Mercosur – The Southern Commom Market

Purpose

The purpose of this report is to determine whether or not it would be beneficial for Venezuelan companies to become associate members of MERCOSUR (Southern Common Market). The best way for us to make this decision we must do four things. First we must get a better understanding of the and it’s economic standpoint, as well as a better understanding of what MERCOSUR is, second we must weigh the benefits and drawbacks of joining the MERCOSUR as a country, third we must determine what the benefits and drawbacks will be as a company and finally we must decide what changes will need to be made to our business as a result of joining the MERCOSUR.

Venezuelan Overview

Venezuela’s economy is highly dependent on the petroleum sector, accounting for roughly one-third of GDP, around 80% of export earnings, and over half of government operating revenues. Our GDP (Gross Domestic Product) is that of about $145.2 Billion a year in US dollars, With a GDP growth rate of about 16.4% since 2004. Their major economic sector is the service sector which accounts for about 53.4% of our income followed by the industry sector which accounts for about 46.5%. Venezuela’s annual budget is about $26.91 billion a year with expenditures totaling around $30.7 billion a year this includes capital expenditures which are about $2.6 billion a year. Venezuela’s major agricultural products are corn, sorghum, sugarcane, rice, bananas, vegetables, coffee; beef, pork, milk, eggs and fish and our major industries are petroleum, iron ore mining, construction materials, food processing, textiles, steel, aluminum and motor vehicle assembly. Their main exports are petroleum, bauxite and aluminum, steel, chemicals, agricultural products, and basic manufactures. Their current export partners are the US at 55.6% the Netherlands Antilles at 4.7% and the Dominican Republic at 2.8%. All in all this information suggests that their economy is stable however we could definitely use a boost in yearly revenue.

What is MERCOSUR (Southern Common Market?)

The MERCOSUR was created by Argentina, Brazil, Paraguay and Uruguay in March 1991 with the signing of the Treaty of Asuncion. Its ordinal purpose was to was to create a common market/customs union between the participating countries on the basis of various forms of economic co-operation that had been taking place between Argentina and Brazil since 1986.

Comprising Argentina, Paraguay, Uruguay and Brazil, the Southern Common Market – MERCOSUR represents a total population of 190 million individuals, living in an area larger than the total surface of the European continent, covering more than 12 million square kilometers. In 1993, the total Gross Domestic Products (GDP) of these four nations was approximately US$ 715 billion. Brazil has a territory of 8.5 million square kilometers and 155 million inhabitants, as well as the largest economy within MERCOSUR. Argentina, the second largest MERCOSUR nation, has 2.8 million square kilometers in area. The Argentine economy has been one of the fastest growing in the last few years. Paraguay, with 406 thousand square kilometers and a population of 4.6 million, has a growing economy. Uruguay in turn has the smallest population, calculated at some 3.1 million inhabitants, and the smallest territory in MERCOSUR – 177 thousand square kilometers.

The MERCOSUR common market involves the free movement of goods, services and factors of production between countries the elimination of customs duties and non-tariff restrictions on the movement of goods, and any other equivalent measures;
The establishment of a common external tariff and the adoption of a common trade policy in relation to third States or groups of States, and the co-ordination of positions in regional and international economic and commercial forums; The co-ordination of macroeconomic and sectoral policies between the States Parties in the areas of foreign trade, agriculture, industry, fiscal and monetary matters, foreign exchange and capital, services, customs, transport and communications and any other areas that may be agreed upon, in order to ensure proper competition between the States Parties and finally the commitment by States Parties to harmonize their legislation in the relevant areas in order to strengthen the integration process.( http://www.sice.oas.org)

Benefits and Drawbacks of Joining MERCOSUR (Southern Common Market) as a Country
Benefits

Some of the benefits for Venezuela joining the Southern Common Market are as follows. The first benefit is the creation of trade, basically what this means is that free trade areas create trade that would not have existed otherwise. As a result, supply occurs from a more efficient producer of the product. In all cases trade creation will raise a country’s national welfare. Basically what this does for consumers in the country is aid in the reduction of the cost both imported and exported goods. Another benefit of Venezuela entering the MERCOSUR would be lower transaction costs for business’s and consumers. This could prove to be very beneficial because lower costs ultimately mean that more people will purchase products and companies will be able to make more money which translates to a significant increase in the economy. Another benefit would be diminished exchange rate volatility, with gains for both large and small companies especially in the manufacturing sector with potentially greater gains for smaller companies. Again if companies are making more money the economy will reap the benefits and consumers will have more money to purchase products. Yet another benefit of joining the MERCOSUR could be Better Employment opportunities. If more jobs are created with better pay and more reasonable hours their countries consumers will be much happier they will also generate more income which helps to give the country and economic boost. It also helps in lessening the unemployment rate, and it helps to decrease the number of poverty stricken individuals and families in their country.

Drawbacks

Some of the drawbacks of entering the MERCOSUR would be Trade Diversion. Basically what trade diversion means is that a free trade area diverts trade, away from a more efficient supplier outside the FTA, towards a less efficient supplier within the FTA. In some cases, trade diversion will reduce a country’s national welfare. This could lead to our government losing all of its tariff revenue, this in turn reduces government revenue which may reduce government spending or raise government debt. One other drawback that could occur upon joining the MERCOSUR would be sudden shifts in employment what this means is that production could be shifted to lower wage nations meaning that there could be fewer jobs in our country. If were suddenly have fewer jobs in our nation that could greatly decrease our annual revenue possibly causing our economy to go into a serious decline.

Benefits and Drawbacks of Joining MERCOSUR (Southern Common Market) as a Company
Benefits

Although there are many drawbacks to Venezuela joining the Southern Common Market, there are still many benefits for a company. For example one major benefit would be that we would be among a group of countries that already have many foreign companies investing in there countries. This leads to more money for production, larger trading regions and ultimately more money in a company’s pocket. Another benefit could be reduction of high tariffs. If tariffs are decreased this means that companies will be able to import and export more products for less than what they were previously paying fewer charges means more money saved and more money earned.

One other benefit would be the ability to higher more qualified employees. If companies are able to expand their reach into other countries within the trading bloc they will be more likely to recruit employees that will benefit the company with there extensive knowledge of their foreign markets. Also for non-skilled jobs they will be able to move jobs to lower wage countries which ultimately means will save even more money and create better products.

Drawbacks

With any venture there are always drawbacks some of the drawbacks for a company would be more competitors in our market. Once a country becomes a member of MERCOSUR they will have more companies competing for customers within the Union, which could mean we will have to invest more money in marketing and research and development so that we will maintain our customers and acquire new ones. Yet another drawback could be lower tariffs resulting in increased trade with less efficient producers and reduced trade with more efficient producers that are not in the union. What this means it’s that buyers will end up paying more for poorer quality products. This could lead to consumers becoming angry and possibly not purchasing companies products. And if they aren’t making sales than their company is not making any profit and without profit simply put a company will not survive.

Steps that need to be taken upon joining MERCOSUR (Southern Common Market)

If the country decides that they should join MERCOSUR several steps must be implemented. One of the first steps would be to establish a positive relationship within other countries in the Union, if we are able to do this we will be able to do this will be able to acquire the oh so important word of mouth factor that will lead to other positive relationships with other countries and companies in the trade union. They will also need to make an effort to study and understand the different customs, cultures and general business principles of each country so as not to offend anyone and also so that they will be able to build a higher level of truth with participating countries. A company will also need to hire local professional within the participating countries hiring professionals that are intimately familiar with there countries inner workings will greatly benefit a companies future, mainly because they understand there customs better than the companies does as well as laws and regulations this can help prevent companies from angering neighboring countries and possibly violating local laws. They will also need to plan for the possibility of competitors beating us out for customers. Companies will need to make products that are specific to their partnering countries so that they will have a better chance of competing in a growing and changing market.

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