Latin America’s Free-Trade Champions

Chilean finance minister Felipe Larraín has called it “the most exciting thing going on today in Latin America.” Colombian president Juan Manuel Santos believes it is “perhaps the most significant and profound integration process in the history of Latin America.” A recent headline said it has created “a new Latin American superpower.” It has also been hailed as a “bridge to Asia” and “a promising yardstick of Latin America’s prosperity.”

“It” is the so-called Pacific Alliance, a free-trade bloc that was first outlined in the April 2011 Lima Declaration and was officially established in June 2012. Its four members are Chile, Colombia, Mexico, and Peru — four countries with a long record of supporting free markets and open commerce. Over the past year, these countries have abolished tariffs on 90 percent of all goods they trade with each other, and have also taken many other steps (such as eliminating visa requirements, merging stock exchanges, and launching a scholarship program) to integrate their economies. Next week, their presidents will meet in Colombia to sign yet another multilateral agreement.

The Pacific Alliance nations account for more than one-third of Latin America’s total GDP, a similar share of its population, and roughly half of its global trade. They are the highest-ranking Latin American countries in the World Bank’s 2013 Ease of Doing Business Index, and they are also some of the region’s fastest-growing economies. “Mexico, Colombia, Chile, and Peru will grow an average 5 percent this year,” notes John Paul Rathbone of the Financial Times, citing IMF data, “while Brazil, Argentina, and Venezuela, will grow an average of 2 percent.”

Not surprisingly, many other nations want to join the Pacific Alliance, and the list of “observer” countries has grown to include Australia, Canada, Costa Rica, Guatemala, Japan, New Zealand, Panama, Spain, and Uruguay. As that list suggests, the trade bloc has attracted governments from well beyond Latin America’s shores. Indeed, it is considered a promising vehicle for boosting economic cooperation and integration between Latin America and Asia. In other words, it is seen as a valuable complement to the Trans-Pacific Partnership (TPP) free-trade deal that is now being discussed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Colombia is eager to join the TPP talks, and the Pacific Alliance will help Bogotá make its case.

Hopefully the trade bloc will also encourage Brazil to move away from the protectionist policies that are holding back its economic development. Whereas the Pacific Alliance countries have become Latin America’s biggest champions of free trade — Mexico has actually signed more free-trade pacts than any other nation on earth — Brazil remains a stubborn opponent of trade liberalization, and it has actually become more protectionist under President Dilma Rousseff, who took office in January 2011. (Two years ago, Brazilian finance minister Guido Mantega complained that rising imports had left his country “under siege.”) This divergence in economic policies can be seen, not only in the World Bank’s Ease of Doing Business Index (in which Brazil ranks a lowly 130th), but also in the Heritage Foundation’s Index of Economic Freedom: The Pacific Alliance countries all rank among the top 50 freest economies worldwide, while Brazil ranks 100th.

That’s why it was so disappointing when, on May 8, Brazilian diplomat Roberto Azevedo was chosen over Mexican economist Herminio Blanco to be the next director-general of the World Trade Organization. Azevedo has consistently defended Brazilian protectionism, while Blanco was an architect of NAFTA. As the Wall Street Journal pointed out following his selection, “Mr. Azevedo is by all accounts a charming diplomat who won because of support among developing nations. Yet he won that support in large part by helping to scuttle the Doha round of free-trade talks. Mr. Azevedo was Brazil’s chief Doha negotiator, and opposition to freer trade in manufacturing by Brazil, India, South Africa, and other emerging economic powers made a worthwhile Doha deal impossible.”

The good news is that Chile, Colombia, Mexico, and Peru are increasingly viewed as the four most successful large economies in Latin America. In fact, analysts at Nomura, the Japanese financial giant, have predicted that Mexico could supplant Brazil as the region’s biggest economy by 2022. The combination of strong growth in the Pacific Alliance countries and sluggish growth in Brazil is helping convince other Latin American governments that free trade and open markets are better than Brazilian-style protectionism. (Roberto Setúbal, the CEO of Latin America’s largest bank, recently said that Brazil “clearly” had to change its economic model.)

Unfortunately, the Obama administration still has not pushed for a hemispheric free-trade zone of the sort championed by George W. Bush and Bill Clinton. Yes, administration officials are trying to negotiate a TPP deal, but they have depicted TPP as part of their “pivot” or “rebalancing” to Asia. Apart from belatedly signing the Colombia and Panama free-trade accords — both of which originated under the Bush administration — President Obama has done very little to promote greater U.S. trade with Latin America. Indeed, while the Pacific Alliance countries are busy pursuing economic integration across the hemisphere, the United States remains a mostly passive observer.