA

Bilateral FTA Service agreement

FA (PA) FA (PA) In Study In Study In Study In Study In Study In Study In Study

FA (PA)

FA (PA)

FA (FTA) FA (FTA)

4, 8, & 10a

15 years

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By the end of 2006, Bolivia also requested membership in MERCOSUR. However, rather than formalizing its request, Bolivia asked for the establishment of an ad hoc task force to examine the costs and benefits of full membership, and the terms of entry. No formal decision has been taken yet. In the meanwhile, according to a complementation agreement signed in 1997, mutual trade is gradually being liberalized between 2005 and 2011, with barriers for few goods remaining in place at most until 2014.

b) Extra Regional Negotiations Since 1995, MERCOSUR and the European Union have been negotiating an Association Agreement including not only a free trade area, but also political dialogue and cooperation. While negotiations on the latter two are virtually concluded, progress has been very slow on the trade chapter. Various pledges to complete the negotiations by a certain date have remained unfulfilled. The most contentious issues are the same as those impeding an agreement in the Doha Round: reforms to EU farm support and access for European manufacturing goods and services to the Southern Cone markets. Moreover, the EU Commission pushes for commitments beyond those negotiated in the WTO in the areas of public procurement, investments and intellectual property rights, which are contentious issues for MERCOSUR. Both parties signalled that they would resume talks in the second half of 2008. In light of previous complications, it seems unlikely negotiations will be concluded before 2010. Meanwhile, joint projects have been launched in the areas of renewable energy, infrastructure, science and technology. Parallel to its negotiations with MERCOSUR, the EU is developing a special relationship with Brazil, which should become an engine for deeper regional integration in MERCOSUR (ECLAC 2008).9

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The same topics that complicate EU-MERCOSUR negotiations were at the root of the failed negotiations for a Free Trade Agreement of the Americas (FTAA). These talks started in 1994, but met with massive protests at negotiating meetings in Quebec City (2001) and Miami (2003). At their last meeting in Mar del Plata (2005), it became clear differences were impossible to bridge. Since then the FTAA project has been put on hold. The main reason for its failure is the opposite trade-related interests between MERCOSUR and the United States, with the former pushing for better market access to U.S. markets of agricultural products, steel and paper, and the latter looking for less protection of certain MERCOSUR markets (mainly manufacturing and services) (Barbosa 2007).10 Moreover, negotiations were complicated by the fact that MERCOSUR members had different and changing attitudes towards the FTAA. In the 2000s, MERCOSUR signed several framework agreements with countries in Africa (Egypt, Morocco, and South African Trade Union), Turkey, India and Jordan. In 2007, MERCOSUR signed its first fully-fledged trade agreement with Israel, which covers 90 per cent of bilateral trade, with a phase out of tariffs in four steps (immediate, four, eight and ten years). Negotiations and/or talks are under way with Canada, CARICOM, Dominican Republic, the Gulf Cooperation Council, Republic of Korea, Panama, and Central American Common Market, and lately with Russia and the ASEAN countries. In the multilateral sphere of the WTO and the on-going Doha Round, each MERCOSUR members participate individually and not as a bloc. Together with India, Brazil is one of the leaders of the “Group of 20” developing countries. Although other MERCOSUR members also participate in this group, their position at times differs substantially from that of Brazil. For example, in

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the August 2008 break-up of trade negotiations in Geneva, India, China and Argentina were unable to agree on measures to protect farmers from emerging economies. This was in contrast to Brazil, who considered the draft proposal acceptable.

c) MERCOSUR-ASEAN Economic Relations The heads of delegation of MERCOSUR members and the Association of Southeast Asian Nations (ASEAN), taking advantage of the Third Ministerial Meeting of the Forum for East Asia-Latin America Cooperation (FEALAC), organized for the first time a meeting to strengthen the bi-regional cooperation. The meeting agreed that closer cooperation between MERCOSUR and ASEAN would bring important benefits to the two regions. Both sides will actively explore ways to deepen and broaden their engagement. The two groupings will launch a process of consultations with the aim of increasing economic, trade and investment cooperation. Uruguay, as the pro-tempore president of MERCOSUR, extended an invitation for ASEAN to attend the MERCOSUR Summit to be held in Montevideo, in December 2007. The ASEAN chair, Singapore, expressed appreciation for this invitation and indicated that ASEAN would be represented at the meeting. The heads of delegation agreed that it would be useful to establish contacts between the Commission of Permanent Representatives of MERCOSUR (CRPM) and the ASEAN Secretariat, in order to explore ways to deepen links between the two regions. The current level of intra-regional trade between MERCOSUR and ASEAN countries is quite low, and does not surpass the 3 per cent of the total of the exports and imports of MERCOSUR countries. Currently MERCOSUR’s imports from ASEAN countries has reached US$6.24 billion, and figures show that in the last few years, the rate of growth of imports from ASEAN to MERCOSUR

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has been increasing. Should this growth rate be maintained in the long run, MERCOSUR would show a small trade deficit with ASEAN countries beginning in 2010 (see Figure 1.6). A possible way to balance trade between the regions would be by putting in place policies geared at promoting higher exchanges between the two regions, as the bulk of the bilateral trade is inter-industrial rather than intra-industrial as indicated by the low level of the Grubel-Lloyd index of bilateral trade of MERCOSUR with ASEAN countries (see Table 1.11). An additional element to be pointed out is that the bulk of the bi-regional trade exchanges are undertaken among the larger countries of the group (Brazil and Argentina in MERCOSUR; Indonesia, Malaysia, the Philippines and Singapore in ASEAN). Among total MERCOSUR exports, 77 per cent and 20 per cent is

FIGURE 1.6 Intra-regional Trade between MERCOSUR and ASEAN, 1980–2010 (US$ millions) 14,000 12,000

Trade balance

Exports

Imports

10,000 8,000 6,000 4,000 2,000 0 -2,000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-4,000

Source: CEPAL, based on COMTRADE database and ITID projections.

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Brunei

Cambodia

Indonesia

Laos

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

TABLE 1.11 FEALAC: Intra-industrial Trade Relations MERCOSUR-ASEAN (IGLL of bilateral trade 2006)

Argentina

0.00

0.00

0.02

0.00

0.01

0.00

0.00

0.13

0.02

0.01

Brazil

0.00

0.00

0.05

0.00

0.02

0.00

0.02

0.18

0.05

0.06

Paraguay

—

0.00

0.00

—

0.00

0.00

0.04

0.00

0.00

0.00

Uruguay

0.00

0.00

0.11

0.00

0.01

0.00

0.00

0.03

0.00

0.00

Partners

Countries

GLL > 0.33 GLL > 0.10 < 0.33 GLL < 0.10 Source: ECLAC/ITID based on United Nations Commodity Trade Database (COMTRADE).

carried out by Brazil and Argentina respectively, and the remaining 3 per cent is carried out by Uruguay and Paraguay. These figures show that trade between the two regions has great potential. Therefore, the advances in the two regions to improve the conditions of access to markets in reciprocal form are of great relevance, especially since trade between both sub-regions is by nature extremely complementary (higher manufacturing component in ASEAN than in MERCOSUR). Studies of possible gaining and losing sectors are necessary in order to understand more clearly the real possibilities that could arise from the beginning of commercial negotiations between both groups of countries.

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3. Rule of Law and Legislation

3.1.

Inter-governmental Model versus Supranationality

Since its origins, MERCOSUR has faced a dilemma regarding the legal nature of its organs. The debate has centred around two alternatives: inter-governmental model versus supranationality. The inter-governmental model preserves full sovereignty of member states. Decisions are taken by representatives of member states. Likewise, decisions are taken by consensus. To be fully valid, a community norm requires incorporation in the law of each member country. Supranationality emphasizes the creation of a group of supranational and community institutions that should guarantee the adoption, control, and application of community law created and applied by member states. The central idea behind this theme lies in a mechanism of sharing of competencies between member states and community institutions. Such sharing is produced through the progressive concession of legislative competencies that, before the existence of a community institution, were exclusively concentrated in the member states. The main example of an advanced integration scheme based on supranationality is the European Union. According to some regional integration law studies (Moncayo 1999; Marchesini 1998, 1999; Sabsay 1999; Midón 1998, 2002; Peña 2006; Malamud and Schmitter 2007), MERCOSUR integration rules are deficient, since the regulation originating from intergovernmental organs does not have full hierarchical priority over internal law of member states, which complicates the application of MERCOSUR law. Critics of such deficiencies argue that the group is advancing toward supranationality: (i) the primacy of community norms over national legislation; (ii) direct applicability

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of norms by all member states; and (iii) immediate applicability, whichever may be the country in which the norm is claimed. Nevertheless, this is unlikely to happen in the short run. This debate is one of the biggest failures of the juridical system of MERCOSUR. It is not clear whether there is a real supremacy of MERCOSUR norms over national law in the member countries. Common norms are difficult to apply as many have not yet been incorporated in the national legislation of member states (Martinez Puñal 2005). The main problem identified by some lawyers lies in the ambiguous editing of Article 42 of the Ouro Preto Protocol which establishes that norms originating from MERCOSUR decisionmaking bodies — The Council of the Common Market, the Common Market Group and the MERCOSUR Trade Commission — shall be binding and, “when necessary, must be incorporated in the domestic legal system in accordance with the procedures provided for in each country’s legislation”. Even though the first part of this paper leaves no doubts over the binding of the rules from the decision-making organs mentioned in Article 2 of the Ouro Preto Protocol, the second creates much uncertainty, since it creates a duality with respect to a type of norms which require incorporation to the internal law of the countries through parliamentary approval, and others that would not require it, so that the protocol accepts in some way a minimalist approach of the “supranationality” of some norms (Mata Diz 2005). Legal uncertainty is hindering regional trade and investment integration. Legal institutions are important for the development of trust of exporters of different member countries of a trade agreement. Rather than their number, what is important is their quality; a low quality of institutions affects the fulfilment of commercial contracts negatively. On the other hand, good

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institutions create a friendlier environment more conducive to intra-regional trade. Supranationality, as already mentioned, is according to many, the way to follow in order to solve the great deficit of institutional credibility of the group. Nevertheless, this path remains complex due to the great institutional inflation, which has been harshly criticized in the cases of other integration schemes (precocious over-institutionalization in the past, with former regional blocs — the Central American Common Markets and the Andean Pact) (Malamud 2004). On the other hand, it is recognized that supranationality is important in the executive, legislative, and judicial fields. One of the main effects of the inter-governmental model is the delay in the incorporation of community norms into national legislations, which originates an additional problem, that is, the failure to settle disputes in the Dispute Settlement Body created by the group. The creation of the MERCOSUR Parliament is an attempt to solve the delay in the incorporation of community norms into national legislation and of legitimizing civil society participation through its representative, the legislator. Likewise, the creation of the Permanent Tribunal of Revision and the inclusion of the possibility that this may solve consultative opinions, are all efforts to endow the process with a certain degree of “supranationality”. In spite of this, the institutional and functional framework has been inter-governmental in matter.

3.2. Incorporation of Common Regulation to National Legislation A key impediment to de facto economic integration is the poor rate of transposition of MERCOSUR rules and directives into national laws. The transposition of MERCOSUR decisions is the

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responsibility of the member states, which are not always rigorous in carrying out their obligations to transpose directives. This means than each regulation has to be approved five times, once in MERCOSUR institutional bodies and once in each of the four countries of the group. As a result, only half of the regulations issued by the various institutional bodies of MERCOSUR is in force. The situation is critical in some spheres, as in the case of decisions regarding the administration of justice, about 80 per cent of which have not yet been enacted (MERCOSUR Secretariat 2004; European Commission 2007). According to Duran and Maldonado (2005), until May of 2004, the main types of regulation that need to be incorporated were the Common Market Group Resolutions. If we take into consideration the norms for the period between 1991 and October 2008, the decision organs of MERCOSUR had approved more than 2,062 norms, of which details are known only until February 2007. With the information available, it is estimated that around 67 per cent of the total MERCOSUR norms are still awaiting incorporation to national regulations (see Table 1.12). There are various reasons for the poor rate of transposition: first, numerous standards have not been defined precisely; and second, the national body charged with adopting the regulation domestically is not the one negotiating it, which raises delicate issues of coordination within governments.11

a) Parliament In the Asunción Treaty (1991), parliamentary representation was formally mentioned only in Article 24, nevertheless its exact form was left to the will of the executive powers of member states. Some representatives were pushing for the creation of a joint Parliamentary Commission which would be created at the end of

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216

94

2,062

1,291

509

957

555

354

Total (1991–2008)

—

120

8

57

55

—

390

63

220

107

—

261

34

163

64

Do not Require Not require incorporation incorporated incorporation

—

66.9%

54.0%

74.1%

59.8%

Percentage of regulations not incorporated

Notes: a = For the case of Directives. b = Consider all the Regulation Rules (Decisions, Resolutions and Directives from 1991 to October 2008. Source: International Trade and Integration Division (ITID)/Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Duran and Maldonado (2005); Rivas (2006) and information from the MERCOSUR official webpage for the case of the MERCOSUR Trade Commission Directives .

Decisions of the Common Market Council (January 2000 to May 2004) Resolutions of the Common Market Group (January 2000 to May 2004) Directives of the MERCOSUR Trade Commission (January 2000 to February 2007) All MERCOSUR regulations (2000–04/07) All MERCOSUR regulations (1991–2008)

Regulation by body

Totals (2000–06)

TABLE 1.12 Incorporation of MERCOSUR Intra-regional Inter-governmental Organs Regulations into Domestic Legislation (from January 2000 to February 2007a and from 1991 to October 2008b) The MERCOSUR Experience 59

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1991, with the objective to lay the foundations for the creation of a future Parliament. Subsequently the Ouro Preto Protocol in its Article 1 created the Joint Parliamentary Commission as an effective organ of MERCOSUR. In the same protocol its main functions and tasks were defined (Section IV, Articles 22–27). In October 2003, the Joint Parliamentary Commission and the Common Market Council signed an Inter-Institutional Agreement which laid the foundations for what would subsequently be the Parliament, which was established in December 2006. The Parliament has ninety members: eighteen for each member state including the Bolivarian Republic of Venezuela. The Parliament is headquartered in Montevideo, and it is essentially an organ for deliberations, control and follow-up and, in particular instances, of co-decision with the CMC and with legislative bodies. Its power is expressed through the issuance of opinions, proposals on norms, declarations, recommendations, reports and dispositions. The main task of Parliament is to oversee the full harmonization of MERCOSUR legislation, for example by encouraging incorporation of communal laws into national legislations. This step, as previously pointed out, is of outmost importance for the enforcement of community regulation and the credibility and juridical security within the enlarged common market. Beginning 1 January 2011 all parliamentarians will be elected by universal vote and directly from the citizens of the member states. The current legislative body still has limited power, and members are elected indirectly by member countries’ parliaments. However, this institution can expand its role in the future. According to many jurists and lawyers, the Parliament should advance towards an effective parliamentarization of the integration process, playing a balancing role to the current presidential power in the group, and taking into account the needs of its represented.

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Nevertheless the advances are still scarce and there is still a long way to go until the full concretization of the parliamentary consolidation (Caetano, Rosi, and Perez 1998; Caetano and Perina 2000; Paikin 2006).

3.3. The Dispute Settlement Mechanism MERCOSUR has dispute settlement mechanisms of an arbitrary nature, similar to the mechanism used in the World Trade Organization. Currently the dispute settlement system of MERCOSUR is regulated in the Olivos Protocol, in force since 2004. Prior to this, the Annex III of the Asunción Treaty was applied. On the other hand, other steps also exist: the procedures of consultations and complaints, regulated in the Directive CCM no. 17/99, and in the Annex to the Protocol of Ouro Preto land in Decision CMC no. 18/02, respectively. Such mechanisms are managed by the Trade Commission of MERCOSUR and by the Common Market Group. An important element of the reform of the SSC of MERCOSUR was the creation of the Permanent Tribunal of Revision (TPR), which was inaugurated on the 13 August 2004 and is headquartered in the city of Asunción. It is composed of five referees, who remain in their role for two or three years depending on the case. This body also counts as a technical secretariat. The disputes included in the realm of application of the dispute settlement mechanism of MERCOSUR — which could also been submitted to the dispute settlement system of the WTO or other preferential schemes that individual member states belong to — may be submitted to either forum according to the demanding party. Nonetheless, the disputing parties may reach an agreement to meet in a specified forum. As soon as a procedure of dispute settlement has begun, neither party will be able to appeal to

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mechanisms established in other forums for the same subject matter (Article 1 of the Olivos Protocol). The following bodies are part of the dispute settlement system laid out in the Olivos Protocol: I)

II)

The Common Market Group (CMG — Chapter V Olivos Protocol): executive organ responsible, among other functions, to watch over the fulfilment of the Asunción Treaty, its protocols and the agreements signed within its framework. It issues resolutions which are binding for the member states (Article 15 of the Ouro Preto Protocol). Nevertheless, when its intervention is required in a dispute settlement, the CMG issues recommendations, the binding character of which is not expressly mandated in the protocol (Article 7). “Ad hoc” Arbitration Tribunal (Chapter VI of the Olivos Protocol): it is made up of three referees, one designated by each of the parties and a third by common agreement. It is agreed upon from the List of Referees deposited by each member state in the MERCOSUR Secretariat.

The Olivos Protocol establishes that whichever party could request an appeal of revision against the decision of the Ad hoc Tribunal to the Permanente Tribunal of Revision (TPR) (Article 17 of the Olivos Protocol). The TPR will review the matter, limiting itself to the juridical questions involved. In this case, the ruling of the TPR will be final and will prevail over the decision of ad hoc Arbitration Tribunal. One of the features of the new dispute settlement mechanism is the possibility for the TPR to solve petitions of the member states and of their supreme courts judges through the system of

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consultative opinions. This is the mechanism through which the supreme tribunals of the member states undergoing integration processes — such as those of the Andean Community or of the European Union — interpret community norms which subsequently transform itself into jurisprudence through the principle of interpretation and uniform application of the law. Unfortunately, this does not occur in the case of consultative opinions, which currently do not have a binding character since such opinions are not subject to a principle of uniform interpretation.12 Before revising the main criticism and worries to the mechanism established by the Olivos Protocol, we will analyse the evolution of the use of the system, including the administrative step in the Trade Commission of MERCOSUR.

a) Consultations in MERCOSUR Trade Commission In order to help countries come together and resolve their differences before an actual dispute arises, MERCOSUR created a three-stage system that involves the following steps: (i) file a consultation with the Trade Commission (CCM); (ii) file a complaint with the Common Market Group (GMC); and (iii) take the case to the dispute resolution arbitration system Brasilia and Olivos Protocols. Although disputes, in the strictest sense of the term, only arise in the second and third stages, consultations with the CCM are a true reflection of the topics and principal areas where the most significant differences arise. Between 1995 and September 2008, there were 541 consultations (see Figure 1.3), the main ones being those related to: standards and technical rules (22.4 per cent), discrimination and tax measures (which includes tax discrimination) (22 per cent), export duties, financing of imports, export subsidies and specific duties. They are followed

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by tariff preferences (13.5 per cent), licences and prohibition of imports (10.4 per cent) and items grouped together as measures for trade facilitation (8.7 per cent), among others (see Figure 1.7). The sector most severely affected is the food industry (36 per cent), followed by other manufacturing (31 per cent), especially metalworking, chemicals and the textile industry (see also MERCOSUR Secretariat 2004b; Maldonado and Durán 2005; and Rosales, Durán, and Saez 2008). An analysis of the seventy-six consultations filed with CCM in January 2003 to September 2008 indicates that: (i) more than 40 per cent were filed by Argentina and Brazil with respect to their bilateral trade, with Uruguay being the country making the least use of this mechanism; (ii) Brazil has been the subject of the most consultations — more than 50 per cent, especially those filed by Argentina and Paraguay; (iii) the largest number of complaints involves manufactured goods: fertilizers, animal nutrients, tyres, pharmaceuticals, textiles, wine, whisky, and also soy and lumber in the commodities category (see Table 1.13). In sum, non-tariff barriers are the main cause of complaints, and a clear threat to the functioning of the free trade zone. Countries must move towards the harmonization of their rules, especially regulations and standards, and must also limit the application of sectoral exceptions. One allegation made by Argentine producers is that Brazil’s mechanisms to boost production and support exporters exacerbate the size asymmetry, making it less likely that other MERCOSUR partners will be able to attract investment for exports to the Brazilian market (Delgado 2004; Bouzas 2004). The number of complaints filed by Argentina has grown between 2003 and 2008, especially in the industrial sectors. The trigger for this upsurge, according to Argentine authorities, has been Argentina’s huge trade deficit with Brazil, as

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Public procurement Safeguards

A

20

B

B

40

Tariff preference 14%

60

B

80

100

Licences and prohibition of imports 10%

Other sectors 13%

A

Quantitative restrictions 2%

Rules of origin 4%

121

Trade facilitation 9 % (47) B

Anti-dumping 4%

73

77

120

Discrimination and tax measures 22.0% (119) A

Standards and technical rules 22.4% (121)

A

140

Note: a = As of September 2008. Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the MERCOSUR Secretariat.

0

6 5

Administered prices

8 6

Export subsidies

Quantitative restrictions on exports

Quantitative restrictions on imports

9 8

Nomenclature Consular visas

9

Registration

9

Customs valuation Specific duties

13 12

Export duties Import financing

24 22

Anti-dumping Rules of origin

B

27 27

Prohibitions

29

By: ROS Tariff preferences

Customs procedures

Tax discrimination

Import licence

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FIGURE 1.7 Consultations with the Trade Commission by Type of Non-tariff Barrier, 1995–2008a (number of consultations and percentage share) The MERCOSUR Experience 65

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24 31.6

Total MERCOSUR

Percentages of total 51.3

39

10

5

24

Brazil

10.5

8

1

3

4

Uruguay

6.6

5

1

4

Paraguay

100

76

20

12

16

28

Total

100.0

26.3

15.8

21.1

36.8

Percentages of total

Note: a = As of September 2008. Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the MERCOSUR Secretariat, “Primer informe semestral: un foco para el proceso de integración regional” and Meetings of the Trade Commission of MERCOSUR in its official website .

9

6

Uruguay

Paraguay

9

Argentina

Brazil

Argentina

Requesting country/ respondent country

TABLE 1.13 Consultations with the Trade Commission by Requesting Country, 2003–08a (number of consultations by country)

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well as the erosion of the competitiveness of many industrial products, particularly household appliances.

b) The Use of the Brasilia and Olivos Protocols Until 1999, the Brasilia Protocol for dispute settlement was practically unused as no arbitrating decision had been pronounced even though this does not indicate a lack of conflicts within the group. In fact, in the 1991–98 period, 350 consultations were submitted to the Trade Commission of MERCOSUR. The situation improved slightly in the period 2000–02, when the arbitrating tribunals issued eight arbitrating decisions.13 In the following period and just before beginning to apply the new framework within the mechanism of the Olivos Protocol, the requests began to diminish, while at the same time the level of activity of the dispute settlement system increased with a higher presence of rulings of the Permanent Tribunal of Revision, whose rulings increased in proportion to the total claims presented in all the system, considering the whole of requests before the Trade Commission of MERCOSUR (see Table 1.14). Even though the higher activity in the utilization of the arbitrating mechanism in the TPR, and the reduction in complaints may be interpreted as a substantial advance in the system of dispute settlement, it has to be recognized that there are still a number of criticisms to the mechanisms established by Olivos Protocol. The following are the main criticisms: a.

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The freedom to choose the arbitrage forum could result in the parties submitting a controversy to the dispute settlement body of the WTO. This would prevent the creation of a uniform and coherent jurisprudence in the MERCOSUR forum (de Clement 2008; Lucarellil y Sá; Puceiro Ripio, R (s/f));

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Periods

1991–99

2000–02

2003–05

2003–08

1991–2008 10

0

2

8

—

2

1

1

—

—

cases under cases under Protocol of Protocol of Brasilia (B) Olivos (C)

Ad Hoc Arbitral Tribunal Decisions

559

36

6a 6

50

123

350

Total cases E=A+B +C+D

0

—

—

Permanent Review Tribunal Decisions under Protocol of Olivos cases (D)

3.2%

19.4%

6.0%

6.5%

0.0%

Share of Arbitral Tribunal Decisions in total cases (in percentages) (B+C+D)/E

Note: a = Includes a consultative opinion (see dispute settlement section of the Mercosur official website ). Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the MERCOSUR Secretariat, “Primer informe semestral: un foco para el proceso de integración regional”; Meetings of the MERCOSUR Trade Commission (see website ; Mercosur Secretariat (2007), “Laudos, Aclaraciones y Opiniones Consultivas de los Tribunales del Mercosur”. Montevideo; and the Dispute Settlement ECLAC database BADICC ).

Consultation to the MERCOSUR Trade Commission (MTC) (A)

TABLE 1.14 Utilization of the Dispute Settlement Mechanism in MERCOSUR, 1991 to September 2008

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b.

c.

d.

69

The exclusion of private individuals as petitioning actors before the tribunals of the mechanism for dispute settlement to which only member states will have access. Private citizens will have to issue their complaints before the Trade Commission of MERCOSUR, with the guarantee of their member state (de Clement 2008); The political inconvenience of having allowed the possibility of complaints between member states (cases like these have been rare in the European system (de Clement 2008); Another criticism that is often repeated is that the TPR is not endowed with supranationality, keeping its character of inter-governmental entity, which caused difficulties in making consultative opinions to be fully binding (Bartesaghi 2006).

According to some lawyers such as Martinez Puñal (2005), and Dreizin de Flor (2003), the creation of a permanent mechanism of dispute settlement will have to combine few important characteristics required for a true integration process, such as: (i) creation of a tribunal of justice with permanent character; (ii) compulsory jurisdictional petition; (iii) character of superior petition; mandatory, non-appealable and final sentences, provided that sentences, as long as consultative opinions, are effectively binding; (iv) wide competencies between member states, bodies and civil servants of MERCOSUR.

3.4. The Protocol of Ushuaia and the Democratic Clause Full and associate members (Bolivia and Chile), signed in 1998 the Ushuaia Protocol, which mandates the guarantee of democracy in the institutions of member states as an essential condition for

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the development and the continuity of the processes of political, economic, and social integration. When democratic conditions in a member country are infringed, the protocol mandates other members of the protocol to initiate consultations with that country (Articles 2, 3 and 4). If the infringement is not solved, then measures can be imposed on that country, which, according to the seriousness of the situation, range from the suspension of its rights to participate as member state in MERCOSUR bodies to the suspension of all rights and duties emerging from this process. The adherence of the member states of MERCOSUR, and its associate members, to the Ushuaia Protocol, brings the bloc to a new level of political integration and consolidation of the democratic values in order to guarantee the evolution of formal institutions and the stability and political security of the bloc and of its associate members. The protocol was tested for the first time in 1999, when the Vice President of Paraguay Dr Luis Maria Argana, was murdered during the rallies known as “marzo paraguayo”, and which caused President Raul Cubas to step down. This institutional crisis endangered political stability. The presidents of the other members condemned and rejected the violence as a means of political action, and reaffirmed their support to the Paraguayan democratic system, and to its normalization and institutional strengthening, when the presidency had already been assumed, in a pacific way, by the President of the Senate Luis Angel Gonzalez Macchi. In 2006, based on the protocol, the Observatory of Democracy of MERCOSUR was created, with the goal for the member states of designing a body of observers for the electoral processes which would be undertaken in the member states of MERCOSUR. The Observatory was already present in different electoral events,

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such as the recent referenda in Bolivia and Venezuela, and elections in Paraguay, among others. In 2008, the Ushuaia Protocol was used again for Paraguay. In a press release, member states declared that, after having been informed of the declaration of the recently elected president, Fernando Lugo, on a conspiracy against his government, the “process of regional integration is inseparable from the full respect of democracy and its institutions and reaffirm their support to the democratic institutionality in Paraguay and to its President, legitimately elected by the Paraguayan people”.

4. Conclusion This document analyses the institutional evolution of MERCOSUR. It also studies the trade and economic performance of the group during seventeen years. Research demonstrates that MERCOSUR’s development can be broken down into three periods: (i) trade expansion (1991–97); (ii) monetary alterations and trade crisis (1998–2002); and (iii) sustained trade flow recovery (2003–08). The near future is highly uncertain in the context of a slowing world economy. In the institutional sphere, the group increased the number of institutions and integration mechanisms. This has always been implemented in the frame of the inter-governance body, which implies that the executive powers in each country, specifically the presidents, have been the main actors and leaders of this political process. Although, this is important for handling political solutions to problems which arise from socioeconomic tensions in the group, it is not ideal for dealing with economic conflicts, where there still exists an institutional vacuum. One weakness of the integration process has been the limited private sector involvement in the design and generation of

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integration norms. Nevertheless, intra-regional investment initiatives from some regional companies have been growing over time, especially from Brazil, which have invested in neighbouring countries, particularly in Argentina. There is growing political interest to increase social cooperation (social protection, human rights promotion and protection, improving education quality, among others), as well as solving common economic problems which affect the private companies’ competitiveness (infrastructure and energy, innovation, human capital development, among others). In foreign policy, there is notable progress to improve market access to new members in and outside Latin America. From 2000 onwards, MERCOSUR has signed about twenty different types of trade agreements. Outside the region, most preferential agreements have been signed with countries in Asia and Middle East. Although the group has tried to restart negotiations with the EU, these have been put on hold. Although MERCOSUR’s integration is still ongoing, there may be some useful insights for ASEAN countries: •

•

•

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The embracing of a democratic commitment, which allow countries to guarantee up-to-date democratic institutions. The joint intervention of Argentina, Brazil, and Uruguay in Paraguay in 1999, when democratic stability was disrupted, was essential to restore normal political conditions. Attempts to reduce regional asymmetries. The Convergence Fund (FOCEM in Spanish) has been created for this purpose; moreover, when it focuses on technical and financial assistance for regions and areas with relatively lower development. The comprehensive development of participatory mechanisms through the Consultation Panel (Foros

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•

•

73

Consultivos in Spanish). In similar vein, it is important to observe the steadily increasing importance of NGOs. Efforts to eliminate double taxation (still in place), which would allow custom revenues to be redistributed among group members. Moreover, this measure would favour local producers who import components. Actions to promote convergence on key issues in the group as well as with other regional projects — such as the Union of South American Nations (UNASUR) — where all countries are also members. The key topics include trade facilitation, infrastructure development, energy and financial integration.

Other issues have hampered the integration process in MERCOSUR, and should be avoided or minimized to ensure effective regional integration: •

•

•

•

•

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Difficulty to transfer decision-making processes from sovereign states to a supranational level of trade integration scheme. Excessive workload of regional leaders. It has been difficult to prioritize work areas, such as infrastructure, trade facilitation, productive development, energy, and reduction of asymmetries. Limited private sector participation in decision-making processes regarding regional integration. This is particularly important in infrastructure, energy, and trade facilitation. Multiple cases of non-compliance with judicial institutions. It is widely recognized that a well-functioning judicial court is key. Lack of effective implementation of some cooperation projects, as they miss quantifiable goals to measure progress made in social areas, such as alphabetization and poverty reduction, among others.

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•

Multiple bilateral conflicts among members, which harmed group confidence. Difficulty to reach trade agreements with external members, as variable geometric and/or multiple-speed approaches are mostly missing, as well as internal incentives to consolidate and present joint positions.

•

During its seventeen years of existence since the Treaty of Asuncíon, MERCOSUR has made significant achievements in promoting peace and democracy in the sub-region and established a high-level political dialogue in a number of important areas, giving impulse to collective actions in a multitude of domains of importance to all members, such as infrastructure development and environment. However, a lot of space persists to develop effective mechanisms to ensure economic convergence and create sub-regional public goods. MERCOSUR remains an integration scheme under construction. With regard to MERCOSUR’s trade with ASEAN, current flows are small, indicating there is a great potential to increase bilateral trade through more intense cooperation.

Notes 1.

2.

This is not a minor issue, as negative trade balances may trigger protectionist behaviour as a substitute for a trade defence mechanism. The other extreme is the opinion that coordination is not necessary in MERCOSUR because the critical mass of trade is not present, and there is no central bank or other authority with the reputation necessary to provide leadership in the process. More moderate is the view that certain obstacles to convergence exist, but there is room for some degree of macroeconomic policy coordination,

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3. 4.

5.

6.

7.

8.

75

placing emphasis on strengthening of national fiscal, monetary and regulatory institutions (Machinea 2003, 2004; Machinea and Rozenwurcel 2005). In that case targets should be established with respect to fiscal balances, inflation, current account deficit, public debt and other indicators, as well as mechanisms to offset the effects of abrupt changes in trade flows due to external disturbances. Mexico’s suspension of principal payments on its debts to foreign banks in August 1982. This protocol was signed to countervail the political crisis in Paraguay preceded by the threat of coup d’etat issued by the Chief of the Army Lino Oviedo in 1996. In 2007, member states have sent a list of NTBs encountered when exporting to other members as well as suggestions for solutions. Subsequently, these issues will be dealt with through bilateral consultations, after which the Common Market Group should decide on solutions for each of the NTBs. In turn, these have to be implemented by 2010 in Argentina and Brazil, and in 2012 in Paraguay and Uruguay (Aladi 2008). As most goods enter the MERCOSUR area through one of the other three countries, the double taxation issue is particularly relevant for Paraguay. Without some type of comprehensive customs revenue sharing plan, it may suffer significant revenue losses. Three other changes introduced in 2007 were: first, it is considered that a product fulfils the requisite for a change in its tariff category if the CIF value of the non-originary materials used in its production which are not coded in a category different to that of the product does not exceed the 10 per cent of the FOB value of the exported product; second, the 40 per cent rule of regional content for products to be considered originating from Paraguay was extended from 2008 until 2022; and third, exports from Paraguay and Uruguay to other member states cannot be subject to rules of origin less favourable than exports from other countries. Associate membership is a limited agreement, mainly focused on

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long-term trade liberalization. It does not convey membership status per se, and does not require the adoption of the CET. In May 2007 the EU Commission proposed a strategic partnership to strengthen its ties with Brazil, focusing on trade and investment as issues of particular bilateral relevance. Other areas for proposed joint action included strengthening multilateralism and cooperation on global challenges such as tackling poverty and inequality, environmental issues (particularly climate change), energy, regional stability in Latin America and integration within MERCOSUR. These areas were discussed at the first EU-Brazil Summit that was held in Lisbon in July 2007 (ECLAC 2008). The four most contentious issues were agriculture; services and investment; intellectual property rights and labour; and the environment. For a deeper analysis of the mechanism of internalization of the community norms, please see Rivas (2006). This work displays in much detail the whole normative originating from the organs of MERCOSUR since its origins (1991) until the middle of 2004. In order to have an idea of the more recent evolution, please review the official website of the MERCOSUR Secretariat . The members of the TPR indicated in their first ruling of consultative opinion: “we respectfully urge that in a proximate future the relevant authorities improve the characteristics, today already absolutely uniform of the comparative law as far as the mandatory character of the raising of consultations is concerned, as much as the mandatory character of the response of this TPR” (Consultative Opinion no. 1/2007). The large number of complaints in only three years is explained by the significant number of reciprocal complaints between Brazil and Argentina during a recession in the latter country, one of the worst periods for the Argentine economy. There were complaints from diverse products, including milk, wheat, textiles, steel, rice, and chickens (Vease Ziller 2006).

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de Ciencias Sociales, Universidad de la República, November 2005. Bichara, Julimar da Silva, A.M. Cunha y M.T.C. Lelis. “Integración monetaria y financiera en América del Sur y Asia”. Latin American Research Review 43, no. 1 (2008): 84. Bouza, Roberto. “La din·mica institucional y formativa: un balance”. In Evaluación del desempeño y aportes para un rediseño del MERCOSUR. Una perspectiva desde los sectores productivos argentinos, coordinated by Bernardo Kosacoff. Buenos Aires: Naciones Unidas, 2004. Bouzas, Roberto, Pedro De Motta Veiga, and Ramon Torrent. “In-depth Analysis of MERCOSUR Integration, Its Prospective and the Effects thereof on the Market Access of EU Goods, Services and Investment”. Observatory of Globalisation, 2002. . Caetano, Gerardo y Ruben Perina, comp. “MERCOSUR y Parlamentos”. CLAEH: Montevideo, 2000. Candia Veiga, Joao Paulo. “As Negociações Comerciais no Governo Lula”. Revista Brasileira de Comércio Exterior, no. 83, 2005. CNI (National Confederation of Industry). “A cúpula do Mercosul garante a manutenção de metas e a continuidade do processo de integração”. Boletín MERCOSUR, no. 371, December 2004. Crawley, A. “MERCOSUR: In Search of a New Agenda”. Rapporteur’s Report. Buenos Aires: Institute for the Integration of Latin America and the Caribbean (INTAL), March 2004. Cresta Arias, Juan. “El Paraguay es el gran perdedor del Mercosur”. ABC digital, 2007. . Da Motta Veiga, Pedro and Sandra P. Rios. “O regionalismo pós-liberal, na América do Sul: origens, iniciativas e dilemas”. Serie Comercio internacional, no. 82. Santiago: CEPAL, 2007. Da Motta Veiga, Pedro. “Continuidade e inflexão”. Revista Brasileira de Comércio Exterior, no. 83, 2005. De Clement, Zlata Drnas. “Un Análisis Comparativo de Distintos Sistemas de Solución de Controversias en Zonas Latinoamericanas de

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Fanelli, J.M. “Coordinación macroeconómica, competitividad y crecimiento”. In Evaluación del desempeño y aportes para un rediseño del MERCOSUR. Una perspectiva desde los sectores productivos argentinos, coordinated by Bernardo Kosacoff. Buenos Aires: Naciones Unidas, 2004. Garavaglia, Georgina M.I. and Jose H. De J. Granado. “Mercosur: Su Problemática Jurídica en la Etapa de Relanzamiento. Incidencia de los Estados Partes en el Proceso de Integración”. Universidad Nacional del Nordeste, 2005. . Giambiagi, F. “Mercosul: Por que a Unificação Monetária faz Sentido a Longo Prazo?”. Ensayo, no. 12. Río de Janeiro: National Bank for Economic and Social Development (BNDES), December 1999. Hornbeck, J.F. “CRS Report for Congress. Mercosur: Evolution and Implications for U.S. Trade Policy”. Congressional Research Service, March 2008. . Hosono, Akio. “ASEAN, MERCOSUR and the Possibilities of Cooperation East Asia-Latin America”. IV Reunión de la Red de América Latina y el Caribe de Centros de Estudios de Asia-Pacífico. Buenos Aires: INTAL, September 2000. IBGE (Instituto Brasileño de Geografía y Estadística). “As Fundações Privadas e Associações sem Fins Lucrativos no Brasil — 2005”. Rio de Janeiro: IBGE, 2008. INTAL (Institute for the Integration of Latin America and the Caribbean). “MERCOSUR Report 2003–2004”, year 8, no. 9, Buenos Aires, 2004. Kosacoff, Bernardo, ed. “Políticas Nacionales de Competitividad y su Impacto Sobre la Profundización del MERCOSUR”. Washington, D.C.: Inter-American Development Bank (IDB), 2005. Kume, Honorio, coord. “Crecimiento Económico, Instituciones Política Comercial y Defensa de la Competencia en el MERCOSUR”. Red del MERCOSUR, no. 11, 2008. Kume, Honorio, Guida Piani y Pedro Miranda. “Política Commercial e Instituições no MERCOSUL: Impacto Sobre o Comércio e a Productividade”. In Crecimiento económico, instituciones política.

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comercial y defensa de la competencia en el MERCOSUR, coordinated by Honorio Kume. Red del MERCOSUR, no. 11, 2008. Kuwayama, Mikio and Jose E. Duran Lima. “La Calidad de la Inserción Internacional de América Latina y el Caribe en el Comercio Mundial”. Serie Comercio Internacional, no. 26. Santiago, Chile: Naciones Unidas, 2003. Lafer, Celso. “Brasil: dilemas e desafios da política externa”. Revista de estudios avançãdos 14, no. 38, 2000. Latin American Integration Association (LAIA). “Informe del Secretario General Sobre la Evolución del Proceso de Integración Regional durante el Año 2007”. Laia, Montevideo, 2008. Leiva Lavalle, Patricio, ed. “Los Caminos para la Integración de América Latina”. Santiago de Chile: Universidad Miguel de Cervantes, 2008. Levy, Yeyati E. and Federico Sturzenegger. “Is EMU a blueprint for MERCOSUR?”. Cuadernos de economía, year 37, no. 110, Buenos Aires: Universidad Torcuato Di Tella, 2000. Licandro Ferrando, Gerardo. “¿Un Área Monetaria para el MERCOSUR?”. Universidad de California/Banco Central del Uruguay: No publicado, 1999. Lorenzo, Fernando, Diego Aboal, y Ana Laura Badagián. “Cooperación monetaria en el MERCOSUR: aportes de un modelo simplificado”. Proyecto Coordinación Macroeconómica en el MERCOSUR/ MERCOSUR Research Network. International Development Research Centre (IDRC), 2004. Lucarelli de Salvio, Gabriella G., and Jeanine Gama Sá Cabral. “Considerations on the MERCOSUR Settlement Mechanism and the Impact of its Decisions in the WTO Dispute Resolution System”. Fifth Annual Conference of the Euro-Latin Study Network on Integration and Trade — ELSNIT, 2007. Machinea, Jose Luis. “La inestabilidad cambiaria en el MERCOSUR: Causas, Problemas y Posibles Soluciones”. MERCOSUR: en busca de una nueva agenda. Institute for Latin American Integration (INTAL), Working Paper no. IECI- 06D, December 2003.

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_____. “La Integración como instrumento de desarrollo”. Documento presentado en el Foro: Centroamérica y otras experiencias internacionales de integración. San Salvador, 8–9 November 2004. Machinea, Jose Luis and Guillermo Rozenwurcel. “Macroeconomic Coordination in Latin America: Does it have a Future?”. No publicado, 2005. Malamud, Andres. “Regional Integration in Latin America. Comparative Theories and Institutions”. Sociologia Problemas e Prácticas, no. 44 (2004): 135–54. ———. “Mercosur Turns 15: Between Rising Rhetoric and Declining Achievement”. Cambridge Review of International Affairs 18, no. 3 (October 2005): 421–36. Malamud, Andres and Philippe Schmitter. “The Experience of European Integration and the Potential for Integration in South America”. CIDOB editions, IBEI Working Paper, Barcelona, 2007. Markwald, Ricardo. “Política Externa Commercial: O Caso do MERCOSUR”. Revista Brasileira de Comércio Exterior, no. 83, 2005. Martínez Punal, Antonio. “El Sistema Institucional del MERCOSUR: De la Intergubernamentalidad hacia la Supranacionalidad”. Tórculo Editions: Santiago de Compostela, 2005. MERCOSUR. “Protocolo de Brasilia para la Solución de Controversias”. MERCOSUR 1991. . ———. “Tratado para la Constitución de un Mercado Común Entre la Republica Argentina, la República Federativa del Brasil, la República del Paraguay y la República Oriental del Uruguay: Tratado de Asunción”. MERCOSUR, 1991. . ———. “Protocolo Adicional al Tratado de Asunción sobre la Estructura Institucional del Mercosur: Protocolo de Ouro Preto”. MERCOSUR, 1994. . ———. “Protocolo de Ushuaia sobre Compromiso Democrático en el Mercosur, la República de Bolivia y la República de Chile”. MERCOSUR, 1998. .

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———. “Protocolo de Olivos para la Solución de Controversias en el Mercosur”. MERCOSUR, 2002. . MERCOSUR Secretariat. “Primer Informe Semestral de la Secretaría del Mercosur”. Montevideo, July 2004. ———. “Informe Anual de Actividades de la Secretaría del MERCOSUR”. Montevideo: MERCOSUR, 2007a. ———. “Laudos, Aclaraciones y Opiniones Consultivas de los Tribunales del MERCOSUR”. Montevideo: MERCOSUR, 2007b. ———. “Solução de Controvérsis no MERCOSUL”. Montevideo: MERCOSUR, 2007c. ———. Official Website: , 2008. MERCOSUR and Fundacion Konrad Adenauer, eds. “Segundo Informe sobre la Aplicación del Derecho del MERCOSUR por los Tribunales Nacionales” (2004). Montevideo: Konrad Adenauer, 2007. MERCOSUR/CMC/DEC (Decisiones del Consejo del Mercado Común). “No. 09/94 Creación de la Comisión de Comercio del Mercosur”. MERCOSUR, . ——— “No. 26/03 Programa de Trabajo del MERCOSUR 2004–2006”. MERCOSUR, . ——— “No. 06/07 Superación de las Asimetrías en el MERCOSUR”. MERCOSUR, . Midon, Mario A.R. “Tras diez años de Mercosur y más de cuarenta de integración. Algunos caracteres del tipo asociativo en Latinoamérica”. Revista de Derecho Internacional y del Mercosur, year 6, no. 1 (2002): 140. ———. “La postergada supranacionalidad en el ámbito del MERCOSUR”. Federalismi e Integrazioni Sopranazionali Unione Europea e MERCOSUR a Confronto. Dipartimento Giuridico Politico, December 2005. . Moncayo, Guillermo R. “Mercosur: orden normativo y realidad”. In Liber Amicorum “In Memoriam” of Judge Jose María Ruda, edited by C.A. Armas Barea et al. Netherland: Kluwer Law International, 2000. Onuki, Janina. “Sociedad Civil y MERCOSUR. Más allá de una agenda interna”. MERCOSUR ABC, 2004. .

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Paikin, Damian. “Legitimidad, soberanía y Democracia. Debates Abordados en Torno al Parlamento del MERCOSUR”. XIV Jornadas AUGM, 2006. . Pena, Cecilia and Ricardo Rozemberg. “MERCOSUR: A Different Approach to Institutional Development”. Focal Policy Paper, FPP-05-06 5, 2005. Pena, Felix. “Algunos desafíos políticos e institucionales que plantea la globalización de la integración: el caso de los países socios del MERCOSUR”. Seminario La globalización de la integración en América Latina. Barcelona: Fundación CIDOB, Marzo, 2004. ———. “¿En que se diferenciaría UNASUR de un MERCOSUR ampliado?”, 2008. . Pinar Manas, Jose Luis, and Ricardo Sanchez Rivera. “El Tercer Sector Iberoamericano: Fundaciones, Asociaciones y ONGs”. Valencia: Tirant lo Blanch, 2001. Rivas, Eduardo. “Adopción e internalización de la normativa comunitaria en el seno del MERCOSUR: un repaso histórico”. Observatorio de la Economía Latinoamericana, no. 62, June 2006. Rosales, Osvaldo, Jose E. Duran Lima, and Sebastian Saez. “Trends in Latin American Integration: An Overview”. In Economic Integration in the Americas, edited by Joseph A. McKinney and H. Stephen Gardner. London: Routledge, 2008. Sabsay, Daniel A. “Integración y supranacionalidad sin considerar los desarrollos europeos recientes, bases constitucionales y límites. La experiencia del Mercosur”. Fundación Ambiente y Recursos Naturales (FARN), 1999. . Saez, Sebastian. “La integración en busca de un modelo: los problemas de convergencia en América Latina y el Caribe”. Serie Comercio internacional, no. 88. Santiago de Chile: Naciones Unidas, 2008. Stephenson, Sherry M. “Lessons from the FTAA for APEC Economies”. For the Feasibility Study by the PECC of the Free Trade Area of the Asia-Pacific (FTAAP), September 2006.

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Tiranutti, Vilailuk. “Latin America Economic Integration (MERCOSUR): Lessons for ASEAN by Vilailuk Tiranutti”. International Institute for Trade and Development, 2006. . Torrent, Ramon. “Una Aproximación a la Anatomía del MERCOSUR Real”. 15 años de MERCOSUR: Comercio, Macroeconomía e Inversiones Extranjeras, coordinated by Julio Berlinski et al. Serie Red MERCOSUR, no. 8. Montevideo, 2006. Vaillant, Marcel. “Oportunidades de una Economía Pequeña y Remota en el Mundo Global: Uruguay como Exportador de Servicios”. Santiago de Chile: No publicado, 2008. Ziller, Jacques. “The Development of Trade Dispute Settlements in the Context of the ‘Spaghetti Bowl’ of Trade Agreements”. Annual Conference of the Euro-Latin Study Network on Integration and Trade — ELSNIT, no. 3, 2006.

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II MERCOSUR: The Elusive Quest for Regional Integration

Eul-Soo Pang and Laura Jarnagin Master of International Political Economy of Resources Program Division of Liberal Arts & International Studies Colorado School of Mines Golden, CO 80401 USA

27 October 2008

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Executive Summary

The common market cum customs union known as MERCOSUR remains an incomplete and uneven integration project since its establishment in 1991. Today it faces the possibility of dissolution as the result of recent and deepening political and economic rifts among its members and an inability to resolve the most serious and divisive issues arising among them. Even so, the dream of achieving a comprehensive level of integration in the region remains a goal. This paper opens with four sections that provide an overview of MERCOSUR’s basic structure and performance. It begins with a brief review of MERCOSUR’s genesis and evolution as its two largest members, Argentina and Brazil, emerged heavily indebted from military regimes and re-democratized. As supranational trade arrangements emerged elsewhere in an increasingly globalized economy, the South American Southern Cone sought to compete by forming MERCOSUR. A brief statistical snapshot comparing MERCOSUR and ASEAN today reveals the former has a smaller population but is more productive than the latter. However, MERCOSUR commands only 2 per cent to 3 per cent of world trade versus ASEAN’s 6.5 per cent. An explanation of eligibility for membership in MERCOSUR follows and notes that full members cannot join any other sub-regional integration schemes. Finally, a summary of MERCOSUR’s structure discusses the weaknesses of its institutions and its lack of enforcement power. Rather than addressing these issues, MERCOSUR countries tend

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to focus on granting preferential trade and investment terms to each other and harmonizing common external tariff rates. The next five sections discuss issues facing MERCOSUR today within the following categories: the problem of different economic systems among its members and would-be member countries; trade asymmetries between small and large economies (in favour of the latter) that promote disunity; the persistence of state subsidies and special zones of industrial promotion that run contrary to MERCOSUR rules; and the pursuit of a diverse set of foreign economic and security policies on the part of individual members. Highlights include: •

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The political and economic rifts between pragmatic social democracy Brazil and statist Venezuela, whose admission as a full member of MERCOSUR is pending. Venezuela’s President Hugo Ch·vez is using MERCOSUR as a platform for spreading his menacing anti-U.S. foreign economic policy that advocates a “twenty-first century socialism” for Latin America. Meanwhile, Brazil acknowledges that the United States is its most important business partner and finds Venezuela’s military populism to be outdated and its democracy questionable. These tensions are reflected in other MERCOSUR relationships, such as Argentina’s support for Venezuela on the one hand and Uruguay’s pursuit of possible free trade area arrangements (FTAs) with nonLatin American countries on the other. The plight of the two smallest members, Uruguay and Paraguay. Contrary to economic theories, these two countries have not benefited from MERCOSUR vis-à-vis the much larger economies of Brazil and Argentina and are in fact heavily indebted to both as a consequence of

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MERCOSUR arrangements. In addition to Uruguay’s pursuit of extra-MERCOSUR FTAs, which could result in its expulsion from that organization, Paraguay has recently elected an anti-MERCOSUR president. The shortcomings of MERCOSUR’s dispute-settlement mechanisms, as revealed in the ongoing controversy between Uruguay and Argentina over the construction of a Finnish cellulose plant in Uruguay on the river that divides the two countries. The unwillingness of either Brazil or Argentina to dismantle their respective state subsidies and special zones of industrial promotion, and MERCOSUR’s unwillingness to address the issue.

The paper concludes with a discussion of future prospects and lessons learned from MERCOSUR’s seventeen-year legacy to date. Internal political and economic rifts, the trend to search for new external trade agreements as the source of future economic growth, the stasis of internal trade among member countries, and MERCOSUR’s inability to eliminate formal and informal built-in barriers to furthering trade and resolving disputes within its own membership do not bode well for the continued viability of this ambitious integration project.

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“We have allowed Latin America to disintegrate. Mercosur is today but an illusion, a caricature of integration”. — Fernando Henrique Cardoso, former President of Brazil, 1994–2002, 31 May 2007 “If Venezuela, Panama, Chile and Bolivia managed to recover sovereignty over oil, the canal, copper and natural gas, why can’t we recover our sovereignty over Itaipu and Yacyretá?” — Bishop Fernando Lugo, President of Paraguay, 2008– , 25 January 2007

INTRODUCTION The purpose of this article is to review the history, institutional framework, and current status of MERCOSUR, one of the world’s most ambitious supranational integration organizations, and to do so with occasional comparisons with ASEAN. Despite MERCOSUR’s original grand vision, the organization today suffers from significant problems and issues that threaten to undermine its very existence. In the late 1980s and early 1990s, MERCOSUR emerged from a Brazilian-Argentine binational project designed to respond to the challenges and opportunities of globalization as well as to counterbalance the power of the United States in South America. The original four founders of the 1991 common market cum customs union sought to lay groundwork for the continent’s integration by exploiting their common historical, economic, political, and cultural endowments. Those perceived commonalities, however, may ultimately prove to be insufficient grounds for achieving the level of integration originally envisioned. The initial euphoria surrounding MERCOSUR subsided as, during its first decade, intra-regional

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trade never surpassed 12 per cent of total trade. In addition, trade gains have been overshadowed by the internecine geopolitical rivalry between Brazil and Argentina, which has grown more acute in recent years. More recently, with the possible, pending addition of Venezuela as a full member, the regional system has become a political stage for advancing the anti-neoliberal and anti-market movement currently championed by Venezuela, Bolivia, and Argentina. Meanwhile, the more pragmatic social democracies of Brazil, Chile, and Uruguay acknowledge the realities of the global market and seek greater engagement with it. Further hampering smooth integration among MERCOSUR’s full and associate members is a lack of effective supranational institutions and a failure to address the “trade asymmetry” that exists between large and small members. Thus, in reviewing lessons learned from the MERCOSUR experience, we find several forces running counter to a trajectory of integration: small members have suffered from the association, contrary to economic theories; many members are actively pursuing extra-regional bilateral trade agreements, contrary to MERCOSUR rules; and there is little evidence of the sovereignty pooling, contrary to what one would expect of a common market and customs union arrangement. In short, although MERCOSUR countries may continue to find common cause in bashing the United States and the European Union, they are far less astute at bridging the more visceral internal issues found within the organization that reflect the deepening political and economic rifts among its members.

1. Genesis and Evolution: An Overview In 1991, four contiguous countries in South America — Argentina, Brazil, Paraguay, and Uruguay — created the Common Market of the South or the Southern Cone Common Market, known in Spanish as Mercado Común del Sur (MERCOSUR) and in

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Portuguese as Mercado Comum do Sul (MERCOSUL) by virtue of the Treaty of Asunción. The organization is more conventionally known by the Spanish acronym. The first segment of this ambitious integration project was laid in the late 1980s and early 1990s when two Argentina presidents, Raul Alfonsin and Carlos Menem, and two Brazilian presidents, Jose Sarney and Fernando Collor de Mello, agreed to set aside historical rivalry and animosity between their countries and construct a better future for their citizens. Uruguay’s president, Julio Maria Sanguinetti, added his support to the vision. At the time, both Brazil and Argentina were emerging from dark days of military dictatorship. They saw themselves as victims of crippling external indebtedness to the developed world; as deserving leaders of the incipient new wave of regional redemocratization and as inherent spokesmen for Latin America in a new era that would counter a century-and-a-half of U.S. domination and hegemony; and as advocates for the region in various world fora. In their view, Latin America needed to emerge from the throes of inertia, rebuild its economy, and forge ahead to become respected in global affairs. By contrast, East Asia had posted stunning levels of growth and development in the 1970s and 1980s that Latin America admired and now sought to emulate. Latin leaders believed that no single country could achieve these goals alone in the age of globalization; instead, the region needed to promote integration through economic cooperation and shared political will, as was occurring elsewhere. Europe was rapidly heading towards a single market (achieved in 1992), and North America had just forged its first free trade agreement, CUSFTA, between Canada and the United States in 1988. Without similar regionwide economic integration, Latin America believed it could not grow and would be left behind. In the early 1990s, MERCOSUR hoped to become the cornerstone for eventual continent-wide integration. The Treaty

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of Asunción makes it clear that its members were committed to the creation of a common market through the adoption of a common external tariff or customs union; the free flow of goods, services, people, and other factors of production; macroeconomic policy coordination; and consensual decision-making. The 1990s became a decade of serious reforms following the “lost decade” of the 1980s as heavily-indebted Latin America was encouraged by American, Japanese, and European creditors to embrace a series of neoliberal reform measures. Under the rubric of what came to be known as the Washington Consensus, Latin American economies were restructured to favour free markets and to reduce state ownership of enterprises. In exchange, debt was rescheduled accordingly. Financial pressures were thus eased, notable economic growth occurred in the first half of the decade, and Latin America was able to devote more public resources to economic development and political stability in the context of democracy, which became the common regime type for the hemisphere as a whole, with the exception of Cuba. Today, however, MERCOSUR remains the unfulfilled dream of an incomplete and uneven integration project, whether viewed in the context of the original four or in that of its expanded membership. Assertive economic nationalism, historical rancour, market protection, and border disputes among its members have grown in number and intensity over the past five years, and more notably in the last two as members compete for the same foreign direct investment capital and overseas markets while pursuing bilateral preferential relationships both among themselves and beyond MERCOSUR. In practice, it is a club of managed traders retaining hidden subsidies and exercising preferential sectoral protection (in automotive, energy, sugar, and financial sectors, to cite a few examples). It has also become a forum for articulating increasingly divergent political ideologies and foreign policy

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objectives. All of these practices and forces stand in the way of integration.

2. A Snapshot of MERCOSUR and ASEAN in Numbers In its 2008 World Development Indicators, the World Bank reports that the population of MERCOSUR’s four full members (Argentina, Brazil, Paraguay, and Uruguay) and one pending full member (Venezuela) is 226 million. Their combined GDP is US$1.5 trillion. By comparison, ASEAN countries have 550 million people with a combined GDP of US$1 trillion (Australian Government 2008); that is, ASEAN has more than double MERCOSUR’s population but less than its GDP (see Figure 2.1). From another perspective, these five countries have 3.4 per cent of the world’s population and produce 3 per cent of the world’s output. Brazil represents 72 per cent of this total productivity, while the ratio goes up to 86 per cent if Argentina and Brazil’s GDPs are combined. In per capita terms, the differential is not as great as that of ASEAN. The lowest gross national income per capita in MERCOSUR is US$1,410 (Paraguay, or US$4,040 at purchasing power parity [PPP]), while the lowest in ASEAN is US$490 (Cambodia, or US$1,550 at PPP). The highest in MERCOSUR is US$6,070 (Venezuela, or US$10,970 at PPP) while in ASEAN, Singapore holds pride of place at US$28,730 (or US$43,300 at PPP). The differential between ASEAN’s richest and poorest is US$28,240 in nominal terms, making Singapore almost 59 times richer than its poorest neighbour. In MERCOSUR, the differential is only US$4,660 in nominal terms. Or, viewed through another lens, Venezuela as the world’s ninth largest oil producer is only 4.3 times richer than Paraguay, one of South America’s poorest countries (see Figure 2.2).

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Brazil 1067 892.6

Argentina

214

201.4 8.5

9.3

Paraguay

Source: The World Bank, 2008 WDI.

GDP GNI

0

200

400

600

800

1,000

1,200

17.9

19

Uruguay 164

182 7

7.3

Venezula Cambodia 315.9

365

Indonesia

2.9

3.4

Laos

146.8

151

Malaysia

120

118

128.8

132

193.7

206

Philippines Singapore Thailand

FIGURE 2.1 GDP vs GNI 2006: ASEAN vs MERCOSUR

58.5

61

Vietnam

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49.6

41.7 2.9 47.3

39.4 7.1

Cambodia Indonesia

43.3

34.6 8.1

Laos

54.3

49.2 4.4 50.6

44.5 5.4 49

42.5 5 49

42 6.3

Malaysia Philippines Singapore Thailand

Source: The World Bank, 2008 WDI, Table 2.8.

Top 20%

Bottom 20^

Gini Index

0

10

20

30

40

50

60

70

44.8

37 7.1

Vietnam

55.4

51.3 3.1

Argentina

60.8

56.6 2.9

Brazil

61.9

58.4 2.4

50.5

44.9 5

Paraguay Uruguay

FIGURE 2.2 Income Distribution/Consumption Power, 2008: ASEAN vs MERCOSUR

52.1

48.2 3.3

Venezula

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In theory, MERCOSUR has a better chance of closing the income gap than ASEAN-10 in the short run, if economic integration through free trade and unencumbered flows of capital is achieved (see Figure 2.3). In 2006, MERCOSUR merchandise exports to external destinations were worth US$256 billion (compared to US$88 billion in 1995), or a little over 2 per cent of the world’s total of US$12,084 billion. Imports from the world to MERCOSUR countries were US$175 billion (compared to US$84 billion in 1995), thus generating trade surpluses of US$81 billion (US$4 billion in 1995), thanks to their import suppression strategy. This significant increase in MERCOSUR’s share of world trade gave it more clout globally during the 1995–2006 period but represented a substantially lower level than ASEAN’s 6.5 per cent share during the same time. MERCOSUR aspires to become both a common market (free trade for all sectors, and therefore a free trade area (FTA) or regional trade area (RTA)) plus a customs union with a common external tariff (CET) for all goods imported from non-member countries (closed regionalism). To date, this dual goal has not been achieved. At best, its pursuit has been uneven. From a political economy perspective, the FTA goal cannot be achieved as long as one or more of the four and potentially five members retains statist industrial, trade, and financial policies that place politically sensitive sectors off-limits to other MERCOSUR partners. At the moment, none has an open economy. Argentina had the most open economy among the five as of the end of the 1990s, but since its economic crisis of 2001–02, Argentina has slowly reverted to a more statist economy. For common external tariffs to work in unison and in an efficient manner, members must calibrate their macroeconomic policies, coordinate similar financial practices, and forge a single international trade policy.

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41.7 2.9 49.6 39.4 7.1 47.3

Cambodia Indonesia 34.6 8.1 43.3

Laos 49.2 4.4 54.3 44.5 5.4 50.6 42.5 5 49 42 6.3 49

Malaysia Philippines Singapore Thailand

Source: The World Bank, 2008 WDI, Table 2.8.

Top 20%

Bottom 20^

Gini Index

0

10

20

30

40

50

60

70

37 7.1 44.8

Vietnam

51.3 3.1 55.4

Argentina

56.6 2.9 60.8

Brazil

58.4 2.4 61.9

44.9 5 50.5

Paraguay Uruguay

FIGURE 2.3 Income Distribution/Consumption Power, 2008: ASEAN vs MERCOSUR

48.2 3.3 52.1

Venezula

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This has not been done, in spite of much lip service since 1991. Further, it is probably impossible for MERCOSUR to achieve this level of unity in the near future, if ever. Economic xenophobia and the primacy of domestic politics have gotten in the way of integration. Thus far, the price and quality of comparable extraregional products have been able to overcome CET barriers.

3. Defining Membership in MERCOSUR Article 20 of the Treaty of Asunción stipulates that only members of the Latin American Integration Association, generally known by its Spanish acronym ALADI (Asociación Latinoamericana de Integración), can join MERCOSUR. ALADI was established by the Treaty of Montevideo in 1980 and went into effect in 1981. Its eleven members (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela) seek to promote economic cooperation and free trade in a flexible but limited way, but without any timetable for establishing a common market. MERCOSUR and other trade agreements among these eleven countries have been and continue to be established in the context of ALADI. However, MERCOSUR rules state that no country that belongs to any other “sub-regional integration scheme” can become a member. Thus, Mexico, for instance, as a member of the North American Free Trade Area (NAFTA) must content itself with first observer and now associate status in MERCOSUR. Further, in order to join MERCOSUR as full members, signatories of other trade arrangements among the eleven ALADI members must renounce their membership in those other entities. They may, however, join MERCOSUR as associate members. Since its founding, MERCOSUR has added six associate members: Bolivia, Chile, Colombia, Ecuador, Mexico, and Peru. As associate members

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of MERCOSUR, Bolivia, Colombia, Ecuador, and Peru would have to renounce their current membership in the Andean Community (Comunidad Andina, or CAN) if they wish to become full members of MERCOSUR. Chile, another associate member of MERCOSUR, left the Andean group in 1976 and is thus qualified to be a full member of MERCOSUR but has steadfastly refused to do so, although it is the most ideal candidate among the associates, an issue that will be discussed further below. Venezuela, a former member of the Andean Community, renounced its membership in that organization before being allowed to seek full membership in MERCOSUR as of late 2005. Full members Brazil and Paraguay have yet to approve Venezuela’s ascension, however.

4. The Structure of MERCOSUR Although MERCOSUR is frequently compared to the European Union (both being customs unions practising closed regionalism) the founding members of MERCOSUR have thus far been unable to take the bold steps necessary to create a monetary union and forge political integration, although the former option is starting to be pursued modestly (“MERCOSUR: Mercosur Finds”). Instead, members have adopted the modest goal of granting each other preferential terms of trade and investment internally while externally harmonizing themselves in line with the common external tariff, thus pre-empting an errant member from acquiring unfair advantages. To achieve these two goals, MERCOSUR has created a minimum of institutional foundations and jealously guards its members’ national sovereignty. So far, little “sovereignty pooling” has taken place. MERCOSUR has three broad aims: the implementation of a common trade policy; the establishment of a common market, and coordination of common external tariffs against non-members.

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Members are expected to reciprocate preferential trade measures (but not “free” in the sense of no restrictions) adopted in the common market (Articles 1 and 2, Treaty of Asunción). The founders laid down four “common policies” that all members must embrace: (i) trade liberalization, that targeted zero tariffs by 31 December 1994; (ii) coordination of macroeconomic policy by eliminating all non-trade barriers/restrictions (NTBs); (iii) common external tariffs against non-members; and (iv) maximization of the unrestricted movement of factors of production (Article 5). None of the above four objectives has been achieved in full. Further, MERCOSUR recognizes the differentials in the levels of economic development of its members (Article 6) but fails to address the issue by specifying how the more developed countries and the less developed members should interact to compensate for the imbalances. This lacuna has created the issue of “trade asymmetry”, which will be discussed below. Also, the “domestic treatment” (national treatment) of one member’s products when entering another member country’s market has been prominently stipulated (Article 7) but has not been honoured on disputed products. The Ouro Preto Protocol signed on 17 December 1994 established juridical person status for MERCOSUR, thus allowing it to own and dispose of assets and real property, enter into litigation, keep funds, and transfer whatever it owns, just like a corporation (Articles 34 and 35). The protocol makes it clear that MERCOSUR and its organs draw their power from three sources: (i) the Treaty of Asunción and its side agreements and protocols; (ii) all agreements signed by members based on the treaty; and (iii) decisions by the Common Market Council, resolutions by the Common Market Group, and directives by the MERCOSUR Trade Commission (Article 41). All MERCOSUR decisions are made by consensus and with the presence of

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members in meetings (Article 37). Once norms or decisions are made, member states have the obligation to integrate them into their national legislation and implement them. The members must notify the Administrative Secretariat when MERCOSUR norms are implemented (Article 40). MERCOSUR has a total of six umbrella agreements and a host of side agreements that are variously bilateral and plurilateral. Montevideo is the “capital” of MERCOSUR, but the Administrative Secretariat is small, understaffed, and lacks the power to enforce the group’s administrative, judicial, and legislative decisions. Foreign ministers represent member countries, hold ultimate power over the secretariat, and set the common market’s agenda, while the heads of state meet at least once a year in the capital of one of the full members. In 2002 MERCOSUR established the Permanent Tribunal of Review (Tribunal Permanente de Revisión/ da Revisão), but it has no permanent lower courts. Lower courts are created on an ad hoc basis to address disputes and conflicts as they arise between member states (Protocol of Brasília, 17 December 1991 and amended by the Protocol of Olivos, Buenos Aires, 18 February 2002). MERCOSUR also created a supranational Parliament Commission in 2007 to promote the process of the region’s integration. The Protocol of Ouro Preto lays down the basic rules for six institutions to function as a common market and customs union. They are as follows:

Common Market Council (Articles 5, 6, 7, and 8) The council is the highest organ whose constituent members are foreign ministers and ministers of economy and whose affairs are coordinated by foreign ministers. The presidency is rotated among

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the members, alphabetically, every six months (Articles 10, 11, and 12, Asunción).

Common Market Group (Article 14) The group has four members who must come from foreign ministries, economy ministries, or their equivalent, and central banks (Article 11, Ouro Preto). They coordinate key decisions for integration, free trade, and external customs issues, as well as macroeconomic, monetary, fiscal, agricultural, industrial, and environmental policies. The council directs the group.

MERCOSUR Trade Commission (Articles 16, 17, 18, and 19) Charged with eleven duties, it implements policies developed by the council and the group. The commission assists the group in the areas of customs union issues and common market affairs.

Joint Parliamentary Commission (Articles 23, 24, 25, and 26) The Parliamentary Commission’s objective is to coordinate the regional integration process by harmonizing each country’s legislation. Each country’s Parliament or Congress selects representatives to the commission. The council can lay down priority themes for the commission to study and recommend.

Socio-Economic Consultative Forum (Articles 28 and 29) Representatives of civil society, issue specialists, and concerned citizens can be represented in the forum to advise the group. Each state will have an equal number of representatives.

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MERCOSUR Administrative Secretariat (Articles 31, 32, and 33) The secretariat’s most important duty is to serve as MERCOSUR’s archive and communication hub (Article 15, Asunción). Its “director” (not secretary general) is chosen by the group but with the consent of the council. The director is elected for a term of two years, with no re-election allowed (Article 33, Ouro Preto). The secretariat has eight specific duties (Article 32, Ouro Preto), but the following are the most important: (i) to be the organization’s official archive; (ii) to publish and distribute official documents, including the Official Bulletin of MERCOSUR; and (iii) to provide logistics for meetings of the council, the group, the Trade Commission, and other entities. The lack of supranational institutions with enforcement power still remains a strong concern among the members. The smaller members in particular are fearful of being dominated by larger countries. In reality, much of Uruguay’s economy is heavily penetrated by Brazilian and Argentine companies and landowners. Paraguay is the only predominantly Amerindian (Guarani) country in the region and is the least developed. Paraguayans are known to be prone to respond harshly to slights from its larger historical nemeses.

5. Structural Issues Undermining Integration Since early 2007, it has become clear that the fabric of which MERCOSUR was woven in 1991 is being pulled in all directions, a situation exacerbated in particular by the growing ideological rift between Venezuela and Argentina on the one hand and Brazil on the other. Meanwhile, small members have been vacillating and hedging their bets, except on issues concerning widening trade deficits. The purpose of this section, therefore, will be to review

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several of the more compelling issues that are indicative of why many are questioning the continued viability of MERCOSUR.

5.1 The Shortcomings of MERCOSUR Dispute Settlement One important yardstick for the successful integration of a regional common market and customs union is how its members resolve differences. In its first four years of existence (from the 1991 Treaty of Asunción to 1994 when the common market went into operation), the Protocol of Ouro Preto of 1994 and its annex specifically addressed conflict resolution methods. That protocol remained in force until 2005 when it was replaced by the 2002 Protocol of Olivos, which created a system of an ad hoc tribunal in the first instance. If no resolution is found at that level, a case can be referred to the Permanent Tribunal of Review. The Permanent Tribunal has four judges serving for two years with the possibility of one renewal of appointment. The Administrative Secretariat maintains a list of permanent judges from all member countries. In a case that involves two countries, each country can nominate a judge with a third chosen by the Secretariat. Both state and non-state players can bring a case to the ad hoc tribunal, provided the case involves (mis)interpretation or a failure to implement MERCOSUR rules, decisions, and norms. The losing party must face “compensatory measures” that can contain monetary rewards to the injured party. The Permanent Tribunal of Review is empowered to “confirm, modify or revoke” the decisions and judicial basis of ad hoc tribunals. Judgements from the Permanent Tribunal are final and supercede decisions by ad hoc tribunals. Between 1993 and 2005 when the Ouro Preto Protocol was in force, ad hoc tribunals heard ten cases: five involving Argentina

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and Brazil; two involving Uruguay and Argentina; two involving Brazil and Uruguay; and one involving Uruguay and Paraguay. Thus, MERCOSUR’s two largest partners were involved in seven out of ten cases, followed by three cases filed by Uruguay. Paraguay was the least contentious member with a single case (Venuesa 2006, pp. 86–87). These ten cases aside, however, the ad hoc system does not always function well, as seen in the unresolved case of Botnia, a Finnish firm that began constructing a pulp mill on the Uruguayan side of the Uruguay River, which serves as the boundary between Uruguay and Argentina in 2005. The project represents the largest foreign investment project in Uruguay’s history and from its inception became a focal point of dispute. The binational bridge linking Argentina and Uruguay has repeatedly been blocked by Argentine protesters opposed to the plant who, on several occasions, have prevented the routine cross-border flow of commercial and tourist traffic at the Uruguayan port of Fray Bentos, where the mill has been built. Argentina has brought a suit against Uruguay for its failure to consult Argentina on the plant’s construction as provided for in the Uruguay River Statute, signed between Argentina and Uruguay. This agreement states that if either country plans public works that affect navigation, the river’s ecosystem, or water quality, it must advise the other, which Uruguay did not do (“Governments Downplay…” LARR 2006). Argentine environmentalists oppose the Botnia project for fear that it will pollute the river and thus disrupt plant and wildlife, along with agriculture. Uruguay has claimed that Argentina’s actions intrude into Uruguay’s sovereignty to make economic decisions. Uruguay has also complained of lost revenue from reduced tourism and overland trade flows that normally occur at Fray Bentos, an apparent violation of the Treaty of Asunción,

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which enshrines the free movement of people and goods in its first article (“Governments Downplay…”). At one point, as the dispute dragged on, Uruguay appealed to Brazil for assistance in settling it but got a cold shoulder. Brazil has stated that it considers the dispute strictly “bilateral”. Subsequently, Argentina became miffed when Uruguay raised the issue at a MERCOSUR heads of state meeting (“Disappointing Summit…” LARR 2007). Under MERCOSUR’s dispute resolution mechanisms, a case that cannot be resolved within the group can be referred to the International Court of Justice (ICJ), which Uruguay did. Uruguay’s appeal to the ICJ sought an end to Argentine protestors’ repeated blockage of the international bridge that Uruguay claims has caused “irreparable damage”. The Hague, however, rejected Uruguay’s claim by a vote of fourteen to one against, asserting that Montevideo failed to prove its case (“MERCOSUR: Argentina Victorious…” LAWR 2007). MERCOSUR refused to hear the case, at which point Argentina and Uruguay chose to appeal to King Juan Carlos of Spain for resolution, but he ultimately chose to abandon the project (“Banco del Sur…” LAER 2007). In December 2007, Botnia shipped its first pulp cargo to Europe. For the present, the case languishes in limbo.

5.2 The Need for New External Ties Normally, regional common markets go outside of their organizations to expand as their internal capacity for market augmentation peaks. In the case of MERCOSUR, though, its members have been seeking outside partners due to the internal failure of integration. At present, MERCOSUR has established six FTAs (with Bolivia, Chile, Colombia, Peru, Israel, and Venezuela), five framework agreements (one each with India and the Andean Community, two with Mexico, and one with the Southern African Customs Union), and is in negotiations with nine countries and

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trading groups (the EU, Egypt, the Gulf Cooperation Council, Panama, Mexico, Morocco, South Korea, and the Central American Integration System). In the case of “preferential trade agreement” with India, MERCOSUR invoked Article 27 of the ALADI Treaty of Montevideo that empowers the group to sign “partial scope agreements” with developing countries to promote South-South solidarity (OAS 2004). With Israel, a developed country, MERCOSUR negotiated a “Free Trade Area Agreement” (State of Israel 2006). With South Korea, MERCOSUR left open whether the negotiations would lead to either a “preferential trade agreement” or a “free trade agreement” (South Korea 2005). None of these is a comprehensive FTA in the mold of the United StatesSingapore FTA. Such “beyond trade” and WTO-plus issues like labour, environment, competition, intellectual property rights, and democratic governance are not the core of MERCOSUR’s trade strategy. The longest running negotiations (thirteen years) for new external partners are with the European Union. To date, however, these talks remain inconclusive due to a host of divergent issues, ranging from the EU’s agricultural subsidies to its objections to dealing with Hugo Chávez and MERCOSUR’s refusal to discuss access to government procurement. All of these issues have mostly been Brazil’s concern, not that of the smaller members. At one time, the EU proposed to grant Brazil “strategic partner” status to keep the negotiations alive. MERCOSUR absorbs half of Europe’s total exports to Latin America, with a little over 90 per cent constituting manufactured goods, while the Southern Cone common market’s exports to the EU remain overwhelmingly agricultural (OAS 2004). MERCOSUR has sought to restrict the negotiations to trade issues only, while Europe prefers to inject a broad range of “soft power” issues such as democratic governance, human rights, civil society, and inter-regional

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integration “based on equity and cooperation rather than power inequality” (Doctor 2007; Duina 2007). In 2007, the EU, MERCOSUR, and the Andean Community all reaffirmed their desire to continue with negotiations for an “Association Agreement” (“Dispute over EU”; “Tracking Trends”; “MERCOSUR: Disappointing”). As noted above, MERCOSUR and several other sub-regional trade agreements within Latin America have been crafted within the umbrella context of the 1980 ALADI agreement whose original vision was for regionwide integration. However, as ALADI failed to spark the imagination of its members, various fragments of Latin American countries began to proceed on their own by the late 1980s to set up other agreements. Mexico moved forward with neoliberal reforms to join the Canada-U.S. FTA, which became NAFTA in 1994. Recently, Central America and the Dominican Republic preferred to sign an FTA with the United States, despite the fact that each has its own customs union and common market. The old Central American Common Market never developed its members’ economies as intended. The Caribbean microstates (Caricom) have neither the economy of scale nor the political will to build a flourishing common market of their own. More independent-minded Brazil and Argentina established MERCOSUR as a fuller implementation of ALADI by focusing on the tightly defined geographic region of the Southern Cone. Chile presents yet another example of the limits of MERCOSUR’s attraction as an integrative force. As noted above, Chile has stubbornly remained as associate member, eschewing full membership, although it began investing throughout the region in the 1990s (notably in Argentina, Brazil, Peru, and Mexico). As a result of the evolution of the neoliberal political economy model that it adopted in the mid-1970s, Chile’s average tariff today (simple and weighted) is 2.3 per cent while MERCOSUR’s is 12 per cent.

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2.9

Brunei

10.8

14.1 4.3

6

Cambodia Indonesia

9.3

6.5

Laos

Source: The World Bank, 2008 WDI, Table 6.7.

Weighted

Simple

0

2

4

6

8

10

12

14

16

3.4

6.2

Malaysia

3.9

4.4 3.2

5.4

0

0

Mynamar Philippines Singapore

4.7

10.8

Thailand

13.3

13.1

Vietnam

5

10.1

Argentina

6.7

12.1

Brazil

3.2

7.2

Paraguay

FIGURE 2.4 Simple versus Weighted Tariff Rates: ASEAN vs MERCOSUR, 2006

3.3

9.6

Uruguay

10.2

11.1

Venezula

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Further, Chile’s highest tariff is 6 per cent versus MERCOSUR’s 35 per cent (on textiles and clothing). Obviously, Chile does not want to forfeit its globally competitive low tariff edge just to join MERCOSUR. Paradoxically, Uruguay and Paraguay have the lowest weighted tariff rates at 3.3 per cent and 3.2 per cent, respectively (see Figure 2.4). Thus, the dream of comprehensive Latin American and Caribbean integration remains elusive while nevertheless remaining MERCOSUR’s mantra.

6. The Problems of Different Economic Systems Aside from the contrasting sizes of their economies, Argentina, Brazil, Paraguay, Uruguay, and Venezuela have pursued different developmental policies. Venezuela is the most statist, or “the twenty-first century socialist”, while Argentina under the Kirchners (Nestor Kirchner, 2003–07, and now his wife, Cristina Fernandez de Kirchner, 2007–present) has been reverting to the old state-led mixed political economy model. Brazil, the original developmental state of the continent, has privatized mining, metallurgy, airlines, and public utilities, but has kept oil, gas, health and pension services, and part of the financial sector in the hands of the state. The country’s two largest companies are the Bank of Brazil and Petrobrás (the oil monopoly), both state-owned and state-managed enterprises. Similarly, Paraguay and Uruguay liberalized, deregulated, and privatized in the 1990s as external creditors pressured them. The common denominator among the five has been, however, the use and abuse of the state power and resources for economic development. In 2007, Brazil (the only country that shares common borders with all MERCOSUR members) established seventeen new duty free export promoting platforms known as Export Processing

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Zones. Argentina opposed their creation, claiming that they would undermine the Argentine manufacturing sector and arguing that the zones give Brazilian products undue advantages in the Argentine market (“MERCOSUR: Argentina and Brazil”). Argentina has similar export promotion zones of its own that Uruguay opposes. When Brazil proposed an increase of the CET from 30 per cent to 35 per cent on textiles and clothing imported from non-member countries, the Center for Paraguayan Importers opposed it, claiming that the cost of imported inputs would make its manufactures uncompetitive and arguing that the proposed CET would only protect Brazil’s uncompetitive industries “from Chinese competition” (“Economic Overview…” LARR 2007). A more substantive international political economy issue confronting MERCOSUR is the Brazil-Venezuela geopolitical rift. Venezuela’s president, Hugo Chavez, vociferously opposes Brazil’s “ethanol diplomacy” that seeks to expand its ethanol production throughout the continent, which could undercut Chavez’s “petrodiplomacy”. In fact, Brazil and the United States signed an agreement for joint ventures in producing ethanol in the Caribbean (“Realignment…” LARR 2007). Chavez has argued that Brazil is taking lands away from the poor who need to be growing food, not sugar cane and energy for capitalist markets. Furthermore, Brazil imports 50 per cent of its natural gas needs from Bolivia, whose president, Evo Morales, is closely aligned with Chavez and Fidel Castro. In a twenty-first century style of “nationalization”, Bolivia seized the refineries and gas lease that Brazil’s Petrobras held for decades and sought to collect what it considered to be the true “just price” for its natural resources. Brazilians suspect that the Bolivian hardline policy is urged by Chavez. Most significantly, however, is Brazil’s announcement of two enormous oil deposit finds in 2007 and 2008 that have suddenly catapulted Brazil to tenth place in the world in terms of reserves (36.2 billion

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barrels), ahead of Nigeria (“Brazil: Aiming…” LARR 2008). Although exploitation of these offshore deep water fields is still some five to ten years in the future, their existence, along with Brazil’s advances in alternative energy sources, give it a new and powerful advantage vis-à-vis Venezuela’s efforts to foist its politics upon the region as a whole. Argentina, Brazil, and Mexico all have aspirations to become permanent members of the United Nations Security Council. Each opposes the other’s bid. Mexico has been wooed by Argentina to join MERCOSUR so that the alliance of three major Spanishspeaking countries (Argentina, Mexico, and Venezuela) could cancel out the hegemonic power now held by Brazil (“Realignment…” LARR 2007). It is not likely that Mexico would leave NAFTA, though, to become a member of the Southern Cone Common Market, given that 85 per cent of its exports go north to the United States and that the U.S.-Mexican economies are highly integrated. Argentina’s recent anti-Brazilian, pro-Venezuelan foreign policy has been considered by Brazil as an unwarranted nuisance and has become an impediment to deeper integration.

7. Trade Asymmetry as Catalyst for Disunity Economic theories of trade integration often hold that smaller economies are more likely to be the beneficiaries of such arrangements than the larger economies in the mix. In the case of MERCOSUR, however, its two smallest full members, Uruguay and Paraguay, whose economies are small fractions of Brazil and Argentina’s, have had the opposite experience.

7.1 The Case of Uruguay In 2006, Uruguay threatened to leave MERCOSUR, primarily due to the huge deficit it runs with its two large neighbours and Venezuela, totalling some US$1,973 million: US$777 million with

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Argentina; US$521 million with Venezuela; and US$495 million with Brazil (“MERCOSUR: Lula and Vázquez…” LAWR 2007). Such trade asymmetry has provoked smaller members to seek solutions within the common market first. In response, Brazil has offered a series of small bilateral concessions, development loans, and even joint ventures through FDI, but none has been able to relieve the trade deficit. Argentina has claimed that such bilateral arrangements are not allowed within MERCOSUR. Venezuela and Argentina have not been forthcoming in trying to address the asymmetries due to ideological differences — in particular, their foreign economic and security policy towards the United States that Uruguay and Brazil do not share. Chavez has offered Uruguay a PetroCaribe oil deal, but it would come with strings attached: recipients of these discounted future petroleum deliveries must endorse Venezuela’s foreign policy. Uruguay’s anti-Chavez sentiment is perhaps best captured in a quotation from the former Argentina President Carlos Menem: “[I] had borrowed from the IMF, but Kirchner was borrowing from Chavez at a greater risk” (“Venezuela: Chavez Conducts…” LAWR 2007). Rejecting Chavez’s PetroCaribe deal, Uruguay instead signed a Trade and Investment Framework Agreement (TIFA) with the United States in 2007. TIFAs are generally preludes to negotiating full-blown free trade agreements. In 2007, Brazil warned Uruguay that going beyond the TIFA to a full FTA with the United States would result in its expulsion from MERCOSUR (“Uruguay: Vázquez…” LAWR 2007). As of mid-September 2008, Uruguay has asked MERCOSUR for permission to actively pursue free trade agreements not only with the United States but also the EU, Canada, and South Korea (“Uruguay pide…” La Nacion 2008). Concurrently, Peru’s president, Alan Garcia, has suggested that the time has come for both MERCOSUR and the Andean

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Community to revisit and rework some of their statutes to allow intra- and extra-regional bilateral agreements. Garcia’s suggestion could provide Brazil with a face-saving measure vis-à-vis its earlier pronouncements about expelling Uruguay from MERCOSUR if it signs an FTA with the United States. If Peru’s suggestion is pursued, then MERCOSUR can no longer be the nucleus for further integration, either among its members or for the region as a whole. Instead, trade agreements will become the tools of competitive — not complementary — economic growth.

7.2 The Case of Paraguay In the first half of 2008, Paraguay had a US$1.28 billion trade deficit (“Paraguay: Trade…” LAEB 2008). Paraguayans — chafing from occupying the lowest wrung on the MERCOSUR ladder — elected a former priest, Fernando Lugo, as president. During his campaign, Lugo promised that his government would pursue an anti-MERCOSUR, more nationalistic trade and investment policy vis-à-vis Argentina and Brazil, thereby further undermining group harmony (“Disappointing Summit…” LARR 2007). His campaign also stressed recovering “hydroelectric sovereignty” from Brazil and Argentina. The Paraguayan Republic owes Brazil US$18 billion for its share of the construction of the binational dam Itaipu, for which Brazil has been charging an 11 per cent interest rate. In fact, the Paraguayan press had accused Brazil of having exhibited an “imperialist attitude” toward its small neighbour when Brazil offered a series of palliative development agreements (“Brazil–Paraguay…” LAWR 2007). Paraguay owes US$6.5 billion to Argentina for its share of the Yacyreta dam and other loans. In short, this junior MERCOSUR partner has been squeezed by debt payments and has sought relief in vain from the senior partners (“Paraguay: Duarte…” LAWR 2007).

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8. State Subsidies and Special Zones of Industrial Promotion The Amazonian city of Manaus has been Brazil’s premier “dutyfree zone” since the 1970s. A large number of MNCs and Brazilian firms have established electronic and home appliance assembly plants as well as parts and components makers there. Routinely, Brazilian firms “import” duty free parts and components from Manaus to finalize their products elsewhere in Brazil, then export them to Argentina, Uruguay, Paraguay, and the rest of the world (“MERCOSUR: Lula and Vásquez…”). Argentina also has its own subsidized, tax-haven “special zones of industrial promotion”. In November 2006, Uruguay, already reeling from a trade deficit with Argentina, imposed stiff quotas on sixty-three Argentine products that Montevideo claimed were manufactured in these special zones in the Argentine provinces of La Rioja, San Luis, and Catamarca (“MERCOSUR: Lula and Vázquez…”). Uruguay grants no domestic or national treatment for these Argentine products. In fact, such subsidies are not allowed under MERCOSUR rules, but neither Argentina nor Brazil is prepared to remove or scale down the subsidies due to domestic political considerations. Clearly, this state of affairs works against a healthy MERCOSUR: a customs union cannot become a reality until the members agree on a system of acceptable corrective and remedial measures when disputes occur. So far, MERCOSUR has failed to address this issue. The outcome is that true integration is nowhere in sight and the aggressive pursuit of nationalist interests (export more, import less) is effectively undermining MERCOSUR.

9. Members’ Pursuit of Diverse Foreign Economic and Security Policies Venezuela’s Chavez has argued for MERCOSUR unity to serve as the foundation for its anti-American and anti-imperialist foreign

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economic policy (“MERCOSUR: Tension…” LARR 2007). He has made it clear that he intends to change MERCOSUR, which he accused of having practised unregulated free market policies whereas he would prefer to use it as a vehicle to bring the “twenty-first century socialism” to Latin America. In 2007, while awaiting a vote for the ratification of his country’s membership that never came, Chavez stated: “If we want integration we have to move away from the paradigm of savage capitalism” (“Venezuela: Chavez Gives…” LARR 2007). Venezuela and Argentina aligned themselves in this enterprise, especially after the world’s ninth largest oil producer bought Argentine bonds worth US$4.3 billion and purportedly attempted to make a significant contribution to Cristina Fernandez de Kirchner’s 2007 presidential campaign (“Lula Travels North…” LNDR 2007; “Tracking Trends: Argentina…” LAWR 2008). Their alliance is designed to counterbalance Brazil (“MERCOSUR: Lula Meets…” LAWR 2007). Associate MERCOSUR member Bolivia supports Chavez unconditionally. Thus, Venezuela’s 2006 admission to candidacy for full membership in MERCOSUR with its singularly anti-imperialist foreign economic and security policy poses a difficult choice for the organization. The Brazilian Senate is unwilling to ratify Venezuela’s membership given Chavez’s charge that it is “parroting the U.S. Senate” (“MERCOSUR: Tension…” LARR 2007). Further, Brazil’s centre-leftist president, Luis Inacio “Lula” da Silva has no illusions about which side his bread is buttered on. Replying to a congratulatory comment made by the U.S. ambassador about the progress Brazil had been making on economic agreements with South Africa, India, and China, Lula quipped: “But if you believe for one moment that I’m not absolutely certain that our most important relationship and our most important business partner is the United States, then you must think I’m very much a fool”, to which the ambassador

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promptly replied, “No, I don’t think you’re a fool at all” (Oppenheimer 2007, p. 238). Over the past three years, Chavez has spent US$4 billion to purchase Russian arms, which in and of itself has upset its neighbours. Then, in September 2008, Russia agreed to grant Venezuela a US$1 billion line of credit for more weapons and dispatched a naval fleet and long range bombers to support Chavez’s anti-American position. These growing security ties with Russia have introduced a new dimension into MERCOSUR’s external policy with its larger trading partners in the Atlantic. Further, as of this writing, the expulsion of the U.S. ambassadors from Bolivia and Venezuela, plus Honduras’s refusal to grant an agreement to an ambassador nominated by the Bush administration, were countered by the United States by sending the Venezuelan ambassador home. Such diplomatic fallout can damage not only MERCOSUR’s reputation and its relations with the United States but also send the wrong message to European and Asian partners as well. In an unprecedented manner, the Brazilian Congress criticized Chavez for the deterioration of democracy in Venezuela and his menacing foreign policy, in particular, his poor relations with the United States. A former Brazilian president has also loudly criticized Chavez’s “outdated military populism” and his arms acquisition from Russia as creating an unstable security environment (“military imbalance”) in the Amazon region. In response to Chavez’s activities, Brazil has announced it will hold several military exercises in the Amazon and will post its national intelligence officers in Caracas and La Paz (Bolivia) to monitor the Venezuela’s budding security relations with Russia. Brazil would prefer South-South integration instead of the balance of power approach with the great powers. In fact, in 2006 — and for

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the first time — Brazil’s exports to the South — US$67.8 billion — were marginally greater than those to developed countries — US$67.2 billion (“Brazil: Rethinking…” LAWR 2007). There are two institutions relevant to the future of MERCOSUR that Chavez has created. The first is ALBA, the Alternativa Bolivariana para las Américas in Spanish, or the Bolivarian Alliance of the Americas. In 2002, Fidel Castro of Cuba and Hugo Chavez were said to have agreed to form an organization of development and solidarity for Latin America as an alternative to Washington-dominated neoliberal institutions such as the World Bank, the IMF, and the Inter-American Development Bank. ALBA was formally set up in 2005. Its objective is to create an alliance of like-minded Latin American countries in search of a new future, rejecting a pro-market political economy model and promoting a collectivist socialist alternative. Chavez has been positioning himself as the legitimate regional ideological successor to Fidel Castro. At present, ALBA has six members: Bolivia, Cuba, Dominica, Honduras, Nicaragua, and Venezuela. The first five are all recipients of financial aid and discounted oil from Venezuela’s PetroCaribe project. Recipients are required to pay 60 per cent of the price of oil bought in ninety days but can pay the remaining 40 per cent over twentyfive years at 1 per cent interest (Mejia 2008). Curiously, no MERCOSUR member has signed up for similar deals. The second institution is the Bank of the South, which Chavez hopes to nurture into a World Bank for Latin America and other developing countries. Its five members are Argentina, Bolivia, Brazil, Ecuador, and Venezuela. The idea for the bank was born of MERCOSUR’s long-term goal of integration but was proposed by Venezuela and Argentina. The institution was formally unveiled in December 2007 with the goal of raising US$22 billion. Venezuela’s finance minister explained the goal of the bank as being to

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“free Latin America from the humiliating conditions imposed by Washington” (“MERCOSUR: Brazil Likely…” LAWR 2007). Venezuela committed US$1.4 billion in start-up capital. Brazil and Argentina favour funding the bank through the private market while Venezuela supports state financing. Brazil resisted this possibility at first, being unwilling to give the control of the bank to Venezuela. It finally relented, however, for fear of being isolated. Nevertheless, it did not want to match Venezuela’s start-up amount, offering instead to come up with somewhere between US$300 million and US$500 million (“MERCOSUR: Brazil Likely…”; “Brazil and Paraguay…”). The bank has yet to find a permanent home and set up branches for operation, though. Beyond Chavez, however, South American countries are establishing other venues for multilateral association, sans the United States and outside of such U.S.-dominated supranational entities as the Organization of American States. In May 2008, UNASUR (La Unión de Naciones Suramericanas, or the Union of South American Nations) came into existence, replacing the short-lived 2004 South American Community of Nations. Brazil’s Lula welcomed the twelve-nation UNASUR (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay, and Venezuela) as a harbinger of South American unity. Critics, however, point out that MERCOSUR at the time of its founding was also the hope of Latin American integration. If MERCOSUR countries have failed to achieve that goal even among themselves, then how are twelve countries going to unite (“Brazil–Region…”)? The ultimate objective of UNASUR is grander than MERCOSUR’s: regional integration of the whole of South America, including the possibility of a common defence council. Thus, for the time being, political union or integration is its priority. At the end of the day, however, UNASUR will need to

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foster closer economic integration if it is to avoid the label of being just another “talk shop”. One can also question whether MERCOSUR and UNASUR are “complementary” since both seek integration (Council on Hemispheric Affairs 2008). Yet another interpretation is that MERCOSUR deliberately seeks external partnerships to divert attention away from the slow disintegration of the group, whose 2007 summit the Brazilian press derided as “a waste of time” (“MERCOSUR: Lula…”; “Interstate Conflict…” LASR 2007).

10. Future Prospects and Lessons Learned The level of regional integration originally envisioned with the creation of MERCOSUR has not been achieved as laid out in the 1991 Treaty of Asunción. Brazil’s devaluation of its currency, the real, in 1999 and the subsequent Argentine economic crisis of 2001–02, brought more nationalistic presidents to power. These changes in domestic politics have caused relations among member states to degenerate into pre-MERCOSUR practices: interstate rivalries, the use of economic power to gain the support of small members, catering to strong domestic interest groups, and engaging in a bidding war among themselves to extract greater concessions from Europe and the United States. With Venezuela’s possible ascension to the group, a more virulent anti-Americanism has dominated MERCOSUR’s agenda. Economists such as Jeffrey Schott, Paul Krugman, and Jagdish Bhagwati, to name a few, have argued that when a free trade agreement is forged between large countries and small ones, the economic benefits and gains accrue faster to the small members. This has not happened in MERCOSUR. In fact, both Paraguay and Uruguay have incurred debt and are running trade deficits with Brazil and Argentina. This situation has impeded integration

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because the junior members have sought ways to bolster their economic positions, which has often meant resorting to more protectionist measures or going outside MERCOSUR to seek extraregional FTA partners. For the two large partners, history matters. Both practise state subsidization for export promotion, but each accuses the other of using unfair trade practices. Uruguay’s imposition of the quotas on Argentine products constitutes protectionism, in flagrant violation of MERCOSUR’s rules, while Argentina complains about Brazil’s creation of seventeen new export processing zones to gain access to Argentine and other markets in the group. The proliferation of extra-regional trade agreements in MERCOSUR illustrates that integration remains elusive. It also suggests that the economic gains that the current model of customs union and common market has achieved may have reached their limits, as appears to be the case with the EU and NAFTA, thus forcing the group to seek new outside markets. Here too, inconsistency abounds. Some arrangements are FTAs, others are less comprehensive plain preferential trade agreements, and still others offer little economic value, such as MERCOSUR’s modest US$1.1 billion per year two-way trade with Israel, one of its extra-regional FTA partners. The unwillingness on the part of member states to cede sovereignty to MERCOSUR institutions and the lack of supranational power to administer and promote the common market and customs union goals have impaired the quality of MERCOSUR policies, which are often ignored and subject to the nationalist whims of each member. The feeble Administrative Secretariat and the lessthan-satisfactory adjudication system for conflict resolution and dispute settlement have contributed to a lack of coordination in

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checking the group’s persistent pursuit of protectionist and nationalist trade policies. Uruguay’s Botnia paper mill is a major case in point. Brazil’s unwillingness to mediate the conflict plus the ad hoc tribunal system of unenforceable arbitration decisions has resulted in MERCOSUR washing its hands off the case. MERCOSUR’s seventeen-year-old legacy has been mixed. During this time, Brazil has emerged as a U.S. trillion-dollar economy while Argentina has gone through a series of economic and financial traumas. Uruguay and Paraguay have chafed under the CET rules that discriminate against them. Fundamentally, MERCOSUR’s problem is that the group is not a player in the global economy. It depends on extra-regional trading partners for growth. For the past twenty years, it has represented less than 2 per cent of world trade. As an integration vehicle, it falls short as well. Intra-regional trade has never risen above 12 per cent. This means that 88 per cent of MERCOSUR trade is with outsiders. MERCOSUR needs more FTAs with outsiders, not with its partners. By contrast, ASEAN’s internal trade ratio has increased from 23 per cent to 25 per cent since 2000 (see Figure 2.5). During this same period, MERCOSUR’s internal export ratio has decreased. This is hardly an encouraging sign for integration. Institutions empowered to administer trade and investment are as necessary for MERCOSUR as any other regional trading bloc. Further, MERCOSUR has been emphasizing the harmonization of trade policies instead of eliminating built-in barriers, both formal and informal, as well as technical and non-technical, as EU and NAFTA have done. MERCOSUR has yet to launch a well thoughtout strategy of true “beyond harmonization” integration. Without such a strategy, the prospects for success are remote.

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1.4

1.1

P4

Source: The World Bank, 2008 WDI, Table.

676 1603

226 1023

NAFTA

2262

20

98

Y2000

EU

2026

5

MERCOSUR

APEC

27

Y1990

ASEAN

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1.6

2087

651

2437

14

117

Y2003

2

2482

737

2924

20

142

Y2004

2.3

2649

825

3309

24

165

Y2005

FIGURE 2.5 ASEAN vs MERCOSUR: Intra-Regional Trade, 1990–2006

3

2987

902

3764

31

194

Y2006

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Abbreviations LAEB LNDR LARR: AG LARR: B&SC LASR LAWR

Latin American Economy & Business Latin News Daily Report Latin American Regional Reports: Andean Group Latin American Regional Reports: Brazil & Southern Cone Latin American Special Reports Latin American Weekly Report

References Australian Government, Department of Foreign Affairs and Trade. “ASEAN-10 Fact Sheet”, 2008. (accessed 27 October 2008). “Banco del Sur Gets Go Ahead from Mercosur”. LAEB, May 2007. “Brazil: Aiming to Triple Oil Reserves”. LARR: B&SC, July 2008. “Brazil: Rethinking U.S. Relations”. LAWR, 15 February 2007. “Brazil and Paraguay Join Banco del Sur”. LAWR, 10 May 2007. “Brazil–Paraguay: Lula Pursues “Imperialist” Agenda in Asunción”. LAWR, 24 May 2007. “Brazil–Region: Defence Council Receives Lukewarm Response”. LAWR, 29 May 2008. Carranza, Mario E. “Clinging Together: Mercosur’s Ambitious External Agenda, Its Internal Crisis, and the Future of Regional Economic Integration in South America”. Review of International Political Economy 13, no. 5 (December 2006): 802–29. Council on Hemispheric Affairs. “The Politicization of MERCOSUR: With a Divided Past, Is There Hope for a United Future?”, 1 July 2008. (accessed 5 October 2008). “Disappointing Summit Fails to Address Mercosur Schism”. LARR: B&SC, January 2007. “Dispute over EU Deal Splits CAN”. LARR: AG, June 2007.

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Doctor, Mahrukh. “Why Bother with Inter-Regionalism? Negotiations for a European Union-Mercosur Agreement”. JCMS 45, no. 2 (2007): 281–314. Duina, F. The Social Construction of Free Trade: The European Union, NAFTA, and MERCOSUR. Princeton: Princeton University Press, 2006. Duina, Francisco and Jason Buxbaum. “Regional Trade Agreements and the Pursuit of State Interests: Institutional Perspectives from NAFTA and Mercosur”. Economy and Society 37, no. 2 (May 2008): 193– 223. “Economic Overview: Paraguay”. LARR: B&SC, July 2007. Gardini, Gian Luca. “Who Invented MERCOSUR?” Diplomacy and Statecraft 18 (2007): 805–30. “Governments Downplay Spat over Pulp Plants”. LARR, January 2006. “Interstate Conflict in Latin America: A Thing of the Past?” LASR, April 2007. “Lula Travels North; Chavez Goes South”. LNDR, 6 August 2007. Mansfield, Edward D., and Helen V. Milner, eds. The Political Economy of Regionalism. New York: Columbia University Press, 1997. Mejia, Thelma. “Honduras: Joining ALBA: ‘A Step Towards the Center-Left’, Says President”. Inter Press Service, 26 August 2008. (accessed 5 October 2008). “MERCOSUR: Argentina and Brazil at Odds over Trade”. LAWR, 2 August 2007. “MERCOSUR: Argentina Victorious but Mercosur Loses Out”. LAWR, 25 January 2007. “MERCOSUR: Brazil Likely to Sign Up to Banco del Sur”. LAWR, 22 March 2007. “MERCOSUR: Disappointing, Undisciplined, and Developing”. LASR, November 2007. “MERCOSUR: Lula and V·zquez Mend Fences Ahead of Bush Visit”. LAWR, 1 March 2007.

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ABOUT THE AUTHORS

The Economic Commission for Latin America and the Caribbean (ECLAC) is one of the five Regional Commissions established by the UN in 1948, whose objective is to provide assistance and to promote economic and social development in the region. ECLAC serves as a centre of excellence in the region. It collaborates with its member states and with a variety of local, national and international institutions in undertaking a comprehensive analysis of development processes based on an examination of the design, follow-up and evaluation of public policies. Eul-Soo Pang (Ph.D., Berkeley) is a Professor of International Political Economy at Colorado School of Mines. Founding director of the Master of International Political Economy of Resources (MIPER) Program, he is a specialist on the comparative development of Latin America and East Asia, world trade, finance, and Asia-Pacific security. Author of four books, he is currently completing his fifth, provisionally titled Embedding Security into Free Trade: The United States-Singapore Free Trade Agreement in the Asia Pacific World-System. He is a Visiting Professorial Fellow at the Institute of Southeast Asian Studies, Singapore (2008–09) where he has conducted field research for his forthcoming book.

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Laura Jarnagin (Pang) (Ph.D., Vanderbilt) is an Associate Professor of International Political Economy at Colorado School of Mines. A co-founder of the MIPER Program, she also served for five years as the director of the Division of Liberal Arts and International Studies. Her research and teaching interests include trans-Atlantic socioeconomic history, hemispheric integration of the Americas, and Latin American political economy. She has just published a book entitled A Confluence of Transatlantic Networks: Elites, Capitalism, and Confederate Migration to Brazil (University of Alabama Press 2008).

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