Published in International Trade Law & Regulation, Oxford, UK, January 1998.
The recent visit of the president of the United States of America (USA) to Venezuela, Brazil and Argentina brought public attention to the otherwise arcane subject of commerce negotiations and trade pacts and in some respects contributed to a greater awareness, by the respective civil societies, of the strategic implications of the US initiative of the Free Trade Area of the Americas (FTAA). The end result was a great diplomatic and public relations disappointment for the USA, as public opinion in all countries turned almost unanimously against such an initiative, for reasons which will be analysed in this article.
The WTO and MERCOSUL
The WTO was created on December 31, 1994, as a direct result of the Uruguay Round. Sources from GATT, the World Bank and the OECD have estimated that, as a consequence of the liberalization of trade promoted by the Uruguay Round, world trade will grow by US$ 755 billion annually until the year 2002(2), making the developed countries the major winners of the Round with 64% of the direct benefits. Such concessions, however, have been made by the developing countries in the hope of indirect benefits, such as the inclusion in GATT of the traditional sectors of agriculture and textiles and the opportunity of dealing with the questions of subsidies. These benefits would, in the long term, compensate for losses in the short term.
In addition, the increased juridicity of the multilateral system was seen in a very favourable light by the developing nations as a whole and Latin American nations in particular, as a fundamental tool in stemming unilateralism on the part of developed countries. Contemporaneously, with the advent of the WTO, developing countries in general have, for a number of institutional macro-economic reasons, as well as the greater credibility of the multilateral system, liberalised their tariffs well beyond the thresholds consolidated during the Uruguay Round(3). This has happened to such a degree that today the 20 most liberal countries in terms of world trade(4) are developing nations, followed by Germany, in 21st place, the USA in 25th place, then Colombia, Greece and India, and Japan with the 28th position, all preceded by Argentina and Brazil(5).
Simultaneously with the conclusion of the Uruguay Round, MERCOSUL had already achieved a remarkable economic, social and political success, doubling its internal trade in three years(6). The main economic reason for such an instant success was quite clear: Argentina, Brazil, Paraguay and Uruguay had succeeded in creating a free trade zone, free of agricultural subsidies where the member countries were able to place their products, particularly commodities, without major interferences from the practice of distorted prices maintained by the United States, Canada, Japan, Korea and the European Union, which combined have expended more than US$ 500 billion each year in subsidies in the agricultural sector alone. The benefit of a subsidy free trade in agricultural goods has been denied to both Argentina and Brazil by the multilateral system since its inception in 1947.
The elimination of internal tariffs in 1995 also stimulated the industrial and service sectors in MERCOSUL’s member states, whose economies have been in constant expansion. On January 1, 1995, the Common External Tariff (TEC) of MERCOSUL came into force with an average rate of 14%, applicable to the member states in a consistent and uniform base in relation to trade with third parties. The TEC is applied on a percentage basis in accordance with the common nomenclature of MERCOSUL (NCM). Non-tariff barriers were identified and are now in the continuing process of being eliminated under the control of a special group, the Trade Commission of MERCOSUL. Exceptions to the TEC were limited to three hundred items per country, or in the case of Paraguay 399, until January 1, 2001. Some sectors were accorded special treatment, such as automobiles, information technology, telecommunications and sugar.(7)
Politically, MERCOSUL has been also a great success in that it eliminated the traditionally abrasive relations of the past amongst the countries involved, in favour of a constructive agenda for the future. This aspect, very often overlooked by those abroad in less culturally sensitive areas, not only was very effective for relations between Brazil and Argentina, but it also offers an excellent framework for the elimination of differences between Argentina and Chile, as well as those between Chile and Bolivia. Institutionally, the pact has also had a very positive effect on the stability of the democratic regimes and of the rule of law in that part of the world, very precious values indeed that should never be taken for granted.
As a direct consequence of those circumstances, the initiative of MERCOSUL is enormously popular in all of the member states, in spite of the very obvious daunting challenges that lay ahead.
WTO and NAFTA
For the duration of the Uruguay Round, negotiations became more difficult among Japan, the European Union (UE) and the USA and, on more than one occasion, there were doubts that the Round could be concluded successfully. Such difficulties arose in spite of the fact that, for the first time the Europeans and Japanese effectively resisted pressure from the USA to maintain its dominant position in world trade. At this time, there was a radical shift in the position of the USA on the formulation of its trade policy, abandoning the traditionally favoured multilateralism (GATT) for regionalism.(8) Previously, for the USA no other routes for international trade other than multilateralism had been acceptable.(9) The first indications(10) that the tone of this situation was about to change occurred when the USA reneged on the same propositions which it had previously supported during the beginning of the Round, in particular the liberalisation of the banking sector and of telecommunications. The USA even questioned their own proposals related to the system of dispute resolution, accepted by the WTO. According to the USA, the power invested with the WTO was no longer acceptable. “The Americans want to know how much it is possible to win with the new world trade order” said ‘Business Week’, directly and candidly.(11)
At the same time that the Uruguay Round concluded, NAFTA came into force(12) with a totally different approach towards international trade, in respect to the traditional perception of the interests of the USA. Canada and Mexico were not in a position to resist the dominating strength of the USA. Trade with the USA represented around 70 and 80% respectively of the foreign trade of Canada and Mexico. In 1992, Mexico imported US$ 37 billion from the USA and exported US$ 32 billion, generating a surplus of US$ 5 billion for the Americans in a year in which their trade balance experienced a deficit of US$ 90 billion. For Mexico, the agricultural subsidy policies of Canada and the USA were not disastrous, because Mexico was already a large importer of agricultural products.(13) Nevertheless, for the USA and Canada, Mexico, a populous country, was a very attractive consumer of agricultural products in an increasingly difficult situation in world trade due to extensive use of subsidies as practised by other trading partners, notably by the EU.(14)
During the negotiations, the USA obtained from Mexico the total opening of its market in services, while keeping its own market closed by means of horizontal barriers to the free circulation of service workers. This established, “inter-alia”, an infamous system of quotas (sic) for Mexican service providers.(15) World trade in services is estimated at approximately US$ 12 trillion, or more than 60% of total world trade.(16) The service sector employs three-quarters of the workforce in the USA, generating 68% of the Gross National Product (GNP). The USA is the largest exporter of services in the world, making this sector one of the most competitive in its economy. Canada and Mexico are respectively the first and the third largest importers of US services. The domination of the Mexican service sector, estimated at US$ 146 billion, was one of the objectives of the US negotiators in the NAFTA agreement.(17)
The NAFTA negotiations were conducted by Mexico through, at best, a notoriously incompetent government, and who characterised itself “by the virtual acceptance of all the demands and by making virtually all the concessions”.(18) As a result of the NAFTA model, Mexico became, at least in the sense of trade, a client state of the USA, designed to buy services, industrial and agricultural products, and to produce huge trade deficits to be financed with speculative borrowings by the financial sector. In 1994 this bizarre situation caused the accumulation by Mexico of an enormous trade deficit of the value of US$ 19 billion(19), which in turn caused the liquidity crisis in Mexico at the beginning of 1995, and the massive devaluation of the peso. This resulted in an unprecedented financial rescue package having a magnitude of US$ 50 billion, almost equivalent to the historic Marshall Plan. The deal was arranged by the United States to be given to Mexico, in such a way that this country could pay the irresponsible American banks which assumed the extraordinary credit risk.(20) Mexico, of course, has to pay the bill in the end and there are doubts that the country will be in a position to honour even the resulting interest.(21)
Exports from the USA to Mexico increased by 45% between 1993 and 1996 and the US share of Mexican imports increased even further. At the same time as no fewer than 500 Mexican tariffs were increased to third trade partners, its tariffs on US goods were cut by an average of 7.1. percentage points. This resulted in a ten percentage point average tariff advantage over foreign suppliers.(22) Trade diversion losses for Mexico on account of this situation, and applicable only to the trade in goods, have recently been put as high as US$ 3 billion a year.(23) As Bhagwati poignantly observed, this situation was fatuously hailed in the USA as the proof of NAFTA’s success, when in fact it suggests the very opposite. (24)
In addition, through NAFTA the USA has achieved its ardent desire to apply its laws extra-territorially in that the treaty extended to Mexico certian US legal concepts. Such are, for instance investments (including insurance and foreign capital), intellectual property, competition and antitrust law, labour law, environmental law, the traffic of drugs, illegal immigration (sic) and even the administration of justice. All of these to be applied on the pretext of the liberalisation of trade. The euphemism used by US negotiators to describe this situation was “convergence of values”(25).
Moreover, the 2000 pages of the NAFTA did its utmost to consolidate the trade diversion advantages obtained from Mexico by the USA against third trade partners countries by dedicating approximately 10% or 200 pages of the agreement to the question of the rules of origin – the mechanism recognised today as the cutting edge of protectionism. As soon as the benefits of the MFN clause are waived, then different tariffs will apply to different trade partners depending on specific agreements and subjective criteria.
Having attained so many advantages in NAFTA, the articulators of its policy decided, not surprisingly, that the same draconian conditions ought to applied consistently throughout Latin America, where they would prove to be even more lucrative for the USA.(26) With the objective of expanding this situation to the rest of Latin America, the USA officially adopted the “hub and spoke” model, in which the USA would be the hub and the hapless countries of Latin America, the spokes. This model was incorporated into the “Initiative to the Americas” by the USA , and in 1994 resulted in the signing of an agreement hemispheric, in principle, for the creation of the Free Trade Area of the Americas (FTAA) by the year 2005.(27)
It was then that the secretariat of the WTO took an unprecedented measure. In a considered reflection on the dangers of the “hub and spoke” model it warned that its essence was always the same – that goods and services (and perhaps labour and capital) flowed more easily from the spokes to the hub than between the spokes. Beyond this, the WTO secretariat also warned that in these cases, there was a tendency for the trade administration, sensitive to each of the extremes, to limit the sector in which the trading partner was most competitive.(28) Even the USA has accused this model of representing “a new era of imperialism”.(29)
The Pitfalls of FTAA
For countries such as Brazil and Argentina, adhering to NAFTA or to FTAA based on the “hub and spoke” model, in general, and with the dour conditions imposed on Mexico, in particular(30), would be a disaster for both economic and social order. This disaster would certainly occur in the services sector, which represents more that 50% of the Brazilian and Argentine GDPs. Such a fate would occur because the movement of people, essential for the supply of services(31), is not guaranteed by NAFTA(32) for the “spoke” countries. As warned by the WTO, the flow between the spokes and the hub would limit the relationship between the spokes and would serve as an enormous incentive for the flight of capital and commercial presence in the hub. Companies from other parts of the world would be more interested in establishing a trade presence in the hub than in the spokes, even if they are, in theory, more closely related to the spokes. The hub would supply the financial sector for the spokes. The education sector of the spokes would be greatly affected, at least in the fringe areas of administrative negotiations and finance, since there would be a centripetal force attracting them to the hub, for the same reasons explained above. Agriculture, at least in Brazil and Argentina, would be destroyed by the $200 billion in subsidies practised by the USA and Canada, and such a tragic end would certainly include the soy and sugar sectors in Brazil, the latter of which employs more than 1 million rural workers, and the Argentine wheat sector, one of the most important segments of its economy. Without a doubt, this is not a very attractive perspective.(33)
However, would an expanded NAFTA not present opportunities for increasing Latin American exports? The answer is given by an American lawyer, a specialist in international trade, “an expanded NAFTA probably would not produce an increase in exports from Latin America to the USA, except in the areas of textiles and clothing, where the restrictive rules of NAFTA on the regions of origin are able to control exactly this type of trade anomaly. Generally, for industrial products, the tariffs of the USA are comparatively much lower and the prospect of a preference in favour the regional exports over the non-regional exports is remote”(34).
In the formation of the FTAA, the USA plans to use the structure of NAFTA within the following affirmative agenda(35):
opening of the service markets of the other countries;
the access to the market of goods with much lower tariffs;
the formulation of rules of origin which obstruct access to partner countries;
the imposition of their own legislative criteria, with the expressed enunciation of the sovereignty on the part of the other members; and
an “early harvest” of all the above benefits.
The defensive agenda of the USA for the FTAA negotiations consist of the following:
maintaining a closed regime on services through horizontal barriers;
maintaining a regime of agricultural subsidies;
maintaining a unilateral legislative structure positioned above international treaties, in violation of international law; and
Concessions to be made only in the distant future.
None other than Ms. Charlene Barshefsky, the head of United States Trade Representative (USTR), commented publicly in Washington on what this would signify in trade terms: “a tremendous free lunch for the USA”.(36)
Within a legal perspective, there are other reasons against joining the FTAA, because in the USA, treaties like NAFTA and similar ones derived from the Uruguay Round and involving the WTO have a lower hierarchy than federal law. In Latin America, as in Europe and the majority of the countries of the world, treaties have a higher precedence than local laws and are applicable in the respective territory.(37) This does not occur in the U.S.A.
Over and above this, the internal legislation of the USA, in moving the implementation of the Uruguay Round treaties, establishes in section 102 (a) that “no instrument of any agreements of the Uruguay Round, no applications of any of these instruments by any person or circumstance, which would be incompatible with a law of the USA should have any effect”(38). Similarly, in connection with NAFTA, United States federal law establishes in section 102 (a) (1) of the government legislation that “no instrument of an agreement or any application of such agreement by any person or circumstance, which would be incompatible with the US law ought to have effect”(39). Consequently, NAFTA is not necessarily enforceable in the USA, but certainly it is in the territories of the other signatories. In a world which searches for transparency and the prevalence of its laws on international trade, as well as with international business, this situation would be clearly unacceptable .(40)
CONCLUSION: THE FTAA IS A BAD DEAL FOR MERCOSUL.
Brazil’s trade profit is very much different than those of Canada and Mexico. Twenty seven per cent ( 27%) of Brazil’s exports go to the EU; twenty two point nine per cent (22.9%) go to LAIA(41) countries; twenty point four per cent (20.4%) go to NAFTA countries; and sixteen point four per cent (16.4%) go to Asia.(42) For the MERCOSUL as a whole, the statistics do not differ in substance. Culturally gifted observers from abroad perceive that MERCOSUL has global economic interests and a rich cultural diversity, as indicated recently by the French President, Jacques Chirac.(43) Therefore, for MERCOSUL it would be a complete nonsense to alienate traditional trade partners representing most buyers of its products in a major trade diversity mechanism devised to give one of its partners a “tremendous free lunch”.
In addition, a FTAA structured along the NAFTA model would have a most destructive impact in the agricultural sector of all MERCOSUL economies (which represents approximately 28% of the collective GDP), in view of the subsidies in place in the USA and Canada. For the service sector, a FTAA along the above lines would be equally damaging to MERCOSUL countries, as a result of the infamous one way quota system in place in NAFTA. Otherwise, the impact of US ideology on the local cultures fostered by a NAFTA based agreement would have a most undesirable effect. Thus, it seems very clear to me that the FTAA concept was devised to have one winner and multiple losers. For the MERCOSUL countries, it would be certainly much better to stay away.