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Tuesday, July 27, 1999 Published at 12:50 GMT 13:50 UK

Business: The Economy

Argentina and Brazil square up on trade

Unemployment has hit Argentina hard

Latin America's two biggest economies are on the verge of a trade war.

Brazil has suspended all trade talks with Argentina after the latter introduced several hurdles to limit the import of Brazilian products.

The row could stall the process of integrating Latin America's economies. Eight years ago, Argentina, Brazil, Paraguay and Uruguay set up the Mercosur trading bloc, with Bolivia and Chile as associate partners.

But the devaluation of Brazil's currency during last year's global economic crisis has undermined prospects for trade liberalisation.

[ image: Subsidies for Ford in Brazil have enraged the countries trading partners]
Subsidies for Ford in Brazil have enraged the countries trading partners
Brazil's products are now very cheap and swamping the markets of its neighbours.

The decision to subsidise a new Ford factory in north eastern Brazil has further annoyed the country's trading partners.

Argentina is in a particularly tricky situation. Its economy is shrinking, and its industries is priced out of the markets because of the country's strong curreny.

However, Argentina cannot increase its competitiveness by devaluing its currency, because that is tied to the US dollar in a bid to achieve stability.

This monetary policy has spared the country much of the financial turmoil that savaged the region last year, but ultimately has plunged it into a recession deeper than Brazil's.

In an attempt to protect its industries, Argentina has now set import quotas for Brazilian textiles, minimum prices for steel and other regulatory hurdles for importing home appliances.

Furthermore, the government in Buenos Aires reserved itself the right to impose emergency barriers on a wider range of goods, even if there is no evidence of unfair competition.

Brazils top trade negotiator, Jose Alfredo Graca Lima say any protectionist "measure taken by the Argentine government has serious consequences for Mercosur countries and is devoid of legal support".

The Brazil government has now called for an emergency meeting of the Mercosur council.

The row could scupper the whole Mercosur project, at a time when the organisation was just about to negotiate its own trade deal with the European Union.

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