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Expanding the North American Free Trade Agreement.

Why limit NAFTA to the U.S., Canada, and Mexico? Including other Latin American nations could create an economic giant in the Western Hemisphere.

Expansion of the North American Free Trade Agreement (NAFTA) to cover other Central and Latin American nations, including the Caribbean countries, is very much on the agenda of trade discussions. It looks increasingly likely that there will be a request to Congress for authority to negotiate a series of bilateral agreements involving a number of Central and Latin American countries. The issues are with whom they would take place, how these may proceed, and what the pros and cons would be and to whom.

In considering some form of extended NAFTA, perhaps the first and most important issue is its trade significance relative to the potential negotiating complexities involved. Exports of all Latin and Central American countries to the U.S. are smaller than Mexico's. Also, Mexico sends the highest percentage of its total exports to the U.S. of any Latin or Central American economy. Thus, in evaluating any regional extension of NAFTA, a starting point is that the accord with Mexico is of more significance to the U.S. than its extension (were it achievable) to cover the rest of Latin and Central America. Moreover, on the basis of its large export share going to U.S. markets, an agreement with the U.S. seemingly is more important to Mexico than to any other country in the region.

In examining the major commodity categories of Latin American exports to the U.S., Argentinean petroleum products and iron and steel are especially significant. The petroleum products face higher than average tariff barriers in the U.S. markets, so gains may occur here for Argentina in an extended NAFTA, but iron and steel traditionally have been protected in U.S. markets, and may change little. Brazil's exports to the U.S. are more varied, relying on machinery, footwear, orange juice, coffee, textiles, and other products. Improvements in access could come in some of these (footwear), although restrictions in others (textiles/apparel) likely would be little altered, and for some categories (coffee), few or no barriers apply.

Chile has trade in copper and agricultural products, which, because they are shipped outside of the U.S. season, face no significant barriers in U.S. markets. Peru has exports in petroleum and non-ferrous metals; the latter being little restricted in U.S. markets. Venezuela has trade almost exclusively in crude oil, which faces no barriers, as does Colombia (also with trade in coffee, which largely is barrier-free in the U.S., too). A more major area of trade irritants for Colombia, over the years, has been cut flowers, where there have been a series of anti-dumping cases. Since NAFTA does not substantively alter U.S. anti-dumping statutes, an extended agreement might be expected to offer Colombia little relief.

Uruguay has large shipments of clothing, which hardly would be affected. Ecuador ships tropical goods (largely duty-free) and crude oil (also barrier-free), and little difference would result. Honduras, Panama, Costa Rica, Guatemala, and El Salvador rely on a combination of tropical products (bananas, fish, coffee) and restricted items such as textiles, apparel, and sugar. Some benefits comparable to those achieved by Mexico in sugar may be possible, but trade benefits seem small elsewhere. Jamaica relies on bauxite and clothing; Trinidad, petroleum products.

A further issue is the number of possible countries involved and the fact that any such negotiations would be complicated by existing trade agreements. These include not only the NAFFA arrangements themselves, but a series of bilateral and other pacts concluded between various Latin American nations and the U.S. and other countries in the region. There are regional trade agreements that are covered under the Caribbean Basin Initiatives (CBI), including preferential arrangements in textiles and other key products (such as sugar), which the CBI nations wish to see protected. New attempts in the Central American Common Market also are being made to complete their trade initiatives by adding Panama, finalize their remaining General Agreement on Tariffs and Trade (GATT) accessions, and, for certain countries, to speed negotiations (either individually or bloc-wise) with the U.S.

There also are a range of actual and possible trade negotiations either being considered or under way that would complicate extending NAFTA. Brazil and Argentina signed a bilateral trade agreement in 1987. As a result, their cross-border trade has increased by about 80%. The four Mercosur countries (Argentina, Uruguay, Paraguay, and Brazil) are attempting to move towards full economic integration behind a common external tariff by 1995. The Andean Pact (Peru, Bolivia, Ecuador, Colombia, and Venezuela), in place since 1960, has begun substantive negotiation with commitments to move to a common external tariff by 1994 and achieve a full common market by 1995.

Mexico and Chile have agreed on a bilateral free trade agreement that includes a commitment to phased bilateral tariff elimination over five years and a reaffirmation of their GATT commitments. Chile and Venezuela are poised to sign a similar bilateral agreement, as is Mexico. The Chileans have announced their desire to move towards a pact with the U.S. before the expiration of the Congressional negotiating authority for bilateral trade pacts under which NAFTA negotiations are taking place. They apparently were advised to come to an agreement with Mexico prior to entering a US. negotiation, a precondition they have met. Costa Rica similarly has had to face the issue of whether Central American trade agreements should be sorted out first.

If all of this were not enough, the Latin American nations are signatories to the Latin American Integration Association (ALADI) treaty of the 1960s, which contains a super most favored nation provision requiring that bilateral agreements entered into by any of them be extended to other ALADI countries. Thus, what Mexico has achieved in the NAFRA negotiations should be extended automatically to the other Latin and Central American nations, although ALADI provisions are not backed by an enforcement mechanism.

It seems to be agreed that most likely to negotiate a bilateral agreement with the US. next is Chile. It consciously has stayed out of regional trade negotiations such as Mercosur on the grounds that these would complicate an eventual pact with the US. The Chilean case is especially interesting because the Chileans have no substantive trade issues with the U.S., other than health and safety inspections for horticultural products following the ban on grapes and other produce in 1990. The absence of trade conflict, in part, is because the seasons in Chile are opposite to those of the U.S., so that when Chilean produce is in season, it is off-season in the U.S. and vice versa. The significant U.S. ownership of companies in Chile in such areas as copper and other metallic ores is another factor. A Chilean negotiation should be relatively straightforward, although experiences in recent years with trade negotiations suggest that things are seldom as easy as they appear.

A number of other countries similarly have indicated a desire for bilateral negotiations. Costa Rica, Venezuela, and Colombia have shown substantial interest. Thus far, a formal request from the Argentineans has not been forthcoming. Further down the list would come Brazil, in terms of quantity the most important trading partner in the region for the U.S. after Mexico. Brazil accounts for well over 50% of the Gross Domestic Product of South America, so trade issues for this nation are dominant in the region.

The questions, then, are the approach to be taken in such negotiations, what difficulties could be encountered, and what the impacts of any eventual agreement could be in terms of gains or losses to the U.S. and the participating countries. For instance, would the approach be a sequential country negotiating type of tactic deemed by most people the most likely, or would some comprehensive agreement aimed at an overall Latin American negotiation be attempted? Alternatively, would a series of product or sectoral deals be struck that later would be extended and consolidated into a single pact?

The most likely development would be for the existing NAFTA partners simply to invite countries in Latin and Central America to accede to the agreement by taking on its obligations, including the tariff elimination commitments, as well as sharing in its benefits. For Chile, this may be relatively easy since liberalization has proceeded so far. For some of the Caribbean nations, it would appear attractive if they received Mexican entry to the U.S. market for sugar. A series of bilateral negotiations with the U.S. would seem the second most likely option; a complete hemispheric negotiation the least. Either would face difficulties.

In some, there are existing rules of origin that will conflict with those embodied in the Canada-U.S. agreement and in NAFTA. There also will be problems in modifying existing agreements where a significant number of countries are party to them. In the case of NAFTA, this became clear in the car talks, where the content rules between Canada and the U.S. had to be altered to achieve an accord. Prior agreements such as Mercosur, ALADI, Latin American Free Trade Agreement (LAFTA), and others further complicate any extended NAFTA arrangement, because of the meshing difficulties of two different sets of trade disciplines.

Potential benefits

The potential gains and losses from an expansion of NAFTA, especially to the developing nations in the region, are somewhat difficult to quantify. On the one hand, there are the clear benefits of improved access to the large-country market and further insurance advantages if this access is made more secure. On the other hand, any benefits obtained by one nation risk being diluted as subsequent ones enter an extended NAFTA-type arrangement. Moreover, for a number of countries, their key exports to U.S. markets either are free of barriers or subject to those that seem likely to change little in an expanded NAFTA. Combined with the fact that several countries' trade share with the U.S. is significantly below that of Mexico, the direct gains to the Latin and Central Americans from an extended NAFTA do not seem that great at first glance. There may be other benefits if their objective is, like Mexico's, in part to use trade agreements to lock in domestic policy reform.

With the exception of Brazil, Latin American markets are relatively small and, as a result, the expectation would seem to be that the benefits to the U.S. from enlarging NAFTA also would be minimal unless initial levels of barriers in some of the larger markets were high. In some nations, this still is the situation; in others, most of the potential access benefits to the US. already will have been achieved through unilateral liberalizations initiated by these countries.

However, as smaller countries first gain access to the larger market through a negotiated agreement, many of their advantages will be transferred as others join later, giving an incentive to prevent other smaller nations gaining equal access and undermining their margin of preference. Thus, sequentially opening up the U.S. market to a series of Central and Latin American suppliers through an expanded NAFTA-type process could have the effect of simply reallocating the benefits that initial entrants have received to subsequent entrants with little new global benefit and, in fact, a dilution of benefits for early entrants.

Only time will tell whether or not a substantive effort will be made to expand NAFTA. In part, the idea emerged as a bargaining tactic for the U.S., which progressively had become frustrated in dealing with fellow large partners in multilateral negotiations in the GATT. However, it now is sought actively by some of the smaller countries in the region (Chile, Costa Rica) that have changed their domestic policy orientation towards more openness, are dubious of major forward progress multi-laterally, and, rejecting the North-South schisms of the past, are willing to move hemispherically.

It seemingly was no accident that the week of the supposed final Uruguay Round Ministerial in Brussels in December, 1990, coincided with a week-long tour of Latin America by Pres. George Bush promoting the Enterprise for the Americas Initiative. A successful conclusion to the current Uruguay Round perhaps could undermine further attempts to achieve a substantive expansion of NAFTA, but a weak, indecisive, or nil result almost certainly will accelerate things the other way. From a developing nation point of view, the countries being invited to join have to ask themselves what the benefits are, whether they face any significant costs, and if they are proceeding on a realistic basis.
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Author:Whalley, John
Publication:USA Today (Magazine)
Date:Sep 1, 1993
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