By Geoff Dyer in São Paulo and Thomas Catán in Buenos Aires - Apr 03 2001 00:00:00
Ten years after Mercosur was founded, the South American trade bloc, which includes Brazil, Argentina, Paraguay and Uruguay, is looking forlorn.
The emergency measures introduced by Domingo Cavallo, Argentina's new economy chief, have called into question the future of the trade grouping. In the short term, at least, Mr Cavallo's package has torn up Mercosur's common external tariff policy and its customs union pretensions.
Arturo Porzecanski, the chief economist for emerging markets at ABN Amro in New York, says: "Like all the other attempts at creating free-trade areas in South America, Mercosur is slowly dying."
The Argentine measures are the latest in a series of setbacks for Mercosur. Brazil's devaluation in 1999 helped push Argentina's economy, whose peso is linked to the dollar, into a recession from which it has yet to recover.
A succession of trade disputes has strained relations. A Brazilian ban on Argentine grain because of fears of foot-and-mouth disease caused an outcry in Argentina. Attempts to deepen Mercosur through the creation of a disputes-settlement mechanism or rules on dumping have floundered.
As part of his plan to revive the moribund Argentine economy, Mr Cavallo announced that he would unilaterally raise import tariffs on consumer goods to 35 per cent and eliminate duties on capital goods imports. Publicly, Mr Cavallo has said that he supports Mercosur. However, Argentine analysts say Mr Cavallo views Mercosur as a trading zone rather than a customs union and is unsympathetic to Brazil's projection of itself as the regional power.
For Brazil, the weakening of Mercosur comes at delicate time. Heads of state from the 34 nations in the western hemisphere will gather this month in Quebec to discuss the Free Trade Area of the Americas. Brazil had hoped to enter the negotiations as the leader of a united Mercosur bloc to boost its leverage with the US. The common external tariff was a negotiating chip. That position had been undercut by Chile, an associate Mercosur member, which announced in November that it was seeking bilateral trade talks with the US.
"From the strategic point of view of negotiating together in the FTAA, Mercosur is dead," says José Roberto Mendonça de Barros, a former Brazilian economics minister.
Argentina's crisis could lead it to a different relationship with the US. The Bush team seems keener to do a trade deal with Latin America than its predecessor.
Some Brazilians fear that in return for extending further credit to Argentina, the US will press it to take a more independent stance from Brazil in the FTAA talks. In spite of the trade friction, Brazil and Argentina are becoming more integrated in other ways, providing ballast for Mercosur, as their economies become linked through cross-investments and energy projects. Mercosur has also acted as a guarantor of the region's democratic stability.
"The momentum to move forward may have run out at the moment but Mercosur will absolutely not disappear," says Riordan Roett, a Latin American expert at the School of Advanced International Studies in Washington, DC.