Since the Mercosur economic integration project began in 1991, trade among the four core member states of Argentina, Brazil, Paraguay, and Uruguay has mushroomed from approximately $5 million U.S. dollars in 1991 to $20 billion in 1997. This explosion in intra-regional trade has been accompanied by significant increases in imports from and exports to the outside world (see graphic on next page). With the recent addition of Chile and Bolivia as associate members of the alliance, these countries can increasingly be viewed as part of one "Southern Cone" market.

Despite the success achieved over such a relatively short period of time, Mercosur is still in a state of evolution, with many problems yet to be resolved. Global supply chain managers need a thorough understanding of the current rules and realities for getting products into, out of, and across the borders of these countries if costly mistakes are to be avoided. Particular attention must be paid to the evolving tariff rules, the transportation challenges, and the regulatory environment.

One of the most important realities is that Mercosur at present is a very imperfect customs union. For one thing, the details of this intra-regional free-trade program are not yet fully implemented. Some 10 percent of the items that originate within the countries and are found in the Mercosur Harmonized Tariff Schedule still are charged duties until at least January 1, 1999. In addition, the automobile sector, most textiles, and sugar are completely left out of the free-trade program for the time being.

Another reason why Mercosur still is not a full-fledged customs union is that the Common External Tariff (CET), intended to be uniformly charged on all goods entering from the outside world, contains plenty of exceptions. Specifically excluded from the CET regime are capital goods, computers, and related software. Also excluded are telecommunications equipment and many other items found on each country's list of exceptions. Further complicating matters, Argentina and Brazil in December 1997 raised the Mercosur Common External Tariff, previously set at 0 to 20 percent, an additional three percentage points. This increase will remain in effect until 2001. Paraguay and Uruguay were given the discretion to opt out of this duty increase and they have for a number of items.

The current disarray in application of the tariff rules explains, in part, why a product that already has been assessed the CET when it entered the national territory of one Mercosur country is charged the tariff again every time it is re-exported within the bloc if it does not meet the relevant rules-of-origin requirements.

The vast majority of cargo transported between the Mercosur countries moves by truck. This traffic is funneled through a limited number of border crossings. The practical result has been delays at customs that can easily last three or four days. And this, in turn, leads to significantly higher transportation costs because drivers must be compensated for overtime and equipment idles needlessly.

To give more options to intra-Mercosur shippers, the member countries have explored alternative ways of facilitating intra-bloc trade. One avenue has been to encourage greater use of river and ocean transport. Until recently, it was cheaper to ship goods from Buenos Aires to Liverpool, England, than to the Port of Santos in Brazil. Several years ago, in an attempt to resolve this problem by encouraging competition and lower shipping rates, intra-Mercosur maritime shipping was opened up to all carriers of the four member countries. Port privatization also has contributed significantly to lowering water-based transportation costs. Privatization, accompanied by new labor reforms, already is a reality in Argentina and Uruguay, and is finally catching on in Brazil.

In December 1996 the Mercosur members and associate members agreed to new air routes between cities not previously served in the six countries under older bilateral agreements. Almost as soon as the accord was signed, new passenger air services linking provincial centers were established throughout the Southern Cone. This meant that passengers could fly direct between Rosario, Argentina, and Curitiba, Brazil, without having to connect through Buenos Aires and São Paulo. Travel time on this route was effectively reduced from seven hours to one hour and forty-five minutes. These new routes undoubtedly will have a similarly positive impact on the transport of cargo and mail. Currently, air transport accounts for only about 10 to 13 percent of intra-Mercosur cargo traffic.

Intermodal transportation may become another viable option for shipping within the region. In 1994 the Common Market Council adopted a uniform Mercosur intermodal law that since has been ratified by all four member states. The new law permits the use of a single contract for the transport of goods using different modes. It also spells out the obligations of all the parties to such contracts, including the specific terms that must be included in the agreement. The uniform law includes provisions on monetary liability of the parties to the contract as well as on which country's laws will apply and how arbitration will proceed in the case of a contract dispute.

Excessive paperwork demands generated by an extremely bureaucratic customs service contribute to some of the border bottlenecks within the region. In an attempt to eliminate this problem, the Common Market Group (Mercosur's rule-making body) adopted the International Cargo Manifest and Customs Transit Declaration in 1991. The uniform cargo manifest permits cargo to be sealed at a special customs warehouse within the country of origin and waved through at the border following presentation of the manifest and a perfunctory inspection. The actual customs inspection occurs at the final destination point. Although 70 percent of Argentine trucking lines use this system, most Brazilian truckers do not. They complain that there are not enough special customs warehouses within Brazil, and those that do exist are often located far from shippers.

In 1993 the Common Market Council (one of Mercosur's most important institutional bodies) called for the immediate establishment of 16 integrated one-stop customs inspection posts for long-distance truck traffic passing from one Mercosur country into another. (Another three posts were created for rail traffic.) The integrated border operations have worked well at the Argentine crossings with Paraguay and Uruguay. But problems persist at all of the border crossings into Brazil. The two notable exceptions are the Santo Tomé-São Borja crossing on the Brazilian border with Argentina and Rivera-Santana do Livremento on the Brazilian border with Uruguay.

A Mercosur Customs Code approved four years ago should further speed up customs clearance once it is finally ratified by all four member states. (To date, only Paraguay has done so.) Among other things, the code provides for uniform rules certifying customs brokers, methods for verifying written or electronic documentation accompanying imports, customs valuation of goods, different regimes admitting products free of import duties (such as temporary admissions programs), and penalties for false declarations and other customs offenses. All four member countries already have adopted uniform procedures for clearing imports and exports through customs, including the creation of a uniform Mercosur declarations form.

Without question, the economic dynamism of the Mercosur countries is great—and promises to become even greater. But before international companies enter this exciting market arena, they need to be fully aware of the real obstacles and challenges they may well encounter. And among the most prominent are those that relate directly to transportation, logistics, and supply chain management.