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  Félix Peña

INTERNATIONAL TRADE RELATIONS NEWSLETTER
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009
STRUCTURAL CRACKS IN MERCOSUR:
Is it possible to adapt some of its ground rules to the current realities?

by Félix Peña
November 2009

English translation: Isabel Romero Carranza


 

The precariousness of Mercosur's ground rules has contributed to the slow but steady process of deterioration of its credibility. In this sense, precariousness has characterized the Latin American integration processes since their formal inception may be observed.

The Treaty of Asuncion, which gave birth to Mercosur, was supposed to put an end to such precariousness. Aside from other cases that have become evident throughout the years, the issue of the fragility of Mercosur's ground rules has recently resurfaced in the mutual complaints, both by Argentina and Brazil, regarding the application of non-automatic import licenses in their bilateral trade.

The quid pro quo of non-fulfillments by both countries confirms a culture of legal frailty that erodes the fundamental asset that was sought after by the creation of Mercosur which was precisely to safeguard member countries from unilateral decisions that, in practice, imply the protectionism of the respective markets. The most alarming fact is that the interpretation of which are the rules that should be complied with or not depends on the unilateral criteria of each partner.

Due to several reasons, the transformation of Mercosur into a Free Trade Area has been proposed as a possible solution. However certain innovations in its ground rules would be less costly and would allow for the adaptation of Mercosur's instruments to the new international realities and of the member countries. Innovations such as the ones suggested would help prevent the fate of those buildings plagued with cracks and structural flaws: eventually their inhabitants tend to abandon them.


The issue of the institutional and legal quality is always present in the recurring debates over the efficiency and relevance of Mercosur. In fact, the precariousness of its ground rules is one of the factors - albeit not the only one - that is contributing towards a slow but continuous process of deterioration of its image, credibility and even social legitimacy.

In this sense, precariousness has characterized the Latin American integration processes since their formal inception in the 1950s may be observed. Both in the experience of the Latin American Free Trade Association (LAFTA) and then of the Latin American Integration Association (LAIA) it was evident that the main tendency was to consider that the rules would be observed in the measure that was possible. And what was possible was often decided by each member country in relation to their frequent economic emergencies. It was common practice to compensate one non-fulfillment with another non-fulfillment. In the name of pragmatism the end result was that citizens, investors and third countries perceived an image of a "fake" economic integration, meaning that due to the precariousness of its rules it had great difficulties to impact reality.

With the Treaty of Asuncion of March 1991, which created Mercosur, it was understood that such precariousness would be overcome. In this sense, the main rule for compliance is the one established by Article 5 and expounded in Article 1 of Annex I. It explicitly establishes the total and complete elimination of any duties or charges of equivalent effect on foreign trade - both for imports as for exports -. It also eliminates the restrictions imposed by "unilateral decision" of a State Party. Even though the original deadline established for its compliance was December 31, 1994, circumstances led to a delay until the end of 1999 (on this issue, see the interpretation of the ad hoc Court of Arbitration, contemplated by the Protocol of Brasilia, in its decision of April 28, 1999, at http://www.tprmercosur.org/). Even with regards to the unilateral restrictions, Decision CMC 22/00 opened up the path for a kind of "filibustering" that had previously been observed during the LAFTA and the LAIA periods.

Without disservice to other cases that have become manifest throughout the years, the issue has resurfaced once again as Argentina and Brazil raise mutual complaints regarding the application of non-automatic licenses in their bilateral trade. It has been claimed that these are consistent with the corresponding World Trade Organization (WTO) regulations, which at first glance is correct, although it may be argued if the implementation has been as consistent. In the case of Brazil the measures have been justified as a direct response to those being applied by Argentina. In truth it has been possible to apply them because the internal ground rules allow for it, as they do not exclude products originated within the Mercosur area from the possible non-automatic licenses (on this issue see Section III, Licençamento das Importaçôes, da Portaría SECEX Nº 25 of November 27, 2008, at http://www.desenvolvimento.gov.br/ and Relação dos produtos sujeitos a licenciamento não automático contém todas as mercadorias, relacionadas em NCM/SH e respectivos destaques (se houver), sujeitas à manifestação prévia nas licenças (LI), com a indicação do Órgão envolvido, at http://www.desenvolvimento.gov.br/).

There has been no mention - at least in public declarations - that such licenses are in fact restrictions which are not authorized by the current rules of Mercosur. In this way the application of non-automatic licenses - aside from the commercial reasons given for their use - is contributing towards an evident weakening of the ground rules that govern trade within Mercosur.

In fact, the quid pro quo of non-fulfillments by both partners on what was formally agreed upon reaffirms a culture of legal precariousness. This undermines the fundamental asset that was sought after by the creation of Mercosur and which was, precisely, to safeguard member countries against unilateral behaviors which, in practice, imply the protectionism of the respective markets. As is well known, the aim of such safeguard is to prevent the negative economic impact caused by the uncertainty of the access to markets, particularly in relation to those decisions of productive investment.

Concretely, the economic consequences of the predominance of precarious ground rules can be felt in the weakening of the advantages originated by the decision to invest in any of the member countries in relation to the expanded market. As can be seen in other regions where countries with marked differences in their economic dimensions and levels of relative development coexist, this weakening will effectively benefit the country with the largest internal market.

The most alarming fact is that the interpretation of which are the rules that should be complied with or not depends on the unilateral criteria of each member country. In this way, there is an added risk of severely affecting one of the fundamental pillars of the legal architecture of Mercosur, stated in Article 2 which explicitly establishes that "The common market shall be based on reciprocity of rights and obligations between the State Parties". If each member country can unilaterally decide whether to fulfill an obligation or not, it is extremely difficult to determine whether the principle of reciprocity is being respected. In fact there may be situations where a member country chooses not to fulfill those obligations which it considers inconvenient while, at the same time, the other countries might be fulfilling these same obligations or might be unable to stop from fulfilling them due to the characteristics of their own internal legal systems.

Hereby lays probably the main crack that is eroding the construction of Mercosur. If the rules that imply rights and obligations may be complied with or not, according to the discretion of a member country, how can there be a guarantee for the other partners that the balance of national interests that led to the approval of the Treaty as well as of the resulting regulations will not be seriously affected?

This is not a trivial issue if we consider, additionally, that other economic and even political factors are triggering centrifugal forces in the process of integration that was supposed to be institutionalized by Mercosur. These have become quite evident in view of the growing pressure to establish bilateral and preferential negotiations with third countries. Uruguay raised the issue at one point and more recently such trend has become increasingly evident in different sectors of Brazil. The Brazilian press mirrored this at the EU- Mercosur meeting held in Lisbon during the first week of November (see the article "Industria pode ceder em acordo com a UE", in the newspaper Valor Econômico, of November 4). Up until now such possibility has been excluded by Decision CMC 32/00 of the Mercosur Council, at least for preferential trade negotiations between a member country and a third country or group of countries.

The transformation of Mercosur into a Free Trade Area instead of the current Customs Union has been proposed as a possible solution for the multiple problems faced. However, it should be considered that such a solution would only be feasible through the modification of the Treaty of Asuncion, given that Article 5 explicitly establishes the validity of the external common tariff as a constituent element of a Customs Union. On the other hand, The Ouro Preto Protocol explicitly mentions "the introduction of the customs union as a stage in the establishment of a common market". It is easy to anticipate that a negotiation conductive to the amendment of such a fundamental aspect of the Treaty of Asuncion would have obvious technical and political implications. In practice, it could actually mean a full renegotiation, even affecting the current stock of commercial preferences which, in spite of Mercosur's deterioration, is still of significant value for many businesses in the four member countries. .

However, three innovations in the ground rules would be less costly and would allow for an adaptation of the Mercosur instruments to the new international realities and of the member countries. These innovations would allow for the introduction of variable geometry and multi speed elements in its functioning. The first one of such innovations would be the regulation of the restrictions that are compatible with the correct functioning of the customs union. Therefore, they would not be "unilateral restrictions" - such as the ones currently being applied and referred to by Article 1 of Annex I of the Treaty of Asuncion - since they would be adopted under the conditions established by common ground rules that could be similar to those of the WTO in relation to automatic and non-automatic licenses. A second innovation would be to modify Decision CMC 32/00 making provisions for the possibility of bilateral trade negotiations with third countries, at least in the cases of Paraguay and Uruguay, under the conditions established by the new common ground rules. Finally, the third innovation would be to set up a safeguard system for Mercosur that, under special circumstances, allows for a temporary withdrawal of products from unrestricted free trade. Neither in the current legal structure of Mercosur nor in that of the WTO (article XXIV from GATT-1994) are there any substantial impediments for the establishment of such regime.

If the member countries requested the Technical Secretariat to examine the issue and make proposals in relation to these innovations, this would contribute to the strengthening of the institutional quality of Mercosur and, as a consequence, of its image and credibility. These innovations should then be approved by consensus at the Mercosur Council after being considered by the Common Market Group. This could be one of the initiatives to be presented at the upcoming Mercosur Summit next December.

Innovations such as the ones suggested would help prevent a fate such as the one of those buildings plagued with cracks and structural flaws: eventually their inhabitants will tend to abandon them.


Recommended Readings of Recent Publication:

  • AITIC, "Concluding Doha in 2010 - A Serious Commitment of Baseless Hope?, Situation Report, Agency for International Trade and Cooperation, October 2009, at http://www.acici.org/aitic/documents/notes/note70_enjg.htm.
  • Bergreen, Laurence, "Marco Polo. De Venecia a Xanadú", Ediciones Ariel, Barcelona 2009.
  • Brombacher, Daniel; Maihold, Günther, "El negocio transatlántico de la cocaína: opciones europeas antes las nuevas rutas del narcotráfico", Documento de Trabajo 45/2009, Real Instituto Elcano, Madrid 17/09/2009, http://www.realinstitutoelcano.org.
  • Caetano, Gerardo (coordinador), "América Latina. Desafíos de su inserción internacional", CLAEH, Montevideo 2007.
  • Carnegie Endowment for International Peace, "Crisis, Protectionism, and Doha - What Future for the WTO?", Transcript Not Checked Against Delivery of the Tuesday, September 15, 2009 meeting with Paul Blustein as Moderator, and Uri Dadush, Steve Charnovitz, Gary Hufbauer and Arvind Subramanian, as Speakers, at http://www.carnegieendowment.org.
  • Davies, Rob, "Reclaiming the Development Dimension of the Multilateral Trading System", Special Address, Geneva Lectures on Global Economic Governance, Global Economic Governance Programme, University College, Oxford - The Graduate Institute, Geneva, 2 March 2009, at http://www.globaleconomicgovernance.org.
  • Evans, Peter B., "In Search of The 21st Century Developmental State", Centre for Global Political Economy (CGPE), in the University of Sussex, Working Paper Nº 4, December 2008, at http://www.sussex.acuk/cgpe.
  • González Guyer, Fernando, "Uruguay. El país de los fisiócratas. Auge y decadencia del "Uruguay feliz"", Ediciones de la Banda Oriental, Montevideo 2009.
  • Harbinson, Stuart, "The Doha Round: Death-Defying Agenda or Don't Do it Again?", European Centre for International Political Economy (ECIPE), Working Paper - Nº 10 -2009, at http://www.ecipe.org.
  • Mikic, Mia; Ramjoué, Melanie, "Preferential Trade Agreements: An Insurance Against Protectionism?", Asia Pacific Research and Training Network on Trade - United Nations Economic and Social Commission for Asia and the Pacific, Issue Nº 2, February 2009, at http://www.unescap.org/tid/artnet/pub/alert2.pdf.
  • Organización Mundial del Comercio, "Informe Anual 2009", OMC, Ginebra 2009, at http://www.wto.org.
  • Polaski, Sandra (coordinadora), "O Brasil na economia global: medindo os ganhos comerciais", Organizaçâo Internacional do Trabalho - Carnegie Endowment for International Peace - PNUD, at http://www.oit.org.br (and in English at http://www.carnegieendowment.org.
  • Sparks, Allister, "Beyond the Miracle. Inside the New South Africa", The University Press of Chicago, Paperback Edition, Chicago 2009.
  • Stokes, Bruce, "Countdown to Copenhagen", National Journal, 10/31/2009, at http://www.NaionalJournal.com.
  • Van Damme, Isabelle, "Treaty Interpretation by the WTO Appellate Body", International Economic Law Series, Oxford University Press, Oxford-New York 2009.
  • Woods, Ngaire, "Power Shift. Do we need better global economic institutions?", Institute for Public Policy Research, January 2007, at http://www.ippr.org.
  • Woods, Ngaire, "Governing the Global Economy: Strenghening Multilateral Institutions", International Peace Institute, 2008, at http://www.ipinst.org.

Félix Peña Director of the Institute of International Trade at the ICBC Foundation. Director of the Masters Degree in International Trade Relations at Tres de Febrero National University (UNTREF). Member of the Executive Committee of the Argentine Council for International Relations (CARI). Member of the Evian Group Brains Trust. More information.

http://www.felixpena.com.ar | info@felixpena.com.ar


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