Betting on Free Trade

George Bush wants to turn North and South America into the world's biggest single market. Is it for real--or just a dream?

It's one of the biggest and boldest ideas ever proposed in the realm of commerce: the Free Trade Area of the Americas. Stretching from the Bering Strait to Cape Horn, with a population of 800 million and a combined gross domestic product of more than $11 trillion, the FTAA would be the largest free-trade zone on the planet--a vast market marked by nonexistent or very low tariffs, streamlined customs regulations, and the gradual disappearance of quotas, subsidies, and other impediments to trade.

To date, this vast commercial bloc exists only on paper. Officials from 34 countries have been pegging away at the details of a pact for nearly seven years. And recently, hopes for the FTAA seemed dim, as nations struggled to reach agreement on a host of complicated issues. But a powerful new advocate for the idea has now emerged. President George W. Bush has placed the FTAA firmly at the top of his ambitious trade agenda. The former Texas governor has seen firsthand the benefits of cross-border commerce with Mexico through the North American Free Trade Agreement. And he has a legacy to carry on: His father first floated the idea of a hemispheric free-trade zone during his own Presidency 10 years ago. "Bush is willing to spend considerable political capital on the FTAA," says Richard W. Fisher, former Deputy U.S. Trade Representative.

Bush now has a highly visible opportunity to press the case for the FTAA and move it closer to reality. On Apr. 20-22, at the Third Summit of the Americas in Quebec City, he will meet with heads of state from around the region to assess the progress of talks. Quebec will be the first test of an Administration that hopes to return the U.S. to its leadership position on global trade. Already, U.S. Trade Representative Robert B. Zoellick has been working behind the scenes to build support both at home and in Latin America for speeding up FTAA negotiations. "U.S. [trade] policy has drifted in recent years," Zoellick said during a recent visit to Chile. "We have nobody to blame but ourselves, and there is a price to pay for our delay."

Businesses both north and south have a lot riding on a breakthrough. Take William Weiller. The chairman and CEO of Purafil Inc., an Atlanta company that makes air-purification systems, exported just 15% of his company's $22 million in sales last year to customers south of the border: The tariffs simply add too much to the final bill. But Weiller thinks duty-free trade would allow his Latin-bound exports to jump to 25% of sales. "If there's a level playing field, we'll be more aggressive," says Purafil's chief exec.

Weiller is rooting for Bush to bring all his Latin counterparts on board when he meets with them in Canada. But the U.S. President is not finding the road to Quebec City a smooth one. Bush wanted to head into the summit with trade negotiating authority--that's a mandate to craft deals that Congress can approve or reject but not amend. He doesn't have it. So far, the Administration's attempts to round up votes to renew that mandate, which lapsed in 1994, have stumbled over Republicans' refusal to meet Democrats' demands that any new trade deals incorporate protections of labor rights and the environment. "You don't just wave a wand and produce a policy that's going to have the support of both sides of the aisle. Not after seven years of noxious debate on trade," remarks Jeffrey J. Schott, a senior fellow at the Institute for International Economics in Washington.

In early April, the Brazilians dealt the Bush team another setback: Brasília's negotiators successfully led a revolt against a U.S. proposal to move up the deadline for the conclusion of FTAA negotiations to yearend 2003 from Jan. 1, 2005, as originally scheduled. Meanwhile, labor and environmental activists are descending on Quebec City to launch anti-FTAA protests as part of their escalating war against globalization.

NO SURE THING. Hardly a cheery scene for free-trade advocates. Yet many negotiators from the Americas maintain that the FTAA will become a reality in some form or another. Quebec will provide the hemisphere's leaders with "an important opportunity to reaffirm their commitment to the proposal," says Luis de la Calle, Mexico's chief trade negotiator.

Policymakers have already mapped out a comprehensive agenda spanning everything from intellectual property-rights protection to guarantees for cross-border investments. Procedures to speed goods through customs--a notorious source of bureaucratic hassle--have been drafted and are being put into practice. There's still much work to be done: Talks on tariff reductions will not kick off until May of next year. Yet at a meeting in Buenos Aires in early April, trade ministers from the 34 countries agreed that a final pact should come into force no later than December, 2005.

That's not to say a deal is a sure thing. The FTAA will not come to fruition without strong U.S. leadership, which has faltered in the past five years. And many civil groups are demanding that their concerns be heard. "The negotiators are going to be a little surprised that they wasted seven years talking to each other in closed rooms, only to find out that nobody really wants this," says Thea Lee, deputy director of public policy at the AFL-CIO, the federation of American labor unions that represents some 13 million workers. The U.S. unions fear FTAA would prompt manufacturers to move en masse to low-wage locations in Latin America.

Should the talks snarl, the U.S. is prepared to take an alternate route. Washington is already working on a bilateral pact with Chile and is indicating it will talk to any other Latin nation that wants to cut a deal. Argentina and Uruguay have already expressed interest. That will step up the pressure on the potential spoilers in a hemispheric accord. Washington is "sending a signal to Latin America [that] we want to move ahead on FTAA," says Zoellick. Of Brazil's resistance to accelerating talks, he simply says: "If you don't want to move, I'll move with others."

But beyond all the maneuvering, there's another reason the FTAA will probably move forward, even with the inevitable wrangles and delays. For Latin nations, the opportunity for preferential access to the largest market in the world--the U.S.--is too good to pass up. And in the U.S., business executives are increasingly alarmed that the rest of the world is banding together into trade blocs--blocs that are also seeking treaties with the major countries of Latin America. The European Union, currently the world's largest trading club, signed a free-trade agreement with Mexico last year. Now it's pursuing a pact with Mercosur, the customs union made up of Brazil, Argentina, Uruguay, and Paraguay. "American businesses are consistently losing a competitive edge as other countries make these agreements," says Robert N. Burt, CEO of FMC Corp. and chairman of the Business Roundtable, a group of blue-chip U.S. corporations that push a big-business agenda in Washington.

BOTTLENECKS. If the U.S. could forge a trade partnership with Latin America, the potential for expanded sales would be significant. Last year, 22% of American exports went to Latin America. Not bad--until you consider that Mexico accounts for two-thirds of that sum, which means there's huge untapped potential in the rest of the region. Schott calculates that U.S.-Brazil merchandise trade, at just over $29 billion in 2000, could double or triple under a free-trade arrangement.

U.S. companies with operations in Latin America are some of the most bullish on free trade. No wonder. Eastman Kodak Co., which manufactures cameras, film, photographic paper, and chemicals in the U.S., Canada, Mexico, and Brazil, figures it could save $25 million a year on import duties under an FTAA. "If you've got tariff-free trade, you can use your factories in new and different ways," says Christopher Padilla, the company's director for international trade relations. Multinationals could reap big savings by concentrating production in a few plants to supply the entire region.

Liberation from high tariffs would also make a difference for Caterpillar Inc., the world's largest maker of earth-moving equipment. According to Robert C. Petterson, vice-president of Caterpillar's Latin America operations, Brazil levies a tariff of around 15% on imports of the company's equipment, which adds nearly $40,000 to the cost of a $250,000 machine. Worse, though, are delays at customs that make it difficult for Caterpillar to honor its sales promise to deliver replacement parts within 24 hours. By removing those bottlenecks, an FTAA could boost economic growth in Latin America by 1.5% a year, says the Institute of International Economics. Petterson calculates that could generate $4.5 billion in additional sales of construction equipment in the first 10 years. "We'll get our share of that $4.5 billion," he says hopefully.

In Latin America, the benefits of unfettered trade will fall unevenly. Chile, for example, was the first Latin American country to begin tearing down its tariff walls in the late 1970s, and it suffered heavy job losses as domestic industries lost ground to imports. But today, Chile is one of the most open economies in the world: Import duties are low, while trade equals nearly 60% of gross domestic product. Despite recent problems, Chile's growth rate remains one of the highest in Latin America. "We already paid a tremendous human price for lowering tariffs, so we want to take advantage of opening trade further with the U.S. and Europe," says President Ricardo Lagos.

A DEFIANT STANCE. Brazil is another story, though. Latin America's biggest economy has lagged others in the region in opening its market. Tariffs remain high, averaging around 14%. Because of such protectionism, Brazilian manufacturers--who suffer from high capital costs and a heavy tax burden--are ill-prepared for full-fledged competition from more efficient U.S. and Canadian rivals. Brazilian makers of machinery and equipment, household appliances, and furniture would be among the hardest hit. "[The FTAA] would mean the annihilation of Brazilian industry," claims Paulo Nogueira Batista Jr., an economist at the Fundaçao Getúlio Vargas, a business school in São Paulo.

Not surprisingly, Brazil has adopted a defiant stance towards the FTAA. Officials in Brasília say they are open to a deal, but only if Washington agrees to remove barriers on key exports. Brazilian steelmakers complain that antidumping levies have cost them some $186 million a year in lost sales to the U.S. Just 15% of Brazil's annual $1.1 billion in exports of frozen orange-juice concentrate go to the U.S.: Thanks to the Florida citrus lobby, U.S. duties on Brazilian OJ imports add $418 to every ton of juice shipped stateside. Says Ademerval Garcia, president of Abecitrus, the Brazilian association of citrus exporters: "Changing the tariff will be one of Brazil's conditions for entering the FTAA."

Yet Brazil, for all its concerns, seems to realize that some sort of free trade area is desirable. Its exports to the rest of the region are growing far faster than its exports to the rest of the world: An FTAA would boost that growth further. "Any increase in trade is important," says José Alfredo Graca Lima, Brazil's chief negotiator. "Brazilian taxpayers can't go on subsidizing and protecting less-efficient industrial sectors." Meanwhile, other members of Mercosur may dash Brazil's hopes of presenting a united front in FTAA talks. Argentina's chief of economic advisers, Guillermo Mondino, told investors on Apr. 3 that his country may follow in Chile's steps and negotiate directly with the U.S.

Smaller countries also have mixed feelings about the FTAA. The finances of some Caribbean nations, such as Jamaica, depend heavily on tariff income collected by customs agencies: These governments want to stretch out the schedule for tariff reductions. Yet El Salvador sees the FTAA less as a threat than as a tool to attract investment and thus break its dependence on foreign aid and remittances from Salvadorans working abroad.

The role of Mexico in the trade talks is suffused with ambivalence. It publicly supports the FTAA. Yet it does not relish losing its exclusive access to the U.S. market. "Who wants to share such privileged access? The longer Mexico can hold on to that, the better," says Luis Rubio, general director of the Center for Research and Development, a private think tank in Mexico City.

Still, Mexico has billed itself as a free-trade convert. And President Vicente Fox is anxious to cooperate with the Bush Administration on this issue as a first step toward building a North American common market or in the shorter term, securing expanded immigration quotas for Mexicans who want to work legally in the U.S. Indeed, it is Mexico's mostly positive experience with NAFTA that other countries in the region are eager to replicate. Mexico's exports have tripled since the agreement took effect in 1994, with 88% of them going directly to the U.S.

The building blocks for a hemispheric pact are already in place. At Washington's urging, many of the countries in the region have spent the past decade or more implementing difficult economic reforms. Swathes of state industry have been privatized, tariffs lowered, subsidies reduced, and regional trade deals inked. In Quebec City, Bush's task will be to convince his counterparts that the time has come to complete the journey.

By Geri Smith, with Elisabeth Malkin in Mexico City, Jonathan Wheatley in São Paulo, Paul Magnusson in Washington, Michael Arndt in Chicago, and bureau reports

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