Media Center



September 6, 2002 - Washington DC

Good Morning. It is a great pleasure to be with you this morning to participate in the inauguration of this VI Annual CAF-OAS-Inter-American Dialogue Conference on Trade and Investment in the Americas and US-Andean Community Relations.
A lot has happened since we met on September 6, 2001. Most notably an event that changed our world: the September 11 terrorist attack on the United States. I would like to point out some of the trends and developments at the global level, then at the hemispheric level and finally in the Andean region, and finish by re-stating the main challenges we face.

Global Trends
As regards global developments and trends, the September 11 attack was a tremendous human tragedy and has had important long-term effects on international relations and on perception and policies in the United States about its role in the world. In particular, it brought home to the US that despite unsurpassed global military, economic and cultural power, the US is not isolated but part of an increasingly interdependent world. Accordingly it has led to a deep rethinking about how best to protect US economic and security interests including a realization that to ensure these objectives the US cannot act by itself but needs the cooperation of other countries, and needs to exercise leadership by engaging and working with partners, including within the context of multilateral and regional institutions, norms and principles.

Of course there is an ongoing debate in this country about these complex issues but I am convinced that the outcome of this debate will be an enhanced willingness to cooperate and engage with countries that share values and aspirations for a better, more prosperous, more democratic and peaceful world. And this is precisely the agenda of the Summit of the Americas process and the core of what the inter-American system is about. So the first trend I would like to point out is one in which, instead of distraction of the United States with crises and problems around the world, I see increased opportunities for collaboration and attention to the problems of the Americas.

A second trend in the global economy is related to trade and integration. The launching of a new round of multilateral trade negotiations in Doha in November, 2001 is a positive and remarkable development. Positive because, as much research has shown, the potential gains for all participants, but for developing countries in particular, are significant. A successful round can boost the growth rate of many developing countries around the world. But the Doha result is also remarkable because it blended in an
I unprecedented way trade and development concerns. The Doha Development Agenda reflects a new international consensus that reasserts the role of trade in development and places the broader development issues and institutional capacity building at the center of the international cooperation agenda. One of the most profound implications of the Doha Development Agenda is that it has created incentives to bridge the often-huge differences between the trade and development communities that have plagued national and international policy discussions for years. New exercises to mainstream trade into national development plans are being adopted by the WTO and the World Bank in partnership with regional institutions, including the OAS. This will allow additional mobilization of resources to help countries take advantage of the new market access opportunities and to participate fully in the world trading system.

The past year has seen serious economic upheavals signaling, perhaps, the emergence of a trend towards increased volatility in the world economy. National economies have been hit by both exogenous and endogenous shocks. It is still too early to tell which of these will have lasting impact and, if so, what this impact will be. One thing that can be said, as was stated in the IMF's most recent World Economic Outlook, is that countries that have greater policy flexibility have been better able to manage the recent downturn. Thus, more attention should be given to finding ways to overcome the fiscal, financial and other economic constraints faced by many Latin American and Caribbean countries that limit their ability to handle the impacts of turmoil in the world economy. In this respect, it is encouraging to note the intense pace of trade negotiations taking place in the multilateral, regional and bilateral contexts. Increased and more stable access to their partners' markets and progress towards a phase out of trade-distorting subsidies will provide these countries with the means to support growth and the reform efforts they have promoted during the past decade. Failing to do so could seriously undermine support for those reforms-- with very worrying consequences.

Regional Trends
Let me now turn to the region. Unfortunately, economic and political trends in Latin American have deteriorated to some extent since we last met, increasing the risk of populist, and anti-globalization backlash. Trade liberalization and market-friendly policies have become more unpopular in some countries.

According to CEP AL, the economic growth outlook for the region is not promising. Regional GDP is expected to contract by 0.8 % for 2002 while per capita GDP will slip by 2.4%, due in great part to the severe crisis in Argentina. Growth rates will nonetheless be positive in most economies. (The outlook for 2003 is one of low growth and no more than a moderate recovery of regional GDP is likely in 2003.)
The severe situation of the Argentine economy has not only affected all domestic economic activity in that country but has also exacerbated the difficulties that neighboring countries were already facing. The crisis has had a strong impact on trade in both goods and services with Argentina. It has also affected the flow of external resources to the region and unsettled foreign exchange markets. The region's FDI inflows are expected to shrink significantly in 2002, falling to around US$ 40 billion (compared with an average of73 billion in 1997-1999). The banking system in several countries, especially those in MERCOSUR, has become quite fragile as a result of the crisis.

Uruguay in particular has had to adopt drastic adjustment measures in order to counteract its impact, calculated at somewhat more than two percentage points of GDP, with a decrease in exports amounting to nearly US $500 million.
Brazil has also been hurt by the Argentine crisis. The slide in Brazil's exports to Argentina has caused its total merchandise exports to shrink by almost 6% and 25% in the case of exports of manufactured goods.

This trend towards economic deterioration in some countries cuts both ways: on the one hand it exacerbates the constraints (fiscal, social, political) binding even those forward looking governments committed to freer trade, and on the other, it makes progress towards and completion of the FT AA more necessary as a way to anchor economic policies, attract investment and promote growth.

This is why progress in the FT AA is so important for the economic and political future of the Americas. And I am glad to report that significant progress continues to be made in the FT AA negotiations. Market access negotiations have started on agricultural and nonagricultural products, services, investment and government procurement under agreed methods and modalities and within defined calendars. The following timetable was established for the presentation of offers and requests:

Presentation of offers: between 15 December 2002 and 15 February 2003.

Submission of requests for improvements to the offers: between 16 February 2003 and 15 June 2003
Initiation of process for the presentation of revised offers: 15 July 2003.

A new draft of the FTAA Agreement will be presented to Ministers at their next meeting in Quito, Ecuador on November 1 st, 2002, reflecting consensus achieved during the past negotiating period. A Hemispheric Cooperation Program (HCP), designed to provide support to the smaller economies to ensure their full participation in the FT AA, is expected to be one of the main outputs at that same meeting.

The Trade Negotiations Committee, at its meeting in Dominican Republic this past 28-30 August, gave further momentum to the negotiations by taking important decisions regarding the base tariff for market access negotiations and by considerably advancing the preparatory work leading to the Ministerial Meeting in November.

The negotiations have thus entered the most sensitive and complex stage, one that requires full engagement by all parties. In this context, the adoption of Trade Promotion
Authority by the US Congress in August, 2002 goes a long way to ensure that the market access talks in the FT AA will be fully engaged and that the political commitment will be there for all participants to show their cards at the negotiating table. One of the main hurdles to the completion of the FT AA has been overcome.

There are still, however, a number of challenges that need to be addressed both on the negotiating front and on the political front. Moreover, the stability of the Brazilian economy and the attitude of the new Brazilian government towards the FT AA will be a key element in the political and economic scenario for further trade integration in the Americas. Likewise, a renewed U.S. leadership and engagement in the region, building on the shared Summit of the Americas values of peace, security and prosperity, can make an enormous difference. Although the U.S. cannot solve Latin America's problems, the possibility of the FTAA being completed successfully and on time will depend critically on the nature of the overall U.S. response to Latin America's predicament in the next few years.

And this brings me to the situation of the Andean Community (CAN) countries and relations between the Andean Community and the United States.

The Andean Community: situation and challenges
The global slowdown in the world economy, the weakening of commodity prices and, in some cases, political instability, adversely affected the countries of the Andean Community during 2001 and the beginning of 2002. According to data from the CAN General Secretariat, the macroeconomic results for 2001 were modest with the only exception of Ecuador where GDP grew by 5.4 %, the best performance in Latin America. In contrast, GDP grew only by 0.98% in Bolivia, 1.7% in Colombia, 0.2% in Peru and 2.7% in Venezuela.

The negative impact on exports from lower commodity prices was significant in all Andean Community countries. The decrease in oil prices during 2001 was, to a great extent, responsible for the fall in total FOB exports in Ecuador (6.3%) and Venezuela (18%) with respect to the previous year. It also had an impact in Colombia where, added to the attacks on the main oil pipeline and the fall of coffee prices to US$ 0.62 at the end of the year, resulted in a 6.3% drop in FOB exports. Although exports increased by a modest 1 % in Peru, this was due largely to its exports to other CAN partners (a 16% increase) where the weight of commodities is not so significant as in the exports to the rest of the world (a 0.2% drop). In the case of Bolivia, the 8.7% increase in exports can be mainly explained by an expansion of more than 80% of exports of natural gas with respect to 2000. This helped offset the impact of lower commodities prices in the world market, particularly in the case of soya that accounts for 14% of Bolivian exports.
Despite growing expectations of recovery from the global slowdown, the Andean Community countries continue to face important challenges in the near future. Political and economic instability dampen prospects for improvement in countries like Venezuela which, despite recent changes in the exchange rate regime and announced reductions in
government spending, still faces serious fiscal pressures.

In Colombia, the outlook remains worrisome due to uncertainties linked to the breakdown of peace negotiations at the beginning of the year and the possible impact of the difficulties in the Venezuelan economy, among others. The other Andean countries also remain vulnerable to endogenous and exogenous factors.

Prospects for recovery in the Andean Community will be influenced by economic performance in developed economies. In particular, dynamism in the US economy and, most importantly, an increasingly open US market for Andean exports will undoubtedly support growth and shore up reform efforts in those countries. In this respect, the enactment of the Andean Trade Promotion and Drug Eradication Act (ATPDEA) is a very welcome development.

For ten years, since the Andean Trade Preference Act was enacted in 1991, Bolivia, Colombia, Ecuador and Peru exported some $1.7 billion worth of goods under the program. As was acknowledged by Congress in its findings, "Two-way trade has doubled, with the United States serving as the leading source of imports and leading export market for each of the Andean beneficiary countries. This has resulted in increased jobs and expanded export opportunities in both the United States and the Andean region."

When the program expired last December, the consequences were soon felt throughout the region. As representatives of the cut flower industry have pointed out, for example, during the six-month period after December 5, 2001, the industry had to bear the burden of nearly US$ 18 million in tariffs to enter the US market. This had disastrous effects on a sector composed of around 500 businesses that account for annual exports of more than 140,000 tons of the product, a US$ 500 million value.

Beneficiary countries have welcomed not only the renewal of the program until December 31, 2006 (retroactive to December 4, 2001) but also its expansion to areas not previously covered such as textiles, apparel, leather and leather goods. Government and private sector sources in beneficiary countries have projected important gains both in increased exports to the US and in the creation of new jobs as a direct result of the expanded market access.

In addition to the tangible economic benefits from the A TPDEA, some important lessons can be drawn from the process that led to the renewal and expansion of the program. First, the positive outcome of the process owes a lot to a very active and engaged negotiating strategy on the part of beneficiary countries that brought together governments and private sectors with a well-defined set of objectives. It also made good use of partnerships and strategic alliances with private sector groups within the US and with government and congressional counterparts that shared a common interest and Vision.

Second, the case for market liberalization was backed with arguments that went beyond pure mercantilist considerations. As Congress acknowledged in its Findings "The continuing instability in the Andean region poses a threat to the security interests of the United States and the world. This problem has been partially addressed through foreign aid (. . .). However, foreign aid alone is not sufficient. Enhancement of legitimate trade with the United States provides an alternative means for reviving and stabilizing the economies in the Andean region. The Andean Trade Preference Act constitutes a tangible commitment by the United States to the promotion of prosperity, stability, and democracy in the beneficiary countries."

Third, the complexities of the process of renewal and expansion of the program highlighted the fragility of unilateral preferential schemes. Businesses that were established or expanded during the ten-year period of application of the previous program based on preferential market access were hard hit with its expiration. A sound business strategy cannot continue to rely on the possibility of a further renewal after 2006. The focus needs to be placed now on ensuring access to the US market that is permanent, protected by the appropriate trade rules and not subject to the uncertainties of unilateral preferences. The Free Trade Area of the Americas negotiations represent an unique opportunity for the Andean countries to achieve just that.

The Andean countries are facing important challenges in several fronts. This Conference is very timely because it provides an opportunity to these countries and their partners in the Hemisphere to explore together policy options and to propose new ways to ensure the attainment of a more prosperous, democratic and peaceful region. I wish you all a very fruitful exchange of ideas.