08 November 2007

What Does Peru's FTA Mean For The Rest Of The Region?

U.S. newspapers announced this week that Congress is expected to ratify a free trade agreement (FTA) with Peru before its Nov. recess. The FTA will eliminate 80 percent of U.S. export tariffs to Peru with the remaining 20 percent to be phased out over the next 10 years. While U.S. lawmakers argued over the inclusion of labor and environmental provisions, no comment was made about the impact the FTA will have on regional integration efforts in South America.

When Peru began trade talks with the U.S. in 2006 both Colombia and Ecuador were also in the process of negotiating bilateral FTAs. Many worried that these agreements would undermine the goals of the Andean Community (CAN). Bolivian President Evo Morales expressed this bluntly when he said, "These treaties are destroying the Andean Community," accusing the countries of abandoning the principle of regional solidarity by negotiating individually instead of as a group. Ultimately the decision to pursue these FTAs led to Venezuela's withdrawal from the CAN in opposition to what President Hugo Chávez called the imperial designs of the United States.

Since that time Colombia has approved their FTA and is now waiting for U.S. Congressional ratification while Ecuador eventually pulled out of negotiations after socialist candidate Rafael Correa won the 2006 presidential elections.

Putting the merits of free trade to one side, the agreement represents a significant victory for U.S. trade policy in general. Since the first President Bush proposed the "Enterprise for the Americas Initiative" in 1991 the U.S. has been trying to unite the hemisphere into one open community where goods and services could flow freely throughout the Americas.

The proposal was initially rejected by Central and South American countries who argued that a mega-trade pact of this sort would be national suicide for their countries. That same year the nations of Brazil, Argentina, Uruguay, and Paraguay formed Mercosur, a regional integration block designed to integrate the economies of the Southern Cone and increase their bargaining position in future trade negotiations with the foreign powers. In 2000, the 12 presidents of South American nations met in Brasilia to discuss the formation of a South American block that would allow the region to negotiate on an even footing with its northern neighbor, this initiative eventually led to the creation of the Union of South American Nations (Unasur), a continent wide block with similar goals.

While South America was reorganizing itself for what it saw as an inevitable round two, the U.S. was moving forward with plans B and C. In 1994 the U.S., Canada, and Mexico signed the North American Free Trade Agreement (NAFTA). With the election of George W. Bush in 2000 the U.S. began a new push to form a hemisphere wide FTA, or the Free Trade Area of the Americas (FTAA or ALCA in Spanish) as it came to be called. While initially unsuccessful, this time the U.S. managed to convince the Central American and Caribbean States of Guatemala, El Salvador, Honduras, Costa Rica, Nicaragua, Panama, and the Dominican Republic to sign the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) in 2004. This agreement, along with NAFTA, has left South America in an even weaker position when and if it ever decides to reopen trade talks with the U.S.

So, was South America wrong to reject the FTAA-ALCA when it did? Perhaps, perhaps not, but the subsequent failure to achieve any sort of internal unity on the subject has left them much weaker than they were in 1991 or 2000. The refusal of the regional powers of Brazil, Argentina, and Venezuela left smaller regional countries in favor of the treaty with few options other than a bilateral trade agreement. To this end Chile negotiated a FTA in 2006 and Uruguay is now threatening to pull out of Mercosur and negotiate its own if progress towards Mercosur's regional goals does not advance.

This leaves the large economies of Brazil and Argentina with few remaining allies in any future negotiations and the very poor nations of Venezuela, Paraguay, Bolivia, Ecuador, Guyana, and Surinam even further behind than they already are. Ultimately, the continued belief in regional unity as a viable economic strategy is evaporating as the lack of concrete progress towards South American integration forces individual nations to go it alone. It seems that the Greek Thrasymachus was right when he said that it is not enough to refute your opponent, you should have your own solution; for there is many a one who can ask but few who can answer.

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Map From The Economist, Oct. 4, 2007