The Reasons for Mercosur´s Rejection of the FTAA

Published in the Britcham Magazine, January 2004 edition 2004, pages 16 and 17.

Never has a proposed trade pact been opposed by any civil society with greater vigour and fervour than the initiative of the Free Trade Area of the Americas (FTAA), mostly in Argentina and Brazil, but also in Paraguay and Uruguay. As we know, the FTAA has been modelled after the North America Free Trade Agreement (NAFTA) signed between Canada, Mexico and the United States of America (USA) in 1992 and which entered into force in 1994. The NAFTA was negotiated by the USA with the effete Mexican administration of Salinas de Gortari, which accepted virtually all that was proposed without making any notable demands. NAFTA also marked two new precedents in the US trade policy, the first of which in moving away from multilateralism to regionalism. This occurred as a result of the frustration the USA had with its agenda in the beginning of the Uruguay Round of the GATT, in view of the opposition of developing countries organised in the Group of 10. The second new precedent is that of placing, in its internal hierarchy of laws, US internal norms above international trade treaties, in the respective domestic implementation legislation of every subsequent convention (3).

The FTAA´s scope is quite ambitious and includes, in accordance with the Plan of Action approved in the Miami Summit of 1994, trade in goods and services, agriculture, subsidies, investments, intellectual property rights, governmental purchases, technical barriers to trade, safeguards, rules of origin, anti-dumping and countervailing duties, sanitary and phitosanitary procedures, dispute settlement and competition law. However, in reality the points targeted for effective liberalisation are selective in respect of the idiosyncratic interests of the USA, what reveals a brutal zero sum game in which this country stands to be the sole beneficiary of the trade pact, if it ever comes into existence.

Thus, in the area of trade in goods, the USA eschews negotiations addressing the important matter of tariff peaks, which would involve inter alia the US protectionist anti-dumping legislation. This point is of extreme importance for the MERCOSUR countries because US industrial tariffs are already very low, applied at an average of approximately 1.9 % under the most favoured nation clause rule. On the other hand, the matter of tariff peaks is very important as it normally affects the most competitive export products of developing countries. Thus, in the case of Brazil, for instance, approximately 60% of its exports products suffer either tariff or non-tariff barriers in the USA, which translate in the trenchant fact that Brazil`s 20 main export products to the USA pay an average tariff of 39.1%. Conversely, the top 20 US export products to Brazil pay average tariffs of 12.9%. As a consequence, the reduction of the average normal tariffs, even if considerable, within the FTAA would not benefit MERCOSUR´s exports facing other countries´ competition under the most favoured nation rule. The relevant progress would be the elimination of the tariff peaks. However, the USA excludes discussions on the matter within the FTAA talks and favours to address the matter within the multilateral ambit of the World Trade Organisation (WTO), where it duplicitously struggles to maintain in place the current system, highly beneficial for its interests.

With respect to the reduction of the normal tariffs within MERCOSUR, the situation is entirely different, as tariffs within the developing countries´ trade bloc are relatively high, at an average of approximately 14%. Thus, a considerable reduction there would have the effect of a massive trade distortion, as a result of a great margin of 14% in favour of US products, alienating traditional trade partners of the region. Some of those traditional trade partners to be alienated, like the European Union (EU), also represent the majority of the foreign direct investments in MERCOSUR and are the providers of the majority of the financial lines available to the region. Other developing countries with growing trade with the bloc, like China, would suffer. For the same reason, MERCOSUR trade would flow unnaturally more to the USA than within the region. This detrimental effect would neutralise some of the geo-political benefits of the bloc.

The agricultural sector is of course of great relevance for MERCOSUR countries. In Brazil, for instance, 25% of the GDP and 37% of jobs are dependant on agribusiness. In the USA, there are at present no fewer than 10 direct and 10 indirect programmes of agricultural subsidies. In absolute numbers, US agricultural subsidies reached today an amount of US$ 150 billion for a total agricultural production of US$ 128 billion, which makes subsidies represent 115% of the effective production. These stunning numbers signify that the USA has long ceased being a market economy in the agricultural sector. The amount of agricultural subsidies disbursed by the US government is approximately twice as much the total value of MERCOSUR´s farm production and three times that of Brazil! Because some of the US programmes involve a price guarantee arrangement, they have a predatory nature with a view to eliminating international competition. However, the USA refuses to discuss the matter of agricultural subsidies within the ambit of the FTAA and states preference to address the matter within the scope of the Doha Round of the WTO. Nevertheless, even within the Doha Round the USA, in this matter together with the UE, refuses to address the topic with a view to the eradication of the practice. Thus, a FTAA without an agreement of the elimination of agricultural subsidies would signify the demise of the agricultural sector of MERCOSUR countries, with enormously adverse economic and social consequences.

In services, the USA disregards negotiations on the elimination of horizontal barriers to professional service providers, which in fact will continue to maintain Latin-American professionals at a marked disadvantage with respect to those of other trade partners, for example from the EU, Canada and Japan. In addition, the sensitive matter of the migration of manual workers is not subject to discussion, in the same way that it has been avoided within the NAFTA in the classical ostrich approach (4), but no less callously because of it. Thus, the area of services is restricted to those of interest to US companies and not those of interest to MERCOSUR´s citizens.

In the area of investments, US negotiators seek a governmental guarantee on the part of all Latin American countries of foreign exchange convertibility to the US dollar on behalf of their private initiative agents. This would of course present an impossibly onerous burden on the national treasures of all eventual FTAA signatory states. As the issuer of the US dollar, the USA has missed the opportunity to propose the creation of a fund of its own to guarantee such convertibility. In addition, it has failed to address, within the FTAA, matters of regional development assistance, similarly to what was done within the EU. In this area of investments, the FTAA framework has also failed to address the infamous matters of capital flight and assistance to tax fraud in developing countries. The proposed FTAA framework on investments also fails to address the imbalances in access to financial resources of the developing countries´ member to be, in comparison with those of the USA and Canada (5).

Likewise, in some of the other areas of negotiations, as in governmental purchases, the developing countries of MERCOSUR will be the predatory subjects of major US contractors, which in many cases will neutralise development policies and support of nascent industries. Without protection and without due consideration for the competitive disadvantage arising from lack of access to financial resources of the same nature as its competitors, developing countries´s will inexorably succumb in the competition to purvey their own governments. In the area of dispute settlement, the model adopted is the one of the WTO, accused by developing countries of unwarranted derogation of their rights under other international agreements, and which is now undergoing a painful process of reform of all of its 24 articles and 4 annexes.

The US deportment during the negotiations of the trade pact has typically resembled more that of an empire imposing a diktat than that of a responsible member of the community of nations acting within the parameters of international law and engaged in a effort to ensure generalised prosperity (6). The USA tried to divide the countries of the region in general, but in particular those of MERCOSUR, with a view to imposing its wishes. The latter was attempted by several measures, including the induction of the adoption of an artificial convertibility at parity with the US dollar in Argentina, which ultimately caused this country´s financial ruin. The former was represented again by many actions, not least the illegal discriminatory offers to groups of countries of the region, CARICOM, ANDEAN PACT and MERCOSUR. Destabilisation of governments is thus to be expected for the final phases of the negotiations, if resistance materialises. (7)

Concluding, from a legal perspective (8), for the reasons stated, the USA is negotiating the FTAA in violation of international law, as codified by the Vienna Convention on the Law of Treaties, because it lacks the prerequisite of good faith established by article 26 of this convention. The USA is also in breach of the rules of non-discrimination of article 24 of the General Agreement on Tariffs and Trade (GATT 1947), still in force. However, from a sociological perspective, the clear and generalised perception of the civil societies of MERCOSUR countries is that the proposed FTAA is an instrument of the zero sum game in which they will be the most absolute losers. Moreover, they perceive the initiative as part of the effort to relegate them to the position of purveyors of cheap goods to the US markets, engaged in the bizarre economic and social equation according to which the more miserable they are, the more competitive they will be (9). Rightly, that is not the vision they have of their own future.