BY JOSE RAUL PERALES
Twenty years after the launch of market reforms, Latin American countries are among the most active players in the international trading system, thanks to their participation in free-trade agreements (FTAs) and preferential market access accords.
As the network of Latin American and Caribbean free-trade agreements matures—with more than 20 intraregional FTAs signed—this is the time to work toward a convergence of the region’s many agreements and market access rules. Greater coordination would not only strengthen individual economies but foster the region’s global competitive position.
The flurry of regional FTAs began with the 1994 North American Free Trade Agreement (NAFTA) involving
The passage of FTAs has helped
Overall, the regional trend is to strike FTAs with advanced industrial countries in traditional markets (like
While the trend toward free trade has been generally positive, there have been some recent signs of backlash. For example, policymakers in
At the same time,
Trade’s emergence as a source of policy expertise in its own right has been especially noticeable in countries that have concluded the most FTAs:
The network of free-trade agreements in the hemisphere—58 negotiated and implemented so far—has boosted the total regional share of foreign trade as a percentage of
With more FTAs in the pipeline, the prospects for an economically integrated continent look bright. Supply chains are increasingly linked, and regional investment poles, like retail and financial services in
But the growing number of free-trade agreements has also posed management challenges and transaction costs that can potentially affect the gains from free trade.
The increasingly complicated web of FTAs raises concerns about overlap, duplication and conflicts of rules and technical standards. For example, standards vary from agreement to agreement on issues such as the acceptable levels of pesticides for certain agricultural exports and in-country content requirements for machinery equipment exports.
Even when free-trade agreements exist among countries participating in a commodity chain, differences in rules of origin may impose additional costs by forcing producers to change their supply chains to source from an FTA-partner country or from one where the rules of origin involve more favorable terms. This is a salient feature of Mercosur’s automotive regime, which was conceived to promote investments by a key group of transnational companies that sought to boost production linkages and build supply chains with local providers, particularly small- and medium-size businesses.
The Mercosur example illustrates how rules are often tailored in response to sectoral pressures as producers adapt to foreign competition. Rules of origin also may serve a political and economic function: they facilitate an adjustment process to foreign competition that results from greater commercial openness. This is particularly the case in key or sensitive sectors like textiles, autos and agricultural products like poultry or beef.
As countries adapt to freer trade and lower trade barriers, they should, in theory, have greater incentives to standardize the FTAs’ rules of origin. In
But this has not happened. In more than half of the FTAs concluded by
Complicated or restrictive rules of origin hinder the development of “cumulation processes” in which producers in one FTA country use inputs from another FTA country to make goods without affecting the preferential status of the finished product. This runs contrary to one of the basic premises of free-trade agreements: countries are likely to be more attractive to foreign investors because preferential market access and the possibility of cumulation allows companies to build lean cross-country supply chains and lower costs of production. Successful examples of cross-border production include textiles in
Beyond just getting a trade agreement in place, governments also have to ensure its proper functioning and to develop complementary agendas in areas, such as trade facilitation and customs efficiency, competitiveness policies, and even workforce development. Governments sometimes use the policy space created by FTA implementation to pursue policies associated with, but not strictly belonging to, the concluded trade agreement.
This was the case in Peru. In the wake of negotiating the FTA with the U.S., President Alan García’s government submitted 99 legislative decrees on a wide range of issues, including the creation of a civil service, supposedly to comply with the U.S.–Peru Trade Promotion Agreement.
For countries like Mexico and Chile, implementation of FTAs has created an opportunity to make necessary reforms both in the way trade policy is formulated and in the overall policymaking environment, especially on issues of transparency and the business environment.
These reforms, including competition policy, investment rules and regulatory framework changes, supported the ambitious array of trade negotiations both countries launched in the 1990s.
But doing so requires a commitment of resources, both financial and human, that may lie beyond the means of many government budgets and the capacity of technocrats. Concerns over these resources and commitments to full FTA implementation have underpinned recent efforts in support of trade facilitation, particularly in the Dominican Republic–Central America–United States Free Trade Agreement (DR-CAFTA) region.
In the same vein, the idea of linking or harmonizing the various Latin American free-trade agreements is gathering strength. Doing so would also reduce the hub-and-spoke behavior of regional FTAs, where multiple countries possess an FTA with a given country (the “hub”), but there is no connection among the different partners (the “spokes”).
In cases where there are similar FTAs—both in terms of scope and actors involved—a convergence of all or portions of these FTAs, especially rules of origin, would dramatically reduce the burdens of administration and enforcement. That would apply, for instance, to the FTAs concluded by Mexico and Chile with Central American countries, or to the partial-scope agreements concluded under the rubric of the Latin American Integration Association.
Convergence would also reduce the private sector’s burden of complying with competing or overlapping rules and regulations, and thereby allow businesses to improve productivity. It would expand the universe of cumulation sources, thus reducing the transaction costs of sourcing and eliminating possible disincentives arising from competing rules applied to the same product.
Consequently, the private sector has expressed interest in convergence. But actual convergence would require a negotiation exercise that may be politically difficult because of the enormous effort required to secure ratification of the FTA in the first place. In some cases, however, specific FTAs have language that allows for the possibility of extended cumulation with other countries that share FTAs, thus avoiding separate approval processes. This is the case in Canada’s FTA with Peru (2009), allowing it to negotiate extension to the other countries with which it shares FTAs (like Chile and the U.S.).
Furthermore, since a substantial percentage of Latin America’s trade already takes place through some type of preferential program, convergence of FTAs can lead to increased gains from trade that extend beyond the actual network of free-trade agreements. This is different from the now-abandoned dream of creating a Free Trade Area of the Americas.
The countries tied up in individual FTAs have already worked on the elimination of tariff and nontariff barriers for trade in goods and services. Many are now searching for ways to streamline rules and create a more dynamic and efficient way of engaging in free trade. Such is the case for Mexico and the Central American countries, which in November 2011 concluded the process of consolidating their various FTAs into a regionwide trade regime for goods and services.
Considering its central role in the spaghetti bowl of free-trade agreements in Latin America, the U.S. should play a pivotal role in FTA convergence. This could start with harmonizing the rules of origin for textiles in the various FTAs negotiated by the U.S. with Latin America and the Caribbean. Since textiles involve some of the most politically sensitive aspects of trade negotiations, both in the U.S. and in Latin America, an agreement on a single rule of origin for textiles would pave the way for convergence in other realms.
Of course, any move in this direction would require a serious investment of political capital that is currently not evident in Washington.
Yet the current negotiations of the Trans-Pacific Partnership (
Given that it remains the central axis for most trade agreements in the region, the U.S. is uniquely positioned to start the process. Political support for trade expansion is difficult, but already the movement toward harmonization is starting to pick up strong backing from the U.S. and regional business communities.
This should surprise no one. If Latin America is to fully realize the potential unlocked by trade liberalization, it must move in the direction of greater convergence.
The foundation has already been laid. The region already has a robust set of trade rules and preferential pacts that have woven together markets that once operated at cross-currents to one another.
Arguably, the task of harmonization will be no easier to accomplish. Existing free-trade agreements must be fully implemented, and the clutter of overlapping rules and regulations that continue to stand in the way of full harmonization must be eliminated—with the ultimate goal of developing a set of clear and transparent rules for doing business anywhere in the Americas.
But by keeping that goal firmly in mind, the governments of the Americas can free up the resources and recently developed expertise currently devoted to FTA management to craft policies that can truly bolster the region’s competitive position—and at the same time improve the lives and living conditions of their people.
José Raúl Perales is executive director of the Association of American Chambers of Commerce in
A previous version of this article appeared in Spring 2012 Americas Quarterly (www.americasquarterly.org)