A Free Trade Area of the Americas: Major Policy Issues and Status of Negotiations

A Free Trade Area of the Americas: Major
Policy Issues and Status of Negotiations
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
In 1994, 34 Western Hemisphere nations met at the first Summit of the Americas,
envisioning a plan to complete a Free Trade Area of the Americas (FTAA) by January
1, 2005. Faced with deadlocked negotiations, the United States and Brazil, the FTAA
co-chairs, brokered a compromise at the November 2003 Miami trade ministerial. It
moved the FTAA away from the comprehensive, single undertaking principle, toward
a two-tier framework comprising a set of “common rights and obligations” for all
countries, combined with voluntary plurilateral arrangements with country benefits
related to commitments. So far, defining this concept has proven elusive, causing the
FTAA talks to stall and the January 1, 2005 deadline to be missed. At the fourth
Summit of the Americas held in November 2005, Brazil, Argentina, Uruguay, Paraguay,
and Venezuela blocked an effort to restart negotiations, and further action has not
occurred. This report follows the FTAA process and will be updated periodically.
Background and Negotiation Process
Following the 1980s debt crisis, much of Latin America embraced broad economic
policy reform that included major strides toward trade liberalization. This trend raised
the prospect of a previously unrealized idea — a Free Trade Area of the Americas
(FTAA) among 34 nations of the region. Latin America’s trade reform was christened the
“New Regionalism” to reflect the evolution from an “old” system of closed subregional
agreements that dominated in the post-war era, to one based on more open and deeper
commitments both within and outside the region. Examples include the North American
Free Trade Agreement (NAFTA), the Southern Common Market (Mercosur), the Andean
Community of Nations (CAN), the revitalized Central American Common Market
(CACM), and the Dominican Republic-Central America-United States Free Trade
Agreement (CAFTA-DR). Combined with unilateral, bilateral, and multilateral efforts,
these subregional agreements have fostered trade opening, with average applied tariff
rates for the region falling from 40% in the mid-1980s to under 10% by 2002.

Despite noted progress in Latin America’s trade liberalization, the multiple free trade
agreements (FTAs) that this “New Regionalism” cultivated also created complicated rules
and discriminatory trading patterns. The impetus to simplify this situation, combined with
the conviction that trade liberalization is a cornerstone for broader reform and
development, initially generated widespread interest in an FTAA. The United States has
led the FTAA effort in expectation that it not only would open markets for U.S. goods and
services, but would provide benefits to the entire region by: 1) increasing Latin American
trade with the large U.S. market; 2) fostering reciprocal trade among Latin American
countries; and 3) encouraging more foreign direct investment in Latin America.1
The FTAA negotiation process is organized into nine working groups responsible
for: market access; agriculture; investment; services; government procurement;
intellectual property rights; subsidies, antidumping, and countervailing duties;
competition policy; and dispute settlement. The groups are directed by the Trade
Negotiations Committee (TNC) and each is chaired by a different country on a rotating
basis. There is also a consultative group on smaller economies, a committee on civil
society to provide input from non-government parties (e.g., labor, academia, and
environmental groups), a technical committee on institutional issues, and a joint
government-private sector committee of experts on electronic commerce. Draft FTAA
texts are released in all four official languages, with “bracketed text” reflecting areas of
Since 1994, there have been four summits and eight trade ministerial meetings. The
first draft of the FTAA was adopted at the Quebec City Summit in 2001 and a second
draft at the Quito ministerial in November 2002. At that time, Brazil and the United
States became co-chairs of the TNC and were charged with guiding the negotiating
process to completion. The third draft text was accepted at the November 2003 FTAA
ministerial in Miami. Soon thereafter the negotiations stalled and the January 1, 2005
completion deadline was missed, exposing more clearly challenges to the negotiation
process, especially the need to resolve differences between the United States and Brazil
if the FTAA is to move forward.
The breadth of an emerging resistence to the FTAA became clearer at the fourth
Summit of the Americas held on November 4-5, 2005, in Mar del Plata, Argentina. Amid
dramatic and sometimes violent protests against President George W. Bush and the
FTAA, which was not scheduled as the major topic of this summit, it became evident that
the hemisphere was divided over how to proceed. A total of 29 countries supported
renewing negotiations, and the United States pushed to set a specific date in 2006. Brazil,
Argentina, Uruguay, and Paraguay (the Mercosur countries) rejected this idea, arguing
that the conditions for achieving a balanced and equitable agreement did not yet exist.
Venezuela went one step further, lobbying to end any further effort on the FTAA and to
unify resistence against U.S. policies and presence in Latin America. The Summit
declaration called for a time to explore problems in the FTAA process, while awaiting the
outcome of the World Trade Organization (WTO) Doha Development Round, indicating
that there was (and still is) no unified vision on how to proceed with the proposed FTAA.

1 Inter-American Development Bank. Beyond Borders: The New Regionalism in Latin America.
Economic and Social Progress Report. Washington, D.C. 2002. pp. 24-29.

Major Negotiation Issues
The FTAA began as a commitment by 34 countries to consider a comprehensive
trade agreement that would be accepted as a single undertaking, meaning all parties would
have to agree to it as a whole. This proved to be a challenging task given that U.S.
priorities differ from those of key Latin American countries, making a balanced and
mutually acceptable agreement difficult to define, as a short review of the negotiating
issues suggests.
Market Access and Trade Remedy Issues. Market access is one of the most
difficult challenges because two of the largest regional economies, Brazil and the United
States, have different priorities. The United States has the lowest average tariff rate in the
Western Hemisphere of 4.3% (8.5% for agriculture and 3.7% for industrial goods), but
maintains high peak tariffs related to tariff rate quotas (TRQs) on agricultural products.
It also subsidizes many agricultural products and has applied antidumping duties to a
concentrated group of industrial products (steel) that Latin American countries export.
By contrast, Brazil has much lower peak tariff rates, but a much higher average tariff rate
of 10.9% (10.2% for agriculture and 11.0% for industrial goods) and relies on other trade
barriers, as well.2 The United States, therefore, has focused its attention on eliminating
tariffs broadly, whereas Brazil and other countries want to address peak tariffs and TRQs.
Latin American efforts to address U.S. trade remedy laws and domestic support
programs have focused specifically on opening the U.S. market further to the region’s
agricultural, steel, and textile exports. Agriculture is a protected sector, but it is important
for Latin America’s economic output, employment, income, and exports. Historically,
it has proven to be the most difficult area to liberalize, yet many Latin American countries
consider tackling U.S. agricultural trade policies central to any discussion on market
access. The United States is open to discussing many agricultural issues, but has made
clear that it will not negotiate domestic agricultural subsidies in a regional pact arguing
that 1) it would hurt U.S. exporters in the Latin American market relative to other
agricultural exporting countries that subsidize, and 2) it would diminish the U.S.
multilateral bargaining position on subsidies in the WTO talks. The Summit declaration
addressed this issue, indicating that progress on agricultural issues in the Doha Round3
appears necessary to resolve this major sticking point in the FTAA.
Other Trade Barrier Issues. The United States is also interested in non-goods
trade, areas in which it is very competitive. Services trade, for example, is a vital issue,
including such important sectors as financial services, transportation, engineering, and
professional services. Intellectual property rights (IPR), government procurement, and
competition policy are also critical U.S. issues. IPR violations throughout much of Latin
America have hurt U.S. producers and no country has laws equal to the United States in
protecting intellectual property. IPR rules, however, have been criticized for increasing
the financial burden on developing countries and there are competing views as to whether
greater IPR protection will increase or diminish levels of technology transfer and foreign

2 2004 simple average Most Favored Nation (MFN) tariff rates as calculated by the Inter-
American Development Bank.
3 See also: de Paiva Abreu, Marcelo. The FTAA and the Political Economy of Protection in
Brazil and the US. Inter-American Development Bank. Washington, D.C. March 2006.

direct investment. Competition policy is another difficult area because of the need to
change regulatory regimes covering domestic economic activity. In government
procurement, many Latin American countries, including Brazil, are reluctant to open up
their systems, preferring instead to support, if not protect, domestic industry participation.
Labor and Environment Provisions. Discussion of labor and environment
issues is key for U.S. support of many trade agreements, but resisted by developing
countries. Advocates for including these issues argue that lower standards provide an
exploitive and unfair competitive advantage (lower costs) for exporting and attracting
foreign investment, and that higher U.S. standards should not be challenged as disguised
barriers to trade. Environmental advocates also point to the social impact of failure to
enforce pollution abatement and resource management laws. The United States continues
to set precedents of including relevant provisions in bilateral FTAs, including more
stringent rules in FTAs with Peru, Colombia, and Panama that would require enforceable
labor rights as defined in the fundamental principles of the International Labor
Organization (ILO). The FTAA debate has yet to focus on this concern.
Status of Negotiations: A Two-Tier FTAA?
Four years ago, formal FTAA negotiations stalled. As the TNC co-chairs, Brazil and
the United States have continued to meet to discuss the details of a framework for moving
ahead, but negotiators face a huge challenge in trying to reconcile their divergent
priorities. When the FTAA negotiations began, they were predicated on the assumption
that all countries could gain from a comprehensive and inclusive agreement, one that
would address everything from market access to trade remedies and rules-based issues.
Currently, it is unclear how many countries may be ready to accept such broad
obligations. This issue is highlighted in the debate between Brazil and the United States
and formed the basis for the November 2003 Miami Ministerial compromise.
Brazil’s leadership role among developing countries is a cornerstone of its foreign
policy, which for its trade strategy means acting as a counterweight to U.S. influence in4
the region. Tension between the United States and Brazil heightened in May 2003 when
Brazil challenged three U.S. policy initiatives. First was U.S. pursuit of subregional and
bilateral trade arrangements, which Brazil suggested isolates Mercosur in the context of
the FTAA negotiations. Second, Brazil argued that U.S. refusal to address agricultural
subsidies and antidumping disciplines in the FTAA affected its key export sectors. Third,
the U.S. offer of “differentiated” market access gave Brazil the least favorable treatment.
Brazil responded with its “Three Track Proposal” requesting the United States: 1) conduct
separate market access discussions with Mercosur (the “4+1” arrangement); 2) jettison
investment, services, government procurement, and IPR issues along with agricultural
subsidies and antidumping (per U.S. wishes) to the Doha WTO round; and 3) include
some rules-based issues in the FTAA discussions. The United States rejected this so-
called “FTAA lite” proposal and continued to argue for a more comprehensive agreement.

4 See CRS Report RL33258, Brazilian Trade Policy and the United States, by J. F. Hornbeck.

Brazil’s tactics include, on the offensive, to support its growing agricultural export
sector by insisting on prioritizing market access and subsidy issues.5 Equally important
is its defensive position toward opening its less competitive sectors of the economy to
developed countries (services, IPR, government procurement, and investment), while
prioritizing Mercosur trade and domestic market development. Although the private
sector may be more open to engagement with the United States, Brazil’s economy is one
of the least dependent in Latin America on the U.S. market and has no U.S. preferential
arrangement at stake to protect (e.g. Caribbean Basin Initiative — CBI). Therefore, there
is no pressure to accept a deeper FTAA in place of unilateral preferences and Brazil has
instead pressed to begin U.S.-Mercosur market access talks.6
U.S.-Brazil differences were the major factor determining the outcome of the 2003
jointly-authored Ministerial Declaration. Although the ministerial declaration reaffirms
the commitment to complete a “comprehensive and balanced” agreement, it does so in the
context of a rather unorthodox compromise. The declaration states that “countries may
assume different levels of commitments...[with a] common set of rights and obligations
applicable to all countries...[and may also] choose, within the FTAA, to agree to
additional obligations and benefits.” The additional obligations may be defined in
plurilateral negotiations, with a country’s benefits being linked to the obligations it
undertakes. The trade negotiating committee (TNC) was instructed to clarify the
differences, which so far has not been possible.
The fourth, and last, Summit of the Americas at Mar del Plata in November 2005
was punctuated by violent protests against President Bush and U.S. policy in general, as
well as a failure to set a date for restarting FTAA talks. Some interpreted this as a sign
of diminished U.S. influence in the region, which could bode poorly for any hope of
resurrecting the FTAA in the near future. The United States, however, remains
committed to the two-tier framework and is continuing to work with Brazil to forge a
solution to the impasse.
In the meantime, Latin America’s New Regionalism is thriving in the form of a
growing number of bilateral and plurilateral trade deals, many anchored to the economies
of Brazil and the United States — the de facto default approach to a stalled FTAA. The
United States implemented CAFTA-DR on August 2, 2005, and has concluded bilateral
FTA negotiations with Peru (approved by Congress in 2007), Panama, and Colombia.
The USTR framework for negotiating these FTAs relies on similar language for many of
the chapters, with detailed market access and other schedules developed for each country.
This approach allows for considerable flexibility in addressing sensitive products and
disciplines within a comprehensive agreement that includes many of the critical U.S.

5 This despite evidence that ending agricultural subsidies would increase FTAA agricultural trade
little compared to a far bigger gain from eliminating tariffs, particularly for Brazil. Salazar-
Xirinachs, José M. Development Issues Posed by the FTAA. In Weintraub, Sidney, Alan M.
Rugman, and Gavin Boyd, eds. Free Trade in the Americas: Economic and Political Issues for
Governments and Firms. Cheltenham, Edward Elgar Publishing, Inc. 2004. p. 238.
6 Lorenzo, Fernando and Rosa Osimani. Negotiations of the Mercosur with the FTAA and the
U.S. Red de Investigaciones Económicas del Mercosur. Montevideo, Uruguay. July 2003.

issues such as services trade, investment, government procurement, intellectual property
rights, labor, and environmental concerns, but avoids any mention of domestic subsidies
and antidumping. As well as this approach has worked on a bilateral basis (opinions
differ on this, but FTAs are being implemented), the United States has so far not been able
to replicate it for the FTAA.
Nor has Brazil stood still in the regional integration game. Mercosur has four
associate members and succeeded in consummating a long-awaited political and
economic pact with the Andean Community in October 2004. Brazil pushed the regional
integration effort further on December 9, 2004, when twelve countries agreed to form the
South American Community of Nations, a loose agreement calling for lower tariffs and
improved political dialogue. The most significant development occurred on July 2, 2006,
when Venezuela became the first country to join Mercosur as a full member, although its
membership has not been ratified by all Mercosur countries. President Chávez’s staunch
anti-Americanism and determined opposition to an FTAA bodes poorly for restarting the
negotiations at any point in time. Bolivia has since sought to join Mercosur, which would
unite in one trade pact nearly all opposition to the FTAA.
As the FTAA negotiations continue to flounder, the trade dynamics of the region
appear to be shifting. The region may be heading toward a competitive if not bifurcated
approach toward economic integration, with the United States and its FTAs on one side
and an expanding Mercosur customs union approach on the other. Those countries still
not committed to either, such as the Caribbean nations, which support restarting the
FTAA talks, would seem to be in an awkward middle position. Given that developing
country trade preference programs such as the Andean Trade Preference Act (ATPA) and
the Caribbean Basin Initiative (CBI) are due to expire during the second session of the

110th Congress, the U.S. trade strategy for the region may be up for reconsideration,

particularly if the WTO Doha round fails to reach a “successful” conclusion.
The FTAA was initially proposed to simplify trade relations with a balanced,
comprehensive, single undertaking in which all countries would be treated equally. This
approach proved to be too difficult to reconcile, slowing progress and giving way to a host
of subregional agreements that will likely further complicate trade and investment
decisions, if not the FTAA negotiations themselves. The lack of movement has created
an opportunity for anti-FTAA forces, so that getting the FTAA back on track in 2009 or
later is one of the major challenges to U.S.-Latin America trade policy. Recent political
realignments in Latin America suggest this task may only become more difficult.