Trade Integration in the Americas
Released: 2006-01-25T00:00:00

What Are Regional Trade Agreements?

Regional trade agreements (RTAs) are trade arrangements under which member-countriesgrant each other preferential treatment in trade. RTAs may be categorized as bilateral, multilateral,or sub-regional. With no formal definitions, these terms are sometimes used loosely to describevarious groupings. A bilateral trade agreement is usually an agreement between two countries toreduce tariffs and quotas on items between themselves. While this definition seemingly indicatesan agreement between just two countries, it is sometimes used to describe trade agreementsinvolving more than two countries.

There are a number of types of arrangements including free trade agreements, customsunions, common markets, and economic unions. (1) Free trade agreements (FTAs) are the most common form ofregional economic integration in which members of a group remove tariffs and some nontariffbarriers to trade among member countries. (2) At the same time, each member retains its independent trade policy,including its tariffs, towards nonmember countries. FTAs are those in which member countriesagree to eliminate tariffs and nontariff barriers on trade in goods within the free trade area, but eachcountry maintains its own trade policies, including tariffs on trade outside the region. FTAs accountfor 84% of all RTAs in force in the world, and 96% of those that are pending. The likely reasonthere are more FTAs than customs unions is that they can be concluded more quickly and require lesspolicy coordination among members. In an FTA, member countries maintain their own trade policyvis-a-vis non-member countries. (3) The U.S.-Chile free trade agreement is an example of a bilateralFTA.

Customs unions are agreements in which members conduct free trade among themselves andmaintain a common trade policy towards non-members. These agreements require the establishmentof a common external tariff and harmonization of external trade policies. Such agreements implya greater loss of autonomy over the parties' commercial policies and require longer and morecomplex negotiations and implementation periods. Geographical considerations play an importantrole in defining the objective of economic, and sometimes political, integration among the membercountries. (4) The SouthernCommon Market (Mercosur) in South America is an example of a customs union.

Common markets are those in which member countries go beyond a customs union byeliminating barriers to labor and capital flows across national borders within the market. TheEuropean Union is the most prominent example of a common market.

In economic unions, member countries merge their economies even further than commonmarkets by establishing a common currency, and therefore a unified monetary policy, along withother common economic institutions. The 12 members of the European Union that have adoptedthe euro as a common currency is the most significant example of a group of countries that has gonefrom a customs union to an economic union.

Growth of Regional Trade Agreements

Between January 2004 and February 2005, the World Trade Organization (WTO) receivednotification of 43 new RTAs, "making this the most prolific RTA period in recorded history." (5) A WTO discussion paperreported in May 2005 that the number of world RTAs in force totaled 170, with 20 additional RTAsdue to enter force pending domestic ratification, and a further 70 under negotiation or consideration. RTA activities have intensified in all world regions "particularly in the Western Hemisphere andAsia-Pacific." (6)

Motivations for Forming Regional Trade Agreements

While economic motivations may be a major driving force, countries form RTAs for anumber of reasons. Political and security factors also play a role in forming RTAs. Countriesusually enter into trade agreements to improve their country's or region's bargaining position inglobal negotiations, attract foreign direct investment to increase economic growth, achieveeconomies of scale, and expand export markets. Countries also see RTAs as building blocks forfurther trade liberalization under the World Trade Organization (WTO) or for forming larger freetrade areas such as the FTAA.

Expanding market access is probably the primary motivation for entering into tradeagreements. RTAs give the signatories trading preferences in each other's markets while excludingother nations from the same privileges. These preferential trade arrangements reduce tariffs and othertrade barriers among trading partners, providing partners with broader market access for their goodsand services. Trade liberalization allows countries to achieve economies of scale as they are ableto expand their export market. Smaller countries benefit from trade agreements because producersin these countries can lower their unit costs by producing larger volumes for regional markets inaddition to their own smaller domestic markets. (7) When more units of a good or a service can be produced on a largerscale, companies will have a better chance to decrease cost of production.

Attracting foreign direct investment (FDI) is another reason for forming RTAs, especiallyfor developing countries. The lowering of foreign investment restrictions through trade agreementsimprove investor confidence in a country, which helps attract FDI. Multinational firms invest incountries to gain access to markets, but they also do it to lower production costs. One of themotivating factors in Mexico's interest in forming NAFTA was to attract FDI. It was also amotivating factor for Central American countries and the Dominican Republic in the CAFTA-DR.

The slow progress in multilateral negotiations may also contribute to the increasing interestin regional trade blocs. Some countries may see smaller trade arrangements as "building blocks" formultilateral agreements. For example, the United States recently ratified CAFTA-DR and is movingforward on negotiations with Panama and the Andean countries as part of its overall trade strategyfor free trade in the Americas.

Some countries form RTAs for political reasons. Governments may seek trade agreementsas a way to promote peace or increase regional security. Countries may want to demonstrate goodgovernance by locking in political and economic reforms through trading partnerships. Largercountries may use RTAs to forge new geopolitical alliances and strengthen diplomatic ties, whichcould ensure or reward political support. For example, the United States formed RTAs with Israeland Jordan as a way of reaffirming U.S. support of these countries and to strengthen relations withthem. Some analysts believe that the choice of RTA partners is increasingly based on political andsecurity concerns and not so much on economic rationale. (8)

The Americas and Regional Trade Agreements

The formation of RTAs throughout the world has intensified in the last few years withcountries in the Americas forming a notable share of the world's total. Thirty-nine of the 170agreements in force around the world involve countries in the Western Hemisphere. Europe has thegreatest concentration of RTAs in the world, with the European Union and the European Free TradeAssociation as the "main continental hubs." The WTO reports that in the Western Hemisphere, RTAdynamics are more diverse than they are in Europe with "several major players engaged inmultilayered RTA processes and not necessarily sharing similar objectives." (9)

Table 1. Major Trade Arrangements in theAmericas

Sources: Compiled by CRS using information from IDB Beyond Borders ; and WTO, DiscussionPaper No. 8, "The Changing Landscape of Regional Trade Agreements," 2005.

Table 2. Economic Indicators for Selected Regional Trade Blocs(2003)

Source: Compiled by CRS using data from International Financial Statistics, InternationalMonetary Fund (IMF), August 2005; the Economist Intelligence Unit, and the CIA World Factbook .

* Less than 0.1%.

** Data for CARICOM region are estimates from 2003, 2004, and July 2005.

Trade liberalization has been a central component of structural reform process in LatinAmerica and the Caribbean since the mid-1980s when countries were implementing unilateralmeasures to liberalize trade. After NAFTA, countries began taking a more regional approachthrough the formation of regional trade agreements. Some of the major trade arrangements in theAmericas are described in Table 1 below. By adopting a more regional approach, countries havebeen able to go beyond that which was attainable or desirable at the unilateral and multilateral levels. Most of the regional integration to date has involved trade in goods and has not advanced as far inother areas such as trade in services or intellectual property rights. In this regard, Mexico'sliberalization has been the most comprehensive through its implementation of NAFTA. (10)

NAFTA has the largest market size of all regional trade blocs in the Americas, encompassinga market of 430 million people with a nominal GDP of $13.4 trillion (see Table 2). In South andCentral America, the largest markets are formed by Mercosur, with a population of 227 million anda nominal GDP of $778 billion; and the Andean Community, with a population of 121 million anda nominal GDP of $314 billion.

World Trade Organization and RTAs

A basic principle of the General Agreement on Tariffs and Trade (GATT) that isadministered by the WTO is the most-favored nation (MFN) principle. In general, the MFNprinciple requires that trade concessions granted to one WTO member are to be applied to the tradeof all other signatories. RTAs, by definition, run counter to the MFN principle because products ofRTA member countries are given preferential treatment over nonmember products. (11) However, the WTO allowsmember countries to form regional trade agreements under strict rules. The WTO position is thatregional trade agreements can often support the WTO's multilateral trading system by allowinggroups of countries to negotiate rules and commitments that go beyond what was possible at the timeunder the WTO. The WTO has a committee on regional trade agreements that examines regionalgroups and assesses whether they are consistent with WTO rules. (12)

WTO members are permitted to enter into RTAs under specific conditions. (13) Paragraphs 4 to 10 ofGATT Article XXIV as clarified in the Understanding on the Interpretation of Article XXIV of theGATT 1994 , provide for the formation and operation of customs unions and free-trade areas coveringtrade in goods. Article V of the General Agreement on Trade in Services (GATS), governs theconclusion of RTAs in the area of trade in services, for both developed and developing countries.Three of the key elements in these rules state that countries participating in an RTA must providedetailed notification of the agreement to the WTO; that the agreement applies to "substantially all"trade between partner countries; and that the agreement does not raise barriers to third-countrytrade. (14)

Another set of rules refers to the so-called "Enabling Clause", the 1979 Decision onDifferential and More Favorable Treatment, Reciprocity and Fuller Participation of DevelopingCountries. These rules apply to preferential trade arrangements in trade in goods betweendeveloping country members and allows developing countries to form preferential tradingarrangements without the conditions under Article XXIV. (15)

For non-reciprocal preferential trade arrangements, such as the US-Caribbean BasinEconomic Recovery Act, members must seek a waiver from WTO rules. These waivers require theapproval of three-fourths of WTO members.

Economic Effects of Trade Integration

Supporters of trade integration in the Americas view hemispheric free trade as supportingU.S. economic and political interests in several ways. They argue that the movement towards tradeintegration is beneficial for U.S. economic prosperity and will serve to strengthen democraticregimes and support U.S. values and security interests. Forming closer economic relations withcountries in the region is seen by some as a means to improve cooperation on other issues such asthe environment and anti-drug efforts. U.S. opponents to regional integration in the Americas areconcerned that hemispheric free trade would lead to a loss of jobs in the United States. They arguethat trade agreements would result in U.S. companies shifting production to lower-wage countrieswith weak labor and environmental standards.

Economists are in general agreement that RTAs can provide economic benefits, but not thatthere are also associated costs. In general, they see RTAs as beneficial for an economy to the extentthat they provide trade creation over trade diversion. When a trade agreement lowers trade barrierson a good, production may shift from domestic producers to lower cost foreign producers and resultin substituting an imported good for the domestic good. This process is called trade creation. Tradecreation provides economic benefits as consumers have a wider choice of goods and servicesavailable at lower costs. Trade creation also results in adjustment costs, however, usually in theform of domestic job losses as production shifts to another country.

The drawback to RTAs is that they may result in trade diversion because they are not fullyinclusive of all regional trading partners. Trade diversion results when a country forms an RTA andthen shifts the purchase of goods or services (imports) from a country that is not an RTA partner toa country that is an RTA partner. For example, if the United States was purchasing an item fromAsia prior to NAFTA and then began to purchase this item from Mexico after NAFTA was enforced,solely as a result of the trade agreement, even though the Asian country was the lower-cost producer,then NAFTA would be associated with trade diversion. Mexico would now be the producer of thatitem, not because it produced the good more efficiently, but because it was receiving preferentialaccess to the U.S. market.

The effects of trade creation versus trade diversion are complex and difficult to measure. Much depends on the market structure and costs in which an RTA intervenes and the long-termdynamic effects of the RTA. A report by the Inter-American Development Bank (IADB) states thatmost studies have found that "trade creation greatly dominates trade diversion" in most regionalintegration trade arrangements. The study indicates that in the case of NAFTA, all members standto gain, particularly Mexico. In the case of Mercosur, the study indicates that Argentina, Brazil, andUruguay have the potential of increasing their GDP. (16)

While an increase in RTAs throughout the Western Hemisphere may have benefits, they canalso result in complex networks of preferential trade arrangements. There are an increasing numberof overlapping trade agreements, each with its own tariff schedule and rules of origin regime. Someeconomists believe that these arrangements may pose challenges for developing countries and putthem in a "weaker position than under the multilateral framework." (17) Developing countries mayhave difficulties in navigating the maze of rules that accompany RTAs, and they may not be able tofully benefit from the new trade rules. Another disadvantage for developing countries is that RTAsmay result in a decreasing reliance on nonreciprocal trade preferences such as the duty-free treatmentthat Andean countries receive from the U.S. ATPDEA. According to the WTO study on RTAs, thereplacement of preferential trade arrangements with RTAs could present developing countries withchallenges as they transition from non-reciprocal trade preferences to mutual tradeliberalization. (18) Thesedisadvantages have the possibility of perpetuating poverty in the region.

U.S. Trade Policy in Latin America and the Caribbean

Since the passage of NAFTA, the United States, Canada, and Mexico have pursued tradeliberalization through bilateral, regional, and multilateral negotiations. All have participated in themultilateral talks for an FTAA but have also formed other bilateral agreements to help achieve theiroverall trade integration objectives. Many of the negotiations that have produced trade agreementshave been completed relatively quickly and have achieved broader trade liberalization thanmultilateral trade negotiations. One of the advantages in forming agreements on a bilateral orregional basis is that these agreements can achieve more liberalization in tariff and non-tariff barriersas opposed to the multilateral approach that usually achieves partial reductions on a limited numberof goods.

NAFTA has served as a precedent for other U.S. trade agreements. The United States hasadvanced its trade policy agenda in the Western Hemisphere through bilateral trade initiatives withChile, Central America and the Dominican Republic, Panama and selected Andean countries (seeTable 3). The U.S.-Chile FTA was signed in June 2003 and entered into force in January 2004. CAFTA-DR was signed into U.S. law on August 2, 2005 and is expected to enter into force inJanuary 2006. In May 2004, the United States began negotiations with Colombia, Peru, Ecuador,and Bolivia on the U.S.-Andean free trade agreement. Those negotiations continue and are expectedto be concluded by the end of 2005. In April 2004, the United States began negotiations withPanama on the U.S.-Panama free trade agreement and those negotiations have not been concluded.

Role of Trade Promotion Authority

Trade promotion authority (TPA) is an arrangement involving the executive and legislativebranches that recognizes the distinct constitutional responsibilities of those branches regarding tradenegotiations and trade policy. By virtue of the constitutional power to conduct foreign affairs, thePresident has authority to negotiate and enter into agreements with foreign countries, including thoseagreements dealing with trade and tariff policy. At the same time, the Constitution gives Congressthe primary power over trade policy under Article I, and the Congress decides whether or not toapprove statutory changes that are called for under trade agreements that the President hasnegotiated. (19)

The basic provisions of TPA were established in the Trade Act of 1974 ( P.L. 93-618 ) for alimited period of time. Those provisions have been renewed periodically, most recently under theTrade Act of 2002. Under TPA, Congress provides that, if a trade agreement is reached by a givendeadline, it will consider legislation to implement the trade agreement under expedited proceduresthat prohibit amendments, limit debate, and set deadlines on congressional action. Under the 2002Act as amended, Congress approved TPA for trade agreements entered into before July 1, 2005, butalso approved an automatic two-year extension of TPA to cover trade agreements entered into beforeJuly 1, 2007. With TPA, the President is assured that agreements such as the U.S.-Andean theU.S.-Panama FTAs would receive a timely, up-or-down vote in Congress as long as certainrequirements, such as consultations with Congress, are met. Without TPA, bills would be consideredunder normal legislative procedures and would be amendable.

TPA expires in June 2007 and renewal of the trade act is uncertain. All trade agreementscurrently under negotiation by the United States must be concluded before this deadline in order toreceive the expedited procedures under TPA.

North American Free Trade Agreement (NAFTA)

NAFTA, signed by President George H.W. Bush on December 17, 1992, has been in effectsince January 1994. It is the largest preferential trade agreement in the world. The agreementeliminated tariffs and other trade and investment barriers among Canada, Mexico, and the UnitedStates with a phase-in period of 15 years. The phase-in period will end in 2008. The three countriesform the largest market in the Western Hemisphere, encompassing 430 million people and with agross domestic product (GDP) of $13.4 trillion. Total exports from the three countries total over onetrillion dollars, or 15.4% of the world total. Imports totaled $1.7 trillion in 2003, or 23% of theworld total.

The goals of the NAFTA are to eliminate trade barriers, facilitate cross-border movement ofgoods and services among the countries, promote fair competition in the free trade area, increaseinvestment opportunities, and provide effective protection and enforcement of intellectual propertyrights. NAFTA is supplemented by two additional side agreements on environmental and laborstandards. The trade liberalization program has been implemented according to schedule, or earlier. Over 90 percent of goods are currently duty-free. (20)

Total U.S. trade with NAFTA partners increased significantly over the past 11 years. Tradevolume with NAFTA partners increased from $293 billion in 1993 to $710 billion in 2004. Canadaand Mexico accounted for 31% of total U.S. trade of $2.29 trillion in 2004, up from $292.7 billionor 28% of U.S. total trade in 1993. The U.S. trade deficit with NAFTA partners has also grown,rising from $12 billion (9% of the total) in 1993 to $113 billion in 2004 (17% of the total). Over thepast three years, the share of U.S. trade with NAFTA partners, with respect to the rest of the world,has fallen. In 2001, Canada and Mexico accounted for 33% of total U.S. trade. In 2004, thispercentage fell to 31%. Canada and Mexico also account for a smaller share of the U.S. trade deficitsince 2001, down from 27% of the total in 2001 to 17% of the total in 2004. (21)

Mexico and Canada have increased as a site for U.S. direct investment abroad (USDIA),though their share of total USDIA has fallen slightly since the 1990s. (22) Between 1993 and 2003,USDIA in Canada and Mexico increased from $84 billion (15% of total USDIA) to $254 billion(14% of total). In Canada, USDIA went from $70.4 billion (12.8% of total) to $192 billion (10.8%of total), while in Mexico it went from $15.4 billion (1.8% of total) to $62 billion (2.8% of total)during the same time period. Canada was the second largest recipient of USDIA in 2003 (behind theUnited Kingdom, which ranked first), while Mexico was the ninth largest recipient. (23)

Table 3. United States' Trade Agreements

Sources: Organization of American States (OAS), Foreign Trade Information System (SICE);Inter-American Development Bank, Beyond Borders, p. 26.

* CAFTA-DR has been ratified by Dominican Republic, El Salvador, Honduras, Guatemala, andUnited States. Costa Rica has not yet ratified the agreement.

U.S.-Chile FTA

On June 6, 2003, the United States and Chile signed the U.S.-Chile FTA in Miami, Florida. On September 3, 2003, President George W. Bush signed the bill into law ( P.L. 108-77 ) and theagreement entered into force on January 1, 2004. The FTA with Chile is the first U.S. agreementwith a South American country and, at the time it was passed, there were expectations that it wouldprove to be a step forward in completing the FTAA. (24)

The United States is Chile's largest single-country trading partner, accounting for 20% ofChilean exports and 15% of imports. In contrast, Chile ranks 29th among U.S. trading partners intotal trade. When the agreement entered into force in January 2004, 87% of bilateral trade inconsumer and industrial products became duty-free immediately, with the remaining tariffs to bereduced over time. Within four years of the agreement, about 75% of U.S. farm exports were toenter Chile duty-free. The agreement also increased market access for the United States in a broadrange of services. For Chile, 95% of its export products gained immediate duty-free status and only1.2% of its products fell into the longest 12-year phase-out period. In addition to the market accessprovisions, the agreement includes environment and labor provisions, more open governmentprocurement rules, increased access for services trade, greater protection of U.S. investment andintellectual property, and creation of a new e-commerce chapter.

Central America-Dominican Republic Free Trade Agreement

On August 5, 2004, the United States, Costa Rica, El Salvador, Guatemala, Honduras,Nicaragua, and the Dominican Republic signed the CAFTA-DR. The agreement has been ratifiedby six countries and had a target implementation date of January 1, 2006, which was not met. TheDominican Republic, El Salvador, Nicaragua, Honduras, and Guatemala have experienced delaysin writing the agreement's commitments into their national laws, but are expected to do so in early2006. Costa Rica has not ratified the agreement and may delay ratification until after its presidentialelections on February 5, 2006. (25)

CAFTA-DR is a regional agreement with all parties subject to "the same set of obligationsand commitments," but with each country defining its own market access schedule. The agreementreplaces U.S. preferential trade treatment extended to these countries under the Caribbean BasinEconomic Recovery Act (CBERA), the Caribbean Basin Trade Partnership Act (CBTPA), and theGeneralized System of Preferences (GSP). It liberalizes trade in goods, services, governmentprocurement, intellectual property, and investment, and addresses labor and environment issues.Most commercial and farm goods attain duty-free status immediately. Remaining trade will havetariffs phased out incrementally over five to twenty years. Duty-free treatment will be delayedlongest for the most sensitive agricultural products. The CAFTA-DR specifies rules for transitionalsafeguards, tariff rate quotas, and trade capacity building. (26)

The Dominican Republic and Central America partners are smaller countries with acombined population of 44 million and a total GDP of $86 billion. Exports from and imports to theregion account for less than one percent of the world total. All of the countries have haddemocratically elected presidents for some time, and several of the countries have experienced recentelectoral transitions. For each of the countries the United States is the dominant market as well asthe major source of investment and foreign assistance, including trade preferences under theCaribbean Basin Initiative (CBI) and assistance following devastating hurricanes. (27)

CAFTA-DR is not expected to have a large effect on the U.S. economy as a whole, but itcould impose adjustment costs on some sectors. As with other trade agreements, supporters see itas part of a policy to support improved intra-regional trade, as well as political, and economicdevelopment in an area of strategic importance to the United States. Opponents to the agreementwere seeking improved trade adjustment and capacity building policies for Central Americancountries and the Dominican Republic. They also argued that these countries had inadequate laborlaws and that the labor provisions in the CAFTA-DR needed strengthening.

U.S.-Andean FTA

On May 18-19, 2004, the United States began free-trade negotiations with Colombia, Peru,and Ecuador. The first round of negotiations was held with Colombia, Peru, and Ecuador (withBolivia participating as an observer) in Cartagena, Colombia, in May 2004. The last round ofnegotiations (thirteenth round) in which all countries participated was held in Washington, D.C., inNovember 2005. This round was expected to be the last, but the talks ended without an agreement. Prior to the November talks, Presidents Alejandro Toledo of Peru, Alvaro Uribe of Colombia, andAlfredo Palacio of Ecuador had sent President Bush a letter in October 2005, urging the UnitedStates "to be more flexible in negotiations." (28) Colombia and Ecuador stepped out of the negotiations becausethey said they couldn't accept the U.S. position on patent protections and agriculture, while Perudecided to move forward alone in negotiations with the United States. (29)

On December 7, 2005, the United States and Peru announced that they had successfullycompleted a bilateral free trade agreement. On January 6, 2006, President Bush notified theCongress of the United States' intention to sign a free trade agreement with Peru. Colombia andEcuador are continuing trade negotiations with the United States this year. Talks with Colombia arescheduled to take place January 25-31, 2006, while talks with Ecuador are expected to resumesometime in February 2006. Negotiators from Colombia and Ecuador have expressed hope toconclude the talks in their next set of meetings. If the two countries reach an agreement with theUnited States, it is unclear whether they would join with Peru to form a U.S.-Andean FTA orwhether the U.S.-Peru FTA would be considered as a separate agreement.

A U.S.-Andean free trade agreement would eliminate tariff and non-tariff barriers to tradeamong the countries, but there have been some difficult issues in the negotiations. In general, theAndean countries want a long-term commitment that they will be able to export duty-free to the U.S.market, since their current trade preferences expire at the end of 2006. Intellectual property rights(IPR) protection and agriculture have been the most sensitive issues in the negotiations, thoughnegotiators have stated that progress in the IPR issue has been made.

The Andean governments want to ensure access to the U.S. market, especially since theircurrent trade preferences will terminate at the end of 2006. The Andean governments also want toattract investment and see an FTA with the United States as a way to establish a more secureeconomic environment and increase foreign investment. (30) However, there is broad grass-roots opposition to an FTA withinthe Andean countries. The talks have drawn thousands of protestors in Colombia, Ecuador, andPeru. Opponents argue that any economic benefits from increased trade under an FTA will berealized by only a small segment of the economy, worsening the separation of the classes. They alsoargue that a large part of the Andean population is poor farmers, who are especially vulnerable andcannot compete against increased agricultural imports from the United States, which some Andeanofficials assert are heavily subsidized.

Presently, Andean countries have preferential trade access under unilateral U.S. programs,but that access is scheduled to expire at the end of December 2006. The program began under theAndean Trade Preference Act (ATPA; title II of P.L. 102-182 ), enacted on December 4, 1991. ATPA authorized the President to grant duty-free treatment to certain products from the four Andeancountries that met domestic content and other requirements. It was intended to promote economicgrowth in the Andean region and to encourage a shift away from dependence on illegal drugs bysupporting legitimate economic activities. ATPA was originally authorized for 10 years and lapsedon December 4, 2001.

After ATPA had lapsed for months, the ATPDEA (Title XXXI of P.L. 107-210 ), was enactedon August 6, 2002. ATPDEA reauthorized the ATPA preference program and expanded tradepreferences to include additional products that were excluded under ATPA. ATPDEA alsoauthorized the President to grant duty-free treatment to U.S. imports of certain apparel articles, if thearticles met domestic content rules. The ATPDEA accounted for about half of all U.S. imports fromthe four countries in 2003. Duty-free benefits under ATPDEA end on December 31, 2006. It ispossible that the trade preferences with Andean countries will not be renewed. An FTA with theUnited States would lock-in those preferences and additional duty-free treatment.

U.S.-Panama FTA

On November 16, 2003, President George W. Bush formally notified Congress of hisintention to negotiate an FTA with Panama. Negotiations began in April 2004, with eight rounds ofnegotiations held thus far. The last round was held in February 2005. Panama approached theUnited States for a stand-alone FTA, avoiding a link to CAFTA-DR because of the historical andstrategic nature of the U.S.-Panamanian relationship. Panama's limited integration with the CentralAmerican economies also bolstered the case for separate negotiations. (31)

The United States is Panama's most important trading partner, accounting for approximately50% of Panama's exports and 34% of its imports. U.S.-Panama merchandise trade is small. In 2004,U.S. exports to Panama totaled $1.8 billion and U.S. imports totaled $316 million, producing a U.S.trade surplus of $1.5 billion. Panama ranked 48th as an export market for U.S. goods and 99th forU.S. imports.

Supporters of the U.S.-Panama FTA believe that it would support foreign policy andeconomic interests of the United States and that is expected to lend stability to Panama's increasinglyopen economy. Those in the United States who oppose the FTA have raised concerns about laborand environmental standards in Panama. In Panama, protesters have held demonstrations againstthe agreement over various policy issues. (32)

U.S. and Panamanian negotiators have used the CAFTA-DR framework to advance anagreement. The negotiation process moved fairly fast in the early stages, but no significant progresshas been made since February 2005. There is a possibility that talks will resume in the fall of 2005. President Bush visited Panama on November 7, 2005 and met with Panamanian President MartinTorrijos. The two leaders held a joint news conference in which they cited progress in reaching afree trade agreement but acknowledge the political challenges related to the trade talks. (33)

Free Trade Area of the Americas (FTAA)

The 1994 vision of hemispheric free trade has been embraced by President George W. Bushand promoted by the formal negotiations in the FTAA process but also by the expansion of bilateralfree trade agreements. An FTAA could have 34 members and nearly 800 million people. Thispopulation would be nearly twice the population of the European Union. The FTAA trade talks werelaunched in April 1998 and, after seven years, the original deadline for concluding the agreement haspassed and negotiators have failed to conclude an agreement, mostly over differences due toagriculture.

Under the Declaration of Miami from the first Summit of the Americas, the 34 countriescommitted to make concrete progress toward an FTAA before 2000 and complete negotiations nolater than 2005. The Declaration called for building on existing subregional and bilateral agreementsto broaden and deepen integration. The Ministers elected to establish nine initial negotiating groups,which covered all the tariff and non-tariff barrier issue areas identified by the leaders at the MiamiSummit. The overall process is directed by the Trade Negotiation Committee (TNC), co-chaired bythe United States and Brazil for the remainder of the negotiations. (34)

Under the General Principles and Objectives for the negotiations, trade ministers agreed toprovide transparency during the negotiations and also agreed that the FTAA should improve uponWTO rules and disciplines wherever possible and appropriate. The ministers agreed that thenegotiations would be a single undertaking in that the signatories to the final FTAA Agreementwould have to accept all parts of it (i.e. cannot pick and choose among the obligations.) (35) They also agreed that onlydemocracies would be able to participate in an FTAA and to make public the preliminary negotiatedtexts.

At the November 2003 FTAA ministerial meeting in Miami, participating countries madea compromise on the scope and ambition of an FTAA. As worked out by the United States andBrazil, the compromise would create a two-tier FTAA structure by January 1, 2005. The first tierwould be comprised of a common set of rights and obligations on the nine negotiating groups for all34 FTAA countries. The second tier would consist of a series of plurilateral agreements in whichcountries would voluntarily undertake to achieve deeper disciplines and further liberalization in thenine groups. Although no negotiating area would be left out of the agreement, because countriescould take on varying obligations within the FTAA structure, it was a very different notion from thebroad "single undertaking" principle that had initially been envisioned.

The 2003 Miami declaration also instructed the deputy trade ministers to define the commonset of obligations. However, the United States and Brazil were unable to agree on what areas wouldbe obligatory for all participants and the FTAA negotiations were suspended. Brazil's position calledfor all industrial and agricultural goods to be in the market access provisions and pressed forelimination of export subsidies and action on domestic price supports for agricultural goods. TheUnited States agreed to the elimination of export subsidies, but not domestic support for agriculture. The United States wants these provisions to be discussed in the WTO negotiations.

According to a recent report analyzing the possible future of the FTAA talks, the negotiationshave produced a "heavily bracketed draft text and little else." (36) One positive developmentcited by the report is the trade capacity building initiatives advanced by the Inter-AmericanDevelopment Bank and national development agencies that have addressed critical infrastructure andadministrative problems in smaller economies. (37)

The most recent Summit of the Americas, held in November 2005 in Mar del Plata,Argentina, failed to reach a consensus on the FTAA. One group, comprising the majority of the 34participating countries, were in support of reviving the FTAA talks, while the other group, comprisedof five countries including Brazil, Argentina, and Venezuela, refused to sign up for the talks. Thedisagreements mostly concern agriculture and intellectual property standards. The President ofBrazil's top foreign policy aide, Marco Aurelio Garcia, commented after the meeting that it isnecessary for "rich countries to reduce agricultural subsidies and barriers to trade" before talkingabout any launch dates for the talks. (38) There is also disagreement on the U.S. commitment toimplementing continent-wide intellectual property standards, which would reduce the prevalence ofunauthorized medicines. Brazil's government believes that this provision would reduce theavailability of lower-priced medicines for low-income populations in Brazil. (39)

Regional Integration Initiatives in the Americas

Countries in the Western Hemisphere have been forming regional trade agreements since1961 when the Central American Common Market was formed. Latin American countries viewregional trade agreements as a tool to help promote economic and social development but also as away of gaining leverage in the negotiations of larger scale agreements such as the FTAA. In general,Latin American countries have economic interests, but also recognize that trade agreements aloneare not sufficient to combat poverty and the larger social problems caused by poverty.

Mexico

Since the early 1990s, Mexico has had a growing commitment to trade liberalization and itstrade policy is among the most open in the world. Mexico has been actively pursing free tradeagreements with other countries as a way to bring benefits to the economy, but mostly to reduce itseconomic dependence on the United States. The United States is, by far, Mexico's most significanttrading partner. Approximately 90% of Mexico's exports go to the United States and about 60% ofMexico's imports come from the United States. Mexico's second largest trading partner is Canada,which accounts for approximately 2% of Mexico's exports and imports. (40) In an effort to increasetrade with other countries, Mexico has negotiated a total of 12 trade agreements involving over 40countries (see Table 4). These include bilateral or multilateral trade agreements with most countriesin the Western Hemisphere including the United States and Canada, Chile, Bolivia, Costa Rica,Nicaragua, Uruguay, Colombia, Venezuela, Guatemala, El Salvador, and Honduras. Mexico has alsobeen an active participant in the FTAA negotiations.

Mexico has also negotiated free trade agreements outside of the Western Hemisphere and,in July 2000, entered into agreements with Israel and the European Union. Mexico became the firstLatin American country to have preferred access to these two markets. Mexico has completed atrade agreement with the European Free Trade Association (EFTA) of Iceland, Liechtenstein,Norway, and Switzerland. The Mexican government expanded its outreach to Asia in 2000 byentering into negotiations with Singapore, Korea, and Japan. In 2004, Japan and Mexico signed anEconomic Partnership Agreement. It was the first comprehensive trade agreement that Japan signedwith any country. (41) The large number of trade agreements has not yet been successful in decreasing Mexico'sdependence on trade with the United States.

Canada

Canada has been active in the FTAA negotiating process, but has not pursued bilateral tradeagreements to the degree of Mexico or the United States. Canada's dominating trading partner is theUnited States and most of its trade policy focus is centered on its trade relationship with the UnitedStates. Canada has achieved considerable economic integration with the United States in a numberof sectors and considered options to further its relationship. However, after the terrorist attack ofSeptember 11, there has been a wide-ranging debate in Canada over its relationship with the UnitedStates and the question of whether deeper North American integration would be beneficial to theCanadian economy. (42) Canada has entered into three bilateral trade agreements since NAFTA. These include agreementswith Israel (1997), Chile (1997), and Costa Rica (2001). It is also considering trade agreements withSingapore and the EFTA.

Table 4. Mexico's Trade IntegrationAgreements

Sources: Organization of American States (OAS), Foreign Trade Information System (SICE);Inter-American Development Bank, Beyond Borders, p. 26.

Southern Common Market (Mercosur)

Mercosur was created in March 1991 by Argentina, Brazil, Paraguay, and Uruguay throughthe signing of the Treaty of AsunciÃ³n. The goals of the treaty included the formation of a commonmarket with free movement of goods, services, and factors of production; the adoption of a commonexternal tariff and a common trade policy; the coordination of macroeconomic and sectoral policies;and legislative harmonization in areas conducive to stronger integration.

Mercosur is the largest preferential trade group in South America, with a combined grossdomestic product of $778 billion (representing 40% of Latin America's GDP) and a population of227 million in 2004. (43) U.S. exports to Mercosur totaled $18.2 billion in 2004, while U.S. imports totaled $25.5 billion. TheUnited States had a trade deficit of $7.3 billion with Mercosur in 2004, an increase of $2.7 billionover the $4.6 billion deficit in 2002. Prior to 2002, the United States had a trade surplus with thesecountries. The surplus went from a high of $11.1 billion in 1997 to $2.9 billion in 2001. The U.S.direct investment position in Mercosur totaled approximately $45 billion in 2004, down from $55.4billion in 2000. Brazil accounts for over 70% of USDIA in Mercosur countries.

Mercosur countries have progressively lifted trade barriers and established a free trade areasince 1991, but continue to have barriers in some sectors. In 1994, the Treaty of Asuncion wasamended and updated by the Treaty of Ouro Preto. The 1994 treaty helped improve the institutionalstructure of Mercosur and initiated a new phase in the trade relationship of member countries as theyfurthered their goal of realizing a common market. Bolivia, Chile, Colombia, Ecuador, Peru, andVenezuela have associate member status in Mercosur. Associate members do not take part inMercosur's major trade negotiations and may choose not to abide by its trade rules.

Mercosur countries began the transition to a common market in 1994 with the goal ofcompleting internal free trade by 2000 and a common market by 2006. The free trade goal wasdelayed due to economic difficulties in the member countries. The 2002 crisis in which Argentinafaced its most serious economic downturn in its independent history has been one of the moreserious setbacks. Mercosur has a common external tariff (CET) organized in 11 tiers with tariff ratesranging from 0 to 20 percent with an average level of 13.5 percent that entered into force in 1995. The CET has some exceptions with special customs regimes applying to the sugar and automotivesectors. Member countries have approved common regional provisions covering trade in services,safeguards, anti-dumping and dispute settlement, but these have been only partially implemented. The executive body of Mercosur, the Common Market Council (CM), has agreed on a workingprogram focused on the lifting of the remaining market access barriers. (44)

Throughout much of the 1990s, Mercosur was the most dynamic economic subgroup in theWestern Hemisphere in terms of trade growth among its members. Things changed at the end of thedecade when Brazil was faced with a financial crisis and the devaluation of the Brazilian real in1999. The economic situation affected Argentina as well, causing a severe and political financialcrisis that ended the presidency of Fernando de la Rua. The downturn in the economies of bothcountries caused the momentum towards deeper integration to decrease. Some have questionedwhether trade liberalization was partly at fault for the economic crises and whether furtherliberalization is feasible or beneficial for the economy. (45)

In recent years, Mercosur countries have been working on several trade initiatives. Mercosurand the Andean Community of Nations (CAN) signed a statement of intent in December 2004 toform an economic union similar to the European Union by 2019 (see section on South AmericanCommunity of Nations of this report). Mercosur has also pursued trade liberalization with the EU. The 1995 EU-Mercosur Interregional Framework Cooperation Agreement began the preparation ofnegotiations for an interregional agreement which would a include a liberalization of trade in goodsand services, in conformity with WTO rules, as well as enhanced cooperation and a strengtheningof political dialogue. In June 1999, negotiations on the agreement formally began. The latest roundof negotiations to strengthen political, economic, and trade ties between Mercosur and the EU tookplace in October 2004 and the next round is scheduled to take place before the end of 2005. (46)

Mercosur countries held preliminary talks with Mexico on May 20, 2005 toward makingMexico an associate member of the trade bloc. Associate members receive preferential dutytreatment for their products but are not required to adopt Mercosur's common external tariffs. (47)

Andean Community of Nations (CAN)

The CAN is one of the oldest sub-regional groupings in the hemisphere. It was originallyformed in 1969 as the Andean Pact (later called the Andean Group and later the Andean Communityof Nations). The Andean Community presently consists of Bolivia, Colombia, Ecuador, Peru, andVenezuela. The Cartagena Agreement creating the Andean Pact was signed by Bolivia, Chile,Colombia, Ecuador, and Peru in May 1969. Venezuela acceded in February 1973 and Chilewithdrew in October 1976.

In 2004, Andean Community countries had a combined GDP of $314 billion and a populationof 121 million. Exports from these countries totaled $76 billion or 0.8% of the world total, whileimports totaled $52 billion or 0.6% of the world total. The country with the highest amount ofexports is Venezuela, with $36 billion in exports, and the country with the highest amount of importsis Colombia with $17 billion in imports. About ten percent of Andean Community trade is intra-bloctrade. The United States is the principal trading partner, accounting for approximately 50 percentof CAN exports, while the EU is second. U.S. imports from the region totaled $40 billion, whileU.S. exports totaled $13 billion. The United States had a trade deficit of $27 billion with the AndeanCommunity in 2004. (48)

The Cartagena Agreement was the initial step toward economic integration among the partieswith a broader vision towards forming a common market over time. The process lost momentumin the 1970s but then revived in the 1990s. The group established a four-country free trade area in1993 (Bolivia, Colombia, Ecuador, and Venezuela) and agreed on the implementation of a commonexternal tariff. In 1996, the presidents of the Andean countries pledged to transform the group intoa common market and created the Andean Community (it had been called the Andean Group priorto that) based on a new institutional structure. The parties agreed on a timetable to reincorporatePeru into the free trade area (Peru had been suspended since 1992), committed to creating a commonmarket by the end of 2005 in which goods, services, capital, and labor would move freely. Theleaders also started the negotiation of a four-tier common external tariff expected to be in place bythe end of 2003. (49) Political and economic setbacks have prevented the formation of a more integrated Andean union.

The trade in goods between Bolivia, Colombia, Ecuador, and Venezuela is fully deregulated,which means that goods originating in any one of those countries can enter the territory of the othersduty-free. As a result, these four countries have a free trade area that Peru is becoming a part ofthrough a liberalization program. The efforts of the Andean countries continue to focus onintegration and implementing measures for preventing and correcting practices that distort freecompetition (50)

The Andean Community is considered one of the most institutionalized regional agreementsamong developing countries. Its institutional structure is patterned along the lines of the EuropeanCommunity. The institutions include a formal Andean Presidential Council that meets regularly, aCourt of Justice with supranational powers, and an Andean Integration System that incorporates allthe Andean integration agencies. (51)

The Andean Community is pursuing trade integration agreements with Mercosur, aspreviously mentioned, and also with the EU. Free trade talks between the CAN and the EU werescheduled to start in 2006, but that is no longer a certainty. During a meeting in Peru in June 2005,members of the European Parliament said a lack of agreement on trade issues among CAN membersmay derail the start of talks. One of the major problems they mentioned has to do with the lack ofagreement on how to implement a common tariff structure. The CAN's target date for implementinga common external tariff has not been met. (52)

Central American Common Market (CACM)

The Central American Common Market (CACM) was established in December 1960 byCosta Rica, El Salvador, Guatemala, Honduras, and Nicaragua upon the signing of the GeneralTreaty on Central American Economic Integration. Costa Rica acceded to the integration agreementin July 1962. The 1960 treaty envisioned the creation of a common market which would come intoeffect after the treaty came into force. Although integration looked very promising in the firstdecade, political and economic challenges in the region prevented the region from establishing thecommon market that was earlier envisioned. The process was renewed in 1993 with the GuatemalaProtocol which provided a new foundation for Central America's economic integration. Membercountries hoped to implement a customs union by the end of 2003 but that process has been delayedas well. With the signing of CAFTA-DR, it is uncertain whether or when the Central Americanregion will establish a customs union. Currently, most intra-regional trade is tariff-free, but someexceptions remain including coffee and sugar. Member countries have agreed to a four-tier commonexternal tariff schedule. About 80% of the common external tariff schedule has beenimplemented. (53)

Caribbean Community (CARICOM)

Members of the Caribbean Community include Antigua and Barbuda, the Bahamas,Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St.Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. The DominicanRepublic has observer status.

In 1989, CARICOM members agreed to create a CARICOM Single Market and Economy(CSME) that would entail removing obstacles to trade in goods and services; allowing the freemovement of skilled persons; ending the restrictions on capital movements; adopting a commonexternal tariff (CET) and common trade policy; and having greater coordination in other areas ofeconomic policy. The founding treaty has nine modifying protocols to facilitate completion of thesingle market. These include the Institutional Framework (Protocol I); Establishment, Provision ofServices and Movement of Capital (Protocol II); Industrial Policy (Protocol III), Trade Policy(Protocol IV), Agricultural Policy (Protocol V), Transport Policy (Protocol VI), DisadvantagedCountries, Regions and Sectors (Protocol VII), Competition Policy (Protocol VIII), and DisputeSettlement (Protocol IX). Some of the protocols have entered into force while others are beingapplied provisionally by some member countries. Protocols that have entered into force include I,II, IV, and VII. (54)

CARICOM has moved ahead with its regional integration since the founding treaty. Intra-regional trade is virtually free. All tariffs and most trade restrictions have been removed,although some exceptions do remain. Efforts have been made to harmonize national customs laws,but corresponding legislation has not been fully implemented. The trade group has instituted aregime governing common standards for trade in goods, and is establishing a Caribbean RegionalOrganization for Standards and Quality (CROSQ). The CET is fully implemented in most countriesalthough member states have the right to negotiate bilateral trade agreements with third countries.Progress has been made in the free movement of capital, but some restrictions remain. In regard tothe free movement of people, this is limited to certain professional categories. Member countriesare also making progress in harmonizing regulatory frameworks, but much depends on their abilityto devote the necessary technical and financial resources. The countries indicate that they needfinancing to establish a fund to assist the less developed countries and to establish the envisagedlegal bodies. (55)

In 2004, CARICOM made advancements in its integration process, including implementationof the CSME, foreign policy coordination, and functional cooperation. CARICOM made progresson removing restrictions on services provisions and the movement of capital and skilled labor. Inthe area of functional cooperation, member countries have cooperated in the fight against HIV/AIDSand natural disaster management plans. (56) In mid-April 2005, CARICOM members established theCaribbean Court of Justice, headquartered in Port-of-Spain in Trinidad and Tobago, that will serveas region's final court of appeal and replace the Privy Council based in London. The Court will playan important role in the region's economic integration by ruling on trade disputes in the forthcomingCARICOM CSME. Barbados, Jamaica, and Trinidad are leading the way in moving ahead with theimplementation of the CSME, and other Caribbean states are expected to become compliant by theend of 2005. (57)

CARICOM countries have been taking steps to form trade agreements with other countriesand regional trade blocs. In March 2004, CARICOM (with the exception of the Bahamas and Haiti)signed a free trade agreement with Costa Rica. It is also in the process of negotiating an agreementto improve trade with Canada by focusing on four areas: market access, investment, services, andinstitutional arrangements and dispute settlement. (58) CARICOM countries are also negotiating agreements with theEU and Mercosur. CARICOM countries and the Dominican Republic are in the third stage ofnegotiations toward an economic partnership agreement that will contain a reciprocal free tradeagreement with the EU. Officials from the Caribbean and Mercosur countries held talks in February2005 about establishing a free trade agreement between the two regions.

South American Community of Nations (CSN)

After the Third South America Summit on December 8, 2004, the two major trade blocs inSouth America, Mercosur and the CAN, signed the Cuzco Declaration, a statement of intent to formthe South American Community of Nations (CSN). The CSN is planned as a continent-wide freetrade zone uniting the two trade blocs and has a plan to eliminate tariffs for non-sensitive productsby 2014 and sensitive products by 2019. The declaration was signed by representatives from twelveSouth American nations. Panama attended the signing ceremony as an observer. One of the goalswas to have a constitution drafted in 2005, but it is uncertain if that goal will be met because the firstmeeting of heads of state held in September 30, 2005 in Brasilia ended without a plan of action.

The group of twelve South American nations would eventually become the world's fifthlargest trade block according to Didier Opertti, the Secretary-General of the Latin AmericanIntegration Association (ALADI). Tariffs are to be phased out in stages and through bilateralmeetings between countries, without the need for parliamentary ratification in most cases. (59) Political leaders in SouthAmerica view this agreement as a significant step towards economic integration in South Americaand the possible creation of a South American union. The accord includes all the countries in SouthAmerica with the exception of the smaller economies of Suriname, Guyana and French Guiana. Thetwo trade blocs have a combined GDP of $800 billion. Total trade among the countries totals around$30 billion a year.

Some South American leaders have mentioned the possibility of political union as well,saying that it would be "the most important political development of the decade." Brazilian ForeignMinister Celso Amorim underlined the importance of creating institutions that are needed to bringabout South American economic integration and of doing the same in the future for social andpolitical integration of the "South American Community". (60) Leaders expect that theintegration of South America would put South American countries in a stronger position innegotiations with the rest of the world, including a possible free trade agreement with the EU andthe Free Trade Area of the Americas (FTAA). Interest in strengthening integration with LatinAmerica has been supported by foreign ministers of the 12 ALADI countries (Argentina, Bolivia,Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.)

The first summit of the South American Community of Nations was held in Brasilia onSeptember 30, 2005. The summit was attended by the majority of heads of state of South Americancountries. Despite efforts by Venezuelan President Hugo Chavez to replace the proposed structureof the CSN by his own proposal, the representatives at the summit decided to press ahead with whatalready been developed by their foreign ministers in preparatory meetings. They endorsed the ideaof a merger of Mercosur and CAN to make the whole of South America a free-trade area. One ofthe results of the summit was a request to the secretariats of all existing mechanisms of integrationto prepare studies on the convergence of trade agreements between South American countries bymid-2006 at the latest. (61)

Policy Issues and Implications

Continuation of Bilaterals and Regional Trade Agreements

In the absence of an FTAA, it is highly possible that the number of bilateral RTAs in theWestern Hemisphere may continue to increase. Some analysts note that as the number of RTAsincrease, there is a possibility of consolidating existing agreements into larger trading arrangementsin regions of the world, as in the case of the EU which went through five consecutive enlargements,bringing the membership of the Union from six to 25 members. (62) Another example ofconsolidation or expansion is the bilateral agreement between the United States and Canada in the1980s, which helped to bring focus on the Uruguay Round of multilateral negotiations and theformation of NAFTA. However, some believe that this strategy is not the best course of action forthe United States. One of the reasons given is that the focus on bilaterals is distracting the UnitedStates from its leadership role in energizing the FTAA negotiations. Another reason given is thatthe bilateral agreements are doing little to resolve problems such as the trade issues related toagriculture, or strengthening the trade relationship between the United States and Brazil. (63)

Completion of an FTAA

All the countries of the Western Hemisphere, with the exception of Cuba, have been activeparticipants in the establishment of an FTAA. In August 2005, senior representatives from all FTAAcountries met in Mexico. Caribbean trade officials urged countries to hold an administrative meetingprior to the November 2005 Summit of the Americas to restart the stalled FTAA negotiations. Theysuggested that negotiators look at the technical and political obstacles that are holding back the talksand restart the negotiations with a new "road map" that would guide negotiators toward a conclusionof the negotiations. (64) However, the recent Summit of the Americas, held in Mar del Plata, Argentina, was not successfulin reactivating the trade talks. The majority of the 34 participating countries were in support of thetalks, while five countries, including Brazil, Argentina, and Venezuela, were opposed to signing upfor the talks, mostly due to disagreements over agriculture and intellectual property rights.

Some observers are pessimistic about the near-term possibility of restarting the talks, butthere are many analysts who believe that pursuing multilateral talks would be advantageous for theregion. Some have expressed hope that progress on agriculture at the WTO and that the November2005 Summit of the Americas could help move the negotiations forward. According to a study bythe Government Accountability Office (GAO), there are three factors that have been impedingprogress in the FTAA negotiations: 1) The United States and Brazil have made little progress inresolving basic differences on key negotiation issues; (2) member governments have shifted energyand engagement from the FTAA to bilateral and other multilateral trade agreements; and 3) twomechanisms intended to facilitate progress, a new negotiating structure and the co-chairmanship bythe U.S. and Brazil, have failed to do so. (65) The GAO study found that officials from many nations andregional groups in the Western Hemisphere have indicated a continued commitment to establishinga mutually beneficial FTAA. (66)

If the FTAA talks move forward and an agreement is signed, it would provide considerablenew trade and investment opportunities for the 34 participating countries. For the United States, anFTAA would support the U.S. interest in gaining deeper access to markets in South America. TheUnited States might also benefit in that an FTAA could reinforce economic and political reforms thathave occurred in Latin America and could help build support for other important U.S. goals such asdrug interdiction, improving environmental and labor conditions, supporting educational reforms,and reinforcing democracy. (67) In terms of trade, the U.S. position has been that the FTAAwould be significant if it achieves trade liberalization beyond that which has been accomplishedunder the WTO, especially in the areas of liberalization of trade in services and investment;liberalization in government procurement; enforcement of intellectual property rights; and theinclusion of labor and environmental issues. (68)

For countries in Latin America and the Caribbean, the FTAA may help national incomelevels in the region, but not all economic sectors would benefit. Some economists believe that tradeliberalization is needed to improve economic development in the region. An International MonetaryFund (IMF) report found that trade openness in Latin America remained low and cited "abundantempirical evidence" that the more open a country is to trade, the higher its growth performance. Among the report's recommendations is that countries in Latin America need "to liberalize trade andstrengthen their financial systems" to help sustain economic growth. (69) However, Latin Americancountries would have to take additional measures to benefit from trade liberalization and improveeconomic conditions. One study on the effects of an FTAA on Latin America reports that anysignificant effect on incomes and inequality would take a very long time to show up. It states thatthe long-term economic health of Latin America would require much improvement ineducation. (70)

Trade Integration and U.S. Interests

Trade integration in the Americas has gained momentum since the 1990s. The possibilityof forming an FTAA or trade agreements with Andean countries and Panama is of interest topolicymakers because of the economic and political implications for the United States. As theeffects of NAFTA on the U.S., Mexican, and Canadian economies become clearer, policymakers arefaced with the issue of whether trade agreements are beneficial to the United States and how theUnited States should proceed in its trade policy in the Western Hemisphere.

An underlying question is whether the United States should continue to deepen tradeintegration in the Americas and, if so, whether negotiating bilateral trade agreements is the mostappropriate trade policy. As pointed out earlier, some analysts do not believe that bilateral tradeagreements are the best course of action because they take away the focus from energizing the FTAAnegotiations and are slowing down the process. Others believe that RTAs have led to theconsolidation of trade agreements into larger free trade areas in other parts of the world and that thesame thing could occur in the Western Hemisphere over time.

Another issue is whether the United States should deepen integration with its NAFTA tradingpartners. A recent study by senior fellows at the Institute for International Economics on theachievements and challenges of NAFTA finds that, while NAFTA has been successful in promotingregional trade and investment, it also has limitations. The authors propose that NAFTA be"upgraded" and that the United States, Canada, and Mexico should convert their free trade agreementinto a customs union and adopt a common external tariff. They believe that this would promotecommerce among the three trading partners; reduce distortions generated by NAFTA rules of origin;and help resolve some of the trade disputes that are affecting trade relationships in NorthAmerica. (71)

Regional integration also has political implications for the United States. Some observerssee the impetus for trade liberalization as political as well as economic. There are several questionsthat policymakers could consider. To what extent do trade integration agreements foster politicalstability in a country? Are they a useful tool for building a more democratic, secure, and prosperousregion?