Commerce between friends and foes

Oct 4th 2007 | LIMA AND MEXICO CITY
From The Economist print edition

The United States may finally ratify a trade deal with Peru. But pan-American trade diplomacy remains a mess

IN HIS first term as Peru's president, in the 1980s, Alan García was a firm believer in protectionism, banning the import of foreign cars and even of Chilean wine. But since coming to office again last year he has embraced free trade with a passion bordering on mania. “More trade and more investment [means] less migration, less poverty and less environmental destruction,” he told a meeting in Lima last month convened by the World Trade Organisation (WTO). “You might resign yourself to just having a free-trade agreement with the United States, but for me it's not enough,” he told his audience, ordering his harried trade minister to secure similar deals with a score of other countries.

That Mr García was so pumped up was perhaps because at long last Peru's trade deal with the United States, negotiated 18 months ago, looks close to ratification by a hitherto reluctant American Congress. On September 27th the administration sent a bill to Congress after a majority of the House Ways and Means Committee and the Senate Finance Committee indicated they would back it. Though upsets are still possible, supporters reckon the bill will be approved within weeks. But for free-traders, that is cause for only the faintest cheer.

The benefits to Peru seem clear. Mr García, who when a candidate was sceptical of the deal, now says that it could add an additional percentage point to economic growth (which reached 8% last year). That is mainly because it provides investors with greater security. Peru's industrialists' association reckons that it could prompt an extra $9 billion in industrial investment in 2008 and 2009 alone.

Opponents worry that farmers, especially of maize, cotton and wheat, will struggle to compete with their subsidised counterparts in the United States. They also fret that American companies will try to take out patents on Amazonian plants.

Free-traders have other worries. A decade ago, the United States and 33 countries in Latin America and the Caribbean hoped to negotiate an all-embracing Free Trade Area of the Americas (FTAA). But the mood has changed. The Democrats, who won control of the American Congress last November, are mistrustful of trade agreements, reflecting widespread fears that globalisation has made jobs more insecure in the United States. Mercosur, the trade block led by Brazil, backed away from an FTAA in favour of the Doha round of WTO talks, but these have stalled too. All this comes as some governments in Latin America, led by Venezuela's Hugo Chávez, are turning their backs on open trade.

Others have negotiated bilateral free-trade agreements (FTAs) with the United States. But George Bush's administration has struggled to persuade Congress to ratify them: even before the Democrats took control, the Central American Free Trade Agreement (known as CAFTA-DR) passed by just two votes; as well as Peru, deals with Panama and Colombia (and South Korea) still await approval.

So Latin American politicians, such as Mr García, who see trade as an engine of growth, find themselves caught between American indifference and a resurgent, anti-trade left at home. When they negotiate bilateral FTAs, they are in a much weaker position than they would have been when gathered together in an FTAA.

Even so, the Democrats have insisted on changing the agreements. In May they struck a deal with the administration under which the FTAs would have to include clauses to strengthen labour rights and the environment (see article), while slightly loosening intellectual-property protection (giving more flexibility for generic medicines). The Democrats say this was the only way to restore bipartisan consensus on trade. Some economists note that since countries such as Peru already subscribe to many of these standards, in theory at least, their formal incorporation is no big deal.

Even so, only a minority of Democrats are likely to vote for any of the FTAs. Peter Hakim of the Inter-American Dialogue, a think-tank in Washington DC, reckons that at most about 70 of the 232 Democrats in the House of Representatives might vote for the Peru FTA. The agreement with Panama was supposed to be next in line. But the Bush administration has balked over the recent choice to head Panama's parliament of a politician whom it accuses of killing an American in 1992.

The FTA with Colombia faces even bigger obstacles. The Democratic leadership in the House has refused to back it, arguing that Colombia's government needs to do more to prevent the killing of trade unionists and to punish officials linked to right-wing paramilitaries. That was a slap in the face for Álvaro Uribe, Colombia's president, who has been Mr Bush's most loyal ally in Latin America. Colombian officials argue that their efforts to strengthen the rule of law in the face of violence from drug traffickers, guerrillas and former paramilitaries will be undermined by failure to approve an FTA.

This is a powerful point and an objection to the whole structure of trade agreements that is now evolving in Latin America. If the agreements with Peru and Panama are approved, the effect would be to divert trade and investment from Colombia. A recent study by EAFIT, a university in Medellín, and the University of Antioquia found that if the Colombia FTA is not approved and the others are, Colombia's GDP would be 2.2% smaller and 400,000 jobs would be lost.

Some Democrats, at least, recognise that this would be a perverse outcome. Mr Hakim reckons there is a chance the Colombia agreement could be ratified next year—but only if Mr Uribe's government takes further steps to protect trade unionists, and these are seen to be working.

The United States' hard-nosed approach to trade is winning few friends in Latin America. That may become apparent in Costa Rica, which is holding a referendum on October 7th on whether to ratify CAFTA-DR. Polls suggest the result will be close, but opponents appear to have momentum. They recently assembled more than 100,000 protestors in San José, the capital. Although Oscar Arias, the president, insists the accord is vital to his country's future, his government may have overplayed its hand. Last month one of his vice-presidents resigned after the leaking of a memo in which he advocated scare tactics such as painting opponents as allies of Mr Chávez. Some are—but others merely think CAFTA-DR a bad deal, especially in its intellectual-property clauses.

If the American Congress does ratify the pending FTAs, turning its back on CAFTA-DR could cause Costa Rica to lose jobs—a fate that may also await Bolivia and Ecuador. This whole mess underlines that bilateral deals are a third-best option after the Doha Round or the FTAA. But for those Latin American countries that are ambitious to expand their share of the biggest market for manufactured exports, they are the only game in town.