Domestic Determinants of National Trade Strategies. A Comparative Analysis of MERCOSUR Countries, Chile and Mexico

01_CM_DomDet.fm Page 1 Mercredi, 5.
juillet 2006 11:00 11
Domestic Determinants
of National Trade Strategies
A Comparative Analysis of Mercosur Countries,
Mexico and Chile
1
01_CM_DomDet.fm Page 2 Mercredi, 5. juillet 2006 11:00 11
WORKING GROUP ON EU-MERCOSUR NEGOTIATIONS

Thematic Area 1 OBREAL/EULARO
Research Program 2005
A Comparative Analysis of Mercosur
Countries, Mexico and Chile
Edited by
Roberto Bouzas
CHAIRE MERCOSUR
DE SCIENCES PO
3
Couverture : Emmanuel Le Ngoc
© 2006. CHAIRE MERCOSUR DE SCIENCES PO
4
Acknowledgements
A Comparative Analysis of Mercosur Countries,
Mexico and Chile
The Mercosur Chair of the Institut d’études politiques de Paris

(Sciences Po) acknowledges the following institutions for their
generous support of the Working Group on European Union-Mer-
cosur Negotiations: the Integration and Regional Programs Depart-
ment and the Special Office in Europe of the Inter-American
Development Bank; the European Commission’s program of the
European Union Latin America Relations Observatory (OBREAL/
EULARO) and the University of Barcelona. It also acknowledges
the University of San Andres for its most valuable assistance to our
Buenos Aires meeting. The Mercosur Chair is also grateful for the
intellectual contributions of the experts, discussants and representa-
tives of the European Union, Mercosur countries, Mexico and
Chile who participated in the research and debates of this Work-
shop.
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6
Table
Foreword, by Alfredo G.A. Valadão .............................................. 9
INTRODUCTION, by Roberto Bouzas ............................................. 11

Introduction ........................................................................................ 11
Alternative Analytical Approaches to the Determinants
of Trade Policy ................................................................................... 12
The National Case Studies: the Role of “Structural” and “Institutional”
Factors in Trade Policy-Making ......................................................... 16
Some Comparative Lessons Drawn from the Cases Studies .............. 32
Conclusions ........................................................................................ 41
CHAPTER 1. The Political Economy of International Trade

Policy in Argentina, by Marcelo Leiras and Hernán Soltz ...... 45
Introduction ........................................................................................ 45
Strategies and Revealed Preferences in Foreign Trade Policy ........... 46
Domestic Determinants of International Trade Policy in Argentina .. 61
Concluding Remarks: Interpreting Argentina International
Trade Strategies in Light of Domestic Factors ................................... 78
CHAPTER 2. The Political Economy of Foreign Trade Policy:

the Brazilian Case, by Ricardo A. Markwald ............................. 85
Introduction ........................................................................................ 85
Main Features of the Revealed Preferences of Brazil’s Foreign
Trade Policy ........................................................................................ 86
Domestic Determinants of Revealed Preferences .............................. 111
Summary and Conclusions ................................................................. 134
Final Remarks ..................................................................................... 139
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CHAPTER 3. Determinants of Trade Liberalization Strategies

in Uruguay, by Marcel Vaillant ..................................................... 145
Introduction ........................................................................................ 145
Trade Policy Regimes and Strategies ................................................. 146
Revealed Preferences and Domestic Determinants ............................ 157
Conclusions ........................................................................................ 172
CHAPTER 4. Ups and Downs of Paraguayan Trade Policy

in the 1990s, by Fernando Masi ................................................... 183
Introduction ........................................................................................ 183
Background: Inherited Trade Policies ................................................ 184
Trade Integration in the 1990s: New Scenarios, New Policies .......... 188
Trade Strategies and Institutional Constraints .................................... 194
The Future of Trade Policy in Paraguay: Change or More of the Same? 203
CHAPTER 5. The Domestic Determinants of Mexico’s

Trade Strategy, by Antonio Ortiz Mena L.N. ................................ 209
Introduction ........................................................................................... 209
Mexican Trade Strategies and Revealed Preferences ........................... 210
The Domestic Sources of Mexico’s Strategy and Revealed Preferences 222
Conclusions ........................................................................................... 242
CHAPTER 6. The Political Economy of Chilean Trade Policy:

A Review, by Patricio Meller ....................................................... 249
Introduction ........................................................................................ 249
The Political Economy of Chilean Trade Strategies .......................... 250
Empirical Evidence ............................................................................ 262
Neo-protectionnism ............................................................................ 265
Trade Policy Determinants ................................................................. 273
Final Remarks ..................................................................................... 276
Contributors, Seminar Program

and Participants
CONTRIBUTORS ................................................................................ 281
SEMINAR PROGRAM ........................................................................ 285
PARTICIPANTS .................................................................................. 287
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Foreword
This publication presents the results of a workshop on “National

Trade Strategies: A Comparative Analysis of Mercosur Countries,
Mexico and Chile”. The papers commissioned for this book make
a comparative assessment of the domestic factors that help to
understand the trade policy choices and foreign trade strategies
implemented by these six Latin American countries, including their
inconsistencies. The six case studies do not purport to explain
policy choice focusing exclusively on domestic factors. Rather,
they are aimed at shedding light to the role of domestic
considerations in trade policy formulation, as they interact with a
given external environment
These contributions were first analysed and discussed in a work-
shop that was held on November 25, 2005 at the Sede Capital of the
University of San Andrés in Buenos Aires (Argentina). The meet-
ing was part of the 2005 research program of the Working Group
on EU-Mercosur Negotiations (WG) and of the Thematic Group I
of the European Union Latin America Relations Observatory
(OBREAL/EULARO) that is coordinated by the Mercosur Chair of
Sciences Po, as was another workshop, held in Barcelona, that
focused on EU-Mercosur common sectorial interests and conflicts
related to their positions in the WTO Doha Round.
The WG, established in 1999 by the Mercosur Chair of the
Institut d’études politiques de Paris (Sciences Po), serves as an
interface between business, negotiators and civil society. A flexible
structure of working contacts between the two regions, it seeks to
9
contribute to the preparation and monitoring of the EU-Mercosur

negotiations, and to the discussion of the two regions’ positions in
the WTO and towards the Free Trade Area of the Americas (FTAA).
It benefits from an independent academic framework and links the
main partners involved: negotiators, entrepreneurs, public officials,
political representatives, academic specialists, and non-govern-
mental and international organizations.
This volume, coordinated by Roberto Bouzas (Argentina),
brings together the contributions of distinguished Latin American
experts on significant aspects of the subject. The first study by
Hernán Soltz and Marcelo Leiras (both from Argentina), analyses
the structural and institutional roots of Argentina’s trade policy
volatility. The second study by Ricardo Markwald (Brazil) deals
with the domestic determinants of Brazil’s defensive trade strategy.
The third study, by Marcel Vaillant (Uruguay) shows how a
peculiar domestic environment can lead to perverse trade policy
coalitions. The fourth study, by Fernando Masi and Francisco Ruiz
(both from Paraguay) emphasizes the fact that Paraguay’s trade
policy can be seen as a patchwork of conflicting private sector
interests. The fifth study, by Antonio Ortiz Mena (Mexico) shows
the fragile domestic foundations of Mexico’s outward-orientation.
Finally, Chile’s sustainable outward-orientation and the role of path
dependence in its trade policy are studied by Patricio Meller
(Chile).
The Chair Mercosur is grateful for the valuable contributions of
the experts, business representatives, negotiators and public offi-
cials from Europe, Mercosur and Latin America who participated
in our Barcelona Workshop. Its extends its warm thanks to the Uni-
versity of San Andrés and its dean Eduardo Zimmermann, for
ensuring that the meeting was a success and that it could take place
in such a pleasant setting.
Alfredo G.A. VALLADÃO

Coordinator
Working Group on EU-Mercosur Negotiations
10
Introduction
Introduction
This chapter makes a comparative assessment of the domestic

factors that help to understand the trade policy choices and foreign
trade strategies implemented by six Latin American countries,
including their inconsistencies. The countries analyzed are
Argentina, Brazil, Paraguay, Uruguay, Chile and Mexico. Despite
their diversity in terms of size, location, economic structure, trade
openness and the commodity and regional composition of trade,
these countries have faced a similar external environment which
can be summarized in three main features: strong pressures towards
unilateral trade liberalization, a new wave of preferential trade
negotiations (the so-called “new regionalism”) and stronger WTO
disciplines. Despite this common environment and the fact that all
are developing economies their trade policy choices have been far
from homogeneous. The intensity and depth of trade liberalization
has differed across countries and some of them have pursued quite
divergent trade strategies. While Argentina, Brazil, Paraguay and
Uruguay become formal members of a customs union (Mercosur),
Chile and Mexico pursued an aggressive policy of preferential
negotiations with as many partners as possible.
Ambitious trade policy reforms and hyper-active international
negotiations have attracted renewed attention to the issue of the
domestic determinants of trade policy-making. Of course, domes-
tic factors are not the sole determinant of trade policy. Bargaining
11
considerations and legal constraints stemming from multilateral,

regional and/or bilateral trade agreements play a decisive role in
framing the scope for policy choice. In addition, since viable trade
policy choices are strongly “path-dependent”, decisions taken in
the past will limit the range of available options and the balance of
interests that will exert pressure today. The six case studies
reviewed in this chapter do not purport to explain policy choice
focusing exclusively on domestic factors. Rather, they are aimed at
shedding light to the role of domestic considerations in trade policy
formulation, as they interact with a given external environment.
The chapter is organized as follows. The next section provides a
brief theoretical introduction on how the issue has been dealt with
by the received literature and outlines the approach used in the six
national case studies. The third section provides a summary of the
main findings of each national case study. The fourth section draws
some comparative lessons that emerge from national case analyses.
Finally, a fifth and last section underlines some conclusions.
Alternative Analytical Approaches

to the Determinants of Trade Policy
The study of foreign trade policy has been approached through

different disciplinary lenses. Economists have traditionally sought to
reach positive conclusions about optimal trade policies (aiming to speak
for the general interest), rather than to understand the underlying
determinants of trade policy choice. More recently, based on received
international trade theory, political economists have investigated the
distributive effects of alternative trade policies and the predicted
alignment of sectors or owners of factors of production.1 One dominant
approach has tried to explain trade policy as the result of the
maximizing behaviour of rational economic and political agents.
According to this view, when setting export and import taxes (and
subsidies), public officials take into account the distributive and welfare
effects of their decisions on consumers and organized pressure groups
(lobbies). They do so because these effects will influence political
behaviour and elected officials want to (directly or indirectly) win votes
and stay in power. Accordingly, endogenous trade policy models have
sought to explain the underlying determinants of trade policy choice.
1. For a review see Rodrik (1994).
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For obvious reasons, political scientists have been traditionally

keener than economists to study the determinants of revealed
policy preferences. 1 In order to approach the issue they have used
different analytical perspectives. One major strand of thought
(influenced by the pluralist paradigm) has regarded policy choice
as a somewhat direct expression of domestic political and
economic interests. An alternative strand has emphasized the
domestic political institutions that regulate interactions between
societal and state actors, trying to shed light on how these
institutions shape the ability of private interests to put pressure on
public sector officials. In a way, these two paradigms are
tantamount, respectively, to a demand and supply approach to
trade policy-making. They are likely to be more fruitful if taken
as complements rather than substitutes.
The study of foreign trade policies has also attracted the
attention of internationalists. For a long time, the predominant
view addressed the issue as the outcome of decisions and actions
undertaken by unitary actors seeking to promote their own
interest, but bounded by the structure of relative power and
existing international regimes. In an interesting contribution,
Putnam (1993) put forward the two-level game hypothesis,
according to which trade policies are seen as the outcome of a
simultaneous or iterative process in which public sector officials
negotiate among themselves (Level I negotiations) and with
domestic actors (Level II negotiations). The role of the latter is
important because they have to formally or informally ratify
international agreements.
These issues have also been studied in Latin America, first
encouraged by the wave of trade policy reforms that pervaded the
region in the 1980s and early 1990s and, more recently, by the
proliferation of preferential trade negotiations. Aggarwal, Espach
and Tulchin (2004), for example, compiled a set of national case
studies linking the disparate trade strategies of four Latin American
countries (Argentina, Brazil, Chile and Mexico) to the strategic
perceptions and the political and economic objectives of their
respective governments. According to the authors, these divergent
trade strategies cannot be explained by differences in comparative
advantages or by asymmetries in bargaining power vis-à-vis other
countries or trading blocs. Rather, they were interpreted as a result of
1. For a review see Milner (1999).
13
deliberate options made by policy makers, after weighting the trade-

offs involved in different patterns of integration into the world
economy. These differences, in turn, were based on divergent
economic, political and, above, all strategic goals. The conclusions
of Aggarwal et al. (2004) underline the role of governments as
unitary actors that rationally pursue specific national objectives, as
perceived and defined by politicians and technocrats. In this context,
the preferences of business, trade unions, political parties and non-
governmental organizations are given a secondary role.
Sáez (2005), by contrast, offers a more eclectic view. He
concludes that no single approach (i.e.: the two-level game, the
bureaucratic policy model or the state strength-centered view)
accounts for the variety of trade policy-making patterns that prevail
in Latin America. In his view, what is needed is a combination of
analytical approaches that are more or less applicable depending
on: a) who are the actors (size of the country), b) the scope of the
negotiating process (bilateral, pluri-lateral or multilateral), c) how
deeply-rooted is the democratic tradition, and d) the complexity
and depth of organization of civil society. According to Sáez
(2005), depending on the type of negotiation the second-level may
not be at all relevant to influence first-level negotiations. In any
case, he argues that bureaucracies remain a major player of trade
policy-making game, mainly as a result of the institutional
weaknesses reflected in a poorly-organized private sector.
In a different vein, INTAL-ITD-STA (2002) compiled a set of eight
national case studies on private sector participation and trade
policy-making patterns in the Western Hemisphere. The papers
were inspired in Putnam two-level game approach and focused on
the domestic side of the equation. The case studies showed
significant divergences in policy-making patterns across countries,
as defined by prevailing institutional arrangements, consultation
mechanisms, involved groups, etc. Most remarkably, all Latin
American case studies confirmed the role of policies as external
catalysts of process change, in contradiction to the typical
relationship found in the developed world. In effect, according to
Ostry (2002) in developed countries the domestic policy-making
process is usually considered to be the main determinant of the
content and dynamics of international trade bargaining.
Jordana y Ramió (2002) analyzed the trade policy decision-
making processes of a selected group of Latin American countries,
focusing on the contribution of institutional design to solve policy-
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making and implementation constraints. 1 In their survey Jordana

y Ramió (2002) found that the cases studied included a broad
variety of organizational forms and degrees of institutional
fragmentation. Their taxonomy of organizational models included
three major categories, namely: a) a Foreign Affairs-centered
model, b) an Economy/Sector-centered model, and c) a Foreign
Trade-centered model. Each of these models had its pros and cons,
including different degrees of institutional fragmentation.
Consequently, each one posed different demands for formal or
informal inter-agency coordination. Jordana y Ramió (2002)
found that the effectiveness and formalization of coordination
mechanisms is quite divergent across countries, as well as the
extent and formalization of private sector participation. Although
the period analyzed is one of significant institutional change, the
authors find few success stories throughout the region.
In a recent work, Robin (2006) tried to explain the likelihood of
success in a trade integration strategy by appealing to two explana-
tory variables, namely: a) the coherence of the state executive, and
b) the validity of business interlocutors. Coherence of the state
executive was defined as the outcome of the combination of three
elements, namely: a) how clear and effective is the division of labor
among agencies and inter-agency coordination (“responsibilities”);
b) the organizational strength of the agency in charge (“resources”);
and c) the degree of participation of business and civil society in
policy-making (“openness”). The validity of business interlocutors
was qualitatively measured, in turn, by what the author called
“institutional leadership” (existence of legitimate mechanisms for
private sector policy coordination) and “organizational strength”
(the professionalism of business organizations). Robin (2006)
applied this analytical framework to four case studies (Argentina,
Bolivia, Chile and Peru), to conclude that the critical factors to
account for performance were the way in which “responsibilities”
were allocated within the Executive and the effective “institutional
leadership” and “organizational strength” of business interlocutors.
1. The authors analyze four main problems/constraints, namely: a) the need to

strengthen the influence and capacity of the organization in charge of trade policy-
design; b) the administration of rising demands for inter-agency coordination
posed by a broader negotiating agenda; c) the need to reduce the information
asymmetries that exist between the decision-making organ and other public sector
and private institutions; and d) the need to filter and coordinate private sector inte-
rests in a way consistent with the national interest.
15
The six case studies referred in this chapter used a common

framework to investigate the role of domestic factors in shaping
foreign trade strategies. The starting point was to propose a distinc-
tion between “structural” and “institutional” factors that influence
trade policy-making. “Structural” factors were defined to capture
the underlying determinants of trade policy preferences, the most
important of which are economic size, degree of openness, struc-
ture of comparative advantage and the regional composition of
trade. Although some of these attributes can be affected by policy
interventions in the long term, they can be taken as relatively stable
in the short term. “Institutional” factors, in turn, aim to reflect the
effectiveness and cohesion of governmental institutions and their
autonomy in relation to private sector interests. In line with other
“institutionalist” perspectives, this dimension was geared to cap-
ture government capacities, independently of the precise policy
objectives. Weaver and Rockman (1993) defined government
capacities as “a pattern of government influence over its environ-
ment (…that…) produces significantly similar results in different
decision making areas and time periods”. These capacities include
the ability to effectively mediate conflicting interests, advance a
practical notion of the public interest, administer divisions between
political and ideological groups, implement government policies
and achieve policy stability. These capacities also influence deci-
sively the ability of governments to strategically choose the most
adequate social or economic policies. Thus, “institutional” factors
should be important to shape the ability to make decisions and
undertake consistent interventions.
The National Case Studies:

the Role of “Structural”
and “Institutional” Factors in Trade Policy-Making
The six national case studies were the four members of Mercosur
(Argentina, Brazil, Paraguay and Uruguay), Chile and Mexico.
Despite their diversity in terms of size, location, economic struc-
ture, trade openness and the commodity and regional composition
of trade, these countries have faced a similar external environment.
However, their trade policy choices have differed widely: the inten-
sity and depth of trade liberalization has been disparate and some of
them have pursued quite divergent trade strategies. This section
16
summarizes the main findings of each national case study, before

raising some conclusions based on a comparative analysis. 1
Argentina: the Structural

and Institutional Roots of Policy Volatility
In the last fifteen years Argentina underwent a far-reaching
process of trade liberalization, both on a unilateral and reciprocal
basis. The result was a significant reduction in average nominal
and effective protection. Despite this liberalizing trend, Argentina
maintained some sectors sheltered from foreign competition.
Although the scope for implementing non-tariff measures was
greatly reduced by multilateral and regional commitments,
Argentina remained an active user of “safety valves” such as anti-
dumping and countervailing duties (AD and CVD) and safeguards.
Other ad hoc protectionist measures (such as “voluntary export
restraints”) were also used intensely in regional trade. Tariff policy
was particularly erratic in the case of capital goods, pressed by
Mercosur common external tariff, fiscal constraints and the desire
to encourage investment and modernization. On balance,
multilateral and regional commitments have worked as lock-in
devices, effectively limiting the scope for policy reversal.
Argentina has typically used a wide array of instruments to
encourage exports. However, export promotion policies have been
volatile and vulnerable to the macroeconomic environment. More-
over, exchange rate policies and the lack of financial support (at
internationally competitive costs) have frequently run at cross-pur-
poses with the proclaimed desire to promote exports. The benefits
of Argentine export promotion policies have also been concen-
trated in a relatively small number of large firms. Export taxes,
which were eliminated during the trade reforms of the early 1990s,
were restored in 2002 and are expected to remain in place for the
foreseeable future
In the realm of foreign trade negotiations, the prime strategic
choice of Argentina was the creation of a customs union with Bra-
zil, Paraguay and Uruguay (Mercosur). Despite the fact that Mer-
cosur was presented as a state-policy, the details of the strategy (and
particularly the customs union approach) were far from consensual.
1. This section is based in my reading of the national case studies. Conse-

quently, any error of fact or interpretation is my sole responsibility.
17
This translated into ambiguous policies, particularly in relation to

Argentina´s largest trade partner (Brazil). Foreign trade relations
with Brazil have been characterized by large structural and regula-
tory imbalances, which were not ameliorated by Mercosur.
Leiras and Soltz (2006) rightly argue that domestic factors alone
are insufficient to account for some key features of Argentine trade
policies, such as the persistence of low tariff barriers in the last
decade and a half. As in other case studies, in Argentina trade
liberalization was triggered by a combination of new ideological
persuasions on the part of governmental elites, a deep economic
crisis and pressure from international financial institutions. After
this liberalization effort occurred and was locked-in through
multilateral and regional agreements, policy reversals became
much costlier. However, domestic factors need to be factored in to
account for other tracts of Argentine trade policies, such as the
persistence of ad hoc and remedial protection for sectors such as
steel, paper, home appliances, textiles, footwear and toys.
Domestic structural factors also help to shed light on the
instability of export promotion policies: in effect, Argentine
exports are highly concentrated in relatively low value-added
agricultural commodities and energy products as well as in a small
number of firms. In 2005 nearly half of Argentine total exports
were accounted for by the soybeans cluster (seeds, pellets and
edible oils), cereals and the petroleum and natural gas sector. In
that same year, a relatively small group of 350 firms was
responsible for nearly 90% of total exports. These firms are
internationally competitive (they exploit Argentina´s absolute cost
advantages) and their success do not depend on export promotion.
Moreover, given the highly distorted nature of some of the world
markets in which they operate (as a result of the protectionist and
subsidy policies of developed countries), the pay-off of pursuing
aggressive market-opening initiatives is limited. On balance, the
absence of a large number of export-oriented firms with substantial
backward linkages to the domestic economy that fight for survival
in the world market has limited domestic constituencies demanding
consistent and stable export promotion policies.
According to Leiras and Soltz (2006), the instability and low
insulation of Argentine trade policies and strategies have been
made easier by constitutional, partisan and bureaucratic features.
Major constitutional features are a strong presidential system, a
legislative that has remained largely isolated from the trade policy
18
debate and an electoral system that strengthens the power of the

President. These characteristics have reduced the number of
effective veto players and opened the door to more volatile policies,
increasing the vulnerability of the policy-making process to special
interests. Similarly, the prevalent low levels of party fragmentation
have posed few constraints on trade policy-making, encouraging
higher policy volatility and lower policy insulation. As far as the
linkages between parties and citizens are concerned, the
predominance of clientelistic ties has insulated policy-makers from
the concerns of the citizenry at large, but not from the pressures of
organized interest groups. Clientelism is also argued to have given
political parties broad room to redefine policies, discourses and
coalitions with organized actors from one election to the next. At
last, the bureaucratic structure in charge of trade policy-making
and trade negotiations appears highly fragmented and poorly
coordinated. Since a fragmented bureaucracy offers no robust
check to interest group pressure, the result has been a relatively
high degree of policy instability and ad hoc interventions.
In summary, in the case of Argentina the authors find that the
relative weakness of effective veto players makes policy change
easier and stable bargains more difficult to reach. Moreover, fragile
institutions and a fragmented bureaucracy have failed to isolate
policy-makers (except in exceptional circumstances such as
episodic periods of radical trade reform), leaving them subject to
the pressure of special interests. In those policy arenas where
institutional capacities and policy consistency are most critical
(such as export promotion), the infirmities of Argentine
institutional arrangements and the fragility of public sector
organizational strength have become more evident.
Brazil: the Domestic Determinants

of a Defensive Trade Strategy
In the last fifteen years trade liberalization was also far-reaching in

Brazil, the largest South American nation. However, in contrast to
other countries of the region, the process was a gradual one. Nominal
and effective protection fell significantly during the 1990s, to
experience a temporary reversal during the years of the Plano Real,
when the domestic currency underwent a significant real
appreciation. This reversal was a response to strong domestic
pressures. However, by 2005 average nominal protection had
19
returned to the levels prevalent one decade earlier. The likelihood

that Brazil will undertake additional unilateral liberalization is low
because of strong domestic resistance and Brazilian trade negotiators
perception that tariffs remain a bargaining chip in multilateral or
preferential negotiations. As far as trade remedies are concerned,
Markwald (2006) argues that although the intensity in the use of such
measures increased (especially during the period of real domestic
currency appreciation during the Plano Real), a more detailed
examination shows an image of restraint and moderation,
particularly when judged against the adverse macroeconomic context
and the exchange rate misalignments that prevailed after 1994.
Export promotion policies were overhauled in the 1990s, drifting
away from the predominantly selective and discretionary approach
previously in force. Although the Brazilian government made
systematic efforts to prevent exporting taxes, they were frequently
blocked by disputes over the distribution of costs and the
widespread opposition to fiscal reform initiatives. Consequently,
policies have focused mainly on compensatory mechanisms, such as
a drawback regime (very much used especially by large and regular
exporters). The Brazilian government also allocated significant
budgetary resources to finance exports, but mainly to the benefit of
large exporting firms. In 1997 a Trade Promotion Agency was
created with the task of promoting exports of small and medium-
sized firms. Although it is still early to assess its effectiveness,
preliminary evaluations suggest that it made a modest contribution.
Overall, the result of Brazilian export promotion policies has not
been very encouraging in terms of diversifying either exports or
exporters. Although the firm concentration of exports is
significantly lower than in the case of Argentina, nearly two thirds
of Brazilian total exports are accounted for by only 500 firms.
In the realm of foreign trade negotiations Brazil has followed a
predominantly defensive strategy. Its emphasis on the formation of
a customs union with its regional partners (Mercosur) has been
dwarfed by its reluctance to engage in deeper integration commit-
ments that may reduce its policy discretion. Moreover, Brazilian
negotiators have been typically reluctant to take stock of prevailing
asymmetries in size, industrial development and institutional and
financial capabilities, and to devise policies apt to compensate
these imbalances. Brazilian trade policies have been even more
defensive in North-South preferential negotiations. Since the
offensive interests of Brazil lay mostly in areas that are sensitive in
20
the US and the EU (the same is true the other way round), the role of
Brazil in the FTAA and EU-Mercosur negotiations has been emi-
nently defensive. In coincidence with the size of the Brazilian
economy and the diversification of its regional trade pattern, trade
diplomacy has been increasingly active in the multilateral arena,
promoting new coalitions aimed at strengthening developing coun-
tries’ bargaining power.
Markwald (2006) points out that structural features such as a
relatively low foreign trade coefficient and the regional and
commodity composition of foreign trade flows help to account for
the priority which Brazilian trade policies has given to multilateral
and regional negotiations, as well as the strength and influence of
defensive import-competing interests. In effect, import-competing
sectors have enjoyed relatively high protection and generous
government incentives. This has been the case with very influential
industries such as motor vehicles and textiles and clothing, which
have been sheltered from foreign competition and have received
generous government support to penetrate foreign markets. As far
as export-oriented sectors are concerned, while agribusiness has
become internationally very competitive without the need of public
support, industrial exporters (such as the steel and aircraft
industries) have grown fast in a context of heavy dependence on
public sector export finance and special import regimes. While
internationally competitive agribusiness has most of its offensive
interests in developed country markets (a fact that partly accounts
for its lack of enthusiasm with Mercosur), most industrial sectors
with offensive export interest are heavily dependent from regional
or the US markets. There is no doubt that since the mid-1990s the
balance of influence of these sectors has changed significantly, with
agribusiness gaining more leverage in public debates and policy-
making. However, this has yet failed to be fully reflected in a new
trade policy approach. In effect, the predominant Brazilian policies
still regard trade negotiations (particularly North-South) as a source
of threats rather than opportunities.
The role of institutional factors has also been important in
shaping Brazilian foreign trade strategies. According to Mark-
wald (2006), domestic elites have been traditionally cohesive in
their view of the role of Brazil as a relevant international eco-
nomic and political actor, backed by a strong regional leadership.
However, there is no equivalent level of consensus as to the best
way to achieve that end. While a more “liberal” elite emphasizes
21
multilateralism and outward-orientation as the best policy option,

a more “inward-oriented” foreign policy community adheres to
the more traditional paradigms of “developmentalism”, empha-
sizing a healthy domestic market and strong regional alliances.
Despite the cohesion of the Brazilian diplomatic elite, this ideo-
logical conflict can help to account some of the recent impasses in
Brazilian foreign trade strategies.
As mentioned before, one major institutional feature of Brazilian
trade policy has been the autonomy, competence and strength of the
bureaucracy in charge of foreign relations, including international
trade policies. This autonomy and cohesion, however, has weakened
in parallel to the increasing complexity of trade negotiations and the
emergence of more diversified interests within the private sector.
Policy-making, as a result, has become a more contested arena, and
one in which the number of relevant actors –both public and private–
has increased markedly. New stakeholders have emerged from the
so-called civil society, as well as from the business community and
the Executive itself. In this context, business interests closely
intertwined with sector agencies (particularly the Ministries of
Industry and Agriculture) have become important players in foreign
trade policy-making and negotiations.
Although it is hard to foresee a reversal of trade liberalization,
Brazil is unlikely to move towards further trade opening unless export
barriers in third markets fall down. The emergence of strong
offensive interests in agribusiness has changed the balance that kept
the domestic economy insulated from world markets for decades, in
line with this sector demand for more aggressive policies. This
pressure towards more offensive policies has also been encouraged by
the growing perception that Brazil may be paying a high price for the
negative discrimination that suffers in third markets, as a result of the
explosion of preferential trade agreements. However, this new policy
stance has been implemented more easily in the WTO (although its
pay-off is still to be seen) that in preferential negotiations (particularly
those with the European Union and the United States).
Brazilian foreign trade policy will continue to be guided by the
aspiration to make the country a relevant actor in world, and
especially, regional affairs. However, this aspiration will not
necessarily translate into effective policies, as suggested by the
reluctance to engage in deeper integration commitments in Mercosur.
Since the sectors that have been more offensive in pushing Brazilian
trade negotiation strategies forward are also those with the weakest
22
incentives to make concessions at the regional level, this policy area

is likely to loose relevance unless it is seen as an effective strategic
tool in broader international trade negotiations.
Chile: Sustainable Outward-Orientation

and the Role of Path Dependence
Chile, jointly with Argentina, made an early start in the process
of unilateral trade liberalization, but also experienced episodes of
policy reversal. However, in contrast to its neighbor, policy
reversals were short-lived. The initial phase of trade liberalization
(launched in the second half of the 1970s) followed the exhaustion
of the import-substitution model. This new approach, followed by
a severe crisis, gave way to a second phase of trade liberalization in
the mid-1980s. According to Meller (2006), one key difference
between the two periods was exchange-rate policy: whereas in the
late 1970s the exchange rate served as an inflationary anchor,
during the late 1980s a high real rate exchange rate was used to
encourage export growth and diversification. In the last decade, in
order to sustain and export-led growth model the successive
Chilean governments combined an open trade regime with the
negotiation of as many preferential trade agreements as possible.
Preferential negotiations were regarded as the main vehicle to
improve access to other country markets, enabling the export sector
to continue to play the role of a growth engine.
One peculiarity of the Chilean tariff system has been the adoption
of a flat (and low) import tariff rate (except for agricultural products),
which has reduced distortions and simplified customs procedures.
This has not precluded the existence of distorting import policies that
cannot be justified on efficiency grounds. According to Meller
(2006), another peculiarity of the Chilean record has been the imple-
mentation of horizontal export promotion policies, which have main-
tained a high degree of stability across time. However, in sectors of
great export success such as the salmon and forestry industries,
export-promotion policies seem to have been more targeted and spe-
cific than implied the paradigm of horizontal policies.
One tract of Chilean trade policies common to other Latin
American countries is that trade reform was a top-down process
launched by governmental elites and against the opposition of
large sectors of the domestic economy. One key difference, how-
ever, has been that the transformation of Chile into an open and
23
specialized economy in which exports have led economic growth

has sharply reduced (and de-legitimized) domestic opposition to
trade outward-orientation. Yet according to Meller (2006), Chile
has become a successful export economy only relatively recently:
in effect, despite the early start of import liberalization, it was only
at the turn of the century that Chile became a leading world
exporter of products such as copper, forest goods, fruits, wine, cel-
lulose and salmon. Moreover, only by that time Chile reached per
capita export levels similar to those of other small successful
exporting countries. This performance increased remarkably the
number of exporting firms, thus strengthening the pre-existing
ideological and political consensus in favor of an open economy.
In summary, Chilean trade policies –particularly in the last fifteen
years– have successfully built on the comparative advantages of a
natural resource-rich small economy, by implementing a strategy
of trade liberalization (consistent with sustainable outward-orien-
tation), export promotion and preferential negotiations aimed at
improving market access.
As far as institutional factors are concerned, the Chilean polity has
been characterized by a strong Presidential regime, a comparatively
low degree of institutional fragmentation and a relatively high degree
of formalization of inter-agency coordination. Interestingly, and in
contrast to the experience of other Latin American countries, a strong
presidential regime has led to stable rather than volatile trade poli-
cies. One reason may have been the combination of a long period of
authoritarian rule with a successful export-oriented economy that
multiplied the number of interested actors actively engaged in export
trade. Ideological convictions in the elites are likely to have also
played a role in sustaining the Chilean policy choice in favor of out-
ward-orientation. A comparatively low degree of institutional frag-
mentation in the public sector and a relatively high degree of
formalization of inter-agency coordination also help to account for
policy stability. In particular, during the 1990s a lower-rank public
agency (Dirección de Relaciones Económicas Internacionales, DIRE-
CON) played a salient role in trade negotiations and a leading role in
setting foreign trade strategies.
The Chilean record on the participation of the private sector in
trade policy-making and foreign trade negotiations is far from
unrepresentative. On the part of the public sector the innovation
has been that competent authorities have strived to maintain a
regular flow of information to the private sector. As far as the
24
private sector is concerned, Robin (2006) argues that SOFOFA

(Sociedad de Fomento Fabril) played a leading role among
business associations and coupled with DIRECON to advocate for an
aggressive bilateral trade integration strategy. According to Meller
(2006), one major institutional innovation of Chile has been the
adoption of a flat tariff rate, which has significantly reduced the
scope for lobbying and corruption. Preferential negotiations,
however, have re-introduced discrimination through the back door
through exceptions and different tariff phase-out calendars.
Defensive agricultural interests grouped in the SNA (Sociedad
Nacional de Agricultores) have used this mechanism to effectively
promote the interest of inward-oriented, import-competing sectors
such as wheat, sugar and edible oils.
Mexico: the Fragile Domestic Foundations

of Outward-Orientation
In Mexico unilateral trade liberalization started in the mid-

1980s, to be followed by an aggressive strategy of preferential
negotiations throughout the 1990s. As a result, by 2005 Mexico
applied relatively low nominal tariff rates and had signed
preferential trade agreements with more than 40 countries.
Although Mexican applied tariff rates are lower than WTO bound
rates, in contrast to Chile MFN trade partners suffer substantial
discrimination in the Mexican market. Mexico was also the first
developing country to sign a comprehensive preferential trade
agreement with developed countries (NAFTA), launching a domino
effect of successive preferential negotiations. Pari passi to trade
liberalization Mexico has also become an active user of contingent
protection, basically antidumping duties.
Mexico has been an active promoter of exports through a variety
of instruments such as the maquiladora program, the PITEX and sec-
tor programs (PROSEC). These initiatives have basically consisted in
preferential tax and import tariff treatment for export-oriented firms.
The provision of export finance, in contrast, has been modest and it
has generally addressed the demands of large exporting firms.
According to Ortiz Mena (2006), the Banco Mexicano de Comercio
Exterior has done very little to encourage the emergence of new
exporters. Moreover, despite the existence of multiple incentive
mechanisms, the use of domestic inputs in the production of exports
has been very limited.
25
One key Mexican comparative advantage has been its proximity

to the US market. Compared to the US, Mexico is an unskilled labor
and energy-abundant country that can complement the capital and
technology-abundant US. According to Ortiz Mena (2006), the
major factor shaping Mexican foreign trade strategies has been the
nature of its relationship with its big and powerful neighbor, of
which NAFTA has been a by-product. The challenge faced by
policy-makers has been to take advantage of the opportunities of
proximity and complementariness, while at the same time
overcoming the constraints posed by the sizable asymmetries that
exists with the US.
After nearly two decades of liberalization, the benefits of that
policy in terms of export expansion have concentrated in a small
number of large firms. Small and medium-sized business, in
contrast, has suffered the effects of import competition, while
facing limited opportunities to increase foreign sales. The result
has been that export-oriented firms remain a small minority, with
very fragile backward linkages to the domestic economy.
According to Ortiz Mena (2006), these results explain why in
recent years business has turned more reluctant to new trade
agreements and further trade liberalization. The present high level
of foreign trade concentration in the US market has also left Mexico
vulnerable to the competition posed by new players, such as China.
This has been made worse by the fact that Mexican exports are
heavily concentrated in a small group of manufacturing activities
(six sectors account for more than 30% of total exports). The fact
that only a handful of sectors and firms (many of them
multinationals) have benefited from liberalization has rendered
political support to an open trade policy more difficult to garner.
As in other national case studies, the foreign trade policy-
making process has become more complex throughout the 1990s.
To a certain extent this may have been a result of a more open
political system, after decades of hegemony of the PRI. This
growing complexity has translated into more explicit internal
divisions within the Executive and even among high-ranking
officials of the same agency. Policy disagreements have been
aggravated by an increasingly active Legislature and, since 2000,
by a divided government. The rising activism of the Legislature
has made more difficult to put forward a coherent trade strategy,
since Congressmen tend to have short time horizons. While the
Senate is empowered to pass international treaties, the House has
26
vast fiscal and budgetary powers and it has become a resonance

box for negatively affected domestic interests. A new
International Economic Agreements Law passed in 2004 provided
for broad consultations prior to, during and after the negotiation of
new trade agreements. This new legislation may increase the
credibility and legitimacy of trade policy, but it can also impair the
effectiveness of the foreign trade negotiating machinery.
In a divided government the President has had his powers cut and
has been forced to negotiate permanently with Congress. Although
the president still has veto power, he has lost the ability to set the
agenda freely. The result is that in spite of the many challenges faced
by Mexican foreign trade strategies, it has been easier to maintain the
status quo than to innovate. The prevailing differences range from
issues such as how to deal with the “Chinese challenge” up to
whether it is desirable to foster deeper economic integration with the
US. Deeper economic integration with the US has had its economic
rationale but also potential economic and political costs, which has
led major Mexican political actors to vocally express their second
thoughts or even opposition. According to Ortiz Mena (2006), the
state of flux of Mexican trade policies is clearly seen in the
combination of unilateral liberalization initiatives (through PROSEC
programs) and the moratorium on new preferential trade agreements
that has been in place since late 2003.
The lack of consensus as to the desirability of further trade
liberalization extends to the private sector. Whereas multinational
firms have partly backed the Executive in its strategy of unilateral
trade liberalization through sector programs, other actors have been
more inclined to focus on strengthening the domestic market. NAFTA
negotiations were instrumental to organize the private sector to take
part in international negotiations (Mexico led other countries in
implementing the strategy of the cuarto de al lado). COECE, a sort of
umbrella organization which brought together most business
organizations with interests in foreign trade issues, has represented the
private business sector (particularly big business) in most
negotiations. The participation of COECE has not been structured
along rigid lines, but it has adapted to the specific demands of each
negotiation. The dominant role of COECE has been challenged by
COMCE, created in 1999 by a group of large firms with the aim of
promoting foreign trade (rather than to assist the Executive in trade
negotiations). COMCE has been increasingly critical of unilateral
liberalization through PROSEC programs and of the signature of new
27
preferential agreements, although both groups have criticized the slow

pace of “second generation” reforms. In contrast to business-
government relations, which were fairy stable and functional from the
early 1990s until very recently, relations between government and
civil society have been far more unstable and unstructured (except
during the NAFTA negotiations). In effect, the Consejo Asesor para
las Negociaciones Comerciales (created after the Advisory Council
on the Free Trade Agreement) has not met since 2000.
Paraguay: Trade Policy as a Patchwork

of Conflicting Private Sector Interests
Even prior to the generalization of structural reforms throughout

Latin America, Paraguay had undergone a peculiar process of trade
liberalization triggered by the opportunity to exploit its locational
advantages as a trading entrepot between its two highly protected
neighbors (Argentina and Brazil). That opportunity arose in the
mid-1970s with the development of closer physical connections
with Brazil. Those connections strengthened the role of Paraguay
as an exporter of agricultural commodities (mainly soybeans) and
encouraged the development of triangular informal (illegal) trade
networks with neighboring markets. The construction of the Itaipú
(and later on Yaciretá) hydroelectric dams also presided over a
boom in the construction and services industries, but one closely
linked to government favors. Masi (2006) calls this strategy “inter-
mediation-oriented integration” to emphasize the focus and benefi-
ciaries of this “informal” pattern of trade liberalization (the golden
age of which was between the mid-1970s and the late 1980s). One
result of this strategy has been the emergence of powerful interest
groups specialized in rent-seeking and illegal activities, closely
intertwined with the authoritarian regime.
These policies were challenged in the 1990s by the end of the
authoritarian regime and a new regional and international economic
environment. In particular, the strategy of “intermediation-oriented
liberalization” seemed to be at odds with the decision to open up the
foreign trade regimes of neighboring countries and the Paraguayan
decision to join Mercosur. The combination of these two facts
eroded Paraguay advantages as an informal (illegal) trading
entrepot and opened the opportunity to expand and diversify
Paraguayan exports to the broader regional market. The
governments that followed after the end of the authoritarian regime
28
took measures aimed to encourage investment, production and

exports getting closer, according to Masi (2006), to a strategy of
“production-oriented integration”. However, they also hesitated to
abandon completely the previous pattern of specialization. This
was made most evident by a series of policy decisions that openly
supported the informal intermediation business, such as the
adoption of a special tourism regime in 1992 (granting lower tariffs
and local taxes to imports made for re-export) and the use of
temporary exemptions to Mercosur common external tariff to
benefit products included in the special regime. The result was an
ambivalent trade policy, suggesting that domestic factors have been
far more important than regional or international forces to shape the
foreign trade policy of Paraguay in the last fifteen years.
The political economy of this policy-mix was shaped by the
structure of actors inherited from the period of authoritarian rule.
In effect, foreign trade policies (and, more broadly, development
policies) remained very much influenced by the power of interest
groups closely linked to the old authoritarian regime and govern-
mental elites. These groups included the “informal” traders (basi-
cally importers involved in the re-export business), large
agricultural producers and state contractors. According to Masi
(2006) these groups shared a common tract: they did not live up by
the rules of the market but by the informal cannons of the favors
and privileges granted by the state. Gradually, however, a group of
new agents less reliant on government favors emerged in the 1990s.
These new elites gained influence in some sector ministries but
failed to build a new foreign trade strategic vision for Paraguay.
Replicating old patterns of behavior, they also ended up making
particularistic demands.
The policy ambiguity that emerged from the conflicting demands
of private sector actors was compounded by the fragility of
Paraguayan public sector institutions. Masi (2006) argues that
government agencies are plagued by informality, corruption and
inefficiencies, which have been overcome only partially and very
slowly. Ministries and public sector agencies are still closed feuds and
human resources are administered on the basis of political loyalties
and rewards. As a result, there has been no truly professional career
service or meritocracy in the public sector. This state of affairs has
translated into a very low quality public administration in comparison
to other Latin American countries. The result has been that public
sector institutions failed to provide leadership and became an arena
29
where private sector interests and demands openly clashed.

Consequently, public policies (including trade policy) have remained
contradictory and have become a patchwork of conflicting private
interests. In fact, trade policy has been more than the simple
coexistence of different preferences: it has been a string of
concessions made to different and often opposing economic sectors.
Uruguay: the Domestic Basis

of Perverse Trade Policy Coalitions
Like in Argentina and Chile, in Uruguay the process of trade

liberalization was launched in the mid-1970s. The compromise for
this policy to settle as a new domestic equilibrium was that reforms
had to be implemented gradually, maintaining a group of potentially
damaged sectors sheltered from foreign competition. Two decades
later this policy approach was complemented by a renewed emphasis
on preferential liberalization. The result was a significant
restructuring of the production of tradable goods, a pattern of
specialization based on primary commodities and a concentration of
trade flows within the region. The creation of Mercosur also meant
that Uruguay lost discretion in trade policy-making and the conduct
of international negotiations. Vaillant (2006) argues that Uruguayan
external trade policies and negotiation strategies have been cautious
and to a certain extent inconsistent with a process of trade
liberalization, as shown –for example– by the frequent use of
discretionary protection and the defensive stance adopted in
Mercosur.
These policies have been associated to a particular configuration
of interest groups. In effect, during the 1990s import-competing
sectors (traditionally opposed to trade liberalization) reduced their
influence on policy-making, while other more outward-oriented
groups gained more influence. This latter group included a small
number of large export-oriented firms (predominantly specialized
in primary commodities) and a relatively large number of dynamic
exporters of manufactured products (basically metallurgy and
chemical goods). The incentives to influence trade policy-making
by primary commodity exporters have been limited by the
constraints on market access faced in developed country markets
(Uruguayan primary commodity exports are concentrated in
products traded in heavily distorted markets). Small manufacturing
exporters, in turn, have grown very dependent from the regional
30
market (that absorbed nearly 50% of total Uruguayan exports) and

the benefits of special regimes. By the late 1990s they accounted
for nearly 50% of total exporting firms.
The relative weakness of export-oriented groups and the weight of
import-competing sectors gave a protectionist bias to trade policy-
making and encouraged a virtual coalition of tradable goods-
producing sectors that demanded a combination of import barriers
and export subsidies. This “perverse” coalition was strengthened by
the strong overvaluation of the domestic currency that prevailed for
most of the 1990s. Until a new exchange rate policy was adopted in
2002 the successive governments frequently gave in to pressures,
granting subsidies and restoring old protectionist practices, such as
specific tariffs. The fact that this phenomenon had some inertia was
shown by the maintenance of the instruments adopted even after the
large devaluation produced by new floating exchange rate regime
adopted in 2002. According to Vaillant (2006) trade policy became
hostage of private sector interests, which fail to lead to a protectionist
reversal because of conflicting private interests rather than the
persuasion of governmental elites.
This policy-making pattern has been facilitated by the institu-
tional fragilities of the Uruguayan public sector. The Presidency is
very powerful as compared to the Legislature, but the Executive
power has been characterized by poor inter-agency coordination
and a short-term focus. According to Vaillant (2006), the Uru-
guayan public sector has lacked a strategic vision as well as the
institutional capabilities to push towards that objective. The quality
of human resources and the efforts made to be up to the tasks were
frequently enough to go through critical situations. The systematic
and responsible way of dealing with issues and the existence of
competent local resources also triggered a learning process. This,
however, failed to show at the level of state policies because of the
absence of a suitable institutional framework or hierarchy capable
of taking stock of it.
The cost of these institutional fragilities showed up both in the
local and international arenas. Domestically, the virtual
institutional chaos of trade policy-making opened the door to the
conflicting influence of particular interests. Internationally,
Uruguay has obtained few tangible results from preferential
negotiations. In effect, national negotiating positions (including
those at the regional level where Uruguay has allocated the largest
amount of human and institutional recourses) have revealed a
31
strong inertial behaviour. These institutional weaknesses have

enabled groups that benefit from the status quo to successfully
make their particular interests prevail over the general interest.
Some Comparative Lessons Drawn

from the Case Studies
The six national case studies addressed in this chapter show mul-
tiple divergences in the trade policy and negotiation strategies
implemented in the last two decades. In effect, except for the pro-
cess of unilateral trade liberalization launched at different points in
time in all countries, they have all adopted different strategies of
integration into the world trading system. Not surprisingly, this
group of countries also differs in the domestic structural and insti-
tutional factors that lay behind their respective policy choices. This
section aims to assess to what extent these underlying differences in
domestic factors are relevant to account for the contrasts in
revealed policy preferences.
Differences in Revealed Policy Preferences

The case studies summarized in section 3 confirm that the six
Latin American countries made disparate policy choices. As far as
trade negotiation strategies are concerned the contrast is vivid.
Whereas Mexico and Chile pursued a strategy of negotiating free
trade areas with as many partners as possible, the four Mercosur
countries joined a customs union and, at least formally, resigned
trade policy discretion. Whether this policy choice was a
reasonable one for each one of the four countries involved remains
an open question and one that has been raised with particular
strength in recent times.
This conclusion is coincident with the findings of previous studies,
such as Aggarwal, Espach and Tulchin (2004). Based on a comparison
of the trade negotiating strategies implemented by Argentina, Brazil,
Chile and Mexico, Aggarwal et al. (2004) concluded that the four
countries made different trade policy choices throughout the 1990s.
While Mexico and Chile implemented what the authors called a
strategy of “geographically-diffuse bilateralism”, Brazil and Argentina
strived at becoming, respectively, a “regional leader” and a “regional
partner”. Following this taxonomy, the strategies followed by
Paraguay and Uruguay can also be classified as those of “regional
partners”, although their role as “regime-takers” is much more evident
32
than in the case of Argentina. Despite the shared features of the trade
negotiation strategies pursued by Mexico and Chile, while the former
tried to become a hub and exploit its proximity and preferential access
to the large US market, Chile strived to use its limited bargaining
leverage to improve access conditions to as many markets as possible
(particularly in sectors with export potential).
These disparate trade negotiation strategies were accompanied
by divergent trade policies. In effect, whereas the six countries
studied adopted policies of unilateral trade liberalization, their
depth and radicalism was very different (see Table 1). Chile
implemented the most ambitious and consistent trade liberalization
policy, materialized in the adoption of a low and flat tariff rate on
most goods. In the 1990s this unilateral policy was complemented
by an aggressive strategy of preferential negotiations. As a result,
in 2004 Chile applied average tariff levels were nearly half those of
Argentina, Brazil, Paraguay and Uruguay and, most remarkably, a
third of Mexican applied nominal tariff rates. Mexico opened
significantly its economy as well, but in contrast to Chile it did so
basically through preferential agreements (since Mexico trades
heavily with the US and the US offers a broad range of goods, NAFTA
was tantamount to unilateral liberalization). However, Mexican
trade partners receiving MFN treatment still suffer significant
discrimination to access that market.
In the opposite side of the spectrum, Brazil adopted a more pru-
dent approach to trade liberalization, focusing on a more gradual
and regionally-concentrated trade opening. The Brazilian strategy
also focused on building a customs union with its regional trade
partners, as a means to broaden its domestic market and, most
importantly, increasing its bargaining leverage in multilateral and
other preferential negotiations. Brazil also adopted a defensive
stance in preferential negotiations, particularly North-South. The
three other Mercosur members (Argentina, Paraguay and Uruguay)
formally adopted the customs union approach and a common exter-
nal tariff (largely shaped by Brazilian structure of protection), but
maintained a large number of (legal or de facto) exceptions to
accommodate their particular needs. For the smaller members of
Mercosur, and especially for Uruguay, free trade with larger and
more diversified economies (such as Argentina and Brazil) was
close to unilateral liberalization (as in the case of Mexico). How-
ever, the costs in terms of trade diversion are likely to have been
higher than for the North American country. Paraguay, at last,
33
Table 1. Indicators of Revealed Trade Policy Preferences

Argentina Brazil Chile Mexico Paraguay Uruguay
Tariff binding
coverage 100.0 100.0 100.0 100.0 100.0 100.0
(%, 2004)
Simple average
of ad-valorem 31.9 31.4 25.1 34.9 33.5 31.7
duties (final
bound)
Simple average
of ad-valorem
duties (applied, 12.7 12.4 6.0 18.0 10.8 13.3
2004)
MFN duty free
imports (share in 4.8 22.4 2.8(*) 9.8 10.0 13.7
total imports, (**)
2001)
Import duties
collected (to total
merchandise 7.8 8.4 na 1.9 6.1 4.7
imports,
1991-2001)
Number of
contingency
measures in force
(30/06/04): 76 54 na 58 na na
Antidumping 3 na na 1 na na
Countervailing 0 2 1 0 0 0
duties
Safeguards (***)
Dominant Regional Region Diffuse Diffuse Region Region
foreign trade partner/ al bilaterali bilaterali al al
negotiation CU leader/ sm/ sm/ partner/ partner/
strategy CU FTA FTA CU CU
* Year 2003.
** Year 2002.
*** 18/10/04.
na: not available.
Source: Based on WTO Database.
formally adopted the customs union approach, but strived to main-

tain a relatively open economy to exploit as much as possible its
traditional comparative advantage as an informal trade entrepot.
When the stability of access conditions to the regional market is
taken into consideration, the second thoughts that have emerged
about the rational of a customs union approach for Paraguay and
Uruguay gain heightened relevance.
34
The six countries analyzed also differed in the coherence and

consistency of their respective policy choices. Chile outstands for
the consistency of its trade (and macroeconomic, particularly
exchange rate) policies, especially since after the crisis of the early-
1980s. In the other cases, however, trade policy choices have been
ambiguous or inconsistent with other policy priorities (such as
using the exchange rate as a nominal anchor to keep inflation under
reign). Episodes of conflict between trade and exchange rate policy
were frequent in Argentina and, to a lesser extent in Mexico, Brazil
and Uruguay. By the same token, the content of trade policies has
been more volatile and ad hoc in some countries than others. While
the low and flat rate implemented by Chile reduced the scope for
policy discretion, in other countries policies proved to be more sub-
ject to the vagaries of the macroeconomic situation or domestic
pressures, Argentina being an outstanding example.
In sum, the differences in the trade policy patterns adopted by the
six countries studied suggest that a common external environment has
been filtered by domestic influences before translating into concrete
policy choices. While all have felt the shared effects of mounting
pressures towards trade liberalization in the 1980s and 1990s, the
wave of preferential negotiations that pervaded the international
trading system since the early 1990s and the stronger disciplines
posed by the WTO regime, their responses to these common challenges
have differed sufficiently to give support to the idea that domestic
mediations have played an important role in policy formation.
Structural Factors
As shown in Table 2, the six countries under study are quite dif-
ferent in terms of some structural variables influencing trade policy
choice. These variables include: a) economic size; b) the intensity
of integration into the world trading system (as suggested by trade
to GDP ratios and per-capita exports); and c) the commodity and
regional composition of foreign trade flows.
At one extreme of the spectrum, Brazil and Mexico can be
characterized as relatively large economies, at last by developing
countries’ standards. Despite this shared feature, they show quite
contrasting patterns of integration into the world economy. In
effect, the trade to GDP ratio of Mexico doubles that of Brazil and
per capita exports are four times higher. Location and factor
endowments, apart from policy choices, help to account for these
35
Table 2. Indicators of structural factors shaping trade policy preferences

Argentina Brazil Chile Mexico Paraguay Uruguay
Population (million) 38.2 178.8 15.9 103.8 5.8 3.4
GDP (million current US$) 151,501 604,855 94,105 676,497 7,127 13,138
Trade to GDP ratio (average
2002-04) 42.2 29.8 68.8 58.3 86.7 42.6
Trade per capita (US$, average
2002-04) 1,422 883 3,403 3,730 965 1,774
Real GDP (1995 = 100) 115 122 142 139 110 109
Exports of goods and services
(volume, 1995 = 100) 157 229 191 215 65 123
Rank in world exports
(merchandise), 2004 42 25 46 13 116 96
Share in total world exports 0.38 1.05 0.35 2.07 0.02 0.03
Breakdown by export
categories:
– Agricultural products 49.6 32.0 28.5 6.0 86.5 63.1
– Fuels & mining products 20.0 13.5 53.9 13.5 0.8 4.9
– Manufactures 28.6 52.4 12.4 80.3 12.7 30.2
Breakdown by main
destination of exports:
– Largest market 18.3 (UE) 25.4 (EU) 25.0 (EU) 88.9 (US) 27.8 (Ur) 20.6 (US)
– Second largest market 15.8 (Br) 21.4 (US) 14.8 (US) 3.4 (EU) 19.2 (Br) 20.0 (EU)
– Third largest market 11.2 (Chl) 7.8 (Ar) 12.0 (Jap) 1.7 (Can) 12.5 (CI) 16.5 (Br)
– Fourth largest market 10.8 (US) 5.7 (Chn) 10.4(Chn) 0.5 (Aru) 6.3 (Ar) 7.6 (Ar)
– Fifth largest market 7.7 (Chn) 4.2 (Mx) 5.8 (SK) 0.4 (Swi) 6.2 (EU) 4.0 (Mx)
Breakdown by import
categories:
– Agricultural products 5.1 6.7 7.7 7.8 8.1 12.7
– Fuels & mining products 6.6 22.5 20.8 6.5 19.1 25.3
vManufactures 87.2 69.8 61.3 85.3 71.7 62.0
Breakdown by main origin of
imports:
– Largest market 32.9 (Jap) 24.3 (EU) 18.5 (Ar) 61.9 (US) 27.8 (Br) 22.2 (Ar)
– Second largest market 23.4 (Br) 18.3 (US) 16.0 (EU) 10.9 (EU) 21.4 (Ar) 21.7 (Br)
– Third largest market 13.1 (UE) 9.0 (Ar) 15.1 (US) 5.5 (Chn) 15.7 (Chn) 11.8 (EU)
– Fourth largest market 10.6 (US) 6.2 (Chn) 12.4 (Br) 4.5 (Jpn) 10.7 (Jap) 11.0 (Ru)
– Fifth largest market 4.3 (Chn) 5.5 (Nig) 8.3 (Chn) 2.4 (Can) 6.7 (EU) 7.2 (US)
Source: Based on WTO Database.
differences. In effect, Mexico’s integration into the world trading

system has taken place mainly through its trade relationship with
the United States, which accounts for 90% of total Mexican
exports. The commodity composition of Mexican exports is also
strongly concentrated in manufactures (80% of the total),
suggesting that this country has exploited intensely its comparative
advantage in unskilled labor vis-à-vis the United States. As Ortiz
Mena (2006) has argued, this has been a sort of mixed blessing for
Mexico, since its opened many opportunities but also creates many
vulnerabilities.
36
In comparison to Mexico, Brazil displays a relatively closed

economy. Brazil has the lowest trade to GDP ratio in the sample and
the lowest per capita exports. Brazil is also a heavy exporter of
manufactures (which account for more than half of total exports),
but the markets of destination are much more diversified than in the
case of Mexico. In effect, whereas Mexico concentrates nearly
90% of its exports in the US market, Brazil has a more even
distribution of trade flows among different trade partners.
Moreover, some of the sectors in which Brazil enjoys comparative
advantages are heavily distorted internationally, which means that
international tradability may be “repressed” by foreign regulatory
barriers. Following Vaillant (2006), the limited ability to improve
market access conditions for key export products due to prevailing
protectionist practices weakens the incentives of export-oriented
sectors to lobby in favor of more open trade policies. Similarly,
they discourage mercantilist-oriented government officials to
deepen domestic liberalization.
Argentina and Chile can be defined as mid-sized economies, but
they also show quite contrasting patterns of integration in the inter-
national trading system. In effect, Chile’s trade to GDP ratio is
nearly 50% higher than that of Argentina (partially inflated by an
undervalued exchange rate), while per capita exports are two and a
half times higher. As a result, Chile is very close to Argentina in the
world ranking of exporting nations and accounts for a practically
equal share of total world exports than Argentina. Chile is heavily
specialized in agricultural and (basically) fuel and mining products,
but its exports face less market access obstacles in the rest of the
world. Agricultural products, in contrast, account for nearly 50%
of Argentine exports and many of them are temperate agricultural
goods traded in highly distorted world markets. Both countries
show a diversified regional trade pattern, but Argentina relies much
more heavily in regional markets than Chile.
Another structural difference in the case of Chile has been the
emergence and consolidation of a large and dynamic export-
oriented sector, which has resulted in the formation of a
comparatively large and influential cluster of export-oriented
interests. This contrasts with the cases of Argentina and even
Mexico, where export businesses have remained limited to a
relatively small group of large firms (many of them multinational).
In the case of Mexico, and despite a high export coefficient, the
absence of a dense network of export-oriented interest throughout
37
the economy has been aggravated by the very limited backward

linkages that major exporters’ have with the domestic economy.
The two smaller economies (Paraguay and Uruguay) share
common structural features such as a small size, high foreign trade
coefficients and a concentration of foreign trade in regional
markets. However, Uruguay shows a trade to GDP ratio lower than
Mexico and Chile and per capita exports that are approximately
half those two countries. Based on structural factors, it is not
obvious why Paraguay and Uruguay would find attractive a
“regional partner” strategy which involved membership to a
customs union and the “importation” of Brazilian foreign trade
policy. In the case of Paraguay, political rather than economic
considerations seem to have played a key role in joining Mercosur.
However, dissatisfaction with the customs union has deepened
throughout the 1990s. In the case of Uruguay that decision was
probably the result of distorted expectations as to the benefits to be
obtained from higher bargaining leverage (both regional and
worldwide) and from enjoying preferential access to the market of
a large and relatively highly protected regional leader. This
strategy has become increasingly challenged as Mercosur proved to
have had a limited role in stabilizing market access conditions to
the Brazilian (and Argentine) markets and to raising Uruguay’s
bargaining power at the global, hemispheric or regional level.
This summary revision of structural factors in the six case
studies addressed in this paper suggests a number of conclusions.
First, in those cases where foreign trade has become deeply
intertwined with the domestic economy, thus increasing the number
and variety of agents engaged in an outward-oriented economy,
outward-orientation has been pursued more consistently through
time. In other countries that have become heavy international
trades (such as Mexico), but where the benefits of export expansion
have remained limited to a relatively small number of firms with
poor linkages to the domestic economy, the local sources of support
for outward-orientation have been weaker. Second, different
countries face “different worlds” in terms of the correspondence of
their comparative advantages and the level and inflexibility of the
restrictions that they face in main world markets. This will
decisively shape the opportunities and composition of interest
groups that can influence trade policy-making. As a result,
countries having comparative advantages in sectors that are very
much distorted internationally are more likely to have domestic
38
political equilibria characterized by less aggressive outward-

orientation. Third, path dependence has played a key role in trade
policy choice, limiting the range of available options or changing
the value of alternative policies. This was the case either in
successful experiences (such as that of Chile) or more controversial
ones (such as the decision of the regional partners of Brazil to join
a customs union with the regional leader). In all cases, however,
inertia has played a relevant role.
Institutional Factors
This category aims to capture the effectiveness and cohesion of
governmental institutions and their autonomy in relation to private
sector interests. Foreign trade policy and foreign trade negotiations
(especially as a result of the expanding coverage of the
international trade agenda) are by definition complex policy areas
in which multiple governmental agencies must take part. This
makes a high degree of inter-agency coordination necessary for
policy effectiveness, quite independently from the specific (formal
or informal) arrangements adopted by the policy-making process.
As discussed in section 2, Jordana y Ramió (2002) proposed a
taxonomy of key organizational models based on the criteria of
which Executive agency/ies plays the leading role in trade policy-
making. Our six countries illustrate the point: they display different
organizational arrangements and some of them show either hybrid
or even volatile patterns of institutional organization, as reflected
by frequent organizational change. Yet the countries in our sample
and other national experiences show that a particular organizational
model is neither a sufficient nor a necessary condition for policy
effectiveness. Instead, what seems critical is the ability to coordi-
nate and/or lead the policy process by an individual agency.
Stein and others (2006) have estimated a qualitative Policy
Index aimed to capture Weaver and Rockman concept of
“government capacities” in the case of eighteen Latin American
countries (see Table 3). They find that Chile ranks at the very top
of the table with a “Very High” Policy Index, followed by Brazil,
Mexico and Uruguay, which show a “High” Policy Index.
Argentina and Paraguay, in contrast, are reported to have a “Low”
Policy Index. These findings, with minor corrections, are
coincident to those of our six national case studies (applied
exclusively to the realm of trade policy).
39
Table 3. Key features of public policy since the 1980s

Enforcement Coordination Public Policy
and and
Stability Adaptability regardedness Efficiency Index
implementation coherence
Argentina Low Medium Low Low Medium Low Low
Brazil High High High High Medium Medium High
Chile High High High High High High Very high
Mexico High Medium High Medium Medium High High
Paraguay Medium Low Low Low Low Low Low
Uruguay High High High Medium Medium Medium High
Source: Stein et al. (2006).
In effect, our qualitative case studies also show that Chile ranks
at the top of policy effectiveness. According to Meller (2006), the
Chilean polity is characterized by a strong Presidential regime, a
comparatively low degree of institutional fragmentation and a
relatively high degree of formalization of inter-agency
coordination. Interestingly, and in contrast to the experience of
other Latin American countries, a strong presidential regime has
led to stable rather than volatile trade policies, probably as a result
of the combination of a long period of authoritarian rule with a
successful export-oriented economy that multiplied the number of
interested actors actively engaged in export trade. A comparatively
low degree of institutional fragmentation and a relatively high
degree of formalization of inter-agency coordination can also help
to account for policy stability and, particularly, for the fact that
during the 1990s a lower-rank agency played a salient role in trade
negotiations and foreign trade strategies.
Brazil and Mexico show a relatively high degree of policy
effectiveness, but rising fragmentation in the case of Mexico and, to
a lower extent, Brazil. In both cases trade policy-making and
foreign trade negotiations have been concentrated in state agencies
with significant influence, technical competence and a relatively
high degree of autonomy. However, in both cases the
diversification of private sector interests has not been easily
translated into a new policy pattern. In Mexico, this inability has
led trade policy-making and foreign trade negotiations to an
unstable status quo, in which a protectionist reversal cannot be
discarded. In Brazil, in turn, there has been a growing
dissatisfaction with the traditionally defensive policy stance of
Itamaraty, but not enough to encourage a policy change.
40
The cases of Argentina, Paraguay and Uruguay show multiple

weaknesses associated to feeble public sector institutions, aggra-
vated by a relatively dispersed representation of private sector
interests. This combination has encouraged ambiguous, volatile
and inconsistent foreign trade policies and negotiation strategies.
Argentina and Paraguay also rank low in Stein et al. (2006) Policy
Index. Uruguay, however, is a different case, since it shows a high
Policy Index. The discrepancy may be accounted for by the pecu-
liarities of foreign trade issues. In effect, the inconsistencies of
Uruguayan foreign trade policies and negotiation strategies may be
accounted for by the feeble incentives of export-oriented sectors to
push for more aggressive outward-oriented policies as a result of
the large distortions prevalent in world markets in products of Uru-
guayan export interest and the peculiarities of Uruguayan insertion
into the regional market.
Conclusions
Policy choices are the result of a complex set of factors. This

fact makes any deterministic approach a poor methodological
resource. Our case studies have sought to examine how structural
and institutional factors have affected policy strategies in six Latin
American countries. The purpose was not to fully account for
policy choice, but to bring into the analysis aspects which have
received little attention in the past (when external factors typically
played an overwhelming role).
Our case studies started showing that in spite of the general trend
towards trade liberalization, the countries analyzed have pursued
quite different trade strategies. Part of the reason can be found in
structural factors, such as size, degree of openness and the structure
of comparative advantages. Structural differences can help to
account for the policy choices made by Chile and Mexico, on the one
hand, and Brazil on the other. The structure of comparative
advantages and the significant distortions that prevail in world
markets for products of export interest to Argentina and Uruguay
may also account for the relatively weak incentives to more radical
outward-orientation in their case. In this context, Paraguay emerges
as a special case: the Paraguayan experience can be interpreted as an
ambiguous effort to accommodate to new regional circumstances and
the subsequent disappearance of a traditional source of comparative
41
advantage. Structural factors and economic incentives can hardly

explain the policy choice to join a customs union tailored after
Brazilian trade policies on the part of Paraguay and Uruguay.
Political considerations and miscalculations may help to account for
the original decision, with path dependence accounting for the rest.
Our survey shows that institutional factors also affected policy
consistency and stability. Although Mexico and Brazil faced different
structural incentives, they shared relatively efficient policy-making
institutions. This made possible to maintain coherent policies across
time and to cope with policy volatility. In other countries the picture is
less clear: again, Argentina, Paraguay and Uruguay, which seem to
have less effective public sector institutions, have suffered more
ambiguous and volatile policies.
One lesson which comes out from the set of studies is the power
of history and past events. In this sense, policy success is self-
reinforcing and tends to raise the likelihood of policy continuity
and of a constructive learning process. This fits the experience of
Chile, where the combination of high policy effectiveness and
structural factors encouraging outward-orientation has made that
country a relative successful story in outward-orientation. In other
cases, despite favorable structural conditions, the transition
between policy patterns has been more traumatic and unstable.
Mexico is a good example: despite the radical transformation
brought about by unilateral liberalization in the 1980s, and by
NAFTA in the early 1990s, the benefits of deeper integration into the
world economy remained limited to a relatively small fraction of
the domestic political economy. This has limited the support for
outward-oriented policies and encouraged a debate as to the most
appropriate policy course for the future.
In the case of Brazil the change in the trade policy model has been
more gradual and prudent, reflecting defensive rather than offensive
interests. The recent emergence of a new export-oriented sector with
a more aggressive outward-oriented focus has introduced a factor not
adequately factored in the policy process yet. The cohesion of public
sector institutions (and the associated inertia) probably account more
for the coherence and stability of Brazilian foreign trade policies,
than the present configuration of sector interests.
Argentina and Uruguay are also interesting cases. Both coun-
tries made a clear choice for a regionalist trade strategy focused on
a customs union approach, presumably expecting to benefit from
42
preferential access to the Brazilian market and stronger bargaining

capacity at the regional and multilateral level. Both assumptions
have materialized only partially for a diversity of reasons that
exceed the scope of the studies. This has trapped these countries in
a policy choice made under different circumstances and expecta-
tions, contributing (and revealing) their policy ambiguity and
inconsistencies. The recent deepening of the affectio societatis cri-
sis in Mercosur is revealing frustration and a strong demand for
greater flexibility.
The studies also show that policy change usually tends to begin
in a radical way and through the initiative of governmental or pri-
vate elites with access to policy-making. This was the case of the
unilateral reforms that all countries launched in the 1970s and
1980s, as well of the preferential initiatives that mushroomed in the
1980s and 1990s. However, the ability to produce positive results
becomes critical to ensure that policy change becomes sustainable
and self-reinforcing.
Roberto BOUZAS
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44
Chapter 1
The Political Economy of International Trade
Policy in Argentina
Introduction
This chapter analyzes the domestic determinants of interna-

tional trade policies in Argentina. Based on existing theories in
the political economy of international trade, it presents a basic
framework to interpret strategies and revealed preferences in the
case under study, with a main focus on the 1989-2005 period.
The exposition is organized in three sections. Section 1 presents
a stylized description of the evolution of international trade policy
in Argentina over said period. The description focuses on: i) the
extent and mechanisms of domestic market protection (including
tariff and non-tariff barriers), ii) the nature and effectiveness of
export promotion policies and iii) the negotiation strategies
displayed in multilateral and regional arenas. Section 2
synthetically presents theoretical arguments that account for the
domestic determinants of international trade policy. The analysis
distinguishes between structural, institutional, ideological and
conjuncture factors. In this section we also analyze the Argentine
case using these theoretical arguments. Section 3 concludes by
offering an interpretation of Argentine trade strategies and revealed
preferences in the light of the domestic factors analyzed.
45
Strategies and Revealed Preferences

in Foreign Trade Policy
Argentina’s trade policy experienced significant changes over

the last twenty years. They were part of a wider set of structural
reforms that redefined the roles of public authorities and private
agents in economic processes and outcomes. The resulting trade
policy regime –including domestic market protection and export
promotion activities– and foreign trade negotiation strategies
differed significantly from those prevailing during the import
substitution period. We provide a brief sketch of these changes
and their precedents in the next section.
Domestic Market Protection:

Trade Policy Towards Imports
Argentina’s trade policy started to change gears in the mid
1970s. Tariff rates dropped from an average of 55% in 1976 to
29% in 1978 and several quantitative restrictions to imports
were lifted. These changes along with the appreciation of the
domestic currency resulted in a significant increase in imports,
damaging severely the domestic manufacturing sector (Bouzas
and Keifman, 1987). The commercial opening was partially
reversed in the 1980s. A severe balance of payments crisis
prompted the government to stop the drainage of international
reserves through quantitative restrictions and higher tariff rates,
which reached an average of 40% in 1987. A system of import
licenses worked as a virtual prohibition on various imports.
Prompted by mounting pressure from multilateral financial
institutions and new reformist goals, national authorities
resumed attempts at trade liberalization, but only by the late
1980s and in a moderate way. Policy makers were convinced of
the benefits of opening the domestic economy to international
competition but, unlike their predecessors in the 1970s, chose to
do so gradually. In October 1988, average tariff levels were
lowered, price controls on some imports were replaced with spe-
cific duties and the scope of import licenses was reduced.
The authorities elected in 1989 deepened trade reform, since
trade liberalization was consistent with the goal of getting prices
under control in a context of hyperinflation. Drastic unilateral
trade liberalization also signaled the new administration’s
46
commitment to deregulation and “market-friendly” policies. In

just two years, officials in charge of the economy completed the
liberalizing tasks initiated by the previous administration.
Between 1989 and 1991 import licenses and quantitative
restrictions on imports were progressively reduced up to their
complete elimination, while customs procedures were
significantly streamlined. Although tariff levels changed
frequently during the period, 1 the declining trend in tariff
average levels and dispersion was clear. In addition, specific
duties were replaced with ad valorem tariffs. In contrast with
the trade opening of the 1970s, tariff reductions were
implemented abruptly, forcing import-competing sectors to
adjust rapidly to a dramatically new competitive environment in
a context of real appreciation of the local currency.
Preferential and multilateral agreements subscribed later in
the decade restricted Argentina’s policy discretion (Ablin and
Lucángeli, 2000) thus reinforcing the commitment to predomi-
nantly low tariffs adopted in the early 90s. The constitution of
Mercosur freed intra-regional imports from tariff restrictions
(excepting sugar and other products subject to anti-dumping
duties) from 1994 on. In 1995, Mercosur countries committed
to a Common External Tariff (CET) (although its effectiveness
was later compromised by numerous and frequent exceptions).
Additionally, Argentina subscribed to the agreements of the
Uruguay round of the GATT/WTO, consolidating tariffs at a level
of 35%. 2
Level and Structure of Tariff Protection

Average tariffs (including the “statistical fee” 3) decreased
from 42.4% in 1987 to 14.7% in 1991. Tariffs remained at this
level during the following years, with relatively short-lived
1. More than ten tariff reforms were implemented between October 1989 and
November 1991. These reforms included even a short-lived uniform 22% tariff
rate for almost all products (in place between January and April 1991). Not only
tariff levels but also the underlying objectives of the tariff structure changed dra-
matically throughout the period.
2. The fixed exchange rate schedule (locally known as Convertibilidad) also
constrained fiscal and monetary policies.
3. A duty on imports imposed in 1961 to finance the collection and publication
of statistical information on imports and exports by the National Customs Admi-
nistration.
47
increases in 1992-1994 and 2001. Tariffs have slightly declined

since 2002 (See Figure 1).
The liberalizing trend was first reversed in 1992 when the sta-
tistical fee was increased from 3 to 10%. The increase was in
place for almost two years and was complemented by non-tariff
barriers. The aim was to mitigate the effect of trade liberaliza-
tion in a context of real appreciation of the local currency and
rapid domestic demand growth, leading to a sharp increase in
imports (in 1992 total imports were 3.5 times higher than in
1990). A second and short-lived reversal occurred in 2001,
when Argentina unilaterally eliminated duties on computer, tele-
communication and most capital goods imported from non-Mer-
cosur countries and raised tariffs from 20 to 35% on several
consumer goods. 1 In contrast with the previous episode, this
one took place in a context of recession and falling imports.
Figure 1. Tariff Protection, 1987-2004

45
40
35
30
percentage
25
20
15
10
Common
5 External Tariff
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Years
Avg. Tariff Avg. Tariff + Statistical Fee Statistical Fee Tariff revenue/Imports value Trend
Source: authors´ calculation based on data from FIEL, Ministry of Economy and Production
and Crespo Armengol (2002).
Import protection, measured as the relationship between cus-

toms revenues (including statistical fees) and total imports,
amounted to about 70% of average extra-Mercosur tariffs in the
1. For most of 2001 a so-called “covergence factor” imposed an extra tariff rate
of around 5% on all imports. Estimates of average tariff levels do not include this
component.
48
early 90s and neared 40% by 2004. Intra-Mercosur, import pro-

tection reduction is even more pronounced than extra-Mercosur
tariff protection due to the liberalization of intra-regional trade
and the increasing contribution of Mercosur as a source of
Argentina’s imports. This indicator highlights the contrasting
effects of tariff policy reversals during the Convertibility years:
while the 1992-1994 episode increased protection, that was not
the case in 2001.
Intra-Mercosur tariff protection gradually diminished starting
with the signing of the Asunción Treaty in 1991. This
agreement set a program of gradual, linear and automatic tariff
reductions that would have led to a tariff-free intra-regional
trade by December 1994. At the Ouro Preto Summit, in
December 1994, member countries agreed to exclude sugar and
automobiles from the reduction program and adopted a special
regime for sensitive products, maintaining intra-regional
protection until 1998 for Argentina and Brazil and until 1999 for
Paraguay and Uruguay. Argentina included 200 tariff lines in
the special regime (including steel, paper, textiles, footwear,
tires and home appliances). Tariffs on these products, which
represented 7% of total imports from regional partners, steadily
decreased from an average of 21.9% in 1995 to 5.9% in 1998
(Crespo Armengol and Perez Constanzó, 1998).
We register a sharp reduction in both nominal and effective
protection for most sectors between 1990 and 1995. Average
levels for both indicators remained close to 1995 levels in 2002
(See the last line in table 1). However, there are some sectoral
variations. Protection to sectors such as “Machinery” and
“Electronics and telecommunications” was significantly
reduced. For other sectors, it remained high or even increased. 1
Nominal and effective protection for capital goods in 2002
was significantly lower than in 1990. However, trade policy
towards these goods was highly volatile throughout the period,
1. Such were the cases of automobiles (which benefited from a special regime)
and textiles and footwear (which enjoyed specific minimum import duties with
high ad valorem equivalents). Considering their structural international competiti-
veness, it is particularly surprising the increase in effective protection in the case
of food and beverages.
49
constituting an exception to the relative stable trend towards

lower tariff protection (Berlinksi, 2004). 1
Table 1. Nominal and Effective Protection Rates

(%)
NPR NPR NPR EPR EPR EPR
Sector
90 95 02 90 95 02
Agriculture, livestock and fishing ..... 12.5 8.6 7.3 11.8 8.4 7.9
Oil & coal extraction ......................... 15.9 0.0 0.0 15.8 –0.6 –2.0
Mining ............................................... 20.0 5.8 5.9 20.2 5.0 6.2
Meat, fish, fruits, vegetables ............. 14.6 11.2 11.8 14.0 21.6 33.2
Dairy products ................................... 13.8 18.0 17.2 11.8 18.0 17.5
Others food and tobacco products .... 18.3 18.6 17.8 18.5 21.2 23.2
Beverages .......................................... 15.5 20.8 20.4 13.9 23.8 23.2
Textiles ............................................... 25.3 19.6 20.5 28.5 21.8 27.9
Textiles products ................................ 27.0 23.4 28.7 29.8 30.2 38.4
Clothing, leather and footwear .......... 26.5 22.6 28.8 29.8 27.2 45.4
Wood and furnitures .......................... 25.8 16.9 15.8 29.2 21.7 19.3
Paste, paper and publication .............. 22.5 16.3 11.6 24.4 19.2 10.4
Basic chemicals products .................. 23.2 12.6 12.4 25.7 17.4 17.6
Refined petroleum ............................. 14.6 1.4 0.4 10.0 3.9 1.4
Others chemical products .................. 24.6 11.8 13.7 32.3 13.1 15.4
Rubber products ................................ 24.3 21.8 15.6 27.2 27.2 18.8
Plastic products ................................. 26.3 19.7 18.4 30.2 22.7 24.0
Non-metallic minerals products ........ 22.5 14.9 10.8 24.1 16.1 12.3
Iron and steel ..................................... 22.2 19.6 13.9 28.3 25.0 17.1
Non ferrous metals primary products 24.6 12.3 11.2 30.0 14.5 12.7
Smelting and metal products ............. 25.8 17.1 15.7 30.1 17.4 16.4
Machinery ......................................... 26.7 13.3 3.6 31.6 11.5 –4.3
Electric material and home appliances 26.6 19.4 19.6 31.3 21.7 28.8
Electronic and telecommunications .. 26.5 12.3 8.8 30.9 9.9 10.0
Automobiles ...................................... 27.0 21.0 34.4 34.0 23.3 118.5
Autoparts and other vehicles ............. 26.8 16.2 13.8 31.2 18.8 15.9
Other manufactures ........................... 24.6 20.9 19.6 26.4 24.4 23.6
Total 18.4 12.9 13.1 20.3 13.9 15.3
NPR:Nominal protection rate.
EPR: Effective protection rate.
Source: authors’ calculation based on data partially published in Crespo Armengol et al. (2004)
1. Import tariffs on capital goods were reduced to 0% in early 1993, but domestic
producers were compensated with a 15% tax reimbursement on local sales. Eco-
nomic authorities expected to promote technological modernization through these
measures. Yet, they also compromised negotiations with Brazil over a Common
External Tariff, since Brazil protected domestic production of capital goods at the
highest rate. In 1994, both countries agreed to temporarily exempt capital goods,
computer and telecommunication products from the Common External Tariff and
gradually converge towards a level of 14% for capital goods in 2001 and 16% for
computer and telecommunications in 2006. In 1995 fiscal considerations led Argen-
tine authorities to raise extra-Mercosur tariffs on capital goods to 10% and reduce
compensation to local producers to the same percentage. By mid 1996, reimburse-
ments to local producers were eliminated and tariffs on capital imports were
increased again. These changes account for a significant portion of the increase in
tariff levels recorded in 1995 and 1996 (see Figure 1). Yet another reversion took
place three years later, when tariffs on capital, computer and communications goods
produced outside Mercosur were cut down to zero (Argentina obtained a waiver
from its Mercosur partners) and the compensation to local producers was restored.
50
Extent and Intensity of Non-tariff Barriers

In spite of the liberalization policy adopted in the early 90s,
tariff and non-tariff instruments were selectively used to protect
designated sectors. These protectionist devices included tariff
measures (variable tariffs, specific minimum import duties)
trade relief measures (anti-dumping duties, countervailing
duties, and safeguard clauses), (automatic and non-automatic)
import licenses, performance requirements and orderly market
arrangement agreements negotiated between firms (with or
without government approval; see Table 2). Although all these
measures aimed to strengthen protection, they differed in their
restrictiveness, sectoral coverage, compatibility with WTO rules
and impact on intra-Mercosur trade
– Except for automatic licenses (with relatively mild restrictive
effects), all these measures were implemented to protect a few sec-
tors: textiles, footwear, sugar, toys, steel, paper and automobiles.
– Some tools covered only one or a few sectors. Such is the case
of variable tariffs (sugar), specific minimum import duties (textiles,
footwear and toys) and performance requirements (automobiles).
– The two sectors with the highest diversity of additional protec-
tion measures are textiles and footwear, which enjoyed specific
minimum import duties, safeguards, licenses and market ordering
agreements.
– WTO commitments limited the use of non-tariff barriers such as
specific minimum import duties, safeguards and anti-dumping. 1
– Mercosur agreements also constrained the application of
import licenses, specific minimum import duties and safeguards on
imports from regional partners.
– Argentine authorities encouraged local firms to seek “voluntary
agreements” to obtain additional protection from imports originated
in Brazil. Unilateral measures were adopted only when this
alternative route reached a dead end.
– Most of these measures have remained in place for a long time.
Their “contingent” nature is highly debatable. This applies particularly
to textiles, footwear, sugar and steel.
1. Including the statistical fee.
51
Table 2. Non-tariff barriers in Argentina
Rest of
Instrument Type Sectors Period Mercosur
the world
Automatic NO
Textiles and
previous Since 19961 except for YES
Licenses footwear 1995-1997
import
licenses Several Since 1999 YES YES
Since 1999
NO YES
(footwear, paper)
Non
Automatic Paper, footwear, Since 2004
previous Licenses washing (washing
import machines, toys machines)
licenses
Since 2005
(toys)
YES
(with preference
Variable tariff Tariff Sugar Since 1992 YES
margins since
1999)
Since 1993
(textiles)
1993-1997
Specific Textiles, (all footwear)
minimum Tariff footwear Since 2000 NO YES
import duties and toys (non-sport
footwear)
Since 1999
(toys)
Mainly metal
products (15),
steel (12),
Anti-dumping Trade relief chemicals (10), 1992-96
Since 1999 YES YES
duties measure machinery and (steel)
equipment (8)
electric
appliances(6)
Food products
(peach YES
Countervailin Trade relief
g duties measure conserves, Since 1996 NO (against
gluten de trigo, EU)
olive oil)
Paper (Mercosur 1992-1994 YES NO
safeguard)2 (paper)
1997-2000
(footwear)
NO YES
1992-1994
(paper)
Footwear,
motorcycles, TV Since 2000
Trade relief NO YES
Safeguards sets and paper (sport footwear)
measure (GATT/WTO
safeguard) 2001-2004
(motorcycles,
NO YES
peach conserves)
Since 2005
YES3 NO
(TV sets)
Textiles Since 1999 YES
YES
(safeguard ATC) (textiles) (1999-2000)
52
Rest of
Instrument Type Sectors Period Mercosur
the world
1992-1994
Since 1999
(steel)
Steel,
Market petrochemical, YES
ordering Private sector footwear, home 1999-2000 (exclusively with NO
agreement (footwear)
agreements appliances, Brazil)
some textiles
Since 2004
(denim and
refrigerators)
Balanced trade Performance Automobiles Since 1991 YES YES
requirements requirements
National Performance
content Automobiles Since 1991 YES YES
requirements
requirements
a. Automatic licenses applied until 1999, to be then replaced by non-automatic licenses.
b. See note 1, p. 54.
c. Originating in the Zona Franca de Manaos (Brazil).
Source: authors’ elaboration on data from Ministry of Economy and Production, National Foreign
Trade Commission and Mercosur Reports (BID/INTAL).
Trade Policy Towards Exports

Policies towards exports changed frequently over the last two
decades. Their scope, characteristics and effectiveness fluctuated
in response to general macro-economic conditions.
Export Promotion Mechanisms
Export promotion schedules 1 were reformed in the context of
trade liberalization measures implemented in the early 1990s. They
were applied with varying intensity over the decade and their vola-
tility was particularly high in the case of fiscal instruments. Export
promotion systems comprised four main segments: compensation
of the anti-export bias, special reimbursements, financial incentives
and trade-promotion.
The main instruments used to compensate for the anti-export
bias of tariffs levied on imported inputs are duty-.free temporary
imports and the draw back of paid import taxes. The first one is the
most frequently used, since it entails lower financial costs for
exporters (Table 3). Exporters also benefit from the reimbursement
1. Argentina started using export promotion mechanisms in the 1960s with the
main purpose of spurring non-traditional exports. The use of these mechanisms
declined with the trade reforms adopted in the mid-1970s, but they were restored
in the mid-1980s. The 1989-90 crises significantly compromised its efficiency.
53
of the Value Added Tax paid over the production process, which
takes the form of a tax credit. Fiscal considerations often lead the
authorities to delay credit determinations, thus raising exporters´
financial costs (particularly damaging small firms). In Argentina
the VAT rate is 21%. An Industrial Specialization Regime was in
place between 1992 and 1996, offering preferential 2% tariffs on
imports used to increase exports. The regime was suspended for
fiscal reasons three years earlier than originally expected, thus
barely having an impact on exports 1 (Sirlin, 1999).
Table 3. Usage rate of temporary admissions and draw back

Percentage of responses in two surveys
Temporary
Draw back
admission
Successful Pymex panel (1999) .......... 56 18
Large industrial firms panel (2005) .... 55 11
Source: Authors’ calculations based on data reported by Milesi, Yoguel y Moori Koenig
(2001) and CEP’s Big Industrial Firms Survey (2005).
Special reimbursements constitute another compensation

mechanism. They were modified several times during the 1990s.
Four rates were established in 1991 (3.3%, 6.7%, 8.3% and 10%)
on the basis of estimates of the incidence of internal taxes on
exported goods. In late 1992 the system was replaced with a so-
called “mirror” system that set reimbursement rates equal to import
tariff levels on a product-by-product basis. Thus, weighted average
reimbursement levels increased from 3.3% to 6.3% (Berlinsky
2004). By the mid 1990s, fiscal constraints led to a reduction in the
maximum reimbursement rate from 20% to 10%. Reimbursements
on some exports were raised again in 1999-2000 and in 2001 with
the purpose of improving the international competitiveness of local
production, but after the 2002 devaluation they were cut in half
again. Currently they vary from 0% to 6% and they have fallen as
a portion of total exports. 2 In November 2005, reimbursements to a
1. In fact, exports under this program grew at a slower pace than the rest of
manufacturing exports over the same period. The regime, which rewarded sales
that would not have been made in the absence of any official incentive, concentra-
ted benefits on a few large export-oriented firms.
2. Except for a brief period in 2001, since 1995, exports to Mercosur have not
benefited from reimbursements.
54
group of food products were suspended to discourage exports and

weaken pressures on domestic prices.
Specific tax incentives subsidize international sales of goods
whose production is concentrated in some regions. The most sig-
nificant benefits exports of products originated or were manufac-
tured in the Patagonia region (south of the Colorado River) and
shipped through Patagonian ports. An additional 5% reimburse-
ment on exports of mineral products extracted in the provinces of
Catamarca, Jujuy and Salta was established in 1993. Both instru-
ments go against the WTO Agreement on Subsidies and for that rea-
son the Argentine government is gradually dismantling them. 1
Until the early 1990s, financial support for exports was chan-
neled through the Central Bank, but since then the agency in charge
has been the Investment and Foreign Trade Bank (IFTB) 2. The IFTB
is a public second-level bank that channels loans to private banks to
finance investment and, to a lesser extent, foreign trade projects: in
2003 only 16% of loans were destined to foreign trade operations.
High financial intermediation costs, bureaucratic delays and lack of
interest of private banks to offer credit lines have curtailed the
effectiveness of this mechanism (Berkinstein, 1996).
Several national and provincial public agencies carry out trade
promotion activities. The Export-AR foundation is a non-profit
organization associated with the Ministry of Foreign Relations,
Trade and Cult and underwritten by several government agencies
and business organizations. It organizes trade fairs and missions
abroad, provides trade-related information and develops consulting
and training activities. Its small budget, the limited participation of
private sector representatives in decision making, the lack of
specialization of its personnel and ineffective provision of
information to firms greatly compromises its effectiveness. Local
firms also receive assistance from Argentine embassies and
consulates. The varying effectiveness of these complementary
services depends on the personal qualities of the officials in charge
(Castello, 2001). A study by Bekinstein (1996) indicates that
Argentine businessmen view trade missions and fairs organized by
public officials favorably, but do not find the information and
assistance received from government sources to be satisfactory.
1. Patagonic reimbursements started to drop in 2000 and are scheduled to com-

pletely disappear between 2007 and 2012.
2. Banco de Inversión y Comercio Exterior (BICE).
55
Results from the interviews conducted by Milesi, Yoguel y Moori

Koenig (2001) reinforce this assessment. A majority of small and
medium-sized firms who responded to this survey do not use trade
promotion services because either they ignore their existence or
they find the information they receive to be inadequate for their
purposes. Other trade promotion programs are carried out by the
Undersecretariat of Agriculture, Livestock Fishing and Food, the
Undersecretariat of Trade Policy and Trade Management and the
Undersecretariat for Small and Medium-seized Firms and Regional
Development, as well as by several provincial governments that
developed autonomous trade promotion activities. The activities of
different national and provincial agencies usually overlap and are
poorly coordinated, thus conspiring against the overall efficiency of
efforts in this area.
Scholarly assessments of export promotion policies tend to agree
that during the 1990s their impact on the increase and diversification of
exports was limited. CEPAL (2003) finds that export promotion instru-
ments –particularly reimbursements to exports outside Mercosur– had
small positive effects on certain agricultural and mining products and
on larger firms. Export promotion instruments applied in Argentina
have proven to be successful in other countries. Their performance in
the case under consideration has been disappointing. The difference
can be related to the volatility of reimbursement policies, the concen-
tration of benefits on a handful of large firms, the weakness of second-
level financial instruments and the information and coordination prob-
lems experienced by public trade-promotion agencies.1
Export Taxes
Taxes on exports display the same volatile pattern that is charac-
teristic of all trade policies towards exports. Since the late 19th cen-
tury, Argentine governments have taxed exports often, most of the
time in order to dampen the effect of devaluations on domestic
prices and increase fiscal revenue. The liberalization policies
adopted in the late 1970s led to a significant reduction in export
taxes, but they were restored in the 1980s and almost completely
eliminated between 1991 and 2001. 2 They returned to the scene in
1. Studies assessing the effectiveness of trade promotion instruments over the

1980s reach similar conclusions (See Bisang 1990).
2. A 5% export tax on unprocessed leather and a 3% export tax on oilseeds
were maintained to encourage domestic processing and compensate the effect of
tariff escalation in export markets.
56
2002 and currently affect all products with rates ranging from 5 to
25%. 1 The sharp increase in international prices for crude oil led
national authorities to adopt a system of variable taxes on exports
of this product. 2
Several reasons account for the maintenance of taxes on exports
since 2002 in spite of their distorting effect on trade policy. First,
export taxes explain most of the improvement in the fiscal stance in
the post-Convertibility period. 3 Second, the relatively small num-
ber of exporting firms facilitates tax administration (Lederman and
Sanguinetti, 2003). Third, taxes on exports mitigate the effect of
devaluations on domestic prices. This is politically significant as
food and energy-related products represent the bulk of Argentine
exports and weigh heavily on domestic production and consump-
tion patterns. For this reason the government has increased exports
taxes on sectors that reorient their sales from the local market to
international markets. 4 Finally, by taxing exports the state captures
part of the rents accruing to agricultural and oil extracting sectors as
a result of the devaluation and higher international prices. 5
International Trade Negotiations

Since the early 1990s, Argentina’s negotiation strategies focused
on the regional scale and more precisely on its relationships with
Brazil in the context of Mercosur. In Aggarwal and Espach´s terms
(2004), this is the strategy of a “regional partner, focused at the
minilateral (concentrated) level, with transregionalism pursued
through collective regional activity”. Currently, Argentina is
engaged in many negotiations on complex and overlapping topics
(Bouzas and Pagnotta, 2003) such as: internal Mercosur affairs,
negotiations with other Latin American countries, negotiations
1. Grains and oilseeds pay 20%, while most manufactures pay around 5%.
2. The rate increases when the price of each barrel exceeds USD 32 up to a
maximum of an additional 20%. The current tax rate on oil exports is 45%.
3. They have accounted for 8% to 10.5% of total tax collection since 2002.
4. Late in August 2005 government increased export tax rates on dairy prod-
ucts from 5% to 15% after attempts to reach a price agreement with dairy firms
failed. To institutionalize this policy the Argentine government has recently
adopted a “competitive need clause” by which firms affected by internal or exter-
nal factors may apply for tariff reductions, increases in export taxes or a reduction
of reimbursements.
5. For an estimate on the distribution of after-tax oil rent see Gaggero and
Grasso (2005).
57
with the US over an FTAA and with the European Union and the
WTO’s Doha Round negotiations. Argentina also pursues bilateral
negotiations with countries such as China and Russia.
The Multilateral Dimension: Argentina and the GATT/WTO
Argentina joined the GATT in 1968, after the completion of the
Kennedy Round. As a member, Argentina gained concessions
from the European Community and the US, which were broadened
during the Tokyo Round (1973-1979). As a developing country,
Argentina had only to consolidate a small number of tariff positions
in exchange (De las Carreras, 1991). Until the Uruguay Round,
Argentina participated in the multilateral trade forum only sporadi-
cally (Ablin and Makuc, 1995). 1 However, it was very active in the
Uruguay Round 2 acting both alone and through the Cairns Group.
Argentina’s unilateral trade liberalization was completed before the
end of the Uruguay Round. Consequently, commitments did not
always result from an exchange of concessions but were sparked by
domestic considerations. 3 As a result of the Uruguay Round,
Argentina consolidated its tariffs at around 35%. The ratification of
the Uruguay Round agreements meant the adoption of formal pro-
cedures to enforce trade relief measures, the reform of intellectual
property laws according to the TRIPs, a commitment to eliminate
measures incompatible with TRIMs, and a reduction of subsidies. 4
The new commitments entailed acceptance of WTO conflict resolu-
tion procedures, which Argentina also used successfully as a com-
plainant. 5 WTO commitments also served to restrain the use of
certain trade protection measures during the 1990s.
Argentina is seeking further liberalization of agricultural trade
from the US and the EU, and has thus remained active in the Doha
Round. The country partakes in a coalition led by Brazil, China and
India countries that are able to make concessions of interest to
1. Argentina implemented many of the codes agreed during the Tokio Round
well ahead (Ablin and Makuc, 1997). For example, the Customs Valuations code
was implemented in 1988 and the Anti-dumping code in 1992.
2. We thank Néstor Stancanelli for calling our attention to this point.
3. Bouzas and Soltz (2004) analyze Argentina commitments before the GATS.
4. For a detailed analysis of these commitments and their implications see Cas-
aburi et al. (1998).
5. These are the cases of Chile’s price ranges and definitive anti-dumping
duties applied by the US to certain steel products. A controversy against the EU
about measures affecting trade of certain bio-technological products (the so-called
transgenic soybean) is still under way.
58
developed countries. Having, unilaterally, adopted fairly open

investment and trade regimes in the 1990s, Argentina has little to
offer as a single country in the multilateral arena. Thus, a coalition
strategy seems a rational way to follow.
The Regional Dimension: Argentina in Mercosur

Argentina’s incentives to move closer to Brazil 1 rested mainly
on political considerations 2 with the significant economic element
of gaining access to a large market. (Bouzas, 1998). This
partnership was also perceived as a means to gain leverage in
international negotiations. After a long period of rivalry,
competition and mutual distrust, 3 by the mid-1980s both countries
signed the Program of Economic Exchange and Cooperation
(Programa de Intercambio y Cooperación Económica-[PICE]). The
critical macro-economic situation of the late 1980s restored
protectionist measures. After a sequence of bilateral agreements, a
new phase on the integration process between Brazil and Argentina
was inaugurated in 1991 in the context of Mercosur. Paraguay and
Uruguay joined the partnership, which involved adopting an
automatic, linear and generalized trade liberalization mechanism. 4
As expected, Argentina’s trade with its regional partners and the
level of economic interdependence increased as a result. However,
the bilateral relation with Brazil has been loaded with significant
asymmetries: whereas Brazil’s relative significance as a destination
of Argentine exports increased until 1998, it contracted afterwards
to reach levels similar to those prevailing in the early 1990s. In
1. Argentina actively took part in ALALC negotiations during the 1960s. This
integration process soon faced the constraints posed by the very logic of ISI, the
exhaustion of the phase of “easy” concessions and high political and economic ins-
tability in participating countries. Acknowledging these difficulties, a more flexi-
ble scheme without specific time commitments was adopted (the ALADI
agreements established in 1980). This context drew Argentina and Brazil closer
by the mid 1980s.
2. Economic integration with its neighbour dissolved military confrontation
and helped democratic governments to reach their priority goal of reducing the
influence of the Armed Forces in domestic politics.
3. Russell and Tokatlian (2003) highlight the fluctuations of Argentine percep-
tions of Brazil, which traditionally “was seen as an indispensable ally to enlarge
national autonomy, strengthen international negotiation capabilities but also as the
main geopolitical rival, which threatened national security and even our country’s
territorial integrity.”
4. This mode of regional integration, with “more market and less state,” suited
the neo-liberal paradigm prevailing over economic policies at the time.
59
contrast, the share of imports from Brazil in total Argentine imports

increased permanently, heightening the exposure of domestic
producers to the competition of Brazilian products.
Mercosur increased the share of Argentine industrial products in
total exports to Brazil, thus giving rise to a trade specialization pat-
tern quite different from that with the rest of the world. However,
Argentina’s stance towards Mercosur has been ambiguous. This
has stemmed from divergent interests with its partners, a difficulty
in setting priorities and the consideration of other preferential nego-
tiation opportunities (Bouzas, 2001; Ablin and Bouzas, 2004). It
also derives from internal dissents that gained intensity at different
times, but that were present since the very inception of the integra-
tion process. While some sectors advocated other partnerships
(basically with the US), 1 others strove for deeper integration with
Mercosur. Mounting dissatisfaction with Mercosur has derived in
part from the unsatisfactory treatment of asymmetries, combined
with Brazilian reluctance to adopt a mechanism of intra-zone safe-
guards.
In spite of these difficulties, Argentina’s trade negotiations with
the rest of Latin American countries and with developed regions
have been channeled through Mercosur. 2 Since Argentina’s offen-
sive interests lay where most counterparts exhibit strong defensive
interests, progress in these negotiations has been modest. After
subscribing free trade agreements with Chile and Bolivia in 1996,
Mercosur faced difficulties in reaching similar deals with other
ALADI members. Only in late 2003, and after eight years of thorny
negotiations, Mercosur countries signed a free trade agreement
with the Andean Community countries. Disagreements about agri-
cultural subsidies and market access have blocked negotiations
with the US and the EU.
After this stylized description of the dominant patterns in Argen-
tine trade policy we turn to a consideration of their domestic deter-
minants.
1. Criticisms flourished during the negotiation of the Common External Tariff

(1992-94), when the Brazilian government announced the adoption of an automo-
bile regime similar to the Argentine one, after the devaluation of the Real (1999-
2001) and more recently with the generation of negative trade balances for Argen-
tina (2004-05).
2. For an analysis of Argentina’s incentives in these negotiations see Bouzas
(1999).
60
of International Trade Policy in Argentina
This section presents some theoretical arguments to guide the

interpretation of the impact of domestic factors on international
trade policy. Based on these arguments we then offer a brief inter-
pretation of the Argentine case. The analysis is divided in two
parts, structural and institutional factors. Passing references will be
made to ideological factors and junctures, but they will not be the
object of a separate treatment.
Theoretical Arguments
Trade policies obviously reflect policy makers’ intentions.
However, those intentions do not always express policy makers’
preferences. Policy makers face restrictions and internalize them in
forming their preferences. Theories should account for the effect
of these restrictions that interact with ideologically-inspired
preferences to shape policy decisions. In the case of trade policy
these restrictions can be roughly classified according to their origin.
National authorities take into account the actual or potential
trade policies adopted by other national states to decide on levels of
domestic market protection, implement export promotion measures
(Brander, 1995) and develop international negotiation strategies
(Maxfield, 2001). These considerations, together with bilateral,
multilateral and regional agreements constrain trade policy choices.
As these factors operate outside the national territory, we can then
call them external factors. External factors are significant determi-
nants of international trade policies. However, as we have indi-
cated, our discussion will focus exclusively on domestic factors.
This does not mean that we believe domestic factors to be more
important. Indeed, domestic factors are not sufficient to interpret
some features of Argentine trade policy, particularly the persistence
of relatively low tariff barriers.
We will not comprehensively review the extensive literature on
domestic factors and international trade policy. 1 Instead, we will
briefly outline some theoretical arguments to guide our analysis
of the Argentine case. The arguments are divided into four
1. For two excellent comprehensive assessments of knowledge in the field see

Rodrik (1995) and Milner (1999).
61
groups: structural factors, institutional factors, ideological factors

and conjunctural factors.
Structural Factors
Trade and trade policies –even intra-industry trade– have distri-
butional consequences (Rodrik, 1995, p. 1460-63). Individuals
develop preferences about distributional outcomes and, given cer-
tain beliefs about the influence of trade policy on trade flows,
derive preferences on trade policies from preferences on outcomes.
Approaches differ in their criteria to identify the sources of those
preferences and in their specification of the mechanisms through
which preferences over trade policy translate into attempts to influ-
ence policy-making
According to one approach, it is the relative abundance of factors
of production in a given country that prompts their owners to
develop different preferences over international trade and trade
policies. The “factor endowments approach” states that owners of
factors of production that are abundant in a given country should
favor free trade, since it will raise their income. By the same token,
owners of scarce factors should seek protection through restrictions
on international trade. The factor endowments approach assumes
free movement of factors of production across sectors. The factor-
specific approach does not. According to this second approach,
owners of factors of production employed in export-oriented
sectors will benefit from trade liberalization whereas owners of
factors employed in import-competing sectors will benefit from
trade restrictions.
The empirical literature has found support for both factor-endow-
ments and factor-specific arguments (among many others Mayda and
Rodrik, 2005; Esfahani, 2005; Milner, 1999 and citations therein).
These arguments help us to identify the necessary conditions for
political mobilization for or against a certain trade policy. However,
they are not sufficient to interpret constraints on trade policy-making.
Political mobilization from representatives of sectors or factors of
production may or may not affect trade policy, depending on other
intervening elements. Considerations of this kind have led scholars
to focus on other attributes of societal sectors.
A number of studies explain the ability of societal actors to
influence trade policy in terms of features that indicate either
political influence or political salience. “Political influence” refers
to the ability of a societal actor to directly impose costs on policy
62
makers in case they decide against the actor’s interests. “Political

salience” refers to the costs that result from hurting a particular
sector, but that are not directly imposed by sectoral collective
action. Market and spatial concentration and financial capability to
contribute to political campaigns are common indicators of
political influence. Labor-intensity, employment of low-skilled
workers, restricted access to credit and insurance (Esfahani, 2005)
and rising import penetration are usually referred to as indicators of
political salience. The literature is not altogether clear as to what
prompts policy makers to protect vulnerable sectors or to choose
vulnerability to international trade as a criterion to grant protection.
However, vulnerability to trade can be construed as a proxy for
potential increase in unemployment, potential political
mobilization, potential electoral loss or potential raise in the costs
of social protection. Any of these factors may lead the authorities
to restrict trade in order to protect domestic sectors. 1
In sum, trade and trade policy have distributional consequences.
According to structural approaches, relative factor abundance or
sectoral international competitiveness set fundamental preferences
over trade policy. Those preferences can translate into effective
restrictions on trade policy-making depending on the political
salience of the sectors involved or the political influence of partic-
ular sectoral actors. Our argument will try to relate the evolution of
trade policy in Argentina to the political salience or political influ-
ence of societal actors.
Institutional Factors
Structural approaches account (with different degrees of success
depending on the topic) for the “demand side” of trade policy. A
complete account should bring “supply side” considerations into
the picture. Two basic reasons justify this claim. First, satisfying
societal demands is one among many constraints that public
officials face. Consequently, they enter as just one factor in the
utility function of policy makers. Second, the state is not a unified
actor. Policies result from the interaction between different
1. It should be noted that, as Rodrik (1995) argues, the literature tends to focus
on the reasons why societal sectors will demand trade restrictions. It is far from
obvious that this should always be the case. The systematic bias of trade policies
against free trade is thus left unaccounted for. Rodrik suggests that the signifi-
cance of tariffs as a source of fiscal revenue and the status quo bias of any policy
hold the greatest promise in accounting for anti-trade bias (1995, 1480).
63
individuals and groups endowed with legal authority to intervene in

public policy decisions. Our argument considers two kinds of
supply-side elements: the ideological orientation of policy makers
and political institutions.
We understand political institutions as “the set of contextual
features in a collective choice setting that defines constraints on, and
opportunities for, individual behavior in the setting” (Diermeier and
Krehbiel, 2003). In other words, political institutions are the rules
(both formal and informal) of the political game. Several efforts
have been made to understand how the rules according to which
politicians decide affect trade policy-making (Rogowski, 1987;
Mansfield and Busch, 1995; Nielson, 2003; O’Reilly, 2005). These
studies present and test different hypotheses and reach different
conclusions. Their fundamental tenets can be summarized in two
statements: political institutions affect, a) the relative insulation of
decision makers from special-interest pressure, and b) the relative
simplicity of decision-making processes. From these basic insights
scholars infer different corollaries.
Predictions about the influence of institutions on the nature of
trade policies differ widely. For example, Mansfield and Busch
(1995) predict domestic market protection and Nielson (2003)
predicts trade liberalization from institutions that insulate policy
makers from societal pressures. The contrast is unsurprising, for
direct inferences of particular trade policies from a given institutional
framework are misleading. Institutions determine how many actors
get to decide, how cohesive those actors are, and how their
preferences are aggregated to reach a final decision. The nature of
the decision depends on the preferences of those actors. Different
public officials advocate different trade policies and have different
influences in the trade policy game. 1 Thus, it is not possible to
predict what the final decision will be by just knowing how many
players there are and how aggregating rules weigh their preferences.
Institutional features may lead to stronger predictions about the
relative stability of trade policies. We expect more volatile policies
from insulating institutions. Rules that prevent the intervention of
societal actors in decision making or aggregate voters’ preferences
at higher levels insulate politicians from special interest pressure.
1. Preferences about trade policy outcomes can be processed differently in dif-

ferent institutional settings. That is, preferences are not totally exogenous to the
political game; yet, they are basically exogenous.
64
Since different parties tend to advance different trade policies

(O’Halloran, 1994) we expect trade policy change from party turn-
over when political institutions effectively insulate policy makers
from societal pressures. Following this line of reasoning, we will
interpret the relative stability of trade policies in Argentina taking
into account the effect of political institutions on the insulation of
policy makers.
Rules that make for more cumbersome decision processes are
associated with more stable policy processes. The relative
simplicity of decision making processes is best explained in the
veto players approach developed by George Tsebelis (1995, 2002).
A veto player is an individual or collective agent whose agreement
is necessary to bring about policy change. 1 Constitutional
prescriptions, attributes of the party system and electoral rules
determine the number and cohesion of veto players. Tsebelis
defines as institutional veto players those agents whose agreement
is required by legal prescriptions to change policy. Parties that
partake of government coalitions are defined as partisan veto
players. 2 The number of institutional players depends on legal
mandates. The number and the internal cohesion of partisan
players depend on electoral rules. Partisan alignment can modify
the number of veto positions legally established; players with a
similar partisan composition can be counted as one player. The
number and cohesion of veto players, given the ideological
distances that separate them, affect the set of outcomes that can
replace the status quo (the winset of the status quo). The size of the
winset is smaller when the number of veto players and the
ideological distance between them are larger and when players are
more cohesive. When the winset is very small, the status quo
prevails and “policy stability” obtains. Extending this general
framework, we expect more stable trade policies in systems with a
1. Strom and Swindle (2002) develop further the language to refer to institutio-
nal positions with regard to their authority to intervene in policy-making. They
distinguish between veto players, agents whose agreement is necessary but not suf-
ficient to bring about policy change; decisive players, agents whose agreement is
sufficient but not necessary to enact policies and dictators, whose agreement is
both necessary and sufficient to adopt political decisions.
2. Members of interest groups or sections of the state apparatus such as the
armed forces can also count as veto players. The number of veto players can thus
vary across issues and over time. However, the distinction between institutional
and veto players is most relevant for a general analysis of political systems.
65
higher number of veto players and with more cohesive players.

Accordingly, we will interpret relative stability in Argentina’s trade
policy in the light of these two institutional factors (Tommasi and
Stein, 2005). 1
Institutional arguments can be applied to account for consistency
in the implementation of trade policy. We understand policy
consistency as the ability of public officials to sustain policy goals
over time. It mainly depends on their ability to solve coordination
problems. Along the lines detailed above, it could be argued that
effective institutional isolation and fewer veto players lead to more
consistent implementation.
Ideological Factors
Trade policies are intended to produce substantive economic and
political results. Politicians hold beliefs about the likely results of
the policies that they implement. Those beliefs drive policy-mak-
ing and policy implementation. Politicians also value the distribu-
tional effects of policy according to normative considerations. We
conceive ideological factors as the set of beliefs that drive policy-
making and normative considerations that shape the assessment of
substantive results. This set of beliefs and norms could be derived
from theories or experience. It could also be associated with parti-
san identity (O’Halloran, 1994) or the individual social status of
policy makers (Mayda and Rodrik, 2005).
Policy makers usually are familiar with structural and institu-
tional factors. They can always formalize this knowledge in terms
of a “theory” of the likely effects of policy. They can justify this
theory on some normative ground. Therefore, it is often difficult to
determine the degree of independence of ideological factors. How-
ever, the literature identifies numerous instances of sudden policy
reversal, particularly unilateral trade liberalization in Latin Ameri-
can countries (Milner, 1999; Rodrik, 1994) that can at least be par-
tially accounted for by a change in the ideological orientation of
policy makers and policy communities. This change may reflect an
interpretation of structural or institutional changes. However, the
ideological mediation is as relevant to interpreting the timing and
generality of episodes of unilateral liberalization as it is relevant to
interpreting the protracted previous ISI experiences.
1. This argument is consisten with O’Reilly’s (2005) findings on a sample of

23 OECD countries during the period 1960-1996.
66
Interactions Among Factors and Junctures

Although some efforts have been made to model the simulta-
neous influence of structural and institutional factors (see, for
instance, Mansfield and Busch, 1995) there is still no general
framework that can simultaneously account for both the demand-
side and supply-side aspects of international trade policy (Rodrik,
1995). Non-societal theories are still inchoate and the interaction
among structural, institutional and ideological factors poorly
understood. For this reason, our interpretation of the Argentine
case draws alternatively from different theoretical arguments that,
according to the rationales exposed here, we deem sound.
In line with some political science literature, we understand
junctures as points in time when relevant variables simultaneously
adopt critical values so as to prompt or make feasible previously
unlikely policy change. In this sense, junctures should not be
interpreted as carrying an explanatory weight of their own, but as
labels indicating sudden or convergent change in structural,
institutional and/or ideological factors. For example, some studies
relate recessions with increasing domestic market protection (see
Rodrik, 1995, and citations therein). It is not recession as such, but
the societal demands expected to spring from a drop in domestic
production that prompt changes in trade policy. It should be noted
that juncture arguments figure prominently in interpretations of
unilateral trade liberalization in developing countries, including
Argentina (Rodrik, 1994).
Structural Factors:
Structure and Nature of Domestic Interest Groups
Traditionally, clashes among dominant economic sectors heavily
influenced international trade policy and negotiation strategies in
Argentina. Until the early 20th century, these clashes were easily
resolved in favor of exporting landowners and against the
embryonic manufacturing sectors. As the industrialization process
unfolded, the structure of economic sectors became more complex.
Some industrialists (mainly in the metal-mechanic sector)
developed technical abilities during the import substitution period
and enjoyed the benefits of export promotion. By the late 1960s
they had started to export part of their product. In the 1980s, when
domestic demand contracted, some producers of intermediary
goods also joined the select club of exporters. These sectors gained
67
most of the benefits of export promoting policies, while also taking

advantage of import restrictions and a high level of market
concentration in the domestic economy. These capital-intensive
sectors managed to sustain a relatively high level of protection even
during the liberalizing process of the 1970s and exploited the
additional benefits of industrial promotion schedules in the 1980s.
Yet, primary goods still constituted the bulk of Argentine exports.
Industrial interests resisted the liberalizing process that started in
the late 1980s. A combination of ideological beliefs in the political
elites, pressure from multilateral institutions and a macro-economic
crisis neutralized this resistance and paved the way for a faster and
deeper liberalizing effort by the early 1990s. Tariff reduction
became a fait accompli, the reversal of which was made highly
unlikely by regional and multilateral agreements. Under these
conditions, industrial interests sought sectoral negotiations and ad-
hoc measures to delay or dampen the effect of trade reforms
(Viguera, 1998). This sectoral and “minimalist” strategy succeeded
during the initial period and was also useful in more recent episodes
of external shock.
Even in the context of a more open trade policy environment,
some producers of intermediary goods (such as steel) were able to
strengthen their positions in concentrated and still protected
domestic markets. Other domestic groups, previously dependent
on trade restrictions and state assistance, adjusted their business
strategies by reorienting their investment toward activities with
natural comparative advantages (mainly natural resource-intensive)
and less vulnerable to international competition (such as
partnerships with foreign firms in the privatization of public
utilities (Bisang, 1998; Basualdo, 2000).
To what extent can the structural factors just described help to
interpret the main features of Argentine import policies? Table 4
suggests that the highest protection has been granted to sectors of
predominantly domestic capital, except for the case of automobiles
(the weight of which in total industrial production may account for
the resilience of trade protection). 1 Within the group of protected
sectors we distinguish politically influential groups (producing
1. In the context of this chapter we considered the national origin of capital in

the early 1990s, when “contingent” protective measures were granted to this sec-
tor.
68
intermediary goods, such as steel and paper, and capital intensive,

durable consumption goods, such as home appliances) and
politically salient sectors (mainly producing labor-intensive, final
consumption goods such as textiles, footwear and toys). Whereas
politically influential groups tend to operate in markets
characterized by relatively high levels of concentration, politically
salient sectors usually operate in more competitive environments.
During the 1990s this second group experienced increased import
penetration from products originating mainly from Brazil and, in
the case of toys, China.
Predominance of domestic capital and rising import penetration
are necessary but not sufficient conditions for trade remedies. To
illustrate this point consider the case of the capital goods industry.
In spite of the dominance of local producers and mounting foreign
competition, the economic authorities gave priority to technologi-
cal modernization as compared to the protection of local produc-
tion. Other sectors (such as wood furniture) did not enjoy remedial
protection in spite of suffering a true avalanche of imports. We
observe that the lack of remedial protection in these cases is consis-
tent with their limited political influence and salience.
The structural configuration of sectors also sheds light on export
policies and international trade negotiations. An average of only
350 firms accounts for much more than three quarters of total
exports. (Crespo Armengol, 2005). This small group of firms
reaps most of the benefits from export promotion, which has
mainly served to raise profits, since these exporters are already
internationally competitive. The instability of export incentives
(excluding special regimes), the lack of foreign trade finance and
the inefficacy of trade promotion prevent smaller firms from
developing consistent export-oriented strategies. Although the
number of exporting firms rose in the second half of the 1990s and
after the 2002 devaluation, they usually engage in small
transactions that follow an erratic path. 1, 2 If a larger number of
smaller firms were engaged in foreign trade, their expected reliance
1. Bianchi, Bozzalla and Mascareño (2003) show that half of the firms that
began exporting in the second half of the 1990s did so discontinuously, 40% aban-
doned the effort and only 10% continued to export throughout the period (1994-
2002).
2. Small and medium-sized firms prevail in exports of capital goods, electro-
nics, medical instruments, construction inputs, fruits and fishing (Crespo Armen-
gol, 2005).
69
on export incentives and export promotion policies may encourage

them to lobby more effectively for consistency and stability.
Large exporters also constitute the most influential group in
defining Argentina’s offensive interests in preferential and
multilateral trade negotiations. Their key demand is the removal of
access barriers to foreign markets, particularly in the developed
world. As we argued before, in multilateral arenas Argentina relies
on the market access concessions that its big regional partner
(Brazil) may, but is unlikely, to make. Following Krishna and
Mitra (2003) we believe that Argentina agro-exporting firms will
find weak incentives to demand a reduction of protection to import-
competing sectors as long as developed countries continue
protecting their agricultural producers.
Institutional Factors:
Insulation, Veto Players and Trade Policy in Argentina
In this subsection we describe the features of the Argentine
political system that are most relevant to interpreting trade policy
patterns. We divide the analysis into three parts. The first one deals
with constitutional features. Constitutional features are rules of the
political game that are explicitly set by the Constitution or by laws
of constitutional standing. The second refers to basic characteristics
of the party system. Partisan features can be interpreted as
contextual constraints on policy-making (by our definition, as
institutions) between elections. The third section addresses
bureaucratic features. By this we refer to the distribution of policy-
making authority and the policy capabilities of different Executive
agencies (mainly at the national level).
Constitutional Features
Presidentialism. Argentina is a presidential republic. Executive
power is exercised by an individual who is directly elected in a
nationwide electoral district for a fixed four-year term. Argentine
law endows presidents with significant legislative powers.
Presidents can initiate and veto legislation and legislate by
emergency decrees. Vetoes can affect an entire piece of legislation
or only parts of it. A qualified majority of 2/3 of both chambers in
Congress is required to override presidential vetoes. However, veto
overrides are rare. In practice, this means that Presidents should
agree on every detail of a bill for it to become a law. The 1994
Constitution grants Congress the ability to revise or suspend
70
Table 4. Main features of highly-protected sectors

Sectors
Textiles and
Automobiles Sugar Footwear Home appliances Toys Paper Steel garment
Trade Nominal Protection Rate (%) High High High Intermediate High Intermediate Intermediate High
policy
Effective Protection Rate (%) High High High Intermediate High Intermediate Intermediate High
Exc transition Exc transition Exc transition Exc transition Exc transition
Mercosur Tariff treatment Special Special na.
regime/CET regime/CET regime/CET regime/CET regime/CET
Non automatic SMIDs, non
SMIDs, safeguard
previous import automatic Antidumping duties, SMIDs, automatic
Performance clauses, non Safeguard clauses
Non tariff protection licences, market previous market ordering previous import
requirements Variable tariff automatic previous (1992-94)
order agreements, import agreements licenses
import licenses safeguard clauses licenses
Non automatic Non previous
previous import automatic Antidumping duties, Automatic
Performance Automatic previous Safeguard clauses import licenses,
Brazil licences, market previous market ordering
requirements Variable tariff import licences (1992-94) market ordering
order agreements, import agreements agreements (denim)
safeguard clauses licenses
Foreign Exports/Gross production value 41.7 na. 2.7 3.1/5.4 na. 14.1 20 15.4/16.4/5.3
trade (2004) (*)
Imports/Apparent Consumption 51.1 na. 16.8 26.8/21.1 na. 18.7 13.5 22.55/22.3/7.6
(2004) (*)
Predominant origin of the imports Brazil na. Brazil/China Brazil/China China Brazil/USA/Chile Brazil Brazil
Share in industrial employment (%)
Structure 1.1 na. 2.8 1.1/0.3 na. 2.2 2.1 2.8/1.2/2.8
(*)
Share in industrial gross production 3.5 na. 0.8 0.9/0.8 na. 3.2 5.7 3.5
value (%) (*)
concentrated (sport
Concentrated, footwear), non Non
Concentration level Concentrated regional Concentrated Concentrated Concentrated Non concentrated
concentrated (non concentrated
concentrated sport footwear)
Foreign (previous National/Foreign
Capital origin Foreign National National National/Foreign National National
national) (previous national)
na. Not available (*) Include subsectors
Source: Authors´ elaboration on data from MeyP, INDEC, CEP, Chudnovsky y López (2001), Crespo Armengol et al. (2004), convergencia del AEC.
71
emergency decrees. However, since this faculty has not been

reglamented, in practice Presidents can chose whether to initiate
legislation or legislate by emergency decrees as they see fit.
In addition, Argentina political mores implies further delegation
of Congressional prerogatives on the Executive. Presidents
Menem, De la Rúa, Duhalde and Kirchner have all asked, obtained
and renewed congressional approval to bypass congressional over-
sight in economic issues, most of the time in the form of so-called
“economic emergency laws.” Typically, these laws are sanctioned
at times of deep economic crisis, but they have frequently stayed in
place long after the emergency passed.
In sum, no change from the status quo is possible without presi-
dential approval. This turns the President into a powerful veto player.
Typically, Argentine presidents are able to set new policies close to
their ideal. Extensive use of decree powers transforms presidents
into decisive players (whose agreement is sufficient to bring about
policy change). The Argentine presidency provides for rather simple
decision-making processes. We would then expect relatively high
policy volatility whenever societal preferences, ideological orienta-
tions of policy makers or macro-economic conditions change.
In terms of policy insulation from societal pressures, the effect
of presidentialism is difficult to ascertain theoretically. Some
literature correctly argues that presidents are less likely to fall
prey to particular interests when they are elected, as they are in
Argentina, in a nationwide district (Nielson, 2003). However,
elections are not the only means through which sectoral pressure
can be channeled. Sectoral organizations can lobby Executive
agencies and the effectiveness of that lobbying activity may be
higher when the voice of the Executive is the only relevant one to
decide over policy issues. Thus, there are reasons to expect that
the delegation of strong legislative powers to the President will
lead to less effective policy insulation.
Part of the reason that helps us associate Argentine presidentialism
with policy volatility; also helps us to account for the relative
inconsistency in policy implementation. If the decision process is
highly concentrated, the ability to change suspend or simply dilute
previously implemented policies, increases. However, the strong
concentration of political power in one office could also lead to
consistent implementation; particularly when presidents can rely on
professional and disciplined bureaucracies. Therefore, we associate
the instability of non-tariff measures and the inconsistency on the
72
implementation of export-promotion schedules previously identified

not to presidentialism as such, but to its interaction with a fragmented
and poorly coordinated bureaucracy.
The Role of Congress. The Argentine Congress is divided into two

chambers. The lower one (Chamber of deputies) has 256 members
elected in 24 provincial districts for four-year terms. The Higher
Chamber (Senate) has 72 members elected in 24 provincial districts
for six-year terms. Article 75 of the Constitution grants Congress the
authority to set tariffs, legislate on customs issues and ratify
international treaties. In practice, Congress delegates many of these
authorities to the Executive. Congress has intervened in trade policy-
making only when the interests of regionally concentrated sectors
were affected (as it was the case of intra-Mercosur sugar trade or
some regionally concentrated export promotion mechanisms) or
when WTO commitments required a reform of intellectual property
protection laws (Bouzas and Pagnotta, 2003, p. 90).
Bicameralism would make for a policy game with a higher num-
ber of players. However, Peronist presidents usually enjoy solid
majorities in both Chambers of Congress. This allows them to turn
most of their agenda into law. Non-Peronist presidents, in contrast,
have faced Peronist majorities in the Senate, although they had
majorities in the lower chamber for most of their terms. Partisan
coincidence between the President and legislative majorities
reduces the number of effective veto players and increases the like-
lihood of delegation of Congressional prerogatives to the Executive
(Shugart and Carey, 1998). Thus, for most of the time international
trade initiatives did not face significant opposition in Congress.
Those that did, mostly reflected the ability of regionally concen-
trated interests to exercise pressure over their legislative represen-
tatives. The Argentine legislative process is simpler than one
would expect after reading the Constitution. This is also consistent
with higher trade policy volatility. 1
Electoral System. Electoral rules constrain potential party system

fragmentation (Amorim Neto and Cox, 1997) and influence party
discipline in Congress (Carey and Shugart, 1995). In Argentina the
1. Some authors construe bicameralism as a sign of feeble insulation from

societal influence. We believe that bicameralism could also be consistent with
stronger insulation. Still, as the Argentine Congress is not a relevant actor in trade
policy-making, this argument loses relevance to interpret the case of Argentina.
73
average number of legislators that provinces reinstate on each

election is rather low (3 for Senators and 5 for deputies). Therefore,
in spite of the proportional representation formula used to allocate
seats in the Lower Chamber, a small number of parties can expect
to gain seats. Voters choose among lists of candidates selected by
political parties. The expectation to get a place in the party list,
along with other factors, prompts legislators to follow party lines in
Congressional votes. Few and disciplined legislative parties lead to
larger partisan powers of presidents and a lower number of veto
positions. For the reasons stated above they are both consistent
with higher policy volatility and low policy insulation.
Partisan Features
Evolution of Party System Fragmentation. Figure 2 displays the
evolution of party-system fragmentation in terms of the effective
number of parties (that is, the number of parties that receive votes
or earn seats weighted by their share of votes or seats). As we can
see, the increase has been significant and persistent since 2001.
Given that each province reinstates relatively few legislators, fewer
parties gain seats in Congress. Accordingly, the increase in frag-
mentation in the legislative arena is not as pronounced as in the
electoral arena.
Figure 2. Evolution of party system electoral and legislative fragmentation

1983-2003
Effective number of parties
0
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
ENP votes ENP seats
Source. Authors’ calculations on data from the National Electoral Department, Ministry of
the Interior.
74
Electoral and legislative levels of party fragmentation were

rather low for most of the period. Recent party fragmentation
affected mainly non-Peronist parties that participated in the coali-
tion that backed the De la Rúa administration. The Partido Justi-
cialista withstood the electoral maelstrom and thus allowed
Peronist incumbents to keep on enjoying significant Congressional
support. The dispersal of opposition organizations reinforces the
centripetal tendencies in the policy-making process. The structure
of the Argentine party-system poses no additional restrictions on
trade policy-making and therefore, again, provides for higher pol-
icy volatility and low policy insulation.
Linkages between Parties and Society. Political parties establish

different kind of linkages with societal actors. The political science
literature distinguishes between clientelistic and programmatic
linkages (Kitschelt, 2000). Clientelistic linkages consist in the
exchange of political support (votes, campaign contributions) in
return for private or club goods. Program linkages consist in
exchanges of political support for public goods. Argentine political
parties, especially the Partido Justicialista, favor clientelistic
linkages (Leiras, 2004). In a predominantly clientelistic setting,
elections place no effective constrain on policy-making. Thus,
clientelism insulates policy makers from the concerns of the
citizenry at large (although probably not from the pressures of
organized interest groups). Clientelism also gives parties ample
room to redefine policies, discourses and alliances with organized
actors from one election to the next.
Given that Argentine political parties are ideologically inconsistent,
sectoral actors channel trade policy demands directly through
corporatist organizations, bypassing the party system. The most
significant organizations (yet, of course, not the only ones) representing
business interests are the Argentine Rural Society (SRA) and the
Argentine Industrial Organization (UIA). They both are large, complex
and experienced organizations. Their incidence on policy-making is
significant. Divergences between export-oriented and import-
competing sectors have often posed coordination problems to these
organizations. These problems have been particularly acute in the case
of UIA. Although UIA has often demanded protection for import
competing sectors, the most significant influence of these organizations
over trade policy comes from their advocacy for or against fundamental
macro-economic policy, especially exchange rate policy.
75
Bureaucratic Features
A complete account should bring into the picture the attributes of
bureaucratic organizations. The division of authority among Exec-
utive agencies (Ministries, Secretaries, Undersecretaries and
National Departments) can be analyzed in terms of the veto players
approach and its effects on policy insulation. 1
Up to the early 1990s, trade policy prerogatives were concen-
trated in the Ministry of Economy. In 1992, Law 24.290/92 split
competences between this Ministry and the Ministry of Foreign
Relations. The former has authority over tariffs, export taxes,
quantitative import restrictions, licenses and special import
regimes, customs regimes, export tax rebates and trade relief. The
Ministry of Foreign Relations, in turn, is responsible for interna-
tional trade negotiations and trade promotion activities abroad. The
Ministry of Economy also has a say on trade negotiations. This
basic distribution of functions was kept unaltered since 1992, but
the division of labor among subagencies within each Ministry has
experienced frequent changes (Bouzas and Soltz, 2004).
Within the Ministry of Economy, most trade-policy related
authority is concentrated in the Secretariat of Industry, Trade and
Small and Medium-Sized Firms, which is in turn divided into
three Undersecretariats. The Undersecretariat of Trade Policy
and Management carries most trade-related responsibilities, such
as the implementation of trade relief measures and export
promotion programs and the determination of tariff levels
(although it has no final authority on this area). It also
participates in foreign trade negotiations. The Undersecretariat of
Industry administers industrial promotion regimes and, since
2003, coordinates the National Forum on Industrial
Competitiveness. The Undersecretariat for Small and Medium-
Sized Firms and Regional Development helps smaller firms with
financial, informational and training trade-promoting activities
and oversees the National Foreign Trade Commission, which
participates in trade relief investigations. Within the sphere of the
Secretariat of Economic Policy, the Undersecretariat of Economic
Coordination (through the Department of Foreign Economic
Policy) has primary authority on tariff issues. The Secretariat of
1. Given that bureaucratic agents are typically not endowed with political
authority of their own, political transaction-costs considerations are somewhat less
relevant to interpreting interbureaucratic coordination.
76
Agriculture, Livestock, Fishing and Food carries out export

promoting programs of its own and partakes actively in international
trade negotiations. Finally, the Federal Administration of Public
Revenue, also under the direction of the Ministry of Economy,
collects taxes and custom duties.
Within the Ministry of Foreign Relations, two agencies, depen-
dent from the Secretariat of Trade and International Economic
Relations, partake on trade policy. The Undersecretariat of Interna-
tional Trade carries out negotiations in multilateral arenas and trade
promotion activities overseas. The Undersecretariat of American
Economic Integration and Mercosur is, in turn, responsible for
preferential agreements. This Ministry, along with private sector
organizations, run the Export-Ar foundation, an entity that offers
foreign trade promotion services to exporters. Also under the aus-
pices of this Ministry is the Center of International Economics that
performs studies on trade and regional integration.
Scholarly opinion highlights the coordination problems resulting
from this highly fragmented bureaucratic structure (Bouzas and
Pagnotta 2003; Bouzas and Soltz 2004; Tussie et al., 2003). Jordana
and Ramió (2002) classify Argentina as a case of high institutional
fragmentation and a medium level of formalization and coordination.
There are no formal inter-Ministerial coordinating mechanisms and
consultations among officials in charge of different aspects of trade
policy which, according to existing assessments, are highly
dependent on the personal attributes of incumbents. The lack of
consultation leads to overlappings and lower negotiation efficiency,
especially in multilateral arenas.
Bureaucratic fragmentation affects both policy insulation and
policy stability. The absence of inter-agency binding coordinating
mechanisms makes public officials more vulnerable to interest-
groups pressure. Agencies in charge of different aspects of trade
policy have no overarching agreement or procedure to abide by.
Societal actors, especially those with long experience in dealing
with state authorities, may exploit this leeway when negotiating an
official response to their claims. The ex-post, ad-hoc and sectorally
concentrated pattern of trade protection, illustrates this point.
In terms of policy stability, a fragmented bureaucracy offers no
robust check on the policy initiatives decided by elected officials. In
summary, the joint consideration of constitutional, partisan and
bureaucratic features helps to account for the predominantly volatile
and feebly insulated pattern of trade policy-making in Argentina.
77
Concluding Remarks:
Interpreting Argentina International Trade
Strategies in Light of Domestic Factors
To summarize our conclusions we will first present the defining

characteristics of Argentine trade policies and then turn to interpreting
them in the light of the domestic attributes just described. Consider
first policies toward imports. After some early and failed attempts at
trade liberalization, since 1988 tariff reduction has been rapid and
across-the-board. Average levels have remained low ever since,
except for two short-lived reversals. All sectors suffered the effects of
liberalization and some of them (such as producers of capital goods)
have experienced almost complete exposure to international
competition. Demands for continued protection have been responded
through trade relief measures and ad hoc mechanisms.
Although export promotion instruments are horizontal, in practice
only certain sectors and firms benefit from them. Export incentives
are vulnerable to fiscal and macro-economic constraints (especially
exchange rate policy) and to lack of financial assistance.
Consequently, public policy commitment with export promotion
appears unstable and inconsistent. The lack of coordination among
fiscal incentives, financial incentives and trade promotion reveals the
absence of a medium-term strategy. The inconsistency of policy
signals and programs compromises the ability of non-traditional
sectors and smaller firms to focus on foreign market expansion.
Trade negotiation strategies have emphasized subregional inte-
gration. As a member of Mercosur and following the leadership of
a larger partner (Brazil), Argentina partakes in multilateral talks.
These strategies have been more stable than export promotion and
less ad-hoc than market protection policies. However, the effect of
asymmetries in the process of subregional integration, intra-Merco-
sur dissent as to the distribution of benefits and divergence between
Argentina’s offensive interests and Brazil’s defensive concerns
have prevented the integration process from moving forward. Yet
it is difficult to conceive a negotiation course different to that which
Argentina has adopted and maintained.
Structural factors help explain the volatile trade policies
characteristic of Argentina over the ISI period. Considering the
feeble policy insulation and weak constitutional fetters that the local
institutional framework presents, it is as perplexing that Argentine
authorities could impose sudden and generalized trade liberalization
78
in the late 1980s, as it is that they have been able to sustain it since.
The neutralizing effects of the 1989 crisis (and the signs of instability
already apparent in 1987) can probably help to account for the lack or
inefficacy of societal resistance to trade reform. However, politically
influential and politically salient sectors were able to obtain some
level of remedial protection. 1 All of these sectors are import-
competing, which is consistent with factor-specific approaches.
Incomplete insulation and the relative simplicity and lack of
decision-making coordination help to understand the discretional
pattern of trade relief.
In spite of its relative institutional weakness, the Argentine pub-
lic sector succeeded in sustaining its main policy towards imports
through time. In line with prevailing scholarly opinion, we believe
that the adoption of regional and multilateral commitments locked
in the policy orientation set in the late 1980s. It is also possible that
the simultaneity of trade liberalization with privatization and inter-
nal deregulation offered incumbent authorities the possibility to
offer part of the business community with compensations in
exchange for abiding to trade liberalization.
It is in those areas where institutional capabilities and policy
consistency are most critical that the Argentine public sector
reveals its institutional infirmities. Export promotion policies have
contributed relatively little to enhance the competitive abilities of
exporting sectors and they have been largely ineffective to promote
exports from non-traditional sectors and smaller firms (indepen-
dently of the macro-economic environment). The persistence of
some special export promotion regimes (now receding in light of
international commitments) also illustrates the inability of local
institutions to insulate policy makers from the pressure of politi-
cally influential groups or firms.
Marcelo LEIRAS
Hernán SOLTZ*
1. The automobile sector constitutes a special case, as its promotion seems to

reflect a long term commitment of all national administrations.
* We thank Pablo Sanguinetti, Néstor Stancanelli, Roberto Bouzas, Ramiro

Bertoni and other seminar participants for their comments on a previous version of
this chapter.
79
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84
Chapter 2
The Political Economy of Foreign Trade Policy
The Brazilian Case
Introduction
The early 90s marked a moment of change and even rupture in

Brazil’s trade policy. The unilateral trade liberalization begun in
the late 80s with the implementation of measures meant to
rationalize the tariff structure which, was definitively implemented
as of 1990, when an enormous range of non-tariff barriers were
eliminated and an automatic calendar of tariff reductions was
adopted. The tariff structure presently in place is not substantially
different from the one adopted in the mid-90s.
Also, dating from the mid-90s, is the institutionalization of trade-
defense mechanisms and the restructuring of the public system of
export financing. In the same period, Brazil became involved in pref-
erential negotiations in the FTAA and with the European Union, at the
same time that it began to negotiate preferential or free-trade agree-
ments with member countries of the Andean Community and Mexico.
The trade-policy regime redesigned in the last decade, together with
the stance taken by Brazil in the various trade negotiation scenarios,
reveals the country´s foreign trade strategies and preferences as
described in Section 2. Section 3 examines the domestic factors
determining those preferences, focusing on structural factors such as
trade patterns and the configuration of interests of the various sectors
of economic activity, as well as on political and institutional variables,
with emphasis on the perceptions and goals of the various public and
private actors that interact in foreign-trade policy-making and in
85
shaping the international trade strategy of Brazil. Lastly, Section 4

summarizes the main findings and conclusions of this chapter.
Main Features of the Revealed Preferences

of Brazil’s Foreign Trade Policy
The Structure of Import Protection
Brazil was a latecomer to the Latin American process of trade

liberalization and opening up of economies (Abreu, 2004). In fact,
on the eve of this process in 1987 the prevailing tariff structure was
virtually the same as that instituted in 1957, during the initial phase
of the import-substitution industrialization model.
The performance of the Brazilian economy in the 80s was so dis-
appointing that the period was called “the lost decade”. In addition,
during the second half of the 80s the international environment
changed dramatically while, on the home front, confidence in the
virtues of the autarkic model showed clear signs of erosion (Abreu,
2004). Still, it cannot be said that in the late 80s the pressures in
favor of opening up the economy were particularly intense. Conse-
quently, it should come as no surprise that, unlike other countries,
trade liberalization in Brazil took the form of a relatively gradual
process that stretched out over seven years.
In fact, in Brazil the trade liberalization process was carried out in
three stages: (i) the first, which took place in 1988-89, eliminated tariff
redundancy and some surcharges on imports and partially trimmed the
42 special tax regimes that were in place, thereby enabling the nominal
average tariff rate to drop from 57.5% in 1987 to 32.1% in 1989; (ii)
the second period spread across four years (from 1990 to 1993) and it
involved the elimination of a vast number of non-tariff barriers,
including products with temporarily suspended import licenses
covering 21% of the tariff lines (in addition to the adoption of a semi-
annual calendar of tariff reductions that cut the nominal average tariff
rate to 13.5% in 1993; and lastly, (iii) the third stage in 1994 coincided
with the adoption of the Real Plan and resulted in lower tariffs for some
inputs and a six months anticipation in the adoption of the Common
External Tariff (CET) agreed upon with Mercosur partners (Kume and
Piani, 2005). These measures led to a further cut in the nominal
average tariff rate to 11.2% in 1994 (Table 1).
86
The first two stages of the liberalization process faced no serious

resistance from the private sector, but things were quite different with
the adjustments promoted in mid-1994. The joint effect of the
increase in imports and the real appreciation of the domestic currency
promoted by the adoption of a floating exchange rate regime during
the first nine months of the Real Plan led to trade deficits starting as
early as late 1994. The situation grew even worse with the Mexican
crisis of December 1994. Between the end of 1994 and the outbreak
of Brazil’s foreign exchange crisis in early 1999 the economy
experienced a period characterized by growing current-account
deficits and intense criticism of the exchange rate policy.
The new macroeconomic environment encouraged the re-appearance
of protectionist pressures that eventually were accommodated either by
the adoption of trade relief and contingent protection measures or by
changes to the structure of tariff protection. In addition, the government
adopted less effective initiatives aimed at bringing down systemic costs
(the “Brazil cost”).1 To a certain extent, the adoption of the CET
contributed to placing limits on this policy reversal since tariff hikes
required negotiations with custom union partners.
To satisfy the demands of the private sector, in the first semester of
1995 the government raised tariffs on automobiles and motorbikes,
tractors, electronic goods and sports shoes, in addition to adopting
certain administrative measures (cash payment for some imports,
shorter import financing terms, non-automatic import licenses for a
long list of goods, and new phyto-sanitary barriers) to moderate the
rapid growth of imports (Kume and Piani, 2005). In late 1997, the
Brazilian government followed Argentina’s decision to transform a
statistics tax on imports into a tariff and introduced a temporary
increase of 3% on all tariff rates, except for capital goods.
The set of measures adopted during this period led to a real, though
moderate, reversal of the process of trade liberalization. The reversal
reached a peak in 1997 when the nominal average tariff rate stood almost
4.5 percentage points above the 1994 level. An assessment based on the
evolution of effective protection rates shows that, besides an increase in
simple and weighted average tariff rates, there was an increase in tariff
dispersion. The increase in maximum tariffs was quite significant.
1. The private sector led by the CNI –National Confederation of Industry– esta-
blished an agenda for modernization and reforms, much of it of a legal nature, designed
to reduce the “Brazilian cost”. This set of demands was followed up through meetings
with governmental authorities during a period of almost three years (1995/1998).
87
Table 1. Nominal and Effective Tariff Protection –
88
Selected years from 1987- 2004
Nominal Tariff Rates (%) Effective Tariff Protection Rates (%)
Trade liberalization
process Year Simple Weighted Standard Simple Weighted Standard
Maximum
Average Average 1 Deviation Average Average 1 Deviation
1987 57.5 54.9 21.3 77.1 67.8 53.8 308.1
1st. Stage
1989 32.1 29.4 15.8 46.5 38.8 44.5 244.3
1990 30.5 27.2 14.9 47.7 37.0 60.6 351.1
2nd. Stage
1993 13.5 12.5 6.7 16.7 15.2 13.5 76.5
3rd. Stage 1994 11.2 10.2 5.9 13.6 12.3 8.4 27.7
1995 12.8 10.8 7.4 17.1 10.4 19.5 113.8
1997 15.6 13.4 7.6 21.6 16.6 29.6 177.0
Post-liberalization
1999 15.0 13.2 5.7 18.7 15.4 14.6 n.a.
period
2002 13.5 n.a. n.a. n.a. n.a. n.a. n.a.
2004 10.4 n.a. n.a. n.a. n.a. n.a. n.a.
1. Averages weighted by value added. n.a.: not available.
Sources: Kume, Piani and Souza (2000) for 1987-1999; Abreu (2004), based on unpublished data from Kume for 2002 (4th quarter); WTO (2004) for 2004 (Janu-
ary).
Table 2. Sectors with above-average effective tariff protection rates, 1990-1999

Effective Tariff Protection Rates (%)
Sectors 90 91 92 93 94 95 96 97 98 99
Automobiles, trucks and buses ................. 351.1 198.3 93.5 76.5 27.7 113.8 217.5 177.0 129.2 89.1
Apparel ...................................................... 67.0 63.1 36.6 23.7 24.5 23.6 23.1 26.1 26.1 26.1
Textile products ......................................... 49.2 50.9 31.4 21.3 20.9 21.9 21.8 24.9 24.9 25.0
Other metallurgical products ..................... 51.1 40.8 30.7 23.5 19.7 22.0 21.5 24.7 24.8 24.8
Other food products ................................... 94.5 82.8 36.5 25.3 19.2 20.3 21.6 24.3 24.1 24.1
Electrical equipment .................................. 62.5 50.6 32.1 24.8 25.8 31.3 22.7 25.0 24.5 23.8
Dairy industry 1 ......................................... 35.0 29.8 22.9 21.7 24.8 18.6 19.9 22.1 24.4 23.3
Plastic products .......................................... 50.7 41.4 24.2 20.2 23.2 21.2 19.1 21.9 21.9 20.7
Memorandum:
Simple average (28 sectors) ............... 47.7 34.8 20.3 16.7 13.6 17.1 19.9 21.6 20.2 18.7
1. In 1990 and 1991 rates were below average.
Source: Kume, Piani and Souza (2000).
89
A more detailed account of the evolution of effective protection in

the 1990-99 period is presented in Table 2, which highlights the sec-
tors that benefited by above-average levels of protection. It should
be noted that the motor-vehicle sector is consistently at the top of
the ranking and that the policy reversal was very significant in this
sector. Likewise, three other sectors (textiles, other metallurgic
products and other food products) show quite a significant reversal
after that year.
A return to the protection levels of the middle of the decade
would take place only after the exchange crisis of late 1998 and the
adoption early next year of a floating exchange rate regime. The
devaluation also made room to phase out the 3% tariff set in 1997,
a process concluded in 2003 when the simple average tariff rate
dropped to 11.4% (WTO, 2005).
The latest estimates of the structure of tariff protection suggest
that Brazil currently finds itself at a stage of opening similar or
superior to that recorded in 1994. In fact, based on data gathered in
January 2004, the Trade Policy Review (WTO, 2005) estimated the
simple average tariff at 10.4%, whereas more recent calculations
made in late 2005, set this average at 10.7% (Rios and Velloso,
2005).
In general, the balance of the trade liberalization process is sub-
stantially favorable and the evaluations at hand place special
emphasis on its positive impact on productivity. When examined in
the light of the performance of the import penetration ratio
(imports/apparent consumption), the impact of trade opening have
been significant. In the case of industry this ratio increased almost
fourfold between 1990 and 1997, when it stabilized and even expe-
rienced a slight reversal. (Table 3).
Even for sectors that had always benefited from high levels of
protection, such as textiles, the impact of liberalization was signifi-
cant, as attested by the evolution of the import penetration ratio,
which rose from an insignificant 1.5% in 1990 to 12.2% in 1997.
Nevertheless, it should be noted that in 2004 a relatively low num-
ber of sectors showed a coefficient of import penetration equal to or
above 15%. 1
1. There are estimates of the coefficient of import penetration based on diffe-

rent methodologies and disaggregations from those used in the Funcex calcula-
tions. The results are also at times uncomfortably different. See Levy and Serra
(2002), Moreira and Puga (2004) and Puga (2005).
90
Table 3. Import penetration ratios in selected sectors (%) (at 2004 prices)
Selected sectors 1990 1994 1997 1999 2002 2004
Electronic equipment ............................................................ 9.1 24.6 37.3 49.2 55.5 52.8
Parts, components and other vehicles ................................... 6.5 13.9 24.6 31.8 29.5 35.0
Pharmaceutical and perfumery products .............................. 5.2 11.4 16.0 19.1 25.5 27.8
Electrical equipment .............................................................. 6.2 13.8 21.1 23.5 30.2 24.7
Other chemical products ....................................................... 3.7 8.1 11.9 12.0 14.2 18.1
Chemical elements ................................................................ 8.6 12.5 14.5 14.9 14.9 16.3
Machinery and tractors .......................................................... 7.6 15.6 26.3 24.2 18.6 15.0
Non-ferrous metallurgy ......................................................... 4.0 7.9 13.4 11.7 11.2 13.9
Rubber products .................................................................... 3.1 7.3 11.8 10.7 12.1 12.4
Plastic products ...................................................................... 1.3 4.1 7.2 8.1 8.6 10.0
Textile products ..................................................................... 1.5 7.2 12.2 8.4 8.3 9.5
Automobiles, trucks and buses ............................................. 0.2 13.2 14.5 13.1 10.0 6.1
Memorandum:
Transformation Industry 1 .............................................. 3.1 7.5 12.1 11.3 11.1 11.6
1. 28 sectors.
Source: FUNCEX. Raw data from IBGE and SECEX/MDIC.
91
Following the process of trade liberalization of the mid-90s, no

government initiative envisioned deepening the process of trade
liberalization outside the scope of preferential negotiations. In fact,
in Brazil, prevails a perspective that regards the reduction of tariff
protection as a “cost” that must be bargained against better market
access for Brazilian exports
The Use of Antidumping and Safeguard Mechanisms

The use of trade relief measures reveals a typical two-level game
in trade policy-making, since its implementation implies interac-
tions between private actors –domestic companies asking for con-
tingent measures– and public agencies –government authorities
responsible for implementing such measures. 1 Consequently, our
analysis will concentrate on the intensity and frequency of the use
of such instruments; the identification of sectors of the economy
that most frequently demanded contingent protection measures; the
degree of discretion on the part of government authorities in inter-
preting and applying the rules and regulations on the matter; the
transparency of the decision-making process; and the permeability
of public institutions to lobbying action from domestic producers.
Over the last decade, Brazil has become an intense user of
measures against unfair trade practices. In fact, the WTO ranks
Brazil number eight among the countries that notified opening
investigations for application of antidumping measures from 1995
to 2002. Among the developing countries, only India (332 cases),
Argentina (180) and South Africa (160) recorded more
notifications to the WTO than Brazil (105). Until 1987, Brazil had
only two instruments to fight dumping: the first, introduced in
1957, consisted of a minimum customs tariff to be applied in cases
of presumed dumping; the second, enacted in 1970, consisted of
applying benchmark prices whenever significant price differences
appeared in imports made from different countries. Both measures
lasted until 1987, when Brazil ratified GATT codes on antidumping,
countervailing duties and safeguards and entrusted the Customs
Policy Commission (CPA) oversighted by the Ministry of Finance,
to implement them. However, until 1990 the use of trade defense
1. In theory, the opening of antidumping and anti-subsidy processes is also a

prerogative of government authorities. However, this is not usual practice. In Bra-
zil, no process has been opened by governmental initiative since 2000 (WTO, 2004,
p. 61).
92
instruments proved not only irrelevant but also unnecessary, since

Brazil had a government agency (CACEX) subordinated to the Bank
of Brazil, with generous discretionary powers and a variety of
administrative resources (import licenses, trade finance, etc.) that
gave it almost absolute control over imports (Kume and Piani,
2005).
In 1990, during the Collor Administration, the process of trade
liberalization was launched and CACEX was abolished jointly with
other important changes to the federal administration structure.
The authority of the former CPA was inherited by the Tariff
Technical Coordination (CTT), a third-level organ subordinated to
the Ministry of Economy, Finance and Planning, until the Ministry
of Industry, Trade and Tourism (MICT) was created in 1993 and the
CTT was transformed into the Tariff Technical Department (DTT),
subordinated to the Foreign Trade Secretariat (SECEX) of this
Ministry. The noteworthy fact here is that despite being attached to
a “sectoral” Ministry (more permeable to the demands and appeals
of its specific clientele than other governmental organs whose
decisions affect more diffuse interests), the technical decisions
made by DTT and approved by SECEX had to be submitted to the
consideration and approval of the Ministry of Finance.
The institutional and legal changes introduced to the area of trade
defense was especially intense during the second half of the 90s and
the next decade. Besides ratifying the agreements reached during the
Uruguay Round, there were measures enacted to deal with the
demands and concerns of the private sector as to mounting import
competition as well as to cope with the objective of price
stabilization, which turned into a major governmental concern during
this period. In effect, the possibility to apply retroactive antidumping
duties and to establish more restrictive maximum deadlines to
examine appeals were two measures adopted to attend private sector
complaints. Conversely, the authorities also approved two measures
not provided for in the WTO agreements designed to prevent the
erotion of stabilization efforts caused by antidumping measures. The
first recommended that the determination of injury in AD
investigations should exclude the effects on domestic prices of trade
liberalization, differentiating them from those resulting from real
dumping. The second was the possibility, in exceptional cases, to
invoke reasons of “national interest” to either interrupt the
application of a specified duty or apply a lower rate. One such reason
could be stabilization policies (Kume and Piani, 2005).
93
From the institutional point of view, the changes brought about as

of 1995, notably the creation of a structure specifically geared towards
managing the instruments of trade defense (DECOM – Department of
Commercial Defense, subordinated to SECEX/MICT), reflected the
growing importance given by the government to this policy area. On
the other hand, these institutional changes also resulted in a progres-
sive reduction of the decision-making power of the Ministry of
Finance. As a matter of fact, between 1995 and 2001, decisions on
trade defense measures, based on previous technical analyses
entrusted to DECOM, began to be made jointly by the Ministry of
Industry and Trade and the Ministry of Finance. As of 2001, however,
this function was delegated to CAMEX –the Chamber of Foreign
Trade, an inter-ministerial body presided over by the Ministry of
Industry and Trade and with representatives from five other Minis-
tries, including the Ministry of Finance. Since decisions at CAMEX are
taken by majority vote, the change amounted to a loss of decision-
making power on the part of the Ministry of Finance on trade defense
issues (Kume and Piani, 2005).
Based on the examination of nearly 200 antidumping investiga-
tions launched during 1988-2002, Kume and Piani (2005) underline
some aspects of interest in evaluating the Brazilian experience with
trade defense. The main conclusions were: (i) a higher concentration
of investigations on raw materials, mainly chemical products, metals
and plastics, following a very similar pattern to that observed interna-
tionally; (ii) a reasonably low number of affirmative determinations
of dumping (52.8%) 1; and (iii) the imposition of antidumping duties
systematically lower than the margin of dumping determined in the
investigations. So, generally speaking, the use of trade defense mea-
sures in Brazil seems to have been guided by moderation and compli-
ance with the norms agreed upon in the WTO.
Nonetheless, the macroeconomic context seems to have been a
conditioning factor of the frequency in the use of these instruments,
and to a lesser extent of its form of administration. This is sug-
gested by the examination of how these measures were applied over
1. An international comparison confirms that the share of final affirmative

determinations is reasonably low in Brazil. As a matter of fact, a study carried out
by Zanardi (2003) covering the period 1981-2001, shows that this share is 49.6%
in the case of Brazil, a ratio lower than that observed in the European Union
(73.7%), India (71.9%), South Korea (65.1%), Mexico (65.0%), USA (59.3%),
Canada (58.4%) and Turkey (52.5%).
94
time during the more radical phase of trade-liberalization and dif-

ferent exchange-rate regimes. Indeed, replicating and extending
the analysis made by Kume and Piani (2005), the 1998-2005 period
can be divided into four phases: (i) the first, corresponding to 1988
and 1989, is a period still characterized by very high import tariffs
and significant non-tariff barriers; (ii) the second covers the 1990-
1993 period, when trade liberalization brought a marked reduction
in tariffs and the elimination of numerous non-tariff barriers in a
context of low economic growth; (iii) the third phase (1994-1998)
coincides with the successful implementation of the stabilization
program and is characterized by rapid import growth in the context
of significant real appreciation of the domestic currency; and (iv)
the fourth period lasting from 1999 to 2004, was characterized by
the effect of a floating-exchange rate regime and a moderate pace of
economic growth. Table 4 shows the evolution of antidumping
investigations across the 1988-2004 period, based on these four
phases.
The data shows a significant increase in the number of investiga-
tions with affirmative determination in the post-trade liberalization
cum exchange appreciation phase (1994-1998). To offset this, how-
ever, the ADD/ DM ratio also drops throughout the period. Kume and
Piani (2005) therefore conclude that the demand for increased protec-
tion through trade-defense measures during this period is a result of
the combination of three factors: trade liberalization, the economic
cycle and real exchange rate misalignments.
Finally, two other features deserve mentioning: a) the repeated
renovation of safeguards granted to the toys sector –despite high
tariff protection, this sector applied for and obtained safeguard
measures in 1996, renewed in 1999 and extended in 2003 until mid-
2006 (WTO, 2004)– and b) the high percentage of review cases
accepting requests for time extensions. As a matter of fact,
between 2000 and 2003 there were a total of 24 reviews requested,
nine of them ending with the maintenance of duties, two with duties
being eliminated and the remaining 13 still pending definition, but
with the applied duties in effect (WTO, 2004).
In general, however, it is difficult to disagree with the conclusions
drawn by Kume and Piani (2005), whose final evaluation underlines
restraint in the use of trade defense instruments on the part of the Bra-
zilian authorities, who were able to properly administer protectionist
pressures by heeding the good practices recommended by the WTO in
the context of a troubled macroeconomic environment and rising
95
Table 4. Antidumping and Countervailing duties: selected indicators by sub-periods, 1988- 2004
96
ANTIDUMPING COUNTERVAILING DUTIES
Period
No of cases Accepted (%) ADD/ DM 3 No of cases Accepted
1988-89 4 4 100.0% n.a. – –

1990-93 46 17 2 37.0 % 83.1% 5 2
1994-98 70 44 62.9 % 68.1% 7 6
1999-04 81 1 44 2 54.3 % 47.1% 4 2 1
Total 201 1 109 2 54.2% 61.3% 5 14 9
Source: DECOM/SECEX. Report – 2004 (Tables 1 & 2) and Kume and Piani (2005, Table 10).
1. On-going investigations (11) not included.
2. Price undertakings included.
3. Antidumping duty / Dumping Margin (Kume and Piani, 2005).
4. Period 1999-2002.
5. Period 1990-2002.
exposure to international competition. This evaluation is confirmed

by the statistics presented in the most recent Trade Policy Review
(WTO, 2004): of the 182 measures adopted between 1988 and 2002,
only one was questioned by the WTO.
Export-Promotion Policy
In the last 40 years Brazilian export-promotion policies have

experienced two different, non-consecutive cycles. The first
stretched from the mid-60s to the late-80s. Behind high protectionist
barriers, export promotion policies revolved around three
instruments: (i) reducing the indirect tax burden on exports; (ii)
conceding generous fiscal and credit subsidies; and (iii)
implementing a policy of exchange rate mini-devaluations aimed at
preventing the volatility and real appreciation of the domestic
currency (Motta Veiga and Iglesias, 2003). The explicit objective of
these policies was to increase and diversify foreign sales, especially
of manufactured goods. It is generally acknowledged that this first
cycle of export-promotion policies, gradually dismantled throughout
the 80s, had the merit of contributing effectively to diversifying
Brazilian exports. However, they did so at a very high fiscal cost.
Moreover, these policies were unable to launch virtuous cycles of
rising competitiveness and sustained export expansion once the
incentives and subsidies were phased out, even in those sectors that
received the benefits (Motta Veiga and Iglesias, 2003).
The second cycle of export promotion was launched in the
1990s, but in a very different macroeconomic context. If anything,
the import-substitution development model had been exhausted,
the objective of fast economic growth sheltered by high protective
barriers had been left behind and selective “picking the winners”
industrial policies had been discredited. Moreover, Brazil had
subscribed to the Uruguay Round agreements, which constrained
many of the instruments previously used. Efforts to set up a new
export policy were incipient in the first half of the 90s but grew
more intense as of 1995, triggered by a worsening trade-balance.
Motta Veiga and Iglesias (2003) underscore the main components
of this second cycle of export promotion policies, namely: (i)
improvements in intra-governmental coordination of foreign trade
policies, which in 1995 led to the creation of the Chamber of
Foreign Trade (CAMEX); (ii) tax rebates on exports and better
implementation of the drawback system; (iii) re-establishment of
97
public sector export finance and export credit guarantees (credit

insurance and guarantee fund), in addition to more flexible rules as
to how companies could use private export-finance; (iv)
reorganization of trade-promotion institutions through the creation
of an export-promotion agency; and (v) efforts to reduce “Brazilian
cost”, defined as a set of systemic, regulatory and infrastructural
costs that discouraged investments, production and exports. Export
tax rebates, public export finance and the creation of an export-
promoting agency shall be examined below.
Taxation
During the 90s private firms ranked partial tax rebates on
exports, whether due to the existence of goods not listed in the
legislation or because of cascade taxes, or due to the difficulties to
effectively cash tax credits, as the first or second most important
obstacles to export expansion. The complexity of the Brazilian tax
system, the frustration of successive tax and fiscal reform
initiatives, and disputes as to the distribution of revenue losses
among different government levels were key factors to maintain
“incomplete tax exemption” as a major concern to the export sector.
Demands made by exporters were gradually responded with
solutions that were either permanent or merely palliative. For
example, in 1996 the federal government agreed with state
governments to eliminate the main state tax (ICMS) on exports of
primary and semi-manufactured goods, granting them financial
compensations if the measure led to a loss of revenue during the
first years of implementation. Consequently, the exemption
which benefited manufactured goods for over 30 years was
extended to primary and semi-manufactured goods. Exemptions
also included services provided abroad and the purchase of
equipment for domestic investment. The government also
eliminated social contribution taxes on domestic purchases of raw
materials, intermediary products and packaging inputs through a
presumed credit on the federal tax on industrial goods (Motta
Veiga and Iglesias, 2003). However, the exemption and the tax
credit not always worked as expected. In 2001 the imprecise
calculations of the cumulative impact of cascading taxes on
exports was still a matter of dispute between government and
exporters (Tyler, 2003).
The drawback regime was one of the tax-exemptions introduced
in the mid-60s that survived the end of the first policy cycle. In the
98
80s the mechanism increased its relevance as an instrument to

promote exports and it is still the most important special customs
regime in effect in Brazil. The value of imports benefiting by this
mechanism tripled between 1985 and the end of the 90s from
US$ 1.2 billion to US$ 3.7 billion/year. In 2000, imports benefited
by the drawback regime reaching US$ 4 billion, while
approximately half of Brazilian manufactured exports (US$
18 billion) benefited from drawbacks on some of their inputs
(Tyler, 2003 and WTO, 2004).
Motta Veiga and Iglesias (2003) argue that, unlike other special
customs regimes, the drawback regime benefits a broad range of
sectors. However,some industries stand out as the main beneficia-
ries of the regime, notably airplanes, automobiles, machines,
mechanical and electrical equipment, metallurgic products, chemi-
cal and petrochemicals, foodstuffs and footwear. As a general rule
successful exporters in these sectors have integrated imports into
their export strategies, using the benefits of the drawback regime.
Considering the significant cost reduction made possible by this
mechanism, its contribution to international competitiveness is
likely to have been sizable. Motta Veiga and Iglesias (2003) also
emphasize that the mechanism mostly benefits large companies and
exporting regularly. Since the use of this instrument demands the
allocation of administrative resources (i.e. controlling and planning
stocks), it excludes in practice a large number of exporters, espe-
cially small and medium-sized firms and occasional exporters.
The same bias is present in other special import regimes similar
to the drawback system created in the 90s, such as RECOF (Com-
puter-Controlled Industrial Deposit Customs Regime). In this case
the discrimination is explicit, since the instrument was specifically
designed for industrial sectors operating with large volumes of
imports and exports (electronics, information technology, aeronau-
tics) that require extremely agile systems to track product flows.
Export Financing
The public export financing system revolved around two pro-
grams, PROEX and FINAMEX. The latter was re-named BNDES-Exim
and placed under the administration of BNDES. The former, in
contrast, is operated by the Bank of Brazil and funded with
resources from the federal budget. Set up in 1991, PROEX operates
through two modalities: (i) financing directly granted to the
exporter and funded by the National Treasury; and (ii) equalization
99
of interest and service rates on export financing granted by domes-

tic or foreign banks to equalize costs with that of international mar-
kets. Both modalities are only available for the post-shipment
stage. After 1996-1997 the funds and technical-human resources
allocated to both lines of operation were strengthened significantly
and the mechanism became increasingly “horizontal” and more and
more detached from sectoral priorities (Motta Veiga and Iglesias,
2003). BNDES-Exim, in turn, contemplates four different lines of
financing, two in the pre-shipment phase (financing exportable pro-
duction) and two in the post-shipment phase.
In addition to these mechanisms, in 1997 a majoritary-privately
owned export-credit insurance company and a guarantee mechanism
for smaller-size companies (guarantee fund) was launched. From 2000
on, according to Motta Veiga and Iglesias (2003), a public export-
credit system began to take shape, mainly based on BNDES-Exim lines,
PROEX equalization and export-credit insurance 1. The PROEX
financing line was the less relevant public export-credit mechanism,
basically geared towards smaller-size companies. Export finance for
large companies, in turn, was entirely shifted to BNDES-Exim. This
specialization enabled the Bank of Brazil to focus on servicing smaller-
size companies facing difficulties in gaining access to BNDES-Exim
lines. In 2001, mounting concerns as to discrimination against small-
sized companies’ access to credit led to new restrictions on large
companies’ access to BNDES-Exim pre-shipment lines.
In the three-year period from 2002 to 2004, BNDES-Exim export
finance disbursements reached nearly US$ 4 billion/year, equivalent to
6.5% of Brazilian total exports in 2002 and 4% in 2004. In the case of
the PROEX lines, available budget resources reached a peak in 1998
(US$ 1.2 billion), benefiting exports for a total of US$ 7.3 billion (Tyler,
2003). Export finance reached a peak in 2001 and 2002 (US$ 8.2
billion/year), but contracted in the next two years (US$ 2.0 billion and
US$ 4.1 billion in 2002 and 2003 respectively). The data for 2003 and
2004 show that only three sectors (transportation material –airplanes
and motor vehicles–, machines and equipment, and engineering
services) account for over 90% of the exports financed by PROEX.
Agribusiness, mining products and textiles account for the rest.
1. The PROEX equalization modality had to be reformulated on two occasions

in an attempt to purge the subsidy component implicit in this mechanism, fol-
lowing a WTO dispute between Embraer and Bombardier.
100
The number of exporters benefited by PROEX peaked in 2000, when

nearly 650 companies benefited from the two existing lines of
financing. Thereafter, the number of beneficiaries fell to about
400 exporters in 2003. In 2004, the number of companies benefiting
from BNDES-Exim lines was even lower (approximately 240 exporting
firms). These figures seem rather insignificant when compared to the
total number of exporters, which reached about 18,000 companies in
2004. Nevertheless, it should be noted that Brazilian exports are
extremely concentrated among a small number of companies, with the
500 biggest exporters accounting for nearly two-thirds of the country’s
total exports. Even so, it is clear that smaller-size companies have very
limited access to public export-financing mechanisms: in fact, less than
350 micro, small and medium-size companies used financing lines
offered by PROEX and BNDES-Exim.
According to Motta Veiga and Iglesias (2003), there is a clear
conflict between the commercial and the political logic behind the
action of public sector banks. This has been evident in the actions
addressed to expand access of small and medium-sized companies
to export credit lines. Under the commercial logic and typical risk-
management criteria of financial institutions accredited to
distribute BNDES financial products, smaller-size companies rarely
succeed in gaining access to export credit.
Setting up the export-credit insurance agency and the export-
guarantee fund failed to resolve this problem. As a matter of fact,
the major clients of the Brazilian Export-Credit Insurance Com-
pany (SBCE) are large companies that export capital goods and engi-
neering services and the value of insured exports is still very small
(WTO, 2004). Small and medium-sized firms can still apply for
financement at market rates by private banks, but this option is very
expensive, which makes credit for export highly selective (Tyler,
2003).
Trade Promotion
In 1997 the government created the Trade Promotion Agency
(APEX), endowed with an annual budget of nearly R$ 50 million and
the objective of implementing an export-promotion policy geared
towards the needs of micro and small sized firms. The rule that
excluded medium and large sized firms from APEX programs was
rapidly flexibilized to attend to larger firms capable of generating
benefits to smaller companies. Although the Agency is not presently
constrained in this sense, its operating procedures (based on
101
transferring financial resources to non-profit entities –business

associations, chambers of commerce, international business centers
(committed to carrying out export-support programs previously
approved by the Agency), leads to its clients being mainly small-
sized companies.
APEX operates under a broader concept of trade promotion that is
focused on developing exportable supply rather than on traditional
foreign trade promotion activities. APEX programs require counter-
part agencies and they contemplate a widely-varied range of initia-
tives (market studies, trade missions, fairs, business meetings, new
brands, training human resources, spreading information). APEX
programs promote exports not only for goods, but also for services,
especially audiovisuals and software.
From 1998 to 2004, APEX approved nearly 450 projects and
invested more than US$ 153 million (an average of US$ 350,000 per
project). Counterpart investment was estimated at US$ 190 million
(WTO, 2004). It is difficult to evaluate the effectiveness of the
Agency’s actions. A relatively small number of projects were
evaluated by FUNCEX using different quantitative and qualitative
indicators, and the rate of success was low. This result is not very
different from that of other public trade-promotion institutions.
Other external evaluations, albeit superficial, questioned the
excessive number of projects supported by the Agency, as well as
the focus on certain markets decided more based on foreign policy
considerations than on potential opportunities. 1

In the 90s, Brazil engaged in a wide array of trade-negotiation at
the regional (Mercosur and South America), plurilateral (FTAA), bi-
regional (EU) and multilateral levels (WTO). In all these trade nego-
tiations Brazil generally adopted a defensive stance. This was the
case not only in the FTAA or EU-Mercosur negotiations (in which
there are significant size asymmetries and differences in levels of
development), but also in the case of Mercosur, where Brazil has
been reluctant to move forward in deeper integration initiatives that
1. It is difficult to disagree with the assessment made by Motta Veiga and Igle-
sias [2003]: “APEX exemplifies a commonplace situation in Brazilian public
policy-making: policy new initiatives are adopted and public money is transferred
to the private sector, but there is practically no mechanism to make a technical-
economic evaluation of the policies and initiatives adopted”.
102
may imply relinquishing even limited degrees of sovereignty. As

far as the WTO is concerned, agriculture is one of the few compo-
nents of Brazilian offensive interests.
Trade Negotiations at the Regional Level: Mercosur
Integration with the countries of the Southern Cone, and with
Argentina in particular, has been a Brazilian foreign trade policy
priority for the last twenty years. However, Brazilian negotiators
have reshuffled the sub-regional integration scheme on several
occasions in response to changes in the domestic and international
environment. The bilateral agreements signed with Argentina in
the second half of the 80s were politically motivated and signaled a
departure from the relationship of mutual distrust and rivalry that
had traditionally prevailed between the two countries. The transi-
tion towards democratic regimes in both countries was critical in
fostering this approximation. However, these bilateral agreements
failed to change radically the format used on the ALADI-type agree-
ments, based on a gradualist approach focused on maintaining equi-
librium in sectoral trade balances. Consequently, the results of this
first stage of integration was quite positive on the political side, but
less so from a trade standpoint. Although relations between Brazil
and Argentina became far closer and flexible, bilateral trade
improved only marginally.
In the early 90s, Brazil and Argentina engaged in similar struc-
tural reform and unilateral trade liberalization policies. As a result,
the project of sub-regional integration underwent a drastic transfor-
mation. Uruguay and Paraguay joined Argentina and Brazil in
Mercosur, which was launched as a customs union. The integration
project became not only more ambitious, but also gained interna-
tional recognition, and above all, a renewed impetus. As part of the
new methodology, member countries adopted an automatic tariff
cut schedule. Intra-zone trade grew at spectacular rates between
1991 and 1998, raising economic inter-dependence.
For Brazil, Mercosur turned into a key component of its foreign
trade negotiation strategies, pacticularly with developed countries
(FTAA and EU), while also playing an important role in attracting
foreign investment flows. Mercosur was also instrumental to more
ambitious trade negotiations with other ALADI countries, which
aimed at expanding the scope of pre-existing agreements.
Nevertheless, the focus adopted by Brazilian diplomacy in these
negotiations was quite pragmatic and did not exclude the option of
103
bilateral agreements. Other members of the bloc were reluctanct to

move forward.
Although Brazilian trade balances with Mercosur was persis-
tently negative since 1994, this was to a large extent the result of
administered trade agreements with Argentina (including wheat, oil
and derivatives, and automobiles). In most industrial sectors, how-
ever, intra-regional trade balances were favorable to Brazil, which
may help to account for the rising support of Brazilian business to
Mercosur, in contrast to the fear and distrust prevalent in the phase
of diplomatic negotiations. Brazilian subsidiaries of multinational
corporations were the first to exploit the opportunities offered by
the expanded market, to be promptly followed by large domestic
firms and even small and medium-size companies. For many firms,
Mercosur represented the first step on their way towards interna-
tionalization.
From 2002 onwards, Brazilian aggregate trade figures showed
rising bilateral surpluses with its Mercosur trade partners.
Accordingly, from the Brazilian point of view the balance of the
regional-integration project is highly favorable: there have been
few threats and the potential gains are still abundant. In effect, the
main opportunities for Brazil lie in sectors not yet fully liberalized
(such as sugar and automobiles) or in industries such as footwear,
textiles, steel products, chicken meat and household appliances that
have been frequently subject to ad hoc protection or trade relief
measures, particularly on the part of Argentina. These restrictions
account for the mounting irritation of the business sector, which
claims a firmer and less placatory attitude on the part of Brazilian
negotiators. There is also a predominant view that considers that
Brazil devotes too much attention to Mercosur, thereby committing
an excessive amount of diplomatic resources to this particular
integration initiative.
Strictly speaking, the asymmetries that prevail among the
members of the bloc account for most of the crisis of the integration
project since the late 90s. These asymmetries are related to size,
industrial diversification, scope and effectiveness of industrial and
trade policies, and the extent of institutional development. In
general these asymmetries benefit Brazil. They will not be
removed or mitigated unless Brazil assumes leadership in finding
practical solutions, which will mean committing significant
political, institutional and financial resources, as well as showing a
certain willingness to accept limitations to its sovereignty in
104
different economic policy areas. However, despite some recent

measures, the Brazilian stance on this matter is still ambiguous.
Some examples are the establishment of a structural fund to foster
convergence among Mercosur members, the concession of
prerogatives and flexibility to the smaller economies (Paraguay and
Uruguay), and the adoption of an emergency mechanism to limit
intra-zone trade in sectors under stress. Nevertheless, the scope of
these measures still seems inadequate to make sure that Mercosur
regains its lost vitality.
Trade Negotiations at the WTO

As a medium-sized power Brazil has a clear interest in creating and
establishing strong multilateral trade rules and playing a leading role in
the international scenario. The country has a reasonably complex
industrial and economic structure and a geographically diversified
trade pattern. In addition, it holds a significant stock of foreign direct
investment. These factors account for the importance that Brazilian
trade diplomacy gives to WTO negotiations. Despite these interests
and the fact that Brazil was a founding member of GATT, the coun-
try’s involvement in the regime was marginal until the Tokyo
Round (Abreu, 1998). Even during the Uruguay Round Brazil ini-
tially kept an obstructionist stance and resisted the introduction of
the so-called “new issues” (services, investment, government pro-
curement and intellectual property rights) in negotiating agenda.
According to Abreu (1998), the defensive and reactive stance
shown by Brazilian diplomacy during the GATT period and up to the
mid-80s was the natural reflection of the development strategy
adopted by the country, based on the import-substitution
industrialization model. This involved high protection, generous
subsidies and “picking the winners” industrial policies.
Nonetheless, by the late 80s there were clear signs of exhaustion of
this strategy, which led Brazil to unilaterally liberalize its economy.
This environment changed the attitude of Brazilian trade
negotiators during the latter phases of the Uruguay Round, when
Brazil assumed more proactive positions. After the WTO was
created in 1995, the country took part in the failed sectoral
negotiations on maritime-transportation services, as well as those
on telecommunications and financial services. In addition, as
mentioned above, Brazil became a frequent user of WTO dispute-
settlement, obtaining favorable results in path-breaking disputes
with the USA (cotton) and the European Union (sugar).
105
Brazil was also an active participant in the Doha Round

negotiations. Its interests in the current Round are basically centered
on two areas: (i) dismantling agricultural protection and subsidies in
developed country markets (particularly the EU and USA), and (ii)
limiting the discretionary use of antidumping measures, particularly
by the United States. On the domestic side, the Brazilian negotiating
agenda in the Doha Round requires reconciling: (i) the offensive
interests of competitive export sectors that face external barriers,
such as agro-industry, steel and some other scale-intensive industries,
and (ii) the defensive interests of less efficient industrial and service
sectors, such as manufacturers of capital goods, chemical and
electrical-electronic products that still enjoy relatively high tariff
and/or regulatory protection and fear the competition of foreign
producers. Defensive interests are strengthened by the dominant
view in the state bureaucracy on maintaining as much autonomy as
possible in the use of instruments of industrial policy, in spite of the
fiscal constraints and the uncertainty as to the best possible means of
intervention.
Lastly, special mention should be made to the role played by Bra-
zil in establishing and leading the G-20, probably the major success
of Brazilian diplomacy in the Doha Round. The G-20, a thematic
coalition focused on agriculture, brings together the principal emerg-
ing powers of the developing world (India, Brazil and China), as well
as other powerful allies (Argentina, South Africa, Mexico and Chile).
It was founded during the Ministerial Meeting at Cancun in 2003 as
a reaction against a quite unambitious proposal made by the Euro-
pean Union and the United States in the field of agricultural negotia-
tions. The peculiarity of the group is that it brings together
improbable allies such as agricultural exporters from the Cairns
Group and food importers. In addition, it is the first time that China
plays a role of committed leadership in the WTO. The G-20 has other
attributes that make it special, namely: (i) its membership represents
nearly 70% of world production and half of the planet’s population;
(ii) its action is not limited to a veto agenda but displays a proactive
attitude; and (iii) its proposals are technically sound, as well as sub-
stantive (Narlikar and Tussie, 2004).
The G-20 evokes two orientations of Brazilian commercial
diplomacy with important historical antecedents: first, the endeavor
to forming coalitions of “Southern countries” to negotiate with
“Northern countries”, replicating with greater realism and sounder
theoretical foundations previous experiences such as the leadership
106
of the G-77 in the 60s; second, the exercise of constructive mediation

between “strong countries” and “weak countries”, a role for which
Brazil has shown an inclination based on the pendular tradition of its
multilateral diplomacy, which blends idealistic principles of an
egalitarian international order with an attitude guided by realism and
pragmatism (Lima, 2005 a). The likelihood that the G-20 will
fragment and dissolve will grow higher as negotiations move
forward. So far, Brazil and Argentina, which have clear offensive
interests in agricultural negotiations, have agreed to moderate their
demands in order to preserve the cohesion of the group and
accommodate the protectionist interests of countries like China and
India. However, there are obvious difficulties in expanding the
thematic scope of the coalition and building consensus in other
negotiating areas (Rios, 2005). However, the success of the initiative
is undeniable, enabling Brazil to participate along with India,
Australia, the EU and the USA in the restricted group of countries
responsible for articulating agricultural negotiations at Doha.
Trade Negotiations in the FTAA

Brazil adopted an attitude of caution and distrust in response to the
North-American initiative to build a hemispheric free trade area put
forward at the Summit Meeting held in Miami in December 1994.
Brazil’s cautious attitude was based on the following reasons: (i) the
North-American proposal failed to take into consideration pre-existing
integration schemes, since it privileged integration between countries
rather than between blocs, thereby reducing the bargaining power of
Brazil and its Mercosur partners, apart from threatening the very
existence of the trade bloc; (ii) the initiative included issues such as
government procurement, trade in services, competition policy,
investment rules and intellectual property rights in which the United
States would press for GATT-plus agreements; and (iii) based on the
NAFTA precedent, it was possible that the US would press for the
inclusion of specific agreements on environment and labor standards,
which may serve as vehicles for additional protection (Abreu, 1997).
Moreover, in late 1994 the Brazilian macroeconomic situation was not
propitious to further opening up the economy. Consequently, Brazil´s
initial strategy was to stretch out negotiations as far as possible.
Before the ministerial meeting held in Belo Horizonte in 1997,
Brazil’s involvement in negotiations was quite limited.
Nevertheless, at the meeting held in Cartagena de Índias in 1996,
the Brazilian business sector was deeply impressed by the
107
information, interest and clear objectives of the North-American

counterparts at the business forum. This served as an alert for the
need to prepare an alternative agenda. Albuquerque (2001) also
highlights what he considers a “classic” of diplomacy: no country
feels at ease with the failure of a meeting of which it is a host.
Consequently, in the ministerial meeting of Belo Horizonte in 1997
the interest and involvement of Brazilian public and private sectors
reached a peak. Shortly after, in Santiago de Chile, in 1998, Brazil
managed to ensure balanced negotiations by obtaining the consent
of the US to some of its demands, such as: (i) the single undertaking
principle, which barred any attempt to close interim agreements;
(ii) the building block principle, which enabled Mercosur to
negotiate en bloc and preserve pre-existing bilateral or sub-regional
agreements; and (iii) setting a calendar that left the more substantial
negotiations on market access to the end of the process.
Brazilian interests in the FTAA negotiations revolved around the
elimination of the obstacles to export to the North-American mar-
ket, namely: tariff peaks, tariff escalation, specific tariffs, quotas,
restrictive technical standards and phyto-sanitary measures, discre-
tionary trade relief measures (antidumping, section 301 and super
301 of the US Trade Act) and export subsidies and internal aids
(Barbosa, 2005). The major complainants were segments of agri-
business (producers of sugar, ethanol, orange juice, beef, tobacco,
tropical fruits), as well as the steel, textile and footwear sectors. In
other industries, as well as in the services sector, Brazilian concerns
were largely defensive and focused on the risks from being exposed
to US and Canadian producers.
The modeling exercises undertaken to assess the possible results
of liberalization have invariably pointed out to significant increases
in imports from the USA and rather moderate expansion of Brazilian
exports. Kume and Piani (2004), for example, estimated the
increase in Brazilian exports to the North American market at
US$ 1.2 billion. In contrast, the results of the partial-equilibrium
model pointed to an increase of US$ 2.2 billion in Brazilian imports
from the USA. In the case of Brazilian exports, 57% of the gain was
due to the elimination of tariffs while the remaining 43% came
from removing NTBs (tariff quotas for sugar and other foodstuffs,
intra-quota tariffs for tobacco, antidumping rights for silicon and
steel products). The result emphasized the importance that Brazil
should attribute to the complete a timely elimination of NTBs. The
share of agriculture and manufacturing in export gains was quite
108
balanced: 53% for the former, concentrated in 20 products, and

47% for the latter, distributed among 72 products. In the case of
imports, the biggest increases were observed in the segments of
machines and mechanical equipment, electrical and electronic
equipment, electrical material, scientific instruments and appara-
tuses, inorganic chemical products, rubber and plastics.
In 2002, three events contributed towards the subsequent deadlock
in negotiations. First, the approval in May 2002 of a new agricultural
law (the Farm Bill) that extended subsidy programs to a broad range
of goods (sugar, dairy products, cotton, corn, soy). Second, the
approval by the US Congress, in August 2002, of the Trade
Promotion Authority (TPA), which included many conditions for
negotiating tariff cuts for goods of interest for Brazil (such as orange
juice, ethanol, tobacco, fresh and frozen meat, dairy products, fruits
and vegetables), in addition to levying restrictions on normative
aspects such as the use of antidumping. Third, the structure of the US
market access offer made in late 2002, which discriminated among
four groups of economies in the transition period towards the FTAA,
granting the least favorable treatment to Mercosur and neglecting the
MFN principle during the transition period.
In addition, the USA and Canada announced their decision to
exclude from the negotiations the systemic questions that interested
Brazil the most, such as internal aids and export subsidies. The USA
and Canada argued that these could only be negotiated on the mul-
tilateral level, since eliminating them would amount to unilateral
disarmament in favor of countries outside the hemisphere that grant
ample subsidies to their producers. In fact, not being subject to the
same disciplinary measures, these producers could invade the
regional markets with their artificially competitive goods (Barbosa,
2005).
Already during the Lula Government, Mercosur answered the US
negotiating offer with a radical change in the architecture of the
negotiations: priority issues for the United States (rules on services
and investment, intellectual property rights, government procure-
ment and competition policies) would be reserved for multilateral
negotiations (Doha Round), while trade rules would be reserved for
plurilateral negotiations in the context of the FTAA. Finally, market
access issues for agricultural and industrial goods would be dealt
with through bilateral negotiations among FTAA partners. In late
2003 the proposed architecture converged towards a negotiating
format called “FTAA à la carte”, based on a minimum core of rules
109
and obligations common to all parties and additional commitments

reserved for plurilateral or bilateral negotiations (Barbosa, 2005).
After that agreement negotiations were interrupted and they are
unlikely to be resumed before the Doha Round is concluded.
Trade Negotiations with the European Union
Trade negotiations between Mercosur and the European Union
began in November 1995 with the signing of the Bi-regional
Association Agreement. The scope of trade negotiations included
reciprocal liberalization of market access for goods and services,
trade disciplines, intellectual property right protection and access to
government procurement markets. Brazil’s and Mercosur’s interests
in negotiations with the EU concentrate on the following areas: (i)
improving market access for agricultural goods; (ii) attracting
European investments; (iii) keeping the possibility of simultaneous
negotiations in the FTAA and the WTO so as to minimize trade
diversion and maintain the geographical balance of trade and
investment flows. As for the EU side, their main targets were: (i) to
expand the market for goods and services and to foster the opening of
government procurement; (ii) to establish clear and stable rules for
trade and investment flows; and (iii) to avoid trade distortions
resulting from a possible Free Trade Area of the Americas (Chaire
Mercosur, 2005).
Comparing the interests of the two partners underlines the diffi-
culties that need to be surmounted by these negotiations. In fact,
Mercosur’s main interest lies in agricultural liberalization, which is
the most sensitive issue for the EU. Likewise, the EU interests focus
on the liberalization of trade in services and the opening of public
procurement, areas where Mercosur, and especially Brazil, adopts a
defensive stance. Parallel negotiations at the FTAA and the WTO are
relevant for both parties, as they influence the rhythm and timing of
the bilateral negotiation, each party´s bargaining power and poten-
tial blockades in any specific area.
The offer exchanges between Mercosur and the EU began in 2001
and lasted until September 2004, when negotiations were temporarily
suspended. Kume et al. (2004) estimated the gains for Brazil as a
result of zeroing EU import tariffs on manufactured goods and the con-
cession of tariff-rate quotas for processed agricultural products.1 The
1. The estimates presented by Kume et alii (2004) were based on the exchange
of offers held in May 2004.
110
estimated gains were just over US$ 900 million over 2002 exports,
about 80% of which was concentrated in agriculture and only 20% in
manufactures. More than half of the gain in agriculture was due to a
sole product, ethanol, followed by orange juice and beef, chicken and
pork. On the EU side, the estimated gain was larger: more than
US$ 1.3 billion, concentrated on various capital goods (54%), transpor-
tation equipment (20%) and chemical products (7%). The conclusion
drawn by Kume et ali. (2004) is that the limited concessions made by
the EU on agricultural products and the defensive posture of the latter in
services and government procurement are the main obstacles to
exploiting the economic complementarity between the blocs and the
main factor behind the impasse in the negotiations.
Domestic Determinants of Revealed Preferences

Introduction
Over the last twenty years, several Latin-American countries
have undergone quite similar processes of trade opening and
microeconomic reform. However, liberalization paths and styles
have been somewhat different. Similarly, the foreign trade
strategies pursued by some of the largest countries in the region
(Argentina, Brazil, Chile and Mexico) show notable divergences.
Aggarwal and Espach (2004) claim that these divergent trade
strategies cannot be explained by differences in comparative
advantages, or by asymmetries in the bargaining power of these
countries vis-à-vis other blocs or countries. Rather, they interpret
these divergent foreign trade strategies as the result of a deliberate
option made by policy-makers, based on an evaluation of the trade-
offs involved in different paths of integration into world economy.
These, in turn, are based on different economic, political and, above
all, strategic goals. Thus, their conclusions underline the role of
countries as unitary actors rationally pursuing specific national
objectives (Aggarwal, Espach and Tulchin, 2004, p. 263). In this
perspective, preferences of business, trade unions, political parties
and non-governmental organizations play a less important role.
What evaluation do these authors make of Brazilian trade strate-
gies? Brazil emerges from the comparative analysis as a country that
sets its foreign trade policy priorities according to strategic rather
than economic considerations, based on attributes such as size,
institutional legacy and, especially, a particular perception of Brazil´s
place in the world. The country is defined as a regional leader that
111
develops a strategy focused on a mini-lateral arrangement (Merco-

sur) with the purpose of leveraging its bargaining power in negotia-
tions with more weighty partners, such as the US of the European
Union. By the same token, Brazil is seen as very active at the multi-
lateral level (WTO). The option for a trade strategy anchored in the
region is based on the objective of promoting a gradual adjustment of
the Brazilian economy to international competition.
Other studies included in the same volume provide complemen-
tary interpretations. For example, Motta Veiga (2004 b) agrees on
the prevalence of political and strategic goals in drafting Brazil’s
foreign-trade policy, but also emphasizes the weight and influence
of import-competing lobbies to explain the country’s defensive
stance in trade negotiations. Maxfield (2004), in turn, underlines
the fragility and low representativity of top business organizations,
a factor that contributes to raise the lobbying power of the more
protectionist interest groups represented by business associations
with more restrictive sectoral or regional interests. Lastly, Tulchin
(2004) states emphatically that Brazil is hostage to the dilemma
between pursuing a regional or global strategy. He criticizes the
regional option and views the country’s betting on Mercosur as
problematic in the long run. These issues will be discussed and
qualified in the next two sections.
Structural Factors
Trade Patterns
The structure of trade flows is a relevant factor to understand
Brazilian foreign-trade policy and, especially, to identify the offen-
sive and defensive interests mobilized in each negotiating forum. It
is thus important to make a brief description of the geographical
pattern of Brazilian trade flows, focused on the partners with which
the country is engaged in major negotitations (FTAA, European
Union, Mercosur, Andean Community). Tables 5 and 6 present the
basic information on exports, while Table 7 describes import pat-
terns, both based on 2004 data.
• Geographic Distribution of Trade
The geographical structure of Brazilian foreign trade is evenly dis-
tributed between FTAA (41.6%), the European Union (25.1%) and the
Rest of the World (33.3%). This structure illustrates the global-trader
status generally conferred to Brazil (Table 5). In contrast to what is
observed in other Western Hemisphere countries (except the United
112
States and other South Cone countries), in the case of Brazil extra-
hemispheric trade is very significant. This is a relevant factor to
understand the cautious position adopted by Brazil and Mercosur in
the FTAA negotiations. As a matter of fact, the FTAA and the Euro-
pean Union account for 2/3 of Brazilian foreign trade. These trade
shares and these partners´ weight in the world economy illustrate the
nearly multilateral nature of these preferential negotiations.
• Exports
FTAA. The FTAA is the destination of 67.6% of Brazilian manu-
facturing exports, a figure which is significantly lower in the case
of primary products (19.4%) and semi-manufactures (31.7%).
Strictly speaking, no single bloc or country has a significant share
in exports of primary goods (Table 6).
LAIA. LAIA member countries (Mercosur, Andean Community,
Chile and Mexico) are important destinations for Brazilian exports
of manufactured goods (Table 5). These exports enjoy significant
trade preferences, which are threatened by the recent US drive
towards bilateral negotiations with the Latin American countries.
USA. The US market alone accounts for over one-fourth of
Brazilian manufacturing exports. This share is significantly higher in
the case of R&D-intensive (46.2%) and labor-intensive industries
(34.6%). However, the offensive interests of Brazil in the US market
are focused on less elaborated goods facing high tariff and non-tariff
barriers, such as foodstuffs, beverages, tobacco, edible oils and fats.
This is confirmed by analyses based on revealed comparative
advantages (Kume and Piani, 2004a) and by identifying sectors
penalized with tariffs above 15% or trade relief measures, such as
steel (Schott, 2005).
EU. The European Union is the destination of one-fourth of Bra-
zilian total exports, but accounts for nearly 40% of primary goods
exports (a pattern similar to that of the Rest of the World (45%)
[Table 5]. Exports to the European Union show a high share of pri-
mary agricultural products (45.9% of Brazilian total exports), a
ratio which is even higher than in exports to the Rest of the World
(40.0%). As for manufactured goods, the European Union is a sig-
nificant destination for exports of capital goods (29.7%) and labor-
intensive industries (22.7%). However, on aggregate, the share of
the European Union in total manufacturing exports (17.9%) is just
a little higher than that of Mercosur (15.4%) (Table 6).
113
Table 5. Brazilian exports classified by category of use and export markets - 2004
114
CATEGORIES OF USE
EXPORTS
SHARE IN EXPORTS (%) SHARE IN EXPORT MARKETS
(%)
BLOCK / TRADE
COUNTRY (%) Semi- Semi-
US$ Primary Manufactured Primary Manufactured
% manufactured Total manufactured
million goods goods goods goods goods goods
FTAA 41.6 43,680 45.3 14.9 36.2 65.3 100.0 9.7 11.1 79.2
USA 20.0 20,341 21.1 6.0 27.2 28.2 100.0 8.4 18.0 73.6
Mercosur 9.6 8,912 9.2 1.5 2.4 15.3 100.0 4.9 3.7 91.4
Andean 3.5 4,161 4.3 1.0 0.9 7.0 100.0 7.1 3.0 89.9
Mexico + Chile 5.4 6,494 6.7 2.9 1.9 10.2 100.0 12.5 4.1 83.4
Rest of FTAA 3.1 3,772 4.0 3.5 3.2 4.6 100.0 25.5 12.6 61.9
EU (25 countries) 25.1 24,160 25.0 40.1 20.5 18.7 100.0 47.5 11.4 41.1
Rest of the world 33.3 28,635 29.7 45.0 43.3 16.0 100.0 48.8 17.2 34.0
Total 100.0 96,475 100.0 100.0 100.0 100.0 100.0 30.0 14.1 55.9
Memo: US$ million 159,257 96,475 28,518 13,431 53,055
Source: SECEX/MDIC
Table 6. Brazilian exports classified by groups of products and export markets – 2004
FTAA
Groups of EU Rest of
Andean Mexico Rest of Total
products Total USA Mercosur (25) world
comm. + Chile FTAA
Primary 19.5 8.0 2.5 1.0 3.1 5.0 37.8 42.7 100.0
Agriculture 14.1 8.8 1.4 1.1 1.9 0.9 45.9 40.0 100.0
Minerals & Fuels 26.4 6.8 3.9 0.8 4.6 10.3 27.4 46.2 100.0
Seminaufactured 31.7 18.6 5.0 2.3 2.1 3.7 28.3 39.9 100.0
Agriculture 23.1 12.6 3.0 2.3 2.1 3.1 31.9 45.0 100.0
Minerals & Fuels 56.6 35.8 10.7 2.4 2.3 5.5 18.2 25.3 100.0
Manufactured 67.6 28.5 15.4 7.3 11.7 4.7 17.9 14.5 100.0
Labour intensive industries 60.2 34.6 11.2 4.9 5.4 6.0 22.7 15.1 100.0
Scale intensive industries 70.5 22.7 18.1 8.1 16.3 5.3 10.6 18.9 100.0
Suppliers of capital goods 58.9 23.5 14.1 7.7 8.9 4.7 29.7 11.4 100.0
R&D intensive industries 78.3 46.2 13.9 6.8 9.4 2.0 15.0 6.7 100.0
Other 3.0 1.8 0.2 0.5 0.2 0.3 2.9 94.1 100.0
Total 45.4 20.8 9.2 4.3 6.7 4.4 25.0 29.6 100.0
Source: SECEX/MDIC
115
• Imports
In 2004, Brazilian imports from the FTAA and the EU-25
accounted for more than 60% of total foreign purchases. In both
cases imports are basically concentrated on manufactured goods,
which account for more than 95% of imports from the EU and
almost 93% imports from the US. Brazilian imports from Mercosur
also show a share of manufactured goods (69.9%) higher than in
purchases from other LAIA countries (Table 7).
Sumarizing, these figures show that the major offensive
interests of Brazil in agriculture lay in the US and EU markets,
while in the case of manufactures they lay in the US and LAIA.
Conversely, the major threats to the Brazilian industry come from
the US and the EU.
Revealed Preferences and Sectoral Interests
Identifying the structural determinants of Brazilian foreign-trade
policy demands a brief description of the interests of main
economic sectors. In effect, tariff protection, trade relief measures,
special import regimes and export promotion policies penalize or
benefit various economic sectors in different ways. Similarly,
partial equilibrium models estimating the effect of alternative
preferential trade negotiations point to sectorally differentiated
distribution of opportunities and threats.
Table 8 distinguishes the interests of three differentiated sets of
sectors based on the following elements: (i) sectoral indices of
outward orientation (export coefficients and import penetration
ratios); (ii) the intensity of public policy instruments (tariff
protection, public finance and special import regimes); and (iii) the
evaluation of potential sectoral gains and losses as a result of the
two main negotiations currently underway (FTAA and EU):
• The first set of sectors brings together those based on Brazilian
natural resources: mining, agriculture and livestock, foodstuffs
and beverages, wood and furniture, tobacco, leather and footwear,
paper and pulp. Excluding mining, these activities are usually
considered part of Brazilian agribusiness 1. These sectors are
export-oriented and show relatively low import penetration ratios.
They all have offensive interests in the FTAA and EU negotiations,
which are confirmed by estimates of sectoral gains from reliable
1. In Brazil the definition of agribusiness used by the Ministry of Agriculture

is broader than that used by the WTO, including segments of the textile, footwear
and paper and pulp sectors.
116
Table 7. Brazilian imports classified by category of use and import markets – 2004
CATEGORIES OF USE
IMPORTS
SHARE IN IMPORTS (%) SHARE IN IMPORT MARKETS (%)
BLOCK/ TRADE
COUNTRY (%) Semi- Semi-
US$ Primary Manufactur Primary Manufactured
% manufactured Total manufactured
million goods ed goods goods goods
goods goods
FTAA 41.6 22,279 35.5 29.8 50.6 36.0 100.0 15.6 6.4 78.0
USA 20.0 11,337 18.1 5.0 8.9 21.7 100.0 5.1 2.2 92.7
Mercosur 9.6 6,393 10.2 14.4 8.4 9.3 100.0 26.4 3.7 69.9
Andean 3.5 1,489 2.4 3.4 8.1 1.8 100.0 26.5 15.4 58.1
Mexico + Chile 5.4 2,094 3.3 5.3 15.3 2.2 100.0 29.6 20.6 49.8
Rest of FTAA 3.1 966 1.5 1.7 9.8 1.0 100.0 20.1 28.8 51.1
EU (25 countries) 25.1 15,895 25.3 1.8 16.8 31.5 100.0 1.4 3.0 95.6
Rest of the world 33.3 24,608 39.2 68.4 32.6 32.5 100.0 32.5 3.7 63.8
Total 100.0 62,782 100.0 100.0 100.0 100.0 100.0 18.6 4.5 76.9
Memo: US$ million 159,257 62,782 11,691 2,818 48,273 – – – –
Source: SECEX/MDIC.
117
econometric models. In general, these sectors do not rely on

public financing or special import regimes because their demand
of foreign inputs is very low. However, some activities (dairy
products, sugar, processing of vegetable products, tobacco,
alcoholic beverages) enjoy quite high levels of protection and
even trade relief measures (price undertakings in the case of dairy
products).
• The second set includes two industrial sectors that are predomi-
nantly export-oriented. The first one, the aircraft industry, is
fully accounted for by one large company (Embraer) and a few
number of medium-size local suppliers. This is a highly export-
oriented sector heavily dependent on imported parts and compo-
nents. Consequently, it is an intensive user of special import
regimes and a strong demander of public financing. The second
sector brings together three industries: steel, non-ferrous metals
and other metallurgic products. Brazil is competitive in the first
two segments, which show fairly high export coefficients, but
not in the last (exports and imports are not very significant as a
share of domestic production or consumption, but the sector
enjoys a high level of protection). Broadly speaking, this is a
sector that can benefit from trade negotiations, especially in the
US market where it is a major target of antidumping measures,
but it is threatened by both, the EU and the US.
• The third set includes import-competing sectors and/or highly
protected activities. Import-competing sectors include producers
of machines, equipment and mechanical, electrical and electronic
apparatuses, including precision instruments, and manufacturers
of chemical products, pharmaceuticals, rubber and plastic. The
aggregate share of these sectors in the gross value added of the
transformation industry is relevant and higher than 35%. These
industrial sectors have clearly defensive interests in foreign trade
negotiations. As a matter of fact, these products are considered
“sensitive” and therefore excluded from the negotiations or
included in “baskets” with the longer liberalization schedule.
Effective protection is high in most of these sectors, except for
domestically non-produced goods, which enjoy tariff reductions
or so-called ex-tarifarios) exemptions. Some activities with a
relatively high presence of foreign firms show reasonably high
export coefficients on account of foreign sales to the regional or
hemispheric market. These too are heavy users of public finance
and special import regimes.
118
Table 8. Revealed sectoral preferences based on selected indicators and policy instruments
Use Estimated impact of trade preferential

Export Effective Import Access to of special agreements
Sectors ratio protection penetration public import USA EU
rate Ratio Finance
regimes Positive Negative Positive Negative
Mineral products ................... High Low Medium X X
Agricultural products ............ High Low Low X X
Food and beverages .............. High Medium-high Low X X X X
Wood and furniture ............... High Medium Low X X
Tobacco ................................. Medium Medium-high Low X X
Footwear ............................... High Medium-high Medium X X X X
Pulp and paper ...................... Medium Medium Low X
Aircraft .................................. High Medium High X X
Steel and metal products ....... Medium Medium Low X X X X X
Mechanical equipment .......... Medium Medium Medium X X X X
Electrical equipment ............. Medium-high High High X X X X
Electronic equipment ............ Medium-high Medium High X X X X
Chemical products ................ Low Medium Medium-high X X X X
Rubber products .................... Medium-low Medium Medium X X
Plastic products ..................... Low High Medium X X
Automobiles, trucks and buses Medium-high High Low X X X X X
Textile products and apparel . Medium-low High Medium X X X X
X (high case) and x (low case) stand for high / low intensity (use or gain), respectively.
Sources: FUNCEX for sectoral export and import penetration ratios (data for 2004); Kume et ali. (2001) for sectoral effective protection rates (data for 2000); Kume
and Piani (2004) for the estimated impact of a trade agreement with the USA; Kume et ali. (2004) for the estimated impact of a trade agreement with the EU; BNDES
and Banco do Brasil for data on public financing (period 2002 to 2004); Motta Veiga and Iglesias (2003) for sectoral use of special import regimes.
119
The second group includes two sectors (motor vehicles and,

textiles and clothing) with special characteristics that are relatively
isolated from foreign competition. In fact, both sectors enjoy the
highest levels of protection of all Brazilian industry and their
products are typically considered “sensitive” in foreign trade
negotiations. They also have other characteristics in common,
namely: (i) both significantly increased the level of effective
protection between 1994 and 2000 by using their strong lobby power,
and (ii) both underwent rapid modernization in the 90s and increased
their exports in the last few years, with the motor-vehicle sector,
benefiting from substantial direct foreign investment inflows. The
motor-vehicle sector is also an important user of public credit and
special import regimes. Both instruments are important for levering
their exports, which concentrate heavily on LAIA markets (Argentina,
Mexico, Chile and the Andean Community). For motor vehicles, as
well as for clothing, foreign trade negotiations represent threats
rather than opportunities. The textile industry, in turn, has offensive
interests in the US, where it is penalized by the preferences granted to
competitors from other developing countries.
The above analysis would be incomplete without discussing the
position of these sectors vis-à-vis regional preferential negotiations,
principally in Mercosur. Mercosur and the other South-American
markets are of little importance to Brazilian agribusiness because
exports of agricultural products are not significant. Argentina’s
refusal to liberalize sugar trade and the application of non-tariff
barriers against Brazilian exports of footwear or paper, have nurtured
the critical stance of agribusiness towards Mercosur. In the case of
industrial sectors, including import-competing activities, the regional
market is very important and in some cases fundamental. However,
trade frictions, mainly with Argentina, have led to frequent
restrictions on Brazilian exports of steel products, textiles, rubber,
and machines and electrical apparatuses. Other conflicts have arisen
out of the repeated renegotiation of flexibility clauses in the the
Automotive Regime, as well as of disputes concerning the common
external tariff on capital goods and information-technology and
telecommunication products. In 2004, excluding agribusiness and
mining, the remaining sectors accounted for about 85% of exports to
Mercosur and over 80% of exports to Chile and the Andean
Community. In spite of this, it is difficult to envisage a coalition of
Brazilian industrial sectors favoring a regional orientation for trade
policy.
120
Political and Institutional Determinants

of Revealed Preferences
The View of the Domestic Elites
In mid-2001, when Fernando Henrique Cardoso was running the
last year of his second presidential term, a qualitative and quantitative
survey interviewed 150 personalities of the so-called “foreign-policy
community”. The group included members of the Executive and the
Legislative, business and trade-union leaders, chairmen of non-
governmental organizations, academics and journalists, in other words,
“people who take part in the decision-making process and/or
contribute to shape public opinion about the international relations
of Brazil and whose ideas and assessments define the legitimacy of
political discourse, set the contours of other segments of public
opinion and, in this way, bear a direct or indirect influence on the
course of foreign policy decisions” (Souza, 2002). Three topics
included in the survey are of special interest here: (i) the prevailing
consensus on the role and place of Brazil in the international
system; (ii) the disagreement that prevails as to the best strategy to
integrate Brazil into the world economy; and (iii) the prevalent
perceptions concerning the role of sectoral interests in shaping
Brazilian foreign policy. The consensus refers mostly to the
perception of national identity and the aspiration to leadership. In
addition to a broad criticism for the defensive attitude of Brazilian
foreign policy, there is also widespread convergence as to the
priority of the regional arena.
• National Identity and Aspiration to Leadership
The aspiration of making Brazil a relevant actor in regional and
world politics is widely shared by the interviewees. A sense of
national identity built around the idea of a country of continental
dimensions that strives to promote its economic development and
consolidate a position of leadership and regional cooperation in
South America lies at the root of this aspiration. The size of its
territory and population, a large and diversified economy and a
remarkable cultural and linguistic uniformity are features that make
Brazil so different from other nations, contributing to build a strong
national identity and justifying the aspiration to play a prominent
role in international affairs (Souza, 2002). On one hand, the
attributes that make up Brazilian “national identity” are frequently
referred to in the Brazilian foreign policy literature: for example,
for Lafer (2004) they are the “deep forces” that feed Brazilian
121
diplomacy, whereas for Lima (2005) they constitute the “founding

myth” of the country’s foreign policy and its very raison d’être.
More importantly, such attributes are the factors that confer
stability and continuity to Brazilian foreign policy and that define
its worldview and interests in the international order (Lafer, 2004).
On the other hand, the desire to see the country more actively
involved in international affairs (an opinion shared by 99% of those
interviewed) and the valorization of South America as a natural
geographical area for Brazilian activism, reflects a more recent
consensus encouraged by globalization and the constitution of
Mercosur.
• Strategies of International Insertion
However, there is no such consensus regarding the strategies
needed to propel the country onto the international scene. The
results of the survey show a clear contrast between the ambition to
exercise more influence on the international sphere and the status of
Brazil as a medium-sized power located in the area of influence of
a hegemonic superpower. According to the survey there is still a
conflict between a development model based on opening up the
economy to foreign competition and world markets, and another
that emphasizes raising national output and encouraging export
growth. When translated into international priorities, this
disagreement seems as if one side emphasizes the importance of
multilateralism, while the other, more inward-looking, supports a
stronger Mercosur and horizontal alliances with other countries of
the region (Souza, 2002). In sum, these are two different views,
one more liberal and the other more autonomous and closer to
developmentism, which expresses two different strategies of
international insertion.
The liberal view is based on the premise that in order to benefit
from globalization Brazil needs to show coherence and
trustworthiness by implementing internal reforms that promote a
market economy and stiffer competition, thus making the country
more attractive to foreign investment flows and faster economic
growth. Based on a “realistic” assessment of the power resources
at hand, this perspective suggests a commitment to multilateralism
as a means to curb unilateral action. In other words, from the
liberal point of view, autonomy comes from the capacity to
cooperate to create norms and institutions that level the playing
field and limit the unilateral exercise of power and influence. In
this sense, multilateral forums are a privileged space of action for
122
countries such as Brazil, since they can enhance their bargaining

power by taking part in multiple coalitions. In short, on this
perspective, liberalization is the element that connects domestic
and foreign agendas (Souza, 2002).
In contrast, the autonomist view claims that a successfull inter-
national insertion for Brazil first calls for the capacity to articulate
a national policy geared towards overcoming internal imbalances.
The autonomists defend active development policies, distrust the
trade-liberalization agenda and doubt over the efficacy of global
rules to constrain dominant interests. According to this view, WTO
negotiations are biased against Brazilian interests and the commit-
ments already undertaken have limited the ability to implement
developmental industrial and trade policies. Consequently, the
autonomist view defends more active foreign policies centered on
building alliances with countries with similar interests, enhancing
Brazil’s position as regional leader. This view is associated to more
assertive and voluntarist foreign policies (Souza, 2002).
The answers gathered in the survey reflect the ambivalence that
prevails in the domestic elites: 82% of those interviewed support a
more aggressive stance in trade negotiations, yet a less significant
majority (67%) supports opening up the economy. However, there
is considerable dispersion in preferences regarding Brazil’s
international insertion. While 31% of the interviewees are in favor
of prioritizing multilateral negotiations in the WTO, 21% support
sub-regional integration in Mercosur, 17% integration in a South-
American bloc and 16% hemispheric integration in the context of
the FTAA.
• Participation of Interest Groups in Foreign Policy-making
The survey also shows that there is a “democratic deficit”
stemming from the lack of transparency in decision-making and the
absence of appropriate channels to represent the interests of
organized groups or public opinion (Souza, 2002). Itamaraty is
frequently criticized for paying little attention to external opinions
and influence, a fact clearly reflected in the survey. When asked
about the attention paid by the Ministry of Foreign Affairs to other
public and private sector actors, only other Ministries of the Federal
government receive a slight majority of positive answers (57%). In
effect, business associations (49%), the media (46%), the National
Congress (30%), public opinion (28%), non-governmental
organizations (18%), universities and studies centers (14%) and
123
workers’ unions (6%) are largely ignored in foreign policy-making.

It is not unlikely that the results of this survey shaped Aggarwal,
Espach and Tulchin (2004) views, which point to Brazil as a
country that defines its foreign-trade policy based on strategic
rather than economic considerations, spurred by an aspiration to
leadership and a worldview that enjoys wide social consensus, even
though this may result in an ambivalent attitude when it comes to
opting for regional or multilateral insertion.
The Role of Itamaraty
The opinion is unanimous that Brazil has an efficient and highly
professional diplomatic corps with legitimacy and substantial
autonomy in conducting the country’s foreign affairs. Even more
importantly, Itamaraty constitutes a relevant factor in explaining
the continuity and stability of Brazilian foreign policy. Three insti-
tutional characteristics contributed decisively to this stability: (i)
regular standards and a recruiting and training process that creates a
strong organizational identity; (ii) a high degree of insulation from the
influence of the political and social environment (both an asset and a
liability); and (iii) a high capacity to formulate policies and develop a
strategic perspective of its own (Lima, 1994).
Even acknowledging the capacity of the Brazilian diplomatic
community to manage foreign policy and to develop its own strate-
gies, autonomy has its limits. The first and fundamental one is set
by the Executive, and more specifically by the President. In effect,
“in Brazilian presidentialism the parameter that regulates the
degrees of freedom or the relative autonomy enjoyed by the diplo-
matic corps is presidential authorization, whether by omission or by
delegation of power” (Lima, 1994). The interaction between the
diplomatic community and the Executive is precisely the factor that
accounts for periods of foreign policy discontinuity. This was the
case in the past during the governments of Vargas or Geisel and,
more recently, during the F.H. Cardoso and Lula administrations. 1
Furthermore, despite its strong organizational identity, the same
conflicting views identified above coexist within the diplomatic
community. In effect, the conflict between a liberal and an autono-
mist or national-developmental view is also present in Itamaraty,
clearly exemplified by the predominance of the latter in President
Lula’s administration. Even more, the “defensive” character of
1. See Lima (1994, 2005 a and 2005 b).
124
Brazilian foreign policy can hardly be attributed exclusively to the

diplomatic community, since that stance also reflects the wide-
spread influence of protectionist interests. 1
In any case, the almost absolute predominance of Itamaraty in
foreign trade policy-making began to wane during the mid-90s, when
Brazil engaged in multiple trade negotiations. These negotiations
touched on domestic and border issues capable of imposing
significant gains and losses on various domestic groups, apart from
covering policy areas under the competence of other public sector
agencies. In addition, the complexity and scope of issues under
negotiation called for knowledge and abilities scarce among
professional diplomats. All these factors contributed to the
progressive establishment of consultation mechanisms and
participation channels in the process of drawing up foreign-trade
policies, including both public and private sector actors. In fact, as
pointed out by Motta Veiga (2005), trade negotiations were “the
entry door” for many civil-society groups interested in foreign-trade
policy-making, a sphere hitherto reserved almost exclusively to the
diplomatic community.
Consultation Mechanisms
and Interest Representation in Trade Policy-Making
Until the late 80s, foreign trade negotiations played a marginal
role in Brazilian trade policies. For that very reason the involvement
of non-governmental actors was very limited and sporadic. The
agreements negotiated within the framework of LAIA, based on inter-
1. In this sense, the following statement by a Brazilian negotiator is illustrative:

“[A] question that calls our attention is the relation between external negotiations
and internal processes... The problem is that at the present moment there is no cla-
rity as to the definition of domestic interests. In the 50s, 60s and 70s it was diffe-
rent: developmentist policies were dominant and the role of a trade negotiator was
to make room for these policies by protecting infant industries and limiting the
opening up of the Brazilian market. That logic has been abandoned and, as I see it,
no new logic has taken its place. Brazil is not convinced that opening up is benefi-
cial in itself. That is the truth. Consequently, life for a Brazilian negotiator is
extremely difficult... Brazil still lives with the idea that what is not produced
today can be produced tomorrow.... This is actually the position of the Brazilian
industrial sector. That is why Brazilian trade negotiation strategies are basically
defensive. Offensive interests are still small and that is why we prefer to negotiate
at the WTO: not just because Brazilian foreign trade is diversified, but because it is
easier to be defensive in the WTO than in the FTAA. I believe that our preference
for multilateralism comes to a large extent from the fact that we still have signifi-
cant defensive interests.” (Hugueney Filho, 2003.)
125
sectoral bilateral concessions, involved ad-hoc consultations with the

companies and segments directly involved. This pattern was
repeated in WTO negotiations, the textile sector being consulted in
negotiations on the Multifiber Arrangement and the steel sector in
negotiations on Voluntary Export Restraints (Motta Veiga, 2005).
Unilateral trade liberalization and the negotiations that led to the
constitution of Mercosur in the early 1990s also had scant or no par-
ticipation at all by the private sector. Both policies were managed
exclusively by the bureaucracy and followed by the private sector
with skepticism and fear. The National Confederation of Industry
(CNI) monitored the liberalization process by conducting regular
(annual) surveys capturing the reaction of industrial business to the
tariff-reduction calendar. On the other hand, the CNI and other sectoral
organizations occasionally participated in selected Mercosur technical
sub-groups. However, cooperation between the private sector and
government officials was essentially informal and rarely led to the
creation of routines to coordinate and monitor the negotiations.
FTAA negotiations represented a turning point in this process,
opening the door to a significant change in the relationship between
Brazilian diplomacy, the business sector and other public sector
agencies. Three factors contributed to the specificity of FTAA nego-
tiations: (i) the political impact caused by the participation of Brazil
in an initiative that involved negotiations with the United States and
thus raised strong resistance in public opinion, notably from busi-
ness, trade unions and non-governmental organizations; (ii) the
broad scope of the negotiations and their Gatt-plus focus threatened
to affect many interest groups and to reduce public policy discre-
tion; and (iii) the reactive nature of the negotiations, which were
accepted mainly on account of the risks of exclusion.
The fact that Belo Horizonte was chosen as the venue for the
1998 ministerial meeting and Business Forum of the Americas
brought the government and the business sector closer. In this
period the Ministry of Foreign Affairs created a National FTAA Sec-
retariat (SENALCA), a forum for discussion with the participation of
several Ministries and public agencies (Central Bank, CAMEX, etc.)
aimed at coordinating and shaping a national position on issues
involved in the hemispheric negotiations. These meetings were
joined by business organizations and a workers’ central union, who
participated as “guests”. Soon after, negotiations with the EU led to
a pattern of analogous coordination (SENEUROPA). The Ministry of
Foreign Affairs also launched Inter-ministerial Thematic Groups to
126
discuss different issues under negotiation, such as investment, gov-

ernment procurement, etc. These groups, eminently technical in
nature, gradually broadened their scope to include all negotiations
underway (FTAA, EU, WTO and Mercosur). Private sector participa-
tion was “informally” admitted in some of them, but not in all
(Motta Veiga, 2005).
The degree of institutionalization of the consultation mecha-
nisms between government and civil society was not uniform.
More complex agendas, such as those of the FTAA and the EU, led to
more institutionalized mechanisms with a clear hierarchy, formal
meeting procedures, routines to evaluate reports and a reasonable
degree of transparency. However, these mechanisms were limited
to the groups that had access to them (government agencies, busi-
ness associations, trade-union confederations and representatives
of the Legislative). In negotiations of a more limited thematic
scope, such as those with the LAIA countries, mechanisms were less
formal and less regular.
In 2003, already in the Lula Administration, the mechanisms for
exchange between government and civil society underwent some
changes. Three of them deserve special mention: (i) the broadening
of civil society representation, with the participation of non-
business sectors (trade unions and non-governmental
organizations); (ii) the invitation to civil society representatives to
participate directly in the negotiations; and (iii) the more frequent
use of informal, not institutionalized, channels of communication
or coalition forming, especially through sectoral ministries such as
the Ministry of Agriculture, the Ministry of Agrarian Development
and the Ministry of Industry and Trade. These agencies
strengthened relations with their specific clienteles, that is, with
sectors of agribusiness, representatives of small-scale agricultural
producers and industrial firms, respectively. The changes brought
about by the Lula Government contributed to engage new actors in
the debate over international trade negotiations, counter-balancing
the privileged position held by the business sector up to 2002.
Nevertheless, this “democratization” merits qualification: in effect,
access to the broader discussion about the strategic options
available in each negotiation was still limited, as it had happened in
the previous government. Incorporating new actors has basically
served to confer legitimacy to the new government’s negotiating
strategy, as suggested by the “instrumentalization” of the
procedures adopted. In this sense, Motta Veiga (2005) finds certain
127
similarities with Hocking’s “club model” in which “the objective of

the consultation consists not in questioning the general aims of the
trade policy but, rather, in generating support for the aims defined
by the policy makers”.
The Participation of the Business Sector
• The Brazilian Business Coalition
The evidence made explicit at the 1996 Cartagena Business
Forum that Brazilian business was poorly equipped to face complex
and encompassing negotiations such as the FTAA, led the National
Confederation of Industry (CNI) to create the Brazilian Business Coa-
lition (CEB). Industrial business associations and state industrial fed-
erations constituted the initial constituency of the mechanism, which
gradually included representatives of non-industrial interests, such as
agriculture and services. However, these sectors always had minor
participation and industrial interests remain predominant. 1
The CEB is an informal organization based on voluntary membership.
The political and technical coordination is charged to the CNI. A forum
exclusively focused on foreign trade negotiations (FTAA, EU, WTO,
Mercosur, LAIA), CEB has promoted consensus, exchange of information
with government officials and dissemination, aimed at building
negotiating offers. Meetings and debates take place in plenaries and
decisions are taken by consensus. The CEB is a new institution that has
made outstanding contributions through the informed participation of the
business sector in the debate on Brazilian foreign trade policy. However,
it suffers from some non insignificant weaknesses. First, business
leaders participate only indirectly or occasionally in CEB meetings.
Second, some business associations, state industrial federations and
agricultural organizations keep direct contact with government agencies
and even with the negotiators themselves, a practice that grows more
intense when internal differences are more pronounced. Lastly, the CEB
tends to focus on specific issues and not on the strategic framework
behind each negotiating exercise, which limits its potential. In short,
these deficiencies weaken CEB’s political and institutional role as a
mechanism to represent interests and act as a partner to the public sector.2
1. More than 150 business associations are affiliated to the CEB.

2. These characteristics support the observations made by Maxfield (2004):
“Brazilian business associations are plagued by size, sectoral, and regional diffe-
rences... Fragmented business interacting in largely particularistic fashion with a
fragmented government was not conducive to building the technically oriented
state-business dynamic evident in México and Chile.” (p. 73 and 74.)
128
CEB’s thematic interests have focused on agricultural and non-

agricultural market access issues, and to a lesser extent on govern-
ment procurement. Issues such as the services trade and rules on
investment are of limited interest and have failed to attract the atten-
tion of the business sector as a whole (Motta Veiga, 2005). The inter-
est and position of different sectors within CEB follow the lines of
sectoral interests described above. Import-competing sectors are
mostly interested in regional negotiations with LAIA countries,
including Mercosur, where their major export interests lie. The rele-
vance of these markets to the agro-industrial sectors is considerably
smaller. However, although more ambitious negotiations (such as
the FTAA, EU, WTO) draw the attention of all sectors, there are clear
interest divergencies: a great number of industries have predomi-
nantly defensive interests, while the offensive agenda is mostly con-
centrated in agribusiness.
Until 2002 the stance adopted by CEB in preferential trade negoti-
ations was close to that of the Brazilian government. But in the Lula
Government, when it seemed that most negotiations were approach-
ing their final stage, the convergence between CEB and the govern-
ment position began to unravel (Motta Veiga, 2005). In fact, CEB
turned critical of the official stance under the following arguments:
(i) the need to continue FTAA negotiations, albeit with a less ambi-
tious format; (ii) the “limited commercial economic content” of some
preferential negotiations, such as those undertaken with the Andean
Community (basically politically motivated); and (iii) displeasure
with the sporadic and less transparent mechanisms to dialogue with
the business sector.
With the impasse of the two major preferential negotiations in
2004, CEB’s attention concentrated on the multilateral front. Once
more, these negotiations oppose the protectionist interests of promi-
nent sectors of Brazilian industry to the offensive objectives of agri-
business. Nonetheless, since different interests have focused on
different fora, debate within the CEB has proved less stormy than
expected. While CEB has played an active role in drawing up the Bra-
zilian offer on non-agricultural products, agribusiness has focused on
shaping proposals for the G-20. Since the Doha negotiations are at a
standstill, the discussion of domestic trade-offs is still pending.
• Agribusiness
The term agronegócio or agribusiness was almost unknown in
Brazil ten years ago: the sector did not even exist in economic
129
statistics. Nowadays, however, we know that agribusiness accounts

for just over 30% of the GNP, employs 35% of the active population,
is responsible for 42% of Brazilian exports and prides itself on
having placed the country among the world most competitive
producers of agro-industrial commodities. In fact, in 2003 Brazil
was the third largest agricultural exporter in the world, only behind
the United States and the European Union. Moreover, Brazil ranked
first in the world as exporter of coffee, orange juice, soybeans and
tobacco, and second as the largest exporter of soy flour, soy oil and
chicken. Brazil was the fourth largest exporter of swine, corn and
cotton.
During the 70s and 80s the sector underwent a significant
diversification of production and expansion of the agricultural
frontier. This led to higher exports and investment in research.
Public policies helped through making credit available and
implementing price maintenance mechanisms. In the 90s the sector
underwent an efficiency and competitiveness shock triggered by
deregulation, the end of subsidized credit, trade liberalization and
real appreciation of the domestic currency. However, the sector
benefited from the stabilization of the economy and, not less
importantly, from the official help provided by securitization and
renegotiation of rural debts. At the end of the decade the “golden
age” of Brazilian agribusiness had begun: in fact, since the 1999
devaluation of the real, agribusiness entered a phase of rapid
growth encouraged by the rising demand from Asia and higher
international prices. In this recent phase the production of grains
increased from 80 to 125 million tons (Jank, Nassar and Tachinardi,
2005).
This brief history explains the scant interest of the agricultural
sector in trade negotiations until the mid-90s. Actually, the
representatives of agribusiness had a very modest participation in
the Uruguay Round negotiations and they adopted a basically
defensive attitude in the negotiations to establish Mercosur, when
they feared competition from Argentina. The stance adopted by the
sector began to change in the second half of the 90s, when its
representatives began to pressure the government to adopt more
aggressive attitudes in negotiations such as the FTAA and those with
the EU. In the WTO this new and more aggressive position
influenced the government’s decision to request the establishment
of dispute settlement panels against the United States (cotton) and
the European Union (sugar).
130
The founding of the G-20 in August 2003 opened a new phase in

the participation of agribusiness in Brazilian foreign trade policy.
As reported by Motta Veiga (2005), this was preceded by constant
coordination and intense dialogue between representatives of the
public sector (the Ministry of Agriculture) and the private sector,
“leading to the establishment of new structures and institutions,
such as a non-governmental organization focused on technical
research concerning agricultural negotiations and financed by the
leading private associations of Brazilian agribusiness”. However,
the just alluded Institute of Studies on International Trade and
Negotiations (ICONE) is not merely a research institution carrying
forward high-quality technical studies, but it also contributes
actively to shaping official Brazilian positions on multiple agricul-
tural negotiating forums. Since it was established in early 2003,
members of the institute have published over 70 articles in leading
newspapers and weekly magazines, defending and disseminating
the points of view of agribusiness and becoming, in practice, the
spokesman for agribusiness.
These articles identify the main targets, the style of political
action and the thematic agenda of Brazilian agribusiness:
Trade Negotiations. Published articles defend the active partici-
pation of Brazil in the Doha Round, the conclusion of the FTAA, the
negotiations with the EU, and the establishment of bilateral agree-
ments with Russia and China. The material is also critical of the
official rhetoric on behalf of South-South trade: “with the exception
of South America, a region that deserves priority for obvious his-
torical and geographical reasons, the countries that most attend to
[the interests of Brazil] are situated physically and mentally in the
North: USA, EU, China, Russia, India and Mexico”. There is also
wide criticism of the Brazilian trade policy in South America:
“Integration with other South-American countries is pursued in an
incipient and incomplete manner, with the biggest concessions
coming from us. By definition, these countries are always going to
accept to sign non-reciprocal agreements with us, because they tend
to have far more of a geo-political dimension than an economic
one. We are still far from seeing agreements that bring real gains in
terms of trade and investments”.
False Opposition between Agriculture and Industry. There is
clear interest to avoid confrontation with sectors with potentially or
effectively conflictive interests with those of agribusiness. They assert,
131
for example, that “the demand for market access is not the sole
prerogative of agribusiness. The same demand is made by many other
industries –textiles, footwear, steel, airplanes– that face very high
tariffs, non-tariff barriers, predatory subsidies, antidumping duties and
safeguards. [Consequently] the perception that protectionist industrial
sectors are inhibiting market access negotiations that may favor the
agricultural sector is utterly shortsighted”.
The Targets of the Criticism. Criticism of official policies
include the following: (i) lack of investments in infrastructure,
especially transportation and logistics; (ii) scant resources
earmarked for sanitary protection; (iii) threats to property rights,
such as “the invasions made by the Landless Workers’ Movement
and other radical groups, [since] property rights are key
guarantees of the functioning of society [and therefore] the
current questioning of rural property is simply unacceptable and
is liable to jeopardize the whole effort to develop the interior of
the country”; and (iv) the concept of food sovereignty defended
by areas of the government sensitive to the interests of family-
based agriculture (“few things can be more egrerious than the
expansion of protectionism disguised under the concept of food
sovereignty... If the idea of food sovereignty spreads, markets
that are fundamental to the country may close in the developed
and developing countries”).
What emerges from these articles is a very pragmatic and cau-
tious approach geared to avoid direct confrontation either with the
government or with protectionist industrial sectors, carefully
selecting the targets of the criticism. In short, agribusiness has
become a leading actor in Brazilian foreign-trade negotiations as
well as the most commited proponent of a liberal view concerning
foreign trade policy.
Non-Governmental Organizations and Trade Unions 1
Over the last few years, international affairs, and especially trade
issues, have attracted the interest of a multitude of non-
governmental organizations (NGOs). This interest has led to the
creation of a network of approximately 35 NGOs, trade-union
organizations –including CUT (the Central Workers’ Union
Confederation)– and social movements dedicated to trade issues,
1. This section is entirely based on Motta Veiga (2005).
132
such as the Brazilian Network for Peoples´ Integration (REBRIP).

The Network, associated to the Social Continental Alliance, was
created in the context of the FTAA negotiations and just prior to the
WTO Ministerial Meeting in Seattle. The initial objective of the
Network was to seek “alternatives to hemispheric integration
distinct from the predominant logic of trade and financial
liberalization”. More recently, with the paralysis of the FTAA
negotiations, the Network has turned its attention to multilateral
negotiations. Members of the Network have focused their attention
on specific issues. Consequently public health and AIDs-related
NGOs are focused on intellectual property issues, while those
concerned with public services issues concentrate on services and
investments negotiations. Others deal with issues such as the
environment and family agriculture.
The membership of the Network seems to have little interest on
market access issues for industrial products, as suggested by the
fact that they have never expressed any concern or criticism
regarding market opening initiatives in this area. However, explicit
concerns have been shown as to the opening up of the domestic
markets for agricultural goods produced by small farmers. Two
other issues addressed have been the “mercantilization” of public
services, including social services such as health and education,
and environmental protection. In these areas the members of the
Network seem to agree as to the inadequacy of purely ideological
attitudes and the need to make technically sound proposals.
Until the second Cardoso administration, the dialogue between
the Network and public sector officials took place in political
forums such as SENALCA. During the Lula administration, in
contrast, the Network was invited to policy-making forums, such
as the issue groups coordinated by the Ministry of Foreign
Affairs. However, the Network’s channels of influence on trade
negotiations are not restricted to this agency. Other mechanisms,
such as the access enjoyed by other members of the Network to
sectoral ministries such as the Ministry of Agricultural
Development (responsible for formulating negotiating positions
on small farmers issues), have also been used to influence
negotiating positions. In general, the positions of NGOs combine
elements of classic protectionism, albeit meant to benefit small
farmers, with a “social” component evident in issues such as
public health, TRIPs, the environment and public service
liberalization.
133
As far as trade-union participation is concerned, the Interna-

tional Relations Department of CUT has been actively engaged in
foreign trade negotiation issues. In the case of Mercosur, after ini-
tially opposing the project, the trade unions adopted a more prag-
matic stance and put forward a Mercosur Social and Labor
Declaration at the Economic and Social Consultative Forum. Also
in the 90s Brazilian and Argentine trade unions signed with one
automobile company the first Mercosur-wide labor agreement. As
for hemispheric negotiations CUT opposed the creation of an FTAA,
but it was less critical with regards to a possible Mercosur-Euro-
pean Union free trade agreement, which was seen as politically
positive. An outstanding event concerning trade-union involve-
ment in trade negotiations was the support of a “social clause” in
FTAA negotiations, which was made explicit at the Miami Ministe-
rial Meeting in late 2003. In a broader sense, despite the opposition
of the Workers´ Party to proposals of this kind, the CUT seems to
have become more sympathetic to the idea of including this sort of
clauses in the trade agreements to be signed by Brazil. However,
trade negotiations are still an issue of secondary importance in
CUT’s political agenda, which also holds true for the other Brazilian
trade-union confederations.
Summary and Conclusions
Import Policies
Brazil is one of the Latin-American countries where import-

substitution industrialization was most successfully implemented.
In effect, high import barriers and selective industrial policies
based on generous tax and credit incentives contributed to a
reasonably diversified industrial structure, large FDI inflows and
relatively high rates of economic growth. It should thus come as
no surprise that opening up the economy found few supporters
and faced strong resistance, even when import-substitution
industrialization began to loose steam. This explains to a large
extent why Brazil was a latecomer to trade liberalization in Latin
America. For the same reasons, opening up the Brazilian
economy was a gradual process that took more than seven years.
However, by the time it was concluded Brazil had done away with
most non-tariff barriers and average nominal tariffs had
134
contracted by more than 45 percentage points, dropping from

57.5% in 1988 to 11.2% in 1994.
The impact of trade liberalization was significant. The import
penetration ratio increased more than fourfold between 1990 and
1997, pressing domestic industry to modernize. The pressure of
import competition seems to have played a key role in the raising
productivity throughout the 90s. After the adoption of the Real
Plan in mid-1994 the domestic currency experienced a strong real
appreciation, leading to successive foreign trade deficits. In this
context, trade liberalization experienced a slight reversal and
nominal average tariff rates rose by more than 4 percentage points.
At the same time, Brazil intensified the use of trade-defense
measures as revealed by the significant increase in the number of
anti-dumping investigations.
As of 1999, however, average nominal tariffs began to recede
again. The most recent estimates suggest that presently the
Brazilian economy faces a level of nominal protection similar or
slightly higher than that of 1994. On the other hand, reliable
assessments of the use of trade defense measures have concluded
that their use was moderate and consistent with WTO rules. In
effect, an investigation of the implementation of trade relief
measures applied between 1988 and 2002 show that applied
antidumping duties (AD) have been systematically lower than the
margin of dumping (MD) determined by the investigations. In
addition, the AD/MD ratio shows a declining trend over time.
Export-Promotion Policies
In the 90s the Brazilian government overhauled its export
promotion policies, leaving behind the highly discretionary and
selective bias characteristic during the previous two decades. The
provision of export public financing became more horizontal, tax
rebates were extended to primary and semi-manufactured products,
and special import regimes (such as drawback) were simplified and
computarized. In addition, an agency was set up to foster exports
of microenterprises and small-size firms. Despite these changes,
however, export promotion policies have kept their selective spirit.
In fact, access of small and medium-size export firms to public
export financing remains very limited and special import regimes
benefit disproportionately more to larger firms and regular and
more experienced exporters. Indeed, less than 7% of the existing
18,000 exporting firms use any of these instruments at all.
135
Although Brazilian exports are highly concentrated (the 500

leading exporters account for about 2/3 of total sales abroad), it
would be reasonable to expect that public sector policies would
effectively contribute to diversify this pattern. This has so far not
occurred. In this respect, the efficacy of the official agency in
charge of promoting exports of smaller firms seems to have been
modest.
Foreign-Trade Negotiations
Throughout the 90s Brazil engaged in a vast array of trade-
negotiation, not only at the regional (Mercosur, Chile, Bolivia,
Mexico and CAN) but also at the plurilateral (FTAA), bi-regional
(EU) and multilateral (OMC) levels. At the regional level these
negotiations led to the creation of Mercosur and other preferential
trade agreements with other members of ALADI. These results were
not obtained in any of the preferential trade negotiations with
developed countries, certainly those with the largest potential
impact. In fact, both the FTAA and the Mercosur-EU negotiations
failed to reach a successful conclusion and both were suspended at
least until the end of the Doha Round. In contrast, Brazil has been
an active participant in WTO negotiations, becoming a key actor and
leader of the G-20. Nonetheless, these negotiations are unlikely to
lead to fast and effective liberalization of agricultural products
trade, which is what Brazil wants.
Until recently, the balance of the Brazilian negotiating initiatives
undertaken in the last decade failed to render tangible results.
Between 2002 and 2005 Brazil had a remarkable export perfor-
mance (export volumes increased almost twofold), but this cannot
be accredited to trade agreements, with the probable exception of
Mexico. In fact, the Brazilian negotiating stance in most of these
arenas has been clearly defensive. This observation holds true even
for Mercosur, where Brazil has resisted deeper integration initia-
tives whenever they require relinquishing even limited degrees of
public policy sovereignty.
The above considerations, based on a description of the major
features of Brazilian import and export policies, as well as of the
stance adopted in foreign trade negotiations, summarize the
“revealed preferences” of Brazilian foreign trade policy. This leaves
the question open of: what are the structural and conditioning factors
behind these trade-policy options and this negotiating strategy?
136
Structural Factors and Revealed Policy Preferences

The trade pattern and the level of international competitiveness
reached by domestic producers are relevant factors to understand
Brazilian foreign trade policy strategies. They are also useful to
identify the offensive and defensive interests present in foreign
trade negotiations. The configuration of trade flows helps to
explain, for example: (i) the importance that Brazil attaches to the
multilateral arena, in turn a reflection of the scope and diversity of
its trade interests; (ii) the regional focus of Brazilian foreign trade
policy, as well as the threats posed by bilateral negotiations
between the US and the ALADI countries (where Brazil sells a large
share of its manufacturing exports); (iii) the relevance of the
opening up of agricultural markets, particularly for Brazilian
agribusiness in the case of the EU; and (iv) the fear with which
import-competing sectors face the negotiation of simultaneous
preferential trade agreements with the US and the EU, markets that
account for almost 80% of Brazil’s total imports.
The chapter examines the international competitiveness of major
Brazilian industrial and agricultural sectors in the light of four
indicators: (i) foreign orientation indexes (export and import
penetration coefficients); (ii) tariff protection levels; (iii) intensity
of the use of public policy instruments (public financing and special
import regimes); and (iv) losses or gains from preferential
negotiations with the US and the EU. The emerging picture reveals
three sets of sectors. The first set includes activities traditionally
classified as part of Brazilian agribusiness (agriculture and
livestock, food and beverages, wood and furniture, tobacco, leather
and footwear, paper and pulp). These sectors are predominantly
export-oriented, they have low import penetration coefficients, and
they make little use of public policy instruments and held clear
offensive interests in negotiations with the US and the EU.
The second set includes two industrial sectors that are significant
exporters, namely: aircraft and steel. Unlike agribusiness, these
sectors are more heavily dependent on public policy instruments
(special import regimes and/or public sector financing) and may be
threatened by negotiations with the developed countries (steel).
Finally, the third set includes import-competing sectors (capital
goods, electro-electronics, chemicals, pharmaceuticals, plastics,
automobiles, textiles and apparel). In general, these sectors have
three characteristics in common: high tariff protection, intensive
use of public policy instruments, and significant defensive interests
137
in trade negotiations with developed countries. However, some of

these sectors present reasonably high export coefficients,
particulary as a result of sales to the regional and/or hemispheric
market.
Institutional Factors that Condition the Brazilian Negotiating Strategy
The views of the domestic elites, the role of Itamaraty and the
institutional organization of industrial and agricultural business
interests are the chief institutional factors that shape Brazilian
foreign trade negotiation strategies. The views of the domestic elites
include both areas of consensus and dissent. Two areas of consensus
that deserve special attention are the ideas of making Brazil a relevant
actor in regional and world politics (and, more specifically, to
strengthen the position of Brazil as a leader in South America), and
of actively and offensively engaging in international affairs.
However, which is the most adequate strategy to promote Brazilian
international insertion is a matter of dissent. A liberal view
acknowledges the limitations of material resources and power, and
thus emphasizes the key role of multilateralism and a coherent and
trustworthy stance in the international scenario. The alternative
view is more assertive, autonomist and voluntaristic. It advocates
active development policies, it doubts about the effectiveness of
global rules, it promotes a more active international engagement of
Brazil, and it attaches a key role to the region. Clashes between
these two views certainly help to account for many of the
ambiguities of Brazilian foreign policy.
The role of Brazilian diplomacy is an institutional factor that
must not be underestimated. In fact, there is a unanimous opinion
that Brazil has an efficient and highly professional diplomatic
corps, legitimate and fully autonomous to steer the country’s
foreign affairs. When combined with its policy-making capacity,
this autonomy, which the domestic elites deem “excessive”, helps
to explain the continuity and stability of Brazilian foreign policy.
Despite its strong organizational identity, the diplomatic corps is
not immune to these conflicting views. In fact, the opposition
between a liberal and an autonomist or national-developmentist
view is also present in Itamaraty.
Until very recently, Itamaraty’s predominant position in the
foreign trade policy-making process was almost absolute. As of the
second half of the 90s, however, this autonomy has experienced
constraints. These constraints, triggered by the fact that the
138
country’s involvement in trade negotiations capable of generating

significant gains or losses for different groups or even interfering
with other public policy areas, have affected the policy-making
process. This explains the increasing participation of groups from
civil society and representatives of other areas of the Executive
(apart from Itamaraty) in the process of consultation to shape
Brazilian negotiating position. The most relevant new actors are
the business sector and the “sectoral” Ministries (the Ministry of
Agriculture (March) and the Ministry of Industry and Trade (MICT).
Business interests are represented through formal mechanisms of
consultation and informal contacts with negotiators or
representatives of “sectoral” Ministries. They typically use their
lobbying power where it is more effective. The industrial sector
has a fluid and constant relationship with the MICT, and the same
holds true for agribusiness in the case of the MA.
Final Remarks
In Brazil it is hard to imagine a reversal of the trade liberalization
process, which seems to be reasonably consolidated. However, it is
also unlikely that Brazil will engage in a new phase of unilateral
liberalization in the medium term, except for changes in the com-
mon external tariff eventually agreed with its Mercosur partners.
Lowering import tariffs, particularly those that protect the indus-
trial sector, is seen as Brazil’s main bargaining tool in international
trade negotiations. As a result, not only the less competitive indus-
trial sectors but also the more efficient agro-industrial interests tend
to resist liberalization initiatives that do not bring about lower bar-
riers to Brazilian exports in third markets.
Export promotion policies need restructuring to become more
effective and less selective. There are already pressures pointing
out in this direction. The threat of Chinese competition in third
markets, for example, has underlined the need to develop
technological policies to promote further export diversification and
upgrading. There is also a growing awareness that the recent export
boom has been the result of the exceptional performance of a small
group of big firms and that policies to promote small and medium-
sized firms have produced scant results. At last, it has also become
imperative to set up mechanisms and systematic routines to
evaluate government agencies and export promotion policies.
Unfortunately, this institutional “deficit” is still underestimated.
139
Foreign-trade policy will continue to be guided by the aspiration

to make Brazil a relevant actor in regional and world politics. This
political and strategic objective should nevertheless be made
compatible with the growing demand of the more efficient and
competitive sectors for reaching substantive trade agreements,
including those with developed countries. In this sense, Brazil is
already showing more willingness to bring down tariffs protecting
its less competitive industrial sectors in exchange for an effective
lowering of the barriers that hinder exports to third markets.
However, Brazilian reluctance to accept disciplinary measures
restricting public policy discretion is still high, but not
insurmountable. In this context, the “special” relationship with
Argentina will continue to enjoy priority status and should be
preserved, even at the cost of some concessions.
Ricardo A. MARKWALD
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Chapter 3
Determinants of Trade Liberalization Strategies
in Uruguay
Introduction
As many other countries in the region, during the nineties, Uru-
guay engaged in deeper trade liberalization combining unilateral
and reciprocal strategies (at a regional as well as a multilateral
level). This paper discusses continuity and change in Uruguayan
trade policies and its domestic determinants.
Initially, unilateral liberalization was gradually undertaken to
mitigate adjustment costs in import-sensitive sectors. In the nine-
ties, policies shifted towards reciprocal liberalization. The combi-
nation of the two processes led to important changes in the structure
of production of the tradable sector. The recent crisis showed the
problems faced by the stability of the trade liberalization model and
the associated political equilibrium. This paper develops the argu-
ment of reciprocal unilateralism (Krishna and Mitra, 2000) to
explain the influence of export-oriented lobbies (supportive of
trade liberalization) as a function of the degree of openness of third
country markets. Another important element to be considered in
the case of Uruguay is the slow progress in non-tradable sector
reforms, in turn explained by an adverse political equilibrium
(Forteza et al., 2004 y Bergara et al., 2004). The imbalanced per-
formance of productivity in the tradable and non-tradable sectors
had led to a structural appreciation of the real exchange rate.
The chapter is organized in this introduction and three other
sections. The second section is descriptive and includes two sub-
sections: the first one describes the trade policy regime (tariffs,
145
non-tariff barriers and export promotion policies), while the sec-

ond discusses the international negotiation agenda from a Uru-
guayan perspective. The third section presents the determinants
of revealed preferences regarding trade liberalization. A brief
theoretical introduction presents a standard model of the political
economy of trade policy-making, before examining the role
played by the main determinants identified in the case of Uruguay
(the structure of integration into the international market, the role
of domestic lobbies and the objectives of the political elites).
Finally, the fourth section states the main conclusions reached.
Trade Policy Regimes and Strategies
Trade Policy Regimes

Tariffs
In April 1990 unilateral trade liberalization speeded up through
the announcement of a tariff cutting schedule to be implemented in
April 1992 and April 1993. These measures led to a significant
liberalization of the trade regime, lowering effective protection and
tariff dispersion. In the last quarter of 1991 a new set of measures
simplifying foreign trade operations and a new tariff cut schedule
were announced, deepening the liberalization process already
underway.
As far as preferential liberalization is concerned, in 1991 Uru-
guay ratified the Treaty of Asunción (TA) and launched a tariff cut-
ting schedule for intra-Mercosur trade 1. Uruguay negotiated a long
list of transitory exceptions which included 960 items. At the end
of 1994 the TA was amended by the Ouro Preto Protocol (OP),
which set in motion the Régimen de Adecuación del Mercosur
(RAM). Apart from intra-regional trade liberalization, Mercosur
adopted a common external tariff (CET) with two types of transitory
exceptions: sector lists (for capital, information and telecommuni-
cation goods) and national lists covering selected products.
Trade liberalization moved forward in a context characterized by
private sector resistance and government sensitivity to those
pressures. However, reciprocal liberalization and the commitments
undertaken built, in a period of ten years, an almost universal free
1. Trade Liberalization Program (TLP), Annex I Treaty of Asunción.
146
trade area (except for sugar and automobiles). Complementary

unilateral and discriminatory liberalization brought about increased
competition in the tradable sectors and encouraged significant
adjustment in production structures. In December 1994 the
Parliament ratified the Marrakech Final Act adopting the Uruguay
Round Agreements (URA). In spite of the fact that the round of
negotiations had begun in Uruguay in 1986, issues concerning the
multilateral trading system had typically received little attention in
the domestic debate (Vaillant and Ventura Díaz, 2003).
Preferential liberalization was not a smooth process though. In
effect, in early 1995 Uruguay applied compensatory actions against
what was considered unilateral measures in violation of Mercosur
agreements. Uruguay also made extensive use of special sector and
import regimes, including temporary admission of inputs from out-
side the area to be used in the manufacturing of exports. An invest-
ment promotion law also allowed for duty-free imports of capital
goods.
During the past decade average tariffs fell but tariff dispersion
increased (see table A1). In 2004 the average tariff level of Uru-
guay was 9.1%; almost a percentage point lower than the CET. Uru-
guay has implemented the CET for 86% of the tariff schedule, even
though the structure of the CET is not the most appropriate for a
small and specialized economy. The systematic use of special
import regimes suggests that protection is actually lower than that
conferred by the CET. In fact, the present level of the CET seems
more related to international bargaining consideration than to the
needs of the domestic structure of production, at least in the case of
the smaller Mercosur countries. It has been said that this is the only
“currency” that the countries of the region have in order to gain bet-
ter market access to developed countries.
Non-Tariff Barriers and Trade Disciplines
In the early nineties unfair trade practices were addressed through
administered prices (reference prices [RP] and minimum export
prices [MEP]). Sectors threatened or damaged by import competition
could raise a claim to the administrative authority, which enforced
administered prices as a mechanism of contingent protection. More
recently, the trend has been towards reducing discretion and raising
compliance with multilateral rules, as shown by the fall in the use of
administered prices. Reciprocal and multilateral agreements played
a key role in reducing the ability to use discretionary trade defence
147
instruments. In fact, new multilateral rules provided the framework

to apply trade remedies, particularly antidumping. These rules are
very detailed and require that complainants prove the existence of
both dumping and injury to domestic industry before taking actions.
Uruguay´s compliance record with Mercosur’s non-tariff
disciplines was mixed. In effect, during the nineties tariff
liberalization proceeded swiftly and the use of contingent protection
became more rational and restrained. However, since 2001 the trend
reversed and the pressure posed by sectors negatively affected by the
economic recession led to new unilateral NTBs (Bank of the Republic
commissions, consular taxes, higher VAT advanced payments and
other discriminatory domestic taxes). Relative price misalignments
also encouraged the implementation of instruments targeted at
specific sectors, such as import licenses and red channel customs
control procedures for shoes and oil products; specific duties for
textile products; import restrictions from duty-free zones; etc. Even
though after 2004 these extraordinary conditions partly disappeared,
many of the instruments used continued in place due to policy inertia
and the effective lobbying of sectors benefited during the crisis.
Although the structure of production of the tradable sector changed
remarkably in the nineties, for some sectors NTBs are still the road to
survival.
Since it is a small group, it can be claimed that the cost of pro-
tecting these notoriously inefficient activities is relatively low.
However, even if this were the case it would be more rational to
protect them through direct production subsidies. One usually dis-
regarded cost of using NTBs is to weaken the ability to demand
equal treatment in other markets. This argument is especially rele-
vant for a small country that trades heavily with its region.
Export Promotion
Adjustment in the production of tradable goods led to a con-
traction of import-competing activities and an expansion of
export-oriented industries. The first trend was strengthened by
abundant external financing and the real exchange rate apprecia-
tion that followed during most of the nineties. The contraction of
the import-substituting sector was fast and deep, but the expan-
sion of export-oriented activities was much slower. This was the
result of several factors, such as a real exchange rate appreciation
that shrank profits in export-oriented activities, market access
obstacles for products with strong comparative advantages, and
148
uncertainty about the sustainability of the new policy rules.

These adverse factors inhibited new export-oriented projects and
strengthened supply constraints.
Uruguay enforces many export promotion mechanisms that can
be considered a sort of active trade policy. Credit incentives are tar-
geted basically to provide foreign currency export financing. They
are applicable to the purchase or production of goods for export,
whether traditional or not. Fiscal incentives aim at reducing the tax
burden on export goods. Temporary admission regimes exempts
payment of tariffs on imported inputs and raw materials used in the
elaboration of export products. The exemption is temporary, since
it requires that the final good be exported within a definite period of
time. There is also several domestic tax refund programs (Indirect
Taxes Refund [ITR] and Tax Refund [TR]) aimed at preventing the
“exportation of indirect taxes”. These regimes do not apply on a
universal basis and their benefits cannot be accumulated. They
underwent many changes in the nineties and would involve an ele-
ment of subsidy if indirect tax refunds exceed the taxes levied on
similar products sold in the internal market.
There are many sector regimes that offer special conditions for
selected imports: agricultural inputs, forestry products, irrigation
equipment to be used in agricultural production, reproductive
animals for poultry and tourism. There is a promotional regime
for imports of capital goods, computer and telecommunication
products as well. The 1998 Investment Law also established a
regime by which the Executive could grant promotional
conditions to new investments carried out by national or foreign
investors in the national territory (the incentive consists of an
exemption of the VAT and IMESI charged on imports of
equipment). The regime includes the possibility of granting
additional benefits to investment projects explicitly declared as
promoted by the Executive. One of these incentives may be tariff
exemptions.
Uruguay also enforced two special regimes that granted export
subsidies to the wool industry (fabrics or clothes) and the automotive
parts and vehicles industries. The wool fabrics and clothing industry
received a 22% export subsidy at the beginning of the nineties, which
was subject to many changes thereafter (reducing the scope of the
subsidy). Presently, products reached by this benefit enjoy a
maximum tax refund of 6%, which will stay in place until the
mechanism remains in force (February 28, 2005). The automotive
149
sector promotion regime has suffered many reforms and currently

consists of a tax refund and import quotas from Argentina and Brazil.
Other sectors benefiting from preferential treatment for inputs were
the tannery and metallurgic industries.
External Trade Negotiation Strategies

A General Map: Agenda, Scope, Maturity and Interests
The trade negotiating agenda broadened its reach from tradi-
tional border issues to new sectors and disciplines that touch
broader economic policy areas. Traditionally, these new issues
were under domestic oversight and lacked any kind of international
conditionality. The broadening of the agenda can be illustrated by
the variety of instruments that can demand new disciplines, which
range from import tariff levels to national treatment of foreign
direct investment. The broadening of the negotiating agenda has
also demanded a high level of technical expertise, since in many
areas it is almost impossible to adopt a bargaining position without
the required technical knowledge. The broadening of the agenda
has also increased the complexity of shaping a negotiating position
due to the variety of intervening issues and the absence of focal
points. Unsurprisingly, the first step in shaping a successful nego-
tiating stance is to be able to set priorities and focus on the agenda.
This can be done by crossing four dimensions, namely: issues, are-
nas, maturity and interests.
During the early stages of a negotiation the issues to be
included in the agenda are numerous and respond to the
assessment made by each party of the benefits to be reaped from
the negotiation. This tends to create long agendas at the
beginning, which enables to shed light on the issues that generate
resistance and pose obstacles. Part of the negotiating exercise
consists in identifying the issues that will be subject to
negotiation and the possible exchanges that may be carried out.
The description of the agenda made in Table A-2 goes from the
general to the specific. It does not attempt to be exhaustive, but
to include only essential issues. The issues relevant for goods
liberalization differ depending on the sector. Related issues are
trade facilitation and trade rules (trade defence). Liberalization in
services is organized in sub-sectors and modes of provision. At
last there are the new disciplines of government procurement;
competition policy; intellectual property rights´ protection and
investment agreements.
150
Regarding the negotiating arena a useful distinction would take

into account its nature, namely: whether it is discriminatory or not
and whether it is reciprocal or not. It is possible to adopt additional
criteria related to depth, type and number of partners involved
(Aggarwal V. K., 2004). The alternative environments or trade
liberalization strategies identified in our study of the Uruguayan
case were the following: unilateral, sub-regional, bilateral,
plurilateral and multilateral. Implicitly, the chosen order adopts, as
a criteria, the number of partners and its geographic proximity. The
two extremes (unilateral and multilateral) share the property of
being non-discriminatory. All the rest are preferential. Among
preferential strategies, sub-regional liberalization with adjacent
neighbours facilitates taking part in more ambitious economic
integration projects. Among bilateral preferential strategies a
distinction can be made between those carried out jointly by
Mercosur and those undertaken solely by Uruguay. The last
modality is structurally limited by Mercosur, since the architecture
of a customs union constrains the ability to pursue the bilateral road
with third parties. Plurilateral preferential arenas include mainly
the negotiation of a Free Trade Area of the Americas, which is a
continental process and can be seen as intermediate between
multilateral and regional negotiations.
Maturity refers to the degree of progress reached by each
negotiation. Table A-2 includes not only negotiations underway,
but also those concluded in the recent past. The fourth dimension,
at last, pragmatically identifies interests from a strictly national
(non-cosmopolitan) standpoint. Generally, national negotiating
positions have a mercantilist bias that seeks to maximize
concessions in areas where offensive interests prevail (benefiting
export sectors) and minimize concessions in areas where local
defensive interest predominate (import-competing sectors). The
interests dimension tries to describe the position of the country in
international negotiations, which is likely to vary according to the
issue. By clearly identifying interests to be promoted in each
negotiating arena, it is possible to design negotiating strategies
seeking to accommodate the general rather than the private interest.
To a certain extent, the combination of issues and arenas is
quite specific. In effect, while some issues may be dealt with in
all arenas, there are others that can only be addressed in specific
negotiations. For instance, at a multilateral level the traditional
distinction in goods negotiations is between agricultural products
151
and manufactured goods (non-agricultural products). This same

classification is generally used at the plurilateral level, which
usually involves many partners in a negotiation. At the regional
and bilateral level, in contrast, sector issues can become more
specific, which means that liberalization commitments or
exceptions can be addressed at a detailed level.
The Map for Uruguay
Table A-2 applies the above criteria to the case of Uruguay in the
last decade and a half. The sequential description follows the order
of the columns, which is equivalent to telling the story across
different negotiating arenas. In the early nineties the government
of Partido Nacional launched a process of unilateral trade
liberalization which reduced average nominal protection and tariff
dispersion. These measures were accompanied by trade facilitation
initiatives aimed at eliminating unnecessary customs procedures
and simplifying others. Contingent protection was implemented
parsimoniously, but still using discretionary mechanisms such as
administered prices. The promotion of internationally tradable
goods became a focal point of governmental policies. The
government´s rationale was based on the traditional liberal idea that
a small-sized economy should seek export-led growth. The
following governments neither deepen trade liberalization nor
revert it (except for commitments derived from membership to
Mercosur). Despite trade liberalization, Uruguay maintained
protection for some sectors using instruments that changed in shape
but not necessarily in orientation and intensity.
In the services sector progress was slower. In the first half of the
nineties the government adopted a series of measures aimed at
liberalizing the ports service sector. These measures encouraged
new investment and a sustained expansion. Regarding public
services, although the successive governments tried to withdraw
the state from some activities, they faced the successful opposition
of a majority of the population acting through direct democracy
mechanisms. However, in some cases there was some progress
towards more competitive supply conditions (particularly in
telecommunications and to a lesser extent in electricity generation).
In the early nineties Uruguay and its neighbours signed an
ambitious regional integration agreement (Mercosur, March
1991). The first target was to reach a complete free trade area
(FTA) in a short period of time. After 1994 Mercosur should move
152
towards a customs union (CU) with a Common External Tariff

(CET). In those sectors in which it was not possible to
immediately implement the agreed CET, a convergence schedule
would be set in motion for several years (for capital goods,
computer and telecommunication goods and a limited list of
nationally-sensitive products). More than ten years after the
creation of the CET the convergence process is still incomplete. In
fact, Mercosur still operates like a FTA in which duty-free
treatment is applied only to originating products. An agreement
reached in 2004 established that since 2008 all goods should
enjoy free circulation within the customs union. The Uruguayan
position on this issue has been ambiguous. Naturally, a small-
sized economy with limited vertical integration in its productive
structure would benefit from a more universal free circulation rule
that does not restrict preferences to native goods. Considering
Uruguay's location advantages, deepening the CU would make it
possible to exploit its potential as a distribution centre. There is
evidence that this role is already being played by Uruguay.
For all these reasons it seems obvious that the negotiating
strategy on this issue should be straightforwardly offensive. But
this has not been the case. The status quo of Mercosur is clearly
harmful to the smallest economies, even if the latter have been
granted more flexibility to implement agreements. One example of
such flexibility has been the authorization to maintain special
import regimes (for example, temporary admission programs) even
for intra-regional trade. It is likely that the status quo has been
promoted by agents who have designed business strategies that
have worked in this regulatory context, but that ignore their ability
to grasp new opportunities in a free circulation environment.
Inconsistently, the private sector has pushed to maintain current
rules while at the same time demanding the elimination of double
CET-collection. Private actors do not seem to realize that greater
flexibility has a price, namely: to block deeper integration
initiatives and to weaken the consistency of the trade agreement.
Governmental authorities, in turn, have generally followed private
sector demands. Occasionally, they have implemented more
offensive strategies but only half-heartedly and for short periods of
time.
The sub-regional agreement deals with almost all subjects of the
negotiating agenda. Most of the disciplines agreed (including trade
facilitation) are effectively in force for intra-regional trade. In other
153
issue areas, however, Mercosur has adopted the practice of creating

a discipline but not applying it 1. In this context, the successive
Uruguayan governments have taken decisions difficult to account
based on a reasonable definition of the national interest. For exam-
ple, in government procurement negotiations the Uruguayan stance
was openly defensive, when a small-sized economy should have
been logically defending a more offensive attitude.
As far as bilateral negotiations are concerned, a distinction must be
made between those agreements negotiated collectively by Mercosur
and those negotiated bilaterally by Uruguay. In the first group the rel-
evant cases are the free trade agreements with Chile and Bolivia. Other
preferential trade agreements have been concluded by Mercosur (par-
ticularly with other South American countries), but none qualify prop-
erly as free trade areas. Moreover, they will have little impact in the
next decade. The agreement, still under negotiation, with the EU could
have great importance for Mercosur, and particularly for Uruguay. On
the one hand, such agreement would have the potential to improve
access to the large European market. On the other, the agreement
should press Mercosur to upgrade the functioning of the free trade area
and the customs union. In addition, an agreement with the European
Union would reduce trade diversion from other preferential agree-
ments concluded by the EU. However, the largest member of Mercosur
considers that the concessions offered by the EU are still insufficient
and that negotiations should continue. Uruguay has had an offensive
position regarding negotiations with third countries, as the country has
tried to capitalize its membership to Mercosur. This position is natural.
For a small-sized economy such as Uruguay, one major advantage of
participating in a customs union, and particularly one with Brazil, is to
strengthen its bargaining capacity in the international economy.
In spite of the fact that the Ouro Preto Protocol (1994) made Uru-
guay loose its ability to carry out independent trade negotiations with
third countries, two recent initiatives must be emphasized. In effect,
although Uruguay has not broken Mercosur common trade policies,
1. The Montevideo Protocol on Trade in Services (CMC Decision 13/97) was

ratified only by Argentina. The Protocol on Government Procurement (CMC Deci-
sion 27/04 and 55/04) is not in effect in any country. The Fortaleza Protocol (CMC
Decision 18/96) is in force only in Brazil and Paraguay. The Intellectual Property
Rights Protocol (CMC Decision 8/95) applies only to a limited set of issues and is
in effect only in Paraguay and Uruguay. On intra-Mercosur investment issues CMC
Decision 11/93 has been implemented only by Argentina. On extra-Mercosur
investment issues CMC Decisión 11/94 is not yet applicable in Brazil.
154
it has pushed them to the limits. One example was the successful
negotiation of a free trade agreement with Mexico. After Merco-
sur failed to reach a collective agreement with Mexico, Uruguay
took advantage of an authorization to conclude bilateral agree-
ments with that country and signed a NAFTA-like FTA covering
goods, services and new disciplines. In the same vein, in 2004
Uruguay signed an investment agreement with the US along lines
similar to other US investment agreements or investment chapters
in FTA agreements (such as that with Chile). The agreement was
ratified by Congress after substantial debate and divisions within
the current government.
As far as plurilateral negotiations are concerned, the FTAA
agenda is extremely diverse and complex (Salazar-Xirinachs y
Robert, 2001). Uruguay has had to take part in negotiations on
issues in which the country lacked modern normative frameworks
or institutional structures. But FTAA negotiations stalled due to a
broad agenda, heterogeneous interests and ambiguous calendars.
Moreover, the key US-Brazil bilateral relationship did not work
smoothly since the start (Lorenzo and Vaillant, 2005). Although
the Uruguayan governments could have pushed from within
Mercosur for a successful FTAA agreement, their position was
hesitant because of the opposite effects of such agreement. In
effect, while on the one hand the FTAA would erode Uruguay´s
preferential access to the large Brazilian market, on the other it
would grant preferential access to the US market and reduce
potential trade diversion as a result of a comparatively high CET.
This simple static analysis illustrates the kind of conflicts and
complex political economy issues posed by the juxtaposition of
preferential trade negotiations. On issues not directly related to
liberalization of goods markets, Uruguay has generally had a
prudent position that can be best described as “defensive”.
Frequently, this position was not aimed at protecting a particular
sector, but the result of the novelty of some of the issues involved
and the lack of a well-defined national position.
Uruguay also failed to have a consistent and stable position in
multilateral negotiations (WTO Doha Round). The Doha Round
started with a very broad agenda (Hoekman, Mattoo and English,
2002). After the failure of the mid-term conference in Cancun the
government faced a dilemma over its coalition policy, particularly
with respect to agricultural trade liberalization. In Cancun Uruguay
did not join the Group of 20 led by Brazil and India, which
155
demanded more concessions on agriculture on the part of industrial

countries (basically on production and export subsidies). As a
competitive producer and exporter of agricultural products traded
in distorted world markets (such as beef, dairy products and
cereals), Uruguay should be interested to achieve the greatest
possible liberalization in market access conditions. However, the
Group of 20 membership is heterogeneous and the interests of net
exporters mix with those of net importers. In effect, the latter
promote import substitution frequently through protectionist
policies endangered by the subsidies granted by industrial
countries. Cancun´s failure in 2003 was followed by the “package
agreement” of July 2004 (Baumann, 2005), which gave renewed
impetus to a more focused negotiation. From Uruguay's standpoint
the multilateral agenda is focused on four issues of varying
importance: agriculture, manufactured products, services and trade
disciplines. In 2005 the new government that took office in
Uruguay asked to be admitted into the Group of 20.
In the case of agriculture the likely outcome of the negotiations
will be a continuation of the path towards liberalization, but proba-
bly at a slower pace. The EU has resisted deeper trade liberalization
in this sector. Other countries, industrial as well as developing,
have actively or passively, made the EU position possible. The
highest expectations are placed in the elimination of export subsi-
dies, although they are not essential to maintaining agricultural pro-
tection. The focus of the negotiation is covered by three chapters:
measures of internal help, subsidies to exports (export credits, food
aid and state trading companies) and market access.
Regarding non-agricultural products, developed countries
demand large tariff reductions while developing countries have a
defensive stance. There is already an agreement to use a non-linear
formula to cut tariffs, but the details are still to be arranged. Some
developing countries propose using two coefficients, one more
ambitious for developed countries and the other more conservative
for developing nations. Other issues under debate are how to effec-
tively cut tariffs (applied tariffs are usually lower than consolidated
tariffs, particularly in developing countries), the scope of liberaliza-
tion (the general trend is towards tariff consolidation) and how to
set ad valorem equivalents instead of specific tariff rates.
In the area of services progress has been modest and the quality
of proposals made has been generally poor. Continuing a preceding
policy, Uruguay has made a relatively generous offer. In the area of
156
disciplines, particularly antidumping, key issues under discussion

are the extinction clause, proof of damage and greater transparency
in procedures.
Revealed Preferences and Domestic Determinants
Theoretical Perspectives on Trade Liberalization

According to perspective of political economy, economic policy
can be regarded as an equilibrium outcome triggered by the
operation of the economic and political system. In this framework,
the mechanisms through which particular economic interests
influence trade policy decisions must be explained. In effect, one
should be able to account for the endogenous trade policy that
emerges as a game equilibrium (in the sense that nobody has an
incentive to deviate from it). One of the most interesting
approaches explains trade policy through the functioning of the
political system. When setting taxes and subsidies on exports and
imports, the government takes into account the income distribution
and welfare effects of its decisions on consumers and organized
pressure groups (lobbies). These effects may influence the political
behaviour of actors. This is important because the government
wants to win votes (directly or indirectly) in order to reach or stay
in power. The political economy of trade policy builds a positive
theory in this field and endogenous trade policy models seek to
explain the behaviour of government in trade policy-making.
These models also show how private sector behaviour is
determined, since the latter must choose the level of pressure
(effort) that it will exert in order to influence government policies.
A popular endogenous trade policy model is set out in Grossman
and Helpman (1994). On the supply side, the model assumes that
an incumbent government sets trade policy trying to maximize an
objective function that gives different weights to the contribution of
the private sector organized in pressure groups (political objective)
and aggregate consumers’ welfare (economic objective). On the
demand side, the model assumes that a given number of lobbies
play a contribution game to influence trade policy. Lobbies set
their contributions to maximize an aggregate welfare function and
obtain the most convenient trade policy. Government action can be
described as that of an agent facing the simultaneous influence of
several principals (interest groups) which demand specific policy
157
actions for their own benefit. The literature provides evidence that
policy makers decide over trade policy instruments in a very similar
environment. Within this general framework, much of the litera-
ture on endogenous trade policy formation aims to account how a
specific pattern of protection relates to a particular model of inter-
action between government and interest groups. The main objec-
tive is to explain tariff levels as a game equilibrium, given key
parameters for the model (preferences, technology and ownership
of production factors). Unfortunately, these models have faced
problems in handling the many constraints that are relevant in the
real world (institutional, informational, etc.).
An alternative approach is to inquire as to the circumstances
under which a government will aim at unilateral reform or any
other particular type of liberalization strategy. In many developing
countries, the interesting question is how and when unilateral
reform can become part of a political equilibrium. Grossman and
Helpman (1995) have developed a model that could be adapted to
this problem. They analyze the decision of whether or not to enter
into a free trade agreement within a model of political contribu-
tions. This model seems especially relevant to the case of unilateral
trade liberalization. Drawing on this idea, Vaillant (2000) has
shown that a trade opening that is not part of a political equilibrium
(i.e. is not incentive-compatible) could become so if the govern-
ment is able to isolate certain sectors from international competi-
tion through sufficiently long periods of time (implementing a
gradual approach or lists of exceptions). These features seem to
have been present in the case of Uruguay.
In the first half of the seventies the protectionist status quo
stopped being a political equilibrium because of the diverse actors
affecting trade policy design (government and private interest
groups). In effect, in 1973 a dictatorship took office. The policy
support function changed because the government changed and the
costs of protection increased due to structural reasons and a critical
external situation. Thus, unilateral trade liberalization became a
preferred option; but one based on gradualism and that isolated for
a long period of time a group of potentially damaged sectors. This
was necessary for the trade reform to settle as a new policy equilib-
rium in the contributions game.
In the nineties the predominant strategy was reciprocal trade
liberalization. Traditionally, the literature on reciprocal trade
liberalization focused on the incentives problem faced by large
158
economies, which may lead them to fall into trade wars (large
economies can affect their terms of trade through policy action).
Thus, each country acting unilaterally on its own behalf may set a
positive level of trade protection that eventually reduces trade and
welfare for all. The trade policy game equilibrium is clearly
inefficient. In this context, it may be preferable to commit to
reciprocal liberalization agreements which allow countries to
cooperate and reach a better allocation of resources for every one.
Multilateral trade negotiations can be understood in this context.
For the small-sized economy case, the traditional view did not take
into account the relevance of reciprocity, since small-sized
economies cannot affect their terms of trade. However, for small-
sized economies, the degree of liberalization of other countries also
matter.
Recently, the Grossman and Helpman (1994) model was used
to propose a causal link between unilateral and reciprocal trade
liberalization. Krishna and Mitra (2000) analyze whether
unilateral trade liberalization by one country could induce
reciprocal liberalization by its partner in the absence of any
communication or agreement between the two. This result has
important normative implications because it contradicts the
predominant perspective. In fact, the conventional policy wisdom
is to use (or threat to use) one’s trade barriers to remove those of
the others (for example, the well-know section Super 301 in US
trade law). The model’s key analytical point is to combine
Grossman and Helpman’s (1994) result with Mitra’s (1999)
model of endogenous lobby formation. The main idea can be
summarized in one paragraph. A small economy is trading with a
large partner. The initial condition in the small country is that
there is only an import substitution lobby and no export lobby. It
is assumed that the fixed cost of organizing an export lobby is
greater than the net benefits that it would generate. The
endogenous trade policy according to Grossman and Helpman is
an import tariff and an export tax. Unilateral liberalization by the
large country can be shown to generally increase the incentives
for the formation of an export lobby in the small country, since it
would bring about a higher world price for the exportable good.
That would make existing export taxes not only more costly for
the export lobby; but would also give the import-competing lobby
an incentive to levy an even higher export tax. Therefore,
unilateral liberalization by one country has a “strategic” effect on
159
the relevant group in the partner country. As a result, with some

additional assumptions, free trade by the small country could be the
new endogenous trade policy. The equilibrium is a different one
because in the original situation (when the large country protected
its import-competing sector) the export lobby in the small country
was inactive. However, after the large country liberalized, the
export lobby in the small country became more active and
endogenous trade policy shifted towards more openness. Making
some additional assumptions, Krishna and Mitra (2000) show that
unilateralism is reciprocated and the small country moves towards
free trade. The paper first assumes the tariff reduction of the large
country as exogenous and then derives the results for the
endogenous lobby formation and the endogenous trade policy for
the small country. In a second section the paper assumes a world
with one large country and many small countries and derives the
optimal tariff for the large country, taking into account the strategic
effect in the endogenous trade policy of small countries. The result
is that the optimal tariff for the large country is smaller than if only
the terms of trade effect had been considered.
The paper of Krishna and Mitra (2000) concludes with the
following statement: “We find that such unilateral liberalization
induces reciprocal tariff reduction by the partner country.
Intuitively, unilateral liberalization by one country has the effect
of increasing the incentives for the export lobby in the partner
country to form and to lobby effectively against the import-
competing lobbies there for lower protection. The results stands
in contrast to the policy arguments that suggest that closing (or
threatening to close) one’s market would help pry open the
markets of others as well as some recent results in the literature
which emphasize institutional reciprocity as an essential means of
getting to efficient outcomes”. The result can be read also in the
opposite sense, namely: a protectionist policy by a large country
can be reciprocated by protectionism in the small country due to
the configuration of pressure groups that influence trade policies.
More generally, this factor could be thought of as a determinant of
the differences in trade liberalization strategies followed by the
countries of the region. In this sense, each country faces a
different world in terms of the correspondence of its comparative
advantages and the restrictions faced to access world markets.
This will determine the opportunities and composition of interest
groups having an influence on trade policy.
160
Main Determinants in the Case of Uruguay

Structural Factors
• International Integrations: Products, Markets and Firms
To analyze the underlying factors that shape the structure and
nature of domestic interest groups with trade policy preferences, it
is necessary to highlight the pattern of integration of Uruguay into
the world economy along three basic dimensions: products; mar-
kets and firms. In effect, the configuration of interest groups has its
foundations in this set of structural factors.
Despite fluctuations, exports and imports show a pattern of
sustained growth. Table A-3 broadly describes the pattern of
specialization on the export and import sides. The recent recovery
of exports was based on a consolidation of the traditional profile of
the country, particularly an expansion of natural resource-intensive
and agribusiness exports. On the import side there is a significant
increase in natural resource-intensive goods, reflecting the strong
increase in oil prices.
At the product level, the pattern of specialization follows the rela-
tive abundance of natural resources apt for the production of agricul-
tural foods and inputs. Since these factors of production are cheap in
comparison to the rest of the world, comparative advantage indicates
that exports (agricultural products) will use intensively the relatively
cheap productive factors. Uruguay agro-exporter model is not a
recent invention: it has been reborn as many times as it has been
declared dead. In the last twenty years the structure of agricultural
production has gradually changed to adapt to new market conditions,
economic policies and technologies. In spite of diversification in the
agro-food and agricultural inputs sectors; there is a marked trend
towards an export structure based on commodities (homogeneous
products with little differentiation and low unit values). However,
Uruguay also shows some export specialization in the services sector.
This has basically taken the shape of consumption by non-residents
of services traditionally considered to be non-tradable. The best, but
not only, example is the explosive growth of tourism in the nineties.
In effect, provided regional integration grows more intense, the
development of port facilities, services and international transporta-
tion suggests a possible role for Uruguay as a natural transportation
and logistic node for the Cuenca del Plata. Finally, and despite sharp
restructuring, the financial sector shows a potential for becoming a
regional supplier of services.
161
Uruguayan exports also display a clear pattern when classified

by market of destination. Products and markets also show a regular
pattern. Although this structure is dynamic and has evolved
through time, the nineties confirmed trends already visible in the
eighties. Mercosur countries have always been important destina-
tions for Uruguayan exports. However, in the nineties Mercosur
turned into the major export market, accounting for almost fifty
percent of the total. The last regional crisis reduced its share in
Uruguayan exports, but Mercosur still remained as the main outlet.
International trade theory shows that trade and specialization
brings about economic gains. It also accounts for production and
trade specialization patterns among countries. But the
identification of trade partners is more ambiguous. By extending
the concept of comparative advantages and specialization, one can
argue that a country will trade more heavily with those partners
with which trade is more trade complementary. There must be a
correspondence between the comparative advantages of one
country and that of the other, and vice versa. However, at the world
level there is a clear geographic concentration of trade. Geography
(reflected in transaction and transport costs) and the spatial
distribution of non-mobile factors of production is a structural
variable that explains the international distribution of production
and trade. In the international economy, trade is made mainly
among neighbours and within regions: some models have been
empirically tested to explain closer trade relationships among
neighbouring economies. Distance, contiguous borders, same
language, shared cultural patterns and similar development levels
are all dimensions that contribute to explain the level of relative
trade intensity among countries. This, in turn, is directly related to
the existence of preferential trade agreements. All these factors are
present in Mercosur, the members of which are close, adjacent and
distant from the rest of the world. They also share similar relative
development levels, conforming a so-called natural trade block.
Apart from sharing the geographic characteristics that are com-
mon to the region, Uruguay has certain peculiarities. In fact, Uru-
guay is simultaneously an internal as well as an external frontier of
the region. As an internal frontier, its entire land border is shared
with the two largest countries of the region. But Uruguay also
plays the role of an external frontier, since it is the entry door to the
Atlantic for the Cuenca del Plata (Plata basin), giving Uruguay an
outward-looking stance.
162
Empirical studies carried out in Uruguay at the firm level

confirm a conventional hypothesis on product and market
diversification (Cassoni and Vaillant, 1993; Roche and Vaillant,
1990) 1. During the first stage of their export cycle firms usually
sell a small amount, normally trading one product in one market. It
is thus natural that neighbour markets are the destination of first
exports. In a second stage, and in order to grow, successful
exporters combine a strategy of product and market diversification.
During the nineties the gross entry of firms into the export market
contracted. By the end of the decade mature domestic exporters
and foreign firms weighted more heavily in total exports. Foreign
firms are usually born with a mature profile, either because they
carry out activities in more than one country or because they enter
the export business by buying an exporting firm that is already
mature. Entrance of foreign firms can strengthen exports when
their participation implies a step forward in the maturity of
exporting firms (considering size, market and product
diversification, sector and orientation). During the nineties, export
growth was triggered by large firms, with an increasing
participation of foreign firms fundamentally concentrated in food
products and intensive on raw natural resource materials. During
the recent recovery of exports (2003-2005), this pattern was
reinforced.
As far as destination markets is concerned, during the nineties
there was a clear trend towards the regionalization of exports. On
the one hand, many firms which had their trade basically focused
outside the region switched to a more multilateral pattern. On the
other, many firms with multilateral patterns switched to more
regional patterns. Regional firms kept this predominant pattern and
the vast majority of new firms (entering the markets in the nineties)
showed a pattern predominantly oriented to the region. New trade
policies, and particularly the creation of Mercosur in 1991, were the
1. Firms that for different reasons do not reach a certain critical threshold of
exports (which varies according to the sector) do not survive in export activity.
The idea is that in order to export there are some fixed costs which are diluted over
time if firms stay in the activity and grow. Firms learn about the exporting activity
over time and so there are dynamic economies of scale. As the firm accumulates
exporting experience, average specific costs decrease. This allows a competition
improvement entering to a reinforced growth circle. Uruguayan exporting firms
do not seem to have reached that threshold, even though, in the Nineties, there was
important growth in firms that already existed at the beginning of the decade.
163
key factors behind this change in market orientation of exporting

firms. Another contributing factor was the performance of relative
prices vis-à-vis the rest of the world and the region. During the
recent export recovery (2003-2005) there was a partial de-
regionalization of exports again.
The predominance of products based on traditional comparative
advantages is not complete. In the nineties, an export flow of
dynamic manufacturing products (basically metallurgy and chemical
products) gradually developed, oriented particularly to the region.
Despite the productive restructuring that occurred in the nineties, a
very important share of total exports came from the manufacturing
sector. In 1998 these exports accounted for almost half the total num-
ber of exporting firms. This was a heterogeneous group of sectors
mostly oriented to the region and with small average sizes.
Even if the general orientation was towards lower export
incentives, the process was carried out in a conflict-laden
environment with private corporations. The latter always
demanded export incentives and domestic market protection, a
position that united producers of tradable goods (exportable and
import-substitutes). In fact, the demand of the private sector can be
regarded as the equivalent of a fiscal devaluation: the position of
tradable goods producers (exporters and import-competing) with
respect to the real exchange rate is the same (both demand a high
real exchange rate). The trade policy conflict between exporters
and import-competing sectors is not so evident. According to the
Lerner’s symmetry condition, trade liberalization would eliminate
distortions against exporters and in favour of import-competing
sectors. But in practice, conflicts between producers of tradable
goods have tended to be addressed in a less transparent way
through mechanisms of partial or sector exemptions that seek to
safeguard the effective protection of sectors threatened by import
competition.
• Domestic Interest Groups
A special feature of the Uruguayan private sector is the diver-
sity of representative organizations. At the firm level, several
organizations represent corporative interests. A detailed descrip-
tion of interest group organizations can be found in Vaillant
(2003). The position of interests groups traditionally associated
with protection of the domestic market has gradually changed as
a result of the adjustment process of the manufacturing sector
during the last decade. However, there is still a demand for
164
government intervention to prevent damage to local industry

(either exporters to the region or domestic market-oriented) as a
result of third parties’ unfair trade practices.
Although Uruguay is a country with relatively abundant natural
resources used to produce food and agricultural raw materials and has
a clear export orientation in these sectors, the position of these groups
does not entirely reflect this potential. In fact, these groups represent
quite different interests. They intervene actively on fiscal and mone-
tary issues, but in the trade policy field their intervention has been
restricted to the historical demand to authorize the exportation of
unprocessed agricultural products (un-tanned leather, unprocessed
wool, live cattle, fluid milk, etc) to reduce the power of agro-industrial
users. The groups associated with traders’ and importers’ interests
have voiced their support to more open trade policies, but they have
generally had relatively little influence. An organization that repre-
sents exporting interests has supported export promotion policies (see
p. 148-149). Foreign multinational are less active in Uruguay than in
other Latin American countries. Nevertheless, in some industrial and
service sectors (food production and tourism) there is a potential for
closer cooperation between domestic and foreign firms.
The organization and representation of workers’ interests is
more homogeneous. Workers are organized in a single labour con-
federation made up of several sector trade unions representing
organizations in the public and private sectors. The central trade
union has had an active and continuous participation in interna-
tional negotiations at the regional level (Mercosur and FTAA). In
some cases that participation has been determinant, as shown by the
leading role of Uruguayan trade unions in the creation and func-
tioning of the Foro Consultivo Economico y Social del Mercosur.
The central trade union supports regional integration in Mercosur,
but is more cautious as regards hemispheric integration (FTAA) or
multilateral negotiations (WTO). Its position is not sympathetic
with trade liberalization in general or with multilateral negotiations
aimed at deepening it. However, it has accepted more intense sub-
regional trade flows as a cost to be paid to strengthen integration
with neighbouring countries. Although Uruguayan worker organi-
zations share a protectionist speech, they have not actively opposed
trade liberalization in the context of a strong productive adjustment.
With respect to liberalization strategies, worker organizations have
supported regional economic integration, but they have been more
distant or opposed to other clubs (FTAA, WTO, etc.).
165
The external trade policy and the trade negotiation strategies

implemented by Uruguay have been cautious, moderate and, in a
certain way, inconsistent with a process of trade liberalization.
Although the general trend has been towards trade liberalization,
the description above (see above, p. 152) shows ambiguity and con-
tradictions in a variety of fields and issues. It makes sense to relate
this feature to the pattern of integration of the country into the
world economy and the particular configuration of interest groups
as developed in this section. In fact, pro-exports interest groups
include a very small set of large firms. Other sectors are not aligned
with tough protectionism, but since they lack a clear diagnostic of
how they would be affected by trade liberalization (deepening of
Mercosur, concluding the FTAA and negotiations with the EU or
multilateral liberalization), they have an ambiguous and unclear
position. This is the result of the particular pattern of sector gains
faced by the country, which determines the configuration and
strength of domestic interest groups and the resulting endogenous
trade policy, including positions on trade liberalization (see p. 157).
Institutional and Political Factors
• Trade Policy Institutions
In recent decades (since 1958 until today) trade policy has been
done by the Executive through presidential decrees. Very few laws
have been approved with the participation of Parliament. In effect,
trade policy has not been shaped, directly or indirectly, by the
democratic mechanisms of parliamentary representation. Instead, it
has been set at the discretion of the government in office. This
pattern has been referred to, in the literature, and it is similar to the
experience of other countries of the region (for example, Argentina).
Rajapatirana (1995) argues that trade reform was based on
resolutions and decrees, but included no changes in the institutions
that would implement it. A new legal framework requires support
and consensus from the opposition, while decrees only require
agreement within the Executive. The use of decrees is expedient.
But they also make it easier to change policies in the future, thus
creating uncertainty as to the stability of the new policy framework.
In the nineties, the two outstanding events of parliamentary par-
ticipation in trade policy-making were the ratification of the Treaty
of Asunción in 1991 and the Marrakesh agreements in 1994. In
both cases Congressional ratification was done as a package and
without detailed discussion. Both agreements set constraints to the
166
discretionary implementation of trade policy measures. The effec-

tiveness of such constraints depends on the costs and benefits of
breaking the rules. In general, reciprocal trade agreements have
stabilized trade policy, although discipline has been variable. In
periods of crisis the violation of agreements increases, since the
costs and benefits of non-compliance change abruptly.
The institutional demands posed by the new trade policies
increased because it was necessary to implement reciprocal trade
agreements and facilitate integration into the world market. The
adverse effects of the domestic institutional context were
compounded by Uruguay’s level of relative development and size
constraints, which severely influenced the amount of resources that
could be allocated to international negotiations. Successive
governments reacted with a short term perspective and looking for
solutions that may respond to the immediate demands posed by the
negotiation process, but without setting a detailed working program
or a suitable institutional context to carry it out in a longer term.
The same institutions created more than four decades ago, with the
scopes and structures designed to promote import substitution, are
presently responsible for administering an international negotiation
agenda in constant change and with decisive effects on economic
growth prospects. A detailed description of public institutions in
charge of trade policy can be found in Vaillant (2003) and Giordano
and Quevedo (2004).
The “reactive development” model has created public sector
institutions that carry out international negotiations in a disperse
manner. Key competences lay with the Ministry of Finance, the
Ministry of Foreign Affairs and the Oficina de Planeamiento y
Presupuesto (Presidencia de la Republica). However, sector
ministries (Agriculture, Industry, Tourism and Transportation) also
take part on international negotiations. These more specialized areas
and their development potential are increasingly influenced by
international conditions. Relations among agencies are characterized
by overlapping actions, diffuse competencies and unclear leadership/
responsibility roles in the Executive. The performance of each
administration is contingent upon the particular agreements reached
by officials in charge at each time.
Uruguay was left adrift with the abilities and personal talents of
the individuals in charge of international negotiations. Frequently,
the quality of human resources and the sizable efforts done to be up
to the task were enough to go through critical situations. Similarly,
167
the systematic and responsible way of dealing with issues and the
existence of competent local resources triggered learning pro-
cesses. These, however, failed to show at a broader level because
of the absence of a suitable institutional framework or hierarchy
able to capitalize that learning. The costs of these institutional
weaknesses are evident in the local and international arena.
Locally, the virtual institutional chaos in trade policy-making opens
the door to influences from private interests. Internationally, Uru-
guay has obtained few tangible negotiating results and national
positions usually reveal a strong inertial behaviour. This is particu-
larly evident at the regional level, which has demanded the largest
amount of human and institutional resources. These institutional
weaknesses have enabled groups that benefit from the status quo to
successfully make their particular interests predominate over the
general interest. A government that is institutionally weak in trade
policy-making can be seen as less benevolent and more prone to
weight political objectives when deciding over trade policy instru-
ments. Similarly, failure to obtain significant access concessions to
international markets strengthens the political economy of the sta-
tus quo.
• Political System
Trade liberalization has been a constant for over three decades.
Political parties seem to have understood that in the present
circumstances an economy like that of Uruguay cannot grow with the
trade policies of the sixties. However, changing international
conditions have influenced the way in which this policy orientation
was carried out: in effect, the unilateral liberalization of the first
decades was replaced in the nineties by a clearer focus on reciprocal
liberalization (discriminatory and multilateral). But the trend
towards trade liberalization has had its exceptions. For example,
some sectors have succeeded in isolating themselves from the
liberalizing trend through discretionary protectionist measures. In
effect, in some cases trade policy has been taken hostage by private
sector interests. The fact that private sector interests have not been
more influential and have failed to change the global policy thrust
(protectionist reversion), was due more to the fact that corporative
interests are contradictory and neutralize each other than to the clear
objectives of governmental elites. In spite of this context, the
liberalization strategies adopted in the nineties significantly
transformed the production of tradable goods. Regional
liberalization initiatives were a key to this process. When a small
168
economy like Uruguay enters into free trade agreements with much
larger and economically diversified neighbours, competitive
pressures upon domestic producers increase markedly.
The traditional parties that have been in office since the recovery
of democracy and until 2004 supported the trade liberalization pro-
cess launched by the authoritarian regime. However, there have
been differences among parties. The majority sector of the Partido
Nacional has defended and enforced orthodox free trade policies.
The Partido Colorado, in contrast, has been more sensitive to pres-
sures from damaged sectors and has admitted exceptions to the glo-
bal policy approach. The overall orientation, however, has not
changed. In general terms, the trade liberalization process under-
taken in the nineties has underlined the importance of international
trade negotiations. This includes not only opening one’s own mar-
ket, but also improving access conditions to the rest of the world.
Reciprocal trade liberalization has been broadly accepted, even by
left-wing sectors. This explains the almost unanimous Parliamen-
tary approval of Mercosur (1991) and WTO agreements (1994).
During the nineties, the lobby contrary to trade liberalization
(import-competing) reduced its influence over policy-making.
Gradually, other sectors with comparative advantages (production
of goods for export) built up a political economy in favour of trade
liberalization. However, the fact that a large share of Uruguayan
exports are heavily protected in industrial countries and face
significant market access barriers, weakened the influence of
export-oriented sectors and partially threatened the trade
liberalization process. Protectionist bias is always latent given that
there are domestic interest groups that demand protection and a
government sensitive to these demands. By simply inverting
Krishna and Mitra’s (2000) argument of reciprocated unilateralism,
if a large and developed economy liberalizes unilaterally, this will
encourage a domestic political equilibrium more favourable to
trade liberalization in the small economies.
The relative weakness of export-oriented groups and those
traditionally oriented to the internal market, resulted in a virtual
coalition of tradable goods producing sectors in demand of higher
import barriers and export subsidies. In other words, a “fiscal
devaluation” turned into the main demand to protect tradable
products in a context of strong overvaluation as that which
prevailed in the early nineties. Subsequent governments opposed,
with varying intensity, to the pressure exerted by tradable goods
169
producers and implemented policies oriented to lower the trade

policy-induced distortions of relative prices. The economic crisis
that started in 1999 severely increased the pressure on the
government, in the hands of a more receptive Partido Colorado at
the time. Until a new exchange rate policy was adopted in 2002,
the government frequently gave in to pressures, granted “fiscal
devaluation” measures and restored old policy instruments, such as
specific tariffs. This process had some inertia and many of the
instruments adopted were not eliminated even after the relative
price correction caused by the new floating exchange rate regime
adopted in 2002 (that resulted in a large devaluation).
During the recent economic recovery (2003-2005) an impor-
tant change occurred, since a coalition of left-wing forces took
office for the first time in the political history of Uruguay. Before
the elections these groups attributed the economic crisis to the
failure of the economic policy model implemented in the nineties,
and especially to trade liberalization. In particular, these groups
underlined the negative effects on the labour market. Their argu-
ment was that trade liberalization had worsened the situation of
unskilled workers both in volume (employment) and price (wage
levels) terms. However, the argument only takes into account the
effect on incomes (and not expenditure) of low-skilled workers.
Moreover, skilled workers in successful sectors may have
improved their situation after trade liberalization. Consequently,
although part of the population may be unenthusiastic over trade
liberalization, it is by no means certain that left-wing voters want
a protectionist reversion.
In fact, once in office, the left-wing government did not intro-
duce any major change in the economic policy orientation. More-
over, in the current macroeconomic environment a familiar
government-private sector debate over the real exchange rate has
re-emerged: once again, tradable goods producers (exporters and
import-competing sectors) share a same position, while the govern-
ment is on the other side. Curiously, export-oriented lobbies
demand more trade policy interventions to change relative prices
(raise the real exchange rate), while placing less emphasis on
improving access conditions to international markets (one of the
major obstacles faced by Uruguay).
The focus on the real exchange rate confirms that Uruguayan
domestic competitive conditions remain a key factor in the trade
policy debate. From a structural perspective, the evolution of the
170
real exchange rate (the price of tradables vis-a-vis non-tradables)

shows the relatively slower productivity growth of non-tradable
sectors 1. These sectors are less exposed to foreign competition;
they operate in less competitive market environments and face
public regulations that pose obstacles to competition. During the
nineties, structural adjustment brought about a significant increase
in the productivity of tradable sectors (exportable as well as import-
competing industries). However, productivity did not increase at
the same rate in non-tradable sectors. Moreover, in many of them
production continued to be carried out in the same non-competitive
conditions. The imbalanced performance of productivity in the
tradable and non-tradable sectors appreciates the real exchange rate
and deepens competitive forces in the latter. The 2003-2005
recovery raised the issue again, but without the dramatic overtones
of the exchange rate over-valuation typical during the nineties.
The main characteristics of the Uruguayan political system made
it possible to maintain trade policy stable in global terms. Political
parties have shared the view that for a small-sized country it is
impossible to maintain a sustainable growth path without
deepening Uruguay’s insertion into the world economy. However,
slow progress in the reform agenda has placed strong pressure on
the production of tradable goods, encouraging the government to
use trade policy discretionally to face particular demands. These
individual interventions, however, accumulate through time. The
major problems of the Uruguayan political system are not directly
reflected in trade policy, but eventually affect it. Bergara et al
(2004) have pointed out that the inelasticity and low quality of
policies towards the public sector (that accounts for a big share of
non-tradable economic activities) are due to a mix of institutional
factors: multiple veto faculties, fragmentation of political parties
and direct democracy mechanisms.
1. The definition of non tradable services does not include all of these. In the
case of Uruguay, the tradable sector includes agriculture, extractive industries;
manufacturing industries, but also a group of services that are consumed by non
residents (tourism, port activity and international transportation, financial sector).
171
Conclusions
Since 1973 trade liberalization has been one of the pillars of Uru-
guayan economic policy. Despite some temporary reversions and a
slow down in the path of tariff cuts, this policy has been relatively
stable over a period of nearly thirty years. Trade reform underwent
six different stages: 1) export promotion (1974-1978); 2) unilateral
liberalization (1979-1984); 3) trade reform continuity (1985-1989);
4) deepening of the liberalization process (1990-1994); 5) conver-
gence to a common trade policy within Mercosur (1995-1999); and
6) trade policy during times of crisis (2000-2003). Year 2004 can
be regarded as the starting point of a new stage, but there is still not
enough information to anticipate a direction.
External factors played a small role at the beginning of the trade
liberalization process (early seventies). However, by the end of the
period, their influence grew more intense (nineties). In the eighties
the role of external factors were basically reflected in the influence
of ideas, formalized in the so-called Washington Consensus. In the
nineties, external conditionality became more explicit, either
through reciprocal trade liberalization agreements (such as Merco-
sur) or multilateral negotiations (since 1994).
In the early stages trade liberalization was pursued through tariff
cuts, particularly higher ones, which reduced average levels and
dispersion. The pro-liberalization orientation did not change and
there were no important policy reversals. However, there were
isolated interventions to neutralize undesired side effects of
productivity adjustments (Vaillant, 2003). Some sectors were isolated
from the liberalization schedule, granting the process some ambiguity.
Liberalization combined different instruments, such as unilateral,
preferential and multilateral agreements. During the first period, the
emphasis was placed in unilateral measures, while during the nineties
the focus turned toward reciprocity-based initiatives.
Domestic political elites have reached a consensus on trade
liberalization strategies, which does not differ much from the
traditional view about the role of a small open economy that
prevailed in previous reform processes in the region. Given the
characteristics of the policy-making process, this issue is important
only for elites in office. In effect, there is no frontal disagreement
as to desirability of an open economy and the issue of integration
into the world economy has become progressively less important
among public policies. Particularly in the present circumstances
172
the hot spots for the Ministry of Finance are other policies: trade
liberalization is not a relevant issue and the prevailing perception is
that the authorities must administer what already exists. There is
also a shared belief that the influence of Uruguay in the
international context is small. These ideas are somehow consistent
with the maintenance of the current institutional status quo and the
continuation of the reactive model based on the capacities located
in different public sector areas.
The predominant view is that trade liberalization is already done.
However, it is difficult to say that there is an articulated body of
trade policies. In effect, more work needs to be done in order to
reach agreement on an appropriate set of new trade policies. It is
necessary to develop a coherent position on a broad set of issues,
since our previous discussion shows that Uruguayan trade policies
lack such coherence. For example, the Uruguayan position in Mer-
cosur on government procurement issues was, unexpectedly, a
defensive one. Uruguay also lacked a well-defined position in
Mercosur as regards to the flexibility vs. deepening dilemma. The
country also shows erratic policies towards protected economic
sectors, which still survive thanks to governmental favours. Lastly,
Uruguay has been reluctant to move forward towards reform of the
non-tradable sectors, which is a major current negotiation topic.
Existing trade policy institutions are weak, easily captured by
private sector interests and ineffective in actual negotiations. The
following transformations are necessary:
• to build a general discourse about Uruguay’s negotiating posi-
tions that is consistent with a strategic vision of the country 1.
• to develop institutional capabilities to promote this position.
As far as the first issue is concerned, the strategic vision must

serve the country's general interest and should be geared to
improving the conditions for sustainable growth and development.
In the case of a small economy, part of the negotiation efforts reflects
into an appropriate diagnostic and a suitable allocation of scarce
technical and political resources. A number of general principles
should be adopted by a shared national vision. Although there are
consensual points that may lead some to think that such a national
vision exists, it is not really incorporated by policy makers.
1. Giordano and Quevedo (2004) stress this need as well, suggesting some use-
ful general guidelines for Uruguay.
173
After setting a main direction, targets must translate into a nego-

tiation practice. This requires two stages. First, it is necessary to
develop a negotiation practice which is consistent both within the
government and within private sector's expectations. Second, there
must be some capacity to implement this practice, which demands
appropriately qualified human and technical resources, a high
degree of coordination between them and a strong political support
to avoid typical pressures. Clearly, the first stage is the most diffi-
cult. However, taking into account Uruguayan institutional fea-
tures, it is also difficult to efficiently develop the second stage.
Existing institutions reflect a political equilibrium that responds
to the gains obtained from trade liberalization. On one hand, the
fact that trade liberalization produced small gains has inhibited the
development of lobbies demanding more trade liberalization-
oriented public policies. As a result, it is necessary to have more
credibility signals for the private sector to become more committed
with the export strategy. Part of the private sector problem is
related to supply-side restrictions due to low investments in the
export sector, caused, in turn, by the lack of strong signals in favour
of an export-oriented model. Krishna and Mitra´s (2000)
reciprocated unilateralism argument is particularly applicable to
this case
On the other hand, the relatively slow reform of the non-tradable
sector discourages productivity growth in this sector and
consolidates an imbalanced performance of tradable vis-a-vis non-
tradable sectors. In the case of Uruguay the political economy of
reforms attaches particular importance to the economic role of the
public sector (Forteza et al., 2004; Bergara et al., 2004). The
constraints posed by reciprocal liberalization agreements could
have played a more important role if they had evolved according to
what was originally expected, thus encouraging the transformation
of other sectors. However, after the big impulse of the early
nineties, reciprocal liberalization weakened its intensity.
Marcel VAILLANT
174
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176
ANNEX A
Table A1. Uruguay: Global Tariff Rates

Selected years, average by sector ( %)
1992 1997 2004
Capital goods .................................... 14.2 5.1 3.7
Intermediate goods ........................... 17.1 8.9 8.8
Oil products ...................................... 20.0 2.2 2.2
Capital goods parts & accessories ... 18.7 8.7 8.1
Consumption goods ......................... 21.8 14.9 14.4
Motor vehicles .................................. 18.5 23.0 23
Rest of goods .................................... 14.6 14.3 13.7
Number of tariff rates ....................... 4 26 31
Average ............................................. 18.0 9.4 9.1
Standard deviation ............................ 5.7 7.0 7.0
Dispersion coefficient ...................... 0.3 0.7 0.8
Number of items w/ zero tariff rates . 15 632 1,366
Total number of tariff items ............. 6,943 9,379 9,750
Source: own elaboration based on Berlinski et al. (2005).
177
Table A2. A map of Uruguay’s negotiating agenda classified by issues, maturity and interests
178
Bilateral
Issue/Arena Unilateral Sub Regional Plurilateral Multilateral
Mercosur ACE 18 As part of Mexico ACE FTAA WTO
USA
Mercosur 60
Goods
Doha Round.
Domestic aids vis
Negotiations Negotiation stand a vis market
• Agricultural Unilateral Tratado de Chile (ACE 35) unfinished by (NI)/Offensive access/Offensive
liberalization Asunción 1991. and Bolivia Universal (SN) interests but with
in the early Free intra-regional (ACE 36) free free trade. decreasing
1990s: lower trade/CET and trade agreements Only intensity.
tariff rates and negotiations with 2006. Association agreement
items/ third parties. New Agreement with with FTA
Offensive circulation rules in the EU under format/ Doha Round/
export-led process of being negotiation (EN)/ Offensive Defensive
• Non- growth model. implemented. Offensive interests
SN NI/Deffensive
agricultural following other
countries in the
region.
Excluded
Chile and Bolivia
from ACE 60, SN
• Motor vehicles Administered trade/ not included.
Defensive included in
EU EN
ACE 55.
Liberalization Excluded from

• Sugar – Protection/ negotiations (EN)
Defensive.
Bilateral
USA
Mercosur 60
• Resisting Few specific Non-tariff barriers/ Resisting sectors

sectors tariffs/ Defensive in negotiations
Defensive with the EU
Trade facilitation
Simplification Customs Phyto-

procedures,
• Various in the early Many arrangements technical sanitary NI/Offensive Doha Round
1990s/ and norms standards, measures/
Offensive etc. Beef
Trade defence
Prohibited for intra-
regional trade.
• Safeguards Against third parties SN NI/Offensive
still not enforced
NV 4.
WTO-compatible
Applicable to intra- domestic
regional trade.
• Antidumping Against third parties SN NI/Offensive
legislation/
still under Offensive
negotiation.
• Counter value Against third parties

still under SN NI/Offensive
duties
negotiation
179
Table A2. (continued)
180
Bilateral
USA
Mercosur 60
Services
Chapter
Moderate Chile and Bolivia
Mode 1
liberalization SN. With the EU (cross-
• Modality in some mode 1 and with SN NI/Defensive Generous offer
Montevideo border)
service Mercosur mode 3/
Protocol, global liberalizing/
sectors, such Defensive.
agreement still not Defensive
as ports,
electricity and implemented/ Telecommuni
Offensive. Generous offer,
telecommunic cations,
• Sector UE lists under financial in SN NI/Defensive
public monopoly
ations in the discussion. in basic telephone
1990s the future / services
Defensive
New disciplines
Government Chile and Bolivia Excluded from
Procurement To be
Government Protocol still to be SN.
negotiated in SN NI/Defensive
the Doha Round
procurement implemented (NV)/
UE lackof the future. after the July
information (SD) 2004 package
Defensive
Table A2. (continued)
Bilateral
USA
Mercosur 60
Part of the
FTA,
Recent emphasis on
progress in Chile and Bolivia public Excluded from
Competition sector Fortaleza Protocol
SN.
monopolies/ SN NI/Defensive
the Doha Round
policy regulations- NV 4/Defensive
EU SD
Defensive, after the July
Ley mínima excludes 2004 package
PC 2000. dispute
settlement
PC.
Chile and Bolivia Part of the
Intellectual Intellectual Property SN. FTA/ SN NI/Defensive
property Protocol NV 4 EU SD Defensive.
Negotiations
Chile and Bolivia Part of the concluded/
Investment Colonia Protocol SN. FTA/ Ratification NI/Defensive
NV 4.
EU SD Defensive stage/
Defensive.
181
Table 3. Specialization pattern by sector
182
Years 2000-2004 (thousand US$ and %)
Exports Imports
Sectors CIIU Divisions 2000 2004 2000 2004
(Thousand US$) (Thousand US$)
Natural resource intensive 11,12,13,20 118 374 219 718
Agro-food 31 1.010 1.331 278 171
Textiles/Clothing 32 517 500 231 171
Non metallic mineral manufactures 34.36 91 72 206 107
Import-competing 33,35,37,38,39 & others 564 645 2.531 1.946
Total 2.299 2.922 3.466 3.114
% %
Natural resource intensive 11,12,13,20 5.1 12.8 6.3 23.1
Agro-food 31 43.9 45.5 8.0 5.5
Textiles/Clothing 32 22.5 17.1 6.7 5.5
Non metallic mineral manufactures 34.36 4.0 2.5 5.9 3.4
Import/competing 33,35,37,38,39,& others 24.5 22.1 73.0 62.5
Total 100.0 100.0 100.0 100.0
Source: own elaboration based on BCU data.
Chapter 4
Ups and Downs of Paraguayan
Trade Policy in the 1990s
Introduction
During the last twenty years the trade strategies of developing
countries have evolved within a context of structural reforms and
liberalization. These policy choices have been strongly influenced
by foreign policy decisions of developed countries and interna-
tional financial institutions. In the last few years, several authors
have analyzed the trade strategies of developing countries –espe-
cially Latin American nations– not only as a result of the pressures
of a globalizing world economy, but also as a response to such pres-
sures. These authors have emphasized the role of domestic determi-
nants, namely institutional and political factors as well as the
relationship of the state with private sector economic agents.
The specificity of the Paraguayan case is that even before the
period of structural reform, the country had undergone a very
peculiar process of unilateral trade liberalization. During the 1990s
this model of liberalization, that I will call intermediation-oriented
integration, would be at odds with the Paraguayan strategy of
joining Mercosur. The purpose of this chapter is twofold. First, to
describe the Paraguayan foreign trade strategy inherited after
30 years of authoritarian rule and second, to explain why such
policy pattern was not completely dismantled in the 1990s to be
replaced by a strategy of production-oriented integration. I will
argue that while the new international context of the 1990s shaped
Paraguay’s decision to join Mercosur, the pressure of competing
economic interests have resulted in an ambivalent foreign trade
183
policy. In short, I will argue that domestic factors have been far
more important than regional or international forces in shaping
Paraguay’s foreign trade policy in the last 15 years.
The period under study is relevant because it coincides with the
transition from an authoritarian to a democratic regime. This may
lead one to expect that economic and institutional reforms would
lay the basis for a new development model. This period also coin-
cides with heightened transparency of Paraguay’s true levels of
trade liberalization and the opening up of an opportunity to inte-
grate into the region and the world on the basis of a specialized
and competitive pattern of production. The first section of the
paper explains Paraguay’s inherited trade policy patterns, empha-
sizing the non-protectionist and informal nature of the Para-
guayan trade and economy. The second section describes main
trade policy decisions taken in the 1990s in the light of a new
regional environment, as well as the evolution of foreign trade
patterns. The third section analyzes the foreign trade policy deci-
sion-making process of the state agencies and the latter’s interac-
tion with the most influential economic agents. Finally, the
chapter briefly examines current foreign trade policies and makes
a set of recommendations.
Background: Inherited Trade Policies
To understand the evolution of Paraguay’s trade policy under the

authoritarian regime and the strategy inherited in the 1990s, it is first
necessary to briefly outline the main trends of recent Paraguayan
economic development and the concomitant trade policies. A first
stage began in the 1960s and lasted until the mid-1970s. During this
period most Latin American countries focused on raising agricultural
productivity and promoting industrial growth. Paraguay, instead,
emphasized agricultural exports and lacked a coherent industrial
promotion or import substitution strategy, except for relatively high
tariffs and a fixed and overvalued exchange rate.
The opening up of a physical and trading connection with Brazil
in the 1970s brought about important changes and inaugurated a
second stage. First, soybean production in bordering areas with
Brazil, the official promotion of cotton and rising international
prices for these two items encouraged the emergence of large-scale
commerce of agriculture and strengthened the specialization of
184
Paraguay as an agricultural commodity exporter. 1 Second, the

opening up of the Brazilian border led not only to rising agricultural
commodity flows but also to high import levels by historical stan-
dards and equally high levels of illegal trade. These flows of infor-
mal trade were encouraged in the mid-1980s by the high taxes and
tariffs prevalent in Paraguay’s neighbors. The dynamic was that of
a triangular flow of consumer goods 2 imported illegally or invoiced
below its real price (mainly from East Asia and the United States)
and re-exported, also illegally, to neighboring countries. The
importance of these trade flows is quite visible when they are com-
pared to the legal exports of domestic goods. In effect, in the mid-
1990s the former were three times higher than the latter. Similarly,
from 1995 to 1999 an estimated 67% of Paraguayan imports (both
recorded and unrecorded) were re-exported to neighboring coun-
tries. 3 Third, the construction of the Itaipú hydroelectric dam dra-
matically increased capital inflows, which turned into an engine for
unprecedented economic growth, especially from 1975 to 1981. 4
First with Itaipú, and later on with the construction of the Yacyreta
dam with Argentina, Paraguay became an important exporter of
electricity to the region. In the first years of the new century the
revenue from electricity exports accounted for 20% of total
recorded exports and 25 % of total government revenues. 5
Summarizing, while in the first stage (1960 to mid-1970s) Para-
guay failed to put together a clear-cut policy of import substitution
industrialization, during the second stage (mid-1970s to late 1980s)
that target was plainly abandoned. Nonetheless, during the 1980s a
modest process of industrialization fostered by private investment
1. Prior to this period, Paraguay’s main export products were meat and lumber.
By the end of the 70s they had been displaced by cotton and soybeans. Meat
exports had been strongly affected by the 1973 closure of European markets.
Extensive soybean production resulted in massive deforestation of the Eastern part
of the country. Exports of lumber have been mainly in the form of illegal sales of
unprocessed logs to Brazil.
2. Cigarettes, alcoholic beverages, watches, photo cameras, toys, computer and
electronic goods, etc.
3. Data from balance of payments of the Banco Central del Paraguay (BCP) and
estimates of the BCP and the IMF.
4. Revenues from goods and services used during the construction of the Itaipú
dam were three times higher than GDP, which increased at a 9% average annual
rate during that period.
5. Calculations based on bcp Balance of Payments and Ministry of Finance´s
Informe Fiscal.
185
and capital inflows associated to the construction of Itaipú started

to emerge. 1 Yet without the support of special policies that process
has been slow and very limited. The result has been an industrial
sector that lags significantly behind those of the rest of the region.
The Resultant “Trade Policy”

After three decades of authoritarian rule the Paraguayan
economy presented characteristics quite different from those of the
other Mercosur countries. These countries had specialized in
exporting agricultural commodities and processed agricultural
products, but had also undergone a strong process of
industrialization through import substitution, extensive protection
and state intervention. In the case of Paraguay exports were
concentrated in two or three agricultural commodities and the sale
of electricity to neighboring countries, but there was no import
substitution industrialization. In fact, the rapid growth of informal
trade with neighboring countries by-passed the formal protection
granted by high nominal tariff rates. This system was supported by
the state and constituted one of foundations of the political regime. 2
The authoritarian regime had tried to break Paraguay’s tradi-
tional trade dependence from Argentina, which was for a long time
Paraguay’s sole connection with world markets. The opening up
towards Brazil encouraged a new pattern of integration into the
world economy trough commercial agriculture, capital inflows to
finance the construction of the Itaipu dam and Paraguay’s interme-
diary role in regional trade. In spite of the fact that the opening up
to Brazil was the result of a process planned by the government, the
“trade policy” of the 1970s and 1980s was not the result of a new
strategy of economic development. Rather, it was a fortuitous by-
product deftly utilized to capture rents and enrich a politico-eco-
nomic group close to the dictator. This explains why the govern-
ment never encouraged adding value to agricultural exports or
1. Mainly invested in the construction sector and in import and re-export trade,
as well as in the opening of financial institutions oriented to granting consumer
rather than producer credits.
2. Unlike other authoritarian regimes in South America, the Paraguayan
regime lacked an elaborated trade strategy and sought opportunities to capture
rents to benefit a backward-oriented economic and political elite. As D. Richards
has argued (2005), this predatory state has enabled only very limited productive
and industrial development. Instead, it has been concerned with administering the
distribution of rents among state actors.
186
using the energy surplus to foster industrial production. Instead, it

ended up adopting a model of informal triangular trade which
would prove unsustainable in the long run.
The economic policies adopted by the authoritarian regime were
not friendly to the productive sector and encouraged Paraguay to
build its comparative advantage as an intermediary or re-exporter
of foreign rather than locally-produced goods. 1 In that sense, Para-
guay espoused unilateral trade liberalization policies (though unof-
ficially) even before they had become widespread throughout the
region. This de facto liberalization resulted in a high level of inte-
gration with the region and the world, even before the emergence of
Mercosur. 2 But such policies failed to upgrade Paraguay’s pattern
of integration with world markets, to attract foreign or domestic
capital towards the productive sector and to open new markets for
products in which Paraguay had a competitive advantage. At the
same time, the high levels of protection prevalent in the region
strengthened the strategy of intermediation oriented-integration.
This model of development did not lead to higher rates of export-
led economic growth. In fact, when this model coincided with a
period of rapid economic growth (in 1975-1981), this was mainly
the result of the construction of the Itaipu dam. In a second stage (in
the 1980s and 1990s), when trade liberalization was even deeper,
the rate of economic growth slowed down and the Paraguayan
economy witnessed a long period of stagnation. 3
These policies faced two new challenges in the 1990s, namely: the
end of the authoritarian regime and a new regional and international
environment. In effect, the process of economic reform and
liberalization undertaken by many Latin American countries created a
complex and tightly knit network of preferential trade agreements
between countries and groups of countries. This offered Paraguay an
1. The volume of re-exported goods has been three or even four times higher
than the combined volume of agricultural commodity exports and the sale of elec-
tricity to neighboring countries.
2. Data for non-recorded trade began to be released only in the 1990s. The
estimates suggest that it represented more than half of total Paraguayan foreign
trade. The foreign trade/GDP ratio of Paraguay in the 1990s has been on average
41%, reaching a peak of 64% for 2004 (calculations based on recorded import and
export data of the BCP).
3. The average annual rate of growth of output during the 1980s was 3%.
However, during the 1990s it reached only 1.5%. The rate of growth of per capita
GDP in the two decades has been zero (Calculations of the author based on data
from the BCP)
187
opportunity for production oriented-integration in Mercosur. But this

was not compatible with the traditional trade specialization of
Paraguay. Exploiting the new environment would mean seizing
opportunities for export expansion and diversification based on
comparative advantages, leaving behind foreign trade intermediation.
Trade Integration in the 1990s:

New Scenarios, New Policies
The regional integration process of the 1990s brought about

important changes in Paraguayan relations with its neighbors and
the rest of the world. The successive administrations that ruled the
country during the transition to democracy adopted policies to
adapt to the new situation. Most of these policies were oriented to
transform the economic model and to increase the supply of export
goods with higher added value. However, the transition from an
intermediation oriented-integration to a production oriented-
integration has not been an easy one. To understand the impact of
this process on trade policy-making, I will first briefly describe the
policies adopted and then analyze their results in terms of output
and foreign trade flow growth.
Since 1991 tariff policy has revolved around Mercosur’s decision
to create a free trade zone and a customs union with a common
external tariff as of 1994. Although the target date to reach a free-
trade zone was 1994, in 1992 Paraguay implemented a tariff reform
program aimed at adapting the de facto tariff reduction implicit in
illegal trade to the legal framework. This unilateral reduction
established five tariff levels, with a peak of 10 %. 1 It was expected
that the tariff reform would facilitate Paraguay’s integration into
Mercosur, accelerating the rate of intra-zone tariff reduction
(especially from 1995 onwards). 2 At the same time, the tariff reform
signaled the degree of liberalization desired by Paraguay to rule in its
trade relations with the rest of the world (negotiations on the
1. The lowest levels (0,3% and 5 %) were for primary goods, capital goods and
intermediate goods in the industrial sector. The levels of 7 and 10 % were for finished
consumer goods. An extraordinary 20% tariff rate was adopted for automobiles.
2. In 2005, 80% of tradable goods already had a zero tariff rate. Average tariff
rates for intra-zone trade continued to fall rapidly after 1995 and until 2000 when
the régimen de adecuación that permitted Paraguay to exempt 430 items from the
free trade regime ended.
188
common external tariff [CET] would be shortly forthcoming).

However, the CET was finally set up based largely on the Brazilian
structure of protection (Brazil was the most protected country in the
region). Thus, the CET meant for Paraguay a lost opportunity to set up
a tariff structure that would favor lower costs of production and
consumption goods. Having unilaterally reduced average tariff rates
in 1992, Paraguay was forced to raise them in relation to extra-zone
trading partners in 1995.
As a small economy Paraguay was granted the possibility to
exempt a number of goods from the CET until 2005, but this
concession was not used to encourage domestic production. 1
Despite the fact that other exemptions to the CET, some
implemented unilaterally and others negotiated, were targeted at
protecting domestic production, Graphic 1 shows that the level of
trade liberalization of Paraguay in the 1990s was quite significant,
with average (weighted) tariffs of only 6%. 2 To a large extent, this
low figure was accounted for by the increase in the share of
Mercosur in total Paraguayan foreign trade. 3
Apart from tariff measures, other policies to encourage the pro-
ductive and export sectors were adopted in this period. In effect, the
issue of low domestic productivity started to be faced only in the
early 1990s with the development of Mercosur and the adoption of
structural reform policies. A first concern was the promotion of
investment. Thus, in the early 1990s Law 60/90 offered tax incen-
tives for new investments. Other policy decisions included the cre-
ation of an Export Promotion Agency (to promote non-traditional
exports), a temporary admission regime, the maquila regime, the
free-zone regime and the “single window for exports” system.
Finally, medium- and long-term credit lines were offered to
strengthen the productive capacity of medium and small-sized
firms in the agricultural and industrial sectors.
1. Tariff levels for this list of 399 goods exempted from the Mercosur CET
would converge towards the regional level by 2005.
2. At the end of the 1990s Paraguay established a special regime of duty-free
raw material and input imports from extra-zone. Later, the government implemen-
ted a maquila regime that allowed the duty-free imports of capital goods and
inputs to the maquiladoras. By 2003 Paraguay managed to negotiate the extension
of a new exemption list to the CET until 2010 and a preferential rules of origin
regime until 2014.
3. In this period, 55% of imports originated in Mercosur countries, the larger
part of which entered with a zero tariff-rate.
189
Figure 1. Paraguay
Weighted Average Tariff (%)
18.0
15.0
12.0
9.0
6.0
3.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
WATI WATE WAT
WATI: Weighted Average Tariff for Intra-zone Imports*

WATE: Weighted Average Tariff for Extra-zone Imports.
WAT: Weighted Average Tariff for Total Imports.
* The slight increase in tariffs for Mercosur between 2000 and 2003 has been the result of a
unilateral and exceptional decision adopted by Paraguay to a number of items affected by the
devaluation of the Brazilian and Argentinean currencies. These decisions were eliminated in
2004.
Source: J. Buttner. Programa World Trade Net. Caso Paraguay.
The exchange rate policy was another chapter. Paraguay had

shown a tendency to maintain an over-valued exchange rate that
favored the import sector and commercial intermediation. In the
1990s, however, the government shifted from a fixed to a floating
exchange rate system to promote exports. Yet, an examination of
the effective real exchange rate (ERER) in the 1990-2004 period
shows two things. First, that the ERER was strongly influenced by
the bilateral exchange rate with Brazil, Paraguay’s main trade part-
ner. Second, that during the 1990s there were long periods of over-
valuation, which became more frequent since 1999. 1
The question that emerges here is whether this policy of over-
valuing the local currency was simply the result of market forces or,
instead, it was a deliberate policy on the part of the monetary
authorities to favor imports, the majority of which were then to be “re-
exported”.2 Although the traditional export sector did not criticize the
exchange rate policy, non-traditional manufacturing exporters were
1. Serial calculations of the author based on BCP data.

2. According to the Exchange Rate Intervention Index developed according to
an IMF methodology for the nominal monthly exchange rate, 80% of the interven-
tions of the BCP in the 1994-2005 period were aimed at appreciating the local cur-
rency.
190
very critical.1 Therefore, while on the one hand the government

switched to a floating exchange rate system to encourage exports, on
the other hand it intervened following old-fashioned approaches in
response to pressures from re-exporting business. Thus, the attempt to
use the exchange rate as a tool for export promotion ended blocked by
old and traditional vested interests.
All these policies, except the exchange rate policy, were oriented
towards increasing the supply of higher added value exports and
seizing the opportunities offered by Mercosur. But the successive
administrations considered that production-oriented integration had
to be implemented at the expense of the comparative advantage that
Paraguay had enjoyed as a commercial intermediary. This led the
government to continue implementing policies aimed at supporting the
triangulation model. During the 1992 tariff reform, for example, the
government launched a special tourism regime which benefited all
goods subject to commercial triangulation. These goods were granted
a 7% import tariff and preferential tax treatment.2 The policy was also
aimed at reducing smuggling activities and raising government
revenues. In short, this policy decision aimed to legalize the import
side of the re-export business, even though re-exportation would
continue to break the law of recipient countries. A second measure to
protect and encourage commercial intermediation was adopted after
negotiating the CET (1994-95): since the implementation of the CET
would mean that nominal tariff rates would rise, the government
included tourism regime products among the exemptions to the CET.3
This was done to prevent lower tariff rates to eat down on government
revenue.4
In sum, this policy mix aimed at the coexistence of a new model
based on export competitiveness and the old model of trade
triangulation with proven comparative advantages. The authorities
1. It should be kept in mind here that the traditional sector is an international

price-taker and, until 2005, it was exempted from any domestic tax. The manufac-
turing sector, in contrast, in addition to paying taxes was adversely affected by the
volatility of the exchange rate. (Masi and Ruiz Diaz, 2005).
2. Goods include watches, perfumes, toys, sporting goods, informatics and
electronic goods, etc.
3. This list included 399 products whose tariff rates were supposed to converge
by 2005.
4. Currently, custom revenues account for 18 % of total government revenues.
Computing the domestic taxes collected by the Custom Office through the tourism
regime, that percentage rises to approximately 50%.
191
accepted the challenge of a production-oriented integration without

abandoning the existing intermediation-oriented integration. These
ambiguous economic signals resulted in a lack of enthusiasm to invest
in the productive sector. The result was that the impact of export
expansion on aggregate economic growth remained negligible.
Economic Growth and Foreign Trade in the 1990s

Real output growth showed a modest recovery at the beginning
of the 1990s. However, since 1996 that trend reverted and a
recession took place between 1998 and 2002. As a result, the
average GDP growth rate during the 1990s has been only 2%. 1 A
recent study comparing the performance of the tradable and non-
tradable goods sectors during the 1990-2002 period shows that the
former has recorded a lower growth rate than latter. This was
aggravated by the high volatility of the tradable goods sector, in
turn influenced by the behavior of agro-exporting activities. 2
Consequently, both the trend and the poor performance of GDP were
determined by the performance of the non-tradable sector. This
shows that in the Paraguayan case deeper trade liberalization led
neither to faster growth rates nor to increased dynamism in the
tradable sector, particularly exports.
If Mercosur was expected to be the driving force behind Para-
guayan export expansion in the 1990s, the result was a failure. One of
the causes of the weakness of the tradable sector in the 1990s was
low agricultural and industrial productivity. In the case of the former,
cotton production declined dramatically between 1991 and 2003
(soybeans was a different case). This decrease explained to a large
extent the stagnation of Paraguayan exports. 3 The historic trade def-
icit of Paraguay can also be explained by a modest export supply con-
centrated in a few traditional commodities, which contrasts with the
dynamism of recorded and unrecorded imports. The deficit has not
been overcome, but it was barely alleviated by commercial triangula-
tion. 4 However, and in spite of the policies adopted to protect the re-
export business, the value of these transactions have fallen since
1. National Accounts, BCP.

2. Masi and Ruiz Diaz, 2005.
3. Between 1989 and 2003 Paraguayan exports were below the U$S1 billion
level.
4. In the case of Mercosur, the trade balance has ceased to be negative only
because the re-exportation of extra-zone goods.
192
1995. In 2002 they reached a trough equivalent to only one-third of

its historic peak. 1
The stagnation of Paraguayan export supply during the Mercosur
years could have become a net reduction had it not been for the
increase in non-traditional exports, 2 which jumped from 170 to 376
million dollars between 1994 and 2004 and whose share of total
exports rose from 12% in the 1980s to 22% in the 1990s and to 26%
in the last few years. 3 The higher share of non-traditional exports
was basically accounted for by sales to Mercosur, the share of
which has risen in total Paraguayan trade. Thus, while 33% of
Paraguayan exports to Mercosur were accounted for by non-
traditional exports in 1999, that share rose to 40% in 2004. 4 Even
with a stagnant export supply, Mercosur’s share of total Paraguayan
exports increased from 31% in 1991 to an average of 45% in the
last few years. 5 This has not been sufficient, though, for Paraguay
to fully take advantage of the expanded regional market and to
increase the productivity of exported goods. 6
In short, the Paraguayan economy has neither taken the opportu-
nities offered by the new scenario of trade liberalization nor grown
at a faster rate. Re-export business –Paraguay’s main comparative
advantage prior to Mercosur– has declined due to the convergence
towards a CET and the 1999 Brazilian devaluation. In spite of the
unprecedented growth of soybean production that has made Para-
guay the fifth largest world producer of this commodity, the export
supply of genuinely national goods has remained stagnant between
1989 and 2002.
1. Calculations based on the BCP Balance of Payments.

2. Non-traditional exports are products other than soybean, cotton, meat and
lumber. They include other agricultural products as well as higher added value
goods.
3. Calculations of the author based on BCP data.
4. Since 2001 exports to Mercosur have increased at a yearly rate of 20%,
while non-traditional exports to the rest of the world grew at a 14% yearly rate
between 1999 and 2004. BCP data.
5. BCP data. BCP foreign trade data indicates that more than 50% of Paraguayan
exports are sold to Mercosur. Such percentage, however, is greatly inflated by soy-
beans exports to Argentina and Uruguay, which are then re-exported to extra-zone
markets, and Brazil. The latest BCP reports warn about this. As for Mercosur’s
share of Paraguayan imports, it has risen from 41% to 56% over the same period.
6. The Relative Export Effort Index, a complementary indicator of export pro-
ductivity which measures per capita exports under conditions of equilibrium,
shows lower values for Paraguay than for its Mercosur partners (1980-2002).
193
With a more open economy than those of its neighbors, with the
historically more stable macroeconomic indicators in the region
and with little state intervention in the markets, Paraguay had
favorable conditions for export-led economic growth triggered by
an increasingly liberalized regional market. An interesting question
is why this production-oriented integration model did not
materialize. The answer should be found in the difficulties to steer
a transition from a very peculiar pattern of trade specialization
based on intermediation trade to another based in new sectors and a
greater state effort in a direction opposite to that of the previous
authoritarian regime. This leads to the question of whether new
regionalism, as offered and imposed by Mercosur, has made it
easier to attain the real objectives of those in charge of Paraguayan
foreign trade policy in the 1990s and onwards.
Trade Strategies and Institutional Constraints
The process of trade liberalization and public sector reform in Latin

America during the 1990s has not been uniform. Aggarwal and
Espach (2004) argue that the countries of the region followed quite
different trade negotiation strategies, which resulted from different
perceptions of their political and economic objectives. These, in turn,
were the product of the economic characteristics of each country, the
degree and form of institutionalization of their trade policies, and the
perceptions of decision makers with respect to local and international
constraints and opportunities. Comparing trade strategies from Argen-
tina, Brazil, Chile and Mexico in the 1990s, these authors argue that in
spite of having similar levels of economic and social development and
exporting the same range of goods, these countries followed quite dif-
ferent strategies and pursued equally different strategic objectives.
The different degrees of trade liberalization have been related to dif-
ferent perceptions of the costs and opportunities of the strategies
adopted –unilateral, multilateral and bilateral– and of the relation
between these costs and opportunities and the sectors and economic
activities to be protected or promoted. Aggarwal and Espach conclude
that there are factors and processes that influence the commercial
preferences of the countries and that these differences account for the
different perceptions and trade strategies adopted by policy makers.
These authors consider it important to identify these factors and how
they relate to sub-national interests and the institutions of the state.
194
According to Weaver and Rockman (1993) the factors and

processes that influence the policy decisions adopted in a
democratic system, and the variations observed from country to
country, depend on the institutional arrangements within each state,
which in turn shape the capacity of the state and the effectiveness of
its policies. Regardless of policy objectives, policy effectiveness
depends on government capacity. By government capacities these
authors understand, “a pattern of government influence over its
environment such that it produces significantly similar results in
different decision-making areas and time periods”. Among these
capacities are mediating conflicting interests, representing public
interest, administering divisions between political and ideological
groups, implementing government policies effectively, and
reaching policy stability. These capacities are part of a model where
the quality of state institutions becomes the main determinant of
public policy. According to these authors, the process starts with
the identification of the institutional constraints of the state, which
helps or hinders efficient decision-making and in turn helps or
hinders the exercise of government capacities. These capacities are
key to the ability of governments to strategically choose the most
adequate social or economic policies.
The above-mentioned references are important to understand
how Latin American countries responded to the globalizing trends
of the 1990s. Countries had to honor their financial commitments
by adopting the reforms proposed by the Washington Consensus.
However, as trade liberalization pressures increased, especially
during the Uruguay Round of the GATT and as a result of the
unilateral decisions adopted by several developing countries, the
responses to these pressures varied, with some being more effective
than others. The reasons for this lay on the different strategies
adopted and also in the diversity of each country’s characteristics
and institutional histories, which affect policy continuity.
In the case of Argentina, Brazil, Paraguay, and Uruguay, the
response to such challenges was a strategy of open regionalism
through the creation of Mercosur. Yet its member countries did not
implement similar trade strategies, Indeed, Mercosur’s two largest
partners differed markedly on this point, which further hindered the
coordination of macro and sectoral economic policies. As described
by one analyst; trade policies in Mercosur sought to harmonize dif-
ferent national trade preferences and yet attain common political and
economic goals (Costa Vaz, 2004). In addition, state institutions vary
195
from country to country both in terms of the capacity to enforce pol-

icy and in the degree of reform undertaken to face such challenges. In
this sense, Brazil appears as the country most able, in terms of its
institutional framework, to move forward in a gradual trade liberal-
ization process, especially when compared to Argentina. Uruguay
also has a stronger institutional framework and tradition than Argen-
tina. Finally, Paraguay appears as the weakest case, which is also
reflected by the absence of a clear trade strategy.
Trade Strategies and Institutional Actors

If it is assumed that the political regime and institutional history
play a decisive role in the decision-making process and thus deter-
mine the quality of the policies adopted, it is necessary to analyze
the peculiar institutional characteristics of Paraguay to understand
its trade policies. In this sense, it is clear that the authoritarian leg-
acy inherited by the democratic regimes of the 1990s have imposed
severe constraints and obstacles to the development of stable and
high-quality policies, especially concerning the administration of
conflicting interests and the definition of sectors to be favored to
attain medium and long-term development objectives.
Inherited state institutions were small, offering little coverage of
basic public services 1 and with high degrees of informality and cor-
ruption as a result of a pre-modern model of public administration. 2
Fifteen years after the fall of the authoritarian regime, these limita-
tions are yet to be overcome. Ministries and public agencies are still
closed compartments and human resources are administered on the
basis of political loyalties and rewards, with no truly professional
career service or meritocracy in place. This state of affairs, which
has persisted until now, has resulted in a low quality public admin-
istration as compared to other Latin American countries.
However, the governments of the transition period seemed to
have understood that Latin America and the world were entering a
new period, and that maintaining Paraguay isolated would damage
economic growth prospects. This is why joining the WTO and
Mercosur were essentially political decisions and part of a number
of initiatives aimed at ending the international isolation to which
1. The lowest in Mercosur and one of the lowest in Latin America.

2. Due to an economic structure based on exports of primary products, low
levels of industrialization and the commercial triangulation business, the state
became a very important instrument for the ruling political elite to extract rents.
196
Paraguay had been subjected during the latter part of the

authoritarian regime. The regional integration process was not a
constituent part of the democratic transition, but it played the role
of an exogenous factor pressing for changes in commercial policy.
Domestic institutions did not elaborate a coherent set of policy
priorities and the Foreign Relations Ministry (MRE) played no
significant role in the negotiations. Moreover, it did not even have
a structure or a trained staff capable of handling the complex issues
at stake. 1 Thus, the decision to unilaterally reduce tariffs, the
promotion of non-traditional exports and investment, and the
support of triangular trade were all adopted without its
participation. In effect, the Ministries of Finance (MH) and Industry
and Commerce (MIC) took up the leadership during the
negotiations. 2 In the early 1990s the MIC and the MRE had a strong
dispute over their roles in the negotiations and the MRE launched a
process of internal restructuring aimed to strengthen its commercial
and economic capacities. But the MIC was the institution that more
pro-actively sought to promote a new commercial strategy based on
seizing the opportunities opened by Mercosur and favoring a new
model of economic development (Masi, 1995). The MH, in turn, had
a fiscalista approach focused on increasing government revenues.
This led to its support of the “formalization” of triangular trade,
which by then had become the main source of government
revenue. 3 The MH also instituted various fiscal incentives for
investment and exports, but postponed decisions to grant such
benefits to the industrial and service sectors. The heightened
dispute between the MIC and the MRE to take part in Mercosur
negotiations in the early 1990s led to the creation of the Integration
Ministry, which would be a meeting and coordinating point for all
government agencies. It would supply them with technical
expertise as needed, and would develop the official policy on the
1. The Foreign Relations Ministry set up the Council on Foreign Trade and led
the ALALC-ALADI negotiations during the 1960s and 1970s. After the failure of
such initiatives, the MRE lost all capacity to handle international trade negotiations
to the point that Mercosur negotiations were led by the Political and not the Econo-
mic Under-Secretariat.
2. To such effect, the Ministry of Finance created an Under-Secretariat of Eco-
nomy and Integration and the Ministry of Industry and Commerce a number of
specialized units.
3. The formalization of the re-export business through the creation of the tou-
rism regime reached only the import side, since re-exports to Brazil continued to
be conducted illegally.
197
matter. (Masi, 1995). Thus, Mercosur forced a greater degree of

coordination between public agencies in order to develop a trade
policy strategy, to incorporate a more technical and professional
staff to public institutions, to open dialogue with the business sector
before making policy decisions, and to reorganize institutionally
and professionally the MRE as the chief negotiating agency.
In spite of these advances, other factors prevented the competitive
insertion of Paraguay in the region and the world. First, the newly
created Ministry of Integration was dissolved at the end of the
1990s. 1 Second, the instruments set in place to promote exports and
investments were frequently used for other purposes. Third, the poli-
cies designed to support activities with comparative advantages were
not part of a competitiveness plan with medium and long-term
goals. 2 Fourth, the strong pressure of economic groups managed to
create plenty of loopholes in the tax structure. 3 Unwilling or unable
to fight the high levels of tax evasion and elusion, the MH became
increasingly dependent on revenues from foreign trade, and espe-
cially from the tourism regime. Finally, the frequent changes of heads
of agencies and their technical staff (due to high political instability)
also hindered the development of a coherent set of policies.
It is true that the governments of the transition to democracy
gradually hired professional and technical staff to fill key public
service positions and to help handle a process of fiscal, monetary, trade
and financial reforms. Yet, due to the lack of institutional reforms,
corruption and influence peddling, inefficiency remained rampant.
These institutional weaknesses prevented the state from reconciling
conflicting interests or adopting a coherent set of policies to support
modernizing economic agents. The ability of that group of
professionals to influence policy-making became completely
overshadowed by the growing number of political groups, both from
the government and the “opposition” that emerged along with the
democratic transition. These groups, rather than defending doctrinarian
positions or favoring a certain set of development policies, chose to sell
their votes in Congress to the highest bidder, continuing the
1. It never really functioned as a Ministry of Integration. It had few resources

and their heads were appointed and removed following the ebbs-and-flows of
domestic politics.
2. In 2000 a Competitiveness Plan was developed with the assistance of the
Japanese Cooperation Agency JICA. It has never been implemented.
3. In 1991 the tax structure was revised and simplified and the VAT was adop-
ted.
198
clientelistic practices of the authoritarian regime. Thus, Congress

became an irrelevant actor in determining the direction of trade policy.
The context of the 1990s forced the countries of Mercosur to
develop a response to external challenges, but each member
adopted relatively different strategies. Argentina, Brazil and Uru-
guay pursued trade liberalization strategies at different paces, but
they all shared similar pre-Mercosur development models. This
was not the case for Paraguay, which had to choose between insist-
ing with a sui generis trade liberalization process –what I have
called intermediation-oriented integration– or replacing it by
another capable of seizing the opportunities opened by the
expanded regional market. Ambiguity and ambivalence at the high-
est level provided the framework for an ambiguous policy. As a
result, a set of policies that protected the triangulation business
coexisted with another supposedly aimed at promoting agricultural
and industrial export competitiveness. This policy mix was not so
much the result of government-made decisions, but the by-product
of pressures posed by conflicting interests.
Trade Strategies and Economic Agents

Governmental responses to the challenges of trade liberalization
can be explained not only in terms of interests –sectoral, political or
ideological– of the agencies involved, but also of private sector
pressures. This set of interests and positions, in turn, can strengthen
or weaken the state’s capacity to deal with issues or produce a
policy stalemate. As far as the private sector is concerned, the first
question would be whether its participation helped or hindered the
quality of the policies adopted. The second question would be
whether, given diverse and conflicting interests, this participation
had a disturbing impact.
According to Sylvia Maxfield (2004) the issue is whether the
participation of the private sector is constructive. She provides the
following answer:
The histories of business organizations […] suggest that two fac-

tors provide part of the answer: the stance of government, that is,
whether it is responsive to particularistic pressures; and the history
of business organizations, specifically whether it succeeds in aggre-
gating interests. 1
1. Maxfield (2004), p. 60.
199
The author examines the patterns of business-government

relations in the cases of Mexico, Chile, Brazil and Argentina in the
1990s. In the first two cases, Maxfield argues, business sectors had
been able to work out their differences and speak with one voice.
That has favored successful export-led growth. In the Mexican
case, in particular, the historic exclusion of business groups from
political parties was a particularly relevant factor. In both cases, the
author says, business and government established a pattern of
cooperation rather than confrontation and a proactive rather than
reactive stance. This permitted the government to retain an
important degree of institutional independence in trade policy-
making and granted confidence to domestic and foreign investors.
In contrast, Brazil and Argentina show business organizations
that were disperse and divided, with a reactive rather than a
proactive stance, and with patterns of interaction with the
government based on individual or sectoral links. This led to a
pattern of intervention focused on gaining special favors to
promote or protect one sector or the other. Unlike Mexico and
Chile, the governments of Brazil and Argentina first decided and
implemented trade liberalization policies and only later sought the
support of business organizations. Indeed, the very constitution of
Mercosur responded to a political decision made by the two
governments rather than to pressures from the private sector.
The Paraguayan case mirrors the experience of its main partners,
but with the peculiarities of the historic government-business-
interest group relations inherited from the authoritarian regime.
The main allies of the authoritarian regime, among business, had
been the large agricultural producers, the intermediaries (basically
importers) and the contractors with the state. The first group (large
agricultural producers) were graciously granted (in most cases
illegally) vast tracts of land, cheap credit and tax exemptions. The
second group (importers) was favored by a sui generis trade
liberalization process that laid very favorable conditions (including
an overvalued exchange rate) for the import business. In the case of
contractors, the construction of Itaipú opened the door to
significant monopoly rents.
Based on the above, the authoritarian regime created a political
and business elite that did not live by the rules of the market, but,
instead, by the informal canons of the favors and privileges granted
by the regime. Yet in each of these sectors there were firms and
groups that operated in a more formal fashion and lacked special
200
linkages with the regime. This group joined FEPRINCO and

included: importers and the trading sector, industries –UIP; the
least favored sector, and ranchers (ARP). 1 Business organizations of
the formal sector were firmly controlled by the regime and their
demands were processed either individually or by separate associa-
tions, in order to prevent the exercise of organized pressure. Both
the importing and ranching sectors were strong government allies
unwilling to put pressure through organized actions. Although this
was not the case with the industrial sector, the government found
ways to keep it well under control. Thus, business organizations
lacked independence from the government and had no chance to
influence trade or development policies. 2
The political and economic opening of the 1990s allowed
disputes among different economic sectors to emerge. It also
permitted the creation of new organizations –such as raw materials
exporters or co-operatives– and a reactivation of existing ones. 3
Prominent representatives of several economic groups were given
cabinet posts, the most notable case being the repositioning of
industrialists. 4 Business organizations set up several councils to
cooperate with the government in designing commercial and
economic policy strategies. Over time, however, those councils
ended up as a mosaic of diverse interests without effective
mechanisms of aggregation. Thus, instead of supporting the
government and contributing to develop a coherent set of trade
policies, the prevailing disputes heightened the old practice of the
authoritarian regime, namely: approaching government offices and
officials on an individual basis and seeking, particularistic
decisions that ended up being contradictory as a whole.
The governments of the transition also contributed to this lack of
public-private cooperation by not confronting head-on the
corruption and illegality associated with the re-export business. In
practice, they continued to favor the political and economic elite of
the authoritarian regime. Apart from the intensive use of bilateral
and informal channels, business organizations frequently issued
1. FEPRINCO (Federación de la Producción, la Industria y el Comercio), UIP

(Unión Industrial Paraguaya), and ARP (Asociación Rural del Paraguay).
2. See Caballero and Masi (1989).
3. Within each organization emerged a myriad of chambers and sector-specific
organizations, such as small entrepreneurs, maquila exporters, etc.
4. During most of the decade the Ministers of Industry and Commerce and its
main collaborators were businessmen of the formal sector.
201
statements and policy proposals that looked like broad government

agendas rather than specific sector recommendations.
In spite of their differences, both the importing and industrial
elites shared the same position regarding regional integration. In
effect, many business organizations argued that Mercosur did not
help Paraguayan exports to regional markets. Instead, the region
became a major source for macroeconomic disturbance. Conse-
quently, they demanded to restructure the participation of Paraguay
in Mercosur or even to abandon it, but without offering viable alter-
natives 1.
The disputes between two main groups of economic agents have
influenced policy decision-making in the 1990s. First, those bene-
fiting from doing business with the state and the informal economy
remained powerful economic groups with strong links to the ruling
party and a rising influence in Congress. These groups, which are
not necessarily members of business organizations and do not act
openly to gain government concessions, are largely concentrated in
the area of services and triangulation business.
Second, those business organizations that operate in more formal
and competitive markets, that managed to have their representatives
in relevant positions at the MIC and other government agencies, and
that permanently demanded policies to foster production and
industrialization and to combat informality. However, since these
groups have failed to develop a common stance on trade policy issues,
they ended up seeking equally particularistic benefits. Moreover, by
regularly misusing or abusing the incentives to promote investments
and exports, they lost credibility before the government technical
staff, generating distrust rather than confidence.
In sum, since the 1990s government-business relations involved
two main private sector actors. On the one hand, the representatives
of the business elite, some of them appointed to cabinet posts and
influential over public policy decisions and on the other, the rent-
seeking elite with strong ties to the ruling party and its leaders. The
picture is not complete without taking into account Congressional
representatives largely devoted to profitable business deals and
1. Importers have opposed Mercosur because of the high CET. The industrial
sector, in turn, has claimed that Brazil and Argentina obstruct Paraguayan Exports.
However, the Paraguayan government submitted only a few complaints concer-
ning non-tariff barriers to Mercosur. Most non-traditional exports to Mercosur are
manufacturing goods.
202
lacking a democratic institutional praxis. As a result, public policy

remained contradictory and simply reflected the parceling of areas
of influence within the state. The resulting trade policy was
something more than the coexistence of different preferences: it
was a string of concessions to different and often opposing
economic agents. The trade liberalization of the 1990s also
contributed to the emergence of a third business group made up by
innovative and successful entrepreneurs. In spite of the informality
of the economy and the corruption and clientelism that pervades the
state, this group of modernizers has managed to increase
productivity, significantly raise exports and supply domestic
demand by substituting imports in some areas. 1 Without making
distorting sector demands, using wisely the existing structure of
investment and export incentives and bypassing a myriad of
obstacles placed by the state itself, these businessmen have become
the leading force for a new model of economic development.
Although not organized as such, this group has the possibility to
become a key actor in the development of a sustainable strategy of
production oriented-integration in Paraguay. The question still
remains about whether the officials in charge of commercial policy
have decided upon the convenience of a production oriented-
integration strategy and whether there is enough will to overcome
the pressure of domestic vested interests.
The Future of Trade Policy in Paraguay:

Change or More of the Same?
It is clear that after 15 years of Mercosur, Paraguay has obtained

little benefits due, among other factors, to the lack of affinity
between its economic system and the regional integration process.
It is possible to criticize Mercosur on the grounds that it straight-
jacketed Paraguay –hindering its economic growth by wrestling
away its main comparative advantage. But it is also possible to
challenge the viability and sustainability of a model organized
around trade intermediation and the export of raw materials, even if
Mercosur had not moved towards a CET. In effect, it is doubtful,,if
1. For a description of this new group see “Quién es Quién en la Empresa.

Entrevistas a Empresarios Exitosos”, MES ECONOMICO, several issues, CADEP
1995-1999.
203
after bringing the re-export business into the formal economy,

Paraguay still maintains a comparative advantage in that activity. 1
However, recent new developments are challenging the coexistence
of a policy of promoting the export sector and simultaneously main-
taining trade intermediation as the leading force behind economic
growth. Interestingly, since 2001, and for the first time in two decades,
the value of triangular business was smaller than that of genuinely
national exports. Likewise, especially after 2003, exports seem to have
taken off surpassing the levels reached during the past decade.2 The
current administration has put forward a plan to promote sustainable
economic growth based on a new model of export-oriented agro-indus-
trialization, in replacement of the faltering model of trade intermedia-
tion and raw material exports. That program was adopted in a plan
approved in November 2004 with the participation of government offi-
cials and representatives of the private sector and civil society. The pro-
gram is known as Plan de Crecimiento con Equidad. Paraguay 2011
and one of its four components is Diversification, Added Value, and
Exports. This chapter seeks: a) to increase public and private invest-
ment to promote new export-oriented businesses; b) to industrialize
traditional export goods; c) to increase the production of exportable
non-traditional goods; d) to use Mercosur as a vehicle to develop pro-
duction chains and increase the exportable supply of competitive
goods; and e) to open new markets for export goods. 3
The new administration also started to implement policies aimed
at fulfilling the objectives of the Plan, especially promoting a
greater export supply and opening up new markets. Thus, several
Competitiveness Forum with the participation of high government
officials and business representatives have set specific action plans
to increase productivity in sectors where the country enjoys com-
parative advantages. These forums are complemented with sector-
1. The illegality of this business lies not only in invoicing Paraguayan imports
from extra-zone below real price, but also in illegally re-exporting these goods to
neighboring markets. The elimination of the double charge of import tariffs and
the free circulation of extra-zone goods expected to invigorate from 2009 onwards
would legalize such transactions. However, there is a strong possibility that they
will move towards the large distribution centers of Argentina or Brazil.
2. Between 1989 and 2002 average annual export values reached US$ 1 billion.
In 2002 exports reached US$ 1.3 billion and in 2004 they rose to US$ 1.6 billion.
Data from BCP.
3. Gobierno de Paraguay (2004) Plan de Crecimiento Económico con Equidad
2011.
204
specific negotiating groups aimed at improving the competitiveness

of some segments of production chains. The new administration
has also broken the traditionally reactive role of Paraguay in Mer-
cosur by succeeding, for example, to enact a structural funds initia-
tive aimed at addressing the problem of structural asymmetries and
helping less developed countries and regions in Mercosur. 1 The
new administration seems to understand that all efforts made to fos-
ter a development strategy based on export-oriented agro-industri-
alization will not be enough to ensure a competitive insertion into
the region and the world, unless it is accompanied by policies of
special and differential treatment. Social and economic indicators
in Paraguay are the worst in the region and its structural asymme-
tries are the greatest, not least the fact of being a land-locked coun-
try. It is understood that preferential treatment does not replace, but
instead complements, appropriate domestic strategies.
These efforts are part of other policies to restore macroeconomic
stability and promote fundamental reform in public sector finances in
order to increase the formality of the economy and improve the busi-
ness climate. 2 These policies have been implemented through agree-
ments with the business elite, political leaders and congressional
authorities. This has given the government domestic and interna-
tional credibility and laid the basis for new investments in the export
sector. However, after two years in office, little progress towards a
trade strategy clearly favorable to export-oriented agro-industrializa-
tion has been made and a number of difficulties persist. First, no per-
manent working group to implement the Plan de Crecimiento con
Equidad has been established. Second, no true coordination among
government agencies to promote export competitiveness exists.
Third, urgent institutional reforms in sector ministries to improve
effectiveness have been postponed. Finally, a number of trade policy
1. The most important of these policies has been the creation of the Fondos de
Convergencia Estructural del Mercosur (FOCEM). To establish this structural fund
Paraguay has contributed with 1% of its resources, but will obtain 48% of its dis-
bursements.
2. In addition to avoiding an imminent default and stabilizing main macro-eco-
nomic indicators, during its first two years the Duarte Frutos administration pushed
forward reforms such as: a) a balanced budget with the first primary and total budget
surplus in decades; b) a tax reform to introduce the personal income tax, the income
tax to agricultural and ranching enterprises, and the generalization of the VAT; c) the
reform of the public banking sector; d) the reform of the public sector pension sys-
tem; e) the reform of public sector firms; and f) a new customs code.
205
decisions continue focused on promoting re-exporting business.1

Considering these limitations, the most likely scenario is an inertial
one that will extend the 15 years of coexistence between antagonistic
trade strategies. A real change will demand seizing the opportunities
to access foreign markets through production oriented-integration.
The challenge for Paraguay is to set and maintain a consistent
trade policy. The structure inherited from the authoritarian regime
has been the result of fortuitous developments and not of a detailed
plan or strategy. Policies have been basically oriented to protect the
interests of a rent-seeking elite and democratic governments have
failed to find a clear-cut path to alternative policies, staying marred in
a process of inertia and ambiguity between the old and the new. The
re-exporting business has not been an important source of employ-
ment creation and the bulk of earnings have not stayed in the country,
but mostly benefited Brazil. Informal trade has also diverted consid-
erable inflows of domestic and foreign investment away from the
labor-intensive export sector and has contributed to the informaliza-
tion of the Paraguayan economy. In contrast, an export-oriented agro-
industrialization strategy would have three main advantages. First, it
would be based on known comparative advantages. Second, it would
reduce the dependence of Paraguay on commodity exports, espe-
cially soybeans (which has led to low job creation because of the
extensive nature of exploitations). Third, it would enable the creation
of production chains that generate new wealth.
In spite of all the discussion about leaving Mercosur 2 and adopt a
strategy of multiple bilateral free trade agreements, these proposals
seem to have weak foundations. First, the country is land-locked and
its neighboring countries have historically played a leading role in
Paraguayan foreign trade. Second, abandoning Mercosur would
mean loosing already conquered markets for non-traditional exports.
1. Among the decisions promoted by Paraguay and approved by the Consejo

de Mercado Común de Mercosur (CMC) in December 2003 is the decision to
extend the CET exemption list until 2010. This list includes mainly items belonging
to the tourism regime. A recent government decree lowered the already low inter-
nal taxes on triangulation activities with the alleged objective of adjusting them to
the current situation and thus formalizing them at the Ciudad del Este border.
However, it is well known that the Brazilian-Paraguayan trade that crosses trough
the bridge on the Paraná River is only a small fraction of total informal trade. This
initiative clearly aims at benefiting the triangulation business.
2. In 2005 several high government officials, including the Vice President,
have hinted at that and suggested that a free trade area with the United States
would bring more benefits to Paraguay than Mercosur.
206
Finally, a small country without economies of scale would face many

obstacles to become a global trader. Being part of Mercosur seems to
offer more advantages than disadvantages. Although the Mercosur
countries are specialized in the production of similar goods, small
countries can find complementarities and participate in regional pro-
duction chains to supply either the regional or the international mar-
kets. Thus, Mercosur remains an important asset for a small country
like Paraguay and a vehicle to increase its exportable supply.
In order to pursue a trade strategy based on a more competitive
insertion into the world market, a new type of public-private alli-
ance must emerge. The matrix of this new alliance should be based
on the innovative and successful group of export-oriented entrepre-
neurs. This should enable the emergence of a consensus around a
new trade policy based on the productive sector rather than the
informal sector. This new alliance should also be supported by a
clear institutional leadership within the state as far as trade policy is
concerned. In conclusion, Paraguay needs a trade policy aimed at
promoting exports and generating jobs, based on Mercosur as a
platform for its insertion in the world economy. This policy should
be founded on well-coordinated public sector efforts and a strong
institutional leadership capable of reaching long-term consensus
with the private sector and willing to engage in a new model of
development. This new model should build over the incipient
results of production oriented-integration.
Fernando MASI*
REFERENCES
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Strategy: The Curse of Asymmetric Integration in the World
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Dynamics of Latin American Trade. Woodrow Wilson Center Press –
Stanford University Press.
* I thank Francisco Ruiz Diaz, associate economist of CADEP, for his valuable
help in the quantitative analysis of Paraguay’s foreign trade decisions.I also thank
Diego Abente Brun, associate political scientist of CADEP for translating and edi-
ting the text in English.
207
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208
Chapter 5
The Domestic Determinants
of Mexico’s Trade Strategy
Introduction
Mexico has been a laggard and a leader in trade policy. Mexico,

hesitantly embarked in trade liberalization in the 1970s, only to end
up with a closed economy in 1982. As part of the efforts to stabilize
the macro-economy, Mexico unilaterally liberalized its trade
regime in the 1980s and joined the General Agreement on Tariffs
and Trade (GATT) in 1986 (Mexico was the last country to join the
multilateral trading system among the countries included in these
studies). Starting in the 1990s the country embarked on a series of
bilateral and regional trade negotiations, the most important of
which were the North American Free Trade Agreement (NAFTA,
1994) and the Association Agreement with the European Union
(EU, 2000). As of 2005, Mexico had free trade agreements with
43 countries in the Americas, Europe, the Middle East (Israel) and
Asia (Japan). 1
Thus, it appears that after being a laggard in trade policy, Mexico
has become a world leader steered by a clear strategy. However,
Mexico seems to have lost its sense of direction in the last few
years: Congress has sought a stronger voice in trade policy-making,
some business groups have demanded a moratorium on new free
1. This chapter does not attempt to provide a history of Mexico’s trade policy.
For background on Mexico’s trade policy reforms and trade strategies see, inter
alia, Blanco (1994), Pastor and Wise (1994), Flores 1998, Ortiz Mena L.N.
(2004a), Ortiz Mena L.N. (2004b), and Ortiz Mena L.N. (2005a).
209
trade agreements and, at the same time, the Economy Ministry has
pursued further unilateral liberalization. Preference erosion, and
especially Chinese exports, have damaged Mexico’s share in the US
market and exports to third markets have not grown as much as
expected. With the advent of democracy in 2000, trade
policymaking has become increasingly pluralistic and, likewise,
more complex. Unless, and until, a broad consensus regarding the
basic outlines of trade policy is reached, it will be impossible for
Mexico to have a coherent trade strategy.
This chapter examines the recent performance of Mexican trade
strategies by providing an overview of the use of tariffs and non-
tariff measures, export promotion schedules, and regional and mul-
tilateral initiatives (section I). It then addresses the role played by
structural and institutional factors in determining Mexican policy
choices, including the product and market structure of trade,
domestic political institutions and the role of key economic and
political actors (section II). It concludes by highlighting the chal-
lenges for the next six years, i.e. for the government that will be in
power from 2006 to 2012.
Mexican Trade Strategies and Revealed Preferences
Mexico’s significant unilateral liberalization in the 1980s, its

participation in the Uruguay Round and, especially, its active pur-
suit of free trade agreements since the early 1990s have cut tariffs
down to very low levels. Most favored-nation tariffs are bound at
35%, but applied tariff rates are much lower. However, non-tariff
barriers remain important, especially the use of anti-dumping (AD)
actions. In turn, export promotion policies focus more on adminis-
trative actions (such as sector-based programs comprising, among
other measures, unilateral tariff reductions on temporary imports)
than on adequate provision of export finance.
Import Policies
Tariffs, Import and Export Permits
Mexican bound tariffs rates are relatively high (35%), but the
simple average of MFN applied ad-valorem duties is 18% (24.5% in
the case of agricultural goods and 17.1% in the case of non-agricul-
tural goods). In 2001, MFN duty-free imports were about 10% of all
210
imports. 1 Given the concentration of Mexican foreign trade in FTA

partners, both the simple average of applied rates and, especially,
trade-weighted averages are much lower.
Table 1. Mexico’s Tariff Structure

Item 1995 2000 20051
Number of import tariff lines ...................... 11,089 11,439 11,929
Percentage of controlled import tariff lines2 0.99% 0.99% 0.99%
Export tariff lines ........................................ 5,329 5,303 11,9293
Percentage of controlled export tariff lines 0.98% 0.99% 1%
Simple average ad-valorem import duty ...... 13.7% 16.2% 13.7%
Weighted-average ad-valorem import duty 2.9% 3% 3.5%
1. Figures for 2005 are estimates calculated in June.
2. Tariff lines are classified as free, controlled and prohibited. In this table “controlled” and
“prohibited” tariff lines are reported as “controlled.”
3. The number of export tariff lines increased substantially after 2002, when they were
adjusted according to the provisions of the World Customs Organization.
Source: Presidencia de la República (2005), p. 351.
Table 1 shows that Mexican tariffs have been remarkably stable

during the last ten years. It is striking, however, that the weighted-
average ad-valorem import duty increased slightly despite the fact
that the implementation of FTAs has proceeded apace since January
1994. Countries with which Mexico does not have an FTA, face sig-
nificant discrimination on the Mexican market and, at any time,
rates as high as 35% can be applied.
Controlled imports and exports comprised around 1% of total
tariff lines during the past decade. As of November 10, 2005, this
figure fell when all import permit requirements were abolished.
This streamlining will apply, inter alia, to the following sectors:
agriculture, chemicals, ceramics, glass, rubber, iron and steel, fats
and oils, tuna, clothing, textiles, footwear, wood, kitchen
appliances, toys, and bicycles. Import permits will still be
required for some final imports, covering 192 tariff lines and
some of the following sectors: oil derivatives, used tires, used
clothing, fructose, used vehicles (49 tariff lines), automobile and
truck components, anti-pollution equipment, agricultural items
included in Economic Complementation Agreements (ECAs), and
1. http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=
E&Country=MX. Accessed on October 3, 2005.
211
some items included in the Chile-Mexico and Uruguay-Mexico

FTAs. Export permits were eliminated for 7 tariff lines.
Consequently, at the end of 2005 only 19 tariff lines were still
subject to such permits (most of them covering oil derivatives).
According to the Ministry of the Economy, the elimination of the
aforementioned import and export permits was due to them being
obsolete since they were granted automatically and in some cases
implied double permit requirements, such as with chemicals used
in the pharmaceutical industry, which required both, the Ministry
of the Economy’s and the Ministry of Health’s authorizations.
One ministerial clearing was deemed sufficient. 1
Measures Against Unfair Trade Practices
Mexican exports were frequent targets of US AD measures in the
1980s. During NAFTA negotiations, Mexico had as one of its main
goals to eliminate, or at least curb, unwarranted and unilateral AD
actions by the US.2 In fact, Mexico proposed to eliminate the use of
AD actions within the free trade area and to use competition policy
instead. However, since then, Mexico has also become an avid user of
AD and been loath to do away with that instrument in its other FTAs.
The number of anti-dumping and countervailing duty (CVD) and
safeguard resolutions averaged 59.43 in the years prior to NAFTA
(1987 to 1993). That average increased to 86.82 in 1994-2004. 3 AD
is the instrument most frequently used by Mexico to protect domestic
industries (accounting for 91.58% of all trade remedies from 1987 to
1994). 4 Chinese exports have been a frequent target of AD actions.
In fact, Mexico was the last country to grant its acquiescence to
China’s entry to the World Trade Organization (WTO). Moreover, as
part of China’s Accession Protocol, Mexico secured an agreement
whereby it would be able to maintain AD actions against a host of
Chinese exports until 2007, without China being able to bring the
matter under the WTO’s Dispute Settlement Understanding. 5
1. Reforma, “Agiliza Gobierno Comercio Exterior,” November 10, 2005, p. 1A

(Business Section), and Ministry of the Economy Press Bulletin 145 available at
http://www.economia.gob.mx/?P=125&WrapperElement=link&IdWrapperEle-
ment=25 Accessed on November 10, 2005.
2. Cameron and Tomlin (2000), p. 45.
3. UPCI (2005), p. 103.
4. UPCI (2005), p. 104.
5. See World Trade Organization (2001), Annex 7. The other countries
allowed to maintain restrictions on imports from China are Argentina, the Euro-
pean Communities, Hungary, Poland, and Turkey.
212
Figure 1. Mexico: Investigations and AD/CVD Duties by Country 1987-1994

(Top Five Countries)
80
70
60
50
Investigations
40
Duties
30
20
10
0
il
na
az
a
es
el
re
hi
Br
at
zu
Ko
C
St
ne
h
d
Ve
ut
te
So
ni
U
Source: UPCI 2005, 112.
Figure 1 shows that the US is by far the country against which the
Mexican authorities have launched the highest number of AD/CVD
investigations. However, the number of cases that ended in an
actual imposition of duties was relatively low (18%). In contrast,
China has faced 50 investigations but 37 of them ended with the
imposition of duties (a 74% incidence rate). Five sectors account
for more than 90% of all duties imposed between 1987 and 1994,
and Chinese exports figure prominently in them. 1
Table 2. Mexico: Duties in Force by Sector 1987-1994

(Percentage of Duties in Force)
Sector Percentage of Total Duties
I. Basic Metal Industries .................................... 23.63
II. Chemical Substances, oil products,
rubber products and plastic ................................. 27.16
III. Fabrics, clothes and leather industry ........... 9.88
IV. Metal products, machinery and equipment . 2.47
V. Agriculture, forestry and fisheries ................. 12.35
VI. Other manufacturing industries ................... 17.28
VII. Lumber products ........................................ 1.23
Source: UPCI (2005), 114.
1. See UPCI (2005), p. 115-123.
213
While Mexico rarely uses CVD actions and even more rarely
safeguards, it reached an agreement with China, approved by the
WTO in mid-2005, whereby it will continue to impose safeguards
against a number of Chinese exports until 2013. 1
Export Policies
Mexico implements several export promotion policies; the most
important of which are maquila, PITEX 2 and sector programs.
Export financing has been limited and cumbersome, including
onerous warranty requirements, for at least the past decade.
Export Promotion
Maquila (in-bond processing), an export promotion strategy
based on import duty rebates and preferential tax treatment, started
in the mid 1960s and still remains an important trade policy
instrument. For firms to benefit from the maquila regime, they
must export no less than 10% of total sales. 3 Approximately 45%
of total exports in 2004 were made by the maquila sector. 4 The
sector is on the wane, at least temporarily: it reached a peak in 2001
with 3,630 units employing 1.2 million people. By 2003, the
number of units had decreased by 21.21% and employment had
contracted by 11.41%. Part of the contraction can be attributed to
the US recession (which is the market of destination for 98% of
maquila exports); to changes in Mexican tax laws (which ended the
tax exemption to maquiladoras in 2001; but reinstated it in 2004);
to greater competition from China, the Caribbean and Central
America; and to a relatively strong peso. 5 NAFTA also brought
about changes to the maquila regime: it extended duty-free
treatment to all North American components (whether or not to
used by maquilas), and in 2001 it ended all import duty drawbacks
on non-NAFTA components, adversely affecting many Asian firms. 6
The government has responded by unilaterally reducing tariffs on a
number of items. 7
1. http://www.economia.gob.mx/pics/p/p104/230805.pdf, Accessed on October 10,

2005.
2. PITEX is the Temporary Import Program for the Production of Export Goods.
3. Or $500,000 USD.
4. Presidencia de la República (2005), p. 344.
5. Hufbauer and Schott (2005), p. 48-49.
6. Ibid.
7. See the paragraphs on sectoral programs (PROSECs) below.
214
The other long-standing export promotion program is PITEX.

The program allows the duty-free temporary import of inputs to be
used in the production of exports, but under a more restrictive
regime than in the case of maquiladoras. 1 At least 30% of the
annual sales of PITEX companies must be exported and the regime
also allows for the import of machinery, spare parts, and laboratory
and measurement equipment which will not be re-exported but
used in the production process of export goods. By 2004 there were
3,013 maquila programs and 3,516 PITEX programs, whose exports
accounted for 87% of total manufacturing exports. 2
Another program, ECEX (Foreign Trade Enterprises), supports
the marketing of Mexican products abroad through the identifica-
tion of demand for certain products, promotional campaigns, and
clustering of small producers. To qualify, firms must export at least
$250,000 USD annually and use inputs from a minimum of three
national producers. Its impact is marginal compared to maquila and
PITEX: in 2004 there were 400 ECEX enterprises, with total exports
of $4.2 billion USD. By comparison, maquila and PITEX exported
$137 billion USD that same year. 3
ALTEX (Highly Export-Oriented Firms), established in 1990,
offers a streamlining of administrative foreign trade requirements
for regular exporters. Such firms also have access to SICA, the
Commercial Intelligence System operated by the Ministry of the
Economy, which provides information on export opportunities.
Mexican firms that supply inputs for maquila, PITEX, the auto sec-
tor, 4 and ECEX may qualify as PRONEX (National Suppliers) and
receive preferential fiscal treatment.
Sector Promotion Programs (PROSECs) were introduced in 2002.
They allow the import of certain inputs with preferential (reduced)
import duties if they are used in the following industries: capital
goods, coffee, footwear, chocolates and candies, electric and
electronics, photography, automobiles and their parts, toys and sports
1. Maquiladoras are allowed to undertake a wider array of activities than PITEX

firms, and are thus able to import finished and semi-finished products, unlike PITEX
firms. For greater information on the difference between the maquila and PITEX regi-
mes, see North American Free Trade & Investment Report (2005), 1, p. 5-8.
2. Subsecretaría de Industria y Comercio (2005).
3. Subsecretaría de Industria y Comercio (2005). In fact, ECEX exports
decreased by 21.14% from 2001 to 2004.
4. To qualify for preferential treatment, auto firms must have a safe harbor
(depósito legal).
215
equipment, wood, rubber and plastic manufactures, agricultural

machinery, mining and metallurgy, furniture, paper and cardboard,
pharmo-chemicals, medications, medical equipment, chemical, iron
and steel industry, textiles and clothing, and transportation. 1 PROSEC
is an aggressive export promotion program that operates largely
through the unilateral reduction of tariffs and that was encouraged by
the commitment undertaken in NAFTA to phase out duty drawbacks.
Several duty reductions have taken place since 2002 benefiting firms
using imported inputs. Predictably, these have upset some local
producers. 2 In sum, the most important export promotion programs
are maquila, PITEX and, more recently, PROSEC, although an array of
other instruments is used. Despite some of these programs, the use of
local inputs has not increased. 3
Export Financing
The Mexican financial crisis of late 1994-1995 placed the
financial system under severe stress. Bank lending was radically
curtailed, including that of the Banco Mexicano de Comercio
Exterior (BANCOMEXT). 4 In 2004, BANCOMEXT granted loans for
a total of U$S 5.4 billion, equivalent to a 21.8% increase over the
2000 figure, but to a 17% reduction compared to 2002. Approxi-
mately 40% of the loans were channeled to manufacturing and
services, and 38% to the agricultural sector. 5 According to
Arnulfo R. Gómez, a former high ranking BANCOMEXT official
who was in charge of the Bank’s FTA Department during the
1990s, there was no adequate strategy to make the most out of
Mexico’s FTAs, so that the Bank’s actions were in the end the
result of large firms’ trade and investment decisions. 6 The Bank’s
resources have not been used for the technological modernization
1. Preferential tariffs for each sector can be checked at: http://www.economia-

snci.gob.mx/sic_sistemas/prosec/arma_prosec.php There is an “other” category
that includes tariff lines applied to other industries.
2. In 2004 further liberalization measures were implemented as part of the
Ministry of the Economy’s “Regulatory Improvement Program”. Thus, it seems
that trade policy is now being conducted under the guise of regulatory improve-
ments.
3. Refer to the section on international trade negotiations for more information.
4. Hernández and Villagómez (2001).
5. Presidencia de la República (2005), 177.
6. Interview with Arnulfo R. Gómez, former BANCOMEXT official and Professor
of International Trade at Universidad Anáhuac del Sur, Mexico City, November 4,
2005. He referred to the demand for caviar from BANCOMEXT's representative in
Paris, when it is well known that Mexico is not a producer of caviar!
216
of national firms, and trade promotion has been largely based on

the Bank’s representatives abroad submitting 25 monthly
“demands” for Mexican goods. This led to simulated and absurd
“demands” to merely fulfill the required quota.

The most salient aspect of Mexico’s foreign trade policy is its
aggressive strategy to preferential negotiations. In effect, since the
early 1990s Mexico has been very actively negotiating free trade
agreements and by 2005 it had signed FTAs with 43 countries. Not-
withstanding its “collection” of FTAs, Mexican foreign trade has
remained very concentrated in terms of markets of destination,
commodity composition, and number of exporting firms.
Mexican Preferential Trade Strategy
Mexico started its preferential trade strategy in earnest with
NAFTA. Although the country had been a member of the Latin
American Free Trade Association (LAFTA) and is still a member of
the Latin American Integration Association (LAIA), the regional
deals of significance started with NAFTA.
In addition to these far-reaching agreements, most of which cover
trade in goods, agriculture, trade in services, and investment, 1 Mex-
ico has signed some Economic Complementation Agreements under
the aegis of LAIA. The most significant of these are the Argentina-
Mexico ECA, which entered into force on April 2, 2002, the Brazil-
México ECA, which entered into force on May 2, 2003, and the Mer-
cosur-Mexico ECA, published in Mexico’s Daily Register (Diario
Oficial de la Federación) on May 13, 2003 but which has not been
implemented as Paraguayan ratification is still pending. 2
Although the government presents these agreements as an instru-
ment to diversify markets, they respond to different goals. 3 NAFTA
was Mexico’s “second best” response to try to attract foreign
investment through secure market access to a developed country
1. For a comparison of the scope and coverage of Mexico’s FTAs, see Ortiz
Mena L.N. (2005b).
2. Presidencia de la República (2005), p. 171, and http://www.sice.oas.org/
Trade/mex_s.ASP Accessed on October 18.
3. The table reporting these agreements in President Fox’s 5th State of the
Union Address (Informe) reads: “Instruments to Facilitate Market Diversification”
(Instrumentos de Concertación para Facilitar la Diversificación de Mercados).
Presidencia de la República (2005), p. 171.
217
Table 3. Mexico’s Free Trade Agreements

Name of Agreement Partners Entry into force
NAFTA Canada, United States 1 January 1994
G-3 FTA Colombia, Venezuela 1 January 1995
Mexico-Costa Rica FTA Costa Rica 1 January 1995
Mexico-Bolivia FTA Bolivia 1 January 1995
Mexico-Nicaragua FTA Nicaragua 1 July 1998
Mexico-Chile FTA Chile 1 August 1999
Mexico-EU Association European Union 1 July 2000
Agreement
1 July 2000 (goods)
Mexico-Israel FTA Israel
1 March 2001 (services)
El Salvador, Honduras, 15 March 2001 (El

Northern Triangle FTA Guatemala Salvador, Guatemala),
1 June 2001 (Honduras)
Iceland, Liechtenstein,
Mexico-EFTA FTA Norway, Switzerland 1 July 2001
Mexico-Uruguay FTA Uruguay 15 July 2004

Mexico-Japan Agreement
for the Strengthening of Japan 1 April 2005
the Economic Partnership
Source: Presidencia de la República (2005), p. 171 and http://www.economia.gob.mx/
index.jsp?P=2113#, accessed on August 19, 2005.
market in the early 1990s. Its true preference had been to forge
closer trade and investment links with the European Union, but at
that time the European attention was mostly focused on Eastern and
Central European countries. Likewise, in NAFTA, there was not
such a thing as a “North American” vision: Mexico first sought a
bilateral FTA with the US. Canada joined the negotiations after-
wards fearing trade and investment diversion.
After NAFTA, Mexico steadfastly pursued its objective to secure
a special economic partnership with the EU and finally secured it in
2000. It also sought an FTA with Japan, largely to attract Japanese
investment, for most of the 1990s. It was only able to attain that
goal in April 2005. These agreements are aimed at attracting for-
eign investment through secure market access to the world’s largest
markets. The Latin American agreements are more reactive than
proactive and respond, at least partly, to Latin American countries’
protests over alleged violations of LAIA provisions, under which
Mexico would have been forced to unilaterally grant its LAIA
218
partners the same preferences it had granted to Canada and the US.
Mexico was reluctant to do this and instead offered to negotiate
FTAs with interested parties. Smaller Latin American countries
accepted the offer, but Argentina and Brazil refused to follow suit. 1
In early 2004, Mexico took a more proactive stance toward
Mercosur and asked to be admitted as a full member. This
generated a great deal of confusion, for Mercosur had been
envisaged as having an overriding geographic (and geopolitical)
logic and Mexico did not fit in. Also, given that it is a customs
union, its members will eventually have a common external tariff
(CET). Consequently, bilateral FTAs would have to be adjusted to
accommodate the CET. The matter was clarified when in April
2004 Mexico asked to become an Associate Member, which
would not require adopting the CET but merely reaching an FTA
with each Mercosur member. Mexico has an FTA with Uruguay,
but the conclusion of an FTA with Brazil looks unlikely at least in
the short- and medium-term given Brazilian preferences to
maintain protection for some of its industrial sectors and Mexican
resistance to opening up its agricultural sector (especially
agribusiness) to Brazilian competition. 2
In November 2003, Economy Minister Canales announced that
Mexico would not sign any other FTAs in the foreseeable future,
declaring a “moratorium” on FTAs and stating that it would suspend
ongoing negotiations with Korea, Argentina, and Panama. 3 The
reasons for this stance will be examined further in Section II. How-
ever, this official stance is contradictory insofar as in November
2005 President Fox spoke out as a staunch supporter of the Free
Trade Area of the Americas (FTAA) and insisted on the benefits of
striking regional trade agreements. 4
1. Ortiz Mena L.N. (2004b).

2. Ortiz Mena L.N. and Sennes (2005).
3. http://www.esmas.com/noticierostelevisa/mexico/325931.html, accessed August
19, 2005. In addition, there is a binational working group whose aim is to assess the
feasibility of a Mexico-New Zealand FTA.
4. See “Declara Fox su amor a países del Mercosur.” Reforma, November 6, 2005.
Avialable at: http://busquedas.gruporeforma.com/utilerias/imdservicios3W. DLL?JSear-
chformatS&file=MEX/REFORM01/00663/00663274.htm&palabra=fox%20mar%20del
%20plata&sitereforma Accessed on November 8, 2005.
219
Mexico’s Multilateral Trade Strategy

Mexico’s participation in the multilateral trading system pales
compared to its preferential strategy. However, it has recently
become more salient and it is likely to do so even more in the
future. The relevance of the WTO for Mexico is on the rise for
several reasons. First, whereas in the past the breadth and depth of
issue area coverage of Mexican preferential trade agreements were
general larger than those of multilateral deals, the scope and
coverage of the latter have increased. As a result, Mexico will start
to feel the effects of multilateral undertakings. 1 Mexico will not
be able to opt out of the WTO except at a high cost and,
notwithstanding the obstacles faced by the Doha round, multilateral
trade negotiations will continue to progress. As an attractive
market for goods and services, Mexico will continue to receive
requests for improved market access.
Second, Mexico also has offensive interests that can only be
attained in that forum. Mexico enjoys very good access conditions to
the market of its FTA partners, but with preferential trade agreements
in continuous expansion and multilateral negotiations proceeding
onwards, albeit at a slow pace, Mexico is experiencing preference
erosion. Consequently, Mexico will have to strive for improved mar-
ket access. While the renegotiation of FTAs is politically very diffi-
cult, gaining concessions at the multilateral level is more feasible –
even if they are obtained on an MFN and not a preferential basis.
Third, there are several issues that can best, and perhaps only,
be pursued in WTO negotiations, such as improved market access
for services (under the aegis of the General Agreement on Trade
in Services-GATS), the elimination of export subsidies and a radi-
cal reduction of domestic support for agriculture, a modification
of US AD legislation, and more effective dispute settlement mech-
anisms. 2 In fact, the WTO’s relevance for Mexico, from both an
offensive and a defensive perspective, contrasts with the cavalier
attitude that Mexico showed toward the GATT. It balked at joining
in 1979 after accession negotiations had concluded, and it did not
join until 1986. Mexico participated in the negotiations of the
1. Ortiz Mena L.N. (2005b).

2. All of Mexico’s FTAs have a dispute settlement mechanism, but in some
cases Mexico has chosen to launch complaints before the WTO Dispute Settlement
Understanding. For example, Mexico has been plaintiff in four cases, all of them
involving the US as defendant (DeMateo, 2006).
220
Uruguay Round, but given its deep integration with the US

through NAFTA the effects on Mexico of the multilateral commit-
ments undertaken were negligible. 1
Mexico has now become more active in the multilateral trading
system, and revealed by hosting the Fifth WTO Ministerial Meeting
at Cancun in September 2003. Although the meeting ended in
abject failure, it reflected a more proactive stance by Mexico, as did
its participation as a member of the G-20 group, which seeks an
elimination of export subsidies and a radical reduction of domestic
support (production subsidies) for agriculture. Not only has
Mexican activism increased, but the effects of multilateral
commitments on Mexico have also started to be felt. For instance,
in 2004 a WTO panel issued a report on a Mexico-US dispute over
access to the Mexican telecommunications market (which was in
fact the first dispute over GATS commitments to be heard at the
WTO). In anticipation of the ruling, the largest Mexican telephone
company, TELMEX, which had been accused of anti-competitive
behavior, started to adjust its interconnection rates. 2
At the Sixth WTO Ministerial meeting, held in Hong Kong in
December 2005, Mexico restated its aim, as a member of the G-20,
to eliminate export subsidies and curtail domestic support for agri-
culture. Regarding industrial products, Mexico seeks flexibility for
developing countries but without watering down ambitious goals to
establish low bound tariffs. It also seeks vastly improved market
access regarding trade in services. 3 Should the FTA moratorium
stay in place and the FTAA negotiations stall, at least multilateral
trade negotiations will continue. This means that Mexico has little
option but to pay greater attention to multilateral developments, no
matter which political party is in power. The next section provides
an overview of the main patterns that result from the trade strate-
gies outlined in this section.
1. For an overview of Mexico’s participation in the multilateral trading system

see Ortiz Mena L.N. (2005a).
2. For an overview of the Mexico-US telecom dispute, see Ortiz Mena L.N.
and Rodríguez (2005).
3. Subsecretaría de Negociaciones Comerciales Internacionales (2005).
221
The Domestic Sources of Mexico’s Strategy

and Revealed Preferences
The main challenge and opportunity for Mexico has been, and
continues to be, its geographical location as neighbor of the US.
The reference point of Mexican foreign economic policy has been
its dealing with the US; everything else being a function of the
nature of that interaction, be it a search for greater reliance on the
domestic market, an attempt at trade and investment diversifica-
tion, or a deepening of ties with the Northern neighbor. Mexico
has always tried to make the most out of a geographic situation
that cannot be changed and a disparity in power and wealth that is
difficult to mitigate.
By definition the geographic location cannot be changed and the
bilateral power disparity has been there since at least the mid-19th
Century, when Mexico lost about half of its territory to the US.
However, the actors taking part in the formulation of trade policy as
well as the process itself has been changing since the 1990s. The
greatest challenge at present is to find a new consensus –or at least
its broad outline– about Mexico’s place in the world political econ-
omy and how to make the best out of its structural opportunities and
constraints.
Structural Factors
Major Trade Partners

Mexico’s foreign trade remains very concentrated despite the
plethora of FTAs that has been signed. As far as the regional com-
position of trade is concerned, the pattern has changed very little
since the entry into force of NAFTA. Mexican trade has become in
fact more concentrated in the North American market than prior to
NAFTA and the share of the European Union in Mexican foreign
trade has actually declined despite the 2000 Association Agree-
ment. These trends have been accompanied by an increase in the
Asian share of Mexican foreign trade.
If Mexico’s trade is concentrated by region, it is also
concentrated within each region. The most dramatic example is
NAFTA, where 97% of its trade is with the US. 1 One might say that
222
this is not surprising given the size of the US economy and its
physical proximity to Mexico. But the fact is that trade with
Canada has not increased as much as has been expected or
desired. Moreover, Mexican trade with Latin America, which
accounts for only 5% of total foreign trade, is, on the most part,
not conducted with countries with which Mexico has an FTA. In
fact, 58% of Mexican foreign trade with Latin America is
conducted with countries where Mexico does not have an FTA,
and Brazil looms large among them. In effect, in 2004 Brazil
accounted for 26% of Mexican trade with Latin America. 1
Regarding Mexico’s foreign trade with Asia, trade flows with
China have ballooned despite serious trade frictions and the high
incidence of AD duties against Chinese imports. In fact, China
accounted for the largest share of bilateral trade with individual
Asian countries (32% of Mexico’s trade with Asia). 2
Summarizing, Mexico’s foreign trade is still largely dependent
on the US regardless of the many FTAs signed with other countries.
Apart from that, the countries that account for the highest share of
Mexican foreign trade with other regions did not sign FTAs with
Mexico, such as Brazil and China. 3
Main Exports and Imports
Mexico is no longer dependent on oil exports as it was between
the late 1970s and early 1990s. In effect, in 2004 oil exports
accounted only for about 5% of total exports, despite the prevailing
high oil prices. Mining and agriculture account for a small share of
exports and have not picked up, at least in relative terms, since
1990. The most noteworthy increase has been the share of maquila
exports, which by 2000 accounted for approximately half of total
exports (as compared to slightly over 30% in 1993). 4 Exports are
very concentrated, with only six sectors accounting for 30% of total
exports.

2. Ibid.
3. Mexico has an FTA with EU and EFTA, so Europe is already encompassed by
preferential trade agreements. The Japan-Mexico agreement is quite recent, so its
effects are still to be experienced.
4. Presidencia de la República (2005), p. 339-340.
223
Figure 2. Share of Mexico’s Foreign Trade by Region, 1993 and 2004
11% 1%
North America
12% Latin America & the Caribbean
Europe
5% Asia
Rest of the World
71%
0%
13%
North America
8%
Latin America & the Caribbean
5% Europe
Asia
Rest of the World
74%
Source: Presidencia de la República (2005), p. 173.
Table 4. Export Composition by Main Products (billions USD)

Product 1995 2003
All products .................................... 79.5 164.9
Autos and parts ............................... 18.1 18.4
Electronics ...................................... 11.3 15.9
Oil ................................................... 9.3 10.2
Computers ...................................... 2.2 6.1
Machinery ...................................... 3.5 6.0
Textiles and clothing ...................... 4.6 5.3
Source: Unger (2005).
224
Imports are also highly concentrated, as shown on Table 4 (the

top six sectors account for 32% of total imports). Main import and
export products have remained virtually the same since the mid-
1990s. Furthermore, there is a high degree of correlation between
the commodity composition of exports and imports, indicating the
importance of intra-industrial and intra-firm trade. This is also
associated to a high participation of foreign firms –and foreign cap-
ital– in Mexico’s trade. While in 2001 Mexico’s main exporter was
PEMEX, the national oil company, the other top ten exporters were
General Motors, Daimler Chrysler, Volkswagen, CEMEX, 1 IBM,
Ford, Hewlett-Packard, Visteon, 2 and General Electric. 3 The com-
modity composition of trade has thus remained very stable despite
a marked increase in total trade, which rose from U$S117 bn in
1993 to U$S335 bn in 2003. 4 Likewise, the sensitivity of imports
with respect to exports has been extremely high. 5
Table 5. Import Composition by Main Products (billions USD)

Product 1995 2003
All products .................................... 72.5 170.5
Electronics ...................................... 22.5 22.2
Autos and parts ............................... 7.4 11.6
Plastics ............................................ 5.3 6.3
Diverse machinery ......................... 6.6 6.0
Computers ...................................... 3.0 5.7
Textiles and clothing ...................... 2.4 3.5
Source: Unger (2005).
A particularly salient challenge has been posed by China,

particularly considering Mexico’s reliance on the US market and the
relatively stable commodity composition of foreign trade. In effect,
1. CEMEX is Cementos de México, a private cement company that is one of the

leading cement producers worldwide.
2. Visteon is a producer of air conditioning systems and electronic accessories for
automobiles. See http://www.visteon.com/products/automotive/index.shtml Accessed
on November 8, 2005.
3. Unger (2005).
4. http://www.economia.gob.mx/work/snci/negociaciones/Neg-int.pdf Accessed on
January 31, 2006.
5. Between 1991 and 2002 for every unit change in imports there was a 0.917
unit change in exports. See Unger (2005).
225
China is affecting Mexican export performance through two related

mechanisms: direct export competition and price effects. Regarding
export competition, the export similarity index (ESI) between China
and Mexico for the world market increased from 36.9% in 1995 to
42.8% in 2001. Sixteen out of the top 20 products that accounted for
the increase in the ESI were information technology-related, 1 the
production of which, in the case of Mexico, is largely based in the
maquila sector. China is not only competing with Mexico for market
share in the same products; but its export volumes are also gradually
turning it into a price-maker rather than a price-taker. In effect, from
2001 to 2004 China’s rise in world trade has led to a 2.262%
reduction in Mexico’s export prices. 2
Comparative Advantage
Mexico’s main comparative advantage is its geographic location
as the neighbor of the US. But this is also a major challenge. Geo-
graphic location next to the US gives Mexico headway in attracting
industries where transportation costs are high and proximity to the
market is necessary. In terms of factor endowments, Mexico is a
labor- and energy-abundant country. So, in addition to geographic
location, there is a great complementarity between the Mexican and
US economies: Mexico has a young workforce that is eager and
willing to take up jobs in the US. Migration from the South to the
North continues unabated even with stricter regulations in force
after the 9/11 terrorist attacks on the US. It is estimated that more
than 11 million Mexicans live in the US 3 and that more than 40,000
migrants attempt to cross the border every year, 4 (373 Mexicans
died in 2003 trying to cross the border) 5. Economic push and pull
forces override attempts to stop illegal immigration. Mexico is a
depositary of significant energy reserves, while the US has capital
and technology and is not self-sufficient in energy. But in this area,
1. Kim (2005), 3, 4.
2. Kim (2005), 12. The overall effect in the terms of trade was a deterioration
of 0.95%.
3. US Department of Labor Current Population Survey, available at: Current
Population Survey, available at: http://www.bls.gov/cps/home.htm Accessed on
November 16, 2005.
4. CONAPO, Encuesta Sobre Migración en la Frontera Norte de México, available
at: http://www.conapo.gob.mx/mig_int/3.htm Accessed on November 16, 2005.
5. Secretaría de Relaciones Exteriores, Dirección General de Protección y
Asuntos Culturales. Telephone communication with SRE official, November 16,
2005.
226
politics have trumped economics as the Mexican energy sector

remains out of bounds to foreign investment in a large number of
areas. 1
A comparative advantage that has eroded in recent years but
could still be recovered is political stability: 2 while many Latin
American countries experienced significant political instability
during the second half of the 20th Century (especially regarding
civil-military relations), Mexico was politically stable under the
aegis of the Institutional Revolutionary Party’s (PRI), which con-
trolled the Executive from 1929 to 2000 and Congress from 1929 to
1997. 3 However, 1994 witnessed the start of the Zapatista rebellion
in Chiapas and the assassinations of the PRI’s presidential candidate
(Luis Donaldo Colosio) and of another leading PRI politician (José
Francisco Ruiz Massieu). The new President, Francisco Zedillo
(1994-2000), had an intermittent confrontation with his predeces-
sor, Carlos Salinas, but in 2000 the opposition managed to win the
presidency and open the door for the peaceful transfer of political
authority between parties. As will be discussed below, this ushered
in an era of greater political pluralism, but also increased the diffi-
culty to make decisions. Should Mexico be able to have a political
system allowing for adequate interest representation and, at the
same time, an acceptable measure of efficiency, it could yet reap the
economic benefits derived from political stability in a region where
instability appears to be the rule.
Institutional Factors and Key Actors

Mexican politics are in a state of flux. While there has been a
significant transition from a situation in which the PRI controlled all
three branches of government to a new configuration in which the
Executive power is held by the PAN and no single party has a major-
ity in the Senate and the Chamber of Deputies, the basic rules of the
political game have remained largely unaltered. Mexican presi-
dents were regarded all-powerful during the PRI era, but this was so
only because the president was the de facto leader of the PRI, he
was able to handpick his successor and the PRI controlled all
branches of government and virtually all governorships.
1. Ortiz Mena L.N. (2006).

2. I am indebted to Luis de la Calle for this idea.
3. See Cornelius (1991) for an overview of the Mexican political system. A
more recent work is Schedler (2004).
227
In formal terms, however, the Mexican president has quite

limited powers, especially when compared to the power of
presidents in other presidential systems. 1 This means that it has
become very difficult to govern, as the Executive and the
Legislature are frequently at odds with each other. The current
institutional setup and correlation of forces have resulted in a strong
bias in favor of the status quo. The President has veto power but,
without partial or line-item veto and with no agenda-setting power,
a veto results in maintaining, and not changing, the status quo. 2
While a more decentralized policy-making process, evinced by
increased political pluralism in Congress and a greater role for all
three branches of government, is able to represent a wider array of
interests that under PRI rule, it also makes it more difficult to enact
policy reforms, especially those with clear distributive implications
(such as tax, energy, and labor reform). 3 Some of these reforms are
the underpinnings of a new impetus for trade policy reform.
A long-standing aim of political elites, both during the
authoritarian period under the PRI and since the advent of full
electoral democracy, has been the search for growth and prosperity,
while maintaining as much discretion over foreign policy
(including foreign economic policy) as possible. Thus, from a
purely economic perspective the rational policy would be to seek as
deep economic integration as possible with the US. However, this
strategy would entail some economic risks, since a downturn in the
US economy would adversely –and severely– affect the Mexican
economy, more diversified trade relations may help to compensate
downturns in some countries with expansion in others, mitigating
the impact on Mexico of adverse foreign economic trends. From a
political perspective, there has always been a fear –explicit or
implicit– that an overriding dependence on the US would make
Mexico vulnerable and open to US political pressures. This has
been a concern not only for the left-wing forces, but also for the
right-wing. For example, during the NAFTA negotiations a leading
politician from the center-right National Action Party (PAN) vocally
opposed the negotiations on the ground of its possible effect on
Mexico’s sovereignty. 4 A more recent discussion has involved the
1. See Lehoucq et al. (2005).

2. Lehoucq et al. (2005), p. 30, 32.
3. Lehoucq et al. (200), p. 54, 55.
4. See Conchello (1992).
228
relation between trade and growth: while Mexico has subscribed a

record number of FTAs and its trade has taken off dramatically, GDP
growth has been mediocre at best.
Figure 3. Mexico: Trade Openness and GDP Growth
80%
70%
60%
50%
40% Trade Openness
30% GDP Growth
20%
10%
0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
–10% 2003
Source: World Bank (2005).
Some politicians, such as President Vicente Fox, believe that

free trade should be a part of Mexico’s foreign economic policy and
does not attribute the challenges faced by the Mexican economy to
its deep integration into the world economy. 1 However, other pol-
iticians such as the leader of the left-wing party (PRD) Andrés Man-
uel López Obrador, a leading presidential candidate for the 2006
election, believe that the country needs to focus more on the domes-
tic market and to have a more active industrial policy coupled with
protection of sensitive sectors, such as maize and beans. His con-
victions even include renegotiating NAFTA. 2
As will be shown below, the major Mexican business organizations
are demanding to stop further trade liberalization (either reciprocal or
unilateral) but not improved access to third markets. In effect, their
chief concern is Mexico’s lagging competitiveness, which they
attribute to the lack of reforms in a number of areas such as labor laws,
fiscal policy, and energy costs. Multinational companies are likewise
concerned about lagging competitiveness, but have not been opposed
to further liberalization, especially unilateral tariff reductions.
Notwithstanding the different positions on trade policy shown by
1. See “Llama Fox a lograr un acuerdo comercial continental en América Latina.”

Avaliable at: http://www.presidencia.gob.mx/actividades/?contenido=21727&pagina=2
Accessed on November 8.
2. López Obrador (2004), Chapters 2, 4, and 5.
229
political leaders and business groups, the overriding fact remains that
divided government and the weak constitutional powers of the
President will make it difficult to enact significant policy change in
whichever direction is deemed desirable. Some of the main challenges
facing trade policy are noted below.
Intra-Executive Relations
The Ministry of the Economy, known as the Ministry of Trade
and Industrial Development until 2000, has been in charge of nego-
tiating preferential agreements since the early 1990s. NAFTA was
negotiated by the NAFTA Negotiation Office, which was created
expressly for that purpose at that time. Once NAFTA negotiations
concluded, the Office was turned into the Deputy Ministry for
International Trade Negotiations (SNCI), which to this day coordi-
nates all trade negotiations. 1 SNCI is responsible for establishing
communication channels with business groups and civil society so
as to hear their views regarding trade policy. Likewise, it contacts
other federal ministries, as appropriate, to undertake consultations
before and during negotiations.
Frictions between the Foreign Ministry and the Ministry of the
Economy over the conduct of foreign economic policy have arisen
sporadically. When Jorge Castañeda became Fox’s Foreign Minister
in 2000, he asked for the transfer of vast areas of foreign economic
policy-making authority to the Foreign Ministry. However, the Min-
ister of the Economy at the time, Luis Ernesto Derbez, refused to
abide. 2 When Derbez became Foreign Minister in January 2003 he
applied the maxim of “where you stand is where you sit” and asked
for a transfer of foreign economic policy authority to the Foreign
Ministry. A draft proposal was prepared, but never submitted to the
legislature. In any case, the necessary accommodation is at times a
tense one. While in previous WTO Ministerial meetings it had been
the Trade Minister who represented Mexico, at the Fifth WTO Minis-
terial meeting which Mexico hosted in Cancun in September 2003, it
was the Foreign Minister who hosted the meeting, while the Minister
of the Economy merely headed the Mexican delegation. Conflicting
signals regarding Mexican trade policy have been the result of this
tug of war. As mentioned, in November 2003, shortly after the con-
clusion of the Cancun Ministerial, the Minister of the Economy
1. For an overview of the bureaucratic process of trade negotiations in Mexico,

see Schiavon and Ortiz Mena L.N. (2001).
2. It would also require legislative approval.
230
declared that there would be a moratorium on the negotiation of new

preferential trade agreements. However, five months later, in April
2004, the Foreign Minister formally submitted a request for Mexico
to become an Associate Member of Mercosur, which requires the
negotiation of free trade agreements with all Mercosur countries. 1
Preferences over the nature of economic links with China have
also differed. While the Foreign Ministry has been an avid sup-
porter of closer trade and investment links with China, the Ministry
of the Economy has followed a defensive strategy focused more on
combating alleged unfair trade practices by China and imposing AD
duties than on searching for ways to improve market access for
Mexican exports and attract Chinese investment. During the
Fourth Summit of the Americas held in Mar del Plata, Argentina, in
November 2005, President Fox was an outspoken advocate of re-
launching the FTAA process, and was seconded by Foreign Minister
Derbez. 2 This was clearly not in line with an alleged moratorium
on FTAs and represents an about-face of the situation that prevailed
in the late 1980s and early 1990s, when the Foreign Ministry was
seen as a bastion of economic nationalism and a potential stumbling
bloc for NAFTA negotiations, while the then Ministry of Trade and
Industrial Development was regarded as being at the forefront in
the push for trade liberalization. 3 COCEX, an inter-ministerial coor-
dination mechanism for trade policy formulation that is supposed to
prevent situations such as those that have erupted between the For-
eign and Economics Ministries, has not been up to the task. 4
Dissension pervades not only on inter-ministerial relations but also
within the Ministry of the Economy. While it is natural to have
different and at times opposing views within a given ministry, there are
usually decision-making procedures that tend to facilitate the
formulation of a coherent set of policies. During NAFTA negotiations
this was made possible by a very hierarchical and centralized decision-
making procedure in the NAFTA Negotiation Office.5 However, during
1. By that time FTA negotiations with Uruguay were concluded: the agreement
entered into force in July of that same year.
2. “México: preocupa poco avance en declaración de Mar del Plata,” available
at: http://ar.news.yahoo.com/051026/4/lnco.html Accessed on November 9, 2005.
3. See Schiavon and Ortiz Mena L.N. (2001).
4. COCEX members are Banco de México, the Federal Competition Commis-
sion, and the following ministries: Foreign Affairs, Economy, Finance, Social
Development, Agriculture, Environment, and Health.
5. See Cameron and Tomlin (2000).
231
recent times decisions at the Ministry of the Economy have been

fragmented, with the Minister favoring a moratorium on the
negotiation of free trade agreements, and the Deputy Minister for
Industry and Trade pursuing unilateral trade liberalization under the
aegis of the PROSEC programs. One may ask whether there is a
contradiction between a moratorium on FTA negotiations and unilateral
liberalization. Strictly speaking there is none, for precisely unilateral
liberalization does not require engaging in international trade
negotiations. However, the spirit of the moratorium is that the
government would cease further trade liberalization to concentrate on
making the most out of the agreements that are already in place. If
liberalization were to proceed swiftly, the logical approach would be to
seek reciprocity through negotiations.1
Executive-Legislative Relations
The challenge of securing a modicum of coordination within and
between ministries is compounded by the increasing activism of the
Legislature in trade policy-making. The Senate has the exclusive
faculty to accept or reject international treaties and agreements, and
all of Mexico’s FTAs have been submitted to the Senate for
ratification. However, the lower house has significant faculties on
budgetary and fiscal issues and can affect trade policy through
fiscal policy, with tariffs being a central part thereof. 2 While
extensive consultations with the Senate took place during NAFTA
negotiations, there was no formal obligation of the Trade Ministry
to do so. It was done only as a matter of political expedience.
However, on September 2, 2004 a new International Economic
Agreements Law entered into force, providing for ample consulta-
tions prior to, during, and after negotiations. 3 The Law was pro-
moted as a show of force by legislators, who believed that the
legislature had been sidelined in previous trade negotiations. While
greater transparency and accountability of the actions taken by the
Executive in the conduct of foreign economic policy is welcome, the
1. The sub-section on government business relations addresses some reasons

for the FTA moratorium and unilateral liberalization.
2. In addition, it can affect trade policy through the manipulation of internal
taxes. This was the case in 2004 when the House granted favorable fiscal treat-
ment to the soft-drinks industry whenever it used as an input locally-produced
sugar in place of imported high-fructose corn syrup.
3. Ley Sobre la Aprobación de Tratados en Materia Económica, available at:
http://www.ordenjuridico.gob.mx/Federal/PL/CU/Leyes/02092004(2).pdf
232
new Law could hamstring the Executive and severely hinder the
effective conduct of trade policy. For instance, Article 3:I mandates
that for an agreement to be approved it must contribute to improving
the quality of life of Mexicans. Many economists are not convinced
of the effect of liberalization on economic growth and job creation,
and agree merely on the fact that liberalization would generate incen-
tives for a more efficient use of factors of production and foster an
increase in productivity. Likewise, many agreements have short-
term costs and long-term benefits. How, then, could it be clearly
stated that an agreement will improve the quality of life? Article 8
awards the Senate the faculty to initiate hearings with the presence of
negotiators. Again, this sounds reasonable, but the faculty could be
abused so as to request the frequent presence of negotiators and make
it impossible for them to stick to a negotiation calendar and ade-
quately program meetings with their counterparts. Under Article
9:III, when negotiations are concluded the Executive must provide a
list of all the concessions granted by Mexico. While the language is
reminiscent of “GATT talk”, it also has a mercantilist slant: conces-
sions may be seen as a cost for Mexico, when in many instances they
may benefit the Mexican economy, as it would be the case if they
provide for greater competition in areas where there are oligopolistic
practices. Finally, Article 12 provides for consultations with local
governments and legislatures. Although consultations are non-bind-
ing, this nevertheless means that trade policy could easily be “cap-
tured” by extreme local interests thus making it very difficult to move
away from the status quo. In sum, the new law, if used prudently,
could generate greater credibility and legitimacy for trade policy, but
it could also translate into a sort of mutual hostage taking, whereby a
group of legislators make it nearly impossible for the Executive to
conduct trade policy. When the party in office loses power, it may
then apply the same treatment to the former opposition.
Regarding the preferences shown by political parties over trade
policy, it is safe to say that despite grandstanding and protests to
the contrary, all parties with Senatorial representation have
awarded broad support to the FTAs to which Mexico has
subscribed. 1 Dissent, however, has been greater in the Chamber
of Deputies. The latest agreement to be ratified by the Senate was
1. Email communication with Eduardo Ramos, Chief of Staff to the Deputy

Minister for International Trade Negotiations, August 19, 2005. Senate votes are
not easily accessible and are not available on the Internet.
233
the Japan-Mexico Agreement to Strengthen Economic

Partnership. Out of 128 potential votes, 80 voted in favor of the
agreement. This included Senators from the PAN, PRI, PRD and
PVEM. 1 There were no negative votes or abstentions.
In contrast, the International Economic Agreements Law, which

required approval by both chambers, generated a great deal of dis-
sent. It was approved unanimously by the Senate on 13 December
2002, but it took another sixteen months for a vote to be taken in the
Chamber of Deputies. The result was almost strictly along party
lines, with the PRI, PRD, PVEM, PT, 2 and Convergencia providing
270 votes in favor and the PAN 129 votes against. There were four
abstentions (1 from the PRI and 3 from the PAN). 3 The remainder of
the 500 potential votes was not cast due to absenteeism. Given that
at the time of the vote the PAN controlled the presidency and was
responsible for the conduct of foreign economic policy, it is not sur-
prising that there was great opposition to curtailing the ability of the
Executive to conclude trade agreements with other countries.
The Chamber of Deputies has also been active in areas affecting
trade policy, such as fiscal policy. In effect, in 2002 it introduced a
tax on soft-drinks using imported high-fructose corn syrup to encour-
age the use of locally-produced sugar. This was done in retaliation to
the US because that country had ostensibly not complied with NAFTA
commitments on granting market access to sugar exports from Mex-
ico. In 1998 the Executive had tried to provide an outlet for domes-
tically produced sugar by imposing AD duties on imports of high-
fructose corn syrup (HFCS) from the US. After a NAFTA Chapter 19
panel heard the matter and determined in August 2001 that AD duties
be removed, the Mexican government complied. Some members of
the Chamber of Deputies then decided to take matters into their own
hands and were able to pass legislation in January 2002 whereby a
20% tax would be levied on soft-drinks made with HFCS. This gen-
erated a NAFTA Chapter 11 dispute and another one at the WTO.
1. PVEM is the Green Ecological Party of Mexico. The remaining 48 votes

were not cast because the Senators were absent. See Senado de la República
(2004). I am grateful to Diego Díaz, a Research Assistant at CIDE, who managed
to track down this document.
2. Partido del Trabajo.
3. CIDE Division of Political Studies database on legislative votes in Mexico
(under construction). I am grateful to Dr. Benito Nacif for granting me access to
the database and to Diego Díaz for providing the information. The different posi-
tions adopted by PAN Senators and Deputies warrants clarification.
234
Mexico lost the WTO dispute, but members of the Chamber of Depu-
ties have dragged their heels and want not only to maintain the tax on
soft-drinks made with imported HFCS, but also to award preferential
treatment to soft-drinks made with Mexican sugar or Mexican HFCS.
In November 2005 the Senate refused to follow suit, but the issue
remains contentious and unresolved. 1
Given the presidential election that will take place in July 2006,
all political parties should make public their electoral platform by
the beginning of that year, including their position on trade policy.
Nonetheless, if we focus on actual behavior it seems safe to say that
the Senate has been generally in favor of FTAs. At the same time, it
wants greater oversight faculties over foreign economic policy.
The lower house is divided over the role that the Senate should play
in trade policy (as demonstrated by the divided vote on the Foreign
Economic Agreements Law), but it has been quite active regarding
the protection of local interests even if that means disrespecting
Mexico’s international commitments.
Government-Business Relations
The main business organization dealing with trade policy is
COECE, the Foreign Trade Business Organizations Coordinating
Council. COECE is an umbrella organization that at the time of its
establishment, at the outset of NAFTA negotiations, encompassed all
major business organizations with an interest in foreign trade. It
survives to this day and plays a key role prior to, during, and after
all of Mexico’s trade negotiations. 2
COECE carries out consultations with its members and with the
Ministry of the Economy on an as needed basis. It organizes itself
according to the demands of each negotiation. For instance, during
NAFTA negotiations, it was organized into 19 groups that paralleled
the areas into which the negotiations were divided. Some of its
members also commissioned studies to help them –and negotiators-
establish a negotiating position. After that, COECE members
accompanied negotiators to all meetings and were available in situ
for consultations during the negotiation process. There was an
additional round-up meeting after each negotiating session, and it
1. The HFCS, sugar and NAFTA saga is extremely complex. See Hufbauer and Schott
2005, 310-327. See also “El Senado rechaza extender la exención del impuesto de 20% a
los refrescos fabricados con fructosa,” Avaliable at http://www.sentidocomun.com.mx/
articulo.phtml?id=9338&text1=Arca Accessed on November 12, 2005.
2. See Alba and Vega (2002), and Zabludovsky (2005).
235
followed through the agreement until the drafting and adoption of

legislation by the US Congress.
While COECE is representative in that it encompassed all major
business organizations with an interest in trade, it has tended to
over-represent large firms and under-represent SMEs. This was so
because large firms have the resources to undertake sophisticated
studies to examine the situation of their sectors and to make nego-
tiating proposals in such terms as may be used by negotiators. In
addition, they have the funds to pay for their COECE representatives
to travel to all negotiating venues. Lastly, large firms tended to
have representatives in several constituent units of COECE. In con-
trast, many SMEs did not have the resources to pay for pre-negoti-
ation studies or to fund the travel of representatives to foreign
venues. The problem with SMEs representation, however, runs
deeper that their say in the trade policy-making process: in Mexico,
business chambers are usually organized by industrial sector and
not by size, which means that SMEs tend to get short shrift in the
economic policy-making process in general. 1
A frequent complaint of business groups since the late 1990s has
been the lack of progress on implementing “second generation”
structural reforms, chief among them: fiscal reform, labor reform
and energy reform. The lack of progress in these areas is shown in
the drop that Mexico has experienced in several “competitiveness”
indicators. It also led to the creation in 2003 of the IMCO (the Mex-
ican Institute of Competitiveness), charged with the task of devel-
oping objective and sound competitiveness indicators, ranking
Mexico according to those indications, explaining the reasons for
Mexico’s lagging performance, and proposing remedies. 2
In 2005 it issued a report on Mexico’s Competitiveness. IMCO’s
competitiveness indicator is comprised of 150 variables that cover
ten broad areas: a functioning legal system, sustainable manage-
ment of the environment, a well-educated and healthy society, sta-
ble macroeconomics, stable and functional political system,
efficient factor markets (capital, labor and energy), adequate trans-
portation and financial services, efficient government, benign inter-
national relations, and economic sectors with potential for further
1. Alba and Vega (2002), Ortiz Mena L.N. (2004a). Alba and Vega point out
that CANACINTRA and ANIT represented SMEs, but both organizations complained
that SME interests had not been taken into account during the negotiations.
2. http://imco.solutrends.com/opencms/opencms/en/
236
development. It compared Mexico with 44 other countries with

which it competes in the world economy. The result of the study
shows that Mexico ranks 31 among the 45 countries included in the
study due to lagging performance in each one of the main ten ele-
ments of competitiveness (in none of them Mexico is even at the
top half of the draw). In some areas, such as efficient factor mar-
kets, Mexico ranks 42nd. Business groups have been increasingly
vociferous regarding issues such as the high cost of energy, which
hinders any attempt at being competitive.
The creation of IMCO and its 2005 report are the capping stone of
business complaints over Mexico’s lagging competitiveness in the
face of the government’s insistence in further opening up the
economy. The drop in Mexico’s competitiveness is in fact the main
reason given by business groups on their request, which became
increasingly vociferous in 2003, to place a moratorium on further
trade liberalization. The logic was that further liberalization would
be reasonable if and when Mexico had increased its competitiveness
as a result of domestic reforms.
Some business groups that had basically accepted the fact that
the government would keep on pushing for more FTAs have become
more outspoken in their opposition and more critical of the terms in
which liberalization is being carried out. This has been done within
COECE itself, 1 and independently through the leadership of the
Mexican Foreign Trade Council (COMCE). For instance, the long-
winded Mexico-Japan trade negotiations were supposed to have
ended by the time President Fox visited Japan in October 2003, 2
when the signature of the agreement by Fox and Japanese Prime
Minister Koizumi had been planned. The reason was that some
business groups that represented export agriculture and were inter-
ested in penetrating the Japanese market were dissatisfied with the
quotas granted by Japan for pork and melons. Thus, they exerted
direct pressure on the Minister of the Economy to actually prevent-
ing the signature of the agreement during the visit to Japan. It took
almost another year to finally sign the agreement. 3
1. Interview with Luis Martínez Argüello, Director of COECE, Mexico City,

November 8, 2005. Mr. Argüello told the anecdote regarding Mexico-Japan nego-
tiations explained in the following paragraph.
2. Negotiations formally started only in February 2002, but Mexico and Japan
had been talking about a trade deal as early as the mid 1990s.
3. The agreement was signed in September 2004 during a visit to Mexico by
Prime Minister Junichiro Koizumi.
237
Some COECE members have recently become more outspoken on

their trade policy views, albeit this is usually done privately in
meetings with Mexican trade negotiators rather than through the use of
the press and contacting legislators. During a meeting on the South
Korea-Mexico negotiations between COECE and staff of the Deputy
Ministry for International Trade Negotiations,1 several COECE
members stated that they were dead-set against a South Korea-Mexico
FTA. They argued that they did not understand President Fox’s
decision to go ahead with the negotiations since no business group had
called for improved access to the Korean market. In addition, one
member representing the chemical industry said that they were also
against the unilateral liberalization carried out under PROSEC. He
argued that although PROSEC is supposed to help increase the
competitiveness of firms based in Mexico by reducing the cost of
imported inputs, in reality the unilateral liberalization is carried out on
behalf of multinational corporations from countries like South Korea,
who wanted to use inputs produced by their affiliates independently of
the availability of competitive prices in Mexico. Thus, according to
this view, unilateral liberalization was displacing Mexican producers
not because they were not competitive but because it allowed
international production linkages to develop according to guidelines
set by multinational firms who wanted their affiliates to benefit.
While COECE as such has not called for a moratorium on FTAs
(after all, it is merely a coordination office of existing business
groups and is called upon when negotiations are to take place),
COMCE has taken a strong stand against further liberalization. COMCE
was established in 1999 to promote foreign trade, foreign investment
and technology transfer. Thus, while COECE was supposed to assist
the government and represent business groups during trade negotia-
tions, COMCE was interested in promoting trade. However, COMCE
has gradually veered into pressing the government on trade policy
and in fact it reports being a link with the government during trade
negotiations as one of its mandates. 2 The increased activism of
COMCE regarding trade negotiations created a tiff with COECE leader-
ship in 2005. In effect; while COECE formally remains the official
channel through which business groups are supposed to press for
1. COECE-SNCI meeting on Korea-Mexico negotiations, FTAA, and the WTO

Hong Kong Ministerial. Ministry of the Economy, November 8, 2005.
2. http://www.comce.org.mx/index.php?opc=mv_opc1&secc=5http://www.comce.
org.mx/index.php?opc=mv_opc1&secc=5 Accessed on November 5, 2005.
238
their demands with the government regarding trade negotiations,

COMCE has not abated its activism regarding trade negotiations.
Despite the supposed FTA moratorium established in late 2003, in

November 2005 the leader of COMCE saw it was still appropriate to
call again for a moratorium on FTAs. The argument was that the
existing agreements should be exploited, for they are underused,
before embarking on new ones. Regarding ongoing negotiations
with South Korea, COMCE's position is that an FTA is unadvisable and
that a sectors approach should be followed. It is also contacting leg-
islators to vent its opinion. In early 2006 it will present its foreign
trade program to the three leading presidential candidates. 1
Finally, an issue that COMCE has also spearheaded is that of com-
petitiveness. The President of COMCE is also the President of IMCO,
whose report was mentioned above. Other IMCO board members are
part of the Mexican business elite, representing large local industrial
groups from Monterrey (Cydsa, Imsa, and Alfa), Mexico City (DESC,
Posadas) and a multinational (Kimberly-Clark). It is worth noting that
most of them participated actively in favor of NAFTA negotiations, so
their reluctance to engage in further liberalization is especially telling.
In sum, as the efficient and largely collaborative stance on trade nego-
tiations that developed as a result of COECE-Ministry of the Economy
thus seems to be in peril, it is likely that more channels of communi-
cation will be used by business leaders to get their views across. The
legislature is also likely to play a larger role in channeling business
concerns to the executive.
Civil Society and Trade Policy

If business-government links on trade policy were fairly stable
and functional from the early 1990s until recently, this clearly has
not been the case regarding civil society-government links. As part
of the consultation process undertaken during NAFTA negotiations,
an Advisory Council on the Free Trade Agreement was created. 2
1. “Plantean suspender apertura comercial,” El Universal, November 7, 2005.

Available at: http://www2.eluniversal.com.mx/pls/impreso/noticia.html?id_nota=48251
&tabla=FINANZAS_h Accessed on November 8, 2005.
2. The Advisory Council (Consejo Asesor para el Tratado de Libre Comercio)
was first convened in September 1990 for NAFTA negotiations, but it was formally
established in December 1993 through a governmental decree published in the
Daily Register. It was supposed to represent civil society in all trade negotiations.
See Diario Oficial de la Federación, “Acuerdo por el que se crea el Consejo Ase-
sor para las Negociaciones Comerciales Internacionales,” December 13, 1993.
239
The idea was to have the Council represent “civil society”. Its
membership included four representatives from each of the
following sectors: academia, agriculture, labor, and business. The
Council met approximately on a monthly basis during NAFTA
negotiations, at which time the Trade Minister would update its
members on the status of negotiations. Some of them would also be
in situ during trade negotiations to advice negotiators on as needed
basis, in a similar manner to COECE.
The Council was definitely not representative of civil society –if
ever such a body could be conceived independent of a legislature. 1
Labor representatives were affiliated with the PRI (CTM, CROC,
CROM) or at least not in strong opposition to the government (such
as the head of the Workers’ Council). 2 Rural interests were repre-
sented by the PRI-affiliated CNPR, and by CNA and CNG, which
encompass prosperous rural landowners. Business interests were
heard through the voice of CCE, COECE, CMHN, COMCE, CONCAMIN,
CANACINTRA, ABM, DESC and Grupo San Luis. 3 The academia, at
last, was represented by the deans of UNAM, IPN, COLMEX, ITESM,
COLEF, and ITAM. 4 Although the academic representatives did her-
ald from the most important public and private universities, they
basically took a passive stance toward negotiations.
While the Council met on a monthly basis during NAFTA negoti-
ations, it met only 28 times from 1994 to 2000. Moreover, it did not
meet at all during the Fox Presidency (2000-2006). While the
dynamic of trade negotiations ebbs and flows and it is natural that
1. The membership referred to is that prevailing at the end of the Zedillo admi-
nistration. Its composition during NAFTA negotiations was similar, albeit not iden-
tical. For the NAFTA era composition, see Zabludovsky (2005).
2. For a discussion of these business organizations and state-labor relations in
Mexico, see Middlebrook (1995).
3. CCE, CMHN, and COMCE represent the interests of large and powerful Mexi-
can business groups; ABM is the National Bankers´ Association; CONCAMIN and
CANACINTRA have more varied membership than the other more elite organiza-
tions but not the same amount of political influence and access. DESC and Grupo
San Luis are two large Mexican industrial conglomerates that prospered greatly
during the closed economy era; San Luis produces auto parts in Mexico, the US
and Brazil, while DESC has interests in the petrochemical industry and has recently
fallen on hard times.
4. UNAM is the most important Mexican public university, IPN is the major
public polytechnic, COLMEX and COLEF are two smaller but highly regarded public
institutions of higher education, while ITESM and ITAM are two leading private uni-
versities.
240
Council meeting should do likewise, the absence of meetings dur-

ing the entire Fox administration signals that the composition and
modus operandi of the Council was not appropriate for the new
political and economic circumstances. However, a new way to
channel civil society voices in the trade policymaking process has
not yet been offered. In 2001 the Ministry of the Economy submit-
ted a draft to broaden the membership of the Council and provide
new rules of operation, but the matter was put on hold. 1
The most critical groups of NAFTA and trade liberalization
remained outside the Council, with the Mexican Trade Action Net-
work (RMALC) being the most visible one. 2 The Network repre-
sents the views of a vast and diverse array of interests, ranging from
environmentalists to feminists and to some SMEs. The group has
not been effective in influencing trade policy. 3 While the govern-
ment devises a new way to channel civil society views into the trade
policymaking process, it is likely that RMALC activism rather than
dialogue will continue. RMALC may have a greater impact if it
starts to channel its disquiet through the legislature.
Should the legislature truly reflect public opinion, however,
RMALC will find that its views are not in line with those of the general
public. In 2004 CIDE, the Mexican Council on Foreign Relations and
the Chicago Council on Foreign Relations presented the results of the
first-ever Mexican public opinion survey focused exclusively on
international affairs. 4 While Mexicans do have qualms about global-
ization (only 34% believe it is mostly good for Mexico), the WTO
(only 48% are willing to comply with WTO rulings against Mexico),
and rich countries (66% disagree that rich countries play fair in trade
negotiations), they do not support higher protectionism: the second
most important foreign policy objective is to promote the sale of
Mexican products abroad, 64% of Mexicans support NAFTA, 70%
support the Chile-Mexico FTA, and 62% support an FTAA. Mexican
views on FDI are more divided, with 54% supporting it and 42%
opposed to it. Only a plurality favors FDI in telecommunications and
1. Secretaría de Economía (2001).

2. www.rmalc.org.mx
3. Ortiz Mena L.N. (2004a).
4. The findings were issued in two reports (a Mexico report and a comparative
Mexico-US report). They are available in English and Spanish at: http://mexi-
coyelmundo.cide.edu/index.htm They are cited here as Minushkin et al. (2004a)
(the Mexico report) and Minushkin et al. (2004b) (the Mexico-US report). The
figures presented in the following paragraphs were obtained from both reports.
241
media companies, while a majority (68%) opposes it in oil produc-

tion and distribution, electricity and gas (60%), and even in local cur-
rency government bonds (57%). Mexican political and economic
elites were also covered by the survey. While they have a position
similar to that of the general population, they are much more favor-
able to foreign investment, including the energy sector (76% sup-
ports foreign investment in oil production and distribution and 85%
supports it in electricity and gas). 1
Finding a way to channel diverse opinions on trade policy and
foreign investment and then construct a trade strategy that has broad
support will be a tall order for whoever takes charge of the Mexican
Executive from 2006 to 2012. In the concluding section some of the
main challenges facing Mexican trade policy are highlighted.
Conclusions
What challenges lay ahead in light of Mexico’s revealed

preferences and strategies and given the domestic sources of such
preferences and strategies? We will first address the first issue and
then concentrate on the role of structural determinants and actors.
Mexico has an open economy, both in terms of applied tariffs
(especially when considering trade-weighted averages) and other
measures of trade openness (such as the share of foreign trade in
GDP, which has reached nearly 70% in recent years). This is not to
say that Mexico is a fully open economy –no large economy ever is.
In effect, Mexico is an avid user of AD duties and despite stating
otherwise in NAFTA negotiations, it seems highly unlikely that it
will be willing to discard the use of that trade relief measure with
any of its trade partners in the foreseeable future.
Its favored liberalization strategy since 1990 has been the nego-
tiation of FTAs. Mexico has now a privileged position due to its
excellent access to the world’s major developed country markets:
the US, Europe and Japan. Its preferential trade strategy, however,
has not resulted in a reduction of its trade dependence with the US.
Trade shares with the US remained virtually unaltered since 1993,
despite the fact that Mexico has signed FTAs with 42 other coun-
tries. Its trade share with Europe actually declined during this
1. The elite survey is not representative and is based on the Mexican Council
on Foreign Relations membership.
242
period. Moreover, the only increases worth noting are with trade
partners with which Mexico has not signed FTAs, such as Brazil
and, especially, China.
Not only is Mexico’s foreign trade concentrated in terms of trading
partners, but it is also concentrated in terms of its commodity
composition (on the import as well as on the export side) and the
number of firms that account for the bulk of Mexican exports. One
could wonder whether this multidimensional concentration is a bad
thing. After all, that is what markets determine and perhaps may be for
the best. At any rate, it is always an uphill battle when governments
try to go against markets. Nonetheless, there are negative economic
and political consequences derived from this situation.
On the economic side, as has been argued, such a high degree of
reliance on the US economy –considering the high openness of
Mexico– means that a downturn in the US will severely affect the
Mexican economy. In effect, a high concentration of trade with the
US has been the rule for over a century, but it is only since the mid-
1980s that the Mexican economy opened up and since the mid-1990s
that exports really took off. Concentration may be nothing new, but
the degree of reliance on the US economy is presently very high.
The concentration of imports and exports in a limited number of
sectors also means that Mexico is very sensitive to competition in
those sectors. Since China is an exporter in many of the sectors
which constitute Mexico’s main exports, competition with China is
head-on. Unless Mexico can find new sectors and market niches, it
risks losing ground in many markets. 1 Even competitors that are
not as formidable as China are eating away at Mexico’s preferential
market access, since both the US and the EU have subscribed to
preferential trade agreements with other countries since NAFTA and
the Mexico-EU Association Agreement entered into force.
On the political side, such concentration means that only a handful
of firms and sectors seem to have benefited from liberalization,
rendering political support for an open trade policy difficult to garner.
Since SMEs have not fared very well under liberalization and they are
some of the main employers in the Mexican economy, trade-related
employment is not as high as it could be and the benefits from higher
trade flows are not shared equally. While large and erstwhile
competitive Mexican firms have called for a moratorium on new
1. Kim (2005).
243
FTAs, there could be growing pressures not only for a moratorium but
also for an actual rollback of liberalization. For instance, groups that
have raised the possibility of renegotiating NAFTA to allegedly
protect Mexican agriculture could end up eating away at the
credibility of the durability of Mexican trade policy reforms. And
credibility has been one of the main gains behind Mexico’s FTAs.
Given a political environment in which policymaking is increasingly
difficult, the benefits of Mexican trade and investment links with
other regions could be hampered. This brings us to the issue of the
forces and actors that shape Mexico’s trade policy.
Given the government’s promise to halt further FTA negotiations
in late 2003, while pushing for unilateral liberalization from 2002
until the present (and in fact continuing with FTA negotiations with
Korea), the best one can say is that either present Mexican trade strat-
egy is contradictory, or that Mexico has no strategy and that the gov-
ernment has responded to pressures from different interests and
engaged in contradictory actions. The lack of a clear strategy is
reflected not only in the actions carried out by the Ministry of the
Economy, but also in frictions between the Foreign Ministry and the
Ministry of the Economy on key issues such as how to deal with the
Chinese challenge.
The legislative is becoming increasingly active in trade policy,
albeit not in a constructive manner. The 2004 Foreign Economic
Agreements Law was above all a display of force. Since there is no
re-election to any position, Congress members have short-time hori-
zons. This makes it difficult to have the long-term outlook required
to put together a coherent trade strategy. Business leaders, even those
who in the past were in favor of free trade, are starting to demand a
slow down of the liberalization process. While this may be a way to
protect what shares of the market they still have, it can also be seen
as a genuine call for further economic reforms to help Mexico regain
competitiveness. The IMCO report is an outstanding document in
terms of both breadth and depth, showing what must be done in order
to make Mexico more competitive. Should some of the measures
suggested in the report be implemented, there would be fewer rea-
sons to stop liberalization, which would be merely a respite to the
challenges posed by Mexico’s competitors. In addition, increasing
Mexican competitiveness in areas such as financial and energy costs
would allow many SMEs that have not fully participated in interna-
tional trade to benefit from the windows of opportunity that still
exists as a result of Mexico’s network of trade agreements.
244
The preferences of leading Mexican business groups are thus

clear: at a minimum they want to halt further liberalization, whether
unilateral or negotiated, and are not concerned about improved mar-
ket access. Should the status quo, in terms of pending domestic eco-
nomic reforms prevail, there could be increasing calls for a roll-back
of liberalization through the renegotiation of FTAs. Multinational
corporations, which account for a large share of Mexican exports,
would also benefit from the implementation of domestic economic
reforms. PROSEC has brought some life back to import-intensive
exports but, on the basis of the IMCO report, it will not be enough to
help the Mexican economy regain its competitive edge.
Should there be closer interaction and improved collaboration
between business and the legislature, there could be momentum
toward further domestic economic reforms to improve Mexico’s
competitiveness. This would help both, firms that produce for the
local market and Mexican and foreign export-oriented firms. Should
there be no proactive action from the legislature or even from the
executive itself in areas in which reforms can be carried out without
congressional approval, the status quo and an increasingly defensive
stance toward integration with the world economy will tend to
prevail. This means that FTA negotiations with South Korea and
other potential partners will be halted. WTO negotiations, on the other
hand, will continue regardless of the desires of Mexico’s domestic
sectors. If the current WTO negotiations manage to succeed, Mexico
will be caught ill prepared. It is to be hoped that the situation does
not reach that stage and that Mexicans are able to agree on a basic
outline on a trade strategy that makes the most out of its comparative
advantages and, at the same time, ensures that the benefits of
liberalization are realized more fully and shared more equally.
Antonio ORTIZ MENA L.N. 1
1. I would like to thank the participants at the “Workshop on the Trade Strate-
gies of Mercosur Countries, Chile, and Mexico,” November 25, 2005 for their
valuable comments. I am particularly grateful for the very thorough and detailed
comments provided by Roberto Bouzas and Gustavo Vega, and for the time
granted to me by Arnulfo R. Gómez and Luis Martínez Argüello to exchange
views on government-business relations. Needless to say, all remaining shortcom-
ings and omissions are my sole responsibility.
245
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248
Chapter 6
The Political Economy of Chilean Trade Policy
A Review
Introduction
Chile is a rather peculiar case. Trade policy options have been

discussed in the context of an ideological divide between the State
and the Market. In fact, ideology has played a key role in trade
policy choices. For this reason, this article is focused on the
different conceptual logics laying behind alternative development
strategies (of which trade policy is a key component). The paper
reviews the theoretical elements that have shaped Chilean trade
policies in the last decades, taking into account the strong existing
interaction between trade policy and domestic production patterns.
The first section reviews concepts and ideas prevalent before the
1970s (when the leading strategy was import substitution
industrialization), the unilateral trade liberalization period prior to
1990, and the new emphasis on free trade agreements (FTAs)
adopted by the Concertación governments since democracy was
restored. This latter strategy remains dominant until the present.
The second section of the paper provides empirical evidence on the
changing composition of exports during the 1973-2005 period. The
third section illustrates neo-protectionism (both foreign and
domestic) through two case studies: poisoned grapes and sugar
price bands. Finally, the fourth section reviews the structural and
institutional factors that seem to have determined Chilean trade
policy choices.
249
The Political Economy

of Chilean Trade Strategies
Trade policy (or the foreign trade regime) is a key component of

any development strategy. This section examines the economic
foundations of traditional ISI (import-substitution industrialization)
and import liberalization strategies. ISI lends itself to a very active
role for the State, while the market plays the leading, and possibly
exclusive, role on import liberalization. Much of the economic
debate has been around the superiority of one strategy over the
other. But this kind of debate is not productive. In effect, profound
economic and technological changes can affect the environment in
such a way that a change from one strategy to the other becomes
unavoidable. The target is to maximize the welfare, which requires
avoiding confusion between ends and means. ISI played a positive
role in Chile during the 1940s, 1950s and 1960s, but it was largely
exhausted as a development strategy by the 1970s. Similarly, the
strategy of import liberalization performed well in the 1970s and
1980s, but had exhausted itself by the turn of the decade. Today, in
the context of a global economy, a strategy based on free trade
agreements is one of the key ingredients to foster integration into
the world economy.
The ISI Strategy (Pre-1970 Policy Ideas)

The internal market and the state played a key role in ISI. The
ISI strategy pursued two objectives: independence from world
markets and lower external vulnerability. In fact, before the
1960s ISI was considered to be the only mechanism that would
lead to industrialization. Consequently, national industry ought to
be protected. This was the pattern that promoted development in
the industrial world in the nineteenth century. Industrialization
became synonymous with development. Consequently, if a coun-
try like Chile wished to increase its per capita income to the level
of the more advanced countries, it had to industrialize. The main
instruments behind this strategy were high tariff protection and
industrial incentives in the form of cheap credit and foreign
exchange, as well as generous public investment in infrastructure
complementary to manufacturing.
The promotion of manufacturing was across the board. It was
thought that any kind of domestic production that replaced imports
250
would increase national welfare 1. Consequently, ISI had a clear

anti-export and anti-agricultural sector bias. Price controls on food
products reinforced this bias. High tariffs benefited the industrial
sector as a whole, regardless if they were owners of capital or
workers (Stolper-Samuelson). Furthermore, an important part of
fiscal revenues came from tariffs (and special taxes) levied on
imports as well as taxes on mining exports.
Trade policy was one of the main industrial policy instruments
used in Chile and Latin America. At first sight it may appear that
there was a similarity between Chilean (and Latin American)
industrial policies with those of some Asian countries such as Tai-
wan and Korea. However, there was a crucial difference: Asian
industrial policy focused on export promotion. That objective
was not present –either explicitly or implicitly– in Chile (and
Latin America). During the 1960s the ISI strategy started to be
criticized as it showed clear signs of industrial inefficiency. One
the one hand, ISI had not achieved the goal of making the domestic
economy more independent from external markets. At best, the
degree of dependence had not changed. On the other, every bal-
ance of payments crisis encouraged new protectionist rules.
Higher import barriers only brought about temporary solutions,
making the structure of the Chilean foreign trade regime increas-
ingly chaotic. 2
The trade regime that prevailed between 1970 and 1973 shows
the extremes of the ISI strategy, (French-Davis, 1973 and 2001; De
la Cuadra & Hachette, 1992):
a) Nominal tariffs: high tariffs and a high variance. Tariffs
ranged from 0 to 750%, with an average of 105%. Fifty percent of
tariffs were greater than 80% and only 4 % of tariffs were less than
4%. However, the implicit tariff rate (tariff revenues as a share of
total imports) was only 17%.
b) Non-tariff barriers: sixty percent of foreign purchases
required a deposit equivalent to 10,000% of the value of imports.
1. Many restrictive mechanisms were used from 1930 to 1973 to foster ISI,
including: multiple exchange rate systems, high tariffs, taxes and other import sur-
charges, licenses, quotas and prior deposits, import prohibitions, exceptions and
special regimes, export tax rebates, special foreign investment and related capital
movements rules. See French-Davis (1973), Muñoz (1986), de la Cuadra &
Hachette (1990), Meller (1996).
2. For a fuller discussion, see Meller (1996).
251
Import prohibitions affected more than 300 goods and the Central
Bank had to issue licenses for more than half of all imports. Nev-
ertheless, there were 290 exception schemes.
c) Exchange rate regime: there were multiple exchange rates (a
total of eight different official exchange rates with a wedge
between the minimum and the maximum of 1,000%.
This number of trade restrictions illustrates the growing bureau-
cratization of the economy, which led to a complicated network of
regulations and extremely unstable and often arbitrary government
decisions. This, in turn, was an incentive for corruption. ISI poli-
cies were inflexible when faced with changing conditions. In
effect, once the protection had been granted it was very difficult to
remove it. This brought about a pattern of behavior focused on
easy gains, and one in which profits would depend more on ade-
quate contacts and connections than on efficiency and the develop-
ment of an entrepreneurial spirit.
Furthermore, price distortions encouraged oligopolies and a
non-competitive market structure, protected by high tariff and
non-tariff barriers, where the cost of saving dollars by import sub-
stitution was two to four times higher than that of generating dol-
lars by exporting. The Chilean industrial sector used resources
inefficiently and became responsible for failing to transform
Chile into a developed economy. It is difficult to find explana-
tions as to why, after forty years of ISI, the ever incipient Chilean
industry was unable to mature. As a result of this failure, consum-
ers had to pay high prices for poor quality industrial products. It
appears as a paradox that the sector that enjoyed the biggest eco-
nomic incentives was, at the beginning of the 1970s, highly inef-
ficient. The absence of a competitive environment is a key
explanatory factor.
The Import Liberalization Strategy:

(pre-1990 policy rationale)
The import liberalization strategy was implemented after the

1973 military coup and under General Pinochet’s military dictator-
ship (1973-1990). The ideas behind this strategy differed, particu-
larly those concerning the role of the exchange rate. In effect, the
first decade ended in disaster but the second decade was far more
successful.
252
Import Liberalization
The import liberalization strategy basically involved the reduc-
tion of import barriers. In effect, after 1973 import tariffs were sig-
nificantly reduced and non-tariff barriers were practically
eliminated, radically simplifying the complex and chaotic foreign
trade regime inherited from the ISI phase. The implementation of a
flat tariff rate for all imports notably simplified import activities 1.
By 1979 the situation was characterized by a flat tariff rate with an
average and median of 10%, the absence of non-tariff barriers
(except for a few exceptions such as the armed forces, free trade
zones, etc), and a unified exchange rate (Meller, 1996; French-
Davis, 2001).
An open economy achieves a higher welfare than a closed or
highly protected economy for several reasons. First, imports raise
competition in the domestic economy: since imports can substitute
local goods, it encourages domestic firms to improve their effi-
ciency. Second, the stock of factors of productions is used more
efficiently since an open trade regime encourages specialization
according to existing comparative advantages. Third, the range of
goods offered to consumers increase and their price falls as a result
of foreign competition. In sum, trade liberalization encourages
competition and a more efficient allocation of resources in the
domestic economy, supplying consumers with better quality goods
at a lower cost.
Economists agree that free trade increases social welfare.
Economic liberalization makes external prices the key factor to
decide the internal allocation of resources; playing the role of an
external anchor. Until 1973 the Chilean economy was characterized
by the extensive use of price controls. However, the free market and
the open economy adjusted domestic prices with external ones
preventing the restoration of price controls. Trade liberalization,
especially with a flat tariff rate, means neutral economic incentives.
Thus, trade policy is not used to create privileged sectors. In such a
context the economic authorities abstain from promoting sectors
according to priorities identified by a long-term development
1. According to neoclassical theory, a flat tariff rate prevents distortions (espe-

cially a low tariff or one close to zero). Nevertheless, the main virtues of a flat
tariff rate is that it eliminates incentives for corruption (a customs official has no
incentive to ‘mistake’ an automobile –paying a 100% tariff rate– for a tractor –
paying a 10% tariff) and that it is a powerful instrument to resist corporate pressu-
res from production sectors seeking special protection.
253
strategy. There is no specific development or industrial strategy

(such as “picking the winners”) set by the public sector. The
development strategy is exclusively set by the private sector. In
short, the industrial policy is “there is no industrial policy”. Trade
liberalization is consistent with the more global objective of reducing
the public sector’s role in the economy. Apart from efficiency
considerations, public sector behavior and policy instruments are
restricted by the use of relative international prices as an external
anchor, facilitated by a low and flat tariff rate.
However, despite the policy rhetoric that industrial policy is non-
existent, there have been exceptions to the rule. In effect, the price-
band system has granted the agricultural sector a relatively high
level of protection. Since Chile does not have a comparative
advantage in temperate agricultural products and other products
like sugar, why choose these sectors as “winners” and violate the
principle of policy neutrality? (the consequences of price bands for
sugar will be examined in detail later). Export promotion incen-
tives are another exception to the neutrality rule. They will be dis-
cussed in the following sub section.
As noted previously, Chile implemented two distinct trade
liberalization strategies. Most of the attention has focused on the
trade liberalization process undertaken in the 1970s. Table 1 shows
that average tariffs declined from 105% (1973) to 10% over a
period of six years. The maximum and modal tariff showed an
equally sharp reduction. The first liberalization exercise led to
growing trade deficits which eventually resulted in a balance of
payments crisis (1982) and a profound recession (GDP fell 16% in
1982-83). This made necessary to implement a number of
emergency measures to cope with the crisis (see Meller, 1996)
including import tariff hikes of up to 35%.
Chile’s second trade liberalization process started in 1985 when
tariffs were reduced from 35 to 11% over a period of six years (see
Table 2). There is a remarkable difference in the speed of the trade
liberalization process between the two periods. While in the 1970s
tariffs were reduced from 22 to 11% in only two years, in the 1980s
it took five years to cut tariffs down from 20 to 11%. This was one
of the factors accounting for the failure of trade liberalization during
the 1970s, in contrast to the success of the 1980s. The other crucial
factor was the exchange rate. In effect, since trade liberalization
reduces the protection conferred to import-competing sectors, a com-
pensatory real devaluation enables these sectors to neutralize their
254
Table 1. Nominal Tariffs during the First Trade Liberalization period

Chile, 1973-1979
(%)
Percentage of
Maximum items subject
Average Tariff Modal Tariff
tariff level to maximum
tariffs
1973 105 750a 8.0 90
1974 75 160 17.1 60
1975 49 108 8.2 55
1976 36 66 0.5 35
1977 22 43 0.5 20
1978 15 20 22.0 10
1979b 10 10 99.5 10
Source: Central Bank & French-Davis (2001).
a) 8% of the items were in the range 220% – 750% with an average of 320%.
b) As of June.
losses and eventually adjust to the new competitive conditions. In

the 1980s the under-valuation of the domestic currency (in real
terms) enabled domestic producers to adjust and raise their efficiency
vis-a-vis imports. In the 1970s, in contrast, the real appreciation of
the domestic currency left local firms even less protected (see
Table 3). During the second phase of trade liberalization the
exchange rate replaced tariffs as an instrument of protection (particu-
larly of tradable goods) (see Table 3). In contrast, during the first
trade liberalization period the exchange rate was used as an anchor to
reduce inflation and inflationary expectations.
Table 2. Nominal Tariffs before and after the Second Trade Liberalization
period – Chile 1982-1991
(%)
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
10 20a 20+35b 30+20c 20 20 15d 15 15 11e
Between 1991 and 1998 tariffs stayed at 11%. Since 1999 the flat tariff rate was reduced by
one percentage point per annum to reach 6% in 2003
Source: Central Bank.

a) Tariffs rose 20% in March,1983.
b) Tariffs rose 35% in September, 1984
c) Tariffs fell to 30% in March and to 20%,June, 1985.
d) Tariffs fell by 15% in January, 1988.
e) Tariffs fell to 11% in January, 1991.
255
Table 3. Nominal Tariffs and the Real Exchange Rate, Chile 1973-1990
Nominal
The real protection level
Tariff Real Exchange Ratea
indexb
Year Average (Ch.$ / US $,1990)
(1990 = 100)
(%) (2) (3) = [1+(1)] ⫻ (2)
(1)
1973 105 201.5c 117.8
1974 75 199.8 99.7
1975 49 273.8 116.4
1976 36 221.5 85.9
1977 22 184.7 64.3
1978 15 205.2 67.3
1979 11 200.5 63.5
1980 10 175.0 54.9
1981 10 148.8 46.7
1982 10 172.6 54.2
1983 18 207.2 69.7
1984 25 218.0 77.7
1985 26 264.9 95.2
1986 20 294.6 100.8
1987 20 305.1 104.4
1988 15 324.5 106.4
1989 15 313.6 102.9
1990 15 304.9 100.0
Source: Central Bank, and Meller (1996).
a) The real exchange rate is the official nominal exchange rate deflated by the domestic
price index (IPC) and inflated by an external price inflation index.
b) The real protection level is the real exchange rate multiplied by the nominal tariff, plus
one.
c) Average value of the official and parallel market exchange rate. The official exchange rate
suffered a real devaluation of 212 % in the first quarter of 1973.
Export Expansion
According to the theory of trade liberalization, the reduction of
import tariffs lowers the anti-export bias of the economy. In effect,
import tariffs introduce a disincentive to produce goods for the
external market 1. Consequently, trade liberalization alters relative
prices and encourages domestic firms to produce exportable goods.
As internal prices align with international prices, national output
concentrates on those goods where the country has a comparative
advantage. There is a general increase in efficiency and, given that
the external market is considerably larger than the local market,
exports eventually become the economy’s growth engine.
1. In practice, high import tariffs raise the price of import-competing products,

which means that domestic producers find more convenient to supply the local
rather than the international market.
256
In conceptual terms, the bottom line of the trade liberalization

strategy is the following: lowering import barriers is a sufficient
condition to become an exporting country. Moreover, in doing so,
the country can disregard what the rest of the world does. As a
strategy, trade liberalization can be implemented unilaterally, like
the promotion of ISI. In practice, trade liberalization is tantamount
to dismantling the trade regime used by the ISI strategy. Conceptu-
ally, the final result would be an automatic and spontaneous
increase in exports. The private sector adjusts to the new relative
prices (aligned with world prices) and goes forth to conquer exter-
nal markets.
But, why might tariff reductions automatically shift national
producers into competitive exporters to the international market? Is that
all that is needed to achieve international competitiveness? Whatever
the pre-1990 conceptual stance, several instruments were used to
encourage export expansion, especially sector-specific incentives.
Forest products, for example, enjoyed a preferential tax regime for a
long time. The old Forest Law (Ley de Bosques, 1931) made this
activity tax-free for a period of 30 years, even before a single tree had
been planted. In 1974, the old law was modified by Decree 701, which
established two specific benefits for forestry; (i) a direct subsidy of 75%
against costs and (ii) a special tax credit for 50% of the income
generated by the sector. These benefits lasted for 22 years, until 1996.
The effect was a remarkable increase in cultivated areas from 329,000
(1970) to 3.9 million acres (1990). Chile is now considered to have a
comparative advantage in forest products. Forest product exports
(including cellulose) reached US $3,500 million in 2005.
A special incentive granted to the export sector was the
reimbursement of tariffs paid on imported inputs. In order to qualify,
an exporting firm has to provide evidence of imported inputs, the
amount of tariffs paid and the use of imports to produce exports. The
result was a horrendous bureaucratic process. In 1985, a simplified
reimbursement system for smaller export firms was introduced,
consisting of an automatic reimbursement of 10% of the value of
exports. Small exporting firms are defined as those exporting less
than US $10 million in a given category (8-digit ISTC).
By the end of the 1980s, the list of export incentives included the
following (French-Davis, 2002):
• Exemption of the added value tax (IVA) for exports and reim-
bursement of taxes paid on inputs used to produce exports. This
257
instrument was designed to prevent double taxation on final

goods (since 1974).
• Simplified drawback on taxes paid for small exporters (non-tra-
ditional products), equivalent to a reimbursement ranging from
10 to 5% of the FOB value of exports (since 1985).
• Exemption on import tariffs and the added value tax for inputs
used on the production of export goods in an export free zone
(since 1986).
• Deferred payments of customs duties on capital goods imports.
This instrument was applied across the board and not exclusively
for exporters (since 1987).
• Reimbursement of import charges paid on inputs used to pro-
duce export products (since 1988).
Finally, it is important to highlight the role played by the

exchange rate in the expansion of exports. In effect, in 1985 the
real exchange rate was 51% higher than in 1980. Moreover,
between 1987 and 1990 the peso experienced a real devaluation of
77%, (see Table 3). A real devaluation of this magnitude, main-
tained for a relatively long time, must generate a significant expan-
sion in the export basket.
Free Trade Agreements as Substitutes

for Unilateral Trade Liberalization (post-1990 rationale)
In the second half of the 1980s, globalization accelerated dra-
matically. Almost all countries, particularly developing ones, had
to decide as to the strategy that would best adapt to their interests
and allow them to join the global world. This section looks at the
policy adopted by the governments of the Concertación (1990-
2005), which used Free Trade Agreements (FTAs) as the key trade
policy instrument. By the time democracy was restored, exports
had already become the engine of Chilean economic growth. For
the export engine to work properly, the export basket should
expand continuously. This, in turn, would require better access to
foreign markets. Lowering tariffs was not enough to improve
access to external markets. As a result, the Concertación govern-
ments negotiated many FTAs to ensure better market access for
Chilean exports. In fact, FTAs became a key component of Chilean
trade policies.
258
In the 1990s Chile signed FTAs with México (1991), Venezuela

(1993), Colombia (1993), Ecuador (1994), Mercosur (1996), Canada
(1997) and, most recently, with the European Union (2003), the
United States (2003) and China (2006). This was a remarkable
change from the pre-1990s strategy. In effect, according to neo-liberal
orthodoxy, in order to deepen integration into the world economy a
country must liberalize unilaterally, lowering tariffs independently of
what the rest of the world does. One advantage of this approach is that
the country does not have to negotiate with third parties and can move
forward unilaterally. Partly inspired in this view, some have criticized
the number of FTAs signed by Chile. It has been argued, for example,
that they are paper agreements with no real impact on trade flows. If
this is true, why should these agreements be pursued? Critics have
also argued that these agreements are little more than an expensive
marketing exercise by the Concertación governments to maximize
publicity and news coverage. The persistent questioning of these
agreements emphasizes the low returns brought by them to the
country. However, these criticisms are erroneous. The agreements of
the 1990s provided both a learning mechanism and valuable
experience about how to negotiate an FTA. Today, nobody questions
the well known gains of signing FTAs with Europe, the United States
and China.
A surprising fact is that Chile negotiated FTAs with the EU and the
US simultaneously. Logic would question a simultaneous negotiation.
Given scarce resources, in this case human capital, it would appear to
be more convenient to negotiate and conclude one FTA before starting
another negotiation. Incidentally, this question was put forward to the
negotiators by asking them to rank which of the two FTAs was more
important. Their reply was: “they both are”. This is contrary to the
basic idea of opportunity cost that suggests sequential priorities. Yet
negotiating in parallel helped the approval of both FTAs. EU or US
negotiators would have looked incompetent if one of them reached an
agreement and the other did not 1. The two simultaneous negotiations
created a virtuous circle. Since for any developing country it should
be difficult to negotiate two FTAs simultaneously with the United
States and the European Union. The fact that Chile succeeded distin-
guishes it from other emerging economies.
1. This observation was made by the distinguished head of the Chilean nego-
tiating team, Osvaldo Rosales.
259
From the beginning, orthodox economists have questioned the

rationale of FTAs. Given that most distortions have been eliminated
and that internal and world relative prices are similar, the private
sector should have all the information available and the incentives
to be efficient and take correct decisions. According to this logic,
what role is left for the state? Why should the government
intervene? This rationale explains the criticisms of neo-liberal
economists to the strategy of the Concertación government. If the
previous trade liberalization strategy was working well enough and
was able to generate 7% growth rates, why change it? The reply
emphasizes that a sustained increase in exports requires improved
access to external markets. A unilateral reduction of import tariffs
is not in itself sufficient to reduce the trade barriers faced by
Chilean exports. A strategy focused on FTAs is an appropriate
mechanism to achieve this objective.
There have also been conceptual criticisms. FTAs allow
preferential access to the Chilean market for certain foreign
products. This may produce trade diversion from more efficient
producers that still have to pay tariffs. Trade diversion toward less
efficient producers (for example, of machinery) would generate a
welfare loss. However, when the tariff level is less than 8%, trade
diversion is empirically irrelevant. 1
Chile is among the countries with the largest number of FTAs
signed. This was done to promote exports to third countries
through better market access. Since many other countries are not as
open to imports as Chile, an FTA becomes a kind of trade club
where members mutually grant themselves preferential access.
This means that members’ exports enter the markets of the other
members of the club paying lower tariffs than those that are not
club members. In effect, Chilean trade strategy has been to maxi-
mize the number of FTAs, becoming a member of as many preferen-
tial clubs as possible. There is a consensus that the worst that could
happen to a country in a competitive world is to be excluded from
a “club”. Since countries left to their own have an uncertain future,
there has been a general propensity, especially in small and devel-
oping nations, to become members of trade clubs (Devlin and Gior-
dano, 2004).
1. See estimates for Chilean industry in Meller and Donoso (1998).
260
An FTA is not only an agreement to reciprocally reduce tariffs

and non-tariff barriers. It includes clauses that set standards and
make the movement of production factors easier, for example,
foreign investment and the reallocation of qualified workers (e.g.
professionals, technicians, and businesspeople). Furthermore, it
includes mechanisms to solve conflicts and encourage compliance
with international legal and environmental standards. Since FTAs
set long-term rules to guide relations between members, such
agreement provides Chilean firms with a long-term horizon for
investment decisions.
In addition, the signature of an FTA with the United States or the
European Union constitutes a seal of approval on the authorities’
responsibility and commitment, as well as confidence on the insti-
tutions and economic policy of the developing country member. In
the past, the International Monetary Fund (IMF) used to play this
role by providing information about the macroeconomic stance of a
particular country and its prospects. Now, with almost all countries
subscribing to responsible economic policies, the IMF has lost part
of its discriminatory value. Macroeconomic equilibrium is a pre-
condition required by foreign investors before FTA negotiations are
even considered.
Among the group of developing or emerging economies, there
are more than one hundred countries with similar characteristics, all
competing to attract foreign investors. Only a few have FTAs with
the world major economies. This points to Chile as a country
attractive enough to be selected for foreign investment projects.
This, too, generates positive feedback. The more FTAs a country
signs, the more attractive it becomes for other countries to sign new
agreements with it. This is exactly what has happened to Chile with
South Korea, China and Japan. Something similar also happened to
Mexico.
In brief, FTAs have made Chile an exception in Latin America,
making it visible to foreign investors. The governments of the Con-
certación have made the Chilean economy a model for other Latin
American countries to follow. Moreover, businessmen are pleased
that it is the President who takes the lead, establishes and facilitates
the contacts to carry out negotiations with the major world econo-
mies, such as the United States, the European Union, Japan, China,
India, etc. As the State ought not to undertake any role in the econ-
omy, this is something that is difficult for the neo-liberal approach
to swallow.
261
Empirical Evidence
Chilean exports increased from US $ 4.9 bn in 1985 to US $ 38.8 bn

in 2005. This rapid export growth raised the share of exports in GDP
from 16% in 1970 to 23% in 1990 and 30% in 2004. Between 1985
and 1999 total exports increased at a 10% annual rate. Non-copper
exports, in turn, increased 11% per annum. This performance was
accompanied by a diversification by type of commodity. In effect, in
1970 copper accounted for nearly 80% of exports. However, by the
end of the 20th century that ratio had fallen to less than 40%. Simi-
larly, the number of Chilean companies exporting more than US
$10m per year increased from 38 in 1986 to 282 in 2004.
Chilean exports are primarily concentrated in natural resources,
which account for 90% of the total. The commodity composition of
exports by market of destination is as follows: 60% of exports to
developed countries are natural resources (NR), 35% processed natu-
ral resources (PNR), and 5% other industrial products (OIP). In con-
trast, exports to Latin American countries are 35% (NR), 35% (PNR)
and 30% (OIP). This means that Chile exports goods to Latin Amer-
ica which it does not export to other markets. Chile has no natural
trade partner: in 2003 the European Union accounted for 25% of total
exports, the US and Canada for 23%, Asia (excluding Japan) 23 %,
Latin America 16% and Japan 13%.
The Concertación governments (1990-2005) placed a priority on
further integrating the Chilean economy into the world. This was
done through a strategy of signing as many FTAs as possible and
attracting the greatest number of foreign investors. The official dis-
course emphasized the importance of the export sector and its role
as an engine of growth. The implicit premises that have guided the
Concertación governments were the following: a) globalization is
here to stay; b) Chilean participation into the world economy gen-
erates more benefits than costs; and c) the greater the level of par-
ticipation, the greater the benefits. However, the negotiation of
FTAs does not exhaust public policy actions. Since globalization
creates winners and losers, the public sector must maintain eco-
nomic stability and provide social protection for the losers.
There is the idea that the economic model applied during the dic-
tatorship (1973-1989) generated very positive results. While there
was a great deal of export rhetoric during this period, it was during
the Concertación period that Chile became an exporting country.
In effect, during the military regime total exports increased from
262
US $ 1,300m in 1973 to almost US $ 8,400m in 1990. This amounts

to an average annual growth rate of 5.5 % 1, very much influenced
by its low initial value (1973). In fact, when only the 1980-1990
period is considered, the average annual growth rate for exports
falls to only 3.2% (see table 4). In contrast, under the Concertación
exports increased from US $ 8,400m in 1990 to US $ 32,000m in
2004, tantamount to an average annual growth rate of 8.2 %.
Table 4. Evolution of Chilean Exports (goods)

($US millions – FOB)
Non Copper Exports per
Total exports Total exports Exports capita
Year
(Current US $) (US $ 2004) (US $ 2004) (US $ 2004)
1973 1,309 4,265 848 417
1980 4,705 7,683 4,214 689
1990 8,373 10,562 5,755 802
2004 3,025 32,025 17,667 2.128
Annual Growth %)
1973-1990 --- 5.5 11.9 3.9
1973-1980 --- 8.8 25.7 7.5
1980-1990 --- 3.2 3.2 1.5
1990-2004 --- 8.2 8.3 7.2
Source: Central Bank.
Per capita exports, captures the export performance of a small glo-

bal economy. Moreover, since exports are the main engine of growth,
that indicator can be used as a predictor of per capita income. During
the import liberalization regime per capita exports almost doubled
(measured in constant 2004 dollars), increasing from US $ 417 in 1973
to US $ 802 in 1990. Considering that Chile is a small economy, this
level of per capita exports can hardly be considered a success. The
next period, however, was very different: per capita exports increased
two and a half times, from US $ 802 to more than US $ 2,100 in 2004.
This level of exports per capita is similar to that of other successful
small exporting economies. In brief, Chile can only be considered to
have become a successful exporting economy at the beginning of the
twentieth century. Moreover, from 1990 onwards non-copper exports
have increased substantially: they tripled from US $ 5,755m in 1990 to
US $ 17,700m in 2004 (in constant dollars). In contrast, during the
1980s, non-copper exports increased only by 30%.
1. Growth rates calculated at 2004 US constant dollars (see table).
263
Table 5. Products with High Chilean Shares in World Markets

(Chilean exports/world exports %)
Years
World Markets 1970 1980 1990 2004
Copper 10.7 13.8 17.8 37.0
Salmon/trout – – 20.0 34.0
Fruit – – 12.0
Apples – – 2.3 8.5
Grapes – – 2.4 25.0
Wine – – 1.6 6.0
Forestry – – 2.0 8.2
Cellulose 0.7 2.3 2.7 6.2
Source: Direcon, FAO, Asoex, Infor, ViñasChile.
During the latest phase, Chile also turned into an important

world producer of a number of products, besides copper. Chilean
copper exports accounted for 18% of the world market in 1990, but
by 2004 Chile had become a leading exporter of both copper and
salmon, with a world market share close to 35%. Chile has also
become an important exporter of fresh fruit, accounting for 12% of
the world market (8.5% in the case of apples and 25% in the case of
grapes), forest products (8.2%), and wine and cellulose (6%).
[Table 5].
There are other indicators that show Chile’s export transforma-
tion during the Concertación period. In effect, while in 1990 Chile
exported to 57 destinations, by 2004 this number had increased
threefold to 186 countries’ markets. Similarly, the number of firms
exporting more than US $ 10m annually increased from 87 in 1990
to 282 in 2004. The number of very large exporters, with sales of
more than $100m annually, increased from 8 to 38 in the same
period. This indicator is very important as it shows that the export-
oriented model was sustained by an increase in the number of
exporters.
Table 6. Number of Exporting Firms
Annual firms Year

Exporting more than 1986 1990 2004
US $10 million 38 87 282
US $100 million 4 8 38
Source: PROCHILE.
264
Neo-Protectionism 1
Most countries have significantly reduced their tariff and non-

tariff barriers, especially in Latin America where protectionism was
a major component of ISI strategies. In effect, prior to 1980 a tariff
rate lower than 30% was considered to be low. Presently, a tariff
rate of 15% is regarded as relatively high. The dismantling and
streamlining of the foreign trade regime has become the route by
which the Latin American economies have connected to the global
world.
During the 1990s the region experienced an export boom. Latin
American trade expanded by an annual average rate of 10%, higher
than the world average. (IDB and World Bank). However, success-
ful exporters realized that while developed countries’ average tariff
barriers were lower, there were less visible barriers that made
access to external markets extremely difficult. These included tar-
iff peaks, tariff escalation, non-tariff barriers (quotas, import
licenses, reference prices, rules of origin etc.), anti-dumping duties
and domestic subsidies 2. These protectionist measures have been
in place for decades, but there are new measures that can be defined
as a sort of neo-protectionism. These include a variety of standards
in areas such as sanitation and phyto-sanitary rules, minimum qual-
ity levels, technical standards and labor and environmental rules.
Given the differences in environmental perceptions between Euro-
peans and Latin-Americans, it is difficult to classify countries as to
whether their environmental preferences have a national value or
are motivated by protectionism.
The original version of the General Agreement on Tariffs and
Trade (GATT) included rules not to use standards and norms as pro-
tectionist devices. However, the use of standards as a regulatory
mechanism was accepted to “order the markets”. This is the reason
why Chilean fresh fruit can not be exported during the North Amer-
ican harvest season. These “mark restrictions” imply that if there
were no seasonal differences between the Northern and Southern
hemispheres, Chile would never have been able to export fruit to the
United States. Examples of neo-protectionist actions against Chil-
ean exports include the new law on recycled packaging materials in
1. See the articles in the book edited by R. Fischer (1977) for more discussion.
2. For a more extensive discussion and further information about Latin Amer-
ica, see Meller (2003).
265
Germany (the Topfer law) which requires Chileans to use fruit

wooden crates, thus raising export costs and incidentally leading
Chilean box producers to bankruptcy or the Canadian standard
requiring wood moldings/trim to be made from one piece of wood
and not, as in Chile, from different pieces. In the area of sanitary and
phyto-sanitary standards, publicized cases that caught a lot of atten-
tion were those of ‘contaminated’ grapes, which led the United
States to embargo Chilean fruit imports unilaterally and, the prob-
lems faced to exporting fishmeal to Mexico (Fischer, 1997).
The next sections discuss a number of specific issues concerning
neo-protectionism and their relationship to the Chilean economy,
focusing first on how Chile has negotiated its FTAs, then analyzing
two cases of foreign neo-protectionism and finally, reviewing agri-
cultural price bands (in particular that of sugar) as an example of
domestic neo-protectionism.
Conceptual Aspects of Chilean FTA Negotiations

The assumptions behind FTAs are quasi-mercantilist. First,
negotiators place a priority on exports. Second, negotiators are
concerned about an increase in imports. Third, the expectation of
higher exports compensates the perceived cost of higher imports.
This approach assumes that trade is a zero-sum game, exports being
‘good’ and imports “bad” and the optimum being a trade surplus.
In fact, one Chilean negotiator has called free trade agreement par-
adoxical, since the products that shall be excluded from the negoti-
ations are discussed first. In practice, the first stage of any
negotiation is the identification of the goods that are to be included
in the FTA. During a second stage the negotiators agree on different
calendars of tariff reductions for goods covered by the agreement.
In general, there is a first group or rapid or immediate liberalization
that includes those goods that are already traded on a reciprocal
basis and that already have zero levies 1. The second group includes
a calendar of tariff reductions of between three to six years, at the
end of which tariffs will fall to zero. A third group includes very
slow tariff reductions and includes goods that will reach a zero tar-
iff rate in 10 or 15 years.
1. This has an important signaling effect at the time of signature.
266
For the majority of countries negotiating an FTA, these tariff

phase-out calendars present no great theoretical issue. For Chile,
however, it is a different case. In effect, the conceptual criteria used
in preferential negotiations are genuinely problematic, a fact made
evident by the flat tariff rate regime prevalent in Chile and the
explicit absence of an industrial policy (that is, there are no priority
sectors) 1. Why has Chile, with a flat tariff rate and no industrial
policy agreed to different calendars to phase-out import tariffs?
This is an obvious policy inconsistency, since signing an FTA means
ending the flat import tariff rate. One explanation may be that
when tariffs are at the one digit level (currently they are 6%), break-
ing this rule has little practical effect. But the fact remains that dif-
ferent phase-out calendars mean a conceptual change and explicit
preferences for some sectors over others.
What, then, have been the criteria to allocate sectors according to
the different phase-out calendars? Most Chilean agreements
included two calendars for tariff reduction, one taking four to six
years to reach a zero tariff rate and another taking more than eight
years. In addition, there has been a list of exceptions from the FTA.
This list constituted a new and important protection mechanism.
Since the first FTAs, Chile has used the following four criteria to
construe its list of exceptions: a) agricultural products with price
bands (sugar, wheat, vegetable oils); b) products with high specific
taxes (petroleum, tobacco, cigarettes); c) products manufactured
with inputs with domestic prices lower than international prices;
and d) products from sectors undergoing restructuring (such as tex-
tiles). However, since 1996, Chile abandoned the list of exempted
goods, following the demand made by Brazil and Argentina to
negotiate an FTA with Mercosur.
Different calendars to phase-out tariffs levied on different sec-
tors, amount to the application of an industrial policy. The determi-
nants of such industrial policy seem to be more associated with
lobbying capacity than with the objective of “picking winners”.
Minimizing conflicts seems to have been the leading principle. As
a result, better organized producers got more time to adjust to full
import competition. The question then arises about who defends
the interests of the consumer? Who has represented consumers in
FTA negotiations?
1. Except for the price band system.
267
Neo-Protectionism Abroad 1
The poisoned grapes and the ecological dumping cases illustrate
Chile’s experience with neo-protectionist trends in the rest of the
world. We will examine each in turn.
Poisoned Grapes (Engel, 1997)
In March 1989, the United States Food and Drug Administra-
tion, (FDA) found two grapes containing cyanide in a shipment that
had arrived from Chile. The FDA immediately confiscated the
whole cargo and made a public announcement recommending that
Chilean grapes were withdrawn from sale and existing inventories
destroyed, advising against consumption and prohibiting new
deliveries. All this happened in the middle of the Chilean export
season. This affected not only the delivery of grapes to the United
States, but paralyzed all fruit exports across Chile. The US govern-
ment applied an embargo on all fruits and vegetables arriving from
Chile. The estimated damage to Chilean exports was around
US $ 300m.
At the time, nearly 600,000 boxes of Chilean grapes arrived at
US ports of entry every day. The probability of finding two grains
of poison in a million grains was one in ten thousand. A subsequent
investigation by a group of experts found a series of errors in FDA’s
analysis. Furthermore, given the conditions in which the cyanide
was found, the contamination happened a few hours before the
analysis was done. In other words, the poison was introduced into
the grapes when they were in the United States and not Chile. Why,
then, should such an extreme measure as a complete embargo on all
Chilean fruits and vegetables was applied?
One hypothesis suggests a protectionist motive. In fact, Califor-
nian producers had been pressing the US Congress for greater pro-
tection from Chilean grape producers 2. Chilean producers,
supported by their government, have used several official and legal
channels to obtain compensation, without any results.
Ecological Dumping (O’ Ryan and Ulloa, 1997)
Ecological dumping occurs when production costs in country B
are higher than in country A because of stricter environmental
standards. This encourages country B producers to move their
1. This section is based on Engel (1997) and O´Ryan and Ulloa (1997).
2. For a more detailed analysis of other hypothesis, see Engel (1997).
268
production to A. In other words, costs in country A will be lower

than in country B by the amount that this country allows greater
contamination.
Some developed countries, mainly European, have adopted a
“precautionary principle” endorsing restrictions on the use of cer-
tain products that could affect human health, even though such
precautions may not be fully justified on scientific grounds. It is
estimated that there are about 60,000 dangerous substances, but
the available toxicological information covers less than 25%.
Consequently, if a European technical committee decides to apply
this principle, it can paralyze exports highly relevant for Latin
American countries. Moreover, such technical committee can
include domestic producers, which involves a clear conflict of
interest. This means that exports to the European market face sig-
nificant explicit or implicit threats. This is what is called “contin-
gent protection”, a practice according to which exporters´
behavior may be affected just by the probability that an inquiry or
an investigation be launched. The risks are lower when exporters
agree to “cooperate” with local producers. The analogy with
“anti-dumping” cases would be a situation in which the exporting
company avoids being fined by raising export prices or lowering
prices in the home market 1.
Eco-labeling, particularly ISO 14,000 can also become a protec-
tionist measure, even though its use is voluntary. In effect, import-
ers and distributors may refuse to buy certain products if they are
not certified. An exporting country creating environmental prob-
lems can thus face export restrictions because of contingent protec-
tion or because their products are not certified under the ISO 14,000
label. In theory, export restrictions should be applied if there are
negative externalities that affect the importing country. However,
for the majority of exported products this is not the case: externali-
ties affect only domestic producers.
ISO 14,000 sets out standards for the whole product life cycle. In
the case of mining, this means the installation of filters and pro-
cesses to reduce air pollution and of plans to treat sulfuric acid
emissions, eliminate arsenic residues and properly dispose of other
residues. In addition, all mining sites must have explicit plans for
the time of closure. However, there are no optimum environmental
1. For a deeper theoretical discussion, see the article by Ronal Fischer in

Fischer (1997).
269
standards to deal with these issues, as illustrated by the fact that the
damage caused in urban areas cannot be compared to that made in
a desert, which is where most Chilean mines are located. In any
case, during the last ten years Chilean mining companies have
undertaken investments of approximately US $ 1,000 m to comply
with ISO 14,000 standards.
This investment is necessary but not sufficient to prevent pro-
tectionist pressures. In effect, European governments could
declare copper, which accounts for more than 40% of Chilean
exports, as too dangerous to human health to be used in water
pipelines and roofs. In anticipation, Chilean mining companies
have taken steps to respond to possible allegations over copper’s
dangerous health effects. In this case, the beneficiaries of the
application of the “precautionary principle” would be European
producers of copper’s substitutes for use in roofs and pipelines.
Those negatively affected would be the European consumers and
the Chilean copper exporters.
Neo-Protectionism at Home
The agricultural sector has challenged the value and benefits of
FTAs. Traditional farmers, in particular, fear that they will be the
most negatively affected by these types of agreements. Since the
second Chilean trade liberalization phase (1985-1986), some sensi-
tive agricultural products have benefited from the implementation
of a price band system. These products include wheat (and flour),
vegetable oils, milk and sugar. This section looks at sugar in detail.
Sugar Price Bands 1

Sugar is one of the most protected and distorted sectors in the
world. In effect, most countries use import quotas, tax subsidies
and/or minimum support prices. Typically, these interventions are
justified on the basis of sugar’s highly volatile world prices. In
effect, according to empirical evidence, sugar is the agricultural
crop with the largest price variance. An analysis of the price vari-
ance of sugar in the Chilean domestic market since 1986 onwards
provides the following results (P. Rojas and Jiménez, 2003):
1. This section relies on articles included in the White Book of Sugar: a history
of protectionism (Libro Blanco del Azúcar. Una Historia de Proteccionismo)
(2003).
270
i) Domestic price volatility was relatively high but price bands

have failed to stabilize it;
ii) During most of the period, domestic prices were significantly
higher than world prices (in other words, there was a tariff sur-
charge on sugar imports. Thus, “the intermediate and final con-
sumer did not get stable but higher and less variable prices
compared to international prices“) (op. cit., p. 78);
iii) Between 1998 and 2001 the tariff on sugar imports, based on
price bands, fluctuated between 44 and 106%. This was clearly
above the flat tariff rate, which reached 6% in 2003. More
remarkably, the range of tariff values (44 to 106%) was much
higher than the tariff consolidated in the GATT, which was
expected to fluctuate between 25 to 35% for products with price
bands. As Chile had violated its consolidated tariff, “Chile
claimed safeguards in order to legitimize his infraction and buy
time to renegotiate the consolidated tariff at the World Trade
Organization” (WTO), (Jana, [2003], p. 141). From 2002 on, the
new consolidated tariff for sugar has been set at 98%.
(i) Sugar importers also face contingent protection since the spe-
cific duty implicit in the reference price is hardly transparent.
The fact that reference prices are calculated on a weekly basis
means that if one import operation takes longer than a week the
importer would ignore the specific duty to be applied to his
transaction. This raises the risks faced by the importer of sugar
significantly. Sugar exporting countries have complained
against the Chilean price band system before the WTO, which,
has determined that the Chilean price band does not comply
with WTO standards.
In 2003 the government changed the way in which price bands

were calculated. The underlying reason was that the previous
methodology (which took into consideration ten year price trends)
was leading to an actual reduction of sugar protection. The new
methodology sets out the explicit objective of enabling the survival
of the sugar industry by making “sugar beet and sugar refining via-
ble in the country”. “The new price band was set to save the sugar
sector from a price so low that would place it out of competition”,
(Rojas and Jiménez, p. 91, 93). In spite of this, the Finance Minis-
ter backed the government’s proposal by stating that “price bands
are an instrument for price stability and not for price maintenance,
a practice absolutely inconsistent with WTO rules” (p. 226). The
271
new price floor, in place since 2003, starts at US $ 310/ton, 6.2%

higher than US $ 292/ton (had 1986 price ranges been used). The
agricultural lobby wanted an even higher reference price. The cur-
rent price band system will end in 2014 at US $ 238/ton, but there is
no information as to what will happen next.
Who has benefited from the price band system? According to
Galetovic and Venturelli (2003): i) Between 1986 and 2003 the
existing price arrangement transferred US $ 523 m from consumers
to IANSA (the sugar refining company), sugar beet producers and
the government (in the form of taxes); ii) the transfer made by con-
sumers was “highly regressive”, since it was evenly distributed
across income deciles (if the distribution of the sales tax (IVA) is
used for comparison, the highest income decile paid seven times
more than the lowest decile. Recall that the highest decile is
40 times richer than the poorest decile); and iii) the transfer from
consumers to producers was also regressive: IANSA received 44%
(US $ 230m) and the tax authorities a total of US $ 126m. The
remainder was distributed regressively among beet producers: units
with less than 5 hectares received around US $ 1,000 while those
between 50 to 100 hectares got US $ 52,000.
In sum, the sugar price band system has been protectionist and
doubly regressive. Yet, after 17 years of existence, the government
came to the conclusion that it had to provide protection for an addi-
tional 12 years. Does Chile have comparative advantages in sugar
beet production? What economic rationale justifies this policy?
The evidence reviewed suggests that the major asset of the sugar
producing sector is the price band system. Considering the concern
of the Concertación governments for low income groups; what is
the distributional argument that can support a price arrangement
that is doubly regressive? The incentive of tax authorities to gain
consumer surplus seems higher than profiting from unearned
income, a motive very similar to that of IANSA, the sugar refining
company.
With these breaches in WTO consolidated tariffs, the Chilean
government has also lost credibility on its commitment to free
trade, respect for international norms and sector neutrality (“it is
difficult to understand why sugar has been chosen as a winning sec-
tor”). The most recent price band system conflicts with recently
concluded FTAs (Jana, 2003). In the FTA with the United States, for
example, general tariffs will be reduced to zero in 12 years for all
products (even those with price bands), but a special clause makes
272
its application subject to surpluses in both countries, which implies

that it will never reach a zero tariff. The situation is even more
problematic with the Mercosur, since sugar tariffs will fall to 15%
in 2007 and will be reduced to zero in 2012. It is uncertain how this
conflict will be solved, creating uncertainty as to the completion of
the tariff phase-out calendar.
What is the counterweight to the sugar lobby? There are three
groups. First, there are the professional economists who have
called attention to the distortions created by the price band system
and the unearned income flows that it generates. Second, there are
the soft drink producers that use sugar as an input and that have
complained vocally through various channels (newspaper adds,
seminars, etc.). Finally, third countries negotiators who have chal-
lenged the price band system and have demanded its elimination.
Trade Policy Determinants
This section will examine the structural and institutional deter-

minants of Chilean trade policies.
Structural Factors
In Chile, there has been a high degree of ideological and policy
polarization about the trade policy measures necessary to stimulate
economic growth. As previously explained, different policy
approaches prevailed at different periods in time. Since the begin-
ning of the twentieth century, Chile had a comparative advantage in
copper, and before 1973 it was believed that the country could only
export copper. However, profitable exploitation of copper required
large scale production and huge investments, that could only be car-
ried out by foreign investors. Therefore, an ISI development strat-
egy favoring the domestic market was highly attractive. Trade
policy (and protectionist barriers) was the main instrument used to
promote development. All domestic producers were granted pro-
tection. Moreover, the larger was the producer, the higher the level
of protection. As a result, profitability began to depend on protec-
tion. It became more profitable for national businessmen to lobby
for higher protection than to produce efficiently. The discretional
behavior of the state decisively influenced the size of private sector
profits. Continuous balance of payments crises were dealt with an
273
increasing variety of ever-more restrictive protectionist instru-

ments, to the point that the general rule became an exception among
multiple special cases. After 1973, there was a highly negative
reaction to the excessive intervention of the state. Trade policy was
only one of the three reforms –free markets, free trade and privati-
zation– that made up the structural reform program. To avoid the
resurgence of the state’s discretional role, the principle of equal
treatment was adopted through a low and flat tariff rate.
One second factor was the position of the Concertación govern-
ments vis-a-vis globalization. As many domestic businessmen had
supported the military regime, the Concertación governments were
concerned that businessmen would be reluctant to invest. More-
over, if the Concertación failed, the result would be a new wave of
aggressive pro-business administrations. At first, the Concertación
governments decided to maximize Chile’s links to the global econ-
omy and offered all types of incentives to foreign investors. They
also launched an FTA strategy aimed at achieving rapid export
growth.
The third structural factor is associated with the structure of
Chilean comparative advantages, which fundamentally lays in nat-
ural resources. Since the Chilean economy is a small economy, the
world market is key for the successful exploitation of the endow-
ment of natural resources. This must be combined with global inte-
gration and investment stimuli for all firms, either foreign or
national. Export expansion, higher foreign investment flows and
the active involvement of domestic firms, combined with a respon-
sible and coherent economic policy, has led to high and sustained
economic growth for over two decades. Unsurprisingly, high and
continuous growth validates any policy.
Institutional Factors 1
The institutional characteristics of trade policymaking and FTA
negotiation machinery point out, in the Chilean case, to low institu-
tional fragmentation, a high degree of formal co-ordination (nego-
tiations), a concentrated network of private agents and a high
degree of formal requirements to participate (Jordana and Ramió,
2003, p. 186). Chile has always been characterized as having a
strong presidential regime. These traits were strengthened during
1. This section uses parts of Sáez (2005).
274
the prolonged dictatorship of General Pinochet and consolidated by

the new Constitution. The executive is responsible for both trade
policy and the conduct of foreign policy and it has the exclusive
competence to set or modify taxes. Congress cannot intervene by
own initiative on tax issues and it cannot modify any FTA agree-
ment negotiated by the Executive. In brief, the Congress generally
acts after the event. Overall, since 1973 the executive has had a
monopoly over trade policy and has been the leading actor in FTA
negotiations.
However, negotiations for an FTA with the United States and the
European Union introduced changes because of the opposition by
agricultural producers, who anticipated that the price band system
for agricultural products would be challenged. Congress created an
External Relations Commission in the two houses to gather infor-
mation about the progress of negotiations which served as a forum
to debate FTAs. The Judiciary, at last, played a minor role in over-
seeing the a posteriori implementation of free trade agreements.
As a result, there is an obvious imbalance between the influences
by the three powers, with the Executive branch maintaining almost
full control.
To negotiate the FTAs the Executive created an Inter-ministerial
Committee made up by the Foreign Relations Minister, who
chaired the Committee, and the Finance, Economy, and Agriculture
Ministers and, the Presidential spokesperson (Secretary General of
the Presidency/Secretaría General de la Presidencia, SEGPRES).
Committee decisions were adopted by consensus with disagree-
ments resolved by the President. In practice, however, the Finance
and Foreign Affairs Ministers made the key decisions. This
accounts for the low level of institutional fragmentation described
earlier.
The negotiations were placed under the responsibility of the
Director of DIRECON (Dirección de Relaciones Económicas de la
Cancillería), an agency which acted as a Technical Secretariat.
This technical secretariat organized the different Negotiating
Groups in charge of carrying out the technical work. These groups
received inputs from the private sector, which took part in the pro-
cess in an ad hoc manner. DIRECON was also in continuous contact
with different business associations, but the private sector was not
formally incorporated into the policy-making and negotiating pro-
cess. Summarizing, there was a high level of formalization to
275
participate in the negotiations and the role by the private sector was
restricted to selection by invitation.
To generate support for FTA negotiations there were public
events to exchange ideas and information. The Foreign Ministry
created an Advisory Council made up of parliamentarians, busi-
nessmen and academia to follow the negotiations with the United
States and the European Union. This Council met three times. In
2003, a Public-Private Council for Export Development was cre-
ated bringing together several business associations, Ministers
from the Inter-Ministerial Committee, the Foreign Investment
Committee and PROCHILE. The Council, which would meet twice a
year, was regarded as a forum to exchange information.
As far as the participation of civil society is concerned, DIRECON
organized seminars, round tables and conferences with various
groups in different regions. In 2001 and 2002, when the negotia-
tions with the US were held, DIRECON held 56 public meetings,
while in 2004, a total of 201 public information meetings were
organized (almost one each working day) (Sáez, 2005). The trade
unions have marginalized themselves from the FTA negotiations.
Sáez (2005) describes their position in the following terms, “the
trade union movement holds an unclear position, that neither helps
nor hinders the process (of FTA negotiations)”.
Final Remarks
There is a high degree of consensus about the importance of

export expansion and Chile’s continuing integration into the
world economy. Governments will continue to sign new FTAs
(Japan, China, India etc.) and to deepen existing ones. FTAs have
become a useful mechanism to neutralize corporate pressures.
However, some FTAs have fostered inter-sector rivalry. The tradi-
tional agricultural sector and other sectors have disagreed over
the costs and benefits of FTAs with the US and the European
Union. In the case of the FTA with China, those antagonistic posi-
tions emerged between labor-intensive manufacturing and the rest
of the economy.
It is important to foster greater participation in FTAs negotiations
by the civil society, including businesses, workers, consumers and
environmental non-governmental organizations (NGOs). The Exec-
utive has favored a very limited participation during the negotia-
276
tions. However, it will be necessary to encourage, broaden and

improve the participation of all sectors. In addition, it is necessary
to clarify what are the costs and benefits of each new FTA, as well
as which sectors and agents gain and loose with the agreement.
Studies on these issues are practically non-existent and should be
pursued.
Patricio MELLER 1
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278
Contributors, Seminar Program

and Participants
279
Contributors
Roberto BOUZAS is professor an economist graduated from the Uni-

versity of Buenos Aires (Argentina) and Cambridge University
(UK). He is Associate Professor at Universidad de San Andrés
and Senior Research Fellow at the National Scientific and Tech-
nical Research Board (CONICET) in Argentina. He is Academic
Director of the Masters Program in International Relations and
Negotiations jointly organized by Universidad de San Andrés,
FLACSO/Argentina and Universidad de Barcelona. His latest
book is: Dilemas de la Política Comercial Externa Argentina
(co-authored with E. Pagnotta) (Buenos Aires: Siglo XXI Edi-
tores, 2003).
Marcelo LEIRAS (Ph.D. candidate, Deparment of Political Science,

University of Notre; Licenciado en Sociología, Universidad de Bue-
nos Aires) is a lecturer and director of the undergraduate programs
in Political Science and International Relations in the Deparment of
Humanities, Universidad de San Andrés. He specializes in the com-
parative analysis of democratic institutions, electoral behavior and
political parties. He is currently working on a book-length project
on the determinants of party system nationalization in Argentina.
His most recent publications are “Organización partidaria y democ-
racia: tres tesis de los estudios comparativos y su aplicación a los
partidos en Argentina.” Revista SAAP. 1 (3), 2004; and “¿De qué
hablamos cuando hablamos de instituciones informales,” en Arturo
Fernández, comp. Estudios de Política Comparada. Rosario: Uni-
versidad Nacional de Rosario, 2004, 65-92.
281
Fernando MASI is Sociologist and Economist with specialization in

International Economics and Foreign Policy, School of Advanced
International Studies (SAIS) of the Johns Hopkins University.
Research Member of the Centro de Análisis y Difusión de la
Economía Paraguaya (CADEP). Worked as a Principal Adviser of
the Ministry of Finance of Paraguay (2003-05) for trade negotia-
tions in Mercosur. Visiting Scholar, North-South Center, Univer-
sity of Miami, for research on FTAA and small economies. Former
officer of the World Bank and of the UNDP, and IDB consultant on
regional integration. More than twenty works published on Para-
guay’s economy, Paraguay’s participation in Mercosur and on Par-
aguay’s international relations. Currently working in the Division
of International Trade at the Economic Commission for Latin
America and the Caribbean (ECLAC)
Ricardo Andrés MARKWALD. BSc in Economic Sciences, Economic

Sciences School, Buenos Aires National University (1972); MSc
in Public Sector Economics, Pontifical Catholic University, Rio
de Janeiro (1980). He has worked as a research expert with the
Institute of Applied Economic Research (IPEA) between 1980
and 1993, particularly in the fields of macro-economics, macro-
economic modeling and foreign sector of the Brazilian economy.
Positions: Coordinator, Economic Situation Monitoring Group
(1987-90); Coordinator, Macro-Economic Area (1990-91) and
Deputy Director for Research (1992-93). In 1993-1995 he
worked with the Economic Department of the National Confed-
eration of Industry (CNI), as Assistant Head. In 1995 he was
appointed General Director at FUNCEX at the Foreign Trade
Studies Center Foundation (FUNCEX).
Patricio MELLER is Ph.D. in Economics, University of California,

Berkeley; Full Professor, University of Chile; Senior
Researcher, CIEPLAN. He has been Director of the Department
of Industrial Engineering, U. of Chile, and Director of the Mas-
ter in Management and Public Policy, U. de Chile. Visiting
Professor at Boston University and NotreDame University.
Visiting Researcher at the National Bureau of Economic
Research. Author and editor of 14 books in Spanish, English
and French. Nº of published articles: 66 in journals and books
chapters specialized in economics. Of these 66 there are 39 in
Spanish, 24 in English and 3 in Portuguese.
282
Antonio ORTIZ MENA is Chair of the International Studies Divi-

sion at the Center for Research and Teaching in Economics, in
Mexico City. He specializes in research, teaching and consulting
in foreign policy and trade policy. He was a member of the Mex-
ican government’s North American Free Trade Agreement
(NAFTA) Negotiation Office at the Ministry of Trade and Indus-
trial Development, where he served as the Liaison Director with
the Executive and Legislative Branches and was also a member
of the Mexican NAFTA translation team. He holds a BA in Polit-
ical Sociology, an MA in Area Studies (Latin America) from the
University of London (University College London-London
School of Economics and Political Science-Institute of Latin
American Studies), and a PhD in Political Science with a major
in international political economy from the University of Cali-
fornia, San Diego. His latest publications are the following:
“Mexico,” in Patrick F. J. Macrory, Arthur Appleton, and
Michael G. Plummer (eds), The World Trade Organization: A
Legal, Economic, and Political Analysis (3 volumes). New
York: Springer Publishers, 2005.“Mexico’s International Tele-
communications Policy: Origins, the WTO Dispute, and Future
Challenges,” Telecommunications Policy 29, 2005 (co-authored
with Ricardo Rodríguez). He is a member of the International
Advisory Board of the University of Geneva MBA in Interna-
tional Organizations, of the Mexican Council on Foreign Rela-
tions, and of the Latin American Trade Network.
Recents Publications: Encuentros y Desencuentros: Brasil y México.

Mexico: Instituto Matías Romero, 2005 (co-edited by Octavio
Amorim Neto and Rafael Fernández de Castro); “Getting to No:
Defending Against Demands in NAFTA Energy Negotiations,” in
John S. Odell (ed), Negotiating Trade: Developing Countries in
the WTO and NAFTA. Cambridge University Press, 2006.
Hernán Javier SOLTZ. Economics Degree from Universidad de Bue-

nos Aires. PhD Candidate on Economics at the Universidad de
Buenos Aires. Associate Research Fellow in the International Rela-
tions Area (FLACSO/Argentina). Professor of International Econ-
omy at the Faculty of Economic Sciences (Universidad de Buenos
Aires). Professor at the Universidad Nacional de Quilmes. Profes-
sor at the Exchange Program for Advanced Studies in Social Sci-
ences for Foreign Students of CIEE/FLACSO Argentina.
283
Marcel VAILLANT is Doctor in Economics (University of Antwer-

pen, Belgium). Professor International Trade Universidad de la
República, Economic Consultant in the Mercosur Secretariat
(2004-2006). and was Director Department of Economics,
Social Sciences Faculty, Universidad de la República, Uruguay
(2001-2003). National Researcher, National Research Fund
(CONICYT). Member of regional and international academics
nets (Mercosur-NET, EULALIA-NET, LACEA). Author of several
publications in his field of specialization. Advisor of multilat-
eral institutions (LAIA, IADB, ECLAC, UNDP, FAO, UNCTAD). He
has performed as lecturer in International Trade in many Univer-
sities in Latin America.
284
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01_CM_DomDet.fm Page 1 Mercredi, 5.

juillet 2006 11:00 11

WORKING GROUP ON EU-MERCOSUR NEGOTIATIONS

Research Program 2005

Couverture : Emmanuel Le Ngoc

© 2006. CHAIRE MERCOSUR DE SCIENCES PO

The Mercosur Chair of the Institut d’études politiques de Paris

Foreword, by Alfredo G.A. Valadão .............................................. 9

INTRODUCTION, by Roberto Bouzas ............................................. 11

CHAPTER 1. The Political Economy of International Trade

CHAPTER 2. The Political Economy of Foreign Trade Policy:

CHAPTER 3. Determinants of Trade Liberalization Strategies

CHAPTER 4. Ups and Downs of Paraguayan Trade Policy

CHAPTER 5. The Domestic Determinants of Mexico’s

CHAPTER 6. The Political Economy of Chilean Trade Policy:

Contributors, Seminar Program

This publication presents the results of a workshop on “National

contribute to the preparation and monitoring of the EU-Mercosur

Alfredo G.A. VALLADÃO

This chapter makes a comparative assessment of the domestic

considerations and legal constraints stemming from multilateral,

Alternative Analytical Approaches

The study of foreign trade policy has been approached through

1. For a review see Rodrik (1994).

For obvious reasons, political scientists have been traditionally

1. For a review see Milner (1999).

deliberate options made by policy makers, after weighting the trade-

making and implementation constraints. 1 In their survey Jordana

1. The authors analyze four main problems/constraints, namely: a) the need to

The six case studies referred in this chapter used a common

The National Case Studies:

summarizes the main findings of each national case study, before

Argentina: the Structural

1. This section is based in my reading of the national case studies. Conse-

This translated into ambiguous policies, particularly in relation to

debate and an electoral system that strengthens the power of the

Brazil: the Domestic Determinants

In the last fifteen years trade liberalization was also far-reaching in

returned to the levels prevalent one decade earlier. The likelihood

multilateralism and outward-orientation as the best policy option,

incentives to make concessions at the regional level, this policy area

Chile: Sustainable Outward-Orientation

specialized economy in which exports have led economic growth

private sector is concerned, Robin (2006) argues that SOFOFA

Mexico: the Fragile Domestic Foundations

In Mexico unilateral trade liberalization started in the mid-

One key Mexican comparative advantage has been its proximity

vast fiscal and budgetary powers and it has become a resonance

preferential agreements, although both groups have criticized the slow

Paraguay: Trade Policy as a Patchwork

Even prior to the generalization of structural reforms throughout

took measures aimed to encourage investment, production and

where private sector interests and demands openly clashed.

Uruguay: the Domestic Basis

Like in Argentina and Chile, in Uruguay the process of trade

market (that absorbed nearly 50% of total Uruguayan exports) and

strong inertial behaviour. These institutional weaknesses have

Some Comparative Lessons Drawn

Differences in Revealed Policy Preferences

Table 1. Indicators of Revealed Trade Policy Preferences

formally adopted the customs union approach, but strived to main-

The six countries analyzed also differed in the coherence and

Table 2. Indicators of structural factors shaping trade policy preferences