The death certificate for the Free Trade Area of the Americas (FTAA) was signed on January 1, 2005. That was supposed to be the date that established the ambitious plan for promoting free trade all the way from Alaska to Tierra del Fuego. Instead of the FTAA, a series of trade associations are being developed with alternative blocs of countries, including the “G-20” bloc led by Brazil. These associations bring key developing countries together in an effort to combat the protectionist trade policies pursued by developed countries. In addition, there have been bilateral pacts between the United States and other regional blocs in Latin America such as RD-CAFTA, which includes Central America and the Dominican Republic; and CAN-3, with includes three member states of the Andean Community.
Clearly, the FTAA envisaged by the first President Bush more than a decade ago has no future. Hugo Macias Cardona, professor of economics at the University of Medellín (Colombia), believes things turned out that way “not only because of different positions and interests in the countries of various sub-regions but because the United States can derive more benefit from forging bilateral pacts and multilateral agreements with small groups of countries than it can derive from one single agreement with all the countries of the region. The United States has greater negotiating power when Latin America does not negotiate as a single bloc.” Macias belongs to the Econolatin Network of Latin American economic research centers led by the Autonomous University of Madrid.
This strategic change can be explained largely by the moderate opposition to FTAA that emerged in three Southern countries — Brazil, Argentina and Venezuela — where political trends have taken a turn toward the center left. Macias notes that the emergence of Luiz Inácio Lula da Silva as president of Brazil and Néstor Kirchner as president of Argentina strengthened those countries’ ties with Europe, and diminished the intensity of their relationships with the United States. “Deepened trade relations within Mercosur (Argentina, Brazil, Uruguay and Paraguay) means that the United States is playing less of a leading role at a time when integration with Europe is a stronger force than it is in other countries of the region. For its part, Venezuela — led by the controversial president Hugo Chávez — is banking on an unanticipated oil bonanza and on relations with Asia. Venezuela has been distancing itself more explicitly from the United States, as well as reducing its traditional policy of dependence” on the United States.
Ramón Mahía, professor at the Autonomous University of Madrid and an analyst at Econolatin, believes that after the Uruguay Round that created the World Trade Organization (WTO) “there has been no way to establish trade agreements that have a comprehensive structure. And even in negotiations with countries, it is harder to arrive at an agreement that is symmetrical because the balance of forces is always asymmetrical.”
Trade Dynamics in the Future
Macias argues that the failure of the FTAA will not lead to too many changes in relationships between North and South. That’s because “U.S. executives are already getting the same benefits from negotiations with small groups of countries that they would have gained from the [FTAA] agreement.” What will happen, Macias says, is that “frameworks for trade relationships will broaden. Mexico, Central America and the Caribbean will continue to depend on the United States. In that regard, they will be followed closely by Colombia and Chile. Meanwhile, Argentina will continue to get closer to Europe; it has already forged close ties with Europe because of the massive immigration from that continent between the two world wars. Chile and Costa Rica will continue to diversify their trade ties and move away from focusing on specific countries. Venezuela will continue to defend its political and commercial independence, as far as the high price of oil will permit. The other countries will continue to have fewer external trade relationships.”
According to Macias, “What the United States might gain from integrating [its economy] with Latin America, the U.S. has already achieved with Mexico. The problems involved in negotiating with other countries will provide an impetus for the U.S. and Mexico to strengthen their bilateral ties. The U.S will wind up having fewer trade ties with the rest of the region.” Beyond Mexico, Macias adds, “The best opportunities are in Brazil and Argentina but those countries are reluctant to deepen their integration with the U.S.; they prefer to develop their potential for South-South relationships.”
Macias predicts that the dynamics of international trade will lead to agreements between the United States and blocs of countries. Above all, the Mercosur and Andean Community (CAN) blocs will continue to become stronger. The five member states of CAN are Colombia, Peru, Venezuela, Ecuador and Bolivia. In the case of Mercosur, he adds, “Despite asymmetry among its member states, they have managed to creatively strengthen their ties with Uruguay, which behaves like an additional province of Argentina in macroeconomic terms. In addition, they have strengthened mutual ties within the axis formed by Buenos Aires, Rio de Janeiro and São Paulo. In the case of CAN, there have been many advances in integration between Venezuela and Colombia, and Ecuador has made nearly as much progress.”
Free Trade Agreements with the United States
When it comes to trade pacts involving the U.S., DR-CAFTA stands out. The pact was signed in May 2004 by the U.S. and five Central American countries. The Dominican Republic joined later. The agreement has already been ratified by the legislatures of the U.S., El Salvador, Honduras, Guatemala, the Dominican Republic and Nicaragua. However, it has yet to be approved by the legislature of Costa Rica; that must happen if the treaty is to go into effect. The treaty creates a trading bloc of some $33 billion, which becomes the second-most important bloc for the U.S. (after NAFTA). On the other hand, for more than 16 months, the U.S. has also been negotiating a free-trade agreement with three-members of CAN — Ecuador, Peru and Colombia.
Mahía explains that the U.S. is quite dependent on some products that could be threatened by political realities in Latin America and by the U.S. administration itself. What the U.S. is trying to achieve with this type of agreement, he says, is “to reduce the degree of uncertainty to a minimum so that the treaties are not threatened by the U.S. trade deficit, which is enormous today even with Latin American countries.”
On the other hand, the U.S. has political motives. It can use DR-CAFTA to consolidate democracy in a region whose recent past was marked by political turbulence and war. According to Mahía, “No one really knows if commercial or political interests will win out because a trade agreement is also a political treaty. There’s nothing wrong about that. Treaties always respond to political interests, although it would not be right to suggest that trade agreements respond exclusively to those kinds of interests.”
The negotiation and ratification process for DR-CAFTA has not been problem-free. In the U.S., many voices were raised against DR-CAFTA because of doubts about how well Latin American countries could comply with environmental and labor standards. In Latin America, there have also been fears that DR-CAFTA will result in greater dependence on the North and an inability to purchase U.S. products. As a result, Costa Rica could wind up postponing the entire DR-CAFTA ratification process. In that country, a group of experts has been studying the trade pact at the request of President Abel Pacheco. The group believes that the country is still unprepared to meet its requirements. The experts say Costa Rica needs to undertake reforms in its educational system and infrastructure, while also carrying out a fiscal plan for reducing inflation. Their comments were a source of encouragement for the social and labor groups that had been protesting against the DR-CAFTA agreement.
Macias does not agree with that view. Given current global economic conditions, he argues, “You cannot defend the idea that a country can try to be self-sufficient; actually, you have to become integrated. Strictly speaking, every country will always have some aspects of its structure that must be improved before it can be integrated with other countries. But you cannot wait until you make all those reforms before you get started with the negotiation process. What you have to do is learn how to negotiate; you have to acquire negotiation skills by partnering with other countries. [If it is decided that] a country like Costa Rica definitely has to wait some years before making the reforms required for integration, then the country must do that. But I don’t think that is the case.”
For his part, Mahía explains, “The story of Central American agreements with the U.S. has some very distinctive aspects. In many cases in Central America, the ownership — not so much of the products but of the commercialization and distribution of key products — is already in U.S. hands. This creates power relationships that are very different when it is time to negotiate. It also creates a feeling, above all in Central American public opinion, that this situation involves the predominance of U.S. ownership. In the case of coffee and bananas, there is always going to be a loss of power when it comes to trade negotiations.”
Social protests have also taken place in Peru and Colombia, where thousands of people have demonstrated against their free-trade pact with the United States. The goal of the protestors was to have the last round of negotiations, which took place in Cartagena, Colombia, determine whether this treaty could cause unemployment, and make pharmaceuticals inaccessible to millions of poor people in the region.
Macias believes it is logical for social activists to be concerned about these issues. “The way free-trade agreements are created, they generate many negative effects on lower-income people who are traditionally excluded.” Nevertheless, he says, “The negotiation process has made progress and it will continue to do so. That’s because these treaties also have big winners; namely, those people who design them, defend them and carry them out — the multinational companies in strategic sectors. Meanwhile, strategic sectors in Latin American economies are integrated [into global markets] by a small number of companies that now have greater market power [as a result of the pacts], and in an internal way that promotes discussion and programs for creating small companies.” In reality, he concludes, “Apparently, the processes for creating business are now more oriented toward solving the serious problems of unemployment than toward addressing the concentration of [market share in] strategic industries. Those companies that are unsuccessful wind up being absorbed by larger companies that can take advantage of the [new] economies of scale. Strategic sectors apparently benefit from the economies of scale; those companies that have larger operating size benefit [from the pacts] by getting lower costs per unit.”
In his view, those who suffer the most will be consumers who buy from companies protected by the treaties’ intellectual property provisions, such as pharmaceutical firms and manufacturers of mass market consumer goods. “As employees, citizens will be affected by sectors that operate with subsidies in developed countries, which enable them to sell at lower prices even though they are inefficient. They will also be affected by changes in labor laws promoted by multinational companies and by the U.S. government. These factors lead to deteriorating labor conditions.” In that sense, he explains, “They are inviting Latin American countries to adopt the Mexican arrangement, where there is a very low level of unemployment but where salaries are on a subsistence level. Anyone who wants to work can find work, but the income he earns does not allow him to satisfy his basic needs.”
According to Macias, some Central American countries are trying to specialize in maquilas (manufacturing plants) in various products, including some that have a high level of technological complexity. However, he says, “It is very hard to compete with Asian countries that impose very precarious labor conditions on their workforce. It would be very hard for a small Central American country to provide salaries that compete [with Asia].” Nevertheless, not everything is bleak. Central America and the Caribbean “have a big advantage because of their geographical proximity to huge markets in the United States and Canada. In reality, most international trade in these countries, except for Japan and the United States, takes place with neighbors because lower transaction costs are involved, and people have a greater understanding of internal realities” in neighboring countries.
Nevertheless, Macias does not believe that the trade pacts will enable the U.S. to confront the threat of China when it comes to jobs. “The threat that China represents for workers in the U.S. cannot be solved through agreements involving the U.S. and Latin American countries. If you could find a substitute [for a Chinese product] or if you could find products that can compete on equal terms with Chinese products in the U.S., then the jobs previously lost to China would be replaced by new jobs in the countries that beat out the Chinese in the U.S. market,” he says. However, “They could pressure Central America — as, in fact, these integration agreements already are doing — so that the products exported to the United States have a high percentage of U.S.-made content.”
Protectionism in Developed Countries
The main stumbling blocks in negotiations for DR-CAFTA came in the textile and sugar sectors. In the U.S. treaty with Ecuador, Peru and Colombia, the main stumbling block have been in agricultural products and intellectual property. All this squabbling makes it clear that more developed countries have their own protectionist policies in place. “The United States, just like Europe, continues to be very protectionist in the agricultural sector because of food security concerns,” says Macias. “International tensions force these countries to try to produce their own foods even if these sectors are inefficient by international standards. That’s because they could not depend on their neighbors for food in the event of war. In war time, it’s common to use the approach known as ‘emptying the fish tank.’ That involves preventing your enemy from importing basic products, in order to force him to surrender. That’s why developed countries have maintained these kinds of subsidies for quite a long time. Despite the fact they are very inefficient, these countries sell their products at cheap prices in global markets. Developed countries continue to be protectionist in agriculture and fishing, and they continue to engage in such activities” as selling at cheap prices.
The apparel sector is extremely important in Central America and in such countries as Colombia where garment assembly is a mainstay. This activity often takes place in small factories that generate a large number of jobs that pay very low wages because there is so much competition. Macias says this sector “is different from the textile industry, which produces the actual cloth and is much more industrialized. The Andean countries and the countries in DR-CAFTA are much more interested in apparel because of the [high number of] jobs that it generates, and because of the clear path that has been created in the sector when it comes to productivity and to the recognition of quality in the U.S. market.”
According to Macias, the United States has talked about free trade while internally promoting various mechanisms for protectionism. “They [the U.S.] are not going to change in the short run. What remains is to try to negotiate with them, the way Brazil has; Brazil has refused to pay for intellectual property rights on patents until developed countries dismantle their subsidies. Brazil’s economy is so large that the country has a place at the table when there are international negotiations, such as at the WTO.”
In conclusion, Macias believes that in the near future, we can expect “first, a strengthening of the internal structures of Mercosur and the CAN; second, a re-strengthening of relationships between the U.S. and Mexico, Central America and the Caribbean countries; and finally, a formal structure of agreements between the U.S. and blocs of countries that, in reality, wind up having less functionality than other existing agreements.”