Free Trade between Mercosur and India: New bonds, new boundaries Ranja Sengupta

A framework trade agreement was signed between India and the Mercosur trade block of Latin America on the 17th of June in Asuncion, Paraguay. This sets in motion the process that will ultimately establish a ‘Free Trade Area’ between the Indian market and Mercosur – the Southern Core Common Market in Latin America. “The signing of the framework agreement will pave the way to enter into Preferential Trade Agreement as the first step and ultimately to negotiate a Free Trade Agreement in long-term interest,” the official spokesman for the Indian Ministry of Commerce said in New Delhi, prior to the actual signing of the agreement. The protocol calls for “clear-cut, reliable and enduring ground rules to further the development of trade and investment”. “India is a significant point of reference for Mercosur, and not solely on account of the extraordinary growth that we have witnessed in some sectors, such as information technology and specialty chemicals,” the Paraguayan foreign minister said.

The procedure for a Preferential Trade Agreement (PTA) and a subsequent Free Trade Agreement (FTA) is likely to be concluded by August 2003. Tariff concessions on a reciprocal basis and the mutual reduction of Customs duties should follow soon after. For India, this offers major trading possibilities since Mercosur is the third largest common market in the world, after the US and the European Union. For Mercosur, which has been keen to develop markets outside the US and the EU, its largest trading associates outside of Latin America, this also poses exciting opportunities. India, with its second highest growth rate among the developing nations and a population of over one billion, can offer a market which is both large and possesses considerable buying power.

In the post WTO world, where preferential trade agreements are flourishing, this agreement has even more potential. It can help identify alternate and sometimes cheaper sources of goods between the trading partners. It can also therefore undermine the dominance of other trading partners. So this agreement can also be used as a tool for strategic reasons. It also helps to facilitate co-operation between the weaker developing countries and help the South build a joint economic perspective.

Mercosur, an integration of the economies of the four countries of Argentina, Brazil, Uruguay and Paraguay, was set up in 1991. It counts Bolivia and Chile as associates. The four member countries hold a population of almost 200 million (Brazil 150; Argentina 33; Paraguay 4,5 and Uruguay 3,1); a total area of 11863 square kilometres; a GNP of over 700 billion US dollars and foreign trade adds up to 120 billion US dollars. Intra-regional trade within Mercosur is being gradually liberalised. Tariff on 90% of intra-regional trade has been removed, with Common External Tariff (CET) ranging from 0-20%. Since the signing of the Asunción Treaty in 1991 inter regional trade has almost tripled from 5,1 billion US dollars to 14,38 billion in 1995, while trade with the rest of the world increased from 67 to 120 billion US dollars. Chile and Bolivia are associate members of MERCOSUR.

Initiatives for greater interaction between the Latin American economies and India had already begun. The Focus-LAC (Latin American Countries) programme, the most important from the Indian side, which is an integrated effort of Government of India, Indian Trade Promotion Organisation, Export Promotion Councils, Chambers of Commerce and Industry, and Institutions such as the Exim Bank and the Export Credit Guarantee Corporation of India (ECGC), had been drawn up in 2000 to enquire into greater trading possibilities in the Latin American region. Among the Mercosur countries, the programme concentrated on the giants, Brazil and Argentina.

Trade between the two countries had also been increasing in the recent past. Though at present, India accounts for only 0.83 per cent of total Mercosur imports, it has seen a drastic rise over the last two years. While in 1999-00, total exports from India to the four Mercosur countries were 317.60 million US$, it almost doubled to 626.49 US$ (2001-02) within the span of two years. Brazil and Argentina account for more than 95% of India’s exports to Mercosur. Uruguay and Paraguay have a negligible presence at the moment. India’s shares in Brazil and Argentina’s imports are also higher than the average, at 0.98 and 0.74 per cent (2001). Brazil has been the most dominant trading partner of the four, and India’s share in Brazilian imports has steadily increased from 0.27 % in 1994 to the present figure.

Exports from Mercosur, on the other hand, had started to increase a little earlier, since 1998. It reached 664 million US$ in 2000, and went onto to reach 765.74 million US$ in 2001-02. The share of Mercosur in India’s total imports is about 1.5 % in 2001-02 (excluding petroleum and products). Brazil and Argentina again display their dominance as India’s largest suppliers among the Mercosur bloc. Argentina supplied 57% of the total imports from Mercosur in 2001-02 while Brazil contributed 40.24 %. Argentina’s higher share is explained by the fact that it exported more than three times the amount of vegetable oil exported by Brazil in 2001-02. Vegetable Oil is India’s single largest import from Mercosur.

Exports from India to Mercosur: 
The problem of geographical proximity had always been a key issue for trade between India and South America. Transport has turned out to be expensive and time-consuming. This was a major determinant of trade in this case, since many studies have shown that geographical proximity remained an important reason behind the high intra-regional trade that Mercosur pursued with vigour (Bhattacharya and Pal, 2000). This obviously conferred significant advantage on member and neighbouring countries and imposed certain disadvantages for far away countries like India. The fact that very few direct shipping lines existed between India and the Mercosur countries compounded the problem.

Another major factor that encouraged intra-regional trade in Mercosur and discouraged trading possibilities outside was the regime of preferential tariffs within Mercosur and within the close geographical region around Mercosur. The differences between Mercosur’s common external tariff regime applicable to India and its intra-tariff regime in conjunction with the preferential tariffs for Andean Countries and Mercosur plus (including Chile and Bolivia) created major disincentives for Indian exporters since it gave competing South American countries substantial comparative advantages. Thiss compounded by the fact that many commodities in which India had export potential showed a strong interdependence between the Mercosur countries. So given the geographical proximity and tariff advantages, it was very difficult for India to gain sufficient market access for those commodities where the intra-regional dependence is more than 80 percent. Now, with the signing of the Free Trade Agreement becoming a possible reality, this disadvantage should get greatly reduced.

Another tariff related problem that imposed a major restriction on trade was the rate of Common External Tariffs (CET) imposed on other countries including India. These were marked by an escalation over time. Non-primary products, which are a major importable for the Mercosur countries, showed very high levels as well as a tendency to grow at a steep rate. A forecast by Laird (1996), which in reality has borne out, showed average rates of escalations in CET between 1995 and 2001-06 to be 6.3 % for goods in the first stage of processing, 9.1% for semi processed goods and a massive 12.5 % for fully processed products. Both machinery and transport equipment (Mercosur’s biggest importable) and chemicals including pharmaceuticals (only the second/third highest demand in all 4 countries), for which there is a big demand in the Mercosur countries, fall in these categories. Since these happen to be the biggest exports from India to Mercosur, the escalation in tariffs affected India significantly. A Free trade Agreement would also eliminate the significance of this escalation for India.

In addition to tariff barriers, India had also faced non-tariff measures (NTM) on its major exports to Mercosur. This effect was stronger in Brazil and Argentina, India’s major markets within Mercosur, which had a regime of higher NTMs in manufactured goods compared to Uruguay and Brazil. It is interesting to note that chemicals and industrial inputs, which form bulk of India’s exports to Brazil and Argentina, are the sectors that faced more than 80 percent incidence of NTMs in these two countries. Another major export, textiles, happens to be a highly protected sector in Argentina with about 100 percent NTM incidence, while the NTM incidence in Brazil on textiles is about 10 percent. The signing of the agreement should remove these barriers to a large extent.

However, a crucial factor has been working in favour of the Indian exporters in the recent period. After the crises in Argentina and Brazil, both these countries have been looking for cheaper sources of imports. This requirement, most developed countries like the US and the EU cannot fulfill. Much of this import demand is for cheap intermediate industrial goods, which India can offer at much cheaper rates compared to the West. Once trans-shipment problems over a long distance are better taken care of and tariff barriers go down, there would emerge a great potential for Indian exports in this segment.

The Agreement offers further opportunities for export by Indian traders of a wide range of products some of which are already exported to the region. Drugs, pharmaceuticals and chemicals dominate India’s exports to Mercosur at present and accounts for 27.8 per cent of the total exports to that region in 2000-01. Organic chemicals, followed by pharmaceuticals dominate trade within this sector. This category is followed by transport equipment, inorganic/organic/agro chemicals, plastic and linoleum products, dye intermediates, cotton yarn fabrics, readymade garments, cotton manmade yarn fabrics, electronic goods and coal tar. Diesel oil has been a recent addition to India’s export basket to Brazil.

Pharmaceuticals present a major area for Indian exports. Brazil provides the single largest opportunity in this sector. Despite a recent contraction, the Brazilian pharmaceuticals market continues to be the 10th largest pharmaceutical market among countries that protect intellectual property. According to ANVISA, in 2000-2001, Brazilian generics industry invested approximately US$ 175 million. In spite of such investments, the industry imports far more than it exports. In 2001, imports of formulations was US$ 1.25 billion while imports of bulk drugs reached US$ 780 million, according to the Brazilian Association of Chemicals and pharmaceuticals, ABIQUIM. Exports of formulations from Brazil amounted to US$ 241.7 million. As far as the sale of value added Indian formulations is concerned, figures went up from US$ 34.35 million in 2001, to 50.5 million in 2002. There was a decrease in the sale of organic chemicals (mainly bulk drugs) from US$ 131.37 million in 2001, to USD 114.29 million in 2002.

An Exim Bank study, published in May 2002, indicated that India’s presence in the Mercosur region through FDI or through joint ventures has been concentrated mainly in the pharmaceutical sector. Ranbaxy launched their joint venture in São Paulo in pharmaceuticals in 1999. Being the leading performer it has over 50 formulations registered. Core Health Care/ Claris Life Sciences, has a subsidiary marketing their products in Sao Paulo. M/s Strides Arcolabs have also formed a joint venture in Rio de Janeiro. On 19th September Strides Arcolabs inaugurated operations of a factory in the State of Espirito Santo for manufacturing finished products. Torrent Pharmaceuticals launched its range of branded generics in August, 2002. Aurobindo Pharma is about to launch its formulations, after obtaining GMP certification. Zydus Cadila and IPCA already obtained GMP certification.

Some pharma companies like Wockhardt, Unichem, Lupin Laboratories, NATCO and others are planning to set up operations in Brazil. M/s Hetero, CIPLA, IPCA Brazil, Medicorp, Alembic and others supply bulk drugs. Serum Institute of India, Pune sold about Rs. 50 crores worth of vaccines to the Brazilian Government company, FUNASA against an international tender in 2000.

Pharmaceuticals represent 2.57 % of Mercosur imports, while India supplied only 16 million US$ worth of goods that amounted to 0.71% of total pharmaceuticals import (2000). However, this saw a dramatic increase in the last two years, and India’s exports in 2001-02 amounted to 47.05 million US$. Government sources expressed optimism regarding further boost to exports in this sector.

Engineering goods is another key export segment for India. Some engineering firms like Thermax, Electronic Hitech Components are also trying for investment/partnership. The Exim Bank study also pointed out that infrastructure projects such as electricity transmission; telecom, oil and gas also present significant opportunities for major Indian companies such as KEC, Kalpataru Projects, Reliance and Tatas.

Among the other exports to Mercosur, that of organic chemicals to the Mercosur has however been coming down over the last two years. However, exports in absolute terms remain high. Plastics and linoleum products that India is already supplying to Mercosur, offer a potent growth area. It occupies 5.64% of Mercosur’s total imports while India supplies less than 0.5% of the total amount imported. Transport equipment, another important export from India to Mercosur, presents a similar scenario. This sector represents nearly 10% of Mercosur’s total imports but India supplies only 0.41% of its imports. Given their large shares in total imports of the trade bloc, there is scope for contributing much larger exports in absolute terms in both these sectors. Textile and products is another sector which appears to offer major opportunities for the Indian exporter. This category occupies around 3-4 % of Mercosur’s imports. India supplies, mainly apparel and clothing accessories, man made staple fibres and filaments, only 2 to 2.5 % of these imports. India has been looking to greatly increase its exports in this segment. In 2000, India supplied only 1.35% of total tanning or dyeing extracts imported by Mercosur. Though this sector represents only about 1% of Mercosur imports, it still offers a potential for larger exports than India is delivering at the moment.

Apart from the trade in goods, trade in services has turned out to be a new potent area for exports. E-commerce is an arena in which Indian companies can establish its presence in the Mercosur region. Information technology, it has been indicated by Indian government sources, is to be a key export segment in future. This sector has already witnessed substantial gains in the recent period. Indian IT sector exports to Latin America in 2002-03 was around 583 million US dollars. Though it is still a low figure compared to India’s exports to the US and Western Europe, the share being only 5.9 % of India’s total IT services export and 3.33 % of Latin America’s equivalent imports, it is growing steadily and can reach a huge market in Mercosur.

Exports from Mercosur to India: 
The Mercosur countries, on the other hand, can also export several commodities to India, edible vegetable oil being the foremost at present. However, geographical proximity remains the major problem with Mercosur exports.

Edible vegetable oil is the dominant single export to India, with the largest share of 67.09 per cent in total Mercosur exports in 2001-02. This share, which was only 3.25 per cent of total Mercosur exports in 1994, rose steeply to 28.39 per cent the next year. It continued to rise steadily till it reached around 70 per cent in 1998 and remained there till 2000, and this trend shows no sign of a reversal in the near future.

Due to gross inadequacies in its processing industry, India is the world’s biggest importer of edible vegetable oil. Vegetable oil constitutes as much as 70% of India’s total agricultural imports and about 2.9 % of all Indian imports. Of total imports of vegetable oil, soyabean oil, which is imported from Brazil and Argentina, has the second highest share. In 2001-02 the value of edible oil supplied by Brazil was 125.96 million US$ and that by Argentina, 387.46 million US$. This implies respectively a 40.87 and a phenomenal 88.86 % of total Brazilian and Argentinean exports to India. A cut in duty rates from 1999-00 meant that export possibilities for Mercosur was already going up. However, there were some later increases to those rates though export potential for soyabean oil remains very high and import figures for 2001-02 turned out to be 1.3 million tonnes. After a free trade agreement, this process should get a further boost.

Other exports include petroleum and products , machinery, non-ferrous metals, metaliferrous ores and metal scrap, crude minerals, non-electrical machinery, leather, professional instruments, cotton and raw wool. Among the exports of Brazil, machinery and mechanical as well as electrical appliances and parts occupied an important 11% of total export to India in 2001-02. Vehicles and parts (other than rail or tramways) contributed 8.82 % of total. Organic chemicals, metal products and cotton occupy shares of 7.96, 7.32 and 6.63 % respectively. Since Edible oil occupies a huge share (88.86%) in Argentina’s exports, other items individually contribute negligible shares. Leather and products (2.81%), Cotton (2.22%) and metal and products (2.01%) are the other exported commodities.

As far as India’s present import pattern is concerned, mineral fuels and oils (including petroleum products) occupied a huge 30.67% in 2001-02. Machinery and mechanical products etc contributed an 8.26%, electrical machinery and equipments a further 6.19 %. Metal and products together occupies about 5% of total imports. So it is obvious that the Mercosur countries, Brazil and Argentina in particular, have a tremendous potential in exporting these commodities to India. India offers a huge demand in the respect of all these commodities. Exports have already begun to pick up, and after the agreement, there is no reason why Mercosur cannot capture a large market in these products in the Indian territory. Pearls, semi-precious stones and imitation jewelry is another potential export for Brazil. At present it occupies only about 2% (2001-02) of Brazilian exports to India. But given that fact that this category occupies a large 18.19% of total Indian imports at present, and that Brazil is supplying only 0.06% of this import, it represents a huge potential. Given the consumer boom, and the fact that India has been among the highest growing countries within the developing countries, indicates that this demand is unlikely to diminish in the near future.

After the signing of the agreement, the Indian Government stated that India is expecting to become a big buyer of Brazilian ethanol fuel derived from sugarcane in the near future. Brazil is the world’s leading sugarcane grower. Brazil has also been using alcohol mixed fuel for over three decades now. A delegation from Brazil has already visited India (and China) in 2002 for discussing possibilities of export from the alcohol and the automotive sector. One significant benefit of this for India would be a reduction in dependence on OPEC oil, which has seen major price fluctuations over the last few years.

Many a Pit Fall?
However, signing of treaties is not enough to boost trade between the two regions. More on-the-ground efforts must take place before the potential can be fully realised. A better institutional mechanism to facilitate grievance redressal, dispute settlement, and registration problems must be in place soon. Information flow, exchange of delegations, and participation in trade fairs remain some of the other major areas that need to be looked into. Specific apparatus needs to be set up on both sides for facilitating these particular areas. Language remains another major problem. Since Mercosur and India do not really have a language in common, communication between trading bodies and more specifically, translation of documents can pose major difficulties. The respective governments have to provide support services in these areas too.

The actual trading process also requires smooth and cheap movement of goods. Despite the official launch of direct shipping lines, the absence in reality of direct sailing vessels or direct flights can end up making goods lose part of their price advantages. Physical trading also requires greater warehousing facilities and improved logistics support. Moreover, most trading agents in countries like Brazil and Argentina ask for 180 days under open credit, which may be difficult for Indian traders to provide.

Anti–dumping duties have also been an area of dissent in the past. For example, one of Mercosur’s important trading members, Brazil, has imposed anti dumping duty on jute bags and cycle tyres exported from India. The Brazilian government has also been implementing a policy of non-automatic import license requirements for certain export products of India, particularly stationery, polyester films, garments etc. The procedure involves internal fixing of minimum price subject to which import licenses are issued. On the other hand, India has imposed anti-dumping duty since 1995 on Brazilian chemical BISFENOLA, and has imposed provisional anti-dumping duty on import of Poly-Iso-Butylene and acrylic fibre from Brazil from December 2001. Though many such duties have been revoked in the past, like in the case of ceramic lime export from Brazil and cycle free wheels exported from India, these disagreements need to be sorted out faster in the future so that full benefits of a free-trade agreement can be reaped.

The governments of India, Brazil and Argentina, on their parts, have encouraged apex trade associations to organise seminars and delegate exchanges to encourage greater interaction between businessmen in Mercosur and India. For example, the Confederation of Indian Industry and Federation of Indian Chambers of Commerce and Industry have arranged seminars and the exchange of trade information in Brazil. From the Indian side, the market development assistance scheme is fairly liberalised for travel to LACs, maintaining warehouses in LACs, participation in trade fairs in LACs and opening offices in the countries. Increased textile quotas are available against exports to LACs. The Export Credit Guarantee Corporation has also revised the rating of most LACs to encourage exporters to take greater risks. Similar initiatives have also been launched by Brazil and Argentina in the recent past.

Other region-specific efforts for undertaking a joint initiative to promote and launch a new professional association have also gradually been building up. A major among these is the “Latin America/Caribbean and Asia/Pacific Economics and Business Association (LAEBA)”, set up jointly by the Inter-American Bank (IDB), through the Integration and Regional Programs Department, and the Asian Development Bank (ADB), through the ADB Institute. LAEBA will be dedicated to strengthening linkages between the Latin America/Caribbean and Asia/Pacific regions, through a variety of activities including the promotion of research. The ultimate aim is to improve trade and cooperation between these regions. India and Mercosur should be able to reap considerable benefits through these associations.

Despite these efforts, trade has increased but not so much in actual volume terms. India, at present, comprises only 0.83 per cent of Mercosur’s imports. And Mercosur supplies only 1.5 % of India’s imports.

Cooperation and Coexistence:
Notwithstanding all the negatives, however, there stands out a large positive. And that is the realization, that both sides need the forging of a bond that is based on the recognition of mutual advantages. These advantages involve not only the identification of cheaper sources of imports and larger markets for exports. They entail other factors much broader and deeper in their implication.

This kind of understanding is crucial for developing a south-south cooperation that has not only a political, but also a strong economic basis. This is important because only a joint economic perspective driven by joint economic interests within the south can strengthen stands against exploitative economic forces. And that requires a relative independence from northern economies. Most developing countries are presently heavily dependent on trade with the western world, especially for the supply of manufactured goods. Therefore, first of all, locating and fully utilizing all trading potential within the south, more so for industrial goods, is a must.

Second, this kind of alternative economic relationships then can create strategic advantages in trading negotiations with other countries more powerful than India or any of the Mercosur countries. For example, Mercosur is going into trade agreements with the European Union and talk about Free Trade Area of the Americas (FTAA) is underway. Such negotiations are immersed in controversy. Agreements on unequal terms can only be for short-term gains. In fact, even promised or expected short-term gains may not finally materialize for Mercosur. Such trade agreements can be beneficial to the southern economies only if they receive actual concessions when they give it. Based on past experiences, outcomes of compliance with WTO trade rules have not been happy for the Latin American economies. The US has prized open many of the Latin American economies but has not opened up its own completely to them. The US in particular has a history of not abiding by rules it insists on implementing. But signing alternative agreements with other important trading partners can limit the scope for damages by agreements such as the FTAA, and can give Mercosur, for example, the leverage to maneuver better terms for itself. However, these potentials between not only two but many partners within the south must be fully developed before they can be used as tools for self protection.

In addition, gains and objectives must be complementary and not conflicting for any trade agreement to work. Unlike the FTAA as it now stands, the India-Mercosur agreement, arranged between comparative equals on a give and take basis, has the potential to work given the understanding of common goals and common perspectives.

Finally, common understandings in the field of trade can then pave the way for joint negotiations for the south in the WTO. India and Brazil have already set such an example. Joint negotiations like this must preclude a convergence of interests.

In an atmosphere where western countries are intent on securing economic hegemony with the use or misuse of trade, especially by arm-twisting the developing nations in any way possible, locating alternative relationships that can replace such sources and destinations of and for tradable goods is not merely another choice, it is gradually becoming a necessity.