Briefing Paper : S. America Banking on a New Market

The News

Four South American countries, with a combined population of 190 million and a collective gross domestic product of $390 billion, signed a treaty March 26 to create a common market that is to eliminate all tariffs and other trade barriers among them by 1996. Officially named the Southern Common Market, it is known by the acronyms Mercosur in Spanish and Mercosul in Portuguese. The ambitious project is aimed not only at promoting trade and development within the market area--larger than the United States and Mexico combined--but also at helping the member countries to compete more successfully in trade with the rest of the world.

The Players

Brazil has the 10th-largest economy in the world. Although much of its resource-rich territory is underdeveloped, Brazil is a major producer of tropical and subtropical agricultural products and of industrial products such as motor vehicles and aircraft.

Argentina has the largest middle class in Latin America and is self-sufficient in petroleum. Its rich, temperate farmlands produce a large surplus of grains, fruit and livestock at internationally competitive costs. Its industries, while generally less efficient, make motor vehicles, household appliances and other durable goods.

Paraguay has abundant hydroelectric resources. Its democratic development, the most recent among the four countries, began in 1989 with the overthrow of Gen. Alfredo Stroessner’s 35-year dictatorship.

Uruguay’s main claims to economic fame are in the efficient production of sheep, wool and wool products and in offshore banking services.

The Background

Since 1960, South American countries have been working on projects aimed at economic integration and free trade. Although the efforts have met with repeated frustration, Brazil and Argentina have made considerable progress in bilateral negotiations since 1980.

In 1988, the two South American titans signed a treaty aimed at their full economic integration, including joint development of key industrial sectors. This year’s Mercosur treaty brought in Uruguay and Paraguay and set an automatic timetable for gradually eliminating all trade tariffs within the group.

The fact that all four Mercosur countries are now headed by elected presidents with similar free-market economic policies has helped create a propitious climate for the project, as has the example of progress toward creation of a single market in Europe.

The Goals

The timetable calls for eliminating all Brazilian and Argentine tariffs on trade within the group by the end of 1994. Uruguay and Paraguay’s weaker economies will have until the end of 1995 to follow suit. While the timetable is ambitious, years of tariff negotiations already had reduced or eliminated many levies among the four countries. Brazil and Argentina already give each other preferential tariff reductions of 70% to 100% on most products.

Mercosur commissions are to negotiate other integration steps--such as eliminating non-tariff trade barriers among the four countries, setting a common policy on tariffs for imports from outside the group and coordinating currency exchange rates and other national economic policies.

If integration can be achieved, planners expect it to stimulate economic growth because producers will have a larger potential market, justifying greater investment and increasing economies of scale--the reduction of costs through mass production. The common market is also aimed at forcing producers previously sheltered by protective tariffs to become more efficient and competitive--and thus better prepared for increasing exports to outside markets.

“I think Mercosur is going to be a pillar of the rebirth of economic growth and development in this area,” said an Argentine official.

The Obstacles

The main obstacle on Mercosur’s path is economic instability in Brazil and Argentina. Although their inflation rates have dropped in recent months, they still are running at well over 100% a year. The inflation and continuing economic stagnation lead to widely fluctuating exchange rates.

If currencies of member countries are grossly undervalued or overvalued, prices of goods are skewed, putting some competitors at an unfair disadvantage.

Some inefficient companies, accustomed to operating as oligopolies in a protected market, are expected to lobby against Mercosur. Some bureaucrats who wield the power of protective laws may also resist.

The U.S. Position

A long-term goal of President Bush’s 1990 Enterprise for the Americas Initiative is free trade throughout the Americas. Washington is negotiating with Mercosur on a “framework agreement” for future talks on trade and investment. An agreement may be signed during the early days of May.

Some U.S. officials have voiced concern that Mercosur may create barriers against imports from outside the trade area. But Argentine and Brazilian officials said both governments are committed to an open market because only with free trade will Mercosur producers become more competitive internationally.

The Prognosis

For Mercosur to thrive, it will need both to increase savings and investment internally, and to attract foreign capital. Foreign capital--as well as billions of dollars in “flight” capital that has left the area in search of more stable investment climates--is less likely to come without stabilization of the Brazilian and Argentine economies. Officials hope the coordination of policies required by the Mercosur treaty will discourage instability caused by erratic government measures.

To attract new loans, Brazil and Argentina will need to reach agreements with foreign creditors on their overseas debts--now totaling more than $185 billion, including billions of dollars in overdue interest.

By all accounts, the transition period will be difficult. Even with economic stability and growth, many industries and agricultural producers will face problems of tougher competition as trade barriers are lowered. If unrealistic exchange rates create added disadvantages for producers, opposition could become decisive.

If Mercosur does develop as a thriving, open market, it is likely to become an increasingly important buyer of sophisticated goods and industrial equipment from the United States and other developed countries. And if Bush’s Enterprise for the Americas goes well, Mercosur could also join the United States, Canada and Mexico in a huge, hemispheric free-trade zone. “I think that’s very possible,” said a State Department official in Washington.

Forging an Economic Union

ARGENTINA Population: 32.5 million Area: 1.1 million square miles GDP: $80 billion Per Capita GDP: $2,217 Foreign debt: $65 billion Exports: $10 billion Imports: $4 billion

BRAZIL Population: 152.5 million Area: 3.3 million square miles GDP: $297 billion Per Capita GDP: $2,500 Foreign debt: $120 billion Exports: $34.2 billion Imports: $20 billion

PARAGUAY Population: 4.7 million Area: 157,047 square miles GDP: $4 billion Per Capita GDP: $971 Foreign debt: $1.6 billion Exports: $1 billion Imports: $950 million

URUGUAY Population: 3.5 million Area: 68,037 square miles GDP: $8.4 billion Per Capita GDP: $2,689 Foreign debt: $6.5 billion Exports: $1.7 billion Imports: $1.4 billion

(SOURCE: The World Factbook, 1990; La Nacion, Buenos Aires)