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  Félix Peña

INTERNATIONAL TRADE RELATIONS NEWSLETTER
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CONTRIBUTIONS TO THE DEBATE ON THE FUTURE OF MERCOSUR
How to achieve gains in flexibility and predictability that are credible?

by Félix Peña
December 2016

English translation: Isabel Romero Carranza


 

Foreign Minister Susana Malcorra and her Brazilian counterpart José Serra, meeting on December 8 in Brasilia, have reaffirmed the political will to continue promoting the Mercosur and the integration between the two countries. Against this background, it is worth noting three facts that are affecting the current debate on the future of Mercosur. It is increasingly clear that this is a debate centered on the methodological aspect (how to work together) and not on the existential one (whether to work together).

The first fact is related to the profound changes that can be observed in the external context in which the Mercosur partners are inserted. The changes are enormous, if compared to the context of the founding moment, in 1985 and 1990.

The second fact refers to the differences that have become evident between the four Mercosur founding partners and Venezuela. They often involve the existential dimension and, therefore, are not limited only to the methodological.

Finally, the third fact is related to whether it is necessary and, if so, how to introduce more flexibility to the Mercosur regulations that affect the possible trade negotiations of a member country with other countries or groups of countries. Two alternatives are often mentioned. One is to modify the constituent legal instruments of Mercosur - for example, by abolishing the common external tariff (CET). The other, is to make the most of the potential flexibilities offered by the constitutive rules themselves, without affecting the predictability necessary for Mercosur to be perceived as a favorable environment for productive investment and, therefore, for the creation of jobs.

One conclusion is that the flexibilities that may be required for Mercosur member countries to undertake individually preferential trade negotiations with other countries or groups of countries could be agreed within the framework of a Decision of the Mercosur Council, without modifying the Treaty of Asuncion, and would not mean disavowing the CET instrument. On the contrary, they would have to be a result of the flexibilities that the current regulations in Mercosur and in the GATT-WTO allow to introduce in the CET.


"A friendship centered on the future" is the title of a joint article published simultaneously in the newspapers of Brazil and Argentina, in December 2016, by the Argentine Minister of Foreign Affairs, Susana Malcorra and her Brazilian counterpart José Serra (see the reference under recommended reading).

They did so on the occasion of the thirty years since the launch of the Integration and Economic Cooperation Program (PICE), which started the road that, five years later, led to the creation of the Mercosur and the Brazilian-Argentine Accounting and Control Agency of Nuclear Materials (ABACC), one of the more symbolic and effective instruments of the bilateral strategic relationship. From what the two Foreign Ministers mention in the article, these are milestones that show a political will, supported by the respective societies, to build a space of integration and joint work of regional scope.

Following the impetus given by Presidents Alfonsin and Sarney and beyond frequent contextual differences, the successive governments have preserved in these thirty years, with varying degrees of effectiveness, the support for the foundational strategic idea, adapting, when necessary, the methods and instruments of joint work to the changes experienced in the external and internal circumstances of each country.

In all integration processes between neighboring countries, a continuous adaptation to the changes in the realities calls for a strong dose of flexibility. At the same time, this requires a reasonable degree of predictability to be preserved. Otherwise, the effectiveness of the integration project can be jeopardized and produce negative effects on the goal of generating an environment conductive to economic and social development, productive transformation and job creation for the citizens.

The joint statement by the Foreign Ministers comes at a time when, at least, three facts are affecting the intensity of the debate on the future of Mercosur. Moreover, it is increasingly clear that this is a debate centered on the methodological aspect (how to work together) and not on the existential one (whether to work together).

If these facts were considered in the next steps that the member countries must take to advance the construction of Mercosur, it would not be advisable to presuppose that the environment is the same as it was in the founding moments or even a few months ago.

The first fact to highlight is, precisely, that of the profound changes in the international context in which the partners of Mercosur and the Latin American region are inserted today. The changes are enormous if compared to what such context was at the founding moment, in 1985 and in 1990.

Put simply, what is becoming evident is the end of an era of the international system that began at the end of World War II, and its effects on which countries were able to decisively influence the creation of rules and institutions necessary for global governance. (In this regard, refer to the November 2016 issue of this newsletter on http://www.felixpena.com.ar/).

Among many other effects, such changes make it advisable to review theoretical approaches, concepts and paradigms related to the design of world trade order and with its institutions and rules, including those that influence the approach on how to build a regional integration space. Many are becoming relatively obsolete. An example are the theoretical contributions made by leading specialists such as Professor Bela Balassa and his definition of what he thought a customs union should be (see Chapter 2 of his book "The Theory of Economic Integration ", Routledge, New York 2011, especially when referring to the theory of the customs union, on page 21).

A practical consequence of this fact is that, in order to be effective, the decisions that Mercosur partners adopt to facilitate the adaptation of the integration process to the new global and regional circumstances must be the result, on the one hand, of the strategies that each of the member countries deems necessary, convenient and possible to develop in their joint integration to the international trading system and, on the other hand, of the correct interpretation of the leeway resulting from the rules of the system of multilateral trade, embodied in the GATT and the WTO.

Therefore, there will be very few constraints arising, for example, from theoretical manuals on how to develop voluntary processes of integration between sovereign nations that aspire to remain so, or pressures originating in the main players of international trade, as was often the case in the past with the US and the European Union.

However, it will be necessary to know and interpret correctly the scope of the constructive ambiguities that characterize the international rules that must be taken into account in this regard and which, among others, are found especially in Article XXIV, in the GATT Enabling Clause and in Articles II and V of the GATS.

When properly interpreted, these can provide certain leeway that may not necessarily result from the theoretical concepts, such as could be the case of the concept of "customs union". A good reading of Article XXIV leads to question the validity, at least from the perspective of the GATT rules, of the distinction between "imperfect" or "perfect" customs union. Let us remember that Mercosur is often considered an "imperfect" customs union. However, this would not seem to hold, at least according to the text of paragraph 8, Article XXIV, of the GATT, if read in full and incorporating what Professor Bela Balassa discarded in his previously mentioned work. Indeed, in citing paragraph 8 of Article XXIV he leaves out (censors?) the part of the text that renders flexible the requirement of eliminating tariffs for substantially all the trade between the constituent territories, stating that this must occur "at least" for products originating in such territories. Moreover, interpreting a text such as this requires knowledge of the history of the regulation (a good example of the review of the history of a legal text can be found in an article by professor Kerry Chase, published in 2006 under the suggestive title "Multilateralism compromised : the mysterious origins of GATT Article XXIV", on http://people.brandeis.edu/).

Also to be taken into account are the differences that have become evident between the four Mercosur founding partners and Venezuela. These often involve the existential dimension and, therefore, are not limited only to the methodological.

We will not discuss here the differences in political and economic conceptions that, at times, are influencing the climate of the relations between the five countries. Neither will we address the differences raised in relation to Venezuela's Pro-Tempore Presidency of the Mercosur bodies, which we have previously analyzed in the August 2016 issue of this newsletter (see http://www.felixpena.com.ar/). We will focus on the issue of the commitments made in Venezuela's Protocol of Accession to Mercosur and the decision taken in this regard by the original member countries.

The Protocol of Accession was signed a little more than ten years ago, on 4 July 2006. The first paragraph of Article 3 established that "The Bolivarian Republic of Venezuela shall adopt the current normative body of Mercosur, in a gradual manner, no later than four years from the date of entry into force of this instrument. To this end, the Working Group created in Article 11 of this Protocol, will establish the timetable for the adoption of said legislation "(http://www.sice.oas.org/) (translation ours)..

A little more than ten years later, and quite beyond the deadline agreed with Venezuela for the incorporation of the rules in force, on December 2, 2016, the Foreign Ministers of the original Mercosur member countries notified the Venezuelan Foreign Minister, "the Bolivarian Republic of Venezuela's rights inherent in the status of Member State of Mercosur have been suspended…the adopted measure will remain in force until the signatory Member States of the Treaty of Asunción agree with Venezuela on the conditions for the restoration of the latter's exercise of rights as a Member State" https://www.mrecic.gov.ar/) (translation ours).

The precedent of such a decision was the "Joint declaration on the functioning of Mercosur and the protocol of accession of the Bolivarian Republic of Venezuela", of September 13, 2016, on (https://www.mrecic.gov.ar/) (translation ours).

Two considerations of that Joint Declaration need to be highlighted in order to understand the legal basis of the measure adopted on December 2, referring to the cessation of the exercise of rights. The first consideration states that: "Article 2 of the Treaty of Asunción provides that Mercosur is based on the principle of reciprocal rights and obligations among Member States; that Article 10 of the Protocol of Accession of the Bolivarian Republic of Venezuela vested Venezuela with the status of Member State participating in Mercosur with full rights and obligations, in accordance with Article 2 of the Treaty of Asunción and the terms of such Protocol". From the beginning of the Mercosur this was a central consideration to interpret the scope of the commitments assumed by the partners, in the sense that the fulfillment of the obligations is what allows the exercise of the rights that correspond to a member country. And the second considerations points out that: "the signatory Member States of the Treaty of Asunción have verified that the Bolivarian Republic of Venezuela has failed to comply with the provisions of the Protocol of Accession with regard to the adoption of the normative corpus in force in Mercosur; that, in addition, the Bolivarian Republic of Venezuela has not adhered to Partial Scope Agreement on Economic Complementation No. 18 (ECA 18)."

One of the main commitments not fulfilled by Venezuela was precisely that of the adhesion to the Economic Complementarity Agreement No. 18 of the ALADI. An even superficial knowledge of the history of Mercosur allows us to bear in mind that ECA 18 was considered by the founding partners as a fundamental legal instrument in order to make Mercosur compatible with LAIA rules and, in particular, with the most favored nation clause (http://www.aladi.org/). Its importance transcended the legal aspect. It penetrated deeply into the political necessity of preventing the rest of the Latin American countries from perceiving the creation of Mercosur as a rupture of the broader and more deeply rooted idea of Latin American integration. At times, it is difficult to understand that those responsible for the Latin American policy of the Venezuelan government would not have appreciated in all these years the symbolic and, therefore, political importance of the ECA 18.

Finally, the third of the facts refers to whether it is necessary to introduce more flexibility to the Mercosur regulations that affect the possible trade negotiations of a member country with other countries or groups of countries and, if so, how to do it.

In this respect, two options are mentioned more frequently. The first is to modify Mercosur's constituent legal instruments -for example, by eliminating the common external tariff (CET). This would require amending the Treaty of Asuncion. The second option is to make the most of the potential flexibilities offered by the constitutive rules that are in force, without affecting the predictability necessary for Mercosur to be perceived as a favorable environment for productive investment and, therefore, for the creation of jobs.

What is essential in relation to the second option is to take into account that the Treaty of Asunción, which is the main source of contractual linkage between Mercosur member countries, only refers to the common external tariff on two occasions. The first, with a more programmatic scope, is in Article 1, when stating what a common market implies and includes the reference to a common customs tariff and the adoption of a common foreign trade policy, together with the other instruments to help achieve the sought objectives. The second, with binding scope, is in article 5, which contains the statement of the main instruments to be enforced during the transition period, including explicitly the reference to "a common external tariff, which encourages the foreign competitiveness of the States Parties ".

The fact that there was an explicit reference to the common external tariff in the constitutive agreement, without going into further details on its scope, supports the hypothesis that the inclusion of such an instrument could be explained by the need to avoid the eventual temptation of any partner to opt for a bilateral negotiations with the United States, which had just announced its intention to advance in the establishment of a hemispheric free trade zone. It is like a pact of mutual guarantee not to individually negotiate preferential trade agreements, especially Argentina or Brazil, the major Mercosur economies, which in the past had had conflicting options in their trade relations with the US and the UK. This issue is still relevant today.

Later on, Article 9 of the Protocol of Ouro Preto (1994) when stating the powers conferred to the Trade Commission explicitly refers to the "customs union" (a concept that is not present in the Treaty of Asuncion), to foreign trade policy and to a common external tariff, but with a statement of institutional competencies and not of new commitments among member countries.

The current common external tariff was established by Decisions of the Mercosur Council (see the Council Decisions establishing and amending the CET, at http://www.mercosur.int/). Its flexibilities and exceptions stem from Council regulations and do not reflect any explicit rule of the Treaty of Asuncion or of its Protocols. Even the much-cited Decision CM 32/00 was established by the Council and may be deleted or modified by it. The only thing that has the status of constituent rule incorporated to the Treaty of Asunción is the commitment to have a common external tariff. This may be modified but not abolished without changing the Treaty itself. Politically, this is not a minor fact. Nor do they have an impact on this issue what in theory have been considered to be a customs union or the common external tariff. What does have an impact is the definition of a customs union of paragraph 8, Article XXIV of the GATT, where the "constructive ambiguities" previously mentioned become evident.

A preliminary conclusion of the previous analysis is that the flexibilities that may be required for Mercosur member countries to undertake in1dividual preferential trade negotiations with other countries or groups of countries would have to be agreed within the framework of a Mercosur Council Decision and would not have to ignore the CET instrument. On the contrary, they would have to be a result of the flexibilities that the current regulations in Mercosur and in the GATT-WTO would allow to introduce in the CET. It would seem advisable that such flexibilities have a limited scope and perhaps, even better, that they relate to specific sectors and specific tariff positions, for example in the framework of sectoral agreements.


Recommended Reading:


  • Cernovich, Mike, "MAGA Mindset. Making you and America Great Again", Castalia House, Kouvola, Finland 2016.
  • De Mendiguren, José Ignacio, "Argentina y China: la hora de una definición", diario "El Cronista", Opinión, martes 6 de diciembre 2016, página 16.
  • Desarrollando Ideas, "La diversificación de las exportaciones de América Latina", Informe Especial, desarrollando ideas, Llorente & Cuenca, Madrid, Octubre 2016, en http://www.desarrollando-ideas.com/.
  • Fundación Observatorio Pyme, "Informe 2015/2016. Evolución reciente, situación actual y desafíos para 2017. Tema especial: Indicadores de producción", Fundación Observatorio Pyme, Informe Anual, en www.observatoriopyme.org.ar
  • Glauber, Joseph W., "Unfinished Business in Agricultural Trade Liberalisation", presented at the Cairns Group, 24 November 2016.
  • Ikenson, Daniel J., "Protectionist Steel Interests Given Keys to Trump's Trade Policy Kingdom", CATO at Liberty, CATO Institute, Washington D.C., November 2016, en https://www.cato.org/.
  • INTtrade bid, "Cambio de marcha. América Latina y el Caribe en la nueva normalidad del comercio global", Monitor de Comercio e Integración 2016, Coordinado por Paolo Giordano, Sector de Integración y Comercio, BID, Washington D.C., Noviembre 2016, en https://publications.iadb.org/bitstream/.
  • Lawrence, Robert Z.; Lawson-Remer, Terra, "Making US Trade and Investment Policies Work for Global Development", Peterson Institute for International Economics, Policy Brief, PB 16-21, Washington, November 2016, en https://piie.com/.
  • Lukin, Artyom, "What does the Trump and Putin Relationship mean for Asia?", East Asia Forum, 2 December 2016, en http://www.eastasiaforum.org/.
  • Parkinson, Martin, "The business of US economic diplomacy in Asia", East Asia Forum, 5 December 2016, en http://www.eastasiaforum.org/.
  • Reynaert, François, "La Grand Histoire du Monde", Fayard, Paris, 2016.
  • Sepúlveda Almarza, Alberto, "En torno a la política exterior de Chile", Ediciones Copygraph, Santiago 2016.
  • Serra, José; Malcorra, Susana, "Una amistad centrada en el futuro. La integración entre Brasil y la Argentina", diario "La Nación", 9 de diciembre 2016, p. 43, en http://www.lanacion.com.ar/ y "Brasil e Argentina, amizade para o futuro", jornal "Folha de S.Paulo", 8 de decembre 2016, en http://www.itamaraty.gov.br/.
  • Shepherd, Ben, "Trade Facilitation and Global Value Chains: Opportunities for Sustaintable Development", ICTSD, Issue Paper, Geneva, October 2016, en http://www.ictsd.org/.
  • Stiglitz, Joseph E., "L'Euro. Comment la monnaie unique menace l'avenir de l'Europe", LLL, Les Liens qui Livérent, Paris 2016.
  • Stratfor, "China's unfinished trade revolution", Geopolitical Diary, December 9 2016, en https://www.stratfor.com/.
  • Trebilcock, Michael J.; Chandler, Marsha A.; Howse, Robert, "Trade and Transitions. A Comparative Analysis of Adjustement Policies", Routledge, London and New York 2003.
  • UNCTAD, "African Continental Free Trade Area: Some Issues in Liberalizing Trade in Services", UNCTAD Geneva 2016, en http://unctad.org/.
  • Vasconcelos, Jorge, "El desafío de navegar la era Trump sin un "Plan B"", Revista Novedades Económicas, IERAL, Fundación Mediterránea, Buenos Aires-Córdoba, 5 de Diciembre 2016, en http://www.ieral.org/.
  • Viljoen, Willemien, "Comparing Safeguard Measures in Recent Regional and Bilateral Trade Agreements", ICTSD, Issue Paper, Geneva 2016, en http://www.ictsd.org/.
  • Ziegler, Jean, "Chemins d'espérance. Ces combats gagnés, parfois perdus mais que nous remporterons ensemble", Seuil, Paris 2016.

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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