The Trade Effects of MERCOSUR and The Andean Community on U.S. Cotton Exports to CBI countries

I: Introduction

Since 1960, the formation of Regional Trade Agreements (RTAs) that exclude the United
States has been proliferating throughout Central and South America: Mercado Comun del Sur
(MERCOSUR), the Andean Community, the Central America Common Market (CACM), the
Caribbean Common Market (CARICOM), and the G-3 agreement among Venezuela, Columbia,
and Mexico. In addition, Chile has established its own agreement with MERCOSUR, as well as a
long list of other bilateral agreements.

The rapid proliferation of these RTAs has engendered concerns about the disadvantages
they bequeath upon non-members. Reeder, Torene, Jabara, and Babula (2005), in their analysis
of “Regional Trade Agreements: Effects of the Andean and MERCOSUR Pact on the
Venezuelan soybean Trade and U.S. Exports”, affirmed and concluded that RTAs that exclude
the United States can work to the disadvantage of U.S. exporters that are otherwise competitive
in world markets.

In both Free Trade Areas and Customs Unions, preferential tariffs are granted to
members while tariffs on third-country exports remain unchanged. This is by far, the most
fundamental concern of third-country exporters because they face stiffer competition from
suppliers within the bloc whose exporters now enjoy a preferential tariff rate, which coerce price
and/or sales to reduce (trade diversion).

Nonetheless, Customs Unions (e.g. MERCOSUR and the Andean Community) have a
propensity to be less disadvantageous for third-countries because even though they grant
preferential tariffs to members, they also change third-country tariffs by establishing a common
external tariff (CET). In most cases, tariffs are reduced in the CET; thus there may be
improvement, or at least less deterioration, in third-country exports prospects.

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