Leaders Meeting to Form Free-Trade Zone

President Clinton and 33 other heads of state will gather this weekend in an unprecedented effort to create the world’s largest free-trade zone and economically integrate the Western Hemisphere.

The two-day Summit of the Americas, which opens Saturday in Santiago, Chile, is the first time in more than three years that leaders representing the hemisphere’s 800 million people have met under one roof. And trade, not surprisingly, is the magnet that’s drawing them together.

Clinton and his peers are expected to formally launch what is expected to be a grueling seven-year process to create the Free Trade Area of the Americas (FTAA), which would extend the North American Free Trade Agreement to include South America and the Caribbean. Any pact would have to be approved by the U.S. Congress.

U.S. government and business interests want free trade because they increasingly recognize that Latin America is a huge and largely untapped market, especially south of Mexico, and that the FTAA could help them exploit it. Latin American exports are growing at a 22% annual rate, more than twice the growth of European exports.

Latin American countries want an accord that would open up the U.S., which in some markets, especially agriculture, is now closed to them.

“All the countries want it, so it will move forward,” said Sidney Weintraub, a political economist at the Center for Strategic and International Studies in Washington.

No one expects the negotiations to go smoothly. Clinton was handed a setback last fall when Congress denied him fast-track negotiating authority, a blow that dimmed U.S. leadership and confused trading partners. The loss killed chances of Clinton negotiating an expansion of NAFTA to add Chile to the United States-Mexico-Canada troika.

The biggest hurdle for Clinton in negotiating FTAA provisions could be U.S. labor, which has made it clear it will not back a trade agreement that does not protect American workers and the environment. “Our concern is that capital will seek the easiest worker to exploit and the easiest environment to despoil as [companies] seek lower costs,” said David Smith, public policy director for the AFL-CIO in Washington.

And not all South American countries are equally enthusiastic supporters of FTAA. Brazil, with its still-protected economy, has said it is in no hurry to join the FTAA, and has even floated the idea of a SAFTA, or South American Free Trade Area, that would exclude the United States.

The waters have been muddied by a growing number of bilateral trade agreements within Latin America and with outside countries--a process that began in the early 1990s and accelerated in the last year since Clinton’s fast-track initiative ran aground. Some of the deals, including a Chile-Canada zero-tariff accord, have already hurt U.S. producers, notably wheat farmers.

Peru has joined the Asia-Pacific Economic Cooperation forum, for example, and Chile has signed on as an associate of the Mercosur trade bloc, which includes Brazil, Argentina, Paraguay and Uruguay, and it is in discussions with the European Union.

The danger for U.S. trade is that these arrangements could lead to “privileged treatment” for European or Asian trading partners, said Peter Smith, a political scientist in the Latin American studies department at UC San Diego.

Still, most observers expect the FTAA to become a reality in 2005, based on the growing consensus worldwide that free trade boosts economic growth and creates better-paying jobs--although often at the cost of short-term dislocations. Weintraub said export-related jobs pay 13% better than those geared to domestic markets.

FTAA proponents point to trade gains generated by NAFTA, which took effect in 1994. U.S exports to Mexico last year reached $71.4 billion, up 76% from 1993 levels, and Mexico’s export-related jobs have boomed. Last year, Mexico surpassed Japan as the second-largest U.S. export destination, after Canada.

NAFTA disappointments include a ballooning U.S. trade deficit with Mexico that totaled $14.5 billion last year, a reversal from pre-NAFTA trade surpluses. Environmentalists have also decried NAFTA’s failure to meet its stated goal of raising environmental standards along the border.

But the historical tide, in this hemisphere at least, seems to be sweeping away market barriers.

Countries throughout South America are privatizing inefficient, state-run industries and opening the gates to foreign investment, creating enormous opportunities for U.S. industry. That’s a major reason for the 22% growth rate in U.S. exports to Latin America.

That growth comes despite average Latin America tariffs of 12%, or four times the U.S. average. The elimination of those higher tariffs in the FTAA should create an even better market for U.S. heavy manufacturers, consumer goods marketers and service providers.

Free trade is not a one-way street, and Latin American countries, including Brazil and Chile, say an accord must ease access to U.S. markets that are protected, especially agriculture.

They want an agreement that would do away with “contingent protection” tariffs such as arbitrary anti-dumping penalties they say the U.S. has imposed to protect citrus and sugar producers. Mexico is also a heavy user of such anti-dumping measures.

As envisioned, the FTAA would take NAFTA a step or two further. Latin American countries are pushing for provisions that would open billions of dollars of U.S. government procurement contracts to foreign bidders.

Fast-track authority would have given the Clinton administration the power to negotiate the FTAA and present an all-or-nothing package to Congress for approval, without any possibility of last-minute amendments. The absence of fast track means the FTAA negotiating process will continue in Congress, subjecting individual provisions to political scrutiny.

“Without it, the U.S. is not going to be in a strong negotiating position,” said Colleen S. Morton, vice president of the Institute of the Americas, a Latin American policy think tank on the UC San Diego campus. “My fear is that without progress in the form of interim agreements by, say, the year 2000, the whole process could just die away, lose momentum.”

The FTAA process is already moving forward. In Costa Rica last month, hemispheric trade ministers got the ball rolling by agreeing to set up nine negotiating groups to hammer out details on issues ranging from intellectual property rights to uniform customs rules.

At the insistence of Brazil and Mexico, however, labor and environment issues were left off the list of draft topics to be negotiated , said Raul Hinojosa, a public policy professor at UCLA who attended the Costa Rica meetings as an observer.