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Advantages and disadvantages of MERCOSUR for Venezuela

BUSINESS PLAN Venezuela has an enviable bounty of rich natural resources. In fact its natural endowments far exceed those of any country in its neighborhood. Venezuela has almost a 4. 1% share of the total petroleum production in the world. The petroleum industry itself provides 30% of its GDP, 80% of its Exports and 50% of its government revenues. Apart from its oil resources Venezuela also has the 8th largest gas reserve in the world. Chavez has also for long planned to build a 3,730 mile long natural gas pipeline from Venezuela to Argentina.

The project is estimated to cost about $4 billion and is expected to strengthen ties between the two countries. Such unification is one of the primary reasons why Venezuela has continued to be interested in the Mercosur. (Kar, 2007) Apart from Mercosur the only other significant PTA (preferential trading agreement) Venezuela is a part of are the CAN and the G-3. Negotiations for the FTAA, as we have already mentioned in passing, are also on. However, like almost all other South American countries Venezuela too seems more interested in the regional integration of the southern region than being party to the FTAA at present.

A possible merger of

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the CAN and Mercosur has been in the pipeline for a long time. At present, under the existing government (which is desperately trying to counterbalance U. S. A. ’s domination the western hemisphere) Venezuela is eager that such unification occurs as soon as possible. Many think that this eagerness to outdo the control of the US of A in the western hemisphere is what has finally tilted the Mercosur balance in favor of Venezuela. Like her most other countries in the South America too are keen on counterbalancing U.

S. A. ’s authority on the America’s. However, despite the rebellious sentiments that have gone into its making the Mercosur can hardly be said to be a flawless system. One of its primary problems is the sort of asymmetry that seems to exist amongst the present member states. For instance, Brazil provides almost 70% of the total GDP in Mercosur. In addition it also accounts for about 75% of its total exports. It is of common knowledge that Mercosur is not as significant to Brazil as it obviously is for the rest of the member countries.

This is reflected clearly by the fact that a mere 14% of the total Brazilian export is accounted for by the Mercosur countries such as Paraguay 63% Uruguay 45% and Argentina 32%. (Lamb, 2006) Brazil is keen on strengthening its regional control. As a result opting to be the member of Mercosur at this juncture may allow Venezuela to increase bargaining power at the global political scene, remaining of course in Brazil’s background all the while.

If Venezuela is keen on raising the bargaining power then Mercosur could prove advantageous. However, the glitch is that Brazil, being an economic heavyweight in the CU will most probably be making all the essential decisions on Venezuela’s behalf. Now, from the economic point of view a complete obliteration of trade barriers obviously looks and sounds good. But often there are a number of subterranean problems built into such a PTA. One of them is the fact that a PTA can as easily lower economic welfare as it can increase it.

If you look closer you shall find that a PTA functions on the basis of such lowering and rising of economic relations. Free trade (restricted within the members of the agreement) helps improve economic activities amongst the members but at the same time it grossly distorts trade with the rest of the world. Technically speaking a PTA can cause both trade creation as well as trade diversion. Trade creation is when production is shifted from a supplier who is less competent to a supplier who is more competent.

On the other hand trade diversion occurs when a preference regarding tariff causes a country to purchase its goods from a less competent country (providing goods at a cheaper rate) rather than from a more competent country (which provides goods at a higher rate). Both are possible entirely because of the deletion of the concept of borders. Now, as was hopefully obvious the less competent of the countries is able to provide goods at a cheaper rate simply because it now does not have to pay tariffs while crossing borders.

Such an exemption of tariffs cuts down on the country’s (the one which is being entered) tariff income to a large extent. Apart from such a jolt trade diversion too has often found to be having a particularly negative effect on the countries, which though competent have to let go of customers. Despite the possible negative effects of the trade diversion however analysts think that the amount of trade creation is sure to make up for any such glitch. They point out that re-allocation potential made possible by trade creation can be particularly beneficial for Venezuela.

A quick look at the primary products exported by Mercosur and Venezuela (see list below) reveals that each is strong in their own respective and quite different sectors of industry. (Kar, 2007) Products exported by Venezuela: 3 Minerals fuels, lubricants and other connected articles – about 75% of exports to the world 6 Manufactured goods categorized mainly by material – about 10% of exports to the world 5 Chemicals and connected items – about 5% of exports to the world Products exported by Mercosur: 0 Food and live animals mainly for food – about 25% of exports to the world

7 Machinery and transport gear – about 19% of exports to the world 6 Manufactured goods categorized mainly by material – about 18% of exports to the world 2 Crude materials, inedible, other than fuels – about 15% of exports to the world Given that Venezuela has continued to export goods based on natural resources alone makes it quite appropriate for the Mercosur group, which hasn’t been dealing with this products until now. The particular specializations of Mercosur and Venezuela on different sectors of industry make them good partners and ensure that there will be both economic and industrial exchanges at various levels.

Also, given the asymmetry and thereby the imperfect competition in the Mercosur Venezuela (which is still not a forerunner as far as industrial produce goes) will be pushed to its limit to make a mark and live up to its full potential. In order to survive and do well for itself in the Mercosur Venezuela will have to greatly improve its competency. This urge to do well and compete with others has often been known to bring about a dramatic change in the economies of countries far weaker than Venezuela.

On the whole therefore being a part of Mercosur can bring about some serious changes in Venezuela. The kind of changes these will be depended entirely on the Venezuelan economy itself. (Lamb, 2006) The case in Hand For a small but steadily growing establishment dealing in mineral oil related products there could not be a better time to expand and increase business. With Mercosur my establishment will be undergoing a number of changes, but all of them will hopefully prove to be in my advantage. Mercosur will prove to be beneficial for my company in a number of ways.

Firstly, given that the Mercosur does not yet deal with mineral oil related products my company along with a handful of others who have been in this industry for a while will have the opportunity to expand our business beyond our present limits. Given the relaxed barrier on movements firms like mine will now be able to deal with Brazilian and Paraguayan clients directly and at much lower costs. While most might not realize it but such an easy flow of goods is of particular benefit to both them and us. Previously, not only was the movement of my goods from my country to theirs difficult but also quite expensive.

Now with the removal of extra tariff the costs have reduced to a large extent, which means that the profits to be made are beyond belief. There is a lot of demand for mineral oil related goods in countries neighboring our own since Venezuela is quite literally the sole producer of such products in the region. Formerly we often sold such products illegally to people from our neighboring countries who were eager to buy our produce. While this paid well, orders were far and in between and usually involved a lot of risk. Thankfully, now that the system has been made legal all such illicit activities can be discarded for fair play.

Given the possibility of expanding business my associates and I have also been planning to form a sort of unified organization, which may be able to operate easily in the countries around us. For the purpose we have decided to continue business in the usual manner and learn about the market and only take the plunge when a bit of planning has been done and a spot of funds have been acquired. (King, 2007) Despite the advantages that we obviously have at hand there are a few disadvantages that are causing concern in our circles.

One of these is the fact that many fears Brazil might be taking a lot of important policy decisions on behalf of our country. Being industrially powerful we fear that Brazil’s policy might be particularly difficult for us to keep up with. Also we recognize that with the free flow of goods many Brazilian companies might also start dealing with the sort of products we deal with presently very soon. The only way to keep up with these neophytes in the business would be to pump up our present expertise and outdo ourselves.

This is a difficult proposition, since competition in the field has been rare. But under the circumstances where survival will soon become an issue Venezuelan industries will undoubtedly unite and fight back to the best of their capacities.

References: Kar, P; (2007); History of International Business Structure; Dasgupta & Chatterjee: Kolkata King, H; (2007); Destinations: Latin America Today; HBT & Brooks Ltd: Auckland Lamb, Davis; (2006); Cult to Culture: The Development of Civilization on the Strategic Strata; National Book Trust: Wellington.

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