Time for Latin America to build a free trade area without US involvement

By Business & Finance
04 May 2017
south america currency latin

Latin America needs to build its own free trade area without reliance on the US, writes Andrés Velasco.

How should Latin America respond to US President Donald Trump’s America-first approach to the global economy? Here’s one possible answer: build a free trade area of the Americas without the United States.

Of course, the idea is far from new. The founding fathers of Latin America’s republics talked about it two centuries ago. But it never came to pass.

In the 1960s, there was much discussion about Latin American integration. Summit meetings were held and agreements signed. But little progress on free trade followed. For most countries in the region, Europe or the US remained larger trading partners than their immediate neighbours.

In the early 1990s, then-US President George HW Bush grandly proposed a free-trade area from Alaska to Tierra del Fuego. The US subsequently signed agreements with Canada, Mexico, Chile, Colombia, Peru, and Central America, but the ambitious and overarching north-south agreement did not materialise.

The good news is that most of the factors blocking regional free trade back then have disappeared. So now is the right time to pick up on Simón Bolívar’s two-century-old idea.

One reason why a region-wide trade deal foundered was that proud Brazil was unwilling to attend a party whose main host was the US. But if Trump sticks to his protectionist promises, we will no longer have to worry about US-Brazil rivalry within the same trade agreement.

In the past, US farm subsidies were also deal-breakers for large agricultural exporters like Argentina and, again, Brazil. With the US out of the picture, this also becomes a non-issue.

Now is the right time to pick up on Simon Bolivar’s two-century-old idea 

As the 1990s progressed, left-wing populist governments came to power in a number of Latin American countries. For these governments – in Argentina, Bolivia, Ecuador, Nicaragua, and, of course, Venezuela – free trade was a dirty ‘neoliberal’ phrase. For their leaders, too, an agreement with the US was out of the question.

Today, that brand of populism is (knock on wood) in retreat across Latin America. In Argentina, the Peronists have lost the presidency; in Brazil, President Dilma Rousseff got herself impeached; and in Venezuela, President Nicolás Maduro’s increasingly dictatorial regime is teetering on the edge of the abyss. Ecuador also may soon end its flirtation with populism: Rafael Correa’s handpicked successor did less well than expected in the recent first round of the country’s presidential election.

So, with the three main stumbling blocks gone, what is preventing a free-trade agreement of the Americas from being signed? Nothing much, except for policy inertia and lack of clear leadership. But there is no shortage of regional leaders who could carry the torch of trade integration from the Rio Grande to the Cabo de Hornos.

Aside from their wariness of the US, past Brazilian presidents also feared their domestic business establishment, which never met a tariff or a non-tariff barrier it did not like. That protectionist sentiment, always strongest in the industrial heartland of São Paulo, is still there.

But with Brazil just beginning to emerge from its deepest recession in decades, Brazilian businesses are eagerly seeking new customers. And with China slowing, Europe mired in its own crisis, and the US walling itself in, the region’s growing markets have fresh appeal.


Something similar has happened to Mexico. Its leaders always talked the talk of regional free trade, but no Sherlock Holmes was needed to discover that their real interest lay in the US market, where over 80% of Mexican exports go.

Now that Trump has called Mexican immigrants rapists and has called for a wall on the border (along with a tariff on Mexican exports to pay for it), trade intimacy with the US is losing – how can one put it politely? – some of its appeal.

So it should come as no surprise that Mexican politicians and businesspeople are looking south with newfound enthusiasm.

Argentina also has reasons to back regional free trade. President Mauricio Macri’s year-old administration is naturally inclined toward economic liberalism, and Argentina is caught today in the straitjacket of the external tariff of the Mercosur regional trade agreement with Brazil, Paraguay, and Uruguay.

The least traumatic way to achieve greater openness without having to blow up the existing agreement is to have Mercosur join a larger free-trade area. That transition would suit Argentina well.

With Brazil, Mexico, and Argentina pushing in the same direction, the issue of leadership would be solved automatically. Chile, which for political reasons has always wanted to bring together the more liberal economies of the Pacific with the more protectionist regimes of the Atlantic, would have plenty of reasons to help move the process forward. And Canada, under Prime Minister Justin Trudeau (everybody’s favourite English-speaking leader nowadays), would be most welcome to join.

Andres Velasco

Andres Velasco

Yes, Venezuela’s Maduro would object and denounce a neoliberal conspiracy against him. But, given his rock-bottom standing in the region, most countries would regard this as an additional incentive to join the new bloc. Nicaragua, Bolivia, and perhaps Ecuador might drag their feet. But they lack the political and economic heft to stop a deal.

The always prickly issues of investment and intellectual property should be a part of any new deal

A hemispheric free-trade agreement would not have to start from scratch. The Pacific Alliance, which already binds together Mexico, Colombia, Chile, and Peru, is a useful starting point. That agreement focuses on trade in goods and services, trade facilitation, rules of origin, and dispute resolution.

In any new deal, non-tariff barriers and government procurement, two sets of instruments often used for hidden and not-so-hidden protectionism in Latin America, ought to follow common standards. So should labour and environmental practices.

The always-prickly issues of investment and intellectual property should be a part of any new deal; but, with the US absent, some of the more controversial rules that North American businesses have lobbied for could now be excluded.

So, yes, the era of free trade across much of the Americas finally may have arrived. And we have Trump’s nationalist and protectionist bullying to thank for it. 

About the author: Andrés Velasco, a former finance minister of Chile, is Professor of Professional Practice in International Development at Columbia University