Latin America and Europe: The Future of EU-ACN Trade Negotiations

August 5, 2008 18:43 | by Guillermo Cornejo

Since 1993, representatives from the member countries of the Andean Community of Nations (ACN) and the European Union (EU) have met periodically to strengthen their commercial and political ties. From the European side, the eventual goal of these meetings was to allow for the Andean countries to find an alternative development model to the one proposed by Washington. This would allow for the EU to assist in creating development programmes and offer the Andean nations opportunities for economic integration with the European body. As part of this assistance, the ACN and the EU would negotiate a treaty to enhance their political dialogue and cooperation. Though negotiations have been stalled for quite some time, the potential Association Agreement resulting from the meetings would include pursuing common political and economic goals, such as a free trade agreement (FTA) between the two blocs and for further support for development within the Andean region.

Analysing the Association Agreement

European politicians would like their Latin American counterparts to believe that the above are the goals of the Agreement. In reality, the actions of EU leaders do not begin to address the complex political-economic situation found within the Andean region. Furthermore, it would be naïve to underestimate the possibility of special interests pressuring Andean politicians to sign an FTA and equally as far-fetched to assume that Europe intends to help the ACN out of pure altruism. The proposed FTA is based on previous agreements negotiated by Peru and Colombia (the latter ones, yet to be ratified) with the U.S. and must be closely scrutinized in order to ensure that it is both efficient and rejection proof.

What is the EU's real interest?

The growing commodities crisis is transforming Latin America into a crucial region because of its abundant natural resources. Therefore, Europe developed a heightened interest in improving its commercial relations with the ACN. Other countries, such as the U.S., have already been doing so for some time. It is not a coincidence that both the EU and the U.S. started negotiating with the Andean countries in 1993, and that they compete in similar export markets such as machinery and other capital goods, in addition to both importing huge amounts of raw resources from the region. The Free Trade Area of the Americas (FTAA) was the U.S. attempt at pulling the region into its sphere of influence, though it utterly failed at this due to tough-minded opposition from populist and anti-imperialist presidents in South America. With the Western powers displaying a sobering interest in trading with South America, it became clear that it would be beneficial for the ACN to pursue an Association Agreement with the EU.

Taking into consideration that the ACN already is under the jurisdiction of the Generalised System of Preferences (GSP), and that the GSP allows the ACN to export to the EU under a relatively low tariff regime without having to lower its import tariffs, the intrinsic importance of a new FTA to the ACN could easily be overestimated. The ACN wants the bargaining process to start with the GSP as a reference point, but the EU demands that negotiations must start from scratch. If talks fail, the GSP will be able to ensure that Andean imports still have some commercial preferences in entering the EU market. Again, in order for any potential FTA to be acceptable to the Andean trade association, it must be considered just as beneficial to its commercial interests as the GSP is today.

Furthermore, while the FTA is supposed to include mechanisms that protect its members against artificially low-priced imports, such as subsidized agricultural goods, it is evident from the NAFTA experience that, in practice, these mechanisms usually are insufficient. An FTA, in comparison to the GSP, may be less advantageous for the ACN if subsidized agricultural goods end up potentially bankrupting many more already impoverished Andean farmers.

There are even more reasons to be sceptical of an Association Agreement. Despite a pledge at the Lima summit by EU leaders to protect human rights and the right of migration, a July 18th "return directive" calls the EU's motivations into question. The return directive standardizes procedures for dealing with illegal immigrants hoping to migrate to a European Union country, of which an estimated three million have come from Latin America. While Europeans argue that they favour legal migration and a strong human rights code, Latin American leaders are concerned over the treatment of illegal immigrants in the region. For example, under the new EU directive, minors can be detained and extradited to their home countries without their parents, cruelly separating families. In defence of the law, Francesca Mosca, the ambassador of the EU to Panama, said that the law seeks to unite families and establishes the voluntary return of illegal immigrants.

Reactions to a Shameful Law

In response to the EU's approval of its directive, President Evo Morales of Bolivia dispatched a letter to European leaders, reminding them of the pledge to protect human rights made at the Lima summit. He stressed that the Americas have always welcomed poor European immigrants to their member countries and that it would be impossible to continue trade negotiations if the EU did not modify its new regulations. Morales threatened to require visas for Europeans desiring to enter Bolivia, following the diplomatic principle of reciprocity. The other Andean presidents have joined Morales in condemning the new EU directive. A total of nine Latin American presidents have expressed their disapproval for the directive to date. Bolivia and Venezuela have gone so far as to threaten cutting off oil and natural gas supplies to Europe, while Ecuador has announced the suspension of the EU-ACN negotiation because of the immigration issue. In addition, the Organization of American States (OAS) has organized a multinational commission to discuss the issue with European delegates. Colombia and Peru have not abandoned trade negotiations altogether, but in order to successfully influence European politicians to create a more humanitarian law, all Latin American nations must unite.

The already slow trade negotiations have now stalled completely, arguably for good reason. If the EU cannot fulfil its pledge on immigration, the Andean countries have some logic on their side to be suspicious of EU intentions regarding other outstanding issues, including free trade. Will the Association Agreement include some sort of protection against subsidized European farm goods? Will the new trade deal be more beneficial for the ACN than the GSP has been? Most importantly, is European influence preferable to U.S. influence? Or will it be less benign? Andean leaders are likely to be asking themselves at least some of these very questions.

Divide and conquer, the U.S. strategy

The U.S. seems to be fully aware of the EU's competition for political and economic influence in South America. For this reason, when the FTAA failed, Washington threw itself into pursuing individual bilateral agreements, a strategy that worked in Peru and may yet be successful in Colombia. Thus far, the U.S. has a negative trade balance with both of these countries, and signing the FTAs will probably serve to only increase the U.S. trade deficit. Such sacrifice can only be explained by the belief that a larger long-term benefit, such as the securing of Andean natural resources, would be in the offering.

By signing individual FTAs, the U.S. has been able to slow the negotiation process between the EU and the ACN. These FTAs have divided the members of the ACN. Peru, Colombia, Ecuador and Bolivia have lower import tariffs among themselves in order to promote commercial integration. If the U.S. implements an FTA with one of these countries, subsidized imports from the U.S. may be resold to any of the other three using the FTA signer as a middle man. The result is that cheaper, subsidized American products compete unfairly against poor farmers from the entire ACN bloc. To prevent this, tariffs between ACN members would need to be raised, effectively defeating the purpose of forming the ACN to begin with.

Individual FTAs have contributed substantially to the undermining of the ACN. Venezuela left the pact in part because it disagreed with Peru and Colombia's FTAs with the U.S. The former two have also attempted to sign trade agreements with the EU before Ecuador and Bolivia, which could further accelerate the disintegration of the ACN. The inability of the Andean group to establish a common foreign trade policy has led to the failure of the EU-ACN negotiations, which were postponed by the EU on June 30th. It remains unclear whether the application of U.S. influence was intentional or not, but the recent mobilization of the Fourth Fleet in regional waters is undeniable proof that Latin America is once again on the minds of U.S. policymakers.

South American Economic Alternatives

Given the clear geopolitical and economic interests that both the U.S. and EU have in the Andean region, the reaction of area left-leaning governments, like that of Chavez's, is not surprising. The creation of the Bolivarian Alternative for the Americas (ALBA), an alternative to the American FTAA, was based on a mutual regional cooperation formula instead of neoliberal trade procedures. Up to this point, it has been signed by Venezuela, Nicaragua, Cuba, Bolivia and Dominica. ALBA member countries do not have to fear for the livelihood of their impoverished farmers since they can still use tariff barriers to protect themselves from artificially inexpensive agricultural products coming from the subsidized farms of Europe or the U.S. Though the potential trade among member countries is quite limited in comparison to trade with the Western powers, ALBA brings on a commitment to economic modernization. For example, Cuba sent doctors and teachers to aid Venezuela in exchange for favourable oil prices, marrying social justice to hardcore economics. ALBA may represent what other regional economic agreements are failing to do: trade designed to benefit the poor.

While Venezuela leads ALBA, the Union of South American Nations (UNASUR) has strong ties to Brazil. In years to come, UNASUR may represent a significantly greater potential for South American interests in terms of economic trade, defence and political influence than ALBA. The GDP and population of ALBA nations is only one-eighth that of UNASUR. Founded in May of 2008, UNASUR seeks to eventually unite the ACN and Mercosur in an effort to create a single free market for South America and to promote further integration among member countries. UNASUR may be able to project increased negotiation power and an obvious ability to stand up for Latin America when it comes to formulating free trade agreements. However, different national interests may cause conflicts and delay the whole-hearted implementation of UNASUR. In any case, Brazil could use the treaty as a wedge to expand its growing influence in the region.

Whatever their motives, these countries have the theoretical opportunity to improve their socio-economic situation through UNASUR membership. With the full participation of all South American countries, the combined GDP of UNASUR would be approximately $2 trillion, making it one of the largest markets in the world and irresistibly attractive for investors. Infrastructure projects connecting the different countries would greatly benefit their local economies, whose competitiveness and size are limited because the market for their products is relatively small. Also, new trade routes are likely to open, creating additional opportunities and helping to solve local supply problems. An example of such integration is the Transatlantic Highway between Brazil and Peru, currently under construction. The free movement of people will allow for greater flexibility in accessing the membership's labour market, while the full advent of the South American Defence Council might render UNASUR as an international power once it is fully implemented. However, international disputes like the conflict between Peru and Chile over Pacific ocean borders and fishing rights may slow a much-needed integration process. Despite the favourable economic conditions that much of South America enjoys, it seems likely that UNASUR could remain a distant dream due to ideological differences and the sometime conflicting interests of its member nations.

Other concerns over free trade

According to neoliberal economic theory, liberalization of trade should benefit Latin American economies through increasing competitiveness and foreign investment. Two instances that nurture this idea are the experiences of the Asian Tigers and Chile. It must be noted that when the Asian economies started implementing neoliberal policies, they did not suffer the degree of inequality found in ACN economies today. In the case of Chile, neoliberal policies in the 1973 - 1986 period, under the Pinochet dictatorship, did not bring substantial per capita GDP growth rates.

Although in the long term Chilean neoliberal economics brought sustained GDP growth, the stringent controls affecting structural adjustment process led to repeated human rights violations under the Pinochet regime. It is questionable whether neoliberal policies can be implemented in ACN democracies, given the possibility that the adjustment process involved will result in popular dissatisfaction with the government. This in turn may lead to the election of populist leaders pledged to reverse neoliberal policies.

Discrimination lessens the benefits to certain sectors of society, especially the indigenous and those of African descent. Will free markets be plausible in countries like Peru, Bolivia, Ecuador and Colombia, where these often have excluded groups that represent sizeable segments of the population? It remains to be seen if the Andean countries will be able to meet the conditions for free trade to succeed, and it will be interesting to compare the future economic stability of Colombia and Peru with that of their neighbours Ecuador and Bolivia.

Whether or not the ACN-EU trade agreement is signed, it can be comprehended that the Andean countries are each following disparate trends, from trade liberalization to statism, which has led the ACN into disarray. One school of thought believes that if some of these countries insist on pursuing conflicting interests, they will never be able to establish the unity that would give the group the leverage needed to achieve more favourable deals, like the final form of the Association Agreement proposed by the EU. If properly bargained, this agreement would be more beneficial than previous accords such as the GSP. While the lack of unity has slowed the creation of UNASUR, it also has prevented the possibility for an unfair negotiation that would further impoverish the already neglected farmers of the Andes. Either way, no sign of major change is likely to be seen in the near future in Latin America if increased cooperation is not promoted between the Western and Eastern hemispheres.

This analysis was prepared by COHA Guillermo Cornejo is a Research Associate of the Council on Hemispheric Affairs (COHA)

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