Jan. 1, 1994: The United States, Mexico, and Canada sign the North American Free Trade Agreement (NAFTA) establishing a free trade area.

March 26, 1991: Argentina, Brazil, Paraguay and Uruguay sign a framework treaty that forms the Southern Cone Common Market (MERCOSUR/MERCOSUL). Mercosur is the Spanish and Mercosul the Portuguese for the Southern Cone Common Market.

Post World War II trade agreements have reduced high tariffs and rescinded protectionist trade measures that contributed to the worldwide depression in the 1930s. Over the years, the many negotiating rounds of the General Agreement on Trade and Tariffs (GATT), culminating in the founding of the World Trade Organization (WTO), have resulted in a comprehensive framework facilitating free trade among most nations. These trade agreements recognize the benefits of increased trade, such as economies of scale and a higher standard of living. Regional trade alliances play an even bigger role in economic development because they move beyond basic trade agreements to encompass economic, and in some cases, political integration. Because of their smaller geographic focus, regional trade alliances enable countries to develop closer relations. A perfect example is the European Unions move to a single currency. Often overlooked are the burgeoning trade agreements in the Americas and the opportunities they provide for expanding business operations. The drive to promote free trade and create a common market in the Americas is being spearheaded by Mercosur, and currently to a lesser extent by NAFTA. However, many U.S. businesses are unaware of the opportunities presented by Mercosur.

Background

The two major trade agreements in the Americas are NAFTA and Mercosur. Smaller trades alliances exist such as the Caribbean Community and Common Market (CARICOM) and the Andean Community.

In 1994, NAFTA established a free trade zone among Canada, Mexico and the United States. The NAFTA agreement established a 15-year schedule for removing all tariffs. As of January 1, 1999, nearly all trade between the United States and Canada is tariff free, although many tariffs on trade with Mexico remain.

Mercosur evolved from a free trade zone that began in 1991 to a partial Customs Union in January 1995. A full Customs Union is scheduled to take effect on January 1, 2001. The Mercosur/Mercosul members are Argentina, Brazil, Paraguay and Uruguay. Chile (1996) and Bolivia (1997) are associate members, and other South American nations have expressed interest in joining Mercosur.

NAFTA and Mercosur

At the Summit of the Americas in 1994, President Clinton pledged to create a free trade area from Alaska to Tierra del Fuego by 2005. However, Congress refused to extend Fast Track Authority to the President, making it more difficult for the President to negotiate trade agreements and slowing the expansion of NAFTA. Subsequently, Mexico and Canada have signed trade pacts with Chile and other nations. The U.S. continues to work on a free trade agreement for the Americas, but lags behind the rest of the Hemisphere in negotiating trade deals.

Mercosur has aggressively pursued new opportunities, including signing free trade agreements with Chile and Bolivia, negotiating agreements with Mexico and the Andean Community, and exploring trade agreements with the European Union and Central American countries. Mercosur, including Chile, continues to focus on trade liberalization within Central and South America.

The underlying objective of both trade agreements is to increase trade among its members. To this extent, NAFTA and Mercosur have been very successful. In 1993, the year before NAFTA, trade among Canada, Mexico and the United States was about $275 billion. By 1998, trade amounted to more than $500 billion among the three countries. Trade among Mercosur countries has grown fivefold since 1991, rising to $20.6 billion in 1998.The Mercosur Customs Union eliminates all tariff and non-tariff barriers between members and establishes a Common External Tariff (CET) which applies to non-member countries. Companies operating in Mercosur gain a competitive advantage because the CET is higher than the tariff levels within Mercosur. NAFTA countries set their own external tariffs.

New Opportunities

Many U.S. companies focus on trade within NAFTA, often ignoring the benefits of trade in South America, and Mercosur/Mercosul in particular. Several very good reasons exist for pursuing business and investment opportunities in South America:

* A market comparable to the United States in terms of population
* A growing middle class

The last point bears some further explanation. While South American economies are still volatile, evidenced by Brazil=s recent problems, many countries have undergone structural reforms that enable their economies to better withstand economic volatility. In fact, GDP growth in Mercosur has outstripped GDP growth in the European Union over the past several years.

Politically, free elections and democratic institutions have replaced military dictatorships. Mercosur members recognized the importance of democracy when they adopted three political resolutions in 1996. The key difference between the two agreements lies in the level of economic integration. Mercosur established an ambitious economic integration project for its member that decree respect for democratic institutions as a condition for membership. South American countries will continue to experience growing pains, but the days of hyper-inflation, economic instability and military coups appear over.

While NAFTA affords many opportunities to U.S. businesses, the growth potential in Mercosur remains virtually untapped. U.S. businesses should consider expanding into Mercosur for the following reasons:

* Combined market of 220 million people (62% of South America's population) with a GDP of $1.2 trillion.
* Potential to piggyback on existing and future trade agreements negotiated by Mercosur (e.g., with the European Union).
* Growing trade within Mercosur and between Mercosur and other regions. Exports from Mercosur to non-Mercosur countries reached $62 billion in 1998, up $20 billion since 1992
* Access to markets of new members as they join Mercosur/Mercosul.
* International financial center in Uruguay.
* Entry into one country gains entry into Mercosur/Mercosul, if the rules of origin requirements are met.

Products qualify for lower tariff rates if one of three conditions is met

1. Products are manufactured using material originating in Mercosur countries; while NAFTA created a free trade zone but no formal plans for further economic or political integration. In terms of integration, Mercosur stands somewhere between NAFTA and the European Union.
2. The final value of a product meets the 60% Mercosur content rule;
3. Products manufactured using foreign materials undergo a transformation that results in a change in their Mercosur classification.

A reduction in trade barriers doesn't mean instant success. A company interested in capitalizing on the benefits of Mercosur must still conduct a critical evaluation of the marketplace and the specific business opportunity. At a minimum, a business should conduct market facilitation efforts, to include:

1. a market survey to determine the level of demand for and cultural acceptance of your product.
2. development of appropriate market entry strategies for each country.
3. identification of joint venture partners, distributors, agents, and key government contacts
4. due diligence on potential business partners to avoid future problems.

A word of caution: success in one Mercosur/Mercosul country doesn't automatically guarantee success in another. Each country has its own unique culture, heritage and preferences, requiring careful planning, due diligence and local knowledge to succeed.

Mercosur/Mercosul opens the door to the third largest regional trading block in the world (after NAFTA and the EU). Careful planning coupled with sound business intelligence should enable successful entry into this growing market. South America encompasses an area larger than the United States and is rich in many natural resources. With the falling trade barriers and improved economic and political stability, the future for trade with South America is bright.

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