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  Félix Peña

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  The Washington Quarterly | Diciembre de 1995

New approaches to economic integration in the Southern Cone

WITH ALMOST 210 million consumers, a gross domestic product (GDP) of $800 billion (1993), and a per capita income of $3,500, the five Southern Cone countries (defined here as Argentina, Brazil, Chile, Paraguay, and Uruguay) represent 55 percent of the Latin American market. Together with the countries of the North American Free Trade Agreement (NAFTA), they represent 95 percent of the hemispheric market. In 1994, the global imports of the five countries were $65 billion, of which around 30 percent were capital goods. In 1990 four of these countries began a new experiment: regional economic integration within the framework of the Southern Common Market (Mercosur). The fifth, Chile, will most probably enter in 1995, either as a full member or as a special partner through some kind of association agreement. Mercosur represents the fourth largest world economic space, after NAFTA, the European Union (EU), and Japan. Its market is bigger than Russia's. All of its members have market-oriented economic policies and have opened their markets to foreign trade and investment. Most of their former public enterprises have been privatized in recent years, especially in Argentina and Chile, or will be privatized in the near future, particularly in Brazil. All of them are committed members of the new World Trade Organization (WTO).

Freedom and democracy are today well established in this region, and nobody can seriously complain about the performance of these countries in the human rights field. It is precisely the evolution toward a combination of real and unrestricted democracy—which implies transparency and the possibility of control by an open opposition and public opinion—and deep economic transformation within the logic of a free market that characterizes and differentiates the Southern Cone's recent experiences, transforming it into an increasingly valid precedent for other emerging regions.

As a result of the dramatic cultural and political changes of the last decade,  the  notion  of working togetherhas strong support among Southern Cone nations today. Both governments and public opinion are now clearly in favor of further economic integration and political cooperation within the region.

Argentina and Brazil are among the 10 big emerging markets identified by the Clinton administration in the National Export Strategy as those, with enormous significance for U.S. exports. To understand the background, the logic, the methodology, and the prospects of their cooperation, through Mercosur, becomes increasingly important for other countries of the Western Hemisphere, especially when they are involved, at the same time, as partners in developing the idea of a free trade area in the Americas. My intention is to make a contribution to the understanding of the Southern Cone cooperation process and its future prospects.

Background to Mercosur

This cooperation is relatively new. After the Southern Cone states achieved independence, a pattern of rivalry and lack of mutual confidence, if not open conflict, prevailed among them. For territorial reasons, Argentina and Chile almost went to war as recently as 1978. Until the late 1950s, trade and other economic links were marginal. Then the idea of preferential trade relations was introduced. As a result, the Latin America Free Trade Area (LAFTA) was established in 1960.

This agreement included all South American countries and Mexico, but most trade was concentrated among three countries: Argentina, Brazil, and Chile. Thus LAFTA's practical results were limited. The formal goal of a free trade zone was never achieved, mainly because it was not compatible with the prevailing idea of import substitution Governments and firms—including multinational companies—were not really interested in liberalizing trade. The idea of economic integration had no political strength, and as a result it lacked appeal and, therefore, the support of public opinion.

In 1980 LAFTA was transformed into the Latin American Integration Association (LAIA), a broad institutional framework that provided a kind of collective discipline for the conclusion of so-called partial preferential agreements that did not necessarily include all member countries. Within this LAIA framework, Mercosur, the Andean Group, the Group of 3 (Mex­ico, Venezuela, and Colombia), the Chile-Mexico Free Trade Agreement, and many other mostly bilateral agreements were concluded. All of them included trade preferences.

In the last 15 years, significant progress has been achieved in building political confidence and economic interdependence among Southern Cone countries. The first turning point with respect to the past was the 1980 tripartite agreement among Argentina, Brazil, and Paraguay concerning the use of the Parana River for energy purposes. The 1984 Argentina-Chile Peace and Friendship Treaty was the second turning point. Both agreements set the foundations for a new pattern of political and economic relationships within the region. But the crucial factors that further stimulated the. notion of working together in the Southern Cone countries were the return to democratic institutions and the opening of the economies to international trade and investment. The recognition of shared values with respect to political and economic life, then, has been the real reason for this trend toward active cooperation and a peaceful environment within the region. The end of the Cold War—which in the 1970s had such negative effects for democracy and modernization in Southern Cone countries—and the trend toward economic regionalism in Europe and North America created additional stimulus to the search for economic integration, first of all between Argentina and Brazil, and then later among Uruguay, Chile, and Paraguay. But the relationship between Argentina and Brazil, representing the largest part of the Southern Cone economic activity, will continue to be at the heart of shaping the modalities of economic integration in this region.

Mercosur's Goals

With this as background, Mercosur was created in 1990 by its members as an instrument to facilitate the consolidation of democracy and the productive transformation of each country, together with its competitive insertion into world markets. It was therefore neither conceived as a substitute for the efforts necessary to achieve adequate levels of domestic economic competition and productivity, both at the sectorial and firm level within the four countries, nor as an alternative to the necessity of achieving, at the same time, a high level of competitiveness in world markets. The idea of open regionalism was therefore, from the very beginning, crucial to the Mercosur concept. This was so because the main economies in particular (Argentina and Brazil) were global traders with an equilibrated diversification of economic links with the industrial countries, and therefore with strong interests in the consolidation of a General Agreement on Tariffs and Trade (GATT)-plus, open, nondiscriminatory, multilateral trading system. The sense of lack of options after the hard experience of the 1980s also played an important role in shaping the values and attitudes now visible in the region. Finally, the demonstration effect of the East European revolution of 1989, of Europe 1992, and of the NAFTA negotiations has, without a doubt, played a key role in persuading the public in the Southern Cone countries to see Mercosur and global integration concepts in a favorable light.

But the original concept of the Southern Common Market goes a lot further than many people think. It is not merely a project to expand trade among its members. It is also, and more important, a joint proposal for the shared development of these South American nations. From this point of view, the Mercosur concept's deepest significance is political. As such, it is projected into the twenty-first century and founded on the perception of a great dynamic of change in the international system, in which regional blocs will undoubtedly take a leading role in economic and technological competition.

Mercosur can thus best be described as a multidimensional process of regional integration: a voluntary strategic alliance among sovereign and democratic countries. And it turns on a political axis because, first, it has a high "dream" content -the dream of a more desirable future- which is essential to any transformation that hopes to acquire strong domestic social consensus, and second, it signifies the projection of the region as an integrated market that is a better place to do business and in a better position to compete in a world made up of large political and economic blocs than its member countries standing alone.

But although this political aspect implies a common -but not necessarily identical- view of the world and the challenges that it offers, this alone is not enough to forge lasting integration among Mercosur's members. Sus-tained economic integration and development also requires of its partners shared -but not identical- views on how to develop a favorable economic climate for investment, efficiency, and competition that will generate employment and an environment favorable Progress to Date.

Four years after the signing of the founding treaty, which took place in Asuncion, Paraguay, on March 26, 1991, Mercosur appears to be consistently moving toward its original objectives. Its methodology is very practical and implies incremental development. Only limited objectives were established for the first four-year period. That is the reason why the treaty is so simple. Its institutions are also simple. There is no supranational bureaucracy. The decision-making process is in the hands of government officials. An administrative secretariat only has been established in Montevideo. Most probably in the next years common institutions will gradually evolve, but this still will take some time because governments seem to prefer, for the moment, to avoid new bureaucracies.

In terms of free trade, the results of Mercosur have been very impressive. Mercosur's almost complete elimination of reciprocal trade barriers is a complete success. Since January 1995 around 90 percent of trade between Argentina and Brazil has been zero-tariff, including agricultural products.

This dramatic reduction of tariffs and the elimination of most other trade restrictions between Brazil and Argentina, together with preferential treatment of reciprocal trade and an important reduction in land transportation costs (70 percent of intra-Mercosur trade is by land), explain the fact that trade has increased 200 percent in only four years, from $4 billion in 1990 to nearly $12 billion in 1994. Firms .operating in any of the four member countries are now able to produce almost without restrictions for the markets of the other three countries. To solve eventual trade disputes, a settlement-of-disputes mechanism was established in 1991 by the Protocol of Brasilia.

A customs union has been established also, although some goods are exempted. A common external tariff was implemented in January 1995. For some important sectors, however, such as capital goods, chemicals, and informatics, an additional period of 5 to 10 years will be necessary for the complete implementation of the common external tariff. This timetable is within the possibilities originally allowed by the Asuncion treaty and could be shortened in the future.

Mercosur is now moving to its second period. The first, from 1991 to 1994, concentrated on trade liberalization among the members. Yet the disequilibriums that characterized the Brazilian economy during 1992 and 1993. gave rise to particular difficulties. Further, doubts were strong in Argentina about the feasibility of the integration process due to disparities in the relative macroeconomic situation of the member countries. Businessmen were angry because of what they perceived as artificial economic asymmetries that introduced distortions in relative competitiveness. Trade surpluses in favor of Brazil during this two-year period were perceived as evidence of the weaknesses of the economic integration strategy. But in 1994 the implementation of the stabilization plan- the Real Plan, named for a unit of the new currency- and its success changed the mood quickly in fayor of Mercosur. The election of Fernando Henrique Cardoso as president of Brazil confirmed the impression in Argentina that things were moving in the right direction again. In December 1994, in the historic Brazilian town of Ouro Preto, the Mercosur's six-monthly meeting summit confirmed the economic integration strategy, giving key approval to its common external tariff. Once again, integration was moving ahead, supported by economic evidence and the strong will of the highest political level of each country.

In this second period, one important driving force for Mercosur will be the strong growth within a framework of macroeconomic stability that is expected for the economies of Argentina and, particularly, of Brazil. Both have grown strongly in 1994 (Argentina by 6 percent and Brazil by 5.7 percent). Global imports grew also by 25 percent in both countries. This has had an impact on intraregional trade and on the behavior of firms. More than 300 Brazilian firms have investments and other operations in Argentina today. And each day more Argentine firms are organizing themselves to produce for the Brazilian market. The same has happened with Chilean firms, particularly in Argentina. They have invested more than $2 billion in Argentina in the past three years, mostly in the prvatization program -that is energy- but also, in some cases, as a result of a strategy oriented toward the Mercosur markets.

It will still take many years to transform Mercosur into a real single market. The immediate first priority will be to consolidate what has already been achieved. A lot of homework will have to be done to eliminate distortions and asymmetries that stem from many decades of inward-oriented economic strategies. To level the playing field will still demand a lot of effort, particularly with regard to unfair trade practices, other restrictive practices by firms, and sectorial regulations. To enforce the new rules, particularly at the level of customs, will require deep transformations of administrative structures and mentalities as well. But what it is important is the enormous degree of political will and energy that is behind the regional integration process. In mid-February 1995, there took place the first bilateral meeting between Argentina and Brazil, which involved both presidents and all their ministers. The message is clear: the two countries are going to go further in working together, not only in the economic field but also in the political. One of the effects of the recent Mexican financial crisis and of the war between Peru and Ecuador has been precisely to strengthen the political will of Brazil and Argentina to work together and to demonstrate to investors that today their countries present political and economic realities quite different from those of the past.

External relations will play an important role in the new phase of Mercosur. The idea is to gradually extend the zero-tariff concept to other South American partners within the LAIA framework. This idea originated in a Brazilian proposal for a South American Free Trade Area. The proposal was accepted by the Mercosur partners and negotiations are currently in progress. They are expected to conclude by the end of June 1995 with free trade agreements involving Chile, Bolivia, Peru, Ecuador, Colombia, and Venezuela. In each case Mercosur negotiates as a unity with the other country. This implies a new experience for Mercosur, because its members need to reach a higher degree of internal coordination to negotiate with non-member countries. The current negotiation will yield lessons that will be useful in future and more complex negotiations with, for example, the EU and eventually with NAFTA.

The second important item on the external agenda of Mercosur is the hemispheric dimension, which is related to the follow-up of the December 1994 Miami Summit and to the trade ministers' hemispheric conference that will take place in June 1995 in Denver. The Southern Cone countries regard this hemispheric process as very important for maintaining a strong relationship with NAFTA that is compatible with the Mercosur approach. The best scenario would be an agreement between Mercosur -perhaps including Chile- and NAFTA, following the pattern of the so-called 4+1 agreement (the trade and investment framework accord signed by the four Mercosur countries with the United States in July 1991). For now, it could be convenient to take advantage of the existing framework to explore practical steps toward a future NAFTA-Mercosur bilateral agreement. It would also be very useful to involve the private sector in the 4 + 1 mechanism. A Business Round Table could make concrete and practical contributions to the idea of building a friendly environment for competitiveness in the region. Other scenarios could be worked out in the future. The South American Free Trade Area concept, within LAIA, could be useful as a model at the hemispheric level, allowing countries to negotiate the gradual opening of their preferential agreements. In this way it would be possible to develop a web of closely related and permeable free trade agreements. Perhaps countries could become members of different agreements at the same time.

Conciliation on tariffs between the countries of the region will be easier if a future hemispheric negotiation, within the agreements reached in December 1994 at the Miami Summit, is concentrated on non-tariff elements of market access. Non-tariff restrictions, safeguard clauses, rules of origin, technical standards, economic competition rules, and dispute settlement mechanisms could be the core of free trade agreements within the hemisphere, with a great impact on reciprocal trade and investment. Macroeconomic discipline should be accepted by all partners. Leveling the playing field for economic competition should be the practical effect. A competitiveness alliance in the Americas, aiming to build a friendly economic environment for democracy, should be the practical result of the Miami Summit action plan and should be developed starting early in 1995.

Such a goal will also require strengthening the role of the WTO in monitoring economic blocs under the renewed GATT rules. The new WTO should have concrete powers for monitoring the evolution of regional agreements and their consonance with the multilateral principles and rules of the GATT agreements.

Europe is also a priority in the Mercosur external agenda. More than 25 percent of Mercosur's global trade is with the European countries. And Mercosur is important for Europe: 70 percent of European direct foreign investment in Latin America is concentrated in Mercosur countries, mainly in Argentina and Brazil. The Southern Cone countries have one of the highest concentrations of overseas European populations and firms. Both regions share an interest in the consolidation of democracy and strengthening a more stable and equilibrated multilateral trading system. It is no surprise that the EU and Mercosur have agreed to advance toward a transatlantic free trade area. Negotiations will most probably begin in 1995, and the first step should lead to an interre­gional cooperation framework agreement that will prepare the field for a full free trade area, to be implemented once the Mercosur customs union is completed. This agreement could play an important role in stimulating trade and investments between Europe and the Mercosur countries. But at the same it should be "GATT-plus" and open to other countries, because the Mercosur countries are committed to strengthening an open and nondiscriminatory global trading system.

Foreign investors are already expressing great interest in Mercosur. Most multinational firms operating in the region are planning their trade and investment strategies assuming Mercosur as a fact. But in the immediate future, foreign investment will be attracted not only by business opportunities opened up by Mercosur in the industrial sector -for example, the automobile and the agribusiness sectors- but also by large regional projects mainly in the field of energy, oil and gas, transportation, telecommunications, and physical infrastructure. Regional projects already identified will require investments of the order of more than $20 billion in the coming years. In some cases, the scope of these projects includes also Chile, Bolivia, and Peru in addition to the present Mercosur member countries.

Future Prospects

What are the prospects for economic integration in the Southern Gone in the next years? There is always the possibility that the whole initiative may fail. But it would appear that if democracy and economic transformation continue to be supported by public opinion, as they are today, chances are very high that in the remainder of this decade free trade and economic integration will continue to be a priority and a reality. At the societal level, Mercosur depends on its partners continuing to perceive themselves as like-minded countries, facing common challenges, and willing for that reason to work together. It depends strongly on the democratic and economic stability of its two main partners, Argentina and Brazil, whose recent political and economic performance stimulates an optimistic vision of the future of the region.

In this sense, experience in Europe and Latin America indicates that when economic integration is based on a consensus of sovereign independent and democratic states, it gives rise to a binding link that is based on a minimum ground of homogeneity in political and economic visions. In other words, such states broadly share fundamental political and economic options, institutions, and priorities. In the case of Europe in the 1950s, this minimum common ground emerged from the Marshall Plan and the Bretton Woods financial system. In the Southern Cone, it is the result of the policies of the Washington-based multilateral financial institutions, but it is also particularly the result of the domestic experience of reconciling structural change with democratic institutions that has been accumulated in recent years.

This minimum common ground of economic fundamentals allows the partners to assume the necessary coordination of macroeconomic policies rather than expect it to be a consequence of economic integration. In other words, to be successful this kind of integration requires the partners to already share some aspirations and objectives in their macroeconomic policies. This might be called de facto macroeconomic coordination, and only when it exists is it possible to keep within reasonable limits those disparities among the partners that derive from short-term internal or external economic disequilibriums. [1]

Sharing some long-term economic fundamentals as well as short-term views and objectives in the formulation of economic policies would, then, be the essence of the social pact among sovereign democratic nations. This is what allows a group of coun­tries to be defined as like-minded nations.

What is emerging as a clear trend in recent free trade and economic integration experiences, both in the hemisphere and in Europe, is that there is no unique methodological model for countries that desire to work together to develop free trade at the regional level. This is very important for the future development of free trade and integration processes in the Americas. The temptation to think of NAFTA, or at the other extreme, the EU, as models to follow would be a great mistake.

Mercosur countries are developing their own methodology for working together in a pragmatic way. The future success of their methodology will depend on the capacity to preserve a win-win situation among the partners. Mercosur countries decided to work together, and to share markets and resources, simply because they understood that it was convenient for them. But they perceived their association as a non-zero sum game. Everybody expected to win, even if there were differences in the magnitude of the profits, because these would be larger than the costs in every case. Each nation's rationale is the basis for the social pact. The concept of "region" -in this case Mercosur- becomes real only to the point that it reflects concrete national interests. An association of this kind maintains its vitality and might eventually include new and more ambitious objectives, but only if it preserves a balance of national interests through time. The win-win situ­ation must be essentially dynamic.

That is the reason why institutional development will be so important in Mercosur's future. The member countries will need to develop an institutional structure capable of preserving, in a dynamic manner, the reciprocity of national interests that is the political support of the social pact. In this vision, the vitality of integration does not result so much from an abstract notion of common interests as from the constant exercise of coordinating some very real national interests. The vitality of Mercosur will depend largely on the ability of the partners to identify a common agenda, based on their shared interests, and to keep it updated.

But much will also depend on the capacity of Mercosur's partners to develop a certain degree of collective economic discipline. The binding link feeds on national interests and objectives, but it affects them at the same time because it limits the possibility for a state to act as if the link did not exist. It does not destroy national sovereignty understood as the capacity to make an independent decision within a determined territorial ambit; but it does insert sovereignty into a freely entered framework of collective discipline. The pact is free: individual behavior within the framework of the pact is not.

Collective discipline also requires a certain level of independent surveillance of the development of the social pact. This explains the need for common institutions, whatever their modalities and characteristics. The common institutions facilitate the process of articulation of the national interests and help to define the common interests. They also facilitate an independent vision of the evolution of the assumed responsibility as well as of the individual behavior of the associates in view of these responsibilities. They are, then, like the jurisdictional or arbitral mechanisms, the guardians of collective discipline. Investors will pay close attention to future developments of Mercosur in this field, because common institutions could be very important in preserving the legal right of access to the respective markets for the goods and, eventually, the services of every partner. It is always market access, conceived as a legal right and not as a unilateral revocable privilege, that characterizes economic integration processes.

Some differences in Mercosur's methodology compared to other cases are explained by the fact that the starting point has been a very low level of economic interdependence. Reciprocal trade was relatively marginal for each associate. For Argentina, the Brazilian market was only 13 percent of its total exports. Now it is around 21 percent. For Brazil in 1991, the Argentine market took around 5 percent of its global exports. In late 1994 it took 10 percent. Prospects are that economic interdependence will increase greatly in the future, and not only in the trade field. This will require strengthening the institutional capacity of Mercosur in dealing with macroeconomic coordination and in solving trade disputes.


The argument presented here suggests that the hemispheric free trade concept should be developed in the next years, taking into account the concrete experiences of recent years, such as those of Mercosur. Understanding these experiences will allow the United States, as a global power and the biggest economy in the region, to play a key role in leading the search for a practical approach to free trade.

The Inter-American Development Bank should also continue to play a crucial role, particularly through its financial support to private sector initiatives, both in the field of helping small and medium-size firms adjust to new competitiveness challenges originating in the free trade concept and in the field of regional projects for physical infrastructure, transportation, energy, and telecommunications. The bank has always had a leading role in the field of regional economic integration and has been traditionally known as the "integration bank." Its people have expertise in the field. It gave technical support to Mercosur in its first phase. Yet greater support by the United States and other industrial countries for this role of the bank would be most welcome in the Southern Cone countries as a practical contribution to the idea of working together.

The Southern Cone countries, especially Mercosur, together with NAFTA, will most probably be the two main pillars of a hemispheric system of free trade and investment. The Miami Summit drew up a concrete and very practical action plan. Things should move now in the prescribed direction toward the web of free trade agreements that should be the practical result. All agreements should be consistent with GATT rules. No model should be imposed, not even NAFTA. The states of each region should discover their own reasons and methodologies for working together to improve trade and investment conditions. Mercosur has found its own way. It seems to be working. It is open to further evolution.

The WTO should play a key role in preserving the consonance of open re gionalism with multilateral global trade principles and disciplines. This should be a common aim for both Mercosur and NAFTA. Europe also should be part of this effort. The EU-Merco-sur framework agreement to be negotiated in 1995, and then the transatlantic free trade area, should open the way for GATT-plus interregional agreements. The agreements can be successful only if they are open unconditionally to other WTO members. The Asia-Pacific Economic Cooperation and the hemispheric proposals should be similarly open.

In the long term, all of the regional blocs should measure their success by the degree to which they cease to be agreements about trade preferences and become the door to a strong multilateral global trading system. It could take years. But that should be the direction.

[1] Felix Peña, "Strategies for Macroeconomic Coordination: Mercosur," in Peter H. Smith, ed,, The Challenge of Integration: Europe and the Americas (Miami, Fla. North-South Center, 1993).

Félix Peña es Director del Instituto de Comercio Internacional de la Fundación ICBC; Director de la Maestría en Relaciones Comerciales Internacionales de la Universidad Nacional de Tres de Febrero (UNTREF); Miembro del Comité Ejecutivo del Consejo Argentino para las Relaciones Internacionales (CARI). Miembro del Brains Trust del Evian Group. Ampliar trayectoria. |

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