International Trade/Offshore Manufacturing/Sourcing/Export/Import/Consulting The MERCOSUR Link to Expanding Markets By Ed Arias After decades of failure to formalize and enforce trade agreements between the major countries in South America, MERCOSUR (Southern Cone Market), created by the Treaty of Asuncion in 1991, has succeeded, due to coherent individual open market policies and political stability among its members. MERCOSUR is the fourth largest regional trade zone after NAFTA, E.U. and APEC, and the fastest-growing regional market in the world. MERCOSUR's original members - Brazil, Argentina, Paraguay and Uruguay - have been augmented by the inclusion of Chile and Bolivia as associated members, and with other Latin American countries presently negotiating their association. The member countries are enjoying booming regional trade and investments in each other's markets due to clear policies and low tariffs between them, and a strengthening of their trade negotiating capabilities with other international trade blocs. MERCOSUR represents a single market of more than 210 million people; more than 50 percent of Latin America's GDP; two-thirds of the region's land area; slightly more than 51 percent of its industrial production and intra-regional trade; and 33 percent of total Latin American foreign trade. The importance of regional bloc cooperation is easy to identify when considering that NAFTA and MERCOSUR represent 96 percent of the Western Hemisphere's total GDP. MERCOSUR is the the second-largest customs union after the E.U. This liberalized the bulk of its reciprocal trade and introduced a common external tariff that varies from 0 to 20 percent for most goods. Even though there still exists a list of exceptions, primarily to protect small businesses or products not yet competitive, having achieved a tariff reduction scale for the totality of its tariff schedule is, in itself, an enormous achievement. The agreement allows the free movement of goods and services, and factors of production among member countries, establishing a CET (common external tariff) for third countries. The MERCOSUR Governing Body is the Common Market Council, composed by the Ministers of Foreign Affairs and Economy of each member state. The executive body is composed of 16 members, representing the Ministries of Foreign Affairs, of Economy and Central Banks. The Common Market Group has a permanent Secretariat based in Montevideo (Uruguay) and 11 working groups dealing with sectarian policies. The importance of MERCOSUR for the U.S. is reflected by the fact more than 55 percent of its exports to South America are concentrated in the four MERCOSUR countries. Between these countries, the establishment of trade agreements and preferential tariffs has resulted in an increase in intra-regional trade. In the case of Argentina, since 1991 it has tripled its exports to Brazil, being at present dependent on Brazil for a more than a desirable portion (30 percent) of its total exports. Cooperation Required Judging by recent developments, the integration process in MERCOSUR has made enormous strides and has reached a level of interrelationship and interdependency that not only suggests but requires cooperation between the member nations to provide for additional future progress. MERCOSUR, along with the establishment of sound democracies and open economic policies in the member nations, has created a new working environment for firms wishing to do trade, modifying the traditional financial know-how required to run a company during the region's hyper-inflationary period of the 1980s, to one of an experienced operational management team required to maneuver against global competition in a stable economy. The principal backbone of the policies supporting stability in the transition to an open economic market not only in MERCOSUR trade, but also for internal growth, as well as trade with countries extra-MERCOSUR, has been the two major countries' monetary exchange policy. Brazil with its "Real Plan" and Argentina with its "Convertibility Plan," have been able to lower their inflation rate comparable to that of the U.S., of no more then 1.5 percent yearly, while at the same time achieving high economic growth. The basic difference between the two countries' currency policies is that Brazil utilizes a crawling peg method, maintaining a 0.6 percent fluctuation spread monthly to correct for internal inflation or overvaluation of the real. Argentina, on the other hand, established its currency rate of 1 peso equivalent to 1 U.S. dollar, into a national law, prohibiting the federal reserve, central bank or executive branch from changing this rate, correcting over-valuation of its currency by periods of deflation and increased efficiency in industries and government spending. Both of these methods instill long-term confidence in markets that for years have had their exchange rates modified continuously to correct for incompetent economic and political decisions that produced rampant inflation. Both plans also rely heavily on: Strict fiscal control of expenses, in relation to their tax collection capacity; large foreign reserves to back the local circulating currency in case of a speculative financial run on its institutions, internally or by foreign factors; an increase in exports to offset the natural increase of imports due to the open market economy and the increase in the purchasing power of the local population; and an influx of foreign investments so as to increase foreign reserves and the privatization of inefficient state-owned companies. Even though most of these measures are reasonably under control, Brazil and Argentina still continue to have a deficit trade balance and a fiscal deficit problem, which is presently being covered by the increase of foreign investments or by loans through local financial institutions or international monetary funds. As long as the governments continue to maintain strict fiscal policies and there is an availability of funds from lender markets, the MERCOSUR trade bloc should be able to transition from its past history of instability to being a modern economic world competitor within the next few years. The present economic problems encountered by several Asian nations, and reflected in their stock markets, should not force the MERCOSUR nations to change their present economic or monetary policies, nor should it have a long-term effect on their presently fluctuating stock markets. We must, though, realize that the macro-economies of MERCOSUR nations are stable and predictable. The exchange rates can be successfully defended with solid reserves, and the prices have remained stable, indicating that the economies will continue to grow at a more than acceptable rate. If recent past history repeats itself, Brazil and Argentina may come out of this present speculative attack against their currency and economic policies stronger than before. During the Mexican currency crisis in 1994, Argentina was the Latin American nation most affected by the "Tequila effect," and its financial sector was its weakest link. A run on its financial institutions forced the government to defend its currency, driving the country into an unexpected recession. After this lesson, preventative measures were taken by the government, forcing weak financial institutions to merge or close down. Argentina has negotiated a standby $6 billion loan by a consortium of international banks, which can be tapped, in case of a similar threat to its financial institutions in the future. At present, the Argentine financial sector is much leaner and stronger, with large deposits in both the local currency and in dollars. All but one of the major national private banks are now controlled or have been fully bought out by foreign international banks, indicating the high interest and expectations of this sector in ArgentinaÕs future. The present speculative market fluctuations will surely be seen as a challenge to MERCOSUR members to redirect attention to the present weak points of there economies, which demand immediate political decisions and corrections, but do not represent a threat to their long-term economic models or open market policies. They must continue to grow by increasing their international trade, exporting through diversification of products and opening new markets. These are the main principles behind MERCOSUR and will surely bring many opportunities to internal and foreign investors wishing to participate in this endeavor. When this article was first published, Ed Arias was a partner with Broadview Consulting, Inc., in Alpharetta, Ga., a consulting firm specializing in Latin American markets. Advertise on this site Put your company on this site!