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“Potential Conflict Areas In Any Future Negotiations Between MERCOSUR and the NAFTA To Create a Free Trade Area of the Americas”

Vol. 14, No. 2, Arizona Journal of International and Comparative Law, Spring 1997, pp.305-318

I. Introduction

At the Summit of the Americas held in Miami from December 9th through 11th, 1994, the leaders of all the nations in the Western Hemisphere except Cuba agreed to begin negotiating a treaty to create a Free Trade Area of the Americas (FTAA) to be ready for signature by 2005. To speed up the process leading to such a FTAA, it was initially suggested that the current assortment of sub-regional economic integration projects in Latin America and the Caribbean be used as the foundation blocs to be eventually incorporated into the North American Free Trade Agreement (NAFTA)1. However, a noticeable lack of United States leadership in the creation of a FTAA following the Summit in Miami in 1994, and rapidly changing events in Latin America since then, killed this so-called "hub and spoke" approach to the economic integration of the Western Hemisphere.

The demise of the “hub and spoke” method to create a Free Trade Area Of the Americas (with the possible exception of the Caribbean and Central American states, where the approach may still be feasible) was sealed when Chile signed a free trade agreement with MERCOSUR in June of 1996 and another one with Canada in December of 1996. Under the “hub and spoke” scenario, Chile would have been the first “spoke” to accede to the NAFTA (the hub) to be followed by the various sub-regional economic blocks in Latin America or individual countries (the spokes).

Chile’s free trade agreement with MERCOSUR complicates its ability to negotiate NAFTA accession. Pursuant to Article 52 of the Chile-MERCOSUR Agreement, any signatory state that offers a lower tariff concession to a third party must extend it to the other signatory states. This is the classic "most favored nation" status rule. If not, the party offering the concession to third parties must negotiate some form of equivalent compensation with all the other signatory states to the Chile-MERCOSUR Agreement. While this situation does not make Chilean accession to the NAFTA impossible, it reduces the practical viability of this option because Chile must now answer to MERCOSUR for anything it may concede to the NAFTA.

The Chile-Canada Free Trade Agreement also creates new stumbling blocks for Chilean accession to the NAFTA. Under the Canadian-Chilean accord, Chile preserved its capital retention program whereby foreign investment capital entering Chile cannot be sent abroad for a period of up to one year. The U.S. has labeled this program a foreign investment barrier. Therefore, presumably, the U.S. would not accept this program if Chile were to join the NAFTA.2 Chile was also able to keep its price band mechanism for key agricultural products. The U.S. has opposed this as well as a protectionist measure that puts certain U.S. exports at a serious competitive disadvantage.3 The rule of origin requirements in the Canada-Chile Free Trade Agreement include a very liberal 35% regional content requirement on goods that can be traded duty-free between both countries. By contrast, the comparable minimum regional content requirements in the NAF'TA are in excess of 60%. Unlike the NAFTA, the Canada-Chile Free *Trade Agreement makes no provision for liberalizing cross-border investments in the financial services sector and fails to address intellectual property rights. In sharp contrast to the NAFTA, the Canada-Chile agreement also obligates both countries to phase out the use of anti-dumping duties against imports from either country. Canada sought the same provision in the NAFTA. However, it was ultimately unsuccessful in securing it due to strong U.S. opposition.

Given the concessions obtained in its negotiations with Canada, it is unlikely that Chile would agree to drop them as would be required for accession to the NAFTA. The Chileans are currently negotiating a free trade agreement with Mexico that is also expected to significantly deviate from the NAFTA. Given these circumstances, it is in Chile’s best interest to wait until the rapidly evolving MERCOSUR-led South American Free Trade Area or SAFTA becomes a concrete reality. As part of a SAFTA, Chile significantly increases its negotiating power vis á vis the U.S.

With the collapse of the "hub and spoke" method for integrating the Western Hemisphere through the southward expansion of the NAFTA, a new scenario has emerged for the creation of a FTAA. This has MERCOSUR forming the nucleus of a SAFTA, which would then negotiate a free trade agreement with the NAFTA. The Central American and Caribbean states are left to fend for themselves and negotiate their own accession to the NAFTA as regional blocs or individual states. That MERCOSUR would be the nucleus of a SAFTA is not surprising since MERCOSUR already encompasses half of Latin America’s population including its most affluent and best educated inhabitants, and it is responsible for nearly two-thirds of the region’s total industrial production. MERCOSUR is also Latin America’s most dynamic sub-regional economic integration project today. It is currently expanding its reach to eventually add all of Spanish-speaking South America to its original membership of Argentina, Brazil, Paraguay, and Uruguay (albeit not as full members).

The increasing certainty that a MERCOSUR-led SAFTA will negotiate with the NAFTA in order to create a FTAA, means that it is crucial to understand how MERCOSUR treats certain subject areas that are likely to become potential obstacles in any negotiations with the NAFTA. In examining these potential problem areas, this Commentary will first review what both integration projects are trying to achieve to assess whether there is an irreconcilable clash in goals. This Commentary will then focus on five subject areas that are likely to cause the biggest obstacles in any negotiations between the two blocs. These five areas include: (1) rule of origin requirements; (2) access to government procurement contracts; (3) liberalization of the telecommunications sector; (4) liberalization of the financial services sector; and, (5) intellectual property rights. This Commentary concludes with an overview of domestic U.S. political factors as well as the geo-political concerns of the Latin American countries that will affect any attempt to create a FTAA.

II. How Incompatible Are The Objectives Of The NAFTA And MERCOSUR?

The tariff reduction schedule in the NAFTA began on January 1, 1994 and has been gradually phased in since then (depending upon which of five categories a product falls under). There should be complete free trade among Canada, Mexico, and the U.S. by the year 2008. However, the majority of goods originating in and traded among the three countries will enjoy full duty-free treatment by 2003.

The stated objectives of the NAFTA are found in Article 102 and include:

  1. the elimination of both tariff (Article 302) and non-tariff (Article 309) barriers to trade in, and facilitate the cross-border movement of, goods and services between the member states;
  2. the promotion of fair competition within the free trade area;
  3. increasing investment opportunities; and
  4. the provision of adequate and effective protection and enforcement of intellectual property rights.

Article 1 of the Treaty of Asunción, the legal instrument that established MERCOSUR,[5] stated that the goal of the four signatory parties was to create a Common Market that was to be completed by December 31, 1994. To achieve this goal Article I also stated that by the end of 1994 the MERCOSUR countries should have had coordinated macroeconomic policies on, inter alia, foreign trade, agriculture, industry, capital, services, customs, transportation and communication, fiscal, monetary, and exchange rate policies. None of these goals was ever accomplished by the target date of December 31, 1994. Instead, what came into operation on January 1, 1995 was a very imperfect customs union, with the introduction of a Common External Tariff (CET) for only 85% of the items found in the MERCOSUR Nomenclature and intra-regional free trade on about 90% of the goods found in this same harmonized tariff schedule. An agreement by the presidents of the MERCOSUR countries in Buenos Aires on August 5, 1994 delayed full implementation of the intra-regional free trade area until 1999 in the case of Argentina and Brazil, and 2000 in the case of Paraguay and Uruguay. Full implementation of the CET is postponed until at least the year 2006.

On first examination, the stated objectives of the NAFTA and MERCOSUR indicate basic incompatibilities. MERCOSUR strives for a European-style economic union complete with a CET and coordinated macroeconomic policies. By contrast, the NAFTA, which seeks to facilitate the free movement of services as well as capital among the member states, is (as its name implies) essentially a free trade area. For example, the NAFTA does not contemplate the establishment of a CET (except for computer and computer-related products), which MERCOSUR has had in place since January 1, 1995 for most goods imported into the region.6 Furthermore, the NAFTA does breach the important subject of immigration between the three countries.

Despite the stated differences in the ultimate objectives sought, the NAFTA and MERCOSUR are not significantly incompatible if one examines the actual results that have been achieved by both integration projects to date and will likely be achieved by the end of this decade. For example, while the Treaty of Asunción in the MERCOSUR context contemplates the eventual free movement of labor among the member states, this issue has not yet been addressed and it is unlikely that it will be in the near future. In addition, the level of coordination of policies that the MERCOSUR countries have achieved to date with respect to such things as macroeconomic and exchange rate policies has been minimal at best. They have been more the result of coincidences in the type of macroeconomic policies being pursued in each member state. Even the CET will not be fully implemented until 2006 at the earliest when a CET of 14% is imposed on capital goods and 16% on computers and telecommunications equipment. Accordingly, despite the lofty goals set out for it on paper, by the time the NAFTA comes into full operation early in the next century, MERCOSUR will itself be little more than a free trade area with a partial CET. Even so, there is no reason that the MERCOSUR countries as a customs union could not enter into a free trade agreement with the NAFTA countries in conjunction with the FTAA process.

III. Specific Areas That Pose The Biggest Negotiating Problems

A. Rules Of Origin

The great importance the NAFTA gives to rule of origin requirements is highlighted by the fact that they are included in Chapter 4 of the Agreement. The general rule is that to benefit from the NAFTA free trade scheme, a good must be wholly obtained or produced entirely in any one of the three NAFTA countries with materials originating in at least one of the member states.7 Goods that originate elsewhere but undergo a change in tariff classification because of a manufacturing process within the NAFTA, will also generally be entitled to duty-free treatment within North America.8 Non-originating goods that cannot meet this shift in tariff classification may still qualify for free trade treatment if they can meet the regional value-content requirement found in Article 402.9 Pursuant to Article 402 the regional value content of the good must not be less than 60% if the transaction-value method is used, or not less than 50% if the net-cost method is used. Further rules found in Article 402(5) determine which of the two valuation methods should be used, although the regional value content of motor vehicles and automotive products, for example, can only be calculated under the net-cost method.

The MERCOSUR rules of origin requirements are far less complicated than those of the NAFTA. The original rules were found in Annex II to the Treaty of Asunción, but these were modified by Decisions 6/94 and 23/94 adopted by the Common Market Council (MERCOSUR’s highest institutional body) in the second half of 1994. In sharp contrast to the very detailed and minute treatment given to determining the origin of products in the NAFTA context. MERCOSUR’s rules of origin are relatively simple and comparatively liberal. The basic rule is that a good must originate within or be produced with goods originating within MERCOSUR. Alternately, it must be substantially transformed within the MERCOSUR region (if goods having their origin outside the sub-region are used) so as to achieve a new classification in the MERCOSUR nomenclature, before the product will be accorded intra-regional free trade treatment. However, if no more than 60% of a finished good’s F.O.B. ("Freight on Board") value does not reflect the C.I.F. ("Cost, Insurance & Freight") price of extra-regional inputs that product will normally also be entitled to duty-free status within MERCOSUR. The MERCOSUR rule of origin requirements permit even greater flexibility than the general 60% regional content rule when there is no native equivalent of the good available or the regional product does not meet technical specifications.

The primary reason why the rule of origin requirements in the MERCOSUR context are so much more liberal than those in the NAFTA is the fact that MERCOSUR eventually intends to become a full fledged customs union. Accordingly, once the CET is fully implemented by the year 2006, the need for rule of origin requirements will cease to exist as all foreign inputs will be charged a uniform set of duties upon entrance into MERCOSUR and can thereafter be shipped within the customs union tariff-free. Because the NAFTA has no CET (except for the computer industry), the absence of strong rules of origin requirements in the NAFTA context would allow non-member states to export to the North American country that levies the lowest tariffs on semi-finished goods, assemble them there, and then use that same country as a spring-board into the other member states, thereby evading the higher external tariff barriers of those other countries.

Regardless of the exact reasons why the rule of origin requirements in the NAFTA and MERCOSUR are significantly different, the fact is that a FTAA would require its own set of rules of origin and the current differences between the NAFTA and MERCOSUR rules indicate substantial philosophical differences that are unlikely to be easily resolved. If the NAFTA’s stricter rules were to be adopted as the model for a FTAA, this could detrimentally affect the MERCOSUR countries that might find themselves forced to switch their input sourcing from cheaper and higher quality sources in Europe or Asia, for example, in favor of North American sources to comply with the new and stricter regional content requirements.

B. Government Procurement

NAFTA Chapter 10 governs the procedures whereby companies from one NAFTA member state can bid for federal government (and eventually state, or provincial governments or government-controlled enterprises) procurement contracts for goods and services in the other two countries. Requirements that the successful bidder must purchase supplies locally are eliminated.10 A bid-challenge mechanism guarantees suppliers the right to an independent review of the bidding process.11

The Treaty of Asunción does not address the issue of access to government procurement contracts in one member state by individuals and companies from the other member states. A technical committee was formed in 1995 to investigate the feasibility of harmonizing the different regimes that currently exist in all four countries. In the meantime, the Annex to the Protocol of Colonia for the Promotion and Reciprocal Protection of Investments within MERCOSUR signed in January 1994 contains a reservation by Brazil whereby it specifically reserved the right to discriminate in favor of its nationals with respect to government procurement contracts. This is in conformity with Article 171(2) of the Federal Constitution of 1988, subsequently amended in August of 1995. This reservation coincides with legislation passed by Brazil in March of 1994 that allowed the federal government and para-statal entities to discriminate in favor of Brazilian companies or foreign companies operating in Brazil when purchasing telecommunication, computer, software, and electronic digital equipment and services.12 Until the Brazilians revoke laws such as the one issued in March of 1994, the issue of access to government procurement contracts is likely to be a major stumbling block in any negotiations between MERCOSUR and the NAFTA.

C. Telecommunications

Pursuant to Article 1301, the public telecommunications transport networks and services sector in one NAFTA country are opened up to the companies of the other two countries state parties.13 Under Article 1303, any licensing, permit registration, or notification procedures must be transparent and nondiscriminatory.14 Article 1304 further mandates that the standards requirements can not be used as unnecessary obstacles to cross-border participation.15 Although Article 1305 permits monopolies to provide public telecommunications transport networks or services, this monopoly position cannot be used to engage in anti-competitive behavior such as cross-subsidization, predatory conduct, and the discriminatory provision of access to public telecommunications transport networks or services.16

Opening the telecommunications sector to competition among nationals of the four member states is something that has been ignored in the MERCOSUR context. Undoubtedly one of the reasons for this is that the telecommunications sector has traditionally been off-limits to foreigners in all four countries. As previously mentioned, the Annex to the Protocol of Colonia for the Promotion and Reciprocal Protection of Investments within MERCOSUR provides that each member state may currently limit investment to its own nationals. As a result of this situation, Brazil and Uruguay reserve the right to exclude foreign investment from their respective telecommunications sector, while Paraguay limits ownership of its telephone system to its own nationals. In view of this, and the comparative advantage that Canadian and U.S. companies already enjoy internationally in the telecommunications field, any attempts to open up the telecommunications field to the same extent the NAFTA does in North America, are likely to encounter substantial resistance from the MERCOSUR countries.

D. Financial Services

Under Articles 1403, 1405, and 1406 of the NAFTA,17 providers of financial services from one NAFTA state are entitled to establish themselves and serve clients in any other member state to an extent no less favorable than the rights granted domestic firms. Although a member state is not required to permit a nonresident financial services company to do business or solicit clients within its territory, at the same time it can not prevent its citizens from using the services of such a cross-border firm if they so chose.18

As is true of the services sector in general, the ability of financial service providers from one MERCOSUR country to offer their services in the other three member states has not received much attention in the MERCOSUR context. However, one aspect that has been resolved in this area, is the ability of private investors of one MERCOSUR country to purchase and trade shares listed on the stock exchanges of the other three countries as if they were residents of those other nations. This is a significant development given that Brazilian law, for example, otherwise limits the purchase and sale of stock traded on the Brazilian stock exchanges by foreigners to institutional investors. The MERCOSUR countries also agreed in August of 1993 (Decision 8/93) to a set of minimal standards regarding the offering of publicly traded stock by companies operating within their region as well as common rules affecting mutual funds and the operation of stock exchanges. Opening up the financial services sector to non-nationals in the MERCOSUR context as exists in the NAFTA is likely to generate stiff resistance given that this sector has traditionally been restricted by the MERCOSUR countries to their own nationals. Even within the MERCOSUR context, Brazil and Uruguay both reserved the right to restrict investment in financial intermediary services to their own nationals under the Protocol of Colonia for the Promotion and Reciprocal Protection of Investments within MERCOSUR. Although both countries are also under an obligation by the same Protocol to eventually eliminate this and all areas of the economy currently exempt from intra-regional competition, there is no sign that this will happen soon.

E. Intellectual Property

Chapter 17 of the NAFTA deals with issues affecting the harmonization of rules protecting intellectual property rights, including copyrights19, trademarks,20 and patents.21 Under Article 1701, each member state must offer to the nationals of any other NAFTA member state adequate and effective protection and enforcement of intellectual property rights within its territory, while ensuring that measures to enforce intellectual property rights do not themselves become barriers to legitimate trade.22 In addition each state, if it has not already done so, undertakes to ratify the: (1) 1971 Geneva Convention for the Protection of Producers of Phonograms; (2) the 1971 revisions to the Berne Convention for the Protection of Literary and Artistic Works; (3) the 1967 revisions to the Paris Convention for the Protection of Industrial Property; and (4) either the 1978 or 1991 revisions to the International Convention for the Protection of New Varieties of Plants. Chapter 17 goes beyond the areas protected by these international agreements to also require protection of, among other things, encrypted program-carrying satellite signals,23 lay-out designs of semiconductor integrated circuits,24 trade secrets,25 and industrial designs.26 The member states are also required to establish procedures whereby intellectual property rights can be enforced under both civil27 and criminal laws,28 and permit the use of the national customs services to enforce intellectual property rights by detaining counterfeit trademark or pirated copyright goods at the border.29

The great emphasis given to the protection of intellectual property rights within the NAFTA contrasts with the minimal attention this subject has received in the MERCOSUR context. To date, MERCOSUR has only come up with a set of minimal rules for the protection of trademarks, but even these have yet to be fully ratified and incorporated into the domestic legislations of the individual member states. Only Brazil has ratified the uniform MERCOSUR trademarks legislation, and then, only in part. Historically, many Latin American intellectuals have viewed strong intellectual property protection laws as attempts by the developed countries to keep them in a permanent state of underdevelopment and dependent on the developed world for new technology.30 In recent years, the lack of effective and adequate laws to protect U.S. intellectual property holders has been a source of much friction between the U.S. and countries in South America’s Southern Cone. At the present time both Argentina and Brazil are on special lists maintained by the Office of the United States Trade Representative of countries or economic blocs that do not provide effective and adequate protection of intellectual property rights.31 In the specific case of Argentina, this is a result of the inability to pass a law in Congress that provides immediate protection for pharmaceutical patents. In the specific case of Brazil, U.S. concerns arise out of a perceived deficiency in the country’s current laws with respect to the protection of software, industrial designs for semi-conductors, and copyrights. U.S. exasperation with the situation in Argentina finally caused the U.S. to announce suspension of Generalized System of Preferences (GSP) privileges for a number of Argentine imports into the U.S.32

Because the adequate protection of intellectual property rights is such a fundamental cornerstone of the NAFTA, this issue is one that will undoubtedly produce the most conflicts in any negotiations between MERCOSUR and the NAFTA. Although it is true the MERCOSUR countries have accepted the Trade-Related Aspects of Intellectual Property Rights (TRIPs) negotiated as part of the new World Trade Agreement, the U.S. considers the relevant NAFTA provisions on intellectual property rights far superior to TRIPs. The U.S. has criticized TRIPs for allowing developing countries up to ten years to phase in intellectual property protections, permitting compulsory licensing in some circumstances, and lacking strong enforcement obligations.33

Interestingly, the MERCOSUR process lags behind the Andean Community in terms of adequate communitarian norms for the effective protection of intellectual property rights.34 The current legal norms on intellectual property for all five countries of the Andean Community are found in three decisions issued by the Andean Commission (the highest institutional body in the current Andean system). Because the Commission has supranational authority, in great contrast to the institutions within the MERCOSUR system as well as the NAFTA, its decisions automatically become the law in each of the Andean countries upon their publication in the Gaceta Oficial del Acuerdo de Cartagena (unless the decision itself provides for a later date). Decision 344 contains rules for the protection of patents, utility models, trademarks, industrial secrets, and so-called place of origin denominations. Decision 351 contains the rules governing copyright and related protection for books, records, movies, computer software, arid other forms of literary, artistic, and scientific works (including radio, television, and audio graphic productions). Decision 345 provides protection for inventors of new plant varieties.

IV. Domestic U.S. Political Factors Affecting The Creation Of A Free Trade Area Of The Americas (FTAA)

Any attempt to create a FTAA is likely to rekindle the divisive debate that raged in the U.S. Congress and the country as a whole when the NAFTA was proposed for ratification in 1993. However unfounded, the fact remains that economic integration with developing countries is perceived by many Americans, particularly working-class Americans, to be a direct threat to their jobs.35 In a survey of Americans conducted by the Bank of Boston on the eve of the Summit of the Americas meeting in Cartagena, Colombia at the end of March of 1996, fifty-eight percent of those polled said they were opposed to the U.S. entering into free trade agreements with Latin American countries.36

If economic integration with Mexico was considered by some Americans as threatening their livelihoods, then any attempt to incorporate the MERCOSUR countries into a hemispheric free trade arrangement is likely to engender even greater levels of protest and fear from a much broader spectrum of the American populace. Not only is the income disparity between the MERCOSUR countries and the U.S. and Canada considerable, but these countries are also important competitors of the U.S. as well. Argentina, after all, is one of the world’s largest producers of agricultural products that often compete directly with U.S. goods in the international market. Brazil, as the tenth largest economy in the world, has an industrial park with highly efficient sectors that produce goods that enjoy substantial competitive price differentials over similarly produced goods made in the U.S. Argentina and Brazil have, in fact, both been victims of past U.S. anti-dumping and countervailing duty actions brought, more often than not, as a result of protectionist pressure from fearful U.S. producers.37 Accordingly, any attempt to create a free trade area between MERCOSUR’s major partners and the NAFTA will receive even greater resistance than was encountered by the attempt to include Mexico in the NAFTA, and this factor can not be overlooked or easily dismissed, particularly given current wage stagnation in the U.S.

V. Some Geo-Political Concerns Of The MERCOSUR Countries Regarding Membership In A FTAA

Many consider that for the MERCOSUR countries, the real importance provided by an association with the NAFTA in the context of a FTAA is that it would stamp their economies with an internationally recognized "seal of approval" that will help them attract significant levels of foreign capital. In addition, a free trade agreement with the NAFTA means that the MERCOSUR countries avoid the U.S. shifting imports from traditional sources in South America in favor of imports from Mexico now made cheaper by the NAFTA tariff reductions.38 While all this may be true, the question one must ask from the perspective of someone in a MERCOSUR country is how much is a "seal of approval" and preservation of U.S. market share worth if it entails locking your country into a free trade arrangement with the U.S. to the possible exclusion of trade opportunities with other regions of the world?

Among the specific arguments offered by some MERCOSUR countries against becoming too closely integrated with the U.S. economy in a FTAA, is that such integration would force the MERCOSUR countries to become dependent on the U.S. for the sourcing of inputs and capital goods to the exclusion of cheaper sources available elsewhere in the world. This would have the negative effect of making the final MERCOSUR produced good not only more expensive for the domestic consumer, but less competitive on the international market as well. At the same time, the MERCOSUR countries would gain little in return since only a small portion of their exports are destined for the U.S.39 For example, figures obtained from ALADI in Montevideo show that in 1995, Argentine exports to the U.S. constituted just over 8% of its total global exports, while for Uruguay the figure was 6%, and the comparable figure for Brazil was around 19%. By contrast, on the eve of the NAFTA’s ratification, over three quarters of Mexico’s exports were already destined for the U.S.

Those who make the above argument overlook a number of significant factors, however. While it is true that the European Union (E.U.) remains the largest destination for exports from the MERCOSUR countries, it is important to examine what is being exported. In the particular case of Brazil, for example, nearly 60% of the goods exported to the E.U. in 1990 were primary goods such as agricultural products or natural resources and approximately 40% were manufactured items. However, over 75% of the products exported to North America consisted of manufactured goods.40 Given the higher sums of income generated by value-added manufactured exports, trade with the U.S. and Canada therefore economically benefits Brazil more in the long run than does its trade with Europe. In addition, because the E.U. has various preferential agricultural agreements with the former colonies of some of its member states, as well as a highly protectionist agricultural policy of its own, the possibilities of Brazil expanding what constitutes the bulk of its exports to the E.U. are limited.41

There are other important benefits the MERCOSUR countries may gain from a FTAA. These include ending the quick resort to non-tariff import restrictions as well as anti-dumping quotas and countervailing duties that the U.S. has often imposed on their exports in the past. Another advantage for the MERCOSUR countries in teaming up with the NAFTA in a FTAA is that in a world that often times appears to be headed in the direction of strong regional trading blocs (e.g., the E.U., the NAFTA, Japan, and ASEAN, etc.), it would behoove the countries of South America’s Southern Cone to attach themselves to one of the more important of these blocs rather than risk becoming marginalized in this new world order.

Whatever the arguments in favor of joining a FTAA, it would appear that, at a minimum, the MERCOSUR countries should first consolidate their own regional economic integration bloc before they negotiate a free trade agreement with the NAFTA. Given the deadline for full implementation of the MERCOSUR CET and the intra-regional free trade area, this will not happen before 2006. Therefore, the current 2005 deadline for finalizing the negotiations to have a FTAA agreement ready for execution appears unrealistic.

The chief concern over MERCOSUR’s quick inclusion into a FTAA is that it may undermine the regional attempt at integration. Member states may redirect their attention away from sub-regional integration and instead focus on integration with North America. Such a process might also exacerbate old rivalries (e.g., Brazil vs. Argentina) which the MERCOSUR project has been very successful in pushing to the foreground.42 In addition, by negotiating a FTAA before MERCOSUR has become a cohesive bloc, the Southern Cone countries would also lose the negotiating advantage that comes from being a united front as opposed to individual countries petitioning for a free trade agreement with North America. Finally, there is the practical concern posed by the fact that the neo-liberal, free market economic reforms in the MERCOSUR countries of which MERCOSUR is itself an important part -- are of relatively recent vintage. The private sector in these countries will require several more years to adjust to them before they will be ready to directly compete with their North American counterparts. In the specific case of interest rates charged by banks on corporate loans, for example, these tend to be considerably higher in the MERCOSUR countries than those charged by U.S. and Canadian banks to their clients. The practical effect of this disparity is that a South American company is at a particular disadvantage when it only has access to bank loans at an annual interest rate of 40%, and its U.S. competitor has access to loans at a 7% annual rate.

VI. Conclusion

Despite the seeming incompatibilities in goals between the NAFTA and MERCOSUR, the tangible results that both economic integration programs will likely achieve by the turn of century, make them more similar than different. In any event, there is nothing that would preclude a customs union from negotiating a free trade agreement with a free trade area. The MERCOSUR project does have several important legal gaps in comparison to the NAFTA, however. These must be filled before there can be any realistic chance of successful negotiations leading to a FTAA that would link MERCOSUR with the NAFTA. At a minimum, the MERCOSUR countries will have to establish rules that open up their telecommunications and financial services sectors and provide full access to government procurement contracts to much greater levels of intra-regional competition than is currently permitted, and strong communitarian norms for the effective and adequate enforcement of intellectual property rights will also have to be implemented.

Once the process of harmonizing the different norms and legal regimes between MERCOSUR and the NAFTA is completed, and the MERCOSUR countries have convinced themselves and their domestic constituencies of the benefits of a closer integration with the NAFTA through the FTAA, the next hurdle will be to convince the Canadian and, in particular, the U.S. public on why a FTAA does not pose a threat to jobs and standards of living. Given the current widespread political resistance to free trade in the U.S. found in both political parties, this will not be an easy task.

04/01/97. 10:00:45 am. Categories: Articles ,

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