United States General Accounting Office

GAO Testimony

Before the Subcommittee on Trade, Committee on Ways

and Means, House of Representatives

For Release on Delivery

Expected at

10:00 a.m., EDT

Tuesday,

July 22, 1997

TRADE LIBERALIZATION

Recent Developments in

Western Hemisphere Trade

Arrangements

Statement of JayEtta Z. Hecker, Associate Director,

International Relations and Trade Issues, National

Security and International Affairs Division

GAO/T-NSIAD-97-220

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to talk about various issues regarding

Western Hemisphere trade liberalization. As you know, the United States

is proceeding with discussions leading to a Free Trade Area of the

Americas (FTAA) by the year 2005, a goal established at the Miami Summit

of the Americas in December 1994. My statement will focus on (1) the

principal existing subregional trade arrangements in the Western

Hemisphere, (2) the current status of FTAA discussions, and (3) recent

developments in regional trade liberalization outside the FTAA process and

their possible implications for the United States.

This testimony summarizes our observations in a report to you on these

issues being released today.1

 This work was based on (1) our past and

ongoing work on Western Hemisphere trade issues; (2) a review of

documents on subregional multilateral and bilateral trade arrangements;

(3) reports from the FTAA working groups; (4) analyses of regional trade

developments from academic and technical publications; and

(5) interviews with officials from the Office of the U.S. Trade

Representative (USTR), the Organization of American States (OAS), the U.S.

International Trade Commission, and representatives from five other

Western Hemisphere nations at the forefront of regional trade

negotiations.

Before we discuss the specifics of our presentation, we will give you a

brief overview.

Summary While trade agreements in the Western Hemisphere are not new, they have

recently been revitalized as more countries in the region have committed

to liberalizing their trade regimes. Almost all countries in the region

participate in at least one subregional trade grouping, and many have

concluded numerous bilateral agreements. There are now six major

subregional multilateral trade groupings in the Western Hemisphere.

Among these trade blocs, the two most significant are the North American

Free Trade Agreement (NAFTA) and the Common Market of the South,

known as Mercosur. In addition to these multilateral trade groupings,

there are more than 20 bilateral trade agreements involving countries in

the hemisphere.

1

Trade Liberalization: Western Hemisphere Trade Issues Confronting the United States

(GAO/NSIAD-97-119, July 22, 1997).

Page 1 GAO/T-NSIAD-97-220 Trade Liberalization
The FTAA, which was called for at the 1994 Miami Summit of the Americas,

represents the most ambitious effort in regional trade liberalization to

date. At the Miami Summit, regional leaders agreed to establish a free

trade agreement encompassing the entire Western Hemisphere by the 

year 2005.2

 In the last 2-1/2 years, countries have taken numerous steps to

prepare for formal negotiations. Trade ministers from participating

countries have met three times and have established a number of working

groups to address substantive issues, such as market access, services, and

investment. The United States has been active in all FTAA meetings and

working groups, and chairs the Working Group on Government

Procurement.

Substantial agreement has been reached on several key issues in

preparation for formal FTAA negotiations. For example, countries have

agreed that formal negotiations should be launched by the Western

Hemisphere leaders at their next summit scheduled to take place in

Santiago, Chile, in April 1998, and that an agreement encompassing the

entire hemisphere should be concluded by 2005. Consensus has also been

reached on the right of countries to negotiate independently or, if

members of subregional trade groupings, as a unit. Moreover, countries

agreed to establish a Preparatory Committee at the vice-ministerial level to

complete recommendations on the FTAA negotiations early next year.

Disagreement remains, however, regarding the pace and direction of

negotiations. The United States and most other countries favor immediate

negotiations on all issues beginning in 1998. In contrast, Mercosur

countries would delay negotiations on certain issues, such as market

access, until 2003.

Since the Mexican financial crisis, which surfaced only days after the

Miami Summit, the United States has not actively pursued further trade

liberalization efforts in the hemisphere. At the same time, other countries

have moved forward with a wide range of new free trade initiatives. For

example, Canada and Chile recently concluded a free trade agreement.

Mexico has also negotiated an extensive network of free trade agreements

with countries in the region, including Columbia, Chile, Costa Rica, and

Venezuela. Similarly, the Mercosur countries have concluded free trade

arrangements with Chile and Bolivia, and they are now entering into trade

negotiations with Mexico and the European Union. U.S. exporters’ access

to markets in the region is starting to be adversely affected by these new

trade agreements. Their impact is starting to be felt by U.S. firms in

2

All 34 democratically elected governments in the Western Hemisphere were represented at the Miami

Summit and are involved in the FTAA. Cuba is the only major country in the region that has not

participated in the FTAA process.

Page 2 GAO/T-NSIAD-97-220 Trade Liberalization
various sectors, such as agriculture, telecommunications, and the

pharmaceutical industry. Whether or not the United States participates in

shaping future trade liberalization efforts, representatives of several

countries in the hemisphere generally agree that their countries will

continue to advance their own regional free trade initiatives.

Background As the largest regional market for U.S. products, accounting for

approximately $242 billion, or 40 percent of U.S. exports in 1996, the

Western Hemisphere has assumed growing importance for U.S.

commercial interests. Canada and Mexico are by far the largest U.S. trade

partners in the hemisphere, accounting for approximately two-thirds of

total U.S. exports to the region. The United States is the largest source of

foreign investment in the Western Hemisphere, accounting for about

30 percent of total U.S. foreign direct investment.

By the late 1980s, most Latin American countries instituted

market-oriented economic reforms to stimulate economic growth and

development. Although these reforms were primarily intended to address

domestic economic problems, they also facilitated trade liberalization

efforts. The 1988 U.S.-Canada Free Trade Agreement, which coincided

with Latin America’s opening to international trade, signalled a new

commitment on the part of North American countries to regional trade

liberalization. Currently, almost all countries in the hemisphere are

involved in some form of free trade arrangement in what is becoming an

increasingly complex web of subregional and bilateral trade groupings.

In launching the FTAA discussions, Western Hemisphere leaders sought to

capitalize on the momentum toward regional trade liberalization, bringing

together all countries in the hemisphere under a single and comprehensive

free trade agreement by 2005. The summit declaration committed

participating governments to negotiate the elimination of barriers to trade

in goods and services as well as investment and to provide rules in such

areas as intellectual property rights and government procurement. Since

the summit, trade ministers from participating countries have met three

times—in Denver, Colorado (1995), Cartagena, Colombia (1996), and Belo

Horizonte, Brazil (1997)—and have effectively laid the foundation for

formal FTAA negotiations to begin in 1998.

Western Hemisphere

Trade Arrangements

The six major multilateral trading arrangements among countries of the

Western Hemisphere are NAFTA, Mercosur, the Andean Pact, the Caribbean

Page 3 GAO/T-NSIAD-97-220 Trade Liberalization
Community, the Central American Common Market, and the Latin

American Integration Association. The United States is only a party to

NAFTA. There are also over 20 smaller multilateral and bilateral free trade

accords among countries in the region.

NAFTA NAFTA, the most comprehensive trade arrangement in the region, was

concluded in 1992 by Canada, Mexico, and the United States and became

effective in January 1994. NAFTA created the world’s largest free trade area,

with a combined population of nearly 400 million and a combined gross

domestic product of $8 trillion. NAFTA provides for the gradual elimination

of tariff barriers on most goods over a 10-year period. It covers trade in

services, provides protection for investment and intellectual property

rights, applies rules to government procurement, and contains a dispute

settlement system. A distinct feature of NAFTA is the two side agreements

on labor and the environment.

Mercosur Mercosur was created in March 1991 by Argentina, Brazil, Paraguay, and

Uruguay. Comprising a population of approximately 200 million and with a

combined gross domestic product of about $851 billion, Mercosur is the

world’s third largest integrated multinational market after NAFTA and the

European Union. Mercosur currently functions as a customs union,

providing not only for a free trade area but also for the establishment of a

common external tariff.3

 Mercosur countries are committed to coordinate

macroeconomic policies and to agree on a common foreign trade policy.

Unlike NAFTA, Mercosur lacks agreements on intellectual property rights4

and government procurement.

Other Multilateral

Agreements

Besides NAFTA and Mercosur, which were established in the 1990s, there

are four older subregional multilateral trade groupings in the Western

Hemisphere. Three of these groupings—the Andean Group, the Caribbean

Community, and the Central American Common Market—are customs

unions at varying stages of implementation. They have all recently taken

3

According to a USTR official, the World Trade Organization (WTO)’s Committee on Regional Trade

Agreements is currently reviewing Mercosur to ensure that it conforms with article 24 of the General

Agreement on Tariffs and Trade. Article 24 lays out conditions under which member countries may

form preferential trading arrangements, such as customs unions and free trade areas. This official

noted, however, that without detailed information on Mercosur’s implementation and schedule for

liberalization, it is difficult to fully evaluate the agreement under the criteria set forth by article 24.

4

An August 1995 protocol among Mercosur countries, however, provides limited common terms of

reference on intellectual property rights.

Page 4 GAO/T-NSIAD-97-220 Trade Liberalization
steps to further liberalize trade and promote economic integration. The

fourth subregional trade arrangement, the Latin American Integration

Association, is a network of agreements granting tariff preferences for

certain product categories to member countries.

In addition to the larger trade blocs, there are more than 20 smaller

multilateral and bilateral trade accords among the countries of the

Western Hemisphere. Many of these have been established in this decade.

Status of FTAA

Discussions

At the FTAA meetings of ministers in Denver, Cartagena, and Belo

Horizonte, 12 working groups were established for the purpose of

collecting information to prepare for FTAA negotiations. The areas of

responsibility assigned to the 12 FTAA working groups reflect some of the

priorities of the United States and other countries in the hemisphere. For

example, there are working groups on intellectual property rights and

government procurement, issues of key interest to the United States; on

subsidies, antidumping, and countervailing duties, areas of special concern

to Argentina; and on smaller economies, a priority for Caribbean

countries. The United States chairs the Working Group on Government

Procurement.

The working groups were established to collect basic information on key

issues in preparation for FTAA negotiations. U.S. and OAS officials explained

that the working groups have been the mechanism for accelerating

progress on the priorities of participating countries. Progress in meeting

the information mandates set forth at the ministerials differs for each of

the 12 working groups. The Working Group on Investment, for example, is

particularly advanced, having prepared a comprehensive technical

compendium on investment treaties in the region. According to both U.S.

and OAS officials, the Working Group on Investment has also made

considerable progress, exchanging views on elements that could be

included in a FTAA investment chapter, including investor protection,

national treatment, and dispute settlement. Progress in other working

groups has been more modest. For example, the Working Group on

Market Access reported in February 1997 that many countries had yet to

submit the schedules and statistics required to prepare a hemispheric

database on tariff structures and nontariff measures.

A Tripartite Committee, made up of the OAS, the Inter-American

Development Bank (IDB), and the United Nations Economic Commission

on Latin America and the Caribbean, was formed after the first ministerial

Page 5 GAO/T-NSIAD-97-220 Trade Liberalization
in Denver to provide analytical support to the working groups as

requested. Each organization in the Tripartite Committee is responsible for

providing technical support to the FTAA process through the working

groups. For example, the IDB is collecting trade statistics to assist the

Working Group on Market Access, while the OAS has provided support to

other groups on trade policy issues, such as subsidies and competition

policy. At this time, the Tripartite Committee’s role in support of the FTAA

is anticipated to be transitory. The countries are considering the

possibility of establishing a temporary FTAA secretariat during the

negotiations.

Different Strategies for

Pursuing FTAA

Negotiations

At Belo Horizonte, consensus was reached on several key issues advanced

in these proposals. A joint declaration was issued that called for formal

FTAA negotiations to be launched by the next summit of Western

Hemisphere leaders scheduled to take place in Chile in April 1998. In the

declaration, countries agreed that the FTAA would be consistent with

member countries’ commitments under the WTO. Moreover, countries

agreed that the FTAA would co-exist with rather than supplant existing

subregional trade arrangements, such as NAFTA or Mercosur, to the extent

that rights and obligations under these agreements are not covered or go

beyond rights and obligations under the FTAA. The declaration also

recognized the right of participating countries to negotiate independently

or as members of subregional trade groupings, and the need to establish a

temporary administrative secretariat to support future negotiations.

Finally, the declaration reiterated the commitment of participating

countries to conclude a trade agreement encompassing the entire

hemisphere by 2005 at the latest.

At Belo Horizonte, participating countries also agreed to set up a

Preparatory Committee at the vice-ministerial level that will make

recommendations for FTAA negotiations. The Preparatory Committee is

supposed to meet at least three times between May 1997 and

February 1998, when the next FTAA ministerial is scheduled to take place in

San José, Costa Rica. At San José, trade ministers are committed to reach

agreement on the objectives, approaches, structure, and location of the

FTAA negotiations, based on the recommendations of the Preparatory

Committee.

Still, there is disagreement among participating countries on the pace and

direction of formal negotiations. Most countries, including the United

States, would prefer that formal FTAA negotiations on all issues begin

Page 6 GAO/T-NSIAD-97-220 Trade Liberalization
during the next summit of regional leaders in 1998 and conclude no later

than 2005. The members of Mercosur, however, have proposed that

negotiations proceed in three phases: (1) in 1998 and 1999, countries

would agree on and begin to implement “business facilitation” measures,

such as adopting common customs documents or harmonized plant and

animal health certificates; (2) from the year 2000 to 2002, work would

begin on “standards and disciplines,” including antidumping and

countervailing duty rules, and market access for services; and (3) from

2003 to 2005, other disciplines and market access issues would be

negotiated, including tariff reductions, a key concern of the United States.

Recent Developments

in Regional Trade

Liberalization Outside

the FTAA Process

In launching the FTAA discussions at the Miami Summit, the United States

was building on the momentum for free trade generated by the passage of

NAFTA a year earlier. At that time, NAFTA was generally regarded as a

blueprint for further trade liberalization in the region. This expectation

was also grounded on the anticipated Chilean accession to NAFTA. Only

days after the summit, however, Mexico was hit by a serious financial

crisis, with spillover effects in other Latin American economies. The

commitment by the U.S. government of significant resources to stem and

resolve the crisis raised concerns in the United States about further

regional trade liberalization efforts. In the intervening period, fast track

authority lapsed, and, although U.S. participation in the FTAA preparatory

process continued, the executive branch has been constrained from

pursuing other tariff liberalization negotiations in the region. Formal

negotiations on Chilean accession to NAFTA, for example, were suspended

in 1995.

Other Countries Have

Moved Forward With Their

Own Trade Initiatives

While debate continues in the United States regarding further regional

trade liberalization efforts, other countries in the region have proceeded to

negotiate new trade agreements and deepen their participation in existing

arrangements. Chile has been at the forefront of this trend; it has

negotiated a network of free trade agreements with several countries in

the region, including Colombia and Venezuela. In 1996, Chile concluded a

free trade arrangement with Mercosur, becoming in effect an associate

member of that trade bloc.

Chile’s pursuit of free trade is not limited to South America. The

Canada-Chile Free Trade Agreement, which became effective on July 1 of

this year, is modeled on NAFTA and is intended as a provisional agreement

to facilitate Chilean accession to NAFTA. Nevertheless, there are some

Page 7 GAO/T-NSIAD-97-220 Trade Liberalization
notable differences between this bilateral agreement and NAFTA, reflecting

some of the areas where Chilean and Canadian interests differ from those

of the United States. For example, under their bilateral agreement, Chile

and Canada are committed to forgo imposing antidumping and

countervailing duties within 6 years after the agreement goes into effect.

Mexico has also been extending its own web of bilateral trade agreements

throughout the hemisphere. It has concluded bilateral free trade

agreements with Costa Rica and Bolivia, and has a trilateral arrangement

with Columbia and Venezuela. Mexico is also negotiating free trade

agreements with Ecuador, El Salvador, Guatemala, Honduras, Panama,

and Peru. In addition, it plans to negotiate a transitional agreement with

Mercosur that will cover key areas, such as market access, government

procurement, intellectual property rights, and investment.

Mercosur has also been active in subregional trade initiatives since the

Miami Summit. In addition to its arrangement with Chile, Mercosur has

concluded a free trade agreement with Bolivia and is engaged in

negotiations to widen its reach to other Andean Group countries.

Mercosur has also concluded a framework agreement on trade with the

European Union and is scheduled to begin formal trade negotiations with

Mexico in December 1997.

Mercosur has not only been broadening its network of agreements with

other countries, it has also been deepening the level of economic

integration among the four original member countries. In 1995, Mercosur

countries instituted a common external tariff, which is currently applied to

about 85 percent of imports from outside the bloc. Trade among Mercosur

member countries has almost tripled, from approximately $5 billion in

1991 to $14.5 billion in 1995.

Some U.S. Sectors Feel

Impact of Other

Subregional Trade

Agreements

Lack of U.S. participation in shaping emerging Western Hemisphere trade

agreements has created disadvantages for some U.S. exporters’ access to

these markets.5

 By lowering or eliminating tariffs among participating

countries, subregional free trade agreements that exclude the United

States result in comparatively higher duties for U.S. exports. For example,

5

These examples of select sectors illustrate cases where U.S. export opportunities have been adversely

affected by subregional trade agreements. A broader evaluation of the costs and benefits of increased

trade and specific trade agreements requires a consideration of both U.S. export and import-competing

sectors. While trade liberalization has historically created net benefits to the aggregate economy

through improvements in efficiency, it creates costs that fall more directly on certain sectors of the

economy and labor force.

Page 8 GAO/T-NSIAD-97-220 Trade Liberalization
Chile’s network of bilateral trade agreements has given Chilean

agricultural products an edge over U.S. exports in South America. Thus,

while Chilean apples enter many South American markets duty free,

Washington State apples face 10 to 25 percent tariffs. In recent years,

Washington growers have seen their share of these markets dwindle as

Chile capitalizes on its tariff preferences.

Like Chile’s arrangements with other South American countries, the

Canada-Chile agreement has already yielded benefits for Canadian firms

not enjoyed by U.S. companies. Recently, Canada’s Northern Telecom won

a nearly $200-million telecommunications equipment contract in Chile.

According to the State Department, the choice of Northern Telecom over

U.S. companies was at least in part due to the fact that buying from a U.S.

producer would have meant an additional $20 million cost in duties

relative to purchasing from Canada.

While U.S. exports to Mercosur countries have been growing, U.S.

exporters will likely face increasing difficulties in penetrating markets in

Mercosur countries as commitment to common bloc trade policies

deepens. For example, a USTR official noted that Mercosur is currently

considering adopting product safety standards that are quite different from

U.S. standards. This official explained that if these standards are adopted,

U.S. auto manufacturers could be at a disadvantage in accessing the

growing markets of Mercosur member countries.

Mercosur’s position on the recent WTO Information Technology Agreement

also provides an indication of how the bloc’s common foreign trade policy

will complicate U.S. efforts to promote its economic interests in the

region. The Information Technology Agreement, which was signed by 28

WTO members in Singapore in December 1996, provides important tariff

concessions in an industry where the United States enjoys a considerable

competitive advantage. Brazil did not join in the Information Technology

Agreement, seeking to protect its own emerging information technologies

industry. Brazil’s position on the agreement has now been adopted as an

element of Mercosur’s common external trade policy, while other partners

like Argentina, if acting individually, might have taken a different position.

The difficulties faced by the U.S. pharmaceutical industry in the Argentine

market also illustrate some of the drawbacks encountered by U.S. firms as

countries in the region drift away from the long-standing U.S. concern

regarding intellectual property protection. In a recent statement before the

Page 9 GAO/T-NSIAD-97-220 Trade Liberalization
Trade Subcommittee of the House Ways and Means Committee,6

 the

President of the Pharmaceutical Research and Manufacturers of America

estimated that annual losses by member companies due to patent

infringement in Argentina amount to several hundred million dollars. This

official noted that NAFTA has the strongest safeguards for intellectual

property rights of any trade agreement. He concluded that if Argentina had

been brought into NAFTA, that government would have had to seek to

curtail patent infringement more decisively than it does now. It is worth

noting that Argentina’s former Finance Minister favored joining NAFTA

rather than integrating further within Mercosur. However, after NAFTA

negotiations with Chile were suspended, it became clear that prospects for

Argentine accession to NAFTA were rather distant, and Argentina

proceeded to cement its position within Mercosur.

Regional Trade

Liberalization Likely to

Continue Regardless of

U.S. Participation

Other Western Hemisphere leaders have indicated their countries will

continue their initiatives toward free trade and economic integration. For

example, a Chilean trade official told us that, like the United States, Chile

would like to see the widest and most comprehensive agreement possible

on free trade for the Western Hemisphere. However, this official noted

that whether through NAFTA or the FTAA, with or without the United States,

Chile intends to continue to pursue trade liberalization because it is seen

as furthering Chile’s own interests. Chile still wants to join NAFTA, but

NAFTA is now less critical to Chile than it was in 1995.

Like Chile, Canadian interests in regional trade liberalization generally

coincide with those of the United States. However, the recent

Canada-Chile free trade agreement demonstrates that Canada is pursuing

its commercial interests in the region. According to a Canadian

government spokesman on trade policy, Canada’s free trade agreement

with Chile was not only meant to expedite Chilean accession to NAFTA, but

it was also intended to keep alive the momentum for free trade in

anticipation of FTAA negotiations. Canada would like to see decisive U.S.

participation in FTAA negotiations because the two countries share many

interests with regard to trade.

Mexico’s interests in regional trade liberalization parallel those of Chile

and Canada. According to Mexican government trade officials, all of

Mexico’s agreements and negotiations with other countries in the

hemisphere have sought to encourage the adoption of trade disciplines

consistent with NAFTA. These officials explained that Mexico has actively

6

March 18, 1997.

Page 10 GAO/T-NSIAD-97-220 Trade Liberalization
supported Chilean accession to NAFTA and the concept of a free trade

agreement that would encompass the entire hemisphere. Moreover, they

noted that Mexico is committed to the principles of free trade and will

continue to pursue free trade arrangements with other countries in the

hemisphere and other regions.

In contrast to our NAFTA partners and Chile, the Mercosur countries’ vision

of the FTAA differs significantly from that of the United States. As the

largest member of Mercosur, Brazil has sought to shape the FTAA process

to make it consistent with its distinct trade priorities. Since the FTAA would

entail broadening Brazil’s ongoing market-opening efforts, Brazil favors a

slower managed approach to hemispheric trade liberalization. Thus, Brazil

has proposed that FTAA negotiations on market access be deferred until

2003, while the United States would like to see this matter addressed as

soon as negotiations begin in 1998. A Brazilian government spokesman

noted that, at a minimum, FTAA negotiations in 1998 could include items

such as common customs documents, which would not require legislative

approval. However, if that is the extent of the negotiations, discussions on

market access would be deferred, as favored by Mercosur.

In conclusion, it appears that trade liberalization among countries in the

Western Hemisphere will continue in the near future regardless of U.S.

involvement. U.S. exporters’ access to markets in the region is already

being adversely affected by these new trade agreements. U.S. involvement

in shaping the FTAA and other regional trade arrangements is likely to play

a key role in determining how U.S. exporters will fare in Western

Hemisphere markets in the future.

Mr. Chairman and Members of the Subcommittee, this concludes my

prepared statement. We will be glad to answer any questions you may

have.

(711292) Page 11 GAO/T-NSIAD-97-220 Trade Liberalization
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100