Published in the Comparative Law Yearbook of International Business, vol. 20, by the Center for International Legal Studies, Salzburg, Austria, 1998.
The Treaty of Asuncion signed on 26 March 1991 by and between Argentina, Brazil, Paraguay and Uruguay created the Common Market of the South (MERCOSUR). MERCOSUR came into effect on 1 January 1995 and has made associated agreements with Chile, on 25 July 1996 and Bolivia, on 17 December 1996. Negotiations were under way for a similar agreement with the Andean Pact Nations (Venezuela, Colombia, Ecuador, Peru and Bolivia) to be signed before the end of 1997 (“The Financial Times”, 10 November 1997, “Andean Pact, Mercosur Free Trade Areas). Trade within Mercosur increased from US$ 4-billion in 1990 in a constantly ascending curve to US$14-billion in 1995 and US$ 18-billion in 1996.
The Free Trade Area of the Americas (FTAA) is a regional trade initiative by the Government of the United States of America (USA) with a view to having a hemispheric trade block by the year 2005.
I have divided this presentation as follows:
(1) This Introduction;
(2) The World Trade Organization (WTO) and Mercado Comun de Cone Sul (MERCOSUR);
(3) The WTO and the North American Free Trade Agreement (NAFTA);
(4) The Pitfalls of the FTAA; and,
(2) The World Trade Organization and Mercosur
The WTO was created on 31 December 1994 as a direct result of the Uruguay Round. Sources from the General Agreement on Tariffs and Trade (GATT), the World Bank and the Organization for Economic Cooperation and Development (OECD) have estimated that, as a consequence of the liberalization of trade promoted by the Uruguay Round, world trade will grow by US$ 755-billion annually until the year 2002 (“Trade Liberalization: Global economic implications”, by Ian Goldin et al, World Bank and OECD, 1993), making the developed countries the major winners of the Round with sixty-four per cent of the direct benefits leaving the developing countries with thirty-six per cent. Such concessions, however, have been made by the developing countries in the hope of indirect benefits, such as the inclusion in GATT of the traditional sectors of agriculture and textiles and the opportunity of dealing with the questions of subsidies. These benefits would, in the long term, compensate for losses in the short term.
In addition, the increased juridicity of the multilateral system was seen in a very favorable light by the developing nations as a whole and Latin American nations in particular, as a fundamental tool in stemming unilateralism on the part of developed countries. Contemporaneously, with the advent of the WTO, developing countries in general have, for a number of institutional macro-economic reasons, as well as the greater credibility of the multilateral system, liberalized their tariffs well beyond the thresholds consolidated during the Uruguay Round (Until 1995, according to Decree no. 1490 of 15 May 1995, the average tariff in Brazil was reduced from seventy per cent to fifteen per cent, compared with the overall average of thirty-five per cent of the Uruguay Round. In relation to this matter, see the paper “Perspectivas na América do Sul na Organização Mundial do Comércio – OMC”, presented by Durval de Noronha Goyos Jr. at the first ESARI, in Rio de Janeiro, 19 October,1995). This has happened to such a degree that today the twenty most liberal countries in terms of world trade (Relationship between trade and the Gross National Product) are developing nations, followed by Germany, in twenty-first place, the United States in twenty-fifth place, then Colombia, Greece and India, and Japan with the twenty-eighth position, all preceded by Argentina and Brazil (“The Economist”, 11 May 1996, Page 100).
At the same time as with the conclusion of the Uruguay Round, MERCOSUR had already achieved a remarkable economic, social and political success, doubling its internal trade in three years (“Os perigos da parceria com o NAFTA e a União Européia”, by Durval de Noronha Goyos Jr., Folha de São Paulo, São Paulo, 4 January 1995). The main economic reason for such an instant success was quite clear: Argentina, Brazil, Paraguay and Uruguay had succeeded in creating a free trade zone, free of agricultural subsidies where the Member States were able to place their products, particularly commodities, on the market without major interference from the practice of distorted prices maintained by the United States, Canada, Japan, Korea and the European Union which, combined have expended more than US$ 500-billion each year in subsidies in the agricultural sector alone. The benefit of subsidy free trade in agricultural goods has been denied to both Argentina and Brazil by the multilateral system since its inception in 1947.
The elimination of internal tariffs in 1995 also stimulated the industrial and service sectors in MERCOSUR’s Member States, whose economies have been in constantly expanding. On 1 January 1995, the Common External Tariff (TEC) of MERCOSUR came into force at an average rate of fourteen per cent, applicable to the Member States as a consistent and uniform base in relation to trade with third parties. The TEC is applied on a percentage basis in accordance with the Common Nomenclature of MERCOSUR (NCM). Non-tariff barriers were identified and are now in the continuing process of being eliminated under the control of a special group, the Trade Commission of MERCOSUR. Exceptions to the TEC were limited to three hundred items per country or, in the case of Paraguay, 399, until 1 January 2001. Some sectors were accorded special treatment, such as automobiles, information technology, telecommunications and sugar. (Referring to the subject, see the excellent article “MERCOSUR: A Decisive Step Towards South American Economic Revival”, by Sonia A.M. Viejobueno, Centre for Studies for Latin America at the University of South Africa, Pretoria, South Africa, 1995.)
Politically, MERCOSUR has also been a great success in that it eliminated the traditionally abrasive relations of the past among the countries involved, in favor of a constructive agenda for the future. This aspect, very often overlooked by those abroad in less culturally sensitive areas was, not only very effective for relations between Brazil and Argentina, but it also offers an excellent framework for the elimination of differences between Argentina and Chile, as well as those between Chile and Bolivia. Institutionally, the pact has also had a very positive effect upon the stability of the democratic regimes and of the rule of law in that part of the world.
As a direct consequence of these circumstances, the initiative of MERCOSUR is enormously popular in all of the Member States, despite the very obvious daunting challenges that lay ahead.
(3) World Trade Organization and North American Free Trade Agreement
For the duration of the Uruguay Round, negotiations became more difficult between Japan, the European Union (EU) and the United States and, on more than one occasion, there were doubts that the Round could be concluded successfully. Such difficulties arose in spite of the fact that, for the first time the Europeans and Japanese effectively resisted pressure from the United States to maintain its dominant position in world trade. At this time, there was a radical shift in the position of the United States on the formulation of its trade policy, abandoning the traditionally favored multilateralism, GATT, for regionalism. (See “Trading Free – The GATT and United States Trade Policy”, by Patrick Low, 20th Century Fund, New York, 1993. ) Previously, for the United States no other routes for international trade other than multilateralism had been acceptable. (See “O Direito do Comércio International”, by Ambassador João Clemente Baena Soares, Observador Legal Editora, São Paulo, 1997.) The first indications (Its reasons vary, but include the loss of its share of world exports from seventeen per cent in 1950 to twelve per cent in 1994. See “International Trade – Trends and Statistics for 1995”, by WTO.) that the tone of this situation was about to change occurred when the United States reneged on the same propositions that it had previously supported during the beginning of the Round, in particular the liberalization of the banking sector and of telecommunications. The United States even questioned its own proposals relating to the system of dispute resolution, accepted by the WTO. According to the United States, the power invested in the WTO was no longer acceptable. “The Americans want to know how much it is possible to win with the new world trade order” said ‘Business Week’, directly and candidly. (“Change of Heart”, Business Week, 20 May 1996, page 14)
At the same time that the Uruguay Round concluded, NAFTA came into force (1 January 1994) with a totally different approach towards international trade, from the traditional perception of the interests of the United States. Canada and Mexico were not in a position to resist the dominating strength of the United States. Trade with the United States represented around seventy and eighty per cent, respectively, of the foreign trade of Canada and Mexico. In 1992, Mexico imported US$ 37-billion from the United States and exported US$ 32-billion, generating a surplus of US$ 5-billion for the Americans in a year in which their trade balance experienced a deficit of US$ 90-billion. For Mexico, the agricultural subsidy policies of Canada and the United States were not disastrous, because Mexico was already a large importer of agricultural products (Mexico is the United States’s 3rd largest market for agricultural products.). Nevertheless, for the United States and Canada, Mexico, a populous country, was a very attractive consumer of agricultural products in an increasingly difficult situation in world trade due to extensive use of subsidies as practiced by other trading partners, notably by the EU. (According to the World Bank, such subsidies reached the approximate value of US$500-billion and were responsible for a worldwide reduction of twenty-five per cent in the prices of agricultural products, with fifty per cent of the price reductions derived from milk products. Such policies cost Brazil and Argentina a value greater than their respective national debts. See “NAFTA, a Integração das Américas e as diferenças tarifárias de cada país”, in “GATT, MERCOSUL & NAFTA”, by Durval de Noronha Goyos Jr., Observador Legal Editora, São Paulo, 1996. See also the chapter relating to the Agricultural Agreement in “A OMC e os Tratados de Rodada Uruguay”, by Durval de Noronha Goyos Jr., Observador Legal Editora, São Paulo, 1994)
During the negotiations, the United States obtained from Mexico the total opening of its market in services, while keeping its own market closed by means of horizontal barriers to the free circulation of service workers. This established, “inter-alia”, an infamous system of quotas for Mexican service providers. (“GATT, MERCOSUR & NAFTA”, by Durval de Noronha Goyos Jr., Observador Legal Editora, São Paulo, 1996) World trade in services is estimated at approximately US$ 12-trillion, or more than sixty per cent of total world trade. (“GATT, MERCOSUL & NAFTA”, by Durval de Noronha Goyos Jr., Observador Legal Editora, São Paulo, 1996) The service sector employs three-quarters of the workforce in the United States, generating sixty-eight per cent of the Gross National Product (GNP). The United States is the largest exporter of services in the world, making this sector one of the most competitive in its economy. Canada and Mexico are respectively, the first and the third largest importers of services from United States. The domination of the Mexican service sector, estimated at US$ 146-billion, was one of the objectives of the United States negotiators in the NAFTA agreement. (“NAFTA, a New Frontier in International Trade and Investment in the Americas”, edited by Bello, Holmer and Norton, American Bar Association, Washington, 1994, page 185.)
The NAFTA negotiations were conducted by Mexico through, at best, a notoriously incompetent Government, that characterized itself “by the virtual acceptance of all the demands and by making virtually all the concessions”. (“American Politics, Global Trade”, by C. Fred Bergsten, in “The Economist”, 27 September 1997.) As a result of the NAFTA model, Mexico became, at least in the sense of trade, a client state of the United States, designed to buy services, industrial and agricultural products and to produce huge trade deficits to be financed with speculative borrowings by the financial sector. In 1994, this bizarre situation caused the accumulation by Mexico of an enormous trade deficit of the value of US$ 19-billion (“International Trade Reporter”, Vol. 12, 14 June 1995, page 1035.), which, in turn, caused the liquidity crisis in Mexico at the beginning of 1995 and the massive devaluation of the peso. This resulted in an unprecedented financial rescue package having a magnitude of US$ 50-billion, almost equivalent to the historic Marshall Plan. The deal was arranged by the United States to be given to Mexico in such a way that the country could pay the irresponsible American banks which assumed the extraordinary credit risk. (“International Trade Reporter”, 12 April and 10 May 1995.) Mexico, of course, must pay the bill in the end and there are doubts that the country will be in a position to honor even the resulting interest. (“International Trade Reporter”, 19 April 1995.)
Exports from the United States to Mexico increased by forty-five per cent between 1993 and 1996 and the United States share of Mexican imports increased even further. At the same time that no fewer than 500 Mexican tariffs were increased to third party trading partners, its tariffs on United States goods were cut by an average of 7.1 percentage points. This resulted in a ten percentage point average tariff advantage over foreign suppliers. (See “Fast Track to Nowhere”, by Jagdish Bhagwati, in “The Economist”, 18 October 1997.) Trade diversion losses for Mexico on account of this situation, and applicable only to the trade in goods, have recently been put as high as US$ 3-billion a year. (See “Fast Track to Nowhere”, by Jagdish Bhagwati, in “The Economist”, 18 October 1997.)As Bhagwati poignantly observed, this situation was fatuously hailed in the United States as the proof of NAFTA’s success, when in fact it suggests the very opposite. (See “Fast Track to Nowhere”, by Jagdish Bhagwati, in “The Economist”, 18 October 1997.)
In addition, through NAFTA the United States has achieved its ardent desire to apply its laws extra-territorially in that the treaty extended to Mexico contains United States legal concepts. For instance, investments (including insurance and foreign capital), intellectual property, competition and anti-trust law, labour law, environmental law, the traffic of drugs, illegal immigration and even the administration of justice. All of these were to be applied on the pretext of the liberalization of trade. The euphemism used by United States negotiators to describe this situation was “convergence of values” (“A New Consensus of the Americas”, Secretary Warren Christopher, speech given in Mexico City, 9 May 1994).
Moreover, the 2000 pages of NAFTA did its utmost to consolidate the trade diversion advantages obtained from Mexico by the United States against the countries of third party trading partners countries by dedicating approximately ten per cent or 200 pages of the agreement to the question of the rules of origin – the mechanism recognized today as the cutting edge of protectionism. As soon as the benefits of the Most Favored Nation clause are waived, then different tariffs will apply to different trade partners depending upon specific agreements and subjective criteria.
Having attained so many advantages in NAFTA, the articulators of its policy decided, not surprisingly, that the same draconian conditions ought to be applied consistently throughout Latin America, where they would prove to be even more lucrative for the United States. (A senior United States technocrat was cited in the Wall Street Journal on 9 January 1996, as saying that the United States “intended to extend NAFTA country by country, not negotiating a diluted version of the extended and conflicting MERCOSUR led by Brazil”, in “Southern Exposure”, page 1.) With the objective of expanding this situation to the rest of Latin America, the United States officially adopted the “hub and spoke” model, in which the United States would be the hub and the hapless countries of Latin America the spokes. This model was incorporated into the “Initiative to the Americas” by the United States and, in 1994 resulted in the signing of an agreement hemispheric in principle, for the creation of the Free Trade Area of the Americas (FTAA) by the year 2005. (A new target victim of the hub and spoke mechanism is Africa, with which the United States plans to have an area of free trade by 2010. “International Trade Reporter”, 5 June 1996, page 949.)
It was then that the secretariat of the WTO took an unprecedented measure. In a considered reflection on the dangers of the “hub and spoke” model, it warned that its essence was always the same – that goods and services (and perhaps labour and capital) flowed more easily from the spokes to the hub than between the spokes. Beyond this, the WTO secretariat also warned that, in these cases, there was a tendency for the trade administration, sensitive to each of the extremes, to limit the sector in which the trading partner was most competitive. (“Regionalism and the World Trade System”, WTO, Geneva, April 1995, page 25.) Even the United States has accused this model of representing “a new era of imperialism”. (“The Masters of Mankind”, by Noam Chomsky, in “The Nation”, 29 March 1995.)
(4) The Pitfalls of Free Trade Area of Americas
For countries such as Brazil and Argentina, adhering to NAFTA or to FTAA based upon the “hub and spoke” model, in general, and with the dour conditions imposed upon Mexico, in particular (According to Noam Chomsky, “The Masters of Mankind”, in “The Nation”, 29 March 1995, the liberalization of banking services in Mexico would result in the elimination of local competition and, consequently, result in the loss of sovereign control in Mexico for making economic plans and in promoting independent development.), would be a disaster for both economic and social order. This disaster would certainly occur in the services sector, which represents more that fifty per cent of the Brazilian and Argentine GDPs. Such a fate would occur because the movement of people, essential for the supply of services (“Services … generally require a local presence to compete”, from a presentation by Charles S. Levy in the seminar “International Trade Issues for Specialists”, 14 March 1996, Washington, organized by the American Law Institute and by the American Bar Association.), is not guaranteed by NAFTA (Under NAFTA, Mexico has an annual quota of 5500 professionals for the movement of services workers, which has been in force for less than ten years. This quota is insufficient to guarantee the competitiveness of the country and is going to cause the loss of almost the same amount of Mexican market to foreign businesses due to the lack of economic scale in the sector. The period of less than ten years is enough to perhaps irreparably damage the Mexican service sector. Certainly, American service workers are not subject to any movement quota .) for the “spoke” countries. As warned by the WTO, the flow between the spokes and the hub would limit the relationship between the spokes and would serve as an enormous incentive for the flight of capital and commercial presence in the hub. Companies from other parts of the world would be more interested in establishing a trade presence in the hub than in the spokes, even if they are, in theory, more closely related to the spokes. The hub would supply the financial sector for the spokes. The education sector of the spokes would be greatly affected, at least in the fringe areas of administrative negotiations and finance, since there would be a centripetal force attracting them to the hub, for the same reasons explained above. Agriculture, at least in Brazil and Argentina, would be destroyed by the US$200-billion in subsidies practiced by the United States and Canada, and such a tragic end would certainly include the soy and sugar sectors in Brazil, the latter of which employs more than one million rural workers, and the Argentine wheat sector, one of the most important segments of its economy. Without a doubt, this is not a very attractive perspective. (For more information regarding this, see “GATT, MERCOSUR & NAFTA”, by Durval de Noronha Goyos Jr., Observador Legal Editora, São Paulo,1996)
However, would an expanded NAFTA not present opportunities for increasing Latin American exports? The answer is given by an American lawyer, a specialist in international trade: “… an expanded NAFTA probably would not produce an increase in exports from Latin America to the United States, except in the areas of textiles and clothing, where the restrictive NAFTA rules of origin are able to control exactly this type of trade anomaly. Generally, for industrial products, the tariffs of the United States are comparatively much lower and the prospect of a preference in favor of the regional exports over the non-regional exports is remote” (“Os efeitos do comércio e os acordos de investimentos nos negócios europeus dentro contexto global”, by Joseph P. Klock Jr., in a speech at Canning House, London, England, on 29 January 1996).
In the formation of the FTAA, the United States plans to use the structure of NAFTA within the following affirmative agenda (“A FTAA e a Nova Face do Imperialismo”, by Durval de Noronha Goyos Jr., in “Gazeta Mercantil “, Rio de Janeiro, 10 March 1997.):
Opening of the service markets of the other countries;
The access to the market of goods with much lower tariffs;
The formulation of rules of origin which obstruct access to partner countries;
The imposition of their own legislative criteria, with the expressed enunciation of the sovereignty on the part of the other members; and
An “early harvest” of all the above benefits.
The defensive agenda of the United States for the FTAA negotiations consist of the following:
Maintaining a closed regime on services through horizontal barriers;
Maintaining a regime of agricultural subsidies;
Maintaining a unilateral legislative structure positioned above international treaties, in violation of international law; and
Concessions to be made only in the distant future.
Ms. Charlene Barshefsky, the head of United States Trade Representative (United StatesTR), commented publicly in Washington on what this would signify in trade terms: “a tremendous free lunch for the United States”. (“Financial Times”, New York, 1 September 1997, page 5.)
From a legal perspective, there are other reasons against joining the FTAA because in the United States, treaties such as NAFTA and other similar ones derived from the Uruguay Round and involving the WTO have a lower hierarchy than federal law. In Latin America, as in Europe and the majority of the countries of the world, treaties have a higher precedence than local laws and are applicable in the respective territory. (The Vienna Convention on Rules of International Treaties established that a sovereign nation cannot violate its internal norms as international justification in the sense of letting it carry out its obligations under a treaty. The United States has never ratified such a convention.) This does not occur in the United States.
Over and above this, the internal legislation of the United States, in moving the implementation of the Uruguay Round treaties, establishes in Section 102 (a) that “no instrument of any of the Uruguay Round Agreements, nor the application of such provision to any person or circumstance, that is inconsistent with any law of the United States shall have effect” (19 USC 3512.). Similarly, in connection with NAFTA, United States federal law establishes in Section 102 (a) (1) of the government legislation that “no provision of the Agreement is inconsistent nor the application of any such provision to any person or circumstance, which is inconsistent with any law of the United States shall have effect” (19 USC 3312). Consequently, NAFTA is not necessarily enforceable in the United States, but certainly it is in the territories of the other signatories. In a world that searches for transparency and the prevalence of its laws on international trade, as well as with international business, this situation would be clearly unacceptable . (“O Direito do Comércio Internacional”, by Durval de Noronha Goyos Jr., Observador Legal Editora, São Paulo, 1997)
Brazil’s trade profile is very much different from those of Canada and Mexico. Twenty seven per cent of Brazil’s exports go to the European Union; twenty-three per cent go to LAIA (Latin American Integration Association, also called ALADI, after its name in Portuguese and Spanish.) countries; twenty per cent go to NAFTA countries; and sixteen per cent go to Asia. (See “Gazeta Mercantil”, São Paulo, 23 October 1997, “Estudo comparativo mostra vantagens e desvantagens da ALCA”.) For the MERCOSUR as a whole, the statistics do not differ in substance. Culturally gifted observers from abroad perceive that MERCOSUR has global economic interests and a rich cultural diversity, as indicated recently by the French president, Jacques Chirac. (“The Americans,” said Chirac,”wish to dominate the world: but Brazil is American only in geography; culturally it is European and its economic interests are global.” Corriere della Sera, 17 October 1997, page 9, “Il tango di Clinton non conquista l’America Latina”.) Therefore, for MERCOSUR it would be complete nonsense to alienate traditional trade partners representing the main buyers of its products in a major trade diversity mechanism devised to give one of its partners a “tremendous free lunch”.
In addition, a FTAA structured along the NAFTA model would have a most destructive impact upon the agricultural sector of all MERCOSUR economies (which represents approximately twenty-eight per cent of the collective GDP), in view of the subsidies in place in the United States and Canada. For the service sector, a FTAA along the above lines would be equally damaging to MERCOSUR countries, as a result of the infamous one-way quota system in place under NAFTA. Otherwise, the impact of United States ideology upon the local cultures fostered by a NAFTA based agreement would have a most undesirable effect. Thus, it seems very clear that the FTAA concept was devised to have one winner and multiple losers. For the MERCOSUR countries, it would be certainly much better to stay away.