Pacific Alliance

Where Are We in Global Trade?

This has been an interesting, mixed, two weeks in trade.  On the one hand, the system continues to receive new shocks, particularly from US President Donald Trump.  On the other hand, trade integration is also moving forward.  The net result continues to highlight the increasingly unsettled global environment.  Firms need to focus on how to mitigate the risks facing their business operations.
Let’s start with the bad news. Two separate hearings have wrapped up in Washington.  The first focused on product categories for an additional $16 billion in 25% tariff rate hikes against goods coming from China. Regular readers may recall that the Americans first produced a list of items totaling $50 billion for new tariff increases.  The list was revised on the basis of hearings.  The first $34 billion in tariffs have already gone into force (and were met with retaliation by China on a similar amount).  But $16 billion in products were contested, resulting in a new list from the USTR. Now that hearings on the revised list of products has been completed, tariffs can be imposed at any time.  Expect them to be announced on Friday (since this seems to be the preferred approach of the Trump administration).  These new Section 301 tariffs will likely be met with $16 billion in matched retaliatory tariffs by China. 

The Pacific Alliance at Year 6

The Pacific Alliance, a regional integration initiative which brought together the economics of Mexico, Colombia, Peru and Chile, has garnered a surprising amount of attention from around the world after only six years since its creation; more than 50 countries have flocked to become observers. To understand the sudden interest one has to look at the member’s ability to establish themselves as a credible and ambitious body with incredible potential to increase investment and trade opportunities in the region. Nevertheless and despite the relative success that the PA has had to date, there remain large obstacles it must overcome to achieve its ambitious goals.

TPP Collapse? Plan B for Everybody Else

Few firms buy and sell goods or services in just one market—even if that one market is huge.  In the long run, larger, more comprehensive agreements are much better for firms than smaller, more limited agreements.  This is what makes the TPP such an important agreement for business.  But, if the deal never makes it out of Capitol Hill in Washington, the remaining TPP countries have many options that can be pursued in the near term.  As Plan B strategies go, these are certainly better than nothing.

The Pacific Alliance Turns 3

I was asked to speak this morning at an event from the Latin American Chamber of Commerce in Singapore about the Pacific Alliance (PA) and ASEAN.  There are several striking things about the Pacific Alliance that makes the topic worthy of another blog post this week.

 The Pacific Alliance has brought together four economies in Latin America:  Mexico, Columbia, Peru and Chile. 

The first interesting point to make about the Pacific Alliance is that it is a relative newcomer.   The first week of June, in fact, marks the 3 year anniversary of the launch of the Framework Agreement.  This agreement will be fully in force in early 2016, as domestic procedures to bring it online remain to be sorted.

Second, despite its relative youth, the Alliance has been attracting a surprising amount of attention.  More than 30 other countries have flocked to become observers.   The Alliance has also attracted the attention of its own neighbors, with membership in the cards for several. Costa Rica, for example, has already completed the accession process and is awaiting confirmation of membership from their Parliament.  Panama is in the queue.

To understand the reasons for such intense interest in the PA, it is necessary to look at the sweeping ambition in the organization.  The guiding principles are a commitment to democracy and free trade.  In order to join, members must have in place existing free trade agreements (FTAs) with other members. 

The 8th summit in February 2014 saw members agreeing to drop tariffs to zero just over 90% of products, with the remainder to be phased out over time.  Many of the tariffs between PA members are already low or zero as a result of existing FTAs.

But the PA does not stop at tariff reductions.  It includes interesting and innovative rules of origin (ROOs) that make it relatively easy for firms to use the trade protocol as well as trade and investment promotion efforts.  Regional agreements are easier to use and more beneficial for businesses than bilateral trade arrangements.

Members are also moving towards the free movement of goods, services, capital and people.

In many ways, the sweeping goals of the PA mirror those of ASEAN.  Under the ASEAN Economic Community (AEC), leaders in Southeast Asia have promised free movement of goods, services, investment, skilled labor and freer movement of capital.  The AEC is meant to come into force later this year after more than 20 years of steady progress towards the goal of deeper economic engagement between member states.

To be clear, neither the PA nor the AEC will actually achieve these grand ambitions in the near term.  To reach free movement of goods and services requires a host of complementary policies beyond just dropping tariffs.  At the moment, neither ASEAN nor the PA have implemented many of these supplementary policies. 

But part of what makes the PA worthy of note is how quickly members are moving towards their goals.  For example, the members have dropped visa requirements already, allowing citizens to flow freely as tourists and conduct short-term business visits between PA countries.  The goal is even more ambitious—to allow outside tourists and investors to get one Pacific Alliance visa to cover all members (like the Schengen agreement in Europe) as well as to increase the length of time granted for visa entry to businesses. 

Another notable achievement is the pooling of activities designed to reflect deep integration across members.  The opening of the Latin American Market (MILA) is especially striking, as it brings together stock markets.  Over time, MILA is likely to move towards joint stock listings.  In Singapore and elsewhere, even embassies are joining up—one facility to host multiple members.  

Again, to be clear, ASEAN has no plans underway to either integrate its stock markets or to pool sovereignty to the extent of sharing embassies overseas.  While ASEAN has visa-free tourist travel, it does not intend to create a joint visa or to scrap domestic immigration rules that govern long-term employment entry.

So why have the PA members taken such bold steps towards integration?  Largely because leaders have recognized the structure of the global economy today.  In a world increasingly connected by global value chains or supply chains, it is becoming ever more critical to countries to meaningfully lower barriers to integration.   Current PA members have signed multiple free trade agreements already as part of a process of joining value chains to help spur economic development and growth in the region. 

PA members have had to contend with low levels of integration across Latin America.  Problematic infrastructure, challenging geography, and historical legacies have limited the connections between countries in the region.  The low level of integration with neighbors has made it hard for businesses to plug into value chains. 

Hence from the beginning, PA members have had two objectives—to increase connectivity within PA countries and to attract investment, especially from Asia.  This will allow PA companies to increasingly plug into value chains already active in Asia and to develop new linkages across the region.

Currently, neither ASEAN nor the PA actually trade very much with their own members.  The figures for inter-Latin American trade are extremely low.  Trade levels between PA countries are equally small—in the single digits.  After more than 20 years of integration, the figures for inter-ASEAN trade remain stubbornly stuck at less than 25%. 

On the bright side, the opportunities for improvement in inter-regional trade and investment are significant.  Limited levels of integration should also reduce the pressure on governments from businesses and the market.  ASEAN shows that even with extensive discussions about regional integration and repeated efforts to open markets to one another, the level of direct competition between members may remain relatively muted. 

For the PA, this trend is likely to continue.  The relative lack of infrastructure to connect the markets of members and the sheer geographical distances involved suggest that even completely open markets may not lead to extensive inter-PA trade.  Instead, the objective has to remain building strong linkages with other partners in Asia and to encourage the creation of value chains between Latin American members as well as those that span the Pacific.

This is likely to be hard to do given the current, weak institutional structure of the PA.  Now, leaders largely direct the Alliance from the top.  But it is hard to get serious about implementation without an institution of some sort to pay attention to the nitty gritty details that are critical to real success.  Working groups (19 technical groups already exist) and the use of committees with members and with observers can rapidly get unwieldy. 

However, a focus on meeting the objectives of the PA is likely to be sustained and reinforced by activities elsewhere.  In particular, member commitments to openness and integration are reinforced by promises made in the Trans-Pacific Partnership (TPP).  So far, three PA members (Mexico, Peru and Chile) are also involved in TPP negotiations with four ASEAN countries (Brunei, Vietnam, Malaysia and Singapore).  Between the PA and the TPP, member governments are likely to have a laser-like focus on implementing the kinds of rules and regulatory changes needed to foster the development of value chains for goods and services across the region.

Hence, as the Pacific Alliance heads towards its third anniversary, the future looks bright.  The level of commitment to the goals of freer trade has been enthusiastically embraced by the highest levels of government.  Sustained interest by outside partners suggests that the hunger for improved economic growth and opportunities will continue into the future.