Building on a decade of expanding trade and investment ties and increasing economic integration in the region, the leaders of 34 democratic countries in the Western Hemisphere pledged in December 1994 to establish an FTAA no later than 2005. The agreement would progressively eliminate barriers to trade and investment. The 34 FTAA participants include a diverse set of countries, from some of the wealthiest (the United States and Canada) to some of the poorest (Haiti) and from some of the largest (Brazil) to some of the smallest in the world (St. Kitts and Nevis). The large disparities in size and economic development in the hemisphere mean that countries come to the negotiating table with different defensive and offensive interests that in some instances coincide and in other cases diverge. In addition, smaller economies lack technical capacity and seek assurances that the FTAA will include provisions to assist them in managing the adjustment to more open markets. Many nations are participating in the negotiations as subregional groupings such as the Caribbean Community (CARICOM) and the Common Market of the South (Mercosur) to facilitate their participation in the FTAA talks. Given the size of its economy, Brazil plays a leading role in Mercosur. Between December 1994 and through negotiations’ formal launch in April 1998, FTAA negotiators agreed on several principles to guide them, notably that all decisions would be reached by consensus and that the eventual FTAA agreement would be implemented as a single undertaking. A single undertaking implies that the FTAA is a package deal to be accepted in its entirety by each of the 34 prospective signatory countries in order to benefit from the agreement’s provisions. Additionally, the negotiators agreed to the overall structure, scope, and organization of the negotiations, including the establishment of a Vice-ministerial-level Trade Negotiations Committee (TNC) to oversee negotiations in between ministerial meetings and of nine negotiating groups on particular issues, along with mandated objectives for these groups. (See fig. 1.) They also agreed that a completed FTAA agreement would include trade rules, which each of the nine negotiating groups are to establish, market access schedules in five of these nine areas, and a general text to cover overarching and institutional issues. In April 2001, the first draft FTAA agreement was made public and more precise deadlines were set for the conclusion and entry into force of the FTAA agreement (January and December 2005, respectively). The 435-page text contained a compilation and consolidation of proposals tabled by FTAA participants. Producing the text marked important progress, but also highlighted the considerable work remaining before the FTAA could be finalized. Notably, much of the text remained in brackets, denoting lack of agreement among participants. Subsequent revisions narrowed but did not eliminate these substantive disagreements. Our prior GAO reports have noted that resolving these disagreements would require considerable hard bargaining. In November 2001, in Doha, Qatar, members of the WTO agreed to launch a new round of multilateral trade negotiations called the Doha Development Agenda (commonly referred to as the Doha Round), which was also to conclude by January 1, 2005. The WTO negotiating agenda includes negotiations on issues of great importance to FTAA countries, including some of the same issues as the FTAA such as agriculture and trade remedies such as antidumping. As we noted in our April 2003 report, the inclusion of agriculture in the Doha Round was especially important for the FTAA negotiations because resolution of issues such as domestic support (subsidies) and export subsidies for agricultural goods has been linked to the ongoing WTO Doha Round. Specifically, the United States has consistently argued that the WTO, rather than the FTAA, is the appropriate forum to negotiate domestic support because two primary users of domestic support in agriculture, the European Union (EU) and Japan, are not FTAA participants. Thus, the United States says, domestic support reform must take place in the WTO, where the EU and Japan are present, to avoid putting it and other FTAA countries that subsidize farmers at a disadvantage in world markets. The United States has taken a similar stance on trade remedies. Several events that are significant to the FTAA occurred in 2002. In August 2002, Congress passed the Bipartisan Trade Promotion Authority Act of 2002 (TPA). The United States Trade Representative (USTR) characterized the passage of the TPA as instrumental to completing the FTAA negotiations on the same aggressive time frame as the WTO talks (both negotiations were to be completed by January 2005). TPA sets a number of U.S. trade negotiating objectives relevant to the FTAA, and outlines procedural requirements for the executive branch to fulfill as conditions for expedited congressional consideration of legislation to implement trade agreements. In November 2002, FTAA ministers launched a Hemispheric Cooperation Program (HCP), a special trade capacity building program intended to provide technical assistance to smaller economies for negotiating, implementing, and benefiting from the FTAA. The HCP gives interested countries and donors a mechanism to work together and with other partners to integrate trade into development strategies. Past GAO reports have highlighted the importance of strengthening smaller nations’ trade capacity to FTAA’s ultimate success. Also in November 2002, Brazil and the United States assumed the co-chairmanship of the FTAA process and are expected to remain in that role until the FTAA negotiations conclude. From the November 2002 Quito ministerial to the November 2003 Miami ministerial, negotiators made progress on the technical aspects of the FTAA, including the exchange of market access offers and some requests for improvement of these offers. However, growing differences between the United States, Brazil, and many other countries over the scope and depth of obligations in the FTAA slowed down progress. Leading up to the Miami ministerial, FTAA ministers recognized the need for flexibility and for political guidance to avoid a breakdown in the negotiations. At Miami, countries agreed on a new negotiating structure, but subsequent talks failed to define the new structure. Formal FTAA talks have yet to resume since an inconclusive February 2004 meeting. As a result, the scheduled conclusion of the FTAA in January 2005 passed without an agreement. From the November 2002 Quito ministerial to the November 2003 Miami ministerial, FTAA negotiators made technical progress. For example, the TNC held the three meetings called for in the Quito ministerial declaration. Participating governments also made progress on civil society issues by holding two open public meetings in 2003 on particular issues under discussion. Moreover, each negotiating group submitted revised versions of the FTAA text chapters by the September 2003 deadline. The chapters were substantially reorganized from those presented to ministers at the Quito Ministerial in 2002. The chapters also included proposals the United States tabled during the first half of 2003 that reflected the negotiating objectives set forth in Trade Promotion Authority. On investment, the U.S. proposals were designed to improve the efficiency and transparency of investor-state arbitration and provide guidance to the tribunals that arbitrate such claims. The United States also tabled text on environmental and labor obligations reflecting TPA guidance in the FTAA Technical Committee on Institutional Issues. In addition, all 34 countries exchanged tariff offers, and many countries exchanged services, investment, and government procurement offers by the agreed deadline of February 15, 2003. Fourteen countries prepared and submitted national or subregional trade capacity building strategies as part of the Hemispheric Cooperation Program. These and other key milestones for the FTAA during 2003 are depicted in figure 2. However, during this time—November 2002 to November 2003—mounting differences between the United States and Brazil and their respective allies over the scope and depth of obligations in the proposed agreement slowed substantive progress in the FTAA. In our last report, we noted that Brazilian officials had admitted that Brazil was holding back in FTAA negotiations because they believed the United States was not ready to negotiate on issues of greatest interest to Brazil, such as high tariffs on key Brazilian exports and trade remedies. With the November 2002 election as President of Brazil of Luiz Inacio Lula da Silva, Brazilian participation in the FTAA process further slowed down. Within the FTAA talks, Brazil and Argentina were among the few countries that failed to submit initial market access offers by the established February 2003 deadline for three topics on which they were hesitant to assume obligations--services, investment, and government procurement. Moreover, although the 1998 San Jose ministerial declaration explicitly named the nine issue areas to be negotiated in the FTAA, questions over the substance of the final agreement continued to surface. For example, the United States came under continued pressure to change its long-standing insistence that negotiations on certain agricultural subsidies and trade remedies be conducted within the WTO, not the FTAA. Among other things, passage of the 2002 Farm Bill and the WTO’s failure to meet scheduled milestones heightened concerns by some FTAA nations about prospects for addressing these two key issues. The February 2003 exchange of initial market access offers also highlighted U.S.-Brazil differences in approach to the FTAA. The United States made four different goods market access offers that were calculated to give smaller, less developed economies faster duty-free access to the United States. The United States said that its differentiated offer allowed it to accord smaller economies better treatment, a principle agreed to by other FTAA nations, as well as provided greater leverage to negotiate market- opening concessions in large, lucrative markets. However, Brazil complained that the U.S. market access offer provided Brazil and its Mercosur partners with the least favorable market liberalization for consumer and industrial goods and agricultural products, as well as placing its most competitive products in the category with the longest phase-out period for tariff elimination. However, U.S. officials believe the initial U.S. offer to Brazil and its Mercosur partners was forthcoming because it provided for immediate duty-free treatment to 58 percent of Mercosur’s industrial goods and 50 percent of its agricultural goods. In response to a slowing of progress within FTAA negotiating groups, Ambassador Zoellick visited Brazil’s Foreign Minister Amorim in May 2003 and convened an informal ministerial meeting at Wye, Maryland, in June 2003, to discuss possible ways to move the talks forward. Nevertheless, in July 2003, Mercosur, led by Brazil, formalized its vision of a scaled-back and “rebalanced” FTAA by formally tabling its “Three Track” proposal in FTAA talks. According to press and other accounts, the proposal called for (1) bilateral FTAA negotiations to focus primarily on market access for goods and services; (2) regional FTAA negotiations on rules for several issues not covered by the WTO, including competition policy and dispute settlement, and (3) leaving six of the original nine issues out of the FTAA altogether and moving them to the WTO Doha Round negotiations (i.e., Brazil’s defensive interests of services, investment, government procurement, and IPR, along with the United States’ defensive interests of agricultural subsidies and trade remedies). Figure 3 shows the key issues Mercosur proposed moving to the WTO versus those it wanted to keep in the FTAA. In public remarks the United States rejected the proposal, which some have labeled “FTAA-lite.” The lead U.S. negotiator explained that a broader agenda, including services, investment, government procurement, and intellectual property, is extremely important to fostering real integration in the hemisphere. He stressed that a market access-only agreement would be insufficient to promote economic growth and development, and expressed reservations about providing a high level of access to the U.S. market in the absence of broader commitments on rules and disciplines of interest to the U.S. and others in the region. As we noted in our September 2001 report, the United States is the world’s leading exporter of services ($253 billion in 1999), holds significant investments in FTAA countries ($661 billion in portfolio and direct U.S. investment in 1999), is interested in government procurement opportunities in the Western Hemisphere valued at approximately $250 billion, and enjoys a decisive competitive advantage in terms of high-tech, knowledge-based industries that depend on strong IPR protection. In addition, unlike agriculture and antidumping, the mandate for the WTO Doha Round does not include negotiations on investment or government procurement, nor a major update of IPR protections. As a result, those issues—which are of significant commercial interest to the United States—might not have been addressed in either the FTAA or WTO. The failure of the September 2003 WTO ministerial at Cancun further complicated FTAA talks. As we detail in a separate report, trade ministers at the WTO Cancun ministerial in September 2003 failed to adopt decisions on any of the key issues before them, including a framework for subsequent work on agriculture. Because both the FTAA and the WTO agreements are to be concluded as single undertakings, and their deadlines for conclusion were the same, failure of the WTO to progress at Cancun imperiled timely completion of both the WTO Doha Round and FTAA talks. Moreover, the Cancun failure spawned recriminations among FTAA participants. For example, Latin American nations such as Brazil, Argentina, Chile, Ecuador, and Mexico were prominent in the Group of 20 developing nations that pressed vigorously at the WTO for cuts in developed country agriculture subsidies. The United States complained at the time that the group was engaged in confrontational tactics that were more directed at making a point than making a deal. After Cancun, USTR Zoellick traveled to the Caribbean to discuss the FTAA and other matters. At the first FTAA meeting after the Cancun failure, an October 2003 TNC meeting, a group of 13 FTAA countries—supported by the United States— called for the original, comprehensive vision of the FTAA to be retained. These countries, along with the United States, further urged that the FTAA’s market liberalization commitments be highly ambitious in a number of areas, including intellectual property, investment, services, and government procurement. Although nearly all other FTAA countries expressed willingness to continue negotiating in all nine issue areas and continued commitment to meet the January 2005 deadline for concluding the FTAA, Brazil indicated a limited willingness to undertake new rules in these areas, citing a need to maintain its negotiating leverage in the WTO Doha Round and to preserve flexibility in these issues. Certain other countries also had reservations. Participants in FTAA negotiations thus effectively broke into two “camps,” articulating their competing visions of an FTAA agreement under the separate banners of U.S. and Brazilian leadership. In view of the sharp differences in vision for the FTAA, trade ministers recognized the need to provide political guidance for negotiators. FTAA countries wanted to avoid an outcome similar to the failed September 2003 WTO ministerial in Cancun, Mexico. Participants recognized that keeping all 34 FTAA countries engaged in the negotiations was critical and that flexibility would be required to do so. In particular, a number of participants feared that failure to accommodate Brazil’s demands would prompt it to abandon the negotiations, dashing their hopes of improved trade terms with South America’s largest market. As host of the Miami ministerial, the United States was particularly invested in a successful outcome. USTR and certain other U.S. officials had been working hard all year to bring about a successful ministerial by working closely with officials from the state of Florida and with representatives of Broward County and the city of Miami, which organized the event. In early November, USTR Zoellick hosted an early mini-ministerial meeting among key FTAA nations in Lansdowne, in preparation for the Miami ministerial later that month. At the Miami ministerial, after obtaining informal input from some members the early November mini-ministerial meeting organized by the United States, co-chairs the United States and Brazil proposed a new framework for the FTAA agreement as a means to move forward. Ministers in Miami discussed and approved the proposed new structure, which gives each country the flexibility to decide, according to its needs, sensitivities, objectives, and capabilities, whether to assume commitments beyond the common set which will be applicable to all 34 countries. Specifically, ministers instructed the TNC to: (1) develop a “Common and Balanced Set of Rights and Obligations” applicable to all 34 countries that would include provisions in the nine areas under negotiation since 1998 and (2) establish procedures for negotiations, possibly on a plurilateral basis, for countries interested in negotiating additional disciplines and benefits. FTAA participants, trade experts, and other analysts have commonly referred to these two components using a variety of terms (e.g., tiers, tracks, etc.). For the purposes of this report, we will use lower tier when discussing the baseline or “Common Set of Rights and Obligations” that will apply to all countries, and upper tier when referring to the plurilateral component of additional obligations that will be entered into by individual countries on a voluntary basis. The Miami instructions represented a substantive shift from the previous vision of the FTAA as a single undertaking, applying equally to all 34 nations, to that of a two-tiered or two-track agreement with varying degrees of national commitments to cut trade barriers and abide by trade rules. The two tiers combined would constitute the FTAA. Table 1 provides a brief description of the two-tiered structure. For the common set, or lower tier, ministers agreed that all nine areas previously under negotiation would be covered. They also agreed to the principle that the same rules would apply to all 34 participants. However, the specific obligations under each issue were not determined and were left to the TNC to negotiate in the future. For the upper tier, country participation, issue coverage, and specific obligations were to be worked out by the participating countries. However, the TNC was to develop procedures governing these negotiations as a component of the overall FTAA. Thus, the Miami ministerial declaration left unanswered questions of how ambitious the FTAA as a whole would be and what members could expect to gain in key issues and markets of interest. However, ministers stated that they expect that this new framework would “result in an appropriate balance of rights and obligations where countries reap the benefits of their respective commitments.” U.S. officials stress this means countries will “get what they pay for” in the negotiations. Some experts have said that the Miami compromise was a pragmatic political decision to avoid a collapse of the Miami ministerial meeting and a breakdown in the FTAA talks, even if it lacked details on how the new structure should be instituted by the TNC. Although ultimately accepted as a way to salvage the talks, the new two- tier structure disappointed some member countries. At the ministerial, several countries expressed disappointment that this new structure for the FTAA would reduce their potential gains through the agreement and urged that any two-tier arrangement be temporary in character. For example, at the closing press conference for the Miami ministerial, Mexico’s Foreign Minister noted that Mexico had “had the expectation of achieving greater progress, greater integration, and greater definition of what we want in the hemisphere for free trade.” Chile’s trade minister, while acknowledging the need to make headway in the face of economic and political sensitivities, noted that when it committed to pursuing an FTAA, Chile had been “looking for a comprehensive and ambitious agreement that would cover all the disciplines.” In general, such countries felt the new structure cast doubt on whether the FTAA agreement would ever attain the promise of trade liberalization and hemispheric-wide integration that had been collectively envisioned for nearly a decade. As a result, they urged intensive efforts to find common ground in the months ahead. Ministers at Miami set goals for concluding market access negotiations by September 2004 and the entire FTAA by January 2005 (see fig. 4). However, FTAA countries made little progress to institute the new two-tier structure in 2004 and thus did not meet these negotiation deadlines. The February 2004 TNC meeting was recessed after failing to complete the two tasks given them by ministers at Miami: (1) to define the lower tier of rights and obligations that would apply to all 34 nations and (2) to develop procedures for plurilateral negotiations, resulting in the indefinite suspension of formal talks among all FTAA members. At the close of the February 2004 TNC, the U.S.-Brazil co-chairs cited the complexity of the task and shortness of time as being their primary consideration in recessing the meeting without agreement. Hopes for reconvening the TNC later faded as ongoing efforts by the U.S. and Brazilian co-chairs to bridge outstanding differences reached a halt in mid-2004. Sharply different visions for the FTAA’s common rights and obligations were articulated at the February meeting. Ahead of the February meeting, the United States worked with four other countries (Canada, Chile, Costa Rica, and Mexico) to develop a common strategy. The United States was unsuccessful in reaching agreement with Brazil on the format and participants for a more inclusive preparatory meeting, and thus it was never held. At the February TNC meeting, the United States joined with a group of 13 nations (including the 4 it worked with ahead of the meeting) in making a proposal for the common set. Brazil and its Mercosur partners also presented a proposal. The U.S.-coalition’s proposal went beyond Mercosur’s in certain respects, whereas the Mercosur proposal went beyond the U.S. coalition’s proposal in others. The two main camps that emerged at the February TNC were roughly similar to the two main camps that emerged in the pre-Miami debate over the FTAA’s scope and depth. After the meeting, both the United States and Brazil complained that their partners were denying them benefits that they deemed were essential to attaining an acceptable balance of rights and obligations in the FTAA. Specifically, a U.S. trade official was quoted as saying that the proposal it presented in concert with 13 other countries reflected a scaling back of its objectives in areas of importance to it, namely, services, IPR, investment, and procurement, in light of the Miami framework. The fact that Mercosur’s proposals did not reflect a scale back in their own ambitions for market access for goods and in agriculture was cited by the U.S. official as the primary reason negotiators were not able to strike an acceptable balance at the February meeting. In contrast, in public remarks, Brazil’s then- ambassador complained that Brazil is being unfairly labeled as a spoiler in FTAA talks, claimed that even with the Miami compromise the FTAA could still be comprehensive, and expressed concern about the United States and its allies’ stance on market access at the February meeting. The Brazilian Ambassador stressed that Brazil needs to ensure that its concerns in the areas of domestic support for agriculture and trade remedies are adequately dealt with and that it will obtain improved access to the U.S. market, particularly for agricultural goods, in order to consider the FTAA a balanced agreement. In effect, according to a senior U.S. official involved in the talks, both sides accused the other of walking away from the Miami compromise. Subsequent informal efforts to work out remaining differences continued until June 2004. While these formal and informal efforts resulted in some progress in defining the rights and obligations for the lower tier, collectively, our analysis suggests that they further reduced the scope of the FTAA’s eventual substance in terms of market access and rules on key topics. That is, to the extent common ground was reached, it was often the result of movement in the direction of the proposal with the least ambition on a given issue. No further meetings on the FTAA took place in 2004, and a ministerial meeting slated for that year was never scheduled by Brazil as host. As a result, the scheduled deadline for concluding the FTAA negotiations in January 2005 was missed without agreement. Our analysis suggests that three main factors have inhibited progress on the FTAA. First and foremost, underlying differences between the United States and Brazil and their respective allies on the depth of rights and obligations on key issues continue. Second, negotiations in other forums were given priority over the FTAA, in part because the United States and Brazil deemed that progress there was more possible and could eventually enhance prospects for a mutually advantageous FTAA. Third, two mechanisms intended to facilitate compromise, the U.S.-Brazil co- chairmanship and the two-tier structure, have thus far failed to do so. The U.S. and Brazil’s inability to accommodate each other’s different negotiating priorities continues to be the basis for the ongoing impasse that halted FTAA negotiations for much of 2004. According to U.S. officials, serious and significant rule-making obligations on such topics as services, IPR, investment, and procurement, are essential if the FTAA is to move the hemisphere towards meaningful regional integration. Specifically, the United States seeks greater enforcement of IPR, and new commitments that go beyond existing WTO requirements in investment, government procurement, and other issues. The United States is a world leader in these sectors, yet has few multilateral and bilateral agreements with FTAA countries to protect its interests. For example, only 2 of the 34 nations participating in FTAA talks (the United States and Canada) are signatories to the WTO agreement that sets out predictable rules enabling foreign suppliers to compete on an equal footing with domestic suppliers for government contracts. However, Brazil maintains that there is domestic resistance to such reforms, and that agreeing to disciplines in these areas could be costly and limit its ability to influence its economy. Brazil is a major world producer of commodities such as coffee, oilseeds, sugar, soy, and beef, and, along with Argentina, has been among the most vocal of Mercosur members in insisting that the FTAA involve significant new market access, especially for agricultural products. Domestic sensitivities in many countries regarding these products were always going to complicate the FTAA, and are no less challenging in the new Miami framework involving generally lower ambition. As highlighted below, in the most recent negotiations co-chaired by the United States and Brazil, the 34 governments remained far apart, and agreement has not yet been reached on the extent of rights and obligations on numerous issues. The key sticking points remained market access, agriculture, and IPR. Brazil and its Mercosur partners have argued for up-front commitments that all tariffs will be phased out in the FTAA. However, the United States is not prepared to commit to an outcome to fully liberalize tariffs on all products at this stage of the FTAA negotiations--before tariff negotiations have really begun and before the overall level of ambition of the common set is known. Nevertheless, Brazil says it wants all products to be on the table – agricultural and nonagricultural – and it does not want product exclusions. Previously agreed FTAA guidance states that tariffs on all products will be subject to negotiations. It also established 4 time periods for phasing out tariffs. Both before and after Miami, Brazil unsuccessfully sought language to the effect that the goal of market access negotiations is elimination of tariffs on the entire tariff universe. Brazil’s Ambassador explained that, even since the Miami compromise, Brazil’s goal remains to ensure that the FTAA benefits all of its key export products. However, he expressed concern that the United States and its allies want key Brazilian export market products to be excluded from FTAA tariff elimination. U.S. officials acknowledge that the United States left some Mercosur products off the table at the point at which FTAA negotiations stalled. However, they explain that all of the products excluded from U.S. tariff elimination were agricultural products and that the percentage of agricultural products excluded was not high. U.S. officials had told us that countries making fewer commitments should expect fewer benefits from the FTAA. Most recently, in February 2005, a U.S. official underlined that the degree of market access the United States will offer in the FTAA will depend on what commitments it secures from other FTAA nations. Since the FTAA common set involves fewer market access and rule-making commitments than the United States has received from its bilateral and subregional FTA partners, the FTAA will likely involve fewer U.S. market access benefits, the official said. The United States and Brazil have also been unable to resolve several agricultural issues, including the handling of agricultural domestic supports. As previously noted, the United States has argued that negotiations on domestic supports should be exclusively conducted in the WTO Doha Round because it is not possible to reduce domestic supports solely on a regional basis and without all major subsidizers present. Brazil and its Mercosur partners have called for the elimination of agricultural subsidies, including domestic supports. Although in November 2004 Brazil’s foreign minister recognized that the only way to reach their goal of eliminating subsidies is through the WTO, Brazil, and its Mercosur partners have still sought ways to address agricultural supports in the FTAA. For example, according to a tripartite organization official, Mercosur made a request at the February 2004 TNC to create a hemispheric mechanism “to neutralize the effect of all distorting measures and practices that affect trade of agricultural products within the region.” A U.S. trade official confirmed that Mercosur is hoping to secure some concessions on domestic supports—such as compensation in terms of better market access—in the FTAA, but said that the United States has rejected any attempt to negotiate this issue in the FTAA. In fact, several U.S. officials expressed consternation that this issue had resurfaced after the Miami ministerial. Another outstanding issue is whether to provide for the possibility of a special agricultural safeguard—a concept the United States and numerous non-Mercosur nations have also endorsed. A USTR official said that this mechanism would allow countries to address sudden drops in prices for specified goods. A Brazilian official expressed concern that this would “impair real market access” and might be used for protectionist reasons. On export subsidies, the U.S. and Mercosur agree that export subsidies should be eliminated in the hemisphere, but no agreement has been reached on the definition of agricultural export subsidies or how to handle subsidized imports from countries outside the hemisphere. Brazil’s unwillingness to commit to binding IPR enforcement obligations is a major source of disagreement between the United States and Brazil. In May 2004, the Brazilian co-chair publicly noted that Brazil does not believe trade sanctions in retaliation for failure to enforce IPR are consistent with the FTAA’s goal of lowering barriers to trade. However, he noted that other FTAA countries do not believe voluntary consultations are sufficient for enforcement of IPR. As Foreign Minister Amorim has expressed Brazil’s position, the problem is not with enforcement per se, but with the fact that technical assistance and financing are needed to improve Brazil’s ability to comply. In a September 2004 speech, Deputy USTR Allgeier stated that the United States wants to focus on implementation and enforcement of countries’ existing WTO TRIPs commitments, that the United States has serious, unresolved concerns about Brazil’s IPR enforcement, and that the FTAA must ensure that IPR enforcement is being strengthened. In November 2004, USTR Robert Zoellick said that although the United States recognizes it cannot attain in the FTAA the high standards of IPR protection that have been achieved in bilateral FTAs, countries’ refusal to commit to enforce IPR obligations in the FTAA was unacceptable to the United States. Reports from the latest (February 2005) meeting indicate IPR remains a key sticking point. Other important differences exist on such issues as services, investment, government procurement, and trade remedies. On services, for example, the extent of and approach to FTAA liberalization and rules are at issue. However, participants have made some progress in narrowing their differences on these issues, notably government procurement and investment. In response to these and other substantive problems that slowed FTAA talks, participants turned to negotiations in other forums, such as the multilateral WTO talks and subregional and bilateral efforts, where progress looked more immediate. Coupled with the absence during most of 2004 of formal negotiations on the FTAA, this further diminished the momentum behind the regionwide effort. (See app. I.) In particular, the United States and Brazil have focused their energies on the WTO Doha Round and on regional negotiations, such as those among the United States and several Andean nations and between Mercosur and the European Union (EU). In part, this reflected their judgment that progress in these forums was more possible and would ultimately enable greater advances in the FTAA. Other trade experts, however, are not sure that the FTAs and other agreements have worked to advance the FTAA. In 2004, the United States continued to press an aggressive “competitive liberalization strategy,” which is to move its trade agenda on three fronts: multilaterally at the WTO, regionally at the FTAA, and bilaterally with a series of prospective FTA partners. The USTR has noted in its 2004 annual report that since passage of TPA, the United States has already negotiated FTAs with 12 countries including several in the Western Hemisphere— Chile, the Central American countries (CAFTA), and the Dominican Republic—and is in the process of negotiating with 12 more. Senior U.S. officials have stated that the U.S. pursuit of bilateral and multilateral FTAs would advance the FTAA and further its goal of expanded trade in the hemisphere, even if in a step-by-step fashion. For its part, Brazil’s foreign minister has indicated that the WTO talks are more important than the FTAA talks, since the WTO is the “only way to reach goal of eliminating subsidies and other trade distortions.” Brazilian officials also focused on an EU-Mercosur FTA that some believe could strengthen its hand in FTAA negotiations. The EU-Mercosur talks reportedly slowed in the fall of 2004 over many of the same issues that arose in the FTAA, but are expected to restart soon. There are mixed views about whether these bilateral and regional FTAs are having a positive impact on the FTAA. Some trade experts say that FTAs help the FTAA by facilitating free trade among countries, setting common rules, and providing a better understanding of the benefits of free trade. Moreover, these FTAs are achieving the kind of market access and updated trade rules the United States had hoped to secure in the FTAA prior to Miami. In part for this reason, several U.S. business community representatives we spoke with told us they have shifted their focus to other agreements. For example, a representative from the International Intellectual Property Alliance credited recent U.S. FTAs with Morocco, Singapore, and Australia, as setting new standards for IPR protection that are higher than the WTO, and expressed doubt that a 34-nation FTAA will include such high standards. Similarly, a trade group representative from the services community told us he believes that U.S. industries are likely to receive more market access from present and future FTA partners in the hemisphere than they would through the new two-tier FTAA structure. Trade group representatives from the U.S. agricultural community told us that they believe the sector has gained most of the market access it seeks through bilateral FTAs. Some of them now see the FTAA as more of a threat than an opportunity. This loss of interest has led other trade experts to argue that FTAs detract attention from the FTAA, create a confusing system of trade arrangements, and raise the bar—possibly beyond others’ reach— for new trade rules on issues, including services, government procurement, and IPR. On the multilateral front, lack of progress in global trade talks at the WTO also impeded progress in the FTAA negotiations in 2003 and the first half of 2004. As a result, officials told us that during a part of 2004 the United States and Brazilian focus shifted from the FTAA toward reaching agreement on a WTO framework. In fact, the United States and Brazil, among others, played leadership roles in intensive negotiations at the WTO and successfully reached agreement on a framework on August 1. The framework in agriculture—a guideline for the next phase of negotiations— represents progress. Among other things, it includes a commitment to eliminate all export subsidies on agriculture by a date certain and specifies that countries with higher levels of trade-distorting domestic supports will be subject to deeper cuts in these supports. However, it falls short of the “modalities” (numerical targets, timetables, formulas, and guidelines) required to actually make tariff and subsidy cuts that members had been targeted to attain by March 2003. In fact, given their success in adopting a package and recent efforts to accelerate progress, WTO nations are now hoping that they will have modalities in place by their December 2005 ministerial, but recognize this as an ambitious goal. WTO negotiations are thus about 2 years behind their originally scheduled date for conclusion. A third factor hindering progress on the FTAA is that two mechanisms intended to facilitate U.S.-Brazil compromise—the new two-tier structure and the co-chairmanship—have thus far failed to do so. At Miami, the United States and Brazil billed the two-tier structure as a way to bridge their differences and enable both their visions of an FTAA to co- exist. However, our analyses suggest that in practice, the new negotiating framework added new complications to the negotiations without resolving the U.S.-Brazil centered dispute over the FTAA’s ambition. First, since Miami, FTAA negotiators have faced a conceptual problem because they abandoned the original vision in favor of a scaled-back FTAA, the substantive content of which was left largely undefined. Since details on the level of trade liberalization that was envisaged in the common set were not decided at Miami, FTAA participants have interpreted the goals and the nature of the new FTAA architecture differently. Second, interdependence between the two tiers has also complicated net benefit calculations. Member countries will have to trade-off offensive and defensive interests in the two-tier framework. This is inherently more complicated to do until the content and obligations of each tier is defined. Third, the United States and Brazil have divergent strategies for instituting the two-tier structure. U.S. officials admit that the U.S. long-term goal is an FTAA modeled on the more ambitious upper tier. The United States’ basic premise is that if a country is not willing to undertake higher obligations and new rules for issues of importance to it—services, investment, government procurement, and IPR—then it should not expect as much market access for its goods and services. Brazilian officials, on the other hand, explain that Brazil is trying to achieve balance within the lower tier, including market access for goods and services, and some limited new rules for investment and government procurement. However, Brazil is otherwise generally not willing to accept an FTAA with rules that go beyond those in the WTO. In discussions with us, U.S. and Brazilian officials expressed continued belief that the two-tier structure represents the best way forward for FTAA negotiations. Certain officials from other countries and experts, however, are skeptical. Several officials said the two-tier structure is a symptom of continued U.S.-Brazil failure to agree on an FTAA that provides mutual benefits. They suggest that the two-tier structure needs to be rethought, given the difficulties experienced in instituting it and the potential it creates for moving aspects of issues essential for balance off the negotiating table. Now fearing the prospect that participating exclusively in the lower tier could result in permanent “second class” membership, an FTAA country official who supported the idea suggested to us that a single agreement applicable to all member nations with negotiated exemptions for sensitive products or capacity constraints might be preferable. In our view, the arrangement with the United States and Brazil as co-chairs of the negotiations has complicated the process of moving the FTAA negotiations forward. When negotiations were formally launched in 1998, selecting two of the largest economies in the hemisphere with vastly different interests to share the responsibility of leading the talks seemed logical to some experts, as success in the talks depended upon those two countries working together toward a common goal. Most experts and participants still believe such cooperation is a necessary, if not sufficient, condition for concluding an FTAA. U.S. and Brazilian officials believe that the co-chairmanship reflects the importance of the United States and Brazil in bringing the negotiations to a successful conclusion and keeping countries engaged at senior levels toward that end. However, some participants have questioned whether as co-chairs the United States and Brazil have in practice been able to successfully keep separate their roles of (1) negotiating in their countries’ interest, while (2) impartially leading and finding solutions to move the negotiations forward. As a result, one of the lead FTAA negotiators commented that it may have been preferable to have a neutral chair. Moreover, as co-chairs, the United States and Brazil have the power to set the pace of negotiations by setting schedules and convening meetings. As noted earlier, the co-chairs were unable to agree to hold a preparatory meeting with a cross-section of members ahead of the inconclusive February 2004 TNC. The co-chairs have not reconvened the 34 nation TNC since the February 2004 TNC, and no negotiating group meetings were held in 2004. While for most of 2004 the other member countries gave the United States and Brazil time and space to work out their differences, the co-chair talks came to a halt in June 2004. One lead negotiator suggested to us that since that time neither Brazil nor the United States is effectively leading the negotiations. Yet beginning in August 2004, after the WTO framework was agreed to, certain participating countries began coming forward, urging the co-chairs to update them on progress, including prospects for a relaunch and a schedule for re-engaging the entire membership. Until late February 2005, the co-chairs had yet to do so. In comments to us, an official from another country that has pressed for a comprehensive and ambitious FTAA urged the United States and Brazil, as co-chairs, to disavow self-serving stances and to adopt a more flexible approach, rather than using the FTAA to settle bilateral disputes and blocking, rather than advancing, hemispheric negotiations. On the other hand, Brazilian officials were not alone in commenting favorably on the U.S. co-chairs’ personal commitment to the FTAA’s success. Although many participants and experts were pessimistic when we spoke with them in the fall of 2004, they generally believe that integrating the hemisphere is still worth pursuing and remain hopeful about prospects for reviving the FTAA in 2005. Many FTAA experts and country officials we spoke with were pessimistic about the FTAA’s near-term prospects because the FTAA cannot advance until the U.S.-Brazil impasse is broken. Through mid-November 2004, neither the United States nor Brazil had decided to take the first move to break their 6-month stand-off. However, in late November, USTR Zoellick wrote to Brazil’s Foreign Minister Amorim proposing a fresh effort on the FTAA and called for the two sides to meet soon towards that end. Brazil responded positively. On the eve of issuing this report, new efforts began toward rekindling the FTAA negotiations. On January 30, 2005, Ambassador Zoellick and Brazilian Foreign Minister Amorim met to discuss the possibility of renewing FTAA talks. Following that meeting the co-chairs met in Washington, D.C., on February 23 and 24, 2005, and at the end of the meeting reported that some progress had been made in bridging their differences concerning the scope of the FTAA’s common set of obligations. Another meeting has been scheduled for late March to continue those discussions. If the co-chairs reach agreement, they plan to convene a TNC meeting in late April or early May of this year, with the goal of reaching consensus among the 34 participating countries on the instructions for the common set negotiations and on procedures for the plurilateral negotiations. A statement from the co-chairs said that they are hopeful that based on that agreement they would be able to resume FTAA negotiations in June. Nevertheless, it may be instructive to examine the reasons U.S. and Brazilian officials gave to us for their prior reticence to re-engage, based on our fall 2004 interviews--all three of them related to political will. First, several U.S. trade officials suggested the United States has little room to maneuver, especially to ensure that the final FTAA sufficiently meets the objectives of TPA. A U.S. official explained that the United States has already made considerable concessions to Brazil in agreeing to a two-tiered FTAA at Miami. The United States’ subsequent February 2004 proposals on the lower tier also reflected a scale-back from its earlier demands. The U.S. officials we spoke with are still hopeful that the FTAA will eventually deliver meaningful commercial benefits. However, they acknowledged that any benefits are likely to fall short of what it had hoped to secure prior to Miami—or what the U.S. business community has come to expect as a result of recent bilateral agreements. This diminished business support has weakened the pressure on U.S. negotiators to seek an accommodation with Brazil. Second, in discussions with us, U.S. and Brazilian officials both expressed a sense that they have made considerable effort to find common ground and showed some skepticism about their partner’s commitment. For their part, U.S. officials point to a series of meetings initiated by the USTR, both before and after Miami, as emblematic of U.S. commitment to advance the talks, but say Brazil has seemed to want to hold the FTAA back. According to a U.S. official, the United States had been interested in a substantive FTAA and the administration remains committed to the FTAA because it will be good for the United States and for the region. However, discussions since Miami have helped bring differences in U.S.-Brazil conceptions out in the open, and suggest that Brazil has not reconciled itself to an FTAA that looks anything like what the United States would like to see. U.S. officials also believe they have shown willingness to compromise and express disappointment that Brazil and its Mercosur partners have been unwilling to reciprocate. For example, the USTR told reporters in mid-November 2004 that Mercosur needs to show additional flexibility and be more willing to “give” on issues of importance to the United States in order to “get” what it wants out of the FTAA. On the other hand, Brazilian officials expressed concern to us that its positions are being mischaracterized or misunderstood. For example, Brazil counters that the kind of opening of industrial and services markets it is prepared to offer would present considerable new opportunities to the United States and other FTAA nations. Brazil has also been willing to go beyond its WTO obligations in some areas, notably investment and government procurement, where the WTO presently has no comprehensive multilateral agreements. Thus, Brazilian officials say, efforts by U.S. officials to label it as “unambitious” are both unfair and unproductive. Third, based on our conversations with U.S. and Brazilian officials, each country also appeared to feel it has a “strong hand” in the negotiations and could afford to wait. Brazil believes better access to its large and growing economy is valued by the United States and has shown its influence on the world stage by playing a central role in WTO negotiations and winning WTO disputes against the U.S. cotton and EU sugar agricultural subsidy programs. U.S. officials argue the United States has had considerable success with an aggressive “competitive liberalization strategy,” stating that, taking into account FTAs in effect, completed, or that are in ongoing negotiations, U.S. bilateral and subregional free trade efforts involve two- thirds of the hemisphere’s non-U.S. population and income. The United States also retains certain leverage associated with its trade laws and preference programs. For example, though not formally linked to its FTAA stance, Brazil’s General System of Preferences (GSP) benefits from the United States have been recently placed in jeopardy for alleged failure to adequately protect U.S. intellectual property rights. Some country officials and experts believe that conditions may be more ripe for restarting talks now that the long-standing deadlock in WTO talks has been broken and the U.S. electoral cycle is complete. (Even after the U.S. elections, Brazil had indicated it was waiting for a new USTR to be named before seriously engaging in FTAA talks.) On the substance, the WTO framework adopted in July 2004 resulted in somewhat clearer commitments regarding further disciplining agricultural subsidies and other issues. Breaking the WTO impasse also could improve the FTAA negotiating atmosphere, given the U.S.-Brazil cooperation it required. Thus, to the extent that it provides reassurance about the direction and thrust of partners’ policies, the WTO progress builds confidence that could provide impetus for restarting FTAA talks. However, several experts we spoke with felt that the WTO framework, while welcome, is not concrete enough to forestall the ongoing insistence by some parties that agriculture subsidy and trade remedy reform accompany an FTAA. Indeed, in January 2005, Brazil’s Foreign Minister stressed that Brazil’s capacity to agree to new rules in the FTAA on IPR and investment depends on securing such reform. One Andean country’s lead negotiator echoed this sentiment, saying the FTAA will remain secondary in priority to other negotiations until the outcome of the WTO Doha Round is clear. Brazilian officials told us that the WTO framework sends a “positive message” for the FTAA, but stressed that what the WTO concretely produces on agriculture remains essential to FTAA progress. Several officials and experts said the lead-up to the November 2005 Summit of the Americas in Argentina could generate forward momentum for the FTAA, although others were less sanguine. Yet, even the optimists feel concluding an agreement will only be possible if FTAA ministers halt the downward spiral in the FTAA’s ambitions and renew their efforts to negotiate a meaningful agreement. Certain nations and U.S. business associations we met with stressed that they stand ready to support a two- tier FTAA, as long as it promises sufficiently large economic gains. Several officials also suggested that building forward momentum will not be a minor undertaking, given the considerable length of time FTAA negotiations have languished. As a result, certain FTAA country officials, Tripartite Committee, and trade experts see taking action by mid-2005 such as extending TPA as critical to finishing the FTAA. Other experts suggest FTAA countries will closely watch Congress’ stance in 2005 on whether to approve the CAFTA as a bellwether for support for broader hemispheric integration. Even so, a number of experts felt the deadline for WTO and FTAA talks would remain linked with final bargaining likely to be made in 2006-07, when a new U.S. Farm Bill may be under consideration (the present U.S. Farm Bill expires in late 2006). Despite concern over the short-term prospects, many experts and officials believe that the FTAA is an idea that is still worth pursuing and are hopeful for re-engagement later in 2005. First, experts argue that the ideals that originally motivated pursuit of an FTAA remain valid. These include the desire to deepen economic integration and improve living standards throughout the hemisphere; the shared goal of fostering political cooperation and strengthening democratic, market-oriented institutions; and the imperative to increase the region’s growth and competitiveness in an ever-more-globalized economy. In this regard, China’s emergence as a global trader has lent further importance to attaining the FTAA, some suggested. Second, officials from many of the nations we contacted continue to anticipate gains from concluding an FTAA. Senior U.S. officials have repeatedly and publicly expressed continued commitment to an eventual FTAA. In an October 2004 statement signaling an improved chance of resuming talks after the U.S. election, Brazil’s Foreign Minister stated, “Integration will occur, for better or worse. It will come about through contraband, drug traffic, and guerilla warfare. Or it will be through trade, technology, and investment. Better for it to be the second way.” Nevertheless, various other public remarks by Brazil’s Foreign Minister suggest that the FTAA’s priority is not paramount and that Brazil’s principal interest is in a negotiation with the United States that will yield improved access to the U.S. market. An official from another Mercosur member noted its interest in an FTAA is based on a desire to increase and diversify its exports, a theme echoed by an official from another regional grouping. An official from an existing U.S. FTA partner highlighted its desire to further integrate hemispheric markets and sees the FTAA as integral for promoting hemispheric development. An official from another U.S. FTA partner stressed its strong commitment to the FTAA because it would bring political and economic gains over the medium- and long-term. Officials in another nation pointed out that the FTAA is critical for improving access to Latin American markets, particularly in the Mercosur region. Many could not conceive of the FTAA being officially abandoned given these stakes, and the considerable time, effort, and political capital already invested. A Central American nation representative stressed that it would be foolhardy to abandon the FTAA because it symbolizes the region’s commitment to economic and political progress. Another country representative indicated that the FTAA is a forum in which hemispheric officials at all levels share a vision of where the region aspires to move— which he considers a worthwhile endeavor—even if realizing that vision is “a complex challenge.” A representative of a CARICOM nation expressed hope that the question is not “whether we will have an FTAA, but when.” However, a consistent premise for countries’ commitment to the FTAA is that the final agreement be mutually advantageous and flexibly respond to differing capacities. A Mercosur member, for example, noted that “time frames are important, but in the end, it is more important that countries realize the economic growth, job creation, and narrowing of income disparities that could be achieved by signing an agreement that truly reflects, in the best possible way, the interests of the FTAA’s diverse membership.” After making steady technical progress, FTAA talks slowed in mid-2003 and were essentially at a standstill for over a year. Some U.S., Brazilian, and other FTAA officials think the pause in FTAA talks is an inherent part of achieving an acceptable balance of rights and obligations among the 34 nations participating. However, a number of the participants and experts we spoke with now believe that greater political commitment and decisive involvement is necessary to break the impasse and restore vitality to the flagging negotiations. The missed January 2005 deadline for concluding the FTAA coincided with renewed U.S.-Brazil efforts to find common ground. After their February 23-24, 2005 meeting, the U.S.-Brazil co-chairs issued a joint statement expressing optimism about the progress they had made. A U.S. spokesperson expressed hope that a late March meeting would prove successful in closing gaps on remaining issues and enable the co-chairs to restart FTAA talks by reconvening all 34 FTAA nations in early May. Whether there is decisive action, 2005 will determine if the decade-long effort on the FTAA and long-sought vision of hemispheric economic integration will finally come to fruition. We provided draft copies of this report to the Office of the U.S. Trade Representative, the Departments of State, Commerce, and Agriculture on January 4, 2005, and received formal comments from USTR and the Department of Commerce. USTR disagreed with our report, stating that it is an inaccurate and poorly framed portrayal of progress and problems in the negotiations, overemphasized the role of the United States and Brazil in the current impasse, and did not give sufficient weight to U.S. efforts to make progress in the talks. We disagree with USTR’s assessment. As detailed in our scope and methodology, we conducted more than 58 interviews, most of them with officials directly engaged in the FTAA negotiations, including with representatives from 17 of the 34 countries and each of the major regional groupings participating in the FTAA talks, tripartite officials and other experts, U.S. officials including USTR officials, and private sector representatives over the period leading up to and after the Miami FTAA ministerial. We also reviewed numerous U.S. and foreign government official documents and private sector submissions related to the negotiations. Moreover, we relied on the expertise developed over the course of our three prior reports and two testimonies on the FTAA issued in the past 4 years. The Chairmen of the Senate Finance Committee and the House Ways and Means Committee asked us to provide an independent perspective on the issues and challenges facing FTAA negotiators and the United States, in its capacity of co-chairman of the negotiations. Our objectives were to assess the progress that was made since our April 2003 report, the factors that have affected progress, and future prospects for the FTAA. We stand by our report’s conclusion that FTAA negotiations have not progressed since mid- 2003, in large part due to unresolved U.S.-Brazil disagreements, higher priorities, and negotiating structures that have, to date, tended to compound difficulties, rather than facilitate progress. As the USTR letter points out, the FTAA has been a centerpiece for U.S. policy towards Latin America for more than a decade, and as of yet, no way has been found to move the negotiations toward a successful conclusion. We provide additional detail in appendix II on our response to USTR’s comments, including those areas where we have made modifications to our report. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time we will provide copies to interested congressional committees, the U.S. Trade Representative, the Secretary of State, the Secretary of Commerce, and the Secretary of Agriculture. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4347. Additional GAO contacts and staff acknowledgements are listed in appendix IV. To conduct our analysis of the progress made in FTAA negotiations since our last report (April 2003), the factors influencing the FTAA’s progress, and the FTAA’s future prospects, we reviewed public foreign government and official FTAA and executive branch documents. We also reviewed academic and economic literature related to the negotiations and participated in a number of discussions and panels on the FTAA sponsored by institutions such as the Inter-American Dialogue and the Woodrow Wilson Center. We conducted a total of 58 interviews both before and after the November 2003 Miami ministerial, including 21 interviews with U.S. officials from the Office of the United States Trade Representative and the Departments of State, Agriculture, and Commerce. We also interviewed foreign government officials from five FTAA participant countries and one group of countries participating in the FTAA. In addition, we sent a letter soliciting views from the Lead Negotiators of the 34 FTAA participant countries and received 15 oral and/or written responses. In total, we obtained information from 16 of the 34 nations participating in the FTAA talks, and each of the major groupings within the hemisphere. We also interviewed trade and U.S.-Latin American affairs experts at the Council of the Americas, the Inter-American Dialogue, the Center for Strategic and International Studies, the Institute for International Economics, as well as and officials from the National Association of Manufacturers, Coalition of Services Industries, United States Chamber of Commerce, and Caterpillar. We also reviewed written private sector input provided to USTR by numerous business associations and private sector advisory committee members. We held several discussions with each of the multilateral institutions that provide technical assistance to the FTAA negotiations: the Organization of American States, the Inter-American Development Bank, and the Economic Commission for Latin America and the Caribbean. In November 2003, we attended meetings associated with the FTAA trade ministerial, including the Americas Business Forum and the Americas Trade and Sustainable Development Forum. This report is also based on our past work on the FTAA negotiations in the Western Hemisphere, such as pre- and post-Miami briefings for requesters and previous public reports and testimonies (see related GAO products). We conducted our work from April through December 2004 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the U.S. Trade Representatives’s letter dated February 10, 2005. 1. Our report does not attempt to assign blame for the slowdown of the talks. We conducted extensive research, including in-depth interviews with numerous participants both before and after the Miami ministerial, to identify key developments and factors that were affecting the FTAA’s progress. In general, those with whom we spoke were concerned about the lack of progress in the FTAA. However, the tenor of remarks was generally constructive, in recognition of the complexity of the task faced by the United States and Brazil as co-chairs seeking to finalize an FTAA by bridging substantive differences among the 34 diverse nations of the Western Hemisphere. In terms of our characterization of the role of the U.S. and Brazil, the evidence we collected clearly indicates that the U.S. and Brazil did play the key roles in the negotiating dynamics both as co-chairs and as proponents of different visions of the FTAA. Moreover outstanding U.S.-Brazil disagreements over key issues were identified as the most important cause of the present impasse by the FTAA participants and trade experts from whom we obtained input. Regarding the co-chairmanship see comment 11. 2. Our report describes the chronology of events that occurred since the Miami Ministerial and the level of activity in the various ongoing negotiations. The United States and Brazil are actively involved in negotiations at three levels: regionally in the FTAA, subregionally such as through bilateral FTAs, and globally at the WTO. In some cases, the same personnel are working on multiple negotiations. Officials from both countries indicated that, consistent with their respective “competitive liberalization” strategies, they were channeling their attention and efforts to those negotiations showing the most immediate promise, which for most of 2004, were not on the FTAA. The report reflects this, and also notes that officials from both countries expressed the view that progress in other negotiations would eventually contribute to progress on the FTAA. GAO is not questioning these judgments. 3. We did not assign blame for the slowdown in the negotiations to any of the parties. The report’s objectives were to describe progress in the negotiations and to identify factors affecting the FTAA’s progress. It is undisputed that there are outstanding U.S.-Brazil disagreements over key issues. These disagreements were identified by those officials and experts we contacted as the most important cause of the present impasse. The report does not “choose sides” on the issues but rather explains the basic differences between the parties’ positions. It then notes that an unwillingness or inability to accommodate each others’ priorities is at root of the present impasse. Our report presents these issues in the context of a post-Miami, two-tier FTAA that would likely involve less ambition than prior to Miami, but which remains undefined. 4. We have modified our report to elaborate upon U.S. initiatives to spur progress and on hemispheric efforts to improve dialogue with civil society and implement the Hemispheric Cooperation Program. However, our understanding is that these initiatives have only progressed since Miami with respect to countries with whom the United States is negotiating bilateral or subregional FTAs. 5. Our report already identifies the question of whether to change the FTAA’s originally-envisaged scope and depth as the central dilemma facing negotiators prior to Miami and includes all of the information USTR describes. It also includes the alternate perspective held by Brazil and its Mercosur partners, namely that, in their view, the United States also effectively called into question the FTAA’s original terms of reference by refusing to discuss the topics of domestic supports for agriculture and trade remedies within the FTAA, due to their systemic nature and ongoing WTO negotiations. In our view the presentation of both positions, in the context of the WTO Doha round’s launch in November 2001 and its ensuing delays, yields a balanced and accurate report. 6. Our report notes that the U.S. offer differentiated among nations was in keeping with the shared goal of providing smaller economies better treatment. The report also notes that some Mercosur members did not submit their market access offers on several rule-making topics on schedule. However, this section of the GAO report is intended to explain the slowdown in FTAA talks and the developments that led to the change in the FTAA’s structure at the Miami ministerial. Brazil reacted publicly and negatively to the differentiated U.S. market access offer, and cited it as one reason for its proposed scale-back, and we describe this development. 7. GAO acknowledges the extensive efforts made by U.S. government and Miami officials to make the Miami ministerial successful, and, in response to USTR’s comments, have added specific language to that effect, as well as references to the three meetings Ambassador Zoellick organized in an effort to provide direction and identify ways to move the talks forward. 8. The GAO report provides a detailed description of the Miami ministerial declaration as issued by ministers. In that section, the report makes a clear distinction between the exact words used by ministers and our own use of “lower” and “upper” tiers to describe the new, two- tier FTAA structure. We believe the terms lower and upper tiers are a concise and intuitive way of describing the notion of a baseline of commitments common to all 34 members and another set of supplementary, deeper commitments undertaken on a voluntary basis. Because of the need to refer repeatedly to these concepts throughout the rest of the report, we disagree with USTR’s comment and have not modified our report. 9. GAO modified its report to include the detailed developments described by USTR, including its efforts to work with other countries, in connection with the inconclusive February TNC meeting. The GAO report now also notes that Brazil and its Mercosur partners presented a proposal at the February meeting and that the U.S. and its partners’ proposal goes beyond Mercosur’s in certain respects, whereas the Mercosur proposal goes beyond the U.S. coalition’s proposal in others. We note that the two main “camps” at the February TNC are roughly similar to the two main “camps” that emerged in the pre-Miami debate over the FTAA’s scope and depth of obligations. The report also notes that after the February TNC meeting, both sides complained that the other side’s proposal denied them commercial benefits that they deemed were essential to attaining an acceptable balance of rights and obligations in the FTAA agreement. 10. We believe the report accurately characterizes the role of the co- chairmanship as involving management of the overall negotiating process, scheduling and chairing of senior-level meetings, and facilitating consensus. However, the report also notes that those we spoke with were concerned that thus far the U.S.-Brazil co- chairmanship has had limited success in these areas and in moving the negotiations forward generally. Moreover, we note that even U.S. and Brazilian officials told GAO that the co-chairmanship has complicated progress. For example, a senior U.S. official who is directly involved in the negotiations told us the United States and Brazil could not agree on the format and attendees for a U.S. proposed meeting to coordinate positions ahead of the February 2004 TNC, and as a result, the meeting never occurred. A Brazilian official with intimate knowledge of the co- chairmanship told us that in practice, the co-chairmanship means the U.S. and Brazil must agree on each document before it can be distributed, slowing progress. GAO notes that USTR’s agency comments indicate that the co-chairs still do not agree on the pace and direction for the FTAA. GAO believes, and its interviews suggest, that this lack of agreement has complicated the co-chairmanship’s capacity to spur FTAA progress. 11. See comment 1. 12. Although they often acknowledged that the two-tier structure was agreed to by all 34 participants at Miami, those we spoke with generally expressed disappointment that the two-tiered structure has not, as hoped, propelled the process forward, nor provided members with a workable roadmap for resuming pursuit of an FTAA. In particular, the two tiered structure has not resolved differences in vision over the FTAA’s ambition, and some experts felt it has complicated the task of striking an acceptable balance of rights and obligations among FTAA nations. 13. See comment 2. 14. GAO disagrees. As USTR is aware, GAO extensively reviewed official FTAA and U.S. government documents and had several meetings with U.S. and Brazilian officials to discuss and analyze the outstanding issues. We highlight in the report those issues that emerged as the key sticking points as of when the talks broke down, according to our interviews with officials directly familiar with the talks. We acknowledge that there are more unresolved issues and have made a minor wording changes in the report to make that more clear. 15. GAO disagrees. The report as submitted to USTR for comment states that Brazil’s ambassador expressed concern that key Brazilian products would be excluded from FTAA tariff elimination—not that the U.S. plans to reduce its market access offer. 16. USTR mischaracterizes the treatment of this issue in the report. The report describes the competitive liberalization policy of the United States and the priority given by the United States to pursuit of the WTO Doha round and sub-regional initiatives. In addition, the report notes U.S. officials’ belief that progress in these forums have already yielded important progress and may ultimately be helpful to the FTAA. In addition, the report states that those we spoke with felt the progress in the WTO was helpful to the FTAA and that further WTO progress was desirable. With respect to U.S. pursuit of sub-regional agreements such as bilateral FTAs, consistent with the evidence collected, the report notes that the United States believes that these are advancing U.S. trade goals in the hemisphere in a step-by-step fashion, but states that not all participants and observers are convinced that these are helpful to the FTAA and to hemispheric integration generally. The following is GAO’s comment on the U.S. Department of Commerce’s letter received January 24, 2005. 1. GAO updated the report to reflect this. In addition to those listed above, Jose Martinez-Fabre, Mark Keenan, Michelle Munn, Jonathan Rose, Jamie McDonald, Etana Finkler, and Ernie Jackson made key contributions to this report. World Trade Organization: Cancun Ministerial Fails to Move Global Trade Negotiations Forward; Next Steps Uncertain. GAO-04-250. Washington, D.C.: January 15, 2004. International Trade: Intensifying Free Trade Negotiating Agenda Calls for Better Allocation of Staff and Resources. GAO-04-233. Washington, D.C.: January 12, 2004. Free Trade Area of the Americas: United States Faces Challenges As Co- Chair of Final Negotiating Phase and Host of November 2003 Ministerial, GAO-03-700T. Washington, D.C.: May 13, 2003. Free Trade Area of the Americas: Negotiations Progress, but Successful Ministerial Hinges on Intensified U.S. Preparations. GAO-03-560. Washington, D.C.: April 11, 2003. World Trade Organization: Early Decisions on Key Issues Vital to Progress in Ongoing Negotiations. GAO-02-879. Washington, D.C.: September 4, 2002. Free Trade Area of the Americas: Negotiators Move Toward Agreement That Will Have Benefits, Costs to U.S. Economy. GAO-01-1027. Washington, D.C.: September 7, 2001. Free Trade Area of the Americas: April 2001 Meetings Set Stage for Hard Bargaining to Begin. GAO-01-706T. Washington, D.C.: May 8, 2001. Free Trade Area of the Americas: Negotiations at Key Juncture on Eve of April Meeting. GAO-01-552. Washington, D.C.: March 30, 2001. World Trade Organization: Progress in Agricultural Trade Negotiations May Be Slow. GAO/T-NSIAD-00-122. Washington, D.C.: March 7, 2000. World Trade Organization: Seattle Ministerial: Outcomes and Lessons Learned. GAO/T-NSIAD-00-86. Washington, D.C.: February 10, 2000. World Trade Organization: Seattle Ministerial: Outcomes and Lessons Learned. GAO/T-NSIAD-00-84. Washington, D.C.: February 8, 2000. Agricultural Trade: Changes Made to Market Access Program, but Questions Remain on Economic Impact. GAO/NSIAD-99-38. Washington, D.C.: April 5, 1999.

Summary: If completed, the Free Trade Area of the Americas (FTAA) agreement would encompass an area of 800 million people and about $13 trillion in production of goods and services, making it the most significant regional trade initiative presently being pursued by the United States. The 34 democratic nations of the Western Hemisphere formally launched negotiations towards a FTAA in 1998, and set a January 2005 deadline for concluding a FTAA agreement. GAO was asked to analyze (1) progress made in FTAA negotiations since GAO's last (April 2003) report (2) factors that have been influencing the FTAA's progress; and (3) future prospects for the FTAA. USTR disagreed with our report, stating it was a poorly framed portrayal of progress and problems in the negotiations, overemphasized the role of the United States and Brazil in the current impasse, and did not give sufficient weight to U.S. efforts to make progress. GAO made several changes in response, but disagreed with USTR's assessment. The Departments of State, Commerce, and Agriculture provided technical comments, which we incorporated. Since our April 2003 report, FTAA negotiations reached an impasse that remains unbroken. Prior to the November 2003 FTAA Ministerial in Miami, negotiators made technical advances, but differences over the scope and depth of obligations in the FTAA slowed substantive progress. Despite adopting a new structure at Miami, negotiations have been suspended since early 2004, and the scheduled conclusion of the FTAA in January 2005 expired without agreement. This spurred recent efforts to re-start the talks. Three factors have been impeding progress in the FTAA negotiations: (1) the United States and Brazil have made little progress in resolving basic differences on key negotiation issues, (2) member governments have shifted energy and engagement from the FTAA to bilateral and multilateral trade agreements, and (3) two mechanisms intended to facilitate progress--a new negotiating structure and the co-chairmanship by the U.S. and Brazil--have so far failed to do so. Although in the Fall of 2004 participants and experts were pessimistic about near-term prospects, many believe that integrating the hemisphere is still worth pursuing and hope that FTAA talks can be revived in 2005. Some believe that progress on agriculture at the World Trade Organization and the upcoming 2005 Summit of the Americas could spur movement on the FTAA. However, many still see finally concluding the FTAA as linked to further WTO progress and to renewal of U.S. Trade Promotion Authority, which facilitates U.S. Congressional approval in mid-2005. Nevertheless, officials from many of the nations and regional groups we contacted indicate continued commitment to establishing a mutually beneficial FTAA.