Analysis prepared by COHA Research Associate Manuel Trujillo
Peru, Yes; Colombia? Free Trade Agreements: Lessons from Latin America's Recent Past
* Peru's Free Trade victory in U.S. Senate could later embarrass both Senators Clinton and Obama for their pro Peru
stance, but also could spotlight President Garcia's complicity in massive human rights violations when the Shining Path
Guerrillas were active.
* Free Trade Agreements (FTAs) between the U.S. and Latin America may turn out to be not as beneficial as they promised.
* Intra-regional trade could be a viable alternative to FTAs with Washington.
Free Trade Agreements (FTAs) between the United States and several Latin American countries are increasingly being
described in the media as the centerpiece of this country's western hemispheric relations. Last Tuesday, the FTA between
the U.S. and Peru was approved by the U.S. Senate by a vote of 77 to 18. This gave President Bush his first important
victory on trade matters since the Democrats gained control of both houses of Congress a year ago.
Susan Schwab, the United States Trade Representative (USTR), said that "With the strong votes by both chambers of
Congress, we are sending a strong signal to the world that the United States is regaining its bipartisan footing on
trade policy and is a reliable ally to countries that are building political and economic freedom."
Meanwhile, Peruvian President Alan Garcia hailed the approval of the FTA by the U.S. Congress, referring to it as an
"unprecedented" deal. But in order to reliably predict whether its now achieved FTA with the U.S. will in fact help Peru
attain "political and economic freedom," it is important to first understand the history of U.S.-backed FTAs in Latin
America.
As for Peru's Garcia, the publicity focusing on him may not be welcome by the Peruvian leader, or, for that matter, by
Senators Clinton and Obama, who voted in favor of the trade pact This is because during Garcia's first term as president
during the 1980's the Peruvian ministry, under Garcia's instruction, carried out a brutal dirty war against those which
it perceived as members or sympathizers of the Maoist Shining Path (Sendero Luminoso) which resulted in thousands of
political assassinations by the Peruvian security forces.
The UN-brokered Truth and Reconciliation Commission exposé of these killings are sure to deeply disturb the
international community's conscience on this matter and point out how Clinton and Obama have trivialized the issue by
awarding Garcia a free trade pact.
Aside from Chávez-inspired anti-neoliberal campaigns and the relative minority of economists who feel that free trade
does not automatically register a win-win situation, most economists are receptive to concepts associated with 'free
trade' such as high export-driven growth, mounting foreign investment, and economic modernization.
These aspects are highly inviting to conservative business interests and orthodox economists who are dominant forces
behind the Latin American governments presently negotiating FTAs with the United States. However, the alleged benefits
that come with free trade deals need to be juxtaposed with the far less glamorous realities being faced daily by the
majority of Latin American countries that continue to lack the physical infrastructure, as well as strong democratic
institutions, to guarantee that economic success will spill over to the region's most disadvantaged areas.
However, government representatives would be wise to exercise caution, because FTAs are not always one-way tickets to
long-term stability. In fact, recent Latin American history has indicated that abruptly opening vulnerable local markets
can accentuate already grave domestic social problems.
The typical scenario found throughout the region ritualistically portrays a sharp reduction of tariffs by a Latin
American country, followed immediately by a wave of U.S. exports that can be counted on to flood the domestic market,
and in turn, end up shutting down what has now become non-competitive domestic production.
The experience has been that many Latin American markets have proved to be too weak to compete with a highly-subsidized
U.S. economy, in spite of benefiting from a competitive advantage offered by cheap wages. It thus becomes pertinent to
illustrate the drawbacks that derive from these FTAs, often accentuated by poor representational skills on the part of
Latin American negotiation teams, who turn out to be losers in the process more often than not.
Recent Historical Context
In 1990, President George H.W. Bush put forth his ill-fated Enterprise for the Americas Initiative, which sought to
bring about economic and political change in Latin America. According to Paul H. Boeker, former U.S. Ambassador to
Bolivia and ex-president of the Institute of the Americas at the University of California, Bush claimed that the
proposed extension of free trade to Latin American countries would "bring political benefits, particularly in
strengthening democracy and creating a stable, long-term basis for better U.S. - Latin American relations." At the time,
most heads of states in Latin America embraced the initiative, probably out of the fear of being left behind in the
pursuit of some initial benefits of expanding into the global economy. Today, negotiators on the U.S. side of the table
continue to try to convince Latin American interests that deals with the U.S. should be seen as a national priority that
will undoubtedly benefit their country. This type of thinking often goes unchallenged because it has become customary to
see government leaders' work within "the accepted framework of neoliberalism and the Washington Consensus," as political
science professor Gary Prevost has observed.
The Mexican Example
The North American Free Trade Agreement (NAFTA) has been focused on boosting trade between Mexico and the U.S since it
came into effect in 1994. However, it is undeniable that some sectors of the Mexican labor force, such as the country's
farmers, have markedly suffered from this trade deal. Prevost explains that "lower tariffs caused U.S. corn, which is
subsidized, to push Mexican prices down further, forcing more than one million small farmers out of business since
1994." The consumers have not noticeably benefited from these transactions, since the price of tortillas (a staple of
the Mexican diet) has actually quadrupled in some locales because of the lack of equivalent subsidies from the Mexican
government. Thus it is clear that Mexican farmers were not ready to compete with a Washington subsidized, 'factory in
the field' U.S.-style agricultural economy. For its part, the Mexican government failed to provide a safety net for its
farmers who frequently end up at the bottom of the country's national priorities. Ironically, a substantial proportion
of the 1.5 million Mexican farmers who have lost their livelihoods in the past few years are from the same demographic
pool which is driven to cross the Rio Grande, only to be condemned by brimming majorities in U.S. economic and political
sectors which, in fact, enthusiatically had helped NAFTA get on its feet in the past.
The Chilean Example
Economist Claudio Lara Cortés describes the FTA signed by Chile and the U.S. in 2002 as "a model to avoid." Even though
he acknowledges that Chile's exports to the U.S. have boomed since its implementation, and, broadly speaking, has
benefited the Chilean economy (in 2006 exports accounted for 42 percent of the country's GDP), he argues that the
fundamental flaw of the FTA is that "consumers and workers are excluded from the process, as if they have no rights
besides the right to receive promises." More importantly, he shows that the increased exports have not wholly benefited
the Chilean populace; as a result, many have been adversely affected by the increasing concentration of wealth in the
hands of Chile's business elites. It is the latter who are mainly in charge of making decisions at the peaks of the
country's economy--decisions which decidedly reflect the economic interests of the financial titans in Chile.
To make his point clear, Lara Cortés quotes renowned economist and professor Alexis Guardia, who says that "growth based
solely on exportation [in Chile] has a limited effect on employment (20-25 percent of direct and indirect jobs are in
the exporting sector), trickling down very little because the exporting sector's connecting links are poorly developed
and there is no adequate policy in place that would help them expand." Hence, the FTA with the U.S. may have helped
Chile boost its exports, but in the end, has done little to alleviate Chile's remarkably high level of domestic
inequality.
The Andean Countries
The U.S. has unwaveringly pushed FTAs with the Andean countries. Criticism of the proposed FTA between Ecuador and the
U.S (now indefinitely on hold due to Washington's negative reaction to Ecuador's decision to annul a contract with the
U.S. Occidental oil company) is now focused on the agricultural sector. The United Nations Economic Commission for Latin
America and the Caribbean (ECLAC) published a study in 2005 that analyzed the consequences of the proposed bilateral FTA
in which it found that "Ecuador's agricultural sector loses in all possible scenarios." Once again, a FTA between the
U.S. and a Latin American country is expected to distort a sector already on the margins of poverty, which consistently
has been left out of the nation's participatory political framework.
The U.S.-Peru trade agreement has just been approved by the U.S. with solid bipartisan support in Congress, and now has
been sent to President Bush who will enthusiastically sign the measure. Claims by the Peruvian opposition to the trade
deal such as "TLC: Así No"--which translates to "FTA: not like this"--indicates discontent on the part of the populace,
especially since the Andean nation can already export most of its products to the U.S. duty-free. The opposition also
argues that the trade deal has been poorly negotiated by Peruvian authorities, mainly because average Peruvian citizens
have been utterly excluded from the process.
The pending deal with Colombia faces more opposition in Congress due to continuing violence against local trade
unionists in the country and huge scandals in which the Presidential office in Bogota has been to blame. Proponents of
these FTAs argue that they will help boost trade, offer new employment opportunities, and promote higher foreign
investment in the region. But even if these countries at first experience higher GDPs, this does not mean that living
conditions will necessarily improve or that deprived sectors of the populace will receive the benefits promised by the
authorities. Like in the Peruvian scenario, opposition to the FTA between Colombia and the U.S. has also been rooted in
the same principles. Colombian Senator Cecilia López Montaño, a professional economist, criticizes politicians involved
in drafting the U.S. - Colombia FTA because "rarely do [they] defend the weak, and as usual they end up embracing the
arguments of the obvious winners who, typically in Colombia, have always been the same: the financial sector, the big
business, the exporting regions, and the skilled labor force." According to this line of analysis, not even ordinary
consumers will receive notable benefits because commercial integrated operations "which import, distribute and sell, are
the ones that will end up keeping the subsidies of the products exported by the U.S. to the country Colombia." If the
role of the government is to provide equal opportunity to all its citizens, then leaders must guarantee that no one is
left behind. This seems to be anything but the case with the Colombia-U.S. FTA, which has not been creatively
constructed by concessionally-minded Colombian authorities.
Intra-regional Integration
A number of Latin American governments are anxious to enact free trade deals with the U.S. despite knowing from the
start that this country will insist that it holds the strongest cards in the deck. There is, however, an alternative
game plan that has not been fully explored, which could help Latin American countries become more competitive in the
long run: intra-regional trade.
The Comtrade database of the U.N. compares intra-regional trade performance around the globe. While East Asia has
achieved over 50 percent of intra-regional trade arrangements and Europe has nearly reached 70 percent, South America
remains woefully behind with a low 20 percent. Perhaps now is a good time for Latin American countries to look to their
neighbors to expand upon already existing trade opportunities, as very much has been the case between Colombia and
Venezuela. First of all, intra-regional economic integration would imply negotiating among equals, a patently compelling
idea for the future but chimerical at the present time. Moreover, it would help fortify and rearrange these countries'
physical infrastructure, including transportation, communication, and technological availabilities, while at the same
time avoiding the risk of unequal trade dealings which are almost a given when trade with the U.S. is involved. The
projected creation of Banco del Sur, a monetary fund and lending institution poised to be at least a partial alternative
to the Washington Consensus' IMF, would provide a safety net for Latin American governments seeking to aggressively
invest in a much-needed basic infrastructural capacity without succumbing to the "austerity programmes" normally
mandated by the Washington-based institution. Lastly, the initial moderate volume of trade could also give the involved
countries enough pause to aggregate the necessary capital in order to help to guarantee financial security for those who
are exposed in the process.
The proposed Union of South American Nations could be a major step towards intra-regional integration that attempts to
unite the continent's two largest existing free trade organizations: Mercosur and the Andean Community. Presidents from
both ends of the hemisphere's political spectrum have shown interest in participating in this proposed integration,
which could help de-politicize the free trade issue and provide a gradual widening scope for economic liberalization on
a more level playing field.
Conclusion
As different outcomes across the region illustrate, Latin American countries often lack the essential institutions
necessary to equally and fairly distribute the promised benefits of U.S.-backed FTAs. Therefore, it is crucial that
Latin American countries adequately prepare themselves before contracting such agreements by heavily investing in
transportation and communication capabilities, expanding subsidies to rural areas including to local farmers, as well as
establishing a safety net for those who fail to assimilate in the increasingly competitive market. This type of
investment most likely will promote collateral institution-building, a feature that ensures that the benefits from free
trade are shared by its participants, instead of simply falling into the hands of an already well-off minority.
Intra-regional trade also can play a relevant role in a step-by-step globalization process that can prove its merit with
a cautionary tempo.
Democracy in Latin America is too institutionally weak and non-inclusive to afford room for any further mishaps. Despite
the indignant outcries of free traders, the absence of sufficient governmental regulations could prove highly damaging
for Latin American economies, only prolonging their normally hapless struggle to reduce poverty and attain long-term
stability. Even the U.S., today's biggest free trade advocate, has shaped its economic infrastructure through measures
that have necessitated active government leadership and ample time for the affected public to participate to the extent
so desired. The Peruvian government would be wise to pay close attention to the potential harmful effects of the
recently enacted FTA with the U.S. by reaching out to sectors of the populace that most likely will not be favored by
the trade deal. By guaranteeing fairness and inclusiveness, Lima could greatly fortify the democratic principles needed
for this country's future and equitable development.
The Bush Administration is either too narrow-minded or grossly uninterested with the negative aspects of the recent
history of U.S.-backed FTAs in the region to claim that any refusal to approve the pending FTAs with Colombia and Panama
would be a slap in the face for democracy in Latin America. Policymakers on both sides must realize that a more
comprehensive and unhurried approach to economic liberalization by Washington would help Latin America to gradually
adapt itself into the global trade framework. Ultimately, such an approach could confirm that the U.S. is an effective,
caring neighbor anxious to work to close the gap between the myth and the reality of hemispheric brotherhood. It can be
agreed that this is the preferred approach rather than to make a premature dive by the candidate country into a free
trade pact that is too shallow for economic buoyancy to properly function.
ENDS