PERSPECTIVE ON TRADE : Latin Market Loses Its Luster : After a decade of free- market posturing, selective tariffs are rising, which bodes ill for U.S. export hopes.

For nearly a decade, the United States has sought to meet the challenge of its weakening competitiveness in the world economy by opening up markets abroad and devaluing the dollar, instead of by increasing productivity at home. It has particularly sought to penetrate “emerging markets,” especially in Latin America.

Whatever success (or lack of it) encountered elsewhere, in Latin America, the strategy seemed to work. Previously protected markets opened up, U.S. exports boomed and part of the U.S. trade deficit with the rest of the world was offset by expanding trade surpluses south of the border.

Latin leaders were compliant; they adopted the free-trade creed, but only partly out of conviction. Then came the collapse of the presumed Mexican miracle last December, and now the absence of trade barriers no longer seems the epitome of modernity south of the Rio Grande. Although the United States still enjoys a trade surplus with Latin America (the only commercially significant region where that is the case) that surplus is rapidly shrinking.

From the 1940s through the middle of the ‘80s, most Latin American markets were highly protected. So-called import substitution was seen as the only road to industrialization, which in turn was seen as the only path to modernity and development. Then came the debt crisis of 1982 and the utter exhaustion of the previous policies, followed by the free-market fad and the economic reforms carried out in recent years: trade liberalization, privatization, deregulation and reliance on foreign investment instead of credit from abroad.

The opening up of trade looked particularly attractive. Coupled as it was with appreciating exchange rates, it held three great advantages over apparent alternatives: It was supposed to make inefficient, closed economies competitive; it made the small but significant middle classes terribly happy, for they could now consume infinite volumes of U.S.-produced goods and services at accessible prices, and it kept Washington content, as presidents were able to boast of their accomplishments in prying open new markets and creating “good jobs at good wages” for American workers.

Then came the Mexican collapse and its “tequila effect” throughout South America. Suddenly, trade liberalization no longer seemed a big idea, and its previously devoted advocates began to back away from it and even rescind many of the policies that it spawned.

The first correction came with exchange rates. Mexico’s Dec. 20 devaluation of the peso, mismanaged as it was, finally put the country back on the path toward a competitive parity with the dollar. The Draconian recession that Mexico has plunged into, largely through acquiescence to U.S. wishes, will have a much more dramatic though temporary effect on Mexico’s foreign accounts, but the devaluation should have a more lasting impact.

The same holds true for Brazil. Its devaluation in early March was only 10% and was much more skillfully handled than Mexico’s, but it has already proved quite effective. Brazil began experiencing its first trade deficits in a decade in December; by late March, the numbers seemed to have turned around, thanks to the devaluation, and to the other sea change in Latin trade policy: raising tariffs instead of dropping them.

In January, Mexico began slapping duties on many imports from nations it has no bilateral trade agreements with. Since this excludes the United States, and thus nearly 80% of Mexico’s foreign purchases, some critics belittled the measure, saying it affected only toys and tennis shoes from China and gadgets from Taiwan. Nevertheless, for the first time in a decade, Mexico’s technocrats were raising import barriers. Last month, the Trade Ministry threatened duties of up to 100% on additional products from 12 countries.

Brazil took the biggest step, in keeping with its more prudent stance of opening up its economy only to the extent that its own interests, and not Washington’s, dictated. In February, it raised tariffs on imported automobiles from 20% to 32%, and then proceeded to raise levies on 109 imported consumer items by as much as 70%. While this excluded duties on goods purchased in the Mercosur pact (Brazil, Argentina, Uruguay and Paraguay) it still affected a broad swath of Brazil’s imports. By early April, the Finance Ministry was threatening to raise tariffs on an additional 150 consumer goods. Brazil also viewed favorably, though it has not formally agreed to, the Argentine request to raise the Mercosur common tariff 3% across the board.

This was perhaps the most surprising development, if not the most significant. Even Argentina’s economy minister, Domingo Cavallo, the champion of the open economy in Latin America and the new darling of the region’s boosters in Washington, has begun to have second thoughts--at least in practice--about trade liberalization. Argentina’s huge trade gap does not leave its government much choice: With presidential elections just weeks away and no possibility of devaluing the currency before then, raising tariffs is the only option.

Is this the end of the free-trade fad in Latin America? Clearly not; there were good reasons for ending the excessive protection that too many sectors of the region’s economies enjoyed for too long. But the United States’ hope of solving a significant portion of its trade problems by running huge trade surpluses with the “emerging” Latin American markets, never a very realistic proposition, looks more and more dubious today. That is probably a good thing for Latin America--perhaps for the United States as well.