MERCOSUR AGREES ON CONCESSIONS TO PARAGUAY, URUGUAY, AS CHÁVEZ CASTS CLOUD OVER SUMMIT

South American leaders from the Mercosur (Common Market of the South) trade bloc agreed at a recent summit to several measures aimed at mitigating asymmetries between the group's minnows, Paraguay and Uruguay, and giants Brazil and Argentina. Nevertheless, clouds were cast over the meeting by controversy over Venezuela's pending accession to the bloc.

Established in 1991 with the express purpose of promoting free trade among member states and ultimately moving toward full continent-wide economic integration, Mercosur has emerged as the world's fourth-largest trading bloc, despite a recent slowdown in the dismantling of economic barriers. The group, which accounts for roughly 75 percent of all economic activity in South America, counts four full members, Argentina, Brazil, Paraguay, and Uruguay. Bolivia, Chile, Colombia, Ecuador, and Peru are associate members. Because one of Mercosur's ultimate goals is a customs union with a common external tariff on goods from outside the bloc, the full members are prohibited from signing bilateral trade agreements with other nations.

Asymmetries within Mercosur

Within Mercosur, internal divisions have arisen from the very different economic situations of the bloc's member nations. Paraguay and Uruguay, Mercosur's two smallest economies, have claimed that Argentina and Brazil, the bloc's economic heavyweights, continue to unfairly restrict access to their larger markets. Without additional concessions from the group's more developed members, Paraguay and Uruguay have signaled that remaining in the alliance may not be in their best economic interest. The Uruguayan government had even explored seeking a bilateral free trade agreement with the US.

At the recent summit, leaders agreed to a series of measures to respond to the smaller countries' demands.

On the rules of origin that determine whether a product is eligible for the preferential Mercosur tariff rates, Paraguay and Uruguay were allowed to boost the proportion of value added overseas from 40 percent to 60 percent - thus expanding the pool of merchandise qualifying for the lower duties. In addition, the more flexible rules were extended from 2012 to 2020.

A second concession came in the area of customs duties harmonisation. Mercosur is currently working to build the infrastructure to create a common external tariff. But in order to do so, the bloc must first obtain a list from each member identifying all goods imported from elsewhere, as well as the duties currently levied on those products. To expedite the process, Mercosur had set an end-2007 deadline for countries to submit their lists. Paraguay and Uruguay had complained that that timeframe was too short, and have now been given an extra year.

In a more direct effort at development aid, the summit agreed to boost spending under Mercosur's Structural Convergence Fund (FOCEM) - the bulk of which comes from Argentina and Brazil - to finance projects in Paraguay and Uruguay ranging from housing to transportation, biosafety, sanitation, and incentives for microenterprises.

Venezuela - in or out?

Venezuela, South America's fifth-largest economy, negotiated its entry into Mercosur in July of last year. However, its full membership is contingent upon ratification by a majority of lawmakers in each Mercosur nation (see BRIDGES Weekly, 5 July 2006). Thus far, only the Argentine and Uruguayan parliaments have approved Venezuela's accession.

Legislators in Brazil and Paraguay, on the other hand, have indicated some degree of reservation on the issue, in part because Venezuelan President Hugo Chávez has indicated that he might not be willing to fully liberalise trade in accordance with Mercosur's requirements.

Moreover, a sizeable contingent in Brazil's Congress oppose Venezuela's bid on the grounds that the country does not comply with Mercosur's Democratic Clause, which states that "functioning democratic systems" are "an essential precondition for the development of the integration process."

Such criticisms grew after Chávez's recent decision to effectively shut down an independent Venezuelan television station that was often critical of his government. The Brazilian Congress went so far as to pass a resolution calling on Chávez to reconsider that move. For his part, Chávez called his Brazilian critics the "pirate's parrot," implying that they were merely mimicking Washington's criticisms of Venezuelan government policy.

Despite his country's pending membership in the bloc, Chávez skipped the recent summit, choosing instead to spend the weekend shopping for arms in Russia. Though downplayed by Brazil and others, the Venezuelan leader's absence cast a pall over the meeting, insofar as it implied that he is less than fully committed to the regional bloc. Indeed, Chávez has threatened to withdraw his country's bid for membership if it is not approved over the next three months.

There is some concern, however, that Chávez wishes to use Mercosur as a political, rather than purely economic, platform. At the bloc's January summit in Paraguay, Chavez went so far as to call for the block to be "decontaminated of neoliberalism," a tall order in an organisation created to promote free trade.

Brasilia has reacted strongly to such calls. Brazil's Foreign Secretary Celso Amorim has emphasised that Venezuela must abide by Mercosur's rules.

"If you want to join the club, first accept the existing rules and then try to change them," he said.

Venezuela's concerns have perhaps been exacerbated by the fact that Brazil, by far the region's largest economy, has been developing stronger political and trade ties with the EU and the US.

On 4 July, less than a week after the Mercosur summit, Brazilian president Luiz Inacio Lula da Silva signed an accord to launch a 'strategic partnership' with the EU, including UN reform, human rights, climate change, and energy security, in addition to more traditional bilateral trade issues. Earlier in the year, Brazil also forged an agreement with the US on biofuels production, meant to promote research, encourage investment, and develop international biofuels standards.

Some observers have argued that Chávez might view such deals, which increasingly identify Brazil as South America's premier economic and political force, as a direct threat to his ambitions in the region.

Yet despite the disagreements that have beleaguered the bloc in recent years - with even Argentina and Brazil going to the WTO over a bilateral dispute, rather than to Mercosur arbitration - both Brasilia and Buenos Aires remain publicly committed to overcoming internal differences and bolstering further integration.

"Together we go forward, divided we fall back," Argentine President Nestor Kirchner said.

ICTSD reporting; "Mercosur summit calls for unity and not much more," MERCOPRESS, 29 June 2007; "Mercosur summit concludes in Paraguay," MATHA.NET, 30 June 2007; "Brazil Downplays Chavez Snub. He Skips Mercosur Summit to Go Arms Shopping in Moscow," BRAZZILMAG.COM, 25 June 2007; "A turning point?" THE ECONOMIST, 7 July 2007; "EU holds first trade summit with Brazil," INISIDE US TRADE, 3 July 2007; "EU, Brazil sign strategic partnership accord," THOMSON FINANCIAL, 5 July 2007; "US, Brazil team up to promote ethanol," THE WASHINGTON POST, 10 March 2007.