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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


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
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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