- The Washington Times - Monday, May 30, 2005

SAO PAULO, Brazil - The Argentine government views Brazil the same way the United States sees China — as a threat to the domestic economy that requires political action.

The rivalries between Brazil and Argentina are part of history. But a yearlong trade dispute involving a handful of industries has prompted Buenos Aires to continue to seek special commercial protection from Brazilian competition. This calls into question the future of free trade not only in Mercosul — the four-nation trade agreement between Brazil, Argentina, Uruguay and Paraguay — but also of the Free Trade Area of the Americas proposed by Washington in 1994 during the Clinton administration.

“Last year, Mercosul nations agreed to eliminate tariffs as part of creating a mini-European Union by 2006. We’ve got one year to go, and there’s still a crisis. Nobody believes this will happen,” said Joao Castro Neves, a political scientist at the Brazilian Institute of Political Studies in Brasilia.

“The commercial problems are serious because it goes against the reasons to create Mercosul and free-trade arrangements in the first place,” Mr. Neves said. “Since its inception 10 years ago, not a month has gone by without one side or the other complaining about the invasion of foreign products.”

Argentine President Nestor Kirchner has been criticizing Brazilian business all month, both here and in Buenos Aires.

“Brazil has to understand that industry isn’t something that belongs only in Sao Paulo,” he said in a May 23 interview with the Argentine daily Pagina 12.

Argentina wants permanent safeguards that would allow it to grow out of decades of deindustrialization and recover from the financial crisis of 2001, which resulted in an estimated $50 billion default on its foreign debt. As a result, Argentina has become a raw material exporter and more dependent on importing industrial equipment from Brazil.

In the past 11 months, Argentina has blocked the entry of various Brazilian goods in an effort to lower a trade imbalance of about $1 billion since January.

Last month, Brazil’s exports to Argentina fell 5 percent while Brazil’s imports from Argentina rose 8.4 percent, according to Brazil’s Trade Ministry.

The Industrial Federation of Sao Paulo said its counterpart, the Argentine Industrial Union, was overreacting when its departing president, Hector Mendez, said in Brasilia on May 9: “Mercosul isn’t doing anything for us. We must make Mercosul better or the trade bloc has no future.”

Industrial leaders in both countries have worked out deals to limit Brazilian exports through quotas or higher tariffs.

But new sectors create new problems. Now it’s shoes and wine, with Brazilian wine companies threatening to follow Argentina’s example and lobby their government to impose tariffs on cheap Argentine wine entering Brazil. Meanwhile, Argentine shoemakers are trying to reach an accord with Brazilian firms to limit the amount of shoes that Brazil can sell to Argentina.

“This whole debate over safeguards is just wrong,” said Mariano Levy, an importer of top Argentine wines in Sao Paulo. “South America isn’t getting this ‘global market’ thing.”

Argentina uses the United States as its example. Its businessmen point out that the Washington has erected trade barriers to protect a handful of farmers and restricts imports from Chinese apparel makers. Those actions were in response to complaints by American clothing makers that Chinese imports are hurting U.S. companies.

Buenos Aires thinks the same of Brazil, but Brazilian officials see things differently.

“We have a trade agreement with Argentina that doesn’t allow for measures to limit imports,” said Rubens Barbosa, a former Brazilian ambassador to the United States.

“Argentina’s asking to break our Mercosul agreement, an agreement that calls for the eventual elimination of trade barriers, not the increase of trade barriers.”

Brazilian companies have been buying up Argentine firms since the crash in 2001. Brazilian oil giant Petrobras bought Argentine oil firm Perez Compac in July 2002 for $1.1 billion. That same year, Brazil’s largest beer company, AmBev, bought Quilmes Industrial, an Argentine brewery. Last month, Brazilian construction firm Camargo Correa bought Loma Negra, its counterpart in Argentina.

“If this was a totally free market, Brazil would dominate Argentina,” Mr. Neves said.

Argentina is concerned that that is already the case.

Petrobras, AmBev and Camargo Correa control at least 60 percent of their respective Argentine markets.

Argentina notes that not a single homegrown company has an equivalent presence in Brazil. To get there, Argentina needs to protect some industries, the government says.

But Mr. Barbosa says, “Argentina is creating their own problems.”

Other Latin American countries recently emphasized the role of state intervention in economic development as opposed to a strictly open-market economy. At the Inter-American Development Bank’s (IADB) Board of Governors meeting in Japan in April, the presidents of Colombia, Honduras and Bolivia called for a more active state role in promoting economic growth in the region to counter “excessive liberalism” of the past decade, according to IADB press statements.

Mercosul is the oldest and most important foreign-policy arrangement of the Brazilian government. Argentina is Brazil’s most important ally and Brazil’s second most valuable trading partner after the United States.

Mercosul has been pronounced dead more than once in its 10-year history, mostly because trade between the four countries has risen more slowly than expected. In 1995, Mercosul trade was $12.9 billion. Ten years later, it’s about $15 billion, with more than 85 percent of that being Brazil-Argentina trade.

The two countries have political arrangements with the military and joint scientific projects on nuclear power and aerospace research.

“Integration like this was unheard of before Mercosul,” said Jose Botafogo Goncalves, former ambassador to Argentina and current president of the Brazilian International Relations Center in Rio de Janeiro, referring to the military and joint scientific arrangements.

“Kirchner is paying the price for nonexistent industrial policies in Argentina. Now he has to live with Brazilian competition,” Mr. Goncalves said.

When it comes to cross-border trade woes, Mercosul is not alone. Hemisphere-wide trade talks to create the Free Trade Area of the Americas (FTAA), once hoped to be active by 2006, is not expected until 2009 at the earliest, Brazilian Foreign Minister Celso Amorim said May 19 in Brasilia.

Mercosul has been trying for a similar trade arrangement with the European Union. Lower trade tariffs would boost Brazilian and Argentine agricultural sales, but talks have gone nowhere since October 2004.

“Free trade is for the textbooks,” Mr. Goncalves said. “If you were to walk into the U.S. Congress and talk about the FTAA, for instance, you’d get nowhere. Fast track has become slow track. Face it: No one wants to compete against cheaper products.”

For its part, Brazil has tried to downplay fears in Argentina.

On May 20, Mr. Amorim and his Argentine counterpart, Foreign Minister Rafael Bielsa, signed an agreement to accelerate bilateral relations on matters including economic integration, but that will not go into effect unless and until Brazilian President Luiz Inacio Lula da Silva and Mr. Kirchner agree to the terms on Nov. 30. Mr. Bielsa was awarded the National Order of the Southern Cross, Brazil’s highest state honor given to foreigners, the same day.

“Mercosul can’t exist without a solid Brazil-Argentina relationship,” Mr. Amorim told reporters. “There is no room for rivalries in this case.”

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