A multilateral trade agreement between the U.S. and all South American states could reveal new opportunities for expansion of U.S. exports and stronger economic growth.
In the past two decades, the United States has signed 11 bilateral free trade agreements, but lagged on multilateral free trade agreements aside from the Trans-Pacific Partnership (TPP). In an increasingly globalized world, new multilateral agreements are essential for U.S. economic growth and global influence. Upon completion of TPP, the United States should launch new talks on a U.S.-South America trade agreement. A previous attempt to launch the same type of agreement – Free Trade Area of the Americas (FTAA) – resulted in a gridlock of interests between the developed and developing states. Yet lessons from past obstacles and mistakes could enable the United States to achieve a better outcome this time.
In 2003, FTAA negotiations failed because U.S. negotiators did not budge on intellectual property rights and South American states insisted on the removal of agricultural subsidies. However, there was much agreement to lower tariffs on many goods and services, establish uniform hemispheric rules of origin, and formalize dispute resolution mechanisms. U.S. negotiators need to design a new agreement around these mutually desirable areas, leaving intellectual property rights and agricultural subsidies for later stages of negotiation. A new U.S.-South American trade agreement will bring many benefits:
-- An increase in U.S. exports, growth, and jobs. Greater market access to the 12 countries of South America will increase exports of American made products and generate higher paying domestic jobs. Each additional billion dollars’ worth of exports supports more than five thousand U.S. jobs. Higher exports from the United States will improve the long-term problem of the negative U.S. trade balance.
-- Greater U.S. influence. An agreement will intensify trade and political relations with Brazil, the second largest economy in the Western Hemisphere. As Brazil continues to see China as a state that buys commodities and offers little opportunities for its high-tech exports, this trade agreement will motivate Brazil to realign and strengthen its trading relations with the United States. After recovering from it economic recession, Brazil will be eager to increase its trade with its North American partner. As trade can sometimes transcend political differences, the United States can also enhance its trade relations and influence with adversarial states, such as Bolivia and Venezuela, stabilizing relations based on mutual trade interests.
-- Counteracting China’s influence. China has pledged to invest over 250 billion dollars in South America in the next ten years. Chinese trade and investment in South America is premised on securing a source of cheap primary commodities in South America for its domestic markets and on flooding South American markets with cheap Chinese imports. This trade strategy provides few chances for South America to improve its economic conditions. The new U.S.-South America trade agreement will grant more benefits to South America and make the United States a more attractive trading partner.
Many would claim that past difficulties with the FTAA, Brazil’s economic volatility, adversarial nature of Bolivia and Venezuela, and poor growth of South America in general make this agreement too hard to achieve or even unnecessary. However, U.S. trade negotiators can use the FTAA precedent and sidestep the contentious topics that killed previous talks. Brazil’s economic volatility is tied to its dependence on the export of primary commodities. Brazil currently seeks the United States, not China, as its long-term trading partner to trade high-tech products such as Embraer commercial airplanes. Even if this agreement occurs without some South American states, overall benefits of the increased trade will indirectly compel states such as Venezuela and Bolivia to reconsider their positions.
U.S. unions and other supporters of labor worried that FTAA would incentivize U.S. corporations to move their operations to the Western Hemisphere states with cheaper labor, causing job losses in the United States and oversaturation of the American market with cheaper imports. But the new U.S.-South America trade agreement will require an implementation of minimum wage, right to form unions, and elimination of child labor in all South American states. Such stipulations will increase the production costs in South America, leveling the playing field for U.S. workers and preventing cheap South American imports from flooding the U.S. market.
Expanding the framework of its precursor the North American Free Trade Agreement (NAFTA), FTAA has a realistic chance of enhancing economic growth in the Western Hemisphere based on the indisputable success of NAFTA. Since its implementation in 1994 to 2007, NAFTA created 25 million new U.S. jobs. It also caused an increase in the U.S. manufacturing output by 63 percent, compared to 37 percent between 1980 and 1993. Compensation for workers in the manufacturing sector increased on average by 1.6 percent in comparison to 0.9 percent between 1980 and 1993. During the same period, NAFTA increased non-residential investment in the United States by 107 percent and elevated Mexico to the second largest destination for U.S. exports. The U.S.-South America trade agreement could yield similar economic and trade benefits for the U.S. and South American economies.
A U.S.-South America trade agreement, tying the United States closer to 12 large markets with a total consumer population of over 380 million, is an enticing prospect. By tapping into these markets, the United States will bolster exports, create more domestic jobs, increase tax revenue, improve the trade balance, and stimulate economic growth in the United States and South America. With strong leadership, the United States can achieve a new trade-based alliance for progress benefiting the entire hemisphere.
Michael Bentley is a second year graduate student at the Elliott School of International Affairs, pursuing his degree in International Affairs with a concentration in International Economic Affairs. Michael interned at the U.S. Department of Commerce - Office of Trade Negotiations and Analysis in the Fall of 2014 and Office of Latin America and the Caribbean in the Spring of 2015. He will participate in the 2016 Summer U.S. Department of State Internship Program at the Economic Section of the U.S. Embassy in Brasília, Brazil.