During the last presidential debate, Mitt Romney put the spotlight on an aspect of his five-point economic plan that has received little scrutiny. Romney said forging trade deals with Latin American nations would be a cornerstone of his plan to revitalize the U.S. economy. “The opportunities for us in Latin America we have just not taken advantage of fully. As a matter of fact, Latin America's economy is almost as big as the economy of China,” he said.
Like the other parts of the plan, Romney’s Latin American trade plan is short on details. There are two details that should make Americans think twice about whether more trade deals with Latin America can lead to prosperity. First, the U.S. already has trade deals with most of the major Latin American countries. Second, the outstanding countries, most notably Brazil, would likely not negotiate a trade deal on Romney’s terms.
If any U.S. president wants to significantly increase trade with Latin America, he will have to change the template for U.S. trade deals so that they can truly make the U.S. and its trading partners better off. Time is running out. China has quickly become the largest trading partner for many South American nations and Chinese trade deals are much more amenable to Latin Americans.
The U.S. has trade deals with Mexico—under the North American Free Trade Agreement (NAFTA)—as well as with most Central American and Caribbean nations, Peru, Chile, and Colombia. Moreover, the U.S. has investment treaties with Argentina, Haiti, Ecuador, Grenada, Jamaica, Trinidad and Tobago, and Uruguay. It had a deal with Bolivia that Bolivia withdrew from earlier this year.
That leaves Brazil and Venezuela as the two more significant economies in the region where the U.S. lacks formal trade ties. It is safe to say that Venezuela is not high on Romney’s list of nations to engage with, so that leaves Brazil. It is not at all clear that a Romney administration could even bring the Brazilians back to the negotiating table, let alone close a deal.
The workings of a deal have long been evident. Brazil has an advantage in agricultural products such as soybeans, sugar and beef. U.S. agriculture markets are protected by tariffs, subsidies and de-regulation that has allowed the U.S. agricultural sector to become very concentrated in the hands of a few firms—which often allows them to dictate input and output prices and dump their products overseas. Brazil has relatively protected manufacturing and financial services sectors that could plausibly be opened to U.S. firms in exchange for the lifting of protections in U.S. agriculture.
So why has every U.S. president since Bill Clinton failed to close a deal with Brazil? There are at least three reasons. First is the fact that the U.S. has refused to put agriculture on the table with Brazil, saying it prefers to negotiate agriculture in world trade talks. Such a move gives Brazil little incentive to consider opening its manufacturing sector to U.S. exports.
Second, Brazil sees provisions in U.S. trade deals forcing nations to remove regulations as antithetical to Brazil’s development goals. U.S. trade deals require that nations allow U.S. financial services giants to move financial services in and out of a country without regulation. U.S. trade deals also restrict the ability to ensure that domestic firms share some of the benefits of foreign direct investment. The clincher is that U.S. deals allow foreign firms to file suits claiming violations of such provisions directly against host governments, rather than having disputes be decided at the nation-state level as in the World Trade Organization (WTO).
Third, Brazil looks at the mixed record of other nations that have signed U.S. trade deals. Mexico under NAFTA has grown just over 1 percent per annum in per capita terms, while Brazil and other South American countries have had soaring growth over the past decade. Rather than hitching to the U.S., a good part of Brazil’s growth has been due to trade with its new number-one trading partner, China. China doesn’t even have a trade deal with Brazil, and when China negotiates trade deals in the region, it does not require the deregulation of foreign investment rules.
A bold U.S. president would change the template of U.S. trade policy so that trade treaties raise the standard of living in both the U.S. and its trading partners, and not solely benefit footloose firms. Moreover, he would not be so hypocritical about asking countries to open their economies while keeping the U.S. agricultural sector so protected.
In 2008, candidate Barack Obama promised to do just that. "I voted against CAFTA, never supported NAFTA, and will not support NAFTA-style trade agreements in the future," Obama told Ohio voters in 2008. During his presidency, however, Obama saw to it that two trade deals inked by George Bush were ratified into law. The Latin American trade plank of Romney’s plan doesn’t pass the details test. This issue is there for Obama’s taking if he renews his pledge to reform U.S. trade policy.
Kevin P. Gallagher is a guest blogger to AQ Online. He is an associate professor of international relations at Boston University and co-author of The Dragon in the Room: China and the Future of Latin American Industrialization (Stanford University Press, 2010).
June 1: This AQ-Efecto Naím segment looks at sustainable cities in the hemisphere.