South America trade zone faces challenges

Associated Press

South America Trade Zone Faces Challenges

By ALAN CLENDENNING , 02.14.2006

Brazilian appliance makers are cringing over new trade barriers designed to prevent Argentine industry from being overwhelmed by cheap imports in the so-called "Refrigerator War."

But now it may be time for some wincing from Argentina and free trade advocates who support South America’s Mercosur trade bloc, aimed at integrating a large chunk of the continent.

After heated opposition from Brazilian manufacturers, the agriculture minister said Brazil may use the new bilateral trade dispute resolution process to bypass Mercosur rules and restrict imports of Argentine wine, wheat and rice.

Politicians from both countries insist their "Mechanism of Competitive Adaptation" will smooth over the appliance dispute and other periodic trade spats between South America’s two largest economies.

But economic analysts say the side deal runs contrary to the spirit of free trade and could seriously weaken Mercosur, a trade bloc originally made up of Argentina, Brazil, Paraguay and Uruguay.

With Venezuela on its way to becoming a full-fledged member and Bolivia invited to follow suit, Mercosur is becoming more of a political body than a free-trade advocacy group. Both Venezuelan leader Hugo Chavez and new Bolivian President Evo Morales are strident critics of American-style free trade, which they label a "neoliberal" push to benefit multinational companies and enslave Latin American workers.

But the Argentina-Brazil deal may eventually tempt Paraguay and Uruguay to abandon Mercosur in favor of free trade deals with the United States, and Brazil also risks losing its international clout as an advocate for developing nations trying to persuade rich countries to slash farm subsidies, analysts say.

The Argentina-Brazil trade agreement "is just further evidence that Mercosur is unraveling, losing its coherence and its original purpose," said Michael Shifter of the Inter-American Dialogue, a Washington think tank. "South America’s political landscape is increasingly fractured, with governments making deals and seeking short-term political benefits."

Brazil and Argentina are by far the biggest Mercosur players, home to 221 million of the zone’s 230 million people and 97 percent of the bloc’s $767 billion in gross domestic product. But the zone will be expanded significantly when Venezuela joins, adding the continent’s No. 3 economy and the world’s fifth largest oil exporter to the mix.

Paulo Saab, who heads Brazil’s appliance industry association, said the Feb. 1 Argentina-Brazil accord represents a "dangerous precedent altering the legal rules established with the creation of Mercosur."

The Sao Paulo Federation of Industries, which claims its members produce more than 75 percent of Brazil’s gross domestic product, said it would consider boycotting certain Argentine products.

And while top Brazilian officials initially downplayed the impact on Mercosur, Brazilian Agriculture Minister Roberto Rodrigues announced last week that Brazil may use the accord to justify restrictions on imports of Argentine wine, wheat and rice.

If Brazil follows through, the move could cause severe damage to Argentina’s thriving red wine industry, because Brazil is the third largest export destination after the United States and Britain.

Wine restrictions would end up giving Brazilian consumers fewer choices (most agree that Brazil’s wine is inferior to Argentina’s) and hurt government tax receipts, said Otavio Lilla, marketing director of the Mistral Importadora Ltda. wine importing company, a big supplier in Sao Paulo.

It could also cause an increase in crime related to the black market, he said.

"We’ve already got a problem with Argentine wine being smuggled into Brazil, and that would just increase," Lilla said. "This is perplexing and sad. I understand that there have been big changes in the economies of Argentina and Brazil, but if they put up barriers, Mercosur doesn’t have any use and will become obsolete."

The move wasn’t altogether surprising, because Mercosur has been turning from economics to politics for some time now. Last November, Mercosur nations at the Americas Summit in Argentina joined together against renewing negotiations this year on a U.S.-backed Free Trade Area of the Americas.

The FTAA would stretch from Canada to Chile, creating a 34-nation zone larger than the European Union. But Mercosur nations said they didn’t want to start high-level negotiations until the World Trade Organization agrees on a formula to slash the subsidies that the United States and other rich countries give their farmers.

"Mercosur was already stumbling as an economic agreement," said Gary Hufbauer, a senior fellow at the Institute for International Economics in Washington, D.C. Now, "Brazil has evidently decided to make the Mercosur first and foremost a diplomatic pact."

After the Brazil-Argentina accord was reached, Rio de Janeiro’s O Globo newspaper reported that Argentina secretly pledged to support Brazil’s ongoing lobbying effort for a permanent U.N. Security Council seat.

But such promises aren’t worth much, said Riordan Roett, director of Western Hemisphere studies at Johns Hopkins University.

"The enlargement of the Security Council at the UN is not going anywhere in the foreseeable future," he said. "China has come out against any expansion. The United States is lukewarm."

source: AP