Much has been written about regional integration in the Americas either to praise its positive effects on the economic development of the countries involved or to criticize its shortcomings and opposition to free trade. These analyses tend to focus mainly on economic, trade or structural aspects, and tend to overlook the domestic and foreign factors that have influenced the evolution of the negotiating process throughout the last forty years.
These notes attempt to present a general view of the regional integration process during the last forty years in order to permit a better understanding of the regional integration negotiations and demonstrate that it should not be treated in isolation, but directly linked to the political and economic context of South America.
The last forty years, from 1959/60 until today, at the risk of running into gross simplification, can be divided into three distinct periods: the romantic phase, which began at the end of the 1950s and continued through the ‘60s and ‘70s, ending in the mid 1980s, the pragmatic phase, which began in 1985 and goes up to 1995, and the open regionalism period, from 1995 until possibly 2005.
During the romantic phase, actions and policies dealing with integration, whose final long-term objective was to form a common market in Latin America, were undertaken on a voluntary basis and expressed by rhetorical declarations of intention. These policies were devised and pushed forward almost conspiratorially by the domestic and multilateral bureaucracy, who did not always pay attention to the domestic realities of each country or to the prevailing circumstances on the international scene.
Import substitution was the name of the game and the period was generally dominated by economic policies of development directed to the domestic market, with lip service paid to liberalization of trade and the opening up of their economies to the world market.
The two Treaties of Montevideo (TM) of 1960 and 1980, which regulated trade relationships among South American countries plus Mexico, were negotiated during that period.
Their objectives, main features, and results are summarized in the following paragraphs.
At the end of the 1950s, Latin America experienced a period of downward trend and decline in its growth rates. After a large increase in reserves due to expansion of exports during the Korean War, the region then entered a period of great difficulties as regards balancing its payments and trade. The exports from the region were significantly reduced as a result of the deterioration of prices of raw materials and consequently the ability of these countries to import goods decreased.
The prevailing theories on foreign trade (Viner, Ohlim) called attention to questions relating to access to new markets.
In relation to Brazil, new legislation (law 3244, of 1957), which regulated the tariff system, introduced radical modifications in the system of foreign trade with taxes based on the value of the imported goods. The above law also recommended a revision of bilateral or multilateral trade agreements which, as a consequence, brought the need to review the tariff positions negotiated in GATT.
In the regional bilateral field, trade agreements negotiated with Argentina, Chile, and Uruguay in 1940, 1943, and 1936 respectively, which represented more than 50% of exports and more than 70% of imports between Latin American countries, had to be reviewed as well.
In this context, theories of economic development, first introduced by the experts of the United Nations Economic Commission for Latin America (ECLAT), led by Raul Prebisch began to gain influence. The countries in the region gradually began to accept that an economic development model based on import substitution would stimulate the creation of new industries. Along with this import substitution theory arose the idea that the limitations imposed by small national markets would be overcome by a larger common Latin American market.
The establishment of the European Common Market, by the Treaty of Rome in 1957, made that set of ideas appear up to date and even possibly suitable for urgent adoption.
The Montevideo Treaty of 1960 (TM-60), which created the Latin American Association of Free Trade (ALALC), engaged the member countries in the setting up of a Free Trade Zone to be implemented in 12 years, and had as its final objective the creation of a common regional market. Initially signed by Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay, the TM-60 sought to expand the domestic markets and liberalize the interchange of goods.
These objectives were to be achieved by the elimination of protectionist practices and policies through multilateral negotiations on a product-by-product basis, through the lowering of tariffs and through the elimination of non-tariff restrictions. The member countries of the Montevideo Treaty ensured that its clauses were compatible with the rules of GATT, Article XXIV in particular, which allowed exceptions to the cornerstone clause of the most favored nation.
Practical difficulties began to emerge, mainly due to the fact that the regional integration process had to be achieved through a very complex set of multilateral negotiations. Additional difficulties were also due to the lack of flexibility in the main clauses of the Treaty, the overly-ambitious objectives it established, the opposition of the private sector, and last but not least, political problems, as a consequence of the gradual dominance of authoritarian regimes in nearly all the countries of the region.
The attitude of the United States Government towards regional integration at the time reflected, to say the least, a clear ambiguity. Without directly opposing the idea, Washington vaguely referred to the “common markets”, and to the Monrovian idea of hemispheric integration. The Alliance for Progress Initiative (1956), proposed by the US Government, made no reference to regional economic integration. It was as late as the end of 1961 that the US Government finally showed a positive reaction to Latin American integration. However, as far as financial cooperation with integration was concerned, it continued to show itself to be reluctant right up to 1965.
These difficulties led to rising frustrations and conflicting interests in the implementation of TM-60 and in the functioning of the newly created ALALC.
The TM-60 was basically a mechanism for liberating trade between Argentina, Brazil and Mexico. Medium-size and less-developed countries of the region saw the trade agreement as an instrument to complement their economies, ideally through the reciprocity of benefits and to stimulate each individual economic development through a fair distribution of new industry and investments throughout the region.
The difference in perceptions between free traders and followers of the import substitution model lies at the heart of the inception and formation of the first regional trade subgroup, the Andean Pact.
To maintain the cohesion of the eleven member countries of ALALC (Colombia, Ecuador, Venezuela, and Bolivia joined the Treaty in ‘61, ‘61, ‘66 and ‘67 respectively), a number of attempts were made. One of these efforts was the initiative, in 1965, led by the President of Chile, Eduardo Frei, and the President of the Inter-American Development Bank (IDB), Felipe Herrera, to accelerate the formation of a regional common market. A proposal to form the Latin American Common Market within 15 years, beginning in 1970 was drawn-up at a meeting of the American Chiefs of State and Governments in Punta Del Este in 1967. At that time, a regional system of financing and payments was also established through the Reciprocal Credit Agreement, which was beneficial to all member countries of ALALC. This agreement established a clearing mechanism of payments among the ALALC countries of the region that has played a prominent role since then in stimulating regional trade, especially during the acute difficulties of the period of the debt crisis in the early 80’s.
Failure to overcome the different perceptions and the stagnation in trade in the context of member countries of ALALC led Bolivia, Chile, Colombia, Ecuador and Peru, without formally abandoning the Association, to form an Andean regional subgroup through the negotiation of the Sub regional Integration Agreement of Cartagena of 1969 (later in 1973, Venezuela joined, and in 1976, Chile withdrew).
At the beginning, the Andean Group developed into a relatively dynamic trade integration organization through the establishment of a program which included lowering import duties, a minimal common external tariff and incentives for foreign direct investment. The Andean Group tried to transform itself into an organization to promote the financing of industrial development, with a view to make up for the relative handicap of the smaller countries because of their specialization in given areas and industrial plants distribution among the member countries.
Although the new sub group added, at the time, a more dynamic element to the commercial exchanges among the countries in South America, regional integration negotiations went through a period of crisis at the end of the 60’s. This was a consequence of the lack of governmental and entrepreneurial support.
In 1969, in an attempt to increase reciprocal trade to regain support for regional integration, ALALC member countries decided to revive the idea of the creation of a regional Free Trade Zone and scheduled December 31ST, 1980 as the date for the achievement of this goal.
During the 1970s, there were no major changes in the integration movement deserving of any mention. The growing difficulties impeding progress in the trade discussions in ALALC, together with the stagnation of multilateral negotiations, on a product by product basis, were further aggravated by the priority given by the member countries to their own national economic development projects and by the political-military and economic trade rivalries between the countries of the region, especially between Argentina and Brazil.
At the end of the 1970s, the Latin American countries had a clear perception that the integration process, as foreseen in TM-60, was out of date. The first petroleum crisis, in ‘78, and the beginning of the process of external indebtedness, in ‘82, emphasized the vulnerability of the South American countries and forced them to make their extra-regional interests prevail above the integration process. Thus, international economic factors determined to a large extent the attitudes of the member countries of TM-60 from the late 1970s up to the second half of the ‘80s.
The conditions of this period, including the growth in the world economy and the expansion of regional exports, as well as the abundance of foreign financial resources flowing into the region, all served to make the Latin American economies more dependent on the international market. This led to less ambitious goals regarding economic integration, greater individual flexibility, and no fixed time frames for the eventual goal of forming a regional common market.
As a result, ALALC member countries decided to restructure the organization with a view to adapting it to the situation prevailing in the region at the time, without trying to repeat the previous mistake of setting unrealistic goals, which would not be fulfilled, as had been the case throughout the last 20 years of the Association. Yet this should not be construed as recognition of collective failure in this endeavor.
Member countries of the TM-60 understood that to form a common market a long and difficult process of negotiations was necessary. They realized that a common market was not feasible at that time due to the impossibility of setting up regional programs and mechanisms to stimulate national or sub regional economic development plans. The natural conclusion was that they had to focus on a not over-ambitious target of an intermediate stage in the integration process.
South American countries instead of arriving at a common market through a free trade zone, as was forecast in the Treaty, decided that the way to reach the goal of integration in a more realistic way would be to gradually establish a preferential tariff area.
Rigidity of ALALC multilateral negotiations had to be adapted to a more flexible system of bilateral agreements, allowing also for the possibility of agreements between groups of countries, Member countries even left the door open to eventual multilateral agreements involving all the member countries.
The Agreement of Cartagena, in the 1970s, went through a serious crisis leading to a virtual standstill of the instruments and mechanisms of the trade agreement. Andean countries, in the midst of a rapid deterioration of their respective domestic economic situations, were unable to reach agreement, particularly about a common external tariff, the industrial sector development program, and the handling of foreign capital. Artificial formulas and exuberant integration rhetoric were not enough to overcome difficulties, as past experience had already demonstrated.
Negotiations were very frequently made extremely difficult due to the negative attitude of the countries of the Andean Group. With great difficulty, and not without political hazards, some countries, especially Brazil, succeeded in dismissing most of the Andean proposals aimed at reducing the importance of the trade organization.
The main Brazilian objective was to transform ALALC into an instrument to enhance regional trade as a complement to domestic efforts to increase foreign trade with the rest of the world.
For Brazil – and for all other countries of the region – regional integration should not be seen as an end in itself. Although there was no intention to transform fundamentally the regional trade organization, its member countries were prepared to improve its mechanisms in order to foster exports, especially of manufactured goods, but not to change its main objective to create a Common Market, not a limited Free Trade Zone
In this context, the Treaty of Montevideo was signed in 1980 (TM-80), which created the Latin American Integration Association (ALADI), as a successor to ALALC. This new association inherited a historical legacy of trade negotiations as well as inhibitions and frustrations, which have not been overcome in the last twenty years.
As was clear in 1960, strong protectionist tendencies remained, rooted and originating in the import substitution model. The petroleum crisis of 1979 and the problems due to the foreign debt, especially after the Mexican Moratorium in 1982, showed that these crisis situations demanded dramatic efforts on the part of all countries of the region to increase exports and reduce imports in order to generate positive balances of trade.
As a consequence of this situation, the TM-80 considered regional integration to be a matter of secondary priority, and put emphasis on the individual interests of the member states. Multilateral trade agreements were limited so as to allow countries to preserve their decision-making powers and to favor their relationship with developed countries.
lntertrade among ALADI member countries, which despite its constraints and difficulties had reached the highest level in its history (US$ 24 billion) in 1981, was significantly reduced as the decade continued, only to recover to that amount in the early 90’s.
The long-term objective of the TM-80 was preserved. No firm commitment however was accepted to fix a date for the completion of the Latin American Common Market. The TM-80 established a regional plan to promote and regulate reciprocal trade and to advance economic development cooperation through the formation of an area of trade preferences as an intermediate step towards the common market.
This more flexible trade agreement regulated the negotiations of bilateral agreements, or agreements between groups of countries, recognizing the limitations of the region at that moment. Nevertheless, it included, in its general principles, the concept of convergence, that is to say, the gradual multilateralization of trade, even if in a more limited way.
The reasons for the partial failure of regional integration negotiation based on the TM-80 and on ALADI, whether structural or technical or domestic or due to foreign policies, still persist today, even though they are less relevant in certain aspects due to the changes included in the agreement (flexibility, bilateralism, and convergence).
The TM-80 kept an added emphasis on trade, using negotiations for tariff preferences and the elimination of non-tariff restrictions as an instrument for trade creation or trade deviation. These two elements had proved not to be sufficient to stimulate intra-regional trade over the last twenty years.
Sweeping changes took place in South America in the beginning of the 1980s. In the political area, authoritarian regimes gradually gave way to democratically elected civil governments. Trade and economic relations among countries in the region have developed in a paradoxical context of no liquidity of resources with a trend towards neo-liberal policies geared to the opening up of the economy.
Short-term economic difficulties, a result of the foreign debt crisis, brought with them strong anti-trade integration barriers, due not only to the lack of financial resources (30% of Latin American exports were committed to the repayment of foreign debt), but also due to the adjustments approved by the Governments and international financial institutions, creditors of all the countries in the region.
This fact had, among others, two consequences with direct influence on the integration process: the formation of large trade surpluses (through the shrinking of imports, particularly affecting those of the region), and the opening up of the economies through successive reforms of the tariff system in almost all the countries as well as the liberalization of trade with markets outside Latin America.
The deterioration of the foreign debt crisis during that time affected other areas, which had a direct impact on the integration negotiating process. There was a general increase of non-tariff restrictions.
The substantial reduction in foreign direct investments made it difficult for the countries of intermediate development (Chile, Venezuela, Colombia, Peru, and Uruguay) and those of lesser development (Ecuador, Bolivia, and Paraguay) to expand their exports to the countries with the largest market in the region (Argentina, Brazil and Mexico).
Additional difficulties include the macro-economic disorder in almost all the countries of the region and a rising uncertainty as regards trade in these countries (due to the instability of prices, oscillation of the exchange rates, and changes in internal regulations). Loss of competitiveness as a result of the out-dated technology in industry, and finally, difficulty in articulating trade and economic policies between countries or groups of countries completed the bleak picture of the region.
In 1985 ALADI member countries attempted once again to re-launch the integration process on a regional level through a Regional Round of Trade Negotiations.
In 1987, through the Quito Protocol, the countries of the Andean Group recognized the failures of the Cartagena Agreement and decided to adopt greater flexibility as regards the mechanisms of the agreement and time schedules for the entry into force of measures, which gave a more realistic approach to the common effort. The Andean Group decided to cut the tenuous links that it had maintained with ALADI, thus making them the first South American subgroup outside the TM-80.
The romantic phase was ending as it began, with resounding rhetorical declarations, ambitious projects through the establishment of multilateral trade preferences, the elimination of intra-regional trade barriers (Agreement about the Regional Tariff Preference), and substitution of the third world countries imports for products from the region (Agreement about Trade Expansion Programs).
Meanwhile, the seeds of a new phase in the integration negotiating process were being sown.
The conditions prevailing in 1985/86 are substantially different from those, which existed in the previous 25 years.
Having exhausted its potential for most of the countries of the region, the import substitution model left behind a series of economic distortions and old-fashioned conceptions whose negative effects were heightened by the emergence of neo-liberal tendencies. Authoritarian regimes were replaced by elected governments and concrete efforts were made by governments to redress the defensive and confrontational attitudes among countries of the region.
A period of intense political communication at the highest governmental level began. Ending a historical legacy of weak relationships with Spanish speaking countries of the region, the Brazilian government for the first time accepted to join political groupings, such as the Cartagena Consensus (1984) and the Support Group for the Contadora Group (1985), which later became the Rio Group (1988).
The second period of the regional integration process – the pragmatic phase – began.
The debt crisis of 1982 had made clear to the governments of the region what the limits were of their political will towards integration. It forced them to adjust their policies to the needs of the moment and, in doing this, to discuss ways and means to further the project of regional integration according to their economic and political possibilities. Moreover, changes in the world scene engendered the danger of a growing political and economic marginalization of the Latin American continent and introduced new factors in the regional environment. A renewed interest for “active interdependence” among countries of the region, in a context of growing international openness and liberalization of the domestic economy began to emerge.
Within this context, after many years of reciprocal mistrust and confrontation, democratic civilian governments in Argentina and Brazil in 1985 decided to engage the two countries in a genuine economic integration process, not tied down by traditional regional multilateral negotiations, but which would be inspired by the determination to deepen the limited cooperation that already existed between the two economies.
In November of 1985, Presidents José Sarney and Raul Alfonsin signed the Declaration of lguaçu, strengthening mutual confidence in the nuclear and non-proliferation area. In July 1986, the Brazil-Argentina Program of Integration and Economic Cooperation, with its 12 protocols, and later 24, was signed.
The Brazil-Argentina program was based on the principles of gradualism, flexibility, equilibrium and symmetry. With it both countries adopted a well-defined integration and cooperation strategy, different from the past. There was closer industrial cooperation in sectors whose dynamic inter-dependence was viewed as central for the integration process. Many of these industrial sectors, such as the production of capital goods, the aeronautical industries, and nuclear energy, had already a high technological content, while others were more traditional.
The economic integration process between Brazil-Argentina gained momentum around November 1988 when a more comprehensive Integration Cooperation and Development Treaty was signed. Its main objective was to lay the bases for the creation of a common market within ten years through increasing the elimination of tariff and non-tariff barriers and the gradual liberalization of bilateral trade.
In July, 1990, in a rather optimistic display of political will, Presidents Fernando Collor of Brazil and Carlos Menem of Argentina decided to speed up the economic integration process and established December 31, 1990, as the date for beginning the negotiations to form a common bilateral market with free circulation of goods, services, and factors of production.
The acceleration of the integration process between Brazil and Argentina generated an enormous political and economic impact, with immediate effects throughout South America. To avoid a dangerous isolation, Uruguay quickly tried to be part of the new sub regional context, following its persistent effort to join the two larger economies and main trading partners in the previous period of the negotiations between its two neighbors and principal trade partners. Shortly thereafter, Paraguay also joined in the effort to enlarge the common economic region both because of its geographical position and of the volume of its trade with the other three countries.
From the point of view of trade and regional integration, within a few months, the economic geography of South America has been transformed. A new sub regional grouping under the institutional umbrella of the Montevideo Treaty of 1980, but without the direct interference of the regional trade association (ALADI), was created.
As these developments took place, distinct groups of countries in the region, most of the time in an uncoordinated way, decided to negotiate trade liberalization agreements aiming at the establishment of free trade zones or customs union areas, inside and outside the region covered by ALADI (South America plus Mexico).
This was the case of the Andean Group, which was still having difficulties in achieving its goals and in following established policies. Heads of State and Government decided then to proceed in order to adjust it to reality and revitalize it.
In November 1990, it was decided to strengthen the negotiations among member countries and to set new goals and time frames for the gradual elimination of tariffs and the definition of a common external tariff.
The Southern Common Market (MERCOSUL), the Group of Three (Colombia, Mexico, Venezuela), the Free Trade Area (FTA) between Mexico and the five countries of Central America and the several bilateral agreements signed by Chile and Argentina, Mexico and Venezuela and by Venezuela with Argentina and Mexico were eloquent examples of the dynamism of the growing trade and economic links among the countries of the region.
The concept of a FTA, which acquired renewed vigor with the free trade agreement between the United States and Canada in 1987, was by then more effective than ever due to the Mexican decision to negotiate a trade agreement with those two countries, and also because of President George Bush’s Initiative of the Americas proposal, which included the idea of building a FTA from Alaska to Tierra Del Fuego.
The regional integration process, at the beginning of the 90’s, had been helped by the reduction of the barriers to free trade as a result of the liberal policies adopted by all the countries of the region. It showed more realism in the negotiations and converging objectives, which clearly distinguished it from the previous periods.
The new trade agreements focused the negotiations on a program of trade liberalization, through the gradual linear and automatic tariff reduction, the elimination of non-tariff restrictions, the sectorial coordination of industrial policies, coordination of the macroeconomic policies, and common external tariffs.
The concept of integration became more comprehensive to include areas other than trade and more active with the participation of new actors, such as economic agents, workers, politicians, and consumers. This new trend opened the way for the formation of sub regional trade groupings (MERCOSUL, Andean Group, G-3) which would play a much more coherent role towards the end of the ‘90’s.
At this point, three aspects of the regional integration negotiations deserve mention.
Firstly, the peculiar situation of Mexico. As Mexico signed the North America Free Trade Agreement (NAFTA), without withdrawing from TM-80 it failed to comply with article 44, which formally determines automatic extension to all the member countries of the concessions, preferences and advantages received or granted to third parties outside the region. The Mexican government, showing great consistency, since it has held the same attitude for the last forty years, enforced a pragmatic and balanced attitude by not giving up its links with Latin America and the trade advantages it gains due to the Montevideo Treaty, while, at the same time, it strengthened its privileged trade links with the United States and Canada.
Secondly, the role of the regional trade organization, ALADI. The proliferation of regional subgroups, especially MERCOSUL, and the dynamism and direct negotiations among the four member countries, put into question the role of ALADI, despite the repeated statements of political support on the part of the member countries. The existence of the institutional and bureaucratic structures in the Cartagena Agreement (Andean Group) and in the Asuncion Treaty (MERCOSUL), presented additional difficulties to ALADI in its search for a new role with a view to helping subregional countries in the direction of its long term objective to form a Latin American Common Market. Besides this more general aspect, the liberalization of trade policies with significant reductions of tariff and non-tariff restrictions in all the countries of the region, make the mechanisms included in TM-80 less efficient in creating or diverting trade as a consequence of the narrowing of the margins of preferences.
Thirdly, the decision to include Cuba as the 11th member country of ALADI. In fact, the political decision taken in October 98 puts an end to the formal trade and economic isolation of this Caribbean country, and, for the first time, extended the Montevideo Treaty to an extra-zone region.
Open regionalism which characterizes the present phase of regional integration embodies the negotiation of free trade agreements consistent with those of the World Trade Organization (WTO) and covers trade related matters.
These agreements changed the economic geography of the American continent with the creation of regional groupings (MERCOSUL, the Andean Group, the Central American Common Market, the Caricom), as well as sub-regional (South American Free Trade Area and NAFTA), and hemispheric grouping the whole continent such as the Free Trade Area of the Americas (FTAA).
In this context, special mention should be made of the Southern Cone Common Market (MERCOSUL).
MERCOSUL was formally created in 1991 when Argentina, Brazil, Paraguay and Uruguay signed the Treaty of Asuncion. Following a period of transition, the four countries created a customs union, which is the largest in the world, apart from the European Union. Today, this regional subgroup is as yet an incomplete customs union, with an average Common Foreign Tariff of 17%.
The Treaty of Asuncion, closely modeled on previous bi-lateral instruments views its constitution as having a long term objective of creating a common market between Argentina, Brazil, Uruguay and Paraguay (MERCOSUL), with the same mechanisms and conditions contained in the previous Brazil-Argentina bi-lateral free trade program, consisting of general rules regarding rules of origin, dispute settlement and safeguard clauses.
With the institutional structure defined, MERCOSUL was granted due legal status on the 17 December, 1994, by the Ouro Preto Treaty, when the common external tariff came into force.
At the same time, criteria were established for negotiating with other South American countries, which were members of ALADI. The process started in 1997 with Chile and Bolivia becoming associate members of MERCOSUL, and will be gradually extended to include the other members of the Andean Group (Venezuela, Peru, Colombia and Ecuador)
Taking a seven-year overview, since the signing of the Treaty of Asuncion, it can be seen that this exercise in regional integration has been a successful operation in terms of responding to trends of the globalization of the world economy.
Compliance with the international trade system represented by the rules of GATT/WTO in the development of the sub-regional integration process, represented by MERCOSUL, has ensured consistency of the provisions of Clause 24 of GATT with the modifications introduced by Clause 5 of the new accord that created the WTO.
Since January 1st 1995, MERCOSUL has become the first customs union to operate in the Southern Hemisphere with almost all its trade transactions (90%) being carried out with a zero tariff. It is still an incomplete customs union because some products will only be included in the Common External Tariff (CET) when the Adaptation Regime ends in 1998 and when the CET is unified in 2001 (automobile industry and capital goods) and 2006 (the information technology and telecommunications sectors).
The following figures illustrate the importance of the regional subgroup within the context of the American continent: MERCOSUL represents more than 50% of Latin America’s GDP, 46% of inter-regional trade within the scope of ALADI, or 58% including Bolivia and Chile. It represents around 10% of Latin America’s total trade with the rest of the world, 45% of its population, covers 59% of the land area and accounts for 80% of investment in South America.
The Customs Union has become established as a political and economic reality and a factor of stability and differentiation in relation to other emerging economies.
Since the setting up of MERCOSUL and its satisfactory progress, the process of economic integration and the increase of political links between the countries of the South American subcontinent have acquired their own momentum, which to a certain extent had not been anticipated.
In this respect, taking a historical panorama of the last forty years since the Treaty of Montevideo and the emergence of the ALALC, it would be no exaggeration to consider MERCOSUL as a landmark: the regional integration process can be classified as being before or after the Treaty of Asuncion.
MERCOSUL has played an important role as a promoter of economic, commercial and investment growth in relation to the four member countries. In 1997, South America turned in its best economic performance in recent decades: the growth-rate was at its highest for the last twenty years; inflation was the lowest for the last fifty years whilst the flow of investment was at an all-time high.
The rapid and dramatic upturn in trade within MERCOSUL, climbing from US$ 4 billion in 1991 to US$ 18.8 billion in 1997, has contributed to the consolidation of the trade liberalization process throughout the region and has highlighted some limitations that exist in all countries, particularly in relation to competition and infrastructural areas.
The focus of intra-MERCOSUL trade is between Argentina and Brazil. Between 1990 and 1997 trade grew by around six-fold. Argentina’s exports to Brazil increased by more than 360% whilst Brazilian exports to Argentina went up by more than 620%.
On the political front, the greater closeness and confidence generated have transformed the spirit of confrontation of the sixties and seventies into one of increasing cooperation. Political stability has come to be seen as a valuable asset, leading naturally to the laying down of foundations for the consolidation of democracy.
The inclusion of the democratic clause in 1996 following the European Union model, showed the importance conferred by the member countries on political stability, which became a precondition to full MERCOSUL participation.
The borders that previously separated and divided the nations have become poles of attraction for investment and co-operation. If NAFTA has changed the face of economics, MERCOSUL has changed the geo-politics of the region.
Physical integration (roads, bridges, ports and waterways improvements) and energy integration (natural gas, oil, water, electricity) are high on the region’s current political and economic agenda as a direct result of advances in the process of trade integration accelerated by MERCOSUL. The bi-national and multi-national infrastructural projects linking the countries of MERCOSUL and the rest of South America, are a pole of attraction for investment with the prospect of greater benefits for the countries and consumers of the region.
MERCOSUL’S expanded market has become a magnet for Brazilian and foreign investment which is rapidly spreading into the other countries. Increasing participation by the private sector made favorable by positive results from MERCOSUL is another relevant detail in the regional integration process. Until the mid eighties, there was no private business involvement and there was frequent opposition to regional integration. Nowadays, the expanded sub-regional market is included in the strategies of both Brazilian and foreign companies and intra-company trade is one of MERCOSUL’s commercial levers.
Therefore, in just seven years, MERCOSUL has become the binding axis for recent integrationist developments in South America and the promoter of one of the most important principles of the 1980 Treaty of Montevideo: the co-ordination and the convergence of the regional subgroups in a gradual and ordered manner, by means of the inter-actions of the sub-regional and bilateral agreements drawn up within the context of the Treaty.
Culture, environment, labor, social security, health, agriculture, transport and energy were all included in the negotiations, thus widening its scope and ambition.
The MERCOSUL priorities from 1995 up to the year 2000 are the firm establishment and the consolidation of the sub regional grouping. To strengthen it in the sense of negotiating common rules on services, procurement, competition, defense of the consumer; to consolidate it in the sense of making the common external tariff (CET) fully applicable, to phase out the rules covering exceptions to the CET, and to eliminate some of the special rules covering imports.
At the end of 1998, viewed from a more global angle, MERCOSUL has promoted the expansion of the region’s relationship with the rest of the world, exemplified by the agreements in progress with hemisphere partners (NAFTA, Central-American Countries and Andean Countries), with the European Union, Australia and New Zealand, with the Russian Federation, with ASEAN, China, Japan, South Africa, India, Canada and with Switzerland. Outside South America, the two most important negotiations carried out so far are firstly those taking place among 34 countries of the Hemisphere to form, by 2005, the Free Trade Area of the Americas (FTAA) and secondly the conversations with the European Union to start negotiations leading to the creation of a Free Trade Area between the two Customs Unions perhaps by mid 1999 when a summit meeting of Heads of State and Government will take place.
Taking into account Brazil’s great economic weight within the context of MERCOSUL, the Brazilian market has become the anchor of the South American economy. Including Chile and Bolivia, MERCOSUL represents 80% of the South American GDP, which explains why the dynamism of the Brazilian economy has come to influence the performance of all the countries of the region.
So in a relatively short period of time, the economic geography of the South- American continent has changed dramatically. A new economic and trade grouping was projected into the future and its force and influence will be strongly noticed at the beginning of the XXI Century.
Limitations and Constraints
Following a general overview of the progress of the integration process in Latin America during the last forty years, it is appropriate to sum up some of the main constraints and limitations, which have affected its evolution.
Throughout four decades, regional integration has never been a national independent project, influencing economic policies, for any of the countries of the region, despite official pledges and public statements in its favor.
Specific domestic conditions and political and economic factors in all the countries of the region always prevailed over technocratic and foreign policy objectives to develop and create a South American community culture. (Let alone a Latin American one).
For this reason, a permanent dissociation can be identified between the official rhetoric and the actual positions of the negotiators dealing with the formation of a regional common market through ALALC/ALADI, as established in the Montevideo Treaties of 1960 and 1980. While Foreign Ministries never tired of repeating the priority their countries gave to the economic integration process and to foreign trade, the sectors responsible for the internal implementation of foreign economic and trade policies maintained a prudent distance and cautious silence.
Additionally, special interest groups at national level never supported the idea of regional integration because they perceived it to be contrary to their particular and sectorial convenience and wished to preserve privileges such as state protectionist measures, subsidies, market reserves and others.
It would perhaps not be surprising to learn that out of this situation a permanent contradiction existed between the macro-economic policies of all the countries of the region and the agreed obligations in the context of the negotiations. The measures taken to gradually eliminate tariffs and the elimination of non-tariff restrictions were adopted by mutual consent of the member countries of ALALC/ALADI. These were also adopted, recently, by sub regional groups confronted with restrictive policies that stemmed not only from the economic development model based on import substitution, but also from the need to adjust the domestic economy as a consequence of the problems created by foreign debt and more recently to economic stabilization plans.
There is an additional element, usually neglected when the subject of regional integration is examined: the political factors. The co-existence of authoritarian regimes and democratic governments has been an obstacle to the regional integration process of negotiation. This was a constraint not only due to the resistance, mistrust, and rivalries which were exacerbated between countries in the region (Brazil-Argentina, Chile-Argentina, Venezuela-Colombia, Peru-Ecuador), but also by the attempt to implement national development projects, each based on the country’s capacity (national power), on the domestic market and industrial base, as well as by the combined military and ECLA jargon prevailing in the sixties and seventies.
The lack of interest among state-owned companies and private agents looking for trade opportunities in developed country markets, kept them misinformed and incredulous of the potential of the regional markets. One of the consequences of this attitude was the opening up of the region to multinational corporations, under the mechanisms of liberalization of trade, as established in TM-60 and 80. Another result was the emergence of the perception that governments did not want to seriously engage in regional integration negotiations because they were seen as favorable to the interests of foreign companies.
Perspectives
At the present moment, almost all resistance to the regional integration process has disappeared.
In the political area, after many years, all South American countries are, for the first time, led by democratically elected governments. This has generated a unanimous political will from governments, resulting in decisions leading to concrete actions and practical measures from the administrations of each country. Step by step, a growing coordination between the Economic and Foreign Ministries allows government rhetoric to fuse with government actions in relation to regional integration.
On the other hand, the exhaustion of the import substitution model and a generalized trend towards the introduction of liberal principles and policies in the countries of the region has allowed a convergence of actions leading to the enhancement of regional integration. The opening up of the economies due to the reform of the tariff system and the substantial reduction of non-tariff restrictions explains the radical change that occurred and is at the origin of the agreements made by the regional subgroups.
The negotiations taking place both inside ALADI, but mainly among countries in the region, dealing with issues such as the common external tariff, reduction of trade barriers, services and incipient coordination of macro-economic policies, will give the measure of the real interests of the governments and thus the possibility of making progress, after nearly fifty years. The emergence of regional subgroups, each with its own time frame, but with convergent goals and policies, especially the long-term political objective of forming an integrated South American region, is an asset for the integration process today.
The fact that the Latin American integration process has evolved within a context of a general opening up to the international economy poses an important question for the future: Would it be possible to open up the domestic economy and promote its insertion in a dynamic world market economy and at the same time strengthen regional integration? South American countries appear to have chosen to follow both options. It remains to be seen how to make compatible, or at least not contradictory, policies enforcing liberal economic principles with regional integration policies.
The opening up of the regional economies to the world market (essential to increase competitiveness, modernization, and the attraction of foreign investments), for instance, should take place within limits that will allow the preservation of margins of preference in favor of the countries of the region in order to ensure access to regional products.
Results of regional economic and trade integration are impressive and provide stimulus for future growth. This will influence the way in which economic and trade relations in South America will progress in the XXI Century. In the last ten years, intra-ALADI trade has consistently grown. In 1997 it represented 18% of the trade of member countries with the rest of the world. This trend appears to indicate that these flows of trade will continue to follow a dual track for two reasons: the search for a growing competitive place in the world market, as a pre-condition and dynamic factor for the modernization of production, and the difficulties in getting increased access for their products in the world market leading to an enhancement of the trade liberalization agreements within the region. These two sides of the same coin, global and regional, are complementary to respond to the present challenge: the enlargement of markets as a tool for modernization and the enhancement of efficiency in a world permanently becoming more competitive.
In this context, the motivation of policy makers for regional integration has undergone a radical transformation. Originally perceived as an instrument to defend the countries of the region against foreign competition, today it is perceived to be an additional factor which would lead South American economies to be better placed in the international market.
Finally, the regional economic integration process will have to live with domestic and world uncertainties deriving not only from national economic adjustments and the stabilization policies under way in every South American countries, but also from the transformation of the world economy.
Within this context, as we approach the Millennium, regional integration in South America will, to a large extent, depend on the response the countries of the region provide to the daunting challenges facing the area in the last years of this century: the negotiations with 34 other countries in the hemisphere leading to a Free Trade Area of the Americas, including the USA, by 2005 and the political, economic and social consequences of the world financial crises which, starting in Asia, contagiously affected South America and Brazil in particular.