Western Hemisphere Trade Developments

CRS Report for Congress
Western Hemisphere Trade Developments
Raymond J. Ahearn
Specialist in Trade Relations
Foreign Affairs, Defense, and Trade Division
The countries of the Western Hemisphere constitute the largest regional market for
U.S. exports and the second largest regional market for U.S. foreign direct investments.
The growing importance of this region to U.S. economic interests has been
complemented by the growth of sub-regional integration initiatives such as the North
American Free Trade Agreement (NAFTA), Mercosur, the Andean Community, the
Central American Common Market, and Caribbean Community. These groupings have
not only established free trade areas and in some cases customs unions among partner
countries, but are also expanding trade and investment ties with other countries and
regions in the hemisphere, as well as more tentatively with the European Union.
Concurrent with the deepening and expansion of these sub-regional groupings have been
efforts to create a Free Trade Area of the Americas (FTAA). While FTAA negotiations
formally commenced in September 1998, the deadline for completion is not until 2005.
If the FTAA negotiations were to lose momentum, hemispheric integration could come
to be dominated by the proliferation of sub-regional groupings. This development, in
turn, could have varying impacts on U.S. interests.
The Western Hemisphere Market
The Western Hemisphere is the largest regional market for U.S. exports. In 2001,
the region purchased U.S. goods valued at $324 billion, a sum that accounted for 45% of
total U.S. exports. By contrast, the countries of the Pacific Rim (including Japan)
purchased $182 billion or 25% of U.S. exports, and the countries of Western Europe1
bought $175 billion or 24% of U.S. exports.
U.S. exports to Canada and Mexico, its North American trade partners, totaled $265
billion in 2001, accounting for 82% of the region’s total or 37% of U.S. exports to the
world. Thirty-one countries of the Caribbean, South and Central America purchased $58

1 The data used in this report are from the U.S. Department of Commerce, the World Bank, the
Office of the U.S. Trade Representative, and the Inter-American Development Bank.
Congressional Research Service ˜ The Library of Congress

billion of U.S. exports, equaling 18% of the region’s total or 8% of U.S. exports to the
world. Of these thirty-one countries, three – Argentina, Brazil and Venezuela –
accounted for $25.5 billion or 43% of the group’s total. Argentina and Venezuela
combined to buy more U.S. products ($9.6 billion) than Eastern Europe ($6.9 billion) and
Brazil bought more ($15.9 billion) from the U.S. than Italy and Spain combined ($15.2
On the import side, the United States remains the most important market for the
majority of countries in the Western Hemisphere. Canada and Mexico are the two
countries most heavily dependent on the U.S. market. In recent years, both have shipped
over 75% of their exports to the United States. These shipments, in turn, accounted for

30% of total U.S. imports and 84% of all U.S. imports from the Western Hemisphere.

Most of the Caribbean and Central American countries also tend to be quite dependent
on the U.S. market, sending anywhere from one-fourth to one-half of their total exports
to the U.S. The larger countries of South America, particularly Brazil, Argentina, and
Chile, are less dependent on the U.S. market; historically, the U.S. market has accounted
for only about 20% of their total exports.
U.S. economic ties with the Western Hemisphere are also strengthened through a
large stock of foreign direct investment. In 2000, the countries of the Western Hemisphere
were host to $366 billion or 29% of total U.S. foreign direct investment worldwide. By
contrast, Europe accounted for 52% and the Pacific Rim countries 16% of the total stock
of U.S. foreign direct investment.
The strong U.S. commercial position in the Western Hemisphere has been spurred
by far-reaching market-oriented economic reforms and unilateral reductions in trade and
investment barriers undertaken by most all the countries in the region during the 1990s.
Most notably, the average tariff applied by Latin American and Caribbean countries has
dropped from around 35% in the late 1980s to around 12% today.
The liberalizing trend has been complemented by the evolution of sub-regional
groupings that have deepened economic and political ties among partner countries. These
groups not only have established free trade areas, but in some cases have evolved into
customs unions. Some of the groups have negotiated preferential trade agreements with
other countries in the hemisphere, and some are bolstering their trade and investment ties
with the European Union. In the process, the region has become much more open to trade,
and trade, in turn, has become a more important engine of economic growth.
Sub-regional Groupings
Five sub-regional groups have made considerable progress over the past decade in
reducing barriers to trade and investment. These include the North American Free Trade
Agreement (NAFTA), the Common Market of the South (MERCOSUR), the Andean
Group, the Caribbean Community and Common Market (CARICOM) and the Central
American Common Market (CACM).

2 For further discussion of U.S. trade with Latin America, see CRS Report 98-840, U.S.-Latin
American Trade: Recent Trends, by J.F. Hornbeck.

Nafta. NAFTA, which became effective on January 1, 1994, is the largest
preferential trade agreement in the world. This agreement, which eliminates tariffs and
other trade and investment barriers among Canada, Mexico, and the United States over
a 15-year period, applies to a market that encompasses over 414 million people and that
produces over $11 trillion in goods and services.
The first 8 years of NAFTA’s operation (1994-2001) have seen substantial increases
in intra-regional trade and investment flows. Labor, environmental, and market access
problems illuminated by increased economic integration have been addressed by a variety
of institutional arrangements and fora.
Total U.S. trade with its NAFTA partners has increased significantly over the past
8 years. In 2001, Canada and Mexico accounted for $613 billion or 33% of U.S. total
trade of $1.87 trillion, up from $292.7 billion or 28% of U.S. total trade in 1993. The
U.S. trade deficit with its NAFTA partners has also grown, rising from $12 billion (9 %
of the total) in 1993 to $112 billion (27% of the total) in 2001.
Mexico and Canada have increased their importance in absolute terms as a site for
U.S. direct investment. In 2000 (the most recent data), the two accounted for $162 billion
or 13% of total U.S. foreign direct investment (FDI). This compares to $85 billion or
15% of total U.S. foreign direct investment in 1993. Canadian FDI has gone from $70.4
billion or 12.8% of total FDI to $126.4 or 10% of total FDI and Mexico from $15. 4
billion or2.8% to $35.4 or 2.8% of total U.S. FDI.
The sharp increase in North American trade and investment flows has been
accompanied by some disputes. Prominent U.S.-Canadian disputes have involved trade
in softwood lumber, wheat, and dairy products. Prominent U.S.-Mexican disputes have
involved Mexican access to the U.S. trucking market and sugar market and U.S. access
to the Mexican high-fructose corn syrup (a sweetener) market. With regard to investment,
the investor-state provisions in NAFTA’s Chapter 11, aimed at protecting investors from
expropriation measures, have been actively used.
While the NAFTA agreement allows for the accession of other countries, to date no
country has applied for NAFTA membership. But individual NAFTA members have
negotiated or are negotiating trade agreements with other countries that are patterned
substantially after NAFTA provisions and obligations. Mexico has been the most active,
having negotiated trade agreements with Bolivia, Chile, Costa Rica, the Group of Three
(Colombia, Mexico, and Venezuela), Nicaragua, and the Northern Triangle countries.
Canada has concluded trade agreements with Chile and Costa Rica and the United States
is negotiating a trade agreement with Chile.
Mercosur. MERCOSUR or the Southern Common Market was created in 1991 by
the Treaty of Asuncion. Consisting of Argentina, Brazil, Paraguay, and Uruguay,
MERCOSUR is the second largest preferential trade group in the Western Hemisphere,
with a combined gross domestic product of $900 billion (representing half of Latin
America’s GDP) and a population of 215 million in 2000. Chile and Bolivia are associate
members of the group.
In the process of developing closer economic ties, these countries have eliminated
tariffs on a substantial portion of intra-MERCOSUR trade and have instituted a common

external tariff (CET) covering the majority of products imported from non-member
countries. Intra-MERCOSUR trade in sensitive products such as automobiles and steel
remains subject to tariffs or special arrangements. Moving beyond an internal free trade
area and customs union to a common market, where restrictions on the movement of labor
and capital are eliminated, is the group’s ultimate aim.
Throughout much of the 1990s, MERCOSUR was the most dynamic economic sub-
group in the Western Hemisphere in terms of trade growth among its members. In the
wake of Brazil’s 1999 devaluation and Argentina’s recent economic turmoil, momentum
towards deeper integration has been slowed.
In 2001, the U.S. trade surplus with MERCOSUR was $2.9 billion, a decrease of
$600 million from the U.S. trade surplus of $3.7 billion in 2000. U.S. goods exports to
MERCOSUR were $$20.6 billion in 2001 and U.S. goods imports were $17.7 billion.
The U.S. direct investment position in MERCOSUR totaled $50. 5 billion.
MERCOSUR countries have been negotiating free trade agreements with the
Andean Community and with the European Union (EU) in recent years. In September
2001, the United States and MERCOSUR countries resumed meeting under the
framework known as the Four Plus One. At the September meeting, the two sides agreed
on a work plan to deepen their trade relationship.3
Andean Community. The Andean Community is one of the oldest sub-regional
groupings in the hemisphere. The group, which was originally formed in 1969 as the
Andean Pact (and later called the Andean Group), consists of Bolivia, Colombia, Ecuador,
Peru, and Venezuela. Based on a combined GDP of $279 billion and a population of 113
million in 2000, the Andean Community currently is the third largest preferential trade
group in the Western Hemisphere.
The Community established a four-country free trade area in 1993 and a partial
customs union between three members (Colombia, Ecuador and Venezuela) in 1995.
Although Peru did not initially sign these agreements, it did negotiate bilateral trade
accords with the other members of the group, and in 1997 agreed to fully integrate into
the free trade area by 2005. As a result of the free trade area, the five members of the
community have become not only more integrated among themselves, but also with the
rest of the hemisphere.4
In 1999, the Andean presidents pledged to transform the Andean Community into
a common market by 2005 whereby not only goods and services, but also capital and
labor, would move freely. Efforts to create a more integrated Andean economic union,
however, have been complicated by a number of recent economic and political setbacks
in the region.

3 Office of the U.S. Trade Representative. 2002 Trade Policy Agenda and 2001 Annual Report,
p. 117.
4 Salazar-Xirinachs, Jose M. and Maryse Robert, eds., Towards Free Trade in the Americas,
Brookings Institution, 2001, p.16.

The Community has a substantial institutional structure patterned along the lines of
the European Community. Its 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 integration agencies.
In terms of external trade partners, the group has explored the negotiation of free
trade agreements with MERCOSUR, the Northern Triangle (El Salvador, Guatemala, and
Honduras) and Panama. In the FTAA negotiations, the countries participate with a single
The main trade issue between the United States and the region currently involves the
Andean Trade Preference Act. This act, which provides reduced-duty or duty-free
treatment to most imports from Bolivia, Colombia, Ecuador, and Peru, expired on
December 4, 2001. The Andean countries have strongly supported expansion and renewal
of the program. The European Union provides its own system of Andean Preferences.
Cacm. The Central American Common Market (Cacm) was created in 1960 and
consists of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Panama,
which has observer status, and Belize participate in CACM summits, but not in the
regional economic integration scheme. The CACM countries in 2000 had a combined
GDP in excess of $56 billion, and an internal market of over 39 million people.
The CACM has succeeded in eliminating duties on most products traded among its
members. In 1993, the CACM members committed to achieving a common external tariff
with a floor of 5% and a ceiling of 20%, with almost no exceptions. The CET is applied
to most products of non-CACM origin. Unilateral liberalization of capital markets by all
CACM member countries has facilitated intra-regional financial flows, including
significant levels of intra-regional foreign direct investment.
The CACM members have maintained a flexible position in their external trade
negotiations, operating as a group in some negotiations and individually on others.
CACM as a group negotiated a comprehensive free trade agreement with the Dominican
Republic in 1999. Costa Rica and El Salvador have both negotiated free trade agreements
with Mexico, as have the countries of the Northern Triangle (El Salvador, Guatemala, and
Honduras). Additional efforts at trade integration have included the conclusion of separate
free trade accords by Costa Rica and Canada in 2001. Negotiations between other CACM
countries and Canada began in late 2001.
During 2001, the CACM countries expressed an interest in pursuing free trade
negotiations with the United States. In January 2002, President Bush announced his
administration’s interest in exploring a free trade agreement with the CACM countries.
Currently, the scope and timing of the negotiations are under discussion.
Caricom. The Caribbean Community (CARICOM) was established in 1973, and
consists of 15 independent countries: Antigua and Barbuda, Bahamas, Barbados, Belize,
Dominica, Grenada, Guyana, Jamaica, Haiti, Montserrat, St. Kitts and Nevis, St. Lucia,
St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. Despite its large
membership, CARICOM is the smallest regional integration scheme in the hemisphere:
the group’s combined GDP in 2000 was less than $20 billion and its population
(excluding Haiti) of 6 million. Perhaps due to its small size, CARICOM members

historically have been strong supporters of regional integration schemes and joint
development projects.
Major accomplishments of Caricom during the 1990s include substantial completion
of a free trade area in goods, as well as uneven country implementation of a common
external tariff composed of six rates ranging from 0% to 40%. Progress has also been
made on liberalizing movement of labor and capital with a view towards achieving a
Caricom Single Market and Economy (CSME).
At the same time, the Community has continued to broaden its trade relationships
with neighboring countries, particularly Venezuela, Colombia, the Dominican Republic,
and Cuba. Outside the hemisphere, Caricom members are among the 77 countries
provided trade preferences under the European Union’s African, Caribbean, and Pacific
(ACP) framework.
In recent years, the United States has experienced a trade surplus with Caricom
countries, ranging from $1.6 billion in 1999 to $1.1 billion in 2001. Caricom countries
hope to be able to increase their exports to the United States as a result of implementation
of the U.S.-Caribbean Basin Trade Partnership Act. Enacted on May 18, 2000, the
CBTPA is a program of unilateral trade preferences that intends to provide Caribbean
countries with the same level of tariff preferences that Mexico enjoys under NAFTA.
Prospects for Hemispheric Free Trade
At the Summit of the Americas held in December 1994, the hemisphere’s 34
democratically elected governments committed to the goal of creating a “free trade area
of the Americas” (FTAA) by the year 2005. The agreement would eliminate barriers to
trade in goods and services and to investment, and provide strong rules or disciplines in
such areas as intellectual property protection, subsidies, government procurement, and
competition policy.5
In the six and one-half years since the Miami Summit, negotiators have made
substantial progress, but serious political and economic obstacles remain. Slowing
economic activity throughout the region, lukewarm political support in Brazil and the
United States, on-going economic or political turmoil in countries such as Argentina,
Colombia, and Venezuela, and efforts to launch a new round of multilateral negotiations
are major challenges that will have to be overcome if the FTAA is to come to fruition.
If efforts to create the FTAA are derailed for whatever reason, it can be expected that
the other countries of the Western Hemisphere will continue to expand their own regional
trade groupings and will continue to look for new integration partners — both inside and
outside the region. The impact such a development will have on U.S. exports and
investments remains uncertain.

5 For further discussion, see CRS Issue Brief IB95017, Trade and the Americas, by Raymond J.
Ahearn; and CRS Report RS20864, A Free Trade Area of the Americas: Status of Negotiations
and Major Policy Issues, by J.F. Hornbeck.