Regionalism in the Time of Coronavirus: The Only Way Forward?

By Leslie Elliott Armijo*

Coronavirus Latin America

Map of the COVID-19 outbreak in Latin America as of 30 April 2020/ Pharexia/ Wikimedia Commons (modified)

To overcome the multiple challenges of the COVID‑19 crisis, Latin America’s leaders will need to build regional cooperation around pragmatic solutions – an elusive goal for countries with a legacy of disunity and weak collaboration. The coronavirus has hit at a moment of economic vulnerability. Regional growth averaged only 1.9 percent in 2010-19, worse than in the “lost decade” of the debt-crisis 1980s (2.2 percent). Labor productivity, which in 1960 was almost 250 percent of the world average, has fallen steadily in every subsequent decade, and in 2019 sat at a mere 90 percent of the global mean. Persistent squabbling among Latin countries has meant that major global trading states, including the United States and more recently China, could dictate the terms of bilateral trade and investment agreements in ways that favored these larger powers.

  • In negotiating global trade, Latin America and the Caribbean have shown little shared identity or cohesion, whether as a region or as sub-regions. As of late 2018, as global value chains coalesced around three regional hubs – China/East Asia, U.S./North America, and Germany/European Union – Mexico, Central America, and the Caribbean were linked to the U.S. but lacked bargaining power to seize more advantageous positions vis-à-vis the United States. South America has deindustrialized since the turn of the century, returning to its historic role of commodity exporter to all three hubs. Intra-regional trade as of 2017 was only 22 percent of all Latin American trade and had fallen since 2013.
  • This is a shaky foundation from which to face the health and economic challenges of COVID‑19. The IMF’s scenario, which assumes an optimistic return to business mostly-as-usual in the third quarter, predicts a contraction of GDP in 2020 of 5.2 percent in the region, driven by brutal collapses in the two largest economies, Brazil and Mexico, of -5.5 and -6.6 percent respectively. The extra-regional markets for Latin America’s exports certainly will shrink due to both short-term reasons of global depression and longer-term ones of enhanced economic nationalism abroad. Remittances and tourists from the U.S. and elsewhere will not return to their previous numbers for a long time.

A coronavirus-solidarity virtual summit last month showed that some regional leaders realize the need for joint action. Nine of 12 South American presidents participated, although Brazilian President Jair Bolsonaro – who has made intemperate and dismissive remarks about his fellow leaders – gave his seat at the video conference to his foreign minister, Ernesto Araújo.

  • Argentine President Alberto Fernández participated despite Bolsonaro’s snub (including on previous occasions) and his previously chilly relations with the sponsoring body, PROSUR, founded in 2019 by center-right Presidents Iván Duque of Colombia and Sebastián Piñera of Chile as an explicit counter to the pre-existing regional body, UNASUR, which leaned left during the presidency of Bolivia’s Evo Morales (now in exile in Argentina). In so doing, Fernández demonstrated the pragmatism and understanding that Latin American and Caribbean leaders often eschew: if you want to solve policy challenges, you must maintain dialogue with people with whom you disagree.

If there is any light at the end of this tunnel, it could be psychological, as crises tend to focus minds. The disruption in international relations beyond Latin America probably will accelerate the move away from the post-Cold War “unipolar moment” and fuel domestic economic nationalism that will shake up the three major global trading hubs – a reorganization in which the region could redefine its place. In this scenario the best defense for Latin America is a strong offense. As Alicia Bárcena, Executive Secretary of the UN’s Economic Commission on Latin America and the Caribbean (CEPAL), said recently, the region’s resilience likely depends on “investment in strengthening regional production chains” to create “complementarities in production structures and regional integration.”

  • Diplomacy enables states to share knowledge and engage in collective action to meet real cross-border challenges, including those of the current crisis. Regional solidarity does not require headquarters buildings, formal treaties, and summit pageantry, nor even similar domestic political systems. The considerable achievements of the loose, informal clubs known as the G7, the G20, and the BRICS prove the value of cooperative models that need not boast costly institutional scaffolding. The Association of Southeast Asian Nations (ASEAN), formed in 1967 by 10 countries that were at least as mutually suspicious of one another as they were of China, provides another lesson about somewhat effective regional cooperation that Latin America would do well to note.

April 30, 2020

* Leslie Elliott Armijo is an associate professor at the School for International Studies, Simon Fraser University, Vancouver. Her most recent book, coauthored with C. Roberts and S.A. Katada, is The BRICS and Collective Financial Statecraft (Oxford University Press, 2018).

USMCA: Devil’s in the Details on Automotive Content

By Frank L. DuBois*

Automated manufacturing of cars

Automated car manufacturing/ Steve Jurvetson/ Flickr/ Creative Commons License

The automotive trade regime in the recently completed U.S.-Mexico-Canada Trade Agreement (USMCA) – “NAFTA 2.0” – will create headaches for many manufacturers but appears unlikely to deliver the big boost in jobs it promises. Much of the focus of the negotiations was on changing the automotive rules of origin (ROOs) to encourage more auto manufacturing in the United States and Canada and make it difficult for automakers to shift production from high-wage locations to low-wage factories in Mexico. Under the new rules, some manufacturers will see significant changes in operational strategies while others will be less impacted.

According to the agreement, a 2.5 percent tariff will be applied to the import value of cars (25 percent for light trucks) if the vehicles don’t meet the new ROOs:

  • 70 percent Regional Value Content (RVC) rather than 62.5 percent under the old rules.
  • 40 percent of the Labor Value Content (LVC) of vehicles (45 percent in the case of light trucks) must be made in plants that employ workers making at least $16 per hour.
  • 70 percent of the value of steel and aluminum used in the vehicle must be of regional origin.

The Kogod Made in America Auto Index (KMIAA), which I’ve been compiling for seven years, challenges assumptions used when calculating the U.S. content of a car, including some used as marketing strategies to portray products as being more “American” than what a buyer might think.

  • KMIAA results and rankings differ significantly from those indices that evaluate domestic content solely based on where a car is assembled, without taking into account the country of ownership of the brand. (Japanese, Korean and German car manufacturers are treated the same as U.S. manufacturers despite non-US R&D and profits that are repatriated back to the home country). Location of manufacture of engines and transmissions, which account for approximately 21 percent of vehicle value, may also not be addressed in other indices. Likewise, assembly labor accounts for around 6 percent of vehicle value.
  • The index reveals the complicated nature of content calculations. Toyota assembles only one vehicle at its plant in Tijuana – the Tacoma light truck with an engine of either U.S. or Japanese origin (depending on displacement) and a transmission of either U.S. or Thailand origin. Toyota has made the same truck in San Antonio, Texas, but recently announced that all of Tacoma production will be moving to the Mexican factory. Toyota is likely to reduce its non-North American sourcing (fewer engines and transmissions from Asia), and restructure supply chains to place a premium on U.S. parts and power train sourcing. Other manufacturers face greater shifts. The Audi Q5, for example, currently has 79 percent Mexican parts content and only 3 percent U.S. parts.

Producers’ operational responses are likely to run the gamut from full compliance to limited changes. Some automakers may simply pay the WTO tariff of 2.5 percent for access to the U.S. market. A separate requirement that at least 40 percent of the value of cars be made in plants with $16 per hour labor will be problematic given that wages in Mexican auto plants average $3 to $4 per hour. Producers will have to decide whether to raise wages in Mexican plants, shift sourcing to U.S. and Canadian plants, or attempt to develop ways to game the system by shifting some high-wage expenses into the labor value category. While the new rules may boost some manufacturing jobs in the U.S. and Canada, they will raise costs leading to lower auto sales, and have nowhere near the impact that their boosters have promised. Again, the devil is in the details.

March 5, 2020

* Frank L. DuBois is an Associate Professor of Information Technology and Analytics at American University’s Kogod School of Business. Data for the KMIAA comes from data automakers provide under the American Automotive Labeling Act (AALA) and from field visits to car lots in the DC metropolitan area.

New Western Hemisphere Trade Pacts Push Back Against Big Pharma

By Thomas Andrew O’Keefe*

Money_and_pills_in_three_colors

Attempts to limit competition from generics by pharmaceutical giants were called “TRIPS-plus” provisions in USMCA drafts/ Ragesoss/ Wikimedia Commons

Two major trade agreements affecting the Western Hemisphere have recently struck blows against the pharmaceutical industry’s efforts to keep drug prices high by limiting competition from generic medications. Big Pharma tried, but failed, to include provisions in the United States-Mexico-Canada Agreement (USMCA) and the EU-MERCOSUR Association Agreement that would go beyond those expressly permitted by the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

  • Those provisions would have made it extremely difficult for generic manufacturers to enter the market and contain costs. Unaffordable medicines are a large and growing global problem. Many people die of diseases today not because there is no cure, but because they cannot afford the medications.

In the version of USMCA approved by the U.S. Congress and to be signed by U.S. President Trump this week, the Democratic majority in the House of Representatives removed “TRIPS-plus” provisions that would have given “data exclusivity” for new uses of existing pharmaceutical products for up to three years and for so-called “biologics” for ten years. (Biologic drugs are produced from a living organism or contain components of a living organism, including a wide variety of products derived from humans, animals, or microorganisms by using biotechnology.)

  • Data exclusivity would have prevented generic manufacturers from utilizing the original trial results and other test data filed with regulatory health agencies concurrently with the patent application, demonstrating the medication’s safety, quality, and efficacy. Also removed from the USMCA was a provision that would have restricted competition from generic pharmaceutical manufacturers by delaying patent expirations to compensate for “unreasonable” bureaucratic delays in approving the patent. Furthermore, the USMCA now expressly allows generic manufacturers, as per Article 30 of the TRIPS Agreement, to utilize compounds used to make a patented drug in order to develop a generic version in anticipation of that drug’s patent expiration.

Similarly, the IPR chapter in last year’s EU-MERCOSUR agreement does not include TRIPS-plus provisions thanks, in part, to resistance from South American governments concerned about bankrupting their national health care systems because of increasing costs for new medications. The IPR chapter specifically supports World Health Assembly Resolutions on pandemic influenza preparedness and on a global strategy and plan of action on public health, innovation and intellectual property – both of which recognize that “intellectual property rights do not and should not prevent Member States from taking measures to protect public health.”

  • The IPR chapter is consistent with the Doha Declaration on the TRIPS Agreement and Public Health of November 2001. Furthermore, all the signatory states are required to implement articles of the TRIPS Agreement providing the legal basis for WTO members to grant compulsory licenses exclusively for the production and export of affordable generic medicines to other members that cannot domestically produce the needed medicines in sufficient quantities. (The only obligation is for the signatory states to make “best efforts” to adhere to the Patent Cooperation Treaty.)
  • The MERCOSUR countries resisted intense lobbying pressure from European pharmaceutical companies to accept provisions on data exclusivity and to compensate for bureaucratic delays by extending the monopoly on a patented medication beyond the 20-year maximum permitted by TRIPS. The fact that the United Kingdom, home to global pharmaceutical giants such as GlaxoSmithKline and AstraZeneca, was distracted by Brexit undoubtedly contributed to this outcome.

The successful pushback against attempts by the major pharmaceutical multinationals to extend their state-sanctioned monopolies to guarantee a steady flow of profits reflects public outrage over multiple scandals that have ensnared the industry in recent years. This includes not only the massive opioid addiction crisis in the U.S., but firms buying up patents that are about to expire and jacking up their prices in excess of 1000 percent. It makes the traditional industry argument of needing extended monopolies to incentivize innovation and the development of new drugs ring hollow as these speculators incur no research and development costs. As a result of the efforts of MERCOSUR and Democrats in the U.S. House of Representatives, the pharmaceutical industry may be facing a paradigm shift in which it will be forced to develop a new business model for pricing new treatments.

January 28, 2020

Thomas Andrew O’Keefe is the president of Mercosur Consulting Group, Ltd. and a lecturer at Stanford University. He is the author of Bush II, Obama and the Decline of U.S. Hegemony in the Western Hemisphere (Routledge, 2018).

EU-MERCOSUR: Does Their New Association Agreement Mean Much?

By Thomas Andrew O’Keefe*

29/06/2019 Coletiva de Imprensa UE-Mercosul

Press conference about the trade agreement between the Mercosur and the EU / Palácio do Planalto / Creative Commons

After nearly two decades of intermittent negotiations, the European Union and the four core MERCOSUR nations (Argentina, Brazil, Paraguay, and Uruguay) have finally inked a trade agreement, but its real impact won’t be felt for years, if ever. When the negotiations began in the mid-1990s, the EU was the largest trading partner of the MERCOSUR countries, and the United States was number two. Today China is in first place, the European Union is second, and the U.S. is fourth, behind intra-Latin American trade (EU investors, however, continue to have the largest stock of foreign direct investment assets in the MERCOSUR region). When ratified, the EU-MERCOSUR Association Agreement, signed in Brussels on June 28, will exempt a little more than 90 percent of two-way trade from tariffs.

  • About 93 percent of MERCOSUR exports will eventually obtain duty-free access into the EU market, the bulk as soon as the agreement comes into effect. Agricultural commodities such as beef, chicken, corn, eggs, ethanol, honey, pork, rice, and sugar only get reduced duties, with many also subject to quotas. Another 100 MERCOSUR agricultural items are completely excluded from any type of preferential treatment.
  • Some 91 percent of European exports will get duty-free access to MERCOSUR, but gradually as tariffs are reduced over a 10-year period. The phase-out is over 15 years in the case of European automobiles, furniture, and shoes. MERCOSUR tariffs on the remaining 9 percent of primarily EU manufactured goods will remain in place permanently.
  • The agreement offers service providers from any signatory country full access to the markets of all the other signatory states.

MERCOSUR showed greater flexibility with the EU on agricultural subsidies than it had with the United States, a position that contributed to ultimate rejection of the Free Trade Area of the Americas (FTAA). Subsidies in the EU-MERCOSUR agreement are permitted if “necessary to achieve a public policy objective.” The MERCOSUR countries also capitulated on the use of anti-dumping tariffs on intra-hemisphere trade. The new accord, however, does authorize governments to impose a duty that is less than the margin of dumping if it adequately removes injury to the affected domestic industry. It also includes provisions for ensuring that sanitary and phytosanitary (SPS) measures as well as technical norms are not abused and become disguised impediments to free trade, although it permits enforcement of the European “precautionary principle” notion to restrict the importation of genetically modified food, for example, where the risks to health are not scientifically conclusive.

The agreement – now being “legally scrubbed” and translated into the EU’s 23 official languages – faces an elaborate, multi-year ratification process in the EU, where individual countries and the European Parliament must approve it, as well as each MERCOSUR government. Agricultural forces are already lining up in many European countries in opposition. In the meantime, the accord’s greatest impact is a signal by Brazilian President Bolsonaro and Argentine President Macri that they’re making progress on their stated objective to return MERCOSUR to its original trade focus – in contrast to their predecessors – and to claim an economic “victory” when growth in both countries remains stagnant.

  • Despite the flexibility MERCOSUR showed on agricultural subsidies and anti-dumping, its main sticking points with the United States in the FTAA, a free trade agreement with the United States seems remote as the Trump administration – in contrast to the Europeans – is unlikely to offer meaningful concessions based on the lesser developed status of the MERCOSUR countries. Neither will the Association Agreement with the EU reverse or even slow the region’s shift toward trade with China and the rest of Asia.

August 6, 2019

* Thomas Andrew O’Keefe is the President of New York City-based Mercosur Consulting Group, Ltd. and a lecturer at Stanford University. He is the author of Bush II, Obama, and the Decline of U.S. Hegemony in the Western Hemisphere.

U.S.-Mexico: Tariffs, Threats, and Trade Agreements

By Ken Shadlen*

Cargo ships

Cargo ships off shore of Galveston Island, TX / Jocelyn Augustino / Creative Commons / https://commons.wikimedia.org/wiki/File:FEMA_-_38860_-_Cargo_ships_off_shore_of_Galveston_Island,_TX.jpg

The United States’ threat last week to apply tariffs on imports from Mexico, unless Mexico revamped its approach to Central American migrants passing through the country, underscores the power asymmetries in the global economy – and undermines the credibility of U.S. trade agreements elsewhere. President Trump threatened to abrogate U.S. commitments under NAFTA (and the WTO) unless Mexico introduced measures in an area that is not addressed by NAFTA. While the tariffs won’t be applied, at least not now, and there is debate about just how much Mexico changed its migration policies as a result of Washington’s maneuver, the linkage between trade and “non-trade” issues such as immigration, especially within preferential trade agreements such as NAFTA, have deep implications for the political economy of international trade.

  • Many critics of Trump’s threats claim that immigration policy and trade policy are distinct, and that it makes no sense for the administration to link the two. But this misses the point: what is and is not “trade” is determined politically. Since the 1980s, the United States has conditioned market access on the introduction and enforcement of a wide range of “trade-related” policies, including investment, intellectual property, government procurement practices, and so on. Market size confers to the importing country the power to define what constitutes “trade,” and the definition of “trade” thus has changed according to Washington’s preferences. In that sense, Trump’s linkage maneuver is not at all new.
  • On the one hand, NAFTA is the outcome of massive linkage of this sort, as Mexico was required to introduce extensive changes to policies and practices in a range of trade-related policy areas in order to qualify for the agreement. On the other hand, NAFTA was meant to protect against further “ad hoc linkage,” with new conditions attached at the whim of the United States.
  • Prior to NAFTA, Mexico’s exports largely entered the U.S. market under the Generalized System of Preferences (GSP), which offers preferential market access to exports from developing countries under a wide range of conditions. But GSP preferences can be withdrawn unilaterally, and, as the importing country, the United States changed GSP preferences in response to its changing sentiments. Beneficiary countries always ran the risk of having the U.S. Congress and Executive attach additional conditions to the program, like ornaments on a Christmas tree.
  • NAFTA and other NAFTA-like trade agreements that have followed promised to deliver substantially more predictability and stability than the GSP.

Recent events question these premises. In 2017-18, Trump warned that Washington would withdraw entirely from NAFTA unless it was renegotiated on terms more to his liking. Last week’s threat to remove preferential market access unless Mexico changed its immigration policies and practices is precisely the sort of behavior that NAFTA was meant to protect against. The agreement supposedly replaced the unstable preferences of GSP, which were always vulnerable to the whims of U.S. politicians, with a new set of preferences that were clearly defined, had fixed conditions, and were less prone to being unilaterally withdrawn. But evidently it didn’t.

Washington’s actions are similar to if the Mexican government announced it would stop enforcing copyrights and patents of U.S. firms, unless the United States were to substantially increase science and technology assistance to help upgrade the stock of biologists, chemists, and engineers in Mexico. The reaction to such an announcement would be ridicule, and Washington would claim NAFTA (and the WTO) binds Mexico to protect intellectual property. The United States would assert, moreover, that its science and technology assistance is not covered by NAFTA; Mexico’s threat would elicit no change of behavior on the part of the US. 

  • Beyond NAFTA per se, these events make one wonder why any country would sign a trade agreement with the United States. After all, if countries already have preferential market access under the GSP, then one of the main benefits of reciprocal trade agreements is to lock-in and stabilize those preferences – even with the need to make substantial concessions on “trade-related” policy areas. If, in reality, only half of the bargain is locked in, if the benefits can be made to disappear at the whim of the U.S. President, then for many trading partners the benefits of such agreements will be unlikely to compensate for the costs.

June 11, 2019

*Ken Shadlen is Professor of Development Studies and Head of Department in the Department of International Development at the London School of Economics and Political Science.

Latin America Takes on Big Pharma

By Thomas Andrew O’Keefe*

Colorful pills in capsule form and tablet form

Generic pills / Shutterstock / Creative Commons

For the past decade, Latin America has attempted to reduce the prices of high-cost medications through either joint negotiations, pooled procurement, or both, but so far with limited success.  The incentive for reducing prices is that all Latin American countries have national health care systems, and in some cases (such as Colombia and Uruguay) are legally obligated to provide their citizens with any required medication free of charge and regardless of cost.

  • In the bigger countries, such as Brazil and Mexico, the prices for certain pharmaceutical products and medical devices for public-sector purchase at the federal, state, and even municipal level are negotiated by a single governmental entity. Argentina, Chile, and Mexico also have mechanisms for pooled procurement of public-sector health-related purchases at all levels of government.  Given its huge internal market, Brazil also unilaterally caps prices on medications and threatens to issue compulsory licenses to extract concessions from pharmaceutical multinationals.

Latin American countries have also tried turning to sub-regional mechanisms to protect themselves from excessively high prices, albeit with meager results.

  • The Central American Integration System (SICA) has the most active regional mechanism to negotiate the prices of high-cost drugs and medical devices. The governments of Belize, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Panama have authorized the Council of Central American Ministers of Health (COMISCA) to negotiate lower prices on their behalf.  Those medications and devices that obtain a reduction are then acquired by the public sector utilizing each government’s procurement procedures.  By negotiating as a bloc, the SICA countries report total savings of about US$60 million on dozens of products since the initiative began in 2010.
  • In late 2015, MERCOSUR launched a mechanism to negotiate prices for both the full and associate member states. Since those 12 countries coincided with UNASUR’s membership, that entity was given a supporting role to create a continental data bank of pharmaceutical prices paid by each member government that would be used to support the MERCOSUR negotiations.  That data bank proved to be ineffective, however, as not all countries submitted the required information and the methodologies for determining prices was inconsistent.  To date, MERCOSUR has only obtained price reductions for one HIV medication, manufactured by an Indian firm eager to establish a market presence in South America, and reportedly for an immunosuppressive drug used after organ transplants to lower the risk of rejection.  Reduction offers by Gilead for its Hepatitis C cure have, so far, been rejected by the MERCOSUR governments as inadequate.

MERCOSUR’s limited achievements appear to have encouraged individual countries to press on alone.  Colombia, while initially supporting the MERCOSUR initiative as an associate member, eventually established its own national mechanism to negotiate prices, and in July 2017 announced that it had obtained cost savings of up to 90 percent for three Hepatitis C treatments.  MERCOSUR’s sparse track record also helps to explain why Chile’s Minister of Health announced in October 2018 that his country, Argentina, Colombia, and Peru would utilize the Strategic Fund of the Pan American Health Organization (PAHO) to purchase 10 state-of-the art cancer treatments.  Because of PAHO’s annual bulk purchases, it is often able to obtain significant price reductions from pre-qualified manufacturers and suppliers that are then passed on to member governments.  Member states facing a public health emergency can also make purchases without cash in hand, as the Strategic Fund will extend a short-term loan at no interest.  In the future, the Latin American countries are likely to pragmatically utilize a range of options in trying to contain the rising costs of new medications that include both national and regional mechanisms as well as PAHO’s Strategic Fund.  The challenge will be to avoid Big Pharma “red lining” the region and excluding it from accessing the most innovative medical cures such as gene therapies that can fetch a million-dollar price tag per treatment.

February 19, 2019

* Thomas Andrew O’Keefe is president of New York City-based Mercosur Consulting Group, Ltd. and a lecturer at Stanford University.  He is the author of Bush II, Obama, and the Decline of U.S. Hegemony in the Western Hemisphere (New York: Routledge, 2018).

Mercosur: Diversifying Partnerships

By Andrés Serbin*

Mercosur Summit

A seminar at the 53rd Mercosur Summit. / Sabrina Pizzinato / UCIM / Creative Commons

Mercosur’s signing of a memorandum to increase economic and commercial cooperation with the Eurasian Economic Commission (EAEU) signals the trading bloc’s interest in diversifying its trade and political relationships beyond the western hemisphere.  The presidents of the Mercosur countries – Brazil, Argentina, Uruguay, and Paraguay –signed the agreement at the 53rd Mercosur Summit, held last month in Montevideo.  At a ceremony at which he accepted the rotating presidency from Uruguay, Argentine President Mauricio Macri emphasized the need for Mercosur to open not just to the Pacific Alliance, but also to Central America, Asia, and Africa.

  • Proposals for closer cooperation with the EAEU have been under study for many years, since Russia first created the Commonwealth of Independent States (CIS) from among the former Soviet republics (except the Baltic countries) after the end of the Soviet Union in 1991. The CIS was intended as a post-Soviet space under Russia’s leadership that would reconnect its members within a “Eurasian” geopolitical region distinct from both Europe and Asia.  The EAEU, formalized in 2015 under the leadership of Russia and Kazakhstan, now also includes Belarus, Kyrgyzstan, and Armenia.  Mercosur ministers agreed to sign the memorandum during meetings immediately before the summit, stating that enhanced cooperation and coordination with the EAEU – with which Mercosur would account for a combined 6.5 percent of world GDP – was consistent with efforts to strike a similar arrangement with the European Union.
  • Mercosur’s decision comes amid international tensions over trade and protectionism, but it cannot be divorced from the ideological, cultural, and geopolitical elements of the vision for “Great Eurasia” of which Russian President Vladimir Putin has spoken (and which Chinese President Xi Jinping has shared). The tensions between Russia and Ukraine, and Western pressures in retaliation, were a key driver of Moscow’s push for formalization of the EAEU as a potential interlocutor with the European Union while at the same time putting a brake on U.S. presence in the region.  Western analysts have debated the power of “neo-Eurasian” identity as a tool of geopolitical projection beyond the creation of a new economic bloc.  China is also a factor in Russia’s calculations.  The “Shanghai Cooperation Organization” (OCS) fostered by both countries and Beijing’s “New Silk Road” project, through Central Asia and to the EU, have also increased the salience of “Great Eurasia.”  Russia and China have increased cooperation in trade, in technology (including military) and against terrorism and extremism.  Through the EAEU and OCS mechanisms, they have extended contacts all the way to India and Pakistan and, potentially in the future, Iran and other countries.

Mercosur’s trade with the EAEU is asymmetrical in favor of the Latin American countries, with the exception of Brazil (with which it is more balanced), according to EAEU officials.  The EAEU has high internal tariffs and limited internal trade – except in bilateral trade between Russia and Belarus – but there are already tariff exemptions for Mercosur members.  Food appears to be the biggest Mercosur export to the region.  Experts believe that trade between the two blocs can be significantly increased, and that a free trade agreement can be signed before the completion of the EU-Mercosur FTA, which has been under negotiation for 20 years.

Although many Western analysts remain doubtful about the success of efforts to form a “Great Eurasia,” Mercosur apparently has determined that engagement with it is low-cost and potentially beneficial.  Beyond the possibility of expanded trade, the memorandum of cooperation signed in Montevideo suggests Mercosur sees a geostrategic interest in signaling openness to such collaboration.  The right-leaning governments of Latin America and the Caribbean are likely to remain generally aligned with the United States, but they have learned the importance of trade diversification over the past two decades.  Setting tradition and ideology aside, most are trying to interact with whomever can bring good deals to their countries in terms of trade, investment, and cooperation.  In the context of Russia and China’s interest in a “Great Eurasia,” Mercosur’s increased outreach to EAEU also reflects an important piece in a strategy to undertake the necessary diversification of its foreign policy in a changing world.

  •  The United States may not appreciate the wisdom of Mercosur’s approach. Eurasia is a blind spot for Washington, which focuses on Russia’s actions in Europe and China’s in Asia – but not in Central Asia itself or as a bridge to India, Pakistan, Iran, Turkey, and the Arab world.

January 7, 2019

* Andrés Serbin is an international analyst and president of the Regional Coordinator of Economic and Social Research (CRIES), a network of more than 70 research centers, think tanks, NGOs, and other organizations focused on Latin America and the Caribbean.  This article is adapted from one published by Perfil.com.

Trump on NAFTA: An Offer Canada Can’t Refuse?

By Malcolm Fairbrother*

Chrystia Freeland meets with Mexican President Enrique Peña Nieto

Canadian Foreign Minister Chrystia Freeland meets with Mexican President Enrique Peña Nieto in July 2018. / Presidencia de la República Mexicana / Flickr / Creative Commons

U.S. President Donald Trump’s threat last week to abrogate free trade with Canada while signing a new bilateral agreement with Mexico alone has led many to think that NAFTA – which will be 25 years old on January 1, 2019 – has no future.  But the likeliest outcome remains just a set of fairly modest changes to the agreement.  Much of Trump’s bluster on NAFTA does not reflect the facts in U.S.-Canada-Mexico trade, though Canadian officials will still have to take his threats seriously.  Canadian Foreign Minister Chrystia Freeland, whose government sat out the United States’ renegotiation of NAFTA with Mexico this summer, rushed to Washington after the bilateral accord was announced, launching new talks with U.S. counterparts.  While Trump has said he will make no concessions, Freeland has continued seeking common ground, and looks ready to compromise on at least some issues.

  • The best econometric studies suggest that North American free trade has had disappointingly modest benefits – nowhere near advocates’ earlier projections. But the transition costs of moving to a world without free trade would still be enormously costly for Canada.  The economic and political risk of the highly unlikely, but not completely inconceivable, scenario of losing NAFTA entirely are just too great for the Canadian government to bear.

Canada, which in past negotiations stood up for Mexico on some key issues, now finds itself in the ironic position of looking to Mexico for support.  The two countries are often in a position to benefit from working together, but Trump’s wrath has tempted each to throw the other under the bus – a classic prisoner’s dilemma.

  • In the last few weeks, Mexico decided to give the U.S. what it wanted: most importantly, protectionist rules of origin for autos and textiles, and some enhanced intellectual property rights. Mexico calculated that, compared to Trump’s threats not long ago to kill NAFTA in its entirety, these concessions were a modest price to pay to keep the agreement alive.  Also importantly, Mexican leaders appear to have avoided a national humiliation of epic proportions – putting an end to Trump’s dream of getting Mexico to pay for the wall he wants to build on the border.
  • Looking for a much-needed “win,” Trump has now made an offer he thinks Canada can’t refuse. His wish list covers things Canada specifically fought hard for in the original free trade talks back in the 1980s and 90s, including protections for Canada’s cultural industries and agricultural supply management programs, and what Canada’s trade minister said in 1992 were “the vitally important dispute settlement provisions” of Chapter 19.  Now, just as Canadian opponents of free trade forewarned in the 1980s, Canada’s economy has become so enmeshed with that of its much larger neighbor that the government cannot say no to the demands of an aggressive administration in Washington.

Yet the situation does not spell disaster for U.S.-Canada trade or for Canada itself.  Trump’s claims notwithstanding, the U.S. Congress has final say over U.S. trade policy, and most of its members (with business lobbyists whispering in their ears) recognize that severing the many economic ties built up between Canada and the United States over the last quarter-century would be unnecessarily disruptive and costly.  Freeland and her negotiators will know that Trump’s threat to kill free trade is not really credible.

  •  Even caving on all of Trump’s demands would not be catastrophic for Canada. Contrary to Trump’s zero-sum perspective on trade (like on everything else) as an international battleground, most of the important conflicts with respect to trade are actually within countries.  Canada’s supply management system favors the country’s producers at the expense of consumers, for example, just as do strict rules of origin for U.S. textiles manufacturers.  So while the transition costs of dismantling free trade in North America would be substantial, the impacts of the changes Trump is proposing would be tolerable to all three countries – even if some make no sense (the sunset clause); are just giveaways to specific industries (stricter patents for pharmaceuticals); or favor some industries at the expense of others (U.S. lumber producers and U.S. home builders, respectively, as regards the possible elimination of Chapter 19).  For Canada’s government, the heaviest costs of compromise will be political: Justin Trudeau’s Liberal government will have to choose which bitter pill to swallow, as any concessions will lead to angry recriminations from one domestic constituency or another.

September 7, 2018

* Malcolm Fairbrother is Professor of Sociology at Umeå University and a researcher at the Institute for Futures Studies, both in Sweden.  He is originally from Vancouver, and has been a visiting researcher at multiple institutions in all three countries of North America. He has also participated in the Center’s North America Research Initiative.

U.S.-Mexico: Trump’s Misguided Approach to NAFTA Renegotiation

By Robert A. Blecker*

Three people stand at podiums with flags behind them

Canadian Foreign Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer, and Mexican Minister of Economy Ildefonso Guajardo (L to R) participate in the fourth round of NAFTA negotiations in Washington, DC in October 2017. / State Department / Flickr / Creative Commons

President Trump has characterized NAFTA as a “win” for Mexico and a “loss” for the United States; his administration is currently working on a renegotiated “deal” that would allegedly reduce the U.S. trade deficit and recapture lost manufacturing employment, but his nationalistic approach fails to recognize the fundamental causes of both U.S. and Mexican economic problems.  In fact, NAFTA was a huge success for President George H.W. Bush and his administration, as it achieved their fundamental goal of enabling U.S. corporations to make products in Mexico with low-cost labor – without fear of expropriation, regulation, or other loss of property rights – and export them to the United States duty-free.  The Mexican government went along because it thought NAFTA would bring in desperately needed foreign investment and provide a growth stimulus, while U.S. and Canadian workers rightly feared that they would lose jobs as a result.  While much discussion has focused on which country “won” or “lost” in NAFTA, that is the wrong way to evaluate a trade agreement.  The two key criteria for judging the accord are which sectors, groups, or interests won and lost in each country, and how it, in conjunction with other policies, has affected long-term growth, development, and inequality in each.

  • Under NAFTA, U.S.-Mexican trade in goods and services has grown exponentially, reaching $623 billion (with a U.S. deficit of $69 billion) last year. However, NAFTA (along with other causes and policies) has contributed to worsening inequality in both the United States and Mexico.  Less-skilled U.S. workers definitely lost, with wage losses up to 17 percent in local areas most exposed to NAFTA tariff reductions.  In Mexico, although consumer gains from trade liberalization were widespread, upper-income groups and the northern region benefited the most.  Real wages for Mexican manufacturing workers have stagnated since 1994.  Labor shares of national income have fallen in both countries since the late 1990s.
  • Domestic policies, exchange rates, financial crises, and the impact of China can make the impact of NAFTA difficult to identify, but effects in some sectors are clear. Mexico gained jobs in automobiles and parts, appliances, electrical and electronic equipment, and seasonal produce.  The United States gained in basic grains, soybeans, animal feed, and paper products.  Although about a half million jobs in automobiles and related industries have “moved” to Mexico, total U.S. job losses in manufacturing (5 million since 2000) have been much more affected by China and technology than by Mexico.  What Trump’s nationalistic rhetoric ignores is that U.S. companies capitalized on these dislocations to raise their profit margins and increase their bargaining leverage over workers and governments both within North America and globally.

Trump’s aggressive posture about NAFTA exploits political discontent with these sectoral effects and the overall worsening of inequality, but the U.S. Trade Representative (USTR)’s key demands in the renegotiation appear unlikely to remedy either problem.  USTR Lighthizer is focused on protection for the auto sector, by requiring higher U.S. content (or higher wages for Mexican auto workers), and on changes to dispute resolution procedures that would favor investment in the United States instead of in Mexico.  At best, these measures could bring back a small number of U.S. jobs; at worst, they could make some U.S. industries less competitive (if costs increase).

All of this debate in the United States ignores the fact that NAFTA has been a huge disappointment for Mexico.  Although export industries like automobiles have prospered, the gains to domestic sectors of the Mexican economy have been limited, resulting in sluggish growth (only 2.5 percent per year since 1994, far below the 7.6 percent achieved in East Asia) and leaving millions in poverty while millions more emigrated to the United States.  Of course, other policies and events (including Chinese competition) played into these outcomes, but NAFTA (and related liberalization policies) didn’t turn out to be the panacea for the Mexican economy that then-President Carlos Salinas promised in 1993.  Yet, in the short run the Mexican economy remains highly dependent on foreign investment and exports to the U.S. market, so Trump’s demands for a revised NAFTA and his threats to withdraw are undermining Mexico’s current economic prospects.  Instead of following Trump’s nationalistic approach, the three NAFTA members should focus on making all of North America into a more competitive region with rising living standards for workers in all three countries.  This would start with policies at home, such as public investment in infrastructure, education, and R&D, that could foster industrial growth, along with redistributive measures like higher minimum wages consistent with each country’s economic conditions.

May 11, 2018

* Robert A. Blecker is a Professor of Economics at American University.

Who Really Benefited from the Commodities Supercycle – and Who Loses with Its End?

By Carlos Monge*

2017-05-13 AULABLOG_Carlos_Monge_graphic

Latin American governments and business associations have tended to overstate the benefits of extractive industries during the commodities supercycle that ended in 2014-15.  Resource-rich Latin American countries did experience high rates of economic growth and diminished poverty and inequality during the boom years.  On the surface, this would appear to strengthen arguments that – despite their negative environmental impact – extractive industries are the key to progress, especially in resource-rich areas.  Nevertheless, a closer look at data from household surveys in Bolivia, Chile, Colombia, Ecuador, and Peru shows that things are a bit more complicated.

  • The inequality gap between individuals, as measured on the GINI Index, has narrowed, but the gaps between groups of the population have not evolved evenly. For example, the National Resource Governance Institute (of which I’m regional director) recently completed a study of the performance of social indicators during the supercycle that concluded that the poverty gap between urban and rural populations has increased in all countries.  (The report is available in English and Spanish.)  In Peru and Chile, the gap increased more in territories where extractive territories are located, while in Colombia, Bolivia, and Ecuador less so.  The gap between indigenous and non-indigenous populations increased only in extractive territories in Ecuador, decreasing in both extractive and non-extractive settings in the rest of the countries considered.  Regarding gender, in all five countries the gap between men and women increased slightly in non-extractive territories and decreased a bit more in extractive ones.

This report establishes correlations between the increase in extractive activities, the availability of extractive rents, and patterns of inequality reflected in social indicators, but it does not establish a causal relation between such variables.  For example, the data show that urban populations in Peru’s extractive regions have benefited more than rural ones – which some very preliminary research shows is probably because urban centers provide extractive projects with the goods and services they need, while less sophisticated rural areas do not.  At the same time, rural populations have to compete with the extractive projects for those same urban goods and services, and with local governments for the labor force that the public sector contracts to develop infrastructure projects that are paid for through increased revenues delivered by the extractive sector.  This is what we have called the “Cholo Disease.”  A variation of the “Dutch Disease,” it reflects a loss of competitiveness resulting not from large exports of raw materials causing the currency to appreciate, but rather from increases in the cost of labor and of urban goods and services consumed by campesinos.  However, a more definitive explanation regarding exactly how this happens in Peru and in other countries certainly needs further research.

While our data clearly show the impact of mining and hydrocarbons extraction and the resulting expenditure of extractive rents on the poverty gaps between urban and rural populations, men and women, and indigenous and non-indigenous populations, further investigation into the causes and consequences is needed.  The end of the supercycle has already meant a fall in growth rates and extractive revenues, leading to a worrisome rebound in poverty rates.  We are still unable to answer, however, the question of how broadly it will impact the substantial segments of Latin America’s population that emerged from poverty but remains in a vulnerable position – and how it will aggravate poverty gaps among individuals and between groups in extractive and non-extractive territories.

May 16, 2017

* Carlos Monge is Latin America Director at the Natural Resource Governance Institute in Lima.