The purpose of this article is to identify and briefly explain some of the main challenges confronting Latin American and Caribbean countries in the area of trade policy in 2002 and beyond. This is done first by looking backwards (diagnosis) and then by looking forward (prognosis) into the challenges ahead.

I.    Diagnosis

A diagnosis of trade policies by Latin American and Caribbean (LAC) countries and their results in the last decade should take into account three elements, that should in turn be taken as premises for the prognosis: one concerns the balance of results of the economic reforms of the last 10 to 15 years; the second is the relationship between trade, growth and poverty reduction, and the third refers to the increased interdependence of Latin American economies.

Economic reforms’ balance sheet.

The economic reforms’ scorecard can be summarized by recognizing that there were important achievements or pluses on a number of fronts: the control of inflation, the reduction of fiscal deficits, the reduction of foreign debt, the success in increasing the flows of FDI, and the expansion of exports in some countries. However, there were disappointing results in other areas, and these include mainly: economic growth, employment, poverty reduction, income distribution and social conditions.

The Washington Consensus, under which many of these economic reforms were undertaken, is often blamed for the slow growth and the disappointing social results. While there is plenty of room for valid controversy, those who go to the extreme of questioning the strategic direction of integration into the world economy have to answer the question: what is the alternative?

I think that the most important general conclusion from the intense debate about the deficiencies of the Washington policy consensus is that drawn in a study by Nancy Birdsall and Augusto de la Torre published in early 2001 and it’s the idea that without the reforms the situation would have been worse: Per capita income and output would have been lower, volatility higher and poverty and income inequality deeper. But it is also very clear that the original Washington policy consensus was too narrow and did not take into account many aspects that the development community, and many Latin American economists and institutions have known and stressed for years.

The good news on the policy front is that there has been a dramatic change in approach to policy reform and development in the international community and organizations. Now poverty reduction and equity occupy center stage in the lending operations and programs of the International Financial Institutions (IFIs).

And not only this, one of the most extraordinary developments in the recent WTO meeting in Doha, --in addition to the fact that a new trade round was launched!--, is the central place occupied by development concerns in the WTO agenda and the Doha Ministerial Declaration. This is partly a reflection of the new WTO membership and partly an expression of the developing countries’ frustration with a world trading system that is perceived as unbalanced, characterized by double-standards and that needs to open more opportunities for them. 2

Essential role of Trade and Growth

The second diagnostic point is that recent research shows clearly that growth matters for poverty reduction, and that trade matters for growth. Fast growth is associated with fast poverty reduction, and economic contraction is associated with increased poverty. For poverty to increase with economic growth, there would have to be a drastic worsening of income distribution, and this is not generally the case in most countries. It is also clear that growth by itself does not necessarily improve income distribution, this requires a complex array of accompanying social policies.

But the point is that it would be a trap to think that growth is not important. In fact, it is essential for modernization and for poverty reduction. The relevant questions are then: How do you promote growth? What is the role of trade and integration in doing this?

Two bodies of empirical literature support the general case for the beneficial growth effects of trade and economic openness. One is the recent research that provides evidence about the positive relationship between trade and growth.3  The other is the literature analyzing various integration and trade liberalization scenarios in Latin America using multi-country Computable General Equilibrium (CGE) models. The main channels by which trade and economic openness promote growth are: increased specialization according to comparative advantage; greater exploitation of increasing returns; importing of ideas, knowledge and technological capacities; and improving economic performance through positive impacts on institutions and the political process. I am not suggesting that trade is the only determinant of growth, but that it is a major contributing factor.

Increased integration and interdependence

The third diagnostic point consists of the recognition that all the LAC economies are today much more open and more interdependent among themselves, with the US and with the world economy than a decade ago. Most programs of economic reform in LAC have had as their strategic objective the integration of the national economies to the world economy. There has been a wide variation in the patterns of national economic management, but most countries advanced quite significantly in this strategic objective of deeper integration. In fact, interdependence has increased in three mutually reinforcing dimensions:

a)    In terms of the business dynamism that has transformed trade and investment structures
b)   In terms of legally binding commitments associated with the proliferation of regional and bilateral trade agreements (RTAs) in the hemisphere.
c)   And in terms of a convergence in political, strategic and collective security interests.

The indicators of the new business dynamism and its impact on economic interdependence are well known: average tariffs were drastically reduced since 1985, which is one of the main factors that explains the fact that the share of trade in GDP increased in all countries of the Americas during the last decade. In addition, for Latin America as a whole, the two engines for export expansion were the US market and the rest of LAC markets. The rates of growth of exports to these destinations were around 14% per year from 1988 to 1998, much higher than the business activity and the dynamism of exports to Asia, Europe and Japan. From 1990 to the present the share of intra-regional trade in total trade increased consistently for MERCOSUR, the Andean Community, CARICOM and NAFTA. Finally, Foreign Direct Investment flows into LAC as a whole increased from levels of between 10-15 billion dollars in the early 90s to 80-90 billion dollars at the end of the decade. The message of these indicators is that clearly the economies of LAC are more integrated among themselves, with the US, and with the world economy than a decade ago.

A second dimension of interdependence is associated with the dramatic proliferation of trade agreements. LAC countries are now bound by a tissue of new generation trade agreements like in no other time in their history. LAC countries have negotiated 12 FTAs among themselves since 1990 and are in the process of negotiating 7 more. They have also been negotiating new generation agreements with other countries outside the hemisphere, both transatlantic and transpacific. And they have been deepening and restructuring the four existing customs unions (CACM, Andean Community, Caricom and MERCOSUR) by the inclusion of new areas of discipline. And of course, countries are involved in the most ambitious trade project: the creation of the FTAA. These agreements are called “new generation” agreements because they include, besides liberalization of trade in goods, new sectors such as services and agriculture, and new areas of discipline such as investment, competition policy, Intellectual Property Rights, and dispute settlement mechanisms.

There are two implications of this proliferation that need to be stressed. First, there is sufficient liberalizing momentum in the agreements already negotiated to increase interdependence even more from now to 2010. And second, it means that today, more than ever before, international norms play a key role in influencing the terms of domestic reforms and in shaping domestic regulatory frameworks.

Finally, the new regionalism does not have only an economic rationale, it also has a political and strategic one. How this applies depends on the precise grouping of countries. For instance, the key original rationale for MERCOSUR was closely related to the objective of diffusing long-standing tensions between Argentina and Brazil and fostering better relations between them. MERCOSUR is also based on much more than a desire to liberalize trade. It is part of a vision to assert the role of this group of countries in the Western Hemisphere and as global players.

The efforts to create a Free Trade Area of the Americas also have strong political, strategic and security dimensions. An important question in this respect is whether one of the effects of the tragic events of September 11 will be to strengthen the link between the geopolitical and security elements and the prosperity components of the Summit of the Americas agenda. The answer seems to be positive in the light of the recent policy statement by President Bush delivered at the OAS on January 16, 2002 where he said and explained that “The future of this hemisphere depends on the strength of three commitments: democracy, security and market-based development. These commitments are inseparable…”. In this occasion the President also announced that the United States will explore a free trade agreement with the countries of Central America.

With these elements of diagnosis as premises, let us now look forward to the challenges for LAC in the area of trade and integration in the next few years.


II.     Prognosis: The Trade Policy and Development Agenda in the Next Stage

In my view, the next stage of trade policies and integration into world markets of Latin America requires at least a five part policy agenda. The first two parts refer to external negotiations, and the others to the complementary domestic development policy agenda.

•    The first part is the question of the trade strategy options countries should pursue. What are the paths for market expansion? With a new trade round agreed in Doha with a target completion date of January 1, 2005; ongoing FTAA negotiations with the same deadline; the possibility of continuing to engage in bilateral negotiations; and the challenge of deepening sub-regional groupings, LAC countries have at least five avenues for trade liberalization and reform in the next few years: unilateral, multilateral via the WTO, regional via the FTAA, sub-regional via the deepening and widening of MERCOSUR, the Andean Community, the CACM and CARICOM, and bilateral. Some argue that countries should prioritize unilateral liberalization, others that they should concentrate their scarce negotiating capital and efforts at the multilateral level, rather than on regional, sub-regional or bilateral exercises. I think countries will be better served by a multiple-path strategy of trade negotiations, that is, that they can maximize benefits by moving simultaneously on several negotiating fronts. What precise mix or balance between these different paths is something that each country would have to decide. I also think that the creation of the FTAA should continue to be a priority despite the launching of a new round. Among other implications, this means that the next stage of trade policy will be the most negotiation-intensive ever that Latin American countries have had to face. This is exacerbated by the inevitable fact that all these negotiations are linked in different and complex ways. And these issues of linkage will be among the most difficult technical and political challenges countries will have to face. The last section of this article comes back to this issue.

•    The second component of the five-part policy agenda also involves external negotiations but it refers to the need for a concerted effort with other developing countries and with like-minded industrialized countries to promote a more development-friendly global trade and financial architecture. And here I am referring to the agenda for reshaping the global trade architecture for development contained in the recent Global Economic Prospects report by the World Bank sub-titled “Making Trade Work for the World’s Poor”. I think this report provides a real manifesto for strengthening the global trade system in a development friendly way and that many of its proposals should be embraced by LAC countries.

•    The third component is upgrading trade-related public sector institutions. Negotiating on several fronts at the same time and complying with the new rules and commitments, requires more trade capacity building than ever before. Of course, this represents a challenge not only for the countries themselves but also to aid-providing governments and to inter-american and global development agencies.

•    The fourth part is adoption of pro-growth and pro-competitive policies to augment supply-side response capacities. Achieving improved market access is a necessary condition to create opportunities for growth, and an active trade negotiating agenda can take care of this, but it is not sufficient. To take advantage of such opportunities countries must develop supply-side capacity and provide an attractive investment climate. There is a whole array of initiatives countries should consider to create this pro-growth policy environment. The right incentives for growth include, among others: a stable macroeconomic framework; promotion of efficiency in services sectors that are essential to trade and international competitiveness such as transport, telecommunications, financial activities, business services and others; policies to promote technological innovation and maximize knowledge diffusion in society; and investment in human capital and education.

•    The final part of this policy framework is social development policies. Growth alone will not do to face the social challenges of Latin America.

My point in enumerating this broad spectrum of policies is partly to underline that even though I think trade policy and integration are essential, they are but one component of a much broader set of challenges. The trade agenda should not be confused nor substitute for a development agenda, founded on a clear national vision and a strong national policy consensus.

But having said this, and rather than trespassing the trade field, let me go back to trade and finalize with some comments about the importance of both the WTO and the FTAA negotiations and some of the challenges and links between them.


III.    Simultaneous WTO and FTAA Negotiations: Some Challenges and Links

Many studies have shown the benefits for developing countries, in terms of higher living standards, of increased market access and trade liberalization associated with a new round; and also the benefits for Latin American countries associated with the FTAA.

A number of studies presented at a recent Conference on Impacts of Trade Liberalization Agreements on Latin America and the Caribbean, organized by the IDB and the Center for Prospective Studies (CEPII), corroborate the potentially major gains for LAC countries of both the new round and the FTAA, as well as for MERCOSUR countries of the MERCOSUR-EU agreement. These studies provide a rationale for pursuing the multiple-track strategy mentioned above.

However, I would argue that the benefits of the FTAA can be achieved faster, and in some areas and for some countries be larger, than with multilateral negotiations. The main reasons for this are the following:

•    First, as regards market access issues, the new round of WTO negotiations will not deliver global free trade at the end of the round. The goal is to achieve a significant further step in market access, but it is not to completely eliminate tariffs and non-tariff barriers or subsidies. The list of exceptions and unfinished business at the end of the round is likely to be long. Besides, negotiations are complex and will probably take longer than the formally planed to finish by January 1, 2005.

•    Second, in contrast, the objective in the FTAA negotiations is to create a free trade area, which means, complete elimination of tariffs for trade in goods. Although there will probably be exceptions and reservations, the list will probably be smaller than in the WTO. Whether liberalization of services in the FTAA could go beyond the WTO is an open question, but it is also likely that, given the smaller number of countries and the fact that LAC countries have been engaged in a substantial amount of services liberalization in recent years, the FTAA will be able to go deeper in services than what would be possible in the WTO.

•    Third, the areas of investment, competition and government procurement have been in the FTAA agenda since the beginning and with more ambitious objectives than those defined in the Doha Work Program, where they are new issues. The FTAA negotiations on rules are already well advanced.

•    Finally, I think the case in favor of regionalism in the Americas, and for the FTAA in particular, is also strengthened by the three forces that promote increased interdependence in the hemisphere explained in the diagnosis: the business dynamism towards increased trade and investment linkage; trade agreement proliferation and the corresponding expansion of reciprocal legal commitments, and the convergence in political, strategic and security agendas. The creation of the FTAA can be seen as a natural step building on these forces towards increased interdependence.

Thus, because of the potential benefits of this agreement, the momentum already achieved and the potential in terms speed and depth, the FTAA negotiations should continue to be a priority of LAC countries in addition to the new multilateral round.

These two negotiations are linked in complex ways. Links could be identified at two levels: on the negotiating front and on the political and policy-making front.

On the negotiating front the areas where links are more apparent are: agriculture, antidumping, TRIPS and subsidies. In these four areas there are some specific issues where progress is likely to be only possible at the multilateral level. In the other areas of the negotiations, including in particular the key market access issues of tariffs and services, there is no reason why the FTAA could not make progress with relative independence from the new Round.

On the political and policy-making front managing two major negotiations simultaneously poses a daunting challenge. The sheer complexity and intensity of both negotiations will demand a tremendous effort and additional resources for the negotiating teams of all the countries. This involves practical/managerial issues such as, minimal capacity to be present or meaningfully represented at meetings, appropriate organization of the negotiating teams, ensuring an adequate flow of information about what goes on in each forum, and the domestic and international coordination of negotiating positions. On the positive side, it could be argued that the FTAA has already had “positive learning externalities” and has contributed to significant capacity building that will allow countries to better engage at the multilateral level. 4

Concurrent negotiations will require not only strengthened trade technocracies able to engage internationally, but also increased transparency and heightened engagement locally with broad sectors of civil society, in order to arbitrate the distributional conflict inherent in trade policy reform, articulate national positions, and develop a sense of “local ownership” and support for what is being negotiated.

To conclude it is important to stress that, as part of their strategy to promote high quality growth, integration of the national economies to the world economy should and probably will continue to be a key strategic objective of most programs of economic reform in LAC, along with reducing poverty. Although there are many competing priorities, clear strategies to expand markets and strengthen trade on the demand-side, and to strengthen broad-based supply-side capacities, should be among the main priorities in local efforts and in international cooperation programs.



References

Bush, George (2002) Remarks by the President to the World Affairs Council National Conference, Organization of American States, January 16.

Frankel, Jeffrey and David Romer (1999) “Does Trade Cause Growth”, The American Economic Review, June.

Irwin, Douglas and Marko Tervio (2000) “Does Trade Raise Income? Evidence from the Twentieth Century”, National Bureau of Economic Research, Working Paper 7745 in http://www.nber.org/papers/w7745

Jones, Charles I. (2000) “Comments on Rodríguez and Rodrik, Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence”, NBER Macroeconomics Annual 2000, Cambridge: MIT Press, forthcoming. Available in www.stanford.edu/-chadj.

Levine, Ross and David Renalt (1992) “A Sensitivity Analysis of Cross-Country Growth Regressions”, American Economic Review 82, September, pp 942-963.

Oxfam (2001) Eight Broken Promises: Why the WTO isn’t working for the world’s poor, Oxfam Briefing Paper No 9, en www.oxfam.org.uk

Rodriguez, Francisco and Dani Rodrik (2000) “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence”, in http://ksghome.harvard.edu/-drodrik.academic.ksg/skeptic1299.pdf.

Rodrik, Dani (2001) “Development Strategies for the Next Century”, Harvard University, in www.eclac.org/prensa/noticias/comunicados/6/7616/DaniRodrik29-08.pdf

Sachs, Jeffrey and Andrew Warner (1995) “Economic Reform and the Process of Global Integration”, Brookings Papers on Economic Activity, Vol 1., p 1-118.

Sala-i-Martin, Xavier X. (1997) “I Just Ran Two Million Regressions”, American Economic Review 87, May, pp 178-183.

Salazar-Xirinachs, Jose M (2001) “The FTAA Process: from Miami 1994 to Québec 2001”, in Salazar-Xirinachs, Jose M. and Robert, Maryse (2001) (editors) Towards Free Trade in the Americas, Brookings Institution and OAS General Secretariat, Washington D.C.

Wolf, Martin (2001) “Broken Promises to the Poor”, Financial Times, 21 de Noviembre.

World Bank (2002), Global Economic Prospects 2002: Making Trade Work for the World’s Poor, Washington D.C.

Endnotes

1  This article is a slightly modified version of the remarks by the author at the World Bank-Third Annual Global Development Conference “Blending Local and Global Knowledge”, Rio de Janeiro, Brazil, December 9-12, 2001. The views expressed are those of the author and should not be attributed to the Organization of American States or to its member states.
 

2  See Martin Wolf (2001) “Broken Promises to the Poor”, Financial Times, November 21; Oxfam (2001); World Bank (2002).
 

3  See Levine and Renault (1992), Sachs and Warner (1995), Sala-i-Martin (1997), Frankel and Romer (1999), Irwin and Tervio (2000). Rodriguez and Rodrik (2000) and Rodrik (2001) are skeptical about the robustness of some of these results regarding the relationship between trade openness and growth. Jones (2000), however, focusing on trade policy variables, concludes that trade restrictions are almost invariably harmful to long-run growth, although the magnitude of the effect is uncertain. For Rodrik “The appropriate conclusion to draw … is not that trade protection should be preferred to trade liberalization as a rule. The point is simply that the benefits of trade openness should not be oversold” (Rodrik, 2001, p 39).

4  For a broader explanation on this point see Salazar-Xirinachs (2001).