The Future of Mercosur: An Argentine Perspective

The Future of Mercosur: An Argentine Perspective

Theme: Despite the image of recurring crises in Mercosur, the fact is that its members do not appear to have any reasonable choice but to continue its development.

Summary: Once again there is an intensifying debate on the efficiency and the future of Mercosur. In this debate, Mercosur’s very existence has been called into question. There is discussion of how to move forward, but occasionally the consideration crops up as to whether it is reasonable to continue on the originally charted route. In recent months, this existential doubt has been especially clear in the Brazilian business sector. The idea of abandoning the customs union and going back to a free-trade zone is once again being considered.

The various positions held in this debate are the result of clashing perspectives. These are sometimes based on facts, but sometimes they distort the facts. There is an increasing perception that the quality and intensity of bilateral relations between Argentina and Brazil are deteriorating.

The mishmash of conflicting factors in the debate tends to create the impression that Mercosur is plunging into a crisis. Shrinking reciprocal trade, especially in 2001-03 (largely due to the economic climate in Argentina) and the increasing number of unanswered questions regarding how to proceed with the customs union are real issues that certainly must be tackled by its members. This will require adapting working methods and the rules of play. In this sense, Mercosur is immersed in a transitional crisis, not a terminal one.

The recent meeting between Ministers Palocci and Lavagna on 13 June might indicate a positive trend in which those responsible for economic matters once again take a leading role in dealing with the main challenges facing Mercosur. The important thing is that, despite their natural differences of opinion, the members be able to adjust their positions sufficiently to guarantee the long-term preservation of mutual benefits for all four countries –not just the two biggest ones–. Strengthening preferential economic treatment among members would seem to be a necessary precondition for the political will to continue working together. To accomplish this, new working methods are necessary and perhaps even more heterodox approaches to building Mercosur.

AnalysisTwo Perspectives for Much-needed Reflection
The purpose of this Paper is to provide some notes to enable some much-needed reflection on the future of Mercosur, particularly in the broader context of relations between Argentina and Brazil.

This reflection must include (at least) a double perspective:

• First, we must consider the needs of each partner in terms of transforming its productive sector and fomenting its international competitiveness. This must occur in the framework of democratic governability and growing popular expectations of greater welfare, equity and social cohesion. There are certain similarities in the needs of all the partners, but there are also significant differences, in part as a result of the asymmetries in the sizes and behaviour of their economies. These differences affect public expectations in each country regarding reciprocal relations and the integration project.

• Secondly, we must also consider the challenges and opportunities facing each partner in an international context that shows strong trends towards significant changes in global economic competition and in international trade negotiations.

A Confused Debate on the Future of Mercosur
A number of factors come into play in the current debate on the future of Mercosur, especially between Argentina and Brazil:

• Temporary factors relating to the behaviour of the various economies in recent years –especially Argentina’s– and their impact on: (a) reciprocal trade, which has shrunk since 1998, the last year in which trade increased; Argentina is now showing a trend towards a trade deficit and has certain sensitive sectors, including household appliances and footwear, which are nonetheless of relatively little importance in the overall flow of trade; and (b) the inflow of external investment, especially in the automobile sector, which has been focused on Brazil.

• Situations that have been dragging on for several years, such as the treatment of economic asymmetry and its resulting effects on trade flows and on decisions regarding where to locate productive investments. In this regard, there are three especially controversial issues: (a) the introduction of safeguards relating to the importation of certain sensitive products (proposed by Argentina since the devaluation of the real in 1999 and reiterated more recently by Economy Minister Roberto Lavagna); (b) a code of conduct for investment incentives; and (c) the future regime for the automotive sector.

• Perceptions regarding leadership aspirations in South America and in the world, the latter reflected in the question of who should represent the region in an eventual new permanent seat on the United Nations Security Council.

• Apparent difficulties on the part of the various governmental leaders in terms of communicating and understanding each other, despite their ideological affinities.

The confusion constantly observed in the debate feeds the perception of recurring crisis and might accentuate a progressive devaluation of Mercosur. It is difficult to imagine that this could be beneficial to the national interests of Argentina, Brazil or their partners; especially considering the complex South American context.

From this perspective, it would be useful to look more closely to determine which are the main factors affecting the construction of Mercosur and, particularly, those affecting trade and the patterns that govern investment in the productive sectors of the member countries. This would make it possible to determine whether Mercosur’s rules of play are responsible for its current problems or whether, on the contrary, these problems derive from geographical proximity and deficiencies in structural competitiveness. In any case, it is clear that few people see the current rules of play as being well-adapted to the new realities of global and regional economic competition, which are very different than those existing twenty years ago.

An Argentine Perspective
We must begin by keeping in mind that one of the priorities on the Argentine social agenda is to convince the world of the country’s capacity to produce goods and provide services. It is reasonable to suppose that this is equally true of our partners in Mercosur.

The changes now taking place in global economic competition and the fact that the Argentine people have chosen to build an open, pluralistic, modern and democratic society, have helped put the issue of the country’s international role back on the national agenda as one of the conditions necessary to satisfy popular expectations.

In Argentina, this is increasingly accepted as one of the issues that requires a state policy, necessarily complemented by components of social legitimacy, efficiency and continuity. The experience of recent years has made it clear that accomplishing this will not be an easy task.

However, the experiences of other emerging countries show that it is not only a matter of mobilising all the social energy available, but also of helping to foster social cohesion.

Social cohesion –along with stable public policy, stable macroeconomic conditions, good organisation and optimism regarding international opportunities– is recognised as one of the key factors in determining a country’s capacity to successfully compete in world markets and to negotiate with third countries and with large economic blocks.

In this regard, despite Mercosur’s clear limitations and defects, the organisation is still seen in Argentina as a working instrument that not only favours political stability in South America, but that also enhances the country’s competitive advantage in terms of placing national production in the enlarged regional market –particularly in Brazil– and that facilitates the transformation of the productive sector, thereby improving Argentina’s ability to compete and negotiate in the world.

The Current Situation and the Main Challenges Facing Mercosur
Three main features have characterised Mercosur’s founding and development:

• Its members have opted for democracy, the transformation of the productive sector and social cohesion. The fact that this option was chosen internally in each country led in the 1980s to a desire to work together, enabling the development of a basic (though clearly imperfect) set of rules of play and mutually agreed disciplines.

• There is a low level of relative interdependence among the partners. This was especially true when Mercosur was founded. Even today, Mercosur represents less than 10% of Brazil’s exports.

• The relative power of the four partners is asymmetrical, as is the size of their economies and their levels of development. There is a very large difference in the size of the two biggest partners and the two smallest –Paraguay and Uruguay–.

The experience that Mercosur has accumulated since its creation and, in particular, in these past ten years of common external tariffs, is evident from at least three complementary perspectives:

The first is political. Here we refer to relations that have increasingly but unequally been linking neighbouring countries on all levels. They are relations that to date have been dominated by the logic of integration, as opposed to the historical norm around the world, in which fragmentation, hegemonic domination and even the absorption of some countries by others has been the general rule.

Despite occasional tensions and some inevitable trade disputes, the members of Mercosur have come to accept the idea that a quality space of mutual confidence must be created. Chile is also clearly included within this idea.

It is an idea that fosters the notion of a region at peace and the international value of this idea grows as these countries come to be seen as the hard core of South American political stability. To be preserved and cultivated, this public asset requires a subtle use of diplomacy aimed at integration (not only governmental, but also of internal social actors), the active participation of industrialised countries with interests in the region and painstaking work to weave a dense fabric of connectivity at all levels, transcending economics and trade. In this respect, history proves that it is generally easier to go backwards than forwards in the quality of relations between neighbouring countries.

To what extent an eventual collapse of Mercosur or its decline towards economic irrelevance could undermine any political advances is a question that should be considered by everyone who appreciates the importance of the participation of each member country in a regional subsystem characterised by peace and political stability.

The second perspective is that of trade and mainly involves the flow of goods and services among members. The experience of recent years reveals fluctuations that may be explained by disparities in the behaviour of the different economies of the members –especially Brazil and Argentina– and sometimes also by sharp changes in exchange rates.

The third perspective is that of productive investment. This is probably the most important one from the political as well as the economic perspective. It is a question of seeing Mercosur as an instrument for transforming the productive sector of each member country and, therefore, of fomenting technical progress and the creation of a skilled workforce. This involves the capacity to compete at the global scale, rather than only within the region. At the time that Mercosur was founded, the dominant idea was to open up access to a market of more than 200 million consumers and this is precisely what public opinion in each country wants to see happen. In particular, there is increasing discontent in Paraguay and Uruguay regarding the achievement of this foundational goal of Mercosur.

Some of Mercosur’s Strengths and Weaknesses
Mercosur’s main strength is the political sense it makes. For each partner it implies a surrounding area of peace and political stability –in the case of Brazil encompassing nearly all of South America–. This helps strengthen democracy. The abandonment of support for war has clearly been the greatest contribution made by European integration and the same is true of Mercosur. In both regions, there is a certain tendency to lose perspective on this accomplishment.

This, in turn, has an economic value, for at least two reasons: first, it neutralises any tendency towards unnecessary arms races or nuclear competitiveness; and, secondly, it makes credible the goal of the common market to jointly transform productive sectors and to stimulate investment in those sectors.

Mercosur’s main weakness is the limited and decreasing scope of economic preference among members. This is what is supposed to stimulate productive investment in the enlarged market, generating employment. This is true if investors see the promised market as being effective and not exposed to discretional restrictions. In this light, the effects of low-quality rules of play and asymmetries preventing a level playing field in Mercosur have major effects on investment decisions.

On the new map of global economic competition, all Mercosur members theoretically have several options. Geography, however, must be considered in two senses. First, it is difficult to believe that a credible ‘Plan B’ exists that could replace Mercosur. This does not mean there is no need to continue adapting to new circumstances and preserving accumulated assets. Secondly, we must consider the possibility of a ‘Scenario B’ in the region: that of a return to a South American space dominated by the logic of fragmentation. No country appears eager to take such a step backward. However, history shows us that when the logic of integration is not based on a political idea and specific economic content, it can evaporate despite the best of intentions.

Priorities in the Strategy for Argentina’s Participation in the Region and in International Trade Negotiations
The strategy of playing an active role in global economic competition is a relevant issue on a forward-looking national agenda. In the case of Argentina, the global, regional, hemispheric and inter-regional levels are all priorities in the overall strategy. They are all interconnected, they support each other mutually and they require careful assessment of the room available for manoeuvring in the implementation of public policies, in the development of business strategies and in international negotiations.

At the global level, there is need for a good assessment of the new map of global economic competition and of international trade negotiations. There are three factors that will likely become more significant in the coming years. One is the accelerating growth in the global trade in goods: 21% in nominal terms –the highest in the past 25 years– and 9% in real terms in 2004. Lower growth is expected this year, though it will still reach an estimated 6.5% in real terms. Another factor is the rise of new players on the global economic scene. Among them, China already holds third place among the 30 countries that account for 92% of world trade in goods. The third factor is the weight that these new players have in creating consensus in the WTO, especially through coalitions of varying composition. At the global level, Argentina must give top priority to strengthening the WTO in order to guarantee rules of play that facilitate the country’s external projection and the protection of its rights in the dispute resolution system. Another major priority is to conclude the Doha Round with the currently planned goals and time frame.

At the regional level, especially in South America itself, the important thing is to maintain two key strategic elements. One is the idea of maintaining an area of peace and stability, which we have already discussed. This is a political objective with great economic value –one that particularly enhances the role that Argentina, Brazil and Chile could play as moderators with any country that has interests in the region–. The other is simply to strengthen Mercosur and to overhaul its working methods. In light of the experience that has been acquired, this means considering the different realities of the member countries, eventually making use of variable configurations and different speeds, especially in terms of common external tariffs. But it also means making headway at the institutional level –by strengthening the Technical Secretariat and through the planned creation of a Mercosur parliament– in order to increase efficiency, the quality of the rules of play, the capacity to adapt to varying realities and, particularly, transparency, representativeness and social legitimacy.

At the hemispheric and inter-regional level, the highest priorities are to re-establish trade negotiations with the US and with the European Union. The FTAA is in limbo for now. The Summit of the Americas, in November in Argentina, could be an opportunity to promote a major shift in attitudes.

As for the idea of a strategic association between the European Union and Mercosur, this could not be accomplished last October. An opportunity was lost then that might not return for some time. It will be increasingly difficult to conclude negotiations this year. After the results of the recent referendums in Europe, the EU now has other priorities and is unlikely to give much attention to its international trade negotiations. Weak governments are even less likely to do so. For now, they will shy away from further defeats and will not present their parliaments with an ambitious bi-regional agreement that, from Mercosur’s perspective, must necessarily include significant headway in the agricultural field. It might be best to work on the idea of an association that makes it possible to progressively –step by step– work on the most sensitive compromises on both sides.

Mercosur must necessarily reconsider its methodology and if this can be done in the broader perspective of the scenarios that could arise from current international trade negotiations –regardless of when they are finally concluded–. This could allow for a more realistic approach to the integration project and, in particular, would help the block work more effectively and would facilitate the internal and international requirements of its four members.

Conclusion: In our opinion, it is difficult to imagine that Mercosur’s recurring crises could end with the abandonment of the integration project undertaken by its members. In this sense, Mercosur is immersed in a transitional crisis, not a terminal one.

The recent meeting between Ministers Palocci and Lavagna on 13 June might indicate a positive trend in which those responsible for economic matters once again take a leading role in dealing with the main challenges facing Mercosur. The important thing is that, despite their natural differences of opinion, the members be able to adjust their positions sufficiently to guarantee the long-term preservation of mutual benefits for all four countries –not just the two biggest ones–. Strengthening preferential economic treatment among members would seem to be a necessary precondition for the political will to continue working together.

The challenge facing the current governments is, therefore, to find new points of balance between their respective national interests and to successfully define approaches and working methods that make it possible to capitalise on the experiences of recent years.

Félix Peña
Specialist in International Trade Relations