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Domestic Determinants
of National Trade Strategies
A Comparative Analysis of Mercosur Countries,
Mexico and Chile
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Domestic Determinants
of National Trade Strategies
A Comparative Analysis of Mercosur
Countries, Mexico and Chile
Edited by
Roberto Bouzas
CHAIRE MERCOSUR
DE SCIENCES PO
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Domestic Determinants
Acknowledgements
of National Trade Strategies
A Comparative Analysis of Mercosur Countries,
Mexico and Chile
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Table
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Foreword
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Introduction
Introduction
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The six national case studies were the four members of Mercosur
(Argentina, Brazil, Paraguay and Uruguay), Chile and Mexico.
Despite their diversity in terms of size, location, economic struc-
ture, trade openness and the commodity and regional composition
of trade, these countries have faced a similar external environment.
However, their trade policy choices have differed widely: the inten-
sity and depth of trade liberalization has been disparate and some of
them have pursued quite divergent trade strategies. This section
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the US and the EU (the same is true the other way round), the role of
Brazil in the FTAA and EU-Mercosur negotiations has been emi-
nently defensive. In coincidence with the size of the Brazilian
economy and the diversification of its regional trade pattern, trade
diplomacy has been increasingly active in the multilateral arena,
promoting new coalitions aimed at strengthening developing coun-
tries’ bargaining power.
Markwald (2006) points out that structural features such as a
relatively low foreign trade coefficient and the regional and
commodity composition of foreign trade flows help to account for
the priority which Brazilian trade policies has given to multilateral
and regional negotiations, as well as the strength and influence of
defensive import-competing interests. In effect, import-competing
sectors have enjoyed relatively high protection and generous
government incentives. This has been the case with very influential
industries such as motor vehicles and textiles and clothing, which
have been sheltered from foreign competition and have received
generous government support to penetrate foreign markets. As far
as export-oriented sectors are concerned, while agribusiness has
become internationally very competitive without the need of public
support, industrial exporters (such as the steel and aircraft
industries) have grown fast in a context of heavy dependence on
public sector export finance and special import regimes. While
internationally competitive agribusiness has most of its offensive
interests in developed country markets (a fact that partly accounts
for its lack of enthusiasm with Mercosur), most industrial sectors
with offensive export interest are heavily dependent from regional
or the US markets. There is no doubt that since the mid-1990s the
balance of influence of these sectors has changed significantly, with
agribusiness gaining more leverage in public debates and policy-
making. However, this has yet failed to be fully reflected in a new
trade policy approach. In effect, the predominant Brazilian policies
still regard trade negotiations (particularly North-South) as a source
of threats rather than opportunities.
The role of institutional factors has also been important in
shaping Brazilian foreign trade strategies. According to Mark-
wald (2006), domestic elites have been traditionally cohesive in
their view of the role of Brazil as a relevant international eco-
nomic and political actor, backed by a strong regional leadership.
However, there is no equivalent level of consensus as to the best
way to achieve that end. While a more “liberal” elite emphasizes
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than in the case of Argentina. Despite the shared features of the trade
negotiation strategies pursued by Mexico and Chile, while the former
tried to become a hub and exploit its proximity and preferential access
to the large US market, Chile strived to use its limited bargaining
leverage to improve access conditions to as many markets as possible
(particularly in sectors with export potential).
These disparate trade negotiation strategies were accompanied
by divergent trade policies. In effect, whereas the six countries
studied adopted policies of unilateral trade liberalization, their
depth and radicalism was very different (see Table 1). Chile
implemented the most ambitious and consistent trade liberalization
policy, materialized in the adoption of a low and flat tariff rate on
most goods. In the 1990s this unilateral policy was complemented
by an aggressive strategy of preferential negotiations. As a result,
in 2004 Chile applied average tariff levels were nearly half those of
Argentina, Brazil, Paraguay and Uruguay and, most remarkably, a
third of Mexican applied nominal tariff rates. Mexico opened
significantly its economy as well, but in contrast to Chile it did so
basically through preferential agreements (since Mexico trades
heavily with the US and the US offers a broad range of goods, NAFTA
was tantamount to unilateral liberalization). However, Mexican
trade partners receiving MFN treatment still suffer significant
discrimination to access that market.
In the opposite side of the spectrum, Brazil adopted a more pru-
dent approach to trade liberalization, focusing on a more gradual
and regionally-concentrated trade opening. The Brazilian strategy
also focused on building a customs union with its regional trade
partners, as a means to broaden its domestic market and, most
importantly, increasing its bargaining leverage in multilateral and
other preferential negotiations. Brazil also adopted a defensive
stance in preferential negotiations, particularly North-South. The
three other Mercosur members (Argentina, Paraguay and Uruguay)
formally adopted the customs union approach and a common exter-
nal tariff (largely shaped by Brazilian structure of protection), but
maintained a large number of (legal or de facto) exceptions to
accommodate their particular needs. For the smaller members of
Mercosur, and especially for Uruguay, free trade with larger and
more diversified economies (such as Argentina and Brazil) was
close to unilateral liberalization (as in the case of Mexico). How-
ever, the costs in terms of trade diversion are likely to have been
higher than for the North American country. Paraguay, at last,
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Structural Factors
As shown in Table 2, the six countries under study are quite dif-
ferent in terms of some structural variables influencing trade policy
choice. These variables include: a) economic size; b) the intensity
of integration into the world trading system (as suggested by trade
to GDP ratios and per-capita exports); and c) the commodity and
regional composition of foreign trade flows.
At one extreme of the spectrum, Brazil and Mexico can be
characterized as relatively large economies, at last by developing
countries’ standards. Despite this shared feature, they show quite
contrasting patterns of integration into the world economy. In
effect, the trade to GDP ratio of Mexico doubles that of Brazil and
per capita exports are four times higher. Location and factor
endowments, apart from policy choices, help to account for these
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Institutional Factors
This category aims to capture the effectiveness and cohesion of
governmental institutions and their autonomy in relation to private
sector interests. Foreign trade policy and foreign trade negotiations
(especially as a result of the expanding coverage of the
international trade agenda) are by definition complex policy areas
in which multiple governmental agencies must take part. This
makes a high degree of inter-agency coordination necessary for
policy effectiveness, quite independently from the specific (formal
or informal) arrangements adopted by the policy-making process.
As discussed in section 2, Jordana y Ramió (2002) proposed a
taxonomy of key organizational models based on the criteria of
which Executive agency/ies plays the leading role in trade policy-
making. Our six countries illustrate the point: they display different
organizational arrangements and some of them show either hybrid
or even volatile patterns of institutional organization, as reflected
by frequent organizational change. Yet the countries in our sample
and other national experiences show that a particular organizational
model is neither a sufficient nor a necessary condition for policy
effectiveness. Instead, what seems critical is the ability to coordi-
nate and/or lead the policy process by an individual agency.
Stein and others (2006) have estimated a qualitative Policy
Index aimed to capture Weaver and Rockman concept of
“government capacities” in the case of eighteen Latin American
countries (see Table 3). They find that Chile ranks at the very top
of the table with a “Very High” Policy Index, followed by Brazil,
Mexico and Uruguay, which show a “High” Policy Index.
Argentina and Paraguay, in contrast, are reported to have a “Low”
Policy Index. These findings, with minor corrections, are
coincident to those of our six national case studies (applied
exclusively to the realm of trade policy).
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In effect, our qualitative case studies also show that Chile ranks
at the top of policy effectiveness. According to Meller (2006), the
Chilean polity is characterized by a strong Presidential regime, a
comparatively low degree of institutional fragmentation and a
relatively high degree of formalization of inter-agency
coordination. Interestingly, and in contrast to the experience of
other Latin American countries, a strong presidential regime has
led to stable rather than volatile trade policies, probably as a result
of the combination of a long period of authoritarian rule with a
successful export-oriented economy that multiplied the number of
interested actors actively engaged in export trade. A comparatively
low degree of institutional fragmentation and a relatively high
degree of formalization of inter-agency coordination can also help
to account for policy stability and, particularly, for the fact that
during the 1990s a lower-rank agency played a salient role in trade
negotiations and foreign trade strategies.
Brazil and Mexico show a relatively high degree of policy
effectiveness, but rising fragmentation in the case of Mexico and, to
a lower extent, Brazil. In both cases trade policy-making and
foreign trade negotiations have been concentrated in state agencies
with significant influence, technical competence and a relatively
high degree of autonomy. However, in both cases the
diversification of private sector interests has not been easily
translated into a new policy pattern. In Mexico, this inability has
led trade policy-making and foreign trade negotiations to an
unstable status quo, in which a protectionist reversal cannot be
discarded. In Brazil, in turn, there has been a growing
dissatisfaction with the traditionally defensive policy stance of
Itamaraty, but not enough to encourage a policy change.
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Conclusions
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Roberto BOUZAS
REFERENCES
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Chapter 1
The Political Economy of International Trade
Policy in Argentina
Introduction
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1. More than ten tariff reforms were implemented between October 1989 and
November 1991. These reforms included even a short-lived uniform 22% tariff
rate for almost all products (in place between January and April 1991). Not only
tariff levels but also the underlying objectives of the tariff structure changed dra-
matically throughout the period.
2. The fixed exchange rate schedule (locally known as Convertibilidad) also
constrained fiscal and monetary policies.
3. A duty on imports imposed in 1961 to finance the collection and publication
of statistical information on imports and exports by the National Customs Admi-
nistration.
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25
20
15
10
Common
5 External Tariff
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Years
Avg. Tariff Avg. Tariff + Statistical Fee Statistical Fee Tariff revenue/Imports value Trend
Source: authors´ calculation based on data from FIEL, Ministry of Economy and Production
and Crespo Armengol (2002).
1. For most of 2001 a so-called “covergence factor” imposed an extra tariff rate
of around 5% on all imports. Estimates of average tariff levels do not include this
component.
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1. Such were the cases of automobiles (which benefited from a special regime)
and textiles and footwear (which enjoyed specific minimum import duties with
high ad valorem equivalents). Considering their structural international competiti-
veness, it is particularly surprising the increase in effective protection in the case
of food and beverages.
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1. Import tariffs on capital goods were reduced to 0% in early 1993, but domestic
producers were compensated with a 15% tax reimbursement on local sales. Eco-
nomic authorities expected to promote technological modernization through these
measures. Yet, they also compromised negotiations with Brazil over a Common
External Tariff, since Brazil protected domestic production of capital goods at the
highest rate. In 1994, both countries agreed to temporarily exempt capital goods,
computer and telecommunication products from the Common External Tariff and
gradually converge towards a level of 14% for capital goods in 2001 and 16% for
computer and telecommunications in 2006. In 1995 fiscal considerations led Argen-
tine authorities to raise extra-Mercosur tariffs on capital goods to 10% and reduce
compensation to local producers to the same percentage. By mid 1996, reimburse-
ments to local producers were eliminated and tariffs on capital imports were
increased again. These changes account for a significant portion of the increase in
tariff levels recorded in 1995 and 1996 (see Figure 1). Yet another reversion took
place three years later, when tariffs on capital, computer and communications goods
produced outside Mercosur were cut down to zero (Argentina obtained a waiver
from its Mercosur partners) and the compensation to local producers was restored.
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Rest of
Instrument Type Sectors Period Mercosur
the world
Automatic NO
Textiles and
previous Since 19961 except for YES
Licenses footwear 1995-1997
import
licenses Several Since 1999 YES YES
Since 1999
NO YES
(footwear, paper)
Non
Automatic Paper, footwear, Since 2004
previous Licenses washing (washing
import machines, toys machines)
licenses
Since 2005
(toys)
YES
(with preference
Variable tariff Tariff Sugar Since 1992 YES
margins since
1999)
Since 1993
(textiles)
1993-1997
Specific Textiles, (all footwear)
minimum Tariff footwear Since 2000 NO YES
import duties and toys (non-sport
footwear)
Since 1999
(toys)
Mainly metal
products (15),
steel (12),
Anti-dumping Trade relief chemicals (10), 1992-96
Since 1999 YES YES
duties measure machinery and (steel)
equipment (8)
electric
appliances(6)
Food products
(peach YES
Countervailin Trade relief
g duties measure conserves, Since 1996 NO (against
gluten de trigo, EU)
olive oil)
Paper (Mercosur 1992-1994 YES NO
safeguard)2 (paper)
1997-2000
(footwear)
NO YES
1992-1994
(paper)
Footwear,
motorcycles, TV Since 2000
Trade relief NO YES
Safeguards sets and paper (sport footwear)
measure (GATT/WTO
safeguard) 2001-2004
(motorcycles,
NO YES
peach conserves)
Since 2005
YES3 NO
(TV sets)
Textiles Since 1999 YES
YES
(safeguard ATC) (textiles) (1999-2000)
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Rest of
Instrument Type Sectors Period Mercosur
the world
1992-1994
Since 1999
(steel)
Steel,
Market petrochemical, YES
ordering Private sector footwear, home 1999-2000 (exclusively with NO
agreement (footwear)
agreements appliances, Brazil)
some textiles
Since 2004
(denim and
refrigerators)
Balanced trade Performance Automobiles Since 1991 YES YES
requirements requirements
National Performance
content Automobiles Since 1991 YES YES
requirements
requirements
a. Automatic licenses applied until 1999, to be then replaced by non-automatic licenses.
b. See note 1, p. 54.
c. Originating in the Zona Franca de Manaos (Brazil).
Source: authors’ elaboration on data from Ministry of Economy and Production, National Foreign
Trade Commission and Mercosur Reports (BID/INTAL).
1. Argentina started using export promotion mechanisms in the 1960s with the
main purpose of spurring non-traditional exports. The use of these mechanisms
declined with the trade reforms adopted in the mid-1970s, but they were restored
in the mid-1980s. The 1989-90 crises significantly compromised its efficiency.
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of the Value Added Tax paid over the production process, which
takes the form of a tax credit. Fiscal considerations often lead the
authorities to delay credit determinations, thus raising exporters´
financial costs (particularly damaging small firms). In Argentina
the VAT rate is 21%. An Industrial Specialization Regime was in
place between 1992 and 1996, offering preferential 2% tariffs on
imports used to increase exports. The regime was suspended for
fiscal reasons three years earlier than originally expected, thus
barely having an impact on exports 1 (Sirlin, 1999).
1. In fact, exports under this program grew at a slower pace than the rest of
manufacturing exports over the same period. The regime, which rewarded sales
that would not have been made in the absence of any official incentive, concentra-
ted benefits on a few large export-oriented firms.
2. Except for a brief period in 2001, since 1995, exports to Mercosur have not
benefited from reimbursements.
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2002 and currently affect all products with rates ranging from 5 to
25%. 1 The sharp increase in international prices for crude oil led
national authorities to adopt a system of variable taxes on exports
of this product. 2
Several reasons account for the maintenance of taxes on exports
since 2002 in spite of their distorting effect on trade policy. First,
export taxes explain most of the improvement in the fiscal stance in
the post-Convertibility period. 3 Second, the relatively small num-
ber of exporting firms facilitates tax administration (Lederman and
Sanguinetti, 2003). Third, taxes on exports mitigate the effect of
devaluations on domestic prices. This is politically significant as
food and energy-related products represent the bulk of Argentine
exports and weigh heavily on domestic production and consump-
tion patterns. For this reason the government has increased exports
taxes on sectors that reorient their sales from the local market to
international markets. 4 Finally, by taxing exports the state captures
part of the rents accruing to agricultural and oil extracting sectors as
a result of the devaluation and higher international prices. 5
1. Grains and oilseeds pay 20%, while most manufactures pay around 5%.
2. The rate increases when the price of each barrel exceeds USD 32 up to a
maximum of an additional 20%. The current tax rate on oil exports is 45%.
3. They have accounted for 8% to 10.5% of total tax collection since 2002.
4. Late in August 2005 government increased export tax rates on dairy prod-
ucts from 5% to 15% after attempts to reach a price agreement with dairy firms
failed. To institutionalize this policy the Argentine government has recently
adopted a “competitive need clause” by which firms affected by internal or exter-
nal factors may apply for tariff reductions, increases in export taxes or a reduction
of reimbursements.
5. For an estimate on the distribution of after-tax oil rent see Gaggero and
Grasso (2005).
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with the US over an FTAA and with the European Union and the
WTO’s Doha Round negotiations. Argentina also pursues bilateral
negotiations with countries such as China and Russia.
The Multilateral Dimension: Argentina and the GATT/WTO
Argentina joined the GATT in 1968, after the completion of the
Kennedy Round. As a member, Argentina gained concessions
from the European Community and the US, which were broadened
during the Tokyo Round (1973-1979). As a developing country,
Argentina had only to consolidate a small number of tariff positions
in exchange (De las Carreras, 1991). Until the Uruguay Round,
Argentina participated in the multilateral trade forum only sporadi-
cally (Ablin and Makuc, 1995). 1 However, it was very active in the
Uruguay Round 2 acting both alone and through the Cairns Group.
Argentina’s unilateral trade liberalization was completed before the
end of the Uruguay Round. Consequently, commitments did not
always result from an exchange of concessions but were sparked by
domestic considerations. 3 As a result of the Uruguay Round,
Argentina consolidated its tariffs at around 35%. The ratification of
the Uruguay Round agreements meant the adoption of formal pro-
cedures to enforce trade relief measures, the reform of intellectual
property laws according to the TRIPs, a commitment to eliminate
measures incompatible with TRIMs, and a reduction of subsidies. 4
The new commitments entailed acceptance of WTO conflict resolu-
tion procedures, which Argentina also used successfully as a com-
plainant. 5 WTO commitments also served to restrain the use of
certain trade protection measures during the 1990s.
Argentina is seeking further liberalization of agricultural trade
from the US and the EU, and has thus remained active in the Doha
Round. The country partakes in a coalition led by Brazil, China and
India countries that are able to make concessions of interest to
1. Argentina implemented many of the codes agreed during the Tokio Round
well ahead (Ablin and Makuc, 1997). For example, the Customs Valuations code
was implemented in 1988 and the Anti-dumping code in 1992.
2. We thank Néstor Stancanelli for calling our attention to this point.
3. Bouzas and Soltz (2004) analyze Argentina commitments before the GATS.
4. For a detailed analysis of these commitments and their implications see Cas-
aburi et al. (1998).
5. These are the cases of Chile’s price ranges and definitive anti-dumping
duties applied by the US to certain steel products. A controversy against the EU
about measures affecting trade of certain bio-technological products (the so-called
transgenic soybean) is still under way.
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1. Argentina actively took part in ALALC negotiations during the 1960s. This
integration process soon faced the constraints posed by the very logic of ISI, the
exhaustion of the phase of “easy” concessions and high political and economic ins-
tability in participating countries. Acknowledging these difficulties, a more flexi-
ble scheme without specific time commitments was adopted (the ALADI
agreements established in 1980). This context drew Argentina and Brazil closer
by the mid 1980s.
2. Economic integration with its neighbour dissolved military confrontation
and helped democratic governments to reach their priority goal of reducing the
influence of the Armed Forces in domestic politics.
3. Russell and Tokatlian (2003) highlight the fluctuations of Argentine percep-
tions of Brazil, which traditionally “was seen as an indispensable ally to enlarge
national autonomy, strengthen international negotiation capabilities but also as the
main geopolitical rival, which threatened national security and even our country’s
territorial integrity.”
4. This mode of regional integration, with “more market and less state,” suited
the neo-liberal paradigm prevailing over economic policies at the time.
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Domestic Determinants
of International Trade Policy in Argentina
Theoretical Arguments
Trade policies obviously reflect policy makers’ intentions.
However, those intentions do not always express policy makers’
preferences. Policy makers face restrictions and internalize them in
forming their preferences. Theories should account for the effect
of these restrictions that interact with ideologically-inspired
preferences to shape policy decisions. In the case of trade policy
these restrictions can be roughly classified according to their origin.
National authorities take into account the actual or potential
trade policies adopted by other national states to decide on levels of
domestic market protection, implement export promotion measures
(Brander, 1995) and develop international negotiation strategies
(Maxfield, 2001). These considerations, together with bilateral,
multilateral and regional agreements constrain trade policy choices.
As these factors operate outside the national territory, we can then
call them external factors. External factors are significant determi-
nants of international trade policies. However, as we have indi-
cated, our discussion will focus exclusively on domestic factors.
This does not mean that we believe domestic factors to be more
important. Indeed, domestic factors are not sufficient to interpret
some features of Argentine trade policy, particularly the persistence
of relatively low tariff barriers.
We will not comprehensively review the extensive literature on
domestic factors and international trade policy. 1 Instead, we will
briefly outline some theoretical arguments to guide our analysis
of the Argentine case. The arguments are divided into four
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1. It should be noted that, as Rodrik (1995) argues, the literature tends to focus
on the reasons why societal sectors will demand trade restrictions. It is far from
obvious that this should always be the case. The systematic bias of trade policies
against free trade is thus left unaccounted for. Rodrik suggests that the signifi-
cance of tariffs as a source of fiscal revenue and the status quo bias of any policy
hold the greatest promise in accounting for anti-trade bias (1995, 1480).
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1. Strom and Swindle (2002) develop further the language to refer to institutio-
nal positions with regard to their authority to intervene in policy-making. They
distinguish between veto players, agents whose agreement is necessary but not suf-
ficient to bring about policy change; decisive players, agents whose agreement is
sufficient but not necessary to enact policies and dictators, whose agreement is
both necessary and sufficient to adopt political decisions.
2. Members of interest groups or sections of the state apparatus such as the
armed forces can also count as veto players. The number of veto players can thus
vary across issues and over time. However, the distinction between institutional
and veto players is most relevant for a general analysis of political systems.
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Structural Factors:
Structure and Nature of Domestic Interest Groups
Traditionally, clashes among dominant economic sectors heavily
influenced international trade policy and negotiation strategies in
Argentina. Until the early 20th century, these clashes were easily
resolved in favor of exporting landowners and against the
embryonic manufacturing sectors. As the industrialization process
unfolded, the structure of economic sectors became more complex.
Some industrialists (mainly in the metal-mechanic sector)
developed technical abilities during the import substitution period
and enjoyed the benefits of export promotion. By the late 1960s
they had started to export part of their product. In the 1980s, when
domestic demand contracted, some producers of intermediary
goods also joined the select club of exporters. These sectors gained
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1. Bianchi, Bozzalla and Mascareño (2003) show that half of the firms that
began exporting in the second half of the 1990s did so discontinuously, 40% aban-
doned the effort and only 10% continued to export throughout the period (1994-
2002).
2. Small and medium-sized firms prevail in exports of capital goods, electro-
nics, medical instruments, construction inputs, fruits and fishing (Crespo Armen-
gol, 2005).
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Institutional Factors:
Insulation, Veto Players and Trade Policy in Argentina
In this subsection we describe the features of the Argentine
political system that are most relevant to interpreting trade policy
patterns. We divide the analysis into three parts. The first one deals
with constitutional features. Constitutional features are rules of the
political game that are explicitly set by the Constitution or by laws
of constitutional standing. The second refers to basic characteristics
of the party system. Partisan features can be interpreted as
contextual constraints on policy-making (by our definition, as
institutions) between elections. The third section addresses
bureaucratic features. By this we refer to the distribution of policy-
making authority and the policy capabilities of different Executive
agencies (mainly at the national level).
Constitutional Features
Presidentialism. Argentina is a presidential republic. Executive
power is exercised by an individual who is directly elected in a
nationwide electoral district for a fixed four-year term. Argentine
law endows presidents with significant legislative powers.
Presidents can initiate and veto legislation and legislate by
emergency decrees. Vetoes can affect an entire piece of legislation
or only parts of it. A qualified majority of 2/3 of both chambers in
Congress is required to override presidential vetoes. However, veto
overrides are rare. In practice, this means that Presidents should
agree on every detail of a bill for it to become a law. The 1994
Constitution grants Congress the ability to revise or suspend
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0
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Source. Authors’ calculations on data from the National Electoral Department, Ministry of
the Interior.
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Bureaucratic Features
A complete account should bring into the picture the attributes of
bureaucratic organizations. The division of authority among Exec-
utive agencies (Ministries, Secretaries, Undersecretaries and
National Departments) can be analyzed in terms of the veto players
approach and its effects on policy insulation. 1
Up to the early 1990s, trade policy prerogatives were concen-
trated in the Ministry of Economy. In 1992, Law 24.290/92 split
competences between this Ministry and the Ministry of Foreign
Relations. The former has authority over tariffs, export taxes,
quantitative import restrictions, licenses and special import
regimes, customs regimes, export tax rebates and trade relief. The
Ministry of Foreign Relations, in turn, is responsible for interna-
tional trade negotiations and trade promotion activities abroad. The
Ministry of Economy also has a say on trade negotiations. This
basic distribution of functions was kept unaltered since 1992, but
the division of labor among subagencies within each Ministry has
experienced frequent changes (Bouzas and Soltz, 2004).
Within the Ministry of Economy, most trade-policy related
authority is concentrated in the Secretariat of Industry, Trade and
Small and Medium-Sized Firms, which is in turn divided into
three Undersecretariats. The Undersecretariat of Trade Policy
and Management carries most trade-related responsibilities, such
as the implementation of trade relief measures and export
promotion programs and the determination of tariff levels
(although it has no final authority on this area). It also
participates in foreign trade negotiations. The Undersecretariat of
Industry administers industrial promotion regimes and, since
2003, coordinates the National Forum on Industrial
Competitiveness. The Undersecretariat for Small and Medium-
Sized Firms and Regional Development helps smaller firms with
financial, informational and training trade-promoting activities
and oversees the National Foreign Trade Commission, which
participates in trade relief investigations. Within the sphere of the
Secretariat of Economic Policy, the Undersecretariat of Economic
Coordination (through the Department of Foreign Economic
Policy) has primary authority on tariff issues. The Secretariat of
1. Given that bureaucratic agents are typically not endowed with political
authority of their own, political transaction-costs considerations are somewhat less
relevant to interpreting interbureaucratic coordination.
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Concluding Remarks:
Interpreting Argentina International Trade
Strategies in Light of Domestic Factors
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in the late 1980s, as it is that they have been able to sustain it since.
The neutralizing effects of the 1989 crisis (and the signs of instability
already apparent in 1987) can probably help to account for the lack or
inefficacy of societal resistance to trade reform. However, politically
influential and politically salient sectors were able to obtain some
level of remedial protection. 1 All of these sectors are import-
competing, which is consistent with factor-specific approaches.
Incomplete insulation and the relative simplicity and lack of
decision-making coordination help to understand the discretional
pattern of trade relief.
In spite of its relative institutional weakness, the Argentine pub-
lic sector succeeded in sustaining its main policy towards imports
through time. In line with prevailing scholarly opinion, we believe
that the adoption of regional and multilateral commitments locked
in the policy orientation set in the late 1980s. It is also possible that
the simultaneity of trade liberalization with privatization and inter-
nal deregulation offered incumbent authorities the possibility to
offer part of the business community with compensations in
exchange for abiding to trade liberalization.
It is in those areas where institutional capabilities and policy
consistency are most critical that the Argentine public sector
reveals its institutional infirmities. Export promotion policies have
contributed relatively little to enhance the competitive abilities of
exporting sectors and they have been largely ineffective to promote
exports from non-traditional sectors and smaller firms (indepen-
dently of the macro-economic environment). The persistence of
some special export promotion regimes (now receding in light of
international commitments) also illustrates the inability of local
institutions to insulate policy makers from the pressure of politi-
cally influential groups or firms.
Marcelo LEIRAS
Hernán SOLTZ*
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REFERENCES
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Chapter 2
The Political Economy of Foreign Trade Policy
The Brazilian Case
Introduction
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1. The private sector led by the CNI –National Confederation of Industry– esta-
blished an agenda for modernization and reforms, much of it of a legal nature, designed
to reduce the “Brazilian cost”. This set of demands was followed up through meetings
with governmental authorities during a period of almost three years (1995/1998).
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88
Selected years from 1987- 2004
Nominal Tariff Rates (%) Effective Tariff Protection Rates (%)
Trade liberalization
process Year Simple Weighted Standard Simple Weighted Standard
Maximum
Average Average 1 Deviation Average Average 1 Deviation
1987 57.5 54.9 21.3 77.1 67.8 53.8 308.1
1st. Stage
1989 32.1 29.4 15.8 46.5 38.8 44.5 244.3
1990 30.5 27.2 14.9 47.7 37.0 60.6 351.1
2nd. Stage
1993 13.5 12.5 6.7 16.7 15.2 13.5 76.5
3rd. Stage 1994 11.2 10.2 5.9 13.6 12.3 8.4 27.7
1995 12.8 10.8 7.4 17.1 10.4 19.5 113.8
1997 15.6 13.4 7.6 21.6 16.6 29.6 177.0
Post-liberalization
1999 15.0 13.2 5.7 18.7 15.4 14.6 n.a.
period
2002 13.5 n.a. n.a. n.a. n.a. n.a. n.a.
2004 10.4 n.a. n.a. n.a. n.a. n.a. n.a.
1. Averages weighted by value added. n.a.: not available.
Sources: Kume, Piani and Souza (2000) for 1987-1999; Abreu (2004), based on unpublished data from Kume for 2002 (4th quarter); WTO (2004) for 2004 (Janu-
ary).
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Table 3. Import penetration ratios in selected sectors (%) (at 2004 prices)
Selected sectors 1990 1994 1997 1999 2002 2004
Electronic equipment ............................................................ 9.1 24.6 37.3 49.2 55.5 52.8
Parts, components and other vehicles ................................... 6.5 13.9 24.6 31.8 29.5 35.0
Pharmaceutical and perfumery products .............................. 5.2 11.4 16.0 19.1 25.5 27.8
Electrical equipment .............................................................. 6.2 13.8 21.1 23.5 30.2 24.7
Other chemical products ....................................................... 3.7 8.1 11.9 12.0 14.2 18.1
Chemical elements ................................................................ 8.6 12.5 14.5 14.9 14.9 16.3
Machinery and tractors .......................................................... 7.6 15.6 26.3 24.2 18.6 15.0
Non-ferrous metallurgy ......................................................... 4.0 7.9 13.4 11.7 11.2 13.9
Rubber products .................................................................... 3.1 7.3 11.8 10.7 12.1 12.4
Plastic products ...................................................................... 1.3 4.1 7.2 8.1 8.6 10.0
Textile products ..................................................................... 1.5 7.2 12.2 8.4 8.3 9.5
Automobiles, trucks and buses ............................................. 0.2 13.2 14.5 13.1 10.0 6.1
Memorandum:
Transformation Industry 1 .............................................. 3.1 7.5 12.1 11.3 11.1 11.6
1. 28 sectors.
Source: FUNCEX. Raw data from IBGE and SECEX/MDIC.
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Table 4. Antidumping and Countervailing duties: selected indicators by sub-periods, 1988- 2004
96
ANTIDUMPING COUNTERVAILING DUTIES
Period
No of cases Accepted (%) ADD/ DM 3 No of cases Accepted
Export-Promotion Policy
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1. It is difficult to disagree with the assessment made by Motta Veiga and Igle-
sias [2003]: “APEX exemplifies a commonplace situation in Brazilian public
policy-making: policy new initiatives are adopted and public money is transferred
to the private sector, but there is practically no mechanism to make a technical-
economic evaluation of the policies and initiatives adopted”.
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1. The estimates presented by Kume et alii (2004) were based on the exchange
of offers held in May 2004.
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estimated gains were just over US$ 900 million over 2002 exports,
about 80% of which was concentrated in agriculture and only 20% in
manufactures. More than half of the gain in agriculture was due to a
sole product, ethanol, followed by orange juice and beef, chicken and
pork. On the EU side, the estimated gain was larger: more than
US$ 1.3 billion, concentrated on various capital goods (54%), transpor-
tation equipment (20%) and chemical products (7%). The conclusion
drawn by Kume et ali. (2004) is that the limited concessions made by
the EU on agricultural products and the defensive posture of the latter in
services and government procurement are the main obstacles to
exploiting the economic complementarity between the blocs and the
main factor behind the impasse in the negotiations.
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Structural Factors
Trade Patterns
The structure of trade flows is a relevant factor to understand
Brazilian foreign-trade policy and, especially, to identify the offen-
sive and defensive interests mobilized in each negotiating forum. It
is thus important to make a brief description of the geographical
pattern of Brazilian trade flows, focused on the partners with which
the country is engaged in major negotitations (FTAA, European
Union, Mercosur, Andean Community). Tables 5 and 6 present the
basic information on exports, while Table 7 describes import pat-
terns, both based on 2004 data.
• Geographic Distribution of Trade
The geographical structure of Brazilian foreign trade is evenly dis-
tributed between FTAA (41.6%), the European Union (25.1%) and the
Rest of the World (33.3%). This structure illustrates the global-trader
status generally conferred to Brazil (Table 5). In contrast to what is
observed in other Western Hemisphere countries (except the United
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States and other South Cone countries), in the case of Brazil extra-
hemispheric trade is very significant. This is a relevant factor to
understand the cautious position adopted by Brazil and Mercosur in
the FTAA negotiations. As a matter of fact, the FTAA and the Euro-
pean Union account for 2/3 of Brazilian foreign trade. These trade
shares and these partners´ weight in the world economy illustrate the
nearly multilateral nature of these preferential negotiations.
• Exports
FTAA. The FTAA is the destination of 67.6% of Brazilian manu-
facturing exports, a figure which is significantly lower in the case
of primary products (19.4%) and semi-manufactures (31.7%).
Strictly speaking, no single bloc or country has a significant share
in exports of primary goods (Table 6).
LAIA. LAIA member countries (Mercosur, Andean Community,
Chile and Mexico) are important destinations for Brazilian exports
of manufactured goods (Table 5). These exports enjoy significant
trade preferences, which are threatened by the recent US drive
towards bilateral negotiations with the Latin American countries.
USA. The US market alone accounts for over one-fourth of
Brazilian manufacturing exports. This share is significantly higher in
the case of R&D-intensive (46.2%) and labor-intensive industries
(34.6%). However, the offensive interests of Brazil in the US market
are focused on less elaborated goods facing high tariff and non-tariff
barriers, such as foodstuffs, beverages, tobacco, edible oils and fats.
This is confirmed by analyses based on revealed comparative
advantages (Kume and Piani, 2004a) and by identifying sectors
penalized with tariffs above 15% or trade relief measures, such as
steel (Schott, 2005).
EU. The European Union is the destination of one-fourth of Bra-
zilian total exports, but accounts for nearly 40% of primary goods
exports (a pattern similar to that of the Rest of the World (45%)
[Table 5]. Exports to the European Union show a high share of pri-
mary agricultural products (45.9% of Brazilian total exports), a
ratio which is even higher than in exports to the Rest of the World
(40.0%). As for manufactured goods, the European Union is a sig-
nificant destination for exports of capital goods (29.7%) and labor-
intensive industries (22.7%). However, on aggregate, the share of
the European Union in total manufacturing exports (17.9%) is just
a little higher than that of Mercosur (15.4%) (Table 6).
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Table 5. Brazilian exports classified by category of use and export markets - 2004
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CATEGORIES OF USE
EXPORTS
SHARE IN EXPORTS (%) SHARE IN EXPORT MARKETS
(%)
BLOCK / TRADE
COUNTRY (%) Semi- Semi-
US$ Primary Manufactured Primary Manufactured
% manufactured Total manufactured
million goods goods goods goods goods goods
FTAA 41.6 43,680 45.3 14.9 36.2 65.3 100.0 9.7 11.1 79.2
USA 20.0 20,341 21.1 6.0 27.2 28.2 100.0 8.4 18.0 73.6
Mercosur 9.6 8,912 9.2 1.5 2.4 15.3 100.0 4.9 3.7 91.4
Andean 3.5 4,161 4.3 1.0 0.9 7.0 100.0 7.1 3.0 89.9
Mexico + Chile 5.4 6,494 6.7 2.9 1.9 10.2 100.0 12.5 4.1 83.4
Rest of FTAA 3.1 3,772 4.0 3.5 3.2 4.6 100.0 25.5 12.6 61.9
EU (25 countries) 25.1 24,160 25.0 40.1 20.5 18.7 100.0 47.5 11.4 41.1
Rest of the world 33.3 28,635 29.7 45.0 43.3 16.0 100.0 48.8 17.2 34.0
Total 100.0 96,475 100.0 100.0 100.0 100.0 100.0 30.0 14.1 55.9
Memo: US$ million 159,257 96,475 28,518 13,431 53,055
Source: SECEX/MDIC
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Table 6. Brazilian exports classified by groups of products and export markets – 2004
FTAA
Groups of EU Rest of
Andean Mexico Rest of Total
products Total USA Mercosur (25) world
comm. + Chile FTAA
Primary 19.5 8.0 2.5 1.0 3.1 5.0 37.8 42.7 100.0
Agriculture 14.1 8.8 1.4 1.1 1.9 0.9 45.9 40.0 100.0
Minerals & Fuels 26.4 6.8 3.9 0.8 4.6 10.3 27.4 46.2 100.0
Seminaufactured 31.7 18.6 5.0 2.3 2.1 3.7 28.3 39.9 100.0
Agriculture 23.1 12.6 3.0 2.3 2.1 3.1 31.9 45.0 100.0
Minerals & Fuels 56.6 35.8 10.7 2.4 2.3 5.5 18.2 25.3 100.0
Manufactured 67.6 28.5 15.4 7.3 11.7 4.7 17.9 14.5 100.0
Labour intensive industries 60.2 34.6 11.2 4.9 5.4 6.0 22.7 15.1 100.0
Scale intensive industries 70.5 22.7 18.1 8.1 16.3 5.3 10.6 18.9 100.0
Suppliers of capital goods 58.9 23.5 14.1 7.7 8.9 4.7 29.7 11.4 100.0
R&D intensive industries 78.3 46.2 13.9 6.8 9.4 2.0 15.0 6.7 100.0
Other 3.0 1.8 0.2 0.5 0.2 0.3 2.9 94.1 100.0
Total 45.4 20.8 9.2 4.3 6.7 4.4 25.0 29.6 100.0
Source: SECEX/MDIC
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• Imports
In 2004, Brazilian imports from the FTAA and the EU-25
accounted for more than 60% of total foreign purchases. In both
cases imports are basically concentrated on manufactured goods,
which account for more than 95% of imports from the EU and
almost 93% imports from the US. Brazilian imports from Mercosur
also show a share of manufactured goods (69.9%) higher than in
purchases from other LAIA countries (Table 7).
Sumarizing, these figures show that the major offensive
interests of Brazil in agriculture lay in the US and EU markets,
while in the case of manufactures they lay in the US and LAIA.
Conversely, the major threats to the Brazilian industry come from
the US and the EU.
Revealed Preferences and Sectoral Interests
Identifying the structural determinants of Brazilian foreign-trade
policy demands a brief description of the interests of main
economic sectors. In effect, tariff protection, trade relief measures,
special import regimes and export promotion policies penalize or
benefit various economic sectors in different ways. Similarly,
partial equilibrium models estimating the effect of alternative
preferential trade negotiations point to sectorally differentiated
distribution of opportunities and threats.
Table 8 distinguishes the interests of three differentiated sets of
sectors based on the following elements: (i) sectoral indices of
outward orientation (export coefficients and import penetration
ratios); (ii) the intensity of public policy instruments (tariff
protection, public finance and special import regimes); and (iii) the
evaluation of potential sectoral gains and losses as a result of the
two main negotiations currently underway (FTAA and EU):
• The first set of sectors brings together those based on Brazilian
natural resources: mining, agriculture and livestock, foodstuffs
and beverages, wood and furniture, tobacco, leather and footwear,
paper and pulp. Excluding mining, these activities are usually
considered part of Brazilian agribusiness 1. These sectors are
export-oriented and show relatively low import penetration ratios.
They all have offensive interests in the FTAA and EU negotiations,
which are confirmed by estimates of sectoral gains from reliable
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Table 7. Brazilian imports classified by category of use and import markets – 2004
CATEGORIES OF USE
IMPORTS
SHARE IN IMPORTS (%) SHARE IN IMPORT MARKETS (%)
BLOCK/ TRADE
COUNTRY (%) Semi- Semi-
US$ Primary Manufactur Primary Manufactured
% manufactured Total manufactured
million goods ed goods goods goods
goods goods
FTAA 41.6 22,279 35.5 29.8 50.6 36.0 100.0 15.6 6.4 78.0
USA 20.0 11,337 18.1 5.0 8.9 21.7 100.0 5.1 2.2 92.7
Mercosur 9.6 6,393 10.2 14.4 8.4 9.3 100.0 26.4 3.7 69.9
Andean 3.5 1,489 2.4 3.4 8.1 1.8 100.0 26.5 15.4 58.1
Mexico + Chile 5.4 2,094 3.3 5.3 15.3 2.2 100.0 29.6 20.6 49.8
Rest of FTAA 3.1 966 1.5 1.7 9.8 1.0 100.0 20.1 28.8 51.1
EU (25 countries) 25.1 15,895 25.3 1.8 16.8 31.5 100.0 1.4 3.0 95.6
Rest of the world 33.3 24,608 39.2 68.4 32.6 32.5 100.0 32.5 3.7 63.8
Total 100.0 62,782 100.0 100.0 100.0 100.0 100.0 18.6 4.5 76.9
Memo: US$ million 159,257 62,782 11,691 2,818 48,273 – – – –
Source: SECEX/MDIC.
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Table 8. Revealed sectoral preferences based on selected indicators and policy instruments
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for example, that “the demand for market access is not the sole
prerogative of agribusiness. The same demand is made by many other
industries –textiles, footwear, steel, airplanes– that face very high
tariffs, non-tariff barriers, predatory subsidies, antidumping duties and
safeguards. [Consequently] the perception that protectionist industrial
sectors are inhibiting market access negotiations that may favor the
agricultural sector is utterly shortsighted”.
The Targets of the Criticism. Criticism of official policies
include the following: (i) lack of investments in infrastructure,
especially transportation and logistics; (ii) scant resources
earmarked for sanitary protection; (iii) threats to property rights,
such as “the invasions made by the Landless Workers’ Movement
and other radical groups, [since] property rights are key
guarantees of the functioning of society [and therefore] the
current questioning of rural property is simply unacceptable and
is liable to jeopardize the whole effort to develop the interior of
the country”; and (iv) the concept of food sovereignty defended
by areas of the government sensitive to the interests of family-
based agriculture (“few things can be more egrerious than the
expansion of protectionism disguised under the concept of food
sovereignty... If the idea of food sovereignty spreads, markets
that are fundamental to the country may close in the developed
and developing countries”).
What emerges from these articles is a very pragmatic and cau-
tious approach geared to avoid direct confrontation either with the
government or with protectionist industrial sectors, carefully
selecting the targets of the criticism. In short, agribusiness has
become a leading actor in Brazilian foreign-trade negotiations as
well as the most commited proponent of a liberal view concerning
foreign trade policy.
Non-Governmental Organizations and Trade Unions 1
Over the last few years, international affairs, and especially trade
issues, have attracted the interest of a multitude of non-
governmental organizations (NGOs). This interest has led to the
creation of a network of approximately 35 NGOs, trade-union
organizations –including CUT (the Central Workers’ Union
Confederation)– and social movements dedicated to trade issues,
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Import Policies
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Foreign-Trade Negotiations
Throughout the 90s Brazil engaged in a vast array of trade-
negotiation, not only at the regional (Mercosur, Chile, Bolivia,
Mexico and CAN) but also at the plurilateral (FTAA), bi-regional
(EU) and multilateral (OMC) levels. At the regional level these
negotiations led to the creation of Mercosur and other preferential
trade agreements with other members of ALADI. These results were
not obtained in any of the preferential trade negotiations with
developed countries, certainly those with the largest potential
impact. In fact, both the FTAA and the Mercosur-EU negotiations
failed to reach a successful conclusion and both were suspended at
least until the end of the Doha Round. In contrast, Brazil has been
an active participant in WTO negotiations, becoming a key actor and
leader of the G-20. Nonetheless, these negotiations are unlikely to
lead to fast and effective liberalization of agricultural products
trade, which is what Brazil wants.
Until recently, the balance of the Brazilian negotiating initiatives
undertaken in the last decade failed to render tangible results.
Between 2002 and 2005 Brazil had a remarkable export perfor-
mance (export volumes increased almost twofold), but this cannot
be accredited to trade agreements, with the probable exception of
Mexico. In fact, the Brazilian negotiating stance in most of these
arenas has been clearly defensive. This observation holds true even
for Mercosur, where Brazil has resisted deeper integration initia-
tives whenever they require relinquishing even limited degrees of
public policy sovereignty.
The above considerations, based on a description of the major
features of Brazilian import and export policies, as well as of the
stance adopted in foreign trade negotiations, summarize the
“revealed preferences” of Brazilian foreign trade policy. This leaves
the question open of: what are the structural and conditioning factors
behind these trade-policy options and this negotiating strategy?
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Final Remarks
In Brazil it is hard to imagine a reversal of the trade liberalization
process, which seems to be reasonably consolidated. However, it is
also unlikely that Brazil will engage in a new phase of unilateral
liberalization in the medium term, except for changes in the com-
mon external tariff eventually agreed with its Mercosur partners.
Lowering import tariffs, particularly those that protect the indus-
trial sector, is seen as Brazil’s main bargaining tool in international
trade negotiations. As a result, not only the less competitive indus-
trial sectors but also the more efficient agro-industrial interests tend
to resist liberalization initiatives that do not bring about lower bar-
riers to Brazilian exports in third markets.
Export promotion policies need restructuring to become more
effective and less selective. There are already pressures pointing
out in this direction. The threat of Chinese competition in third
markets, for example, has underlined the need to develop
technological policies to promote further export diversification and
upgrading. There is also a growing awareness that the recent export
boom has been the result of the exceptional performance of a small
group of big firms and that policies to promote small and medium-
sized firms have produced scant results. At last, it has also become
imperative to set up mechanisms and systematic routines to
evaluate government agencies and export promotion policies.
Unfortunately, this institutional “deficit” is still underestimated.
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Ricardo A. MARKWALD
REFERENCES
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Chapter 3
Determinants of Trade Liberalization Strategies
in Uruguay
Introduction
As many other countries in the region, during the nineties, Uru-
guay engaged in deeper trade liberalization combining unilateral
and reciprocal strategies (at a regional as well as a multilateral
level). This paper discusses continuity and change in Uruguayan
trade policies and its domestic determinants.
Initially, unilateral liberalization was gradually undertaken to
mitigate adjustment costs in import-sensitive sectors. In the nine-
ties, policies shifted towards reciprocal liberalization. The combi-
nation of the two processes led to important changes in the structure
of production of the tradable sector. The recent crisis showed the
problems faced by the stability of the trade liberalization model and
the associated political equilibrium. This paper develops the argu-
ment of reciprocal unilateralism (Krishna and Mitra, 2000) to
explain the influence of export-oriented lobbies (supportive of
trade liberalization) as a function of the degree of openness of third
country markets. Another important element to be considered in
the case of Uruguay is the slow progress in non-tradable sector
reforms, in turn explained by an adverse political equilibrium
(Forteza et al., 2004 y Bergara et al., 2004). The imbalanced per-
formance of productivity in the tradable and non-tradable sectors
had led to a structural appreciation of the real exchange rate.
The chapter is organized in this introduction and three other
sections. The second section is descriptive and includes two sub-
sections: the first one describes the trade policy regime (tariffs,
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Export Promotion
Adjustment in the production of tradable goods led to a con-
traction of import-competing activities and an expansion of
export-oriented industries. The first trend was strengthened by
abundant external financing and the real exchange rate apprecia-
tion that followed during most of the nineties. The contraction of
the import-substituting sector was fast and deep, but the expan-
sion of export-oriented activities was much slower. This was the
result of several factors, such as a real exchange rate appreciation
that shrank profits in export-oriented activities, market access
obstacles for products with strong comparative advantages, and
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it has pushed them to the limits. One example was the successful
negotiation of a free trade agreement with Mexico. After Merco-
sur failed to reach a collective agreement with Mexico, Uruguay
took advantage of an authorization to conclude bilateral agree-
ments with that country and signed a NAFTA-like FTA covering
goods, services and new disciplines. In the same vein, in 2004
Uruguay signed an investment agreement with the US along lines
similar to other US investment agreements or investment chapters
in FTA agreements (such as that with Chile). The agreement was
ratified by Congress after substantial debate and divisions within
the current government.
As far as plurilateral negotiations are concerned, the FTAA
agenda is extremely diverse and complex (Salazar-Xirinachs y
Robert, 2001). Uruguay has had to take part in negotiations on
issues in which the country lacked modern normative frameworks
or institutional structures. But FTAA negotiations stalled due to a
broad agenda, heterogeneous interests and ambiguous calendars.
Moreover, the key US-Brazil bilateral relationship did not work
smoothly since the start (Lorenzo and Vaillant, 2005). Although
the Uruguayan governments could have pushed from within
Mercosur for a successful FTAA agreement, their position was
hesitant because of the opposite effects of such agreement. In
effect, while on the one hand the FTAA would erode Uruguay´s
preferential access to the large Brazilian market, on the other it
would grant preferential access to the US market and reduce
potential trade diversion as a result of a comparatively high CET.
This simple static analysis illustrates the kind of conflicts and
complex political economy issues posed by the juxtaposition of
preferential trade negotiations. On issues not directly related to
liberalization of goods markets, Uruguay has generally had a
prudent position that can be best described as “defensive”.
Frequently, this position was not aimed at protecting a particular
sector, but the result of the novelty of some of the issues involved
and the lack of a well-defined national position.
Uruguay also failed to have a consistent and stable position in
multilateral negotiations (WTO Doha Round). The Doha Round
started with a very broad agenda (Hoekman, Mattoo and English,
2002). After the failure of the mid-term conference in Cancun the
government faced a dilemma over its coalition policy, particularly
with respect to agricultural trade liberalization. In Cancun Uruguay
did not join the Group of 20 led by Brazil and India, which
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actions for their own benefit. The literature provides evidence that
policy makers decide over trade policy instruments in a very similar
environment. Within this general framework, much of the litera-
ture on endogenous trade policy formation aims to account how a
specific pattern of protection relates to a particular model of inter-
action between government and interest groups. The main objec-
tive is to explain tariff levels as a game equilibrium, given key
parameters for the model (preferences, technology and ownership
of production factors). Unfortunately, these models have faced
problems in handling the many constraints that are relevant in the
real world (institutional, informational, etc.).
An alternative approach is to inquire as to the circumstances
under which a government will aim at unilateral reform or any
other particular type of liberalization strategy. In many developing
countries, the interesting question is how and when unilateral
reform can become part of a political equilibrium. Grossman and
Helpman (1995) have developed a model that could be adapted to
this problem. They analyze the decision of whether or not to enter
into a free trade agreement within a model of political contribu-
tions. This model seems especially relevant to the case of unilateral
trade liberalization. Drawing on this idea, Vaillant (2000) has
shown that a trade opening that is not part of a political equilibrium
(i.e. is not incentive-compatible) could become so if the govern-
ment is able to isolate certain sectors from international competi-
tion through sufficiently long periods of time (implementing a
gradual approach or lists of exceptions). These features seem to
have been present in the case of Uruguay.
In the first half of the seventies the protectionist status quo
stopped being a political equilibrium because of the diverse actors
affecting trade policy design (government and private interest
groups). In effect, in 1973 a dictatorship took office. The policy
support function changed because the government changed and the
costs of protection increased due to structural reasons and a critical
external situation. Thus, unilateral trade liberalization became a
preferred option; but one based on gradualism and that isolated for
a long period of time a group of potentially damaged sectors. This
was necessary for the trade reform to settle as a new policy equilib-
rium in the contributions game.
In the nineties the predominant strategy was reciprocal trade
liberalization. Traditionally, the literature on reciprocal trade
liberalization focused on the incentives problem faced by large
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economies, which may lead them to fall into trade wars (large
economies can affect their terms of trade through policy action).
Thus, each country acting unilaterally on its own behalf may set a
positive level of trade protection that eventually reduces trade and
welfare for all. The trade policy game equilibrium is clearly
inefficient. In this context, it may be preferable to commit to
reciprocal liberalization agreements which allow countries to
cooperate and reach a better allocation of resources for every one.
Multilateral trade negotiations can be understood in this context.
For the small-sized economy case, the traditional view did not take
into account the relevance of reciprocity, since small-sized
economies cannot affect their terms of trade. However, for small-
sized economies, the degree of liberalization of other countries also
matter.
Recently, the Grossman and Helpman (1994) model was used
to propose a causal link between unilateral and reciprocal trade
liberalization. Krishna and Mitra (2000) analyze whether
unilateral trade liberalization by one country could induce
reciprocal liberalization by its partner in the absence of any
communication or agreement between the two. This result has
important normative implications because it contradicts the
predominant perspective. In fact, the conventional policy wisdom
is to use (or threat to use) one’s trade barriers to remove those of
the others (for example, the well-know section Super 301 in US
trade law). The model’s key analytical point is to combine
Grossman and Helpman’s (1994) result with Mitra’s (1999)
model of endogenous lobby formation. The main idea can be
summarized in one paragraph. A small economy is trading with a
large partner. The initial condition in the small country is that
there is only an import substitution lobby and no export lobby. It
is assumed that the fixed cost of organizing an export lobby is
greater than the net benefits that it would generate. The
endogenous trade policy according to Grossman and Helpman is
an import tariff and an export tax. Unilateral liberalization by the
large country can be shown to generally increase the incentives
for the formation of an export lobby in the small country, since it
would bring about a higher world price for the exportable good.
That would make existing export taxes not only more costly for
the export lobby; but would also give the import-competing lobby
an incentive to levy an even higher export tax. Therefore,
unilateral liberalization by one country has a “strategic” effect on
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1. Firms that for different reasons do not reach a certain critical threshold of
exports (which varies according to the sector) do not survive in export activity.
The idea is that in order to export there are some fixed costs which are diluted over
time if firms stay in the activity and grow. Firms learn about the exporting activity
over time and so there are dynamic economies of scale. As the firm accumulates
exporting experience, average specific costs decrease. This allows a competition
improvement entering to a reinforced growth circle. Uruguayan exporting firms
do not seem to have reached that threshold, even though, in the Nineties, there was
important growth in firms that already existed at the beginning of the decade.
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the systematic and responsible way of dealing with issues and the
existence of competent local resources triggered learning pro-
cesses. These, however, failed to show at a broader level because
of the absence of a suitable institutional framework or hierarchy
able to capitalize that learning. The costs of these institutional
weaknesses are evident in the local and international arena.
Locally, the virtual institutional chaos in trade policy-making opens
the door to influences from private interests. Internationally, Uru-
guay has obtained few tangible negotiating results and national
positions usually reveal a strong inertial behaviour. This is particu-
larly evident at the regional level, which has demanded the largest
amount of human and institutional resources. These institutional
weaknesses have enabled groups that benefit from the status quo to
successfully make their particular interests predominate over the
general interest. A government that is institutionally weak in trade
policy-making can be seen as less benevolent and more prone to
weight political objectives when deciding over trade policy instru-
ments. Similarly, failure to obtain significant access concessions to
international markets strengthens the political economy of the sta-
tus quo.
• Political System
Trade liberalization has been a constant for over three decades.
Political parties seem to have understood that in the present
circumstances an economy like that of Uruguay cannot grow with the
trade policies of the sixties. However, changing international
conditions have influenced the way in which this policy orientation
was carried out: in effect, the unilateral liberalization of the first
decades was replaced in the nineties by a clearer focus on reciprocal
liberalization (discriminatory and multilateral). But the trend
towards trade liberalization has had its exceptions. For example,
some sectors have succeeded in isolating themselves from the
liberalizing trend through discretionary protectionist measures. In
effect, in some cases trade policy has been taken hostage by private
sector interests. The fact that private sector interests have not been
more influential and have failed to change the global policy thrust
(protectionist reversion), was due more to the fact that corporative
interests are contradictory and neutralize each other than to the clear
objectives of governmental elites. In spite of this context, the
liberalization strategies adopted in the nineties significantly
transformed the production of tradable goods. Regional
liberalization initiatives were a key to this process. When a small
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economy like Uruguay enters into free trade agreements with much
larger and economically diversified neighbours, competitive
pressures upon domestic producers increase markedly.
The traditional parties that have been in office since the recovery
of democracy and until 2004 supported the trade liberalization pro-
cess launched by the authoritarian regime. However, there have
been differences among parties. The majority sector of the Partido
Nacional has defended and enforced orthodox free trade policies.
The Partido Colorado, in contrast, has been more sensitive to pres-
sures from damaged sectors and has admitted exceptions to the glo-
bal policy approach. The overall orientation, however, has not
changed. In general terms, the trade liberalization process under-
taken in the nineties has underlined the importance of international
trade negotiations. This includes not only opening one’s own mar-
ket, but also improving access conditions to the rest of the world.
Reciprocal trade liberalization has been broadly accepted, even by
left-wing sectors. This explains the almost unanimous Parliamen-
tary approval of Mercosur (1991) and WTO agreements (1994).
During the nineties, the lobby contrary to trade liberalization
(import-competing) reduced its influence over policy-making.
Gradually, other sectors with comparative advantages (production
of goods for export) built up a political economy in favour of trade
liberalization. However, the fact that a large share of Uruguayan
exports are heavily protected in industrial countries and face
significant market access barriers, weakened the influence of
export-oriented sectors and partially threatened the trade
liberalization process. Protectionist bias is always latent given that
there are domestic interest groups that demand protection and a
government sensitive to these demands. By simply inverting
Krishna and Mitra’s (2000) argument of reciprocated unilateralism,
if a large and developed economy liberalizes unilaterally, this will
encourage a domestic political equilibrium more favourable to
trade liberalization in the small economies.
The relative weakness of export-oriented groups and those
traditionally oriented to the internal market, resulted in a virtual
coalition of tradable goods producing sectors in demand of higher
import barriers and export subsidies. In other words, a “fiscal
devaluation” turned into the main demand to protect tradable
products in a context of strong overvaluation as that which
prevailed in the early nineties. Subsequent governments opposed,
with varying intensity, to the pressure exerted by tradable goods
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1. The definition of non tradable services does not include all of these. In the
case of Uruguay, the tradable sector includes agriculture, extractive industries;
manufacturing industries, but also a group of services that are consumed by non
residents (tourism, port activity and international transportation, financial sector).
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Conclusions
Since 1973 trade liberalization has been one of the pillars of Uru-
guayan economic policy. Despite some temporary reversions and a
slow down in the path of tariff cuts, this policy has been relatively
stable over a period of nearly thirty years. Trade reform underwent
six different stages: 1) export promotion (1974-1978); 2) unilateral
liberalization (1979-1984); 3) trade reform continuity (1985-1989);
4) deepening of the liberalization process (1990-1994); 5) conver-
gence to a common trade policy within Mercosur (1995-1999); and
6) trade policy during times of crisis (2000-2003). Year 2004 can
be regarded as the starting point of a new stage, but there is still not
enough information to anticipate a direction.
External factors played a small role at the beginning of the trade
liberalization process (early seventies). However, by the end of the
period, their influence grew more intense (nineties). In the eighties
the role of external factors were basically reflected in the influence
of ideas, formalized in the so-called Washington Consensus. In the
nineties, external conditionality became more explicit, either
through reciprocal trade liberalization agreements (such as Merco-
sur) or multilateral negotiations (since 1994).
In the early stages trade liberalization was pursued through tariff
cuts, particularly higher ones, which reduced average levels and
dispersion. The pro-liberalization orientation did not change and
there were no important policy reversals. However, there were
isolated interventions to neutralize undesired side effects of
productivity adjustments (Vaillant, 2003). Some sectors were isolated
from the liberalization schedule, granting the process some ambiguity.
Liberalization combined different instruments, such as unilateral,
preferential and multilateral agreements. During the first period, the
emphasis was placed in unilateral measures, while during the nineties
the focus turned toward reciprocity-based initiatives.
Domestic political elites have reached a consensus on trade
liberalization strategies, which does not differ much from the
traditional view about the role of a small open economy that
prevailed in previous reform processes in the region. Given the
characteristics of the policy-making process, this issue is important
only for elites in office. In effect, there is no frontal disagreement
as to desirability of an open economy and the issue of integration
into the world economy has become progressively less important
among public policies. Particularly in the present circumstances
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the hot spots for the Ministry of Finance are other policies: trade
liberalization is not a relevant issue and the prevailing perception is
that the authorities must administer what already exists. There is
also a shared belief that the influence of Uruguay in the
international context is small. These ideas are somehow consistent
with the maintenance of the current institutional status quo and the
continuation of the reactive model based on the capacities located
in different public sector areas.
The predominant view is that trade liberalization is already done.
However, it is difficult to say that there is an articulated body of
trade policies. In effect, more work needs to be done in order to
reach agreement on an appropriate set of new trade policies. It is
necessary to develop a coherent position on a broad set of issues,
since our previous discussion shows that Uruguayan trade policies
lack such coherence. For example, the Uruguayan position in Mer-
cosur on government procurement issues was, unexpectedly, a
defensive one. Uruguay also lacked a well-defined position in
Mercosur as regards to the flexibility vs. deepening dilemma. The
country also shows erratic policies towards protected economic
sectors, which still survive thanks to governmental favours. Lastly,
Uruguay has been reluctant to move forward towards reform of the
non-tradable sectors, which is a major current negotiation topic.
Existing trade policy institutions are weak, easily captured by
private sector interests and ineffective in actual negotiations. The
following transformations are necessary:
• to build a general discourse about Uruguay’s negotiating posi-
tions that is consistent with a strategic vision of the country 1.
• to develop institutional capabilities to promote this position.
1. Giordano and Quevedo (2004) stress this need as well, suggesting some use-
ful general guidelines for Uruguay.
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Marcel VAILLANT
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REFERENCES
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ANNEX A
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Table A2. A map of Uruguay’s negotiating agenda classified by issues, maturity and interests
178
Bilateral
Issue/Arena Unilateral Sub Regional Plurilateral Multilateral
Mercosur ACE 18 As part of Mexico ACE FTAA WTO
USA
Mercosur 60
Goods
Doha Round.
Domestic aids vis
Negotiations Negotiation stand a vis market
• Agricultural Unilateral Tratado de Chile (ACE 35) unfinished by (NI)/Offensive access/Offensive
liberalization Asunción 1991. and Bolivia Universal (SN) interests but with
in the early Free intra-regional (ACE 36) free free trade. decreasing
1990s: lower trade/CET and trade agreements Only intensity.
tariff rates and negotiations with 2006. Association agreement
items/ third parties. New Agreement with with FTA
Offensive circulation rules in the EU under format/ Doha Round/
export-led process of being negotiation (EN)/ Offensive Defensive
• Non- growth model. implemented. Offensive interests
SN NI/Deffensive
agricultural following other
countries in the
region.
Excluded
Chile and Bolivia
from ACE 60, SN
• Motor vehicles Administered trade/ not included.
Defensive included in
EU EN
ACE 55.
Bilateral
Issue/Arena Unilateral Sub Regional Plurilateral Multilateral
Mercosur ACE 18 As part of Mexico ACE FTAA WTO
USA
Mercosur 60
Trade defence
Prohibited for intra-
regional trade.
• Safeguards Against third parties SN NI/Offensive
still not enforced
NV 4.
WTO-compatible
Applicable to intra- domestic
regional trade.
• Antidumping Against third parties SN NI/Offensive
legislation/
still under Offensive
negotiation.
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180
Bilateral
Issue/Arena Unilateral Sub Regional Plurilateral Multilateral
Mercosur ACE 18 As part of Mexico ACE FTAA WTO
USA
Mercosur 60
Services
Chapter
Moderate Chile and Bolivia
Mode 1
liberalization SN. With the EU (cross-
• Modality in some mode 1 and with SN NI/Defensive Generous offer
Montevideo border)
service Mercosur mode 3/
Protocol, global liberalizing/
sectors, such Defensive.
agreement still not Defensive
as ports,
electricity and implemented/ Telecommuni
Offensive. Generous offer,
telecommunic cations,
• Sector UE lists under financial in SN NI/Defensive
public monopoly
ations in the discussion. in basic telephone
1990s the future / services
Defensive
New disciplines
Government Chile and Bolivia Excluded from
Procurement To be
Government Protocol still to be SN.
negotiated in SN NI/Defensive
the Doha Round
procurement implemented (NV)/
UE lackof the future. after the July
information (SD) 2004 package
Defensive
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Bilateral
Issue/Arena Unilateral Sub Regional Plurilateral Multilateral
Mercosur ACE 18 As part of Mexico ACE FTAA WTO
USA
Mercosur 60
Part of the
FTA,
Recent emphasis on
progress in Chile and Bolivia public Excluded from
Competition sector Fortaleza Protocol
SN.
monopolies/ SN NI/Defensive
the Doha Round
policy regulations- NV 4/Defensive
EU SD
Defensive, after the July
Ley mínima excludes 2004 package
PC 2000. dispute
settlement
PC.
Chile and Bolivia Part of the
Intellectual Intellectual Property SN. FTA/ SN NI/Defensive
property Protocol NV 4 EU SD Defensive.
Negotiations
Chile and Bolivia Part of the concluded/
Investment Colonia Protocol SN. FTA/ Ratification NI/Defensive
NV 4.
EU SD Defensive stage/
Defensive.
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182
Years 2000-2004 (thousand US$ and %)
Exports Imports
Sectors CIIU Divisions 2000 2004 2000 2004
(Thousand US$) (Thousand US$)
Natural resource intensive 11,12,13,20 118 374 219 718
Agro-food 31 1.010 1.331 278 171
Textiles/Clothing 32 517 500 231 171
Non metallic mineral manufactures 34.36 91 72 206 107
Import-competing 33,35,37,38,39 & others 564 645 2.531 1.946
Total 2.299 2.922 3.466 3.114
% %
Natural resource intensive 11,12,13,20 5.1 12.8 6.3 23.1
Agro-food 31 43.9 45.5 8.0 5.5
Textiles/Clothing 32 22.5 17.1 6.7 5.5
Non metallic mineral manufactures 34.36 4.0 2.5 5.9 3.4
Import/competing 33,35,37,38,39,& others 24.5 22.1 73.0 62.5
Total 100.0 100.0 100.0 100.0
Source: own elaboration based on BCU data.
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Chapter 4
Ups and Downs of Paraguayan
Trade Policy in the 1990s
Introduction
During the last twenty years the trade strategies of developing
countries have evolved within a context of structural reforms and
liberalization. These policy choices have been strongly influenced
by foreign policy decisions of developed countries and interna-
tional financial institutions. In the last few years, several authors
have analyzed the trade strategies of developing countries –espe-
cially Latin American nations– not only as a result of the pressures
of a globalizing world economy, but also as a response to such pres-
sures. These authors have emphasized the role of domestic determi-
nants, namely institutional and political factors as well as the
relationship of the state with private sector economic agents.
The specificity of the Paraguayan case is that even before the
period of structural reform, the country had undergone a very
peculiar process of unilateral trade liberalization. During the 1990s
this model of liberalization, that I will call intermediation-oriented
integration, would be at odds with the Paraguayan strategy of
joining Mercosur. The purpose of this chapter is twofold. First, to
describe the Paraguayan foreign trade strategy inherited after
30 years of authoritarian rule and second, to explain why such
policy pattern was not completely dismantled in the 1990s to be
replaced by a strategy of production-oriented integration. I will
argue that while the new international context of the 1990s shaped
Paraguay’s decision to join Mercosur, the pressure of competing
economic interests have resulted in an ambivalent foreign trade
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policy. In short, I will argue that domestic factors have been far
more important than regional or international forces in shaping
Paraguay’s foreign trade policy in the last 15 years.
The period under study is relevant because it coincides with the
transition from an authoritarian to a democratic regime. This may
lead one to expect that economic and institutional reforms would
lay the basis for a new development model. This period also coin-
cides with heightened transparency of Paraguay’s true levels of
trade liberalization and the opening up of an opportunity to inte-
grate into the region and the world on the basis of a specialized
and competitive pattern of production. The first section of the
paper explains Paraguay’s inherited trade policy patterns, empha-
sizing the non-protectionist and informal nature of the Para-
guayan trade and economy. The second section describes main
trade policy decisions taken in the 1990s in the light of a new
regional environment, as well as the evolution of foreign trade
patterns. The third section analyzes the foreign trade policy deci-
sion-making process of the state agencies and the latter’s interac-
tion with the most influential economic agents. Finally, the
chapter briefly examines current foreign trade policies and makes
a set of recommendations.
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1. Prior to this period, Paraguay’s main export products were meat and lumber.
By the end of the 70s they had been displaced by cotton and soybeans. Meat
exports had been strongly affected by the 1973 closure of European markets.
Extensive soybean production resulted in massive deforestation of the Eastern part
of the country. Exports of lumber have been mainly in the form of illegal sales of
unprocessed logs to Brazil.
2. Cigarettes, alcoholic beverages, watches, photo cameras, toys, computer and
electronic goods, etc.
3. Data from balance of payments of the Banco Central del Paraguay (BCP) and
estimates of the BCP and the IMF.
4. Revenues from goods and services used during the construction of the Itaipú
dam were three times higher than GDP, which increased at a 9% average annual
rate during that period.
5. Calculations based on bcp Balance of Payments and Ministry of Finance´s
Informe Fiscal.
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1. Mainly invested in the construction sector and in import and re-export trade,
as well as in the opening of financial institutions oriented to granting consumer
rather than producer credits.
2. Unlike other authoritarian regimes in South America, the Paraguayan
regime lacked an elaborated trade strategy and sought opportunities to capture
rents to benefit a backward-oriented economic and political elite. As D. Richards
has argued (2005), this predatory state has enabled only very limited productive
and industrial development. Instead, it has been concerned with administering the
distribution of rents among state actors.
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1. The volume of re-exported goods has been three or even four times higher
than the combined volume of agricultural commodity exports and the sale of elec-
tricity to neighboring countries.
2. Data for non-recorded trade began to be released only in the 1990s. The
estimates suggest that it represented more than half of total Paraguayan foreign
trade. The foreign trade/GDP ratio of Paraguay in the 1990s has been on average
41%, reaching a peak of 64% for 2004 (calculations based on recorded import and
export data of the BCP).
3. The average annual rate of growth of output during the 1980s was 3%.
However, during the 1990s it reached only 1.5%. The rate of growth of per capita
GDP in the two decades has been zero (Calculations of the author based on data
from the BCP)
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1. The lowest levels (0,3% and 5 %) were for primary goods, capital goods and
intermediate goods in the industrial sector. The levels of 7 and 10 % were for finished
consumer goods. An extraordinary 20% tariff rate was adopted for automobiles.
2. In 2005, 80% of tradable goods already had a zero tariff rate. Average tariff
rates for intra-zone trade continued to fall rapidly after 1995 and until 2000 when
the régimen de adecuación that permitted Paraguay to exempt 430 items from the
free trade regime ended.
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1. Tariff levels for this list of 399 goods exempted from the Mercosur CET
would converge towards the regional level by 2005.
2. At the end of the 1990s Paraguay established a special regime of duty-free
raw material and input imports from extra-zone. Later, the government implemen-
ted a maquila regime that allowed the duty-free imports of capital goods and
inputs to the maquiladoras. By 2003 Paraguay managed to negotiate the extension
of a new exemption list to the CET until 2010 and a preferential rules of origin
regime until 2014.
3. In this period, 55% of imports originated in Mercosur countries, the larger
part of which entered with a zero tariff-rate.
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Figure 1. Paraguay
Weighted Average Tariff (%)
18.0
15.0
12.0
9.0
6.0
3.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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191
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192
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With a more open economy than those of its neighbors, with the
historically more stable macroeconomic indicators in the region
and with little state intervention in the markets, Paraguay had
favorable conditions for export-led economic growth triggered by
an increasingly liberalized regional market. An interesting question
is why this production-oriented integration model did not
materialize. The answer should be found in the difficulties to steer
a transition from a very peculiar pattern of trade specialization
based on intermediation trade to another based in new sectors and a
greater state effort in a direction opposite to that of the previous
authoritarian regime. This leads to the question of whether new
regionalism, as offered and imposed by Mercosur, has made it
easier to attain the real objectives of those in charge of Paraguayan
foreign trade policy in the 1990s and onwards.
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1. The Foreign Relations Ministry set up the Council on Foreign Trade and led
the ALALC-ALADI negotiations during the 1960s and 1970s. After the failure of
such initiatives, the MRE lost all capacity to handle international trade negotiations
to the point that Mercosur negotiations were led by the Political and not the Econo-
mic Under-Secretariat.
2. To such effect, the Ministry of Finance created an Under-Secretariat of Eco-
nomy and Integration and the Ministry of Industry and Commerce a number of
specialized units.
3. The formalization of the re-export business through the creation of the tou-
rism regime reached only the import side, since re-exports to Brazil continued to
be conducted illegally.
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198
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199
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200
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1. Importers have opposed Mercosur because of the high CET. The industrial
sector, in turn, has claimed that Brazil and Argentina obstruct Paraguayan Exports.
However, the Paraguayan government submitted only a few complaints concer-
ning non-tariff barriers to Mercosur. Most non-traditional exports to Mercosur are
manufacturing goods.
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1. The illegality of this business lies not only in invoicing Paraguayan imports
from extra-zone below real price, but also in illegally re-exporting these goods to
neighboring markets. The elimination of the double charge of import tariffs and
the free circulation of extra-zone goods expected to invigorate from 2009 onwards
would legalize such transactions. However, there is a strong possibility that they
will move towards the large distribution centers of Argentina or Brazil.
2. Between 1989 and 2002 average annual export values reached US$ 1 billion.
In 2002 exports reached US$ 1.3 billion and in 2004 they rose to US$ 1.6 billion.
Data from BCP.
3. Gobierno de Paraguay (2004) Plan de Crecimiento Económico con Equidad
2011.
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1. The most important of these policies has been the creation of the Fondos de
Convergencia Estructural del Mercosur (FOCEM). To establish this structural fund
Paraguay has contributed with 1% of its resources, but will obtain 48% of its dis-
bursements.
2. In addition to avoiding an imminent default and stabilizing main macro-eco-
nomic indicators, during its first two years the Duarte Frutos administration pushed
forward reforms such as: a) a balanced budget with the first primary and total budget
surplus in decades; b) a tax reform to introduce the personal income tax, the income
tax to agricultural and ranching enterprises, and the generalization of the VAT; c) the
reform of the public banking sector; d) the reform of the public sector pension sys-
tem; e) the reform of public sector firms; and f) a new customs code.
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Fernando MASI*
REFERENCES
* I thank Francisco Ruiz Diaz, associate economist of CADEP, for his valuable
help in the quantitative analysis of Paraguay’s foreign trade decisions.I also thank
Diego Abente Brun, associate political scientist of CADEP for translating and edi-
ting the text in English.
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Chapter 5
The Domestic Determinants
of Mexico’s Trade Strategy
Introduction
1. This chapter does not attempt to provide a history of Mexico’s trade policy.
For background on Mexico’s trade policy reforms and trade strategies see, inter
alia, Blanco (1994), Pastor and Wise (1994), Flores 1998, Ortiz Mena L.N.
(2004a), Ortiz Mena L.N. (2004b), and Ortiz Mena L.N. (2005a).
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trade agreements and, at the same time, the Economy Ministry has
pursued further unilateral liberalization. Preference erosion, and
especially Chinese exports, have damaged Mexico’s share in the US
market and exports to third markets have not grown as much as
expected. With the advent of democracy in 2000, trade
policymaking has become increasingly pluralistic and, likewise,
more complex. Unless, and until, a broad consensus regarding the
basic outlines of trade policy is reached, it will be impossible for
Mexico to have a coherent trade strategy.
This chapter examines the recent performance of Mexican trade
strategies by providing an overview of the use of tariffs and non-
tariff measures, export promotion schedules, and regional and mul-
tilateral initiatives (section I). It then addresses the role played by
structural and institutional factors in determining Mexican policy
choices, including the product and market structure of trade,
domestic political institutions and the role of key economic and
political actors (section II). It concludes by highlighting the chal-
lenges for the next six years, i.e. for the government that will be in
power from 2006 to 2012.
Import Policies
Tariffs, Import and Export Permits
Mexican bound tariffs rates are relatively high (35%), but the
simple average of MFN applied ad-valorem duties is 18% (24.5% in
the case of agricultural goods and 17.1% in the case of non-agricul-
tural goods). In 2001, MFN duty-free imports were about 10% of all
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1. http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=
E&Country=MX. Accessed on October 3, 2005.
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212
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80
70
60
50
Investigations
40
Duties
30
20
10
0
il
na
az
a
es
el
re
hi
Br
at
zu
Ko
C
St
ne
h
d
Ve
ut
te
So
ni
U
Figure 1 shows that the US is by far the country against which the
Mexican authorities have launched the highest number of AD/CVD
investigations. However, the number of cases that ended in an
actual imposition of duties was relatively low (18%). In contrast,
China has faced 50 investigations but 37 of them ended with the
imposition of duties (a 74% incidence rate). Five sectors account
for more than 90% of all duties imposed between 1987 and 1994,
and Chinese exports figure prominently in them. 1
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While Mexico rarely uses CVD actions and even more rarely
safeguards, it reached an agreement with China, approved by the
WTO in mid-2005, whereby it will continue to impose safeguards
against a number of Chinese exports until 2013. 1
Export Policies
Mexico implements several export promotion policies; the most
important of which are maquila, PITEX 2 and sector programs.
Export financing has been limited and cumbersome, including
onerous warranty requirements, for at least the past decade.
Export Promotion
Maquila (in-bond processing), an export promotion strategy
based on import duty rebates and preferential tax treatment, started
in the mid 1960s and still remains an important trade policy
instrument. For firms to benefit from the maquila regime, they
must export no less than 10% of total sales. 3 Approximately 45%
of total exports in 2004 were made by the maquila sector. 4 The
sector is on the wane, at least temporarily: it reached a peak in 2001
with 3,630 units employing 1.2 million people. By 2003, the
number of units had decreased by 21.21% and employment had
contracted by 11.41%. Part of the contraction can be attributed to
the US recession (which is the market of destination for 98% of
maquila exports); to changes in Mexican tax laws (which ended the
tax exemption to maquiladoras in 2001; but reinstated it in 2004);
to greater competition from China, the Caribbean and Central
America; and to a relatively strong peso. 5 NAFTA also brought
about changes to the maquila regime: it extended duty-free
treatment to all North American components (whether or not to
used by maquilas), and in 2001 it ended all import duty drawbacks
on non-NAFTA components, adversely affecting many Asian firms. 6
The government has responded by unilaterally reducing tariffs on a
number of items. 7
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216
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1. For a comparison of the scope and coverage of Mexico’s FTAs, see Ortiz
Mena L.N. (2005b).
2. Presidencia de la República (2005), p. 171, and http://www.sice.oas.org/
Trade/mex_s.ASP Accessed on October 18.
3. The table reporting these agreements in President Fox’s 5th State of the
Union Address (Informe) reads: “Instruments to Facilitate Market Diversification”
(Instrumentos de Concertación para Facilitar la Diversificación de Mercados).
Presidencia de la República (2005), p. 171.
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market in the early 1990s. Its true preference had been to forge
closer trade and investment links with the European Union, but at
that time the European attention was mostly focused on Eastern and
Central European countries. Likewise, in NAFTA, there was not
such a thing as a “North American” vision: Mexico first sought a
bilateral FTA with the US. Canada joined the negotiations after-
wards fearing trade and investment diversion.
After NAFTA, Mexico steadfastly pursued its objective to secure
a special economic partnership with the EU and finally secured it in
2000. It also sought an FTA with Japan, largely to attract Japanese
investment, for most of the 1990s. It was only able to attain that
goal in April 2005. These agreements are aimed at attracting for-
eign investment through secure market access to the world’s largest
markets. The Latin American agreements are more reactive than
proactive and respond, at least partly, to Latin American countries’
protests over alleged violations of LAIA provisions, under which
Mexico would have been forced to unilaterally grant its LAIA
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partners the same preferences it had granted to Canada and the US.
Mexico was reluctant to do this and instead offered to negotiate
FTAs with interested parties. Smaller Latin American countries
accepted the offer, but Argentina and Brazil refused to follow suit. 1
In early 2004, Mexico took a more proactive stance toward
Mercosur and asked to be admitted as a full member. This
generated a great deal of confusion, for Mercosur had been
envisaged as having an overriding geographic (and geopolitical)
logic and Mexico did not fit in. Also, given that it is a customs
union, its members will eventually have a common external tariff
(CET). Consequently, bilateral FTAs would have to be adjusted to
accommodate the CET. The matter was clarified when in April
2004 Mexico asked to become an Associate Member, which
would not require adopting the CET but merely reaching an FTA
with each Mercosur member. Mexico has an FTA with Uruguay,
but the conclusion of an FTA with Brazil looks unlikely at least in
the short- and medium-term given Brazilian preferences to
maintain protection for some of its industrial sectors and Mexican
resistance to opening up its agricultural sector (especially
agribusiness) to Brazilian competition. 2
In November 2003, Economy Minister Canales announced that
Mexico would not sign any other FTAs in the foreseeable future,
declaring a “moratorium” on FTAs and stating that it would suspend
ongoing negotiations with Korea, Argentina, and Panama. 3 The
reasons for this stance will be examined further in Section II. How-
ever, this official stance is contradictory insofar as in November
2005 President Fox spoke out as a staunch supporter of the Free
Trade Area of the Americas (FTAA) and insisted on the benefits of
striking regional trade agreements. 4
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The main challenge and opportunity for Mexico has been, and
continues to be, its geographical location as neighbor of the US.
The reference point of Mexican foreign economic policy has been
its dealing with the US; everything else being a function of the
nature of that interaction, be it a search for greater reliance on the
domestic market, an attempt at trade and investment diversifica-
tion, or a deepening of ties with the Northern neighbor. Mexico
has always tried to make the most out of a geographic situation
that cannot be changed and a disparity in power and wealth that is
difficult to mitigate.
By definition the geographic location cannot be changed and the
bilateral power disparity has been there since at least the mid-19th
Century, when Mexico lost about half of its territory to the US.
However, the actors taking part in the formulation of trade policy as
well as the process itself has been changing since the 1990s. The
greatest challenge at present is to find a new consensus –or at least
its broad outline– about Mexico’s place in the world political econ-
omy and how to make the best out of its structural opportunities and
constraints.
Structural Factors
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this is not surprising given the size of the US economy and its
physical proximity to Mexico. But the fact is that trade with
Canada has not increased as much as has been expected or
desired. Moreover, Mexican trade with Latin America, which
accounts for only 5% of total foreign trade, is, on the most part,
not conducted with countries with which Mexico has an FTA. In
fact, 58% of Mexican foreign trade with Latin America is
conducted with countries where Mexico does not have an FTA,
and Brazil looms large among them. In effect, in 2004 Brazil
accounted for 26% of Mexican trade with Latin America. 1
Regarding Mexico’s foreign trade with Asia, trade flows with
China have ballooned despite serious trade frictions and the high
incidence of AD duties against Chinese imports. In fact, China
accounted for the largest share of bilateral trade with individual
Asian countries (32% of Mexico’s trade with Asia). 2
Summarizing, Mexico’s foreign trade is still largely dependent
on the US regardless of the many FTAs signed with other countries.
Apart from that, the countries that account for the highest share of
Mexican foreign trade with other regions did not sign FTAs with
Mexico, such as Brazil and China. 3
Main Exports and Imports
Mexico is no longer dependent on oil exports as it was between
the late 1970s and early 1990s. In effect, in 2004 oil exports
accounted only for about 5% of total exports, despite the prevailing
high oil prices. Mining and agriculture account for a small share of
exports and have not picked up, at least in relative terms, since
1990. The most noteworthy increase has been the share of maquila
exports, which by 2000 accounted for approximately half of total
exports (as compared to slightly over 30% in 1993). 4 Exports are
very concentrated, with only six sectors accounting for 30% of total
exports.
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11% 1%
North America
12% Latin America & the Caribbean
Europe
5% Asia
Rest of the World
71%
0%
13%
North America
8%
Latin America & the Caribbean
5% Europe
Asia
Rest of the World
74%
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Comparative Advantage
Mexico’s main comparative advantage is its geographic location
as the neighbor of the US. But this is also a major challenge. Geo-
graphic location next to the US gives Mexico headway in attracting
industries where transportation costs are high and proximity to the
market is necessary. In terms of factor endowments, Mexico is a
labor- and energy-abundant country. So, in addition to geographic
location, there is a great complementarity between the Mexican and
US economies: Mexico has a young workforce that is eager and
willing to take up jobs in the US. Migration from the South to the
North continues unabated even with stricter regulations in force
after the 9/11 terrorist attacks on the US. It is estimated that more
than 11 million Mexicans live in the US 3 and that more than 40,000
migrants attempt to cross the border every year, 4 (373 Mexicans
died in 2003 trying to cross the border) 5. Economic push and pull
forces override attempts to stop illegal immigration. Mexico is a
depositary of significant energy reserves, while the US has capital
and technology and is not self-sufficient in energy. But in this area,
1. Kim (2005), 3, 4.
2. Kim (2005), 12. The overall effect in the terms of trade was a deterioration
of 0.95%.
3. US Department of Labor Current Population Survey, available at: Current
Population Survey, available at: http://www.bls.gov/cps/home.htm Accessed on
November 16, 2005.
4. CONAPO, Encuesta Sobre Migración en la Frontera Norte de México, available
at: http://www.conapo.gob.mx/mig_int/3.htm Accessed on November 16, 2005.
5. Secretaría de Relaciones Exteriores, Dirección General de Protección y
Asuntos Culturales. Telephone communication with SRE official, November 16,
2005.
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80%
70%
60%
50%
40% Trade Openness
30% GDP Growth
20%
10%
0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
–10% 2003
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political leaders and business groups, the overriding fact remains that
divided government and the weak constitutional powers of the
President will make it difficult to enact significant policy change in
whichever direction is deemed desirable. Some of the main challenges
facing trade policy are noted below.
Intra-Executive Relations
The Ministry of the Economy, known as the Ministry of Trade
and Industrial Development until 2000, has been in charge of nego-
tiating preferential agreements since the early 1990s. NAFTA was
negotiated by the NAFTA Negotiation Office, which was created
expressly for that purpose at that time. Once NAFTA negotiations
concluded, the Office was turned into the Deputy Ministry for
International Trade Negotiations (SNCI), which to this day coordi-
nates all trade negotiations. 1 SNCI is responsible for establishing
communication channels with business groups and civil society so
as to hear their views regarding trade policy. Likewise, it contacts
other federal ministries, as appropriate, to undertake consultations
before and during negotiations.
Frictions between the Foreign Ministry and the Ministry of the
Economy over the conduct of foreign economic policy have arisen
sporadically. When Jorge Castañeda became Fox’s Foreign Minister
in 2000, he asked for the transfer of vast areas of foreign economic
policy-making authority to the Foreign Ministry. However, the Min-
ister of the Economy at the time, Luis Ernesto Derbez, refused to
abide. 2 When Derbez became Foreign Minister in January 2003 he
applied the maxim of “where you stand is where you sit” and asked
for a transfer of foreign economic policy authority to the Foreign
Ministry. A draft proposal was prepared, but never submitted to the
legislature. In any case, the necessary accommodation is at times a
tense one. While in previous WTO Ministerial meetings it had been
the Trade Minister who represented Mexico, at the Fifth WTO Minis-
terial meeting which Mexico hosted in Cancun in September 2003, it
was the Foreign Minister who hosted the meeting, while the Minister
of the Economy merely headed the Mexican delegation. Conflicting
signals regarding Mexican trade policy have been the result of this
tug of war. As mentioned, in November 2003, shortly after the con-
clusion of the Cancun Ministerial, the Minister of the Economy
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1. By that time FTA negotiations with Uruguay were concluded: the agreement
entered into force in July of that same year.
2. “México: preocupa poco avance en declaración de Mar del Plata,” available
at: http://ar.news.yahoo.com/051026/4/lnco.html Accessed on November 9, 2005.
3. See Schiavon and Ortiz Mena L.N. (2001).
4. COCEX members are Banco de México, the Federal Competition Commis-
sion, and the following ministries: Foreign Affairs, Economy, Finance, Social
Development, Agriculture, Environment, and Health.
5. See Cameron and Tomlin (2000).
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Executive-Legislative Relations
The challenge of securing a modicum of coordination within and
between ministries is compounded by the increasing activism of the
Legislature in trade policy-making. The Senate has the exclusive
faculty to accept or reject international treaties and agreements, and
all of Mexico’s FTAs have been submitted to the Senate for
ratification. However, the lower house has significant faculties on
budgetary and fiscal issues and can affect trade policy through
fiscal policy, with tariffs being a central part thereof. 2 While
extensive consultations with the Senate took place during NAFTA
negotiations, there was no formal obligation of the Trade Ministry
to do so. It was done only as a matter of political expedience.
However, on September 2, 2004 a new International Economic
Agreements Law entered into force, providing for ample consulta-
tions prior to, during, and after negotiations. 3 The Law was pro-
moted as a show of force by legislators, who believed that the
legislature had been sidelined in previous trade negotiations. While
greater transparency and accountability of the actions taken by the
Executive in the conduct of foreign economic policy is welcome, the
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new Law could hamstring the Executive and severely hinder the
effective conduct of trade policy. For instance, Article 3:I mandates
that for an agreement to be approved it must contribute to improving
the quality of life of Mexicans. Many economists are not convinced
of the effect of liberalization on economic growth and job creation,
and agree merely on the fact that liberalization would generate incen-
tives for a more efficient use of factors of production and foster an
increase in productivity. Likewise, many agreements have short-
term costs and long-term benefits. How, then, could it be clearly
stated that an agreement will improve the quality of life? Article 8
awards the Senate the faculty to initiate hearings with the presence of
negotiators. Again, this sounds reasonable, but the faculty could be
abused so as to request the frequent presence of negotiators and make
it impossible for them to stick to a negotiation calendar and ade-
quately program meetings with their counterparts. Under Article
9:III, when negotiations are concluded the Executive must provide a
list of all the concessions granted by Mexico. While the language is
reminiscent of “GATT talk”, it also has a mercantilist slant: conces-
sions may be seen as a cost for Mexico, when in many instances they
may benefit the Mexican economy, as it would be the case if they
provide for greater competition in areas where there are oligopolistic
practices. Finally, Article 12 provides for consultations with local
governments and legislatures. Although consultations are non-bind-
ing, this nevertheless means that trade policy could easily be “cap-
tured” by extreme local interests thus making it very difficult to move
away from the status quo. In sum, the new law, if used prudently,
could generate greater credibility and legitimacy for trade policy, but
it could also translate into a sort of mutual hostage taking, whereby a
group of legislators make it nearly impossible for the Executive to
conduct trade policy. When the party in office loses power, it may
then apply the same treatment to the former opposition.
Regarding the preferences shown by political parties over trade
policy, it is safe to say that despite grandstanding and protests to
the contrary, all parties with Senatorial representation have
awarded broad support to the FTAs to which Mexico has
subscribed. 1 Dissent, however, has been greater in the Chamber
of Deputies. The latest agreement to be ratified by the Senate was
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Mexico lost the WTO dispute, but members of the Chamber of Depu-
ties have dragged their heels and want not only to maintain the tax on
soft-drinks made with imported HFCS, but also to award preferential
treatment to soft-drinks made with Mexican sugar or Mexican HFCS.
In November 2005 the Senate refused to follow suit, but the issue
remains contentious and unresolved. 1
Given the presidential election that will take place in July 2006,
all political parties should make public their electoral platform by
the beginning of that year, including their position on trade policy.
Nonetheless, if we focus on actual behavior it seems safe to say that
the Senate has been generally in favor of FTAs. At the same time, it
wants greater oversight faculties over foreign economic policy.
The lower house is divided over the role that the Senate should play
in trade policy (as demonstrated by the divided vote on the Foreign
Economic Agreements Law), but it has been quite active regarding
the protection of local interests even if that means disrespecting
Mexico’s international commitments.
Government-Business Relations
The main business organization dealing with trade policy is
COECE, the Foreign Trade Business Organizations Coordinating
Council. COECE is an umbrella organization that at the time of its
establishment, at the outset of NAFTA negotiations, encompassed all
major business organizations with an interest in foreign trade. It
survives to this day and plays a key role prior to, during, and after
all of Mexico’s trade negotiations. 2
COECE carries out consultations with its members and with the
Ministry of the Economy on an as needed basis. It organizes itself
according to the demands of each negotiation. For instance, during
NAFTA negotiations, it was organized into 19 groups that paralleled
the areas into which the negotiations were divided. Some of its
members also commissioned studies to help them –and negotiators-
establish a negotiating position. After that, COECE members
accompanied negotiators to all meetings and were available in situ
for consultations during the negotiation process. There was an
additional round-up meeting after each negotiating session, and it
1. The HFCS, sugar and NAFTA saga is extremely complex. See Hufbauer and Schott
2005, 310-327. See also “El Senado rechaza extender la exención del impuesto de 20% a
los refrescos fabricados con fructosa,” Avaliable at http://www.sentidocomun.com.mx/
articulo.phtml?id=9338&text1=Arca Accessed on November 12, 2005.
2. See Alba and Vega (2002), and Zabludovsky (2005).
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1. Alba and Vega (2002), Ortiz Mena L.N. (2004a). Alba and Vega point out
that CANACINTRA and ANIT represented SMEs, but both organizations complained
that SME interests had not been taken into account during the negotiations.
2. http://imco.solutrends.com/opencms/opencms/en/
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The idea was to have the Council represent “civil society”. Its
membership included four representatives from each of the
following sectors: academia, agriculture, labor, and business. The
Council met approximately on a monthly basis during NAFTA
negotiations, at which time the Trade Minister would update its
members on the status of negotiations. Some of them would also be
in situ during trade negotiations to advice negotiators on as needed
basis, in a similar manner to COECE.
The Council was definitely not representative of civil society –if
ever such a body could be conceived independent of a legislature. 1
Labor representatives were affiliated with the PRI (CTM, CROC,
CROM) or at least not in strong opposition to the government (such
as the head of the Workers’ Council). 2 Rural interests were repre-
sented by the PRI-affiliated CNPR, and by CNA and CNG, which
encompass prosperous rural landowners. Business interests were
heard through the voice of CCE, COECE, CMHN, COMCE, CONCAMIN,
CANACINTRA, ABM, DESC and Grupo San Luis. 3 The academia, at
last, was represented by the deans of UNAM, IPN, COLMEX, ITESM,
COLEF, and ITAM. 4 Although the academic representatives did her-
ald from the most important public and private universities, they
basically took a passive stance toward negotiations.
While the Council met on a monthly basis during NAFTA negoti-
ations, it met only 28 times from 1994 to 2000. Moreover, it did not
meet at all during the Fox Presidency (2000-2006). While the
dynamic of trade negotiations ebbs and flows and it is natural that
1. The membership referred to is that prevailing at the end of the Zedillo admi-
nistration. Its composition during NAFTA negotiations was similar, albeit not iden-
tical. For the NAFTA era composition, see Zabludovsky (2005).
2. For a discussion of these business organizations and state-labor relations in
Mexico, see Middlebrook (1995).
3. CCE, CMHN, and COMCE represent the interests of large and powerful Mexi-
can business groups; ABM is the National Bankers´ Association; CONCAMIN and
CANACINTRA have more varied membership than the other more elite organiza-
tions but not the same amount of political influence and access. DESC and Grupo
San Luis are two large Mexican industrial conglomerates that prospered greatly
during the closed economy era; San Luis produces auto parts in Mexico, the US
and Brazil, while DESC has interests in the petrochemical industry and has recently
fallen on hard times.
4. UNAM is the most important Mexican public university, IPN is the major
public polytechnic, COLMEX and COLEF are two smaller but highly regarded public
institutions of higher education, while ITESM and ITAM are two leading private uni-
versities.
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Conclusions
1. The elite survey is not representative and is based on the Mexican Council
on Foreign Relations membership.
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period. Moreover, the only increases worth noting are with trade
partners with which Mexico has not signed FTAs, such as Brazil
and, especially, China.
Not only is Mexico’s foreign trade concentrated in terms of trading
partners, but it is also concentrated in terms of its commodity
composition (on the import as well as on the export side) and the
number of firms that account for the bulk of Mexican exports. One
could wonder whether this multidimensional concentration is a bad
thing. After all, that is what markets determine and perhaps may be for
the best. At any rate, it is always an uphill battle when governments
try to go against markets. Nonetheless, there are negative economic
and political consequences derived from this situation.
On the economic side, as has been argued, such a high degree of
reliance on the US economy –considering the high openness of
Mexico– means that a downturn in the US will severely affect the
Mexican economy. In effect, a high concentration of trade with the
US has been the rule for over a century, but it is only since the mid-
1980s that the Mexican economy opened up and since the mid-1990s
that exports really took off. Concentration may be nothing new, but
the degree of reliance on the US economy is presently very high.
The concentration of imports and exports in a limited number of
sectors also means that Mexico is very sensitive to competition in
those sectors. Since China is an exporter in many of the sectors
which constitute Mexico’s main exports, competition with China is
head-on. Unless Mexico can find new sectors and market niches, it
risks losing ground in many markets. 1 Even competitors that are
not as formidable as China are eating away at Mexico’s preferential
market access, since both the US and the EU have subscribed to
preferential trade agreements with other countries since NAFTA and
the Mexico-EU Association Agreement entered into force.
On the political side, such concentration means that only a handful
of firms and sectors seem to have benefited from liberalization,
rendering political support for an open trade policy difficult to garner.
Since SMEs have not fared very well under liberalization and they are
some of the main employers in the Mexican economy, trade-related
employment is not as high as it could be and the benefits from higher
trade flows are not shared equally. While large and erstwhile
competitive Mexican firms have called for a moratorium on new
1. Kim (2005).
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FTAs, there could be growing pressures not only for a moratorium but
also for an actual rollback of liberalization. For instance, groups that
have raised the possibility of renegotiating NAFTA to allegedly
protect Mexican agriculture could end up eating away at the
credibility of the durability of Mexican trade policy reforms. And
credibility has been one of the main gains behind Mexico’s FTAs.
Given a political environment in which policymaking is increasingly
difficult, the benefits of Mexican trade and investment links with
other regions could be hampered. This brings us to the issue of the
forces and actors that shape Mexico’s trade policy.
Given the government’s promise to halt further FTA negotiations
in late 2003, while pushing for unilateral liberalization from 2002
until the present (and in fact continuing with FTA negotiations with
Korea), the best one can say is that either present Mexican trade strat-
egy is contradictory, or that Mexico has no strategy and that the gov-
ernment has responded to pressures from different interests and
engaged in contradictory actions. The lack of a clear strategy is
reflected not only in the actions carried out by the Ministry of the
Economy, but also in frictions between the Foreign Ministry and the
Ministry of the Economy on key issues such as how to deal with the
Chinese challenge.
The legislative is becoming increasingly active in trade policy,
albeit not in a constructive manner. The 2004 Foreign Economic
Agreements Law was above all a display of force. Since there is no
re-election to any position, Congress members have short-time hori-
zons. This makes it difficult to have the long-term outlook required
to put together a coherent trade strategy. Business leaders, even those
who in the past were in favor of free trade, are starting to demand a
slow down of the liberalization process. While this may be a way to
protect what shares of the market they still have, it can also be seen
as a genuine call for further economic reforms to help Mexico regain
competitiveness. The IMCO report is an outstanding document in
terms of both breadth and depth, showing what must be done in order
to make Mexico more competitive. Should some of the measures
suggested in the report be implemented, there would be fewer rea-
sons to stop liberalization, which would be merely a respite to the
challenges posed by Mexico’s competitors. In addition, increasing
Mexican competitiveness in areas such as financial and energy costs
would allow many SMEs that have not fully participated in interna-
tional trade to benefit from the windows of opportunity that still
exists as a result of Mexico’s network of trade agreements.
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1. I would like to thank the participants at the “Workshop on the Trade Strate-
gies of Mercosur Countries, Chile, and Mexico,” November 25, 2005 for their
valuable comments. I am particularly grateful for the very thorough and detailed
comments provided by Roberto Bouzas and Gustavo Vega, and for the time
granted to me by Arnulfo R. Gómez and Luis Martínez Argüello to exchange
views on government-business relations. Needless to say, all remaining shortcom-
ings and omissions are my sole responsibility.
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REFERENCES
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Interviews
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Chapter 6
The Political Economy of Chilean Trade Policy
A Review
Introduction
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1. Many restrictive mechanisms were used from 1930 to 1973 to foster ISI,
including: multiple exchange rate systems, high tariffs, taxes and other import sur-
charges, licenses, quotas and prior deposits, import prohibitions, exceptions and
special regimes, export tax rebates, special foreign investment and related capital
movements rules. See French-Davis (1973), Muñoz (1986), de la Cuadra &
Hachette (1990), Meller (1996).
2. For a fuller discussion, see Meller (1996).
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Import prohibitions affected more than 300 goods and the Central
Bank had to issue licenses for more than half of all imports. Nev-
ertheless, there were 290 exception schemes.
c) Exchange rate regime: there were multiple exchange rates (a
total of eight different official exchange rates with a wedge
between the minimum and the maximum of 1,000%.
This number of trade restrictions illustrates the growing bureau-
cratization of the economy, which led to a complicated network of
regulations and extremely unstable and often arbitrary government
decisions. This, in turn, was an incentive for corruption. ISI poli-
cies were inflexible when faced with changing conditions. In
effect, once the protection had been granted it was very difficult to
remove it. This brought about a pattern of behavior focused on
easy gains, and one in which profits would depend more on ade-
quate contacts and connections than on efficiency and the develop-
ment of an entrepreneurial spirit.
Furthermore, price distortions encouraged oligopolies and a
non-competitive market structure, protected by high tariff and
non-tariff barriers, where the cost of saving dollars by import sub-
stitution was two to four times higher than that of generating dol-
lars by exporting. The Chilean industrial sector used resources
inefficiently and became responsible for failing to transform
Chile into a developed economy. It is difficult to find explana-
tions as to why, after forty years of ISI, the ever incipient Chilean
industry was unable to mature. As a result of this failure, consum-
ers had to pay high prices for poor quality industrial products. It
appears as a paradox that the sector that enjoyed the biggest eco-
nomic incentives was, at the beginning of the 1970s, highly inef-
ficient. The absence of a competitive environment is a key
explanatory factor.
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Import Liberalization
The import liberalization strategy basically involved the reduc-
tion of import barriers. In effect, after 1973 import tariffs were sig-
nificantly reduced and non-tariff barriers were practically
eliminated, radically simplifying the complex and chaotic foreign
trade regime inherited from the ISI phase. The implementation of a
flat tariff rate for all imports notably simplified import activities 1.
By 1979 the situation was characterized by a flat tariff rate with an
average and median of 10%, the absence of non-tariff barriers
(except for a few exceptions such as the armed forces, free trade
zones, etc), and a unified exchange rate (Meller, 1996; French-
Davis, 2001).
An open economy achieves a higher welfare than a closed or
highly protected economy for several reasons. First, imports raise
competition in the domestic economy: since imports can substitute
local goods, it encourages domestic firms to improve their effi-
ciency. Second, the stock of factors of productions is used more
efficiently since an open trade regime encourages specialization
according to existing comparative advantages. Third, the range of
goods offered to consumers increase and their price falls as a result
of foreign competition. In sum, trade liberalization encourages
competition and a more efficient allocation of resources in the
domestic economy, supplying consumers with better quality goods
at a lower cost.
Economists agree that free trade increases social welfare.
Economic liberalization makes external prices the key factor to
decide the internal allocation of resources; playing the role of an
external anchor. Until 1973 the Chilean economy was characterized
by the extensive use of price controls. However, the free market and
the open economy adjusted domestic prices with external ones
preventing the restoration of price controls. Trade liberalization,
especially with a flat tariff rate, means neutral economic incentives.
Thus, trade policy is not used to create privileged sectors. In such a
context the economic authorities abstain from promoting sectors
according to priorities identified by a long-term development
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Table 2. Nominal Tariffs before and after the Second Trade Liberalization
period – Chile 1982-1991
(%)
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
10 20a 20+35b 30+20c 20 20 15d 15 15 11e
Between 1991 and 1998 tariffs stayed at 11%. Since 1999 the flat tariff rate was reduced by
one percentage point per annum to reach 6% in 2003
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Table 3. Nominal Tariffs and the Real Exchange Rate, Chile 1973-1990
Nominal
The real protection level
Tariff Real Exchange Ratea
indexb
Year Average (Ch.$ / US $,1990)
(1990 = 100)
(%) (2) (3) = [1+(1)] ⫻ (2)
(1)
1973 105 201.5c 117.8
1974 75 199.8 99.7
1975 49 273.8 116.4
1976 36 221.5 85.9
1977 22 184.7 64.3
1978 15 205.2 67.3
1979 11 200.5 63.5
1980 10 175.0 54.9
1981 10 148.8 46.7
1982 10 172.6 54.2
1983 18 207.2 69.7
1984 25 218.0 77.7
1985 26 264.9 95.2
1986 20 294.6 100.8
1987 20 305.1 104.4
1988 15 324.5 106.4
1989 15 313.6 102.9
1990 15 304.9 100.0
Source: Central Bank, and Meller (1996).
a) The real exchange rate is the official nominal exchange rate deflated by the domestic
price index (IPC) and inflated by an external price inflation index.
b) The real protection level is the real exchange rate multiplied by the nominal tariff, plus
one.
c) Average value of the official and parallel market exchange rate. The official exchange rate
suffered a real devaluation of 212 % in the first quarter of 1973.
Export Expansion
According to the theory of trade liberalization, the reduction of
import tariffs lowers the anti-export bias of the economy. In effect,
import tariffs introduce a disincentive to produce goods for the
external market 1. Consequently, trade liberalization alters relative
prices and encourages domestic firms to produce exportable goods.
As internal prices align with international prices, national output
concentrates on those goods where the country has a comparative
advantage. There is a general increase in efficiency and, given that
the external market is considerably larger than the local market,
exports eventually become the economy’s growth engine.
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1. This observation was made by the distinguished head of the Chilean nego-
tiating team, Osvaldo Rosales.
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Empirical Evidence
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Neo-Protectionism 1
1. See the articles in the book edited by R. Fischer (1977) for more discussion.
2. For a more extensive discussion and further information about Latin Amer-
ica, see Meller (2003).
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Neo-Protectionism Abroad 1
The poisoned grapes and the ecological dumping cases illustrate
Chile’s experience with neo-protectionist trends in the rest of the
world. We will examine each in turn.
Poisoned Grapes (Engel, 1997)
In March 1989, the United States Food and Drug Administra-
tion, (FDA) found two grapes containing cyanide in a shipment that
had arrived from Chile. The FDA immediately confiscated the
whole cargo and made a public announcement recommending that
Chilean grapes were withdrawn from sale and existing inventories
destroyed, advising against consumption and prohibiting new
deliveries. All this happened in the middle of the Chilean export
season. This affected not only the delivery of grapes to the United
States, but paralyzed all fruit exports across Chile. The US govern-
ment applied an embargo on all fruits and vegetables arriving from
Chile. The estimated damage to Chilean exports was around
US $ 300m.
At the time, nearly 600,000 boxes of Chilean grapes arrived at
US ports of entry every day. The probability of finding two grains
of poison in a million grains was one in ten thousand. A subsequent
investigation by a group of experts found a series of errors in FDA’s
analysis. Furthermore, given the conditions in which the cyanide
was found, the contamination happened a few hours before the
analysis was done. In other words, the poison was introduced into
the grapes when they were in the United States and not Chile. Why,
then, should such an extreme measure as a complete embargo on all
Chilean fruits and vegetables was applied?
One hypothesis suggests a protectionist motive. In fact, Califor-
nian producers had been pressing the US Congress for greater pro-
tection from Chilean grape producers 2. Chilean producers,
supported by their government, have used several official and legal
channels to obtain compensation, without any results.
Ecological Dumping (O’ Ryan and Ulloa, 1997)
Ecological dumping occurs when production costs in country B
are higher than in country A because of stricter environmental
standards. This encourages country B producers to move their
1. This section is based on Engel (1997) and O´Ryan and Ulloa (1997).
2. For a more detailed analysis of other hypothesis, see Engel (1997).
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standards to deal with these issues, as illustrated by the fact that the
damage caused in urban areas cannot be compared to that made in
a desert, which is where most Chilean mines are located. In any
case, during the last ten years Chilean mining companies have
undertaken investments of approximately US $ 1,000 m to comply
with ISO 14,000 standards.
This investment is necessary but not sufficient to prevent pro-
tectionist pressures. In effect, European governments could
declare copper, which accounts for more than 40% of Chilean
exports, as too dangerous to human health to be used in water
pipelines and roofs. In anticipation, Chilean mining companies
have taken steps to respond to possible allegations over copper’s
dangerous health effects. In this case, the beneficiaries of the
application of the “precautionary principle” would be European
producers of copper’s substitutes for use in roofs and pipelines.
Those negatively affected would be the European consumers and
the Chilean copper exporters.
Neo-Protectionism at Home
The agricultural sector has challenged the value and benefits of
FTAs. Traditional farmers, in particular, fear that they will be the
most negatively affected by these types of agreements. Since the
second Chilean trade liberalization phase (1985-1986), some sensi-
tive agricultural products have benefited from the implementation
of a price band system. These products include wheat (and flour),
vegetable oils, milk and sugar. This section looks at sugar in detail.
1. This section relies on articles included in the White Book of Sugar: a history
of protectionism (Libro Blanco del Azúcar. Una Historia de Proteccionismo)
(2003).
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Structural Factors
In Chile, there has been a high degree of ideological and policy
polarization about the trade policy measures necessary to stimulate
economic growth. As previously explained, different policy
approaches prevailed at different periods in time. Since the begin-
ning of the twentieth century, Chile had a comparative advantage in
copper, and before 1973 it was believed that the country could only
export copper. However, profitable exploitation of copper required
large scale production and huge investments, that could only be car-
ried out by foreign investors. Therefore, an ISI development strat-
egy favoring the domestic market was highly attractive. Trade
policy (and protectionist barriers) was the main instrument used to
promote development. All domestic producers were granted pro-
tection. Moreover, the larger was the producer, the higher the level
of protection. As a result, profitability began to depend on protec-
tion. It became more profitable for national businessmen to lobby
for higher protection than to produce efficiently. The discretional
behavior of the state decisively influenced the size of private sector
profits. Continuous balance of payments crises were dealt with an
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Institutional Factors 1
The institutional characteristics of trade policymaking and FTA
negotiation machinery point out, in the Chilean case, to low institu-
tional fragmentation, a high degree of formal co-ordination (nego-
tiations), a concentrated network of private agents and a high
degree of formal requirements to participate (Jordana and Ramió,
2003, p. 186). Chile has always been characterized as having a
strong presidential regime. These traits were strengthened during
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participate in the negotiations and the role by the private sector was
restricted to selection by invitation.
To generate support for FTA negotiations there were public
events to exchange ideas and information. The Foreign Ministry
created an Advisory Council made up of parliamentarians, busi-
nessmen and academia to follow the negotiations with the United
States and the European Union. This Council met three times. In
2003, a Public-Private Council for Export Development was cre-
ated bringing together several business associations, Ministers
from the Inter-Ministerial Committee, the Foreign Investment
Committee and PROCHILE. The Council, which would meet twice a
year, was regarded as a forum to exchange information.
As far as the participation of civil society is concerned, DIRECON
organized seminars, round tables and conferences with various
groups in different regions. In 2001 and 2002, when the negotia-
tions with the US were held, DIRECON held 56 public meetings,
while in 2004, a total of 201 public information meetings were
organized (almost one each working day) (Sáez, 2005). The trade
unions have marginalized themselves from the FTA negotiations.
Sáez (2005) describes their position in the following terms, “the
trade union movement holds an unclear position, that neither helps
nor hinders the process (of FTA negotiations)”.
Final Remarks
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Patricio MELLER 1
REFERENCES
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