DP2019-02

Pacific Alliance: A Latin American
Version of “Open Regionalism”
in Practice*
Mikio KUWAYAMAMarch 2, 2019

* The Discussion Papers are a series of research papers in their draft form, circulated to encourage
discussion and comment. Citation and use of such a paper should take account of its provisional character.
In some cases, a written consent of the author may be required.

RIEB Discussion Paper Series
March 2019

Pacific Alliance: A Latin American Version of “Open Regionalism”
in PracticeMikio Kuwayama*/
ABSTRACTThis paper will argue that the favorable balance and world appraisal of the eight years of existenceof the Pacific Alliance (PA) owes to its pragmatic, progressive, participatory, and consensual
approach of regional integration based on “Open Regionalism” (OR). The OR concept of the PA
has been renovated and accommodated by new challenges and opportunities that arise from theinternational economy, taking into consideration the specificities of Latin America. The PA’s
version of OR emphasizes not only liberalization, trade facilitation, and economic and technicalcooperation, as in the conventional OR concept, but also the building of regional capacity torespond to the needs of next-generation trade and investment issues. These issues include firms’
participation in GVCs (especially of SMEs), market-driven innovation policies, new forms oftrade facilitation, and “quality” infrastructure, among others. The PA has been seeking integration
modalities and instruments conducive to enhancing the synergy between the “market-led” and“policy-led integration. The four member states of the PA share a vision of a development modelcharacterized by OR and a conviction that economic liberalization should be complemented bycooperation efforts on many fronts, which would result in enhanced productivity, competitiveness,and social inclusion. Therefore, these countries have sought to set themselves apart from otherregional schemes that have been categorized as ideological such as UNASUR, Mercosur, andALBA. The PA has been trying to streamline trade and investment relations with Mercosur,
embarking on joint efforts aimed at creating a more unified and connected market in Latin
America.

_____________________________________________________________________________*/ The author is a Research Fellow of Kobe University Research Institute for Economics and Business (RIEB) andManaging Director of the Japan Association of Latin America and the Caribbean (JALAC). The views expressed in thispaper do not necessarily reflect those of the organizations with which the author is associated. The author is responsible
for any errors or omissions. This paper forms part of the research activities funded by the Grant-in- Aid for Scientific
Research (B) (ID: 16H03313).

1

I. Changing Nature of Open Regionalism and its implications
for Latin America
Despite considerable confusion and ambiguity, or even the questioning of relevanceregarding the concept of “open regionalism” (hereafter abbreviated as OR) (Kuwayama
1999), a consensus among trade specialists in Latin America is that OR provides a usefulpolicy guideline for regional integration suitable for developing countries in the
globalizing world economy (Gonzalez-Perez et al. 2015, Ramírez-Montañez y GonzálezSarmiento 2016). Though considered vintage, the OR concept defined by the Economic
Commission for Latin America and the Caribbean (ECLAC) back in 1994 remains very
relevant in the 21st century for understanding the modalities of regional integration;
ECLAC defines OR as “an effective “process of growing economic interdependence at
the regional level, promoted both by preferential integration agreements and by otherpolicies in a context of liberalization and deregulation, geared towards enhancing thecompetitiveness of the countries of the region and, in so far as possible, constituting thebuilding blocks for a more open and transparent international economy.” (1994, p.8).
This paper will argue that the favorable balance and world appraisal of the eight
years of existence of the Pacific Alliance (hereafter abbreviated as the PA) owes to its
pragmatic, progressive, participatory, and consensual approach of regional integration
based on OR. The foundational and operational principle of the PA is precisely ‘OR’, aconcept original to the Asia-Pacific Economic Cooperation Forum (APEC). 1 As statedin the Preamble of the Pacific Alliance Framework Agreement signed in Paranal, Chile,in June 2012, the PA is “determined to strengthen the different integration schemes in
Latin America, as a forum for concertation and convergence, aimed at fostering open
regionalism (italics added by the author), which will engage the parties efficiently in the
globalized world and link them to other regionalization initiatives” (the author’stranslation).
As in the proper APEC forum, the OR concept by the PA has been renovated andaccommodated following the changing nature of the world economy and new challenges
and opportunities that have arisen from those changes, while taking into consideration thetraits of the Latin American region. Oyarzún (2017) points out that the founding of the
PA has signaled “a return to open regionalism in Latin America, in which the four
1

The term, OR, has been used to describe the development strategy promoted in the Asia-Pacific region since the late1980s based on the following three pillars: 1) trade liberalization, 2) trade facilitation, and 3) economic cooperation.
As is well known, the foundational and operational philosophy of the Asia-Pacific Economic Cooperation Forum(APEC) is precisely this concept. According to the APEC basic principles launched at the 1st APEC Ministerial
Conference in Australia in 1989, for example, the idea of OR underlines an integration strategy to support themultilateral trading system centered on GATT/WTO and to promote regional cooperation in specific areas, taking into
consideration the diversity of the APEC region such as differences in the socioeconomic regimes and the development
stage of the economy, which is based on consensus among the member countries, emphasizing equal participation andmutual benefits, and not aiming at forming trading blocks.

2member states seek to strengthen a type of governance aligned with the current rules of
the world and dominant ideas about trade without questioning the institutions that govern
globalization” (p.154). The PA’s version of OR emphasizes not only liberalization, tradefacilitation, and economic and technical cooperation, as in the conventional APEC’s
understanding of OR, but also the building of regional capacity responding to the needsof next-generation trade and investment issues. These issues include the participation in
global value chains (GVCs) and regional value-chains (RVCs), small- and medium-sizedenterprises’ (SMEs) participation in value-chains, market-driven innovation policies,
trade facilitation, and “quality” infrastructure, among others. As the paper shows, a
mediocre trade performance of Latin America results in most part from the deficits inthese areas when compared with the experiences of the East and Southeast Asia. These
deficiencies are systemic across the whole region; therefore, regional integration is better
suited for providing practical solutions.
A straightforward definition differentiates “open” regional integration from a“closed” one. The usual criterion for such distinction is a clear shift from an “inwardlooking”, “import-substituting” focus, prevalent in the regional integration movements ofthe earlier decades, to a greater emphasis on “outward-oriented” and “exportcompetitiveness”. A principal objective of OR is to make integration a building block ofa more open, competitive, and transparent international economy, instead of turning it
into an obstacle toward achieving that goal. Integration agreements, therefore, should
eliminate the barriers applicable to most trade in goods and services among the signatories
in line with their trade liberalization policies towards third parties, while at the same timemaking it easier for new members to accede to the agreements. The term, “open”, implies
that the parties to a trade agreement are committed to applying liberalization measures
not only to intra-regional members but to the extra-regional ones, though may not be
simultaneously, or of the same magnitude.
With economic cooperation being its core objective, APEC does not focus on legallybinding trade and investment liberalization. The APEC’s Osaka Action Agenda adopted
in 1995 identifies the following three areas as the pillars of action, namely 1) trade andinvestment liberalization, 2) business facilitation and sectoral activities, and 3) economic
and technical cooperation. The inclusion of trade facilitation through non-tariff and nonborder reforms come to constitute a pillar of APEC’s OR. The systemic approach of
APEC took a more concrete form in the Trade Minister’s meeting held in 2011, Hawaii,USA. At this meeting, the member countries agreed that the following issues should be
included in APEC’s deliberations: 1) the framework action plan of "APEC supply chainconnectivity", promoted by the development of GVCs; 2) promotion of SMEs'
participation in GVCs; 3) promotion of effective and market-driven innovation policies;4) standardization and harmonization of customs procedures; and 5) Green Growth(Statement, the 23rd APEC Ministers Meeting, Honolulu, Hawaii November 11, 2011).
3

It should be noted that in Honolulu, the United States government was also seeking
substantial progress with the Trans-Pacific Partnership (TPP) agreement, considered by
the U.S. government as a 21st-century agreement that would tackle pressing tradeconcerns in new ways and address the cross-cutting issues previously not included in
trade agreements.
In the above respect, an important, but often not fully appreciated, feature of the TPP
is that it adopts a holistic approach to the development-related issues, designed especiallyfor developing member countries by including the so-called “horizontals” or “crosssectionals” issues (Fergusson et al. 2013). 2 What distinguishes the TPP from otherconventional mega FTAs is that the TPP incorporates, from the outset, development
dimensions into trade negotiations. The Comprehensive and Progressive Agreement forTrans-Pacific Partnership (CPTPP), also known as TPP11, which went into force on
December 30, 2018 among the eleven member countries 3 without the United States, iscalled ‘Progressive’ because it includes overarching issues previously not addressed in
trade agreements, such as how to make compatible the regulatory systems of the TPP
nations to support innovation and quality job creation, principally in SMEs. 4 These
chapters are designed to be fine-tuned by the needs and interests of developing member
countries.
In short, the OR concept does not aim for the formation of trade blocks but rather astrategy to maximize the benefits of liberalization at the regional level without
jeopardizing the continued vitality of multilateral negotiations centered on the WTO. The
characteristics of OR are conducive to generating the complementarity withmultilateralism and globalization because the rules and disciplines agreed at the regionalor sub-regional levels can be later incorporated into a broader process of integration
within the world economy. From its inception, one of the underlying principles behind
the PA is to exert a strong, positive influence on the future evolution of regional
integration and the global trading system by pursuing liberalization and cooperation
efforts within the PA region on a WTO consistent basis, not to the detriment of others.
All proposals adopted at the PA level can be “multilateralized” in future WTO or othermega trade negotiations. Another significance of the term “open” is that each State canbelong to several integration forums whose foundational concept is OR, as in the case of
Chile, Mexico, and Peru, who are members of the APEC forum and at the same time the2

The TPP agreement has four chapters on cooperation: Cooperation and Capacity Building (Chapter 21),
Competitiveness and Business Facilitation (Chapter 22), Development (Chapter 23), and Small and Medium-Sized
Enterprises (Chapter 24).
3 The eleven countries are the following Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand,
Peru, Singapore, and Vietnam.
4 Admittedly, in the TPP agreement, no Party shall have recourse to dispute settlement under the Dispute Settlement(Chapter 28) for any matter arising under these chapters.

4

PA, and, more recently, the TPP. Being a member of integration schemes founded on the
OR concept should facilitate the multilateralization of trade rules at a global level.
In this regard, it is important to note that the PA has consolidated its open integration
modality through the different FTAs that its member countries have signed with intraand extra-regional trading partners, which might be considered a preliminary step toward
greater global openness. According to Briceño-Ruiz (2013), the foundational base of thePA was laid in the 1990’s when the countries such as Chile and Mexico started tonegotiate FTAs with the North (e.g., the United States, Canada, and the EU), of a “deepintegration” scope, with the “WTO-plus” commitments. 5 Disappointing outcomes of theFTAs with the North have led the countries of the region to realize that without
appropriate public measures to accompany trade liberalization, the FTAs with the Northwould not necessarily bring about the restructuring of the economy as initially expected;
they might reinforce the trade structures based on static comparative advantages insteadof creating new competitive advantages (Rosales y Sáez 2010). The countries of theregion realized that integration initiatives, with the North and the South (intra- and extraregional developing countries) alike, should be reformulated in such a way toaccommodate the developmental dimensions, such as productivity, competitiveness,innovation, value-chain development, and infrastructure building.
Therefore, today’s interpretation of OR is more systemic and goes much further thanconventional trade liberalization. An “OR” suitable for today’s globalized international
economy should help cut down on factors that make transactions more difficult or costly,
which, in addition to tariff and non-tariff trade barriers, increase costs to intra- and extraregional suppliers and effectively obstruct reciprocal trade. Reducing these transaction
costs involves building infrastructure to link countries together, eliminating or
harmonizing rules and regulations, and implementing institutional reforms that make iteasier for incomplete or fragmented markets to become integrated. The renovated OR
emphasizes the reduction of ‘transaction costs” as a measure to enhance productivity andinternational competitiveness, the promotion of GVCs and RVCs, and social inclusionand equity by way of trade facilitation measures and the building of infrastructure (hardand soft alike). In this way, the success of integration should be evaluated from a seriesof cooperative efforts that go beyond the reduction of tariff barriers directed toward the

5 A “deep” FTA means that it includes not only tariff elimination/reduction, trade remedy measures, and conventional
non-tariff trade restrictions, but also trade in services, investment, competition policy, government procurement,
intellectual property rights (IPRs), and dispute settlement mechanisms (especially, Investor-State Dispute Settlement:
ISDS), among others. In turn, the “WTO-plus” obligations mean that in a specific theme, commitments in an FTA go
beyond the scope of the ones included in the WTO agreements; an FTA with a Northern country typically involves IPR
provisions that go beyond those established in the WTO’s TRIPs (Agreement on Trade-Related Aspects of Intellectual
Property Rights). The provisions on trade in services and movement of persons go above and beyond the WTO’s GATS
(General Agreement on Trade in Services) agreements. Investment provisions in an FTA are usually deeper than thosein the WTO’s TRIMs (Agreement on Trade-Related Investment Measures).

5reduction of transaction costs within the region, as postulated by Baldwin (2011) andKimura (2012).
Trade within the LAC region is dominated by finished goods, and this contrasts withthe case of East and Southeast Asia’s intra-regional trade centered on the transaction ofparts and components. In this regard, LAC's current trade pattern does not conform to
mainstream global industrial organization centered around the GVCs and RVCs. For
Latin American countries to actively participate in this new international division of labor,
which Baldwin (2011) has named the "Second Unbundling", 6 it is necessary toincorporate in the integration agendas “Trade Facilitation" measures. In addition to tradeand investment liberalization, measures include trade-related logistics and infrastructure(ports and the customs), harmonization and/or mutual recognition of the Sanitary andphytosanitary (SPS) measures and the Technical Barriers to Trade (TBT), and thepromotion of "supporting services" for manufacturing industries such as trade finance,
unification of Rules of Origin and their "cumulation". One of the causes that have slowed
down the development of GVCs and RVCs in the LAC region might lie in the complexityof rules of origin; it is necessary to provide uniformity among the 33 agreements that
include 44 different types of rules of origin (INTAL 2018). The "Second Unbundling”
process has increasingly called for a new international policy framework and discipline(Kimura 2012).
There has been an increasing awareness among trade officials in Latin America thatthe remarkable development of GVCs and RVCs in East and Southeast Asia,
characterized by the “market-led” (de facto) integration with the "intra-industry trade"and the "intra-firm trade" as its engine of growth, has been complemented by the “policyled” (de jure) integration through regional integration agreements. The proliferation of
GVCs and RVCs in Asia was made possible by horizontal productive complementarities
between the countries in that region and the increase in productivity and competitivenessof the whole region, which, in turn, enhances the "quality" of intra-regional trade, making
it possible to conquer “quality” extra-regional markets.
OR postulates there should be synergy effects between the "market-driven”
integration, which is common in Asia, and the "policy-led” or “institution-led” integration,
exemplified by the European style of regional integration (Kuwayama 1999, GonzalezPerez et al. 2015). The impressive expansion of trade and investment and deepening

6

When transport costs were high, few items could have been profitably shipped internationally. This forced thegeographical bundling of production and consumption. The “First Unbundling” occurred when railroads and steamships
made it feasible to spatially separate production and consumption. However, cheap transport favored large-scale
production and called for closer physical proximity, which lowered the cost of coordination. Thanks to the informationand communication technology (ICT) revolution, it became increasingly economical to geographically separate
manufacturing stages to unbundle the factories. The “Second Unbundling” refers to the process where production stages
previously performed in proximity were dispersed to reduce production costs (Baldwin 2011).

6

integration among Asia Pacific economies was driven by market forces once individual
governments had liberalized external trade on a unilateral basis. Regional
intergovernmental agreements and institutions and formal trade discrimination made little
contribution in the Asia-Pacific region (Garnaut 2004). In this sense, OR means a processthat results from reconciling the two phenomena described above: the interdependence
that stems from special, preferential agreements arising from the market signals that are
produced by trade liberalization. Regional integration has a long history in Latin America,
but its mediocre record owes in part to resorting to the European “policy-led” integration
modality without giving due consideration on the role of market forces in regional
integration.
The Latin American regional integration entities, such as the PA, have been seeking
integration schemes and instruments that are compatible with and conducive to theenhancement of the synergy between the two modalities of integration. Also, to enhance
the synergy effects between the two, the PA considers it necessary to have active
engagement of the private sector in the regional integration process (consequent rises inreal wages) and active engagement of small business entities and civil society in thatprocess. In short, the OR concept serves to fill the gap between the two different
integration routes, performing a reconciliation role between the two to strengthen the
public-private partnership (PPP) and complementing the development strategy of thegovernment.
As in the case of the APEC forums, where the deliberations are not legally binding
and of a voluntary nature, the PA also stresses a participatory and consensual approach toachieving “deep” integration. One of the three objectives of the PA is to “build in aparticipatory and consensual way an area of deep integration to move progressively
towards the free mobility of goods, services, resources and people” (downloaded fromthe official site of the Pacific Alliance, January 18, 2019). In this respect, the PA is less“structured” and “institutionalized” compared with the Southern Common Market(Mercosur), Andean Community of Nations (CAN), Central American Common Market(CACM), and the Caribbean Community (CARICOM). The PA’s immediate goal is tocreate a “Free Trade Area” while that of the other integration groups is the creation of a“Common Market”. Besides, the PA’s decision-making structure is intergovernmental incharacter, and it does not have a dispute settlement body or a General Secretariat.
The four member states of the PA share a vision of a development modelcharacterized by OR and a conviction that economic liberalization should becomplemented by cooperation efforts on many fronts that would result in enhanced
productivity, competitiveness, and social inclusion. These countries hope to confront thechallenges of the international economy with a pragmatic approach and a political will.
Consequently, these countries have sought to set themselves apart from other regional7

entities that have been categorized as ideological, such as the Union of South American
Nations (UNASUR), Mercosur, and the Bolivarian Alliance for the Peoples of Our
America (ALBA).

II. Positive and negative legacies of LAC’s regional integration
Latin American countries are increasingly aware of the difficulties in overcoming
their economic structural shortcomings. The region has not been able to reduce its
productivity gaps with the industrialized economies or ones that exist between the mostmodern sectors and the least advanced ones in the national economies. The countries of
the region have not addressed the “quality” of their participation in the international
markets. Therefore, the countries of the region are aware of the urgent need to: 1) add
more value and incorporate knowledge-contents in the trade-related sectors, and promote
productive linkages (forward and backward) within the economy; 2) encourage theinternationalization of the corporate sector and their participation in GVCs and RVCs;
and 3) establish new links between trade, innovation, and competitiveness, bystrengthening the synergy between trade and investment. Given the new patterns ofgrowth of the world economy, regional integration is called upon to play a moreprotagonist role in tackling these structural problems that the countries of the region face
(Kuwayama 2018: ECLAC 2014b, 2012, 2010).
A. Low “quality” of participation in international markets
The LAC region has not been able to increase its share in world goods and services
exports over the past 30 years. The LAC region's share of world goods exports accounted
for only 5.7% on average for the 2005-2016 period. As in goods, LAC’s share in worldservices exports stands at a low rate of 3.5% on average during the same period. Bothfigures are lower than the LAC's share in world GDP. Although China's strong primarycommodity demand has been a boost to commodity exports, LAC’s share in world goods
exports hardly increased over the years. Despite trade liberalization over the last three
decades have led to greater openness of the LAC economies (the ratio of combined
exports and imports to the regional GDP), trade liberalization has not resulted in asustained increase of LAC participation in the world market (Kuwayama 2018, ECLAC
2017).
This pessimistic observation is related in part to the emergence of two different tradespecialization patterns. The first refers to South American countries who have specialized
in exporting primary products and processed goods to Asia while importing a wide rangeof manufactured goods. This "inter-industry" trade pattern is known to be little conducive
to quality employment and the engagement of Latin American companies in GVCs and8

RVCs. The other is the case of Mexico and Central American countries specializing inexporting manufactured goods destined to the United States. This trade specialization is
primarily based on the comparative advantage of non-skilled workers in industries suchas textiles and apparels and assembly operations in the electric and electronics sectors.
The common feature of these two patterns is that trade specialization is based on staticcomparative advantage that depends either on abundant natural resources or unskilledlabor with limited domestic value-added and technology-knowledge content (Rosales andKuwayama 2012). Trade relations between Central America and the United States might
be mistakenly categorized as successful "intra-industry"-type operations where Latin
American firms engage in a variety of GVCs and RVCs with the North Americancounterparts. However, to carry out these maquiladora-type operations, it is necessary toimport large amounts of intermediate goods, which results in low domestic value-added
and limited foreign exchange earnings (Kuwayama 2017).
Also, LAC has a significant catch-up on improving the “quantity” and “quality” ofservices trade. Services exports, which account for 15% to 20% of the total LAC export
values (goods and services combined) of Latin American countries, remain stagnant. The
LAC’s share in the traditional export categories such as “tourism” and “transport”, inwhich LAC is considered to have competitive advantages, has been stagnant, while theregion's participation in the category of “Other Services", which include the fastest
growing knowledge-intensive services activities, has been declining (Kuwayama 2018,
ECLAC 2017).
The backwardness in the production and exports of LAC's service industries, directly
and indirectly, affects the export performance and international competitiveness of thewhole productive structure as well as the engagement of Latin American firms in GVCs
and RVCs. Many services are traded indirectly through their incorporation as intermediate
inputs in exports of goods, a process called the “servicification” of goods (Kuwayama
2017, ECLAC 2017). The existence of competitive services is a critical determinant ofcompetitiveness. In some cases, this factor is as influential as, or more important than,foreign exchange fluctuations or tariff/non-tariff barriers (USITC 2013). To promote
RVCs within the LAC region and GVCs outside the region, strengthening the “supporting
services” beyond their national boundaries is essential. It is often the case that services
are the primary promoters of GVCs of manufacturing products.
B. LAC's intra-regional trade in standstill
The performance of LAC’s intra-regional trade has been lackluster compared to thatof other regions. LAC’s intra-regional exports increased by three times from US47 billion
to US146 billion during 1995-2016, but the intra-regional trade coefficient (intra-regional
exports as a percentage of LAC exports to the world) never reached 20% and has been9

declining since 2010. In comparison, the EU’s intra-regional trade coefficient has
exceeded 60% over the same period, while that of NAFTA has maintained a 45 to 50%
range. Despite a temporary decrease due to the Asian financial crisis in 1998, Asia’s intraregional trade between ASEAN (10), China, Japan, Republic of Korea, Hong Kong, andTaiwan has loomed over a 50% range. The same coefficient of the ASEAN countries,
which is nearly $10 billion more than the LAC's intra-regional exports, has always
exceeded that of LAC from 1995 to 2016 (see Figure 1). The expansion of intra-Asian
trade has been driven partly by the robust growth of intra-firm and intra-industry trade,thanks to the construction of a complex network of GVCs and RVCs (Rosales andKuwayama 2012).
Looking at the trends in LAC’s intra-regional trade of major integration groups, it
becomes clear that, except for the CACM, whose intra-zonal coefficient has consistently
exceeded a 25% level over the past ten years (Figure 2), the respective coefficients of
Mercosur, CAN and the PA remain standstill at a low level. The CAN has never exceeded
10% over the past 25 years. The coefficient of the PA is notably below 3%, which suggests
limited potential as a “Free Trade Area”. Mercosur's coefficient grew steadily until 1998
but later started to recede, impacted by the Asian economic and financial crisis and theRussian financial crisis. The recovery continued until 2007 with the onset of the Lehman
Brothers crisis, but it has been stagnant ever since. ECLAC (2015a, 2016) notes that intraregional trade in the LAC region is more sensitive to the downward trends of the world
economy than that with third countries/regions, such as the Asia-Pacific, the United States,
and the EU. In this sense, LAC’s intra-regional trade has not yet transformed into a“buffer” that cushions external shocks.

Figure 1: LAC’s intra-regional tradecoefficients, compared with EU (28), NAFTA,ASEAN, ASEAN/China/Japan/ Korea 1995-2016(intra-regional exports as a percentage of LAC exports
to the world, %）Figure 2: Intra-regional trade coefficients of LAC
sub-regional integration groups 1990-2016(intra-regional exports as a percentage of LAC exports
to the world, %）

80

30.0

70

EU(28)

60

CACM
25.0

NAFTA

20.0

50
ASEAN＋３＋HK+Taiwan

40
30

MERCOSUR

15.0

CARICOM

10.0

CAN

ASEAN

20

LAC

5.0

Pacific Alliance

10
0

0.0

1980

1985

1990

1995

Intra ASEAN+3+Hong Kong+Taiwan

2000
Intra ASEAN

2005

2008

Intra LAC

2009

2010

Intra European Union (28)

2015

2016
Pacific Alliance

Intra NAFTA

Notes: 1) The group of the ASEAN +3+HK+Taiwan consists of ASEAN (10) countries, China,
Japan, the Republic of Korea, Hong Kong Province of China, and Taiwan Province of China.
2) ASEAN(10) includes Brunei Darussalam, Cambodia, Indonesia, Lao People's Dem. Rep.,
Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam
Source: The author’s elaboration based on the UNCTAD trade database.

Mercosur

CACM

CAN

CARICOM

Notes: 1) The Pacific Alliance consists of Chile, Colombia, Mexico, and Peru. 2) Mercosur iscomposed of Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Venezuela's figures for 2007, 2014
to 2016 are not included. 3) The CACM values are based on Costa Rica, El Salvador, Honduras,
Guatemala, Nicaragua, and Panama. 4) The Andean Community (CAN) is based on the values from
Bolivia, Colombia, Ecuador, and Peru. Venezuela, which withdrew in 2006, is not included. 5)
CARICOM figures cover the 1995-2016 period.
Source: Author’s calculations based on figures from the UN COMTRADE database. CARICOM data
were calculated from the database of UNCTAD.

10As shown above, the behavioral patterns of LAC’s intra-regional trade contrasts withthat of Southeast Asia in that the latter is increasingly characterized by "intra-industry"
trade focused on the transaction of intermediate goods, such as parts and components, but
LAC intra-regional trade is the processing of primary products and finished manufactured
goods (Kuwayama 2018). In the former, the proportion of parts and components in intraregional trade is 9.8% in 2016. In contrast, in the case of ASEAN (5), this ratio goes up
to 35.6%. The share of these products in LAC intra-regional trade is markedly lower thanthat of the EU or NAFTA (Figure 3).
Figure 3: LAC’s parts and components in intra-regional trade, compared with
ASEAN5, NAFTA and EU 2000-2016（share of parts and components in total intra-regional exports of each bloc, %）
40.0
35.0
ASEAN(5)

30.0
25.0
NAFTA
20.0

EU(28)

15.0
10.0

LAC

5.0
0.0

2000

2002

2004

2006
LAC

2008
ASEAN(5)

2010
NAFTA

2012

2014

2016

EU(28)

Note: The definition of parts and components is based on Fung, Garcia-Herrero, and Siu (2009). According to thisdefinition, parts and components consists of items included as “parts and others” in the International Classification(SITC Revision 2), plus inputs of: textile products (chapter 61 and chapter 65); machinery and transport equipment(chapter 7); metal products (Chapter 69); and other manufactured products (Chapter 8).
ASEAN (5) is composed of five countries: Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
Source: Author’s calculations based on UN: COMTRADE.

Therefore, the current trade pattern of LAC, regrettably, does not conform to themainstream of world trade dynamics. The tariffs levied on parts and components are
known to be low; countries dependent on manufactured goods exports are likely to apply
low duties on intermediate goods, particularly parts and components, to maintain pricecompetitiveness of the final manufactured goods destined for exports. The incipientdevelopment stage of GVCs and RVCs of the Latin American region is related more to
the lack of productive “horizontal” complementarities among the countries in the region
and the backwardness in the region’s systemic competitiveness in which infrastructure(hard and soft alike) has a significant role to play. The development of value chains, nottariff elimination, is the most pressing issue.
C. LAC’s intra-regional trade with a high technological intensity
It is not of common knowledge among trade specialists that LAC intra-regional tradeconsists of non-traditional and differentiated manufactured products, with high value11

added and relatively knowledge-intensive manufactured goods (Kuwayama 2018, Devlin
and French-Davis 1999). In contrast to LAC’s exports to the United States, which showsa relatively high ‘intra-industry” component, LAC’s exports to Asia, particularly to China
and Japan, consists of primary products and their processed products accounting for over
70% of total regional exports. LAC’s exports to the EU also show a relatively high shareof primary products. This overall trade structure contrasts to the case of the Asia-Pacificregion, in which the manufactured goods account for the majority regardless of theirexport destinations.
The relatively high content of manufactured exports in LAC intra-regional trade has
led some institutions like ECLAC (1994) to argue that LAC’s intra-regional trade can be
an excellent training platform for overseas market development of technologically moresophisticated export products to extra-regional markets, laying a foundation for thedevelopment of GVCs and RVCs, especially for SMEs. The relatively high value in the
Grubel and Lloyd index (GLIs), one of the representative indicators to measure the degreeof "intra-industry" trade, 7 suggests not only intra-regional markets are major export
destinations for manufactured products and as export platforms for these products to third
countries, but that there exists a high potential for enhancing GVCs and RVCs with intraand extra-regional markets (Kuwayama 2018, ECLAC 2014a).
A distinctive feature of LAC’s intra-regional trade is that, despite its relatively
sophisticated product composition, the majority are finished products regardless ofwhether they are manufactured goods or primary products and do not involve parts andcomponents necessary for the production of autos, electric machinery, equipment,
instruments, and appliances that facilitate the construction of GVCs and RVCs. The low
trade value of parts and components not only restricts the expansion of "intra-industry"
trade but also invites protectionist measures by trading partners. Also, by promoting“intra-industry” trade in its proper region, cross-industry value chains between the
primary, manufacturing, and services sectors will be promoted. In that sense, as discussed
later in this paper, the PA can deepen its relationship with the Asia-Pacific region by using
the complementarity with the strong manufacturing sectors of the Mercosur member
countries. Meanwhile, the Mercosur countries will be able to actively participate in thevalue chain networks in Asia, using the PA countries as their "gateway " to and from Asianmarkets.
7 The intra-regional trade shows relatively high GLI coefficients. GLIs takes a value between 0 and 1. The higher thevalue of the index, the larger the degree of intra-industry trade in total trade. To capture larger increases and differentiate
the degree of depth in intra-industry relations, three levels are defined: 1) level 1, GLI>0.33 (with intra-industry trade);level 2, 0.10>GLI<0.33(with potential intra-industry trade); and level 3, GLI<0.10 (inter-industry trade). The GLI
within LAC’s intra-regional trade GLI in 2016 is 0.24, with a rising trend since the 1990s. On the other hand, the trade
structure with the Asia-Pacific region is of an "inter-industry” nature (the GLI is 0.07). The LAC's trade with the EU
also shows the characteristics of "inter-industry" trade (GLI 0.13). The GLI between LAC and the US is high (GLI is0.39), influenced by Mexico's trade with the United States based on manufactures. In the intra-Asia Pacific trade, the
GLI is high as 0.33, revealing an advanced stage of “intra-industry” trade characterized often by GVCs and RVCs.

12

In addition, the LAC intra-regional market is the main export market for SMEs in theregion (ECLAC 2014a). In fact, except for Mexico, where exporting firms ship most of
their merchandise to the U.S. market, LAC’s exporting firms export more, in relative
terms, to intra-regional markets. The tendency of exporting firms to concentrate on theintra-regional markets is more pronounced for small- and medium-sized export-oriented
enterprises. As mentioned above, the intra-regional market is high value-added andknowledge content and employment-intensive. In this regard, the "development strategy"
that emphasizes the participation of SMEs in GVCs and RVCs has profound implications
for sustainable development and social inclusion.
D. Complex interlaces of trade agreement networks
LAC countries have undertaken bold and rapid trade liberalization since the 1980s.
As a result, tariffs and other trade barriers in the region have drastically decreased in thelast 30 years. The average values of the Most Favored Nations (MFN) rates fell from 40%
in the 1980s to 10% in the early 21st century. Also, due to the spread of FTAs, the tariffbarriers within the LAC region have come down substantially over the years. This owes
in part, in addition to the unilateral liberalization promoted by several countries, torenewed liberalization efforts by various sub-regional integration groups (CAN, Mercosur,
CACM) in the 1990s, the ALADI framework of “Economic Complementation
Agreements” (Acuerdos de Complementación Económica: ACE), and the "Partial
Coverage Agreements” (Acuerdos de Alcances Parciales: AAP) signed among thecountries. Due to these efforts, the elimination and reduction of tariffs ceased to be anegotiation matter of top priority in trade agreements that LAC countries sign in theregion. As Table 1 shows, non-tariff measures and administrative barriers, measured by
Ad-Valorem Equivalents (AVEs), have become the main factors impeding trade
expansion within the region.
Table-1: Tariff, non-tariff measures, administrative costs as trade barriers of
LAC’s intra-regional trade, by integration bloc, 2002-2011（Average Ad. Valorem Equivalents: AVEs）
Applied tariffs(1)

Non-Tariff Barriers:
AVEs

Tariffs +AVEs(2)（３）＝（１）＋（２）Administrative barriers:
AVEs
（4）

CAN

0.8

58.1

58.9

19.4

Mercosur

2.5

53.8

56.3

21.3

CACM

1.4

0.3

1.7

20.1

Pacific Alliance

1.4

5.1

6.5

17.7
23.0

CARICOM

5.0

35.0

40.0

Mexico

5.3

13.8

19.1

17.2

LAC

2.9

25.3

28.2

20.0

Notes: a/ The figures are weighted by intra-regional import values. / AVEs: Average Ad. Valorem Equivalents.
Source: Durán (2018). Original data are from the WTO “Tariff” database. The methodology is based on Grübler, M.
Ghodsi y R. Stehrer, “Estimating importer-specific ad valorem equivalents of non-tariff measures”, Working Paper,Nº 129, Vienna, Vienna Institute for International Economic Studies, September 2016.

13

One of the merits of LAC integration may be that the region is equipped with a myriadof trade agreements, which later becomes an impediment to the deepening of LAC’sregional integration processes. In the framework of ALADI, there exist 77 trade
agreements in total (Leroux 2018). 8 The crisscrossing of multi-layered trade agreementsof different scope and disciplines among a variety of memberships has resulted in nonuniformity of trade and investment rules, which in turn has become a limiting factor for
LAC’s intra-regional trade (Kuwayama 2018). In short, the complex networks of trade
agreements signed between the countries in the region has not translated into dynamic
intra-regional trade. Despite a complex network of trade agreements, only 19% of the
LAC’s total trade takes place within the region. As argued later in this paper, the PA
proposes achieving the convergence of existing trade agreements in a regional block thatwould then lead to a joint action to influence the political-economic dynamics of theregion.
There is an urgent need to generate a convergence process between these agreements.
However, it is known that harmonizing the trade and investment rules among different
integration schemes is complex and time-consuming. To maximize the synergy between
existing trade agreements and to minimize the effects of segmentation, it is essential toprovide the private sector a clear signal toward the harmonization of rules between thepreferential agreements. In proceeding with such task, priority should be given to 1)
harmonization of different tariff elimination schedules of existing trade agreements in theregion, 2) upgrading of trade and investment rules during that very harmonization process,and 3) introduction of “cumulative” rule of origin rules to incentivize GVCs and RVCs.
E. Insufficient Trade Facilitation measures
The importance of "Trade Facilitation " as a trade policy instrument has increasingly
become evident amid the development of GVCs and the conclusion of the World Trade
Organization (WTO) Trade Facilitation Agreement (TFA) in December 2013.
Enhancement of trade facilitation is equally, if not more, important as benefits that might
accrue from tariff reductions in lowering trade costs (OECD 2015, INTAL 2018). 9 The
WTO defines trade facilitation as “simplification and harmonization of international trade
procedures”, i.e. “the activities, practices, and formalities involved in collecting,
8

Looking at its breakdown, 37 of the 70 AAPs are of ACEs, while 28 are non-preferential agreements (2 are AARs
and 26 are AAPs). In addition, there are 49 preferential agreements (5 AARs and 44 AAPs). Among these 49 agreements,
29 are of limited scope focusing mainly on tariff reductions, and other 20 agreements are of a comprehensive nature,including trade and investment rules in addition to a wide range of tariff reduction commitments. In addition, there
exist 20 free trade agreements (including FTAs and AAPs) in the ALADI repository as of 2016 (Leroux 2018).
9 Estimates by the OECD suggest that full implementation of the TFA has the potential to reduce trade costs by anaverage of 14.3% and that these measures are particularly important for developing countries (OECD 2015), increasing
the opportunity for developing countries to integrate into GVCs. In Brazil, it took 13 days to export and 17 days toimport a product in 2014. These customs delays amount to a tariff of 13.0% on exports and 14.2% on imports, higher
than the average tariff of 7.8% (INTAL 2018).

14

presenting, communicating and processing data, and other information required for the
movement of goods in international trade”. Measures for the facilitation of trade aregrouped into five categories: transparency, formalities, institutional arrangements andcooperation, paperless trade, and transit movement. As of January 2019, 141 countries at
the world level and 23 countries of the LAC region have ratified the TFA agreement;
Colombia, a member of PA, has not done it. 10
Within the universe of actions foreseen by the TFA agreement, Article 10.4 provides
for the establishment of a single entry-point for documentation and information of foreign
trade operations. This "single window" is a uniquely suitable instrument for redesigningand optimizing processes, automating them and managing data electronically. Most of thecountries of the LAC region are engaged in processes of implementation or strengtheningof the “Foreign Trade Single Window” (Ventanillas Únicas para el Comercio Exterior:
VUCE), unlocking bureaucratic opacities and boosting the international insertion ofcompanies. In countries such as Chile and Costa Rica, the VUCE managed to reduce to
50% the time necessary to import or export and the costs associated with these operations(INTAL 2018).
According to a survey conducted by ECLAC (2015), although the results are better for
LAC than other developing regions like sub-Saharan Africa and South and Central Asia,
the LAC region still faces enormous challenges in reducing non-tariff costs and the timerequired to execute foreign trade transactions. The region’s transport infrastructure deficit,
inefficient administrative procedures, and deficiencies in distribution services andlogistics, translate into high non-tariff costs for trade. In addition, for LAC’s three subregions, the cost of trade transactions with the United States is known to be lower thanthe cost of transactions within each sub-region. Such costs discourage not only productive
integration between the region’s economies but also the development of GVCs and RVCs.
Advancing the trade facilitation agenda is important for various reasons. Promoting afaster cross border flows of goods and services between countries in the region will help
to expand both intra-and extra-regional trade. Moreover, since inefficiencies in borderprocedures disproportionally affect SMEs (the vast majority of which do not export),
trade facilitation may promote their internationalization. Facilitation, in turn, may
encourage export diversification and reduce the region’s dependence on raw material
exports, in particular South America’s countries. High costs of inefficiencies at theborders affect the price and competitiveness. Such inefficiencies are most evident for the
trade of parts and components, and other intermediate goods, as GVCs further extend

10

As of January, 2019, The LAC countries that have ratified the TFA are the following in chronological order: Trinidad
and Tobago, Nicaragua, Belize, Panama, Jamaica, Paraguay, Brazil, Saint Kitts and Nevis, El Salvador, Honduras,
Mexico, Peru, Uruguay, Chile, Dominica, Saint Vincent and the Grenadines, Dominican Republic, Costa Rica, Antigua
and Barbuda, Argentina, Bolivia, Cuba, and Ecuador (WTO website, accessed on February 2019).

15

across national borders.
The results of the ECLAC survey show significant progress made in many countries in
the region, but further adjustments are needed at least at the sub-regional level. The impactof trade facilitation will be even more significant if, for example, several countries agree
among themselves on the criteria that a firm must meet to be considered an authorized
operator, or on the content of advance rulings (INTAL 2018). As shown later, the PA has
made significant headways in this respect. In addition, full interoperability of national
single windows for foreign trade at the regional or sub-regional level will be a big asset
for the enhancement of GVCs and RVCs. Ongoing projects on trade facilitation between
the PA and Mercosur have great potential to boost trade and productive integration
throughout the region.
F. Deficiencies in infrastructure
LAC is a region that is backward in infrastructure compared to other developing
regions. Economic infrastructure investment shows a steady decline over the past 30 years
and infrastructure investment/GDP ratio lowered from approximately4% in 1980-1985 to
2% in 2007-2008. Particularly in the transport infrastructure (roads, ports, airports,
railways) sectors, the ratio was lower than the world average in most countries of theregion, and the regional average was less than the average of the Southeast Asia
(IDB/ECLAC/World Bank 2011). ECLAC estimates that the LAC region needs to invest
in infrastructure development equivalent to 5.2% of regional GDP every year from 2006
to 2020 to meet its growth forecast. More recent studies suggest that long-term investmentof about 5.0% to 6.5% of regional GDP is necessary for infrastructure development to fill
the infrastructure gap in the LAC region (Serebrisky et al. 2015). 11
The inadequacy of infrastructure impedes not only greater participation of LAC
countries in international markets, but also regional and territorial development and social
cohesion (ECLAC 2010). The logistics cost of the LAC countries is four times higher
than that of the OECD member countries. If the logistics system in the region had been
more complete, the commodity boom of 2003-2011 could have been better taken
advantage of to contribute to economic development. During the same period, the natural
resource-related transport demand in the LAC region increased by 56%, but limitations
on transport became a bottleneck (Altomonte y Sanchez 2016). 12 There is a growing
11

According an Inter-American Development Bank study (Serebrisky et al. 2014), the region needs to increase its
investment in infrastructure by at least 2% of its GDP over an extended period in order to go from US$150 billion to
US$250 billion per year.
12 For example, if the connectivity of the railway networks in the region is improved, more exports are possible, andthe distribution system of the LAC region, which is concentrated on road transportation means and cannot fully utilize
the potential of railways and river transports, can be improved accordingly. For example, river transport is a low-costmeans of transportation in Bolivia and Paraguay, but road transport is more frequently used due to problems associatedwith the use of navigable rivers. Reducing logistics cost will also promote regional integration by improving tourism

16

awareness that appropriate logistics are needed for both natural-resource development
and export expansion of manufacturing industries, especially for engaging in GVCs andRVCs. Such need, in turn, calls for “quality” infrastructure within the region(Estevadeordal y Blyde 2016).
One of the fundamental challenges surrounding regional/sub-regional cooperation is
the reduction of the infrastructure gap. The promotion of cross-border development axes,
such as ‘bioceanic corridors’ that help enhance region’s competitiveness, improvestransport times and costs for extra-regional trade and connects the coastal areas of the
Pacific and Atlantic Oceans (ECLAC 2010). They also create new production and urban
planning opportunities, improving the geographical (between coastal areas and uplands)
and social balances, and raising living standards for poor and backward communities,
which tend to be in the interior of the sub-regions. The PA may become a “gateway” forMercosur countries, and vice versa; this will have important implications for production
and trade structure as well as for territorial development.

III. Pacific Alliance: Practitioner of Open Regionalism in
Latin America
The PA represents the latest development in the landscape of regional integration in
Latin America (Briceño-Ruiz 2014). The integrationist movement, which began in the
1960s under the aegis of the United Nations Economic Commission for Latin America
and the Caribbean (ECLAC), have experienced at least three waves since the 1990s. The
reformist character of Mercosur, which includes provisions for strengthening social
dimensions and production processes, represented the first wave, although its policyfocus continues trade liberalization. The second wave has been represented by the
UNASUR, CELAC, and ALBA, proposing a non-capitalist integration characterized bySouth-South cooperation, with institutional and political parameters centered on regional
thematic agendas such as peace and security, energy security, infrastructure or financial
architecture (Leví y Reggiardo 2016, Briceño-Ruiz 2013). The PA marks a return of the
trade liberalism prevalent in the 1990s, with a strong dose of facilitation and cooperation.
The PA has been the first multilateral free trade initiative in the Americas after the failureof the Free Trade Area of the Americas (FTAA) to counteract the expansion of theintegration initiatives led by the once region’s leftist group of countries (e.g., Brazil,
Venezuela, and Argentina) (Gonzalez-Perez et al. 2015).
The reason the South-South trade agreements within the proper region lost theirdevelopment and connectivity within the LAC region. If infrastructure integration with neighboring countries is
promoted, the financial investment needs required to fill the gap will be greatly reduced.

17

importance during the last two decades owes not only to the proliferation ofbilateral/plurilateral FTAs which promoted “deep integration” with the North (the UnitedStates, the EU, EFTA, Japan, etc.), which has not brought about positive effects as
expected, but also to the realization on the part of many countries in the region that the
failure of integration movements has more to do with the 1) difficulty in completing the"Customs Union” process among the countries of different stages of economic and social
development; 2) persistence of numerous non-tariff barriers, arbitrary and discretional
applications of “exemption” and frequent abuse of trade remedy measures; 3) policy
mismatches in areas such as macroeconomic policy, sectoral-development policy, andcompetition policy; 4) deficiency in infrastructure (land and air transport, shipping andports, energy-resource connectivity, telecommunications, etc.); and 5) shortcoming in"trade facilitation" measures (customs procedures, interoperability of single window
systems, etc.) at the regional level (Kuwayama 2018). Most importantly, the regional
integration entities became forums of political coalition, rather than of economic allianceand cooperation (AECID 2015).
A. Features and Development Path of the Pacific Alliance
Among the eleven countries of the PA’s predecessor, the "Pacific Alliance Basin"
initiative (Arco del Pacífico Latinoamericano), 13 the Presidents of four countries(Mexico, Colombia, Peru and Chile), followers of the OR philosophy, and practitionersof liberalization with intra- and extra-regional trading partners over the years, signed the"Lima Declaration" in April 2011 to create the PA (Oyarzún 2017). These are four
countries in the LAC region that have maintained political and economic affinities basedon stable democratic political systems, macroeconomic stability and export-oriented
strategy, and shared interests in strengthening relations with the Asia-Pacific region, while
sharing the idea that the globalization process should support economic growth, quality
employment, and innovation, instead of being an impediment to these goals.
Thus, the PA’s OR is a renewed version of the conventional OR that maintains an
outward-oriented and internationally competitive approach prevalent in the 1990s,
although now complemented by a set of policies, regulatory coordination, andcooperation agendas that would lead to inclusive and sustainable development of theregion with an acceptance of new members who are willing to abide by these principles
and for the association with extra-regional partners (Kuwayama 2018). In that respect,

13 The Pacific Alliance was built on the initiative called “Foro sobre la Iniciativa de la Cuenca del Pacífico
Latinoamericano) launched on January 2007 in Cali-Colombia, with the participation of Chile, Colombia, Costa Rica,
Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, and Peru. The main objective of the Arch of
the Pacific was to enhance competitiveness through commercial and economic cooperation among members andstimulate trade with the Asia-Pacific region. However, given discrepancies of the opinions on the depth of commitments
among the countries, especially between the four PA member countries and the rest, coupled with passive participationof Central American countries, nothing concrete resulted from this initiative.

18

the PA has explicitly differentiated itself from other regional initiatives (including
Mercosur) in which integration with extra-regional partners has been either neglected or
openly rejected. The PA has emerged as a response to the disappointing experiences ofregional integration efforts in the region and to “promote OR, seeking to advance theprocess of economic integration among them as well as their global outreach, overcoming
the ideological divergence found within other regional groups” (Gonzalez-Perez et al.
2015). The PA has created a dynamic integration mechanism based on mutual trust
without getting bogged down to political and ideological differences in the Americas. 14
The PA focuses on economic and trade issues within a renewed framework of Latin
American regionalism founded on the OR principles. These countries pursue “deepintegration” based on the network of FTAs that the four members had subscribed among
themselves and with the most important economic blocks in the world (the United States,
the EU, and the Asia-Pacific). In this respect, the participation in the PA has not meant
extra costs for each country because the OR strategy assures the continuity of theirinternational insertion strategies based on OR and provides opportunities to upgrade their
FTA modality of the 1990s by incorporating additional measures to further deepen theirintegration. In short, the PA is not a sudden development for the four countries involved:
All four countries had already been connected by bilateral FTAs between themselves;
therefore, this initiative was a natural outcome on their part to consolidate and further
advance both their economic and political affinities (Kuwayama 2018).
As evidenced throughout the different regionalism waves in the LAC region, politicalfactors have often been prioritized over economic benefits among the Member States(AECID 2015). Rather than insisting on the solidarity and ideals among members,
integration had been used as a tool for power relations and political bargaining, influenced
by the "presidential dynamics" of LAC countries over supranationalism (Sanjuan 2018).
The creation of SICA, Mercosur, and CAN, was inspired by the European model, buteven after a long period of trials and errors, these regional integration initiatives do notmatch the institutional and organizational capabilities of the integration entities in the
North. In addition to the inability to overcome institutional vulnerabilities, the ‘sense of
exhaustion’ felt by national leaders over regional integration intensified, and the private
sector’s confidence in regional integration was also on a clear decline. Against thisbackground, more pragmatic integration initiatives like the PA that emphasize tradepromotion, economic cooperation, and public and private partnership (PPP) have gained
force.
Although the political agenda and the social dimensions also figure in the renewed
14

In this respect, it is interesting to note due to the differences between the governments of the member countries, thegovernments of Argentina, Brazil, Chile, Colombia, Peru, and Paraguay suspended their membership in UNASUR, in
April 2018. In August, Colombia notified UNASUR of its decision to withdraw over the Venezuela crisis.

19

OR of the PA, they are not the key issues that will deepen the process of regional
integration. It is the economic and trade-related objectives that guide the deepening ofintegration (Gonzalez-Perez et al. 2015). The PA, as a promoter of “deep integration”,
establishes cooperation mechanisms that are complementary to those of tradeliberalization, via deliberations by the ‘High Level Group” and technical committees15
on matters of migratory facilitation, higher-education, academic exchanges, andpromotion of SMEs, among others.
Nonetheless, the emergence of the PA also has meant a potential political rebalancein Latin America. During the last decade, Brazil has sought to become both a regional
power and a prominent global player, while Mexico had been rather distanced fromregional affairs as it deepened its integration with the United States through the North
American Free Trade Agreement (NAFTA) (Briceño-Ruiz 2013, Oyarzún 2017).
Mexico’s inclusion in the PA has represented its formal comeback into the dynamics ofregional integration in Latin America. It has also represented a shift of Mexico’s mindset
regarding its productive integration with Asia. Apart from Japan, Mexico had kept a
distance from the Asia-Pacific partners, as it regarded developing nations in that region,
particularly China, as competitors to the U.S. markets. As a member of the PA, Mexico
has become an active participant of the TPP initiative. In sum, Mercosur, in which Brazil
has been a protagonist, differs from the PA in that the former has promoted a revisionist,
post-hegemonic, and autonomist type of regional integration, with a focus on politicaland social coalitions (Briceño-Ruiz 2014). By contrast, the PA allows Mexico to project
itself as a platform of economic and trade integration toward the Asia-Pacific region.
The PA leaves aside the post-liberal or post-hegemonic tendencies that once shaped
South American regionalism, with a modified version of OR by its proper objectives andneeds as a block in Latin America. This route of integration well accommodates the ORof the Asia-Pacific region, with which the PA has particular interest to interact. In thisway, the PA abandons the formal European integration arrangement, unlike the regional
integration groups such as CAN, SICA, and Mercosur. The renovated OR strategy has
provided the PA its proper “pathfinder” for its unique integration approach of anintergovernmental character, founded on mutual interests and interaction among theStates. The block is constituted by the sum of countries and their national policies with atransnational orientation, but supranational initiatives are of limited scope (Leví yReggiardo 2016).
15

Regarding the PA’s institutional structure, the Summit of Heads of State and Government make decisions and set
the agenda. The Council of Ministers, composed by the member state’s ministers of foreign trade and foreign affairs,
is responsible for implementing the objectives set out in the Framework Agreement and the presidential declarations.
The task of the High-Level Group, comprised of member countries’ vice ministers of commerce, trade, and foreign
affairs, is to accomplish the PA’s goals. Officials also serve as national coordinators and operate in 26 technical groups
covering a range of issues, including innovation, labor, mining development, intellectual property, the environment,
and culture. Groups hold meetings to evaluate and discuss progress or changes within their areas. The Inter-American
Development Bank provides technical assistance to these groups upon request.

20

In a relatively short period, the PA has developed a new integration model in thecontext of the Latin American regionalism in pursuit of “deep integration”, with limited
institutional and super-national normative commitments, safeguarding the essential links
with their national political apparatus. In the case of the PA, political issues, such as thecession of sovereignty, have passed on a second plain due to the preponderance ofeconomic considerations (Rojas y Terán 2016). The PA is not equipped with a Secretariat
or a parliament, as often the case of Latin American regional integration entities, the CAN,
Mercosur, CACM, UNASUR, etc.
Another characteristic of the PA is its pragmatic approach to regional integration.
Although the PA aims for deep integration, the “Additional Protocol of the Pacific
Alliance Framework Agreement (the so-called Trade Protocol)” has set the creation of a“Free Trade Area” as its immediate goal. Given the LAC region is still characterized bymarked differences in economic and social development stages and acute asymmetries,
the four member countries are of the view that the PA should adopt a more realistic andpragmatic approach to create a “Free Trade Area” rather than a “Common Market" witha “Common External Tariff” structure where the free circulation of goods, services,
capital, and persons is allowed, as in the case of Mercosur. The intention is to move
forward to deepen integration progressively towards the free circulation of goods,
services, capital and people, not based solely on trade agreements, but on generating
opportunities for social development in participating countries.
The PA, with an OR focus, has emphasized active involvement of the private sector
in the support and development of its proper integration process so that the governmental
impulses invite the entrepreneurs to act as protagonists in that process (Rojas y Terán
2016). The style of integration sought by the PA strengthens the synergy between the“market-led” and “policy-led” integration modalities. In this sense, OR differs from
‘Strategic Regionalism’. 16 The geostrategic significance of the PA in Latin American
integration process, together with its consolidated relationship with the private sector, willallow the PA to act as a “gateway” between Latin America and the Asia-Pacific and as apromoter of GVCs and RVCs with higher value-added (Ramírez-Montañez y GonzálezSarmiento 2016).

16

Though it looks similar, the objective of ‘strategic regionalism’ differs from that of OR in that the former calls for aset of policies that the FTA signatory countries can confront global competition by giving their companies a privileged
position in the world economy. In this regard, it is important to highlight that, although in the strategic regionalism, theState plays a central role in the formulation and execution of policies that facilitate this type of regionalism, companies
also play a decisive role in the design and implementation of these policies (Briceño-Ruiz 2013). In the case of OR,
though the active participation of the private sector is crucial for a successful functioning of regional integration, its
influence on the course of the integration scheme in question is of a supplementary nature.

21

B. Main Achievements of the Pacific Alliance
The "Trade Protocol " (signed on February 10, 2014 and entered into effect on May
1, 2016) includes provisions on market access, services, investment, government
procurement, rules of origin, trade facilitation and customs cooperation, SPS, TBT, tradedispute settlement mechanism, and transparency. Provisions on trade in services include
not only cross-border services but also financial services, marine transport services, ecommerce, telecommunications, among others, thereby assuming features of acomprehensive FTA. In addition, the "cross-sectoral issues" included in the TPP
agreement, such as the promotion of utilization of trade agreements by SMEs,
enhancement of competitiveness, achievement of "scale economy" within the region,
value chain development, are also identified as the PA’s goals.
Another achievement is that the PA has in effect “cumulative” rules of origin for goods
produced by all four members, which will encourage more companies to join GVCs andRVCs. Thus, this comprehensive nature of the trade protocol makes it a “deep" FTA,
based on the OR suitable for the 21st century, which has similarities with the high TPP
standards. All of this is with a view to realize the goals set in the “Pacific Alliance
Framework Agreement” (signed in June 2012 and went into effect 3 years later in July2015), aimed at accelerating the internationalization of companies, especially SMEs,
promoting the development of GVCs and RVCs, investment, tourism, and facilitating
trade.
The trade protocol officializes the liberalization schedules among the four countries.
This FTA provides for the lifting of duties on 92% of goods traded between its member
countries. The remainder will be gradually reduced under the liberalization schedules
until 2030, whereas the TPP agreement among the 12 countries where roughly 96% ofgoods are subject to immediate tariff elimination. Thus, in the PA’s case, tariffeliminations are of a more gradual and practical nature, taking into account of domestic
circumstances of the signatory countries. In addition, because these four countries had
already been connected by bilateral FTAs and tariffs for many products have already been
eliminated or can be imported with low tariffs, the benefits accruing from tariffelimination/reduction might be limited. In this sense, "trade creation" opportunities by theelimination of tariffs within the PA region might be moderate, if not limited. To expand
trade and investment on a sustainable basis, expanding the PA’s membership is desirable,with new accession by intra- and extra-regional trading partner countries/regions(Kuwayama 2018).
The PA is a business-oriented integration project aimed at reducing trade barriers andenhancing competitiveness among the four countries. However, it is important to notethat this economic focus has been supplemented by programs and initiatives designed to22overcome socioeconomic inequality and enhance social inclusion, especially from aperspective of employment creation, technological innovation, and SME participation in
GVCs and RVCs. Despite the PA being established with the mandates to promote tradeand investment, their realm of action has been extended to cover a wide range of areas incooperation ranging from immigration, public-private partnership, cultural promotion,
academic and student mobility, 17 consular cooperation, the sharing of diplomatic andcommercial offices, and the establishment of a cooperation fund.
The high acclaims received so far by the PA result in part from the achievements madeeven before the Trade Protocol entered into effect in May 2016. Specifically, thefollowing joint efforts stand out: 1) elimination of tourist visa requirements for travel
between the four countries, 2) sharing of embassies and offices of representation
overseas, 18 3) reduction of the time required for customs clearance of goods throughadoption of international standards and information digitalization, 4) adoption of criteria
for "mutual recognition" among its members, 5) integration of the respective stock
exchanges (MILA Initiative); 6) enhancement of public-private partnership(establishment of Consejo Empresarial de la Alianza del Pacífico: CEAP), 7) Economic
and Finance Ministerial Meetings and periodic meetings of parliamentarians, and 8)
promotion of cooperation (e.g., education, academia, science, financial sector, business,SMEs). In this way, the PA had made significant headways in improving the region’scompetitiveness and productivity through concrete collaborative actions even before thetrade liberalization schedules stipulated in the Trade Protocol came into effect. These
achievements reflect the programmatic and consensual approach of the PA.
Over the eight years of existence, the PA has prioritized the area of trade facilitationand customs cooperation with an aim to making customs procedures more agile, effective,
simplified, and more interconnected, with streamlined methods and processes based onrisk management. With the objective of providing agility in the clearance of goods, thePA has been promoting interoperability of the “Foreign Trade Single Window” (VUCE),a digital platform to promote customs clearance. As a first step, the following concrete
initiatives have been taken: 1) the issuance of SPS certificate and certificates of origin, 2)
the implementation of “Authorized Economic Operator” programs, 19 and 3) cooperationand mutual assistance for the exchange of information among the respective customs

17 The Alliance also has an academic exchange platform (Plataforma de Movilidad Académico y Estudiantil) that has
benefited over 1,800 students. Besides, there exists a system of free online courses among educational institutions ineach country. A scientific research network on climate change was also established.
18 In African and Asian countries, where diplomatic relations are not as strong as desired, the four countries are sharing
embassies. Indeed, there are seven shared embassies, while the countries are sharing offices in OECD's representative
department and two commercial establishments.
19 The four countries signed the Mutual Recognition Arrangement in the area of Authorized Economic Operator (AEO)
in 2017 to “facilitate commercial operations among operators that meet minimum security standards in their logistic
chain, thus contributing to a region with a more agile trade and facilitating the participation of the companies of the
Pacific Alliance in the global context” (the Alliance official website, downloaded January 19, 2019).

23

administrations (INTAL 2018). All these initiatives will make the PA a regional blockwith high levels of interoperability. In the area of mutual recognition, the Technical Groupon Services and Investment has been working on the launch of the “Operating Frameworkof the Registry of Professional Services” to promote the negotiation of “License
Recognition Agreements in the Pacific Alliance”. A similar project has started with theengineering profession, and negotiations has started between colleges and professional
engineering councils.
In addition, the PA’s SME Technical Group has a mandate to “launch the Network ofBusiness Development Centers of the Pacific Alliance” and “fully implement the Easy
Export stamp in the four countries as a regional identification mechanism that facilitateslogistics, reduces delivery times, and links customs services and postal services. Besides,
the “Pacific Alliance Venture Capital Fund” by IDB (BIDFOMIN) will facilitate
financing and investment for SMEs and their business models. “Regional Observatory
SME and Entrepreneurship”（Observatorio Regional PYME）was established as a virtual
platform to organize and disseminate the current status of entrepreneurs' ecosystem andrelated research on the development of SMEs. 20 In addition, work in fields such as
consumer protection, best practices for attracting investment, identification of investment
barriers and investment opportunities, are underway.
Other achievements include cooperation in the stock market. Since 2014, the four
countries have integrated the stock market through the creation of the Latin American
Integrated Market (MILA), which aims to promote the financial integration of the stock
exchanges of the four countries and is now the second-largest stock market in Latin
America after the Sao Paulo Stock Exchange. In the financial sphere, the signing of the“Convention for the Standardization of the Tax Treatment” is also noteworthy, aimed atharmonizing the applicable tax treatment on certain interest income and capital gains to
avoid double taxation across the four member countries and the establishment of a private
investment infrastructure pre-feasibility analysis fund (Fondo de Inversión en
Infraestructura de la Alianza del Pacífico: FIAP) to promote investment ininfrastructure. 21 In addition, the joint catastrophe bond was launched earlier in 2018 22(Cibrián 2018).

20

The role of the Pacific Alliance Innovation Ecosystem (EIAP, by its acronym in Spanish) is to interact with eachcountry’s own system in order to increase the individual and joint results of the countries regarding business innovationand innovative entrepreneurship. The main objective of the EIAP is to develop strategies, programs, and instrumentsthat accelerate and boost innovation in the member countries.
21 The fund will receive investments both from private entities and from multilateral institutions, such as the World
Bank, the Inter-American Development Bank (IDB), and the Development Bank of Latin America (CAF). Authorities
have estimated that the initiative could mobilize more than US$100 billion.
22 The joint catastrophe bond program was launched with a combined funding of $1.36 billion in total coverage inearly 2018, aimed at funding the reconstruction of buildings and infrastructure in the case of an earthquake for all four
countries and additionally in the case of a hurricane in Mexico (Fitch Solutions 2018).

24

As mentioned earlier, the active participation of the private sector of the four countries
is one of the pillars of the PA. For this reason, each PA member country has made efforts
to build a close relationship with the respective Chamber of Commerce and Industry andthe trade promotion organizations. Under the PA’s sponsorship, "Business Matchmaking
Forums” (macrorruedas de negocios) have been organized as a joint project by trade andinvestment promotion agencies. Also, the Pacific Alliance Business Council (CEAP) 23
has been established, a similar setup as in the APEC Business Advisory Committee(ABAC) of APEC. The CEAP plays an important role because the participation of theprivate sector is vital if the PA were to continue implementing initiatives that benefit
entrepreneurs and exporters.
The PA has incited global interest, as evidenced by that as of January 2019, there are
55 observer states of which two are candidate countries (Costa Rica and Panama) in theprocess of full membership. Recently, Ecuador has applied for full membership. The PA
adopts an "open” stance on its membership, with the explicit requirement that thecandidate country has in vigor trade agreements with all the four original member
countries and with the implicit one that the candidate country shares the principles andobjectives of OR, as mentioned in the Preamble of the Framework Agreement (Leví yReggiardo 2016). To be qualified as an “Observer Country”, the candidate country has
free trade agreements with at least half of the member states.
The PA member countries agreed to establish a new "Associated State" membershipcategory at the March 2017 Ministerial Meeting. In June of the same year, the PA admitted
four “Observer” countries (i.e., Australia, Canada, New Zealand, and Singapore) as its
first “Associated Member States” candidates; these four countries are also participatingin TPP11, and the signatory countries of the PA are also participating in TPP11, except
for Colombia that had once expressed interest in joining TPP11. Later, the PA started
negotiations on a trade deal with these four “candidate” countries. This process, currently
underway, marks a significant milestone for the PA, since it constitutes the first FTA
negotiation with non-original signatory countries. 24
The liberalization schedule with the PA member countries are being negotiated between
the two countries, but other trade and investment rules are discussed between the eight
countries. The membership expansion might mean that the PA can be an alternative
avenue for a “high-standard” regional integration 25 between Asia-Pacific and Latin
23

During the 7th Pacific Alliance Summit (May 23, 2013 in Cali, Colombia) the Presidents of the member countries,
based on the proposal by the Pacific Alliance Business Council (CEAP), instructed the creation of a Committee ofExperts (Committee of Experts-CEAP) to analyze the topics suggested by the business sectors through the CEAP.
24 There have been six rounds of negotiations: the 1st in Cali, Colombia (October 23-27, 2017); 2nd in Gold Coast,
Australia (January 29-February 2, 2018); 3rd in Santiago, Chile (March 3-9, 2018); 4th in Ottawa, Canada (May 12-18,
2018); 5th in Mexico City, Mexico (July 7-14, 2018); and 6th in Oakland, New Zealand (September 22-28). The 7thround meeting was held on November 15-25, in Lima, Peru.
25 The negotiations with the candidates of “Associated States” will include goods market access, investment,25

America to the TPP route. The Republic of Korea has also expressed interest in becoming
an “Associated State”. In addition to the “Associated States”, the PA has been forging its
relationship with the Association of Southeast Asian Nations (ASEAN), with a work plan
and a roadmap to continue building on this relationship. 26 The ongoing negotiations with
the Associated States and policy dialogues with the ASEAN might pave the way to an
Asia-Pacific Free Trade Area, which is one of the goals of the APEC forum.
The PA has already defined its goals and strategies and set 2030 as its deadline, theyear when tariff liberalization of 100% of goods between the four countries will beachieved. Its primary objective is to consolidate the PA as the most competitive andinfluential block in the region and a leading world trading platform, with a solid, dynamic
presence in other markets, especially the ones in the Asia-Pacific region. In the years tocome, the PA expects to have identified best practices in customs cooperation and risk
management, to have implemented the Technological Platforms for Business Formalities,
in order to promote the digitalization of and simplification of procedures between themember countries and to have a “Pacific Alliance Innovation Agencies Network” in fulloperation (Proméxico 2018).
The challenges facing the PA are paramount. Amid increasing protectionism andanti-globalism in certain quarters of the world economy, it will become increasingly
difficult to persevere with the policy of economic liberalization and establish the PA an
effective platform for regional integration. In addition, the PA should double their efforts
on improving connectivity and strengthening links with the digital economy based on
know-how, e-commerce, digital services, and the promotion of innovation as a means ofboosting productivity and competitiveness. Also, the advent of the digital era has brought
afore the need to accommodate integration policies by technological progress instead ofintegration resulting in the marginalization of sectors. Also, as the free circulation ofpeople is facilitated, there will be a greater need for establishing “equivalence” and/or“mutual recognition” of workers’ qualifications, so that the pension and health insurance
benefits are to be forgone (Proméxico 2018). These goals are clear, but the means andvenues to accomplish them are not yet quite visible.

environment and labor rules, public procurement, temporary visas for business people and other services-related issues,
rules of origin, customs, technical barriers to trade, competition policy, sanitary and phytosanitary measures, gender,and small- and medium-sized enterprises, among others.
26 The PA has been cooperating with ASEAN since 2011 when the delegation of the Colombian Ministry of Foreign
Affairs visited the ASEAN Secretariat. Since then, PA-ASEAN cooperation continues primarily through the PAASEAN Ministerial Meeting on the sidelines of the UN General Assembly. The 5th Ministerial Meeting of PA and
ASEAN took place on the sidelines of the 73rd Session of the UN General Assembly, September 26, 2018, in New
York. This meeting had an aim to evaluate the 2017-2018 PA-ASEAN Action plans. So far, both groups have been
implementing various areas of cooperation listed in the ASEAN-PA action plans such as encouraging the participationof businessmen in trade and investment promotion activities in both regions, holding seminars on opportunities for PAASEAN cooperation, and giving scholarships for young people to learn language and culture in both regions. The areasof cooperation are to be extended to include the fields of science, technology, and innovation and sustainable
development.

26

C. Convergence in trade rules between the Pacific Alliance and Mercosur
The PA has been trying to streamline trade and investment relations with Mercosur,along with the policy guideline first proposed by ex-President Bachelet of Chile in 2014.
The Summit between the two blocks, held on the sidelines of the 13th Summit of the
Pacific Alliance (July 24, 2018, Puerto Vallarta in Mexico), concluded with the signingof the Declaration in which the two regional blocks reaffirmed their commitment tostrengthening their integration and agreed to follow up on the process on a half-yearlybasis with a view to reach a FTA framework.
The “Action Plan”, adopted at the Alliance’s Summit, specifies concrete measuresand steps to be taken in the areas as planned in the “Roadmap Pacific Alliance andMercosur,” agreed in May 2016. It is interesting that the issues identified in the Roadmap
as priority coincide with the ongoing cooperation initiatives of the proper PA: 1) Regional
Value Chains / Cumulation of Origin, 2) Trade Facilitation / Single Windows for Foreign
Trade (VUCE), 3) Customs Cooperation, 4) Trade Promotion and SMEs, 5) Non-Tariff
Barriers, and 6) Facilitation of Trade in Services. The Working Groups of both groups are
established and are executing specific projects in each area (INTAL 2017, 2018).
It should be noted that the countries of Mercosur and those of the PA are connectedby the trade agreements in the framework of ALADI, some of which precede thefoundation of the PA in 2011, the most recent milestones being the signing of the FTA
between Uruguay and Chile in 2016 and between Argentina and Chile in 2017. As a resultof trade agreement networks, approximately 70% of Mercosur imports from the PA
countries do not pay import duties, either because they are subject to a 0% tariff or
because they enjoy a 100% tariff preference. To this, an additional 4% must be
implemented in the coming years; only 26% of imports are registered as trade not subject
to some form of ALADI preference. For its part, 86% of the imports of the PA countries
originating in Mercosur countries do not pay import duties, to which will be added 7%
that will shortly enjoy tariff preferences. Only 6% of the bilateral trade flows between
both integration entities are not subject to some form of preference (INTAL 2018). As thepreceding indicates, although there is still room for tariff reduction, to boost trade andinvestment between Mercosur and the PA, a more systemic approach involving measureson trade facilitation and infrastructure building is needed.
The negotiations between Mercosur and Mexico involve the two largest Latin
American economies (Brazil and Mexico), which, however, trade very little among
themselves up to now, incommensurate with their respective market size. In fact, fromthe perspective of the Latin American FTAs network, lack of an FTA between Mercosurand Mexico is said to be a major “missing link.” In this sense, an agreement of Mercosurwith Mexico would be an important milestone on the path towards an integrated regional
27

economic space. In addition, this will help Mexico reduce its high trade dependence on
the United States. Similarly, with a successful conclusion of the negotiations between
Mercosur and the EU, a common body of norms and commitments accepted by all
members of Mercosur and the PA would be created, which could be later incorporated,with appropriate adjustments, to a later agreement between both groups.
The most persuasive reason why cooperation between the two integration entities is
not only desirable but also necessary is that the economic size of the PA as “a Free TradeArea” is limited. The value of intra-zonal trade of the PA is only 10% of total intra-LAC
trade. Mercosur’s intra-zonal trade accounts for 27% of the intra-regional trade (Figure4). Furthermore, the PA's intra-zonal trade ratio (value of intra-zonal trade as a percentageof the total trade value of each group) is only 2.9%, far below Mercosur's 14% (Figure 2
in Chapter II of the present paper). As a matter of fact, among the five LAC integration
entities, the intra-zonal trade ratio is the lowest for the PA, a phenomenon heavily
influenced by large trade of Mexico with the United States. Therefore, the size of the PA’s
intra-zonal trade is minimal compared to that of emerging markets such as ASEAN.
To promote RVCs within the region and to connect with GVCs of the Asia-Pacific,
North American, and European origins, it is necessary to create an enlarged and more
consolidated regional market in the LAC region. Between countries of both trade blocks,“market-led” integration is underway: There exist substantial trade and investment flows(ECLAC 2014c, 2018; Durán and Cracau 2016; INTAL 2018). Major intra-regional tradeflows in LAC take place between the PA and the Mercosur with Brazil as their axes: Tradenexus, Brazil-Chile, Brazil-Colombia, Brazil-Peru, as well as Argentina-Chile figure as
the most important trade partners in the LAC region (Figure 5). Now, there is a need tosupport this process by “government-led” (de jure) integration to facilitate LAC’sregional integration.
Figure 4: Intra-LAC trade, by integrationgroups 2016
(Share of each group in LAC intra-regional
total, %)Intra-CARICOM
1%

Rest
28%

Figure 5: Major Trading Partners in Intra-LAC
Trade 2016
(Million U.S. Dollars and %)Intra Pacific
Alliance
10%

Intra-Mercosur27%
MercosurCACM
1%
PA-CACM
6%

Pacific
Alliance Mercosur
22%
Intra CACM
5%

Source: Elaboration by the Author based on UN Comtrade
ASEAN5 includes Indonesia, Malaysia, the Philippines, Thailand, and Vietnam
Source: Elaboration by the Author based on the UNCTAD database and UN Comtrade.

28

Despite its relatively small amount, the commercial exchange between the PA andMercosur has great potential for export diversification and the generation of productive
linkages. The exchange between both groups of countries is characterized by the presenceof relevant flows of “intra-industry” trade, especially in the automotive sector (vehicles
and their parts) and, to a lesser extent, in the pharmaceutical and plastics sectors. On theother hand, the number of products that the members of both groups export to each otheris, in many cases, greater than the number of products destined for their main extraregional markets, such as the United States, the European Union and China (ECLAC
2018). This difference has an important implication for SMEs’ participation in foreign
trade.
The member countries of the PA and Mercosur have recently given clear signals toaccelerate and deepen the convergence process. Some even have expressed interest in
exploring the possibility of initiating negotiations for an FTA between the two groups, instark contrast to a more modest idea of initiating the discussions on convergence. Despite
this greater political support, the negotiation of a "block by block" agreement is unlikely
until other processes of equal importance, in which some members of both groups are
immersed, come to a concretion (ECLAC 2018). This has been the case of the USMCA’s
approval of the negotiations between Mercosur and Mexico and those carried out by
Mercosur with the EU.
Since the tariff rates and trade and investment rules differ greatly between the PA andMercosur, it might be advisable to proceed with those areas of common interests that canbe agreed upon without major difficulties and to seek later the convergence of rules overthe medium to long-term without aiming at creating a “Customs Union.” In order for the
trade and investment rules between both entities to converge, ECLAC (2018) points tofive areas of joint efforts: 1) regulatory cooperation and reduction of technical barriers totrade, 27 2) investment facilitation, 28 3) mutual recognition of National Authorized
Economic Operator (AEO) Programs, 29 4) cooperation towards a regional digital market,
27

To date, regulatory cooperation has been taking place in cosmetic products, organic products, medical devices, foodsupplements, and pharmaceutical products. All these instruments are intended to eliminate unnecessary technicalbarriers to trade in the respective sectors, safeguarding the legitimate policy objectives pursued by the regulator (forexample, the protection of public and consumer health). In this process, there has been an active participation of thebusiness sector of the member countries (ECLAC 2018).
28 The facilitation of investments aims at making formalities and other requirements on foreign investment moretransparent, predictable, and consistent. As of 2015, Brazil has assumed clear regional and global leadership in this area,
which is reflected in its new model of the Cooperation and Investment Facilitation Agreement (ACFI). Brazil has signed
agreements of this type individually with the four members of the PA. In addition, the Intra-Mercosur Investment
Cooperation and Facilitation Protocol, signed in April 2017, is also based on the ACFI model. Finally, in February 2018,
Brazil presented a detailed draft agreement on investment facilitation within the framework of the WTO. The PA andMercosur can work together for an agreement on investment facilitation, which could include provisions such as the
Ombudsman for Foreign Investment, the Electronic Single Window (VUE), and the mechanisms for prevention of
investment disputes. These initiatives would contribute to generating a more attractive environment for FDI, not only
intra-regionally but also from the rest of the world (ECLAC 2018).
29 All the members of the PA and the four original members of Mercosur have created national programs of AEOs.
However, there exist differences in aspects such as the requirements to obtain the AEO certification, the benefits

29

30

and 5) cooperation in the development of statistics on trade in services. 31

IV. Concluding Remarks
In the LAC region, there exists a myriad of FTAs with different coverage and depth,
resulting in a so-called “spaghetti bowl” phenomenon. Trade agreements havetransformed from "shallow" ones focusing on tariff elimination/reduction on goods to"deep" ones including a wide range of negotiation fields such as services, investment,
intellectual property rights, government procurement, competition policy, and dispute
resolution mechanism, among others. Therefore, it is an urgent task for the LAC countries
to standardize and harmonize different trade and investment rules included in many trade
agreements in uniformity with the OR philosophy to promote trade and investment bothwithin and outside the region. The PA can be considered as a major venue for initiatingsuch a harmonization process in the LAC region.
Several options exist to advance the integration process. The creation of a "Common
Market" requires adjustment and harmonization of a supranational nature in many policy
areas involving many regional institutions and organizations. Although it is possible tomove forward in steps toward this objective, it is advisable to adopt a pragmatic andrealistic policy oriented toward the creation of a “Free Trade Area” that can generate thesynergy between the “market-led” and “policy-led” integration modalities, creating anenvironment in which the private sector can actively engage in regional integration.
Priority should be given to building "bridges" between sub-regional integration groups sothat trade rules and disciplines can converge between them with a similar set ofdevelopment-related polices.
As argued in this paper, though LAC’s intra-regional trade shows a relatively highintra-industry trade component, such trade is characterized by exchanges of final products
associated with it, and the duration of the certification, among others. Therefore, to maximize the impact of these
programs on trade and GVCs and RVCs, it is convenient to move towards mechanisms of mutual recognition on the
AEOs (ECLAC 2018).
30 Both the PA and Mercosur are in the process of defining their respective digital agendas. In the PA’s “Innovation
Technical Group”, there is a subgroup on the Digital Agenda (SGAD), created by presidential mandate in July 2016. In
the case of Mercosur, in December 2017, the Common Market Council (CMC) of Mercosur created the Digital Agenda
Group (GAD), an auxiliary body in charge of the Action Plan of "Mercosur Digital Agenda". ECLAC (2018) considers
it opportune for both groups to coordinate their respective efforts to move toward a regional digital market, such as
consumer protection in the digital environment and cybersecurity, among others.
31 International competitiveness in the export of services, especially modern services, depends on the existence of acoherent policy framework in aspects such as taxation, training of human resources, and digital infrastructure, among
many others. Statistical information on trade in services is a basic input for the design and implementation of suchpolicies. However, both the PA and Mercosur present significant shortcomings in this area: Only Brazil, Chile, andColombia publish figures by trade partner in some categories of services with very different levels of disaggregation.
This makes it difficult to formulate sectoral policies, both at the national level and through joint action, as well as thedefinition of precise objectives in trade negotiations on services.

30

rather than parts and components. A larger and more connected regional market will be
conducive to promoting GVCs and RVCs within the region. Therefore, the attractivenessof Latin American regional markets will be enhanced when trade and investment rules
between the PA and Mercosur are to converge. To promote this type of intra-regional trade,tariffs are not an issue; instead, reduction of non-tariff barriers, bureaucratic red-tapes andother administrative transaction costs, customs procedures, and enhancement of
productivity and competitiveness via infrastructure building (hard and soft) should betargeted policy areas.
The PA’s version of OR emphasizes not only liberalization, trade facilitation, andeconomic and technical cooperation as in the conventional concept of the OR, but also
the building of regional capacity to respond to the needs of next-generation trade andinvestment issues, such as the participation in GVCs, SMEs’ participation in value-chains,
quality infrastructure, and social inclusion, among others. The LAC countries haverealized that regional integration helps to enhance the region’s systemic competitivenessand credibility. Mercosur seems to be in the process of revitalizing itself with the OR
philosophy by strengthening its relationship with the PA. To promote GVCs and RVCs, itis necessary to generate synergy effects between the overall development strategy andsectoral policies to achieve that goal. It is essential to have a cross-cutting policy approach
aimed at strengthening international competitiveness. In this respect, regional integration
along the line of OR offers a variety of venues and ways to tackle these systemic issues.
The long history of regional integration in the LAC region shows that it is not a processof a smooth journey and that the nature of regional agreements has gone under manytransformations through trials and errors. The concept of traditional regional integration,
understood as a tool to promote industrialization in regional markets, has been replaced
by a new OR concept in recent years. The signing of FTAs is insufficient to address theissues that arise from structural asymmetry. In that sense, regional integration has a majorrole to play. Taking into consideration that that tariff measures are losing its importanceas a barrier to promoting trade and investment, the OR approach becomes a more relevant
and appealing policy guideline for the government authorities. LAC countries haverealized that they should double their efforts to enter GVCs and strengthen trade relations
with the Asia-Pacific region, but to achieve this goal, a comprehensive strategy beyond
the signing of FTAs is needed. The PA may become a solid base for initiating theconvergence process in trade and investment rules between different integration entities
and for a platform to tackle the structural problems that countries of the region face.

31

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