Reprinted by permission from Foreign Affairs en Español Otoño-Invierno 2001

The main attraction of the Free Trade Area of the Americas (FTAA) is that it would replace most of the 30 subregional economic integration agreements in the hemisphere and thereby drastically reduce the pervasive cross-discrimination that now exists. This would be the case even if some current agreements do not disappear; the countries involved may wish to promote subregional political relationships or preserve actual or potential features not contemplated for the FTAA.

The critical country for determining the success or failure of the FTAA is the United States. It now takes more than 52 percent of the merchandise exports of the countries of Latin America and the Caribbean (LAC). If Mexico is excluded because it already has a free-trade agreement (FTA) with the United States, the proportion of LAC exports going to the United States is 30 percent. The export reliance on the U.S. market tends to be highest for countries geographically closest to the United States, which explains their great interest in the FTAA. However, even countries with modest percentages of exports to the United States, such as Argentina, Chile, and Uruguay, are anxious to conclude FTAs with the United States, either directly or through the FTAA. Their reason is that, for them, the growth potential of the Latin American market is modest and they wish to obtain reasonably certain access to the large, and largely open, U.S. market. The Brazilian attitude toward the FTAA has been ambiguous, but the formal position is one of welcome if the agreement takes Brazil’s trade needs into account.

The United States is the crucial country in another way. An FTAA without one or more important Latin American countries, especially Brazil, is undesirable; an FTAA without the United States is an oxymoron. It is unlikely that key countries will put their cards completely on the table when the bid-offer process gets under way, now scheduled for May 2002, if the U.S. president does not have trade-promotion authority (TPA). Many will hold back – or not participate at all – if negotiation must be done twice, once with experts from the executive branch and then again with 535 politically-motivated legislators from the two houses of congress.

The discussion that follows will play out scenarios and their impact on the various countries, especially those in Latin America and the Caribbean. The first possible outcome is straightforward: there will be an acceptable FTAA including all countries in the hemisphere, save Cuba, which is not now part of the process. The second is more ambiguous: one or more key LAC countries will stay out, especially Brazil. There is a sub-theme to this scenario: what will happen to Mercosur in that event? The third possibility is complete failure of the FTAA: how will this affect US-LAC relations? This scenario, also, has an important sub-theme: what will the United States and the LAC countries do in that event?

The idea of a hemisphere-wide FTA received a spontaneous and an unexpectedly warm reception when first suggested by President Bush (father) in 1990. The reason was that just about all LAC countries, some boldly and others more cautiously, had altered their development models during the previous "lost" decade to emphasize export growth, coupled with a search for foreign direct investment (FDI). Chile led the way, followed by Mexico. Brazil and Argentina began their process of coming together at that time in what is now the four-country customs union of Mercosur. The other hemispheric subregional groupings – including NAFTA – were beginning or deepening their economic integration arrangements. This was a major paradigm shift from export pessimism to export promotion and President Bush’s proposal was perfectly designed – whether serendipitously or intentionally – to catch the spirit of the time in the hemisphere.

Some of the initial enthusiasm has moderated due to the lengthy process of transforming the free-trade proposal into accomplishment, but the assurance of open access to the U.S. market remains a key element in the development model of the LAC countries. It is not overstatement to assert that the United States can have no meaningful policy in the hemisphere without offering an open market.

U.S. support for the FTAA is based in large part on this political calculation. However, there is also a self-interested economic motive: a growing hemisphere is an attractive market for U.S. goods, services, and investment. This has been evident in Mexico since NAFTA. The United States now captures 32 percent of LAC imports, (excluding Mexico for which the figure is closer to 75 percent), whereas the comparable proportions are 15 percent in Asia and 8 percent in the EU (1999 data). The United States dominates the market in this hemisphere as it does in no other region, and the FTAA would help to cement this situation.

Granting TPA to President Bush does not guarantee a successful negotiation; as economists are prone to put it, TPA may be the necessary element, but is not sufficient unto itself. Even with TPA in a form that permits meaningful negotiation, completing the FTAA negotiation by the start of 2005 – the agreed deadline – will require difficult compromises by all parties. There are pitfalls in each of the negotiating and working groups, even apart from the highly publicized differences on dealing with labor and environment in the trade negotiations. Some of these are related to U.S. positions and others to those of LAC countries.

A few examples are sufficient to lay out the complexity of the negotiating hurdles:

•The United States is unprepared to deal with demands of LAC countries for changes in U.S. antidumping and countervailing duty (AD and CVD) procedures.

•LAC countries want modification of U.S. agricultural income support measures, which the United States is reluctant to cede, especially in a regional as opposed to global context.

•There are deep misgivings in LAC countries and Canada about allowing foreign investors to sue governments for uncompensated "takings" (i.e., measures deemed tantamount to expropriation), as the U.S. private sector wishes.

•The interests of most LAC countries and the United States vary with respect to intellectual property protection.

•Most LAC countries do not wish to open government procurement very widely to international competition in a transparent manner.

•Working out rules of origin for 34 countries is an immense task.

•LAC countries are generally unwilling to open their markets to imports of services to the extent the United States seeks.

•Dispute-settlement procedures are heavily dependent on national judicial systems and procedures and these vary widely.

Yet, despite the difficulties, all parties to the negotiation recognize that reaching agreement requires compromise. The negotiating process has been carefully structured over many years and the negotiators know one another quite well by now. Technical assistance in trade negotiation is being provided to the weaker countries to an extent not previously practiced. Perhaps, most important, just about all the countries involved want the hemispheric integration effort to succeed because they see it as beneficial to their development aspirations.

If the United States comes to the final bid-offer process with an acceptable version of TPA – a big "if" – the prospect for completing the negotiation by the agreed deadline is positive – with a probability of success of about 0.8.

At the end of the day, there may be LAC countries which will decline entry into the FTAA because their key demands are not met or because they are not given enough time to eliminate their border barriers. The latter may be a major impediment for small countries that rely heavily on import tariffs for government revenue and will need years of breathing space to drastically alter their tax structures. However, if the only countries that remain outside are the small ones, those that are minor players in the trade picture, this is unlikely to interrupt the launching of the FTAA. Being small and relatively unimportant in the hemispheric economy has some advantages – namely, some freedom of action that other countries generally ignore. But it has the disadvantage that the legitimate problems of these countries are also largely ignored.

If Brazil remains outside, that would present a significant hemispheric issue. Brazil makes up 33 percent of the LAC region’s population, 33 percent of its GDP (in purchasing power parity terms), and 16 percent of its exports. Free trade without Brazil could not be called hemispheric. Brazil is cited as a potential absentee from the FTAA because lingering elements of protectionism remain strong in a number of industrial and service sectors, and the country’s leaders have been publicly skeptical about the benefits Brazil is likely to obtain from the negotiations. President Fernando Henrique Cardoso articulated this doubt in memorable form when he stated that Mercosur is Brazil’s destiny, whereas the FTAA is but an option.

Argentina’s leaders have made known their desire to have free trade with the United States, directly or in the context of the FTAA. This position is contained in statements by Domingo Cavallo, the minister of economy, and in serious studies undertaken in his ministry. Uruguay has taken a similar position. Both countries would prefer to reach free trade with the United States (or with the NAFTA countries collectively) as part of Mercosur, as was articulated at the recent Mercosur presidential summit in Asuncion, Paraguay. However, if push comes to shove – if Brazil were to remain outside the FTAA – it is highly probable that Argentina, and possibly Uruguay and Paraguay as well, would break ranks and seek entry into the FTAA or separate bilateral agreements with the United States. In that case, Mercosur could no longer exist as a customs union with a common external tariff.

What is at play, therefore, if Brazil were to stay out of a completed FTAA, is that free trade with the United States (directly or as part of the FTAA) would become destiny for Argentina whereas Mercosur would become the rejected option. This would be unfortunate in terms of political relationships in the Southern Cone. While possible, this is an unlikely scenario. It would be excruciatingly difficult for Brazil to stay outside an FTAA that included all or most other hemispheric countries because of the inherent discrimination this would entail against Brazilian exports– not least, in the United States. In the end, this option – an FTAA minus one or more larger countries – merges logically with the first option, that of a hemispheric free-trade agreement that includes all countries, with perhaps a few small countries staying outside for the time being.

The FTAA negotiations may fail. The U.S. Congress may not grant the president a negotiable TPA, or the Congress may wish to alter critical aspects of an agreed negotiation despite TPA, or the United States may refuse to make meaningful concessions on critical elements sought by the LAC countries, or one or more important LAC countries may reject key demands of the United States. Failure is a real option, even if the path to failure is not precisely predictable.

This outcome would leave intact the numerous integration agreements in the hemisphere, and leave in place the discrimination this entails. That, however, is not the end of the story. Mexico is now engaged in discussions with Mercosur to limit the extent of the cross-discrimination that exists, especially in the automotive sector. Mercosur is negotiating with the Andean group, Mexico with a host of countries in the hemisphere with which it does not already have FTAs (Ecuador, Panama, Peru, and Trinidad and Tobago), Central America with Panama, and the United States with Chile.

Some hemispheric countries have positioned themselves to be hubs for preferential agreements; these include Mexico, Chile, Canada, and Mercosur as a group. There is some irony in this listing: Canada was the first country to rail against hub-and-spoke arrangements until it saw merit in itself becoming a hub, and Brazil wants Mercosur to become a hub even as Mercosur struggles with its internal contradictions.

Yet, a simple reality must be recognized: preferential agreements, which by definition are not universal, discriminate against nonmembers. The FTAA itself will discriminate against non-hemispheric countries. The 27 preferential agreements the EU now has and the many others it contemplates put nonparticipants at a trade disadvantage. These preferential (discriminatory) actions stimulate counter-actions. The EU reached an FTA agreement with Mexico in order to restore the market share it enjoyed before NAFTA.

Looking just at the Western Hemisphere, the United States is a member of only one preferential agreement, namely, NAFTA. It is now engaged in negotiating a second, with Chile. If the FTAA does not come into existence, many other LAC countries will want preferential access to the U.S. market; Argentina and Uruguay have been mentioned already, but the Central American countries, some in the Caribbean, and perhaps others, are unlikely to allow a non-FTAA status quo to remain. It is safe to predict that neither will the United States. The United States recently entered into extra-hemispheric FTA negotiations with Jordan and Singapore. If there is no FTAA, no one should expect the United States not to do the same within the hemisphere.

The dynamic pressures of a non-FTAA hemisphere are almost certain to impel the United States into the free trade sweepstakes. As I read the emanations coming out of the U.S. administration, they are the FTAA as first choice, but hemispheric bilateral and plurilateral FTAs if there is no FTAA, particularly now that many countries of the hemisphere are receptive to this path. The Chile FTAA is being negotiated without TPA and so too could other preferential agreements with particular countries or groups of countries.

The conclusion that leaps out from this analysis is that the morass of cross-discrimination that now exists in the hemisphere not only will not be corrected if the FTAA fails, but would lead inexorably to a greater jumble because the United States will almost surely jump into the bilateral and plurilateral FTA contest.

This conclusion leads to a further one, namely, that the new jumble will itself become intolerable over time. What this implies is that if the FTAA fails now, it will be revived in the not too distant future. The only way to avoid this conclusion is for some form of global free trade to be achieved in a new round of negotiations in the World Trade Organization – and I find this outcome most unlikely.

When the Pandora’s box of special trade arrangements was opened in the hemisphere, there was no containing their spread, both inside the hemisphere and extra-hemispherically. In addition to the intra-hemispheric agreements that already exist, there are at least half a dozen more negotiations now taking place. An additional half dozen negotiations are proceeding or about to begin between countries of the hemisphere and countries in Europe, Asia, and even Africa. Some of these could be significant, such as that between Mercosur and the EU.

One potential outcome of the hemispheric negotiations now in progress is that the FTAA will come into existence. The major benefit this would bring is an increase in trade, but it would also reduce the degree of discrimination that now exists among countries in the hemisphere. The prospects for achieving an FTAA depend crucially on the U.S. Congress granting a negotiable version of TPA to President Bush.

A second possibility is achieving an FTAA that excludes one or more major hemispheric countries. This is less likely than the first scenario because any country that deliberately excludes itself from a hemispheric preferential agreement would face discrimination in its exports in comparison with the FTAA member countries. This could be costly, especially if the discrimination is in the large U.S. market.

The third possibility is failure in the FTAA negotiations, and this is a real concern. That would leave an unstable trade equilibrium as countries scramble to conclude new bilateral and plurilateral preferential agreements, thereby complicating the discriminatory swamp even more than now exists. Under these circumstances, the United States almost surely would join the preferential agreement contest if only to protect its exporters from the growing discrimination. This could well bring the hemisphere back once again into considering a hemisphere-wide FTA in order to rectify the enhanced trading chaos. However, much discrimination would take place in the interim, much trade would be foregone, and much time would be lost.

National Law Center for Inter-American Free Trade

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