Opportunity or threat?
MSc. Juan Luis Zúñiga
Partner director
CATRADE CONSULTING GROUP
Background. There is currently a clear global trend toward subregional integration, which allows countries to negotiate as a bloc to obtain better conditions. One explanation for this new trade policy orientation is rooted in a global trade liberalization process that has led to a kind of fragmentation of trade regulations through Regional Trade Agreements (RTAs). To date, 446 RTAs have been notified to the World Trade Organization (WTO), of which 259 are in force. This complex network of regulations poses a significant challenge in terms of trade implementation and administration, with diverse rules agreed upon between various trading partners.
In the American continent, important regional agreements such as NAFTA (North American Free Trade Agreement) and CAFTA-DR (Dominican Republic-Central America Free Trade Agreement), as well as several regional integration initiatives such as the Central American Common Market (CACM); the Southern Common Market (MERCOSUR); the Andean Community of Nations (CAN); and the Caribbean Community (CARICOM), as well as trade convergence processes, such as the new Free Trade Agreement between the countries of Central America and Mexico.
The new facet of regionalism is the formation of mega-trade agreements, formed by the union of several countries that have bilateral agreements in force but now decide to join forces based on a pragmatic approach and with similar objectives, with the aim of creating a mega-trade bloc. This is precisely the scenario that gave rise to the Pacific Alliance Agreement (PA).
Genesis of the AP. It emerged in April 2010 as a regional integration initiative formed by Chile, Colombia, Peru, and Mexico, based on existing bilateral agreements between its members. Essentially, it seeks to create an area of free movement of goods, services, capital, and people, fostering greater growth and competitiveness among its member economies and serving as a platform for political coordination and regional integration, with an emphasis on the Asia-Pacific region.
The negotiations lasted approximately three years and covered major trade-related issues, ultimately achieving a set of "rules of the game" that will govern the future exchange of goods, services, and people between the countries in the trading bloc. Among the issues highlighted in the Agreement are rules related to Trade in Goods, Investment, Government Procurement, Movement of Persons, Air Transport, Electronic Commerce, Trade Promotion, Cooperation, and Dispute Settlement.
Regarding trade in goods, specifically market access, an agreement was reached on immediate liberalization of the 92% (Tariff on Goods) and a progressive liberalization of the remaining product range through tariff reductions (26 different categories), with the exception of sugar, some products with high sugar content (cocoa powder and bakery and pastry mixes), flavored or color-added syrups, and ethyl alcohol; these products were excluded from the tariff reduction program.
The longest tariff reduction periods were granted to Mexico (2033), while the other countries will achieve free trade for all goods subject to tariff reduction in the following years: Chile (2020), Peru (2030) and Colombia (2030).
Regarding rules of origin, it is worth highlighting the rule that allows cumulation of origin among the four countries, provided that the customs tariff is 0% between all of them. In other words, goods that enjoy free trade in the four AP economies may be manufactured with materials from their counterparts, and these inputs or raw materials will be considered as if they had been manufactured or produced in their own territory.
Current status of the AP. The AP currently has four full members (founding countries) and 32 observer countries, including Costa Rica and Panama, strong candidates to join this mega-trade bloc.
In the specific case of Costa Rica, the candidacy was formalized on February 10, 2014, during the Eighth PA Summit, with the signing of the Declaration on the Initiation of Costa Rica's Accession Process. This decision represented Costa Rica's commitment to the principles and values of the PA, as well as its respect for the essential requirements set forth in the PA Framework Agreement and its willingness to promote the integration mechanism.
choppy waters. Since Costa Rica formalized its candidacy, the issue has generated diverse opinions within the Costa Rican business community. On the one hand, some favor the accession initiative, while others have pointed out that incorporation would be subject to respect for the commitments the country assumed in bilateral trade agreements with the founding countries of the AP. However, since the AP is a component of the Ministry of Foreign Trade's (COMEX) work plan for the 2014-2016 four-year period, it will almost certainly open up a space for analysis, the presentation of ideas, and proposals. This situation is not only expected but desirable, in order to avoid the emergence of misinformed opinions or discussions rife with dogmatism. It would be unhealthy to fall into a kind of "caftization" of the AP.
Certainly, unlike other negotiation processes, in this specific case, the private sector and the public have not been widely informed about the scope and implications of future accession to the PA.
The authorities of the previous government, realizing that the waters were choppy and that time was not their best ally, opted to return to port, leaving the current administration to undertake this new journey toward deepening the trade platform. A formidable task, especially in a context where a significant portion of the business sector has voiced strong criticism, alleging a lack of transparency in the handling of the process and stating that they do not favor "reopening" trade negotiations that once had their own dynamics and particular balance.
However, it is necessary to ask not only what the real causes of concern are for this sector, but also whether these concerns outweigh the potential benefits of participating in the initiative.
Private sector concerns. One of the sector's most important concerns is based on Article 19.8 of the PA Framework Agreement, which states that a State's accession to the PA implies unreserved acceptance of the Framework Agreement, its instruments, and commitments. A reading of this article raises some questions: Does it imply that the country has little room for negotiation regarding exclusions from trade liberalization? Will this commitment mean that the country must accept the immediate liberalization of the 92% trade agreement already achieved by the four founding members of the PA? Should 2033 be accepted as the deadline for liberalizing the 100% trade agreement with the remaining members of the group? All these questions, still unanswered, represent a challenge for Costa Rica, which has currently liberalized its trade bilaterally and separately with the PA countries (98% with Mexico, 95% with Chile, 78% with Peru, and 71% with Colombia).
Added to this are concerns about products excluded from current bilateral agreements, where AP member countries are very likely to demand their liberalization within a certain period of time, and the elimination of protection via rules of origin that cumulation will allow, by accepting the use of materials from all countries in the mega-agreement as if they were products of national origin.
Strategic importance. Although the concerns raised are valid and must be adequately addressed during the negotiations, it is important to note that joining the PA is of great strategic importance for Costa Rica. This agreement not only represents an opportunity for the country to continue its integration into the international economy, but would also guarantee it a place in the bloc of the most open and dynamic economies in the Americas, which ranks eighth among the world's economic and exporting powers.
The PA is expected to increase the possibilities of attracting Foreign Direct Investment (FDI) and improve standards in technical regulations, trade facilitation, modernization of customs processes, etc. It would also allow for participation in cooperation programs related to the Environment and Climate Change; Innovation, Science and Technology; Social Development; Student and Academic Exchange; and Tourism.
Furthermore, it is hoped that the achievements the founding countries have made to date will have a positive impact on leveraging the benefits of free trade, through the development of more aggressive and joint investment and trade promotion strategies, such as the opening of joint trade offices.
No less important is that each full member country of the AP has the right to accumulate origins on an expanded basis, thereby strengthening or promoting the creation of productive linkages with the other members of the alliance and, at the same time, receiving benefits in the area of facilitating the movement of business people and migratory transit.
In addition, Costa Rica's accession to the PA represents a gateway to the Organization for Economic Cooperation and Development (OECD), as both Chile and Mexico are already members of this body, and Colombia has candidate status.
Next steps. After reviewing some concerns and the strategic importance of this agreement, it is essential that each company or sector conduct its own analysis, weighing the strengths/opportunities/weaknesses/threats, both sector- and national-level. The decision cannot be improvised or selfish. On the contrary, it must be realistic, well-founded, and strategic, so as to clearly identify the opportunities and challenges ahead. According to COMEX, negotiations will begin in the first half of 2015; however, to date, the exact start date is unknown.
Future articles will analyze specific topics that will be the subject of the AP negotiations.
The opinions expressed in this article are the author's own and do not necessarily reflect the views of the firm at the regional level.