Mercosur Averts Trade Collision

2 August 1999

The Southern Cone Common Market (Mercosur, comprised of Argentina, Brazil, Paraguay and Uruguay) averted a serious collision in its seven-year old relationship on 30 July after Argentina retracted restrictions on imports from its Mercosur partners.

Argentina - struggling under an economic recession - announced on 26 July it would impose restrictions on any imports as needed, including those from Mercosur countries. This followed on an announcement Argentina made earlier in July that it would impose from 31 July quotas on imported shoes, textiles and apparel. The moves prompted Brazil to walk away from bilateral negotiations scheduled to start on 2 August regarding sugar, autos and industrial policy. Argentina argued that the safeguards were necessary to protect its market from the influx of cheap Brazilian goods. Brazil - struggling since January with its own economic crisis - accused Argentina of violating the grouping's founding Treaty of Asunción by implementing safeguard measures without negotiating beforehand, and noted also that safeguard measures of the sort Argentina was planning were phased out under the Treaty in 1994.
Mercosur is the world's third-largest trading bloc: intra-Mercosur trade accounts for about US$15 billion annually. Currency devaluation in Brazil earlier this year has ignited trade tensions among its members, most notably between Brazil and Argentina. (See BRIDGES Weekly Trade News Digest Vol. 3, No. 4, 1 February 1999, and Vol. 3, No.18, 10 May 1999, ). Argentina's economy is expected to shrink by three percent this year, partly because of reduced exports to Brazil. It claims that the 32 percent devaluation of the Brazilian real this past January seriously impaired the competitiveness of Argentinean goods in the Brazilian market.

Prior to retracting the measures, a senior Argentine trade official noted that, "In Mercosur's current economic reality, the situation is complicated by the rigidity of the rules of the game and even by its insufficiencies, imperfections and voids. It has no escape valves in case of emergencies." The official noted further that Argentina had repeatedly sought some so-called escape valves without success from its Mercosur partners and so had to resort to the imposition of import restrictions.

In light of Argentina's retraction of import restrictions for its Mercosur partners, officials from the four Mercosur countries will resume negotiations on trade issues on 4 August. However, the WTO on 26 July established a dispute settlement panel against a November 1998 Argentine tariff-rate quota on footwear which the U.S. argues violates WTO rules on safeguards. The EU brought a similar complaint against Argentina which is now in the appeals stage.

"Argentina: Menem averts rift in Mercosur," FINANCIAL TIMES, 31 July 1999; "Brasil vai à OMC contra a Argentina e abre a maior crise do Mercosul," O GLOBO, 16 July 1999; "Argentina and Brazil squabble over Mercosur soles," REUTERS, 28 July 1999; "Le Brésil dénonce les mesures protectionnistes adoptées par l'Argentine," LE MONDE, 29 July 1999; "Mercosur feels belated strains of Brazilian devaluation," DOW JONES INTERNATIONAL, 28 July 1999; "U.S. faces two new WTO panels on wheat gluten and 1916 AD Act," INSIDE US TRADE, 30 July 1999.

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