[In Spanish]
On April 22, when President George Bush addresses
the third Summit of the Americas in Quebec, he will have a unique
opportunity to launch a new U.S. trade policy for Latin America.
This new strategy should encourage America's neighbors in the
region to continue the tide of economic liberalization they began
in the 1980s in order to strengthen their markets, democratic
institutions, and political environments and to reap the benefits
of free trade for their citizens.
Although the Bush Administration supports
a Free Trade Area of the Americas (FTAA), at the Quebec Summit, the
President should avoid the temptation to re-launch the initiative
as it was designed during the first Summit of the Americas in 1994.
At that time, the Clinton Administration sought to tie hemispheric
free trade to the date of 2005. Rather than encourage Latin
governments to open their markets further, this misguided approach
induced them to stop their liberalization efforts. The governments
saw reforms as bargaining chips for future trade negotiations that
would be wasted if they liberalized their economies before that
date.
The
concept of a free trade area for the hemisphere, which was
originally put forth by the earlier Bush Administration, remains a
worthwhile goal, but the strategy of tying it to a specific date
has undermined the process. President Bush should eliminate this
disincentive by offering to sign a free trade agreement in the
immediate future with any country that already has liberalized its
economy. He should also encourage the rest of Latin America to
accelerate their liberalization efforts. That would make these
countries more attractive partners for a trade agreement.
THE GOAL OF LIBERALIZING HEMISPHERIC
TRADE
At
his confirmation hearing, newly appointed U.S. Trade Representative
(USTR) Robert Zoellick made it clear that the Administration's goal
is to promote economic liberalization through free trade
agreements. "[T]he US will use its leverage as the world's largest
and most attractive market," Zoellick said, "to press other trading
partners to move rapidly on liberalization." This goal, however,
may prove more difficult to achieve than it appears. For one thing,
most Latin American leaders have not made a principled commitment
to economic freedom. Liberalization has come as the result of
random patches of incomplete privatization, fiscal tightening, and
inflation controls--usually in response to some kind of crisis.
These random patches demonstrate the overwhelming protectionism to
which politically vested interests in Latin states cling at the
expense of sound economic policies. Such protectionist habits will
not be easy to break.
Chile is a conspicuous exception to this
trend. Its strong markets, fostered with more than 20 years of
consistent liberalization policy, are responsible for its
impressive economic performance today, as well as its level of
poverty alleviation, political stability, and strengthening of
democratic institutions. Signing a free trade agreement with Chile
should be an essential first step in implementing the new U.S.
trade strategy for Latin America; it would certainly signal
Washington's commitment to its stated goal.
Few
can argue against the evidence that free trade has a positive
effect on economic growth. However, merely offering the promise of
free trade by a date certain can have harmful effects. Mary
O'Grady, editor of the "Americas" column in The Wall Street
Journal, has noted that, for many Latin countries, "the preferred
course is to haggle over `reciprocal' trade agreements with the
rich countries, particularly with the United States." She suggests that
the promise of an FTAA by 2005 made in the Clinton years has
functioned as a "reciprocity trap" that slowed economic reforms
rather than encouraged them. Argentina, for instance, stopped
reforming in 1995 and instead increased government expenditures and
debt. So did Peru, which also failed to strengthen the rule of law,
resulting in a corruption scandal that involved its president and a
top military officer. If the tide of market opening during the
1990s in Latin America was indeed the result of a conviction about
liberalization, no country would have fallen into the "reciprocity
trap."
The
United States should continue to work with its neighbors to bring
transformation and results to this important region. The upcoming
Summit of the Americas in Quebec offers President Bush an
opportunity to exercise such leadership.
WHAT THE PRESIDENT SHOULD DO AT THE
SUMMIT
President Bush should use his speech
before the participants of the Summit of the Americas on April 22
to:
-
Highlight the
benefits of free trade. Free trade is one of the most
important economic policies a country can adopt to alleviate
poverty and to develop economically. According to Heritage trade
analyst Denise Froning, there are four reasons that higher living
standards accompany free trade:
-
Free trade promotes competition and
innovation. A free flow of goods and services gives consumers
and producers access to the world's best products at the lowest
prices. This, in turn, motivates local businesses to innovate in
order to remain competitive in the global market.
-
Free trade generates economic growth.
A broader range of business opportunities creates incentives for
more investment. Higher investment leads to more and higher-paying
jobs both at home and abroad. The economy finds new channels in
which to expand, consumption increases, and additional economic
growth follows.
-
Free trade strengthens the rule of
law. Companies doing business in another country rely on the
host country's enforcement of their property rights in contractual
disputes. Individuals rely on property rights as their living
standards rise. Free trade increases prosperity, which indirectly
strengthens of the rule of law, since without it neither investment
nor higher living standards would endure.
-
Free trade fosters economic freedom.
As Froning explains, "With a sound infrastructure based on economic
freedom, assured property rights, a fair and independent judiciary,
the free flow of capital, and a fair system of low taxation, poor
countries can create an environment that is friendly to trade and
inviting to foreign investors." But these benefits
of free trade can only last in a fully liberalized economy.
-
Propose a new global trade strategy to
begin in the Hemisphere. The basis for a new trade policy is
proposed in the Heritage Foundation/Wall Street Journal 2001
Index of Economic Freedom. The Index outlines a rules-based
global free trade association (GFTA) whose members must meet four
qualifications:
-
An open trade policy,
-
Transparent and open foreign investment
policies,
-
The fewest possible regulations on opening
new businesses, and
- Secure property
rights.
The specific reforms that some Latin
American countries would need to implement in order to qualify for
accession to such a GFTA are listed in the sidebar.
The GFTA members would benefit by gaining
immediate access to a group of open-market, wealthy countries,
including the United States. They also would benefit from an
increase in capital investment, which typically follows free trade.
For the qualifying countries, such an association would offer a
significant opportunity to increase economic growth, which would
lead to a rise in living standards and further their economic
development.
The GFTA format differs from the FTAA in
that its members need to have an open market before they can
enter the club. Such a strategy rewards a nation's commitment to
economic freedom. Likewise, it punishes protectionism; every
decision that protects political interests at the expense of
economic freedom would push the countries further away from trade
agreements with the strongest markets in the world. The United
States could take the lead in driving this strategy forward at the
Summit of the Americas by inviting qualifying countries to join a
GFTA.
- Congratulate Chile. For more than 20
years, Chile has been a model of economic reform for the region. It
made free trade the leading policy of its economic reforms, and
implemented a set of complementary policies to help its citizens
reap the benefits of economic liberalization. For example, Chile
implemented a uniform import tariff that will decrease by 6 percent
by 2003. This uniform tariff has helped reduce the opportunities
for corruption, facilitated trade flows, and weakened
special-interest lobbying. It also undermined the dominant
entrenched interests in other Latin American countries. In
addition, Chile diversified its export markets by signing free
trade agreements with Asia, Canada, Europe, and many Latin
countries.
Chile also has had strong protection for
property rights, which reduces business risk and attracts
investment. Through the privatization of state-owned enterprises
and the pension system, it has created a wide range of investment
opportunities. Two decades of commitment to reform have made
democracy in Chile stronger than ever, reduced poverty by over 30
percent, and raised the
overall living standards of the Chilean people.
- Applaud El
Salvador and Uruguay for their significant reform efforts and
encourage them to continue. Not long ago, El Salvador was
embroiled in a deep internal war; effective economic policy reforms
were not possible. Since the 1992 peace accords, the government has
opened markets, privatized state-owned enterprises, and cut
regulatory and fiscal burdens on businesses. The most important
task today is for the government to strengthen the rule of
law.
Uruguay, too, has made substantial
progress from its social welfare and import substitution policies
of the 1960s. In general, it made progress in liberalizing the
foreign investment code and banking system, opening trade to its
neighbors, and strengthening the rule of law. With further
deregulation, the country could be among the most liberal in the
region.
- Emphasize the crucial importance of
property rights. A transparent judiciary, immune to the
influence of political interests, is a key factor in economic
growth. No long-term investment will occur in a country where the
ability to sue and the right for that lawsuit to be justly and
promptly executed are nonexistent. Ultimately, no economic reform
has a chance to reap its benefits if private property is
unprotected.
In most of Latin America, citizens do not
trust their judicial systems. News of corruption at different
levels of government is common. No Argentine is surprised by the
bribery scandal in the Senate regarding labor reform laws. No
Peruvian is astonished by the current political crisis. Almost no
Venezuelan thinks of criticizing last year's crisis when the
country's president practically coerced changes to the national
constitution. Lack of trust in the rule of law creates a culture
that prompts citizens to consume and invest less, and reinforces a
downward economic spiral that impedes the ability of most citizens
to reap the benefits of economic liberalization.
WHAT PRESIDENT BUSH SHOULD NOT DO
In
addition to these positive steps, there are important things to
avoid. At the Summit in Quebec later this month, President Bush
should:
- Not forgo liberalization in the region
simply to get a trade deal. The United States, the wealthiest
and largest economy in the world, will not get significantly richer
by signing a free trade agreement with most of its Latin neighbors.
But, as USTR Robert Zoellick noted in a speech at the
Chilean-American Chamber of Commerce in Santiago on April 4, 2001,
the reason to pursue such agreements is to bring economic freedom,
stability, and growth opportunities to Latin countries.
Latin America has gone through numerous
economic reforms since the early 1980s. In most Latin countries,
however, political influence still matters. With the exception of
Chile, the countries have not liberalized enough so that ordinary
Latin people can benefit from capitalism. This point is well argued
by economist Hernando de Soto in The Mystery of Capital. De Soto suggests
that burdensome regulations to register property leave
people--mostly the poorest people--with no option but to operate in
the black market. In this extra-legal realm, the cost of doing
business is very high and the benefits significantly lower than
they are in the legal system.
Reform efforts have been incomplete in
Latin American states. Privatization has turned public monopolies
into private ones; lack of judicial transparency has scared away
long-term investment, despite the incentives that deregulation
offers. As the sidebar shows, liberalization in the region has a
long way to go.
- Not tie trade deals to a specific
date. Tying free trade agreements to specific dates rather than
policy reforms has undermined liberalization in the Americas. When
the FTAA was launched in 1994, President Clinton wanted the
agreement to foster a more open and transparent region by a
specific date of 2005. But this strategy only thwarted his goal of
liberalization, as countries saw reforms as bargaining chips for
future trade negotiations. Specifying future dates also signals a
lack of commitment to an agreement, since the proponent might not
be in office when that date arrives.
President Bush should emphasize that the
United States is ready to sign free trade agreements immediately
with countries whose economic openness is similar to that of the
United States. He should invite the other countries to complete
certain economic reforms so that they can engage in free trade
talks with the United States.
CONCLUSION
Despite the economic renaissance in Latin
America that began in the early 1980s, the Latin countries --with
the exception of Chile--have not shown a true commitment to
economic liberalization. Moreover, entrenched interests that are
opposed to free trade remain strong. Only by opening markets will
the Latin people find the resources they need to prosper and the
flexibility their economies need to adjust to the fluctuations that
are typical of today's global economy.
Supporting free trade strategies based on
values, rather than specific dates or geography, would reinforce
the incentives countries have to carry out the reforms that are
necessary to liberalize their economies. President Bush, at the
Summit of the Americas in Quebec, will have a unique opportunity to
promote economic liberalization throughout the hemisphere by
presenting the opportunity for countries that have already
liberalized their economies to sign a free trade agreement with the
United States, beginning with Chile.
Ana I. Eiras is an Economic Policy
Analyst for Latin America in the Center for International Trade and
Economics at The Heritage Foundation.
Endnotes