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CHAPTER 4:
THE OPPORTUNITIES AND CHALLENGES OF AN FTAA
In a few short words, we're trying to capitalize and take advantage
of ... the potential ... the world of the Americas holds for Canada. ...
Canada has done extremely well in the world of the Americas. Not only do
we have a NAFTA deal with Mexico [and the U.S.] and a free trade deal with
Chile, but our bilaterals with all the countries of the Americas, both
on trade and investment, have gone up dramatically. I think it's in the
national interest ... to not only [be seen] participating [in], but also
leading in the unification of, what will be a tremendous region of the
world. [Hon. Sergio Marchi, 24:1530]
The Free Trade Area of the Americas (FTAA) presents Canadians and others
of the hemisphere with many business opportunities. First and foremost,
the FTAA offers the possibility of unexploited trade and investment occasions
thwarted by existing trade barriers. Though in a rapidly developing world
in which new technologies are fostering global economic integration, genuinely
new commercial arrangements could also be included on this list. The next
section will, to the greatest extent possible, try to provide a reasonable
economic assessment of these foregone and forthcoming trade and investment
opportunities.
The FTAA, however, is not without its set of political challenges. Four
of the more prominent challenges to have already surfaced in varying measure
to date include: (1) the lack of American fast-track negotiating legislation
and apparent Brazilian intransigence to an FTAA; (2) the disparity in size
and development of the hemisphere's economies; (3) business facilitation
or customs administration issues; and (4) potential global financial crises.
It goes without saying that, since the existing trade barriers were put
in place as a result of powerful special interest and effective political
lobby group pressures, one should not underestimate these recalcitrant
forces who will exploit these challenges to their advantage and undermine
the negotiations. Due attention and management of these FTAA challenges
are, therefore, paramount and the following sections will deal with them
in turn.
Economic Benefits and Trade Opportunities
International trade is important to the prosperity and well-being of
a nation and its citizens. All participants to the Summit of the Americas
process widely acknowledge this fact and have committed their countries
to negotiate greater economic integration of the hemisphere through the
removal of a wide range of barriers to trade and investment. However there
is considerable misunderstanding over what to expect from free trade; that
is, on what economic impacts would likely follow.
The lessons learned in the aftermath of the Canada-U.S. and the North
American free trade debates bear repeating: free trade is about prosperity
and well-being; it is not about who gains and loses more jobs - although
the latter is undeniably an important consideration that will be taken
up in Chapter 6.1
In removing tariff and non-tariff barriers to trade, the prices of goods
and services will better reflect the scarcity values of resources used
in their production, thereby benefiting those companies, industries and
sectors of the economy with a comparative or competitive advantage relative
to others. Resources will then be reallocated within these economies to
the more efficient production sources and locations, trade and foreign
direct investment (FDI) will rise in response to less uncertainty arising
from political risk, and more wealth will be created in the hemisphere
in the process. From the export side of the trade equation, one could confidently
predict that labour, management and shareholders of companies in the export-oriented
sectors of the economy will share in this gain; this is what is usually
meant by the prosperity claim. From the import side of the trade equation,
one could also predict that increased competitiveness of Canadian firms
importing products and services as an input to their manufacturing processes,
not to mention the value to Canadians of the increased satisfaction derived
from the importation of consumer goods and services from abroad, will form
part of the gains to trade. The former would also be included in the prosperity
figure, while the latter is what is usually meant by the well-being claim.
Moreover, the extent to which greater economies of scale and scope can
be attained with greater foreign market penetration by Canadian exporters,
improved productivity and even greater wealth will result.2
These economic benefits, while hard to measure and quantify, are not negligible
but are widely understood to outweigh the losses incurred in selective
sectors of the economies with a comparative or competitive disadvantage.
One commentator made us aware of an additional non-conventional benefit
accruing to Canada's more resource dependent provinces.
Alberta has developed a value-added industry ... that makes the province
less prone to cyclical boom and bust. The number of value-added industries,
such as meat processing, paper and paperboard, machinery, and electrical
equipment, precision instruments, ... aircraft and parts, and furniture
have really blossomed in the province. ... The FTA and NAFTA have created
a competitive industry out here, which help cushions the blows of the cyclical
boom and bust of the resource industries. [Rolf Mirus, 124:945]
Moving from the general to the specific in economic terms, an FTAA should
provide plenty of trade and investment opportunities for Canadians and
their businesses. One attempt to estimate the impact of opening the North
American Free Trade Agreement (NAFTA) to include Argentina, Brazil, Chile
and Colombia claimed that Canada could expect a small increase in total
output in 10 of 23 tradable goods sectors examined, with the greatest growth
to occur in electrical machinery, non-ferrous metals and miscellaneous
manufacturing.3
However, the Committee recognized from the outset that there are no comparable
trade deals in size which could be used to estimate the magnitude of trade
and investment opportunities that the FTAA would present. Lacking a reliable
statistical anchor, the Committee instead chose to assemble a panel of
business persons with experience in trade with Latin America and the Caribbean
to provide insights on the region's potential for Canada.
First and foremost, there was a consensus among these experts that Latin
America and the Caribbean provide Canadian business with modest export
potential.
As we look at Latin America ... we're looking at economies and societies
that are fast-growing and dynamic. ... The countries of Central and South
America represent increasingly important market opportunities and in some
cases some pretty impressive competition for some of our businesses here
in Canada. ... In the last few years the focus of ... business has shifted.
Markets ... have been growing rapidly in China, other parts of Asia, and
Latin America, while North American opportunities ... have been drying
up. [Robert Weese, 31:1635]
The Alliance of Manufacturers & Exporters supported these beliefs
by way of surveys of its membership.
Their views have changed dramatically over the past five years. Of our
members today, 46% regard Canada's free trade agreement with Chile as an
opportunity, and only 3% see it as a potential threat to their businesses
or markets. ... According to our survey, 79% of our members favour negotiation
of a free trade agreement for the Americas. [Jayson Myers, 28:1605]
Beyond these opportunities being, in and of themselves, a stimulus for
forging a free trade deal with the Americas, the Alliance suggests an additional
strategic motivation for this position.
There's another extremely important reason why our members are looking
at the negotiation of a free trade agreement with the Americas, and that's
because of the increasing penetration from competitors from Asia, Europe,
and the United States into the Latin American market, and the extensive
negotiations that are being conducted within Latin America itself. Countries
like Mexico, Brazil, Argentina and Chile are negotiating other free trade
agreements on a bilateral basis. This is a concern of our members who are
looking at accessing the Latin American market and don't want to be left
out of preferential trade agreements. [Jayson Myers, 28:1605]
This is not just "ivory tower" thinking, the Committee was
told of one such instance unfolding as the hemisphere now contemplates
the FTAA.
We're [Gildan Activewear Inc.] a Montreal-based ... manufacturer of
textiles ... We have 5,000 employees, with 1,000 in Quebec and the balance
in the Caribbean and Central America, specifically Honduras, Nicaragua,
El Salvador, and Haiti. ... The reason we've been very successful is because
of access to the Caribbean and Central America by participating in the
American bilateral agreement, known as the Caribbean Basin Initiative ...
We basically went from 1992, when we did less than $30 million in business,
to this year in which we did $330 million in business, and we're looking
to do a half a billion dollars next year. ... The reason I mention the
bilateral agreement is that ... we need to be aware of, as Canadians, ...
our primary competition ... is the Americans. They really have a jump on
us in terms of a precursor to the free trade of the Americas agreement
by the various bilateral agreements they've created.
Specifically, I'll give you the most recent example, they had the audacity
to present legislation in the United States that is called the Caribbean-NAFTA
parity agreement. They've essentially created a bilateral agreement that
gives the Caribbean all the benefits of NAFTA, yet they've specifically
precluded Canada from participating in the agreement. [Greg Chamandy, 31:1625]
The Committee finds these and other reasons for considering an FTAA
compelling. Despite the small fraction of commercial activity currently
being conducted between Canada and Latin America and the Caribbean relative
to our trade with the rest of the world, a free trade deal with this region
would appear to be in Canada's interest. Trade between Canada and Latin
America and the Caribbean has been growing very rapidly since the latter
discarded their import-substitution policies in the late 1980s to early
1990s. Indeed, as shown in Chapter 1, this trade has grown more rapidly
than it has with the United States in spite of the fact that this trade
is supported by a comprehensive free trade deal, while trade with Latin
American and Caribbean countries is not. This is an outstanding accomplishment
and clearly indicative of the value that institutional support beyond the
series of bilateral investment agreements in force today would bring.
The Government of Canada should, therefore, avoid looking back on past
trade relations with Latin America and the Caribbean, which unquestionably
amounts to a small fraction of Canada's total trade relations with the
world, as an indication of what future trade relations might be. The Committee
believes that Latin America and the Caribbean present trade and investment
opportunities for Canadian business beyond that which is implied by the
past. Canada should, instead, focus squarely on the future, recognizing
the vast economic potential of the region. The Committee found these and
other reasons for considerating an FTAA worthy and convincing.
American and Brazilian Political Posturing
Both the United States and Brazil are on record for being in support
of the FTAA process and its agreed upon deadlines for completion, although
it could be argued that their actions suggest otherwise. And these actions
speak volumes. In the case of the United States, Congress is hesitant to
provide the Clinton Administration with fast-track negotiating authority.
In the case of Brazil, the government has assigned a higher priority to
improving and consolidating the MERCOSUR over that of negotiating an FTAA.
Bipartisan politics, the historically large merchandise goods trade
deficit and concerns over how to ensure labour and environmental concerns
are adequately addressed in new trade deals have been said to preoccupy
the U.S. Congress. Until some compromise is found to break the deadlock,
the U.S. negotiating team appears much like a "lame duck" and
its reputation and engagement at the negotiating table has suffered as
a consequence. Moreover, the 33 other teams at the table sense that there
will be two sets of negotiations: first with the U.S. Administration and
second with the U.S. Congress. Not surprisingly, the prospect of being
caught up at the wrong end of a "good cop, bad cop" negotiating
ploy does not sit well with them and without any sign of leadership from
the United States, all but a few parties appear tentative in their enthusiasm
for an FTAA.
While it is widely known that the United States did not have fast-track
authority early in the Uruguay Round of the General Agreement on Tariffs
and Trade (GATT) negotiations and that it is not essential from the outset,
the United States, which is the dominant economy of the hemisphere, cannot
be allowed to abdicate its leadership role. Until such time as fast-track
authority is granted, it is the opinion of many Canadians that we should
step in and fill the void. The Committee was told:
Canada as a middle power can maximize its leverage at the agenda-setting
stage of a negotiating process ... [T]here's a policy vacuum today. ...
[F]ast track is not there and it won't be there until the next presidential
election, but I do believe they'll get fast-tracked. And Brazil is going
through its own problems right now. So Canada has a unique position to
play. [Bill Holt, 122:1515]
Canada is assuming a leadership role, but apparent Brazilian intransigence
is also a reason for concern. Given its scarcity in negotiating resources,
Brazil has, on many occasions, tried to slow the pace of the FTAA negotiations.
Apart from efforts to revitalize and consolidate the MERCOSUR, Brazil has
just recently, through the MERCOSUR, engaged the European Union in a similar
undertaking that would appear to further divert its attention and limited
resources. There are, however, two opposing explanations advanced by witnesses
appearing before the Committee for this behaviour. On the one hand, the
Committee was told:
Brazil gives priority to MERCOSUR in its trade policy, which means its
trade agreement with Argentina, Paraguay and Uruguay, in order to create
the basis of an economic bloc that is relatively well-integrated. In addition,
through parallel agreements, these countries have agreed to extend the
range of MERCOSUR by signing agreements with Chile and Bolivia, and by
negotiating ... with Andean countries. Brazil has a ... South American
strategy and does not look favourably on the hasty approach of the Clinton
Administration, and especially that of the Government of Canada, to impose
a hemispheric scheme that would inevitably be dominated by the United States.
[Jean Deaudelin, 27:1610]
On the other hand:
History ... points to the fact that most ... attempts at integration
[of Latin America] were unsuccessful. ... The main criticism is that they
tried to do too much in a timeframe that was too rigid. Thus, it's not
surprising to hear that Latin American countries are suggesting that the
FTAA process be conducted at a slower pace and with a less ambitious scope
than originally suggested ... [Annette Hester, 31:1615]
While Canadian trade officials have a lot to be discouraged about in
light of the political posturing of the two largest countries of the hemisphere,
it is the opinion of this Committee that their patience will eventually
pay off. The Committee recommends:
6. That the Government of Canada continue its proactive leadership
role in moving the negotiations of a Free Trade Area of the Americas agreement
forward.
Disparity in Economic Size and Development
The FTAA represents a unique development in the integration of economies
through free trade as it is the first to propose to do so between a large
number of diverse economies. The disparity in size and development of these
countries will inevitably present a significant challenge for two reasons.
The first reason is the rather obvious fact that a huge trade deal between
34 countries will provide for a monumentally complex negotiation process;
but, then, how could a deal of such magnitude be otherwise? The second
reason is that the smaller Latin American and Caribbean countries fear
the larger countries could overwhelm them in the negotiations and, consequently,
that some of the latter's larger multinationals, which can employ more
people and whose revenues can sometimes dwarf their gross domestic products
(GDP), might eventually overrun their economies. This imbalance in size
and economic muscle, they fear, may result in their more scarce natural
resources being exploited to North America's advantage, without adequately
sharing in its spoils, and to external forces dictating the course of their
economic development.
As for the first criticism, it is clear that the smaller countries lack
the resources necessary to conclude a mutually favourable trade deal, but
this can be overcome with cooperation and technical assistance from others
as the Committee explains in some detail in the next chapter. The second
criticism is rather dubious. The disparity in wealth and development between
North America and Latin America and the Caribbean is at best a double-edged
sword. One could convincingly argue that this striking asymmetrical status,
rather than the hypothetical polar case of equal hemispheric wealth, may
show more promise for wealth creation throughout the Americas under a more
harmonized rules-based market trading environment. That is, economic differences
between nations and regions have, since the 1800s, been regarded as important
determinants of, or the breeding ground for, specialization and international
trade. Furthermore, international movements of capital from capital rich
regions, such as North America, can do much to elevate labour productivities
in capital starved regions, such as Latin America and the Caribbean, and
could set the demographic wealth profiles of these distinct societies on
a path of convergence.4,5
Finally, the overwhelming empirical evidence points to the contrary.
The economies of Canada and Mexico are approximately one-twelfth and one-twentieth
the size of that of the United States, respectively, and the latter's firms
boast greater sizes and exploit more economies of scale than do Canadian
and Mexican firms. Yet both Canada and Mexico enjoy a merchandise goods
trade surplus with the United States that have grown to record levels for
both countries since the signing of the NAFTA. Impressions are one thing,
facts are obviously another.
Business Facilitation
Business facilitation, dominated by customs administration issues, represents
one of the four most important challenges to an FTAA. Currently, customs
procedures throughout the 34 countries of the hemisphere are varied and,
in some circumstances, can present a costly obstacle to trade. Indeed,
as some countries consider the scope of customs procedures under negotiation
as market access concessions, they signal their use as something more than
territorial/border measures. A free trade deal, without dealing with customs
procedures, is not quite a satisfactory solution as is suggested by Canada's
export experience to Mexico since the NAFTA. It is, to say the least, not
reassuring.
If there's anything that has detracted from the enthusiasm of Canadian
companies - and particularly I think this is true with respect to Mexico
- it's some of the problems they've met in terms of getting their product
through Mexican customs, dealing with some of the rules and the regulations
affecting investment. We have a free trade agreement, but in actual fact
the implementation of rules is something to be desired ... [Jayson Myers,
28:1655]
The ultimate objective of negotiating new FTAA customs procedures should
be to make it equally as easy for a Toronto-based firm to do business in
Bogota, Colombia, as it is for that firm to do business in Seattle, U.S.
Thus, the amount of "red tape" related to customs administration
should be harmonized and made as simple, efficient and transparent as possible
while ensuring border integrity and territorial sovereignty. As such, all
elements of customs procedures should provide certainty and predictability
to producers, exporters and importers in order to boost their confidence
in doing business throughout the Americas. The related costs of doing business
across borders should, therefore, be as minimal as is conceivably possible
so that the above principle of conducting business across national borders
applies equally across the hemisphere, regardless of the source or destination
of the goods and services in question.
At the outset, it should be understood that business facilitation or
customs administration measures within the hemisphere could be negotiated
separately from the FTAA process; they need not be packaged together. The
Committee appreciates, however, the fact that these obstacles can form
a significant technical barrier to market access and that the resolution
of these issues would be an important objective on the road to an FTAA.
Even if, for the time being, we can't make rapid progress in the FTAA
on significant tariff reductions, there are a number of business facilitation
measures we could take that would make a contribution to good governance
throughout the hemisphere, increase stability and predictability, and help
the flow and reduce the cost of business transactions to the benefit of
all concerned. One of these business facilitation measures is in the area
of customs administration. Canada has played a leading role in promoting
and supporting efficient customs administration in a variety of international
fora. We have encouraged and supported training for customs officials,
we've promoted standardization of customs forms, harmonization of classification
systems, streamlined procedures and codes of conduct for customs officials.
We've urged the adoption of electronic data interchange between customs
authorities. [Robert Weese, 31:1635-1640]
The Committee is aware of the fact that the FTAA process has made business
facilitation an immediate priority issue and that considerable discussions
have already taken place. Many participants have apparently contributed
to a questionnaire disseminated throughout the business communities of
the Americas by the FTAA Trade Negotiations Committee. This effort garnered
217 proposals, which have been further refined to 51 customs measures.
This sharper focus is being done for managerial reasons, with the objective
of reaching an agreement on the principal customs measures by 2000. These
measures were also divided into two groups: (1) customs-related measures
and (2) transparency-related measures. Together, these measures include
temporary importation of goods, importation of commercial samples and advertising
materials, express shipments, reimportation of repaired or transformed
goods, simplified procedures for low-value shipments, compatible electronic
data interchange systems, a harmonized system of classification of goods,
a hemispheric guide on customs procedures, and the rules of origin, amongst
others.
Though business facilitation issues are truly an undertaking unto themselves,
they are currently being considered as one element of the FTAA. The Committee
believes this to be the correct approach to take. Ultimately, the progress
made on this aspect of the negotiations will demonstrate the willingness
of parties to conclude a meaningful FTAA. Business facilitation negotiations
are, therefore, an early warning signal of the prospects and the degree
of success likely to greet the FTAA. Moreover, the Committee holds the
position that this aspect of trade should not be allowed to substitute
for other trade impediments. The Committee therefore recommends:
7. That the Government of Canada make it eminently clear to all negotiating
parties that Canada attaches great importance to the resolution of business
facilitation issues.
Potential Global Financial Crises
The FTAA should be a positive economic development for the hemisphere.
However, no one should be under the illusion that free trade is a panacea
for what ails the Americas, particularly for the developing countries.
If there is not a minimum standard of regulation and adequate supervision
of financial markets (ideally using both incentive and audit instruments),
sound corporate governance principles, and credible codes of conduct in
implementing responsible fiscal and monetary policies, then trade and investment
reforms pursuant to an FTAA will bring little sustainable economic prosperity
to the hemisphere. Free trade cannot be expected to take root in a climate
of high and volatile inflation, wide currency fluctuations, bloated government
budget deficits, and heavy external debt loads. Proper financial preconditions
must be set in place.
Therein lies the most unpredictable challenge, and uncontrollable from
a policy perspective, of the four prominent challenges facing the FTAA
today. Without the above complementary economic and financial stabilization
policies, economic prosperity will last as long as it takes speculators
to find the weakest link in the hemispheric financial network. When the
financial fundamentals turn against this country, a domino effect may soon
grip the Americas that will be costly to correct, if the FTAA is to remain
intact and free trade detractors are not to gain the upper hand.
In most financial crises and when under siege from currency speculators,
developing economies have often resorted to import and capital restrictions.
These reflex reactions have provided their economies some measure of short-term
relief, but as they do not get to the heart of the problem, they only exacerbate
and prolong their financial woes. Indeed, capital restrictions are by no
means a substitute for good macroeconomic management. These options, however,
will largely be foreclosed for all countries of the Americas under the
rules of the FTAA (depending on the terms of the safeguards negotiated),
as they were for Mexico once the so-called "tequila crisis" took
hold there at a time when it had just begun undertaking its NAFTA commitments.
Other institutional measures will, therefore, have to replace these "fair
weather" economic strategies.
[It is unknown what] kind of impact ... global financial markets will
have on the speed and tone and shape of the negotiations of the FTAA ...
A lot of attention is being paid to how Brazil is going to manage its financial
house and how that can impact on the negotiations, given that I believe
the Brazilian economy is responsible for something in the order of 60%
of the Latin South American GDP. From our perspective, these financial
challenges only make the case for liberalized trade, rather than undermining
[it]. ... I think the answer we are certainly pushing is that openness
and transparency of those financial markets will be aided by more liberalized
trade and commerce rather than being handicapped by it. Canada's view is
that there is a challenge to resist the demands for a more protectionist,
insular, inward-looking response to some of these financial challenges
and to try to demonstrate the benefits to be gained by continuing a path
of liberalized trade, whether the fluctuations of the marketplace are positive
or negative. [Kathryn McCallion, 24:1540-1545]
The Committee would like to be able to assure Canadians that financial
crises in the Americas will be a thing of the past once the FTAA is adopted
and implemented, but the Committee would likely have more success ordering
the waters of the Atlantic separated. Without a doubt, the question is
not whether there will or will not be a financial crisis besetting a country
of the Americas before, during or subsequent to the implementation of any
forthcoming FTAA agreement, but when there will be such a crisis. It will
be at these times that our hemispheric resolve for greater economic integration
will be tested most.
The best policy advice the Committee can offer at this time is to put
in place institutional measures to better coordinate domestic stabilization
policies of the hemisphere to both avert financial crises from the outset
and to better enable existing international financial institutions to act
quicker and with more resolve when they cannot be averted. These institutional
measures must also be able to contain the systemic financial risks which
can take on contagion-like characteristics.
The Committee is also of the opinion that, despite the improved financial
position of many Latin American and Caribbean countries (see Appendix 2)
and their privatization efforts of the past decade, further financial reforms
in many countries of the region are needed for the successful implementation
of an FTAA. If the past is any guide, the speed at which financial capital
markets are liberalized should not be allowed to outpace the financial
sector's regulatory and supervisory reforms and modernization initiatives.
1 In making
this argument to the public, the Department of Foreign Affairs and International
Trade often cites that: "One in three Canadian jobs depends on trade
with the rest of the world, and every $1 billion in new exports creates
6,000 to 8,000 jobs in Canada" and "a $1-billion increase in
new inward foreign direct investment (FDI) to Canada generates approximately
45,000 jobs over a five-year period." This Committee, however, wants
the public to understand from the outset that the prosperity and well-being
of a nation go far beyond these job benefits. Indeed, it is doubtful that
these job claims are relevant to an FTAA at all, at least in terms of net
benefits. Imports into Canada have a labour content as well. Since Canada
is a net importer of goods and services from Latin America and the Caribbean,
the net job content of trade with Latin America and the Caribbean for Canada
is presently more likely to be negative, not positive. Canada also maintains
a net investor status in Latin America and the Caribbean, suggesting that
jobs, on a net basis, are being created elsewhere in the Americas with
Canadian financial resources. However, regardless of this apparent job
deficit, the actual job implications of an FTAA may be positive, neutral
or negative to Canada. This would depend on a host of variables such as
any comparative and competitive advantages possessed or created by different
companies and sectors of respective countries that are not currently being
fully realized because of existing trade barriers, the combination of relative
labour productivities and wage rates, and the terms of trade. For all these
reasons, it would be a huge stretch to sell an FTAA on the basis of jobs.
2 Economies
of scope refer to a plant's or firm's unit cost reductions attributable
to new products being added to its production schedule, respectively.
3 D. Brown
et al., "Expanding NAFTA: Economic Effects of Accession of Chile and
Other Major South American Nations," The North American
Journal of Economics and Finance, JAI Press, Vol. 6, No. 2, Fall 1995,
Table 5, p. 161.
4 Greater
productivity is possible and, indeed, made more likely if the reallocation
of resources in these economies results in the attainment of any further
economies in scale or scope in production - an outcome far more likely
to occur in the smaller economies of Latin America and the Caribbean.
5 This
proposition is somewhat controversial as empirical evidence on the matter
is at best mixed. One strand of economic logic takes the position that
the widening gap in incomes between rich and poor countries is in part
the result of trade barriers, demonstrating empirically that their reduction
has, in some cases, produced a convergence of incomes. Another strand of
economic logic holds that trade openness promotes inter-country differences
in the stocks of work-related skills between rich and poor countries in
part because of persistent gaps in technological capabilities between them,
which would tend to cause a divergence in incomes, with limited evidence
in support.