25 Years of MERCOSUR. A successful Example of Regional Integration?

Term Paper, 2017

41 Pages, Grade: 1,3


Table of contents

Acronyms and Abbreviations

List of Figures

List of Tables

1. Introduction

2. Underlying Theoretical Concepts
2.1 Internationalisation and Globalisation
2.2 Regional Economic Integration

3. Introduction to MERCOSUR
3.1 Founding
3.2 Objectives
3.3 Structure

4. Developments
4.1 Trade
4.1.1 Internal Trade
4.1.2 External Trade
4.2 Economics
4.2.1 GDP Evolution
4.2.2 Monetary Developments
4.3 Democracy

5. Conclusion

Reference list

Acronyms and Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: World Merchandise Trade and Trade in Commercial Services between 2005 and 2015

Figure 2: Foreign Direct Investment - Net Inflows in USD

Figure 3: Evolution of Regional Trade Agreements in the World between 1948 and 2016

Figure 4: Types of Regional Integration Agreements

Figure 5: Evolution of MERCOSUR Trade from 1991 to 2014 in Billion USD

Figure 6: MERCOSUR Internal Trade between 1990 and 1999 in Million USD

Figure 7: Internal Trade of MERCOSUR - Exports to Member States as a Percentage of Total Exports between 1990 and 2010

Figure 8: Exports from and Imports to MERCOSUR between 1991 and 1997

Figure 9: GDP of MERCOSUR Member States between 1990 and 2015

Figure 10: GDP per Capita of MERCOSUR Member States between 1990 and 2015

Figure 11: Annual GDP Growth Rates of MERCOSUR Member States between 1990 and 2015

Figure 12: Distribution of FOCEM Funds

List of Tables

Table 1: Trade Liberalisation Programme - Tariff Reductions

Table 2: Five Phases of MERCOSUR between 1991 and 2016

Table 3: Internal Trade of Selected Regional Integration Agreements

Table 4: Comparison of GDP, GDP/Capita and Annual GDP Growth in

MERCOSUR Countries

1. Introduction

In the era of globalisation, international markets have continued to grow in importance. Many regional economic integration agreements have been negotiated and created to improve competitiveness in global trade. One of these regional agreements is the ‘Mercado Común del Sur’ (MERCOSUR), in English ‘Common Market of the Southern Cone’, which was founded by Argentina, Brazil, Paraguay and Uruguay in 1991. Its creation was expected to mark an economic transition of the region as “the conditions for economic expansion were viewed as highly favourable” (ASEAN Studies Centre, 2009, p. 10).

2016 marks the 25th anniversary of MERCOSUR and the regional trade agreement has grown to a significant size over the past years. It is the largest integration agreement in Latin America and the Caribbean, the fourth largest in the world and the fifth biggest economy in the world (MERCOSUR, 2017b). It encompasses around 260 million citizens and had a combined GDP of more than 2.8 trillion USD in 2015 (Campbell, 2015).

The following extended term paper will analyse MERCOSUR and examine whether it can be regarded as a successful example of regional integration. To do so, the paper will review the objectives set in the founding treaty, the Treaty of Asunción, and analyse whether they have been fully met. At a glance, the objectives of MERCOSUR were to “eliminate trade barriers, establish a common external tariff, coordinate macroeconomic policies and develop the harmonization of laws” (Arieti, 2006, p. 764). To fulfil these objectives, the development of MERCOSUR was supposed to go through three gradual stages: the first goal was to create a free trade area, this was to be followed by a customs union, and the third and final aim was the creation of a common market. These stages will be analysed to conclude if they have been reached. At the same time, the main achievements and challenges of MERCOSUR’s integration experience will be presented.

The limited scope of this term paper does not allow for an analysis of every aspect in great detail. Due to this, the main focus after the theoretical section will be on the area of trade and on the earlier stages of the agreement, as this is most important to establish the success of MERCOSUR as a regional trade agreement and thus highly relevant to find an answer to the research question.

The term paper is structured in five sections. In the first part, the relevant underlying theoretical concepts of internationalisation and globalisation will be explained, followed by the theory of regional economic integration and its different types. The next section gives an introduction of MERCOSUR and its foundation, objectives and structure will be reviewed to gain a better understanding of this integration agreement. The following chapter will analyse the most important developments of MERCOSUR in the period between the inception in 1991 and 2016, along with the challenges and problems the agreement had to face over the years. To do so, firstly trade developments with regards to both the intra-regional and extra-regional trade will be identified. Secondly, under the section economics, the GDP evolution and important monetary developments will be examined. This is rounded up by significant socio-political developments on the subject of democracy. In the final section, the conclusion will be presented.

2. Underlying Theoretical Concepts

2.1 Internationalisation and Globalisation

“Pursuing protectionism is just like locking one's self in a dark room: wind and rain might be kept outside but so are light and air” (Jinping, 2017 cited in Dean, 2017). Although this quote is very recent, it can be applied perfectly to the past as it illustrates the motives behind the emergence of internationalism and globalisation. Regarding the last 25 years, it can be noted that both of these two phenomena have developed to a great extent and have served as a prerequisite for the process of regional economic integration and ultimately for the establishment of MERCOSUR.

In the following, internationalisation and globalisation will be defined and introduced to show the difference between these highly important yet frequently confused terms.

Internationalisation can generally be defined as the increasing importance of “flows of exchanges of raw materials, semi-finished and finished products and services, money, ideas and people between two or more nation-states” (Boyer and Drache, 2005, p. 63). The origin of the emergence of internationalisation can be traced back to the rise of colonialism and mercantilism, from the 16th to the 18th century, as people started trading goods across country borders. Since the term internationalisation derives from the word international, which means between nations, the “basic unit remains the nation” (Daly, 1999). This means that national products are manufactured through the cooperation of national capital and national labour, using mostly national resources. The products are then traded in international markets, where they compete with other nations’ produce. This definition complies with Ricardo’s classical 19th century comparative cost advantage theory (Daly, 1999). He argued that “any enduring two-way flow of goods between countries must reflect international differences in the structure of costs and prices” (Dictionary of the Social Sciences, 2002). This means that one nation can produce commodities cheaper than another and therefore has a comparative advantage. It will then export these products to the other nation and in return import products that are cheaper to produce in this other nation. The principle of Ricardo’s theory is that protectionism is obstructive as trade will be beneficial as a result of international dissimilarities in the production costs because countries “will specialise in the production of those commodities where its advantage is greatest” (Dictionary of the Social Sciences, 2002).

The best way to measure and observe the nature and the degree of internationalisation is to utilise instruments such as trade statistics and statistics of population movement. An example for this can be seen in Figure 1 which depicts the growing world trade between 2005 and 2014, with a decline in 2015 and during the financial crisis in 2009.

Figure 1: World Merchandise Trade and Trade in Commercial Services between 2005 and 2015

illustration not visible in this excerpt

(Source: WTO, 2016)

While the process of internationalisation can be regarded as mostly completed because almost all nations in the world participate in cross-border trading, globalisation is an ongoing process and a result of internationalisation. Globalisation, also referred to as international economic integration, can be defined as the association or “integration of many formerly national economies into one global economy” (Daly, 1999). In contrast to internationalism, the relevant unit is no longer the nation but an alliance of former nations. This phenomenon is a consequence of free trade as well as free flows of capital and people between countries. Ricardo’s argument of the comparative cost advantage, which was explained above in the context of internationalisation, is therefore no longer applicable to the concept of globalisation. His theory was based on the assumption that capital and labour are immobile and remain within one nation, which is not the case anymore in today’s globally integrated world (Daly, 1999).

The emergence of globalisation can be regarded as the result of internationalisation and as a resumption of the integration period between the 1850s and the First World War. The prevalent increase in global integration can in many ways be seen as a logical next step, which effectively leads to the erasure of borders between nations and ultimately to the erosion of the nation-state (Daly, 1999). One of the most significant characteristics of globalisation is the fact that activities and events taking place in one location have far-reaching consequences for “individuals and communities in quite distant parts of the globe” (Boyer and Drache, 2005, p. 64). This growing interdependence between multiple economies creates new challenges and threats but at the same time new opportunities and benefits for policymakers and countries. One very obvious threat, for instance, is the increasing competition companies are facing which may lead to the closure of a number of firms. Another central challenge is the uneven distribution of the societal benefits of globalisation. This means that “some groups may initially gain a great deal, while others may benefit only gradually or suffer setbacks” (IMF, 1997, p. 45). In their World Economic Outlook, the IMF (1997) further expresses concerns about the decreasing demand for low-skilled workers in developed economies which leads to a widening of the wage gap between low-skilled and high-skilled labour as well as to a rise in unemployment of low-skilled workers.

In spite of these challenges and threats globalisation confers a number of significant opportunities and benefits for participating countries, such as the rise of both productivity and average living standards as a result of “greater international division of labor and a more efficient allocation of savings” (IMF, 1997, p. 45). While consumers benefit from access to a broader range of foreign services and goods at lower cost than the national equivalents, the country as a whole also has the opportunity to mobilise larger volumes of financial savings. Altogether, the benefits and advantages of globalisation are often compared to those of specialisation (IMF, 1997).

There are two prominent measures used to evaluate the degree of globalisation of a country: foreign direct investment (FDI) and the ratio of trade to output. Foreign direct investment has steadily increased over the past years and can be defined as an investment made by an investor from one nation to an enterprise operating in another nation (OECD, 2008). The following chart gives an example, showing net FDI inflows in the world.

Figure 2: Foreign Direct Investment - Net Inflows in USD

illustration not visible in this excerpt

(Source: Worldbank, 2017a)

The ratio of trade to output, also known as trade as a percentage of GDP, is calculated summarising exports and imports of an economy and dividing this sum by the economy’s gross domestic product (GDP). However, this measure is prone to understate the extent of integration in advanced economies as it does not consider services, most of which are not tradable but make up for a significant share of output (IMF, 1997). To improve these measures, and therefore the extent of international economic integration, and to overcome the above mentioned challenges of globalisation, single nations come together and form associations, making them stronger. The different types of these associations will be explained in the following section.

2.2 Regional Economic Integration

Regional economic integration can be seen as a logical result of globalisation and the growth of regional integration schemes has been a major development over the past few years. In the Encyclopaedia Britannica, regional economic integration is defined as “institutional arrangements designed to facilitate the free flow of goods and services and to coordinate foreign economic policies between countries in the same geographic region” (Moon, 2014). The origin of regional integration initiatives can be traced back to the 19th century, when the first customs unions were established in Germany. Since then, regional integration arrangements (RIA) worldwide have grown in number as well as increased in size (De Lombaerde, 2006). Today, almost all countries are members of at least one RIA and approximately two thirds of the world trade take place within these agreements (Schiff and Winters, 2003). The prerequisite for entering such a regional agreement is the country’s membership in the World Trade Organisation (WTO). The latter sets the rules for global trade between multiple countries and is responsible for ensuring smooth, predictable and free flows of trade (WTO Secretariat, 2016). The WTO also has to be notified about participations in and foundations of any RIAs. As a result, the evolution of regional trade agreements can easily be tracked and is illustrated in the following figure.

Figure 3: Evolution of Regional Trade Agreements in the World between 1948 and 2016

illustration not visible in this excerpt

(Source: WTO Secretariat, 2016)

During the whole time period between 1948 and 2016, the cumulative number of both regional integration agreements in force and inactive RIAs has grown steadily, with two exceptions in 2004 and 2007.

In general, all regional agreements have the shared objective of reducing trade barriers between member countries but there is an overall distinction between two general dimensions: market integration and policy integration. The five different types of agreements depicted in Figure 4 below can all be attributed to one of these two dimensions. The dimension of market integration contains the first three types: free trade area, customs union and common market. It is based on the positive welfare effect of the free movement of products and on the optimum allocation of labour and capital as a result of free movement of production factors. Almost all integration agreements start with the dimension of market integration because it “can proceed without much demand on institutions and policy making [though the process of] taking away […] barriers” (Molle, 2006, p. 9). The dimension of policy integration contains the last two stages: economic union and supranational union. Its goal is creating a common policy framework to establish “equal conditions for the functioning of the integrated parts of the economy” (Molle, 2006, p. 10). This common policy requires common institutions with strong competences.

Before explaining Figure 4 in detail, it is important to state that the stages of the different forms in this figure are sequential from the top to the bottom, which means, for instance, a customs union cannot be established without creating a free trade area first. Furthermore, the distance between the stages is not equal or comparable but increases from the top to the bottom.

Figure 4: Types of Regional Integration Agreements

illustration not visible in this excerpt

(Adapted from: De Lombaerde, 2006, p. 164)

The first stage of international regional integration is a free trade area (FTA). Its most important characteristic is the elimination of tariffs on internal trade between member states, although this tariff removal is often only extended to certain products and services. External customs tariffs are applied individually by each country. An example of an active free trade area is the North American Free Trade Agreement (NAFTA). This is followed by the second stage, the customs union (CU). At this stage, the eradication of internal tariffs is completed without any exceptions concerning product categories. In addition to this, all participating countries adopt a common external tariff (CET) comprising “uniform import tariffs and common restrictions to outside countries” (De Lombaerde, 2006, p. 165). The implementation of the CET implies a certain level of joint decision-making and, therefore, the creation of common institutions to regulate trade, avoid trade deflection, and control the redistribution of tariff revenue.

The third stage of regional integration, and the last one to be attributed to the dimension of market integration, is the common market (CM). Its key attribute is the free movement of production factors - labour and capital - in addition to the free movement of goods and services. This necessitates a considerably greater degree of both economic and political cooperation between member states than the previous two stages, despite remaining different national regulations. This cooperation is reflected in “the harmonisation of policies in health and safety, social security and education” (De Lombaerde, 2006, p. 165). Regarding trade with the external market there are common external regulations for products and production factors (Molle, 2006).

The fourth stage, the economic union (EU), can be attributed to the overall dimension of policy integration. This stage differentiates itself from the three stages of market integration due to its harmonisation of monetary and fiscal policies, for instance a common taxation within the union, which requires a higher and more complex level of supranational cooperation and organisation. This is reflected in the development of supranational institutions with binding decision-making power over all member states. Nonetheless, the individual nations maintain separate identities. An example for an economic union are “the European Union countries participating in the European Monetary Union” (De Lombaerde, 2006, p. 165).

The supranational union (SU) makes up the fifth and final stage of the regional integration agreements. The integration of economic and political policy is complete and national sovereignty of the member states is abandoned and replaced with a common government. The United States of America or the unification of West and East Germany serve as examples of supranational unions (De Lombaerde, 2006).


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25 Years of MERCOSUR. A successful Example of Regional Integration?
Berlin School of Economics and Law
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ISBN (Book)
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MERCOSUR, Handel, Trade, Integration, Regionale Integration, Globalisierung, Internationalisierung
Quote paper
Sabrina Schleimer (Author), 2017, 25 Years of MERCOSUR. A successful Example of Regional Integration?, Munich, GRIN Verlag, https://www.grin.com/document/369458


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