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The World Changing Treaty You’ve Never Heard Of

On June 4th, the Panamanian government announced its intent to join the Pacific Alliance (PA), following the conclusion of a free trade agreement with Colombia. Largely neglected by the media in favor of coverage of the US-led Transpacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), the PA is potentially the most consequential commercial treaty since NAFTA passed in 1994.

Negotiations for the PA, now in their seventh round, officially launched last June. The nearly completed free trade agreement has already been signed by the presidents of Chile, Colombia, Mexico and Peru. The purport of the pact is 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.

The scope of the new bloc is extensive. With a combined population of 204 million (36 percent of Latin America), a GDP of $1.7 trillion (35 percent of the region), the bloc will encompass more than half of all trade for Latin America.

In a rousing speech delivered at the signing ceremony, Chilean President Sabastian Pinera noted the historic import of the agreement. He said, “[the]Pacific Alliance is much more than a Free Trade Agreement. It is an Agreement of deep and broad integration that involves the exchange of goods, services, investment, people, and at the same time is committed towards physical, infrastructure and energy integration.”

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Echoing Pinera’s lofty sentiments, Colombian President Juan Manuel Santos called the new bloc “one of the significant processes towards integrations that have taken place in Latin America.”

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 US. 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 towards 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, many are interpreting the alliance as a response to a growing cleavage between an increasingly leftist, anti-US bloc and increasingly market friendly, pro-US group in Latin America. 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 recently spoke directly to this rivalry: “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.”

Finally, 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.