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29 Int'l L. News 1 (2000)

handle is hein.journals/inrnlwnw29 and id is 1 raw text is: VOL. 29 NO. I [AL WWW.ABAN E1ORG/I NTLAW Why the January 1999 Devaluation of the Brazilian Real Did Not Cause MERCOSUR'S Demise By Thomas Andrew O'Keefe W hen the Brazilian real was drastically ~devalued by some 40 percent in January of 1999, the American press was replete with stories offering dire predictions about the future prospects for MERCOSUR, the customs union which groups Argentina, Brazil, Paraguay, and Uruguay. Bolivia and Chile are currently associate mem- bers of what is now the third largest economic bloc in the world (i.e., after NAFTA and the European Union). These alarmist articles, however, overlooked a number of impor- tant factors which, despite the devaluation and the ten- sions it inevitably produced, did not cause MERCOSUR to collapse. In fact, by the end of 1999, the crisis that was pro- voked within MERCOSUR by the real devaluation may actu- ally have served to further solidify the Southern Cone economic integration process. Why the Pundits Got It Wrong One reason why some people asserted that MERCOSUR was on the verge of collapse was based on the assumption that the devaluation of the real would result in a huge inva- sion of suddenly cheap Brazil- ian goods into .Argentina. Argentina, whose currency has been pegged one-to-one with the U.S. dollar since 1991, was expected to retaliate with a massive imposition of new import duties and quo- tas. However, the great Brazilian invasion never material- ized. In fact, it now appears that Argentina, and not Brazil, will be the country ending the year with a surplus in their bilateral trade relationship. The reason why the invasion scenario failed to materialize was that U.S. ana- lysts overlooked the fact that the bulk of what Brazil exports to Argentina is comprised of manufactured goods which are heavily dependent on foreign material which became more expensive by the devaluation. In addition, the devaluation was accom- panied by a sharp hike in interest rates by local banks in Brazil. Both of these fac- tors, combined with a reces- sion in Argentina, did not permit Brazilian exporters to benefit from the devaluation with respect to Argentina. Although it is true that there were many Argentine threats throughout the year to restrict certain imports from Brazil, the trade, restrictions which were actually imposed only affected a small percent- age of Brazilian exports to Argentina. In reality, the threats of extensive Argentine barriers to Brazilian imports were often rhetoric intended continued on page 22

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