The vision of a continentwide free trade area, unthinkable a few years ago, now merits consideration. Latin American countries have been opening their economies, some have succeeded in lowering previously exorbitant rates of inflation, most have moved toward democratic regimes, and the United States' Enterprise for the Americas Initiative envisions a hemispheric common market. There are obstacles, however, in integrating unequal parties such as the United States and an emerging Latin America. While the United States is the largest trading partner for most countries in the region, its importance has decreased since the early postwar years. Mexico is a striking exception, with almost three-quarters of its trade with the United States. Compared to Mexico, trade diversion costs of a free trade agreement (FTA) with the United States could be high for other Latin American countries. Increased investment rather than trade is the primary Latin American FTA objective. Preconditions for an investment surge are improvement in transportation, other infrastructure, and upgrading the labor force. Excepting Mexico, shortage of resources for human and physical infrastructure will delay substantial Latin American integration benefits far into the future.
Get full access to this article
View all access options for this article.
References
1.
1. See John D. Martz, “Economic Relationships and the Early Debate over Free Trade,” this issue of The Annals of the American Academy of Political and Social Science.
2.
2. Quoted in Joseph B. Lockey, “James Gillespie Blaine,” in The American Secretaries of State and Their Diplomacy, 1776-1925, ed. Samuel F. Bemis (New York: Knopf, 1927-29), 7:275.
3.
3. Joseph Grunwald, Miguel Wionczek, and Martin Carnoy, Latin American Economic Integration and U.S. Policy (Washington, DC: Brookings Institution, 1972), app. D, p. 185.
4.
4. Until recently, Latin American countries continued to fear the overwhelming economic power of the United States within hemispheric economic integration. The “creation of a customs union embracing the entire hemisphere... would have ruined any future possibility of industrialization in Latin America and would have condemned it to the never-ending extraction of raw materials for industry in the United States.”Jorge Castañeda, Mexico and the United Nations (New York: Manhattan Publishing, 1958), p. 170.
5.
5. Ironically, Chile was the prime mover of Latin American economic integration in the 1950s and 1960s. It was a founding member of LAFTA and almost single-handedly promoted the formation of the Andean Group. Since the 1973 military coup, it has shied away from Latin American integration. The country resigned from the Andean Group in 1976, and, even after its return to democracy, Chile has refused to rejoin it or join the Southern Cone Common Market (MERCOSUR) because of monetary instability and still-substantial trade barriers in countries of the two blocks.
6.
6. A recent study projects a net gain of 130,000 U.S. jobs during the first 10 years of NAFTA. See Gary Clyde Hufbauer and Jeffrey J. Schott, North American Free Trade: Issues and Recommendations (Washington, DC: Institute for International Economics, 1992), pp. 55-56.
7.
7. Although East Germany's per capita income was nearly 60 percent of that of West Germany according to World Bank and other data—see, for example, the World Bank's World Development Report for years prior to 1983; since 1983 the World Bank has not published income data for East Germany—unification without subsidies would have destroyed 90 percent of its firms and resulted in open unemployment of well over half of the labor force. Only through the transfer of substantial resources from West Germany was an East German economic catastrophe avoided. Estimates of West German costs have exceeded $100 billion per year since unification. Expenditures are expected to continue at a similar rate for the foreseeable future in order to provide adjustment assistance and a safety net for the 17 million impoverished East Germans. Such a burden has put an enormous strain on the German economy and politics.
8.
8. For estimates of the tariff equivalents of some U.S. NTBs, see Sam Laird and Alexander Yeats, “The UNCTAD Trade Simulation Model” (UNCTAD Discussion Papers, no. 19, United Nations Conference on Trade and Development, 1986).
9.
9. Only about 18 percent of Latin American exports to the United States face significant U.S. duties of 5 percent or more. The proportion is highest for the three largest Latin American countries, Argentina, Brazil, and Mexico, more than a quarter of whose combined exports were subjected to significant U.S. tariffs in 1986. Refik Erzan and Alexander Yeats, “Free Trade Agreements with the United States: What's in It for Latin America?” WPS 827 (Policy Research Working Papers, World Bank, Jan. 1992), tab. 7, p. 18.
10.
10. Erzan and Yeats, “Free Trade Agreements with the United States,” tab. 9, p. 23, indicates that almost two-fifths of the combined exports of the seven major Latin American countries face NTBs in the United States. Central American and Caribbean countries are also subject to U.S. NTBs, because sugar and textiles are exceptions in the free-access arrangement of the Caribbean Basin Initiative.
11.
11. Miguel Rodriguez Mendoza, “United States Trade Policy and Its Consequences for Latin America” in The Insertion of Latin America in the World Economy, Capítulos 16 (Caracas), p. 13 (Apr.-June 1987).
12.
12. See Paula Stern, “The Foreign Debt Problem and Its Impact on U.S. Foreign Trade,” statement before U.S., Congress, House, Committee on Banking, Finance, and Urban Affairs, Subcommittee on International Development Institutions and Finance, 99th Cong., 2d sess., 19 Mar. 1986.
13.
13. Cf. Juan Alberto Fuentes K., “Compatibilidad entre integración subregional y la hemisférica,”Revista de la CEPAL (Santiago, Chile) no. 45, p. 110 (Dec. 1991).
14.
14. Erzan and Yeats, “Free Trade Agreements with the United States,” tab. 11, p. 32. The 11 countries considered cover all of Latin America except Central America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.
15.
15. Erzan and Yeats project an average decline of 2-3 percent. The erosion of Mexico's trade expansion is less than 2 percent, although in absolute numbers it accounts for a third of the total decline for all 11 countries. Ibid., tab. 12, p. 34.
16.
16. Using data available for various years between 1986 and 1990, Erzan and Yeats found that the United States encountered an average trade-weighted tariff of 18 percent in the 11 countries. Ibid., tab. 13, p. 37. This figure is now lower, as Mexico, Argentina, Uruguay, Peru, and many other countries in the region have substantially liberalized their trade regimes since then.
17.
17. Ibid., tab. 14, p. 40, lists the share of total Mexican and South American imports subject to NTBs from the world as 32 percent and from the United States as 21 percent.
18.
18. Between 40 and 50 percent of U.S. exports consist of transportation equipment and machinery items, products that carry relatively high Latin American trade barriers. Because these products also have the highest import demand elasticities, “preferential market access could produce a significant expansion of U.S. exports.”Erzan and Yeats, “Free Trade Agreement with the United States,” p. 15.
19.
19. The recent bilateral free trade arrangement between Mexico and Chile is based on a trivial amount of trade existing between the two countries. The probable rationale for Chile was to gain access to NAFTA. Since these two countries now have the most liberal trade regimes in the region, it is likely that their FTA will result in net trade creation.
20.
20. Fuentes, “Compatibilidad,” tab. 1, p. 113.
21.
21. Canadians have accused the United State of continued breaches of the agreement through an array of aggressive actions to protect special U.S. interests, including counter-vailing duty, anti-dumping, rules of origin, excessive border inspection and enforcement, and other actions. In the words of a bulletin put out by a Canadian consulting company that strongly supports the Canadian-U.S. FTA, the situation is “getting dangerously close to systematic abuse of the letter and spirit of the agreement.”“Put To The Test, Free Trade: Year Three” (Strategico Inc., Ottawa, Dec. 1991), p. 2.
22.
ECIEL is the Spanish acronym for a joint research program on economic integration, organized by Joseph Grunwald in 1963, in which some 60 Latin American research institutions have participated. See also Joseph Grunwald, “Some Reflections on Latin American Economic Integration,” in The Economic Integration Process of Latin America in the 1980's, ed. JoséNuñez del Arco, Eduardo Mar-gain, and Rachelle Cherol (Washington, DC: Inter-American Development Bank, Jan. 1984).
23.
23. For example, in the methanol and formaldehyde product group, the study identified 256 different location patterns—including the nature and size of the plants and their markets—of which one was optimal in the sense of having minimum costs. Among the 256, however, there were over 100 other production patterns with plant locations in different countries whose costs of production and transportation were less than 10 percent higher than at the minimum-cost location. On the other hand, there were also over 100 location patterns that clearly were economically inefficient because their costs would far exceed the minimum. See Carnoy, Industrialization in a Latin American Common Market, chap. 4, pp. 116-134.
24.
See also William R. Cline and Enrique Delgado, eds., Economic Integration in Central America (Washington, DC: Brookings Institution, 1978).
25.
25. Report of the Executive Council of the AFL-CIO to the 19th Convention, Detroit, Nov. 1991, advocates general content requirements of “at least” 80 percent and 100 percent for textile and apparel products in NAFTA. American Federation of Labor and Congress of Industrial Organizations, The Pocketbook Issues: AFL-CIO Policy Recommendations for 1992 (Washington, DC: American Federation of Labor and Congress of Industrial Organizations, 1992), p. 26.
