Chile realized it would need some insurance if the United States decided to delay ratification indefinitely. Sensing that the tide was turning in Latin American politics because of the newfound success of left-leaning politicians in many countries, Lagos decided to be proactive. Visits to neighboring countries and favorable commentary in the local press were part of his campaign. Though Lagos will not be able to cobble together his own coalition, he will be able to garner enough good will to restart talks to join MERCOSUR, something that will further weaken America's bargaining power.

Changing of the Guard

An obvious leadership vacuum opened up when the United States turned its attention away from the region. Faced with a rapidly disintegrating trade scenario, several regional players decided to take matters into their own hands by beginning a discussion of regional integration. From Vicente Fox, principal U.S. trade partner, to Fidel Castro, principal U.S. irritator, the region's leaders all agree the time is ripe to begin a process of increased integration--even if they clearly disagree about its ultimate shape. In separate attempts to carve out their spheres of influence, Mexico and Brazil began negotiating new agreements and enhancing old ones to secure leadership roles in the emerging debate over regional economic integration. Their moves to fill the newly opened power vacuum have caused the United States to take notice. Furthermore, if the situation in the Middle East takes a significant turn for the worse, the United States will have to take action if it is to retain some negotiating power among its neighbors to the south.

Brazil has emerged as the most problematic actor with regard to U.S. influence in Latin America. After a tense electoral period in December 2002, Luiz Inicio da Silva, a left-leaning former labor leader known locally as Lula, secured the presidency with a substantial popular mandate. Immediately after, he set out on a tour of his country to visit and show concern for the poorest segment of the Brazilian population. His "Zero Hunger" program, which provides food subsidies, was launched with surprising bipartisan support, thus securing Lula's image as a concerned politician and social reformer. Following that triumph, he set out on a regional trip to rally support for increased economic integration and home-grown solutions to the region's social ills. His whistle-stop tour included visits to MERCOSUR partners Argentina, Uruguay and Paraguay, and to several members of the Andean Community (made up of Bolivia, Colombia, Ecuador, Peru and Venezuela), as well as to Chile. Lula's oft-repeated mantra of a stronger, united South America was very well received, but it conveniently left several actors out of the picture--NAFTA in general and the United States and Mexico in particular.

Lula's efforts to win support for a South American free trade area have centered on convincing his neighbors of the inequality inherent in U.S. trade policies. He has on several occasions voiced his opposition to U.S. policies that are detrimental to South America: namely, U.S. farm subsidies and the early 2002 imposition of steel tariffs. Despite U.S. promises that these issues will be addressed in the context of the FTAA, Lula remains unconvinced--particularly because of the powers of "fast track" authority, which were granted to President Bush by the U.S. Congress in 2001. Fast track authority allows the president to proceed rapidly with trade negotiations, eliminating much of the bureaucracy and facilitating talks. However, fast track authority also imposes harsh restrictions on the administration's ability to negotiate more open trade in certain product categories. Not surprisingly, these categories include textiles, steel and agriculture--the most heavily protected product areas in the United States and the areas in which Brazil and several other Latin American nations have substantial comparative advantages.

The recently passed 2002 Farm Bill is a perfect case in point. Though farm subsidies are limited under the terms of the Uruguay Round Trade Agreement, the powerful U.S. agricultural lobby, in a bid to reap the highest possible benefit for a small number of domestic producers, has expertly molded the legislation. Under this bill, U.S. farmers will receive subsidies averaging $19.53 billion annually for the 2002-07 period--a substantial increase from the $15.27 billion average annual payment in the previous Farm Bill (that covered the years 1996-2001). But perhaps the most disturbing aspect of the Farm Bill is how it directly flies in the face of previous agreements that were intended to "level the playing field" with the developing world. Since commodity production is a major part of the developing world's economy, such subsidies only create a more uneven playing field.

Steel tariffs are another example. The 30 percent tariff on steel imports imposed by Congress was intended to grant relief to America's ailing domestic steel industry. It effectively insulated domestic producers from their foreign competitors and disproportionately affected Brazilian steel exports. Prior to the imposition of steel tariffs, Brazil had a favorable balance of trade with the United States. Conditions now, however, are decidedly less favorable. The United States claims that these issues can be resolved once FTAA negotiations get underway, but Lula and many other leaders in Latin America would rather apply pressure now than wait until the FTAA is created. (The WTO ruled in July that the steel tariffs violate global trade rules. The United States is appealing the decision.)

Lula's strategy to combat U.S. protectionism focuses on expanding MERCOSUR to include Chile and Bolivia as full members, as well as including the rest of the Andean Community. His keen understanding of MERCOSUR's potential as an engine of unification was evident at the group's June 2003 meeting in Asuncion, Paraguay. The Brazilian contingent presented a comprehensive plan made up of five programs: the political, social and cultural program; the customs union program; the common market program; the new integration program; and the border integration program. Each program highlights the current situation and what steps MERCOSUR can take as an integrated body to redress issues and problems.

The goals include improving democratic institutions, limiting corruption and improving social conditions. (Lula has already become the champion of the poor in Brazil and wants to expand his constituency to include the poor of MERCOSUR as well.) In addition, the plan seeks to strengthen the customs union and expand the common market by including new partners and negotiating trade agreements with the European Union, India, South Africa and South Korea. The joint statement issued at the end of the meeting reiterated MERCOSUR's commitment to the development of democracy, the protection of human rights and a multilateral approach to international conflict through the United Nations and the Security Council--a not-so-subtle indication of the group's hesitancy regarding U.S.-led conflict resolution. In addition, the statement outlines that negotiations with the Andean Community will be completed by the end of 2003.

Before other countries can be included, however, the original members must iron out their difficulties and harden their commitment to the common market--with "common" being the operative word. Both Brazil and Argentina have often approached tariff policy with an eye toward protecting their own industrial sectors. When common policy did not suit their individual needs they issued domestic decrees that did, often at the expense of the trading bloc.

Without a resolution to this problem, a policy of South American economic integration would not be worth the paper on which it was printed. At the June MERCOSUR meeting, Lula deftly handled this issue of unilateral backsliding from common policy. For now, Argentina's cheap imports of capital goods will be tolerated, as will Brazil's imports of chemicals. But these waivers are to be eliminated in 2004. In an appeal to the smaller members, Uruguay and Paraguay, Lula stressed the need to have a directly-elected parliament in place by 2006 that will hold sway over common policies. A joint monetary institute that would work toward the creation of a common currency is also to be in place by 2006. In addition, the June resolution announced that bidders on government contracts would no longer receive special treatment from their home governments--something that had been on the table for some time but on which little consensus could be reached. These concessions produced one very positive effect: Uruguay committed itself to negotiating trade agreements solely as part of MERCOSUR, forgoing bilateral treaties. This proved a critical step towards greater integration, for Uruguay had often threatened economic unilateralism in response to such movements by Brazil and Argentina.

The trading bloc stands to gain greatly from including new members. Trade agreements between MERCOSUR and Peru are underway and should be completed by the end of this year. Venezuelan President Hugo Chávez attended the June meeting as a precursor to the start of negotiations with MERCOSUR, and that pact should also be completed by year-end. (Though Peru and Venezuela are both members of the Andean Community, they are interested in completing individual treaties with MERCOSUR as quickly as possible. These treaties would be similar to a larger treaty encompassing the entire Andean Community, but they would likely come into effect before a MERCOSUR-Andean Community treaty.)

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