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01/02/2006 | Mercosur: regional ructions roll back trade accords

Oxford Analytica Staff

EVENT: Argentine President Nestor Kirchner made his first state visit to Brazil on January 18-19.

 

SIGNIFICANCE: The summit between Kirchner and Brazilian President Luiz Inacio Lula da Silva, joined on the second day by Venezuelan President Hugo Chavez, aimed principally to overcome pending disputes affecting Mercosur. It came as doubts increase over Uruguay's continuity in the bloc and prospects for greater integration.

ANALYSIS: Far from moving towards greater economic integration, the Mercosur bloc has faced increasing strains, primarily relating to inequalities among the members:

The two largest members, Brazil and Argentina, have long disputed the question of safeguards to protect Argentine industries against competition from lower-cost Brazilian products. This is particularly the case since the recovery of the Argentine economy, which has coincided with a period in which Brazil has doubled its exports. Argentina's trade deficit with Brazil reached nearly 3.7 billion dollars in 2005, up from 1.1 billion the previous year. This includes a deficit of nearly 1.8 billion dollars in bilateral automotive trade.

The two smallest members, Paraguay and Uruguay, complain that their access to the larger Mercosur markets is largely theoretical, and that their interests are given little attention in Mercosur decision-making. For example, in 2005 Brazilian exports to the rest of Mercosur rose by some 32.0%, year-on-year, while exports from the rest of the bloc to Brazil rose by only 11.2%.

Uruguay pressures. Relations with Uruguay have become especially contentious in recent months, despite President Tabare Vazquez's long-standing support for the bloc. Tensions focus on two issues in particular:

US trade talks. Uruguay has expressed interest in negotiating a free-trade agreement (FTA) with the United States, independently of Mercosur, which could in theory force its withdrawal from the bloc. US Assistant Secretary of State for Western Hemisphere Affairs Thomas Shannon has denied that an FTA is on the agenda, and Vazquez himself has echoed this position in recent days. However, the move could represent a possible step in Washington's strategy of negotiating bilateral FTAs in the absence of progress on the Free Trade Area of the Americas -- or at least a bargaining counter for Uruguay to gain greater leverage within Mercosur.

Paper mills. Relations between Montevideo and Buenos Aires have recently been severely strained by Uruguayan plans to build two paper mills, involving Finnish investment, on the Uruguay River opposite the Argentine province of Entre Rios. The plans have led Argentine protesters to block bridges between Argentina and Uruguay and roads within Uruguay, causing severe disruption to both goods transport and the summer tourist season. Uruguay dismisses claims by Entre Rios and by environmental groups that the mills will cause environmental damage, and Vazquez has stated that he and his citizens will not be "bullied" into abandoning a project offering significant potential benefits for a small economy. Argentina proposes to take the case to the International Court of Justice in The Hague.

In the event, Uruguay appears to have made its presence felt, despite Vazquez's absence from the meeting between Brazilian President Luiz Inacio Lula da Silva and his Argentine counterpart, Nestor Kirchner, in Brasilia on January 18. Kirchner, making his first state visit to Brazil, used the occasion to note that the interests of the smaller Mercosur members had received insufficient attention to date, while Lula noted the need to be more "generous with our smaller brothers". However, the main focus of the bilateral meeting related to long-standing demands for a 'competition adaptation clause' (CAC) to allow limitations on Brazilian exports perceived to undermine Argentine industries.

Industrial inequalities. Although, under Mercosur norms, Argentina was in theory to eliminate safeguards and reduce import tariffs as of the beginning of 1999, in practice safeguards against Brazilian products have been applied on a number of occasions, in particular on automotive products, household appliances, textiles and footwear. The date for the elimination of safeguards coincided with the devaluation of the real in January 1999, which reduced the competitiveness of Argentine products (affected by the convertibility plan pegging the peso at one-to-one parity with the dollar) and led to an influx of imports and a shift of productive capacity from Argentina to Brazil. Following Argentina's recovery from the 2001-02 crisis, when Brazilian imports again began to expand, unilateral barriers were again imposed on the grounds that Argentine industry required time to restart production in a context of growing demand and more favourable exchange rates (see MERCOSUR: Summit achieves only modest advances - July 19, 2004).

In late 2004, former Argentine Economy Minister Roberto Lavagna proposed the adoption of the CAC, negotiations for which made little progress until recently. Brazil's recent decision in principle to accept the CAC, to be signed on January 31 (over protests from Brazilian industrialists) after further meetings to finalise details, reflects acceptance of the fact that inequalities within the bloc may be threatening its survival. Although in theory the measure can also be used to protect Brazilian sectors from Argentine imports, in practice the move will largely limit Brazil's intra-bloc exports. Brazil has demanded three principal conditions for implementation of the CAC:

- that the measure be temporary;

- that industrial sectors favoured by import restrictions demonstrate efforts to improve their competitiveness; and

- that application of the CAC will be terminated in the event that Brazilian exports to Argentina are substituted by exports from other countries, rather than by domestic production.

It appears evident that renewed pressures from Uruguay and Paraguay over inequalities within Mercosur have been a factor in convincing Lula to accept the CAC as a means of sustaining the bloc. However, it is arguably the case that an agreement to impose safeguards on some intra-bloc imports represents a step backwards in regional trade integration, rather than an advance, while the CAC in itself will do little to reduce inherent economic inequalities.

Hydrocarbons hopes. The presence of Venezuelan President Hugo Chavez in the second day of meetings marked the first such participation since Venezuela was accepted as a full member of Mercosur in December (see MERCOSUR: Venezuelan influence to prove limited - December 13, 2005). Following the meeting, Chavez announced the commitment of the three governments to the project to construct an 8,000-kilometre gas pipeline linking Puerto Ordaz, Venezuela, with Argentina. The proposed pipeline is of particular interest to Argentina and Brazil given the stated intention of Bolivian President Evo Morales to increase the price of gas exports to those countries (although Morales has been invited to join the pipeline project).

However, the cost of transport, and of construction of the pipeline itself, may prove prohibitive. Indeed, although Chavez hinted that the estimated 20 billion dollars needed for the project will be easily found, it is far from clear that this will be the case, given the lengthy construction period envisaged (seven years) and private investor concerns over regional stability and supply security (see LATIN AMERICA: Energy integration proves divisive - October 17, 2005). Proposals that Venezuelan state oil company PDVSA should finance a substantial portion of the pipeline may be unrealistic given its own investment needs and heavy contribution to social spending. Technical proposals are to be published on March 9, one day before the three presidents hold a further meeting on the issue. By contrast, a Chavez proposal to launch a new regional bank, Banco del Sur, incorporating half the reserves of participating countries' central banks, appears to have met with little enthusiasm on the part of his counterparts.

CONCLUSION: Efforts to reduce frictions within Mercosur may make the bloc's survival more viable, but are doing little for regional integration and free trade. Although Chavez is proving able to exert some economic influence in the bloc (not least through continuing purchases of Argentine debt), the political and energy ramifications of Venezuela's entry will become apparent only in the medium to long term.

Oxford Analytica (Reino Unido)

 


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