South American Trade Paper
HEMISPHERIC PARADIGM SHIFT CALLS FOR NEW U.S. STRATEGY IN SOUTH AMERICA
By Rebecca Bratter Coleman, Director of Policy, U.S. Wheat Associates
South America is the new trade battleground for the U.S. and especially so for the U.S. wheat industry. Once dominant U.S. influence in South America is waning under fire from a number of competitive threats and U.S. wheat exports to the region are not immune to shifting geopolitical realities. While there are a number of factors outside the realm of influence, the situation is not without remedy. Congress is currently debating the fate of three free trade agreements (FTAs) in Latin America – Panama, Peru, and Colombia – in addition to a fourth in South Korea. While Panama is important, it is in a region where free trade with the U.S. is already part of the economic landscape through the Central American Free Trade Agreement (CAFTA). The U.S. has one bilateral free trade agreement in South America with Chile, and while significant, the impact is muted by the flourishing level of intra-regional trade. Trade agreements with Peru and Colombia as well as an eventual Doha agreement would go a long way towards leveling the competitive playing field and sealing the U.S.’ position as a committed trade partner in the game for the long haul. This paper will provide an overview of some of the most notable threats to U.S. competitive standing in South America and will look at how FTAs currently under debate hold the promise of long-term benefits beyond trade. As one U.S. diplomat noted, “there is a battle going on for the hemisphere.” The U.S. must decide where it stands in that battle and needs to lob the opening salvo.
The Chavez Factor
In August 2007, Venezuelan President Hugo Chavez completed a four-country tour of South America as part of his continuing “petro-diplomacy,” campaign. Chavez seeks to expand his influence by leveraging Venezuela’s oil reserves to create “a grand South American alliance,” to counter U.S. dominance and influence in the region. Chavez has now committed billions of dollars to finance improvements and new installations for a spectrum of energy-based initiatives in Ecuador, Bolivia, Uruguay, and Argentina. Chavez’ largesse is designed to fully integrate Venezuela into the Mercosur trading block and also realign regional alliances and reliances. Referring to the U.S., Chavez said there is a tremendous difference between his efforts and “the savage hand of imperialism.” He then added, “the U.S. is like Count Dracula…it wants to suck the blood of the world.” While Chavez’ hypeIn August 2007, Venezuelan President Hugo Chavez completed a four-country tour of South America as part of his continuing “petro-diplomacy,” campaign. Chavez seeks to expand his influence by leveraging Venezuela’s oil reserves to create “a grand South American alliance,” to counter U.S. dominance and influence in the region. Chavez has now committed billions of dollars to finance improvements and new installations for a spectrum of energy-based initiatives in Ecuador, Bolivia, Uruguay, and Argentina. Chavez’ largesse is designed to fully integrate Venezuela into the Mercosur trading block and also realign regional alliances and reliances. Referring to the U.S., Chavez said there is a tremendous difference between his efforts and “the savage hand of imperialism.” He then added, “the U.S. is like Count Dracula…it wants to suck the blood of the world.” While Chavez’ hyperbole borders on comical, it underscores the U.S.’ fading influence and status in South America, a region that the U.S. depends on for trade and is the destination for up to 3 MMT of wheat exports every year. The region as a whole imports close to 12 MMT a year and, despite Argentina’s dominance in the marketplace, there is room for tremendous growth for U.S. wheat if it could compete on a more level playing field.
While the U.S. is not currently negotiating a trade agreement with Bolivia, Bolivia’s turn to the left is symbolic of the new South America. Bolivia, along with Ecuador, Uruguay and Argentina, in addition to Nicaragua, have all seen a resurgence of populism, manifested differently in each case. Nicaragua, economically devastated after serving as a proxy battleground during the cold war years, most surprisingly decided to return former Sandinista leader and sworn enemy of the U.S. Daniel Ortega to power. Brazil’s Luis “Lula” Inacio Da Silva, while also left-leaning, opposes Venezuela’s entry into the Mercosur arrangement, arguing that the country doesn’t comply with Mercosur’s commitment to democracy.
The U.S. influence in Latin America, particularly South America, is waning as Bolivia, Nicaragua, Argentina, and Ecuador opt to use Venezuelan aid to pay off debts or allow credit agreements to lapse. By easing reliance on U.S. and multi-lateral institutions such as the World Bank and the International Monetary Fund (IMF), South America has also moved farther away from U.S.-style economic development and closer to Chavez’ so called “pragmatic version of socialism.” Lending by the IMF to Latin America is down to $759 million from $49 billion in 2003. It is still too early to determine if the return to populism and shifting regional loyalties will become the new structural adjustment for South America. A leading analyst at a Washington-based think tank noted, “...it is doubtful whether Chavez will be able to solidify his anti-U.S. coalition in South America through his largesse.” Some within the region have also expressed distrust and concern about the dangers implicit in shifting dependency from one power to another. Either way, the impact is profound, particularly on the U.S. wheat industry as Argentina, a leading wheat producer, is granted preferential duties on wheat exports by their fellow Mercosur trade bloc members, which continues to erode the U.S. wheat industry’s competitiveness in the region.
Regional Trade Arrangements
The U.S. has pursued economic integration with the rest of the Americas for over two decades. This began with the Canadian Free Trade Agreement, progressed to the North American Free Trade Agreement (NAFTA) and the Caribbean Basin Initiative, continued with the Chilean Free Trade Agreement and, most recently, resulted in the Central America and Dominican Republic Free Trade Agreement (CAFTA/DR). There was talk of and hope that this would eventually lead to a free trade area from Alaska to Tierra del Fuego through the Free Trade Area of the Americas (FTAA) agreement but that is now permanently shelved. There is little to no chance that Brazil, with the richest economy in Latin America, will negotiate a free trade deal with the U.S. any time soon. Some leading trade experts have said U.S. economic policy toward Latin America in the years ahead lacks direction. Trade agreements with Panama, Colombia, and Peru are signed but still face varying degrees of battle on the Hill – and an uncertain future.
In the meantime, South America still lacks a customs and currency union and has begun the process of regional integration. As of now, the following regional trade arrangements exist:
- The Latin American Integration Association (ALADI) – includes Brazil, all Spanish-speaking nations in South America, Mexico, and Cuba; the goal is an eventual EU type arrangement but, for now, provides limited arrangements for goods only.
- Mercosur – Southern common market agreement, includes Argentina, Brazil, Paraguay, and Uruguay with Bolivia, Chile, Colombia, Ecuador, and Peru as associate members and Venezuela’s application is pending; allows for preferential duty access within the trade bloc; Argentina may export wheat to all Mercosur countries at very low or zero duty.
- Andean Community – Ecuador, Colombia, Peru and Bolivia have an integration agreement with Mercosur and reap all the benefits of that agreement; Venezuela was a founding member but President Chavez has since withdrawn from the community.
- Bolivarian Alternative (ALBA) – Proposed by Hugo Chavez as an alternative to the FTAA; this is an agreement in name only but includes Venezuela, Cuba, Bolivia, and Nicaragua with Iran as an observer member; differs in that it is integration that is not based primarily on trade liberalization but rather on a vision of social welfare and mutual economic aid.
There is also a G-3 Accord between Colombia, Venezuela, and Mexico as well as the Central American Integration System (SICA).
There is overlap among the different trade blocs but the overarching vision is, of course, for a single, unified South America along the lines of the EU. With CAFTA/DR and NAFTA, the U.S. has assured a strong bond with this region of Latin America. For the U.S. wheat industry this is reflected in healthy and growing wheat exports to the region and an unquestionably dominant market share that has been as high as 100 percent at times in such countries as Honduras and El Salvador. Trade with Central America and Mexico is characterized by accords that favor the U.S. and by the absence or very limited market presence of Argentina.
Third Country Bilaterals and Influence
The void created by delays in the Doha round of negotiations and the continued lack of an agreement has created what many trade analysts call a “spaghetti bowl” of trade agreements. Without one overarching agreement to define parameters for worldwide free trade in agriculture, goods and services, individual nations are rushing to define trade on their own terms. The result is a patchwork quilt of bilateral and regional agreements, each on different teThe void created by delays in the Doha round of negotiations and the continued lack of an agreement has created what many trade analysts call a “spaghetti bowl” of trade agreements. Without one overarching agreement to define parameters for worldwide free trade in agriculture, goods and services, individual nations are rushing to define trade on their own terms. The result is a patchwork quilt of bilateral and regional agreements, each on different terms, marked by differing levels of enforcement. The last two years have seen a dizzying array of bilateral agreements and most do not include the U.S. The situation for the U.S. is exacerbated by political changes in Congress that have led to new labor and environmental requirements for FTAs that were not contemplated in the original texts. As a result, ratification of two key FTAs for South America is on hold and their futures uncertain. In the meantime, Canada has begun FTA discussions with Peru and Colombia, countries where their efforts to gain new market share have been fruitful. In the last two years, Canada and Argentina have successfully eroded U.S. wheat export market share. Argentina enjoys preferential, duty-free access to both markets through the Mercosur agreement and the Canadian Wheat Board has leveraged its export state monopoly status to manipulate pricing and delivery specifications in their favor. While the U.S. is faring better in both markets so far this year, bilateral agreements between Canada and both countries have the potential to put U.S. wheat at a devastating price disadvantage and effectively kill potential growth in both markets. Chile, the only South American nation to sign a bilateral agreement with the U.S., has also signed one with Japan, the first country to enjoy that distinction. Beyond trade agreements, China is stepping up its presence and its investments in South America. A recent Zogby poll suggests people in the U.S. are very concerned about the growing Chinese influence in Latin America. Of those polled, 83 percent believed China’s economic influence in Latin America poses a threat to the U.S.
Trade agreements signify more than preferential duties and market access. While the U.S. tends to think in terms of free trade, potential partners in South America see these agreements as strategic alliances. These are partnerships that can lead to, as one U.S. State Department official termed it, “microeconomic revolutions.” FTAs create an opening for modernization and serve as an engine for economic growth. This in turn can lead to improved livelihoods and a better quality of life with more disposable income. The same State Department official was very clear in telling the U.S. trade community that “there is a battle going on for the hemisphere.” Effectively, there is a battle raging and the U.S. must intensify its tactics.
Both the Peru and Colombia FTAs are critical for the U.S. wheat industry and for U.S. agriculture and each has its own merit. Colombia holds a dramatic and symbolic value for the U.S. and the consequence of not ratifying an FTA with this important hemispheric partner is that much greater. The U.S. has invested over a billion dollars over the years in Plan Colombia. Plan Colombia was developed by the Colombian Government to help the nation address the broad range of complex and interrelated challenges it faces in five key areas: fighting the illicit drug trade; increasing the rule of law; protecting human rights; expanding economic development; reforming its judicial system; and fostering peace. Despite the ongoing challenges Colombia faces, Plan Colombia is widely credited with restoring a sense of peace and stability, resulting in dynamic economic growth and increased foreign investment. The U.S. is seen as a key partner in Colombia’s quest to restore its credibility in the world market and the nation remains loyal to the U.S. for its allegiance and support.
There are many reasons why the U.S.-Colombia partnership is mutually beneficial and serves as an important counter presence to the efforts of Mr. Chavez to realign South America away from the U.S. Not ratifying the FTA sends the wrong signal to Colombia about the U.S.’ commitment to free trade and to the important strategic alliance that has been established over the years. Colombia has traditionally been the top South American buyer of U.S. wheat after Venezuela. The convergence of all these factors, compounded by a decision not to ratify the U.S.-Colombia FTA, would be a disaster for U.S. wheat.
Andean Trade Promotion and Drug Eradication Act
The U.S.’ current trade policy of unilateral trade with the Andean countries of South America is anachronistic. It made sense at one time to allow special market access provisions to the four Andean countries (Colombia, Peru, Ecuador, and Bolivia) to provide economic alternatives to illegal drug trade, promote development and solidify democratic institutions. The Andean Trade Promotion and Drug Eradication Act (ATPDEA) allows the four countries duty-free access to the U.S. market for agricultural exports. ATPDEA was set to expire on June 30, 2007, but was extended for an additional eight months. Allowing the four Andean countries duty-free access to the U.S. market definitively benefits those countries and could indirectly benefit the U.S. However, as long as the U.S. Congress feels strongly enough about the trade relationship with the Andean nations to renew this agreement, not demanding that U.S. agriculture enjoy the same duty-free access to those markets seems like a disservice and a further impediment to U.S. competitiveness. As long as there is a unilateral agreement in place with two of the Andean countries, why continue to delay bilateral trade expansion? The administration and congressional leaders have reached an agreement on labor and environmental language for both agreements. U.S. agriculture and U.S. wheat lose out each day ratification of the Peru and Colombia FTAs is delayed. While ratification of the Peru FTA seems likely, the fate of the Colombia FTA is uncertain as of this writing. The U.S. wheat industry must continue to work with U.S. government administration officials to stress the importance of these FTAs for U.S. agriculture so they, in turn, can effectively communicate this to Congress.
FTAs Essential for the U.S. and U.S. Wheat Growers
The failure of the FTAA forced the current administration to pursue piecemeal economic integration but this strategy seems to be reaching the point of exhaustion. Brazil and, obviously, Venezuela show no interest in a free trade agreement with the U.S. Argentina and Uruguay are not willing to defy their neighbor Brazil. In the meantime, the U.S. has delayed ratification of two key FTAs and their future is uncertain. Many potential trade partners in the region are creating free trade deals among themselves. The U.S. faces very real threats from the movement underway to realign partnerships and strategic alliances as well as from the largesse originating from new, and maybe even untraditional, sources such as China. China has already demonstrated a lending pattern in other parts of the world that comes with few conditions and certainly demands neither respect for democratic institutions, human rights nor the environment. The U.S. has a unilateral agreement that allows the four Andean nations duty-free access to the U.S. market without demanding any reciprocity for U.S. agriculture.
What’s at stake for U.S. wheat with the Peru and Colombia FTAs?
- The FTAs with Peru and Colombia will immediately remove all duties on U.S. wheat and durum sold into these important markets. Binding tariffs on all wheat and durum at zero will help secure the U.S. wheat industry’s opportunity to rebuild market share in these key markets.
- Peru’s largest agricultural import is wheat. It is important that the FTA is implemented to secure U.S. wheat growers the advantage of zero tariffs and the opportunity to regain market share which has been as high as 50 percent.
- U.S. wheat exports have great potential in Colombia. The U.S. has traditionally dominated the market with over 60 percent market share but has recently seen that number slip to under 40 percent. U.S. wheat exports to Colombia decreased from $100 to $50 million and from over 700,000 MT to 470,000 MT in the last year. Market share has primarily been lost to Argentina, which enjoys preferential tariffs under the Mercosur agreement.
- Industry projections suggest that ratification of the Peru FTA will increase sales of U.S. wheat to Peru by more than 37 percent.
- Immediate ratification of the Peru and Colombia FTAs will encourage other important trade partners such as Ecuador and Bolivia to begin or resume trade negotiations with the U.S. and will counter other regional efforts to discourage free trade with the U.S.
- FTAs signal the U.S.’ long-term commitment to strategic alliances in both markets and to the region as a whole.
- Once the agreements are fully ratified, U. S. Wheat Associates expects these two markets to purchase about $400 million of U.S. wheat annually, up from the current pace of about $200 million per year.
Analysts suggest that Congress will likely ratify the Peru (and Panama) agreement this fall but the future of the Colombia FTA remains uncertain. The U.S. cannot afford to further delay or even consider not ratifying both the Peru and Colombia agreements. The current policy hurts U.S. agricultural competitiveness, hurts U.S. wheat exports, and sends the wrong message about U.S. intentions in the hemisphere. The U.S. has always cultivated ties within the hemisphere but is facing a paradigm shift that requires a change of course. The reality is that there is more liquidity in world markets, there are preferential loan rates and terms elsewhere, new leaders are emerging who seek South-South realignment and present options and financing with few or no economic nor democratic strings attached. The longer the U.S. delays ratification of pending FTAs, the greater the risk to strategic alliances that took decades to build. Every day without an agreement is another opportunity for the competition to fill the trade void. The administration needs a new hemispheric strategy. The current strategy is not only outdated and predicated on South-North allegiance and reliance, it puts U.S. agriculture at a disadvantage and directly affects the ability of industries like U.S. wheat to compete and survive long-term.
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U.S. Wheat Associates is the industry’s market development organization working in 90 countries on behalf of America's wheat producers. The activities of U.S. Wheat Associates are made possible by producer checkoff dollars managed by 18 state wheat commissions and through cost-share funding provided by USDA’s Foreign Agricultural Service. For more information, visit www.uswheat.orgor contact your state wheat commission.
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