LAC free trade agreement could provide significant windfall — IDB study


A new study by the Inter-American Development Bank (IDB) says Latin America and the Caribbean (LAC) could add an additional US$11 billion in annual trade flows by blending 33 separate agreements into a single regional free trade bloc, resulting in the formation of a Latin American and Caribbean Free Trade Agreement (LAC-FTA).

The Washington-based international bank said that the study, “Connecting the Dots: A Road Map for a Better Integration of Latin America and the Caribbean,” charts a course for the region to attain the elusive goal of regional integration.

It noted that Argentina, Mexico and Brazil would be the key players in any meaningful integration effort.

“Trade in the region is a complicated patchwork of preferential trade agreements (PTAs), anchored by its two main blocs, the Pacific Alliance and MERCOSUR,” the IDB said.

The study notes that while these agreements have increased intraregional trade by 64 per cent on average since their inception, these gains fell well short of what a US$5 trillion market could offer.

“More worryingly, they have proved inadequate at making the region more competitive internationally,” it added.

The study offers a roadmap toward maximising these gains by promoting a path of convergence among the existing PTAs which would eventually lead to a LAC-FTA

“Convergence is the way to strengthen the economic relevance of the preferential trade agreements in our region,” said Antoni Estevadeordal, manager of the IDB’s Trade and Integration Sector.

“Together, they could help improve the region’s competitiveness abroad, particularly in this increasingly challenging trade environment.

“Alone, and without a critical mass, these agreements face irrelevancy or even a slow death in the face of major deals already in place in Europe, Asia and North America,” he added.

The study examines the trade impacts of a LAC-FTA under various international scenarios.

In the prevailing environment, it states the agreement would produce average gains of nine per cent for intraregional trade in intermediate goods used in exports from Latin America and the Caribbean, “which would bolster the region’s underdeveloped value chains.”

Driven mostly by tariff elimination, the report says a LAC-FTA would also increase intraregional trade in all goods by an average 3.5 per cent or an additional US$11.3 billion, based on 2017 flows.

In a scenario of increasing trade fictions, the report argues that a region wide agreement could prove to be an effective insurance policy against market losses.

“A free trade agreement of this sort could mitigate the negative impacts of global trade frictions on LAC exports by as much as 40 per cent,” Estevadeordal said.

The study acknowledges that this type of strategy is likely to be met with scepticism, given the difficulties faced by previous attempts to reach a single, regional free trade deal.

It argues, however, that nearly 90 per cent of intraregional trade is already duty-free, thus providing a solid platform for building a regional free trade area.

Moreover, the study notes that the region has never been closer to political consensus around the benefits of trade and integration.

Drawing on the lessons of more than a quarter of a century of integration initiatives, the report recommends first creating a free trade zone focused on goods and services, with other issues such as labour, intellectual property and the environment to be added later.

The study states that the free trade zone should also include a chapter on trade facilitation, “which would move beyond mere customs-related measures to include mechanisms that reduce transportation and transaction costs”,
It said a “critical mass of countries” would be required to get the integration process moving and that governments could opt for a “cautious, step-by-step approach that extends accumulation of rules of origin and fills in gaps in relationships where needed.”

But, despite the political advantages of such an approach, the study argues for a more aggressive undertaking, “as the complexities of multiple product rules and intraregional PTAs will remain.”

“If governments in the region are really committed to strengthening both the political and the economic cases for integration, time, unfortunately, is not on their side,” said Mauricio Moreira, IDB trade research specialist and the study’s coordinator.

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