Is the Trans-Pacific Partnership the Solution to Latin America's Fractured Trade Regime?

Many hope an agreement on the TPP will provide a much-needed boost to a still prostrate global economy, but what is being widely hailed as profound progress in the evolution of trade integration globally is having the opposite effect in Latin America.
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Latin America is poised to assume a starring role in the governance of international trade, with a Brazilian having been selected to lead the World Trade Organization and the Trans-Pacific Partnership (TPP) set to enter its 17th round of talks in Peru later this month. Many hope an agreement on the TPP will provide a much-needed boost to a still prostrate global economy, but what is being widely hailed as profound progress in the evolution of trade integration globally is having the opposite effect in Latin America. Rather than deepening trade ties within the region, the TPP is serving to expose and exacerbate underlying political and economic fractures, raising question about how deep Latin American trade cooperation can be, and whether the Americas are fated to continue to be divided along trade policy lines.

Praised as a cutting edge agreement to address 21st century cross-border commercial issues, the TPP will unite a dozen nations with the goal of establishing a core free trade area for the Asia-Pacific region. The bloc will account for more than 30% of global GDP and 20% of the world's exports -- which would grow considerably with the inclusion of Japan and South Korea - which are both actively exploring entry in the Partnership. Many potential signatories, including the U.S., have expressed a desire for conclusion of the Partnership this year. As is the case with any multilateral negotiation, getting to the finish line has not been easy.

The derailment of negotiations over the Free Trade Agreement of the Americas (FTAA) and the Doha Development Round had a significant impact on the perceived realism of regional trade agreements, while negatively effecting Latin America's ability to uniformly and robustly engage with its largest trading partners. The radically different trade policy paths that have emerged - pitting the notion of collaboration against economic nationalism -- have given rise to a region divided over how, and whether, it should approach trade liberalization going forward.

Within Latin America, only Chile, Mexico and Peru are currently party to the TPP. The three formed the Pacific Alliance (PA) in 2012, along with Colombia, which also hopes to join the Partnership. All four have made significant commitments towards trade liberalization. The PA members have concluded FTAs with one another and with the U.S., have implemented numerous bilateral trade agreements, and share a number of overlapping trade agreements that include several Asian countries. Membership in the TPP would facilitate increased integration with one another and offer a more coordinated approach to expanding trade with Asia. In conjunction with the members of the Central American Free Trade Agreement (CAFTA), it should one day be possible to create a supply chain running up the Pacific coast from Chile to Mexico.

On the other side of the spectrum are Latin America's "Atlantic" countries, whose approach to regional and global integration has taken a dramatically different course. Mercosur, the once promising common market, now includes the protectionist wing of Latin America that has come to include Argentina, Brazil, and Uruguay, along with socialist Bolivia and Venezuela. Between them, the ability to make genuine progress along regional trade lines has proven challenging.

During the commodities boom these countries prospered, but as a result of the global recession, growth waned and a propensity toward protectionism became common. The customs union that in the 1990s united its members to reduce trade barriers, forge a common trade policy, and actively participate in the FTAA negotiations has been transformed into one of the most protectionist blocs in Latin America, with its members routinely employing tariffs, taxes, and trade restrictions against one another. This has limited Mercosur's general appeal in and outside of Latin America. Mercosur has largely withdrawn from pursuing FTAs altogether, and its policies over the past decade have failed to consolidate meaningful partnerships with any of its primary trading partners.

In order to mitigate the impact of a divided Latin America and prevent the schism from intensifying, robust multilateral negotiations must be reconstituted. Much of what happens next will be influenced by the actions of the U.S., given its leadership role in the TPP. A primary obstacle that must be overcome is the Brazil/US relationship, which was a major impediment during the Doha round. Brazil is not currently party to any major multilateral trade initiative, and two of the principal agreements it has signed in recent years -- CELAC and UNASUR -- specifically exclude the U.S. Additionally, Mercosur requires that its members negotiate trade agreements in unison, meaning Brazil will need to find a way to compromise, as will its neighbors.

The U.S. has scored notable trade-related achievements in the past several years, mostly in the form of bilateral trade agreements, but these took far too long to accomplish and were highly politicized. Given this, it seems unrealistic to hope for any near term breakthroughs in future multilateral negotiations that rely on the U.S. for leadership. If the region continues to be a secondary priority of U.S. foreign and economic policy, large segments of Latin America will continue to be left out of the broader trade integration picture.

The announcement that the Obama administration will be sending Joe Biden to Brazil, Colombia, and Trinidad and Tobago later this month in what the Vice President called "the most active stretch of high-level engagement on Latin America in a long, long time" suggests that Mr. Obama would like part of his legacy to be a closer relationship with Latin America. To do so would at the same time require finding a way to reduce the appeal of 21st century socialism in a variety of countries in Latin America - something that seems improbable during his tenure.

The most likely near-term outcome is that the U.S. will take a leadership role in pushing for additional Latin American countries to join the TPP, starting with Colombia, Costa Rica, and Panama. All three countries have undertaken significant commitments toward liberalizing trade, have shifted the focus of their trade policies to Asia, and have expressed interest in joining the TPP. Colombia is the best fit, as it already has agreements with five TPP members, is finalizing agreements with Japan and South Korea, and sends nearly half its exports to the TPP-12. While such a development may reinforce the emerging split between Mercosur and the Pacific Alliance, it may also eventually help encourage the adoption of more open trade policies that can counter the protectionist tendencies that have arisen.

Greater Latin American participation in the TPP will surely serve to strengthen the Partnership and the region. If the negotiations are able to successfully address the two biggest problems facing the TPP in Latin America -- synchronizing the dozens of bilateral agreements that exist between members and non-members, and bringing other countries into the TPP -- then the agreement will serve to reinforce integration into the global supply chain and effectively sidestep sclerotic multilateral trade talks at the WTO. Failure to reach agreement may mean that rather than encouraging mutual prosperity through deeper economic ties, the level of political and economic discord surrounding trade in Latin America will rise.

Given the stakes involved, all countries participating in the negotiations need to recognize what is in their mutual long-term interests, step up to the plate, and do what is needed to make the TPP a reality. However, given the track record of lengthy and ultimately unsuccessful multilateral trade negotiations in recent history, it is more likely that any agreement will take much more time to be concluded. In the meantime, the spaghetti bowl of bilateral trade agreements will continue to undermine efforts to achieve multilateral solutions to the region's trade challenges.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk advisory firm based in Connecticut, and author of the book "Managing Country Risk." Nicholas Parker is a research analyst with CRS in New York.

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