Trade Integration between Developed and Developing Nations - Case Study Example

MERCOSUR and the FTAA: An Approach of Trade Integration between Developed and Developing Nations 0 Introduction: By way of a brief background, MERCOSUR is a trading block in Latin America comprising the countries of Brazil, Argentina, Uruguay, and Paraguay. It has Chile and Bolivia as its associate members. MERCOSUR was formed in 1991 with the objective of facilitating the free movement of goods, services, capital and people among the four member countries. “Since the founding in 1991 of Mercosur in the central Argentine city of Cordoba, trade within the bloc has surged from $4.12 billion to nearly $21.11 billion, while the region’s gross domestic product, or GDP, climbed from $650 billion to $990 billion, and direct foreign investment soared from $2.6 billion to $20.24 billion.”(Merco Press 2006)It is the fourth largest integrated market after the European Union (EU), North American Free Trade Agreement (NAFTA) and ASEAN. Despite the setbacks like devaluation in Brazil and Argentine crisis hindering the sustained growth of the sector, the bloc continued to move forward. However the trading block has to face crucial tests with in connection with the Free Trade Area of the Americas (FTAA). This paper envisages bringing out the features and issues that makes the relationship between the block countries and the developed nations a difficult one especially in the political and economic sphere. 2.0 MERCOSUR: MERCOSUR the “Common Market of the Southern Cone’ was formed by the Treaty of Asuncion and consists of Argentina, Brazil, Paraguay and Uruguay with Chile and Bolivia becoming associate members. “Its purpose is to establish a common market which would include the free movement of goods, services and factors of production, the elimination of customs duties and non-tariff restrictions, the establishment of a common external tariff and the adoption of a common trade policy, the coordination of positions in regional and international economic and commercial for a and the coordination of macro economic and sectoral policies amongst the member states in the areas of foreign trade, agriculture, industry, fiscal and monetary matters, foreign exchange and capital, services, customs, transport and communications and any other means that may have been agreed upon” (Malcolm Rowat, et al. 1997) 2.1 Growth of MERCOSUR: There were several factors connected with the member countries which have stood in the way of the growth of MERCOSUR. While there was a possibility for building up regional integration for the clustering less developed smaller countries around a more developed and larger neighbouring country, this advantage could not be taken by MERCOSUR. This was because of the slow economic growth of Brazil being the largest economy in MERCOSUR which was supposed to be the engine for growth. “The development of the region is, therefore, constricted by the inability of Brazils economy to unfold its growth potential. Responsibility for the slow progress of regional integration has to be assigned to the lack of dynamics of the leading economy” (Rasul Shams 2003) The average level of protectionism both towards external countries as well as within the MERCOSUR countries was subjected to a substantial reduction with the unilateral trade policy reforms which led to lower import tariffs, reduced rate differences and abolition of most non-tariff barriers for imports form third countries. This has resulted in more trade creation among member countries as well as from other countries, though comparatively lower than that created among member nations. However there could not be effective trade diversion which could contribute to the growth of MERCOSUR. 3.0 Economic Obstacles for the Growth of MERCOSUR: Uncoordinated macroeconomic policies also were found to be an obstacle in the growth of MERCOSUR. Rasul Shams (2003) says one important deficiency of MERCOSUR is the lack of coordinated macroeconomic policies in the two most important member countries Brazil and Argentina. Similarly the uncoordinated exchange rate policies have their own effects on the integration in MERCOSUR. These uncoordinated exchange rates have created a volatility which had a negative impact on the trade and lead to the unhealthy lobbies for protecting the sector which are in competition with imports. The un-sustainability of Brazil to further its growth due to the burden of external debts and excessive dependence on foreign savings and the resultant failure to function as the engine of growth in the region is another cause for the lowering the growth of MERCOSUR. In order to exploit the opportunities created by the sustainable growth in the leading economy the peripheral economies should pursue appropriate economic policies which make them receptive to an environment conducive to growth. However this has not been the case in the past with Brazil and other member nations of MERCOSUR. The crisis in Argentina was the direct result of a combination of fixed exchange rates and fiscal laxity (The Economist, March 2nd 2002, pp. 27-29). This was the result of an increasing share of public spending in GDP, an inefficient tax system, high levels of tax evasion and a lack of incentive on the part of the provinces to spend more efficiently. In addition the unsound financing decision of the government drained the reserves of the entire banking system resulting in a bank run and social unrest. Thus far reaching structural reforms both in the leading economy as well as in the other member countries is of vital importance to utilize the growth opportunities created by the existence of a large and growing neighbouring country. 4.0 MERCOSUR and FTAA: It had always been the endeavour of Brazil to use the MEROCSUR as leverage in its negotiations with FTAA as well as other global nations. Similarly there have been efforts to expand MERCOSUR by bringing in other Andean countries within the block. “Though not expressed explicitly, there are insinuations that the Andean Community has failed to mature into an integrated bloc whereas MERCOSUR has succeeded. MERCOSURs "expansion" has brought Peru into the group, and Venezuela is expected to be next.” (Eduardo Gudynas 2003) In order to further strengthen the situation, Brazil is promoting several integration agreements on infrastructural facilities with countries like Bolivia, Peru and Venezuela. This way an expanded MERCOSUR would have greater negotiating leverage for negotiations with FTAA and it would be lot easier to effectively deal issues like agricultural protectionism and anti-dumping measures with United States. 5.0 MERCOSUR and Policies of United States: MERCOSUR gaining strength by expanding itself has not always been a pleasant thing for the United States and every time such efforts are taken by Brazil to expand MERCOSUR, United States in order to undermine the efforts has been countering those measures with opposing actions. This was what has happened when Chile was going to join MERCOSUR as a full member. The country received an invitation from the US government for beginning a negotiation on free trade agreements with the United States. A similar tactics was adopted in the case of Peru when Brazil and MERCOSUR came closer to reaching an association agreement with Peru. Exactly at that point of time US government indicated the possibility of a US-Peru free trade agreement which led Peru to withdraw from the group of nations lead by Brazil in the World Trade Organsiation talks. In this way the efforts of MERCOSUR for integrating the economies of the developing countries is being put to task by the US administration at every possible opportunity. 6.0 Weaknesses of MERCOSUR and FTAA: Although with the continued efforts of Brazil, there remains a possibility that MERCOSUR could become a ‘South American Bloc’ the major weakness is that it pursues its objectives through the only route of free trade agreements which doesn’t give the necessary impetus to it to become a political power to have enough strength to negotiate issues against FTAA. Originally MERCOSUR’s objective was to establish a common market and also to contain a strong political component that goes well beyond the organization of free trade agreement with the member nations. If MERCOSUR continues to act through its principle of free trade agreements it will just be regarded as another NAFTA without strong political coordination unlike European Union. Another issue to be considered for increase in the political strength is that the number of full members has to be increased instead of going on admitting more countries as associate members. The next issue in this connection is that Brazil’s move to increase the number of associate members would not yield the necessary political strength to MERCOSUR, as the political agreements made by it would not be binding on the Trade Associates. Hence under such circumstances any agreement reached with FTAA may not be binding on Chile or Peru being associate members and they will be free to enter into free trade agreements with the United States which may be contrary to the agreements reached by MERCOSUR with FTAA. 6.1 Other Issues that Affect MERCOSUR’s Strength against FTAA: While the pressure of counter moves from United States is one source of tension for MERCOSUR there are other internal issues which undermine the strength of MERCOSUR. They are among other things: The apprehension of other South American countries about Brazil-other countries are really afraid about Brazilian hegemony in a local scale Resistance within Brazil to form supernational rules for the unification of all the countries to have a common platform- Brazil does not want to bind itself by any supernational regulations which will distort its system of soverignity. Differences over dispute settlement within MERCOSUR and the absence of more efficient coordination policy have also led to weaken the strength of MERCOSUR. The internal conflicts within the ministries of Brazil and the business sectors calling for greater flexibility in the FTAA negotiations also affect the strength of MERCOSUR. 7.0 MERCOSUR and European Union: There have been negotiations for a free trade agreement between the European Union and MERCOSUR countries. The primary objective of EU is to secure a reasonably sized market for its European Corporations in competition with the United States over control of Latin America. “This explains the influence of the Mercosur-European Business Forum (MEBF), which urges governments to further deepen the process of deregulation, privatisation and liberalisation which has swept the region in the 90s, with dramatic social and environmental consequences.” (Claudia Torrelli 2003) 8.0 Conclusion: It is with those strengths and weaknesses outlined above that MERCOSUR met with FTAA for further negotiations. Eduardo Gudynas (2003) opines that without the additional support for its demands for US concessions on hemispheric trade MERCOSUR had been isolated in those complex discussions. In fact Brazil itself faced possible isolation both in the FTAA and within MERCOSUR. MERCOSURs future largely depended on the FTAA: If MERCOSUR remained confined to a free trade agreement while a hemispheric free trade agreement was simultaneously approved, MERCOSUR would have lost its very purpose. Therefore, the solution for MERCOSUR was to further strengthen regional integration of all the developing nations of the South American Continent for improved trade arrangements not only with the United State but also with the other developed nations of the World. References: 1. Claudia Torrelli 2003 Mercosur for sale? The EU’s FTAA and the need to oppose it Corporate Europe Observatory & Transnational Institute Info Brief August 2003 http://www.bilaterals.org/article.php3?id_article=132 2. Eduardo Gudynas 2003 MERCOSUR and the FTAA: New Tensions and New Options Global Policy Forum http://www.globalpolicy.org/globaliz/econ/2003/1111mercosurftaa.htm 3. Malcolm Rowat, Michele Lubrano, Rafael Jr. Porrata (1997) Competition Policy and Mercosur Published 1997 World Bank Publications 4. Merco Press 2006 Mercosur official says "FTAA is dead" bilaterals,org web page http://www.bilaterals.org/article.php3?id_article=5650 5. Rasul Shams 2003 Regional Integration in Developing Countries: Some Lessons Based on Case Studies HWWA Discussion Paper 251 http://www.hwwa.de/Publikationen/Discussion_Paper/2003/251.pdf Read More