University of Southern California Dissertations and Theses

Financial crises and trade policy in developing countries

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Financial crises and trade policy in developing countries

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FINANCIAL CRISES AND TRADE POLICY IN DEVELOPING COUNTRIES

By

Pablo Heidrich

A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
POLITICAL ECONOMY AND PUBLIC POLICY

May 2014

Copyright 2014 Pablo Heidrich

i

Table of Contents

List of Tables iv
List of Figures v
Abstract vi
Chapter 1. The Bargain of the Unstable. Trade Negotiations
and Financial Crises in Mercosur 1995-2001

1.1. Introduction 1
1.2. Analytical Perspectives 3
1.3. Hypothesis 7
1.4. Methodology 12
1.4.1 Case selection criteria 13
1.5. Contribution 14
1.6. The Case of the Financial Crises in Mercosur (1995-2001) 16
1.6.1 Automobile Industry 20
1.6.2 Textile and Footwear 37
1.7. Alternative Explanations 48
1.8. Conclusions 52
Chapter 2. International Financial Crises’ Contagion and
Trade Barriers in Developing Countries

2.1. Introduction 55

ii

2.2. Preliminary Look at the Relationship between
Financial Crises and Trade Liberalization 60
2.3. The Argument 65
2.4. Hypothesis 77
2.5. Models 79
2.5.1 The Dependent Variable: The Trade Policy Measures 80
2.5.2 Independent Variables 82
2.5.3 Control Variables 88
2.6. Regressions and Interpretations of Results 89
2.7. Alternative Explanations 95
2.8. Conclusions 96
Chapter 3. Regionalism after Financial Crises. Comparing
Policy Responses in East Asia and Latin America.

3.1. Introduction 103
3.2. Preferential Trade Agreements. Literature and Evidence. 111
3.3. Bringing Together Economic Crises and Regionalism 118
3.4. Research Method and Case Selection 120
3.5. East Asia 122
3.5.1 Region-wide Agreements (APEC) 123
3.5.2 Sub-regional Agreements (ASEAN and ASEAN+) 124
3.5.3 Singapore 130

iii

3.5.4 Korea 132
3.5.5 Assessing Asian Regionalism 134
3.6. Latin America 137
3.6.1 Region-wide Agreements (FTAA) 140
3.6.2 Sub-regional Agreements (Mercosur, Andean Pact and CACM) 142
3.6.3 Andean Pact 147
3.6.4 CACM 149
3.6.5 Mexico 150
3.6.6 Chile 153
3.6.7 Assessment of the Latin American PTAs 155
3.7. Conclusions 157
3.8. Appendix 1 161
3.9. Appendix 2 162
Bibliography 163

iv

List of Tables

Table 1: Mercosur: Background Economic Data, 1998 16

Table 2: Peso – Real Parity Index 43

Table 3: Descriptive statistics 99

Table 4: TARIFF as Dependent Variable: Pooled OLS
using 990 observations (891 when lagged) 100

Table 5: ANTIDUMPING as Dependent Variable: Pooled
OLS using 350 observations (315 when lagged) 101

Table 6: EXCHANGE RATE as Dependent Variable: Pooled OLS using 990
observations (891 when lagged) 102

Table 7: Global GDP Growth (current US$) 106

Table 8: GDP Growth Before and After the Asian Financial Crisis 123

Table 9: GDP Growth (Annual % and Averages Pre- and Post-Crises) 140

Table 10: Bilateral Agreements Asia-Pacific 161

Table 11: Bilateral Agreements in Latin America 162

v

List of Figures

Figure 1: Intra-Mercosur Trade 1990=2001 (US$ bn) 17

Figure 2: GDP Growth per Quarter 19

Figure 3: Interest Rates 27

Figure 4: Brazilian Vehicle Production, Sales and Export 29

Figure 5: Argentine Vehicle Production, Sales and Exports 31

Figure 6: Nominal Exchange Rates (Local Currency per US Dollar) 43

Figure 7: World Tariffs 1981-2003 56

Figure 8: World Tariffs 1994 -2003 56

Figure 9: Number of Anti-Dumping Measures 1995-2003 58

Figure 10: Tariff Reductions in Selected Countries 64

Figure 11: US Economic Hegemony Indicators 70

Figure 12: The Expansion of Regional Trade Agreements (RTAs) 103

vi

Abstract

This dissertation consists of three related essays. The first looks at how developing
countries at times deal simultaneously with two different but recurrent events of
economic globalization: financial crises and trade negotiations. Most current research
however does not consider the interrelations of these two. This paper takes then two large
developing countries, Brazil and Argentina, involved in bilateral trade bargaining just as
they are stricken by financial crises. Considering ongoing negotiations plus others
resulting from the crises themselves, this paper hypothesizes that countries change
behavior according to how the industrial sectors involved in those negotiations are
affected by the crises. The specific characteristics of a financial meltdown, scarcity of
lending capital and a drop in the real cost of labor when there is a devaluation, concur to
modify their negotiating positions. Furthermore, the likeliness of contagion makes
countries more or less accommodating to the affected economy. Over all, financial crises’
influences are found to supersede in the short run other factors normally determining
trade negotiations.

The second essay examines to what extent the financial crises’ of the late 1990s and their
contagion via trade linkages explains changes in trade policy in developing countries,
defined as the changes in applied tariffs and the use of antidumping measures. In this
way, it seeks to explain the progressive reduction in the pace of trade liberalization and
its partial reversal in some countries in the developing world since 1995 until 2003. In

vii

order to test this hypothesis, I conduct a statistical analysis on contagion effects on 100
countries from 7 financial crises. The results indicate a strong relationship between
suffering a crisis or contagion from one and reducing the pace of trade liberalization,
particularly, after 1997-8. There is no return to the previous enthusiasm for free trade
after these events, with tariffs staying mostly at the same levels or increasing and with
antidumping use increasing very rapidly. The strength of democratic institutions
increases the likelihood of increased trade barriers during times of crises and their
aftermath.

The third essay shows that since the 1990s, there has been a surge in the numbers of
preferential trade agreements, either regional or bilateral, involving developing countries.
The two regions that show this development most compellingly are Latin America and
East Asia. The hypothesis here is that disappointing GDP growth after the series of
financial crises there in the mid-1990s have provoked a change in trade policy, seeking
now reciprocity in concessions via preferential agreements as the new form to advance
trade liberalization. In contrast, region-wide agreements have floundered, while previous
“open regionalism” initiatives have now become mainly negotiating platforms for
reaching preferential deals with other countries, instead of deepening their levels of
internal integration. By focusing on what countries affected by these crises have done, we
learn that the political response of populations and leaders to these crises has made
preferential trade liberalization the strategy of choice to build alliances with other
developing countries and increase market access for their exporters.

1

Chapter 1. The Bargain of the Unstable. Trade Negotiations and Financial
Crises in Mercosur 1995-2001

1.1. Introduction
Argentina and Brazil suffered grave financial crises during the 1990s
1
. During
that time, they were involved in trade negotiations with each other inside Mercosur. As
the financial crises struck one or the other country, their negotiating positions varied from
accommodating to aggressive, leading to peaks of confrontation from which Mercosur
has not quite recovered yet. Furthermore, those crises provoked a large number of trade
disputes as protectionism from both countries grew when the crises increasingly hurt their
economies
2
.
These episodes illustrate some so far understudied relationships between what
happens in financial spheres with what goes on in trade issues. The studies of political
economy have traditionally specialized into studying one or the other aspect but rarely
the two, together. Here, I make the argument that financial crises were a powerful factor
in changing the bargaining positions of Argentina and Brazil during the 1990s. I draw
insights from the specific characteristics of financial crises, such as the sudden scarcity of
capital and the possibility of contagion, to explain these changes in negotiating positions
in trade issues.

1
Argentina had a financial crisis in 1995 and from 1999 to 2002. Brazil had another from 1998 to 1999. In
all cases, those crises arrived via contagion from other countries.
2
For this paper, I use the terms bargaining and negotiation as synonyms. While there are mostly trade
disputes in the cases, these entailed negotiations to solve them. What usually began as a unilateral move to
increase a trade barrier or create a new one became the subject of a negotiation between Argentina and
Brazil in the period studied. Thus, the negotiations or bargaining are understood here as the political
dialogue established between these countries to resolve their bilateral trade disputes. Often, the initial
positions are unilateral moves that are contested by the other country.

2

Financial crises, as events intersecting other policy developments of the
industrializing world, deserve more attention. After all, developing countries are
increasingly integrated via both, international trade and financial flows, into the world’s
economy. Just as in the case under study, other developing countries have faced financial
crises, which have increased their trade protectionism and thus, triggered negotiations to
solve those trade conflicts (Krugman, 2000; Nava-Campos, 2000). The case in this paper
thus seeks to propose a framework that can be applied to those other cases as well.
This study seeks to contribute to two bodies of literature. One is the political
economy of trade policy in developing countries. The other is international economic
negotiations. The first has sought to show why and how countries have liberalized their
trade or remained more protectionist than others. Their analysis corresponds for the most
part to non-crisis situations, where gradual changes take place (Keohane and Milner,
1996; Milner, 1999; Frieden and Lake, 2000 provide surveys on this). The cases
presented here show, however, that rapid changes in trade policy resulted from financial
crises. Furthermore, this literature remains divided on whether crisis situations give more
or less autonomy to governments to assert control of trade policy from pressure groups.
This paper contributes with a specific framework to explain how and in what
circumstances, crises provide an opportunity for governments to modify trade policy.
Those studying international economic bargaining assume at the start a certain set
of characteristics in the negotiating countries, such as market size, growth rate and
income per capita (Raiffa, 1982; Zartman, 1994; Odell, 2000), which are implicitly
expected to remain roughly the same through the negotiation period. These are key to the

3

negotiation itself as they provide a basic description of whom we are facing. However, if
one of the countries involved suffers a sudden economic downturn due to a fulminating
financial crisis, some of those previously assumed basic characteristics are changed. Such
crises are known to depreciate a negotiating partner’s currency, slow down growth
expectations and reduce market size for exports (Dornbush et al, 1995; Calvo, 2000).
Furthermore, the future becomes suddenly unpredictable since these economic blues
might continue for an unknown period of time and they might even prove contagious to
the other’s economy or affect its economic interests in an area previously not being
negotiated about (Calvo & Mendoza, 1994). This paper includes these changes produced
by a crisis in the context of the negotiations.
The paper proceeds as follows. The first section surveys the existing literature and
proposes how it can be improved to explain situations of financial crises and trade
negotiations. The second presents the hypothesis. The third explains the choice of
methodology and the selection criteria used to choose the cases used. The fourth presents
the evidence. The fifth assesses alternative explanations and the sixth, concludes.

1.2. Analytical Perspectives
This research seeks to add to several fields incorporated in the political economy
of trade and negotiations studies. The state of knowledge in each field as it touches this
topic is summarized and the lagoon to fill is then suggested.
Political economy of trade policy: focuses on why countries have different trade policies.
It emphasizes the importance of domestic factors, pressure groups such as unions and

4

industrial associations, and institutional characteristics of the political environment (Alt
et al., 1996). Other authors focus more on international factors, such as changing world
prices or international organizations (Frieden & Rogowsky, 1996). The analysis,
combining both stems of research, concludes that trade policy is formed along two basic
lines, factor specificity and its relative abundance. While the former explains policy
changes in the medium term, the latter, explains trade policy in the long term
3
.
Because these theories assume factors of production and class cleavages to be
constant in the short term, they are unable to explain why trade policy can change quickly
in the midst of a financial crisis (Rodrik, 2000). In fact, we know that factors of
production are not constant in developing countries as during a crisis, there is capital
flight, large increases in interest rates and drops in borrowed capital (Haggard, 2000,
Calvo, 2000). Furthermore, real labor costs can drop quickly due to a local currency
devaluation. Therefore, in order to understand trade policy in developing countries during
a financial crisis, we should consider a different categorization of domestic actors that
captures those changes in the short-term availability and cost of the factors of production,
particularly, capital and labor.
Domestic factors in trade policy: Milner (1988) explains that sector specific lobby for
trade protection happens according to whether industries are investors in foreign
countries or not. Those who are investors abroad are reluctant to ask for protection in

3
Factor specificity in economics means how specific the factors of production are to the purpose to which
they are being employed. For example, capital applied to car production in the form of specialized
machinery is more specific than capital applied to a shares trading business. While in the former case, that
machinery can hardly be used in another activity, in the latter case, it is very possible to change what one
trades. The same applies to labor skills. Some skills are more specific than others.

5

their home countries even when under heavy import competition. Goodman et al (1996)
proposed that firms ask for more or less protection according to whether they are
domestically or foreign owned. These works however implicitly assume that ownership
and foreign direct investment in such industries remains constant during a trade
negotiation and thus their positions are not expected to change. Gourevitch (1986)
showed however that financial crises changed the domestic-foreign alliances that
underpin economic policy. Simmons (1994) shows precisely that in a financial crisis,
which causes sectoral pressures and political-electoral dynamics, foreign economic
policies are modified. Her work, however, focuses only on unilateral measures affecting
international trade, instead of international economic negotiations, thus missing out an
important constrain on policymakers. Including these negotiations, one can observe the
actions of those sectoral pressures change according to how they are being affected by the
financial crisis.
Negotiations literature: previous studies of bargaining and international negotiation do
cover, for example, crisis management in negotiations (Druckman, 2001; Peterson, 1996;
Shelling, 1963). However, these studies consider either a crisis as the trigger of the
negotiations or very much the topic of the negotiation itself (Hoppman, 1996). In those
aspects, their applicability is limited
4
. However, their main finding is relevant, that
governments do change positions swiftly while in negotiations when a crisis strikes and
that the vehicle producing that change is domestic pressure.

4
In the proposed study here, I intent to look into how two separate events influence each other without
being either the trigger for the negotiation or the matter of it. A trade negotiation, after all, is not by
economic definition linked to a financial crisis. But when they are linked, that linkage is a political
expression of economic interests.

6

The bargaining literature that focuses on economic issues provides some other
clues. The market is seen as an alternative to negotiated solutions by bargaining partners
and according to its evolution, they set their resistance points and strategies. In this
framework, there is the option for agreement or non-agreement, a space of possible
solutions and the strategies employed, such as value claiming, value creating and
combinations (Odell, 2000). While this line of research does not consider cases in which
one of the partners involved in negotiations suffers a sudden economic crisis, thus
altering some of its fundamental characteristics, it can be extended to take account of
such events.
Negotiations of developing countries: This literature is for the most part concentrated on
first, multilateral arenas such as the WTO, the GATT or UNCTAD

(Martin & Winters,
1996; Tussie & Glover, 1993, Tussie, 2000; Panagariya, 2002). Secondly, bilateral
negotiations of developing nations with either the US, the EU and seldom, with Japan are
considered (Thacker, 1999; Shadlen, 2000; Friman, 1993; Avery, 1998; Bouzas, 1999;
Odell, 1985). A few have also explored South-South relations, especially those works
related to economic regionalism (Tussie, 2003 surveys those in Latin America, for
example). All these works use in a slightly more informal way some of the same
propositions previously covered, but emphasizing either structural constrains such
developing countries` position in the world economy, their linkages with industrialized
trading partners (most dependency-influenced works do), the influence of INGOs and
security alliances, or developing countries own characteristics, such as their government
type, their institutions, the autonomy of their governments from social pressures and the

7

organization of local and transnational lobbies. In all cases, this literature omits
instances of financial crises in developing countries, implicitly making the assumption
that developing countries do not negotiate trade issues when facing financial crises. That
is empirically inaccurate, as the cases in this paper will show. Therefore, the present
literature on developing countries` trade negotiations assumes that either both (structural
or domestic factors) or the one aspect of explanatory value chosen to explain behavior
remains the same. Due to this problem, they cannot explain, for example, how developing
countries have often changed their negotiating positions without an alteration in neither.
The proposal here will attempt to show how two developing countries did those changes
when financial crises stroke them, an event that more and more often has touched many
developing countries in the last two decades.

1.3. Hypothesis
Hypothesis 1: Capital scarcity (and devaluation) shift negotiation demands:

We know that industrial sectors react differently to trade negotiations, according
to their perceived interests. These interests are determined, apart from the factors already
reviewed, by circumstances, such as the conjuncture of a financial crisis with a trade
negotiation. In these particular episodes, preferences can change radically and very
quickly, just as the economic fundamentals that frame these policy preferences changes.
There are two ways financial crises induce change:
First, the shortage of capital brought about by a financial crisis in a developing
country named A induces very high interests rates or simply, the unavailability of capital

8

to loan for firms to produce or for consumers to buy goods on credit. Given this
particular development, we can view industrial sectors according to their sensibility to
increases in the real interest rate (credit constraints). Those which depend most heavily
on the availability of credit will suffer greatest and thus, they can be expected to pressure
the government for help the most. One such help consists in trade protectionism or
increased export possibilities. Specifically, they will ask for a trade deal with country B
that gives them more protection in their home market and/or a reduction of the tariffs
they face in their exports.
Second, another effect of a financial crisis is related to the labor-intensity of
industries since most crises in developing countries have brought about depreciations of
their currency in the short term. That reduces real wages and thus, increases the
competitiveness of the most labor –intensive industries
5
. Therefore, we can expect labor-
intensive industries to keep roughly their same demands as before the financial crisis
started if there is no devaluation. In case there is currency devaluation, they will be ready
to reduce their demands since they can afford it now. These predictions interact with
what happens in the markets for these goods, if they have high wage elasticity, one can
expect that as demand decreases, pressures for protection increase.
Finally, there is a third party often ignored in standard theories of trade policy
formation and works in trade negotiations: the state. In case of a financial crisis, the state
will be under great pressure to ameliorate its effects and improve the situation very

5
The macroeconomic assumption here is that real wages are sticky, a strong consensus among economists.
Therefore, real wages will fall in the short term, as real inflation accelerates, and will recover only in the
long term.

9

quickly. The usual parameters would be to improve the trade balance and capital account
to restore confidence in the economy, so that capital will again become available.
Therefore, we can expect the government to be most receptive to sectoral pressures that
match its own objectives in a trade negotiation: improving the trade balance and the
capital account. With that caveat in mind, the hypothesis can be summarized as follows:
a) If the industries under negotiation are sensitive to the interest rate, country A will
ask for more market access for its exports and/or more protection from country B imports
than it was asking before the financial crisis began.
b) If the industries under negotiation are labor intensive, country A (if it devalues)
will ask for the same it was asking before the crisis or it will be ready to give concessions
in these sectors in exchange for better conditions for its interest-rate-sensitive industries.
These are expected to override in the short-term alternative explanations, such as
factor specificity, class cleavages, business organizations and other firms’ characteristics
such as size, ownership and capacity of factor substitution. They however complement
the works that show the importance of domestic institutions as channeling preferences
into policies. Still, the assumption here is that institutions do not change in the short term,
that is, the time of a financial crisis and its immediate aftermath.

Hypothesis 2: Fear of contagion increases partner’s responsiveness:

Another important element of a financial crisis is the possibility of contagion.
That is made possible by three different types of linkages: trade, common financial
creditors and similarity in macroeconomic fundamentals (Eichengreen & Rose, 1998;

10

Frenkel, 2003). In regard to the first kind of contagion linkage, if country A is an
important market for country B`s exports, a financial crisis in A is due to reduce B`s
exports in the short term, at least, and until B finds replacement markets. That would in
turn make country B`s negotiators ready to compromise for less than they wanted in
ongoing negotiations before the crisis stroke A since the possibility of A’s crisis
worsening would further reduce the exports of B there, inducing a contagion effect
through the trade linkage.
On the other side, A`s exports to B will also become more important for A as it
needs them more now than before the crisis in order to keep its industries running while
domestic demand is depressed and to improve its current account. One can expect B to
understand that for the same reason, namely, to avoid A’s crisis from getting worse.
Thus, B will try to help A by being responsive to the latter’s demands because it
is in its own self-interest since the bigger their trade linkage, the more likely it is for
country B to suffer a financial crisis similar to A`s (see Glick and Rose, 1999, on
contagion effects during financial crises). However, once the contagion from the crisis in
A actually affects B, the strategy of B is expected to change. Contagion has taken place in
spite of B’s efforts to avoid it and now, a crisis is affecting B. Thus, B will no longer be
responsive to A’s demands and will, in fact become more aggressive than it was before
the crisis had begun in A. The behavior of B will then become one as described in
hypothesis 1 (a and b).
Therefore, a working hypothesis based on the fear of contagion through trade
linkages and the responses to avoid is:

11

a) The more important A is for B as a trade partner, the more responsive B will be
to A`s after the financial crisis strikes A.
b) If contagion does take effect on B, this will change its strategy from responsive to
aggressive towards A since now B has a crisis.
Secondly, there are the two other channels of financial contagion, common
financial creditors and macroeconomic similarity between A and B in the eyes of foreign
investors. This was an important vehicle of contagion in the Tequila and Asian crises,
where they operated in a correlated fashion (Kahler, 1998). If A and B have common
creditors, namely, the same financial institutions lending them money, a crisis in one
would lead these financiers to hedge their loses by pulling their funds from B. In
macroeconomic similarity, three particular details are relevant: ratio of government
deficit to GDP, ratio of foreign debt to net exports, ratio of FDI to current account deficit.
Therefore, the more similar B`s indicators are with A`s when the crisis strikes, the more
responsive B will be to A`s pressures. Certainly, B has hypothetical alternatives to trade
concessions such as helping A with bilateral loans, or doing something about its own
imbalances (government deficit reduction, foreign debt rescheduling, etc) but none of this
excludes the idea that in a trade negotiation, B will also move towards a more responsive
position in respect to A. Therefore,
c) The more similar A and B are to the eyes of foreign investors, the more B will be
responsive to A.

12

1.4. Methodology
The central goal is to observe outcomes as well as the processes of economic bargaining
during a financial crisis. While the first are usually renegotiable for the most part, the
processes provide a unique venue to analyze the interaction between financial instability
and trade policy making. There, one can see the changes made to the agenda of what is
being negotiated internationally and the strategies used by the parties as the elements
subjected to the influence of a financial crisis. The process of the international
negotiation serves thus as a precise dependent variable to show how a financial crisis, as
an independent variable, affects trade policy making and its subsequent international
economic negotiations
6
.
The methodology preferred for this research is a case study, where process tracing
is made inside a comparative frame
7
. There are several reasons for this choice. First, trade
disputes are very troublesome to compare statistically due to the diversity of national
political contexts and industries where they originate (Schoppa, 1999). Secondly, using a
case study for this project is advantageous because it allows for a detailed analysis
(process tracing) of the twists and turns of the trade negotiations, focusing on the
operation of specific causal factors at certain points in time, permitting the sequential
isolation of these factors (Collier, Brady & Seawright, 2002; Weyland, 2002). And
thirdly, qualitative case studies are better attuned to capture the path dependent nature of

6
That implies that outcomes are also influenced, just as the processes that bring them to light are.
7
Using either a focused, structured comparison or process tracing strengthens a comparative study as it
limits problems of indeterminacy, bias and equifinality (see Bennett, 2003 for details)

13

trade negotiations and capture factors such as learning and the consequences of previous
choices on present ones (Odell, 2000).
While case studies can not prove theoretical generalizations as conclusively as
statistical large-n studies can, they are more apt than the former to probe new
relationships, just as the one proposed in this research, of financial crises on trade policy
making and trade negotiations (see McKeown, 1999 for further discussion or Odell,
2000).

1.4.1 Case selection criteria
To test that a financial crisis does make a difference on how countries modify
their trade policies and negotiate those trade issues internationally, we need two kinds of
trade negotiations, those that have started before a crisis has struck and continued under
the crisis environment and those borne from the trade policy measures taken due to the
financial instability. Both types of negotiations will be affected in the manner described
by the hypothesis. Furthermore, they are all are happening simultaneously
8
.
The three cases proposed for study here are between Argentina and Brazil from
1995 to 2001. Both countries endured financial crises during this period, but at different
times (Brazil from June 1997 to January 1999, Argentina from January to September
1995, and from March 1999 until December 2001
9
). Other sources of possible variation
are excluded since the international economy did not change structurally during the

8
The trade negotiations studied here are bilateral to achieve most clarity in the argumentation but the
hypothesis could also be extended to multiparty negotiations.
9
In fact, the financial crisis in Argentina continued until March 2003 but data availability limits this paper
to December 2001.

14

period under study, these two countries did not have changes in their domestic political
institutions, and the production sectors in which they were having negotiations did not
have their international prices modified. In each of the two countries, industrial sectors
are organized for political purposes (lobbying, trade advocacy) in different manners
10
.
The sectoral negotiations to be studied need to provide variation in their
sensibility to changes in the interest rate, ranging from very sensitive to its opposite. The
same applies to their labor intensity, going from most to least. They also ought to vary in
factor substitution possibilities, firm size and ownership, as well as degree of outward
FDI. Thus, the cases selected are negotiations in the following industries: automobile,
textile and footwear. The first sector is highly sensitive to interest rates (and not labor
intensive)
11
, and the other two are very labor intensive (but not sensitive to interest rates).

1.5. Contribution
The contribution this research makes in academia is twofold. First, it enriches the
research done in international economic negotiations, including an exogenous variable so
far left out, financial crisis, and its corollary, a change in the main characteristics of one
of the parties involved in the bargaining. It thus furthers the qualitative application of a
uniform framework to study different bilateral trade negotiations, especially those
between developing countries.

10
Business organizations tend to be geographic-specific in Brazil and firm size-specific in Argentina. For
the relevance of this of this dimension on the capacity of business to influence policy, see Ross Schneider,
2004.
11
The concept of sensibility to the interest rate comes from the observation that most vehicles are
purchased on credit and thus, consumption is sensitive to interest rates. That makes the production also
sensitive to them.

15

Second, it explores new forms in which international economic instability (i.e. a
financial crisis) affects domestic political processes in developing countries and the
international consequences of this influence. In particular, it attempts to bring together
the researches done in the political economy of financial crises in developing countries
with studies on the political economy of their trade relations, two areas so far investigated
without explicit linkages.
At the policy level, it assists in our understanding of how developing countries
negotiate their trade liberalization and their financial insertion in the global economy. By
focusing on the short-term two-level game of domestic politics and international
negotiations, it can show in a comprehensive manner how the day-to-day operation of
financial and trade internationalization has been like for developing countries in the last
decade.
Furthermore, one of the intentions in selecting these particular industries in this
paper is that these industrial sectors are among the most studied in the political economy
of trade, in both, developed and developing country settings. For different reasons, there
have been and there still are today policies to protect these sectors around the world. This
study, investigating trade negotiations in those industries in a particular context of crises,
seeks to contribute then to that empirical literature that has fed most of the general
theoretical debates on the political economy of trade.

16

1.6. The Case of the Financial Crises in Mercosur (1995-2001)
Within the new generation of regional economic agreements in the developing
world, Mercosur is an example of how quickly they can have an astounding success or
fall precipitously. It formally started in 1991 with the signing of the Treaty of Asuncion
whereby four countries, Paraguay, Uruguay, Brazil and Argentina agreed on a common
external tariff (CET) for all products coming from outside Mercosur. For intraregional
trade, it established a chronogram to achieve free trade over a ten-year period but starting
with a large number of initial concessions. In effect, average tariffs within the area came
down from 27% to just 3% in four years and only the smallest members have kept an
extensive list of protected industries from intra-Mercosur trade. Intraregional trade grew
dramatically as can be seen in the table below and foreign direct investment did a similar
performance partially motivated by the gains in scale of market achieved through the
trade agreement.
Table 1: Mercosur: Background Economic Data, 1998

Argentina Brazil Paraguay Uruguay Mercosur
GDP (u$s bn) 304.521 770.614 8.555 20.167 1.105.857
Population (m) 36,1 161,5 5,2 3,3 206,1
GDP per capita (u$s) 9.433 4.809 1.645 6.111 5.560
Exports (u$sm) 26.441 51.120 1.103 2.769 81.433
Imports (u$sm) 31.404 57.549 2.790 3.808 95.551
Source: National official figures. (IBERG and INDEC)

17

Figure 1: Intra-Mercosur Trade 1990=2001 (US$ bn)

Intra-Mercosur Trade 1990-2001 (US $m.)
4127
5103
7214
10027
12029
14441
17033
20701
20429
14965
17722
15171
0
5000
10000
15000
20000
25000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: National official figures. (IBERG and INDEC)

Mercosur had often been referred to as the most successful of all the developing
countries' trade agreements to date. In later years, it has been dismissed as a failed
experiment (Roett, 1999; Kaltenthaler & Mora, 2002). That can be inferred from the
graph above, showing that since 1997, intraregional trade there has not grown and that,
since 1999, it fell dramatically. The reasons given for the 1997-2001 decline are the
financial crises in the largest members, Brazil and Argentina - which account for 95% of
the intraregional trade and GNP - and their intense bickering on their bilateral trade
(Averburg, 1999; Bouzas, 2001). This paper starts from a previous crisis, one in 1995 that
affected Argentina and then moves on to a sequence of two crises, one in each country,
running from 1997 to 2001.
The financial crises in Mercosur began with one in Argentina in January 1995,
when investors saw its economy as being similar to Mexico’s in terms of current account
deficit and overvalued currency. That country’s crisis had begun on December 15
th
, 1994,

18

when it was forced to devalue its currency and suffered great capital outflows. The
contagion in Argentina was felt in increasing interest rates, capital outflows and reduction
of the economic growth. Argentina did not devalue its currency, however. The GDP’s
contraction for 1995 was of 5.4%. It started recovering only in the second quarter of 1996
(Frenkel, 2003).
The second financial crisis began in Brazil in June 1997, as foreign funds started
leaving the country and it was forced to increase interest rates drastically. That reduced
economic activity but accelerated the growth of its debts, making the country more
vulnerable to future shocks. In June 1998, when international capital markets judged
Brazil to be in a similar situation as Russia, which had just had a financial meltdown, that
feared shock came. Brazil was seen to be similar to Russia in having a large fiscal deficit
of 7% of GDP, a large current account deficit of around 4% of GDP and a currency
overvalued by some 25% (Averburg, 2000, p. 14-15.
The third financial crisis hit Argentina in early 1999 and it was a case of
contagion from Brazil for their also similar macroeconomic data but especially, because
of their very close trade relationship. In 1998, 30% of Argentine exports went to Brazil.
When the latter was forced to devalue its currency, investors feared Argentina would do
the same and expected the economy to shrink. It did at a rate of 5% for the first semester
of 1999 and later, remained unable to grow again. In late 2000 and for all of 2001, the
economy posted strong negative growth, as the financial crisis could not be solved
without an eventual devaluation and foreign debt default (Frenkel, 2003, p. 28-29).

19

Figure 2: GDP Growth per Quarter

GDP Growth per Quarter
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
I 1995
II 1995
III 1995
IV 1995
I 1996
II 1996
III 1996
IV 1996
I 1997
II 1997
III 1997
IV 1997
I 1998
II 1998
III 1998
IV 1998
I 1999
II 1999
III 1999
IV 1999
I 2000
II 2000
III 2000
IV 2000
I 2001
II 2001
III 2001
IV 2001
Argentina Brazil
Source: National Official Figures (IBERG and INDEC)

In the whole period of these three crises, the paper follows the trade bargaining in
three different industries. These different negotiations are considered to see how
financial crises affecting Brazil and Argentina induced and affected trade conflicts. The
first one is on the automobile sector, an industry sensitive to changes in the interest rate.
In 1995, changes were made to the regulations of that sector’s trade. In 1997, a
renegotiation of the whole regulatory regime was required and that coincided with the
years when financial crises came to Brazil in 1997 and Argentina in 1999. This industrial
sector is the single most important one in the intraregional trade, accounting for 25% of
the total. The second one is encompassing comparably minor industries in Mercosur trade
that, added up, account however for another 20% of the exchanges. These are of textiles

20

and footwear. They have in common the characteristic of being not as sensitive to
interest rates and more labor intensive than the auto sector. They are also dominated by
local firms, as opposed to the latter, dominated by multinational enterprises.

1.6.1 Automobile Industry
This case intends to show in respect to the first hypothesis that the crisis hit
country reacted more aggressively in this capital intensive sector than in those industries
shown in the second case. Argentina, hit first by a financial crisis in 1995, ratchet up its
demands in ongoing negotiations regarding the auto industry swiftly. In 1997 Brazil was
in crisis and also increased its demands. Again, Argentina, when entering into a crisis in
March 1999, also became more pressing on Brazil than it was previously. As the crisis
prolonged in Argentina and worsened in 2001, its negotiating position became even more
aggressive towards Brazil. That is starkly different from what happened in the other,
more labor intensive industries.
In regard to the second hypothesis, Brazil was very accommodating to Argentine
pressures during 1995. Argentina, on the other side, is also shown as accommodating to
Brazilian pressures from June 1998 until March 1999, when it feared contagion from
Brazil. Brazil, on the other side, as it started recovering from its own crisis, became less
demanding and actually, agreed to some of the increasing Argentine demands from mid
1999 onwards. Finally, as foreign investors judged Argentina to have similar troubles as
Brazil’s in 1997 and thus, induced contagion from that crisis into Argentina, the latter
was more accommodating. That did not repeat in reverse, when Argentina went into

21

crisis because Brazil was believed to be different from its neighbor by foreign investors.
That difference accounts for the comparatively less responsiveness of Brazil to Argentine
demands in its 1999-2001 period.
This case treats three interrelated issues in the bilateral negotiations for the
automobile sector, namely, the bargaining for the sectoral trade agreement to govern
bilateral exchange, the policies promoting FDI in that industrial sector and the
government instruments used to bolster local demand for vehicles during the period
12
.
First Crisis: Argentina, 1995

The Mercosur agreement had a special protocol for managed trade for this
industrial sector, called “Special Protocol for the Auto Industry” (referred to as Protocol,
hereafter). It was signed in 1991 and it was to last until the end of 1999 (Informe
Mercosur No.3, 1997, p. 24)
13
. The Protocol detailed a system to achieve balanced trade
in each of the classifications of vehicles produced (cars, trucks, agricultural machinery,
etc). If one year Argentina got a deficit in cars' trade with Brazil, that would be a credit
for the following years until 1999 in case it exported more than imported from Brazil.
There was a common tariff for Mercosur of 35% for finished vehicles and of 20% for

12
It is necessary to treat the three issues together as they represent the main policy instruments that
influence the performance of the industry. Furthermore, what concessions were given in one issue were
sometimes erased by unilateral measures or demands made in the other two.
13
This industry is very large in both countries. It employs a total of 200,000 people and it has a production
capacity of around 4,000,000 vehicles, making it one of the largest production platforms in the world. It has
the characteristic of having no indigenous vehicle assemblers and thus being dependent on foreign
investment and technology. The sheer size of the Mercosur market has compelled foreign companies to
make strong investments and even produce vehicles specifically designed for this market. They have been
gradually locked in the region. Only in the car and truck sectors, Argentina received $5.6 billion of FDI
while Brazil got $8.9 billion between 1991 and 2000. (Bastos Tigre et al, 1999, p. 82)

22

auto parts. Both countries had an interest in keeping those tariffs as a way to induce
foreign investments (Chudnosky & Lopez, 2002).
In its practice, however, this trade generated a large deficit for Argentina from
1991 until 1994. In early 1995, when facing a drastic reduction of local demand for
vehicles (see Argentine Vehicle graph), Buenos Aires asked Brazil for a modification in
the agreement. Specifically, it requested that the deficits of previous years be accrued and
given as a credit for Argentine factories to export duty free to Brazil. That meant
permission for Argentina to export 85,000 vehicles or close to $900 million there beyond
what the principle of compensated trade allowed. Brazil, concerned that such increase in
its car imports would further increase its overall trade deficit hesitated but eventually
accepted the Argentine request (Informe Mercosur, no.1, 1996, p. 24).
Argentina did not stop there in its demands. There were two large producers there
that were not present in Brazil yet, Fiat-Peugeot and Renault
14
. These companies had
licensed producers in Argentina that because they were not producing in Brazil as well,
were excluded from the Protocol and had to pay normal tariffs (of 35% for finished
vehicles) to enter the Brazilian market. Buenos Aires managed to include these firms in
the agreement after Brazil had accepted the first draft. Brazil did not complain (ibid, p.
25).
Finally, Argentina also managed to make permanent the idea that deficits in trade
could be accumulated and used in other years, not only 1995 (ibid, p. 25). Still, in regards
to the balanced trade credit system, Argentina had a large deficit in vehicles and auto

14
Fiat and Peugeot were both produced under license by a local company in Argentina, named SEVEL.
Renault was produced by another local firm, CIADEA (Bastos Tigre et al, 1999, p. 80).

23

parts until 1996. But as production increased in Argentina through foreign investment
done to produce for both markets and responding to the signals given by these changes in
the Protocol, exports grew exponentially and by 1997, trade was almost balanced
(Informe Mercosur, no. 2, 1997, p. 28).
Brazil realized very soon that it had conceded too much in the period of the
Tequila Crisis to Argentina and created subsidies for foreign investment for the vehicle
industries. Furthermore, it started in 1996 a whole new system of regulations for its car
industry that for the most part copied the Argentine national regime, compelling firms in
the sector to export as much as they could import with reduced tariffs. After a period of
indecision and internal discussions, it increased the tariffs for imported vehicles up to
70% from the agreed 35% level with the other countries of Mercosur (Cason, 2000, p.
27). That benefited Argentina-based factories as well, but Brazil also modified its auto
parts tariffs, reducing them again beyond the Mercosur common tariff of 14-18% to 2-4%
(Informe Mercosur, no. 2, 1997, p. 29). Argentina auto-part makers were affected by that
but beyond the usual complaints to Argentine authorities, nothing happened in the
negotiating front in 1996-7. The Brazilian reaction to Argentine measures during the
Tequila crisis was still in the net beneficial to the industry there as exports there increased
(Averburg, 2000, p. 57).
Much of these changes in policy can be understood as the pre-negotiation
positioning of Brazil towards the bargaining it would have to do with Argentina the
following year, when they were supposed to renew their bilateral Protocol (Cason, 2000,
p. 31). Before the Protocol elapsed both countries had to start negotiating an extension of

24

this agreement to last until 2003. Initially, the extension negotiation was supposed to be
finished in 1998 but it was not completed until 2000
15
. The reason is that it became
immersed in the financial crisis that hit Brazil first, in 1998 and later, Argentina, in 1999
(Lavagna, 2001, p. 51).
Second Crisis: Brazil, 1998

In the Protocol extension’s negotiations, Argentina asked in June 1998 for a
continuation of the compensated trade principle beyond 2000. Brazil refused even though
in late 1997, it had considered accepting the principle (Informe Mercosur, no. 4, 1998, p.
28). The reason was that the situation of the car industry in Brazil had worsened sensibly
as interest rates were on average 30% during the second semester of 1998, depressing
local demand (see graph on Brazilian car sector). Thus, Brazil needed to export more
than before in order to keep its factories running. This led to Brazil to harden its position
according to the worsening of its crisis.
By June 1998, the negotiators had achieved agreement on only the principles for
the new Protocol, which were:
a. free intra-Mercosur trade
b. unified treatment for out-of-Mercosur production
c. no national incentive programs that will distort competition (Informe Mercosur,
no. 4, 1998, p. 24-5)
Both countries were under heavy pressure from the multinational car companies
that dominated this industry to close a deal
16
. However, Brazilian negotiators asked then

15
The dateline was extended twice at Brazil request, to 4/30/98 and to 6/30/98, and once at Argentina’s
request, to 10/30/99 (Informe Mercosur, vol. 6, 2000, p. 32).

25

for more time to elaborate the details of the agreement since those general principles
allowed for plenty more bargaining. Brazil proposed a unified criterion for out-of-
Mercosur rules of origin set at 60%, raising it from the current 45%. It offered, in
exchange, no more subsidies for companies planning to invest in its car production
complex after the year 2000 (Informe Mercosur, no. 5, 1998, p. 29). That was not a value
creating strategy but in fact, value claiming one as Brazil had already promised in 1997
not to subsidize investments any more
17
. By pushing for its own, more protectionist rules
of origin, and offering no more investment subsidies beyond 2000, Brazil was actually
threatening to go back on its word.
Argentina adopted a mixed response
18
. It accepted the Brazilian proposal of rules
of origin but proposed that the Mercosur content be divided into halves, one per each
country. It also reminded Brazil of its previous agreement on FDI subsidies. In fact, it
announced that it would consider any production from factories subsidized beyond 1997
as extra-Mercosur (Clarin, 5/12/98). Brazil rejected the proposal on dividing Mercosur
content arguing that such contradicted WTO regulations for regional trade agreements (O
Globo, 6/1/98). In FDI subsidies, it remained mute but talked through policy actions,
instead, as in the next example.

16
The MNCs preferred a system of completely free market with no compensated trade between the two
countries, low tariffs for auto parts from outside Mercosur and rapidly descending tariffs for importing
completed vehicles, plus tax reductions that would compensate them for their previous investments made to
jump tariffs and produce inside Mercosur in the early 1990s. Such package of ideas did not have much
resonance with either administration and the MNCs were thus limited to push for lower local content rules
and stability of the agreements (Interviews at ADEFA and ANFAVEA).
17
A value-creating strategy refers to proposals by a negotiating party to attain “goals that are not in
fundamental conflict – actions designed to expand rather than split the pie (Odell, 2000, p. 33). A value-
claiming strategy means the opposite, “actions that promote the attainment of one’s party goals when they
are in conflict with those of the other party” (Odell, 2000, p. 31).
18
A mixed response refers to a combination of value-creating and value-claiming strategies, either
simultaneously or in sequence, to attain one’s goals (Odell, 2000, p. 226).

26

Renault and Chrysler were planning new investments in Mercosur in early 1998.
When deciding where to locate, they were approached by both national governments and
also, by provincial (state) administrations from both countries. Renault finally divided its
investments into 1/3 in Argentina on an existing plant and 2/3 on Brazil, in the Southern
state of Parana as it was offered there $300 million of annual subsidies by that state
(Informe Mercosur, vol. 5, 1998, p. 30). Argentina complained loudly that these
incentives were illegal and promised to take actions against Renault (which never
materialized) (La Nation, 7/29/98). That threat was soon silenced as Chrysler was
tempted by an offer of Santa Fe province in Argentina, which subsidized land leasing,
route construction and obtained an agreement from the autoworkers union there to permit
more flexible contracting. The Brazilian government did not protest that move but
promised to use that example to counter any future Argentine protests (O Globo,
10/21/98). Therefore, Argentina was forced to follow the subsidy policy of Brazil, a
worse outcome still than just tolerating it
19
.

19
It means that that Argentina had to follow a bid war with Brazil on investment subsidies. That outcome
had two negatives for Buenos Aires. First, it was resigning its announced principle of horizontal policy
measures only as opposed to firm specific treatment, and secondly, it was engaging in game that was
proportionally more expensive for itself than for Brazil, which had a larger economy and also, a larger state
budget.

27

Figure 3: Interest Rates
Interest Rates
0
10
20
30
40
50
60
70
80
90
1 00
Aug-94 Feb-95 Aug-95 Feb-96 Aug-96 Feb-97 Aug-97 Feb-98 Aug-98 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02
ARGENTINA BRAZIL

As Brazil crisis worsened during the remaining of 1998, Argentina offered a
further concession: it renounced to the principle of compensated exchange (Informe
Mercosur no.5, p. 30). There were large complaints from the industry association in
Argentina but Brazil appeared then ready to sign the Protocol as soon as the elections
there were over in October (ibid, p. 30). However, the pressure from the financial crisis
forced the Cardoso government to take foreign trade measures that soured the chances of
agreement that year
20
.
For the auto sector, the Brazilian government set up taxes of 70% on all imported
cars, an important item in the imports of Brazil and one seen there as a cause of the

20
The usual policies to avoid a financial crisis for Brazil would have been to balance the fiscal budget
and/or to devalue the currency to reduce the trade deficit. Cardoso’s government did not want to do either.
The first implied an increase in taxes on the majority of the population or a reduction in services for them
in the run up for the presidential election. The second had a prestige cost and also, an inflationary side-
effect which could have affected the election result. That is why he decided to attack the trade deficit with
protectionist measures as a way to, at least, temporarily, improve the accounts of the country and bring
back some confidence to financial investors (see Heymann, 2002, and speeches by Cardoso himself in
1999, looking at this in retrospective).

28

growing trade deficit
21
. Argentina complained that this violated the "spirit of Mercosur
and of the Special Protocol for the Auto Industry currently under review" (Clarin,
8/13/98). Brazil relented, declaring 10 days later that Mercosur countries were excepted
but that cars imported into any Mercosur country from outside the area had to be taxed
70% as well. Argentina refused to apply such tax but promised to impede any re-imports
from there to Brazil taking advantage of the common rate of protection for cars (35% tax
at the time) (La Nacion, 10/21/98). Brazil then sought to extent that to auto parts, taxing
another 70% on imported auto parts but most of the multinationals located there and in
Argentina protested intensively since that would have made them increased their local
content from 40% to around 90% to stay competitive (Journal do Brazil, 10/28/98). The
Argentine government supported the multinationals and even the Secretary of Foreign
Trade of Argentina gave the keynote speech in the meeting where the protesters gathered
in Sao Paulo. The argument used by the secretary, Mr. Campbell, was that these measures
were destroying the positive atmosphere for investments in Mercosur. Brazil backtracked
but sent an official message of displeasure for Mr. Campbell's participation to the
Minister of Foreign Relations of Argentina. President Cardoso, talked of "unwelcome
foreign intromission in local industrial policy" and recommended that Argentine
functionary be punished (Fohla de Sao Paulo, 11/3/98). Menem's administration did not
take any action on him but accepted the tariff increases in Brazil while managing to
exempt itself from them.

21
Brazil had increased its trade deficit between 1996 from US$1bn to $7bn, accounting for over 1% of
GDP.

29

Stopping imports was not the only tool used by Brazil during that time. Its
government expanded a scheme since September 1998 to finance through state banks the
consumption of small cars in its market. That was thought to prop up the demand of
Brazil-based factories, which were specialized in the production of those models
(Informe Mercosur, vol. 5, p. 29). Argentine vehicle exports there were hurt but
Argentina did not complain
22
. As Jacobo Losovitz, head of ADEFA, put it: “we are not
concerned with those manipulations of the market, everybody knows of the
interventionism of the Brazilian authorities”(La Nacion, 9/20/98). That acceptance from
the industry association translated in no actions from the Argentine government. This
reflected the Argentine dependence on Brazil as an export market and their awareness of
Brazil’s vulnerability to a financial crisis.
Figure 4: Brazilian Vehicle Production, Sales and Export
Brazilian Vehicle Production, Sales and Exports
0
100
200
300
400
500
600
700
1994
1995
1996
1997
1998
1999
2000
2001
2002
Thousands
Production Sales Exports
Source: ANFAVEA, Annual Statistics 2004

22
Argentina had specialized since the early 1990s in medium cars and utility vehicles, while Brazil
produced mostly small cars and heavy equipment (Bastos Tigre et al, 1999, p. 62).

30

During the rest of the year 1998, Brazilian interest rates increased dramatically in
the effort to stave off a devaluation of the currency. That caused vehicle sales to drop
very fast and by the end of the year monthly sales were a bare third of those in the first
months of the year (see graph above). Finally, the devaluation of the Brazilian Real came
in January of 1999 and had a tremendous impact on the trade of both countries; Brazil
had to increase its interest rate again to reduce currency overshooting in the aftermath of
the devaluation. That, plus the uncertainty generated by a 40% sudden devaluation, which
affected purchasing power severely in its initial phase, made for Argentina a deficit in the
automobile sector that grew very rapidly in that year. It was a consequence of the slump
in the Brazilian market, where auto sales dropped a further 60% in the first months of the
year. Since Argentina tended to specialize in the more sophisticated and expensive
models while Brazil makes the smaller and cheaper ones, Argentine exports there fell
disproportionably. Even if Argentina’s economy was growing slower since late 1998,
vehicle consumption had not decreased much but it had actually moved from more
expensive to cheaper models, increasing Brazilian imports there at the cost of locally
made larger cars (Panorama de Mercosur, 1999, p. 42). The Argentine automobile
manufacturing sector contracted by as much as 50% in only 4 months, up to March 1999.
Third crisis: Argentina, 1999-2001

Meanwhile, the negotiating positions regarding the Protocol remained the same
until the end of 1998. With the changes in macroeconomic conditions, meaning that
Brazil began to grow again but very slowly in early 1999 while Argentina, affected by the
contagion from Brazil’s crisis, started a recession, those bargaining positions changed.

31

The Argentine government soon began to increase its pressure while the Brazilians
began to show acceptance of some of their partner’s wishes. It was in Brazil’s self-
interest as it feared reverse contagion from its partner
23
. Nonetheless, Brazil was much
less accommodating than Argentina had been, as it slowly became evident that it did not
have to fear contagion from its neighbor and its exports there in this particular industrial
sector could be redirected to other destinations (Interview with Botafogo Goncalves).
Figure 5: Argentine Vehicle Production, Sales and Exports
Argentine Vehicle Production, Sales, Exports
0
20
40
60
80
100
120
140
160
1994
1995
1996
1997
1998
1999
2000
2001
2002
Thousands
Production Sales Exports
Source: ADEFA, Annual Statistics 2005
In regards to the negotiations for the Protocol, Brazil announced its desire to sign
it in early 1999, on time before the previous elapsed in December. This time, Argentina
refused, indicating that the conditions were not acceptable for it any more. It did not
indicate which conditions were acceptable and the negotiation was suspended (Informe
Mercosur, no. 5, 1999, p. 30). Meanwhile, the Argentine government undertook a car
consumption subsidy plan by giving a credit of around 20% of the price of the new car in
exchange for old cars (more than 15 years old) but limiting the validity of the voucher to

23
See Bouzas, 2001 for details and Machado & Ribeiro, 2001, for an official Brazilian view on this.

32

locally produced models (ibid, p. 30). The Brazilian government did not complain and
actually approved the measure, to the dismay of that country's car manufacturers (O
Globo, 2/13/00). The official rational for the approval was the philosophy undermining
the measure: "industrial activism" as understood in Brazil as something a government
should do. Before, Brazil's authorities had repeated their displeasure to what they saw as
the "free market dogmatism" of Argentina to face economic crises (Discourse of
Chancellor Lampeira, 10/11/98). In fact, Brazil was signaling a change of posture
towards Argentina, ready to accept measures that could reduce the crisis in its trade
partner.
A new showdown came in the theme of FDI subsidies as well. In June 1999, Ford
Motors Company got a subsidy of $90 million per year until 2010 to produce cars in a
new factory established near Salvador, in the Brazilian Northeastern state of Bahia
(Informe Mercosur, no. 6, 2000, p. 51). The plant, to produce 250,000 cars per year, had
initially been accorded a subsidy of $390 million per year in the form of subsidized credit
by the national government for capital investment and in tax breaks at the state and city
levels. The Argentine ambassador in Brazil warned that the cars from that factory would
be considered extra-Mercosur by Argentina, thus taxing them with a 35% levy and not
cero as for those from inside the common market (La Nacion, 7/16/99). The Brazilian
government complained, indicating, "Argentina cannot say where Brazilian borders are
or are not." (Journal do Brasil, 7/22/99) but it backtracked from its credit subsidy to Ford,
thus leaving the subsidy at only $90 million in tax breaks, an amount to be paid by Bahia
state. Argentina did not change its claim but Ford of Argentina said that they did not

33

expect to be hindered by the Argentine government in their Mercosur operations that
include that new factory in Northern Brazil (La Nation, 9/1/99)
24
. The Secretary of
Industry of Argentina refused to comment on the issue, implicitly indicating that they
would cede to Ford (and consequently, Brazil) after having reduced the Brazilian subsidy
by 78%. It was the first time Argentina achieved that and that Brazil conceded in this
matter.
Those were the last positions of the Carlos Menem administration, which was
replaced by a new one, from an alliance of opposition parties, headed by Fernando de la
Rua. This new government took office on December 10
th
, 1999 and quickly reached an
official agreement with the Peronist Party (now in opposition), the unions of the sector
and the association of producers of automobiles and auto-parts to have them all support
and coordinate the negotiations with Brazil (Journal do Brasil, 27/12/99). In February
2000, Argentina tried, without consulting previously with Brazil, to get its own car
industry protection program approved by the WTO. Brazil’s government complained and
the Argentina-WTO negotiations were "temporarily stopped" (O Globo, 2/21/00). Still,
the signal given was that unless Argentina’s undisclosed conditions were met, a unilateral
path would be followed.
Between December 31st 1999, when the previous agreement had ended and until
the new one was put together, auto trade between the two countries was made under a
"provisory" accord, to all effects similar to the previous one. That was proposed by

24
Ford, as the other MNCs present in Mercosur, produced in both countries and had a great deal of
intrafirm trade there. Argentina was threatening that link by saying that production from a subsidized plant
in Brazil would not enter duty-free the Argentine market.

34

Argentina, threatening again to go the WTO if answered negatively. The new auto
agreement was finally signed on 6/30/00. Valid until 2005, when free trade will
supposedly begin inside Mercosur. After two years of intermittent negotiations, the main
points were:
a. Bilateral trade was duty free as long as there was no deficit for either country.
Thus, the Argentine request for balanced trade was included but with a
modification. Those vehicles creating a deficit in the bilateral trade would only be
taxed at a fraction of the Mercosur tariff rate.
b. Regarding minimum Mercosur content, the rules varied from 40% to 60%, with a
concession for Argentina to request that half of that percentage had to be
nationally made.
c. The tariff rates for finished vehicles were established at 35 to 14%, and for auto
parts, at 14 to 18%.
d. No more subsidies were allowed for FDI in this industrial sector (Informe
Mercosur, no. 7, 2001, p. 45).
This agreement, closely resembling the previous one, was clearly favorable to the
Argentine position. It provided, for example, high levels of local content with specific
higher levels for Argentina, thus giving it an advantage over Brazilian automakers. It also
diverged from the Brazilian position of 1998, asking for an end to balanced trade and a
free hand to provide incentives for FDI in the sector. Brazil had given up ground because
of the importance of Argentina for its exports and knew that an agreement would be a
positive sign for investors otherwise ready to push Argentina further into crisis. Brazil

35

was also recovering from its own crisis of 1998-1999 and thus, it could afford to give up
something in its bargaining (Interview with Graca Lima). Nonetheless, there were limits
to what Brazil would give in.
Soon after the negotiations were officially finished and the agreement signed,
Brazil made public its disagreement with the way Argentina was doing its calculation of
local content. Argentina’s government Decree 660, signed a week after the agreement
with Brazil, named the 20-30% rule for locally provided auto parts “superlocal content”,
and was counting it as a fraction of the final sale price of the vehicle and not the factory
price of the parts, as Brazil and also Argentina had agreed to do. With this interpretation,
the Argentine government was de facto increasing its local requirement to 40-50%
(Informe Mercosur, no.6, 2001, p. 47). It had the clear goal of benefiting the local auto
parts makers (Interview with B. Nofal). The car producing terminals in both countries got
together and signed a declaration indicating that Argentine auto parts makers did not have
the installed capacity to meet a demand higher than 30% of the parts for vehicles made
there. And if they were to generate that additional capacity, it would be at a higher cost,
thus raising the final costs of cars in Argentina. Still, no policy reversal happened in
Buenos Aires (Clarin, 11/28/00).
A few months later, in March 2001, the Argentine government proposed changes
to the principle of “bilateral balanced trade”. The reason was that, given the economic
recession in Argentina, its imports of vehicles and auto parts from Brazil diminished and
its available surplus in this sector for export grew. However, the “balance clause” was
making Argentina lose opportunities to export more to Brazil. The latter did not accept to

36

negotiate any changes (Informe Mercosur, no. 7, 2001, p. 47). Argentina was clearly
motivated by the dire state of its economy to undo one of the points it had fought the
most to get in the new regime. Brazil, conscious that financial contagion from Argentina
had not affected its economy in the previous two years, decided to resist (Tussie, 2002;
Heymann, 2002).
Undeterred, Argentina proposed in April 2001 an early dismissal of the whole
agreement in January 2004, instead of January 2006, as signed. That was negotiable for
Brazil as long as Argentina would change its calculations of “super local” content
immediately (Informe Mercosur, no. 8, 2001, p. 50). The reasoning for Brazil was that
such rule was reducing its exports to Argentina and that the whole agreement had become
a liability for its own industrial policy as Argentina kept on asking for changes as its
financial fortunes got worse. Still, Argentina had no room to open its auto parts market
just as its industry was suffering extremely high interest rates and vehicles consumption
was going down. Therefore, the regime stayed in place.
Still, as the crisis worsened in Argentina later in 2001, any sectoral policy proved
too expensive. As a final nail in this agreement’s coffin, Argentina proposed the
reduction of the common external tariff for vehicles from 35% to 25% and the
elimination of all duties for heavy equipment (Informe Mercosur, no. 8, 2002, p. 49).
This was a part of a larger proposal of the Argentine government to facilitate investment
and thus push the economy out of its crisis. A commission formed ad hoc in Mercosur
was to study these three proposals of Argentina and any others presented until July 6
th
,
2001, and give a report by September 1
st
. Brazil suspended all participation in this

37

commission in July, rendering it irrelevant as a venue for Argentine pressures (Informe
Mercosur, no. 8, 2002, p. 51).
This final disagreement kept the car regime in place but severely battered by
Argentina’s unilateral measures and Brazil’s resistance. The Argentine government was
getting a measure of its lack of importance for Brazil as a market as this managed to
redirect most of its trade to other countries when Argentina was buying less and less
during 2001. Furthermore, Brazil had managed to separate itself from the Argentine crisis
in the eyes of the foreign financial investors.

1.6.2 Textile and Footwear
This case intends to show in respect to the first hypothesis that the crisis hit country
reacted less aggressively in this labor intensive sectors than in the interest-sensitive sector
shown before. Argentina, hit first by a financial crisis in 1995, just applied timid
measures to protect these two labor intensive industries. Brazil, affected in 1997 by a
crisis, set up de facto measures targeting imports in these labor intensive industries but
gradually reduced their impact, accepting a less favorable outcome. Argentina, when
entering into a crisis in 1999, also became more pressing on Brazil, introducing several
protectionist measures. As the crisis prolonged in Argentina and worsened in 2001, its
negotiating position became actually softer and not more aggressive, in contrast to the

38

auto negotiations. That shows that both countries were ready to decrease their demands
or, at most, keep them at a constant level
25
.
In regard to the second hypothesis, Argentina is shown as accommodating to
Brazilian pressures during 1997-1998 but not later, as contagion from Brazil did bring a
crisis to Argentina. Brazil, on the other side, as it started recovering from its own crisis,
became less demanding and actually, accommodated some of the Argentine protectionist
demands from early 1999 onwards. Again, as Brazil observed that contagion from
Argentina was unlikely and its protectionism was continuously increasing, it became less
accommodating.
This section deals with the bilateral trade issues in the textile and footwear
industries. In these traditional manufactures Brazil has usually been a net exporter and
Argentina, a net importer. Unlike in the vehicle production sector, there is little
intraindustrial trade here in terms of components for assemblers on the other side of the
border. Most of the capital in these industries is also local and not foreign, as in the
previous case
26
.
First Crisis: Argentina, 1995

The financial crisis of 1995 in Argentina drastically reduced disposable income
by increasing unemployment from 12.2% in October 1994 to 18.8% in May 1995. Given
the high elasticity of the textile and footwear industries to changes in income, the

25
Here, as said in the introduction, unilateral moves – increases in trade protectionism - , are considered as
the initial negotiating positions. The reason is that these countries know that when setting up these
measures, they will face some or a lot of resistance from their trade partners and that those partners will ask
them for changes or a return to the previous status quo. That exchange implies a negotiation.
26
These differences between the cases intend to show that other factors considered in the literature such as
the degree of intraindustrial trade or the ownership of the firms do not have the expected effect in this
instance.

39

government was soon forced to take actions. The producers of footwear had long been
asking for more protection, as they could not compete with imports from Asia and Brazil.
The government reacted with a mix bag of measures. In footwear, it raised tariffs from
22% to 27% in March 1995. But Brazil protested immediately through its representative
in Buenos Aires, claiming that such tariff increases were unjustified as Brazil actually
had a deficit in its trade with Argentina in that sector in 1994. Argentina modified then its
tariff for the Mercosur countries; bring it down to its previous level and establishing thus
a margin of preference for intraregional trade (CNCE, Informe Annual, 1995, p. 61). That
was seemingly a large concession to Brazil but it was later partially reversed with the
establishment of specific duties at the free disposal of the National Trade Commission,
which were often applied to Brazilian exporters. Furthermore, shoe tariffs were bounded
inside the Mercosur liberalization scheme at 27% and not the previous 22% but still,
decreasing to 0% by 1999 (ibid, p. 62).
The reasoning for defending this industry as given by Argentine officials was
their labor intensity (Clarin, 6/12/95). In a home market that is shrinking due to a crisis
and without the benefit of a devaluation (Argentina kept its currency value through this
period), factories were very likely to close and increase unemployment even further. Still,
that combination of measures was insufficient to account for a reduction in the demand
for footwear of 18% and a fall in employment of 20% (CIC spokeswoman). Evidently,
there was a lack of will on the Argentine government to further protect this sector and the
resistance from Brazil helped as well.

40

Second Crisis: Brazil, 1998

Brazil, due to its rapidly deteriorating economy since late 1997, applied a non-
tariff barrier of financial nature to address its growing trade and current account deficit. It
ruled that all operations of foreign trade exceeding US$100,000 had to be paid 180 days
ahead of the time of shipping. In that way, Brazilian officials hoped to gain time and slow
down the accrual of the trade deficit (Journal do Brazil, 8/23/97). The Argentine
government complained that such measure was equivalent to an "incommensurable" non-
tariff trade barrier and that Mercosur countries had to be exempted (Clarin, 9/1/97).
Brazil answered that Mercosur countries were "of course" exempted but Argentine
exporters - except those in the vehicle industries - were saying that their operations were
actually not being so (La Nation, 9/2/97). The Argentine government did not pursue the
matter and instead, it opened lines for early export financing at the state banks to help
local exporters deal with the situation (Informe Mercosur, vol. 3, 1997, p. 38). Those
most affected were light manufactures, especially, textiles, apparel and footwear, which
fell by 25% in the last trimester of 1997. These industries had become since 1996 net
exporters to Brazil and thus, were targeted by the authorities at the request of the national
producers associations there (Panorama de Mercosur, 1998; Gazeta Mercantil, 12/23/97).
In January 1998, Brazil abolished the "Canal Mercosur" established in its customs
for the other members’ exports since 1995, part of the upgrading done by all the others
for Brazilian exports as well (Informe Mercosur, vol. 4, 1998, p. 48). That "canal" was a
fast approval track for merchandise imported into Brazil from the rest of Mercosur. From
then on, these countries had to undergo the same inspections, pay the same stamping

41

rights and face the same non-tariff barriers as the non-Mercosur exporters to Brazil.
Argentine exports of textiles fell right after by around 10% in the second trimester of
1998, from the already depressed levels of the end of 1997. Waiting time at the border
increased from 2 hours to 6 six days on average (Gazeta Mercantil, 4/24/98)
27
.
Argentina complained through its embassy in Brasilia and Brazil argued that it did
not have funds to finance that differentiation in procedure at the customs any longer due
to its pressing fiscal situation (Panorama Mercosur, 1999, p. 67). Meanwhile, by
February, at the height of the shopping season for Carnival and other festivities, hundreds
of trucks were awaiting inspection at the Argentine-Brazilian frontier (Clarin, 2/12/98).
Argentina refused to escalate the conflict and the government was heavily criticized as
leaving the economy "on automatic pilot while crash-landing" (Clarin, 4/1/98).
The cost of such strategy of conceding soon surfaced in Argentina. The Brazilian
government insisted in its pressures and Argentina’s strategy of using fiscal funds to
overcome financing troubles for its exporters was not working since the new troubles
were at the customs. It resorted then to opening a panel dispute in the Mercosur tribunals,
which have non-binding rulings, on the case of the customs inspections (La Nacion,
19/3/98). To ensure compliance from Brazil, Argentina used its last recourse, the threat to
denounce the car agreement if Brazil did not accept the panel’s verdict. Brazil agreed the
day after the panel gave its opinion (favorable to Argentina) to lift the licensing system
“for the time being” but did not re-impose them (Cardenas & Tempesta, 2001). A week

27
That did not delay car and auto-parts trade, however. The "Canal Mercosur" remained "unofficially"
open for those goods, as well as for chemicals, electrical equipment and steel tubes (Interview with C.
Bottino).

42

later, it also reinstated the "Canal Mercosur" fast track customs financed this time by a
loan from the Inter-American Development Bank sought by the Argentine national
government to promote regional integration (BID-INTAL, 2000, p. 13).
Brazil had relented in its demands in these labor intensive sectors only after being
threatened in a capital intensive one since the Mercosur rulings had been ignored often by
both parties before. Argentina had not responded before to those increasing domestic
pressures due to its dependency on the Brazilian market and also, because it feared the
worsening of Brazil’s foreign trade and the consequent precipitation of a financial crisis
from which it could hardly avoid contagion. What might seem a large Brazilian
concession was in fact a temporary one, as only two months later, Brasilia decided to
float and devalue the Real, its currency, by 40%. It can be speculated that Brazil’s
government had backtracked on those non-tariff barriers to labor intensive manufactures
because it was already convinced that it would have to devalue soon and that Argentine
imports would be anyway priced out of its market (Bouzas, 2001, Interviews with B.
Nofal and Botafogo Goncalves confirmed that).

43

Figure 6: Nominal Exchange Rates (Local Currency per US Dollar)

Source: Own calculation based on IMF Statistical Yearbook adjusted for inflation.
Table 2: Peso – Real Parity Index

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average
1994 74.3 74.1 76.0 75.0 74.6 76.3 73.3 76.9 80.5 84.3 87.1 87.4 78.3
1995 87.8 89.6 86.4 86.4 89.2 89.7 90.1 89.9 89.8 90.0 91.2 92.1 89.3
1996 92.6 93.0 93.2 93.7 94.5 95.1 95.2 95.2 94.5 93.8 93.8 93.7 94.0
1997 93.6 93.0 93.5 94.0 93.5 93.1 92.5 91.7 91.4 91.2 91.0 90.8 92.4
1998 90.5 90.1 90.1 89.9 90.1 89.5 88.5 87.3 86.3 86.2 85.9 85.4 88.3
1999 68.7 54.7 56.3 63.4 64.1 61.2 60.4 58.3 58.1 56.6 58.4 61.7 60.2
2000 62.9 63.9 65.6 64.7 62.8 63.8 64.8 65.3 64.6 63.2 61.5 61.4 63.7
2001 62.1 61.1 58.7 56.0 53.7 52.7 51.5 51.1 48.3 47.7 52.3 56.7 54.3
Source: Own calculation based on IMF Statistical Yearbook adjusted for inflation.

44

Third Crisis: Argentina, 1999-2001

Brazil already had a slowly depreciating exchange rate with the Argentine Peso
before that but since its January 14
th
, 1999 devaluation of 40%, the difference with its
main trading partner was huge. In those industries in which Argentina faced strong
Brazilian competition, such as textiles, panic ensued and the same business associations
that months before were calling on the government to fight Brazilian protectionism were
calling now for measures to avoid a flood of cheaper Brazilian goods. Facing elections
that year, the Argentine administration obliged and set up between May and July 1999
countervailing duties for textiles and shoes just as requested by the industries involved,
ranging from 14% to 27%, and applicable for 3 years (Informe Mercosur, no. 5, 1999, p.
22). Brazil complained at the highest official level that such duties could not be applied
inside the custom union Mercosur, while second level diplomats suggested that the duties
be variable, according to the evolution of the bilateral exchange rate (Interview with
FITA spokesperson). Argentina refused and Brazil asked for a Mercosur tribunal to settle
the issue (Cardenas & Tempesta, 2001). That institution ruled in Brazil’s favor in
October 1999 but Argentina refused to eliminate the duties. Brazil went to the WTO,
then, where Argentina also lost in September 2000 (Cardenas & Tempesta, 2001). Only
then, Buenos Aires did abolish them. Brazil complained all along this process that
Argentina did not face a flood of Brazilian imports and showed data to prove it. That in
fact was true as Brazilian textile imports had fallen by 15% in the first semester of 1999,
before the duties were applied. And continued to fall another 10% until September 2000

45

(Informe Mercosur, no. 5, 1999, p. 24). The damage to the relationship had gone beyond
that.
On August 8, 1999, the presidents of the Mercosur countries met in Montevideo
to discuss the state of the regional agreement. Brazilian authorities asked for policy
convergence in fiscal and industrial policies but were accused of unilateralist by the
Argentine ones. The meeting developed into a ping-pong of accusations and was finally
abridged. The Minister of Foreign Relations of Brazil, Luiz Lampeira, indicated that
there was no interest on his side to conduct any more negotiations until the presidential
elections in Argentina took place (on October 24th, 1999) (Rozemberg and Svarzman,
2002), . Using a sports analogy, “overtime had begun for the Menem administration”,
declared O Globo, the following day. Brazilian officials went under increased pressure by
businesses to act "harder" against Argentine protectionism (O Globo, 8/21/99). The
occasions would certainly be there. Argentine business people and political parties went
on criticizing the weakness of the government. Even Menem's own party published an
open letter to the administration complaining for the lack of "self-sacrifice" demonstrated
in Montevideo and beyond that as well. A "more energetic defense of the national
markets" was demanded or the ministers in charge of those areas were under threat of
impeachment (Clarin, 8/15/99).
While the Argentine government was seen to be conceding to Brazil by local
politicians and business people, it had in fact been working for increases in the rates of
protection for the footwear industry. In informal meetings organized by the Argentine
government, Brazilian and Argentine businessmen apparently agreed on quotas for

46

Brazilian exports in the Argentine market in footwear (Panorama de Mercosur, 1999, p.
78). These meetings took place between June and July 1999 and the agreement was for
immediate implementation. By September 5, the footwear producers in Argentina were
accusing their Brazilian counterparts of going 25% over their quota of the market
(Journal do Brazil, 9/5/99). As that did not work, on September 8, the Argentine
government decreed that all shoe imports had to be done through a non-automatic license
system. The time for processing those licenses was estimated by the own government in
no less than 3 months (La Nacion, 9/9/99). That closed the Argentine market for
Brazilian footwear until 2000.
Enraged by the shoe licensing, Brazil announced that Argentine exports were all
to go from then on under a non-automatic licensing system, effectively closing the
country to all Argentine exports for the next days (Informe Mercosur, vol. 6, 2000, p. 46).
Argentina responded by reducing the processing time for licenses to one month and did
not proceed with any of the anti-dumping investigations on Brazilian exporters (Clarin,
9/16/99). Brazil reciprocated lifting the licensing to all Argentine exports. Argentina did
however apply countervailing duties to Brazilian shoe-exporters that had also been
declared to be going over the quota agreed in July (BID-INTAL, 2000, p. 19).
In regard to textiles, the Argentine government continued trying to reduce
Brazilian competition, which given its reduced labor costs after the devaluation, was
gaining market share in the crisis-hit Argentine market (at the cost of other exporters but
not local producers). The choice was a creative new NTB, all pieces of apparel were
required to have a stamp that declared the duties paid for each. That was to be required at

47

the port of entry from June 2000 onwards (Informe Mercosur, vol. 7, 2001, p. 32). The
obvious impossibility to add these stamps immediately and the cost of doing it made the
new regulation just another barrier
28
. Brazil protested and threatened again with closing
its borders to all trade. Buenos Aires accepted to give 3 months for producers to adapt to
the new measures (ibid, p. 34).
In March 2001, Argentina decided to unilaterally modify its whole tariff structure,
except for the auto sector. It decreased tariffs for capital and intermediate industrial goods
and increased them to the maximum consolidated in the WTO to all other manufactured
goods. In the cases of textiles and footwear, that implied an increase in tariffs for non-
Mercosur countries from 24 to 35% (ibid, p. 36). That obviously favored Brazil in these
particular goods but affected it very negatively in others as Argentina was reducing
Brazil’s margin of preference for its capital and intermediate industrial exports. Contrary
to expectations in the media, Brazil did not object. It accepted that the Argentine tariffs
be changed until the end of 2002 (ibid, p. 37). The reason was that Brazil feared that a
worsening of the financial crisis in Argentina would further reduce its labor intensive
exports there and that its own capital intensive industries were no longer suffering from
the capital scarcity resulting from a financial crisis. The Argentine measure actually
implied giving up on those import competing labor intensive industries, which now faced
increased Brazilian competition. The result was that in 2001, imports from that origin
took 23%, 27% and 31% shares for textiles, apparel and footwear in the local market,

28
Azzi da Silva & Da Rocha (2001) show over time the evolution of Brazilian exporters’ perception of
NTBs in Mercosur.

48

representing over 72% of all imports in those industries. That was between 5 and 6 times
higher than the penetration they had in 1997 (FITA Interview).

1.7. Alternative Explanations
When set up to explain this variation in negotiating positions that Argentina and
Brazil presented from 1995 until 2001, when facing periods of financial crises, the
already established theories of trade policy formation applied to developing countries do
not do well. Neither can the theories of economic negotiations account for these changes
in bargaining positions without considering the specifics of a financial crisis.
The most frequently used political economic theories of trade policy are of factor
specificity and relative abundance. The first would hypothesize that no changes in the
trade policies of these countries would happen because the factor specificity of the
industrial sectors involved did not changed over these years (Machado & Ribeiro, 2001).
Thus, they cannot explain why Argentina or Brazil did modify their negotiating positions
towards each other several times in that period. Factors’ relative abundance, proposed by
Rogowsky (1989) as an explanation for even more long-term changes in trade policy,
certainly does not contribute, as that could not possibly have changed in these countries
in only 6 years.
Often in coordination with these previous two theories, institutions are given as
explanations for trade policy. The hypothesis here is that electoral systems that facilitate
the influence of small groups of players (industry-specific lobbies or unions) vis a vis the
common good or executive powers thoroughly penetrated by sectoral interests can easily

49

move policy towards protectionism. Furthermore, institutions can also be a vehicle for
change in policy when they are in a period of thorough reformation or change
themselves, as opportunists can seize that to make trade policy more protectionist (Alt et
al, 1996).
In this paper, such notions could hardly explain why trade policy in Argentina and
Brazil changed only in some of the times in the direction of protection but in others, in
the opposite direction, liberalizing trade or at least, not providing protection. It cannot be
said that an electoral system that favors protectionism, it does so only part of the time. In
fact, Argentina and Brazil are shown here not to have protected their labor-intensive
sectors in some of the worst economic times. That could not have been the case if their
institutions were hostage of protectionist (or liberalizing) interests only. Apart from this,
their trade policymaking institutions did not change or were reformed in this period of
time, so no opportunity arose for policy change (Roett, 1999).
Firm ownership and the division between exporters and import-competing firms
inside the same industrial sector has sometimes been proposed as a factor explaining
trade policy changes (Milner, 1988). Here, the hypothesis would have been that the auto
sector, dominated by multinational corporations, would be less likely to have
protectionist policies than the textile and footwear one, dominated by domestic firms. In
the case of Mercosur, protectionism is actually stronger in the auto sector than in the
others, so the firm ownership argument is not valid here. Furthermore, in this case the
changes in the Car Protocol and other punctual changes in tariffs by both Argentina and
Brazil in this period were done in spite of the opposition of those multinationals

50

(Chudnovsky & Lopez, 2002). A division between exporters and import-competing
firms inside the same sector would frame the hypothesis that trade policy changes
according to which group is dominant and for this case, their hypothesis would imply that
Argentina and Brazil resorted to protectionism according to when import-competing
firms were dominant. The shoe and textile sectors in Argentina were through this period
always dominated by import-competing firms but that did not make Buenos Aires always
protectionist. The opposite applied to those sectors in Brazil and that also did not make
Brasilia support free trade there at all times (BID-INTAL, 2000, p. 6).
Others have proposed variations in ideas on economic policy as variables partially
explaining trade policy (Goldstein, 1993). The hypothesis here is that ideas sponsoring
protectionism would induce a change away from free trade in these countries. Even
though it seems plausible that financial crises and the consequent economic deterioration
could facilitate such change in ideas, the neoliberal consensus in both, Argentina and
Brazil, remained. That is the case even in Argentina, where the opposition came to power
in 1999 (Higgott and Phillips, 2000). A variation in that theory of ideas guiding trade
policy is in research that points to the IMF and other international agencies setting the
limits of what trade policy can be in developing countries (Haggard, 2000). The
hypothesis here is that no changes in trade policy are likely to happen as long as they
remain under the tutelage of the IMF. In fact, both countries were during the whole
period under stand-by agreements with the IMF and that did not stop them from
sometimes closing trade in the industries analyzed. Neither did their participation in the
WTO, even though that forced them to vary their instruments of protection, just as it

51

provided them additional tools to fight protectionism on the other side of the border
(Bouzas, 2001).
Economic research on the political economy of trade policy cannot explain either
why Argentina and Brazil modified their commitments over this period. In fact, work on
endogenous trade theory has hypothesized that Brazil led the creation of Mercosur tariffs
to adjust them to its own terms (Olarreaga & Soleaga, 1998). That is incorrect as this
work shows that Brazil was at times forced by Argentina to modify its trade policy. This
is a rather common problem that extends to the other theories of trade based on domestic
factors only: the unawareness of the intrinsically interactive nature of trade policy. Policy
decisions are made at the domestic level but they must also be negotiated internationally
with the trade partners involved. The final outcome is a product of both, domestic
pressures and foreign negotiations (Putnam, 1988).
This is where a very important contribution can be made by research on
international trade negotiations. It picks up precisely where these theories of trade policy
formation leave and explains how the processes that finalize the setting of a trade barrier
or liberalization actually happen. Such processes are the interaction between two
governments that only after reaching an agreement or testing the cost of having none
decide on whether to instrument or maintain a trade policy change. This paper shows
specifically that, in how Brazil and Argentina changed their trade policy to protect their
industries in situations of financial crises and the negotiations that came out from those
changes, as well as how the crises affected ongoing bargaining. Using an existing
framework to show the modifications in the bargaining positions of both countries, this

52

research shows that financial crises influence trade policy making and also the reaction
of the trade partner affected by those measures. Still, it does not mean to establish
determinist causality among crises, trade policy and negotiations but to show that the
former cannot be ignored as a factor in the behavior of developing countries in trade
issues.

1.8. Conclusions
The financial crises that affected Argentina and Brazil had a profound impact on
their trade negotiations. While some of these had begun prior to the beginning of the
crises in 1995, they were made much more contentious under the pressures of rapidly
deteriorating macro indicators. Another set of them appeared as a result of the trade
policy measures taken to reduce the trade imbalances.
The qualitative analysis of these two sets of negotiations provides for a
comprehensive view of how a financial crisis, through its altering of the cost of capital
and labor, when accompanied by a devaluation, changed the bargaining positions of both
countries. It not only modified those positions in the crisis-hit country but also in its
negotiating partner. The possibility of contagion and the dependence on a foreign market
in crisis altered what could have easily been predicted as a “taking advantage” behavior
with a more cooperative one, such as the tolerance of Argentina for Brazilian
protectionism up to late 1998 and the reverse, from early 1999 onwards and prior to that,
in 1995.

53

The comparison between the automobile sector with the other set of labor-
intensive industries allowed for the control of other differences. The first case
exemplified managed trade while the second was under standard free trade; all were
under a common Mercosur tariff that partially isolated them from world price changes.
Another important difference that did not seem to count was ownership. While the
automobile sector is thoroughly owned by multinationals, the other sectors were mostly
firms domestically owned.
The level of detail provided on these negotiations was very high but minding that
regional cooperation agreements are the result of very precise negotiations, particularly in
moments of great economic difficulty. In fact, a strong contribution of this paper was to
just implicitly show how cooperation works in developing countries and what we can
understand from their simultaneous management of unstable financial contexts and
continuous trade bargaining.
A possible line of research to further analyze the impact of financial instability on
trade negotiations could be to investigate what institutional setting, such as arbitration
arrangements, can be fit to deal with the reactions of governments when faced with
financial crises.
Another possibility is to see that financial crises are dealt by with domestic
policies, including trade instruments that evidently have impact beyond the national
economy. The trade protection resulting here from the impact of the crises affected an
important trade partner. This partner reacts with countermeasures that feed right back into
the crisis-hit country. In that regard, the political economy of financial crises in

54

developing countries can potentially gain from observing what happens to the trade
policies of the countries affected by crisis and how those affected by these changes react.
The negotiations literature has the most to gain from observing how financial
crises alter the economic fundamentals of a country and thus, alter its negotiating
positions. Beyond the work already done on sectoral pressures, government capabilities
and structural forces, there are some occasional but great economic crises that also force
changes of bargaining positions.

55

Chapter 2. International Financial Crises’ Contagion and Trade Barriers in
Developing Countries

2.1. Introduction
Since the mid-1990s financial crises have spread through contagion to multiple
countries to become a prominent feature of the international economy in the developing
world
29
. Together, the accumulated effect of these rounds of contagion affected over 50%
of the developing world by GDP and 60% if measured by investment receipts and trade
flows (Ma & Cheng, 2003). In sum, contagion from financial crises has accounted for a
significant amount of economic instability in the developing world in the last decade. It
has reduced GDP growth in the developing world by 50 % (IMF World Economic
Outlook, 2004) and it has called into question some of the tenets underlying market-
oriented reform there (see Rodrik, 2001, Williamson, 2003; Edwards, 2000).
Precisely one of the main issues in these reforms has been trade liberalization in
the form of reductions of tariffs
30
. The pronounced movement towards freer trade in the
developing world since the early 1980s has thus slowed down significantly since the mid
1990s (see Figures 1 and 2). While from 1983 to 1995, the average tariffs in developing
countries fell from 36.9% to 16.7%; from 1995 until 2003, they decreased further only to

29
In the Mexican Peso Crisis of 1995, 10 countries were affected by contagion, mostly other Latin
Americans. In the Asian Financial Crisis of 1997, 16 countries suffered from contagion, being all emerging
markets from East Asia, Latin America and Eastern Europe. In the Russian Financial crisis of 1998, again
some 13 countries were caught up by contagion across the world. In the Brazilian crisis of 1998, 6
countries also were influenced (Forbes, 2001).
30
The emphasis on this paper is on unilateral trade liberalization, as opposed to multilateral (done due the
GATT-WTO commitments) or reciprocal (due to regional or bilateral free trade agreements). The Global
Economic Prospects 2005 report of the World Bank shows that unilateral trade liberalization has been by
far the most important source of trade liberalization for developing countries, accounting for 66% of the
total reductions, with only 25% due to multilateral rounds and 9% due to regional initiatives (GEP, 2005, p.
33).

56

13.5%. That might still seem an advance but in fact; tariffs of industrialized countries
went down much faster, from 6.3% in 1995 to just 3% in 2003.
Figure 7: World Tariffs 1981-2003

World Tariffs 1981-2003
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Developing Countries Industrialized Countries

Source: World Bank, International Trade Research Group.

Figure 8: World Tariffs 1994 -2003

World Tariffs 1994-2003
0.0
5.0
10.0
15.0
20.0
25.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Developing Countries Industrialized Countries

Source: World Bank, International Trade Research Group.

57

International organizations such as UNCTAD, WTO, IMF and the World Bank
have lately issued warnings in that regard. Either blaming the disagreements at the WTO
to start a new round of negotiations (Goldin et al, 2003), focusing on the resistance to
further liberalization by new populist governments in developing countries (Krueger,
2001) or simply by pointing the fact that trade liberalization has slowed down
significantly there and something needs to be done to reverse that (World Bank GEP,
2005, p. 31), international organizations have already noted this phenomenon.
Academic works have long pointed to a related phenomenon, the growing use in
developing countries of antidumping measures as instruments of trade protection
(Blonigen & Prusa, 2001). Precisely in the same period when tariffs have slowed down
their decrease, developing countries have become avid and, by some accounts, the most
frequent users of other barriers to trade such as antidumping measures (see Figure 3).
They certainly apply antidumping with a much higher intensity per million of imports
than industrialized ones (Miranda et al, 1997). The combination of these two measures,
the reduction in the pace of tariff reductions and the increase in the use of antidumping
measures, implies that free trade in the developing world is no longer expanding the way
it did before and that protectionist sentiments are in the rise there.

58

Figure 9: Number of Anti-Dumping Measures 1995-2003

Number of Antidumping Measures 1995-2003
0
50
100
150
200
250
1995 1996 1997 1998 1999 2000 2001 2002 2003
Industrialized LDCs

Source: WTO Antidumping Research Group
This study seeks to examine the nexus between these two developments in the
political economy of the developing world. In particular, it examines to what extent
financial crises’ and their contagion via trade linkages explains changes in trade policy in
developing countries, defined as the changes in applied tariffs and the use of antidumping
measures. In doing so, it first considers the existing understandings of trade policy
formation in developing countries. Secondly, it explores the economic effects of financial
crises on the countries directly hit by them and also on third countries, namely, the
contagion from those crises. And thirdly, it analyzes the policy response of governments
in those countries in terms of trade policy. In this way, it seeks to explain the progressive
reduction in the pace of trade liberalization and its partial reversal in some countries in
the developing world since 1995 until 2003.

59

Consequently, I hypothesize that financial crises and their contagion via trade
linkages brings about the suspension of trade liberalization and possibly, increases in
trade protectionism in the affected countries. In order to test this hypothesis, I conduct a
statistical analysis that examines the impact of the largest financial crises in the last
decade on the economies of the developing world and relate that to the changes in trade
policy made in that period.
This study contributes to the literature in three different ways. First, it contributes
to the political economy literature on trade policy formation in the developing world. Past
and current literatures have concentrated on how to achieve trade liberalization and what
the cost of protectionism is. While macroeconomic conditions have received attention as
a variable, financial crises have not been studied sufficiently. This gap implies lack of
attention to the cost of continuing trade liberalization over time, especially, those of
economic disturbances.
Secondly, it contributes to the political economy of financial crises and contagion.
The works so far researching contagion have focused on three channels that might be
transmitting such crises: macroeconomic similarities, common financial creditors and
trade linkages. While the first two channels have been thoroughly studied, rendering
policy implications on what countries can do to avoid contagion and what they have
actually done, the third has been less studied and policy implications have not been
drawn. Most importantly, what countries have actually done to avoid contagion through

60

trade linkages using tools of trade policy such as tariffs and antidumping legislation has
not been researched.
Thirdly, there is another significant contribution that comes from linking
developments in finance with others in trade. The possible interrelations between
financial and trade issues in the political economy of the developing world have been
ignored for the most part. These developments have been studied most often
independently from each other while in reality; policymakers deal with both kinds of
phenomena at once. One only needs to read the opinions or memories of distinguished
policymakers related to trade and financial issues to see that (i.e. Bresser Pereira, 2004)
This article proceeds as follows. The first section illustrates the relationship
between financial crises and trade liberalization in the form of tariff reductions. The
second reviews the literature to develop the theoretical argument for this paper and offer
a testable hypothesis. The third section elaborates on methodological issues, that is, case
selection, definition and measurement of variables, data collection and research design.
The fourth section reports the results of the statistical analysis conducted to test this
empirical relationship and discusses the implications of these results. The final section
considers alternative explanations and concludes.

2.2. Preliminary Look at the Relationship between Financial Crises and Trade
Liberalization
There is no consensus definition of what constitutes a financial crisis. The
mechanisms defining it are, however, clear enough as “a financial crisis is a disturbance
to financial markets, associated typically with falling asset prices and insolvency among

61

debtors and intermediaries, which spreads through the financial system, disrupting the
market’s capacity to allocate capital” (Eichengreen and Portes, 1986, p.1). The
disagreements begin on what macroeconomic effect, such as fall in GDP or capital flight,
for example, is large enough to say that country X in period Y had a financial crisis.
Tornell (1998) deems a crisis to exist if one of two conditions holds: either the country’s
inflation was 40% or higher and it increased by 25% or more from the year before, or per
capita GDP fell by 15% or more from the previous year (p. 28). Claessens and Forbes
(2001) from the World Bank do not agree with such definition when researching the
sources of financial crises contagion among developing countries and instead, focus their
attention to crisis events according to the Kaminsky and Reinhardt (1998) definition.
These two latter authors define financial crises through changes in 15 different indicators
encompassing domestic finance, current account, economic growth and international
flows
31
. For this paper, this definition is chosen because it explicitly considers variables
that represent the connection between domestic economies and world markets. The list of
countries with at least one financial crisis since 1995 until 2001 is as follows:
1995: Mexico, Argentina
1996: Bulgaria

31
The domestic financial indicators indicating an imminent crisis are increases in the M2 multiplier, the
ratio of domestic credit to nominal GDP and the real interest rates. Decreases in deposits at commercial
banks, in the ratio of M2 to reserves means the same. Current account indicators are trade balance, terms of
trade, and deviations of real exchange rate from trend. Decreases in the first two and an appreciation of the
currency predict a crisis. Capital account indicators are level of hard-currency reserves and the domestic-
international interest rate differential. Loss of reserves and increase in the differential imply a probable
crisis. Real economy variables are output and stock market prices in dollars. Decreases in either predict a
crisis. All indicators are for 12-month periods and compared to the previous 36-month periods. When at
least 10 of these indicators point in the direction of crisis, these did happen with a 99% certainty in East
Asia, Latin America, Eastern Europe and the Middle East in the 1970-1998 period (Kaminsky and
Reinhardt, 1998, p. 446).

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1997: Thailand, Indonesia, Malaysia, Korea, Czech Rep., Romania
1998: Russia, Brazil, Czech Rep., Moldova, Romania
1999: Argentina, Chile, Ecuador, Estonia, Lithuania, Moldova
2001: Argentina, Turkey
Source: Claessens & Forbes (2001)
In Table 1, the largest 20 developing countries in the world, ordered by the size of
their GDP in the year 2000 (constant 1995 $), are listed with their changes in tariffs
between 1983 and 2003
32
. These 20 countries account for 70% of the GDP and 82% of
the trade of the whole developing world. The highlighted countries suffered financial
crises between 1995 and 2001, either starting the crises themselves as Mexico, Thailand
or Russia or suffering significant levels of contagion and entering into crises.
Fourteen countries out of these twenty had financial crises between 1995 and
1998 and the impact can be seen in the change of tariffs in that period, when seven
actually increased their tariffs (Brazil, Korea, Russia, Mexico, Argentina, South Africa
and Poland), one did not lower them further (Chile) but six others reduced them further
(Indonesia, Turkey, Thailand, Malaysia Philippines and Venezuela). Of that last group,
only three (Indonesia, Malaysia and Philippines) reduced faster than in the earlier part of
the decade, while the other three countries (Turkey, Thailand and Venezuela) reduced
them at a slower pace. Therefore, the aggregate influence of financial crises (in absence
of other factors) is seen in eleven out of the fourteen countries shown here. In contrast, of

32
Saudi Arabia is the only top-20 developing country by GDP not listed here because there is no tariff data
available for it.

63

the six countries in this list that did not suffer financial crises, five reduced their tariffs
in the 1995-1998 periods and only one (Iran) kept them at the same level.
In the period since 1998 until 2003, when financial crises occurred only in seven
countries, four countries (Mexico, Turkey, Malaysia and Venezuela) of these fourteen
increased their trade tariffs. It is remarkable that these four countries, which had reduced
their tariffs in the earlier period of crises, now changed course. The reverse happens in
the other ten countries. Still, in only one country (Thailand), such reduction of tariffs was
faster than in the previous period; in all the other countries that had had financial crises
since 1995, tariffs were reduced at a slower pace than before that year.
The general implication of this is that the financial crises happening since 1995 in
developing countries have coincided with reductions of tariffs that are much lower than
in the previous period from 1983 until then in most countries shown here (only China,
Philippines and Pakistan lowered them faster since 1995). More surprising still is that
eight countries (Brazil, Korea, Russia, Mexico, Argentina, South Africa, Poland and Iran)
had in 2003 higher or the same tariffs than in 1995.

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Figure 10: Tariff Reductions in Selected Countries

Tariffs
1983
Tariffs
1990
%
Change
1983-90
Tariffs
1995
%
Change
1990-95
Tariffs
1998
%
Change
1995-98
Tariffs
2003
%
Change
1998-03
%
Chang
1983-95
%
Change
1995-03
China 49.5 40.3 -18.59% 27.1 -32.75% 17.5 -35.42% 12 -31.43% -45.25% -55.72%
Brazil 49 32.2 -34.29% 11.1 -65.53% 14.6 31.53% 12 -17.81% -77.35% 8.11%
Korea, Rep. 23.7 13.3 -43.88% 8.9 -33.08% 11.1 24.72% 8.9 -19.82% -62.45% 0.00%
India 74.3 81.8 10.09% 41 -49.88% 30 -26.83% 33 10.00% -44.82% -19.51%
Russia n/a 18.7 n/a 11.3 -39.57% 13.9 23.01% 11.3 -18.71% -38.50% 0.00%
Mexico 27 11.1 -58.89% 13.1 18.02% 13.3 1.53% 17.3 30.08% -51.48% 32.06%
Argentina 28 20.5 -26.79% 10.5 -48.78% 13.5 28.57% 12.5 -7.41% -62.50% 19.05%
Indonesia 37 20.6 -44.32% 15.1 -26.70% 9.5 -37.09% 7 -26.32% -59.19% -53.64%
Turkey 40 26.7 -33.25% 15.7 -41.20% 12.3 -21.66% 12.4 0.81% -60.75% -21.02%
South Africa 29 11 -62.07% 6.2 -43.64% 7.2 16.13% 6.2 -13.89% -78.62% 0.00%
Thailand 32.3 39.8 23.22% 23.3 -41.46% 20.1 -13.73% 16.1 -19.90% -27.86% -30.90%
Poland n/a 18.3 n/a 11.6 -36.61% 16.1 38.79% 13.9 -13.66% -53.55% 19.83%
Malaysia 18.6 16.9 -9.14% 13 -23.08% 8.1 -37.69% 9.1 12.35% -30.11% -30.00%
Iran 20.7 20.7 0.00% 30 44.93% 30 0.00% 30 0.00% 44.93% 0.00%
Colombia 61 27 -55.74% 13.3 -50.74% 11.6 -12.78% 11.6 0.00% -78.20% -12.78%
Philippines 29.5 27.8 -5.76% 20 -28.06% 10.7 -46.50% 5.7 -46.73% -32.20% -71.50%
Chile 16 15 -6.25% 11 -26.67% 11 0.00% 7 -36.36% -31.25% -36.36%
Venezuela 28 19 -32.14% 13.4 -29.47% 12 -10.45% 13 8.33% -52.14% -2.99%
Egypt 47.4 42.2 -10.97% 28.1 -33.41% 26.8 -4.63% 22 -17.91% -40.72% -21.71%
Pakistan 77 66 -14.29% 50.7 -23.18% 35 -30.97% 17.2 -50.86% -34.16% -66.07%
Developing Countries 36.9 26.6 -27.91% 16.7 -37.22% 16.2 -2.99% 13.5 -16.67% -54.74% -19.16%
Industrial Countries 9.6 7.9 -17.71% 6.3 -20.25% 4.4 -30.16% 3 -31.82% -34.38% -52.38%
Source: World Bank, International Trade Research Group.
This goes in accordance with the changes in the average tariff levels of
developing countries (121 more besides these 20). These tariffs fell only by 2.99%
between 1995 and 1998, and a further 16.67% until 2003, way below the rate at which
the tariffs of industrialized countries fell, by 30.16% between 1995 and 1998 and a
further 31.82% until 2003. All this evidence shows that trade liberalization is actually
stalling in the developing world. The previous path of convergence towards a liberal
world trading system, when developing countries were liberalizing their trade faster than
industrialized ones, maintained from 1983 until 1995 is no longer there.

65

2.3. The Argument
This section discusses trade policymaking in developing countries and the role
assigned there to financial crises as an influence to change commercial policy in the
direction of liberalization or protection. It elaborates then on what the mechanics of
financial crises are when affecting trade policy, focusing on contagion via trade linkages.
Finally, it provides details on how such contagion is measured across countries and
industries.
Trade Policy Making in Developing Countries
This large literature is reviewed here according to which factor is considered key
in such process: preferences, institutions, international politics and international
economics.
Preferences are thought to dominate trade policy making by those focusing on
cleavages dividing domestic politics into protectionists and free traders. The first analysis
emphasized class cleavages between urban and rural forces, or between skilled and
unskilled labor, according to which was more abundant in an economy (Rogowsky, 1989;
Frieden & Rogowsky, 1996; Alt et al, 1996). Given the Ricardian assumption of the
model, the more abundant factor would favor free trade and the scarcer, protectionism.
Since factors abundance does not change fast over time, these theories sought to explain
movements towards trade liberalization over very long periods of time. Empirical
research based on preferences found support to explain the long road towards free trade
in OECD countries since the XIX century but not in the recent and sudden conversion to

66

free trade in the developing world since the 1980s (Balistreri, 1997; Scheve & Slaughter,
1998). Certainly, given their framework, they are even less prepared to explain why trade
liberalization would stall in the last decade.
Instead, other theories have revised these notions; focusing on smaller scale
cleavages, such as those between industrial sectors with more or less factor mobility,
more or less export orientation and the origin of its ownership (foreign or domestic).
These theories do find some evidence to explain the rush to free trade in developing
countries since the 1980s, however hinging their findings on contingent factors such as
financial crises that decimated domestic firms oriented towards import-substitution
(Haggard & Kaufman, 1992). This opened the way for liberalization as protectionist
sectors were eliminated (Frieden & Rogowsky, 1996). They however can not explain
why now, after FDI has increased dramatically in the developing world (albeit
concentrating in only some countries) and many economies have done important trade
reforms to increase exposure to the international economy, free trade has not continued to
expand.
This is most surprising because crises, seen as catalysts for change in trade policy
in the 1980s (Bates & Krueger, 1993), are ignored these days as factors of trade policy.
One problem might be the assumption that free trade has come and stayed on, which is
based on a rather superficial understanding of trade barriers (Horn & Wacziarg, 2002).
Liberalization did happen between 1980 and 1995 but now, it is frozen or in retreat. As
shown before in terms of tariff and the application of antidumping measures, developing
countries are more protectionist now than before 1995, when seen in relation to the

67

industrialized world, its main trading partner. This brings the point of financial crisis
back since that has been the main development besides trade liberalization and other pro-
market reforms since 1995 (IMF, 2003, p. 35).
Financial crises produced strong contractions in the real economy, the one based
on production and trade of real goods. This can be construed as either producing a short
term movement towards protectionism to reduce the pressure on the affected industries
or, as a long term shift towards ideas less friendly to free trade. After all, even in the
previous round of crises during the 1980s, there were authors who opposed then that
these were the direct cause of the shift to open economies in the developing world.
Instead, they argued, crises simply provided a moment in which the long-existing
problems of the import-substitution industrialization strategy became even more acute
(Sikkink, 1997; Rodrik, 1995). The link emphasized here was that the financial crises of
the 1980s induced then a crisis of ideas underpinning protectionism as a strategy for
development.
If that is the case now, that there is a problem with the confidence in the ideas that
supported the move to trade liberalization until 1995, one can start to understand why this
current of trade reform is stalling or even, reversing. Nonetheless, explanations anchored
on ideational changes require a long time frame to produce conclusive evidence
(Goldstein, 1993; Odell, 1985). What one can do now is to investigate instead the
material circumstances, which might have caused that possible change in ideas. The
speculation remains then on whether ideas have actually changed or it is just a pragmatic
wait-and-see attitude.

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Institutions are another source of changes for trade policy in the trade literature.
Basically, domestic institutions provide more or less possibilities to free trade by
aggregating preferences in the direction of protection or liberalization. Presidential
authority tends to help trade liberalization while parliamentary control of trade policy
helps protectionism (Drazen, 2001 for a survey). Eventually, the empirical evidence
found in developing countries is scarce and mixed (Milner, 1999). Administrative
capacity, defined as the ability of trade policymakers to isolate themselves from special
interests, has great relevance, something brought to the fore by the free trade reforms
made since the 1980s (Haggard & Kaufman, 1995; Haggard & Webb, 1994). However,
times of financial crisis showed those isolated institutions to be prone to policy blunders,
while more participatory ones, handled shocks better (Rodrik, quoted by Milner, 1999,
p.102). This result is solid to variance in terms of divided government and party structure
and orientation.
Regime type was part of the discussion, with some leaning towards the benefits of
having dictatorships to bring fast and effective free trade policies (Edwards, 1996). The
early 1990s results of democratization accompanied by trade liberalization brought
ammunition to others, arguing that democracy was, after all, favorable to the latter
(Milner, 2005; Verdier, 1998). There is no research yet on how these newer democracies
behave under financial crises in regards to trade policy, bringing thus a new reason for
the investigation set out by this paper. Still, much of the research on democracy and trade
liberalization is plagued by the confusion between the expansion of trade and the

69

increases in the freeing of trade (Rodriguez & Rodrik, 2001). That has led many to
conclude erroneously that democratization brought trade liberalization, when in fact, we
might be witnessing no more than an expansion of trade flows which is happening across
the global economy and in which, some non-democratic countries are star performers in
terms of trade growth (i.e. China, Vietnam, Saudi Arabia) while others with deteriorating
democratic standards are important contributors, too (i.e. Russia, Venezuela, Malaysia)
International politics is considered a variable explaining trade policy in
developing countries via two interrelated paths: the hegemonic power structure and
international institutions. Hegemonic stability theory performed relatively well when
contributing to the rush to free trade since the 1980s, with the US gaining ascendance all
the way through today since that time (Stallings, 1995; Bierstecker, 1995). It is important
to note that since 1995, when the move to free trade has started stalling; US hegemony
has grown by most standard measures, thus bringing this theory into question
33
.

33
US hegemony has increased between 1995 and 2002. US GDP as a % of world GDP has grown from
23% to 27%, its participation in world trade has grown to 15% from 12.4%. It also increased its dominance
as a source and destination of FDI, retook its first place as a provider of overseas aid and increased its
military superiority (see Table 5).

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Figure 11: US Economic Hegemony Indicators

US Economic Hegemony Indicators
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
1994 1995 1996 1997 1998 1999 2000 2001 2002
Percentages
Ratio E Expo US/WLD
Ratio I Impo US/WLD
Ratio E + I Trade US/WLD
Ratio G GDP US/WLD
Ratio INV Investment US/WLD

Source: World Development Indicators 2004, World Bank.
Another path for those advocating hegemonic pressures as the cause for trade
liberalization is the relevance of international institutions such as the World Bank, the
International Monetary Fund and, of course, the World Trade Organization (Lake, 1993).
Either by fostering free trade via conditionality in loans for structural adjustment and
through the provision of multilateral rounds of liberalization, dispute settlement boards
and trade policy review mechanisms (Kahler, 1997, Bergsten, 2000), these institutions
have grown in importance worldwide. Still, their agenda of free trade for the developing
world has not continued to progress as much as before (Przeworski & Vreeland, 2000).
Since the influence of international financial institutions (IFIs) is highly correlated with
the frequency, spread and depth of financial crises in the developing world, it is even
more puzzling that trade liberalization has not grown there. One would expect that as
countries need more help from these IFIs due to recurrent financial crises, they would
have to become more obedient to the latter’s’ agendas in favor of trade liberalization.

71

Still, since 1995, when IFIs have been most involved with solving recurrent financial
crises in the developing world, trade liberalization has not advanced there (IMF, 2004).
A possible answer might be in that the international economy is another variable
explaining trade policy choices. In fact, it is the “reciprocal effect between international
trade and domestic politics” (Milner, 1999, p. 108) that triggers movements towards
liberalization or protectionism. As economies become more exposed to foreign trade,
domestic factors allied to it grow stronger and stronger while import-substitution ones
disappear. This implies a “virtuous cycle of rising demand for free trade” (Milner, 1999,
p. 109). Unfortunately, this increased exposure also makes economies more vulnerable to
financial crises beyond their borders and it is likely to induce a backlash against those
policies of trade liberalization in rough times (Rodrik, 1997). Other reforms made during
the same decades in the developing world, reducing welfare benefits and introducing
market prices into staple foods, for instance, make even more possible to repeal or reduce
previous indexes of trade liberalization, as the effects of world markets on local
economies are amplified (Haggard & Webb, 1994).
At this point, then, becomes relevant to revisit the relationship between
democracy, bureaucratic autonomy and trade policy to understand how these interact in a
context of financial crises. Since democratization means “a movement towards majority
rule with universal suffrage in contested elections” (Milner, 2005, p. 10), the expected
relationship is that if a crisis affects negatively a majority of the population through
decreased income, unemployment and poverty, measures that protect the economy from a
crisis such as increased tariffs and more application of antidumping regulations will be

72

favored (as predicted by Rodrik, 1992). Therefore, the optimal level of protection that
democratically elected leaders need to provide will increase during times of crises, or at
least, it can no longer decrease at the pace it was having before (Baldwin & Winters,
2004).
This goes against the general notion in the literature that democratization fosters
trade liberalization because as the selectorate expands, political leaders can afford less
protection per capita (Bueno de Mesquita, 1999). In times of crises, such linear
relationship is broken because protecting the economy from the vagaries of international
trade and finance is not only a concern of special interests but of the population at large
(Brodie, 2004). If they vote, it follows that democracy will work against further trade
liberalization or even assist a popular backlash against it.
There comes in the importance of bureaucratic autonomy. While democracy may
push elected politicians to disengage from trade liberalism, autonomous bureaucracies are
not under such pressures and so, they might not relent in their promotion of trade
liberalization in a scenario of financial crises and consequent economic hardship for the
population at large (Haggard, 2000). Still, the inherent interest of bureaucracies rarely is
towards liberalization, and with high indexes of corruption in most developing countries,
one can expect a not too significant effect on trade policy (Verdier, 1998).
This review of the literature on trade policy in developing countries provides us
with some possible answers as to why trade liberalization has slowed down or stopped.
Crises of financial nature and international reach stand out as possible promoters of
policy change. First in the 1980s, of liberalization and later, in the mid to late 1990s, of

73

the stop of liberalization. The changes in preferences might be moving slowly in the
direction of a more moderate opening. This can be expressed in a gradual change of
ideas. The institutional changes (especially, democratization and more professional
bureaucracies) should be fostering this, making leaders more responsive to how
economies perform under a new open trade environment. This point to a growing
pressure from circumstantial factors of global or regional scope, such as financial
instability, overriding influences from other external ones, such as the US hegemony and
international institutions.
Financial Crises and Contagion via Trade Linkages
Still, the question remains on how to articulate an analysis of trade policy changes
with financial instability. The current research on financial crises does tell us of a clear
connection between the two processes. Financial crises do spread via trade linkages. Such
vehicle of contagion was recognized early on but, unlike other causes of crises’
contagion, macroeconomic similarity and common creditors, it has not produced clear
policy implications. While the jury is still out on which individual linkage is the most
significant, most authors agree that all three channels have mattered a great deal in the
last rounds of financial crises (for surveys, see Caramazza et al, 2000; Kaminsky et al,
2003). This paper chooses to investigate the channel of trade linkages because of its
direct relevance to trade policy and consider what have been its implications in trade
policy.
By “trade linkages”, is meant that when a financial crisis happens, capital
becomes suddenly and drastically less available in an economy, sharply reducing the

74

level of economic activity. That affects imports, which in turn transmit that reduction of
economic activity to the countries that produce and export them to the crisis-hit country.
It is also possible that the exports of the crisis-hit country increase, as more goods can not
be sold domestically. That increases the competition for other countries in third markets
and domestically, as well. In case the financial crisis produces devaluation, as it has often
been the case in the 1990s, production from the crisis-hit country also becomes more
competitive domestically and abroad. That also affects its trading partners and its
competitors in third markets (Glick & Rose, 2000; Forbes, 2001). Given the mechanism
of contagion via trade linkages, the expected policy reaction from the affected countries
would be become to become more protectionist and also to support their exports more
aggressively, if they can afford it given the new fiscal constrains resulting from the crises.
The literatures on the other two of these channels of contagion - macroeconomic
similarity and common creditor - have in common clear policy prescriptions already,
backed by a substantive empirical literature on what measures countries have actually
taken to avoid or reduce contagion in the different rounds of crises of the 1990s.
Regarding macroeconomic similarities, countries are told to reduce their deficits,
renegotiate their debt portfolio and clean up their banking system (Clark & Huang, 2001).
The IMF has had a vigorous policy in some of these rounds of crises in assisting and
guiding these policies (Clark & Huang, 2001). Regarding the common creditor problem,
less is feasible as debt holders are independent of debt issuers and thus, developing
countries cannot influence their behavior by themselves (Dornbusch et al, 2000). They
can however increase their reserves and forge emergency loan agreements with other

75

countries to preempt the effect of the creditors hedging their loans in a crisis
environment as they did in the late 1990s (Kaminsky et al, 2003). There is evidence
already that countries have been taking up these measures, reducing deficits, cleaning up
banking systems, increasing reserves and signing emergency swaps of currency for times
of crises.
In spite of those recent advances, IFIs continue to warn regarding the limitations
of these measures (Schmuckler et al, 2004). Thus, the policies followed to reduce
contagion via trade linkages take even more importance. In light of this, it is rather
puzzling to observe that there is no policy discussion or research so far on what countries
do in relation to these trade linkages. After all, this sort of contagion is considered to be
by some, the most significant one (Rose, 2003).
Since contagion via trade linkages reproduces an economic crisis by directly
affecting the real economy, unlike the other vehicles of contagion, the policy response
expected is one addressing this particular area, trade of goods. Forbes (2001) specified
very comprehensively how contagion via trade linkages affected developing countries in
the 1990s. Using industry level data for trade, she demonstrated that industries suffered in
a variety of countries. The proof of that damage came in the form of reduced prices for
their shares in local and international stock markets, and also in the reduction of their
output (Forbes, 2000).
Forbes however left out what governments did, and judging from the information
provided in the beginning of this essay, it seems that they did something indeed. They
increased barriers to trade, just as the theories of political economy of trade would predict

76

they would do in cases of economic crises (Noland, 1999). Rose & Glick (2000) also
speculated that, given the impact of the crises, trade policies would be modified. The
UNCTAD report of 2002 observed that trade liberalization would be affected if it had not
been so already (p. 137-139).
Antidumping researchers have been the most consistent in warning on the
connection between financial crises and the growth in trade barriers. Just as with tariff
measures and export subsidies, governments use antidumping rulings or even
investigations to protect industries under stress from foreign competition. Stiglitz (1997)
argued that there no longer is a connection between objective economic considerations
and antidumping applications; it is just one more instrument of trade policy that is applied
at discretion for protection. Interestingly enough, Blonigen and Prusa (2001) concluded
that there is a strong relationship between the beginning of financial crises with large
trade effects in the 1970s and the explosion of applications of antidumping measures
worldwide since that time. Thus, it is not surprising that developing countries are
increasing their use of this instrument as they suffer more financial crises and their tariffs
reached new lows just before that.
The nature of such connection between trade policy and financial crises is then a
political one. The first part of this review observed that financial crises have been
neglected as a recent cause of trade policy change due to the now outdated understanding
that the freeing of trade is continuing in the developing world. The second part observed
that financial crises contagion studies stop short of analyzing the policy responses of
countries affected by contagion via trade linkages. Nonetheless, both bodies of literature

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admit that in theory, crises and trade policy are related. Thus, this paper can make a
contribution by probing empirically the connection between the two events.

2.4. Hypothesis
The general hypothesis is that financial crises, affecting the developing world
since 1995, have reduced the pace of trade liberalization there, making countries lower
their tariffs slower than before and making more frequent use of antidumping
instruments. The developing world is divided conceptually for this analysis into countries
that had a financial crisis and those which did not, but suffered contagion from them.
The countries that had financial crises would stop reducing their pace in trade
liberalization to keep imports at bay and thus, provide more opportunities for domestic
producers. It is a classic case of protectionism during hard economic times. They would
lower their tariffs slower if at all and apply more antidumping measures than before the
crises struck them.
The other developing countries, assumed to have suffered contagion to different
extents, are expected to follow those policies of trade protectionism in a way that
replicates the strength of contagion they endure. Thus, the more contagion a country
suffers, the less likely it is to continue with trade liberalization. They would reduce their
tariffs less than before and also apply more antidumping measures than before.
The contagion looked at it here is only the one transmitted via trade linkages. This
channel works through three different ways:

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a) Exports to the rest of the world lose competitiveness vis-à-vis exports from
crisis-hit countries.
b) Exports to crisis-hit countries fall because of the reduction in demand there.
c) Imports from crisis-hit countries` become cheaper and threaten domestic
producers.
The accumulative effect from this channel is a deterioration of the trade balance
of other countries and thus, they will increase its trade barriers to prevent that from
happening.
This reasoning assumes that in the short term, international prices do not vary
significantly in the goods considered and that the crisis-hit countries do not suffer severe
trade financing troubles
34
. It considers alternative explanations for trade policy making
such as those of institutional nature, political regime and economic structure.
Nonetheless, these are included to help net out the effect of a financial crisis and the fear
of contagion from it in trade policymaking. The idea here is to explain a “policy
response” to a crisis and not the overall characteristics of trade policymaking in a given
country. Of course, by showing that in situations of crises other variables affect policy
formation, this research demonstrates the importance of these particular events.
On the other side, this hypothesis does not account for all the other possible
measures that countries can take when facing a financial crisis or possible contagion from
one. Only a modification of the exchange rate is considered because that is a natural

34
While these assumptions sound theoretically daring, there is factual evidence that in these financial crises
in the 1990s, it was the case that international prices did not vary significantly and that trade finance did not
become scarcer (Rogowsky, Linkins and Tsuji, 2001).

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substitute for increases in trade protectionism through higher tariffs or more frequent
application of antidumping duties. Finally, contagion from financial crises is recognized
to happen through the other channels detailed before but the only source of contagion
considered here is the one via trade linkages. While there is the possibility of missing
other cases in which countries also stopped trade liberalization because of contagion
through those other channels, this paper limits itself to show the closest possible linkage,
namely, between contagion via trade and trade policy responses.

2.5. Models

The models chosen for this paper are two OLS multiple regressions in which two
trade policy measures taken by developing countries, tariffs and antidumping, are
explained in terms of the trade linkages with they have with the crisis hit countries. In
other words, the relation to probe is whether financial crisis contagion via trade linkages
induced measures that reduced the trade liberalization done before 1995 or lowered its
pace since then until 2003.
The sample of countries considered here is of 99 developing countries for which
there are relatively complete tariff data from 1994 until 2003. This sample includes
nations from all regions of the world, sizes, political systems and levels of economic
development.

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Geographical distribution: Africa, 34 countries; Asia, 19 countries; Latin America and
Caribbean, 22; Eastern Europe, 16, Middle East, 6 and Oceania, 2 countries.
Income distribution (World Bank classification): Low Income: 46, Middle Income: 44,
High Income: 9. Besides, 17 are transition economies.
The regression is done on a time-series cross-sectional dataset, using pooled OLS
equations with fixed effects to show the direct relationship between changes in the levels
of tariffs, numbers of antidumping rulings on one side, and the changes in the
independent and control variables on the other side.

2.5.1 The Dependent Variable: The Trade Policy Measures

With the goal to investigate what countries do to reduce contagion via trade
linkages, I take two indicators: tariffs or duties applied to imports and antidumping
measures. The policy response is observed in the year of the crisis and, in separate
regressions, for the year after. That period is long enough to capture the responses taken
by countries that might have faster or slower bureaucracies and it is also the period when
the possibility of contagion is most acute (Dornbusch, 2000; Caramazza et al, 2000). The
fact that the data is annual limits control as well, since financial crises occurred in
different times of the year. That is another reason to consider both years. Each of these
trade policy measures is taken separately and detailed below.

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Tariff Rates
Tariff data is taken from the World Bank website specialized on trade issues for
99 countries for the period 1994 to 2003, listing MFN average applied tariffs
(http://siteresources.worldbank.org/INTRANETTRADE/Resources/tar2002.xls). This
dataset is far from comprehensive but most of its missing observations are for the period
before 1994. The observations still missing for the period I am interested in (1994-2003)
were replaced with moving averages
35
. In total, 72 observations were created like that out
of the dataset of 990 observations and most were in the year 1994.
An alternative data on trade liberalization from Horn and Warcziag (2002) is not
considered because it is dichotomous (open-closed trade regime) and thus, it can not
capture the degrees of change in the pace of trade liberalization.

Antidumping Measures
Antidumping data is from the World Trade Organization (WTO) website, for 38
countries for the period from 1994 until 2003. The observations are for antidumping
cases opened yearly by developing countries against their trade partners from the rest of
the world and informed to the WTO. This provides another measure of whether barriers
to trade increase during times of financial crises. The data was downloaded from
http://www.wto.org/english/tratop_e/adp_e/adp_e.htm.

35
The moving average was constructed by an average of three observations from previous years and three
from following years.

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Exchange Rate
An alternative measure to increase protection for an economy suffering contagion
from a financial crisis happening to another country or even to itself, is to modify its real
exchange rate. By making imports more expensive that way, it protects its economy from
a flood of cheaper imports from crisis-hit countries, or maintains its trade balance after its
exports are reduced from crisis-hit countries in third markets or their own markets. It is
thus a rough substitute to increasing tariffs. Therefore,

EXCHAN= Exchange rate measured in SDRs, and adjusted by local consumer inflation,
with 1990 serving as year 1 in an index.

2.5.2 Independent Variables

Coefficients of Contagion
The coefficients of contagion via trade linkages are three. They come from
Forbes’ paper “Are trade linkages important determinants of country vulnerability to
crises?” (NBER, 2001), where she estimates financial crises contagion via trade relations
among developing countries. I modified her formula by eliminating the indexes for
industries that she used to calculate the impact on the stock markets of the contagion-
suffering countries. I had to do that because my dependent variables, tariffs and
antidumping, are data provided across each individual economy in each given year,
without giving industry-level details.

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The first coefficient is a competitiveness variable (Competen), which considers the loss of
competitiveness that countries due to another country having a financial crisis. The
country in crisis will export more due to two reasons, one is its own depressed domestic
demand, and the other is due to a very likely devaluation of its currency. That loss of
competitiveness for other countries is felt in the market-share they will lose to the country
in crisis in third markets. It is calculated here as the weighted product of two terms. The
first term is exports from the crisis-hit country as a share of global exports. This captures
how important this country is in global trade and thus, the potential impact of its crisis in
the world as a whole. The second term is total exports from country n (any country other
the crisis-hit one) as a share of country n’s GDP. This captures the importance of exports
to country n, therefore country n’s vulnerability to the crisis. Finally, these products are
calculated and multiplied. The index is written as:
Competen = (Expo,w /Expw,w ) * (Expn,w /GDP n )
Whereas,
Expo,w is exports from the crisis-hit country (o) to all other countries in the world (w).
Expw,w is exports from every country in the world (w) to every other country in the world
(w) (total world exports).
Expn,w is exports from country n to every other country in the world (w), except the
crisis-hit country.
GDP n is the gross domestic product for country n

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The second coefficient is an income-effect variable, named Incomen , to capture how the
financial crisis in a country affects its trade partners in terms of their exports there.
Basically, it complements the previous variable Competen , adding here the exports to the
crisis-hit country. To consider it in function of the importance of trade in country n, it
takes the total exports of country n to the crisis - hit country as a percentage of the
country n’s GDP. It is written as:
Incomen = Exp n,o / GDP n
Whereas,
Exp n,o is exports from country n to the crisis - hit country (o).
GDP n is the gross domestic product of country n.

The third coefficient is the cheap - import effect, named cheap import, and measured as
the total imports from the crisis - hit country to country n as a percentage of consumption
and investment in country n. That captures the impact of lower import prices from the
crisis - hit country on the other countries.
Cheap importn = Imp n,o / ( Consumption n + Investment n )
Whereas,
Imp n,o is imports to country n from the crisis – hit country.
Consumption n + Investment n are total private consumption and gross domestic
investment for country n.

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All variables are for the one year period before the start of each crisis because that
captures the base from which policymakers are expected to be looking at the possibility
of contagion.
These three coefficients are then brought together into one contagion variable
called CONTAG according to the following formula:
CONTAG = (Competen + Incomen) - Cheap importn
The first two terms indicate negative effects from the crisis-hit country on other
countries, increasing the likelihood of contagion. The first implies that the larger trader
the crisis-hit country is and the larger percentage of GDP each other country has
dependent on trade, the stronger it will be affected by a crisis in another country. The
second means that the more a country exports to a crisis hit by a crisis, the more it will
suffer from that crisis, as its exports to that destination will decrease. The last one has a
positive effect because it improves the trade balance and facilitates more consumption
and investment by lowering import prices.
This variable CONTAG allows measuring for contagion from crisis-hit countries
to all the other countries. The crisis-hit countries are the ones identified as such by
Claessens and Forbes (2001), in the World Bank study on financial crises contagion (the
actual list is given already in page 5 of this paper). When there is more than one crisis-hit
country in a given year, the CONTAG all the other countries in the sample suffer is
added. So, for instance, in the year 1995 Argentina and Mexico had financial crisis and
therefore, the CONTAG value for all the other countries is the sum of their CONTAG
from Argentina and their CONTAG from Mexico. The CONTAG value for Argentina is

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only from its CONTAG from Mexico, as the fact that Argentina had a crisis does not
take away from it suffering the effects of the Mexican crisis as well. The reverse is
applied to Mexico.
The expectation is that CONTAG will have a positive effect on trade policy
responses, namely, contributing to increases in tariffs, and in the number of antidumping
measures.

International
WTO membership is often mentioned as a factor inducing further trade
liberalization in developing countries or at least, anchoring their trade reforms via
multilateral negotiations. A system of enforcement of rules through the arbitration
committees also supposedly assists in both, keeping liberal trade discipline and also, in
providing a possibility to countries to punish others who brake them. WTOM is then used
as a dummy variable to indicate membership to this organization, with 1 given to
members and 0 to non-members.
Via structural adjustment loans and the conditionality attached to them, IMF plans
have been during the period under consideration standard in their request for the
reduction of trade barriers, including the lowering of trade tariffs, the reduction or
elimination of export promotion schemes and the conservative use of antidumping
legislation to protect local producers from competing imports.

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Therefore, a dummy variable, named IMFSG is included for those countries that
signed a new letter of intent with this institution within six months from the beginning of
the financial crisis from which they suffered contagion.
Since the levels of need that countries can have to sign a letter of intent with the
IMF are not always the same, its conditionality should be clarified with an index of that
need for IMF funds. Here, the choice is for an index that considers the size of the IMF
loan agreed as a percentage of the sum of the current account and the government deficits
of the country in question in the year previous to signing. The larger the percentage, the
larger the conditionality and the supposed capacity of the IMF to extract conditions from
the country, including measures such as trade liberalization. That variable is named
IMFSZ.

Political
The main variable here is the type of political regime in place in a country at time
t. The political regime variable comes from Polity IV, with collected data on the political
characteristics of 177 countries between 1800 and 2002. To measure each state’s regime
type, the choice is the index constructed by Gurr et al. and Jaggers and Gurr. This index
combines data on factors that capture the institutional differences between democracies
and autocracies:
1.) the competitiveness of the process for selecting a country’s chief executive,
2.) the openness of this process

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3.) the extent to which institutional constraints limit a chief executive’s decision-
making authority
4.) the competitiveness of political participation within a country
5.) the degree to which binding rules govern political participation within it.

These data are used to create an 11-point index called DEMOC. Such variable was
also used by Milner (2005) to establish the direct relationship between democratization
and trade liberalization and by Geddes (1995) to link democratization and economic
reform along liberal policy lines, such as trade liberalization.

2.5.3 Control Variables
The control variables applied here are the standard ones used in other studies of
trade policy making for developing countries.
The first one corresponds to the level of development of the country in question.
Since it has been observed in the literature that more developed countries have more open
trade policies, GDP per capita is taken here to control for that (Rodrik, 1995; Easterly &
Robelo, 1993). Lagged by one year, it is named GDPPC. The expected relationship is
negative, that higher GDP per capita leads to lower tariffs and less application of
antidumping measures.
The second one is a proxy to discount other possible pressures on economic
policymaking coming from the overall pace of the economy of the country. It is well-

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known that often countries raise their levels of protection when facing laggard or almost
no growth, so GDPGR as GDP growth is listed as a control, lagged by one year.
The third corresponds to another common finding of the literature that smaller
countries tend to have more open economies than bigger ones, on average. Thus,
population is taken as an index of the size of the economy and the variable is called
POPUL. It is lagged by one year and included as a log of it, named LNPOPUL. The
connection expected here is positive.

2.6. Regressions and Interpretations of Results

To test the influence of financial crises on trade policy in developing countries,
the regressions done are the following:
Tariff rates = + CONTAG + DEMOC + USHEGEM + WTOM + IMFSG + IMFSZ +
control variables + 
Antidumping measures = + CONTAG + DEMOC + USHEGEM + WTOM + IMFSG +
IMFSZ + control variables + 
Exchange rate = + CONTAG + DEMOC + USHEGEM + WTOM + IMFSG + IMFSZ
+ control variables + 
Since the main purpose is to check the relevance of the variable CONTAG for the
determination of tariff rates or application of antidumping measures, different
combinations of these variables are included in the regressions. An additional regression
set is included to observe whether CONTAG also affected the exchange rate policy of

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these countries, given that this could be an alternative to raising tariffs and applying
antidumping duties to determine the level of protection.
CONTAG is also lagged by one year to observe whether it has an effect beyond
the year of the crisis, giving more time for countries’ governments to alter or not their
trade or exchange rate policies in reaction to contagion. The regressions cover a ten year
period, including 6 years with crisis (1995, 1996, 1997, 1998, 1999, 2001) and 4 without
them (1994, 2000, 2002, 2003). That composition fits the actual history of the period
according to Claessens and Forbes (2001), with the last 2 years added here to test whether
there is a return to the previous pace of trade liberalization, thus rendering the effect of
crises just temporary. Furthermore, the starting year (1994) is one without crises, and
there is one more towards the second half of the sample (2000).
The regressions are done in a panel with corrected standard errors to reduce
problems caused by various forms of heteroeskedasticity. Years and country fixed effects
take account of some of the problems of omitted variable bias. The first one looks into
variations over time, addressing the central question in this paper, to what extent
CONTAG explains changes in tariffs and antidumping application. The second counts
particularities of each country that might not otherwise be captured by this model.
Contagion (CONTAG) is shown to be significant in all the regressions for tariffs,
signed correctly, showing that more contagion leads to higher tariffs. While it remains
signed correctly for antidumping, indicating more contagion leads to more applications of
this instrument of policy, the results are not significant. When contagion is however
decomposed into its three effects, loss of competitiveness in third markets where crisis-

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hit countries also export to (COMPETE), reduced income from lower exports to crisis-
hit countries (INCOME) and increased consumption and investment disposable income
due to cheaper imports from crisis-hit countries (CHEAP_IM), things get even more
interesting. COMPETE and INCOME take negative signs, implying that countries
suffering contagion through those effects actually lower tariffs or apply antidumping
legislation less often in order to make their imports cheaper and thus, their exports more
competitive as well, in third markets and in crisis-hit markets, as well. Given the growing
importance of global production chains in the manufactured exports of developing
countries, this result is consistent with existing evidence and theories. Thus, so far, one
could make the argument that given the increased importance of trade in developing
countries’ economies, they move forward with trade liberalization in times of crises not
to lose out to those other countries which are in crisis and “exporting their way out of it”.
However, more traditional theories take the forefront in the end because
CHEAP_IM does have a positive effect on tariffs, showing that protectionism in times of
economic crises and with the possibility of suffering contagion, does exist. After all, most
economic activities in the developing world are still related to industries that do not
export and the pressures from imports are still resisted. The weight of CHEAP_IM is
such that in the end the overall variable CONTAG, for overall contagion, does keep its
positive sign and has a significant similarity to CHEAP_IM. The components of the
variable CONTAG were tested for collinearity and the result was negative.

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When the regressions were done including lagged versions of CONTAG and its
components, the results indicate that for tariffs, the effect of CONTAG is not temporary,
as both terms (current and lagged) were significant and positive. For antidumping,
CONTAG does seem to appear to have just a temporary effect, as the lagged terms
remained not significant and sometimes, with a negative sign.
An additional regression set was included using the exchange rate (EXCHAN) as
dependent variable. While this model is designed to look at the effect of CONTAG on
explicit trade policy instruments such as tariffs and antidumping, it is useful to see
whether it applies as well to the determination of the exchange rate, which naturally is
affected by many other variables beyond those in this particular model. The results were
not satisfactory, showing that CONTAG is not significant in any of the configurations,
and neither are the political variables or the control ones. Only two, US hegemony
(USHEGM) and having an agreement with the IMF (IMFSG) were significant. The
explanation for USHEGEM is that this country's economic hegemony may rise the
demand for US dollars to buy US goods or invest in this market, thus lowering the value
of other currencies. Having an IMF agreement usually means applying restrictive
monetary policies that lead to a real appreciation of the developing country’s currency.
Returning to the regressions done for tariffs and antidumping, the domestic
political variable such as regime (DEMOC) was found to be significant and with a
positive sign, indicating that the more democratic a country, the more it was likely to
raise tariffs and make more frequent use of antidumping cases when facing contagion.

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While this result is too weak to completely contradict the arguments of Milner and
Kubota (2005) that democratization has led to trade liberalization, it does raise questions.
International variables such as US hegemony (USHEGEM), World Trade
Organization membership (WTOM) and signed agreement with International Monetary
Fund (IMFSG) also have the expected signs, USHEGEM was negative and significant up
to 10% for tariffs, an appreciable result that shows that US hegemony has mattered to
lower tariffs (but not to reduce antidumping measures), thus increasing trade
liberalization, even in a global environment of financial crises in the developing world.
Without attempting to look too much into this result, since it is visible only after
CONTAG is lagged, one can suggest that it has been US bilateral pressure and, not
through the multilateral organizations often seen as its tools, such as the WTO and the
IMF that the US has contributed to lowering tariffs in the developing world. In fact, the
WTO has not had a significant influence in trade policy according to this model but it
does show the expected signs, meaning that participation in the WTO contributes to trade
liberalization. In fact, the IMF, through its two variables, having an agreement signed and
the size of the loan agreed with the IMF as a percentage of the fiscal and current account
deficits of the previous year (IMFSZ), a proxy for the importance of the IMF agreement
for a country’s government, has significance in tariff reductions (when these are lagged
by 1 year) and with the correct sign, as well.
Finally, general control variables confirm the fit of the model. Gross domestic
product per capita (LNGDPPC), taken as an indicator of economic development has the
expected relationship, negative with tariffs, meaning that the more development, the

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stronger the tendency to liberalize trade. The reverse relationship happened for
antidumping applications, and that might have to do with the sample being too small, of
only 35 countries, being most of them the more developed industrializing countries. It is
also a well-known finding that more developed developing countries are the most
frequent users of antidumping procedures to control foreign competition in their home
markets (Bloningen and Prusa, 2001; Miranda et al, 1998).
GDP growth rate (GDPGR), enlisted as a proxy for how well an economic policy
is going in general terms, has no significance, even when lagged for one period. The sign
is however correct, showing that slower or negative growth seems to lead to higher tariffs
and more antidumping applications. Lastly, the natural log of population size
(LNPOPUL) was included as indicator of the size of the economy and it came out
significant to 5%, with a counterintuitive sign, positive, meaning that larger countries
keep higher tariffs. This might be due to the fact that the largest developing countries
have been among the worst hit by financial crises and their contagion in this period, as
shown in the beginning of this paper.
In sum, these results support the claim that contagion from financial crises have
affected trade policy in developing countries in the period in question, That influence is
significant and robust when considered together with several other alternative
explanations and factors.

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2.7. Alternative Explanations

The main alternative explanation is that financial crises are not a relevant factor in
trade policy formation in developing countries. Milner (2005) says so by testing a
variable that accounts for balance of payment crises in a sample of developing countries
from 1970 until 2000. She finds that variable insignificant in her tests, and she concludes
that democratization in that period has superseded the possible effect that those crises
had.
While the samples are not comparable and neither are the hypothesis completely
opposed, her definition of crises, taken from Tornell (1998) is too restrictive, as already
explained in page 4 of this paper. In fact, since Tornell’s definition is clearly geared to
explain the policy change towards liberalization in the 1980s, it does not capture the fact
that most of the countries most affected by the late 1990s financial crises had already
done a great deal of trade liberalization. Just as in the 1980s, now crises have also
produced a change in trade policy, this time in the opposite direction, with a reduction in
the pace of liberalization or its outright (but partial) reversal, as shown in the table on
page 6 here.
That goes against the argument of Tornell that financial crises “solve” wars of
attrition in favor of trade liberalization. In fact, import-competing elements, affected by
the CHEAP_IM component of contagion, still influence policy in favor of slower
liberalization or its partial reversal. Milner’s argument that democratization promotes
trade liberalization is here reversed: democratization assisted the disenchantment with

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trade liberalization since 1995 until now. The fact that most of the wave of
democratization had concluded by then reinforces the argument that democracies do
choose to protect their economies when suffering contagion via trade linkages and they
do it, for instance, by liberalizing their trade less than before.
Finally, another alternative explanation could be that trade liberalization is simply
slowing down due to other causes, such as developing countries reaching the “optimal
rate of protection” for their economies. But as shown before, the industrialized world has
continued with a fast pace of liberalization during this most recent period. Therefore,
developing countries cannot be said to have now “optimal rates” because these are
actually getting progressively higher, the more their industrialized trade partners
liberalize their own trade with the rest of the world.

2.8. Conclusions

Why developing countries that have pursued trade liberalization since the 1980s
have since 1995 started relenting in their pace towards freer trade is a very relevant
question. In fact, the underlying assumption of many current works on trade policy of
developing economies is that trade liberalization is already there or it will be completed
very soon. All sort of factors are assumed to be fostering that movement, from
economists’ consensus to international organizations, multinational companies and the
main economic powers of today, such as the United States government.

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The central proposition of this paper is that this movement towards free trade has
slowed down or is in reversal since 1995 and that this is due to the period of financial
crises that the developing world has experienced. These unprecedented events in terms of
spread and depth of economic downturn for many countries have quite naturally brought
out policy preferences to isolate as much as feasible domestic economies from the waves
of contagion generated by financial crises. The vehicle of contagion considered here,
trade linkages, and is only the most directly related to trade policy. In fact, further studies
could probe whether the other types of financial crises contagion, such as macroeconomic
similarity and common creditor, have also contributed to this change in trade policy.
The model in this paper is limited by a number of factors. One is that it only
considers aggregate data on tariffs, antidumping measures and trade flows (the last to
construct the contagion variable). If future research can disaggregate this data to the
industry level, we can understand much better and in more detail the trade policy
response of developing countries to financial crises contagion. In fact, we could also test
much better the assumptions made on the causes and the continuation of the whole wave
of trade liberalization in the developing world since the 1980s.
A second limitation of this model is that it does not consider social policies and
that is a very important variable to consider for times of economic crises. Developing
countries have for the most part limited welfare systems but there also is a great variance
in what they do have. This relates immediately to the legitimacy question for
governments of countries subjected to contagion and certainly, crises. Since the
population’s economic well-being is an important variable for governments to maintain

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their legitimacy and they do not have other tools than protectionism to try to isolate
them from economic crises happening abroad and influencing their local economy by
contagion, they are certain to abandon trade liberalization. Now that we are dealing with
an increasingly democratized developing world, this factor takes even more importance.
This paper has a preference for considering a large sample of countries to analyze
their trade policy in times of financial crises. The cost is that what they did in the very
short term, weeks or months around the worst episodes of crises is lost here. Since the
data available to create all the variables here was annual, this paper cannot observe what
happened in the short term, where countries suffering a great deal of contagion may have
chosen others measures instead of just raising trade barriers to protect themselves, thus
slowing or reversing their course towards free trade. And since the data is only one per
country per year towards the rest of the world, it does not capture idiosyncrasies in
bilateral trade relations, and how they were affected by contagion from financial crises.
The final question raised after writing this paper is for the very recent past and the
near future. If no more (or much less) trade liberalization, then what is now and will be
soon the trade policy of developing countries? Taking into account that the tariff and
antidumping data here does not consider the preferences given in regional or bilateral free
trade agreements, one may speculate that trade liberalization is happening still and will
continue, but in a selective manner, seeking to extract preferential concessions from those
partners. In that light, the growth in regionalism that has also occurred in the period
treated here and until nowadays, can be reassessed.

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Table 3: Descriptive statistics

Variable Observations Mean Std. Dev. Minimum Maximum

TARIFF 990 14.83 7.61 0.10 50.70
ANTIDUMPING 350 4.38 9.39 0.00 79.00
CONTAG 990 -0.31 3.70 -45.93 6.98
EXCHAN 990 1.92 1.09 0.79 6.41
DEMOC 990 4.89 3.67 1.00 10.00
USHEGEM 990 22.47 2.13 19.41 25.20
WTOM 990 0.76 0.42 0.00 1.00
IMFSG 990 0.23 0.43 0.00 1.00
IMFSZ 990 27.00 3.81 0.00 39.70
LNGDPPC 990 7.09 1.23 4.50 10.21
GDPGR 990 3.40 4.00 -17.60 16.73
LNPOP 990 16.19 1.51 12.54 20.96
COMPETE 990 0.80 1.07 0.00 11.13
INCOME 990 0.11 1.48 0.00 35.44
CHEAP_IM 990 1.20 4.22 0.00 47.99

Data sources:
CONTAG (including COMPETE, INCOME and CHEP_IM): exports and imports from
IMF Direction of Trade Statistics, GDP, consumption and investment from World
Development Indicators 2004.
EXCHAN: exchange rate deflated by consumer price index from IMF International
Financial Statistics 2003 CD-ROM.
DEMOC: democracy and bureaucratic autonomy indicators from Polity IV dataset.
USEGEM: constructed based on data from World Development Indicators 2004 as in
Table 4.
WTOM: membership to WTO data from WTO website.
IMFSG: signed agreement with IMF based on IMF International Financial Statistics 2003
CD-ROM.
IMFSZ: IMF loan size as percentage of the sum of the fiscal and current account deficits
of previous year based on data from IMF International Financial Statistics 2003 CD-
ROM (loan size) and World Development Indicators 2004 (fiscal and current deficits).
GDPPC: GDP per capita from World Development Indicators 2004.
GDPGR: GDP growth from World Development Indicators 2004.

100

Table 4: TARIFF as Dependent Variable: Pooled OLS using 990 observations (891
when lagged)

Variable 1 3 4 5
const 305.588***
107.035
306.628***
106.829
203.825*
120.515
205.536*
120.843
CONTAG 0.0778629*
0.042507
0.0812791**
0.0394097

DEMOC 0.222683*
0.129305
0.22238*
0.12906
0.081035
0.131048
0.0822637
0.131153
USHEGEM -1.09097
0.67238
-1.09292
0.671105
-1.16016*
0.631949
-1.21074*
0.673795
WTOM -0.0388067
0.782905
-0.0258198
0.781594
-0.107808
1.019
-0.0598621
1.02018
IMFSG -0.561572
0.54245
-0.576011
0.541682
-0.94227*
0.569589
-0.960513*
0.57009
IMFSZ -0.000879375
0.000881327
-0.000887924
0.000879709
-0.0013716*
0.000820305
-0.00137682*
0.000820606
LNGDPPC -2.39783*
2.90213
-2.44259*
2.89663
-0.122134
3.05905
-0.059683
3.06052
GDPGR -0.0100348
0.0441182
-0.00998378
0.0441022
-0.0528115
0.0453333
-0.0515683
0.0454817
LNPOP 14.8187**
6.56471
14.8556**
6.55203
9.36552*
7.41588
9.36261*
7.41745
COMPETE -0.322632*
0.098296
-0.289711*
0.078321
INCOME -0.023964*
0.013007
-0.071531*
0.012522
CHEAP_IM 0.0764092*
0.0426596
0.0813902**
0.0397136
CONTAG -1 0.0677051*
0.0395813

COMPET_1 -0.129697
0.284556
INCOME_1 -0.061624
0.122885
CHEAP__1 0.068923*
0.0398168
R2 0.807878 0.808612 0.844351 0.844348
Panel corrected standard errors in parenthesis. * means significant at 10%, ** at 5%, ***
at 1%.

101

Table 5: ANTIDUMPING as Dependent Variable: Pooled OLS using 350
observations (315 when lagged)

Variable 1 3 4 5
const -482.055
422.578
-523.009
411.491
-354.784
554.008
-380.088
541.248
CONTAG 0.00679461
0.158403
0.01354
0.170543

DEMOC 0.157358
0.414791
0.0853922
0.403865
0.143967
0.473064
0.0533634
0.462169
USHEGEM 1.31585
2.10716
1.36295
2.05101
1.11139
2.32582
1.07725
2.53055
WTOM N/A N/A N/A N/A
IMFSG -0.359473
1.46716
-0.624678
1.42865
-0.0616288
1.77194
-0.437623
1.73225
IMFSZ 0.00740502
0.00572296
0.00512295
0.00562141
0.00825385
0.00624773
0.00569125
0.00620314
LNGDPPC 23.2731**
10.041
26.0797***
9.81906
23.1169*
12.0664
26.6725**
11.838
GDPGR -0.124782
0.136067
-0.101575
0.132469
-0.100361
0.154527
-0.0768193
0.153243
LNPOP 22.231*
25.4558
23.6691*
24.7791
14.1261
33.7122
14.1814
32.8788
COMPETE 2.12102
1.21875
2.41274
1.29783
INCOME -3.67616
1.84198
-3.51615
2.01015
CHEAP_IM 0.0268649
0.154954
0.0373307
0.169033
CONTAG -1 -0.0262974
0.173234

COMPET_1 0.0088813
1.37102
INCOME_1 -0.013883
1.95425
CHEAP__1 0.0324252
0.169228
R2 0.564976 0.589375 0.596758 0.619274
Panel corrected standard errors in parenthesis. * means significant at 10%, ** at 5%, **
at 1%.

102

Table 6: EXCHANGE RATE as Dependent Variable: Pooled OLS using 990
observations (891 when lagged)

Variable 1 3 5 6
const 314.226
2343.05
318.247
2343.93
361.425
3277.99
327.779
3290.98
CONTAG -0.213358
0.930503
0.046395
13.6755
-0.368538
1.07194

DEMOC -1.83999
2.83057
-1.84111
2.83077
-2.19185
3.5645
-2.21998
3.57176
USHEGEM 32.3917**
14.7188
32.3896**
14.7203
35.1102**
17.1889
36.0685*
18.3498
WTOM 11.3417
17.1383
11.3669
17.1772
16.5149
27.7167
16.6281
27.7831
IMFSG -33.3341***
11.8746
-33.3698***
11.8808
-42.7848***
15.4927
-42.8729***
15.5255
IMFSZ -0.00818845
0.0192928
-0.00821233
0.0192958
-0.00811954
0.0223122
-0.00809238
0.0223479
LNGDPPC -90.0392
63.5295
-90.1836
63.661
-112.615
83.2057
-112.224
83.3485
GDPGR 0.810019
0.965775
0.807938
0.967286
1.2384
1.23306
1.24222
1.23862
LNPOP -29.2176
143.706
-29.3866
143.728
-26.8742
201.711
-26.4543
202.003
COMPETE -0.923516
15.6999
-1.41138
7.57964
INCOME -0.000535261
13.7612
0.0731852
3.4103
CHEAP_IM 0.249348
13.6749
0.351489
1.08154
CONTAG -1 -0.567824
1.07661

COMPET_1 0.617064
7.74944
INCOME_1 -0.410543
3.34659
CHEAP__1 0.567374
1.08435
R2 0.015238 0.0152648 0.0149339 0.0124837
Panel corrected standard errors in parenthesis. * means significant at 10%, ** at 5%, ***
at 1%.

103

Chapter 3. Regionalism after Financial Crises. Comparing Policy Responses in
East Asia and Latin America.

3.1. Introduction

Since the 1990s, there has been a worldwide surge in the numbers of preferential trade
agreements (PTAs), either regional or bilateral. These initiatives, entitling preferential
trade advantages for their members and discrimination to non-members, had been
appearing for a long period already, being particularly successful in Western Europe
(European Union). The new trend since the 1990s is among developing countries and to
an extent, between them and some industrialized ones (World Bank, 2005, p.24).

Figure 12: The Expansion of Regional Trade Agreements (RTAs)

0
50
100
150
200
250
300
0
20
40
60
80
100
120
1958-1964 1965-1969 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004
RTAs signed Cumulative RTAs Worldwide (right axis)

104

Concurrently with this latest surge of PTAs that has accelerated since 1995 there has
been a series of financial crises in the developing world, particularly in Latin America
and East Asia, beginning with the Mexican crisis of 1995, the extensive Asian financial
meltdown of 1997-98, and the Argentine crisis of 2001. A simple comparison of the list
of countries engaging in most PTAs and those who suffer financial crises since 1995 until
2001, offers a striking similarity.

For example, Mexico has signed a number of PTAs since 1996 until now, Asian countries
affected by the crisis have signed another, and South American countries have committed
themselves to a third set of regional or bilateral trade agreements. This paper looks then
at this coincidence to probe whether financial crises have had an effect on the trade
policy of these countries. The notion is not far-fetched as many authors (CITATION)
coincide on the possibility of a political connection between the following events
happening in both, Latin America and East Asia, characterizing it as a departure from
“open regionalism” or a commitment to multilateralism to a sub-regionalist and
bilateralist trade policies that emphasizes market access for exports, instead of market
enlargement to attract foreign direct investment or anchor pro-market reforms.

The mechanisms connecting financial crises with the renewed but changed emphasis on
preferential liberalization are basically two. One is more macro-political, implying that
there was a change in the notions guiding trade policy because there a rejection of the
Washington Consensus following the disappointing aftermath and high cost of the crisis.

105

The second is more micro-political, as exporting interests gain a stronger voice in
countries after a crisis due to the increased needs for hard currency, and they demand a
more active policy that gets them access to foreign markets. The combination of both is a
strong change from searching for the automatic gains from unilateral or multilateral
liberalization to seeking the conditional gains obtained from reciprocal liberalization on a
subregional or bilateral way. This is not a normative analysis, meaning what is best for
these developing countries, or what inconsistencies there might be in their reasoning, but
a positive investigation on what can be guiding them, based on their public statements
and their actual diplomacy. The point is to see whether policy reactions to financial crises
could have contributed to explain the direction, timing and motivations of developing
countries in these regions for engaging in PTAs
36
.

The first connector is what can be called the “illiberal” one, a reaction built in the
domestic political fall-out from financial crises in the last half of the 1990s. For that, we
would need to consider trade policy in the context of the other economic policies
followed and the political reactions to them. After all, the trade liberalization - including
participation in some regional trade agreements characterized as “open regionalist”
(Bergsten, 2006) – was done by developing countries since the 1980s as part of a wider
policy change following market oriented ideas, which had as main components,
privatizations, reductions in social expenditures, elimination of price controls and a

36
Similar exercises have been made regarding changes in the financial policy of developing countries since
these crises, see Watson (1999), and for development policies in general, see Stubbs and Underhill, (2005)
and on regionalism post-financial crises, see Bowles (2003).

106

general move towards letting economies be managed more by market forces
(Williamson and Kuczynski, 2003). The promise expected from them was higher
economic growth, in great part, via a more open connection with the world economy
through investment and trade linkages (Higgott and Phillips, 2000).

But growth did not accelerate and actually declined between 1995 and 2004 in Latin
America and has failed to reach pre-1995 levels in East Asia, as shown in Table 1. There
one can see that the 1990s economic crises that affected Latin America, first, and East
Asia, later provide a significant breaking point in terms of economic performance. This
slowdown is credited with giving way to political resistance to more reforms, including
non-discriminatory liberalization, either in the form of a “reform fatigue” in Latin
America (IADB, 2003, Lora, 2004) or a “refusal to convergence” in East Asia (Rhodes
and Higgott, 2000). In both regions, countries there have stalled in their economic
reforms and, in trade policy, focused instead on creating a web of preferential trade
agreements (Aggarwal and Koo, 2005)
37
.
Table 7: Global GDP Growth (current US$)

Year 60-69 70-79 80-84 85-89 90-94 95-99 00-04
World 5.44 4.56 2.55 3.55 2.15 3.18 2.60
Industrialized 5.54 4.51 2.59 3.73 2.08 3.02 2.14
Developing Countries 5.12 4.78 2.28 2.78 2.69 4.04 4.55
Latin America 5.34 5.58 0.49 1.83 3.74 2.92 2.31
East Asia 4.76 6.53 7.05 7.70 9.88 5.69 5.93
Other Developing 5.10 3.45 2.58 3.02 1.21 3.93 4.69
Source: Global Economic Prospects 2005, World Bank.

37
There are other theories arguing that PTAs grow “naturally” from neoliberal reforms as an administered
manner to open the economies (Winters, 2000). This case is different because these economies were
already open and further opening is being done now on a preferential basis.

107

The second connector, export-oriented sectors, could activate during the crises and their
aftermath because an important cause for those crises was trade deficits, a consequence of
the inability of developing countries to export sufficiently to finance their imports. One of
the political fall-outs from this is that exporting industries would have a more receptive
government in those countries and could lobby easier for trade diplomacy that would
open markets for them. One could also expect more receptiveness to importing industries
as well. In that context, a more carefully calibrated trade diplomacy could be the
outcome, where market access is given priority over other considerations, such as
anchoring reforms previously made or seeking new investments via enlarged markets.
The preference for restricted partnerships, such as those in bilateral and sub-regional
trade agreements, over larger groupings or multilateral negotiations also has to do with
this need to calibrate more carefully further openings
38
.

In order to see whether crises have affected regionalist policies in these parts of the
world, this study looks at the three main developments regarding regionalism in East Asia
and Latin America happening in simultaneous right after the financial crises. The first is
that region-wide endeavors such as APEC (Asia Pacific Economic Cooperation) and the
FTAA (Free Trade Area for the Americas) initiatives have eclipsed since the time of
these large financial crises in East Asia and Latin America (1995-2001) (Feinberg, 2002).
In contrast, sub-regional enterprises such ASEAN (Association of South-East Asian

38
In principle, all trade negotiations imply an exchange of preferences and enlarged market access for all
parties involved. The reasoning here is that in more restricted deals, such as those in bilateral or minilateral
negotiations, there is more control on what is finally exchanged in terms of preferences (CITATION)

108

Nations), the Andean Pact, the Central American Common Market (CACM) and
Mercosur have not deepened but taken a new role, serving as negotiating platforms for
their member countries to bargain with important trade partners, within and beyond their
respective regions for preferential agreements (Koh, 2004 and Phillips, 2003). Finally,
bilateral PTAs have flourished in an unprecedented number, but with the participation of
only some countries in East Asia and Latin America, further qualifying the spread of a
free trade regime to a myriad of bilateral preferences (Low, 2003; Estevadeordal, 2002).

The alternative explanations to this is that financial crises have not produced a change in
trade policy, simply because there has been no change at all, or because the change has
been due to other factors, such as disappointment with the multilateral trade liberalization
mechanisms of the WTO, imitation of other countries and the fear of being left out from
areas of liberalized trade (domino effect), or increasing levels of intra-industrial trade. In
all these cases, regionalism in East Asia and Latin America remains well explained by
mainstream neoliberal institutionalist theories currently in use.

These neoliberal institutionalist theories do not consider directly the influence of external
events such as financial crises (for a survey, see Mansfield and Milner, 1997, and Milner,
2005). In fact, their assumption is that regionalism would lead to a diffusion of trade
preferences that accumulated, provide for a real change in the direction of trade
liberalization for the countries involved. The more expansive negotiations would
accomplish more and the less ones, would also contribute to push the laggards but

109

making a less comprehensive impact in global trade liberalization (Baldwin, 1997;
Krugman, 1993). These ideas are framed on the notion that trade liberalization generates
a self-sustaining virtuous cycle that feeds further cuts in protection and also, concessions
to ever larger number of countries (Bhagwati, 2002).

However, this paper proposes that this two-dimensional expansion of trade liberalization
is simply not happening any longer in East Asia and Latin America since the period of
these economic crises. The levels of protection may be continuing to decrease but this
time, it is in a preferential (and discriminatory) manner. The post-crisis experience of
sub-regional PTAs, created or resuscitated in the 1990s, such as ASEAN and Mercosur,
adds a further inconsistency to the standard theories of regionalism: trade liberalization
did not deepen inside these groupings but instead, they became instruments to negotiate
preferential access for their members to third markets.

Thus, this study contributes to the IR literature on economic regionalism by providing a
domestic explanation for the growth in number of these agreements as well as the
preferential character they have. Most current work on this topic is systemic in its
explanations, arguing for the forces of globalization, multinationals or even US and EU
policy initiatives favoring regionalism as provoking agents for this reaction from
developing countries. The little domestic incursions made by recent economic
regionalism theories stop at the level of discriminatory effects for certain sectors and their
consequent pressure to become part of the regionalist bandwagon or to create a new

110

comparable grouping, the so-called “domino effect”. Both of these theories cannot
provide insight on why only some developing countries have entered into this supposedly
systemic dynamics, and why they have done it now and not before.

Finally, this paper also furthers the debate on “reform fatigue” and “refusal to converge”
in developing countries, applying that notion to a policy area not yet explored by that
lens. “Reform fatigue” is defined by the international financial institutions as “the luck of
public support, the loss of confidence in the benefits of pro-market reform and a less
proactive stance towards further reforms” (Lora et al, 2004, p.1) and the “refusal to
converge” with neoliberal policy models is understood as “the quick adaptation and
innovation of policies to maintain different forms of national organization for capitalist
development than the ones promoted from Washington and the IFIs” (Rhodes and
Higgott, 2000, p. 15). This analysis that emphasizes domestic resistance to reform is
however not yet applied to trade policy, where IFIs and the WTO coincide there is still
plenty of space for further liberalization (see, for example, the World Bank report on East
Asian trade of 2002 “East Asia Integrates”, or the one from IMF on Latin America,
“Recent Trade Research and Implications for Developing Countries, 2004”.).

This article proceeds as follows. The first section develops the theoretical argument and
offers testable hypothesis. The second section elaborates on methodological issues, such
as case selection and research design. The third section presents the cases and the

111

analysis. The fourth section concludes by discussing the implications of the results for
current theories of regionalism and economic reform.

3.2. Preferential Trade Agreements. Literature and Evidence.

Not all countries and regions in the developing world follow this trend for economic
regionalism, and those who have followed it, they have done for several reasons. The
literature on regionalism is grounded on that experience of the last fifty years, but
especially of the last decade, to come up with the following explanations
39
.

The question to answer in this literature is not why countries have chosen to liberalize
their trade policies but why they have decided to do it in a manner that limits with whom
they liberalize and what they liberalize with them. The optimal trade policy in theory
remains one of total free trade with all (Bhagwati, 2002, Panagariya, 2000, Winters,
2000) but the actual behavior of most developing countries has led to a situation in which
most of the trade they conduct nowadays is within preferential trade agreements (PTAs)
(UNCTAD, 2005, p. 486). Thus, the puzzle remains why they would move in that
direction if the optimal choice would be to liberalize trade with all, either in a unilateral
way (expecting that others would do likewise) or in a multilateral manner, through an
agreement such as those achieved through the GATT and the WTO in previous periods
(Winters, 2000, p. 35).

39
This section emphasizes the explanations for countries to move from protectionism to regional or
bilateral liberalization, having gone through periods of unilateral trade liberalization or not.

112

Three general types of theories have come up to explain this. They can be categorized as
systemic, strategic and domestic. The first one emphasizes systemic pressures from the
global economy on developing countries to open up their trade in a manner that they can
still maintain some protection but at the same time, expand their markets. The second
builds on this previous idea and states that countries respond to what others do in terms of
PTAs by trying to join them or creating their own not to be left behind in this block-
creation trend. The third builds on the previous two, arguing that firms with export
potential lobby for the sort of PTAs that would favor their interests the most, particularly
if their production has increasing gains to scale. Each type of theory is detailed below to
show how well they fit the available evidence from East Asia and Latin America building
PTAs at the present.

The first type of theories on regionalism is the oldest and is grounded on the experience
of Western European countries, which formed the most important PTAs of the 1950s, the
European Common Market (Fawcett, 2004). Attempting to replicate that, developing
countries constructed their own PTAs in the 1960s and 1970s, correctly seeing them as a
possibility to build on their national programs of import substitution industrialization.
Rather than liberalize unilaterally or participate actively in the multilateral rounds of the
GATT, they hoped that these reciprocal trade initiatives would generate the expanded
market some of their firms needed to achieve more affordable scales of production
(Haggard, 1992). The characteristics of most of the developing countries involved in

113

these schemes however hindered their success because their sources of hard currency
needed for industrialization were only obtainable trading with industrialized countries
(Singer & Ansari, 1982). Eventually, these schemes were abandoned de facto while they
remained alive only in name. This accounts for the first 70 or so regional and bilateral
trade agreements shown in Figure 12, until the 1980s, approximately.

The second type of analysis points to the relative position of a country considering a
reciprocal trade agreement in the world economy, especially, how much it perceives to be
suffering from discrimination from other, preexisting or newly-formed, PTAs. This
strategic notion for trade reciprocity implies that if those PTAs are exclusionary or make
inclusion a too costly affair for the country in question, it will seek an alternative by
making its own PTA with other non-members (Haggard, 1997). Still, this does not
represent an ideological preference for PTA-type arrangements over multilateral or
unilateral strategies. In regards to the first one, the multilateral, it is a strategic ploy to
improve the country’s strategic bargaining position (Mansfield and Milner, 1997, p. 5). In
terms of the second one, unilateral, it might be a way to assure foreign investors that
previous rounds of trade liberalization will not be reversed (Haggard, 1997, p.34). This,
for example, plus other neoliberal reform policies in Mexico were points to be locked-in
via PTAs such as the North American Free Trade Agreement (NAFTA).

This theory is based on the experience of developing countries since the late 1980s, and
especially, in the early 1990s, when their concern was how to attract foreign direct

114

investment (FDI) and how penetrate the markets of industrialized countries, perceived to
be increasingly protectionists then (Krueger, 1999). Thus, it was named “open
regionalism” to distinguish it from the previous type born in the 1960s, now judged
isolationist. Baldwin (1997), analyzing the causes of this strategic maneuvering for PTAs
in the developing world, also concludes that it is mostly triggered by a “domino effect”,
generated by the success of the European Union to protect its market and the creation of
NAFTA. Authors looking at the relationship of trade policy with development in East
Asia and Latin America, emphasize the search for mechanisms to attract FDI in a
globalized world, via enlarged regional markets and a stronger position in global
production networks (Bowles, 2000).

The result for multilateral liberalization is not bright. Due to their still higher tariffs (than
industrialized countries), South-South PTAs do hinder multilateral liberalization by
creating or supporting uncompetitive, import-substituting industries (Baldwin, 1997, p.
885; Levy, 1997). The same fear is shared by Krueger (1999), who pointedly asks for
Triad’s
40
pressure on the WTO to enact rules that will make further establishment of
PTAs and especially, free trade agreements, much harder to do. Furthermore, Baldwin
argues that most current PTAs beyond the North Atlantic economies are of a shallow
nature, since they only deal with tariffs and quotas but “fail to address complex trade
barriers” (p. 887), which have grown to be one of the main points of disagreement
between industrialized and most developing countries in the last multilateral rounds for

40
Triad refers to Japan, United States and the European Union (Krueger, 1999, p. 24)

115

trade liberalization. Therefore, there is a dual strategy by developing countries to build
trading blocks that expand export opportunities and also, one that avoids dealing with
non-tariff issues industrialized countries demand at the multilateral level from developing
countries (Bhagwati, 2002). The most frequently cited examples of this literature are
Mercosur and the Andean Pact in Latin America, and the Asian Free Trade Agreement
(AFTA) plus the early phases of the Asia Pacific Economic Cooperation (APEC)
initiative in East Asia.

This leads to the third type of analysis, focused on the domestic sources for PTAs. In
terms of industrial structure and the proclivity to either follow unilateral liberalization or
PTA; the latter is favored when there is a history of intra-industrial trade with the likely
associates. That helps making PTAs less costly in terms of future domestic adjustments,
as fewer firms will be forced out by the increased competition. Thus, we would expect
PTAs in countries that have a lot of intra-industrial trade with at least some partners.
Nonetheless, empirical analysis of this variable in samples of developing countries
getting involved in PTAs since the 1990s has provided no satisfactory support, unlike the
cases of the EU and NAFTA (Baldwin, 1997).

Milner (1997) advocates that regional PTAs may have more to do with the optimal scale
needed as markets for certain politically influential industries. Specifically, she looks at
sectors with increasing returns to scale. Her study provides incomplete evidence (Moon,
1998) and Milner herself advocates for bringing more analysis of the voters’ pressures as

116

well as the political elites’ ideas to forward this particular line of research of domestic
factors (Milner, 1997, p. 101). A different argument has been used to indicate that
countries follow PTAs with some industrialized countries to anchor their domestic
reforms (Frieden and Martin, 2000), which also gave vogue to the notion of “open
regionalism”. That argument for anchoring reforms is essentially the same as Milner’s
point in the sense that is firm-driven, in this case, by the firms that profited from the
economic reforms, such as privatized companies and the financial sector (Manzetti,
2000).

These three types of theories for regionalism have some common problems such as
systematically ignoring the opinions of workers and other groups usually opposed to
trade liberalization, including PTAs (Moon, 1999). In contrast, the literature on economic
reform, for instance, had looked in detail at the power of unions, public opinion and
leaders’ beliefs as variables to consider when and where reforms could be made
(Kaufman and Haggard, 1992; Nelson, 1990). Another common problem that appears
given the North-Atlantic-centric view that has given light to these theories for PTAs is
that, when investigated empirically with evidence from the developing world, they come
up rather short (Mansfield and Milner, 1997, p. 18). The main problems when these
theories are submitted to empirical test are the question of timing of the regional initiative
and the partners who sign it. Contrary to the systemic and “domino” (strategic) theory,
for example, many of the most recent PTAs signed in East Asia and Latin America are
among countries that do not have significant trade or investment relations, furthermore,

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several of these agreements are offered by “discriminating” partners and not asked for
by the “discriminated” ones. And contrary to the “domino” theory, there is the issue of
timing, as often several years have passed between when a “discriminating” grouping is
set up and a “discriminated” country actually does something about it, such as joining it
or joining some other one. Details are given in the cases’ section in this paper.

Given these weaknesses of the theories on the causes of regionalism, other authors have
gone beyond this framework and have looked in detail at the experience of developing
countries with PTAs, starting in a rather more inductive manner. Katzenstein, for
instance, looking at the East Asian experiences, which has evolved from first informal
groupings such as APEC or ASEAN to now, formal bilateral PTAs, concludes that
“economic regionalism is not only an attempt to increase economic growth or to achieve
other economic objectives, and also an effort to regain some measure of political control
over processes of economic globalization that have curtailed national policy instruments”
(Katzenstein and Shiraishi, 1997, p. 344). It is significant that this was written before the
Asian Financial Crisis of 1997. Since then, it has become even more so, as this paper will
show and is not exclusive to East Asia.

Understanding regionalism in a wider sense than simply trade economics such as with the
signing of PTAs leads to a different sort of explanations for its causes. Basically, PTAs
can be seen as a gesture of political cooperation or even alliance of two or more countries
with similar economic concerns (Phillips, 2003). This mostly defensive (as we are talking

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of developing countries here, peripheral to global decision-making centers) initiatives
then seek to manage the forces of globalization to the benefit of the countries signing a
PTA. Agreements that enlarge the regional market are coherent with this approach but
often the main goal is giving signs to domestic and foreign publics alike that the signing
partners intend to support each other to maintain a certain set of policies or even make
changes to other policies (Higgott and Phillips, 2000, Bowles, 2003) . In this case, the
actual size of the market enlargement is not as relevant as the political alliance implied.

In times of crises such as the late 1990s in East Asia and Latin America, this reading of
regionalism can provide some additional insight as to why developing countries there
would keep on starting PTAs with each other and with some extra-regional nations as
well. After all, a political understanding of these initiatives is incomplete if one considers
them only as an instrument to advance a certain set of ideas (i.e. neoliberalism) or
policies (ie. trade liberalization). It might easily be that some of these PTAs or advances
in regionalism were actually done to unite countries in their resistance to more reforms or
to figure out alternatives to generalized trade liberalization.

3.3. Bringing Together Economic Crises and Regionalism

In view of the evidence shown so far for the changes in trade policy in the developing
world in the last decade, the tentative hypothesis to guide this paper is the following:

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Of the developing countries that instrumented economic reforms since the 1980s,
including trade liberalization, several have endured important economic crises in the mid-
1990s. They have moved since then to a strategy focused on preferential trade
liberalization. They have done this change because of the perception that the reforms they
did have not delivered what was expected in terms of higher economic growth and a
more dynamic insertion in the global economy, something brought into light by the
crises, to a large extent provoked by trade deficits (i.e. Mexico, 1994; Thailand, 1997;
Brazil, 1998). This argument takes account of the fact that neoliberal reforms and
preferential trade liberalization are not mutually exclusive, but signing PTAs means that
the further benefits of liberalizing one’s market will be limited to those who provide
improved access to one’s exports (Fernandez and Portes, 1998)). In that regard, it is a
change of policy from the unilateral reforms done by many Latin American and East
Asian countries up to 1995 (Graham and Sukhtankar, 2004; Hiwatari, 2003).

This new view includes making PTAs with important existing or potential markets for
exports but it is not limited to that. Given the ongoing attempts of the industrialized
countries to get a new round of multilateral trade negotiations started, and the gap
between their concerns and those of many important developing countries, there is an
interest among the later to knit alliances to face those negotiations in the future
(Mansfield and Reinhard, 2003). Furthermore, the demands made by international
financial institutions, such as the IMF and the World Bank, for further domestic reform as
a condition for assistance after the economic crises of the 1990s have also generated a

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search for political alliances with like-minded countries anxious to resist that pressure
(Payne, 2001).

This conjuncture that combines doubts for the merits of generalized or non-
discriminatory trade liberalization, resentment for being pushed into reforming further
their economies and the (crisis-highlighted) necessity to increase exports fuels a domestic
environment for trade policy making where exporters have a privileged voice and
skeptics of previous neoliberal reforms recover the upper hand after the heyday of
neoliberalism of the late 1980s and early 1990s in East Asia and Latin America (Mahon,
1999; Terada, 2003). The result is a new wave of bilateral and some regional trade deals
that no longer seek to advance goals of further domestic reforms either via reduced tariffs
or anchoring of neoliberal policies through regional agreements with industrialized
countries. These new trade agreements simply seek more market access and some, also
look for political alliances to actually avoid having to do more neoliberal reforms.

3.4. Research Method and Case Selection

The purpose of this paper is not to attempt a comprehensive understanding of the
economic crises that occurred in East Asia and Latin America in the late 1990s, nor is it a
completely alternative framework to look at their trade policies since the beginning of
that period until today. Instead, this paper considers the possible political relationship
between economic crises and trade policy with the aim of making more precise the

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understanding we have for the causes of regionalism in these regions. This can be later
extended to other parts of the developing world and to other time periods, as well.

For that reason, the method preferred here is a comparison of the regional initiatives
happening in East Asia and Latin America since 1995, when the first large economic
crisis took place in Mexico, until 2002, when the most recent one took place in
Argentina, including the largest of all, the Asian Financial Crisis of 1997-8. This
comparison of the events in these two regions not only captures a lot of what is
happening in the developing world given their importance in that whole but also provides
a representative cross-section of countries with different levels of economic development,
trade relations, endowments, political systems and previous degrees of economic
cooperation inside and beyond their own regions.

Actually, what both regions do have in common is one element above all, the fact that
they were rocked in this period by severe economic crises beyond precedent in their
history for the case of East Asia, and since their conversion to free-market economics in
Latin America. That is the point of departure for this analysis and even when allowing for
the differences noted above among the countries and the fact that these two regions also
have distinctly regional patterns, the results are surprisingly similar. Thus, this a
hypothesis-generating paper that seeks to give context and stricter basis for the larger
theories created to explain the causes of regionalism in the developing world (Buthe,
2002).

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3.5. East Asia
41

This section presents evidence from the regional schemes built in East Asia during the
last ten years. The details provided illustrate how the traditional theories explaining the
causes of regionalism come short in light of this evidence. In contrast, these examples
illustrate the importance of the political consequences of economic crises on trade
policymaking, specifically, on the design and timing of these regional initiatives.

After well over two decades of high rates of economic growth, East Asia faced an
economic crisis of large consequences in 1997-8, with negative GDP growth across the
region, political instability in Indonesia, and important increases in poverty and
unemployment. This change of fortunes in the economic front plus the forceful response
from extra-regional powers, especially the United States and the European Union,
through their influence in the International Monetary Fund and the World Bank,
generated a comprehensive review of the national strategies to relate to the rest of the
world economy. This involved the abandonment of the previous policies of gradual trade
liberalization to the rest of the world through the Asia Pacific Economic Community
(APEC) agreements and initially, a return to regional schemes of preferential trade, such

41
Factual details from the regional and bilateral negotiations taking place in this region were obtained from
Singapore’s Ministry of Trade and Industry website for PTA negotiations www.fta.gov.sg (Singapore is a
member of ASEAN and tracks not only its own bilateral PTAs but also the group’s) and from an
independent website that tracks non-WTO international trade negotiations among developing countries and
between them and industrialized ones www.bilaterals.org . When information does not come from these
two sources, it is noted in the text.

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as ASEAN. When this path proved too difficult to continue, given the unevenness of
how this crisis had affected the region and the lack of sufficient resources and markets
within it, a more bilateral approach was taken by some of the East Asian countries worst
affected by this financial crisis and its aftermath of low growth and reduced expectations.
Table 8: GDP Growth Before and After the Asian Financial Crisis

1991-1997 1998 1999-2003
China 11.20 7.80 7.94
Hong Kong 5.33 -4.97 3.83
Indonesia 7.38 -13.13 3.39
Korea 7.00 -6.85 6.37
Malaysia 9.24 -7.36 4.86
Philippines 3.14 -0.58 4.25
Thailand 6.81 -10.51 4.70
Vietnam 8.36 5.76 6.55
Taiwan 6.91 4.57 3.19
Singapore 8.84 -0.94 3.58
East Asia 10 7.42 -2.62 4.87
EA exc. China 7.00 -3.78 4.52
Source: World Development Indicators, World Bank, 2005.

3.5.1 Region-wide Agreements (APEC)

The renewed enthusiasm for regionalism took a quite particular turn in the 1990s in East
Asia, as the main initiative in the region was started by Australia and incorporated all the
East Asian countries, plus several on the Pacific coast of the Americas, particularly, the
United States and Canada. This diversity in membership plus the declared principle of
supporting free trade “globally” and not only among its members, led to seemingly weak
commitments on regionalism. These were dressed as “voluntary and non-preferential

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commitments of trade liberalization” as well as economic deregulation to facilitate trade
in services with the expectation that peer-pressure would trigger reductions in the levels
of protection, especially among the developing country members in APEC (Ng and
Yeats, 2003).

With the Asian Financial Crisis of 1997, the United States and Australia increased their
pressures on the East Asian economies to accelerate their trade opening within APEC,
facing dramatic diplomatic showdowns in 1998 and 1999 with the South East Asian
countries, now least enthusiastic to open up their economies according to their
“voluntary” commitments of the mid-1990s (Nesadurai, 2003). Given the lack of political
will to further liberalize through this regional mechanism, the US, Australia and the
South East Asian countries quickly lost interest in APEC, downgrading their delegations
to its annual meetings, or using them to announce bilateral deals that openly challenge the
APEC principles of non-preferential liberalization (Ravenhill, 2000). By the end of the
1990s, APEC was basically defunct as region-wide initiative to liberalize trade, leaving
alive just the technocratic and academia forums that remained useful to negotiate
punctual, bilateral or ASEAN-centered preferential trade deals (Yeung, 2004).

3.5.2 Sub-regional Agreements (ASEAN and ASEAN+)

In the immediate aftermath of the Asian Financial Crisis, ASEAN decided to modify the
liberalization path it had agreed on in the early 1990s. Then, it had conducted fast paced

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trade liberalization, along two tracks that coalesced into a typical framework of “open
regionalism”, then in vogue (Bora and Nora, 2001). One track implied an ambitious
reduction of most tariffs from around 20% in 1994 to 5% in 2005 and another,
encouraged members of AFTA to also reduce tariffs to the rest of the world to a target of
10% by 2005, from an average of 19% in 1992-4. The post-Crisis ASEAN policy opted
for increasing intra-regional preferences, bringing forward to 2002 the target date for the
first track, intraregional liberalization, and canceling the reduction in tariffs to the rest of
the world. Furthermore, they announced a common policy to deal with foreign
investment, which further reduced tariffs inside the region to 5% by the year 2000 if the
resulting production was to be exported beyond ASEAN (Stubbs, 2000, p. 311). The
conclusion is that ASEAN became more closed to the rest of the world and more open
among its members after 1998. Regionalism was deepened just as defenses against extra-
regional members were increased, particularly in regards to foreign direct investment
(Eng, 2003).

These changes were wrapped by the national leaders present at Kuala Lumpur for the
AFTA meeting as the strengthening of “regional solidarity”, in order to increase
“regional resilience”, defined as “the ability of a region to cope with, endure and survive
the challenges and threats it meets in the course of her struggle to achieve regional goals”
(Ruland, p. 427). Such rhetoric must be understood in the context of the Asian Financial
Crisis, viewed locally as a “conspiracy of Westerners to destroy the chances of South
East Asian nations to develop autonomously” (Rhodes and Higgott, 2000). This new

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situation of resentment and crisis permitted an alliance of nationalist and liberal political
coalitions in the ASEAN countries (Stubbs, 2000). The first had always suspected trade
liberalization and had only accepted it after the crises of the mid 1980s, while the second
understood the potential backlash that could be started by the crisis. Thus, the agreed
course of action was a deepening of regionalism, making it more exclusive and
discriminatory (or preferential for its members) than before (Stubbs, 2000, p. 312;
Ravenhill, 2003).

These plans for deepening an exclusionary regionalism, soon provoked a line of
resistance from national producers. Malaysian car manufacturer feared Indonesian
competition of Japanese assembly plants there and asked for an exception. The same
happened for Indonesian food producers, fearing competition from the huge San Miguel
conglomerate from Philippines. The result from these and other pressures for protection
was a list of exceptions to the accelerated regional trade liberalization. That list had
grown to over 1200 items by 1999 (Stubbs, 2000, p. 314). As Ravenhill summarized by
2000, “all these exceptions have made ASEAN a free trade grouping where free trade is
limited to unimportant commodities” (p. 330). The large list of exceptions granted inside
ASEAN produced a counterattack from free trade interests inside some of its members
(Desker, 2004), which is detailed later on, in the section on bilateral treaties.

Singapore and Thailand decided then to follow their own agendas through bilateral trade
deals beyond ASEAN. Simultaneously, they also prodded the other ASEAN countries to

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consider, as a regional grouping, trade deals with China, Korea and Japan. These three
countries had harvested on the surge of an “Asian identity” developed during the Asian
Financial Crisis in 1997-1998, when Japan had proposed the idea of an Asian Monetary
Fund (AMF) to replace - but in later versions, complement - the work of the International
Monetary Fund in stabilizing the East Asian economies affected by this crisis
42
. The
ASEAN countries affected by the crisis welcomed it as the needed element to maintain
their developmental institutions, threatened by IMF strong-arm demands of deregulation
and economic liberalization (Higgott and Phillips, 2001). In the end, the AMF idea did
not progress but the seed for economic cooperation in East Asia, leaving aside the non-
Asian countries of the Pacific Rim, was planted. The Chiang Mai initiative signed in
1999 and continuously expanded among all the ASEAN countries and China, Korea and
Japan decidedly sought to lock in a defensive mechanism for their respective financial
systems, and therefore developmental economic models (Pangetsu and Gooptu, 2003).

From this financial cooperation, and the intra-ASEAN problems regarding deepening,
came trade negotiations between ASEAN and these three East Asian countries (Dieter
and Higgott, 2003). In 2001, ASEAN and China signed a “Framework Agreement on
Comprehensive Economic Cooperation” that goes to great lengths to give the impression
that it is not a free trade deal but something different. The main areas to negotiate on are
technological cooperation, harmonization of custom procedures (along a bilateral
ASEAN-China criteria, not WTO recommended ones) and investment agreements that

42
United States had vehemently opposed the idea, but also China disagreed, suspecting the increased
influence Japan pretended from that conjuncture of crisis in South East Asia, particularly (Haggard, 2001).

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are not extensible to other countries with which these parties have deals. Trade
liberalization is limited at the outset to exclude government procurement or any property
rights regulations. It is notorious that these two latter issues are the very same ones that
industrialized countries have been developing countries to agree on (Terada, 2003). In
other words, China and ASEAN countries signed an preliminary agreement to build
economic cooperation along their own preferences, countering other prevailing notions
and enforcing their “refusal to converge” with a Western conception of trade
liberalization. In fact, tariff reductions already agreed on, and implemented since 2003,
have been steep, covering over 80% of the trade between ASEAN and China, with tariffs
on sensible products scheduled to be reduced in a 10 to 15 years period. Besides the
strong ideological statement made in this agreement to others beyond it, there is the
common interest in securing a “first-mover” advantage for ASEAN investors in China as
the latter joins the WTO and for China to insure Chinese ethnic minorities in ASEAN
countries from further discrimination, another fall-out of the Asian Financial Crisis in
Indonesia, especially, but also in Thailand and Malaysia (Pangetsu and Gooptu, 2003).

The impact of this agreement, finally signed in 2005, was immediate and even prior to its
actual entry into force. During the time of the negotiations, ASEAN countries and China
made successive rounds of “good will” reductions in bilateral tariffs as well as
harmonization of trade regulations to facilitate exchanges. Therefore, the bilateral trade
flows increased by a 100% during these 2001-2004 period, making China the third most
important trade partner of ASEAN (ASEAN Annual Report, 2004, p. 26). The level of

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preference granted between ASEAN and China averages 45% for manufactured goods
and 50% for agricultural goods (ASEAN Secretariat, 2005). Accordingly, trade between
these two has grown by a further 25% during 2005 (ASEAN Secretariat quoting an AFP
report, http://www.aseansec.org/afp/134p.htm )

This agreement caught Korean and Japanese officials by surprise and, faced with the
possibility of losing positions in ASEAN markets to China, they both accepted the
invitations of ASEAN for similar deals in 2002 (Lee and Park, 2005). While these
negotiations are not as advanced given the resistance of agricultural lobbies in Japan and
Korea and the resistance of high technology producers in ASEAN countries, they have
the same “Economic Cooperation” label, similar emphasis in maintaining state capacities
for development via technological cooperation and avoiding “new” trade issues, a
sensitive point for Japan (Hatch, 2004). Here, the schedule for trade liberalization is a
very long-term one of 10 to 15 years.

Another window from which to appreciate the symbolic and very political nature of these
agreements is that they have almost all been announced at Asian Pacific Economic
Cooperation (APEC) ministerial meetings. That is in the presence of all the other non-
Asian members of this Pacific Rim trade grouping, such as the United States, Australia,
Mexico, Chile, New Zealand and Peru. The message of that choice of venue to make the
announcements is that if trade liberalization is to continue in the region, it must consider
East Asian, specifically ASEAN countries’ interests (Ravenhill, 2003). In spite of its

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internal disagreements, ASEAN remains then a platform from which to assert, in
Katzenstein’s words, “some measure of political control over processes of economic
globalization that have curtailed national policy instruments” (p. 344).

In that regard, the resort to regionalism as an instrument to obtain trade preferences and
solidify a trade regime different from the one desired by those extra-regional powers, is
grounded on a vision of growing global trade happening in fact inside regions (Terada,
2003). In that suspicion of “open regionalism”, the idea is that those regions that can
generate the most intraregional trade growth will achieve the fastest economic growth.
Therefore, states are to focus on regional enterprises, which can also advance their
political objectives of increased regional security, better bargaining position with
outsiders and a domestically-created pattern of development instead of the one pressed on
by those outside powers (especially, the US but also Japan and Australia) (Pelagidis and
Papasotiriou, 2002).

3.5.3 Singapore

Singapore, as a trading hub, was a natural opponent to this reformulation of ASEAN in
1998 to deepen intra-regional levels of preferences
43
. It judged that since ASEAN was a

43
Also Thailand, one of the most affected South East Asian countries by the economic crisis of 1997
became a late but enterprising designer of bilateral PTAs. Internal divisions in the Thai government on
which sectors to liberalize have however hindered any significant accomplishments. After inviting
Australia and Japan for talks in 2001, no agreements have been signed until now. Japan, because it insisted
on excluding agriculture, fishing or forestry, three key sectors for Thai domestic exporters (Yoshimatsu,
2004). Australia’s insistence on a neoliberal agenda for a PTA that makes emphasis on intellectual property

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too difficult path to attain increases in regional trade, the preferred venue was bilateral
agreements with countries beyond it (Hiwatari, 2003). Such departure towards
bilateralism generated big expectations in the main trading partners of South East Asia,
hoping that in spite of their little progress achieved in opening these ASEAN economies
through IMF reforms in the aftermath of the Asian financial crisis and the paralysis of the
WTO negotiations since the end of the Uruguay Round, trade opening could be achieved
there via bilateral deals (Dent, 2003).

Singapore quickly started negotiations with Japan in 1998 for a bilateral PTA. While
Japan proved to be quite unenthusiastic to this idea of bilateral free trade agreements to
accelerate trade liberalization in ASEAN, and it was not ready to open its economy to
even an agriculturally-insignificant partner as Singapore, preferring a “New-Age
Economic Partnership Agreement”. This was a pointed remainder to others in ASEAN
that what Japan was going for was “new age” trade issues such as liberalization in
services, information technology cooperation, trade facilitation and harmonization of
standards and did not agree with the idea of just free trade bilateral deals (Noordin et al,
2004).

For the PTA, finally signed in 2002, the level of preferences attained by Singapore in
Japan are quite high, increasing the percentage of its exports entering Japan with cero
tariffs from 34% to 74%, while for Japan the increase is from 90 to 94% (MTIS, 2003, p.

rights, government procurement and investors’ privileges is also to be turned down (Pangetsu and Gooptu,
2003).

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13). Besides that, Japan obtained a protocol that facilitates the work of its professionals
in the Singapore market in financial and legal services, essential for the work of Japanese
multinationals operating there with regional headquarters (ibid, p. 15). The granted
bilateral preferences has motivated an increase in bilateral trade of 10% per year since its
inauguration in 2001, compared to an average growth of only 5% in the decade prior to
that. Trade flows now account for 8% of total exports for Singapore and 3% for Japan
(IMF Balance of Payments 2004)
44
.

3.5.4 Korea

Korea, another East Asian country recovering from its economic crisis of 1998, attempted
in its almost immediate aftermath to engineer bilateral PTAs to maintain the reformist
momentum started by IMF-forced measures to open the Korean economy and search for
more export markets. These deals were clearly sold to the domestic public and business
conglomerates as opportunities to gain preferential access into new or non-mature
markets (Freedman, 2005). After failing to achieve one with Japan
45
, Korean officials
have been searching for other partners to sign free trade deals with, mostly along the

44
Singapore went on to offer bilateral deals to Mexico (1999), Chile (2000) Canada (2001), United States
(2002), Korea (2000), Mexico (2000) and New Zealand (2001) openly undermining ASEAN with those
initiatives. Eventually, only the ones with the United States, Australia, Chile and New Zealand have ended
up in signed free trade agreements as of mid-2004. All the other countries found problems in the proposals
and negotiations were paralyzed (World Bank, 2004, p. 34).
45
Such ambitious (and naïve) goal was started with negotiations with Japan in late 1998, taking advantage
of the sympathy obtained by this old rival during the Korean crisis, when Japan had assisted Korea with
bilateral loans and voiced its reservations over the way the IMF was directing reforms there (Yoshimatsu,
2004). Such good exchange came to an abrupt end with renewed fishing conflicts, mutual accusations of
dumping and the impossibility for both governments to contain domestic industry pressures to keep their
national markets closed. After a series of meetings through 1999 and 2000, bargaining is stopped (Weiss,
2000).

133

Pacific rims. Only Chile and Singapore agreed, the first eager enough to assure markets
for its primary exports to be ready to give up immediate market access in agriculture, as
demanded by Korea. For the second, it was the goal of assuring its hub role for South
East Asian exports to the Korean market. On the Korean side, the fact that Chile has not
much of a manufacturing industry helped the Korean government to calm its domestic
industry that no competition was on their way and some increase of industrial exports
could be expected (Sohn, 2001).

The negotiations between Korea and Chile concluded in 2001, establishing a PTA in
which Korea granted preferential access to copper, cellulose and fishing products from
Chile with tariffs 50 to 80% lower than MFN, while Chile agreed for the same on 90% of
Korean manufactures. Agricultural trade remained outside the agreement for the next 15
years, as demanded by the Korean lobby groups (Wong, 2004). This PTA made possible
a growth in bilateral trade of over 100% between 2001 and 2005 (reaching over $2 bn in
2005), way above the aggregate exports´ growth of both countries to other destinations.
Korea thus gained an advantage on other manufactures' exporters to Chile, such as Japan
and China, while Chile got the same, edging out Peru, Brazil and Argentina in the Korean
market (ProChile, 2005, p. 26).

For selling domestically the PTA with Singapore, much more effort was needed. That
was a partner extremely competitive in industrial exports, with an economy much more
liberalized already than Chile. On the other side, with a much larger market to offer and

134

the possibility to accede through it to rest of the ASEAN countries. This was an
important concern for Korean industrial exporters, recovering from recent economic
crisis. The lesson extracted from that event was that Korea needed more aggressive
policies to dynamize exports as a way to avoid a new deterioration in the trade balance,
that had contributed to causing the previous crisis (Wu and Chen, 2004).

The agreement signed in October 2005 between Singapore and Korea gave immediate
preferences, with cero tariffs to 75% of Singaporean exports there and a 5 to 10 year
adjustment period for the rest. In exchange, Korea achieved a 100% duty-free access to
Singapore immediately. Such levels of preference had a strong impact in bilateral flows,
with trade expected to grow by more than 15% per year in the next decade (MTS, 2005,
p. 11).

3.5.5 Assessing Asian Regionalism

The standard theories explaining the causes of regionalism are severely handicapped to
capture this dynamics resulting from the Asian Financial Crisis. The market expansion
argument would suggest that ASEAN countries would expand their grouping or deepen
their integration, when they did neither in the end. The initial reaction to deepen
preferences was eroded by the list of exceptions presented by each member, resulting in
the Ravenhill (2000) summary that “pretty much anything of importance is left out”. That
is not so surprising since regional groupings have usually had problems to increase their

135

level of cooperation under economic crises
46
. There was no attempt to enlarge ASEAN
and, in fact, requests from Australia and New Zealand to enter it were strongly rebuffed
by these Asian countries after the Asian Financial Crisis (Jayasuriya, 2003).

The idea that regionalist deals are signed in strategic manners to decrease the cost of
“discrimination” from existing or newly formed agreements is also insufficient to explain
this resurgence of regionalism in East Asia. After all, here we have several cases where
the “discriminators” (ASEAN) are the ones inviting others to sign agreements with them.
Those that did want to sign PTAs with ASEAN were refused by it, such as the United
States, Australia and Chile. Therefore, this theory does not hold and the quality of the
evidence against in East Asia is very high: not only those expected to ask for agreements
do not ask for it but those that do ask, get rejected. It is a statement for the very
exclusionary nature of regionalism.

More domestically based ideas for the causes of regionalism are equally undermined by
the evidence from East Asia. The neoliberal reforms East Asian countries were forced to
do under the IMF bail-out plans after their economic crises of 1997-8 were certainly not
the subject to be anchored in making bilateral deals such as those by ASEAN with
countries like China, the very expression of a non-liberal economy. Agreements with
very resilient examples of developmental states such as Japan and Korea can also be

46
See for example the problems of the European Economic Community in the 1970s, when under stress
from the oil shocks and the resulting economic downturn, had regional cooperation limited and a period of
Eurosclerosis began with increased unilateralism among its members (Ruland, p. 444). A similar dynamics
developed in Mercosur and the Andean Pact during the late 1990s, as well, as it is shown in this paper.

136

hardly observed as anchoring IMF-forced reforms for economic liberalization. In any
case, one would have to see the reverse of this notion, that regionalism in East Asia seeks
to impede those reforms, by anchoring or at least, reinvigorating developmental
capacities in the ASEAN states and also supporting those interests in more advanced
Asian economies such as Japan and Korea (Rhodes and Higgott, 2000).

Finally, the arguments stemming from the idea that high levels of interindustrial trade
contribute to the possibility of regional trade agreements could be found to be reasonably
accurate. The problem is a matter of timing, which those theories do not specify directly
but seem to imply that once a certain threshold is reached, regional trade agreements will
coalesce (Ng and Yeats, 2003). Regarding East Asia in the late 1990s, the evidence from
trade flows shows that interindustrial trade actually decreased since 1997, the year of the
economic crises there, so regional deals should have become more unlikely instead of
more frequent (Smith, 2004). Perhaps, the specificity of the effects of a region-wide
economic crisis explains part of this. As domestic demand collapsed in the countries in
crisis, such as Thailand, Malaysia, Indonesia and Korea, interindustrial trade suffered
disproportionally (Bora and Nora, 2001).

One element that does come out from this limited review of the developments in East
Asia regionalism since the mid-1990s until now is that export interests have taken a
commanding seat in trade policy from local reformers, and that local political
establishments see the building of regional trade agreements as the way to reinforce their

137

commitment not to follow Western pressures to “converge towards a North Atlantic
model” (Koh, 2004). Not all countries adhere completely to this strategy, being
Philippines, Thailand and Singapore clear examples. Nonetheless, these countries are
members of ASEAN as well so their more or less extensive bilateralist agendas must also
be seen in the context of their adherence to ASEAN goals of increasing ties with the other
East Asian economies and marginalizing venues of Western pressure in Asia such as
APEC (Weiss, 2000).

3.6. Latin America

This section presents evidence from some of the regional schemes built in Latin America
during the last ten years. The details provided illustrate how the traditional theories
explaining the causes of regionalism come short in some cases. In contrast, these
examples illustrate the importance of the consequences of economic crises on trade
policymaking, specifically, on the design and timing of these regional initiatives.

During the early 1990s, there was a wave of activity in the form of regional agreements.
Bilateral deals and regional-wide multilateral ones such as the launching of negotiations
for hemispheric free trade in the Free Trade for the Americas Initiative in December 1994
and the strengthening of some of the existing sub-regional agreements, such as the
Central American Common Market, the Andean Pact and Mercosur. All these moves had
in common the formula of “open regionalism” to imply that its participants were

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engaging in these regional measures to accelerate the trade liberalization of their
economies and to differentiate this from previous initiatives of the 1960s which had
focused on protectionist measures to increase scales of production for domestic
industries.

The optimistic expectations of those times have been crashed by the performance these
groupings have achieved since then. For example, most bilateral deals and subregional
ones such as the Group of 3 of Mexico, Colombia and Venezuela still have the same level
of exchange as percentage of total exports as they had 10 years before, when they signed
their agreement (IADB, 2003, p.12). Expectations were higher for the CACM, which
lived up to them for some years until the late 1990s, when in-group trade decreased again
(Erikson, 2005). Exactly the same happened in the Andean Pact and Mercosur, which
enjoyed large inflows of foreign direct investment and growing intra-regional trade until
1998, to see later ever decreasing levels of trade integration (Phillips, 2003).

In contrast to this rather dismal performance, renewed efforts are put into more regional
trade deals. Bilateral agreements have flourished since 1998, with 18 signed since. What
can be provoking countries to insist in something that has seemingly not helped them to
get good results in the previous decade? The traditional theories for the causes of
regionalism would argue that there are renewed interests for import substitution policies
or fear of discrimination from other trade agreements. Other traditional argument could
be that intraindustrial trade has increased since trade liberalization took hold in Latin

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America in the 1990s and those industries are promoting more agreements. Or that elites
are anxious to anchor reforms that benefit them with international agreements, just as
NAFTA did it for the Mexican ones.

The argument supported by the evidence presented below shows that countries are simply
searching for preferential access to foreign markets, and tie that to any further
concessions given in the liberalization of their own markets. The interest for import
substitution has not increased and the desire to attract FDI via enlarged markets has
declined in all likelihood as a driver for regionalism, as shown in lack of deepening of
existing sub-regional groupings. The replacement strategy for the neoliberal “new
regionalism” of the 1990s is simply a quest for markets, coupled by very limited and
preferential liberalization of their own economies.

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Table 9: GDP growth (Annual % and Averages Pre- and Post-Crises)

1991-1994 1995 1996-1998 1999 2000-2003
Argentina 9.09 -2.85 5.83 -3.39 -1.84
Bolivia 3.96 4.68 4.78 0.43 2.25
Brazil 2.90 4.20 1.67 0.80 1.77
Chile 8.24 10.63 6.24 -1.14 3.18
Colombia 3.88 5.20 2.02 -4.20 2.42
Ecuador 2.93 1.75 2.86 -6.30 3.48
Mexico 3.55 -6.17 5.60 3.74 2.12
Paraguay 2.88 4.71 1.15 0.49 0.54
Peru 4.83 8.58 2.90 0.91 2.97
Uruguay 5.35 -1.45 5.05 -2.85 -3.34
Venezuela 3.43 3.97 2.11 -6.09 -3.02
Latin America 10 4.64 3.02 3.66 -1.60 0.96
Note: Brazil, Paraguay and Peru had economic crises in 1998 that continued into
1999. In 1998, Brazil’s GDP growth was -1.00%, Paraguay’s was -0.42% and
Peru’s, -0.65%.
Source: World Bank. 2005. Global Economic Prospects: Trade, Regionalism and
Development.

3.6.1 Region-wide Agreements (FTAA)
47

In the context of the renewed enthusiasm for regionalism in Latin America since the
1990s, the biggest surprise has been that the Free Trade for the Americas Agreement
(FTAA) has not advanced. It was launched by President George Bush in 1990, and
confirmed by President Bill Clinton in 1994 in the Miami Conference of Western
Hemisphere Presidents. Since 2002, President George W. Bush has had the so-called
“fast track authority” given by the US Congress to negotiate and sign PTAs with other
countries. This is not to say that support in the US for the FTAA has had its ups and
downs during this time but the most significant changes have happened in Latin

47
Factual details come from the official website of the FTAA, www.ftaa-alca.org . Otherwise, citation is
given.

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American countries (Feinberg, 2002). The economic crises in the region have had a
strong influence in their choices.

For example, trade negotiations were progressing rapidly in the preparatory stages up to
1998, with delegations exchanging basic information on trade and investment of their
respective economies, as well as designing the agenda on which the topics would be
discussed. But as Presidents met in Santiago, Chile, in October 1998 to launch the
negotiations officially, the spirit had changed. The financial crisis originated in Asia,
which had strongly affected Brazil, Argentina, Peru, Chile and Uruguay in that year, had
shaken some of the strongest supporters of the FTAA (Remmer, 2002; Madrid, 2003).
Brazil, which had been a reluctant participant even before, suddenly found allies to
modify the agenda. The result was a series of demands from these countries that made the
agreement extremely difficult to negotiate, such as the concept of single undertaking, the
impossibility to eliminate any sectors from the negotiations and the demands to include
antidumping and other market access limitations into the deal (Smith, 1999).

Brazil - and also, Argentina - consciously expected that this would make the FTAA much
slower if at all possible to conclude successfully (Walton, 2004). Another important
element included was that pre-existing Latin American subregional agreements would not
be eliminated by the FTAA and had the right to present themselves as negotiating units.
As a way to preclude the possibility of the least developed countries of LA signing into
the FTAA conditions promoted by the USA, the Mercosur countries also forced the

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clause that no differential treatment could be afforded on the basis of development. This
implied the impossibility of granting different times for countries to adjust to trade
liberalization (Rivas-Campos et al, 2003)).

The negotiations that continued under this program have had a very slow progress,
eventually leading to a bilateralist dynamics in which some LA countries became
increasingly ready to accept onerous USA conditions in exchange for preferential access
to that market. By the time of the next summit in Miami in 2003, the new path for the
FTAA was permanently modified into an agreement of “common points” that do not go
beyond current WTO concessions already accorded before, and another optional deal on
“additional points”, to which countries can sign on if they so desire. This “FTAA-light”,
as was called later, puts the end to the ambition of an hemispheric-wide PTA and passes
the ball on to sub-regional and bilateral negotiations to implement trade liberalization in
the region, with the obvious difference that preferences will be granted to a more limited
set of signatories (Schott, 2005).

3.6.2 Sub-regional Agreements (Mercosur, Andean Pact and CACM)

Mercosur
48

After forming in 1991, Mercosur followed an accelerated path to establish trade
liberalization among its members. Tariffs went down from that time until 1995, where

48
Factual information about Mercosur comes from its official website, www.mercosur.org.uy .Otherwise,
citation is given.

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they reached zero for all goods (but not services), with some exceptions for Brazil,
Argentina and larger ones for Uruguay and Paraguay. Overall, 90% of all trade was free
of any duties by December 1995. According to previously established chronograms,
agreements were then to follow on investment, managed trade for some sectors, services
and competition policies. The irruption of the Mexican Financial Crisis in 1995 and its
contagion to Argentina and Uruguay prevented that from happening as domestic
pressures against further liberalization grew very strongly there (Conger, 1998). Brazil
had been a reluctant participant to plans to liberalize or create common policies for
Mercosur on these issues, so Mercosur stalled its deepening for the time being (Bouzas,
2001). In fact, the level of protection towards external partners was increased by 3%, at
the pressure of Argentina in 1995, thus enlarging the margin of preferences for regional
members.

Instead of this deepening, Mercosur, since 1996, initiated and in some cases,
accomplished some agreements to associate other countries to its initiative. In 1996,
Mercosur invited Chile and Bolivia to join Mercosur to secure markets there for its
agricultural and manufacture exports. While for the first it hardly needed markets like
these since Mercosur’s agricultural exports could be placed in other markets around the
world, manufacturers would appreciate it (Harrison et al, 2001). The margins of
preference for Mercosur exporters grew significantly, as they got levels of preference of
40% in the most industrial tariffs from Chile and Bolivia, and the promise of achieving
zero tariffs within 10 years (SICE, 1997). Given the little manufacturing industry present

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in both of these countries, similar concessions given by Mercosur had little impact.
Exceptions for agricultural raw materials were given, protecting Chile’s and Bolivia’s
uncompetitive sectors from Mercosur’s firms for up to 15 years. Since 1996 until 2004,
exports there from Mercosur have tripled, and now the grouping is the first source of
imports for Bolivia, and the second for Chile (IMF, BOPS, 2004).

As a new round of crises affected Mercosur in 1998, when Brazil suffered contagion
from the Russian Financial Crisis and was finally forced to devalue its currency, the same
development occurred in terms of regionalism. In the context of multiple trade disputes
between Brazil and Argentina, Mercosur offered the Andean Community of Nations
(ACN, also known as Andean Pact), to sign a treaty of association that implied a free
trade agreement between the two groupings, with the aim of creating a “South American
Common Market”. The negotiations began in 1999 and comprehended an ambitious
schedule of tariff reductions and investments in sub-continental infrastructure to facilitate
trade.

Just as these external agenda of Mercosur continued, the internal response of the
grouping to the economic crisis of 1998 was very disappointing. Not only conflicts
flourished and contributed to reduce intra-Mercosur trade from 20% to 15% of total trade,
but no agreements to lower internal barriers to trade, organize dispute resolution
procedures, and increase policy coordination in terms of fiscal, monetary and exchange
rate policies were achieved (Eichengreen, 2004). Only some discussions were also started

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on competition policies to harmonize them and prevent unbalances on FDI flows.
However, the differences in general economic policy between the main members,
Argentina and Brazil, made those agreements impossible to implement (Bouzas, 2001)

This raises an important question about the logic through which crises affect regionalism.
Mercosur was an initiative in existence, with a great deal of political and economic
capital already invested in it by their member countries. However, no strengthening came
about as logic would have implied to increase regional defenses against the vagaries of
financial globalization and its impact on their real economies. The primary line of
reaction to such instability should have been more policy coordination since these
groupings are common markets or custom unions (Bouzas, 2001). The path followed
instead was one of using Mercosur as a negotiating platform to associate other South
American countries to it.

Therefore, how can one explain this? One has to look at the political economy of the
crises themselves, focusing on the domestic aftermath for the countries affected directly
by it and those who suffered contagion from it. For example, in the case of Chile being
invited to associate with Mercosur, Argentina was motivated to expand its exports in
order to avoid a new crisis and Chile provided a possibility to achieve that. Between 1991
and 1994, Argentina accumulated trade deficits equal to 3% of its GDP, making it
particularly vulnerable to financial flows in order to maintain its level of economic
activity. If it wanted a more stable path, one of the measures indicated was to improve its

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trade balance (Teichman, 2004). Chile offered a venue for Argentina and other Mercosur
exports because of its growing domestic market, with an average GDP growth of 7% in
the early 1990s. Furthermore, new exporting industries in Argentina such as oil and gas,
metal manufactures, and Brazil’s car manufacturers and processed foods were looking for
markets to expand to (Phillips, 2003). The government of Argentina was in that moment
of economic crisis likely to support those initiatives for its own goal of avoiding another
downturn, and Brazil’s also supported these efforts as it had an incipient trade deficit of
its own since 1995 (Corrales, 1998). As a new round of crises came in 1998 to Brazil, and
later to the rest of Mercosur, the same logic was applied to increase exports beyond
Mercosur to neighboring countries via preferential agreements.

The other cause for inviting Chile, Bolivia and the ACN was to try to build Mercosur into
an alternative to the existing project of the FTAA. Brazil considered this aspect a high
priority, given its level of disagreement with Washington views on hemispheric free trade
(Castelar-Pinheiro, 2003, p. 23). By trying to package Mercosur as an alternative to USA-
led FTAA, the Argentine and Brazilian authorities were also trying to calm down
criticism inside their own countries towards neoliberal reforms in Mercosur (Graham and
Sukhtankar, 2004). Latinobarometro opinion polls register a strong dip of public
confidence in neoliberal policies such as privatization, economic deregulation and also,
trade liberalization in the Southern Cone (The Economist, June 14
th
, 1997). This also is a
strategic use of regionalism and specifically, preferential agreements to increase leverage

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and deter deeper trade liberalization across the board, as required in the FTAA,
preferring instead limited PTAs as those with Mercosur’s neighbors.

3.6.3 Andean Pact

Such new will to coordinate and harmonize policies, which would have deepened
regional compromises, remained as little more than policy statements in the Andean Pact,
too. It is notorious that no coordination instrument has come into place from all those
meetings. For example, in the Andean Community, partners started negotiations after
1996 for a new four-tier common external tariff expected to be in place by the end of
2003. These negotiations came from the previous on macroeconomic coordination,
setting convergence targets for inflation and public deficit. In 1998, in a meeting of the
Free Trade Commission, agreement was reached for the early removal of tariffs on 600
goods, including many previously scheduled to be removed 10 years later (IADB, 2003,
p. 29). On the initiatives to coordinate macroeconomic policies, no agreements were
reached and therefore, only deepening of trade integration remained.

After the crises of 1998, which affected some of the members of the Andean Pact as well,
the negotiations for a common external tariff advanced faster and were linked to an
agreement to negotiate external trade policy as a group only. The first test of these
measures came in the negotiation with Mercosur cited before. The second and potentially,
more complex came in the offers from the USA to make a free trade agreement in 2001.

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In spite of repeated pressures from Washington, the countries of ACN have managed to
maintain a common position in that bilateral negotiation. Only Venezuela has chosen not
to participate in a deal with the USA, but Bolivia, Peru, Ecuador and Colombia keep their
bargaining relatively coordinated among themselves (Latinnews.com 5/15/05). The
incentive for these four countries is that pre-existing US concessions are to expire in
2005, and Washington has made their continuation conditional on signing a PTA with
itself. Therefore, a PTA with the USA would ensure continued market access for their
new export sectors, such as flowers and processed foods, which have represented over
50% of the growth in their total exports in the last decade (ECLAC, 2003, p. 18). The
margin of preference requested is of 9%, the average tariff these goods are to pay to enter
the USA market if current privileges are interrupted.

The negotiations have been slow mostly due to difficulties for these Andean country
governments to convince their populations that the new trade rules the USA asks for will
not further reduce living standards, such as copyright laws for medicines (expected to
increase medical costs on a 100 to 200% in Peru, for example) (Walton, 2004). Other
issues such as investor rights and their protection from local environmental laws have
generated concern. For example, in early 2005, Ecuador abandoned these negotiations
temporarily when popular protests brought down its president for the second time in three
years, in part due to public resistance to a deal seen to be serving the interests of just a
few exporting industries (Latinnews.com, 5/29/05).

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3.6.4 CACM
The Central American countries were the most interested in this sort of deal with the
United States since they have the strongest trade dependence on the US market,
averaging 40% of their exports. Furthermore, their economies are much more closely
linked to the United States through investment and immigration flows than the rest of the
Latin America. After complying with neoliberal reforms during the early 1990s and
recovering from civil wars in El Salvador, Guatemala and Nicaragua, Central America
was hopeful for a path to return it to faster economic growth (del Aguila, 2001).
Nonetheless, their economies have grown on average at 3% until 1998, and even slower
since, averaging 2.5% until 2003, barely above their demographic growth (Erikson,
2005).

Even if it is a very slow one, much of this recovery has been thanks to the conversion of
these economies from agricultural exporters to textile and electronic manufacturing
platforms for Asian companies to export to the United States (Erikson, 2005). These
sectors have been pushing very strongly for accepting the FTAA as a way to both reduce
their handicap with Mexican maquilas and Chinese exporters, their competitors in the
American market (Gouvea, 2002). Traditional business groups also expected gains from
better access for some of their agro-industrial products (IADB, 2003, p.42).

When Brazil (in the name of Mercosur) managed to establish the mechanics of the FTAA
negotiations as a single undertaking and simultaneously denied any possibility for the

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least developed countries in the FTAA to have longer periods for liberalizing their trade,
the Central American countries felt that a bilateral deal with the United States would be a
better option (Rivas-Campo et al, 2003). They thus secured the Central American Free
Trade Agreement (CAFTA) with Washington in just two years (2003-2005).

Such bilateral deal, framed in a great power asymmetry, cost them a great deal, as market
access in agriculture to the US is limited (i.e. sugar) and the rules of origin for the textile
and electronic sectors effectively convert those plants into processing centers for
American inputs and not of much Asian ones any more (Erikson, 2005). In spite of such
important limitations, this agreement is judged preferable by the Central American
countries because it might increase their exports sooner and perhaps faster than a less
likely FTAA. In a manner relatively similar to the Andean countries, this PTA with the
US has been slowed by concerns of local legislatures to modify regulatory and trade laws
to comply with American conditions. By March 2006, only El Salvador had ratified the
agreement and it remained in discussion in the other Central American countries.

3.6.5 Mexico
These Latin American groupings have not been alone in refocusing their trade policy
towards a sort of inter-regionalism with emphasis on preferential access in the aftermath
of an economic crisis in Latin America. Mexico, just after achieving the NAFTA accord
with the US and Canada was crashed by a massive economic crisis in 1995. Again, the
reading of the causes of that crisis was that regarding trade policy a stronger search for

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more markets should be done (Bulmer-Thomas, 2001). Looking into its “natural” sphere
of influence, Mexico signed Nicaragua up for a preferential trade deal in 1996, started
negotiations with Panama, and the CACM as a whole, reaching levels of 80% of the trade
done duty-free (SELA, 2004, p. 16). Later, in 1997, it asked Peru and Ecuador for similar
agreements. While on the outside, these deals might provide little growth to Mexico’s
export industries; they contributed to increases in trade for those sectors of Mexico,
which are not competitive in NAFTA (Gouvea, 2002). Furthermore, it helped Mexico to
diversify the content and destination of its exports, as well. Another important lesson
drawn from the crisis of 1995.

Just as in the previous cases, the new export industries of Mexico achieved a stronger
influence in the government’s trade policy after the crisis of 1995. Unlike in NAFTA,
when service sectors which had benefited greatly from the neoliberal reforms of President
Carlos Salinas and were seeking to galvanize their control of the economy through
international deals that would freeze the reforms into place, these new promoters of
regional agreements were agricultural and “non-maquilas” industrial domestic firms
searching for markets abroad (Gwyne, 2004).

We should also consider the incentives provided for the other countries to sign these
preferential trade agreements. Mexico had a strong crisis, which produced an important
contraction in domestic demand, strongly reducing imports during 1995 and 1996.
Central American countries had Mexico as an important destination for their exports and

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were consequently affected by the crisis there, especially when Mexico also used
protectionist measures to further reduce its imports, increasing its average tariffs from 9%
to 13% between 1994 and 1998, and again to 17% by 2003 (Estevadeordal, 2003).
Having an agreement with Mexico would then protect these countries from future waves
of protectionism in case there were new crises and gained them exceptions from the
increased protectionism. After losing markets in North America due to NAFTA, the
increased protectionism in Mexico after its economic crisis made them convinced of the
benefit of these deals (Erikson, 2004).

Mexico had been a successful early reformer but with growing “reform fatigue” (Walton,
2004). Opposition to NAFTA there was mostly in the terms of getting closer to the
United States and consequently further from Latin America (Madrid, 2003). The
economic crises of 1995 had also shown the downside of several of the neoliberal
reforms that were contemporary to trade liberalization, such as banking deregulation and
the reduction of social insurances. The Latinobarometro polls for those years showed in
Mexico an increasing disapproval of pro-market reforms, with 65% opposing the
privatizations plans for the banking and energy sectors, 58% opposing the privatization of
social insurance and 79% demanding more distance from the United States in foreign and
economic policy (Lora et al, 2004). Thus, there was an increasing disenchantment with
neoliberalism and the government tried to sell these agreements as part of a strategy to
“rebalance” the policy mix used to develop the country (Kurtz, 2004). Besides the
agreements mentioned before, it signed since 1996 others with Chile, the European

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Union, Japan, the European Free Trade Association, Israel and is still negotiating more
with Panama, Peru, Ecuador and Trinidad and Tobago.

3.6.6 Chile
Another example of an early reformer, Chile, is even more telling of the effect of
economic crises. For example, Chile has signed since 1998 PTAs with Peru, the Central
American Common Market (CACM), Canada, The European Union, United States and
Korea. The margins of preference in the PTAs that Chile has signed with developing
countries are important but not as significant as those obtained with its industrialized
partners. That is related to the fact that the offers presented by Chile to Peru, the CACM
and Korea has been more modest than those given to the EU, Canada and the United
States (Chumacero et al, 2004).

For instance, with Peru, the agreement only covers 10% of the trade, focused on
manufactures that both countries produce and trade little of. Instead, it focuses on
investor rights, as Chilean companies are important investors there (airlines, mining,
transportation, etc). The trade has accordingly increased very little (DIGEN, 2005, p. 17).
With the CACM, it is a similarly limited arrangement and this time more focused on
diplomatic and economic cooperation (DIGEN, 2005, p. 18). Instead, the one accorded
with the EU covers over 80% of the bilateral trade as well as regulations on “new” trade-
issues such as services, procurement, property rights and professional services. The
concessions obtained from the EU have been very important, especially for wines, fruits

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and some processed foods. As Chile is not a relevant cereal or meats exporter, the EU
was able to accommodate those demands (Chumacero et al, 2004). The trade with the EU
has then expanded rapidly, growing by 20% per year in 2004-5, allowing for more
participation of Chilean non-traditional exports (furniture, textiles and ceramics)
(DIGEN, 2005, p. 35).

That period has coincided with much lower growth in Chile, which after its recession of
1999 never achieved sustained rates of more than 3%, compared to the 7.5% average of
the thirteen years before (1985-1998). What had been a “miracle” economy became one
more example of “muddling through” Latin style (Weyland, 2004). For an export-led
experiment in market economics as Chile, then economic crises abroad are also a direct
threat to the path chosen for development.

When one considers this preoccupation in the context of the domestic effect of such slow-
down, with unemployment rising from 6% to 10% between 1998 and 2003, poverty up
from 12% to 19% in the same period and growing popular anger to neoliberal policies
such 65% opposition to privatized utilities, 72% against privatized social security (Lora
et al, 2004), the idea of “selling” more trade liberalization in terms of the reciprocal
access achieved by preferential trade agreements is quite substantial. After all, only trade
liberalization is a policy supported by strong majorities in Chile and through Latin
America, as long as it exempts agreements with the United States (Baker, 2003). Keeping
that perspective in mind, one can see why precisely the most successful of the Latin

155

American economies have been the most enthusiast promoters of preferential trade
agreements in the last years.

3.6.7 Assessment of the Latin American PTAs

Revising again the traditional theories used to explain the growth of regionalism in the
developing world in light of this evidence from Latin America, their explanatory power
seems quite limited. For example, a traditional argument could be that countries feeling
discriminated would seek to join a preferential trade agreement not to lose markets for its
exports. This is not the case here as it was one of the “discriminators” (Argentina, as a
member of Mercosur), which sought Chile’s entry, a “discriminated country”, for
example. The same applies to Mexico, a member of NAFTA, seeking to sign agreements
with Central American and Andean countries.

Another traditional argument is that growing intra-industrial trade would lead to a
preferential trade agreement as the costs of negotiating it go down in terms of industrial
sectors’ adjustments. In fact, the level of intra-industrial trade between Chile and
Mercosur prior to this signing was only 10% and completely irrelevant for Bolivia
(Gwyne, 2004). Similarly, that sort of trade was almost inexistent between Mexico and its
Southern neighbors. And contrary to what other theories on the causes of regionalism
would argue, Mexico did not add important markets to its economy there but some where
it could have a rapid insertion for some of its industries, which had not benefited from

156

NAFTA. And finally, the way to cement reforms in Mexico further was not to sign these
agreements with Central American or Andean countries, not even with the EU, EFTA or
Japan since NAFTA was already in place.

Returning to those traditional arguments for regionalism, Chile could be said to be
expanding its export markets by signing some of these agreements but why now and not
before. Something did happen inside Chile that pushed the country into signing those
deals. After all, it had had an export-led economy for over two decades when it started
looking for PTAs aggressively after 1999. The domino explanation for PTAS also
doesn’t explain Chile’s initiatives with the EU, EFTA or United States since these had
been in place for a long time already and were not turning particularly protectionist
towards Chilean imports during the late 1990s. Chile, a textbook case of a primary goods
exporter to industrialized countries (and East Asia), certainly is not a country with any
significant intra-industrial trade with them and therefore, those grounds for PTAs are also
discounted.

The growing “reform fatigue” made further pro-market reforms difficult if not impossible
and required from domestic leaders the generation of a better economic status quo
immediately. That is why the invitation to associate Chile, Bolivia and the creation of
some policy coordination inside Mercosur were made. Large domestic companies that
had become successful exporters by then, plus multinationals that had taken advantage of
the earlier “open-regionalism” phase lobbied strongly for this measures as a way to

157

increase their profits (Phillips, 2003). The fact that the Mercosur governments listened to
them shows that under the situation of distress in Argentina, for instance, during the crisis
of 1995, a different rationale could be advanced for regionalism. And one cannot
underestimate the power of symbolic slogans, such as the ideas of “Latin American
Unity” and of building a regional trade initiative on the notion of shared values and
tastes. The domestic firms that were successful exporters inside the Southern Cone as
well as the strategy of the newly located multinationals there are according to this same
principle of common identity and tastes (IADB, 2003, p. 21).

3.7. Conclusions

The evidence shown here indicates that some of the causes of regionalism in these two
important areas of the developing world hardly fit the current theoretical models. The
irruption of another phenomenon such as large economic crises in many of these
countries in East Asia and Latin America has naturally had an impact in how trade policy
is designed and accomplished there.

The patterns that can be observed from this paper is that previous regionalist endeavors
such as ASEAN, AFTA, APEC in Asia and Mercosur, the Andean Pact and the Central
American Common Market are either dissolved into policy discussion forums, continue
existing much weaker than before or are reconsidered as platforms from which to bargain
with extra-regional partners. The long recommended prescriptions of policy coordination
and further integration to recover from economic crises is not followed. Nonetheless, they

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cannot be dismissed yet given their political usefulness to negotiate with others and
serve as identity focal points.

The other pattern that can be seen here in both regions is that domestic fallouts from the
economic crises in the 1990s do play a role in promoting faster and stronger results in
terms of export growth that market reforms provided in the time prior to these crises.
That pressure also works to limit, which PTAs can be formed and which cannot, as is the
case of the FTAA and several Asian bilateral deals detailed before. Another way the
crises have modified PTAs is by imprinting in them a clear political design that
distinguish them from the standard notion of simply freeing trade and emphasize other
concerns of developing countries, such as technological cooperation and regional rules to
harmonize exchanges.

East Asia and Latin America are clearly different regions but both have followed these
trends that current theories of regionalism by emphasizing solely global pressures or
economic structures miss out by not observing the politics that frame these agreements as
well as the domestic processes of these countries. This paper only considered the
consequences from economic crises in these regions but other considerations can enrich
this analysis. The clearest one would be a security issues, such as the United States-led
war against terrorism.

159

At the more theoretical level, there are two insights that can be extracted here. One is
that single-events, such as large economic crises, can alter the way countries relate to
others beyond the short term as their understandings of international exchanges are
modified. The second is that the literature on regionalism, heavily dependent on
neoliberal institutionalism, may be having an excess of path dependence within itself.
After all, path dependent processes, such as trade liberalization or regionalism, do not
necessarily need to be understood as having only one possible outcome. The causes for
each step in the process of regionalism, for example, can vary, and so can also its
outcomes change.

This work has not been an exhaustive analysis of how financial crises affect trade policy
in developing countries, but one that complements other works looking at more short-
term reactions to crises. While in the very short term, conflict arose in many of the most
important existing regional trade initiatives, and increased levels of protection may have
spread across the developing world, especially among the most affected countries, the
longer-term response is one of creating new forms of cooperation, via preferential trade
agreements with other developing or developed economies.

The evolution of the reactions in regards to trade policy of developing countries to the
financial crises of the 1990s can be worth then as a venue to study how two different
aspect of their economic integration to the global economy (financial and trade flows)

160

interact. That might contribute to build a more realistic understanding of the
international economic policies of developing countries in today’s realities.

161

3.8. Appendix 1
Table 10: Bilateral Agreements Asia-Pacific

Countries Type of agreement Status Year
Singapore-Australia Free Trade Area Under Negotiation / Signed 00/03
Singapore-Canada Free Trade Area Under Negotiation 2001
Singapore-Chile Free Trade Area Under Negotiation 2000
Singapore-Japan New Age Econ. Partner. Signed 2002
Singapore-Mexico Free Trade Area Under Negotiation 1999
Singapore-New Zealand Closer Economic Partner Signed 2001
Singapore- Korea Free Trade Area Proposal
Singapore-Chile Free Trade Area Under Negotiation 2000
Singapore-Taiwan (China) Free Trade Area Proposal/Study 2002
Singapore-USA Free Trade Area Under Negotiation / Signed 00/03
Korea – Australia Free Trade Area Official Discussion 2000
Korea-China Free Trade Area Proposal/Study
Korea-Chile Free Trade Area Under Negotiation / Signed 98/02
Korea-Japan Free Trade Area Official Discussions/study 1998
Korea-Mexico Free Trade Area Official Discussions/study 2000
Korea-New Zealand Free Trade Area Official Discussions/study 2000
Korea-Thailand Free Trade Area Proposal/Study 2001
Korea-USA Free Trade Area Under Negotiation 2001
Japan-Canada Free Trade Area Proposal/Study 2002
Japan-Chile Free Trade Area Official Discussions/study 2000
Japan-Mexico Free Trade Area Official Discussions/study 1998
Japan-Thailand Closer Economic Partner Proposal/Study 2002
Hong Kong -New Zealand Closer Economic Partner Official discussion 2001
Thailand –Australia Free Trade Area Under negotiation 2002
Thailand-Croatia Free Trade Area Proposal 2001
Thailand-Czech Rep. Free Trade Area Proposal 2001
Thailand – India Free Trade Area Proposal 2002
USA-Philippines Free Trade Area Proposal 2002
AFTA Free Trade Area Implemented 1992
AFTA+CER Closer Economic Relations Official discuss/Study 1999
ASEAN+China Free Trade Area Negotiation 2001
ASEAN+India Regional Trade Agreement Proposal 2002
ASEAN+Japan Comp. Econ. P'nership Official Discussions 2002
ASEAN+ Korea Free Trade Area Official discussions 2002
Singapore+EFTA Free Trade Area Signed, Implem. '03 2002
ASEAN+3 Free Trade Area Official discuss/Study 2000
EU+ASEAN Trans Regional Trade Initiative Proposal 2003
Japan- Korea -China Free Trade Area Official discuss/study 2000
Pacific 5 Free Trade Area Proposal 1998
Notes: EFTA: Switzerland, Iceland, Liechtenstein, and Norway.
Pacific 5: Singapore, Australia, New Zealand, United States, and Chile.
ASEAN: Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines,
Singapore, Thailand, Vietnam.
ASEAN+3: ASEAN plus Japan, Korea, and China.
AFTA: ASEAN Free Trade Area.
CER: Australia-New Zealand Closer Economic Partnership.
Source: World Bank, 2004, “East Asia Integrates”, Washington DC. (p. 42-43).

162

3.9. Appendix 2
Table 11: Bilateral Agreements in Latin America

Completed Agreements (Year Signed) Negotiations in Progress
Intraregional Agreements Intraregional Agreements
Chile-Mercosur (1996) Mercosur-Andean Community (1998)
Bolivia-Mercosur 1996) Costa Rica-Panama
Mexico-Nicaragua (1997) Mexico-Panama
Central Amer. Com. Market –
Dominican Rep. (1998) Mexico-Peru
Chile-Peru (1998) Mexico-Ecuador
Chile - Central American
Common Market (1999) Mexico-Trinidad and Tobago
Chile-Mexico (1999)
Mexico-Northern Triangle of Central
Amer. (2000) North-South Agreements
Caribbean Community-Dominican
Republic (2000) Free Trade Area of the Americas (FTAA)
Costa Rica-Trinidad and Tobago
(2002) Mercosur-European Union
El Salvador-Panama (2002) Chile-European Free Trade Association
North-South Agreements Caribbean Community-European Union
Chile-Canada (1996) Central America–4-Canada
Mexico-European Union (1999) Central Amer. Com. Market-United States
Mexico-European Free Trade
Association (2000)
Mexico-Israel (2000) Mexico-Japan (2004)
Costa Rica-Canada (2001) Chile-Republic of Korea (2004)
Chile-European Union (2002)
Chile-United States (2003)
Source: Inter-American Development Bank (2002) and World Bank. 2005. Global
Economic Prospects: Trade, Regionalism and Development.

163

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Documents

Artigo do Senhor Ministro de Estado das Relações Exteriores, Embaixador Luiz Felipe
Lampreia, no Jornal O Estado de Minas. "O Itamaraty e os exportadores" Minas Gerais,
7/30/1998

Acesso a mercados: Um Esforzo a longo prazo, RELATÓRIO ESPECIAL Nº 136/99
Emb. José Alfredo Graça Lima, 8/24/1999

201

Aula inaugural do Ministro das Relações Exteriores, Embaixador Luiz Felipe Lampreia,
na Cátedra Mercosul do Instituto de Estudos Políticos de Paris,"Que futuro para o
Mercosul"? Paris, 10/27/1999

Artigo do Senhor Ministro de Estado das Relações Exteriores, Embaixador Luiz Felipe
Lampreia, no Jornal "O Globo", "Política externa não é oportunismo", 10/19/ 1999.

Artigo do Senhor Ministro de Estado das Relações Exteriores, Embaixador Luiz Felipe
Lampreia, no jornal Folha de S. Paulo. "Diplomacia, jogo duro" .A palavra diplomacia
evoca conversas suaves, em salões elegantes. É um estereótipo hoje distante da
realidade. 3/7/1999.

Exposição do Embaixador Luiz Felipe Lampreia, Ministro das Relações Exteriores do
Brasil, no XX Aniversário do Conselho Argentino para as Relações Internacionais,
Buenos Aires, "CONFIABILIDADE, CRÍTICA E AUTONOMIA", 6/16/1998.

Discurso do Senhor Presidente Fernando Henrique Cardoso por ocasião da XVII Reunião
do Conselho do Mercado Comum, Montevidéu, 12/8/1999.

Discurso do Senhor Presidente da República no jantar oferecido ao Presidente Carlos
Saúl Menem, da República Argentina, Brasília, 10/14/1999.

202

Discurso do Presidente da República, Fernando Henrique Cardoso, no almoço com o
Presidente do México na Fiesp, São Paulo, 4/28/1999.

Interviews

ADEFA Argentine Association of Automobile Industries
ANFAVEA National Association of Automobile Industries (Brazil)
FITA Argentine Federation of Textile Industries
ABIT Brazilian Textile and Apparel Industry Association
CIC Confederation of Footwear Industries (Argentina)
ABICALCADOS Brazilian Association of Footwear Industries

Jorge Campbell, Secretary of Foreign Economic Relations of Argentina, 1995-1999.
Alieto Guadagni, Secretary of Industry of Argentina, 1997-1999
Carlos Bianchi, Secretary of Trade, 1999-2001.
Gabriel Bottino, Researcher at the Industrial Negotiations Committee for Mercosur,
1997.

Beatriz Nofal, Econaxis Consulting, Mercosur Vehicle Industry analyst, Sao Paulo.
Jose Botafogo Goncalves, Brazilian Ambassador to Mercosur, 1995-1999.
Alfredo Graca Lima, Brazilian Chief of Negotiators for Mercosur, 1999-2001.

203

Newspapers (From January 1st, 1995 to December 2nd, 2001)

Argentina: La Nación, Clarín, Página 12.

Brazil: Journal do Brazil, O Globo, Folha Na São Paulo, Gazeta Mercantil.

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Creator Heidrich, Pablo (author)

Core Title Financial crises and trade policy in developing countries

School College of Letters, Arts and Sciences

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