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Policy Updates

A snapshot of policy trends and successes in the region.

In this issue:
Pacto por México. México, D.F. December 2, 2012. Photo: Presidencia de la República Mexicana.

Cuba: Port Upgrades and Free-Trade Zones

Marc Frank

When Latin American and Caribbean heads of state gather in Cuba in January 2014 for the Comunidad de Estados Latinoamericanos y Caribeños (Community of Latin American and Caribbean States— CELAC) summit, the agenda will include a side trip to Mariel Bay. There, Brazilian President Dilma Rousseff and Cuban President Raúl Castro will cut the ribbon on a brand new container terminal that Cuba hopes will replace Havana as the country’s principal port.

Brazil financed more than two-thirds of the $900 million project, built in partnership with Brazilian construction company Odebrecht over six years—providing $670 million in loans for terminal construction and infrastructure development such as rail and road. The facility, with an initial capacity of 850,000 to 1 million containers, will be operated by Singaporean port operator PSA International.

The Mariel Bay facility, located 28 miles (45 kilometers) west of the capital on the northern coast, was built to attract traffic from the larger container ships expected to traverse the Panama Canal in 2015. It could also serve as a major transfer point for cargo heading to other destinations. But the competition is already fierce. The Dominican Republic, Jamaica, the Bahamas, and Panama are all rushing to improve their port facilities.

The Cubans hope their main drawing power will be the fact that the new terminal can handle vessels with drafts up to 49 feet (15 meters)—the vertical distance from the water to the lowest part of the vessel. Currently, the much-smaller terminal at Havana Bay is limited to ships with drafts smaller than 36 feet (11 meters) because of a tunnel under the channel that was built in the 1950s.

Mariel is at the heart of a planned 180-square-mile (46,620-hectare) free trade and development zone that will offer competitive customs and tax incentives. Cuba expects this new Special Development Zone (SDZ), and others it plans for the future, will “increase exports, [achieve] the effective substitution of imports, [spur] high-technology and local development projects, as well as contribute to the creation of new jobs,” according to a 311-point reform plan adopted by the ruling Communist Party in 2011. In addition, the Cuban government has plans to increase the terminal’s capacity, develop light manufacturing, storage and other facilities near the port, and build hotels, golf courses and condominiums in the broader development zone.

The terminal is ideally situated to handle U.S. cargo if the American trade embargo is eventually lifted. But even now it is preparing to handle U.S. food exports, valued at $500 million last year, flowing into the country under a 2000 amendment to the trade embargo.

For the moment, though, the big market boost remains a big “if.” U.S. sanctions right now represent a large potential brake on the terminal’s future success. Washington bans ships entering the U.S. for six months after docking in Cuba, unless they carry licensed U.S. agricultural goods.

Nevertheless, many shipping experts believe the terminal and free trade zone, at its current modest size, could still turn a profit with the help of Cuba’s Asian and Latin American friends.

In efforts to stimulate foreign interest, new rules governing investment and trade in the SDZ went into effect in November.

Investors will be given up to 50-year contracts, compared with the current 25 years, with the possibility of renewal and 100 percent ownership. They will be charged no labor or local taxes and will be granted a 10-year reprieve from paying a 12 percent tax on profits, which can be repatriated. This compares with a 30 percent profits tax and 20 percent labor tax for the rest of the country, though the labor tax is gradually being reduced.

Investors will, however, pay a 14 percent social security tax and 0.5 percent of income to a zone maintenance and development fund. All equipment and materials brought in to set up shop or imported for processing and re-export will be duty free.

Chastened Optimism

Cuban economists believe large flows of direct investment will be needed for development and to create jobs as the government follows through with plans to move more than 20 percent of the labor force—over a million workers—into what is called the new “non-state” sector made up of small businesses and farms, cooperatives and joint ventures.

And they, along with foreign investors and governments, are now waiting to see if not just the taxes and customs duties have improved, but the business environment.

The new regulations do address one of the issues: the years it takes to get an investment approved. The office overseeing the SDZ will handle most paperwork without clients having to pass from one location to another, and includes strict time limits for approval by an intergovernmental commission and then, except for very small investments, the Council of Ministers.

Nevertheless, the new regulations are not without their pitfalls. Each investment will still need to be negotiated before the approval process begins, and promises in the past to speed up the paperwork have not materialized.

Another complaint of foreign investors in Cuba is not addressed in the new regulations: that they must hire and fire through a state-run labor company. The new regulations also maintain the highly discriminatory exchange-rate regime for contracting Cuban workers, in which foreign companies pay contracted employees in convertible pesos (at a one-to-one exchange rate with the dollar) directly to the state, which then pays its workers in non-convertible pesos at a much less favorable rate.

Finally, investors will face tough supervision, the high cost of services such as Internet, and the requirements that their facilities must be insured through Cuban state companies, and that contract discrepancies must be brought before Cuban state entities unless stipulated otherwise.

 


Energy in Mexico: The Politics of Reform

Duncan Wood

While Washington has struggled with political gridlock, its southern neighbor has achieved notable legislative success over the past 12 months—thanks to a negotiating mechanism called the Pacto por México. Established soon after President Enrique Peña Nieto took office in December 2012, the mechanism was responsible for a series of major reforms in Mexico that had been pending for a number of years. But there are now serious questions about whether the Pacto will come apart as a result of renewed partisan skirmishing.

The Pacto brought together the three major political parties—the Partido Institucional Revolucionario (Institutional Revolutionary Party—PRI), the Partido Acción Nacional (National Action Party—PAN), and the Partido de la Revolución Democrática (Party of the Democratic Revolution—PRD)—in an effort to identify common legislative goals and provide a forum through which to work toward them. Compromises from each party were crucial to getting final approval from Congress for an ambitious legislative agenda that would be the envy of most countries.

The reforms, some of which require amending the constitution, span a broad number of sectors, including labor, education, telecommunications, and fiscal law. A financial reform requiring banks to lend more money to clients was passed by the Chamber of Deputies and awaits approval in the Senate; and both political and energy reforms were moved in the last weeks of 2013.

There have been numerous protests and demonstrations, and the opposition has continued to throw up roadblocks. For example, the PRD reacted violently to some aspects of the proposed energy reforms, which have been seen as the jewel in the crown of the reform agenda. The law—approved by the Chamber of Deputies December 12, 2013—will open the oil and gas sector to private and foreign investment for the first time since the 1950s through profit- and production-sharing contracts and through new licenses for exploration and production. The government’s hope is that opening up the sector will attract billions of dollars annually in new investment and achieve a much-needed boost to the nation’s oil production and reserves. While the center-right PAN supported the bill in both houses of Congress, the PRD labeled it an attempt to sell off national resources to American and foreign interests. As a result, it broke with the Pacto, threatening to disrupt the government’s future legislative agenda.

A major factor in the success of the Pacto in its early stages was a weakened opposition. Within the PAN, the election defeat of 2012 left deep scars between the party leadership (headed by Gustavo Madero) and the faction controlled by Senator Ernesto Cordero, who was widely viewed as President Felipe Calderón’s choice for presidential candidate, but who lost to Josefina Vázquez Mota in the party’s primaries in 2012.

Both the PAN and PRD leadership chose to work closely with the government and the PRI through the Pacto in an effort to prove that they were relevant to the process of governing and to influence the policy process. However, in recent months this has led to accusations from rank-and-file party members that the leadership has sold out the core ideals of the parties and has essentially been bought off by the government. A more dangerous challenge to the Pacto emerged in August, when the government surprised the national and international press by announcing a fiscal reform that focused on raising taxes on the middle class rather than applying the IVA (the value-added tax) to food and medicine, as had been widely predicted.

This has been interpreted as a conciliatory gesture to the PRD after the rupture caused by the energy reform proposal. The fiscal reform, however, proved highly unpopular. Proposed taxes on rent and mortgages and on tuition payments were eventually withdrawn by the government to secure passage of the legislation by the Congress, but it resulted in widespread public rejection and a drop in Peña Nieto’s approval rating from 55 percent to 50 percent, a very low level by Mexican standards. More important, it created a serious rift between the PRI and the PAN, with a number of PAN legislators pledging to vote against the energy reform proposal that was put forward by the government in August.

However, an intriguing new dynamic has emerged as a result of the rupture between the government and the PAN, which has demanded major policy concessions from the government to secure its continued support.

First, it has called on the government to be more ambitious in reforming the oil sector, and to commit itself to improving the contract terms to be offered to investors. Second, PAN has insisted that the government permit a vote on allowing limited-term re-election and a second-round voting system for the presidency.

The government conceded to this second demand, before allowing the energy reforms to pass through both the Senate and Chamber and before receiving ratification by the states. Although the process in the Congress was tumultuous, provoking one PRD legislator to give a press conference in his underwear in protest and the defection of the PRD from the Pacto, the government has achieved impressive advances that will improve Mexico’s productivity and competitiveness. It is still possible that the leftist party will return to the fold in 2014, but even without the PRD, long-awaited reforms should spark continued optimism from financial markets and, more importantly, a return to high rates of economic growth.


Canada-EU Trade: Free Trade Fever Up North

John Parisella

Just recently, Canadian Prime Minister Stephen Harper came to Montreal’s Board of Trade to laud the benefits of the Canada-Europe Trade Agreement (CETA). Choosing Montreal was a recognition of the support provided by the city’s business leaders and the Québec government for the free trade accord. Sitting at the head table was a former Conservative Prime Minister, Brian Mulroney (a Quebecer as well), who was the architect of the 1987 Free Trade Agreement (FTA) signed with U.S. President Ronald Reagan; Montreal’s new mayor, Denis Coderre; and Québec intergovernmental minister, Alexandre Cloutier, topping a who’s-who guest list.

Harper noted pointedly that, in contrast to the debates over the FTAs in the 1980s, there was a general positive reaction to the European accord. Granted, there remains at least two years for ratification from 28 countries, and CETA will need to be translated into 24 languages; but there appears to be no real threat to Canadian approval.

Back in 1987, the Mulroney government faced fierce opposition from labor unions, from Ontario—the largest Canadian province—and from the opposition parties in the federal parliament (Liberals, then led by former Prime Minister John Turner and the socialist New Democratic Party, then led by Ed Broadbent). It was a period in which the Canadian Left and Canadian nationalists coalesced to depict free trade as a threat to jobs, Canada’s social safety net, our autonomy as a nation, and Canada’s cultural identity. The same arguments surfaced a few years later, but to a lesser degree, when Mexico was added to the mix in 1993 to create the North American Free Trade Agreement (NAFTA).

While the fears were not unfounded, free trade did not reduce Canadian autonomy. Nor did it challenge national identity or undermine Canada’s social programs. Instead, it spurred greater expansion by Canadian entrepreneurs and producers into the larger U.S. market. Today, over $1.5 billion in goods are traded daily between the two nations, and it has brought more prosperity and greater diversity to the three economies of NAFTA.

Coming off what Canadians consider the general success of NAFTA, it is not surprising that Canada’s political class now recognizes the advantages that free trade represents for future economic growth.

The Mulroney-Reagan free trade accord, and later NAFTA, made the Canada-U.S. commercial partnership the largest in the world. Harper claims that CETA would represent an even greater achievement, because it will give access to a market of 500 million people with a GDP of $17 billion. It can be argued that the U.S.-Canada accord prepared the way. CETA’s initial acceptance by Canada’s political and economic leadership shows clearly that free trade fever has now gripped the U.S.’ northern neighbor.

The enthusiasm for market liberalization is no longer an isolated phenomenon. U.S. President Barack Obama has set high targets for U.S. exports since his election in 2008 (despite his initial coolness to NAFTA during the 2008 primaries). He indicated in his 2013 State of the Union Address that he also wished to pursue a trade agreement with the European Union. One of the reasons European negotiators sought to reach a successful agreement with Canada was the potential access to the entire North American market.

The Canada-U.S. commercial relationship, while significant and successful, has also demonstrated the limitations of regional accords. The U.S. is on the march toward energy independence; while Canada is currently the biggest oil and gas exporter to the U.S., it may not be for long. Even Canadian hydropower is affected by lower prices coming from an abundance of locally produced natural gas in the United States.

The prospect of a fall-off in energy exports to the U.S. has pushed Canadian officials to move aggressively in search of new markets for fossil fuel production. While Washington continues to debate whether to approve the Keystone pipeline to bring Alberta oil sands production south of the border, Canadian officials and producers are actively pursuing projects to export Alberta oil through British Colombia to Asian markets, as well as pushing for two major projects to bring oil and gas from the West to eastern Canada and beyond.

The uncertainty about the U.S. energy picture and its corresponding impact on Canada makes prioritizing the Trans-Pacific Partnership talks all the more critical. Today, with technology and innovation the buzz words for world economies both in the developed world and in the emerging nations, free trade has become the norm for economic growth.

Currently, Canada has free trade agreements with more than 10 countries, including some in South America (Chile, Colombia) and the Middle East (Jordan, Israel). Negotiations are also taking place with 60 other countries (including Japan, India, and South Korea). Canadian negotiators are keenly aware that some sectors are more vulnerable to international markets than others.

For instance, the European accord has raised some legitimate concerns for Canada’s domestic cheese industry, especially in Québec. At the same time, though, the Canadian government realizes that it may have to develop domestic compensation policies to offset external trade concerns, without affecting the momentum for free trade.

Trade negotiations have also brought collateral benefits in the form of strengthening Canadian federalism. For years, Canada has faced a threat to its survival posed by some nationalists in Québec who contended that the majority French-speaking province could only realize its full economic potential by separating from the rest of the country and establishing an independent state. Yet, Québec leaders have also been among the strongest supporters of free trade, from the early FTA accords to CETA. During the NAFTA debate in Canada, then-Prime Minister Mulroney found a crucial ally in then-Québec Premier Robert Bourassa to counter the strong opposition in many parts of English-speaking Canada. And CETA was largely the brainchild of former Québec Premier Jean Charest. One key to Québec’s fervent support was securing Ottawa’s approval to have a representative from the province at the negotiating table.

The context for CETA indicates that free trade is now seen by Canadians as a win-win proposition in a globalized economy. The agreement, should it be approved, will provide access to new markets and new initiatives, and this will help address one of our biggest national challenges as a federation—the need for more diversified economic growth.




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