Regional Integration in America: MERCOSUR, NAFTA

Ufuk KANTÖRÜN
26 May 2010
A- A A+

The bipolar world system came to end after the Cold War. The Cold War showed that a close and state-driven economy could cause economic bankruptcy and not compete with market driven economy. After the Cold War, the market driven, liberal economic model has spread throughout the world and the world economy has become interconnected as a result of globalization.

In the post-Cold War era, a new wave of regionalization emerged through the establishment of regional blocs in the different parts of the World. Although these new regional blocs are motivated by trade liberalization, export and foreign investment led economic policies; there are a considerable variation among them. This paper will try to discuss reasons behind this variation through analyzing two examples of regional integration NAFTA and MERCOSUR.

 

MERCOSUR
In 1991, Foreign Ministers of Brazil, Argentina, Paraguay and Uruguay signed the Treaty of Asuncion which is the founding treaty of MERCOSUR. The treaty aims to establish a common market among member states with the elimination of internal tariffs and the formation of a common external tariff. The first steps which opened the way to MERCOSUR were taken by two most developed countries of the region, Brazil and Argentina. Two leading countries of Latin America were in rivalry and had a problematic relationship before their rapprochement in the late 1980’s. Their problematic relation caused a security dilemma which feeds the military regimes in both countries and prevents the emergence of democracy in the region. Moreover, the failure of domestic macroeconomic policies and increase of foreign debts resulted in serious economic crisis in both countries. Their rapprochement was started by the process of redemocratization in both countries in mid-1980s. In 1985, the Argentine President Raul Alfonsin initiated negotiations with Brazil. Brazil and Argentina signed the Program for Integration and Economic Cooperation in 1986, which includes agreements covering different areas such as capital goods, food, iron, steel, nuclear, and auto industries.  In 1988, both countries signed the Treaty on Integration which foresaw the formation of a common market within ten years. 1990 Buenos Aires Act which constituted the base of Treaty of Asuncion was signed between Brazil and Argentina.

 

In the case of MERCOSUR, the main motivations of countries for the regional integration were to enhance democracy in their countries and to liberalize their economies. As mentioned before, two important countries of MERCOSUR Argentina and Brazil started the rapprochement in order to eliminate security dilemma which reinforces military regimes. Military takeovers are often seen in the Latin America countries. Member countries of MERCOSUR; Brazil, Argentina, Paraguay and Uruguay all suffered from military interventions to the democracy. Nowadays, there are still countries in Latin America which are governed by leaders which came to the power through coups. So member countries see regional integration as a tool which will prevent military interventions and to support the institutionalization of democracy.

 

The liberalization of economy is another important motivation of regional integration. Before the integration, member countries followed import substitution industrialization programs to develop their local industry and they imposed high tariffs on importation to protect them. Moreover, state own companies had an important place in the economy. This protectionist economic policy weakened the competitiveness of local industries, led the rise of public debt and budget deficit which resulted in economic crisis in member countries. In the late 1980’s, Argentina and Brazil started to shift their economic policy from import substitution to export and foreign investment led policy. They passed economic reforms to liberalize and open their economies. Small members of MERCOSUR Uruguay and Paraguay pursued also similar reforms to open their economies. By the elimination of tariffs among member states and the formation of common market, MERCOSUR facilitates trade and promotes export led economic policy. However, it was not easy to convince all domestic groups and get their support for economic reforms. In order to overcome domestic opposition and to adopt unpopular economic measures, political leaders used MERCOSUR to say opponents of reforms that they implemented reforms required by international agreements. Thus, MERCOSUR enabled political leaders to adopt unpopular economic reforms without risking their post.

 

MERCOSUR is an elite project initiated by political leaders. In the beginning of integration process, there was no pressure coming from domestic groups to reduce market fragmentation and stimulate policy harmonization or to make economic reforms. Moreover, the level of economic interconnection in the region was low, even between Argentina and Brazil. Although there were no domestic demands for regional integration, political leaders took ambitious decisions and to implement them. Economic interdependence among member states rose after the trade liberalization.

 

Role of political leaders in integration process impacted the nature of MERCOSUR organs. Common Market Council, Common Market Group and Trade Commission are the mains organs of MERCOSUR which were created by intergovermentalist logic. The Common Market Council is the decision making authority formed by Ministers of Economy and Foreign Relations. The Common Market Group which is in charge of enforcing Common Market Council decisions is comprised of four officials from each member state Ministers of Foreign Relations, Economy and Central Bank. The Trade Commission is responsible for the enforcement of common trade policies and administration of intra-regional trade-related issues. There are also mechanisms under MERCOSUR for the dispute settlement. Consultation, claims and three separate procedure direct negotiations, intervention of Common Markey Council and ad-hoc tribunal established by Brasilia protocol are mechanisms for the dispute settlement. Although, member states agreed to create a variety of mechanism to resolve controversies among them; in all these mechanisms including ad-hoc tribunals, member states has the last to say because constitutions of some member states did not recognize the supremacy of decisions or verdict of these mechanisms over domestic legislations. Thus, enforceability of decision is subject of the member states’ willingness. So it can be said that although level of institutionalization is high in MERCOSUR, application of decisions is in the hands of member states.   

 

NAFTA
In 1990, Mexico, United States and Canada decided to negotiate a North American Free Trade Agreement. Negotiations completed in 1992 by the signature of NAFTA and the agreement came into the force in 1994. The agreement aims to eliminate tariffs between member countries. However, each member states maintained the right to form their own external tariffs against third countries. Elimination of tariffs occurred in three rounds. The first round took place in 1997 for products traded between Canada, the U.S. and Mexico and the second and third rounds took place in 1998 and 2002 for products traded between Canada and Mexico. Before the establishment of NAFTA, trade barriers between U.S. and Canada were already eliminated due to the formation of free trade agreement CUSFTA in 1988. After the signature of NAFTA, CUSFTA was carried under NAFTA.

 

As it was in the case of MERCOSUR, NAFTA was an elite project initiated by heads of states especially by Mexican President Salinas. There was no pressure from society to force governments to form a free trade agreement. Mexico and U.S. had a history of distrust since Mexican- American War in which U.S. had taken a third of Mexico. Thus, fear of a foreign intervention became a part of Mexican politics. During the Cold War, Mexico tried to pursue an independent path. Mexico followed an income substitution industrialization policy like many other Latin America countries which restricted foreign investment and limited foreign trade. Moreover, many sectors including oil were in the hands of state own enterprises so the state was the main actor in the economy. So it had limited economic relations with other member of NAFTA. Mexico started to open its economy in the beginning of 1980’s and its trade volume with U.S. increased from18.4 billion dollars in 1979 to 51.5 billion dollars in 1989.  Although economic crisis in mid-1980s caused public reaction against the new economic policies, President Salinas, elected in 1988, wanted to continue economic liberalization. So Salinas used NAFTA to overcome domestic opposition to economic reform and to increase the foreign trade volume of Mexico. 

 

For the U.S., the economic and political stability of Mexico is highly crucial because instability in Mexico feeds illegal immigration towards U.S. which creates social and economic problems. On the other hand, Mexico is an important trade partner for U.S. as being the third export market after Canada and Japan. U.S. administration believed that the elimination of tariffs due to the free trade agreement could contribute the trade between two countries, and the success of Salinas’s economic reforms would provide U.S. companies an easy access to Mexican market which is highly dynamic due to the Mexican growing population. So NAFTA could help to reduce illegal immigration and enhance economic relations between two countries.   

 

The signature of CUSFTA caused reactions in Canadian society; a strong opposition emerged against the CUSFTA. So in the beginning of NAFTA negotiations, Canadian Prime Minister Brian Mulroney was not very eager to engage in another free trade agreement which could increase domestic opposition. However, Mulroney decided to participate negotiations because Canadian government believed that if Canada chose to stay out from the agreement, US would be the only country which could sell its products without any trade restrictions to all countries in North America; as a result, business sector located in Canada could move to U.S. On the other hand, free trade agreement with Mexico would not be costly for Canada. Plus, Canada would be able to enter easily to Mexican market, so diversify its trade.

 

As it is in the case of MERCOSUR, intergovernmentalism is the main characteristic of NAFTA institutions. Free Trade Commission, NAFTA Coordinators and Committees and NAFTA Secretariat are institutions of NAFTA. The level of institutionalization is lower than MERCOSUR because NAFTA created a regional integration limited with the elimination of tariffs. There is not a NAFTA institution which brings together heads of state to decide for further integration. Free Trade Commission, which is formed by cabinet representatives of member states supervises, the implementation and further elaboration of the Agreement and helps to resolve disputes arising from its interpretation. Coordinators are responsible for day-to-day management of NAFTA working program and Secretariat manages dispute settlement process between member states. For dispute settlement, a panel of experts meets in secret to resolve trade disputes in cases national laws or practices may constitute restraint of trade and decision of panel are not binding.

 

To conclude, in the case of MERCOSUR and NAFTA, state leaders decided to form regional blocks although they did not receive a pressure from their society for regional integration. MERCOSUR provides deeper integration than NAFTA in terms of goals and level of institutionalization. Main reasons behind this difference come from their economic and political background of NAFTA and MERCOSUR countries. MERCOSUR countries followed similar economic policies and they all suffered from military interventions. In the case of MERCOSUR, the motivation behind regional integration was to open their economy, fulfill unpopular economic reforms and to protect the democracy from military interventions. Thus, they chose a deeper integration to put into practice these goals. In the case of NAFTA, two member states Canada and U.S. had already market driven economies, they had no intention to make radical reforms and to change their economic policy, and they have stable political structure. So their motivation was limited to the increase of trade in the region. Only Mexico could use NAFTA to carry out economic reforms and to reduce domestic opposition against reforms. However it is needed to mention in both cases, the role of the population is quite limited due to intergovernmentalist nature of institutions.    

 


Resources

1- Bouzas Roberto, Sotlz Hernan, Institutions and Regional Integration, The Case of Mercosur, www. netamericas.org

2- Mayer Frederic, Interpreting NAFTA, Columbia University Press, New York, 1998

3- Kathenthaler Karl, Mora Frank, Explaining Latin American Economic Integration: the case of Mercosur, Review of International Political Economy, March 2002

Back to Top