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PREFERENTIAL TRADING AREAS IN SOUTH AMER.
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Role & benefits of PTAs in trade liberalization, economic growth, regional trade pacts, protectionism, debt crisis, global implications.... More...
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Paper Abstract:
Role & benefits of PTAs in trade liberalization, economic growth, regional trade pacts, protectionism, debt crisis, global implications.
Paper Introduction:
Trade liberalization in South America has been channeled largely into the creation of preferential trading areas (PTAs). These subregional trading arrangements are seen by the developing nations of the region as building blocks that will produce economic growth, encourage development, and eventually lead to the creation of a South American or Latin American free-trade area. Such steps are perceived as necessary preliminaries to entry into a global system of free markets or even into a hemispheric free-trade arrangement. Although the nations of South America have agreed in principle to the notion of a Free Trade Agreement for the Americas (FTAA), support is considerable for extensive deepening and expansion of subregional arrangements prior to undertaking the greater degree of liberalization that would be required by a NAFTA-like, hegemony-dominated, FTAA.
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These nations receivesupport based on "principles of non-reciprocity and community cooperation"and in the form of regional agreements that, in order to open markets forthe LDCs, provide "lists of products which have been liberalizedcompletely."[21] But the external debt crisis that began in 1982 "drained off theliquidity from the regional circuit" and caused South American nations torethink their individual approaches to trade.[22] Inward-orienteddevelopment policies in general were rejected in favor of outward-orientedapproaches that led to enormously increased interest in Partial ScopeAgreements. Triennial negotiations regarding thecontents of the lists functioned well, but only so long as traditionaltrade items made up the agenda. [29]Khashayar and Clark, 326. And the regional mode wouldensure the availability of "development finance (for example, through theInter-American Development Bank) and cooperative approaches to providinginfrastructure."[15] The 196 Treaty of Montevideo joined all 1 of the principal SouthAmerican nations and Mexico in the Latin American Free Trade Association(LAFTA).[16] This agreement provided for the creation of a free-trade areaby 1972 through the gradual elimination of customs duties and of"restrictions on any kind of reciprocal products originating in thesecountries."[17] The liberalization of trade was managed through common andnational lists of products on which restrictions were to be eliminatedaccording to various schedules. [47]United Nations Conference on Trade and Development, Secretariat,13. Jagdish Bhagwati and Arvind Panagariya, 136-59. Trade Policy." In The Economics of Preferential Trade Agreements, ed. Trade among the four member nations, Brazil, Uruguay, Paraguay andArgentina, is now duty-free for 85 percent of goods. Thus, since few steps have been taken towardthe regional common market, the only important effect of LAIA has been as"an umbrella group for negotiation of trade agreements among individualmembers."[26] In that capacity, however, it has had a major influence onthe direction of trade liberalization in the region. [11]Ibid., 44. cameto $16.7 billion, or 41 percent of total exports.[38] MERCOSUR's growth since 1991 has been considerable. [43]United Nations Conference on Trade and Development, Secretariat,Trade and Development Report, 1997 (New York: United Nations, 1997) 13. By and large,despite the institution of a CET in 1995, which can range between 5 percentand 2 percent according to the member country and the products involved,the Andean Community nations have begun to ease up on their "policy ofimport substitution at the regional level by policies open to theoutside."[32] The community has begun to take the general approach that,if they intend to function as an economic community along the lines of theEU, they need to be prepared for participation in the world market. [51]Ibid. totaled $13.7 billion,accounting for 38 percent of total imports, while exports to the U.S. Such steps are perceived as necessary preliminaries toentry into a global system of free markets or even into a hemispheric free-trade arrangement. [21]United Nations Conference on Trade and Development, Handbook, 126. [1 ]Ibid., 5 . [5 ]United Nations Conference on Trade and Development, Secretariat,13. TheChilean arrangement makes intra-group free trade immediate for more than7 tariff categories and guarantees the "gradual elimination of intra-market tariffs in 18 years."[35] The addition of Chile, which is "by farLatin America's most stable and most successful economy" and was sought formembership in an expansion of NAFTA by the United States, has assured thefuture prominence of MERCOSUR in hemispheric trade.[36] The addition ofChile and Bolivia "expands the potential market to 212 million people witha combined GDP of nearly $1 trillion."[37] Both the Andean Community and MERCOSUR have been successful in the199 s, according to several measures. But this successful example of regional tradeintegration was not duplicated elsewhere, and it is only recently that PTAshave become a major concern. [25]United Nations Conference on Trade and Development, Handbook, 135. Two types of partial agreements affected trade. [41]Barfield, 147. Jagdish Bhagwati and Arvind Panagariya, 1-78. Inaddition, Bhagwati and Panagariya hold that the notions of "natural tradingpartners," recognized either on the basis of geographic contiguity or highvolumes of mutual trade, are weak as well, since transport costs andhistoric complementarity--the major reasons for asserting that regionalPTAs are beneficial to members--do not offer sufficient economies of scaleor efficiency to make PTAs beneficial to all members.[8] Others argue that renewed protectionism is also a danger because the"fortress effect" of PTAs is likely to result in renewed lobbying forprotection since the benefits of the PTAs are perceived as being greaterthan those of multilateral free trade.[9] And the possibility of PTAmembers resorting increasingly to contingent protective measures (such asanti-dumping laws or voluntary export restraints) in dealing with thirdnations also seems counterproductive to global free trade--though someclaim that, since a member country's use of such measures would only openthe way to a more efficient PTA member's imports, they would not beinvoked. Since that time, intragroup trade hasrisen steadily until, in 1996, the total of intragroup trade reached $3.6billion. Business America 117, no. The expansion of the Canada-U.S. Washington, DC: AEI Press, 1996; College Park: Center for International Economics, University of Maryland, 1996.Khazeh, Khashayar, and Don P. [4 ]"Western Hemisphere Trade Agreements," 2. [46]Ibid.; United Nations Conference on Trade and Development,Secretariat, 13. A number of major "sectoral exceptions, such as automobiles, computers,capital goods, textiles, and sugar" concern both the duty-free and CETaspects of the agreement.[33] But, in terms of the CET, the rates forcapital goods will be harmonized at 14 percent in 2 1, and, forinformatics and telecommunications, the uniform CET will be 16 percent by2 6.[34] The MERCOSUR agreements provide for no centralized institutions inthe short run, but the group has actively engaged in expanding itsmembership. The Pact also laid heavy emphasis on "jointsectoral industrial development programmes to distribute the location ofbasic production activities among members in an equitable fashion."[27]This program, however, was so badly coordinated and so often ignored thatthe revived Pact later did away with "any rigid commitments or marketreservation."[28] The performance of the Andean Pact nations in the early years, from1968 to 1977, has been analyzed by Khashayar and Clark, who found that,during these years, judged in terms of a traditional trade creation versustrade diversion scheme, annual increases in intra-regional trade rangedfrom $13,911 million to $2,124 million.[29] But, with the debt crisis ofthe early 198 s, the members of the Andean Pact were in deep difficulties,limited all imports--no matter what their origin--and resorted to "constantdevaluations, the application of semi-tariff restrictions to imports, andadministrative practices designed to reduce the volume of imports."[3 ]The extension of these measures to Andean countries as well as non-Pactmembers meant the collapse of the initiative. New York: United Nations, 1997."Western Hemisphere Trade Agreements." Business America 117, no. Those who favor faster movement toward multilateral freemarkets hold that the "spaghetti bowl" of regional arrangements in SouthAmerica is counterproductive because it will result in excessive tradediversion and will stall global free trade indefinitely. [6]Bhagwati and Panagariya, 7. In this manner, it is argued, PTAs will "contribute to breakingthe psychology and politics of protection, inviting threatened producersand society at large to face the need to improve competitiveness and drawbenefits from it."[1 ] But others hold that, even with significant trade diversion, PTAs arebeneficial to members. [16]Guyana, Suriname and French Guiana are the three South Americannations that not included in any of the organizations or associationsdiscussed here. [7]Ibid. Such regional markets, it was believed,would give national industries the opportunity to build themselves up in arelatively protected environment--preparing them for competition in widermarkets. Secretariat. [2]James Stamps, "A Closer Look at MERCOSUR," International EconomicReview, February-March 1997, 9. [17]United Nations Conference on Trade and Development, Handbook ofEconomic Integration and Cooperation Groupings of Developing Countries,vol. [28]United Nations Conference on Trade and Development, Handbook, 139. Geneva: World Trade Organization, 1995.----------------------- [1]Jagdish Bhagwati and Arvind Panagariya, ""Preferential TradingAreas and Multilateralism--Strangers, Friends, or Foes?" in The Economicsof Preferential Trade Agreements, ed. [23]World Trade Organization, Secretariat, 35. [9]World Trade Organization, Secretariat, Regionalism and the WorldTrading System (Geneva: World Trade Organization, 1995), 5 . The goal ofthe LAIA is the gradual establishment of a Latin American common market.To this end, the Treaty provided the structure for the creation of a commonmarket via "flexible tariff-cutting mechanisms; regional tariff andadditional bilateral preferences; industrial cooperation; trade promotion,clearing and credit schemes."[19] The principal mechanisms provided for increasing trade among membercountries and between members and third countries were the "Regional ScopeAgreements," which included all members and set up region-basedpreferential trading, and the "Partial Scope Agreements," which were"concluded by sub-groups of LAIA members [and] offered preferentialtreatment to the signatories only."[2 ] The LAIA also placed a specialemphasis on the development of Bolivia, Paraguay and Ecuador, itseconomically less-developed countries (LDCs). Even those who hold that global free trade must be the principalgoal admit that the temporary pause in multilateral trade negotiations(until 1997), which has facilitated the growth of PTAs, may have beenbeneficial for global trade in some respects. [39]Mye and Palagonia, 18. But the Amending Protocol of 1988 abandoned the idea of strictmultilateralism, allowing bilateral negotiations, and set theliberalization program in motion again. ""Preferential Trading Areas and Multilateralism--Strangers, Friends, or Foes?" In The Economics of Preferential Trade Agreements, ed. Trade Policy," in TheEconomics of Preferential Trade Agreements, ed. Future externalinvestment, which is so vital to the region, depends on investors being"convinced that the dynamics of regional integration are supported by astrong political commitment" and stable political regimes.[49] But theslow output growth that has occurred along with the trade liberalization inSouth America "has translated into growing unemployment and falling orstagnant real wages."[5 ] This became an increasingly serious problem in1995 and, despite all the advances in intra-regional and external trade,worsened in 1996 in every country except Chile and Peru.[51] Whether the PTAs of the region will facilitate the entry of thenations of South America into the system of global free trade depends onthe ability of these nations to recognize whether their innovations areworking. [38]"Western Hemisphere Trade Agreements," 3. Some argue, for example, that, in member nations,"gains to consumers from lower prices can more than offset the productionlosses from trade diversion."[11] Average costs of production may also bereduced by the economies of scale in various industries, and increasedcompetition may "lead to an overall reduction in costs of production." [12] And all of these factors, it is argued, will lead to increased economicgrowth. Althoughnone of these PTAs has been censured under the terms of the Article, onlysix have been determined to comply with its provisions. "Regionalism and U. The group alsofeatures a CET which covers 85 percent of all imports from outside the PTA. [36]James Stamps, "Chile-MERCOSUR Union Creates Enlarged SouthAmerican Free-Trade Area," International Economic Review, October-November1996, 24. Clark. S. The Community's imports from the U.S. Regional integration would allow South America to be competitivewith emerging European economic integration. Although the nations of South America have agreed inprinciple to the notion of a Free Trade Agreement for the Americas (FTAA),support is considerable for extensive deepening and expansion ofsubregional arrangements prior to undertaking the greater degree ofliberalization that would be required by a NAFTA-like, hegemony-dominated,FTAA. [42]Mye and Palagonia, 18. In the 196 s, most South American nations had very restrictive tradepolicies centered on the notion of industrialization via importsubstitution. [15]World Trade Organization, Secretariat, 34. Intra-grouptrade in 1991 was $4.5 billion as compared with external trade of $68billion. [49]Ibid. As of that year, the intra-member trade of the entire subregion(with the exception of Peru) was "free of obstacles."[31] The CET wasfinally adopted by all the nations in 1993, and, as of that year, theAndean Community was a fully constituted customs union. Preferential Trading Areas, so-called in order to distinguish themfrom the "nonpreferential free trade" implied by terms such as "Free TradeAreas (FTAs) and customs unions (CUs)" were of sufficient importance in theearly postwar era to merit special attention in the General Agreement onTariffs and Trade (GATT) in its article XXIV, still in force since thetransition to the World Trade Organization (WTO) in 1995.[1] Despite thefact that PTAs conflict with the Most Favored Nation (MFN) principle which"requires that trade concessions made to one member be awarded to all WTOmembers," certain PTAs are permitted by the WTO.[2] One exception, coveredunder the so-called Enabling Clause of Article XXIV, is PTAs that involveonly developing nations. In South America, for example, "the interests of the continent arebest served by the Latin American nations' first getting on their feet andthen negotiating from greater strength" with the United States.[13] Therecent growth of PTAs may have produced enough complications and cross-purposed arrangements to "make it ever easier to make the case for goingback to a single negotiating table in Geneva."[14] An examination of thetwo largest South American PTAs, the Andean Community and the SouthernCommon Market (commonly known by its Spanish acronym MERCOSUR), willprovide some insight into the progress of the region's PTAs and itswillingness to move toward the broader notion of global tradeliberalization. Washington, DC: AEI Press, 1996; College Park: Center for International Economics, University of Maryland, 1996.Bhagwati, Jagdish and Arvind Panagariya. [26]"Western Hemisphere Trade Agreements," 2. [24]Ibid. [44]Stamps, "A Closer Look," 1 . 1, Regional and Subregional Economic Integration Groupings (New York:United Nations, 1996), 123. And, though MERCOSURis experiencing rapid internal growth, the circumstances raise the questionof whether the group is simply relying on sheer size, rather thaninnovative trade or industrialization strategies, to carry it forward. [37]Mye and Palagonia, 17. By 1992, the leaders of BoliviaColombia, Ecuador and Venezuela agreed to finalize the liberalizationprogram. [4]Ibid. New York: United Nations, 1996.United Nations Conference on Trade and Development. "A Closer Look at MERCOSUR." International Economic Review, February-March 1997, 9-11.United Nations Conference on Trade and Development. Secretariat. But domestic markets were so limited that regional marketswere seen as the only means of developing local industry and achieving thenecessary economies of scale. The MERCOSUR, on the other hand, was established more recently andadheres to PTA's common tendency to build on preferential trading at theregional level prior to extensive accommodation of the rest of the world.MERCOSUR was founded in 1991 and was launched as a partial customs union in1995. [5]Claude E. The Andean states' intragroup tradebegan to recover in 1989, with the revival of the Pact, and passed the 1982totals in 199 with $1.3 billion. [27]Khazeh Khashayar, and Don P. In total, 144 PTAs, involving almost all the 128 members,have been reported to the WTO, as required under Article XXIV. [32]Ibid., 136. [3 ]United Nations Conference on Trade and Development, Handbook, 137. Trade with the UnitedStates constituted 22 percent of MERCOSUR's total imports, at $18.4billion, and 15 percent of total exports went to the United States, at$1 .8 billion.[4 ] However, unlike the Andean Community, the EU "as awhole is a more important trading partner for Brazil and Argentine, the twolargest South American economies, than is the United States."[41] Among the other important effects of the two PTAs are theencouragement of intra-regional investment flows--with approximately 1 countries in the MERCOSUR group making the decision "to invest in anothermember."[42] In addition, some cite the increase in intra-group trade inmanufactures, now 37 percent of external trade and 46 percent of intra-regional trade, as an encouraging sign of industrial development--though itmay, in fact, represent simple trade diversion.[43] And trade hascertainly grown in the region in general terms--apparently supporting thecontention that PTAs "can liberalize trade faster and in more areas thanmay be possible through the WTO."[44] Despite all the positive signs, however, cases can be made againstcrediting the region's PTAs with too much of the growth and for questioningtheir future performances. But the positionof the developing nations of Latin America is that, without the chance todevelop their strengths within preferential regional arrangements, theywill be at a permanent disadvantage in dealing with the United States andother major economic powers. Clark, "A Case Study of Effects ofDeveloping Country Integration on Trade Flows: The Andean Pact," Journal ofLatin American Studies 22 (199 ): 319. The early years of the Andean Pact have sometimes been judged asuccess in terms of greater integration of the subregion's trade. But, as Bhagwati and Panagariyaargue, the welfare outcome for individual members of PTAs also depends on"adverse income distribution effects arising from tariff revenueredistribution."[6] The redistribution arises from the change in terms of trade betweenmembers; and, when a member nation lowers its tariffs for a partner withina union, without lowering them for the rest of the world, "within-unionterms of trade shift in favor of the partner" and the higher the margin ofpreference afforded to the partner, the greater the member's losses willbe.[7] NAFTA provides a good example of this effect because the highlyprotected economy of Mexico is now faced with a net welfare loss. The "inflexible rules governing theintegration process" caused LAFTA to stall when novel or highly competitivesituations arose.[18] Thus, the Montevideo Treaty of 198 replaced the LAFTA with the LatinAmerican Integration Association (LAIA) effective March, 1981. [19]Ibid. Trade and Development Report, 1997. Asyet, no definitive evidence supports or denies the PTAs' claims that thisis the best course for trade liberalization. BibliographyBarfield, Claude E. Free TradeAgreement to include Mexico in the North American Free Trade Agreement(NAFTA) was only the most prominent example of the increase in PTAs in thelast decade. [33]Barfield, 147. Handbook of Economic Integration and Cooperation Groupings of Developing Countries. [34]"Western Hemisphere Trade Agreements," 2. Though the Andean Community's desire to integrate itself into thesystem along the lines taken by the EU is an interesting goal, it raisesthe question of whether economies that depend so heavily on the export ofraw materials are in a position to build a strong system of externaltrading partners in the same manner as the Europeans. The WTO has,however, operated under the assumption that "closer integration of regionaleconomies on balance supports the basic economic and trade-liberalizationaim of GATT and contributes to increased global trade."[4] With theClinton administration's move to place "regional preferential agreements[at] the forefront of U.S. The Pact imposedno common external tariff (CET) at the outset, though there was a minimumcommon external tariff. [45]Mye and Palagonia, 18. Mye and Palagonia note, for instance, that muchof the growth in intra-MERCOSUR trade depended on sectors that are stillsubject to internal protections and are more heavily protected by very highCETs, such as the "automotive, agriculture (dairy trade), and energysectors."[45] And both Mye and Palagonia and the UN Conference on Tradeand Development suggest that other forms of trade liberalization, such asBrazil's and Argentina's improved global imports, may have as much to dowith total trade growth as improved intra-regional trade does.[46] And, since the region still relies heavily on raw materials forexport earnings, this leads to a slow rate of economic growth even in thebest of times.[47] Other difficulties that have arisen for MERCOSURinclude the inability of the group to get all its regulations passed intolaw by the legislatures of all its members, "with the resulting uncertaintyconcerning the applicability of any MERCOSUR decision."[48] The mosttelling problem for the South American PTAs may, however, be related to theproblem of unemployment and increasing wage inequalities. These newer agreements included the Group ofThree (Colombia, Mexico and Venezuela) of 1994, the revitalized AndeanCommunity (as of 1989), the Chile-Venezuela Free Trade Agreement of 1993,and the MERCOSUR of 1995. Trade liberalization in South America has been channeled largely intothe creation of preferential trading areas (PTAs). Both Bolivia and Chile decided in 1996 to become associatemembers of MERCOSUR, participating in the FTA but not in the CET. [13]Barfield, 155. 8 (1996): 17-18.Stamps, James. "A Case Study of Effects of Developing Country Integration on Trade Flows: The Andean Pact." Journal of Latin American Studies 22 (199 ): 317-3 .Mye, Randy, and Lorena Palagonia. These exceptions are allowed as long as theyfacilitate trade, "do not create 'undue difficulties' for other countries,and do not impose new trade barriers."[3] Other exceptions are allowed forsome arrangements involving FTAs and CUs and some Generalized System ofPreferences arrangements. Regionalism and the World Trading System. [2 ]World Trade Organization, Secretariat, 35. But, by 1995, the figures had risen to $12.5 billion for intra-group trade and $13 billion for non-MERCOSUR trade.[39] In 1996,intragroup trade jumped again to $14.3 billion. [3]Ibid. Jagdish Bhagwati and ArvindPanagariya (Washington, DC: AEI Press, 1996; College Park: Center forInternational Economics, University of Maryland, 1996), 1. The first wasthe "Economic Complementarity Agreements, which provided for thedevelopment of industrial sectors or subsectors on a subregional basisthrough the liberalization of trade restrictions."[23] The second was thetrade agreements that provided for "preferences on products (ranging from apositive list to all products), for a limited or unlimited duration."[24] Some partial scope agreements had been arranged at earlier dates.The Andean Pact (renamed the Andean Community in 1996) of 1969 includedBolivia, Colombia, Ecuador, Peru and Chile (Venezuela joined later andChile withdrew) and was part of the LAFTA-sponsored effort to "speed upintegration between the signatory states" in pursuit of the goal of acommon market.[25] But the partial scope agreements that arose from thesemechanisms were given additional impetus by increased trade liberalizationin many nations after 1989. [14]Ibid. [12]Ibid. "MERCOSUR's Potential Market Is Now Over 2 Million People With a Combined Economy of Nearly $1 Trillion. All agreements within the Pact,with the exception of separate arrangements for the LDCs, had to bemultilateral--sub-agreements on trade were not permitted. Vol. Traditional analysis of the benefits of PTAs has reliedon the notion that, so long as trade creation outweighs trade diversion,the PTA is beneficial to its members. [35]Randy Mye and Lorena Palagonia, "MERCOSUR's Potential Market IsNow Over 2 Million People With a Combined Economy of Nearly $1 Trillion,"Business America 117, no. The Pactbegan with an automatic reduction process involving elimination of alltariffs, on all traded items originating in the region, to be completed by1983--with Bolivia and Ecuador accorded the greater protection of extendingtariff reduction schedules through 1985. [18]"Western Hemisphere Trade Agreements," Business America 117, no. S. [8]Ibid. 8 (1996): 1-6.World Trade Organization. These subregionaltrading arrangements are seen by the developing nations of the region asbuilding blocks that will produce economic growth, encourage development,and eventually lead to the creation of a South American or Latin Americanfree-trade area. [22]Ibid., 127. "Chile-MERCOSUR Union Creates Enlarged South American Free- Trade Area." International Economic Review, October-November 1996, 22- 26.________. The European Community (now European Union) was able to accede to theWTO because it was a customs union with full autonomy in the constructionof its trade policy. Jagdish Bhagwati and ArvindPanagariya (Washington, DC: AEI Press, 1996; College Park: Center forInternational Economics, University of Maryland, 1996), 146. trade policy," PTAs have come to dominate tradeliberalization in many regions--especially in South America.[5] Those who argue that PTAs are detrimental to the establishment ofmultilateral free trade also hold that they are not necessarily favorableto their members. Chilehas had a flat external tariff of 11 percent ad valorem for many years andwould have had to raise its tariffs to meet the MERCOSUR level. The original intention of the group was to establish a common marketby 1995, but this goal has been pushed back indefinitely. 8(1996): 2. [31]Ibid., 138. 8 (1996): 17. Barfield, "Regionalism and U. 1, Regional and Subregional Economic Integration Groupings. [48]Mye and Palagonia, 18. These associations called for much broader and deeper agreement onmeasures for the establishment of free trade among members and have tendedto supersede LAIA altogether.
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