Latin America Trade: Pacific Alliance v. Mercosur

Brazil-Uruguay frontiers

On May 23rd, 2013 in the Colombian city of Cali the presidents of four Latin American countries—Chile, Colombia, Mexico and Peru—signed  an agreement removing tariffs on 90% of their merchandise trade. They will also agree on a timetable of no more than seven years for eliminating tariffs on the remaining 10%. They have already removed visa requirements for each other’s citizens and will proclaim their aspiration to move swiftly towards setting up a common market.  The Pacific Alliance, as the group calls itself, is “the most exciting thing going on in Latin America today”, according to Felipe Larraín, Chile’s finance minister. Some outsiders think so, too. Costa Rica and Panama want to join; Canada’s prime minister, Stephen Harper, and his Spanish counterpart, Mariano Rajoy, have said they will attend the Cali meeting as observers.

Behind the excitement is the sense that the Pacific Alliance is a hard-nosed business deal, rather than the usual gassy rhetoric of Latin American summitry. Under the leftist governments that rule in much of South America, there has been plenty of talk of regional integration, but precious little practice of it. Intra-regional trade makes up just 27% of total trade in South and Central America, compared with 63% in the European Union and 52% in Asia….

The four founding members are free-market and mainly fast-growing economies which have embraced globalisation, with a web of regional trade-agreements and expanding commercial ties to Asia. Their combined GDP is around $2 trillion—35% of the Latin American total and not much less than that of Brazil, the region’s gian.

The private sectors in the member countries have played a big role in setting the Alliance’s priorities. The stock exchanges of Chile, Colombia and Peru have created a single regional bourse. Negotiators are working to smooth border procedures and standardise rules, such as on labelling. They are making progress in talks to harmonise the rules of origin—how much local content goods must have to be tariff-free—in their existing trade agreements with each other. “They are trying to resolve the problem of the spaghetti bowl of regional trade-agreements,” says Antoni Estevadeordal of the Inter-American Development Bank. This “exercise in regulatory convergence” could be a model for other parts of the world, he adds.

The Pacific Alliance marks a return to the principles of “open regionalism”—the idea, prevalent in Latin America in the 1990s, that opening up to world trade would be more advantageous if combined with creating a deeper regional market, to reap economies of scale. This idea lay behind the founding in 1991 of Mercosur, a group originally comprising Argentina, Brazil, Paraguay and Uruguay.  But the left-wing governments in charge of those countries for much of the past decade have turned Mercosur into a different kind of enterprise. “Today it is almost wholly a political front” with “protectionist internal tendencies which frequently collide with Mercosur’s original principles,” according to Luiz Felipe Lampreia, a former foreign minister of Brazil.  This was underlined last year when the other members suspended Paraguay (because of the impeachment of its left-wing president) and admitted Venezuela, then governed by Hugo Chávez. Under Brazil’s aegis, much of Chávez’s anti-American ALBA block is being absorbed by Mercosur. On May 9th Brazil’s president, Dilma Rousseff welcomed Nicolás Maduro, Chávez’s chosen successor who was narrowly elected as president last month, and affirmed their “strategic partnership”. Brazil is also seeking closer ties with Cuba, which this month offered to send 6,000 doctors to the country.  Brazil’s two main regional partners, Argentina and Venezuela, have slow-growing, state-controlled economies, and their policies flirt with autarchy. That makes them captive markets for Brazilian construction companies and exporters of otherwise uncompetitive capital goods. Brazil had a trade surplus of $4 billion with Venezuela last year.

In the wider world, Mercosur has signed regional trade agreements only with Israel, Egypt and the Palestinian Authority. Argentina has stalled a proposed trade deal with the European Union, on which talks began in 1999. Brazil’s bet has been on the Doha round of world trade talks. It was cheered when Roberto Azevêdo, a Brazilian diplomat, was chosen this month to head the World Trade Organisation (WTO). But many trade specialists consider the Doha round all but dead and the WTO increasingly irrelevant….

In its short life, the Pacific Alliance has proved to be a brilliant piece of diplomatic marketing. Now it has to add substance

Latin American geoeconomics: A continental divide, Economist, May 18, 2013, at 38

See also ALBA

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