Free Trade Agreements and regional integration
Latin American countries are developing strong commercial connections with other economies, so as to expand market opportunities for their national industries. They are also serving as investment platforms for foreign investors looking for access to major markets (mainly the US) through the free trade agreement (FTA) network currently in place; these investors benefit from the strategic location of Latin American countries. The main benefits created by FTAs in this region are:
- better conditions to access other Latin American markets, meaning a reduction or elimination of tariffs and other barriers to trade;
- FTAs enhance cooperation regarding matters such as intellectual property and e-commerce;
- countries have increased their GDP growth by: allowing domestic industries to access cheaper inputs/raw materials; introducing new technologies at a more affordable cost and fostering competition and innovation;
- FTAs promote regional economic integration; in Latin America there are plenty of shared approaches to trade and investment through international organisations and economic integrated regions. They have adopted common rules of origin and product quality standards, as well as the unification of valuation methods; and
- FTAs have created legal security and stability in promoting foreign investment.
Chile, Colombia and Peru have the most developed FTA network in the region, having focused on the ratification of FTAs with industrialised economies such the US, the EU and Canada. They have also enabled domestic players to access cutting-edge technology, which helps them to improve production, safety standards and logistics.
Even though FTAs are key international instruments, they are not a widespread concept in Latin America. While most of the countries continue to sign and negotiate FTAs, Brazil – recognised as the region’s biggest market – hasn’t entered into FTAs to protect the growth of its national industry. It is also important to consider that, in the region, there are trade alliances that negotiate FTAs as an economic bloc.
As stated, regional alliances have also promoted growth and improved trade conditions in Latin America. There are customs unions such as the Andean Community of Nations (CAN), the Caribbean Community, the Central American Common Market and Mercosur, all of which have helped Latin American countries to unify customs-related matters such as tariffs, rules of origin and custom valuation rules. More than customs unions such as the EU, these alliances constitute strong trade agreements between key economic players with enormous growth potential, promoting economic advancement and facilitating busines development.
While Mercosur and the CAN have proven the region’s longest-standing agreements, in the past decade the Pacific Alliance (formed by Chile, Peru, Colombia and Mexico) has emerged as the ultimate means of economic integration, based on a privileged location and the mature economic development of its members.
Mercosur, a bloc composed of Argentina, Brazil, Paraguay and Uruguay (Bolivia is currently in the process of joining), is considered the fifth biggest economy in the world and it has developed strong commercial relations with other countries. The four countries have agreed to eliminate customs duties and implement a common external tariff on certain imports from outside the region. They have also adopted a common trade policy towards third-party countries. Mercosur has developed trade agreements with other countries and alliances, bringing economic growth to each country and strengthening the region.
The CAN is a customs union comprising the South American countries of Bolivia, Colombia, Ecuador and Peru. It works as an intergovernmental programme coordinating trade and public policy programmes in the region. The CAN promotes the free trade of goods between parties where no custom tariffs are charged. The CAN has played an important role in Andean countries, allowing them to specialise in the development of an interconnected economic area. It has also served as a political platform for the negotiation of key agreements with developed economies, such as the US and the EU.
Lastly, the Pacific Alliance is looking towards consolidation of Latin American countries bordering the Pacific Ocean, to become a strong economic coalition. It is mainly seeking to form strong economic relations with Asia and Oceania. The Pacific Alliance has a team concentrating on foreign trade, facilitation of trade and customs cooperation. The alliance is still in the process of being established, particularly through the negotiation of new trade agreements with countries in Asia and Oceania such as Australia, New Zealand and Singapore. The objective of the Pacific Alliance is to access these markets and build agreements that can benefit the region.
Though the effectiveness of bilateral investment treaties (BITs) has been debated, it is unquestionable that their ratification has had a direct impact on FDI in Latin America. Local economies understand that foreign investors are not only looking for a convenient location and tax benefits for the development of their investment projects, but also legal stability and the long-term protection of their investments.
Despite this, the protection of BITs has recently caused a stir in some South American countries. For instance, Ecuador, Venezuela and Bolivia recently denounced their BITs, stating that their benefits are outnumbered by the risks regarding sovereignty and the right of states to regulate. This backlash follows similar incidents – seen particularly in Argentina, which had to face multiple claims made by investors seeking to protect their rights by claiming BIT protection. Recently, Venezuela (on nationalisation/expropriation charges) and Colombia have started international litigations based on BIT and FTA investment chapters.
Even though direct investment is considered an opportunity for growth, Latin American countries must consider the risk of international disputes arising from ensuing compromises, as well as compliance with international treaties. They should weigh the benefits of foreign investment against the risks of international controversy. Looking at the current situation of many Latin American of the countries, the negotiation of BITs must be reconsidered and a new strategy must be devised to avoid future problems.
Latin America is a developing economy seeking new opportunities to grow and build a stronger social and economic environment. The region’s efforts have translated into important achievements, but Latin America still has a long way to go. For this, its countries must continually renew their strategies for foreign trade and foreign investment.