Chile, Mexico and Peru in March became members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The agreement reduces tariffs between 11 countries, including Japan and Canada, which amount to 13% of the global economy. Against the backdrop of President Trump’s withdrawal from the deal and doubts over the future of NAFTA, the CPTPP shows that Latin American nations still have an appetite for trade agreements.
The strong Latin American showing in the CPTPP continues a long tradition of free trade agreements (FTAs) with non-Latin American countries, as well as regional trade blocs. Inside Latin America, the largest bloc is Mercosur, whose full members Argentina, Brazil, Paraguay and Uruguay enjoy free trade and adopt common external tariffs on imports from outside the bloc. They have a combined GDP of $2.9trillion.
The region’s second-largest trade group is the Pacific Alliance, which comprises of Chile, Colombia, Mexico, and Peru, and has a combined GDP of about $1.8trillion. Member countries have cut around 92% of trade tariffs. The Alliance is outward looking and aims to sign FTAs with Asia-Pacific countries. In fact, Latin American and the Caribbean ranks second globally for active tariff agreements, with more than 1,300. To name a few, Chile has a trade deal with China, the EU has a trade deal with Mexico, which was updated in April 2018, and Colombia has an agreement with the US.
Why do they do it?
Trade deals – in theory – stimulate exports and increase the competitiveness of domestic firms. As companies are able to sell to markets without facing tariffs or quotas, exports will increase because they will be competing on a level playing field with domestic businesses. In turn, local companies will be pushed to become more efficient as they compete with international firms. This productivity boost is also be driven by cheaper inputs from FTA member countries. Meanwhile, consumers will benefit from access to higher-quality, cheaper goods.
Moreover, FTAs lead to higher levels of foreign direct investment, attracted by free access to FTA member countries. For example, Japanese car manufacturers may set up factories in Mexico because they will be able to export goods into the United States tariff-free as a result of NAFTA. For Latin American countries historically isolated from global trade routes and suffering productivity deficits, FTAs can act as catalysts for investment and productivity gains.
Pacific Alliance – Success
The Pacific Alliance differs from most Latin American regional blocs because it was founded to seek closer ties with Pacific economies, rather than to deepen internal ties based on political ideology (unlike ALBA and UNASUR both of which are failing as Venezuela collapses). Founded in 2011, the group has successfully boosted global trade for its member countries, to $1.03trillion in 2016, from $876million in 2010.
By working as a trade bloc, all members countries get access to bilateral agreements already in place, and it becomes easier to sign FTAs with economies seeking access to the Latin American market, for example, a deal between the Alliance and Australia and New Zealand is under negotiation.