Trading bloc: Mercosur - Trade Essay Example
Trading bloc: MERCOSUR
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MERCOSUR is one of the trading blocs in the world and the largest in South America. It means ‘Common Market of the South’. Some have likened it to the European Union but the former is four times bigger covering an area of 12 meters squared. The bloc’s market population is 250 million people. Three quarters of economic activities in the continent is accounted for by this bloc (BBC, 2010). Recently some experts have termed the economic bloc as paralyzed and some of its members are not optimistic about its future. One of its members, Brazil is keen on making the organization change its focus to regional trade while another one like Venezuela, who joined the bloc just the other day, wants the organization to be involved in political affairs of its members (Hanson, 2009).This calls for the analysis of the bloc’s performance in relation to its goals and thus this essay seeks to do exactly that.
In the year 1991, March 26, countries such as Argentina, Paraguay, Uruguay and Brazil came together to sign the treaty of Asuncion in order to form the ‘Common Market Of The South’ (MERCOSUR) which was mandated to come up with common market and custom union by 1995 (Business America, 1992). This was followed by another treaty called Ouro Preto which made the bloc have a wider status internationally and also formalizing a customs union. The blocs’ economic giants are Brazil and Argentina (BBC, 2010).The four full member states had a GDP of $715 billion by the year 1993 and Brazil has the largest economy compared to the other four, followed by Argentina. However, the latter’s economy has been developing at a very high rate recently. Paraguay is the third with a population of 4.6 million but its economy is still developing. The last one is Uruguay with the smallest population and the smallest territory in the bloc (International Labor office, nd).
The associate members include; Colombia, Chile, Ecuador and Peru. All these countries are outside the custom union of the bloc but they join agreements related to free trade. Venezuela became a full member in July 2006 but its membership is still waiting ratification by the other member countries. Four years later, the ratification has not yet taken place because Paraguay has not yet approved its membership. This is because Paraguay is not at home with the Venezuelan president’s credentials (BBC, 2010). The official languages of the bloc and of its parliament are Spanish and Portuguese but paperwork in its official version would be prepared using the official language of the country which would be hosting the bloc’s meeting (International Labor Office, ND).
The main goal of forming this bloc was to do away with regional trade’s obstacles for instance high tariffs, inequalities of income or technical requirements that are conflicting. The main purpose of the bloc is stated in the treaty of Asuncion which is to allow members to carry out free trade among themselves, with the aim of integrating the whole of South America economically (Hanson, 2009).The bloc came up with these goals since it had a belief that, the integration process would expand the domestic markets of the member countries, which is a very important factor in speeding economic development and social justice in the member states. They also believe that if large economies would be integrated, then it would put the member states in the better place internationally (Emilio, 2005).
Objectives of the bloc
The bloc has several objectives and these includes; ensuring free transit of goods, services and other factors among the member states. This would be done by doing away with customs rights and restrictions which are based on non tariffs that are usually imposed on goods transition among others. The second objective is to come up with a common external tariff (TEC) and a policy of common trade in relation to those states which are not members or states groups. This would also entail coordinating meetings related to commercial and economic activities at regional and international levels. The third objective is to coordinate member states’ policies of macroeconomics and those related to sectors in regards to agriculture, taxes, industries, foreign trade, capital, exchange, customs, services, communication and transport among others. These are meant to allow free competition among member states (International Labor Office, nd).
Responsibilities of member states
Members are required to be committed to the bloc by adjusting the laws, where necessary, to allow for the integration process to strengthen (International Labor Office, nd). They are also required to make recommendations and the agreements they have reached to the Mercosur organs which include the Common Market Council (CMC) and Commerce Common Market Group (CCM) (Ral Emilio, 2005).
Policies rules and regulations of the trading bloc
The treaty of Asuncion defined the rules of the bloc which would ensure trade zone that is free and fair. The treaty also documented how common markets should be created. There were several elements which affected the common markets which includes; circulation of goods, labor, capital and services freely between countries, trade policies that are unified and are related to bloc’s non members, sector and macroeconomics policies that are coordinated in the bloc. These policies are related to policies of agriculture, foreign trade, industry, services, transport, custom, fiscal, monetary, communications and exchange and lastly, coming up with a common tariff of foreign customs (De Castro,2006).
In addition, the Asuncion treaty came up with two bodies which would be mandated with the establishment of a common market to include; the Common Market Council, which is made up of foreign relations ministers with their counterparts from finance and economy. All these must be from member countries. The other body is a group of Commerce Common Market which is made of individuals to represent central banks of member countries and ministries of finance and economics. This organ which is a permanent executive one is mandated with designing and developing those themes that have been outlined in the treaty (De Castro, 2006).
Benefits to the members
One of the benefits that these countries are enjoying is that the bloc gives them outstanding professionalism, ethics, credibility and trading methodologies that are renowned all over the world. It also offers them concepts that are very instrumental for strategic development of the member countries. Another benefit is that the bloc can do advertisements for its members especially in regards to investments internationally (May, 2008). This is done in support and fusion of foreign enterprises’ presence in the global scene. It also acts as a natural ally to its members, who are always ready to look for potentials for business expansion and addition of value. This ally is always out to solve problems that the members find themselves in, in a way that would yield better results. The methods that the bloc uses in problem solving are recognized globally and are incorporated in such a way that, they always guarantee good results. Moreover the members are always assured of opportunities that are new including trade businesses (May, 2008).
In addition, members of MERCOSUR are provided with common external tariff and trade policy by the bloc, especially towards other states that are not members and including groups that are formed by states. This has really helped them since they are now free to coordinate their positions of trade in economic summits, regionally and internationally. Another benefit is that trade restrictions between the countries are eliminated by the bloc and other tariffs are done away with. This allows free trade between the member countries where goods, services, capital and manpower are exchanged freely between them. It also gives the member countries a common font when it comes to facing competitions outside the bloc countries (Hagen, 2009). This is instrumental in developing their individual economies and stimulating trade among themselves. Moreover, the member countries are given the opportunity by the bloc to ensure that there is free competition amongst them. This is because the bloc has allowed its members to coordinate their policies and macroeconomics in relation to agriculture, foreign trade, taxes, industries, currency, capital investments, capital, transport infrastructure, communications and customs procedures (Hagen, 2009). The members are also allowed to make the necessary adjustments to their laws in order to strengthen the integration process. In addition, they are also provided with an avenue to resolve their trade disputes. Last but not least is that by coming together to form the bloc, member countries can strongly face the other major trading blocs like the European Union and the North American one, Free Trade Agreement. Mercosur has been really instrumental in giving the members the ability to carry out negotiations as an institutional group with countries that are nonmembers. Thus by allowing members to carry out free trade amongst them has really stimulated their economies and has enabled them to expand their investments and exports (Hagen, 2009).
Disadvantages and the problems encountered
One of the disadvantages is that, most of the time, member countries change the rules, structure and tariffs they agreed upon and as a result, the rules have ended up being distorted and inclined towards one side thus favoring it. Another disadvantage is that there are trade diversions which have characterized the member countries. This happens since countries in the bloc are forced to divert their attention away from more efficient trade partners outside the bloc to less efficient ones inside the bloc (May, 2008). This act really reduces the national welfare of a country, leading to loss of revenue. Moreover, the member countries are usually expected to sign an agreement in the bloc which stipulates tough rules in regards to intellectual properly rights (IPRs).This does no favor the member when it comes to exchange of benefits gotten from exporting sectors of agribusiness and profits in the bloc. This is because it hinders the nations from transferring technologies. Lastly, in relation to European investors, the bloc is devoid of transparency when it comes to negotiations and thus most of these investors do not trust it (May, 2008).
Achievements of the bloc
In the year 2003, the bloc commemorated its 12th anniversary since its inception. It has been seen to have developed from restricted structure of trade to a free one. It has also succeeded in establishing a custom union and is till focused on a common market. Despite all these, the integration process has been experiencing many problems due to the financial crisis in Asia and economic phenomena that are conflicting among the member countries. These include devaluation of Brazilian currency and uncertainty when it comes to Argentina economy (Paiva, 2003). However, despite these, the bloc has achieved a lot. One of them is that over the years, the member countries have recorded five times increase in intra bloc trade from the year 1990 to 1998. In 1990, there was 9% increase of exports to 25% increase of the same in 1998. However, these exports have decreased tremendously due to currency devaluation of Brazil and economic crisis in Argentina in 1998. However, between those years, there was a record increase of exports amounting to 75% at a very high rate. Another achievement is that, there was increase of investments and studies show that, the increase in investments is higher than the trade flows between the member states (Paiva, 2003).
Another achievement is that, the bloc has established a customs union which is characterized by a common external tariff which covers 85% of all imports. Moreover, the bloc has already made some steps towards harmonizing macroeconomics policies and this was done by coming up with strong macroeconomics targets which would be accomplished in the near future(Paiva, 2003). For example, the members agreed to have a maximum of 5% inflation rate as a target for the years 2002 to 2005. They also agreed to target a budget deficit of 3% and not more than by the year 2002.The bloc has also achieved to consolidate the democracies of the member states. The Ushuaia protocol of 1998 had all the members agree that democracy is essential for the integration of those countries. The protocol also came up with ways of ensuring democracy in member states for example, by establishing steps to be followed the moment a member country experiences some disorders in relation to democracy. The declaration of 1999, confirmed he commitment of all the member states to uphold democracy in their countries (Paiva, 2003).
In conclusion, the bloc has really performed well in regards to its goals. Most of its objectives have been achieved; for example, there has been an increase in flow of free trade among the member countries and the establishment of a custom union. Although there is much still to be done especially in regards to consolidation of macroeconomics, so far it can be said that it has significantly performed well. At the formation of this bloc, so many South American countries were optimistic about its performance and so far, the majority especially the members have really benefited despite of the setbacks it has experienced.
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