A New Trade Policy Agenda for the Americas

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Trade policy and economic integration are once again emerging as priority issues in inter-American affairs. The regional trade agenda had been largely dormant since hemispheric free trade talks (FTAA) were suspended in 2005 (which, ironically, was the same year that the US Congress approved the CAFTA trade accords negotiated by the George W. Bush Administration with five Central American nations and the Dominican Republic). In its second term, the Bush Administration managed to reach new trade agreements with three other countries, Peru, Panama, and Colombia—but the US Congress, under Democratic control, formally ratified only the Peru treaty.

Global and regional trade issues were largely ignored during most of President Obama’s first term. It was only in 2012 that Congressional approved the US free trade pacts with Colombia and Panama (as well as South Korea) some five years earlier.

The most important hemispheric trade initiatives in recent years has been the Pacific Alliance launched by Mexico, Colombia, Peru, and Chile in 2010. The four-year old Alliance is a particularly ambitious effort to integrate and harmonize four of the region’s most open and reform-minded economies.

Despite the absence of much policy attention, trading patterns in the Americas have changed dramatically in the past dozen or so years. The most striking shift has been the enormous expansion of commerce between China and the Americas, North and South. Chinese trade with Latin America skyrocketed by a factor of 25 from 2000 to 2012—from $10 billion per year at the turn of the century to more than $250 billion today. In the same period, China’s overall trade with the Western Hemisphere (including Canada and the US) grew from some $120 billion to around $800 billion.

China displaced Mexico as the US’s second largest trading partner, while also becoming the first or second largest commercial partner for six South American nations. China’s immense and rapidly rising demand for food, energy, and other natural resources—and the resulting increase in global commodity prices—was a central driver of Latin America’s unusually robust economic growth from 2004 through 2011. It was the huge expansion of exports to China that shielded the economies of most Latin American nations from the economic reversals of the European Union and the US. And it has been the slowing of the Chinese economy that has been mostly responsible for Latin America’s slackening pace of growth in the past couple of years.

Despite China’s extensive penetration of markets across Latin America, US trade with the region also flourished in the 2000 to 2012 period. US exports to Mexico, which account for nearly sixty percent of all US sales to Latin America, doubled. Exports to Brazil grew by nearly three times, while commerce with Peru, Chile, and Colombia expanded almost five-fold.

During this period of expanding trade and surging commodity prices, Latin America grew at its fastest pace in more than a generation. In past two years, however, growth rates across the region have fallen. The economic slowdown reflects, in part, declining export revenues (as demand and prices for the region’s commodities have fallen). These have been compounded by reduced foreign investment, which may be the result of longer term shifts in the global and regional economies. Latin America’s economic performance in the coming period will importantly hinge on the extent to which the region’s governments and corporations effectively respond to these changes. They include:

The Slowing of Growth in China

Although China’s growth rate is expected to remain above seven percent a year, the country can no longer sustain the extremely rapid annual average of about 10 percent that it achieved for more than a generation. China will remain a centrally vital market for Latin America’s commodity exports, but the region’s countries can no longer count on a yearly double digit expansion in Chinese demand. They will have to work harder to maintain their sales to the Asian giant, improve the competitiveness of their exports, and do more to expand other markets in the US, Europe, Asia, and Latin America itself.

The New US Trade Agenda

In its second term, the Obama Administration is giving new emphasis to trade in its foreign policy agenda, and is now deeply involved in negotiations (or meganegotiations as they are often called) toward two extremely ambitious trade agreements.

The closest to completion is the Trans-Pacific Partnership (TPP), which currently involves three Latin American nations (Chile, Mexico, and Peru) and 12 Asian nations (including Japan and Korea, though not China or India). Although now targeted for completions by the end of this year, TPP negotiations are like to continue for some time into the future because they are complex with the toughest issues yet to be resolved. Moreover, US Congress remains deeply divided on trade matters, and it remains uncertain whether it will provide fast track negotiating authority to the White House. That authority has long been essential for US to conclude any foreign trade agreement.

The second mega-negotiation—the Trans-Atlantic Trade and Investment Partnership (TTIP)—is aimed creating a free trade zone joining the United States and the European Union. This would be the largest free trade area ever assembled, with participating countries accounting for about 50 percent of world economic activity.

If the negotiations for the TPP and the TTIP succeed, the resulting agreements would likely reshape the patterns, rules, and practices of international trade. The economic heft and reach of the participating nations virtually assures that the agreements would have an impact across the globe, on the economies of both member and non-member states. Major exporters to either the United States or the European Union, including such trade giants as China, Mexico, and Brazil, for example, could lose competitiveness in both markets and elsewhere as well, unless they were to align their policies with the terms of the new pacts.

Even those countries that have already signed free trade accords with the US and Europe could face new competition. Central American countries, for instance, are alarmed at the prospect of lower-cost Asian garment exports expanding rapidly into US and European markets. Mexico and Canada, whose economies are closely integrated with the US economy and enjoy free trade arrangements with the EU, have made clear their frustration at being excluded from the US-EU trade talks – which could have a sizable impact on their own trade and investment flows.

Another widely expressed concern is that the successful negotiation of the mega-agreements–the TPP and TTIP—could end up undercutting the WTO’s basic mission of creating a single world trading order to which all nations belong. Large scale free trade agreements with their own rules, encompassing a significant share of the world economy, no matter how much they boost international trade, could erode the importance of the WTO, rather than reenergize it.

Mexico’s Economic Reforms

In the past year, Mexico has embarked on an exceptionally ambitious and far-reaching program of economic reform designed to raise long-term productivity, improve fiscal management, and accelerate growth in the economy. The reforms— particularly the opening of Mexico’s energy sector and increasing competition in telecommunications—are expected to attract substantial new investment and add to Mexico’s already formidable export capacity. They may also create new impetus for a revamping and upgrading of NAFTA to make it into an even more productive trade agreement, more tightly integrating the economies of Mexico, the United States, and Canada. It is, however, still early to judge the gains that the Mexican reforms will produce. They will be determined by rules and regulations that are yet to be devised, and by how effectively they are implemented. 

The Maturing of the Pacific Alliance

The Pacific Alliance is nearing its fourth birthday. Three of the four presidents who signed the initial agreement will have been replaced in office by members of opposition parties—and the fourth, Juan Manuel Santos of Colombia, faces a tough re-election challenge this month. The Alliance has made major progress toward removing barriers to trade among the region’s most economically liberal countries, and alignment of their economic policies has begun. Two other countries, Costa Rica and Panama, are likely soon to be incorporated as members.

The next few years will be crucial in determining the viability and longer-term prospects of the Alliance. If progress is sustained, it will be a magnet for other Latin American nations (some of which are already observers) and could become an influential force in regional and international trade discussions. Recently inaugurated President Michelle Bachelet of Chile, who is committed to a stronger relationship with Brazil, has expressed interest in exploring ways to meld the Pacific Alliance and Mercosur. This still appears unlikely, but if it were to proceed, it could well produce a new dynamic in Latin American integration efforts.

Brazil and the Troubled Mercosur

This 25 year-old South American trade pact, which brings together five countries accounting for about 7 one half of Latin America’s economic activity, is largely dysfunctional with regard to trade and other economic issues. Some analysts suggest that Mercosur serves mainly as a political mechanism to mediate and help resolve disputes among its members.

It is a bloc of heavily protectionist nations that may be limiting, rather than boosting the foreign trade prospects and investment appeal of its members. Two Mercosur economies are in particularly difficult straits, with precarious futures. With the value of its oil production and exports falling, Venezuela is nearing economic collapse and is torn by political turmoil. It has the world’s highest inflation, an enormous fiscal deficit, a tottering currency, and widespread shortages of essential goods—all compounded by inept and erratic economic management. Recent measure have slowed the downward slide of the Argentine economy. Though it still faces high and rising inflation, consumer shortages, limited access to foreign investment, and declining reserves, Argentina now appears likely to avoid a full blown crisis.

However, it is the disappointing recent performance of Brazil, the giant of Latin America and the world’s sixth largest economy that may most complicate South America’s trade prospects. After a half a dozen years of robust economic growth (from 2005 through 2010), Brazil has been stumbling in the past three years and most forecasts remain downbeat on the country’s outlook. Although far sturdier and better administered than the economies of neighboring Argentina and Venezuela, the Brazilian economy is facing a period of slow growth, declining foreign investment, and falling export revenues. Like many other South American nations, it is especially vulnerable to declining Chinese demand for its commodity exports.

Although major changes are unlikely to occur before presidential elections in October, Brazil may be forced to reconsider its trade policy options. Brazil’s leadership, public and private, is coming to recognize that its import barriers are compounding other problems confronting their economy. Certainly, the nation’s manufacturing sector is no longer a stronghold of protectionism as it once was. An increasing number of corporate leaders now support wide ranging domestic reforms and a broad opening of the economy.

The Brazilian government and corporate leaders are also very much aware of the competitiveness problems the country could face if the TPP and TTIP agreements move forward. They recognize the restrictions that Mercosur’s status as custom union (with a common external tariff) places on Brazil’s ability to pursue new trade agreements with other nations. Brazil has been seeking to modify Mercosur’s rules so that it can have more autonomy to negotiate commercial arrangement with other nations and groups of nations (like the EU or Pacific Alliance).

Beyond high tariffs on manufactured product, Brazil currently has in place myriad economic policies and arrangements that stand in the way of expanding trade and foreign investments. These include a heavy bias toward national companies through government procurement rules and subsidized prices and interest rates, as well as procedures and regulations that create a range of bureaucratic and logistical obstacles to all businesses. Some observers believe that, however the elections turns out, the country’s economic problems will force the next government to pursue an energetic reform agenda. Others worry that political obstacles will continue to block any serious reform efforts, as they have done for so many years.

Trade analyst Jeffrey Schott calls the start of this century the lost decade for trade negotiations, referring mainly to the very limited progress in the Doha round of global trade talks and the outright failure to conclude the hemisphere-wide FTAA. The one bright spot has been bilateral (and a few plurilateral) negotiations, which produced a complex web of agreements among the countries of the Americas. These included US agreements with 11 Latin American nations, accounting for about one-half of the region’s economic activity. These 11 economies have also negotiated free trade pacts among themselves and with Canada and the EU.

In the last few years, however, a new wave of exceptionally ambitious trade initiatives have emerged—including the TTIP, the TPP, and the Pacific Alliance. They differ markedly from past negotiations in that, they are neither fully international (like those managed by the WTO) nor bound by geographic proximity (as the EU, Mercosur, and Nafta). In addition, they address issues that have been excluded from traditional trade negotiations like government procurement, treatment of foreign investors, labor and environmental questions, and trade in services.

There is no guarantee that new trade agenda will lead to the large multilateral agreements that eluded the FTAA and Doha initiatives. The negotiations, despite their early progress, could well stumble on the more complex and politically sensitive issues which have not yet been dealt with. A lot also depends on the US government, which is playing a central part in both the TTIP and TPP, but may not be able to sustain its role without securing fast track from what now appears to be a reluctant Congress.

Still, this is the best opportunity, since the successful conclusion of the Uruguay Round in 1994, for importantly advancing the global and hemispheric trade agendas. The Latin American nations are today, more than ever before, participating actively and assertively in the international economy with a wide range of diverse partners. The multiple trade initiatives now being negotiated require serious and sustained attention from every Latin American government because of their far-reaching ramifications for the region’s commerce, investment, and growth prospects in the coming period.