United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Trade, Committee on Ways and

Means, House of Representatives

July 1997 TRADE

LIBERALIZATION

Western Hemisphere

Trade Issues

Confronting the United

States

GAO/NSIAD-97-119

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-277248 

July 21, 1997

The Honorable Philip M. Crane

Chairman, Subcommittee on Trade

Committee on Ways and Means

House of Representatives

Dear Mr. Chairman:

As you requested, we are providing information on efforts to liberalize

trade among the countries of the Western Hemisphere. The United States

and other Western Hemisphere countries have been moving forward in

various ways to liberalize trade. Almost all countries in the hemisphere,

including the United States, are proceeding with discussions aimed at

creating a Free Trade Area of the Americas (FTAA) while at the same time

various subregional agreements and arrangements have been formed.

Specifically, this report (1) describes the principal existing subregional

trade arrangements in the Western Hemisphere; (2) outlines the current

status of FTAA discussions; and (3) identifies certain recent developments

in regional trade liberalization outside the FTAA process since “fast track”

authority1

 lapsed in December 1994, and possible implications of these

developments for the United States. Executive branch officials have

indicated that the President will seek fast track authority this fall, but the

administration has not yet submitted a fast track legislative proposal.

Background The U.S. economy has become increasingly oriented toward international

trade, with exports and imports together representing about one-quarter of

U.S. gross domestic product (GDP) in 1996. 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 is of growing importance

to 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 of goods to the region. Countries in the

Western Hemisphere also constitute about 30 percent of total U.S. foreign

direct investment.

1

In the past, the Congress has enacted fast track authority to implement trade agreements with other

countries. Fast track authority provides for a congressional vote within a limited period of time to

accept or reject the implementing legislation for a negotiated agreement without making any changes

to it.

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During the 1960s and 1970s, most countries in Latin America and the

Caribbean experimented with various arrangements to promote

subregional economic integration and free trade. These initiatives were

generally frustrated by trade and investment restrictions characteristic of

these countries’ protective economic development strategies. By the late

1980s, faced with stagnant economies and mounting external debt,

countries in the region began to move away from these restrictive policies

and initiated market-oriented reforms to stimulate economic growth.

Although these reforms were primarily intended to address domestic

economic problems, they also facilitated trade liberalization efforts.

Moreover, the U.S.-Canada Free Trade Agreement in 1988 signaled a new

commitment on the part of North American countries to regional trade

liberalization. By the early 1990s, almost all countries in the hemisphere

were engaged in multilateral or bilateral efforts to liberalize trade. After a

decade of economic decline, Latin American economies have rebounded

in the 1990s, and the region now represents the second fastest growing

area in the world after Southeast Asia.

The 1994 Miami Summit of the Americas gave new impetus to trade

liberalization efforts in the region. At Miami, the 34 democratically elected

leaders of countries in the Western Hemisphere agreed to conclude a free

trade agreement no later than 2005, with concrete progress by the turn of

the century.2

 The summit declaration committed participating

governments to negotiate, among other things, 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.

The plan of action adopted at Miami called for two meetings of trade

ministers (“ministerials”) to reach agreement on the key principles upon

which to base the FTAA. These two ministerials, held in Denver, Colorado

(1995), and Cartagena, Colombia (1996), established a series of working

groups to gather data and make recommendations to the ministers in

preparation for FTAA negotiations. A third ministerial took place in Belo

Horizonte, Brazil, earlier this year.

Results in Brief Almost all countries in the region participate in at least one subregional

trade grouping. There are now six major subregional multilateral trade

groupings among countries in the hemisphere. The two most significant

trade blocs, the North American Free Trade Agreement (NAFTA) and the

Common Market of the South, known as Mercosur, were both established

2

Since the Miami Summit was limited to democratically elected governments in the Western

Hemisphere, Cuba was the only country in the region that did not participate.

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during the 1990s. NAFTA, the only one of these arrangements to which the

United States is a party, created the world’s largest free trade area and is

the most comprehensive trade agreement in the region. Mercosur has

followed a different approach than NAFTA to economic integration through

the creation of a customs union.3

 In addition to the major multilateral

trade groupings, there are more than 20 smaller trade agreements in the

region; most of these have been concluded during the 1990s.

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

and Inter-American Development Bank (IDB) officials note that the FTAA

working groups have made significant progress to support the launching

of formal negotiations. According to these observers, progress in the FTAA

process thus far exceeds what had been achieved during the first 

2 to 3 years of the Uruguay Round negotiations that led to the

establishment of the World Trade Organization (WTO).4

 Substantial

agreement has been reached on several key issues. For example, at the

latest ministerial meeting in Belo Horizonte in May 1997, participating

countries agreed on the right to negotiate independently or, if members of

subregional trade groupings, as a unit. They also agreed on the

establishment of a Preparatory Committee at the vice ministerial level to

complete recommendations on the FTAA negotiations. At Belo Horizonte,

the ministers further agreed to recommend that formal FTAA negotiations

be launched by the Western Hemisphere leaders at their next summit

scheduled to take place in Santiago, Chile, in April 1998, and reiterated the

commitment to conclude a trade agreement encompassing the entire

hemisphere by 2005. Disagreement remains, however, regarding the pace

and direction of negotiations. The United States and most other countries

favor immediate negotiations on all issues. In contrast, Mercosur proposes

that negotiations on certain issues such as market access, which is a

priority for the United States, be delayed until 2003.

Following the Miami Summit, the 1995 Mexican financial crisis raised

concerns in the United States about pursuing further regional trade

liberalization efforts. In the meantime, other countries have moved

forward with their own trade liberalization efforts. For example, Canada

3

A free trade agreement, such as NAFTA, entails, among other things, the elimination of tariffs among

member countries. A customs union calls for not only the elimination of tariffs, but also the

establishment of a common external tariff; that is, a common tariff applied to imports from third

countries.

4

All countries involved in the FTAA process, except the Bahamas, are members of WTO. WTO,

established by the 1994 Uruguay Round agreements of the General Agreement on Tariffs and Trade

(GATT), is a multinational organization that serves as a forum for international trade negotiations and

oversees the administration of the Uruguay Round agreements. GATT, created in 1947, is the primary

multilateral agreement governing international trade in goods.

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and Chile recently reached a free trade agreement. Also, Mercosur has

strengthened its position, concluding free trade arrangements with Chile

and Bolivia, and is beginning trade negotiations with Mexico and the

European Union (EU). These agreements have created disadvantages for

some U.S. exporters’ access to markets in the region. For example, the

agreement between Chile and Canada grants tariff preferences to

Canadian exporters that are not available to their U.S. counterparts. In

fact, U.S. companies recently lost a bid for a telecommunications

equipment contract in Chile to a Canadian competitor due in part to the

tariff differential. Similarly, Mercosur is in the process of adopting product

safety standards that may impair U.S. firms’ access to markets in member

countries. Representatives of several countries in the region generally

agree that their countries will continue to advance their own regional free

trade initiatives regardless of whether the United States participates in

further regional trade liberalization. A complete understanding of the

impact of these initiatives on the United States requires a consideration of

their impact on U.S. import-competing as well as export sectors.

Western Hemisphere

Trade Arrangements

The six major multilateral trading arrangements5 among countries of the

Western Hemisphere are NAFTA, Mercosur, the Andean Community, the

Caribbean Community, the Central American Common Market, and the

Latin American Integration Association (LAIA). (See figs. 1 and 2.) The

United States is a party only to NAFTA. There are also over 20 smaller

multilateral and bilateral free trade accords among countries in the region.

5

The appendix provides a general profile of each of the major Western Hemisphere trade

arrangements, including membership, population, and GDP figures.

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Figure 1: Members of NAFTA, Mercosur, the Andean Community, and LAIA

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Figure 2: Members of the Caribbean Community and the Central American Common Market

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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,

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

almost $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, designed to institutionalize efforts to (1) improve

working conditions and living standards in each country and (2) address

and resolve environmental issues that may arise between the parties.

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

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

combined GDP of about $851 billion, Mercosur is the world’s third largest

integrated multinational market, after NAFTA and the EU. 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.6

 The

external tariff instituted in 1995 is not to exceed 20 percent for most

imports. Today, approximately 85 percent of imports from outside the bloc

enter under the common external tariff, and about 90 percent of all

intra-Mercosur trade is duty free. Mercosur includes a commitment by

member countries to coordinate more disciplined macroeconomic

policies. Also, Mercosur countries are committed to agree on a common

foreign trade policy. Unlike NAFTA, Mercosur lacks agreements on

intellectual property rights7

 and government procurement. Further, while

Mercosur calls for coordination on trade in services, the U.S. International

Trade Commission reports that there is no fixed schedule for liberalization

in this area.

Other Major Multilateral

Agreements

Besides NAFTA and Mercosur, there are four older subregional multilateral

trade groupings in the Western Hemisphere. Three of these groupings—the

Andean Community, the Caribbean Community, and the Central American

Common Market—are customs unions at varying stages of

implementation. They have all recently taken steps to further liberalize

6

According to a USTR official, the WTO’s Committee on Regional Trade Agreements is currently

reviewing Mercosur to ensure that it conforms with article 24 of the GATT. 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.

7

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

reference on intellectual property rights.

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trade and promote economic integration. The fourth subregional trade

arrangement, LAIA, is a network of agreements granting tariff preferences

for certain product categories to member countries.

Smaller Trade

Arrangements Involving

NAFTA Partners

In addition to the larger trade blocs previously discussed, there are more

than 20 smaller multilateral and bilateral trade accords among the

countries of the Western Hemisphere. Many of these were established

during the 1990s. Five of these arrangements involve our NAFTA partners

Canada and Mexico.

• Mexico-Chile Free Trade Accord (1992). This agreement calls for a phased

tariff elimination between the parties. It excludes many product categories

such as agricultural commodities. Mexico and Chile are currently in the

process of renegotiating their 1992 agreement in an effort to broaden its

scope.

• Mexico-Costa Rica Free Trade Agreement (1995). This agreement is

generally modeled on NAFTA but excludes many agriculture and energy

products.

• Mexico-Bolivia Free Trade Agreement (1995). This is similar to the

Mexican agreement with Costa Rica.

• Group of Three Agreement—Mexico, Colombia, and Venezuela (1995). The

Group of Three Agreement calls for the total elimination of tariffs over a

10-year period with some exceptions in the textile, petrochemical, and

agricultural sectors. In addition, the arrangement includes agreements on

services, intellectual property rights, government procurement, and

investment.

• Canada-Chile Free Trade Agreement (1996). The Canada-Chile Free Trade

Agreement provides for tariff elimination and contains side agreements on

labor and the environment. However, it excludes, among other items,

financial services and intellectual property rights.

Status of FTAA

Discussions

At the FTAA ministerial meetings in Denver, Cartagena, and Belo Horizonte,

12 working groups were established for the purpose of collecting

information in preparation for FTAA negotiations.8

 At Belo Horizonte, trade

ministers issued a declaration calling for formal FTAA negotiations to be

8

The FTAA working groups formed in Denver were (1) Market Access; (2) Customs Procedures and

Rules of Origin; (3) Investment; (4) Standards and Technical Barriers to Trade; (5) Sanitary and

Phyto-sanitary Measures; (6) Subsidies, Antidumping, and Countervailing Duties; and (7) Smaller

Economies. The following groups were formed at the second ministerial in Cartagena: (8) Government

Procurement, (9) Intellectual Property Rights, (10) Services, and (11) Competition Policy. At Belo

Horizonte a group was established to deal with (12) Dispute Settlement.

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launched by Western Hemisphere leaders at their next summit in

April 1998. While the ministers agreed on several other key issues, there is

still disagreement among participating countries on the approach formal

negotiations should follow.

FTAA Working Groups 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 (see table 1). 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. According to

administration officials, there are also some issues of particular U.S.

interest, such as labor and the environment,9

 that are not fully addressed

by any of the existing working groups. USTR officials noted that the United

States has participated in all of the meetings and other activities of each

working group.

9

The original Miami Summit declaration included commitments to convene specific high-level

meetings to address, among others, topics such as labor and sustainable development—that is, the

environment.

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Table 1: FTAA Working Groups

Working group

Country

chair

Meetings

held to

date Work completed

Market Access El Salvador 5 A comprehensive data base on market access barriers

in the Western Hemisphere has not yet been fully

completed

Customs Procedures & Rules of Origin Bolivia 7 A “Guide to Customs Procedures in the Western

Hemisphere” is in draft form

Investment Costa Rica 7 Published two inventories: (1) “Investment Agreements

in the Western Hemisphere” and (2) “Investment

Regimes in the Americas: A Compendium”

Standards & Technical Barriers to Trade

(SPS)

Canada 6 Published an inventory detailing national practices on

standards, technical regulations, and conformity

assessment in the Western Hemisphere

Sanitary & Phytosanitary Measures Mexico 4 A mandated inventory of all SPS agreements in the

Western Hemisphere and other technical work is

progressing but not yet complete

Subsidies, Antidumping & Countervailing

Duties

Argentina 6 Published the inventory titled “A Compendium of

Antidumping and Countervailing Duty Laws in the

Western Hemisphere”

Smaller Economies Jamaica 6 Received paper presentations from the Tripartite

Committeea and the World Bank on topics of importance

to smaller economies

Government Procurement United States 4 Published an inventory titled “Government Procurement

Rules in Integration Arrangements in the Americas”

Intellectual Property Rights (IPR) Honduras 3 An inventory is in draft form on all conventions and

agreements on IPR to which Western Hemisphere

countries are a party, as well as the main IPR provisions

of these trade arrangements

Services Chile 3 Published the report “Provisions on Trade in Services in

Trade and Integration Agreements in the Western

Hemisphere”

Competition Policy Peru 3 Group meetings have encouraged networking and

better understanding of competition policy

Dispute Settlement Uruguay 0 First meeting scheduled for Montevideo (July 1997).

OAS has prepared a draft compendium on regional

dispute settlement mechanisms

aSee following section for an explanation of the Tripartite Committee.

Sources: GAO and OAS.

The working groups were established to collect basic information on key

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

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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.10 For example, the Working Group on Investment

is particularly advanced, having prepared a comprehensive technical

compendium on investment treaties in the region. This compendium was

published at the Belo Horizonte ministerial in May 1997. 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 data base on tariff structures and nontariff

measures. Moreover, the Working Group on Dispute Settlement, which

was only established in May 1997, has not yet met.

A Tripartite Committee, made up of the OAS, the IDB, and the United

Nations Economic Commission on Latin America and the Caribbean, was

formed after the first ministerial 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. At the Belo Horizonte meeting, ministers directed

the Tripartite Committee to conduct a feasibility study based on the

agreed functions of a temporary secretariat. This study is to be reported to

the vice ministers at their meeting scheduled to take place in

October 1997.

Different Strategies for

Pursuing FTAA

Negotiations

In preparation for the ministerial meeting in Belo Horizonte, various

countries and subregional blocs involved in the FTAA process submitted

proposals for the overall strategy they would like to see pursued in formal

10Generally, each working group was instructed to compile a basic inventory of data and identify

possible approaches to negotiations for its area of responsibility. However, there is disagreement

among countries involved in the FTAA process on whether working groups have been empowered to

make recommendations on the content of the FTAA in their subject areas.

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FTAA negotiations. At the ministerial, consensus was reached on several

key issues advanced in these proposals. A joint declaration issued at Belo

Horizonte 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 and the

FTAA. Moreover, countries agreed that the FTAA would coexist 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,11 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 the Belo Horizonte ministerial, participating countries also agreed to set

up a Preparatory Committee at the vice ministerial level that will make

recommendations for FTAA negotiations. The establishment of a

Preparatory Committee signals a new level in the FTAA process. It indicates

participating countries expect concrete results in preparing for

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 the San

José ministerial, 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 commence

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

11According to USTR, it appears at this time that most countries will negotiate individually, although

Mercosur may negotiate as a bloc.

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

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

No other countries appear to support Mercosur’s phased approach to

negotiations.

Recent Developments

in Regional Trade

Liberalization Outside

the FTAA Process

Adverse economic developments in Mexico in the months immediately

following the 1994 Miami Summit raised U.S. concerns about pursuing

further free trade initiatives in the region. While U.S. officials were

debating the future course of U.S. involvement in regional trade efforts,

other countries in the hemisphere began pursuing their own agenda, both

deepening commitments under existing trade blocs and establishing new

bilateral agreements. In principle, these efforts may be consistent with

U.S. goals to promote free trade. In practical terms, lack of U.S.

participation in shaping these agreements has created disadvantages for

some U.S. exporters’ access to markets in the region. These disadvantages

are beginning to be felt in various sectors, including agriculture,

telecommunications, pharmaceuticals, and the automotive industry.

According to representatives of several Western Hemisphere countries,

regardless of whether the United States resumes a more active role in

shaping regional trade liberalization efforts, their countries will continue

their own initiatives toward free trade and economic integration, even if

these efforts do not coincide with U.S. interests. Moreover, these officials

noted that it is essential for the U.S. administration to obtain fast track

authority in order to make meaningful progress toward achieving the FTAA.

U.S. Reconsiders Further

Regional Trade

Liberalization

In launching the FTAA at the Miami Summit, the United States was building

on the momentum for free trade generated by the passage of NAFTA a year

earlier. NAFTA was more comprehensive than any other agreement in the

Western Hemisphere. It not only covered traditional tariff and nontariff

issues but also placed important obligations on member countries in

matters such as investment, government procurement practices, customs

procedures, and trade in services. At the time, NAFTA was generally

regarded as a blueprint for further trade liberalization in the region.

Moreover, U.S. leadership was evident in its support of negotiations on

Chile’s 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. Although U.S. participation

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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 Venezuela and Colombia. In 1996, Chile also

concluded a free trade arrangement with Mercosur, becoming in effect an

associate member of that trade bloc. Under this arrangement, Chile and

the Mercosur countries will phase out tariffs on products traded among

them, but Chile will not adopt Mercosur’s common external tariff.

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

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

1997, is modeled on NAFTA and is intended as a provisional agreement to

facilitate Chilean accession to NAFTA. Nevertheless, as noted earlier, there

are some differences between this bilateral agreement and NAFTA,

reflecting some of the areas where Chilean and Canadian interests differ

significantly 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. NAFTA, on the other hand, does not affect member

countries’ ability to unilaterally impose antidumping measures and

countervailing duties. In addition to its trade negotiations with Canada,

Chile has cultivated close commercial relations with Mexico, our other

NAFTA partner. Currently, Chile and Mexico are renegotiating their 1992

free trade agreement to make it more compatible with NAFTA.

Mexico, in turn, has been extending its own web of bilateral trade

agreements throughout the hemisphere. As noted earlier, Mexico has

concluded bilateral free trade agreements with Costa Rica and Bolivia and

has a trilateral arrangement with Colombia and Venezuela. Mexico is also

negotiating free trade agreements with Ecuador, El Salvador, Guatemala,

Honduras, Panama, and Peru. In addition, Mexico plans to negotiate a

transitional agreement with Mercosur that will cover key areas, such as

market access, government procurement, intellectual property rights, and

investment.

Page 14 GAO/NSIAD-97-119 Trade Liberalization
B-277248 

Mercosur has been another focus of subregional trade initiatives since the

Miami Summit. In addition to the 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 and Mexico are also scheduled to begin trade negotiations later

this year. Beyond the Western Hemisphere, Mercosur has concluded a

framework agreement on trade with the EU and there are discussions

aimed at establishing a free trade area encompassing the two trade blocs

(see fig. 3).

Page 15 GAO/NSIAD-97-119 Trade Liberalization
B-277248 

Figure 3: Countries Engaged in Trade Negotiations With Mercosur

Countries with Free Trade Agreements 

with Mercosur

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Source: GAO and Governments of Brazil and Mexico.

Page 16 GAO/NSIAD-97-119 Trade Liberalization
B-277248 

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. As noted earlier, in

1995 Mercosur countries instituted the 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—the last year for

which figures were available.

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.12 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,

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,

12These 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 17 GAO/NSIAD-97-119 Trade Liberalization
B-277248 

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 in which 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

Trade Subcommittee of the House Ways and Means Committee,13 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. He

noted that NAFTA has the strongest safeguards for intellectual property

rights of any trade agreement, and 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

Western Hemisphere leaders have indicated their countries will continue

their own initiatives toward free trade and economic integration. For

example, in statements during his recent visit to the United States, the

President of Chile said that his country shares the U.S. interest in

promoting free trade. Elaborating on his President’s remarks, a Chilean

government spokesman on trade issues explained that, like the United

13March 18, 1997.

Page 18 GAO/NSIAD-97-119 Trade Liberalization
B-277248 

States, Chile would like to see the widest and most comprehensive

agreement possible on free trade for the Western Hemisphere. According

to this official, 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. Indeed, the Canadian Minister of

International Trade recently indicated that his government is considering

negotiating a trade agreement with Mercosur. 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. This official explained that it would be

unfortunate if the United States lacked fast track authority by the time of

the 1998 Santiago Summit, as it would be at a distinct disadvantage in

shaping the FTAA.

It would appear that Mexico’s interests in regional trade liberalization

parallel those of Chile and Canada. However, some observers suggest that

Mexico may be reluctant to surrender the current advantage it enjoys in

terms of access to North American markets. Nevertheless, 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 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 the 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. This would

Page 19 GAO/NSIAD-97-119 Trade Liberalization
B-277248 

give its industries more time to adjust to foreign competition.14 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 if U.S. negotiators lack fast track authority in 1998, FTAA

negotiations would still be able to reach agreement on business facilitation

measures. These include items such as common customs documents,

which would not require legislative approval. In this case, discussions on

market access would be deferred, as favored by Mercosur in general and

by Brazil in particular.

Scope and

Methodology

In preparing this report, we relied on our past and ongoing work on

Western Hemisphere trade issues.15 Our description of existing

subregional and bilateral trade arrangements is based primarily on a

review of documents on these arrangements from academic and technical

publications. For our discussion on the status of FTAA negotiations and

recent trade developments in the region outside the FTAA process, we

interviewed officials from the OAS, IDB, USTR, the U.S. International Trade

Commission, and the U.S. Department of State; representatives from five

other Western Hemisphere nations at the forefront of regional trade

negotiations; and academicians and other experts on the process of

regional economic integration.

We also reviewed documents on the FTAA prepared by the OAS Trade Unit

and the FTAA working groups; declarations and supporting documentation

from the Miami Summit and the three FTAA ministerial meetings that have

taken place thus far; and reports from USTR, the U.S. Department of

Commerce, the U.S. International Trade Commission and the

Congressional Research Service. In addition, we attended several

conferences and congressional hearings dealing with various aspects of

the FTAA process.

In order to provide some indication of the relative size of markets in the

region, we prepared tables on the principal Western Hemisphere trade

groupings presented in the appendix. These tables are based on data for

individual countries in the region from the International Monetary Fund’s

Publications International Financial Statistics and Direction of Trade

14Beginning in the 1990s, Brazil initiated a unilateral process of opening its markets to foreign

competition. Subsequently, it has opened its markets further within the context of Mercosur. This

process has put great pressure on Brazilian domestic producers, and the country has amassed sizable

trade deficits in recent years.

15See the list of GAO reports related to this subject at the end of this report.

Page 20 GAO/NSIAD-97-119 Trade Liberalization
B-277248 

Statistics. We used 1994 figures for these tables because that is the latest

year for which information was available for most countries in the region.

For certain countries we used 1993 data, when 1994 data were not

available.

We conducted our review from February to June 1997 in accordance with

generally accepted government auditing standards.

Agency Comments USTR provided technical comments on a draft of this report, and we have

incorporated them in the text where appropriate. USTR did not provide any

evaluation of the overall thrust of the report.

We are sending copies of this report to USTR, the Secretaries of Commerce

and State, and interested congressional committees. We will make copies

available to others on request.

Please call me at (202) 512-8984 if you have any questions concerning this

report. Major contributors to this report were Elizabeth Sirois, Assistant

Director; Juan Gobel, Evaluator-in-Charge; Emil Friberg, Senior

Economist; and Patricia Cazares, Evaluator.

Sincerely yours,

JayEtta Z. Hecker, Associate Director

International Relations and Trade Issues

Page 21 GAO/NSIAD-97-119 Trade Liberalization
Contents

Letter 1

Appendix I 

Principal Economic

Indicators by Trading

Bloc, 1994

24

Andean Community 24

Caribbean Community 24

Central American Common Market 25

Common Market of the South (Mercosur) 25

Latin American Integration Association 25

North American Free Trade Agreement 26

Related GAO Products 28

Table Table 1: FTAA Working Groups 10

Figures Figure 1: Members of NAFTA, Mercosur, the Andean Community,

and LAIA

5

Figure 2: Members of the Caribbean Community and the Central

American Common Market

6

Figure 3: Countries Engaged in Trade Negotiations With

Mercosur

16

Abbreviations

EU European Union

FTAA Free Trade Area of Americas

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

IDB Inter-American Development Bank

IMF International Monetary Fund’s

IPR intellectual property rights

LAIA Latin American Integration Association

NAFTA North Atlantic Free Trade Agreement

OAS Organization of American States

USTR United States Trade Representative

WTO World Trade Organization

Page 22 GAO/NSIAD-97-119 Trade Liberalization
Page 23 GAO/NSIAD-97-119 Trade Liberalization
Appendix I 

Principal Economic Indicators by Trading

Bloc, 1994

Currently, there are six major multilateral trading blocs in the Western

Hemisphere. Following is a general profile of each of these blocs,

including information on membership, gross domestic product (GDP), per

capita gross domestic product, and the bloc’s total exports, using data

from 1994, except as noted.

Andean Community Established in 1969 (formerly Andean Pact or Andean Group).

Members: Bolivia, Colombia, Ecuador, Peru, Venezuela

Population: 75 million1

Combined GDP: $149 billion

Per capita GDP: $1,987

Total imports: $26 billion

Imports from the United States: $10 billion

Total exports: $31 billion

Exports to the United States: $14 billion

Caribbean Community Established in 1973 as successor to the Caribbean Free Trade Association

(CARIFTA, established in 1967).

Members: Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica,

Grenada, Guyana, Jamaica, Montserrat,2

 St. Kitts & Nevis, St. Lucia, St.

Vincent & the Grenadines, Suriname, Trinidad & Tobago

Population: 6 million3

Combined GDP: $20 billion4

Per capita GDP: $3,237

Total imports: $9 billion

Imports from the United States: $3 billion

Total exports: $6 billion

Exports to the United States: $2 billion

1

Calculated using 1993 population data for Bolivia.

2

No data were available for Montserrat.

3

Calculated using 1993 population data for Antigua & Barbuda and Suriname.

4

GDP data were not available for the Bahamas and St. Vincent & the Grenadines.

Page 24 GAO/NSIAD-97-119 Trade Liberalization
Appendix I 

Principal Economic Indicators by Trading

Bloc, 1994

Central American

Common Market

Established in 1961.

Members: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

Population: 29 million

Combined GDP: $34 billion

Per capita GDP: $1,174

Total imports: $11 billion

Imports from the United States: $5 billion

Total exports: $7 billion

Exports to the United States: $3 billion

Common Market of

the South (Mercosur)

Established in 1991.

Members: Argentina, Brazil, Paraguay, Uruguay

Population: 196 million

Combined GDP: $852 billion

Per capita GDP: $4,346

Total imports: $61 billion

Imports from the United States: $12 billion

Total exports: $63 billion

Exports to the United States:$11 billion

Latin American

Integration

Association

Established in 1980 as a successor to the Latin American Free Trade

Association (LAFTA, established in 1960).

Members: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico,

Paraguay, Peru, Uruguay, Venezuela

Population: 401 million5

Combined GDP: $1.5 trillion

Per capita GDP: $3,801

Total imports: $183 billion

Imports from the United States: $83 billion

Total exports: $171 billion

Exports to the United States: $79 billion

5

Calculated using 1993 population data for Bolivia.

Page 25 GAO/NSIAD-97-119 Trade Liberalization
Appendix I 

Principal Economic Indicators by Trading

Bloc, 1994

North American Free

Trade Agreement

Established in 1994.

Members: Canada, Mexico, United States

Population: 383 million

Combined GDP: $7.9 trillion

Per capita GDP: $20,643

Total imports: $920 billion

Canadian & Mexican imports from the United States: $157 billion

Total exports: $735 billion

Canadian & Mexican exports to the United States: $185 billion

Sources: International Monetary Fund (IMF) International Financial Statistics, March 1997, for

population, GDP, and per capita GDP data; IMF Direction of Trade Statistics, April 1997, for

import and export data.

Page 26 GAO/NSIAD-97-119 Trade Liberalization
Page 27 GAO/NSIAD-97-119 Trade Liberalization
Related GAO Products

Budget Issues: Privatization Practices in Argentina (GAO/AIMD-96-55; Mar. 19,

1996).

Mexico’s Financial Crisis: Origins, Awareness, Assistance, and Efforts to

Recover (GAO/GGD-96-56; Feb. 23, 1996).

NAFTA: Structure and Status of Implementing Organizations

(GAO/GGD-95-10BR; Oct. 7, 1994).

U.S.-Chilean Trade: Pesticide Standards and Concerns Regarding Chilean

Sanitary Rules (GAO/GGD-94-198; Sept. 28, 1994).

North American Free Trade Agreement: Assessment of Major Issues

(GAO/GGD-93-137; Sept. 9, 1993; 2 vols.).

U.S.-Chilean Trade: Developments in the Agriculture, Fisheries, and

Forestry Sectors (GAO/GGD-93-88; Apr. 1, 1993).

CFTA/NAFTA: Agricultural Safeguards (GAO/GGD-93-14R; Mar. 18, 1993).

(711252) Page 28 GAO/NSIAD-97-119 Trade Liberalization
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