Law and Business Review of the Americas

Volume 4 Number 3 Article 7

1998

MERCOSUR and NAFTA: The Need for Convergence

Miguel Otero-Lathrop

Recommended Citation
Miguel Otero-Lathrop, MERCOSUR and NAFTA: The Need for Convergence, 4 LAW & BUS. REV. AM. 116
(1998)
https://scholar.smu.edu/lbra/vol4/iss3/7

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116 NAFTA. Law and Business Review of the Americas

MERCOSUR and NAFTA:

The Need for Convergence
ProfessorMiguel Otero-Latbrop*

I. Promoting Free Trade in the Americas.

Trade negotiations seem to be on the rise in the Americas. Hardly a month goes by with-
out a trade pact being signed or a new initiative announced. Existing integration schemes are
revised and new groupings are formed. Trade agreements - be it in their Latin American or
North American variants - are viewed as a pre-condition for securing effective competitive-
ness, improving positions in foreign markets, and attracting new investments. Almost all
countries have discarded options that emphasize autarchy and national self-sufficiency. Trade
liberalization is viewed as a means to enhance the competitiveness of industries and services.
Widened markets are also more attractive to foreign partners and become effective instru-
ments for competing for goods, services, and capital in world markets.
Trade liberalization in the Americas seems to coincide with increasing polarization of
the global economy around the "triad" of the European Union (EU), the North American
Free Trade Agreement (NAFTA), and Japan and its Asian partners. However, even if sub-
stantial regionalization is taking place, this regionalization does not necessarily reverse the
trend towards globalization and multilateralism in the region. Thus, in Latin America, as
in the rest of the world, globalization and regionalization are not mutually exclusive con-
cepts or polar opposites.
Despite the many trade agreements signed in our hemisphere, much remains to be
done to achieve real free trade throughout the Americas. At the Miami Summit, the rulers
of the hemisphere agreed to establish a Free Trade Area of the Americas (FTAA) by the
year 2005 and to achieve concrete progress in negotiations before the end of the century.
Specifically, the first paragraph of the Declarationof Principlesof the Miami Summit
in the trade area reads as follows:
Our continued economic progress depends on sound economic policies, sus-
tainable development, and dynamic private sectors. A key to prosperity is
trade without barriers, without subsidies, without unfair practices, and with
an increasing stream of productive investments. Eliminating impediments to
market access for goods and services among our countries will foster our eco-
nomic growth. A growing world economy will also enhance our domestic
prosperity. Free trade and increased economic integration are key factors for
raising standards of living, improving the working conditions of people in the
Americas, and better protecting the environment.

Currently serving as Senator for the country of Chile; the author received his J.D. from Southern
Methodist University School of Law.
Summer 1998 117

The paragraph is eloquent and retains all of its validity. The FTAA project is the most
ambitious economic undertaking in the history of the continent. When fully implemented
it will create the largest free trade arrangement in history, encompassing an area with over
800 million people and overall GDP in excess of $9 trillion dollars. Latin American mar-
kets are among the fastest growing in the world, and U.S. and Canadian exporters and ser-
vice providers are some of the principal beneficiaries of this growth.
But, we are still far from this objective. The countries of the Americas, and especially
their exporters, still need a guarantee for continuous and predictable access to the hemi-
spheric markets. This objective seems more valuable in the context of growing perceptions
about the inevitable break up of the world economy into trading blocks, and the threat of
resurgence of protectionism in many large markets in the world.

II. The Revitalization of Integration in Latin America: MERCOSUR.

In the early 1990s there has been a revitalization of sub-regional integration projects
throughout Latin America. The new initiatives are closely linked to policies of structural
reform and to the opening of the participating economies to international trade and
investment. This new impulse expresses itself in projects for the creation of free trade
zones and common markets within a very short period of time. These projects are aimed
at the free circulation of goods, services, capital, and persons. And, in a later stage, such
projects are aimed at the coordination of economic policies. These measures have been
adopted by traditional integration schemes such as the Andean Pact and the Central
American Common Market, and by newer initiatives such as MERCOSUR.
MERCOSUR, an integration scheme that comprises the two most powerful
economies of South America and the most significant system of intra-regional trade rela-
tions in Latin America, provides the most remarkable example of this option. The four-
member countries have already achieved ambitious objectives: a customs union, with the
elimination of most barriers to trade in goods and services; the establishment of a com-
mon external tariff, as part of a joint trade policy; and the development of common poli-
cies in a growing number of areas. Over the long term, there is the prospect that MERCO-
SUR will progress to economic and monetary union and the harmonization of economic
policies. The process goes beyond purely commercial and economic matters. Since the
1980s, Argentina and Brazil have adopted a series of accords aimed at the promotion of
bilateral cooperation in such sensitive fields as nuclear development, military exchanges,
transport and communications, etc. In turn, the MERCOSUR countries have signed an
important agreement on river transport.
The member countries of MERCOSUR have chosen a pragmatic and flexible
approach to further sub-regional integration. Its proponents consider it an open process,
which seems reasonable in light of the failure of previous integration experiences, and the
economic uncertainties that still affect the participant countries. The openness of the pro-
ject is reflected by the absence of an advanced institutional structure that is supposed to
develop gradually according to specific and concrete needs. But the very ambitious objec-
tives and the strict deadlines set at the onset seem somewhat contradictory with this pro-
fessed flexibility. Thus, the member countries of MERCOSUR purport to establish a com-
plete functioning common market at a much faster pace than the European Community,
in a context of weak common institutions.
118 NAFTA. Law and Business Review of the Americas

Nevertheless, MERCOSUR has already produced very interesting results.

Liberalization between its member states is proceeding swiftly and has stimulated intra-
regional trade. A common external tariff is already in force. Probably more important than
these economic achievements, MERCOSUR has implied a remarkable political change in
the area, reflecting close cooperation in a subregion which has had a long history of rivalry
and narrow-minded nationalistic suspicion.
MERCOSUR is becoming one of the most significant economic areas of the develop-
ing world. It includes almost half of the population of Latin America, with a GDP of
approximately $840 billion dollars in 1997, which is more than half of the output of the
region as a whole. In recognition of its potential, the EU negotiated a cooperation agree-
ment with the subregional group aimed at ulterior trade liberalization.

III. North American Free Trade: NAFTA.

The "conversion" of the United States to the regional approach has led to the creation
of NAFTA and to the broader vision of hemispheric partnership outlined in the 1994
Summit of the Americas. In the past, both notions would not only have been dismissed as
implausible, but also would have been rejected in the United States and Canada, and for
different reasons in Latin American countries.
NAFTA is not geared towards the establishment of a common market and has no
intention of emulating the EU model. Unlike the EU, NAFTA is not a customs union with
a common external tariff. NAFTA does not cede sovereignty to common economic or
political institutions, nor does it contemplate the free movement of labor. NAFTA does not
include agricultural or social common policies and it does not establish special funds to
rectify the imbalances that may arise between the United States and Canada and/or
Mexico.
Notwithstanding, it seems evident that the three member countries of NAFTA were
already linked through a process of de facto integration. The density of cross-border inter-
dependence has created problems that demand common management. Thus, the agree-
ment was considered as a way to formalize, regulate, and deepen an ongoing process.
Mexico's option for a free trade area (FTA) with its North American neighbors repre-
sented a radical break from the past. Historically, the idea of integration with the United
States had been discarded by Mexican political leaders and considered elite on nationalistic
grounds. But the new economic realities of the country led to a revision of this traditional
position. In less than a decade, Mexico was transformed from a highly protected and state-
centered economy to an open one. For its new strategy to succeed, access to the main
world markets had to be secured. After an initial search for new partners, Mexico realized
that its heavy reliance on the U.S. market was an inescapable reality. In that context, an
FTA with the United States was seen as a guarantee for continued access to a market which
accounted for more than seventy percent of Mexican foreign trade, and as a powerful
incentive for the attraction of new U.S. investments. Additionally, it was viewed as a means
to provide external reinforcement for the policies adopted by past governments and to
ensure the continuation of those policies in the future.
Although NAFTA does not purport to establish a common market in North America,
its implementation will lead to increased integration in the area. The expansion of interde-
pendence will require new institutions and instruments. The financial package fixed by the
Summer 1998 119

United States in 1995 to rescue Mexico's troubled economy illustrates one of the aspects of
this growing interdependence. On the otherhand, NAFTA negotiations demonstrated the
difficulty of preventing discussions on trade from spilling over into the fields of environ-
mental protection and labor regulations. Thus, a process of institutional growth and spill-
over across different sectors seems likely in the future.
The establishment of NAFTA held important implications for the other countries of
Latin America. Immediately after its conclusion, several countries of the region expressed
their interest in negotiating FTA's with the United States; Brazil demonstrated less willing-
ness than other South American countries.
The countries of Central and South America are interested in achieving free-trade
with the United States for reasons that are similar to those of Mexico to a certain extent.
They view this option as a guarantee for continuous and predictable access to the U.S.
market and as an incentive for foreign investors, proceeding from either the United States
or third countries interested in acceding that market.

A. CONVERGENCE.
The proliferation of trade agreements in the Western Hemisphere poses the question
of an eventual convergence. Will NAFTA or bilateral agreements conducive to FTAA lead
to the fragmentation of Latin America? Is free trade with the United States and Canada
compatible with the strengthening of sub-regional accords? Are sub-regional agreements
conducive to regional integration?
It is tempting to assume that the various agreements and groupings that are beginning
to crystallize in Latin America form building blocks for regional integration and for the
emergence of a hemispheric free-trade area. However, this would present a rather idealized
image of a very complex reality. Subregions are advancing at very different paces.
Memberships and commitments to specific groupings are ambiguous or contradictory [at
times], and tend to overlap. Problems of compatibility may emerge from simultaneous
participation in NAFTA and subregional schemes in Latin America. Sub-regional agree-
ments can inhibit further trade liberalization with respect to third countries.
The alternatives are definitely not mutually exclusive, but some options involve diffi-
cult dilemmas and problematic trade-offs for the Latin American countries. Successive
bilateral negotiations could lead to friction and practical problems. Overlapping arrange-
ments can cause mismatches in the phasing of tariff reductions, inconsistencies between
different dispute settlement mechanisms, and difficulties in the implementation of dis-
parate rules of origin. The likelihood of jurisdictional disputes seems high, especially con-
cerning the application of most favored nation status.
There is also a political issue about leadership to achieve FTAA: should free-trade in
the Americas be built around NAFTA or MERCOSUR? This debate may seem very attrac-
tive, but it is misleading. Although the alternatives may be charged with considerable polit-
ical symbolism, the FTAA negotiation difficulties are of a different nature. As soon as
negotiations start, the technical issues will become the political issues, and the debate
about leadership and hegemony in the hemisphere will become academic.
It is important to stress that the issue is not choosing between Latin American and
hemispheric integration or between MERCOSUR and NAFTA. Rather, the problem of
convergence derives from the ambiguity and different views that seem to pervade many
trade and integration mechanisms in the region. FTAA negotiations will have to include
120 NAFTA: law and Business Review of the Americas

several polemical trade-related issues in the negotiations, such as rules of origin provi-
sions, dispute settlement procedures, intellectual property regulations, environmental pro-
tection, investment liberalization, labor protection, etc.
In this context, the major task ahead will be to achieve the convergence of the various
trade arrangements developed in the hemisphere. There is a clear need to advance towards
the convergence of hemispheric, regional, sub-regional, and bilateral integration actions.
All routes should be mutually reinforcing rather than obstacles to one another. Unilateral
tariff cuts are still extremely useful, since they reduce the chances of trade diversion as a
result of sub-regional arrangements or bilateral free trade agreements. Alternatively, all
routes should only be seen as steps towards multilateralism.
The FTAA concept has been refined at the Ministerial meetings that have been held
during the last years, as well as through the impressive amount of preparatory technical
work done in the twelve FTAA working groups. The United States has advocated very
ambitious objectives and time frame for negotiations. However, this commitment has
weakened. The U.S. Executive and Legislative branches have not been able to reach consen-
sus over the granting of fast-track authority to negotiate new trade agreements. The credi-
bility of the United States is now at stake.
The FTAA will remain a credible alternative if the initiation of formal negotiations
can be announced at the Second Summit of the Americas, which will take place in
Santiago, Chile, on April 18 and 19, 1998. Any further postponement will question the
seriousness of the initiative.

B. WHERE DOES CHILE STAND?

In the latter part of September 1973, while nearly all of the Latin American countries
were following import substitution inward looking strategies, Chile's new government
decided to ride against the tide and initiate a trade liberalization process. After decades of
state-populist policies, the economy was in a disastrous state, investment was low, the pro-
ductive processes were nearly obsolete, there was little product differentiation, a great mar-
ket concentration, high state interventionism in the economy, and a balance of payment
crisis. Chile also had an oversized bureaucracy.
The main reforms were focused towards incentives for the private sector's participa-
tion in the economy. The reduction of the State was managed principally through privati-
zation and deep fiscal reform, including reduction in corporate and personal income taxes.
These structural reforms were accompanied by trade liberalization policies that finally led
to economic development. As a result of all of these reforms, Chile is now one of the most
open economies in the world.

C. I AM LEAVING WITH YOU STATISTICS THAT CLEARLY SHOW THIS REALITY.

The Chilean government has accepted the basic assumptions of an open economy:
export-driven growth and the relevance of a balanced budget and strict fiscal policy. The
result has been fourteen years of continued high economic growth. In turn, the recovery of
democracy in Chile has marked a turning point in its relations with the rest of the world,
allowing the country to reap the benefits of its economic reforms.
Chile's economy is outward-looking. The external sector represents already more than
a third of its GNP, a share that is likely to increase in the coming years. Foreign investors
are taking advantage of the exceptional economic climate in Chile and the specific terms
Summer 1998 121

that the country offers regarding profit rates and its repatriation, legal protection, taxation,
and respect for property rights. Continued growth is essential for meeting social demands
and improving a very skewed income distribution in the country.
Chile aspires to enter a new exporting phase, adding value to its foreign sales.
Processed natural products from the agricultural, forestry, and fisheries sectors will
undoubtedly play a major role in this new stage. The country is also interested in increas-
ing its manufactured exports.
Chile, after having witnessed the failure of the traditional and rigid integration
schemes that were introduced in Latin America in the 1960s, is following a multi-track
trade and integration policy. Therefore, Chile is entering into special agreements with geo-
graphically and economically close countries in Latin America and free trade agreements
with countries in North America-such as Canada and Mexico. Also, Chile is establishing
new forms of economic association with her partners in the Pacific Rim and Europe.
Chile opted for an association agreement with MERCOSUR, which was signed at the
end of June 1996. The association formula, which establishes a free trade area between the
four members of MERCOSUR and Chile, was an alternative to full membership. The latter
option would have implied joining the customs union that has a common external tariff,
which is higher than the Chilean average. The Chilean Congress even negotiated an agree-
ment with the Executive for the application of new unilateral tariff cuts to reduce the
chances of trade diversion. On the other hand, Chile pretends to maintain its freedom to
engage individually in trade negotiations with other partners.
Strong economic regionalism is not yet prevalent in the Chilean case. Extra-hemi-
spheric trade still accounts for more than two-thirds of Chile's economic transactions.
Although regional trade has increased during the last years, this change must be seen
against the background of a history of modest real economic integration with the rest of
Latin America. Analysis of international direct investment data indicates that Chilean
investors are concentrating heavily on neighboring countries. However, at the receiving
end, Chile's foreign investments flow mainly from North America, Europe and Asia-not
from Latin America.
On December 11, 1994, the Governments of Canada, Mexico and the United States,
invited Chile to initiate negotiations for joining NAFTA. The Chilean Government viewed
this option as a guarantee for continuous and predictable access to the vast North
American markets and as an incentive for foreign investors, proceeding from either the
NAFTA countries or third countries interested in access to that market. Chile was con-
vinced that it met the basic requirements for accession to NAFTA, such as economic stabil-
ity, openness towards the world economy, significant trade and investment linkages with
the NAFTA countries, a functioning democracy, and compliance with basic environmental
and labor regulations.
NAFTA is undoubtedly an important element in the internationalization of the
Chilean economy because NAFTA ensures Chile a part in the "global economy powerful
triad' but by no means is NAFTA the only instrument that can facilitate Chile's economic
relationship with the global economy. Thus, unlike the Mexican case, accession to NAFTA
is not a life or death matter in Chile. Rather, its effects on the Chilean economy do not
seem crucial. Accordingly, from a Chilean perspective, NAFTA is seen as a useful comple-
ment to the wider multitrack trade policy that is being pursued by the country.
Chile's trade policy is attempting to conciliate diverse regional priorities. The concept
of open regionalism provides a good guide for Chile's foreign policy. Regional agreements
122 NAFTA: Law and Business Review of the Americas

are extremely helpful in promoting the integration of national markets and permitting the
expansion of trade and investment. But it is essential that regional agreements develop
within the discipline of a strong multilateral system, that they stay open for new members,
and that they not imply new barriers to goods and services imported from outside.
Chile has a strong regional identity and should strive for even closer relationships
with the rest of Latin America. History, geography, and culture inextricably link Chile
with the region to which it obviously belongs. Latin America, and especially MERCO-
SUR, will remain a priority for Chilean foreign policy makers. However, exclusionary
trade policies should be avoided. Being the only country linked through free trade agree-
ments to two economies of North America, three of the Andean Pact, and the four MER-
COSUR economies, Chile has a high interest in the convergence of trade agreements in
the hemisphere.

D. PROTECTIONISM.
Allow me to dedicate a final paragraph to "Protectionism." Protectionism is one of the
most dangerous enemies of NAFTA and other free trade agreements because it is hidden
behind a curtain of good wishes or idealistic purposes. Usually, it is the result of economic
and political influence used by certain sectors of the economy when they believe that their
own interests may be harmed by foreign competition. Its purpose is to prevent or delay the
agreement or to obtain a wide array of non-tariff barriers to protect them. Some European
countries and even the United States disguise protectionism under the pretext of demand-
ing determined standards in labor or environmental laws. Examples of "disguised protec-
tionism" are marketing orders and other sanitary conditions that must be complied with
in order to export products to the United States.
President Clinton's failure to obtain a fast track for negotiating the incorporation of
Chile to NAFTA has nothing to do with Chile. It is due to differences of opinion between
the Republican and the Liberal parties regarding labor law and environmental standards to
be included in the agreement. Political issues must be separated from economic ones.
Until we can definitively eliminate protectionism and understand that free trade must
not be limited by private considerations or interests, we are not fulfilling or abiding by the
most important principle enunciated at the 1994 Summit of the Americas in Miami: "[a]
key to prosperity is trade without barriers, without subsidies, without unfair practices, and
with an increasing stream of productive investments."