From iatp@igc.apc.orgSat Mar 18 19:11:28 1995 Date: Fri, 17 Mar 1995 15:30:30 -0800 (PST) From: IATP To: Recipients of conference Subject: NAFTA & Inter-Am Trade Monitor 3/17 NAFTA and Inter-American Trade Monitor Produced by the Institute for Agriculture and Trade Policy Friday, March 17, 1995 Volume 2, Number 7 ______________________________________________ Headlines: - TROUBLE AHEAD FOR NAFTA AND THE "BIG EMERGING MARKETS"? - EXPANDING NAFTA? FOCUS ON CHILE - FACING CRISIS, ARGENTINA ACCEPTS IMF LOANS - BRAZILIAN REAL DEVALUED - ZEDISHOCK - EFFECT OF WAR ON RESIDENTS OF CHIAPAS - FLORIDA TOMATO GROWERS SEEING RED - U.S. MEAT EXPORTS SLASHED ______________________________________________ TROUBLE AHEAD FOR NAFTA AND THE "BIG EMERGING MARKETS"? While voicing continued faith in NAFTA, U.S. Undersecretary of Commerce Jeffrey E. Garten acknowledged that the Clinton administration has scaled back its expectations for the 10 countries it calls the "big emerging markets" or BEMs -- Mexico, Brazil, Argentina, Poland, Turkey, China, South Korea, Indonesia, India, and South Africa. Mexico's peso devaluation, pressure on Brazil's new currency, severe economic problems in Argentina, imminent bankruptcy in Turkey, divisive elections in India, and steeply declining foreign investment in China mean that the "prospect of a prosperous BEM was shaken in just a few weeks," said Garten. According to Garten, the Mexican crisis has made other BEMs more cautious and quicker to deal with economic and currency difficulties. Still, he says, "We ought to realize we're going to see recurring disturbances (in these countries) and we've got to learn how to deal with instability." The administration will move ahead with its plans for expanding free trade, and has invited trade ministers from all Latin American countries to Denver in June to plan for hemispheric free trade. Milan Ruzicka, "US Committed to Nafta Despite Perils of Peso," JOURNAL OF COMMERCE, 3/13/95; Graham Bowley, "Shockwaves Spread Beyond Latin America," FINANCIAL TIMES, 3/13/95 EXPANDING NAFTA: FOCUS ON CHILE In a March speech, U.S. House Democratic Leader Richard Gephardt signaled problems ahead for Chile's admission to NAFTA. Gephardt said that, given the financial turmoil in Mexico, "I don't believe that we ought to be trying to do other free-trade agreements with Central and South America." Gephardt had also opposed passage of NAFTA. The Clinton administration plans formal talks on Chile's admission to NAFTA later this year. Chile had seemed willing to sign on to the environment and labor "side accords" of NAFTA. However, U.S. Republicans say that there will be no side accords for Chile, setting up an immediate conflict within the U.S. Congress. Overall, Chile trades more than half the value of its gross domestic product. Its fruit, wine, forestry products, fish meal, and salmon reinforce the diversity of Chile's exports. Agricultural and fishing products make up only 15 percent of Chilean exports, with mining accounting for 41 percent and industry for 44 percent. The government recently created a fund for agricultural export promotion, in response to a serious agricultural crisis that resulted in a 13 percent decline in agricultural profits last year. The hardest hit agricultural sectors are those producing food and basic goods for the domestic market. A flood of dollars, resulting from foreign investment in stocks and higher prices for Chilean commodities (such as copper), strengthened the Chilean peso in 1994. Chilean exports to other Latin American countries increased by 26.7 percent between January and October 1994, with sales to Asia rising by 21 percent, exports to North America rising by 8.4 percent, and exports to Europe growing by 1.5 percent during the same period. The Chilean peso appreciated by about nine percent against the dollar during 1994, with Chile showing a trade surplus of about $600 million. Chile's gross domestic product (GDP) grew by 4.5 to 5 percent in 1994, and growth of six percent is expected in 1995. Inflation is expected to be eight percent in 1995 (down from nine percent in 1994), and unemployment is expected to average 5.5 percent (down from 6.5 percent in 1994). The single-digit inflation rate for 1994 was even lower than the government projections of 10-11 percent and represented a dramatic drop from the 12 percent inflation rate of 1993. Chile is also negotiating with Mercosur (Argentina, Brazil, Paraguay and Uruguay), aiming for a five-nation free trade zone within 10 years. Source: Stephen Fidler and George Graham, "Nafta Aims for Swift Chilean Entry," FINANCIAL TIMES, 12/10-11/94; Kevin G. Hall, "GOP Trade Leader: No Side Accords for Chile," JOURNAL OF COMMERCE, 12/15/94; "More Growth, Less Inflation Foreseen for 1995," INTERPRESS SERVICE, 12/21/94; Matt Moffett, "Chile Faces Embarrassment of Riches as Dollars Flood In, Boosting Peso," WALL STREET JOURNAL, 12/16/94; "Latin American Market is the Fastest Growing," INTERPRESS SERVICE, 12/13/94; David Piling, "Global Player," U.S./LATIN TRADE, 1/95; Violetta V. Argueta and Juan P. Llambas, "Chile: Business News Watch," LATIN AMERICAN LAW & BUSINESS REPORT, 1/31/95; "Agricultura Chilena Vive la Peor Crisis de los Ultimos 20 Aos," SUCESOS, 1/12/95; Gephardt Opposes Further Latin America Trade Pacts," WALL STREET JOURNAL, 3/14/95. FACING CRISIS, ARGENTINA ACCEPTS IMF LOANS On March 13, Economy Minister Domingo Cavallo announced agreement on an $11 billion loan package, including $2.4 billion from the International Monetary Fund (IMF), $1.3 billion from the World Bank, $1 billion from regional development banks, and $2 billion from bond issues. He said taxes will increase to help achieve a $4.4 billion fiscal surplus. In the recent past, Argentina had rejected IMF loans, saying that Argentina did not want IMF economic supervision and conditions. With Argentina's May 14 presidential election on the horizon, President Carlos Menem's government sent to Congress a $3.3 billion austerity package that will cut spending by $1 billion and raise taxes by $2.3 billion. Economy Minister Domingo Cavallo said the tough measures are necessary to head off a 1995 budget deficit and restore investor confidence in Argentina. The cuts follow January's $1 billion of budget cuts. In the aftermath of the Mexican peso devaluation, the Argentine stock market lost more than 30 percent of its value, as did many government bonds. Bank deposits fell by $4 billion. Alto Paran became Argentina's first major company in default since the 1980s when it said on March 1 that it could not make payments due. The default will make it more difficult for other Argentine companies to refinance $1 billion in corporate debt that comes due this year. Alto Paran is owned by international investment and financial institutions, including Citicorp. As the government instituted privatization and other economic measures in recent years, inflation fell sharply, the gross domestic product grew, and official unemployment figures doubled, to more than 12 percent last year. An additional 10.4 percent of the work force is under-employed, according to the National Institute of Statistics and Census. The government has proposed labor law changes, including cuts in social security and disability benefits paid by employers, extension of working hours, and easier procedures for firing workers, as an incentive to businesses to hire more workers. David Pilling, "Drive to Enact Argentine Austerity," FINANCIAL TIMES, 3/2/95; "Major Argentine Paper Company Defaults," NEW YORK TIMES, 3/2/95; Calvin Sims, "Argentina Booming, Bypassing Jobless," NEW YORK TIMES, 2/5/95; Marcela Valente, "Crisis Looms Among Work Force," INTERPRESS SERVICE, 2/22/95; Timothy L. O'Brien and Thomas T. Vogel Jr. and Michael R. Sesit, "Argentina Seeks $3 Billion Credit to Boost Banks," WALL STREET JOURNAL, 3/14/95; "Argentina Announces Package of Financing to Bolster Peso," NEW YORK TIMES, 3/14/95. BRAZILIAN REAL DEVALUED Brazil's Real currency fell more than two percent against the dollar immediately after a March 6 central bank announcement of a new exchange rate policy and a two-step devaluation. Exporters welcomed the announcement of "floating bands" for the Real, hoping it will reverse the trade deficit that the country has run since November. The band will be set at 86-90 centavos to the dollar until May 1 and widened to 86-98 centavos to the dollar on May 2, representing a maximum possible devaluation of more than 15 percent. On March 9, Brazil's central bank intervened 32 times to support the Real and keep it trading above the 90 centavo floor, and then changed the band's lower limit to 93 centavos. Finance Minister Pedro Malan said the change was "not a devaluation in the conventional sense of the word," since the Real was supposed to be equivalent to the dollar when it was introduced and its initial appreciation against the dollar was unplanned. President Fernando Henrique Cardoso, who took office on January 1, has proposed major constitutional reforms and vetoed an increase in the minimum wage from 70 Reales (about $80) to 100 Reales per month. About 20 percent of Brazilians receive the minimum wage. Cardoso said that the increase would bankrupt the government social security system, and said he must make budget cuts to avoid a deficit. Congress also voted to more than double its own salaries, bringing them to 120,000 Reales yearly, about 50 times the average Brazilian salary of 5,200 Reales. Congressional members also have medical, postage, and most telephone bills paid, and get rent subsidies and three free air flights home per month. The constitutional changes proposed by Cardoso include provisions for privatizing state companies, lifting limitations on foreign- controlled companies, simplifying the tax system, and implementing changes in the national social security and retirement system. Angus Foster, "Brazil Allows Real to Fall," FINANCIAL TIMES, 3/7/95; Leslie Crawford and Angus Foster, "Mexican, Brazilian Currencies Under New Pressure," FINANCIAL TIMES, 3/10/95; George Graham and Angus Foster, "Brazil Brings in Emergency Support for Real, US Hails Mexican Resolve Over Tough Austerity Measures," FINANCIAL TIMES, 3/11-12/95; "Minimum Wage Hike Vetoed," CENTROAMERICA, 3/95. ZEDISHOCK Although neither business nor labor would sign on to the new economic plan, President Zedillo announced a new economic emergency package on March 10. Dubbed "Zedishock" by Mexicans, the package provides for immediate price hikes of 20 percent for electricity and 35 percent for petroleum, to be followed by monthly price hikes for the next year. The value-added tax was increased from 10 percent to 15 percent. Family income is expected to drop by 25 percent, and inflation is forecast at 42 percent during 1995, with negative economic growth of two percent predicted. The minimum wage is set to increase by 10 percent. Thirteen years after Mexicans adopted austerity measures to cope with the 1982 debt crisis, dissatisfaction with the new measures was evident. According to Liliana Flores, an economist who leads the El Barzon "can't pay, won't pay" agricultural movement, "We are all indebted to the banks -- we have mortgages, car loans, credit card debts, and we stand to lose everything we own." The prices of basic grains -- except corn -- are expected to rise by 42-50 percent, according to government agricultural officials. The price of tortillas, bread, and milk will be subsidized. The peso began to rebound, increasing 18 percent against the dollar on March 10, after the plan was announced. Brazilian, Argentinian, and Chilean stock markets followed the rebound of Mexico's markets, with increases in market indices of 25.6 percent, 12.8 percent, and 9.4 percent, respectively. "The markets have a manic-depressive nature," commented a Brazilian newspaper editor. Mexico has also advised the World Trade Organization (WTO) that it will increase tariffs to protect its apparel industry. The average tariff for textiles will rise from about 20 percent to about 35 percent, the upper limit under WTO rules. Tariffs on footwear, confectionery goods, and leather products will also rise. U.S. retailers operating in Mexico criticized the action as a virtual embargo on Asian goods, which the U.S. retailers sell. Roberto Gonzalez Amador, "Plan Economico - Severo Ajuste," LA JORNADA, 3/10/95; Matilde Prez, "Nuevos Precios en Granos Basicos," LA JORNADA, 3/12/95; Kevin G. Hall, "Mexico Tells WTO of Plan to Raise Tariffs on Apparel," JOURNAL OF COMMERCE, 3/3/95; Diane Solis and Craig Torres and David Wessel, "Salinas May Be Leaving Mexico; Markets Gain on Austerity Plan," WALL STREET JOURNAL, 3/13/95; Leslie Crawford, "Anger on the Streets as Mexico Swallows the Economic Medicine," FINANCIAL TIMES, 3/13/95; James Brooke, "Latin Rallies Follow Gains in Mexico," NEW YORK TIMES, 3/13/95. EFFECT OF WAR ON RESIDENTS OF CHIAPAS On March 13, Mexican President Zedillo announced that troops will be moved out of villages formerly occupied by the Zapatista National Liberation Army (EZLN), but will continue to patrol roads to ensure their own safety. The announcement followed by one month Zedillo's earlier order that troops stop pursuing the EZLN. The first order had little impact on residents of Chiapas, an estimated 20,000 of whom are living in hiding from the Mexican army. According to human rights organizations, the state of Chiapas has been militarized, with soldiers suspending all individual constitutional liberties. The presence of the military has altered the daily lives of Chiapans. They face army checkpoints when they enter or leave occupied communities. People working in their cornfields are stopped, interrogated about the EZLN, sometimes threatened. Soldiers enter people's homes to question them about what they know of the Zapatistas. In one community, Ejido Santa Elena, the people fled when the military marched in. Soldiers found them in the mountains and forced them to return. Now soldiers check each person who leaves the village to gather firewood, to be sure they are not carrying food to the EZLN. Those who leave are given a time to return. The school has been turned into a jail. Soldiers give bags of Maseca to the village women, ordering the women to make tortillas for them, and take the villagers' chickens for their meals. The village women are also required to wash the soldiers' clothing. Eighty Mexican observers who traveled through Chiapas in early March at the request of the National Mediation Commission (CONAI) concluded that the government-military strategy closely corresponds to the strategic hamlet program implemented in Vietnam and Guatemala. Soldiers entering communities sympathetic to the Zapatistas systematically destroy seed grain, tools, food, and household goods and empty or pollute water supplies. Some of the communities havebeen repopulated with peasants more sympathetic to the government. The Rural Association of Collective Interest - Independent (ARIC - Independent) voiced the strong objections of the segment of the indigenous population that rejects the army's attempts to control the territory: "The government supports only those who obey. But we are different. We do not want food packages, we want to participate directly in the solution to our problems. We are working people, and we want to be allowed to work, not to be helped as they think that it is necessary to help us. We do not speak their language, but we have capacities. We are tzeltales, not idiots." Tim Golden, "In Gesture to Rebels, Mexico Will Pull Back Its Troops," NEW YORK TIMES, 3/15/95; "Military Occupation in Chiapas Persists, 20,000 Displaced," LA JORNADA, 3/10/95; Juan Antonio Zuniga, Montanas del Sureste," LA JORNADA, 3/12,13/95; Oscar Camacho Guzman, "The Army's Blockade and the Detentions in the Lacandon Jungle Continue," LA JORNADA, 3/13/95; Jos Gil Olmos, Ejido Santa Elena Is Under Military Rule, Complain Inhabitants," LA JORNADA, 3/13/95; Sergio Zermeno, "Lacandonia: Testimonios de la Soberana," LA JORNADA, 3/13/95. FLORIDA TOMATO GROWERS SEEING RED The peso devaluation has given Mexican growers added incentive to export all the tomatoes they can, since even low dollar prices bring more than selling domestically for pesos. The price for a 25 pound box of Mexican tomatoes dropped from $14 to $2.50 in the U.S. after the devaluation, rebounding to $6-7. Wholesale price fluctuations rarely showed up in supermarket prices, however. Florida tomato growers have been devastated by competition from lower-cost Mexican tomatoes since the passage of NAFTA. Florida's share of the fresh-tomato market in the U.S. fell from 73 percent in January 1993 to 57 percent in January 1994 and to 36 percent in January 1995. Florida is the leading U.S. producer of fresh tomatoes, with the $600 million earned from last year's crop last year placing tomatoes second to oranges as a Florida crop. While California and Mexico have complementary tomato seasons, Florida and Mexico are direct competitors, especially during the winter. California exports tomatoes to Mexico. Jane Bussey, "Mexican Growers Boost Tomato Shipments," MIAMI HERALD, 2/27/95; Bob Walter, "NAFTA Hits the Spot for Farm Exports," SACRAMENTO BEE, 1/22/95. U.S. MEAT EXPORTS SLASHED Because Mexico is one of the largest importers of U.S. meat, U.S. exporters are in deep trouble. The peso devaluation has stopped beef shipments as Mexican buyers cancel contracts, fearing that the now-expensive meat will spoil on the shelf. During the first six weeks after the December 20 peso devaluation, U.S. beef and pork exports to Mexico dropped about 80 percent. Janet Day, "Peso Crisis Hits Meat Exporters," DENVER POST, 1/31/95. _________________________________________ Produced by the Institute for Agriculture and Trade Policy, Mark Ritchie, President. Edited by Mary C. Turck. The NAFTA & Inter- American Trade Monitor is available free of charge to Econet and IATPNet subscribers. For information about fax or mail subscriptions, or other IATP publications, contact: The Institute for Agriculture and Trade Policy, 1313 5th Street SE, Suite 303, Minneapolis, MN 55414. Phone: 612-379-5980; fax: 612-379-5982; e-mail: iatp@iatp.org. 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