A Review of Integrating the Americas: FTAA and Beyond
FTAA: The Big Enchilada?
Today, two out of five people in Latin America and the Caribbean (LAC) live below the official World Bank poverty line of two dollars per day. Over the last two decades, the number of poor people in the region has increased in both absolute and relative terms.
What will be the impact of the Free Trade Agreement of the Americas (FTAA) on economic development in the region?Integrating the Americas: FTAA and Beyond takes a look at the broad implications of the agreement.
Since 1980, LAC has been experimenting with a free trade model—rapid liberalization of trade, investment and domestic policies. Yet income growth in the region has been a mere one percent per annum. Between World War II and 1980—a period characterized by high levels of protectionism—average incomes grew by three percent a year.
The community on this issue is split on the effects of free trade (or more broadly “neoliberalism” as its called south of the US border) on development in the region. Some say the reforms of the 1980s and 1990s are to blame for the region’s return to slow growth and stalled progress on poverty and inequality. Others argue that the current situation is a result of a poorly executed and incomplete set of reforms, rather than the reforms themselves. Neither group argues that LAC, or any other region for that matter, can develop without integrating into the world economy. The real questions are how, how quickly and to what extent?
In 1994, Latin American nations proposed the FTAA, a NAFTA-like free trade agreement that would stretch from “C to shining C” (Canada to the tip of Chile). After ten years of talks, FTAA negotiations are at a standstill. The U.S. unwillingness to negotiate reductions in agricultural support and insistence on “WTO plus” (commitments that go much deeper than conventional trade agreements) concessions has been met with a stiff resistance in the negotiations led by MERCOSUR countries, notably Brazil.
The promotional blurb for this book asks the following question: “The payoffs to the strategy of liberalization, privatization, and openness have been meager and disappointing to date. Will the FTAA be able to reverse this and allow Latin America to reap the benefits of globalization?” In more than 800 pages, the 44 authors in this volume say yes. The volume is a must read for anyone interested or involved in the development debates in LAC. It provides an essential overview of virtually all of the key issues involved in the FTAA discussions. Given current developments and the myriad studies already out there however, the authors present quite an optimistic vision of hemispheric trade that will raise the eyebrows of some readers.
The book’s overwhelming strength is in its interdisciplinary approach. Although each of the editors is an economist by training, the authors tackle the historical, political and economic questions surrounding hemispheric integration. It would be impossible to summarize this truly mammoth volume, so let me act as politicians do and give three bullet points:
1) “Trade” in the FTAA is really much more than trade. Integration in the region as proposed under the FTAA will not only encompass reductions in tariffs on trade flows. It would also cover investment and intellectual property rules, competition policy, subsidies, and quite possibly labor and environmental issues as well. Many of these issues have been major sticking points in global trade talks, but they are all on the menu at the FTAA and even propose to go deeper than global rules (thus the WTO plus tag).
Aaditya Matoo shows that services liberalization could be highly beneficial to the region. Indeed, the greatest benefit could be in liberalizing the movement of labor across the hemisphere. Although this is a political non-starter in the US, it is important to point out that such liberalization could swamp out the benefits from all other proposed liberalizations in the hemisphere. Julian Clarke and Simon Evenett discuss the merits of competition policy negotiations as part of an FTAA. Although similar measures have been rejected in the global arena, these authors nevertheless show that the benefits could be quite high in LAC.
Perhaps most important finding is that by Mario Berrios and four others from the Inter-American Development Bank. Contrary to the popular misconception that US subsidies are to blame for agricultural distortions in the world economy, like most other rigorous studies, the IDB team finds that reducing US agricultural subsidies will not alleviate the problem of agricultural distortions in the region. The authors show that tariffs are more the culprit (though such tariffs may be necessary to hold off dumping from the United States).
2) Integration will increase trade and investment flows, and maybe growth. Drawing on some of the more state of the art statistical techniques, authors in this volume unequivocally show that an FTAA will increase trade and investment flows in LAC. Estevadeoral and Robertson find that most LAC countries will experience increases in trade between 20 and 60 percent, though most of those increases will be in imports.
Levy Yeyati et al., estimate that liberalizing investment will increase flows of foreign direct investment by 27 percent. The authors are not unanimous that the predicted increases in trade and investment will automatically lead to growth and reductions in income inequality. Other authors in the volume argue that increases in foreign portfolio investment will not increase volatility in such markets—a phenomenon that has plagued the region for decades.
Although the reallocation of goods and services based on integration will lead to efficiency and productivity gains, the authors in the volume are not unanimous about whether it will lead to growth and a redistribution of incomes.
3) Negotiating an FTAA won’t be easy. Several of the authors do a superb job of outlining the political economy of the FTAA negotiations. Coatsworth and Williamson show that high tariffs have long been the norm in the region, leading other authors in the volume to note that persuading the beneficiaries of those protections to move toward liberalization could be a daunting task.
Destler argues that the same problem lies in the United States., where mobilized textiles and agricultural interests work hard to guard their protections. What’s more, the economic benefits to the United States may not be enough to create the kind of political constituency for an agreement. NAFTA was already the big enchilada—more than 80 percent of all hemispheric trade occurs in the NAFTA region. According to the U.S. government, NAFTA only increased U.S. GDP by one quarter of one percent over eight years (CAFTA is predicted to yield 1/100th of one percent growth).
Numerous other articles also show that highly contentious issues like labor and human rights and environmental protection are bound to muddy the waters even more.
For all the comprehensiveness of this book, gaps remain. Perhaps the most glaring is the lack of analysis of the period ranging from 1950 to the present. Split in two (1950 to 1980 and 1980 to 2004), each sub-period achieved numerous successes and failures. What worked and what didn’t? To what extent did deep integration over the past twenty years make the region better off? Did the very policies that will be deepened under an FTAA lead to slow growth in the 1980s and 1990s? The volume’s authors argue that changing investment rules will not increase volatility in the region, but that’s exactly what happened in the 1990s. Why would an FTAA be different?
Little attention is also paid to the asymmetries between the United States and the rest of the countries in the region. The United States already accounts for 80 percent of all economic activity in the region, has strong institutions, educational systems and safety nets to smooth trade policy transitions. Prominent economists argue that developing countries such as those in LAC need to maintain the policy space to develop similar institutions and that WTO plus arrangements make it difficult to instate effective development policy. In the volume, only Bustillo and Ocampo explicitly deal with this question, arguing that equal rules for unequal partners become unequal rules.
In spite of these shortcomings, the book is an ambitious undertaking that demands a close read. It will soon become a reference point for academic and policy debates alike.
Spring/Summer 2005, Volume IV, Number 2
Kevin P. Gallagher is Assistant Professor of International Relations at Boston University and author of Free Trade and the Environment: Mexico, NAFTA, and Beyond (Stanford, 2004).
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