Trade Integration in the Americas
CRS Report for Congress
Trade Integration in the Americas
Updated January 25, 2006
M. Angeles Villarreal
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
Trade Integration in the Americas
Since the 1990s, the countries of Latin America and the Caribbean have been
a focus of United States trade policy, as demonstrated by the passage of the North
American Free Trade Agreement (NAFTA), the U.S.-Chile Free Trade Agreement,
and, more recently, the Central America-Dominican Republic Free Trade Agreement
(CAFTA-DR). The Bush Administration has made trade agreements important
elements of U.S. trade policy. The United States currently is in the process of
completing trade negotiations with Andean countries for a free trade agreement
(FTA) and on reactivating talks for a U.S.-Panama FTA and a Free Trade Area of the
Americas (FTAA). The FTAA is an on-going regional trade initiative that was first
discussed in 1994 and formally started in 1998. The last FTAA trade ministerial
meeting was held in Miami in November 2003, but the talks are currently stalled.
The efforts of the United States in regional trade integration in the Americas are
significant for Congress because U.S. entry into any free trade agreement may only
be done with the legislative approval of the Congress. U.S. supporters of trade
integration in the Americas believe it helps U.S. economic and political interests in
several ways. Proponents believe that the movement towards trade integration of the
Americas is beneficial for U.S. prosperity, and also serves to strengthen democratic
regimes and support U.S. values and security. Forming closer economic relations
with countries in the region is seen by some as a means to improve cooperation on
other issues such as the environment and anti-drug efforts. U.S. opponents of trade
integration proposals are mainly concerned that hemispheric free trade would lead
to a loss of jobs in the United States through increased import competition or as a
result of U.S. companies shifting production to lower-wage countries with weak
The number of regional trade agreements in the Americas has been increasing
since the 1990s. Major trade arrangements include NAFTA, CAFTA-DR, the
Southern Common Market (Mercosur) in South America , the Andean Community
(CAN), the Caribbean Community and Common Market (CARICOM), the Central
American Common Market (CACM), and the Latin American Integration
Association (ALADI). With a total of 12 trade agreements involving over 40
countries, Mexico is one of the countries with the highest number of agreements.
Supporters note that if countries in the Western Hemisphere ultimately establish an
FTAA, it could have as many as 34 members and nearly 800 million people, nearly
twice the population of the European Union.
Trade integration in the Americas is of interest to policymakers because of the
implications for the United States. Issues under debate include the pros and cons of
deepened trade relations with Latin America and the Caribbean, and whether the
current focus on bilateral and regional FTAs is the most appropriate trade policy.
Some analysts do not believe that such a policy is a good idea because it is creating
a complicated network of trade agreements throughout the region could slow down
the FTAA process. Others believe that regional trade agreements lead to the
consolidation of regional trade areas into larger free trade areas, and although a slow
process, may eventually lead to a hemispheric free trade area.
What Are Regional Trade Agreements?................................1
Motivations for Forming Regional Trade Agreements.................3
The Americas and Regional Trade Agreements......................4
World Trade Organization and RTAs..............................7
Economic Effects of Trade Integration.................................8
U.S. Trade Policy in Latin America and the Caribbean.....................9
Role of Trade Promotion Authority...............................10
North American Free Trade Agreement (NAFTA)...................11
Central America-Dominican Republic Free Trade Agreement..........13
U.S.-Panama FTA ...........................................16
Free Trade Area of the Americas (FTAA)..........................16
Regional Integration Initiatives in the Americas.........................18
Southern Common Market (Mercosur)............................20
Andean Community of Nations (CAN)............................22
Central American Common Market (CACM) ......................24
Caribbean Community (CARICOM) .............................24
South American Community of Nations (CSN).....................26
Policy Issues and Implications.......................................27
Continuation of Bilaterals and Regional Trade Agreements............27
Completion of an FTAA.......................................27
Trade Integration and U.S. Interests...............................29
List of Tables
Table 1. Major Trade Arrangements in the Americas......................5
Table 2. Economic Indicatorsfor Selected Regional Trade Blocs (2003).......6
Table 3. United States’ Trade Agreements.............................12
Table 4. Mexico’s Trade Integration Agreements.......................20
Trade Integration in the Americas
Since the 1990s, the countries of Latin America and the Caribbean have been
a focus of U.S. trade policy as demonstrated by the passage of the North American
Free Trade Agreement (NAFTA), the U.S.-Chile Free Trade Agreement, and the
Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). The
Bush Administration has made bilateral and regional trade agreements key elements
of U.S. trade policy. Current U.S. trade policy in the Western Hemisphere is now
focused on completing trade negotiations with Andean countries for a free trade
agreement (FTA) and on reigniting talks for a U.S.-Panama FTA and a Free Trade
Area of the Americas (FTAA). The FTAA is an on-going regional trade initiative
that was first discussed in 1994 and formally started in 1998. The last trade
ministerial meeting was held in Miami in November 2003, but the talks are currently
stalled. At the fourth Summit of the Americas, held in Mar del Plata, Argentina, on
November 4-5, 2005, Brazil, Argentina, Uruguay, Paraguay, and Venezuela blocked
an effort to restart negotiations in 2006, which now appear to rely, at a minimum, on
the resolution of agricultural issues in the WTO Doha Round before they can resume.
The efforts of the United States in regional trade integration in the Americas are
significant for Congress because U.S. participation in any free trade agreement may
only be done with the legislative approval of the Congress. Trade is a controversial
issue for Congress. In the second session of the 109th Congress, issues will likely
include consideration of a free trade agreement with Peru (negotiations were
concluded in December 2005), ongoing trade negotiations with Colombia and
Ecuador, elections in Latin America and implications for U.S. trade policy, as well
as general oversight on U.S. trade relations with Latin America. This report will be
updated as events warrant.
What Are Regional Trade Agreements?
Regional trade agreements (RTAs) are trade arrangements under which
member-countries grant each other preferential treatment in trade. RTAs may be
categorized as bilateral, multilateral, or sub-regional. With no formal definitions,
these terms are sometimes used loosely to describe various groupings. A bilateral
trade agreement is usually an agreement between two countries to reduce tariffs and
quotas on items between themselves. While this definition seemingly indicates an
agreement between just two countries, it is sometimes used to describe trade
agreements involving more than two countries.
There are a number of types of arrangements including free trade agreements,
customs unions, common markets, and economic unions.1 Free trade agreements
(FTAs) are the most common form of regional economic integration in which
members of a group remove tariffs and some nontariff barriers to trade among
member countries.2 At the same time, each member retains its independent trade
policy, including its tariffs, towards nonmember countries. FTAs are those in which
member countries agree to eliminate tariffs and nontariff barriers on trade in goods
within the free trade area, but each country maintains its own trade policies, including
tariffs on trade outside the region. FTAs account for 84% of all RTAs in force in the
world, and 96% of those that are pending. The likely reason there are more FTAs
than customs unions is that they can be concluded more quickly and require less
policy coordination among members. In an FTA, member countries maintain their
own trade policy vis-a-vis non-member countries.3 The U.S.-Chile free trade
agreement is an example of a bilateral FTA.
Customs unions are agreements in which members conduct free trade among
themselves and maintain a common trade policy towards non-members. These
agreements require the establishment of a common external tariff and harmonization
of external trade policies. Such agreements imply a greater loss of autonomy over
the parties’ commercial policies and require longer and more complex negotiations
and implementation periods. Geographical considerations play an important role in
defining the objective of economic, and sometimes political, integration among the
member countries.4 The Southern Common Market (Mercosur) in South America
is an example of a customs union.
Common markets are those in which member countries go beyond a customs
union by eliminating barriers to labor and capital flows across national borders within
the market. The European Union is the most prominent example of a common
In economic unions, member countries merge their economies even further than
common markets by establishing a common currency, and therefore a unified
monetary policy, along with other common economic institutions. The 12 members
of the European Union that have adopted the euro as a common currency is the most
significant example of a group of countries that has gone from a customs union to an
1 In addition to the trade arrangements described in this section in which member countries
extend reciprocal preferential treatment, there are trade arrangements under which one party
agrees to extend nonreciprocal preferential treatment to the imports of a country or group
of countries unilaterally. Such arrangements primarily involve developed countries
extending nonreciprocal preferential treatment to the imports from developing countries.
2 For the impact of Free Trade Agreements, see CRS Report RL31356, Free Trade
Agreements: Impact on U.S. Trade Policy, by William H. Cooper.
3 World Trade Organization, The Changing Landscape of Regional Trade Agreements, by
Jo-Ann Crawford and Roberto V. Fiorentino, Discussion Paper No. 8, 2005.
Growth of Regional Trade Agreements
Between January 2004 and February 2005, the World Trade Organization
(WTO) received notification of 43 new RTAs, “making this the most prolific RTA
period in recorded history.”5 A WTO discussion paper reported in May 2005 that
the number of world RTAs in force totaled 170, with 20 additional RTAs due to enter
force pending domestic ratification, and a further 70 under negotiation or
consideration. RTA activities have intensified in all world regions “particularly in
the Western Hemisphere and Asia-Pacific.”6
Motivations for Forming Regional Trade Agreements
While economic motivations may be a major driving force, countries form
RTAs for a number of reasons. Political and security factors also play a role in
forming RTAs. Countries usually enter into trade agreements to improve their
country’s or region’s bargaining position in global negotiations, attract foreign direct
investment to increase economic growth, achieve economies of scale, and expand
export markets. Countries also see RTAs as building blocks for further trade
liberalization under the World Trade Organization (WTO) or for forming larger free
trade areas such as the FTAA.
Expanding market access is probably the primary motivation for entering into
trade agreements. RTAs give the signatories trading preferences in each other’s
markets while excluding other nations from the same privileges. These preferential
trade arrangements reduce tariffs and other trade barriers among trading partners,
providing partners with broader market access for their goods and services. Trade
liberalization allows countries to achieve economies of scale as they are able to
expand their export market. Smaller countries benefit from trade agreements because
producers in these countries can lower their unit costs by producing larger volumes
for regional markets in addition to their own smaller domestic markets.7 When more
units of a good or a service can be produced on a larger scale, companies will have
a better chance to decrease cost of production.
Attracting foreign direct investment (FDI) is another reason for forming RTAs,
especially for developing countries. The lowering of foreign investment restrictions
through trade agreements improve investor confidence in a country, which helps
attract FDI. Multinational firms invest in countries to gain access to markets, but
they also do it to lower production costs. One of the motivating factors in Mexico’s
5 Pruzin, Daniel, “Challenges Posed to Developing nations by Upswing in Regional Trade
Agreements,” International Trade Reporter, May 26, 2005.
6 Crawford, Jo-Ann and Roberto V. Fiorentino (Crawford and Fiorentino), “The Changing
Landscape of Regional Trade Agreements,” World Trade Organization (WTO) Discussion
Paper No. 8, May 2005, p. 1.
7 For more information on the costs and benefits of regional trade agreements, see Cohen,
Stephen D., Robert A. Blecker, and Peter D. Whitney, Fundamentals of U.S. Foreign Policy,
Westview Press, 2003, pp. 49-79.
interest in forming NAFTA was to attract FDI. It was also a motivating factor for
Central American countries and the Dominican Republic in the CAFTA-DR.
The slow progress in multilateral negotiations may also contribute to the
increasing interest in regional trade blocs. Some countries may see smaller trade
arrangements as “building blocks” for multilateral agreements. For example, the
United States recently ratified CAFTA-DR and is moving forward on negotiations
with Panama and the Andean countries as part of its overall trade strategy for free
trade in the Americas.
Some countries form RTAs for political reasons. Governments may seek trade
agreements as a way to promote peace or increase regional security. Countries may
want to demonstrate good governance by locking in political and economic reforms
through trading partnerships. Larger countries may use RTAs to forge new
geopolitical alliances and strengthen diplomatic ties, which could ensure or reward
political support. For example, the United States formed RTAs with Israel and
Jordan as a way of reaffirming U.S. support of these countries and to strengthen
relations with them. Some analysts believe that the choice of RTA partners is
increasingly based on political and security concerns and not so much on economic
The Americas and Regional Trade Agreements
The formation of RTAs throughout the world has intensified in the last few
years with countries in the Americas forming a notable share of the world’s total.
Thirty-nine of the 170 agreements in force around the world involve countries in the
Western Hemisphere. Europe has the greatest concentration of RTAs in the world,
with the European Union and the European Free Trade Association as the “main
continental hubs.” The WTO reports that in the Western Hemisphere, RTA
dynamics are more diverse than they are in Europe with “several major players
engaged in multilayered RTA processes and not necessarily sharing similar
8 Crawford and Fiorentino, p. 16.
9 Crawford and Fiorentino, p. 10.
Table 1. Major Trade Arrangements in the Americas
North AmericanMember countries: Canada, Mexico, United States. The free
Free Tradetrade agreement was signed in December 1992 and entered
Agreementinto force on January 1, 1994.
Central America-Signatory countries: Costa Rica, Dominican Republic, El
DominicanSalvador, Guatemala, Honduras, Nicaragua, United States.
Republic Free TradeThe free trade agreement was signed on August 5, 2004. As of
AgreementSeptember 2005, the agreement had been ratified by six
(CAFTA-DR)countries. Costa Rica has not ratified. The agreement is
expected to enter into force in January 2006.
Southern CommonMember countries: Argentina, Brazil, Paraguay, Uruguay.
Market (Mercosur)Associate Member Countries: Venezuela, Colombia, Ecuador,
Bolivia, Chile, and Peru. The treaty was signed in 1991. The
goal of the treaty is to form a common market. The program
has progressively removed trade barriers and established a
common external tariff structure with selected national
Andean CommunityMember countries: Bolivia, Colombia, Ecuador, Peru,
(CAN)Venezuela. The 1969 founding agreement was a step forward
in creating a customs union with a longer term goal of creating
a common market. Over the years, member countries have
taken adopted a number of measures towards trade integration
and have committed to the creation of a common market by the
end of 2005.
CaribbeanMember countries: Antigua&Barbuda, Bahamas, Barbados,
Community andBelize, Dominica, Grenada, Guyana, Haiti, Jamaica,
Common MarketMontserrat, Trinidad & Tobago, St. Kitts & Nevis, St. Lucia,
(CARICOM)St. Vincent & the Grenadines, and Surinam. The original
treaty was signed in 1973. In 1989, member countries agreed
to create a CARICOM Single Market and Economy (CSME).
Efforts are being made to establish the CSME by end of 2005.
Central AmericanMember countries: Costa Rica, El Salvador, Guatemala,
Common MarketHonduras, and Nicaragua. Panama has observer status.
(CACM)Original treaty signed in 1960 and 1963 but although most
intra-regional trade is duty-free, integration process continues.
The goal was to establish a common market but integration
was delayed to political and economic challenges in the region.
Latin AmericanMember countries: Argentina, Bolivia, Brazil, Chile,
IntegrationColombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay,
Associationand VenezuelaThe ALADI framework is a preferential trade
(ALADI)arrangement consisting of about 40 partial scope agreements
involving two or more countries. Most were signed in the
Sources: Compiled by CRS using information from IDB Beyond Borders; and WTO, Discussion
Paper No. 8, “The Changing Landscape of Regional Trade Agreements,” 2005.
Table 2. Economic Indicators
for Selected Regional Trade Blocs (2003)
Count ry People( M illio n) GDP( $ B illio n) Amo unt( $ B ill) World Amo unt( $ B ill) World
Canada 32 870 286 3.73% 244 3.3%
Mexico 105 639 165 2.15% 171 2.3%
Central America &0.4%
Domi nican 44 85 21 0.3% 32
Tot a l 337 11,056 746 9.7% 1,335 17.9%
Arge ntina 39 153 30 0.4% 13 0.2%
Brazil 179 605 73 1.0% 51 0.7%
Paraguay 6 7 1 0.0% * 2 0.0% *
Uruguay 3 13 2 0.0% * 2 0.0% *
Bolivia 9 9 2 0.0%* 2 0.0% *
Colombia 45 97 14 0.2% 13 0.2%
Ecuador 13 30 6 0.1% 6 0.1%
Peru 28 69 9 0.1% 8 0.1%
V e nezuela 26 109 27 0.4% 11 0.1%
CARI CO M ** 15 54 12 0.2% 16 0.2%
WORLD TOTAL5,92055,8217,661 — 7,477 —
Source: Compiled by CRS using data from International Financial Statistics, International Monetary
Fund (IMF), August 2005; the Economist Intelligence Unit, and the CIA World Factbook.
* Less than 0.1%.
** Data for CARICOM region are estimates from 2003, 2004, and July 2005.
Trade liberalization has been a central component of structural reform process
in Latin America and the Caribbean since the mid-1980s when countries were
implementing unilateral measures to liberalize trade. After NAFTA, countries began
taking a more regional approach through the formation of regional trade agreements.
Some of the major trade arrangements in the Americas are described in Table 1
below. By adopting a more regional approach, countries have been able to go beyond
that which was attainable or desirable at the unilateral and multilateral levels. Most
of the regional integration to date has involved trade in goods and has not advanced
as far in other areas such as trade in services or intellectual property rights. In this
regard, Mexico’s liberalization has been the most comprehensive through its10
implementation of NAFTA.
NAFTA has the largest market size of all regional trade blocs in the Americas,
encompassing a market of 430 million people with a nominal GDP of $13.4 trillion
(see Table 2). In South and Central America, the largest markets are formed by
Mercosur, with a population of 227 million and a nominal GDP of $778 billion; and
the Andean Community, with a population of 121 million and a nominal GDP of
World Trade Organization and RTAs
A basic principle of the General Agreement on Tariffs and Trade (GATT) that
is administered by the WTO is the most-favored nation (MFN) principle. In general,
the MFN principle requires that trade concessions granted to one WTO member are
to be applied to the trade of all other signatories. RTAs, by definition, run counter
to the MFN principle because products of RTA member countries are given
preferential treatment over nonmember products.11 However, the WTO allows
member countries to form regional trade agreements under strict rules. The WTO
position is that regional trade agreements can often support the WTO’s multilateral
trading system by allowing groups of countries to negotiate rules and commitments
that go beyond what was possible at the time under the WTO. The WTO has a
committee on regional trade agreements that examines regional groups and assesses
whether they are consistent with WTO rules.12
WTO members are permitted to enter into RTAs under specific conditions.13
Paragraphs 4 to 10 of GATT Article XXIV as clarified in the Understanding on the
Interpretation of Article XXIV of the GATT 1994, provide for the formation and
operation of customs unions and free-trade areas covering trade in goods. Article V
10 Beyond Borders: The New Regionalism in Latin America (Beyond Borders), Inter-
American Development Bank, Economic and Social Progress in Latin America 2002 Report,
11 For more information on the WTO, regional trade agreements, and U.S. trade policy, see
CRS Report RL31356, Free Trade Agreements: Impact on U.S. Trade and Implications for
U.S. Trade Policy, by William H. Cooper.
12 See World Trade Organization, “Understanding the WTO: Cross-Cutting and New Issues,
Regionalism: Friends or Rivals?,” [http://www.wto.org].
13 For more information on the specific sets of rules for regional trade agreements among
WTO members, see Regional Trade Agreements: Rules on the WTO website
[ h t t p : / / www.wt o.or g] .
of the General Agreement on Trade in Services (GATS), governs the conclusion of
RTAs in the area of trade in services, for both developed and developing countries.
Three of the key elements in these rules state that countries participating in an RTA
must provide detailed notification of the agreement to the WTO; that the agreement
applies to “substantially all” trade between partner countries; and that the agreement
does not raise barriers to third-country trade.14
Another set of rules refers to the so-called “Enabling Clause”, the 1979 Decision
on Differential and More Favorable Treatment, Reciprocity and Fuller Participation
of Developing Countries. These rules apply to preferential trade arrangements in
trade in goods between developing country members and allows developing countries
to form preferential trading arrangements without the conditions under Article
For non-reciprocal preferential trade arrangements, such as the US-Caribbean
Basin Economic Recovery Act, members must seek a waiver from WTO rules.
These waivers require the approval of three-fourths of WTO members.
Economic Effects of Trade Integration
Supporters of trade integration in the Americas view hemispheric free trade as
supporting U.S. economic and political interests in several ways. They argue that the
movement towards trade integration is beneficial for U.S. economic prosperity and
will serve to strengthen democratic regimes and support U.S. values and security
interests. Forming closer economic relations with countries in the region is seen by
some as a means to improve cooperation on other issues such as the environment and
anti-drug efforts. U.S. opponents to regional integration in the Americas are
concerned that hemispheric free trade would lead to a loss of jobs in the United
States. They argue that trade agreements would result in U.S. companies shifting
production to lower-wage countries with weak labor and environmental standards.
Economists are in general agreement that RTAs can provide economic benefits,
but not that there are also associated costs. In general, they see RTAs as beneficial
for an economy to the extent that they provide trade creation over trade diversion.
When a trade agreement lowers trade barriers on a good, production may shift from
domestic producers to lower cost foreign producers and result in substituting an
imported good for the domestic good. This process is called trade creation. Trade
creation provides economic benefits as consumers have a wider choice of goods and
services available at lower costs. Trade creation also results in adjustment costs,
however, usually in the form of domestic job losses as production shifts to another
14 See Schott, Jeffrey J., More Free Trade Areas?, Institute for International Economics,
Policy Analyses in International Economics 27, May 1989.
15 For more detailed information on the Enabling Clause rules, see WTO, Differential and
More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries
on the WTO website [http://www.wto.org].
The drawback to RTAs is that they may result in trade diversion because they
are not fully inclusive of all regional trading partners. Trade diversion results when
a country forms an RTA and then shifts the purchase of goods or services (imports)
from a country that is not an RTA partner to a country that is an RTA partner. For
example, if the United States was purchasing an item from Asia prior to NAFTA and
then began to purchase this item from Mexico after NAFTA was enforced, solely as
a result of the trade agreement, even though the Asian country was the lower-cost
producer, then NAFTA would be associated with trade diversion. Mexico would
now be the producer of that item, not because it produced the good more efficiently,
but because it was receiving preferential access to the U.S. market.
The effects of trade creation versus trade diversion are complex and difficult to
measure. Much depends on the market structure and costs in which an RTA
intervenes and the long-term dynamic effects of the RTA. A report by the Inter-
American Development Bank (IADB) states that most studies have found that “trade
creation greatly dominates trade diversion” in most regional integration trade
arrangements. The study indicates that in the case of NAFTA, all members stand to
gain, particularly Mexico. In the case of Mercosur, the study indicates that
Argentina, Brazil, and Uruguay have the potential of increasing their GDP.16
While an increase in RTAs throughout the Western Hemisphere may have
benefits, they can also result in complex networks of preferential trade arrangements.
There are an increasing number of overlapping trade agreements, each with its own
tariff schedule and rules of origin regime. Some economists believe that these
arrangements may pose challenges for developing countries and put them in a
“weaker position than under the multilateral framework.”17 Developing countries
may have difficulties in navigating the maze of rules that accompany RTAs, and they
may not be able to fully benefit from the new trade rules. Another disadvantage for
developing countries is that RTAs may result in a decreasing reliance on
nonreciprocal trade preferences such as the duty-free treatment that Andean countries
receive from the U.S. ATPDEA. According to the WTO study on RTAs, the
replacement of preferential trade arrangements with RTAs could present developing
countries with challenges as they transition from non-reciprocal trade preferences to
mutual trade liberalization.18 These disadvantages have the possibility of
perpetuating poverty in the region.
U.S. Trade Policy in Latin America and the
Since the passage of NAFTA, the United States, Canada, and Mexico have
pursued trade liberalization through bilateral, regional, and multilateral negotiations.
All have participated in the multilateral talks for an FTAA but have also formed other
bilateral agreements to help achieve their overall trade integration objectives. Many
16 Beyond Borders, p. 41.
17 Crawford and Fiorentino.
of the negotiations that have produced trade agreements have been completed
relatively quickly and have achieved broader trade liberalization than multilateral
trade negotiations. One of the advantages in forming agreements on a bilateral or
regional basis is that these agreements can achieve more liberalization in tariff and
non-tariff barriers as opposed to the multilateral approach that usually achieves
partial reductions on a limited number of goods.
NAFTA has served as a precedent for other U.S. trade agreements. The United
States has advanced its trade policy agenda in the Western Hemisphere through
bilateral trade initiatives with Chile, Central America and the Dominican Republic,
Panama and selected Andean countries (see Table 3). The U.S.-Chile FTA was
signed in June 2003 and entered into force in January 2004. CAFTA-DR was signed
into U.S. law on August 2, 2005 and is expected to enter into force in January 2006.
In May 2004, the United States began negotiations with Colombia, Peru, Ecuador,
and Bolivia on the U.S.-Andean free trade agreement. Those negotiations continue
and are expected to be concluded by the end of 2005. In April 2004, the United
States began negotiations with Panama on the U.S.-Panama free trade agreement and
those negotiations have not been concluded.
Role of Trade Promotion Authority
Trade promotion authority (TPA) is an arrangement involving the executive and
legislative branches that recognizes the distinct constitutional responsibilities of those
branches regarding trade negotiations and trade policy. By virtue of the constitutional
power to conduct foreign affairs, the President has authority to negotiate and enter
into agreements with foreign countries, including those agreements dealing with trade
and tariff policy. At the same time, the Constitution gives Congress the primary
power over trade policy under Article I, and the Congress decides whether or not to
approve statutory changes that are called for under trade agreements that the
President has negotiated.19
The basic provisions of TPA were established in the Trade Act of 1974 (P.L. 93-
most recently under the Trade Act of 2002. Under TPA, Congress provides that, if
a trade agreement is reached by a given deadline, it will consider legislation to
implement the trade agreement under expedited procedures that prohibit
amendments, limit debate, and set deadlines on congressional action. Under the 2002
Act as amended, Congress approved TPA for trade agreements entered into before
July 1, 2005, but also approved an automatic two-year extension of TPA to cover
trade agreements entered into before July 1, 2007. With TPA, the President is
assured that agreements such as the U.S.-Andean the U.S.-Panama FTAs would
receive a timely, up-or-down vote in Congress as long as certain requirements, such
as consultations with Congress, are met. Without TPA, bills would be considered
under normal legislative procedures and would be amendable.
19 For more information on Trade Promotion Authority (TPA), see CRS Report RS22102,
Trade Promotion Authority: Possible Vote on Two-Year Extension, by Lenore Sek.
TPA expires in June 2007 and renewal of the trade act is uncertain. All trade
agreements currently under negotiation by the United States must be concluded
before this deadline in order to receive the expedited procedures under TPA.
North American Free Trade Agreement (NAFTA)
NAFTA, signed by President George H.W. Bush on December 17, 1992, has
been in effect since January 1994. It is the largest preferential trade agreement in the
world. The agreement eliminated tariffs and other trade and investment barriers
among Canada, Mexico, and the United States with a phase-in period of 15 years.
The phase-in period will end in 2008. The three countries form the largest market
in the Western Hemisphere, encompassing 430 million people and with a gross
domestic product (GDP) of $13.4 trillion. Total exports from the three countries total
over one trillion dollars, or 15.4% of the world total. Imports totaled $1.7 trillion in
The goals of the NAFTA are to eliminate trade barriers, facilitate cross-border
movement of goods and services among the countries, promote fair competition in
the free trade area, increase investment opportunities, and provide effective
protection and enforcement of intellectual property rights. NAFTA is supplemented
by two additional side agreements on environmental and labor standards. The trade
liberalization program has been implemented according to schedule, or earlier. Over
Total U.S. trade with NAFTA partners increased significantly over the past 11
years. Trade volume with NAFTA partners increased from $293 billion in 1993 to
$710 billion in 2004. Canada and Mexico accounted for 31% of total U.S. trade of
$2.29 trillion in 2004, up from $292.7 billion or 28% of U.S. total trade in 1993. The
U.S. trade deficit with NAFTA partners has also grown, rising from $12 billion (9%
of the total) in 1993 to $113 billion in 2004 (17% of the total). Over the past three
years, the share of U.S. trade with NAFTA partners, with respect to the rest of the
world, has fallen. In 2001, Canada and Mexico accounted for 33% of total U.S.
trade. In 2004, this percentage fell to 31%. Canada and Mexico also account for a
smaller share of the U.S. trade deficit since 2001, down from 27% of the total in
Mexico and Canada have increased as a site for U.S. direct investment abroad
(USDIA), though their share of total USDIA has fallen slightly since the 1990s.22
Between 1993 and 2003, USDIA in Canada and Mexico increased from $84 billion
(15% of total USDIA) to $254 billion (14% of total). In Canada, USDIA went from
$70.4 billion (12.8% of total) to $192 billion (10.8% of total), while in Mexico it
went from $15.4 billion (1.8% of total) to $62 billion (2.8% of total) during the same
20 Beyond Borders, p. 29.
21 Based on trade data from the U.S. International Trade Commission.
22 U.S. Direct Investment Abroad (ISDIA) is the book value of U.S. direct investors’ equity
in, and net outstanding loans to, their foreign affiliates.
time period. Canada was the second largest recipient of USDIA in 2003 (behind the
United Kingdom, which ranked first), while Mexico was the ninth largest recipient.23
Table 3. United States’ Trade Agreements
GATTContracting Party - January 1, 1948
WTOMember - January 1, 1995
FTAANegotiations began in 1994 but are currently
Free Trade Agreements in the Western Hemisphere
NAFTAEntry into force - 1994
United States - ChileEntry into force - 2004
CAFTA-DRDate of signature - August 5, 2004. Expected
to enter into force in January 2006*
U.S.-Andean FTANegotiations began in May 2004, but have
not been concluded with Colombia and
Ecuador. Negotiations with Peru were
concluded in December 2005 but it is not
known whether the agreements would be
considered separately or as part of a U.S.-
U.S.-Panama FTANegotiations began in April 2004 but have
not been concluded
United States - Israel FTAEntry into force - 1985
United States - Jordan FTAEntry into force - 2001
United States - Singapore FTAEntry into force - 2004
United States - Bahrain FTAAgreement signed September 14, 2004,
legislation signed into U.S. law January 11,
United States - Morocco FTASigned, not yet in force
United States - Australia FTADate of signature - May 18, 2004, not yet in
Sources: Organization of American States (OAS), Foreign Trade Information System (SICE); Inter-
American Development Bank, Beyond Borders, p. 26.
* CAFTA-DR has been ratified by Dominican Republic, El Salvador, Honduras, Guatemala, and
United States. Costa Rica has not yet ratified the agreement.
On June 6, 2003, the United States and Chile signed the U.S.-Chile FTA in
Miami, Florida. On September 3, 2003, President George W. Bush signed the bill
into law (P.L. 108-77) and the agreement entered into force on January 1, 2004. The
23 Based on data from the U.S. Bureau of Economic Analysis, Survey of Current Business,
FTA with Chile is the first U.S. agreement with a South American country and, at the
time it was passed, there were expectations that it would prove to be a step forward
in completing the FTAA.24
The United States is Chile’s largest single-country trading partner, accounting
for 20% of Chilean exports and 15% of imports. In contrast, Chile ranks 29th among
U.S. trading partners in total trade. When the agreement entered into force in January
2004, 87% of bilateral trade in consumer and industrial products became duty-free
immediately, with the remaining tariffs to be reduced over time. Within four years
of the agreement, about 75% of U.S. farm exports were to enter Chile duty-free. The
agreement also increased market access for the United States in a broad range of
services. For Chile, 95% of its export products gained immediate duty-free status
and only 1.2% of its products fell into the longest 12-year phase-out period. In
addition to the market access provisions, the agreement includes environment and
labor provisions, more open government procurement rules, increased access for
services trade, greater protection of U.S. investment and intellectual property, and
creation of a new e-commerce chapter.
Central America-Dominican Republic Free Trade Agreement
On August 5, 2004, the United States, Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the Dominican Republic signed the CAFTA-DR. The
agreement has been ratified by six countries and had a target implementation date of
January 1, 2006, which was not met. The Dominican Republic, El Salvador,
Nicaragua, Honduras, and Guatemala have experienced delays in writing the
agreement’s commitments into their national laws, but are expected to do so in early
2006. Costa Rica has not ratified the agreement and may delay ratification until after
its presidential elections on February 5, 2006.25
CAFTA-DR is a regional agreement with all parties subject to “the same set of
obligations and commitments,” but with each country defining its own market access
schedule. The agreement replaces U.S. preferential trade treatment extended to these
countries under the Caribbean Basin Economic Recovery Act (CBERA), the
Caribbean Basin Trade Partnership Act (CBTPA), and the Generalized System of
Preferences (GSP). It liberalizes trade in goods, services, government procurement,
intellectual property, and investment, and addresses labor and environment issues.
Most commercial and farm goods attain duty-free status immediately. Remaining
trade will have tariffs phased out incrementally over five to twenty years. Duty-free
treatment will be delayed longest for the most sensitive agricultural products. The
24 For more information, see CRS Report RL31144, The U.S.-Chile Free Trade Agreement:
Economic and Trade Policy Issues, by J.F. Hornbeck.
25 Brevetti, Rosella, “Despite Long Battle, CAFTA-DR Countries Miss Target
Implementation Date of 2006,” International Trade Reporter, The Bureau of National
Affairs, January 19, 2006.
CAFTA-DR specifies rules for transitional safeguards, tariff rate quotas, and trade
The Dominican Republic and Central America partners are smaller countries
with a combined population of 44 million and a total GDP of $86 billion. Exports
from and imports to the region account for less than one percent of the world total.
All of the countries have had democratically elected presidents for some time, and
several of the countries have experienced recent electoral transitions. For each of the
countries the United States is the dominant market as well as the major source of
investment and foreign assistance, including trade preferences under the Caribbean
Basin Initiative (CBI) and assistance following devastating hurricanes.27
CAFTA-DR is not expected to have a large effect on the U.S. economy as a
whole, but it could impose adjustment costs on some sectors. As with other trade
agreements, supporters see it as part of a policy to support improved intra-regional
trade, as well as political, and economic development in an area of strategic
importance to the United States. Opponents to the agreement were seeking improved
trade adjustment and capacity building policies for Central American countries and
the Dominican Republic. They also argued that these countries had inadequate labor
laws and that the labor provisions in the CAFTA-DR needed strengthening.
On May 18-19, 2004, the United States began free-trade negotiations with
Colombia, Peru, and Ecuador. The first round of negotiations was held with
Colombia, Peru, and Ecuador (with Bolivia participating as an observer) in
Cartagena, Colombia, in May 2004. The last round of negotiations (thirteenth round)
in which all countries participated was held in Washington, D.C., in November 2005.
This round was expected to be the last, but the talks ended without an agreement.
Prior to the November talks, Presidents Alejandro Toledo of Peru, Alvaro Uribe of
Colombia, and Alfredo Palacio of Ecuador had sent President Bush a letter in
October 2005, urging the United States “to be more flexible in negotiations.”28
Colombia and Ecuador stepped out of the negotiations because they said they
couldn’t accept the U.S. position on patent protections and agriculture, while Peru
decided to move forward alone in negotiations with the United States.29
On December 7, 2005, the United States and Peru announced that they had
successfully completed a bilateral free trade agreement. On January 6, 2006,
President Bush notified the Congress of the United States’ intention to sign a free
26 For more information, see CRS Report RL31870, The Dominican Republic-Central
America-United States Free Trade Agreement (CAFTA-DR), by J.F. Hornbeck.
27 For more information on CAFTA-DR countries, See CRS Report RL32322, Central
America and the Dominican Republic in the Context of the Free Trade Agreement (CAFTA-
DR) with the United States, coordinated by K. Larry Storrs.
29 Drajem, Mark, “U.S. and Andean Nations Fail to Reach Free Trade Deal,”
Bloomberg.com, November 23, 2005.
trade agreement with Peru. Colombia and Ecuador are continuing trade negotiations
with the United States this year. Talks with Colombia are scheduled to take place
January 25-31, 2006, while talks with Ecuador are expected to resume sometime in
February 2006. Negotiators from Colombia and Ecuador have expressed hope to
conclude the talks in their next set of meetings. If the two countries reach an
agreement with the United States, it is unclear whether they would join with Peru to
form a U.S.-Andean FTA or whether the U.S.-Peru FTA would be considered as a
A U.S.-Andean free trade agreement would eliminate tariff and non-tariff
barriers to trade among the countries, but there have been some difficult issues in the
negotiations. In general, the Andean countries want a long-term commitment that
they will be able to export duty-free to the U.S. market, since their current trade
preferences expire at the end of 2006. Intellectual property rights (IPR) protection
and agriculture have been the most sensitive issues in the negotiations, though
negotiators have stated that progress in the IPR issue has been made.
The Andean governments want to ensure access to the U.S. market, especially
since their current trade preferences will terminate at the end of 2006. The Andean
governments also want to attract investment and see an FTA with the United States
as a way to establish a more secure economic environment and increase foreign
investment.30 However, there is broad grass-roots opposition to an FTA within the
Andean countries. The talks have drawn thousands of protestors in Colombia,
Ecuador, and Peru. Opponents argue that any economic benefits from increased trade
under an FTA will be realized by only a small segment of the economy, worsening
the separation of the classes. They also argue that a large part of the Andean
population is poor farmers, who are especially vulnerable and cannot compete against
increased agricultural imports from the United States, which some Andean officials
assert are heavily subsidized.
Presently, Andean countries have preferential trade access under unilateral U.S.
programs, but that access is scheduled to expire at the end of December 2006. The
program began under the Andean Trade Preference Act (ATPA; title II of P.L. 102-
free treatment to certain products from the four Andean countries that met domestic
content and other requirements. It was intended to promote economic growth in the
Andean region and to encourage a shift away from dependence on illegal drugs by
supporting legitimate economic activities. ATPA was originally authorized for 10
years and lapsed on December 4, 2001.
After ATPA had lapsed for months, the ATPDEA (Title XXXI of P.L. 107-
210), was enacted on August 6, 2002. ATPDEA reauthorized the ATPA preference
program and expanded trade preferences to include additional products that were
excluded under ATPA. ATPDEA also authorized the President to grant duty-free
treatment to U.S. imports of certain apparel articles, if the articles met domestic
content rules. The ATPDEA accounted for about half of all U.S. imports from the
30 See CRS Report RL32770, Andean-U.S. Free-Trade Negotiations, by M. Angeles
four countries in 2003. Duty-free benefits under ATPDEA end on December 31,
2006. It is possible that the trade preferences with Andean countries will not be
renewed. An FTA with the United States would lock-in those preferences and
additional duty-free treatment.
On November 16, 2003, President George W. Bush formally notified Congress
of his intention to negotiate an FTA with Panama. Negotiations began in April 2004,
with eight rounds of negotiations held thus far. The last round was held in February
2005. Panama approached the United States for a stand-alone FTA, avoiding a link
to CAFTA-DR because of the historical and strategic nature of the U.S.-Panamanian
relationship. Panama’s limited integration with the Central American economies also
bolstered the case for separate negotiations.31
The United States is Panama’s most important trading partner, accounting for
approximately 50% of Panama’s exports and 34% of its imports. U.S.-Panama
merchandise trade is small. In 2004, U.S. exports to Panama totaled $1.8 billion and
U.S. imports totaled $316 million, producing a U.S. trade surplus of $1.5 billion.
Panama ranked 48th as an export market for U.S. goods and 99th for U.S. imports.
Supporters of the U.S.-Panama FTA believe that it would support foreign policy
and economic interests of the United States and that is expected to lend stability to
Panama’s increasingly open economy. Those in the United States who oppose the
FTA have raised concerns about labor and environmental standards in Panama. In
Panama, protesters have held demonstrations against the agreement over various
U.S. and Panamanian negotiators have used the CAFTA-DR framework to
advance an agreement. The negotiation process moved fairly fast in the early stages,
but no significant progress has been made since February 2005. There is a possibility
that talks will resume in the fall of 2005. President Bush visited Panama on
November 7, 2005 and met with Panamanian President Martin Torrijos. The two
leaders held a joint news conference in which they cited progress in reaching a free
trade agreement but acknowledge the political challenges related to the trade talks.33
Free Trade Area of the Americas (FTAA)
The 1994 vision of hemispheric free trade has been embraced by President
George W. Bush and promoted by the formal negotiations in the FTAA process but
also by the expansion of bilateral free trade agreements. An FTAA could have 34
members and nearly 800 million people. This population would be nearly twice the
31 See CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement, by J.F.
33 Bumiller, Elisabeth, “Bush, Meeting Panama’s Leader, Endorses Widening of the Canal,”
The New York Times, November 8, 2005.
population of the European Union. The FTAA trade talks were launched in April
1998 and, after seven years, the original deadline for concluding the agreement has
passed and negotiators have failed to conclude an agreement, mostly over differences
due to agriculture.
Under the Declaration of Miami from the first Summit of the Americas, the 34
countries committed to make concrete progress toward an FTAA before 2000 and
complete negotiations no later than 2005. The Declaration called for building on
existing subregional and bilateral agreements to broaden and deepen integration. The
Ministers elected to establish nine initial negotiating groups, which covered all the
tariff and non-tariff barrier issue areas identified by the leaders at the Miami Summit.
The overall process is directed by the Trade Negotiation Committee (TNC), co-
chaired by the United States and Brazil for the remainder of the negotiations.34
Under the General Principles and Objectives for the negotiations, trade ministers
agreed to provide transparency during the negotiations and also agreed that the FTAA
should improve upon WTO rules and disciplines wherever possible and appropriate.
The ministers agreed that the negotiations would be a single undertaking in that the
signatories to the final FTAA Agreement would have to accept all parts of it (i.e.
cannot pick and choose among the obligations.)35 They also agreed that only
democracies would be able to participate in an FTAA and to make public the
preliminary negotiated texts.
At the November 2003 FTAA ministerial meeting in Miami, participating
countries made a compromise on the scope and ambition of an FTAA. As worked
out by the United States and Brazil, the compromise would create a two-tier FTAA
structure by January 1, 2005. The first tier would be comprised of a common set of
rights and obligations on the nine negotiating groups for all 34 FTAA countries. The
second tier would consist of a series of plurilateral agreements in which countries
would voluntarily undertake to achieve deeper disciplines and further liberalization
in the nine groups. Although no negotiating area would be left out of the agreement,
because countries could take on varying obligations within the FTAA structure, it
was a very different notion from the broad “single undertaking” principle that had
initially been envisioned.
The 2003 Miami declaration also instructed the deputy trade ministers to define
the common set of obligations. However, the United States and Brazil were unable
to agree on what areas would be obligatory for all participants and the FTAA
negotiations were suspended. Brazil’s position called for all industrial and
agricultural goods to be in the market access provisions and pressed for elimination
of export subsidies and action on domestic price supports for agricultural goods. The
United States agreed to the elimination of export subsidies, but not domestic support
for agriculture. The United States wants these provisions to be discussed in the WTO
34 See CRS Report RS20864, Free Trade Area of the Americas: Major Policy Issues and
Status of Negotiations, by J.F. Hornbeck.
35 See FTAA website, [http://www.ftaa-alca.org].
According to a recent report analyzing the possible future of the FTAA talks,
the negotiations have produced a “heavily bracketed draft text and little else.”36 One
positive development cited by the report is the trade capacity building initiatives
advanced by the Inter-American Development Bank and national development
agencies that have addressed critical infrastructure and administrative problems in
The most recent Summit of the Americas, held in November 2005 in Mar del
Plata, Argentina, failed to reach a consensus on the FTAA. One group, comprising
the majority of the 34 participating countries, were in support of reviving the FTAA
talks, while the other group, comprised of five countries including Brazil, Argentina,
and Venezuela, refused to sign up for the talks. The disagreements mostly concern
agriculture and intellectual property standards. The President of Brazil’s top foreign
policy aide, Marco Aurelio Garcia, commented after the meeting that it is necessary
for “rich countries to reduce agricultural subsidies and barriers to trade” before
talking about any launch dates for the talks.38 There is also disagreement on the U.S.
commitment to implementing continent-wide intellectual property standards, which
would reduce the prevalence of unauthorized medicines. Brazil’s government
believes that this provision would reduce the availability of lower-priced medicines
for low-income populations in Brazil.39
Regional Integration Initiatives in the Americas
Countries in the Western Hemisphere have been forming regional trade
agreements since 1961 when the Central American Common Market was formed.
Latin American countries view regional trade agreements as a tool to help promote
economic and social development but also as a way of gaining leverage in the
negotiations of larger scale agreements such as the FTAA. In general, Latin
American countries have economic interests, but also recognize that trade agreements
alone are not sufficient to combat poverty and the larger social problems caused by
Since the early 1990s, Mexico has had a growing commitment to trade
liberalization and its trade policy is among the most open in the world. Mexico has
been actively pursing free trade agreements with other countries as a way to bring
benefits to the economy, but mostly to reduce its economic dependence on the United
States. The United States is, by far, Mexico’s most significant trading partner.
36 Schott, Jeffrey J., Senior Fellow, Institute for International Economics, Does the FTAA
have a Future?, November 2005, p. 4.
37 Ibid, pp. 4-5.
38 EFE News Service, “Brazil criticizes Mexico’s Stance on Regional Trade Pact,”
November 8, 2005.
39 Washington Business Information, Inc., “Intellectual Property Remains a Problem for
Proposed FTAA,” November 8, 2005.
Approximately 90% of Mexico’s exports go to the United States and about 60% of
Mexico’s imports come from the United States. Mexico’s second largest trading
partner is Canada, which accounts for approximately 2% of Mexico’s exports and
imports.40 In an effort to increase trade with other countries, Mexico has negotiated
a total of 12 trade agreements involving over 40 countries (see Table 4). These
include bilateral or multilateral trade agreements with most countries in the Western
Hemisphere including the United States and Canada, Chile, Bolivia, Costa Rica,
Nicaragua, Uruguay, Colombia, Venezuela, Guatemala, El Salvador, and Honduras.
Mexico has also been an active participant in the FTAA negotiations.
Mexico has also negotiated free trade agreements outside of the Western
Hemisphere and, in July 2000, entered into agreements with Israel and the European
Union. Mexico became the first Latin American country to have preferred access to
these two markets. Mexico has completed a trade agreement with the European Free
Trade Association (EFTA) of Iceland, Liechtenstein, Norway, and Switzerland. The
Mexican government expanded its outreach to Asia in 2000 by entering into
negotiations with Singapore, Korea, and Japan. In 2004, Japan and Mexico signed
an Economic Partnership Agreement. It was the first comprehensive trade agreement
that Japan signed with any country.41 The large number of trade agreements has not
yet been successful in decreasing Mexico’s dependence on trade with the United
Canada has been active in the FTAA negotiating process, but has not pursued
bilateral trade agreements to the degree of Mexico or the United States. Canada’s
dominating trading partner is the United States and most of its trade policy focus is
centered on its trade relationship with the United States. Canada has achieved
considerable economic integration with the United States in a number of sectors and
considered options to further its relationship. However, after the terrorist attack of
September 11, there has been a wide-ranging debate in Canada over its relationship
with the United States and the question of whether deeper North American
integration would be beneficial to the Canadian economy.42 Canada has entered into
three bilateral trade agreements since NAFTA. These include agreements with Israel
(1997), Chile (1997), and Costa Rica (2001). It is also considering trade agreements
with Singapore and the EFTA.
40 Based on statistics from the International Monetary Fund, Direction of Trade Statistics,
41 The Asahi Shimbun, “Japan: Free Trade with Mexico,” March 12, 2004.
42 See CRS Report RL33087, United States-Canada Trade and Economic Relationship:
Prospects and Challenges, by Ian F. Fergusson.
Table 4. Mexico’s Trade Integration Agreements
GATTContracting Party - August 24, 1986
WTOMember - January 1, 1995
FTAANegotiations began in 1994 but are currently
Regional Scope Agreements
ALADIMember - August 12, 1980
Free Trade Agreements in the Western Hemisphere
NAFTAEntry into force - 1994
Mexico-BoliviaEntry into force - 1995
Group of Three Entry into force - 1995
Mexico-Costa RicaEntry into force - 1995
Mexico-NicaraguaEntry into force - 1998
Mexico-ChileEntry into force - 1999
Mexico-Northern Triangle ofEntry into force - 2001
Mexico-UruguayEntry into force - 2003
Mexico-Trinidad and TobagoUnder consideration
Partial Scope Agreements
Mexico-Colombia-Venezuela Date of signature: 2004
Mexico-Mercosur (2)Date of signatures: 2002
Mexico-BrazilDate of signature: 2002
Mexico-PanamaEntry into force: 1986
Mexico-UruguayEntry into force: 2001
Mexico-EUEntry into force - 2000
Mexico-EFTAEntry into force - 2001
Mexico-IsraelEntry into force - 2000
Mexico-JapanEntry into force - 2005
Sources: Organization of American States (OAS), Foreign Trade Information System (SICE); Inter-
American Development Bank, Beyond Borders, p. 26.
Southern Common Market (Mercosur)
Mercosur was created in March 1991 by Argentina, Brazil, Paraguay, and
Uruguay through the signing of the Treaty of Asunción. The goals of the treaty
included the formation of a common market with free movement of goods, services,
and factors of production; the adoption of a common external tariff and a common
trade policy; the coordination of macroeconomic and sectoral policies; and legislative
harmonization in areas conducive to stronger integration.
Mercosur is the largest preferential trade group in South America, with a
combined gross domestic product of $778 billion (representing 40% of Latin
America’s GDP) and a population of 227 million in 2004.43 U.S. exports to
Mercosur totaled $18.2 billion in 2004, while U.S. imports totaled $25.5 billion. The
United States had a trade deficit of $7.3 billion with Mercosur in 2004, an increase
of $2.7 billion over the $4.6 billion deficit in 2002. Prior to 2002, the United States
had a trade surplus with these countries. The surplus went from a high of $11.1
billion in 1997 to $2.9 billion in 2001. The U.S. direct investment position in
Mercosur totaled approximately $45 billion in 2004, down from $55.4 billion in
Mercosur countries have progressively lifted trade barriers and established a free
trade area since 1991, but continue to have barriers in some sectors. In 1994, the
Treaty of Asuncion was amended and updated by the Treaty of Ouro Preto. The 1994
treaty helped improve the institutional structure of Mercosur and initiated a new
phase in the trade relationship of member countries as they furthered their goal of
realizing a common market. Bolivia, Chile, Colombia, Ecuador, Peru, and
Venezuela have associate member status in Mercosur. Associate members do not
take part in Mercosur’s major trade negotiations and may choose not to abide by its
Mercosur countries began the transition to a common market in 1994 with the
goal of completing internal free trade by 2000 and a common market by 2006. The
free trade goal was delayed due to economic difficulties in the member countries.
The 2002 crisis in which Argentina faced its most serious economic downturn in its
independent history has been one of the more serious setbacks. Mercosur has a
common external tariff (CET) organized in 11 tiers with tariff rates ranging from 0
to 20 percent with an average level of 13.5 percent that entered into force in 1995.
The CET has some exceptions with special customs regimes applying to the sugar
and automotive sectors. Member countries have approved common regional
provisions covering trade in services, safeguards, anti-dumping and dispute
settlement, but these have been only partially implemented. The executive body of
Mercosur, the Common Market Council (CM), has agreed on a working program
focused on the lifting of the remaining market access barriers.44
Throughout much of the 1990s, Mercosur was the most dynamic economic
subgroup in the Western Hemisphere in terms of trade growth among its members.
Things changed at the end of the decade when Brazil was faced with a financial crisis
and the devaluation of the Brazilian real in 1999. The economic situation affected
Argentina as well, causing a severe and political financial crisis that ended the
presidency of Fernando de la Rua. The downturn in the economies of both countries
caused the momentum towards deeper integration to decrease. Some have
43 Figures are based on data from the Economist Intelligence Unit.
44 Inter-American Development Bank (IDB), Economic and Social Progress in Latin
America, “Beyond Borders: The New Regionalism in Latin America,” 2002 Report, p. 29.
questioned whether trade liberalization was partly at fault for the economic crises
and whether further liberalization is feasible or beneficial for the economy.45
In recent years, Mercosur countries have been working on several trade
initiatives. Mercosur and the Andean Community of Nations (CAN) signed a
statement of intent in December 2004 to form an economic union similar to the
European Union by 2019 (see section on South American Community of Nations of
this report). Mercosur has also pursued trade liberalization with the EU. The 1995
EU-Mercosur Interregional Framework Cooperation Agreement began the
preparation of negotiations for an interregional agreement which would a include a
liberalization of trade in goods and services, in conformity with WTO rules, as well
as enhanced cooperation and a strengthening of political dialogue. In June 1999,
negotiations on the agreement formally began. The latest round of negotiations to
strengthen political, economic, and trade ties between Mercosur and the EU took
place in October 2004 and the next round is scheduled to take place before the end
Mercosur countries held preliminary talks with Mexico on May 20, 2005 toward
making Mexico an associate member of the trade bloc. Associate members receive
preferential duty treatment for their products but are not required to adopt Mercosur’s
common external tariffs.47
Andean Community of Nations (CAN)
The CAN is one of the oldest sub-regional groupings in the hemisphere. It was
originally formed in 1969 as the Andean Pact (later called the Andean Group and
later the Andean Community of Nations). The Andean Community presently consists
of Bolivia, Colombia, Ecuador, Peru, and Venezuela. The Cartagena Agreement
creating the Andean Pact was signed by Bolivia, Chile, Colombia, Ecuador, and Peru
in May 1969. Venezuela acceded in February 1973 and Chile withdrew in October
In 2004, Andean Community countries had a combined GDP of $314 billion
and a population of 121 million. Exports from these countries totaled $76 billion or
The country with the highest amount of exports is Venezuela, with $36 billion in
exports, and the country with the highest amount of imports is Colombia with $17
billion in imports. About ten percent of Andean Community trade is intra-bloc trade.
The United States is the principal trading partner, accounting for approximately 50
percent of CAN exports, while the EU is second. U.S. imports from the region
45 Estevadeordal, Antoni, Dani Rodrik, Alan M. Taylor, and Andres Velasco, Integrating
the Americas: FTAA and Beyond, “The Political Economy of Economic Integration in the
Americas,” 2004, pp. 430-431.
46 For more information see Mercosur in the external relations section of the European
Commission’s website [http://europa.eu.int/comm/external_relations/Mercosur/intro].
47 “Mexico, Mercosur Hold Initial Talks on Negotiating Free Trade Deal,” International
Trade Reporter, Volume 22, Number 22, June 2, 2005.
totaled $40 billion, while U.S. exports totaled $13 billion. The United States had a
trade deficit of $27 billion with the Andean Community in 2004.48
The Cartagena Agreement was the initial step toward economic integration
among the parties with a broader vision towards forming a common market over
time. The process lost momentum in the 1970s but then revived in the 1990s. The
group established a four-country free trade area in 1993 (Bolivia, Colombia, Ecuador,
and Venezuela) and agreed on the implementation of a common external tariff. In
1996, the presidents of the Andean countries pledged to transform the group into a
common market and created the Andean Community (it had been called the Andean
Group prior to that) based on a new institutional structure. The parties agreed on a
timetable to reincorporate Peru into the free trade area (Peru had been suspended
since 1992), committed to creating a common market by the end of 2005 in which
goods, services, capital, and labor would move freely. The leaders also started the
negotiation of a four-tier common external tariff expected to be in place by the end
of 2003.49 Political and economic setbacks have prevented the formation of a more
integrated Andean union.
The trade in goods between Bolivia, Colombia, Ecuador, and Venezuela is fully
deregulated, which means that goods originating in any one of those countries can
enter the territory of the others duty-free. As a result, these four countries have a free
trade area that Peru is becoming a part of through a liberalization program. The
efforts of the Andean countries continue to focus on integration and implementing
measures for preventing and correcting practices that distort free competition50
The Andean Community is considered one of the most institutionalized regional
agreements among developing countries. Its institutional structure is patterned along
the lines of the European Community. The institutions include a formal Andean
Presidential Council that meets regularly, a Court of Justice with supranational
powers, and an Andean Integration System that incorporates all the Andean
The Andean Community is pursuing trade integration agreements with
Mercosur, as previously mentioned, and also with the EU. Free trade talks between
the CAN and the EU were scheduled to start in 2006, but that is no longer a certainty.
During a meeting in Peru in June 2005, members of the European Parliament said a
lack of agreement on trade issues among CAN members may derail the start of talks.
One of the major problems they mentioned has to do with the lack of agreement on
48 Andean trade data are based on data from the Economist Intelligence Unit (EIU). U.S.-
Andean trade data are based on data from the United States International Trade Commission
(USITC) trade database.
49 Beyond Borders, p. 28.
50 See Andean Community website [http://www.comunidadandina.org].
51 CRS Report 96-541, Western Hemisphere Trade Developments, by Raymond Ahearn.
how to implement a common tariff structure. The CAN’s target date for
implementing a common external tariff has not been met.52
Central American Common Market (CACM)
The Central American Common Market (CACM) was established in December
1960 by Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua upon the
signing of the General Treaty on Central American Economic Integration. Costa
Rica acceded to the integration agreement in July 1962. The 1960 treaty envisioned
the creation of a common market which would come into effect after the treaty came
into force. Although integration looked very promising in the first decade, political
and economic challenges in the region prevented the region from establishing the
common market that was earlier envisioned. The process was renewed in 1993 with
the Guatemala Protocol which provided a new foundation for Central America’s
economic integration. Member countries hoped to implement a customs union by the
end of 2003 but that process has been delayed as well. With the signing of CAFTA-
DR, it is uncertain whether or when the Central American region will establish a
customs union. Currently, most intra-regional trade is tariff-free, but some
exceptions remain including coffee and sugar. Member countries have agreed to a
four-tier common external tariff schedule. About 80% of the common external tariff
schedule has been implemented.53
Caribbean Community (CARICOM)
Members of the Caribbean Community include Antigua and Barbuda, the
Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat,
St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and
Trinidad and Tobago. The Dominican Republic has observer status.
In 1989, CARICOM members agreed to create a CARICOM Single Market and
Economy (CSME) that would entail removing obstacles to trade in goods and
services; allowing the free movement of skilled persons; ending the restrictions on
capital movements; adopting a common external tariff (CET) and common trade
policy; and having greater coordination in other areas of economic policy. The
founding treaty has nine modifying protocols to facilitate completion of the single
market. These include the Institutional Framework (Protocol I); Establishment,
Provision of Services and Movement of Capital (Protocol II); Industrial Policy
(Protocol III), Trade Policy (Protocol IV), Agricultural Policy (Protocol V), Transport
Policy (Protocol VI), Disadvantaged Countries, Regions and Sectors (Protocol VII),
Competition Policy (Protocol VIII), and Dispute Settlement (Protocol IX). Some of
the protocols have entered into force while others are being applied provisionally by
52 “Prospects for Holding Free Trade Talks in 2006 between EU, Andean Nations Darken,”
International Trade Reporter, Volume 22 Number 25, June 23, 2005.
53 Beyond Borders, p. 28.
some member countries. Protocols that have entered into force include I, II, IV, and
V II. 54
CARICOM has moved ahead with its regional integration since the founding
treaty. Intra-regional trade is virtually free. All tariffs and most trade restrictions
have been removed, although some exceptions do remain. Efforts have been made
to harmonize national customs laws, but corresponding legislation has not been fully
implemented. The trade group has instituted a regime governing common standards
for trade in goods, and is establishing a Caribbean Regional Organization for
Standards and Quality (CROSQ). The CET is fully implemented in most countries
although member states have the right to negotiate bilateral trade agreements with
third countries. Progress has been made in the free movement of capital, but some
restrictions remain. In regard to the free movement of people, this is limited to
certain professional categories. Member countries are also making progress in
harmonizing regulatory frameworks, but much depends on their ability to devote the
necessary technical and financial resources. The countries indicate that they need
financing to establish a fund to assist the less developed countries and to establish the
envisaged legal bodies.55
In 2004, CARICOM made advancements in its integration process, including
implementation of the CSME, foreign policy coordination, and functional
cooperation. CARICOM made progress on removing restrictions on services
provisions and the movement of capital and skilled labor. In the area of functional
cooperation, member countries have cooperated in the fight against HIV/AIDS and
natural disaster management plans.56 In mid-April 2005, CARICOM members
established the Caribbean Court of Justice, headquartered in Port-of-Spain in
Trinidad and Tobago, that will serve as region’s final court of appeal and replace the
Privy Council based in London. The Court will play an important role in the region’s
economic integration by ruling on trade disputes in the forthcoming CARICOM
CSME. Barbados, Jamaica, and Trinidad are leading the way in moving ahead with
the implementation of the CSME, and other Caribbean states are expected to become
compliant by the end of 2005.57
CARICOM countries have been taking steps to form trade agreements with
other countries and regional trade blocs. In March 2004, CARICOM (with the
exception of the Bahamas and Haiti) signed a free trade agreement with Costa Rica.
It is also in the process of negotiating an agreement to improve trade with Canada by
focusing on four areas: market access, investment, services, and institutional
arrangements and dispute settlement.58 CARICOM countries are also negotiating
56 Inter-American Development Bank, Annual Report 2004, “Latin America and the
Caribbean in 2004: Trade and Integration,” July 7, 2005. See [http://www.iadb.org].
57 See CRS Report RL32160, Caribbean Region: Issues in U.S. Relations, by Mark P.
58 Caribbean Media Corporation (CMC), BBC Monitoring Americas, “Caribbean-Canada
agreements with the EU and Mercosur. CARICOM countries and the Dominican
Republic are in the third stage of negotiations toward an economic partnership
agreement that will contain a reciprocal free trade agreement with the EU. Officials
from the Caribbean and Mercosur countries held talks in February 2005 about
establishing a free trade agreement between the two regions.
South American Community of Nations (CSN)
After the Third South America Summit on December 8, 2004, the two major
trade blocs in South America, Mercosur and the CAN, signed the Cuzco Declaration,
a statement of intent to form the South American Community of Nations (CSN). The
CSN is planned as a continent-wide free trade zone uniting the two trade blocs and
has a plan to eliminate tariffs for non-sensitive products by 2014 and sensitive
products by 2019. The declaration was signed by representatives from twelve South
American nations. Panama attended the signing ceremony as an observer. One of
the goals was to have a constitution drafted in 2005, but it is uncertain if that goal
will be met because the first meeting of heads of state held in September 30, 2005 in
Brasilia ended without a plan of action.
The group of twelve South American nations would eventually become the
world’s fifth largest trade block according to Didier Opertti, the Secretary-General
of the Latin American Integration Association (ALADI). Tariffs are to be phased out
in stages and through bilateral meetings between countries, without the need for
parliamentary ratification in most cases.59 Political leaders in South America view
this agreement as a significant step towards economic integration in South America
and the possible creation of a South American union. The accord includes all the
countries in South America with the exception of the smaller economies of Suriname,
Guyana and French Guiana. The two trade blocs have a combined GDP of $800
billion. Total trade among the countries totals around $30 billion a year.
Some South American leaders have mentioned the possibility of political union
as well, saying that it would be “the most important political development of the
decade.” Brazilian Foreign Minister Celso Amorim underlined the importance of
creating institutions that are needed to bring about South American economic
integration and of doing the same in the future for social and political integration of
the “South American Community”.60 Leaders expect that the integration of South
America would put South American countries in a stronger position in negotiations
with the rest of the world, including a possible free trade agreement with the EU and
the Free Trade Area of the Americas (FTAA). Interest in strengthening integration
with Latin America has been supported by foreign ministers of the 12 ALADI
countries (Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico,
Paraguay, Peru, Uruguay, and Venezuela.)
Trade Talks Described as Successful,” March 3, 2005.
59 Raul Pierri, “Mercosur and Andean Community Sign Free Trade Pact,” Bilaterals Org,
October 19, 2004.
The first summit of the South American Community of Nations was held in
Brasilia on September 30, 2005. The summit was attended by the majority of heads
of state of South American countries. Despite efforts by Venezuelan President Hugo
Chavez to replace the proposed structure of the CSN by his own proposal, the
representatives at the summit decided to press ahead with what already been
developed by their foreign ministers in preparatory meetings. They endorsed the idea
of a merger of Mercosur and CAN to make the whole of South America a free-trade
area. One of the results of the summit was a request to the secretariats of all existing
mechanisms of integration to prepare studies on the convergence of trade agreements
between South American countries by mid-2006 at the latest.61
Policy Issues and Implications
Continuation of Bilaterals and Regional Trade Agreements
In the absence of an FTAA, it is highly possible that the number of bilateral
RTAs in the Western Hemisphere may continue to increase. Some analysts note that
as the number of RTAs increase, there is a possibility of consolidating existing
agreements into larger trading arrangements in regions of the world, as in the case of
the EU which went through five consecutive enlargements, bringing the membership
of the Union from six to 25 members.62 Another example of consolidation or
expansion is the bilateral agreement between the United States and Canada in the
1980s, which helped to bring focus on the Uruguay Round of multilateral
negotiations and the formation of NAFTA. However, some believe that this strategy
is not the best course of action for the United States. One of the reasons given is that
the focus on bilaterals is distracting the United States from its leadership role in
energizing the FTAA negotiations. Another reason given is that the bilateral
agreements are doing little to resolve problems such as the trade issues related to
agriculture, or strengthening the trade relationship between the United States and
Completion of an FTAA
All the countries of the Western Hemisphere, with the exception of Cuba, have
been active participants in the establishment of an FTAA. In August 2005, senior
representatives from all FTAA countries met in Mexico. Caribbean trade officials
urged countries to hold an administrative meeting prior to the November 2005
Summit of the Americas to restart the stalled FTAA negotiations. They suggested
that negotiators look at the technical and political obstacles that are holding back the
talks and restart the negotiations with a new “road map” that would guide negotiators
61 Latin American Weekly Report, “Chavez Comes Close to Derailing South American
Community’s First Summit”, October 5, 2005.
62 Crawford and Fiorentino, p. 15.
63 Masi, Fernando and Carol Wise, “Negotiating the FTAA Between the Main Players,”
Mercosur and the Creation of the Free Trade Area of the Americas,” Woodrow Wilson
International Center for Scholars, 2005.
toward a conclusion of the negotiations.64 However, the recent Summit of the
Americas, held in Mar del Plata, Argentina, was not successful in reactivating the
trade talks. The majority of the 34 participating countries were in support of the
talks, while five countries, including Brazil, Argentina, and Venezuela, were opposed
to signing up for the talks, mostly due to disagreements over agriculture and
intellectual property rights.
Some observers are pessimistic about the near-term possibility of restarting the
talks, but there are many analysts who believe that pursuing multilateral talks would
be advantageous for the region. Some have expressed hope that progress on
agriculture at the WTO and that the November 2005 Summit of the Americas could
help move the negotiations forward. According to a study by the Government
Accountability Office (GAO), there are three factors that have been impeding
progress in the FTAA negotiations: 1) The United States and Brazil have made little
progress in resolving basic differences on key negotiation issues; (2) member
governments have shifted energy and engagement from the FTAA to bilateral and
other multilateral trade agreements; and 3) two mechanisms intended to facilitate
progress, a new negotiating structure and the co-chairmanship by the U.S. and Brazil,
have failed to do so.65 The GAO study found that officials from many nations and
regional groups in the Western Hemisphere have indicated a continued commitment
to establishing a mutually beneficial FTAA.66
If the FTAA talks move forward and an agreement is signed, it would provide
considerable new trade and investment opportunities for the 34 participating
countries. For the United States, an FTAA would support the U.S. interest in gaining
deeper access to markets in South America. The United States might also benefit in
that an FTAA could reinforce economic and political reforms that have occurred in
Latin America and could help build support for other important U.S. goals such as
drug interdiction, improving environmental and labor conditions, supporting
educational reforms, and reinforcing democracy.67 In terms of trade, the U.S.
position has been that the FTAA would be significant if it achieves trade
liberalization beyond that which has been accomplished under the WTO, especially
in the areas of liberalization of trade in services and investment; liberalization in
government procurement; enforcement of intellectual property rights; and the
inclusion of labor and environmental issues.68
For countries in Latin America and the Caribbean, the FTAA may help national
income levels in the region, but not all economic sectors would benefit. Some
64 Bussey, Jane, “Negotiators Call for Free Trade Area of the Americas Talks,” Miami
Herald, August 24, 2005.
65 United States Government Accountability Office, Free Trade Area of the Americas:
Missed Deadline Prompts Efforts to Restart Stalled Hemispheric Trade Negotiations, GAO
Report Number GAO-05-166, March 2005.
67 Schott, Jeffrey, Prospects for Free Trade in the Americas, Institute for international
Economics, August 2001, p. 109.
68 Masi and Wise, pp. 309-310.
economists believe that trade liberalization is needed to improve economic
development in the region. An International Monetary Fund (IMF) report found that
trade openness in Latin America remained low and cited “abundant empirical
evidence” that the more open a country is to trade, the higher its growth performance.
Among the report’s recommendations is that countries in Latin America need “to
liberalize trade and strengthen their financial systems” to help sustain economic
growth.69 However, Latin American countries would have to take additional
measures to benefit from trade liberalization and improve economic conditions. One
study on the effects of an FTAA on Latin America reports that any significant effect
on incomes and inequality would take a very long time to show up. It states that the
long-term economic health of Latin America would require much improvement in
Trade Integration and U.S. Interests
Trade integration in the Americas has gained momentum since the 1990s. The
possibility of forming an FTAA or trade agreements with Andean countries and
Panama is of interest to policymakers because of the economic and political
implications for the United States. As the effects of NAFTA on the U.S., Mexican,
and Canadian economies become clearer, policymakers are faced with the issue of
whether trade agreements are beneficial to the United States and how the United
States should proceed in its trade policy in the Western Hemisphere.
An underlying question is whether the United States should continue to deepen
trade integration in the Americas and, if so, whether negotiating bilateral trade
agreements is the most appropriate trade policy. As pointed out earlier, some
analysts do not believe that bilateral trade agreements are the best course of action
because they take away the focus from energizing the FTAA negotiations and are
slowing down the process. Others believe that RTAs have led to the consolidation
of trade agreements into larger free trade areas in other parts of the world and that the
same thing could occur in the Western Hemisphere over time.
Another issue is whether the United States should deepen integration with its
NAFTA trading partners. A recent study by senior fellows at the Institute for
International Economics on the achievements and challenges of NAFTA finds that,
while NAFTA has been successful in promoting regional trade and investment, it
also has limitations. The authors propose that NAFTA be “upgraded” and that the
United States, Canada, and Mexico should convert their free trade agreement into a
customs union and adopt a common external tariff. They believe that this would
promote commerce among the three trading partners; reduce distortions generated by
69 Gregg, Diana I., International Trade Reporter, “IMF Says Control of Inflation Big Plus,
But Worries Latin America Growth Lags,” February 9, 2005.
70 Blum, Bernardo S., and Edward E. Leamer, “Can an FTAA Suspend the Law of Gravity
and Give the Americas Higher Growth and Better Income Distributions?,” Integrating the
Americas: FTAA and Beyond, 2004.
NAFTA rules of origin; and help resolve some of the trade disputes that are affecting
trade relationships in North America.71
Regional integration also has political implications for the United States. Some
observers see the impetus for trade liberalization as political as well as economic.
There are several questions that policymakers could consider. To what extent do
trade integration agreements foster political stability in a country? Are they a useful
tool for building a more democratic, secure, and prosperous region?
71 Hufbauer, Gary Clyde, and Jeffrey J. Schott, NAFTA Revisited: Achievements and
Challenges, Institute for International Economics, October 2005.