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CHAPTER 2:
THE ECONOMIES OF THE AMERICAS
Political and economic changes have been the basis to rethink old integration
... The older integration efforts, such as the Central American Common
Market, the ... CARICOM, and the Andean Pact ... have been revitalized
and combined with more recent developments such as MERCOSUR, established
in 1991, and of course the North American Free Trade Agreement in 1994.
The result ... has been a significant increase in intra-regional trade.
... The improvements ... of these regional trading groups ... provide a
strong foundation on which to build something as ambitious ... as a free
trade area of the Americas. [Stephen Randall, 125:840]
A Socio-Economic Profile of the Americas
The Americas comprise a population of more than 800 million people and
an economy approaching US$11 trillion as measured by the combined annual
gross domestic product (GDP) of its 50 constituent countries and territories
(see Table 2.1). With slightly less than 15% of the world's population,
the hemisphere conducts more than 35% of the world's measured economic
activity. So, from a regional perspective, the Americas is by far the largest
and most productive economic region of the world, surpassing the European
Union (EU), the second leading region, by more than US$3 trillion.1
Collectively, the countries and territories of the Americas exported
US$1.2 trillion worth of merchandise goods and commercial services in 1997,
representing an 18.2% share of world exports. They, in turn, imported US$1.4
trillion in goods and services in the same period, attaining a 20.7% share
of world imports. Apart from being a net importer of goods and services,
this performance suggests that the Americas is under-represented in international
trade relative to its overall economic activity when compared to other
regions. But this is largely because the Western Hemisphere's two dominant
powerhouses, the United States and Brazil, have large domestic economies,
with trade accounting for less than 10% of their GDPs. All other countries
of the Americas can be characterized as small to mid-sized open economies,
with international trade averaging more than 25% of their combined GDP
in 1997. In fact, Canadian, Central American or Caribbean trade accounts
for approximately 40% of their respective GDPs, thereby greatly out-performing
the world average of 23% in the same year. The countries of the Americas
have thus shown both the capacity and willingness to participate, if not
lead the way in international trade.
Table 2.1
Western Hemisphere
Selective Economic Data - 1997
-- not available
Sources: Americas Review 1998; World Bank, World Development
Indicators 1998 and World Investment Report 1998; World Trade
Organization, Annual Report 1998; International Trade Statistics 1998;
International Monetary Fund, Direction of Trade Statistics Yearbook
1998.
The Americas also attracted US$155.2 billion in foreign direct investment
(FDI), representing a 38.7% share of the world's FDI inflows in 1997. They
similarly made direct investments in other countries valued by the market
at US$136.6 billion and accounting for 32.2% of the world's FDI outflows.2
While again being a net importer, the Western Hemisphere's FDI activity
level relative to its GDP is very much in line with the rest of the world.
These economic statistics are indeed impressive, but differences in
the countries of the Americas go beyond their relative openness to trade
and their status as net exporters or importers of goods, services and direct
capital investment. Behind this aggregate data are 50 quite different and
complex societies. They differ in terms of history, geography, population,
ethnicity, language, religious beliefs, economic status and political structure.
For example, consider the Western Hemisphere's geography which encompasses
many small island nations such as Bermuda, comprising a territory of only
55 square kilometres in the Caribbean Basin, and large continental countries
such as Canada, spanning 10 million square kilometres of the Northern Hemisphere.
Consider resident populations that range from 2,000 inhabitants in the
Falklands to 266 million in the United States. Now consider these facts
in combination. Average population densities vary from as few as 3 people
per square kilometre in Guyana to 1,240 in Bermuda; and urbanization accounts
for as little as 32% of the population in Haiti and for as much as 88%
in Argentina. When it comes to the official languages of these countries,
there are six: English, Spanish, Portuguese, French, Quechua and Creole.
Average annual incomes per capita of these nations can vary almost hundredfold
from US$399 in Haiti to US$30,395 in the United States knowing full well
that these averages themselves mask yet more personal income dispersion
within these countries.3
Finally, from a political perspective, this hemisphere boasts almost as
many territorial possessions of European countries (United Kingdom, France
and The Netherlands) and the United States as there are independently chartered
countries.4
What is striking here is that the former are, in some cases, administered
as an overseas government department and the latter are, by constitution,
governed by democratically elected legislatures. Of course, Cuba remains
the only non-democratic country in the hemisphere today and, therefore,
since 1961 has had its membership in the Organization of American States
suspended.
Economic Integration within the Americas
Despite these striking differences in socio-economic circumstances,
it would be misleading to conclude that the 50 economies of the Americas
operate entirely independent of each other. There is plenty of evidence
of economic integration within the hemisphere, even between the historically,
culturally and ethnically distinct regions of Latin America, the Caribbean
and North America. The Committee will establish this fact in terms of merchandise
trade and direct investment, but the kind of economic integration lacking
is in terms of institutional measures facilitating labour mobility, specifically
those classified as specialized and therefore relatively more scarce, the
harmonization of fiscal and monetary policies, and the development of supra-national
administrative and coordinating institutions (i.e. competition authority,
industrial policy, etc.).
[W]ithin Europe there are institutions that allow for the formation
of some kind of collective opinion. We don't have any such institutions
within NAFTA, let alone within the hemisphere. In other words, what you're
looking at in Europe is what we basically call a common market. ... What
we have under NAFTA is a free trade agreement, plus it does not provide
for any common decision-making institutions. What it provides for is a
range of mechanisms for the resolution of disputes. And there is an enormous
difference. ... There was mention earlier of a common currency ..., but
this would provoke enormous debate. We don't have amongst our three countries
common external tariffs. In other words, although goods move back and forth
under NAFTA, we each have separate tariffs, for example, on automobiles
imported from outside North America. We have different tariffs on a wide
range of things. The concept of even establishing a common external tariff
would provoke an enormous outcry with respect to loss of sovereignty, let
alone anything as dramatic as formulating a common position for the WTO.
[Maureen Molot, 27:1725]
Underpinning the economic integration taken so far are 7 (sub)regional
free trade agreements, 4 customs unions, and 14 countries have signed scope-limited
bilateral free and preferential trade agreements (see Exhibit 2.1).
Exhibit 2.1
Trade Agreements in the Americas
Source: Free Trade Area of the Americas Website.
At this juncture, it would be fruitful to take stock of the trade and
investment integration already existing within the Americas. In this regard,
Table 2.2 provides a snapshot of intra- and inter-(sub)regional, west hemispheric
and world exports of merchandise goods and commercial services originating
in the Americas in 1997. Although one would naturally expect intra-(sub)regional
trade to dominate inter-(sub)regional trade because of proximity, this
is only true for the NAFTA and MERCOSUR (sub)regions; it is not true for
the Andean Community, CARICOM and CACM subregions. The latter three trade
groups export more to the NAFTA countries than to their free trade partners.
Table 2.2
The Americas: Direction of International Trade - 1997
Source: International Monetary Fund, Direction of Trade Statistics
Yearbook, 1998.
Upon further inspection, one immediately observes that the United States
is the largest market for the exports of all but eight countries of the
Americas.5
Apparently, wealth dominates proximity and a legal trade agreement as a
determinant of trade volumes within the Americas. Brazil, nevertheless,
is the single largest market for its MERCOSUR partners, while Canada is
the largest export market for goods and services from the United States
and Guyana. So the existing trading relationships within the hemisphere,
which are akin to hub-and-spoke trade network whereby the United States
is the primary hub and Brazil is a secondary hub in the trade of goods,
are large both in absolute and relative world terms and would be considered
by most as supportive of a free trade initiative in the Americas.
Table 2.3
Intro-Sub-Regional Exports Within the Americas
Source: International Monetary Fund, Diretion of Trade Statistics
Yearbook, 1998; United Nations, Handbook of International Trade
and Development Statistics, 1995.
Furthermore, Table 2.3 reveals that, regardless of the fact that the
United States may be the largest export market for virtually every country
in the Americas, each (sub)regional trade pact has seen their members'
intra-trade performance bolstered in the 1990s. For example, the NAFTA
has more than doubled its intra-regional trade between 1990-97, while both
the CARICOM and the CACM have more than tripled their intra-sub-regional
trade in this period. The Andean Community and MERCOSUR have respectively
quadrupled and quintupled their intra-sub-regional trade in the 1990s.
Since the overall economic output of these countries and sub-regions did
not match their trade performances, it would, therefore, be fair to conclude
that the trade deals struck so far have played some positive role in raising
intra-(sub)regional demand for goods and services within the Americas.
However, one cannot unequivocally claim that the positive intra-(sub)regional
trade performance, in absolute or relative terms, was the result of trade
creation rather than trade diversion.6
This is particularly true for the MERCOSUR, Andean Community, CACM and
CARICOM whose weak intra-trade relationships from the outset suggest that
they are not natural trade blocs. Despite their similar histories and ethnicities,
this economic fact suggests that these regional groupings may have a difficult
time realizing their aspirations of a common market. In any event, this
debate could largely be put to rest with the formation of a Free Trade
Area of the Americas (FTAA), as it would reconfigure trading patterns more
along efficiency lines and thus reduce the amount of trade diversion within
the hemisphere, but not between hemispheres, resulting from these preferential
regional agreements (see Appendix 1).
Table 2.4
Foreign Direct Investment Stocks and Flows
-- not available
Sources: United Nations, World Investment Report 1998: Trends
and Determinants, 1998.
Table 2.1 indicated that FDI inflows and outflows in the Americas amounted
to US$155.2 billion and US$136.6 billion, respectively, in 1997. Table
2.4, on the other hand, indicates that FDI inward and outward stocks totalled
US$1.2 trillion and US$1.1 trillion in 1997, representing a 35% and 31%
world share, respectively.7
However, it is probably more meaningful to consider this investment activity,
not in absolute terms or relative to other regions, but relative to a country's
gross fixed capital formation (GFCF). In this way, one can assess the extent
to which foreign investors are integrating into the host economy, as well
as measure their contribution relative to their domestic counterparts.
As the selective figures in Table 2.4 suggest, FDI inflows and outflows
represent between 6% and 8% of North America's GFCF, but respectively average
11.4% and 0.6% of GFCF in Latin America and the Caribbean. Moreover, annual
FDI inflows in some Caribbean countries can represent up to 53% of their
GFCF in the year, whereas they can represent as much as 40% in selective
countries of Latin America as it did in 1996 in Dominica and Bolivia, respectively.
North America also distinguishes itself as a net source or exporter of
FDI flows, whereas Latin America and the Caribbean are net destinations
or importers. The above-noted hub-and-spoke trade network is, therefore,
complemented by a very similar network of investment; only this time Canada
replaces Brazil as a secondary hub.
The FTAA initiative, which would include 34 countries of the Americas,
therefore proposes to reinforce and enhance the economic integration taken
so far by expanding the rules-based order of a trade agreement, such as
provided by existing (sub)regional agreements, under a more inclusive plurilateral
or hemispheric format.8
Given the greater commercial certainty that a trade and investment agreement
provides to private sector decision makers compared to that of political
bargaining, in which the largest economy has the advantage, a legal free
trade agreement could eventually transform this hemisphere into a bonafide
regional trade bloc.9
Such a trade bloc would be the largest of its kind in the world and would
be unique in that it would include a greater number and diversity of economies,
most notably in terms of size and development.
When it comes to forging a free trade agreement, which would be helpful
in cementing a trade bloc, the disparity in wealth and development between
North America and Latin America and the Caribbean need not be an insurmountable
barrier. Indeed, the disparity of wealth is at best a double-edged sword
and the Committee will have more to say on this issue in Chapters 4 and
5. For the time being, the Committee wishes to emphasize that no one should
be left with the impression that, with such a legal agreement in place,
there would be a general convergence over time to a single homogeneous
economy of the Americas as would be more characteristic of a common market
union. Greater trade and investment between the Americas should be viewed,
not as supporting a confluence of societies, but as promoting greater economic
integration and welfare while, at the same time, allowing for their respective
domestic economic policies and non-economic distinctions to flourish.
1 The
EU, however, is a common market and has constructed fewer institutional
barriers to commerce between member countries than have most regional and
sub-regional free trade areas, including the NAFTA, MERCOSUR, Andean Community,
CACM and the CARICOM (see the glossary for the relevant regional definitions).
As such, labour and capital move more freely within the EU and supra-national
political and economic institutions, covering and coordinating a broader
spectrum of trade and commercial issues, also supplement existing national
institutions.
2 These
figures include FDI originating from, and destined for, elsewhere in the
Americas.
3 The
sources of this data are listed with Table 2.1.
4 United
Kingdom territories include Anguilla, British Virgin Islands, Cayman Islands,
Falklands, Monserrat and Turks & Caicos; French territories include
French Guiana, Guadeloupe, Martinique and St. Pierre et Miquelon; Netherlands
territories include Aruba and the Netherland Antilles; the associated states
of the United States of America include Puerto Rico and the U.S. Virgin
Islands.
5 The
United States is, nevertheless, the second largest export market for most
of these countries, which include Antigua & Barbuda, Argentina, Cuba,
Grenada, Guyana, Paraguay, St. Vincent & the Grenadines, and Uruguay.
6 Trade
creation is defined as the overall amount of trade generated by the removal
of trade impediments, such as a tariff, enabling trade to shift from high-
to low-cost sources irrespective of regional status. Trade diversion, on
the other hand, is defined as the amount of trade that would shift from
low-cost sources outside the free trade region to higher cost sources within
the region due only to preferential access through exemption from tariff
and non-tariff barriers they would otherwise face. Regional trade agrements
(RTAs) are by definition discriminatory and are, therefore, a violation
of the most-favoured nation (MFN) trade principle. Consequently, without
any evidence of a relative improvement in total factor productivity of
these export industries and data on the importance of transportation costs
relative to delivered costs within and between regions, we cannot definitively
conclude that world economic welfare has improved, but has merely been
redistributed, as a result of the formation of these RTAs.
7 In this
description, the Committee omits, but does not wish to understate, the
importance of portfolio capital in bringing the real interest rate for
a given debt risk in line with the world and for facilitating a convergence
of price-earnings ratios and thereby levelling the playing field between
rival companies' cost of capital. The Committee, however, feels that it
makes little sense to point to ties between countries by way of a highly
mobile and anonymous source of capital, such as portfolio capital (sometimes
referred to as flight capital). Direct investment, on the other hand, is
not perfectly substitutable between regions because multinational firms
have command over different products, processes and distribution networks.
8 The
existing quilted patchwork of international trade and investment agreements
in the Americas both provide and impose differential reciprocal rights
and obligations.
9 The
trade rules emerging from negotiations often reflect the priorities and
preferences of the larger countries as they have more bargaining power.
This situation can sometimes be disadvantageous to the smaller countries.
However, the fact that the latter sign on to a rules-based regime can be
taken as evidence of a more preferable arrangement to that of political
bargaining.