In last week’s blog, I discussed the collapse the Doha round of trade talks and Brazil’s leading role in these negotiations. This week's blog looks at progress on other free trade agreements in Latin America and asks, who really stands to benefit from trade liberalization?

FTAA, bilateral FTAs and regional integration

Doha is not the only recent example of trade talks collapsing after failed negotiations. In 2005, the Free Trade Agreement of the Americas (FTAA) floundered over similar issues to Doha: the US was seeking to expand trade in services and increase intellectual property rights, while Latin American countries pushed for an end to agricultural subsidies and freer trade in agricultural goods. Again, Brazil’s role in negotiations was crucial and it’s opposition at the Mar de Plata Summit in January 2005 played a large part in blocking a deal. There is some speculation that reaching a last-minute agreement over the Doha round could pave the way for a revival of the FTAA, but the terms of any negotiations would most likely be very different.

Following the collapse of the FTAA, a number of Latin American countries have engaged in  bilateral free-trade agreements with the US and the EU. The US has signed or is working towards FTAs with Chile, Peru, Colombia, Panama, Uruguay and Central America through CAFTA (click here for more on bilateral FTAs). More such agreements seem likely in the future, particularly if the Doha talks are finally given up on. However, developing countries tend to have less negotiating power in such agreements and they are often forced to accept US or EU demands. The recent proliferation of bilateral agreements have also worried some economists, who see them as a  'pox on the trading system'.

There has also been progress on regional integration, which Brazil is keen to move forward. Recent examples include Peru’s agreement with Mexico and Chile and Colombia’s agreement with Guatemala, El Salvador, Honduras and Chile. The Andean Community has expanded with the inclusion of Chile, while Venezuela has recently became the fifth member of Mercosur. Trade relations between the two blocs have also deepened through an agreement on goods. 

Trade liberalization - who stands to benefit?

While many see trade liberalization as the path to economic development and social progress, critics claim that free trade agreements are biased towards rich countries and increase poverty and inequality. What impact is further trade liberalization likely to have on countries in Latin America and who stands to benefit?

 One country with extensive experience of trade liberalization is Brazil. Previous ODI research on this shows that trade liberalization in Brazil has brought important economic benefits, particularly in the case of agriculture, which has already helped stimulate regional development. Brazil also stands to gain from liberalization of trade in services and from TRIPS rules that allow it to export generic drugs to other developing countries. However, despite bringing net economic gains, high regional and social inequality prevent these gains from being neutrally distributed. The ability of the poor to access a larger share of these gains depends on domestic policies, such as improvements in infrastructure and transportation and access to credit (click here to read more).

 This is likely to be the case in many Latin American countries, given the high levels of inequality across the region. It suggests that trade liberalization alone will not combat the problem of poverty and that governments must play a crucial role in making sure that the poor share in the benefits of increased trade.

One argument put forward by the World Bank is that developing countries stand to benefit from access to markets of other developing countries through trade liberalization. However, according to ODI’s Sheila Page, the principal markets for Least Developed countries’ exports (both agriculture and nonagriculture) are the developed countries. Liberalisation by East-Asian developing countries is likely to be important for the Asian countries, but not for African or Latin American countries, while liberalisation by African and Latin American countries is unlikely to have a major effect even in their own regions. She concludes that ‘there seems no reason yet to alter the assumption that the principal gains for developing and Least Developed country exports will come from opening US and European markets’.

Although the impact is mixed, smaller and poorer countries are likely to benefit the least from trade liberalization and may be adversely affected. For example, LDCs find it difficult to enter into agro-export markets and net food importers may suffer from higher world prices (see ODI meeting on ‘Agriculture and the WTO’). Given that developing countries don’t stand to gain as much from normal trade, Special and Differential Treatment can ensure that there is ‘something for everyone at the table’. This can include a combination of principles and money to help poor countries adjust and build trade capacity (see ODI meeting ‘SDT and the WTO’). The recognition of the importance of this type of assistance is reflected in the recent shift away from ‘trade for aid’ and towards ‘aid for trade’.

It therefore seems right to conclude that the rich countries stand to gain more from trade liberalization than poor countries. However, provided developing countries have the necessary bargaining power in negotiations through forming trade blocs such as the G20, free trade agreements can be made fairer and more tailored towards their needs. Similarly, while the poor will not be the automatic beneficiaries of trade liberalization and may be adversely affected, pro-poor domestic policy can ensure that their interests are protected and that gains from trade are evenly distributed.  

Winning over civil society

Convincing opponents of free trade that this is possible will not be an easy task. Many Latin American social movements remain determined to resist future FTAs with developed countries. I witnessed the strength of this opposition at the first Social Forum of the Americas in Quito in July 2004 when massive demonstrations against free trade brought the city to a standstill. I soon found myself swept along in a tide of social activists, political groups and indigenous organizations. Demands ranged from the cancellation of NAFTA and FTAA to an end to US imperialism and the withdrawal of all foreign multinationals. Someone smashed the windows of the World Trade Center. The Marriott Hotel was covered with graffiti demanding ‘Yankees go home’ (photo above).

Such sentiments are widespread in many Latin American countries and are reflected in the anti-neoliberal rhetoric of leaders such as Chavez and Morales. The future of free trade in the region depends not only on whether leaders can reach agreement at Doha or elsewhere, but also on whether they can win over civil society groups who have neither been consulted in nor benefited from previous free trade agreements. In order to do so, they must prove – through both negotiating better trade agreements and implementing pro-poor domestic policies –  that trade can be an instrument to combat poverty and inequality.