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A way forward for hemispheric trade

Americas Society/Council of the Americas | February 2009

A Way Forward for Hemispheric Trade

Eric Farnsworth

Job creation in the formal economy is arguably Latin America’s most pressing development need, particularly during troubled economic times. For this, healthy trade and investment flows are essential. And yet, the existing model of hemispheric trade expansion has reached a point of diminishing returns. This is why a new path forward must be found.

The existing US trade strategy-competitive liberalization-was conceived early in the Bush administration’s tenure as a way to advance the trade agenda once it became clear that a hemispheric consensus on trade no longer prevailed. Supporters of the strategy, which involves striking trade agreements with willing hemispheric partners on a bilateral or subregional basis, argued that it would allow the United States to stitch together a virtual hemisphere-wide free trade area while putting pressure on nations such as Brazil (which has been reluctant to conclude a comprehensive hemispheric trade agreement absent progress on agriculture subsidies) to come to the table or risk being left behind.

Indeed, if and when agreements with Colombia and Panama are concluded, the United States will have completed trade pacts with nations representing some 55 percent of the hemisphere’s GDP (excluding the United States) and covering almost 90 percent of total US trade with the hemisphere. That represents concrete progress both on commercial and foreign policy grounds, and is a basis on which to build a broader hemispheric trade agenda.

Nonetheless, it was also clear from the beginning that competitive liberalization would take us only so far. Potential problems were readily apparent. Individual US agreements with hemispheric nations differ in their tariff schedules, product coverage, and other provisions. Nations including Canada, Chile, Colombia, Mexico, and Peru, no longer bound by the idea of forging a comprehensive, single hemispheric trade pact, have moved aggressively to conclude their own agreements with each other and with third countries-agreements that put the United States at a commercial disadvantage because it is not a party to them.

An expanding web of distinct trade agreements has now created a so-called spaghetti-bowl dilemma in the hemisphere. Commercial relationships, in an age when global competitiveness requires global production platforms and supply chain efficiencies, are in some cases more complicated than ever.

Leaving out Brazil

At the same time, a strategy explicitly or implicitly designed to isolate Brazil on hemispheric trade has predictably backfired. Brazil has refused to be cornered, leaving an agreement with Latin America’s largest economy-the main interest of the private sector-off the table. This point is worth emphasizing, because as a practical matter it has required more political capital to get each successive trade agreement through Congress, a situation worsened by reduced private sector interest in each individual agreement, given the comparatively small commercial stakes involved.

Consider, for example, the amount of private sector lobbying heft that was expended on permanent normal trade status for China, or that was ready to be deployed to advance a hemisphere-wide Free Trade Area of the Americas, versus that deployed for smaller trade agreements such as those with Central America and the Dominican Republic, or the pending agreements with Colombia and Panama. For the former, CEOs and members of corporate boards personally lobbied as a priority; for the latter, government relations professionals and trade associations carried most of the load. When the hemispheric trade agenda was sliced and then diced into smaller, more digestible parts, excluding the largest regional economy, the private sector lost a certain amount of interest and ramped up its efforts elsewhere.

Finally, competitive liberalization was bound to run aground eventually because of the finite number of willing trade partners in the Americas. Simply put, there just are not that many additional hemispheric nations lining up for free trade deals with the United States. The reasons for this are complex and varied.

Brazil in particular has objected to the fact that US agriculture subsidies are not open to negotiation in the hemispheric context (they are part of the Doha Development Round ofn negotiations at the World Trade Organization). At the same time, by effectively slowing down the timetable for broader hemispheric trade expansion, Brazil has been able to build its own political and economic influence in the region, a long-sought goal. As a consequence, any negotiation on hemispheric trade, if and when it comes, could be between the United States and Brazil as the leaders of roughly equal trade blocs.

In addition, the politics of Latin America has changed dramatically in the past decade. Thus a number of nations, including Argentina, Bolivia, Ecuador, and Venezuela, have little interest at this point anyway in joining a trade grouping that they see as US-led, or even one that includes the United States. In part, this view may honestly reflect populist leaders’ ideological rejection of the prevailing trade and investment models. But politics is the dominant motivation. Venezuela, for example, has little difficulty trading with the United States when it suits its economic purposes. And Bolivia and Ecuador have both sent delegations to Washington in recent months to ask for an extension of U.S. trade preferences.

Nonetheless, since it takes two to tango, the reality is that, looking forward, a new course for trade expansion must be pursued.

The vital tool

With roughly 40 percent of the region’s population continuing to live in poverty, the need for a broad hemispheric growth agenda is critical, even more so during the current time of economic uncertainty and stress. Trade is no panacea, nor is trade sufficient in and of itself to produce prosperity. Nobody suggests that it is, despite the overheated rhetoric of the more bombastic critics. But it is a vital tool-alongside enlightened domestic policies on education and innovation, workforce development, labor codes, rule of law, and investment climate reforms-to help address the pressing development challenges facing the region. Trade expansion seen in this light offers the best means for linking the hemisphere to the global economy while encouraging the reforms necessary to build hemispheric competitiveness.

Even so, following the November election results in the United States, a number of observers on both sides of the trade debate have pronounced last rites on the US trade agenda in the Americas. To the cheers of trade opponents, these observers assert that there is little political appetite for further trade expansion efforts, that the Doha Round of global trade talks is far from completion, that pending free trade agreements including those with Colombia and Panama are unlikely to pass, and that even existing trade pacts, including the North American Free Trade Agreement (NAFTA), are subject to review and face possible renegotiation. At best, they say, other non-trade priorities will predominate. In the trade community, some go further, arguing that the greatest need of the moment is to fight looming protectionism and trade contraction, rather than to promote trade expansion.

The political climate is indeed difficult. Still, freer trade and increased foreign direct and domestic investment provide a vital means not only for promoting regional development but also for encouraging and underwriting political, economic, and social reforms. As part of a renewed emphasis on the Americas, the trade agenda could build hemispheric development while promoting US economic and foreign policy interests at the same time.

What to do? In the first place, the agreements with Colombia and Panama would need to be passed, and NAFTA reaffirmed, for the United States to maintain the credibility required to lead an effort on hemispheric trade expansion. Since trade expansion cannot occur in a vacuum, a new spirit of goodwill and mutual interest must also be established that will build a positive atmosphere within which specific policies can be pursued. Early, unilateral steps should be considered by the new US administration, among them: support for additional efforts to reduce the effects of the global financial crisis; a softening of the most punitive measures targeting Cuba, including restrictions on visits, exchanges, and remittances; and the naming of a special envoy for the Americas well in advance of the April Summit of the Americas in Trinidad and Tobago.

Second, near-term trade facilitation measures would keep the agenda moving while sidestepping the largest potential political difficulties. Increased technical assistance for countries in the region is warranted. Within existing frameworks, trade liberalization should also be advanced in areas that support a broader hemispheric agenda, including green technologies, alternative energy, education services, and customs reforms.

Consideration should also be given to certain promising efforts begun at the end of the Bush administration, including negotiations to enter the Trans-Pacific Strategic Economic Partnership, one of the most exciting frameworks for trade expansion that currently exists. Given the dynamism of Asia and much of South America’s West Coast, US engagement to promote the pan-Pacific trade and investment agenda would be a force multiplier, both for US commercial and policy interests and for broad-based Latin American development. It would also begin to build a broader hemispheric trade agenda, potentially attracting nations like Brazil (which sees huge opportunity in Asia) to participate fully.

What is needed now is a discussion to frame convergence among all these agreements and initiatives, and a road map on how to get there. One useful place to begin would be to push hard for the harmonization of rules of origin contained in existing US agreements with Latin American countries and Canada. Pathways to Prosperity, launched in September 2008 at the Americas Society in New York, would be one vehicle to consider for this purpose. The Pathways initiative seeks to bring together existing and potential hemispheric trade agreements into a more cohesive
approach, while working at the same time to build the broader development agenda. Over the longer term, a reevaluation of agriculture policies, perhaps linked to a new strategy on energy and climate change, would also be required.

Avenues for development

For the most part this is not sexy or headline-grabbing stuff, but it would make a lasting, positive impact on the conduct of commerce in the Western Hemisphere, leading to expanded trade and investment flows and job creation in the formal economy. And without job creation in the formal economy, where workers have access to health benefits and state-protected labor rights, it is difficult to develop credible avenues for broad-based economic development.

The Free Trade Area of the Americas proved too ambitious when it was proposed in the 1990s, but it should remain a longer-term goal of US and hemispheric leaders. The Doha negotiations are important but far from being concluded. In the meantime, a new path forward on trade must be found in order to support the broader hemispheric growth agenda. With the global economy acutely troubled, the time to move forward is now.

 source: AS/COA