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Pacific Alliance Settled; Historic Opening of Latin American Markets

The Pacific Alliance (PA)–a free trade agreement between Mexico, Peru, Colombia and Chile–finally concluded on February 10. The accord instantly creates a liberalized market that includes approximately 210 million people, larger than the population of Brazil.

Negotiations over the agreement launched June of 2013 with the intention to liberalize competition in services among the signatory nations, providing a stable regulatory framework that continues to magnetize foreign investment. For example, new “cumulative rules of origin” permit producers to contribute value to an item produced in one country and still export it to another, infusing supply chains with greater flexibility. Visas will no longer be necessary for either businessmen or tourists between member nations. Mexico has already removed visa requirements for visitors from Colombia and Peru, boasting a 63 percent spike in tourism from both countries as a result.

Between the four members of the Pacific Alliance 92 percent of all goods will be exchanged tariff free, with the aim to gradually include the remaining 8 percent over the next several years. According to Morgan Stanley forecasts, the new trade bloc is anticipated to grow about 4.25% this year. Overall, the group accounts for 36 percent of Latin America’s population, 35 percent of its GDP ($1.7 trillion) and more than half the trade for the entire region.

Also, the PA is specifically designed with the intent of strengthening economic ties with Asia. Ultimately, the PA plans to strike a free trade agreement with ASEAN, following up deals Chile and Peru have already brokered with China, Japan and Korea. Also, India still does not have any commercial arrangement with the PA at all though the four members did $7.7 billion worth of trade with India in 2011. Some experts estimate that a more predictable regulatory framework could double that volume over the next three years.

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At a cursory glance, the PA could appear redundant in a region already tightly knit together by bi-lateral trade agreements. All of the members already enjoy pre-existing arrangements with each other and all four have free trade agreements with the U.S. Also, each of the member nations have already transformed their once statist economies into open markets accustomed to and hungry for foreign investment. Now that Columbia has made significant inroads toward liberalizing its economy under President Santos, an additional accord might seem unnecessary.

Further, the region is already carved into five separate and overlapping trading groups: the Andean Community, Mercosur, UNASUR, SICA, and NAFTA.

However, some are touting the agreement as a historic consolidation of the most liberal economies in Latin America. Michael Shifter, president of the Inter-American Dialogue, a think tank headquartered in Washington, D.C., said, “This is the most exciting thing happening in the hemisphere on the integration front.”

Some have expressed a combination of both optimism and pessimism, noting that there is no panacea solution for the region’s daunting economic impairments. For example, Columbia still suffers from deep infrastructural problems and persistent political unrest. Barbara Kotschwar, research fellow at the Petersen Institute for International Economics, said, “It’s reasonable to expect the Pacific Alliance countries to continue to grow in coming years, and difficult to see the other countries overcoming their economic difficulties–barring some other manna from heaven.” Rafael Mejia, president of Colombia’s Society of Agricultural Producers, expects that the accord will have minimal impact. “There’s a complete lack of competitiveness in this country. There’s not the necessary infrastructure, ports, airports…this is more a political alliance than a commercial one.”

Many view the new alliance as pregnant with political import. Latin America has become fragmented into two competing halves, one which embraces free market competition and privatization and one which clings to a retrograde statism and protectionism. The PA essentially codifies the commercial relationships among its member nations, all generally pro-U.S., that continue to court both foreign investment and competition. In a region riven by such a sharp political and economic divide, the PA could become a formidable counterweight to the unregenerate statism of Bolivia, Venezuela, Brazil, and Argentina. In particular, it has the potential to become a free trade alternative to the Brazil-led Mercosur group.

Mexican President Calderon favorably compared the PA with Mercosur in economic terms. “Even when we are less in population and in the size of our economies compared to our brothers from Mercosur, we export double in volume and value than Mercosur. We have an extraordinary potential,” he said.

Later in his remarks to a roomful of foreign correspondents, Patriota softened his blustery rhetoric. He said, “When I say that the alliance is marketing or a new package for the same existing produce I’m not trying to downplay, since we are talking of countries that are most important for Brazil. And Brazil hopes and expects that this effort will help make those economies more dynamic and elevate living standards.”

Mexican President Pena Nieto downplayed the political character of the PA.  He said, “We are not a political alliance, we are countries who believe in and have a shared vision on free trade, social inclusion and economic growth. This is an open alliance for those who are in favor of the same principals and convictions.”