Latin American and Caribbean Trade Agreements

Latin American and Caribbean Trade Agreements

Latin American and Caribbean Trade Agreements: Keys to a Prosperous Community of the Americas

Thomas Andrew O’Keefe

2009

Library of Congress Cataloging-in-Publication Data O’Keefe, Thomas Andrew, 1961–   Latin American and Caribbean trade agreement  :  keys to a prosperous community of the American  /  Thomas Andrew O’Keefe.     p.  cm.    Includes bibliographical references and index.    ISBN 978-90-04-16488-8   1.  Foreign trade regulation—American.  2.  American—Commercial treaties.  3.  Free trade—American.  4.  American—Economic conditions. I.  Title.   KDZ944.O34 2009   343'.087—dc22

Copyright © 2009 Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Hotei Publishing, IDC Publishers, Martinus Nijhoff Publishers, and VSP. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Brill provided that the appropriate fees are paid directly to the Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. printed in the netherlands

In memory of my father, Thomas (1933–2000) and my maternal grandmother, Clemencia Ferrari León de la Barra, who lived to the ripe old age of 100.

TABLE OF CONTENTS Acknowledgments................................................................................................. xvii About the Author....................................................................................................xix List of Abbreviations and Acronyms.........................................................................xx Introduction ........................................................................................................xxv Chapter 1:  Early Attempts at Latin American and Caribbean Economic Integration..................................................................................................1 I. Overview of the Theory of Economic Integration.............................................1

II. Central American Common Market...................................................... 3 III. Latin American Free Trade Area........................................................... 5 IV. Andean Pact............................................................................................ 7 V. Caribbean Free Trade Area and Caribbean Community and Common Market........................................................................... 10 VI. New Climate for Latin American and Caribbean Economic Integration in the 1990s....................................................................... 12 VII. Regional Economic Integration and the World Trade Organization......................................................................................... 13 Chapter 2:  Latin American Integration Association........................................ 19 I. Latin American Integration Association and Its Relevance to Intra-Regional Trade............................................................................. 19 A. Introduction.................................................................................... 19 B. Latin American Integration Association Today............................ 20 II. Institutional Framework of the Latin American Integration Association............................................................................................. 22 A. Decision-Making Bodies................................................................. 22 B. Central Clearing House Mechanism for Intra-Latin American Integration Association Trade....................................... 23 III. Rule of Origin Requirements............................................................... 25 IV. Safeguard Measures.............................................................................. 27 V. Agreements Under the Latin American Integration Association Framework......................................................................... 28 VI. Agreements Between Latin American Integration Association Countries and Non-Member States in Central America and the Caribbean................................................................. 34 A. Colombia-Venezuela and Central American Agreement............. 34 B. Caribbean Common Market and Community Preferential Market Access Agreements with Colombia and Venezuela.......... 34 vii

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VII. Latin American Integration Association Economic Complementation Agreements............................................................ 37 A. Chile-Mexico Free Trade Agreement............................................ 37 B. Chile-Venezuela Free Trade Agreement........................................ 44 C. Chile-Colombia Free Trade Agreement........................................ 45 D. Bolivia-Mexico Free Trade Agreement.......................................... 47 E. Chile-Ecuador Free Trade Agreement........................................... 51 F. G-3 Accord Between Colombia, Mexico, and Venezuela............. 53 1. Introduction............................................................................. 53 2. Free Trade in Goods................................................................ 55 3. Rule of Origin Requirements.................................................. 57 4. Safeguard Measures................................................................. 58 5. Unfair Trade Practice Remedies............................................. 58 6. Technical Norms...................................................................... 59 7. Sanitary and Phytosanitary Measures...................................... 59 8. Services..................................................................................... 60 9. Government Procurement...................................................... 62 10. Investment Protection............................................................. 64 11. Intellectual Property Rights Protection.................................. 66 12. Dispute Resolution................................................................... 67 13. Institutional Framework.......................................................... 68 14. Transparency............................................................................ 69 15. Temporary Entry of Businesspeople....................................... 69 G. Chile-Peru Free Trade Agreement................................................. 70 H. Mexico-Uruguay Free Trade Agreement....................................... 70 1. Introduction............................................................................ 70 2. Free Trade in Goods............................................................... 71 3. Rule of Origin Requirements................................................. 71 4. Safeguard Measures................................................................ 73 5. Unfair Trade Practice Remedies............................................ 74 6. Technical Norms, Sanitary and Phytosanitary Measures.................................................................................. 75 7. Services.................................................................................... 75 8. Investment Protection............................................................. 76 9. Temporary Entry of Businesspeople, Professionals, and Investors........................................................................... 77 10. Intellectual Property Rights Protection................................. 78 11. Dispute Resolution.................................................................. 79 12. Conclusion............................................................................... 80 Chapter 3:  Origins, Current Status, and Future of MERCOSUR..................... 81 I. Introduction........................................................................................... 81 II. Argentine-Brazilian Integration and Economic Cooperation Program of 1986.................................................................................... 82 III. Overview of MERCOSUR from Its Inception...................................... 84 A. Introduction.................................................................................... 84 B. Trade Creation vs. Trade Diversion............................................... 85

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C. Political Considerations.................................................................. 96 D. Full Membership by Venezuela and Bolivia in MERCOSUR.................................................................................... 99 E. Reaching Out to the Rest of the World....................................... 100 IV. Chile-MERCOSUR Free Trade Agreement....................................... 104 A. Introduction.................................................................................. 104 B. Free Trade in Goods..................................................................... 105 C. Rule of Origin Requirements....................................................... 106 D. Unfair Trade Practice Remedies.................................................. 107 E. Safeguard Measures...................................................................... 107 F. Dispute Resolution....................................................................... 107 G. Integration of Physical Infrastructure......................................... 108 H. Services.......................................................................................... 109 I. Other Measures............................................................................. 109 V. Bolivia-MERCOSUR Free Trade Agreement..................................... 110 A. Introduction.................................................................................. 110 B. Administrative Commission......................................................... 111 C. Free Trade in Goods..................................................................... 111 D. Rule of Origin Requirements....................................................... 112 E. Unfair Trade Practice Remedies.................................................. 114 F. Safeguard Measures...................................................................... 114 G. Dispute Resolution....................................................................... 115 H. Other Measures............................................................................. 116 VI. MERCOSUR-Peru Free Trade Agreement........................................ 117 A. Introduction.................................................................................. 117 B. Free Trade in Goods..................................................................... 118 C. Rule of Origin Requirements....................................................... 120 D. Unfair Trade Practice Remedies.................................................. 121 E. Safeguard Measures...................................................................... 122 F. Technical Norms, Sanitary and Phytosanitary Measures............ 122 G. Dispute Resolution....................................................................... 123 H. Administrative Commission......................................................... 124 I. Conclusion.................................................................................... 125 VII. Andean Community-MERCOSUR Free Trade Agreement.............. 125 A. Introduction.................................................................................. 125 B. Free Trade in Goods..................................................................... 126 C. Rule of Origin Requirements....................................................... 127 D. Unfair Trade Practice Remedies.................................................. 129 E. Safeguard Measures...................................................................... 130 F. Technical Norms........................................................................... 131 G. Sanitary and Phytosanitary Measures.......................................... 131 H. Dispute Resolution....................................................................... 132 I. Transportation and Infrastructure............................................... 134 J. Administrative Commission......................................................... 134 K. Conclusion.................................................................................... 134

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Chapter 4: Institutional Framework of MERCOSUR and How the MERCOSUR Economic Integration Process Functions.......................... 137 I. Introduction...................................................................................... 137 II. Institutional Framework................................................................... 137 A. Common Market Council.......................................................... 139 B. Common Market Group............................................................ 140 C. MERCOSUR Trade Commission............................................... 141 D. Socio-Economic Advisory Forum.............................................. 142 E. MERCOSUR Secretariat............................................................ 143 F. Commission of Permanent Representatives............................. 143 G. Advisory Forum of Municipalities, Federal States, Provinces, and Departments...................................................... 144 H. MERCOSUR Parliament............................................................ 144 I. Special Funds to Strengthen the Economic Integration Process........................................................................................ 146 J. Program for the Integration of Production in MERCOSUR .............................................................................. 147 III. Dispute Resolution System............................................................... 148 A. Disputes Arising Among the State Parties................................ 149 B. Disputes Involving Private Parties and a State Party(ies)......... 152 C. Implementing Regulations for the Protocol of Olivos............ 153 D. Decisions Arising Under the Protocol of Olivos...................... 155 1. Dispute Between Uruguay and Argentina Arising from the Prohibition on the Importation of Remolded Tires (October 25, 2005).................................................... 155 2. Complaint Brought by Uruguay Against Argentina for Failure to Adopt Appropriate Measures to Prevent and/or Halt Interruptions to Free Movement Over the International Bridges of General San Martin and General Artigas that Link the Argentine Republic with the Eastern Republic of Uruguay (June 21, 2006)................................................................... 158 3. Request for an Advisory Opinion from the Court of First Instance in Civil and Commercial Matters (First Division) of Asuncion, Paraguay re: Norte S.A. Imp. Exp. c/ Laboratorios Northia Sociedad Anónima, Comercial, Industrial, Financiera, Inmobilaria y Agropecuaria s/ Indeminzación de Daños y Perjuicios y Lucro Cesante (April 3, 2007)..................................................................... 160 IV. Intra-Regional Free Trade Program................................................ 161 V. Rule of Origin Requirements.......................................................... 164 VI. Certificates of Origin........................................................................ 166 VII. Common External Tariff.................................................................. 168 VIII.  Other Import Regulations............................................................... 172 A. Customs Valuation..................................................................... 172 B. Special Taxes and Licensing Requirements............................. 173

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1. Argentina.......................................................................... 174 2. Brazil.................................................................................. 175 3. Paraguay............................................................................ 175 4. Uruguay............................................................................. 176 IX. MERCOSUR Automobile Regime................................................. 176 X. Technical Norms............................................................................. 181 XI. Sanitary and Phytosanitary Measures............................................ 183 XII. Free Trade/Export Processing Zones and Special Customs Areas................................................................................. 183 XIII.  Temporary Admission and Duty Drawback................................... 184 XIV.  Safeguard Measures........................................................................ 185 XV. Unfair Trade Practice Remedies.................................................... 189 XVI.  Trade in Services............................................................................. 191 XVII.  Government Procurement............................................................. 193 Chapter 5: Foreign Investment Climate Within MERCOSUR and Business Opportunities............................................................................. 195 I. Legal Regime for Foreign Investment........................................... 195 II. Intellectual Property Rights Protection......................................... 197 III. Free Movement of Labor................................................................ 199 IV. Environmental Protection.............................................................. 201 V. Trends in Foreign Direct Investment in the MERCOSUR Region during the 1990s................................................................ 204 VI. Examples of Companies that Incorporated MERCOSUR into Their Strategic Business Plans for the Southern Cone of South America................................................................................ 208 A. Automobiles............................................................................ 209 B. Auto Parts................................................................................ 213 C. Beverages................................................................................. 214 D. Computers and Informatics................................................... 215 E. Consumer Goods.................................................................... 216 F. Electronic Appliances and Mobile Telephony...................... 216 G. Forestry and Paper Products.................................................. 218 H. Lactate Industry....................................................................... 219 I. Other Manufactured Goods................................................... 220 J. Petrochemicals........................................................................ 222 K. Pharmaceuticals...................................................................... 224 L. Processed Foodstuffs............................................................... 225 M. Services.................................................................................... 227 N. Steel.......................................................................................... 228 O. Textiles/Apparel and Footwear.............................................. 229 P. Transportation......................................................................... 230 VII. Investment Trends in the MERCOSUR Region Following the Argentine Economic Implosion of 2001–02................................. 231 VIII.  Argentine Energy Crisis and Its Impact on Foreign Direct Investment and Regional Energy Integration............................... 233

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A. Natural Gas............................................................................... 234 B. Electricity................................................................................... 236 C. Potential Role for MERCOSUR?............................................. 238

Chapter 6:  Institutional Framework of the Andean Community and How the Andean Economic Integration Process Functions.................... 243 I. Current Status of the Andean Community.................................... 243 II. Institutional Framework.................................................................. 247 A. Andean Presidential Council and Andean Council of Ministers of Foreign Relations................................................. 247 B. Andean Commission................................................................ 248 C. General Secretariat of the Andean Community..................... 248 D. Andean Labor Advisory Council and Andean Business Advisory Council....................................................................... 249 E. Tribunal of Justice of the Andean Community....................... 250 F. Andean Development Corporation......................................... 251 G. Latin American Reserve Fund................................................. 254 H. Andean Parliament................................................................... 254 III. Intra-Regional Free Trade Program............................................... 255 IV. Rule of Origin Requirements......................................................... 255 V. Common External Tariff................................................................. 257 VI. Other Import Regulations.............................................................. 259 A. Customs Valuation.................................................................... 259 B. Customs Procedures................................................................. 260 C. Special Taxes and Licensing Requirements............................ 261 1. Bolivia................................................................................. 262 2. Colombia............................................................................ 262 3. Ecuador.............................................................................. 263 4. Peru.................................................................................... 263 5. Venezuela........................................................................... 264 VII.  Technical Norms.............................................................................. 265 VIII.  Sanitary and Phytosanitary Measures............................................. 266 IX. Safeguard Measures......................................................................... 267 X. Unfair Trade Practice Remedies..................................................... 270 XI. Services............................................................................................. 271 Chapter 7:  Foreign Investment Climate Within the Andean Community and Business Opportunities...................................................................... 275 I. Legal Regime for Foreign Investment............................................ 275 II. Intellectual Property Rights Protection.......................................... 276 III. Free Movement of Labor................................................................. 279 IV. Environmental Protection............................................................... 282 V. Competition Policy.......................................................................... 284 VI. Opportunities for Foreign Direct Investors................................... 290 A. Andean Trade Promotion Act.................................................. 291 B. Andean Trade Promotion and Drug Eradication Act............ 293

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VII. Opportunities in the Transportation Infrastructure Sector......... 294 A. Andean Community Decisions on Transportation Issues...... 295 B. Specific Transportation Infrastructure Improvement Projects...................................................................................... 298 VIII.  Energy Integration.......................................................................... 298 IX. Initiative for the Integration of Regional Infrastructure in South America................................................................................. 299 Chapter 8:  Central American Integration System.......................................... 303 I. Revival of the Central American Economic Integration Process................................................................................................. 303 II. Institutional Framework..................................................................... 305 A. Decision-Making Bodies........................................................... 305 B. General Secretariat and Other Specialized Bodies................ 306 C. Central American Bank for Economic Integration................ 306 III. Dispute Resolution System............................................................. 308 IV. Intra-Regional Free Trade Program............................................... 312 V. Rule of Origin Requirements......................................................... 313 VI. Common External Tariff................................................................. 315 VII. Other Import Regulations.............................................................. 316 A. Customs Valuation.................................................................... 316 B. Customs Regulations................................................................ 317 C. Special Taxes and Licensing Requirements........................... 317 1. Costa Rica.......................................................................... 318 2. El Salvador........................................................................ 318 3. Guatemala......................................................................... 318 4. Honduras.......................................................................... 319 5. Nicaragua.......................................................................... 319 VIII.  Safeguard Measures.......................................................................... 320 IX. Unfair Trade Practice Remedies.................................................... 321 X. Technical Norms............................................................................. 323 XI. Sanitary and Phytosanitary Measures............................................. 324 XII.  Investment Protection and Cross-Border Trade in Services......... 324 XIII.  Intellectual Property Rights Protection......................................... 329 XIV.  Environmental Protection.............................................................. 330 XV. Opportunities for Foreign Direct Investors................................... 334 A. Plan Puebla-Panamá................................................................. 336 B. Electricity Integration of Central America............................. 337 XVI.  Trade Agreements Between Central America and Other Nations in the Western Hemisphere....................................... 338 A. Association of Caribbean States.............................................. 338 B. Costa Rica-Mexico Free Trade Agreement............................. 340 C. Nicaragua-Mexico Free Trade Agreement.............................. 341 D. Central America-Dominican Republic Free Trade Agreement................................................................................ 342 E. Central America-Chile Free Trade Agreement....................... 344

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F. Mexico-Northern Triangle of Central America Free Trade Agreement..................................................................... 347 G. U.S.-Central America and Dominican Republic Free Trade Agreement..................................................................... 349 1. Introduction...................................................................... 349 2. Free Trade in Goods......................................................... 350 3. Rule of Origin Requirements........................................... 351 4. Origin Verification Procedures........................................ 353 5. Temporary Admission, Duty Drawback, and Free Trade Zones....................................................................... 354 6. Customs Administration and Trade Facilitation............. 354 7. Sanitary and Phytosanitary Measures and Technical Norms................................................................................ 354 8. Subsidies............................................................................ 355 9. Unfair Trade Practice Remedies and Safeguards .......... 355 10. Government Procurement............................................... 356 11. Investment ........................................................................ 357 12. Services.............................................................................. 358 13. Electronic Commerce....................................................... 359 14. Intellectual Property Rights Protection........................... 359 15. Labor Rights...................................................................... 360 16. Environmental Protection................................................ 362 17. Free Trade Commission and Other Administrative Issues.................................................................................. 363 18. Dispute Resolution............................................................ 363 Chapter 9:  The Caribbean Common Market and Community and the Organization of Eastern Caribbean States......................................... 365 I. Introduction.................................................................................... 365 II. Institutional Framework................................................................. 366 III. Dispute Settlement and the Role of the Caribbean Court of Justice.............................................................................................. 368 IV. Intra-Regional Free Trade Program.............................................. 370 V. Rule of Origin Requirements......................................................... 370 VI. Common External Tariff................................................................ 371 VII. Safeguard Measures........................................................................ 372 VIII.  Unfair Trade Practice Remedies.................................................... 373 IX. Services............................................................................................ 374 X. Free Movement of Labor................................................................ 375 XI. Free Movement of Capital.............................................................. 375 XII.  Competition Policy......................................................................... 376 XIII.  Opportunities for Foreign Investors.............................................. 377 A. Caribbean Basin Economic Recovery Act and U.S. Caribbean Basin Trade Partnership Act................................. 378 B. From Lomé I to the European Union-Africa, the Caribbean, and the Pacific Economic Partnership Agreements.............. 382

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C. Caribbean-Canada Program.................................................... 385 D. CARICOM-Dominican Republic Free Trade Agreement...... 385 E. CARICOM-Costa Rica Free Trade Agreement....................... 387 XIV.  Organization of Eastern Caribbean States.................................... 389 A. Inter-Relationship Between CARICOM and the Organization of Eastern Caribbean States.............................. 389 B. Achievements of the Organization of Eastern Caribbean States......................................................................................... 390 C. Has the Organization of Eastern Caribbean States Become an Impediment to Deeper CARICOM Integration?.............. 391 XV. Test Case for the Organization of Eastern Caribbean States: Proposal to Convert Antigua and Barbuda into a Free Port.......................................................................................... 393 A. Competitive Productive Sectors for Antigua and Barbuda.... 393 1. Agriculture......................................................................... 393 2. Manufacturing................................................................... 394 3. Services............................................................................... 396 B. Does St. Maarten Provide an Appropriate Free Port Model for Antigua and Barbuda?............................................ 398 1. Overview of the Free Port Concept.................................. 398 2. St. Maarten......................................................................... 399 C. Feasibility of Turning Antigua and Barbuda into a Free Port................................................................................... 403 1. Importance of All the Organization of Eastern Caribbean States Countries Moving to Free-Port Status Within the Context of CARICOM.......................... 403 2. Impact of Lost Tax Revenue from Imports...................... 404 3. Gains to the Local Economy............................................. 405 Chapter 10:  Rise and Fall of the Free Trade Area of the Americas.............................409

I. From the First to the Second Summit of the Americas (December 1994–April 1998)......................................................... 409 II. From the Second to the Third Summit of the Americas (April 1998–April 2001).................................................................. 416 III. From the Third to the Special Summit of the Americas in Monterrey, Mexico (April 2001–January 2004)............................. 421 IV. From the Special Summit of the Americas in Monterrey, Mexico, to the Fourth Summit of the Americas (January 2004–November 2005).................................................... 430 V. Why the Bolivarian Alternative for the Peoples of Our America Is Not a Viable Alternative to the Free Trade Area of the Americas....................................................................... 433 Chapter 11:  Creating a Prosperous Community of the Americas................. 437 I. Introduction.................................................................................... 437 II. Energy as the Linchpin for the Community of the Americas...... 438

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III. IV. V. VI. VII. VIII. 

Leveraging the Precedent Set on Energy by the North American Free Trade Agreement and the North American Security Prosperity Partnership..................................................... 442 Bringing MERCOSUR and CARICOM on Board........................ 444 Using Current Regional Economic Integration Projects as the Building Blocks for the Community of the Americas.................. 447 Effective Enforcement of Legislation to Protect Basic Labor Rights and the Environment.............................................. 449 Cross-Border Migration................................................................. 455 Conclusion...................................................................................... 456

Table of Instruments............................................................................................. 461 Bibliography......................................................................................................... 477 Index................................................................................................................... 485

ACKNOWLEDGMENTS I want to express my deepest appreciation to all my colleagues in academia and in public institutions throughout the Western Hemisphere who, over the course of nearly two decades, have generously shared with me their knowledge and experiences with respect to regional economic integration. Many of their written works are cited in this volume, which represents an expression of esteem and respect for their contributions to the struggle to create more equitable societies and provide genuine economic opportunities for a majority of the inhabitants of North and South America. I would be remiss if I did not make particular mention of Luis Castillo, Guillermo Devoto, Adriana Dreyzin de Klor, Marcos Simão Figueiras, Daniel Hargain, Robin King, Barbara Kotschwar, Karen Monaghan, Maryse Robert, Sherry Stephenson, and Carol Wise. Years of fruitful exchange of ideas and encouragement have contributed to the writing of this volume. I am also grateful to my student intern Ana Sheila Victorino for assisting me in pulling together the Table of Contents and Bibliography.

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ABOUT THE AUTHOR Thomas Andrew O’Keefe is the president of Mercosur Consulting Group, Ltd. (http://www.mercosurconsulting.net), a legal and economic consulting firm that assists companies with their strategic business planning for South America and advises Latin American firms exporting to the United States. The firm was founded in New York in 1993 and moved to Washington, DC in 1996. Mr. O’Keefe is a dual national of the United States and Chile. He is bilingual in English and Spanish, and he is fluent in French and Portuguese. He did his undergraduate work at Columbia University, and received his J.D. from the Villanova University School of Law. In 1986, he worked for the legal departments of the Chilean Human Rights Commission and the Vicaría de la Solidaridad (the human rights office of the Archdiocese of Santiago). He also worked as an associate at the Wall Street law firm of Carter, Ledyard & Milburn and the Boston-based Gadsby & Hannah before returning to study at the University of Oxford, where he received an M.Phil. in Latin American Studies (History and Economics) in 1992. He has taught courses on Western Hemisphere economic integration and the Political Economy of the Southern Cone countries of South America at Johns Hopkins University’s School of Advanced International Studies, The George Washington University’s Elliott School of International Affairs, George Mason University, and Stanford University. He was chair of the Brazil and Southern Cone course at the Foreign Service Institute between September and December 2005. Mr. O’Keefe is the author of numerous articles on Latin American economic integration and globalization and has lectured extensively on the topic in the United States and abroad. He has been a frequent guest on television programs on the subject. He has also been invited to brief U.S. government officials and testify before the U.S. Congress on developments within MERCOSUR and the Free Trade Area of the Americas project. He is the former managing editor of Focus Americas, an analytical review of business and legal developments throughout the Western Hemisphere. His book, Latin American Trade Agreements, is the only comprehensive publication in English that discusses the major Latin American economic integration projects from a practical perspective and addresses related topics such as laws affecting foreign investment and intellectual property rights. He was also a major contributing editor to FTAA Executive Briefing published by Orbis Publications, L.L.C. in 1998. In 1999, Mr. O’Keefe prepared a report entitled Lessons From the MERCOSUR Experience that Are Relevant for the Negotiations to Create a SADC Free Trade Area under a U.S. AID/R.C.S.A. funded Southern African Development Community (SADC) Protocol on Trade Project. He also oversaw the preparation of a report under the same project analyzing the costs and benefits to Mozambique in ratifying xix

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the SADC Protocol on Trade. In 2001, he participated in the U.S. AID/RAPID project as an African Growth and Opportunity Act (AGOA) trade specialist based in Gaborone, Botswana. In 2005, he received a Fulbright Scholars Award to lecture on international trade topics at the National Universities of Córdoba and Rosario in Argentina and conduct research on the Argentine energy sector for a chapter in a book published by the Center for Strategic and International Studies (CSIS) in 2007. Between October 2005 and October 2006, Mr. O’Keefe was the Legal and Economic Integration Specialist for the U.S. AID funded Caribbean Open Trade and Support Program based in Antigua that provided trade capacity-building and competitiveness assistance to the governments and private sectors in Antigua and Barbuda as well as Dominica.

LIST OF ABBREVIATIONS AND ACRONYMS ACE ACP ACS AGOA ALADI ALALC ALBA ALIDES AMN APEC ATPA ATPDEA BNDES BOAC BWIA CAAAM CABEI CACM CAF CAFTA-DR CARIBCAN CARICOM CARIFORUM CARIFTA CAUCA CAUCE

Economic Complementation Agreement or Acuerdo de Complementación Económica Africa, the Caribbean, and the Pacific Association of Caribbean States African Growth and Opportunity Act Latin American Integration Association or Asociación Latinoamericana de Integración Latin American Free Trade Area or Área Latinoamericana de Libre Comercio Bolivarian Alternative for the Peoples of Our America or Alternativa Bolivariana para los Pueblos de Nuestra America Central American Alliance for Sustainable Development MERCOSUR Standardization Association or Asociación MERCOSUR de Normalización Asia-Pacific Economic Cooperation Andean Trade Promotion Act Andean Trade Preference and Drug Eradication Act Brazilian National Development Bank British Overseas Airways Corporation British West Indian Airlines Andean Committee of Environmental Authorities Central American Bank for Economic Integration Central American Common Market Andean Development Corporation or Corporación Andina de Fomento Central America-Dominican Republic and United States Free Trade Agreement Caribbean-Canada Program Caribbean Common Market and Community Caribbean Forum Caribbean Free Trade Area Uniform Central American Customs Code or Código Aduanero Uniforme Centroamericano Argentine-Uruguyan Economic Complementation Agreement or Convenio Argentino-Uruguayo de Complementación Económica xxi

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CBERA CBN CBTPA CCAD CCCC CCJ CDM CECC CET CICAD CIF CIRI CMC COFAP COTED CRAS CRNM CRRH CSME CSIS ECLAC EEC EPA EU FOB FOCEM FTA FTAA GATS GATT GSP HTS IADB ICSID ICSID Convention

Caribbean Basin Economic Recovery Act Committee on Bilateral Negotiations United States-Caribbean Basin Trade Partnership Act Central American Commission on the Environment and Development Central American Council on Climate Change Caribbean Court of Justice Clean Development Mechanism Central American Education and Culture Coordinating Commission Common External Tariff Central America Inter-Parliamentary Commission on the Environment and Natural Resources Cost, Insurance, and Freight Regional Integration Committee on Inputs Common Market Council (MERCOSUR) Council of Finance and Planning Council of Trade and Economic Development Regional Commission on Social Affairs (SICA) Caribbean Regional Negotiating Machinery Regional Committee on Water Resources of the Central American Isthmus Caribbean Single Market and Economy Center for Strategic and International Studies UN Economic Commission for Latin America and the Caribbean European Economic Community Economic Partnership Agreement European Union Freight on Board Fund for Structural Convergence in MERCOSUR Free Trade Agreement Free Trade Area of the Americas WTO General Agreement on Trade in Services WTO General Agreement on Tariffs and Trade General System of Preferences Harmonized Tariff Schedule Inter-American Development Bank International Center for the Settlement of Investment Disputes Convention on the Settlement of Investment Disputes between States and Nationals of Other States

List of Abbreviations and Acronyms  •  xxiii

IIRSA Integration of Regional Infrastructure in South America or Iniciativa para la Infraestructura Regional de Sur América ILO International Labor Organization IMF International Monetary Fund INTAL Institute for the Integration of Latin America and the Caribbean (IADB) MERCOSUR/MERCOSUL Common Market of the South or Mercado Comun de ������������������������ Sur/Mercado Comum do Sul MFN Most-Favored Nation MOU Memorandum of Understanding NAFTA North American Free Trade Agreement NALADISA ALADI tariff classification system NCM MERCOSUR harmonized tariff classification system OAS Organization of American States ODECA Organizational Letter of the Organization of Central American States of 1962 OECS Organization of Eastern Caribbean States PARLACEN Central American Parliament PEC Trade Expansion Protocol (Brazil-Uruguay) or Protocolo de Expansión Comercial PICAB Argentine-Brazilian Program for Integration and Economic Cooperation or Programa de Integración y Cooperación Argentino-Brasileño PTO U.S. Patent and Trademark Office SAC Central American Harmonized Tariff Schedule or Sistema Arancelario Centroamericano SACU South African Customs Union SADC Southern African Development Community SCA Secretariat of the Central American Agricultural Council SICA Central American Economic Integration System or Sistema de la Integración Centroamericana SPP Security and Prosperity Partnership (North America) SICAP Central American System of Protected Areas SIECA Old Permanent Secretariat of the General Treaty on Central American Economic Integration SITCA Secretariat for Central American Integration of Tourism SPS Agreement WTO Agreement on the Application of Sanitary and Phytosanitary Measures SEMCA Executive Secretariat of the Central American Monetary Council

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TBT Agreement TCP TRIMs TRIPs TRQ UK UN UNASUR UNCITRAL US USAID USTR UWI VAT WIPO WTO

WTO Agreement on Technical Barriers to Trade Peoples’ Trade Treaty or Tratado de Comercio de los Pueblos WTO Trade-Related Investment Measures WTO Agreement on Trade-Related Aspects of Intellectual Property Rights tariff rate quota United Kingdom United Nations Union of South American Nations UN Commission on International Trade Law United States US Agency for International Development US Trade Representative University of the West Indies value added tax World Intellectual Property Organization World Trade Organization

INTRODUCTION Latin American and Caribbean Trade Agreements: Keys to a Prosperous Community of the Americas has two purposes: (1) to fill the void in academic texts that can be used to teach courses on economic integration in the Western Hemisphere and (2) to provide a road map for the new administration that moves into the White House in January 2009 to complete the Free Trade Area of the Americas (FTAA) project. Launched in the 1990s with the enthusiastic support of all the elected leaders of the Western Hemisphere, the FTAA has been a victim of the same neglect that has characterized overall U.S. policy to the region under the Bush administration. As this book makes clear, however, a free trade agreement will not be enough. A bolder and more ambitious project that also seeks to redress many of the deep-seated problems that have long plagued Latin America and the Caribbean is required. The Community of the Americas that is proposed in this book and rests upon important pillars such as energy security, migration, economic, and political reform provides a new and cohesive U.S. policy for Latin America and the Caribbean. Latin American and Caribbean Trade Agreements: Keys to a Prosperous Community of the Americas is intended to complement Latin American Trade Agreements that was first published by this author in 1997 and has been periodically updated since then. Whereas the earlier book provides more detailed information for exporters to and investors in Latin America and contains hard-to-find or non-existent English translations of the major treaties and trade regulations, companies trading with Latin America and the Caribbean or wishing to use a country in the region as an export platform for neighboring countries or globally will also find the current work an extremely useful reference guide.

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CHAPTER 1

EARLY ATTEMPTS AT LATIN AMERICAN AND CARIBBEAN ECONOMIC INTEGRATION I. Overview of the Theory of Economic Integration Since the late 1950s, there have been several attempts at economic integration in Latin America and the Caribbean. Until the 1990s, the results achieved by all these previous efforts were disappointing and fell short of the lofty goals initially laid out for them. The economic integration projects, which were revived or have appeared since the 1990s, have been much more successful in terms of fomenting significant increases in intra-regional trade. One important explanation for this phenomenon has been the market-oriented economic policies that were adopted in one degree or another in each of the Latin American countries that better complimented the overall goals sought through economic integration. Before the 1990s, the rhetorical goal of bigger markets and the corresponding economies of scale often collided with protectionist trade policies being pursued at the national level. Before examining the exact reasons why past attempts at economic integration in Latin America and the Caribbean stagnated or collapsed, it is important to define exactly what is meant by the term economic integration. Economic integration projects have traditionally been divided into one of five categories. The first and least complicated form of economic integration is a free trade area. In a free trade area, tariffs and quantitative restrictions are eliminated on goods traded among the member states. Each participating country, however, retains its own individual external tariff structure as against non-member states. The second form is a customs union and consists of a free trade area coupled with a common external tariff (CET) that is applied by all the member states on imports from outside the union. The third form of integration, a common market, includes all the features of a customs union but adds the free movement of factors of production (i.e., labor and capital) between the member states. An economic union, the fourth form of integration, combines a common market with some degree of harmonization of each member state’s macroeconomic policies. It has been argued that, for a common market to be truly successful, it must be an economic union. This view eventually prevailed in Europe, when the European Economic Community (EEC)—a common market—became the European Union (EU) in 1992 following the creation of the European Central Bank and eventually the establishment of a   See, e.g., B. Balassa, The Theory of Economic Integration 2 (1962).





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single currency. Finally, total economic integration, the fifth form, involves the unification of monetary, fiscal, and social policies, and the establishment of a supranational authority whose decisions are binding on all the member states. Total economic integration is synonymous with the creation of a federal entity such Brazil, Canada, or the United States of America. Under traditional economic integration theory, the justification for joining a customs union or common market depended upon whether the union would lead to the creation of new trade flows or whether it would simply divert trade flows to inefficient producers within the newly established bloc. A union that increased overall trade was considered the ideal, if the most efficient producer in the international arena became the chief supplier of the new customs union or common market. Trade creation was said to be more likely to occur in a proposed economic bloc where the member states had previously traded heavily among themselves and where trade had been competitive but potentially complementary. Developing countries generally conduct very little trade among themselves, and they are usually not very industrialized. Under traditional economic integration theory, it was thought that a customs union or common market was unlikely to be successful under such circumstances. For example, the imposition of high tariff walls around a union of developing countries would only divert trade away from more efficient producers in the developed world to inefficient producers operating within the new bloc. Despite this, a group of economists from the now discredited import-substitution or dependista school of economics argued that while a customs union or common market among developing countries might initially result in trade diversion, the larger market created would provide economies of scale and decrease production costs, encouraging industrial growth. Over the long run, this new industrial growth would contribute to a modern and diverse productive structure. Among the major proponents of this line of thought were economists associated with the UN Economic Commission for Latin America based in Santiago, Chile. Implicit in the dependista perspective was the understanding that the high CET used to protect the nascent industrial sector would be temporary in nature until the new industries had gained sufficient strength in order to effectively compete on the international market. Unfortunately, this assumption was never put into practice. Accordingly, whatever positive gains might have initially been obtained from the initial high tariff barriers dissipated as they were retained indefinitely. Not only did this long-term protectionism encourage high inefficiency, low productivity, and technological obsolescence, it also contributed to a heavy foreign debt burden as money had to be borrowed abroad to finance the importation of capital goods and inputs to sustain many uncompetitive manufacturing activities.

  J. Viner, The Customs Union Issue 44 (1950).   A.M. El-Agraa, International Economic Integration 24 (1982).    J. Grunwald, Latin American Economic Integration and the United States 31 (1972). 2 

Early Attempts at Economic Integration  •  

II. Central American Common Market The idea for the Central American Common Market (CACM) originated in the Mexico City office of the UN Economic Commission for Latin America. CACM sought to diversify the economies of the five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) away from their dependency on agriculture toward increased industrialization, by expanding import substitution policies from the national to the regional level. The thought was that there would be less inefficiency if infant industries were protected on a regional level by high tariff barriers as opposed to a national one. El Salvador, Guatemala, Honduras, and Nicaragua signed the General Treaty of Central American Economic Integration (General Treaty) in Managua on October 13, 1960, which set the formal ground rules for establishing CACM. Costa Rica signed the General Treaty in 1962. Although called a common market, CACM was really a customs union since it never called for the free movement of at least one important factor of production: workers. Pursuant to the General Treaty, the signatory states began reducing import duties and eliminating quotas on all primary and manufactured goods traded among them. The General Treaty provided that this process would be completed by 1967. The General Treaty also required the Central American nations to endorse an earlier agreement that committed them to building factories in the less developed countries or in those best suited for the task. These factories would produce goods not already made in Central America and be protected from outside competition by a high CET. Rules for determining the origin of a product and whether it qualified for intra-regional free trade treatment were left for subsequent negotiations. Future negotiations would also establish a more gradual liberalization program for a special list of goods that were initially exempt from CACM’s free trade provisions. In conjunction with the General Treaty, the Central American states signed an agreement establishing a Central American Bank for Economic Integration to be headquartered in Tegucigalpa, Honduras. The bank was intended to promote regional integration and balanced economic development by investing in, inter alia, infrastructure projects and new factories, as well as technologies to enhance the efficiency and output capabilities of already existing industries. A subsequent agreement established the Chamber of Central American Compensation. The Chamber provided a clearinghouse mechanism through which the Central American countries could funnel intra-regional trade transactions and only have to use hard currency to cancel outstanding debits on a periodic basis. By 1966, more than 90 percent of intra-Central America trade was exempt from customs duties, and the member countries had started to implement a CET.    It is interesting to note, however, that a 1960 Treaty of Economic Association between El Salvador, Guatemala, and Honduras contemplated the free movement of persons, goods, and capital among the three signatory states.    G. Mace, Regional Integration in Latin America: A Long and Winding Road, 43 Int’l J. 413 (Summer 1988).

  •  Latin American and Caribbean Trade Agreements

Exports by member countries to their CACM partners increased from 7 percent of total global exports in 1960 to 25 percent by 1968. In addition, about 85 percent of these intra-regional exports consisted of manufactured consumer goods and construction material. CACM was also responsible for initiating several successful infrastructure improvements including the expansion of ports and the creation of the Inter-American Highway that, for the first time, linked all the region’s major cities with paved roads. Despite the increased trade and infrastructure improvements it sparked, CACM began experiencing problems by the late 1960s. The member states could not agree on where to place the new factories that would produce goods not already manufactured in the region. In addition, the region’s major aid donor, the United States, refused to provide money for a scheme it labeled “monopolistic,” and this led to a severe shortage of investment capital to build the new factories.10 More problems surfaced when industrialists in the less-developed CACM countries faced bankruptcy at the hands of their more efficient regional competitors. These industrialists then pressured their respective governments, already unhappy at the loss in revenues traditionally obtained from import duties levied on intra-regional trade, to unilaterally restrict imports from their more developed neighbors. The General Treaty’s failure to include safeguard clauses to deal with sudden import surges, which threatened to cause grave economic disruption, permitted these unilateral restrictions to continue indefinitely. In 1969 Honduras withdrew from CACM following a territorial dispute with El Salvador that led to the so-called Soccer War. Perhaps not coincidentally, Honduras was also the country that benefited least from CACM, and repeated Honduran requests for preferential treatment in view of its low level of development was rebuffed by the other member states.11 Honduras’s withdrawal was soon followed by a rapid increase in the prices of Central America’s traditional primary commodity exports, especially coffee, which dampened interest in regional integration and refocused the attention of local businesspersons to meeting the international market.12 The rapid increase in petroleum prices in 1979–80 and the international recession that followed caused CACM to enter into a period of stagnation from which it would not recover until the 1990s. During the 1980s, Central American countries saw their export sales plummet, while interest rates on their   Grunwald, supra note 4, at 45.   División de Comercio Internacional y Desarollo (Cepal), La Evolución Reciente de los Procesos de Integración en América Latina y el Caribe 27–28 (1991).    G. Fonseca, Integración Económica: El Caso Centro Americano 357–60 (1987). 10   Id. at 365. See also P.C. Schmitter, Central American Integration: Spillover, Spill-around or Encapsulation. 9 J. Common Mkt. Stud. 11 (Sept. 1970). 11   Fonseca, supra note 9, at 375. 12   V. Bulmer-Thomas, The Central American Common Market, in International Economic Integration 251–52 (1982). Central America’s traditional exports include coffee, banana, sugar, meat, cotton, and cacao.  

Early Attempts at Economic Integration  •  

outstanding debt increased. Private sector international lending came to a halt as a result of difficulty in servicing already existing foreign debt, coupled with armed conflicts that engulfed most of the countries of the Central American isthmus throughout the decade.13 In a bid to boost exports and obtain revenues to service their foreign debt obligations, the Central American countries responded with uncoordinated currency devaluations. These measures, coupled with war-induced disruptions, had a serious detrimental impact on intra-regional trade, causing it to drop from a high of 25 percent of global exports in 1980 to 10 percent by 1986.14 III. Latin American Free Trade Area As with the CACM, the idea for the Latin American Free Trade Association (ALALC; its better known Spanish and Portuguese acronym) originated with the UN Economic Commission for Latin America. The UN Commission’s main office in Santiago, Chile, proposed a Latin American common market as a way of revitalizing import substitution on a regional level so as to overcome the limitations imposed by small domestic markets that prevented the formation of consumer-durable and capital goods industries.15 Of Latin America’s big industrial players, however, only Mexico welcomed the common market plan put forward by the UN Economic Commission for Latin America.16 The others (i.e., Argentina, Brazil, Chile, and Uruguay) sought a more modest mechanism designed to end the balance of payments crisis they faced as a result of the post-Korean War drop in their primary commodity exports.17 Accordingly, the more modest free trade area goal was pursued rather than the common market concept originally advocated by the UN Economic Commission. ALALC was born on February 18, 1960, when Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay signed the Treaty of Montevideo. Colombia and Ecuador joined the following year, and Bolivia and Venezuela became members in 1966 and 1967, respectively. The Treaty of Montevideo envisioned a 12-year transition period during which the signatory states would negotiate what goods would be traded among them free of tariffs and quantitative restrictions. So-called National Lists would be negotiated annually between any two member states and extended to the other ALALC members through a most-favored nation (MFN) clause found in Article 18 of the Treaty of 13   F. Ballestero & E. Rodriguez, Centroamérica Hacia Un Área Económica Armonizada, 1 Revista Integracón Y Comercio 8 (Jan.-Apr. 1997). 14   Id. at 8. The uncoordinated currency devaluations also helped to destroy the informal monetary union that, along with relatively similar inflation rates, had previously characterized Central America during the 1960s and 1970s. 15   M.H.J. Finch, The Latin American Free Trade Association, in International Economic Integration 207–08 (1982). Another factor, no doubt, was the formation of the EEC in 1958 and the perceived threat a Fortress Europe posed to Latin American exports to the continent. 16   E. Haas & P.C. Schmitter, Economics and Differential Patterns of Political Integration: Projections About Unity in Latin America, 18 Intl Org. 708 (Autumn 1964). 17   Emb. R.A. Barbosa, A Evolução do Processo de Integração na América do Sul, in Série Política Internacional 2, at 2 (1991).

  •  Latin American and Caribbean Trade Agreements

Montevideo.18 “Common Lists,” by contrast, would involve negotiations among many member countries and would be conducted once every three years. Like CACM, the Treaty of Montevideo did not contain rules for determining the origin of goods that could benefit from its free trade provisions, but the treaty left this important subject open for subsequent negotiations. Unlike CACM, however, the Treaty of Montevideo did include a safeguard clause by which a state could restrict the continued importation from another ALALC member of an item included on the National Lists (but not the Common Lists) so as to avoid “significant and grave detrimental effects” to its economy. ALALC was also different from CACM in that it did not provide for a CET, nor did it create financial institutions to fund development projects in the lesserdeveloped member states.19 While the Treaty of Montevideo did encourage industrial complementation agreements to promote the production of goods not already produced in Latin America, no supranational bodies were created to coordinate or oversee these projects. This was a serious omission given that the industrial complementation agreements were supposed to foment manufacturing by dividing the production of a good not already produced within the region among various member states. The ALALC states signed the Convention of Reciprocal Credit in 1965, which created a central clearinghouse mechanism for intra-regional trade deals similar to the one in CACM. As a result of this clearinghouse system, the immediate use of hard currency was avoided, as U.S. dollars were only required to cancel outstanding debits arising from intra-ALALC trade at the end of every four-month period. Although ALALC did spark a modest increase in intra-regional trade among member states from U.S.$488 million in 1961 (6.7 percent of the region’s global exports) to U.S.$850 million in 1967 (8.5 percent of total exports), most of this increase was in traditional primary products, and very little came from the hoped for manufacturing sector.20 The few industrial products that were traded within ALALC were largely Argentine or Brazilian in origin. By 1965, the ALALC process had become hopelessly stagnant. Only one Common List had been agreed upon. The National Lists proved ineffective because few ALALC members agreed to extend the MFN treatment in their 18   Under an MFN clause, a country promises to automatically extend to other countries whatever trade benefits it has given to third nations. 19   This omission can partially be explained by the fact that the International Monetary Fund (IMF) and the World Bank refused to extend loans to create a system to finance intra-regional trade. C. López Dawson, Les Problémes Politique du Pacte Andin: Pour Une Sociologie Politique de l’Intégration Économique 213 (1979) (unpublished Ph.D. thesis, Institut d’Etudes Politiques de Paris). In fact, the United States, Latin America’s major supplier of aid and funding during this period, was initially very hostile to ALALC and only relented when it realized it could be used as an effective bulwark against the spread of Castroite influence in the region. Finch, supra note 15, at 213. 20   Finch, supra note 15, at 213.

Early Attempts at Economic Integration  •  

bilateral agreements to other countries. Although 16 industrial complementation agreements had been signed and ratified by 1970, most were at the behest of foreign multinationals already operating within the region before ALALC’s creation, and did not represent new or regionally based investments.21 The primary reason for ALALC’s stagnation lay in the fact that it sought to integrate some 11 countries with widely different levels of economic development. These countries also had different and usually conflicting reasons for joining ALALC. For example, Argentina and Brazil viewed ALALC as a way of selling their excess industrial production to a captive market. They therefore had little interest in sponsoring the type of industrial development programs favored by the smaller countries that would have undermined Argentine and Brazilian manufacturing predominance. ALALC’s requirements that all new rules and changes to existing ones required a unanimous vote by all the member states contributed to insurmountable deadlocks in ALALC’s main institutional bodies. IV. Andean Pact Frustration with ALALC’s shortcomings led Bolivia, Chile, Colombia, Ecuador, and Peru to sign the Cartagena Agreement on May 29, 1969. This agreement, which Venezuela signed in 1973, led to the establishment of the Andean Pact. Although the Andean Pact was initially viewed as a subgroup operating within the ALALC framework, it soon developed into an independent entity. The Andean Pact countries continued to utilize ALALC’s central clearinghouse mechanism, however, for intra-pact trade. The Cartagena Agreement called for the gradual elimination of all tariff barriers and quantitative restrictions on all goods traded between the Andean states, so as to be completely eliminated by December 21, 1980. Bolivia and Ecuador were given more time to eliminate intra-regional trade barriers in recognition of their lesser-developed status. The Cartagena Agreement further called for the establishment of a CET by December 31, 1980, on all goods imported from all non-Andean countries that did not enjoy a pre-existing preferential tariff treatment under ALALC. As was true of ALALC and CACM, the Cartagena Agreement left rules for determining the origin of products that could take advantage of the Andean free trade area to future negotiations. The Andean Pact also adopted ALALC’s rather lax safeguard clause permitting the imposition of import duties and quota restrictions to counteract serious trade imbalances that threatened to cause grave harm to the economy of the country using the safeguard. The Andean Pact differed from ALALC in that decisions made by its highest governing bodies (e.g., the Andean Commission) normally only required a two-thirds majority vote for approval of new norms. In May 1979 a treaty was signed calling for the creation of an Andean Tribunal of Justice so as to provide uniform interpretations of the provisions of the Cartagena Agreement and its protocols, and to determine the legal validity of the Andean Commission   Grunwald, supra note 4, at 53.

21

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decisions as well as resolutions of the Junta del Acuerdo de Cartagena. The tribunal was also given authority to resolve disputes between member states arising from a country’s non-compliance with obligations imposed by the Cartagena Agreement. The Andean Pact differed most dramatically from ALALC, however, in that it called for the establishment of a CET and sought to create a customs union. In addition, the Cartagena Agreement contemplated so-called sectoral industrial development programs. Under these programs, various member states would be involved in producing different components for a manufactured good not already produced within the Andean Pact countries that would then be traded among them duty-free or exported outside of the Andean region. Goods not specifically reserved for the sectoral industrial development programs would, instead, be made in new factories that were to be built in less-developed Bolivia and Ecuador and then traded within the Andean Pact duty free. Both of these industrial development programs had the overtly political aim of garnering more support for the integration process among populations in the various Andean states.22 The intent was to promote balanced regional growth rather than permitting market forces (as had been the case with ALALC) to decide where the new industries would be located. By far the most controversial aspect of the Andean Pact was the adoption of Decision 24, which sought to control the perceived pernicious effects of foreign investment. Decision 24 forbade foreigners from investing in activities, which would compete with those already being carried out by Andean enterprises, and prohibited foreigners from purchasing the stock of Andean companies. Absent a rule by an individual member state permitting a higher amount, Decision 24 set 20 percent as the maximum amount of annual profits a foreign corporation could remit abroad. Decision 24 also required any foreign company not already operating within the Andean subregion before January 1, 1974, to sell at least 51 percent of its shares to Andean Pact nationals before the company could partake of the pact’s intra-regional free trade scheme. Finally, in an attempt to prevent foreign controlled monopolies and restrictions on technology transfer, Decision 24 prohibited member states from granting licensing contracts to foreign companies that contained restrictive non-competition clauses. The first years of the Andean Pact’s existence saw intra-regional trade increase at an average annual rate of 28.2 percent, and, in sharp contrast to the situation in ALALC, this regional trade was heavily weighed in favor of manufactured goods.23 Sectoral industrial development projects in metal working and petrochemicals were also implemented. A minimal CET was in place in Colombia, Peru, and Venezuela by December 31, 1975, with an average duty rate of 27 percent.

22   W.P Avery & J.D. Cochrane, Innovation in Latin American Regionalism: The Andean Common Market 27 Intl Org. 193 (Spring 1973). 23   Mace, supra note 6, at 417. See also,S. Peñaherrera, The Andean Pact: Problems and Perspectives, in Regional Integration: The Latin American Experience 178 (1985).

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The Andean Pact experienced its first visible crisis when Chile withdrew in 1976 over opposition to Decision 24. The dictatorship of General Augusto Pinochet decided to aggressively pursue a free market style economic model that clashed with the protectionist, state-led industrial development philosophy underpinning the Andean Pact scheme. More problems followed when the remaining member states, bowing to domestic pressure groups unhappy with the differences in short-term costs and benefits flowing from the integration process, failed to observe, or even incorporate into national law, all the provisions of the Cartagena Agreement.24 Unresolved political and territorial disputes between the member states, particularly the armed conflict between Peru and Ecuador in 1977, only compounded this problem. The final blow to the Andean integration process, however, was set off by the 1979 oil price increase, which affected the remaining Andean Pact members differently and caused them to adopt conflicting macroeconomic policies. Oil-producing Venezuela and Ecuador, for example, benefited from the sharp rise in international petroleum prices. The other Andean countries attempted to get the foreign currency needed to pay for higher-priced oil imports by sharply devaluating their national currencies in the hope that this would increase exports. By devaluating, they made imports from Venezuela and Ecuador more expensive (thereby creating an indirect tariff barrier), while at the same time their own exports to both these countries became so cheap that they threatened to bankrupt the Venezuelan and Ecuadorian manufacturing sectors. In response to this situation, Venezuelan and Ecuadorian industrialists pressured their respective governments to reimpose tariffs on imports from their three Andean neighbors. The cumulative effect of all these measures was to wreak havoc on intra-regional trade flows. The sharp rise in international interest rates in 1982, which ignited the infamous Latin American debt crisis and halted foreign lending to the region, only exacerbated the problem. Under those circumstances, it became impossible to temporarily “fund” trade imbalances. The end result was that, by 1983, intra-regional trade among the Andean Pact countries was not only stagnant, but it was actually contracting in real terms.25 In an attempt to revitalize the regional integration process, the presidents of the remaining five Andean Pact countries signed the Quito Protocol in May 1987. The Quito Protocol eliminated the strict time deadlines for establishing an intra-regional free trade area and a CET, abolished the sectoral industrial development programs, and focused efforts on encouraging member states to achieve bilateral free trade accords (since the original goal of a regional free trade area had proved unsuccessful). In conjunction with the adoption of the   R. Vargas-Hidalgo, The Crisis of the Andean Pact: Lessons for Development Among Developing Countries 17 J. Common Mkt. Stud. 219 (Mar. 1979). 25   The first oil crisis of 1973/74 did not produce the same negative effects because it coincided with a price increase in traditional Andean primary product exports, resulted in only a short-lived recession in the developed countries, and petro-dollars soon made themselves available at very low interest rates to “subsidize“ any intra-regional trade imbalances. A. Fuentes & J. Villanueva, Economía Mundial e Integración de América Latina 124–25 (1989). 24

10  •  Latin American and Caribbean Trade Agreements

Quito Protocol, the Andean Commission also repealed controversial Decision 24 and substituted it with Decision 220. This decision dropped prohibitions on foreign purchases of the stock of Andean companies and ended limits on repatriation of profits (although it retained the rule requiring 51 percent ownership by Andean nationals before the companies could participate in the intra-regional free trade scheme). Despite the changes introduced by the Quito Protocol, the Andean economic integration process could not be revived. A revival would have to wait until the beginning of the 1990s when the entire philosophical underpinnings of the original Andean Pact concept were reformulated, and each member state began adopting market-oriented economic policies. V. Caribbean Free Trade Area and Caribbean Community and Common Market The Caribbean Common Market and Community (CARICOM) has its roots in the West Indies Federation (1958–1962), and the Caribbean Free Trade Area (CARIFTA) founded in 1965. The rationale behind the West Indies Federation was that the former British colonies in the Caribbean were too small to be viable economic entities on their own.26 It therefore sought to move them to independence as a political union. The capital was established in Trinidad and Tobago (a decision that, in itself, was controversial). Unfortunately, this experiment in political federation proved short lived, as the two largest territories, Jamaica and Trinidad and Tobago, jostled with each other to achieve political preeminence in the new West Indies Federation. In 1961 a plebiscite was held in Jamaica, and a majority of that country’s citizens favored withdrawal from the West Indies Federation. Shortly after the collapse of the West Indies Federation in 1962, initiatives were taken by the United Kingdom, Canada, and the United States to explore the possibility of some form of integration of the small islands of the Eastern Caribbean and Barbados.27 These initiatives led to the creation of the Caribbean Central Bank. In 1965 the governments of Antigua and Barbuda, Barbados, British Guiana, and Trinidad and Tobago signed the Dickenson Bay Agreement to Establish a Caribbean Free Trade Association or CARIFTA.28 This agreement was amended in 1968 to include other governments (some now independent from the United Kingdom) in the Caribbean (i.e., Dominica, Grenada, Jamaica, Montserrat, St. Kitts-Nevis  The West Indies Federation was made up of ten territories: Antigua and Barbuda, Barbados, Dominica, Grenada, Jamaica, Montserrat, St. Kitts-Nevis-Anguilla, St. Lucia, St. Vincent, and Trinidad and Tobago. 27   D. Pollard, The Caricom System: Basic Instruments 49 (2003). Despite its ultimate collapse, the West Indies Federation was successful in establishing the West Indies Shipping Service in 1962, which provided frequent service up and down the Caribbean with two ships donated by the Canadian government and the purchase of British West Indian Airlines (BWIA) from the British Overseas Airways Corporation (BOAC). The University College of the West Indies, which was established in 1948 with one campus in Jamaica, became the University of the West Indies (UWI), with a second campus opened in Trinidad and Tobago in 1960. 28   A full copy of the text of the Dickenson Bay Agreement and subsequent amendments is available at Pollard, supra note 27, at 51–95. 26

Early Attempts at Economic Integration  • 11

Anguilla, St. Lucia, and St. Vincent, and the Grenadines in 1968, and British Honduras in 1971). As outlined in Article 2 of the agreement, the objectives of CARIFTA were to: 1. promote the expansion and diversification of trade; 2. ensure that trade took place between the member states in conditions of fair competition; 3. encourage the progressive development of the member economies; and 4. foster the harmonious development of Caribbean trade and its liberalization by the removal of barriers. Other objectives of CARIFTA included promoting the industrial development of the least developed member states as well as the development of a coconut oils industry in those same countries. There was also an agricultural marketing project to rationalize agricultural production among the least developed countries. The Treaty of Chaguaramas was signed in 1973 to establish CARICOM. Interestingly, it was the Common Market Annex to the Treaty of Chaguaramas that actually replaced CARIFTA the following year with what purported to be a common market but, except for some hortatory expressions about free movement of the factors of production, was more focused on building a customs union. The development model, upon which the original Treaty of Chaguaramas of 1973 was based, was an inward-looking, protectionist, import-substitution process that was buttressed by regional industrial programming, ownership and control of regional natural resources, and regional self-reliance.29 The hybrid situation of a common market operating within the Caribbean Community allowed a country to become a member of CARICOM without participating in the regional economic integration project. The Guyanese capital, Georgetown, was selected as the headquarters for the CARICOM Secretariat as a way of encouraging movement to the southern portions of the Caribbean region and to facilitate exploitation of the abundant natural resources of Guyana.30 During the period from when the Treaty of Chaguaramas was signed in 1973 through 1980, intra-regional trade increased some 26.5 percent.31 Because the 1970s was marked by an increase in international commodity prices, the CARICOM countries tended to focus their attention on serving foreign regional markets. This meant that exports to the subregion never exceeded 10 percent of global exports. Beginning in the early 1980s, most of the CARICOM countries were detrimentally impacted by the global recession. In order to reduce budgetary deficits and to cut back on foreign exchange outflows, Jamaica and Guyana both used Article 28 of the Common Market Annex to   Pollard, supra note 27,at 25.   Id. at 7. 31   A.M. El-Agraa, Economic Integration Worldwide 284 (1997). 29 30

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the Treaty of Chaguaramas to impose quotas on CARICOM imports.32 Other CARICOM countries soon followed with unilateral restrictions, contributing to a significant contraction in intra-regional trade flows. An additional blow to CARICOM was the failure of many member states to implement the CET by the outside target date of 1981. Additional revisions to the CET occurred throughout the 1980s, but these were also not uniformly carried out in all the member nations.33 Exacerbating the overall loss of interest in the CARICOM market during the 1980s was the collapse of the CARICOM Multilateral Clearing Facility designed to encourage intra-regional trade flows without expending hard currency reserves. VI. New Climate for Latin American and Caribbean Economic Integration in the 1990s The collapse of the Soviet bloc in the early 1990s sparked concerns throughout Latin America and the Caribbean that investors in the developed world would focus their attention on the many new markets returning to the capitalist fold in Eastern Europe and Central Asia. Under these circumstances, there was a fear that Latin America and the Caribbean would lose out in the race to attract foreign direct investment if countries did not reform their underperforming economies. Accordingly, the 1990s witnessed widespread adoption of neoliberal, market-oriented economic policies throughout Latin America and many Caribbean nations. The precise reforms and the pace at which they were adopted varied from country to country. The overall effect, however, was the adoption of policies that complemented rather than undermined the goals sought through economic integration. Another important incentive for the revival of efforts to economically integrate countries in Latin America and the Caribbean in the 1990s was the appearance of new trading blocs around the globe, including the European Union and the North American Free Trade Area. Although not inherently protectionist, there was a perception that these new blocs might favor imports from within the region at the expense of outside suppliers and increase their bargaining power at multilateral fora such as the new World Trade Organization (WTO). As a result, countries in Latin America and the Caribbean could not afford to risk becoming marginal in this new world order by not forming their own economic blocs. The change in international and domestic economic factors coincided with another phenomenon that strongly favored the revival of Latin American economic integration projects, in particular, during the 1990s. The end of military rule in many Latin American countries during the 1980s allowed the new, democratically elected governments to resolve long-standing border disputes and not view their neighbors as potential military threats. As a result, the integration programs of the 1990s acquired important geo-political

  Id. at 287.   Id. at 282.

32 33

Early Attempts at Economic Integration  • 13

dimensions that went beyond purely commercial concerns.34 Unlike the older forms of Latin American and Caribbean economic integration, which often sought to extend the import-substitution model regionally after its exhaustion on the national level, the new efforts at economic integration are premised on the concept of “open regionalism.” The central features of this new type of regionalism include an opening to world markets, promotion of private sector initiative, and the withdrawal of the state from direct economic activity.35 The new regionalism is therefore strongly connected to the structural reform process that all countries in Latin America and the Caribbean underwent at the beginning of the 1990s (or in some cases, such as Chile, much earlier), which were designed to make their respective economies more competitive in the global market. The new regionalism is also designed to attract foreign investment, not restrict or control it like the old Andean Commission Decision 24.36 Open regionalism encourages duty-free trade among neighbors as a stepping stone to prepare them for eventual integration with the international economy. By focusing first on the regional market, there is less political resistance to trade liberalization, given that it takes place within a limited and familiar market space that reflects more symmetric competition than is found in the international arena.37 One of the most dramatic features accompanying open regionalism has been the shift from the traditional intra-regional focus of “South-South” preferential trade integration to a growing interest in interregional “North-South” agreements, which commercially link Latin American and Caribbean economies with industrialized countries in reciprocal free trade often in conjunction with ambitious functional cooperation agreements.38 VII. Regional Economic Integration and the World Trade Organization Any discussion of regional economic integration, whether in Latin America and the Caribbean or anywhere else in the world, cannot ignore the connection with the WTO. This is particularly true when discussing Latin America and the Caribbean, given that all the countries in the region (but for the Bahamas) are now WTO members. This means the Latin American and Caribbean countries must ensure that the rules for their respective economic integration projects conform to their obligations at the multilateral level. For the most part, WTO rules serve as the base upon which the regional integration programs are built. For many disciplines, the rules of the regional integration projects are identical   O. Stahringer de Caramuti, El MERCOSUR en un Mundo de Bloques, in El MERCOSUR en Nuevo Orden Mundial 101–02 (1996). 35   R. Devlin & A. Estevadeordal, What’s New in the New Regionalism in the Americas? 6 (2001). 36   Id. at 21. 37   Id. at 7. Regional integration can also be more politically popular because increased trade among neighboring states may reduce historical tensions of a military or geo-political nature. This has certainly been true of MERCOSUR, especially in terms of Argentine-Brazilian relations. 38   P.Giordano, The External Dimension of MERCOSUR: Prospects for North-South Integration With the European Union 5 (2003). 34

el

14  •  Latin American and Caribbean Trade Agreements

with those at the multilateral level. In most cases, subregional integration creates new disciplines or offers greater liberalization than is available through the WTO. The WTO is the result of the Uruguay Round negotiations that began in 1986 to achieve further multilateral trade liberalization. The Uruguay Round was preceded by seven other negotiating rounds conducted under the auspices of the General Agreement on Tariffs and Trade (GATT) that was signed in 1947 by 23 founding member states. The purpose of GATT is to prevent a recurrence of the collapse of international trade that occurred between World War I and World War II, when countries unilaterally imposed high tariffs and retaliatory trade measures that devastated world trade flows and contributed significantly to the Great Depression of the 1930s.39 GATT prohibits unilateral tariff action by binding all member countries to maximum tariff levels on most goods and provides the means for the progressive reduction of tariff barriers through periodic multilateral negotiations.40 The decision to create the WTO was a desire by the participating countries to provide a solid institutional structure that would oversee the international trading order. Prior to this time, whatever institutions existed that grew out of GATT, were ad hoc in nature. The WTO and its institutional framework came into formal existence on January 1, 1995. There are now some 150 countries who are members of the WTO. Among the major countries that remain outside the WTO are Algeria, Iran, Russia, and many of the new states that emerged following the collapse of the Soviet Union and Yugoslavia. The governing rules of the WTO are found in the Agreement Establishing the World Trade Organization of 1994 and its annexes. Annex 1A includes 13 multilateral agreements that deal with some aspect of trade in goods. The first is GATT 1994, which carries forward, with some modifications, the principles established by GATT 1947.41 This is followed by the: (1) Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement), (2) Agreement on Technical Barriers to Trade (TBT Agreement), (3) Agreement on Implementation of Article VI of GATT (Antidumping Agreement), (4) Agreement on the Implementation of Article VII of GATT (Valuation Agreement), (5) Agreement on Pre-shipment Inspection, (6) Agreement on Rules of Origin, (7) Agreement on Import Licensing Procedures, (8) Agreement on Subsidies and Countervailing Measures, and (9) Agreement on Safeguards. The Uruguay Round added the: (1) Agreement on Agriculture, (2) Agreement on Textiles and Clothing, and (3) Agreement on Trade-Related Investment Measures. The Uruguay Round also added two separate agreements included in individual annexes: (1) the General Agreement on Trade in Services (GATS) and (2) the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The WTO also has two plurilateral agreements, which are still in effect, that deal with trade in civil aircraft and government procurement,   J. Johnson, International Trade Law 1 (1998).   Id. at 1. 41   Id. at 22. 39 40

Early Attempts at Economic Integration  • 15

and they are binding only on those WTO members that have actually acceded to them. To date, no country in Latin America and the Caribbean has signed on to either plurilateral agreement. The WTO is based on two fundamental principles: 1. MFN treatment, which requires that a WTO member unconditionally extend the same preferential tariff treatment and application of importation rules and formalities to goods that it may extend to one or more countries (regardless if they are WTO members), to all goods from all WTO member states; and 2. National treatment, which requires that, once goods enter a country from a fellow WTO member state, they must be treated no less favorably than domestic goods. As can be gathered from the above discussion, the whole concept of regional economic integration flies in the face of the WTO principle of MFN treatment, as the participants in an economic integration process do not extend the same preferential market access treatment accorded each other to the remaining WTO members. On the contrary, they engage in the type of discrimination that is generally prohibited by the WTO. Article 24 of GATT, however, creates an exception that allows countries participating in a regional trading arrangement, like a free trade area or a customs union, to treat each other more favorably. A similar provision found in Article 5 of GATS permits such countries to treat each other more favorably with respect to the cross-border trade in services. In the particular case of Article 24 of GATT, countries participating in a free trade area must ensure that the elimination of tariffs and non-tariff barriers among themselves covers “substantially all trade” and “the duties and regulations of commerce” applied by them to other, non-participating WTO members “shall not be higher or more restrictive” than was the case before the formation of the free trade area. In the case of a customs union, the same caveat with respect to “substantially all [intra-regional] trade” exists, and the new CET and common regulations of commerce applied to imports from non-participating WTO members “shall not on the whole be higher or more restrictive” than what existed previously.42 Article 24 also requires that the countries participating in a regional economic integration project implement their free trade area or customs union within a “reasonable length of time.” Finally, Article 24 requires that the participating countries notify the WTO 42   The difference in the obligations between a free trade area and customs union is based on the fact that the latter involves elimination of each party’s individual schedule of duties and other regulations of commerce and substitution of a regime of duties and other regulations common to all. Unless the parties to a [customs union] have identical tariff schedules to begin with, the harmonization of their schedules inevitably will mean that the rates for each of the [regional trading agreement] parties will go up for some products and down for other products. Article XXIV:5 indicates that the common regime resulting from this harmonization may not ‘on the whole’ impose higher duties or more restrictive regulations of commerce on third countries. R.E. Hudec & J.D. Southwick, Regionalism and WTO Rules: Problems in the Fine Art of Discriminating Fairly, in Trade Rules in the Making: Chalenges in Regional and Multilateral Negotiations 50 (1999).

16  •  Latin American and Caribbean Trade Agreements

Committee on Regional Trade Agreements so that a working group can review the proposed accord to ensure compatibility with WTO obligations. Differences of opinion among WTO members on whether Article 24 has been complied with can be referred to the WTO’s dispute resolution system.43 Over the years, a number of issues have arisen with respect to the provisions of Article 24. For example, what is meant by “substantially all trade”? To date, the WTO has been unable to reach a consensus as to whether this term means that countries participating in a regional economic integration program can exclude an entire sector of the economy, such as agriculture.44 Similarly, no consensus has been achieved on fixing a set percentage of trade flows (whether based on value or volume) to define what constitutes “substantially all trade.” On the other hand, there is now a consensus that the “reasonable length of time” for implementing a free trade area or customs union “should exceed 10 years only in exceptional cases.”45 Another matter that has generated much debate over the years concerns the methodology used to determine if new duties and import regulations are not “on the whole” higher or more restrictive after the formation of a customs union. Since 1995, a consensus has emerged that the CET is evaluated based upon an overall assessment of weighted average tariff rates applied by participating states to individual tariff schedule lines (broken down by values and quantities) for a representative period prior to the customs union’s formation.46 This means that the impact of new duties is examined on a product-by-product basis, and an increase in one sector (e.g., automobile manufacturing) cannot be offset by a decrease in another (e.g., agriculture). Furthermore, the calculation is based 43   Id. at 52. Interestingly, the dispute resolution system was among the most important innovations that came out of the Uruguay Round. It resulted in a three-step mechanism divided into an initial consultation phase, referral to an arbitration panel (if the consultations are unsuccessful), and then the possibility of review by an appellate body. More significantly, it changed the rules on submitting a complaint to an arbitration panel and how panel decisions are adopted. Under the old system, requests for the formation of a panel could be blocked by one member state and arbitral decisions were adopted only with the consensus of all GATT signatories. Today, the right to request a panel (following unsuccessful consultations) is automatic, and panel decisions can be enforced without a full consensus of all WTO member states. The possibility now also exists to appeal a panel decision. 44   Id. at 61–62. It is important to point out that Article 24 allows member states participating in a regional economic integration project to apply tariffs and non-tariffs barriers to intra-regional trade “where necessary” as permitted by GATT Articles 11 (to support a domestic supply management regime such as a price support program), 12 (to respond to balance of payments emergencies), 13 (to apply quotas where still allowed by the WTO, such as agriculture, on a non-discriminatory basis), 14 (to apply discriminatory quotas for balance of payments reasons), 15 (to fulfill commitments made to the IMF), and 20 (to protect human, animal, or plant life or health, the environment, support law enforcement, etc.). Id. at 63. Interestingly, safeguards found in GATT Article 19 are excluded from the specific restrictive measures that participants in a regional trading arrangement can impose “when necessary” on each other’s imports. Id. at 67–68. 45   See, Paragraph 3 of the Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994, available at http://www.wto.org/english/ docs_e/10-24_e.htm. 46   Hudick & Southwick, supra note 42, at 53–54.

Early Attempts at Economic Integration  • 17

on applied tariffs (i.e., the customs duty that is actually levied on imported goods) and not the bound rate that a country reports to the WTO as the highest tariff it will theoretically levy on imports from other WTO members.47 On the other hand, no agreement has been reached as to whether rules of origin are even “regulations of commerce” that must not become more restrictive upon the formation of a free trade area.48 As a result of an “Enabling Clause” that was added to GATT in 1979, Article 24 does not apply to economic integration projects that exclusively involve developing countries. Under the Enabling Clause, the notification requirement is still mandatory, but there is much more flexibility on how much trade must be covered by the tariff reductions and elimination of non-tariff barriers among the participating countries. There is also greater flexibility in terms of the time required for full implementation, although any new tariffs and non-tariff measures (as would result from the creation of a customs union, for example) should “not raise barriers to or create undue difficulties for the trade of any other” WTO member.49 Although most countries in Latin America and the Caribbean are deemed to be developing countries, this designation has been challenged, particularly in the case of MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese). During the mid-1990s Argentina enjoyed a per capita income that should have made it ineligible in some countries, such as the United States, for the General System of Preferences (GSP) preferential market access benefits given by the developed nations to the developing world.50 Accordingly, an argument was made that because MERCOSUR included Argentina, it was subject to Article 24 requirements and not the more permissive Enabling Clause. In 1993 the WTO Committee on Trade and Development (which has jurisdiction to review economic integration projects that are exclusively made up of developing countries) accepted a compromise position and established a working group to examine MERCOSUR “in the light of the relevant provisions of the Enabling Clause and of the General Agreement [GATT], including Article XXIV.”51   Id. at 54.   Id. at 54–56. Strict rules of origin can cause manufacturers to shift the sourcing of inputs from extra-regional suppliers in favor of those from within the free trade area in order to ensure that the final product qualifies for preferential tariff treatment under the regional trading arrangement. It should be noted that while not normally the case, the WTO recognizes that a customs union may have rules of origin as well. This will often arise in situations where a customs union has not fully implemented its CET. This is currently the situation with MERCOSUR. 49   See Paragraph 3(a) of the Decision of November 28, 1979 (L/4903) establishing the Enabling Clause, available at http://www.wro.org/english/docs_e/legal_e/enabling1979_e.htm. 50   The Enabling Clause also allows developed countries to grant unilateral preferential duty reductions to developing countries. This can be done under GSP or, alternatively, it can be done through unilateral preferential tariff access agreements granted by a developed country to a small group of developing countries for a specified period of time. However, this latter alternative requires a waiver by all WTO member states to the temporary program. By the mid-1990s, Argentina’s per capita gross national product (GNP) exceeded the U.S.$ 8,000 threshold that, at the time, made it a “high-income country” and therefore should have triggered its graduation from the U.S. GSP program. 51   Note on Proceedings of the Seventy-fourth Session of the Committee on Trade and 47 48

18  •  Latin American and Caribbean Trade Agreements

As previously mentioned, Article 5 of GATS provides the exception to the underlying non-discrimination principle that allows members of a regional economic integration project to treat trade in services among themselves more favorably than the treatment accorded to non-participating WTO members. First, the regional agreement must substantially eliminate barriers to intraregional trade in services “in the sense of [national treatment].” In particular, the regional agreement must have “substantial sectoral coverage” and this is to be “understood in terms of numbers of sectors, volume of trade affected, and modes of supply.”52 Unlike the vague “substantially all trade” in Article 24 of GATT, Article 5 of GATS makes it clear that all sectors need not be included.53 Secondly, the services agreement may not create new barriers to non-participating WTO members. Where developing countries are party to a subregional services agreement, the two conditions of “substantial sectoral coverage” and “absence or elimination of substantially all discrimination” are to be interpreted with flexibility “in accordance with the level of development of the countries concerned, both overall and in individual sectors and sub-sectors.”54 Furthermore, if all the signatories to a regional services agreement are exclusively developing countries, Article 5(3)(b) of GATS states that “more favourable treatment may be granted to juridical persons [i.e., corporations] owned or controlled by natural persons of the parties to such an agreement.”

Development (May 28, 1993), available at http://www.wto.org/gatt_docs/english/sulpdf/ 91720099.pdf. 52   Hudec & Southwick, supra note 42, at 75. It should be pointed out that GATS Article 5 allows countries participating in a regional trading arrangement to exclude service sectors for reasons outlined in GATS Articles 11 (in response to mandates imposed by the IMF). Article 12 (to respond to balance of payments crises), Article 14 (to protect human, animal, or plant life or health, the environment, support law enforcement, etc.), and Article 14 bis (to protect national security). 53   Id. at 75. On the other hand, Article 5 offers little or no guidance in judging how many sectoral exclusions may be allowed before an agreement no longer has “substantial sectoral coverage.” Id. at 76. 54   See M.E. Footer & C. George, The General Agreement on Trade in Services, in 1 The World Trade Oprganization: Legal, Economic and Political Analysis 835 (P.F. Macrory, A.E. Appleton & M.G. Plummer eds., 2005).

CHAPTER 2

LATIN AMERICAN INTEGRATION ASSOCIATION I. Latin American Integration Association and Its Relevance to Intra-Regional Trade A. Introduction With the Latin American Free Trade Area (ALALC; see Chapter 1, Section III) moribund and the Andean Pact (see Chapter 1, Section IV) struggling to survive by the end of the 1970s, the Spanish-speaking countries of South America, Brazil, and Mexico met in the Uruguayan capital in 1980 to try to reinvigorate the Latin American economic integration process. As a result of their efforts, a new Treaty of Montevideo was signed creating the Latin American Integration Association (or, as it is better known by its Spanish and Portuguese acronym, ALADI). ALADI sought to avoid some of the major problems the ALALC encountered, due to its multilateral character, by focusing on more modest bilateral trade agreements. The National and Common Lists of the old ALALC were therefore abandoned in favor of so-called agreements of partial reach in which two member states would agree to reduce or eliminate tariff barriers and quantitative restrictions on specified products traded amongst them. The treaty creating ALADI also provided for Economic Complementation Agreements or Acuerdos de Complementación Económica (ACEs). These agreements could be either bilateral or multilateral in scope and were intended to stimulate more extensive forms of economic cooperation among the signatory states beyond preferential tariff arrangements on a limited group of products. Although the Treaty of Montevideo of 1980 established no supranational oversight bodies or financial institutions to fund development projects, it did retain and strengthen the central clearing house mechanism established within the ALALC framework in 1965. In addition, Article 35 provided for the establishment of various new institutional bodies including a Committee of Representatives that was given the task of, among other things, resolving disputes arising among the member states. In addition, most decisions of the institutional bodies now required only a two-thirds majority in order to be approved (thereby replacing the unworkable unanimous voting arrangements of the old ALALC). Despite the reforms introduced by the new Treaty of Montevideo, it failed to immediately revive the movement toward greater Latin American economic integration. For one thing, the reform effort coincided with the sharp rise in 19

20  •  Latin American and Caribbean Trade Agreements

international oil prices that affected the Latin American countries differently and the type of economic policies they pursued. The economies of the net petroleum producers boomed, leading to an increased demand in imports that was further boosted by a rise in the value of their currencies. This situation was soon followed by the Mexican debt default, which halted all bank lending to the region that could have helped those non-oil-producing Latin American countries to finance (over the short term at least) higher energy costs. Instead, they responded to the credit squeeze by devaluating their currencies in an effort to increase exports and therefore revenue. These devaluations led to suddenly cheaper goods flooding the markets of the oil-producing countries that threatened to undermine their national production, while most of their exports to the regional market became that much more uncompetitive. The oil producers responded with safeguards and non-tariff measures, throwing their non-oil-producing ALADI partners further into recession. The end result was that whereas total intra-ALADI trade had reached an historical high of almost U.S.$12 billion in 1981, by 1983 total intra-ALADI had dropped to around U.S.$7 billion. Intra-ALADI trade thereafter remained stagnant until the beginning of the 1990s. B. Latin American Integration Association Today The current membership of ALADI consists of Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela. ALADI is the organization that oversees the bilateral trade agreements that any of these 12 countries may have with each other or with countries in Central America and the Caribbean. All the recent multilateral economic integration programs in South America, such as MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) and the G-3 Accord, also fall under the institutional and legal framework of ALADI. Even the Andean Community, although technically not falling under the ALADI umbrella, for many years adhered to many ALADI norms, including Resolution 78 (eventually superseded by Resolution 252), which dealt with rule of origin requirements. In actual practice, however, the newer trade agreements under ALADI have strayed, sometimes dramatically, from the norms established under ALADI. For example, neither MERCOSUR nor the G-3 Accord adhere to ALADI’s rule of origin requirements. The Council of Ministers of Foreign Affairs, ALADI’s highest institutional body, met in Mexico City in April 1990 with the goal of introducing modifications that would better facilitate ALADI’s ability to handle the renewed increases in intra-regional trade flows. One of the important technical reforms adopted two months later was the setting of a minimal, across-the-board preferential tariff schedule under which goods would be traded among the member states that were not already subject to other, pre-negotiated duties. In addition, the list of items exempt from the general preferential tariff schedule (and also not subject to any specifically pre-negotiated duty rate), was set at: 1,920 products in the case of Bolivia, Ecuador, and Paraguay; 960 products in the case of Colombia, Chile, Peru, Uruguay, and Venezuela; and 480 goods in the case of Argentina, Brazil, and Mexico.

Latin American Integration Association  • 21

With Mexico’s ratification of the North American Free Trade Agreement (NAFTA) in 1993, the other ALADI countries demanded that Mexico extend to them the same preferential tariff arrangements it had granted the United States and Canada. Such a result was required by the most-favored nation (MFN) clause found in Article 44 of the Treaty of Montevideo of 1980. At a meeting of the Council of Ministers of Foreign Affairs held in Cartagena, Colombia, in June 1994, a protocol to the Treaty of Montevideo was signed which was intended to resolve the issue of the applicability of Article 44. Pursuant to the June 1994 protocol, any ALADI member state may petition the ALADI Committee of Representatives (i.e., ALADI’s permanent institutional body, which sits in Montevideo, Uruguay) to temporarily suspend its MFN obligations under Article 44 of the Treaty of Montevideo of 1980. In order for this suspension to become effective, however, the petitioning state must first conduct bilateral negotiations with each member state so as to insure that trade flows generated by previously negotiated ALADI agreements are not detrimentally affected by the suspension. These negotiations should ideally not exceed 24 months (unless a longer extension is granted by the Committee of Representatives). The petitioning state should also negotiate the question of eliminating the same non-tariff barriers on imports from ALADI members as it granted to non-ALADI countries in another trade agreement. The petitioning state is under a further obligation to negotiate the same rules of origin with ALADI members as it has with third countries (in the event these are more liberal). The temporary suspension of the MFN obligations found in Article 44 can be made long term (i.e., potentially up to ten years) upon a two-thirds affirmative vote of the Committee of Representatives if the petitioning country fulfills its negotiating obligations, and the detrimentally affected ALADI countries feel that they have been satisfactorily compensated. On the other hand, if the detrimentally affected ALADI countries feel they have not been satisfactorily compensated, a Special Group of the Committee of Representatives is formed (made up of either three or five members, but in no case consisting of nationals of the detrimentally affected countries) to determine what would be a “just compensation.” The Special Group’s determination is binding. If the Special Group’s determination is accepted by the petitioning country, the suspension of Article 44 is made “permanent” for five years, subject to renewal for another five. By the same token, any detrimentally affected ALADI country can suspend preferential tariff arrangements with the petitioning country to the extent they are not compensated for the greater tariff preference accorded the nonmember state(s). Negotiations to determine the exact nature of Mexico’s compensation to its fellow ALADI members as a result of Mexico’s membership in NAFTA have   Article 44 of the Treaty of Montevideo of 1980 states in relevant part that the advantages, favors, special tariff rates, immunities, and privileges which the member states apply to products originating in or destined to another member or non-member state, as a result of decisions or agreements which are not in keeping with this Treaty or the Cartagena Agreement, will be immediately and unconditionally extended to the other member states. 

22  •  Latin American and Caribbean Trade Agreements

dragged on for years without full resolution. ��������������������������������� One of the explanations was that since all the ALADI countries were negotiating a Free Trade Area of the Americas (FTAA), whilch would have extended to them similar if not more generous access to the Mexican market than Mexico granted Canada and the United States under NAFTA, there was no need to press the issue. Furthermore, the matter was resolved at least with those ALADI countries with which Mexico has negotiatd free trade agreements (i.e., Bolivia, Chile, Colombia, Uruguay, and at one point Venezuela). A MERCOSUR-Mexico Free Trade Agreement has been proposed since the late 1990s, although the discussions have dragged on inconclusively for over a decade. On the other hand, Chile did extend to the MERCOSUR countries the same preferential market access it offered Canada for a number of tariff lines under its 1996 bilateral free trade agreement with that country. II. Institutional Framework of the Latin American Integration Association A. Decision-Making Bodies ALADI’s institutional framework consists of: (1) the Council of Ministers of Foreign Affairs, (2) the Evaluation and Convergence Conference, (3) the Committee of Representatives, and (4) the Secretariat. The Council of Ministers of Foreign Affairs is the highest institutional body within ALADI. Among its duties are to issue general norms intended to strengthen the ALADI integration process and to adopt amendments and additions to the Treaty of Montevideo of 1980, including approving the accession of new members. The Council is made up of the Ministers of Foreign Affairs of each member state, or a minister who is specifically given the task of overseeing integration matters in a particular country. The Council meets when convened by the Committee of Representatives and makes decisions when all the member states are present. Most decisions made by the Council of Foreign Ministers require an affirmative vote of two thirds of the member states. Important decisions of the Council, such as amendments to the Treaty of Montevideo, accession of new member states, or adoption of norms designed to strengthen the regional integration process, require a two-thirds affirmative vote and the absence of any negative votes. Abstentions do not count as negative votes. The Evaluation and Convergence Conference is entrusted with the task of making sure that the bilateral agreements of partial reach are made multilateral. It also oversees negotiations designed to deepen the regional preferential tariff arrangements. The Conference meets at least once every three years at the request of the Committee of Representatives and is made up of special ministers from each country duly appointed for this purpose. Any measures adopted by the Evaluation and Convergence Conference require a two-thirds affirmative vote in favor (with important decisions requiring the absence of any negative vote as well). The Committee of Representatives is the permanent body of ALADI and is headquartered in Montevideo. It holds meetings with the representatives of each member state’s government at least once a year and encourages the member

Latin American Integration Association  • 23

states to execute regional economic integration agreements. The committee’s other functions include the adoption of all measures necessary to implement the Treaty of Montevideo, the submission of recommendations to the Council of Foreign Ministers and the Evaluation and Convergence Conference on ways to strengthen the integration process (including proposing solutions to resolve situations in which certain members do not comply with their ALADI obligations), and requesting the Secretariat to carry out needed technical studies. The committee is made up of one permanent representative and one alternate from each member country. Each country is entitled to one vote in the Committee of Representatives. Any resolutions adopted by the committee require the affirmative votes of two thirds of the member states. As is true of the Council on Foreign Relations and the Evaluation and Convergence Conference, any resolutions that affect ALADI’s fundamental legal underpinnings also require the absence of any negative votes. The Secretariat is composed of a technical and administrative staff that assists ALADI’s other institutional bodies to carry out their tasks, including furnishing the necessary technical reports and trade data. The Secretariat is located in Montevideo and is headed by a Secretary General who is appointed by the Council of Foreign Affairs for an initial term of three years, with the possibility of reelection. B. Central Clearing House Mechanism for Intra-Latin American Integration Association Trade In 1982 representatives from the Central Banks of the ALADI countries plus the Dominican Republic met in Montego Bay, Jamaica, to modify the Agreement on Reciprocal Payments and Credits and the Regulation on the Multilateral Compensation System of Balances that had been created in the 1960s in the context of the old ALALC. A new Convention on Reciprocal Payments and Credit emerged from this meeting. Under the Convention on Reciprocal Payments and Credit, the Central Bank of each signatory state establishes credit lines in U.S. dollars to cover transactions between persons or entities resident in their respective countries. The credit lines vary according to anticipated transactional levels based on past patterns of trade flows between the respective states. The transactions are run through a central clearing house mechanism headquartered at the Central Reserve Bank of Peru in Lima. This system permits goods (so long as they originate in an ALADI country and the Dominican Republic) to be traded between signatory states without the need to immediately exchange U.S. dollars for purposes of payment. The exporter simply goes to its country’s Central Bank or other expressly authorized financial institution and presents the proper documentation reflecting the proposed transaction. The Central Bank (or authorized financial institution that works through the respective Central    This documentation can include payment orders, drafts in the name of a particular payee, letters of credit, documentary credit, drafts connected with trade operations and guaranteed by an authorized bank, promissory notes arising out of trade operations that are either issued or guaranteed by an authorized institution, and ordinary promissory notes or promissory notes issued at a discount based on instruments involving another transaction.

24  •  Latin American and Caribbean Trade Agreements

Bank) then forwards this documentation to its respective counterpart in the importing country. When the importer has received and paid for the goods in its local currency, the exporter’s Central Bank is notified, and the Central Bank debits the dollar account of the importing country. The exporter is then paid in local currency by its country’s Central Bank through an authorized financial institution. On the last day of April, August, and December of each year, the debits for the preceding four months of each country are reconciled with the credits, and each Central Bank is obligated to pay to its counterparts’ (in U.S. dollars) outstanding debits (plus interest). The obligation to pay an outstanding debit is automatic, and no part of it can be challenged in the event the Central Bank of the importing country subsequently learns that the underlying commercial transaction it purported to represent was fraudulent. Needless to say, such an obligation has been abused by unscrupulous financial institutions, particularly after 1992 when the Convention’s system was opened to so-called triangular trade, in which the debit one Central Bank owes to country A is, in turn, used by country A to cancel a debit it owes to country B (with the corresponding exchange of negotiable instruments). In 1994 a Protocol for the Resolution of Controversies between Participating Central Banks to the Convention on Reciprocal Payments and Credits of ALADI was opened for ratification by each country participating in the central clearing house mechanism. The Convention seeks to, inter alia, resolve disputes that may arise when a Central Bank questions the validity of the underlying commercial transaction (a problem that arose in May 1996, for example, when Argentina refused to recognize debits recorded against it by Uruguay’s Central Bank because of allegations that the underlying trade deals were fraudulent). By 1997, the Central Banks of all the ALADI countries had ratified the protocol. In 1995 approximately U.S.$14 billion in intra-regional trade was run through ALADI’s central clearing house mechanism; 56 percent represented canceled debits (thereby avoiding the use of hard currency reserves). The countries funneling the largest number of trade transactions through the central clearing house in 1995 were (in descending order): Brazil, Argentina, Venezuela, Uruguay, and Chile. The countries that best managed to avoid the use of hard currency payments, with over 50 percent of their trade transactions resulting in canceled debits, were Chile, Colombia, and Venezuela. After 1995, use of the central clearing house mechanism dropped steadily until it reached a low point of only U.S.$700 million by 2003. At that point, there began a slow recovery, although only U.S.$6 billion in trade was funneled through the central clearing house mechanism in 2006 (still less than half of what was recorded in 1995). In addition, the mechanism today handles only a small   There are currently some 560 financial institutions (excluding branch offices) participating in the ALADI central clearing house mechanism. Brazil and Ecuador have the most private sector banks participating in the system.    El Sistema de Pagos de la ALADI en 1995, 2 Estadisticas y Comercio 27–28 (Feb.–Apr. 1996). This figure of 56 percent actually represents a drop from the historical average of 73 percent. Id. at 29.    Id. at 29.    Id. at 30. 

Latin American Integration Association  • 25

percentage of total intra-regional trade transactions (i.e., 6.5 percent in 2006) as compared with 1989, for example, when over 90 percent of intra-regional trade was funneled through the ALADI central clearinghouse mechanism. Venezuela is currently the largest user of the ALADI central clearing house. III. Rule of Origin Requirements Resolution 252, which was issued by the ALADI Committee of Representatives in August 1999 to replace Resolution 78, contains the current rule of origin requirements. In theory, all products must meet these requirements in order to take advantage of the various preferential tariff arrangements and trade agreements that exist under the ALADI umbrella. The reality, however, is that this has often not been the case, as trade agreements such as MERCOSUR, the G-3 Accord, and the Bolivia-Mexico Free Trade Agreement have their own rule of origin requirements that may significantly digress from those found in Article 252. Accordingly, it is wiser to refer to the particular agreement in question than rely on the provisions of Resolution 252 for guidance in this area. Pursuant to Resolution 252, in order to enjoy intra-regional preferential tariff treatment, a good must be: 1. Entirely made with inputs that originate exclusively in the territory (including free trade zones) of one or more of the ALADI countries; or 2. Originate in the territory (including free trade zones) of one or more of the ALADI countries whether it be a mineral, vegetable, or animal product, including those goods specifically listed in Annex 1 to Resolution 252 (e.g., books, newspapers, and music manuscripts). Products obtained from outside territorial waters will also be considered to originate within ALADI if taken by a vessel bearing the flag of one of the ALADI states or rented by a company legally established in an ALADI country; or 3. Made with inputs from outside ALADI so long as the good is transformed in such a manner as to achieve a new tariff classification heading under the ALADI nomenclature or tariff classification system (NALADISA). Goods that are merely assembled, packaged, marked, sorted, or otherwise do not undergo a substantial transformation within one of the ALADI countries are specifically excluded from consideration; or 4. Made with foreign inputs and assembled in one of the ALADI countries, so long as no more than 50 percent of the freight on board (FOB) value of the final product reflects the cost, insurance, and freight (CIF) costs of the foreign input(s). In addition, goods that are made in the ALADI countries but do not change tariff classification heading under the NALADISA can benefit from intra-regional tariff preferential arrangements if they meet this 50 percent regional content requirement; or   If the particular trade agreement does not exclusively encompass ALADI countries, the origin rules of Resolution 252 are supposed to be applicable to the goods sourced in an ALADI country. 

26  •  Latin American and Caribbean Trade Agreements

5. Made or processed in non-ALADI countries with ALADI inputs that are equal or exceed 50 percent of the final product’s FOB value, so long as a special waiver has been obtained from the ALADI Committee of Representatives. Annex 2 to Resolution 252 contains an additional set of products that must include the specified content(s) outlined in detail in the annex before the products will be considered as originating within ALADI and allowed to partake of preferential market access provided under ALADI trade agreements. For example, condensed milk is considered as originating in an ALADI country only if it is made from milk and sugar produced within a member state. Wine is considered to originate within ALADI if it is only made with grapes that originate within an ALADI country. Finally, marmalades and preserves must be made with fruit and sugar that originate in an ALADI country for them to be considered eligible for preferential treatment under an ALADI trade agreement. Article 3 to Resolution 252 permits the least-developed countries within ALADI (i.e., Bolivia, Ecuador, and Paraguay) a 40 percent regional content requirement for goods made with non-ALADI inputs and then exported to a more-developed member state under an ALADI trade agreement. In addition, Article 6 to Resolution 252 allows all the member states to agree to different rules of origin for specific products as part of their so-called partial reach agreements. These rules must not be more liberal than the minimum 50 percent regional content requirement (except in the case of goods made in the least-developed ALADI countries). In order for a good to receive preferential tariff treatment, Article 4 of Resolution 252 requires that the good be shipped directly from the territory of one ALADI member state to that of the other. It is permissible to ship goods through a non-ALADI country only if the goods remain under the supervision of the customs authority in the transit county(ies) and: 1. Such transit is justified by geographic reasons or because the chosen mode of transport provides no other alternative; 2. The goods will not be sold or in any way be used in the transit country(ies); and 3. The goods are handled in the transit country(ies) only in ways compatible with facilitating the transfer of cargo. All goods shipped between ALADI countries desiring to take advantage of an ALADI preferential tariff arrangement must be accompanied by the requisite ALADI-approved certificate declaring compliance with the relevant rules of origin. The statement of compliance should be made by the final producer of the good or the exporter under penalty of perjury. The certificate of origin is obtained from the entity designated by the government of the country of export for this task. The certificate of origin is valid for a period of up to 180 days from its date of issue. The certificate of origin should normally bear the same date as the commercial invoice or be issued within 60 days thereafter. Any importing country that feels that a certificate of origin is invalid may complain to the other country’s government and can even require the posting of a bond

Latin American Integration Association  • 27

to cover the potential duty on the challenged good, but it cannot refuse entry of that good into its territory. IV. Safeguard Measures The general rules for the use of safeguard measures within the ALADI context are found in ALADI Resolution 70. It is important to point out, however, that Article 49 of the Treaty of Montevideo of 1980 authorizes member states to supplement these measures with their own safeguard clauses in whatever trade agreements they may negotiate among themselves on a bilateral or multilateral level. This right is also specifically permitted by Article 9(g) of the Treaty of Montevideo in the context of so-called agreements of partial scope and by Article 17 in the context of agreements with the less-developed ALADI member states. Accordingly, most trade agreements under the ALADI umbrella have their own safeguard clauses that, while they generally follow the basic framework set down in Resolution 70, may also differ in some crucial respects. Resolution 70 allows countries to impose temporary safeguard measures on the continued importation of goods from a fellow ALADI state so long as they are not imposed in a discriminatory manner. Safeguard measures can only be imposed: 1. to counteract imbalances created by general balance of payments problems (although a safeguard cannot be utilized for this motive against the imports of Bolivia, Ecuador, and Paraguay); 2. when the importation of one or more goods from another ALADI country(ies) occurs in such quantities or in such a manner that it causes or threatens to cause grave harm to the national producers of similar or directly competitive products; or 3. when authorized by the Committee of Representatives to overcome chronic deficits arising from implementation of a preferential tariff agreement under the ALADI umbrella. When the decision to impose a safeguard measure is made, the relevant government should communicate this fact within seven working days to its fellow ALADI members through the Committee of Representatives so as to reach some sort of understanding that will limit any unnecessary prejudicial effects on intraregional trade flows. Safeguard measures should not be imposed for longer than one year and can be renewed for up to another year following notification and consultations within the Committee of Representatives. Safeguards can take the form of quotas (that can restrict importation of a product based on volume or value). In the case of a safeguard imposed for reasons other than to a balance of payment crisis, the preferential tariff arrangement should be preserved for the quantity imported within the quota limit. In the specific case of imports from the least-developed ALADI countries (i.e., Bolivia, Ecuador, and Paraguay), safeguards may only be imposed against their exports to the extent that there has been a determination that they are fundamentally responsible for actual harm to national production. If the decision is made to impose a safeguard against a culpable least-developed country, it cannot reduce the level habitually imported from that country.

28  •  Latin American and Caribbean Trade Agreements

V. Agreements Under the Latin American Integration Association Framework Article 4 of the Treaty of Montevideo of 1980 established three categories of agreements that were designed to be stepping stones to the eventual creation of a Latin American common market. These three categories of agreements are: 1. regional tariff preference agreements (which is the general tariff preference scheme agreed upon by all ALADI member states in Acuerdo Regional No. 4 and covers almost all the items found in the NALADISA); 2. regional accords (which require the participation of all the ALADI member states as per Article 6 of the Treaty of Montevideo); and 3. partial reach agreements (which are adhered to by less than the full membership of ALADI and are usually bilateral in nature). In addition to Acuerdo Regional No. 4, the general preferential tariff agreement that is valid for the entire ALADI membership, there are currently six other types of agreements included under the rubric of Regional Accords. These include three agreements in which the more-developed member states grant greater market access to each of the three least-developed members of ALADI (i.e., Bolivia, Ecuador, and Paraguay). There is also a Regional ALADI Agreement on Scientific and Technological Cooperation, a Regional Agreement on Cooperation and Exchange of Cultural, Educational and Scientific Material, and a Framework Agreement to Promote Trade through the Elimination of Technical Barriers to Trade. Included under the rubric of partial reach agreements are the ACEs, which are designed to systematically reduce tariffs across the board so as to eventually culminate in a free trade area among participating ALADI member states. In addition to the ACE, other partial reach agreements include: 1. the agreements that renegotiated the preferential tariff arrangements that had been previously set under the old ALALC of the 1960s (see Table 2.1); 2. commercial agreements designed to encourage the regional integration of specific industrial sectors and, in doing so, greater intraregional trade of the inputs used in these sectors10;    Article 11 of the Treaty of Montevideo viewed ACEs as trade agreements that would “promote maximum utilization of factors of production, stimulate economic complementation, insure equitable conditions of competition, facilitate the launching of products into the international market, and provide incentives for equitable and harmonious development among the member states.” As previously pointed out, one of the tasks of ALADI’s Evaluation and Convergence Conference is to ensure that those ACE that are bilateral or involve a small number of countries eventually encompass all the ALADI member states.    It is important to point out that many of the ALALC agreements were subsequently supplanted by new ACEs. 10   Article 10 of the Treaty of Montevideo called for the creation of commercial agreements between two or more ALADI members that are designed to encourage intra-regional trade in specific industrial sectors, especially with respect to inputs used in those industries. Out of the 27 that were signed during the 1980s, none are still in effect.

Latin American Integration Association  • 29

3. agreements designed to promote intra-ALADI trade by eliminating non-tariff barriers, harmonizing technical norms and rules with respect to the imposition of antidumping and countervailing duties, and facilitating the transport of goods (see Table 2.2); 4. agreements designed to encourage and streamline intra-ALADI trade in agro-industrial goods11; 5. non-commercial agreements intended to encourage regional cooperation on transportation issues, tourism, environmental protection, culture, communication, science and technology (see Table 2.3); and 6. trade agreements with non-ALADI countries of Latin America and the Caribbean. Table 2.1. Renegotiated ALALC Agreements Still in Effect Agreement No.

Signatories

Effective Date

Protocols

9

Brazil Mexico

April 30, 1983

Yes (2)

18

Colombia Paraguay

April 30, 1983

No

20

Paraguay Peru

April 30, 1983

No

21

Paraguay Venezuela

April 30, 1983

No

23

Colombia Uruguay

April 30, 1983

No

25

Uruguay Venezuela

Dec. 31, 1981

No

29

Ecuador Mexico

April 30, 1983

Yes (3)

33

Peru Uruguay

April 30, 1983

No

38

Mexico Paraguay

April 30, 1983

Yes (10)

11   Only three agreements survive under this category, pursuant to Article 12 of the Treaty of Montevideo. One is a 1984 agro-industrial agreement between Argentina and Uruguay. The other concerns the liberalization and expansion of intra-regional trade in seeds, signed by all the ALADI countries except Mexico. The third agreement establishes an Agro-Industrial Council of the South and was signed by the MERCOSUR countries plus Bolivia and Chile.

30  •  Latin American and Caribbean Trade Agreements

Table 2.2. Agreements to Promote Intra-ALADI Trade Currently in Effect Agreement

Signatories

Date of Execution

Protocols

Provision of Gas

Argentina Uruguay

January 31, 1992

No

Provision of Natural Gas

Bolivia Brazil

August 17, 1992

No

Recife Agreement on Integrated Border Control Measures

Argentina Brazil Paraguay Uruguay

May 18, 1994

Yes (3)

Intra-MERCOSUR Transport of Hazardous Cargo

Argentina Brazil Paraguay Uruguay

December 30, 1994

Yes (1)

Multi-Modal Transportation Contracts

Argentina Brazil Paraguay Uruguay

December 30, 1994

No

Energy Cooperation

Paraguay Uruguay

April 12, 1996

No

Energy Integration

Argentina Bolivia

February 16, 1998

Yes (1)

Framework Agreement to Overcome Technical Barriers to Trade

All ALADI Member States

December 8, 1997

No

Energy Cooperation

Argentina Peru

August 12, 1998

No

Phytosanitary Measures

Argentina Peru

August 12, 1998

No

Cooperation on Vegetable Sanitation & Quarantine

Argentina Peru

August 12, 1998

No

Latin American Integration Association  • 31

Table 2.2. Agreements to Promote Intra-ALADI Trade Currently in Effect (continued) Agreement

Signatories

Date of Execution

Protocols

Mutual Recognition of Technical Norm Certificates

Argentina Ecuador

September 7, 2001

No

Provision of Natural Gas

Bolivia Paraguay

March 15, 1994

No

Promotion of Bilateral Trade and Investment

Argentina Bolivia

April 21, 2004

Yes (3)

Customs Cooperation

Chile Peru

December 17, 2003

No

Framework Agreement on Regional Energy Cooperation

Argentina Brazil Chile Colombia Ecuador Paraguay Uruguay Venezuela

December 9, 2005

No

32  •  Latin American and Caribbean Trade Agreements

Table 2.3. Non-commercial Agreeements to Encourage Regional Cooperation Currently in Effect Agreement

Signatories

Date of Execution

Protocols

Tourism Promotion

Bolivia Uruguay

September 29, 1986

No

Exchange of Cultural, Educational, & Scientific Goods

All ALADI Members

October 27, 1988

Yes (1)

Uniform Rules on International Surface Transport

Argentina Bolivia Brazil Chile Paraguay Peru Uruguay

January 1, 1990

Yes (4)

Joint Actions to Promote South America as a Tourist Destination

Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela

August 30, 1990

Yes (1)

Legal Framework for Use of Paraguay-Parana River Network

Argentina Bolivia Brazil Paraguay Uruguay

June 26, 1992 (Entered into Force on February 13, 1995)

Yes (7)

Cooperation & Exchange of Goods to Protect the Environment

Argentina Brazil Uruguay

June 27, 1992

Yes (1)

Latin American Common Market for Books

Brazil Uruguay

December 30, 1992

No

Uniform Framework of Rules for International Vehicle Transit

Argentina Bolivia Brazil Chile Paraguay Peru Uruguay

September 29, 1992

No

Latin American Integration Association  • 33

Table 2.3. Non-commercial Agreeements to Encourage Regional Cooperation Currently in Effect (continued) Agreement

Signatories

Date of Execution

Protocols

Assignment & Use of TV Generating and Transmission Stations

Argentina Brazil Paraguay Uruguay

May 25, 1995

No

Surface Transport of Cargo Contracts & Civil Responsibility

Bolivia Brazil Chile Paraguay Peru Uruguay

August 16, 1995

No

Framework Agreement for a Free Trade Area Between MERCOSUR and the Andean Community

Argentina Bolivia Brazil Colombia Ecuador Paraguay Peru Uruguay Venezuela

April 16, 1998

No

Framework Agreement on Trade & Investment Between MERCOSUR and Central America Common Market

Argentina Brazil Costa Rica El Salvador Guatemala Honduras Nicaragua Paraguay Uruguay

April 18, 1998

No

Mining Cooperation

Argentina Ecuador

June 2, 1999

Yes (1)

Mining Cooperation & Integration

Argentina Peru

October 29, 1999

No

Surface Transport for Cargo & Passengers

Brazil Venezuela

July 4, 1995

No

Mining Cooperation

Chile Ecuador

August 26, 1999

No

34  •  Latin American and Caribbean Trade Agreements

VI. Agreements Between Latin American Integration Association Countries and Non-Member States in Central America and the Caribbean Article 25 of the Treaty of Montevideo of 1980 encourages ALADI countries to enter into trade agreements with non-member states (including economic blocs) in Central America and the Caribbean (including Guyana and Suriname in northern South America). As is true of the commercial agreements to permit trade in specific sectors (see Table 2.2), any preferential tariff arrangement that may be extended by a member state to a non-ALADI country is automatically extended to the three least-developed ALADI countries (i.e., Bolivia, Ecuador, and Paraguay) as well. Table 2.4 lists the current Article 25 agreements, including participating countries, the date the agreements came into force, and whether any protocols to the original agreements have been executed since their initial effective date. Interestingly, none of the free trade agreements that Chile and Mexico have signed with the Central American countries since the mid-1990s has ever been registered with the ALADI Secretariat, even though the free trade agreements technically should fall under Article 25. A. Colombia-Venezuela and Central American Agreement In February 1993 Colombia and Venezuela jointly signed an Agreement on Trade and Investment with the five Central American countries (i.e., Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua). In doing so, Colombia and Venezuela sought to replace their original limited preferential market access agreements with the Central American states from the 1980s with a more ambitious free trade agreement. In addition, the new agreement also sought to establish common rules to promote and protect investments among the signatory states. All the signatories to the agreement were supposed to have established a three-category tariff reduction program by June 30, 1993, which would be phased in so as to eliminate all duties on so-called category one goods imported into Colombia and Venezuela and originating in Central America by 1996. The Central Americans would eliminate all duties on Colombian and Venezuelan category one products by 1998. For category two products, the tariff reduction schedule would be phased in over five years on the part of Colombia and Venezuela and ten years by the Central American states. A third group of products (mostly agricultural goods) would be included in a tariff reduction schedule that would be implemented over an even longer period of time. Unfortunately, the negotiations to decide what goods would be included in what categories collapsed. Accordingly, only those portions of the agreement dealing with investment promotion and protection ever came into force. B. Caribbean Common Market and Community Preferential Market Access Agreements with Colombia and Venezuela Venezuela and the Caribbean Common Market and Community (CARICOM) signed a preferential tariff agreement on October 13, 1992, pursuant to Article 25 of the Treaty of Montevideo of 1980. As a result of this agreement, Venezuela granted immediate duty-free access to those products included in Annex I (i.e., mostly plants, foodstuffs, natural gas and petroleum derivatives, and consumer

Latin American Integration Association  • 35

Table 2.4. Commercial Trade Agreements Between ALADI Members and Central America/Caribbean Currently in Effect Agreement No. 5 6 7 8 9 14 16 20 22 23 24 25 26 27 29 31 36 37 38 41

Signatories Colombia Guatemala Colombia Nicaragua Colombia Costa Rica Colombia El Salvador Colombia Honduras Mexico Panama Venezuela Honduras Venezuela Trinidad & Tobago Venezuela Guyana Venezuela Guatemala Venezuela CARICOM Venezuela Nicaragua Venezuela Costa Rica Venezuela El Salvador Colombia Panama Colombia CARICOM Cuba Guatemala Mexico Guatemala Brazil Guyana Brazil Suriname

Effective Date March 1, 1984

Protocols Yes (1)

March 2, 1984

No

March 2, 1984

No

May 24, 1984

No

May 30, 1984

Yes (2)

May 22, 1985

Yes (1)

February 20, 1986

Yes (1)

August 4, 1989

Yes (1)

October 27, 1990

No

October 30, 1985

Yes (1)

October 13, 1992

No

August 15, 1986

Yes (1)

March 21, 1986

Yes (1)

March 10, 1986

Yes (2)

July 9, 1993

Yes (2)

July 24, 1994

Yes (1)

April 12, 2000

No

March 19, 2001

Yes (1)

July 8, 2004

Yes (4)

September 6, 2006

No

36  •  Latin American and Caribbean Trade Agreements

items) that originated in CARICOM. Goods found in Annex II (i.e., mostly seafood, vegetables, and certain meats and processed foodstuffs, jewelry, certain types of furniture, garments, machinery, as well as steel and iron products) would be subject to an annual 25 percent reduction in Venezuela’s tariff rates beginning on January 1, 1993, and culminating in zero by January 1, l996. Finally, Venezuela agreed to levy a MFN duty on CARICOM goods listed in Annex III. The only obligation on the CARICOM countries was to levy the MFN rate on all Venezuelan imports and ensure that they would never be subject to quota restrictions. On July 24, 1994, Colombia and CARICOM signed their own preferential tariff agreement pursuant to Article 25 of the Treaty of Montevideo. Colombia agreed to eliminate tariffs on products found in Annex I that originated in CARICOM as soon as the agreement came into force. Tariffs on goods listed in Annex II were to be reduced annually over a three-year period to eventually reach zero. Finally, yet another list of products found in Annex III were to receive preferential tariff treatment only after negotiations were concluded between CARICOM and Colombia sometime before the end of 1998. In recognition of CARICOM’s less-developed status, only Barbados, Guyana, Jamaica, and Trinidad and Tobago were required to begin eliminating tariffs on all goods imported from Colombia, but this obligation would not begin until 1998. With the exception of a significant increase in Venezuelan petroleum exports to CARICOM, neither the Colombian nor the Venezuelan agreements with CARICOM have, to date, produced significant increases in trade originating in either the Caribbean or in the two South American countries. In the particular case of Venezuela, its non-petroleum exports to CARICOM presently include small amounts of cement, steel, iron, paper and plastic products, and some foodstuffs (including beer). Venezuelan imports from CARICOM consist mostly of scrap and corrugated paper, spices, and pleasure boats. One of the biggest obstacles to increasing trade flows between the CARICOM countries and both Colombia and Venezuela is the current poor state of transportation links. Few shipping lines maintain regular service between either Colombia or Venezuela and most of the Caribbean islands. This is because the small size of many Caribbean markets makes it unprofitable for shipping lines to either launch direct services from South America to the Caribbean or to undertake regular calls at Caribbean ports on established routes between South and North America or South America and Europe. The limited, special services that do exist make shipping goods to and from the Caribbean very expensive. In addition, the small volumes of cargo do not justify container services (thereby increasing the possibility that goods will arrive at their final destination damaged). In late 1997, Colombia and Venezuela proposed that the bilateral preferential tariff arrangements with CARICOM be replaced by a more comprehensive free trade agreement with reciprocal obligations that would also include the remaining countries of the Andean Community. Although the negotiations for this new trade agreement were scheduled to begin by the end of 1998, this never happened.

Latin American Integration Association  • 37

VII. Latin American Integration Association Economic Complementation Agreements During the 1990s, the most noticeable phenomenon among the ALADI member states was the movement away from bilateral partial reach agreements— which only liberalized trade in a small number of goods—to more ambitious ACEs (see Table 2.5) that universally liberalized trade in goods and included additional disciplines such as cross-border trade in services. In addition, many of the new ACEs involved more than two countries. Concurrent with the adoption of these new type of ACE was a tendency to abandon ALADI’s standardized legal norms with respect to rules of origin and safeguard measures in favor of ones unique to the particular circumstances of the new trade agreements. This was true of ACE No. 14, the original MERCOSUR agreement between Argentina and Brazil, and the subsequent ACE No. 18, which added Paraguay and Uruguay to MERCOSUR. It has also been true of ACE No. 31 (i.e., the Bolivia-Mexico Free Trade Agreement), as well as ACE No. 33 (i.e., the G-3 Accord between Colombia, Mexico, and Venezuela). One feature that has been retained in the new ACE, however, is the standard ALADI accession clause, which opens possible future accession to any other ALADI member state. Perhaps the country that has been most aggressive in its use of ACEs to pursue free trade agreements with all of its ALADI partners is Chile. Chile has bilateral ACEs with Bolivia, Colombia, Ecuador, Mexico, Peru, and Venezuela. Although Chile has long proposed replacing it with a free trade agreement, ACE No. 22 with Bolivia only contains a limited number of products that can be traded at preferential tariff rates. Chile also has an ACE with MERCOSUR, which was preceded by a bilateral ACE that Chile and Argentina signed in 1991 (i.e., ACE No. 16). ACE No. 16 served as a catalyst for an explosion in Argentine-Chilean trade, which went from a mere U.S.$500 million in 1989 to over U.S.$2 billion by 1995. A significant portion of Chile’s exports to Argentina consisted of value-added products such as computer software and furniture. The main focus of the 1991 Argentine-Chilean ALADI agreement was, however, to encourage the private sector in each country to invest in the other and to promote infrastructural integration between the two neighbors. For example, by 1995 Argentina was the recipient of U.S.$5.5 billion worth of Chilean investments. Chilean holdings included two electricity distributors (Central Costanera and Central de Buenos Aires), a natural gas company (Enagas), Banco Transandino, supermarkets, and department stores. A. Chile-Mexico Free Trade Agreement The first Chile-Mexico Free Trade Agreement or ACE No. 17 was signed in Santiago in 1991. Beginning on January 1, 1992, the tariff levied on the majority of each country’s products was gradually reduced so that by January 1, 1996, most Chilean-Mexican trade was duty free. Non-tariff barriers were supposed to have been eliminated as of January 1, 1992, but this goal was slower to achieve. In February 1994, for example, Mexico imposed compensatory quotas on Chile’s significant fish meal exports. These were only removed in October of that year. A select group of products found in Annex 1 to ACE No.

38  •  Latin American and Caribbean Trade Agreements

Table 2.5. ACE Agreements Currently in Effect ACE No.

Signatories

Effective Date

Protocols

2

Brazil Uruguay

December 20, 1982

Yes (68)

6

Argentina Mexico

October 24, 1986

Yes (15)

8

Mexico Peru

March 25, 1987

Yes (9)

13

Argentina Paraguay

November 28, 1989

Yes (1)

14

Argentina Brazil

December 20, 1990

Yes (38)

15

Bolivia Uruguay

April 12, 1991

No

16

Argentina Chile

August 2, 1991

Yes (27)

18

Argentina Brazil Paraguay Uruguay

November 29, 1991

Yes (67)

19

Argentina Bolivia

April 28, 1992

No

22

Bolivia Chile

April 6, 1993

Yes (16)

23

Chile Venezuela

April 2, 1993

Yes (3)

24

Chile Colombia

January 1, 1994

Yes (8)

26

Bolivia Brazil

January 27, 1994

No

27

Brazil Venezuela

July 15, 1994

Yes (4)

28

Ecuador Uruguay

May 1, 1994

No

29

Bolivia Paraguay

March 15, 1994

No

Latin American Integration Association  • 39

Table 2.5. ACE Agreements Currently in Effect (continued) ACE No.

Signatories

Effective Date

Protocols

30

Ecuador Paraguay

September 15, 1994

No

31

Bolivia Mexico

September 10, 1994

No

32

Chile Ecuador

January 1, 1995

Yes (5)

33

Colombia Mexico Venezuela

June 13, 1994

Yes (7)

35

MERCOSUR Chile

September 30, 1996

Yes (51)

36

MERCOSUR Bolivia

February 28, 1997

Yes (25)

38

Chile Peru

July 1, 1998

Yes (2)

39

Brazil Colombia Ecuador Peru Venezuela

August 12, 1998

No

40

Cuba Venezuela

July 28, 2001

Yes (3)

41

Chile Mexico

April 17, 1998

No

42

Chile Cuba

December 20, 1999

Yes (1)

43

Brazil Cuba

December 22, 1999

No

44

Cuba Uruguay

December 22, 1999

Yes (2)

45

Argentina Cuba

December 21, 1999

Yes (8)

46

Cuba Ecuador

May 10, 2000

Yes (1)

47

Bolivia Cuba

May 8, 2000

Yes

40  •  Latin American and Caribbean Trade Agreements

Table 2.5. ACE Agreements Currently in Effect (continued) ACE No.

Signatories

Effective Date

Protocols

48

Argentina Colombia Ecuador Peru Venezuela

June 29, 2000

No

49

Colombia Cuba

September 15, 2000

Yes (2)

50

Cuba Peru

October 5, 2000

No

51

Cuba Mexico

October 10, 2000

Yes (2)

52

Cuba Paraguay

November 20, 2000

No

53

Brazil Mexico

May 2, 2003

Yes (3)

54

Argentina Brazil Mexico Paraguay Uruguay

January 5, 2006

No

55

Argentina Brazil Mexico Paraguay Uruguay

January 1, 2003

Yes (6)

56

Argentina Bolivia Brazil Colombia Ecuador Paraguay Peru Uruguay Venezuela

N/A

No

57

Argentina Uruguay

May 1, 2003

Yes (2)

Latin American Integration Association  • 41

Table 2.5. ACE Agreements Currently in Effect (continued) ACE No.

Signatories

Effective Date

Protocols

58

Argentina Brazil Paraguay Peru Uruguay

December 12, 2005 through February 6, 2006

Yes (4)

59

Argentina Brazil Colombia Ecuador Paraguay Uruguay Venezuela

January 5, 2005 through April 19, 2005

Yes (7)

60

Mexico Uruguay

July 15, 2004

No

62

Argentina Brazil Cuba Paraguay Uruguay

January 15, 2007 through August 8, 2007 For Paraguay & Uruguay: N/A

No

63

Uruguay Venezuela

No

17, including chemicals, glass, ceramics, textiles, wood, and poultry were not scheduled to receive complete free trade treatment until January 1, 1998. By January 1, 1996, ACE No. 17 had eliminated all duties and non-tariff restrictions on the bilateral trade of passenger cars, vans, and trucks made in either Chile or Mexico and traded between them. By January 1, 1998, some 80 percent of all goods exchanged between Mexico and Chile were traded free of all tariff barriers and non-tariff restrictions. Of the 20 percent of goods that did not receive free trade treatment, the most significant were Chilean seafood, tobacco, and certain petroleum products such as gasoline and natural gas. For their part, the Chileans continued to impose tariffs on certain types of petroleum products imported from Mexico. In April 1998 the Chilean and Mexican governments signed a new, more expansive free trade agreement during the II Summit of the Americas in Santiago. The new Chile-Mexico Free Trade Agreement was incorporated into the ALADI framework as ACE No. 41 and superseded ACE No. 17 to the extent there were any discrepancies between the two treaties. Otherwise, the provisions and obligations of the earlier ACE remained in effect. The new bilateral agreement was very similar to NAFTA, including the fact that its text was divided into some

42  •  Latin American and Caribbean Trade Agreements

20 chapters. Unlike NAFTA, however, ACE No. 41 initially did not have any chapters covering financial services and government procurement. A chapter on government procurement was not added until August 2007. Another major difference from NAFTA was that within a year after their new bilateral free trade agreement came into force, the Chilean and Mexican governments were supposed to negotiate an end to using antidumping duties on their reciprocal trade (something that has yet to occur, although not for lack of trying on the part of the Chileans). When ACE No. 41 came into force, any products not already subject to bilateral free trade were accorded immediate duty-free treatment. The exceptions to this general rule were few and included apples (which were subject to quotas and gradually decreasing tariffs until 2006), certain Mexican seafood, grapes, vegetable-based oil, petroleum, and natural gas, as well as Chilean powdered milk, cheese, flour, gasoline, and natural gas. In addition, both countries continued to prohibit the importation of used vehicles, and Mexico could restrict the importation of used machinery and computer equipment until 2004. The rule of origin requirements in ACE No. 41 contain the same level of complexity as found in NAFTA and incorporate the concepts of transaction value and net cost methodologies in determining the regional content value of goods, as well as de minimis exceptions. There are also specific rules of origin for certain products. As soon as their latest agreement came into force on August 1, 1999, all goods traded between Chile and Mexico had to be accompanied by a new declaration and certificate of origin opposed to the standard ALADI form. During a product’s transition to free trade, safeguard measures could be imposed that included the suspension of a tariff reduction schedule as well as increases in duties to the levels in effect before the agreement’s entry into force. Chapters 7 and 8 of ACE No. 41 cover the rules for establishing and enforcing sanitary and phytosanitary measures as well as technical norms. In general, sanitary and phytosanitary measures should be based on scientific principle and should not be used as a disguised form of protectionism. Chile and Mexico should also, to the extent possible, mutually accept the equivalency of their respective sanitary and phytosanitary norms. As a general rule, technical norms should conform to international standards and should not create a greater barrier to trade than is necessary to fulfill a legitimate objective. Chile and Mexico made a commitment to collaborate in ensuring the compatibility of their technical standards. Chapter 9 of ACE No. 41 covers the rules affecting investment by the nationals of one country in the territory of the other, including issues related to expropriation and the resolution of disputes that may arise between a private sector investor and a government. As was true of the 1996 Canada-Chile Free Trade Agreement, the Chileans were able to maintain requirements that Mexican (as well as other foreign) investors had to keep their initial investment capital in Chile for at least one year before they could repatriate it, as well as a withholding rule that required that 30 percent of any loan made to a

Latin American Integration Association  • 43

Chilean entity by a Mexican (or other foreign bank for that matter) had to be deposited with the Central Bank of Chile. The requirement on keeping investment capital in Chile for up to a year was suspended in 2000, while the withholding rule was suspended in 1998. Chapter 10 contains the specific rules for the offering of services by the nationals of one country in the territory of the other. Among the restrictions retained was one that only allowed Chilean lawyers to perform legal services in Chile and another that required the owners and directors of a Chilean-based newspaper, magazine, or newsletter to be Chilean nationals actually domiciled in the country. For their part, the Mexicans maintained restrictions by Chileans on the ownership of agricultural land and property within 100 kilometers of a border or 50 kilometers in from the sea, as well as ownership of television and radio broadcasting firms. In addition, various activities were reserved for the state in both countries (e.g., offering postal services), and the Mexican state also retained the exclusive right to exploit, transport, store, distribute, and sell crude oil, artificial gas, and basic petrochemicals and to generate, distribute, and sell electricity, as well as to print money. Chapter 11 of ACE No. 41 codifies within the body of the treaty itself the bilateral Convention on Air Transport that Chile and Mexico signed on January 14, 1997. Chapter 12 of ACE No. 41 contains the rules for opening up access to the public telecommunication networks and services, the offering of value added services (such as cable or Internet access), and the harmonization of technical norms in the telecommunications sector. Chapter 13 governs the temporary entry of businessmen of one country into the territory of the other, while Chapter 14 covers the rules that state entities and monopolies should follow so as not to impose unfair restraints on trade. Chapter 15 of ACE No. 41 contains the minimal obligations that Chile and Mexico must provide in order to offer an adequate and effective protection of intellectual property rights (which the parties are free to make more stringent in the future). Among the specific requirements is that each country treat computer programs as literary works protected under their respective copyright laws, that infringement of program carrying satellite signals be punished with civil penalties, and that Chile revamp its trademark law within five years after the trade agreement’s entry into force. In Chapter 16 of ACE No. 41, Chile and Mexico obligated themselves to establish an information center and undertake various initiatives to make the contents of the agreement known to their respective nationals. Chapter 17 creates various institutions and subcommittees to oversee the proper implementation of the provisions and objectives of the Chile-Mexico Free Trade Agreement. In general, disputes that may arise between Chile and Mexico over different interpretations of the provisions and obligations arising under ACE No. 41 are to be resolved by the dispute resolution mechanism found in Chapter 18. For its part, Chapter 19 contains specific reservations each government retained, including the right to restrict the future transfers of capital abroad in the

44  •  Latin American and Caribbean Trade Agreements

event of a serious balance of payment crisis and following notification to the International Monetary Fund (IMF). B. Chile-Venezuela Free Trade Agreement The Chile-Venezuela Free Trade Agreement or ACE No. 21 was signed in April 1993. The agreement took effect on July 1, 1993. On that date all non-tariff barriers were supposed to have been eliminated, and the first of five annual reductions in tariffs occurred, which culminated in the elimination of all tariffs on January 1, 1997. There was a slower tariff reduction plan for approximately 300 items found in Annex 1 to ACE No. 21, which included pork, poultry, agricultural staples like rice and beans, tobacco, paper products, and steel. Tariffs on these items were not fully eliminated until January 1, 1999. Among the more significant goods permanently excluded from the bilateral free trade scheme of ACE No. 21 were Chilean lactate products, wheat, vegetable-based oils, sugar, tobacco, petroleum products including gasoline, and certain types of wood. Special permission also had to be sought from the relevant Venezuelan government ministry before such Chilean goods could enter Venezuela, even upon payment of the relevant tariff. With the exception of the automotive sector (which has its own rules of origin), the rules found in ALADI Resolution 78 (and later replaced by Resolution 252) are applicable to ACE No. 21. Nothing prevents new rules of origin different from the ALADI rules being formulated for specific products or sectors. Unlike the first Chile-Mexico Free Trade Agreement (see Section VII.A), which required a four-year waiting period, the Chile-Venezuela accord granted immediate free trade treatment to passenger cars, vans, and trucks effective July 1, 1993. In order to partake of the bilateral free trade arrangement, no more than 65 percent of the FOB price of the finished Venezuelan- or Chileanmade vehicle can reflect the CIF value of foreign inputs. Auto parts, on the other hand, follow the general tariff reduction schedule and must meet the ALADI rules of origin now found in Resolution 252. The safeguard mechanisms in ACE No. 21 are similar to those set out in ALADI Resolution 70. As is true of the Chile-Mexico Free Trade Agreement, Chapter VI of ACE No. 21 allows Chile and Venezuela to use their own internal domestic legislation in response to dumping or other unfair trading practices such as subsidized exports. Chile and Venezuela also agree not to adopt socalled public pricing practices and policies that can distort trade. The Chile-Venezuela accord required that an Administrative Commission address issues such as the implementation of uniform rules on access to government procurement opportunities, uniform rules on technical norms, mutual promotion of trade and investment among each country’s nationals in the other country’s economy, and the opening up of the services industry to bilateral competition. Both countries also pledged to open up their maritime and air transport sectors to bilateral competition. As of mid-2008, however, there has been no progress on these issues. Interestingly, Article 36 of ACE No. 21 called for the gradual implementation of rules affecting the free movement

Latin American Integration Association  • 45

of labor between Chile and Venezuela, particularly in the services sector. No timetable was set for implementing this provision, however, and there has been no further discussion of the issue since the agreement was signed in 1993. Article 31 to ACE No. 21 establishes a dispute resolution mechanism to resolve differences in the interpretation of provisions of the Chile-Venezuela Free Trade Agreement as well as non-compliance with its obligations. Disputes should first be resolved by the corresponding agencies of each country entrusted with this task, and if no resolution can be reached within 15 days, the matter should be referred to the Administrative Commission. If a decision cannot be made by the Commission within 30 days, the matter is referred to a three-person arbitration panel made up of one expert from each country and a presiding arbitrator from a neutral, third country. The arbitration panel has 30 days (which can be extended for another 30 days) to make a final decision that cannot be appealed. C. Chile-Colombia Free Trade Agreement The Chile-Colombia Free Trade Agreement or ACE No. 24 was signed in December 1993. When it took effect on January 1, 1994, each country began to gradually reduce its tariffs on bilateral trade. By January 1, 1997, duties and non-tariff restrictions were removed on the majority of goods traded between Chile and Colombia. A second group of products included in Annex No. 1 to ACE No. 24 did not receive free trade treatment until January 1, 1999. These goods included certain agricultural products, poultry, petrochemicals, most paper products, most types of wire, and textiles. Among the more important items found in Annex No. 3 of ACE No. 24, which the Colombians originally excluded from free trade treatment, were Chilean copper, flour, lactate products, turkeys, and wheat. For their part, the Chileans permanently barred certain types of Colombian textiles, rice, sugar, and tobacco products from duty-free treatment. In August 1997 Chile and Colombia signed a protocol to ACE No. 24, which gradually phased out the duties on the goods included in the Annex 3 list of exceptions. ALADI Resolution 78 (since replaced by Resolution 252) provides the rule of origin requirements for goods (except for the automotive sector) that can benefit from the Chile-Colombia Free Trade Agreement. The Administrative Commission established to oversee implementation of ACE No. 24 is also given the authority to create new rules of origin different from the ALADI rules. All goods from countries wishing to partake of the bilateral free trade regime must be accompanied by a certificate of origin that the final producer or exporter obtains from a government-authorized entity. Chilean- or Colombian-made vehicles for the transport of passengers and cargo have been traded between the two countries free of duties and nontariff barriers since January 1, 1994, so long as no more than 60 percent of the finished vehicle’s FOB price reflects the CIF value of inputs not produced in either Chile or Colombia. Chilean- and Colombian-made auto parts are also subject to bilateral free trade treatment as long as they meet the general rule of origin requirements found in ALADI Resolution 252.

46  •  Latin American and Caribbean Trade Agreements

The safeguard mechanisms in ACE No. 24 are the same as those set out in ALADI Resolution 70. Chapter VI of ACE No. 24 allows each country to resort to its own internal domestic legislation in response to dumping or other unfair trading practices such as subsidized exports. Chile and Colombia also agree not to adopt so-called public pricing practices and policies that can distort trade. As is true of the other Chilean bilateral free trade accords under ALADI, ACE No. 24 requires that the signatory states establish open, transparent, equitable, and competitive rules with respect to government procurement opportunities, and each country agrees to promote trade and investment opportunities by their respective nationals in the other’s economy. In particular, Article 22 requires that each government ensure that its foreign direct investment laws provide for national or MFN treatment to investments originating from the other country. Chile and Colombia also commit themselves to adopt an open air and seas transport policy, which will benefit companies from both countries, and to harmonize their respective economic policies. Furthermore, both governments commit to making any changes that may be necessary to their respective national legislation in order to adequately protect intellectual property rights. An Administrative Commission set up under ACE No. 24 is authorized to harmonize technical norms that exist in Chile and Colombia so that they do not become unnecessary impediments to bilateral free trade. The Administrative Commission was also entrusted with the task of devising rules to facilitate the offering of services by their respective nationals in the territory of the other and with establishing new rules affecting access to government procurement opportunities. The Administrative Commission is headed by the Chilean Minister of Foreign Relations and the Colombian Minister of Foreign Trade. One interesting item included as Annex 6 to ACE No. 24 is a Convention on Cooperation and Coordination in Matters Affecting Agro-industrial Sanitary Codes. The idea behind the convention is to prevent the use of sanitary and phytosanitary rules from being unfairly used to create new, artificial barriers to free trade. In particular, the treaty seeks to harmonize the testing and inspection of animals, plants, and derivative products, and promote the exchange of information and personnel. It also enhances Chilean-Colombian cooperation to prevent the spread of pestilence and plague. Any sanitary or phytosanitary measure adopted must be on the basis of scientific principle and an evaluation of the risks. Article 32 to ACE No. 24 establishes a dispute resolution mechanism to resolve differences in the interpretation or application of provisions of the ChileColombia Free Trade Agreement as well as non-fulfillment of its obligations. Conflicts arising from the imposition of unfair trade practice remedies cannot, however, be referred to the dispute resolution system. The governments are required as a first step to resolve any disputes through negotiations. If no resolution can be reached within 20 days, the matter should be referred to the Administrative Commission. If a decision cannot be made by the Administrative Commission within 30 days, the matter is referred to a three-person arbitration

Latin American Integration Association  • 47

panel made up of one expert from each country and a presiding arbitrator from a neutral, third country. The arbitration panel has 30 days (which can be extended for another 30 days) to make a final decision, which cannot be appealed. In October 2006 the governments of Chile and Colombia initiated negotiations to substitute ACE No. 24 with a more comprehensive free trade agreement that will include detailed provisions on cross-border trade in services, government procurement, investment, environmental protection, and effective enforcement of intellectual property rights. D. Bolivia-Mexico Free Trade Agreement The Bolivia-Mexico Free Trade Agreement or ACE No. 31 came into force on September 10, 1994. The agreement bears a remarkable similarity to NAFTA in terms of the type and scope of disciplines included that went well beyond a traditional ACE. Given the fact that trade between Bolivia and Mexico was negligible prior to the signing of their free trade agreement, and remains so even today, it appears that it was signed primarily for political reasons. One humorous anecdote connected to the agreement serves to further underscore this point. In the mid-1990s, representatives of the U.S. Patent and Trademark Office (PTO) visited their counterparts in La Paz to discuss what the Americans considered shortcomings in Bolivia’s intellectual property laws. When the Bolivians objected to suggestions by the PTO that they make certain changes to their legislation, the Bolivians claimed this could not be done because it would violate Bolivia’s commitments to the Andean Community. The Bolivian intellectual property personnel, when it was pointed out to them by their American counterparts, were then shocked to discover that their government had already agreed to do precisely what the PTO was suggesting in ACE No. 31! The bulk of non-agricultural tariff lines (i.e., 75 percent of Bolivian tariff lines into Mexico, 67 percent of Mexican tariff lines into Bolivia) received immediate duty-free treatment when ACE No. 31 came into force. The remainder of products reached zero within three to nine years thereafter, while a very small number (mostly pharmaceuticals) did not reach zero until 11 years after ACE No. 31 came into effect. Although most agricultural goods were subject to an annual tariff reduction schedule that would culminate at zero by January 1, 2004, Mexico was allowed to permanently exclude just under 200 tariff lines while Bolivia could do the same for approximately 140 agricultural tariff lines found in the Annex to Article 4-04. While ACE No. 31 called for future negotiations to eliminate these exemptions, as of mid-2008 this had not happened yet. Bolivia also retained the right to apply the Andean price band mechanism on some 150 basic foodstuffs. The rules of origin give preference in ACE No. 31 to a change in tariff classification heading for third country inputs over the local content requirement option. The local content is calculated at 50 percent, in the event the transaction value methodology is used, or 41.66 percent, if net cost is utilized. Net cost is limited to calculating the origin of automobiles, intra-company sales, or when

48  •  Latin American and Caribbean Trade Agreements

the value cannot otherwise be adequately determined if the transaction value method is employed. There are also special rules of origin for certain products that require specific inputs to be sourced in either Bolivia or Mexico, regardless whether there is a substantial transformation or the local content percentage is met. In addition, the textiles for most clothing must be cut or knit to shape in either Bolivia or Mexico, and the yarn to make the textiles must be spun in either Bolivia or Mexico. There is, however, a 7 percent de minimis exclusion for non-originating fiber and thread. All goods from countries wishing to partake of duty-free treatment must be accompanied by a certificate of origin that the exporter or final producer was required (at least until 2000) to validate with the entity approved by the exporting country. Safeguard measures can be used on bilateral trade only during the transition period to free trade of a particular product and only in response to actual or threatened grave harm to national production of the same or a similar product that is directly competitive. Safeguards may remain in place for a maximum of one year and can be extended for another year only. Safeguards are limited to tariffs and cannot be higher than MFN duties levied on third-country exports or those levied on the partner’s exports prior to when ACE No. 31 took effect (which is lower). There is also the requirement that the government imposing the safeguard offer the other country some type of mutually agreed upon compensation in terms of increased market access for another product. With ACE No. 31’s entry into force, a general prohibition was imposed on exporting subsidized goods to the other partner (including agricultural exports). On the other hand, Bolivia and Mexico were allowed to continue any domestic agricultural support payment programs, so long as these complied with World Trade Organization (WTO) obligations. In addition, no prohibition was imposed on the use of antidumping or countervailing duties on bilateral trade, so long as their imposition complied with relevant WTO obligations. However, an option was offered for both governments to reach a mutually acceptable compromise prior to the initiation of a formal investigation into allegations of dumping or subsidized exports. ACE No. 31 allowed either government to request consultations with the other in the event complications arise with respect to the enforcement of sanitary or phytosanitary measures. Disputes can also eventually be referred to the general dispute resolution mechanism. The adoption of new sanitary and phytosanitrary measures requires 60 days’ advance notice for review and comment by the other government. The enactment of new sanitary and phytosanitary measures must be based on scientific principles and following an appropriate evaluation of the potential risks and benefits. There are advance notice requirements for the adoption of new, or the modification of existing, technical norms. There is also a national treatment obligation with respect to technical norms affecting packaging, grading, quality, and measurements. As a general rule, technical standards should be based on international norms, should be rigorously evaluated to ensure they respond to a precise risk, and both governments should make a commitment

Latin American Integration Association  • 49

to harmonize and/or mutually recognize technical norms and evaluation conformity procedures. The only services that Bolivian firms may not offer in Mexico and vice versa are those related to the provision of air transportation and those left to government prerogative. There is a separate chapter on access to public telecommunication networks by service providers from the other country who wish to offer value-added services. In this regard, Article 10-06 prohibits either government from abusing the state monopoly ownership of telecommunication services and networks to interfere with the ability of private sector companies or individuals from the other country to sell telecommunication equipment or offer value added services such as cable TV, the Internet, or mobile telephony. There is also a separate chapter in ACE No. 31, which deals exclusively with financial services. The number of service providers from the other country that could offer their services in the territory of the other was to be negotiated in biannual rounds (although as of mid-2008 there is no indication that this ever happened). There are rules on the temporary entry of businesspeople (broadly defined as service providers, investors, and employees of crossborder service providers) into the territory of the other. There is a general prohibition on local presence requirements for cross-border service providers, as well as nationality or residency requirements as a prerequisite to obtaining a professional license. Bolivian firms must be allowed to participate in Mexican government procurement bids at the federal and state level that involve purchases of goods and services in excess of U.S.$50,000 or construction projects in excess of U.S.$6.5 million. If the goods or services are being purchased by a state enterprise, the minimal amount is U.S.$250,000. Similarly, Mexican firms can participate in government bidding contests for goods and service at the national and departmental level in Bolivia, although the threshold amounts are initially higher. In addition, Bolivia reserved the right to set aside 5 percent of government procurement opportunities for goods or services to Bolivian firms. Bolivian investments in Mexico and vice versa are subject to the principles of national and MFN treatment. The definition of an investment includes the cross-border transfer of capital for purposes of making a profit as well as participation in or outright ownership of a business (but not capital and interest on short-term financing loans or on money lent to state enterprises). Article 15-05 prohibits conditioning acceptance of cross-border investment on compliance with export performance criteria, mandated use of domestic inputs, local purchase of services, technology, or personnel transfer, or exclusivity arrangements. Article 15-06 prohibits requiring that management of the foreign firm be nationals of the country wherein it is operating. Article 1508 requires unhindered transfer abroad of all investment related movements of capital, including profits, dividends, interest, technical assistance fees, and royalty payments in the currency of choice. Temporary exchange controls are only permitted in response to a balance of payment crisis. Article 15-09 contains detailed rules on expropriation and just compensation. Investor-state disputes are resolved through consultations, as a first step, and then binding

50  •  Latin American and Caribbean Trade Agreements

arbitration using rules established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention; done at Washington, DC, on March 18, 1965),12 the United Nations Commission on International Trade Law (UNCITRAL) Rules on International Commercial Arbitration and Conciliation,13 or the Inter-American Convention on International Commercial Arbitration (signed in Panama on January 30, 1975).14 Article 15-14(2) prohibits Bolivia or Mexico from eliminating or exempting investors from compliance with environmental laws as a way to attract foreign investment. There is also a commitment by both countries to adhere to the recommendations of the United Nations and provisions found in international environmental treaties to which they are signatories. Bolivia and Mexico are required to ratify a number of international intellectual property treaties (if they have not already done so) or at least adhere to their substantive provisions. Copyrights must be protected for the life of the author plus 50 years. Software and data compilation must be protected as well. Marks are broadly defined to include service and collective marks, and ACE No. 31 provides protection for so-called well known marks. A service or product with a mark registered in both Bolivia and Mexico cannot be exported from one to the other, unless the mark holder specifically authorizes such a transaction. Protection of geographical name indicators is recognized as are industrial or business secrets as well as test data, which must be revealed in order to obtain approval to sell a pharmaceutical or agro-chemical product. Bolivia specifically commits itself not to permit the domestic sale of alcoholic beverages denominated “tequila” or “mescal” unless it is made in Mexico. Article 16-07 allows the Bolivian and Mexican governments to consider the negative impact on free competition that may result from an intellectual property rights licensing agreement. Pursuant to Article 16-32, the Bolivian or Mexican governments can override patent protection in response to a national emergency or for the public good but only if the patent holder has unreasonably refused to grant a license. Article 16-40 includes a detailed list of civil and administrative procedures for enforcing intellectual property rights, including payment of adequate compensation that may include attorneys’ fees. Article 16-41 contains a list of preliminary measures that government authorities can take to prevent the infringement of intellectual property rights, while Article 16-43 details the types of border measures that may be utilized to enforce the protection of intellectual property rights. Article 16-43(15) contemplates cases where a government may order its customs service to suspend the entry process of goods suspected of infringing on intellectual property rights. Article 16-42 contains criminal procedures and sanctions for violations of intellectual property rights (including the destruction of infringing goods). 12   ICSID is the International Center for the Settlement of Investment Disputes. The full text of the ICSID Convention is available at http://icsid.worldbank.org/ICSID/ICSID/ RulesMain.jsp. 13   The full text of UNCITRAL’s Rules on Commercial Arbitration and Conciliation is available at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration.html. 14   The full text of the Inter-American Convention on International Commercial Arbitration is available at http://www.sice.oas.org/dispute.comarb/iacac/iacac2e.asp.

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Any disputes arising from “the application or interpretation” of the provisions of ACE No. 31 or when one government feels the other has implemented measures that are incompatible with its obligations or otherwise undermines benefits established under ACE No. 31, can be referred to the agreement’s dispute resolution system. The three-level state-to-state dispute resolution system consists of initial consultations, followed by referral to the Administrative Commission created to oversee implementation of the free trade agreement, and finally arbitration. If the dispute cannot be resolved within 45 days after consultations are initiated, the matter must be referred to the Administrative Commission, which is authorized to convene a panel of technicians or experts to assist it in formulating a recommendation to resolve the dispute. If it too cannot resolve the dispute, it will be referred to a five-person panel of arbitrators who must be specialists or experienced “in law, international trade, other matters related to this Treaty, or in the resolution of disputes arising under international trade agreements.” The panel should ideally issue a set of initial recommendations within 90 days. This should allow for a month of discussions with the parties to the dispute, and then issuance of a final decision. Failure to adhere to a final decision allows the aggrieved party to impose retaliatory measures that are equivalent to the harm suffered. The panel plays no subsequent role once it issues its final decision, however, in terms of determining whether the retaliatory measures are commensurate with the damage inflicted. E. Chile-Ecuador Free Trade Agreement The Chile-Ecuador Free Trade Agreement or ACE No. 32 became effective on January 1, 1995. On that day, goods found in Annex 1 to ACE No. 32 could henceforth be traded among both countries free of all tariff and non-tariff barriers. These were goods that had already been subject to a previous ALADI preferential tariff arrangement between Chile and Ecuador. Among the items subject to immediate duty-free treatment were seafood, fruits, wine, tobacco, and film. The tariffs on most of the other products (e.g., the vast majority of agricultural tariff lines) traded between Chile and Ecuador were gradually reduced on an annual basis so as to be completely eliminated by January 1, 1998. A limited amount of goods, found in Annex 2 to ACE No. 32, were accorded a more gradual reduction in duty rates and did not reach the 0 percent level until January 1, 2000. These goods included soluble coffee, certain chemicals, and shoes. Finally, some 238 tariff lines were completely excluded from the bilateral free trade scheme (i.e., certain kinds of meat, poultry, lactate products, corn, rice, seeds, vegetable oils, as well as petroleum products). In 2004 oil was removed from this list of exceptions. The rules of origin for determining what goods can be traded between Ecuador and Chile duty free are found in ALADI Resolution 78 (since replaced by Resolution 252). Both countries also gave the Administrative Commission overseeing implementation of ACE No. 32 the right to modify or set new rules of origin for specific products or services as the need may arise. All goods from countries that wish to partake of free trade must be accompanied by a certificate of origin, which it is the responsibility of the final producer and/or exporter to obtain from government-authorized entities.

52  •  Latin American and Caribbean Trade Agreements

The automotive and auto parts sector is subject to its own set of requisites with respect to the gradual elimination of tariffs. Automobiles also have their own rules of origin. Auto parts are subject to the general ALADI rules of origin regime. As of January 1, 1997, there has been complete free trade in passenger cars, buses and trucks, and auto parts traded between Chile and Ecuador. In order for automobiles and trucks to be traded between the two countries dutyfree, however, no more than 65 percent of a vehicle’s final FOB price can reflect the CIF price of third-country inputs. The ALADI safeguard clause found in Resolution 70 is applicable to ACE No. 32. Chapter VI of ACE No. 32 allows Chile and Ecuador to use their respective domestic legislation in response to dumping or other unfair trading practices such as subsidized exports. There is a requirement that both governments must consult with each other prior to initiating an unfair trade practice investigation. Antidumping or countervailing duties cannot be imposed without first conducting an investigation that establishes significant prejudicial effect or an important threat of harm to local production. Any additional duty imposed should not exceed the difference between the accepted market price and the alleged dumping price or the paid subsidy and, in general, should conform to WTO obligations. Chile and Ecuador also agree not to adopt socalled public pricing practices and policies that can distort trade. Chile and Ecuador also pledge to mutually encourage trade and investment by their respective nationals in the other’s economy. An Administrative Commission is established pursuant to Article 33 of ACE No. 32 and is authorized to oversee implementation of the agreement. Among the Administrative Commission’s specific functions is the obligation to insure that the technical norms of Chile and Ecuador do not serve as non-tariff barriers to free trade and to draft a protocol regarding the opening up of the services sector to bilateral free trade and another on government procurement. As of mid-2008, neither protocol had yet been formulated. Pursuant to Article 23 of ACE No. 32, Chile and Ecuador commit themselves not to use sanitary and phytosanitary regulations as non-tariff barriers to free trade and, for this purpose, both countries signed the Convention on Cooperation and Coordination in Matters Related to Agro-Industrial Health (which was incorporated as a protocol to ACE No. 32). The treaty commits both governments to exchange information and personnel involved in formulating sanitary and phytosanitary rules. There are also commitments to harmonize and/or mutually recognize sanitary and phytosanitary measures. Pursuant to Article 27 of ACE No. 32, Chile and Ecuador agree to adopt an “open skies” and an “open seas” policy for each other’s firms. In particular, Ecuador grants Chilean shipping lines the same rights of exclusivity to transport petroleum that Ecuador may have granted to other countries or blocs of countries (such as the Andean Community). Under Article 29, Chile and Ecuador agree to increase cooperation in the scientific and technology fields, expanding on the Basic Convention on Scientific and Technological Cooperation both countries signed in 1993. Finally, Article 37 requires that both

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countries implement domestic legislation that adequately protects intellectual property rights. Article 32 of ACE No. 32 establishes a dispute resolution mechanism to resolve differences in interpretation or application of the provisions of the Chile-Ecuador Free Trade Agreement as well as non-fulfillment of obligations. Conflicts over the imposition of antidumping and countervailing duties, however, cannot be referred to the dispute resolution system. The disputes should first be resolved by the corresponding agencies of each country entrusted with this task. If no resolution can be reached within 20 days, the matter should be referred to the Administrative Commission. If a decision cannot be made by the Commission within 30 days, the matter is referred to a three-person arbitration panel made up of one expert from each country and a presiding arbitrator from a neutral, third country. The arbitration panel has 30 days (which can be extended for another 30 days) to make a final decision. This decision cannot be appealed. F. G-3 Accord Between Colombia, Mexico, and Venezuela 1. Introduction The Group of Three or G-3 Accord was an outgrowth of the Contadora Peace Process of the mid-1980s. At that time, Colombia, Mexico, and Venezuela, joined by Costa Rica, sought to bring an end to the civil wars then raging in El Salvador, Guatemala, and Nicaragua. The first suggestion of establishing a free trade area among Colombia, Mexico, and Venezuela came up at a regional presidential summit held in Tuxtla Gutierrez, Mexico, in 1989.15 In 1992 the three countries agreed to establish a tripartite free trade area that would take effect on January 1, 1993. After a number of delays occasioned by, among other things, the forced resignation of President Carlos Andres Perez in Venezuela in 1993 and the severe economic crisis his successor Rafael Caldera had to confront shortly after his inauguration in 1994, the starting date for the G-3 Accord was delayed until January 1, 1995. Of the many economic integration projects that appeared in Latin America in the 1990s, the G-3 Accord, along with the Bolivia-Mexico Free Trade Agreement, were among the first that were most compatible with NAFTA. In fact, many of the provisions of the G-3 Accord are almost identical to those found in NAFTA. The explanation for this was not merely coincidental, but rather an intentional strategy devised by the Colombians and Venezuelans to facilitate their eventual incorporation into NAFTA. This intention is underscored by the fact that Article 23-05 of the G-3 Accord states that the agreement has a maximum life of three years. Only at the end of that time period would the treaty become indefinite in duration, if it had not already been superseded or rendered superfluous (as would be the case if Colombia and Venezuela were to be incorporated into NAFTA). In discussing the G-3 Accord, it is important to keep in mind that when it was signed, Colombia and Venezuela were already members of the Andean   Unidad de Comercio International (CEPAL), Desenvolvimiento de Los Procesos de InAmérica Latinay el Caribe 43 (1995)

15

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Community. Accordingly, trade in goods between Colombia and Venezuela was governed by Andean Community rules. The Andean Community’s rules of origin, safeguard measures, and regulations on unfair trading practices were also controlling in terms of Colombian-Venezuelan trade. Accordingly, the G-3 Accord primarily governed the trade of goods between Colombia and Venezuela, on the one hand, and among those countries and Mexico, on the other. To the extent that the G-3 Accord added provisions not contemplated at the time in the Andean Community integration process, such as the opening up of cross-border trade in services, these new obligations were binding as between Colombia and Venezuela. It should also be noted that because the G-3 Accord falls under the umbrella of ALADI as ACE No. 33, Article 23-07 permits accession to the tripartite agreement by other ALADI member states as well as by the countries of Central America and the Caribbean. In a May 31, 2006, press release, the Ministry of Foreign Relations announced that the Bolivarian Republic of Venezuela was withdrawing from the G-3 Accord because, according to Venezuelan President Hugo Chavez, the agreement was based on a neo-liberal conception of capitalism. According to the text that accompanied the Venezuelan withdrawal decision, “far from representing a complementation agreement,” in the G-3 Accord “we find a Free Trade Agreement, conceived during the years when in our country, as in the rest of the world, a neo-liberal vision predominated which only looked at commercial interests, without giving any priority, as should be the case, to the fate of our peoples.” The statement from the Venezuelan Foreign Ministry went on to point out that under “the new orientation that is being defined not only in Venezuela but in other brother countries, issues of integration are based more on criteria of complementation, cooperation, and solidarity rather than on competition among our nations, as well as on respect for sovereignty.” By leaving the G-3 Accord, the statement noted that Venezuela will be able to focus its efforts on integrating with MERCOSUR “based on the principles of gradualness, differential treatment, flexibility and complementation.” The response of the Venezuelan private sector, as exemplified in a press statement issued by The Federación de Camaras de Comercio y Asociaciones de Comercio y Producción de Venezuela or the Venezuelan Federation of Chambers of Commerce (FEDECÁMARAS; a major opponent of Hugo Chavez), was to warn the Chavez government not to sabotage Venezuela’s natural export markets in favor of a short term and narrow political agenda. Although the G-3 Accord is now really the G-2 Accord, the following discussion continues to include Venezuela as if it were still a beneficiary, in the expectation that Venezuela’s mercurial president may eventually recognize the wisdom of retaining a free trade agreement with Mexico and therefore retract his government’s 2006 notice of withdrawal. In any event, it is interesting to note that in 2004 the Panamanian government requested its inclusion into the G-3 Accord. If that ever comes to pass, it would once again give logic to retaining the name “G-3 Accord,” even if Venezuela remains absent.

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2. Free Trade in Goods While many goods traded by Colombia and Venezuela with Mexico and vice versa received immediate duty-free treatment as soon as the G-3 Accord came into force, most were subject to ten proportional reductions in the tariffs to zero that began on January 1, 1995. The second reduction came on July 1, 1996, and was followed by eight more on an annual basis until all duties were completely eliminated by July 1, 2004 (although for some of these items, Mexico and Venezuela eventually accelerated the process, so that complete duty-free trade was achieved even earlier). A limited number of products, designated Code B goods, were given faster preferential tariff treatment and reached the 0 percent level by July 1, 1999. On the other hand, certain textile, clothing, and shoes were permanently excluded from intra-regional free trade until the governments determined otherwise. The automotive sector had its own tariff reduction schedule found in Article 4-04 of the G-3 Accord, while the agricultural sector is governed by the provisions contained in Chapter 5.16 In addition to calling for the eventual elimination of all tariff barriers, Chapter 3 of the G-3 Accord also called on the member states to gradually eliminate non-tariff barriers, except those specifically permitted by Article XI of the General Agreement on Tariffs and Trade (GATT), and not to impose new service charges levied by customs on goods that meet the G-3 rule of origin requirements and are traded among them. In general, the G-3 countries were also required to eliminate export taxes on products traded among them, except those imposed on items deemed to be of primary necessity (i.e., basic foodstuffs such as rice, bean, and lactates). The governments were also under an obligation to eliminate export subsidies on manufactured goods. Despite the goal of eventual universal free trade, Mexico reserved the right to permanently restrict importation of petroleum products—a right also retained by Venezuela—and large vehicles, while Colombia could restrict exports and imports of energy resources in conformity with its Constitution. Furthermore, Colombia retained the right to reserve production of liquor and other alcoholic beverages to specific departments within the country, as well as to permit those departments to levy internal taxes on liquor. Pursuant to Article 4-04(1) of the G-3 Accord, tariffs on trucks and buses produced in and traded among Colombia, Mexico, and Venezuela, were to be eliminated in 11 annual and proportional reductions that began on January 1, 1997, and were to culminate at 0 percent on January 1, 2007 (subsequently extended to January 1, 2009, in the case of Mexico, and January 1, 2011, in the case of Colombia and Venezuela). Tariffs on auto parts were originally supposed to have been completely eliminated by 2007, but the deadline for many parts was also subsequently extended to either January 1, 2009, or January 1, 2010. 16   Venezuela also excluded textiles and clothing from the general tariff reduction program, while Colombia and Venezuela both excluded polystyrene. See G. Capriles, El Tratado de Libre Comercio del Grupo de los Tres 4 (Sept. 6, 1994) (unpublished manuscript, available from the author’s law firm, Bentata Hoet & Asociados in Caracas, Venezuela). In addition, all three countries reserved the right to prohibit or restrict the importation into their territory of used goods (including used auto parts as per Article 4-07).

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Article 4-03 of the G-3 Accord established a Committee on the Automobile Sector with private sector input. The goal of the committee was to devise a managed trade (as opposed to complete free trade) regime for exchanging automobiles and auto parts among the three countries. In December 2004, for example, the three countries executed ACE No. 61, which established a regime for trading vehicles among them in effect from January 1 to December 31, 2005. Colombia and Venezuela each allowed up to 3,000 automobiles made in Mexico to enter their territory upon payment of a 10 percent duty. Meanwhile, up to 6,000 vehicles made in Colombia and another 6,000 made in Venezuela could enter Mexico upon payment of a 7 percent duty during the same time period. A separate protocol to ACE No. 33 established a timetable gradually increasing these quotas on an annual basis after 2005 and reducing the import duty on an annual basis so as to reach zero by January 1, 2008 (in the case of Mexico) or January 1, 2010 (in the case of Colombia and Venezuela). Chapter Five of the G-3 Accord contains not only the rules that govern trade in agro-industrial products among the member states, but it also contains rules concerning the imposition of sanitary and phytosanitary measures. In general, the G-3 countries were under an obligation to reduce or eliminate trade barriers that impeded trilateral trade in agro-industrial products. Export subsidies on agricultural goods traded among the three would also have to be gradually phased out, as these goods were included in the G-3’s free trade program. While each member state reserved the right to decide which agricultural goods would enter its territory under an open market approach, once these goods were selected, all import duties levied on them had to be reduced to zero over a ten-year period. A very limited number of agricultural tariff lines either received immediate duty-free treatment or were subject to a 15-year phase out of tariffs to zero. Annex 2 to Article 5-04 of the G-3 Accord specifically gave Colombia the right to require that an importer first seek a license from the appropriate Colombian government agency before it can import various agro-industrial products such as chicken and duck parts or lactate products from the other two G-3 countries. For its part, Mexico can require that an importer seek prior authorization from the government before it can import agro-industrial goods such as cheese, eggs, beans, sugar cane, and tobacco products from the other signatory states. All three countries retained the right to impose tariffs and/or quotas indefinitely as safeguard measures on a wide range of agro-industrial products. While all three countries were allowed to continue paying price supports to local producers, these had to be done in such a way that they had a minimal impact on trade or production and conformed to WTO principles. Article 5-10 calls for the creation of a Committee on Agro-Industrial Trade,which is entrusted with overseeing and recommending ways to facilitate the liberalization of intraregional trade in the agricultural sector. Under Article 5-09, a Working Group on Technical Norms and Agro-Industrial Commercialization was also created to devise solutions to problems created by a lack of harmonization in technical norms and packaging requirements. Pursuant to Annex 3 to Article 5-04, a special committee was established to review the feasibility of incorporating

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sugar (which was originally excluded) into the G-3 free trade scheme. Although Colombia and Venezuela did eventually open up their respective markets to Mexican sugar in 2002, sugar was subject to the Andean Community’s price band mechanism (along with about another 150 agricultural items). 3. Rule of Origin Requirements The rules for determining the origin of a product that qualifies for free trade treatment among the G-3 countries are found in Chapter Six of the G-3 Accord. Those rules are strikingly similar to the complex and detailed rules of origin found in NAFTA. In order to receive free trade treatment, a good must be wholly obtained from or entirely produced within the territory of one or more of the G-3 countries, or the good must be produced with foreign inputs but undergo a substantial transformation within the G-3 so as to change tariff classification heading and/or meet minimal regional content requirements. One significant difference between the G-3 and NAFTA rule of origin requirements, however, is that the minimal regional content of most goods that can be traded among the G-3 countries tariff free must be 55 percent (and it was only 50 percent until January 1, 2000). By contrast, NAFTA has a general 60 percent rule when the transaction value method is used to calculate regional content value (the only method that is permitted under the G-3 Accord). Furthermore, various types of metals and goods made from them, as well various chemical products and pharmaceuticals, enjoy even lower regional content percentages in recognition of the difficulty in obtaining inputs within the G-3 countries to make them. For example, under Article 6-18 of the G-3 Accord, the regional content requirement for metals such as steel, nickel, and tin, and any goods produced with these materials, is 50 percent (and was even lower before January 1, 2000). The regional content requirement for chemical products, fertilizers, photographic material, and pharmaceuticals is set at 50 percent. A working group on the rules of origin was created under Article 6-17 of the G-3 Accord to investigate ways to facilitate the implementation of the rules of origin and insure their uniform application. Article 6-20 created a Regional Integration Committee on Inputs (CIRI). CIRI investigates difficulties in complying with the rules of origin in the chemical, plastic, textile, copper, and aluminum sectors because of scarcities of regional inputs. CIRI is authorized to recommend temporary waivers of the general requirements on regional content when appropriate. Agricultural products are subject to specific rule of origin requirements found in the Annex to Article 6-03, Section B. Normally, the minimal content requirement is set at 50 percent, but certain items must comply with additional requirements (e.g., all fruit sold in cans must originate in one or more of the G3 countries). Like agriculture, the automotive sector has its own special rules of origin requirements that were based on those found in ALADI Resolution 78 but were subsequently revised, in part, by the Committee on the Automobile Sector (whose creation, was in turn, authorized by Article 4-03 of the G-3 Accord). The regulations concerning declarations and certificates of origin, which must be produced at border crossings or other ports of entry, are found in

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Chapter 7 to the G-3 Accord. The origin verification procedures are similar to those in the Andean Community. Obtaining a certificate of origin is the responsibility of the producer or the exporter. A working group is established to insure compliance with the rules affecting certificates of origin. Valuation of goods as a way of determining their origin and whether they benefits from the G-3 Accord is based exclusively on the WTO Customs Valuation Code. 4. Safeguard Measures Chapter 8 of the G-3 Accord contains safeguard measures pursuant to which a signatory can temporarily raise tariffs on goods imported from one of the other G-3 countries in order to prevent serious injury to one of its domestic industries. Safeguard measures can either be applied on a bilateral or multilateral basis (with the latter subject to the norms established under the WTO). Although similar to the safeguard provisions found in NAFTA, the G-3 Accord allows protective tariffs to be used for up to five years beyond the end of the transition period on July 1, 2004. In NAFTA, bilateral safeguard measures can only be used during the transition period. Despite the longer time frame permitted in the G-3 context, Article 8-03 of the G-3 Accord limits the initial imposition of a tariff increase as a safeguard for up to one year (with a single one-year extension permitted thereafter), whereas Article 801(2)(c)(i) of NAFTA allows a tariff increase for similar reasons for an initial three-year period. 5. Unfair Trade Practice Remedies Chapter 9 of the G-3 Accord addresses matters related to unfair trading practices such as dumping and subsidized exports. Pursuant to Article 9-02, the G-3 countries commit themselves to eliminate all types of export subsidies on industrial exports destined to the other member states. Subsidies on agricultural exports are governed by the provisions established in Chapter 5. The rest of Chapter 9 is primarily devoted to establishing procedures for denouncing and investigating allegations of dumping or subsidized exports and imposing antidumping and countervailing duties as a means of redress. As a general principle, the imposition of antidumping or countervailing duties must adhere to WTO obligations. It is interesting to note that the G-3 Accord incorporates the concept of de minimis violations, something that did not exist at that time in the Andean Community’s antidumping or subsidized export legislation.17 Generally, a dumping margin of less than 2 percent, or a subsidy representing less than 1 percent of the product’s ad valorem value, is considered minimal and not worthy of an investigation. Similarly, if the alleged dumped or subsidized import makes up less than 1 percent of domestic market share of 17   Id. at 5. With the adoption of Andean Community Decisions 456 and 457 in 1999, an antidumping or countervailing duty will not be imposed in the event the country that is the target of the measure is responsible for less than 6 percent of all the dumped or subsidized goods, or the dumping margin is less than 5 percent or the subsidy represents less than 3 percent of the product’s value.

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all like or similar goods, the authorities should not even launch an unfair trade practice investigation. 6. Technical Norms The procedures governing the use of technical norms so as to prevent them from being abused as non-tariff barriers to trade are found in Chapter 14 of the G-3 Accord. The provisions in Chapter 14 are nearly identical to those found in Chapter 9 of NAFTA. In general, the signatories are under an obligation not to develop, adopt, maintain, or apply technical rules that create unnecessary obstacles to trilateral trade. Rules with respect to the protection of human, animal, and floral and vegetable health, the environment, and consumer protection laws are usually exempt from this overall obligation. Whatever rules that are applied in these specific areas, however, should be applicable to both domestically produced and all imported products from the region. For the most part, the norms established by international treaties are the base rules for those existing in the G-3 countries. Article 14-07 further obligates the signatories to make their different technical norms compatible, without reducing levels of legitimate and higher protection. Article 14-10 obligates each G-3 member state to set up an “information center” to provide data on all technical norms it applies within its territory. Pursuant to Article 14-17, a Committee on Technical Norms was created in order to facilitate the coordination and harmonization of technical norms among the three countries and to promote the exchange of information and ideas. A Subcommittee on Health Related Norms was also established to focus on issues related to the health sector. Any doubts that may arise with respect to the interpretation or application of obligations arising under Chapter 14 should be referred for clarification to the Committee on Technical Norms and, when resolution of the problem is not forthcoming, the matter can then be referred to the arbitration mechanism established under Chapter 19. 7. Sanitary and Phytosanitary Measures The G-3 countries are under an obligation to provide advanced notice of the adoption of new, or the modification of existing, sanitary and phytosanitary standards and to allow the right of interested parties to submit comments. Pursuant to Article 5-15, the adoption, enforcement, and maintenance of any sanitary and phytosanitary norm must be based on “scientific principles” and on a “risk evaluation appropriate to the circumstances that inspired it.” A Committee on Plant and Animal Health was established under the G-3 Accord to, inter alia, facilitate expeditious consultations among the relevant agencies from the three countries on specific sanitary and phytosanitary norms and to encourage the adoption of international standards as well as the recognition of the equivalency of different domestic sanitary and phytosanitary standards. There is no express prohibition to referring disputes arising from the application of sanitary and phytosanitary measures to the general dispute resolution mechanism.

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8. Services Chapter 10 of the G-3 Accord establishes the general principles for trade in services among the three member states. For the most part, they follow the rules laid down in NAFTA’s Chapter 12. These general principles include a requirement of transparency in legal regulations, as well as national treatment, MFN treatment, and the elimination of residency requirements for service providers. As a result of the transparency requirements imposed by Article 1003, the signatories obligated themselves to publish new laws and regulations affecting the services sector before they become law, to inform the other governments of changes in their domestic law that could affect the cross-border trade in services, and to respond to all requests for information from the other two governments. In the specific case of professionals offering services, Article 10-14 required that each G-3 country had until 1996 to eliminate any nationality or permanent residency requirements as a prerequisite for obtaining a license, certificate, or title by a national of another member state in order to practice a profession. A working subgroup made up of education authorities was also created pursuant to Annex No. 1 to Article 10-02 to investigate ways of simplifying the revalidation and recognition of university degrees issued in one country in the other two. In terms of transportation services, airline services were excluded from intra-regional liberalization pursuant to Annex No. 2 to Article 10-02 (although certain services associated with the airline industry, such as maintenance and computer reservations, were not). Cabotage restrictions were eliminated so as to allow any goods shipped by boat between the three member states to be carried by any of the country’s national flag carriers. As with NAFTA, the G-3 Accord also contains special chapters dealing with the liberalization of services in telecommunications (i.e., Chapter 11) and financial services (i.e., Chapter 12). The inclusion of a special chapter on the telecommunications sector was not necessary in the G-3 context because Article 10-02(1)(d) specifically included access to and use of public telecommunications networks among the services subject to the general liberalization scheme of Chapter 10. Undoubtedly, one reason for the inclusion of a special chapter on telecommunications was to highlight that Colombia and Venezuela were ready for quick accession into NAFTA (given the perceived importance Canadian and U.S. negotiators would attach to this sector). Chapter 11 of the G-3 Accord opens up access to public telecommunications networks by providers of so-called value added services (i.e., cellular telephony but not necessarily cable TV) from the other two countries. Any licensing, permit, registration, or notification procedures must be transparent and nondiscriminatory, and technical standards cannot be used as non-tariff barriers. Not included in this liberalization of the telecommunications sector are basic telecommunications services such as land line telephones. Although a public telecommunications transport network may be owned by a state entity that enjoys a monopoly, Article 11-07 requires that each country ensure that any monopoly situation is not abused so as to impede the provision of other

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types of services that depend on access to public telecommunication transport networks. Chapter 12 of the G-3 Accord allows financial service providers from any member state to establish themselves and provide the same type of services in any other G-3 country that a domestic or third-country company is allowed to provide. This includes the establishment, acquisition, expansion, administration, conducting of business, operation and sale, or other operation associated with financial institutions and investments. While Article 12-05 prohibits the G-3 governments from imposing restrictions on the ability of their nationals to utilize the financial services offered by firms located in another G-3 country, they can restrict the advertising and solicitation of business by these off-shore companies within their national territory. Pursuant to Article 12-09, the G-3 countries may take reasonable financial measures to protect policy holders and their beneficiaries, bank depositors, creditors, and fiduciaries, and otherwise ensure the integrity and stability of the domestic financial system and the institutions themselves. Article 12-14 specifically prohibits a G-3 country from requiring that financial institutions operating within its territory have a specified number of their own nationals occupying managerial or high administrative positions. A special dispute resolution procedure is established to resolve disputes that may arise between two state parties (Article 12-19) or an investor and a state party (article 12-20) as a result of a failure to adhere to the obligations created by Chapter 12. In situations involving disputes between state parties, the procedure established under the general dispute resolution system found in Chapter 19 is followed, except that the arbitrators are chosen from a 15person list drawn up by the Committee on Financial Services and made up of five individuals from each member state that enjoy special financial skills. In situations where the dispute arises between a private party and a state party, the procedure found in Section B of Chapter 17 is followed. In those cases where a state party has exerted an Article 12-09 exception to the general liberalization scheme of Chapter 12, the arbitral panel must refer the matter to the Committee on Financial Services. One of the major differences between the G-3 Accord and NAFTA with respect to cross-border trade in the telecommunications and financial services sectors is found in a similarly worded clause that is included in both Chapters 11 and 12 of the G-3 Accord. Specifically, Article 11-11 of the G-3 Accord permits a state party to prevent a company from another member state from providing telecommunications services within its territory when it can be established that the services and facilities connected with the provision of these services are actually installed and emanate from a country that is not a member of the G-3, or it is determined that the property or the person providing the telecommunication services is ultimately controlled by a company that is not from a G-3 member state. For its part, Article 12-16 of the G-3 Accord allows a state party to prohibit a financial services company from another member state from offering services within its territory if the company has no significant activity in that other member state, or the property or the activities of the company is controlled by an entity from outside the G-3. The idea behind

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both these similarly worded provisions is to keep outsiders, including U.S. and Canadian telecommunications and financial services companies, from establishing a “paper presence” in Mexico, for example, and then trying to penetrate the Colombian and Venezuelan markets from there. Chapter 12 of the G-3 Accord also adds two further provisions that are not found in NAFTA with respect to financial services but are designed to reflect certain economic realities in the G-3 region. In particular, Article 12-17 of the G-3 Accord guarantees that each country permit, without delay and restrictions, all types of cross-border transfers related to financial investments in whatever form, including profits, dividends, interest payments, administrative costs, and royalties. However, in recognition of Venezuela’s imposition of currency exchange controls in 1994 (which were not lifted until April 1996), Article 12-18 also permits a country to adopt measures suspending, for a reasonable period of time, the guarantees on unhindered transferability in order to address grave economic and financial upheaval, or because the country faces a serious balance-of-payments crisis. 9. Government Procurement Chapter 15 of the G-3 Accord contains the provisions relating to the ability of private firms from any of the three countries to bid on government procurement contracts in Colombia, Mexico, or Venezuela. These rules affect government purchases of goods and services not only by the central or federal government branches, but also procurement by certain government-owned companies and certain state or provincial governments as specified in the protocol to Chapter 15. In addition, Chapter 15 applies only to those procurement contracts that exceed certain minimal thresholds. In the case of contracts for the purchase of goods and services by a federal or central government agency, the threshold level is U.S.$50,000. If the services involve construction, the threshold is a much heftier U.S.$6.5 million. In the case of goods and services purchased by governmentowned entities, the threshold is U.S.$250,000 (or U.S.$8 million in the case of construction services). Different threshold amounts are established with respect to purchases of goods or services by entities at the state or provincial levels. In general, each country is required to allow nationals of the other two the right to participate in procurement bids on a level that is no less favorable than that offered to its own nationals or to persons or entities from third countries. Elaborate rules exist with respect to: the qualifications of bidders (Article 15-10); the procedure for soliciting bids (Article 15-11); the procedure for choosing so-called selective bids (Article 15-12); time limits for preparing and accepting bids (Article 15-13); information that must be included in a bid or tender offer (Article 15-14); methods of presenting bids or tender offers (Article 15-15); and the procedures for participating in so-called restricted or limited bid offerings (Article 15-16). Section C to Chapter 15 establishes a procedure for challenging the awarding of bids deemed by a losing party to have been done in contravention of the rules and obligations established under Chapter 15, as well as for the

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resolution of these disputes. The actual procedural rules are found in the Annex to Article 15-17. Any dispute that may arise among two or more of the G3 countries with respect to Chapter 15 are resolved pursuant to the procedure established in the general dispute resolution system found in Chapter 19 (albeit the time limits are modified). A special committee was created pursuant to Article 15-22, which is designed to encourage small and medium sized enterprises from the G-3 countries to actively participate in bidding for government procurement contracts that are appropriate to their size. Although the overall provisions of Chapter 15 to the G-3 Accord are very similar to NAFTA’s Chapter 10 on government procurement, the annexes to Chapter 15 in the G-3 Accord contain various exemptions taken by Colombia and Venezuela. In particular, Colombia and Venezuela exempted themselves from various aspects of Article 15-10 (qualifications of suppliers), as well as Articles 15-11 (procedures for inviting bids), 15-12 (selective tendering procedures), 15-13(2) and (3) (time limits for tendering and delivery of bids), 15-14 (tender documentation), 15-15 (submission, receipt and opening of tenders and awarding of contracts), 15-16 (limited bidding procedures), 15-17 (procedures for challenging bid awards), and 15-20(4) (provision of information to interested parties). The fact that both Colombia and Venezuela did not adhere to these G-3 provisions did not mean that there were no rules applicable to them in this area. As substitutes, both countries provided for generally less complicated procedures. The only area where this was not true related to restricted or limited tendering procedures, which Colombia and Venezuela do not recognize since they consider it a contradiction to the overall goal of free and fair bidding procedures that Chapter 15 seeks to establish. Finally, it should be noted that all three G-3 countries restricted participation in government procurement opportunities when it came to the provision of arms, explosives, airplane parts, and embarkation devises used for maritime transport to their own nationals (see Annex No. 3 to Article 15-02). In addition, procurement of services required by each country’s respective armed forces or Ministry of Defense was also limited to their own nationals. Colombia and Venezuela also restricted participation in procurement opportunities offered by their respective state-owned petroleum and energy monopolies, although each country was under an obligation to gradually phase out these restrictions (see Annex 7 to Article 15-02). Interestingly, Chapter 15 of the G-3 Accord is followed by Chapter 16, which deals with the relation of state-owned entities vis-à-vis private sector companies from the other member states. Article 16-02 requires that the G-3 countries ensure that their state-owned companies do not discriminate against private sector individuals or companies from the other member states. In addition, state-owned monopolies are under an obligation not to use their position in any unfair commercial manner that does not reflect respect for market rules when dealing with their regional, private sector competitors.

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10. Investment Protection Chapter 17 contains the rules affecting cross-border investments by nationals of one of the G-3 countries in the territory of the others. Chapter 17 of the G-3 Accord has many provisions that parrot Chapter 11 in NAFTA. For example, Article 17-01 defines an investment very broadly and includes the transfer of all types of resources, as well as reinvestment of those resources in the same country. Investments can take many forms, including the purchase of corporate stock, although credit or debt transactions are explicitly excluded.18 The G-3 definition of what constitutes an investment is more expansive than that found in Andean Commission Decision 291 with respect to foreign investment.19 Pursuant to Article 17-03, each country accords an investor from another G-3 country treatment that is no less favorable than that accorded to its own nationals or those from third countries. The major exceptions to most MFN treatment are special tax arrangements resulting from treaties to prevent double taxation. In addition, Article 17-04 generally prohibits any laws requiring that a foreign investor purchase or use the products made in the host country as part of its investment activity, as well as laws that limit the amount of foreign inputs that can be used in domestic production (except with respect to fulfilling rule of origin requirements), or laws which put limits on the volume of what can be exported. There is no express prohibition on governments requiring technology transfer, however, as part of the bargain for permitting investment from the other country. Some important differences exist between the G-3 Accord and NAFTA with respect to foreign investment. To begin with, Article 17-05 of the G-3 Accord permits limitations on the numbers of foreigners (regardless if they are from another G-3 member state) who can work in enterprises in any capacity, including managerial positions (so long as such a rule does not interfere with the ability of an investor to control his or her investment). By contrast, while Article 1107 in NAFTA does allow domestic laws, which require that a majority on a company’s Board of Directors (or any committee thereof) be of a certain nationality, NAFTA expressly prohibits nationality restrictions for senior management positions. In addition, Article 17-07(6) of the G-3 Accord deviates from the general rule on unhindered repatriation of capital and profits found in NAFTA by allowing G-3 member states to impose temporary and nondiscriminatory restrictions on transfers in the event of exceptional difficulties or severe balance-of-payment problems. Pursuant to the Annex to Article 17-08 of the G-3 Accord, the provisions affecting expropriation and compensation (that were based on NAFTA) did not apply to Colombian investments in Mexico or Venezuela, or to Mexican and Venezuelan investments in Colombia. Despite this anomaly, which were made necessary as a result of provisions in Colombia’s Constitution when the 18   The latter exclusion was apparently a concession to Colombian currency exchange and foreign investment regulations in force at the time the G-3 was negotiated. Id. at 14. 19   Id. at 13. On the other hand, there are less areas in the Colombian and Venezuelan economy that are closed to foreign investment as a result of Andean Commission Decision 291 than is the case with Mexico. Id. at 15.

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G-3 Accord was negotiated, Colombia did make a commitment that it would not establish new laws or regulations that were more permissive with respect to nationalizations or more restrictive with respect to compensation than those already in effect on January 1, 1995.20 As for the other two countries, Article 17-08 required that any partial or full nationalization or expropriation had to be done for reasons of public utility, could only be based upon the principle of non-discrimination, had to be carried out under color of law, and any compensation had to reflect the fair market value of the investment just prior to its confiscation. In addition, any compensation had to be promptly paid for in liquid and freely transferable funds. Interestingly, Article 17-12 of the G-3 Accord specifically prohibited any of the three governments from using an investment made by one of its nationals in another member state in which the investment is organized (e.g., through a foreign subsidiary) as a means of exerting extra-territorial jurisdiction, thereby creating obstacles to trade among the signatories or with a third country not a signatory to the G-3 Accord. Pursuant to Article 17-13, no government is allowed to eliminate or fail to enforce domestic rules with respect to health, national security, or environmental protection as a way of attracting or retaining foreign direct investment. Section B to Chapter 17 contains the procedure for resolving disputes that may arise between a government and an investor from one of the other two G-3 countries. Pursuant to Article 17-17, any private party damaged by the failure of a host government to adhere to its investment obligations under the G-3 Accord may submit its dispute to the national court systems or to arbitration. Any claim must be brought within three years after the investor first learned or should have learned of the damage-inducing violation. If an investor elected to first submit its claim to regular judicial channels, however, it is barred from later seeking arbitration, and vice versa. An investor pursuing arbitration is required to give its adversary 90 days’ notice and wait for a period of at least six months after the damage was inflicted before requesting arbitration. The arbitration proceedings are conducted pursuant to the rules found in the ICSID Convention and its Complementary Procedural Rules or to the UNCITRAL Rules on International Commercial Arbitration and Conciliation. The actual rules of procedure for G-3 arbitration hearings are found in the Annex to Article 17-16 of the G-3 Accord. Arbitration awards are enforced through the mechanisms established under the ICSID Convention (which only Mexico, of the three G-3 countries, had ratified at the time the G-3 Accord was signed); the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a.k.a., the New York Convention, which had only been ratified by Colombia and Mexico at the time the G-3 Accord was signed)21; or the Inter-American Convention on International Commercial Arbitration (ratified by all three countries). 20   Id. at 16–7. Pursuant to language in Article 58 to the Colombian Constitution, expropriations can be legislated by the Colombian Congress without the payment of compensation if the expropriation is for the public good. 21   The full text of the New York Convention (1958) is available at http://www.uncitral. org/uncitral/en/uncitral_texts/arbitration/NYConvention.html.

66  •  Latin American and Caribbean Trade Agreements

11. Intellectual Property Rights Protection It is important to emphasize with respect to intellectual property rights, that Colombia and Venezuela, as members of the Andean Community, were both bound by the various Andean Commission decisions on the subject matter. Chapter 18 of the G-3 Accord both complements those Andean Community obligations and fills in some of the gaps in order to be more compatible with NAFTA (although there are certain notable exceptions where this is not true). The most significant difference between Chapter 18 of the G-3 Accord and its counterpart chapter in NAFTA concerning intellectual property rights and procedures is that the G-3 countries do not commit themselves to ratify the Geneva Convention of 1971 on the Protection of Producers of Phonograms Against Unauthorized Duplication, the 1971 revisions to the Berne Convention for the Protection of Literary and Artistic Works, and the 1978 and 1991 versions of the International Convention for the Protection of New Varieties of Plants. The G-3 countries only committed themselves to ratify (if they had not already done so) the Paris Convention for the Protection of Industrial Property (1883).22 As for the other international intellectual property treaties (including some not specifically mentioned in NAFTA), the G-3 countries agree only to adhere to the principles they espouse and to incorporate them into their domestic legislation. Another significant difference between the G-3 Accord and NAFTA is that under Article 18-25 of the G-3 Accord, the signatories do not obligate themselves to implement special judicial systems and/or new procedures (as Article 1714 requires in the NAFTA context) in order to insure proper observance and enforcement of intellectual property rights. Under Article 18-26, however, the G-3 countries agree to work together to insure that the procedures for enforcing intellectual property rights within their existing judicial systems are fair, are not unnecessarily complicated or costly, and do not include unreasonable time limits or result in unwarranted delays. Article 18-27 specifically lists the minimal procedural guarantees that should be provided by each country’s legal system in order to ensure an adequate and effective method for enforcing intellectual property rights. The intellectual property protection offered under the G-3 Accord covers trademarks and service marks, copyrights (including computer software and radio signals), so-called origin or geographical name designations, industrial secrets (including undisclosed test data for pharmaceutical and agro-chemical products that must be divulged to government authorities for compliance with registration requirements), new plant varieties, and technology transfer. One thing that the rules do not specifically protect is patents and industrial designs. The reason for this is that at the time the G-3 Accord was negotiated, there were considerable differences between Mexican law on patent protection and those offered under Andean Decision 313 (which covered patent protection in the Andean Community prior to the enactment of Decision 344 in 1994 which, in turn, was replaced by Decision 486 in 2000).23 22   The full text of the Paris Convention (1883) is available at http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html. 23   Capriles, supra note 16, at 24.

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Another important difference affecting intellectual property rights between the then-existing Andean Community norms and those found in the G-3 Accord was that, under the G-3 Accord, the right to registered trademark protection based on prior so-called notorious use was explicitly recognized even though the trademark may not have been previously registered. Furthermore, trademarks under the G-3 Accord are protected for up to ten years (subject to renewal) from the date the application for registration is made (in the case of Mexico) or ten years (subject to renewal) from the date the registration is approved (in the case of Colombia and Venezuela). Pursuant to Article 18-13, trademark protection may be lost if not utilized within three years from the date granted. With respect to so-called origin or geographical name designations and new plant varieties, the G-3 Accord gives precedence to the legislation in effect in each member state. Once again, this situation was the result of the fact that Colombia and Venezuela were subject to very detailed Andean communitarian norms in this area, while Mexico’s intellectual property norms incorporated rules from various international conventions.24 One of the important contributions made by the G-3 Accord to the legal regime for the protection of intellectual property norms in all three signatory states is the incorporation of the right of a party alleging trademark or copyright infringement to petition the relevant administrative or judicial authorities to have customs authorities seize the infringing goods at the border.25 12. Dispute Resolution Chapter 19 of the G-3 Accord contains the provisions for the resolution of state-to-state disputes, which may arise with respect to the interpretation and application of rights and obligations created by the treaty, or when one country feels that a measure has been adopted by the other(s), which is incompatible with obligations assumed under the G-3 Accord (i.e., it is either contradictory or undermines granted rights). Disputes arising between Colombia and Venezuela over obligations created exclusively under the G-3 Accord and/or involving Mexico are required to utilize the procedures and institutions established by Chapter 19. An option also exists to refer the dispute to the WTO, so long as it has subject matter jurisdiction. As previously indicated, a separate dispute resolution system exists for handling problems arising with respect to the cross-border provision of financial services that is found in Chapter 12 to the G-3 Accord. Furthermore, a separate dispute resolution mechanism found in Chapter 17 handles disputes arising between a state party and an investor from one of the other G-3 countries concerning cross border investments. As is true of the general dispute resolution system in NAFTA, any disputes that may arise among any of the signatories to the G-3 Accord should first be   Id. at 26–27.   Id. at 29. See also arts. 18–28, 18–32, and 18–34 of the G-3 Accord.

24 25

68  •  Latin American and Caribbean Trade Agreements

resolved through a negotiated settlement.26 When such an agreement is not possible, the aggrieved party or parties can then request a meeting of the Administrative Commission, in writing, pursuant to Article 19-06. The Administrative Commission must meet within ten days after a written demand has been filed. If the Administrative Commission is unable to make a determination within 45 days after its first meetings (or longer if all the parties so agree), the aggrieved party(ies) can request the formation of an arbitration panel. Under Article 19-09 of the G-3 Accord, when there are only two parties to a dispute, the arbitration panel shall consist of five members (who are chosen from a predetermined list of 30 individuals kept on file with the Administrative Commission). Arbitrators should be persons with “knowledge or experience in law, international trade, and other matters related to this Treaty, or in dispute resolution involving international trade agreements.” The arbitration panel is headed by a president who cannot be a national of any of the disputing parties. The president is selected by either mutual consent or, if this is not possible, by the party that wins a lottery to determine which side shall designate the president. Within 15 days of the president’s selection, each side chooses two arbitrators who are nationals of the opposing country. The procedure for selecting the arbitration panel was similar when all three countries were involved, although the method for selecting the president was different in the event there was no mutual consent. The arbitration panel should normally issue a preliminary decision within 90 days after the last arbitrator has been chosen to sit on the arbitral panel. The preliminary decision contains the findings and suggestions of the arbitration panel, and the parties to the dispute are then allowed to submit their observations (if any) within 14 days after the preliminary decision is issued. Within 30 days after the preliminary decision is issued, the arbitration panel then informs the Administrative Commission of its final decision, which is then, in turn, made public. Under Article 19-15(2), the identity of how the individual arbitrators voted remains a secret. Arbitration awards cannot be appealed and must be fully complied with. Failure to comply permits the detrimentally affected parties to suspend benefits granted under the G-3 Accord that are to be commensurate with the damage inflicted by the non-compliance. 13. Institutional Framework The G-3 Accord created an Administrative Commission to insure the smooth implementation of the agreement, supervise the work of the various committees and working groups established under the G-3 Accord, and authorized it to make recommendations to the three governments on measures it felt could strengthen the integration process. Article 20-02 called for the creation of National Sections of the Administrative Commission in each member state so as to oversee the agreement’s full implementation in that country. In the   In the specific case of unilateral increases in import taxes, Article 19-02(2) of the G-3 Accord permits the affected state parties to negotiate an appropriate compensatory measure without resorting to the formal dispute resolution mechanism. 26

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case of Colombia, the National Section of the Administrative Commission falls within the jurisdiction of the Ministry of Foreign Trade (or any other substitute body it many designate). In the case of Mexico, the task falls on the Secretariat of Trade and Industrial Development (or any other agency it may designate), while in Venezuela it was the responsibility of the Foreign Trade Institute. When the G-3 Accord came into effect there were some nine committees,27 one Subcommittee on the Harmonization of Health-Related Measures, and five working groups28 operating under the Administrative Commission. 14. Transparency Chapter 21 of the G-3 Accord requires each country to keep the others and their nationals abreast of developments affecting the G-3 integration process. For example, Article 21-01 specifically called for the creation of a central clearinghouse to facilitate communication between the three governments and disseminate information on the progress of the G-3 Accord’s implementation. Each government is also under an obligation to publish and make readily available all laws, regulations, administrative procedures, and resolutions related to implementation of the G-3 Accord. 15. Temporary Entry of Businesspeople Chapter 13 of the G-3 Accord calls for the member states to facilitate, on a reciprocal basis, the temporary entry of businesspeople who otherwise comply with standard immigration rules with respect to health, public order, and national security. The annex to Article 13-04 defines businesspeople as business visitors (including salespeople, designers, supervisors, market analysts, and technical service representatives), investors, intra-company personnel transferees, and professionals. In general, the signatory governments cannot impose quotas on the number of temporary entry authorizations. Entry authorizations may be denied, however, when the temporary entry of a businessperson would have a negative impact on the resolution of a local labor dispute. Article 13-04 called for the creation of a database of regional companies doing business in all three countries, so as to facilitate the temporary, crossborder transfer of their employees. A special Working Group on Temporary Entry on Businesspeople and Intra-Company Employee Transfer was created pursuant to Article 13-06 so as to examine additional ways to facilitate the crossborder movement of businesspeople. Generally, a denial of a temporary entry business visa cannot be referred to the general dispute resolution mechanism established under Article 19.

27   These nine committees consisted of: (1) the Automobile Sector; (2) Agro-Industrial Trade; (3) Sanitary and Phytosanitary Measures; (4) the Sugar Industry; (5) Financial Services; (6) Rule-Making; (7) Public Sector Purchases; (8) Competition Policy; and (9) Practices by State-Owned Enterprises. 28   The five working groups consisted of: (1) Technical Norms and Agro-Industrial Trade; (2) Rules of Origin; (3) Customs Procedures; (4) Professional Services; and (5) Temporary Entry of Businesspeople and Intra-Company Employee Transfers.

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G. Chile-Peru Free Trade Agreement In June 1998 Chile and Peru signed a free trade agreement that was incorporated into the ALADI framework as ACE No. 38. The agreement established five different tariff reduction schedules (i.e., immediate reduction to zero upon entry into force of the agreement on July 1, 1998, or 0 percent after five, ten, 15, or 18 years, respectively) that were differentiated by the type of product and covered almost the entire universe of goods traded between the two countries. The textile and apparel industry had its own special tariff reduction schedule that was scheduled to culminate at zero for all items in 2006. Furthermore, Chile retained the right to use a price band mechanism for a select group of basic agricultural commodities, while Peru kept its special surcharge system for similar products. In February 2005 Chile and Peru signed an agreement to immediately reduce the tariffs to zero on a whole range of so-called sensitive products (e.g., cigarettes, paper, pens, tobacco, and washbasins) that had previously been subject to longer phase-out periods. The ALADI rules of origin (including its comparatively liberal 50 percent regional content requirement) apply to ACE No. 38. Special rules of origin that are generally stricter than the ALADI rules also exist for textiles, copper products, pharmaceuticals, agro-chemicals, and fruit juices. Goods made or assembled in “walled off” free trade zones such as Iquique in Chile and Tacna in Peru are specifically excluded from the bilateral free trade program. So too are used goods. Safeguard measures consisting of the temporary suspension of a tariff reduction schedule or even an increase of duties can be imposed to counteract sudden increases in the importation of goods that cause or threaten to cause grave harm to a national producer of the same or like product. A dispute resolution mechanism is created that, as a final step, can result in binding arbitration. In August 2006 Chile and Peru signed a new, much more comprehensive free trade agreement that includes chapters on investment (including procedures for resolving state-investor disputes), cross-border trade in services, and the temporary entry of businesspersons, and will replace ACE No. 38 when it comes into force (something that as of mid-2008 had not yet occurred). The new agreement will also provide a more sophisticated dispute resolution mechanism that, inter alia, allows state-to-state disputes to be referred to the WTO (when jurisdiction exists) or to utilize the system established under the agreement itself. One of the explanations for the emphasis on investment and services in the new agreement was that by 2005, Chile had become the seventh largest foreign direct investor in Peru, with about a third of those investments concentrated in services. Almost half of Chilean investments in Peru are concentrated in the energy sector, particularly in utilities providing electricity services. Left for future negotiations, however, were provisions on cross-border trade in financial services and participation in government procurement opportunities. H. Mexico-Uruguay Free Trade Agreement 1. Introduction In November 2003 the governments of Mexico and Uruguay signed a free trade agreement that came into force on July 15, 2004. The agreement was

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incorporated into the ALADI framework as ACE No. 60. ACE No. 60 does not apply to the petroleum sector. It also does not cover most trade in the automotive sector, which is subject to a previous ALADI agreement (i.e., ACE No. 55) that was signed in 2002 between Mexico, on the one hand, and the MERCOSUR bloc, on the other. ACE No. 60 must be seen in the light of a long and frustrating effort to conclude a Mexico-MERCOSUR Free Trade Agreement since 1996, when the ALADI preferential tariff agreements that Mexico had with each of the MERCOSUR countries should have expired. These bilateral ALADI agreements were regularly extended for 180-day periods in anticipation of an imminent Mexico-MERCOSUR Free Trade Agreement. When this accord never materialized by late 1997, Brazil stopped offering Mexico 180-day extensions and then signed a preferential market access agreement with Mexico in March 2002 (i.e., ACE No. 53) without consulting any of its other three MERCOSUR partners. Accordingly, it was difficult for Uruguay’s largest neighbor to object when Montevideo decided to sign a more ambitious free trade agreement with Mexico that went beyond the scope of its former ALADI preferential tariff access agreement on a limited number of goods to one that encompassed more tariff lines and added commitments on cross-border investment, protection of intellectual property rights, and trade in services. 2. Free Trade in Goods As previously mentioned, almost all trade in vehicles and auto parts is subject to the provisions of the previously negotiated ACE No. 55 between Mexico and MERCOSUR. The general rule is that if an item is not included in Annexes 3-03 (3) or 303 (4) to ACE No. 60, the product received immediate duty-free treatment when the agreement entered into force on July 15, 2004. Most industrial products of a non-agricultural origin were accorded immediate duty-free treatment as of mid-2004. On the other hand, a significant number of products found in both annexes are subject to either product-specific tariff reduction schedules that do not necessarily achieve complete free trade but only a higher tariff preference over imports from third countries (e.g., cow meat, certain fruits, and rice) or are subject to graduated levels of preferential tariff treatment eventually culminating at zero (e.g., shoes and a whole range of primary commodities from Uruguay). In addition, there are goods (such as cheeses as well as textiles and clothing imported from Uruguay) that are subject to tariff rate quotas or can only be imported at a preferential duty during certain times of the year. Other items such as sugar, tobacco, and certain types of clothing are permanently excluded from receiving any type of tariff preference. With the exception of basic foodstuffs exported from Mexico, Mexico and Uruguay both agreed not to levy export taxes on products traded among them. 3. Rule of Origin Requirements Only those products that satisfy the applicable rules of origin can be traded between Mexico and Uruguay duty free or at a preferential tariff rate. It should

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be pointed out that the vast majority of automotive products are subject to separate rules of origin found in ACE No. 55. To be eligible for duty-free treatment, the good must either be: 1. obtained or made exclusively with inputs from either Mexico or Uruguay or both; 2. made with inputs from outside of either Mexico or Uruguay, so long as the final product undergoes a transformation in either or both countries as reflected by a change in tariff classification heading; 3. made with inputs from outside of either Mexico or Uruguay, so long as the final product undergoes a change in tariff classification heading as well as satisfies a regional content requirement; or 4. made with inputs from outside either Mexico or Uruguay that satisfy a regional content requirement. In order to determine the regional content of a product, either the transaction value method or the net cost methodology may be used. The same formula used in NAFTA to determine the transaction value of a good is also used for the Mexico-Uruguay Free Trade Agreement:

Regional Content Value =

FOB Price of the Good – Value of Non-Originating Inputs FOB Price of the Good

× 100

Similarly, the identical formula used in NAFTA to obtain the net cost value of a product is also applicable to ACE No. 60: Regional Content Value =

Net Cost of the Good – Value of Non-Originating Inputs Net Cost of the Good

× 100

The net cost method must be used when there is no transaction value because the input was not the subject of an arm’s-length sale (e.g., an intracompany sale) or there exists some other impediment to determining its actual value. Otherwise, the decision as to which of the two methodologies to use is left to the discretion of the exporter or the producer (unlike NAFTA, which limits use of the net cost method to the automotive sector). As a general rule, regional content when the transaction value method is utilized must be at least 50 percent in order for a product to receive the benefits of ACE No. 60 while the corresponding regional content requirement under the net cost methodology is at least 40 percent. ACE No. 60 includes a de minimis rule that allows inputs that do not exceed 8 percent of the final product’s value and do not undergo a required change in tariff classification heading to be disregarded in determining a final product’s origin. Annex 4-03 to ACE No. 60 contains specific rules of origin for certain

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products. For the most part, these product-specific rules mandate what type of shift in tariff classification heading must occur in order to make the final product eligible for preferential duty treatment and, in some cases, what additional regional content requirement must be fulfilled. This represents a change from product-specific rules of origin in traditional Latin American trade agreements that mandated that certain national inputs had to be used in the elaboration of a final product (e.g., cheese or yogurt made with nationally produced milk). Exporters are required to fill out a certificate of origin for all goods (except those reflecting a transaction less than U.S.$1,000) from countries that wish to receive preferential tariff treatment under ACE No. 60. Certificates of origin are valid for up to two years after they have been issued by a qualified government authority or designated agent. The certificates of origin can cover the exportation of one or more goods, or can cover continuous exports of identical products for a period of up to 12 months. Unlike traditional ALADI agreements, however, the certificate of origin does not have to be physically presented to the customs authorities upon entry of the good unless customs specifically requests to see it. Otherwise a simple statement in the entry documents that the product meets the relevant origin requirements is sufficient. The complete rules on procedures for challenging the authenticity of certificates of origin and applicable penalties for making a fraudulent claim of compliance are found in Chapter 5 to ACE No. 60. Interestingly, Chapter 5 allows the customs’ authorities in each country to issue preliminary determinations as to whether a good qualifies as originating in either Mexico or Uruguay and is therefore able to take advantage of ACE No. 60. 4. Safeguard Measures Safeguard measures can be imposed on goods subject to the tariff reduction schedules in ACE No. 60 whenever there is a sudden surge in their importation that causes actual or threatened harm to a segment of national production representing no less than 50 percent of all domestic producers of a similar or directly competitive item. The safeguard measures are limited to suspension in whole or in part of the preferential tariff treatment for a level of imports that exceeds the average amount imported during the preceding three years. Safeguard measures are generally imposed for a year (but can, when justified, be extended for a subsequent one-year period). Safeguard measures can only be imposed following an investigation that is “equitable, transparent and efficient” and allows input from all interested parties at a public hearing that must also guarantee, where appropriate, the confidentiality of any disclosed information. Any investigation must be preceded by a ten-day opportunity for consultations among the two governments. Emergency safeguard measures based on a preliminary showing of actual or threatened grave harm can be imposed for up to 200 days. Any monies collected as a result of an emergency safeguard tariff must be returned, however, if it is subsequently determined, following a full-fledged investigation, that there is no evidence of harm.

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Any country that imposes a safeguard measure must offer some type of mutually agreed upon and equivalent level of compensation that may include increased preferential market access for another product or service into the country that has applied the safeguard measure. If the governments cannot reach a mutually satisfactory arrangement as to what this compensation should be, the country against which a safeguard has been imposed may respond with a retaliatory measure of equivalent commercial impact for up to 60 days (presumably to force an agreement). Whenever either Mexico or Uruguay wants to impose an across-the-board “global” safeguard, it can only include imports from the other partner if they “represent a substantial part of the total [global] imports and contribute in an important manner to the grave harm or threat of grave harm” to national production. To be deemed to represent a “substantial” part of total imports, the partner must be among the five largest providers within the immediate previous three years and must have contributed to the sudden surge in imports of a like or similar good. 5. Unfair Trade Practice Remedies Mexico and Uruguay agree to cooperate and coordinate efforts to prevent uncompetitive practices that may undermine the full functioning of ACE No. 60. In those areas of the economies where state enterprises maintain a monopoly, both countries commit themselves to prevent abuse of that position through a myriad of potential practices, including the failure to issue import or export licenses, manipulate prices, or restrict the sale of goods and services to firms or individuals from the other state party. From the moment ACE No. 60 came into force in July 2004 Mexico and Uruguay have agreed not to subsidize the export of any type of agricultural product that is traded among them. At the same time, if either country feels that its exports to the other are being harmed through the latter’s importation from third countries of agricultural products that received some type of export subsidy, it can request that the other government impose measures to counteract that negative impact. Pursuant to Chapter 7 of ACE No. 60, Mexico and Uruguay have the right to impose antidumping or countervailing duties on imports from the other whenever an investigation carried out by the relevant national authority determines that there is evidence of dumping or that the imported goods benefited from some type of subsidy, and that either practice harms or threatens to harm a segment of national production of identical or similar goods or significantly retards its development. Before an antidumping or countervailing duty investigation can commence, however, the governments are required to engage in consultations. Although the procedures for antidumping and subsidized exports are carried out according to the national legislation in force in each country, there are certain notification, publication, and other requirements (such as mandatory public hearings and how to handle confidential information) that

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must be fulfilled. Furthermore, any interested party can make a request that the decision to impose an antidumping or countervailing duty be reviewed at the end of each year. In no case may antidumping or countervailing duties be in place for more than five years. Article 7-19 allows new exporters who are not affiliated with existing firms to request either a complete exemption or an individualized dumping margin or countervailing duty. Pursuant to Article 720, a country may request consultations of the other if it feels that dumped or subsidized goods are being imported from third countries and undermining its ability to compete in that market. The main objective of these consultations is to encourage the other government to impose antidumping or countervailing duties vis-à-vis the third-country imports. 6. Technical Norms, Sanitary and Phytosanitary Measures As a general rule, the use of technical norms by Mexico and Uruguay is governed by the WTO’s Agreement on Technical Barriers to Trade. This includes an obligation not to apply technical norms to imports from the other country in a fashion different than that accorded to national or third-country producers. In addition, both countries commit themselves to promoting the compatibility of their respective technical norms and procedures for evaluating compliance so as to facilitate recognition of the equivalency of their respective technical norms. In general, both governments are required to keep each other appraised of any proposed adoption of new technical norms or any modification of existing ones, as well as to provide sufficient opportunity for feedback and commentary. Mexico and Uruguay are only allowed to impose sanitary and phytosanitary measures that protect the health and well-being of their respective citizens, as well as that of agricultural and forestry products and fisheries, so long as they can be scientifically justified. Each country is also required to accept the equivalency of their respective sanitary and phytosanitary norms, even if they differ, so long as it can be shown that they provide a comparable level of protection. In addition, both countries must facilitate the entry of inspectors from the other country carrying out testing and other relevant activities. If the parties are unable to reach a consensus on the applicability of a sanitary or phytosanitary measure, the matter may be referred to the dispute resolution mechanism found in Chapter 18 of ACE No. 60. 7. Services The airline industry (although not support services such as aircraft maintenance and repair operations) and the financial services sectors are specifically excluded from the category of services otherwise liberalized by ACE No. 60. In addition, the rules governing the telecommunications sector are subject to a separate chapter. As a general rule, each country is required to accord any service provider from the other country the same treatment it accords its own nationals or (where relevant) to third-country nationals. In addition, no government may require that a service provider from the other country establish or maintain any office

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or subsidiary corporation within its territory or that it otherwise be resident in the country as a pre-condition for offering its services within its territory. Each government is also required to ensure that any licensing or certification requirements for service providers are based on “objective and transparent” criteria that seek to ensure capability and aptitude and are not unnecessarily onerous or veiled attempts at protectionism. Interestingly, there is no automatic requirement of mutual recognition of degrees and education, unless Mexico and Uruguay actually enter into such an agreement. An annex to Chapter 10 does, however, provide regulations that harmonize the procedure for mutual recognition of the degrees of professional service providers. Unless the two countries otherwise agree, there is also no automatic requirement that the governments must remove nationality or permanent residency requirements as a pre-condition for receiving licenses or certificates to offer specific services within its territory. Finally, a government may (after prior notification and consultation with the other government) strip the right of a service provider to offer services within its territory if it can establish that the firm does not conduct significant commercial activities in either Mexico or Uruguay and is owned or controlled by persons who are not from either country. A number of annexes are included in Chapter 10 in addition to the previously mentioned one dealing with professional services. In particular, Annex I lists services that are exempt from the ACE No. 60’s liberalization program, while Annex II contains Non-Discriminatory Quantitative Restrictions. Annex III lists exceptions to the MFN clause where either Mexico or Uruguay list services that they may permit third-country service providers to offer within their respective territories but not to those from their ACE No. 60 partner. Finally, Annex IV lists service activities reserved for the government. As previously mentioned, the rules governing the provision of services in the telecommunications sector are found in a separate chapter in ACE No. 60. The type of telecommunication services that are opened to service providers from the other country in a “reasonable and non-discriminatory” fashion are those dealing with access to or use of public telecommunication networks (such as by Pay TV or Internet service providers) as well as so-called value added services (such as cellular telephony). 8. Investment Protection Investors from either Mexico or Uruguay are to be treated in the other country in the same manner as if they were a national of that country. Similarly, under a MFN clause, they are to be treated in a no less favorable manner than investors from third countries. This treatment shall, at a minimum, be “fair and equitable” and provide adequate protection of an investment. Export performance targets, requirements that products bear a certain level of national content, or that national service or goods providers be utilized as a condition for permitting any investment project are strictly forbidden. So too are requirements that restrict domestic sales, make access to foreign exchange contingent on the level of imported inputs or exports of final products, or that mandate the transfer of certain skilled personnel or technology. Furthermore,

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neither country can require that a certain percentage of the executives of a firm investing within its territory consists of its own nationals (although it is possible to have nationality or residency requirements with respect to the firm’s board of directors). As a general rule, both countries must permit the timely cross-border transfer of funds associated with any investment (including dividend and interest payments, royalties, etc.) in a fully convertible currency. Notwithstanding this general rule, Mexico and Uruguay are authorized to impose temporary restrictions on the free transfer of capital whenever either faces a balance-ofpayment crisis. Property representing an investment cannot be expropriated unless it is for public use, and the decision adheres to the principle of non-discrimination, occurs under the full color of law, and an indemnification is paid based on the fair market value of the investment just prior to its expropriation. The protections accorded to cross-border investment can be denied to firms that are owned or controlled by third-country individuals that have no substantive presence in the country that is being offered preferential access under ACE No. 60. Disputes arising over the interpretation and enforcement of the investment chapter can be referred to a special dispute resolution mechanism that is separate and apart from the general system found in Chapter 18 of ACE No. 60. The complaining party also has the option to use the national court system, but once one of the two options is exercised, the individual or firm is bound by that choice. As a precursor to the use of the arbitration option, the individual or firm is required to first attempt to settle its dispute with the government through consultations. If the matter cannot be resolved, the dispute can be referred to a three-person (unless the parties agree to a different number) arbitration panel organized under the ICSID Convention or that adheres to the rules of arbitration of UNCITRAL. The actual rules of procedure that must be followed in the arbitration proceedings are either those of ICSID, the New York Convention of 1958, or the Inter-American Convention on International Commercial Arbitration. The arbitration panel, whether on its own initiative or at the request of one of the parties, can seek the opinions of outside experts and can also issue temporary injunctive relief. Arbitration awards are final and, if the complaint was filed by Mexico, can be published. 9. Temporary Entry of Businesspeople, Professionals, and Investors In order to facilitate the temporary entry of individuals who are either involved in the cross-border provision of goods or services or who seek to establish and manage their investments in the other country, Chapter 12 of the free trade agreement commits both countries to apply their respective immigration laws in an “expeditious manner so as to avoid delays and unnecessary prejudice.” There are no provisions requiring the creation of special visas, however, or exemption from the payment of consular processing fees. Instead, the focus of Chapter 12 is to make immigration requirements fully transparent and easily

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accessible to interested parties. Disputes arising over application of Chapter 12 can be referred to the general dispute resolution system found in Chapter 18 only if the practice that is being complained about is recurrent, and all administrative procedures under domestic law have already been exhausted. In order to obtain temporary entry for businesspersons and those offering the type of professional services listed in an Annex to Chapter 12 as well as for investment purposes, the interested party must submit some type of documentation that supports this claim as well as proof of the international character of the business activity. The purpose of this requirement is to show that the individual seeking entry will not join the local work force. Accordingly, evidence of this can include an employment contract in which the salary is paid by an entity that carries out the bulk of its business overseas. Furthermore, the crossborder activity should either be “sustainable” or represent an “important sum of capital.” The facilitation of temporary entry extends to all executives, managers, and employees with specialized skills from legally constituted companies that are involved in cross-border business or investment activities. Mexico and Uruguay can require, however, that an individual has been employed by a firm for at least three years. Neither country can place limits on the number of persons who can be temporarily admitted as businesspersons or investors, nor can they demand that they first obtain a work permit or comply with other labor procedures as a pre-condition for gaining temporary entry status. 10. Intellectual Property Rights Protection Pursuant to Chapter 15 of ACE No. 60, Mexico and Uruguay are required to enforce the provisions of: the Paris Convention for the Protection of Industrial Property (as modified by the 1967 Stockholm Act); the Berne Convention for the Protection of Literary and Artistic Works (as modified by the Paris Act of 1971); the 1961 Rome Convention for the Protection of Actual or Interpretive Artistic Works, Phonograms, and Radio Broadcasts; the 1971 Geneva Convention for the Protection of the Producers of Phonograms Against Unauthorized Duplication; and the 1961 Convention for the Protection of New Plant Varieties (as revised in Geneva in 1972 and modified in accordance with the 1978 Act).29 Similarly, both governments must enforce Article 16.3 of the WTO TRIPs Agreement. Both countries also agree “to do everything possible” to ratify (if they have not already done so) the World Intellectual Property Organization (WIPO) Copyright Treaty of 1996 and the WIPO Performances and Phonogram Treaty of 1996.30 The copyright protections of the Berne Convention are expressly extended to include all types of computer software programs. Furthermore, both Mexico and Uruguay agree to protect so-called notorious marks, utility models, industrial designs, trade secrets, as well as origin or geographical name 29   The full texts of all these treaties and agreements (but for the Convention for the Protection of New Varieties of Plants) are available at the Web site of WIPO, at http://www. wipo.int/treaties/en. The full text of the various Acts of the 1961 International Convention for the Protection of New Varieties of Plants, as revised at Geneva (1972, 1978, and 1991) are available at http://www.upov.int/en/publications/conventions. 30   The full texts for both these treaties are available at the Web site of WIPO, at http:// www.wipo.int/treaties/en.

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designations. With respect to the latter, Uruguay expressly recognizes that the terms “tequila” or “mezcal” can only refer to products originating in Mexico. Mexico and Uruguay reserve the right to prevent intellectual property rights from being used in such a way that unjustifiably limits trade or undermines the transfer of technology or are otherwise uncompetitive or perpetuate a monopoly. Within five years after the ACE No. 60 came into force (i.e., by July 2009), Article 15-11 obligates both countries to impose civil fines on anyone who manufactures, imports, sells, or rents devices intended to capture satellite transmission of programs without authorization of the rightful owners. As a general rule, Mexico and Uruguay are required to establish legal procedures to effectively protect intellectual property rights. These include the ability of judges to issue preliminary injunctions, order the seizure and destruction of infringing goods, and require customs officials to prevent the importation of infringing goods from entering the local market. Judges are also allowed to impose legal fees as part of any damage award in a civil case. Furthermore, both countries must establish criminal penalties (including incarceration) for serious cases of trademark falsification and copyright pirating on a widespread commercial level. There is no obligation to establish any type of special judicial system to enforce intellectual property rights, however. 11 Dispute Resolution Chapter 18 of ACE No. 60 contains the general system for resolving disputes among Mexico and Uruguay that may arise over the “interpretation, application, or failure to comply with the provisions” of their free trade agreement as well as “the application of measures that are incompatible with the obligations” or that annul or undermine the provisions of ACE No. 60. As previously noted, a special dispute resolution mechanism exists to handle investment disputes that may arise between a government and an investor from the other country. Interestingly, Chapter 18 gives either government the option of using the WTO dispute resolution system as well whenever it has subject matter jurisdiction. Once either of the two options is exercised, however, the parties are bound by that decision. Prior to the submission of the dispute to either system, the parties are required to engage in consultations to settle the matter, and these discussions should not extend beyond 30 days. If a matter cannot be resolved amicably within 30 days, and the decision is made to use the system created under Chapter 18, the matter is sent to binding arbitration. Pursuant to Article 18-05, an arbitration panel is made up of three-person (unless the parties agree to a different number) panel. Each country designates its own panelist from a pre-established list of arbitrators, and the third should ideally be chosen by mutual consent and should not be a national or resident of either country to the dispute. The remuneration for the arbitrators is borne by each side in an equal amount. As part of the deliberative process, the arbitrators are permitted to evaluate the provisions of ACE No. 60, any additional legal instruments and treaties that are connected

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to it, all information submitted by the parties, and to utilize the standards of interpretation commonly accepted under public international law. The arbitrators are also allowed to seek the assistance of outside experts in making a final interpretation but must first inform the state parties of their intention to do so. The arbitration panel should normally issue an award within 90 days after it has been seated. Articles 18-11 and 18-12 contemplate that the Administrative Commission created under Chapter 17 to oversee implementation of ACE No. 60 play a role in ensuring implementation of an arbitration panel’s decision through the recommendations it issues to the parties following the issuance of an award. If the Administrative Commission, for whatever reason, decides not to intervene and issue recommendations, the parties are obliged to comply with the arbitration panel’s decision. If a government fails to comply with an arbitration award within 60 days after it has been issued, the other country can retaliate through the suspension of benefits arising under ACE No. 60 of an equivalent nature. Claims that the retaliatory measures imposed are excessive are referred to the Administrative Commission, which has the authority to recall the same arbitration panel that issued the original award (or to seat a new, special panel if this is not possible) to make such a determination. 12. Conclusion In order to ensure the smooth functioning of their free trade agreement, Mexico and Uruguay committed themselves to publishing all their laws, regulations, and procedures, and making them freely available to all interested parties from both countries. Similarly, each country committed itself to keeping the other government abreast of all proposed changes in the law that might impact on ACE No. 60 in order to facilitate the exchange of appropriate feedback. Mexico and Uruguay left open for future negotiations the inclusion of a chapter to ACE No. 60 dealing with government procurement. Similarly, they also committed themselves to negotiate a chapter on cross-border liberalization of their respective financial services sectors. As of mid-2008, however, neither of these two chapters had been negotiated (despite a mid-2006 deadline for both). The fact that neither chapter has been negotiated is not surprising. The reality is that bilateral trade and cross-border investment between Mexico and Uruguay is insignificant, and ACE No. 60 has done little to dramatically change this. ACE No. 60 was as much a political statement on the part of the Uruguayan government led by then President Jorge Batlle to let its two larger MERCOSUR partners know that Uruguay was unhappy with their bilateral deals and trade arrangements and that it too could pursue other trade options including negotiating an accord that perforated MERCOSUR’s common external tariff.

CHAPTER 3

ORIGINS, CURRENT STATUS, AND FUTURE OF MERCOSUR I. Introduction On July 6, 1990, Presidents Carlos Menem of Argentina and Fernando Collor de Mello of Brazil signed the Act of Buenos Aires calling for the creation of a common market between their two countries by 1995. The date was specifically chosen to coincide with the end of both presidents’ respective terms in office and therefore emphasize the personal importance both men attached to the project. The broad, general guidelines for the establishment of this common market to be known as the Common Market of the South (MERCOSUR, or MERCOSUL in Portuguese) were included in the Latin American Integration Association (ALADI) Economic Complementation Agreement or Acuerdo de Complementación Económica (ACE) No. 14, signed in December 1990. Paraguayan and Uruguayan fears that they would be shut out of a common market between two of their largest trading partners caused both countries to ask to be included in the MERCOSUR process. This request resulted in the Treaty of Asuncion, which was signed by Argentina, Brazil, Paraguay, and Uruguay in the Paraguayan capital on March 26, 1991. The Treaty of Asuncion was later incorporated into the ALADI framework as ACE No. 18 in November 1991, following the treaty’s near unanimous ratification in the legislatures of all four member states. The Treaty of Asuncion, besides including two new countries in the MERCOSUR project, also expanded on ACE No. 14 by filling in some of the legal and institutional gaps found in the earlier document.    The decision to bring the MERCOSUR process within the ALADI framework was reputedly done as a way to avoid the reporting requirements under the General Agreement on Tariffs and Trade (GATT), since ALADI had already been reported under the Enabling Clause. Regardless, the WTO Committee on International Trade and Development established a working group in 1993 to review MERCOSUR under both Article 24 of the GATT and the Enabling Clause.    According to figures supplied by the ALADI Secretariat in Montevideo, by 1990 nearly a third of Paraguay’s exports and approximately 30 percent of Uruguay’s exports went to Brazil. Together, Brazil and Argentina supplied almost 40 percent of Uruguay’s total imports and just under 30 percent of Paraguay’s imports.    Among the innovations of ACE No. 18 over ACE No. 14 were better defined rules of origin as well as a more effective dispute resolution mechanism. For its part, the provisions in ACE No. 18 were almost identical to those found in the Treaty of Asuncion, albeit the language in ACE No. 18 detailed with greater precision any exceptions to the general free trade scheme during the transition period.

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The original intention of MERCOSUR was to encourage each member state to specialize in producing those inputs in which it enjoyed a competitive advantage. The final good would then be exported outside the region as a product made in MERCOSUR. The Treaty of Asuncion mandates that the MERCOSUR common external tariff (CET) has to be at such a level so as to ensure that the final output of the member states is internationally competitive. II. Argentine-Brazilian Integration and Economic Cooperation Program of 1986 The idea of creating a common market between Argentina and Brazil was not the brainchild of either Presidents Menem or Collor de Mello. Previously, in November 1988, then Presidents Raul Alfonsin of Argentina and José Sarney of Brazil had signed the Treaty of Integration and Economic Cooperation. This agreement sought to transform Argentina and Brazil into a customs union by 1999. After 1999 both countries would begin taking further steps to transform the proposed customs union into a full-fledged common market. The 1988 Treaty on Integration and Economic Cooperation was, in turn, an outgrowth of the Argentine-Brazilian Program for Integration and Economic Cooperation (PICAB), begun by Presidents Sarney and Alfonsin in 1986. The primary motive behind PICAB was to gradually open ever more sectors of Argentine-Brazilian trade to complete free trade and thereby improve each country’s respective economy through the concept of comparative advantages. The sectors that were particularly targeted included wheat, agro-industrial (including basic foodstuffs), capital goods, steel, automobile, aeronautics, communications, energy, surface and maritime transport, biotechnology, and nuclear power. The hope was that steady economic growth in a complementary fashion would help insure political stability for both nations as they emerged from years of harsh military rule and pent-up social demands. Although PICAB brought neither economic nor political stability to Argentina or Brazil, it did initiate the steady rise in total Argentine-Brazilian bilateral trade that continues to the present (albeit with a temporary contraction at the start of the 21st century). In addition, PICAB included a number of programs that supported the subsequent adoption of market-oriented economic policies in Argentina and Brazil during the 1990s. For example, PICAB insured Brazil of a steady supply of agro-industrial products, particularly grain imports, which allowed the country to begin dismantling its expensive agricultural subsidies program to wheat farmers in southern Brazil.

   This is acknowledged in the Treaty of Asuncion itself. The preamble states that one of the main reasons the MERCOSUR countries are trying to create a single, integrated market is that they wish to establish a more effective negotiating position to help ensure that their products will have better access into the markets of other trade blocs such as the European Union.    M. Hirst, El Programa de Integración Argentina-Brazil: Concepción Original y Ajustes Recientes 22 (1990).

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PICAB also incorporated an important program designed to improve surface transport between Argentina, Brazil, and Uruguay (i.e., Protocol No. 18). Among the concrete results of this program was that Argentina and Brazil established single sanitary inspections for agricultural products at border crossings. In addition, since January 1988 goods shipped from São Paulo to Buenos Aires or vice versa only need be inspected by customs officials at the point of embarkation rather than at the actual border posts. Another measure adopted under this PICAB program included increasing tonnage limits at Argentine-Brazilian border crossings to correspond with the maximum permitted on each country’s highway system, thereby ending the previous time-consuming and costly transshipment of goods at the border. The cumulative effect of all these measures led to reduced rates for cargo shipped by truck and helped make Argentine exports to Brazil cost competitive despite an Argentine peso which was overvalued during most of the 1990s vis-à-vis the Brazilian currency. Finally, the inclusion in PICAB of programs designed to encourage cooperation in the nuclear energy and aeronautics fields contributed to a sharp reduction in the tensions that had traditionally characterized Argentine-Brazilian relations since colonial times. Undoubtedly, this was the PICAB’s most important contribution. It finally put an end to the intense military rivalry between Argentina and Brazil that, as recently as the 1970s, had the two countries locked in a bitter nuclear arms race.10 Absent the resolution of this intense rivalry, no economic integration project in the Southern Cone could have had any realistic chance of success. The end of this traditional rivalry also allowed both governments to redirect scarce resources from bloated military defense budgets to human capital resource development. Despite the creative debt it owes to PICAB and the 1988 Treaty on Integration and Economic Cooperation, MERCOSUR abandoned the PICAB’s more gradualist approach. It sought universal free trade within a short period of time. That MERCOSUR adopted a more aggressive free trade stance is not surprising since this coincided with the wide-ranging market-oriented economic policies that were being pursued by all four MERCOSUR countries during the 1990s.11    As a result of Uruguay’s inclusion, this was the only program in PICAB that was trilateral in nature. While Uruguay was never invited to participate in the full PICAB program, it enjoyed preexisting bilateral trade agreements with Argentina under the CAUCE (Argentine-Uruguayan Economic Complementation Agreement) of 1974 and with Brazil under the PEC (Trade Expansion Protocol) of 1975.    N. Huici, Primeros Pasos de la Integración: Argentina-Brasil-Uruguay 179 (1989).    Id. at 179–80.    Id. at 180–81. 10   A retired Brazilian vice-admiral attending a Buenos Aires symposium sponsored by the general staffs of the Argentine and Brazilian Armed Forces in April 1987 credited PICAB with giving each country’s military a new horizon and replacing the historical theory of inevitable conflict between the two countries. Military Affairs: Proposals for Closer Ties with Argentina, Latin Am. Wkly. Rep., Apr. 23, 1987, at 9. A binational venture was proposed at this same conference for the construction of a nuclear submarine. 11   It is interesting to point out, however, that while the PICAB initially opened comparatively few sectors of the economy to bilateral free trade, the elimination of tariffs, when

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Given the dislocations that this “each country for itself” approach engendered, however, the wisdom of the PICAB’s gradualist and more cooperative program has taken on a more attractive hue in hindsight. Former Argentine Economics Minister and 2007 presidential candidate Roberto Lavagna, who was also one of the architects of PICAB, emphasizes that the difference between the earlier PICAB and the subsequent MERCOSUR process is not that both did not share universal free trade as an ultimate goal, but rather that the PICAB’s methodology for achieving that goal permitted a joint restructuring of key industries. During an interview in 1996 Lavagna pointed out that the automobile accord developed under PICAB and which continued into the 21st century, permitted Argentina and Brazil to work together to restructure, modernize, and make their automobile industries internationally competitive rather than engage in a zero sum game that would ultimately have been lost by Argentina (given the smaller size of its economy and reduced economies of scale).12 III. Overview of MERCOSUR from Its Inception A. Introduction Almost from the day it was launched on March 26, 1991, skeptics predicted MERCOSUR’s imminent collapse, while some economists fretted about the project’s supposed protectionist designs to create a trade fortress. The most notorious example of the latter was a 1996 report written by a World Bank economist that relied on out-of-date trade statistics and attributed to MERCOSUR certain policies that were actually premised on pre-existing national automotive regimes.13 Subsequent tirades tried to blame Argentina’s economic melt down at the start of the twenty-first century on membership in MERCOSUR.14 A wellknown economist from a New York City investment bank even went as far as to proclaim MERCOSUR dead in 2001.15 All of these negative predictions and assessments proved to be intemperate, as MERCOSUR continues to facilitate increases in intra-regional trade flows and plays a central role in the foreign it came, was immediate and not phased during a transition period as in the MERCOSUR project. 12   Interview with Dr. Roberto Lavagna, President, Ecolatina, in Buenos Aires, Argentina, May 14, 1996. 13   See, A.J. Yeats, Does Mercosur’s [sic] Trade Performance Justify Concerns about the Global Welfare-Reducing Effects of Regional Trading Arrangements? Yes! (1996) (unpublished manuscript, World Bank, Washington, DC). Yeats’s report led to bombastic newspaper headlines in the U.S. media. See, e.g., South American Trade Pact Is Under Fire, Wall St. J., Oct. 23, 1996, at A3; MERCOSUR Under Siege, J. COM., Oct. 30, 1996, at 6A. 14   S. Edwards, This Argentine Scheme, Fin. Times, Jan. 21, 2002, at 15. See also M.A. O’Grady, Waiting for a Trade Deal Has Cost Latin States Dearly, Wall St. J., June 28, 2002, at A9. 15   The economist was Arturo C. Porzecanski, who was a managing director at the time at ABN-AMRO Securities in New York City. Members’ Policies Spell MERCOSUR’s Demise, STRATFOR (2001), available at http://www.stratfor.com/latinamerica/commentary/0110101600. htm. He repeated that assertion at a conference attended by this author in New York City and sponsored by the Brazilian-American Chamber of Commerce on August 13, 2002, even though the reason for his initial statement in 2001 was Argentina’s then “incompatible” trade and fixed exchange rate regimes (something that the January 2002 devaluation of the Argentina peso resolved).

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trade policy of all its member states.16 That is not to deny, however, that the original common market goal of MERCOSUR now appears ephemeral and the project has lately been utilized as a way to attain short-term, geopolitical aims that could well undermine its long-term economic mission. Since its launch, MERCOSUR has been a catalyst for hundreds of crossborder investments, a phenomenon virtually unknown in the Southern Cone prior to the 1990s, and one that needs to be further encouraged as part of a strategy that facilitates the creation of internationally competitive subregional firms. With the return of economic growth to the Southern Cone following the recessions at the beginning of the 21st century, the dramatic annual increases in intra-regional trade flows that MERCOSUR experienced prior to 1998 have also returned. This has been facilitated by the fact that all four core member states now enjoy similar currency regimes. After January 1999, for example, Argentine exports to Brazil were handicapped by a highly overvalued currency, following Brazil’s decision to devalue the already weaker real, and a rough parity in exchange rates was not restored until the sharp devaluation of the Argentine peso in January 2002. B. Trade Creation vs. Trade Diversion Argentina and Brazil are jointly responsible for some 80 percent of total intra-MERCOSUR trade flows. In 1991 MERCOSUR’s first year in existence, bilateral trade between the two countries totaled U.S.$3 billion, with a slight surplus in favor of Argentina. The next two years saw steady increases in bilateral trade as MERCOSUR’s automatic annual tariff reduction schedule was implemented. During that time, the trade surplus was in Brazil’s favor as a result of the 1991 adoption of the Convertibility Plan in Argentina that tied the Argentine peso one-to-one with the U.S. dollar. Convertibility served not only to restore economic stability and growth to Argentina, thus creating a greater demand for Brazilian goods, but also made Brazilian goods cheaper given the policy of sharp currency devaluation Brazil pursued at the time. Even with the disadvantage of an overvalued currency vis-à-vis Brazil, however, the Argentines were still able to annually increase the quantity of exports going to Brazil in

  See, e.g., A. Hurrell, The Politics of Regional Integration in MERCOSUR, in Regional InteLatin America and the Caribbean: The Political Economy of Open Regionalism 210 (V. Bulmer-Thomas ed., 2001). Hurrell points out that Brazil, for example, has a number of important reasons for supporting MERCOSUR as a key component of its economic and foreign policy. First, the direct costs of any reversion to rivalry with Argentina would be very high. Second, a prolonged souring of relations would undermine the strategic objective of regional integration—integration as a means of taking forward a national industrial project under new global conditions, increasing international bargaining power, and attracting foreign capital and direct foreign investment. Third, MERCOSUR is critical to Brazil’s relations with Europe, which continue to rely very heavily on the continued development of the ‘region-region’/EU.-MERCOSUR ties. Fourth, MERCOSUR provides the political and economic framework for Brazil’s broader policy in South America. Finally, and most importantly, MERCOSUR is central to Brazilian relations with the United States. The idea of MERCOSUR as a counterweight, as a negotiating instrument with the United States, has never been far beneath the surface. Id. at 210. 16

gration in

86  •  Latin American and Caribbean Trade Agreements

1992, 1993, and 1994.17 Dramatic growth in bilateral trade continued through 1997, although by 1995 the surplus had switched in favor of Argentina. The explanation for this reversal was, in part, the adoption of the real plan which, temporarily at least, left the new Brazilian currency worth more than the U.S. dollar (and hence the Argentine peso). Despite the significant stagnation in Argentine-Brazilian trade flows between 1998 and 2004, total trade between the two countries in 2002 (the year of sharpest contraction) still represented a higher than threefold increase from the U.S.$2.1 billion total recorded in 1990 (the year before MERCOSUR came into existence). Secondly, Argentina managed to retain its trade surplus with Brazil, despite the January 1999 maxi-devaluation of the Brazilian real that left Argentine exporters at a competitive disadvantage because of an overvalued currency. Widely reported fears that Argentina would suffer a mass invasion of Brazilian imports into Argentina never materialized. For one thing, the prolonged Argentine recession that began in 1998 proved more effective in quelling demand for Brazilian imports than threatened safeguards (that, for the most part, were never actually imposed). The most interesting development with respect to MERCOSUR is that the feared trade diversion away from more efficient sources of final goods and inputs from other parts of the world never materialized.18 Until 1999 the importance of the subregional market as a destination for MERCOSUR exports increased, in some cases at a higher percentage than globally. What is most noteworthy is that this increase in the importance of the subregional market did not come at the expense of exports destined for outside MERCOSUR, which also grew. After 2002 the percentage of MERCOSUR exports destined for the subregional market decreased dramatically as a percentage of global exports, but this was primarily a result of the explosion in Asian demand for Southern Cone primary commodities such as grains, soy, vegetable oils, and minerals. The fact is that trade within MERCOSUR has fully recovered from its nadir in 2002 and has expanded significantly beyond the peaks achieved during the 1990s, but this has been masked by the fact that the international prices of raw materials 17   This fact should have given pause to those who, as it turns out, wrongly argued that MERCOSUR would disintegrate in the face of a maxi-devaluation of the Brazilian real in January 1999. Despite its overvalued currency, Argentina still managed to increase overall exports to Brazil during these three years. Undoubtedly the economic stability that Argentina enjoyed at the time was also a factor, in that it allowed Argentine exporters to further reduce profit margins so as to remain competitive in the Brazilian market. 18   The truth is that this concern was overblown given that levels of protectionism fell sharply in the MERCOSUR countries during the late 1980s and 1990s due to implementation of unilateral tariff reduction programs. The simple average most-favored nation (MFN) tariff for MERCOSUR fell from 41 percent in 1986 to 12 percent by 1996. Furthermore, the preferential tariff reductions within MERCOSUR were smaller than the World Trade Organizatin (WTO) MFN reductions and, as a result, there was a substantial reduction in the average level of protectionism to external countries as well as within MERCOSUR. These reductions in external tariffs coupled with economic growth both served to encourage trade between MERCOSUR countries and the rest of the world throughout the 1990s. A. Bartholomew, MERCOSUR and the Rest of the World, in Regional Integration in Latin America and the Caribbean: The Political Economy of Open Regionalism 253 (V. Bulmer-Thomas ed., 2001).

Origins, Current Status, and Future of MERCOSUR  • 87

(which dominate global exports) have risen faster than prices of manufactured goods (which are more significant in intra-MERCOSUR trade).19 Import data reveal even more clearly that MERCOSUR never contributed to trade diversion. Since MERCOSUR’s founding in 1991, imports sourced from within the subregion have remained fairly steady at 20 percent (give or take a couple of percentage points above or below in a given year) of MERCOSUR’s total imports from all sources in the world. Accordingly, MERCOSUR never produced any significant trade diversion. Instead, it has augmented new trade opportunities within the subregion, as MERCOSUR’s four core member states have also sought to diversify exports to markets in other parts of the world.20 Despite the overall contraction of the importance of the subregional market for the four member states after 2002, MERCOSUR remains the most important export market for Argentina, Paraguay, and Uruguay. This is less so in the case of Brazil, where MERCOSUR hovers between third or fourth place after the United States, the European Union, and sometimes China. However, MERCOSUR was responsible for the most important change of the 1990s in the pattern of Brazil’s foreign trade, favoring goods with a higher degree of technological intensity and encouraging small- and medium-sized firms in Brazil to export for the first time.21 MERCOSUR also served as a catalyst for increased Brazilian foreign investment in the subregion, thereby playing an important role in the internationalization of Brazilian firms.22 A review of the composition of Argentine-Brazilian trade provides further cause for optimism about the future viability of MERCOSUR. When the first attempts were made by Argentina and Brazil in 1986 to open up specific sectors of their economies to free trade under PICAB, many Argentines feared that their country’s industrial sector would be wiped out and the country reduced to being a net exporter of agro-industrial goods to Brazil. In 1986 manufactured goods represented 34 percent of Argentine exports to Brazil in value terms, while foodstuffs (primarily agro-industrial in nature) accounted for 60 percent of Argentine exports. By 1992 the proportion of manufactured exports had increased to 39 percent, and foodstuffs had actually decreased to 52 percent. Data for 2000 19   Inter-American Development Bank-Intal, Mercosur Rep. No. 12, at 20 (2008). The dynamism of MERCOSUR trade with China in recent years is truly impressive. While China was the destination of 1 percent of MERCOSUR exports in 1991, it took 6.4 percent of the bloc’s exports in 2006. At the same time, while 0.6 percent of MERCOSUR imports came from China in 1991, that number was 8.3 percent in 2006. Id. at 23. 20   This conclusion is further buttressed by the research findings conducted by Ann Bartholomew of the University of Oxford. Bartholomew notes that during the period 1990 through 1999 while intra-MERCOSUR trade increased at a greater pace then trade with the rest of the world, nonetheless, in terms of total trade, MERCOSUR still had a greater volume of trade with the rest of the world. This indicates that the MERCOSUR not only did not discourage trade with the rest of the world, but a trade augmentation effect may well have resulted, due to the fact that external trade barriers fell during the 1990s as well as barriers to intra-MERCOSUR trade. Bartholomew, supra note 18 at 240. 21   P. da Motta Veiga, Brazil in Mercosur: Reciprocal Influence, in MERCOSUR: Regional Integration, World Markets 30–31 (R. Roett ed., 2001). 22   Id. at 31.

88  •  Latin American and Caribbean Trade Agreements

indicate this trend continued, with manufactured goods accounting for 46 percent of Argentine exports to Brazil that year in value terms and foodstuffs shrinking to 28 percent. Argentine exports to Brazil measured in volume terms for the year 2000 underscore the beneficial significance of this phenomenon. Although foodstuffs (despite their noticeable decline in value share) dominate Argentine exports to Brazil in volume terms in 2000, manufactured exports represent a mere 6 percent of Argentine exports in volume terms. This underscores that Argentine manufactured exports with significant value added have been the greatest beneficiaries of the opening to Brazil. See Figures 3.1 to 3.7.

0

50

100

150

200

250

91

19

45.9 11.3%

92

19

50.4 14.5%

93

19

54.1 18.7%

94

19

62.1 19.3%

95

19

69.8 20.6%

96

19

74.3 23%

97

19

82.2 25.1%

Source: Secretaria del MERCOSUR (Montevideo) & ALADI (Montevideo).

(In billions of u.s.$

98 19

80.5 25.3%

99 19

73.3 20.7%

00 20

83.1 21.3%

01 20

86.2 17.5%

02 20

87.5 11.7%

03 20

104.5 12.2%

04 20

133.7 12.9%

05 20

161.1 13.1%

Figure 3.1. Total MERCOSUR Global Exports & Percentage Bound for Intra-MERCOSUR Trade 1991–2007

06 20

186.5 13.8%

07 20

219.2 14.7%

Origins, Current Status, and Future of MERCOSUR  • 89

0

20

40

60

80

100

120

140

160

180

200

19

91

34.2 15.5%

92 19

40.7 18.7%

93 19

47.9 19.6%

94 19

59.6 19.6%

95

19

78.8 18.1%

96

19

86.8 20.3%

97

19

100.5 20.7%

Source: Secretaria del MERCOSUR (Montevideo) & ALADI (Montevideo).

(In Billions of U.S.$)

98 19

99 21.1%

99 19

82.4 19.2%

00 20

86.4 20.1%

01 20

84 18.8%

02 20

62.3 17.2%

03 20

68.9 19.3%

04 20

94.6 18.9%

05 20

113.