SHOULD VENEZUELA JOIN MERCOSUR?AN ECONOMICAL ANALYSIS FROM VENEZUELA’S POINT OF VIEW
One option for Venezuela in the current regional setting would be to become a member of Mercosur. How can we evaluate this potential integration choice from Venezuela’s point of view? In the following article we will focus on 4 major aspects for analysis; excluding all monetary aspects. In general the idea is, to base the evaluation on “national welfare effects” for Venezuela caused by a potential accession to Mercosur. First we will examine the direct effects of integration making use of Jacob Viner’s customs union theory[1] (and newer insights as well) based on the concepts of trade creation and trade diversion. Direct effects of bilateral tariff elimination are for example the changes in the production and consumption structure of firms and individuals due to the changed relative prices.[2] This will lead us to take a look on possible Terms of Trade effects. In this part of the essay we are obligated as well to take a closer look on the oil sector, since this is the major determinant element for Venezuela’s Terms of Trade.[3] After that we will take a look on dynamic effects; as well known as additional gains from trade. These take place when we assume imperfect competition (e.g. economies of scale). In order to that, there is for example the possibility that because of the bigger market size after forming a customs union (CU), increased competition leads to efficiency gains.[4] Last but not least some political aspects will be presented to give a better image of possible outcomes, since integration never takes place on pure economical grounds.[5] The essay concludes with some key findings from the 4 elements of analysis.
1. Welfare effects of trade creation and trade diversion
At first sight one thinks that the elimination of trade barriers (as it happens when forming a CU) will necessarily lead to welfare gains through improved resource allocation and bigger consumer surpluses.[6] This is what the standard theory of international economics tells us.
The problem is that a preferential trading agreement (PTA) can either raise or lower economic welfare, in that it does both; free trade (among their members) and distort trade (with the outside world). Beneficial trade creation results when protected production is competed down and trade expanded between members. The effects are like those of a nondiscriminatory removal of tariffs. Trade diversion occurs when a preference causes a country to switch its purchases from a more efficient to a less efficient supplier. That switch itself imposes a welfare cost, but that cost could be offset by a gain for consumers.[7]
The final welfare effect is the result of these two trade effects over all goods markets. From a single country point of view forming part of a PTA has negative welfare effects if:
- trade diversion has a net negative welfare effect and
- the negative impact of this trade diversion is bigger than the benefits of trade creation.
Now it is obvious that there are certain difficulties for examining possible impacts on a country’s welfare. It would be necessary to analyze trade creation and diversion effects for each goods market and then compare the effects over all good markets. That’s why in literature there have been established some general criteria, which indicate that the trade creation effects offset any (possibly negative) trade diversion effects. Those are the criteria we will use in the following analysis.
(a) The effects of trade creation are likely to be bigger than the (possibly negative) effects of trade diversion, the bigger the CU is.
The seize of a CU between Venezuela and Mercosur seems fairly small. They only comprise around 2% of the world’s exports. This share has even become smaller over years (see table 1.1). The imports of Venezuela and Mercosur together are as well below 2% of the world’s imports. From this point of view the chances that the world’s most efficient producers are inside the union seems very low and there is a high risk for trade diversion caused by a discriminatory tariff removal.
(b) The effects of trade creation are likely to be bigger than the (possibly negative) effects of trade diversion, the bigger the existing bilateral trading volume is already; the integrating parties are so called “natural trading partners”.
Within the existing trading agreements Venezuela’s main trading partner is the USA followed by Brazil and Colombia (see table 1.2). In fact the only Mercosur country of importance to Venezuela is Brazil comprising roughly 90% of exports to Mercosur and 60% of imports from Mercosur.
There has been some rapid growth of trade between Venezuela and Mercosur from 1985 to 2000 (see figure 1.1), but the levels are still very low. Only 4% of exports go to Mercosur and 7% of imports come from Mercosur countries (see table 1.3). These low shares show little potential for trade creation but high risk for trade diversion.
(c) The effects of trade creation are likely to be bigger than the (possibly negative) effects of trade diversion, if the integrating parties have complementary efficient and non efficient industry structures. Each member is an efficient producer of goods that are produced in the partner countries with inefficient methods and vice versa.
If we look at the major export products on an aggregated level we see that Venezuela and Mercosur are strong in very different industry sectors.
Venezuela’s major export categories:[8][9]
3 Minerals fuels, lubricants and related materials~ 75%of exports to the World
6 Manufactured goods classified chiefly by material~ 10%of exports to the World
5 Chemicals and related products~ 5%of exports to the World
Mercosur’s major export categories:[10]
0 Food and live animals chiefly for food~ 25%of exports to the World
7 Machinery and transport equipment~ 19%of exports to the World
6 Manufactured goods classified chiefly by material~ 18%of exports to the World
2 Crude materials, inedible, except fuels~ 15%of exports to the World
Venezuela’s major import categories:[11]
7 Machinery and transport equipment~ 45%of imports from World
6 Manufactured goods classified chiefly by material~ 15%of imports from World
5 Chemicals and related products~ 13%of imports from World
0 Food and live animals chiefly for food~ 10%of imports from World
8 Miscellaneous manufactured articles~ 9%of imports from World
Measuring the Revealed Comparative Advantage index (RCA) gives a similar image. Venezuela and Mercosur have pretty different sectors where they are strong in. The major import industries of Venezuela seem to be among those in which Mercosur is a strong exporter. It looks a little bit different though if we take a closer look at the non-oil exports of Venezuela. In the long run Venezuela should be able to diversify its export structure. Of the total non-oil exports only a very small share goes to Mercosur, whereas the CAN absorbs a surprisingly big part of Venezuela’s non-oil exports (see table 1.4).
In general the different comparative advantages seem to favor trade creation effects. Both could concentrate more on industries where they have comparative advantages. The only negative aspect is the low potential for non-oil exports of Venezuela.
(d) The effects of trade creation are likely to be bigger than the (possibly negative) effects of trade diversion, if tariffs are very high before forming a CU and if the joint tariff for third countries after becoming a CU is very low.
If we look at the current tariffs between Venezuela and Brazil/Argentina it looks like the biggest benefits from a tariff removal have already taken place. There are some important bilateral agreements (ACE 39 and 48) which assure that the important goods for both parties enter already at a tariff rate of almost zero. The common external tariff (CET) levels of the CAN and the Mercosur are similar. It would be better though if Venezuela would be forced to lower its current tariff level for third countries in order to avoid trade diversion.
It is worth to mention as well that the structure of the CET in the CAN is less complicated than that of Mercosur. In the CAN there are 4 general tariff levels while in the Mercosur 11 different levels are applicable.
The biggest gains from a bilateral tariff reduction have already taken place. There is not much potential for further trade creation through tariff removals.
2. Possible Terms of Trade effects
The impact of a CU with the Mercosur will probably be minor for Venezuela’s ToT. These seem to be related very much to the oil-prize for Venezuelan oil in the international markets (see figure 1.2).[12] This variable won’t be influenced a lot by forming a CU with the Mercosur. Venezuela will export mainly oil as well in the soon future. For answering the question whether it would be positive or negative for Venezuela to become a member of Mercosur the ToT as an indicator are neutral.
3. Additional gains from Trade
Here we will analyze what growth effects can be caused by a bigger market size. This goes beyond the changes in production and consumption structure analyzed before. We assume imperfect competition and this will lead us to intra-industry trade which is not based on comparative advantages. Intra-industry trade has to with specialization effects if we introduce possible economies of scale on firm level.
(a) A bigger integrated market gives rise to economies of scale if: the reason for not realizing economies of scale was a too small internal market. This is only possible if in general there are options for product differentiation. That means that the integrating economies have similar industry structures which enables intra-industry trade.
For Venezuelan industries the Mercosur does represent only limited possibilities for intra-industry trade. The two have focused on quite different industries and the Mercosur industries are often more advanced (as well because of strong governmental pushing in the case of Brazil). Intra-industry trade has been fairly small between Venezuela and the Mercosur countries (see table 1.6). Of all trade between Brazil and Argentina for example 39% classifies as intra-industry trade. Venezuela has its biggest share in intra-industry trade with Columbia (31%). This would confirm theory which says that countries with similar development and structures tend to have bigger shares of intra-industry trade. Columbia is as well a major oil-exporting country. In general Venezuela has South America’s lowest intra-industry trade shares.
Economies of scale would be possible in the oil sector but here the volume of exports is already very high and tariffs of Mercosur countries are already almost zero.
(b) A bigger integrated market strengthens competition and gives pressure on monopolistic or oligopol-like industries.
The biggest pressure for Venezuelan businesses has occurred at the end of the 1980s and the beginning of the 90s, when Venezuela started to liberalize trade and lowered its high tariffs. There is some potential although for pressure from Brazilian businesses. The problem is, that these are often strong not only because of efficient management. The Brazilian government tries considerably to push exports.
4. Political aspects of joining Mercosur
Venezuela is a desired partner for PTAs in the region. First of all the oil is of interest to virtually every country and second Venezuela has had traditionally strong ties to the USA. From that point of view it could serve as a bridge to the USA for other South American countries.
The bargaining power in international negotiations (like for the FTAA) could be strengthened for Venezuela with Brazil on its side. At the same time there is the risk, that Venezuela would have to adapt more to what Brazil wants. Mercosur could be a way for Venezuela to decrease the dependence of the USA, since the Mercosur has good relations with the European Union. Joining Mercosur would maybe give more confidence for foreign investors in a way that joining Mercosur would strengthen the political stability of Venezuela. The problem here is the lack of any supranational institutions. Mercosur cannot enforce its members to do something by authority.
5. Key findings
A lot of potential trade creation between Venezuela and the Mercosur countries seems to already have taken place. The industry structures of Venezuela and Brazil for example seem very different. That’s why there is no common basis for the development of considerable intra-industry trade based on economies of scale and a bigger market size. Politically it could be a way to import some political stability in the long run and to raise bargaining power.
With these results in mind it doesn’t seem very favorable for Venezuela to join Mercosur.
Tables
Table 1.1: Venezuela’s and Mercosur’s shares of total world exports
Year / 1985 / 1990 / 1995 / 2000Venezuela’s shares of total world exports (%) / 0.68 / 0.452 / 0.411 / 0.436
MERCOSURS shares of total world exports (%) / 1.861 / 1.562 / 1.546 / 1.417
SOURCE:Elaboration by the author, Data from Trade CAN 2002:
Table 1.2: Venezuelas main trading partners Ländern 2001
Exportpartner / ImportpartnerUSA / 60.0% / USA / 35.8%
Brasilien / 5.5% / Kolumbien / 6.8%
Kolumbien / 3.5% / Brasilien / 4.5%
Italien / 3.5% / Deutschland / 3.9%
Spanien / 3.4% / Italien / 3.9%
SORUCE:CIA (2003).
Tab. 1.3: Venezuela’s exports and imports – World and Mercosur
(Mio. US$) / 1985 / 1990 / 1991 / 1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998 / 1999 / 2000Total Exports / 14'283 / 17'444 / 14'968 / 13'988 / 14'586 / 15'905 / 18'842 / 23'414 / 23'443 / 17'367 / 20'076 / 31'402
Of which Mercosur / 253 / 326 / 326 / 300 / 425 / 615 / 861 / 1'100 / 1'030 / 762 / 955 / 1'287
Mercosur in % / 1.77% / 1.87% / 2.18% / 2.14% / 2.91% / 3.87% / 4.57% / 4.70% / 4.39% / 4.39% / 4.76% / 4.10%
Total Imports / 7'501 / 6'807 / 10'131 / 12'714 / 11'390 / 8'346 / 11'937 / 9'810 / 13'641 / 15'048 / 13'290 / 15'256
Of which Mercosur / 404 / 391 / 685 / 737 / 619 / 485 / 844 / 718 / 980 / 1'006 / 791 / 1'074
Mercosur in % / 5.39% / 5.74% / 6.76% / 5.80% / 5.43% / 5.81% / 7.07% / 7.32% / 7.18% / 6.69% / 5.95% / 7.04%
SOURCE:BCV and URL= (Stand: 24.09.03).
Tab. 1.4: Non oil exports from Venezuela to:CAN, Mercosur und Nordamerika (in % of total non oil exports to the world)
1990 / 1995 / 1996 / 1997 / 1998 / 1999 / 2000CAN / 9.7% / 28.1% / 28.8% / 29.6% / 27.5% / 24.3% / 20.7%
MERCOSUR / 2.2% / 3.6% / 3.9% / 3.9% / 3.5% / 3.2% / 3.0%
NORTH AMERICA / 33.7% / 33.3% / 31.5% / 31.6% / 32.8% / 35.2% / 37.9%
SOURCE:Elaboration by the author, Data from Trade CAN 2002.
Table 1.5: Exports of Venezuela and Mercosur by regions
Jahr / 1985 / 1990 / 1995 / 1996 / 1997 / 1998 / 1999 / 2000Venezuela, exports by region
Western Europe / 22.3% / 14.2% / 10.7% / 9.9% / 9.3% / 9.4% / 9.3% / 9.3%
North America / 60.5% / 66.0% / 62.7% / 63.4% / 63.9% / 63.9% / 65.3% / 66.8%
Developing America / 12.8% / 14.0% / 23.3% / 23.6% / 24.1% / 24.0% / 22.8% / 21.5%
Mercosur 1 / 3.2% / 3.3% / 5.2% / 5.5% / 5.7% / 5.9% / 5.9% / 5.9%
CAN 1 / 3.1% / 3.1% / 10.4% / 10.5% / 10.8% / 10.2% / 8.4% / 6.8%
Other Industrialized / 3.7% / 3.5% / 2.1% / 1.9% / 1.5% / 1.7% / 1.4% / 1.4%
Rest of the world / 0.6% / 2.3% / 1.2% / 1.2% / 1.1% / 1.1% / 1.1% / 1.0%
Mercosur, exports by region
Western Europe / 36.3% / 37.5% / 28.7% / 27.1% / 26.6% / 27.2% / 27.7% / 27.9%
North America / 31.8% / 23.1% / 18.3% / 17.7% / 17.9% / 19.2% / 21.0% / 22.3%
Developing America / 14.4% / 17.8% / 31.5% / 33.6% / 35.6% / 35.3% / 34.4% / 33.0%
Mercosur 1 / 7.4% / 9.5% / 21.4% / 23.6% / 25.4% / 24.8% / 23.0% / 21.4%
CAN 1 / 4.4% / 3.4% / 3.9% / 4.0% / 4.0% / 4.1% / 4.0% / 3.8%
Venezuela 1, 2 / 1.373% / 1.023% / 1.064% / 1.254% / 1.297% / 1.294% / 1.231% / 1.152%
Other Industrialized / 8.8% / 8.9% / 7.0% / 6.7% / 6.2% / 5.7% / 5.3% / 5.2%
Rest of the world / 8.7% / 12.7% / 14.5% / 14.9% / 13.8% / 12.6% / 11.7% / 11.6%
SOURCE:Elaboration by the author, Data from Trade CAN 2002:
NOTES:
1Include in Developing America. Western Europe, North America, Developing America, Other industrialized and Rest of world make up 100%.
2Data for exports to Venezuela are from the BCV, because single countries as a destination for exports
are not available in Trade CAN 2002.
Tab. 1.6: Intra-Industry trade between Venezuela and Brazil/Argentina
Share of trade which classifies as intra-industry trade / 1985 / 1990 / 1995 / 1998 / 1999Exports to Argentina / 1.8% / 4.6% / 2.5% / 3.0% / 3.5%
Imports from Argentina / 2.8% / 6.6% / 1.8% / 3.5% / 2.6%
Exports to Brazil / 0.1% / 9.5%% / 4.7% / 6.7% / 4.5%
Imports from Brazil / 0.2% / 13.0% / 2.5% / 6.5% / 4.8%
SOURCE:ALADI (2000, S.42 f.).
Figures
Figure 1.1: Percentage change in Exports 1985/2000 for different regions
SOURCE:Proper elaboration, Data from Trade CAN 2002.[13]
NOTES:
„North America“ includes the USA, all U.S. territories (Puerto Rico and Virgin Islands) and Canada. „Western Europe“
includes the EU (without the new candidates), Switzerland and Liechtenstein. „Other Industrialized“ includes Australia, Japan, New Zealand and Israel. „Developing America“ includes the American Continent without North America. CAN, Venezuela and Mercosur are included in „Developing America“. Data for Venezuela is coming from the Venezuelan Central Bank (BCV).
Figure 1.1: Average annual crude oil price for Venezuela and ToT
QUELLEN:Erdölexportpreisevon URL= (Stand: 24.09.03) und Economist Intelligence Unit (1993, S. 37).
ToT aus und World Bank (2003, Tab. 4.4) und World Bank (2002, Tab. 4.4).
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