The founding countries of the Mercado Comun del Cono Sur (MERCOSUR) — Argentina, Brazil, Paraguay, and Uruguay — have suffered from the economic slowdown in Latin America that began last year.

Nevertheless, U.S. exports to the trade bloc have increased 245%, from $6.5 billion in 1990 to $22.5 billion in 1998. And as we enter the new millennium, Mercosur imports are expected to continue to rise.

A History of Economic Liberalization

Formed in 1991, Mercosur was designed to stimulate members’ economies. To achieve this, the trade bloc proceeded to emulate the Chilean growth model, which was based on unilateral tariff reductions, privatization of publicly owned industries and services, and openness to foreign investment.

On January 1, 1995, Mercosur established a customs union, introducing a system of common external tariffs. As members opened their markets to greater competition and reduced inflation, production levels and demand for imports, especially capital goods, rose. By 1996, imports from member countries increased by 314%, compared with 185% from non-member countries.

Strained Internal Relations

Primarily because of Asian economic problems, recent economic growth in Brazil and Argentina decreased from 1997 levels. And the surprise 30% devaluation of Brazil’s real and abandonment of the fixed exchange rate in January 1999 boosted its exports. This, combined with poor regional growth, strained Brazil’s relations with the other Mercosur countries, especially Argentina.

During periods of economic decline, countries sometimes erect trade barriers to protect their industries from imports. Brazil and Argentina took that step. Consequently, trade between the two Mercosur members dropped 20% during the first six months of 1999.

Enter the European Union

During this time of fragile recovery, the leaders of the 15-nation European Union (EU) and Mercosur met in August to discuss a possible free-trade agreement. A significant impediment, however, is the highly subsidized EU farm sector, which effectively limits South American agricultural exports to the EU.

Nevertheless, EU-Mercosur negotiations may prompt the U.S. to renew talks to create a Free Trade Area of the Americas, creating a hemispheric free trade zone. Thus, a budding relationship between the EU and Mercosur sends a clear message that Europe could pose real competition for the U.S. in South America.

Franchising in Brazil

Brazil’s economy, the largest in South America, is rapidly expanding its presence in world markets. And franchising is becoming big business. With strong annual sales, the Brazilian franchise industry reached about $11.5 billion in 1997. Currently, two-thirds of the foreign franchises (66 companies) are headquartered in the United States.

The best franchising prospects include training courses, construction, and personal fitness. Other major non-franchise imports include crude oil, capital goods, chemical products, foodstuffs, and coal.

Argentine Privatization under Way

Argentina recently completed one of the world’s most ambitious airport privatization programs. And between 1999 and 2004, investment in airport infrastructure is expected to exceed $1.7 billion. Consequently, airport ground support equipment is anticipated to become a prime U.S. export to Argentina over the next decade. Other major projected imports from the U.S. include vehicles and parts, chemicals, telecommunications equipment, and plastics.

Calling Paraguay

Paraguay’s economy is largely service oriented. The need for improved communications has resulted in a significant demand for telephone and computer equipment. And the need for better transportation has brought about investment in road construction.

The country also has a large underground market, which involves thousands of micro-enterprises and urban street vendors, as well as the re-export of imported consumer goods and office equipment to Brazil and Argentina.

Geriatric Equipment for Uruguay

Uruguay’s proportionally large elderly population should be an attractive market for geriatric equipment and services in the near future.

Other favorable prospects for U.S. exporters include chemicals, manufactured goods, machinery, transport equipment, food processing equipment, and computer hardware and software.

Positive Economic Growth Ahead

With a population of more than 200 million people, a growing middle class, and positive economic growth predicted in 2000, trade among members of Mercosur and with the United States is anticipated to increase, offering U.S. exporters greater opportunities.

This article appeared in October 1999. (BA)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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