Regional integration agreements, reductions in tariff barriers, and North-South trade pacts have become important development tools that will help Latin America and the Caribbean to become more competitive in the 21st Century, according to a new report produced by the Inter-American Development Bank.
Titled Beyond Borders: The New Regionalism in Latin America, the 2002 IDB report on Economic and Social Progress in Latin America observes that regional initiatives “represent a third tier of trade policy reform, complementing unilateral and multilateral initiatives that have been underway” as part of the structural reform process since the mid-1980s. Seen in this light, regional integration is a vital component of the structural reform process itself, the report says.
In addition to discussing long-standing issues of trade and market access, the report examines the institutional requirements necessary to make integration work, the challenges of integrating financial markets and physical infrastructure, and the role of macroeconomic policy coordination. It also provides a detailed analysis of the effects of different forms of regional integration on issues such as foreign direct investment, productivity and inequality.
The study argues that regional integration has helped to lower average levels of protection through relatively fast and automatic tariff elimination programs, creating an environment for growth of intraregional trade, increased specialization and productivity. It has also helped to attract foreign investment, “lock in” policy reform, enhance international bargaining power and induce cooperation in noneconomic areas such as peace and democracy.
Difficult stage ahead
The 1990s saw a surge in regional integration initiatives ranging from free trade areas to subregional customs unions with ambitions of becoming a common market. During that period the region’s governments also concluded that the benefits of regional integration could be enhanced by linking up with industrialized countries in reciprocal free trade agreements. Mexico led the way by joining NAFTA. Several other countries struck bilateral accords with Canada and the European Union, and nearly all the hemisphere’s countries are participating in negotiations leading toward the Free Trade Area of the Americas (FTAA).
However, the study observes, the “the easy stage of integration is now over,” and that countries will have to work on multiple fronts in order to preserve and expand the benefits of recent regional initiatives.
Subregional blocks—including Mercosur, Caricom, the Central American Common Market and the Andean Community—must proceed to deepen their trade relationship if they want to remain relevant within the framework of the FTAA. “None of Latin America’s subregions is near to being a true customs union,” the report says. “The imperfect status of the region’s customs unions has created precisely the type of costs that the system is supposed to eliminate.”
In addition to completing customs unions and further reducing tariffs, the subregions must remove nontariff barriers, liberalize services, harmonize regulatory frameworks, effectively coordinate macroeconomic policy and strengthen regional institutions if the objectives of forming common markets are to be achieved.
FTAA agreement critical
Completion of a balanced and comprehensive FTAA agreement by 2005 is a crucial strategic objective for Latin America and the Caribbean, according to the report. Such an agreement promises to provide more secure market access to North America, reduce trade diversion within the subregions, improve productivity, stimulate foreign direct investment, and strengthen cooperation with North America, the report says.
It also observes that the increasing number of bilateral initiatives under development in the region can function as building blocks for the FTAA, so long as agenda-setting countries take into account the needs and preferences of all countries rather than catering to narrow commercial interests through “hub and spoke” trade arrangements.
Agreements with the European Union are expected to have a similar effect and facilitate access to the EU’s cooperation programs, many of which are geared to support the deepening subregional integration. Countries should also look east to Asia, a relatively unexploited market that is displaying increasing interest in regional integration.
The successful completion of the Doha Development Agenda agreed upon by world trade negotiators in November of 2001 “clearly is an important goal for Latin America’s trade agenda,” the report says.
“To live up to its name, the round will have to succeed in achieving much-postponed access to markets in sectors in which Latin America has a comparative advantage, but for which high levels of protection have persisted over decades,” it adds. Moreover, advances in the World Trade Organization are essential for completing parts of the FTAA agenda and agreements with the EU.
“One of the most important and sensitive sectors in market access negotiations will be agriculture,” the report says. “Significant progress must be made in the FTAA, but a full response will probably be linked to success in the parallel Doha Development Agenda negotiations on agriculture, where developing countries are demanding multilateral action on agricultural tariffs, export subsidies and distortionary domestic support.”
The study urges countries to strengthen their capacity to negotiate and implement complex integration and trade agreements. These preparations should include mechanisms to assist the adjustment of sectors that are adversely affected by integration, as well social safety nets to protect groups negatively affected by these processes. The study also examines the consequences of inadequate infrastructure in Latin America and the Caribbean. It notes how problems in road networks, for example, have prompted 12 South American countries to launch the Initiative for the Integration of Regional Infrastructure in South America , and how Central American countries and Mexico have launched the Plan Puebla-Panama to strengthen both infrastructure and overall integration.