Latin America and the Caribbean present complex trade integration architectures. Today there are four customs union projects at different stages of completion (MERCOSUR, the Andean Community, the Central American Common Market and CARICOM) plus several other Preferential Trade Agreements (PTAs) linking these integration schemes among themselves and with the countries (Mexico, Chile, Cuba, Panama and the Dominican Republic) that are not full members of any of them.
PTAs in the region are extremely varied. At one end are old-style “economic complementation agreements” that cover only trade in goods and which essentially consist of the reduction of tariffs (not their elimination) for a limited range of products. At the other end are free trade agreements (FTAs) which eliminate tariffs for nearly all products and also cover issues such as services, investment, government procurement, competition policy and intellectual property. There are also numerous “intermediate” types of PTAs.
One consequence of this fragmented architecture is that the benefits that could flow from having a single, integrated economic space (such as larger production scales, reduced transaction costs for both regional and extra-regional traders, and increased formation of regional value chains) are only partly realized. Moreover, although most intra-regional trade is already theoretically tariff-free, numerous non-tariff barriers persist, both within trading blocs and between them. As a result of these and other problems (such as poor infrastructure and red tape at the borders), intra-regional trade accounts for less than 20% of total Latin American trade, compared to about two thirds in the European Union (EU), almost 50% in NAFTA and about 40% in Asia.
Much can be done within the region to both encourage greater intra-regional trade and increase synergies between its integration architecture and the multilateral trading system. In most cases this involves designing mechanisms to promote convergence among PTAs and to reduce discrimination. One possibility is reducing the actual number of PTAs, for example by replacing the many existing bilateral PTAs by a smaller number of larger agreements. Another alternative, in principle less politically complicated, is to establish links between existing PTAs. In the case of trade in goods, this can be done through cumulation of origin, following the example set by the EU in its agreements with the Mediterranean countries.
A third alternative would be to reduce discrimination within each PTA. This in turn can be done in several ways:
- Extending certain concessions to non-members on a Most Favoured Nation (MFN) basis. This is usually more feasible in areas such as services, investment or intellectual property (where commitments tend to reflect a country’s general regulatory framework) than in others like tariffs or government procurement, where preferential treatment (i.e. discrimination) is precisely the goal pursued through a PTA. Nevertheless, even in the case of tariffs, countries that have liberalized over a certain percentage of their total imports through PTAs could voluntarily extend that treatment to non PTA partners on an MFN basis.
- Extending concessions to selected non-members, in particular relatively less developed countries. This is a variant of the above: If countries A and B have a PTA, and country C (relatively less developed than both A and B) faces trade diversion in the markets of A, B or both as a result of the agreement, then A and B could agree to extend PTA benefits unilaterally to C (either across the board or in the sectors where C’s exports face trade diversion).
- Open membership clauses, allowing non-members to accede to a PTA if they are prepared to undertake commitments comparable/equivalent to those assumed by current members. Here the EU enlargement process is the main historic example (although admittedly EU membership involves much more than trade commitments), while the current negotiations of the Trans Pacific Strategic Partnership Agreement (TPP) is another.
In 2006, and responding to the request of the Presidents of all South American countries, the Secretariats of MERCOSUR, the Andean Community and the Latin American Integration Association (ALADI) jointly presented concrete proposals for the convergence of PTAs in the region. These included, inter alia, modalities for the acceleration of tariff phase-outs; harmonisation of rules of origin, customs procedures and sanitary and phytosanitary regimes; and a single safeguard regime. At the time ECLAC supported these proposals and suggested going further in some areas, for example moving towards cumulation of origin among the ten South American countries; focusing more effort on trade facilitation; and eliminating antidumping and safeguard measures for intraregional trade. Nevertheless, to this date no concerted action has been taken in response to either set of proposals.
Currently there are no region-wide convergence efforts underway in Latin America and the Caribbean. However, the negotiations announced in November 2010 towards a comprehensive economic integration agreement between its two largest economies, Brazil and Mexico, could — if successful — serve as a catalyst for the convergence of the different PTAs within the region. Another initiative pointing in the same direction is the ongoing process whereby Mexico and the five Central American countries aim to merge the three FTAs currently linking them into a single association agreement.
Summing up, Latin American regionalism does not appear to have resulted in substantial discrimination against extra-regional partners. This is partly due to widespread unilateral trade liberalization, especially in the 1990s, and more recently to the growing number of PTAs with partners such as the US, EU and Asian countries. A successful conclusion of the Doha Round would further reduce scope for such discrimination. The main shortcoming of Latin American regionalism is not having created more intra-regional trade. Rationalization of the region’s integration architecture would go a long way towards that goal. More generally, it would help the region as a whole become more internationally competitive and make trade with it easier for outside partners by increasing transparency and reducing transaction costs.
1. The views expressed are those of the authors. back to text
Osvaldo Rosales is Director of the International Trade and Integration Division, United Nations Economic Commission for Latin America and the Caribbean (ECLAC).
Sebastian Herreros is Expert of the International Trade and Integration Division, United Nations Economic Commission for Latin America and the Caribbean (ECLAC).