Download Preferential Trading Arrangements Between the European Union

Preferential Trading Arrangements
Between the European Union and
South America: The Political
Economy of Free Trade Zones in
Practice1
Marcel Vaillant and Alvaro Ons
1. INTRODUCTION
I
N South America (SA), after several decades of trade liberalisation, the
positive effects of changes in the structure of production and consumption
are clear; there have been static and dynamic gains in efficiency. However, the
costs of productive restructuring have been high; it is partly responsible for the
persistence of high unemployment rates and low quality employment. As is
typical in this process, the transformations have been characterised by rapid
contraction in import substitution industries and slow expansion in export
industries (Rodrik, 1991). The problem is that SA has traditional comparative
advantages in the wrong place (Stiglitz, 1999). SA is inserted in the international
economy as an exporter of goods that are intensive in the use of natural resources.
Many of these products are currently being replaced by other materials and/or
there is a systematic technical progress path that tends to save natural resources;
both factors have a negative influence on international demand. Finally, and
perhaps more relevant, international agricultural markets are distorted by the
protectionist policies of the industrialised economies.
MARCEL VAILLANT and ALVARO ONS are from the Departamento de Economı́a, Facultad de
Ciencias Sociales de la Universidad de la República, Uruguay. The authors acknowledge the
detailed comments and suggestions made by an anonymous referee.
1
JEL: F02, F13, F15. This paper uses data from other publications undertaken with the financial
support of LAIA.
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and 350 Main Street, Malden, MA 02148, USA.
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MARCEL VAILLANT AND ALVARO ONS
In international trade negotiations, a priority objective for SA countries is the
improvement of their market access conditions in high income countries, in order
to achieve better export performance. The new strategies are oriented to
establishing preferential trading arrangements with the industrialised economies.
The countries of the Latin American Integration Association (LAIA) are involved
in various trade negotiations (among which those with the European Union (EU)
stand out).2 These are all progressing at different speeds. Trade talks with Mexico
determined the initiation of a move to a free trade zone: in just a short time,
Mexico succeeded in signing a free trade agreement with the EU in 1998.
The EU has three trade negotiations under way with SA. The EU is negotiating
trade arrangements with Chile, the MERCOSUR, and the Andean Community
(AC). In May 2002 Chile completed negotiations for the setting up of a free trade
zone with the EU. Region-to-region negotiations are also advancing, but at a
slower pace. Talks with the MERCOSUR are under way, tariff proposals have
been exchanged but there is as yet no clear finalisation date in sight (two
presidential summit meetings and seven rounds of negotiations have already
taken place without definite results). The MERCOSUR, which is regarded as one
of the most successful regional integration experiences in the developing world,
is going through its worst crisis since its inception in 1991. Despite the
difficulties encountered since 1999, the political decision to enhance the
integration process has been clearly confirmed by the governments of the four
member countries. Finally, negotiations with the countries of the Andes are the
least advanced and trade talks with the AC countries have reached a virtual
impasse.
All the trade negotiations mentioned above are taking place within a wider
context of integration agreements. These agreements contain aspects such as
intensified political dialogue, economic cooperation, foreign investment,
integration in the service sector, and the new subjects on the multilateral agenda
(environment and labour standards, etc.). The present study focuses on the trade
negotiations in goods, a process which involves all the factors which bear on
market access (tariffs, non-tariff barriers, and the rules of trade in a wide sense).
The analysis of modern integration processes must adopt an integral focus on the
factors involved in economic integration. It is generally accepted that trade
integration is an essential stage in the process. This is especially important for the
developing countries, who are encountering serious problems in accessing
2
The countries of South America and Mexico have developed their agreement on economic
integration in a wide and polyvalent trade arrangement, the LAIA. This deal (Treaty of Montevideo,
1980) includes a collection of preferential plurilateral and bilateral agreements between the member
countries. In practice, the trade arrangements which are relevant on a regional level (SA plus
Mexico) are sub-regional arrangements (the Andean Community, the MERCOSUR plus Chile and
Bolivia). Since 1999 Cuba has been a member of the LAIA but it was not considered in this study
because of problems with the availability of data.
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PREFERENTIAL TRADING ARRANGEMENTS: THE EU AND SA
1435
markets in industrialised economies, and progress in this sphere has become a
prerequisite for progress in other fields.
The results of the process of trade liberalisation between SA countries and the
EU will have differential consequences for the foreign trade of each of the
countries involved. Such consequences can be grouped in two sets:
(i)
trade opportunities – this refers to the potential expansion of SA (EU)
extra-regional exports as a result of the improvement in the access
conditions to the EU (SA) market.
(ii) trade perils – this refers to the defensive action by import substitution
sectors on a regional scale, faced with the potential displacement of their
regional exports.
The objective of this study is the construction of two lists of products, one
expansive (opportunities) and one defensive (perils). Thus, it would be possible to
design a guide for trade negotiations between the EU and the countries of SA.
This guide would establish offensive and defensive priorities (opportunities and
perils) at the level of products, for each of the participants. The general focus here
is of a mercantilist type; it implicitly assumes that exports are good and imports
are bad. In fact, it is known that, in terms of an evaluation of the effects on
economic welfare, exactly the opposite is true. However, in trade negotiations the
mercantilist focus is very often equally or more decisive than considerations of
added welfare. Trade negotiations are in their very essence mercantilist.
The idea is to identify the private interest groups that are for or against the
trade arrangements between the EU and the SA countries. The relevance of
explicitly introducing the list of products to be excluded from negotiation has
been pointed out in the modern literature on the political economy of trade policy
(Grossman and Helpman, 1995). From this perspective, the exceptions list
improves the chances of signing a preferential trade agreement (PTA) because it
makes it more palatable in political terms. The general results of these models are
summed up by the fact that the ideal exceptions list of each partner is like an
index of the comparative advantages of the other. As Grossman and Helpman
(1995) explained, the conditions needed for the political viability of a Free Trade
Agreement (FTA) may contradict those that ensure its social desirability. The
industries with more potential for trade creation, for which the FTA implies an
improvement in welfare, are those where there will be more resistance in the
import substitution country to accept their inclusion in the agreement.
In this paper, we extend the idea to the regional market without considering the
effects of the FTA in each domestic market itself, that is, we only take into
account a country’s export interests in the regional market and the potential
expansion of its extra-regional exports. Moreover, in spite of the general nature of
the proposed methodology, we study only the effects of the eventual preferential
trading agreements on the exports of SA countries. We suggest an industry
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MARCEL VAILLANT AND ALVARO ONS
typology of the effects of the FTA on regional trade inside SA and on exports
from SA to the EU.
To sum up, the method consists in the analysis of trade flows and trade policy,
and reaches conclusions about the unilateral stances of SA countries with respect
to the PTA with the EU. A mercantilist perspective has been adopted, since it is
the more pertinent from a political economy point of view. In this stage we do not
include interests inside the EU, and so we take as given the position of the EU to
sign the agreement.
The article is organised as follows. Section 2 contains a brief sketch of the
bilateral trade and a general description of the trade policy of both regions.
Section 3 presents aspects of methodology and data. Section 4 reports the results
for each of the bilateral trade arrangements. Finally, Section 5 concludes.
2. TRADE STRUCTURE AND TRADE POLICY
a. Pattern of Bilateral Trade Between the EU and SA
In this sub-section, we analyse the structure and the global evolution of trade
relationships between SA countries and the EU. We develop three main themes.
First, some figures about recent bilateral trade are presented; then some structural
indexes of trade intensity and trade complementarity are computed; and finally,
the industry pattern of exports and imports is described.
In the year 2000, total bilateral trade (exports plus imports) between the LAIA
and the EU was 83 thousand million US dollars. Trade with Mexico accounted for
more than a quarter of this (see Table 1). During the past decade, trade with Mexico
grew more than the global trade between the EU and the LAIA, however, the most
important part of this exchange has still been concentrated in SA. At the end of the
1990s (1998–2000), imports from the United States made up almost half the imports of the LAIA countries, while imports from the EU were 16 per cent of the
total. More than 70 per cent of imports from the EU went to SA countries.
The information available for the 1990s shows that the growth rate of LAIA
total imports (15 per cent) was greater than the growth rate of imports from the
EU (10.3 per cent). Furthermore, the EU was not a big importer of LAIA exports,
it only accounted for 12 per cent of the total, while the United States took more
than half. The growth rate of total exports from LAIA (11.3 per cent) was higher
than the growth rate of LAIA exports to the EU. The situation varied among the
different sub-regions. For Mexico, the EU is of limited importance as a source of
imports (9 per cent), and is even less relevant as an export destination (3.5 per
cent). In AC countries, the EU accounts for 17.5 per cent of their imports and
12.7 per cent of their exports, while in the MERCOSUR and Chile it is even more
important, accounting for a quarter of all import origins and export destinations.
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TABLE 1
Trade Evolution Between LAIA and the EU
(Percentages and millions of US$)
Argentina
Brazil
Paraguay
Uruguay
MERCOSUR
Chile
Bolivia
Colombia
Ecuador
Peru
Venezuela
AC
South America
Mexico
Total (m US$)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
23.1
71.2
2.4
3.4
47.6
11.6
3.8
31.9
7.1
16
41.1
22.3
81.5
18.6
44.973
27
68.1
1.9
3
48.6
9.8
4.2
30.1
10.3
14.8
40.7
21.2
79.6
20.4
47.057
30.5
64.7
1.7
3.1
48.3
9.8
5
30.2
10
14.7
40.2
20.5
78.6
21.5
51.601
30.8
64.1
1.7
3.3
50.1
9.3
5
33.8
10.5
15.2
35.5
20.4
79.8
20.2
51.879
30.8
65
1.5
2.7
53.6
8
3.8
40.3
11.1
18.9
25.9
19.5
81.1
18.8
63.012
26.3
69.8
1.3
2.6
56.1
10.4
4.2
36.8
10.8
21.8
26.4
19.4
85.9
14.1
71.261
28
68
1.3
2.7
55.9
9.9
3.6
37.3
11.6
21.6
25.8
18.8
84.6
15.3
73.286
27.1
68.5
1.7
2.7
55.5
9.8
4.1
37.6
12.6
20.7
25.1
17.7
83
17
81.783
27.9
68.2
1.3
2.6
55.4
9.4
4.4
37.5
11.7
17.9
28.6
17
81.8
18.2
85.509
27.7
68.6
1.3
2.5
53.3
8.6
4.3
32.5
10.4
21.4
31.4
15
76.9
23.1
80.325
25.3
71.3
0.9
2.4
49.9
8.9
3.8
30.5
8.4
20.4
36.9
14.7
73.5
26.6
82.875
Source: Own calculations using data of LAIA.
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MARCEL VAILLANT AND ALVARO ONS
TABLE 2
Trade Structure and Trade Dynamic between LAIA and the EU
(Percentages and millions of US$)
LAIA Imports from EU
Structure
1998–2000
Argentina
Brazil
Paraguay
Uruguay
MERCOSUR
Chile
Bolivia
Colombia
Ecuador
Peru
Venezuela
AC
South America
Mexico
LAIA (m US$)
Growth Rate
1990–2000
29.8
66.2
1.2
2.8
50.1
6.6
3.7
32.7
7.9
16.4
39.3
14.5
71.2
28.8
48.075
17.8
11.4
2.5
8.2
12.4
4.1
6.5
4.2
ÿ0.6
6.8
4.5
4.4
12.7
10.3
LAIA Exports to EU
Structure
1998–2000
23.7
73
1.2
2.1
56.7
12.2
4.8
35
13
23.8
23.5
17
85.9
14.1
34.828
Growth Rate
1990–2000
2.1
3.8
ÿ9
ÿ1.4
3.1
3.1
ÿ0.6
ÿ0.8
8.2
3.1
ÿ3.1
ÿ0.1
5.2
2.8
Source: Own calculations using data of LAIA.
The bilateral trade pattern between each SA country and the EU is measured
using a trade intensity index (TII, see equation (1) in the Appendix). The TII
measures the geographical bias of bilateral trade, and equals the ratio between the
share of a certain destination in a country’s total exports and the share of that
destination in total world imports. If the relationship is close to one, there is no
bias. If it is greater (less) than one, the destination is more (less) represented in
the exports of that country than in world trade. The TII could be split into the
effects of two factors: trade complementarity among the specialisation patterns of
the partners, and the residual geographical bias that characterises the exchanges
between them. The trade complementarity index (TCI, see equation (2) in the
Appendix) measures the level of similarity between the export supply of a
country and the import demand of one of its partners; the greater this similarity,
the more likely trade between them is. A value of the TCI greater (less) than one
implies the existence of strong (weak) complementarity between the export
specialisation of the country and the import specialisation of its partner. A value
close to one means that export and import specialisations are similar to the world
economy specialisation and, for this reason, the bias in bilateral trade cannot be
explained by the existence of comparative advantages. The geographical bias
index (GBI, see equation (3) in the Appendix) captures the fraction of the
observed bias not explained by trade complementarity between partners. In other
words, GBI is a residual that picks up the effects of geography and of
discriminatory trade policies on the structure of trade.
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PREFERENTIAL TRADING ARRANGEMENTS: THE EU AND SA
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The EU export pattern to SA (by countries or sub-regions) is characterised by a
TII that is a lot less than one (see Table 3). This shows the relatively minor
importance of SA as a destination for EU exports.3 The average level of the TII
was lower in the 1990s than in the 1980s; the different countries and sub-regions
of the LAIA showed different behaviour. Chile, Mexico and the AC countries
have become less important as destinations for EU exports, while the importance
of the MERCOSUR has increased. In the case of the MERCOSUR, this
phenomenon is explained by the behaviour of EU exports to Brazil and to a lesser
extent to Uruguay. On the other hand, EU exports are also characterised by a TCI
that registers values greater than one with almost all the SA countries. Thus, the
TII is low due to a negative geographical bias (GBI smaller than one). For the SA
region as an importer, the tendency in the 1990s was to distance itself from the
EU (GBI fell). This pattern was different for the various countries and subregions. In particular, the MERCOSUR maintained the GBI around 0.6. The case
of Brazil is remarkable, the GBI increased to 0.65 in the 1990s (see Table 3).
The SA export pattern to the EU shows a similar situation. The EU accounts
for a relatively much smaller share in SA exports than in world trade (the TII is
low). However, the TCI is high: the EU buys products that SA countries sell.
Then, the TII is explained by a negative geographical bias. It is also observed
that, in the 1990s, the countries of SA as exporters became more distant from the
EU in trade relationships.
When the SA region is taken as a whole, its role in world trade is that of an
exporter of goods intensive in the use of natural resources (food, petroleum and
mineral raw materials) and an importer of goods that are intensive in capital and
qualified labour (manufactured products, see Table 4).4 This same pattern
prevails in trade with the EU, although in this case the specialisation is more
marked. Trade between SA and the EU shows a typical ‘North-South’ pattern,
even more so than SA trade with the United States.
The AC presents an import-export pattern similar to that of the LAIA region
taken as a whole, but it is much more specialised in the export of goods from the
petroleum sector, and to a lesser extent from the minerals sector. The
manufacturing sector is very specialised in imports (the cover ratio is 0.20).
This pattern is similar in all markets considered. With SA, there is less export
specialisation in petroleum and minerals, and there is import specialisation in
food. Again, the specialisation is more intense with the EU. Evolution by trade
flow shows that imports have grown more rapidly than exports (8.5 per cent
compared to 6.4 per cent) during the 1990s. Imports from inside the region have
3
For the same period,
LAIA, 2001).
4
We use the standard
beverages and tobacco;
minerals and metals; (5)
the TII for United States exports to SA has been greater than one (see
classification of products (SCP) from LAIA based in SITC: (1) food,
(2) raw materials of agricultural origin; (3) fuels and lubricants; (4)
manufactures; (6) other products n.e.s.
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MARCEL VAILLANT AND ALVARO ONS
TABLE 3
Trade Intensity, Trade Complementarity and Geographical Bias
(Index)
Intensity
Complementarity
Bias
1980–1989 1990–1997 1980–1989 1990–1997 1980–1989 1990–1997
(a) EU Exports
LAIA
MERCOSUR
Argentina
Brazil
Paraguay
Uruguay
Chile
AC
Bolivia
Colombia
Ecuador
Peru
Venezuela
Mexico
0.50
0.53
0.75
0.46
0.40
0.49
0.55
0.57
0.42
0.50
0.56
0.57
0.62
0.36
0.44
0.62
0.68
0.63
0.23
0.54
0.51
0.46
0.37
0.47
0.48
0.40
0.47
0.25
1.02
0.85
1.10
0.75
1.13
0.95
1.05
1.17
1.25
1.14
1.21
1.17
1.16
1.12
1.05
1.01
1.11
0.96
1.04
1.08
1.04
1.10
1.18
1.10
1.16
1.06
1.10
1.05
0.49
0.62
0.69
0.62
0.35
0.51
0.52
0.49
0.33
0.44
0.46
0.49
0.54
0.32
0.42
0.61
0.62
0.65
0.22
0.50
0.49
0.41
0.31
0.43
0.41
0.38
0.43
0.24
(b) LAIA Exports
LAIA
MERCOSUR
Argentina
Brazil
Paraguay
Uruguay
Chile
AC
Bolivia
Colombia
Ecuador
Peru
Venezuela
Mexico
0.73
0.74
0.69
0.75
0.94
0.65
0.92
0.99
0.52
0.94
0.16
4.27
0.49
0.39
0.43
0.68
0.60
0.72
0.61
0.54
0.69
0.44
0.68
0.64
0.44
0.71
0.23
0.13
1.05
1.07
1.02
1.08
1.04
1.15
1.22
1.07
1.17
1.16
1.04
1.12
1.03
1.00
1.02
1.04
1.01
1.05
1.00
1.13
1.05
0.98
1.06
1.09
1.05
1.02
0.90
1.02
0.69
0.69
0.67
0.70
0.90
0.57
0.75
0.93
0.44
0.81
0.15
3.81
0.48
0.39
0.42
0.65
0.60
0.68
0.61
0.48
0.65
0.44
0.64
0.59
0.42
0.70
0.26
0.13
Source: Own calculations using data of Feenstra (2000).
been dynamic and have increased much more than the average. On the other
hand, imports from the EU have only grown at half the rate of total imports.
When it comes to exports, the regional market has shown dynamism, while there
has been reduction or stagnation in other areas (a fall in current export values).
In the MERCOSUR plus Chile, the sectors which are exporters are the food
sector, raw materials of agricultural origin, and minerals. The other sectors are
importers. The pattern of trade with the EU is similar but even more specialised.
When it comes to trade with the South American region, manufactures have an
export specialisation. In trade flows, the phenomenon of greater growth in
imports is repeated; it is nearly double the growth rate of exports. The most
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PREFERENTIAL TRADING ARRANGEMENTS: THE EU AND SA
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TABLE 4
Import and Export Specialisation Pattern by Product and Region
(Percentages, ratios and millions US$)
Import Structure
1998–2000
MERCOSUR
MERCOSUR
Chile
Chile
AC
AC
Mexico
Mexico
LAIA
SCP
(1)
Total
1
2
3
4
5
6
7.6
1.9
9
2.5
78.9
0.1
30.1
7.7
1.2
13.4
1.1
75.8
0.8
5.3
12.3
2
4.7
1.7
79.1
0.2
13.3
5.2
1.5
2.4
2.1
85.8
3
51.3
7
1.7
5.3
2.1
82.3
1.6
300.311
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
LAIA (m US$)
(2)
UE
3.6
0.9
1.5
1.4
92.6
0
50.1
3
1.2
0.6
0.8
93.4
1
6.6
7.5
1
1.4
1.2
88.9
0
14.5
3.3
0.6
0.8
0.9
91.7
2.7
28.8
4
0.9
1.2
1.2
91.9
0.8
48.075
Geographic
Ratio
(2)/(1)
0.47
0.48
0.17
0.55
1.17
0.02
1.66
0.39
1.02
0.04
0.75
1.23
1.2
1.25
0.61
0.51
0.3
0.71
1.12
0.2
1.09
0.63
0.41
0.34
0.43
1.07
0.89
0.56
0.57
0.51
0.23
0.56
1.12
0.51
Export Structure
1998–2000
(3)
Total
34.7
3.9
4.8
7.5
47.1
2
28.3
26.5
10.3
0.7
43.1
15.7
3.7
5.7
16.2
2.3
53.5
7.2
17.9
2.8
16.5
5.3
0.6
7.8
1.5
84.5
0.3
49.5
16.7
2.4
14.1
6.5
59
1.4
282.999
(4)
UE
50.9
5.8
0.3
11.3
31.1
0.6
56.7
19.3
10.2
0
57.3
7.7
5.5
12.2
41
2.5
24.7
12.7
10.7
8.3
17
9.1
1.2
20.1
3.1
65.7
0.8
14.1
39.5
5.1
7.2
16
29.7
2.5
34.828
Geographic
Ratio
(4)/(3)
1.46
1.5
0.06
1.51
0.66
0.28
2
0.73
0.98
0.02
1.33
0.49
1.5
2.13
2.53
1.11
0.46
1.77
0.6
2.92
1.03
1.71
1.92
2.57
2.11
0.78
3.07
0.28
2.37
2.16
0.51
2.46
0.5
1.83
Source: Own calculations using data of LAIA.
dynamic markets as suppliers of imports were those in SA. Purchases from the
EU grew at the average rate for total imports. In the 1990s, exports to regional
destinations were dynamic.
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MARCEL VAILLANT AND ALVARO ONS
b. Trade Policy
During the 1990s, the LAIA continued with the process of unilateral reduction
of tariffs on trade with the rest of the world. Trade liberalisation adopted the
strategy of unilateral opening, the outstanding features of which were that it was
non-discriminatory between partners, and that it was not reciprocal, unlike what
happens in processes of a multilateral or bilateral nature. In some cases, the
unilateral opening was accompanied by other liberalisation strategies to widen
market access in the rest of the world.
At the end of the 1990s, the average Most Favoured Nation (MFN) tariff of the
LAIA countries stood at 62 per cent of its 1990 level (see LAIA, 2001; and
LAIA, 2002). The evolution of the tariffs showed a continual decrease over the
decade, in spite of some unimportant reversions. The tariffs of the AC countries
showed a downward trend until 1996 and, in the year 2000, they stood at 57 per
cent of their 1990 level. In 1999–2000, the average tariff in the MERCOSUR was
60 per cent of the 1990 level. In 1997, the MERCOSUR countries underwent a
reversion in trade policy, and this was intensified in 1998 due to the
generalisation of the statistical rate of Argentina for all the countries in the
bloc. In 1991, Chile registered a great reduction in tariffs, they fell by 27 per cent,
after which trade policy remained stable for some years, showing a new decline in
the last year of the 1990s. Chile, with a uniform trade policy at 6 per cent, has the
lowest average tariff rate of all the countries in the region. In the rest of the SA
countries trade policy is characterised by higher tariff levels that are not uniform,
following a structure of tariff escalation. However, in the case of AC countries,
the protection of agriculture stands out.
Jointly with the process of unilateral opening mentioned above, sub-regional
agreements were intensified, implying higher tariff preferences inside the region
(LAIA, 2001). The liberalisation was greater than that shown by the evolution of
MFN tariffs. In the 1990s, the countries of the region were increasingly rigorous
in the application of the rules of trade, in accordance with the new multilateral
agreement which emerged from Marrakesh in 1994.5
Starting at the end of the 1990s, the orientation towards trade liberalisation has
been called into question following episodes of macroeconomic domestic
instability (Mexico, Brazil and Argentina), combined with the changes in the
scenario of the international economy (from the previous international liquidity
of the 1990s to the crisis in the capacity for foreign indebtedness of the present
time). Although some signs of protectionism have appeared, there have not been
5
The LAIA has abundant material on non-tariff barriers to trade on the national level; there is an
exhaustive inventory of non-tariff trade policy for every one of the member countries. However, as
yet, there are no indicators at the level of position which are feasible to be re-aggregated and
compared by sectors and countries, as are available, for example, in a database used for the case of
the United States (OECD, 1997).
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great reversions in tariff levels in the markets of the region. At the present time,
the obsession of regional policy makers in matters of trade is to make new
reductions in the levels of protection, but in exchange for improved market access
to the richest countries (the United States, Canada and the EU).
The current trade policy of the MERCOSUR members is what was established
at the beginning of the decade in the MERCOSUR agreement. From 1995
(1 January), the MERCOSUR began to operate as an imperfect Customs Union.
The approval of the Common External Tariffs (CET), even with some exceptions,
generated expectations for a rapid implementation of a common trade policy in
the MERCOSUR.
The CET made it difficult for local interests to press governments to apply
protectionist measures. However, the member countries have proposed measures
that ‘perforate’ the CET. They seek the approval of the other members, and these
have endorsed the majority of the decisions. Since 1999, a number of unilateral
measures have been taken by member countries. The situation from the first half
of 2001 reveals uncertainty about the future of the customs union strategy. The
measures taken by Argentina in March 2001, which implied a reversion to higher
levels of protection, have been the most recent events in this process. An effort to
encompass this change in the regional logic has been made. However, it is not
clear what direction the regional agreement will take in the future: strengthening
the customs union or redirecting the agreement towards an FTA.
EU trade policy is not characterised by a standardised scheme of tariff
escalation (see OECD, 1997). In particular, raw materials and agricultural
products have high tariffs. It can be seen that around 13 per cent of the total tariff
lines are subject to some kind of non-tariff measures (NTM) of the ‘core’ type.6
This indicator is somewhat lower than that for the United States, although in raw
materials and agricultural products it is noticeably higher. The NTM weighted by
trade shows that only 4 per cent of imports are subject to NTM of the ‘core’ type.
However, this indicator is deceptive given that where the NTM are most severe,
trade is consequently low or null, and therefore the level of influence in the global
indicator is appreciably reduced. In other words, the structure of weights is
endogenous to the applied non-tariff instruments of trade policy.
In the EU, the MFN average tariff is low (6.4 per cent), but in those sectors
with highly protected industries, the dispersion of their tariff structures is also
6
Put simply, the frequency of NTM is measured as the number of tariff lines affected by these
measures out of the total number of tariff lines in the position in question. For example, if the
indicator shows 17 per cent of the total, this means that of the approximately 10,000 tariff lines,
1,700 would be affected by non-tariff restrictions. The NTM ‘core’ includes measures of price
control (MCP, variable charges, anti-dumping and compensatory rights) and quantitative
restrictions (RC, restrictions on exports, non-automatic licences, quotas, prohibitions). The total
NTM includes, besides the ‘core’ NTM, automatic licences and monopolistic measures (state trade
monopolies).
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TABLE 5
South America Countries in the GSP of the EU
Industries Without
Preferencesa
Argentina
Brazil
Paraguay
Uruguay
Chile
Bolivia
Colombia
Ecuador
Peru
Venezuela
Fight
Against Drugs
I, III, XI, XII
I, VI, IX, XI, XII, XVII, XX, XXIII, XXVI, XXX
I
V, IX, XV
X
X
X
X
X
Note:
a
Section of HS details in Annex III of Comunidades Europeas (2001).
Source: Diario Oficial de las CE (2001).
high (see WTO, 2002). The average indicators of NTM show that they are used
with moderate frequency. However, in an industry perspective their use could be
intensive (see OECD, 1997). As it is shown in OECD (1997) for the EU the
sectors with greater frequency of NTM (core) are textiles and clothing (Section
XI, Harmonised System), food industry products (Section IV), and vegetable
products (Section II). The trade weighted NTM are more relevant (6 per cent or
more of the trade affected by NTM) in the following industries: textiles and
clothing (Section XI), products of the animal kingdom (Section I), and vegetable
products (Section II).
Except for the PTA recently signed with Chile, the EU does not have a
reciprocal preferential agreement with any other of the South American countries.
However, through the Generalised Preferences System (GPS), the countries of the
sub-region have obtained preferential conditions (non-reciprocal) in the EU. This
mode of exchange is regulated by a recent EU normative framework (see the
Diario Oficial de las Comunidades Europeas, 2001). The general regime of
preferences classifies the products in two sets: non-sensitive, in which ad valorem
and specific tariffs go to zero; and sensitive, in which ad valorem tariffs are
reduced by 3.5 percentage points and specific tariffs are reduced by 30 per cent.7
The particular characteristics of the GPS for the countries of the region are shown
in Table 5. Basically, these can be summed up in two dimensions: products with
suppressed preferences (para. 8 of Article 7), and countries within the special
regime of the fight against the production and traffic of drugs (Title IV). A great
proportion of the sensitive products are treated as non-sensitive for the countries
7
The reduction is 20 per cent of the ad valorem tariff for the products in Chapters 50 to 63.
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included in the special regime of the fight against the production and traffic of
drugs.
The GSP is discriminatory and not reciprocal. These kinds of arrangements are
made between industrialised economies and those at a relatively lower level of
development. They are unilateral concessions, aimed at promoting the
development of the countries.
The GSP is legitimised in the WTO as an exception to the principle of MFN by
the so-called enabling clause. These agreements are more vulnerable given the
fact that they are unilateral concessions and do not have the nature of a contract in
which both parties have obligations and rights. The establishment of permanent
and dynamic trade flows is more difficult when the preferences are subject to
these uncertainties.
The GSP between the member countries of SA and the EU seemed to be a
good example of this situation. The countries which have more unilateral
concessions are those with less bilateral trade (AC countries). On the other hand,
the GSP is a very complex mechanism which introduces many distortions both
for the countries which make the concessions and for those which benefit from
them. In the case of the trade negotiation with the EU, the GSP has become an
obstacle. The position of the EU was to offer in the reciprocal agreement
concessions that had already been granted in the GSP. Thus, for many countries,
the negotiation entails granting preferences to the EU without receiving any new
trade preferences.
3. METHODOLOGY
From the perspective of SA countries, the PTAs with the EU would imply a
trade-off between the gain in access to the EU market and the loss in the
differential in regional trade preferences. The first can generate trade
opportunities and the second can generate trade perils. In this context, the less
the industries and trade that could be negatively affected by the agreement are,
and the more the export industries that improve their market access are, the more
politically acceptable the FTA is to SA countries.
In the rest of this section, we outline the methodology used in the construction
of the expansive (opportunities) and defensive (perils) lists of products (see the
Appendix for a more formal presentation). Both lists involve a two-step
procedure. The selection of trade opportunities requires the prior determination of
what we call trade options, while the selection of trade perils requires the prior
determination of what we call trade threats. The first step only considers trade
data, while the second incorporates trade policy information as well.
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a. Options and Opportunities
Trade options and trade opportunities are connected to the potential expansion
of SA extra-regional exports which would result from the eventual improvement
in the conditions under which they access to the EU market.
The selection of trade options involves consideration of the export profiles of
SA countries together with the import profiles of EU countries, in order to
identify industries in which South Americans are big exporters and Europeans are
big importers. We consider that an SA country has an option in a certain industry
(SITC revision 2, 4 digits) when its exports show strong trade complementarity
with EU imports. That is, trade options occur in those industries that would have
better chances of exploiting the eventual improvement in access to European
markets.
Specifically, we use a trade complementarity index based on the ‘revealed
comparative advantage’ index of trade specialisation proposed by Balassa (1965).
For each industry, the trade complementarity index (see equation (4) in the
Appendix) equals the product of the export specialisation index of the SA country
(comparative advantage index) and the import specialisation index of the EU
(comparative disadvantage index). The export specialisation index equals the
ratio between the share of the industry in a country’s (or region’s) total exports
and the share of the industry in world trade. When the export specialisation index
is greater than one, we say that the country is more export oriented in that
particular industry than the world average and, therefore, we conclude that the
country has a comparative advantage in that industry.8 Analogously, the import
specialisation index equals the ratio between the share of the industry in a
country’s total imports and the share of the industry in world trade. When the
import specialisation index is greater than one, we say that the country has a
comparative disadvantage in that industry.
The trade option level for a certain industry is given by its export trade
complementarity level. We have selected as trade options a subset of the
industries with export trade complementarity greater than one: those industries
that also satisfy the condition that the export specialisation of the SA country is
greater than one and the import specialisation of the EU is greater than one half.
We have been less strict with the lower bound for EU comparative disadvantage,
since the export trade complementarity index of an SA country vis-à-vis the EU
can be written as a weighted average of the complementarity index with each EU
member, the weights being the share of each member in EU total imports (see
equation (5) in the Appendix). Because of disparity in economic size inside the
EU, we are trying to avoid a situation in which the set of selected trade options
would be dominated almost exclusively by options in the bigger markets.
8
Note that we consider each SA country vis-à-vis the EU and that we compute the indexes
including the trade between EU members.
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The data source for the options analysis was the World Trade Flows (Feenstra,
2000). Because of the structural nature of the variables involved in trade
specialisation, we compute the indexes for averaged trade data for the period
1990–1997 (1997 being the last year for which consistent information on the
world economy is available).
The selection of trade opportunities involves completing the above analysis
with trade policy information and trade data at a higher level of disaggregation
(Harmonised System, 6 digits). In the first step, we applied a trade
complementarity filter. In this second step, we filter the trade options set using
the information about ad valorem tariffs. Specifically, we consider that an SA
country has an opportunity in a certain product (HS, 6 digits) when a two-fold
condition is satisfied:
(i)
the product belongs to an industry (SITC, 4 digits) that constitutes a trade
option for the SA country, and
(ii) EU imports of that product from that SA country face a common external
tariff different from zero.
Thus, trade opportunities occur in those products that, being trade options,
would gain improved conditions of access to the EU market as a result of the
constitution of a free trade area. On the other hand, a trade option does not turn
into a trade opportunity in those products in which SA suppliers are currently
faced with a zero tariff. We propose an opportunity index at the industry level
computing the option index (trade complementarity) adjusted by the share of
industry exports that constitute an opportunity in the industry exports that
constitute an option (see equation (9) in the Appendix). That is, the trade
opportunity level for a certain industry equals the product of its option level and
its share of exports with an opportunity in total industry exports. For example, if
in an industry that is a trade option the products that are opportunities represent
one half of its exports, the value of the opportunity index will be one half of the
value of the option index.
The additional data needed for carrying out the opportunity analysis came from
different sources. We constructed a database of EU trade policy that includes the
MFN tariffs at the HS 6 digit level, and all the current trade preferences granted
by the EU to SA countries.9 The MFN tariffs were obtained from the CD Rom
‘Tariffs and Trade’ (OECD, 2000) and the trade preferences from the EU (Diario
Oficial de las Comunidades Europeas, 2001). We also used averaged export data
at the HS 6 digit level for the time period 1998–2000, that were kindly supplied
by the LAIA General Secretary’s office.
9
The non-reciprocal trade preferences contained in the General Preference System (GPS).
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b. Threats and Perils
Trade threats and trade perils are connected to the potential displacement of
SA intra-regional exports by EU exports following the eventual improvement in
the conditions under which European suppliers access SA markets. The threats
and perils analysis is formally similar to the options and opportunities selection.
The determination of trade threats involves considering EU trade options in SA
markets in conjunction with the intra-regional export patterns of the SA countries.
We consider that an SA country faces a threat in a certain industry (SITC, 4
digits) in another SA market when a two-fold condition is satisfied:
(i) that industry in that SA market constitutes a trade option for the EU, and
(ii) the SA country exports products in that industry to that SA market (this
would be the threatened trade flow).
That is, trade threats occur in those industries more likely to have their regional
exports displaced by the trade flows from the EU. Analogously to the selection of
the trade options for SA, we define the EU trade options set as a subset of the
industries with export trade complementarity greater than one: those industries
that also satisfy the condition that the export specialisation of the EU is greater
than one half and the import specialisation of the SA countries is greater than one
(see equation (7) in the Appendix).
The threat level for the exports of a certain industry in a certain SA market is
positively associated with the level of the corresponding EU trade option and
with the relevance of that market for industry and total exports. We propose two
trade threat indexes that capture those aspects. One index equals the product of
the EU trade option and the proportion of industry exports orientated to that SA
market (see equation (11) in the Appendix). The other index equals the product of
the EU trade option and the share that industry exports to that SA market have in
the country’s total exports (see equation (12) in the Appendix). Thus, the former
considers the threat from the point of view of industry exports, while the latter
captures the implications of that industry threat from the point of view of total
exports, through the inclusion of the industry export share. We are assuming that
each industry has a capacity to influence government action that is proportional to
its trade importance (the share of the affected export in total exports) and we
compute this variable to have an empirical approximation to the opposition and
resistance to a particular FTA.
The data source, the disaggregation level and the time period for averaging the
trade data are the same as in the options analysis.
The selection of trade perils involves completing the above analysis with trade
policy information and trade data at a higher level of disaggregation (HS, 6
digits). The defensive list includes those products in which the EU would be able
to displace SA intra-regional trade flows. In this case, imports from the EU would
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tend to reduce the trade diversion cost associated with discriminatory regional
trade arrangements. If we adopt this perspective, what we call perils would be
good news for consumers in SA. However, from the productive point of view at
industry level, what we call perils would effectively be just that. In this sense,
these lists would yield information on the problems of political economy in the
process of constructing the bilateral trading arrangements. In the language of
trade negotiation, these are known as sensitive products. Specifically, we
consider an SA country to be at peril in a certain product (HS, 6 digits) in another
SA market, when a two-fold condition is satisfied:
(i)
the product belongs to an industry (SITC, 4 digits) that constitutes a trade
threat in that regional market for the SA country, and
(ii) EU exports of the product to that SA country face an ad valorem tariff
different from zero.
On the other hand, a trade threat does not turn into a trade peril in those cases
where EU suppliers are currently facing a zero tariff.
We propose two trade peril indexes adjusting the above-mentioned threat
indexes by the share of the industry exports that constitute a peril in the industry
exports that constitute a threat (see equations (14) and (15) in the Appendix).
For example, if in an industry that is a trade threat in an SA market the products
that are perils represent one half of industry exports to that market, the value of
each of the peril indexes will be one half of the value of the respective threat
index.
Additional data needed for carrying out the trade perils analysis came from the
LAIA General Secretary’s office, who provided a database of the trade policies of
SA countries that includes the MFN tariffs at the HS 6 digit level, and all current
intra-regional trade preferences. We also used averaged export data on SA
countries at the HS 6 digit level for the period 1998–2000, supplied from the
same source.
c. Shortcomings
The methodology outlined above has several limitations:
(i)
Some of these shortcomings could derive from the fact that the
methodology is based on indexes of comparative advantage that are of a
‘revealed’ type. Thus, as has been typically stated, we would be assuming
that the real pattern of comparative advantage can be observed from trade
data. In this sense, the indexes could be biased due to existing trade policy
barriers, subsidies, geography, tastes, foreign direct investment, etc., all of
which are not uniform across sectors and countries. However, we have
adopted a mercantilist perspective and, therefore, we are not interested in
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these indexes as indexes of comparative advantage. Our interest is in the
patterns of specialisation and in the trade complementarities that those
patterns determine, beyond the factors that are generating those patterns.
These indexes help us to map the private interest groups that are for or
against the corresponding PTA in each SA country. The allusions to
comparative advantages and disadvantages merely refer to the fact that the
indexes of specialisation are frequently named in that way.
(ii) We are not identifying those products that are basically exchanged on a
regional basis; the type of products that do not travel long distances. In
those cases, the opportunities and perils would not be relevant.
(iii) The existence of trade opportunities and trade perils requires the
corresponding tariff to be different from zero. It should be noted that we
are not considering that the level of an opportunity or peril also depends
on the level of the existing tariff.
(iv) We are ignoring the perils that an FTA would generate in the domestic
market; in other words, we are considering the industry exports that are in
peril instead of the industry production that is in peril. This problem
could be solved with the appropriate production data, but they are hard to
compile.
4. RESULTS
a. EU and Chile
In April 2000, representatives from the Chilean and EU governments began
negotiations for a political and economic association. In May 2002, after ten
negotiation meetings, the first preferential and reciprocal trade agreement
subscribed to by the EU with an SA country was signed. Besides the trade chapter
which establishes a free trade area between the two partners, the association
agreement also includes political dialogue and many matters of economic cooperation.
In the tariff liberalisation process, the PTA considers six types of products.
Only some agricultural and fish products are excluded from these categories (for
example in cases where Chile has variable import levies, and in dairy products,
among others). From the moment that the PTA comes into force, 85 per cent of
Chile’s exports to the EU will enter without any tariff. It is thought that, at the
start of the fourth year, the total of goods benefiting from a zero tariff will make
up 96 per cent of the export flow to the EU.
It should be noted that only 0.3 per cent of the trade with the EU has remained
as an exception to this tariff liberalisation. The PTA contemplates a ‘Revision
Clause’, which means that every three years the viability of widening tariff
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FIGURE 1
EU and Chile: Bilateral Export Options
concessions for these excepted products, and for other agricultural products (for
example those with quantitative restrictions), will be examined.
The bilateral industry trade pattern between the EU and Chile is clearly
presented in Figure 1. In this figure, trade options of one market in the other are
the coordinates of each point on the plane.10 The fact that the trade options are
concentrated along the axes illustrates the inter-industrial pattern of trade. The
figure also gives information about the type of the products.11 This is a markedly
North-South trade pattern of manufactures for natural resource intensive goods.
Also, while Chile’s trade options are concentrated in a few products, the EU
presents a much more diversified profile of trade options.
In the Chile-EU PTA, the trade opportunities for Chilean exports are moderately significant. The global index of opportunities is 0.28, which represents less
than 30 per cent of the export trade complementarity between Chile and the EU
(see Table 3). The share of the industries with trade opportunities in total exports
10
In order to obtain a clear graphical representation, the scale of the data has been changed by an
appropriated transformation that preserves the essential properties of the option patterns (square
root of the index).
11
A square represents a manufacturing industry; a triangle pointing up is an agricultural industry
(foods, beverage, tobacco and raw material of agricultural origin); and a triangle pointing down
corresponds to minerals, metals or fuels. In the case of Figure 1, the bigger icons show that the
option turns into a trade opportunity for Chile.
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is less than a quarter. More than 95 per cent of the trade opportunities are
concentrated in natural resource intensive industries as shown in Figure 1 (0575 –
grapes, fresh or dried; 0343 – fish fillets, fresh or chilled; 4111 – fats and oils of
fish and marine mammals; 0574 – fresh apples; 2460 – pulp wood).
Chile does not register trade threats or trade perils. This is a bilateral countryregion agreement and so, from the point of view of Chilean exports, there is no
preference loss in a sub-regional market. Chile has a large number of PTAs with
all SA countries inside LAIA. In the global framework of the Treaty of
Montevideo (1980), from which LAIA was created, countries in the region should
compensate for regional preferences that are negatively affected by agreements
with third countries not belonging to the Association. However, from the first half
of the 1990s, when the NAFTA agreement was signed, Mexico has been granted
a general waiver (interpretative Protocol of Article 44 of the Treaty of
Montevideo). In the subsequent years, there have been a series of agreements
between LAIA member countries and third markets, and all have received the
same treatment. In practice, Article 44 of the Treaty of Montevideo, which
compels the application of the principle of most favoured nation at the regional
level, is inoperative at the present time.
In any case, when we consider the trade perils that this agreement might generate
in the neighbouring countries of SA, the PTA is not expected to generate resistance
of the other markets with potential erosion in trade conditions with Chile (see Table
6). Indeed, in the EU-Chile PTA, in no country do the trade perils reach 2.5 per cent
of total exports. In Bolivia, Paraguay and Uruguay, the trade perils are concentrated
in the food industry, while in the rest of the countries of SA (particularly Brazil,
Colombia and Argentina) they are in the manufacturing industries.
TABLE 6
Perils: Chile-EU Agreement for Other SA Countries
Trade Perils
Argentina
Brazil
Paraguay
Uruguay
Bolivia
Colombia
Ecuador
Peru
Venezuela
Global Index
Share NR a
Export Share
0.06
0.05
0.05
0.04
0.02
0.02
0.00
0.02
0.01
46.5
3.0
95.3
85.8
82.0
5.4
2.5
27.8
19.5
2.3
1.8
1.6
1.3
0.5
1.0
0.1
0.8
0.3
Note:
a
NR: natural resources intensive products (1, 2, 3 and 4 SCP).
Source: Own calculations using data of Feenstra (2000) and LAIA.
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b. EU-AC
AC countries maintain a special trade relationship with the EU within the
framework of the Special Regime of Preferences, and since 1990 the SGP has
established EU support in the fight against the production and traffic of drugs
(Drug Countries Preference List). Recently, the GSP was updated with a new list
of products and preferences starting from January 2002.
AC governments are making efforts to begin the negotiation of a global
agreement with the EU similar to the ones that have already been signed with
Mexico and with Chile, and the one under negotiation with the MERCOSUR.
This ‘fourth generation’ agreement could substitute the one signed in 1992 in
recognition of the progress made in the process of sub-regional integration. The
Andean Presidential Council, using EU terminology, has defined four pillars:
political dialogue, access to the European single market, a cooperation
framework agreement, and specialised dialogue on the subject of drugs. In the
last few meetings there has been political dialogue, and the Ministers of Foreign
Affairs of the AC and the EU have begun to analyse the initiative of the AC
countries, and the possibility of advancing in the negotiation of this association
agreement.
The trade options of the EU and the AC countries in each market are
presented in Figure 2. Again, in this case the options are concentrated on the
axes or near them, so in general a trade export option for one region does not
coincide with a trade export option for the other. This fact represents the
markedly inter-industrial character of the specialisation. Also, it shows a
potential North-South trade type between the two regions; a diverse group of
European manufactured products and a concentrated group of goods intensive
in natural resources from the AC countries. However, the EU has some options
in agricultural products in the AC countries (0470 – other cereal meals and
flours; 4232 – soya bean oil).
The AC countries all face high levels of trade option index in the EU market,
which represent a majority of their export share (more than 80 per cent).
However, in all the AC countries, the levels of trade opportunities are much lower
than the identified trade options. There are two reasons for this reduction in trade
options when trade policy information is considered: on the one hand, the EU has
a high frequency of zero tariffs in the set of Andean options, and also these
countries enjoy important unilateral concessions through the GSP and the
additional preferences included in the special regime of preferences (Drug
Countries Preference List). Bolivia, Peru and Venezuela practically do not have
trade opportunities in a potential agreement with the EU, while Colombia and
Ecuador could increase their exports there. In these last two countries, around one
third of their export complementarity with the EU (see Table 3) registers
opportunities which amount to about a quarter of the total exports of both
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FIGURE 2
EU and AC: Bilateral Export Options
countries (see Table 7). In both, the list of products with trade opportunities for
export expansion is basically made up of agricultural products.
In the agreement between AC-EU, the SA countries that belong to this subregion are those that also have the highest share of trade threatened and in peril.
This fact is a consequence of the market access improvement of EU exports.
Unlike the comparison between options and opportunities, which shows a
reduction in the amount of options, in this case most of the trade threat becomes
trade perils. The countries with the highest levels of trade peril are Bolivia and
Colombia. While Bolivia faces them in the agricultural sector, Colombia
encounters potential problems in manufactured goods in sub-regional trade. In
general, it can be observed that although the threats do not represent a majority
total export share, they are important when bilateral flows are considered. This is
particularly true in the Colombian case, where more than 80 per cent of the
regional trade with their Andean neighbours is in trade peril.
Among the other countries of SA that would be harmed by the agreement,
Argentina, Brazil and Chile stand out. Brazil and Chile have their trade perils
with the Andean countries concentrated in manufactured products, and Argentina
has its trade perils concentrated in agricultural products.
For example, we illustrate global results for the case of Colombia in Figure 3.
This figure shows only the main opportunities and perils (those that cover one half
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TABLE 7
Perils and Opportunities in the AC-EU Agreement
Trade Opportunities
(a) AC Countries
Bolivia
Colombia
Ecuador
Peru
Venezuela
Trade Perils
Global
Index
Share
NR
Export
Share
Global
Index
Share
NR
Export
Share
0.07
0.34
0.35
0.07
0.00
87.5
99.8
100.0
99.3
99.7
7.2
25.7
25.0
6.0
0.3
0.46
0.24
0.07
0.14
0.13
96.9
38.5
43.7
61.8
41.5
5.5
6.8
3.0
4.6
4.9
Trade Perils
Global
Index
(b) Others in South America
Argentina
0.22
Brazil
0.08
Paraguay
0.02
Uruguay
0.05
Chile
0.12
Share
NR
Export
Share
69.1
10.9
26.4
75.2
49.1
3.9
2.6
0.4
0.9
3.6
Source: Own calculations using data of Feenstra (2000) and LAIA.
of the exports that are an opportunity and one half of the exports that constitute a
peril, respectively).12 It can be seen that the opportunities are few and overconcentrated in agricultural products (0711 – coffee; 0579 – fruit, fresh or dried).
Some of the trade perils shown in the figure are: disinfectants, insecticides,
fungicides, etc. (591A); lubricating petroleum oils (3345); and potatoes (0541).
c. EU-MERCOSUR
The MERCOSUR was set up as a Customs Union by the Agreements of Ouro
Preto (December 1994), and it was necessary to establish a Common External
Trade Policy. Since that date, a process of trade negotiation with third markets
has been under way. On 15 December, 1995, an agreement was signed in Madrid,
‘The Inter-regional Framework Agreement of Cooperation between the
MERCOSUR and their States Parts and the European Community and their
States Members.’ This global agreement came into force on 1 July, 1999, and it
constituted the basis to begin negotiations aimed at the establishment of a free
trade area between the two trade blocs.
12
The empty icons are options that turn into opportunities and those with a dot inside are threats
that turn into perils.
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FIGURE 3
Colombia: Opportunities and Perils in the AC-EU Agreement
Since the global agreement came into force, the negotiation process has
advanced slowly. The first meeting of the Council of Cooperation MERCOSUREU took place on 24 November, 1999, in Brussels, as had been stipulated in the
Declaration of the Summit of Rio de Janeiro (June 1999). On that occasion, a
number of definitions were adopted as to the structure, methodology and calendar
of the trade negotiations. It was decided that various bodies would be created to
institutionalise the negotiation process: a Committee of Bi-regional Negotiation
responsible for undertaking the trade negotiations and for coordinating the process
(it was planned that this would meet three times a year); a Subcommittee of
Cooperation; Technical Groups; and secretaries of coordination in both regions.
Up until now, the Committee of Bi-regional Negotiation has met on seven
occasions.13 In the first meeting, trade negotiations between the two blocs were
initiated. At that time three Technical Groups were created:
(i)
Trade in goods (with three sub-groups);
13
The meetings were as follows: First Meeting: April 2000 in Buenos Aires; Second Meeting: June
2000 in Brussels; Third Meeting: November 2000 in Brasilia; Fourth Meeting: March 2001 in
Brussels; Fifth Meeting: July 2001 in Montevideo; Sixth Meeting: October 2001 in Brussels;
Seventh Meeting: April 2002 in Buenos Aires.
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(ii) Trade in services, the movement of capital, investment and intellectual
property,
(iii) Competition policy, the solution of controversies.
In the second meeting, the discussion focused on three points: (i) the exchange
of information; (ii) the identification of non-tariff barriers, and (iii) the definition
of the specific objectives for each negotiation stage. During the third meeting of
the Committee, the parties exchanged opinions on the treatment of some
technical points to do with the following issues: agriculture, sanitary and phytosanitary measures, services, and government purchases. In the fourth meeting the
debates continued. A first document was presented on non-tariff restrictions, and
there was an initiative on trade facilitation. During the fifth meeting (July 2001)
the EU delegation presented the MERCOSUR with their offer of tariff and nontariff negotiation, with the corresponding texts for the liberalisation of the trade
of goods, services and government purchases.
The framework and principles of the negotiation were established in the text of
the trade liberalisation of goods. It is expected that all non-tariff measures will be
eliminated when the EU-MERCOSUR Agreement of Association comes into
force. The conclusion of phyto-sanitary and standard of products agreements,
among others, are also expected. The EU tariff offer does not exclude any sector,
and it respects the objective of covering all trade. Six categories of agricultural
products were defined,14 and a dismantling of tariffs was proposed for the first
five categories. The elimination of tariffs is planned in different stages, and it
would cover 2.2 thousand million Euros of trade (80 per cent of all trade in
agricultural products subjected to tariffs). The sixth category covers the most
sensitive products with ad valorem tariffs and specific rights, like the sectors of
cereals, olive oil, dairy products, meat, tobacco, sugar and some fruit and
processed vegetables. In those products, the EU is willing to negotiate a wider
liberalisation through the concession of quotas with preferential tariffs.
The bilateral pattern of trade between the MERCOSUR and the EU is
presented using the definition of export industry options for each side in the other
region’s market. The results are presented in Figure 4. The fundamental
difference from the previous patterns (Chile-EU and AC-EU) is that in this case
14
As to agricultural products, according to EU documents the offer covers all the products that can
be summarised in 6 categories: 1st Category: immediate and total liberalisation of all tariff rights
(this includes fresh fruit, some oils and fat materials, around 270 million Euros). 2nd Category:
tariff rights will be eliminated in 4 stages over a period of 4 years (horse meat, fruit, vegetables,
some oils, flowers, bulbs, etc., with a trade volume of 600 million Euros). 3rd Category: elimination
of tariff rights in 7 years and in 7 stages (fruit and processed vegetables, fruit juice, processed
chicken meat, etc., with a trade volume of 330 million Euros). 4th Category: elimination of tariff
rights in 10 years, in 10 stages (pork, ham, honey, canned meat, fruit and processed vegetables, a
trade volume of a thousand million Euros). 5th Category: the progressive elimination of tariffs on
wine and the liquor sector, and the parallel negotiation of specific agreements for this sector (60
million Euros).
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FIGURE 4
EU and MERCOSUR: Bilateral Export Options
for certain agricultural products both regions present export options in the same
industries (0421 – rice in the husk or husked; 0574 – apples, fresh; 265A –
vegetable textiles fibres, among other). In the rest of the products, the NorthSouth trade pattern is again present, and the characterisation is similar to the other
sub-regions and countries.
For the MERCOSUR-EU Agreement, it has been verified that the highest
proportion of options are concentrated in agriculture (Argentina, Uruguay and
Brazil), raw materials of agricultural origin (Paraguay) and manufacturing
industries (Brazil and Uruguay). When pre-existing trade policy preferences are
considered, the MERCOSUR countries register a smaller reduction in their export
options, so they have a greater incentive to sign a trade agreement with the EU
that allows them to improve their export performance through improved market
access. The case of Uruguay stands out, followed by Brazil and Argentina.
Industry distribution indicates that the larger concentration of opportunities
occurs in agriculture for all the MERCOSUR countries (Argentina, Uruguay,
Paraguay and Brazil), and in manufacturing industries for Brazil.
As was pointed out above for the case of the AC, the global profile of trade
perils is similar to trade threats. The result was to be expected given that the
MERCOSUR region has a small number of products with zero tariff, and besides,
there is no pre-existing preferential and reciprocal agreement with the EU. For
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TABLE 8
Perils and Opportunities in the MERCOSUR-EU Agreement
Trade Opportunities
Trade Perils
Global
Index
Share
NR
Export
Share
Global
Index
Share
NR
Export
Share
(a) MERCOSUR Countries
Argentina
0.40
Brazil
0.46
Paraguay
0.23
Uruguay
0.73
83.71
48.72
78.71
64.06
40.17
43.29
21.80
65.09
0.45
0.26
0.22
0.86
66.2
25.7
85.7
75.8
14.9
8.9
11.5
21.2
Trade Perils
Global
Index
(b) Others in South America
Chile
0.10
Bolivia
0.06
Colombia
0.02
Ecuador
0.02
Peru
0.01
Venezuela
0.04
Share
NR
Export
Share
32.9
75.9
33.8
87.4
59.5
87.9
3.7
2.8
0.7
1.2
0.9
1.9
Source: Own calculations using data of Feenstra (2000) and LAIA.
the countries where trade perils are significant, it is also clear that these are
mainly concentrated in agriculture. However, in the case of Brazil, there is a big
concentration of trade perils in manufactured products. Argentina and Uruguay
register their biggest perils in the traditional agricultural basket of exports (dairy
products, cereals, meat, malted barley and fish) to Brazil, and in second place to
Paraguay. Most of these exports will have problems. The EU registers a high
export complementarity index in these products in two sub-regional markets that
are natural export destinations for Argentina and Uruguay. In the case of
Uruguay, three quarters of the trade perils with the EU in the MERCOSUR are
accounted for by agricultural products. For Argentina, more than half of the trade
perils with the EU in the MERCOSUR are accounted for by the agricultural
sector, and this figure increases to two thirds if other products intensive in natural
resources are considered. On the other hand, Brazil’s problems in MERCOSUR
(more than a third of its trade perils that represent around half of their exports) are
concentrated in machinery and transport material (for example, washing
machines, car parts, motors, etc.). Paraguay faces a similar situation to that of
Argentina in its trade with Brazil. In the rest of the SA countries, trade perils in
their intra-regional trade stemming from an agreement between the EU and the
MERCOSUR practically do not exist.
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FIGURE 5
Argentina: Opportunities and Perils in the MERCOSUR-EU Agreement
The global results for Argentina and Brazil are illustrated. The main
opportunities and perils for Argentina are presented in Figure 5.15 The
opportunities are basically concentrated in agricultural products (0115 – meat of
horses, asses, etc.; 0616 – natural honey; 0149 – other prepared or preserved meat
or meat offals; 4249 – fixed vegetable oils, n.e.s.; 0572 – other citrus fruits, fresh or
dried). Some of the trade perils shown in the figure are: disinfectants, insecticides,
fungicides, etc. (591A); other cereal meals or flours (0470); milk and cream
(0224); other wheat and meslin, unmilled (0412); perfumery, cosmetics (5530).
Things are different in the Brazilian case (see Figure 6). On the trade opportunities
side, in spite off the fact that there are many agricultural products (4314 – waxes of
animal or vegetable origin; 1213/12 – tobacco; 0585 – juices; fruits and vegetables
unfermented) it is also possible to identify some manufactured products (6725 –
blooms, etc., of iron or steel; 8946 – non-military arms and ammunition; 6416 –
building board of wood pulp or of vegetable fibre). On the trade perils side, there
are basically manufactured products (591A – disinfectants, insecticides, fungicides,
etc.; 7211 – agriculture and horticulture machinery).
15
Figures 5 and 6 follow the same procedure used in Figure 3. Moreover, in Figure 5 black icons
represent industries that constitute a peril and an opportunity, simultaneously.
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FIGURE 6
Brazil: Opportunities and Perils in the MERCOSUR-EU Agreement
5. CONCLUSIONS
In the 1990s, the foreign trade of the SA countries showed an increased
multilateralism in their imports together with an increased regionalism in their
exports. Among the factors that could explain this phenomenon, the restrictions
that SA countries have faced in market access to developed economies seem to be
specially significant. Thus, the improvement in those market access conditions
constitutes a requisite for the sustainability of the trade liberalisation strategies
that evolved during the last decade. In this context, the preferential trade
agreements with the EU are particularly important.
The present study examines the situation from the perspective of SA countries,
and the position of the EU to sign the agreements is taken as given (in fact, the
EU has maintained an active initiative during the ongoing negotiations). That is,
we tried to determine the unilateral stances that SA countries would take with
respect to the three preferential trade agreements under consideration: EU-Chile,
EU-AC and EU-MERCOSUR. To determine the position of each SA country we
adopted a mercantilist perspective, since this is the normal stance in international
trade negotiations. The recent literature on the political economy of trade policy
explains this focus.
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With this objective, we developed a methodology aimed at producing two lists
of products. The first covers export opportunities in the EU market, and considers
both information on the specialisation pattern and the improvement in trade
preferences at the level of product. The second list identifies the trade perils
which result from the loss of tariff preferences in intra-regional trade, and where
the EU has export complementarity.
The information on trade is introduced through the measure of a trade
complementarity index at the industry level (comparative advantage against
comparative disadvantage). In spite of the usual denomination of the indexes, we
used them strictly as specialisation indexes and we do not derive conclusions
about the existence of comparative advantages or disadvantages. As to trade
policy, the change in the tariff preference which would potentially result from a
free trade agreement has been calculated. To this end, tariff information at the
product level (6 digit HS) was used.
The results of the analysis are clear, and they validate the proposed
methodology. In the first place, the specialisation model between the economies
of SA and the EU show a marked North-South pattern: a diversified basket of
manufactured products from Europe vis-à-vis a basket of primary products from
SA.
In the case of the agreement between Chile and the EU, there are arguments in
support of Chile’s unilateral stand in favour of the agreement, and there has not
been any strong opposition on the part of her regional trade partners since they
are not particularly affected by this agreement.
In the case of the AC, in spite of official rhetoric, the countries have not
obtained big export opportunities when measured against the trade perils. This
situation is exemplified by Colombia, which has opportunities only in few
agricultural products to set against a more diversified basket of manufactured
products in peril. Some other trade partners in SA (Argentina, Chile and Brazil)
face trade perils that represent a significant share in their bilateral trade with the
AC countries. This description enables us to predict that many sectors are
opposed to the agreement and will put obstacles in its path.
Lastly, in the MERCOSUR there are big export opportunities, but these are
balanced by perils in the sub-regional market which are also significant. The rest
of the SA countries are not particularly affected by this agreement, and the trade
perils are concentrated within the sub-region itself. In the case of Argentina and
Uruguay, the perils occur in the agricultural sector, while in Brazil it is the intraMERCOSUR trade in manufactured goods which is in peril by the export offer
from the EU.
The three bilateral trade negotiations under way reflect the map of
opportunities and perils presented. The agreement with Chile has met almost
no resistance, there are elements in favour, and in fact the agreement was signed
after rapid negotiations. The Andean countries do not have much to gain and
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quite a bit to lose, a state of affairs that has practically brought the negotiations to
an impasse. Lastly, the MERCOSUR is in a more complex situation, the trade
opportunities and perils are sizeable and also more balanced. There is a will to
negotiate, this is evident from the long duration of the talks, but there is as yet no
clear finalisation date. In this agreement, the preparation of a list of exceptions is
an important tool for resolving the political economy problems. This study
provides specific lists for each country identifying the products to be included
and the products to be excluded. It remains to find the trade bargaining
equilibrium which would allow a single list of exceptions to be determined.
All the results of the paper have a structural nature and they do not depend on
the particular contingencies of the present time. However, it is relevant to link the
conclusions to some of the characteristics of the difficult situation that some
countries of the region are experiencing. The present setback in the MERCOSUR
is not envisaged as a definitive reversion of the integration process, but rather as a
critical time which should be overcome sooner or later, on the bases of the
strategic common interests of the regional partners. One of these common
interests is the trade negotiation with third markets that is a central part of the
idiosyncratic Customs Union integration strategies of MERCOSUR countries.
The trade negotiation with the EU is one of the most important stages on which
regional countries are defining the future of their international insertion. The
trade negotiation framework with the EU (region to region agreement) constitutes
an additional incentive to negotiate as a bloc. In particular, the present need for
MERCOSUR countries to obtain results in the short term could precipitate the
signing of an agreement, if the EU really wants it.
APPENDIX
Methodology
a. Trade Intensity, Trade Complementarity and Geographical Bias
The ‘Trade Intensity Index’ (TII) (see Anderson and Nordheim, 1993) is
defined as:
TIIij ˆ
Xij =Xi
xij
X
ˆ
ˆ TCIij GBIij
Mj =
Mk mj
…1†
k6ˆi
where TIIij is the intensity index of exports from country i to country (or region)
j; Xij are exports from i to j; Xi are total exports from i; Mk are total imports to
country k; xij is the share of partner j in exports of country i; and mj is the share of
country j in world imports (the net of country i’s imports given that a country
cannot export to itself ).
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Drysdale (1988) expresses the TII as the product of a trade complementarity
index (TCI) and a residual index of geographic bias (GBI) (see equation (1)). The
TCI, based on the ‘revealed comparative advantage’ index (see Balassa, 1965), is:
X xs msj
X
s
s
i
t
ˆ
TCIsij twi
…2†
TCIij ˆ
s s wi
t
t
wi
wi
s
s
where xsi is the share of industry s in country i’s exports; msj is the share of
s
is the share of industry s in world imports
industry s in country j’s imports; twi
from the point of view of country i’s exports,
X
XX
s
s
twi
ˆ
Mks =
Mks ˆ Mwi
=Mwi
k6ˆi
s
k6ˆi
and TCIsij is the trade complementarity index for industry s.
The geographical bias index can be derived from equations (1) and (2),
obtaining:
xij =mj
Xij
GBIij ˆ X s s s ˆ X s s s
xi mj =twi
Xi …Mj =Mwi †
s
where
Xis
(Mjs )
…3†
s
are country i’s ( j’s) total exports (imports) of industry s.
b. Option and Opportunity Indexes
Let there be three markets: countries A and B that are part of the region R
(SA), and market C that is a region (EU). Region R and region C are going to sign
an FTA.
Without loss of generality, we consider the trade options of country A in the
markets of region C. The trade option level of country A for industry s in a
country j (OPTsAj ) of the region C is given by its export trade complementarity
level:
OPTsAj ˆ TCIsAj ˆ
xSA msj
s
s
twA
twA
…4†
The trade option index can be aggregated for industries, export markets and/or
import markets. The trade option level of country A for industry s in region C
(OPTsAC ) is a weighted average of the trade option level with each C member, the
weights being the share of each member in C’s total imports:
X
Mj
xs ms
OPTsAC ˆ sA s C ˆ
OPTsAj
…5†
twA twA
MC
j2C
Equation (5) was used for selecting the trade options of each SA country in the
EU market. We considered as trade options a subset of the industries with trade
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1465
option level greater than one: those industries that also satisfy the condition that
s
) is greater than one and the import
the export specialisation of A (xsA =twA
s s
specialisation of the EU (mC =twA ) is greater than one half.
The aggregate trade option level of country A in country j (OPTAj) is defined
as in equation (2), and the aggregate trade option level of country A in region C
(OPTAC), is:
X
X
Mj
s
OPTsAC twA
ˆ
OPTAj
…6†
OPTAC ˆ
MC
s
j2C
Equation (6) was used for computing the aggregate trade option level for each
SA country in the EU markets.
The trade option level of region R for industry s in a country j (OPTsRj ) is:
s 2
X
xsR msj
twi
s
s Xi
OPTij
…7†
OPTRj ˆ s s ˆ
s
twR twR
XR twR
i2R
with
X
s
twR
Mks ÿ MRs =n
ˆ XkX s
Mk ÿ MR =n
s
k
and n is the number of countries in region R.
An equation like this (index region-country) was used for computing the trade
option level of the EU for each industry in the market of Chile (Figure 1).
The trade option level of region R for industry s in region C (OPTsRC ) is:
X
Mj
xs ms
OPTsRC ˆ sR s C ˆ
OPCsRj
…8†
twR twR
MB
j2C
Equation (8) (index region-region) was used for computing the trade option
levels represented in Figures 2 and 4.
When s is an industry that constitutes a trade option for country A in the
markets of region C, the trade opportunity level of country A for that sector s in
the markets of C (OPPOsAC ) is given by:
OPPOsAC ˆ OPTsAC
XAs 0
XAs
…9†
where XA0 are the exports of industry s that constitute an opportunity, that is, the
exports of the products of industry s that face a tariff different from zero in the
markets of C.
The aggregate trade opportunity level of country A in region C (OPPOAC), is:
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OPPOAC ˆ
X
s
s
s XA0 s
OPTAC
t
XA wA
…10†
Equation (10) was used for computing the global opportunity index of each SA
country in Tables 7 and 8.
c. Threat and Peril Indexes
Without loss of generality, we consider the trade threats of country A in the
market of country B, generated from the region C. When s is an industry that
constitutes a trade option for the region C in the market of B, the trade threat level
of country A for industry s in market B, generated from the region C, from the
point of view of sector exports, (THR(XS)sAB;C ), is:
THR…XS†sAB;C ˆ OPTsCB
s
XAB
XAs
…11†
We considered as trade options of region C (EU) in market B a subset of the
sectors with trade option level greater than one: those sectors that also satisfy
the condition that the export specialisation of the EU is greater than one half and
the import specialisation of the SA country is greater than one. Note that in all the
threats and perils analysis, we are only including the industries that constitute
trade options for region C. The trade threat level of country A for industry s in
market B, generated from the region C, from the point of view of total exports,
(THR(XT)sAB;C ) is:
THR…XT†sAB;C ˆ THR…XS†sAB;C
XAs
Xs
ˆ OPTsCB AB
XA
XA
…12†
The aggregate trade threat level of country A in market B, generated from the
region C (THRAB,C), is:
X
X
Xs
THRAB;C ˆ
THR…XT†sAB;C ˆ
THR…XS†sAB;C A
…13†
XA
s
s
When B is a region, the threat indexes are computed using an average option
level of region C for industry s in the markets of B. This average is expressed
from the point of view of country A’s exports that constitute a threat, that is, it
equals a weighted average of the option of region C in each market of region B,
the weights being the share of country A’s exports of industry s to each B market
in country A’s exports of industry s to region B (we include only the markets of
region B where country A’s exports of industry s constitute a threat).
Analytically:
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THR…XS†sAB;C
0
1
s
X
X
Xs 0
Aj
ˆ@
OPTsCj s A AB
XAB0 XAs
j2B0
1467
…110 †
where B0 is the subset of region B markets where country A’s exports of industry
s constitute a threat. The other threat indexes can be derived from equation (110 )
analogously to equations (12) and (13).
When s is an industry that constitutes a trade threat for country A in the market
of country B, generated from region C, we can obtain the trade peril index that
corresponds to each one of the trade threat indexes.
0
PER…XS†sAB;C
0
ˆ
THR…XS†sAB;C
s
s
XAB
s XAB
ˆ
OPT
CB
s
XAB
XAs
ˆ
THR…XT†sAB;C
s
s
XAB
s XAB
ˆ
OPT
CB
s
XAB
XA
0
PER…XT†sAB;C
PERAB;C ˆ
X
PER…XT†sAB;C ˆ
X
s
s
…14†
0
PER…XS†sAB;C
XAs
XA
…15†
…16†
0
s
are the exports of industry s from country A to country B that
where XAB
constitute a peril, that is, those corresponding to the products in which region C
exports face a tariff different from zero in market B. Equation (16) was used for
computing the global peril index of each SA country (except Chile) in the case of
the EU-Chile agreement (Table 6).
When B is a region, equation (14) turns into:
0
1
0
s0
X
X
Xs 0
Aj
PER…XS†sAB;C ˆ @
OPTsCj s0 A AB
…140 †
s
X
X
A
AB0
j2B0
where B0 is the subset of region B markets where country A’s exports of industry
s constitute a peril. Again, the other peril indexes can be derived from equation
(140 ) analogously to equations (15) and (16). The corresponding version of
equation (16) was used for computing the global peril index of each SA country
in the case of the EU-AC and EU-MERCOSUR agreements (Tables 7 and 8).
REFERENCES
Anderson, K. and H. Norheim (1993), ‘From Imperial to Regional Trade Preferences: Its Effect on
Europe’s Intra and Extra-Regional Trade’, Weltwirtschaftliches Archiv, 129, 1, 78–101.
Balassa, B. (1965), ‘Trade Liberalization and ‘‘Revealed’’ Comparative Advantage’, The
Manchester School of Economic and Social Studies, 33, 99–123.
Comunidades Europeas (2001), ‘Reglamento (CE) No 2501/2001 del Consejo de 10 de diciembre
ß Blackwell Publishers Ltd 2002
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MARCEL VAILLANT AND ALVARO ONS
de 2001 relativo a la aplicación de un sistema de preferencias arancelarias generalizado entre el
1 de enero de 2002 y el 31 de diciembre del 2004’, Diario Oficial de las CE (31/12/2001).
Feenstra, R.C. (2000), ‘World Trade Flows, 1980–1997, with Production and Tariff Data’, Center
for International Data, Institute of Governmental Affairs (University of California, Davis, and
National Bureau of Economic Research).
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