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September 3, 1997 - The Brookings Institution

The Brookings Institution

Good Morning.

First, allow me to thank the Andean Development Corporation and the Inter-American Dialogue for agreeing to co-host this important conference on the policy issues and choices concerning US-Andean Trade and Investment Relations. The seminar is part of the activities we are undertaking in order to better inform all of us about the trade and integration eforts which are taking place between our member countries. The conference will surly benefit from the presence of the Ministers of trade who are here today, as well as from all the trade experts The conference follows on new and decisive steps taken recently by the leaders of the countries of the Andean Community towards deeper South American integration. It is only right that we have Enrique Garcia here with us today As President of the Andean Development Corporation, the main promotional and financial institution of the Andean sub-regional integration process, Enrique has been at the helm of many important initiatives in support of the sustainable development and integration efforts of the member countries.

Working with the Inter-American Dialogue, the Andean Development Corporation, and other policy institutions in Washington and in the region to provide a forum for, and to stimulate dialogue on, the Americas, is a responsibility that the OAS roundly embraces. And so it goes without saying that I am delighted to have been invited to offer some inaugural remarks to this distinguished gathering.

The broad range of issues to be addressed during this two-day conference will acknowledge and highlight the tremendous advances that have been made by the Andean countries in their efforts towards trade and investment liberalisation, as well as the future challenges that they must confront to enhance the process of regional integration and encourage further external opening. The progress made and the future challenges of the Andean Community preview some of the hurdles that other sub-regional groupings in the Americas must surmount to move us closer to the complete liberalisation of trade and investment in this Hemisphere. I hope that some of the issues I will mention in the next few minutes will be addressed in detail during the upcoming sessions, and that this conference will give us some insight into the road ahead.

Since the mid-1980s, the primary goal of economic integration in the Americas was no longer aimed at the protection of member states' production and markets for developmental purposes, but rather at the enlargement of national markets into regional ones so as to promote their efficient and fair participation in the world economy. This meant revitalising and readjusting old trade and integration arrangements like the Andean Pact, and creating new ones, like MERCOSUR and the G-3, to facilitate the re-insertion of the member countries into the world economy within a framework of systemic competitiveness, and to support and "lock-in" domestic strategies of growth and economic and political reforms.

Unilateral trade liberalisation in the Andean countries translated rapidly into a collective approach to integration, and considerable headway has been made in consolidating the Andean integration scheme. Its accomplishments, many times hidden by certain facts, in the present decade include the complete liberalisation of trade among four of its five member countries (Bolivia, Colombia, Ecuador, and Venezuela), the implementation of a common external tariff (CET) for most of its tariff schedule by three countries (Colombia, Ecuador, and Venezuela), and the adoption of common sectoral policies in a number of areas instrumental in achieving the region's integration objectives, such as foreign investment, intellectual property rights, and air transportation. Wide-ranging institutional reforms also have been implemented in order to strengthen the coordination of integration activities at the political level and foster more effective collaboration between the various Andean institutions.

The recent success of the Andean Community also can be measured by its impact on the member countries' reciprocal trade. Since 1990, intra-Andean trade has expanded by an average 29 percent a year, making trade among Andean Community countries the most dynamic of the sub-regional arrangements in the Hemisphere.

Yet, while the Andean Community has been successful in terms of progress by member countries towards freer trade among themselves and the adoption of a common approach in a number of policy areas, it confronts tremendous challenges in advancing its integration process. The Andean Community has been unable to consolidate itself as a customs union. The implementation of the CET proved to be a more difficult and lengthy process than expected, not being implemented until March 1995, and then, only by three of the five member countries. Bolivia maintains its own external tariff structure; and Ecuador, while formally accepting the CET, maintains significant exceptions. Colombia and Venezuela also have numerous temporary exceptions to the CET. Furthermore, the Commission's decisions on Peru's participation in the Andean free trade area have recognised Peru's intention to keep its own tariff schedule. The trade policies of Bolivia and Peru seem so well-established now that their governments are unlikely to consider adjusting them to the tariff structure of the Andean CET.

But, the Andean Community has not much to gain beeing half customs union and half free trade area. In addition to limiting the economic gains to be derived from deeper integration, the failure of the Andean Community to consolidate itself and develop a common approach towards Latin American and hemispheric integration lessens its institutional credibility and dilutes its impact as a collective undertaking. It is critical, then, for the Andean countries to start thinking about how to "multilateralise" their agreements at the sub-regional level.

The process ,back by all countries now, of creating an Andean political identity is essential to this task. The internal cohesion that we all expect will emerge from a consolidated and manifest Andean identity, sustained by solid democracies with dynamic civil societies, would strengthen the legitimacy of the Andean integration system, help to guarantee the sustainability of the integration process over the long-term, and would position the region ahead of the integrationist dynamic in the Americas.

Meanwhile Andean countries strive to define a strategy for attaining the internal cohesion so essential to their effectiveness and sustainability as a group, individual countries have proceeded to conclude bilateral free trade agreements with other Latin American and Caribbean nations to broaden the markets for their products. This combination of formal commitment to the Andean Community and simultaneous outreach to the other Latin American and Caribbean countries illustrates the development of a new integration movement in the Americas, which has come to be termed as "open regionalism". In this new context, sub-regional groups are not ends in themselves. Instead, they are seen as paths towards larger integration efforts at the Latin American, hemispheric, and global levels.

A very dynamic and healthy picture emerges from the experience of open regionalism in the Andean region. In 1992, Venezuela and Chile signed an Economic Complementarity Agreement with the objective of eliminating all tariff and non-tariff restrictions to most of their reciprocal trade by early 1999. A similar agreement was concluded between Colombia and Chile in 1993. In 1994, Colombia, Mexico, and Venezuela entered into the G-3 Agreement, which provides for free trade among the three countries by 2005. Colombia and Venezuela concluded separate preferential trade agreements with the CARICOM countries, which envisage some degree of reciprocity offered by the CARICOM countries within five years of implementation of the agreements. Colombia and Venezuela also have committed to negotiate jointly a free trade area with the Central American countries. Bolivia has secured comprehensive bilateral agreements with Chile and Mexico; and Chile is negotiating trade liberalisation separately with both Ecuador and Peru. And just this past weekend, in Asunci\n, the member countries of the Andean Community and MERCOSUR agreed to redouble their efforts to complete free trade talks by the end of this year.

Further demonstrating their commitment to trade openness beyond the sub-regional level, Andean Community presidents partook fully in the ambitious and far-reaching decision, adopted at the Miami Summit, to create a Free Trade Area of the Americas (FTAA) by 2005; and since Miami, the Andean countries have been active participants in the preparatory process, which will set the foundation for the commencement of negotiations in 1998.

The path by which the FTAA will be achieved will bring liberalization of trade and investment in goods and services. President Clinton's announcement that he will step up his campaign for presidential fast track negotiating authority with the Congress next week certainly provides a well-needed impetus to the FTAA process.

A refocussing of US efforts in this regard is welcome because lack of presidential fast track negotiating authority, thus far, has dampened US leadership in the negotiations. It also has been the primary obstacle to NAFTA-expansion or NAFTA-based convergence as a possible path to many of the coutries that haved pledge for the creation of the FTAA . Although "fast track" is not necessary to begin negotiations, after the Chile Summit, , the absence of it coul creat a great deal of uncertainty. The region needs a clear demonstration from the United States, and especially the US Congress, that it is actually prepared and willing to negotiate free trade agreements with all the countries of the Americas. Thus, the region will be following very closely the Administration's campaign to rebuild US political consensus for the FTAA negotiations, and looks forward to its successful conclusion.

In the meantime, other Western Hemisphere countries will continue to make trade agreements with each other, reinforcing the MERCOSUR-centred option of South America. which would include the Andean Community nations and its Amazon neighbours, Guyana and Suriname.. Significant progress has been made towards this goal with Chile's and Bolivia's formal associations through free trade agreements to this sub-regional arrangement, and may well lead to a SAFTA with the eventual inter-scheme association between MERCOSUR and the Andean Community relatively soon.

Whatever the path chosen to bring the Hemisphere to complete trade and investment liberalisation within the next eight and a half years ,until 2005, the OAS, in coordination with its partners in the Tripartite Committee, will continue to support the preparatory and negotiation process when requested by the governments of the Hemisphere. After two years of intense work,the preparatory process has now been almost completed. A great deal has been accomplished. We have a better understanding of the issues and the challenges in front of us and we have dedeloped a a program which will prepare the countries for the beginning of negotiations in 1998. This first phase has been the creation of a common language and a common technical vocabulary for the main negotiating issues. We have compiled solid basic information, built data banks, conducted systemic comparisons of the various accords, and gathered statistics and standards. The objective is to guarantee transparency in the functioning of the regimes for trade and investment in the various countries and ensure, through familiarity with these regimes, a first step for beginning actual negotiations.

It is important to understand that success in the FTAA negotiations will depend on balance and symmetry in dealing with the goals of the different participants and respect for existing trading relationships. The Andean countries are in a unique position within the Western Hemisphere, lying between the two main sub regional poles of Nafta and Mercosur The Andian countries can play a positive role in pushing forward the negotiantions and in helping to find areas of common ground. Between the larger players.. The Andean Community has already achieved significant progress in its own sub regional integration efforts in areas that will be of significance to the negotiations such as investment, intellectual property rights and standars and conformity. Assessment procedures, among others. In sevices for example, the Andean Community has put this issue as a priority of the negotiating agenda, following a mandate of the Heads of State.

Before I conclude my remarks, I must address the concern raised by some observers regarding the expanding network of sub-regional and regional arrangements in the Americas. The question of regionalism versus multilateralism is not new. However, it has acquired particular relevance recently, owing to the growing number of regional agreements and their implications for international economic relations.

As in any debate, there are supporters and opponents of regionalism. For the latter, regional agreements run the risk of becoming inward-looking and discriminatory, causing important diversion of trade and investment flows, and weakening the multilateral trading system. They also worry that regional agreements may cause national leaders to lose interest in trade liberalisation at the global level and divert resources and political capital away from their multilateral initiatives, slowing the pace of progress at the multilateral level.

Others, however, see a brighter side to this phenomenon. For them, regional agreements provide an opportunity to promote faster trade liberalisation at the regional and multilateral level. The enhanced international competitiveness brought about by regional integration should build confidence and prepare countries for further advances in unilateral and multilateral liberalisation. From this perspective, regional agreements also could provide a valuable testing ground for new approaches to difficult trade problems, generating valuable information that could make multilateral agreements more palatable and durable.

I would not hesitate in qualifying the new Latin American integration as the most important economic fact in the end of this century. And I do not doubt for the slightest moment that the countries of the region will be better prepared to face the enormous challenges of the next millennium, if they manage to consolidate their current efforts at integration. A rapid examination of the recent evolution of integration processes in Latin America and the Caribbean is sufficient to dispel any doubts that these efforts may generate. Let me just highlight a few of the characteristics of existing regional integration processes and their global implications.

First, membership in such arrangements, especially those that aim at the formation of customs unions, like the Andean Community and MERCOSUR, has allowed participating countries to consolidate and lock in the economic liberalisation reforms made during the last decade and to move forward into new areas where unilateral reform had proved difficult domestically. The new trade and integration agreements in the region contain disciplines in matters related to trade as well as investment, government procurement, and intellectual property, and contribute to a rules-based framework that is more stable and predictable for the conduct of intra-regional trade relations and opening to the rest of the world. This is good for the region and also for the multilateral trading system.

Second, the notable expansion in intra-regional trade in the 1990s, especially within sub-regional groupings, has not taken place at the expense of third countries. There is a boom in regional trade, but this does not limit trade between the members of the different schemes. The trade interdependence among countries of great geographical proximity and committed to common integration efforts, as in the case of Colombia and Venezuela, is an undeniable fact, but none of these countries have cut off trade with the rest of the world. In fact, the world trades more with these countries now than at any other time during their economic relations.

Third, the emphasis that the countries of the region have placed recently on the consolidation of their trade and integration agreements have not prevented these countries from being active, pro-liberalisation members of the WTO. The region was a very active participant in the Uruguay Round negotiations. In fact, in these negotiations, the final stages of which coincided with the peak of regional integration, the Latin American and Caribbean countries assumed larger trade commitments than ever before in the history of the GATT. Latin America and the Caribbean was the only developing region to bind 100% of its tariffs during the negotiations. The region also gave up an important number of concessions in the negotiations on services. This Latin American activism has been maintained since the conclusion of the Uruguay Round negotiations as is demonstrated by the fact that 18 countries of the region participated in the WTO agreement on basic telecommunication services that was recently concluded. It is evident then, that the countries of the region have not given up interest in multilateralism. To the contrary, the new interest in regionalism takes place against a backdrop of increased outward orientation, exhibited in unilateral reforms as well as increased membership and substantive participation in the work of the GATT/WTO.

Hence, the critics of regionalism have little to fear from the new Latin American integration. Our regionalism does not run counter to the trade liberalisation efforts at the multilateral level. It does not obstruct, but facilitates trade openness. It does not result in trade diversion, but trade creation. It does not close markets, but contributes to keeping them open. It does not hold back investment, but stimulates it. It is no longer inward-oriented integration, but outward-looking, towards the rest of the world.

"But care must be taken to ensure that the potentially positive contributions of regionalism to global opening are not undermined. Regional trade agreements must be consistent with the multilateral trading system to maximise global benefits. Indeed, compatibility is an objective as well as a necessity given that all countries in the region are members of the WTO.

Accordingly, it is important to take appropriate precautions to strengthen the WTO's ability to guide the process of regionalisation. To this end, the WTO should intensify efforts to improve further GATT Article XXIV to provide compliance criteria for regional trading arrangements, and work toward the gradual harmonisation of trade rules employed by member countries of regional trade agreements to ensure their consistency with the objective of trade expansion. It also could seek to develop a model accession clause to be included in all regional trade agreements, which does not have the effect of preventing other countries from becoming members and would establish beforehand the disciplines to which they must submit themselves prior to entering into accession negotiations.

Furthermore, a necessary complement to trade liberalisation is the liberalisation of private investment. Policy recommendations must address the growing indivisibility between trade, investment, and technology decisions in today's global economy. The existing multilateral rules on trade under the WTO umbrella, and on investment under various agreements and WTO codes are either incomplete or dispersed and overlapping. No one institution rules on these closely linked issues. These shortcomings weaken the WTO's ability to play a meaningful role in avoiding distortions in global trade in goods and capital. It is therefore equally important to advance the establishment of multilateral rules for investment.

We expect to cover all these rich topics in this conference and have invited a very distinguished group of policy-makers, academics, and members of the private sector and multilateral institutions to encourage a wide discussion that will be crucial for the development of the Andean Community and the region as a whole. I thank all the panelists and speakers for their cooperation and participation and trust that you will have very stimulating and fruitful discussions over the next two days.

Thank you.