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McGill University Centre for Continuing Education North America and Global Economy CPL-561-781 MERCOSUR Regional Trade Report Lecturer: K. N. Matziorinis, B.A., M.A., Ph.D., C.M.C. Prepared by: Andrei Bolchakov 119846991 German Odstrcil 260102470 WINTER 2005 1 Table of Contents Subject 1. Background 1.1 Argentina 1.2 Brazil 1.3 Paraguay 1.4 Uruguay 2. International Trade 2.1 International Trade intra-Mercosur 2.2 International Trade between Mercosur and main world regions 2.2.1 International Trade Fact sheet by country 2.3 Mercosur and Canada 2.3.1 Merchandise Trade between Canada and Mercosur 2.3.2 Service Trade between Canada and Mercosur 2.3.3 Canada’s Exports to Mercosur by Industry 2.3.4 Canada’s Exports from Mercosur by Industry 2.4 Foreign Direct Investment in Mercosur 2.4.1 Canadian Direct Investment in Mercosur 2.4.1.1 Canadian Direct Investment in Argentina 2.4.1.2 Canadian Direct Investment in Brazil 2.5. International Trade Issues 2.5.1 Disputes at the WTO involving Argentina, Brazil and Canada 2.5.2 State of Bilateral Trade relations with Canada 3. Trade Policy 3.1 The DOHA Round – Agricultural Negotiations 3.2 Trade Policy in Action – The Hard Ball 3.3 Mercosur Future Outlook 3.3.1 Advantages of Mercosur 3.3.2 Disadvantages of Mercosur 3.4 Conclusions Page 4 5 9 13 16 20 20 21 24 25 25 27 28 29 30 31 32 33 33 33 35 36 36 36 39 39 40 42 2 3 1. Background MERCOSUR was initiated in 1988 as a free trade pact between Brazil and Argentina. The modest diminutions in tariffs and quotas accompanying this pact reportedly helped bring about an 80 percent increase in trade between the two countries in the late 1980. This achievement pushed the extension of the pact in 1990 to contain Paraguay and Uruguay. The primary plan was to set up a full free trade area by the end of 1994 and a common market sometime later. The four countries of MERCOSUR have a combined population of about 200 million. With a market of this size, MERCOSUR could have a considerable impact on the economic growth rate of the four economies. In 1995, MERCOSUR’s members established a five-year program under which they hoped to perfect their free trade area and move toward a full customs union. For its first eight years, MERCOSUR gave the impression to be making a constructive contribution to the economic growth rates of its members states. Trade between MERCOSUR’s four core members quadrupled between 1990 and 1998. The combined GDP of the four member states grew at an annual average rate of 3.5 percent between 1990 and 1996, a performance that is significantly superior than these countries achieved during the 1980s. MERCOSUR hit an important barrier in 1998, when its member states slipped into recession and intrabloc trade slumped. Trade fell further in 1999 following a financial crisis in Brazil that led to the devaluation of the Brazilian real, which made the goods of other MERCOSUR members 40 percent more expensive in Brazil, their principal export market. At this point, advancement toward establishing a full customs union all but came to a halt. Things went down further in 2001 when Argentina, beset by economic stresses, recommended that the customs union be temporarily suspended. Argentina wanted to suspend MERCOSUR’s tariff so that it could eliminate duties on imports of capital equipment, while raising those on consumer goods to 35 percent (MERCOSUR had established a 14 percent import tariff on both sets of goods). Brazil agreed to this request, effectively halting MERCOSUR’s quest ot become a fully functioning 4 customs union. Hope for a renewal in the importance of MERCOSUR increased in 2003 when new Brazilian President Lula da Silva announced his support for a revitalized and extended MERCOSUR modeled after the European Union with a lager membership, a common currency, and a democratically elected MERCOSUR parliament. MEMBER STATES : 1.1 Argentina Geography Location: Southern South America, bordering the South Atlantic Ocean, between Chile and Uruguay Area: total: 2,766,890 sq km, land: 2,736,690 sq km Land boundaries: total: 9,665 km border countries: Bolivia 832 km, Brazil 1,224 km, Chile 5,150 km, Paraguay 1,880 km, Uruguay 579 km Climate: mostly temperate; arid in southeast; subantarctic in southwest Terrain: rich plains of the Pampas in northern half, flat to rolling plateau of Patagonia in south, rugged Andes along western border Natural resources: fertile plains of the pampas, lead, zinc, tin, copper, iron ore, manganese, petroleum, uranium Environment international agreements: - party to: Antarctic-Environmental Protocol, Antarctic-Marine Living Resources, Antarctic Seals, Antarctic Treaty, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Ozone Layer Protection, Ship Pollution, Wetlands, Whaling signed, but not ratified: Marine Life Conservation 5 People Population: 39,144,753 (2004) Age structure: 0-14 years: 25.9% (male 5,179,236; female 4,947,234) 15-64 years: 63.6% (male 12,452,566; female 12,457,451) 65 years and over: 10.5% (male 1,685,371; female 2,422,895) (2004) Population growth rate: 1.02% (2004) Birth rate: 17.19 births/1,000 population (2004) Death rate: 7.57 deaths/1,000 population (2004) Life expectancy at birth: total population: 75.7 years, male: 71.95 years, female: 79.65 years (2004) Ethnic groups: white (mostly Spanish and Italian) 97%, mestizo, Amerindian, or other nonwhite groups 3% Religions: nominally Roman Catholic 92% (less than 20% practicing), Protestant 2%, Jewish 2%, other 4% Languages: Spanish (official), English, Italian, German, French Literacy: total population: 97.1% male: 97.1% female: 97.1% (2003) Government Government type: republic Capital: Buenos Aires Administrative divisions: 23 provinces (provincias, singular - provincia), and 1 autonomous city* (distrito federal); Buenos Aires, Buenos Aires Capital Federal*, Catamarca, Chaco, Chubut, Cordoba, Corrientes, Entre Rios, Formosa, Jujuy, La Pampa, La Rioja, Mendoza, Misiones, Neuquen, Rio Negro, Salta, San Juan, San Luis, Santa Cruz, Santa Fe, Santiago del Estero, Tierra del Fuego - Antartida e Islas del Atlantico Sur, Tucuman Legal system: mixture of West European and US legal systems Executive branch: chief of state: President Nestor KIRCHNER (since 25 May 2003); Vice President Daniel SCIOLI (since 25 May 2003); note - the president is both the chief of state and head of government head of government: President Nestor KIRCHNER (since 25 May 2003); Vice President Daniel SCIOLI (since 25 May 2003); note the president is both the chief of state and head of government cabinet: Cabinet appointed by the president 6 election results: results of the presidential primary of 27 April 2003: Carlos Saul MENEM 24.3%, Nestor KIRCHNER 22%,…; the subsequent runoff election slated for 25 May 2003 was awarded to KIRCHNER by default after MENEM withdrew his candidacy on the eve of the election elections: president and vice president elected on the same ticket by popular vote for four-year terms International organization participation: AfDB, Australia Group, BCIE, BIS, FAO, G-6, G-15, G-24, G-77, IADB, IAEA, IBRD, ICAO, ICC, ICCt, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, Interpol, IOC, IOM, ISO, ITU, LAES, LAIA, Mercosur, MIGA, MINURSO, MINUSTAH, NSG, OAS, OPANAL, OPCW, PCA, RG, UN, UN Security Council (temporary), UNCTAD, UNESCO, UNFICYP, UNHCR, UNIDO, UNMIK, UNMOVIC, UNTSO, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WToO, WTO, ZC Economy Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Over the past decade, however, the country has suffered recurring economic problems of inflation, external debt, capital flight, and budget deficits. Growth in 2000 was a negative 0.8%, as both domestic and foreign investors remained sceptical of the government's ability to pay debts and maintain the peso's fixed exchange rate with the US dollar. The economic situation worsened in 2001 with the widening of spreads on Argentine bonds, massive withdrawals from the banks, and a further decline in consumer and investor confidence. Government efforts to achieve a "zero deficit," to stabilize the banking system, and to restore economic growth proved inadequate in the face of the mounting economic problems. The peso's peg to the dollar was abandoned in January 2002, and the peso was floated in February; the exchange rate plunged and inflation picked up rapidly, but by mid2002 the economy had stabilized, albeit at a lower level. Strong demand for the peso compelled the Central Bank to intervene in foreign exchange markets to curb its appreciation in 2003. Led by record exports, the economy began to recover with output up 8% in 2003, unemployment falling, and inflation reduced to under 4% at year-end. 7 GDP: purchasing power parity - $435.5 billion (2003) GDP - real growth rate: 8.7% (2003) GDP - per capita: purchasing power parity - $11,200 (2003) GDP - composition by sector: agriculture: 11.1% industry: 34.8% services: 54.1% (2003) Investment fixed): 15.1% of GDP (2003) (gross Inflation rate: 13.4% (2003) Unemployment rate: 17.3% (2003) Budget: revenues: $26.62 billion expenditures: $26 billion, including capital expenditures of NA (2003) Public debt: 65.7% of GDP (2003) Agriculture products: - Industries: Industrial production rate: Current balance: sunflower seeds, lemons, soybeans, grapes, corn, tobacco, peanuts, tea, wheat; livestock food processing, motor vehicles, consumer durables, textiles, chemicals and petrochemicals, printing, metallurgy, steel 16.2% (2003) growth account $7.855 billion (2003) Exports: $29.57 billion f.o.b. (2003) Exports commodities: edible oils, fuels and energy, cereals, feed, motor vehicles Exports - partners: Brazil 15.8%, Chile 12%, US 10.6%, China 8.4%, Spain 4.7% (2003) Imports: $13.27 billion f.o.b. (2003) Imports commodities: machinery and equipment, manufactures, plastics Imports - partners: Brazil 34%, US 16.4%, Germany 5.6%, China 5.2% (2003) Debt - external: $145.6 billion (2003) Currency: Argentine peso (ARS) Exchange rates: Argentine pesos per US dollar - 2.9003 (2003), 3.0633 (2002), 0.9995 (2001), 0.9995 (2000), 0.9995 (1999) motor vehicles, chemicals, metal 8 International Issues UK continues to reject sovereignty talks requested by Argentina, whose constitution still claims UK-administered Falkland Islands (Islas Malvinas) and South Georgia and the South Sandwich Islands, but in 1995 ceded the right to settle the dispute by force; Beagle Channel islands dispute resolved through Papal mediation in 1984, but armed incidents persist since 1992 oil discovery; territorial claim in Antarctica partially overlaps UK and Chilean claims (see Antarctic disputes); unruly region at convergence of Argentina-Brazil-Paraguay borders is locus of money laundering, smuggling, arms and drug trafficking, and fundraising for extremist organizations; uncontested dispute between Brazil and Uruguay over Braziliera Island in the Quarai/Cuareim River leaves the tripoint with Argentina in question.1 1.2 Brazil Geography Location: Eastern South America, bordering the Atlantic Ocean Area: total: 8,511,965 sq km, land: 8,456,510 sq km Land boundaries: total: 14,691 km border countries: Argentina 1,224 km, Bolivia 3,400 km, Colombia 1,643 km, French Guiana 673 km, Guyana 1,119 km, Paraguay 1,290 km, Peru 1,560 km, Suriname 597 km, Uruguay 985 km, Venezuela 2,200 km Climate: mostly tropical, but temperate in south Terrain: mostly flat to rolling lowlands in north; some plains, hills, mountains, and narrow coastal belt Natural resources: bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, timber 1 www.cia.gov, Central Intelligence Agency 9 Environment international agreements: - party to: Antarctic-Environmental Protocol, Antarctic-Marine Living Resources, Antarctic Seals, Antarctic Treaty, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Tropical Timber 94, Wetlands, Whaling signed, but not ratified: none of the selected agreements People Population: 184,101,109 (2004) Age structure: 0-14 years: 26.6% (male 24,915,902; female 23,966,713) 15-64 years: 67.6% (male 61,739,012; female 62,770,480) 65 years and over: 5.8% (male 4,389,659; female 6,319,343) (2004) Median age: total: 27.4 years, male: 26.7 years, female: 28.2 years (2004) Population growth rate: 1.11% (2004) Birth rate: 17.25 births/1,000 population (2004) Death rate: 6.14 deaths/1,000 population (2004) Life expectancy birth: at total population: 71.41 years, male: 67.45 years, female: 75.57 years (2004) Ethnic groups: white (includes Portuguese, German, Italian, Spanish, Polish) 55%, mixed white and black 38%, black 6%, other (includes Japanese, Arab, Amerindian) 1% Religions: Roman Catholic (nominal) 80% Languages: Portuguese (official), Spanish, English, French Literacy: total population: 86.4% male: 86.1% female: 86.6% (2003) Government Government type: federative republic Capital: Brasilia Administrative divisions: 26 states (estados, singular - estado) and 1 federal district* (distrito federal); Acre, Alagoas, Amapa, Amazonas, Bahia, Ceara, Distrito Federal*, Espirito Santo, Goias, Maranhao, Mato Grosso, Mato Grosso do Sul, Minas Gerais, Para, Paraiba, Parana, Pernambuco, 10 Piaui, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondonia, Roraima, Santa Catarina, Sao Paulo, Sergipe, Tocantins Legal system: based on Roman codes Executive branch: chief of state: President Luiz Inacio LULA DA SILVA (since 1 January 2003); Vice President Jose ALENCAR (since 1 January 2003); note - the president is both the chief of state and head of government election results: in runoff election 27 October 2002, Luiz Inacio LULA DA SILVA (PT) was elected with 61.3% of the vote; Jose SERRA (PSDB) 38.7% elections: president and vice president elected on the same ticket by popular vote for four-year terms; election last held 6 October 2002 (next to be held 1 October 2006, with a runoff on 29 October 2006 if necessary); runoff election held 27 October 2002 cabinet: Cabinet appointed by the president head of government: President Luiz Inacio LULA DA SILVA (since 1 January 2003); Vice President Jose ALENCAR (since 1 January 2003); note - the president is both the chief of state and head of government International organization participation: AfDB, BIS, FAO, G-15, G-24, G-77, IADB, IAEA, IBRD, ICAO, ICC, ICCt, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, Interpol, IOC, IOM, ISO, ITU, LAES, LAIA, Mercosur, MIGA, MINUSTAH, NAM (observer), NSG, OAS, OPANAL, OPCW, PCA, RG, UN, UN Security Council (temporary), UNCTAD, UNESCO, UNHCR, UNIDO, UNITAR, UNMIK, UNMIL, UNMISET, UNMOVIC, UNOCI, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WToO, WTO Economy Possessing large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. From 2001-03 real wages fell and Brazil's economy grew, on average, only 1.1% per year, as the country absorbed a series of domestic and international economic shocks. That Brazil absorbed these shocks without financial collapse is a tribute to the resiliency of the Brazilian economy and the economic program put in place by former President CARDOSO and strengthened by President Lula DA SILVA. The three pillars of the economic program are a floating exchange rate, an inflationtargeting regime, and tight fiscal policy, which have been reinforced by a series of IMF programs. The currency depreciated sharply in 2001 and 2002, which contributed to a dramatic current account adjustment: in 2003, Brazil ran a record trade surplus and recorded the first current account surplus since 1992. While 11 economic management has been good, there remain important economic vulnerabilities. The most significant are debt-related: the government's largely domestic debt increased steadily from 1994 to 2003, straining government finances, while Brazil's foreign debt (a mix of private and public debt) is large in relation to Brazil's modest (but growing) export base. Another challenge is maintaining economic growth over a period of time to generate employment and make the government debt burden more manageable. 1 GDP: purchasing power parity - $1.375 trillion (2003) GDP - real growth rate: -0.2% (2003) GDP - per capita: purchasing power parity - $7,600 (2003) GDP - composition by sector: agriculture: 10.2% industry: 38.7% services: 51.2% (2003) Investment fixed): 18% of GDP (2003) (gross Inflation rate: 14.7% (2003) Unemployment rate: 12.3% (2003) Budget: revenues: $147.2 billion expenditures: $172.4 billion, including capital expenditures of NA (2003) Public debt: 58.5% of GDP (2003) Agriculture products: coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef Industries: textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery and equipment Industrial production growth rate: 0.4% (2003) Current balance: $3.52 billion (2003) account Exports: Exports commodities: 1 $73.28 billion f.o.b. (2003) - transport equipment, iron ore, soybeans, footwear, coffee, autos www.cia.gov, Central Intelligence Agency 12 Exports - partners: US 23%, Argentina 6.1%, China 6%, Netherlands 5.8%, Germany 4.2% (2003) Imports: $48.25 billion f.o.b. (2003) Imports commodities: - machinery, electrical and transport equipment, chemical products, oil Imports - partners: US 20%, Argentina 9.8%, Germany 8.7%, Japan 5.2%, China 4.4% (2003) Debt - external: $214.9 billion (2003) Currency: real (BRL) Exchange rates: reals per US dollar - 3.0771 (2003), 2.9208 (2002), 2.3577 (2001), 1.8301 (2000), 1.8147 (1999) 1.3 Paraguay Geography Location: Central South America, northeast of Argentina Area: total: 406,750 sq km, land: 397,300 sq km Land boundaries: total: 3,920 km border countries: Argentina 1,880 km, Bolivia 750 km, Brazil 1,290 km Climate: subtropical to temperate; substantial rainfall in the eastern portions, becoming semiarid in the far west Terrain: grassy plains and wooded hills east of Rio Paraguay; Gran Chaco region west of Rio Paraguay mostly low, marshy plain near the river, and dry forest and thorny scrub elsewhere Natural resources: hydropower, timber, iron ore, manganese, limestone Environment international agreements: - party to: Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Hazardous Wastes, Law of the Sea, Ozone Layer Protection, Wetlands signed, but not ratified: none of the selected agreements 13 People Population: 6,191,368 (2004) Age structure: 0-14 years: 38.2% (male 1,201,459; female 1,162,954) 15-64 years: 57% (male 1,773,151; female 1,758,323) 65 years and over: 4.8% (male 136,376; female 159,105) (2004) Population rate: growth 2.51% (2004) Birth rate: 29.78 births/1,000 population (2004) Death rate: 4.58 deaths/1,000 population (2004) Life expectancy birth: at total population: 74.64 years male: 72.12 years female: 77.29 years (2004) Ethnic groups: mestizo (mixed Spanish and Amerindian) 95% Religions: Roman Catholic 90%, Mennonite, and other Protestant Languages: Spanish (official), Guarani (official) Literacy: total population: 94% male: 94.9% female: 93% (2003) Government Capital: Asuncion Adm. divisions: 17 departments Legal system: based on Argentine codes, Roman law, and French codes Executive branch: chief of state: President Nicanor DUARTE Frutos (since 15 August 2003); Vice President Luis CASTIGLIONI Joria (since 15 August 2003); note - the president is both the chief of state and head of government International organization participation: FAO, G-77, IADB, IAEA, IBRD, ICAO, ICCt, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, ILO, IMF, IMO, Interpol, IOC, IOM, ISO (correspondent), ITU, LAES, LAIA, Mercosur, MIGA, MINUSTAH, MONUC, NAM (observer), OAS, ONUB, OPANAL, OPCW, PCA, RG, UN, UNCTAD, UNESCO, UNIDO, UNMEE, UNMIL, UNOCI, UPU, WCL, WCO, WHO, WIPO, WMO, WToO, WTO Economy Paraguay has a market economy marked by a large informal sector. The informal sector features both re-export of imported consumer goods to neighbouring 14 countries as well as the activities of thousands of micro enterprises and urban street vendors. Because of the importance of the informal sector, accurate economic measures are difficult to obtain. A large percentage of the population derives their living from agricultural activity, often on a subsistence basis. The formal economy grew by an average of about 3% annually in 1995-97; but GDP declined slightly in 1998, 1999, and 2000, rose slightly in 2001, only to fall again in 2002. On a per capita basis, real income has stagnated at 1980 levels. Most observers attribute Paraguay's poor economic performance to political uncertainty, corruption, lack of progress on structural reform, substantial internal and external debt, and deficient infrastructure.1 GDP: purchasing power parity - $28.17 billion (2003) GDP - real growth rate: 1.8% (2003) GDP - per capita: purchasing power parity - $4,700 (2003) GDP - composition by sector: agriculture: 24.8% industry: 23.7% services: 51.4% (2003) Investment (gross fixed): 17.2% of GDP (2003) Inflation rate (consumer prices): 14.2% (2003) Unemployment rate: 18.5% (2003) Budget: revenues: $937.8 million expenditures: $988.4 million, including capital expenditures of $700 million (2003) Public debt: 45.1% of GDP (2003) Agriculture - products: cotton, sugarcane, soybeans, corn, wheat, tobacco, cassava (tapioca), fruits, vegetables; beef, pork, eggs, milk; timber Industries: sugar, cement, textiles, metallurgic, electric power Industrial production growth rate: 0% (2000) Current account $146 million (2003) 1 beverages, wood products, steel, www.cia.gov, Central Intelligence Agency 15 balance: Exports: $2.727 billion f.o.b. (2003) Exports - commodities: soybeans, feed, cotton, meat, edible oils, electricity, wood, leather Exports - partners: Brazil 34.2%, Uruguay 19.6%, Switzerland 7.8%, Argentina 5.3% (2003) Imports: $2.77 billion f.o.b. (2003) Imports - commodities: road vehicles, consumer goods, tobacco, petroleum products, electrical machinery Imports - partners: Brazil 32.5%, Argentina 21.6%, China 12.7% (2003) Debt - external: $2.96 billion (2003) Currency: guarani (PYG) Exchange rates: guarani per US dollar - 6,424.34 (2003), 5,716.26 (2002), 4,105.92 (2001), 3,486.35 (2000), 3,119.07 (1999) 1.4 Uruguay Geography Location: Southern South America, bordering the South Atlantic Ocean, between Argentina and Brazil Area: total: 176,220 sq km, land: 173,620 sq km Land boundaries: total: 1,564 km border countries: Argentina 579 km, Brazil 985 km Climate: warm temperate; freezing temperatures almost unknown Terrain: mostly rolling plains and low hills; fertile coastal lowland Natural resources: arable land, hydropower, minor minerals, fisheries Environment international agreements: - party to: Antarctic-Environmental Protocol, Antarctic-Marine Living Resources, Antarctic Treaty, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Ozone Layer Protection, Ship Pollution, Tropical Timber 94, Wetlands signed, but not ratified: Marine Dumping, Marine Life Conservation 16 People Population: 3,399,237 (2004) Age structure: 0-14 years: 23.5% (male 406,500; female 392,497) 15-64 years: 63.4% (male 1,066,464; female 1,087,100) 65 years and over: 13.1% (male 182,654; female 264,022) (2004) Population growth rate: 0.51% (2004) Birth rate: 14.44 births/1,000 population (2004) Death rate: 9.07 deaths/1,000 population (2004) Life expectancy at birth: total population: 75.92 years male: 72.71 years female: 79.24 years (2004) Ethnic groups: white 88%, mestizo 8%, black 4%, Amerindian, practically nonexistent Religions: Roman Catholic 66% (less than half of the adult population attends church regularly), Protestant 2%, Jewish 1%, nonprofessing or other 31% Languages: Spanish, Portunol, or Brazilero (Portuguese-Spanish mix on the Brazilian frontier) Literacy: total population: 98% male: 97.6% female: 98.4% (2003) Government Government type: constitutional republic Capital: Montevideo Administrative divisions: 19 departments Legal system: based on Spanish civil law system Executive branch: chief of state: President Jorge BATLLE Ibanez (since 1 March 2000) and Vice President Luis HIERRO (since 1 March 2000); note - the president is both the chief of state and head of government International organization participation: FAO, G-77, IADB, IAEA, IBRD, ICAO, ICC, ICCt, ICRM, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, Interpol, IOC, IOM, ISO, ITU, LAES, LAIA, Mercosur, MIGA, MINURSO, MINUSTAH, MONUC, NAM (observer), OAS, ONUB, OPANAL, OPCW, PCA, RG, UN, UNAMSIL, UNCTAD, UNESCO, UNFICYP, UNIDO, UNMEE, UNMOGIP, UNMOT, UNOCI, UNOMIG, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WToO, WTO 17 Economy Uruguay's well-to-do economy is characterized by an export-oriented agricultural sector, a well-educated workforce, and high levels of social spending. After averaging growth of 5% annually during 1996-98, in 1999-2002 the economy suffered a major downturn, stemming largely from the spillover effects of the economic problems of its large neighbors, Argentina and Brazil. For instance, in 2001-02 massive withdrawals by Argentina of dollars deposited in Uruguayan banks led to a plunge in the Uruguayan peso and a massive rise in unemployment. Total GDP in these four years dropped by nearly 20%, with 2002 the worst year due to the serious banking crisis. Unemployment rose to nearly 20% in 2002, inflation surged, and the burden of external debt doubled. Cooperation with the IMF and the US has limited the damage. The debt swap with private creditors carried out in 2003, which extended the maturity dates on nearly half of Uruguay's $11.3 billion in public debt, substantially alleviated the country's amortization burden in the coming years and restored public confidence. The economy is expected to resume growth in 2004 (perhaps 4% or more) as a result of high commodity prices for Uruguayan exports, the weakness of the dollar against the euro, growth in the region, low international interest rates, and greater export competitiveness. On the negative side, in December 2003 the electorate voted to repeal the law permitting a cautious liberalization of the energy industry.1 GDP: purchasing power parity - $43.67 billion (2003) GDP - real growth rate: 2.5% (2003) GDP - per capita: purchasing power parity - $12,800 (2003) GDP - composition by sector: agriculture: 7.4% industry: 26.6% services: 66% (2003) Investment (gross fixed): 9.7% of GDP (2003) 1 www.cia.gov, Central Intelligence Agency 18 Inflation rate (consumer prices): 19.4% (2003) Unemployment rate: 16% (2003) Budget: revenues: $2.934 billion expenditures: $3.425 billion, including capital expenditures of $193 million (2003) Agriculture products: - rice, wheat, corn, barley; livestock; fish Industries: food processing, electrical machinery, transportation equipment, petroleum products, textiles, chemicals, beverages Industrial production growth rate: 0.7% (2003) Current account balance: $76 million (2003) Exports: $2.164 billion f.o.b. (2003) Exports commodities: meat, rice, leather products, wool, fish, dairy products Exports - partners: Brazil 21.4%, US 11.4%, Argentina 7.1%, Germany 6.6%, China 4.3%, Mexico 4.1%, Italy 4.1%, Canada 4% (2003) Imports: $1.989 billion f.o.b. (2003) Imports commodities: machinery, chemicals, road vehicles, crude petroleum Imports - partners: Argentina 26.1%, Brazil 21%, Russia 11.7%, US 7.6% (2003) Debt - external: $10.73 billion (2003) Currency: Uruguayan peso (UYU) Currency code: UYU Exchange rates: Uruguayan pesos per US dollar - 28.2091 (2003), 21.257 (2002), 13.3191 (2001), 12.0996 (2000), 11.3393 (1999) 19 2. International Trade 2.1 International Trade intra-Mercosur In order to integrate and summarize the information, we worked in a double entry table: EXPORTS in 2003 (millions of USD) Argentina Brazil Paraguay Uruguay TOTAL 4,561 IMPORTS in 2003 (millions of USD) Argentina Brazil 4,605 66 155 4,782 IntraMercosur Imports as % of Total Imports per country 37% 425 471 5,501 12% 48 1,176 58% 1,172 48% Paraguay 421 707 Uruguay 525 404 243 TOTAL 5,551 5,672 734 674 IntraMercosur Exports as % of Exports per country 19% 8% 59% 31% 12,631 SOURCE: Own development based on data from: Centro de Economía Internacional en base a Indec, SECEX, Secretaría Administrativa del Mercosur y Banco Central del Uruguay 2. As we can see graphically, most of the trade intra-Mercosur is done by Brazil and Argentina. Together they account for almost 72% of the total intra-Mercosur Commerce. Another important issue is that smaller countries like Uruguay and Paraguay seem to depend more in Mercosur than in the rest of the world. 2 Moreover, http://www.cei.gov.ar/html/estadistica.htm#mer 20 Uruguay and Paraguay show a negative trade balance intra-Mercousur. Argentina, as a medium economy seems to be in the middle of the spectrum. 2.2 International Trade between Mercosur and main world regions We have integrated the information available for the countries member of Mercosur with the objective to have an aggregate picture. Please, take into account that this figures are approximately as each the sources as different for each country. Furthermore, Paraguay does not provide the level of detail as Argentina or Brazil. Nevertheless, considering Paraguay’s international trade relative volume, the impact will not be significant. Graphically: 1993 REGION INTRA-MERCOSUR ANDEAN COMMUNITY (*) CHILE NAFTA Canada Estados Unidos Mexico EU (15 members) CHINA JAPAN MIDDLE EAST REST OF THE WORLD 10,057 2577 1796 11,053 530 9,321 1,258 14,447 1,031 2,795 1,732 8,978 EXPORTS % of total Exports 2003 in 1993 12,630 3847 5370 24,920 1,283 20,009 3,629 24,572 7,071 2,699 3,723 22,145 18% 5% 3% 20% 1% 17% 2% 27% 2% 5% 3% 16% % of total Exports in 2003 12% 4% 5% 23% 1% 19% 3% 23% 7% 3% 3% 21% 1993 9,086 1,031 988 10,084 855 8,612 617 10,824 948 3,253 2,346 7,429 IMPORTS % of total Imports 2003 in 1993 12,966 1,371 1,150 13,697 848 12,046 804 15,840 2,954 3,010 1,678 13,616 % of total Imports in 2003 20% 2% 2% 22% 2% 19% 1% 24% 2% 7% 5% 16% 20% 2% 2% 21% 1% 18% 1% 24% 4% 5% 3% 21% TOTAL 54,466 106,977 45,988 66,284 SOURCE: Own development based on data from: Centro de Economía Internacional en base a Indec, SECEX, Secretaría Administrativa del Mercosur y Banco Central del Uruguay. NOTES : Figures in millions of USD. (*) Andean Community : Bolivia, Colombia, Ecuardor, Peru and Venezuela. 21 Mercosur’s total exports grew from $54,466 million USD in 1993 to 106,977 in 2003. This increments represent an increase of 94.41%. In the meantime, imports only grew at a rate of 44.13%. As a result, Mercosur’s Net Exports increased from $8,478 million USD in 1993 to 40,693 million USD. This growth is approximately equivalent to an increase of 380% over 10 years. The main drivers of this spectacular growth in Net Exports are: The growth of Brazilian exports from $38,555 millions USD in 1993 to $73,084 millions in 2003. An increased of almost 90% over the mentioned years. The growth if Argentine exports from $13,118 millions USD in 1993 to $29,565 millions in 2003. An increased of more than 125% over 10 years. Imports from Argentina decreased by almost 18% between 1993 and 2003. The principal reason behind this is Argentina living the Currency Board in 2001, the devaluation of the peso and the subsequent relative increment in prices of imported goods. We must shed light in the fact that exports intra-Mercosur countries, shrunk from 18% of the total exports in 1993 to 12% in 2003. Moreover, this fact is not intrinsically a negative aspect as Total Exports grew by 94.41% in the same time. However, this statistic could be an alarm signal that will be address later on the analysis. Between 1993 and 2003: - Considering the % of total exports by region, Mercosur has Increased its participation of exports to: NAFTA by 15%. CHINA by 250%. REST OF THE WORLD by 31%. 22 - Considering the % of total exports by region, Mercosur has Decreased its participation of exports with the: EU by 15%. - Considering the % of total imports by region, Mercosur has increased its participation of imports from: CHINA by 100%. REST OF THE WORLD by 31%. - Considering the % of total imports by region, Mercosur has decreased its participation of imports: CANADA by 50%. JAPAN by 29%. 23 2.2.1 International Trade Fact sheet by country. 24 2.3 Mercosur and Canada 2.3.1 Merchandise Trade between Canada and Mercosur CANADA’S MERCHANDISE EXPORTS (Including re-exports) (thousands of Canadian dollars) - customs basis Country and Rank as Cdn Export Market in 2004 (based on 2004 Exports) 55 Argentina 17 Brazil 83 Uruguay 2002 2003 2004 % Share of Exports 2004 1999 2000 2001 211,808 244,298 133,436 43,868 78,115 127,953 0.031 1,079,693 1,110,804 957,448 766,440 894,665 952,553 0.232 37,518 27,862 19,876 10,345 13,061 38,685 0.009 CANADA’S MERCHANDISE IMPORTS (Customs Basis) (thousands of Canadian dollars) - customs basis Country and Rank as Cdn Import Source in 2004 50 Argentina 14 Brazil 64 Uruguay % Share of Imports 2004 1999 2000 2001 2002 2003 2004 303,937 367,132 350,104 322,721 374,085 287,754 0.081 1,502,304 1,531,070 1,905,005 1,992,652 2,340,629 0.659 47,928 136,953 130,185 0.037 1,374,692 89,130 118,107 138,147 CANADA’S MERCHANDISE TRADE BALANCE (thousands of Canadian dollars) - customs basis 1999 Argentina Brazil Uruguay SOURCE : Statistics 3 2000 2001 2002 2003 2004 -92,129 -122,834 -216,668 -278,853 -295,970 -159,801 -294,999 -391,500 -573,622 -1,138,565 -1,097,987 -1,388,076 -51,612 -90,245 -118,271 -37,583 -123,892 -91,500 Canada3 http://www.dfait-maeci.gc.ca/eet/cimt/2004/pfact_annual_trade_2004-12-en.asp 25 Canada’s merchandise trade balance shows an increasing deficit with Brazil, reaching a peak of nearly 1.4 billion CAD in 2004. When considering Canada’s merchandise trade balance with Argentina, we observe an increasing deficit from 2000 to 2003. The major driver behind this situation could be found in the devaluation of the Argentine peso and the corresponding relative increase in price of Canadian goods. This situation began to reverse in 2004, where the deficit contracted from nearly 296 million CAD in 2003 to 160 million CAD in 2004. Graphically: CANADA'S MERCHANDISE TRADE DEFICIT (Thousands of CND) 1,600,000 1,400,000 1,200,000 1,000,000 Argentina Brazil Uruguay 800,000 600,000 400,000 200,000 0 1999 2000 2001 2002 2003 2004 SOURCE : Statistics Canada 26 2.3.2 Service Trade between Canada and Mercosur Canada's International transactions in services, (millions of CAD) 1997 65 24 18 1998 64 22 20 22 22 20 25 26 16 56 32 10 50 29 11 62 32 20 53 24 16 65 36 16 34 11 16 14 10 10 13 13 7 SERVICE TRADE BAL. 9 14 4 Total Services Receipts (exports) 400 429 347 Travel 106 113 107 Commercial services 226 249 182 Transportation and government services 68 67 57 Total Services Payments Brazil (imports) 142 194 173 Travel 44 78 74 Commercial services 42 58 44 Transportation and government services 56 58 55 SERVICE TRADE BAL. 258 235 174 SOURCE: International Trade Canada. Trade and Economic Analysis. 4 33 412 115 225 44 357 74 221 42 333 61 210 72 62 62 189 88 43 208 118 42 208 112 40 58 223 48 149 55 125 Total Services Receipts (exports) Travel Commercial services Transportation and government services Total Services Payments Argentina (imports) Travel Commercial services Transportation and government services 4 1999 2000 2001 2002 66 86 109 76 24 33 29 19 22 27 54 41 http://www.dfait-maeci.gc.ca/eet/CIMT/2003/intern_trade_in_services_2003-en.asp 27 2.3.3 Canada’s Exports to Mercosur by Industry Canadian Exports to Argentina by industry Value in Thousands of Canadian Dollars 5-digit NAICS codes 32411 - Petroleum Refineries 33421 - Telephone Apparatus Manufacturing 32212 - Paper Mills 33241 - Power Boiler and Heat Exchanger Manufacturing 33451 - Navigational, Measuring, Medical and Control Instruments Manufacturing 2000 2001 2002 2003 2004 31 61 30 18 10,347 Canadian Exports to Brazil by industry Value in Thousands of Canadian Dollars 27,580 21,139 975 4,178 9,058 5-digit NAICS codes 2000 2001 2002 2003 2004 21239 - Other Non- 219,590 170,770 193,328 200,566 247,849 Metallic Mineral Mining and Quarrying 32212 - Paper Mills 294,358 256,190 145,800 114,834 152,197 17,290 10,606 813 8,218 6,886 21211 - Coal Mining 70,073 92,670 80,401 109,887 89,485 2 -- 1,431 304 5,295 8,026 4,376 1,597 2,268 4,831 33422 - Radio and 11,099 2,522 433 1,168 4,438 Television Broadcasting and Wireless Communications Equipment Manufacturing 11113 - Dry Pea and 1,304 3,464 1,239 2,675 4,227 Bean Farming 33329 - Other Industrial Machinery Manufacturing 33313 - Mining and Oil and Gas Field Machinery Manufacturing 3,658 2,824 1,792 2,754 4,152 33322 - Rubber and Plastics Industry Machinery Manufacturing 33531 - Electrical Equipment Manufacturing 32541 Pharmaceutical and Medicine Manufacturing 5,474 8,657 637 1,968 3,729 5,384 3,271 633 3,805 3,595 1,525 2,890 2,030 1,947 3,968 1,830 1,861 2,691 2,953 3,551 21111 - Oil and Gas 48,298 35,705 36,065 40,575 44,674 Extraction 33451 Navigational, Measuring, Medical and Control Instruments Manufacturing 32521 - Resin and Synthetic Rubber Manufacturing 8,556 11,923 13,173 21,602 28,699 22,041 8,419 22,151 20,149 25,583 32518 - Other Basic 2,878 3,085 2,876 11,447 23,902 Inorganic Chemical Manufacturing 33329 - Other 7,288 13,113 4,989 37,876 20,542 Industrial Machinery Manufacturing 33361 - Engine, 9,069 16,478 18,341 16,615 18,298 Turbine and Power Transmission Equipment Manufacturing 32541 6,032 9,211 8,462 12,114 16,771 Pharmaceutical and Medicine Manufacturing 11119 - Other Grain 11,744 9,427 19,470 22,232 16,755 Farming 33641 - Aerospace Product and Parts Manufacturing 8,224 15,904 9,508 16,857 16,541 SOURCE: Statistics Canada5. 5 http://strategis.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag 28 2.3.4 Canada’s Imports from Mercosur by Industry Canadian Imports from Argentina by industry Value in Thousands of Canadian Dollars 2000 2001 2002 2003 2004 5-digit NAICS codes 33121 - Iron and Steel Pipes and Tubes Manufacturing from Purchased Steel 61,579 48,062 41,284 77,543 70,690 33111 - Iron and Steel Mills and Ferro-Alloy Manufacturing 10,656 24,776 46,620 35,836 19,550 31213 - Wineries 10,020 8,117 9,416 12,070 18,706 11133 - Non-Citrus Fruit and Tree Nut Farming 23,172 19,472 16,695 18,346 16,747 32191 - Millwork 31611 - Leather and Hide Tanning and Finishing 31142 - Fruit and Vegetable Canning, Pickling and Drying 31171 - Seafood Product Preparation and Packaging 0 1,954 5,361 11,598 13,228 32,672 34,214 23,996 15,764 13,189 5,833 7,221 8,771 10,917 11,613 11,301 14,614 12,561 13,762 7,956 31133 - Confectionery Manufacturing from Purchased Chocolate 12,759 11,413 7,680 8,557 11132 - Citrus (except Orange) Groves 7,182 11,593 10,067 6,941 33391 - Pump and Compressor Manufacturing 648 2,038 1,657 5,720 33721 - Office Furniture (including Fixtures) Manufacturing 5 7 190 3,012 7,494 Canadian Imports from Brazil by industry Value in Thousands of Canadian Dollars 5-digit NAICS codes 2000 2001 2002 2003 2004 33111 - Iron and Steel Mills and Ferro-Alloy Manufacturing 187,795 133,656 307,713 251,433 391,982 31131 - Sugar Manufacturing 33131 - Alumina and Aluminum Production and Processing 33361 - Engine, Turbine and Power Transmission Equipment Manufacturing 31621 - Footwear Manufacturing 21222 - Gold and Silver Ore Mining 71,336 114,693 152,147 176,080 141,172 26,679 2,198 25,509 64,719 118,504 11,080 14,392 13,909 84,963 99,130 67,217 67,999 81,680 74,373 95,461 0 -- 1,017 61,417 93,232 33611 - Automobile and Light-Duty Motor Vehicle Manufacturing 59,643 189,212 190,296 156,157 84,828 11133 - Non-Citrus Fruit and Tree Nut Farming 88,373 77,083 75,387 69,083 68,106 6,007 32191 - Millwork 31141 - Frozen Food Manufacturing 22,183 28,858 57,175 59,026 64,333 5,812 21229 - Other Metal Ore Mining 5,064 33634 - Motor Vehicle Brake System Manufacturing 31,612 27,965 37,287 39,046 56,688 74,061 77,122 85,495 74,264 62,618 43,411 57,065 56,489 42,626 57,955 SOURCE: Statistics Canada 29 2.4 Foreign Direct Investment in Mercosur Led by economic reforms and the associated growth prospects, FDI in Chile and the Mercosur—that includes Argentina, Brazil, Paraguay, and Uruguay— increased sharply from $10 billion in 1994 to $62 billion in 1999. This was led initially by marketseeking investments and later by investments in the services sector that was catalyzed by rapid privatization of state-owned assets. Since 2000, FDI in Latin America has declined sharply, driven largely by the contraction in flows to Mercosur. This has been triggered, among other things, by crisis in Argentina, sluggish growth and dim prospects, and the slowdown in the privatization process in other countries, notably Brazil 6. Nonetheless, this is a situation that reversing as the Argentine and Brazilian economies are regaining momentum since 2003. 6 FOREIGN DIRECT INVESTMENT IN EMERGING MARKET COUNTRIES. Report of the Working Group of the Capital Markets Consultative Group. September 2003. 30 2.4.1 Canadian Direct Investment in Mercosur Canadian Direct Investment in Mercosur - Millions of dollars CAD Source: CANSIM Table 376-0051 Argentina Brazil Uruguay TOTAL 1997 1998 1999 2,004 2,972 3,274 3,155 3,975 4,662 5 7 37 5,164 6,954 7,973 2000 5,023 6,667 26 11,716 2001 2002 6,002 5,104 6,275 7,605 7 5 12,284 12,714 2003 5,216 7,578 7 12,801 Foreign Direct Investment in Canada - Millions of dollars 1997 1998 1999 2000 2001 2002 Brazil 294 365 387 621 854 774 SOURCE: International Trade Canada. Trade and Economic Analysis. CANSIM Table 376-00517 2003 770 With regards to Canadian Direct Investment in Argentina an Brazil, we observe an increasing a sustain trend. In addition, Canadian Direct Investment in Argentina has a stronger weight than in Brazil despite the later’s market size. Surprisingly, despite Argentina’s devaluation in 2001 and default, Canada continued its solid CDI in the country. 7 http://www.dfait-maeci.gc.ca/eet/cimt/2003/CIIP03-en.asp 31 2.4.1.1 Canadian Direct Investment in Argentina - Ranking of the 30 leading Canadian companies investing in Argentina Period 1998-2003 - in million of USD – Company 1 Barrick Gold 2 Millar Western 3 Profértil 4 Otros proyectos mineros 5 Wheaton River Minerals Ltd. Mining Pulp and paper Chemicals Mining Mining Total 1998-2003 633,3 350 294,6 289 275 6 Inversiones en exploración 7 Pachón 8 Barrick Gold Corporation 9 Transportadora Gas del Norte 10 Potasio Río Colorado 11 Agua Rica 12 Meridian Gold 13 AEC Pipelines Mining Mining Mining Natural Gas Supply Mining Mining Mining Oleoducts, Gasoducts 265 260 221 146,4 105 97,5 90 68 14 Saputo Inc. 15 Sudpap 16 Gasoducto Uruguayana Food and Beverages Forestry Oleoducts, Gasoducts 50,8 50 47,4 17 Canadian Hunter Exploration Oil and Gas 39,6 18 Gasoducto del Pacífico Oleoducts, Gasoducts 38,1 19 Scotiabank Quilmes (*) 20 Minera Alumbrera 21 Caisse de Depot et Placement du Quebéc Banking Mining Construction 30 28,2 25 22 Cuarta Línea del Comahue Electricity 22,3 23 Thomson Printing and Editorial 18 24 Comunicación Dinámica 25 Editorial Antártica 26 Mc Cain Foods Printing and Editorial Printing and Editorial Food and Beverages 15 15 14,5 27 Agrium Food and Beverages 10 28 YPF Oil and Gas 11 29 Clearwater Seafoods Food and Beverages 7,5 30 Minera Andes TOTAL (*)Left Argentina in 2002. SOURCE: 8 Sector Mining 6 3.556,50 CEP, Base de Inversiones.8 http://www.comercio.gov.ar/dnpce/bilaterales/canada/inversiones.html 32 Canadian Direct Investment in Argentina is congruent with Canada’s main sectors: Mining, Oil and Gas, Forestry, Pulp and paper. 2.4.1.2 Canadian Direct Investment in Brazil - Largest Canadian Companies operating in Brazil More than 800 Canadian companies do business with Brazil with about 60 having full-time operations there. Several of them have high profiles in Brazil, including Brascan, which has been in the country for 150 years. Alcan has become the country's leading producer of aluminum and the pre-eminent company in Brazil's world-leading aluminum recycling program since establishing operations there in 1966. While Molson Breweries has more recently gained stature with its purchase of Brazil's leading brewery and its internationally known Bavaria brand and Cervecerias Kaiser. Other leading Canadian investors include the pharmaceutical company Apotex and the petroleum exploration firms Nexen and Encana9. 2.5. International Trade Issues 2.5.1 Disputes at the WTO involving Argentina, Brazil and Canada 22.04.03 Argentina’s anti-dumping measure found to violate WTO agreement A WTO dispute panel has concluded that Argentina acted inconsistently with the WTO Anti-Dumping Agreement on a number of counts when it imposed anti-dumping duties on poultry from Brazil. The panel report in case DS241 was circulated on 22 April 2003. Canada, Chile, the EU, Guatemala, Paraguay and the US were third parties in this case10. 19.02.02 DSB adopts report on aircraft dispute The Dispute Settlement Body, on 19 February 2002, adopted the panel report on Brazil's complaint against “Canada — export credits and loan guarantees for regional aircraft” (DS 222). 9 EDC. Brazil: Back in Business. By Mike Trickey. http://www.edc.ca/corpinfo/pubs/exportwise/summer04/p16_e.htm 10 WTO. http://www.wto.org/english/news_e/news03_e/news03_e.htm 33 28.01.02 Panel report out on aircraft financing dispute The WTO, on 28 January 2002, released the report of the panel that had examined Brazil's complaints against Canada's export credits and loan guarantees for regional aircraft (DS222/R). The panel concluded that some of the Canadian measures constituted prohibited export subsidies but also rejected a number of Brazil's claims. The battle began in 1996 when Canada requested the establishment of a WTO panel to investigate the legality of state subsidies given to the Brazilian aircraft manufacturer, Embraer. The WTO found that the subsidies were illegal and when Brazil did not comply with the ruling, Canada was granted permission by the WTO to impose countermeasures against Brazilian goods. Instead of proceeding with tariffs, Canada decided to fight the subsidies given to Embraer by essentially giving matching subsidies to its own regional aircraft manufacturer, Bombardier. Proving once again that two wrongs don’t make a right, the WTO found Canada’s subsidies illegal and granted Brazil permission to impose economic countermeasures against Canada. To date neither country has proceeded with retaliatory duties11. However, the settlement being worked on may also stipulate what other kinds of assistance, such as research and development or location grants, could trigger a complaint from either side. The task to close an agreement has become more complex because Brazil in recent months has been pushing to expand the agreement to cover the type of production and development assistance that Canadian governments may give to Bombardier to build the new regional jets12. 11 12 BRITISH COLUMBIA. Ministry of Management Services. BC stats. September, 2004. GLOBE AND MAIL. Canada, Brazil tackle ‘thorny issue'. By STEVEN CHASE . March 10, 2005. 34 2.5.2 State of Bilateral Trade relations with Canada November 25, 2004 . International Trade Minister Jim Peterson today concluded the Canada trade mission to Sao Paulo and Rio de Janeiro, Brazil. "Canada is targeting Brazil as a key country in the emerging markets strategy it is developing," said Minister Peterson. "Brazil is a gateway to South America and this mission has allowed us to build bridges for the long term." 13 Also among the main objectives were: working together to resolve the aircraft dispute between the two countries and to moving forward on the WTO Doha Development Round. February 7 and 8, 2005. MERCOSUR – CANADA. The meeting in Ottawa was organized as a continuation of the dialog between Canada’s Prime Minister, Paul Martin, and the President of Brazil, Luis Inácio Lula da Silva, last November. The objective was to discuss the possibility of initiating bilateral negotiations that would allow access to the market of goods, services and investments between Canada and Mercosur within the FTTA framework14. March 3, 2005. The president of Sanitary Services and Agri-food Quality from Argentina (SENASA), Jorge Amaya, maintained a meeting in Ottawa with the chief of the CFIA, Richard Fadden. Argentina requested that Canada reopen the importation of fresh and mature beef from the former country. They also signed various agreements related to animal and vegetable health15. 13 http://www.teamcanada.gc.ca/brazil/menu-en.asp Subsecretaria de Política y Gestión Comercial. http://www.comercio.gov.ar/novedades.html#canada . 15 SENASA. El SENASA y la CFIA de Canadá alcanzaron coincidencias institucionales y sanitarias. http://www.senasa.gov.ar/noticias/canada.php?id=60136 . 14 35 3. Trade Policy In this section we will address Mercosur’s Trade Policy. Particularly, we will focus on Brazil given the size of its economy and the leading role in Mercosur’s policy making process. 3.1 The DOHA Round – Agricultural Negotiations Through the Doha round, many developing countries complain that their exports still face high tariffs and other barriers in developed countries’ markets and that their attempts to develop processing industries are hampered by tariff escalation (higher import duties on processed products compared to raw materials). They want to see substantial cuts in these barriers16. Specifically the Doha round, August 2004 framework, that treats export subsidies and competition if fully adopted could signify an incredible benefit for Mercosur agricultural exports. The framework states clearly that all forms of export subsidies will be eliminated by a “credible” date. The elimination will work in parallel for all types of subsidies, including those in government-supported export credit, food aid, and statesanctioned exporting monopolies17. 3.2 Trade Policy in Action – The Hard Ball The U.S. Trade Representative Robert B. Zoellick once told Brazilian officials that if they were unhappy trading with the United States, their other option was to trade with Antarctica. 16 WTO. AGRICULTURE NEGOTIATIONS: BACKGROUNDER. Developing countries. http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd14_devopcount_e.htm#august 17 WTO. August 2004 framework: export subsidies and competition. http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd24_subsidiesframework_e.htm 36 Under President Luiz Inacio Lula da Silva, Brazil's foreign policy has followed Mr. Zoellick's advice. Though it is not actually trading with Antarctica, it has decidedly turned east for economic growth and political partnerships instead of looking toward its traditional partner in the north. A key example of Brazil's foreign-policy initiatives is the accord among Brazil, India and South Africa signed in June. It focuses on scientific and technological cooperation, but one of its chief strategies is to act as a unified opposition voice inside the World Trade Organization. China and Brazil signed an accord that will increase commercial alliances and technological cooperation in agribusiness, construction, civil engineering and in natural-resource development projects. A Chinese delegation was in Brazil Aug. 18-20 and again in mid-September 2004 to discuss trade with Mercosur. Brazil is also looking for alternatives in case the U.S.-proposed Free Trade Area of the Americas doesn't go its way. Brazil — the world's largest beef, coffee, sugar cane and orange juice exporter — has tried unsuccessfully to get Washington to lower or eliminate trade barriers to Brazilian food products in past FTAA-development negotiations18. Rafael Bielsa, Argentina’s Minister of Foreign Affairs was quoted by a Brazilian weekly as saying his country's position on the FTAA is "very similar to Brazil's." Mercosur represents Brazil’s first priority. From a Brazilian standpoint , one of the main objectives of Mercosur is Brazil’s insertion in the international economy. Moreover, from a strategic viewpoint, Mercosur would help to prevent further interdependence with the US economy, and to avoid isolation in the region 19. 18 WASHINGTON TIMES. Brazil moves to form bloc 'against' U.S. By Kenneth Rapoza. VAN ROMPAY, JAN. Brazil’s Strategy towards the FTTA. Free Trade for the Americas? Edited by Paulo Vicentini and Marianne Weisbron. Zed Books, 2004. 19 37 We can conclude that Mercosur is an strategic framework that would allowed its members and Brazil in particular, to leverage its bargaining power with the EU, NAFTA, FTAA, SAFTA, and ASEAN among others. With regards to Foreign Direct Investment, tax breaks and other incentives are being provided for foreign firms that set up operations in Brazil, especially in the pharmaceutical, software and intellectual technology sectors where Lula is attempting to establish a strong domestic presence. 3.3 Mercosur Future Outlook 3.3.1 Advantages of Mercosur When looking for other reasons explaining Mercosur’s advantages as a subregional entity, there are three basic points: 1. MERCOSUR advocates a multipolar system and its inherent benefits cannot ignore the difference between an FTAA with MERCOSUR and an FTAA without MERCOSUR. 2. Developed countries represent increasingly ageing societies. More and more young people are looking for ways to find new geographic solution to an anti-fiscal rebellion. In order to maintain the implemented structures of welfare, capital in those countries will have to find productivity outside their borders. Taking into account the demand which is bound to fall, the apparent overinvestment observed in many sectors ant the ongoing race for profitability, these countries will be forced to look for solutions outside their unions. This is despite the new borders formed by Central Europe. 3. Only a few languages on a global scale will achieve the required dimension of a “lingua franca”. Those languages include English, Mandarin, Arabic and Spanish that will be without a doubt the Latin world’s point of reference. In addition, Spanish has the enormous advantage of growing within the NAFTA’s sphere. 38 4. Mercosur allows for an evolutional economic and trade development within member states. If the FTTA becomes fully effective, this would mean the end of Mercosur, as it would cancel the advantages that the Common External Tariff provides to local companies. The Southern Cone integration is among developing countries only, with limited competitiveness. Its fusion into a bloc that includes Canada and the US would imply the collapse of the productive chains, as it would grant the highly competitive companies of the North the same advantages as local companies20. 5. Mercosur’s enables a multi-level negotiation process that combines an evolutionary competitive adaptation process for local companies and at the same time maximizes the bloc bargaining power. Mercosur is able to exploit this advantages by engaging in multiple negotiations within the Bloc, with the EU, NAFTA, the WTO, the FTTA, considering options at the bilateral level, and also the possibility of negotiating a South American Free Trade Area (SAFTA). 3.3.2 Disadvantages of Mercosur 1. Institutional Weakness : Until today Mercosur is operated on a highly informal institutional basis. In essence, Mercosur is managed politically rather than by a commonly agreed and binding principles (rules-based system). This impression is underlined by the fact that these groups are themselves constrained by the presidents - from Brazil and Argentina in particular – who used to decide on vital questions of the Mercosur on a strictly personal level21. 20 VIZENTINI, PAULO G. F., WEISEBROWN, MARIANNE L. Free Trade for the Americas? Zed Books, 2004. 21 PREUSSE, HEINZ G. The Future of Mercosur. Free Trade in the Americas. Edited by Sidney Weintraub, Alan M. Raugman and Gavin Boyd. Edward Elgar, 2004. 39 2. Excessive dependency on the international financial markets. For example, Brazil’s stock of external debt remains the largest in the emerging world, despite this decline. The need to roll over an average of US$40bn in long- and medium term debt falling due each year accounts for the country’s vulnerability to changes in conditions in international capital markets22. 3. Divergence in International Insertion (Van Rompay 2004 : 134). Member countries within Mercosur seems to follow different strategies to foster economic development and International Insertion. This example was most evident with Argentina’s opportunistic behaviour in the FTTA negotiations. 4. Missing Macroeconomic Coordination (Preusse 2004: 133) : The different concepts of macroeconomic management, for example the Argentine currency board and the Brazilian system of managed floating, turned out to be a major factor of uncertainty for the determination of reliable competitive positions within the region. After the Brazilian crisis of January 1999, the incompatibility of both concepts could not be overlooked any more and eventually turned out to be one of the driving forces of the Argentine crash of 2001/2. 5. Retreat of National Trade Policies to unilateralism and protectionism. For example, in the first half of 2001 when Argentina introduced unilateral tariff changes as part of a series of measures designed to help its economy recover from three years of stagnation. These changes, notably the abolition of tariffs on imports of capital goods from outside Mercosur, contravene the CET, but were accepted by Brazil on the understanding that they would be temporary. Paraguay’s decision in July 2001 to impose a 10% tariff on imports from its Mercosur partners was accepted by Brazil on the same understanding, as was Uruguay’s decision, its first unilateral 22 ECONOMIST INTELLIGENCE UNIT. Brazil, Country Profile, 2004. 40 initiative, later that month to join Argentina in suspending the CET for capital goods and to impose a 3% tariff on imports from within the bloc23. 6. Trade Diversion: Occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade are 24 . A working paper developed by the IMF 25 concludes that MERCOSUR’S propensities to import and export decreased and became significant precisely at the time when integration became significant. Thus integration and trade diversion went hand in hand in MERCOSUR. This probably reflects the overall trade liberalization of the MERCOSUR countries at the same time as they were forming the RTA among themselves. 3.4 Conclusions Arguably we can object the benefits of Mercosur. Above all, Mercosur’s strategic framework that would allowed its members, to leverage its bargaining power with the EU, NAFTA, FTAA, SAFTA, and ASEAN among others. Despite the asymmetry of the economies of the member states when considering Brazil, Mercosur offers so far a more equal position to negotiate with when compared to the overwhelming power of the US. Secondly, Mercosur integration is among developing countries only, with limited competitiveness to local companies that enables a progression of economic development and evolution. However, the combined effects of Institutional Weakness, Macroeconomic discoordination, Uniteralism, and excessive Dependency on Financial Markets creates a serious treat to Mercosur’s survival. Each of the issues must be address if the political leaders of Argentina, Brazil, Paraguay and Uruguay 23 24 25 ECONOMIST INTELLIGENCE UNIT. Argentina, Country Profile, 2004. HILL, CHARLES. International Business. Competing in the Global Marketplace. McGraw Hill, 2005. Enzo Croce, V. Hugo Juan-Ramón, and Feng Zhu. IMF Working Paper. Performance of Western Hemisphere Trading Blocs : A Cost-Corrected Gravity Approach. International Monetary Fund, 2004. 41 expects to maximize Mercosur’s strategic framework to insert their economies in the trade system. Finally, the moment of truth for Mercosur will come when in November 2005 hemisphere’s leaders are due to gather in Buenos Aires to the 4 th Summit of the Americas26. 26 The Economist. The World in 2005. 42