It is a pleasure to be with you on the occasion of the first SME Congress of the Americas Steering Committee Meeting.I have been asked to address the issue of “Regional Economic Integration in the Western Hemisphere”.As a representative of the OAS Trade Section, I come from one of the three organizations that has been playing a key supporting analytical and technical role to the Free Trade Area of the Americas negotiations since their outset in 1998. Thus “regionalism” has been our “raison d’etre” from the creation of the Trade Section within the OAS in 1995 to present.

My purpose today is to briefly review the state of regional integration in the Western Hemisphere and comment on how it has evolved over the post-war period and whether or not it is likely to be a permanent feature of our future trade landscape.

First, it is important to point out that regionalism in the Western Hemisphere is not new.This part of the world has had an interest in regional arrangements as long ago as the 1960s, when the Andean Community Common Market, the Central American Common Market, the Caribbean Economic Community and the Latin American Integration Association all saw the light of day.

However, the lifetime of one generation can change many things.Regionalism today is not the same creature as regionalism was 35 or 40 years ago.While earlier regional efforts were largely viewed by Latin America and the Caribbean as attempts to develop along lines of import substitution in isolation from the rest of the world, the “second wave” of regionalism that began in the 1990s has been outward-oriented, focused on promoting the integration of these economies not only with each other but with the rest of the world through deepening trade liberalization.

The current pattern of regional integration agreements in the Western Hemisphere is certainly much more complex than it was even 10 or 15 years ago.This is because over the past decade a web of criss-crossing bilateral and plurilateral free trade agreements have sprung up, to coincide with vigorous attempts to redefine the economic and trade content of the earlier common market agreements.We now can count 18 regional economic integration arrangements in our hemisphere, consisting of 4 customs unions and 14 free trade agreements, as shown in the attached table.

Many Latin American countries also have concluded regional agreements with countries outside the Hemisphere, such as the agreements between Mexico and the EU, Chile and the EU, and Chile and Korea.Indeed, the United States has started well down this path, with its own FTA concluded with Singapore at the end of last year, and current negotiations ongoing with Australia, Morocco and the countries of the South African Development Corporation. And all of these negotiating fronts must keep up with, or stay ahead of, WTO discussions, which shouldn’t be too difficult in light of last week’s events in Cancun.However, any regional arrangement must comply with criteria specified by the WTO rules, both for goods and for services, and must be reviewed and sanctified by this organization.

Reasons behind the growth of regionalism

Five main factors can be highlighted to explain the growth of regionalism among countries of the Western Hemisphere.

1.Economic – desire to stimulate economic growth & development

More than a decade ago, Latin American countries decided that in order to achieve the objective of reaching faster economic growth and development, so critical to poverty reduction and alleviation, this would require increased trade and investment.Such an objective needed to be based on a more solid footing through the conclusion of free trade and integration agreements, as well as the putting in place of appropriate policies at home.This “New Regionalism” of the 90s was under the umbrella of the broad-based structural reforms carried out in Latin America.The major tenets of this regionalism included opening up to world markets, promoting the private sector, and a lessened role of the state in economic activity.

2. Stability – desire to lock in domestic reforms

Rules are useful in regional agreements to “lock-in” liberalization commitments that under unilateral policy alone can often be easily reversed, particularly with a change of leader or dominant political party.Lock-in effects of regional arrangements have allowed trade liberalization to move forward at a quicker pace.This is because such binding agreements create signaling effects, calling attention to the relative stability and/or certainty to be expected from a country’s trade and investment regime.This is particularly important for attracting outside investors.

3. Frustration with slow pace of multilateral system

The WTO, with 146 members (and soon to be 148, as soon as Cambodia and Nepal ratify their agreements), moves at level of lowest common denominator since everything must be done by consensus.This makes the liberalization process both slow and frustrating.As the number of subjects under multilateral disciplines increases, each round of trade negotiations becomes more lengthy and difficult to conclude, as evidenced by the blockage at the Cancun Ministerial.

At the regional level negotiating among like-minded countries can allow rapid progress to be made.For example:the US-Singapore FTA concluded in 18 months;the US- Central America FTA should be concluded in 12 months; and the Canada-Central America FTA concluded in 12 months; all with deeper disciplines than multilateral agreements.

4. Political – policy innovation & deepening

The FTAA negotiations have been ongoing since 1998, and much advance has taken place in several areas where multilateral talks have stalled or not even begun.For example, issues of investment and competition policy have been a part of the FTAA agenda from the outset, while they have not even gotten off the ground in the WTO and possibly never will. This is because the objective of regional arrangements is different from that of the multilateral system;free trade agreements need to go farther and deeper with their liberalization efforts (in the attempt to completely remove all barriers to trade in goods and services and investment), while trade liberalization at the WTO level is an incremental process.Thus engaging at the regional level already implies a degree of commitment that is already strong from the outset;for participants it would be counter-productive to politicize such shared objectives.In additional to deeper liberalization, regional agreements in the hemisphere also contain strengthened disciplines which often provide inputs into the multilateral system during negotiating rounds.

5. Strategic – to achieve more economic and/or negotiating weight in the international arena

Regional integration has promoted cooperation and permitted countries to be more integral global players.In the FTAA negotiations, the members of MERCOSUR, CARICOM, and the Andean Community negotiate as a group rather than as individual countries, enabling them to be more relevant and carry more weight in the negotiations.On a broader level, the link between Latin America and the Caribbean, and the two developed economies of North America (the US and Canada) that would occur as a result of a successful FTAA would make these developing countries much more significant participants in the world trading system.Agreements with these industrialized nations would amplify the positive effects of integration such as attraction of FDI, the lock-in of stable policies, and a further shield to protect democratic systems.

Growing Complexity of Trade Policy and the Political Environment for Trade

Much has been done in trade policy and in negotiating regional agreements in the last few years.However, in 2003 the economic and political environment for trade liberalization has become more complex and more difficult for countries in the Hemisphere.

Many different negotiating fronts
Today countries in the region have not only the FTAA avenue whose approaching deadline is looming imminent.They also have the multilateral road of the Doha Round, a process that is looking somewhat uncertain after the Ministerial Meeting in Cancun. And with the adoption of Trade Promotion Authority and the new US policy of “competitive negotiations”, many are also enthused by the prospect of a possible bilateral negotiation with the United States.How should countries prioritize and decide among these different options? How are they linked? What do these options imply for existing regional integration efforts? Particularly in the growing light of skepticism on the part of the general public surrounding the benefits to be derived from further engagement in trade.

Trade Liberalization has become controversial
Skepticism over further trade liberalization and reform is compounded at present by the significant deterioration in the economic situation in many countries of the hemisphere during 2001 and 2002, with growth slipping to negative numbers in many and poverty levels on the increase.

Unsatisfactory economic performance and persistent poverty cut both ways. On the one hand, they exacerbate fiscal, social and political constraints, and make the task of trade liberalization more difficult, even for those reformist governments committed to freer trade.On the other hand, the more difficult macroeconomic context makes it more imperative to progress toward and complete the FTAA in a timely manner so as to anchor economic policies, attract investment, and promote growth.

What is especially clear after the failure of the Cancun meeting is that the “selling” of further trade liberalization and economic reform has become much more difficult in Latin America and in the world. And yet, as a recent report by the Inter-American Dialogue argues, the FTAA will only become a reality if each government in Latin America and the Caribbean can make a credible case that the FTAA is good for the nation, that it is a key ingredient to restore economic growth, increase employment, reduce poverty; in short, that the FTAA is an important element of a broader national strategy to reduce the economic and social distress that has been on the rise in recent years.

Importance of Concluding the FTAA

Why does the FTAA loom so large and so importantly on this horizon? Because economic theory tells us that the larger the economic grouping, the smaller will be the trade diversion effects and thus the potential negative impact on countries outside the regional arrangement will be lessened. Countries participating in the FTAA account for roughly 25% of world GDP and 20% of world trade.Thus a regional agreement of this size would be economically highly significant, second only to the EU, and would therefore create the opportunities for both economies of scale and scope within the region, as well as diminish the trade diverting effects for those outside.

The FTAA negotiations are ambitious, as they are based on a far-reaching “WTO plus” agenda. Naturally, agriculture is one of the more contentious issues on the table, and a conclusion in this area may not be possible before the issue is resolved at the WTO level.Market access for non-agricultural goods is a central aspect of the negotiations, as is that for services.Other areas being negotiated include investment, government procurement, competition policy, intellectual property rights, services, dispute settlement, and subsidies, anti-dumping and countervailing duty disciplines.One unique feature of the FTAA negotiations is the special groups and committees devoted to issues significant to the content and conclusion of the agreement.These include groups on smaller economies, institutional issues, and the participation of civil society.

Lastly, the current tendency of the U.S. to negotiate on all fronts and particularly actively on the bilateral front, should be a worrying factor for Latin America and the Caribbean.If the FTAA is not concluded in a timely manner, there is a danger that the US will cast its interest elsewhere.The US public has a very short attention span, and trade issues are difficult and highly contentious, especially going into an election year.Failure to conclude the FTAA in January 2005 would run the danger of seeing a future increase in the number of FTAs with two or small number membership and thus possibly increase the distortions in trade in the region due to incompatible rules of origin requirements, increased transactions costs for suppliers trying to comply with a myriad of different rules and preferential opportunities as well as differing timetables for implementation.

The Latin American and Caribbean participants in the FTAA should actively strive to focus the attention of the US and Canada on the conclusion of the hemispheric agreement in the agreed time frame and in the most ambitious terms possible.This is the only way that the tendency we have seen towards an ever-increasing bilateral world in the Hemisphere may be checked.Dividing up the region into competing FTAs would serve to harm the interests and growth possibilities of all those countries left outside agreements with major partners.