Spanning the Western Hemisphere: free trade area of the Americas - International Focus

EconSouth, Spring, 2003 by Francisco Parodi

Negotiations are under way in 2003 to establish a free trade area that would encompass 34 countries in North, Central and South America and the Caribbean. Many of the member countries would benefit from liberalizing trade with the United States' large and dynamic economy. But a number of obstacles still need to be overcome before this trade agreement is finalized.

This year will be an important one for U.S. trade policy. Already, there have been some significant trade developments, including the signing of the U.S.-Chile free trade agreement and the beginning of talks with Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua to form a U.S.-Central America free trade agreement. The United States is also a leading player in negotiations, conducted under World Trade Organization (WTO) agreements, aimed at liberalizing agricultural trade among WTO member countries by 2015.

In addition, in 2003 Brazil and the United States are the co-chairs of the negotiations for a Free Trade Area of the Americas (FTAA) that would span from Ellesmere Island, Canada, to Tierra del Fuego, Argentina. Negotiations are set to conclude by the end of 2005. If the FTAA is established, it will represent the largest trading bloc in the world. While the agreement offers many potential benefits, a number of issues must be addressed before all of the countries can reach consensus on this wide-ranging plan.

Gains from trade

According to its proponents, the FTAA will bring a number of economic benefits to its members. The trading bloc promises to make imports from the region cheaper for consumers and expand markets for exporting firms. Over time, economists expect that countries in the FTAA will begin to specialize in the materials, goods or services in which they have a comparative advantage and realize gains from that specialization. For the developing countries of the hemisphere, this agreement offers hopes of increased foreign direct investment, increased productivity, the sharing of technology, and higher wages and standards of living.

The FTAA economy

Under the agreement, the proposed 34-member region includes all the independent nations of the Western Hemisphere except Cuba. The FTAA region will have a total population of approximately 825 million, of which 285 million (34 percent) live in the United States. The North American Free Trade Agreement (NAFTA) countries, Canada, Mexico and the United States, account for 50 percent of the area's population while the Mercosur countries of Argentina, Brazil, Paraguay and Uruguay make up 27 percent.

In economic terms, the NAFTA countries make up an even larger share of the FTAA. The United States is by far the largest economy in the region, representing 79 percent of the FTAA's total gross domestic product (GDP), which was $12.5 trillion (in U.S. dollars) in 2000. Canada and Mexico account for another 10 percent of the FTAA economy, and Mercosur, a little over 7 percent. Thus, the NAFTA and Mercosur countries make up more than 96 percent of the FTAA's economy and 77 percent of its population.

Differences in the development and structure of the various economies within the FTAA area are also evident. The United States and Canada are members of the G-7 group representing the largest industrialized countries in the world; Argentina, Brazil and Mexico also have sizable industrial bases. In contrast, several Caribbean countries, such as the Bahamas, Barbados and Jamaica, have very small economies driven almost exclusively by tourism. Also, several countries in the region have primarily commodity-based economies, such as Bolivia, Guatemala and Paraguay, where agriculture represents over 20 percent of GDP.

Western Hemisphere trade patterns

An analysis of trade patterns helps reveal the relative importance of the FTAA countries for the United States. The latest available data, from 2001, show that trade with FTAA countries makes up 44 percent of total U.S. exports and 36 percent of total U.S. imports (see table 1). But trade with NAFTA partners Canada and Mexico accounts for 36 percent of U.S. exports and 30 percent of imports, so only 8 percent of U.S. exports and 6 percent of imports is with the other FTAA countries. While trade with NAFTA is a very significant part of total U.S. trade, transactions with the rest of the hemisphere are, at this stage, considerably less important. But if history is a guide, the signing of the FTAA may increase U.S. trade with these countries. In 1991, prior to NAFTA, trade with Mexico accounted for only 9 percent of U.S. exports and 6 percent of imports. By 2001, trade with Mexico made up 14 percent of U.S. exports and 11 percent of U.S. imports.

For the other 34 members of the FTAA, trade with FTAA members as a share of total trade is significantly higher than it is for the United States, as table 2 shows. In addition, the United States is a major export destination and an important source for imports for FTAA countries. These trade patterns have significant implications for FTAA countries. The most obvious one is that some member countries could stand to benefit from the liberalization of trade with the United States, gaining access to the largest and most dynamic markets in the world. However, the fact that U.S. trade with non-NAFTA countries within the FTAA is comparatively small may add to the United States' bargaining power in the negotiations ahead. (See the sidebar on page 18 for a description of the negotiations.)