When the world heard last June that Mexico, Colombia, Peru and Chile had confirmed a previously announced plan to form a bloc called the Pacific Alliance to tighten economic and political ties, the response was lukewarm. Seasoned observers took a wait-and-see approach, in part because the announcement was short on details.
But now we have some momentum, and something to chew on. At the end of September Mexico’s president-elect Peña Nieto visited Peru, saying that trade between the two countries would hit US $2 billion in 2012, and that Peru was number two in Latin America for Mexican investment. Then, on Oct. 1 the four Pacific Alliance countries formally acknowledged they were following through on the promise to allow inter-country travel without visas, strengthening ties in air transport and tourism. The free movement of goods is expected before the end of 2012.
Nonetheless, building a trade bloc to rival Brazil-led Mercosur and leading the charge in the Asian market will be many years in the making.
“Asian trade will continue to be important for Pacific Alliance countries,” Prof. June Teufel Dreyer, an expert on Asian-Pacific political and economic systems at the University of Miami, told Global Delivery Report. “However, since Chinese growth has been slowing down, and the Indian economy is having some problems, trade with Asia may not grow as fast as it has in the recent past.”
That said, the potential strengths of the bloc could be significant. Each of the four Pacific Alliance countries has some kind of free trade partnership or agreement with the United States. They have open markets and are pragmatic politically, with Mexico’s incoming centrist president Peña Nieto and Peru’s left-leaning Ollanta Humala able to work with their right-of-center neighbors in Colombia and Chile. The challenge will be to present a solid front to Asia.
“The Asian heavyweights like China and India want Latin America’s raw materials,” says Teufel Dreyer. “And they want to return higher-value products.”
But economies change, and not all Asian countries have the identical profile. China, for example, is more active as a consumer of resource-based industries with India having a more sophisticated focus on high technology and services.
The Pacific Alliance’s India Play
The Pacific Alliance represents 30 percent of Latin America’s trade with India, despite the fact that none of the four countries have a free trade agreement with the Asian giant. Chile has been an early mover, establishing a preferential trade agreement with India, but to date engagement with the other three countries has been lackluster.
This is despite the fact that India was an important – and fairly balanced – trading partner with the Pacific Alliance countries in 2011. Overall trade was U.S. $7.7 billion, with a mix of U.S. $3.1 billion in exports and US $4.6 billion in imports. This is a dynamic market that represents opportunity for all players.
But first the Pacific Alliance countries must address their internal barriers. Despite Mexico’s impressive $2 billion annual investment in Peru, Pacific Alliance members conduct less than 3 percent of their trade among themselves, compared to Mercosur’s 20 percent. The Pacific Alliance has also been criticized for having no fixed targets for the free circulation of services, investment and labor.
Long-time Latin America observer and Pulitzer Prize winner Andrés Oppenheimer has argued that expanding the Pacific Alliance makes sense. Support has come from more official quarters, too, with the Inter-American Development Bank’s Manager of the Integration and Trade Sector, Antoni Estevadeordal, saying that, with the right political will, “We may see something new and very promising in the region.”
A Divided Continent?
Mercosur is now 15 years old; it has as its full members Argentina, Brazil, Uruguay and Venezuela. (Paraguay’s membership has been suspended.) The organization has had difficulty expanding due to political rifts that resulted in its members’ rejection of a previous U.S. proposal for a Free Trade Area of the Americas (FTAA). It is from these ashes that the Pacific Alliance was born.
“Certainly the goal of Pacific Alliance is to act as a counter to Mercosur,” says Teufel Dreyer. “But it isn’t clear that the member states will be able to make the necessary adjustments to their economies to make this possible.”
Teufel Dreyer points to the internal trade challenges facing Latin America, and a tough global climate that makes trade wars more likely. In this regard, Mercosur appears to be going in the opposite direction of the Pacific Alliance: Brazil recently strong-armed Mexico to limit car imports, and Argentina has made a number of seemingly arbitrary and restrictive trade and regulatory decisions. And, no matter what Latin American trade bloc you belong to, China can play tough.
“There could be an ongoing unfavorable balance of trade that would be difficult for Latin American countries to counter,” says Teufel Dreyer. “For example, when President Kirchner of Argentina tried anti-dumping measures, China announced it would cease imports of Argentine soya oil.”
This is not the path promised by the Pacific Alliance, which hopes to open its markets to its member states – including associate members Panama and Costa Rica – and to Asia. The table is set. Only time will tell what the Pacific Alliance partners will serve to the world.
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