FTA's: Lessons From Latin America's Recent Past

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

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