Insight : There’s Opportunity for U.S. as Latin Trade Barriers Fall Away

With crucial votes scheduled in Congress this week on the GATT world trade agreement, Capitol Hill’s new Republican leaders--emboldened by their election victory--are sounding more and more like their predecessors of the late 1940s.

Then, as now, a Republican Congress faced an unpopular Democratic President. Then, as now, long and arduous negotiations had led to the signing of an ambitious world agreement that would slash barriers to trade in goods and services, promote international investment and safeguard intellectual property rights. Then, as now, the agreement called for international arbitration procedures with real teeth.

And then, as now, a coalition of conservative Democrats and Republicans rallied against any abdication of American sovereignty, providing a useful flag in which to wrap special interests clamoring for protection.

In 1950, President Harry S. Truman gave in to the conservative coalition, dropping the Havana Charter and its promise of a new international trade organization. This week, by contrast, President Clinton seems likely to win approval of GATT. The price for incoming Senate Majority Leader Bob Dole’s support: Creation of a judicial panel empowered to monitor decisions taken by the new World Trade Organization (scheduled to replace the GATT on Jan. 1) and recommend withdrawal if it rules too often against U.S. interests.

In reality, the Democratic President is simply picking up where Republicans left off in pursuing free trade. Fresh from his success in Indonesia, where the President won a commitment from the nations of the Pacific Basin to eliminate trade barriers by 2020, Clinton heads in two weeks to Miami for a summit with Latin American heads of state. There, the United States will face increasing pressure to make good on President George Bush’s promise of a free trade zone stretching from Alaska to Tierra del Fuego.

The region’s transformation has been startling since the debt crisis of 1982 and the subsequent collapse in living standards and business activity.

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The old order of import protection and government-led industrialization has fallen away. In its place came a new order characterized by fiscal discipline, falling trade barriers (tariff rates dropped from an average of nearly 50% in 1985 to about 15% by 1992), big privatizations and deregulation of foreign exchange markets and direct foreign investment.

The results have been dramatic.

Chile, which led the process under Gen. Augusto Pinochet’s regime, has experienced sustained growth of more than 6% in recent years, with inflation down to single digits by 1994. The successful transition to democracy has added new vigor to the economy and to the stock market.

President Carlos Menem’s government in Argentina overcame a history of ineffective reforms and saw inflation reduced from 5,000% in 1989 to 4% this year. Growth has been dynamic, exceeding 8% in the first half of 1994.

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Brazil has had seven finance ministers, three currencies and two economic shock treatments in the last four years. But now, with the imposition of the “real” plan and the election of its author, Fernando Cardoso, to the presidency, the country seems poised to fulfill its role as the engine of Latin American growth. Inflation dropped from more than 50% in June to less than 1% in September. Economic growth is expected to boom to the 7% to 8% range for the rest of the decade.

There are, of course, exceptions. Venezuela represents the worst-case scenario. After a short-lived reform process, the country is now retreating under the leadership of a populist government modeled after the old order. A severe banking crisis has caused the government to reinstate exchange controls and increase the public deficit to more than 18% of gross domestic product.

Still, the prospects for the region have not been brighter in decades. Improvements in productivity augur well for the competitiveness of local industries, particularly in sectors such as steel, automobiles and mining. And a spate of regional free trade pacts has added fuel and discipline to the liberalization process:

* Following the signing of NAFTA, Mexico has joined in bilateral free-trade agreements with Chile and Costa Rica. Two-way trade between Colombia and Venezuela has doubled since they signed a customs agreement in 1992. And in June of this year, the two joined Mexico to form the “G-3” duty-free area, pledging to liberalize most trade among them.

* After languishing in the 1980s, the Andean Pact--linking Colombia, Venezuela, Ecuador, Peru and Bolivia--has markedly lowered barriers to trade and investment in the last five years. Beginning in January, it will become a common tariff and customs union, providing uniform treatment to all foreign investors.

* Since Brazil, Argentina, Paraguay and Uruguay created the Mercosur free trade area in 1991, their internal trade has nearly tripled to about $12 billion this year. By Jan. 1, this group, too, will enter into a customs union with common external tariffs and a renewed commitment to integration into the world economy.

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All of this is good news for American business. U.S. exports to the region have more than doubled since 1987, to more than $80 billion last year. And U.S. firms have been active in investing in these growth markets, pouring in more than $25 billion in the last five years. It would be a great shame if a new provincialism in Washington means that all this progress is met with an excessively cautious approach in Miami next month.