Mercosur and CAFTA

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1 Mercosur and Cafta

Mercosur and Cafta

Mercosur

The Treaty of Asunción

The 1991 Treaty of Asunción declared the intention of many eastern South American countries to bind their economies together by December 31st, 1994. Thus, Mercosur was created. The name Mercosur is a contraction of the official name of the organization, in either Spanish ^[1] or Portuguese ^[2], the Market of the South. The trade from Mercosur comprises three-quarters of South America’s combined GDP and constitutes the world’s fourth largest trading bloc. The organization is a trading bloc and customs union with different levels of membership, along with which come tiered levels of benefits and responsibility^[3]. As they become full members, nations are expected to eliminate tariff and non-tariff barriers to trade, while enforcing a common external tariff upon non-members. Additionally, member states must harmonize macroeconomic policy and comply with other Mercosur conventions to maximize their cooperation ^[4].

Members and Associate Members

To date, the full members operating within Mercosur include Argentina, Paraguay, Uruguay, Venezuela and Brazil, the region’s largest economy ^[5]. These nations enjoy representation on the Council of the Common Market ^[6] and the Common Market Group ^[7]. The CMC is the chief decision making body, which convenes the Ministers of Foreign Affairs and Ministers of the Economy of the member states to create and implement policy for the trading bloc. The GMC , over which the Ministers of Foreign Affairs also preside, acts as an executive branch with the powers to monitor compliances with the Treaty of Asunción and other Mercosur conventions, enforces compliance should divergences be discovered and negotiates with third-parties ^[8]. Current associate members include Chile, Bolivia, Columbia, Ecuador and Peru. At this level of membership, these five nations have limited voting rights on the Council and the Group. Additionally, associate members also only receive limited benefits of accession into Mercosur, since the external tariff employed by the full members is similarly leveled at them, but at a reduced rate ^[9].

Fractious Partners

The challenges and critiques of Mercosur are many. In order to woo economically strategic countries like Bolivia and Venezuela, Mercosur has been accused of bending its rules. Bolivia has a long border with Brazil making it a potential transportation hub. Not only does Venezuela give Mercosur access to the Caribbean and its trade routes, but it is an energy rich nation. Upon seeing Bolivia and Venezuela dodge the GMC’s attempts to standardize the terms of their participation, the Uruguayans naturally grew vexed at the special treatment enjoyed by new members ^[10]. Because of Bolivia’s extreme poverty, its leaders have demanded that the external tariff on foodstuffs be dropped for Bolivia so that its population need not incur higher prices through accession. At the same time, Uruguay and Paraguay have contemplated their own bilateral trade arrangements with the United States, which would undermine the common external tariff ^[11]. Because many of Mercosur’s members perceive other members to be playing fast and loose with policy standardization, they similarly feel prompted to cheat.

CAFTA

A Different Creature Still Finding its Legs; Costa Rican Accession

Conversely, CAFTA is an agreement no longer under debate, but effects are still unfolding. Its founding members include the Dominican Republic, Guatemala, El Salvador, Honduras, Nicaragua and the US, but thre recent addition of Costa Rica adds greater strength to the Latin side of the arrangement. More akin to NAFTA, CAFTA ^[12] is a trade bloc, but not a customs union ^[13]. Unlike the European Union or even to a lesser extent Mercosur, CAFTA does not require as stringent harmonization of policy or even that member states reach certain economic and social watermarks to join. Costa Rica was the only country that put the question of membership to a public referendum, which bisected the country into trenchantly vitriolic camps for and against accession. Costa Rican critics of CAFTA had some reasonable arguments, chiefly that they already enjoyed the benefits of free trade with the United States via another agreement, the Caribbean Basin Initiative ^[14].

Costs and Benefits for Costa Rica, a Key Player

Costa Rica brings a lot to the CAFTA table, due to their stabler institutions and economy. Despite this exalted status as the flagship of Central American nations, within CAFTA an enduring fear of some Costa Ricans is the loss of national sovereignty on a narrow band of policy issues. President Óscar Arias, who recently came to power under the slogan “Costa Rica, Sí!” has posed the counterargument that should Costa Rican institutions be forced to imitate US standards and practices, the benefit to Costa Rica would be substantial ^[15] . Of particular concern to US corporations is the chance to get Central American countries to adopt stricter intellectual property rights to curb the piracy of software and media. But as President Arias has claimed, these benefits would probably travel both ways as Costa Ricans make trade offs that secure a better future ^[16]; hence, as pirated DVDs become less visible on the streets, the robustness of their banking and legal systems should yield higher, more stable wages on a more stable currency.

Challenges and Benefits for other CAFTA Members

Although great attention has been paid here to Costa Rica, it should be noted that the other potential members of CAFTA have relatively less healthy economies and institutions. Of course, what this translates into in practical terms, is that despite their greater challenges to fully exploiting their positions within CAFTA, the potential payouts are relatively higher. Because of the staggered implementation of CAFTA, the benefit to its members has been hard to track until now. Specific industries, mostly low-skill manufacturing and apparel, are enjoying a sky-rocketing in trade between the US and other CAFTA members ^[17]. Of course these transactions put money into Central American pockets, but without the complimentary institutional reform there is no guarantee those will be the pockets of typical citizens of CAFTA nations participating at all levels of the economy. But should Central American nations achieve such institutional reform, according to a 2005 World Bank report on CAFTA, all participant nations should enjoy an average increase of 0.6% in annual growth rates during the first five years of participation. Should this math hold up for the case of CAFTA, almost half a million Central Americans should be delivered from poverty by 2010 ^[18].