Council On Hemispheric Affairs
Monitoring Political, Economic and Diplomatic Issues Affecting the Western Hemisphere
Tuesday, October 18, 2005
COHA ECONOMIC RESEARCH
An Eye for an Eye? Disregarding Fairness, Disconnecting from the FTAA
– Brazil takes on the U.S. over the faltering hemispheric trade pact.
– EU in the race down to the wire.
– With the EU being responsible for a higher volume of trade with the region than the U.S. , Washington has to work harder to woo Latin America into its web.
– Disbelief in the region that rich nations will actually cancel existing agricultural subsidies.
Learning Not to Distrust Washington
In response to the 1980s debt crisis, many Latin American countries adopted far-flung economic reforms centered on trade liberalization. The capstone of their efforts occurred in 1994 when 34 Western Hemisphere nations met at the first Summit of the Americas in Miami. There, under U.S. leadership, they proposed a Free Trade Area of the Americas (FTAA) to integrate the economies of the Americas, and planned on signing it by January 1, 2005. Since 1994, however, there have been four summits and eight trade ministerial meetings, during which the shape of the proposed FTAA has advanced gradually through rounds of practical negotiations. As a result, three versions have since been created. In 2002, a second text was drafted at the Quito Ministerial Meeting which created a clause whereby the United States and Brazil would become the new, permanent co-chairs of the Trade Negotiations Committee (TNC). The third and most recent draft FTAA text was completed at the 2003 ministerial meeting in Miami.
However, a 2004 de facto suspension caused them to miss the January 1, 2005 completion deadline. Unlike the broad strategy fashioned at the commencement of the trade talks, both the United States and Brazil decided to concentrate on bilateral or sub-regional trade areas after the negotiations stalled at Cancún, Mexico in 2004 and there was a good deal of talk about FTAA-lite. As a result, the United States turned away from performing in the big tent in favor of an alternate strategy pushing for a Dominican Republic and Central American Free Trade Area Agreement (DR-CAFTA), meanwhile Brazil worked on strengthening its leadership with the Southern Common Market (MERCOSUR) and the South American Community of Nations.
The Causes of the Stalemate
The main issues that led to the standoff between the two hemispheric giants can be found in the 2003 FTAA draft agreement. The first source of contention has to do with the issue of market access, whose terms are stipulated in the FTAA’s Chapter 8 - Tariffs and Non- tariffs Measures. According to Chapter 8 Article 4, all parties shall eliminate custom duties or ensure that peak tariffs conform to the Tariff Elimination Program (TEP). Non-tariff measures, such as import licensing procedures, are prohibited as well.
The problem is that the U.S. and Brazil have different concerns on tariff matters. The United States - a country with low average tariffs (4%) and high peak tariffs - has sought to lower the overall tariff rate on all products, especially after seeing its textile and IT products lose price competitiveness in Brazil. On the other hand, Brazil and other Latin American countries with high average tariffs (15%) and low peak tariffs maintain that the latter should be handled on an item by item negotiation basis since they largely affect specifically the footwear, textile and fruit juices industries in Brazil. This difference of opinion has made it difficult to agree on the specifics of the TEP.
The second issue concerns the global outrage among the poor countries over the question of agricultural subsidies. Chapter 9 Article 7 of the FTAA draft, reads “Parties shall eliminate and shall not introduce or reintroduce in any form export subsidies for agricultural products exported to other parties.” However, even efforts to define “export subsidies” have been difficult. The issue looms large mainly because of U.S. farm subsidies, which, according to the Environmental Working Group, amount to over $10 billion every year, totaling $130 billion from 1995 to 2003. U.S. legislators are reluctant to reduce the subsidies due to the political clout of interest groups from the farming states, particularly among producers of sugar and orange juice, who see subsidy abatement as the third rail of U.S. politics, and whose sectors would be highly vulnerable to competition from Latin America.
The U.S. has maintained that subsidy reduction should not be discussed in the FTAA but rather in the World Trade Organization, since both of the world’s major farm subsidizers - the EU and Japan, as well as the U.S. - would be included in that venue. That sectarian position is based on a concern that subsidy reduction scheduled by the FTAA might weaken the competitive standing of U.S. agriculture on the world market. But this is not necessarily true. A 1998 U.S. Department of Agriculture analysis concluded that under the FTAA, U.S agriculture would generally see gains - namely wheat, corn, soybean, cotton, etc - even though sugar and orange juice might face increased competition.
The last issue currently affecting FTAA negotiations is that of non-goods trade, especially how Intellectual Property Rights (IPRs) will be managed. According to the present FTAA draft (Chapter 20), each party should comply with existing agreements on IPRs such as the Bern Convention of 1971, which regulates the protection of literary and art work, and the Paris Convention of 1967, which safeguards patents, industrial designs and trademarks. Such requirements would represent a huge financial burden on developing countries, including most of Latin America which have profited from tax regulation of non-tangible goods. Brazil has argued that if the U.S will not confront the agricultural subsidy issue in the FTAA, the IPR question should likewise be discussed in the WTO.
The present FTAA impasse may stem from the abuse of two terms: “free” and “fair.” The concept of “free,” the anti- U.S. bloc maintains, shouldn’t mean “no obstacles to the strong.” The U.S. is set on winning “never-interrupted” benefits from both the goods trade and the non-goods trade under the FTAA. This compels Latin American countries to willingly suffer damage to their own economies. This is not truly “free” trade because free trade means trade “without coercion.”
In his second term presidential agenda, President Bush stated that trade between the duty-free market of the U.S and the protectionist market of Central America was not “fair.” However, it is hard to call the imposition of equal rules on profoundly unequal players as “fair.” Equality is not the only criterion for “fair.” The basic needs of economically-strained Latin American nations should also be taken into consideration.
Necessity of Alternatives
Brazil, Latin America’s de facto spokesman, has no particular incentive to complete the FTAA negotiations: as its officials see things, it would be more advantageous for the country to maintain the status quo. That is because the terms of trade are presently in Brazil’s favor - a $4.4 billion differential in 2004 - due to its high average tariff rate on the goods trade (10.8% in 2004) and existing non-tariff barriers such as non-automatic import license procedures or high registration fees. These advantages would disappear under the FTAA’s elimination of both tariff and non-tariff barriers. On the other hand, it is in the U.S.’s best interest to see the FTAA through to fruition. A 2001 analysis by the business group, the Council of the Americas, found that national income of the U.S would increase about $6.291 billion if the FTAA were to be ratified.
On the other hand, a free trade agreement with the European Union (EU) already the most important partner in MERCOSUR’s trade, would provide greater benefits to Brazil than the FTAA. The EU’s offer to MERCOSUR would, importantly, expand Brazil’s agricultural market access and reduce the tariffs in ten years. It appears on the surface to be far more favorable to Latin American interests than the FTAA. The relations between MERCOSUR and the EU, in fact, have intensified in recent months, and a ministerial level meeting was held in September 2005, while the FTAA discussions have not significantly advanced since 2003.
This means that an alternative model must be found to end the standoff over the FTAA, if that pact is to move forward. Such an alternative could be found by changing the fundamental calculus of the agreement. The substantial asymmetry among the trading partners and the basic needs of ordinary citizens should be taken into consideration during the negotiations, rather than focusing solely on the single factor of economic profitability.
Despite the pessimistic view held by many hemispheric figures concerning the viability of the FTAA in its present form, most hemispheric countries would acknowledge that an improved FTAA, bringing economic integration among 34 nations, is still worth pursuing. However, is it uncertain whether the FTAA can produce the “win-win” strategy that Washington’s rhetoric so ardently touts. The U.S. has been steadfast in its efforts to communicate the telling that the FTAA is good for the soul, mind and body, while Brazil and other South American countries have stepped up efforts to lift a barrier against it. In the past decade, the FTAA increasingly has become a political issue, rather than an economic one; thus it seems that only major political compromises can rescue it from sinking, to be replaced with another trade plan.
At this moment, Washington and Brasilia must take a leap of faith to salvage their trade pact. To achieve even a small breakthrough, both sides must be flexible and open to hearing out alternatives, yet at the current moment the only available alternatives would appear to further cripple the FTAA. For instance, the Economic Complementation Agreement (ECA) between South Korea and Mexico, and the Comprehensive Economic Partnership Agreement (CEPA) between Japan and the United States could partially substitute for the FTAA. Another approach is pose by Venezuela’s proposed economic program, ALBA (Alternativa Bolivarina para las Américas), which would bar the United States from dominating trade issues in the Americas.
Perhaps, the advancement of the FTAA will only come through serious concessions by each major player. First, each will have to realize that the current ongoing bilateral and sub-regional efforts can only complicate the advancement of the FTAA. For example, Washington considered the recent ratification of the DR-CAFTA, as a major achievement towards the FTAA. Yet, DR-CAFTA still rankles Brazilian officials, because they are afraid of losing their role as a regional leader. Brazil is prepared to work to advance the FTAA, but only if it can be harmonized with authentic Brazilian interests.
The FTAA could lead to both the expansion of the hemispheric market economy and strengthen democracy. Or, it could threaten the stability and prosperity of Latin America. But if it is to be achieved, the current impasse must be overcome. For example, Brazilian authorities have asked to have sanctions authorized against the U.S. cotton subsidy program, because under the WTO rules, the US had to eliminate its subsidy schedule before July 1, 2005. However, Washington is still debating the measure, and Brazil finally has delivered its request that the U.S. be sanctioned by the WTO.
In his address at the United Nations, President Bush declared that “The United States is ready to eliminate all tariffs, subsidies and other barriers to free flow of goods and services as other nations do the same.” In another venue, the U.S. has offered to slash its agricultural subsidies by 50%. However Washington must go through the difficult task of resolving the agricultural subsidy question in Congress and by engaging U.S. public opinion, if it is to have a prayer of a chance of challenging the current standoff over the issue. Statements by President Bush will continue to reek of hypocrisy until that issue is frontally addressed with no secret agenda using substitute para-subsidy methods near at hand. By continually insisting on equal terms for such controversial issues as the service trade, IPR, and government procurement, while remaining unwilling to eliminate up front its farm subsidy programs, the U.S. stymies the one predictable trade area where Latin America otherwise might have a comparative advantage.
The United States needs to earnestly consider the meaning of “fair trade” when using that phrase. Like President Bush said when addressing his presidential agenda last August, the U.S. wants fair and free trade: “...All I say to people is you treat us the way we treat you. If your goods can come into our markets duty-free, our goods ought to be able to go into your markets duty-free.”
Nevertheless, such openness does not imply fairness. As far as the economic scales are concerned, according to a World Bank report (2004), the United States overwhelms the other FTAA countries. If some poor regional nations have their economies severely damaged by such one-sided trade, it could potentially have a ripple effect through all of Latin America. The core value of democracy is equality, and it does not necessarily mean the same eventual benefits for weak and strong alike will take place; it only means the same opportunities for each will be present. The FTAA policies that the U.S. is insisting upon would rather systematically deny those opportunities to weaker Latin American economies. Moreover, the United States has stated that the FTAA will not only open markets for domestic goods and services, but will prove politically beneficial, leading to an expansion of democracy linked to open markets. But the FTAA could also impede democratic growth, exacerbating gaping social inequalities and encouraging a powerful local elite, further underscoring the pattern of uneven concentration of wealth and creating a vastly imbalanced legion of stakeholders.
Latin American countries have rightly learned to be apprehensive over the domination of the United States, and it is this reluctance that is behind their slowdown over the FTAA. However, there are potential benefits for all if a truly “free” and “fair” agreement can be reached. The FTAA would not have been launched without Washington’s leadership, and now Washington must exhibit that sort of inclusive, high-minded vision if it wants to bring about an integrated American economic community.
This analysis was prepared by COHA Research Associates Ji Kim and Min Sun Kim
COHA Staff Editor: Michael Lettieri
October 18, 2005
For more information
“Trade Facts.” A Facts sheet of the Office of the United States Trade Representative. November 2003
“FTAA Blueprint for prosperity.” Council of the Americas September 2001
“Farm subsidy database.” The Environmental Working Group. (updated for 2003)
“EU-Mercosur FTA Talks to restart in November.” USDA Foreign Agricultural Service GAIN Report. 7 September 2005.
“Beyond Borders: The New Regionalism in Latin America.” Inter-American Development Bank. November 2004.
“International Agriculture and Trade.” Economic Research Service, the United States Department of Agriculture, 10 November 1998.
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