Europe's Challenge to the US In South America's Biggest Market

French President Jacques Chirac's recent 10-day tour of Latin America was rich with symbolism (echoes of Charles de Gaulle's historic 1964 visit) and substance (promotion of European and French goods and technology).

While laying the groundwork for a major conference of European and Latin American officials to be held next year, he made no bones about his ultimate objective, stating repeatedly his wish that Mercosur - the burgeoning common market of South America - look to Europe rather than the United States for future trade growth.

President Clinton has delayed until October a similar mission to the region to promote the long envisioned Treaty of the Americas. Fully 25 percent of Mercosur's imports are now supplied by the US, and as Mr. Clinton noted pointedly in his State of the Union address, Latin America is the second fastest growing region in the world, after East Asia, with 5 percent annual increases in gross domestic product (GDP) forecast for the next five years.

In light of this high-profile economic diplomacy, and the recent Mercosur agreements concluded with Chile and Bolivia, it is a good time to take a closer look at this dynamic new entity in South America.

Known also as the Southern Cone common market, Mercosur was created on March 26, 1991, when the Treaty of Asuncion was signed by Argentina, Brazil, Uruguay, and Paraguay. The Treaty guarantees free movement of assets, services, capital, and people within Mercosur; abolition of customs duties among members; and the establishment of a common external customs duty.

Mercosur became operational on Jan. 1, 1995. Last October, Mercosur's doors opened to Chile and, just last month, to Bolivia. A full customs union is to be established on Jan. 1, 2001.

In effect, Mercosur is in a period of transition comparable to that of the European Union (EU) between 1958 and 1968. The degree of economic integration that it has achieved places it - vis--vis the rest of the world - midway between NAFTA's commercial free-trade area and the EU's combination of economic integration and partially integrated foreign policy.

Mercosur's sheer economic power would be hard to overstate. With Chile and Bolivia included, it can lay claim to a GDP of $1.1 trillion, which represents three-quarters of South America's economic activity. Mercosur accounts for three-fourths of the continent's trade, nearly three-fourths of its population, and more than three-fourths of its land mass.

Some experts, however, have raised questions about whether this system truly serves the interests of its member states' consumers. They argue that the Treaty of Asuncion has encouraged free trade only in the lowest-value products of local origin, while actually deterring competition in the more sophisticated goods manufactured largely outside of the Southern Cone.

A recent World Bank report raised a stir by charging that Mercosur's economic impact has been contrary to the spirit of the Uruguay Round and recommending changes in the interpretation of Article XXV of the GATT, together with closer monitoring by the World Trade Organization.

Though initially disturbing, it would appear that this analysis does not stand up to factual analysis. Although it is true that Mercosur's member states have benefited from the creation of this common market, it is also patently obvious that outside countries have sharply increased exports to Mercosur since 1990. Thus, while imports from member states have tripled between 1991 and 1996, imports from the rest of the world also have tripled, from $25 billion to $75 billion.

Moreover, the four original members have largely run up balance-of-trade deficits over the last two years, to the benefit of its principal trading partners - the US, Europe, and Japan. If this is what the experts consider "protectionism," the protected region would seem to include most of the planet.

The story of Mercosur is still being written in new memberships and new mutual consultation mechanisms. For instance, Chile's execution of a commercial free-trade agreement with the original four member states has not ended the keen competition between the US and the EU for privileged economic partner status.

Undoubtedly, this was the subtext of Clinton's call on Feb. 26 for Chile's integration into NAFTA. The creation of a free-market corridor along the entire Pacific Coast of the Americas, beckoning toward Asia, would benefit US industry.

In fact, it is interesting to note that corporations are building factories in Mercosur with visions of export sales far beyond the Southern Cone. Automobile manufacturers in particular have understood that Mercosur represents not just a "domestic" market of 220 million consumers but a low-cost platform for world export.

This may explain why Chirac is willing to organize the Conference of 1998 between European and Latin American governments and why Clinton is willing to open NAFTA to Chile as a step toward the Treaty of the Americas.

* A Franco-Argentinean lawyer, Emeric Lepoutre practices in the Paris office and is currently based in the New York office of Jones, Day, Reavis & Pogue.