Latin America’s Search for Regional Integration

Although the global economic crisis continues to impact a significant number of countries in Latin America, the region is experiencing a Golden Age of economic growth and political stability. Favorable winds have been blowing across Latin America since 2003, “except for the brief halt [to growth] that came in 2009 as a result of the global financial crisis,” notes Juan Carlos Martínez Lazaro, professor of economics at the IE Business School. However, the global crisis has had much less impact on the region than previous crises, he adds.

While the region has been somewhat sheltered from negative global trends, “Latin America has tried to equip itself with a regional model for its commercial, economic and political integration," Martínez Lazaro says. "This process had already begun 20 or 30 years ago, but it had not advanced with the desired intensity. Now it is accelerating.” Latin American governments have forged numerous trade agreements and political alliances within the region, as well as agreements with other countries and blocs far from their own borders. Nevertheless, all this frenetic activity has made it obvious that Latin America has been unable to settle on a model for regional integration. It has also cast a spotlight on such thorny issues as legal security and protectionism.

These sorts of divisions became obvious most recently during the first summit meeting of the Community of Latin American and Caribbean States (CELAC) and the European Union (E.U.), which took place in Santiago, Chile, at the end of January. To start with, the government of Venezuela, supported by other populist governments of the region, opposed any mention of foreign investment in Latin America in the text of the final declaration. After some arm twisting by the E.U., the Venezuelans and the two regional organizations (CELAC and the E.U.) recognized the importance of relying on “stable and transparent” regulatory regimes that provide “legal certainty for economic players” in the context of promoting high-quality social and environmental investments.

The E.U. was very interested in including this point in the declaration after suffering a significant setback to Spanish foreign investment in the region in 2012. Last May, Argentine President Cristina Fernández nationalized the YPF oil company, which had been in the hands of Spain’s Repsol. In addition, last December, her Bolivian counterpart Evo Morales expropriated two energy firms that had belonged to Spain’s Iberdrola. The Argentine government refused to negotiate a settlement for the expropriation of 51% of YPF, which Repsol had insisted was worth some US$10 billion.

Political Coordination

Formal declarations about foreign investment aside, the meeting in Santiago accomplished another significant goal: It enabled Latin Americans to express themselves in a single voice for the second time in their history — free of “foreign meddling,” as they had stated during the inaugural Summit of CELAC in December 2011 in Caracas, Venezuela. Neither the United States nor Canada belongs to CELAC, despite the fact that they are members of the Organization of American States (OAS), a regional organization that has a political character. Established in 1948, the OAS brings together 35 independent countries from the Americas.

However, analysts note, it will be no easy task to transform this Latin American nationalism into a model for political coordination. According to Martínez Lazaro, formulas such as CELAC and UNASUR (the Union of South American Nations) “don’t wind up succeeding because it is not very clear where they want to get or how they intend to get there.” Beyond that, there exists “an absolute lack of coordination and alignment of the various organizations, alliances and so forth. It is very hard to understand their goals because some goals are overlapping.”

Martínez Lazaro predicts that the multiplicity of sub-regional, regional and pan-regional integrations will continue to increase because there are two very clear blocs. They have different ideologies, and they are incapable of finding a political, economic or commercial model that brings together all of the elements that are shared in the region, such as language, religion and culture. “At the end of the day, some countries, such as Chile, find it easier to sign a free-trade agreement with Japan or Korea than with Argentina, their neighbor,” he points out.

Carlos Malamud, chief Latin American researcher at the Real Instituto Elcano, agrees. He notes that “the region is extraordinarily fragmented,” and that the fundamental problem is that CELAC is incapable of resolving these differences because two very different plans co-exist within the organization. “On the one hand, there are countries such as Venezuela and Cuba, which are interested in creating [their own version of] an Organization of American States, but without the [membership of] the U.S. or Canada; on the other hand, there are other countries that have a genuine will to bring together a Latin American union,” he says.

Liberals Versus Protectionists

Nowadays, these two ideological blocs have hardened, above all, around the free trade agreement of the Pacific Alliance, on the one hand, and around the Mercosur customs union, on the other. Since 2011, the Pacific Alliance of the most liberal countries of the region – Chile, Peru, Colombia and Mexico, as well as both Costa Rica and Panama acting as observers – promotes free trade among its members, and gives them total freedom to maintain their own free trade agreements that are currently in effect. Its members also have freedom to negotiate other trade pacts that they consider worthwhile. The nations of this bloc have signed free trade agreements with some on the biggest economies in the world, such as the United States, the European Union and China.

At the other extreme of the scale is Mercosur, the customs union led by Argentina and Brazil. Its members also include Uruguay, Venezuela and Paraguay (which is currently suspended from the bloc after a political trial that ended with the removal of President Fernando Lugo). Mercosur establishes free trade among its members and common external tariffs against third nations. For the past 18 years, Mercosur has been negotiating a trade agreement with the E.U., but recently that treaty has been blocked by Mercosur members’ criticism of European agricultural subsidies as well as by the opposition of these South American countries to the dismantling of any trade barriers that protect their own local industries. Argentina's Fernandez said during the CELA Summit in Santiago: “These emerging countries, which have emerging industries, are lined up against the well-established industries of the E.U.; and these asymmetries [in trade policy] need to be provided so as not to harm our industry and, above all, our population.”

Short term, observers say, it would be very hard to eliminate this impasse, all the more so because Mercosur seems to be stagnating and has neither advanced nor deepened its regional integration effort because of internal problems and its own members’ lack of will. According to Malamud, Mercosur’s evolution “is going to depend to a great extent on whether the Brazilian government decides to continue to support the bloc as a central part of its regional policy. We’ll have to see how much its relationship with the U.S. and the E.U. evolves toward the creation of a free trade zone [between the E.U., the U.S. and Brazil], which would affect the Brazilian economy. Brazil has a strategic alliance with the E.U. outside of Mercosur, and it remains to be seen to what degree it will be able to take advantage of that alliance and profit from it.”

Brazil finds itself in a tangle of significant uncertainties. “It still doesn’t know what it wants to be when it grows up,” notes Martínez Lazaro. In his view, “it has become an economic giant, and that gives it a position as an important regional leader. But it is playing all of its cards, and it doesn’t know if it wants to be a regional leader or be a world leader. Nor does it have a very clear idea about how to exercise the world leadership that it would like to have.” From an ideological viewpoint, Brazil’s views are also undefined, he adds. On the one hand, its economy is quite deregulated, and it could be included in the liberal bloc. “But during the second term of [President] Lula da Silva [2006-2011], Brazil developed friendships with countries such as Venezuela and Iran, which caused people to have serious doubts about Brazil’s role as a regional leader or a world leader.”

According to Martínez Lazaro, the fundamental question is whether Latin America can find a framework for its economic, commercial and political integration. “The problem is that [countries in the region] are looking for that model and they can’t find it.” Without such a model, each country has realized that “you have to continue to do things in an individual way, with each country and bloc, by signing FTAs [free-trade agreements] with other regions in the world. Given the lack of specific results on a regional level, each of these countries continues along its own path,” he says.

The U.S. Agenda

Latin America is also divided among those countries that are friends of the United States, and those that are not. The U.S. continues to be the main trading partner of the region, and it is still the biggest foreign investor in Latin America, ahead of China. This affinity has led the U.S. to sign separate bilateral free trade agreements with 11 different Latin American countries, including Mexico (as part of NAFTA, which also includes Canada), Chile, Peru, Colombia, Panama and the Central America-Dominican Republic Free-Trade Agreement (which includes Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and the Dominican Republic). Nevertheless, notes Malamud, “The ceiling has been reached when it comes to expanding free trade agreements, because it would be very hard [for the U.S.] to reach agreements with the remaining countries [in the region]. Some of those [remaining] countries are members of ALBA (the leftist counterpart of the Free Trade Agreement of the Americas — a moribund plan to expand NAFTA to all of Latin America that was once promoted by the U.S.). The other countries [not in that category] are members of Mercosur, and this limits the spectrum of growth possibilities for their policy of free trade agreements.”

In any case, the economic boom the region is now experiencing has also changed the way these countries relate with the U.S. from an economic point of view. According to Martínez Lazaro, “Latin America does not feel that it depends as much on the U.S. as it did in the past, because it has found other key trading partners, such as China, on the other side of the Pacific.” He adds that “in the past, [Latin America] depended more on its neighbor to the north for obtaining loans and assistance, but this has changed. There are more places and institutions where [countries in the region] can get sources of financing.”

Along the same lines, political dependence is less of a problem for both sides as a result of the strength of democratic regimes in Latin America. In many ways, the preoccupations of the U.S. have turned toward the Middle East, and moved away from Latin America. As a result, “the tutelage of the United States has been reduced, and is now limited to cooperation with countries such as Mexico and Colombia in the battle against drug trafficking and guerrilla fighters.”

Those Latin American issues that affect the internal politics of the U.S., such as immigration and the relaxation of the Cuban regime’s restrictions on travel — which could have repercussions on Cuban immigration to Florida —  are going to be on the agenda of the U.S., notes Malamud. Other experts don’t believe that there are going to be any changes[in the U.S. policy agenda during the second Obama administration. “Recent statements by Senator John Kerry, Hillary Clinton’s successor as Secretary of State, create the impression that Latin America will continue to occupy quite a marginal place on the agenda of the U.S. They also confirm the role that the [Latin American] continent is going to have in the foreign policy of [the U.S.],” he says.

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