ABSTRACT: With a Gross Domestic product (GDP) of US$750 billion, a population of about 200 million consumers, and 11.8 million square kilometers of area, MERCOSUR (the Southern Cone Common Market) is the most important regional integration plan of Latin America. Signed on March 26, 1991 by the four South American countries of Argentina, Brazil, Paraguay, and Uruguay, the Treaty of Asunción established a process of transition for the creation of a common market among the signatory countries by January 1, 1995. This paper provides an overview of the origin and characteristics of MERCOSUR and the implications of MERCOSUR for agricultural markets.
 

EXECUTIVE SUMMARY: With a Gross Domestic product (GDP) of US$750 billion, a population of about 200 million consumers, and 11.8 million square kilometers of area, MERCOSUR (the Southern Cone Common Market) is the most important regional integration plan of Latin America. Signed on March 26, 1991 by the four South American countries of Argentina, Brazil, Paraguay, and Uruguay, the Treaty of Asunción established a process of transition for the creation of a common market among the signatory countries by January 1, 1995. Despite an overly ambitious goal to establish a common market by 1995, the integration process has met with some success.

MERCOSUR is not Latin America's first attempt at regional integration. The most well-known previous attempts at were the Latin American Free Trade Association (ALALC) and the Latin American Development and Integration Association (ALADI). Established in 1960, ALALC attempted to create a free trade area among Argentina, Brazil, Chile, Paraguay, Peru, Uruguay, Mexico. Colombia, Ecuador, Venezuela, and Bolivia joined in later years. Despite good intentions, however, the participating ALALC countries failed to agree on important issues.

The MERCOSUR integration process has ALADI as its basis. In 1988, Brazil and Argentina signed the Integration, Cooperation, and Development Treaty with the objective of establishing a common market in ten years. In July 1990, the two countries signed the Buenos Aires Act which drastically moved up the schedule to establish a common market to four and a half years with a target date of December 1994. A month later, both Uruguay and Paraguay joined the proposed integration scheme. On March 26, 1991, the foreign ministers of Argentina, Brazil, Paraguay, and Uruguay signed the Treaty of Asunción, formally establishing MERCOSUR.

The main objective of the Treaty of Asunción was the establishment of a Common Market which was to be characterized by: (1) free circulation of goods, services, and factors of production among member countries, (2) common external tariffs among member countries, and (3) macroeconomic policy coordination among member countries. In June 1992, the MERCOSUR countries agreed on a process for achieving the objectives of the Treaty of Asunción by January 1995.

The schedule of internal tariff reductions under the Treaty is progressively linear and automatic. Tariff reductions began immediately with the signing of the Treaty. The objective was to attain a zero average tariff on imports from member countries into Argentina and Brazil by the end of December 1994 with tariff cuts to occur on January 1 and July 1 of each year. Uruguay and Paraguay were given an additional year. The Treaty of Asunción also allowed member countries to exempt a number of products from tariff reduction. The number of exempted products was to be gradually reduced, however, with the objective of eliminating all such exemptions by December 1994 for Argentina and Brazil and a year later for Paraguay and Uruguay.

As of January 1, 1995, however, only the first stage of integration (preferential internal tariffs) had been clearly achieved. Although the goal of establishing a common market by 1995 was not reached, significant progress in trade among the MERCOSUR member countries has occurred. In fact, by 1995, after a four-year transitory period, MERCOSUR functions as an imperfect customs union with more than 85% of the goods produced in non-member countries being subject to a common tariff that ranges from zero to 20%.

The commercial success of MERCOSUR has exceeded the most optimistic predictions for the early 1990s. MERCOSUR has achieved international recognition as the third largest trading block in the world after the European Union and NAFTA. The trade volume among MERCOSUR member countries has practically tripled over the last five years. The integration between Argentina and Brazil has laid important groundwork for further market integration in South America. In 1994, trade between Brazil and Argentina exceeded US$7 billion, a record for trade between two countries in Southern America. Argentina has become Brazil's second largest export market.

The goal of economic integration is to increase the level of economic development in all participating countries. Economic integration, however, is also painful, forcing a restructuring of each participating country's economic activities. Fierce competition among various segments of the agricultural sectors of MERCOSUR member countries has impacted the direction and pattern of economic development and trade among the four countries. Agricultural products and agricultural industries in which Brazil was once considered less competitive in comparison to the highly specialized sectors in Argentina are now experiencing a considerable increase in exports. Brazil has exhibited major advances in the processed food sector while Argentina has distinguished itself in the production of primary agricultural goods. Brazil has become an importer of grains giving Argentina, Uruguay, and Paraguay preferential access to its large market.

Economic integration has been a slow process for the MERCOSUR countries. If MERCOSUR is ever to become a true common market, a number of important - and politically difficult - challenges remain, including the elimination of all remaining tariff and non-tariff trade barriers, the granting of free movement to productive factors among member countries, the harmonization of macroeconomic policies, and the coordination of national legislation. The difficulties in achieving economic coordination and harmonization among MERCOSUR members are exacerbated by the differences in the political systems of the four member countries.

Despite the challenges faced by the governments involved in the economic integration of the region, MERCOSUR has strengthened the relationship of member countries with world markets. The U.S., for example, has increased its trade with MERCOSUR countries. Without question, the MERCOSUR experience has demonstrated that economic development and stabilization within a major Latin American region is possible through free trade and economic cooperation among countries.

*  Dr. Viera is Researcher, Public Policy Studies, Empresa Brasiliera de Pesquisa Agropecuaria (EMBRAPA), Brazil and a post-doctoral student in the Department of Agricultural Economics, Texas A&M University.  Dr. Williams is Professor and TAMRC Director, Department of Agricultural Economics, Texas A&M University, College Station, Texas  77843-2124.