USITC Research Program 

Office of Industries 

Office of Economics 

U.S. International Trade Commission 

Staff Issue Paper 

Market Developments in Mercosur Countries 

Affecting Leading U.S. Exporters 

USITC Publication 3117 

July 1998 
This report was prepared principally by 

Office of Industries 

William Greene, Project Leader 

(including sectors on medical equipment, automobiles) 

Felix Bello (computers, telecommunications) 

John Cutchin (power generation) 

Office of Economics 

Kim Frankena, Sandra Rivera, James Stamps 

(Mercosur trade and member profiles, Mercosur agreement) 

with Office of Industries assistance from 

Larry Brookhart, Mark Paulson, Ralph Watkins, Sylvia McDonough 

Diane Bennett, Sharon Greenfield, Zema Tucker 

in consultation with Commission staff responsible 

for the transportation and electronic technology/equipment sectors 

Robert Rogowsky 

Director of Operations 

Acting Director of Economics 

Vern Simpson 

Director of Industries 
JULY1998 

Staff Issue Paper:· Market Developments in Mercosur 

Countries Affecting Leading U.S. Exporters 

ABSTRACT 

This paper examines trade and investment trends in the Mercosur countries in the context of both the 

Mercosur agreement and unilateral policy changes implemented by member nations to spur economic 

growth Profiles of the four charter members provide a synopsis of their macroeconomic performance 

and of the government policies, reforms, and remaining barriers affecting trade and foreign investment. 

To illustrate these trends and the outlook for US. firms in these markets, the report also profiles five 

leading US. export industries that account for about 25 percent of US. exports to Mercosur countries. 

These leading US. export industries include power generation equipment, motor vehicles and parts, 

medical devices and equipment, computer equipment and parts, and telecommunications equipment. For 

each industry, the paper provides a summary of a key bloc member's industry structure and recent market 

developments, an assessment of intra-Mercosur trade, a discussion of factors affecting market access for 

US. goods, and information on industry-specific tariff and nontariff barriers. 

CONTENTS 

Page 

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 

Overview of market developments and trade in the Mercosur bloc . . . . . . . . . . . . . . . . . . . . . . . . 3 

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 

Mercosur in perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 

Mercosur' s role in hemispheric trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 

Mercosur charter member profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 

Paraguay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 

Uruguay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

Overview of industry analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 

Power generation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 

Motor vehicles and parts ................................................. _ . . . . . . . . 28 

Medical devices and equipment.................................................... 38 

Computer equipment and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 

Telecommunications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 

Appendix A: The Mercosur agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 

• Note to readers: The views and conclusions expressed in this staff issue paper do not necessarily reflect the 

views of the U.S. International Trade Commission or of an individual Commissioner. Market developments in the 

Mercosur region are dynamic and more up-to-date information may be available. For additional information on 

industry sectors, please contact William Greene (greene@usitc.gov or 202-205-3405). For additional information 

on Mercosur countries and developments in the region, please contact James Stamps (stamps@usitc.gov or 202-205-

3227). 
INTRODUCTION 

Mercosur· is a customs union whose founding members are Argentina, Brazil, Paraguay, and 

Uruguay. Chile and Bolivia are associate members. When Mercosur was originally formed in 1991 as a 

free trade zone, the two largest members, Argentina and Brazil, were trying to solidify democratic 

institutions after extended periods of military rule and to wean their economies away from policies of 

import substitution and government ownership, or support, of key industries. Most governments in the 

region had been facing stagnant productivity, shortages of investment capital, high inflation, and weak 

domestic consumption. In response to these challenges, the charter members of Mercosur took steps of 

varying degrees to emulate the Chilean growth model, which was based on unilateral tariff reductions, 

privatization of publicly owned industries and services, and openness to foreign investment. Mercosur' s 

implementation of a regional customs union on January 1, 1995, provided a large market for its members, 

thereby providing an incentive for regional development and allowing each member to realize economies 

of scale. In the past several years, the charter members have experienced significant growth in GDP and 

international trade, both with fellow members and with nonmembers. 

It is not yet possible to draw conclusions about the economic effects of Mercosur' s implementation 

of a customs union, given the ongoing phase-in of common tariff rules, the short period of time the union 

has been in existence, and many other factors at work in the region. At the conclusion of the April 1998 

Summit of the Americas in Santiago, Chile, leaders of 34 countries in the Western Hemisphere agreed to 

launch formal negotiations in September for a Free Trade Area of the Americas (FTAA). Recent 

developments in hemispheric trade and investment that involve Mercosur members may serve to provide 

insights on how market reforms could affect other hemispheric partners. Unilateral policy changes 

implemented by member nations in the early 1990s seem to have created an investment climate conducive 

to economic growth. It is anticipated that the Mercosur agreement will also influence the growth of these 

member economies by promoting trade and investment within the customs union. 

This paper examines trends during 1990-97 in the political and economic climate of Mercosur 

countries, intra-Mercosur trade and bloc member trade with the United States and the rest of the world, and 

U.S. exports to and investment in member countries. Executive summary highlights (in italics) are 

provided for: ( 1) the overview of market developments in the Mercosur bloc; (2) the overview of industry 

analysis; and (3) each of the industry analyses which follow. Certain trade data on Mercosur imports and 

intra-regional Mercosur trade are provided throughout this paper for the latest year available (1996). 

• Mercosur is shortened from the Spanish Mercado Comun de/ Sur (Southern Common Market); in Portuguese 

(Brazil), the bloc is referred to as Mercosul. 

2 
OVERVIEW OF MARKET DEVELOPMENTS AND TJUDE IN THE MERCOSUR BLOC 

IDGHLIGHTS 

a Mercosur is the customs union formed by the Treaty of Asuncion in 1991, which joined 

Argentina, Brazil, Paraguay, and Uruguay. In 1995, a set of common external tariffs (CET) 

on imports from nonmembers was added to the intra-regional free trade policies adopted 

earlier. 

a By 1990, each founding member had begun to shift away from protectionism and had 

launched measures to implement market-oriented economic reforms on a unilateral basis. 

The Mercosur agreement has established a formal timetable for the harmonized liberalization 

of their trading regimes. 

a Latin America has become one of the fastest growing markets for US. products during the 

1990s. US. exports to the Mercosur bloc, the second largest Latin American market for US. 

products after Mexico, more than tripled during 1990-97, rising to $21.9 billion. Meanwhile, 

the US. merchandise trade balance with Mercosur countries shifted from a $3.1 billion deficit 

in 1990 to a trade surplus of$10.0 billion in 1997. The strong growth in US. exports to the 

Mercosur bloc reflects economic expansion in the region, lower rates of inflation, reduced 

trade barriers, liberalized foreign investment rules, and privatization of government-owned 

industries. 

a Under Mercosur, US. exports now entering member countries generally face a lower average 

tariff than was the case before the CET was implemented However, member countries have 

raised tariffs on selected goods, either as part of the agreement or in response to rising trade 

deficits and.fiscal shortfalls which have occurred since its implementation. 

a During the 1990-96 period, imports by Mercosur countries from other bloc members 

increased 314 percent, to $17.1 billion, as imports from non-Mercosur countries increased 

185 percent, to $66.2 billion. At the same time, the Mercosur bloc exports to the rest of the 

world increased 37 percent, to $57.9 billion. 

MERCOSUR IN PERSPECTIVE 1 

With a population of over 200 million and a growing middle class, the Mercosur region has 

significant market potential for U.S. exports of merchandise and services. The charter members of 

Mercosur (Argentina, Brazil, Paraguay, and Uruguay) account for roughly two-thirds of U.S. trade with the 

region. The Mercosur agreement represents one of a series of bilateral and multilateral trade agreements 

among Latin American nations.· Following the ratification of the Treaty of Asuncion in 1991, a transition 

period commenced during which most tariffs on intra-regional trade were phased out and trade regimes 

were harmonized under the auspices of a free-trade area (FTA). Mercosur's second phase was 

implemented on January 1, 1995, with the introduction of a system of common external tariffs (CEn. The 

FTA serves to liberalize trade among the Mercosur partners by reducing and ultimately eliminating tariffs 

and some nontariffbarriers on most goods within the region. Under the CET, most imports from outside 

·See Appendix A for a separate discussion of the mechanics of the Mercosur agreement. 

3 
the Mercosur region are subject to a common tariff regime. Bolivia and Chile joined the FTA as Mercosur 

. "associate members" in 1997. • 

The advent of Mercosur coincided with a general expansion of trade and investment opportunities. 

Generally improved macroeconomic performance throughout the region gave momentum to Mercosur' s 

goals of economic integration and trade liberalization. Furthermore, the Mercosur agreement was 

negotiated and implemented during a period of declining global trade barriers; the multilateral Uruguay 

Round Agreements (URA) also entered into force on January 1, 1995. Mercosur members already had 

adopted unilateral reforms that were more far-reaching than those agreed to in the URA, a fact that is in 

part reflected in the CET. (See the section of this paper entitled "Mercosur Charter Member Profiles" for a 

discussion of the recent economic performance and trade policies of these Mercosur members.) 

Mercosur is not a union of equals. Although Argentina has a higher per capita GDP (table 1), 

Brazil dominates the Mercosur region in terms of economic activity (measured by GDP), land area, 

population, and trade volume. Consequently, Brazilian economic policies influence the pace of 

Mercosur' s overall trade liberalization program. Brazil's shift away from protectionist trade policies and 

the implementation of market-oriented economic reforms have been influenced by similar steps taken by 

Chile and Argentina. Lower barriers to trade and investment and the privatization of state enterprises have 

also opened new areas of economic activity to foreign participation. 

Table 1 

Economic indicators for Mercosur members, 1997 

Country Total GDP Land area Population GDP per capita Exports Imports 

Billion 1990 Million 

dollars sq km Millions 1990 dollars - Billion 1997 dollars' -

Argentina ....... . 231.0 2.8 35.7 6,476 19.0 20.6 

Brazil ........... . 504.9 8.5 163.0 3,090 53.0 61.4 

Paraguay ....... . 7.6 0.4 5.0 1,502 2.6 4.0 

Uruguay ........ . 11.1 0.2 3.2 3,448 2.7 3.5 

1 Balance of payments basis. 

Source: Inter-American Development Bank, Basic Socio-Economic Data, Mar. 16, 1998. 

MERCOSUR'S ROLE IN HEMISPHERIC TRADE 

The formation of Mercosur coincided with increased U.S. attention to and participation in efforts 

to create a hemisphere-wide free trade zone. The U.S.-Canada free trade agreement became operative in 

1989 and the North American Free Trade Agreement (NAFTA) in 1994. The Clinton administration has 

indicated a desire to move toward a Free Trade Area of the Americas (FTAA) by expanding the NAFTA to 

other countries in the hemisphere. However, the United States Trade Representative (USTR) believes that 

agreements to expand NAFTA are unlikely without fast-track negotiating authority, which expired in 

1994.2 With NAFTA expansion delayed, Mercosur has taken on increasing importance in promoting 

hemispheric economic integration and as a vehicle for coordinating member country relations with the 

United States. Mercosur has already become a regional hub for trade agreements among South American 

·This paper discusses trends related to the four charter member countries ofMercosur. Associate members enjoy 

the benefits of the Mercosur FT A without having to adopt the CET. 

4 
countries. Ongoing talks between Mercosur and both Canada and Mexico, in addition to negotiations with 

members of the Andean Pact, could make Mercosur the first trade agreement to span the hemisphere. 

Since the signing of the Treaty of Asuncion in 1991, Mercosur members have made significant 

progress toward the liberalization of their trade regimes. As the four economies have opened their markets 

to greater competition and reduced inflation, they have stimulated higher production levels and greater 

demand for imports, especially capital goods. 3 

Mercosur Trade with the United States 

During 1990 to 1997, U.S. exports to the Mercosur bloc nearly tripled, rising from $6.5 billion to 

$21.9 billion (table 2). U.S. exports to each country have increased almost every year since the early 

1990s.* Although Mercosur's share of U.S. exports (in total value) remains a modest 3 percent, U.S. 

exports to the region grew significantly faster in 1990-97 than U.S. exports to other important markets. In 

1997, U.S. exports to Mercosur were dominated by computers and related equipment; telecommunications 

equipment; equipment for use in construction and mining; and industrial machinery; as well as chemicals, 

plastics, and transportation equipment. A significant portion of U.S. exports to Argentina and Brazil are in 

the form of parts for final assembly by subsidiaries or joint ventures of U.S. producers. The finished goods 

are then distributed to markets through out the region. 

Table 2 

U.S.-Mercosur bilateral trade, 1990-1997 

(Million dol/arsl 

Trading Eartner 1990 1991 1992 1993 1994 1995 1996 1997 

Argentina: 

U.S. imports from 1,474 1,252 1,225 1,889 1,653 1,761 2,227 2,195 

U.S. expo~s to ........ 1,223 1,897 2,984 3,507 4,206 3,980 4,317 5,553 

Brazil: 

U.S. imports from ...... 7,762 6,760 7,588 7,763 8,847 8,989 8,871 9,510 

U.S. exports to ........ 4,877 5,945 5,442 5,712 7,638 10,757 11,920 15,001 

Paraguay: 

U.S. imports from ...... 51 44 35 50 80 55 43 40 

U.S. exports to ........ 256 317 357 459 713 928 858 856 

Uruguay: 

U.S. imports from ...... 207 237 263 266 166 168 260 229 

U.S. exports to ........ 136 198 210 231 288 374 461 514 

Mercosur 

U.S. imports from ...... 9,494 8,293 9,111 9,267 10,746 10,972 11,400 11,974 

U.S. exEorts to ........ 6,493 8,357 8,993 9,909 12,845 16,038 17,556 21,923 

Note.-Because of rounding, figures may not add to totals shown. 

Source: Compiled from official statistics of the U.S. Department of Commerce. 

The U.S. trade balance with Mercosur during 1990-1997 improved from a deficit of$3.l billion to 

a surplus of$10.0 billion. After adjusting data for inflation, this trend becomes even more evident (figure 

1). During the U.S. recession of 1990-91, U.S. imports from Mercosur dropped both in real and nominal 

terms, and are just now recovering to reach their 1989 levels.•• In contrast, U.S. exports to the bloc 

countries consistently showed growth throughout the period and, after 1990, export rates generally 

·The decrease in U.S. exports to Argentina in 1995 may be attributed to the crisis in Argentina's financial sector, 

which was triggered by the 1994-95 Mexican peso crisis. This is sometimes called the ''tequila effect." 

••Using constant 1992 dollars, U.S. imports from Mercosur members totaled $10.4 billion in 1989 and $10.39 

billion in 1997. In nominal dollars, imports were $10.l billion and $12.0 billion, respectively. 

5 
Figure 1 

U.S. Trade with Mercosur (in 1992 dollars) 

U.S. real trade (billions) 

20 

18 

16 

14 

12 

10 

8 

6 

4 

2 

0 

-2 

-4 

• 

• 

U.S. real imports 

Trade balance 

-x- U.S. real exports 

- II I -6~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 

Source: Compiled by ITC staff using data from U.S. Department of Commerce. 

exceeded the growth rate of the region's GDP.* The rapid increase in exports to the region can be 

attributed to the overall market expansion resulting from trade liberalization, GDP growth, privatization, 

and a positive investment climate in Mercosur countries. 

Examination of trade flows on a sectoral basis between the United States and the Mercosur bloc, 

between 1993 and 1997, (table 3) shows growth in exports in all sectors with the exception of footwear. 

Similarly, most sectors show growth in imports with the exception of textiles, apparel, and footwear. 

Major export sectors tend to be value-added products (chemicals, machinery, transportation equipment, 

and electronic products). Major import sectors include natural resource-based commodities (agriculture 

products, minerals and metals), transportation equipment, and footwear. 

Intra-Regional Mercosur Trade 

Trade among the Mercosur signatories expanded more than threefold during 1990-96, from $4.1 

billion to just over $17 billion (table 4). This period of expansion was dominated by bilateral trade 

between Argentina and Brazil; Brazil's imports from Argentina increased by 384 percent and Argentina's 

imports from Brazil increased 640 percent. This increase in bilateral trade raised the two countries' share 

of total intra-Mercosur imports from 76 percent in 1990 to 89 percent in 1996. 

·Source: U.S. Department of Commerce. 

6 
Table 3 

U.S.-Mercosur trade by sector, 1993-1997 

(Million dollars) 

Sector 1993 1994 1995 1996 1997 

U.S. exports: 

Agriculture products .............. 390 846 910 862 992 

Forest products .................. 224 280 483 536 614 

Chemicals and related products ..... 1,969 2,485 3,169 3,596 4,152 

Energy-related products ........... 527 547 612 732 691 

Textiles and apparel .............. 188 215 323 312 365 

Footwear ....................... 12 14 16 16 10 

Minerals and metals .............. 334 453 677 598 887 

Machinery ...................... 1,053 1,363 1,839 2,026 2,581 

Transportation equipment .......... 1,983 1,995 2,537 2,442 3,550 

Electronic products ............... 2,728 4,023 4,691 5,616 7,134 

Miscellaneous manufactures ....... 207 281 387 372 426 

Special tariff provisions ........... 294 344 395 448 521 

Total ........................ 9,909 12,845 16,038 17,556 21,923 

U.S. imports: 

Agriculture products .............. 2,180 2,084 2,080 2,474 2,709 

Forest products .................. 497 651 951 712 778 

Chemicals and related products ..... 619 666 741 765 818 

Energy-related products ........... 541 608 491 966 710 

Textiles and apparel .............. 440 464 366 285 275 

Footwear ....................... 1,459 1,308 1,155 1,220 1,167 

Minerals and metals .............. 1,353 1,994 2,235 2,194 2,388 

Machinery ...................... 523 676 816 753 687 

Transportation equipment .......... 933 997 1,060 1,093 1,419 

Electronic products ............... 344 373 499 484 514 

Miscellaneous manufactures ....... 254 555 344 244 258 

Special tariff provisions ........... 124 367 234 211 253 

Total ........................ 9,267 10,746 10,972 11,400 11,974 

Note.-Because of rounding, figures may not add to totals shown. 

Source: Compiled from official statistics of the U.S. Department of Commerce. 

7 
Table4 

lntra-Mercosur trade, 1990-1996 

(Million dollarsi 

Country 1990 1991 1992 1993 1994 1995 1996 

Exports: 

Argentina ............. 1,832 1,977 2,290 3,674 4,804 6,760 7,922 

Brazil ................ 1,321 2,309 4,128 5,394 5,921 6,153 7,305 

Paraguay ............. 379 259 242 287 340 465 660 

Uruguay ............. 591 558 559 675 891 995 1 151 

Total ............... 4,123 5,102 7,220 10,031 11,955 14,375 17,038 

Imports: 

Argentina ............. 878 1,804 3,755 4,202 4,784 4,745 5,800 

Brazil ................ 2,318 2,268 2,208 3,572 4,826 6,821 8,257 

Paraguay ............. 367 397 475 571 891 1,170 1,548 

Uruguay ............. 559 655 831 1046 1 322 1 320 1 461 

Total ............... 4,122 5,124 7,269 9,391 11,822 14,056 17,067 

Note.-Because of rounding, figures may not add to totals shown. 

Source: Inter-American Development Bank, Datalntal. 

Extra-Mercosur Trade 

While trade between Mercosur and non-Mercosur trading partners grew at slower rates than trade 

within the group during 1990-96, the increase in the volume of trade was much greater, especially for 

imports (table 5). Mercosur imports from the rest of the world (ROW) increased 185 percent ($42.9 

billion) to $66.2 billion. Mercosur member exports to the ROW increased 37 percent ($15.6 billion) to 

$57 .9 billion. 

Tables 

Mercosur bloc trade with the rest of the world (ROW), 1990-96 

(Million dollarsl 

Country 1990 1991 1992 1993 1994 1995 1996 

Exports: 

Argentina ............. 10,518 9,999 9,738 9,418 11,035 14,202 15,889 

Brazil ................ 30,093 29,315 32,076 33,304 37,634 40,350 40,440 

Paraguay ............. 579 478 404 438 476 354 383 

Uruguay ............. 1,113 1,017 1,122 972 1,011 1, 121 j,148 

Total ............... 42,302 40,808 43,341 44,132 50,157 56,027 57,860 

Imports: 

Argentina ............. 3,201 6,470 11, 114 12,512 16,804 15,323 17,960 

Brazil ................ 18,322 18,773 18,305 23,728 30,714 42,761 45,027 

Paraguay ............. 826 878 762 906 1,247 1,026 1,302 

Uruguay ............. 853 894 1 084 1 286 1264 1 545 1.861 

Total ............... 23,202 27,016 31,266 38,432 50,029 61,255 66,150 

Trade balance with 

the ROW ............ 19,100 13,792 12,075 5,700 128 -5,228 -5,228 

Note.-Because of rounding, figures may not add to totals shown. 

Source: Statistics Canada, 1997 and Inter-American Development Bank, Datalntal. 

8 
MERCOSUR CHARTER MEMBER PROFILES 

Argentina 

A far-reaching macroeconomic stabilization program launched in 1989, together with additional 

efforts contained in the 1991 Convertibility Plan, has revitalized Argentina's economy after years of 

stagnation. Argentina is Mercosur's second largest member in terms of geographic size, national income, 

and population, but its per capita income is Mercosur's highest. It has abundant natural resources, 

including copper, iron ore, lead, manganese, petroleum, tin, uranium, natural gas, and fertile plains for 

agricultural production. Argentina's leading manufactures are food processing, machinery and equipment 

for oil refining, textiles, chemicals, and petrochemicals. Its leading agricultural crops are com, wheat, 

sorghum, oilseeds, livestock, and industrial crops (raw cotton, sugar cane, tobacco, and tea). 

Economic Reforms and Performance 

The Menem Administration's economic reform program has made significant progress in 

transforming Argentina from a closed, highly regulated economy to one based on market forces and 

exposed to international competition. Although economic liberalization started as early as 1989 with the 

privatization of government-owned enterprises, the key to restoring investor confidence in the Argentine 

economy was the 1991 Convertibility Plan. The Plan made the Argentine currency, the peso, freely 

convertible and established a one-to-one relationship between its value and that of the U.S. dollar. These 

actions brought about currency stability and monetary discipline that had long eluded Argentina, and 

indeed are attributed with helping to reign in Argentina's fiscal deficits, drive down inflation, and spur 

economic growth. Argentina averaged 8.9 percent real economic growth during the 1991-94. 

The Argentine economy suffered a sharp recession during 1995 due to spillover effects from 

Mexico's 1994-95 peso crisis. Mirroring the sudden loss of investor confidence that plunged Mexico into 

a recession, many investors also rushed to pull out of Argentina. This trend was based on the view that 

Argentina's economic reform program was modeled on that of Mexico and that the Argentine peso like the 

Mexican peso was overvalued-effectively linking the two distant economies. A financial support plan 

undertaken by the International Monetary Fund (IMF) helped shore up Argentina's economy and rebuild 

investor confidence, but involved difficult austerity measures. Argentina also experienced some financial 

turbulence in 1997 that was triggered by the East Asian financial crisis. A new Extended Fund facility 

arrangement with the IMF was concluded at the end of 1997. 

Argentina's economy grew by 4.4percentin1996 and 8.0 percent in 1997-a strong recovery 

from the 4.6 percent decline in output recorded in 1995. Inflation continued to decline and, through 

stepped-up efforts to improve tax collection, progress was made in reducing the fiscal deficit. 

Unemployment, which exceeded 17 percent in 1996 (and which had doubled between 1991and1994), 

edged down to 14.9 percent in 1997, according to Inter-American Development Bank (IADB) statistics. 

However, public opposition to austerity measures has increased. 

Trade and Investment 

Argentina's exports and imports have grown considerably since 1990, increasing the significance 

of trade for the country's GDP. The composition of Argentina's trade also changed, with industrial-based 

manufactures and fuels becoming more important export products and capital goods increasing their share 

of imports.4 Argentina's merchandise trade balance moved from a peak surplus of $8.6 billion in 1990 to a 

series of deficits during the period 1992-94 that prompted the government to enact ad hoc protectionist 

measures. Argentina's trade balance returned to surplus in 1995, and reached $1.7 billion in 1996. In 

9 
1997, however, a trade deficit of $1.6 billion was recorded, largely due to sharply higher imports of capital 

goods and lower exports of certain primary products. 

Reflecting a steady increase in the importance of regional partners during the past 5 years, 

developing countries in Latin America were the primary destination of Argentine exports during 1997, 

accounting for 47 percent of the country's total (of which Brazil alone accounted for 30 percent). Other 

leading destinations for Argentine exports were the EU (16 percent) and the United States (9 percent). 

Argentina's principal suppliers of imports were the EU (29 percent), Mercosur partners (26 percent, 

primarily Brazil), and the United States (21 percent).5 

The United States registered a merchandise trade surplus with Argentina of $2.2 billion in 1995, 

$2.2 billion in 1996, and $3.4 billion in 1997. U.S. shipments of $5.6 billion in 1997 made Argentina the 

twenty-fourth largest export market for the United States. The stock of U.S. direct investment in 

Argentina, $8.1 billion in 1996 (historical cost basis), is concentrated in chemicals and allied products; 

finance, insurance, air travel services, and real estate; and food and kindred products.6 

Trade Policy 

As table 6 outlines, since 1989 (before Mercosur's implementation), Argentina has made 

significant progress in unilaterally reducing tariff and certain nontariff barriers. Licensing and quota 

restrictions were removed, while tariffs were lowered and made more uniform. In addition, the large-scale 

privatization and deregulation process that Argentina undertook opened significant new foreign opportunities. The result has been a dramatic expansion of Argentina's trade and increased openness to global 

market forces. 7 Relations with key trading partners, including the United States, were improved with the 

signing of agreements such as the Uruguay round of the G.A.T.T. and the U.S.-Argentina Bilateral 

Investment Treaty. Today, the list of bilateral issues is fairly small, with the lack of intellectual property 

rights protection and recent ad hoc protectionist measures being the top U.S. complaints. The United 

States has taken some action on these issues; for example, in May 1997, the administration suspended 50 

percent of Argentina's GSP benefits due to a lack of patent protection for pharmaceuticals. 

The Mercosur agreement has not significantly altered Argentina's already liberal foreign trade and 

investment regime, but it did formalize previous changes and provide an overall framework for continued 

reform. Argentina's pre-Mercosur advalorem tariff average was close to that established by the CET; 

however,* 90 percent of Argentina's negotiated exceptions to the CET are currently subject to higher rates. 

Mercosur commits Argentina to progressively lower such tariffs to the CET rate.8 In the case of capital 

goods, computers, and telecommunications equipment, Argentina's tariffs had generally been lower than 

the negotiated CET rates, which are slated to be fully implemented in 2001 (capital goods) and 2006 

(computers and telecommunications equipment). In August 1996, Argentina raised its tariffs on these 

goods to the Mercosur level.9 Argentina implemented a 3 percent increase in external tariffs in January 

1998, allowing exceptions for certain capital goods, informatics, telecommunications, and items carrying a 

zero tariff. 10 It is estimated that excepted goods account for over 40 percent of U.S. exports to the country. 

Under Mercosur, Argentina is permitted to retain a 3 percent "statistical tax" on imports, charged 

in addition to any applicable duty, but the application of this tax is often inconsistent. 11 In September 

1995, in order to help raise revenue during the fallout from the Mexican peso crisis, Argentina also raised 

substantially "specific" duties on apparel and athletic footwear and expanded the application of the 

·See appendix A, "The Mercosur Agreement," for a more detailed discussion of the CET and exceptions to the 

CET granted for Argentina. 

IO 
Table 6 

Argentina: Trade and invesbnent liberalization and remaining barriers 

Tariff and Starting in 1991, tariffs were made more uniform Continued application of0.5 percent "statistical 

nontariff barriers and reduced from an average rate of 29 percent fee• to certain goods; minimum specific duties 

(NTBs) ad valorem (1990) to 12 percent before Mercosur imposed on footwear and textile and apparel 

Motor vehicles 

sector 

Services 

Investment 

Intellectual 

property 

Subsidies 

Phytosanitary 

Customs 

procedures 

CET was implemented; comprehensively bound products; and a temporary 3 percentage point 

at 35 percent in Uruguay Round. Import licensing increase in the CET (with certain exceptions). 

requirements and most quantitative restrictions 

removed (1989). 

None identified. 

Commitments under the General Agreement on 

Trade and Services (GATS) are the most 

complete of the nine South American countries 

examined in a 1996 USITC study and include 

most basic telecommunications services. 

Privatization of pension funds and workers 

compensation offers opportunities to U.S. firms. 

One of the most open foreign investment regimes 

in Latin America. Reforms began in 1989 with 

removal of government approval requirement. 

Foreign direct and portfolio investment is virtually 

unrestricted and foreign investors are accorded 

nondiscriminatory treatment Privatization 

program actively seeks foreign investors. 

Enterprises in mining, oil, steel, petrochemicals, 

air1ines, railroads, ports, telecommunications, toll 

roads, water, sanitation, electricity, natural gas, 

financial services, and television have all been 

sold, often with participation by foreign investors. 

Current privatization plans include the country's 

largest commercial banks. 

A 1994 bilateral investment treaty with the United 

States provides nondiscriminatory treatment to 

U.S. investors in most sectors (excluding 

shipbuilding, fishing, insurance, and nuclear 

power generation); removes performance 

requirements; and provides for international 

arbitration of investor-state disputes. 

A 1994 decree explicitly extended copyright 

protection to software and provided for criminal 

sanctions for infringement; court subsequently 

ruled that criminal sanctions are not authorized. 

A 1989 law suspended subsidies and tax 

exemptions to Argentine industries and repealed 

regulations that prohibited state enterprises from 

purchasing goods/materials from foreign 

suppliers. 

None identified. 

Automated system installed in 1994. Customs 

and tax authorities merged in 1997. 

Import licensing regime for automobiles; quotas, 

high tariffs, and other restrictions. Bilateral auto 

trade regime with Brazil. 

Broadcast rules effectively bar use of foreignbased advertisements. Cable regulations 

require local generation of majority of cable 

channels. Foreign access to satellite services 

market is precluded. 

Sector-based restrictions on foreign investment 

incorporated into Mercosur agreement. Local 

content and trade balancing requirements in the. 

automotive industry notified by the WTO, 

permitting Argentina to retain such measures 

until year-end 1999. 

Inadequate patent protection for pharma~ 

ceutical products led U.S. to suspend 50 

percent of Argentina's GSP benefits as of May 

1997. Inadequate enforcement of trademarks 

and video piracy are problems. 

Government retains minimal supports such as 

reimbursement of indirect tax payments to 

exporters and an industrial specialization 

program. 

Certain U.S. fruits, such as Florida citrus, 

denied entry; others face uncertain and nontransparent entry requirements. 

Certificates of origin and reference prices more 

frequently employed; preshipment inspection 

instituted for certain goods in November 1997. 

Source: Complied by USITC staff from IMF, World Economic Outlook, Oct. 1997; USTR, "Argentina," 1998. Report on National Trade 

Estimates on Foreign Trade Barriers-, and U.S. Department of State, Country Reports on Economic Policy and Trade Practices, 1998. 

11 
statistical tax to include capital goods and computer and telecommunications equipment. These actions 

resulted in a U.S. complaint to the World Trade Organization (WTO) and, in October 1996, initiation of a 

U.S. Section 301 investigation. In February 1997, Argentina repealed the existing "specific" duties on 

footwear, but immediately reinstated them under a safeguard investigation. In November 1997, a WTO 

dispute settlement panel ruled in favor of the U.S. challenge to the duties and taxes assessed by Argentina, 

though it did not rule on footwear. Also in November 1997, Argentina instituted pre-shipment inspection 

for imports of most consumer goods and vehicle products. In January 1998, Argentina reduced the 

statistical tax to 0.5 percent. Sectoral restrictions on foreign investment in Argentina were incorporated 

into the Mercosur agreement. 

Brazil 

Brazil's economic performance continues to benefit from the macroeconomic stabilization process 

introduced by the 1994 Real Plan. By virtue of its sheer size, the country dominates the Mercosur region 

in terms of economic activity, land area, population, and trade volume. Brazil has abundant natural 

resources, including bauxite, iron ore, manganese, nickel, uranium, gemstones, oil, and timber. Coffee, 

soybeans, sugar cane, cocoa, rice, beef, com, oranges, cotton, and wheat are other leading primary exports; 

major manufactures include petrochemicals, steel, chemicals, motor vehicles, aircraft, cement, lumber, 

electrical and electronic appliances, textiles and apparel, and footwear. 12 

Economic Reforms and Performance 

Although the process of economic liberalization in Brazil dates back to 1990, the Real Plan 

remains the key element driving the country's ongoing success in stabilizing its economy. The Real Plan 

was introduced after nearly a decade of economic stagnation and periods of hyperinflation. Based on deep 

spending cuts, de-indexation of most prices to remove automatic adjustments for inflation, and the 

adoption of a fixed exchange rate for the real (initially with a value equal to one U.S. dollar), the Real Plan 

facilitated a sharp deceleration of sustained inflation. Consequently, inflation, which reached 2,668.6 

percent in 1994, has fallen dramatically, averaging 7.5 percent in 1997, the lowest rate in over 4 years. 13 

Brazilian policy makers have used a strongly valued currency (relative to the U.S. dollar) and high 

real interest rates to attract foreign capital. Foreign direct investment (FDI) rose from less than $1 billion 

in 1993 to an estimated $17 billion in 1997. 14 The Brazilian government has also launched efforts to 

privatize government-owned enterprises and reduce federal and state spending. 15 By 1997, government 

enterprises in such sectors as steel, petrochemicals, and electric power had been sold. 

Macroeconomic stabilization, reduced inflation, lower trade barriers, and a strongly valued 

currency have increased buying power for Brazilians, spurred consumption, and triggered an increase in 

imports-adding to the merchandise trade deficit and prompting the government to take various measures 

to dampen demand. In 1997, for example, Brazil imposed restrictions on import finance and consumer 

credit. High real interest rates discourage business investment and, notwithstanding the privatization 

program, the government still dominates certain sectors of the economy such as telecommunications. 

Progress in reducing fiscal deficits has lagged-moving from nearly balanced accounts during 1990-94 to 

an expanding operating deficit in 1995 and slightly lower deficits in 1996 and 1997. In 1997, part of a 

package aimed at fiscal reforms at the federal, state, and municipal levels of government was approved. 

Brazil's currency has come under pressure since October 1997 as a result of the East Asian 

financial crisis, prompting Brazilian monetary authorities to nearly double interest rates in late October and 

adopt a budget austerity package aimed at saving $18 billion in 1998 (2.5 percent of GDP). Financial 

markets have responded favorably to the package and reserves have returned to pre-crisis levels. 16 

12 
Trade and Investment 

Brazil's $8.4 billion merchandise trade deficit in 1997 exacerbated a $33.5 billion current account 

deficit-the highest since the early 1980s. The United States registered a $5.5 billion trade surplus with 

Brazil in 1997, when exports of $15.0 billion made Brazil the United States' eleventh largest export 

market. The stock of U.S. FDI in Brazil, $26.2 billion in 1996, is concentrated largely in the 

manufacturing, financial, and banking sectors. 

Trade Policy 

Brazil undertook a series of unilateral trade liberalization measures beginning in 1990 (before 

Mercosur's implementation). Import prohibitions were lifted, duties reduced, and quantitative restrictions 

eased or eliminated. Indeed, the United States Trade Representative's (USTR) latest report on foreign 

trade barriers indicates that despite some restrictive measures, "access to Brazilian markets in a significant 

number of sectors is generally good, and most markets are characterized by competition and participation 

by foreign firms through imports, local production, and joint ventures."17 Table 7 summarizes Brazil's 

recent trade and investment liberalization efforts and identifies its most important remaining barriers: high 

tariffs in selected sectors, restrictions on foreign investment, and discriminatory government procurement. 

A prosperous economy and increasing consumer demand has led to a surge in imports and large 

monthly trade deficits. Concerned that the economy could not remain stable under such conditions and 

rising imports, the Brazilian government imposed new credit restrictions and sharply increased tariffs in 

1995. Initially, a range of consumer durable goods, including shoes and automobiles, was affected. 

However, the exemption for most capital goods, which constitute a significant portion of U.S. exports to 

Brazil, was phased out in September 1997, although an exemption for capital goods not available 

domestically was re-instituted as of January 1, 1998. The higher tariff was to be temporary and remain in 

place only until 2000. In March 1997, Brazil imposed new import financing rules that effectively 

increased the cost of many imports by eliminating or reducing supplier credits of less than 1 year. In 

November, Brazil instituted a 3 percentage point increase for most tariff rates, although limited exceptions 

to the increase were made for certain machinery, agriculture products, and petroleum products. 18 In 

December 1997, Brazil removed 300 items from the list of products for which import licensing is 

automatic and took steps to counter under-invoicing. 

In December 1995, Brazil issued regulations establishing investment incentives for domestic 

automobile production. In August 1996, a decree was issued that provided tariff-rate quotas to Japanese, 

Korean, and European auto manufacturers; in-quota rates equaled the rates being offered to U.S. firms that 

had already invested in Brazil, but the United States was not included in the tariff-rate quota. In October 

1996, the United States initiated a Section 301 investigation into Brazil's practices19 and in March 1997, 

the United States and Brazil signed an agreement settling the dispute. Among other things, Brazil 

committed to end the tariff rate regime by December 31, 1999, and to not extend the trade-related 

investment measures to Mercosur partners. 

Paraguay 

Paraguay is a small, primarily agrarian, landlocked economy and is South America's poorest 

country after Bolivia. It is sparsely populated and has a political and economic history that has been 

heavily influenced by its Mercosur neighbors. The country's leading exports include cotton, soybeans, 

cattle, and timber. The government is Paraguay's largest employer, with a budget that accounts for onethird of the country's GDP. Export taxes and tariffs on imports have represented a significant source of 

central government revenues. In addition, the smuggling of consumer goods and other products to 

13 
Table 7 

Brazil: Trade and investment liberalization and remaining barriers 

Tariff and nontariff 

barriers 

Export subsidies 

Motor vehicles sector 

Services 

Investment 

'::=qR.!,f#l!~Y~n::M~~~~f.i~:::::::::::rn::::;··::::·:::;:::_'!:.::":::::-:·:=.:_·::: :::·~m~~~ij:::~l!~i·:_:,::.:::-:·:::,:::=,:::-:::::::.,:::,::::::,:::_::·::::·,::'.:::::.::-::=:::::.:,:·:::-P:::::: 

Tariffs reduced to an average of 14 

percent ad valorem by 1993. Import 

prohibitions on 1,300 products and most 

quantitative restrictions were eliminated 

(1991 ). Computerized import licensing 

system introduced in Jan. 1997. 

None identified. 

None identified. 

In WTO negotiations, Brazil made 

commitments on most basic 

telecommunications services and will 

remove foreign investment restrictions 

on cellular and satellite services on July 

20, 1999. 

Prior approval abolished (1990). 

Foreign exchange controls were lifted 

and the practice of foreign exchange 

allocation to priority sectors abandoned. 

Privatization program launched (1991) 

and later expanded (1995), opening 

many once government-dominated 

sectors (e.g. steel, electric power) to 

foreign investment. Cellular phone 

service is in the process of being 

opened to private investors and foreign 

firms; a bill to regulate privatization of 

remaining phone services is before 

Congress. Five electric companies were 

sold in 1997. Legislation and regulations 

to implement constitutional amendments 

eliminating the government monopoly in 

the petroleum and telecommunications 

sectors has been introduced. 

14 

Post-Mercosur (March 1995) tariff increases 

apply to a wide range of consumer durable 

goods, including automobiles. These 

temporary increases are currently slated to 

expire in 2000. In November 1997, Brazil 

implemented a 3 percentage point hike in its 

external tariffs on most items. Exemptions 

were made for certain machinery, agricultural 

products and petroleum products. Industry 

reports tariffs remain high on certain food 

and chemical products. 

In December 1997, Brazil removed 300 

items from the list of products for which 

licensing is automatic and took other steps to 

counter under-invoicing. 

Numerous tariff exceptions to CET. 

Tax and tariff incentives used to encourage 

production for export and use of Brazilian 

inputs. 

Local content and incentive-based export 

performance requirements introduced in 

1995. Tariff-rate quota provided to Japanese, 

Korean, and European auto manufacturers; 

United States not included. 

Restrictive investment laws; lack of 

transparency in administrative procedures; 

legal and administrative restrictions on 

remittances; arbitrary application of 

regulations. 

1988 Constitution restricts foreign investment 

in petroleum and natural gas, mining, 

nuclear power, fishing, health care, financial 

institutions, insurance, print and electronic 

media, construction, and professional 

services. Sector-based restrictions on 

foreign investment, e.g. computers and 

motor vehicles, incorporated into Mercosur 

agreement. Limitations on foreign equity, 

local content requirements, and export 

performance incentives. 
Table 7-Continued 

Brazil: Trade and invesbnent liberalization and remaining barriers 

Intellectual property New industrial propertY law entered into Compulsory licensing is common. Long list 

force in May 1997. Patents now of categories of marks not eligible for 

available for pharmaceutical products registration. No law enacted to protect 

and processes, chemical products, and integrated circuit designs. Piracy of 

other inventions. A law on the computer software, motion pictures, sound 

protection of plant varieties was passed recordings, and musical compositions is a 

in 1997. A bill to improve protection for problem, but enforcement has improved. 

computer software was signed by 

President Cardoso in February 1998. 

Government 1993 law generally provides Discriminatory practices govern the 

procurement' nondiscriminatory treatment, except for telecommunications, computer, and 

computer technology and computer software sectors. Non-price 

telecommunications products. factors allowed to be taken into consideration 

Privatization of state monopolies has in other bids. 

opened opportunities in some sectors. 

Sanitary and Bilateral agreement reached in July U.S. poultry and horticultural products still 

phytosanitary 1996 enables most U.S. fruit, grain, and face barriers. 

measures seed exports to meet new phytosanitary 

requirements. 

Sources: U.S. Department of Commerce, "Brazil: Market Access and Competition," found at Internet address 

http://www.stat-usa.gov/bems/bemsbraz/brzmac.html; Office of the U.S. Trade Representative, "Brazil, 9 1998 

Report on National Trade Estimate on Foreign Trade Barriers; U.S. Department of State, Country Reports on 

Economic Policy and Trade Practices 1998; Brazil, and U.S. Department of State, "Background Notes: Brazil," 

Mar. 1998. 

neighboring Argentina and Brazil has historically been a significant economic activity in Paraguay's 

"informal" economy; such illegal activities were profitable because of the relatively closed Argentine and 

Brazilian markets. The opening of regional markets due to Mercosur and increased border enforcement by 

Brazil have significantly reduced demand for Paraguay's role as a trade intermediary.20 

Economic reforms in Paraguay began in 1989. A free-floating exchange rate system was adopted, 

interest rates freed from government control, selective credit controls removed, and reserve requirements 

reduced. Expansion of the tax base and adoption of a value-added tax improved the state of public 

finances. In 1992, a new tariff code was passed which simplified and lowered rates. A new law permits 

the privatization of government-owned entities; however, only two out of six planned privatizations have 

occurred. Plans to relaunch the foundering privatization program were initiated by the President in 199621 

and a law opening up the telecommunications sector has since been passed, but further action is effectively 

on hold until after the mid-1998 elections. 22 

Important barriers remain, particularly with respect to intellectual property rights. U.S. intellectual 

property rights concerns include Paraguay's out-dated patent law, infringement of well-known trademarks, 

copyright piracy, and lack of protection for industrial designs and trade secrets.23 On January 16, 1998, the 

USTR identified Paraguay as a Priority Foreign Country under the Special 301 provisions of U.S. trade 

law. Paraguay is a regional distribution and assembly center for counterfeit merchandise in part due to its 

large re-export trade to Brazil, which caters to consumer demand for electronics, audio tapes, compact 

discs, and designer clothing and footwear, among other items. 

Paraguay's economic and political system remains fragile, a fact that has tempered progress in 

economic reform despite the long-term improvement in economic fundamentals. New mechanisms for 

·banking supervision have been established since a financial crisis emerged in 1995. A military coup was 

15 
attempted, but failed, in 1996. A slow down in growth since 1996 has made the reform process more 

difficult. Growth in 1997 was double the rate of the previous year (2.6 versus 1.3 percent), but currency 

reserves fell, exports and private investment were below expectations, the public deficit expanded, and the 

guarani fell against the U.S. dollar.24 Uncertainty surrounding the May 1998 elections further dampened 

prospects for growth. 

To encourage foreign investment and provide employment opportunities for semi-skilled workers, 

the Government of Paraguay implemented a maquila law in July 1997.25 Modeled after Mexico's 

Maquiladora Program, the Paraguayan maquila law permits duty-free imports of machinery, components, 

and raw materials for use in the production/assembly of goods for export. The Government of Paraguay 

touts apparel, furniture, food processing, and energy-intensive industries as the sectors with the greatest 

potential for investment in export-oriented assembly or processing plants." 

U.S. companies can take advantage of Paraguay's maquila law to supply Mercosur markets at 

reduced rates of duty. For example, Mercosur customers of U.S. apparel or appliance manufacturers with 

assembly operations in Paraguay would pay the 23 percent common external tariff only on the value of the 

U.S. and other non-Mercosur origin components used to make the articles; no duty would be applied to the 

value added in Paraguay. IfU.S.-based companies make use of Mercosur-origin materials in their maquila 

plants (such as lumber in the production of wood furniture), their customers would be responsible for just a 

1 percent customs processing fee.26 

To date, no U.S. companies have established assembly plants in Paraguay. Investors from Brazil 

and Argentina, however, have established industrial parks in Paraguay's duty-free zones27 for companies 

from those two countries to take advantage oflower labor costs in Paraguay. Critics of the maquila law in 

other Mercosur countries have claimed that the law undermines the standards set forth in the Treaty of 

Asuncion, complicating rules of origin determinations when crossing borders in the customs union. These 

critics complain that the maquila law has made it easier for companies from China and Taiwan to assemble 

and/or re-label counterfeit goods in Paraguay's duty-free zones and avoid detection when entering the 

Mercosur market. Chief examples of these illegal operations are the assembly of music tapes and compact 

discs and the re-labeling of apparel.28 

Uruguay 

Uruguay is a small country in terms of area and population, but its per capita income is high by 

Latin American standards. Uruguay's economy remains closely linked to the economies of neighboring 

Argentina and Brazil and has traditionally been heavily dependent on the production of a few agricultural 

commodities (wool and rice) and agriculture-based manufactures (textiles, leather, and meat). Efforts to 

diversify domestic production and exports during the 1970s and 1980s were moderately successful in 

establishing Uruguayan producers of chemicals and consumer goods, but these industries have declined in 

the face of rising global competition. Agriculture still accounts for more than half of Uruguay's exports. 

• Proparaguay, Paraguay: Centro de Produccion y de Servicios, undated. According to Dr. Emilio Baez 

Maldonado in an interview with Commission staff in Washington, D.C. on Apr. 24, 1998, Paraguay offers foreign 

investors low-cost labor for the sewing of apparel; nearby forests as a source of lumber for use in furniture 

production; and low-cost energy from the hydroelectric complex at lguazu. Because of lower labor costs in 

Paraguay, Brazilian suppliers of poultry and other agricultural products have establish processing plants in Paraguay. 

The maquila law allows Brazilian agricultural products to enter Paraguay free of duty for the purpose of export 

processing, even though Paraguay has "excepted" many agricultural products from duty-free treabnent under the 

Mercosur agreement. 

16 
The country also serves as a regional financial center; services, particularly tourism and finance, now 

account for approximately 50 percent of GDP.29 

Uruguay's economic reforms date back to 1973-85, when tariffs were reduced and price controls 

eliminated. Since 1990, successive Uruguayan administrations have carried out additional reforms, 

including lowering tariffs, reducing government spending, and controlling inflation, in addition to agreeing 

to liberalize trade with its Mercosur partners. In January 1993, Uruguay's top Most Favored Nation 

(MFN) applied tariff rate was lowered from 24 to 20 percent, a level equal to the top tariff rate in 

Mercosur's CET. A limited degree of privatization has been attempted, with success achieved in port 

services, natural gas distribution,30 air service, water supply, airport and toll road construction, passenger 

rail service, cellular telephone service, banking, and insurance.31 The social security system has been 

partially privatized. Setbacks include failed efforts to privatize the state telephone company. Since 1995, 

Uruguay's economic reforms have been further consolidated, increasing growth and reducing inflation. 

Uruguay's reform efforts have paid off. After holding average annual increases of just 1.2 percent 

for the 35 years ending in 1990, Uruguay's GDP rose at an average annual rate of 3.5 percent during 1991-

95. Real GDP rose by 4.9 percent in 1996 and 6.0 percent in 1997, according to IADB figures. Financial 

performance of public enterprises has improved, government spending has fallen, and the public sector 

deficit as a proportion of GDP has declined. Some progress has been made in curbing inflation, which fell 

from 129 percent in 1990 to an estimated 15 percent in 1997. Capital inflows have been strong32 and 

investment rates have also risen, fueling imports of capital goods.33 

Remaining barriers include high tariffs on certain products, notably footwear, textiles, processed 

foods, and miscellaneous manufactured articles. Uruguay implemented the increase in Mercosur' s CET in 

January 1998, with exceptions for capital goods, telecommunications, and information technology.34 

Certain imports require special licenses or customs documents, including pharmaceuticals, medical 

equipment, chemicals, fertilizers, and vehicles. Gaps in Uruguay's intellectual property regime exist; 

pharmaceuticals and chemicals are not patentable and piracy of software, videotapes, and music is 

common.35 Significant limitations on foreign investment in strategic sectors remain. 

Endnotes 

I. Information in this section is from the following sources: Office of the United States Trade Representative, 1997 

National Trade Estimate Report on Foreign Trade Barriers, Washington, DC, 1997; Trade Unit, Organization of 

American States (OAS), Trade and Integration Arrangements in the Americas: An Analytical 

Compendium,(Washington, DC, 1997; and the World Trade Organization (WTO), Trade Policy Review Division, 

Mercosur: Objectives and Achievements, Staff Working Paper TPRD-97-002, Washington, DC, June 3, 1997. 

2. USTR, "Renewal ofFast Track Negotiating Authority," Testimony of Ambassador Charlene Barshefsky, before 

the Senate Finance Committee, Sept. 17, 1997, p. 5. 

3. Guy de Jonquieres, "Mercosur trade group under fire," Financial Times, Oct. 24, 1996, p. 5 and Greg Mastel, 

"Regional trade under fire," The Journal of Commerce, Dec. 6, 1996, p. 9A. 

4. Guillermo Mondino and Alejandro Reca, "Toward a Hemispheric Free Trade Area: The Case of Argentina," in 

Ana Julia Jata and Sidney Weintraub (eds.), Integrating the Hemisphere, Washington, DC: Inter-American 

Dialogue, Mar. 1997, p. 179. 

5. U.S. Department of Commerce, Country Fact Sheet: Argentina, OLAC Facts Doc. 1001, July 1996; Economist 

Intelligence Unit, Country Profile: Argentina, 1994-95; Inter-American Development Bank (IADB), "Argentina," 

found at Internet address http://www.iadb.org/sep/AR-IPES.htm; U.S. Department of State telegram, "1997 Trade 

Act Report: Argentina," prepared by U.S. Embassy, Buenos Aires, message reference No. 06915, Nov. 19, 1996. 

6. U.S. Department of State, Country Reports on Economic and Trade Policies; Argentina, 1998 and U.S. 

Department of State, Background Notes; Argentina, Mar. 1998. 

7. The Inter-American Development Bank has developed a series of structural policy indicators of openness and 

exchange rate flexibility. According to this index, the IADB's latest annual report indicates that Argentina is now 

relatively open to international trade; its average tariffs, nontariffbarriers to imports, and market and official 

17 
exchange rate differentials were each deemed low. IADB, Economic and Social Progress in Latin America: 1996 

Report, Washington, DC: Johns Hopkins University Press, Nov. 1996, p. 72. 

8. Guillermo Mondino and Alejandro Reca, "Toward a Hemispheric Free Trade Area: The Case of Argentina," op. 

cit., p. 183. 

9. Ibid., p. 184. 

10. U.S. and Foreign Commercial Service and U.S. Department of State, "Argentina - Tariff Increase," Market 

Research Report 3182, Jan. 9, 1998. 

11. OAS, Trade and Integration Arrangements in the Americas, pp. 42 and 65. This rate is bound in Argentina's 

WTO schedule. 

12. U.S. Department of State, Background Notes: Brazil, Mar. 1998. 

13. IMF, World Economic Outlook, May 1997, p. 30. 

14. U.S. Department of State, Background Notes: Brazil, Mar. 1998. 

15. U.S. Department of State telegram, "Brazil: 1997 Trade Act Report," message reference No. 05322, prepared by 

U.S. Embassy, Brasilia, Nov. 20, 1996. 

16. U.S. Department of State, Background Notes: Brazil, Mar. 1998. 

17. USTR, 1997 National Trade Estimate Report on Foreign Trade Barriers, p. 21. 

18. U.S. Department of State telegram, "Further Study of Brazilian Tariff Increases; List," message reference No. 

005149, prepared by U.S. Embassy, Brasilia, Nov. 21, 1997 . 

. 19. USTR, 1997 National Trade Estimate Report on Foreign Trade Barriers, p. 22. 

20. U.S. Department of Commerce, "Economic Overview: Paraguay," OLAC Facts, Doc. 1305, July 1996; U.S. 

Department of State telegram, "1997 Trade Act Report for Paraguay," message reference No. 02817, prepared by 

U.S. Embassy, Asunci6n, Nov. 13, 1996; World Bank, "Paraguay," Trends in Developing Economies, p. 414; U.S. 

Department of State, Background Notes: Paraguay, Mar. 1998; and U.S. Department of Commerce, Country 

Commercial Guide: Paraguay, 1998. 

21. Ibid. 

22. U.S. Department of Commerce, "Economic Overview: Paraguay," OLAC Facts, Doc. 1305, July 1996. 

23. USTR, "Paraguay," 1997 National Trade Estimate Report on Foreign Trade Barriers. 

24. U.S. Department of State, "Paraguay Macroeconomic issues," message reference No. 332, prepared by U.S. 

Embassy, Asunci6n, Feb. 12, 1998. 

25. The Paraguayan Senate passed the "Maquila Law" on December 20, 1996. PROPARAGUAY, Investor 

Assistance Department, Law No. 1.064 Maquila, Mar. 1997. The law was "promulgated" on July 3, 1997. 

"Existiria Desacuerdo Para Integrar Consejo de Maquila," Noticias (Asuncion, Paraguay), Oct. 25, 1997. 

26. Information for this paragraph was provided by Dr. Emilio Baez Maldonado, a principal author of Paraguay's 

maquila law, in an interview with Commission staff in Washington, D.C. on Apr. 24, 1998. 

27. For a description of the laws governing duty-free zones in Paraguay, see PROPARAGUAY, Investor Assistance 

Department, Legal Regimen of Duty Free Zones, Apr. 1997. 

28. Mauro Laviola, "Quien le Teme a la Ley de Maquila?" Gazeta Mercantil Latinoamericana, Jan. 1998 (precise 

date not available). Mr. Laviola is a member of the Consejo Tecnico de la Asociacion Exportatdores Brasilenos 

(Technical Committee of the Brazilian Exporters Association). 

29. U.S. Department of State, "Uruguay," Country Reports on Economic Policy and Trade Practices, Mar. 1997, 

p. 304, and World Bank, "Uruguay," Trends in Developing Economies, p. 531. 

30. U.S. Department of State, "Uruguay," Country Reports on Economic Policy and Trade Practices, Mar. 1997, 

p. 304. 

31. U.S. Department of State, "Uruguay," Country Reports on Economic Policy and Trade Practices, 1998. 

32. World Bank, "Uruguay," Trends in Developing Economies, pp. 531-2. 

33. U.S. Department of State, "The Economy in 1996: Growth, Inflation Stronger than Expected," message reference 

No. 107, prepared by U.S. Embassy, Montevideo, Jan. 14, 1997. 

34. U.S. Department of State telegram, "Uruguay Implements the Increased Mercosur Common External Tariff," 

message reference No. 000022, prepared by U.S. Embassy, Montevideo, Jan. 8, 1998. 

35. U.S. Department of Commerce, "Economic Trends and Outlook: Uruguay," OLAC Facts, Doc. 1405, Aug. 1996. 

18 
OVERVIEW OF INDUSTRY ANALYSIS 

The industry analysis that follows focuses on U.S. exports and foreign investment for five 

important manufacturing groups that together accounted for about 25 percent of total U.S. exports to 

Mercosur members in 1997. These industries--power generation equipment, motor vehicles and parts, 

medical devices and equipment, computer equipment and parts, and telecommunications equipment--

represent a cross-section of U.S. manufacturing industries whose performances in foreign markets are 

influenced by several factors. In addition, motor-vehicle parts and telecommunications equipment are 

important targets for foreign direct investment in the region. 

Examination of these industries illuminates an interesting point about the application of common 

external tariffs (CET). Although the Mercosur customs union generally results in CETs lower than the 

average applied tariffs that prevailed prior to Mercosur, the implementation schedule is not uniform across 

manufacturing groups. For example, exceptions (items subject to a longer phase-in to the CET) taken by 

certain Mercosur members have allowed tariffs on some products to remain lower or higher until CET 

convergence occurs by 2006. Other bloc members have agreed to increase tariffs from prevailing national 

rates up to or exceeding the CET with convergence to CET by 2006, while the motor vehicle sector is 

exempt from Mercosur and the CET until January 1, 2000. 

In many cases, unilateral actions by member countries that are unrelated to the Mercosur 

agreement may have an equal or larger effect on the export and investment performance of U.S. industries. 

Important unilateral actions include reduction of country-specific tariff and nontariff barriers, privatization, 

fiscal and monetary measures to control inflation and/or encourage growth, infrastructure development, 

and incentives to manufacture within the region. 

IDGHLIGHTS 

c U.S. exports to Mercosur countries during 1993-97 have increased for each of the five major 

manufacturing product groups examined; U.S. export growth has ranged from 14 percent for 

power generation equipment to 347 percent for telecommunications equipment. 

c The CET generally established tariffs on par with or lower than average applied tariffs that 

existed prior to Mercosur for the products of nonmembers entering the region. However, 

computer equipment/parts and telecommunications equipment are two categories for which 

the Mercosur agreement has resulted in higher applied tariffs. Argentina, Paraguay, and 

Uruguay increased prevailing national rates on computer products to the CET of 16 percent, 

whereas Brazil retains tariffs of up to 32 percent on these products under an exemption from 

the CET until 2006. Similarly, bloc members acceded to Brazil by raising tariffs for most 

telecommunications equipment to 20 percent, a rate which will fall to the CET level of 16 

percent by 2006. 

c Despite increased tariffs on certain products, total imports by Mercosur nations from nonmember countries in the five manufacturing groups increased between 1993 and 1996 by a 

range of 58 to 138 percent. The change in intra-Mercosur imports during this period was 

substantially less than the increased trade with the Mercosur bloc experienced by nonmember countries. 

c In the long term, U.S. trade with Mercosur members is likely to be mixed. Among the five 

manufacturing groups, U.S. exports of certain power generation equipment are expected to 

expand; technology transfer and import substitution are likely to limit U.S. exports of motor 

19 
vehicles; US. medical equipment exports will likely continue to dominate the Mercosur 

market; US. exports of computer equipment and parts will face increasing competition from 

Mercosur producers; and investment in US. subsidiaries located in Mercosur countries is 

likely to increase local production capabilities for telecommunications equipment and may 

diminish demand for US. exports. Reasons for these likely trends are noted in the highlights 

and discussion sections of each industry analysis. 

20 
POWER GENERATION EQUIPMENT* 

IDGHLIGHTS 

c Privatization of electrical utilities expands opportunities for equipment sales by 

the United States and other suppliers. 

c US. exports of power generation equipment to Mercosur rose by 38 percent 

during 1993-97 to $84 million, peaking at $94 million in 1995. 

c US. and German suppliers accounted for nearly three-quarters of total 

Argentine and Brazilian imports during 1993-96. 

c Intra-Mercosur imports increased by fourteenfold from $2 million to $28 million, whereas 

imports from non-member countries increased by 61 percent from $185 million 

to $295 million during 1993-96. 

c In the long term, demand for US. exports of fossil fuel-fired power 

generation equipment is expected to expand as Mercosur partners diversify and 

privatize their electrical generating assets. 

INDUSTRY STRUCTURE AND RECENT MARKET DEVELOPMENTS 

With the exception of Argentina, which has substantial deposits of natural gas, most of the 

countries in the Mercosur region have insignificant reserves of high-grade fossil fuel with which to 

generate electrical energy. For this reason, the individual Mercosur nations (particularly Brazil) have taken 

advantage of extensive water resources to establish hydroelectric facilities and thereby reduce their 

dependence on imported fossil fuels. For example, huge hydroelectric projects on the Parana and other 

rivers in Brazil currently supply an estimated 95 percent of the country's annual power consumption. 

The power-generation equipment (hydraulic turbines, power generators, power transformers, and 

electrical switchgear) for many of these projects was supplied by European manufacturers during the 1970s 

and 1980s. Since major U.S. suppliers of generation equipment at the time were heavily committed to 

fossil fuel-burning equipment (particularly gas turbines), the Mercosur region did not afford these 

. companies significant market potential. As a result, European producers have established themselves as 

the preeminent suppliers of hydro-related equipment to the Brazilian and Argentine markets. 

The relatively small populations, industrial activity, and economic growth of Paraguay and 

Uruguay limit the potential for investments in power generation assets. In addition, Paraguay enjoys 

access to extensive power reserves as a result of its participation with Brazil in the world's largest 

hydroelectric facility, Itaipu. A similar joint project with Argentina is also planned. 

·Data for this industry sector are compiled from the U.S. Department of Commerce, the U.S. State Department, 

and the Inter-American Development Bank {IADB), Datalntal. The discrepancies between IADB and U.S.· 

government data are attributed to differences in collection methodology, item classification, and reporting origin 

and destination of the merchandise (c.i.f. vs. f.o.b.). Furthermore, there are no trade reconciling agreements 

between the United States and the Mercosur countries. 

21 
Brazil's significant production capacity for hydroelectric generating equipment was established by 

European suppliers partly in response to high tariffs on equipment (in the range of 30 to 40 percent during 

the 1980s and early 1990s) and to assorted nontariff measures, particularly domestic content requirements. 

In addition, various tax incentives were offered to foreign suppliers to persuade them to set up production 

operations in Brazil. These policies were predicated to a large extent on a lack of foreign exchange with 

which to purchase imported equipment, as well as on a desire to stimulate local economies. Accordingly, 

major European suppliers of power generation equipment won most of the early contracts for.powergenerating installations and equipment, and subsequently established a significant base of indigenous 

operations to serve South American markets. As a result, the Brazilian market is currently dominated by 

subsidiaries of multinationals such as Asea Brown Boveri (Sweden/Switzerland), Siemens (Germany), 

Merlin Gerin (Italy), Gee-Ashton (France), and Voit (Germany). 

The Brazilian market for electric 

power systems (including power 

generation equipment) grew by 11 percent 

between 1995-97 (table 8). The market 

for these products is expected to grow over 

the medium term as more state-run utilities 

are privatized and as a number of 

unfinished hydro plants are completed. 

Current estimates are that Brazilian 

consumption of electricity will increase by 

4 to 5 percent annually (versus 1to2 

percent in the United States). 1 Although 

Table 8 

Brazil: Electric power.systems1 

Item 1995 1996 1997 

Total market size (million dollars) .... 1,970 1,980 2, 178 

Local production (million dollars) .... 1,860 1,870 2,057 

Import market share (percent) . . . . . . 18 18 18 

U.S. import market share (percent) . . 4 4 4 1 These figures represent estimates for eleciric power generation, 

transmission, and distribution equipment. 

Source: U.S. Department of State. 

demand for electric power systems in Brazil has previously been satisfied primarily by local production, 

imports are expected to account for an increasing share of annual equipment purchases in the future. As 

Brazil attempts to diversify its energy sources in order to get away from a heavy reliance on hydroelectric 

power, opportunities for U.S. companies should be enhanced if, as expected, the market moves towards 

fossil fuel-fired technologies.• A major effort was begun in early 1996 by the U.S. Energy Association and 

the U.S. Department of Energy's Office of Coal and Power Import and Export to support the expanded use 

of low-grade coal and coal technology by Brazil in the generation of electric power. This effort led to !Jie 

development of the first Brazilian Coal Policy, which, if adopted, could bolster the efforts of leading U.S. 

coal-fired generating equipment suppliers to supply this equipment to the region.2 

By the late 1980s, Argentina was experiencing significant power outages and brownouts primarily 

because of aging facilities and inadequate generating capacity. In early 1992, the Argentine Government 

began to privatize its electric utility industry in an effort to respond to sustained problems. The 

government sale of $1.5 billion in power generation, transmission, and distribution assets over a 2 year 

period not only significantly improved operational and management efficiencies and curtailed power 

failures, but also reportedly cut the wholesale cost of power in half.3 Argentina chose to follow the 

example set by Chile (the "Chilean Model"), which successfully divested most of its publicly held electric 

utility industry beginning in 1985. 

·The overwhelming dependence of Brazil on hydroelectric resources (95 to 97 percent) for power generation is 

virtually unprecedented globally. The potential for severe economic disruption associated with both natural 

disasters (drought, earthquake, etc.) or human events (terrorism, equipment failure, etc.) has prompted Brazilian 

officials to reassess the country's near total dependence on a single power generation resource. 

22 
The Argentine power generation 

and transmission equipment market grew 

by 26 percent during 1995-97 (table 9). 

Unlike Brazil, imports play an important 

role in Argentina's market. Privatization 

of electric utilities and a 7 percent 

increase in consumption of electricity in 

1996 further accelerated the need to 

modernize the country's distribution 

system.4 In 1997, imports accounted for 

65 percent of total equipment purchases, 

Table 9 . 

Argentina: Power generation and transmission equipment1 

Item 1995 1996 1997 

Total market size (million dollars) . . . . 570 625 720 

Local production (million dollars) . . . . 221 230 270 

Import market share (percent) . . . . . . 64 66 6 

U.S. import market share (percent) . . 22 24 23 1 These figures represent estimates for electric power generation 

and transmission equipment. 

Source: U.S. Department of State. 

with U.S. producers accounting for 23 percent of total consumption. Domestic production is generated by 

five large and ten medium-sized companies, which until recently have been major players in the Argentine 

market. Electric power generation and transmission equipment from the United States has traditionally 

dominated the market for foreign equipment, accounting for 52 percent of total imports.' Other leading 

sources include Germany (27 percent), Italy (6.5 percent), and Spain (4 percent). 

MERCOSUR TRADE 

Despite the significant growth in intra-Mercosur trade for power generation equipment during 

1993-96, this source was greatly outpaced by imports from non-member countries. Intra-Mercosur imports 

increased dramatically from $2 million in 1993 to $28 million in 1996, but the value of U.S. exports to 

Brazil and Argentina in 1996 alone exceeded intra-Mercosur trade by nearly $60 million. Imports from 

non-member countries rose by nearly 60 percent from $185 million in 1993 to $295 million in 1996, 

despite a 50-percent decline from the 1994 import total of $594 million (table 10). Imports from the 

United States and Germany were particularly notable during 1993-96; Germany accounted for 46 percent 

($618 million) of period imports (largely steam turbine equipment to Brazil) and the United States for 24 

percent ($327 million) of the period total (principally gas turbines and gas turbine generator sets to 

Argentina). Imports of power generation equipment by Paraguay and Uruguay were negligible (less than 

$43 million) during the period. 

As noted in table 10, the available statistical data showing imports of power generation equipment 

into Mercosur members were compiled at a higher level of statistical aggregation (broader product scope) 

than official U.S. export statistics. Consequently, equipment other than that used specifically for power 

generation was captured in the country totals, elevating the reported overall imports by approximately 30 to 

40 percent. The vast majority of German shipments ($450 million, or 33 percent of the period total) 

arrived in 1994. 

23 
Table 10 

Power generation equipment: Mercosur imports for consumption, by country or country grouping, for 

Argentina, Brazil, total, cumulative total, and supplier.country share 

Europe 

Mercosur United Other Other 

Country partners States Germany Europe1 Total Japan countries Total 

Value (million dollars) 

Argentina: 

1993 .................. 1.3 65.6 5.8 29.0 34.8 (2) 2.2 103.3 

1994 .................. 2.8 30.1 10.7 67.2 n.9 0.1 9.9 117.3 

1995 .................. 4.2 87.6 31.2 19.5 50.7 16.3 15.0 168.4 

1996 .................. 13.3 43.9 12.0 18.9 30.9 0.0 22.5 106.0 

Brazil: 

1993 .................. 0.0 11.7 4.8 51.4 56.2 5.7 4.9 78.5 

1994 .................. 0.0 7.3 439.4 17.5 456.9 1.6 1.8 467.1 

1995 .................. 5.6 17.3 26.6 3.1 29.7 0.1 7.8 60.5 

1996 .................. 11.0 62.4 87.2 15.4 102.6 3.5 25.0 204.5 

Mercosur total: 

1993 .................. 1.9 79.5 11.8 80.7 92.5 5.7 7.7 187.3 

1994 .................. 4.3 36.5 450.0 86.0 536.0 1.8 20.1 598.7 

1995 ............. •.• ... 12.5 104.9 57.4 23.4 80.8 16.4 25.5 240.1 

1996 .................. 27.9 106.5 99.2 34.8 134.0 3.5 51.1 323.0 

Cumulative 1993-96 ........ 46.6 327.4 618.4 224.9 843.3 27.4 104.4 1,349.1 

Supplier share of 

cumulative total (percent) . 3.5 24.3 45.8 16.7 62.5 2.0 7.7 100.0 1 The principal contributors of these imports were France, Italy, the United Kingdom, Spain, the Netherlands, 

Sweden, Denmark, and Belgium/Luxembourg. 2 Less than $50,000. 

Note.-The data in this table had to be compiled at a higher level of statistical aggregation (a broader product range) 

than official U.S. export data shown later in this sector write.up. Consequently, these totals include some equipment 

that would normally be excluded from the scope of power generation equipment. 

Source: Inter-American Development Bank, Datalntal. 

24 
FACTORS AFFECTING U.S. MARKET ACCESS 

Although barriers remain, 

structural changes in Mercosur national 

markets have done much to improve 

U.S. market access (table 11). Tariffs 

and government procurement practices 

continue to be the chief instruments for 

limiting imports. In addition, U.S. 

equipment exports must be adapted to 

Mercosur markets because of the bloc's 

usage of low-voltage distribution 

networks designed to follow Instituto 

Argentino de Racionalizacion de 

Materales (IRAM) and German DIN. 

standards (380/220 volts, 50 cycle) 

rather than the U.S. standard (2201110, 

60 cycle). 

Until recently, markets for 

power generation equipment in the 

Mercosur countries were heavily 

influenced by purchasing decisions 

made by the principal suppliers of 

electric power--federal- and state-owned 

electrical utilities. Electricity 

production in Brazil is dominated by 

national utility giant Electrobras and by 

smaller state-run suppliers. In 

Argentina, most of the major generating 

facilities are operated by the federal 

government. For domestic political 

Table 11 

Specific import and invesbnent policies for power generation 

equipment, 1997 

Argentina 

• Tariff: 1 0 to 22 percent. 

• Statistical fee:2 3 percent. 

Brazil 

• T ariff:3 0 to 18 percent. 

• State and federal government "Buy Brazilian• policies have 

traditionally encouraged foreign hydroelectric equipment 

manufacturers to produce locally instead of importing. 

• Domestic equipment bidders that meet preferential "Buy 

Brazilian" criteria enjoy 12-percent price differential. 

Paraguay 

• Tariff:1 0 to 16 percent. 

• Government procurement policies has hindered sales of 

U.S. equipment to public utilities. 

• Limited import financing and high domestic interest rates 

represent a significant impediment to imports. 

Uruguay 

• Tariff:1 0 to 16 percent. 

• Significant limitations on equity participation in the 

electricity sector of the domestic economy. 

• Locally produced products enjoy a 10-percent price 

differential over comparable foreign equipment. 1 Argentina, Paraguay, and Uruguay implemented a 3 percentage 

point increase in most CETs in early 1998. 2 In January 1998, Argentina reduced the statistical fee to 0.5 

percent. 3 Refers to tariffs applied throughout most of 1997. In November, 

Brazil increased CETs by 3 percentage points. 

Sources: U.S. Department of State, U.S. Department of Commerce, 

and Embassies of Argentina and Brazil. 

reasons, these government-owned utilities have tended to buy domestic products even if better and less 

expensive equipment is available from foreign suppliers. As a result, concerns such as trade balances, full 

employment, and protection of indigenous suppliers have taken precedence over providing the lowest cost 

and most stable supply of electricity to domestic consumers. 

Recent developments in the region, most of which are unrelated to the establishment ofMercosur, 

have changed the traditional way in which power generation equipment is procured. Whereas the stateowned electrical utilities historically controlled equipment purchases, they did not foster the most efficient 

and least expensive generation of electrical energy. In addition, Brazil had become almost totally 

dependent on its hydroelectric capabilities, which in tum had become susceptible to recurring droughts. At 

the same time, significant technological developments in the combustion of low-grade fossil fuels had 

caused Brazil to seriously consider developing its sizeable deposits of low-grade coal. Consequently, 

influenced by the success of Chile's privatization efforts, the markets for power generation equipment, 

particularly in Argentina and Brazil, have been opened to competition from the private sector. For 

example, in early 1995, the Brazilian Congress initiated a variety of new constitutional amendments aimed 

at introducing private competition into state-run companies (including Electrobras). The amendments 

were designed to permit private companies to own controlling interests in hydroelectric and other electric 

projects. 

25 
U.S. EXPORTS AND INVESTMENT FLOWS TO MERCOSUR 

U.S. exports of power 

generation equipment (principally 

to Argentina and Brazil) rose 

irregularly from $61 million in 

1993 to $84 million in 1997 after 

peaking at $94 million in 1995 

(table 12). Argentina accounted 

for the vast majority of U.S. 

exports until 1996, when a sudden 

rise in Brazilian demand for steam 

boiler parts and miscellaneous 

electric generating sets pushed 

that country's share to nearly $38 

million, or 48 percent of total U.S. 

exports to the region. This trend 

Table 12 

U.S. exports of power generation equipment to Mercosur members 

and the wortd, 1993-97 

(Million dollars) 

Country1 1993 1994 1995 1996 

Brazil............. 3.4 0.7 4.5 37.9 

Uruguay . . . . . . . . . . 2.4 (2) (2) 0.2 

Argentina . . . . . . . . . 55.2 31.4 89.1 41.0 

Total Mercosur.... 61.0 32.1 93.6 79.1 

World . . . . . . . . . . . . 1 ,592.0 1 ,334.6 1 ,864.6 1 ,498.8 1 U.S. exports to Paraguay were negligible during this period. 2 Less than $50,000. 

Source: Official statistics of the U.S. Department of Commerce. 

1997 

56.4 

.1 

27.7 

84.2 

1,811.7 

continued in 1997, when U.S. exports to Brazil rose to $56 million, or 67 percent of the annual total. This 

surge is reportedly associated with the construction of six coal-fired power plants in the Brazilian state of 

Santa Catarina announced by General Electric do Brasil (GE do Brasil) in February 1995.6 

GE do Brasil, an affiliate ofU.S.-based General Electric Company (GE), plans to build the plants 

(valued collectively at $2 billion) over the next 7 years in order to provide 1,590 mega (million) watts of 

electrical energy to the region. GE do Brasil is also planning to invest from $2.1 billion to $3 .5 billion to 

construct six to ten similar plants in the state of Rio Grande do Sul. Each of these plants would generate a 

peak capacity of 265 megawatts and consume 800,000 tons of local coal per year. The Czech company, 

Skoda Export, and Brazilian regional power companies Celesc, Eletrosul, and CESP have also expressed 

an interest in investing in this venture, which will rely on GE's patented integrated gasification combined 

cycle (IGCC) technology to process the coal and manage the production of electricity.7 GE is 

acknowledged as the worldwide leader in IGCC installations, which permit a power station to generate 

electricity from either coal or natural gas. 

U.S. equipment exports to Argentina during 1993-97 were predominately gas turbines and large 

alternating current (AC) generators (shipped separately), with a temporary surge in miscellaneous 

generating sets (primarily gas turbine generating sets) contributing to a significant rise in U.S. sales during 

1995. These shipments reflect the ongoing Argentine privatization of the electric utility sector. Gas 

turbine generator units (gas turbine and matching alternating current generator) provide the most rapid 

means of supplying electrical energy to an existing power grid. When they are used in conjunction with a 

separate steam turbine or boiler unit to capture and recycle the spent exhaust from the gas turbine 

(cogeneration), they are also nearly as efficient as fossil fuel-fired steam turbine generators. Argentina's 

ample reserves of natural gas make this equipment a logical answer to the short term power disruptions that 

the nation has experienced. 

To date, investment by U.S. producers of power generation equipment in Mercosur countries has 

been minimal. Current operations are supported primarily through a network of regional sales 

representatives and agents. The only notable facilities that are owned by U.S. companies in the region are 

for maintenance and repair operations.8 In addition, since almost all of the fossil fuel-fired equipment 

currently being sold in the region is imported and markets are relatively open, U.S. companies are not 

likely to make significant investments in regional facilities in the near future. Given the fact that markets 

are extensively supplied by imported equipment, U.S. companies are competing with other importers who 

are subject to the same duties and fees. Furthermore, because the production operations associated with 

26 
this equipment are highly capital and technology intensive, U.S. producers do not view potential savings in 

transportation, labor, and inventory costs as being sufficient to offset the cost of relocating these 

operations. 

OUTLOOK 

With the exception of certain hydroelectric equipment, most of the power generation equipment 

that is consumed in the region is imported (predominately from the United States, Europe, or Japan), with 

all suppliers subject to the same tariff and nontariff regime. Because there is minimal intra-regional trade 

in this equipment, the preferential treatment of such shipments does not determine the conditions of 

competition between major foreign suppliers. However, what has already begun to develop, and is likely 

to increase rapidly, is a series of cooperative energy ventures between Mercosur members and adjoining 

non-member countries that may favorably affect future U.S. exports. Brazil, for example, which has few 

natural gas resources of its own, has entered into agreements with Argentina and Bolivia to provide gas via 

pipeline.9 This fuel is to be used principally in conjunction with gas-fired cogeneration power plants. 10 

The market for U.S.-made power generation equipment in the region is likely to be enhanced as a result of 

such ventures. 

Endnotes 

I. Claire Poole, "The Age of Enlightenment: The Brazilian Promise," Latin Trade, Dec. 1996, p. 54. 

2. U.S. Energy Association, "Proposals for a Policy of a Coal Based Thermoelectric Generation of Energy," 1620 

Eye St., NW, Washington DC, July 15, 1997. 

3. Poole, "Age of Enlightenment ... ," p. 50. 

4. U.S. Department of Commerce, Argentina: Leasing Sectors for U.S. Exports & Investment, National Trade Data 

Banlc, Country Commercial Guides, 1996, found at Internet address http://www.stat-usa.gov, retrieved July 24, 

1997. 

5. U.S. Department of Commerce, Argentina-Low Tension Electric Energy Distribution Equipment/Supplies, 

National Trade Data Banlc, Market Research Reports, FY 1997, found at Internet address http://www.stat-usa.gov, 

retrieved July 24, 1997. 

6. Business Latin America, Feb. 27, 1995. 

7. Business Latin America, Mar. 6, 1995. 

8. Conversation with official of the General Electric Co., Washington, DC, July 24, 1997. 

9. U.S. Department of Energy, "Brazil," found at Internet address http://www.eia.doe.gov, retrieved Feb. 18, 1997. 

10. Jose Emilio Nunes Pinto and Charles E. Schwenck, "Natural Gas Power Projects in Brazil," staff memorandum 

for Morrison & Foerster LLP, Irvine, CA, June 10, 1997, p. 3. 

27 
MOTOR VEIDCLES AND PARTS" 

IDGHLIGHTS: 

c US. exports to Brazil and Argentina more than doubled in quantity during 1993-97. 

c Intra-Mercosur trade increased by 71 percent to $1.6 billion during 1993-96, 

whereas imports.from non-member countries increased by 73 percent to $2.3 billion. 

c Motor vehicles are exempt from the Mercosur agreement and CET until January 1, 

2000. Based on a national policy grandfathered under Mercosur until 

2000 and bilateral trade accords, Brazil uses high tariffs and local-content 

requirements to limit and regulate imports from both nonmember and member 

countries. 

c Under a special transition agreement that applies solely to the motor vehicle sector, 

preferential tariff treatment is granted to US. and other foreign vehicle companies 

with domestic assembly operations in Brazil and Argentina. 

c US. motor vehicle companies are expected to invest between $5 and $6 billion in the 

Mercosur region before the end of the decade. 

c Over the long term, emphasis on technology transfer through local manufacturers 

and import substitution are likely to limit the growth of US. vehicle exports. 

INDUSTRY STRUCTURE AND RECENT MARKET DEVELOPMENTS 

Under the Mercosur agreement, motor vehicles and parts are exempt from the FTA and the CET 

until January l, 2000. Intra-Mercosur motor vehicle trade is governed by a series of bilateral accords 

signed by the four charter member nations during the 1980s. In January 1996, Brazil and Argentina signed 

a transitional agreement (covering the period of 1996-2000) that allows new vehicles and parts to qualify 

for duty-free treatment if they conform to local-content and trade-balancing requirements; however, each 

country's intra-Mercosur imports must be compensated for by exports within Mercosur or to other 

markets. 1 Qualifying producers are eligible for a 90-percent reduction of tariffs on imported new 

production machinery, test equipment, tools and dies, and quality-control instruments, and for a 55 percent 

reduction of tariffs on motor vehicle parts. 

The Mercosur region is one of the world's fastest growing motor vehicle markets, with annual 

sales of more than two million vehicles. International motor vehicle producers believe the creation of a 

market that is twice the size of Canada's has tremendous potential for sales, especially in Brazil, where less 

than 25 percent of the population owns an automobile. Annual Mercosur auto production is expected to 

reach five million units by 2005, with Brazil alone accounting for more than three million units.2 

• Includes automobiles, light trucks, and parts thereof. Data for this industry sector have been compiled from 

official U.S. sources and the Inter-American Development Bank, Datalnta/. The discrepancies between these two 

data sources are attributed to differences in collection methodology, item classification, and reporting origin and 

destination of the merchandise (c.i.f. vs. f.o.b.). Furthermore, there are no trade reconciling agreements between the 

United States and the Mercosur countries. 

28 
Motor vehicle production in 

both South America and the Mercosur 

customs union is dominated by Brazil, 

which was the world's eighth-largest 

motor vehicle producer in 1996. 

Brazilian motor vehicle production 

increased by 33 percent during 1993-96 

(the fastest rate among Mercosur 

partners) to almost 1.5 million units in 

1996, representing more than 80 

percent of all motor vehicles produced 

by member countries (table 13).3 

Paraguay has no established 

Table 13 

Mercosur motor vehicle production 

(Units) 

Country 1993 1994 

Brazil . . . . . . 1,099,459 1,249,265 

Argentina . . 286,964 338,494 

Paraguay . . (1) (1) 

Uruguay . . . 12.000 16.000 

Total.... 1,398,523 1,603,759 1 No production facilities exist. 

1995 

1,297,500 

226,700 

(1) 

1.900 

1,526,100 

1996 

1,468,100 

269,200 

(1) 

2.100 

1,739AOO 

Source: Automotive News, 1995 & 1997 Market Data Books. 

motor vehicle industry. Sevel Uruguay and Nordex assemble motor vehicles in Uruguay under license for 

several European manufacturers. A Nordex-Sevel venture assembles Fiats in Montevideo principally for 

export to the Argentine market and Nordex assembles Peugeots, Citroens, and Renaults in its other 

plants. The motor industry in Uruguay is exploring niche markets, especially short-series exclusive models 

that cannot be assembled economically in either Brazil or Argentina.4 

The importance of the motor vehicle industry has grown in both Brazil and Argentina, 

representing nearly 10 percent of each nation's GDP in 1995.5 Motor vehicle production within Mercosur 

is dominated either by local companies that assemble under licensing arrangements or by subsidiaries of 

large multinational corporations. Sales, production, and exports have grown significantly. Small cars lead 

the way, especially in Brazil where models such as the family-oriented "popular car" with an engine 

displacement of 1.0 liters or less, dominate sales. The Brazilian market share of these cars grew from 12 

percent in 1993 to more than 60 percent in 1995.6 As a result of their larger and faster growing markets, 

Brazilian and Argentine producers have recently restructured to take advantage of specializ.ation in the 

production of a smaller number of models. Such specialization has reportedly boosted intra-Mercosur 

trade.7 

Brazil is the only member ofMercosur with both the production capacity to satisfy its own 

internal market and the ability to compete in foreign markets outside of Mercosur. The Argentine motor 

vehicle industry, on the other hand, is regarded as too small to profit from economies of scale; 

consequently, unit costs tend to be significantly higher than in other major producing countries. 

Argentine facilities tend to be relatively small, with the average factory assembling only 15,000 vehicles 

of one model annually, compared with nearly 130,000 vehicles in the United States.8 Quality remains 

low for both Argentine- and Brazilian-produced vehicles, while prices for both imports and domestically 

assembled vehicles remain high. Stringent local-content requirements also tend to prevent the 

production of vehicles that are technologically competitive both internationally and within Mercosur. 

For example, because of local content requirements Chrysler will be prevented from installing features 

that are standard on U.S.-made Jeep Grand Cherokees (such as its various computer systems) in its new 

Argentine models.9 

Throughout 1997, Brazil's $18-billion motor vehicle market was dominated by General Motors 

(U.S.), Fiat (Italy), Ford (U.S.), and Volkswagen (Germany). 10 In September 1994, Brazil had lowered its 

tariffs on imported motor vehicles from 35 to 20 percent in order to cut costs, increase supply, and force 

local assemblers to lower prices. 11 The tariff cuts attracted large numbers of imported vehicles and turned 

Brazil's trade balance from a surplus into a deficit. 12 The Brazilian Government responded by raising the 

import tariff on motor vehicles to 32 percent and increasing the Industrial Products sales tax (IPI) on 

29 
popular cars from 0.1 to 8 percent. 13 The tariff increase was intended to slow the pace of imports by as 

much as 50 percent during the latter half of 1995. 

The motor vehicle market in Brazil slumped as the economy fell into a recession during the first 

quarter of 1995. In order to stem its increasing monthly trade deficit and reinforce domestic price and 

production controls, Brazil temporarily raised tariffs on a wide range of consumer durables, including 

motor vehicles. 14 In March 1995, Brazil raised its tariff rate on motor vehicles from non-Mercosur nations 

to 70 percent.* 

In addition, the Brazilian Government unilaterally instituted a series of initiatives, including quotas 

and import and investment incentives, that were designed to protect domestic producers and improve the 

country's trade balance. 15 In 1995, Brazil offered incentives and quotas for motor vehicles and parts 

manufactured by Japanese, Korean, and Western European producers who agreed to meet its export and 

production goals. 16 In December 1995, the quota regime was found to be inconsistent with World Trade 

Organization (WTO) obligations and was eliminated after the WTO's Balance of Payments committee 

rejected Brazil's justification for its quotas on the grounds of balance ofpayments. 17 Brazil also lowered to 

35 percent its tariff rates on motor vehicles imported by domestic producers and subsidiaries of foreign 

producers with manufacturing facilities in Brazil, as long as they adhere to the country's trade-balancing 

scheme. The tariff reduction provides local producers with a competitive edge over importers that have no 

domestic production capabilities. 18 A Presidential decree issued in January 1996 established additional tax 

breaks and other incentives for motor vehicle assemblers willing to locate facilities in any of 19 states, 

especially in the underdeveloped northeast region. 19 

Motor vehicle assembly operations in Argentina are dominated by Ford, General Motors, 

Volkswagen, Fiat, Sevel (Peugeot and Citroen, a licensee assembler for GM), and CIADEA (a Renault 

licensee). These firms accounted for approximately 95 percent of Argentina's production of motor 

vehicles during 1994 and 1995.20 The production of vehicles began to decline in Argentina during the first 

quarter of 1995 as the country slid into a recession brought on by capital flight that followed the 1994 

Mexican peso crash.21 Argentine vehicle production had grown from 90,000 units in 1990 to 338,494 

units in 1994 before falling to 269,199 units in 1996. To cope with declining demand, Argentine 

manufacturers were forced to layoff workers, temporarily close plants, and cut prices (up to 40 percent off 

list price) to reduce inventories.22 To counter a growing trade deficit in motor vehicles, Argentina 

established quotas on imports from its Mercosur partners as well as from other countries.23 The Argentine 

market recovered strongly in 1997, but the East Asian-inspired recession in Brazil forced Ford and Fiat to 

scale back production at their Argentine assembly plants in December 1997 and January 1998. A 

significant share of the Escorts assembled t>y Ford in Argentina are exported to Brazil.24 

Under the recently signed transitional agreement between Brazil and Argentina, the latter will be 

permitted to export 26,400 motor vehicles duty-free to the former during 1997, while Brazil will be 

allowed to export one unit for every two it receives from Argentina. Argentine production will come from 

local producers such as Renault (13,000 units), Peugeot (8,400 units), Toyota (4,500 units), and Chrysler 

(500 units). 

Argentina has established a system of differing quotas and tariff rates for local assemblers, official 

distributors and motor vehicle dealers, as well as other firms and individuals.25 Brazilian exports have 

been eligible to enter Argentina duty-free as of January 1, 1995, within the rules of a production-swapping 

agreement.26 In that same month, Argentina increased its annual quota on imported autos from Uruguay 

·Argentina held that these actions violated the Protocol ofOuro Preto (see appendix A). Brazil subsequently 

exempted Mercosur members as long as they complied with Brazil's compensation scheme. 

30 
from 17,000 to 20,000 and eliminated customs restrictions and export-compensation requirements. In tum, 

Uruguay agreed to increase its quota on duty-free Argentine imports to 4,000 vehicles.27 

The Brazilian and Argentine motor vehicle parts, accessories, and service equipment market was 

estimated at $19.4 billion in 1997.28 The Mercosur market for motor-vehicle parts and components is 

supplied principally by local producers, who accounted for approximately 94 percent of parts sales in 

Argentina and Brazil during 1995.29 As with motor vehicles, Brazil dominates the Mercosur parts market, 

accounting for 93 percent of the total. The sales of parts boomed in both Brazilian and Argentine markets 

with the expansion in demand for new car sales, 30 with growth so brisk that Argentine parts producers 

ignored repeated violations of the country's 60 percent local-content requirement for locally assembled 

autos.31 These violations have led in recent years to the elimination or reduction of Argentina's tariff and 

nontariffbarriers on imports of parts and accessories. In December 1995, the Brazilian Government also 

instituted performance incentives for the parts industry similar to those applied to finished vehicles.32 

MERCOSUR TRADE 

In 1996, traditional trading patterns 

were upset, as intra-mercosur imports grew 

almost 70 percent and imports from 

non-Mercosur sources reversed their previous 

growth path. lntra-Mercosur imports had risen 

by less than 1 percent between 1993 and 1995 

(table 14), while trade with non-Mercosur 

countries had tripled during that period (table 

15). 

During 1996, Brazil accounted for 

approximately 65 percent of total intra-Mercosur 

motor vehicle imports, Argentina for 27 percent, 

Paraguay for 5 percent, and Uruguay for 2 

percent (table 14). Since 1993, intra-Mercosur 

trade has become more important to Argentina 

as its motor vehicle exports to Brazil increased 

by 45 percent in 1996 (103,000 units) as major 

motor vehicle producers such as VW, Ford, and 

GM shifted production of some models from 

Brazilian to Argentine plants in order to gain 

economies of scale and other efficiencies.33 The 

percentage share of Brazil's imports accounted 

for by intra-Mercosur trade increased from 8 

Table 14 

lntra-Mercosur motor vehicles imports, 1993-96 

!Million dollars} 

Count!}'. 1993 1994 1995 1996 

Argentina .. 491.4 437.6 256.9 430.4 

Brazil ...... 226.6 291.1 534.8 1,023.0 

Uruguay ... n.1 27.0 32.7 30.4 

Paraguay . . 121.7 170.6 100.8 84.3 

Total .... 917.4 926.3 925.2 1,568.1 

Source: Inter-American Development Bank, Datalntal. 

Table 15 

Mercosur motor vehicles imports from nonMercosur partners, 1993-96 

!Million dollars} 

Source 1993 1994 1995 1996 

United States .. 164.3 297.3 433.6 211.7 

EU ........... 383.1 1,735.5 2,614.4 1,269.4 

Japan ........ 543.4 541.6 487.7 300.9 

All other ...... 268.2 343.4 536.6 562.1 

Total . . . . . . . 1,359.0 2,917.8 4,072.3 2,344.1 · 

Source: Inter-American Development Bank, Datalntal. 

percent in 1993 to 53 percent in 1996. Imports of motor vehicles from non-member nations declined by 42 

percent in 1996 compared to 1995 principally in response to the effects of the Peso crisis on Argentina's 

economy. Intra-Mercosur trade in parts and accessories also grew substantially, from $50 million in 1990 

to more than $550 million in 1996. As with vehicles, Brazil dominates parts and accessories imports 

within the bloc, accounting for 51 percent of the total in 1996 and the imposition of import financing rules 

by Brazil that effectively increased the cost of most imports.34 

Despite the actions cited earlier to counter deficits, government policies aimed at attracting 

substantial direct foreign investment in the Brazilian and Argentine motor vehicle industries have been 

extremely successful. Lured by the enormous potential of Brazil's market, protective trade regimes, rising 

incomes, and the low cost of establishing assembly facilities in Argentina, foreign-based vehicle producers 

31 
have announced plans to invest between $12 and $14 billion in both countries by the end of the decade. At 

the end of 1995, the Brazilian Trade Ministry estimated that companies already operating in Brazil would 

spend $10.6 billion during 1996-99.35 Although 75 percent of the money pledged is destined for Brazil, 

GM, Fiat, and Chrysler plan to construct plants in Argentina for the first time since the early 1980s.36 

While GM plans to export nearly 80 percent of its new Argentine production to Brazil, other manufacturers 

within the bloc have announced that, as the domestic markets become saturated, they will export to the rest 

of Latin America, the United States, and Western Europe.37 · 

FACTORS AFFECTING U.S. MARKET ACCESS 

Although vehicle markets in Argentina, Brazil, Paraguay, and Uruguay have been liberalized, they 

remain relatively protected from foreign competition by quotas, high import tariffs and other tax levies, a 

cumbersome bidding process for private importers, and performance requirements under local-content 

rules (table 16). 

Table 16 

Specific import and investment policies for motor vehicle and parts, 1997 

Argentina 

• Tariff:1 25 percent for private individuals, 10 percent for official distributors, 8 percent for dealers, and 

2 percent for Argentine manufacturers. 

• Tariff:1 18 percent on parts. 

• 3 percent statistical fee levied on imports.2 

• Sixty percent local content requirement for locally produced vehicles. 

• Import quotas raised from 10 to 13 percent of domestic output. . 

• Companies located in Argentina are required to offset imports with exports. 

Brazil 

• Tariff:3 70 percent for private importers and 35 percent on motor vehicles imported by Brazilian producers. 

• Tariff:3 7.2 percent for motor vehicle parts (IPI: 4 to 16 percent). 

• Import compensation scheme for motor vehicles. 

• Sixty percent local content requirement for locally produced vehicles. 

• Industrial products tax ranging from 31 to 55 percent on imports with engine displacement exceeding 1.0 

liters. 

• Tariff reduction offered on imported capital equipment used to manufacture motor vehicles. 

Paraguay 

• Tariff: 1 0 to 10 percent for motor vehicles and parts .. 

Uruguay 

• Tariff: 1 7 to 20 percent for motor vehicles, lesser rates for domestic producers. 

• Tariff: 1 18 percent on parts. 

• Quotas on imports. 

Mercosur-wide policies 

• Motor vehicles are exempted from the CET and FT A until Jan. 1, 2000. 1 Argentina, Paraguay, and Uruguay implemented a 3 percentage point increase in most CETs in early 1998. 2 In January 1998, Argentina reduced the statistical fee to 0.5 percent. 3 Refers to tariffs applied throughout most of 1997. In November, Brazil increased CETs by 3 percentage points. 

Sources: U.S. Department of State, U.S. Department of Commerce, and Embassies of Brazil, Argentina, Paraguay, and 

Uruguay. 

Despite the growing importance of imports, the Brazilian Government continues to impose tariffs, 

taxes, and fees on imported motor vehicles, consequently, increasing vehicle prices substantially and 

discouraging vehicle sales. These levies reportedly elevate the price of an imported motor vehicle by more 

than 250 percent and tend to discriminate against most U.S. export models, since they are based on vehicle 

weight, engine type, and engine displacement.38 For example, a four-door Chrysler Neon retails for 

$26,000 to $28,000 in Brazil, compared with $12,000 to $15,000 in the United States.39 An average 

annual income of only $4,000 in Brazil therefore effectively places most imported new motor vehicle 

models beyond the reach of much of the population.40 In addition, since U.S. manufacturers export few, if 

32 
any, motor vehicle with engines of 1.0 liter engines or less to Mercosur countries, they are not eligible for 

Brazil's lowest Industrial Products sales (IPI) tax.* 

However, tariffs reportedly continue to be Brazil's chief instrument for limiting motor vehicle 

imports from non-Mercosur sources and for sheltering non-competitive local producers.41 Brazil raised 

tariffs on motor vehicles to 70 percent in 1995 and on imported motor-vehicle parts from 4.8 percent in 

1996 to 7.2 percent in 1997. Additionally, the government announced its intention to raise motor-vehicle 

parts tariffs from 9.6 percent in 1998 to the CET level of 16 percent in 2000. Brazil also has initiated a 

series of measures to encourage foreign manufacturers to locate additional production capacity there.42 

Special categories of quotas and tariff reductions on imported finished vehicles, parts, components, 

and other inputs for local producers were implemented to encourage additional investment and local 

production by foreign manufacturers.43 In January 1997, the United States called for a series of 

consultations in the WTO to address the concerns of certain U.S. producers regarding preferential tariffs 

granted by Brazil to foreign-based assemblers that produce locally.44 

U.S. EXPORTS AND INVESTMENT FLOWS TO MERCOSUR 

Demand for imported vehicles 

intensified following the liberalization of the 

trade regimes and improvements in economic 

conditions in Brazilian and Argentine 

markets. The number of foreignmanufactured motor vehicles on the roads in 

the four Mercosur nations is increasing due 

to ongoing demand that outpaces local 

production. U.S. exports of motor vehicles 

to Argentina and Brazil, spurred by the rapid 

expansion of Brazil's vehicle market, more 

than doubled in units during 1993-97 (table 

17). Approximately 43 percent of all motor 

vehicles sold in Argentina during 1995 were 

imported and nearly 30 percent of the 

country's motor vehicle fleet consists of 

either U.S.-made or U.S.-designed vehicles.45 

Table 17 

U.S. exports of passenger vehicles to Brazil and 

Argentina, 1993-971 

Country 

Brazil ...... . 

Argentina .. . 

Total .... . 

1993 

121.7 

88.6 

210.3 

1994 1995 1996 

Value (million dollars) 

262.0 405.5 153.4 

113.8 78.8 93.2 

375.8 484.3 246.6 

1997 

241.4 

112.2 

353.6 

Quantity (units) 

Brazil....... 6,916 18,168 28,618 14,465 20,008 

Argentina . . . 5,782 6.797 4,698 6,988 8.937 

Total..... 12,698 24,965 33,316 21,453 28,942 1 U.S. exports to Paraguay and Uruguay were negligible. 

Source: Official statistics of the U.S. Department of Commerce. 

Exports (in units) from the United States to the region, however, accounted for less than 2 percent of total 

U.S. vehicle exports in 1997 and consisted principally of autos with four cylinder engines (between 1.5 

liters and 3.0 liters in size) and an average unit value of$12,065 in Brazil and $12,554 in Argentina.46 

Market expectations of leading international producers continue to be positive. In 1995, both 

Ford and GM announced that they would modernize their products and boost Mercosur-based capacity to 

counter investment proposals by rival multinational producers.47 GM and Ford will also restructure their 

Brazilian and Argentine operations in order to adjust to long-term changes in the market, gain economies 

of scale, increase efficiency, and cut costs while maintaining access to an enlarged Mercosur market.48 

·Brazil's IPI is levied on most domestic and imported manufactured products and, in the case of motor vehicles, 

is based on weight, engine type, and engine displacement. Gasoline-powered motor vehicles with an engine 

displacement of 1.0 liter or less are subject to a tax of 12 percent, those between 1.0 to 1.5 liters are taxed at 31 

percent, those between 1.5 to 3.0 liter at 31to36 percent, and those with engines greater than 3.0 liters are taxed at 

30 percent. The IPI tax is assessed on the sum of the c.i.f. value plus the import duty. 

33 
GM, currently vying with Fiat for second place (in terms of sales) in Brazil's market, has added new 

products and more than doubled its capacity there since 1990. General Motors do Brasil, one of GM' s 

top international performers, reported that sales have·increased in each of the last 5 years.49 GM plans to 

invest $3 billion in Mercosur by the end of the decade and expects to produce 400,000 vehicles annually 

in Brazil alone. so GM also returned to Argentina in May 1994 for the first time since closing its local 

plants in 1979 and plans to invest $100 million in Paraguay to assemble small- and medium-sized motor 

vehicles.s 1 

Even after the dissolution of its failed Autolatina· production alliance with Volkswagen in 1995, 

Ford reported losses in Brazil of nearly $300 million in 1995 and $130 million during the first half of 

1996. Once Brazil's second-leading producer, Ford has seen its market share slide from 20 to 12 percent 

when the collapse of Autolatina left the company without a competitive entry in Brazil's critical small-car 

market:• Ford reportedly planned to rely on imports of older model subcompacts from Europe until it 

could launch a new, modem Brazilian subcompact.52 In March 1995, however, Brazil raised its IPI tax 

on cars with 1:-liter engines or less and raised tariffs on imported motor vehicles to 70 percent:•• At that 

point, Ford officials considered that imports were no longer a profitable alternative and estimated that the 

company would record an additional $260 million of losses during the latter half of 1996.s3 However, 

Brazil subsequently lowered its motor vehicle tariffs for local producers to 35 percent, allowing Ford and 

GM' s exports to the region to qualify for the preferential tariff rate granted to local producers.•••• 

Chrysler, without production facilities in either Brazil or Argentina until April 1997, recently 

dedicated a $165 million assembly plant in the latter that will produce Jeep Grand Cherokee luxury sport 

utility vehicles for the Mercosur market. The company announced plans to produce 20,000 vehicles per 

year, 70 percent of which will be sold in the Brazilian market.54 Chrysler has also entered into a joint 

venture with BMW to produce engines in Brazil and plans to erect a $315 million pickup truck assembly 

facility in Campo Largo, the state of Paranee, Brazil. Chrysler will qualify for lower tariff rates in mid1998 when it begins to produce vehicles at these new plants.ss 

The Mercosur market for U.S. motor vehicles and parts production by U.S. firms in member 

countries have expanded simultaneously. Moreover, most of the world's leading parts producers have 

located production facilities in Brazil and are currently investing large sums of money to upgrade their 

operations. Global sourcing of parts is already changing the relationship between producers and parts 

suppliers in Brazil and Argentina;s6 the procurement of parts outside ofMercosur has forced local 

producers to become more efficient and more competitive. In 1995, U.S. exports accounted for 

approximateiy 15 percent of Argentina's and 2 percent of Brazil's vehicle parts and accessories market.s7 

The preponderant share of U.S. products has been original equipment parts for locally assembled U.S.-

designed vehicles, although U.S. producers also have supplied this market with aftermarket items such as 

spark plugs, roller bearings, and gaskets. To compete more effectively, U.S. parts producers are also 

acquiring local producers. For example, the Dana Corp. (U.S.) and Freios Varga (Brazil) formed a new 

company, Sistemas Modulares, to provide suspension systems for Brazilian-made Volkswagen Golf 

models.ss In addition, Tenneco Automotive (U.S.) acquired Argentine exhaust system manufacturer 

Minuzzi, which produces systems locally for Volkswagen, Ford, and Daimler-Benz.s9 

·Ford (U.S.) and Volkswagen (Germany) formed a joint venture known as Autolatina in 1987, which was once 

Latin America's largest car assembler. 

··The popular car market represents between 60 and 70 percent of Brazil's total motor vehicle market. 

•••The 70 percent tariff forced Japanese manufacturers to cut exports by 95 percent during 1995. 

•••• Ford plans to invest approximately $2 billion in Brazil during 1997-2000. 

34 
OUTLOOK 

Export opportunities exist for U.S. companies with production facilities in the Mercosur region, 

which as local producers, are exempt from import quotas, high tariffs, and other restrictive measures. 

Much of the direct investment made by foreign assemblers in Argentina and Brazil has been prompted by 

governmental policies that favor local manufacturers. More than a dozen U.S. and foreign motor vehicle 

producers and parts suppliers from the United States, Europe, and Asia have announced plans to invest 

more than $12 billion in new production facilities in Brazil and Argentina by the end of the decade. 

In the short-term, U.S. exports are likely to increase because motor vehicle and parts are still in 

short supply. The number of imported motor vehicles on the roads within the Mercosur region is 

expected to expand as long as demand continues to outpace local production. Over the next 5 to I 0 years, 

however, market saturation and the continued emphasis by Brazil and Argentina on technology transfer 

through local manufacturing and import substitution will likely limit future exports, although the 

existence of U.S.- affiliated assembly plants will likely ensure continued demand for U.S. exports of parts 

to the Mercosur bloc. The trend towards the globalization of production by Ford and GM, together with 

their historic preference for manufacturing locally may act to limit demand for U.S. exports. In addition, 

the industries in Brazil and Argentina are expected to rely increasingly on exports to other Latin American 

markets as the primary mechanism for expansion, as the surge in capacity outpaces growth in the . 

Mercosur market. 60 

Endnotes 

1. "Integration Agreements," Investing, Licensing & Trading Conditions Abroad, The Economist Intelligence Unit, 

Jan. 1, 1996. 

2. U.S. Department of State telegram, "World's Auto Makers Beat a Path to Brazil's Door," message reference No. 

12958, prepared by U.S. Embassy, Sao Paulo, Apr. 12, 1996. 

3. Wards Auto World, 1996. 

4. "Road warriors in Mercosur," Business Latin America, The Economist Intelligence Unit, Feb. 27, 1995. 

5. U.S. Department of State telegram, "Argentine Auto Industry in the Spotlight," message reference No. 04112, 

prepared by U.S. Embassy, Buenos Aires, July 20, 1995. 

6. Ian Katz, "High Gear," U.S./Latin Trade, July 1995, p. 36. 

7. Standard and Poors ORI, from Brendan M. Case and Andrea Mandel-Campbell, "Auto Fever," Latin Trade, May 

1998, p. 42. 

8. U.S. Department of State telegram, "Argentine Auto Industry in the Spotlight," message reference No. 04112, 

prepared by U.S. Embassy, Buenos Aires, July 20, 1995. 

9. Ibid. 

10. Mercedes, BMW, Chrysler, Toyota, Honda, and Peugeot are also building new production facilities in Brazil. 

11. Jonathan Wheatly, "Brasilia rocks the boat," Financial Times, Feb. 4, 1997. 

12. "Manufacturing-Automobiles Forge Ahead," Latin American Country Report, The Economist Intelligence Unit, 

Mar. 3, 1995. 

13. U.S. Department of State telegram, "Brazil sets out on the long road to Mercosul integration," message 

reference No. 000643, prepared by U.S. Embassy, Brasilia, Feb. 14, 1996. 

14. Inter-American Dialogue, Integrating the Hemisphere, Perspectives from Latin America and the Caribbean, 

Mar. 1997, Washington, DC, p. 162. 

15. Ibid. 

16. Ibid. 

17. "Brazil sets low auto tariffs, but critics are not appeased," The Journal of Commerce, Aug. 22, 1996. 

18. U.S. Department of Commerce, Brazil-Investment Climate, 1996, National Trade Data Bank, Stat-USA 

database, found at Internet address http://www.stat-usa.gov, retrieved Apr. 15, 1997. 

19. Stephen Fidler, "Mercosur," Financial Times, Feb. 4, 1997. 

20. Ministry of Economy and Public Works and Services in Argentina, Investment Opportunities in Argentina: 

Automobiles, Oct. 31, 1996, p. l, found at Internet address http://www.mecon.ar, retrieved Apr. 17, 1997. 

35 
21. U.S. Department of Commerce, Argentina - New Automobiles, National Trade Data Bank, Country Commercial 

Guides, 1995, Stat-USA database, found at Internet address http://www.stat-usa.gov, retrieved Apr. 16, 1997. 

22. Argentina, Country Profile, The Economist Intelligence Unit, Nov. 1, 1995. 

23. In July of 1995, Argentine President Menem signed Law No. 1024 (Media Provisioria) establishing auto import 

quotas for 1995 and 1996. 

24. Brendon M. Case and Andrea Mandel-Campbell, "Auto Fever," Latin Trade, May 1998, p. 446. 

25. U.S. Department of State telegram, "1997 Argentina-National Trade Estimates Report," message reference No. 

000440, prepared by U.S. Embassy, Buenos Aires, Jan. 27, 1997. 

26. "Brazil fixes car import quotas from Argentina," 0 Estado de Siio Paulo, p. Bl, received by NEWSEDGE/LAN, 

Apr. 28, 1997. 

27. "Road warriors in Mercosur," Business Latin America, The Economist Intelligence Unit, Feb. 27, 1995. 

28. U.S. Department of Commerce, Argentina: Leading Sectors for U.S. Exports & Investment, 1997, National 

Trade Data Bank, Country Commercial Guides; and Brazil: Leading Sectors for U.S. Exports & Investment, StatUSA Database, found at Internet address http://www.stat-usa.gov, retrieved July 24, 1997. 

29. U.S. Department of Commerce, Brazil: Leading Sectors for U.S. Exports & Investment, National Trade Data 

Bank, Country Commercial Guides, 1996, Stat-USA database, found at Internet address http://www.stat-usa.gov, 

retrieved Apr. 17, 1997. 

30. Ibid. 

31. U.S. Department of Commerce, Argentina: Leading Sectors/or U.S. Exports & Investments, National Trade 

Data Bank, Country Commercial Guides, 1995, Stat-USA database, found at Internet address http://www.statusa.gov, retrieved Apr. 17, 1997. 

32. "The new automotive regime reduces tariffs," Latin American Country Report, The Economist Intelligence Unit, 

Feb. 26, 1996. 

33. Latin American Weekly Report, Jan. 1, 1997, p. 36. 

34. Inter-American Development Bank. 

35. "Brazil: On a Crash Course?," Business Latin America, The Economist Intelligence Unit, Mar. 25, 1996. 

36. Ibid. 

37. Jonathan Wheatley, "Brasilia rocks the boat," Financial Times, Feb. 14, 1997. 

38. Frances Williams, "Brazil urged to pursue liberal measures," Financial Times, Nov. 1, 1996, p. 5. 

39. Jeb Blount, "Protectionism, Latin Style," Latin Trade, Mar. 1997, pp. 59-62. 

40. Ibid. 

41. Jeb Blount, "Protectionism, Latin Style," Latin Trade, Mar. 1997, p. 61. 

42. U.S. Department of Commerce, Brazil-Automobiles and Autoparts, 1997, National Trade Data Bank, Market 

Research Reports, Stat-USA-database, found at Internet address http://www.stat-usa.gov, retrieved July 29, 1997. 

43. The Market Access Data Base, Market Access Sectoral Report-Brazil, found at Internet address 

·http://www.mkaccdb.eu, retrieved Apr. 16, 1997. 

44. "Protests Over Car Incentives," Latin American Regional Reports-Brazil, Feb. 4, 1997, p. 3. 

45. Latin American Weekly Report, Jan. 14, 1997, p. 29; and U.S. Department of Commerce, Argentina-Automotive 

Parts, 1997, National Trade Data Bank, Market Research Reports, Stat-USA database, found at Internet address 

http://www.stat-usa.gov, retrieved Apr. 15, 1997. · 

46. Compiled from official statistics of the U.S. Department of Commerce. 

47. Caroline Wilson, "The Automotive Sector Poised for Major Investments," Inside Brazil, Edition No. 13, Apr. 5, 

1996, found at Internet address http://www.amcham.com.br, retrieved Apr. 16, 1997. 

48. U.S. Department of State telegram, "Brazil sets out on the long road to Mercosul integration," message 

reference No. 000643, prepared by U.S. Embassy, Brasilia, Feb. 14, 1996. 

49. U.S. Department of Commerce, Brazil-Auto Industry Trends, 1996, National Trade Data Bank, Market Research 

Reports, Stat-USA database, found at http://www.stat-usa.gov, retrieved Apr. 16, 1997. 

50. Caroline Wilson, "The Automotive Sector Poised for Major Investments," Inside Brazil, Edition No. 13, Apr. 5, 

1996, found at Internet address http://www.amcham.com.br, retrieved Apr. 16, 1997. 

51. "General Motors to set up plant in Paraguay," Gazette Mercantile, Apr. 22, 1997, p. 23, retrieved from NEW 

SEDGE/LAN, Apr. 24, 1997. 

52. Katherine Yung, "Ford paying for a bad South American marriage," The Detroit News, Apr. 28, 1996, found at 

Internet address http://www.detnews.com, retrieved Apr. 16, 1997. 

53. "Ford Warns of Brazil Losses, Sees UAW Pact," Reuter, Industry Net Report, found at Internet address 

http://www.industry.net, retrieved Apr. 14, 1997. 

36 
54. "Detroit fires up Argentine automotive industry," WARD's Automotive International, Dec. 1997, p.l. 

55. "Chrysler Dedicated First Plant in Mercosur," Chrysler Corp., retrieved from NEW SEDGE/LAN, Apr. 25, 

1997. 

56. Caroline Wilson, "The Automotive Sector Poised for Major Investments," Inside Brazil, Edition No. 13, Apr. 5, 

1996, found at Internet address http://www.amcham.com.br, retrieved Apr. 16, 1997. 

57. U.S. Department of Commerce, Brazil: Leading Sectors/or U.S. Exports & Investment, National Trade Data 

Bank, Country Commercial Guides, 1996, Stat-USA database, found at Internet address http://www.stat-usa.gov, 

retrieved Apr. 17, 1997. 

58. Latin Trade, Nov. 1996, p. 19. 

59. "Tenneco Buys Parts Maker," Latin Trade, Nov. 1996, p. 18. 

60. Keith Bradsher, "In South America, Auto Makers See One Big Showroom," The New York Times, Apr. 25. 

1997, p. 4. 

37 
MEDICAL DEVICES AND EQUIPMENT• 

IDGHLIGHTS 

a Between 1993-97, U.S. exports to the Mercosur countries grew by 86 percent to $376 

million. 

a Medical devices and equipment are exempted.from the CET by Brazil until 2001. 

a U.S. exports of medical equipment will likely continue to dominate the Mercosur 

market in the future since local producers are unable to provide customers with 

sophisticated, high-technology equipment. 

a lntra-Mercosur imports declined by 17 percent to $9.6 million during 1993-96, 

whereas imports from non-member countries have increased by 66 percent to $827 

million. 

INDUSTRY STRUCTURE AND RECENT MARKET DEVELOPMENTS 

The vast majority ofMercosur medical device and equipment manufacturers tend to be small-to 

medium-sized companies that produce almost exclusively for their own domestic markets. 1 Products 

manufactured within Mercosur, although durable, are considered to be low-tech in nature.2 U.S. exports 

face limited competition from local producers, especially high technology equipment for large hospitals, 

private sector clinics, and major diagnostic centers. European and Japanese companies have proven to be 

the primary competition for U.S. exports in the Mercosur market.3 Companies such as Siemens (Germany) 

and Philips (the Netherlands) have maintained assembly facilities in Brazil and Argentina since the 1960s; 

Seimens has had a particularly commanding presence in the Argentine market for more than 25 years.4 In 

recent years, Japanese companies, especially Toshiba, have established a presence in the Mercosur market 

by supplying lower priced equipment and some medical devices that employ the latest in digital 

technology, such as computerized scanners and ultra-sound equipment.5 

The demand for imported medical devices and equipment in Mercosur will continue to expand as 

Argentina and Brazil implement programs to modernize, reform, and overhaul their health care systems, 

which will ultimately result in the privatization of many government-owned hospitals.6 Historically, 

Brazil's National Institute for Medical Assistance and Social Security (INAMB) was responsible for more 

than 70 percent of all medical equipment bought by the country's hospitals. By 1996, the market for 

medical devices and equipment reached more than $1.2 billion.7 Locally produced Argentine and 

Brazilian medical devices and equipment, intended primarily for domestic consumption, increased by 25 

percent during 1994-97. 

• Data for this industry sector have been compiled from official U.S. sources and the Inter-American 

Development Bank, Datalntal. The discrepancies between these two data sources are attributed to differences in 

collection methodology, item classification, and reporting origin and destination of the merchandise (c.i.f. vs. 

f.o.b.). Furthermore, there are no trade reconciling agreements between the United States and the Mercosur 

countries. 

38 
The Argentine market for 

medical devices and equipment grew by 

nearly 79 percent in 1993-97,8 to $755 

million, as estimated by the U.S. 

Department of State (table 18). 

Whereas local producers satisfy only a 

small percentage of Argentina's demand 

for sophisticated, high-tech equipment, 

foreign companies supply the bulk of 

these products through either imports or 

domestic assembly. In 1997, U.S. 

producers accounted for roughly 35 

percent of Argentina's estimated market, 

Table 18 

Argentina: Medical devices and equipment market 

Item 

Total market ....... . 

Local production .... . 

Import market ...... . 

Imports from U.S. . . 

Exports ........... . 1 Estimated. 

(Million dollars) 

1993 

422 

204 

262 

118 

44 

1994 

551 

216 

388 

212 

53 

Source: U.S. Department of State. 

1995 

602 

231 

429 

237 

58 

19961 

699 

242 

511 

241 

62 

47 percent of the total import market, and 65 percent of imports from non-Mercosur countries.9 

19971 

755 

260 

560 

265 

65 

Opportunities for new investment and additional sales were created after the government partially 

deregulated Argentina's union-managed health care system, thereby allowing employees to select their 

own health care plans. The Argentine Government also signed a Memorandum of Understanding with the 

World Bank in April 1995 pledging to totally deregulate its health care sector within 2 years. 10 

Privatization of government-owned hospitals and the aforementioned deregulation plan will encourage 

these facilities to invest large amounts of private sector capital in new machinery and equipment. In June 

1994, after the Argentine Government lifted its ban on imports of some types of used and refurbished 

health care equipment, a thriving market for these items was created. Since that time, U.S. companies have 

captured over 70 percent of the used equipment market. 11 

Declining import duties, the 

elimination of other import restrictions, 

and the need to improve the quality and 

availability of medical services have 

created a growing market for medical 

equipment in Brazil. Between 1993 and 

1997, the Brazilian market for medical 

devices and equipment grew by 34 

percent to an estimated $1.3 billion 

(table 19). 12 As in Argentina, imports 

. dominate the high-tech sectors in Brazil, 

accounting for 4 7 percent of the 

estimated value of the country's total 

Table 19 

Brazil: Medical devices and equipment market 

Item 

Total market ....... . 

Local production .... . 

Import market ...... . 

Imports from U.S. . . 

Exports ........... . 1 Estimated . 

(Million dollars) 

1993 

955 

650 

450 

180 

145 

1994 

990 

665 

470 

190 

145 

Source: U.S. Department of State. 

1995 

1,130 

750 

530 

225 

150 

19961 

1,233 

847 

540 

267 

154 

19971 

1,277 

957 

551 

315 

231 

market in 1997. Imports, particularly products made in the United States, enjoy a reputation for being of 

better quality and more technically sophisticated, user friendly, and dependable than those produced 

domestically. Brazilian production of low-tech devices was e_xpected to grow by 12 percent annually 

during 1996 and 1997. Medical equipment manufactured by Brazilian producers is targeted almost 

exclusively for domestic consumption, with 7 5 percent of such production consumed in-country in 1997. 13 

International organizations such as the World Bank and the Inter-American Development Bank 

have recently initiated a series of projects designed to assist Brazil and Argentina in improving their public 

health care systems. In June 1996, the World Bank and the Inter-American Development Bank provided 

$750 million for Brazil to expand and improve its public health care facilities. The project sets up an 

investment fund that will support facility rehabilitation and equipment purchases and improve management 

systems for the state-owned Unified Health System (Sistema Unicode Saude) hospital and ambulatory 

network. 14 

39 
These two international institutions have also provided Argentina with substantial financial 

support to restructure its health care facilities. The World Bank recently approved a $100 million loan to 

refurbish hospitals in the Buenos Aires area and is considering an additional $300 million loan to reform 

Argentina's health care and insurance system. 15 These programs will result in significant purchases of 

medical equipment, some of which is likely to be supplied by U.S. firms. 

MERCOSUR TRADE 

Whereas total intra-Mercosur imports of medical devices and equipment declined by 17 percent 

during 1993-96 (table 20), imports from non-member countries increased by 68 percent (table 21). The 

trend in intra-Mercosur iinports of medical devices and equipment has been the inverse of that seen with 

non-member imports. Thus, whatever growth has occurred in intra-Mercosur trade has been outpaced by 

imports from non-member countries. In 1996, products from non-member nations accounted for 99 

percent ofMercosur's total imports. The United States dominated non-member imports, accounting for. 

more than 3 7 percent of the total during 1996. 

Table 20 Table 21 

lntra-Mercosur medical devices and equipment Mercosur medical devices and equipment 

imports, 1993-96 imports from non-Mercosur partners, 1993-96 

{Million dollars2 {Million dollars2 

Count~ 1993 1994 1995 1996 Count~ 1993 1994 1995 1996 

Argentina 6.5 6.5 7.7 2.4 u.s ...... 179.3 207.7 260.6 308.0 

Brazil ....... 1.8 1.5 2.9 3.0 EU ....... 164.1 173.5 190.1 244.1 

Paraguay ... 1.2 2.7 1.9 2.5 Japan .... 93.9 96.6 99.9 135.3 

Uruguay .... 2.0 2.3 2.0 1,7 Others .... 49.5 73.8 80.2 129.5 

Total ..... 11.5 13.0 14.5 9.6 Total .. '. 486.8 551.6 630.8 816.9 

Source: Inter-American Development Bank, Datalntal. Source: Inter-American Development Bank, Datalntal. 

FACTORS AFFECTING U.S. MARKET ACCESS 

Recent market-oriented reforms by the Mercosur members--spurred by the need to improve the 

quality and availability of medical services--have transformed the market for medical devices and 

equipment into one of the region's most important sectors. However, imports from non-Mercosur member 

countries continue to face a variety of barriers, such as moderately high taxes and tariffs designed to 

protect sensitive sectors, discriminatory government procuremedt policies, local content requirements, and 

disparities between Mercosur and foreign regulations and standards for government safety and quality 

(table 22). 

As recently as 1990, Brazil's medical device and equipment market was partially closed to imports 

in order to protect local producers from foreign competition until they could restructure and become 

internationally competitive. 16 Since Brazilian manufacturers were unsuccessful in their attempts to 

produce the sophisticated equipment required by hospitals, the market was opened and duty rates were 

lowered substantially for imports that do not compete with locally produced equipment. 17 Duty rates for 

medical devices and equipment exported to Brazil and Argentina from non-member nations range from 

zero to 22 percent, and are substantially higher than those of the United States, the EU, and Japan. 

However, Brazil has exempted medical equipment from the CET until 2001. The Mercosur FTA provides 

for duty-free trade in medical devices among members as long as more than SO percent of a product's cost 

is produced locally in one of the four countries. 18 

40 
Table 22 

Specific import and investment policies for medical devices and equipment, 1997 

Argentina 

• Tariff:1 0 to 22 percent. 

• Statistical fee:2 3 percent. 

Brazil 

• Tariff:3 0 to 18 percent. 

• Lacie of intellectual property rights. 

• Import licenses required. 

• Discriminatory government procurement practices. 

Paraguay 

• Tariff: 1 16 percent. 

Uruguay 

• Tariff: 1 16 percent. 

Mercosur-wide policies 

• Medical equipment is subject to a CET rate of 16 percent. 

• Medical equipment is exempted by Brazil from the CET until Jan. 1, 2001. 

• 50 percent local content requirement for duty-free trade within Mercosur. 

• Disparities between Mercosur and foreign regulations and standards for government safety and quality. 1 Argentina, Paraguay, and Uruguay implemented a 3 percentage point increase in most CETs in early 1998. 2 In January 1998, Argentina reduced the statistical fee to 0.5 percent. 3 Refers to tariffs applied throughout most of 1997. In November, Brazil increased CETs by 3 percentage points. 

Sources: U.S. Department of Commerce, U.S. Department of State, and Embassies of Argentina, Brazil, Paraguay, and 

Uruguay. 

Although notable progress has been made in the elimination of nontariff barriers, imports continue 

to face hurdles. For example, Resolution 225 mandates compulsory product registration and approval by 

the Ministries of Health, as well as the establishment of on-premises quality control laboratories for quality 

and performance testing on medical devices. 19 Some producers have alleged that this testing is duplicative 

and unnecessary. Another resolution (266) recently proposed in the Argentine Congress would exempt the 

United States and 18 other industrialized countries from such requirements, since they are deemed to have 

well-established manufacturing and product standards at home. 

U.S. EXPORTS AND INVESTMENT FLOWS TO MERCOSUR 

The Mercosur agreement has encouraged many U.S. medical device and equipment companies to 

change the way they do business in Latin America. Before its implementation, many U.S. companies 

focused primarily on Brazil and Argentina, while other Latin American markets were often considered 

solely as secondary markets.20 With the elimination of tariffs and most nontariff barriers among member 

nations, many large U.S. companies have adopted a region-wide focus and are now in the process of 

establishing a local presence in the other Mercosur countries in order to more effectively serve the whole 

region.21 Currently, however, exports to each country must satisfy the standards, testing, and conformity 

requirements of all four member nations. Although the harmonization of rules under the Mercosur 

agreement would decrease conformity assessment costs, reduce time needed to reach a market, and prevent 

delays in delivery within Mercosur, such an effort has not yet been undertaken. 

U.S. and other foreign suppliers of medical devices and equipment to the Mercosur market expect 

to benefit from recent national programs designed to extend health care coverage to all citizens and to 

rejuvenate the public health-care sectors in Brazil and Argentina.22 These and other measures have 

attracted significant foreign capital to the region for new machinery and equipment at the same time that 

former government-owned medical facilities have been forced to modernize.23 

41 
The consumption ofU.S.-origin 

medical devices and equipment within the 

Mercosur region increased by 86 percent 

during 1993-97 (table 23). ,U.S. exports 

are expected to grow by 7 percent 

annually over the next 5 years as U.S. 

medical equipment producers shift more 

of their focus from traditional mature 

markets to the developing world.24 The 

Mercosur market for medical devices and 

equipment, while still relatively small in 

dollar terms, is growing two to four times 

faster than markets in the United States, 

Table 23 

U.S. exports of medical devices and equipment to 

Mercosur members, 1993-97 

(Million dollars) 

Country 1993 1994 1995 1996 1997 

Brazil............ 128.7 126.9 203.0 224.8 262.8 

Argentina . . . . . . . . 60.8 88.9 64.7 67.3 89.2 

Paraguay . . . . . . . . 2.2 . 2.9 6.0 5.0 5.2 

Uruguay . . . . . . . . . 10.9 13.1 17.1 13.7 18.9 

Total Mercosur... 202.6 231.8 290.8 310.8 376.1 

Source: Official statistics of the U.S. Department of Commerce. 

Western Europe, and other industrialized countries.25 Even though Mercosur's demand for U.S.-made 

devices has increased significantly, in 1997, U.S. trade with the region accounted for only 3.3 percent of 

the value of all U.S. exports of medical devices and equipment. 

In recent years, major U.S. medical device producers have boosted their sales through exports and 

by expanding manufacturing operations overseas. Since 1992, exports have grown to account for almost 

33 percent of U.S. industry sales growth.26 Major U.S. equipment manufacturers have maintained 

assembly operations, subsidiaries, and distribution networks in Brazil and Argentina since the 1960s. 

Baxter International, for example, earns nearly 75 percent of its revenues outside the United States. 

Becton Dickinson and St. Jude Medical have been active in the Mercosur market for more than 40 years, 

supplying higher end products from the United States and locally produced lower end products.27 

Similarly, GE Medical Systems, a subsidiary of General Electric Co. (U.S.), announced in 1995 that it 

would increase its investment in Brazil by constructing an X-ray tube recharging plant in Sao Paulo.28 

OUTLOOK 

U.S. medical device and equipment manufacturers are cautiously optimistic about their future in 

the Mercosur region. Many believe that they are well situated to take advantage of the vast growth 

potential and dynamism of the market. The inability of domestic industries to provide customers with 

sophisticated high-technology equipment will likely continue to drive demand for products manufactured 

by long-established, local subsidiaries of U.S. companies and for imports from the United States, Europe, 

and Japan.29 As a result, U.S. companies such as Becton Dickinson, Johnson & Johnson, Medtronic, and 

3M have substantially increased their investments in Mercosur countries, with Brazil serving as the 

principal market area for near-term investments.30 

Endnotes 

1. U.S. Department of Commerce, The Medical Equipment Sector in Brazil, National Trade Data Bank, Market 

Research Reports, 1996, Stat-USA database, found at Internet address http://www.stat-usa.gov, retrieved Apr. 17, 

1997. . 

2. Ibid. 

3. Mark B. Rosenberg, "Benign Neglect," Latin Trade, Feb. 1997, p. 96. 

4. U.S. Department of Commerce, Medical Equipment and Services, Aug. 26, 1996, National Trade Data Bank, 

Market Research Reports, Stat-USA database, found at Internet address http://www.stat-usa.gov, retrieved Apr. 14, 

1997. 

5. U.S. Department of Commerce, Brazil Health Technology Sector, found at Internet address http://www.ita. 

doc.gov, retrieved Apr. 11, 1997. . 

6. U.S. Department of Commerce, The Medical Equipment Sector in Brazil, National Trade Data Base, Market 

Research Reports, Aug. 26, 1996. 

42 
7. Health Industry Manufacturers Association, The 1997 Global Medical Technology Update, The Challenges 

Facing U.S. Industry and Policy Markers, Washington, DC, 1997, p. 6. 

8. U.S. Department of Commerce, Best Prospects for U.S. Exports to Argentina, National Trade Data Base, Country 

Commercial Guides, Aug. 26, 1996, Stat-USA database, found at Internet address http://www.stat-usagov, retrieved 

Apr. 11, 1997. 

9. Health Industry Manufacturers Association, 1996 HIMA Emerging Market Report, Washington, DC, 1996, pp. 

11-25. 

IO. U.S. Department of State telegram, "Argentina Economic Trends," message reference No. 01057, prepared by 

U.S. Embassy, Buenos Aires, Feb. 27, 1997. 

11. Used and refurbished imports are required to meet the International Standards Organiz.ation (ISO) 9000 

standards. U.S. Department of Commerce, Argentina Health Technology Sector, found at Internet address 

ftp://www.ita.doc.gov, retrieved Apr. 12, 1997. 

12. U.S. Department of Commerce, The Medical Equipment Sector in Brazil, National Trade Data Base, Market 

Research Reports, 1996, Stat-USA database, found at Internet address http://www.stat-usa.gov, retrieved Apr. 11, 

1997 .. 

13. Ibid. 

14. "$750 Million Project to Improve Health Care to the Poor in Brazil," The World Bank Group, Press Release No. 

96/65LAC, June 21, 1996. 

15. Health Industry Manufacturers Association, 1996, HIMA Emerging Market Report, Washington, DC, 1996. 

16. USITC staff conversations with officials of Becton Dickinson Industries, Cirugicas Ltda., Sao Paulo, Brazil, 

Mar. 11, 1997. 

17. Health Industry Manufacturers Association, 1996, HIMA Emerging Market Report, Washington, DC, 1996. 

18. The Mercosur agreement is discussed in greater detail in appendix A. 

19. USITC staff conversation with Mr. Ronaldo Pitta, Treasury Secretary, St. Jude Medical Brazil Ltda., Sao Paulo, 

Brazil, Apr. 2, 1997. 

20. USITC staff conversations with officials of Becton Dickinson Industries, Cirugicas Ltd., Sao Paulo, Brazil, Mar. 

11, 1997. 

21. Ibid. 

22. Health Industry Manufacturers Association, 1996, HIMA Emerging Market Report, Washington, DC, 1996. 

23. USITC staff conversations with officials of Becton Dickinson Industries, Cirugicas Ltd., Sao Paulo, Brazil, Mar. 

11, 1997. 

24. Ian Katz, "Brazil's Big Chance," U.S.!Latin Trade, June 1995, p. 54 and U.S. Department of Commerce, 

Expanding Opportunities for Industry, National Trade Data Bank, Stat-USA database, found at Internet address 

http://www.stat-usa.gov, retrieved Apr. 13, 1997. 

25. Richard Lawrence, "Good vital signs," The Journal of Commerce, Mar. 17, 1997, p. IA. 

26. Ibid. 

27. USITC staff conversations with officials of Becton Dickinson Industries, Cirugicas Ltd., Sao Paulo, Brazil, Mar. 

11, 1997. 

28. GE also allocated $10 million for the construction of a special customs stock replacement warehouse. 

"Examples of recent foreign investment in Brazil," Investing, Licensing & Trading Conditions Abroad, The 

Economist Intelligence Unit, Jan. 1, 1995. 

29. U.S. Department of Commerce, Expanding Opportl!nitiesfor Industry, National Trade Data Bank, found at 

Internet address http://www.stat-usa.gov, retrieved Apr. 13, 1997. 

30. Ibid. 

43 
COMPUTER EQUIPMENT AND PARTS• 

IDGHLIGHTS 

a US. exports to Mercosur grew by more than 150 percent during 1993-97. 

a The CET does not apply to computer equipment until 2006. 

a Brazilian tariffs on computer equipment reach as high as 32 percent. 

a Intra-Mercosur imports increased by 131 percent to $62 million during 1993-96, 

whereas imports from non-member countries increased by 58 percent to $2.2 

billion. 

a Imports from the United States are likely to face increasing competition from 

domestic production. 

INDUSTRY STRUCTURE AND RECENT MARKET DEVELOPMENTS 

Table 24 

Computer companies operating in Mercosur 

The Mercosur region provides a fast 

growing and dynamic market for computers, with 

Brazil its most promising and largest market. 1 

Brazil ranked fourth in the world in 1996 with 2.7 

percent share of the global market.2 Computer 

equipment multinationals from around the world 

operate in Brazil, with far fewer in Argentina 

(table 24). The largest domestic firm is Brazil's 

ltautec-Philco, established in 1982. IBM, with 19 

percent of the market, is the Brazilian sales leader, 

followed by Compaq (18 percent), ltautec-Philco 

(15 percent), and Microtec (6 percent).3 

Company Argentina Brazil 

As expected, Brazil accounts for the vast 

majority of all computers sold within Mercosur. 

Sales there increased by 88 percent to $2.7 billion 

during 1992-96. Prospects for Brazil's computer 

market remain bright, with sales projected to reach 

$3 .1 billion by the end of 1997. Overall, personal 

computers (PCs) account for the majority of sales 

within the region with $1. 7 billion in Brazil and 

$574 million in Argentina in 1996. Since 1992, 

Hewlett-Packard . . . . . . . X 

Compaq . . . . . . . . . . . . . X 

Acer ............... . 

NEC .... : . ......... . 

IBM ................. X 

Apple . . . . . . . . . . . . . . . X 

Edisa-HP ........... . 

Sid Informatica ....... . 

Procomp............. X 

ABC Bull ............ . 

Digital Equipment ..... . 

CPM ............... . 

Dismac ............. . 

Sisco ............... . 

ltautec-Philco ........ . 

UIS ................ . 

Unisys .............. . 

Fujitsu .............. . 

Epson . . . . . . . . . . . . . . . X 

Packard Bell ......... . 

Source: Informatica Exame, July 1995. 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

"IJlcludes Harmonized Tariff System (HTS) headings 8471 (automatic data processing machines and units 

thereof) and 8473 (parts and accessories suitable for use solely or principally with machines of headings 8469-

8472). Data for this industry sector have been compiled from official U.S. sources and the Inter-American 

Development Bank, Data/ntal. The discrepancies between these two data sources are attributed to differences in 

collection methodology, item classification, and reporting origin and destination of the merchandise (c.i.f. vs. 

f.o.b.). Furthermore, there are no trade reconciling agreements between the United States and the Mercosur 

countries. 

44 
Brazil's PC base grew by 207 percent to an estimated 3.8 million units in 1996, whereas Argentina's 

expanded 140 percent to an estimated 862,000 units.4 By comparison, the European Union PC base, an 

important export market for U.S. manufacturers, grew by 40 percent to an estimated 52.4 million units 

during the same period. A relative steep decline in prices in the Brazilian market has made low-end PCs 

more accessible to the average buyer, as evidenced by the growth in the small office-home office (SOHO) 

market.s This segment of the market represented approximately 50 percent of Brazil's PC sales in 1995 

and is expected to grow even further.6 

Until 1992, Brazil operated 

under the "market reserve" system 

(see text box) whereby the imported 

and domestic products of 

multinational producers had only 

limited access to the Brazilian market 

while local producers enjoyed a virtual 

monopoly. This policy excluded 

foreign suppliers that did not have a 

domestic presence in the Brazilian PC 

industry. It also led to significant 

levels of smuggled goods (at times 

estimated to be 50 percent of the 

country's installed PC base), 

contributing to the abolition of the 

market reserve system in 1992.7 

As a result of the market 

reserve, many of Brazil's computer 

manufacturers formed domestic joint 

ventures with foreign manufacturers in 

Brazil's "market reserve" 

Until 1992, Brazil's hardware and software markets functioned 

under the "market reserve" system, which strongly limited access to 

imported products. The market reserve was justified by the 

military's regard for the computer sector as strategically critical and 

by their prevailing market ideology of import substitution, which 

included efforts to foster local infant industries. The market reserve 

for computers was administered in the 1970s by federal agencies 

known as CAPRE and SEI. CAPRE oversaw bidding by foreign 

minicomputer firms for limited entrance to the Brazilian market, 

judging foreign minicomputer vendors' s bids primarily on the basis 

of the amount of technology and equity transferred to Brazil. Under 

SEI, and later Depin, the sale of PCs was limited to local 

manufacturers, except where it could be demonstrated, on a case-bycase basis, that no local technology was capable of meeting the end 

user's needs. 

Source: U.S. Department of Commerce, International Trade 

Administration. 

the early 1990's, especially with those who could offer them the latest in computer technology. NEC 

(Japan), for example, formed a joint venture assembly operation with Scopus Technologia to produce 

imported PCs and monitors in a semi-knocked-down state.8 Also, UIS, Brazil's third-leading 

manufacturer, has signed technology exchange partnerships with Daewoo (Korea).9 

In 1996, PCs dominated 

Brazil's computer hardware 

market, growing from 33 percent 

of total computer sales in 1992 to 

more than 62 percent in 1996 

(table 25). In 1997, PC sales were 

expected to account for 69 percent 

of total hardware sales, with sales 

reaching $2.2 billion. Growth in 

this market has been driven by 

falling prices, greater product 

Table 25 

Brazilian computer sales, 1992-961 

Item 1992 1993 1994 1995 19962 

Total sales (million dollars} . . . 1,440 1,677 1,893 2,278 2, 707 

PC sales (million dollars} . . . . 470 700 920 1,270 1,680 

Installed base (1,000 units) .. 1,240 1,600 2,200 2,830 3,810 1 Includes sales of PCs, workstations, servers, and mainframes. 2 Estimates. 

Source: FENASOFT, lnformfJtica No Brasil: Fatos E Numeros, 1996. 

availability, increased use of the Internet, a rise in real income, and investments by corporations in 

customized networking technology (i.e. LAN and W AN). 10 PCs and workstations remain the fastest 

growing segment of the computer market whereas mainframes and other multi-use systems have been 

displaced in large part by PC-based client server networks. 11 

45 
The Argentine computer market has been one of the world's fastest growing import markets. 12 

Whereas overall imports from non-Mercosur member countries grew by 32 percent during 1993-96, 

imports from the United States grew by 42 percent. 13 A price war initiated by locally based subsidiaries of 

foreign multinationals has enabled the following brand name suppliers to recoup the market share 

prevfously lost to local clones: IBM, Hewlett-Packard, Compaq, Acer (Taiwan), and Epson (Japan). These 

companies accounted for 60 percent of Argentina's market for PCs in 1996. 14 

In Argentina, demand for 

mainframes and related peripherals 

is expected to remain strong as 

recently privatized firms continue 

to upgrade their obsolete 

equipment. PC sales tripled 

between 1992 and 1996, while the 

installed base (PCs in use) more 

than doubled (table 26). Sales of 

personal computers are expected to 

continue their strong growth as the 

Table 26 

Argentina: Personal computer sales and installation, 1992-96 

Item 1992 1993 1994 1995 19961 

Sales (million dollars} . . . . . . . 184 283 428 454 574 

Unit price (dollars} ......... 1,736 1,630 1,783 1,794 1,761 

Installed base (1,000 units) 359 458 574 709 862 1 Estimates. 

Source: FENASOFT 

use of client server networks expands. 15 

U.S. exports also dominate the computer markets of both Paraguay and Uruguay. 16 The relatively 

small size of these markets, however, discourages direct investment by major multinational computer 

equipment firms. 17 

MERCOSUR TRADE 

During 1993-96, intra-bloc imports of computer equipment increased by 131 percent to $62 

million (table 27). In the same period, Mercosur imports from non-members increased by 58 percent to 

$2.2 billion (table 28) and exports of U.S. computer equipment and parts to Mercosur countries rose by 30 

percent to $1.3 billion. 

Table27 

lntra-Mercosur imports of computers and parts, 

1993-96 

(Million dollars) 

Count!}'. 1993 1994 1995 1996 

Argentina 10.7 11.2 20.8 50.3 

Brazil ......... 8.2 5.3 10.3 1.5 

Paraguay ..... 2.5 3.0 3.4 4.0 

Uruguay ...... 5.4 3.2 4.6 6.1 

Total ......... 26.8 22.7 39.1 61.9 

Source: Inter-American Development Bank, Datalntal. 

Table 28 

Mercosur imports of computers and parts from 

non-Mercosur partners, 1993-96 

(Million dollars) 

Source 1993 1994 1995 1996 

United States 999.0 1,062.4 1,387.0 1,295.9 

EU........... 155.1 160.9 164.4 213.8 

Japan . . . . . . . . 101.0 193.2 99.1 169.6 

Others........ 164.3 461.7 365.2 562.4 

Total ....... 1,419.4 1,878.2 2,015.7 2,241.7 

Source: Inter-American Development Bank, Datalntal. 

In 1996, Argentina accounted for 81 percent of total intra-Mercosur imports, most of which came 

from Brazil, followed by Uruguay (10 percent), Paraguay (7 percent), and Brazil (2 percent). The 

Brazilian industry's dominant market position in the bloc is due in part to that country's market size and 

associated economies of scale in production. The use of high tariffs and other nontariff measures by the 

Brazilian government has successfully induced foreign multinationals to establish local production 

facilities rather than relying exclusively on imports to serve these markets. 18 

46 
As with other products, the Brazilian computer market has become very important to Argentina's 

equipment and parts manufacturers. Though its exports have increased, Argentina still lags significantly 

behind the United States, the EU, and Japan as a supplier to the Brazilian market. 19 The share of Argentine 

exports is the result of investment by Brazilian-based manufacturers, who have recently begun to establish 

production facilities in Argentina. For example, Procomp of Brazil opened its first Argentine 

manufacturing subsidiary in 1996.20 

FACTORS AFFECTING U.S. MARKET ACCESS 

Although many of the trade barriers placed 

on imports by the Mercosur countries have been 

terminated or eased, Brazilian producers of computer equipment continue to receive protection from 

foreign competition (table 29). Restrictions remain 

despite the phase-out of the "market reserve" 

system in 1992, which lifted a longstanding ban on 

the importation and independent manufacture of 

foreign-made computers and peripheral equipment. 

Computers are one example of how the Mercosur 

agreement will result in higher external tariffs for 

some members; Argentina, Paraguay, and Uruguay 

have already increased some tariffs from the level 

of prevailing national rates to that ofMercosur's 16 

percent CET. All countries will meet the CET by 

2006. 

Brazil has developed the most significant 

computer industry within Mercosur, particularly 

PCs, behind high protective tariffs. Since 1990, 

Brazil has unilaterally lowered its duties on PCs 

from 105 percent to 32 percent. In negotiations 

regarding the CET, Brazil insisted that its nascent 

industry continue to be protected from import 

competition until it becomes competitive on an 

Table 29 

Specific import and investment policies for 

computer equipment and parts, 1997 

Argentina 

• Tariff:1 Oto 22 percent. 

• Statistical ·fee:2 3 percent. 

Brazil 

• T ariff:3 0 to 32 percent. 

• Equity partnership limitations. 

• Incentive-based performance requirements. 

• Government procurement preferences. 

• Computers are exempted from the CET by 

Brazil until 2006. 

Paraguay 

• Tariff:1 0 to 16 percent. 

Uruguay 

• Tariff:1 0 to 16 percent. 

Mercosur-wide policies 

• CET rate: 16 percent. 1 Most computer parts and equipment were exempted 

from the 3 percent CET increase in early 1998. 2 In January 1998, the statistical fee was reduced to 0.5 

percent. 3 Refers to tariffs applied throughout most of 1997. In 

November, Brazil increased CETs by 3 percentage points. 

Sources: U.S. Department of Commerce and Embassies 

of Argentina, Brazil, and Uruguay. 

international level.21 However, the Brazilian Ministry of Science and Technology announced in February 

1997 that Brazil would lower its duties to the CET rate more quickly than initially expected. 22 Brazil's 

high tariffs and other charges have driven the cost of imported computers up to more than 180 percent of 

their home market price.23 

In addition, Brazilian firms are eligible for preferential treatment in government procurement and 

have access to fiscal benefits and tax reductions that discriminate against U.S. exporters without a local 

presence.24 Bidders that meet one or more of the preferential treatment criteria are allowed up to a 

12-percent price differential compared with other bidders.· Local manufacturers that meet Brazil's strict 

Basic Production Process guidelines are also eligible for significant tax relief. Accordingly, the majority of 

computers sold in Brazil, particularly PCs, are manufactured locally (except for high-end PCs and laptops 

that have yet to be produced in Brazil). Local producers also benefit from government incentive programs 

·Decree No. 1070 (1994) regulates government procurement of informatics and telecommunications goods and 

services. The decree requires federal and state entities to give preference to domestically produced computer goods 

based on a complex price/technology matrix. 

47 
such as a reduction in the IPI tax• on computers manufactured in Brazil and generous exemptions and 

discounts from local and state taxes. 25 

U.S. EXPORTS AND INVESTMENT FLOWS TO MERCOSUR 

Prior to the termination of the informatics "market reserve" system in the early 1990s, many 

foreign-based multinational computer manufacturers entered into joint ventures, distribution agreements, 

and assembly operations with Brazilian firms in order to produce locally and avoid import restrictions that 

were imposed on foreign producers.26 Nevertheless, since 1993, imports have captured an increasing share 

of the Brazilian market, currently accounting for more than 50 percent. Subsequently, both imports and 

domestic competition from foreign-based computer manufacturers have forced Brazilian "home-grown" 

PC producers to improve the quality of their equipment and lower their prices by 25 to 32 percent.27 

U.S. exports of computer equipment 

and parts to the Mercosur region more than 

doubled during 1993-97 and are expected to 

continue their vigorous growth over the next 

5 years (table 30). Although this amount 

accounted for less than 5 percent of the value 

of U.S. exports of such products during 1996, 

the United States was the dominant supplier 

of computer equipment and parts to the 

region, with the latter making up about 5 5 

percent of the total. Mercosur import data 

indicates that the United States accounted for 

Table 30 

U.S. exports of computer equipment and parts to 

Mercosur members, 1993-97 

(Million dollars) 

Country 1993 1994 1995 1996 1997 

Argentina . . . . . . . . 382 510 398 476 575 

Brazil . . . . . . . . . . . . 558 779 1,053 1,395 1, 765 

Paraguay . . . . . . . . 134 247 306 372 348 

Uruguay . . . . . . . . . 25 26 41 53 82 

Total Mercosur .. 1,099 1,562 1,798 2,296 2,770 

Source: Official statistics of the U.S. Department of Commerce · · 

58 percent of the bloc's total non-member imports during 1996. 

U.S. producers also compete in the Mercosur market thiough local assembly operations, joint 

ventures, and distribution agreements. Firms such as Hewlett-Packard (HP), Packard Bell, and Compaq 

qualify as local producers since they now have production facilities in member countries. For example, 

throughout the 1990's, HP has invested in a Sao Paulo-based joint venture, Edisa Informatica. In 1993, the 

company paid $59 million to pay down Edisa's debt,28 and in late 1995 spent $10 million on a new 

production line for .its HP9000 minicomputers.29 In January 1996, HP announced that it had bought out its 

joint venture partner, Iochpe-Maxion, and that the facility would operate as a subsidiary, Edisa HewlettPackard S.A.30 

Compaq, the world's largest maker of PCs, opened a $430 million facility in early 1995 that is 

capable of producing 400,000 PCs annually.31 It also announced plans to invest an additional $40 million 

in its Brazilian operations during 1997. Other U.S. companies such as IBM, Apple, NCR, and Digital 

Equipment have entered into joint production ventures with Brazilian businesses in order to qualify as 

domestic producers. 32 

As these companies add more production within the bloc, many of their subsidiaries will 

eventually compete with U.S. exports and displace them in the long term.33 For example, IBM Argentina 

has announced that it may procure some of its equipment from Brazil rather than importing it from the 

United States.34 The region's high tariffs and other restrictions will continue to place U.S. exports at a 

distinct price disadvantage while favoring Brazilian-based producers. Consequently, U.S. exports may 

·Brazil's Industrial Products sales tax (IPI) is levied on most domestic and imported manufactured products. 

The IPI tax is assessed on the sum of the c.i.f. value plus the import duty. 

48 
decline as Brazilian producers expand their presence within Mercosur to take advantage of a tariff-based 

price differential.J5 

OUTLOOK 

As computer equipment markets reach maturity in developed nations, the importance ofU.S.-

based manufacturers penetrating new markets, such as Mercosur, will increase. Latin America as a whole 

contains one of the world's fastest growing regional computer markets (albeit from a small base) and much 

of the continent's growth potential comes from Mercosur economies, especially Brazil.J6 Printer 

manufacturer Xerox views Brazil as an "immense untapped market."J7 Apple, though a relatively small 

player, expects Brazil's PC market to grow by 20 percent annually through 2000, and the rest of Latin 

America by 25 percent.Js 

Joint venture and local assembly arrangements involving U.S. and other foreign computer 

manufacturers have successfully narrowed the price gap between local clones and international brands 

such as Apple, Acer, Compaq, Hewlett-Packard, and IBM, which have relied heavily on name recognition, 

quality, and support service to justify the higher prices of their products.J9 In the near future, market 

growth will continue to be driven by lower prices, the development ofMercosur's computer culture, the 

increasing use of the Internet, and the proliferation of new product technologies. 40 

Imports of computer equipment and parts/subassemblies not manufactured in the bloc are expected 

to expand further. Imports of lower end products (PCs, printers, modems, etc.) are expected to decline as 

manufacturing capacity within the bloc increases and as international producers use their Mercosur 

production facilities as export platforms to the rest of the region.41 

Endnotes 

I. Mabel Corrales, "The HP Way," U.S./Latin Trade, Oct. 1995, p. 27, and Fenasoft, Feiras Comerciais LIDA, 

Informatica no Brasil: Fatos e Numeros, Ecii~ao No. l, 1996. 

2. Elsevier, Yearbook of World Electronics Data, 1996. 

3. Fenasoft, Feiras Comerciais LIDA, Informatica no Brasil: Fatos e Numeros, Edi~ao No. 1, 1996. Digital 

Equipment Corporation (U.S.) holds a 45-percent stake in Microtec. 

4. Fenasoft, Informatica no Brasil: .... 

5. Ibid. 

6. "O avanco dos megabytes," Mercosul, Revista de Negocios, No. 49, July 1996, pp. 4-8. 

7. U.S. Department of Commerce, Brazil - Brazil Lowers Import Duties, National Trade Data Bank, Country 

Commercial Guides, Aug. 1996, Stat-USA Database, found at Internet address http://www.stat-usa.gov, retrieved 

Dec. 12, 1996 and "O avanco dos megabytes," Mercosul, Revista de Negocios, No. 49, July 1996, pp. 6-8. 

8. "Examples of Foreign Investment," Investing & Trading Conditions Abroad, Jan. 1, 1993, The Economist 

Intelligence Unit. 

9. "Brazil: UIS to set up $25 million plant in Manaus," Gazeta Mercantil, Apr. 18, 1997, p. C-2, reported by 

NEWSEDGE, Apr. 23, 1997. 

10. U.S. Department of Commerce, Brazil- Software Development Tools, National Trade Data Bank, Market 

Research Reports, Aug. 1996, Stat-USA database, found at Internet address http://www.stat-usa.gov, retrieved Feb. 

19, 1997. 

11. Scott Norvell and Ian Katz, "lnfotech Revolution," U.S./Latin Trade, May 1995, p. 73. 

12. U.S. Department of Commerce, Argentina: Economic Trends and Outlook, National Trade Data Bank, Country 

Commercial Guides, 1995, Stat-USA Database, found at Internet address http://www.stat-usa.gov, retrieved Jan. 13, 

1997. 

13. Inter-American Development Bank, Data/ntal. 

14. "Computers," Business Latin America, Mar. 24, 1997, p. 7. 

15. U.S. Department of Commerce, Argentina - Networking Software, National Trade Data Bank, Market Research 

Reports, Aug. 1996, Stat-USA Database, found at Internet address http://www.stat-usa.gov, retrieved Dec. 20, 1996. 

49 
16. Inter-American Development Bank, Dataintal. 

17. U.S. Department of State telegram, "1997 Trade Act Report: Uruguay," message reference No. 002817, 

prepared by U.S. Embassy, Asunci6n, Nov. 1996. 

18. Charles W. Thurston, "The Trade Boom," Latin Trade, Dec. 1996, p. 40. 

19. Inter-American Development Bank, Data/ntal. 

20. "Banking on Computers," Latin American Regional Reports - Brazil, The Economist Intelligence Unit, Mar. 

1997, p. 2. 

21. "Mercosur: Give and Take," Business Latin America, The Economist Intelligence Unit, Sept. 19, 1994. 

22. "Edginess in relations with U.S.," Latin American Regional Reports-Brazil, The Economist Intelligence Unit, 

Mar. 11, 1997, p. 3, 

23. "Tariffs & Import Taxes," Investing, Licensing & Trading Conditions Abroad, Latin Business International, 

The Economist Intelligence Unit, Jan. l, 1997. 

24. U.S. Department of State telegram, "1997 Trade Act Report- Brazil," message reference No. 05322, prepared 

by U.S. Embassy, Brasilia, Nov. 1996. 

25. "Brazil: High-Tech Bedfellows," Business Latin America, Apr. 25, 1994, The Economist Intelligence Unit. 

26. Ibid. 

27. U.S. Department of Commerce, "Software Distribution Channels," National Trade Data Banlc, Market Research 

Reports, 1996, Stat-USA Database, found at Internet address http://www.stat-usa.gov, retrieved Nov. 13, 1996. 

28. "United States Management Alerts," Business Latin America, The Economist Intelligence Unit, Dec. 6, 1993. 

29. "Company Watch in Latin America," Business Latin America, The Economist Intelligence Unit, Nov. 6, 1995. 

30. Hewlett-Packard, press release, "HP Acquires Majority Shares ofEdisa Hewlett-Packard," Jan. 31, 1996. 

31. Ian Katz, "Brazil's Big Chance," U.S./Latin Trade, June 1995, p. 53. 

32. James Purdy Levaux, "Giving Direct PC Business A Brazilian Beat," Investor's Business Daily, Feb. 19, 1997. 

33. "O avanco dos megabytes," Mercosul, Revista de Negocios, No. 49, July 1996, pp. 4-8. 

34. U.S. Department of State telegram, "Making the Case for Fast Track--Argentina," message reference No. 

001470, prepared by U.S. Embassy, Buenos Aires, Mar. 1997. 

35. Ibid. 

36. Scott Norvell and Ian Katz, "lnfotech Revolution," U.S./Latin Trade, May 1995, p. 73. 

37. Xerox do Brasil president Carlos Salles, as quoted in Katz, "Brazil's Big Chance," p. 53. 

38. Stan Runyon, "Brazil: Sleeping giant set to surge," Emerging Markets: Annual Report, C:MP Publications, Inc., 

Apr. 29, 1996, issue: 899. 

39. Latin America Computer Systems Market Review and Forecast 1992-1997, International Data Corporation, Feb. 

1994. 

40. "O avanco dos megabytes," Mercosul, Revista de Negocios, No.49, July 1996, pp. 4-8. 

41. Charles W. Thurston, "The Trade Boom," Latin Trade, Dec. 1996, p. 40, and David Pilling and Tim Coone, 

"The Computer Revolution," Latin Trade, Mar. 1996, p. 68. 

50 
TELECOMMUNICATIONS EQUIPMENT• 

IDGHLIGHTS 

o Between 1993 and 1997 U.S. exports to Mercosur nations more than quadrupled to $894 

million. 

o Trends in trade between the United States and Mercosur countries have not changed 

significantly since commencement of the customs union in 1995. 

o Temporary tariff standardization for some products at 20 percent, above the agreed CET 

of 16 percent, required significant increases in tariffs for Argentina, Paraguay, and 

Uruguay. 

o lntra-Mercosur trade in telecommunications equipment grew 93 percent to $29 million 

during 1993-96, whereas imports from non-member countries increased by 138 percent to 

$1.8 billion. 

o In the long term, demand for U.S. exports may decline as offehore investment in 

subsidiaries increases local production capabilities. 

INDUSTRY STRUCTURE AND RECENT MARKET DEVELOPMENTS 

The Mercosur countries have an average annual 

growth in phone lines of more than 10 percent. However, 

outside the large urban areas basic phone service remains 

underdeveloped by industrialized country standards. 1 The 

potential consumer base of the Mercosur bloc is reflected in 

the contrast between the number of phone lines per 100 people 

("teledensity") in the United States (62.8) and the average for 

Mercosur countries (11.6) (table 31).2 Recognizing that the 

development of a modem telecommunications system is 

essential for active participation in the global economy, bloc 

members have initiated a series of privatization and 

deregulation programs aimed at attracting investments that 

would help modernize their telecommunications sector. Prior 

to the adoption of these programs, tariffs and nontariff barriers 

guaranteed local producers a virtual monopoly in Argentine 

Table 31 

NAFT A and Mercosur teledensity by 

country,1995 

Country 

Phone lines 

per 100 people 

Argentina . . . . . . . . . . . . . . . . 16.0 

Brazil.................... 7.5 

Paraguay . . . . . . . . . . . . . . . . 3.4 

Uruguay . . . . . . . . . . . . . . . . . 20.0 

Average for Mercosur . . . . . 11.6 

United States . . . . . . . . . . . . . 62.8 

Canada . . . . . . . . . . . . . . . . . . 59.0 

Mexico . . . . . . . . . . . . . . . . . . 9.6 

Source: International Telecommunication 

Union, 1997. 

and Brazilian markets. In response, the leading foreign-based multinationals established local production 

facilities and since the opening of markets, import competition has increased from the United States, 

Europe, and Japan. 3 

• This section primarily examines wired and wireless telecommunications equipment contained within 

Harmonized System classifications 8517 (wired equipment), 8520.20 (answering machines) and 8525.20 (wireless 

equipment). Subheading 8525.20 also includes some radio-wave transmitting/receiving equipment that is not 

typically considered telecommunications equipment. Data for this industry are compiled from the U.S. Dept. of 

Commerce and the Inter-American Development Bank, Datalntal. Discrepancies exist between these sources of 

data for imports from the United States and official U.S. export data. 

51 
The introduction of new technologies such as cellular phones, digital specialized mobile radio 

(SMR) networks, satellites, and cable service will enable bloc members to leap frog several generations of 

development and move directly to products that supplement or compete with existing, inferior systems. 

Brazil dominates the production of telecommunications equipment in Latin America and, historically, is 

the only country in the region capable of undertaking research and development activities. The pent-up 

demand for new, more efficient and cheaper equipment and services makes the Brazilian market the most 

attractive for investment and exports. 

Paraguay and Uruguay do not manufacture telecommunications equipment. Historically, these two 

nations have relied exclusively on imports for their equipment needs.4 Paraguay reportedly has the most 

antiquated telecommunications infrastructure within the Mercosur region, which, along with low 

teledensity, tends to discourage foreign investment. However, ANTELCO, Paraguay's state-owned 

monopoly service provider, signed a $106 million agreement with Siemens in 1995 to modernize its phone 

system.5 The Paraguayan Government supports updating the country's telecommunications infrastructure 

and has since pledged $120 million to expand and modernize this sector.6 

Uruguay boasts the highest telephone density in Latin America with approximately 20 phone lines 

per 100 inhabitants, and its telecommunications infrastructure is reasonably adequate to meet future 

demands.7 Nonetheless, its monopoly service provider, ANTEL, has initiated a program to modernize 

services and plans to invest $150 million annually over the next 5 years to improve its cellular telephone 

and wireless local loop capabilities. 8 Siemens, Ericsson, NEC do Brasil, and Motorola have all won 

contracts to supply ANTEL with new telecommunications equipment for both wired and wireless systems.9 

Table 32 

The production of telecommunications equipment in Brazil increased 

irregularly during 1993-96 to approximately $1.3 billion, or by 8 percent (table 

32). Brazilian manufacturers are expected 

to strengthen their position in the region as 

the market expands in response to 

deregulation and privatization efforts 

within Mercosur, including the pending 

Brazilian production of telecommunications equipment · 

(Million dollars) 

Year 1993 1994 1995 1996 

Production 1,200 1,300 1,261 1,299 

Source: Yearbook of World Electronics Data 1994, 1996. 

Table 33 privatization of Brazil's state monopoly service providers, 

TELEBRAS and EMBRATEL. 10 

Foreign companies with local production facilities 

play a very important role in Brazil (table 33). Ericsson 

(Sweden), for example, has been active in the Brazilian 

market since the 1920s and, with a 41-percent market 

share, dominates the country's market for wire line 

switching equipment. 11 Ericsson's cellular terminals and 

switching equipment production facility in Brazil is Latin 

America's largest. In 1996-97, the company began 

construction of a new $25 million cell phone facility12 and 

invested $11 million to complete a facility to manufacture 

cellular base stations in early 1998. 13 Ericsson commands 

approximately 35 percent of Brazil's cellular telephone 

market, making it second only to NEC, which holds 43 

percent. Ericsson also signed a series of contracts, valued 

at approximately $1.2 billion, with TELEBRAS and three 

of its state-level subsidiaries, to purchase a range of 

Mercosur foreign telecommunication 

equipment suppliers 

Company Argentina Brazil 

Alcatel (France) x x 

Lucent (U.S.) ..... x x 

Ericsson {Sweden) . x x 

ltaltel {Italy) ....... x 

Moddata {U.S.)1 ••• x 

Motorola (U.S.) .... x x 

Movicom {U.S.)1 ••• x 

N.Telecom (Canada) x 

NEC {Japan) ...... x x 

Qualcomm (U.S.) .. x 

Samsung(Korea) .. x 

Siemens (Germany) x x 

T elettra (Ital~) ..... x x 1 U.S. joint venture. 

Source: Compiled by USITC staff. 

52 
equipment including both analog and digital Advanced Mobile Phone Service wireless communications 

systems and phone switching equipment. 14 Other foreign companies recently investing in Brazil include 

Samsung, which spent $500 million to $1 billion on manufacturing facilities for cellular equipment; and 

NEC do Brasil, which operates a $15 million plant to produce a variety of cellular and paging products. 15 

In 1996, the Brazilian Government instituted a program--Programa de Recupera~ao e Amplia~ao 

do Sistema de Telecomunica~oes e do Sistema Postal (P ASTE)--to promote competition and thereby 

expand service, modernize its network, and attract investment. Initially, PASTE focused on liberalizing 

cellular markets by auctioning B-band licenses and privatizing cellular operations ofTELEBRAS, which 

created demand for new equipment. Also enacted in 1996, the National Plan for Investments allocated $16 

billion for telecommunications infrastructure projects during 1997-98. 16 The Government initially 

anticipated a mix of private and government investment of just over $75 billion to help increase the 

country's teledensity to 24 percent by 2003, 17 but has revised its estimate to more than $90 billion.18 

In April 1997, the privatization of Brazil's telecommunications service sector began with 

government acceptance of bids on ten cellular phone concessions, which were awarded in September of 

that year. To stimulate domestic production of cellular equipment, Brazil temporarily suspended import 

duties on 100 components of cellular radio base stations and telephone switching equipment. The 

Government hoped that this measure would aide domestic producers while inducing foreign manufacturers 

to establish production facilities in Brazil. 19 The agreement is also moving to fully privatize TELEBRAS, 

its 26 subsidiaries, and the long distance carrier EMBRA TEL, which is likely to lead to additional 

investment in modem equipment.20 The privatization process for TELEBRAS began on October 23, 1997 

and is scheduled to be completed in late June 1998.21 

Seven firms, all subsidiaries of foreign-based multinationals, account for 85 percent of 

telecommunications equipment production in Argentina: These firms are involved in the sales and 

production of cellular phone, switching and transmission equipment. Argentina is almost self-sufficient in 

the production of telephone sets and most switching equipment, such as branch exchanges, that are 

assembled locally using imported components. Foreign-based companies such as Siemens (Germany) 

dominate Argentina's equipment market through a combination of imports and local production. 

The Argentine Government is trying to improve the nation's telecommunications network. During 

1995-96, Argentina's phone monopolies Telecom Argentina STET and Telefonica de Argentina signed 

loan agreements with the Export-Import Bank of Japan for $50 million and $80 million, respectively, to 

modernize and expand the country's phone network.22 

MERCOSUR MEMBER TRADE 

During 1993-96, intra-Mercosur trade for telecommunications equipment remained low compared 

with imports from non-member countries. Whereas intra-Mercosur trade increased by 93 percent to $29 

million (table 34), imports from non-members more than doubled to more than $1.8 billion (table 35).23 As 

tariffs and trade barriers among member countries have fallen and their markets have grown, Brazilian 

manufacturers, including multinationals, have begun to exploit opportunities within Mercosur. Since 

Mercosur's inception, Brazil has been the bloc's top exporter, accounting for 79 percent of all intra-bloc 

exports in 1996, followed by Argentina (20 percent), and Uruguay (l percent). 

• The entire Argentine industry is comprised of about 40 companies. 

53 
Table34 

lntra-Mercosur telecommunications equipment 

imports, 1993-96 

{ 1, 000 dollars} 

Count!}'. 1993 1994 1995 1996 

Argentina 13,274 15,425 6,376 4,383 

Brazil ...... 485 592 1,921 1,808 

Paraguay .. 744 433 556 8,505 

Uruguay ... 808 16,363 4,148 14,n9 

Total .... 15,311 32,813 13,001 . 291475 

Source: Inter-American Development Bank, Datalntal. 

Table35 

Mercosur telecommunication equipment imports 

from non-Mercosur partners 

{1,000 dollars} 

Count!}'. 1993 1994 1995 1996 

United 

States. 250,396 449,122 500,944 687,312 

EU ...... 275,089 370,896 506,592 634,840 

Japan . . . 146,821 224,513 163,947 164,403 

Others ... 91,529 162,178 192,120 331,558 

Total . . 7631

835 11206?09 1,3631603 1,8181113 

Source: Inter-American Development Bank, Datalntal. 

FACTORS AFFECTING U.S. MARKET ACCESS 

The demand for telecommunications equipment began to expand in· the early 1990s as most 

Mercosur member countries opened their markets to import competition, embraced new technologies, and 

committed to either partial or total privatization of state-owned telecommunications service monopolies. 

Member governments and private investors are expected to commit billions of dollars to expand and 

modernize their telecommunications systems over the next 10 years. 

Progress toward greater market access 

remains mixed despite recent and ongoing 

sector reform in Argentina and Brazil. Foreign 

suppliers attempting to participate in 

Mercosur' s telecommunications equipment 

market still encounter barriers in the form of 

high tariffs, import restrictions, and 

government purchasing policies (table 36). 

Because telecommunications equipment was 

included on Brazil's national list of 

exceptions, the other bloc members acceded to 

the country's insistence that its tariffs for most 

telecommunications equipment be raised to 20 

percent, which will fall to the common 

· external tariff (CET) of 16 percent by 2006. 

Prior to 1991, however, other bloc members 

had lowered or eliminated their tariffs on these 

products.24 

The Brazilian Government has 

traditionally sheltered its domestic industries 

with "buy Brazilian" policies and high tariffs. 

Official procurement practices require foreign 

companies to have a majority Brazilian partner 

in order to receive preferential treatment in 

bidding processes. For example, in 1993, the 

Government passed a decree mandating that 

state agencies and parastatals give priority to 

Brazilian-developed informatics and 

automation goods.25 Telecommunications 

Table 36 

Specific import and investment policies, 1997 

Argentina 

• Tariff:1 0 to 28 percent. 

• Fees: Three percent statistical fee for certain 

products.2 

• Three percent anticipated profits tax on all imported 

consumer goods, except for goods directly imported 

by user. 

Brazil 

• Tariff:3 Oto 30 percent. 

• Local content requirements. 

• Limit on foreign equity participation. 

• Government procurement practices are not 

transparent and tend to discriminate against foreign 

companies. 

Paraguay 

• Tariff:1 Oto 20 percent. 

• Trademark infringement and counterfeiting. 

Uruguay 

• Tariff: 1 0 to 20 percent. 

• Limit on foreign equity participation. 

Mercosur-wide policies 

• CET rate of 16 percent by 2006. 1 Most telecommunications equipment was exempted from 

the 3 percentage point CET increase implemented in early 

1998. 2 In January 1998, the statistical fee was reduced to 0.5 

percent. 3 Refers to tariffs applied throughout most of 1997. In 

November, Brazil increased CETs by 3 percentage points. 

Source: U. S. Department of Commerce and Embassies of 

Argentina and Uruguay. 

54 
. equipment covered by this decree includes public telephones, teleprinters, switching equipment for 

telephony and telegraphy, and radio transceivers. In addition, since 1994 several non-price factors, such as 

domestic content requirements, are considered in the bidding process. Bidders that meet the criteria for 

preferential treatment (Brazilian-owned company, Brazilian technology or products, and minimum local 

value-added content) are allowed up to a 12 percent price advantage over other bidders.26 To avoid such 

barriers, leading U.S. and other international manufacturers of telecommunications equipment established 

local production facilities, formed joint ventures and consortiums, and entered into distribution agreements 

in order to qualify as local producers. "Loopholes" also exist that allow duty-free imports of network 

equipment for private use, which in tum permit businesses and residential groups to import and install a 

private network and terminal equipment that may be connected to the public telephone system. The 

Brazilan Government has also lowered or eliminated tariffs on imported telecommunications equipment 

that cannot be substituted with domestic products and has temporarily eliminated duties on components for 

cellular radio base stations and telephone switching equipment. 

U.S. EXPORTS AND INVESTMENT FLOWS TO MERCOSUR 

Imports have not been significant 

in the Argentine and Brazilian markets 

due to government restrictions and the 

pivotal role played by local subsidiaries 

of foreign producers.27 Nonetheless, the 

United States has traditionally been one 

ofMercosur's leading suppliers; between 

1993-97, the value of U.S. exports of 

telecommunication equipment increased 

by almost 350 percent to $894 million 

(table 37). U.S. producers have been 

able to take advantage of the process of 

Table 37 

U.S. exports of telecommunications equipment, 1993-97 

(1,000 dollars) 

Country 1993 1994 1995 1996 1997 

Brazil...... 84,297 162,347 266,938 332,560 534,127 

Argentina . . 92,710 252,493 121,259 121,299 302,261 

Paraguay . . 20,400 28,463 42,015 44,347 41,256 

Uruguay . . . 2.409 7.065 6.907 21.588 16.047 

Total.... 199,815 450,369 437,120 519,794 894,051 

Source: Official statistics of the U.S. Department of Commerce. 

deregulation and privatization in the Argentine and Brazilian telecommunications sectors, as well as the 

pent-up demand for modem, more efficient, and cheaper equipment.28 However, the Mercosur market 

accounted for only 5 percent of the value of total U.S. exports of these products during 1997. 

The opening of Brazilian and Argentinian telecommunications markets to significant foreign 

participation has increased demand for associated equipment.29 A number of U.S. producers have secured 

contracts with Mercosur's state-owned telecommunications monopolies. Lucent Technologies, for 

example, has won contracts with Brazil's state phone monopoly service provider, TELEBRAS, to supply a 

variety of switching and radio equipment. As government control of the telecommunications markets has 

waned, U.S. and other foreign firms have made substantial direct investments in their manufacturing 

facilities in Argentina and Brazil since 1990. In October 1996, Motorola, one of the world's leading 

cellular telephone and pager manufacturers, invested $20 million to begin assembly of cellular phones in 

Brazil (from foreign parts) for both the domestic and Mercosur markets.Jo In November 1997, the 

company began production of cellular infrastructure equipment in Brazil in response to winning more than 

$300 million of business from Brazilian cellular system operators.JI In the spring of 1997, Lucent revealed 

plans to construct a $40 million manufacturing facility in Brazil to supply digital and analog cellular 

equipment to markets in Brazil, Argentina, Uruguay, and Chile.J2 Qualcomm, a leading U.S. manufacturer 

of cellular phone infrastructure equipment, also announced plans to construct a $50 million factory for the 

production of code division multiple access equipment in Brazil to serve the Mercosur market. 

55 
OUTLOOK 

Enhanced telecommunications services and an improved infrastructure will help the Mercosur 

economies to develop. However, infrastructure development will require large amounts of capital 

investment. While the prospects for growth in these countries' telecommunications markets are strong, the 

equipment market will not reach its greatest potential until state-owned monopolies are fully privatized. 

Mercosur' s high external tariffs and other restrictions will continue to place imports, regardless of source, 

at a disadvantage in relation to locally produced equipment.33 Still, the prospects for further growth in U.S. 

exports of telecommunications equipment and parts are good, since demand within the bloc for basic 

infrastructure should remain strong and barriers to imports will continue to be reduced. As privatization 

advances in Brazil, government purchasing polices and concessions that have placed imported equipment 

at a disadvantage will become less of a barrier. U.S. producers should benefit from being perceived as 

trend setters in telecommunications and for offering high quality and value.34 However, demand for 

imported products may decline in the long term (10 to 15 years) as the market matures and Mercosur 

domestic production increases. Certain U.S. exports may face additional competition as subsidiaries of 

U.S. companies develop their local production facilities as export platforms for Mercosur countries and the 

rest of Latin America. 

Endnotes 

l. Paula Green, "Latin America Plans Massive Telecom Investment," Journal of Commerce, June 10, 1996. 

2. Source: International Telecommunications Union. 

3. U.S. Department of Commerce, National Trade Data Bank, Argentina Telecom. Equip. and Services, Market 

Research Reports, Aug. 1996, Stat-USA Database, found at Internet address http://www.stat-usa.gov, retrieved Sept. 

8, 1997. 

4. Telephone conversation with Paraguayan embassy official, June 27, 1997. 

5. "Economic infrastructure: Transport & Communications-- Paraguay," Country Profiles, The Economist 

Intelligence Unit, Nov. 22, 1996. 

6. U.S. Department of State telegram, "1997 Trade Act Report for Paraguay," message reference No. 002817, 

prepared by U.S. Embassy, Asunci6n, Nov. 1996. 

7. Siemens, "Telecommunications in Latin America," Te/com Report International 19 (1996) No. 2, found at 

Internet address http://www.siemens.de/telecomreport/articles, retrieved Mar. 26, 1997. 

8. U.S. Department of State telegram, "1997 Trade Act Report: Argentina," message reference No. 006915, prepared 

by U.S. Embassy, Buenos Aires, Nov. 1996. 

9. "Ericsson Receives D-Amps Order to Expand Uruguay's Network," Ericsson Press Release, Sept. 3, 1996, found 

at Internet address http://www.ericsson.se, retrieved Oct. 8, 1997; Motorola, "Motorola continues to lead the industry 

in delivering cellular technology to Latin America," Motorola Press Release, June 10, 1996; Siemens, "Company 

tradition since 1957," Telecom Report International 19 (1996) No. 2, found at Internet address 

http://www.siemens.de/telecomreport/articles, retrieved Mar. 26, 1997. 

10. TELEBRAS controls 27 regional subsidiaries and EMBRATEL, Brazil's long distance carrier. 

11. "Ericsson Signs a Total ofUSD 150 Million Contracts," Ericsson Press Release, Apr. 2, 1997, found at Internet 

address http://www.ericsson, retrieved Apr. 28, 1997. 

12. Jonathan Wheatly, "Shape up in Brazil," 1996 Ericsson Connection, found at Internet address 

http://www.ericsson, retrieved Apr. 22, 1997. 

13. "Ericsson to start D-Amps wireless base station production in Brazil," Ericsson Press Release, Oct. 20, 1997. 

14. "Switching deal landed," Latin Trade, Mar. 1997, p. 21; "Ericsson Signs AMPS Expansion Contract in Brazil," 

Ericsson Press Release, June 27, 1997; "Ericsson Signs USD 150 Million Contracts in Brazil," Ericsson Press 

Release, Apr. 2, 1997; "Ericsson Signs Orders for USD 400 Million in Brazil," Ericsson Press Release, Mar. 18, 

1996; Ericsson Signs USD 385 Million AXE Contracts in Brazil, Ericsson Press Release, Dec. 1996, found at 

Internet address http://ericsson.se, retrieved Oct. 8, 1997. 

15. "Recent Foreign Investment in Brazi~" Licensing & Trading Conditions Abroad, Jan. l, 1997, The Economist 

Intelligence Unit; J.J. Gullish, "Brazil Ushers in Liberalization," Focus Brazilian-Trade Magazine, 1996; and 

Motorola Press Releases, Oct. 31, 1996 and Nov. 24 1997. 

56 
16. U.S. Department of State telegram, "Brazil: 1997 Country Report on Economic Policy and Trade Practices," 

message reference No. 0005322, prepared by U.S. Embassy, Brasilia, Nov. 1996. 

17. J.J. Gullish, "Brazil Ushers in Liberalization," Focus Brazilian-Trade Magazine, 1996, found at Internet address 

http://www.focustrade.com, retrieved Jan. 8, 1997. 

18. "Economic Infrastructure: Transport and Communications," Business Latin America, The Economist Intelligence 

Unit, Sept. 1, 1997. 

19. J.J. Gullish, "B-Band: Let It Begin ... ," The Brazilianist, found at Internet address http://www.brazilianist.com, 

retrieved Oct. 7, 1997. 

20. "Brazil to open bidding to private companies for cellular service," The Boston Globe, Apr. 6, 1997, found at 

Internet address http://www.1/096/Brazil, retrieved Apr. 28, 1997. 

21. J.J. Gullish, "Telebras Privatiz.ation," The Brazilianist, Autum 1997, found at Internet address 

http://www.brazilianist.com/ Autum 97/, retrieved May 13, 1998. 

22. "Loan Guarantee to Telecommunications Network Project in Argentina," The Export-Import Bank of Japan, 

Press Release NR96-36, Dec. 27, 1996, found at Internet address http://www.japanexim.go.jp, retrieved Apr. 28, 

1997. 

23. Because intra-Mercosur trade could only be generated at a 4 digit Harmonized Schedule heading level, intrabloc export and non-member import trade represent a somewhat broader group of products than were examined for 

U.S. exports to bloc members. 

24. U.S. Department of State telegram, "Tariffs Reduced to GAIT Binding Levels," message reference No. 002669, 

prepared by U.S. Embassy, Buenos Aires, May 5, 1995. 

25. U.S. Department of Commerce, National Trade Data Bank, Brazil: Leading Sectors for U.S. Exports & 

Investment, 1997, Country Commercial Guide, Stat-USA Database, found at Internet address http://www.statusa.gov, retrieved Oct. 7, 1997. 

26. U.S. Department of State telegram, "Brazil: 1997 Country Report on &onomic Policy and Trade Practices," 

message reference No. 0005322, prepared by U.S. Embassy, Brasilia, Nov. 1996. 

27. U.S. Department of Commerce, National Trade Data Bank, Argentina-Telecom. Equipment and Services, Market 

Research Reports, 1995, Stat-USA Database, found at Internet address http://www.stat-usa.gov, retrieved Jan. 21, 

1997. 

28. U.S. Department of Commerce, National Trade Data Bank, Argentina Telecom, Equip. And Services, Aug. 

1996, Stat-USA Database, found at Internet address http://www.stat-usa.gov, retrieved Apr. 16, 1997. 

29. James Hoo, "Telecommunications Business Opportunities in Brazil," Telecommunications, Aug.-1996, p. 57. 

30. "Brazil Ushers ... ," Focus Brazilian-Trade Magazine, 1996, and Motorola opens new cellular telephone plant in 

Brazil, Motorola Press Release, Oct. 31, 1996. 

31. "Motorola CIG to open new manufacturing facility in Brazil," Motorola Press Release, Nov. 24, 1997. 

32. "Lucent Completing Cellular Phone Factory," El Diario, Mar. 24, 1997, found at Internet address 

http://www.net.cVatamericas, retrieved Apr. 28, 1997. 

33. U.S. Department of State telegram, "Making the Case for Fast Track--Argentina," message reference No. 

001470, prepared by U.S. Embassy, Buenos Aires, Mar. 1997. 

34. USDOC, Argentina-Te/com .... 

57 

APPENDIX A 

THE MERCOSUR AGREEMENT 

Mercosur's Origins 

Mercosur was built upon a series of bilateral economic and trade agreements between Argentina 

and Brazil, South America's two largest economies. A 1986 agreement liberalized sectoral and bilateral 

trade in capital goods. The subsequent 1989 Treaty for Integration, Cooperation, and Development aimed 

to eliminate tariff and nontariff barriers to trade between the two countries by the year 2000. In July 1990, 

the Argentina-Brazil Integration and Economic Cooperation Program systematized and deepened existing 

commercial market-opening agreements; at the same time, the two countries advanced the liberalization 

timetable to 1995. Later in 1990, Paraguay and Uruguay expressed an interest in participating in this 

process. 1 

Mercosur was formally launched with the signing of the Treaty of Asuncion by Argentina, Brazil, 

Paraguay, and Uruguay on March 26, 1991.2 The treaty was subsequently ratified by all members and 

entered into force on November 29, 1991-initiating a transition period during which most tariffs on intraregional trade were to be eliminated and trade policies harmonized in preparation for the implementation of 

a regional customs union in 1995. The Treaty of Asuncion was formally amended by the Additional 

Protocol of the Treaty of Asuncion, known as the Protocol of Ouro Preto, signed on December 17, 1994. 

Among other things, the Protocol of Ouro Preto confers on Mercosur its status as a distinct international 

legal entity.3 Although they undertake a common trade policy vis-a-vis third countries and coordinate 

positions on economic and trade forums (such as negotiations towards a Free Trade Area of the Americas 

or FTAA), the Mercosur countries continue to be represented individually, rather than as a single entity, in 

the World Trade Organization (WT0).4 

Mercosur and NAFTA Compared 

Mercosur is the secondlargest economic integration group in 

the Western Hemisphere after the 

North American Free Trade 

Agreement (NAFTA) (table A-1). As 

initially implemented, Mercosur is 

generally less comprehensive than 

NAFTA,5 although its long-term 

objective --creation of a common 

market-ultimately could make it the 

more far-reaching agreement. A 

Table A-1 

Economic Indicators: Mercosur and NAFTA, 1996 

Item Mercosur 

Population (millions) . . . . . . . . . . . . . . . . . . . . . 207 

GDP (billion 1990 U.S. dollars) . . . . . . . . . . . . . 667 

GDP per capita (1990 U.S. dollars) . . . . . . . . . 3,225 

Real GDP growth rate (1991-96 average) . . . . 3.4 

NAFTA 

388 

7,117 

18,352 

2.1 

Source: Inter-American Development Bank, Principal Economic 

Indicators by Integration Group, 1991-96. 

common market would include the free movement of goods, services, and factors of production, such as 

capital and labor, within the Mercosur region. However, the Mercosur partners could not reach agreement 

on implementation of these measures in time for inclusion in the Protocol of Ouro Preto, and some 

issues-in particular the free movement of labor and free trade in banking and financial services-proved 

difficult to negotiate. 

Mercosur Within the ALADI Framework 

Regional trade agreements in Latin America such as Mercosur are not new, dating back to the 

1960 Latin American Free Trade Association, which in 1980 became the Latin American Integration 

A-1 
Association (LAIA, commonly referred to by the Spanish acronym ALADI). All Mercosur members are 

also members of ALADI, • which among other things, establishes a general preferential tariff 

scheme for trade among its members and common rules of origin. ALADI also provides the 

framework for numerous bilateral preferential trade arrangements among trading partners, with the goal of 

eventually achieving regional free trade.6 Even before Mercosur was launched, bilateral trade among its 

members was conducted on a preferential basis under ALADI, with tariffs as much as 40 percent below the 

ad valorem tariff generally applied to non-ALADI countries.7 

Mercosur was formally established as a sub-regional agreement within the ALADI legal 

framework and as such generally remains subject to the latter's broader trade rules.8 Mercosur is only open 

to the accession of other ALADI members. In tum, only Latin American countries are eligible for ALADI 

membership. Bolivia and Chile joined Mercosur as associate members in 1997 and the union signed 

framework liberalization agreements with the Andean Community and Central American Common Market 

in April 1998. The Andean Agreement calls for negotiations of a free trade area between the two regional 

groups by the year 2000 with an initial phase of liberalization to be completed by October 1998. Although 

the Treaty of Asuncion and the Protocol of Ouro Preto do not state that only democratic governments can 

be members of Mercosur, a political crisis in Paraguay forced approval of a resolution that established 

respect for democratic institutions as a sine-qua non condition for Mercosur countries. 

Intra-Regional Trade: The Mercosur Free Trade Area 

To create the Mercosur Free Trade Area (FTA), the Trade Liberalization Program set forth by the 

Treaty of Asuncion implemented "gradual, linear, and automatic" tariff reductions on intra-regional trade. 

Mercosur partners reduced their tariffs on intra-regional trade by 4 7 percent in applied rates immediately 

following the ratification of the Treaty of Asuncion in 1991. Afterwards, tariffs in each country were 

reduced by 7 percent once every 6 months during a transition period that began in July 1991 and ended on 

December 31, 1994. Remaining duties were eliminated at the end of the transition phase. 

Each Mercosur country is permitted to maintain a list of import-sensitive products for which intraregional tariffs temporarily remain in effect. These exceptions9 allow countries to continue to protect 

industries that require additional time to modernize in order to compete with other Mercosur industries. 10 

Argentina has 222 such sensitive items listed, including iron and steel products, textile, footwear, and 

paper products. Brazil has 29 items, primarily textile and rubber products. Paraguay has 436, and 

Uruguay 492; the lists of both countries include textile, food, and paper products. Tariffs on listed items 

may not be higher than the prevailing import duty, which is either the Common External Tariff (CET) or 

the corresponding tariff under the CET exception. 11 

Beginning January 1, 1995 (for Argentina and Brazil) and January 1, 1996 (for Paraguay and 

Uruguay), tariffs on import-sensitive items were scheduled to undergo automatic annual reductions, with 

the goal of tariff elimination by January 1, 1999 (for Argentina and Brazil) and January l, 2000 (for 

Paraguay and Uruguay). However, with prior notice, any Mercosur country _can restart the tariff reduction 

timetable at the original 1995 or 1996 tariff level. All remaining tariffs are scheduled to be phased out by 

January 1, 2006. 

The automotive and sugar industries are the only economic sectors not formally included in the 

FT A. Trade in automobiles (discussed in more detail in the sectoral analysis) is governed by separate 

• ALADI members are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, 

and Venezuela. 

A-2 
bilateral accords between Argentina and Brazil-the region's main producers-and both countries and 

Uruguay until January 1, 2000. 12 After that time, goods are to be traded freely, without tariffs, and subject 

to the CET. Intra-regional tariffs continue to be applied on sugar, although a commission has been 

established to develop a plan for free trade in the product by January 2001. 13 

External Trade: The Mercosur Common External Tariff 

Unlike NAFTA, the four Mercosur partners apply a common tariffregime to products imported 

into the region from all non-member countries. As finalized by the Protocol of Ouro Preto, the CET 

consists entirely of ad valorem rates charged on the c.i.f. value of imports, ranging from 0 to 20 percent. 

The CET became operative on January 1, 1995 as part of the Mercosur customs union and immediately 

covered approximately 88 percent of the region's combined tariff schedule. The remaining 12 percent was 

made up of products that had a longer phase-in timetable or were subject to special tariff regimes. 

The CET established an average ad valorem tariff of approximately 10-12 percent for products 

from nonmember countries entering the Mercosur region, which was on par with or lower than prevailing 

average applied tariffs before Mercosur was implemented. 14 Mercosur' s CET is characterized by tariff 

escalation. Raw materials face the lowest tariffs, averaging 6.3 percent in 1995. Tariffs on semimanufactures and goods used as inputs for other production average 9 .1 percent, while those on processed 

articles average 12.5 percent. Members are permitted to retain certain customs surtaxes on imports from 

non-members. 15 

Each member maintains a list of items subject to a longer CET phase-in. These exceptions are 

intended to facilitate national structural adjustment and to provide a transition period, during which sectors 

can improve their competitiveness. Argentina, Brazil, and Uruguay were initially permitted to list 300 

such items each; tariffs on these were to be phased out by the year 2000. Paraguay was permitted 399 

items, subject to CET convergence by 2006. To achieve convergence, the Mercosur partners periodically 

adjust tariffs downward (for tariffs above the CET) and upward (for tariffs below the CET) on these 

exceptions. In 1995, Mercosur countries reported to the WTO that Argentina, Brazil, Paraguay, and 

Uruguay would increase CET rates on 84, 123, 214, and 212 of their items, respectively, and decrease rates 

on 147, 52, 0, and 6 of their items, respectively. 16 

Mercosur members temporarily raised CETs by 3 percentage points in late 1997 and early 1998. 

Brazil implemented the increases first in November 1997, Argentina and Uruguay implemented in January 

1998, and Paraguay increased its CETs in March 1998. Each country excepted certain products from the 

increase, but these exceptions were not uniform across the member countries. The increases in these tariffs 

are scheduled to be in effect until December 31, 1999. 

Initially, Mercosur members were permitted only to eliminate items from the CET exceptions 

lists, not to add new items. 17 However, beginning in 1995, members were permitted to exempt a limited 

number of additional items for domestic macroeconomic stabilization, price control, and domestic supply 

purposes. For example, Brazil could exempt an additional 150 items as part of its macroeconomic 

stabilization program; these products included foods such as meat, cheese, rice, and barley; steel products; 

and consumer durables. Brazil raised its auto tariffs to 70 percent ad valorem. 18 In March 1997, Brazil's 

Central Bank imposed limits on import financing, although Mercosur partners were exempted from these 

restrictions starting in mid-April. 

Capital goods are subject to a special CET implementation timetable. Each country's tariffs are to 

converge to a common tariff of 14 percent ad valorem by 2001 (for Argentina and Brazil) or 2006 (for 

Paraguay and Uruguay). Tariffs on computer systems and telecommunications products are scheduled to 

A-3 
converge to a common rate of 16 percent ad valorem by 2006. Automobiles are excluded from the CET 

until 200019 and sugar until 2001.20 

Mercosur members are also permitted to diverge from the CET in the case of certain special tariff 

rates. These include rates below scheduled rates on particular investment goods to assure basic supplies of 

primary products and inputs for industries, temporary admission of goods to be re-exported, and duty-free 

entry of goods from free-trade zones. Such exceptions are to be consolidated into a common Mercosurwide regime, but a timetable has not been established.21 

Rules of Origin 

Mercosur's rules of origin are derived from (but are stricter than) those established under ALADI. 

Beginning January 1, 1995, products eligible for Mercosur treatment must be made entirely within the 

region or, ifmade ofnon-Mercosur components, generally must meet two requirements: (1) a change of 

tariff classification through processing or transformation within the region (certain products also must be 

made up of no more than 40 percent non-Mercosur components); and (2) ifthere is no substantial 

transformation (i.e. ifthe production process entails only assembly), foreign inputs can account for no 

more than 40 percent of the f.o.b. value of the good (versus 50 percent under ALADI). Products from 

Uruguay are permitted to contain up to 50 percent non-Mercosur components until 2001. Capital goods 

have stricter rules of origin; to qualify for Mercosur preferences, they must be made up of no more than 20 

percent non-Mercosur components.22 

Circulation of Goods within the Mercosur Zone 

In theory, products from non-member countries that enter a Mercosur member can circulate freely 

among the four partners and importers should be able to take it across internal frontiers by showing that the 

appropriate CET duty has been paid. However, several reports have documented bottlenecks and 

administrative difficulties that continue to impede the free circulation of goods within the Mercosur zone. 

An estimated 60 percent of the goods traded within the region are transported by trucks linking Sao Paulo, 

Brazil, and Buenos Aires, Argentina; carriers on this route apparently face problems of poor roads, border 

and customs clearance delays, and high freight charges.23 Moreover, goods from non-member countries 

that do not enter Mercosur under international transit arrangements (i.e. with a customs seal) and which 

pay the CET at the first port of entry could also be assessed duty at borders within the bloc.24 

Many nontariff barriers to intra-regional trade were eliminated or harmonized as of July 1995. A 

technical committee was created to follow up on the lifting of remaining restrictions.25 The harmonization 

of a number of technical standards under the Mercosur agreement has reportedly benefitted intra-regional 

trade and produced significant liberalization in the food, automotive, and telecommunications sectors.26 

However, Mercosur does not provide a regime for the reciprocal recognition of national technical 

standards.27 

Institutional Structure 

Mercosur is an international treaty subscribed to by member states. The bodies established under 

the treaty are inter-governmental rather than supra-national.28 Mercosur's policy-making body is the 

Common Market Council, made up of the four countries' economic and finance ministers. Measures 

passed by the Council have no force on their own, but must be implemented through corresponding 

national legislation. Unlike in the case of the European Union (EU), Mercosur bodies do not have the 

A-4 
power to oblige member states to comply with common market rules.29 However, member states have 

agreed to adopt measures that are necessary to assure (in their respective territories) compliance with 

decisions of the Common Market Council, the Common Market Group, and the Treaty Commission of 

Mercosur. Decisions are reached on the basis of consensus, with each country having one vote. 

Provisions to settle disputes concerning intra-regional trade are set forth in the 1991 Protocol of 

Brasilia, as modified by the Protocol of Ouro Preto. Complaints are initially heard by the Mercosur Trade 

Commission consultator and they may subsequently be sent to the Common Market Council or to an Ad 

Hoc Arbitration Panel.30 

The Treaty of Asuncion commits the Mercosur partners to engage in the coordination of their 

macroeconomic policies. To this end, the economic authorities of the four countries have had frequent 

contact at various levels, although no specific agreements on macroeconomic coordination have been 

made.31 Mercosur partners have also committed to maintaining a common commercial policy with nonmembers in matters such as the adopting of trade and investment agreeme~ts in the future.32 Common 

rules on anti-dumping have reportedly been drafted and are being brought into alignment with WTO 

rules.33 

Investment 

The Mercosur countries have a separate reciprocal investment promotion and protection 

agreement, the January 1994 Colonia Protocol. It guarantees nondiscriminatory treatment, prohibits both 

expropriation and performance criteria such as minimum exports or local inputs, bans restrictions on 

capital repatriation and profit remittances, and establishes mechanisms for handling govemment-togovemment and investor-government disputes. However, the Mercosur partners have invoked numerous 

sectoral exceptions to these regulations of unspecified duration, including two assessed in the industry 

profiles below (automobiles and power generation equipment).34 For example: 

• Argentina exempted border real estate, air transportation, shipbuilding, nuclear power 

generation, uranium mining, insurance, and fisheries; 

• Brazil exempted mineral exploration and exploitation, hydroelectric power, health care, 

telecommunications, rural property, banking and insurance, construction, and shipping; 

• Argentina and Brazil reserved the right to maintain performance requirements in the 

automobile sector; 

• Paraguay exempted border real estate, radio and television broadcasting, transportation, 

electricity, exploitation of hydrocarbons and strategic minerals, the importing and refining 

of petroleum products, and the postal service; and 

• Uruguay exempted electricity, hydrocarbons, petrochemical and plastics industries, 

nuclear energy, exploitation and extraction of strategic minerals, financial industries, rail 

transportation, telecommunications, radio and television, and journalism. 

The Mercosur countries have also signed a Protocol for the Promotion and Protection of 

Investments from Non-Mercosur Countries, which defines minimal acceptable standards for the reduction 

of national incentives to attract foreign investment. In addition, to encourage trade and investment in the 

region, Mercosur signed a framework treaty with the United States in June 1991, which established a 

consultative council.35 

A-5 
Areas not Covered by Mercosur 

The Treaty of Asuncion mentions trade in services, but does not set a schedule for liberalization in 

this area. In December 1996, Mercosur countries signed a protocol establishing guidelines for a common 

competition policy in the region. At a December 1997 meeting, Mercosur foreign and economy ministers 

agreed to launch negotiations to attain free trade in services in the coming decade. In the same month, 

Mercosur presidents approved guidelines to restrict imports of dumped products from non-Mercosur 

countries and also instructed the Mercosur Trade Commission to develop and implement a common 

antidumping regulation.36 An Ad Hoc Group on Services was scheduled to present a framework 

agreement on trade in services by late 1997.37 At their December 15, 1997 summit, the Presidents of the 

Mercosur member countries endorsed the progressive and eventually total liberalization of services over a 

10-year term. They also approved norms for common rules on antidumping measures and discussed full 

participation of Chile in the bloc's decisionmaking.38 Mercosur does not address government procurement; 

however, a Technical Committee has been created to investigate similar public policies that distort 

competitiveness.39 The Treaty of Asuncion does not address intellectual property rights (IPR) but an 

August 1995 protocol provides limited common terms ofreference on them.4

° Common Mercosur 

safeguard provisions are currently under discussion. 

Mercosur and the WTO 

Article XXIV of the 1994 General Agreement on Tariffs and Trade (GAIT) permits the formation 

of preferential regional trade arrangements such as Mercosur, notwithstanding the most-favored-nation 

(MFN) principle. This principle requires that trade concessions made to one WTO member be made to all 

members. However, preferential trade arrangements are permitted under certain circumstances in the 

belief that closer integration of regional economies can, on balance, support the goals of liberalizing 

economic and trade policies. Article XXIV requires that such agreements not harm the trade interests of 

other WTO members and that they cover "substantially all trade." Under the 1979 Decision on 

Differential and More Favorable Treatment, Reciprocity, and Fuller Participation of Developing Countries 

(also known as the "Enabling Clause"), preferential trade agreements involving only developing countries 

such as Mercosur members are exempt from the article XXIV requirements so long as they facilitate trade, 

do not create "undue difficulties" for other countries, and do not impose new trade barriers. 

A WTO working party has looked at Mercosur in light of the relevant provisions of article XXIV 

as well as the Enabling Clause, an examination that continues under the WTO Committee on Regional 

Trade Agreements.41 During a 1996 trade policy review of Brazil, the WTO noted that the country's 

adoption of the CET had raised some tariffs and led to the violation of a number of WTO tariff bindings. 

Brazil responded that ''the actual tariff rate under the Mercosur CET was lower than the pre-existing tariff 

averages," but that it "stood ready to engage in consultations with interested WTO members where WTO 

bindings had been exceeded and notified. "42 

Endnotes 

1. Embassy of Uruguay, "Mercosur and Its Origins," Jan. l, 1997, found at Internet address 

http://www.embassy.org/uruguay/econ/mercosur/mere-002.html. 

2. The original Span~h and Portuguese text and English translations and summaries of the treaties, protocols, 

resolutions, and decisions related to Mercosur are available through numerous print and Internet sources. Further 

source citations to these documents are therefore not provided. For a print version, see GAIT, "Southern Common 

Market (Mercosur) Agreement," U7379/Add.l, Jan. 18, 1994. For an electronic version, see Organization of 

American States (OAS), found at Internet address http://www.demon.co.uk/ltamaraty/msul.html. 

3. World Trade Organization (WTO), Trade Policy Review Division, Mercosur: Objectives and Achievements, Staff 

Working Paper TPRD-97-002, June 3, 1997, p. 4. 

A-6 
4. Ibid., p. 15. 

5. In addition to eliminating tariffs on most goods, NAFTA covers trade in services, provides for the protection of 

investment and intellectual property, applies rules to government procurement, contains highly developed systems 

for dispute settlement, and facilitates the movement of business people and professionals. NAFTA also liberalizes 

market access conditions in transportation, telecommunications, and financial services, and is accompanied by 

additional agreements concerning labor and the environment. For further discussion comparing the agreements with 

Mercosur, see OAS, Trade and Integration A"angements in the Americas: An Analytical Compendium, 

Washington, DC, 1997, p. 10. 

6. Ibid, p. 12. 

7. Under the ALADI preferential tariff regime, tariffs on trade among members are 8, 12, 20, 28, or 40 percent below 

applicable most-favored-nation rates, depending on the relative level of economic development of the trading 

partners. Inter-American Development Bank (IADB), El proceso de integracion en America Latina en 1990, 

Buenos Aires, 1991, p. 35. 

8. WTO, Mercosur: Objectives and Achievements, p. 4. 

9. Safeguard actions (in the form of quotas) were permitted during the transition phase, at the end of which, products 

subject to safeguard actions could be placed on countries' exemptions lists. OAS, Trade and Integration 

Arrangements in the Americas: An Analytical Compendium, Washington, DC, 1997, pp. 43 and 66. 

10. Martin Arocena, "Common Market of the Southern Cone (Mercosur)," in Integrating the Hemisphere: 

Perspectives from Latin America and the Caribbean, Ana Julia Jatar and Sidney Weintraub, eds., Washington, DC, 

Inter-American Dialogue, 1997, p. 156. 

11. Guillermo Mondino and Alejandro Reca, "Toward a Hemispheric Free Trade Area: The Case of Argentina," in 

Ibid., p. 184. 

12. Bloc members have signed separate bilateral agreements covering their trade in autos until January 1, 2000. 

13. Martin Arocena, "Common Market of the Southern Cone," in Ibid., p. 158. 

14. That is, in the cases of Argentina (with an average tariffrate of 12.2 percent in 1991), Brazil (with an average 

tariff of 21.2 percent in early 1992), and Uruguay (with an average tariff of 21.5 percent in late 1991 ); only 

Paraguay had pre-Mercosur tariffs lower than the prevailing CET levels. WTO, Mercosur: Objectives and 

Achievement, p. 8. This source cautions that this is a simple average MFN rate that does not take into account 

concessional tariff rates which, if included, could lower the average tariff rate even more. Estimates vary, and an 

independent estimate was not calculated by USITC staff. Unofficial estimates are as low as 10 percent. One source 

provides an estimate of 12 percent; see Roberto Bouzas, "Mercosur's Economic Agenda," in Integration and Trade, 

p. 65. Another source calculates an arithmetic average CET tariff of 11.14 percent with a standard deviation of 6.22 

percent; see Martin Arocena, "Common Market of the Southern Cone," in Integration in the Hemisphere: 

Perspectives from Latin America and the Caribbean, Ana Julia Jatar and Sidney Weintraub, eds., Washington, DC, 

Inter-American Dialogue, March 1997, p. 160. However, it is noted that the U.S. Embassy in Buenos Aires reports 

that Argentina's average tariffrate (no further clarification provided) before Mercosur was 10 percent, but rose to 12 

percent as a result of compliance with the CET; U.S. Department of State telegram, "1997 Trade Act Report: 

Argentina," message reference No. 06915, prepared by U.S. Embassy, Buenos Aires, Nov. 19, 1996. 

15. OAS, Trade and Integration Arrangements in the Americas, pp. 42 and 65. 

16. WTO, Mercosur: Objectives and Achievement, p. 7. 

17. Ibid. 

18. Ibid., p. 9. 

19. OAS, Trade and Integration A"angements in the Americas, pp. 142 and 146. 

20. Martin Arocena, "Common Market of the Southern Cone," in Integrating the Hemisphere: Perspectives from 

Latin America and the Caribbean, Ana Julia Jatar and Sidney Weintraub, eds., Washington, DC, Inter-American 

Dialogue, 1997, p. 158. 

21. WTO, Mercosur: Objectives and Achievements, p. 7. 

22. Ibid. 

23. Martin Arocena, "Common Market of the Southern Cone," p. 172. 

24. WTO, Mercosur: Objectives and Achievements, p. 14. 

25. OAS, Trade and Integration and A"angements in the Americas, p. 54. 

26. Arocena, "Common Market of the Southern Cone," p. 172. 

27. OAS, Trade and Integration and A"angements in the Americas, p. 54. 

28. WTO, Mercosur: Objectives and Achievements, p. 5. 

29. Ibid. 

30. OAS, Trade and Integration Arrangements in the Americas, pp. 19 and 31. 

A-7 
31. Ibid., p. 17. 

32. Ibid., p. 16. 

33. WTO, Mercosur: Objectives and Achievements, p. 15. 

34. OAS, Trade and Integration Arrangements in the Americas, p. 125. 

35. WTO, Mercosur: Objectives and Achievements, p. 17. 

36. U.S. Department of State, "Highlights ofMercosur Guidelines on Antidumping," message reference No. 372, 

prepared by U.S. Embassy, Montevideo, Feb. 21, 1998. 

37. Ibid., p. 19. 

38. Washington Trade Daily, Dec. 16, 1997. 

39. Ibid., p. 22. 

40. Ibid., p. 21. 

41. The Committee on Regional Trade Agreements was created by the WTO in February 1996. 

42. WTO, Trade Policy Review Body, "Review of Brazil's TPRB Evaluation," Press Release PRESSrrPRB/47, 

Nov. 1, 1996. 

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