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  Félix Peña

INTERNATIONAL TRADE RELATIONS NEWSLETTER
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ADAPTATION TO THE NEW REALITIES OF WORLD TRADE?
Insights on the debate about Mercosur's common external tariff.

by Félix Peña
November 2014

English translation: Isabel Romero Carranza


 

The need to adapt institutional frameworks and rules of global scope, such as those of the WTO, or of regional scope, such as those of Mercosur, arises from the dynamics of international relations and world trade. If there is no adaptation the efficiency, effectiveness and even the social legitimacy of these frameworks may be eroded over time. The adaptation may even lead to the renegotiation of the corresponding founding agreement or eventually to the introduction of substantial changes.

Both in the WTO and in Mercosur there are today situations that may require and adjustment of their objectives and instruments to the new realities. In the case of the WTO, the temporary obstacles to implement one of the major agreements reached at the Ministerial Conference in Bali last December has introduced, as a relevant issue, the need to revise the methods for decision-making that help move forward, especially in the context of a Doha Round with no visible prospects. At the same time, in Mercosur, various questions have been raised regarding the instrument of the common external tariff, in view of the interests of relevant sectors and of some of its member countries that see fit to pursue, individually, preferential trade negotiations with third countries or groups of countries.

This generates the need to analyze and discuss in Mercosur both the extent of the commitment to the common external tariff and the methods that will eventually allow reviewing such commitment, for example by eliminating it or making it more flexible through an interpretation of its real scope.

The fact that there are no legal regulations that specify what is meant by a common external tariff or that those present in the GATT or Mercosur, when properly interpreted provide a reasonable leeway for flexibility, allows us to envision a future development of Mercosur that does not require a substantial modification of the foundational legal texts, which could be costly in political terms.

In any case, the important thing would be to preserve the essence of what was sought, both in a political and economic perspective, with the construction of the regional preferential space. And it would seem to be essential to achieve it not so much through a new single economic space of regional scope, but through one that is common but differentiated, even with variable geometries, and which favors the objectives of connectivity, compatibility and convergence of the respective national spaces while preserving the rich differences, identities and individualities.


The institutional framework for international trade relations in the global space, or of multinational integration in a regional or sub regional space, is built over time. Its rules and processes for making decisions and creating regulations may be viewed as the result of an ongoing effort to build without time constraints and without the need of having a pre-defined end result.

The formal starting point of such a construction is often reflected in the founding agreement, embodied in some form of multilateral international legal instrument. It is what sets the regulatory framework for the development of actions aimed at achieving common objectives pursued by the participating countries.

When designing this initial regulatory framework the founding countries should not necessarily follow a predetermined pattern, be it theoretical or historical. On the contrary, the principle of "freedom of organization" usually prevails, as was pointed out decades ago by the Italian internationalist Angelo Piero Seregni. It is a principle that, at least in the case of this kind of institutional frameworks, can only be influenced by what is considered as rational and, in particular, by what is prescribed by the respective domestic legal systems and by the international legal commitments of the founding countries. Such is the case, for example, of the conditions for the design of preferential trade agreements -whatever their specific modality- that result from the framework of the World Trade Organization.

The founding agreement results in processes that are not usually linear. Rather, they are the outcome of successive steps taken over time or at pre-determined stages -such as the case, for example, of what is stipulated by the Treaty of Asunción for the end of the transition period of Mercosur- and aimed at the achievement of common goals among participating nations.

Over time these steps often require a subsequent adaptation of the objectives, instruments and work methods to the inevitable changes in the political, economic and social realities, both of the participating countries and of the global or regional international environment.

Depending on the factors that influence the requirement for adaptation, the institutional framework can be adjusted or eventually even redesigned through its complete transformation. The latter is what usually leads to the expression "re-founding", which is like starting from square one. The inability to adapt to the changing realities can also lead to a failure of the idea that led to the original founding moment and, therefore, to the banishment of the respective institutional framework to the realm of irrelevance or oblivion.

The above considerations are motivated by what happened in the scope of the WTO, especially with the standstill, last July, of the enactment of one of the main agreements for trade facilitation reached at the Ministerial Conference in Bali, in December 2013. The virtual veto of India opened a debate in Geneva on how to adapt the decision-making methods of the WTO to the new international realities. An argument that is often presented is that there are currently too many members and that the distribution of relative power among the countries that have the greatest impact on the global trade of goods and services is very different from what it was at the founding moments of the WTO and, even more so, of the GATT. So it is not possible to continue to assume that the consensus method that was the basis of the Doha Round can produce agreements and rules that have the necessary three qualities of effectiveness, efficiency and social legitimacy. The problem is that it is not easy to change such method or to create new modalities to move forward with the eventual dismantling of the restrictions on international trade or to define rules that apply to global trade.

But these are also considerations motivated by what is happening with Mercosur. What can be perceived in this case is a questioning, at times very intense and that would be counterproductive to ignore, of its adaptation to the new realities of the regional and international insertion of the member countries. This is focused on one of the instruments that originate from the founding moment, which is the common external tariff (CET). Some of the most relevant questions are: Is it convenient to keep the CET or not? And in any case, what is the real extent of the commitment assumed in this regard by the member countries? And most particularly, what kind of flexibility exists for its effective implementation in the case of trade negotiations with third countries? Moreover, what would be the impact of its elimination on the validity and the actual scope of the intra-Mercosur trade preference originally agreed in the Treaty of Asuncion?

As a consequence of its effect on the leeway for action that member countries consider they have to carry out preferential trade agreements with third countries or group of countries -such as the negotiations with the EU- it is an issue that tends to gain more strength due to the weight of the arguments and the protagonists in business and political sectors of Brazil, Uruguay and Paraguay. In some cases, it even reaches the point where the very existence of Mercosur is questioned, although this is not often reflected in proposals on how to replace it in a way that takes into account economic and political factors that contribute to the direction, quality and density of the relations between the member countries.

If, from an economic point of view, it would be convenient or not to preserve the instrument of the common external tariff and, therefore, the figure of a customs union, is something that, in practice, should be determined by the member countries based on to their own national interests and on other considerations related with their trade policies and the effective operation of the preferential agreement concluded by them.

In this regard, it is also important to note the degree of permissibility granted by the existing regulatory framework of Mercosur. The basic question is whether it would be sufficient to modify the rules that have been approved by the Mercosur Council as the main body for normative creation or if, on the contrary, amendments to the founding treaty, i.e. the Treaty of Asuncion, would be required. The political energy and the costs that either option would demand could be quite different, even to a great extent.

On this occasion we will only make an initial approach to this last dimension of the question, which is the legal and institutional. This does not imply, of course, underestimating the weight of the other dimensions.

In that regard it should be noted that the figure of the CET is explicitly incorporated into the founding pact of Mercosur (articles 1 and 5 c) and that it is linked to a common commercial policy. It is mentioned as one of the basic elements of the methods to be employed in the construction of the preferential economic space. In that sense, it can be considered to be closely linked to another basic element which is the complete elimination of tariffs and restrictions on mutual trade. This element was made more flexible during the process that led to the formation of the customs union. Such flexibility was formalized by article 53 of the Protocol of Ouro Preto.

A question that may be relevant in this regard relates to the reasons that led to include the CET in the Treaty of Asuncion. A plausible hypothesis is that, among other things, a commitment to a CET implied a mutual guarantee among member countries regarding any possible trade negotiations with third countries and, in particular, with the United States following the launch of the Initiative for the Americas.

This being so, the argument that implies that what prevents member countries from individually negotiating preferences with third parties is Decision 32/00 CM loses its strength. This effectively prevents the individual negotiation of preferential trade tariffs. But a decision may be amended by a further Council decision. Instead, a Treaty commitment can only be modified by a review of the very same international foundational legal instrument. In order to grasp the scope of such revision, we should keep in mind that it would involve reviewing other commitments that were later added to the original text. We are referring in particular to the complete elimination of tariffs and restrictions on reciprocal trade between partners. In this regard, a key provision of the Treaty is article 2 which stipulates reciprocal rights and obligations among member countries.

Another viable option would be to relax the interpretation of the scope of the CET. The fact that the founding legal instrument does not define such a scope -it only states that a common external tariff must be approved- and that, moreover, the wording of article XXIV of GATT lends itself to multiple interpretations, which do not necessarily conform to the usual definitions of economic theory, provides ample space to adapt this instrument to the needs of Mercosur member countries.

The flexibilization can be an option more in tune with the political necessity of preserving Mercosur as a hard core for the construction of a common space among its member countries, conductive to the objectives of regional political stability, convergence in the national economic and social development strategies and a reasonable articulation between the respective production systems, at least in the most important sectors for their development and integration into international economy.

Hence the convenience of analyzing and debating between the Mercosur countries, in the broader context of the Latin American regional space or, at least, the South American space, both the extent of the assumed commitment in the sense of having a common external tariff, and the methods that would eventually allow either to significantly revise such commitment -for example, through the elimination of the common external tariff- or to make it more flexible through an interpretation of its effective scope.

The fact that there are no legal regulations that prescribe what is meant by a common external tariff or that those in the GATT or Mercosur, properly interpreted, provide ample room for reasonable flexibility, enables us to imagine a future development of Mercosur that does not require substantial modifications to its foundational legal texts, which could be very costly in political terms.

Perhaps in this regard it would be important to try to preserve the essence of what the members wanted to achieve, both in a political and economic perspective, with the construction of a regional preferential space. And what is essential could be reflected not so much by the idea of a new single economic space of regional scope, but by a space which is common but differentiated, even with variable geometries, and that favors the connectivity, compatibility and convergence goals of the respective national spaces while preserving their rich differences, identities and individualities.



Recommended Reading:


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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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