ࡱ>    !"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}~Root Entry F`ރ+EWordDocument %CompObjn But they also pose significant policy challenges, particularly to countries with a regionally diversified trade and investment pattern. This paper discusses the prospects of a free trade agreement between the Common Market of the South (Mercosur) and the EU, within the broader framework of the formers increasingly complex and exacting domestic and external agenda. The first section provides an overview of Mercosurs recent performance and future challenges. The second section offers a preliminary assessment of Mercosur incentives to engage in a FTA with the EU. The third section discusses some issues likely to arise in a Mercosur-EU FTA negotiation. The fourth section, at last, concludes exploring the broader framework of Mercosur-EU economic relations. 2. An Overview of Mercosur There is a shared consensus that since its inception Mercosur outperformed expectations. This is revealed by rapidly growing trade and investment flows, no evidence of significant trade diversion and sizeable spill-around effects on non-economic areas. The record of Mercosur is particularly remarkable when compared to the skepticism with which most observers received the Treaty of Asuncin in March 1991. 2.1 Trade, investment and interdependence In the 1990s trade and investment flows among Mercosur countries increased at a rapid pace, drawing a new map of subregional economic relations. In effect, between 1991 and 1997 intra-Mercosur exports rose at a rate that trebled the growth of exports to the rest of the world (r.o.w.), raising trade and production links among member countries, particularly Argentina and Brazil (table 1). However, the gap between the growth rates of intra and extra-regional trade flows is remarkably lower if imports (instead of exports) are taken as the indicator. This confirms the idea that rapid growth rates of intra-Mercosur trade flows were not accompanied by significant trade diversion. Indeed, the divergent perfomance of Mercosur exports and imports was the result of a combination of significant trade liberalisation (both preferential and unilateral), real exchange rate appreciation and rapid domestic demand growth in the region. After the Treaty of Asuncin signed in 1991 intra-Mercosur trade flows not only increased rapidly, but also changed their composition. By 1996 the share of manufactures in intra-Mercosur exports was considerably higher than its share in exports to the r.o.w. (table 2). A more detailed analysis of trade in manufactures (which accounts for nearly 60% of intra-Mercosur exports and over 40% of r.o.w. exports) shows important changes in composition as well. While in 1991 the structure of exports of manufactured to Mercosur and to the r.o.w. (classified by factor intensity) was similar, by 1996 human capital and technology-intensive manufactures accounted for a higher share of intra-regional manufactured trade (table 3). Growing economic interactions were not restricted to trade flows, but they also extended to direct investment flows and inter-firm cooperation. Intra-regional FDI, regarded as a vehicle for the internationalisation of domestic firms, was spurred by the incentive to establish presence in neighbour markets. Joint-ventures and strategic alliances (as in the petroleum and energy industries) multiplied as well (table 4). Although available evidence suggests that Mercosurs inward FDI boom was associated to rapid domestic demand growth and privatisation, significant restructuring took place in sectors such as the motor vehicles industry. In fact, the regional market has turned into a key outlet for the Argentine motor vehicle industry, which currently exports about half of its output to the region (largely Brazil). In other sectors, such as the food-processing industry, the establishment of foreign multinationals (as Danone, Nabisco, Parmalat and Cadbury-Schweppes, among others) can be seen as a first step towards future trade expansion and regional specialisation. As a result of these trends interdependence incrܥe# C% A,$l,$l$$ $ C($$$T$<4CTimes New Roman Symbol ArialCourier NewFLACSO Argentina - Issues and Prospects Serie: Documentos e Informes de Investigacin N 228 Area: Relaciones Internacioanales A MERCOSUR-EUROPEAN UNION FREE TRADE AGREEMENT. ISSUES AND PROSPECTS Roberto Bouzas Buenos Aires February 1999 Este trabajo fue preparado para el Instituto de Relaciones Europeo-Latinoamericanas (IRELA). TABLE OF CONTENTS Page Introduction1 2. An Overview of Mercosur 2 2.1 Trade, investment and interdependence 2 2.2 The policy agenda 4 2.3 External trade negotiations 6 Incentives for a Mercosur-EU FTA: A Preliminary Assessment 9 3.1 Trends in trade and investment flows 9 3.2 What do countries look for in PTAs? 11 3.3 Trade incentives 13 3.4 International bargaining considerations 16 3.5 Credibility 17 Issues in a Mercosur-EU FTA: A View From Mercosur 18 4.1 Sensitive products 19 4.2 A Mercosur-EU FTA: shaping the agenda 20 4.3 The EU and the FTAA: a two-track negotiation? 22 5. Mercosur-EU Relations: A Look Ahead 24 5.1 Trade and investment 25 Foreign trade negotiations27 References 31 Tables 33 LIST OF TABLES Page Table 1 - Mercosur: Export Growth by Market of Destination, 1991/97 34 Table 2 - Mercosur: Commodity Composition of Exports, 1991/96 35 Table 3 - Mercosur: Composition of Manufactured Exports, 1991/96 35 Table 4 - Argentina-Brazil: Main Bilateral Investment Projects, 1997/2000 36 Table 5 - Mercosur: Share of Intra-regional Exports in GDP, 1991/97 36 Table 6 - Mercosur: Geographical Composition of Trade, 1996 37 Table 7 - Mercosur-EU Export-Import Trade, 1990/96 38 Table 8 - Mercosur: FDI Inflows by Origin, 1980/96 39 Table 9 - Mercosur: Commodity Composition of Exports to the EU and the World, 1990/96 39 Table 10 - Mercosur: Commodity Composition of Imports From the EU and the World, 1990/96 40 Table 11 - EU: Tariffs, Non-Tariff Barriers and Mercosur Exports, 1996 41 Table 12 - Estimated Effects of a Mercosur-EU FTA 42 Table 13 - Estimated Effects of a Mercosur-EU FTA on Brazil 42 Table 14 - EU: Alternative Estimates of Sensitive Products 43 Table 15 - Mercosur: CET and Imports From the EU, 1996 43 Table 16 - Mercosur: Deviations from the CET, 1995 44 1. Introduction* Preferential trade arrangements (PTAs) have become popular again. In the last decade a large number of agreements were completed while many other are under negotiation. It is likely that many of the latter will never materialise or, that if they do, they will never achieve substantive results. However, PTAs must be taken seriously. The may be building blocks towards a more effective multilateral trading system. But they may also detract energies from multilateral efforts, particularly when large players (such as the European Union -EU- or the United States -US-) engage actively in the discriminatory game. For developing economies PTAs were traditionally regarded as vehicles to stimulate economic growth, increase efficiency and improve their insertion into the world economy. However, results were frequently disappointing. More recently, a new vintage of discriminatory trade arrangements came to scene, ie: that linking industrial and developing economies. The North-South variety of economic integration opens new windows of opportunity for developing economies. eased substantially in the region, especially among the two largest economies. By 1997 the regional market accounted for over 36% of Argentine total exports, as compared to only 16.5% in 1991 (table 1). For Brazil the regions share in total exports increased from 7.3% to 17.1%, a lower value in absolute terms but a higher rate of growth. Paraguay and Uruguays trade links with their two larger partners were also deepened, although for them neighbours had traditionally been important export outlets and sources of supply. The resulting increase in interdependence displays two major features. The first one is its asymmetry, which mirrors the disparities in economic size typical of the region. The second is the still relatively low level of interdependence, despite the rapid increase recorded during the 1990s. Although between 1991 and 1997 exports to the subregion more than doubled its share of GDP, by the end of the period they still accounted for a modest 1.8% (table 5). 2.2 The policy agenda The Treaty of Asuncin set the framework for the establishment of a common market between Argentina, Brazil, Paraguay and Uruguay. In particular, it included an automatic schedule for the elimination of tariffs and it commited the parties to adopt a common external tariff (CET) by the end of the "transition period" (scheduled to expire on December 1994). The Treaty also called for the coordination of macroeconomic and sectoral policies, but made no specific provision to that end. There is a shared consensus that during the "transition period" Mercosur made significant progress towards its stated aims, particularly in the realm of market access. In effect, by December 1994 the vast majority of goods had zero tariff rates. To deal with sensitive products member countries agreed on an automatic tariff-cutting schedule (rgimen de adecuacin final) to end in 1999 for Argentina and Brazil (and one year later for Paraguay and Uruguay). Member countries also settled a date to fully liberalise trade in sugar and motor vehicles (the so-called "special sectors"). By the end of the "transition period" member countries also agreed on the structure of the CET, a list of transitory exemptions and a schedule for them to converge towards the CET (in a maximum of ten years). These results were accompanied by institutional innovations such as the establishment of a Trade Commission (CCM), an Administrative Secretariat and minor reforms of the dispute settlement mechanism. Since 1995 progress in the policy agenda has been less remakable than in the inital, founding years. The most significant achievements were the improvement in market access through the gradual reduction of tariffs on sensitive products as agreed in the rgimen de adecuacin, and the drafting of new protocols on competition defense, trade in services and common antidumping procedures (although these new instruments still have to be fully implemented). However, a number of issues pending at the end of the "transition period" remain unsettled. In the realm of market access the main stumbling block has been the issue of non-tariff barriers (NTBs), where progress has been scant since 1995. Identification, classification and harmonisation of NTBs have advanced slowly. Moreover, even when harmonisation progressed, internalisation and enforcement were dissappointingly slow. The debate on NTBs not only revolved around pre-existing measures, but also on new, unilateral decisions taken by member states. Although mechanisms created to monitor progress in internalisation increased transparency, they failed to speed up the pace of implementation. Negotiations to extend free trade to the so-called special sectors (automobiles and sugar) have been underway since 1995. In late 1998 Argentina and Brazil agreed on a framework to govern motor vehicles trade as from year 2000. The guidelines include a 35% CET and a transitional regime of "monitored trade", the details of which are still to be worked out. However, Paraguay and Uruguay -which oppose the level set for the CET- are stil to join the agreement. Treatment of sugar has been equally problematic. All partners are sugar producers and the sector displays significant policy asymmetries. This has led some members (particularly Argentina) to oppose trade liberalisation before a "level playing field" is guaranteed throughout the region. So far Mercosur has failed to make progress on the issue of regulatory asymmetries (and particularly state aids to industry). An ad hoc group created to deal with national policies affecting competitiveness has failed to produce substantive results. In the Protocol on Competition Defense approved on December 1996 the issue was dealt with in a transitory chapter. Since no substantial agreement was reached, member countries were authorised to continue to enforce domestic antidumping legislation. After the structure of the common external tariff was set in 1994, implementation advanced slowly. Moreover, the CET was frequently perforated by national special import regimes and a slower-than-expected multilateralisation of pre-existing bilateral preferential agreements (particularly with the Andean Community and Mexico). The result is that all trade is still subject to rules of origins, a practice reinforced by the fact that no agreement on tariff-revenue distribution has yet been reached. The effective implementation of common trade policies was also delayed by the lack of common administrative procedures, such as a Customs Code. Since implementation of the code approved in 1994 proved to be impractical, member countries have engaged into the drafting of complementary regulations. Progress in the area of common trade policies is likely to be slow, not least because of budgetary constraints (which have even delayed the establishment of joint border inspection facilities). Mercosur has progressed along the so-called deepening agenda set by the "Year 2000 Action Program" of December 1995. The major results have been the signature of a Protocol on Trade in Services in 1997, the establishment of an ad hoc group on government procurement, the adoption of common rules to oversee and regulate the financial system, the signature of a Social Security Multilateral Agreement, and the enforcement of other educational and cultural understandings. Some of these are just initial steps which still have a long way to go: for example, effective liberalisation of trade in services will proceed through succesive negotiating rounds and the group on government procurement has no target date to draft a proposal. During the 1994/98 period the issue of macroeconomic convergence was overcome in practice by de facto policy confluence between Mercosur two largest partners. However, no formal steps were taken to increase inter-state cooperation in this key area. Although the Argentine government proposal to examine the creation of a common currency was taken with skepticism, it illustrates the concerns about the potential for conflict which divergent macroeconomic policies or performances may create in the future. 2.3 External trade negotiations As a recently born customs union Mercosur has faced an extremely demanding agenda of extra-regional trade negotiations. Except for the initial decision to invite Chile to join, Mercosurs negotiations with the rest of its Latin American partners have been largely the result of a built-in agenda (a by-product of the decision to implement a CET and of Mercosur members prior membership to LAIA) rather than of an activist stance. Participation in the FTAA process and in negotiations with the EU, in turn, were esentially reactive and driven by defensive considerations. Multiple and simultaneous negotiating exercises have challenged Mercosur to develop a common stance and to design a consistent framework to carry it forward. This has not been a smooth process, as the complexities of arbitraging divergent national interests have been compounded by size asymmetries and Mercosurs peculiar institutional arrangements. The characteristics of Mercosurs FTAs with Chile and Bolivia (no exemptions and a replication of the rules governing Mercosur in the realm of NTBs, rules of origin, safeguards and trade remedies) as well as the difficulties faced by the negotiations with the Andean Community and Mexico can be explained by three main factors. The first one is Mercosurs lack of permanent exemptions to intra-regional free trade, a fact which has inhibited the negotiation of non-comprehensive FTAs with other LAIA members, particularly due to the opposition of the smaller economies. The second factor is Mercosurs inter-governmental decision-making and negotiating structure, an institutional feature which has favoured arbitrage among divergent national interests rather than the identification and pursuit of a "strategic common interest" as a customs union. The third factor is Mercosurs performance: in particular, the rapid rise of trade links within the region which reshaped perceived national interests. To a large extent, Mercosur participation in the FTAA process and in preparatory negotiations with the EU are different and more demanding games than negotiations with LAIA partners. From the start-out of the FTAA process (indeed, since the launching of the Enterprise for the Americas Initiative in 1991), enthusiasm among Mercosur partners differed widely. While there was open interest on the part of the Argentine government, Paraguay and Uruguay were largely indifferent. Brazilian authorities, in contrast, remained for the most part reluctant. These differences have not been completely ironed out, but since the Miami summit a common negotiating stance gradually evolved. As already mentioned, to a certain extent this was the result of gradually convergent national incentives, particularly as the smaller partners (mainly Argentina) came to appreciate the benefits of having preferential access to the large Brazilian market. Moreover, as the agenda of negotiations of the FTAA became more evident, a more balanced assessment of costs and benefits could be made not only by public officials but also by the private sector. In addition, as preparatory talks gained momentum and the chances of the US Administration obtaining fast-track authority diminished, the costs of a recalcitrant and obstructionist position on the part of Mercosur increased, while its benefits fell considerably. During the FTAA preparatory process Mercosur member countries emphasised the agreements WTO-compatibility rather than its WTO-plus scope and the inherited market access agenda, rather than the new issues pushed by US negotiators. This was clearly demonstrated by the groups stance in issues such as intellectual property rights protection, government procurement and trade in services, as well as in its opposition to include labor and environmental standards in the negotiations. The emphasis on priority treatment for agriculture, textiles and apparel was in turn a consequence of the perceived export potential of these sectors (particularly agriculture) member countries fear that old issues (such as agricultural trade liberalisation) may be relegated (as it happened in the case of the Canadian-US free trade agreement or NAFTA). This also explains the emphasis placed on limiting discretion in the implementation of trade-remedy laws, a prerrogative which has been jeaslously protected by the US Congress. Mercosur member countries were equally reluctant to undertake any commitment about piecemeal implementation ("early harvest"), except for "business facilitation" measures. The rationale of this stance was that a "single undertaking" was the best means to ensure a balanced result in the context of a unlevelled playing field. The inclination in favour of a gradual approach was reflected in Mercosurs defeated proposal for three-phased negotiations made at the Belo Horizonte ministerial summit in 1997, and by its insistence on the subordination of substantive progress to the improvement of basic data and information. 3. Incentives for a Mercosur-EU FTA: A Preliminary Assessment In contrast to the typical Latin American and Caribbean country (for which the US is the dominant foreign economic partner), Mercosur is formed by a group of economies with a geographically diversified pattern of foreign trade and investment. Moreover, the European Union (EU) is a major economic partner for the region, in some areas (such as foreign trade) even more important than the US. This fact gives particular relevance to a potential Mercosur-EU FTA negotiation. 3.1 Trends in Trade and Investment Flows In 1996 the EU accounted for about a quarter of Mercosurs total foreign trade, a share which makes the former the single most important trade partner for region (table 6). The relatively high share of the EU in Mercosur foreign trade is not new: it has been a long-lasting feature of Mercosur commercial ties with the rest of the world. The EU is also the largest foreign investor in the region. According to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), in 1997 the EU accounted for 42.7% and 34.1% of the total FDI stock in Argentina and Brazil, respectively. As in the case of trade, EU firms have been active in the region for decades. In the 1990s economic relations between Mercosur and the EU continued to unfold rapidly. In particular, trade and investment flows increased at a fast pace. Total bilateral trade more than doubled between 1990 and 1996, while annual average FDI inflows from the EU increased more than twofold as compared to the 1980-89 average (tables 7/8). To a significant extent, closer EU-Mercosur interactions were the result of far-reaching economic reforms and rapid growth rates in the latter. As far as investment is concerned, the EU had its share in the 1990s boom of FDI into the region. Although EU investors failed to follow the rapid pace of US inflows (particularly during the first half of the decade), the EUs share in total FDI stock did not fall substantially. Indeed, the contraction of EUs share in total FDI inflows into Mercosur during 1992-95 was not related to developments in bilateral relations, but rather to the broader performance of EUs FDI into Latin America and the Caribbean (table 8). Although the bulk of EUs FDI stock in Mercosur is in manufacturing, services and infrastructure received a rising share during the 1990s. Since the mid-1990s acquisition of existing firms also gained new importance as a vehicle for FDI. FDI inflows into Mercosur during the 1990s have been natural-resource seeking (such as in natural gas, petroleum or the mining industry) and (domestic/regional) market seeking (as in motor vehicles, chemicals, agroindustry, banking and finance, telecommunications, electricity and natural gas distribution). In the case of motor vehicles the industry restructured to take advantage of the potential of a regional division of labour, a process in which EU firms (such as Fiat, Renault and Volkswagen) have played a leading role. But growing trade interactions between the EU and Mercosur in the 1990s were far from balanced. While in 1990-96 Mercosur exports to the EU increased by a meager 23%, Mercosur purchases to the EU experienced more than a threefold increase. As a result, the Mercosur-EU bilateral trade balance shifted from a u$s8.2bn surplus in 1990 to a u$s4.7bn deficit in 1996. Although rapid import growth was a dominant feature of Mercosur aggregate foreign trade during the period, the wedge between import and export growth rates was particularly high in the case of EU-Mercosur trade. The disparate performance of Mercosur-EU export-import trade was the result of both transient and structural factors. Among the former the most significant were trade liberalisation (which encouraged the expansion of previously repressed imports), real exchange rate appreciation (particularly of the Argentine peso and the Brazilian real), and fast aggregate demand growth brought about by successful macroeconomic stabilisation (the 1991 Convertibility Plan in Argentina and the 1994 Real Plan in Brazil). A major structural factor was the commodity composition of bilateral trade flows. Whereas Mercosur exports to the EU are heavily concentrated in natural resource-based products (accounting for nearly 80% of total exports in 1996 -if natural resource-based manufactures are included), the bulk of Mercosur imports from the EU are manufactures not based in natural resources (tables 9/10). The implication of this pattern of specialisation is particularly detrimental for Mercosur: natural resource-intensive products account for a falling share of EU total imports. Moreover, the EU implements restrictive import policies in many of these sectors, particularly agricultural products (table 11). The pattern of specialisation of Mercosur export/import trade with the EU is not only problematic, but it worsened during the 1990s. As table 9 shows, the concentration of Mercosur exports to the EU in natural resource-intensive goods increased, and it did so at a much faster pace than that of Mercosur exports to the world. 3.2 What do countries look for in PTAs? Countries enter into PTAs (such as free trade areas or customs unions) for multiple reasons, including political and security concerns. However, if a PTA brings about persistent net economic losses to member countries, it is unlikely to survive as a voluntary arrangement. Therefore, in any case welfare (and, more broadly, economic) considerations will play an important role in the decision to launch and maintain a PTA. Narrow trade considerations are the most customary economic objective behind the formation of a PTA. In effect, a regional agreement can be seen as a means to increase economic welfare through the static and dynamic gains which such arrangement may bring about. But governments may engage in PTAs for other economic reasons as well, such as gaining insurance against future increases in trade protection, strengthening the credibility of domestic or external policies and/or enhancing the countrys international bargaining stance. The search for insurance against future increases in trade protection can be a relevant incentive for small countries, which may be vulnerable to restrictive policies implemented by a large and important partner. Although an effective multilateral trading regime is small economies best insurance against undue exercise of market power by larger partners, their policy choice is of little relevance to the direction and health of the multilateral trading system. Thus, under certain circumstances buying insurance through a PTA may look like an attractive option. Governments may also find useful to enter into PTAs because they may want to gain credibility for their domestic and foreign economic policies. Of course, the question of whether the same credibility could not be gained from sticking to multilateral commitments can be raised. Political economy considerations offer a clue: it may be easier to mobilise domestic groups (particularly exporters) in support of a more open trade regime or other policy reforms in the context of a PTA (in which gains from market access can be more clearly identified) than in the context of unilateral, or even multilateral, liberalisation. Alternatively, regional agreements (particularly among asymmetric partners, as in the case of North-South PTAs) may offer more effective constraints on reluctant or half-hearted enforcement and/or on policy reversal as compared to multilateral commitments. At last, governments may want to take part in PTAs due to a variey of reasons which may fall under the label "international bargaining considerations". For example, two or more countries may find that their bargaining stance vis a vis the rest of the world strengthens if they act together in trade negotiations (as a customs union would do). Alternatively, dissatisfaction either with the rythm or the direction of multilateral trade negotiations may stimulate a group of countries to advance faster and/or to engage into deeper commitments by taking part in a PTA. However, this would demand either common interests or a dominant partner able to push its own agenda forward. A PTA may also be regarded as a vehicle to compensate for the costs of being discriminated by other parties which engage in preferential trade arrangements, or to prevent "marginalization" in the international trading system. For Mercosur, trade as well as credibility and international bargaining considerations oustand among the factors which may be considered when assessing the incentives to enter into a PTA with the EU. 3.3 Trade incentives If the economic costs and benefits of a PTA could be unambiguously measured, it would be a great step towards sound policy-making. Unfortunately that is not the case. Although it is possible to arrive at rough estimates of the static net welfare gains of a PTA, conclusions are more difficult to reach (and contingent to the underlying model) if the much more important dynamic considerations are also to be taken into account. Moreover, the new vintage of PTAs include many issues other than border barriers to trade in goods, such as trade in services and, more important, regulations traditionally deemed to fall within the realm of domestic policies. Their impact on economic welfare is even more contentious, as no clear-cut answer to the question of whether policy harmonization improves or worsens economic welfare (particularly among countries with large income disparities) has been offered. With these caveats in mind, a broad-brush picture of the welfare costs and benefits of a PTA among Mercosur and the EU can be offered. One of the most comprehensive quantitative studies on the effects of a Mercosur-EU FTA was done at the Fundacao Getulio Vargas in Brazil. Using an applied general equilibrium model (AGE), the study estimated that an FTA between Mercosur and the EU would improve the terms of trade and raise the GDP of both Argentina and Brazil (table 12). The rationale behind this result is that EU trade liberalization would raise demand for Mercosur exports (a large share of which is currently taxed at high tariff rates) and thus increase their price. However, the net welfare gain (as measured by the equivalent income variation) would be disappointingly small: 0.63% of GDP in the case of Argentina and 0.46% of GDP in the case of Brazil. A more detailed analysis of the effects of a Mercosur-EU free-trade agreement on Brazil (which accounts for nearly two thirds of Mercosur GDP and total foreign trade) shows that Brazilian exports to the EU would record the largest increases in categories such as animal products, other agricultural products (oilseeds), grains and food products (table 13). However, in two out of three manufacturing sectors export volumes would fall (natural-resource intensive manufactures and machinery and equipment). Import volumes, in turn, were expected to increase over all categories, in most of them at double digit rates (table 13). When real output change is estimated, the study shows increases in most agricultural sectors and a contraction in manufactures and natural resources. The FGV study compares these results with those expected from an FTAA. Several important conclusions emerge. One is that an FTAA, in contrast to a Mercosur-EU agreement, would raise export volumes of manufactures but reduce natural-resource based exports (except for food and diary products). This suggests that different domestic sectors would benefit from an agreement with the EU as opposed to the FTAA (a Mercosur-EU agreement benefitting relatively more the agroindustrial sector). The second major conclusion is that in an FTAA import volumes would increase over all categories, but by a lower percentage than in the case of a Mercosur-EU trade deal (except in natural resources). At last, the effects of an FTAA on real output would be less significant and more ambiguous than in a Mercosur-EU agreement: while the latter would benefit agricultural production at the expense of natural resources and manufactures, the former would produce contractions in natural resources, machinery and equipment, grains, other agricultural products, and animal and diary products. In summary, the net effect of an agreement with the EU would be larger than the FTAA in terms of income, but sectoral impacts would differ. While agriculture would benefit more from an agreement with the EU, manufacturing would gain more with an FTAA. This result is largely a consequence of the commodity composition of trade with both regions, with Mercosur exports to the EU displaying a higher concentration in agricultural products. Other studies about the effects of a Mercosur-EU PTA arrive at similar conclusions. Using partial equilibrium techniques, the European Commission estimated that the impact of a Mercosur-EU FTA on total EU imports would lead to an almost negligible increase of 0.023-0.024%. The same study arrives to a slightly higher, but still modest, positive estimate on Mercosur imports (1.317-1.394%). General equilibrium calculations reported by the EC confirm that an FTA between Mercosur and the EU would bring about mutual gains, estimated at u$s6.2bn for the EU and at u$5.1bn for Mercosur (if most barriers to trade in agricultural products were removed). Similar conclusions are also reached by Calfat and Waelbroeck. These estimates are contingent to the assumptions made as regards the extent of liberalisation. In effect, if products in which the potential for trade creation is high are excluded from the agreement (or granted extremely large phase-out periods), the estimated benefits should be accordingly reduced. 3.4 International bargaining considerations International bargaining considerations can push governments to negotiate and engage into PTAs. Countries may want to increase their international bargaining capabilities, they may want to use PTAs as a training ground for further integration into the world economy, they may want to gain market access in an uncertain global trading environment or even prevent the costs of being discriminated. Some of these considerations, such as the perception of marginalisation in the world economy, played a key role in the creation of Mercosur. The establishment of Mercosur as a customs union was further reinforced by the announcement of tripartite negotiations to create an FTA between Canada, Mexico and the United States and the launching of the Enterprise for the Americas Initiative by the Bush Administration in 1991. International bargaining considerations continued to inspire the conduct of Mercosurs exacting agenda of external trade negotiations since the Treaty of Asuncin. In particular, participation in FTAA preparatory negotiations was itself influenced by "defensive" considerations. This, in turn, shaped the course of negotiations with the rest of the members of the Latin American Integration Association (LAIA) and the incentives to engage in a trade deal with the EU. The Brazilian proposal to create a South American Free Trade Area (SAFTA) was also linked to strategic considerations and alternative bargaining scenarios. Mercosur incentives to negotiate an FTA with the EU cannot be properly understood isolated from this broader bargaining picture. Once the commitment to enter into negotiations for an FTAA was undertaken at the Miami Presidential summit in December 1994, it was difficult to find a reason for not entering into parallel negotiations with the EU if the possibility existed. From a strict trade standpoint, it is certainly a matter of controvery whether a group of global traders (such as those in Mercosur) should engage into preferential negotiations with any of its partners. However, once the decision to embark into such negotiations hade been taken, it is difficult to come up with a reason not to replicate them. It is paradox that a group of small global traders which have their foremost interest in the well-functioning of the multilateral trading regime, felt so compelled to engage into preferential negotiations. This is the classical domino effect which discriminatory trade arrangements (particularly when large markets take part) can have on smaller economies. From an international bargaining stance, therefore, Mercosur negotiations with the European Union may be regarded as reactive (to the EUs initiative) and mutually complementary with its participation in the FTAA process. From a political economy standpoint, the diversified trade and investment pattern of Mercosur means that there were powerful domestic actors interested in maintaining a balanced approach to external trade negotiations or, at least, not suffering from negative trade or investment discrimination. 3.5 Credibility A preferential trade agreement can help to increase the credibility of domestic policies, particularly in an environment characterised by a changing policy regime. Examples of this motivation can be found in NAFTA (in the case of Mexico) and in the Europa Agreements (in the case of Central and Eastern European countries). If it is to play any role at all, the credibility factor is scheduled to be a minor incentive in the case of a Mercosur-EU FTA. One key reason is the time-frame for such an agreement to materialise. In effect, an FTA with the EU -or the FTAA- is unlikely to be successfully negotiated and put in place before the mid-2000s. This relatively long period of time contrasts with the relatively short negotiations which led either to NAFTA or to the Europa Agreements, and which proved so important to lock-in domestic policy reforms. However, a negotiation with the EU, even if it takes a long time, may have other positive side-effects on Mercosurs credibility as a customs union. It must be remembered that in order to sign the Inter-Regional Framework Agreement of December 1995, the Commission requested that Mercosur acted as a single juridical entity, thus pushing Mercosur into adopting the formal status of an organisation under international law. Negotiations with the EU, even more an agreement, would create renewed pressures for Mercosur to consolidate itself as a customs union. In contrast to the FTAA process, which at times has threatend Mercosur with centrifugal forces, negotiations with the EU are more likely to have the effect of a glue on Mercosur member countries bonds. 4. Issues in a Mercosur-EU FTA: A View From Mercosur On December 1995 Mercosur and the EU signed an Inter-Regional Framework Agreement aimed to foster economic cooperation and closer trade relations between the two regions. The process launched may lay the foundations for an FTA. From the start-out the Framework Agreement was influenced by the evolution of the FTAA process. On the side of the European Commission (EC), a major incentive was to counterbalance the "attraction force" which FTAA preparatory negotiations were exerting throughout Latin America, including Mercosur (where EUs economic and political stakes are high). On the side of Mercosur, having decided to take part in the FTAA process, it made little sense not to look for a balanced approach in its trade relations with its most important trade partner. So far the exchanges developed in the framework of the Inter-Regional Framework Agreement have been geared to gather information and to lay the groundwork for eventual future negotiations. Although no formal commitment to an FTA exists, it is expected that the European Council will give the Commission a mandate to start negotiations towards an FTA with Mercosur some time in 1999. Yet this outcome is far from certain. The Agriculture commissioners and some European governments oppose including a range of sensitive agricultural products in an FTA with Mercosur. 4.1 Sensitive products A number of EC agencies have carried forward studies to identify products which may be characterised as sensitive in a Mercosur-EU FTA negotiation. The criteria used to define sensitivity differ in each study, but the results share some basic conclusions. Combining the estimates available, the share of sensitive products on total EU imports from Mercosur range from a minimum of 13.39% to a maximum of 17.76% (table 14). From the EUs standpoint, the bulk of sensitive products are in agriculture. Outstanding examples are beef, sugar and cereals, where the price differential between Mercosur and the EU is large and protection in the latter is very high. It should be pointed out that these shares are calculated on the basis of actual imports, which are themselves kept artificially low by the fact that the EU protects these sectors heavily. No comparable studies have been carried forward in Mercosur. However, aggregate data may be used as an indicator of sensitivities. In the absence of NTBs or "water in the tariff", nominal tariff rates (as set in the common external tariff) provide indirect evidence of the differential between domestic and world prices. Therefore, in aggregate terms Mercosurs CET provides a first approximation to potentially sensitive sectors. If imports from the EU (as a share of total imports) in these high-tariff sectors are large, there is a high potential for sensitivity. Aggregate data confirms that from Mercosurs standpoint sensitivities are concentrated in the manufacturing sector, particularly in machinery and equipment, where imports from the EU are a relatively high share of total imports. Moreover, in 1996 these two sectors accounted for more than half of Mercosur imports from the EU (table 15). Qualitative evidence from recent Mercosur negotiations with Mexico confirm this pattern of sensitivies. Mercosur negotiations to multilateralise existing bilateral preferences with Mexico broke down as Brazil refused to grant Mexico with preferences in sectors such as telecommunications, informatics and motor vehicles. The three sectors have relatively high tariffs (and effective protection) in Brazil and the agreed CET is in the upper range. However, as in the case of the EU (where some countries are more enthusiastic about a comprehensive agreement with Mercosur because it may help to reduce the burden of the Common Agricultural Policy), not all Mercosur member countries share the same interests regarding tariff protection (table 16). In particular, the smaller economies would favour an agreement which would bring domestic prices of manufactures closer to world levels. As the motor vehicle issue illustrates, neither Paraguay nor Uruguay have accepted easily a CET as high as 35%. However, it is uncertain how much weight this consideration may have on the overall negotiating strategy of Mercosur, where Brazil (and to a lesser extent Argentina) carry the upper hand. 4.2 A Mercosur-EU FTA: shaping the agenda Section 3 discussed some of the incentives which Mercosur may have to engage into FTA negotiations with the EU. It was argued that trade, international bargaining and credibility considerations may all have a role to play. More specifically, we cited evidence that agroindustrial interests would be particularly interested in such an agreement, provided the main products with export potential are included in the liberalisation process. However, two caveats are in order. First, as a group Mercosur (and particularly Brazil) has not been particularly enthusiastic about engaging in preferential trade negotiations with developed countries. As argued earlier, Mercosurs stance vis-a-vis the FTAA process and negotiations with the EU can best be characterised as defensive/reactive. Second, the development of a common stance on the part of Mercosur has been so far successfully arbitraged. But this is a still unfolding process. Taking into consideration the precedents set by Mercosurs negotiating stance in the preparatory phase of the FTAA, in a negotiation with the EU Mercosur countries are likely to emphasise that the agreement be WTO-compatible, that it is implemented gradually (with no liberalisation taking place before the mid-2000s), that it includes products of export interest for Mercosur, that the "old" market access agenda (agricultural trade, export subsidies, unfair legislation) receives at least as much attention as the "new issues" and that the agreement be implemented as a "single undertaking". Mercosur countries may also push for business facilitation in areas such as customs procedures, sanitary and phyto-sanitary measures and standards. This set of principles has several implications, not least that any agreement will be slow to negotiate and implement. WTO-compatibility requires that "substantially all trade" is included in the agreement, which is conventionally understood as not least than 90% of bilateral trade flows. Available estimates of EUs sensitive products account for more than 10% of EU imports from Mercosur, and a higher share is likely to meet that standard in the case of Mercosur. Although not all sensitive products may be treated as exclusions, available calculations show that in order to arrive to a figure compatible with WTO standards it will be necessary to touch upon sensitive products. Long phase out periods may help to reduce pressure in the short term, but even that would mean -at least in the case of the EU- that a significant transformation of the Common Agricultural Policy will have to be comitted for a definite point of time in the future. Criteria may be even more stringent if account is taken of the fact that current trade shares are severely repressed by relatively high protection walls in certain sectors. The principles of gradual implementation of the agreement and that no liberalisation will take place before the mid-2000s are mutually reinforcing. Both are corollaries of the view that the process of liberalisation should be smoothed to allow adaptation to the new competitive conditions. They are also consistent with the idea that no far-reaching additional liberalisation should take place (particularly vis a vis developed economies) before Mercosur customs union is fully in operation (and the FTAA eventually starts to be implemented). The rationale for the "single undertaking" principle is similar to that put forward in FTAA negotiations. In a bargaining process characterised by unequal capabilities, the principle that all commitments should be undertaken simultaneously (no partial enforcement envisaged) may contribute to level the playing field. This may help to raise the importance of the "old" market access agenda to a standing comparable to the so-called "new issues" which EU -as well as US- trade negotiators may be more interested to push ahead. In order to engage into credible negotiations with the EU, Mercosur will need to progress further into an effective, rather than formal, customs union. As discussed in section 2, since the adoption of the common external tariff (CET) in January 1995, progress towards effective implementation of common trade policies has been at best partial. FTA negotiations with the EU and participation in the FTAA process may introduce an element of discipline in the functioning of the customs union. The smaller countries may be interested in the disciplinary role of external trade negotiations (particularly vis-a-vis the larger markets), although in the long-term they may end up loosing their preferential access, precisely the reason which moved them into engaging into a customs union. 4.3 The EU and the FTAA process: a two-track negotiation? As explained in section 2 the negotiation of an FTAA and of an FTA between Mercosur and the EU are likely to remain closely inter-twined. EUs incentives to engage in substantive negotiations with Mercosur will depend closely on the progress recorded by the FTAA. By the same token, if the FTAA process moves forward, Mercosur incentives to embark in a simultaneous negotiation with a trade partner as important as the EU will mount. Moreover, in the case of Mercosur a regionally diversified structure of foreign trade and investment means that there will influential domestic actors supporting a balanced approach to foreign trade negotiations. Since the US and the EU are competitors in Mercosur domestic markets, the pace of negotiations is likely to be mutually reinforcing. So far the US has more openly adopted the role of a demandeur in its trade deals with the rest of the Western Hemisphere as compared to the EU. The broadening of the FTAA agenda has been pushed forward by US trade negotiators, while their counterparts have reacted defensively. Although the Administration has not yet obtained fast-track negotiating authority, it has played the role of demandeur. In contrast, the EU has maintained a less aggresive stance, probably due to the lower political clout which the Commision can wave (as opposed to the USTR or other US governmental agencies) in the conduct of trade negotiations for which a mandate has not yet been given. Different institutional arrangements have resulted in different bargaining stances. For Mercosur, carrying forward parallel negotiations with the EU and the FTAA will not be an easy task. Two obstacles outstand. The first one is the content of the agenda. In the case of the FTAA, as well as in negotiations with the EU, Mercosur demands for trade liberalisation in agricultural products will rank high among its priorities. However, it is uncertain whether substantial progress in these areas can be made on a regional basis. Distortions in international markets for agricultural products (including domestic subsidies) are basically the result of EU-US interactions, and regional agreements may not be the appropriate forum to solve the issue. Indeed, treatment of agriculture both in the Canadian-US Free Trade Agreement -CUSFTA- and NAFTA suggests that a regional approach may be inappropriate to change the rules of the game in the US. Similarly, the EC agreements with Central and Eastern European and Mediterranean countries showed CAPs resilience. A related issue to which Mercosur will also give high priority (trade remedy laws) is unlikely to be adequately dealt with in a regional agreement either. At least in the case of the US, Congress has been reluctant to resign discretion in the implementation of trade relief legislation (particularly antidumping). Canada, which had as one of its foremost objectives in dealing with the US, to reduce discretion in the implementation of US trade-remedy laws, had to settle for the current system of binational review panels which was later on extended into NAFTA. The second obstacle is related to institutional and bureaucratic capabilities. Mercosur lacks the bureaucratic and institutional structure to engage into multiple negotiations with sophisticated partners. Moreover, in many areas under negotiation (such as foreign investment, government procurement, trade in services, etc) Mercosur has made only modest progress towards common rules to be applied in the region. Although a common negotiating stance may not be necessary (in fact it does not prevail in some of these areas even in the case of the EU), it can be expected that Mercosur countries may want to reach first a common framework to treat those sectors in its own internal market before engaging into commitments with third parties. Here again credible negotiations with third parties (particularly developed countries) may put pressure on Mercosur members to find common ground on these new issues. 5. Mercosur-EU Relations: A Look Ahead An FTA between Mercosur and the European Union will take long to negotiate and, if a deal is striken, it will be only gradually implemented. The pace and content of negotiations are likely to be influenced by the evolution of the FTAA process and the ocurrence of a new round of multilateral trade negotiations (a millenium round?). Unless the world trading system openly drifts towards a regionalist game, PTAs will continue to be a complement to multilateral trade negotiations. Similarly, PTAs will also to continue to take place majoritarily among geographically close economies. However, this may change if bargaining/strategic considerations begin to play a major role in fostering trade negotiations. 5.1 Trade and investment During the 1990s the economies of Mercosur took advantage of abundant international liquidity to grow at rates faster than in the earlier decade. Rapid import growth widened the trade and current account deficits, but foreign capital inflows easily financed the imbalance. Rapid import growth turned Mercosur into one of the fastest growing markets for EUs extra-regional exports, thus contributing to raise interest in the region both in the private and public sectors. The maintenance of high rates of economic growth in Mercosur will be critical to raise the regions appeal for the EU. If Mercosur continues to be regarded as offering attractive long-term trade and investment opportunities, EU domestic sectors threatened by competition of imports from Mercosur may face more effective counterbalances. The odds would thus be in favour of a constructive approach to Mercosur-EU negotiations. However, the chances that Mercosur will continue to sustain rapid rates of economic growth based on protfolio capital inflows as in the 1990s are slim. The change in international financial markets mood which followed the East Asian and Russian crisis threatens to be long-lasting. Although portfolio diversification suggests that capital will continue to flow to emerging markets over the medium term, the extremely favourable conditions which prevailed until the East Asian crisis of 1997 (temporarily interrupted by the Mexican devaluation) are unlikely to last indefinitely. Thus, the achievement of rapid rates of export growth will be a key factor if Mercosur is to secure the foreign exchange necessary to pay for its import bill and prevent a growth slow-down. Mercosurs thirst for imports is unlikely to decrease, a fact which was strengthened by the far-reaching structural reforms undertaken in the 1990s. Outward-oriented trade regimes will not be reversed, although episodes of "forced" protection may occurr if the external financial environment worsens. Moreover, large inflows of foreign direct investment towards infrastructure (such as telecommunications) in the 1990s will sustain demand for capital and intermediate goods imports to modernise and expand capacity. Since EU firms have been active in the process of privatization in Argentina and Brazil in the 1990s, there is a strong ground for a sustained demand of imports from the EU. On the demand side, therefore, the potential for rapid import growth on the part of Mercosur remains untouched and, if anything, it has increased. But in the future Mercosur will need to rely much more on the expansion of exports than in portfolio capital inflows to finance its import bill. Therefore, improving access conditions into markets where Mercosur displays clear-cut comparative advantages will contribute to boost effective demand. Export-oriented EU firms and businesses, which are likely to benefit the most, should take this potential into consideration. In order to sustain rapid trade growth, Mercosur will also need to upgrade the commodity composition of its exports to the EU (and overall). Manufactures account for a relatively minor share of EU-Mercosur bilateral trade flows and the extent of intra-industry trade is very limited. An upgrading of Mercosur exports along the value-added chain will serve to lower the dislocation pressures associated with increased interindustry trade. The outlook for FDI will also experience change. On the hand, as the end of privatizations nears, public sector sell-offs will play a less significant role as factors to attract FDI. However, the sizable FDI inflows recorded in the 1990s are likely to stimulate follow-up investments in the future. If Mercosur progresses along the road to create a custom union, foreign investors will find new incentives to exploit the dynamic gains brought about by a larger domestic market. EU firms are well placed to take advantage of growing markets in the region, and eventually a SAFTA. In contrast to EU investments in Mexico or other countries in Latin America, where they are clearly minoritary, EU firms are firmly established and have the potential to act aggresively in the Southern Cone A continuing flow of EU FDI into Mercosur would also lay the basis for more dense intra-industry trade relations in the future. All Mercosur countries have made important inroads into macroeconomic stabilization. However, the potential for disruption is significant, as demonstrated by the Brazilian macroeconomic upheaval which bursted out in early 1999. Interdependence in the region has increased, making macroeconomic linkages stronger and the potential for contagion effects higher. This will increasingly raise the issue of macroeconomic cooperation (if not coordination) to a higher stance. Macroeconomic issues have not been dealt with openly by Mercosur member countries. But they will have to do so sooner of later if the process of economic integration is to progress further. The issue was placed into the agenda by the Argentine official initiative to create a common currency, later transformed into a proposal for dollarisation. But the way in which the idea was put forward may have been premature, Moreover, many feared that the proposal amounted largely to an extension of Argentinas currency board system into other members, a possibility strongly resisted by the Brazilian govenment. In any case, the choice of exchange rate regime will grown increasingly important in Mercosur, as the prevalence of disparate arrangements (particularly among Argentina and Brazil) will be hard to sustain in the context of increased interdependence (or else, interdependence will suffer). The emergence of the Euro as an international money able to compete with the US dollar in the latters vehicle and reserve currency roles will open new alternatives for pegging Mercosur exchange rates, if that is the course finally chosen. But as the Argentine government proposal for dollarisation demonstrates, it is likely that much more than economics will play a role in shaping the choice of an exchange rate regime and a currency to peg. 5.2 Mercosur foreign trade negotiations The multi-tiered trade negotiations in which Mercosur member countries engaged since 1991 place huge demands upon limited bureaucratic capabilities and a still developing common agenda. On the one hand, a demanding schedule of intra-regional market access negotiations is still on progress. Main issues include non-tariff barriers, treatment of special sectors (such as motor vehicles and sugar) and non-border regulations (such as state aids to industry and asymmetric public policies). Similarly, market access negotiations in the realm of services and government procurement are only in their early stages. Mercosur has been far from actively pursuing its external trade negotiations. Except for the FTAs with Chile and Bolivia, Mercosurs stance has been either defensive/reactive (as in the case of the FTAA process and negotiations with the EU) or motivated by a built-in agenda (as in the case of LAIA). Even solely for "defensive" considerations, not to take part in the FTAA process may eventually entail high costs. Similarly, for a group of global traders, maintaining a balanced approach to PTAs seems a reasonable couse of action, hence the rationale for a negotiation with the EU. As a group of relatively small-sized economies, not to take part in these exercises would be probably unwise in an uncertain international trading environment. However, these simultaneous exercises pose sizeable challenges to member countries. The first issue at stake is what will remain of Mercosur if FTAA negotiations go ahead and an FTA with the EU is eventually agreed. The key lays on whether Mercosur will succeed in enforcing common trade policies and in taking its "deepening" agenda forward. Only by making sustained progress in these two areas Mercosur member countries can make sure that a "variable geometry" approach to preferential trade negotiations will maintain a premium for continued membership to the customs unions. This places the primary emphasis on intra-regional negotiations aimed to strengthen and expand disciplines and regulations The consolidation and deepening of Mercosur is also necessary to provide a counterbalance to the extraordinary weight which the US will carry in hemispheric trade negotiations. Although Mercosurs strategy during the preparatory phase of the FTAA succeeded in turning the FTAA process into an effective negotiation, this was made easier by the US Administrations lack of fast-track authority. However, Mercosur is the only regional group which can play a modest balancing role in hemispheric negotiations. The EU can contribute to it by creating incentives for Mercosur to strengthen as a customs union. The second issue is the uncertainty as to whether Mercosurs trade agenda can be effectively promoted through preferential negotiations. Although Mercosur has high stakes in a wide variety of issues included in the present international trade agenda, market access demands (at least as far as goods are concerned) tend to be concentrated in issues in which progress through regional agreements may be difficult to achieve (such as agricultural trade and procedural protectionism). The Argentine chairmanship of the Negotiating Group on Agriculture in the FTAA process will be a key place from where to assess to what extent substantial progress in the subject can be effectively achieved on a regional basis. Finally, in order to maximise potential gains from this set of demanding negotiations Mercosur needs to make substantial homework. The first task is to complete the pending market access agenda and to advance in the implementation of common trade policies and "deepening". This will be the most decisive contribution to strengthen common interests and develop a shared agenda to carry forward negotiations with non-members. However, Mercosur seems prisioner of a paradox: diminshed pressure from third parties (particularly the US and the EU) to engage in preferential negotiations may reduce the incentives to make progress in the intra-regional agenda. A related challenge faced by Mercosur is institutional. Its inter-governmental organisation has so far been effective. However, a demand for more technical support to deal both with the intra-regional and extra-regional agenda is becoming evident. Although the authority to carry forward negotiations is likely to remain in the hands of government officials (it is unlikely that anything similar to the European Commission will be created in the foreseable future), the establishment of a technical locus to provide support and information for conducting the negotiations (both intra and extra-regional) seems warranted. This technical group may also contribute to shape and identify common interests and a shared agenda, moving beyond the simple arbitrage of not always consistent national interests. In any case, Mercosur will have to get used to play in an uncertain world trading environment. Although its foremost interest lays in a strong multilateral system, its actions will be generally of little relevance to the latters health. Therefore, Mercosur will remain a follower, reacting to initiatives taken by other influential partners such as the US or the EU. From a static trade standpoint an FTA with the EU would entail more direct benefits than an agreement with the US or the FTAA. However, a high potential for trade creation is also associated to sizeable transition and adjustment costs, which will need to be adequately dealt with. An FTA negotiation with the EU is also likely to contribute to strengthen Mercosur as the customs union, as the EU will introduce an element of discipline into the trading arrangement. This contrasts with the centrifugal forces which have usually been associated to trade negotiations with the US. References ALADI (1998), "Las Negociaciones de la Unin Europea y sus Relaciones Comerciales con la ALADI", ALADI/SEC7dt404, mimeo Baghwati, J. and A. Panagariya (1996), "Preferential Trading Areas and Multilateralism -Strangers, Friends or Foes?", in J. Baghwati and A. Panagariya (ed), The Economics of Preferential Trade Agreements, Washington DC: The AEI Press Bouzas, R. And J. Ros (1994), "The North-South Variety of Economic Integration: Issues and Prospects for Latin America", in R. Bouzas and R. Ros (ed), Economic Integration in the Western Hemisphere, Notre Dame, Ind: University of Notre Dame Press Bouzas, R. (1999), "Mercosurs External Trade Negotiations: Dealing with a Congested Agenda", in R. Roett (ed), Mercosur: Regional Integration, World Markets, Boulder, Co: Lynne Rienner Publishers Bouzas, R. (forthcoming), "Regional Trade Arrangements: Lessons from Past Experiences", in M. Rodrguez Mendoza, P. Low and B. Kotschwar (ed), Trade Rules in the Making: Challenges in Regional and Multilateral Negotiations, Washington DC: Brookings Institute CEPAL (1998), La Inversin Extranjera en Amricesa Latina y el Caribe, 1998, Santiago de Chile: CEPAL Document de Travail des Services de la Commission Concernant lEtablissement dune Association Inte-Regionale entre lUnion Europene et le Mercosur, mimeo, 1998 Hart, M. (1990), A North American Free Trade Agreement. The Strategic Implications for Canada, Ottawa: Insitute for Research in Public Policy INTAL (1997/98), Mercosur Report, numbers 1-3 IRELA-BID (1998), Foreign Direct Investment in Latin America: Perspectives of the Major Investors, Madrid: BID/IRELA Kume, H. (1996), "A Poltica de Importacao no Plano Real e a Estrutura de Protecao Efetiva", Texto para Discussao nm. 18, Ro de Janeiro: FUNCEX Motta Veiga, P. (1997), "El Mercosur y el Proceso de Construccin del ALCA", Integracin y Comercio Num 3 Oye, K. (1992), Economic Discrimination and Political Exchange, Princeton: Princeton University Press Panagariya, A. (1996), "The Free Trade Area of the Americas", The World Economy, vol. 19, nm. 5 Salazar Brandao, A., L. Valls Pereira, M. de Resende Lopes, A.L. Silva de Souza y S. Pereira Ribeiro (1998), "Anlise Comparativa dos Ganhos da Integracao: ALCA e Uniao Europeia", Ro de Janeiro: FGV Svarzman, G. (1996), "El Comercio de Mercosur con la Unin Europea", FLACSO, mimeo Whalley, J. (1998), "Why Do Countries Seek Regional Trade Arrangements?", in J. A. Frankel (ed), Regionalization of the World Economy, Chicago: The University of Chicago Press Yeats, A. (1998), "Does Mercosurs Trade Performance Raise Concerns About the Effects of Regional Trade Arrangements?", World Bank Economic Review, 12 Tables Table 1 Mercosur: Export Growth by Market of Destination, 1991/97 (million US dollars and percentage) 1991 1997Average annual growth rate 1991/97 ArgentinaBillion US dollars Total11.975,925.443,113.4 To Mercosur1.976,89.217,229.2 To the Rest of the world9.999,116.225,98.4 Share of Mercosur16,5%36,2%119,3a Brazil Total31.623,653.030,09.0 To Mercosur2.308,69.047,125.6 To the Rest of the world29.315,043.982,97,0 Share of Mercosur7,3%17,1%134,3a Paraguay Total736,91.171,88.0 To Mercosur259,3726,118,7 To the Rest of the world477,6445,7-1.1 Share of Mercosur35,2%62,0%76,1a Uruguay Total1.574,12.622,38,9 To Mercosur557,61.348,315,8 To the Rest of the world1.016,51.274,03,8 Share of Mercosur35,4%51,4%45,2a Mercosur Total 45.910,682.267.29,7 To Mercosur5.102,320.338,719,4 To the Rest of the world40.808,361.928,56,8 Share of Mercosur11,1%24,7%122,5b a Accumulated change 1991/97 Source: INTAL databank Table 2 Mercosur: Changes in the Commodity Composition of Exports, 1991/96 (percentage) CategoryMercosurRest of the worldTotal Share of each category in total exports, % 199119961991199619911996 Foods and Beverages28,225,013,642,515,838,5 Agricultural Raw Materials 4,83,16,44,96,24,5 Oil and Fuels3,69,83,43,33,44,8 Minerals and Metals3,52,315,38,313,66,9 Manufactures59,859,861,241,061,045,4 Total100,0100,0100,0100,0100,0100,0 Average annual growth rate, % 1991/961991/961991/96 Foods and Beverages24,242,638,7 Agricultural Raw Materials16,77,68,8 Oil and Fuels55,313,024,1 Minerals and Metals16,60,56,8 Manufactures27,34,99,4 Total27,313,616,0 Notes: Foods and Beverages (SITC 0+1+22+4); Agricultural Raw Materials (SITC 2-22-27-28); Oil and Fuels (SITC 3); Minerals and Metals (SITC 27+28+68); Manufactures (SITC 5+6+7+8-68). Section 9 (unclassified) was excluded from the computation Source: INTAL databank Table 3 Mercosur: Composition of Manufactured Exports, 1991/96 Type of manufactureMercosurRest of the worldTotal Share of each category in the total, % 199119961991199619911996 Natural resource-intensive10,711,18,420,88,717,9 Unskilled labor-intensive14,49,119,510,218,79,9 Human capital and technology-intensive74,979,872,168,972,572,2 Total100,0100,0100,0100,0100,0100,0 The classification was made using SICTrev3 two-digit categories. Natural resource-intensive manufactures (52+56+63+64+66). Unskilled labor-intensive manufactures (61+65+82+83+84+85). The remainder two-digit categories (except 68) were classified as Human capital and technology-intensive manufactures Source: INTAL databank Table 4 Argentina-Brazil: Largest Bilateral Investment Projects, 1997/2000 Investor Subsidiary/PartnerInvestment (million US dollars) SectorProjected Date Argentine firms in Brazil: Sancor Prez Companc SOCMA IMPSAT Prez Companc/PASA YPF-Enron Techint Argentina Arcor Sancor Prez Companc Canale-Itrn-Sideco IMPSAT Brasil Copesul YPF-Enron Techint Arcor Food Equipment Food-Telecom Telecom Petro-chemicals Petroleum Equipment Food 1997/2000 1997/2000 1997/2000 1997/2000 1997/99 1997/99 1997/98 1997/98 Brazilian firms in Argentina: Petrobrs Petrobrs AGA Bras. Praxair Brahma YPF YPF AGA Arg. Praxair Arg. Brahma 275 200 60 50 40 Petro-chemicals Petroleum Industrial gas Industrial gas Beverages 1997/99 1997 1997/99 1997/99 1997 Source: Argentine Embassy in Brazil Table 5 Mercosur: Share of Intra-regional Exports in GDP , 1991/97 (percentage) 1991199219931994199519961997e Argentina1,041,001,431,702,412,662,86 Brasil0,601,091,241,060,880,981,17 Paraguay4,183,784,164,365,176,957,48 Uruguay5,584,744,895,505,596,056,67 Mercosur Total0,861,161,401,391,421,581,80 e, estimate Source: INTAL, Mercosur Report. Table 6 Mercosur: Geographical Composition of Trade, 1996 (percentage and u$s billion) MercosurEuropean UnionNAFTARest of Latin AmericaRest of the WorldWorld Share of exports (% of total exports) Argentina3320101423100.0 Brazil1627221026100.0 Paraguay6322483100.0 Uruguay48198718100.0 Mercosur2325171124100.0 Share of imports (% of total imports) Argentina242923716100.0 Brazil162626725100.0 Paraguay541012420100.0 Uruguay441914715100.0 Mercosur212624722100.0 Share in total foreign trade (% of total foreign trade) Argentina2925161119100.0 Brazil162724825100.0 Paraguay571310515100.0 Uruguay461912716100.0 Mercosur222621923100.0 Memorandum items (u$s billion) Exports17,02918,17412,6208,09917,84673,768 Imports17,05621,84320,1355,58318,29282,909 Source: INTAL databank Table 7 Mercosur-EU Export-Import Trade, 1990-96 (u$s million) 1990 1991 1992 1993 1994 1995 19961990-96 Average annual growth rate (percentage) Exports to the EU: Argentina3,8114,0223,7993,6853,9314,4844,5753.1 Brazil10,16410,15310,86810,19012,20212,91212,8354.0 Paraguay304236225248227178227-4.8 Uruguay4284004333453984384671.5 Mercosur14,70814,81115,32514,46816,75818,01218,1033.5 Memorandum: total exports46,43345,91150,48754,04662,12770,49474,9478.3 Imports from the EU: Argentina 1,1202,1483,8024,3266,4806,0246,90135.4 Brazil4,8835,4055,2626,4599,76014,98214,89920.4 Paraguay2042082032002763463187.7 Uruguay28628433052351559864514.5 Mercosur6,4938,0449,59711,50717,03121,95022,76323.3 Memorandum: total imports29,30234,26440,65048,43062,71979,86183,44319.1 Bilateral trade balance with the EU: Argentina 2,6911,874-3-641-2,549-1,540-2,326NA Brazil5,2814,7485,6063,7312,442-2,070-2,064NA Paraguay100282248-49-168-91NA Uruguay142116103-178-117-160-178NA Mercosur8,2146,7665,7282,960-273-3,938-4,659NA Memorandum: total trade balance 17,131 11,647 9,837 5,616 -592 -9,367 -8,496 NA NA: not applicable Source: Based on ALADI (1998). Table 8 Mercosur: FDI Inflows by Origin, 1980-96 (u$s million and percentage) Annual average 1990 1991 1992 1993 1994 1995 1996 1980-91990-6 FDI inflows into Mercosur According to Region/Country of Origin ($ million) EU8291,9629278721,1356502,3243,1274,702 United States7863,5501,2181,2842,6954,3694,4847,2533,550 Japan2142491583669711833296673 Total1,8295,7612,3032,5223,9275,1376,84110,6768,925 Share of FDI inflows into Mercosur According to Region/Country of Origin (as a percentage of total FDI inflows) EU45.334.140.334.628.912.734.029.352.7 United States43.061.652.950.968.685.065.567.939.8 Japan11.74.36.814.52.52.30.52.87.5 Total100.0100.0100.0100.0100.0100.0100.0100.0100.0 Share of Mercosur in FDI inflows to Latin America and the Caribbean According to Region/Country of Origin (as a percentage of total inflows to Latin America and the Caribbean) EU67.956.054.271.060.957.142.552.365.8 United States71.343.537.925.849.551.237.953.537.3 Japan 73.354.539.665.235.989.45.860.286.3 Source: Based on IDB/IRELA, Foreign Direct Investment in Latin America: Perspectives of the Major Investors, Madrid: IDB/IRELA, 1998 Table 9 Mercosur: Commodity composition of exports to the EU and the world, 1990/96 (percentage) European UnionWorld 1990199619901996 Natural Resources64.368.751.051.3 Agriculture and foods52.060.438.540.6 Energy1.40.63.64.7 Others11.07.88.96.0 Manufactures35.731.349.048.7 Natural resource based9.810.49.08.1 Not based in natural resources25.720.039.139.0 Others0.10.80.91.6 Total100.0100.0100.0100.0 Memo item: Export values (u$s million)15,03518,32346,42574,998 Source: INTAL databank Table 10 Mercosur: Commodity composition of imports from the EU and the world, 1990/96 (percentage) European UnionWorld 1990199619901996 Natural Resources883723 Agriculture and foods651011 Energy122210 Others1143 Manufactures92926377 Natural resource based3232 Not based in natural resources89896074 Others0100 Total100.0100.0100.0100.0 Memo item: Import values (u$s million)6,24121,95527,32483,217 Source: INTAL databank Table 11 EU: Tariffs, Non-Tariff Barriers and Mercosur Exports, 1996 (percentages) Sections of the Harmonised Tariff Schedule Average tariffNon-tariff-barriersComposition of Mercosur exports Tariff linesImports Live animals30.967.29.98.2 Vegetal products17.7812.34.618.1 Edible oils15.211.51.20.8 Food, beverages, tobacco25.3532.47.029.9 Mineral products1.283.13.36.9 Chemical products5.773.43.33.2 Plastic, rubber and manuf6.650.00.01.0 Leather, skins and manuf3.180.00.05.1 Wood and manufactures3.030.00.02.7 Celulose, paper, cardboard and manuf 5.100.40.0 3.3 Textiles and manuf9.5683.741.82.7 Footwear8.7667.982.31.2 Stone, glass manufactures4.840.00.00.9 Precious metals and manf1.320.00.00.8 Metals and manufactures3.9223.815.46.0 Machinery3.490.10.05.9 Transport equipment5.472.65.32.7 Medical and precision inst3.660.00.00.3 Arms and ammunition3.470.00.00.1 Miscellaneous manuf4.220.00.01.1 Art objects and antiques0.000.00.00.0 Total9.4419.16.7100.0 Source: Based on ALADI (1998) and INTAL databank Table 12 Estimated effects of a Mercosur-EU FTA Change in the terms of trade (percentage)Change in GDP (percentage)Equivalent income variation (u$s million) Argentina6.166.711,194.40 Brazil3.595.053,260.17 EU-0.150.051,042.32 Memo item: estimated effects of a FTAA: Argentina-0.340.68-0.40 Brazil1.092.081,498,90 EU-0.29-0.15-4,336.53 Source: FGV (1998) Table 13 Estimated effects of a Mercosur-EU FTA on Brazil Percentage change in world pricesPercentage change in export volumesPercentage change in import volumesPercentage change in real output Natural resources0.07-13.064.56-4.57 Natural-resource intensive manufactures 0.12 -8.98 15.17 -2.92 Capital intensive manufactures 0.06 2.55 14.15 -3.24 Machinery and equipment0.00-6.1112.34-8.15 Grains0.2188.7611.950.90 Other agricultural products0.86114.2229.6618.68 Animal products0.46141.4639.379.12 Food products0.098.176.311.62 Diary products0.37-4.8021.87-1.92 Services -13.056.78-0.01 Source: FGV (1998) Table 14 EU: Alternative Estimates of Sensitive Products (percentage of EU imports from Mercosur) Source of the calculationAgriculture and FisheryNon-agriculture TotalAgricultureFishery DG1.B Minimum9.868.329.86Na Maximum14.2313.041.19Na DG E II 3.53 DG VINa11.35NaNa Source: EC, DG VI, "Mercosur-EU: Effects on Agriculture",mimeo, 1998; DG E II, "Document du Travail des Services de la Commission", mimeo, 1998 Table 15 Mercosur: Common External Tariff and Imports from the EU (percentages) Sections of the Harmonised Tariff ScheduleAverage common external tariff 2001/2006Share of the section in total imports from the EU - 1996Share of the EU in total imports of the section - 1996 Live animals9.10.811.2 Vegetal products7.61.05.7 Edible oils9.40.629.5 Food, beverages, tobacco14.82.824.0 Mineral products2.02.76.3 Chemical products8.016.815.3 Plastic, rubber and manuf12.04.924.7 Leather, skins and manuf10.90.19.3 Wood and manufactures7.80.213.8 Celulose, paper, cardboard and manuf 11.03.127.6 Textiles and manuf17.02.013.0 Footwear19.00.14.4 Stone, glass manufactures11.01.438.5 Precious metals and manf10.00.124.9 Metals and manufactures12.05.730.7 Machinery12.438.534.2 Transport equipment14.813.534.4 Medical and precision inst13.24.231.3 Arms and ammunition20.00.020.5 Miscellaneous manuf18.51.120.7 Art objects and antiques4.00.338.9 Total11.2100.026.0 Source: INTAL databank Table 16 Mercosur: Deviations from the CET, 1995 (percentage) Common External Tariff 2001/2005Percentage Deviation from the CET, 1995 Argentina Brazil Paraguay Uruguay 1. Agriculture, forestry & fishery7.00.00.0-1.4-1.4 2. Mining and quarrying3.40.00.00.00.0 3. Manufactures11.5-6.1+7.0-16.5-3.5 31. Food, beverages and tobacco11.60.0+0.8-0.8+0.8 32. Textiles, garment and leather17.1+0.6-1.2-1.2-1.2 33. Wood and wood products10.5+2.9-2.90.00.0 34. Paper and printing10.9+7.3-1.8-1.8-4.6 35. Chemical, petroleum, coal, rubber and plastics 8.1 -2.5 +1.2 -4.9 -11.1 36. Non-metallic mineral products (excl. Petroleum and coal) 10.9 0.0 -3.7 -2.8 0.0 37. Basic metal industries9.9+10.10.0-3.0-6.1 38. Metal manufactures, machinery and equipment 13.3 -18.0 +18.8 -39.8 -0.8 39. 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