Americas

U.S. Engagement Critical to Pacific Trade Alliance


Earlier this year, I argued in Charged Affairs that successful implementation of Colombia’s peace deal with the FARC paramilitary group would serve US long-term strategic interests in the region. However, President Trump’s renewed promises in the past two months to radically change trade agreements with traditional Latin American partners brings to light the fact that an entire bloc of Latin American nations, the Pacific Alliance, fit my classification of Colombia. Drastic consequences for Americans will occur if the United States suddenly leans away from, rather than into, these relationships.

The principal U.S. foreign policy priorities for Latin America include: 1) decreasing violence and illicit economies; 2) enabling more stable democratic governance; 3) reducing illegal immigration into the United States; and 4) improving Americans’ access to and cost of the diverse array of goods the region produces. The Pacific Alliance (PA), established by Chile, Colombia, Mexico and Peru in 2011, is a new, but thriving trade bloc whose continued growth and development will further U.S. interests.

Image courtesy of the ESO, © 2012.

The PA focuses on increasing its collective trade bargaining power with the Asia-Pacific and other regions. It succeeds by removing most tariffs and promoting responsible governance and fiscal practices at the country level that improves the investment climate across the entire bloc. The alliance also epitomizes a broader decades-long political-economic shift within Latin America toward the ideological center in accordance with U.S. values. Encouragingly, these countries’ dramatic improvements in governance capacity and economic diversification have been largely self-initiated rather than U.S.-influenced. Furthermore, Costa Rica and Panama, both with strong democratic track records are applying for membership to the PA.

From 2010 to 2015, PA countries grew their GDP 1.5% more than and had 3.6% less inflation than the Latin American average. They have also steadily diversified their economies away from traditional reliance on commodity exports. Colombia still relies heavily on fossil fuel exports (around 63%), but increasingly less so than its neighbor Venezuela (93%). Mexico and Chile have coupled their traditional petroleum, copper, and manufactured goods exports with a strengthening of their services industries.

The Pacific Alliance has overshadowed MERCOSUR, the established, but struggling South American trade alliance. In Venezuela, a founding MERCOSUR member, its socialist leadership this century has slammed free trade, enacted protectionist measures, and hinged the country’s fate on petroleum exports, resulting in prolonged crisis. Essentially, the PA has filled the vacuum from MERCOSUR’s lack of leadership and adherence to its own values. This explains why MERCOSUR has preferential trade access to only seven percent of global markets, while the PA has trade pacts with almost 75 percent of the world. PA countries also have a budget deficit of only 2-3%, less than the United States (-3.5%), Brazil (-4.5%) and Venezuela (-19.5%). Notably, Argentina has explored ways to integrate MERCOSUR with the PA.

Boosting the success of the Pacific Alliance supports each of the aforementioned U.S. foreign policy goals. However, the Trump administration’s tone and proposed policies toward the region actually threaten to worsen and create new economic and security problems for the United States. For example, corruption, drug trafficking, and domestic violence all tend to worsen under weakened economies. The U.S. Department of State’s Bureau for International Narcotics and Law Enforcement invests billions of dollars annually into training programs for law enforcement in countries such as Mexico and Colombia. Economic downturns and unemployment in these countries that cause an uptick in violence will dilute the effectiveness of these programs, or require additional, all as the Trump administration plans to cut State funding by over 30%.

Colombia currently faces 11% unemployment, largely driven by rural job scarcity and armed conflict. The peace deal prioritizes capitalizing on reduced violence in rural areas to open up more land and employment for agriculture, as Colombia currently only utilizes 16% of its arable land across diverse climates. The reduction in violence should enable major growth in Colombia’s tourism industry, especially in tropical, but traditionally crime-ridden regions. However, any delays in rural development could cause a return to violence that either limits or reverses the country’s advances.

Additionally, Mexican illegal immigration to the United States actually peaked in 2007, with a net outflow ever since. However, the United States has seen a marked increase in illegal immigration from other Central American countries in the past decade, largely due to unemployment and drug violence. Consequently, any U.S. actions toward Mexico that weaken its economy and reignite violence will likely cause new waves of Mexican illegal immigration for similar reasons.

U.S. free-trade pacts with PA countries have produced many economic benefits for Americans. Mexico and Chile rely on the United States for imports more than any other country, and in Colombia, U.S. imports are a close second to China. Mexico is the United States’ third largest trading partner and the United States ranks as Mexico’s largest economic partner. NAFTA has created approximately 5 million U.S. jobs that depend on free trade with Mexico—and largely fueled Texas’ 600% increase in exports to Mexico from 1991 to 2015 to nearly $100 billion. Companies from both countries are increasingly creating joint ventures that reduce costs across the supply chain and bring lower-priced goods to consumers.

In a recent conversation with an acquaintance who works at the US Export-Import Bank, he described Mexico’s economy as “solid” and a safe location for US investment. However, uncertainty about the future U.S. posture towards Mexico has created a platform for Andres Manual López Obrador, a left-leaning politician with growing support for Mexico’s 2018 presidential election. He proposes to end the NAFTA “straitjacket” and Mexico’s “subordination” to the United States, and to reverse reforms that opened up Mexico’s petroleum sector to private investment. Changing trade arrangements could create a trade war that rapidly raises the cost of goods for Americans.

Finally, United States should invest more resources into the PA to highlight a model for democratic governance and responsible economic stewardship in a region that traditionally has had little of either. Bolstering these countries’ growth will create a stable and sustained market for U.S. goods and consumer access to reasonably priced commodities and agricultural exports. All free trade agreements have flaws and should be regularly reviewed to ensure that the maximum number of stakeholders benefit. However, leaning away from these countries will harm Americans’ security and prosperity.

Sam is a second-year student in the MBA program at American University’s Kogod School of Business. He also works at the U.S. Department of State in a budgetary role and as a research assistant at the Kogod Cybersecurity Governance Center. Sam regularly writes on topics at the intersection of business, the political economy, and U.S. foreign policy. He has a B.A. in International Affairs from the University of New Hampshire and previously worked in Boston for an NGO focused on sustainable development for rural communities in Central America and Mexico.

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