Deep Integration in Latin American Trade Agreements

Ninfa M. Fuentes-Sosa

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000520811
• Edition: 1
• Topic: Politica e relazioni internazionali
• Subtopic: Commercio e tariffe

Trade agreements have uncontested relevance as essential instruments governing international trade, yet little attention has been directed towards explaining differences in their content. Deep Integration in Latin American Trade Agreements analyzes the structure, nature, and characteristics of deep integration in trade agreements established by Latin American countries after the crises of 1982 and until 2020 with their regional and extra-regional partners.

Ninfa M. Fuentes-Sosa argues that deep integration can be disaggregated into its institutional, operative, and horizontal dimensions (which differ regarding their functions and application level). Empirically, she demonstrates that trade provisions can be mapped, measured, and allocated into their corresponding dimension, providing an understanding of the deep integration structure in Latin America. She claims that the current structure poses challenges for deepening regionalism at a broad scale. Countries working on specific areas over time could diminish obstacles that have prevented them from achieving deeper trade integration.

Providing an operational definition and measures of deep integration, this book will be of great interest to scholars, graduate students, and policymakers working in the field of international political economy, trade, and trade politics.

1 Introduction

DOI: 10.4324/9780429318313-1

For more than 25 years, deep integration in trade agreements has been a recurring topic for politicians and scholars. There are ongoing news reports about the efforts of political leaders to pursue deep integration. Additionally, trade agreements have uncontested relevance as the most critical instruments that govern international trade. Trade agreements have increased both in number and in the policy areas they cover. The number of preferential agreements has increased from 50 in the early 1990s to approximately 300 in 2019.

Moreover, since the 1950s and 1960s, Latin American governments, international organizations, and scholars have acknowledged trade integration as a means to promote economic development. Furthermore, international organizations have emphatically suggested that the region requires further deep integration to recover from the effects of the COVID-19 pandemic. The disruptions for the countries’ economies and political and social spheres have debilitated the already weak multilateral institutions and aggravated the tensions between the major economic powers. Convergence through deep integration could enhance the region’s opportunities of improving its productivity, rising complementarity, and increasing its possibilities to participate in global supply chains. In sum, deep trade agreements are crucial for the world economy and, thereby, for Latin American countries.

However, as in other regions, little attention has been paid to understanding and explaining differences in the content of trade agreements. For example, Smith (2000: 137) states that neglect in the study of the content of trade agreements is ‘curious’ given their wide variation and the implications which such differences may have for ‘academic debates regarding sovereignty, globalization, and interdependence.’ Furthermore, there is no clarity yet on what deep integration is and how it can be assessed.

Over the last decade, there has been increased interest in Latin America about the different trade policies implemented in countries of the region. The proliferation of divergent trade agreements in Latin America during the last two decades has raised several analytical and policy issues in academic debate, such as the complementarity between the multilateral system and regional trade agreements, the consequences of the overlap between trade agreements, and the contribution of trade agreements towards economic growth and stability, among others (Ortiz-Mena L.N. A. and Fuentes-Sosa, N., forthcoming). Nevertheless, despite extensive literature about trade integration in Latin American countries, there is a lack of knowledge about the content of their agreements. Therefore, the question that motivated this research is: How is the structure and nature of deep integration in the agreements signed by Latin American countries with their regional and extra-regional partners?

This research studies the texts of reciprocal trade agreements established by Latin American countries from 1982 to 2020 towards the liberalization of goods and services that were in force and for which their complete legal text was available. This research primarily uses the original hand-coded Database of Deep Integration in Latin America (Fuentes-Sosa, 2014) which included more than 256 dyadic trade agreements. These agreements were gathered and hand-coded in 110 aspects for a total of 28,160 data points. The database was assessed and updated in the relevant areas for this book and complemented with information from other more recent databases that partially overlap. The wording of the templates was adjusted, where possible, to be most similar to relevant and recent studies to facilitate aggregation of knowledge. This database provides a relatively more detailed coding of the institutional and operative dimensions. The construction of the dataset follows an original approach to studying deep integration in preferential trade agreements, described in Chapters 2 and 3. This approach distinguishes provisions that contribute towards deep integration by analyzing their function, scope of application, coverage of policy areas, and the types of measures they include (Fuentes-Sosa, forthcoming). To the best of my knowledge, the database coded and compiled is the most comprehensive for studying deep integration in Latin American countries’ trade agreements.

At the time of writing, several agreements in the region changed aspects of their structure or were in the process of doing it. For example, the North America Free Trade Agreement (NAFTA) and the Trans Pacific Partnership (TPP) and the Trans-Pacific Partnership (TPP) had modifications in one or more dimensions because the government of President Trump of the United States denounced them. Also, the European Union (EU) and the European Free Trade Association (EFTA) were in the process of modernizing their agreements. Because this study requires the complete texts of the agreements, the study was conducted with the information of the agreement in force. Then, Chapter 5 expands on the changes in the structure of the agreements.

This chapter presented the broad theoretical and empirical areas that anchor this book. The first section schematically reviewed trade integration in the region, including the effects of the COVID-19 pandemic regarding the decrease of the value of exports, the primarization of production, and loss of industrial capacity. The second section discussed liberal institutionalism as an appropriate theoretical approach to frame this study. It also explained the conceptualization of trade agreements used in this book as the product of rational, purposeful exchanges among governments and economic interest groups. The third section presented the complementarities of said approach with other perspectives, such as rational design and legalization. The fourth and fifth sections broadly addressed the arguments and results of this study. There is empirical evidence to support the analytical differentiation, according to their different nature and function, of deep integration in the studied trade agreements, into institutional, operative, and horizontal (coverage of policy areas). The next section integrates the aspects mentioned above in an overview of the content of the rest of the chapters.

Overview of Trade Integration

For several years, progress in the liberalization of global trade has been slow and fragile. Before the COVID-19 pandemic, since the 2008–2009 global financial crisis, world trade was already debilitated because of the following factors. First, the increasing unpopularity of globalization and integration in the developed countries. Second, the dynamics of the competition between the United States and China. Third, the decrease of China’s dependence on imports and exports. Finally, with the fourth industrial revolution, trade in physical goods was replaced by digital products (ECLAC, 2020: 37).

Simultaneously, the multilateral trade system has been underperforming as an alternative to achieving reciprocal liberalization through preferential trade agreements. The primary sources of the frailty of the multilateral trade system are the following. First, the members’ inability to reach substantive compromises after their inability to complete the Doha Round. Second, claims for reform of the World Trade Organization (WTO) without consensus on which forms and objectives the reform should address. Third, the United States induced paralysis of the appellate body since December 2019, weakening its dispute settlement mechanism. Fourth, the postponing of the 12th ministerial conference due to the pandemic. Fifth, the conflicts and delays in appointing a new director general. Sixth, the lack of an alternative forum in which countries could cooperate to advance trade issues. Governments have tried to cooperate in trade issues in the Group of 20, but the conflicts between associates reproduce those at the WTO (ECLAC, 2020: 41–42). The COVID-19 crisis was a catalyst for the global and regional trends of weakening trade integration. The crisis worsened tensions between the main international economy actors and further weakened the multilateral system structures.

The pandemic and the measures governments took to avoid its spread have had a lasting impact on the world economy, particularly in developing countries. The pandemic affected global trade because of the confinement measures that governments took to avoid the propagation of the disease. The severe demand and supply shocks affected countries’ gross domestic product (GDP) and increased their levels of unemployment. Although the pandemic initially affected more developed than developing economies, the lack of vaccines and fiscal resources has made the economic recovery particularly difficult for the latter. Furthermore, COVID-19 exacerbated the global and multilateral trends mentioned above, increasing conflict in trade relations and security and geopolitical concerns.

At the regional level, the crisis decreased the value of exports, promoted the re-primarization of exports, and fostered an undergoing loss of industrial capacity. The United Nations Economic Commission for Latin America and the Caribbean’s (ECLAC, 2020) most recent statistics present the challenging context of regional trade. First, the region’s exports of goods and services contracted sharply from January to May (16 and 30 percent, respectively). The Andean Community (AC) and the Caribbean Community (CARICOM) had the most significant falls in the value of regional goods exports. The value of exports from the Southern Common Market (MERCOSUR) fell by 12.1 percent in the first half of 2020. The most severe falls were in Venezuela (64 percent) because of the decline in oil prices and the breakdown of its production; and Uruguay (15 percent), because the sales of manufactures (agricultural and industrial) fell, mainly within MERCOSUR. In Argentina and Brazil, shipments of manufactures fell, but both countries increased the volume of their agricultural exports to China. Furthermore, tourism almost ceased between April and June 2019, affecting mainly Caribbean countries, whose economies rely heavily on the sector.

The study also explains the main reason for the contraction of the region’s exports was the reduction of the demand from the United States, the EU, and the Latin American countries; the demand from China for agricultural products, food and minerals, and metals remained relatively stable. This situation has worsened the re-primarization of the economies of South America due to the manufacturing displacement by China’s manufactures and the increase of exports of raw materials to meet the demands from their trade partners in Asia. Also, previous to the pandemic, the region’s imports fell because of the economic recession. The economic crisis decreased the demand for imports even more. Although exports have started rising due to the economic recovery of developed countries and China, imports have not recovered. Considering that intra-regional trade concentrates trade in manufacturers, the industrial sector’s recovery expectations are also limited.

International organizations, such as ECLAC (2020), emphatically recommend that the region broaden and deepen its economic integration to recover from the pandemic and increase its competitiveness and its political leverage in the international system. ECLAC predicts that although there will not be a reversal of globalization, tensions between the main actors of the international economy (Europe, the United States and China) will exacerbate and further weaken the multilateral system. In turn, countries will continue managing international trade through their trade agreements. As a result, the world’s economy will become more regionalized into North America, Europe, and Asia blocks. The following are examples of this trend: the United States-Mexico-Canada Agreement (USMCA), the Regional Comprehensive Economic Partnership (RCEP), the African Continental Free Trade Area (AfCFTA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Latin America should also build up the region’s coordinated action to increase its leverage for equitable relationships with the leading powers in the world economy.

Furthermore, Latin America should also deepen regional trade integration to increase its productive returns to scale to face the economic effects of the pandemic, strengthen the countries’ strategic industries, and develop production and research networks. Greater regional integration is necessary to reduce the region’s productive structures’ vulnerabilities against supply or demand shocks and achieve more efficient production. According to ECLAC (2020: 11), developing regional economies of scale would also foster complementarity among Latin American economies and promote their diversification of production and exports. Furthermore, since regional trade is intensive in manufacturing, promoting it would also lead to developing manufacturing capacity and reducing the region’s dependence on exports of raw materials.

Nevertheless, trade integration in the region is sharply divided between the groups of countries that have integrated, limiting the economic benefits of said integration. Since the 1990s, the region has pursued strategies to achieve trade liberalization, resulting in a “spaghetti bowl” of multilateral, regional, and bilateral trade agreements. In the Americas, bilateral trade agreements have proven to be the most vibrant, but as the regional trade has grown, so has the relevance of regional trade agreements in governing the regional economies’ trade (Estevadeordal et al., 2009: 1). The economic integration became subregional due to the failure of ambitious regional projects, like the Latin American Free Trade Association (LAFTA) and the Latin American Integration Association (LAIA). Currently, trade integration in the region includes numerous bilateral agreements and various subregional agreements, such as MERCOSUR, the AC, the Pacific Alliance (PA) and the Central American Common Market. ECLAC (2020: 75) emphasizes that the current schemes miss the opportunity of developing regional economies of scale that could build more sophisticated structures of production based on complementarity and advanced technologies. In turn, this productivity would expand the interregional trade in manufactured products and decrease the countries’ dependence on commodity exports. In this way, the high fragmentation of integration in the region limits the countries’ abilities to take advantage of economic opportunities from increasing returns to scale production.

Deep Integration in Trade Agreements

In Latin America, ...