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Towards a Community of the Americas

The next U.S. President should launch a phased initiative to create a Community of the Americas based on existing and new free trade agreements.

BY THOMAS ANDREW O’KEEFE
AND EVAN SCOTT THOMAS


Unable to conclude a free trade pact for the Western Hemisphere, the Bush administration will leave behind a honeycomb of various sub-regional and bilateral free trade agreements in various stages of negotiation and implementation with the other countries of the region.  Partly as a result of the lack of leadership from Washington, the past eight years have been marked by a backlash in Latin America and the Caribbean against closer economic and political ties with the United States. Domestically, the leadership vacuum has been filled by a growing populist movement that equates free trade, and labor migration, with decline of the American middle class. The reasons for this policy failure from the standpoint of U.S. leadership include lack of vision, unwillingness to compromise, incoherence and inconsistent enforcement of a number of the measures within the trade pacts that have been agreed. A new initiative is needed to get economic and political cooperation in the Americas back on track.  This paper suggests building on existing sub-regional and bilateral trade accords, and completing bilateral trade agreements with those blocs of countries with which the United States still does not have an accord. A phased approach to development of such a de facto regional trade pact would initiate dialogue on a number of essential elements of hemispheric economic integration, including environmental protection, labor and migration policy, competition (i.e., anti-trust) policy and energy security.  Broad-based inclusion in such a dialogue is the best way to begin building popular support for an eventual Community of the Americas. 


LITANY OF FAILURE

When George W. Bush took office, there was still a broad consensus within most of Latin America and the Caribbean in favor of progressive economic integration with the United States. There was also bipartisan domestic support within the United States – led by the first President Bush, and later developed by President Clinton into the Free Trade Area of the Americas (FTAA) initiative – for a regional trade accord.  But despite quickly gaining control of both houses of Congress, and enjoying renewed fast-track trade negotiating authority, the second President Bush proved unable to broker a hemispheric trade deal that would capitalize on this momentum.  Instead, the Bush administration allowed a vacuum to be created that was soon filled by Venezuelan President Hugo Chavez and his Bolivarian Alternative for the Americas, created expressly to avoid closer economic and political ties with the United States. 

President Bush was eventually forced to abandon the FTAA initiative, and pushed instead for a regional free trade accord with Central America and the Dominican Republic (CAFTA-DR), as well as bilateral Free Trade Agreements (FTAs) with selected countries in the region.  As with the recently collapsed Doha Round, the FTAA talks failed because of Mr. Bush’s inability, or unwillingness, to make concessions to trading partners large enough to have real clout (e.g., Brazil), in order to lock in the deal.


At Doha, what appeared to be dramatic agricultural tariff “reductions” by developed countries would in fact have tended to lock in tariff levels actually imposed, reducing average effective levels from 15 percent to only 11 percent; while on agricultural subsidies, the United States proposed setting ceilings at levels higher than it had actually spent in three of the previous seven years. In the event, China and India walked away from this proposed deal.


In the Americas, Mr. Bush pursued bilateral trade negotiations with smaller countries in the region, offering them few real concessions – nothing of note, for example, in reducing subsidies and protection of U.S. commercial agriculture – against the threat of losing long-standing trade preferences if they did not accept what the U.S. was offering.  At this point, only one of the negotiated bilateral FTAs – with Peru – has come into force, while two (Colombia and Panama) languish in Congress, and two more (Bolivia and Ecuador) were rejected by those countries’ governments, as their growing reliance on a political and economic alliance with Venezuela grew.


The root cause of Mr. Bush’s inability to close the deal on economic integration within the Western Hemisphere was his fundamental lack of any vision beyond expanding free trade itself.  This effectively precluded meaningful dialogue – of the kind Europeans have engaged in for decades -- about the parameters of a more comprehensive regional economic integration. Concepts like regulatory harmonization and economic convergence were ignored. What eventually emerged in the FTAs with respect to environmental protection or employee safety and rights came about more as concessions to critics rather than from proactive initiatives on the part of the Bush administration.  The lack of coherence was nowhere more evident than in the treatment of competition (i.e., anti-trust) laws and enforcement measures, a featured chapter in NAFTA but not even mentioned in the CAFTA-DR accord. 


Lack of a coherent vision inevitably led to incomplete and inconsistent enforcement of FTA chapters that were not of direct concern to U.S. commercial interests.  In sharp contrast to the EU process for accession of new members, no step-by-step harmonization was pursued to ensure implementation of important chapters of the trade agreements.  And, once the FTAs were signed, the U.S. failed to extend to its new partners the levels of technical and financial support needed to ensure adequate implementation of the chapters that had been agreed.  Instead, the Bush administration precipitously axed foreign assistance funding for most countries in the Latin America and Caribbean region


During President Bush’s visit to Latin America in 2007, it turned out that his administration’s claim that U.S. assistance to the region had doubled since 2001 relied on accounting gimmicks, such as that the 2001 baseline was a year in which aid was essentially cut in half to make up for a large increase in military assistance to Colombia and several of its neighbors in that year. In fact, total aid to the region in 2000 was actually higher than the President’s budget request in 2008; and to maintain levels of aid to favored countries such as Colombia, support to others in the region has been dramatically reduced.


Failure to devise a visionary trade policy for the Western Hemisphere has been coupled with the inability to communicate a persuasive message to the American public. An essential part of regional economic integration – which features large in European integration – is compensation to the losers from trade expansion, in recognition that whereas the benefits of free trade are enjoyed broadly across society, the costs are borne by a few.  But the Bush administration has never on its own initiative developed policies and programs to help the few adjust to the losses that are entailed by reducing barriers to trade.  Just as important, beyond advocating the benefits of free trade, the Bush administration never initiated a broad-based dialogue to build domestic support for hemispheric economic integration, including such critical aspects as environmental protection, labor migration and energy security. 


In consequence, the trade agenda is increasingly dominated by a domestic populist movement that equates free trade, and labor migration, with the decline of the American middle class.  Although Latin America and the Caribbean clearly are not responsible for the massive U.S. trade imbalances that have been prevalent during the Bush administration, NAFTA, CAFTA and other FTAs within the Western Hemisphere have become the focus of domestic opposition to globalization.  Declining U.S. Government support for programs designed to help reduce poverty and ensure equitable economic growth in Latin America and the Caribbean makes it easy for free trade opponents to attack recent FTAs as initiatives to facilitate U.S. economic imperialism. Ineffective implementation of environmental, labor and competition policy chapters in the NAFTA accord has become a rallying cry against the ratification of any more FTAs, and for re-negotiation of NAFTA itself. 


THE CHALLENGE AHEAD

In comparison with other foreign policy challenges left behind by the Bush Administration, making progress in Latin America and the Caribbean would seem to be relatively simpler to accomplish. But it will certainly not be easy. Recent polls show that a huge a majority of Latin Americans currently view U.S. foreign policy unfavorably. This is coupled with a widespread perception, shared by people from throughout Latin America and the Caribbean irrespective of political orientation, that the United States. has ignored their region since September 11, 2001. Initiatives to manage the flow of immigrants into the United States have been put on the back burner.  The only policy that the United States pursues with any vigor in the region is the “war on drugs,” which has yielded mixed results, at best. (Recent UN reports indicate that coca cultivation in the world's three top producers, Colombia, Peru and Bolivia, increased 16 percent in 2007.) 


The void created by the absence of any visionary or proactive policies emanating from Washington has been filled by Venezuelan President Hugo Chavez’s attacks on market-oriented economic policies coupled with generous cash transfers and subsidized fuel exports.  In the Caribbean, Chavez has successfully convinced many governments to shift their petroleum imports away from Trinidad & Tobago toward Venezuela.  In many Latin American countries, politicians have adopted Chavez’s rhetoric to win power and begin chipping away at the trade liberalization and market reforms of the 1990s. 


Beyond this, many countries in the region are now prioritizing trade relations away from the United States.  Since 2001, Latin American agricultural and mineral exports to Asia (particularly China and India) have exploded, replacing Europe and North America as the most important destination for some South American exports. As for trade agreements, at present, both Canada and the EU are better poised than the United States to complete FTAs with important markets in South America. 


To reverse the serious loss of political influence and economic advantages historically enjoyed by the U.S. in Latin America and the Caribbean, the new administration moving into the White House in January 2009 should put forward an ambitious policy that excites the imagination of the majority of the region’s population, while answering some core objections of free trade critics at home.  One such initiative is a Community of the Americas that contemplates not only the establishment of a hemispheric free trade area but also proactively addresses issues associated with economic integration more broadly. 


Such an initiative would acknowledge that the FTAA has become an anathema to many in Latin America and the Caribbean and is even rejected by important constituencies at home.  In contrast, a Community of the Americas would build on measures contained in several FTAs in the areas of environmental protection, employment quality and promotion of competition, by introducing effective, step-by-step implementation mechanisms for harmonization and convergence.  It would also include provisions on regulated, cross border migration and offer EU-style funding to improve infrastructure and human resource capabilities, to help adjust to the losses entailed by trade expansion while taking advantage of the benefits of free trade.  And it would include measures to enhance energy security, through development of alternative energy sources and expanding potential clean-energy markets.


Among other opportunities, in an environment in which the United States is trying to reduce its reliance on fossil fuels, expanded trade with Brazil would allow a shift away from heavily subsidized transformation of corn into ethanol toward importation of Brazil’s sugar-based ethanol, which is eight times more energy efficient than corn-based ethanol, contributing to substantially lower carbon emissions. This is yet one more example of an initiative in the Americas that was never followed through with concrete actions by the Bush administration.


ADDRESSING THE CHALLENGE

One of the biggest challenges to establishing a Western Hemisphere free trade area, even within the context of a Community of the Americas, will be to get the MERCOSUR countries on board, particularly Brazil.  A lesser but not insignificant challenge is represented by the Caribbean states (excepting the Dominican Republic, which is a member of CAFTA).  Venezuela also provides a potential bottleneck that must be handled with a level of diplomatic dexterity that has not been a salient feature of the Bush administration.


Even without any type of free trade agreement with the United States, Brazil is already among the top 15 destinations for U.S. exports in the world today.  The UnitedStates is also the largest single foreign investor in Brazil, representing almost a quarter of foreign direct investment in that country. With some 190 million people and a growing and stable economy, Brazil is the Latin American country that provides the best opportunities for future growth of U.S. exports of goods and services.  At the same time, the United States is Brazil’s most important trading partner, with a significant percentage of Brazilian exports made up of non-traditional manufactured products such as airplanes, motor vehicles, and auto-parts.


While in the past Brazil was perceived by some U.S. government officials as the key impediment to creation of the FTAA, the reality is that Brazil always sought to obtain two key concessions from the United States within the FTAA that had previously eluded it in the multilateral context.  One involved reducing and eventually eliminating domestic agricultural support payments and subsidized agricultural exports, as well as restricting the use of tariff peaks.  A second was to eliminate the application of anti-dumping duties.  The U.S. insistence that both issues could only be negotiated in the context of the WTO’s Doha Round contributed to the stagnation of the FTAA process and focused Brazilian attention on obtaining concessions in the multilateral arena. 


The collapse of the Doha Round, however, may have left Brazil with little option but to return to negotiating some type of preferential market access agreement with the United States. In fact, Brazil now has several reasons to show more flexibility in hemispheric trade negotiations than previously.  First, although Brazil often appears as the chief proponent for eliminating agricultural subsidies at both the multilateral and hemispheric level, this issue was always more of an imperative for its MERCOSUR partner, Argentina, which has had little else but agricultural commodities to offer the international market on a genuinely competitive basis. 


Up to now, Brasilia has spearheaded the issue because it is also in its interest and it provides a way of preserving MERCOSUR unity and appearing as a regional leader on the international stage. But the administration of President Luiz Inácio Lula da Silva has repeatedly shown itself to be pragmatic, and is unlikely to let agricultural subsidies kill an agreement that would allow Brazil to expand non-traditional, manufactured exports to the U.S. market and obtain new inflows of foreign direct investment.  In addition, the detrimental impact of agricultural subsidies and even of tariff peaks for Brazil has been diminished by the recent explosion in Chinese and Indian demand for Latin American agricultural exports. If the United States follows through on prior statements that it would be willing to curtail its use of agricultural export subsidy programs to nations participating in a hemispheric free trade area, this may be sufficient for Brazil to compromise on the agricultural subsidies issue. 


For its part, the anti-dumping issue has been defused in recent years as those Brazilian industries that historically were most negatively affected by U.S. anti-dumping and countervailing tariffs have simply acquired U.S. subsidiaries. Brasilia is therefore now more likely to settle on the antidumping issue for a procedure similar to one that currently exists in the MERCOSUR, which requires government-level consultations before an anti-dumping investigation is initiated.


Given that Paraguay and Uruguay are likely to strongly support a free trade agreement that includes the United States, MERCOSUR unity would be enhanced by any Brazilian decision to also participate in such negotiations.  As for the embattled President Cristina Fernandez de Kirchner of Argentina, she will have little option but to follow the rest of the MERCOSUR countries and negotiate a free trade agreement with the United States. For one thing, the huge growth in Argentine agricultural exports to Asia in recent years has defused the once crucial subsidies issue for Buenos Aires just as it has for Brasilia.  More important, the sharp devaluation of the Argentine peso in 2002 has made service providers based in Argentina more competitive internationally, and they will serve as an important new constituency group advocating a free trade agreement with the United States.


Although less significant for the U.S. economy than the MERCOSUR countries, CARICOM is nonetheless politically important because of the large number of votes it represents in multilateral and regional institutions such as the United Nations and the Organization of American States.  CARICOM countries already enjoy special, duty-free market access into the U.S. market for a wide range of products under the Caribbean Basin Economic Recovery Act (CBERA) and Caribbean Basin Trade Partnership Act (CBTPA).  In the case of CBERA, eligible products enjoy duty-free treatment indefinitely, but duty-free eligibility for textile and apparel items under CBTPA is set to expire on September 30, 2008.  The larger CARICOM states would likely be amenable to a bilateral free trade agreement that made apparel access permanent and included cross border movement of service providers.  As for the six mini-states of the Organization of Eastern Caribbean which have expressed opposition to any type of free trade agreement with the UnitedStates, a practical way to deal with their potential obstructionism would be to simply exempt them from compliance with certain obligations otherwise incumbent on the bigger Caribbean states.


Finally, the inclusion of energy security as a key component of economic integration within the Western Hemisphere provides an opportunity to open discussions with Venezuela, given its huge reserves of fossil fuels and the importance of petroleum exports for the Venezuelan economy. Joining a hemispheric discussion on energy security – including technical innovations to reduce dependence on fossil fuels -- will offer President Chavez the potential to play an important and constructive role that may well assuage his past opposition to any closer economic and political relations with the United States.


PHASED APPROACH

Unable to make progress on a free trade pact for the Western Hemisphere, the Bush administration will leave behind a honeycomb of various sub-regional and bilateral free trade agreements in various stages of negotiation and implementation with the other countries of the Western Hemisphere.   The United States currently has free trade agreements in force with Canada, Chile, the Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua and Peru.  FTA accords with Colombia and Panama await ratification by the U.S. Congress. A free trade agreement with Costa Rica has yet to be ratified by the Costa Rican Congress.   


One option for the pursuit of a Community of the Americas would be for the United States to complete bilateral free trade agreements with those blocs of countries in the Americas with which it still does not have an accord. An advantage of this approach is that it would build on the economic integration measures already negotiated successfully within NAFTA and CAFTA-DR, while focusing attention on the coherency of those measures and effectiveness in their implementation.  Another is that it would avoid a hemispheric negotiation based on the “single undertaking” principle, under which negotiations are not concluded until all the issues on the table have been resolved, and the ensuing obligations are applicable to all the parties. A third advantage is that, through incorporation of NAFTA into the process, the approach would reduce the incentive for competition between Canada and the United States, or even Mexico and the United States, in signing bilateral free trade accords with the other nations in the Western Hemisphere. 


CAFTA-DR provides an ideal model, as it not only creates obligations and disciplines between the United States and each of the signatory states, but also among them.  In particular, new obligations with respect to intellectual property, foreign investment, and trade in services were created that did not previously exist within the Central America Integration System (SICA) or in the free trade agreements the Central American states had with the Dominican Republic.  Perhaps even more important for the small countries of Central America, common rules of origin mean that raw materials in one country may be used to manufacture products in a second, that are in turn packaged and exported by a third, all within a common tariff structure. Indeed, increased economic integration among the Central American countries under CAFTA-DR may be as important to their growth and prosperity as increases in trade with the United States.  This principle applies even more cogently to regional trading relations with countries like Brazil and Mexico.


In contrast, the bilateral agreements that the U.S. has negotiated individually with Colombia and Peru tend to undermine the Andean regional economic integration process by, among other things, perforating its Common External Tariff system. (It was precisely this issue that led to Venezuela’s withdrawal from the Andean Community in 2006.) It is for this reason, as well, that bilateral accords with individual MERCOSUR and CARICOM countries might be both difficult to achieve, as well as counterproductive.


Once bilateral free trade agreements are concluded between the United States and sub-regional blocs like MERCOSUR and CARICOM, a de facto FTAA could be fashioned by activating the relevant Most Favored Nation (MFN) clauses and harmonizing the rules and chapters among the different sub-regional accords to which the U.S. is a party, including NAFTA and CAFTA-DR.  This will be crucial in the area of rules of origin, for example, in order to avoid imposing unnecessary costs on businesses by requiring different lines of production depending upon the country of export.  It will also enable the first hemispheric discussion of chapters contained in NAFTA and CAFTA-DR, covering environmental, labor and competition undertakings that are critical for economic integration.


One thing that will facilitate harmonization is the fact that Canada, Chile, and Mexico have already negotiated their own bilateral free trade agreements with many hemispheric countries that contain key provisions resembling the NAFTA template.  In addition, many of the sub-regional integration projects such as the Andean Community, CARICOM, and MERCOSUR have, since the FTAA negotiations were launched in 1998, adopted common disciplines on trade in services and government procurement that did not exist a decade ago.  Accordingly, much of the groundwork for carrying out the harmonization process that will eventually result in a de facto FTAA is already in place.


There is a direct incentive for our NAFTA partners (Canada and Mexico), as well as our CAFTA-DR partners, to sign up to such a phased process, because it would  give them access to the South American markets with which  they don't currently have free trade agreements (namely all of MERCOSUR). Another incentive for both NAFTA and CAFTA partners would be that of regularizing migration flows.  Finally, and critically, the phased approach would allow the incorporation of a step-by-step process of harmonization in several key areas, including environmental protection, employment quality, competition policy and energy security, prior to the achievement of a Community of the Americas. 

The key question remains:  How to sell the concept of expanding regional free trade to an increasingly skeptical U.S. public?  The answer has to begin with an acknowledgement that negotiation of free trade agreements based principally on U.S. commercial interests has faltered. And that, to be successful, future trade liberalization within the Western Hemisphere will have to be discussed within the context of broader economic integration.  A phased approach to development of a de facto regional trade pact would initiate dialogue on a number of essential elements of hemispheric integration, including environmental protection, labor and migration policy, competition (i.e., anti-trust) policy and energy security.  Broad-based inclusion in such a dialogue is the best way to begin building popular support within the United States for an eventual Community of the Americas. 

Thomas Andrew O’Keefe is President of the Washington, D.C.-based Mercosur Consulting Group, Ltd. and the author of Latin American and Caribbean Trade Agreements: Keys to a Prosperous Community of the Americas. Evan Scott Thomas is a senior international economist who has published on a wide variety of economic development topics, including trade and investment, economic governance, privatization, property rights, private sector development and social policy. 

 

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