The New World's Newest Trade Bloc

In the dusty pampas town of Puan, 300 miles southwest of Buenos Aires, Brazil's green-and-yellow flag flutters alongside Argentina's blue-and-white banner above the Maltaria Pampa factory. The thriving plant was built by Brazil's biggest brewer, with Argentine partners, to supply malt to its breweries. Around the factory, streets named Brasil, Argentina, America Latina, and Integracion celebrate a new spirit of regional togetherness. "The town is fanatical about the plant and what it has done for the local economy," says Argentine partner Carlos Rodriguez.

If all goes well, the successful Puan venture could be the wave of the future for a big chunk of Latin America. While the U.S. and Mexico negotiate a free-trade pact, the barriers already are dropping in the four-nation Southern Common Market, or Mercosur. The aim is to accelerate economic growth by linking Argentina, Brazil, Paraguay, and Uruguay in a market of nearly 190 million people, with a $427 billion total gross regional product and Latin America's biggest industrial base (map). Most of the expansion will be concentrated in South America's economic powerhouse--the 1,200-mile-long swath of industries, farms, and sprawling cities on the east coast from Sao Paulo to Buenos Aires.

`COLLECTIVE DISCIPLINE.' To cash in on the emerging regional market, many local and foreign companies are stepping up cross-border investments, often through joint ventures. Such U.S. multinationals as Monsanto, Ford, and Eastman Kodak are on the move (table). And as Mercosur spurs new investment, U.S. exporters, particularly of capital goods, are likely to benefit. U.S. exports to the region rose to $8.8 billion last year, up from $6.7 billion in 1990.

Opening up regional trade will strengthen Mercosur members' bargaining clout when the time comes to negotiate with the North American Free Trade Agreement (NAFTA) to create a hemispheric market. President Bush's Enterprise Initiative for the Americas set that goal. On May 28, the U.S. and Mercosur members will meet in Buenos Aires to discuss progress toward freeing trade and investment flows.

As barriers fall under Mercosur, the pact will also speed up the shift from state intervention to free markets throughout the hemisphere. Under the March, 1991, Asuncion Treaty, Mercosur members are cutting duties every six months, aiming to eliminate tariff barriers altogether by Dec. 31, 1994. To meet demands of the treaty, governments also have to continue deregulating their economies. "It's a form of regional collective discipline," says Carlos Floria of Argentina's University of San Andres.

Traditionally, the region has traded mostly with Europe and the U.S. But trade within Mercosur jumped to $4.9 billion in 1991, up from $2.2 billion in 1987, and another sharp rise is expected this year.

Signs of the new single market are everywhere. Brazil's largest auto-parts maker, Cofap, for example, bought a 50% stake in its Argentine counterpart to share distribution networks. Italy's Edizione Holding, which controls apparel maker Benetton, bought a 1-million acre Argentine sheep ranch to supply wool to Benetton factories in Brazil and Argentina. And Brazilian agribusiness giant Sadia Concordia Industria e Comercio branched out into Argentina three months ago. Sadia is selling processed chicken and turkey and buying Argentine wheat, meat, and plastic margarine containers. Executives say that sales to Argentina, negligible in the past, could soon reach 10% of Sadia's $280 million in annual worldwide exports.

IN FOCUS. Kodak do Brasil is setting up a distribution center near Sao Paulo. It will import Kodak products from around the world for sale in the region starting in 1993. Says director of corporate relations Gilberto Galan: "It will be much easier to work within this bloc than in other countries."

For other multinationals, a big benefit is slicing through the snarl of rules that have long hurt business in the region. "We've seen an easing of restrictions and red tape recently, particularly with Argentina," says James J. Groberg, senior vice-president of Volt Information Sciences Inc., a New York-based maker of digital typesetting systems. Volt is expanding its regional service center and printing plant in Montevideo, Uruguay.

There are still skeptics, both local and foreign, who doubt that Mercosur will meet its schedule for easing trade barriers--or that it will work at all. For Mercosur to succeed, Brazil will have to continue its painful moves to cut inflation, still 20% a month. And Mercosur faces tough decisions. Hundreds of products are temporarily exempted from tariff cuts, and lobbies are campaigning to keep the ax from falling on them.

Still, the market-opening is acquiring its own momentum. Even before Mercosur, Ford Motor Co. and Volkswagen started looking for ways to combine production in Brazil and Argentina. Their jointly owned company, Autolatina, has reduced its factories from 15 to 10 since 1987 and cut its work force by 37%. Last month, the auto giant opened a $230 million factory in Cordoba, Argentina, to supply transmissions for all Autolatina cars by mid-1993. "We think that in the long run, we can allocate investments better and not have to duplicate facilities," says Ivan Fonseca e Silva, an Autolatina vice-president.

NO RUSH. Even companies still tepid to Mercosur are trying to figure out its impact on their businesses, from marketing to factory location. During Latin America's protectionist era, U.S. companies scattered plants across the region to supply individual national markets. Now, consolidation is likely. Take the petrochemical industry. "It's efficient, but it was built during the years of almost absolute protectionism," says Monsanto do Brasil President Antonio Carlos Queiroz. Monsanto now has two plants making ingredients for its Roundup herbicide--one in Argentina, the other in Brazil. Says Queiroz: "One plant could supply both countries."

The trade pact could deliver some less obvious advantages to the multinationals, too. Many local companies are keen on striking joint ventures with foreign giants to help them meet rising competition as protection vanishes. Argentina's petrochemical industry will soon be staring at a Brazilian counterpart that's seven times larger. To achieve economies of scale, PASA Petroquimica, the No. 1 Argentine petrochemical producer, recently joined forces with Monsanto to make plastics using both companies' plants in Argentina. PASA is exploring similar links with two other companies. "By doing this," says PASA President Ruben Puentedura, "we'll be able to compete not only with Brazil but with the rest of the world."

Eventually, if Mercosur links up with NAFTA, the region's industries will face head-on competition from the U.S. Argentines are more enthusiastic than Brazilians about such an opening. "Mercosur and Bush's Initiative for the Americas are two faces of the same coin," says Felix Pena, Argentina's Mercosur delegate. But many Brazilian executives are in no rush to compete with the U.S. "Sooner or later, Brazil will be part of a big economic bloc," says Luiz Fernando Furlan, who heads a Mercosur committee at the Sao Paulo Federation of Industries. "But we'll have to have some experience first, and it's best if that is gained with neighboring countries."

Even so, some companies, such as Kodak, are already looking beyond Mercosur to the possibility of a vast continental trading area. Venezuela and Colombia have opened the border between them as part of a separate Andean trade pact that also includes Ecuador, Bolivia, and Peru. Although Chile has kept aloof from Mercosur so far, Chilean companies are buying dozens of Argentine businesses to gain a foothold in Mercosur. As the joint-venture malt factory on the Argentine pampas proclaims, free trade can bring lots of new riches.

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