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SPECIAL REPORT
THE LATIN AMERICAN FREE TRADE ASSOCIATION
CENTRAL INTELLIGENCE AGENCY
OFFICE OF CURRENT INTELLIGENCE
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THIS LATIN AMERICAN FREE TRADE ASSOCIATION
The Lntin American Froe Trade Association (LAFTA) is currently in session to negotiatethird annual round of tariff reductions on intrn-reglonal trade. The LAFTA treaty envisages the elimination of tariffs on "substantially all"commerce The treatythat this willtep toward the eventual formationontinental common market, although LAFTA so far has made little progress in this The prospect of rogional integration, however, has not only stirred the Imaginations of economists and businessmen; it has sparked theof political lenders, who perceiveof developing LAFTAital forco for extending Latin American influence in world councils.
Background
LAFTA ls partider movement toward economic region-allsm. Like tbe visions which gave rise to the EuropeanCommunity, the European Froo Trade Association, and tho Central American Common Market, the concept of LAFTA took root in. The rationale for LAFTA, as for tho other regional systems, was that big industries on thepattern could develop only if the size of the market was also on the American scale.
The caseatin American economic region took on urgency after the middle of tho doendo, when the break in prices of coffee and other key commodities finally cracked the postwar boom. Economic projections indicated thatdemand for coffee, copper, tin. and other traditionalwould not sustain arnte of economic growth in Latin America. The
situation soomod to call for new trade patterns based on the establishment of new Industries.
The two romedies--expan-sion of intrareglonal trade and creation of newlogically wont hand in band. Ecuador could hardly sell much coffee to Brazil. In tho absenci of new industries, tho economies of the different countries would not be sufficientlyand the growth oftradeertain point would take on the absurd caricature of countries taking in each other's washing. it was not politically possible to take more than one cautious stop toward economic union; the LAFTA treaty signed in Montevideo In0 centered on tbe promotion of intrareglonal trade, with only peripheral attention to the establishment of new industries.
The LAFTA Treaty
The Treaty of Montevideo specifies a sequence of
negotiations tbat will hopefully lead,year period, to establishmentree trade area for most products. The main characteristic of this area will be the virtual eliroina tion of tariffs and other import restrictions against goodsin any of thecountries. The treaty does not stipulate any steps toward completing the customs union by the establishmentommon tariff wall. National tariffs continue to govern against imports from outside countries.
Duringyearperiod, the treaty allows for variations among the LAFTA countries in tho itoias selected for tariff roductlon. Therule la that the average duty collected by each LAFTA member on lntrarogional tradetipulated percentage lower than the average of dutieson imports from third countries. This differential, setercent the first year, is to widen byercent increments each year. The tariff cuts are notat each stage, nor are they across the board. They are rather to bu negotiated item by item In annual LAFTA conferences. There is nothat the negotiations will be invariably successful.
It is not obvious at first reading, but what tho treaty provisions como to is that the signatories have to negotiate tariff cuts only on items they are already importing from
each other. The encouragement to new industries is minimal, since they have no assurance of getting the tariff that would open up the whole regional market.
Results
LAFTA mayhape more substantial than the treatyoutline. The first round of tariff reductions in
aintraregiona; andtariffs well inthe prescribed 8signatories also wentthe treaty provisionstariff reductionsnot yet included intrade.
These concessions may have odest impact onatterns. 2ecline in LAFTA imports from outside countriesisen intraregional commerce. Mexico made the most striking gains. Mexican exports to the rest of the region doubled; Mexico's chemical exports to the region went up moreercent. However, over nine tenths of LAFTA's foreign commerce is still with nonmember countries (see chart).
The second round of tariff reductions in the summer of
harder, as theran out of items onfelt they could makewithoutinterests. Thenow being negotiated,
nay well be the acid test,whether or not LAFTA ls to developrulyeconomic system. Even after tariff concessions are negotiated, there are escape clauses, permitting signatories to reimpose import restrictions in the event ofdisequilibrium or to avert difficulties with such important political elements as domestic farm lobbies.
Apprn lsal
The treaty has been in forceooime for definitive appraisal. LAFTA's prosont goals, limited though they aro, could prove to be out of reach because ofinstability. Chronic inflation may impose another restraint on economic Tbe cost-of-living index in Brazil, for oxample, went up about SO percent in the first nine months of this year. prices weaken theposition of domesticand bring greateragainst tariff reduction. However, if tho present limited
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goals of tariff liberalization are realized, tho LAFTA treaty suggests that more ambitious objectives of economicwill bo pursuod, In the meantime, tho consultative machinery has been sot uporking regional system (see inset).
Although trade promotion is the main thrust of theTreaty,or some encouragement also to Industrial developmentegional basis. So-called complementation agreements are authorized among tho member countries to achieve industrialin certain Industries. Zt is expected that most of these agreemonts will ensure tariff preferences for theaffected. ew may take on cartol-like arrangements.
The progress of industrial complementarity depends in large
part on how competitive new Latin American industries can be against traditional supply sources. Tho treaty itself does nothing to promote newand highways across the mountains and jungles of Latin America . As long as overland transport costs ar* high, the economies of ocean carriage from the US and Europe may against the tariffand other advantages accorded by the complementation agreements.
Credit facilities constitute another lack which the Montevideo Treaty does nothing to overcome. Terms of credit can be as crucialatin American buyer's decision as price differentials. The advantage here lies with the US and West European manufacturer, who can borrow and in turn extend credit on comparatively liberal terms. atin American regional bank has been proposed which would make comparablo credit facilities available to LAFTA businessmen, but tho bank is still in the talking stago.
Beyond the problem of credit facilities for privatethere has been someof arrangements along the lines of paymonts union for clearing the debit and credit balances among central banks arising fron lntra-LAFTA trade. Proposed arrangements include stand-by credits to central banks to carry them ovor periods of deficit in tholr balance of Here again the proposals are not near the point of adoption.
Pol it lea 1 Impllent ions
The US, tha principal trading partner of the region, is on record in favor of Latin American programs for economic integration. If these aretbe machineryof now Latin American industries and the elevation of popular living standards should have the effect ofUS trade with the area despite the considerablein lntra-LAFTA commerce.
At the sane time, the US will havo to contendertain Latin Americanto maximize whatever leverago LAFTA can muster against foreign businoas interests. At last year'B LAFTA conference, Mexico proposed controls on foreign investmentsiew to keeping ownership of new industries in the hands ofstates. The Moxlcans do not seem to be out to exclude American capital entirely. They prefer to attract it on terms that would in practice require US businessmen to work through Latin Americanpreferably Mexican.
The Mexican proposala wldosproad chauvinism within LAFTA tbat views the organizationotentially strong bargainer against the US. the EEC, and othersystems. The political potential is considered toon tho organization's geographic extent, whichis to encompass all the
Latin American countries from the Rio Grande to Cape Horn. So far, it includes nine of these countries (seene of tbe gaps is Central America, where five countries have formed their own common market. It is now onvisaged that tho two regional systems will proceed toward economic integration at their own pace, but merica will link up with LAFTA. Panama, which is at presentember of either system, is expected to associate with the CentralCommon Market.
On the South Americanthere are two holdouts, Venezuela and Bolivia. Wago levels in oil-rich Venezuela are higher than in the other countries, and Venezuelans have been dubious about their ability to compete without tariff Still, the Venezuelans are far from dismissing the idea of eventual membership in LAFTA. They attend LAFTA maetlngs as obsorvers and discuss thoof specializing in industries where labor costs areigh proportion of totallastics and synthetic fibers. When the presidents of Venezuela and ColombiaAFTA member) met at San Cristobal in earlytheyommunique1 affirming the desirability of gradual oconomic integration between the two countries. It was agreed that they wouldtheir economicplans and would promote studies on the possibilities of closer association.
Bolivia's reservations about Joining LAFTA may also dissolve with time. ifth of Bolivia's imports come from the LAFTA countries, which takeercent of Bolivia's exports. Bolivians are fearful that tbe balance-of-payments disequilibrium would be aggravated by any leveling of tariffs. Sentiment In favor of joining Is nevertheless widespread in La Paz. Like the Venezuelans, the Bolivians have attended LAFTA meetings as observers.
Cuba would like to join. Before the Castro takeover, someercent of Cuba's trade was with the US; trade with LAFTA countries was negligible. Castro now sees opportun It les in LAFTA to develop new com-mericnl links and to expand his political prestige in the area. The Cuban bid forwas voted down at the LAFTA conference in Mexico City last year, Brazil and Mexico abstaining. actor in the voting was the generalthat US assistance through AID and theDevelopment Bank could not be given to any regional program that included Cuba.
The Cuban vote struck home the fact tbat LAFTA is not just an economic grouping butystem with an ovolvingcharacter. Tho foreign minister of Uruguay,
indicated nis viow tnat LflJTfl was now too important to be left to the economichree-man
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would be set up in the foreign office, he said, to give political direction to Uruguay's LAFTA delegation.
Some Latin Americanhave also urged that aof foreign ministers bein LAFTA to modify its predominantly economic This interest in LAFTA's political potentials draws on the successes of the European Economic Community and reflects the widespread aspiration among Latin Americans that they too can win greater international
stature on the basis of regional cohesion. For the present, however, LAFTA embodies mainly this aspiration, not any record of achievement approaching that of the European Community.
If, as many observers expect, the current round of tariffin Montevideo yieldsresults, LAFTA'swill continue toerivative of its longer range potential rather than anyvitality as an economic and political force in Latin America.
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Original document.
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