REGIONALISM IN THE AMERICAS DURING THE 1990s:
CURRENT TRENDS AND IMPLICATIONS

Roberto Echandi

Regionalism is in vogue in the Americas. During the last decade, in no other place of the world have there been as many Regional Trade Agreements (RTAs) negotiated as in the Western Hemisphere. Since the 1990s, the countries of the Americas have negotiated more than a dozen RTAs of different kinds, generating a complex web of trade agreements, which is still in evolution. A more cohesive system should be achieved with the establishment of the Free Trade Area of the Americas (FTAA), an ongoing negotiation process which aims to establish, by the year 2005, a free trade area from Alaska to Patagonia.

Often the press and other media refer to international trade negotiations. However, very few entrepreneurs have the chance to familiarize themselves with the features and content of these agreements­in particular, what they do, or do not, entail. The purpose of this article is to represent a small step in filling this gap. In particular, this note purports to be an eye opener to those thousands of North American entrepreneurs who still have not discovered all the opportunities awaiting them in Latin America as a result of the process of regional trade integration.

What should an entrepreneur know about the different types of RTAs?

Currently, in the Americas there are at least 50 regional trade agreements (RTAs) of different kinds already in place or in the process of negotiation. One could classify these agreements in three broad categories: bilateral "partial scope" agreements, custom unions, and free trade areas.

Bilateral Partial Scope Agreements (BIPSAs)

  The Bilateral "Partial Scope" Agreements ("BIPSAs") comprise the most numerous category of the existing RTAs in the Western Hemisphere. There are 26 in total, and most of these agreements were negotiated before the 1990s under the auspices of the Latin American Free Trade Area (LAFTA) which later became
the Latin American Integration Association (LAIA). The BIPSAs have four main features.

First, the scope of application of the BIPSAs is limited to the group of products explicitly listed in the agreements. Such inclusion entails the provision of a preferential tariff treatment often expressed in terms of tariff preferences rather than duty free access.

Second, BIPSAs usually do not contain rules and disciplines to counteract non- tariff measures capable of eroding the tariff preferences. Thus, these agreements usually do not contain rules in areas such as sanitary and phytosanitary measures, technical barriers to trade, unfair trade practices, etc.

Third, the BIPSAs are limited to trade in goods. They do not contain provisions on trade in services, investment, and intellectual property or government procurement.

Fourth, and probably the main defect of this kind of agreements, is that the BIPSAs do not contain any kind of dispute settlement adjudication procedures, and simply rely on government-to-government consultations to solve any conflict regarding the application or interpretation of the agreement. It should not surprise, then, that such a loophole has rendered the tariff preferences very vulnerable to domestic protectionist pressures.

Customs Unions
Among the numerous RTAs existing in the Americas, only four of them are customs unions. They are the Central American Common Market (CACM), the Caribbean Common Market (CARICOM), the Andean Community and the Common Market of the South (MERCOSUR being its Spanish acronym). Three features are salient within this category of RTAs.

First, all of these agreements are plurilateral ­ its membership comprising at least four countries‹and all of them constitute subregional groupings established along geographic lines.
Second, with the exception of MERCOSUR, all of the other customs unions are not new at all. In fact these three customs unions were established during the 1960s, and responded to the import substitution industrialization (ISI) policies that were in vogue in Latin America during this period.

Third, and as a consequence of the significant market-oriented reforms undertaken within their member countries, during the last decade the old customs unions have been going through a process of modernization. The new domestic and international economic context is increasingly calling for the redefinition of the objectives and rationale of these old customs unions. Attempts to modernize these integration schemes have proven to be a very difficult task.

Free Trade Areas
Practically all of the free trade areas (FTAs) existing in the Americas have been negotiated during the 1990s. In fact, most of the dynamism of the integration process in the Western Hemisphere during the last decade is usually associated with the significant number of FTAs negotiated during this period ­17 in total. The negotiation of these FTAs evidences four salient aspects.

First, through these free trade agreements there has been a qualitative improvement in the level of rules and disciplines applicable to intra-regional trade. Indeed, the FTAs negotiated during this period contain comprehensive tariff liberalization programs based on a negative list approach. That is, over a period of time‹usually spanning from 0 to 15 years‹the Parties to an FTA, in principle, will grant duty free access to practically all their reciprocal trade, with just a few exceptions which must be explicitly listed for that purpose.

Second, the FTAs also establish a number of rules and disciplines to avoid the tariff liberalization program being eroded by the use of non-tariff barriers. In this regard, it is worth noting that most FTAs practically cover the same wide range of matters regulated by the GATT.
Third, the rules and disciplines included in these agreements go well beyond regulating trade in goods, dealing with other matters such as trade in services, investment, and trade-related intellectual property rights. In fact, in many cases, the scope of issues regulated by the FTAs go beyond those covered at the multilateral level by the World Trade Organization (WTO).

Fourth, there is a remarkable similarity among the scope and features of most FTAs. This is not a coincidence. Most of the texts of the FTAs negotiated between Latin American countries during the 1990s have an evident resemblance with NAFTA. Most Latin American countries have acted on the assumption that following such a model will be useful in preparing for their future membership in the FTAA, and using the bilateral and subregional FTAs as "building blocs" for the future hemispheric free trade area.


Evaluating Regionalism in the Americas during the 1990s: What has really happened?

From an economic perspective, there are four main trends that can be observed in the process of regional economic integration in the Americas

First, intra-regional trade has grown at impressive rates

Between 1991 and 1998, intra-hemispheric exports grew from U.S.$300.765 million to U.S.$692.358 million, representing an increase of approximately 230 percent. If Latin American exports are observed separately, the growth appears to be more impressive. Intra-Latin American exports grew from U.S.$16.894 million to U.S.$ 56.691 million in 1998, representing an increase of approximately 335 percent. Of course, it could be argued that these impressive figures are somewhat misleading giving the limited dimensions of the trade flows existing at the beginning of the 1990s. Indeed, the smaller the initial figure, the easier it is to achieve substantial rates of growth. So, how do these figures stand when compared with the evolution of trade flows with the rest of the world?

During the 1991­1998 period, intra-hemispheric exports grew at an average rate of 11 percent per annum, while exports from the Western Hemisphere to the world as a whole grew at a rate of 7.9 percent, and exports to countries beyond the Americas at a rate of 4.7 percent. There is no doubt then, that, during the last decade the growth of intra-hemispheric exports has been more dynamic than the export growth from the Western Hemisphere to the rest of the world.

Second, although intra-regional trade has grown significantly, most countries still trade more with their traditional trade partners

Despite how impressive the absolute numbers of intra-regional trade may look, evidence shows that, with the exception of MERCOSUR and‹to a lesser extent‹ NAFTA, the negotiation of regional trade agreements has not lead to a significant variation of the trade structure of the countries of the Western Hemisphere.

Thus, significant shares of Latin American exports are sold either in the United States, the European Union, or the rest of the world. The weight of the U.S. market as a destination for Latin American exports varies significantly depending on the geographic location of the exporting countries. While for countries such as Mexico, those of Central America, the Caribbean Basin, and even of the Andean Community the United States is the main destination for their exports, for the members of MERCOSUR, their own subregional market has become the main destination for their exports.

Thus, in terms of trade flows, a bipolar pattern has emerged, with the U.S. market as a center of gravitation in the northern part of the hemisphere and MERCOSUR in the southern cone. As will be explained below, this fact has several implications, in particular for the political economy of the FTAA negotiations as well as for other subregional trade integration initiatives in the Western Hemisphere.

Third, intra-regional trade has a different composition than trade with the rest of the world

Intra-regional trade has been more dynamic in manufactured goods than in primary products. This is a fact of paramount importance and explains to a great extent the political economy of regionalism in the Americas. Indeed, what this finding evidences is that Latin American industry is gradually turning away from their traditionally "cozy" national markets, where for decades the sector used to enjoy a protected environment away from foreign competition. Further, this finding shows that Latin American governments implementing market-oriented structural adjustment programs during the last decade have found in the negotiation of regional trade agreements a tool to gradually push their industries toward the export sector and to become more outward oriented.

Several factors may explain why the composition of intra-regional trade among Latin American countries differs from the composition of their exports to the rest of the world. The list could include a wide range of factors, such as geographic vicinity, products adapted to subregional incomes, taste and custom, remaining shortcomings with respect to world-wide international competitiveness, protection in extra-regional markets, deficient international marketing networks, etc. Further research is required in this regard. However, what is important to note meanwhile is that in most Latin American countries a segmentation within the export sector seems to be evolving. While some segments of the export sector have reached world-competitiveness and are used to export to markets in the north (mainly the United States, Europe, and‹to a lesser extent‹Japan), a significant part of the export sector producing manufacturers, especially in smaller economies, still has not reached world-competitiveness. Thus, this sector prefers to focus on subregional markets, where it is perceived that geographic vicinity, familiar cultural consumer patterns, and less competitive environments increase their export possibilities.

The interaction of regional integration and Foreign Direct Investment (FDI) is braking old paradigms Š

FDI has allowed a process of industrialization of Latin American exports
The increase in intra-regional trade and the greater participation of manufacturers in those trade flows are symptomatic of a deeper transformation affecting the Latin American economies during the last decade.

The negotiation of regional trade agreements has promoted increased flows of Foreign Direct Investment (FDI) into Latin America in two different ways. In the countries of the Caribbean Basin and Mexico, the negotiation of NAFTA and the enactment of the Caribbean Basin Initiative (CBI) brought greater certainty regarding the market access conditions into the U.S. market. This fact has allowed multinational enterprises to invest abroad, promoting efficiency-seeking FDI in the region. Thus, numerous multinational enterprises have located productive facilities in these countries as part of vertical integration strategies, using the region as a production and export platform for the North American market. These multinational enterprises then are transforming the competitive position of the host economies and are shifting their production and trade structures toward exports in dynamic automobile, electronics, and textile industries.

Thus, if oil is no longer Mexico´s main export product, or coffee that of Costa Rica, or sugar that of Dominican Republic, it is‹ to a great extent‹ due to the qualitative impact that FDI has had over the productive sector of these countries. Further, given the outward orientation of this kind of FDI, such flows could have never developed if exporters had not had certainty regarding their duty free or preferential access to the North American market. Such degree of certainty is the result of the existence of regional trade agreements.

Regionalism has also had an important, but somewhat different, impact in attracting FDI flows into the southern cone. Contrary to the case of Mexico and the Caribbean Basin, recent FDI in South America has tended to concentrate in non-tradable services‹ manufacturing for local markets and natural-resource-based commodities. However, the establishment of a wider market through the negotiation of MERCOSUR has been instrumental in promoting market-seeking FDI into these countries. Despite the fact that such FDI tends to be inward-oriented‹that is, aimed at exploiting the local market rather than another abroad‹there is no doubt that during the 1990s, as during the 1950s­1980s, these capital flows have played a significant role in promoting the industrialization of the economies in the Southern Cone, in particular those with the bigger dimensions such as Argentina and Brazil. However, during the last decade, market-oriented reform has prevented multinational corporations from benefitting from a "tariff jumping" strategy, forcing even those primarily focused on the regional market to face extra-regional competition.

FDI is no longer a North-South phenomenon: the emerging Latin American multinational corporations

During the last decade Latin America has not only been a recipient of FDI, but also a producer of foreign investors who have began to invest heavily in other countries of the region. It has been estimated that assets abroad by firms headquartered in countries like Argentina, Chile, Mexico, and‹to a lesser extent‹Brazil can be estimated at between $40 and $50 billion. FDI outflows from Chile increased from an annual average of only $8 million during 1986­1990 to $525 million during 1991­1995. In Mexico, according to official sources FDI, outflows increased from an annual average of $142 million during 1986­1990, to nearly $300 million from 1991­1995 and, after the financial crisis, amounted to $836 million during 1996­1998. In Argentina, there has been an outward FDI "boom" since 1994. FDI outflows increased from an annual average of $ 5 million during 1986­1990 to $869 million during 1991­1995 and to $2.2 billion during 1996­1998. Even smaller economies like Costa Rica, Nicaragua, El Salvador, Guatemala, Panama and Jamaica have began to witness the spring of their own international investors establishing regional conglomerates in a variety of sectors such as financial services, tourism, retailer stores, airlines, and even in the manufacturers and software.

Regardless of how predominant the negotiation of regional trade agreements may have been in promoting the increase in intra-Latin American FDI flows, these trends have a significant implication: new multinational enterprises are emerging in Latin America. Thus, neither MNEs nor FDI can continue to be perceived as creatures of the developed world.

The Free Trade Area of the Americas: Deepening the Process of Regional Trade Integration in the Western Hemisphere

What is the FTAA?

The starting ideas which underpin the FTAA process are to be found in the Declaration of Principles which emerged from the Summit of the Americas held in Miami in December of 1994. At the Miami Summit, the Heads of State of 34 countries of the Western Hemisphere agreed to begin a multi-faceted process of political and technical/legal consultations aimed at:

• preserving and strengthening democracy;
• promoting prosperity through economic integration;
• eradicating poverty and discrimination, and
• assuring sustainable development

The second objective, which is of primary interest for the purposes of this article, was geared at a recasting of the dynamics of hemispheric trade. The leaders resolved to conclude negotiations for the establishment of a free trade area by no later than 2005. Between 1994 and 1999, the intergovernmental consultations passed through many phases, and the discussions gave rise to an ambitious and wide-ranging negotiating agenda, a formal negotiating structure, and a network of inter-governmental working and negotiating groups which have addressed specific areas of trade with clear terms of reference.

The discussion on the FTAA has basically evolved in two phases: the first phase lasted from 1995 to1998, and was largely diagnostic in nature. In this phase, institutional and administrative structures to guide the consultations were established and information gathering was undertaken. Further, areas of convergence and divergence between national regimes and existing bilateral or sub-regional treaties were analyzed in each of the areas that will be regulated by the future FTAA Agreement. A second stage, lasting from 1998 to the present, has been marked by the launch of formal negotiations on selected trade-related areas. The decision to launch negotiations was made by 34 Heads of State of the Americas at a Second Hemispheric Summit held in Santiago de Chile in April 1998.

In terms of the organization of the work at the inter-governmental level, once a year a Ministerial Conference has been celebrated in order to oversee the progress reached. The first FTAA Ministerial Conference was held in Denver, Colorado, in 1995. In that occasion seven Working Groups were established and were mandated to identify and examine existing trade-related measures and present possible negotiating approaches in the following areas:

• Market Access
• Customs Procedures and Rules of Origin
• Investment
• Standards and Technical Barriers to Trade
• Sanitary and Phytosanitary (SPS) Measures
• Subsidies, anti-dumping, and countervailing duties
• Smaller Economies

By 1997 five additional Working Groups were established, namely:

• Government Procurement
• Intellectual Property Rights
• Services
• Competition Policy, and
• Dispute Settlement

At the start of the formal negotiations in 1998 issues related to agriculture were added to the mix and Consultative Groups on Smaller Economies, Electronic Commerce, and Civil Society were convened. By 1999 a clearer modus operandi on aspects of the negotiating process had already emerged; for example, that the consensus rule would operate, the negotiation of an FTAA would entail a single undertaking, the FTAA would co-exist with established bilateral and sub-regional agreements, and that the participating countries had the latitude to negotiate individually or as a sub-regional bloc ( eg. as MERCOSUR, the Andean Community, and the CARICOM have sought to do).

The results of the first year of negotiations were examined by Trade Ministers in Toronto in November 1999. On this occasion, each negotiating and consultative group submitted a report to the Ministers, and in the case of the negotiating groups, the report contained a preliminary annotated outline of the provisions which were to be included in each specific chapter of the future FTAA Agreement. Considering the progress made, Ministers ambitiously agreed to go one step forward in the construction of the FTAA, and mandated the negotiating groups to prepare a preliminary consolidated text of each chapter of the FTAA Agreement. This bracketed draft contained the positions of all the negotiating parties and was initially submitted at the Ministerial Meeting held in Buenos Aires, Argentina, in early 2001.

FTAA: What is next?

Since last year the FTAA negotiations have continued in Panama City, using the bracketed text submitted in Buenos Aires as a basis for the talks. Significant progress has been reached to date, although it is not until this year, 2002, when the negotiations will really begin to tackle more central issues. 2002 will be a key year for the FTAA for two main reasons. First, according to the Ministerial Declaration agreed on in Buenos Aires, by May countries will have to start market access negotiations in the diverse relevant disciplines; that is, trade in goods, investment, and services. Second, given the likelihood of the Bush Administration to finally receive trade promotion authority to negotiate, the U.S. bargaining positions will certainly receive a boost of credibility.

In 1889, James D. Blaine, then U.S. Secretary of State, proposed the establishment of a Pan-American Customs Union. More than 100 years later, the dynamic forces of trade and investment are gradually contributing to integrate the Americas in that direction. As demonstrated in this note, the FTAA process is not an isolated event, but rather an initiative aimed at organizing and maximizing the benefits that numerous agreements are bringing to entrepreneurs, workers, and consumers in the Americas.