McGill University

Centre for Continuing Education

North America and Global Economy

CPL-561-781

MERCOSUR

Regional Trade Report

Lecturer:

K. N. Matziorinis, B.A., M.A., Ph.D., C.M.C.

Prepared by:

Andrei Bolchakov119846991
German Odstrcil260102470
WINTER 2005

Table of Contents

Subject
/
Page
1. Background / 4
1.1 Argentina / 5
1.2 Brazil / 9
1.3 Paraguay / 13
1.4 Uruguay / 16
2. International Trade / 20
2.1 International Trade intra-Mercosur / 20
2.2 International Trade between Mercosur and main world regions / 21
2.2.1 International Trade Fact sheet by country / 24
2.3 Mercosur and Canada / 25
2.3.1 Merchandise Trade between Canada and Mercosur / 25
2.3.2 Service Trade between Canada and Mercosur / 27
2.3.3 Canada’s Exports to Mercosur by Industry / 28
2.3.4 Canada’s Exports from Mercosur by Industry / 29
2.4 Foreign Direct Investment in Mercosur / 30
2.4.1 Canadian Direct Investment in Mercosur / 31
2.4.1.1 Canadian Direct Investment in Argentina / 32
2.4.1.2 Canadian Direct Investment in Brazil / 33
2.5. International Trade Issues / 33
2.5.1 Disputes at the WTO involving Argentina, Brazil and Canada / 33
2.5.2 State of Bilateral Trade relations with Canada / 35
3. Trade Policy / 36
3.1 The DOHA Round – Agricultural Negotiations / 36
3.2 Trade Policy in Action – The Hard Ball / 36
3.3 Mercosur Future Outlook / 39
3.3.1 Advantages of Mercosur / 39
3.3.2 Disadvantages of Mercosur / 40
3.4 Conclusions / 42

1. Background

MERCOSUR was initiated in 1988 as a free trade pact between Brazil and Argentina. The modest diminutions in tariffs and quotas accompanying this pact reportedly helped bring about an 80 percent increase in trade between the two countries in the late 1980. This achievement pushed the extension of the pact in 1990 to contain Paraguay and Uruguay. The primary plan was to set up a full free trade area by the end of 1994 and a common market sometime later. The four countries of MERCOSUR have a combined population of about 200 million. With a market of this size, MERCOSUR could have a considerable impact on the economic growth rate of the four economies. In 1995, MERCOSUR’s members established a five-year program under which they hoped to perfect their free trade area and move toward a full customs union.

For its first eight years, MERCOSUR gave the impression to be making a constructive contribution to the economic growth rates of its members states. Trade between MERCOSUR’s four core members quadrupled between 1990 and 1998. The combined GDP of the four member states grew at an annual average rate of 3.5 percent between 1990 and 1996, a performance that is significantly superior than these countries achieved during the 1980s.

MERCOSUR hit an important barrier in 1998, when its member states slipped into recession and intrabloc trade slumped. Trade fell further in 1999 following a financial crisis in Brazil that led to the devaluation of the Brazilian real, which made the goods of other MERCOSUR members 40 percent more expensive in Brazil, their principal export market. At this point, advancement toward establishing a full customs union all but came to a halt. Things went down further in 2001 when Argentina, beset by economic stresses, recommended that the customs union be temporarily suspended. Argentina wanted to suspend MERCOSUR’s tariff so that it could eliminate duties on imports of capital equipment, while raising those on consumer goods to 35 percent (MERCOSUR had established a 14 percent import tariff on both sets of goods). Brazil agreed to this request, effectively halting MERCOSUR’s quest ot become a fully functioning customs union. Hope for a renewal in the importance of MERCOSUR increased in 2003 when new Brazilian President Lula da Silva announced his support for a revitalized and extended MERCOSUR modeled after the European Union with a lager membership, a common currency, and a democratically elected MERCOSUR parliament.

Member States :

1.1 Argentina

Geography

Location: / Southern South America, bordering the South Atlantic Ocean, between Chile and Uruguay
Area: / total: 2,766,890 sq km, land: 2,736,690 sq km
Land boundaries: / total: 9,665 km
border countries: Bolivia 832 km, Brazil 1,224 km, Chile 5,150 km, Paraguay 1,880 km, Uruguay 579 km
Climate: / mostly temperate; arid in southeast; subantarctic in southwest
Terrain: / rich plains of the Pampas in northern half, flat to rolling plateau of Patagonia in south, rugged Andes along western border
Natural resources: / fertile plains of the pampas, lead, zinc, tin, copper, iron ore, manganese, petroleum, uranium
Environment - international agreements: / party to: Antarctic-Environmental Protocol, Antarctic-Marine Living Resources, Antarctic Seals, Antarctic Treaty, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Ozone Layer Protection, Ship Pollution, Wetlands, Whaling
signed, but not ratified: Marine Life Conservation

People

Population: / 39,144,753 (2004)
Age structure: / 0-14 years: 25.9% (male 5,179,236; female 4,947,234)
15-64 years: 63.6% (male 12,452,566; female 12,457,451)
65 years and over: 10.5% (male 1,685,371; female 2,422,895) (2004)
Population growth rate: / 1.02% (2004)
Birth rate: / 17.19 births/1,000 population (2004)
Death rate: / 7.57 deaths/1,000 population (2004)
Life expectancy at birth: / total population: 75.7 years, male: 71.95 years, female: 79.65 years (2004)
Ethnic groups: / white (mostly Spanish and Italian) 97%, mestizo, Amerindian, or other nonwhite groups 3%
Religions: / nominally Roman Catholic 92% (less than 20% practicing), Protestant 2%, Jewish 2%, other 4%
Languages: / Spanish (official), English, Italian, German, French
Literacy: / total population: 97.1%
male: 97.1%
female: 97.1% (2003)

Government

Government type: / republic
Capital: / Buenos Aires
Administrative divisions: / 23 provinces (provincias, singular - provincia), and 1 autonomous city* (distrito federal); Buenos Aires, Buenos Aires Capital Federal*, Catamarca, Chaco, Chubut, Cordoba, Corrientes, Entre Rios, Formosa, Jujuy, La Pampa, La Rioja, Mendoza, Misiones, Neuquen, Rio Negro, Salta, San Juan, San Luis, Santa Cruz, Santa Fe, Santiago del Estero, Tierra del Fuego - Antartida e Islas del Atlantico Sur, Tucuman
Legal system: / mixture of West European and US legal systems
Executive branch: / chief of state: President Nestor KIRCHNER (since 25 May 2003); Vice President Daniel SCIOLI (since 25 May 2003); note - the president is both the chief of state and head of government
head of government: President Nestor KIRCHNER (since 25 May 2003); Vice President Daniel SCIOLI (since 25 May 2003); note - the president is both the chief of state and head of government
cabinet: Cabinet appointed by the president
election results: results of the presidential primary of 27 April 2003: Carlos Saul MENEM 24.3%, Nestor KIRCHNER 22%,…; the subsequent runoff election slated for 25 May 2003 was awarded to KIRCHNER by default after MENEM withdrew his candidacy on the eve of the election
elections: president and vice president elected on the same ticket by popular vote for four-year terms
International organization participation: / AfDB, Australia Group, BCIE, BIS, FAO, G-6, G-15, G-24, G-77, IADB, IAEA, IBRD, ICAO, ICC, ICCt, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, Interpol, IOC, IOM, ISO, ITU, LAES, LAIA, Mercosur, MIGA, MINURSO, MINUSTAH, NSG, OAS, OPANAL, OPCW, PCA, RG, UN, UN Security Council (temporary), UNCTAD, UNESCO, UNFICYP, UNHCR, UNIDO, UNMIK, UNMOVIC, UNTSO, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WToO, WTO, ZC

Economy

Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Over the past decade, however, the country has suffered recurring economic problems of inflation, external debt, capital flight, and budget deficits. Growth in 2000 was a negative 0.8%, as both domestic and foreign investors remained sceptical of the government's ability to pay debts and maintain the peso's fixed exchange rate with the US dollar. The economic situation worsened in 2001 with the widening of spreads on Argentine bonds, massive withdrawals from the banks, and a further decline in consumer and investor confidence. Government efforts to achieve a "zero deficit," to stabilize the banking system, and to restore economic growth proved inadequate in the face of the mounting economic problems. The peso's peg to the dollar was abandoned in January 2002, and the peso was floated in February; the exchange rate plunged and inflation picked up rapidly, but by mid-2002 the economy had stabilized, albeit at a lower level. Strong demand for the peso compelled the Central Bank to intervene in foreign exchange markets to curb its appreciation in 2003. Led by record exports, the economy began to recover with output up 8% in 2003, unemployment falling, and inflation reduced to under 4% at year-end.

GDP: / purchasing power parity - $435.5 billion (2003)
GDP - real growth rate: / 8.7% (2003)
GDP - per capita: / purchasing power parity - $11,200 (2003)
GDP - composition by sector: / agriculture: 11.1%
industry: 34.8%
services: 54.1% (2003)
Investment (gross fixed): / 15.1% of GDP (2003)
Inflation rate: / 13.4% (2003)
Unemployment rate: / 17.3% (2003)
Budget: / revenues: $26.62 billion
expenditures: $26 billion, including capital expenditures of NA (2003)
Public debt: / 65.7% of GDP (2003)
Agriculture - products: / sunflower seeds, lemons, soybeans, grapes, corn, tobacco, peanuts, tea, wheat; livestock
Industries: / food processing, motor vehicles, consumer durables, textiles, chemicals and petrochemicals, printing, metallurgy, steel
Industrial production growth rate: / 16.2% (2003)
Current account balance: / $7.855 billion (2003)
Exports: / $29.57 billion f.o.b. (2003)
Exports - commodities: / edible oils, fuels and energy, cereals, feed, motor vehicles
Exports - partners: / Brazil 15.8%, Chile 12%, US 10.6%, China 8.4%, Spain 4.7% (2003)
Imports: / $13.27 billion f.o.b. (2003)
Imports commodities: / machinery and equipment, motor vehicles, chemicals, metal manufactures, plastics
Imports - partners: / Brazil 34%, US 16.4%, Germany 5.6%, China 5.2% (2003)
Debt - external: / $145.6 billion (2003)
Currency: / Argentine peso (ARS)
Exchange rates: / Argentine pesos per US dollar - 2.9003 (2003), 3.0633 (2002), 0.9995 (2001), 0.9995 (2000), 0.9995 (1999)

International Issues

UK continues to reject sovereignty talks requested by Argentina, whose constitution still claims UK-administered Falkland Islands (Islas Malvinas) and South Georgia and the South Sandwich Islands, but in 1995 ceded the right to settle the dispute by force; Beagle Channel islands dispute resolved through Papal mediation in 1984, but armed incidents persist since 1992 oil discovery; territorial claim in Antarctica partially overlaps UK and Chilean claims (see Antarctic disputes); unruly region at convergence of Argentina-Brazil-Paraguay borders is locus of money laundering, smuggling, arms and drug trafficking, and fundraising for extremist organizations; uncontested dispute between Brazil and Uruguay over Braziliera Island in the Quarai/Cuareim River leaves the tripoint with Argentina in question.[1]

1.2 Brazil

Geography

Location: / Eastern South America, bordering the Atlantic Ocean
Area: / total: 8,511,965 sq km, land: 8,456,510 sq km
Land boundaries: / total: 14,691 km
border countries: Argentina 1,224 km, Bolivia 3,400 km, Colombia 1,643 km, French Guiana 673 km, Guyana 1,119 km, Paraguay 1,290 km, Peru 1,560 km, Suriname 597 km, Uruguay 985 km, Venezuela 2,200 km
Climate: / mostly tropical, but temperate in south
Terrain: / mostly flat to rolling lowlands in north; some plains, hills, mountains, and narrow coastal belt
Natural resources: / bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, timber
Environment - international agreements: / party to: Antarctic-Environmental Protocol, Antarctic-Marine Living Resources, Antarctic Seals, Antarctic Treaty, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Tropical Timber 94, Wetlands, Whaling
signed, but not ratified: none of the selected agreements

People

Population: / 184,101,109 (2004)
Age structure: / 0-14 years: 26.6% (male 24,915,902; female 23,966,713)
15-64 years: 67.6% (male 61,739,012; female 62,770,480)
65 years and over: 5.8% (male 4,389,659; female 6,319,343) (2004)
Median age: / total: 27.4 years, male: 26.7 years, female: 28.2 years (2004)
Population growth rate: / 1.11% (2004)
Birth rate: / 17.25 births/1,000 population (2004)
Death rate: / 6.14 deaths/1,000 population (2004)
Life expectancy at birth: / total population: 71.41 years, male: 67.45 years, female: 75.57 years (2004)
Ethnic groups: / white (includes Portuguese, German, Italian, Spanish, Polish) 55%, mixed white and black 38%, black 6%, other (includes Japanese, Arab, Amerindian) 1%
Religions: / Roman Catholic (nominal) 80%
Languages: / Portuguese (official), Spanish, English, French
Literacy: / total population: 86.4%
male: 86.1%
female: 86.6% (2003)

Government

Government type: / federative republic
Capital: / Brasilia
Administrative divisions: / 26 states (estados, singular - estado) and 1 federal district* (distrito federal); Acre, Alagoas, Amapa, Amazonas, Bahia, Ceara, Distrito Federal*, Espirito Santo, Goias, Maranhao, Mato Grosso, Mato Grosso do Sul, Minas Gerais, Para, Paraiba, Parana, Pernambuco, Piaui, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondonia, Roraima, Santa Catarina, Sao Paulo, Sergipe, Tocantins
Legal system: / based on Roman codes
Executive branch: / chief of state: President Luiz Inacio LULA DA SILVA (since 1 January 2003); Vice President Jose ALENCAR (since 1 January 2003); note - the president is both the chief of state and head of government
election results: in runoff election 27 October 2002, Luiz Inacio LULA DA SILVA (PT) was elected with 61.3% of the vote; Jose SERRA (PSDB) 38.7%
elections: president and vice president elected on the same ticket by popular vote for four-year terms; election last held 6 October 2002 (next to be held 1 October 2006, with a runoff on 29 October 2006 if necessary); runoff election held 27 October 2002
cabinet: Cabinet appointed by the president
head of government: President Luiz Inacio LULA DA SILVA (since 1 January 2003); Vice President Jose ALENCAR (since 1 January 2003); note - the president is both the chief of state and head of government
International organization participation: / AfDB, BIS, FAO, G-15, G-24, G-77, IADB, IAEA, IBRD, ICAO, ICC, ICCt, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, Interpol, IOC, IOM, ISO, ITU, LAES, LAIA, Mercosur, MIGA, MINUSTAH, NAM (observer), NSG, OAS, OPANAL, OPCW, PCA, RG, UN, UN Security Council (temporary), UNCTAD, UNESCO, UNHCR, UNIDO, UNITAR, UNMIK, UNMIL, UNMISET, UNMOVIC, UNOCI, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WToO, WTO

Economy

Possessing large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. From 2001-03 real wages fell and Brazil's economy grew, on average, only 1.1% per year, as the country absorbed a series of domestic and international economic shocks. That Brazil absorbed these shocks without financial collapse is a tribute to the resiliency of the Brazilian economy and the economic program put in place by former President CARDOSO and strengthened by President Lula DA SILVA. The three pillars of the economic program are a floating exchange rate, an inflation-targeting regime, and tight fiscal policy, which have been reinforced by a series of IMF programs. The currency depreciated sharply in 2001 and 2002, which contributed to a dramatic current account adjustment: in 2003, Brazil ran a record trade surplus and recorded the first current account surplus since 1992. While economic management has been good, there remain important economic vulnerabilities. The most significant are debt-related: the government's largely domestic debt increased steadily from 1994 to 2003, straining government finances, while Brazil's foreign debt (a mix of private and public debt) is large in relation to Brazil's modest (but growing) export base. Another challenge is maintaining economic growth over a period of time to generate employment and make the government debt burden more manageable.[1]

GDP: / purchasing power parity - $1.375 trillion (2003)
GDP - real growth rate: / -0.2% (2003)
GDP - per capita: / purchasing power parity - $7,600 (2003)
GDP - composition by sector: / agriculture: 10.2%
industry: 38.7%
services: 51.2% (2003)
Investment (gross fixed): / 18% of GDP (2003)
Inflation rate: / 14.7% (2003)
Unemployment rate: / 12.3% (2003)
Budget: / revenues: $147.2 billion
expenditures: $172.4 billion, including capital expenditures of NA (2003)
Public debt: / 58.5% of GDP (2003)
Agriculture - products: / coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef
Industries: / textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery and equipment
Industrial production growth rate: / 0.4% (2003)
Current account balance: / $3.52 billion (2003)
Exports: / $73.28 billion f.o.b. (2003)
Exports - commodities: / transport equipment, iron ore, soybeans, footwear, coffee, autos
Exports - partners: / US 23%, Argentina 6.1%, China 6%, Netherlands 5.8%, Germany 4.2% (2003)
Imports: / $48.25 billion f.o.b. (2003)
Imports - commodities: / machinery, electrical and transport equipment, chemical products, oil
Imports - partners: / US 20%, Argentina 9.8%, Germany 8.7%, Japan 5.2%, China 4.4% (2003)
Debt - external: / $214.9 billion (2003)
Currency: / real (BRL)
Exchange rates: / reals per US dollar - 3.0771 (2003), 2.9208 (2002), 2.3577 (2001), 1.8301 (2000), 1.8147 (1999)

1.3 Paraguay

Geography

Location: / Central South America, northeast of Argentina
Area: / total: 406,750 sq km, land: 397,300 sq km
Land boundaries: / total: 3,920 km
border countries: Argentina 1,880 km, Bolivia 750 km, Brazil 1,290 km
Climate: / subtropical to temperate; substantial rainfall in the eastern portions, becoming semiarid in the far west
Terrain: / grassy plains and wooded hills east of Rio Paraguay; Gran Chaco region west of Rio Paraguay mostly low, marshy plain near the river, and dry forest and thorny scrub elsewhere
Natural resources: / hydropower, timber, iron ore, manganese, limestone
Environment - international agreements: / party to: Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Hazardous Wastes, Law of the Sea, Ozone Layer Protection, Wetlands
signed, but not ratified: none of the selected agreements

People

Population: / 6,191,368 (2004)
Age structure: / 0-14 years: 38.2% (male 1,201,459; female 1,162,954)
15-64 years: 57% (male 1,773,151; female 1,758,323)
65 years and over: 4.8% (male 136,376; female 159,105) (2004)
Population growth rate: / 2.51% (2004)
Birth rate: / 29.78 births/1,000 population (2004)
Death rate: / 4.58 deaths/1,000 population (2004)
Life expectancy at birth: / total population: 74.64 years
male: 72.12 years
female: 77.29 years (2004)
Ethnic groups: / mestizo (mixed Spanish and Amerindian) 95%
Religions: / Roman Catholic 90%, Mennonite, and other Protestant
Languages: / Spanish (official), Guarani (official)
Literacy: / total population: 94%
male: 94.9%
female: 93% (2003)

Government

Capital: / Asuncion
Adm. divisions: / 17 departments
Legal system: / based on Argentine codes, Roman law, and French codes
Executive branch: / chief of state: President Nicanor DUARTE Frutos (since 15 August 2003); Vice President Luis CASTIGLIONI Joria (since 15 August 2003); note - the president is both the chief of state and head of government
International organization participation: / FAO, G-77, IADB, IAEA, IBRD, ICAO, ICCt, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, ILO, IMF, IMO, Interpol, IOC, IOM, ISO (correspondent), ITU, LAES, LAIA, Mercosur, MIGA, MINUSTAH, MONUC, NAM (observer), OAS, ONUB, OPANAL, OPCW, PCA, RG, UN, UNCTAD, UNESCO, UNIDO, UNMEE, UNMIL, UNOCI, UPU, WCL, WCO, WHO, WIPO, WMO, WToO, WTO

Economy

Paraguay has a market economy marked by a large informal sector. The informal sector features both re-export of imported consumer goods to neighbouring countries as well as the activities of thousands of micro enterprises and urban street vendors. Because of the importance of the informal sector, accurate economic measures are difficult to obtain. A large percentage of the population derives their living from agricultural activity, often on a subsistence basis. The formal economy grew by an average of about 3% annually in 1995-97; but GDP declined slightly in 1998, 1999, and 2000, rose slightly in 2001, only to fall again in 2002. On a per capita basis, real income has stagnated at 1980 levels. Most observers attribute Paraguay's poor economic performance to political uncertainty, corruption, lack of progress on structural reform, substantial internal and external debt, and deficient infrastructure.[1]