Pacific Trade Alliance committed to free market development

Pacific Trade Alliance committed to free market development

In February, the leaders of the Pacific Alliance met in Cartagena, Colombia to discuss tariff reductions. This economic integration project demonstrates a long term credible commitment to sustain liberalized markets via a pro-trade, pro-business, export-oriented development agenda.

In April 2011, Chile, Colombia, Mexico and Peru created the Pacific Alliance, a regional trading bloc aiming to substantially deepen economic integration between member states. Since its creation, the Pacific Alliance has expanded, adding Costa Rica as a full member state last month and more than 28 observer states from across the globe.

Although the bloc has expanded, it has not deepened—the integration goals in the original manifesto have yet to be fulfilled. However, the political impact of the Pacific Alliance is as relevant for investment. It should be seen as an agreement tailored towards business where the leaders of these Latin American countries commit to strengthening the competitiveness of their exporting industries as a long-term development model.

The Pacific Trade Alliance aims to help the free circulation of goods, services, capital and persons without becoming a customs union, all while maintaining a liberalized trade regime. It offers a very practical integration approach, in which members prioritize building economic ties within the bloc while allowing for liberalization with third countries. This open approach of regionalism contrasts the neighboring Mercosur model, which has recently diverged from its initial platform of liberalization.

The model pursued by the Pacific Trade Alliance does not seek to reform the economies of its member states. Instead, it simply seeks to strengthen the current development trajectory of each member. This trajectory is based on liberalizing trade in strategic sectors, tightening monetary policy, achieving low debt to GDP ratio, formulating business friendly fiscal policy and retaining free market principles.

Even before the pact was signed in 2011, Chile, Peru, Colombia and Mexico followed the trade and fiscal policies now prescribed by the Pacific Alliance. Their economies grew substantially in the 2000s, particularly Chile and Peru.

Politically, the bloc acts as an international confirmation that these countries will remain committed to maintaining the growth model of the 2000’s. Instead of reforming their economic models, the Pacific Alliance seeks to continue the growth trajectory that its member states have enjoyed in the past decade. Solidifying their commitment to export-oriented growth is crucial to retaining long-term investment.

The Pacific Trade Alliance is also committed to expanding trade with Asia in an attempt to diversify its export model beyond traditional consumer markets such as the EU and the United States. Its strategic view towards Asia and its affirmation of trade openness as a practical development model is politically relevant.

As the Brazilian economy cools down, Colombia, Peru, Chile, Costa Rica, and Mexico need to show their commitment to stay attractive destinations for investment. This promise is now more important than ever, as the Fed makes cuts to its bond-buying stimulus and fear of capital fleeing from Latin America grows.

Politically, the Pacific Trade Alliance polarizes a continent already divided between open and protectionist economic models. Critics of the Pacific Alliance claim that this trade bloc exists purely for ideological and geopolitical purposes as it excludes leftist progressive neighboring states such as Bolivia, Argentina, Brazil, and Venezuela.

However, the bloc has member states representing both sides of the political spectrum. Chile’s government consists of a broad coalition of social democrats, Peru’s government is social democratic and Costa Rica’s ruling party is a part of Socialist International.

What does seem to be a determinant of exclusivity is the degree of radical rhetoric. The moderate degree of ideological rhetoric demonstrated by Pacific Trade Alliance members suggests that the trade bloc is more concerned with providing stable growth rates driven by export-oriented industries and orthodox monetary policy in line with the global financial system.

Judging by the portfolio of Pacific Trade Alliance member states, it is reasonable to think these countries have created the bloc to move away from the protectionist approach taken by other countries in the region. It signifies a commitment to economic stability and a development agenda focused on at least 3 percent growth—historically difficult to achieve across Latin America. Colombia and Peru have had very promising growth in the 2000s. Chile is almost at OECD GDP levels, and Mexico has made worthy efforts in the past year to create a more competitive economy.

The Pacific Trade Alliance sends a much-needed and timely reassuring message to investors, even if it does not achieve deeper integration. These economies are for the most part commodity-driven—extractive industries dominate the Colombian, Chilean and Peruvian economy.

As emerging markets lose their attractiveness and with speculation that gold and copper prices may fall, these export-driven economies need an agreement such as the Pacific Alliance to strengthen the competitiveness of the region. The Pacific Trade Alliance is a sign of good faith that these economies are open for business, on a continent that recently lost the competitive edge it gained in the 2000s.

Categories: Economics, Latin America

About Author

Daniel Lemaitre

Daniel is a GRI Senior Analyst. He has worked in policy research centered on the political economy of the Andean region in the public, NGO, and private sectors. Daniel holds an MSc in Comparative Political Economy from the London School of Economics, concentrating on Latin American markets.