(INTAL) MERCOSUR Report 4

MERCOSUR Report N° 4 REPORT JANUARY-JUNE 1998 Inter-American Development Bank Integration and Regional Programs Department Institute for the Integration of Latin America and the Caribbean IDB - INTAL Esmeralda 130, 16th and 17th Floors (1035) Buenos Aires, Argentina tel 54 1 320-1871 fax 54 1 320-1872 E-mail: INT/[email protected] http://www.iadb.org/intal The authors are responsible for ideas and opinions hereby expressed which may not necessarily reflect policies and/or positions from IDB or INTAL. Printed in Argentina IDB - INTAL MERCOSUR Report Buenos Aires, 1998. 100 pages. Report Nº 4, January-June 1998. I.S.B.N. 950-738-073-6 US$ 15,00 The MERCOSUR Report series represents a new effort of INTAL aimed at promoting understanding and dissemination of information about the current dynamic process of integration in Latin America and the Caribbean. As part of this integrationist trend, the Southern Common Market has become, since the signing of the Asunción Treaty in 1991, a leading case for the evaluation of the achievements and challenges encompassed by this ambitious initiative. The purpose of INTAL, through the publication of this semiannual series, is to facilitate access of information to a wide number of readers interested in MERCOSUR, which comprises the public and private sectors and the community of the subregion as a whole. Likewise, in order to promote MERCOSUR within and beyond the subregion, information dissemination oriented towards the international community is fostered through the publication of this report in English, as well as in Portuguese and Spanish, the two official languages of the process. Report N° 4 covers the first half of 1998 and includes the month of July with relevant information from the XIV Meeting of the Common Market Council, the Presidential Summit and the XXX Meeting of the Common Market Group. This Report has been prepared by Dr. João Bosco M. Machado, UFRJ Professor and FUNCEX researcher in Rio de Janeiro, Brazil with the collaboration of Mr Ricardo A. Markwald, FUNCEX researcher. The main text of the report is complemented by an Appendix on Paraguay and MERCOSUR; an academic article prepared by Mr. Fernando Masi, senior researcher from CADEP in Asunción, Paraguay. Mr. Juan José Taccone and Mr. Uziel Nogueira, INTAL’s Director and Integration Economist respectively, were responsible for the coordination and general and technical editing of the Report. Following upon the goal and expectations raised in previous issues, readers are encouraged to keep on sending their comments and/or suggestions in order to improve the scope and content of these publications in the future. T A B L E O F C O N T E N T S EXECUTIVE SUMMARY CHAPTER I. MACROECONOMIC TRENDS 1 Macroeconomic performance in the first half of 1998 1 Economic activity and employment 1 Inflation 3 Public Finances 5 Foreign Sector 6 Evolution of macroeconomic policy 7 Macroeconomic coordination, institutions and productive configuration 9 CHAPTER II. TRADE AND FOREIGN DIRECT INVESTMENT 11 Foreign trade over the first half of 1998 12 Extra-bloc trade flows 12 Intra-MERCOSUR flows 13 The automobile, vehicle and auto-parts trade between Brazil and Argentina 14 Flows of foreign direct investment 15 CHAPTER III. MARKET ACCESS AND CONDITIONS OF COMPETITION 19 Trade restrictions, non-tariff measures and trade disputes 19 Brazilian restrictions on the imports of milk, dairy products, and other foodstuffs 19 Brazil’s previous license system on imports 20 GATT-WTO trade defense mechanisms 21 Customs valuation regime 21 Pork subsidies 22 Taxation of Foreign Cigarettes in Uruguay 22 Consultations to the MERCOSUR Trade Commission 23 Special Sectors 24 Automotive regime 24 Sugar sector 26 Competition Defense Protocol 26 CHAPTER IV. COMMON POLICIES, POLICY HARMONIZATION AND OTHER STRENGTHENING MEASURES 27 Liberalization of the services sector 27 Legal issues 28 MERCOSUR norms 28 Common Protocol of Consumer Defense 29 Private Controversy Resolution Center 29 Security Cooperation 30 Cultural and educational issues 31 Financial issues 31 Military issues 32 Labor and social issues 32 MERCOSUR Women’s Forum and Specialized Council on Women 32 Labor legislation 33 Institutional aspects 33 The Ushuaia Protocol on the Democratic Commitment in MERCOSUR 34 Government purchases 34 Environment 34 Supply lists and common external tariff 34 MERCOSUR customs Code 35 CHAPTER V. INFRASTRUCTURE 37 Energy infrastructure 38 Natural gas 38 Electrical energy distribution networks 39 Distribution of petroleum and its by-products 40 Transportation and communication infrastructure 40 CHAPTER VI. FOREIGN ECONOMIC RELATIONS 45 MERCOSUR-Andean Community Free Trade Area 45 FTAA and hemispheric integration 46 MERCOSUR-Mexico negotiations 47 MERCOSUR-CACM Framework Agreement on Trade and Investments 47 MERCOSUR-European Union negotiations 48 MERCOSUR-Chile agreement 48 MERCOSUR-Canada agreement 49 BIBLIOGRAPHY A P P E N D I X PARAGUAY AND MERCOSUR 1. PARAGUAY JOINS MERCOSUR 1 2. MACROECONOMIC EVOLUTION 4 3. TRADE AND FOREIGN INVESTMENT PERFORMANCE 9 Real trade 9 Trade creation and trade diversion 10 Destination of Investments 14 4. TOWARDS A NEW ECONOMIC MODEL 17 Competitiveness and costs 18 A look to the future 21 ANNEX STUDY OF THE NATIONAL T RANSPORTATION MASTER PLAN (ETNA) 25 BIBLIOGRAPHY EXECUTIVE SUMMARY I. Macroeconomic trends In the first half of 1998, the impact of the Asian crisis on the level of economic activity in the four MERCOSUR countries was, in addition to being reasonably differentiated, much less severe than had been forecast at the end of 1997. However, the sub-regional gross domestic product (GDP), after registering 3.2% growth in 1996 and 4.7% growth in 1997, is expected to register much more modest growth this year, probably less than 3%. At the end of 1997, it appeared that the MERCOSUR countries were going to be faced with some serious difficulties due to the effect of the Asian crisis on the sub-region. Brazil’s adoption of severe fiscal and monetary adjustment measures, as an attempt to slow the loss of foreign exchange reserves and strengthen foreign investors’ confidence, led to forecasts of an abrupt drop in the economic activity in the bloc’s primary member. The expected contraction of Brazilian imports would inevitably impact the aggregate demand of the other members, thereby promoting a rapid reverse of the economic growth cycle, which began at the end of 1995. However, the cooling of the Brazilian economy was less severe than expected and the impact on the other members of the bloc was much more diluted. Nevertheless, beginning in May the signs of a slowing in economic activity in the Argentine economy were clear. Soon after, the fragility of the economic situation in Japan and Russia became evident, advancing the possibility of new turbulence. Therefore, it is too early to formulate any more optimistic prognostic in terms of the medium range forecasts for the economies of the MERCOSUR Member Countries. The sub-region’s average inflation rate, measured by the evolution of the consumer price indices of the four members, fell from 6.9% in 1996 to 3.4% in 1997. Last year’s more than 50% reduction in the average inflation rate in MERCOSUR occurred in a phase of expansion in sub-regional economic activity, and resulted in a lower dispersion of national indices. In 1998, the results will certainly be less auspicious, without this implying a threat to the increasing stabilization of inflation in MERCOSUR. In terms of public finances, the recent efforts to promote a reversal of fiscal deficits in MERCOSUR will not result in very significant advances in 1998. The evolution of fiscal accounts in the first half of the year point to a worsening of the deficits in Brazil and Paraguay, while Uruguay and Argentina registered a slight improvement. Until now the MERCOSUR countries have not been able to harmonize satisfactory economic growth levels with moderate deficits in the current account. The deficits in the foreign accounts have become recurrent, promoting stop and go growth, based on cycles of short duration the amplitude of which tends to be larger in some countries (Argentina and Uruguay) than in others (Brazil and Paraguay). However, the result is only moderate growth for the sub-region as a group, accompanied by a high and growing foreign deficit. The year of 1998 will not be an exception, the foreign deficits are worsening in the two economies which are still in an expansion phase (Argentina and Uruguay), while the deficit in the current accounts is shrinking in the two economies that are in a cooling phase. The macroeconomic policy in MERCOSUR shows wide convergence in the general lines of actions of the national economic authorities. The stabilization, based on the use of a nominal exchange rate to anchor the price system, the adjustment and fiscal regime reform policies, the reform of the state and particularly the privatization programs constitute the common ingredients of the macroeconomic policies of the sub-region’s two main economies, Brazil and Argentina. The macroeconomic policy in Uruguay also shares many of i these characteristics, showing last year greater convergence with the larger members as exhibited by the results. Paraguay’s situation is definitely different, but it is likely that the new government will attempt to move its domestic macroeconomic policy closer to the general orientation in the other MERCOSUR countries. II. Trade and Foreign Direct Investment In the first seven years after the formation of MERCOSUR, the sub-region’s global trade evolved at very high rates of more than 15% per year. The expansion of trade between the members of the bloc was much larger than that registered in trade with non-members. In fact between 1991 and 1997 the extra-zonal trade flows doubled, while the trade between members quadrupled.

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