Amalgamation or dissolution? An outlook of the future of Mercosur under E.U. and U.S. influences.

• Jurisdiction: European Union
• Author: Baeza, Miguel A.
• Date: 22 September 2011

1. INTRODUCTION

   As globalization is spreading across the world, various countries on different continents are strengthening their competitive advantages (i.e., strategic location and natural resources) by forming trade blocs to sustain growth. MERCOSUR (South America Common Market) is one of the regions based on free trade formed up by Argentina, Brazil, Uruguay, and Paraguay along with associate members, Chile, Colombia, Bolivia, Ecuador, Peru, Mexico, and Venezuela. MERCOSUR was created in 1991 under new democracies after military rule ended for these nations: Argentina in 1982, Brazil in 1985, Paraguay in 1989 and Uruguay in 1985. Using its consolidated gross domestic product (GDP) as the yardstick, MERCOSUR is the third largest trade bloc in the world after the European Union (E.U.) and North America Free Trade Agreement (NAFTA). MERCOSUR's economic output (over one trillion dollars annually) accounts for 75% of South America's GDP, and its people (220 million inhabitants) account for 60% of South America's population.

   MERCOSUR's importance has been recognized by the United States (U.S.), not only because of its market, population, potential growth and economic production (e.g., world's richest agricultural and mineral resources), but also because this is the only region where the U.S. is currently running a trade surplus (Carranza, 2003; Coates, 2003). In 1994, the U.S. proposed the Free Trade Area of the Americas (FTAA), which is a Free Trade Agreement of 34 countries in the Western Hemisphere (Bardouille, 2002; Venkataramany and Bhasin, 2008). The purpose of FTAA is to consolidate the nearly 25 trade pacts already operating in the Americas, which is the home of nearly 800 million inhabitants, and has a combined GDP of over $13 trillion and total exports of more than $1 trillion (Petry, 2004; Carranza, 2004a). FTAA would also become more powerful than the E.U. because its population would be more than twice that of the E.U. The E.U. is also attracted to the MERCOSUR trade bloc because more than 30% of the E.U.'s trade is with MERCOSUR countries (Santander, 2002). The E.U. wants to pursue possible integration with MERCOSUR after having lost more than 50% of its trade with Mexico after Mexico joined NAFTA (Santander, 2002). This study aims to evaluate which of the two different trade integrations (FTAA versus E.U.-MERCOSUR) better fits MERCOSUR's needs. Furthermore, this study also stresses the key issues in MERCOSUR's negotiation process toward further economic integration.

2. E.U. and U.S. INVOLVEMENT IN MERCOSUR

   2.1. MERCOSUR's Importance to Western Powers

   According to Carranza (2004a), the MERCOSUR trade bloc is very important to the U.S., in particular because it "embraces an area larger than the continental USA, with 50% of the population, 58% of the gross domestic product and 40% of the total foreign trade of the Latin American Integration Association" (p. 320). It is expected that U.S. exports to Latin America will exceed U.S. sales to the E.U. and Japan combined within a few decades (U.S. Information Service, 1995). MERCOSUR's member countries, such as Brazil and Argentina, are very important for the U.S.'s regionalism scheme (FTAA) because they include more than 40% of the economy of Latin America and the Caribbean, and without these two countries, FTAA's role is limited (Carranza, 2004a).

   Bulmer-Thomas (2000) described how the E.U. has also constantly benefited from MERCOSUR's market: 80% of the E.U.'s exports to MERCOSUR are machinery and transport equipment, chemicals, and manufactured products. On the other hand, MERCOSUR's exports are concentrated in agriculture and fishing products which accounted for more than 50% of MERCOSUR's exports. Carranza (2004a, p. 324) stated that "MERCOSUR in 2000 was accounted for half of the E.U. sales to the region, half of imports from the region, and two-thirds of FDI in Latin America". According to Klom (2003), the E.U. has already replaced the U.S. as the main investor in Latin America.

   2.2. E.U.'s Influence on MERCOSUR

   MERCOSUR's access to the European market is crucial to its export performance. For example, Europe accounts for more than 30% of MERCOSUR's export, and in particular, MERCOSUR's trade with the E.U. increased by 10% during the 1990s (Santander, 2002). This situation grants the E.U. more power in its economic relations with MERCOSUR and also shows MERCOSUR's strong interest in its further trade negotiations with the E.U.

   The E.U. stresses "interdependence" and "mutual benefit" in its external relations, not only with MERCOSUR member countries but also with other economies (Crawley, 2000). This strategy contrasts with the U.S.'s exclusive pursuit of national interests in the region (Crawley, 2000). The E.U.'s intent for economic integration with MERCOSUR was viewed in the Declaration of Rio in which the primary objective of the meeting was "to strengthen the links of political, economic and cultural understanding between the two regions in order to develop a strategic partnership" (Council of the European Union, 1999, p. 19). This partnership was mainly based on the E.U.'s contribution, which provided political, logistical, technical and, even sometimes, financial support, to MERCOSUR's integration process. This was more pronounced when MERCOSUR encountered internal and external problems as it contemplated various E.U.-MERCOSUR agreements (Santander, 2002). Further, the E.U. calls for closer macroeconomic and financial cooperation with MERCOSUR by suggesting the creation of a single currency (Giambiagi, 1997).

   MERCOSUR is in the process of trying to implement supranational institutions in order to coordinate more appropriate macroeconomic policies, making it easier to adopt a common currency and build a permanent MERCOSUR supranational structure (Carranza, 2003). MERCOSUR's country members appeared committed to adopt common macroeconomic objectives (Eichengreen, 2004). MERCOSUR's country members have agreed to similar foreign policies for economic cooperation, share mutual beneficial relations in the military by conducting joint military exercises, hold regular conferences of education, health, and cultural activities, and they have adopted a decision to create a MERCOSUR parliament (Eichengreen, 2004). The E.U. has been helping MERCOSUR country members achieve a structural measurement that would guarantee stability. At a summit in Asuncion, Paraguay in June of 2003, MERCOSUR established a Macroeconomic Monitoring Group (GMM) adopting macroeconomic policies that are similar to the Maastricht Treaty. This institution would support the creation of a monetary institute by having closer coordination of common policies that would eventually create a common currency among state members (Hall, 2003). In this summit, the presidents of Argentina and Brazil not only agreed to the creation of a MERCOSUR monetary institute to promote closer coordination policies but also a MERCOSUR parliament. Eichengreen (2004) held that the influence of European experience on MERCOSUR is clear based on the fact that MERCOSUR member countries are committed to targeting major issues such as inflation, fiscal deficits, and pubic debts. All these promotions of economic and political policies and the creation of new trade partners with investment opportunities are signs of acceptance about how the E.U. model holds up for regional integration by demonstrating its values to

   MERCOSUR (Crawley, 2000).

   These movements undoubtedly indicate the E.U.'s subtle influences on MERCOSUR as a model paradigm, and signify the shared economic visions of these two trade blocs. However, one of the main barriers that the E.U. has in formalizing the integration with the MERCOSUR trade region is agricultural subsidies. MERCOSUR has been negotiating in international economic organizations such as WTO to seek significant concessions from the E.U. and other countries on agriculture trade. On the contrary, the E.U. was eager...