Transcript Brazil - Babson College

March 1991
“The American Dream is
becoming a reality.”
Carlos Menem
Former President of Argentina
As presidents of Argentina, Brazil, Paraguay and
Uruguay sign the treaty to form Mercosur
March 2001
“On March 26th, a small and rather sad
ceremony took place outside Mercosur’s
headquarters in Montevideo. A few officials
gathered in autumn drizzle to raise the trade
block’s flag to commemorate the tenth
anniversary of the founding treaty. None of the
leaders of the member states turned up. Even
Uruguay’s president felt unable to travel the five
kilometers from his office to take part.”
- The Economist 3/31/01
Mercosur: From Here to Where?
Gracie Alcid, Alexa Hall, Stacia Huddleston,
Atul Pahwa, and Michael Schultz
The Objectives of Mercosur
To improve the economies of member countries by
making them more efficient and competitive
• Enlarging markets
• Improving
communications
• Coordinating
macroeconomic policies
• Harmonizing different
sectors of the economy
The History of Mercosur
• 1970s
Uruguay and Brazil Commercial Expansion Protocol
(PEC)
• 1980s
Argentina and Brazil sign 24 bilateral trade improvement
protocols
• 1990
Uruguay and Paraguay signal intent to join new trade
federation
• 1991
Treaty of Ascunsion signed by four countries creating
Mercosur
Mercosur: A Marriage of Unequals
• Brazil & Argentina
• 97% of the trade
• 210 million people
• $1 trillion in
goods/services
• Uruguay over
dependent on
Brazil/Argentina
• Paraguay lacks access
to ports
Destination of
Mercosur Exports
EU
Other
Intra Mercosur
US
Chile
Andean Community
Mexico
25.6%
25.9%
20.7%
18.4%
3.8%
3.8%
1.9%
1999 % of Total: 74.3bn
Analysis of Member Countries
Argentina
• Banking Crisis
• Frozen Economy
• Can Argentina’s
problems rescue
Mercosur?
• Rebuilding alliance
with Brazil and
Mercosur
No country can trap
itself in a single
relationship. In
foreign relations, I am
more for polygamy.”
-Argentinean Foreign Minister Carlos
Ruckauf
Analysis of Member Countries: Brazil
Current Economic Pressures
•
•
•
•
•
•
Energy Crisis
Slowing Global Economy
Political Instability
Exports Slowing
Domestic Savings Slim
Human Capital
Possible Solutions
• Increase both imports and
exports
• Overcome legacy of import
substitution
• Move toward integration
• Look to world markets
Analysis of Member Countries
• Uruguay
• Still recovering from
1999 devaluation of
Brazilian Real
• Relies greatly on
exports to Brazil &
Argentina
• COMISEC
• US Bilateral Trade
“Officially,
Uruguay has to
break its ties with
Mercosur if it is to
negotiate
separately with
the US.”
-Brazil’s Ambassador to
Argentina, Botafogo
Goncalves
Analysis of Member Countries
• Paraguay
• Primarily agrarian
• Poorest country in
South America after
Bolivia
• Political friction and
exiled former leaders
• Smuggling of exports
to Brazil & Argentina
Chile & Bolivia: Associate Members
Chile
• Free Trade and The Customs Union
• Chile wanted to maintain external tariffs lower
than those imposed by the Mercosur countries
• Chile’s tariff is applied evenly to almost all
imports at 9% (falling to 6% by 2003)
• Mercosur’s tariffs vary from 0-20% on most
imports (tariffs to converge going forward at
12.5%)
Chile Threatens Regional Integration
“The presence or the
absence of Chile in
the long run will be a
sign of Mercosur’s
efficiency.”
Former Uruguayan
President Luis Lacalle at
Mercosur’s birth 03/26/1991
• Chile applies for full
membership in
Mercosur
• In 2000, Chile
announces it would
negotiate a free
trade agreement
with the US
• Entry into Mercosur
“on hold”
Should Chile Join Mercosur?
Mercosur Viewpoint
• Mercosur itself gains access to Pacific ports and
Asian trade links
• Chilean membership strengthens bloc in near term
Chilean Viewpoint
• PRO: globalized private sector well positioned to
capitalize on opportunities
• CON: very stable economy becomes more
exposed to shocks like the Argentina crisis (exports
to Argentina dropped 35%)
Macroeconomic Coordination
• Developing Common
Macroeconomic targets
• Annual inflation ceiling
5% 2002-’05
• Maximum common
consolidated public
sector deficit of 3% as of
2002
• Maastricht-style targets
• The Mercosur Monetary
Institute
“Now that Argentina
has adopted a floating
exchange rate system,
it will be easier to
move forward with the
project for a single
currency for the bloc.”
Correio Braziliense website
Factors Affecting Future of Mercosur
“If Mercosur wants
further economic
integration, it will have
to resolve underlying
differences.”
Botafogo Goncalves,
Brazil’s chief Mercosur negotiator
• History
• Trade agreements
• Politics, personality,
and culture
• Nature of local
economy
• Banking crisis and
current world
events
Predictions for Mercosur’s Future
“I have been defending
a pattern since 1988,
the Chilean one,…We
cannot search for ideas
in Europe or Australia,
because they are very
different from us.”
Eduardo Duhalde –
Argentine President
• Breakdown of the bloc
• Threat of independent
alliances
• Alexander Yeats: pros
and cons of regional
trading agreements –
the relevance of
comparative advantage
• The acceptance of a
supranational authority
Mercosur: Conclusions
• Mercosur’s future existence uncertain
• Successes have been few
• Argentina crisis could be a positive
stimulus for integrating the bloc
• Chile’s entry and coordinated
macroeconomic policies are CSFs
• History informs today: Back to ISI?
Thank You. Questions?
Back-up Slides
Analysis of Member Countries: Brazil
• Facts
• Region’s largest economy
• Largest debtor
• Proxy for South America
• History
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Public sector dominance
Protectionism
Heavy regulation of private industry
High concentration and utilization of price controls
to limit competition and inflation
Analysis of Member Countries: Brazil
• Problems
• Currency
• Depreciated 25% this year
• CB raise interest ratios to stick to inflation
target of 4%
• Argentina
• Mercosur
• Efficacy
• Adequacy
• Market access
Chile: Economic Statistics
• Unprecedented growth
1990-1997 (real GDP growth
averaged 8%)
• Reported negative growth
only once since 1990
• 1998, due to global
financial crisis and
severe drought
• A role model for economic
reform
1999
2000E
GDP – real
growth rate
1.1%
5.6%
unemployment
9.7%
9.5%
inflation
2.3%
4.5%
foreign debt
$33.9B
$36.0B
exports
$15.6B
$17.7B
imports
$13.9B
$16.7B
Chile: Current Trade Agreements
Rio Group
member countries include: Argentina, Bolivia, Brazil,
Columbia, Ecuador, Mexico, Panama, Paraguay, Peru,
Uruguay, Venezuela
Latin America Integration Association (LAIA)
member countries include: Argentina, Bolivia, Brazil,Columbia,
Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela
Chile – Mexico Free Trade Agreement
Chile – Canada Free Trade Agreement
Chile – Venezuela Free Trade Agreement
Chile – Columbia Free Trade Agreement
Chile – Ecuador Free Trade Agreement
Chile – in discussions with the U.S.
Name
Members
Type
Status
Rio Group
Argentina, Bolivia, Brazil, Columbia,
Ecuador, Mexico, Panama, Paraguay,
Peru, Uruguay, Venezuela
Political and economic
cooperation
Signed
December 1999
Latin American
Integration
Association (LAIA)
Argentina, Bolivia, Brazil,Columbia,
Ecuador, Mexico, Paraguay, Peru,
Uruguay, Venezuela
Economic cooperation
and preferential trade
agreement
Chile – Mexico
Free Trade
Agreement
Mexico
Free trade area
Economic
complementarity
agreement signed
September 1991
Chile – Canada
Free Trade
Agreement
Canada
Free trade area
Signed November
1996, went into effect
July 1997
Chile – Venezuela
Free Trade
Agreement
Venezuela
Free trade area
Signed April 1993,
went into effect July
1993
Chile – Columbia
Free Trade
Agreement
Columbia
Free trade area
Partial agreement
signed December
1993
Chile – Ecuador
Free Trade
Agreement
Ecuador
Free trade area
Signed December
1994, went into effect
January 1995