Key Problems

  • The economic crisis in Mexico has dampened enthusiasm in the U.S. for the extension of free-trade agreements throughout the Americas.
  • Eleven Working Groups have been set up to compare practices and make recommendations for negotiations of the Free Trade Agreement of the Americas (FTAA).
  • The Mercosur countries have proposed instead that an FTAA should be built on existing trade blocs.

In December 1994 the leaders of 34 Western Hemisphere countries gathered in Miami for the Summit of the Americas, a triumphal event celebrating the emergence of democracy and the consolidation of free-market economies throughout the Americas. At the meeting, President Clinton was poised to fulfill President Bush’s dream of a free-trade agreement stretching from Anchorage to Tierra del Fuego. In the summit’s final declaration, the participating countries promised to create an historic Free Trade Area of the Americas (FTAA) linking all of the hemisphere’s economies (except Cuba’s) by the year 2005.

During the summit, President Clinton lauded those governments that had adopted “sound policies to tame inflation, to restore economic growth.” Mexico was held out as the model of economic reform and NAFTA as the model trade agreement. Just ten days later, however, the Mexican peso experienced a massive devaluation. That, coupled with the austerity conditions attached to the bailout package financed by the U.S. Treasury and the International Monetary Fund (IMF), sent the Mexican economy into a deep depression and further lowered the purchasing power of Mexican wages and the prices of export goods, contributing in turn to job losses in the United States. The effects of the crisis reverberated well beyond Mexico. The so-called tequila effect rocked stock markets around the world, and confidence in the free-trade model of globalization was shaken.

While the continuing economic and political crises in Mexico have dampened public and congressional enthusiasm in the U.S. for the FTAA, governments have continued the process set in motion at the summit. Eleven international Working Groups, each headed by a different country, have been established to cover such topics as customs procedures and rules of origin. The Working Groups, with support from special units established at the Inter-American Development Bank (IDB) and the Organization of American States (OAS), report back to the region’s trade ministers at periodic meetings. At the next meeting, scheduled for May 1997 in Brazil, the Working Groups are expected to outline the key differences among country and regional practices in each sector, thus identifying an agenda for formal negotiations of the FTAA.

This plan, which the U.S. has supported, was recently challenged by Brazil, representing the Common Market of the Southern Cone (Mercosur, which includes Brazil, Argentina, Paraguay, and Uruguay). At a meeting of deputy trade ministers held in September 1996, the Brazilian representative called for an approach building on the hemisphere’s existing bilateral and multilateral trade agreements. Negotiations would occur in three stages: the establishment of “business facilitation” measures, such as the publication of guides comparing investment, customs and antidumping practices in the hemisphere; the negotiation of nonmarket issues, such as investment; and, finally, talks on market access.

This proposal represents more than a technical change in the order of negotiating points. It is part of Brazil’s bid to lead the process of economic integration in the Americas. Since the autumn of 1995 the Clinton administration has been unable to obtain fast-track authorization to negotiate free-trade agreements from the U.S. Congress, both because of doubts about the wisdom of expanding NAFTA and because of Republican opposition to the inclusion of labor or environmental issues in that negotiating authority. As a result, the U.S. presumption of leadership in the FTAA process has been eroded. Increasingly, the trade debate can be seen as positing the NAFTA model against that presented by the Mercosur. Whether Latin American leadership in such an endeavor would lead to more equitable and sustainable trade relations, remains to be seen.

Problems with Current U.S. Policy

Key Problems

  • Despite their apparent differences, both NAFTA and Mercosur are similar accords.
  • Through their provisions on trade and investment, both agreements lock in the structural adjustment agreements implemented over the past decade.
  • The negative effects of this model of economic integration include falling wages and rising unemployment.

Over the past few years, numerous trade and investment agreements have been signed by different countries in Latin America and the Caribbean. In addition to regional pacts, such as NAFTA, Mercosur, the Andean Pact and the Caribbean Community (Caricom), there are bilateral agreements, such as the one between Chile and Mexico, as well as accords between regional groupings and individual countries. Part of the FTAA Working Groups’ formidable task is to document and compare exactly what agreements have already been reached in the region.

Despite their apparent differences, NAFTA and Mercosur are similar accords. Both entail extensive liberalization of trade and investment regimes. NAFTA establishes a free-trade area, in which barriers to trade in goods produced in the member countries are removed but each country retains the ability to set tariffs on goods from nonmember countries. More than a trade agreement, NAFTA also includes measures to liberalize capital flows, protect intellectual-property rights, open new sectors to foreign investment, and facilitate temporary labor mobility of certain classes of businesspeople and professionals. In reality, then, it does include many elements of a common market.

While Mercosur is officially termed a common market, it has not fully achieved that status. The Treaty of Asunción, signed by the four member countries on January 1, 1991, eliminated tariffs on 90% of the goods traded within the bloc, with remaining exceptions to be phased out by 1999. It also entailed an average common external tariff of 14% on 85% of the goods imported from nonmembers. But, while supplementary decisions and resolutions are reached by consensus among the members in an ongoing process of negotiation on a variety of issues, no decisions have yet been reached on such issues as labor mobility and common labor standards. The lack of provisions on labor mobility and the exceptions to the common external tariff mean that Mercosur falls short of being a true common market.

Both NAFTA and Mercosur include measures to deregulate foreign investment. Each calls for national treatment (with some exceptions) for foreign investors from the member countries, i.e., that they are treated no differently than local investors. Both agreements also prohibit the application of performance requirements that obligate investors to achieve a certain level of exports or technology transfer. NAFTA goes so far as to prohibit performance requirements on any foreign investments, even those from nonmember countries.

These provisions, along with others on public and financial services, have the effect of locking in the structural adjustment programs implemented in the region over the past decade and therefore have serious implications for the member countries. If countries cannot regulate foreign investment, for example, then they will be unable to implement a coordinated industrial or development strategy. They will thus be forced to continue to lower wages, working conditions, and environmental regulations in increasingly desperate moves to attract mobile international capital. This, in turn, contributes to job and wage losses and economic insecurity in the United States.

Evidence of the failure of this model of economic integration continues to mount. In the aftermath of the Mexican peso crisis, the International Monetary Fund and the U.S. Treasury insisted that Mexico maintain its commitments under NAFTA by continuing to liberalize trade and investment regimes and by maintaining high interest rates in order to shore up the peso. The impact on small and medium-scale producers and workers has been devastating. More than a third of Mexican businesses have gone bankrupt because of the cost of their loans and the drop in domestic demand caused by the austerity measures. More than two million Mexicans have been lost their jobs, and the purchasing power of wages has dropped by 50% since the peso crisis.

In its desperation to attract foreign investment, the Mexican government has also initiated legal reforms to relax already poorly enforced environmental regulations. Meanwhile, official U.S. statistics, which show that more than 90,000 people have been certified under the NAFTA Trade Adjustment Assistance program as having lost their jobs because of the agreement. Many of the trade liberalization measures in the Mercosur only began to be phased in last year, but already signs of troubling fallout are appearing. Union federations in Brazil, Argentina, Paraguay, and Uruguay plan to hold massive demonstrations during the next Mercosur summit in December in protest against growing unemployment. Meanwhile, already financially strapped state governments in the region have found themselves competing with each other to offer the greatest tax incentives to investors attracted to the Mercosur market.

Toward a New Foreign Policy

Key Recommendations

  • Trade negotiations should be opened up to a broader representation of society.
  • Labor, environmental, and other relevant social issues should be included in the negotiations of trade agreements.
  • Investment policy should balance investors’ needs for clear rules with the needs of each country’s development strategy.

While Mercosur is not dramatically different from NAFTA, it does offer certain advantages for Latin American countries. The Treaty of Asunción established a process of discussion on a variety of issues related to economic integration. Since its structure is more flexible than NAFTA’s, it could eventually include meaningful provisions on labor rights, environmental issues and other social concerns.

Also, if the non-NAFTA countries in the hemisphere were to join together, building on existing trading blocs, they would have greater leverage in their negotiations with the NAFTA countries than if they were to negotiate bilateral agreements or conform to recommendations made by the Working Groups. In fact, a number of countries have already entered into negotiations to become associate members of the Mercosur. Chile became an associate member in October 1996, Bolivia will join in January, and Venezuela is continuing negotiations to join as an associate member. In addition, the five members of the Andean Pact (Bolivia, Colombia, Ecuador, Peru, and Venezuela) have agreed to negotiate free trade in goods with the Mercosur countries. The Mercosur has also initiated discussions with the European Union and the Asia-Pacific Economic Cooperation (APEC) countries in order to lessen its dependence on the United States.

There is little evidence that a hemisphere-wide trade agreement based on the NAFTA/Mercosur model would establish the foundation for economic relationships among countries that foster sustainable development and economic progress. The NAFTA experience has demonstrated that the benefits of trade will not “trickle down” to the population as a whole; trade agreements must be specifically designed to serve as tools for development.

A critical first step in achieving a different kind of trade agreement in the Americas is to open up the process to a broader representation of different social sectors. Businesspeople in the hemisphere already have significant access to the official negotiations process, establishing their own parallel Working Groups and holding conferences alongside the ministerial meetings in Denver and Cartagena.

Businesses, however, represent just one segment of society. Family-farm, women’s, immigrant, environmental organizations, as well as unions and other interested parties, must also be involved in the official discussions on hemispheric integration. Representatives of these groups should actively participate in the Working Groups and other negotiating bodies.Concurrently, labor, environmental, and other relevant social issues should also be included in the negotiations process. The resulting agreements should affirm such internationally recognized accords as International Labor Organisation Conventions, the United Nations Convention to Eliminate All Forms of Discrimination Against Women, and the Inter-American Convention on Human Rights. Additionally, any consensus reached on these issues must be included within the text of the trade agreements, not in unenforceable side agreements.

The approach to investment policy should also be changed to balance the needs of foreign investors for clear rules with those of the national economy. Governments should retain the right to impose performance requirements on those investors, as well as to maintain protections for small and medium-scale producers and key sectors in their respective national development plans. Countries’ rights to maintain food and nutritional security (such as excluding basic grains from liberalization measures) should also be established.

At the Summit of the Americas, President Clinton proclaimed that, with the Free Trade Agreement of the Americas, “we can create a partnership for prosperity where freedom and trade and economic opportunity become the common property of the people of the Americas.” If this partnership is to include all of the hemisphere’s peoples, and not just a relatively small, elite and well-connected group of investors, then the FTAA process must be fundamentally democratized and reoriented. The future stability of the region depends on it.

Written by Karen Hansen-Kuhn, The Development GAP.