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Uruguayans lose faith in Mercosur trade pact

Financial Times, London

Uruguayans lose faith in Mercosur trade pact

By Benedict Mander in Montevideo

March 20 2006

Uruguay is looking to increase trade with the US amid mounting disappointment about the benefits of membership of the Mercosur trade bloc.

“The government is in agreement that Uruguay must improve its trade links with the US,” said Danilo Astori, Uruguay’s trade minister, in an interview with the Financial Times.

The South American trade bloc, which celebrates its 15th anniversary on Sunday, is suffering its worst moment in history, Mr Astori said. Although talks on a bilateral trade deal with Washington are still some way off, he said Uruguay had to deepen its trade links with not only the US, but “China, India, and the EU so we can take much greater advantage of our economic and commercial potential.”

“The serious bilateralism between Argentina and Brazil is damaging the smaller countries in Mercosur,” he added. Instead of asymmetries between member countries being alleviated, they have worsened, most of all in the two smallest members of the grouping - Paraguay and Uruguay.

Bilateral trade deals could help to solve these problems, said Mr Astori, who argued they were not incompatible with the principles of the trade zone. “Uruguay’s problem is that we depend only on the goodwill of Brazil and Argentina. And at the moment I don’t get the impression that they are particularly enthusiastic about Mercosur.”

Bilateral trade deals between the US and Mexico, Chile and five Central American countries and the Dominican Republic are all in place, and a number of other countries including Peru, Colombia, Panama and Ecuador are all negotiating similar deals.

In November, Uruguay voted alongside fellow Mercosur members against US plans to attach a timetable to talks about a hemispheric trade area, but relations within the Mercosur trading bloc have deteriorated sharply in recent weeks, not least because of a dispute over Uruguay’s $1.7bn (£970m, €1.4bn) paper mill project that has prompted Argentine environmental activists to block roads between the two countries. The blockades are in direct contravention of the basic principle of Mercosur to guarantee the free movement of goods and people between member countries.

The spat has badly eroded Uruguay’s dwindling confidence in Mercosur. “But Uruguay should not commit the error of abandoning Mercosur,” cautioned Mr Astori.

Not all agree. Some advocate withdrawal, in favour of following the example of Chile, which has flourished on the back of bilateral trade deals. “Mercosur is dead. We need to leave Mercosur,” says Jorge Batlle, Uruguay’s former president, who says the US now accounts for more of Uruguay’s trade than the rest of the Mercosur countries combined.

“Uruguay doesn’t have an internal market; its market is the world,” says Mr Batlle, explaining that the tiny nation of 3m people joined Mercosur to gain easy access to a market of over 200m people. In the case of Brazil in particular, this has not happened.

Most observers admit that Uruguay’s destiny is bound to the region, however.

“It is naive to think that we can leave Mercosur,” says Gabriel Oddone of Cinve, a Montevideo-based economic think-tank. “But we do live between two extremely unstable countries, so to diversify our trade links with other countries is absolutely logical.”

Tabaré Vázquez, Uruguay’s leftwing president, has been mixed in his signals as to whether or not he wants a trade agreement with the US. “It is clear that the government doesn’t know where it is going,” says Jorge Larrañaga, the leader of the main opposition party, who favours bilateral deals while staying in Mercosur. “Unfortunately our president doesn’t dare to take the necessary steps, owing to internal problems.”

A key barrier to a bilateral deal with the US is that such an agreement would be economically insignificant for the US, yet it could undermine US political relations with Brazil. Members of Mercosur are also not technically allowed to make bilateral trade deals - although Brazil and Argentina say this could change.

Fernando González Guyer, of the Mercosur Research Network in Montevideo, says it is the US itself - together with Europe - that has played the most important part in preventing meaningful development of Mercosur. Its protectionist agricultural policies affect the area where Mercosur countries have their greatest competitive advantage.

A lack of macroeconomic policy co-ordination has also been damaging. Brazil’s devaluation of its currency in 1999 gave it an even stronger advantage over other Mercosur members, and marked the beginning of Uruguayans’ growing disaffection with Mercosur.

“Uruguay’s idea was to become like an aircraft carrier,” explains Luis Alberto Lacalle, the former Uruguayan president who signed the country into Mercosur in 1991. Montevideo was to become a hub for trade and finance. “Everything failed - there was an increase in trade but we have not fulfilled the dreams and ideas that we had.”

“We’re just onlookers,” sighs Mr Lacalle. “Mercosur is broken, so let’s fix it.”

 source: FT