Mercosur: what comes next?

Judged on the basis of trade figures, Mercosur has been an undeniable success. In less than a decade, the trade bloc made up of Argentina, Brazil, Paraguay and Uruguay has turned itself into the world's fourth largest market, after NAFTA, the European Union and Japan. In six years, intra-Mercosur trade has more than quadrupled, from $4.1 billion in 1990 to $16.9 billion in 1996.

The flow of investments among the four countries, although small compared to the amount received from external sources, is stimulating business and commerce in a way never seen before. Moreover, intra-Mercosur trade, which now stands at 1.6 percent of the four countries' gross domestic product, leaves considerable room for increase, judging from the much higher rates of trade within the three larger trade markets.

For a region whose history is littered with economic failures, the burning question is how to sustain this remarkable success. More specifically, how can Mercosur's members increase trade among themselves without reducing trade ties with the rest of the world? And how will Mercosur respond to the Hemispheric Free Trade Area set to begin functioning early next century?

There are two currents of thinking on this question, according to the recent Mercosur Report by the idb administered Institute for the Integration of Latin America and the Caribbean (intal) in Buenos Aires. The economic argument holds, realistically, that Mercosur's importance will necessarily be diluted by the creation of the hemispheric trade area. Mercosur's common external tariff, its principal commercial line of defense with the rest of the world, will lose its effectiveness with its other hemispheric partners, including the world's biggest economy, the United States.

The second argument takes a political strategic point of view. Its proponents maintain that Mercosur is a cultural, political and security arrangement as much as it is a trading bloc. As such, it can coexist perfectly well within a broader free-trade area for the entire hemisphere. But if this is so, then we must ask if deep noneconomic integration within the framework of Mercosur is really possible. Moreover, is a strategic alliance between Brazil and Argentina really sustainable in the long term?

Finally, the intal report reflects on a subject often left out of discussions about regional and hemispheric integration. For one thing, integration is a means, not an end in itself. Countries seek the road to integration as a path to economic and social development, but ultimately, development depends on policies adopted by each country.

Chile is a good example. It abandoned the Andean Pact in 1976 to pursue a growth strategy that ran counter to the protectionist rules the pact then had in place. In contrast, Brazil today is carrying out a series of economic reforms, including an important liberalization of trade. The objective of this policy is to strengthen the potential of the regional market and at the same time create a basis for competing on the international markets. How to reconcile these two objectives is the challenge facing Brazil as well as Mercosur.

**The author is senior economist at the Institute for the Integration of Latin America and the Caribbean.