Latin Countries Forge Trade Accord With Eyes On Asia

Courtesy of the Wall Street Journal, a report on the new Pacific Alliance between Mexico, Colombia, Peru and Chile:


Latin America’s most open economies signed a free-trade pact on Monday in an effort to firm their ties and raise commerce with Asia, a move that also creates a counterbalance to their colossal neighbor Brazil.

The so-called Pacific Alliance between Mexico, Colombia, Peru and Chile aims to make 92% of the four countries’ goods tariff-free, while phasing in the remaining 8% over the coming years. The accord creates a market of some 210 million people, bigger than Brazil’s, with a combined economic output equal to 35% of the total GDP of Latin America and the Caribbean.

Monday’s development deepens an ideological and economic split within Latin America.

The Pacific alliance nations generally embrace free trade and open markets, while the Atlantic coast countries of Brazil, Argentina and Venezuela have introduced larger state roles to their economies and view globalization with suspicion.

The new bloc is expected to grow an average of 4.25% this year, supported by foreign investment and low inflation, according to Morgan Stanley. MS -0.74% In contrast, many economists say Venezuela will contract, Argentina will enter recession and Brazil will grow just 2% this year.

The alliance, founded in June 2012, aims to decrease trade barriers in goods and services, link stock markets, and find common policy on issues such as currency fluctuations. A vital goal is to increase trade with fast-growing Asian nations. It also aims to expand membership to its neighbors. Costa Rica is working toward becoming a full member; Panama is a candidate.

“This is the most exciting thing happening in the hemisphere on the integration front,” said Michael Shifter, president of the Inter-American Dialogue, a think tank in Washington.

Monday’s pact was born after a failed attempt to forge a U.S.-led Free Trade Area of the Americas, a 2000s-era attempt to link the economics of North, Central and South America. The ambition faltered after opposition from countries including Argentina, Brazil and Venezuela.

Before the new pact, some of the members states had already moved toward free trade. Chile, for example, had signed pacts with Mexico, Colombia and Peru.

Economists say Pacific Alliance nations have a more dynamic export sector than their regional counterparts and a higher likelihood of attracting foreign investment, putting it a better position to weather the weaker demand from China that is hurting many of them.

“It’s reasonable to expect the Pacific Alliance countries to continue to grow in coming years, and difficult to see the other countries overcoming their economic difficulties—barring some other manna from heaven,” said Barbara Kotschwar, a research fellow at the Petersen Institute for International Economics. But Mr. Shifter and others pointed out that the new trade agreement won’t help the countries make needed strides in infrastructure and productivity.

In Colombia, for example, the development of roads, bridges, ports and airports has been uneven in recent years. Last fall, the country was roiled by massive protests by agricultural producers demanding more state investment and protection against price drops due to the country’s recent free trade agreement with the U.S.

“There’s a complete lack of competitiveness in this country,” said Rafael Mejia, president of Colombia’s Society of Agricultural Producers, a critic of the new Alliance pact. “There’s not the necessary infrastructure, ports, airports…this is more a political alliance than a commercial one.”

Some critics even point out the irony that Colombia’s Pacific coast is still so underdeveloped that the signing ceremony with the country’s leaders on Monday was held in Cartagena—a city on the Caribbean coast. Colombia’s most important Pacific city, Buenaventura, is mired in drug violence and has barely passable roads.

Peru also lags in much of its infrastructure, and has been working to improve its antiquated highways, airports and sea ports.

In addition to logistical challenges, the leaders’ public support has eroded since the pact was signed—especially for President Ollanta Humala of Peru and President Enrique Peña Nieto of Mexico—as their countries’ economies have slowed. This could make it harder to implement the new trade rules.

During a recent panel on the alliance at the World Economic Forum in Davos, Switzerland, last month, presidents from the Pacific Alliance member countries sought to down play the group’s political ties. Some observers said this as done in an effort to maintain good relations with Brazil, whose economy is still the region’s largest.

“We are not a political alliance, we are countries who believe in and have a shared vision on free trade, social inclusion and economic growth,” said Mr. Peña Nieto told the panel. “This is an open alliance for those who are in favor of the same principals and convictions.”

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