Articles

Testimoy before the House Committee on International Relations Subcommittee on International Economic Policy & Trade, July 9, 1997

Let me begin my remarks by thanking the House Subcommittee on International Economic Policy and Trade, and in particular its Chair, Congresswoman Ileana Ros-Lehtinen, for the invitation to share with all of you our viewpoints on MERCOSUR and how the continued lack of fast track authority for the Executive Branch is negatively affecting the ability of the United States to shape the agenda for a Free Trade Area of the Americas.
Mercosur Consulting Group, Ltd. has a rather unique perspective on the issues affecting the economic integration of the Western Hemisphere because of the type of work we do. We are a legal and economic consulting firm which advises U.S. companies interested in either direct investment opportunities within South America or in exporting to South America from this country. Our particular niche specialty consists of advising U.S. companies on how the various Latin American economic integration projects operate so that they can optimally benefit from them. Our work, therefore, gives us a very practical insight into how these various sub-regional economic integration projects in Latin America are functioning -- or are not, for that matter -- and how they can facilitate or hinder the overall goal of a Free Trade Area of the Americas. Accordingly, the comments I make today are based on years of observations gained from assisting companies actually doing business in the region and attempting to grapple with the many rules and regulations imposed by the different sub-regional integration projects in our Hemisphere.

The first thing I want to emphasize is that whether or not the Clinton Administration ever gets fast track authority, it seems to us that the economic and financial integration of the Western Hemisphere will continue at its current break neck speed. What the private sector is doing today in terms of cross-border investment and trade activity in the Americas will eventually force the political sector to take action and establish the legal framework for this increasingly integrated Hemisphere, even if some political leaders, particularly in this country, currently appear either unable or unwilling to face up to this responsibility. As a result, we do not share the alarmist view expressed by some that if Congress fails to grant President Clinton fast track authority prior to the Second Summit of the Americas scheduled for Santiago, Chile in March of 1998 this would be a major blow to the FTAA project. Such a failure to grant fast track authority might be a pathetic reflection of the sorry state of U.S. leadership on trade issues in this Hemisphere, but it would not mean the demise of the economic and financial integration of the Americas.

Secondly, we do not see the emergence of a strong MERCOSUR or a MERCOSUR-led South American Free Trade Area (SAFTA), as undermining the ultimate goal of a Free Trade Area of the Americas. if anything, the sub-regional projects throughout Latin America, including MERCOSUR, facilitate the FTAA goal in that they first iron out problems that inevitably result from attempts to integrate economies that are vastly different in size and development on a much more manageable, sub-regional level where the disparities tend to be less stark. Furthermore, a strong MERCOSUR or SAFTA might actually serve as an effective negotiating counterweight to the United States and force our country to finally get rid of our own protectionist policies that are often cloaked in terms of "antidumping" measures, for example, and which only serve to hurt the U.S. consumer by forcing them to buy more expensive and/or inferior goods.

Having said all this, however, it would be extremely unwise to think that continued Congressional inaction on granting President Clinton fast track authority will not have serious negative repercussions for the United States. We believe that as long as the Executive Branch lacks fast track authority, it will sharply diminish the negotiating position of the United States in shaping the agenda for what will be included under the umbrella of a Free Trade Area of the Americas agreement. Such a situation could very well mean that certain topics will never be considered for inclusion to the great detriment of many U.S. companies and their employees. One has only to look at how the MERCOSUR project -- by far the most important of the Latin American integration projects in terms of such things as population, GDP, industrial and agricultural production, and dynamism -- treats certain subject areas, to under score what we mean by this.

Despite the impressive gains that MERCOSUR has achieved in six short years, one will search in vain for programs that open up of the telecommunications and financial services sector as well as government procurement opportunities as found in the NAFTA. Instead, the annex to the Protocol of Colonia, the legal document which controls intraregional investment within MERCOSUR, currently allows member states to restrict operation of telephone systems, media ownership, participation in financial intermediary services, and bidding on government procurement contracts to their own nationals.[1] The fact that some of the MERCOSUR countries have decided to restrict competition in these sectors on a sub-regional level when their domestic companies face little threat from other, regionally-based operations, is a troubling development. After all, these are precisely among the very economic sectors where U.S. companies enjoy a strong international comparative advantage. Accordingly, one can imagine the great resistance there will be in liberalizing these sectors to competition from U.S. companies in the context of an FTAA. We believe that the more time that goes by in which the Executive Branch does not have fast track authority, the greater the likelihood that the ultimate FTAA agreement that is presented for signature in 2005 will not contain the type of market liberalization rules that benefit the most dynamic sectors of the U.S. economy.

The lack of fast track authority has already had negative repercussions which many in the media and the foreign policy establishment seem to be completely unaware of as they repeat the mantra of fast track authority being needed for “Chilean accession to NAFTA.” As we see it, Chilean accession to NAFTA is now a dead issue as is an FTAA based on the steady expansion of NAFTA southwards to include other countries in the Western Hemisphere. While NAFTA accession might arguably still be feasible for Central America and the Caribbean, NAFTA expansion to include South America died on June 25, 1996 when Chile signed a free trade agreement with MERCOSUR. The Chilean agreement with MERCOSUR was followed by another similar one between the bloc and Bolivia, while agreements between MERCOSUR and the remaining member states of the Andean Community are currently under negotiation. As a result, it now seems inevitable that by the time of the Santiago Summit next March, the United States will find itself sitting down to negotiate an FTAA with a united South American bloc that shares certain interests that do not necessarily coincide with those of the NAFTA countries.

One of the reasons why we think that the historical moment for Chilean accession has passed is because of a provision found in the agreement Chile reached with the MERCOSUR whereby any favorable tariff concession Chile may grant to third parties, such as the current NAFTA partners, must also be extended to the MERCOSUR countries. if not, Article 52 of the Chile-MERCOSUR free trade agreement requires that Chile negotiate some form of equivalent compensation. In practical terms, this means that Chile is no longer the independent player it was when NAFTA accession was first promised in 1994, but must now answer to MERCOSUR for anything it may concede to NAFTA. For anyone who thinks that Article 52 is simply an idle or theoretical threat, I would point out that the MERCOSUR countries are presently using Article 52 to demand that Chile grant them the same more favorable tariff concessions on agricultural products it just gave Canada under a bilateral free trade agreement Chile signed with that country in December of 1996.

Contrary to press reports which accompanied its execution, we also believe the new Chilean-Canadian free trade agreement does not facilitate but rather creates further stumbling blocks for Chilean accession to the NAFTA.[2] Under the Canadian-Chilean accord, Chile preserved its capital retention program whereby foreign investment capital entering the country can not be sent abroad for a period of up to one year. In addition, the Chileans also managed to retain a requirement whereby the equivalent of 30% of the capital of a foreign loan or a so-called "non productive" (i.e., portfolio) investment must be deposited in a non-interest bearing account held by the Chilean Central Bank for a period of one year.[3] In the past, the United States government has complained that these requirements create significant foreign investment barriers and would not be tolerated if Chile were to accede to the NAFTA. Chile was also able to keep its price band mechanism for key agricultural products, which the United States has attacked as a protectionist measure which puts certain U.S. exports at a serious competitive disadvantage.

The rule of origin requirements in the Canada-Chile Free Trade Agreement includes a very liberal 35% regional content requirement for a wide range of manufactured goods that can traded duty-free between both countries. By contrast, the comparable minimal regional content requirements in NAFTA are 60% or higher. Unlike NAFTA, the Canada-Chile Free Trade Agreement makes no provisions for liberalizing cross-border investments in the financial services sector and has no chapter on intellectual property rights. In sharp contrast to NAFTA, the Canada-Chile agreement also obligates both countries to phase out within six years the use of antidumping duties against imports from either country. This was something the Canadians also wanted eliminated within NAFTA but were unsuccessful in securing in the face of vehement opposition by the United States.

Given the concessions that Chile was able to obtain in its negotiations with Canada, it is unlikely that she would agree to drop them as would inevitably be the case if Chile were to accede to the NAFTA. Current negotiations between Chile and Mexico may well result in a comprehensive free trade agreement which, while it may go beyond the current limited free trade accord the two countries have under the ALADI framework, is also likely to deviate in some significant ways from the NAFTA. Under such circumstances, the most the United States can now hope to obtain from Chile is a bilateral free trade agreement. Even this may not be feasible, however, since the Chileans may now find it in their best interests to negotiate with the United States as part of a SAFTA bloc, particularly if they want to eliminate the use of non-tariff barriers, antidumping and countervailing duties, and other measures currently used to restrict access to the U.S. market. Alone they may not succeed in such a quest, but they stand a significantly greater chance negotiating as part of a SAFTA.

In summary then, we do not view the continued failure of Congress to grant fast track authority to the President as necessarily fatal to the FTAA process, nor do we see MERCOSUR as a looming menace which threatens to undermine attempts to create an FTAA. However, the continued lack of fast track authority sharply diminishes the ability of the United States to shape the agenda for an FTAA in a way that will benefit the greatest numbers of workers in our country. The reason for this, quite simply, is that the longer the Executive Branch is denied fast track authority, the more other trading blocks in this Hemisphere -- particularly what appears to be a rapidly developing MERCOSURA-led SAFTA -- increase their negotiating strength vis-a-vis the United States. In our view, the failure of Congress to grant the President fast track authority goes to the question not of whether there will be a Free Trade Area of the Americas, but rather what will this FTAA be like?

1. Interestingly, the Protocol of Colonia, with all its restrictions, still awaits ratification by any of the four signatory states. Accordingly, the MERCOSUR countries are currently free to retain and/or enact even stronger restrictions to intra-regional competition than those permitted in the Protocol.
2. The initial media euphoria may have been based on the fact that the Chilean-Canadian free trade agreement does include NAFTA-style side agreements on labor and the environment, two issues which are often blamed for the current impasse between Congress and the Executive Branch with respect to fast track authority.
3. As an alternative, the investor or lender may purchase Central Bank commercial paper which is equivalent to the amount of interest that the deposited funds would have generated.