Despite the difficulties and failures that free trade agreements (FTA) have posed in Latin America, the political chiefs of four emerging economies in the region have taken a leap of faith once again to open their borders and find common ground for exchange of goods and services while hoping to present an enticing opportunity to foreign investment.
The presidents of Chile, Sebastian Pinera; Peru, Ollanta Humala; Mexico, Enrique Pena Nieto and Colombia, Juan Manuel Santos met in Cali, Colombia, this past week to establish new bases for the Pacific Alliance, the free trade agreement created in 2011.
Observer countries aspiring to become full members were also invited to the Cali meeting including the President of Panama, Ricardo Martinelli; from Guatemala, Otto Perez Molina and Costa Rica’s Laura Chinchilla. Mariano Rajoy, the head of Spain and Canadian Prime Minister Stephen Harper were also part of the meeting.
Eric Farnsworth, vice president of Council of the Americas and the Americas Society (AS/COA), moderated a panel discussion related to the agreement hosted at the AS/COA delegation in New York City. Panelists included Colombian Ambassador Carlos Urrutia; Barbara Kotschwar, research fellow at the Peterson Institute for International Economics and co-author of “The Next Big Thing? The Trans Pacific Partnership and Latin America”; Chris Ryan, CEO, Lakeland Industries and Sidney N. Weiss, attorney, customs and international trade issues.
The panel examined Latin America’s new trade bloc that represents 215 million people and 39 percent of Latin America’s GDP, placing the Pacific Alliance as the ninth largest economy in the world.
The Pacific Alliance’s goal is to open new doors to trade with Asian countries while easing tariffs, integrating stock markets and increasing trade opportunities among themselves based on common guidelines to avoid currency fluctuations. They are also attempting to attract investment in infrastructure and energy projects.
The discussion was centered on a number of issues including how the new FTA is looking to overcome difficulties other similar trade agreements have had in the region, including lack of infrastructure to increase transportation of goods and services among members and education and training deficits in the member countries’ labor force. Also discussed were the possible future inclusion of the United States and the role of other FTAs in the region such as Mercosur.
“We understand the Alliance as much more than a trade agreement,” said the Ambassador of Colombia. “It is an ongoing process to create a deep integration among our nations so we can better engage with the rest of the world.”
Urrutia continued to clarify that these countries do not see this FTA as a members-only initiative but as an open process that serves their goal of integrating with the world, particularly, with the Asia Pacific region. The Alliance, he said, heads to a free flow of capital and people.
FTA experiences in the region
Since the 1960s, several attempts have been made to materialize FTAs among the Americas—Latin America, the Caribbean and the United States and Canada—and between these countries and the rest of the world but few with any success. Some Latin American economists and political observers believe the presence of the United States and Canada as well as the European Union countries and China represents a threat and a peril to the vulnerable emerging economies in Latin America.
The issue has consistently been the protection these strong economies bestow on certain domestic industries, such as agricultural, farming and oil subsidies, originating the well-known phenomenon of “dumping.” The failure of the Free Trade Agreement of the Americas (FTAA) was basically the ignored request to the United States from Brazil and Argentina to eliminate agricultural subsidies that hurt the agro-economies in the region.
Conservative as well as socialist senators in Colombia have clearly stated that free trade agreements such as the Pacific Alliance and other FTAs in the past have damaged the agricultural industry in the country, especially in the Valle of Cauca, a region considered “Colombia’s door to the Pacific” and known for its sugar cane industry, providing the product internally and to neighboring countries.
For their part, Colombian farmers have also expressed their concern regarding the Alliance, which they believe will preclude them to compete with other countries’ more advanced technologies. Also, they affirm that trade with larger economies such as India and China will reduce their odds to compete at international prices due to Asian countries’ larger labor forces if existing domestic prices pacts—such as the Andean Pact—are not maintained.
Pacific Alliance and Mercosur
According to AS/COA panelist and researcher Barbara Kotschwar, there are two approaches to free trade in the region: Mercosur—with member countries Argentina, Brazil, Uruguay, Paraguay and Venezuela, recently included Bolivia and possible inclusion of Cuba—and the Pacific Alliance.
“While Mercosur represents 21st Century socialism, the Pacific Alliance is more of 21st Century capitalism, which is taking a more pragmatic approach toward economic development incorporating elements of social inclusion as well as liberal economic policies,” Kotschwar said.
The expert believes the Pacific Alliance is a less ambitious project than the FTAA, in the sense that it will eliminate the political innuendos that have plagued the FTAA and will center on simple tariff issues—the FTA will eliminate 90 percent of the exchange duties among members—but a more ambitious one that will allow free movement of labor and capital. The Pacific Alliance is not trying to set up a model of FTAs for the 21st Century but just a pragmatic way to resolve the issues, she said.
Free trade includes flow of people
Presently, the Pacific Alliance country members have agreed to eliminate visas to the nationals of each country to move freely in the region. Eric Farnsworth, the panel moderator, posed the question regarding this issue with other prospective members such as Canada—implicitly the United States if this country ever decides to move into the FTA. Ambassador Urrutia responded saying that “the idea is that anybody that signs as a full member will have to sign up to ‘everything,’ that would be my own take [on the issue].”
The impact of NAFTA and later CAFTA-DR expelled millions of Mexicans and other rural workers from their countries of origin into the United States territory. It would be interesting to see how the “free flow of people” would develop in the next steps of the Pacific Alliance and if developed nations willing to become members would agree to it.