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Bounded by the Reality of Trade: Practical Limitsto a South American Region*

Sean W. BurgesCarleton University, Ottawa

Abstract This article argues that regionalism in South America will meet with limitedsuccess because continental and subregional integration projects lack the necessaryeconomic underpinnings. The result is an incomplete form of regional integration that,while offering some rewards to the participating countries, predominantly serves theenergy security needs of the regions major players. Brazil, in particular, benefits from this

process and also is the prime reason that regionalism in South America will not deepen.Without a major state to absorb the costs of region-building the process will stall. As theevidence in this article implies, Brazil is not willing to absorb these costs, placing severelimits on the region and regional acceptance of Brazilian leadership.

South American integration is again an issue in New World political economy.Despite the failed Latin American Free Trade Area in the 1960s and the Latin

American Integration Association of 1980, attention has returned to integration,putatively as a response to international economic and political pressures(van Klaveren 1997). And it is political pressure, especially in the form ofpresidential diplomacy (Danese 1999), that is driving contemporary continentalintegration initiatives such as the South American Union launched in December2004 at a Cuzco, Peru presidential summit. But is there an economic fundament tothese political proclamations of integration?

This article argues that joint presidential declarations are not matched by thewider dynamics necessary to sustain integration processes. Propositions thatcontinental region formation continues to be about the collective economic growthof the early 1990s appear reasonable, but overlook the underlying intentionsdriving initiatives such as the South American Regional Infrastructure Integration

programme (IIRSA). A central strut of the argument is that the conventionaleconomic basis for a deeply integrated South American region is, at best, thin.An examination of intra-continental trade flows and the factors influencing themcalls for an alternative explanation of continued attention to integration,particularly by the regions dominant players. In short, South Americanregionalism emerges as a project lacking a leader willing to absorb the costs of

*The author would like to thank Jean Daudelin, Gian Luca Gardini, Andres Malamud, andthe two anonymous reviewers for their comments and encouragement with regard to thispaper. Research was supported by Canadian Social Science and Humanities ResearchCouncil Postdoctoral Fellowship #756-2004-0074. All errors, oversights, and omissions are,of course, attributable to the author.

Cambridge Review of International Affairs,Volume 18, Number 3, October 2005

ISSN 0955-7571 print/ISSN 1474-449X online/05/03043718q 2005 Centre of International Studies

DOI: 10.1080/09557570500238076

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providing the necessary public goods, but nevertheless is pushing forward indirections that serve the interests of the country that could fill that role: Brazil.

Two theoretical propositions will be developed by drawing on the newregionalism literature. First, a deep integration project requires a transfer ofownership of the region from the policy elite to economic, civil, and culturalsociety. Although such deepening has been discussed in the context of Mercosurand macroeconomic as well as institutional coordination (Pena 1997; Grandi &Schutt 1996; Preusse 2001; Ferrari Filho 2001), proposals remain more an ambitionthan the recipe for a realistic future. Empirical examination of intra-continentaltrade flows as well as lacunae in technical questions such as trade facilitationsuggests that South American regionalism is distinctly limited in character. Thesecond proposition is thus that there is more to region formation than trade flows.

Central to the South American case is a non-traditional aspect of securityenergysecurityand the unwillingness of Brazil to assume the costs associated with itsleadership ambitions.

On an empirical level this paper provides data demonstrating that there isinsufficient economic pressure to support a deep South American region. In thecase of Mercosur the data puncture suggestion that the bloc is a prelude to an EU-style union. (de Oliveira 2000; Bajo 1999). Evidence is organised under sixheadings: the character of intra-continental trade; the size of trade flows; the roleof trade in South American economies; the paucity of transnationalisedproduction; low intra-continental foreign direct investment (FDI) flows; andtransnational infrastructure networks. Two of these factors, FDI flows andtransnational infrastructure, are key elements for understanding the emergingnature of South American regionalismi.e. its focus on energy. Although

traditional security concerns were important to the origins of Mercosur, there isnow minimal fear of intra-continental state-state conflict; hence, external threatmanagement is not addressed here (Mera 2005). A more detailed treatment ofBrazilian attempts at costless leadership (Burges, forthcoming) are largely leftimplicit in this article due to space restrictions, with the subject assuming greaterresonance in the conclusion.

Regionalising: Why and How?

Hettne and Soderbaum (2002) describe region formation as a political processguided by formal governmental policies. A conscious decision is made by a seriesof countries to group together, whether in reaction to perceived erosion of the

Westphalian system, the rise of unipolarity, or globalisation-induced competi-tiveness concerns. The goal is to create a larger, supranational space collectivelytransforming or protecting existing structures. Regional initiatives are thussimultaneously political, economic, and social projects designed to collectivelyprotect national sovereignty and autonomy. Discussion about which actor createsthe initial regionalist impetussome argue the market, others the stateis not ofimmediate importance to an examination of regionalisms trajectory in SouthAmerica; what matters is that deepening and extending a region requiresincreased contacts between previously separate groups. As Acharya (2002, 25)suggests, regional progress depends on non-state-level interaction providingeconomic substance through trade, which precipitates shifts in public opinion.

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The argument in this paper is that the economic substance of a South Americanregion will not generate the necessary integrative pressures.

Cable (1994) notes that the major difference between first- and second-waveregionalism is that market considerations drive contemporary region formation,particularly capital movements and multinational corporations decision making.Tussie (1998, 82) points at this factor in her examination of regionalism in theAmericas, highlighting a desire for expanded market access as a bottom-up pushfor integration. Yet a contradiction remains embedded within this market-seekingapproach, namely the concentration on market access as opposed to regionaldisaggregation of production structures. Ethier (2001) points to this conundrum

by stating the obvious: convenience suggests that countries trade with theirneighbours. But this does not necessarily tell us why or how far countries will

pursue integration. A simple boost in trade may tell us little about thesustainability of a region (Thomsen 1994). I will thus consider what is traded aswell as the nature of transnational investment flows and their impact on theintegrative impetus of trade. Thomsen posits that it is intra-firm trade, and I willalso include investment, which is key because much international trade serves thegeographical distribution of production, implying that regionalism involves theevolution of a truly integrated economic space, not just an increase in commercialexchange.

This is the network of economic, cultural, scientific, diplomatic, military, andpolitical linkages that Mace and Therien (1996, 3) place at the core of regionalism,precipitating what Baldwin (1997, 87778) labels a domino theory of regionalism.The benefits from small preferential trading agreements create incentives to notonly deepen but also enlarge the bloc in search of greater advantage. An

inherently protectionist logic is implicit, one that should prompt participatingstates to establish institutional frameworks protecting the advantage gainedthrough the bloc. The issue is one of control: a state seeks to preserve autonomy byceding a limited degree of sovereignty to the region. Again, pressure forinstitutionalisation comes from economic and civil society interests becomingincreasingly embedded in the region, creating domestic pressure for expandedcollectivisation of sovereignty. Such is the suggestion from the Europeanexperience (Baldwin 1997). In a South American context the process isfundamentally more defensive, with regionalism becoming a protectionist toolfor globally uncompetitive industries. The critical consideration is whether or notstates feel that the payoffs from participation in the project are sufficient to justifythe surrender of sovereignty and the effective collectivisation of some aspects ofpolicymaking.

Bulmer-Thomas and Page (1999, 77) as well as Gamble and Payne (1996)suggest that a state might pursue the regional integration path independent ofmarket pressures to force economic liberalisation and seek the integrationistgrowth possibilities long mooted by the Economic Commission for Latin Americaand the Caribbean (ECLAC). To a significant extent this is what happened inSouth America (Baumann and Lerda 1987; Manzetti 1990). Here the embeddedneoliberalism that Mittelmann (2000, 128 29) finds in the resurgence ofregionalism underpins a belief that trade expansion will perforce bring economicgrowth. This assumes first that trade is important to the national economy, and,second, that trade with neighbouring countries is on a significant scale. Asrepeated relaunchings of Mercosur demonstrate (Phillips 2001; Cason 2002),

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pressure for deeper integration in Mercosur and the wider South America hasremained a presidential political imperative that appears to lack substantialdomestic economic or political demand. Those areas where interaction hasexpanded, most notably in the energy sector, reflect a far more pragmaticapproach that reveals more about energy security concerns than economicintegration.

The pragmatic and defensive nature of regionalism in South America has twoimportant implications for the future of the continental project. The mercantilistapproach to integration that sees countries engage in tit-for-tat trade spats toprotect domestic firms actively retards the creation of transnationalised economicspace and the recruitment of efficiency-seeking FDI. Second, the inward-orientedfocus of South American regionalism sees major players such as Brazil using the

process predominantly as a self-serving device to secure access to essential inputsfor their national economies. While a political element does overlay thesedefensive and pragmatic considerations, the daily reality is, not surprisingly giventhe lack of sustained incentives, far less cooperative.

The Character of Continental Trade

Implicit in the market-led approach to regionalism is the assumption that thegoods exchanged have a wide enough impact to mobilise popular and/or elitegroup pressure for regional deepening. This in turn accepts as unquestioned twocrucial propositions. First, that a variety of goods are traded, bringing the benefitsof expanded regional market access to more segments of the national economy.Second, that the participants in the regional project are exporting products of

interest to each other.As the figures in Table 1 demonstrate, the pattern of South American national

exports is highly concentrated, with just ten products accounting for over half of

Table 1. Top ten exports as a percentage of total exports

1995 1996 1997 1998 1999 2000 2001 2002

Mercosura 24.8 26.5 29.2 27.5 25.2 29.5 31.2 33.5Mercosur 2b 25.5 25.3 28.3 25.5 25.2 29.4 29.1 31.0Andean Communityc 66.3 69.7 67.8 62.0 68.0 72.5 67.7 66.4Argentina 43.0 48.4 49.6 47.0 44.3 47.3 49.6 50.4Bolivia 70.5 68.5 69.9 65.8 66.9 66.0 70.8 74.9

Brazil 33.8 33.5 35.3 34.4 33.2 34.4 34.3 34.8Chile 64.7 62.0 63.2 58.9 59.8 63.0 59.5 59.3Colombia 64.5 66.9 66.2 63.9 68.1 65.1 58.6 60.0Ecuador 85.1 82.3 83.4 83.5 82.9 84.2 80.9 82.1Paraguay 78.4 78.6 79.5 79.5 78.0 76.0 79.6 80.3Peru 61.6 61.3 62.6 60.3 64.6 64.9 64.0 65.6Uruguay 51.7 51.1 48.3 48.5 49.1 51.0 49.7 53.9Venezuela 85.1 88.3 86.0 80.7 88.6 91.4 89.3 88.2

a Argentina, Brazil, Paraguay, Uruguayb Argetnina, Brazil, Paraguay, Uruguay Bolivia, Chilec Bolivia, Colombia, Ecuador, Peru, VenezuelaSource: ECLAC 2003, Statistical Appendix, tables 83108.

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exports in most countries. Figures for Mercosur, which at first glance appears amodel of diversification, are skewed by the value of Brazilian exports. WhereBrazilian and Mercosur figures are roughly equal, with the top ten productsaccounting for approximately a third of exports, there is a markedly higherpattern of concentration in Argentina and Uruguay, rising from the higher mid-forties to over 50% in 2002. Paraguay has levels consistently over 75%. AndeanCommunity (CAN) countries display less diversification than Mercosur, withapproximately two-thirds of bloc exports coming from ten products.

While these figures are useful for making the macro case about a lack of exportdiversification, the data do need expansion. For example, the 88.6 91.4%concentration in Venezuela between 1999 and 2002 is partially due to internationaloil prices: petroleum products consistently accounted for 80% of exports. In

Paraguay soya has dominated since 1996, ranging from 31% to 43.4% of exports.The trend displayed throughout South America is for exports to concentrate in afew subsectors of traditional extractive industries. Brazil emerges as the only realexception to this trend, with iron ore top at 5.16.4%, followed by soya at 3.35.0%, and then aircraft at 2.36.3%. By contrast the CAN is an archetypicalstructuralist economic study: exports one through six in 2003 were crudepetroleum, gold, petroleum products, bananas, coal, and coffee. Since 2001 naturalgas has emerged as crucial for Bolivian exports. Value-added entries for theCANcut flowers, meat/fish fodder, refined copper, and unwrought alu-miniumdo not point to the economic sophistication often attributed tointegration.

Setting aside the debate about the long-term impact that resource exports haveon national economic growth, populist presidents and recent popular uprisings in

Bolivia, Ecuador, Peru, and Venezuela suggest that immediate, employment-generating results are desired. In terms of advancing a regionalist project thistranslates into a need to increase value-added exports such as manufactures andservices or ensure widespread distribution of the gains from natural resourceextraction. Table 2 suggests that the continental option is preferable to thesweeping global opening seen in Chile. For each country manufactures as apercentage of exports to South America outstrip the equivalent for world exports.South America emerges on this evidence as a important market for the regionsmore industrialised countries. Well over 40% of Argentine exports to SouthAmerica are manufactures, Brazilian manufactured exports are consistently near80%, Colombia 70%, and the petrol economy of Venezuela 25% to 37%, numbersup to four times those found in its world trade.

There is, however, a problem with this analysis. Only Uruguay demonstrates

evenness in itsexport composition to both South America and the World. Brazilhasattempted to use regionalism to encourage an internationalist outlook in domesticfirms and recruit FDI flows that bring technology and production techniques(Bonelli 1999). In contrast Argentine industry opted to focus on the bloc marketinstead of scaling up for international expansion (Cason 2002; Kosacoff 1999). Withthe exception of Colombia, the other South American countries demonstrate adisjuncture between global and continental exports, with manufactures rarelyapproaching 20% of world sales. Chile, the model of an export-oriented economy,has a steady 29-point difference between continental and internationalmanufactured exports. Although neither the CAN nor Mercosur demonstratesthe sort of internationalised surge in manufactured exports suggested by the open

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regionalism literature, the higher level of these sales to the continental market is auseful political device that has been deployed at the three South Americanpresidential summits to build the case for expanded regional integration.

Economic Importance of Trade

What happens if we look at the role of trade in the South American economies?Only two countries, Chile and Venezuela, consistently obtain close to a third oftheir GDP from international trade (Table 3). The largest economy in the region,

Table 2. Manufactured exports as percentage of total exports to the world and SouthAmerica

1995 1996 1997 1998 1999 2000 2001

Argentina South America 40.8 39.4 45.3 48.2 43.6 40.2 42.5World 30.7 27.0 30.1 31.8 29.0 29.1 29.3

Bolivia South America 7.3 11.5 9.8 8.2 27.7 12.8 13.0World 13.4 20.3 14.5 13.1 38.1 27.0 20.4

Brazil South America 76.1 78.1 79.0 78.2 79.6 80.0 78.0World 43.8 44.1 45.5 46.7 46.7 50.9 48.1

Chile South America 37.3 41.3 43.8 44.0 45.8 41.2 42.3World 10.9 12.6 13.6 15.7 15.2 14.8 16.2

Colombia South America 66.7 71.2 70.2 68.8 70.5 76.1 76.1World 33.4 27.4 28.4 30.3 27.8 30.1 36.5

Ecuador South America 31.2 31.4 30.5 35.2 31.0 28.4 33.9World 6.7 7.7 8.0 9.5 8.2 8.4 10.5

Paraguay South America 11.2 15.7 16.3 13.7 15.7 14.3 12.8World 13.2 16.2 14.3 13.0 14.8 18.4 15.6

Peru South America 24.3 28.1 29.6 38.5 35.9 32.2 37.8World 13.3 13.9 14.6 19.5 16.1 16.4 17.9

Uruguay South America 46.8 43.0 45.3 43.3 49.3 52.5 50.0World 47.6 45.4 43.5 42.7 42.2 45.7 46.9

Venezuela South America 34.7 36.1 32.9 43.9 28.8 24.8 36.7World 11.3 8.7 9.7 13.9 8.2 6.1 8.3

Source: Information System of External Trade, DATAINTAL, UNCTAD classificationsystem.

Table 3. Exports of goods and services as percentage of GDP

1995 1996 1997 1998 1999 2000 2001 2002

Argentina 10.5 10.8 11.4 11.9 12.0 12.4 13.3 15.2Bolivia 22.5 22.5 21.0 21.3 18.5 20.4 22.4 24.5Brazil 8.2 8.0 8.7 9.0 9.7 10.3 11.3 12.0Chile 27.7 28.9 30.1 30.7 33.1 33.5 34.4 34.2Colombia 14.5 15.6 15.6 16.6 18.3 19.0 19.2 18.2Ecuador 19.9 19.8 20.3 18.8 21.5 21.1 19.8 19.2Paraguay 37.6 32.9 30.2 28.2 20.6 17.6 17.1 20.1Peru 12.5 13.5 14.3 15.1 17.0 18.2 19.5 8.4Uruguay 19.7 20.9 21.9 20.7 20.2 21.7 20.7 20.3Venezuela 29.4 31.8 32.2 33.3 31.5 32.5 31.3 31.8

Source: ECLAC 2003.

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Brazil, has only recently surged past the 10% mark to hit 30% (World TradeOrganisation [WTO] 2004, xiv), reflecting attitudinal shifts in the Brazilian

business community, a development President Lula has enthusiasticallycontinued (Burges 2005). Chiles reliance on trade stems from the countrysexport-oriented economic strategy. High Venezuelan numbers reflect thecountrys oil economy. Argentinas slow increase reflects rising sales to Mercosur,first due to the 1991 signing of the Treaty of Asuncion and then due to the realplans stabilisation of Brazils economy in the mid-1990s; the minor surge in 2002points to the return of price competitiveness caused by devaluation of theArgentine peso.

Table 3 reaffirms the importance of trade to the South American economies(Bulmer-Thomas 2003). Indeed, economic flows have played an important role in

Brazilian foreign policy since the 1970s, with flows to Bolivia, Paraguay, andUruguay being strategically altered to draw those countries away from thepotential power competitor Argentina (Souto 2001, 55 57). This pattern wasduplicated in the 1980s and 1990s, with Brazil altering grain-purchasing patternsto address the trade imbalance with Argentina that threatened the 1986 bilateraleconomic cooperation accords; after the first Gulf War attention was turned toArgentina and Venezuela as more stable, reliable, and localised oil sources.Construction of regional arrangements was not only about opening new marketsfor manufacturers, attracting new FDI flows, and consolidating regional peace,

but also protecting Brazilian energy security by capturing South Americansources of electricity, oil, and, latterly more importantly, natural gas (Barbosa 2001,151; de Holanda 2001, 31-33; O Estado de Sao Paulo, 6 June 2005).

The importance of energy in the Brazilian regional vision, born of the 2001

national energy crisis, points to continental export concentration in primaryproducts and presents a challenge for the logic of regional integration, namely thatthe regional project will grow through an expansion of trade and deepen inresponse to political pressure exerted by interest groups benefiting from theprocess. Apart from the need in Argentina, Brazil, Chile, and Uruguay for gas andelectricity supplies, the relative homogeneity of continental exports makes itquestionable whether there is in fact a regional market for the dominant exportedgoods and commodities, suggesting that it is the extra-continental dimension oftrade that matters most.

Alternatively, we might ask which sectors will precipitate pressure forexpanded integration. Energy, as already stated, is one demand-side factor(O Estado de Sao Paulo, 7 June 2005). Manufacturing exports might create a supply-side push for regionalism. Table 4 sets out manufactured exports to South America

and the world as a percentage of GDP, highlighting the importance of primaryproducts to regional exports. Boosting trade in manufactures has traditionallydriven Latin American integration (Ocampo and Martin 2003). Yet Table 5 shows adecline in the proportional contribution of manufacturing to GDP in all four of themain Mercosur countries. An interpretative comparison of Tables 3, 4, and 5suggests that the export of primary products is more important thanmanufacturing. In part this can be explained by the return of Mercosur membersas global agro-industry exporters, the rise in service industries, and thearticulation of an increasingly integrated continental energy matrix. The resultantsuggestion indicates that not only is there likely to be little substantial pressure fordeeper integration, but also little political gain in strenuously pursuing it.

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Regional Production Chains?

This discussion of manufactured and total exports overlooks Cables (1994)emphasis on multinational corporations as agents of trade, particularly theelaboration of transnational production chains. Almost completely absent fromdiscussions of intra-continental and intra-Mercosur trade is reference to intra-firmtrade. Instead, attention in academic and policy studies is concentrates on totaltrade flows (Phillips 1999, 7982; Hasmi 2000, 43; Bouzas 2001; Kosacoff 1999) andthe barriers that prevent an expansion in the regional distribution of finishedgoods and raw materials (da Silva and da Rocha 2001; Hasmi 2000; UNCTAD2000; Magarinos 2001; Kuwayama 2005). Given the importance attributed totransfer pricing in the host MNC literature of the late 1980s and early 1990s, thealmost complete failure to examine intra-firm regional trade flows suggests that

there is very little to study, a proposition supported by the character of theinvestment flows discussed below.

There are preliminary indications that the literature has overlooked thesubject because there simply is not much to study. The dramatic increases ininternal trade flows experienced by Mercosur make the bloc the mostlikely place in South America to find evidence of transnational integratedproduction structures. Indeed, trade between the industrial powerhousesof MercosurBrazil and Argentinareveals an increasingly complex range ofproducts exchanged. But suggestions of integrated production structures onlyreally emerge in the automotive industry (SECEX 2005), which is itself thesubject of an extensive series of bilateral and regional agreements independentof the Mercosur treaties. Instead, commercial exchange in value-addedsectors has been marked by a succession of unilateral protectionist trade

restrictions on goods ranging from shoes to refrigerators and ovens (Malamud2005; Phillips 2001).

The pattern found in Mercosur is one of mercantilistic conceptions ofmarket access seeking to preserve intact each nations producers. With the

bloc again in crisis due to persistent commercial discord, the Mercosur presidentshave at least tacitly recognised the need to transform economic relations. The 24thMercosur Meeting Declaration of 18 June 2003 reiterated the blocs importanceas a mechanism for pursuing new international opportunities and blessedthe new Wood and Furniture Production Chain Competitiveness Fora(Mercosur 2003). The object was to encourage region-wide distribution ofcompetitive value-added production aimed at extra-bloc markets, giving renewedpolitical impetus to the creation of transnational production chains. Althoughmuch importance was attached to this initiative in 2003, it has yet to cause similaragreements in other sectors, most notably in the processing of agriculturalproducts and the automotive industry. Moreover, the initiative is not an originalventure, being but a more sophisticated version of the voluntaryproduction restrictions that competing business councils establish to ensurethat efforts to protect their member firms do not precipitate trade wars.The mercantilistic nature that has historically plagued regional integrationplans in South America is thus perpetuated, with each participating countryseeking to retain full capacity in a whole range of industries at the expense ofdeveloping the region-wide distributed production systems that would causepressure for deeper integration.

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Investment Flows

One important factor contributing to the paucity of transnational production chainsin Mercosur and the wider South America is the nature of intra-continentalinvestment flows. Following Dunning (1994, 35 40) the type of FDI flowing into andthroughout the continent can be divided into four main categories. The twodominant types found in South America are resource seeking and market seeking.Very little of the investment stocks and flows are efficiency seeking or strategic assetseeking in nature (CEPAL 2004, 1518; Chudnovsky and Lopez 2000). Investment,whether by an intra- or an extra-continental firm, is thus focused on either exploitingdeposits of natural resources or circumventing market-access restrictions byestablishing branch plant operations. The lack of efficiency-seeking investmentpoints to the low level of extra-continental trade in higher value-added goods and

services and the integration of production chains. Indeed, with one or twoexceptions, such as the 2004 merger of brewing giants InterBrew and AmBev, verylittle of the investment or mergers and acquisitions activities that have taken placeaim to capture economies of scale for export to third countries or exploit proprietarytechnology and production processes on a multinational basis. As the 2004 CEPALreport on FDI in Latin America notes (2005, 42), the emerging trans-Latin firms notonly are predominantly based in Mexico, Chile, Brazil, and Argentina, but also areconcentrated either in food industries or resource extraction, sectors that aredominated by resource-seeking and market-seeking FDI.

In one of the few detailed studies of Latin-American-sourced FDI,Chudnovsky and colleagues (1999, 22 32) highlight two important points. First,the vast majority of intra-regional FDI comes from Argentina, Brazil, Chile, and

Mexico. The size of these outflows, both in terms of a percentage of total FDI flowsand as a percentage of GDP is minimal. In the time period examined by theauthors, 198697, regional FDI flows rarely surpassed 0.1% of global FDI flows,and the total value of each countrys resultant FDI stocks did not surpass 1% ofGDP until 1996 when Chile suddenly registered a level of 5.4%. A sense of theimportance that regional governments give to the foreign investments made bycompanies established in their countries comes from the authors (1999, 2526)warning that they had to rely on UNCTAD data and that detailed figures fromeach government were difficult to obtain. Indeed, it was not until 2001 that theBrazilian central bank actually began to seriously accumulate statistics on thecountrys private overseas investment activity.

The most detailed and readily obtainable FDI statistics for a South Americancountry remain those provided by the Brazilian Central Bank. Two things are

immediately apparent from the figures set out in Table 6. First, Brazilian FDIoutflows can hardly be classified as domineering. Indeed, the wider SouthAmerican market remains of limited interest to Brazilian entrepreneurs despiterepeated assertions of its political importance by both Cardoso and Lula. Thoseinvestments that do take place lack the integrated intra-firm character necessary tosupport the evolution of the production chains feted at the 24th Mercosurmeeting. The exception is in the energy sector, where the Brazilian state oilcompany Petrobras is being deployed as a device to secure regional energysupplies for Brazil (CEPAL 2005, 5152), a strategy that is different from theelaboration of transnationalised production chains. Chief among the Petrobrasinvestment activities are the elaboration of a natural gas pipeline system to

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Table6.BrazilianFDIflow

sinSouthAmerica(US$million)

2001

2002

2003

FDI

outflow

Ouflow

as%of

total

Intra-

firmFDI

Intra-firm

FDIas%

oftotal

FDI

outflow

O

uflow

a

s%

of

total

Intra-

firmFDI

Intra-firm

FDIas%

oftotal

FDI

outflo

w

Ouflow

as%

of

total

Intra-

firmFDI

Intra-firm

FDIas%

oftotal

Argentina

1625

3.8

2

164

0.3

9

1503

3.4

6

121

0.2

8

154

9

3.4

6

100

0.2

2

Bolivia

36

0.0

8

16

0.0

4

53

0.1

2

12

0.0

3

5

2

0.1

2

11

0.0

2

Chile

158

0.3

7

2

0.0

0

168

0.3

9

2

0.0

0

20

3

0.4

5

2

0.0

0

Colombia

130

0.3

1

1

0.0

0

26

0.0

6

2

0.0

0

4

2

0.0

9

5

0.0

1

Ecuador

71

0.1

7

1

0.0

0

96

0.2

2

4

0.0

1

4

5

0.1

0

11

0.0

2

Paraguay

40

0.0

9

18

0.0

4

29

0.0

7

5

0.0

1

5

9

0.1

3

11

0.0

2

Peru

40

0.0

9

10

0.0

2

47

0.1

1

4

0.0

1

5

2

0.1

2

2

0.0

0

Uruguay

3121

7.3

3

482

1.1

3

1547

3.5

6

693

1.6

0

281

0

6.2

8

831

1.8

6

Venezuela

27

0.0

6

13

0.0

3

19

0.0

4

16

0.0

4

1

3

0.0

3

6

0.0

1

Total

42584

43397

4476

9

Note:Intra-firm

FDIincludesloansandfinancing.

Source:BancoCentraldoBrasil/DepartamentodeCapitaisEstrangeiroseCambio(Decec).

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Bolivia, a parallel system to Peru in the wake of political instability in Bolivia(O Estado de Sao Paulo, 11 June 2005), and formation of the integrated energycompany Petrosur to strategically pool resources with the Argentine andVenezuelan state oil companies. This last venture points to the centrality ofenergy in Brazils vision of regionalism, securing access to new oil and gassupplies by providing funds to capital-poor Argentina and helping Venezuelan oilgiant Petroleos de Venezuela SA deal with the suggested collapse of its ownproduction system (Stratfor 2005).

The second point evident in the Brazilian statistics is that Thomsens (1994)argument about regionalism encouraging FDI would appear to have a strongmeasure of validity. Brazils FDI outflows, especially intra-firm flows, are heavilyconcentrated within Mercosur. Yet, these same data deviate from Thomsons

proposition. Levels of intra-firm FDI within the bloc are significantly lower thanthe gross levels of investment, a difference that points again to the paucity oftransnationalised production chains in the region. Significantly, Brazilian FDI intoMercosur also appeared to plateau in 2003. More important is the overall nature ofthese capital outflows, which include financial investment transfers by Brazilianfirms. Investment in Argentina and Uruguay is dwarfed by sums sent to theBahamas ($5.9 6.9 billion), the Cayman Islands ($14.7 16.4 billion), and theVirgin Islands ($5.4 7.1 billion), money that is either engaged in financialspeculation or being sheltered from regional economic instability. On a sectoral

basis, energy is again a central theme for Brazilian FDI, which is dominated byPetrobrass continental energy integration strategy. Perhaps more revealing is thenature of the extra-continental flows of FDI coming to the Mercosur countries,which focus on resource-seeking and market-seeking ventures, not the efficiency-seeking activity that would point to production for other continental markets.

Another aspect of the character of intra-continental FDI is also significant andpointsto theimportance of region-buildinginitiativesfor theareas major economies.As Chudnovsky and colleagues (1999, 32) note, the vast majority of regionalinvestment flows are concentrated in the energy sector, with particular emphasis onpetroleum investments and other major industrial ventures. Brazilian purchases ofArgentine firms in the wake of the 2002 economic crisis point to an emphasis onresource- and market-seeking investment. Indeed, Brazils then newly appointedambassador to Buenos Aires, Jose Botafogo Goncalves, publicly suggested that theBrazilian Development Banks (BNDES) funds be used to underwrite the acquisitionof Argentine firms embattled by their countryseconomic crisis (OEstadodeSaoPaulo,11 January 2002). Although BNDES financing for such ventures was not extended

untilveryrecently, a number of high-profile investments didtake place, includingtheBelgo Mineira takeover of steel producer Acindar, drinks company AmBevspurchase of the Quilmes brewery, and Petrobrass absorption of Argentinassecond-largest integrated energy firm, Perez Companc (MSNBC.com, 28 February 2005).Similar phenomena can be observed with Chilean purchases of Boliviantransportation companies when the creation of bi-oceanic corridors resurfaced as apolitically desirable ideaafter the 2000 BrasliaSouth American presidential summit.Even in the example of the 1998 Ecuador-Peru peace treaty, where integrationistimpulses played a strong role in ending the 45-year conflict, the emphasis was onexpanding bilateral trade, not seeking methods of integrating national productionstructures (Herz and Nogueira 2002).

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Infrastructural Interference

The almost autarkic nature of the state in South American regionalism and themarket-seekingnature of FDIin theregion arenotespeciallysurprising if we focus onthe logistical issues central to geographically disaggregated production systems, inparticularthe time-critical natureof just-in-timeproductiontechniques.The shortageof integrated production systems within Mercosur, despite the dramatic increases inintra-bloc trade since 1991, points to a central problem with the regional visionespoused by political figures. Technocrats within the transportation ministry inBrazil areclear thathighway linkages betweenmajor industrial centresarecapableofcarrying the traffic that would be created by transnationalised manufacturingsystems.1 Rather, the issue is regulatory. Researchers in ECLACs transportationdivision estimate that the busiest Argentina-Brazil frontier points see approximately

650truckscrossingthebordereachday.Yetatsomeofthesecrossingpointsitcantake3036 hours for a truck to clear the customs regulations (Sanchez and Tomassian2003, 49 51), presenting a significant level of unreliability for businesses attemptingto establish JIToperations. Added to this arethevariable quality of theroads on eitherside of the border away from the main trunk route, which can add up to 40% intransportation costs (Taccone and Nogueira 2004, 101), and the different railwaygaugesused in eachcountry, requiring freight trans-shipmentat eachbordercrossing(CEPAL 2003).

The regulatory dimension remains a critical question when assessing thefuture of a South American region. While the CAN has seriously addressed someof the major regulatory details involved in intra-regional transportation (CEPAL1999), trade between the bloc members remains depressed by the parlous state of

the road network along the Andean cordillera. In Mercosur, where the volume ofintra-bloc trade is significantly higher and transportation interlinkages are of aconsiderably better standard, national governments have yet to back presidentialcommitments to bloc deepening with a consolidation of regional regulatorystructures that have long been seen as necessary (Bouzas 1996).2 Indeed,Argentina has gone so far as to actively retard the development of regional trade

by imposing severe restrictions on transiting trucks. BrazilChile shipments wereconfined in 2004 to a single route, which added some 2,000 km to the existingcorridor between Santiago and Uruguayana, the dry dock for some 7080% ofland-based BrazilChile trade. This blockage of trade between Argentinasregional partner Brazil and Mercosur associate member Chile was matched by aDecember 2003 decision to stop Uruguayan trucks transiting Argentine territoryon the way to Paraguay (Taccone and Nogueira 2004, 103).

Poor transportation infrastructure has been highlighted as an important factordeterring FDI flows and retarding socioeconomic development (UNCTAD 2000;Benitez 1999). The 2004 CEPAL (2005, 22) report on FDI in South Americaexpanded this theme to the energy sector by noting that elaboration of anintegrated gas and electricity matrix requires continued investment in thenecessary physical infrastructure as well as regulatory alignment. This theme of

1 Interview with Francisco de Paulo Magalhaes Gomes, Director, GEIPOT, Ministeeriodos Transportes, Brazil, 21 September 2001.

2 Paraguays ambassador to the WTO outlined the conceptual problems afflicting intra-bloc trade and summarised them neatly as unresolved issues of trade facilitation (GautoVielman 2005).

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addressing infrastructural deficiencies was addressed in the Avanca Brasilprogramme implemented by Cardoso in Brazil and expanded to a continentallevel at the 2000 Braslia South American presidential summit. Indeed, theresultant regional organisation, the Initiative for the Integration of RegionalInfrastructure in South America (IIRSA), has emerged as a central building blockin regional integration processes.

Rather than focusing on the political goalsof opening markets, IIRSA concentrateson creating the underlying conditions that will encourage trade, providing ten maincorridors of transportation, telecommunications, and energy infrastructure linkingmajor populationand productioncentresthroughoutthecontinent. While hundredsofprojects have beenproposed andinsomecases initiated,3 themostsubstantial progresshas been made in the energy sector, particularly the construction of pipeline networks

to supply natural gas to the industrial heartland of Mercosur and Venezuelanelectricity to the northeast of Brazil. Although the IIRSA infrastructure plan issupposed to direct significant investment to the upgrading of the Andean regiontransportation system, the overarching problem again remains the shortage ofproductsto trade, discussed earlier, the market- and resource-seeking nature of FDIinthe continent, and Brazils concentration on using these networks to exploit newmarkets without necessarily having to absorb more imports. Moreover, the item thathas attracted the most attention is the construction of bi-oceanic corridors to provideBrazils agro-exporters with access to a Pacific port (Burges 2004, 193208). Again, theemphasis has been placed on creating trade and trans-shipment routes to extra-continental markets, not establishing the synergies necessary for the integratedproduction structures thatwill create domestic pressure for expanded political as wellas economic integration.

Conclusion

The evidence presented in this article demonstrates that the future of regionalism inSouth America is bounded and limited by the possibilities of intra-continental trade.Although not a revolutionary proposition, the detailed examination of the issue haspointed to a more revealing question: what exactly is driving the regional impetus inSouth America? Discussion of where trade has expanded, the nature of investmentflows, andprogress on infrastructureintegration suggests an emphasis on the energysector, the activities of the Brazilian state oil company Petrobras pointing to a clearand sustained strategy of securing the oil and gas supplies necessary to fuel Brazilseconomy. While this should by no means discount the importance of growth in thetrade of manufactures throughout the region, the point is that it is energy demand,coupled with Brazilian leadership ambitions, that is driving regionalism, notcooperative economic growth.

Questions of leadership, and in this case Brazils emerging desire to be a leader,matter to the formation of vibrant and deep regions. As Mattli (1999, 5566)explains, formation of a region requires one or two states to absorb the costs ofcreating and stabilising the region, generally by absorbing less-than-competitiveimports from other participants in the project. This cost-bearing function is muchthe same as the sense of stability-inducing leadership that Kindleberger (1989)found missing in his study of the Great Depression and points back to the

3 See the IIRSA website: ,www.iirsa.org. .

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proposition at the start of this article that a region will not fully integrate if it doesnot offer returns of a sufficient magnitude to incite political pressure fordeepening from economic and civil society actors. With these theoretical guides inmind the relevant point becomes one of what is not happening in South Americato bolster regionalism. Integrated production chains are not forming. Investmentremains in resource- and market-seeking mode. Intra-continental transportationand trade facilitation linkages are modernising very slowly.

The problem outlined elsewhere (Burges 2005; forthcoming) is that, while theSouth American regional project has a leader in the shape of Brazil, the countrythat relaunched the continental integration movement with the 2000 Brasliasummit of South American presidents, the evidence in this article suggests thatthe leader is unwilling to assume the costs alluded to by Mattli as necessary to

deepen the project. Brazilian investment in the region stands as the example forother countries, remaining tightly focused in a resource- or market-seeking mode.The resultant theoretical lesson is a reminder that regionalism is not strictly abouteconomic growth, but also about using a collective body to advance nationalinterests, a venture that can be decidedly one- sided. Areas where regionalism ismaking solid progress in South America are increasingly being seen as giving

benefits to only one side. Sustained mass protests in Bolivia against Brazilianexploitation of gas reserves, including the bombing of Petrobrass Santa Cruzoffice (O Estado de Sao Paulo, 14 May 2005), as well as Argentinas May 2005,unilateral decision to drastically reduce gas exports to Chile are but two examples.

Dissatisfaction with South America as a regional entity and Brazils highlycost-averse leadership style became clear at the 2005 Arab South-AmericaSummit, where presidential attendance was not just sparse, but also decidedly

barbed; Chilean President Lagos quietly left midway through the event and hisArgentine counterpart, Nestor Kirchner, stormed from the meeting with loudcomplaints about acquiescence to a measure of Brazilian leadership not beingequivalent to acceptance of Brazilian hegemony (Oxford Analytica, 17 May 2005).As this article has suggested, the economic potential of a South American regionlacks the attraction necessary to elicit support for an enthusiastic pursuit of theproject. Indeed, the unilateral nature of the benefits arising from the elements ofthe regional vision enacted to date are bringing the political future of the projectinto question as the other South American states become increasingly dissatisfiedwith a largely Brazilian-led venture that offers few immediate benefits and mayherald a future of dependence on an emergent regional Brazilian hegemony.

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