Chile - Almost a member of the Mercosur Club

Shawn Abrahim

Internal Assessment- Economics Coursework

Chile - Almost a member of the Mercosur Club

GDP is a popular measure that gauges the total amount of goods and services produced in a country annually. Chile is enormously dependant on trade, which makes up approximately 87% of its GDP. The economic benefits of joining Mercosur would be outstanding.

Mercosur is a customs market comprised of Brazil, Uruguay, Paraguay and Argentina. It is the third largest trading bloc in the world with a market of $1.1trillion (U.S) and 220 million consumers. Members of a customs market have no trade barriers, such as tariffs, amongst themselves. Tariffs, which are payments to the domestic government imposed on foreign imports, restrict the free flow of trade across borders. Customs markets have no restrictions on labour or capital movement amongst themselves. Mercosur hopes to have a common trade policy for non-members, each member country will charge similar tariffs etc, on non-member goods and services. When this is accomplished, Mercosur will be a Common market.

Joining Mercosur will give Chile the negotiating power to trade with other large trading bloc's such as the EU. This will help increase Chile's volume of trade and lower trade barriers they face across the world. With increased trade, all parties involved will benefit. Chile will further specialize in the products that they have a competitive advantage (Lowest opportunity cost associated with production) in and they will be able to operate more efficiently. They will trade goods that they can efficiently produce for goods that they cannot produce resourcefully.

There are people who feel more trade is negative. Many people ...

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There are people who feel more trade is negative. Many people are calling for the government to adopt more "protectionist" policies, which would necessitate increased trade barriers. The most popular protectionist argument is that less trade would entail more jobs more the Chilean people. This however is a flawed argument, as less trade would destroy Chile's bourgeoning export sector, decreasing employment. All protectionist economic arguments are flawed, the most visible flaw in most is that in a retaliatory tit-for-tat, all trade parties would lose.

A common trade policy for non-members is Chile's main problem with joining Mercosur. Chile has low tariffs and few trade barriers against imports. This makes Chile an attractive trading partner due to the ease with which foreign products can enter Chile. While common trade policies for nonmembers usually mean lower tariffs for most countries, Chile would have to increase its tariffs to keep inline with the rest of Mercosur. This would make Chile less popular as a trading partner for non-Mercosur members. (See figure A) Chile must decide if the benefits of increased influence in the international market, combined with increased trade with Mercosur members, will outweigh the problems created if domestic tariffs against non-members are raised.

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Source: Rachel Holmes, (November 1 2000) Almost a member of the Mercosur club

http://www.ecountries.com/the_americas/chile/news/1403231