Mercosur

Regional Paper - MERCOSUR

Regional integration is the process by which countries agree to reduce or eventually remove tariff and non-tariff barriers to promote the free flow of goods and services amongst countries. Global business is accomplished when organizations conduct business internationally and are not committed or bounded to a single home country. Regional integration combined with global business supports organizations conducting business globally amongst a variety of countries by removing restricting barriers and other obstacles. A move toward regional economical integration can provide consumers with new benefits and present organizations with innovative challenges (Hill, 2005).

There are several levels of regional economic integration which includes: free trade area, customs union, common market, economic union, and political union. Currently the North American Free Trade Agreement (NAFTA) is in the free trade area, the European Union (EU) is in the economic market, and The Southern Common Market (MERCOSUR) is in the customs union. The integration groups listed above pertain to members of the same regional integration union. However, unions are allowed to decide what trade policies are put into play with nonmembers of their union.

The Southern Common Market, also known as MERCOSUR, is a regional integration development that includes Brazil, Argentina, Paraguay, and Uruguay. MERCOSUR was originated in 1988 when a free trade pact was cultivated between Brazil and Argentina. This regional integration brought about an 80 percent increase in trade amongst the two countries. The success of the pact encouraged Paraguay and Uruguay to become part of the integration. In March of 1991, the Treaty of Asuncion was signed including all four countries, which was geared toward a full free trade area and eventually turning into a common market. On January 1, 1995, MERCOSUR “began operating as a customs union, meaning that it has tariff preferences between its four member countries (free-trade area) and a common external policy on trade with non-member countries and economic groups (Lima, 1997)”. MERCOSUR represents an approximate population of 200 million individuals, accounts for approximately 70 percent of South America's territory, 64 percent of the population, and 60 percent of regional gross domestic product (GDP). The primary purpose of this regional integration is to create a common market where goods and services can be freely traded amid member countries (Ministry of External Relations, 2005).

The creation and expansion of MERCOSUR has gained substantial success in their 14 years of existence. They are currently the fourth largest regional integration market after North America, Europe, and Japan. Trade occurring within MERCOSUR countries was initially set to have no tariffs; however, member countries were to impose a common external tariff (CET) on goods imported from countries outside the union. In early 1997, nearly 90 percent of all trade within the MERCOSUR region was free of tariffs. All members of the regional union accepted and practiced the CET, which originated at 12 percent and increased to 15 percent by 1997 (Connolly & Gunther, 1999). “From 1990 to 1998 total exports increased by 75 percent, representing growth of 44 percent for exports to countries outside MERCOSUR and an astonishing rate of almost 400 percent growth for intra-bloc exports (Paiva & Gazel, 2004).” Exports jumped to 25 percent in 1998 which was a 177 percent increase from the 9 percent received in 1990. Although these increases are beneficial, long-term effects have not been completely evaluated. The implemented trade blocs promote intra-group trade rather than outside trading. This facet may reduce member countries with the ability to access highly innovated technological components from industrialized nations, which will limit their opportunities for technological distribution and the potential for faster growth (Connolly & Gunther, 1999).

In 1998, several disastrous events took place preventing MERCOSUR from moving forward. Countries of the union fell into recession and intra-bloc trade plummeted. Further devastation hit when Brazil descended into a financial crisis and the Brazilian real lost value. The global and regional economical demise along with the economic downturn in Argentina created the intra-bloc share of exports to drop to 17.3 percent in 2001 (Paiva & Gazel, 2004). With the recession in Argentina’s economy, a request