Brazil's Ills Pressure Mercosur;
Argentina Cuts Tax on Exports
By CRAIG TORRES
Staff Reporter of THE WALL STREET JOURNAL
BUENOS AIRES -- Brazil's devaluation of its currency has put the big South American
trade bloc known as Mercosur under the worst strains in its four-year history.
Last week, Argentina cut taxes for exporters and dispatched its top trade official to
Brazil as it scrambled to contain damage caused by the currency shift of its largest
trading partner.
Argentine President Carlos Menem and his cabinet have been slow to react to the
Brazilian economic crises. But the real's 29% decline since the devaluation has alarmed
Argentine business groups, and they have pressured Mr. Menem for protection or new
measures that will enhance their competitiveness.
"The Brazilian devaluation changes the competitive situation for many industries in
Argentina," said Javier Tizado, executive vice president of Argentine steel producer
Siderar. "We have to take transitory measures. We are going to see an avalanche of
products."
Presidential Election Year
Mr. Menem faces the intricate task of placating top industrialists and keeping
unemployment down during a presidential election year, while avoiding protectionist
measures that might jeopardize Mercosur, one of Latin America's largest free-trade
zones. The four-country trade bloc, comprising Brazil, Argentina, Paraguay and
Uruguay, exchanged more than $20 billion of goods and services in 1997. Chile and
Bolivia are associate members, which means they partake in some regional accords but
aren't fully integrated into the Mercosur regime.
Last week, Mr. Menem dispatched Jorge Campbell, secretary of international economic
relations, to Brasilia to begin a series of talks on compensatory steps.
In an interview, Mr. Campbell said many trade issues are unclear because nobody is
sure where the Brazilian real will settle. But he said the ministry has a list of several
industries that are in obvious jeopardy. He declined to elaborate, but analysts say
textiles and shoes, as well as food products such as milk and chicken, will face
difficulties. The steel industry is already in dire condition because of cheap Asian
exports.
"We will look at all the ways trade is being slowed, and at subsidies, and try to clear
them up," Mr. Campbell said. The talks resume Monday.
Officials from Uruguay and Paraguay, whose economies are relatively small, are likely to
go along with measures that will help their trade advantage with Brazil.
Brazilian officials said they may scale back an export-finance program, Proex, under
which the government provides credit to exporters at below-market rates.
"The revision of Proex for the countries of Mercosur and the revision of terms of credit
for importing are subjects that could be on the negotiating table," said Joao Alfredo
Graca Lima, trade subsecretary for the Brazilian foreign ministry.
Some Steps Taken
Argentina's economy ministry has already taken some steps to protect businesses. The
implementation of a 5% wage tax cut was sped up and targeted more specifically to
companies involved in international trade. A plan to cut import taxes on certain
capital-goods imports, such as computers, is on the table.
Argentina and Brazil exchanged $15 billion of goods and services in 1997, which
represented about 75% of all Mercosur trade. From 1995 through 1997, Argentina
enjoyed a trade surplus with its giant neighbor. Brazil's economic instability made it a
costly place to work, so many companies set up plants in Argentina.
Of the estimated $14.4 billion Argentina received in foreign investment last year, one
third was directed toward the export-oriented manufacturing sector. Nobody is sure
whether the Brazilian devaluation will dissolve the Argentine advantage. But all the new
industrial capacity oriented toward Brazil will have to either slow or new markets will
have to be found.
"We are faced with a very difficult situation," said Federico Zorraquin Jr., chief
executive of the Argentine conglomerate Garovaglio & Zorraquin, which sells plastics in
Brazil. Aside from falling demand, long-term contracting is another problem. Mr.
Zorraquin's exports are priced in reals, but when the money is repatriated into
Argentina, it now risks being clipped by foreign-exchange losses.
--Matt Moffett in Rio de Janiero contributed to this article. |
