Hare And Tortoise Set For Americas Free Trade Race

It is being billed in Brazil as a clash between the two largest economies in the Americas on how to proceed towards a free trade area for the western hemisphere. The venue is the south-eastern Brazilian city of Belo Horizonte, where trade ministers representing 34 countries from the western hemisphere meet this week.

Leaders from the 34 all the countries of the hemisphere except Cuba agreed at a summit in Miami in 1994 to have an agreement on a Free Trade Area of the Americas (FTAA) in place by 2005.

The Belo Horizonte meeting is meant to provide the groundwork for the next hemispheric summit in the Chilean capital, Santiago, next March. After that, negotiations proper to an FTAA are scheduled to begin.

 

Agreement has so far been reached on two issues: tariff reductions should be in place by 2005 and whatever is agreed will be part of a single agreement, rather than a series of separate undertakings.

However, fundamental differences in the approach to the FTAA have emerged. On one side, the US, backed by Canada, wants to move into talks on reducing tariffs straight after the Santiago summit.

On the other, Brazil - also speaking on behalf of its Mercosur partners, Argentina, Uruguay and Paraguay -favours a gradual build-up to talks on tariffs. Brazil wants a three-stage approach.

Step one, to begin next year, would involve negotiations over what it calls business facilitation and deregulation. Then it would embark on negotiations on trade related rules, such as disputes settlement and rules of origin. Only then, by perhaps 2003, would the talks on tariffs begin.

The US, on the other hand, wants to start negotiations on all these issues at the same time. Its priority is the fastest possible opening to US companies of what it views as fast growing markets in Latin America.

Latin American governments undertook a significant unilateral reduction in tariffs in the late 1980s and early 1990s, but that pace has slowed and tariffs remain relatively high in international terms.

Bill Daley, the US secretary of commerce, launched a broadside against Brazils trade restrictions as he arrived there this week. He criticised the Brazilian automobile regime, requiring foreign carmakers to maintain factories in Brazil in order to import cars at half the normal 70 per cent tariff and setting quotas on eligible imports.

This measure was a clear violation of WTO rules and would, if not resolved, result in a US complaint to the World Trade Organisation sooner rather than later, he said.

He also expressed serious concerns about Brazils recent trade financing restrictions and criticised the slow pace of copyright and computer software protection legislation.

However, he added that Brazil was one of 10 markets expected to account for over 40 per cent of total world imports and growth over the next 15 years. It was therefore one in which we are aggressively seeking commercial relations. Brazil has its own complaints against US trade barriers in particular to textiles, shoes, orange juice and other agricultural products - and against the US section 301 legislation which allows Washington to take unilateral action against producers deemed to be trading unfairly.

According to Brazilian diplomats, the US attitude to the agricultural sector will be the key to whether any progress can be made at Belo Horizonte. President Fernando Henrique Cardoso implied this on Monday, saying:

Regional integration depends a lot more on the capacity of countries in the north to open up their markets.

The FTAA negotiations are a dangerous game for Cardoso, who is expected to stand for re-election next year. Brazils first wave of tariff reductions has led to a widening trade deficit, expected to exceed $10 billion this year.

According to Luiz Felipe Lampreia, Brazilian foreign minister, the economy was submitted to an intense competitive shock in the early 1990s as a result of tariff reductions and the creation on Mercosur. He argues that it is too early inflict another shock on industry. If the government is perceived to be moving too fast in terms of tariff reduction, it risks a strong domestic backlash. And if it loses control over the trade debate, it could weaken support for other aspects of its market-oriented economic programme.

Rubens Ricupero, the former finance minister, gave an indication of the anxiety that the FTAA was creating when he said that Brazil was playing with its destiny in these talks.

Nonetheless, the talks also provide an opportunity for the government to assert a regional leadership role, a long-held ambition of the Brazilian political establishment. The government would not want a go-slow on trade to endanger its chance of regional leadership.

Brazil and the US differ on other issues too. The US would like to use the FTAA as the basis for wide-ranging agreement on hemispheric issues such as security, drug trafficking, the environment and labour issues. Brazil takes a much more narrow approach, believing the accords should be limited to trade.

There are some areas of agreement, however. Against the objections of Mexico and others, both the US and Brazil would like to see trade unions consulted closely in the negotiations, rather as corporations are at present.

Moreover, with President Bill Clinton making his first visit to Brazil in October, there are strong reasons of diplomacy for leaving the door open for compromise. Such a compromise, say Brazilian officials, might allow negotiations on a tariff reduction schedule to start next year -leaving a decision on the date of implementation until later.

Washingtons ability to push its own more rapid timetable for tariff reductions in any case depends on whether it can convince Latin American governments that it can follow up on its pledges.

That depends on Congress granting fast track authority - which allows the administration to negotiate trade deals without a line-by-line veto from Congress - an issue on which there has been little progress to date. Washingtons priority is the fastest possible opening to US companies of fast growing markets in Latin America.