Exactly three months after moving into the White House, the new president
will face one of the biggest foreign policy challenges -- and opportunities
-- of his term. In April 2001, at the Summit of the Americas in Quebec,
he can assert U.S. leadership in the creation of a Free Trade Area of
the Americas (FTAA) -- a $10 trillion common market of 800 million people
stretching from the Bering Strait to Tierra del Fuego. By taking the lead
at a critical moment in the FTAA's formation, the president can ensure
that it reflects U.S. interests and values while locking in Latin America's
movement toward democracy and economic reforms. Failure to lead the way
into this enormous and unprecedented free market, furthermore, would be
costly: The United States could be shut out of Latin American markets,
regional protectionism would rise, and the leadership vacuum would be
filled by another powerful player such as Brazil.
Preparations for the FTAA -- which will reduce barriers to trade, spurring
competition and economic growth throughout the hemisphere -- have been
under way since 1994, and formal negotiations were launched in 1998. And
while the U.S. government has publicly supported the process, the administration's
attention has mostly been elsewhere as working groups did the initial
yeomanship of trade talks. Now, however, the momentum to create this vast
new trade area is entering its crucial final phase. Over the next two
or three years, the most important decisions will be made. If the result
is to be favorable to the United States, both economically and politically,
White House leadership is urgently called for. As the largest player in
the region, the United States cannot afford to sit on the sidelines.
There are other reasons why the FTAA should be a top priority for the
new president. Locking in the economic reforms among Latin American economies
of the past two decades, for example, will spur continued growth and reinforce
pressure for political reform. Such a commitment will reduce risk for
investors, spur inflows of much-needed foreign capital, and promote development.
Such economic liberalization can also challenge powerful, entrenched interests
and liberate opposition forces to push for democratic change. Indeed,
in most countries in the region, economic reform has gone hand-in-hand
with progress on the political front. According to a Freedom House study,
the major economies of Latin America have moved from "unfree"
to "free" since the 1970s (though there has been some danger
of backsliding in the Andean region recently).
The best case in point is Mexico. The election of a new Mexican president,
Vicente Fox, in July 2000, represented a genuine democratic transition
of power, ending more than 70 years of authoritarian rule, and is arguably
proof that the North American Free Trade Agreement "worked."
Fox himself recognizes the connection between opening an economy to external
competition and subsequent political and democratic reform. In a speech
in Washington soon after his election, he noted that "the Mexican
transition will be developed respecting the political identity of every
Mexican, with a constructive spirit, with a firm promotion of plurality,
with a solid ethical commitment, with respect for the rule of law, and
mainly with doors open to the world." Not surprisingly, Fox is also
a strong supporter of the FTAA.
Making admission to the proposed FTAA conditional upon a functioning
democracy (free elections and a democratic form of government) could provide
a powerful incentive for countries to move ahead with democratic reform,
much as potential membership in the European Union (EU) has spurred reform
in the candidate countries of Eastern Europe.
The FTAA could thus form a basis for a broader "community of democracies"
in the Western Hemisphere. The negotiating process to date has already
improved communication between government officials and helped build trust
between the nations of the region. Forging strong ties through trade and
investment increases the possibility for cooperation on a host of other
issues of common concern, such as illegal drug trafficking and environmental
degradation. Addressing such emerging global challenges will require much
more of this sort of consensus building and common action by policymakers,
particularly between developed and developing countries.
The deadline for completion of the FTAA is Dec. 31, 2004. But much needs
to be done before then. Countries must make specific commitments to significantly
lower tariffs and eliminate other barriers to trade. They must agree on
rules to govern investment, government procurement, and dispute settlement.
They also need to find new and innovative ways to address legitimate concerns
arising from globalization -- such as workers' rights and environmental
degradation -- without restricting the trade and investment that the poorer
countries in the region so desperately need.
In addition to the need to consolidate economic and political reform
in Latin America, however, there is the simple question of economic advantage.
Does the U.S. economy stand to benefit from the deal? The answer is clearly
yes.
First, it will open new markets in Latin America and the Caribbean to
U.S. farmers, companies, and small businesses. Today, American trade with
the proposed FTAA countries excluding Canada and Mexico is a paltry 8
percent of our nation's trade. U.S. firms currently face significant entry
barriers in Latin American markets. Tariffs average 10 percent to 15 percent,
compared with zero on virtually all trade with Canada and Mexico. Some
sectors face much higher barriers -- American automobiles face a tariff
of 35 percent in the countries of the Mercosur common market, Argentina,
Brazil, Uruguay, and Paraguay. Clearly, the removal of barriers to trade
with Latin America presents one of the greatest opportunities to expand
markets for American producers.
Second, the FTAA will act as a buffer in times of economic crisis and
rising protectionism. During the 1980s, Mexico responded to its currency
crisis by raising tariffs and shutting out U.S. exports. In contrast,
commitments under the NAFTA, implemented in 1994, kept the Mexican market
open following the peso crisis, allowing U.S. exports to continue and
even increase. The FTAA would guarantee U.S. access in a similar way by
legally binding members' commitments to lower tariff and nontariff barriers.
Third, the proposed FTAA will have a unifying effect on Latin America
by reducing complexity and uncertainty in economic relations. There are
currently more than 20 subregional and bilateral free trade pacts in Latin
America and the Caribbean, with many more under discussion. This highly
complex web of overlapping preferences reduces transparency for business
and distorts incentives for trade and investment. By pulling together
all of the players under one agreement and committing them to the principle
of "most-favored nation" (the benefits given to one country
must be given to all trading partners), the FTAA will simplify trade relations
among the countries in the region.
Finally, the FTAA could be a building block for the launch of a new round
of multilateral trade negotiations under the World Trade Organization
(WTO). For example, agreement between trading partners in the Western
Hemisphere to liberalize agricultural trade could raise concerns in the
European Union and Japan about being left behind, creating an incentive
for them to accept liberalization in a sensitive area. Similarly, the
technical assistance and capacity building that has been part of the FTAA
process has enabled many of the smaller countries in the region to implement
their Uruguay Round commitments and to develop independent positions on
trade policy. Increasing the participation of such developing countries
will be crucial to gaining their support for a new, global round of talks.
To ensure that the FTAA is a genuine building block for global trade liberalization
and not a retreat into regional protectionism, the members should commit
to "open regionalism." For example, the FTAA countries could
offer equivalent market access to nonmembers that commit to reducing their
barriers in a compatible way. If a significant bloc of outside countries
were to take up that option, the momentum would quickly build for a new
multilateral round of talks under the WTO.
Moving ahead with the FTAA is a medium-term goal. However, the potential
costs of a lack of U.S. leadership are immediate. Three scenarios, all
unfavorable to U.S. interests, are possible.
1) Protectionism reemerges in the region. In the wake of the Asian financial
crisis, several countries in the region have recently shown signs of backsliding
on open markets. In December 1997, Brazil introduced several new nontariff
barriers (such as discretional licenses for some imported products) and
followed this in mid-1998 with an increase in import duties on several
products. In response, Argentina has adopted its own import restrictions,
including a regime for pre-shipment inspection of goods destined for Argentine
markets, import quotas for textiles, and anti-dumping duties for steel.
Other countries imposing new trade restrictions since 1997 include Venezuela,
Ecuador, and Colombia. Without strong momentum on trade liberalization
under the FTAA, such backsliding could continue and even accelerate. The
result would be reduced trade and lower economic growth rates, as well
as escalating regional tensions. Much of the good work of the past six
years could be undone.
2) The FTAA process becomes sidelined as countries move ahead with subregional
and bilateral trade deals that disadvantage the United States. When the
administration failed in its bid for fast track negotiating authority
in 1997, the expansion of NAFTA to include Chile dropped off the radar
screen. In response, the Chilean government pressed ahead and negotiated
preferential trade deals with Mercosur (1996), Canada (1997), and Peru
(1998). While the administration recently opened negotiations with Chile,
there is an emerging risk of the United States' being slowly shut out
of Latin American markets, while our competitors, particularly the European
Union, gain ground. In the future, if Latin American countries face lower
barriers on imports from the EU than from the United States, they will
purchase goods and services, including highly lucrative capital goods,
from our competitors. This potential outcome is not lost on the Europeans
-- the EU just this year signed a free trade agreement with Mexico and
is in talks with Mercosur, the Caribbean nations, and Chile.
3) The FTAA negotiations proceed and produce an agreement that does not
reflect U.S. interests. Under the formal negotiating structure, the United
States and Brazil will co-chair the final stage of the talks, from 2002
until 2005. A lack of U.S. leadership will create a vacuum that could
easily be filled by other powerful players such as Brazil. Under another
country's leadership, the FTAA could overlook areas of interest to the
United States (such as intellectual property protection) and allow continued
protection of sectors, such as automobiles, in which the United States
is highly competitive. Shaping trade negotiations and building consensus
around proposals beneficial to the United States is a lengthy process
that requires persistent U.S. leadership. The United States will not be
able to step in at the last minute and dictate the outcome.
The new administration must make the passage of fast track negotiating
authority a top priority. U.S. leadership in trade negotiations such as
the FTAA is impossible without such domestic backing. The new president
must also reiterate, early and often, his commitment to leading and completing
the FTAA process.
Yet finishing the FTAA on time will require more than fast track authority
and tough negotiating. The administration also needs to find innovative
ways to address the growing concerns surrounding trade expansion and globalization
-- issues ranging from environmental degradation to child labor. The challenge
is to address these legitimate worries without restricting the international
trade and investment that will help alleviate poverty in developing countries.
This will require new thinking as well as leadership.
On labor and the environment, the United States must move the debate
away from the inclusion of specific labor and environmental conditions
in trade agreements. Such conditions are highly unpopular with most countries
in the region. They pose significant risks of backdoor protectionism
by the developed countries (primarily the United States and Canada) and
they will do little to improve conditions among our poorer trading partners
in Latin America and the Caribbean Basin. Instead, the members of the
FTAA must create Pan-American institutions and mechanisms designed to
improve standards directly. One model is the North American Development
Bank and the Border Environmental Cooperation Commission, established
under the NAFTA. These institutions have had some success in financing
and coordinating environmental cleanup projects along the U.S.-Mexico
border. Similarly, the Commission for Environmental Cooperation has worked
to counter smuggling of endangered species and prevent the transborder
movement of hazardous wastes. Similar institutions created under the FTAA
would require a genuine commitment of resources and strong enforcement
mechanisms. The FTAA parties should also develop new regional environmental
treaties to address hemispheric environmental problems.
On labor issues, the United States should call for increased technical
assistance to monitor and enforce labor laws. This could be funded both
bilaterally and/or multilaterally through the Inter-American Development
Bank.
In sum, the FTAA is an opportunity waiting to be seized by the new president
-- an opportunity to support the wave of economic and democratic reform
sweeping Latin America and to expand our prosperity at home by building
markets overseas. The benefits to the United States of more prosperous,
stable, and democratic neighbors, willing and able to engage in the new
challenges facing the hemisphere, cannot be overstated. The challenge
for the new president is to take the lead and shape the FTAA process according
to U.S. interests while addressing the genuine concerns that many Americans
have about the new global economy.
Blueprint Keywords: Extra Fast Track
