Mercosur - Changing Course?

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Case Details:

Case Code : BENV002
Case Length : 19 Pages
Period : 1991-2005
Pub Date : 2006
Teaching Note :Not Available
Organization : -
Industry : -
Countries : Latin America

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Launching an integration initiative is easier than sustaining it."¹

- Enrique V. Iglesias, President, Inter-American Development Bank in 2000.²

Introduction

On February 1, 2006, Argentina and Brazil, the two dominant members of the Southern Common Market (Mercosur),³ a four-nation trade bloc, negotiated a 'Competitive Adjustment Mechanism' agreement under which industries in either country could demand protection if they felt they were being harmed by rising imports from the other. The agreement was the result of a longstanding demand by Argentina which wanted to restrict certain imports from Brazil, that had hit some sectors of its domestic industry. Brazil's much larger size, its ability to attract foreign investment and provide fiscal incentives gave it an edge in reaping the benefits of liberalization and regionalization vis-à-vis Argentina and the other smaller members of Mercosur - Uruguay and Paraguay (Refer Exhibit I for map of South America showing Mercosur members).

Argentine Economy Minister Felica Miceli called the agreement "a triumph of cooperation and common work,"and urged further steps to strengthen Mercosur, but some analysts were critical of these moves to restrict trade and felt it was not in line with the idea of a Customs Union⁴ (CU) at all (Refer Exhibit II for stages of economic integration).

Brazilian businessmen openly expressed their displeasure at the pact. Humberto Barbato, Director for Trade at CIESP, a Sao Paulo state industry association, said, "This is an enormous step backwards. Instead of increasing free trade it creates more exceptions."⁵

This was just one in a series of controversies that had rocked Mercosur in the 2000s. In January 2006, Uruguayan Economy Minister shocked Mercosur members when he said that Uruguay wanted to negotiate a free trade deal with the US, its top export market, "as soon as possible."⁶ Under Mercosur's rules, member countries were not allowed to negotiate free trade agreements with third parties on an individual country basis.

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1] Enrique V. Iglesias, "Twelve Lessons from Five Decades of Regional Integration in Latin America and the Caribbean,"presentation to the Conference of the Institute for the Integration of Latin America and the Caribbean, Buenos Aires, November 27-28, 2000, www.iadb.org/INT/Trade/1_english/2_WhatWeDo/Documents/ c_OtherPubs/Speeches/e_talk%20points%20intal%2035%20years%20Eng.pdf.

2] Enrique V. Iglesias was the president of the Inter-American Development Bank between 1988 and 2005.

3] Mercosur is the Spanish acronym of Mercado Comun del Sur and consists of Argentina, Brazil, Paraguay and Uruguay. The Portuguese acronym used by Brazilians is MERCOSUL for Mercado Comum do Sul. In 2005, Mercosur had a combined GDP of roughly US$2 trillion, which was led by Brazil's GDP of US$1.46 trillion for that year. With a combined population of more than 225 million, encompassing an area of 11.8 million square kilometers, Mercosur is one of the largest trade blocs in the world.

4] A customs union is a free trade area with a common external tariff.

5] "Argentina and Brazil deal hits Mercosur,"http://www.sela.org/sela/prensa.asp?id=6090&step=3.

6] "Mercosur "rebel"member, seen from Buenos Aires,"www.mercopress.com/Detalle.asp?NUM=7080& Palabra=Mercosur.