Power and Regionalism in Latin America: The Politics of MERCOSUR

Chapter Five: The Footwear Industry Dispute

95 Chapter five The Footwear Industry Dispute The devaluation of the Brazilian currency in January 1999 marked the beginning of a highly conflictive period in the Southern Cone. For the next year and a half, Argentina and Brazil were almost continuously involved in commercial disputes, triggered by recurrent unilateral restrictions on intraregional trade. The highest peak of tension between the two countries during this period occurred during the footwear industry dispute, triggered by Argentina’s decision to impose nontariff barriers on footwear imports from Brazil in August 1999. Brazil threatened to retaliate by imposing nonautomatic import licenses on over four hundred agricultural products from Argentina. Diplomatic conflict escalated as commercial friction spilled over to other sectors. Despite the confrontational stances adopted initially by the Argentine and Brazilian governments , both were soon eager to defuse tension and restore cooperation. Applying the framework developed in chapter 3, we will trace the process through which domestic interests and institutions interacted to 96 Power and Regionalism in Latin America undermine the stability of regional cooperation in the late 1990s. Like the case of the automobile crisis, the footwear industry dispute highlights the tension between domestic and systemic imperatives in the determination of national preferences and choices regarding MERCOSUR. Yet, as the analysis demonstrates, Argentina and Brazil continued to face strong strategic incentives to overcome domestic political constraints and ensure the survival and sustainability of the regional project. The Conflict The devaluation of the Brazilian currency in January 1999 severely disrupted the stability of cooperation in the Southern Cone. The abrupt shift in relative prices triggered by the devaluation raised fears in the Argentine private and public sectors that an “avalanche” of cheap Brazilian products would flood the Argentine market. Despite the almost immediate calls for protection from national producers, the Argentine government initially adopted a conciliatory position. In a meeting held in Brazil in January 1999, Presidents Carlos Menem and Fernando Henrique Cardoso agreed to create a special commission to monitor bilateral trade flows and to propose solutions for imbalances (IDB 2000). However, Argentina’s flexible stance did not last long. Argentine economic officials soon called for the establishment of “mechanisms of compensation” for those sectors that were most severely hit by the effects of the Brazilian devaluation. In Brazil, these demands were immediately dismissed. Brazilian state and private actors believed that Argentina ’s competitiveness problems were a consequence not of the shift in macroeconomic conditions in the region, but rather of the Argentine government’s “obstinate” commitment to the exchange-­ rate anchor. Tension rose further when, in April 1999, the Argentine economy minister applied antidumping duties on steel imports from Brazil (IDB 2000). The Brazilian government rejected the measure, claiming it violated regional trade commitments. In July, the focus of tension shifted to the textile sector. The Argentine Foreign Trade Commission established quotas on cotton textiles from Pakistan, Brazil, and China, claiming that imports from these countries were harming the Argentine textile The Footwear Industry Dispute 97 industry. In response, Brazil threatened to take legal action against Argentina.1 Bilateral relations further deteriorated during the second half of the year. At the end of July, Argentina passed a resolution regulating the application of the safeguards mechanism included in the ALADI within MERCOSUR.2 ALADI Resolution N. 70/87 authorized the use of safeguards measures in trade between ALADI partners when the “quantity or conditions of imports of one or several products from the region causes or threatens to cause serious damage to national producers of similar products.”3 Although Argentina’s move did not have immediate consequences , it set the stage for the future implementation of safeguards on intraregional trade, a possibility that Brazil had consistently opposed since the beginning of MERCOSUR negotiations. Consequently, the Brazilian government reacted strongly, threatening to suspend participation in all regional negotiations and “postponing” a meeting between Presidents Menem and Cardoso scheduled to take place in Brazil in August.4 Despite Brazil’s vigorous response, the Argentine economic team defended the measure and its applicability within the bloc.5 Nonetheless , only a few days after the measure was announced, Menem traveled to Brasília and, in bilateral talks with Cardoso, agreed to exempt Brazil from the scope of the measure.6 A few weeks later, however, Argentina imposed unilateral trade restrictions on imports of footwear products. On August 9, the Ministry of Economy issued a new technical rule (Resolution 508/99) requiring all footwear products entering the country to include a label with information on the manufacturing materials...