Trade Negotiations Are Everywhere, but Can They Reach Fruition?

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Trade Negotiations Are Everywhere, but Can They Reach Fruition?Author(s): Jane BusseySource: Foreign Policy, No. 146 (Jan. - Feb., 2005), pp. 8-14Published by: Washingtonpost.Newsweek Interactive, LLCStable URL: http://www.jstor.org/stable/30048182 .

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mr ade ]Nego ti ionS But Can hey Reach Fruition?

BY JANE BUSSEY

Colombian President Alvaro Uribe surveyed the hundreds of executives, investors, and vendors

accompanying him on a recent high-profile trade mission to Miami and brushed aside the problem of domestic opposition to a trade accord with

Washington that has become one of his government's top priorities.

"This is how we put into practice the expansion of markets that we are seeking in a free trade

agreement with the United States," Uribe said

during a visit to Proexport Colombia, a forum and trade fair held in the Intercontinental Hotel in Miami at the end of September.

For how to deal with the opposition to the free trade accord, the Colombian president had one word-"persuasion."

Uribe, like the other presidents in the Andean

region, treads a fine line as he tries to balance

opposition to a commercial treaty with Washing- ton with his need for an agreement that will give a boost to the Colombian economy and provide a

political feather in his cap. The business com-

munity has already signaled its support for Colombia's turnaround with a massive turnout for trade fairs for the construction and fashion

industry held in the country. But there is also a new element in the rush to

regional trade talks. Like the rest of the region's leaders, Uribe is

looking over his shoulder at what has turned into

the most significant change in world trade and investment patterns-the integration of China into the global economy, a sea change on world markets that began more than a decade ago.

China, with its massive population of 1.3 billion

people, has become both a boon and bane to the

region. While the Asian country's surging devel-

opment gobbles ever expanding quantities of copper, iron ore, and soybeans, its subsidized facto- ries-with one of the world's lowest-cost labor forces and some non-free market practices-churn out ever increasing amounts of shirts, socks, trousers, televisions sets, and hair dryers for U.S. and even developing world consumers.

In a move that no one foresaw, even as the Free Trade Area of the Americas (FTAA) project got under way in 1994, developing countries in Latin America geared up to become partners with the

largest consumer market in the world, only to see China slip in ahead of them.

For the moment, Colombia lies just outside the vortex of Chinese competition that is sweeping aside industry in much of Latin America. Mexican textile and apparel makers have not only seen China displace them as the fastest-growing exporter to the United States, but smuggled Chi- nese products are also increasingly displacing domestically made shirts and trousers in Mexico. To counter China, the Mexican government imposed import duties as high as 600 percent on

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1,400 items, but Rosendo Valles, the president of Mexico's National Chamber of Textile Industry, said that $6 of every $10 in Mexico's apparel sales comes from illegal imports.

Latin American countries, including those in the Andean region, are understandably concerned as China attracts foreign direct investment-more than $50 billion last year-that once came to them, while Chinese products supplant their own in the

poor countries, the increase in the price of a bar- rel of oil has had a damaging effect on national finances.

Central American leaders were looking over their shoulder at the mighty Chinese manufac-

turing juggernaut when they hurriedly negotiat- ed a free trade agreement with the United States. Mexico's assembly industry has already faced the

problem: some 25 percent of maquiladora plants

Textiles are one of the sectors in which Latin America shows comparative advantages. Considerable emphasis is being made by governments of the region in preserving these advantages within the framework of future trade agreements.

1imfes are propit:ious for launching trFade negotiar, ions. But tese are not te ost auspicious t~ees sor concleLiing regonoal or global trade pacrts.

U.S. market and threaten to overwhelm higher- cost producers at home. China, not Latin Ameri-

ca, has become the favorite factory floor for world

producers. Meanwhile, Chile, Argentina, Brazil, and, to a

lesser extent, Peru have experienced an export boom as Chinese demand has pushed their export prices higher. Oil producers have also gained as China's hunger for oil has combined with other

supply factors to send prices soaring. But for oil-

closed between 2000 and 2003, many of them

relocating to China.

qo dndean countries are also looking at

sewing up access to the U.S. market. In

addition, under social and political pres- sure in their countries to deliver real economic

progress and not just promises, the presidents of three Andean nations, Colombia, Ecuador, and

Peru, began negotiations on a free trade agree-

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ment with the United States in mid-May. The

pace of talks has accelerated as Washington trade

negotiators remind the South Americans of the calendar in the United States, with the expira- tion of the president's trade negotiating author-

ity next June. But rarely has the political and economic back-

drop to trade treaties held so many perils. Times are propitious for launching trade nego-

tiations. But these are not the most auspicious times for concluding regional or global trade pacts.

From negotiations in the World Trade Orga-

mally established a free trade agreement between the four Mercosur nations and the Andean Com-

munity countries of Venezuela, Colombia, and Ecuador on December 16 has yet to take off, in

part because Brazil and Argentina have hit a new

snag in their own bilateral commerce. The Central American Free Trade Agreement

(CAFTA), which was finalized between the Unit- ed States and Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua at the end of 2003, has run into obstacles. The U.S. administration has found the accord to be a lot easier to negotiate

Political leaders and business sectors in Andean countries are undeterred by the challenging external

factors...they look north to the United States.

nization (WTO) to regional talks of the FTAA or

European Union (EU) efforts to forge an accord with Mercosur-the Argentine, Brazilian, Paraguayan, and Uruguayan common market-

negotiations flounder in the face of stalemates.

Negotiators have missed one deadline after anoth-

er; in the FTAA, for example, the September 30 market-access deadline passed unmet and without remark.

Even the July breakthrough at the WTO meet-

ing in Geneva, which managed to salvage the Doha Round of negotiations, is being viewed in

retrospect as not enough to bridge long-standing differences between industrialized nations and

developing countries over the thorny issue of agricultural subsidies in richer countries.

"The reason why you have 100 free trade agreements in the world and another 150 under nego- tiation is because the WTO negotiations have

ground to a halt," said Richard E. Feinberg, a former Clinton administration official and current

professor of international political economy at the

University of California.

Advancing trade pacts is equally challenging in the Western Hemisphere.

Negotiators for the FTAA have not met since

early February, and the effort is likely to miss the

year-end deadline. Still, the key players insist the

process will be revived now that the U.S. presi- dential elections have taken place.

The "complementation agreement" that for-

than sell to Congress, where lawmakers have been reluctant to take up the issue in an election year. The United States is not alone. Even before cor-

ruption scandals hit Costa Rica, members of its National Congress were threatening to torpedo the trade treaty.

In some parts of the region, the timetable is not the major issue. "It really doesn't matter if it

[FTAA] comes in 2005 or 2010," said Richard

Bernal, who heads negotiations for the Caribbean

Regional Negotiating Machinery. "The whole Free Trade Area of the Americas

process seems to have been overtaken by complex- ity," said Carl Cira, director of Florida Internation- al University's Summit of the Americas Center.

ut the veteran of Latin American issues does see some positive results.

Overnight shipping companies like FedEx and UPS have been working consistently within the framework of the FTAA to create "a set of mechanisms that will build a more seamless web of goods."

Political leaders and business sectors in Andean countries are undeterred by the challenging external factors. As the prospect of finalizing WTO or FTAA negotiations fades, Colombia, Ecuador, and Peru look north to the United States.

Their goal is not only to cement benefits from the temporary Andean trade preferences into a

permanent pact, but also to gain additional access

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to the U.S. market. There is an added benefit. Free trade agreements boost trade at the beginning, experts note, not just because they place a seal of

approval on a foreign economy but also because

they make executives take notice of opportunities in the new trade partner or partners.

Washington has put trade talks with the three Andean countries on fast track, aiming to complete the tough negotiations by January or February.

Colombian, Ecuadorian, and Peruvian trade officials have now met with their U.S. counterparts four times since talks were launched in mid-May. After meetings in Cartagena, Lima, and Atlanta, negotiators reached the midpoint with the Sep- tember 14-17 talks in Fajardo, Puerto Rico. Only three more bargaining sessions are scheduled, the next in Guayaquil, Ecuador. In Fajardo, some 1,000 negotiators, advisers, and private sector represen- tatives not only tackled tough negotiations but also rode out the assault of Hurricane Jeanne on the island. Trade negotiators for the four countries have submitted initial offers on market access, but all sides are hoping for improved offers when the four nations meet again in Guayaquil.

The size of the delegations and the haste of the

proceedings underscore the significance of the

negotiations for the region. All three countries have official and unofficial Web sites offering information and updates on the talks. The main- stream media are filled with reports of the negotiations; the business community is busy com-

menting. In contrast, for the United States, the talks with the Andean Community are just one set of negotiations in a crowded agenda and rarely receive media attention, except in specialized publications.

The possibility of launching bilateral or "pluri- lateral" accords first emerged during the fractious discussions preceding the hemispheric trade min- isters' meeting for the FTAA in Miami last Novem- ber. As disagreements over the scope of the talks

persisted between Washington, on one hand, and the Mercosur nations led by Brazil, on the other, negotiators were forced to scale back the goals of the trade pact or face a collapse in the process.

Latin America's "wish list" to negotiate U.S.

agricultural subsidies was dropped, since Wash-

ington insisted it would be handled at the WTO.

COMPANY PROFILE

THE INTER-AMERICAN

INVESTMENT CORPORATION

The Inter-American Investment Corporation (IIC) is a multilateral financial organization that is affiliated with the Inter-American Development Bank Group. It began operations in 1989. The IIC's mission is to promote economic development in Latin America and the Caribbean by providing financing for privately owned small and medium-size

enterprises in the region. The IIC is the only multilateral organization entirely devoted to doing so. To fulfill its mission, the IIC provides project financing in the form of direct loans and equity investments, lines of credit to local financial intermediaries, and investments in local and regional investment funds.

The Corporation serves as a catalyst for attracting other resources: additional financing, technology,

and know-how. These resources are mobilized

through cofinancing and syndication, supporting security underwritings, and identifying joint ven- ture partners. Projects must also further economic

development by creating jobs, broadening capital ownership, generating net foreign currency income,

facilitating the transfer of resources and technology, utilizing local resources sustainably, and promoting local savings.

The Corporation also promotes modern technol-

ogy to increase productivity and seeks to make the

region's suppliers more competitive by introducing new business models that foster the creation and

operation of new, successful businesses that are envi-

ronmentally responsible.

Phone: (202) 623-3900 * E-mail: [email protected] * Web: www.iic.int Address: 1350 NewYork Ave., NW, Washington, DC 20577

11



Washington's top targets-Latin America's serv- ices sector, investment rules, intellectual proper- ty rights protection, and government purchasing limitations-were taken off the agenda for the full talks. Top trade officials departed Miami with an agreement to move forward, but the new agenda was dubbed "FTAA Lite" or "FTAA a la carte."

regional integration, U.S. Trade Representa- tive Robert B. Zoellick announced during

the Miami meeting that the Bush administration would launch trade talks with the Andean countries. With that, governments in Bogota, Quito, and Lima

rapidly signed on. "The Free Trade Area of the Americas has been

drifting," Uribe explained in a recent speech to business leaders from Colombia and Miami. His

country, he said, was looking for "an equitable agreement" that would use "imaginative clauses" to achieve results, especially paring away at non- tariff barriers.

Uribe is not alone. A free trade agreement to help Peru to create

jobs in the textile and agricultural sectors is the

linchpin of Peruvian President Alejandro Tole-

flower exports over a 10-year period and want the duties to be eliminated from day one. The United States has expressed its disagreement with a sim- ilar 10-year elimination of tariffs on its manufac- tured goods.

Colombia, in a first for regional talks, has

signaled its desire to have the U.S. government remove some state rules, the non-tariff barriers cited by the Colombian president. These include a Florida law that requires engineers who design construction projects to be U.S. residents and a Texas law that restricts liquor sales to U.S. citizens.

But the kind of deal-breaker issues that plague CAFTA, along with the parallel Dominican pact, are present for the Andean countries.

Colombian sugar producers are asking for

large access to the U.S. market, which is limited by quotas of high-priced sugar imports. The producers cite high-fructose corn syrup imports from the United States as a threat to their domestic sales. But it is precisely the U.S. sugar sector, along with textile mills, that has presented the most adamant opposition to CAFTA.

Agricultural issues could prove thorny in another area. The Colombian government recent-

Despite the enthusiasm for trade agreements, regional experts are searching for new formulas to advance

development in Latin America and the Caribbean.

do's economic goals. Toledo, who is currently president of the Andean Community, is pushing the countries into the accelerated timetable.

Negotiations are taking place behind closed

doors, but some of the specifics have slipped out. In a region where remittances from abroad

have become a vital factor in national finances, negotiators wanted immigration and the visa issue on the table. But Regina Vargo, assistant U.S. trade representative for the Americas, ruled out any such discussions. U.S. negotiators also ruled out discussions of U.S. agricultural subsi-

dies, insisting the thorny issue is being handled in the WTO.

Bargaining differences abound. Both Ecuador and Colombia are dissatisfied

with the U.S. offer to reduce tariffs on fresh-cut

ly slapped a 45 percent three-month tariff on corn imports to protect Colombian farmers, who have seen their own production become less com-

petitive with the revaluation of the Colombia

peso. Uribe's negotiators could be squeezed between U.S. negotiators demanding greater access for U.S. corn and the desire to protect Colombian farmers.

F or once, the winds of world trade have been mostly in favor of South American countries.

Many of the nations have seen their exports soar because of the rise in world commodity prices, from crude oil to copper. Higher prices and

greater access have helped countries like Peru

change their position from net importer to net

12




exporter. A decade ago, Peru's exports reached $4.6 billion; in 2004 they are

expected to reach $11.8 billion, boost- ed in the past two years by higher prices for mining exports.

But if one wanted to observe the fruits of trade accords, they need look no further than the Peruvian textile and

apparel sector. Peru's exports of cloth-

ing and apparel to the United States have soared almost 90 percent, from

$365 million to $707 million since the Andean Trade Preferences Act went into effect in October 2002. More than $1 billion of the country's nearly $12 bil-

lion in exports for 2004 come from this sector. But Andres von Wedemeyer, the

president of Creditex, the Compania Industrial Textil Credisa Trutex, recent-

ly insisted that the free trade agreement with the United States was the most important objective for the country's textile sector.

Only Bolivia is sitting on the sidelines for now as President Carlos Mesa completes his first year in the Palacio Quemado, trying to restore public faith in government and its institutions. Bolivia is an observer in the talks, but not a participant. Still ahead for the leader is restructuring the oil and natural gas sector, a national dispute that con- tributed to the downfall of his predecessor, Gon- zalo Sanchez Lozada. Mesa must set new rules for

private oil companies mandated by a recent ref- erendum on natural gas.

Faced with public opposition to building a natural gas pipeline through Chile, Mesa has worked to establish a new route through Peru, which he calls more expensive but workable. But with or without a trade agreement with the United States, Bolivia will share in the export boom, since the

country is expected to duplicate its natural gas exports to $2 billion over the next few years.

During a recent speech in Miami, Mesa

explained the narrow options he faces, trying to follow the economic prescription known as the

"Washington Consensus," as well as appease impoverished sectors of his own country.

"It is private enterprise that is the huge gener- ator of employment," Mesa said. Still, he added, "a

poor country needs a different government, larg-

er than the ones in places where the market is sup- posed to solve everything."

Mjrade treaties may face an uphill battle, but there is no lack of countries willing to

Snegotiate. Chile has signaled that it will negotiate a free

trade agreement with China. Mexico just signed a trade accord with Japan. Even as the two major players in Mercosur, Argentina and Brazil, face the fallout from the former's decision to impose import restrictions on Brazilian goods, Mexico has signaled its interest in joining.

Neither the collapse of Mercosur trade follow-

ing Argentina's economic implosion, nor the stalled talks with the EU, which is reluctant to allow greater agricultural access for South Amer- ican products, nor any of other problems facing the customs union have halted the rising Brazil- ian influence in world political and economic affairs using Mercosur as its entree.

"Mercosur is the building bloc for this region," said Donna Hrinak, former U.S. ambassador to Brazil.

Hrinak, who is a senior counselor for international trade and government affairs at Steel Hec- tor & Davis in Miami, conceded that Mercosur's influence could wane if and when the FTAA goes forward. But in the meantime, Mercosur has

Sugar is one of the most deli- cate and difficult of the issues which complicate trade agreement negotiations between the U.S. and Latin America. Access of Latin American sugar to the U.S. market is strongly opposed by U.S. sugar growers.

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o u




altered the region's role in global affairs by "brand-

ing" itself, that is creating better name recognition for the regional political-economic bloc, Hrinak said. Mercosur, she added, "is giving an identity to this part of the world."

Hrinak's former counterpart in Washington, Rubens Barbosa, who left his post as envoy to

Washington to become a private consultant ear- lier this year, also cited Mercosur's role as a structure useful to President Luiz Inacio Lula da Silva.

"The current Brazilian government is not

going to let Mercosur vanish," Barbosa said. "We need to strengthen some of its institutions."

espite the enthusiasm for trade agreements, regional experts are searching for new formulas to advance develop-

ment in Latin America and the Caribbean. Even in countries with the strongest of free trade

agreements, such as Mexico in the North American Free Trade Agreement, the additional investment has not been sufficient to fund needed roads, ports, bridges, and other infrastructure projects. Nor has a decade of trade liberalization, government dereg- ulation, and fiscal discipline been sufficient to attack the region's long-standing poverty problem. In many countries, unemployment is double what it was a decade ago, complicating efforts to reduce the number of poor.

Pete Romero, former

acting assistant secretary of state for Western Hemi-

sphere affairs, recently noted that free trade was "oversold" to Latin Ameri- cans as a solution for poverty. "We have lost touch with the issues that are the most

urgent for Latin America," said Romero. The president and chief executive of Expe- rior Advisory LLC, a Wash-

ington consulting firm, called for a new set of reforms to help justice sys- tems address current problems and reduce government red tape. "There are so many other things that

governments need to do to stimulate foreign investment and job growth," he said.

Mexican telephone magnate Carlos Slim, labeled the richest man in Latin America by Forbes magazine, has also jumped on the infrastructure bandwagon. As Slim advocates more

government involvement in development, his financial group Inbursa has announced plans to

spin off a new company, to be named Impulsora Para el Desarrollo Economico de America Latina, IDEAL, to finance infrastructure projects. Initial

capital for the company, which requires Mexican

government approval, will be $800 million. Brazilian Banco Nacional de Desenvolvimento

Economico e Social, BNDES, has pledged some $1.5 billion to $2 billion in loans for regional infrastructure projects through 2006. The Cor-

poracion Andina de Fomento, CAF, has asked South American countries to draw up two pro- posals each for projects and has already spent some $680 million on hydroelectric projects in Venezuela and Ecuador.

Conventional wisdom holds that Republican presidents are better for free trade agreements, and many leaders in Latin America hoped that a Bush victory would mean early passage of CAFTA.

Passage of free trade agreements may still be an

uphill battle, but the Bush victory may give a new life for further trade agreements. N

This shoe factory in

Guanajato, Mexico, is one

of the numerous Latin American industrial units

facing fierce competition

from China and India.Trade negotiations

underwaywill help to protect

these small industries from the formidable

competition presented by

the new industrial giants.

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Trade Negotiations Are Everywhere, but Can They Reach Fruition?