At a crossroads in Latin America - trade agreements; includes related article on Latin American economic conditions

Nation's Business, April, 1996 by Roberta Maynard

The race is on among the U.S., Europe, and Asia to negotiate trade pacts in the region, and the stakes are high for U.S. firms.

Through the Andean Pact, Bolivia, Colombia, Ecuador, Peru, and Venezuela eliminated most nontariff barriers among themselves and agreed to a common external tariff. Colombia, Venezuela, and though reforms throughout Latin America are creating opportunities for U.S. companies, Asia or Europe may beat the U.S. to a trade-bloc agreement in the region.

When they're viewed as potential trading partners, the countries of Latin America have begun to look like the most popular girl at the dance, despite the nations' unattractive history of economic and political volatility.

The pursuit of various trade-pact possibilities in the region by the United States, Japan, and member nations of the European Union is beginning to shape up as a war--diplomatically speaking--for the Latin American market. The question is: Who among them will strike a deal for preferential treatment?

The current trade-pact activity follows the region's emergence from the so-called lost decade of the 1980s, which was characterized by authoritative regimes, state-controlled industries, and dosed markets.

Even before the North American Free Trade Agreement, nearly every South American country had developed agreements with at least one other to promote trade by lowering tariffs and quotas.

Another motivation for these countries was to make themselves more attractive as future participants in NAFTA.

Mexico have formed a free-trade pact called the Group of Three.

The largest Latin American trade bloc is the Mercosur, a common market established by Argentina, Brazil, Uruguay, and Paraguay. It represents more than half of South America's gross domestic product and 40 percent of its foreign trade.

Having already reduced tariffs by 75 percent, merebars of the Mercosur are working toward the free movement of goods and capital and ultimately full economic integration among the four nations. Chile and Bolivia are discussing whether to join the trade group as associate members, meaning they would participate but wouldn't abide by certain provisions such as the Mercosur's common external tariff.

The immediate risk for U.S. companies is that Latin American countries might make preferential trade agreements with nations or blocs outside the hemisphere, placing imports from the United States at a competitive disadvantage. Since early last year, members of the Mercosur have been negotiating with the European Union about preferential trade agreements.

There are strong Latin American ties to Asia, too; Chile and Mexico are members of the Asian Pacific Economic Cooperation.

And then there is the matter of the U.S. effort to bring Chile into NAFTA as a first step in building a Western economic powerhouse. Last year, trade ministers of 34 Western Hemisphere countries met to set a course toward the group's goal of a free-trade area in the Americas by 2005. Chile's accession to NAFTA by 1996 had been considered an important step in this process.

But what had seemed a sure thing became a lower priority for Congress and the Clinton administration as budget battles and other concerns took attention away from trade during 1995 and early this year. Now, trade experts say Chilean accession is unlikely in 1996.

Chile, meanwhile, reportedly has grown impatient with waiting in the wings since being invited in December 1994 to begin negotiations to join NAFTA. Chilean officials say they won't negotiate fundamental issues until the U.S. Congress approves fast-track trade-negotiating authority for the White House. That means that Congress participates in the drafting of the trade pact and agrees not to try to amend it when it is presented for a ratification vote.

Even if approving fast-track authority becomes a priority, the White House and Congress disagree about whether to tie in sanctions related to labor and environmental issues. The disagreement became a sticking point in NAFTA negotiations when the administration leaned toward such a tie-in but many members of Congress believed those matters should be negotiated separately. Ultimately, environmental and labor pacts were concluded separately.

Why is Chile important? The slender nation of 14 million people is no economic giant, but it is a model for reform that the region's major countries are trying to emulate.

About 15 years ahead of Brazil in its market reforms, Chile has an open, healthy economy with rules favoring trade and investment and a moderate 11 percent duty on imports. Total foreign investment in Chile in 1994 exceeded $4.6 billion, the highest in its history.

"Chile is important because it shows the way," says David Hirschmann, manager for Western Hemisphere affairs at the U.S. Chamber of Commerce, in Washington, D.C. "It has enjoyed 6 percent average growth for the past 12 years, has a long history of democracy, a 96 percent literacy rate, diversified trade, and is outward-looking."

Because of U.S. failure to bring Chile into NAFTA, Hirschmann says, "Chile is like a bride left at the altar."