GENERAL BACKGROUND ON REGIONAL TRADE AGREEMENTS IN LATIN AMERICA May 2003 ANDEAN GROUP Following difficult years in the 1970s and 1980s the integration process between members of the Andean group was revitalized in 1997 when members agreed to terms for full integration into the Andean common market by 2005.The agenda for 2005 includes not only free trade in goods and services, but also the free movement of capital and people. The Andean free trade area has largely been completed. Progress towards the common external tariff (CET), however, has been slow. The CET is still a three-country arrangement that currently encompasses some 87 percent of tariff lines between Colombia and Venezuela, and only 67 percent of total tariff lines if Ecuador. Peru is not a member, and Bolivia is authorized to maintain its own external tariff structure. Recent developments Implementation of the agreements has been hindered by economic and political setbacks in the region. Economic difficulties in some Andean countries have led to the increased use of unilateral, trade-distorting tariff and non-tariff measures by Community members, while also putting pressure on the CET system and slowing the overall move towards further intraregional liberalization. On August 3, 2000, the Andean Court ruled against Venezuela for violating Andean Community rules by restricting the movement of truck cargo from Colombia (in order to enter Venezuela, Colombian truck drivers were required to transfer their cargo to Venezuelan trucks at the border). Disputes regarding agricultural trade with both Andean and external partners, including food oil, sugar and garlic, as well as questions about the price band system applied to many agricultural products also occupied the Community's attention. According to IDB, intra-community trade has been hampered by the persistence of other unilateral barriers to trade adopted in recent years, including unofficial administrative barriers - often linked to local customs procedures - that are difficult to monitor or control. Domestic developments in the past year have also influenced the functioning of the Community, including the legislative changes in Venezuela, political turbulence in Peru and the economic effects of Ecuador's dollarization. Other recent actions include the initiation (in May 2000) of a common customs program designed to facilitate customs procedures, such as rules of origin administration, customs value, nomenclature, and transparency; a program by the Andean Statistics Commission to promote common statistical standards, including common indicators and methodologies; and most significantly, the passage in September of a new common regime (Decision 486) on industrial intellectual property that is consistent with WTO rules and covers treatment of patents, industrial design, and trademarks. Community's links With other Latin American countries The group launched negotiations for a trade and investment treaty between the Andean Community and the "Northern Triangle" of Central America - Honduras, Guatemala, and El Salvador with the objective of signing a simple agreement that promotes trade and investment between the two groups and would ultimately lead to a free trade agreement. In August 2000, talks were initiated between Ecuador and Mexico for the development of a possible bilateral trade agreement.
Andean countries have recently drawn up a proposal for extending and expanding the United States Andean Trade Preferences Act (ATPA) that has since 1991 allowed reduced or tariff free exports to the US market from Bolivia, Colombia, Ecuador, and Peru. The Caribbean Community (CARICOM) CARICOM was established in 1973 with three objectives: to foster economic integration among its member states through the creation of a common market; to strengthen the region's external position through the coordination of member states' foreign policies; and to pool resources through cooperation in a variety of areas related to socioeconomic development. 1 Despite its large membership, CARICOM is the smallest regional integration scheme in the Hemisphere in economic terms: the group's combined GDP is less than $20 billion and its population (excluding Haiti) is just 6 million. Following relative stagnation in its integration process during the 1980s, the group has experienced considerable progress 1990s. A free trade area in goods was established following the elimination of most tariffs on intra-regional goods trade in the early years of the Community. The group is in advanced stages of implementing a common external tariff. Considerable progress was also achieved during the decade in harmonizing member states' tariff schedules and reducing external protection. The common external tariff is now implemented across most of the region, although some member states have yet to complete the final phase of tariff reduction entailed in the new program. Recent Development In 2000, the US-Caribbean Basin Trade Partnership Act (CBTPA) was enacted. The CBTPA is a program of unilateral US trade preferences for Caribbean Basin countries that builds on the Caribbean Basin Economic Recovery Act of 1984 and extends additional trade benefits for CBI countries through 2008. It is intended to correct the adverse impact on Caribbean exports of apparel to the US market as a consequence of more generous access provisions for Mexican apparel under NAFTA. Central American Common Market (CACM) In the early 1990s Central American countries began a process of reviving their sub-regional integration scheme. The revival of integration coupled with unilateral and multilateral trade liberalization stimulated intraregional trade and attracted much higher levels of investment. Unilateral liberalization of capital markets by all CACM member countries has led to a surge in intra-regional financial flows, including significant levels of intraregional FDI. Along with the development of sub-regional infrastructure, this has helped Central American countries both to revitalize their economies and to handle the economic turbulence of recent years more effectively. Recent Developments In 2000, the sub-region reached its goal of establishing a common external tariff (CET) which ranges from zero percent and 15 percent. Central America has also remained active in the area of external trade relations. The free trade agreement negotiated by the CACM with the Dominican Republic in 1998 is the most highly integrated treaty that the region has negotiated. Also in 2000, the countries of the Northern Triangle (El Salvador, Guatemala and Honduras) reached a free trade agreement with Mexico (Costa Rica and Nicaragua signed independent free trade agreements with Mexico in 1994 and 1997, respectively). Finally, CACM has also launched free trade negotiations with the US. 1 The group's initial membership included twelve English-speaking countries - Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, and Trinidad & Tobago - and the dependent territory of Montserrat. Suriname joined Caricom in 1995, and Haiti is in the process of becoming the 15` member of the Community
Central America Free Trade Agreement (CAFTA) On January 8 th 2003, U.S. Trade Representative and ministers from Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua announced the launch of negotiations on a free trade agreement. Working-level negotiations on the agreement, or CAFTA, began in San José, Costa Rica, on January 27 and are scheduled to be completed by December 2003. The ministers agreed to form six negotiating groups. Five groups will cover topics such as market access; investment and services; government procurement and intellectual property; labor and environment; and institutional issues such as dispute settlement. A sixth group on trade capacity-building will meet in parallel with the five negotiating groups. They also agreed on a special framework to immediately address sanitary and phytosanitary issues related to agricultural trade. This special effort will focus on resolving such problems as import bans on U.S. pork, poultry, and dairy products. In parallel with the negotiations, the US committed to funding a number of programs to improve the capacity of Central American countries to compete in the modern global economy.(see section on highlights of the assistance strategy Over 50 projects will assist Central America, including funds for computers and travel, projects to help increase citizen input to trade negotiations, assistance to strengthen science-based food safety inspection systems, and programs to promote cleaner production. The President's 2003 budget request includes $47 million in U.S. capacitybuilding assistance for the region a 74 percent increase over 2002.There is no information yet available on the progress of the negotiations. Southern Common Market (MERCOSUR) MERCOSUR is the largest economic grouping in Latin America and the Caribbean. It was officially established in 1991 by Argentina, Brazil, Paraguay and Uruguay. As a result of the limited experience MERCOSUR countries have in cooperating as a group, it does not have a large and comprehensive regional institutional infrastructure. Throughout much of the 1990s, however, MERCOSUR was the most dynamic economic integration scheme in the Western Hemisphere in terms of trade growth among its members (with intraregional exports accounting for 25 percent of the group's total in 1998, up from just 9 percent in 1990). The integration plan entails five broad steps: (i) elimination of customs duties and non-tariff barriers to the circulation of goods and services; (ii) establishment of a CET and a common external trade policy; (iii) liberalization of factor movements in the Community; (iv) coordination of macroeconomic and sectoral policies among member countries; and (v) harmonization of laws to strengthen the integration process. Most tariffs were dismantled according to the agreed timetable, with the majority of intra-regional trade facing zero duties since 1995. A number of sensitive goods are still to be phased into the free trade area. With the free trade area largely in place, a CET structure ranging from zero to 20 percent was introduced in January 1995. Like the free trade regime, a number of sensitive goods are being phased into the CET gradually, among them capital goods, computers and software and telecommunications equipment. Similar to other groups in the region, MERCOSUR has witnessed a sharp reduction in external protection in the past decade. The simple average most-favored-nation (MFN) tariff for the group declined from 41 percent in 1986 to just below 13 percent in 1999. Along with market access issues, MERCOSUR has facilitated discussion on, and the development of, a wide range of regional issues. The group has promoted the development of regional infrastructure in the Southern Cone, mainly in transport, energy and telecommunications. Following the onset of the international financial crisis in 1997 and, later, the Brazilian currency devaluation in January 1999, integration efforts have slowed down.
The decision to raise the CET by three percentage points and a rise in the use of unilateral tariff and non-tariff trade barriers have created tensions between members. MERCOSUR is currently working towards perfecting the CET and eliminating some its sectoral exceptions. Recent Developments Since 1994, MERCOSUR countries had been trying to establish a common automotive regime, based on unrestricted intra-zone free trade and a CET. In December 2000, Brazil and Argentina agreed on a six-year transition regime, starting in 2001. For passenger vehicles, Argentina and Brazil apply a 35 percent CET, while the other MERCOSUR members will gradually move towards this common rate within the next six years. Similarly, for auto parts and other transport equipment, MERCOSUR countries will converge to specific common rates by 2006. In order to advance beyond free trade in goods and towards the free movement of services and capital, MERCOSUR is studying how to harmonize some practices such as the presentation of financial statements and statistics, prudential standards and supervision. Likewise, MERCOSUR is preparing changes to facilitate workforce mobility between its member countries; a possible MERCOSUR passport is being evaluated in this regard. Meanwhile, several already liberalized sectors, such as textiles, pork, poultry, steel and footwear products, have been subject to some degree of dispute and renegotiation. In some cases non-tariff barriers have been applied to intra-regional trade in these products. North American Free Trade Agreement NAFTA The North American Free Trade Agreement between Canada, Mexico, and the United States came into effect on January 1, 1994.To date, NAFTA has led to substantial increases in intra-regional trade and investment flows. It has also led to the creation of an institutional framework to address common concerns brought to the forefront by closer economic integration, ranging from dispute settlement to border infrastructure and environmental protection. NAFTA has, moreover, served as a model for a number of subsequent trade accords across the continent, as group members have unilaterally embarked on negotiating NAFTA-like bilateral agreements with other nations. NAFTA provides for the elimination of tariffs on virtually all products according to a phase-out schedule rarely exceeding 10 years. Only a few dairy and poultry products traded between Canada and its partners were excluded from the tariff phase-out schedule, as well as sugar, peanuts, and cotton between the United States and Canada. Moreover, import duties on a few sensitive products - such as corn in Mexico and orange juice in the United States - will be eliminated over a 15-year period. To date, the parties have abided by the phase-out schedule set out in the agreement. Aside from liberalizing market access for goods, NAFTA establishes disciplines for trade in services within North America. Chapter Twelve of the agreement grants MFN and national treatment to all cross-border service providers, and local presence is not required for a provider to render services in any of the partners' markets. Such provisions do not apply to a number of sectors that are explicitly excluded from the agreement - air transport and government services, among others - as well as to telecommunications and financial sector services, which are covered under different chapters in the agreement. Telephone and basic telecommunication services are excluded from the agreement, although NAFTA facilitates the use of public networks for selling value-added services and intracorporate communications. With regard to financial services, the agreement provides for a phased, substantial liberalization of banking and insurance markets in the region, particularly in Mexico. 36 According to figures from the US Bureau of Economic Analysis, from 1996 to 1999, cross-border trade in private services between Mexico and the United States grew faster than US trade with the world as a whole (21.6 percent versus 19.4 percent, respectively).
Recent Developments Since the signing of NAFTA, efforts have focused on implementing the terms of the agreement and on addressing the disputes associated with increased trade and investment Disputes have surfaced between U.S. and Mexico on agricultural trade specially in relation to U.S. exports to Mexico. Disputes relate to U.S. exports of pork, poultry, apples and dry beans, as well as a potential new trade dispute over a possible Mexican safeguard against U.S. beef. Mexico demands for increased market access for avocados. Current U.S. phytosanitary rules allow access for Mexican avocados into 32 states. There is also a long-standing sweetener dispute between the U.S. and Mexico over a tax imposed on imports of U.S. high fructose corn syrup and over market access for Mexican. Free Trade Area of Americas (FTAA) At the 1994 Miami Summit of the Americas, 34 countries of the Western Hemisphere pledged to create a hemisphere-wide free trade area. Following a three-year preparatory phase, formal FTAA negotiations were launched in April 1998. Governments plan to complete the talks by 2005, when the free trade area will come into effect. With a combined population of 800 million and a GDP of $9 trillion, the FTAA will be the largest free trade area in the world. The FTAA process has been very dynamic from the beginning. The 1995-1998 preparatory phase achieved major results in terms of documenting the current trading environment in the hemisphere. Governments established comprehensive databases and other background information on key issues affecting trade, greatly increasing the transparency regarding existing rules. They also agreed on the general structure and scope of the negotiations and the rules that would guide those talks. The technical progress achieved by the FTAA negotiations since the Toronto ministerial has been significant and has kept the process on track for its 2005 completion date. Almost all of the tasks mandated in Toronto are near completion. Recent Developments Negotiations in services and investment are hampered by continuing disagreement regarding the scope and modalities of negotiations. In services, some countries are expected to submit their offers based on a positive-list approach, while others might submit offers based on a negative-list approach. This reflects an ongoing division in the services group. MERCOSUR, Andean countries and Caricom want an FTAA services agreement to be modeled after the positive list approach under the WTO General Agreement on Trade in Services. The U.S., Canada, Chile and Central America, want the NAFTA negative-list model, which would provide for more far-reaching commitments in services A related dispute involves whether protections for the right to establish services firms in a country should be dealt with in the services or investment chapters of the FTAA. MERCOSUR is resisting a U.S. proposal to place this issue of commercial presence in the investment chapter, in part because countries have already agreed to use a negative-list approach in negotiating investment provisions. Brazil is also behind schedule on its market access offers on industrial and agricultural goods. The FTAA has made significant progress on implementing the business facilitation measures adopted in Toronto. All transparency-related measures have been successfully implemented, including the requirement that the FTAA official web site contain a section on Business Facilitation with hyperlinks to multiple sources of relevant trade information. These measures are expected to make procedures and regulations much better known and more accessible to the public.
Other Regional and Bilateral Trade Agreements in Latin America in the 1990s Agreements signed in the early 1990s were so-called "first generation" agreements and were based on the Latin American Integration Association (LAIA) model. The majority of those signed in the second half of the 1990s were so-called "second generation" agreements based on the North American Free Trade Agreement (NAFTA) model. The two types of agreements differ considerably both in their breadth and depth of coverage. The "first generation" or "LAIA-type" agreements focus mainly on eliminating restrictions to the movement of goods across borders (tariffs and non-tariff measures). They use the framework of the 1980 Treaty of Montevideo, LAIA's founding charter. The "second generation" agreements, in addition to cross-border restrictions, focus on barriers arising from how governments organize and regulate their economies through government procurement, the enforcement of intellectual property rights, the regulation of service sectors and the administration of competition policies. The second generation, NAFTA-like agreements also include the elimination of tariffs and a Harmonized System (HS)- based methodology for rules of origin. Two among Latin American countries, Chile and Mexico, have been particularly active in pursuing trade agreements with a broad range of partners in Latin America and elsewhere in the world. Below is a listing of the principal agreements that emerged in Latin America in the 1990s. AGREEMENT ENTRY INTO FORCE First Generation Agreements Chile-Mexico (ALADI model) 1992 Chile-Venezuela 1993 Bolivia-Chile 1993 Colombia-Chile 1994 Chile-Ecuador 1995 Chile-MERCOSUR 1996 Bolivia-MERCOSUR 1997 Chile-Peru 1998 Second Generation Agreements North American Free Trade Agreement (NAFTA) 1994 Costa Rica-Mexico 1995 Group of Three (G-3) (Colombia, Mexico, Venezuela) 1995 Bolivia-Mexico 1995 Canada-Chile 1997 Mexico-Nicaragua 1998 Chile-Mexico (NAFTA model) 1999 Mexico-European Union 2000 Mexico-Israel 2000 CACM-Dominican Republic 2001 Caricom-Dominican Republic 2001 CACM-Chile 2001 Mexico-El Salvador/Guatemala/Honduras 2001 Mexico-European Free Trade Association 2001
Summary Table of Regional Trade Agreements in Latin America NAFTA FTAA CAFTA CACM ANDEAN MERCOSUR COMMUNITY North American Free Trade Free Trade Area of the Central America Free Trade Central American Southern Common Market Agreement Americas Agreement Common Market Type of Agreement Free Trade Area Free Trade Area Free Trade Area Customs Union Customs Union Customs Union Entry into force January,1994 On-going negotiations On-going negotiations June, 1961 May, 1988 January,1995 Agreement objectives 1-Eliminate Tariff, 2-Liberalise market 3- Facilitate movement of business and people 1-Eliminate Tariff, 2-Liberalise market 3- Facilitate movement of business and people Eliminate tariffs and other barriers to trade in goods, agriculture, services, and investment between the United States and Central America 1- Create customs union 2- Implement common external tariff 3- Eleminate intraregional trade barriers 1- Create customs union 2- Implement common external tariff 3- Eleminate intraregional trade barriers 1- Create customs union 2- Implement common external tariff 3- Eleminate intraregional trade barriers Member countries US, Mexico, Canada US, Costa Rica, El Salvador, Guatemala,Honduras Nicaragua Bolivia, Costa Rica, El Salvador, Colombia, Ecuador, Guatemala,Honduras Nicaragua Peru, Venezuela Argentina, Brazil, Paraguay, Uruguay, Bolivia, Chili