A New Opportunity for Economic Integration in South America

The comeback of center-right administrations in South America could lead the region towards new integration opportunities, yet the road ahead remains challenging.

By Alvaro Zapatel

Sixteen years ago, U.S. President George W. Bush began exploring deeper integration opportunities with Latin America. The Bush administration's intent was to expand the North American Free Trade Agreement (NAFTA) to 34 nations in the hemisphere into a proposed Free Trade Area of the Americas (FTAA). But the potential reboot in the U.S. trade relationship with the Americas in the early 2000s sunk in 2005 for two reasons: a shift in priorities in U.S. foreign affairs after the 9/11 attacks, and broad regional resistance to the FTAA from leftist governments, such as those in Venezuela, Argentina, and Bolivia. More recent regime changes in South America, however, signal new opportunities to reopen free trade negotiations in the Americas.

The political shift in the region has taken place amidst the economic turmoil of South America's main opposition to the United States in the 2000s: Venezuela. In fact, Venezuela spent the first decade of the twenty-first century building a regional economic platform to legitimize its geopolitical influence. As a consequence, the late Venezuelan President Hugo Chávez began to expand Venezuela's influence in the second half of the 2000s, taking advantage of the lack of U.S. interest in the region. With substantial oil revenue, Chávez augmented Venezuela's extensive social programs both at home and abroad, providing special trade agreements and subsidies to its allies. In 2007, Venezuela spent $8.8 billion in subsidies and development projects in the region, whereas U.S. aid amounted to only $1.6 billion in the same period. In this way, the Venezuelan regime gained legitimacy and became an important counterweight to U.S. influence. Venezuela built strong relationships with Brazil, Argentina, Ecuador, and Bolivia by subsidizing their external debt and providing oil while the United States continued to disengage from the region.

Today, inflation, food shortages, and an increase in crime, combined with the fall in oil prices, has substantially decreased Venezuela's capacity to subsidize its neighbors and thus has decreased its leftist influence in the region. At the same time, economic instability in Brazil and Argentina--caused by price controls, inflation, currency controls, and systemic corruption--led voters and politicians to support drastic political and economic reforms. As a result, two of Latin America's largest economies--and crucial Venezuelan allies--underwent dramatic regime changes in early 2016. However, Brazil and Argentina are not the only countries that have shifted towards the center-right in the region. Colombia, and more recently Peru, have elected governments with center-right platforms, making this the first substantial regional shift to the center-right side of the spectrum in Latin American politics since 1999. Such broad political changes in South America present an opportunity for the United States to meaningfully re-engage with Latin America.

South America is welcoming economic reforms that imply fiscal responsibility and stronger bilateral and multilateral agreements. These reforms--which include expanded trade areas and greater foreign direct investment in the region--aim to increase the South American bloc's leverage in negotiations with its North American and European counterparts. This scenario provides an opportunity to resume FTAA negotiations, which have essentially been frozen since 2005. In effect, South America has the opportunity to focus on economic and trade policies that can serve as stepping stones towards regional integration.

The challenge to South American integration hinges on the region's influential countries' capacity to build strong economic ties that bring political stability in the medium-term. But steps toward a regional trading bloc are impossible without support from the United States. The United States must present opportunities beyond better conditions for trade--such as new opportunities for foreign direct investment and development aid--to the negotiating table. Additionally, the United States' South American counterparts need to translate the benefits of economic integration into more investment in social programs, such as healthcare and education programs to eradicate poverty, and robust reforms to the judiciary. Failure to implement these types of reforms in Argentina, Brazil, and Peru is simply an opportunity for new demagogues to move the region towards populism once again. The United States should seize this opportunity, because a demagogic backlash would be detrimental to Latin America's future economic development and democratic consolidation.

Alvaro Zapatel holds a BA in Economics from Boston College, and currently works as a Specialist in Project Monitoring and Evaluation at the Peruvian Ministry of Education. He is also a Professor in the Department of Economics and Communications at the University of Lima. Alvaro is a Latin America Fellow at Young Professionals in Foreign Policy.