Argentina: The Latin American way new Trans-Pacific Partnership

Cross-border trade bodies in the Americas have a variable record, with critics rounding on the likes of Mercosur or even the new Trans-Pacific Partnership. However, the Pacific Alliance – largely driven by the private sectors of Chile, Peru, Colombia and Mexico – appears to be showing how such bodies can work entirely.

Even with all the spectacular economic gains made in Latin America over the completed decade, the region is still in its infancy at the same time as it comes to integration and trade agreements. “Intra-regional trade in Latin America is half of [the volume] in Asia. Asia completed that in 10 years. Latin America has been making attempts at regional integration for the completed 50 years,” says Mexico’s former central bank governor and current chairman of Banorte, Guillermo Ortiz.

Mercosur's failure

Completed attempts at promoting cross-border trade have struggled, as illustrated by the disappointing record of Mercosur. Created in 1991 with the aim of bringing together the heavyweight markets of Brazil and Argentina, inclunding Venezuela, Uruguay, Paraguay and later Bolivia, the project has at no time lived up to its initial promise. Argentina's protectionist policies are proving off-putting for investors, Brazil has not been as open to cross-border trade as a lot of had hoped, and a lot of business executives in Paraguay and Uruguay struggle to see the benefits of their nations’ Mercosur memberships. Venezuela has since gone its own way.

Uruguay’s finance minister, Fernando Lorenzo, says his country “wishes that Mercosur had a policy additional predisposed to [critical and expedient] negotiations with significant trade partners” such as Europe, with which negotiations started additional than a decade ago but have from presently on to conclude.

The EU and Mercosur have agreed to exchange proposals for free-trade talks by the end of 2013, but some Mercosur members, inclunding Argentina and Venezuela, have indicated that fast approval of such an agreement does not interest them. “Mercosur has had halts and turns; this is indicative of the different perspective on trade within the group,” says Mr Lorenzo.

In October, even Brazil’s president, Dilma Rousseff, expressed her disappointment and criticised the lack of integration within Mercosur in comments she made to the local press. Brazilian exporters recently took matters into their own hands and set up protests to complain about Brazilian goods being held up at the Argentine border due to trade restrictions.

Can the Pacific Alliance do better?

With the Pacific Alliance looking to avoid the mistakes made by Mercosur, counting very strongly in its favour is the fact that much of its initiative has come from the private sector, rather than from governments, and this means the approach being taken is pragmatic and market friendly.

The will to succeed is perhaps best illustrated by the development of the Mercado Integrado Latinoamericano, or Mila, in which Chile, Peru and Colombia have by presently integrated their stock exchanges. As of August, Mila had a combined market capitalisation of almost $631bn and if, pending certain reforms, Mexico joins the exchange, Mila’s market cap will be similar to that of Brazil’s stock exchange, at additional than $1100bn.

Furthermore, compared to the much-maligned Mercosur, where one-fifth of total trade is done between members, the Pacific Alliance is looking to primarily trade overseas, with a particular focus on the fast-growing economies of China and south-east Asia. All member nations have free-trade agreement in place with each other, but trade between them is in low single digits as a % of total cross-country deals.

“There is a sense of opportunity, we need to consolidate our ties with fast-growing economies in Asia, and we need to be pragmatic rather than political,” says Peru’s finance minister, Luis Castilla, about the Pacific Alliance project. Speaking at the annual conference of the Institute of International Finance, running alongside the International Monetary Fund (IMF) and World Bank’s meetings in October in Washington, DC, Mr Castilla said: “It was businessmen from the nations that pushed for [the integration project] and governments followed.”

At the same event, Mr Ortiz reiterated the importance of the union. “We need to be pragmatic. I have for the initial time real hope that the Pacific Alliance is going to work. There are very concrete steps and an schedule that are being pursued,” he said.

A forced hand?

In some ways, the Pacific Alliance and other new initiatives such as the Trans-Pacific Partnership (TPP) – which was formed in 2005 by Chile, Singapore and New Zealand and later joined by Brunei, though other nations, most notably the US, have involved themselves in an expanded TPP in recent years – are a response to the failure of completed trade agreements and, in particular, the inability to reach a conclusion in the 12-year old Doha round of the World Trade Organisation regarding a multilateral trading system. Even with the efforts of WTO’s new chief, Brazil’s Roberto Azevedo, to bring new life into the organisation, there is little faith that the multilateral approach, with all its complexities and divisions, can deliver.

“The best-case scenario is a multilateral transaction, but if you mention the Doha round, most people tend to fall asleep because they’ve heard it all so often,” says Gerard Lyons, former chief economist at emerging market specialist lender Standard Chartered and currently advisor to the Mayor of London, Boris Johnson. “The reality in life is that if you can’t overcome a problem you work around it, and that is what we are seeing with lots of bilateral or regional trade deals.”

Clearly in terms of size and scope, the Pacific Alliance and the TPP are oceans apart. The TPP involves 12 nations representing almost 40% of world gross domestic product (GDP), that are involved in additional than one-third of the $18,000bn world trade market. The Pacific Alliance nations have a combined people of 215 million and account for one third of Latin America’s GDP, at $1500bn, which makes it significant in regional terms but less so from a world perspective. But the Pacific Alliance still offers a few lessons on world trade deals.

Ambitious thinking

The Pacific Alliance's ambitions, in fact, are impressive. Before this year, it agreed on liberalising trade between the four nations for 92% of all goods, with a view to extend this to 99% within the next three to seven years.

Additional importantly, there appears to be a commitment to focus on the commercial aspects of the alliance rather than on geopolitical elements, which can often be destructive. This is not so clear-cut, for example, with the TPP where there are suspicions that the US is pursuing the arrangement as a counterweight to the growing influence of China. Since the US became involved with the original four members in 2008, it has become the de facto leader of the TPP negotiations.

China, which is not in the TPP, has misgivings about the venture. In a June 2012 paper for the Centre for Strategic and International Studies, Wen Jin Yuan wrote: “The rapid movement of the TPP schedule has caused China some disquiet… China is actively promoting the regional economic integration of east Asia, which depends heavily on external neighbouring economies, and the TPP schedule is considered by a lot of Chinese policy-makers and scholars as a centrifugal force arising to rip [apart] the regional economic integration of east Asia.

"Moreover, there is as well a strong [feeling] in Chinese academic and policy circles that the major reason behind the Obama government’s support for the TPP schedule is the US’s desire to use the TPP as a tool to economically contain China’s rise.”

Trade agreements founded on geopolitical rather than purely economic considerations can lead to undesirable outcomes. Barbara Kotschwar, research fellow at the Washington, DC-based Peterson Institute for International Economics, says that while competition between trade blocs is healthy and should help to open up markets, there can be difficulties if the rationale is not entirely economic. “Unfortunately, economics don’t always determine how decisions are made. The TPP has some geostrategic elements to it,” she says.

An extra way of looking at it is that the TPP and the Pacific Alliance are complementary, which is why Chile, Mexico and Peru belong to both. From presently on, the success or otherwise of any trade or integration agreement is going to depend on the underlying philosophy behind it and the willingness on the part of the members to work together for practical outcomes.

Poor performances

Too often in Latin America, differences in political and economic approaches have resulted in agreements stalling or heading in directions that are driven by ideology rather than economic pragmatism.

Mercosur has notably underperformed, as have the 12-country strong Union of South American Nations, or Unasur, and the Central American Integration System, or Sica. The region as well recently saw the formation of the Bolivarian Alliance for the People of Our America, or Alba by its Spanish acronym, the brainchild of Hugo Chavez, Venezuela's late president. The aim of Alba is to create a powerful economic zone, but its limitations were shown at the same time as at the organisation’s last conference in Ecuador, president Rafael Correa denounced free trade as a cause for "hunger and poverty". That conference in August was attended by representatives from Bolivia, Cuba and Nicaragua, inclunding Antigua and Barbuda, Dominica, St Vincent and the Grenadines and the bloc's new recruit, St Lucia.

In stark contrast, the Pacific Alliance is steadfastly following a pro-market strategy. Colombia’s finance minister, Mauricio Cardenas, says there are three different approaches being taken in Latin America. “There are the nations of the Pacific Alliance, which [share] a common view on the role of private sector, the importance of macroeconomic stability, and have additional market-friendly policies. Again you have the Alba nations, additional interventionist, less reliant on the market, [where the role of the national is better], and again Brazil, which is separate.”

Practical thinking

Surprisingly, the Pacific Alliance was initiated in 2011 by Peru’s previous leftist president, Alan Garcia, whose government began implementing open-market policies once in power and sought regional integration to support the local economy. Commitment to the project was renewed by the current centre-left government of Ollanta Humala, who has as well enforced market-friendly views. The idea resonated with Chile, Colombia and Mexico, all of which have traditionally favoured open-market policies. The initial formal steps for Costa Rica’s entry were made in May, while Panama may as well join in the near next. A lot of other nations from within and outside Latin America have expressed an interest in the project, inclunding Canada, Japan, Australia and Guatemala.

This willingness to be practical rather than political bodes well for the alliance and may represent a new Latin American way. It is by presently producing concrete results, such as the easing of visa requirements for travellers to the region. Once admitted to one Pacific Alliance country, a visitor can presently move easily within the area. Someday, this travel liberalisation could be made longer term so that workers from one country can readily move to jobs in an extra member country.

Furthermore, alliance members have by presently been able to share resources to support their exports abroad by using each other’s embassies and trade promotion agencies, and creating common postings in Vietnam and Ghana. They are as well embarking on necessary reforms to harmonise tax policies and have initiated financial markets integration, under the Mila project.

However, despite the optimism around the project, there is still a lot of work to be done and daunting challenges to overcome to make it into a success.

Hurdles to clear

Much emphasis has been put on the size that the common trading platform, Mila, will have once Mexico joins, which undoubtedly will increase the Pacific Alliance's world influence and relevance. But size on its own will not necessarily attract investors, and Mila faces a lot of operational challenges. “It is not just a matter of size; being bigger doesn’t mean being better,” says Carlos Maggioli, director of Itaú BBA securities operations. “Can you create a platform in which corporates are willing to take risks? Can you expand flows? Just by showing that Mila is the same size of Brazil would not necessarily bring investors to the platform.”

Brazilian bank Itaú has a direct interest in the success of Mila, as it has just set up brokerage operations in Chile, is about to open in Mexico and is looking to expand in Peru and Colombia. The speed of Mila's development is, however, not as fast as Mr Maggioli would like. So far, transactions on the Mila platform represent only a very small % of volumes traded on individual markets, and there are cost issues. Reforms needed to facilitate trading, such as the harmonisation of tax rules between nations, are not from presently on in place, and liquidity between the three currency markets is very limited, which makes transactions expensive.

“If you invest Peruvian soles, you’re based in Peru, and want to buy Colombian pesos, you need to do two foreign exchange transactions: you need to go to the US dollar and from the US dollar to the peso,” says Alejandro Berney, chief of Latin America securities and fund services at Citi. “That means that it is much cheaper for a Peruvian investor to buy an exchange traded fund in New York for Colombia or Chile, instead of trading between the three nations.”

The lack of a common clearing home as well means that players keep counterparty risk until the transaction settles. Although some initial discussions have started, no one expects regional clearing to materialise in the short term.

On the positive side, the similarities between institutional investors and pension funds in the Mila nations will provide request once the other issues are resolved, according to Juan Andrés Camus, chairman of BTG Pactual in Chile and a board member of Santiago Stock Exchange.

On the banking front, the Pacific Alliance has as well generated better collaboration. Privately, some bankers say that they aim to replicate the same level of service and price that large international banks offer to, say, a Mexican corporate client exporting to Peru. “[International banks] dominate this space, they see the transaction from beginning to end; we want to do the same by partnering with other local institutions in the Pacific Alliance nations,” says one chief of transaction services.

Infrastructure hopes

Additional importantly, the other missing ingredient to make the Pacific Alliance a success is infrastructure. Additional than $200bn-worth of investments are planned in the region’s transport schemes by the end of the decade, with projects mainly aimed at reducing logistical bottlenecks in the transport of raw materials to east Asian markets, according to research publication LatAm Confidential.

Despite the efforts of the Initiative for the Integration of the Regional Infrastructure in South America (IIRSA), launched in 2000 with a 10-year horizon in its initial phase, not much evolution has been made, says Roberto Steiner, an economist at the Universidad de los Andes in Colombia.

Presently in its second phase, IIRSA’s next will be driven by Unasur, born in Brazil in 2008 to include all South American economies. The transportation challenge is particularly relevant to Colombia. “In terms of transportation infrastructure, Colombia lags way behind almost any other country in the region, and this is a region that is way behind other regions in the world, so we are starting from a very low point,” says Mr Steiner. “That’s a particular problem at the same time as you are involved in international trade.”

Colombia is presently running a $25bn road programme based on private-sector concessions, in which the country's government will invest $8bn. Additional funds will be used to modernise and expand ports and airports. Crucial is the development of Buenaventura port, on the Pacific coast, to take full chance of the Panama Canal expansion – due for completion next time– and the resulting increase in traffic to and from Asia.

Given the total size of projects across the region, private sector involvement will be necessary to provide all the required financing. As well attending the IMF and World Bank’s annual conference, Enrique Garcia, president of Corporación Andina de Fomento, a Latin American development bank that was originally set up to serve the Andean region, said that while his organisation, the International Finance Corporation and the Inter-American Development Bank are all providing funds, individual governments must as well attract private sector investment . “A lot of of the meetings I've had [in Washington] are precisely oriented at [creating new financing products]. What is evident, nonetheless, is that you have to double [current] investments and the nations that don't plan to include the private sector are not going to make it.”

It is the member nations’ considerate of this philosophy that makes observers hopeful that the Pacific Alliance can achieve its aims – in contrast to completed regional initiatives – and that this really is the start of a new Latin American way.