Purpose - JustAnswer



Purpose of this report

In this report we shall the study the impact of the recent joining of Venezuela as an associate member of MERCOSUR (July, 2004). As a Venezuelan business owner of an IT company that deals in software development including a division dealing in computer hardware, it must be borne in mind that this fact will have a far-reaching effect on our company. In this report we shall try to analyze the benefits and drawbacks of Venezuela joining the MERCOSUR and how to gear up our company to take advantage of this opportunity.

Overview of the Venezuelan Economy

The Venezuelan economy is largely based on oil and petroleum products. It has vast reserves of petroleum and natural gas. Petroleum accounts for the lion’s share of exports and also supplies inexpensive energy to the country’s industries. Petroleum is responsible for about 80% of the export income, 50% of government revenue, and roughly 30% of the gross domestic product.. Other exports are iron ore, bauxite, aluminum, coffee, cocoa, rice, and cotton. Venezuela imports a variety of manufactured goods like machinery, vehicles, chemicals and also food. From the 1950s to the 1980s, the Venezuelan economy was one of the strongest in South America but the economy went into a tailspin after the fall in oil prices in the mid-1980s. Lower oil prices in the world market had forced Venezuela to take reform measures to liberalize its economy. Economic liberalization has led to a significant opening of the trade regime. Venezuela is the world's fifth largest oil producer, and the recent rise in crude oil prices has helped boost its economy. The Government is using oil revenue to develop heavy industries in the steel and aluminum sectors and also to spur growth in the manufacturing industries and in food processing. It is also trying to revive its agriculture sector on which it is highly dependant. Both coffee and cocoa crops have a major potential for export-led growth. While Venezuela's most pressing need is to overcome its macro-economic problems, it also needs to advance its trade reform program.

About MERCOSUR (Southern Common Market)

Mercosur (Southern Common Market) is a Regional Trade Agreement (RTA) between Brazil, Argentina, Uruguay, Paraguay which was was founded in 1991 by the Treaty of Asuncion. This was later amended and updated by the Treaty of Ouro Preto in 1994. The purpose of Mercosur was to create a common market between the participating countries and to promote free trade and the fluid movement of goods, peoples, and currency within the free trade zone with the elimination of customs duties and non-tariff restrictions on the movement of goods. The origins of Mercosur can be traced back to the various forms of economic co-operation that had been taking place between Argentina and Brazil since 1985. In July 2004, Venezuela joined the Mercosur as an Associate Member. This has far-reaching implications for the Venezuelan economy.

Benefits and drawbacks for the country of Venezuela as a result of their membership in MERCOSUR :-

Benefits

There are many benefits to Venezuela joining Mercosur. The Southern Common Market will open up trade opportunities in the free trade area that would not have existed otherwise. For instance, its integration with Brazil through Mercosur will open up for Venezuela the huge market that Brazil represents for a few sectors in which Venezuela has comparative advantage, especially in the energy and mine sector, and also in other smaller sectors such as the textiles and some agricultural products. The Mercosur is experiencing rapid growth and it has a flexible scheme of negotiations that allow special treatment to sensible industries. Entry into the Mercosur will also allow the Venezuelan economy, among other things, to trade with tariffs that are three times lower among a list of products that could exceed 500 in a first phase. In addition, it would facilitate special co-investment agreements in infrastructure and strategic projects such as satellites, ships, medicines, food and combustibles. Another long-term benefit is that by joining Mercosur, Venezuela would be joining a Free Trade Agreement not just with the other Mercosur menbers but also with the whole of the European Union, since Mercosur has signed several co-operation agreements with the EU in 1992, 1994 and 1995. Further, better employment opportunities will also be opened up for the Venezuelan people.

Drawbacks

Joining a free trade area (FTA) also has its drawbacks in that it may cause Trade Diversion. Trade may be diverted from a more efficient supplier outside the FTA to a less efficient supplier within the FTA. This may result in lowering of Government revenue and also a lessening in the quality of products. Employment inside the country may also be affected if production is out-sourced to lower wage countries resulting in fewer jobs within the country, which could greatly decrease the annual revenue and have a big impact on the national economy. Another drawback is that Venezuela’s Mercosur entry may devastate local industry by prompting a flood of cheap imports, especially from Brazil and Argentina, which are some of the world's biggest exporters of agricultural goods.

Benefits and drawbacks for my business as a result of Venezuela’s membership in MERCOSUR :-

Benefits

There are benefits for a company as a result of Venezuela joining Mercosur. A major benefit is that we will now be among a group of countries that already enjoy major foreign investment. Access to such investment and capital will put Venezuelan companies in an advantageous position by pumping in more money for production and other works. Venezuela now also has free access through Mercosur to a larger trading region. Lower tariff rates in this region will result in more revenue for the company. Money saved is money earned. Another big benefit is the access to more qualified employees to boost the company’s revenue. Some jobs can also be out-sourced to countries having lower wages.

Drawbacks

The biggest drawback for a company to the entry of Venezuela into Mercosur is the entry of more competitors in the market. The market could get flooded with goods and services and all companies will have to make major efforts to stay ahead of their existing and emerging competitors. Companies may reduce their prices to retain and attract customers but this could also mean that the quality of goods could decline. Also, free movement of peoples within the FTA resulting in recruitment of foreign nationals could also bring about cross-cultural dilemmas within a company.

Adjustments to my business due to Venezuela’s entry into Mercosur :-

Some adjustments will have to be made to my business so as to take advantage of the opportunity represented by Venezuela’s entry into Mercosur and to ensure that we remain ahead of our competitors. My business is in the field of Information Technology and is engaged in developing software of various kinds and we also have a division that manufactures certain hardware parts. A potentially cost effective adjustment will be to out-source some of our software development projects to other countries in the free trade area that have a lower wage rate than Venezuela. We will have to source an ideal partner and enter into an agreement for Business Process Out-sourcing. We shall also draw up plans to export the hardware parts that we manufacture to the other countries that are members of Mercosur. Further, in our planned recruitment drive for new employees, we have adjusted the recruitment process to enable us to take advantage of the larger pool of qualified personnel within the FTA that will now be available to us. But in carrying out these adjustments, we must bear in mind that the quality of our products does not decrease. In the long run, we also hope to enter into advantageous agreements with companies in the European Union.

In conclusion, I must add that we shall have to see Venezuela’s entry into Mercosur in a positive light and seize the opportunities that this will offer to us as a country and as a company.

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References :

Guerrero, Modesto Emilio. (Jul 9, 2004). Venezuela’s Triumph in Mercosur. Retrieved on Dec 6, 2007 from

Press Release, World Trade Organization. (Feb 7, 1996). Venezuela : February 1996. Retrieved on Dec 6, 2007 from

Columbia University Press. (2007). Encyclopedia-Venezuela Economy. The Columbia Electronic Encyclopedia, 6th Ed. Retrieved on Dec 6, 2007 from

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