1. Introduction
2. Brazil agenda and its strategy in the FTAA
3. U.S. agenda and its strategy in the FTAA
4. Will the FTTA process begin as planned?
5. Conclusions

Paper presented to the XI FIEALC Congress, Osaka, Japan

* Professor at San Marcos National University, Lima, Peru
* Visiting Professor at Yokohama National University, Japan

• E-mail: caquinojp@yahoo.co.jp
• Web site: http://www.oocities.org/Eureka/Plaza/1406

1.Introduction.-

The Free Trade Area of the Americas, FTAA , slated to begin at the end of 2005, will involve all countries in the American continent, 34 of them (except Cuba), and would be the biggest FTA in the world, with more than 800 millions consumers, with a total GDP of more than 12 trillion dollars.

The biggest attraction for most countries in the continent (and of course for Brazil) is the possibility of gaining free access to the U.S. market, the biggest in the world. For the U.S. one attraction is to gain access to the market of Brazil, the biggest in the South American region (and the fourth biggest in the continent after Canada and Mexico, by size of the GDP). The Brazilian market still has many restrictions for foreign companies, much more than for example the U.S. market has.

But then, in the last years, Brazilian authorities has said several times that if in the FTAA the U.S. market will continue closed as it is now for some of its exports, then, it will not be willing to join the FTAA. For its part U.S, has said that it could began the FTAA with the countries that are willing to do that (and leave Brazil out).

A FTAA without Brazil will not be a good beginning for the process of economic integration of the whole American continent. However, the problems between Brazil and U.S. regarding access for example to the farm market of the U.S., will not be easily solved, as show by the failure of the Conference of the World Trade Organization (WTO) held in Cancun two weeks ago. Here rich countries like U.S. opposed (among other things) eliminating all subsidies to agricultural as claimed by developing countries like Brazil (one issue also in discussion in the FTAA process).

Anyway, negotiations are still going on between Brazil and U.S. previous to the, up to now, planned start of the FTTA in the year 2005. Both countries, as actual Co-chairs of the Trade Negotiating Committee of the FTAA, have the biggest responsibility for the successful conclusion of this process.

In this paper we will see what are the issues in discussions for Brazil and its strategy in the FTAA, what are those for the U.S., and finally it will be seen if it is going to be possible for the FTTA to be launched as planned in the year 2005.
 

2. Brazil agenda and its strategy in the FTAA

Even if Brazil is the eleventh biggest economy in the world by GDP size, in the international trade its presence is not as large. According to data for the year 2001, in the ranking of world exporters it is in the 26^th place, and in the ranking of world importers it is in the 23^rd place (Table 1). Brazil export sector is not important in relation to the size of its GDP, as in Mexico, not to say nothing compared to the East Asian countries (Table 2).

Brazil trade with countries in the American continent represented a 48.7% of is total exports and a 43.3% of its total imports in the year 2001. A Free Trade Area of the Americas agreement will mean a boost to Brazil trade with the countries in the continent.

But Brazil has manifested that it will join the FTAA only if the USA drop some restrictions against products where Brazil has competitive advantages, like orange juice, sugar, steel, medium-size aircraft (actually Brazil’s biggest export item). U.S. use antidumping measures to block some Brazilian exports. Also Canada has some restrictions against Brazilian exports of its medium-size aircraft.

FTAA will not only look for the creation of a free trade area for goods but also will try to eliminate restrictions against foreign investment in the region. Still Brazil keeps some restrictions on foreign investment in some areas of its economy. How this will be solved will determine if the FTAA will begin its process in 2005 as planned. US have said that it will began the FTAA with other countries in the region that date (even without Brazil), but as the biggest economy in the South American region, Brazil should be included from the beginning.

A. What are the issues for Brazil?

1. Access to the US market and reduction of agricultural subsidies is of high priority for Brazil. This includes also Brazil interest in finishing the indiscriminate use by the U.S. of antidumping measures that hurt some of its exports.

2. The US proposals in intellectual property could block Brazil use of local generic production of drugs to combat HIV/AIDS (even if in the WTO meeting in Qatar in 2001 Brazil successfully argued that AIDS medicines should be exempted from the TRIPS (Trade-Related Aspects of Intellectual Property Rights) accord –despite U.S. resistance).

3. There is a National Campaign against the FTAA which wants a plebiscite on the issue of Brazil joining it. At the end of 2001 the lower house of Brazil’s Congress unanimously passed a non-binding measure to withdraw from FTAA talks.

B. Brazil strategy in the FTAA

Brazil has tried to slow down the progress of the FTAA so as to buy time to build Mercosur into a unified bloc which can have more bargaining power over and rival the North American Free Trade Area (NAFTA).

Since assuming power at the beginning of this year, Brazilian President Luiz Inacio Lula da Silva has been shuttling between Latin American countries offering access to the Brazilian market and to the Mercosur. Just recently he was in Peru and Venezuela, giving to Peru "partnership" in the Mercosur, and offering $ 1 billion in trade loans to Venezuela. Lula was also present at the WTO Conference in Cancun two weeks ago, where Brazil led a group of developing countries - now the Group of 23 nations- in opposing farm subsidies.

The aim of Brazil is not only to strengthen its negotiation power working together with South American countries in the FTAA process but also in the WTO. In Lima Lula said "We have to unite, we have to create a South American nation. The more policies we have in common, the more understanding there is between businessmen, the better we will be able to succeed in big negotiations, above all in trying to break down WTO’s protectionist barriers and prevent the FTAA becoming an instrument that suffocates our chances of growth" ("Brazil seeking stronger ties", The Miami Herald, Internet edition, September 13, 2003).

C. Is convenient for Brazil to join the FTAA?

If Brazil does not join the FTAA it will lose the possibility of gaining more easy access to the U.S. market. Even if U.S. keep some restrictions to several goods from Brazil, the U.S. market have several advantages over other markets (see Jerry Haar article on Brazil and the FTAA):

1. Brazil sends a quarter of its total exports to the giant in the North (Table 3). It is the biggest destination for Brazilian goods and its importance is increasing year by year.
2. Brazil sells manufactured goods to the U.S., whereas Europe for example buys mainly commodities from Brazil.
3. Even if some agricultural goods and steel are subject to U.S. trade barriers, most Brazilian exports are not. Even in the steel area, 88% of Brazilian exports were exempted from the 30% U.S. tariff increase announced last year.

Another benefit of the FTAA is that it will lessen Brazil dependence on the Southern Common Market (Mercado Comun del Sur –Mercosur). The common external tariff (CET of around 35%) does not make possible for Brazil manufacturers to source cheaper, higher quality, and more varied capital goods inputs from outside Mercosur and drives up costs of final goods to both consumers and industrial buyers.
 
 

* Retained imports are defined as imports less re-exports. * Secretariat estimates

• Source: WTO: "International Trade Statistics 2002", table I.5.

• Source: World Bank: "World Development Report 2003"

• Source: IMF: "DOTS Yearbook 2002"
• Source: IMF: "DOTS Quarterly, June 2003"

• Source: ECLAC: "2002 Statistical Yearbook for Latin America and the Caribbean", table 93.

3. U.S. agenda and its strategy in the FTAA

Brazil means 40% of the South American market so it is important for the U.S. to gain access to this. Brazil maintains many restrictions against foreign products thanks to a high external tariff (around 35%), restrictions against foreign investment in some sectors, and not a complete adherence to treaties that impose respect to intellectual property rights (thus hurting many U.S. companies patent’s rights).

With many Latin American countries willing to gain free access to the huge U. S. market, the U.S. is working in the bilateral and multilateral front to achieve trade deals with most of them.

A. What are the issues for the U.S.?

When the U.S. government launched the initiative for a continental wide free trade area in the summit of the Americas in Miami in 1994, just after starting of the NAFTA agreement, it hoped to have a free market where U.S. companies could freely trade and invest. With the example of the successful economic integration of Western Europe into the European Union, it wanted the same for the American continent.

But in the South American region Brazil position is presenting some problems for this U.S. vision. Brazil market itself is full of many restrictions, probably one of the less open market in the region. Concretely the U.S. wants:

1. Brazil opening of several sectors of its economy for foreign investment.
2. Brazil lowering of its tariffs in capital goods where U.S. companies have a competitive edge.
3. The full acceptance by Brazil of the TRIPS accord.

B. U.S. strategy in the FTAA

Two years ago the U.S. tried to shorten the period to the start of the FTAA, to the year 2003 instead of 2005 as planned, but met with strong resistance from Brazil and other Latin American countries.

The U.S. is moving in the bilateral front and the multilateral front to achieve free trade with countries in the American continent. It has a free trade area, the NAFTA, with Canada and Mexico, and this year signed a FTA with Chile. Other countries, like Panama, Colombia, the Dominican Republic, and Peru, have already expressed interest in FTAs with the U.S. It is said that U.S. is reaching bilateral FTA agreements with some Latin American countries to use it as building blocks that can be catalysts for multilateral agreements – much like Lego blocks, they can be integrated into a larger framework like the FTAA.

U.S. has said that its markets are open and will be more open after the FTAA began. For example, currently the U.S. imposes average tariffs of 3% on Brazilian goods, compared to Brazilian duties of 16% on U.S. imports (but Brazilian point out that 15 of their most important exports to the United States are charged, on average, a tariff of 45.6%, and add that many of their exports also confront numerous phytosanitary barriers and quotas).

The U.S. government got in November 2001 the Trade Promotion Authority, commonly called "fast track", designed to accelerate negotiations in a series of trade deals the country is involved, one of them, the FTAA process. With this U.S. trade negotiators are pursuing free trade deals with several Latin American countries one by one and will use it to undermine Brazil position to present a unified front of South American countries against the U.S.
 

4. Will the FTAA begin as planned?

The coming Ministerial Meeting of the FTAA to be held next November in Miami will show how U.S. and Brazil positions are at this point and could give a clue as to know if the FTAA process will begin as planned. Brazil and U.S, as Co-chairs of the Trade Negotiation Committee of the FTAA, will try to influence others countries positions to support their own one.

At the end with some issues, like farm subsidies that U.S. has, still in discussion at venues like the WTO, both countries will try to agree in issues not as contentious like that and could clinch an agreement so the negotiations for the FTAA agreement could finish as planned by 2005.
 

5. Conclusions

The Free Trade Area of the Americas probably will start as planned when negotiations to that end are completed by the year 2005. It will be the beginning of a process of achieving free trade in the area of goods, services and investment in the continent.

For Brazil, choosing the Mercosur instead of the FTAA is not a goof choice. With Argentina’s economy in problems Brazil needs to export to gain foreign exchange to serve its enormous external debt. Entering into the FTAA will not only allow it to gain easier access to the U.S. market, but also will facilitate its entrance to the Mexico and Canada market. These NAFTA countries are growing very fast and can buy manufactured goods from Brazilian industries. At the end, areas of contentions between Brazil and U.S., like the subsidies on agriculture, will be left to discussions in the WTO arena.

The U.S. is eager to get all Latin American countries into a free trade area. The Bush administration got the fast track authority to negotiate trade deals with the region. The Lula administration in Brazil will probably also came to a compromise with the U.S. As the liberalization process will require some years to complete, depending in the item, in the details both countries will put its own conditions and an agreement will be reached.

Bibliography:

• ECLAC: "2002 Statistical Yearbook for Latin America and the Caribbean", 2003
• FTAA official website.
• Haar, Jerry: "Brazil could win big from the FTAA", from the Dante B. Fascell North-South Center, June 6, 2003.
• IMF: "Direction of Trade Statistics Yearbook 2002", 2003.
• Inter American Development Bank: "Beyond Borders -The New Regionalism in Latin America-", Economic and Social Progress in Latin America 2002 Report,
• World Bank: "World Development Report 2003", 2003.

WTO: "International Trade Statistics 2002", 2003.