Mercosur: An update

Published in International Financial Law Review, London, U.K., Euromoney Publications PLC 1997.


The expansion of multilateral trade is a feature of the contemporary world that has profound economic, strategic and legal implications. This is especially so for Brazil, where the adherence to multilateral trade treaties has been accompanied by significant unilateral tariff reductions. This article examines the background to multilateral trade both at the global (GATT and WTO) and regional (NAFTA and MERCOSUL) levels. The flaws in NAFTA are exposed and the serious dangers posed to Brazil by a NAFTA-style Free Trade Area for the Americas are presented. Constructive alternatives to a super-NAFTA are proposed.


Die uitbreiding van multilaterale handel is ‘n aspek van die hedendaagse wêreld wat verreikende ekonomiese, strategiese en wetlike implikasies inhou. Dit geld veral vir Brasilie waar die hou by multilaterale handelsooreenkomste noemenswaardige eensydige tariefverminderings meegebring het. Hierdie artikel kyk na die agtergrond waarteen multilaterale handel op globale (AOTH en WHO) sowel as op streeksvlak (NAFTA en MERCOSUL) plaasvind. Die gebreke in NAFTA word uitgewys. so ook die ernstige gevare wat ‘n NAFTA-tipe Vryehandelsgebied vir die Amerikas vir Brasilie inhou. Positiewe alternatiewe tot ‘n super-NAFTA word voorgestel.


La ampliación del comercio multilateral es una característica del mundo contemporáneo con profundas implicaciones econômicas, estratégicas y militares, sobre todo para Brasil, donde los tratados comerciales multilaterales han estado acompanados de importantes reducciones de tarifas. Este artículo analiza los antecedentes del comercio multilateral en los niveles mundial (GATT y OMC) y regional (TLC y MERCOSUR). Se reseñan los fallos que presenta el TLC y los graves danos que entrañaría para Brasil la creación de una Area de Libre Comercio para las Américas (ALCA), al estilo del TLC. Se proponen alternativas constructivas para un super TLC.


A expanção do comércio multilateral é uma característica do mundo contemporâneo, com consequências profundas do ponto de vista econômico, estratégico e legal. Isto é válido principalmente para o Brasil, onde a aderência a tratados multilaterais tem sido acompanhada por significativas reduções tarifárias unilaterais. Este artigo analisa os antecedentes do comércio multilateral tanto do ponto de vista global (GATT e OMC) como do regional (NAFTA e MERCOSUL). São expostas as falhas da NAFTA, assim como os sérios perigos que importam para o Brasil se uma Área de Livre Comércio para as Américas (ALCA) for imposta ao estilo da NAFTA. São propostas alternativas construtivas a uma eventual super-NAFTA.


At this particular moment in history, regional economic integration has more important implications for Brazil than at any other time, maximized by the unilateral trade liberalization of our economy, the relevance of an undervalued currency for the success of the Real plan, and the consequent threats to Brazilian agriculture, as well as to the industrial and service sectors.


Dominance of international commerce has always been the most important strategic objective of nations. Wars have been fought for it over thousands of years and millions of people have perished as a direct result thereof. Very often in history, preponderance in international trade has meant internal prosperity for nations. This situation remained unaltered for centuries and, even during the Cold War, trade policy was perceived, albeit not always clearly, as an instrument of foreign policy for fulfilling the same hegemonic goals that had always been vigorously pursued.

In the New World, economic liberty and free trade were the chief motivating factors behind the independence of the United States of America (USA) from Great Britain. Many early American leaders, including Thomas Jefferson and James Madison, were familiar with Adam Smith’s powerful arguments in favor of free trade and against mercantilism. Indeed, immediately after the declaration of independence, the Americans launched a diplomatic initiative seeking free trade and reciprocal access to foreign markets.(1)

Disgracefully, the different circumstances attending Brazil’s independence in 1822 prevented a clear break with mercantilism as in the American case. Indeed, Brazil’s independence was more of a preventive manoeuvre by a prince of the Portuguese crown than an affirmative action with a clear strategic agenda.

Such a lamentable situation led to the acceptance by Brazil of the callous Treaty of Commerce and Navigation between Great Britain and Portugal signed in 1810 (2) by Portugal under duress during the Napoleon wars. This treaty established a monopoly for British manufactured goods in Brazil, it established special British courts in Brazil for British subjects, and at the same time established restrictions preventing Brazilian goods from gaining access to Great Britain.(3) These strict conditions remained in force in Brazil until 1842, the deadline established by the Treaty of Commerce, negotiated in 1827 by the Emperor D. Pedro, as part of the diplomatic efforts to gain recognition of Brazil’s independence. (In Portugal, the treaty had come to an end in 1835.) This treaty is the most important reason for the difference in industrial development and economic growth between Brazil and the USA from 1776 to 1842.(4)

Conversely, the Americans, since independence, very aggressively pursued their trade agenda until, in 1947, following the Second World War, and as part of the New World Order, the General Agreement on Tariffs and Trade (GATT), largely inspired by the USA, was signed by 23 countries, including Brazil. (5) GATT was, and still is, under the World Trade Organisation (WTO) (6), the only multilateral trade agreement and forum for the resolution of trade controversies between the sovereign states of the world. The objective behind GATT was to put some legal order into the chaotic situation of international trade as well as to liberalise world commerce, a goal that greatly interested the USA at that particular stage, in view of its considerable comparative competitive advantage over any other country in the world – the result of a globe shattered by the terrible military conflict.

This situation, however, changed gradually with the declining competitiveness of the US economy as other countries, particularly Japan and the member states of the now European Union (EU) recovered from the destruction inflicted by the War. After the end of the Tokyo Round (7) of the GATT concluded in 1979, the USA felt not only the strong competition referred to above, but it also came at a moment when the USA’s economy was suffering the consequences of the second oil crisis, the international commercial banking crisis, and the liquidity crisis of the developing countries. Then the USA augmented its already aggressive posture of intimidation of its commercial partners with inter alia the development of the euphemistically entitled ‘voluntary restraint arrangements’ (VRAs) by which sovereign countries would voluntarily’ waive rights to export to the USA, accepting quotas unofficially imposed by the Americans, contrary to international law.

The extent of these pressures was such that for the first time ever a country other than the USA, in this case Japan, took the initiative to start a new round, called the Uruguay Round, which began in 1986. From the inception of the Round, the USA insisted on the inclusion within the framework of GATT of the so-called new areas comprising services in general, and inter alia banking, investments, technology, telecommunications and regulated professions. Brazil, together with India, led the Group of Ten (8) opposing this initiative on the grounds that

(a) the emphasis on services would distract the attention from the resolution of traditional trade disputes;
(b) the developing countries would become buyers and not sellers of services; and
(c) the developing countries would become involuntary purchasers of technologies that are not necessarily adequate to their reality.(9)

After a stubborn resistance of about three years, a negotiated solution was reached between developed and developing countries to the effect that some of the traditional sectors such as agriculture and textiles (sic), of major importance to the developing countries, would be included in the scope of the Uruguay Round, together with the treatment of subsidies and a general enhancement of the rule of law in international trade. The latter would undoubtedly be to the benefit of all, but mostly to the developing countries, that had been systematic victims of arbitrary action on the part of the major trade partners.

Two years after the conclusion of the Uruguay Round and the implementation of the WTO, the reasoning of the Group of Ten is still valid and remains a challenge to be met.


The WTO was created on 31 December 1994, as a direct result of the Uruguay Round. GATT, World Bank and Organisation for Economic Co-operation and Development (OECD) sources estimate that world Trade will increase to about US$ 765 billion annually by the year 2002, as a result of trade liberalisation promoted by the Round,(10) and the developed countries will prove to be the winners of the Uruguay Round with 64% of the tangible benefits, leaving the developing countries with 36%. Such concessions, however, were made by the developing countries in the hope that the intangible benefits, such as the inclusion within GATT of the traditional agricultural and textile sectors, as well as the addressing of the matters of subsidies and the overall reinforcement of the rule of law in international trade, would on a long-term basis compensate for the short-term losses.

Of course, the negotiators of the developed countries generally favoured the medium-term objectives of maintaining or increasing the extant comparative trade advantages of the time, because they were used not only to modifying the rules of the game at any time it pleased them, but also to eschewing adherence to the least palatable ones. Therefore the advent of the WTO represented an era of hope for the developing countries which, with unbounded enthusiasm, unilaterally liberalised their tariffs over and above their commitments under the Uruguay Round.(11) This occurred to such an extent that today the top 20 most liberal trade countries (12) are developing nations, followed by Germany in the 21 St place, the USA in 25th place (after Colombia, Greece and India), and Japan in 28th place, preceded by Argentina and Brazil! (13)

At about the same time as the conclusion of the Uruguay Round, MERCOSUL had proved to be a success, having doubled its internal trade in the space of three years. (14) The reason for such success is eminently clear. Argentina, Brazil, Paraguay and Uruguay succeeded in the creation of a subsidiesfree area in which they can place their products, particularly commodities, without the, interference of the adverse price-distorting practices maintained by the USA, Canada, Japan, Korea and the European Union, who collectively spend more than US$ 500 billion per year on subsidies in the agricultural sector alone. The elimination of internal tariffs in 1995 also promoted the industrial and service sectors in the MERCOSUL countries, which have experienced unprecedented growth previously denied by the perverse situation of multilateral trade.

On 1 January 1995, the Common External Tariff (CET) of MERCOSUL came into effect with an average rate of 14%, applied by the member countries on a consistent and uniform basis for trade with third parties. The CET is applied on a percentage basis, in accordance with a nomenclature-designated MCN (MERCOSUL Common Nomenclature). Non-tariff trade barriers have been identified and are in the process of being eliminated; the process is overseen by a special group, the MERCOSUL Trade Commission. Exceptions to the CET were limited to 300 per country (Paraguay has 399) until 1 January, 2001. Some sectors were subjected to special treatment, such as automobiles, informatics, telecommunications and sugar. (15)

Regional trade agreements such as MERCOSUL and NAFTA are admitted within the scope of the WTO. The Uruguay Round indeed clarified and strengthened article 24 of GATT/1947, which provides rules and disciplines for customs unions and free-trade areas. Some issues, however, remain outstanding and such include the need for greater transparency of the regional trade agreements and requirements for their collective monitoring, in the future, by the WTO. Since the inception of the organisation in 1947, 109 trade agreements were notified to GATT, 33 of them since 1990.(16)


Towards the end of the Uruguay Round, negotiations had become quite difficult between Japan, the European Union and the USA, and more than once there were doubts as to whether the Round could be successfully closed. Such difficulties stemmed from the fact that the Europeans and the Japanese had, for the first time, effectively resisted US attempts to maintain a hegemonic position in world trade. At this moment there was a radical change in the posture of US trade policy formulators, who had in the past traditionally and consistently favoured and supported the multilateral approach (GATT) to world trade: away from it and towards regionalism. (17) The first indications (18) of this came when the USA started reneging on the very same proposals it had pursued vigorously at the beginning of the Round, such as the liberalisation of the banking and telecommunications sectors, and questioning its own proposal regarding, the dispute resolution system, once it had been accepted by the WTO. For the Americans, shared power over the WTO proved to be far from their desire.’Americans want to know how much they can gain from the new world trade order’, wrote Business Week in an eminently candid manner. (19)

At about the same time that the Uruguay Round was concluded, NAFTA came into force (20) with a totally different story concerning the negotiations and the prevalence of the American designs. Canada and Mexico, as trade partners within NAFTA, were hardly in a position to resist the hegemonic intent of the USA. Trade with the USA represents about, 70% of Canada’s and 80% of Mexico’s external commerce. In 1992 Mexico imported US$ 37 billion from the USA and sold products to the value of US$ 32 billion, generating a US trade surplus of US$ 5 billion, in a year in which the American trade balance had a deficit of US$ 90 billion. For Mexico, the US and Canadian policies of agricultural subsidies were not disastrous, as Mexico is an importer of agricultural goods. Conversely, for the US and Canada, populous Mexico represents a very attractive customer for their agricultural goods (21), which have become increasingly difficult to place in a world market in view of the extensive subsidies practised by other producers, notably the EU.(22)

During the negotiations the USA obtained from Mexico the total opening of its services market whilst keeping the American market closed by means of horizontal barriers on the free movement of service providers, which established inter alia a most undignified quota system for Mexican citizens.(23) The world market for services is estimated at approximately US$ 12 trillion or more than 60% of the world trade total. (24) The service sectors employs three-quarters of the American work force and generates about 68% of country’s GDP. The USA is the greatest service exporter in the world and this is the most competitive sector of the American economy. Canada and Mexico are the first- and third- largest importers of American services. Dominance of the Mexican services sector, estimated at US$ 146 billion, was a stated objective of the USA’s NAFTA negotiators.(25)

As a result of the NAFTA model, Mexico became officially, at least in trade terms, a client state of the USA, designed to buy services, industrial and agricultural goods, generating huge trade deficits to be financed whit hot money borrowed by its financial sector. This bizarre situation led to the enormous trade deficit accumulated by Mexico in 1994 to the value of US$ 19 billion, (26) which caused that country’s liquidity crisis of early 1995, and the massive devaluation of the peso. As a result an unprecedented financial rescue package to the value of US$ 50 billion, almost equivalent to the historical Marshal Plan, was arranged by the USA to be given to Mexico so that Mexico could repay the irresponsible American Banks that had taken such extraordinary credit risks (27). Mexico, of course , will have to foot the bill at the end of the day.(28)

The USA has systematically tried to enforce its laws extraterritorially, which is not only bizarre and abusive, but also contrary to international law, and found in NAFTA an excellent opportunity to achieve this end in a very expedient manner. NAFTA provided the USA with a number of strategic advantages, not only in the trading of goods and services, but also extended to Mexico certain American concepts dealing with investments ( including insurance on foreign capital ) , intellectual property, competition law, labour law, environmental law, trafficking of drugs, legal immigration and even administration of justice, all under the pretext of trade liberalisation. The euphemism utilized by the Americans to define this situation was convergence of values’.(29)

In addition the 2000 pages of the NAFTA agreement strove to protect, from the competition of third countries, the advantages obtained by the USA from Mexico by means of this appalling agreement, by dedicating approximately 10% or 200 of its pages to the rules of origin, a mechanism recognised today as the cutting edge of protectionism.

Having achieved such advantages, US policy formulators decided, quite obviously, that the same draconian conditions, if applied consistently within Latin America, would come to the profitable advantage of the USA.(30) Indeed, in the first year of NAFTA, US merchandise exports to Canada and Mexico grew more than twice as fast as US exports to the rest of the world, accounting for 50% of the total American gains in exports in 1994.(31) In order to expand this situation to the rest of Latin America, the USA officially adopted the hub and spoke model, where the USA would be the hub and the hapless Latin American countries the spokes. This model was incorporated in the US government’s Initiative for the Americas, which resulted in an agreement in principle (in 1994) for the creation of a free trade zone for the Americas (FTAA) by the year 2005.(32)

It was then that the secretariat of the WTO took the unprecedented step of warning, in a recent official publication, about the perils of the hub and spoke model, in the sense that its essence is always the same, in that goods and services (and maybe capital and work) flow more freely from the spokes to the hub than between the spokes. Furthermore, the secretariat of the WTO also warns that, in such cases, there is a tendency for the separate administration of sensitive trade with each of the spokes by the hub, always reducing the sector when the trade partner is more competitive in it.(33) Even in the USA this model was accused of representing ‘the new era of imperialism’.(34)


For a country like Brazil, adhesion to NAFTA or to a FTAA based on the hub and spoke model would in general be a true social and economic disaster, and particularly so under the draconian conditions applied to Mexico.(35) This disaster would certainly occur in the services sector, an area that represents more than 50% of Brazil’s GDP, because movement of people, essential to service providers, (36) is not assured within NAFTA (37) to spoke countries. As the WTO warned, the ‘flows between the spokes and the hub would limit the relationships among the spokes and would serve as an enormous incentive for capital flight to, and commercial presence in, the hub. Companies from other parts the world would be attracted to establish a presence in the hub rather than in the spokes, even if to deal with the spokes. The hub would provide the financial sector for the spokes. The educational sector in the spokes would be much affected, at least with regard to business, as there would be a centripetal force of attraction to the hub. The agricultural sector, at least in Brazil and in Argentina, would be wiped out by the US$ 200 billion plus subsidies practised by the USA and Canada, and that certainly would include the sugar sector in Brazil which employs more than one million rural workers. Indeed, not a very bright prospect ! (38)

Wouldn’t, on the other hand, an enhanced NAFTA present Latin America with more export opportunities? The answer is given by an unsuspecting American lawyer, a specialist in international trade, who said ‘an enhanced NAFTA is unlikely to lead to increased Latin American exports to the US except in the area of textiles and garments, where NAFTA’s restrictive rules of origin may lead exactly to this type of trade diversion. For industrial goods, generally, US tariffs are comparatively low and the likelihood of a strong preference in favour of regional exports over non-regional competitors is remote.(39)

From the legal perspective, there is another reason against joining a FTAA: in the USA, treaties like NAFTA and even those deriving from the Uruguay Round and involving the WTO are situated under American federal law in the US hierarchy of norms. In Latin America, as in Europe and in most of the world, the foregoing treaties are situated above local law and are enforceable in the respective territories.(40) This is not so in the USA. Indeed, because the US law only gives enforceability to self-executing treaties, and that excludes both GATT and NAFTA, ‘the possibility arises that a United States court could come to a conclusion contrary to that of international law, and that such court decision would cause a breach of United States international obligations’.(41) In such a case the relevant domestic US court will be bound to follow the domestic rule.

In addition, American internal legislation with respect to the implementation of the treaties of the Uruguay Round establishes in section 102(a) that ‘no provision of any of the Uruguay Round Agreements, nor the application of any such provision to any person or circumstance, that is inconsistent with any law of the United States, shall have effect’.(42) Similarly, in connection with NAFTA, US law provides in section 102 (a)(1) of the implementing legislation that ‘no provision of the Agreement, 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’.(43) Therefore, NAFTA is not necessarily enforceable in the USA, but certainly is in the other signatories’ territories. In a world searching for transparency and the prevalence of the rule of law in international trade, as well as in international affairs, this is clearly non-admissible and allows the instant presumption of bad faith in any trade agreement negotiated by the US government.

Of course Itamaraty, Brazil’s experienced Ministry of Foreign Relations, saw the implications of an FTAA patterned after NAFTA and looked for alternative ways to achieve hemispheric free trade, without falling into the trap of NAFTA. One such way is the creation of the South American Free Trade Association (SAFTA), a meritorious concept. This position was instantly perceived by the American negotiators and became notorious.(44) Several academic exercises are presently being discussed in US circles on how to isolate Brazil in the FTAA negotiations. One alternative is the so-called differential treatment offering specific advantages to certain countries to lure them into NAFTA.(45) Another is for the USA to ‘encourage’ Brazil to slow its non-MERCOSUL tariff reductions, so as to neutralise internal Brazilian ideological opposition to regional integration. A third is for the USA to penalise Brazil in bilateral trade offering the FTAA as resolution (46) for the problems.

At the second ministerial trade meeting of the summit of the Americas, in Cartagena, Colombia, on 21 March 1996, an action plan based on an American agenda and with no immediate damage was agreed upon, and Brazil agreed to host the next ministerial meeting in Belo Horizonte on 13 May 1997.(47) In a recent interview, the general secretary of the Organisation of American States declared that the decision about which path to take will be the most critical issue for the next series of meetings.(48)


In spite of certain specific idiosyncrasies such as the automotive sector policy, of all the WTO members, Brazil has in the recent past possibly been the country responsible for the greatest degree of unilateral liberalisation. Not only were tariffs dramatically reduced, but important economic sectors were liberalised, such as banking, insurance, telecommunications, energy, mining, etc. In spite of all this, Brazil has never been under so much pressure in international trade negotiations. Within MERCOSUL there is, of course, a constant need for understandings and evolution, which strains the limited resources of Itamaraty.(49) In addition, Brazil’s automotive and investment policies are being challenged within the WTO. In the WTO there still is pressure to include the concepts of ‘social dumping’ and ‘environment’ in the GATT, (50) and for a reduction of tariffs beyond the commitments of the Uruguay Round.(51) At the same time a number of issues in services pending during the Uruguay Round – such as banking and telecommunications, agriculture, subsidies, textiles, resolution of disputes, movement of service providers, rules of origin and regional groupings – have scarcely been addressed. In addition, top or very sensitive posts within the WTO have been disproportionately allocated to a few of the trading partners, and this is a matter that needs very close monitoring in view of the obvious potential for conflict of interests.(52)

Thus, as it is eminently and indisputably clear that Brazil has absolutely nothing to gain and very much to lose within the FTAA, as already demonstrated, then Brazil could

(a) advise the USA in no uncertain manner that the FTAA is not in the interests of Brazil for the immediate future and certainly not by the year 2005;
(b) advise the USA that the relationship between Brazil and the USA would be better conducted within the framework of the multilateral order and the WTO;
(c) invite the USA to join Brazil in strengthening the WTO and the rule of law in international trade;
(d) invite the USA to join the international community and Brazil in ratifying the Vienna Convention on the Law of Treaties;
(e) concentrate efforts on the consolidation of MERCOSUL’s structure, and on the strengthening of the WTO, by demanding from the trade partners the fulfilment of the obligations and of the pendencies of the multilateral order and of the traditional issues that were unsuccessfully resolved by the Uruguay Round;
(f) resist energetically the inclusion of any new areas within the WTO without the adequate solution of the numerous pendencies; and
(g) dedicate minute attention to the adjustment of internal government structures to the free trade scenario, including the capacitation of government officials.

In trade matters it is always better to say no to an impossible proposition, and the FTAA concept undoubtedly falls, for Brazil, in this category. This attitude prevents a waste of time and resources as well as misunderstandings with the trade partner, saves credibility and keeps open for the future an opportunity for an agreement that may be satisfactory.