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

113.5 19.1%

Figure 3.2. Total MERCOSUR Global Imports & Percentage Originating Within MERCOSUR 1991–2007

06 20

140.3 18.6%

07 20

181.4 17.9%

90  •  Latin American and Caribbean Trade Agreements

0

5

10

15

20

25

19

91

1.5

1.5

3

92 19

3

1.7

4.7

Source: ALADI (Montevideo).

(In Billions of U.S.$)

30

93 19

3.7

2.8

6.5

94 19

4.1

3.7

7.8

95

19

4

5.5

9.5

97

19

6.8

8.1

98 19

6.7

8

14.7

99 19

5.4

5.7

11.1

Brazilian Exports to Argentina

96

19

5.2

6.6

11.8

14.9

00 20

6.2

7

13.2

01 20

5

6.2

11.2

03 20

4.5

4.7

04 20

7.4

5.6

1.3

05 20

9.9

6.3

16.2

Argentine Exports to Brazil

02 20

2.3

4.9

7.2

9.3

Figure 3.3. Total ARGENTINE–Brazilian Bilateral Trade for 1991–2007

06 20

11.7

8.1

19.8

07 20

14.4

10.5

24.9

Origins, Current Status, and Future of MERCOSUR  • 91

1986

Source:BID-INTAL (BUENOS AIRES)..

Foodstuffs 60%

Minerals & Metal 2% Fuels 3%

Minerals & Metal 2%

Manufactured 46%

Minerals & Metal 2%

Manufactured 34%

2000

Fuels 22%

Foodstuffs 28%

Primary Agriculture 2%

Minerals & Metal 1% Fuels 7%

Figure 3.4. Composition of Argentine Exports to Brazil by Value

Foodstuffs 52%

1992

Primary Agriculture 1%

Manufactured 39%

92  •  Latin American and Caribbean Trade Agreements

Source: BID-INTAL (Buenos Aires).

Primary Agriculture 4%

Foodstuffs 17%

Fuels 0%

1986

Primary Agriculture 1%

Foodstuffs 7%

Manufactured 59%

Minerals & Metal 20%

Fuels 1%

2000

Manufactured 82%

Minerals & Metal 9%

Manufactured 70%

Figure 3.5. Composition of Brazilian Exports to Argentina by Value

Minerals & Metal 13%

Fuels 1%

Primary Agriculture 8% Foodstuffs 8%

1992

Origins, Current Status, and Future of MERCOSUR  • 93

Source: BID-INTAL (BUENOS AIRES)..

Fuels 34%

Minerals & Metal 2%

Manufactured 6%

2000

Primary Agriculture 1%

Figure 3.6. Composition of Argentine Exports to Brazil by Volume 2000

Foodstuffs 57%

94  •  Latin American and Caribbean Trade Agreements

Source: BID-INTAL (BUENOS AIRES)..

Manufactured 24%

Primary Agriculture 1%

Foodstuffs 4%

2000

Fuels 3%

Figure 3.7. Composition of Brazilian Exports to Argentina by Volume 2000

Minerals & Metal 68%

Origins, Current Status, and Future of MERCOSUR  • 95

96  •  Latin American and Caribbean Trade Agreements

C. Political Considerations From the beginning, the MERCOSUR project has had important political dimensions, whether in serving as a means of supporting democracy in the subregion or increasing the Southern Cone’s geopolitical profile in the international arena. These political interests have often given MERCOSUR momentum and compensated for shortcomings on the trade liberalization front. As one commentator has noted “MERCOSUR was always intended not as a static, one-off bargain but as an on-going process of regional co-operation.”23 For example, regional infrastructure initiatives, cooperative agendas in education and culture, and heightened interaction among political actors of member states have widened the scope and deepened the level of intraMERCOSUR relations.24 In June 1996 the presidents of the MERCOSUR countries issued a Declaration on the Commitment to Democracy in MERCOSUR that required them to consult and apply punitive measures to any member state wherein democratic rule was threatened or abolished. The measure was in response to a threat by General Lino Oviedo to take power through a coup d’etat in Paraguay in April of that year. These principles were further developed and made binding in 1998 in the Protocol of Ushuaia on the Commitment to Democracy in MERCOSUR, Bolivia and Chile. The crisis provoked by the collapse of the Argentine financial system in January 2002 underscored that Argentina’s real friends in its hour of need were its MERCOSUR partners. The policy of “carnal” relations that the Menem administration pursued with the United States, and Argentina’s much vaunted status as a special extra-NATO ally, brought it no special favors from the United States and the International Monetary Fund when the country sought fresh loans to stave off collapse of its monetary regime. The spreading contagion from Argentina’s economic mess cemented the sense of mutualism between Argentina and Brazil that first appeared after the Mexican peso crisis at the end of 1994 when political leaders in both countries realized their nations were too vulnerable to erratic global financial movements and needed to act together to better withstand them.25 In sharp contrast to the perceived callous indifference of the United States to Argentina’s plight, Brazil announced in February 2002 that it would open its market to Argentine exports by immediately eliminating any remaining tariff and non-tariff barriers (but for phytosanitary requirements to prevent the spread of hoof and mouth disease).26 Following the June 2002 meeting of   Hurrell, supra note 16, at 202.   M. Hirst, Mercosur’s Complex Political Agenda, in MERCOSUR: Regonal Integration, World Markets 43 (R. Roett ed., 1999). Hirst points out that besides these initiatives at the local and federal levels, cross-border interaction has been intense among business sectors, social organizations, and political elites, and inter-provincial networking is a reality between the southern states of Brazil and the northern provinces of Argentina. 25   Id. at 39. 26   C. Bay-Smith, Brasil Deroga Aranceles a Bienes Argentinos, El Mercurio, Feb. 9, 2002, at C1. 23 24

Origins, Current Status, and Future of MERCOSUR  • 97

MERCOSUR’s Common Market Council, the Brazilians also announced that they would permit the Argentine automotive industry to export the equivalent of two U.S. dollars worth of goods for every one U.S. dollar exported by Brazil to Argentina under their bilateral managed trade regime for the automotive sector. This marked a change in a previous version of their managed trade agreement, in effect through 2006, where the exchange was fixed roughly at a one-to-one parity. Furthermore, the Brazilian president announced plans in August 2002 to send to Congress a bill exempting the subsidiaries of Brazilian firms who invest in Argentina, Paraguay, or Uruguay from paying corporate income tax in Brazil. These firms would be further eligible for loans from the Brazilian National Development Bank (BNDES), even if the investment projects outside Brazil were joint ventures with local firms.27 In recent years, Paraguay and Uruguay have expressed increasing dissatisfaction with the way Argentina and Brazil appear to overlook or disregard their concerns with respect to the Southern Cone economic integration process. Paraguay believes its status as a landlocked country means that it will always be prejudiced by policies that do not permit an equitable distribution of the revenues collected by the MERCOSUR CET, as most of its imports enter through ports in Argentina, Brazil, or Uruguay. The full implementation of rules designed to eliminate multiple collections of the CET on third-country imports that are reexported within MERCOSUR will only aggravate Paraguay’s shortfall in collecting revenue raised through the CET. Although it is true that many goods destined for Paraguay arrive at free ports in neighboring countries, and the CET is therefore only collected when it actually reaches Paraguayan territory, the country is still at a competitive disadvantage because of the high shipping costs associated in transporting items from these free ports overland to Paraguay. Successive Uruguayan governments have been frustrated by the continuing failure of Argentina and Brazil to abide by their MERCOSUR obligations, by either imposing new non-tariff barriers to Uruguayan exports or pushing off the implementation of universal free trade ever further into the distant future. Uruguay is also troubled by the refusal of the larger countries to fully comply with many of the arbitration awards handed down by MERCOSUR’s dispute resolution system. A failure to respect the rules and obligations of MERCOSUR and an inability to enforce them has created a climate of legal insecurity that prejudices Uruguay’s ability to retain and attract direct investment. This scenario is further aggravated by the continuation of policies at the national, state/provincial, or local level in Argentina and Brazil to attract foreign investment by offering fiscal and other types of incentives that puts the two smaller MERCOSUR countries (with less resources and means of generating revenue) at a particular disadvantage. 27   L. Linn & J.C. Raffo, Brasil Acepta Pagar el Precio del Liderazgo Regional, El ObservaAug. 22, 2002, at 1. In January 2002 the Brazilian Agriculture Minister, Marcus Vinicius Pratini de Moraes, proposed that BNDES guarantee payments for a set period and up to a specified limit to Brazilian firms for their exports to Argentina, on the understanding that Argentina would later repay Brazil for the financing. See Brazil Minister Eyes Funding Exports to Argentina, Am. J. Transp., Jan. 14, 2002, at 1.

dor,

98  •  Latin American and Caribbean Trade Agreements

At the beginning of 2006 the Uruguayan government of President Tabaré Vasquez announced his country’s desire to negotiate a bilateral free trade agreement with the United States. This was immediately rejected by Brazil, which argued that the bilateral free trade agreement that Uruguay signed with Mexico in 2003 had been different because it fell under the ALADI umbrella, and it could therefore be deemed to be a precursor to a free trade accord that all four MERCOSUR countries and Mexico have, since 2002, formally committed themselves to achieving. A bilateral free trade agreement with the United States, on the other hand, would seriously undermine the MERCOSUR customs union scheme. Brazil also claimed that it would violate an implicit understanding contained in MERCOSUR Common Market Council Decision 8/01 issued in June 2001 requiring participation of the entire MERCOSUR bloc in any type of trade negotiations with the United States. Paraguayan President Nicanor Duarte Frutos also began voicing interest in negotiating a bilateral free trade agreement with the United States within months of the Uruguayan announcement. The Paraguayan and Uruguayan threats to undermine MERCOSUR solidarity by signing free trade agreements with the United States have to be seen as ploys to garner greater concessions from the two larger trading partners, Argentina and Brazil. This is a reflection of the weak bargaining power Paraguay and Uruguay have within the Southern Cone economic integration scheme. These threats seem to have had their desired impact to the extent that Brazil wishes to preserve the image of it being at the helm of an economically integrated and politically united Southern Cone. Accordingly, it is not surprising to learn that the Fund for Structural Convergence in MERCOSUR (FOCEM) announced special programs in mid-2006 to provide financial assistance to Paraguay and Uruguay. Many of FOCEM’s projects are concentrated on improving the physical infrastructure within Paraguay and facilitating linkages to neighboring countries. In addition, the Common Market Council meeting in Brasilia in December 2006 adopted a new plan of action designed to overcome internal asymmetries among the MERCOSUR countries that have proven to be especially detrimental for Paraguay and Uruguay. The plan calls for providing assistance to Paraguay and Uruguay to make their economies more competitive, facilitate access by their producers to both the regional and international markets, and reform MERCOSUR’s institutional framework to better incorporate the interests of the smaller member states. This was followed in 2008 by the creation of a MERCOSUR Fund to Support Small and Medium Sized Enterprises and the establishment of a Program for the Productive Integration of MERCOSUR. Paraguayan exports within MERCOSUR are also now subject to more liberal rule of origin requirements, and Paraguay and Uruguay both enjoy more flexibility in terms of exempting themselves from the CET and setting their own import duties. Paraguay, in particular, will likely be a major beneficiary of monies from the Fund to Finance the MERCOSUR Education Sector created in 2004 as well as programs arising under the new MERCOSUR Social Institute, the MERCOSUR Training Institute, and the MERCOSUR Democracy Observatory.

Origins, Current Status, and Future of MERCOSUR  • 99

D. Full Membership by Venezuela and Bolivia in MERCOSUR In December 2005 during a meeting of the Common Market Council in Montevideo, the Bolivarian Republic of Venezuela formally sought to be incorporated into MERCOSUR as a full member. This request was accepted by the four core MERCOSUR countries and, until an agreement reflecting this reality could be drafted and executed, Venezuela was granted the right to fully participate in the deliberations of all of MERCOSUR’s institutional bodies, albeit without voting rights. On July 4, 2006, the Protocol of Adhesion of the Bolivarian Republic of Venezuela to MERCOSUR was executed in Caracas. The coincidence of the date with Independence Day in the United States was probably not coincidental as it served to highlight Venezuelan hostility to any economic integration project that emanates out of Washington, DC instead of South America. The protocol contemplates it will enter into force once it is ratified by all five signatory states. Although the Protocol of Adhesion was quickly ratified by the Venezuelan Congress in August 2006, as of January 2009 it had still not been approved by the legislatures in Brazil and Paraguay. Once the protocol does take effect, Venezuela will have at least four years to adopt the full panoply of MERCOSUR norms, including the CET. Immediate incorporation is also stymied by the fact that Venezuela, despite its formal withdrawal from the Andean Community in 2006, is still subject to the Andean intra-regional liberalization program until at least 2011. Interestingly, incorporation of Venezuela into the MERCOSUR free trade area under the Protocol of Adhesion establishes more ambitious parameters than are found in ALADI ACE No. 59, the existing free trade agreement that Venezuela has with each of the MERCOSUR countries. For example, the many tariff reduction schedules under ACE No. 59 are not expected to be fully implemented until January 1, 2018, and there are even products permanently excluded from free trade. By contrast, under the Protocol of Adhesion, Argentina and Brazil will—as a general rule—eliminate tariffs on all imports from Venezuela by January 1, 2010; Paraguay and Uruguay will eliminate them by January 1, 2013; and Venezuela will remove all tariffs on the MERCOSUR imports by January 1, 2012. For a number of important Paraguayan and Uruguayan exports, Venezuela agreed to open up its market immediately following entry into force of the Protocol of Adhesion. The protocol also includes a provision that allows for a longer phase-out period ending on January 1, 2014, for so-called sensitive products (mostly agricultural in nature). Venezuela’s decision to join MERCOSUR as a full member is eminently political. Venezuela is currently not a significant export market for the MERCOSUR countries. Brazil and, to a lesser extent, Argentina, export some value-added manufactured goods to Venezuela (mostly auto parts) as well as small amounts of agricultural goods and foodstuffs. Perhaps surprisingly, Venezuela also does not export much to the MERCOSUR countries. At the present time, only Brazil imports large amounts of oil from Venezuela, but these exports are currently miniscule in comparison to Venezuela’s global petroleum exports.

100  •  Latin American and Caribbean Trade Agreements

On the MERCOSUR side, the decision to admit Venezuela as a full member serves short- and medium-term economic interests. The Argentines are interested in having PDVSA, the Venezuelan state petroleum company, provide investment capital to develop off-shore oil and natural gas fields in the Patagonia and Tierra del Fuego. Meanwhile, the Brazilian state petroleum company, Petrobras, is interested in joint ventures with its Venezuelan counterpart to explore and develop new wells to extract heavy oil in Venezuela’s Orinoco River Valley that can then be exported to northeastern Brazil. Both companies have already built a U.S.$ 2.5 billion heavy oil refinery in the northeastern Brazilian state of Pernambuco. The Uruguayan state petroleum company also has a joint venture with PDVSA to develop heavy oil wells in the Orinoco and expand an oil refinery in Uruguay to process that heavy crude. Furthermore, Venezuela is contributing money to build a natural gas pipeline from Bolivia to Paraguay and Uruguay. Finally, all the MERCOSUR countries would also like to see Venezuelan President Hugo Chavez make good on his promise to build a natural gas pipeline from Venezuela to the Southern Cone (however unfeasible that may be given the huge costs entailed, not to mention serious environmental concerns). In agreeing to accept Venezuela as a full member, the MERCOSUR governments appear to have overlooked the long-term strategic downside. As a full member, Venezuela will have the right to participate with the rest of the MERCOSUR bloc in future trade negotiations with third countries. This risks complicating already difficult negotiations between MERCOSUR and the European Union to establish a transatlantic free trade area. Unlike the MERCOSUR countries, which tend to have a highly competitive agricultural sector that is willing to fully liberalize in exchange for duty-free access to the EU market, Venezuela has a heavily protected and uncompetitive agricultural sector. Opposition by Venezuelan President Hugo Chavez to negotiate any type of free trade agreement with the United States is also well known. The diplomatic spat that erupted between Brazil and Venezuela in mid-2007 over statements made by President Chavez about Brazil being subservient to Bush administration designs for South America stalled the ratification process of full Venezuelan membership in MERCOSUR in the Brazilian Congress. It is possible that this situation may cause leaders in MERCOSUR to reassess the wisdom of admitting Venezuela as a full member. In addition to the already mentioned negative impact on trade policy, full Venezuelan membership risks converting MERCOSUR from a regional economic integration project designed to facilitate the subregion’s participation in the international economy into a political counterforce hostile to the United States. In response to a request by Bolivian President Evo Morales in December 2006 that his country become a full member of MERCOSUR, a special working group was created by the Common Market Council in January 2007 to look into the issue. E. Reaching Out to the Rest of the World In 1992 the European Union agreed to provide MERCOSUR’s Common Market Council and Common Market Group with technical support. This was followed by the signing of a framework agreement between the European Union

Origins, Current Status, and Future of MERCOSUR  •  101

and MERCOSUR on December 15, 1995, which called for periodic meetings between representatives of the two blocs to exchange ideas on commercial and economic matters. In addition, the framework agreement sought to facilitate trade between the European Union and MERCOSUR by enhancing cooperation between the respective customs bureaus, harmonizing quality standards for manufacturing and agricultural products, improving methodologies for statistical collection, and encouraging investment by facilitating linkages between European small- and medium-sized enterprises with their counterparts in the Southern Cone. Although there was vague language calling for a future interregional trade accord between the European Union and MERCOSUR, there was no explicit mention of establishing a trans-Atlantic free trade area nor was any date provided for when this was to occur. A Cooperation Council made up of representatives from the EU Council and Commission as well as MERCOSUR’s Common Market Group and Common Market Council was established to oversee implementation of the framework agreement. The council was assisted on technical matters by a Joint Commission on Cooperation and on trade-related issues by a Joint Subcommission on Trade. In July 1998 the EU Commission authorized the launch of negotiations for a free trade agreement between the European Union and MERCOSUR plus Chile. The fact that the European Union would want to sign a free trade agreement with MERCOSUR and Chile was logical, given that by the late 1990s the Europeans had replaced the Americans as the largest foreign investors in South America’s Southern Cone. In addition, the largest foreign trading partner for the MERCOSUR countries both in terms of exports and imports was the European Union. Furthermore, progress in the negotiations to establish a Free Trade Area of the Americas (FTAA) posed a risk to European companies of being put in the same disadvantageous position they found themselves in Mexico after the North American Free Trade Agreement (NAFTA) was signed. The actual negotiations for a trans-Atlantic free trade agreement did not commence until April 2000, however. By that time the Chileans had decided to negotiate with the European Union separately from MERCOSUR as they did not want the agriculture issue, which was much more sensitive for the MERCOSUR countries than for Chile, to delay concluding the negotiations for a free trade area with the European Union. The Chileans eventually signed a free trade agreement with the European Union in 2002. The EU-MERCOSUR negotiations were carried out under the auspices of a Committee on Bilateral Negotiations (CBN), which included representatives from the EU Council and Commission as well as MERCOSUR’s Common Market Group and Common Market Council. Under the CBN were three working groups as well as a MERCOSUR-EU Business Forum (representing private sector interests). Working Group No. 1 dealt with market access issues, including tariffs and non-tariff barriers, rules of origin, agriculture, technical norms, and unfair trade practice remedies. The second working group examined issues related to services, intellectual property rights, investment, and capital flows. Finally, Working Group No. 3 had jurisdiction over matters related to government procurement, competition policy, and dispute resolution. At a

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summit of EU-MERCOSUR heads of state in Madrid in May 2002, a package of 35 trade facilitation measures (related to customs, technical norms, Ecommerce, sanitary and phytosanitary measures) were approved for immediate implementation. The EU-MERCOSUR talks for an EU-MERCOSUR free trade area, however, collapsed in late 2004. The reasons why the EU-MERCOSUR negotiations to establish a transAtlantic free trade area stagnated are similar to why the negotiations for the FTAA also collapsed. The MERCOSUR countries (particularly Brazil) were reluctant to liberalize access to services, investment, and government procurement and accept intellectual property disciplines that went beyond the World Trade Organization’s (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) agreement if the European Union was not willing to fully open its market to the MERCOSUR agricultural exports. At one point in April 2004 it appeared that the MERCOSUR countries might accept higher quota access to the European Union instead of demanding the complete elimination of EU tariff rate quotas on targeted MERCOSUR exports as well as the elimination of agricultural export subsidies. But that possibility was soon mooted by Brazil when it recognized it as an EU ploy to destroy the G-20 coalition of developing countries in the WTO talks. Until the agricultural market access and subsidies issues are resolved at the WTO level, it is unlikely that the EU-MERCOSUR negotiations can be revived. On the other hand, a collapse of the multilateral Doha Round and the revival of the FTAA or the creation of a Community of the Americas would provide the European Union with an important incentive to restart their own talks with MERCOSUR. In July 1998 the then President of the Republic of South Africa, Nelson Mandela, was invited to attend a meeting of MERCOSUR’s Common Market Council held in Ushuaia, Argentina, which also counted with the presence of the heads of state of the four MERCOSUR countries plus associate members Bolivia and Chile. This was the same session that produced the Protocol of Ushuaia on the Commitment to Democracy within MERCOSUR, Bolivia, and Chile. For the MERCOSUR countries, the presence of Nelson Mandela was intended to underscore the fact that their regional economic integration process was not intended to seal off the Southern Cone behind protectionist walls but to serve as a step towards global integration. In December 2000 South African President Thabo Mbeki was invited to participate in yet another session of the MERCOSUR Common Market Council, this time in Florianopolis, Brazil. At this session, President Mbeki signed a framework agreement for the creation of a free trade area between MERCOSUR and the Republic of South Africa. In 2002 the remaining members of the South African Customs Union (SACU); i.e., Botswana, Lesotho, Namibia, and Swaziland) were included in the negotiations. The MERCOSUR-SACU relationship is primarily motivated by politics and driven by the affinity between South Africa and Brazil as the economic and political hubs of their respective regions—particularly evident in the multilateral arena where both countries have sought to shape the WTO agenda to better suit

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the developing world.28 The presence of President Mbeki at the inauguration of Brazilian President Luiz Inácio Lula da Silva in January 2003 further underscored this close political affinity. So too did the inclusion of South Africa in the G-20 alliance led by Brazil that scuttled an effort led by the European Union and the United States at the WTO Trade Ministerial in Cancun in September 2003 to force through acceptance of minimal reductions to prejudicial agricultural subsidies. Despite the commonality of interests at the multilateral level, negotiations for a free trade area between MERCOSUR and SACU dragged on inconclusively for years. One explanation was that despite the fact the Brazilian automotive sector was especially interested in seeing a conclusion to the talks, their counterparts in South Africa remained fearful that they could adequately compete in a liberalized trade environment.29 Finally, MERCOSUR and SACU signed a preferential trade agreement on December 16, 2004, although it has yet to enter into force. MERCOSUR granted preferential tariff treatment at 10, 25, 50 and even 100 percent over normal tariff rates as reflected in the CET on just under 1,000 tariff lines. SACU’s offer to MERCOSUR was similar. On the positive side, a majority of these tariff lines were subject to a 100 percent preference by both MERCOSUR and SACU. Given that most of these items already entered both blocs at very low duties anyway, however, it is doubtful that this agreement in its current form will ever lead to dramatic increases in trade flows between MERCOSUR and SACU (particularly given that the important automotive sector was excluded from coverage). Perhaps cognizant of this fact, representatives from MERCOSUR and SACU countries have met at least twice since 2004 to include additional tariff lines in their preferential market access agreement. At the last session in August 2006, a proposal was formally tabled to include the automotive sector. In 2003 the MERCOSUR countries signed a framework agreement with India to negotiate a free trade agreement. As a first step in this process, the signatories were supposed to provide preferential access for a limited number of products. In January 2004 MERCOSUR and India did sign a preferential tariff agreement, although the annexes that included the products that would benefit from reduced tariff (usually only 10 or 20 percent preference over the normal duty) or, in an extremely limited number of items, duty-free trade, were not approved until March 2005. On the MERCOSUR side, the opening consisted of a meager 452 tariff lines, while on the Indian side, it was limited to 450 tariff lines. As is true of the agreement with SACU, MERCOSUR’s agreement with India seems to be driven primarily by politics and solidifying its participation in the G-20 alliance at the WTO Doha Round. In December 2007 Israel and MERCOSUR signed a free trade agreement 28   L. White, It’s a Long Road to MERCOSUR, 18 Univ. S. Afr. Latin Am. Rep. 27 (2002). Trade flows between SACU and MERCOSUR are negligible and even began to dwindle following the 2000 signing of the framework agreement as it coincided with the onset of a severe recession throughout the Southern Cone. Id. at 25, 28. 29   See, e.g., L. White, Driving SACU-MERCOSUR: Transatlantic Cooperation in the Automotive Industry, S. Afr. Inst. Int’l. Aff. Rep. No. 34 (2003). In an effort to facilitate conclusion of the negotiations, SACU and MERCOSUR have pursued a sector-by-sector preferential market access agreement instead of an across-the-board free trade agreement. Id. at 3.

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that encompasses almost all tariff lines that receive either immediate duty-free treatment or on which duties are gradually phased out over a four-, eight- or ten-year period. The rules of origin include two options for incorporating thirdcountry inputs that will still allow the product to be traded duty free between Israel and MERCOSUR. The first option is if the non-originating material undergoes sufficient working or processing in Israel and/or MERCOSUR resulting in a change in tariff classification heading at the four-digit level. The second option is if the non-originating materials used to make the final product do not exceed 50 percent of its price at the factory door (or 40 percent in the case of goods originating in Paraguay). There is also a de minimis rule that is only applicable on bilateral Israel-Paraguay and Israel-Uruguay trade in which up to 10 percent of non-originating material that does not undergo a change in tariff classification heading will be disregarded. The de minimis rule does not apply to textiles and clothing, however. Although trade in services was not included in the agreement, this possibility is left open for future negotiations. As of mid-2008, MERCOSUR has signed framework agreements that establish the parameters for negotiating a free trade agreement with Egypt (2004), Morocco (2004), Pakistan (2006), Turkey (2008), and Jordan (2008). If all these negotiations eventually lead to the type of minimal tariff reductions on a relatively small number of items that characterize the India-MERCOSUR or current MERCOSUR-SACU agreement, such a development will underscore that they are political accords designed to solidify geopolitical alliances and have little commercial significance. IV. Chile-MERCOSUR Free Trade Agreement A. Introduction The Chile-MERCOSUR Free Trade Agreement was incorporated into the ALADI framework as Economic Complementation Agreement or ACE No. 35. It is important to emphasize that Chile’s relationship with MERCOSUR is that of only an associate member. This means that Chile only participates in MERCOSUR’s intra-regional free trade scheme, but it is not part of the customs union. The Chileans had no interest in dropping their own across-the-board external tariff, which was 11 percent when ACE No. 35 was signed in June 1996 (and since dropped to 6 percent) and adopt MERCOSUR’s CET system (which at the time ACE No. 35 came into force on October 1, 1996, averaged at around 14 percent). In December 1997 the Common Market Council approved Decision 12/97 permitting Chile to participate as an observer in the various MERCOSUR institutional bodies, including the working groups of the Common Market Group when they discuss matters affecting Chilean-MERCOSUR relations. Chile has no voting privileges within any of these institutional bodies, however. Chile’s inability to shape the MERCOSUR agenda and play a direct role in formulating new rules and regulations that affect its trade relations with MERCOSUR is one very important inducement to eventually becoming a full member of MERCOSUR. An effort to do so at the start of then Chilean

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President Ricardo Lagos’s term in 2000 ended in frustration when MERCOSUR made clear its reluctance to reduce the MERCOSUR CET so as to harmonize it with lower Chilean import duties. At the same time, the Chileans became increasingly reluctant to give up the freedom to independently negotiate trade agreements with any country they chose. Accordingly, by the end of 2000, Chile suspended the negotiations for full membership in MERCOSUR, even as then Brazilian President Fernando Henrique Cardoso indicated a willingness to explore reductions to the MERCOSUR CET in order to accommodate Chilean anxieties. B. Free Trade in Goods On October 1, 1996, the first in a series of gradual reductions in tariff barriers began so as to culminate in complete free trade for a majority of products traded between Chile and MERCOSUR by January 1, 2004. It is important to point out, however, that some goods already enjoyed duty-free treatment even before ACE No. 35 took effect, as a result of older ALADI agreements that Chile had with each of the MERCOSUR member states. For items such as beef, poultry, chocolate, furs and cured hides, glass, laminated iron or steel products, and certain household appliances found in Annex 2 to ACE No. 35, the tariff reductions did not begin until January 1, 2000, so as to culminate at zero on January 1, 2006. The same was true of goods found in Annex 3 (consisting mostly of textiles and shoes), as well as Annex 5. On the other hand, for products, such as beef, rice, temperate climate fruits, vegetable oils, soy, wine, jeeps and special use vehicles, and wooden furniture included in Annex 6, the tariff reduction process did not begin until January 1, 2006, and will culminate at zero on January 1, 2011. Meanwhile, for sugar, tariff reductions did not begin until January 1, 2007, and will reach zero only on January 1, 2016. In addition to the tariff reduction timetables discussed above, there are yet other rules that apply to certain countries and/or products. For example, auto parts traded between Chile and Paraguay remained subject to a preexisting ALADI agreement until December 31, 1999. Goods included in Annex 7 to ACE No. 35 had until 2011 to receive duty-free treatment, while the few items found in Annex 10 (mostly fruit or preserves) could theoretically be subject to duties indefinitely. Furthermore, tariffs charged by the MERCOSUR countries for goods imported from Chile may vary from the general rules, depending upon whether one of the MERCOSUR countries has included these goods on its list of items temporarily exempt from intra-MERCOSUR free trade. Finally, the Administrative Commission, which oversees the implementation of the agreement, was supposed to formulate before 2003 a tariff reduction schedule for wheat and mixed grains, and flour made from either, so that these products could be traded free of all tariff barriers by January 1, 2014. One of the things the Chileans were successful in obtaining from Argentina in the negotiations culminating in ACE No. 35 was a pledge to exempt Chilean imports from the 3 percent Argentine statistical tax (which eventually was reduced to 0.5 percent in response to complaints lodged with the WTO that it

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was an illegal tariff). In addition, the Argentines agreed to eliminate special, additional duties that were levied in 1996 on imported textiles and footwear from outside MERCOSUR. C. Rule of Origin Requirements Annex 13 to ACE No. 35 contains the rules of origin that must be complied with in order for goods to be traded at a preferential tariff rate between Chile and MERCOSUR. The rules are more complicated than those found within MERCOSUR, for example, because Chile applies its own external tariff schedule that, in most cases, is lower than the MERCOSUR CET. Accordingly, the MERCOSUR countries wanted stringent rule of origin regulations in order to prevent Chile from becoming a backdoor conduit for importing goods into MERCOSUR from third countries and thereby undermining the CET. Goods that are native to or made wholly from products that originate in Chile or MERCOSUR are entitled to free trade treatment. So too are goods that, although not originating within Chile or MERCOSUR, are sufficiently transformed within the subregion so as to achieve a new identity under the ALADI tariff classification system (NALADISA). Certain products such as vegetable oils, textiles, and kitchen appliances are required to not only undergo a change in tariff classification heading, but must also comply with the regional content requirement. Regional content provides yet another alternative in its own right to fulfill the rules of origin for exporting duty free. Under this option, no more than 40 percent of a final product’s freight on board (FOB) price may reflect the cost, insurance, and freight (CIF) value of non-regional inputs. In addition to complying with regional content requirements, certain inputs used in specific products must originate in either Chile and/or MERCOSUR. For example, the milk used in lactate products (e.g., butter, cheese, and ice cream) must originate in the Southern Cone. Similarly, the wheat or mixed grains, barley, malt, and palm oil used in certain products (e.g., bread and soaps) must also originate within the subregion. All insecticides or herbicides must be made with active agents that were produced in Chile and/or MERCOSUR. Specific components used in a number of other items including x-ray film, glass, and paper must be produced in the Southern Cone. Clothing items such as coats, dresses, shirts, and sweaters must be made with thread and/or fibers produced in the subregion. Petrochemical and chemical products must undergo a molecular transformation within the Southern Cone that creates a new chemical identity before they will be granted intra-regional free trade privileges. For a whole series of items, such as wire, tubes, cable, screws, needles, and fillings, which contain processed iron, the processing must be carried out in Chile and/ or MERCOSUR. Goods that have only undergone packaging or assembly operations within the Southern Cone are explicitly excluded from intraregional free trade treatment, as are goods that have been “transformed” only as a result of a filtering or dilution process. Used goods are also not entitled to intra-regional free trade privileges. All goods traded between Chile and MERCOSUR must be accompanied by a certificate of origin certified under oath by the final producer or exporter.

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The requirements for these certificates are very similar to those found in ALADI Resolution 252. D. Unfair Trade Practice Remedies The imposition of antidumping or countervailing duties are handled in the same manner that is permitted by the WTO. Interestingly, if one signatory state to ACE No. 35 feels that another is importing goods from third countries at below-market prices, or that these goods were purchased at subsidized prices, it can request high-level consultations among all the parties to address the issue. This clause is designed to prevent traditional sources of final products or inputs from within the Southern Cone being displaced by outsiders as a result of unfair trading practices. Goods that include inputs that benefit from duty drawback schemes may be traded between Chile and MERCOSUR duty free through January 1, 2011, so long as the final good complies with the relevant rule of origin requirements. E. Safeguard Measures ACE No. 35 permits the use of safeguard measures on trade between Chile and MERCOSUR. The actual rules on the use of safeguard measures did not come into force until January 2000, however. Safeguards can only be imposed in response to a sudden surge in importation of a product, either in absolute terms or with respect to domestic national production that actually causes or threatens to cause grave harm to the national production of similar or directly competing goods. The safeguard measure is limited to either suspending the tariff reduction schedule or reducing or suspending the preferential tariff that has been accorded that item. In theory, safeguards should normally not be imposed on goods that are already subject to free trade. On the MERCOSUR side, safeguards can be imposed by all the countries in the bloc or only those directly impacted by the sudden surge. Safeguards can remain in force for up to two years and can only be renewed once, for up to one year. The use of a safeguard also requires that the country that imposes it offer the other party a mutually agreed upon compensatory measure consisting of a tariff reduction on another product. F. Dispute Resolution The original system for resolving disputes that may arise between Chile and the MERCOSUR countries concerning the interpretation, application, or noncompliance with obligations arising under ACE No. 35 was found in Annex 14. As Article 22 to ACE No. 35 mandated, however, this mechanism had to be replaced by 1999. Accordingly, at the end of that year, the MERCOSUR countries and Chile agreed to a new system found in the Protocol on Dispute Resolution Procedures attached to Common Market Group Resolution 61/99. Article 2 to that protocol now specifically gives either Chile or the MERCOSUR countries the option to refer any trade-related disputes that may arise among them either to the WTO (so long as it has subject matter jurisdiction) or to the system established under the protocol.

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Under the procedure established in the Protocol on Dispute Resolution Procedures, disputes that may arise among the signatory states should first be resolved through negotiations. If the matter cannot be resolved within 30 days (or 45 days if the parties agree to such an extension), the dispute is referred to the Administrative Commission. The Administrative Commission must meet within 30 days after a petition is submitted to it and normally has another 30 days to issue its recommendations for resolving the problem. The Administrative Commission is specifically authorized to seek the advice of a group of experts that are selected from a list of ten persons (four of these experts cannot be nationals of any of the signatory states) that each country previously submitted to the ALADI General Secretariat. If the Administrative Commission decides to seek the advice of experts (or one of the countries to the dispute demands it), each side chooses one expert and a third, who cannot be a national of Chile or the MERCOSUR countries, is chosen by mutual consent. The process for putting together the group of experts should be completed within ten days. The experts then have 30 days to issue a report to the Administrative Commission that, in turn, has 15 days to issue its final recommendations based on the conclusions of the experts. As a result of subsequent modifications to the Protocol on Dispute Resolution Procedures, if Chile and the MERCOSUR country(ies) cannot resolve a dispute following the experts’ report and the recommendations made by the Administrative Commission within a 15-day time period, the matter may be referred to binding arbitration. The arbitration panel will be made up of three members, one (plus a substitute) chosen by each side to the dispute, and the third (plus a substitute) picked by mutual consent. If there is no consensus on the third arbitrator, then he or she is selected through a lottery conducted by the Secretary General of ALADI. The third arbitrator should not be a national of Chile or the MERCOSUR countries. The arbitrators are chosen from a list of 12 persons each country previously submits to the ALADI General Secretariat (although four cannot be nationals of any of the signatories to ACE No. 35). The arbitration panel is specifically authorized to issue preliminary measures in order to prevent grave and irreparable damage. The arbitrators normally have 60 days to make a decision, although this can be extended for another 30 days. Their decision can be based on equity, and it is adopted by majority vote (with information as to how the arbitrators voted kept secret). The loosing side generally has 30 days within which to fully comply with a decision. If it does not, the other side can retaliate with appropriate compensatory measures. The same arbitral panel (at the request of a state party to the original dispute) can be recalled to decide if any compensatory measures adopted are appropriate. G. Integration of Physical Infrastructure One of the major reasons why the MERCOSUR countries were especially interested in having Chile move closer to their integration process was to facilitate access to Chile’s Pacific coast ports and, from there, the booming markets of East Asia and the Pacific Rim. This concern is reflected in Chapters XII and XIV to ACE No. 35, which obligate the signatories to execute a Protocol on Physical Integration. ACE No. 35 also requires that Chile and the MERCOSUR

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countries cooperate in improving their domestic transportation infrastructure systems (i.e., surface, river, ocean, and air) so as to create a seamless bioceanic corridor running from the Atlantic to the Pacific. Article 39 to ACE No. 35 mandates that none of the signatories can impose any restrictions on the transport of goods within their respective territories (barring some recognized sanitary or phytosanitary concerns) that are made in either Chile or within MERCOSUR and are destined for third countries. In the Protocol on Physical Integration signed in conjunction with ACE No. 35, Chile and MERCOSUR agree to facilitate transport and the flow of trade through their territories and into third countries whether by land, river, water, or air. In addition, Argentina and Chile agree to undertake the investments needed to improve and/or construct 12 Andean passes connecting Chile with Argentina and the rest of MERCOSUR. The Administrative Commission will then decide which of these passes can feasibly be incorporated into bioceanic corridors and receive priority investment in terms of building highways and making other infrastructure improvements. H. Services Although not part of their original free trade agreement signed in 1996, Chile and MERCOSUR signed a Protocol on Trade in Services on June 20, 2008, that will be formally included under the umbrella of ACE No. 35. All four modes of service provision found in the WTO General Agreement on Trade in Services are liberalized. The only sector excluded is financial services. The list of what services have been liberalized is found in bilateral lists negotiated between Chile and each of the four MERCOSUR countries. In the case of ArgentinaChile, the services liberalized include: advertising, computer, construction, distribution, engineering, mail, professional, publishing, telecommunication, and tourism. In the case of Brazil-Chile, the services liberalized include: aircraft maintenance and repair, architecture, audiovisual, computers, construction, education, engineering, manufacturing, mining, and tourism. In terms of ChileParaguay, the services liberalized include: computer, distribution, education, franchises, and tourism. In terms of Chile-Uruguay, the services liberalized include: aircraft maintenance, advertising, computer, distribution, health, professional, manufacturing, mining, and tourism. I. Other Measures In terms of customs valuation of products, technical norms, sanitary and phytosanitary measures, export incentives, liberalization of trade in services, and protection of intellectual property rights, Chile and the MERCOSUR countries obligate themselves to adhere to the WTO rules. Any agreements for the protection and promotion of investments that Chile may have with the individual MERCOSUR member states remain in effect. In addition, in an attempt to further promote mutual investment, the signatories to ACE No. 35 agreed to investigate the possibility of executing a treaty to prevent double taxation. The signatories also agreed to encourage joint efforts at scientific and technological research based on preexisting agreements on

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Sectoral, Scientific, and Technological Cooperation negotiated within the ALADI framework. Article 52 to ACE No. 35 contains the provisions that a signatory state must follow if it extends any sort of tariff reduction or other favorable trade arrangement to a non-signatory state that is not contemplated by the Treaty of Montevideo of 1980 that created ALADI. The signatory state entering into such an arrangement must contact the other signatories within 15 days after it does so and announce its pre-disposition to negotiate the extension of the same privileges and favors to them. If such an extension cannot be granted within the next 90 days, the parties have an additional 90 days to negotiate some type of compensatory measures. If no agreement can be reached at the end of those 90 days, the matter can be referred to the general dispute resolution mechanism. Article 52 was specifically included in ACE No. 35 to resolve the procedural void under ALADI rules when NAFTA came into force in 1994, and Mexico did not extend the same tariff concessions it granted Canada and the United States to the other ALADI member states as it was required to do so by the most-favored nation (MFN) clause in Article 44 of the Treaty of Montevideo of 1980. ACE No. 35 creates an Administrative Commission designed to oversee implementation of the free trade accord between Chile and MERCOSUR. It also plays an important role in the dispute resolution system. The Administrative Commission is made up of a representative from the Chilean Foreign Ministry’s General Directorate on International Economic Relations and the MERCOSUR Common Market Group. One of the specific tasks given to the Administrative Commission was to design a special agreement for the automotive sector in order to improve trade in motor vehicles and auto parts between Chile and MERCOSUR. Although this agreement never materialized, trade in the automotive sector has been liberalized on a bilateral level between Chile and specific countries in MERCOSUR. It is important to note that the Administrative Commission has the right to quicken the pace of trade liberalization, something that has occurred on a number of occasions since ACE No. 35 was signed in 1996. V. Bolivia-MERCOSUR Free Trade Agreement A. Introduction After a delay of two months occasioned mainly by last minute misgivings of Bolivia’s private sector over the prospect of increased competition from their bigger and better financed competitors in Argentina and Brazil, the BoliviaMERCOSUR Free Trade Agreement entered into force on February 28, 1997, as ACE No. 36. Bolivia had been actively seeking full membership in MERCOSUR since at least 1992. Membership was initially rebuffed, however, with the argument that Article 20 of the Treaty of Asuncion restricted accession to MERCOSUR to any ALADI country that was already a member of another subregional grouping until after 1996. Bolivia has, of course, been a member of the Andean Pact since its founding in 1969. Despite this fact, Bolivian membership in MERCOSUR has

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always made more sense than membership in the Andean Community given that Bolivia’s trade with the MERCOSUR countries, particularly in terms of imports, is considerably greater. For example, in 1996 Bolivia exported U.S.$132 million in products to Argentina, while it exported only U.S.$127 million to fellow Andean Community member Peru, a country to which Bolivia enjoyed almost complete duty-free access. In addition, Bolivia is heavily dependent on Brazil for imports of capital goods, telecommunication equipment, agricultural machinery, textiles, and shoes. The trade accord Bolivia finally signed with MERCOSUR in December 1996 fell short of the full membership status it originally sought, but it is similar to the associate status the Chileans had earlier negotiated with MERCOSUR. Like Chile, Bolivia currently only participates in the intra-regional free trade aspects of the MERCOSUR integration program. Bolivia retains it own external duty system on goods imported from any country with which it does not already have a free trade arrangement. In addition, Bolivia does not have voting privileges in any of MERCOSUR’s decision-making bodies such as the Common Market Council or Group and the MERCOSUR Trade Commission. B. Administrative Commission Oversight over the administration and implementation of ACE No. 36 and any additional protocols that may be negotiated under it is entrusted to an Administrative Commission made up of MERCOSUR’s Common Market Group, on the one hand, and a National Commission consisting of the Bolivian Ministry of Foreign Relation’s National Secretariat on International Economic Relations, on the other hand. The Commission must meet at least once a year, and its decisions are adopted by unanimous consensus. The Commission may, inter alia, make modifications to the rule of origin requirements. ACE No. 36 also calls for the creation of a Business Advisory Committee made up of representatives of the major business associations in each signatory state who are supposed to offer the Administrative Commission their insights and suggestions. The Administrative Commission plays an important role in the dispute resolution mechanism found in Annex 11 to ACE No. 36. C. Free Trade in Goods Beginning on February 28, 1997, most products traded between Bolivia and MERCOSUR were subject to increasing preferential tariff rates that were phased in annually so that 90 percent of the tariff lines on ALADI’s NALADISA achieved duty-free status by January 1, 2006. The tariff reduction schedule for items found in Annex 5 to ACE No. 36 (i.e., sugar cane, carton boxes, telecommunications equipment, and more bulky household domestic items imported by MERCOSUR, and chicken, flour of various types, and processed fruit products imported by Bolivia) did not commence until January 1, 2005, and will not reach zero until January 1, 2011. On the other hand, products such as soy derivatives and refined sugar included in Annex No. 6, have an even longer phase-in period that begins in 2005 but does not conclude until January 1, 2014. On the other hand, products included in Annex No. 7 and consisting

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of flowers, musical instruments, and books imported into MERCOSUR, as well as certain chemicals and capital goods imported into Bolivia, received immediate duty-free treatment when ACE No. 36 came into effect on the last day of February 1997. It should be noted that Bolivia can utilize the Andean Community’s price band mechanism on approximately 150 basic foodstuffs (subject to approval from the Administrative Commission). Article 3 of ACE No. 36 allows the signatory states to accelerate the agreedupon tariff reduction timetables found in the annexes. Article 4 of ACE No. 36 also includes a provision whereby the MERCOSUR countries may import from Bolivia goods at preexisting preferential tariff rates granted in previous ALADI agreements. These rates would be lower than the duty levels that must be charged for goods included in Annex 8 (i.e., goods that have still not even achieved full duty-free treatment within MERCOSUR). This provision, as well as another permitting the importation of a limited number of Bolivian-made goods into MERCOSUR with a regional content requirement as low as 40 percent until 2002, is the only special and differential treatment granted by the MERCOSUR countries to Bolivia in recognition of the country’s special less-developed country status in the ALADI context. Except for these two exceptions, ACE No. 36 otherwise maintains MERCOSUR’s position during the 1990s that no country seeking membership or associate status with the Southern Cone trade bloc could expect to receive special treatment as a result of its less-developed economic status. While the signatories to ACE No. 36 are required to eliminate all non-tariff barriers to intra-regional free trade, certain measures were retained when the agreement entered into force. The Administrative Commission was, however, supposed to review and convince the signatory states to eventually phase out as many of these non-tariff barriers whenever it was feasible. One measure that was immediately eliminated for Bolivian goods imported into Argentina on the day ACE No. 36 entered into force was the 3 percent statistical tax levied by Argentine customs authorities at the time on all imports (except those originating within MERCOSUR and Chile). Goods imported from free trade or export processing zones located within the borders of any of the signatory states to ACE No. 36 shall be properly labeled as such and will be charged the applicable external tariff levied on third-country imports. Finally, all goods imported into the territory of one signatory from another signatory state shall not be treated differently than domestic goods produced under similar circumstances for purposes of national taxes. D. Rule of Origin Requirements In order for goods to be traded between Bolivia and MERCOSUR duty free, all products must comply with the requisite rule of origin requirements found in Annex 9 to ACE No. 36. Goods that originate or are made with inputs originating within one or more of the signatory states, or are caught or otherwise found outside the territorial waters of the signatory states by a boat or company from one of them, or (as a provision for the twenty-first century) are found in outer space, may enjoy complete intra-regional free trade status.

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Goods made with inputs from outside the signatory states may also be traded among them duty free if they are substantially transformed within Bolivia and/ or the MERCOSUR countries so as to achieve a new tariff classification heading under NALADISA. If no shift in tariff classification heading occurs, a good can also be traded duty free if no more than 40 percent of the final product’s FOB price reflects the CIF value of the third-country input(s). Goods made in Bolivia were allowed to comply with a more generous 50 percent regional content (or even 40 percent in the case of some items), but it was expected that even Bolivian-made items would eventually have to comply with the 60 percent regional content rule no later than January 1, 2002. Additional rule of origin requirements exist for specified products and must be complied with before these goods can be traded among the signatory states duty free. For example, lactates such as concentrated milk, yogurt, butter, cheese, and cream must be made from milk wholly produced in one or more of the signatory states. Until 2001 a whole series of agro-industrial products, including mineral water, had to be packaged with material made in Bolivia and/or the MERCOSUR countries. Various natural oils, tapes, materials found in bathrooms, stationery, toys, and most textiles bearing third-country inputs not only have to comply with the regional content requirement, but they must also undergo a shift in tariff classification heading. Certain clothing requires that it be wholly made with materials produced within MERCOSUR and/or Bolivia. A whole range of steel products must be made with iron forged or smelted within MERCOSUR and/or Bolivia. Certain telecommunications and computer equipment requires that certain inputs be made and/or assembled within the subregion. Products made exclusively with inputs that are imported from third countries and that merely undergo simple assemblage (including from knockdown kits), packaging, or processing (such as the addition of water or even the mixing of fungibles in some cases) will not be considered eligible for intraregional free trade treatment, even if they may undergo a tariff classification heading in Bolivia and/or MERCOSUR. On the other hand, more substantial assembly operations may enjoy intra-regional duty-free treatment so long as the regional content requirement can be fulfilled. In recognition of Bolivia’s membership in the Andean Community’s free trade area and MERCOSUR’s free trade agreement with Chile, the signatories to ACE No. 36 reserve the right to include inputs originating within one of the Andean Community’s member states or Chile for purposes of satisfying the regional content requirement for intra-regional free trade between Bolivia and MERCOSUR. In order to take advantage of the preferential tariff treatment accorded under ACE No. 36, all goods must be accompanied by a certificate of origin verified under oath. The requisites for the type of information these certificates must include and the organizations authorized to issue them are similar to those that exist in the intra-MERCOSUR context. So too is the procedure that must be followed if the customs authorities in the importing country suspect

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fraud or other unfair play in the issuance of certificates of origin. Certificates are valid for 180 days after issuance and, if the identical type of product for which the certificate of origin was issued is being exported on a regular basis within those 180 days, it can be used for more than one export transaction. The final producer or exporter of a good is responsible for obtaining a certificate of origin from an entity authorized by the national government (e.g., chambers of commerce, etc.). E. Unfair Trade Practice Remedies Article 16 of ACE No. 36 gives one signatory state the right to complain and demand consultations of another signatory state that is allegedly receiving dumped or subsidized imports from third countries. This provision is designed to eliminate the possibility that the complainant’s exports will be replaced by the dumped or subsidized imports from a non-signatory country. Article 15 obligates a signatory state to inform the others of any antidumping or countervailing duty measure it has enacted against third-country imports. All measures adopted to combat unfair trading practices from third parties should conform to WTO mandates. Article 19 of ACE No. 36 calls for the eventual elimination of temporary entry or duty drawback regimes wherein inputs are imported from third countries into Bolivia or the MERCOSUR states, and the duty that was paid on them is reimbursed when the final good is reexported. It was originally anticipated that the final goods for which the third-country inputs received temporary entry or duty drawback privileges could not be traded duty free between Bolivia and the MERCOSUR countries after January 1, 2002. Given the difficulty in eliminating their use with respect to intra-MERCOSUR trade, however, this deadline has subsequently been extended until January 1, 2011. F. Safeguard Measures Annex 10 to ACE No. 36 includes safeguard measures that the signatory states are allowed to adopt under exceptional circumstances. Until the transition period formally comes to an end in 2014, the signatory states are permitted to either suspend the timetable for gradually eliminating tariffs or restore the original tariff rate for quantities of a particular product in excess of the average imported during the preceding three years. Safeguard measures may only be adopted when imports from another signatory country have increased in such a fashion so as to cause or threaten to cause significant harm to the domestic production of a similar or directly competing good. Article 5(b) in Annex 10 emphasizes that a “threat of grave harm” must clearly be imminent and must be based on concrete facts and not simply on the basis of allegations, conjecture, or remote possibilities. Before a government can impose a safeguard measure on goods originating in one of the other signatory states, it must notify all the other signatory states that it will carry out an investigation to determine whether there is sufficient cause to impose such measures. The signatory states should meet within 30 days following notification so as to offer their recommendations. If no agreement

Origins, Current Status, and Future of MERCOSUR  •  115

can be reached, any country that feels that it will be detrimentally affected by the proposed safeguard measure may petition for convening an extraordinary session of the Administrative Commission. Safeguard measures cannot be imposed for longer than two years, but they can be extended for a total period that should not exceed four years. A country can impose a safeguard measure unilaterally if it faces a critical threat under which any delay would produce irreparable prejudicial harm. In such a situation, any type of safeguard measure that is adopted can only last for 180 days, and all the other signatory parties to ACE No. 36 must be informed within five days after it is adopted. If the other signatory states determine that the unilateral measure was unjustified, the country that unilaterally suspended or reduced the preferential tariff margin or restored the original duty must reimburse the affected parties. If the signatory states cannot resolve a problem arising from the initial application or extension of a safeguard measure, the matter can be referred to the dispute resolution mechanism found in Annex 11 to ACE No. 36. G. Dispute Resolution Annex 11 to ACE No. 36 contains the procedure for resolving all disputes that may arise as a result of controversies over the interpretation, application, or non-compliance with provisions of ACE No. 36 or any subsequently negotiated instruments or protocols. The parties to a dispute should first try to resolve the matter though consultations and direct negotiations. Notification of the commencement of such negotiations shall be made to the Administrative Commission. Those negotiations should be completed within 30 days after notice is given to the Administrative Commission, although an additional extension of up to 30 days is permitted if the parties so agree. If no resolution is forthcoming within the allotted time period, any of the parties to the dispute may request, in writing, the intervention of the Administrative Commission. The Administrative Commission should meet within 15 days following receipt of the request for its intervention and should conclude its deliberations within 45 days thereafter (unless the parties agree to a longer time period). The parties to a dispute are allowed to present all the material and arguments supporting their position. If the Administrative Commission feels it cannot issue a decision on its own, it can call for assistance from an ad hoc Group of Experts. The ad hoc Group of Experts shall consist of three individuals who should be convened within ten days after a solicitation from the Administrative Commission. Each side to the dispute shall designate one expert (as well as an alternate) from a pre-selected list of experts. The third expert (and an alternate), who presides over the group’s meetings and cannot be a national of any of the countries to the dispute, shall be chosen by mutual consent. He or she does not necessarily have to be picked from the pre-selected list of experts filed by each government with the Administrative Commission. If the parties cannot agree on the third expert or fail to select their own expert within the

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ten-day period allowed for the Group of Expert’s formation, he or she shall be chosen by the Administrative Commission through a lottery. The costs of the experts shall be borne by the party that chose them, and the third expert’s costs shall be split among the disputing nations in equal amounts. Each country is entitled to nominate eight people for inclusion in it’s Group of Experts who are competent to resolve trade and other related matters, as well as eight people for the list of competent third-country experts. The Group of Experts will make their recommendations based on the previsions of ACE No. 36, the additional protocols and other instruments signed under its auspices, and the information provided by the disputing parties. The Group of Experts will adopt its own rules of procedure for each matter it reviews within five days after its formation, and those rules should guarantee that each side has ample opportunity to be heard in an expeditious manner. The Group of Experts must submit its findings to the Administrative Commission within 30 days after its creation. The Administrative Commission, in turn, has 15 days after receipt of the Group of Experts’ findings to issue its recommendations to the parties with respect to the dispute and to insure that they are implemented. The dispute resolution system found in Annex 11 of ACE No. 36 was modified in 2001 with the addition of a third level open to the state parties if the Administrative Commission advised by the Group of Experts is unable to resolve the dispute. This third level consists of an arbitration panel made up of “jurists of recognized competence in the matters that can be the subject matter of a dispute.” The arbitrators are authorized to issue preliminary injunctions as well as provide equitable relief. The arbitration panel retains jurisdiction to oversee implementation of its original decision, including differences of opinion as to whether retaliatory measures adopted in response to non-compliance with an arbitral decision are excessive. H. Other Measures The customs valuation system used by the signatories to ACE No. 36 is the same as that mandated by the WTO Customs Valuation Agreement. The signatories agree not to adopt technical norms, sanitary and phytosanitary rules, environmental regulations, and related measures to create unnecessary obstacles to trade. The imposition of technical norms, sanitary and phytosanitary measures shall be governed by the WTO Agreement on Technical Obstacles to Trade and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures. The signatory states also agree to facilitate and encourage joint ventures in the scientific and technological fields, including joint investigations. Chapter XI of ACE No. 36 encourages the signatory states to complement their public and private sector’s productive capabilities and encourage transnational joint ventures in the production of goods and in the provision of services. Article 33 of ACE No. 36 specifically requires that each signatory implement measures designed to facilitate the cross-border provision of services. In order to further facilitate cross-border business transactions, the parties agreed to examine the possibility of signing an agreement on the promotion and protection of foreign investment and treaties avoiding double taxation.

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In conjunction with the execution of ACE No. 36, an Additional Protocol on Physical Integration was signed by Bolivia and MERCOSUR that calls for the establishment of bioceanic corridors through Bolivia and the improvement of road, river, rail, and air connections between Bolivia and the MERCOSUR countries. Article 42 to ACE No. 36 allows those provisions found in previous ALADI bilateral agreements Bolivia enjoyed with each of the MERCOSUR countries to remain in effect so long as they do not contradict or otherwise conflict with the provisions of ACE No. 36. Pursuant to Article 43 of ACE No. 36, if any signatory state enters into a type of agreement not contemplated in the Treaty of Montevideo of 1980 (e.g., a free trade agreement with a non-ALADI country), that country has 15 days to inform the other ALADI states of its actions, and, within 90 days thereafter, it must negotiate and offer the same or similar concessions to the other ALADI members. If these concessions cannot be granted, the signatories shall have an additional 90 days to negotiate some sort of equivalent compensation and, failing this, the matter can then be turned over to the general dispute resolution mechanism. VI. MERCOSUR-Peru Free Trade Agreement A. Introduction On August 25, 2003, representatives of the governments of Peru and the four MERCOSUR countries, in the presence of Presidents Alejandro Toledo of Peru and Luiz Inacio Lula da Silva of Brazil, signed an agreement that makes Peru an associate member of MERCOSUR. In addition to gradually establishing a free trade area of goods between Peru, on the one hand, and MERCOSUR, on the other, the agreement seeks to improve infrastructure links in order to expand intra-regional trade and international exports. The agreement also promotes complementation and cooperation in the energy field, cooperation in scientific and technical research and development, and the promotion of cross-border investment through, inter alia, the eventual signing of treaties to avoid double taxation. There is a general obligation for the signatories to adhere to the TRIPs Agreement and the Convention on Biological Diversity, and to “develop norms and disciplines to protect traditional knowledge.” Although it was originally intended that the Peru-MERCOSUR agreement would enter into effect by November 1, 2003, as ALADI ACE No. 58, it did not actually do so until December 2005 (and not until February 2006 in the case of Paraguay). One explanation for the long delay was a last-minute disagreement between Peru and Uruguay over certain items included in their respective list of sensitive products subject to a longer phase-out period of duties. It also did not help that crucial Annexes to ACE No. 58 (including the tariff reduction schedules) had not even been negotiated when it was signed in August 2003. Interestingly, while ACE No. 58 is designed to replace any previous ALADI agreements that may have existed between Peru and the four MERCOSUR countries, certain provisions in these older agreements remain in effect so long

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as they do not contradict provisions found in the newer agreement. This means that it is still necessary to refer to these older agreements (including ACE No. 39 and 48 as well as Renegotiated ALALC Agreements No. 20 and 33) in order to determine what provisions may still be in effect. Article 39 to ACE No. 58 contains a specific provision in the event any of the signatories enters into a trade agreement with a non-ALADI country. Its terms will be applicable to Peru as it signed a bilateral free trade agreement with the United States that is now expected to come into force in 2009. In the future, this provision can also be used by Peru if MERCOSUR ever completes its long-standing negotiations with the European Union to establish a transAtlantic free trade area. Pursuant to Article 39, any country that enters into a non-ALADI trade agreement has 15 days to inform the others thereafter. The country then has 90 days to extend the same, more favorable concessions made to non-ALADI country(ies), or to negotiate a mutually satisfactory and equivalent level of compensation. If the matter cannot be resolved through negotiations, the issue of what is an equivalent measure of compensation can be referred to the general dispute resolution mechanism. B. Free Trade in Goods The general tariff reduction schedule is laid out in Annex II to ACE No. 58 and is divided into at least three major schedules: one for trade between Argentina and Brazil, on the one hand, and Peru, on the other; a second schedule for bilateral trade between Paraguay and Peru; and a third schedule for trade between Peru and Uruguay. Each of those three major schedules is, in turn, broken down into separate tracks depending upon the particular tariff classification heading of the product or the specific country involved (including bilateral differences between Argentina-Peru and Brazil-Peru). It is also important to note that a not insignificant group of products received immediate duty-free treatment as soon as ACE No. 58 came into effect. The general preferential tariff margin granted by Argentina and Brazil to PeruUntil (over the normalBeginning tariff rates on file Beginning with the WTO in Geneva) as follows: Beginning Beginning Beginning Beginning isBeginning 12/31/04

1/1/05

1/1/06

1/1/07

1/1/08

1/1/09

1/1/10

1/1/11

30%

40%

50%

60%

70%

80%

90%

100%

The general preferential tariff margin granted by Argentina and Brazil to Peru is above, while below is Peru to Argentina and Brazil. Until Beginning Beginning Beginning Beginning Beginning Beginning Beginning Beginning Beginning 12/31/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13 15%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Depending on the product, additional tariff reduction schedules are established that, on the Argentine and Brazilian side, began on January 1, 2006,

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and run through January 1, 2015. On the Peruvian side, the tariff reductions began before January 1, 2006, but run as late as 2015 or 2018. In addition, for a small set of agricultural products deemed to be extra sensitive, the tariff reduction schedule did not begin until January 1, 2008, and will teach zero in 2018. In the two and a half or so years between the time ACE No. 58 was signed and when it actually came into force, Argentina added quota restrictions on certain Peruvian imports, including adhesive tape, textiles, and clothing. Likewise, Peru reserved the right to impose quotas on the importation of meat from Argentina. Hidden in the appendices to Annex II is the fact that Argentina, Brazil, and Peru have excluded sugar and ethyl alcohol from receiving any type of preferential tariff access into their respective markets. The general preferential tariff margin granted by Paraguay to Peru, and vice versa, began on December 31, 2005, and culminates with a 100 percent preference on January 1, 2012. The actual preferential tariff margin charged during any of those intervening years, however, varies by country. Meanwhile, Peru and Uruguay have two general preferential tariff margins that are identical in terms of the annual preference each country offers the other. Both schedules began before December 31, 2005, but one is phased in over a fiveyear period and culminates at zero on January 1, 2009, while the second is for seven years and reaches zero duties as of January 1, 2011. For all three countries, additional tariff reduction schedules began before December 31, 2005, but do not culminate in a 100 percent preferential tariff margin until January 1, 2017. There are also instances in which a tariff reduction schedule for a particular product does not commence until some years after ACE No. 58 came into force (usually either in 2008 or 2010). A whole range of textile and apparel goods traded between Paraguay and Peru as well as between Peru and Uruguay are excluded from any type of preferential tariff treatment, as are certain steel products traded between Peru and Uruguay, until specific rules of origin can be negotiated for these items. Peru has also imposed quotas on yellow hard corn imported from Paraguay and has reserved the right to do so on imports of Paraguayan beef. Furthermore, Peru and Paraguay mutually excluded sugar and ethyl alcohol from receiving any type of preferential tariff treatment. For its part, Uruguay reserved the right to impose quotas on certain Peruvian textile items made from alpaca wool. Peru, in turn, imposes quotas on the importation of Uruguayan tractors and trucks (a rather bizarre restriction given that Uruguay currently manufactures neither). Peru and Uruguay have also agreed to mutually exclude sugar and ethyl alcohol from preferential tariff treatment. It should be pointed out that any preference granted for certain lactate and agricultural products such as rice is based on specific tariff rates found in Annex I to ACE No. 58. These are frozen and not subject to subsequent tariff reductions. Because Peru had preexisting ALADI agreements with all four countries of MERCOSUR on a bilateral basis prior to the entry into effect of ACE No.

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58, these goods received duty-free treatment over a wide-ranging period that began at the end of 2004 and extend through January 1, 2013. The agreement between Peru and MERCOSUR requires that all taxes be removed from the bilateral exchange of new and unused products, including the tax Brazil levies on goods imported by ship to support its Merchant Marine as well as Argentina’s statistical tax. The only exceptions to the tax elimination rule are those fiscal measures specifically included in Annex III to ACE No. 58. Annex III also includes specific legislative requirements that are not waived as a result of the entry into force of ACE No. 58 (including the need to present Customs with technical compliance and consumer quality certificates, prohibitions on the importation of certain chemicals, drugs, etc.). Finally, the signatories also agree not to levy any new taxes on exports destined to each other as of the date the agreement comes into effect, except for those export taxes that were already being levied before 2005 and are listed in Annex IV to ACE No. 58. C. Rule of Origin Requirements Annex V to ACE No. 58 contains the rules of origins that all products traded between the MERCOSUR countries, on the one hand, and Peru on the other, must fulfill in order to enjoy the benefits of bilateral free trade. In general, in order to receive duty-free treatment: 1. Goods must originate wholly within the territory of one of the signatories (including fish caught outside of territorial waters by the duly registered ships of companies incorporated in one of the signatory states); 2. Goods must be made within a signatory with inputs from any of the five signatory states; 3. Goods must be made within a signatory with third-country inputs, so long as each input is sufficiently transformed within the territory of a signatory so as to acquire a new tariff classification heading; or 4. Goods must be made within a signatory with third-country inputs, so long as the CIF value of the foreign inputs do not exceed 50 percent of the product’s FOB value in the first three years after ACE No. 58 comes into effect, 45 percent in the fourth, fifth, and sixth years, and 40 percent from the seventh year forward. This can even include goods that are merely assembled (such as automobiles). For purposes of accumulation of regional value, Bolivia is deemed to be a signatory to ACE No. 58 (given that both Peru and MERCOSUR have preexisting free trade agreements with that country) as well as the other three members of the Andean Community (Colombia, Ecuador, and Venezuela) that signed a free trade agreement with MERCOSUR in October 2004. Annex V to ACE No. 58 also includes special rules of origin for certain products regardless if they meet the criteria listed above. For example, cheese must be made with milk produced in one of the signatory states. In addition,

Origins, Current Status, and Future of MERCOSUR  •  121

there are appendices to Annex V that include special rules of origin that only apply to goods traded by Argentina and Brazil with Peru, Paraguay with Peru, and Uruguay with Peru. All goods traded between Peru and the MERCOSUR countries must be accompanied by a certificate of origin in order to take advantage of the preferential tariff arrangement created by ACE No. 58. The certificates of origin issued by the relevant, authorized entities under the oath of the exporter and/ or producer should follow the format established in ALADI Resolution 252. Certificates of origin should be issued within five days after a request is made and are normally valid for a single shipment for up to 180 days thereafter. Any doubts by a Customs Service about the authenticity or validity of a certificate of origin should normally be handled by allowing the good to enter, upon payment of the normal tariff rate or upon the posting of a bond by the importer. The Customs Service can then follow up with the relevant authorities in the country of origin to exchange information in order to make a final determination as to the validity of any certificate of origin. An elaborate procedure is established for carrying out investigations whenever the mutual exchange of information is insufficient to establish the validity of a certificate of origin. As part of this investigation process, the authorities in the importing country may make on-site inspections of any relevant production facilities in the country of export. Depending upon the seriousness of the offense, any intentional misuse of certificates of origin can be punished by suspending the culpable producer and/or exporter from cross-border trade for 18 to 24 months (or longer). It can also lead to permanent suspension in cases of recidivism. Furthermore, sanctions can be imposed on issuers that are negligent or have engaged in intentional wrongful behavior, as well as against importers. D. Unfair Trade Practice Remedies Unlike the situation that is eventually contemplated for intra-MERCOSUR trade, ACE No. 58 permits the continued use of antidumping and countervailing duties on bilateral trade flows between Peru and MERCOSUR, so long as any decision to impose them is in compliance with WTO obligations. In the event a signatory decides to impose an antidumping or countervailing duty on goods coming from a third country that is not a signatory to ACE No. 58, that government must inform all the other signatories. The signatories to ACE No. 58 are also required to notify each other of any changes made to their own domestic antidumping and countervailing duty legislation. All the signatories to ACE No. 58 agree not to provide their domestic agricultural producers with any type of export subsidies earmarked for bilateral trade. They also agree not to provide any type of subsidies for industrial goods that are directed to bilateral trade, in compliance with their general WTO obligations. Subsidized goods are specifically excluded from bilateral free trade. In addition, any country that feels that another signatory to ACE No. 58 is subsidizing the export of any of its products has the right to demand detailed

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information. This information must be provided within a 15-day time frame. Once this information is received, the affected countries are required to engage in consultations within a 30-day time frame. If these consultations determine that a product or group of products has benefited from illegal subsidies, the detrimentally affected country(ies) has the right to suspend any preferential tariff treatment otherwise granted to those goods by ACE No. 58. E. Safeguard Measures The safeguard measures that can be used on bilateral trade flows between MERCOSUR and Peru are outlined in Annex VI to ACE No. 58. These measures are in addition to those permitted by Article XIX to the GATT and the WTO Agreement on Safeguards. Safeguard measures can be requested by one or more countries of MERCOSUR and can be imposed on imports from Peru so long as they can establish actual grave harm or threat of grave harm. On the other hand, Peru can only impose a safeguard measure against imports from the member state responsible for the harm or threat of harm and not on the entire MERCOSUR bloc. Before a safeguard measure is imposed, there must be an investigation, which is initiated after the filing of a petition by a sufficiently significant domestic producer of like or similar products. Safeguard measures can consist of either the suspension of a tariff reduction schedule or the reimposition of previously lifted tariffs in whole or in part. Any suspension or increase in tariffs will generally not be applicable to a level of imports equivalent to the average amount of the particular product imported for the three years immediately preceding the sudden surge. Safeguard measures can be imposed for a maximum of two years, with a single one-year extension. Normally an entire year must elapse before a safeguard measure can be reimposed on the same product. Preliminary safeguard measures can also be imposed under exigent circumstances, but only for a 180-day period. Any preliminary safeguard that is subsequently determined to be unjustified will result in the immediate refund of any higher tariffs that may have been paid. Any disputes arising over the imposition of a safeguard measure shall first be handled by the Administrative Commission that oversees implementation of ACE No. 58. Any disputes it cannot resolve shall, in turn, be referred to the general dispute resolution system. Annex X to ACE No. 58 permits Argentina, Brazil, and Peru to impose a special safeguard regime on a small group of mostly foodstuffs (i.e., meat, lactate products, fruit, rice, vegetable oils, sugar, etc.) traded between Argentina-Peru or Brazil-Peru as they become subject to increasing preferential tariff margins. F. Technical Norms, Sanitary and Phytosanitary Measures Annex VIII to ACE No. 58 contains the general rules for preventing technical norms and regulations, as well as the mechanisms for ensuring compliance with these norms, from becoming unnecessary barriers to free trade. Among one of the specific commitments is not to apply more rigorous

Origins, Current Status, and Future of MERCOSUR  •  123

technical obligations on imports from other signatories than those imposed on domestic producers (i.e., national treatment). The signatories are encouraged to enter into agreements that mutually recognize compliance certifications issued by one of their respective national bodies with respect to technical norms. Disputes on whether the enforcement of a technical norm is causing an unnecessary barrier to trade should be handled through direct consultations among the affected governments and, failing that, through the general dispute resolution system. The signatories are also obligated to exchange information on proposed changes to current legislation and provide an adequate time for discussion and review (i.e., normally 60 days). The rules for imposing sanitary and phytosanitary measures on bilateral trade are found in Annex IX to ACE No. 58. As a general rule, the state parties are bound by the rules of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures. In addition, any sanitary or phytosanitary norm must be based on scientific principles and evidentiary support. The signatories are encouraged to reach agreements that recognize the equivalency of different national sanitary and phytosanitary standards. A country is required to provide all the signatories with at least a 60-day notice of any intention to issue new national sanitary and phytosanitary standards. Disputes between signatories regarding their obligations under Annex IX can either be resolved through direct consultations or by referral to the general dispute resolution mechanism. G. Dispute Resolution Annex VII to ACE No. 58 contained the original procedure for resolving any disputes that might arise between one or more members of MERCOSUR, on the one hand, and Peru, on the other hand, over the “interpretation, application and non-compliance with the provisions contained within . . . [ACE No. 58] and the instruments and protocols that are executed or that may be signed within its scope.” Annex VII was modified by a subsequent protocol executed by MERCOSUR and Peru. Under the current dispute resolution system, Peru and the MERCOSUR countries have the option to refer any dispute that may also fall within the WTO’s purview to the WTO dispute resolution system or to the system established under ACE No. 58. Once a choice of forum is made, however, the parties are bound by that decision. As a first step in the system established by the Protocol on Dispute Resolution, the parties are required to resolve their controversy through direct negotiations. These negotiations should take no longer than 30 days (unless the parties agree to extend them for another 15 days). If the negotiations prove fruitless (or the matter can only be resolved in part), either side can request in writing a meeting of the Administrative Commission. The Administrative Commission has within 30 days after the filing of this request to convene in order to discuss the dispute. The Administrative Commission shall allow both sides to present their positions and should issue its recommendations within 30 days after its first meeting. Whenever deemed necessary, the Administrative Commission can request the formation of an ad hoc Group of Experts to advise it in drafting its recommendations on how to best resolve the dispute.

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If one of the sides to the dispute fails to adopt the recommendations made by the Administrative Commission, or if the time periods for meeting or issuing recommendations are not met by the Administrative Commission, either side can request that the matter be referred to a panel made up of three arbitrators. Each side to the dispute gets to select one arbitrator and an alternate from a list of ten arbitrators it has previously filed with the ALADI General Secretariat in Montevideo. The arbitrators should be jurists of recognized competence. The third arbitrator is picked by mutual agreement and cannot be a national of either side to the controversy. If the 15-day time limit for designating an arbitrator is not met and/or the two sides cannot agree on the third arbitrator, then the selection is made through a lottery by the ALADI General Secretariat. The arbitrators have the authority to issue preliminary injunctive relief in order to prevent grave and irreparable harm. The arbitrators shall base their final decisions on the provisions of ACE No. 58, other legal instruments signed within its framework, and relevant principles and provisions of applicable international law. The arbitrators can also issue an award based on equity if both sides to the dispute so agree. The arbitrators have 60 days (extendable for an additional 30-day period) following formation of the panel to issue their decision. Arbitration awards are by majority vote and shall be in writing and cannot include a dissenting opinion. How each arbitrator actually votes remains secret. Arbitration decisions are final and cannot be appealed and have the effect of res judicata. An arbitration award must be complied with within 60 days after its issuance, unless the panel of arbitrators specifies otherwise. Any party to the dispute has 15 days following the issuance of an arbitration award to request clarification or guidance as to how it should be implemented. The arbitration panel then has an additional 15 days to respond. If one of the sides fails to comply with an award or does so only partially, the complaining party can notify the recalcitrant party in writing of the benefits equivalent to the harm inflicted that it intends to temporarily suspend, in order to force compliance. If the non-compliant side feels that the proposed suspension of benefits is excessive, it can request that an arbitration panel (ideally the one that made the original award) issue its opinion as to the appropriateness of the benefits proposed for suspension. The arbitration panel has 30 days following its first meeting to issue its findings. H. Administrative Commission Implementation of ACE No. 58 is overseen by an Administrative Commission made up of the Common Market Group for MERCOSUR, and the Peruvian Vice-Minister of International Trade. The Administrative Commission is required to meet at least once a year, and all decisions require the consensus of all the signatories of ACE No. 58. Among the specific tasks of the Administrative Commission is to make any revisions or modifications to the rule of origin requirements. As previously noted, the Administrative Commission also plays an important role in the dispute resolution system.

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I. Conclusion Despite language found in the preamble of ACE No. 58 indicating it covered the free trade of services between Peru and MERCOSUR, no commitments were actually made in the body of the text with respect to the liberalization of specific services. In addition, ACE No. 58 left for future discussion how to treat goods that originate in a free trade or export processing zone (something that Brazil and Peru finally reached an agreement on in late 2005, but no one else yet). These omissions can be attributed to the rush to sign a MERCOSUR-Peru Free Trade Agreement for political reasons. On the one hand, then President Toledo of Peru was desperately looking for initiatives in 2003 that might improve his rock bottom popularity ratings in the single digits among Peruvians, while President Lula da Silva of Brazil wanted to solidify MERCOSUR’s negotiating position in the FTAA negotiations and underscore the priority his new government attached to improving Brazilian relations with Latin America. VII. Andean Community-MERCOSUR Free Trade Agreement A. Introduction After several years of seemingly endless negotiations and premature announcements that an agreement was imminent, the remaining three members of the Andean Community finally followed Bolivia and Peru in signing a free trade agreement with MERCOSUR on October 18, 2004. In this way Colombia, Ecuador, and Venezuela also became associate members of MERCOSUR. It is important to point out, however, that the actual tariff reduction schedules and rule of origin requirements for goods are the result of separate, bilateral agreements between Colombia, Ecuador, and Venezuela with each of the four MERCOSUR countries. This is partially the result of the fact that the CET in both the Andean Community and MERCOSUR have still not been fully consolidated, and so neither bloc was in a position to make a single offer binding on all their members. To add further confusion to this scenario, the date the 12 bilateral free trade agreements actually entered into force was not uniform and ranged anywhere from January 5, 2005, through April 19, 2005. Interestingly, provisions of older bilateral ALADI agreements among the seven signatory states remain in effect so long as they are not replaced or do not contradict current obligations arising under the subsequent Andean Community-MERCOSUR agreement. The Andean Community-MERCOSUR Free Trade Agreement, also known as ALADI ACE No. 59, has been criticized by some trade specialists as a victory of political expediency that does little to facilitate new opportunities for the private sector. The administration of Brazilian President Luiz Inácio Lula da Silva seemed especially anxious to close a deal that would enhance MERCOSUR’s position (and, ipso facto, that of its largest member) in the international trading arena. Accordingly, the Brazilian negotiators were even willing to make changes in MERCOSUR’s own internal rules of origin so as to secure a deal.30 The end 30   The MERCOSUR countries acknowledged as much in Common Market Council Decision 41/03, which notes that the rules of origin being negotiated in the Andean Community-

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result is a trade agreement of Byzantine complexity that undermines rather than enhances transparency and facilitates new opportunities for the private sector. B. Free Trade in Goods As part of their obligations to reduce and eliminate tariff barriers, Argentina exempted Colombian, Ecuadorian, and Venezuelan imports from paying its statistical tax, while Brazil exempted the three Andean countries with payment of its hefty tax on imports to support its Merchant Marine. All the signatories to ACE No. 59 were required to exchange lists of non-tariff measures such as non-automatic licenses and outright import bans or registration requirements that can serve as impediments to free trade within six months after ACE No. 59 came into force. There are up to six general tariff reduction schedules for Colombian and Venezuelan exports to Argentina, Brazil, Paraguay, Uruguay and vice versa as well as a seventh general tariff reduction schedule for some Argentine products imported from Colombia and Venezuela. Similarly, there are up to seven general tariff reduction schedules for Ecuadorian exports to Argentina, Brazil, Paraguay, and Uruguay as well as six general schedules for imports from Argentina, Brazil, and Uruguay (seven from Paraguay) into Ecuador. Tariffs were reduced to zero for some products immediately after ACE No. 59 came into force, while the majority of products reach zero at different dates that can be as late as January 1, 2018, and are usually implemented in fairly linear fashion. The latest tariff phase-out is for a small group of “sensitive” agricultural products (i.e., in the case of the Andean countries, the150 or so agricultural tariff lines subject to the Andean Community’s price band mechanism). While preferential tariff treatment for the majority of goods begins from the moment ACE No. 59 comes into force, there are a significant number of products for which the tariff reduction schedule did not begin until later. Because these commencement dates are exceptions to the six or seven general tariff reduction schedules, it is essential to examine the precise treatment accorded specific tariff lines in each of the seven countries. In general, tariff reduction schedules reach zero at a faster pace for Argentina and Brazil than for the other five countries. This difference (also evident with respect to the rules of origin) marks an acceptance by Brazil of the concept of “special and differential treatment” for smaller economies. Ironically this was a concept Brazil traditionally resisted, both in terms of MERCOSUR and in the context of the FTAA negotiations. In reviewing the specific treatment afforded a particular tariff line in each of the seven countries, one is also able to uncover many examples of MERCOSUR Free Trade Agreement will be more liberal than those within the MERCOSUR. Accordingly, Article 1 of Decision 41/03 allows the MERCOSUR countries to apply the same origin rules to intra-MERCOSUR trade as that offered to third countries. In addition, Article 2 indicates that for purposes of determining local content, the inputs of the Andean Community and the MERCOSUR are to be deemed fungible once ACE No. 59 comes into force.

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hidden protectionism that riddle ACE No. 59. For example, sugar is currently exempt in most of the countries from preferential tariff treatment until future negotiations. For still other products, an initial preference may be granted, but further reductions in the tariff to zero are subject to future negotiations such as establishing new rules of origin for that particular good. This is the case for most auto parts, clothing, steel products, and textiles. Tariff rate quotas (TRQs), a rarity in traditional Latin American trade agreements, also apply for a significant number of agricultural products. This means that the Andean countries, for example, offer meat and lactate products imported from the MERCOSUR countries at either fixed or increasing preferential tariff treatment below a certain cap. Anything imported above the cap receives a reduced preferential tariff or is simply charged the general MFN duty. While the quantitative limits are normally fixed, there are instances where the cap is gradually raised over time. In the case of Ecuador and Venezuela, the quotas are assigned to each of the four MERCOSUR countries. Colombia, on the other hand, imposes the quota on meat for the entire MERCOSUR as a group and lets them negotiate among themselves as to how they will divide up that quota. Colombia also imposes TRQs on Argentine and Brazilian candy. Although TRQs are generally not used by the MERCOSUR countries on imports from the Andean countries, Argentina has imposed them on Colombian auto parts, candy, and fruit jams. Among the tariff lines subject to immediate duty-free trade upon ACE No. 59’s entry into force are Colombian asparagus, cacao butter, graphic art, flowers, and shrimp imported by Argentina; Colombian bedding, cement, children’s books, coal, films, flowers, fuel oil, salt, tires, toys, and vaccines imported into Brazil; some Colombian petrochemicals imported into Paraguay; and certain Colombian auto parts, machinery, medical equipment, paper products, and pharmaceuticals imported into Uruguay. On the other hand, Colombia grants immediate duty-free treatment to Brazilian artwork and recordings, shrimp, and seeds; Paraguayan barbecues and lamps; and Uruguayan seafood. Meanwhile, Ecuador provides immediate duty-free entry to Argentine petrochemicals and Paraguayan auto parts, while Argentina grants similar treatment to Ecuadorian tropical fruit pulp and seeds, and Uruguay does so for Ecuadorian cookies. Venezuela grants immediate duty-free entry upon ACE No. 59’s entry into force to a wide variety of Argentine, Paraguayan, and Uruguayan fruits, seeds, and vegetables, while Argentina does the same for Venezuelan seeds and tropical fruit pulp. C. Rule of Origin Requirements The rules of origin are found in Annex IV to ACE No. 59. Goods that originate wholly within the territory of one or more of the seven signatory states (plus Bolivia and Peru) are eligible for duty-free treatment. So too are goods made with foreign inputs, so long as they undergo a substantial transformation within the territory of one or more of the seven signatory states (plus Bolivia and Peru) as reflected in a complete shift in tariff classification heading at the initial four number level. Goods containing foreign inputs that do not meet the substantial transformation test (including products that are merely assembled)

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may still qualify if the CIF price of the foreign inputs does not exceed a certain percentage of the final product’s FOB price. In the case of goods originating in Argentina and Brazil, the CIF value of the foreign input(s) cannot exceed 40 percent of the final product’s FOB value. In the case of goods originating in Colombia, Venezuela, and Uruguay, the CIF value of foreign inputs cannot represent more than 50 percent of the final product’s FOB price until the seventh year after the entry into force of ACE No. 59. From the seventh year forward, the CIF value of the foreign inputs should not exceed 45 percent of the product’s FOB price, and the three countries are required to examine the possibility of reducing this to 40 percent. In the case of goods originating in Ecuador and Paraguay, the CIF value of foreign inputs can represent up to 60 percent of the final product’s FOB value, but this percentage must drop to 55 percent in the sixth year after the agreement’s entry into force and to 50 percent in the tenth year.31 After the tenth year, Ecuador and Paraguay are required to consider dropping the foreign content requirement to 40 percent. ACE No. 59 also contains specific rules of origin for particular products that take precedence over the general rules. This is most notorious in the automotive sector where passenger automobiles and trucks made in Argentina and Brazil must fulfill a 60 percent regional content requirement, and those made in Paraguay and Uruguay must fulfill a 50 percent regional content requirement. In the case of passenger automobiles and trucks produced in Colombia and Venezuela, however, the regional content requirement started at 30.4 percent in 2005 and increases annually until it reaches 36.5 percent in 2011. For Ecuador, the corresponding percentages were 21.4 percent in 2005 and increasing annually to 25.5 percent by 2011. After 2012, Colombia and Venezuela are required to consider raising the regional content requirement to eventually reach 50 percent by 2017, while Ecuador should attempt to fulfill a target of 37.5 percent. Even more liberal percentages incorporating higher foreign content exist for truck or bus chasses and new models. Auto parts that cannot meet the wholly produced or substantial transformation rules can still be traded duty free if, in the case of imports into the four MERCOSUR countries, no more than 55 percent of the final product’s FOB price represents the CIF cost of the foreign inputs. For Colombia and Venezuela, the corresponding percentages vary depending on the exact product and ranges from 50 or 55 percent through 2011 (and 50 or 45 percent, respectively, thereafter), while for Ecuador it ranges from 55 to 60 percent. Other specific rules of origin are particular to the two countries involved and may include requirements that all cheese be made with milk produced in one of the two countries (regardless if it meets the substantial transformation or general regional content requirements) or a yarn-forward rule for textile and apparel products. Interestingly, there are even products (e.g., some chemicals and textiles) that had no defined rule of origin when ACE No. 59 came into effect. Instead, the Administrative Commission was supposed to define the rule 31   Given Paraguay’s status as a landlocked country, the CIF value is calculated at the first port within the territory of one of the seven signatory states where the goods are offloaded.

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by January 1, 2006 (or even later). This meant that there was no preferential treatment for this product until a particular rule of origin was drafted. In still other cases, an initial tariff preference was accorded a product, but this could be frozen or even dropped if the countries could not agree in the future to devise a new rule of origin for that good. All products that seek to take advantage of the free trade program of ACE No. 59 must be accompanied by a certificate of origin issued by a government body or its designated agent and should normally be shipped directly from the country of export to the country of destination. The certificate is issued upon a sworn statement of compliance with the rules of origin made by the producer and/or exporter. The certificate of origin is valid for 180 days after issuance and cannot pre-date the drafting of the underlying Invoice. Doubts over the authenticity of a certificate of origin or the validity of the information contained therein, cannot be resolved by prohibiting the importation of the good. The good must be admitted, albeit upon the posting of a bond. Annex VI does provide, however, for consultations among the relevant customs authorities and a procedure for investigating challenged certificates of origin that can include on-site inspection of the relevant production site. If the certificate of origin or any information found therein is determined to be fraudulent, then the exporter and/or producer may be barred from exporting for a period ranging from six to 24 months. A second violation doubles the suspension period, while a third violation will result in being permanently barred from exporting. A certification authority can also be suspended from issuing certificates for a period of time ranging from 12 months or higher (or even permanently) if it negligently or intentionally issues fraudulent certificates of origin. Importers may also be suspended from using the preferences granted under ACE No. 59 for a period of up to one year and even permanently barred if they are deemed to have adulterated or falsified a certificate of origin. D. Unfair Trade Practice Remedies The signatory states agree to comply with WTO mandates and not subsidize industrial products traded among them. In addition, they also agree not to subsidize agricultural exports. For those countries that do subsidize national agricultural production, Article 18 to ACE No. 59 requires that they insure that these subsidy programs are WTO compliant and have little or no distortional effect on trade and production in the other countries. If the subsidies do produce trade distortions, such subsidized products are excluded from preferential tariff treatment. Furthermore, Article 18 creates a consultation mechanism for countries to utilize if they feel detrimentally impacted by another country’s domestic agricultural subsidy programs. Pursuant to Article 14 of ACE No. 59, the signatory states are permitted to impose antidumping and countervailing duties on reciprocal trade as per their respective national legislations so long as these comply with WTO mandates. If any government imposes an antidumping or countervailing duty on a third country’s imports, it has an obligation under Article 15 to inform the other signatory states. The signatories are also under an obligation to give each

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other at least 15 days’ advance notice of any modifications or changes to their respective antidumping and countervailing duty legislation. E. Safeguard Measures Annex V to ACE No. 59 contains highly elaborate rules on the use of safeguards and the detailed procedures that must be followed before a safeguard measure can be imposed. Safeguards are normally limited to the suspension of the tariff reduction schedule or a partial or complete reversal of already granted preferential tariff treatment for quantities of the item exceeding the average imported during the preceding 36 months. Safeguards can only be used while a product is subject to a tariff reduction schedule and, normally, for an additional four years thereafter. Before a safeguard can be imposed, there must be an investigation that determines that a surge in imports is causing actual, or threatens to cause grave, harm to a branch of national production that is similar or directly competes with the import. Any safeguard lasting longer than one year (which includes the time limit granted for emergency safeguards) requires that the affected national industry draw up an acceptable restructuring plan designed to achieve competitiveness. Safeguards may not be imposed for a period longer than two years and can only be extended once for up to one year. Petitions to impose a safeguard may be filed by either the detrimentally affected companies or, in the case of large numbers of small enterprises, by the relevant government authority. A waiting period of one year must pass before a new petition can be filed on a product previously protected by a safeguard. Emergency safeguards may be imposed upon an objective showing that any delay could irreparably harm or threaten to cause grave harm to national production. The emergency safeguard can be imposed for up to 180 days only and shall consist of the suspension or the annulment in whole or in part of the preferential tariff for an amount that exceeds the average imported during the preceding 36 months. Immediately after the safeguard is imposed, the exporting countries must be notified. If the subsequent investigation finds no justification for imposition of the emergency measure, any bond or additional tariffs shall be promptly refunded and the measure immediately lifted. A special safeguard regime found in Annex IX to ACE No. 59 can be used by Colombia, Ecuador, and Venezuela on certain agricultural imports from Argentina and Brazil and vice versa during the product’s transition to free trade (and for another four years thereafter).32 The safeguards can be imposed whenever there is an increase in imports of the particular product over the last 12 months that is equal to or exceeds 20 percent of the average amount imported during the previous 36 months. There is also an alternative calculation mechanism based on a specified percentage drop in the price of the imported agricultural product. While there is a requirement to review the imposition of such safeguards at the end of every 90 days to determine if they 32   At the time ACE No. 59 came into effect, Ecuador, Paraguay, and Uruguay had still not made a decision on whether to apply this special safeguards regime in their respective reciprocal agricultural trade.

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are still required, the longest time period such a measure may be imposed is for two years, subject to a single one-year renewal. F. Technical Norms In Article 1 of Annex VII to ACE No. 59, the signatory states reaffirm their rights and obligations arising out of the WTO Agreement on Technical Barriers to Trade as well as a similar ALADI agreement on technical barriers. There are also many other references to the WTO agreement in Annex VII with respect to formulating new technical norms, negotiating mutual recognition agreements, providing advance notification of changes to legislation, as well as cooperating and providing technical assistance with respect to their implementation. There is also an overall obligation not to impose more onerous evaluation procedures on imports than those required of national producers. Pursuant to Article 6 in Annex VII, if a country believes that another signatory state has adopted a technical norm or established an evaluation procedure that creates an unnecessary obstacle to trade, it can request consultations with that government. If the matter cannot be resolved within a period of 60 calendar days, it can be referred to the general dispute resolution system. Pursuant to Article 7, the signatories commit to giving each other up to 60 days’ advanced notice of proposed changes to technical norms, evaluation procedures, and related measures to permit adequate feedback. Any proposed technical standard should normally not enter into force until at least six months following its publication in an official government bulletin. Technical norms, evaluation procedures, or other relevant measures may be immediately adopted without advance warning in response to an emergency but only on a non-discriminatory basis and upon immediate subsequent notification to the other countries (which then have an opportunity to challenge its adoption). Pursuant to Article 10 of Annex VII, the signatory states are required to adopt mechanisms to facilitate the exchange of information affecting technical norms and evaluation procedures that may impact on cross-border trade. G. Sanitary and Phytosanitary Measures Pursuant to Article 1 in Annex VIII to ACE No. 59, the adoption and enforcement of sanitary and phytosanitary measures among the signatory states is subject to the WTO Agreement on the Application of Sanitary and Phytosanitary Measures as well as provisions established in Annex VIII itself. Article 1 also makes reference to the fact that definitions found in the WTO agreement control terms used in Annex VIII. Pursuant to Article 2, sanitary and phytosanitary measures can only be imposed when necessary to protect the health and the life of persons, animals, or to preserve plant life and must be “based on scientific principles and cannot be maintained without sufficient scientific evidence.” Article 3 further mandates that sanitary and phytosanitary measures cannot used as disguised restrictions on trade. Although the signatory states are not required to harmonize their sanitary and phytosanitary measures, there is a commitment to adopt the regulations,

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directives, and recommendations developed by international organizations recognized in the WTO agreement or by subregional bodies such as the Andean Commission. Article 7 to Annex VIII encourages the parties to establish agreements recognizing the equivalency of sanitary and phytosanitary measures. Pursuant to Article 12, the adoption and enforcement of sanitary and phytosanitary measures shall be based upon an adequate evaluation of the risks and should normally not result in any impediments to trade during the evaluation period. Emergency measures may be imposed, but Article 15 mandates that trade partners be notified within three days of their adoption, and justification must be provided. Emergency measures can only be left in place while the reason that gave rise to their use persists. Annex VIII contains procedures for the recognition among trading partners of zones or regions free of pests and illness. Article 22 to Annex VIII requires that the parties keep each other appraised of changes in their domestic sanitary and phytosanitary legislation and offer their trading partners the opportunity to make observations and engage in consultations. There is also an obligation for each country to make its respective sanitary and phytosanitary legislation available to the public free of charge through the Internet. In order to further encourage transparency, Article 26 provides for a counternotification mechanism that allows for a quick exchange of information by relevant government agencies on sanitary and phytosanitary measures imposed on imports. Article 27 also contains a commitment by countries with more sophisticated systems to provide technical assistance to those with lessdeveloped legislation and enforcement mechanisms. Any disputes arising among the signatory states from the failure to adhere to the obligations and time limits established in Annex VIII to ACE No. 59 should be resolved through consultations involving the interested governments and, if this is not possible, the matter can be directed to the general dispute resolution system. H. Dispute Resolution Article 20 to ACE No. 59 requires the seven signatory countries to sign a separate protocol that will become the agreement’s permanent dispute resolution system. Although drafted, this protocol will not come into force until all seven countries ratify it. As of mid-2008, this protocol had still not been ratified by Argentina and Brazil. In the interim, the dispute resolution system found in Annex VI is controlling. Annex VI contains the temporary three-step dispute resolution system that has fairly quick turnaround times (i.e., generally a maximum of 30, 45, and 55 days, respectively). Under the third stage of the temporary dispute resolution system, matters are referred to a three-person Group of Experts who are “persons of recognized competence in trade matters and of any other nature that could be the subject of a dispute” arising from ACE No. 59. Failure to comply with recommendations of the experts allows a complaining party to return to them and request suitable retaliatory measures that may be undertaken to force

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compliance and may include the total or partial suspension or withdrawal of concessions equivalent to the harm caused. Under the permanent dispute resolution system found in the protocol, all disputes that arise from obligations incurred under ACE No. 59 or that are regulated by the WTO, can be resolved by referral to either system as appropriate. Once a choice has been made, however, it excludes subsequent use of the other forum. The first step in the system established under the protocol involves direct negotiations to reach a mutually acceptable resolution. The negotiations are conducted on behalf of the MERCOSUR countries by the president pro tempore of MERCOSUR or each country’s National Coordinator for the Common Market Group. The Andean countries are represented by individuals designated by each national government for that purpose with the support of the General Secretariat of the Andean Community in Lima. Negotiations should commence within ten days after a notice requesting consultations has been served on the appropriate representatives. These negotiations should normally be concluded within 30 days thereafter (although they can be extended for another 15 days upon mutual consent). If direct negotiations prove unsuccessful, the parties can refer the matter to the Administrative Commission that oversees implementation of ACE No. 59 or proceed directly to binding arbitration. The Administrative Commission must meet within 30 days after it has been referred a dispute. If it cannot, the parties proceed directly to binding arbitration. When the Administrative Commission does meet, and after it has offered both sides to the dispute an opportunity to appear and present supporting evidence, it then has 30 days (extendable for another 15 days if it calls experts) to issue its recommendations. If no recommendations are issued, or if the parties do not adopt those that are made (or adopt them only partially), either side can then request binding arbitration. Arbitration panels consist of three members, one chosen by each side to the dispute, and a third, who cannot be a national of either side and is selected by mutual consent. The arbitrators should normally come from a previously drafted list of individuals (ten for the Andean Community and ten for MERCOSUR). Two of the individuals on each list should not be nationals of either the Andean Community or MERCOSUR. The arbitrators (and their alternates) should be selected within 15 days after a request to establish a panel is made. If the third arbitrator cannot be agreed upon, then the ALADI General Secretariat in Montevideo uses a lottery to make that designation. The arbitration panel is required to collect testimony and evidence both orally and in written form. Hearings are normally not open to the public, and certain information can be submitted confidentially only for viewing by the arbitrators. The arbitrators are authorized to issue preliminary injunctions to prevent grave and irreparable harm and can call on outside experts for technical assistance. Arbitration panels should issue their decisions in writing within 60 days (extendable for another 30 days), measured from the date

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the last arbitrator was selected. Decisions should be based on the provisions of ACE No. 59 and additional legal instruments that arise within the scope of the agreement as well as relevant principles of international law. Decisions are by majority vote, with the actual votes kept secret and dissenting opinions forbidden. Arbitration decisions, which have the force of res judicata and cannot be appealed, should normally be implemented by the parties within 60 days after they are made. Each side to the dispute can request that a panel clarify its decision within 15 days after its issuance. If the winning side is unhappy with the measures undertaken to implement the decision, it can refer the matter back to the same arbitration panel for guidance. Failure to implement a decision in whole or in part can lead to retaliation through the suspension of benefits obtained through ACE No. 59. All measures adopted by the retaliating party must be communicated to the Administrative Commission. If a government feels that the retaliatory measures adopted are excessive, it can request guidance from the same arbitration panel that issued the original decision. I. Transportation and Infrastructure In recognition of the traditional geographical barriers that have made it difficult to transport goods and build infrastructure linking the Andean countries with those nations on the Atlantic seaboard, ACE No. 59 calls for the promotion of initiatives and cooperation mechanisms that will permit the development, extension, and modernization of infrastructure. The intention here is to complement efforts under the Integration of Regional Infrastructure in South America or Iniciativa para la Infraestructura Regional de Sur América (IIRSA), a set of ambitious infrastructure projects designed to create bioceanic corridors that was announced by the South American presidents meeting in Brazil in September 2000. ACE No. 59 also calls for extending existing transportation liberalization and facilitation agreements within the Andean Community or MERCOSUR to encompass all seven of the signatory states as well as encourages them to sign new ones. J. Administrative Commission ACE No. 59 establishes an Administrative Commission made up of representatives of MERCOSUR’s Common Market Group and those individuals who represent Colombia, Ecuador, and Venezuela on the Andean Community Commission. The Administrative Commission is required to, inter alia, oversee implementation of ACE No. 59, participate in the dispute resolution system (as well as set the honorariums for the arbitrators), and modify existing, or formulate new, rules of origin as the circumstances may require. All decisions of the Administrative Commission are adopted by consensus. K. Conclusion Given their importance for manufacturing activities in many of the signatory states, it is remarkable that ACE No. 59 contains no provisions on the treatment of goods originating in free trade and export processing zones.

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This oversight underscores the political pressure that existed to sign off on the Andean Community-MERCOSUR Free Trade Agreement, even if key issues had not yet been resolved. ACE No. 59 also contains no provisions for the liberalization of trade in services, although there is a hortatory commitment to promote the cross-border offering of services. Similarly, there are no specific provisions on investment protection other than a statement that the state parties shall endeavor to encourage cross-border investment and examine the possibilities (if they do not already exist) of signing bilateral investment as well as double taxation treaties. In terms of intellectual property, there is a very general statement that the state parties agree to be bound by the terms of the TRIPs Agreement under the WTO and the l992 Convention on Biological Diversity. Opening up government procurement bids to providers of goods and services from the other signatory states is not even broached. In recognition of the fact that Colombia and Ecuador were negotiating a free trade agreement with the United States at the time ACE No. 59 was signed, Article 43 of ACE No. 59 mandates that any country that enters into a free trade agreement with a country outside the ALADI framework has 15 days to notify the other signatory states. It then has 90 days to negotiate an extension of the favorable concessions or equivalent alternatives to the other signatories to ACE No. 59, which may have been granted to the non-ALADI country.

CHAPTER 4

INSTITUTIONAL FRAMEWORK OF MERCOSUR AND HOW THE MERCOSUR ECONOMIC INTEGRATION PROCESS FUNCTIONS I. Introduction The original goal of MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) was the creation of a common market between Argentina, Brazil, Paraguay, and Uruguay by January 1, 1995. Despite the stated goals of the Treaty of Asuncion (the document that set the outlines for establishing that common market), what actually appeared in the Southern Cone on New Year’s Day in 1995 was a very imperfect customs union. The common external tariff (CET) was applied to only about 85 percent of the tariff lines found in the MERCOSUR nomenclature or harmonized tariff classification system (NCM). The actual duty charged depended on the particular item, although during the mid-1990’s the weighted average of the CET was approximately 14 percent. In addition, about 10 percent of the tariff lines found in the NCM originating within and traded among the MERCOSUR countries was still subject to tariffs or non-tariff barriers such as quotas or outright import restrictions. II. Institutional Framework The Treaty of Asuncion provided for three institutional bodies that were to be replaced by January 1, 1995. In particular, Article 9 of the treaty established the Common Market Council and the Common Market Group to oversee the administration and implementation of the MERCOSUR process during the socalled transition period that officially began in November 1991 and ended on December 31, 1994. In addition, Article 15 of the Treaty of Asuncion set up an Administrative Secretariat in Montevideo to coordinate meetings, issue press releases, and handle public relations. The Protocol of Ouro Preto, which was signed by the four MERCOSUR countries in December 1994 and came into full force and effect on December 15, 1995, instituted a new institutional framework for MERCOSUR. The Protocol retained the three original institutional bodies and added three new ones as well, including the MERCOSUR Trade Commission. The Protocol of Ouro Preto is also important because it gave MERCOSUR a juridical personality

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under international law, thereby allowing MERCOSUR to negotiate agreements with other countries, trade blocs, and international organizations. One of the biggest shortcomings of MERCOSUR’s institutional framework is that none of the bodies enjoys supranational authority. This means that all decisions, resolutions, or directives (but for those affecting the daily operations of MERCOSUR’s institutional bodies) must either be ratified by each member state’s respective legislature or incorporated into domestic law by executive decree before they have any legal effect within each country’s territory. There is no concept of “direct effect” as in the European Union where regulations issued by the EU Council, for example, are directly applicable in each member state without the need for national measures to implement them. Although each MERCOSUR country is under an obligation to incorporate all MERCOSURissued decisions, resolutions, and directives into its respective domestic legislation, this procedure is time consuming and prevents quick resolution of the many asymmetries that currently exist among the MERCOSUR countries. Furthermore, the legislation is not enforceable on a regional level until all four member states have ratified it (although there are instances where a decision or resolution only requires that it be ratified by two or three out of the four member states before it comes into force on a regional level). Another potential problem with MERCOSUR’s institutional bodies is that any measures must be adopted with the consensus of all four member states. This procedure has worked reasonably well up until now, but if MERCOSUR ever becomes the type of deep economic integration process similar to the European Union (as was contemplated when the project was launched in the early 1990s), the current voting system may become unfeasible. Under the current system, for example, tiny Paraguay (population 6 million) and Uruguay (population 3.5 million) have a vote that is equal to Argentina (population 34 million) and Brazil (population 186 million). Even in 1995 the four MERCOSUR governments recognized some of the shortcomings of MERCOSUR’s current institutional framework. This is the reason why Article 47 to the Protocol of Ouro Preto reserved the right to convene a diplomatic conference in the future to revise MERCOSUR’s institutional structure. Although the current associate members of MERCOSUR do not have the right to vote in any matters before MERCOSUR’s institutional bodies, they are allowed a limited presence. For example, Common Market Council Decision (CMC) 12/97 authorizes Chile to participate in meetings of the Common Market Council and to attend meetings of the Common Market Group when this is deemed convenient by both Chile and MERCOSUR. The Chilean    As a result of 1994 amendments to the Argentine Constitution and subsequent holdings by the Argentine Supreme Court, norms that flow out of a binding international legal treaty (such as the Treaty of Asuncion) may take precedence over conflicting domestic legislation or fill in for voids in the national legal framework.    It is important to point out that the affirmative vote of all countries is not required to achieve a “consensus.” A country may abstain and not destroy the requirement of consensus.

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government is also allowed to participate in Common Market Group working groups and other specialized or ad hoc MERCOSUR bodies, particularly when matters related to the Chile-MERCOSUR Free Trade Agreement are under discussion. In terms of foreign relations, Chile and MERCOSUR are expected to regularly coordinate negotiating positions when deemed of mutual interest. Similar rights and obligations have been extended to Bolivia through CMC Decision 38/03 and to Peru as a result CMC Decision 39/03. A. Common Market Council The Common Market Council is the highest body in the MERCOSUR institutional framework and issues decisions to insure that the objectives laid out in the Treaty of Asuncion are complied with. The council is made up of the ministers of foreign relations and the ministers of economy (or their equivalent) from each of the four MERCOSUR member states. Ministers representing other government departments may also be invited to attend council sessions when a particular subject matter over which they have jurisdiction is being discussed. The presidency of the council is rotated among the chief representatives of each MERCOSUR country (in alphabetical order beginning with Argentina) for a six-month period. The council meets as often as is necessary but at least once during each six-month period. At least once during the six-month period, the presidents of each of the four MERCOSUR countries should also attend. Among the specific functions of the council are to: 1. oversee compliance with the Treaty of Asuncion and any protocols and agreements that may flow out of that treaty, 2. undertake the necessary actions to establish a common market, 3. negotiate and sign agreements with other countries and international bodies on behalf of MERCOSUR, 4. decide on proposals referred to it by the Common Market Group, 5. create new institutional bodies as may be needed, 6. designate the director of the MERCOSUR Administrative Secretariat, and 7. issue all decisions of a financial nature. Beginning in 2004 specialized meetings involving only particular ministries from the four member states (e.g., Agriculture, Culture, Education, Environment, Health, Interior, Justice, Social Development, and Tourism) have convened under the auspices of the Common Market Council to discuss matters of mutual concern or propose new communitarian norms and agreements that touch upon those subject areas falling within their particular areas of jurisdiction. Special groups have also been appointed over the years to look at particular matters deemed of high importance to the Common Market Council and to propose appropriate solutions. These special groups are usually ad hoc in nature and dissolve once their work is completed. Recent examples include the High Level Strategic Groups on the Common External Tariff, Institutional Reform, Job Growth, Overcoming Asymmetries, and South-South Cooperation, as well as special working groups looking into the incorporation of Bolivia and Venezuela as full members of MERCOSUR.

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B. Common Market Group The Common Market Group is the second most important institution within MERCOSUR and fulfills the role of an executive body. It is made up of four permanent representatives (as well as four alternates) from each member state representing each country’s Ministry of Foreign Relations, Ministry of Economy (or its equivalent), and Central Bank. The fourth representative will come from the most appropriate government agency that has jurisdiction over the particular subject matter that is being discussed at a particular session of the Common Market Group (e.g., a discussion on sanitary and phytosanitary measures would include a representative from each country’s Ministry of Agriculture). The Common Market Group meets as often as is required and the Ministry of Foreign Relations in each country coordinates the meetings. Among the Common Market Group’s specific functions is to: 1. propose measures to be adopted by the Common Market Council, 2. ensure that Common Market Council decisions are implemented, 3. create working subgroups to assist in efforts to fulfill the goals of MERCOSUR, including the eventual implementation of a common market, 4. negotiate with third countries or international organizations when the right to do so has been delegated to the group by the Common Market Council, 5. organize meetings of the Common Market Council and prepare all the necessary reports and studies that the council may order, and 6. supervise the activities of the MERCOSUR Secretariat. The Common Market Group issues resolutions that should be implemented by the member states. The Common Market Group currently has 14 working subgroups that provide it with expert input and assistance in the following areas: 1. communications; 2. institutional matters; 3. technical norms and evaluation with conformity; 4. financial matters; 5. transportation; 6. environment; 7. industry; 8. agriculture; 9. energy; 10. labor matters, employment, and social security; 11. health; 12. investment; 13. electronic commerce; and 14. mining. In 1999 the Common Market Group issued Resolution 15/99 that formally creates a MERCOSUR Social-Labor Commission. The MERCOSUR

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Social-Labor Commission is designed to assist the Common Market Group in implementing the policy objectives and regulatory commitments included in a Social-Labor Declaration issued by the MERCOSUR presidents in Rio de Janeiro on December 10, 1998. The declaration reaffirms a number of core labor rights found in various international agreements (including those of the International Labor Organization) and creates a mechanism to insure their implementation and enforcement in the four core MERCOSUR countries. In particular, the declaration forbids discrimination in the workplace based on race, national origin, color, sex, sexual orientation, age, religion, political opinion, union membership, ideology, economic position, or whatever other social or familial conditions. It also promotes the inclusion of mentally or physically incapacitated persons into the workforce and guarantees equality of treatment and opportunity for men and women. There also exist provisions related to the treatment of migrant workers, forced labor, and work by infants and minors. The declaration further recognizes the right of workers to form unions, bargain collectively, strike, and receive adequate social security benefits. Special groups or committees have been formed over the years to assist the Common Market Group in drafting appropriate communitarian norms and overseeing their implementation. Usually these are ad hoc in nature and exist for as long as the circumstances require. Examples include the Ad Hoc Group of Experts on the Fund for Structural Convergence in MERCOSUR (FOCEM), the Ad Hoc Group on a MERCOSUR Customs Code, the Automotive Committee, the Group on Government Procurement, the MERCOSUR Committee on Technical Cooperation, and the Services Group. As a result of CMC Decision 12/08, the Special Group on the Integration of Production within MERCOSUR was created in June 2008 to oversee implementation of a new program by the same name that is designed to create regional chains of production that include small- and medium-sized enterprises. The new special group, which has a representative from each of the MERCOSUR countries, falls under the jurisdiction of the Common Market Group. It has an obligation, however, to regularly report on its activities to both the Common Market Council and the Common Market Group. The Special Group on Productive Integration is also authorized to invite the private sector to participate in its deliberations as well as representatives from relevant government agencies. C. MERCOSUR Trade Commission The MERCOSUR Trade Commission is a creation of the Protocol of Ouro Preto. The Trade Commission assists the Common Market Group, particularly in proposing and overseeing the implementation of regulations that will permit the smooth functioning of the MERCOSUR customs union. It also proposes common trade policies for the four member nations vis-à-vis non-member states and international organizations. The MERCOSUR Trade Commission is made up of four permanent representatives (and four alternates) from each MERCOSUR country under the coordination of their respective Ministries of Foreign Relations. The Trade

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Commission meets at least once a month (and more frequently when deemed necessary by the Common Market Group or the respective governments), and its specific functions include: 1. issuing recommendations on any modifications proposed by member states or claims of non-compliance with respect to the CET and other instruments of common trade policy; 2. ensuring that MERCOSUR trade regulations are implemented by the member states; 3. analyzing current MERCOSUR trade and customs norms and, when deemed necessary, 4. proposing modifications or new rules to be adopted by the Common Market Group; 5. creating and supervising the work of technical committees designed to investigate specific aspects of customs and trade policies; and 6. carrying out any tasks related to common trade policy that may be requested of it by the Common Market Group. The MERCOSUR Trade Commission issues directives, which should be implemented by all the MERCOSUR countries (but these directives, as is true of Common Market Council decisions and Common Market Group resolutions, are not directly applicable within the legal framework of each member state but must be ratified by them to come into force). The Trade Commission currently has seven technical committees of experts to assist it in its work. There is also a specialized Committee on Defensive Trade Measures and Safeguards. The MERCOSUR Trade Commission also plays an important role in helping to resolve disputes that may arise within MERCOSUR. These disputes may arise over the interpretation or method of application as well as non-compliance by governments of their obligations under the Treaty of Asuncion and subsidiary documents as well as the rules issued by MERCOSUR’s institutional bodies. These complaints are first presented to the respective National Sections of the MERCOSUR Trade Commission by either government entities or private parties (whether individuals or corporations) that are domiciled within that country. If the National Sections cannot resolve the problem, it is then referred to the full MERCOSUR Trade Commission. A more complete description of the role of the Trade Commission within the context of MERCOSUR’s dispute resolution system follows later in this chapter (see Section III). D. Socio-Economic Advisory Forum The Socio-Economic Advisory Forum is a creation of the Protocol of Ouro Preto. The forum is designed to represent private sector views emanating from both industry and other sectors in society (e.g., labor and academia) with    These seven technical committees are: (1) Tariffs, Nomenclature & Product Classification; (2) Customs Matters; (3) Trade Norms; (4) Public Policies that Distort Competition; (5) Defense of Competition; (6) Foreign Trade Statistics of MERCOSUR; and (7) Consumer Protection.

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respect to the integration process. From its unique vantage point, the forum makes recommendations to the Common Market Group on how to improve shortcomings and strengthen the integration process. Each country has an equal number of representatives on the Socio-Economic Advisory Forum. E. MERCOSUR Secretariat The Protocol of Ouro Preto retained the MERCOSUR Administrative Secretariat based in Montevideo, which was originally established during the transition period. In December 2002 the Common Market Council issued Decision 30/02, which called for the gradual transformation of the Administrative Secretariat into a Technical Secretariat. The thought was that a Technical Secretariat was needed to overcome a shortcoming in the original MERCOSUR institutional framework where no one was authorized to provide objective input on MERCOSUR developments from a broader, regional perspective that went above partisan, national interests. As a first step in this transformation, the Secretariat was authorized to hire, effective May 1, 2003, four professionals from each of the member states (i.e., two lawyers and two economists) to provide assistance to the different MERCOSUR institutional bodies on technical issues. These professionals are chosen after a rigorous and transparent selection process for an initial three-year term, with the possibility of reappointment. The failure to reappoint the first two lawyers was viewed by many observers in the region as a repudiation of the genuinely independent stance they took, pointing out repeated failures by the member governments to take the integration process seriously and fulfill their MERCOSUR obligations. Both lawyers were also critical of the MERCOSUR institutional framework’s overall lack of transparency, where critical analyses, internal minutes, or even annexes to crucial decisions are not made public. As of mid-2008, there is still no easy way for the public to even determine what Common Market decisions or Common Market Group resolutions are in force, as this information is not posted on MERCOSUR’s official Web site. Part of the problem, is a recurring failure on the part of the respective governments to inform the Secretariat as to what decisions and resolutions have actually been incorporated into their domestic legal frameworks. The MERCOSUR Secretariat serves as the official depository of MERCOSUR archives, edits the Boletín Oficial del MERCOSUR, which contains all the legal norms adopted by MERCOSUR’s institutional bodies; provides logistical support for the meetings of all of MERCOSUR’s institutional bodies; and serves as a clearing house for information on legislation adopted by each member state with respect to their incorporation of MERCOSUR-issued decisions, resolutions, and directives into their domestic legal systems. The Secretariat is headed by a director from one of the MERCOSUR countries who, in turn, is selected by the Common Market Group for one two-year term. F. Commission of Permanent Representatives In October 2003 the Common Market Council—at the behest of Argentina— authorized the creation of a Commission of Permanent Representatives from

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each of the member states that is permanently based in Montevideo and primarily serves as an advisory body to the Common Market Council. The Commission of Permanent Representatives is headed by a president who is appointed for a twoyear term (renewable for an additional one-year period), who is also based in Montevideo. The president of the Commission of Permanent Representatives is supposed to be the face of MERCOSUR before the international community, although anyone who holds the position is unable to legally bind MERCOSUR or any of its member countries. The first president of the Commission of Permanent Representatives was Eduardo Duhalde, Argentina’s president by default between January 2002 and May 2003 (after four of his predecessors resigned the office during a two-week period, and he was selected by Congress). More cynical observers view the presidency of the Commission of Permanent Representatives as a convenient dumping ground for former Argentine presidents and vice presidents that the administration in power at the time in Buenos Aires finds inconvenient to have present in the country. Duhalde, after all, was succeeded by Chacho Alvarez, former vice president of Argentina between December 1999 and October 2000 who had prematurely resigned from the administration of President Fernando de la Rua in protest over a government corruption scandal (De la Rua himself prematurely resigned his office in December 2001). Recent initiatives of the Commission of Permanent Representatives include: (1) the MERCOSUR Social Institute based in Asuncion that was established through CMC Decision 3/07 and will, inter alia, maintain a data bank of regional social indicators, provide technical assistance in formulating regional social policy, and support initiatives to overcome asymmetries in development that exist within and among the MERCOSUR countries; (2) the MERCOSUR Training Institute based in Montevideo and established through CMC Decision 4/07, which will train public servants from the MERCOSUR countries on topics related to regional integration; and (3) the MERCOSUR Democracy Observatory established through CMC Decision 5/07, which is designed to provide election observers at the request of countries that are signatories to the Protocol of Ushuaia on the Commitment to Democracy in the MERCOSUR, Bolivia, and Chile (and that now also includes Colombia, Ecuador, Peru, and Venezuela as associate members states of MERCOSUR). G. Advisory Forum of Municipalities, Federal States, Provinces, and Departments In December 2004 the Common Market Council approved the creation of an Advisory Forum of Municipalities, Federal States, Provinces, and Departments in order to obtain their cooperation in fully implementing MERCOSUR obligations. The forum is also intended to facilitate the coordination of policies among the member states that aim to improve the well-being of their respective citizens. The forum is made up of representatives from the different government entities at the subnational level, but these are selected by the respective central governments. H. MERCOSUR Parliament In December 2005 the four MERCOSUR countries, through CMC Decision 23/05, issued the Protocol to Establish a MERCOSUR Parliament. The Parliament

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met for the first time on December 6, 2006, with members initially chosen for four-year terms by the legislatures of each country. By 2010, members of the Parliament from each country should be elected for a four-year term based on direct elections in their home countries. As a result of the first meeting of the Parliament, the Joint Parliamentary Commission, established under the Protocol of Ouro Preto in 1995 to ensure that representatives of the legislative branches of the four MERCOSUR countries were kept informed of developments within the subregional economic integration process, ceased to exist. The idea for a MERCOSUR Parliament had been around for many years, and in 2003 a specialized working group was established by the Joint Parliamentary Commission to look into the matter and make concrete recommendations. Brazilian President Luiz Inácio Lula da Silva was a strong proponent of the MERCOSUR Parliament, believing that it would instill a deeper integrationist spirit among the general populations of all the MERCOSUR member states. The MERCOSUR Parliament is expected to carry out, among other things, the following functions that are more advisory than deliberative in nature: 1. oversee compliance with MERCOSUR norms; 2. draft an annual report on the human rights situation in each of the MERCOSUR countries; 3. request information and opinions from the rule making and consultative bodies established under the Protocol of Ouro Preto related to the integration process; 4. invite representatives of the different MERCOSUR bodies to appear before the Parliament to present information, exchange opinions, and discuss matters that are either being implemented or are being considered; 5. carry out meetings once a semester with the Socio-Economic Advisory Council in order to exchange information and opinions on developments within MERCOSUR; 6. organize public meetings with civil society groups and those representing producers to keep them abreast of developments affecting the integration process; 7. review and pass on to the relevant MERCOSUR institutional bodies petitions made by any member of the public related to the acts and omissions of these same institutions; 8. issue declarations, recommendations, or reports related to the integration process; 9. suggest new rules that the Common Market Council should adopt, as well as propose national legislation that will contribute to harmonizing the laws of the different member states; and 10. facilitate and speed up the process for adopting MERCOSUR rules in the legislatures of each of the member states through the use of advisory reports and public hearings issued in conjunction with each new norm that requires such ratification. The MERCOSUR Parliament is authorized to request advisory opinions from the Permanent Tribunal of Review that sits in Asuncion. The Parliament

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currently has ten commissions that look at various issues including: (1) Legal and Institutional Matters; 2) Economic, Financial, Trade, Tax, and Monetary Matters; (2) International and Inter-Regional Affairs and Strategic Planning; (3) Education, Culture, Science, Technology, and Sport; (4) Citizenship and Human Rights; and (5) Infrastructure, Transportation, Energy Resources, Agriculture, Livestock, and Fishing. The MERCOSUR Parliament is based in Montevideo and is required to meet at least once a month in ordinary sessions and more frequently in extraordinary sessions at the request of either the Common Market Council or on the initiative of the Parliament itself. Decisions of the Parliament, depending on perceived importance of the matter at hand, can be adopted by simple majority or absolute majority (i.e., more than half the body present at a session or the actual members of Parliament, respectively), by special majority (i.e., two thirds of the actual members of Parliament representing each member state), and by qualified majority (i.e., more than half the actual members of each country’s respective delegation). Each member of the MERCOSUR Parliament is entitled to one vote. Each country currently has 18 members in the Parliament. It is expected that by 2010, however, representation in the Parliament will be modified according to a formula devised by a qualified majority of the Parliament and formally adopted through a Common Market Council decision. The modification will better reflect the principle of citizen representation by basing the number of members of Parliament on a country’s population. The MERCOSUR Parliament is authorized to invite representatives of the national legislatures of the associated states of MERCOSUR as non-voting observers. I. Special Funds to Strengthen the Economic Integration Process In December 2004 the MERCOSUR countries announced the creation of FOCEM, which designed to promote the structural convergence, competitive development, and social cohesion within and among the MERCOSUR countries as well as strengthen MERCOSUR’s institutional framework. The inspiration for FOCEM comes from the structural funds the European Union has historically used to facilitate the incorporation of new member states in order to minimize asymmetries in development between new and existing members. FOCEM’s total proposed budget of U.S.$125 million is supposed to be funded with contributions from each member state of MERCOSUR as well as money from third countries and international organizations. There is a formula under which the smaller MERCOSUR countries contribute the least to FOCEM but at the same time receive a considerably larger proportion of    Interestingly, a proposal put forward by the special working group, which was not adopted by the Common Market Council when it authorized the creation of the MERCOSUR Parliament, had recommended giving each country an equal number of representatives and then a number based on a percentage of its population not to exceed a cap (so as to prevent the Parliament from being swamped with representatives from Brazil). See F. Farinella, Las Instituciones del MERCOSUR: La Creación del Parlamento del Mercado Común, 10 Revista de Derecho Internacional y Del Mercosur 70–71 (Feb. 2006).

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the funds. CMC Decision 17/06 lists an ambitious set of 12 pilot projects to be funded by FOCEM in the coming years, including eight for Paraguay that range from assistance in eliminating hoof and mouth disease in cattle, paving major access roads, strengthening a bio-security laboratory, and technical assistance for micro-enterprises. The rest of the projects are focused on providing the MERCOSUR Secretariat in Montevideo with assistance that includes improving its statistical data bank collections. In December 2004 the Common Market Council also approved the creation of a Fund to Finance the Education Sector in MERCOSUR that will earmark money to schools and universities for courses and research projects that advance the regional integration pro