Regional Outlook : Look Out, NAFTA! Latin Trade Bloc Is Growing : The four-nation Mercosur is larger than Europe and boasts two economic powerhouses: Brazil and Argentina.

By WILLIAM R. LONG

Jan. 24, 1995 12 AM PT

TIMES STAFF WRITER

BRASILIA, Brazil — Suddenly, an economic powerhouse is rising on the South American horizon.

Ambitious dreams became a reality Jan. 1 with the beginning of zero-tariff trade among the four members of Mercosur, the so-called Southern Common Market. The new free-trade bloc has a combined population of nearly 200 million, is larger than Europe and includes South America’s two most productive economies, Brazil and Argentina. Paraguay and Uruguay are the other members.

But Mercosur is not stopping there. Like the North American Free Trade Agreement, it has expansion plans.

Even as zero tariffs kick in among its members, Mercosur is negotiating with neighboring countries to extend free trade across the continent. Brazilian diplomats hope that by midyear, new agreements will form the framework for a future South American Free Trade Area.

Heads up, NAFTA: Here comes SAFTA.

“It will make South America one of the most dynamic, growing areas in the world--it already is to some extent,” said Jose Artur Medeiros, a Brazilian Foreign Ministry specialist.

Since Mercosur began lowering tariffs by stages in 1991, yearly trade among the four member countries has multiplied from $2.7 billion to an estimated $12 billion.

Trucks loaded with goods clog roads and bridges between the countries. Companies of all kinds are expanding to serve the expanded market; many are forming cross-border joint ventures. And multinationals from the United States and Europe are also investing, eager for a piece of the growing pie.

The recent good health of both the Brazilian and Argentine economies is a key to Mercosur’s potential as a world-class market. Argentina’s economy has been growing at annual rates of 6% or more since 1991, and Brazil tamed its super-inflation last year while maintaining growth of 4.5%.

“That makes the whole thing one of the most attractive emerging markets in the world,” Medeiros boasted. Mercosur’s combined gross domestic product in 1994 was about $800 billion, its total exports were $61.5 billion, and its imports were $56 billion. These figures might have seemed impossible a decade ago.

The economic integration of South America has been an elusive goal. Attempts to build free-trade areas bogged down in a swamp of nationalistic rivalries and border disputes; conflicting military and civilian governments; policies that protected domestic producers with high tariff barriers, and preoccupying problems with foreign debt, inflation and erratic exchange rates.

But now, South American political and economic harmony is at an all-time high. All of the continent’s countries are governed by elected civilians, and all have adopted economic policies that emphasize market reforms and free trade.

After negotiations for free trade between Brazil and Argentina began making progress in the late 1980s, the two big countries decided to bring Paraguay and Uruguay into the plan. In 1991, the presidents of the four countries agreed to set Jan. 1, 1995, as a deadline for bringing tariffs down to zero.

Every six months, Mercosur whittled away its internal tariffs by 7%. Finally, with a few exceptions, the zero target was met. Remaining tariffs, applied to about 5% of Mercosur’s internal trade, are to be eliminated within five years.

New common external tariffs, ranging from zero to 20% and averaging about 14%, cover all but 15% of Mercosur’s imports from the rest of the world. The arrangement makes this the only major “customs union” outside the European Union.

Exceptions to the common tariff schedule will be phased out over the next 10 years. Then Mercosur is to begin seeking common monetary, exchange, labor tax and other policies, with the goal of becoming a full-fledged common market like the EU.

But first, the free-trade area is poised for expansion to include Chile and Bolivia. According to Medeiros, negotiations with those two countries could be finished in three or four months. Then, he said, similar free-trade agreements could be reached quickly with Peru, Ecuador, Colombia and Venezuela.

All of those countries except Chile already belong to the Andean Pact, a free-trade area that is also beginning zero-tariff trade among its members. And Chile has been negotiating bilateral free-trade agreements with Andean Pact members.

If all the interlocking negotiations go well, Medeiros predicted, zero-tariff trade could be phased in by the year 2005 or earlier. In effect, that would make all of Spanish- and Portuguese-speaking South America a single free-trade area--SAFTA.

Then, SAFTA, NAFTA and other countries could converge in a single Free Trade Area of the Americas.

Mercosur’s early success is being touted as a harbinger of how free trade can benefit the hemisphere’s developing countries.

In the first place, “it’s a catalyst for economic reforms,” said Alieto Aldo Guadagni, Argentina’s ambassador to Brazil. To participate successfully in a free-trade area, Guadagni said, countries need to liberalize their economies, increase efficiency and open up to international competition.

And a bigger market, with greater business potential, is likely to draw greater capital investment for new equipment and technology. That helps make products from the free-trade area more competitive on the world market.

Mercosur is eager to expand its trade with the rest of the world. The European Union and Mercosur are starting negotiations for special tariff treatment.

Meanwhile, Guadagni said, Mercosur is attracting increasing investments from North American, European and Asian corporations.

Just three years ago, partly because of Brazil’s inflation problems, many North American and European observers regarded Mercosur’s plan for free trade by 1995 as ill-conceived and overly ambitious.

“It was considered to be typical Latin American slapdash and lack of planning power,” recalled Richard Foster, editor of an executive newsletter named Brazil Watch. But now, he added, skeptics “are eating their words.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

NAFTA Members

Canada

United States

Mexico

Mercosur Members

Brazil

Paraguay

Uruguay

Argenitina

Considering Membership in Mercosur

Greenland