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Latin America Strives for Economic Integration
Area Development / November 1996

By Larry Luxner

WASHINGTON -- Five years ago, only a handful of economists and politicians had ever heard of Mercosur. Today, it's a household word throughout most of South America.

The Spanish acronym for Southern Common Market, Mercosur (or Mercosul, as it's known in Portuguese), is the region's most powerful trading bloc. Its four original members -- Argentina, Brazil, Paraguay and Uruguay -- have a combined population of 200 million and a combined gross domestic product of over $900 billion, about 4.8% of the world's GDP.

The basic idea behind Mercosur is to strengthen the region's economies by dis-mantling prohibitive trade barriers such as customs or tariffs, and by setting a common external tariff in order to encourage its member states to buy from each other rather than from third countries. A spate of recent announcements underscores U.S. investor interest in Mercosur. In one of the most important such announcements, Chrysler Corp. says it'll invest $315 million in a Brazilian factory to assemble the all-new Dakota pickup truck, and $65 million to add the Jeep Cherokee to the production line of a plant now being built in Córdoba, Argentina.

"Our decision to manufacture in Brazil and expand production in Argentina is based on the favorable economic conditions and future growth prospects we see in the Southern Common Market, as well as the positive response our export models are receiving from consumers in these countries," says Chrysler's chairman and CEO, Robert J. Eaton. By exporting Dakota trucks from Brazil to Argentina and other member nations, Chrysler -- taking advantage of Mercosur rules -- will be able to import duty-free Argentine-assembled Jeeps for sale in Brazil, and vice-versa.

However, a recent study by Brazil's National Association of Financial, Administra-tive and Accounting Executives (Anefac) shows that government bureaucracy and customs problems at the borders are hurting trade. Anefac's survey of 300 Brazilian businesses -- conducted earlier this year -- shows that 47% of the 300 businesses polled face operational difficulties in relation to Mercosur, and that many think Argentina benefits far more than does Brazil from membership in the trade bloc. Surprisingly, only 5.1% of Brazilian companies that already do business with Argentina, Paraguay and Uruguay know the rules for trading within Mercosur; another 48.7% think their knowledge is adequate, and 46.1% have either little knowledge or are completely unaware of the rules.

For companies such as Chrysler that understand the inner workings of Mercosur, however, the trade pact can be quite advantageous. According to Guillermo Perry, chief economist at the World Bank, some of the fastest-growing exports are products Mercosur members export among themselves rather than to third countries.

"Manufacturing as a percentage of regional trade is higher than with the rest of the world," said Perry, a former Colombian finance minister who spoke at a recent Mercosur business conference in Washington. "This is concentrated in a few products, mainly auto-mobiles, which have grown 67% over the last five years. Intra-regional trade will continue to grow, and some of their inefficiencies will decrease. We will see more specialization as time goes by."

Perry added that Mercosur's share of total foreign investment was 12% between 1987 and 1991, and 9% between 1992 and 1995 -- partly because of rapid growth in Asia. Yet between 1992 and 1995, the four Mercosur countries attracted 38.7% of all new foreign investment in Latin America.

Mercosur got a big boost on Oct. 1, when Chile was admitted as an associate member. The distinction underscores that country's dramatic economic strides under President Eduardo Frei and his predecessors. Last year, Chile's GDP grew by a record 8.5%, reaching an estimated $56.6 billion (or $4,015 per-capita).

Joining Mercosur provides Chile easier market access to 200 million consumers in the other four countries, while giving companies from those nations the access they've always sought to Chile's Pacific ports, and hence the Pacific Rim. Some 90% of all products traded by the five nations will see an immediate 40% reduction in tariffs, though trade won't be tariff-free until 2003. Even then, certain agricultural products will be protected for up to 15 years. Chile will also keep its own external tariff of 11%, despite Mercosur's common external tariff of 13%.

Notwithstanding its Mercosur success, however, Chile won't be getting into another important trading group -- the North American Free Trade Agreement -- anytime soon. That comes despite intensive lobbying by the Chilean-American Chamber of Com-merce and the Chilean Embassy in Washington. U.S. opposition by lawmakers still upset at free trade with Mexico, not to mention labor and environmental concerns, have prevented Congress from giving President Clinton fast-track authority on the NAFTA debate.

"There's no way Chile will get in next year," remarked Dean Alexander, director of international business development at Grant Thornton Chile. "In the United States, there's no voting base, and it's not a strategic national interest. Besides, Chile has played its cards with Mercosur."

One thing all economists agree on, however, is this: successful economic integra-tion depends on strong growth. According to the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), the region will finish 1996 with an overall growth rate of about 3% -- not very dramatic compared to the supercharged economies of Asia, but far better than last year's dismal 0.6% showing.

Actual growth rates will vary dramatically from one country to the next. Chile's GDP should expand by 7%, while Venezuela's will shrink, though ECLAC didn't say by how much. The agency's forecasts -- based on the last six months' performance of nine nations that account for 90% of the region's GDP and population -- predict that both Argentina and Mexico will recover from the disastrous showings of last year. ECLAC also welcomed the return of foreign capital this year.

"Unless unforeseen events occur, net income from all the capital will exceed $50 billion -- a figure which will easily double the 1995 total," the report said, adding that inflation could tumble to its lowest level since 1972. Yet overall per-capita income will rise by only 1%, and high unemployment still plagues most Latin nations, says ECLAC, noting that the job market "is the most negative aspect in the regional economic panorama."

While membership in trade blocs does have its advantages, it certainly doesn't prevent Latin nations from being drawn into trade disputes with the United States and other countries. In mid-October, for example, Washington opened proceedings with the WTO against Argentina, charging that the President Carlos Menem's duty hikes on imports of textiles, apparel and footwear violate global trade rules. The case -- initiated following a complaint by sporting-goods giant Nike -- says the imposition of import duties in excess of the bound rate of 35% violates Argentina's obligations under relevant WTO accords.

Along those same lines, the European Commission has asked the government in Buenos Aires to take urgent action to remove trade barriers which are "severely restricting" access to Argentina's market for EU textiles. The EU -- alleging restrictive legislation on labeling and certificates of origin contrary to WTO rules -- warns it'll seek a formal WTO consultations should current negotiations fail.

"If European industry is to compete globally, it is essential that it too has fair access to markets in third countries," said Sir Leon Brittan, the EU commissioner responsible for external trade, adding that this will be the first time the EU opens a WTO case on textiles.

Notwithstanding their overwhelming importance to the region, NAFTA (dominated by the United States) and Mercosur (dominated by Brazil) are not the only games in town. There's also the Andean Pact, made up of Bolivia, Colombia, Ecuador, Peru and Venezuela. Two others are Caricom -- a 14-member trading bloc made up of 13 English-speaking Caribbean nations plus the Dutch-speaking nation of Suriname -- and the Central American Common Market, which comprises Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama.

A look at one of the region's most fastest-growing industries, apparel manufactur-ing, illustrates the importance of trade preferences. Since joining NAFTA in 1994, Mexico's apparel industry has been bursting at the seams. During the first six months of 1996, according to U.S. Commerce Department statistics, Mexican garment shipments to the United States skyrocketed by 32.3% to $1.53 billion, while Far East exports dropped dramatically (Hong Kong export, for example, tumbled by 10.31% to $1.6 billion).

Central America has also benefitted. Despite allegations of child labor and worker abuse, Honduras has climbed to the ninth-leading world source of apparel exports to the United States. Over the first half of 1996, according to Caribbean Update -- a monthly newsletter based in Maplewood, N.J. -- Honduran apparel exports rose by 26.68% to $522 million. This came at a time when apparel exports by the region's biggest garment producer, the Dominican Republic, declined by 5.89% to $754 million, and saw the layoffs of thousands of textile workers in the country's two dozen or so free zones.

Apparel exports from the entire Caribbean Basin Initiative region over the first half of 1996 rose by 4.32% to $2.63 billion. In the sub-category of Item 807, 807-A and GAL (Guaranteed Access Levels), apparel exports from CBI countries rose by 4.6% to $2.18 billion. Leading the pack was the Dominican Republic, followed by Honduras, Costa Rica, El Salvador, Guatemala, Jamaica and Haiti.

To allow them to compete fairly with Mexico, CBI nations are seeking "parity" and the removal of all restrictions on their exports to the three NAFTA partners.

"We want to get NAFTA parity back on the legislative agenda of the U.S. Congress as soon as possible after the presidential election in the United States," said Jamaican Prime Minister P.J. Patterson, at a recent meeting of Caricom heads of state called to discuss how the region should deal with its trade relationships with NAFTA and the European Union. Twice before, measures that would give 24 CBI countries increased preferential access over the next six years were withdrawn by Washington lawmakers under pressure from U.S. labor unions and textile manufacturers.

Over the long term, regional leaders dream of a Free Trade Area of the Americas by 2005 -- a goal set in 1994 at the Miami Summit of the Americas. At the moment, 11 work-ing groups are "building the common language" of the negotiations, according to ECLAC's Washington director, Dr. Isaac Cohen, who spoke at a recent meeting of the Inter-American Council.

"Just negotiating the agreement will take from now until 2005, and negotiations haven't even started yet," he said, adding that "the United States and Brazil have to be looking in the same direction" in order for such talks to succeed.

The most immediate development in regional integration, however, involves South America's two major trading blocs. Both Mercosur and the five-member Andean Pact have voted to join forces, creating a 10-member super-entity that will eventually encompass all of South America except Guyana, Suriname and French Guiana (which together have a population of less than 1.5 million).

The decision was announced at a Sept. 4 presidential summit in Cochabamba, Bolivia. Analysts say the proposed merger between Mercosur and the 27-year old Andean Pact also strengthens Brazil's hemispheric standing at a time when the United States -- mired in election-year politics -- is viewed as having dropped the ball following the hyped-up 1994 Miami summit.

Riordan Roett, director of Latin American Studies at Washington's Johns Hopkins University, says he's confident the marriage will succeed.

"As long as negotiations are as careful as they were with Chile, there shouldn't be any problem," he predicted. "It probably won't be a complete integration process, but it does set the stage for further negotiations as we move into the next century."

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