Bloomberg News

Latin American Pacific Bloc Rejects Brazil-Led Protectionism

June 06, 2012

Leaders from Latin America’s most open economies will sign a trade accord today to increase commerce along the Pacific rim of the region, distancing themselves from countries such as Argentina and Brazil that are raising import restrictions amid the global slowdown.

Chilean President Sebastian Pinera is hosting the meeting at Paranal, the site of a telescope in the northern desert, to ratify the Pacific Alliance trade bloc with his counterparts from Mexico, Peru and Colombia. Representatives from Costa Rica and Panama will attend as observers and eventually say they may join the bloc, which was created in April last year.

Those attending “are the most outwardly focused and open economies in the region,” Abraham Lowenthal, a Latin American expert at The Brookings Institution in Washington, said in a phone interview. “This is in keeping with where these countries are going in terms of diversifying their international economic relations.”

The alliance will remove barriers not covered under existing bilateral free trade agreements, such as the free movement of people, establishing a bloc that accounts for more than 35 percent of Latin America’s gross domestic product. The drive toward free trade contrasts with the slow pace of integration in the four-nation Mercosur trade bloc led by Brazil and Argentina, which hasn’t achieved its goal of a common market more than two decades after its creation.

Open Economies

Chile has the most open trade policies of any country in Latin America and ranks 14th in the world, followed in the region by Uruguay, Costa Rica, Peru, Panama and Mexico, which is in position 65, according to the World Economic Forum’s 2012 ranking of 132 countries for trade openness. Brazil, Latin America’s biggest economy, ranks 84 followed by Argentina at 96 and Venezuela at 130.

Pacific Alliance members are seeking ways to further link financial services after bourses from Lima, Bogota and Santiago last year formed the integrated exchange known as Mila. Mexico’s main stock exchange has expressed interest in joining the Andean exchange, said Rodrigo Contreras, acting director of Chile’s international economic relations office.

The bloc also will create ties with Asia as Latin America looks to that region for growth. Latin American exports to Asia Pacific grew three times faster than those to the entire world between 2006 and 2010, while China is on track to overtake the European Union as the second-biggest source of imports behind the U.S., according to United Nations data.

Opportunity for Trade

The alliance is an “opportunity to promote and consolidate new investments and greater trade between our countries, as well as a decisive step to consolidating our integration with the Asian Pacific,” Pinera said in a statement on the Foreign Ministry’s website.

The Pacific Alliance’s openness contrasts with the Mercosur, which also includes Uruguay and Paraguay.

After a surge in car imports from China, Brazilian President Dilma Rousseff this year raised taxes for automakers that don’t assemble in the country. Along with Argentina, Brazil also raised Mercosur’s common external tariff on 100 products to protect manufacturers from foreign competition.

Separately, Brazil raised taxes on foreign investment in a bid to weaken the real, whose 10 percent rally in the first two months of the year was the world’s largest.

Defending Industry

The loose monetary policy of the developed world had caused a “monetary tsunami,” pushing up currencies in emerging markets and making Latin America “easy prey for de- industrialization,” Rousseff said during a trip to Colombia last month.

Argentina has stepped up its barriers to imports of everything from glassware to kitty litter to protect its industry this year, prompting a World Trade Organization challenge from the European Union. The government says it won’t backtrack.

“We are determined to continue with import substitution despite the criticism from some parts that only live from imports,” Argentine President Cristina Fernandez de Kirchner said on June 4 in the northern province of Catamarca.

While Mercosur has signed only one free trade agreement since its creation in 1991, with Israel, Pacific Alliance members all have deals with the U.S. and all but Colombia has one with China. The four countries are rated investment grade by Standard & Poor’s.

Chile Trade

Chile, which has trade agreements with 58 countries, is considering legislation that would eliminate all import tariffs by 2015 in a bid to compete with Singapore and Hong Kong as one of the world’s most open economies.

Chile’s benchmark IPSA stock index is down 13 percent in the past year, while Mexico’s IPC index is up 7 percent. That compares with declines of 17 percent in Brazil’s Bovespa index and 30 percent for Argentina’s Merval.

“This alliance isn’t against Brazil or Argentina, but shows that we believe in a track of openness,” Mercedes Araoz, a former Peruvian finance and trade minister who helped pave the way to today’s accord, said in a phone interview from Mexico City. “If you want to be a member you have to believe in that openness, which we believe really helps us create more jobs.”

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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