Rivalry in Mercosur resurfaces once more

When Brazil and Argentina joined hands in 1991 to form the world's third largest trade bloc they were putting behind themselves a culture of rivalry that went deeper than historic competitiveness over football.

Mercosur, which also includes Uruguay and Paraguay, gave South America's southern cone a new focus and showed to the outside world that the region's reputation for dictatorship and financial recklessness was a thing of the past. The countries attracted high levels of investment and garnered political prestige.

However, it looks like the honeymoon is over.

This month Brazil and Argentina have changed from lovers to bickering partners as they appear unable to resolve crucial economic differences which have laid Mercosur's fragility bare - and cast doubts over its sustainability.

The trigger was Brazil's 30 per cent devaluation in January, which has massively tilted the internal balance of trade. Because the Argentinean peso is tied to the dollar, virtually overnight Brazilian goods became 30 per cent cheaper for Argentina and Argentinean goods 30 per cent more expensive for Brazilians.

To try and protect its own industries, Argentina wanted to find a way of stopping a flood of cheap Brazilian imports. Two weeks ago it announced a plan to impose import quotas on shoes, textiles and clothes, but it was forced to back down when Brazil threatened to retaliate and stop trade talks on cars, one of Argentina's main exports to its neighbour. Brazil then said it would make a complaint to the World Trade Organisation.

An emergency Mercosur summit was held two weeks ago in Montevideo, the Uruguayan capital, to try to find common ground but the only thing they could agree was to set up new meetings this week.

Meanwhile, the dispute has heated. Argentina's Industry Department has introduced a backhand hurdle to imports - a new labelling requirement on all shoes sold - and the conflict has spread to rice producers, with Brazilians briefly taking over a bridge over to Argentina in protest about cheaper imported rice.

The s the recent talks have highlighted that Mercosur - which has Bolivia and Chile as associate members - is suffering from teething problems in that it appears lacking in the apparatus to resolve disputes.

But it also emphasised the inherent lopsidedness of the trade bloc because of the sheer size of Brazil - which makes up 80 per cent of the area's total population - Argentina has 16 per cent. A Brazilian devaluation has much more effect on its neighbours than the devaluation by Argentina, Paraguay or Uruguay would have on Brazil.

Analysts have questioned how long Mercosur can stay together with such divergent monetary regimes, saying there will always be tensions as long as the peso is tied to the dollar and the Brazilian real floats freely.