Whither hemispheric integration?

Business Economics, July, 1999 by Peter H. Smith

HEMISPHERIC ACCORD MAY TAKE A DECADE, BUT SUBREGIONAL AGREEMENTS MAY BE ENOUGH TO ATTRACT COMMERCE AND INVESTMENT

Free trade has become a mantra for the Western Hemisphere. Partly out of conviction and partly in response to outside pressure, leaders of Latin America have turned from the state to the market. They have reduced tariff and nontariff barriers to trade, opened doors to foreign investment, and privatized large portions of the parastatal sector. Their goals have been to stimulate competition, promote efficiency, benefit consumers and find a productive niche in the post-Cold War global economy. A key element in this overall strategy has been to devise a special relationship with the United States, principally through a Free Trade Area of the Americas. What are the prospects for success?

A realistic assessment of inter-American integration should be essential for any firm now conducting (or planning to conduct) business in Latin America. My basic conclusion is cautionary: Don't count on FTAA to clarify rules for trade or investment any time within the next five years, and maybe not within the next ten years. There is an upside too: Subregional agreements, not a hemispheric accord, might provide sufficient discipline and conditions for attracting commerce and investment to substantial and growing markets.

Strategies For Integration

Three distinct routes toward economic integration of the Americas have appeared during the 1990s: accession via NAFTA, hemispheric negotiations for FTAA, and a "coupling" of North and South America. They demonstrate the vigor and vitality of movements toward regional integration. They have also created a good deal of confusion.

NAFTA Accession

Unveiled in 1992 and implemented in 1994, NAFTA promotes the free flow of goods between Canada, Mexico, and the United States by eliminating tariffs and nontariff barriers over a period of fifteen years. It has constructed one of the two largest trading blocs in the world. With a population of 370 million and combined economic production of approximately $6 trillion as of 1992, North America became a worthy rival to the European Union.

Two of NAFTA's features are pertinent here. One is its implicit commitment to regional economic integration. In spite of its title, NAFTA is not concerned primarily with "free trade." By 1990 tariff and even nontariff barriers to U.S.-Mexican commerce were already low. NAFTA is mainly about investment. By obtaining preferential access to U.S. markets and a formal "seal of approval" through NAFTA, Mexico was hoping to attract sizable flows of foreign direct investment (FDI) from Japan and Europe as well as the United States. By obtaining untrammeled access to low-wage (but highly skilled) Mexican labor, the United States was hoping to create an export platform for manufactured goods to improve its competitive position in the global economy. These are the reasons why the NAFTA treaty contains extensive chapters about investment, competition, telecommunications and financial services, plus supplementary accords on labor and the environment. Commerce was only one part of the picture.

Another key characteristic is NAFTA's political rationale. This is especially compelling for the United States and Mexico. During the course of negotiations, Washington was pursuing four basic goals:

1. The preservation of stability along its southern border. The idea was that NAFTA would stimulate economic growth in Mexico and help sustain the regime.

2. NAFTA would provide the United States with an important bargaining chip in its trade negotiations with Europe, Japan, the GATT (and later the WTO).

3. The United States was seeking secure and steady access to petroleum. Mexican shipments in the late 1980s and early 1990s were roughly half as large as those from Saudi Arabia; by 1997 Venezuela had moved into first place, and Mexico (accounting for nearly 14 percent of U.S. imports) was barely behind the Saudis.

4. The United States wanted to consolidate diplomatic support from Mexico on foreign policy in general. With NAFTA in place, Mexico became unlikely to express serious disagreement with the United States on major issues of international diplomacy.

On the other side, Mexico was seeking:

1. Preservation of its social peace. The hope was that NAFTA would attract investment, stimulate employment, reduce social tension - and perpetuate the country's political regime. In this sense the goal of the PRI party was thoroughly compatible with Washington's desire to prolong stability in Mexico.

2. The agreement offered President Carlos Salinas de Gortari an opportunity to institutionalize and perpetuate his economic reforms. Under NAFTA, the Salinas program of "structural readjustment" now became part of an international treaty, one that was subscribed to by the world's only remaining superpower.

3. Mexico was seeking international benediction for its not-quite-democratic political regime. Such acceptance was especially important, because, in comparison with Argentina, Chile, Brazil, and other countries in transition toward democracy, Mexico no longer looked like a paragon of political civility.