In 1994, former President Clinton hosted the Summit of the Americas in Miami. At that time, 34 Western Hemisphere countries committed to establish the Free Trade Area of the Americas agreement (FTAA) by 2005. Since then, summits held in Toronto, Buenos Aires, and Quebec have established nine working parties and laid the framework for negotiations to begin.

What is the FTAA?

The FTAA is a comprehensive trade agreement designed to eliminate trade barriers among 34 countries in the Western Hemisphere with a combined population of 800 million. The nine negotiating groups cover market access; agriculture; services; investment; government procurement; intellectual property; subsidies, antidumping, and countervailing duties; competition policy; and dispute settlement.

Currently, trade barriers are relatively high in South America. In fact, according to the National Association of Manufacturers, duties there average 14% or more, and it’s not uncommon for U.S. manufacturers to face duties of 20-30%. Additionally, the region imposes substantial non-tariff barriers that involve costly customs clearance procedures, excessive standards, regulations, and testing procedures. In contrast, the average U.S. import duty is 1.6%.

The Importance of Hemispheric Trade

In 2000, U.S. merchandise exports to Western Hemisphere countries totalled $350 billion, representing 45% of total U.S. exports to the world. Based on the U.S. Trade Representative’s multiplier, this supports more than 3.8 million American jobs. U.S. exports south of the border reached $171 billion, just slightly less than U.S. exports to all of Europe.

FTAA Expectations

According to the National Association of Manufacturers, with an FTAA in place, annual U.S. exports to Central and South America would triple.

Since 1994, the year the North American Free Trade Agreement (NAFTA) was implemented, U.S. exports to Mexico rose by 120%, while exports to South America rose by only 34%. Why did exports to Mexico rise so fast? The reduction in Mexican duties resulting from NAFTA certainly played a major part.

The NAFTA Legacy

According to NAFTA At Five Years, published by the Council of the Americas and The U.S. Council of the Mexico-U.S. Business Committee, “NAFTA has led to more high-quality, better-paying jobs for U.S. workers.” Additionally, the report says, “NAFTA has fostered growth in cross-border investment that has improved the competitiveness of American companies and, consequently, their ability to keep high-skill, high-wage jobs in the United States.”

But job gains are only one indicator of the benefits generated by NAFTA. Another significant measure of NAFTA’s performance is its positive impact on economies of scale, technological change, new investments, and productivity growth in the liberated sectors.

The Costs of Not Completing the FTAA

In July 2001, the European Union (EU) and Mercosur, the South American trade bloc comprised of Argentina, Brazil, Uruguay, and Paraguay, began their fifth round of negotiations to establish a free trade agreement. Upon completion of the EU-Mercosur agreement, and in the absence of an FTAA, EU exporters and investors will have preferential access to Mercosur markets, putting U.S. companies at a competitive disadvantage.

Brazilian Opposition & Slowing Economy

Trade analysts indicate that Brazil has resisted an FTAA for some time. It has positioned Mercosur as a competitor with the United States and has challenged the U.S. for regional leadership. Brazil is concerned that direct competition with the U.S. could be difficult.

If Brazil resists an FTAA, analysts believe that Chile, Argentina, and other Latin American countries are likely to individually negotiate free trade deals with the United States, putting Brazil at a competitive disadvantage. Consequently, Brazil would lose Latin American market share as well as foreign investment, which could be diverted to Chile and Argentina. And the strength of Mercosur as a bloc would be greatly diminished.

Currently, the Argentine and Brazilian economies are experiencing severe difficulties. In fact, in the second half of 2001, Brazil could face a sharp economic slowdown due, in part, to Argentina’s slowing market and energy problems. This could further affect Brazil’s outlook and interest in an FTAA.

Preparation is Key

Although obstacles exist, it is very likely that an FTAA, with Brazil’s cooperation, will be completed by 2005. As a result, it’s important that companies do their homework, establish a new Latin American trade and investment strategy, and anticipate greater competition.

This article appeared in September 2001. (BA)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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