Allies of the Pacific

Peru’s Former President Alan García has called the Pacific the “ocean of the future”. It’s not hard to see why – on the opposite side of the ocean lies Asia, a vast and populous trading partner hungry for commodities produced in Latin America. But, as García has pointed out, Peru, Chile, Colombia and Mexico are better positioned to tap this huge market if they are united.

The four countries represent a combined market of 215 million people with an average per capita income of US$13,000. They also account for about one third of Latin America’s GDP – some US$2 billion, equivalent to the ninth largest economy in the world (California) – and half of Latin America’s total trade with the rest of the world.

In early 2011, then-President García proposed a trade integration initiative called the Pacific Alliance. The first meeting of the four countries was held in Lima in April last year and established the framework for negotiations. Chile hosted the fourth meeting on June 6 and the leaders of the four countries – Chilean President Sebastian Piñera, Mexico’s Felipe Calderón, Colombia’s Juan Manuel Santos, and Peru’s Ollanta Humala – met at the Paranal Observatory near Antofagasta to sign an agreement that formally created the Alliance.

“This is much more than a free trade agreement, it seeks the free movement not only of goods but also services, capital and people… together we can go further and advance faster than if we acted on our own,” said President Piñera at the signing ceremony.

“In today’s world characterized by recession, stagnation and economic slowdown, it is satisfying to note that our countries are leading the way in growth, free trade and integration,” he continued.

Colombia’s President Juan Manuel Santos called the agreement “the most important process of integration in Latin America” and he emphasized the shared principals and objectives that helped to facilitate negotiations.

A spin-off of the wider and fruitless Pacific Arch initiative, which in turn derived from the failed US–led Free Trade Area of the Americas (FTAA), the Pacific Alliance integrates countries that are already committed to each other through bilateral agreements.

But it also establishes the basis for admitting future members. In fact, two of the Pacific Arch countries are waiting in the wings: Panama and Costa Rica acted as observers during the signing of the framework agreement and may be ready to join the open accord as early as 2013. 

Rules of origin

Crucially, the new accord includes cumulative rules of origin, which means that Chilean producers can use Peruvian and Colombian inputs to export to Mexico, and still have preferential access to that market under the Free Trade Agreement between the two countries.

“The cumulative rules of origin is the most evident gain of the Pacific Alliance agreement,” the director of the Foreign Affairs Ministry’s Department of International Economic Affairs (DIRECON), Rodrigo Contreras, told bUSiness Chile.

“Other advantages are tariff convergence, free movement of businesspeople, and the possibility of university exchange programs. So, we’re not limiting ourselves to mere commercial issues in this negotiation – we’re going a step further,” says Contreras.

Although the United States was not invited to join the initiative, US companies still stand to gain, according to the US Chamber of Commerce’s senior director for the Americas, Patrick Kilbride.

“US companies invested in the region can benefit from the efficiencies and the networks established by the Pacific Alliance,” he says.

“From a broader policy perspective, though, we regret that the United States did not take a more active role. It was frustrating to see the FTAA not brought to fruition, but some of the countries engaged in the Pacific Arch, and ultimately the ones that were ready to move forward, formed the Alliance. Those that did not will have to catch up later,” says Kilbride.

Apart from Costa Rica and Panama, the members of the Pacific Arch not included in the Alliance are Ecuador, El Salvador, Guatemala, Honduras and Nicaragua.

As for the founding members, Contreras explains that Chile, Peru, Colombia and Mexico will implement the agreement in two stages. The first will strengthen the trade agreements already in place (Chile, for instance, is close to achieving a zero tariff zone with Colombia and Peru). The second will interconnect the existing bilateral accords between the four countries and add additional steps, such as making it easier for business travelers to move around the Alliance, facilitating student exchanges, and integrating electronic markets. 

All in all, though, the biggest takeaway for the newly minted Pacific Alliance members is the knowledge that they are not alone. “There’s a feeling of strength when you go before a third party as an association of at least four countries, instead of negotiating individually,” says Contreras.

Bound for Asia

The naming of the Pacific Alliance is no accident. It is focused on expanding trade across the Pacific with Asia, where the four countries exported a combined US$71 billion worth of goods and services last year, registering an annual average growth of 13% between 2007 and 2011. 

Together, Chile, Peru, Colombia and Mexico aim to negotiate better terms of trade and investment with their Asian partners. “The Asia-Pacific region is not just the world of the future, but the world of the present,” said President Piñera at the Paranal ceremony.

As part of its strategic interest in the Asia-Pacific region, Chile is involved in ongoing negotiations to widen its Trans-Pacific Partnership (TPP) agreement. Chile was a founding member of the trade pact, previously known as P4, when it came into force in 2006 along with Brunei, New Zealand and Singapore. Now the United States and other countries are keen to join the agreement which is seen as a vehicle for trade liberalization across the Asia-Pacific region.

But considering that China has not expressed interest in joining the TPP, not everyone thinks Chile’s participation is a good move.

“For South America today, it’s more important that the Chinese economy grows a percentage point than a one-point growth in the US economy,” says Osvaldo Rosales, head of the International Trade and Integration Division at the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).

“If China is the pretty girl at the party, then is the TPP the best way to get to her? I have serious doubts,” he says.

According to Rosales, China is waiting for a collective response from Latin American countries about how they want to relate to the new engine of the global economy, and the Pacific Alliance is a positive step in this regard.

Yet despite all the talk about China, which has overtaken the United States as Chile’s largest export market mainly due to its demand for copper, the US Chamber of Commerce’s Kilbride believes that the United States has a healthier relationship with Chile and the rest of the Pacific Alliance countries.

“Chile has a more diverse trade relationship with us, one that involves many different sectors of its economy and is more resilient and sustainable over time – it’s not susceptible to commodity price shocks.”

Market integration and investment

The four countries have already increased integration in areas such as electronic markets, scientific research, export promotion and tariff elimination.

In May last year, the stock exchanges of Chile, Colombia and Peru launched the Integrated Latin American Market (MILA by its Spanish acronym), creating the first private cross-trading platform in the region.

Although MILA started off slow, with modest trading volume, the potential addition of the Mexican BMV Exchange in 2013, and perhaps Brazil’s BM&F Bovespa further down the road, could turn it into a global financial player.

And Foreign Direct Investment in the region is growing.  The World Investment Report, prepared by the United Nations Conference on Trade and Development (UNCTAD), shows that last year Latin America and the Caribbean received 34.6% of total Foreign Direct Investment in the world, for a total of US$216.4 billion.

Colombia was fifth in the global ranking of FDI growth and first in the region last year with US$14.4 billion, an increase of 113.4% from 2010. Chile grew by 16.4% in 2011, while FDI in Peru rose 7.4%.

“Investors have been looking for an Andean framework for some time,” says Hedmond Ríos, an economist at Chilean broker Celfin Capital. “An agreement of this kind can lubricate the economic policies among these countries, increase legal certainty for operators and traders, and reduce interest rates, all of which favors investment and has a potent effect on capital.” 

The business community is doing its part to move the Pacific Alliance forward and private sector representatives from the four countries held a parallel summit during the meeting at the Paranal Observatory.

From the vantage point of government officials and businesspeople, high up in the Atacama Desert, the Pacific Alliance sails west with the wind on its back. But ECLAC’s Rosales, who advised some of the governments during the Pacific Arch negotiations and pushed to no avail for a regional free trade agreement, fears it could all amount to little more than a photo opportunity.

“Time and lots of gray hairs teach you that there’s a huge gap between the headlines and the real content of an agreement,” says Rosales. “For now, until we see results, it’s just good intentions.”

Sebastián Pérez-Ferreiro is a freelance journalist based in Santiago