Capítulos

Special Edition 1996

Free Trade Area of the Americas by 2005: The New Direction

Luis Alberto Rodríguez
Deputy Permanent Secretary of the Latin American Economic System (SELA)

I. FTAA: Opportunities and Challenges for the Caribbean Region

The proposal for a Free Trade Area of the Americas was strongly motivated by the need to ensure that markets in Latin America and the Caribbean would remain open to US goods and services. The emerging economies of Latin America have been an important growth market for US exports as well as investment since the beginning of this decade. According to GATT Secretariat estimates in a 1994 publication, North American exports to Latin America were valued at 28 billion dollars in 1983, but grew to 80.7 billion by 1993. UNCTAD suggests that US exports to Latin America are expected to exceed those to the European Union, its third most important trading partner after Canada and Japan, by the end of the decade.

The proposal reflects as well the US Administration's understanding that the struggle for global supremacy and power is now being waged in economic and trade fields and that in today's highly competitive international environment, the goal of economic dominance can be served by the forging of alliances with main trading partners in the region in an atmosphere of «open regionalism». This has been described by ECLAC as an interdependence which is the result of preferential agreements promoted by market signals within a trade liberalisation context. In this way new economic activity would be created and productivity increased, producing new jobs and new wealth not just for the United States but, it has been argued, for its trading partners in the region whose economic transformation could allow them to take advantage of hemispheric free trade.

It was in that spirit of a new beginning, of the expectation of new gains from a changing hemispheric relationship, that the Heads of State and Government of 34 countries met in Miami in December 1994. Some saw this as an opportunity for increased trade and investment; others, and particularly some of the smaller countries of the wider Caribbean were a little more cautious in their expectations, not sure whether they were capable and ready to participate as a full partner in this proposed free trade area, yet recognising that they could not afford to remain apart from this historic step forward in hemispheric cooperation.

These are justifiable concerns, as the Free Trade Area of the Americas is likely to lead to a fundamental change in current trade and economic relationships. Although by the CARICOM Secretariat's estimates some 45.7% of CARICOM trade was with the United States and Canada in 1994, the European Union still accounted for 15.6% of total exports in that same year. Much of this trade has taken place on the basis of unilateral preferential arrangements negotiated with each of the main trading partners.

At the same time the markets of the rest of the Americas with whom we have pledged to enter into trade agreements, remain relatively unknown to much of the Caribbean. In 1994, as well, CARICOM exports to ALADI member countries amounted to 6.2% of total trade -up from 2.1% in 1985 and 4.8% in 1991. Over the same period, Central America's share of CARICOM exports did not exceed 0.6%. This is a marked contrast to the significant increases in intra-regional trade in Latin America today.

Secondly, in the long term, if the commitments made in the Miami Plan of Action are implemented, economic activity in the hemisphere could be gradually integrated. This might be advantageous for attracting foreign investment if the institutional framework for finance and production in the sub-region are sufficiently well developed to profit from this integration. This is not yet the case, however.

In the more medium term, Caribbean countries will now be expected to arrive at agreements in new areas such as competition policy, public procurement and intellectual property, not previously the subject of sub-regional trade negotiations, and for which they will need to be fully prepared.

In the ministerial discussions which followed the Summit, Latin American and Caribbean governments agreed on the following principles for the establishment of a free trade area by the Year 2005:

a) to maximise and consolidate existing efforts at trade liberalization while not imposing barriers to trade with other nations outside the hemisphere;

b) the FTAA would be compatible with the WTO agreements;

c) to seek to build on existing regional and sub-regional trade and investment agreements;

d) the agreement would be a balanced and comprehensive effort which would integrate all mutual rights and obligations.

In order to initiate action in respect of preparation for hemispheric negotiations, seven working groups were formed. At the last ministerial meeting in Cartagena, Colombia, it was agreed to add three new working groups on the areas of trade in services, intellectual property, competition policy and public purchasing. Two of these areas, competition policy and public purchasing, were not the subject of the Uruguay Round negotiations leading to the Marrakesh Agreements. Nor have they been part of negotiations within CARICOM although there are plans in train to establish agreements at the sub-regional level.

While trade-related Intellectual Property is now a part of WTO multilateral trade disciplines following the completion of the Round, the Intellectual Property provisions of the NAFTA agreements and the bilateral agreements signed with the United States -and both Jamaica and Trinidad & Tobago have signed bilateral agreements with the US- have been more exacting than the Uruguay Round agreement on intellectual property, the TRIPS agreement, reflecting the increasing importance which the United States attaches to the protection of its innovations. This is likely to be the direction that the proposal for an hemispheric intellectual property agreement will take and this will have significant implications for approaches to production in both good and services.

Within the context of free trade, the Summit Plan of Action also makes reference to mutually supportive environmental policies and securing «the observance and promotion of workers rights» as economic integration proceeds. These are relatively new areas for cross-border understandings for the Caribbean region. The lack of experience in negotiating in these areas at the subregional and multilateral level will increase the Caribbean's difficulties in preparing for hemispheric free trade.

This leads me to focus on the readiness of our countries to obtain maximum benefit through preparation for effective negotiations and to take advantage of the benefits of free trade. There are two issues here that are worth mentioning. The first has to do with the problems which arise when states of widely varying levels of size and development seek to jointly enter into trade agreements. The second relates to the capacity of the private sector to access the means to prepare itself to fully participate in the new hemispheric environment.

Developing countries participate in these mixed agreements with more developed countries largely to secure sectors of developed-country markets not hitherto open to them and to increase their attraction as sites for investment and technology transfer. For the CARICOM region, this is only partly the case.

Traditionally, CARICOM countries have been accustomed to negotiating two main types of trade agreements with trading partners. This group of countries has negotiated non-reciprocal trade agreements with the European Union, Canada, and together with other CBI countries, the United States. More recently, CARICOM negotiated asymmetrical agreements with the government of Colombia and Venezuela in which special concessions were granted to CARICOM.

However, what is contemplated here at the hemispheric level is neither a non-reciprocal or asymmetrical agreement. Nothing so far in the set of principles enunciated by the ministers in the Americas suggests special or preferential treatment for the smaller, less developed countries of the hemisphere.

On the contrary, the path promoted by the main international and regional organisations for sustained growth and development is one of a deepening of the trade liberalisation policies currently being pursued by most countries in the region. Growth in economic activity will be sustained not by preferential access but by opening markets to competition, by strengthening the competitive base of the economy through structural and legisative reforms. In a recent WTO trade policy meeting, concern was expressed at the vulnerability of the economy of a Caribbean country with its high dependence on a few exports of limited value. The meeting attributed this vulnerability to the unilateral preferential agreements which have governed market access for the country's main exports.

While one-way preferential agreements have been very helpful to the region in maintaining stable markets for their main products and earning governments well-needed foreign exchange, it has not been as successful in supporting the development of new products or processes or sharpened our marketing skills, to enable us to survive in this increasingly competitive environment. There has been little change in the value of Caribbean exports to the European market, for example. The situation is generally the same for the US market although there has been some dynamism noted in a few sectors.

The earlier our entrepreneurs begin to operate within an open trading environment, the easier will be the transition. To this end the Association of Caribbean States provides a way forward for trade and economic integration within a wider economic space.

II. Modernisation of the Region's Capital Markets

Moving to the issue of attracting investments within the framework of hemispheric economic integration, the new relationship proposed is supposed to facilitate the flow of external investment capital within and to the region to exploit the competitive advantage of the new Americas, but regardless of the agreements entered into, the flow of capital will not increase significantly to the Caribbean, unless there is a stable economic environment, activities worth investing in, and adequate mechanisms in place to facilitate the movement of capital.

It is reassuring to note that efforts are being made to strengthen and integrate the capital markets in the Caribbean region and that studies are being undertaken to examine the viability of an eventual linkage to the markets of the G3 countries - Colombia Mexico and Venezuela - and as well as Central America. The Permanent Secretariat is willing to lend its support to these efforts as we recognise the need for widening and modernising the region's capital markets in an environment of heightened competition to attract capital for private investment.

The FTAA Working Group on Investments, chaired by Costa Rica, in its meeting earlier this year has agreed to organise a training activity for the private sector in the Americas to acquaint it with the issues and the benefits of foreign investment and I urge you to keep informed of these developments.

Initially, the Caribbean joined the talks on hemispheric free trade probably less from a recognition of the benefits which could accrue to the region from participation in such a trading bloc, than from a fear that non-participation would have a negative impact on their current trading arrangements; that trade would be diverted away from non-members to members; that investments would increase to members at the expense of non-members. In the case of NAFTA, for example, since it came into force trade has increased among the members by 50%.

In response, Caribbean Basin countries have been seeking as an interim measure NAFTA parity to ensure that benefits accrued under the CBI would not be eroded. The immediate prospects for the parity bill do not seem very good as a NAFTA-wary, US Congress focuses on other issues.

However, given this reality of potential membership in a Free Trade Area of the Americas, and the unlikelihood of long-term tariff or non-tariff concessions for the smaller economies, what then are our options? What will be the obligations resulting from this commitment to participate in the FTAA? Given our administrative and institutional weaknesses, will we be able to fulfil these obligations?

The answers to these questins can only be found through joint preparation and internal discussion which will have an input into the hemispheric process. Already regional inter-sectoral committees which include the public and private sector, labour and academia should have been established, providing inputs into a subregional strategy in such areas as services, competition policy, trade and the environment as well as labour policies. There is need for more wide-ranging intersectoral debate on these issues before positions are finalised. The private sector as main actors in the implementation of any agreement reached must be in a position to articulate its views and have them taken into account in the development of sub-regional strategy. While the Caribbean region is still trying to promote inter-subregional debate, organised labour in the United States has been advancing its point of view to its trade union counterparts throughout the region on the very sensitive trade-related labour issues which might yet be the subject of free trade negotiations.

III. The Role of the Caribbean Private Sector

Given the resource limitations in the Caribbean, and the need for the private sector to be strengthened to play a supportive role in the preparation process, one might consider a scenario of shared responsibilities, where national private-sector organisations, such as the Chambers of Commerce or the Manufacturers' Association, might be responsible for developing positions on a specific issue. The annual CAIC conferences are an important forum for the exchange of ideas. However these activities alone are not sufficient to maintain the necessary momentum. There is need for a concerted and on-going effort drawing on the existing private sector-based institutional capacities within the region.

The Action Plan of the Summit recognises the problem of huge differences in size and development of the economies of the hemisphere and includes in its principles a reference to «the provision of technical assistance to facilitate the integration of the smaller economies and increase their level of development». It was in this vein that it was agreed to establish a working group on small economies chaired by Jamaica.

The terms of reference of the working group include an evaluation of the technical assistance requirements to take these countries to a stage where they can benefit from a hemispheric free trade area. This could provide an opportunity to strengthen the public sector's role in supporting competitiveness, to deepen intersectoral links and modernise our financial and productive sectors. This is an issue which could be clarified within the framework of the Americas Business Forum.

Another related issue worth considering as we look towards the new decade is the question of the flexibility of the private sector to benefit from membership in a hemispheric free trade zone.

It is generally agreed that benefits will accrue to countries from liberalisation only in proportion to their capacity to respond to the changes in market opportunities. That is, the extent to which reforms have allowed the productive sector to be flexible and internationally competitive. Products of export importance today might not have much of a market in the future. However, there will be new market opportunities, and these can be accessed through the modernisation of the productive sector, innovative approaches to marketing which include the development of alliances within and outside of the sub-region and a labour force trained to function in the new retooled and refocused productive sector.

It is important that our Entrepreneurs begin to build on the skills already acquired through current export activities, particularly in non-traditionals to the US and other markets, to create more products of high value-added which can openly compete. To succeed, there is need for a concerted regional effort among science and technology departments, management and other sills training institutions, the banks and government to provide the necessary institutional support infrastructure for promoting, through innovation, the development of high-value products in goods and services.

This also means new approaches to production which emphasize a skilled, flexible labour force, flexible production units. In a very dynamic and competitive international environment, a cheap, unskilled labour force is of very little use in developing and sustaining competitive advantage. On the other hand, a highly skilled and well-paid labour force will allow for constant product development and improvement, production flexibility and increased productivity.

A managed and focused programme for the development of the productive sector, based on the coordinated effort of the private and public sector and involving our training institutions could help the region to reap the benefits of trade liberalisation. The coordinated effort is up to all of us. This is not just an issue for government action as we all have a role to play. The private sector in the region needs to combine its resources and organise itself to address issues such as labour training and productivity and plant modernisation which are essential to the adjustment process.

Cooperating to Compete was one of the themes in the SELA seminar on «Small & Medium Enterprises -a Challenge for Globalisation» which was held in Sao Paulo, Brazil- October 28 - 31, 1996. This was a Latin American and Caribbean tripartite dialogue involving the government, the private sector and international organisations aimed at identifying areas of cooperation among private sector institutions.

The IDB-funded joint Private Sector of Jamaica/Trade Union pilot project for the development of human capital in the productive sector is worth focusing on as an example of intersectoral linkages for transformation. The IDB Multilateral Investment Fund also provides funding opportunities for strengthening the private sector in several areas. There are also opportunities for private sector exchanges which could be promoted either under the aegis of SELA or some other appropriate regional organisation. But in order to maximise these opportunities the private sector needs to strengthen its capacity to manage its own development in line with this new direction.

Whether or not hemispheric free trade is achieved by 2005 the signs are clear coming out of the Uruguay Round. The world of international trade as we knew it in the 1970s and 1980s is changing rapidly. The bases on which we did business are fast disappearing. As we enter this new era, indeed this new decade, let us agree to harness our resources to prepare us for the challenges that lie ahead.

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