Free trade in the Americas

 

 

Heads of state from 34 Western Hemisphere countries have injected new political momentum into attempts to create a Free Trade Area of the Americas (FTAA). At the Third Summit of the Americas, held on 20-22 April in Quebec City, Canada, leaders agreed to conclude negotiations on an FTAA by 1 January, 2005. Comprising 800 million consumers and accounting for over one-third of global economic output, the FTAA would constitute the world's largest trade bloc.

 

However, progress will not be achieved easily or quickly. In both the US and Latin America, public opinion is divided on the virtues of a hemispheric trade bloc. The two key countries involved in the negotiations, the US and Brazil, are at odds over the terms of any agreement; in both countries, major domestic political lobbies are resisting compromise. The creation of an FTAA would have broad implications for the international trade system. However, at this stage, it is not clear whether the project would promote further liberalisation or simply generate increased rivalry with other trade blocs in Europe and Asia, fracturing the global trade system.

 

 

The concept of free trade in the Americas was proposed in June 1990 by former US President George Bush, who envisaged a free trade system stretching from Alaska to the southern tip of Chile. Given the uncertainty over the proposal's terms and timeframe, its main significance was Washington's offer of a special relationship between the US and the other countries of the Western Hemisphere. On assuming office in 1992, President Bill Clinton added his backing to the concept of hemispheric free trade. As a first step in pushing the project forward, in 1993 he persuaded the US Congress to approve the North America Free Trade Agreement (NAFTA) with Canada and Mexico. The domestic debate in the US over the merits of NAFTA was intense, with a large segment of the public particularly sceptical of closer economic and political relationships with Mexico.

 

In December 1994, Clinton convened in Miami the first hemispheric summit since 1967. While leaders agreed to complete an FTAA by 2005, talks were hampered by Clinton's failure to persuade the US Congress to renew 'fast-track' negotiating authority. This authority gives the US President the ability to move specific trade talks forward, as it provides a high degree of assurance that Congress will approve the trade agreement that is eventually negotiated. The inauguration of US President George W. Bush in January 2001 was greeted with cautious optimism by the majority of Latin American leaders. As the former governor of a southern US border state – Texas – Bush is regarded as a leader who understands the importance of the free trade proposal to Latin America's development prospects and the region's broader relations with the US. At the Quebec City meeting, Bush committed himself to obtaining fast-track authority by the end of 2001. This pledge, and the probability that it will be realised (albeit in return for considerable concessions of some form), has given the faltering FTAA process another push forward.

 

 

Nevertheless, the FTAA initiative remains controversial in the US. Supporters argue that a regional free trade agreement will bolster US prosperity by opening up Latin American markets to increased exports and investment. Currently, average import tariffs in Latin America are three times higher than in the US (12%, compared with 4%). While Latin and Central American countries – excluding Mexico - account for less than 7% of total US trade flows, they are among the fastest-growing and most receptive US trading partners. In 1990-99, US exports to the Americas – excluding Canada and Mexico – increased by 7.8%, compared with 6.3% for the rest of the world. In the same period, US exporters captured 32% of the Latin American market, compared with 15% in Asia and 8% in Europe. Advocates of the FTAA agreement also argue that the project includes a significant political dimension: closer ties are seen as helping to underpin stability, security and liberal democracy in Latin America, while improving US-Latin American cooperation on a range of issues, including anti-narcotics efforts.

 

However, US labour unions and anti-globalisation activists argue that an FTAA would lead to the export of jobs by inducing an outflow of US capital in pursuit of the much lower wages and weaker safety and environmental standards that exist throughout Latin America. The FTAA project has also been criticised on political grounds: there are concerns that it would involve the US more intimately in the instabilities and economic turmoil of many of its southern neighbours. By offering Latin American countries a special relationship, the US might also come under pressure to provide more aid to the region and/or to lead further financial bailouts of crisis-hit countries there.

 

The US offer of a special relationship was greeted enthusiastically by most Latin American leaders in the mid-1990s. They hoped that stronger trade and investment ties with the US would solidify the impressive economic reforms of the early 1990s and accelerate economic growth. However, expectations have fallen sharply since 1994. Clinton's failure over six years to obtain fast-track authority from Congress, and the current impasse over providing his successor with such powers, have been interpreted as symbolising a decline in US support for a special hemispheric relationship.

 

The support of Latin American governments for the FTAA process cannot conceal misgivings harboured by sections of public opinion and vested interests in the region. Many Latin Americans understand that a free trade agreement with the US will open domestic economies to increased competition and scrutiny in policy areas relating to workers' rights and environmental standards. Public opposition to hemispheric free trade could grow if the region's levels of poverty do not decline. Despite the improvement in overall levels of economic growth in the 1990s, economic inequality remains a major problem: the number of people living on less than $1 a day stands at 40% of the Latin American population. Too few Latin Americans have so far seen evidence that the shift towards freer trade has improved their living standards.

 

 

Whether an FTAA comes into being may ultimately depend on the willingness and ability of the US and Brazil to reach agreement. Brazil's preferred trade negotiation strategy would have been to unite Latin American countries under its ostensible leadership and/or within the Mercosur trade bloc, so that regional countries could approach talks with the more powerful US from a position of strength. Although Brazil at Quebec City supported the drive to complete FTAA talks by 2005, the fact remains that its government would have to face down powerful industrial lobbies before reaching a deal. Brazil's economy is highly protected, with import tariffs averaging almost 15%. Even higher tariff levels and restrictions protect large industries such as automobiles, chemicals, pharmaceuticals and computers.

 

Brazilian officials have stressed that, if a deal is to be reached, it will have to provide substantial access to the most highly protected sectors of the US economy. Increased access to the US agricultural sector is a particular priority for Brazil, which objects to high US price supports and import restrictions for products such as sugar, peanuts and tobacco. Brazil has also criticised the anti-dumping procedures that protect US steelmakers. Officials claim that these various restrictions cost Brazil $10 billion annually in lost export sales. However, the US is unwilling to negotiate reductions with Brazil on most of these restrictions and anti-dumping measures. For example, Washington argues that financial support for the US agricultural sector should only be discussed in global trade talks in which the policies of its largest competitor, the European Union (EU), are also addressed. The US does not wish to make concessions in the context of talks with Brazil, as this would involve spending negotiating capital at the global level.

Arriving at a solution acceptable to both the US and Brazil is not an impossible task. Negotiators could finesse some differences by allowing each side to accept long phase-in periods for free trade arrangements to take effect. Gradual market opening, perhaps over a 10-15 year period, could do much to quell protectionist opposition. Any US attempt to push Brazil into a deal – for example, by pursuing free trade agreements with Chile and Argentina – could backfire. A strategy of isolating Brazil, which US Trade Representative Robert Zoellick has openly advocated, could prompt Brazil to complete ongoing free trade negotiations with the EU instead. As the US accounts for 22% of Brazil's trade, and Europe for 28%, this is a credible option. A hemispheric free trade grouping without Brazil, which accounts for half of Latin America's population and one-third of its economic output, would lack credibility.

 

 

If the obstacles facing the FTAA are substantial, there are also sound reasons to question the wisdom of the FTAA vision itself. Economists have long argued that broad, multilateral trade liberalisation is far superior to narrower bilateral or regional agreements in enhancing trade flows and economic growth. Global agreements are also less likely to discriminate against non-members and increase rivalry among trade blocs. In the case of the FTAA, there are concerns that the US risks balkanising the international trading system for the sake of gaining better access to Latin America's comparatively diminutive markets.

 

Washington argues that, far from undermining the world trade system, the FTAA will produce 'competition for liberalisation' at the global level, as non-members experience discrimination against their exports. Specifically, it expects the FTAA project to pressure Europe and Asia into accepting a compromise with the US on the agenda of any new round of multilateral negotiations launched at the November 2001 World Trade Organisation Ministerial Meeting in Qatar. The Bush administration views regional and multilateral talks as alternative, rather than conflicting, trade strategies. However, the complexity of the issues and trade-offs involved could eventually force it to choose between tracks.