PROSPECTS for a FREE TRADE
AREA of the AMERICAS
 
An International Conference
 
Presented by

The Center for Latin American Issues
and
Bayer Consulting, LLC
 
Thursday, November 21, 2002

One of the most significant global political and economic trends of the past two decades has been the push to open markets for trade among nations. Nowhere is this effort more evident than in the Americas, where nearly every nation is involved in a regional trading bloc and numerous bilateral trade agreements are either in effect or under negotiation. The most important such agreement under discussion right now, the FTAA, would establish a free trade area for the Western Hemisphere. Many believe that an FTAA would be the most effective way to bring about economic and other development benefits to the nations of the region.

On Thursday, November 21, the GW Center for Latin American Issues and Bayer Consulting hosted an international conference to discuss the likelihood that an FTAA would be achieved by the 2005 deadline, and to examine the obstacles to and likely impacts of such an agreement. The day-long event featured numerous prominent political and economic leaders and analysts, including Mary Estelle Ryckman, Deputy Assistant U.S. Trade Representative for Capacity Building; Robert Devlin, of the Inter-American Development Bank; Alex Chafuen, President and CEO of the Atlas Economic Research Foundation; William Lane, Director of Government Affairs at the Caterpillar Company; Jon E. Huenemann, Senior Vice President of FH/GPC; U.S. Congressman Ruben Hinojosa; the Honorable Miguel Angel Rodríguez, former President of Costa Rica and Visiting Scholar at the George Washington University; Hector Marquez, Director of the Trade and NAFTA Office at the Embassy of Mexico; José Niño, Chairman of the Cypress Capital Group; and Eric Farnsworth, Senior Advisor and Managing Director at Manatt Jones Global Strategies.
 

Mary Ryckman addresses the audience.	The afternoon panel: Hon. Miguel Angel Rodríguez, Jose Niño, Hector Marquez, Eric Farnsworth.

Much of the current discussion surrounding the FTAA focuses on whether an agreement will be reached by the current deadline, January 1, 2005. The individual interests of nations vary widely, and a number of economic and political issues are potential roadblocks for a final agreement. First, the logistics of having 34 nations agree to anything is a huge task. Mary Ryckman pointed out that, as opposed to the previous round of negotiations, the recent talks in Quito produced a consolidated draft text for an FTAA. Every nation involved seems to be committed to the process at this point, and most nations are comfortable publicizing many of their negotiating points. Some contend, however, that too many bilateral agreements and regional trading blocs, particularly those involving the U.S., will take away the economic impetus and the political will that are driving the FTAA negotiations. Ryckman argues that bilateral negotiations are actually helpful to the goals of the FTAA, because they help the negotiating parties articulate and prioritize issues. This process is especially important for the small nations with little negotiating experience. Hector Marquez from the Mexican Embassy pointed out that Mexico has aggressively pursued free trade agreements with many nations even after the passage of NAFTA. Although Mexico has secured an agreement giving it access to the world’s largest economy, it still sees measurable benefits from engaging in free trade with other nations. Marquez believes that other nations will follow Mexico’s lead.

Formalizing ad hoc agreements is a top priority for many nations involved in the negotiations, particularly those with the smallest and most vulnerable economies. President Rodríguez says that in spite of the fact that Costa Rica already has access to the U.S. market, it seeks to enter into a free trade agreement that will lock in that access; at the moment the U.S has unilaterally granted access. A treaty would give assurances of open markets, which would create conditions for more foreign direct investment. Robert Devlin noted that members of the Caribbean Basin Initiative and the Andean Trade Preference Agreement are also subject to losing their privileged status with the U.S. until a formal treaty has been signed. Rodríguez views a U.S.-Central America free trade agreement as an important building block for an FTAA.

Some observers feel that there has been massive rejection of free trade by the public in the resurgence of populist leaders such as Chávez in Venezuela, Ortega in Nicaragua, and Lula in Brazil. Eric Farnsworth says that while people are generally frustrated with the lack of economic progress, he does not see a wholesale rejection of the idea of free trade. Although historically Lula has been adamantly opposed to free trade, taken in context, his election is not necessarily a disavowal of an FTAA. Essentially, Brazilians want to be sure that they get an agreement that maximizes their benefit, and Lula seems poised to fight for Brazil’s legitimate interests while supporting a free trade agreement. Most panelists were hesitant to comment much on Lula’s likely impact, which is difficult to predict before he takes office.

Farnsworth noted the somewhat bleak economic picture of the Americas: the U.S. economy is not doing well; the Caribbean nations that didn’t go very far with their reforms in the 1990s are suffering; and Argentina recently defaulted on its payments to the IMF. The prospect of war in the Middle East and the possibility of another attack on the Brazilian currency are sources of concern that also depress economic growth. With all these problems, says Farnsworth, an FTAA is even more important, because it underwrites political and economic reforms.

There are many signs that the negotiations are on track to create an FTAA by the 2005 deadline; and enormous effort is being put forth to see that it be done. Ryckman discussed the importance of the Hemispheric Cooperation Program, managed by the IDB, the OAS and ECLAC. This program has sought to include the business community and civil society in the preparation, implementation, and transition to a free trade area. By including foundations and private sector representatives along with governments and multilateral institutions in the talks, they seek to create partnerships that help make each stage of creating a free trade area more efficient, thereby distributing the benefits of an eventual agreement more quickly and more broadly. The Hemispheric Cooperation Program will also help manage technical assistance efforts. The U.S., for example, is spending $140 million in the hemisphere to support trade capacity building. The effort to organize and to coordinate this funding through roundtable discussion is designed to promote demand-driven assistance rather than supply-driven assistance, said Ryckman. Devlin noted that the IDB, the OAS and ECLAC have all improved as a result of their efforts to support the trade negotiations, and that coordination among their organizations has improved considerably.
 

The morning panel: Alex Chafuen, Jon E. Huenemann, William Lane.	Robert Devlin discusses the FTAA negotiations.

There are many reasons that nations are interested in establishing free trade. Chafuen made the argument that “there is a moral imperative to allow people to trade freely.” There are several economic and political arguments in favor of free trade as well. The first and most obvious impact, noted Devlin, will be increased market access for all involved nations. The U.S. currently imposes tariffs on a relatively small number of products, but they tend to be on products in which Latin America has a competitive advantage. A free trade agreement, it is assumed, would have to deal with U.S. and Canadian agricultural subsidies that Latin America cannot match. The U.S. would benefit from improved access to Latin American markets that currently have high tariffs.
But the benefits would go beyond improved market access, having far-reaching impacts on institutional and economic development that may not be clear at the outset. Member nations of an FTAA, says Devlin, would be forced to modernize institutions, monitor human rights, standardize accounting procedures, improve judiciary proceedings, etc. Marquez highlighted the importance to Mexico of developing a set of rules under NAFTA; e.g., it had to establish a legal infrastructure to settle disputes. As a result, the government, customs, and businesses are much more disciplined, and this change has been tremendously valuable in creating a better environment for business and the rule of law. These are the types of benefits, he says, that all Latin American nations will experience if an FTAA is created.

In addition, an FTAA would anchor economies, especially vulnerable economies, and lock in improvements because it would be exceedingly costly, both politically and economically, to break the rules of an FTAA. These anchored economies would be stable, helping the Americas to compete more effectively with China and the EU for foreign direct investment. The competition for FDI would, in turn, force nations to continue to improve their institutions of public management. In other words, an FTAA “could be the handmaiden for cooperation that goes beyond trade,” says Devlin.

Devlin went on to point out several impacts of an FTAA. Trade in goods would be likely to increase across the board. Foreign direct investment would increase dramatically, especially in countries that don’t currently have free trade agreements with the U.S. The reverse of this is also true, he noted: countries that have free trade agreements with the U.S., such as Mexico, would suffer because of a dilution of FDI funding. Productivity would likely increase as a result of improved efficiency as nations strive for competitive advantage. Since the FTAA would supercede or absorb all agreements that are not deeper or wider than the FTAA, many current agreements would be eliminated, resulting in more transparency in trade agreements. Many theorize that free trade will lead to decreasing wage inequality because it would narrow the skill gap; however, the evidence on this point, Devlin conceded, is inconclusive. Using the EU as an example, Devlin pointed out that the FTAA would deepen many kinds of cooperation, including macroeconomic stabilization efforts, infrastructure development, and methods to manage labor and migration issues. Chafuen pointed out that there is a strong correlation between high levels of economic development and low corruption.

So, in spite of the challenges, there is guarded optimism that an agreement can be reached, and that it would produce widespread benefits. These benefits, however, are contingent on the shape the final agreement takes. Several speakers pointed out that the final form of the agreement would be largely determined by the U.S. and Brazil. An important element to an effective agreement would be that the interests of the small nations be accommodated in a meaningful way. Chafuen noted the lack of substantial progress in recent free trade negotiations; many of the most contentious issues have been excluded from these accords. The FTAA must deal effectively with these highly contentious issues, which include subsidies for agricultural products, steel, citrus and sugar, among other products. Negotiating the agricultural export issue is particularly complicated because of global competition with highly subsidized exports from the EU and Japan. While some progress has been made, this issue will have to be negotiated simultaneously through the WTO and FTAA agreements. Chafuen also argued that a truly free trade area should allow for the free mobility of labor; however, that issue has not been broached in the FTAA talks and he does not anticipate that it will be included in a final agreement.
 

Several speakers pointed to the ways in which the U.S. is guilty of not following through on its rhetoric of free trade. Chafuen recalled the precedent set by the U.S. in the late 19th century, when the effort to create a hemispheric free trade area was foiled by the McKinley Tariff Act. In the 1980’s, he said, Bolivia, Chile and Mexico initiated free trade talks, but the U.S. sidetracked those efforts. William Lane also pointed out that there are many legitimate complaints about the U.S. commitment to free trade, e.g. by misapplying outdated anti-dumping laws and by continuing to exclude Cuba from trade discussions. Over the years, the perception has developed that the rules of trade do not apply to the U.S. and to Europe the same way that they do for other nations.

A final issue that surfaced in many presentations is the primacy of local politics. In the U.S., for example, the level of private sector support for an FTAA is unclear, but it is definitely not at the level it was for NAFTA. Key industries, including pharmaceuticals, banks, some agricultural sectors, energy and hi-tech have all been muted in their support for free trade, noted Lane. Jon Huenemann pointed out that the opponents of free trade are extremely disciplined, and its supporters would have to match that discipline in order for an agreement to be reached and passed into law. U.S. negotiating teams are making an effort to keep Congress continuously updated so that it will have a good idea of what the final document will contain well before they receive the final draft. Nonetheless, the head of the Committee on International Relations recently declared Lula to be part of a new axis of evil in Latin America, which includes also Chávez and Castro. Extremist sentiments such as this in any of the 34 nations could scuttle hopes for an FTAA.

As President Rodríguez stated, an FTAA “is not an end to problems but a better way of dealing with problems.” Even in the best-case scenario, benefits will not be evenly spread geographically: new opportunities will be created in some quarters; in others, jobs will be lost, industries will close, and prices will rise. Those negotiating the FTAA will have to take this into account and seek to accommodate those who lose because of a free trade agreement. Congressman Hinojosa illustrated the importance of this point quite clearly in his keynote address. As a businessman, he expanded a small family business into a multimillion-dollar enterprise within a few years, primarily by expanding his market throughout Texas and into Mexico. As a congressman, however, he voted against fast track authority for President Clinton because the U.S. administration had not paid sufficient attention to his district. He finally voted in favor of FTAA for President Bush after enough federal funds had been allotted to his district to provide job training and other infrastructure. Hinojosa spoke for all those involved in the negotiations when he said that, for an FTAA to be successful, whatever form it takes, “when you weigh it all out, there should be more benefits than negatives.”
 

To view the FTAA Program, click here.

To view the Speakers' Bios, click here.