Mexico Business / August 1995
By Larry Luxner
The 23,000 townspeople of Colonia, Uruguay, seem to be arguing about only one thing these days: a proposed billion-dollar bridge that would link their historic little city -- with its 300-year-old cobblestone streets, 1940s vintage automobiles and quaint antique shops -- to sprawling Buenos Aires, on the other side of the Río de la Plata.
Fernando Balbucha, a sidewalk vendor who sells yerba-mate bombillas and other Uruguayan souvenirs across from the aptly named Café Mercosur, puts it in perspective: "There are some people who want the puente, and some who don't. As a businessman, I want it."
Proponents like Balbucha say the proposed 47-kilometer bridge -- longest of its kind in the world --would dramatically reduce trucking time between Buenos Aires and San Paulo, Brazil, create at least 2,000 jobs for Colonia and, most importantly, strengthen Uruguay's position within Mercosur, a customs union that took effect Jan. 1, 1995, and seeks eventually to unite the economies of Argentina, Brazil, Uruguay and Paraguay.
Yet almost no one in Colonia talks about joining Nafta, or one day becoming part of some hypothetical Free Trade Area of the Americas.
Nor do the people of Ciudad del Este, a seedy, traffic-choked Paraguayan city known as the contraband capital of Latin America. There, as in Colonia, the main concern is Mercosur, and whether it will erase all the duty-free advantages that for years have lured millions of Brazilian tourists to Ciudad del Este in search of cheap liquor, cigarettes and bootlegged cassette tapes.
Not to worry, says one U.S. diplomat in Asunción.
"Even if Mercosur functions as well as it's supposed to, there will still be profits in the contraband industry, because internal tariffs in Brazil are higher than in Paraguay," he says. "In fact, Paraguay has taken steps to lower its internal tariffs in order to keep the spread wide, so that Ciudad del Este doesn't dry up overnight."
Miguel Angel Britos, who directs economic integration efforts at the Paraguayan Ministry of Foreign Affairs, says that on the whole, Mercosur will help more than hurt his landlocked nation of 5 million people.
"For us, Mercosur is very important because it gives us the credibility we're looking for, internally and externally," he argues.
The real success of the Southern Cone Common Market, however, depends not so much on Paraguay and Uruguay, which are relatively junior partners within Mercosur, but on South America's two largest countries, Argentina and Brazil. Since 1991, according to the Financial Times, inter-Mercosur trade has expanded from $4.7 billion to more than $10 billion last year; over the same period, Brazilian investments in Argentina came to $1 billion.
In Argentina itself, where the "tequila effect" of Mexico's recent peso devaluation was sudden but short-lived, foreign investment is clearly booming. This year, multinationals will spend an estimated $3.5 billion on factories and other hard assets. Investors include everyone from Wal-Mart, which is building six department stores throughout metropolitan Buenos Aires, to General Motors, which is planning a $1 billion truck factory in Córdoba.
Felix E. Zumelzu, executive director of the American Chamber of Commerce in Argentina, says his biggest concern regarding Mercosur is Brazil's financial health. Gross domestic product in Brazil is expected to grow 5.6% this year, while inflation has been slashed to only 2.5% a month. Barring any unforeseen crises in either country, Zumelzu said he expects Mercosur to succeed.
In numerical terms, Mercosur's economic strength is formidable. Its four member countries cover 12 million square kilometers, or 59% of the land area of Latin America, and encompass 190 million people, or 44% of Latin America's population. More importantly, the four nations have a combined gross domestic product of $437 billion, with annual exports of $47 billion and imports of $25 billion.
Mercosur's program for the reduction of trade barriers had called for the elimination of most tariffs by Dec. 31, 1994, though Paraguay and Uruguay -- smaller countries with much more vulnerable economies -- will get an extra year to comply.
Under Mercosur, the four signatory nations also have a common external tariff, aimed at stimulating the region's competitive edge and increasing investment in each other's countries.
This means that, for example, Paraguay -- a major cotton producer -- can export threads and finished garments to neighboring Brazil for the first time ever, without having to pay duties. Up until now, 90% of Paraguay's cotton has been exported to Brazil as raw material, without any value added.
"This is nonsense," says Fernando Villalba, president of Hilandería Central SA, a $10 million textile factory outside of Asunción. "We are so far behind. You don't always get a niche market in the world. We have one, and we should take advantage of the situation."
Mercosur will not, however, immediately erase the large differences between per-capita income levels or average labor costs in the four member countries. According to the World Bank, Paraguayan factory wages come to $242 a month, compared to $626 in Brazil, $825 in Chile, $901 in Uruguay and $1,005 in Argentina.
Argentina's Zumelzu speculated that "Mercosur may, at some stage, negotiate together as a body" to join a wider Free Trade Area of the Americas, but added that it won't happen for awhile.
Nevertheless, the Clinton administration would like to expand Nafta beyond the United States, Canada and Mexico to include Chile, which is not currently a member of Mercosur. There's no reason why that shouldn't happen by year's end, says Julius Katz, president of Hills Co., and a recent speaker at a one-day Washington conference that focused on the "broadening and deepening" of Nafta.
Dean Alexander, director of the NAFTA Research Institute in Washington, says progress on fast-track legislation for Chile's accession to Nafta is stymied along party lines; Democrats want to include environmental and labor issues, while Republicans want a "clean" fast-track. Either way, he said, Chile must become a full-fledged member of Nafta before anything else can happen.
"There's no way you can go from Nafta to Mercosur without Chile," said Alexander. "After Chile, it's a different ball game. Some suggest doing Mercosur as a bloc, since those countries have more negotiating power as a bloc than if they go individually. The amount of leverage Paraguay has to join Nafta, for example, is quite small. If it's part of a larger group with Argentina and Brazil, then they can strike a much better deal."
Despite optimism on the part of the Clinton administration, the road to Nafta accession may not be that smooth for the four Mercosur nations. Even for Chile -- whose 13 million people enjoy South America's strongest economy -- Nafta membership is far from guaranteed. Many U.S. interest groups, from labor unions to California winemakers, are opposed to enlarging the Nafta club.
Furthermore, no every nation is begging to be let into Nafta, and certainly not Brazil, with 159 million inhabitants the largest and most populous nation in Latin America.
According to a recent commentary in the Financial Times,"Brazil clearly sees Mercosur as a first step towards wider regional integration, leading eventually towards a South American Free Trade Area (Safta) to counterbalance Nafta. As such, it obviously represents a rival view to the country-by-country expansion of Nafta favored by Washington."
Brazil's undersecretary-general of economic integration matters and foreign trade, José Botafogo, recently told reporters at a Washington press conference that the elements of a hemispheric-wide free trade area are the present regional and sub-regional groupings such as Mercosur and the Andean Pact. Those, he said, would move with their own rhythm and coalesce into a Free Trade Area of the Americas by the year 2005, rather than follow any pre-established pattern determined by Washington.
For one thing, some Latin governments are afraid of tying their economies so directly to the United States; for others, it could be a question of putting regional concerns ahead of hemispheric-wide ones.
Even if the Clinton administration renews its push for a Free Trade Area of the Americas, "there's no stomach in Congress right now" for including any country besides Chile, says Sidney Weintraub, a political economist at Washington's Center for Strategic and International Studies.
"The advice we're getting is to calm down for awhile and not push things," he said. "Eventually, if the United States and Brazil were able to reach a deal, the rest of the countries would fall into place. Mercosur is a customs union with a common external tariff. Individual countries cannot break off and sign a free-trade agreement with the United States. If it does, it ceases to be a customs union. Beyond Chile, it's hard for me to find other countries in the hemisphere that are prepared to accede to Nafta."
He added, however, that "as Mexico slowly pulls out of its current problems, I think the interest in a free-trade agreement will be rekindled, particularly if Mercosur is able to sign trade agreements with other countries."
And that could eventually have an impact in little Colonia, Uruguay, where by 2005 the much-debated puente from Buenos Aires will already be as much a part of the landscape as the town's cobblestone streets.
"I'm afraid of the bridge," says Sergio Vega, owner of a seafood restaurant in Colonia's historic district, "but if it's good for the country, let's begin building it today."