Market Study on Mercosul (prepared in June 1997)

M E R C O S U L

Introduction:

MERCOSUL (Mercado Comum do Sul - Southern Common Market) was formed under the Treaty of Asuncion on 26th March, 1991. In Spanish it is called as MERCOSUR.

MERCOSUL consists of Brazil, Argentina, Uruguay and Paraguay. MERCOSUL has a population of 200 million people and over a trillion US Dollars of combined GDP. It has an area of 12 million sq. kms. which is greater than that of Europe. It’s trade in 1996 was 165 billion US Dollars of which 86 billion dollars was imports and 79 billion dollars was exports.

MERCOSUL accounts for 50 per cent of the GDP of Latin America, 50 per cent of the industrial production, 33 per cent of foreign trade, 43 per cent of the population and 50 per cent of the total area of Latin America.

MERCOSUL is the fourth largest integrated market in the world after EU, NAFTA and Japan. As investors, both local and foreign, exploit the potential for growth, scale and specialisation offered by this new market, MERCOSUL is emerging as an agribusiness and mining superpower with a diversified and modernised manufacturing industry fuelled by cheap and abundant energy.

When the Assunction Treaty was signed in 1991, critics commented that the new Association would not survive tensions which would be generated by the next soccer match between the member countries. Some media commentators called the meeting of the Four Presidents in 1991 as a ´meeting of four economic losers´. MERCOSUL has proved its critics wrong and it has come to stay as a success.

MERCOSUL has transformed this region which was historically afflicted by political instability, military dictatorship, arms race, mutual suspicion and hostility, hyper inflation, volatile exchange rate, debt crisis and very little trade with each other. Today this region has become a dynamic one with political and economic stability. MERCOSUL has become a force to be reckoned with and is shaping the destiny of South America.

MERCOSUL’s success has attracted Chile and Bolivia who have become Associate Members in 1996. Other South American countries are in the process of negotiating Trade Agreements with MERCOSUL or thinking about joining MERCOSUL.

This is the most ambitious scheme of regional integration since the birth of European Economic Community in 1957. It goes beyond NAFTA in scope and its role model is European Union.

Overview of MERCOSUL

Genesis and Evolution

As the European Union began with a political understanding between France and Germany, MERCOSUL started with a similar understanding between Argentina and Brazil in the mid eighties, when both countries had at that time turned from military to civilian rule. The new political leaders of Brazil and Argentina embarked on a programme of cooperation intended primarily to reduce military suspicions and rivalries, especially in the nuclear area. Early success led to expansion of cooperation in other areas of policy, and to a treaty in 1988 committing both countries to broad economic integration which was followed by 12 commercial protocols. These set the stage for a common market between the two countries within ten years, with gradual elimination of tariff barriers and harmonisation of macro economic policies. It was further established that this Agreement would be open to all other Latin American countries. Uruguay and Paraguay, two small countries sandwiched between the Big countries - Brazil and Argentina, had no other go but to join them. They are very much dependent on Brazil and Argentina for trade and economic prosperity and they could not afford to be excluded. When Uruguay and Paraguay joined, a new Agreement establishing MERCOSUL was formed in March, 1991. The four countries embarked on a three stage integration involving (i) Free Trade Area; (ii) Customs Union; and (iii) Common Market.

Objectives of MERCOSUL

(i) Free movement of goods, services and people between the member states with, inter alia, the elimination of customs duties and lifting of nontariff restrictions on the transit of goods, or any other measures with similar effects;

(ii) fixing of a Common External Tariff, adoption of a common trade policy with regard to nonmember states or groups of states, and the coordination of positions in regional and international commercial and economic meetings;

(iii) coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary systems, exchange rates, capital, services, customs, transport and communications, and any other items they may agree on, in order to ensure free competition within MERCOSUL; and

(iv) commitment by the member states to make the necessary adjustments in their laws to strengthen the integration process.

Free Trade Area

The Asuncion Treaty signed in 1991 gave a transition period of four years for the member states to cut tariff sharply on trade with each other. Today most goods go tariff free inside MERCOSUL. Temporary exceptions have been given for trade in cars and sugar (which are subject to special arrangements) and groups of products considered sensitive by each member; 950 items for Uruguay, 427 for Paraguay, 221 for Argentina and 29 for Brazil. Internal tariffs are to be cut progressively to zero by 2000 (1999 for Brazil and Argentina) by which time cars and sugar are also to be brought into the free trade scheme.

Customs Union

At the end of 1994 MERCOSUL decided to embark on the second stage of its integration project; to create a customs union, in which, as in the European Union (but not in NAFTA) members apply a Common External Tariff (CET) to imports from third countries. The Customs Union came into being from January 1st, 1995. CET has 11 different levels, from zero to 20%. The average trade-weighted external tariff is 14% which is well below that of its members (except Paraguay) in 1990. The average tariff in MERCOSUL area before integration was 30 per cent. At the time of negotiations, Argentina, Uruguay and Paraguay had low tariffs on capital goods and they wanted cheap access to imported technology. But Brazil had higher tariffs and wanted to give protection to its capital goods industry. In the event, the agreed CET was a compromise : Argentina and others agreed to raise their tariffs, Brazil to bring them down. Temporary exemption from CET has been given to some capital, computer and telecom goods. Tariffs on capital goods are to converge by 2001 at a CET of 14%, and on computers and telecommunications equipment at 16% by 2006. During 1995, two further changes were made. To support its anti-inflation plan, Brazil was allowed temporarily to cut tariffs below CET levels on 150 products (since reduced to ten), while the others were allowed to do this for 50 products. Secondly, because of global financial markets’ concern over fiscal and balance-of-payments deficits in developing countries after the Mexican crisis, Argentina imposed a general 3% duty on imports from outside MERCOSUL, besides raising its tariffs on capital goods and telecoms equipment; while Brazil increased its list of CET-exempt products by 150 for a year, and raised tariffs on consumer electronics and cars.

Towards a Common Market

In December, 1995, MERCOSUL agreed on a five-year programme under which it hopes to perfect the free-trade area and customs union. This involves standardising many trade-related rules and procedures, and moving towards harmonising its members’ economic policies. MERCOSUL is working on a single customs document, valid for exports to all members, by 1997. Mutual recognition of sanitary certificates, and a common register of products and common technical standards should come by 1998. By April, 1996 harmonisation of technical norms and standards was achieved in the case of 87 products. By the end of 1997, harmonisation is expected to be achieved for 530 products.

MERCOSUL will have a common law on anti-dumping by the year 2001.

Rules of Origin

For products to enjoy duty free transit within MERCOSUL they should have used materials of at least 60% from within the member countries. The certificate about the Rules of Origin should be issued by designated authorities. Products subjected to CET will enjoy free circulation. When all products become subject to CET, the Rules of Origin will no longer apply.

Dispute Settlement

Disputes among member states are settled by consultations in the first stage. Last year, there were 81 disputes of which 79 were settled by consultations. The remaining two issues (i) Restrictions on import of salt from Argentina into Uruguay and (ii) Brazilian restrictions on imports of Uruguayan paper, are to be taken to an Arbitration Tribunal whose decisions are binding. Basically, the decisions are made on political considerations rather than on technical merit.

Investment

MERCOSUL businessmen can invest freely in the MERCOSUL area, except in designated fields such as nuclear energy, arms and ammunition etc. MERCOSUL investors can freely trade on the securities market, without having to operate through an investment fund or portfolio, as is the case for non-MERCOSUL investors.

Intra-MERCOSUL movement of people

People of MERCOSUL countries can visit each other countries without the need for visas or passports. National identity cards are sufficient. Immigration clearance for MERCOSUL citizens is done separately in the MERCOSUL international airports.

Mercosul Institutions:

Common Market Council:

This is the highest authority for policy decision-making and for negotiating and signing agreements with other countries, groups and international organizations. It consists of the Ministers of Foreign Affairs and Economy (or the equivalent) of all the four countries. Member states preside over the Council in rotating alphabetical order every six months. The Council meets whenever necessary but at least once a year. The decisions of the Council are taken by consensus. The Presidents of MERCOSUL countries hold Summit Meetings every six months.

Common Market Group:

This is the executive body of MERCOSUL and is coordinated by the Ministries of Foreign Affairs. It ensures compliance with the Asuncion Treaty and implementation of decisions of the Common Market Council. It meets at least once in a quarter.

MERCOSUL Trade Commission

This body, consisting of officials of the Foreign Ministries, deals with the trade aspects of MERCOSUL. This meets, at least, once a month.

Work Subgroups

There are ten Work Subgroups, subordinated to the Common Market Group to deal with specific issues in the fields of communications, mining, industry, agriculture, energy etc. The meetings of the Work Subgroups are held quarterly. The private sector also participates in these Subgroups.

Joint Parliamentary Committee

This represents the Legislative Branches of the member nations. It has both advisory and decision-making powers regarding the integration process, approval of budget etc. It consists of a maximum of 64 Members of Parliament with 16 each from the four states. This meets twice a year.

Secretariat

MERCOSUL has established a Secretariat at Montevideo. The first Secretary-General is Mr. Jorge Enrique Fernandez Reyes of Uruguay. MERCOSUL Secretariat is small with a limited budget and it is still in the process of establishment. MERCOSUL does not have any plans for a large bureaucracy at the Secretariat like the Eurocracy.

The logo of MERCOSUL features four stars from the Southern Cross.

Latest MERCOSUL Summit - December, 1996

The Presidents of Brazil, Argentina, Paraguay and Uruguay had MERCOSUL Summit Meeting on 16th and 17th December, 1996 at Fortaleza, Brazil. They took some important decisions to accelerate the process of integration. They signed a Free Trade Agreement with Bolivia. The Summit was also attended by the Presidents of Bolivia and Chile. There were also separate meetings of intellectuals and media on MERCOSUL at Fortaleza coinciding with the Summit.

The Summit Meeting considered 13 Agreements of which 10 were signed. Signing of three were postponed since they needed further consideration. The following were the Agreements signed :

1. Agreement on establishment of MERCOSUL Secretariat at Montevideo. 2. Air Services Agreement

Under this Agreement MERCOSUL countries, Chile and Bolivia have agreed to open up their markets for all the airlines in the member countries. The airlines in these countries can now fly between the international airports of the region freely. This Agreement is considered as the first genuine multilateral air services agreement in the world since the signing of the Chicago Convention in 1944.

3 & 4 Protocols regarding mutual recognition of Post Graduate courses and other educational qualifications.

5. Agreement on Protections Uniform rules and regulations and anti-dumping measures will be evolved against products from third countries. Protection for goods traded within MERCOSUL is prohibited.

6. Agreement on Defending Competition By 2001 uniform rules and norms will be evolved.

7. Agreement on Cultural Integration Measures will be taken for Promotion of Cultural Exchanges.

8&9 Agreement on Consumer Rights Under these Agreements, consumers in one member country of MERCOSUL will be able to exercise their rights over products from other member countries of MERCOSUL.

10. Agreement on Free Trade between MERCOSUL and Bolivia This will be effective from 30th April, 1997.

The three other Agreements which were postponed relate to social security, maritime transport and MERCOSUL Register.

MERCOSUL Bank

During the Fortaleza Summit, it was decided to create a MERCOSUL Bank, which would finance MERCOSUL projects in infrastructure, commerce, economic and social development. The new Bank will be created from an existing financial institution called as "Fundo Financiamento Para Desenvolvimento da Bacia do Prata (FONPLATA - Fund for Development of Prata Region) which was established in 1976 for development of Prata region. This institution, which has funds of US$ 330 million, was not effectively functioning in recent years. It will now get a new life as MERCOSUL Bank. This Bank will seek funds from Private sector, international financial institutions and from other sources such as Japanese EximBank. The Bank will be autonomous and it will be open for participation of countries outside MERCOSUL and multinational funding agencies.

Present Position of MERCOSUL

MERCOSUL has successfully completed the first stage of its integration. The second stage, namely the Customs Union started in January, 1995, is progressing satisfactorily. All the four partners have amply demonstrated in this period their sincere commitment to MERCOSUL. They are, at present, analysing how the national policies of each country affect the other partners and how they are to be harmonised in services, movement of capital, environmental issues and energy. While consolidating the integration, MERCOSUL is also keeping the options open for widening.

While progressing steadily towards integration, MERCOSUL is also considering distant goals of a common currency and a common passport. These were proposed informally by a delegation of Argentine legislators to the President of Brazil in May, 1997. The Brazilian President considered these politically desirable. These proposals are, of course, very preliminary in nature and it would take lot of time to achieve. However, the Argentinian delegation felt that Brazil and Argentina could reach a bilateral agreement on common currency and passport and thereafter it could be extended to the other countries.

Intra-MERCOSUL Trade:

Since the formation of MERCOSUL in 1991 the trade among MERCOSUL member states have steadily increased from US Dollars 4 billion in 1991 to US Dollars 16 billion in 1996. It is expected to go upto US$ 32 billion by 2000. The member countries of MERCOSUL have become increasingly more dependent upon each other. For example, Argentina is dependent upon MERCOSUL for 32 per cent of its exports; Paraguay for 56 per cent of its exports; Uruguay for 47 per cent ot its exports. The only exception is Brazil, for which MERCOSUL accounts for only 13 per cent of its total exports. The internal markets of MERCOSUL countries, accounts for 20 per cent of the total exports of MERCOSUL countries. Brazil is the largest buyer of Argentinian goods and Argentina is the second largest trading partner of Brazil.

While MERCOSUL’s exports to much of the rest of the world are dominated by primary products, trade liberalisation has helped to create local markets for manufactures within MERCOSUL area. These (especially cars, autoparts, chemicals and machinery) make up a sizeable part of intra-MERCOSUL trade: almost half of Argentina’s exports to Brazil and about 80 per cent of Brazilian exports to Argentina. For example, in 1996, Argentina exported 103,000 vehicles to Brazil and imported 53,000 vehicles from Brazil. The value of this transaction is 3.5 billion US Dollars. Much of this is intra-industry trade, as similar firms, or branches of the same firm, swap products or components, taking advantage of the specialisation made possible by a bigger market. This process is helped along by the hefty foreign investment that MERCOSUL countries are attracting, some from each other, but more from outside.

MERCOSUL´s External Trade

MERCOSUL´s external trade has increased from 73 billion US Dollars in 1992 to 164 billion US Dollars in 1996.

(figures in billion US Dollars) Year Exports Imports Total Trade 1992 43.32 30.14 73.46 1993 44.12 38.42 82.54 1994 50.15 46.99 97.14 1995 56.01 61.53 117.54 1996 78.7 85.6 164.3

European Union is the largest trading partner followed by USA and Japan as can be seen from the trade figures for 1995. (Figures in billion US Dollars) Exports of Imports of Total Percentage Mercosul Mercosul trade share European Union 18.30 20.67 38.97 33 USA 10.75 15.35 26.10 22 Japan 3.57 4.36 7.93 6.7 Andean Pact 3.44 1.63 5.07 4.2 Chile 2.75 1.74 4.49 3.8 Others 17.20 17.78 34.98 29.5

Imports of MERCOSUL from the various regions have steadily increased as seen below.

Imports of Mercosul (billion US Dollars)

1990 1991 1992 1993 1994 1995 Annual percentage increase

World 29 34 39 49 60 78 22 European Union 7 8 9 11 16 21 23 USA 6 7 9 11 14 16 22 MERCOSUL 4 5 7 9 12 13 25 Rest of Latin America 4 5 6 7 8 11 20 Rest of world 8 8 8 10 10 16 15

Intra-MERCOSUL Investment

The industries and trade sectors in the member countries of MERCOSUL are in harmony with the Governments regarding the perception of the advantages of integration. They are expanding and diversifying their operations to take advantage of the larger market of MERCOSUL. Over 300 MERCOSUL-scale business alliances have already been formed. Companies from MERCOSUL countries are investing in the other MERCOSUL countries to expand their activities and trade. For example, the Brazilian companies have invested in the period 1994-95 US Dollars 465 million in Argentina, US$ 93 million in Paraguay, 78 million US dollars in Uruguay, 151 million US Dollars in Chile and 44 million US Dollars in Bolivia. Similarly, Brazil has received investment in the same period from Argentina US$ 168 million, Paraguay US$ 14 million, Uruguay US$ 339 million, Chile US$ 36 million and Bolivia US$ 2 million.

Multinational Corporations

MNCs from USA, Germany, Italy, France, Japan and Korea have reacted positively and quickly to the integration process to take advantage of the larger market of MERCOSUL. They are investing in member countries of MERCOSUL to get optimum results from the regional market as a whole. In 1995-96 MNCs announced investment plans to the tune of US$ 40 billion in MERCOSUL area. They are upgrading existing plants, building new ones or entering regions that they used to ignore. The areas which attracted most investment by MNCs are cars, chemicals and food industries. For example, the General Motors is planning an investment of US$ 3 billion upto 1999 in Brazil, Argentina and Uruguay. Ford Motor’s plan is to invest US$ 2.5 billion in the same period. Automobiles will be the leading sector of industry in MERCOSUL with an annual production of 3 million vehicles per year by the year 2000. The American, European, Japanese and Korean car manufacturers have already started investment in MERCOSUL. The automobile industry, in fact, has led the way toward making MERCOSUL a real single market. Most of the car makers are concentrating the production of each model for the whole of MERCOSUL at a single plant in Brazil or Argentina.

Infrastructural Projects

The economic integration will be complemented by the following two transnational projects : (i) A waterway project of 2000 km.linking Brazil, Uruguay and Argentina through the rivers of Parana and Tiete, (ii) Gas project linking Bolivian supplies to Brazilian and Argentinian consumers and (iii) a ‘MERCOSUL Highway’ linking Sao Paulo with Buenos Aires (4000 km.). Brazil is investing US $ 1.2 billion in MERCOSUL Highway project. The MERCOSUL countries are also working on a project called as "Atlantic Corridor for MERCOSUL" for improving the coastal shipping transporation between different ports of MERCOSUL countries.

Progress is fastest in energy integration. The earlier building of giant bi-national dams on the rivers in Parana and Uruguay means that only a small investment is needed to link MERCOSUL’s electricity systems. According to a forecast, there could be an interconnected grid in ten years’ time linking the seven Southern cone countries (Mercosul + Chile, Bolivia and Peru) with a single multinational regulator ensuring efficient use of capacity.

Border States of Brazil

Within Brazil, the three Southern States of Rio Grande do Sul, Santa Catarina and Parana who are physically closer to the other three MERCOSUL countries, have shown great enthusiasm for MERCOSUL. They are developing the infrastructure such as roads, railways etc. for facilitating the integration process. The Southern States have been seeking (somewhat successfully) investment (both domestic and foreign) in their states for orientation to MERCOSUL as a whole. The InterAmerican Bank is financing some of the MERCOSUL infrastructure projects.

The other border States of Brazil are keen for signing free trade agreements with countries with whom they share border. For example the States of Ceara and Para which have borders with Venezuela are keen on free trade agreement with that country.

Culture

Culture has also become part of the MERCOSUL integration. Cultural exchange programmes between member countries are increasing. The intellectuals and journalists who discussed MERCOSUL integration at the Fortaleza Summit in December, 1996 called for more cultural exchanges, youth exchange programmes, establishment of MERCOSUL awards in art and culture and education of people about MERCOSUL. The Sao Paulo Municipality organized a grand MERCOSUL Festival of Culture lasting three months in 1996.

Educational Integration

Based on the premise that education is a fundamental factor in the regional integration process, educational courses at the primary or junior high level - provided that they do not entail technical studies - will be recognised by member states as being on the same level for all member nations. Likewise, in order to permit continuing education, certificates proving course conclusion issued by an official institution accredited in one of the member states will be valid in all other member states. The process of educational integration will be coordinated by a Regional Technical Commission. Exchange programmes between universities and academic institutions are also being encouraged.

Trade Unions

Trade Unions from the MERCOSUL countries and Chile and Bolivia have formed a coordinating body ‘CCSCS’ (Coordenadora de Centrais Sindicais do Cone Sul). They have plans for common action to assert the right of workers in MERCOSUL countries.

Information

The Federation of Commercial Association of Sao Paulo have been publishing a magazine "MERCOSUL" to inform their members of the opportunities for business in the member countries of MERCOSUL. "Gazetta Mercantil", the leading business daily of Brazil has a supplement on MERCOSUL every Monday. The supplement highlights the integration process in different areas and the developments in the member countries in respect of trade and industry. Similar dissemination of news takes place in the other MERCOSUL countries also.

Language

Language does not pose any significant barrier to the integration process. Spanish is by and large understood in Brazil. There is growing interest in Brazil to learn Spanish language and similarly in the other three countries there is greater interest in Portuguese language. The documents and working of MERCOSUL are, of course, done in both the languages.

Criticism against MERCOSUL

MERCOSUL has been a target of criticism by USA and also World Bank. The report of the Chief Economist of World Bank (Alexander Yeats) leaked out to media in 1996 claimed that MERCOSUL was a fortress and that it "stimulated substantial inefficiencies in its members trade and that it restricted trade with the rest of the world". Mr. Yeats claimed that the growth in intra-MERCOSUL trade was artificially caused by a few items such as automobiles, agro-machinery and a few other capital goods. MERCOSUL countries attacked the World Bank Report as biased. Later, a senior official of the Bank explained that the leaked report did not reflect the views of the World Bank.

It is true that MERCOSUL has put non-MERCOSUL countries at a disadvantage by giving duty free access to its member states. Some of the rise in trade within MERCOSUL represents a diversion of trade from outside sources: for instance, the sale of cars between Brazil and Argentina; or more, deliberately, Brazil’s decision to buy oil from Argentina rather than from Iraq. But the rise in intra-group trade has gone hand-in-hand with an accelerating rise in MERCOSUL’s trade with the rest of the world. It is to be noted that while MERCOSUL’s imports from within the region have gone up by 25% every year from 1990 to 1995, the increase in the same period in the imports from European Union was 23%, from USA 22%, from the rest of Latin America 20% and in global imports 22%. Even Economist is of the view that "MERCOSUL has been more trade creating than trade diverting".

MERCOSUL as a force for regional stability

Apart from the benefits in trade, MERCOSUL has contributed to the regional political and economic stability. It is not any longer conceivable to have war or hostilities or debilitating rivalry between Brazil and Argentina, the key powers of South America. There is no more arms race between Argentina and Brazil. Their resources are used for economic development rather than wasteful military expenditure. MERCOSUL has created so much of interdependence that it will be extremely difficult for the two countries to fall apart. The rapproachment between Brazil and Argentina is a great stabilising force in South American politics.

MERCOSUL has become a guardian of democracy for South America as vindicated in the case of Paraguay when a military coup attempt was stopped by the combined democratic forces of MERCOSUL. But for MERCOSUL, Paraguay would have almost certainly gone back to military rule, setting a dangerous precedent for the new Latin America. MERCOSUL’s Presidents promptly agreed that, as in EU, democracy should be a precondition for membership.

Economic stability has also been assured in the region by the discipline brought about through MERCOSUL rules. The region’s economies have became more predictable, less volatile and more stable thanks to MERCOSUL.

How is MERCOSUL different from the earlier attempts at regional integration

Some critics of MERCOSUL point out that this is not the first time that South American countries had attempted regional integration. They quote the past attempts which had failed. A Latin American Free Trade Association (ALALC) formed in 1960 failed to take off. A Latin American Integration Association (ALADI) was created in 1980 to create a more modest economic preference zone instead of a free trade zone. This was supposed to create conditions favourable to the growth of bilateral initiatives as a prelude to multilateral relationship in Latin America. This again was not successful. But the critics of MERCOSUL ignore one vital difference between the South America of today and that of the past. The present day South America is characterised by democratically elected Governments pursuing free market policies, economic liberalisation and privatisation. These common characteristics give a firm foundation to the pursuit of regional integration and greater chance of success than in the past. This could be best illustrated by the example of the coup attempt in Paraguay in April, 1996. When a Paraguan General attempted the coup, the Foreign Ministers of Brazil, Argentina and Uruguay flew to Asuncion and told the General categorically that Paraguay would be thrown out of MERCOSUL if it became a military dictatorship. The General backed out and democracy continues in Paraguay.

Another important factor which has made a critical difference for the success of MERCOSUL is the relationship between Brazil and Argentina. Just as the relationship between France and Germany determined the formation and evolution of European Union, the relationship between Argentina and Brazil is the determining factor for the success of MERCOSUL. The two countries have been traditionally rivals for leadership in South America. However, in the last ten years they have patched up and have reached a common understanding for giving priority to success of MERCOSUL. A visible demonstration of the closeness of the two countries was the joint Brazil-Argentina military and naval exercises held in recent years. For the first time, small units from the two armies are to conduct joint training exercise in peace keeping. The two countries consult each other frequently at all levels to ensure that differences between them do not become obstacles to the MERCOSUL integration process. The business and industrial sectors of the two countries have also established longterm links with each other. There are about 450 Brazilian firms which have investments or joint ventures worth a total of US$ 1.2 billion in Argentina; and around 100 Argentine firms have invested over US$ 200 million in Brazil. The trade between Brazil and Argentina was US$ 12 billion in 1996 and is expected to reach US$ 14 billion in 1997. Brazil is the largest market for Argentina accounting for 30 per cent of the exports of the latter. Argentina is the second largest trading partner of Brazil. With such established and growing interdependence, it would be extremely difficult, costly and painful, to break it up.

Apart from the bilateral relationship between Brazil and Argentina, the other crucial factor for the success of MERCOSUL is the attitude of Brazil itself. As the largest and the strongest country and economy in South America, Brazil would obviously be regarded as a `big brother´ by the neighbouring countries. It may be noted here that Brazil is the only country which has borders with all the other countries of South America (except for Ecuador and Chile). Conscious of this, Brazil has made every endeavour in recent years to convey to MERCOSUL members and other neighbours its commitment to regional integration and its intention not to do anything that would jeopardise the regional integration. Even in the sensitive matter of its aspiration to become a Permanent Member of the UN Security Council, Brazil has made it clear that it does not seek that post at the cost of MERCOSUL. Brazil´s statements have been circumspect and measured in order not to rub the others in the region and particularly Argentina.

Brazil’s interest in MERCOSUL is clear. MERCOSUL adds to the diplomatic pulling power of Brazil in the international political, economic and trade scenario. More importantly, MERCOSUL is a useful vehicle for Brazil to the leadership of South America.

Challenges Facing MERCOSUL

Although MERCOSUL has been a success story so far, it faces a number of challenges in the integration process. There are still some tendencies to impose non-tariff barriers against entry of MERCOSUL products in the Member States when the trade balance goes too negative or when the domestic industry seeks protection against cheaper imports. Differences in phytosanitary rules, and differences in the procedures for registration of products such as pharmaceuticals are examples. The trade block’s institutional system is too weak and inadequate to achieve a genuine customs union and the more ambitious goal of a full fledged common market. Although Mercosul has a Common External Tariff (CET), payment of the CET at one country is not always respected by the others. This may partly be explained by the lack of any supra-national institution within MERCOSUL, which can collect the revenue obtained from the CET and distribute it fairly among the member States. Resolutions and directives issued by Mercosul’s Institutional Bodies such as the Common External Council, the Common Market Group or the Trade Commission have to be ratified by the domestic legislators before they have to take effect as law and this is a very time consuming process.

MERCOSUL will have to move to open up trade in services, especially financial services, and to tackle such difficult issues as harmonisation of tax and of macroeconomic policies. The Central Banks have held preliminary talks about harmonising bank regulatory systems and finance officials have similarly discussed their tax regimes. But the differences are wide. Uruguay, for example, has a large off-shore financial business and a liberal corporate tax regime. Brazil and (Chile) have exchange controls, while the others do not. Harmonisation of macroeconomic policies within MERCOSUL so far extends no farther than exchange of information. Argentina’s fixed exchange rate could prove to be a problem. Neither the Peso nor the Real is yet solid enough to play a role like that of the Duetschmark or the US Dollar.

The economies of MERCOSUL are still fragile and vulnerable to external shocks, to some extent; for instance, a sharp rise in global interest rates. The market reforms of these countries are yet incomplete in many respects. The process of adjustment of globalisation is painful and there might be temptations to seek short cuts to lessen or avoid the pains.

There are also marked differences between the key members of MERCOSUL namely Argentina and Brazil on a number of issues. Argentina favours creation of a supranational body to arbitrate on disputes between MERCOSUL members. Brazil is vehemently opposed to this. Brazil insists that MERCOSUL should be a union of member states with minimum of supranational institutions and decisions should be taken by consensus.

Argentina fears that Brazil’s size makes it the obvious choice for foreign investors. They do not like the incentives being offered by the different States of Brazil who compete with each other to woo foreign investors. So, Argentina wants MERCOSUL to set up a group to study competition distorting public policies. Opening of the Brazilian market for Argentinian pharmaceuticals, petroleum distribution, banks and food items are also issues which Argentina has raised.

Yet another challenge facing MERCOSUL is the tendency of the big brother ‘Brazil’ acting unilaterally from time to time without consulting their MERCOSUL partners. In the last two years the Brazilians took unilateral action at least twice changing their trade policies which affected MERCOSUL partners. Later, when the MERCOSUL partners protested, the Brazilians had to modify their policies to accommodate the interests of other MERCOSUL members. Whereas in European Union, France and UK act as counter balance to Germany, in MERCOSUL Brazil towers over others.The combined GDP of the other three members is less than half of that of Brazil. While the others are more dependent upon MERCOSUL, Brazil’s trade with MERCOSUL is only about 15 per cent. Brazil is a genuinely global trader.

PART - II

External Relations of MERCOSUL

The success of MERCOSUL has attracted other countries and regional groups who have sought closer institutional relations with MERCOSUL. Chile signed a Free Trade Agreement with MERCOSUL in October, 1996 followed by Bolivia in December, 1996. The association of these two countries with MERCOSUL has increased the population of MERCOSUL by 20 million and the GDP by US$ 73 billion.

Chile - MERCOSUL Free Trade Agreement

This was signed in June, 1996 and became effective from 10th October, 1996. The Agreement provides for establishment of a free trade zone. Customs tariff is being gradually reduced to reach zero level by 2004 on 62% of products. On some sensitive items zero duty will be achieved in ten to fifteen years. The sensitive items are food products, beverages, fish, metal products, electrical items and transport equipments. A joint MERCOSUL - Chile Commission has been set up to supervise the implementation of Free Trade Agreement. To qualify for tariff preferences, goods must have 60% of MERCOSUL or Chilean content. It may be noted here that Chile’s external tariff (11%) is lower than that of MERCOSUL’s. While MERCOSUL’s CET varies from low to high, Chile’s tariff of 11% is applied uniformly to all imports.

Chile´s trade with MERCOSUL has increased 174 per cent between 1990 and 1995 and it is expected to increase at a higher rate from now on. In 1995 Chile exported to MERCOSUL US$ 656 million worth of goods and imported US$ 1.6 billion worth of goods.

Chile will benefit by way of access to MERCOSUL trucks, cars, buses, steel products, tropical fruits and it will supply to MERCOSUL light industrial products, such as textiles, shoes and paper to a vast market where Chile, with cheap labour and low financing costs, is expected to be the low-cost producer. Chile expects to generate 170,000 new jobs in the next five years in the manufacturing sector as a result of the association with MERCOSUL. On the other hand, the association of Chile, the best economy in Latin America (Latin Tiger) adds to the prestige and weight of MERCOSUL.

Bolivia - MERCOSUL Free Trade Agreement

Signed in December, 1996, this Agreement provides for a free trade area between MERCOSUL and Bolivia within a period of ten years starting from 1st April, 1997. However, some sensitive items such as flour, sugar and textiles will remain protected upto 18 years.

About 25 per cent of Bolivia’s total trade is with MERCOSUL. Through the Free Trade Agreement with MERCOSUL, Bolivia expects to double its trade with MERCOSUL in the next 2-3 years. Besides trade, Bolivia will benefit from the energy connection. It already supplies gas to Brazil and Argentina and will soon supply to Paraguay also. Bolivia will also get access to the Atlantic Ports through the MERCOSUL waterway Parana-Paraguay.

The association of Chile and Bolivia have opened an entry to the Pacific Ocean for MERCOSUL and Brazil. This is particularly important for the Western States of Brazil for whom the Pacific Ports are closer than the Atlantic ones.

MERCOSUL is planning to negotiate with Chile and Bolivia and reach agreements on services, intellectual property rights, consumer rights and workers’ rights. Chile and Bolivia may have to adopt the same Common External Tariff as that of MERCOSUL. This appears to be difficult to achieve for the moment since Chile’s tariff of 11 per cent is lower than that of the average MERCOSUL tariff of 14 per cent.

Other Countries

Neighbours

Venezuela, Columbia and Peru have already evinced interest in joining MERCOSUL. Preliminary negotiations have been held in some cases but no time frames have been set. The Venezuelan President mentioned to the Press in February, 1997 that his country would like to join MERCOSUL irrespective of the position of other Andean Pact members.

The Andean Pact (Bolivia, Columbia, Ecuador, Peru and Venezuela) has been negotiating for a Free Trade Agreement with Mercosul. These negotiations started in 1994 and are still continuing although a bit slowly. It is expected that this Agreement might be signed in late ’97 or 1998. One of the issues yet to be resolved is the elimination of customs duties. Andean Pact wants this to be done in a period of 20-25 years, MERCOSUL is not agreeable beyond a period of 10-15 years. Another point of contention is that Andean Pact wants exemption for some products from the Free Trade Agreement but MERCOSUL is not agreeable to this.

Mexico

Mexico is holding talks with MERCOSUL for a Free Trade Agreement expected to be signed in 1998.

European Union

The European Union has signed a Framework Agreement for Cooperation with MERCOSUL in 1992. The Agreement provides for cooperation in trade, technical standards, agriculture, industry etc. The Agreement sets a tentative target of free trade by 2005. EU-MERCOSUL dialogue is held through a Joint Commission, which has a subcommission on trade which meets twice a year. EU has announced financial assistance of US$ 20 million to MERCOSUL integration and cooperation programmes. It may be noted here that EU is the largest trading partner of MERCOSUL, with US$ 45 billion of trade in 1996. EU is also the largest source of investment. French President Chirac, who visited Brazil in March, 1997, and the German Chancellor Kohl, who visited Brazil in 1996, had favoured closer cooperation between MERCOSUL and EU and also called for a Summit Meeting of the leaders of the two sides. The MERCOSUL Parliament is planning to sign a Cooperation Agreement with the European Parliament.

Japan

The Japanese Prime Minister, during his visit to Brazil in 1996, had sought closer cooperation and dialogue between Japan and MERCOSUL. Following this, a working meeting between delegations of MERCOSUL and Japan was held in October, 1996.

ASEAN

The Secretary General of ASEAN visited Brazil and Argentina in April 1997 to establish ties with MERCOSUL. During his visit, it was decided to set up an ASEAN-MERCOSUL Business Council. This Council will deal with commercial issues between the two blocs. The possibility of signature of a Free Trade Agreement between the two blocs is also being explored although it seems to be a long shot. ASEAN’s trade with MERCOSUL in 1996 was about US$ 7 billion. It may be noted here that a MERCOSUL-ASEAN meeting was held in Singapore in 1996 during the WTO Conference.

Africa

South Africa and SADC have also sought institutional cooperation with MERCOSUL.

U.S.A.

USA is not happy with MERCOSUL. Official and unofficial statements have emanated from Washington DC in recent times criticising MERCOSUL as an attempt to protect the industries within MERCOSUL and restricting imports from outside. The Brazilian newspapers have commented that the American criticism is consequent to their perception that MERCOSUL would undermine the leadership of USA in this hemisphere. This, indeed, was witnessed during the FTAA meeting at Belo Horizante in May ’97 when MERCOSUL put up a successful joint fight against USA. This is perhaps the first time that someone from South America stood upto USA successfully. It may be noted here that while seeking Fast Track from Congress for Free Trade Area of Americas (FTAA), the Administration stated that "if FTAA negotiations were not accelerated there would be a leadership vacuum in the hemisphere. Such vacuum had already given rise to secondary actors such as MERCOSUL".

The American Administration was hoping to get Argentina out of MERCOSUL. But the Americans were not ready to take them on board NAFTA or offer any better option to Argentina. Now it is practically impossible since Argentina has deeply integrated itself with Brazil. President Menem of Argentina joked recently that "if NAFTA wanted to join MERCOSUL, they would be welcome". The American unhappiness got aggravated when Chile became an Associate Member of MERCOSUL in October, 1996, after having waited in vain for the call from NAFTA to join.

Canada

During the Brazilian President´s visit to Canada in April ´97, the Canadian Prime Minister announced the interest of his country in negotiating a trade liberalisation agreement with MERCOSUL. In reply to this, the Brazilian President said that he was also in favour of a Free Trade Area between MERCOSUL and Canada. Negotiations are expected to start by July ’97.

Australia and New Zealand

These two countries have also expressed interest in closer contacts with MERCOSUL. A Ministerial Meeting of these two and MERCOSUL was held in May’97 to work out a mechanism for facilitation of trade and investment.

International Fora

MERCOSUL has been registered with WTO as a Customs Union under Article 24 of GATT. WTO has created a group under the Committee on Regional Agreements to go into the compatibility of MERCOSUL with the WTO rules. MERCOSUL is interacting with this group.

MERCOSUL has started acting unitedly in international fora, such as UN and WTO. During the UN General Assembly Sessions in New York MERCOSUL Foreign Ministers hold meetings with Foreign Ministers of other blocs and countries. During the WTO Meeting in Singapore in 1996, MERCOSUL countries took united position on many issues.

Free Trade Area of Americas (FTAA)

The Summit of Americas held in Miami in 1994 took the decision for formation of FTAA with 33 of the 34 countries in this hemisphere excluding Cuba. It was agreed that negotiations would be completed by 2005 and FTAA would be implemented over a period of further ten years. If and when this is achieved FTAA will become the largest market surpassing European Union as seen from the following comparison :

G D P Population Exports Imports trillion $ million trillion $ trillion $

FTAA 7.9 711 1.1 1.2

EU 7.3 369 1.7 1.7

FTAA negotiations have been going on at various levels since 1994 through the 11 Working Groups. The most recent negotiations were held at Belo Horizonte (Brazil) in May ‘97 during the Third Hemisphere Meeting of Ministers. This would be followed by the next Summit Meeting in Santiago in March, 1998.

The negotiations are not making appreciable progress because of the divergence of views between MERCOSUL on the one hand and USA on the other. MERCOSUL and USA differ on the structure, timing and pace of negotiations as well as on the nature of FTAA. USA wants the Summit Meeting in 1998 to announce opening of negotiations without the need to define the scope and precise objectives and they want early progress on market opening. But MERCOSUL does not want to sign a blank cheque. They want the parameters of negotiations to be defined before starting the negotiations. MERCOSUL has proposed three stage negotiations involving business facilitation in the first stage, market access issues in the second stage and substantial negotiations at the last stage. But USA wants all these issues to be negotiated simultaneously. While U.S.A. wants the negotiations by individual countries, MERCOSUL has decided to negotiate as a bloc. There are also substantial differences on issues such as environment, rights of workers, Government procurement, product standards and investment protection.

An important issue for FTAA negotiations is the need for US Administration to get Fast Track Authority from Congress. The usual obstructionist attitude of Congress on trade matters and the relative lack of interest in Latin America - beyond Mexico and Cuba - within the current US Administration have put question marks in the FTAA negotiations.

It may be noted here that the trade between NAFTA and MERCOSUL in 1996 was US$ 31 billion of which US$ 19 billion was the exports of NAFTA to MERCOSUL and US$ 12 billion was their imports.

Comparison of MERCOSUL with other regional pacts in this Hemisphere

MERCOSUL is the second largest integrated market in Americas as seen

from the following comparison (with 1995 figures) :

Group Year of Population GDP Exports Imports signature of (millions) (billion $) (billion $) (billion $) Agreement & entering into force

NAFTA 1993 378 6840 996 1115 (US, Canada, 2009 Mexico)

MERCOSUL 1991 193 1069 79 85 (Brazil, Argentina, 1995 Paraguay & Uruguay)

Andean Pact 1969 98 180 30 30 (Venezuela, Peru, 1995 Columbia, Bolivia and Ecuador)

Central American 1993 29 28 5 9 Common Market No date (Guatemala, Costa fixed Rica, Honduras, El Salvador & Nicaragua)

CARICOM 1973 6 16 4 7 (Jamaica, Bahamas, 1995 Barbados, St.Lucia, Guyana, Belize, Antigua, St. Vincente, Grenada, Dominica, St. Cristao) Chile, Dominican Republic, Panama, Haiti and Surinam are not part of any regional pacts.

In terms of quality of integration, MERCOSUL is in between European Union and NAFTA. MERCOSUL does not go that far to repeat what European Union has done in terms of integration or planning to do in future. MERCOSUL does not envisage a supranational structure which would take away part of the sovereignty of Member States. There is no MERCOSULacracy like Eurocracy. But MERCOSUL goes beyond the arrangement of NAFTA.

Unlike NAFTA, MERCOSUL has established a Common External Tariff and coordination of fiscal, monetary and foreign exchange policies as well as sectoral policies affecting industry, agriculture, transportation, communication, financial services etc. On the other hand NAFTA, unlike MERCOSUL, deals with commercial issues that are not traditionally covered in trade agreements, including investment related disciplines, trade in services, competition policy, state enterprises, government procurement and protection of intellectual property.

PART - III

OVERVIEW OF MERCOSUL ECONOMIES

The economies of MERCOSUL members share some common characteristics. They are strong in agricultural production, livestock breeding and meat production. They have rich mineral resources. Exports of agro-products and minerals are important economic activities.

Members of MERCOSUL are predominantly exporters of primary products.

All the MERCOSUL member States follow similar economic policies with similar objectives. Economic reforms, liberalisation and privatisation are the common pursuits. Containment of inflation, attracting foreign investment and modernisation of infrastructure are common objectives.

MERCOSUL economies have been showing good performance in recent years. The average growth rate of MERCOSUL was 3.2 per cent in 1996. While the GDP of Uruguay grew by 5 per cent, Brazil’s growth rate was 4 per cent, Argentina 3.5 per cent and Paraguay 2 per cent. The prediction for 1997 is that the average growth rate of MERCOSUL as a whole will increase to 3.7 per cent and the Member States growth rate will vary from 2.5 per cent in the case of Uruguay to 4.5 per cent in the case of Brazil. The average growth rate of MERCOSUL countries in the period 1990-95 was 3.5 per cent.

All the four countries have achieved remarkable success in containing inflation. The average MERCOSUL inflation which was 1627 per cent in 1994 has come down dramatically to 15.6 per cent in 1995 and 7.6 per cent in 1996. It is expected to go down to 7.5 per cent in 1997. MERCOSUL countries have been attracting more and more foreign direct investment. In 1996, Brazil got a foreign direct investment of US$ 9 billion, Argentina US $ 3.2 billion, Paraguay 220 million US Dollars and Uruguay 190 million US Dollars.

Brazil

Brazil is the eighth largest economy in the world, with a GDP of US$ 748 billion. It is a relatively prosperous country with a per capita income of US$ 4800. It is the fifth largest country in the world in area (8.5 m. sq. kms) and population (158 million people). It accounts for 50% of the population of GDP of South America.

Brazilian economy has turned the corner since 1994 after the introduction of "Real Plan". Inflation which had gone to a peak of 2600% in the beginning of 1990s has now been brought down to a single digit in 1997. The economy has been put on a stable foundation and sustainable progress.

Brazil has a diversified industrial base. About 2000 Brazilian firms are ISO 9000 certified. Brazil is the sixth largest producer of automobiles with about 1.7 million units per year. The iron and steel industry is within the top ten in the world. Other important industries are in the fields of metallurgy, cement, paper, petro-chemicals, sugar, textiles, chemicals, food and beverages etc.

Brazil is rich in natural resources and minerals. It is the second largest producer of tin, third largest producer of iron ore, fourth largest producer of manganese, sixth largest producer of aluminium and seventh largest producer of nickel.

Brazil is a major producer of agricultural products and still has considerable untapped potential. Brazil is the world’s largest producer of sugarcane, coffee and orange juice, the second largest producer of soya, cocoa and beef and third largest producer of corn and chicken. However, the production of rice, wheat and cotton have declined in recent years leading to large scale imports of these items.

The foreign trade of Brazil in 1996 was US$ 100 billion with imports of US$ 53 billion and exports of US$ 47 billion. Imports have been steadily increasing from US$ 38 billion in 1993 to 43 billion Dollars in 1994 and 46 billion Dollars in 1995. Brazil used to have a trade surplus of over 10 billion US Dollars every year from 1984 to 1994. In 1995, Brazil registered a trade deficit of 3 billion US Dollars, which has increased to 5 billion Dollars in 1996. Major exports are iron ore, coffee, soya, footwear, iron and steel products, motor vehicles and parts, cellulose, orange juice, aluminium, sugar, chicken and beef. The major imports are petroleum products, capital goods, raw materials, consumer goods, wheat, rice and cotton.

European Union is the largest trading partner of Brazil with a trade of US$ 24 billion, followed by USA (US$ 19 billion), MERCOSUL (US$ 12 billion), Japan (US$ 5 billion), Republic of Korea (US$ 2 billion) and China (US$ 1.5 billion).

The growth rate in 1996 which was 4%, is expected to increase to 4.5% in 1997 and is likely to stay at this level in 1998 also.

Foreign exchange reserves have reached a comfortable level of 60 billion US Dollars in December, 1996 from US$ 53 billion in January, 1996.

The Brazilian currency Real has remained relatively stable in 1996 and it is expected to get devalued marginally and gradually in the medium term.

Foreign investment in 1996 was a record US$ 9 billion. It is estimated to go up to US$ 12 billion in 1997. Brazil has emerged as number one country in the developing world receiving the highest level of foreign investment.

Trade Policies

The Government of Brazil has introduced "SISCOMEX" from January 1st, 1997. According to this new system, the Brazilian importers are required to apply for import authorisation through computers. There will be no more paperwork. The authorisation for imports will be processed and approved ‘on line’. The on line system links Customs, Foreign Trade Ministry, Finance Ministry and Central Bank. Export procedures have already been put ‘on line’ earlier.

Concerned by the growing trade deficit (Brazil had a consistent trade surplus of over US Dollars 10 billion every year from 1984 to 1994) in the past two years and in response to the pressure from local industry for protection, the Government is trying to discourage imports of some items through tariff and non-tariff barriers. Customs duty has been increased in the case of imports of cars, toys, pencils etc. Minimum prices have been fixed for items such as garments, carpets and jute bags. Quotas have been fixed for imports of synthetic fibres from China, Hong Kong and Panama. In April ‘97, the Government has introduced a temporary law imposing some restrictions on the financing of imports.

The Economy of Argentina

The Argentinian economy which was growing between 6 and 9 per cent in the period 1991 to 1994 went into recession and negative growth of -4.6 per cent in 1995 as a fall out of the Mexican crisis. The economy has come out of recession in 1996 with growth rate of 3.4 per cent. It is expected that the GDP would grow by 4.6% in 1997.

The Argentinian Government has achieved remarkable success in containing inflation. The rate of inflation in 1996 was only about 0.2 per cent.

The main agricultural crops are soya, wheat, rice and maize. Main exports are petroleum crude, oil seed cake, wheat, soyabeans and oil, leather, maize, fish and meat.

Argentina’s exports have increased from 14.3 billion US dollars in 1991 to 27.4 billion US Dollars in 1996. Imports increased from 11.5 billion US Dollars in 1991 to 26.3 billion US Dollars in 1996. The export consists of 30% agroproducts, 30% industrial products, 30% raw materials and 10% petroleum.

In 1996, 31.5% of exports went to MERCOSUL, 20% to European Union (EU), 9.8% to NAFTA. Out of the total imports 26% came from MERCOSUL, 24.5% from NAFTA and 29.6% from EU.

Foreign exchange reserves stood at US$ 16.9 billion US Dollars in September, 1996.

Paraguay

It is a small landlocked country with a market economy marked by a large informal sector. While the formal economy is largely oriented towards services, the informal sector is involved in re-export of imported consumer goods to neighbouring countries.

The priorities of the Government are economic reform, liberalisation and privatisation.

Agriculture, forestry and fishing are the dominant economic activities. Industries are limited to a few fields such as meat packing, textiles, light consumer goods, oil seed crushing and cement.

Exports include raw cotton, soya beans, maize, leather, wheat, meat and hydro-electric power and some non- traditional items such as garments, plastics, cosmetics etc. Imports cover a wide range of capital and consumer goods, raw materials and fuel. It is interesting to note that while the registered (official) exports of Paraguay were around 1 billion US Dollars in 1996 the non-registered exports (re-exports of imported consumer goods) were to the tune of 1.6 billion US Dollars, according to an estimate.

The Government of Paraguay expects in 1997 growth rate of 4%, inflation of 8% (inflation 42 per cent in 1994-95) and strong growth in exports and agro-production (soya and cotton main crops). The economy has been growing in recent years at a modest rate of 2 to 4.5 per cent. The balance of payments continues to be in deficit in the last three years.

Uruguay

The Uruguyan economy is a small one benefitting from a favourable climate for agriculture and substantial hydro-electric power potential. The main agricultural crops are wheat, rice and corn. The important industries are : meat processing, wool and hides, sugar, textiles, footwear, leacher and wine. Fishing and livestock are the other activities. Exports of Uruguay are meat, wool, rice, cotton, fish, textiles, leather and passenger cars while the imports include a large range of capital and consumer goods.

The economy of Uruguay grew by 4.8 per cent in 1996, although it continued to have in 1996 some characterisation of recession witnessed in 1995 (growth rate -2.8 per cent). Inflation in 1996 was around 2.6 per cent. The balance of payment remains at deficit in the last three years. 1997 appears to be an improvement over 1996 for the economy of Uruguay. Inflation is expected to go down to 15%.

Brazil is the largest trading partner accounting for 34 per cent of exports and 22 per cent of imports. Artgentina is the second largest partner accounting for 11 per cent of exports and 20 per cent of imports. EU´s share in Uruguay´s foreign trade is 18 per cent while that of USA is 9.8 per cent and China´s share 3 per cent.

Chile

The economy of Chile is the most open, strongest and best performing in Latin America. Chile has been enshrined in popular thinking as an ‘economic miracle’ of the 90’s and as a economic model for Latin America. Over the last 12 years, economic growth has averaged 7 per cent.

In 1996, inflation was at 6.6 per cent (sixth consecutive year of decreasing inflation rate) and GDP grew by 7.1 per cent. Foreign investment went up by 42 per cent to US$ 8 billion.

The trade balance for 1996 showed a deficit exceeding US$ 1.2 billion, mostly due to a decrease in the prices of copper. However, the balance of payments showed a surplus exceeding US$ 1.2 billion. Reserves as at December 31, 1996 were US$ 15.4 billion.

Chile is world´s largest producer and exporter of copper. Copper accounts for 41 per cent of the exports. European Union is the largest trading partner followed by USA, Asia and MERCOSUL. Besides the free-trade agreement with MERCOSUL, Chile has signed a Cooperation Agreement with EU and free-trade agreement with Canada. From January 1997, most of trade with Venezuela and Colombia are subject to zero tariffs, which is the case for trade with Mexico since 1992. From January 01, 1998, zero tariffs will also apply on trade with Ecuador. These trade agreements are expected to lead to significant growth in trade.

The growth rate for 1997 is expected to be around 5.7% and inflation 5.5%. Bolivia Bolivia is one of the poorest countries in Latin America with an arable land of 3 per cent of its total area. It grows soya, coffee, coco, cotton, sugarcane and rice. The important industries are in the fields of mining, petroleum, tobacco and textiles. Main exports are metals, ores, minerals, natural gas, soya beans, wood, oil seed cakes and jewellery. It imports a broad range of capital and consumer goods. USA is the largest trading partner, followed by MERCOSUL and Japan.

Bolivia

Bolivia is one of the poorest countries in the region.It grows coffee,soya,cocoa,cotton,sugarcane and rice. The important industries are mining,petroleum,tobacco and textiles. Main exports are metals,minerals,natural gas,soya,wood etc. USA is the largest trade partner followed by Mercosul and Japan.

The Bolivian Government´s priorities are economic reforms and privatisation.

The Bolivian economy has been growing over 4 per cent since 1990 except in 1992 (1.6 per cent). The balance of payments was negative in 1996 after a nominal surplus in 1995.

PART IV

India´s Trade with MERCOSUL

The two-way trade between India and MERCOSUL was around US Dollars 648 million in 1996. This went up to 828 million US Dollars in 1994 and 730 million US Dollars in 1995 because of the large scale imports of sugar from Brazil. If we include Chile and Bolivia, the Associate Members of MERCOSUL, our two-way trade in 1996 was about 803 million US Dollars.

MERCOSUL accounts for about 75 per cent of India’s exports and 66 per cent of imports with the whole of Latin America.

India´s trade with MERCOSUL in the last six years may be seen below.

[ These figures are approximate since accurate figures for Uruguay and Paraguay could not be obtained.]

Our trade with MERCOSUL has always been characterised by deficit for our side. In the last six years, our imports from MERCOSUL has ranged from a minimum of 165 million US Dollars in 1993 to maximum of 676 million US Dollars in 1994. On the other hand, our exports to MERCOSUL were a measly 32 million US Dollars in 1991, at the time of formation of MERCOSUL. This has increased by 880 per cent in five years to 282 million US Dollars in 1996.

Brazil is our largest trading partner in MERCOSUL followed by Argentina, Uruguay and Paraguay.

Major items of our exports to MERCOSUL are garments, fabrics, yarn, hand tools, cycle parts, scooters and motor cycles, automobiles and trucks, autoparts, chemicals, bulk drugs, pharmaceuticals, carpets and handicrafts.

Main imports are minerals and ores, iron and steel and other metal products, soya, equipments and machinery, leather, wheat, wood pulp & wool.

India’s exports to MERCOSUL in 1996 were about 282 million US Dollars. If we include our exports to Chile and Bolivia, the Associate Members of MERCOSUL, our total exports were 341 million US Dollars.

Our exports to MERCOSUL have increased by 880 per cent in the period from 1991 to 1996. Our exports should continue the momentum of increase in the future and should double in the next three years. This is possible in view of the more aggressive export promotion measures of our Missions, more interest shown in this region by our exporters, growth and opening up of the economies in this region and the greater interest in imports from India shown by importers of MERCOSUL who are getting to know about the competitivity of Indian products.

Our imports from MERCOSUL have been somewhat consistent in comparison to our exports. They should also go up in the future consequent to the greater commercial and economic interaction between the two sides. More and more Indian companies have started sourcing their supplies from MERCOSUL.

The integration of MERCOSUL market gives opportunities for increasing our exports to this region. In the past, South America has been an area of political instability and economic uncertainty. Because of this, our exporters did not take much interest in this region in the past. But now the situation has changed dramatically. The region has stabilised politically and economically. The economies are doing well. MERCOSUL has reinforced the stability of this region and is contributing to the growth and prosperity of the member countries. Moreover, MERCOSUL is also shaping the future of South America adding to its stability and growth. This new scenario has made this region attractive for our exporters. Already a number of our exporters have started targeting South America as a new market for their exports.

We no longer have to dissipate our marketing efforts in each of the different MERCOSUL countries. Our exporters can now make unified marketing for MERCOSUL as a whole. If they could establish entry at any one of the MERCOSUL countries, from there they could penetrate the whole market. Earlier, our exporters were not much interested in the small markets of Uruguay and Paraguay. Now they can combine them with the large markets of Argentina and Uruguay under MERCOSUL. Once our exporters are well established in MERCOSUL it would be easy for them to expand their exports to Chile, Bolivia and other South American countries. If our exporters stock their products in MERCOSUL, they can supply to the whole of South America, taking advantage of the trade agreement between MERCOSUL and the other countries in the region.

We will benefit from the MERCOSUL processes of harmonisation of standards, registration procedures and phytosanitary requirements. Instead of having to deal with four different authorities we would be able to get market for our products after approval from one single authority. This is important for our exports of pharmaceuticals, chemicals, pesticides, rice etc.

The large volume of market offered by MERCOSUL is good for our companies who are interested in setting up local manufacturing units or joint ventures in MERCOSUL area.

South America is particularly attractive for our garment exporters who have reached a saturation point in their traditional markets. South America has become an important non-quota market for our garment exporters. The BSMs and visits of garment delegations organized in the last two years have confirmed this assessment. It is based on this assessment that AEPC has posted a Marketing Officer at Sao Paulo to penetrate this new market of South America.

MERCOSUL and South America are also becoming significant markets for our engineering exports. Handtools, cycle parts, scooters and motor cycles have now become regular items of exports to MERCOSUL. The exporters of these items can now consolidate their market presence in MERCOSUL and reach out to the other South American countries as well using MERCOSUL as the base.

A promising area for our exports to MERCOSUL is autoparts. As mentioned earlier in this paper, MERCOSUL has emerged as one of the important automobile markets in the world. It will have a capacity of about 3 million vehicles by the year 2000, given the new investments and plans of the manufacturers. This large market provides ample scope for our exports of auto parts to the OEMs as well as to the after-sales market. All the manufacturers in MERCOSUL are the major players from USA, Europe, Japan and Korea. Those of our companies who have established supplier relationship with them will find it easier to penetrate the market here.

Industries in MERCOSUL are presently going through a phase of modernisation and they are preoccupied with reducing the cost of production in order to survive the on-going globalisation process. This is, therefore, the right time to intensify our promotion of exports of machine tools and equipments and machinery. Some of our companies have already made a beginning with exports of machinery for printing, packaging, tyre industry etc. MERCOSUL manufacturers are happy with the supplies from India and our image is improving.

Pharmaceutical exporters from India have started targeting MERCOSUL for the last two years. Almost all the major players from India have taken interest in this region. The market of Brazil alone is worth 9 billion US Dollars. The manufacturers in MERCOSUL are by now well aware of the competitivity and quality of our bulk drugs. These have started coming regularly. But export of finished formulations is somewhat difficult. It involves registration which takes considerable time. However, some of the importers who have registration in their names import almost-finished items from India. There is definite scope to increase our exports of finished formulations if our exporters intensify their promotion campaign.

Our exports of chemicals, dyestuff, yarn (both cotton and synthetic), fabrics and other such inputs for MERCOSUL industries have started increasing steadily. MERCOSUL manufacturers import these from India as part of their efforts to reduce the local cost of production. We can get a significant share of the MERCOSUL market for industrial inputs, with adequate export promotion from our side.

Indian exporters have no more excuses to ignore MERCOSUL area any longer. The following excuses held out in the past are no longer valid:

Past Stereotype Present Position

Political instability - become stable now

Economic crisis - no longer

Inflation - has been controlled

Currency fluctuations & - stable currencies now changes

Absence of direct shipping - Now there is direct shipping service service

South Americans were not - Now they are getting to know about responsive to Indian trade Indian products and are willing to try. Enquiries

Distance is a problem - No longer true after the revolution in communications and internet. There have been cases of business transactions after Indian companies were spotted in the ‘internet’ by the MERCOSUL companies.

Language is a problem - Software is now available for US Dollars 200 for quick translation of business correspondence between English, Portuguese and Spanish. It should be noted that even with the least interaction in the past, MERCOSUL citizens have by and large admiration for Indian civilisation, culture and spiritualism. There are a lot of followers of Hare Krishna Movement, Saibaba and other gurus. Yoga is popular in all the cities of MERCOSUL. However, the knowledge about India’s industrial achievements and export capabilities was very little in the past. But this is changing now. MERCOSUL businessmen have started looking at India as a source of supply of not only traditional items but also industrial products such as equipments and machinery, computer software, transportation items etc. Prejudice against and ignorance of India is declining. India’s achievements in scientific research, nuclear energy, space research and computer software are well known among MERCOSUL businessmen and decision makers. These augur well for our exports.

In the past, MERCOSUL importers were importing Indian goods through Europe and Florida. But now they have started dealing with Indian suppliers directly.

The only disadvantage arising out of MERCOSUL integration for our exports is that we will not be competitive in those items which MERCOSUL countries supply to each other. For example, we are interested in export of rice to Brazil. While our exports attract a tariff of about 20 per cent, Argentinian and Uruguayan rice enters Brazil duty free.

Shipping

One of the main problems faced by our exporters to South America earlier was lack of direct shipping service. Transhipment caused delays and added to the freight cost. Fortunately, this problem has been solved. "United Arab Shipping - Clipper" Shipping Company has started in 1995 a regular direct shipping service between Bombay and the Brazilian Ports of Santos (70 km from Sao Paulo. It is the largest Port in South America), Rio and Itajai (a small port in the Southern State of Santa Catarina).Their ship leaves Bombay every 20 days and takes only three weeks to reach Brazil after touching Durban in South Africa. The same ship calls at Buenos Aires and discharges cargo for Paraguay at Itajai (Brazil). This shipping service is a great boon to our exporters. The shipping company is happy with the volume of cargo and is open to increasing the frequencies of services when demand increases.

The opening up of South Africa has reduced the distance, cost and time involved in transhipment.

India’s Trade with Brazil

The trade between the two countries was US$ 366 million in 1996.

The low level of exports from India to Brazil until 1993 was due to the fact that our exporters did not take interest in the Brazilian market since Brazil was afflicted by hyper-inflation, volatile exchange rates, restrictions on imports and general economic instability. However, these are now things of the past. The Brazilian situation has dramatically and fundamentally changed for good from 1993 onwards. This has been complemented by (i) the commencement of a direct shipping service between India and Brazil, starting from 1995, (ii) the establishment of the Consulate General of India at Sao Paulo, the business and industrial capital of Brazil and (iii) the successful organization of an exclusive Indian Trade Fair in Sao Paulo in November, 1996. The Consulate’s aggressive export promotion campaign is opening the eyes of the Brazilian business and industry who have started looking at India more seriously as a source of supply.

Exports to Brazil

The products which are being exported to Brazil are the following:

bulk drugs, pharmaceuticals, chemicals, agrochemicals, cosmetics, plastic products, naphtha, resins, dyestuff, essential oils, molasses. - tyres for buses, trucks and cycles. - garments, fabrics, yarn, raw cotton, carpets, jute fabrics. hand tools, machine tools, machinery for printing, packaging, plastic and rubber industries, industrial belts, metal products, pumps and construction material. - auto parts, automobile lamps, scooters, cycle parts. - electrical items such as lamps, insulators, circuit breakers. - handicrafts, incense sticks, sports items, leather. - castor oil, spices, coconut powder, sesame seeds.

• There is very good scope for export of railway equipments, computer software, components for computer hardware, herbal products including cosmetics, equipments for space research, textile machinery parts, tractors, rice (non-basmati), wheat etc. As the Brazilians get to know more and more about what they could import from India competitively, this list will expand further.
• Joint Ventures
• Kamani Engineering Corporation has formed (in October, 1996) a joint venture with M/s Shaheen Cury of Sao Paulo in the field of power transmission. The joint venture company will manufacture equipments and bid for projects in Brazil as well as in the rest of Latin America. Dr. Reddy Labs of Hyderabad is negotiating a joint venture with M/s Instituto BioChemica of Sao Paulo for manufacture of pharmaceuticals in Brazil. Some more Indian companies are also planning joint ventures in Brazil.

A Brazilian company Ceval has established a joint venture for production of soya oil in India. ‘Magic Company’ of Brazil has set up a joint venture factory in Bangalore in collaboration with Goloka Enterprises for manufacture of incense sticks for exports. COFAP of Brazil is negotiating a joint venture with Escorts to manufacture autoparts in India.

There are also possibilities for Indo-Brazilian joint ventures in third countries such as Angola, Mozambique and MERCOSUL countries.

Imports from Brazil

India imports the following items from Brazil : n Iron and steel products, copper and aluminium products. n Sugar, soya oil, cotton oil. n Compressors, X-ray films, electrical machinery. n Silk yarn, viscose rayon fibres. n Hides and skins, leather, resins, paper, chemicals, newsprint & lubricating oil. n Minerals, iron ore, precious and semi-precious stones.

India-Argentina Trade

Trade figures for the last five years are given below:

Main exports to Argentina are : chemicals, textiles and garments, two-wheelers, bicycles and parts, trucks, electrical and electronic equipments, rubber products, jute yarn and products, automobiles and parts, carpets, hand tools, essential oils, leather and leather products, ceramic products, imitation jewellery, iron & steel articles, etc. Items imported by India from Argentina are : Iron and steel products, soya oil, wool, leather, wheat, chemicals, tanning materials (used for leather tanning), wood pulp, textile & other machineries, petroleum and petroleum products.

An Argentine holding group, Lybra International, has joint ventures with Kedia Group and Oswal Sugar Factory, Ludhiana, in the field of sugar refining and potable alcohol. Another Indo-Argentine joint venture operating successfully since 1988-89 is Indo-American Chemicals Pvt. Ltd. This joint venture company, based in India, produces chemicals used in textile industry, with technical assistance from their Argentine partners. The Argentine partners of Indo-American Chemicals are currently negotiating a similar joint venture with M/s Pashupati Textiles. Hero Motors of India have formed a joint venture with their Argentine distributor, M/s Motomel S.A., for assembly of Hero Puch motorbikes in Argentina. An Argentine company, IMPSA S.A. is in the process of opening an office in India. They are tying up with the Modis to form a joint venture company. IMPSA have recently received a license from DoT for value added services in the telecom sector. The company is expected to invest around $ 200 million in India in the next 2-3 years.

India - Paraguay Trade

Major items of India’s exports to Paraguay are : motorcycles, scooters, cars, trucks, handtools, garments, fabrics and pharmaceuticals. Main imports are essential oils, transport equipments, tanning material.

There is a proposal to sign an agreement on trade and another one on promotion and protection of investment.

India - Uruguay Trade

Main exports of India to Uruguay are : scooters, motorcycles, parts for two wheelers, handtools, pharmaceuticals, garments, fabrics, leather and leather products. Main imports are : raw wool, leather, organic chemicals, ores and metal scrap.

Indo-Chilean Trade

India’s exports to Chile include Maruti cars and Hero motorcycles, besides the traditional items. Important items of imports are : copper, paper pulp, minerals, chemicals, non-ferrous metals and dyestuff and tanning materials.

Indo - Bolivian Trade

India’s exports to Bolivia include garments, vaccines, jute bags, steel tubes, autoparts, motorcycles, tyres, cycles etc. India’s imports from Bolivia are : raw wool, non-ferrous metals, chemicals and leather.

PART - V

ACTION PLAN

The Government of India, Export Promotion Councils, Chambers of Commerce and Industry, institutions such as EximBank, ECGC, and the exporters of India need to recognise and take note of the importance of MERCOSUL, a large and promising market for our exports. We cannot afford to ignore South America any longer. We need to take a fresh look at South America in the context of the political stability and economic growth brought out by MERCOSUL. If we enter the MERCOSUL market seriously at this formative time we would be able to significantly increase our exports to this region as a whole. We need to formulate a strategy for exploring the opportunities offered by MERCOSUL. Following are some suggestions for action.

Action by Government of India

We need to establish a political dialogue with MERCOSUL, who could be a useful ally in international fora. During the UN General assembly Session in 1996, the External Affairs Minister of India had discussions with the MERCOSUL Foreign Ministers. Such political dialogue may be institutionalised on a regular basis.

We may consider signing a Framework Agreement on cooperation between India and MERCOSUL. This Agreement could be in the lines of Indo-European Union Agreement. The Agreement could be in three parts : (i) political dialogue (to be done annually at New York), (ii) trade, and (iii) cooperation in other areas. In the commercial part of the Agreement trade issues, barriers to trade, registration of India’s export items to MERCOSUL, phytosanitary requirements for agro-products etc. could be discussed. A Joint Indo-MERCOSUL Commercial Council consisting of Government and private sector could be formed. It could meet once in a year or 18 months to review trade and related issues. The third part of the Agreement could deal with harmonisation of technical standards, investment, joint ventures, avoidance of double taxation, cooperation in science and technology etc.

Indian businessmen have difficulties in getting visas to MERCOSUL and Chile. These countries givs visas valid only for 3 months. We have to persuade these Governments to give longterm multiple entry visas.

Seminars and workshops need to be organised in India to sensitise our business community about MERCOSUL and the opportunities it offers to them. Initiatives for this could be taken by MEA or Commerce Ministry and it could be done in collaboration with ICRIER, IIFT or Chambers of Commerce. Secretary-General of MERCOSUL and some experts of MERCOSUL could be invited for these seminars.

For most of the MERCOSUL importers, imports from India is a relatively recent experience. It is a trial period for them and for us. It is in this period that we need to intensify our export promotion and maximise our efforts. If we do this over the next three years or so, India’s name would register deeply in the minds of the MERCOSUL importers who would thereafter consider India as a regular source of supply. In order to intensify our export promotion campaign, the support of Commerce Ministry, Textile Ministry, etc. are needed. Macro-level support and push by the Government of India will help in creating an impact in MERCOSUL and complement the export promotion of sectoral items and microefforts by the exporters.

Journalists from the business dailies and magazines of MERCOSUL should be invited to visit India. Such visits to India by Brazilian journalists in 1996-97 contributed greatly to our business image here.

Even non-commercial events could be considered for raising our image and profile in MERCOSUL. For example, a ‘Festival of India’ could be organized in MERCOSUL. While this may not result in immediate export orders, it will enhance awareness about India and bring longterm dividends for our exports.

Action by Missions

Formal contact should be established with the MERCOSUL Secretariat at Montevideo.

The Missions in Brasilia, Sao Paulo, Buenos Aires, Santiago and Lima (for Bolivia) need to interact more with each other and share information and assessment on a continuing basis on the developments in their countries which have bearing on our exports. The Missions should evolve strategies to promote our exports to the MERCOSUL as a whole. They should identify strengths and advantages of particular regions, commodities and contacts which would help in the promotion of our exports. For example, there are certain importers in Sao Paulo who have the facilities and willingness to market Indian products throughout MERCOSUL region. The Missions could meet once in six months and the reports of the meetings could be sent to the Ministries concerned and Export Promotion Councils in India.

The Missions could prepare sectoral studies for the promotion of important export items. The Missions could also coordinate promotional measures such as organisation of BSMs, visit of delegations and participation in trade fairs.

Action by non-Governmental bodies

The Indian Institute of Foreign Trade and EximBank could consider doing more professional and detailed studies of MERCOSUL and survey prospects and implications for our trade.

The apex Chambers of Commerce and Industry in India should establish and strengthen ties with their counterparts in MERCOSUL countries and exchange delegations and information.

The State Bank of India should consider converting its representative office at Sao Paulo into a full-fledged branch for activities in MERCOSUL and in the whole of South America. (The proposal has already been sent to State Bank of India.)

EximBank should consider extending lines of credit to promote export of our capital goods to MERCOSUL. EximBank could also consider establishment of an office in Sao Paulo to cover South America.

ECGC should re-evaluate their risk rating for MERCOSUL countries and consider reduction of their premium which is said to be high.

Indian academic institutions studying Latin America and teaching Spanish and Portuguese should be encouraged to have exchange programmes with their counterparts in MERCOSUL.

Action by Export Promotion Councils

Export Promotion Councils (in particular EEPC, Chemexil, Capexil, AEPC, Texprocil etc) should carry out market surveys for the important items of exports to MERCOSUL. The following items could be considered for market surveys :

Garments, fabrics, yarn, made-ups, pharmaceuticals and bulk drugs, chemicals, two wheelers, autoparts, machine tools, equipments, machinery, railway equipments & computer software.

The EPCs and our exporters should consider participation in the international fairs (there are over 50 sectoral fairs) in Sao Paulo, which has the largest fairs in the whole of Latin America. Traders from MERCOSUL countries and other parts of South America participate in and visit these fairs.

Exclusive sectoral trade fairs in the case of items such as carpets, handicrafts, etc. could be organised in Sao Paulo and Buenos Aires.

AEPC could organise Fashion Shows in Sao Paulo, Buenos Aires and other cities to popularise Indian garments and fabrics.

AEPC has posted at the Consulate Office in Sao Paulo a Marketing Officer for garments and textiles. This officer covers the whole of South America besides MERCOSUL. Other EPCs such as EEPC should also consider establishing such offices. The office of the Consulate General of India at Sao Paulo has adequate space to accommodate such offices.

Action by exporters

Export and trading houses and large exporters could consider setting up marketing offices in MERCOSUL area. A resident marketing office can interact closely with importers and significantly increase exports. This is the experience of companies such as Modi, Torrent and JK. Sao Paulo is the most convenient location to penetrate the MERCOSUL market. Sao Paulo city is the centre of MERCOSUL with large business houses having MERCOSUL-wide activities, convenient flight connections etc. The GDP of Sao Paulo State itself is about 250 billion US Dollars, making the State as the fourth largest economy in Latin America.

Large exporters to South America could consider setting up of manufacturing / assembly units or joint ventures in MERCOSUL to get more market share for their products.

The Registration procedures in the member States of MERCOSUL are at present different. MERCOSUL plans to form a single registration authority. CHEMEXIL and our pharmaceutical exporters need to monitor this development and prepare themselves for the possible new situation.

Our exporters could consider establishing regional warehousing, storage facilities in the MERCOSUL area. From these facilities, they could supply to the whole of MERCOSUL as well as the rest of South America. This should be considered particularly in the case of raw materials and intermediates (such as bulk drugs, chemicals, dyestuff, yarn etc.) which go as inputs to industries. Through such regional stocking centres, supplies could be made quickly to the endusers and this will help in getting regular and more orders.