Tuesday, April 17, 2007

Trading Tariffs for Hope in Latin America

Trade and economic ministers from five Central American countries kicked off negotiations with Washington over a regional free-trade agreement on Jan. 8. The idea: Reduce tariffs and other trade barriers between the U.S. and Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The model will be a free-trade deal recently completed between the U.S. and Chile.
Central American economies are small and fragile, however, and the U.S. is mainly interested in a hemispheric free-trade deal among the 34 democracies of the Americas. The Bush Administration hopes to pressure Latin America's biggest economies -- Brazil and Argentina -- into supporting the larger deal by first reaching agreements with smaller nations. Paul Magnusson, Washington correspondent for BusinessWeek, recently spoke with El Salvador's Economic Minister, Miguel Lacayo, about the proposal. Edited excerpts of their conversation follow.

Q: Why is a free-trade agreement important?
First of all, the U.S. is the most significant trading partner for Central America. Half of our exports and imports go to and from the U.S., about $20 billion worth of trade a year. We are the No. 1 trading partner with Florida. Our political and cultural relationship with the U.S. will also be consolidated. We see this as the path toward development and democracy in the region.

Central America is a bigger market for the U.S. than Russia, India, and Indonesia combined. If you look at the growth in trade [between the U.S.] and Central America, you find that it's the fastest-growing trade relationship in the world. In 1996, the U.S. exported $5 billion to Central American and last year, $9 billion. That's a big increase in just five years.

Q: What will the U.S. be importing from Central America?
One of the largest imports will be textiles and apparel. But also agricultural goods, which will be very complementary to the reciprocal trade with the U.S., such as vegetables that are grown in small parcels of land. We will continue to be a huge buyer of U.S. grains such as yellow corn, soy, cotton, rice, and wheat. We'll be able to supply some of the tropical goods to the U.S. because of our climate and latitude.

Q: Agriculture is very important to Central America's economy although it's only 10% of El Salvador's economy. But won't Central American farmers be at a big disadvantage compared to American farmers who have large, highly mechanized farms and big subsidies from the government?
We're already a huge buyer of U.S. agricultural goods and most are coming in duty-free or with very small duties. What the free-trade agreement will do is consolidate those duties and make sure they never go up, or if they do go up for the rest of the world, they won't go up for the U.S.

It's important to remember that this agreement will be very comprehensive. It involves intellectual property rights, pharmaceuticals, movie production, music production, software. All of these sectors will benefit. We'll have a level playing field through all of Central America. We'll have a proper dispute-resolution system, so you can bypass the local judicial sectors if you have a problem over noncompliance with the agreement. This will make Central America a region that's easier to invest in.

Q: Since most of El Salvador's exports already enter the U.S. duty-free, would a free-trade agreement really make that much difference?
Yes. In some of the areas in which we're paying a significant duty, we [already] can be very competitive.

Q: Is the idea of free trade a popular one among the people?
Central America already has about 20 free-trade agreements [involving] Chile, Panama, the Dominican Republic, Mexico, and Canada. So we understand the link between free trade, development, and democracy. We are true believers in a two-way street. And we feel that is the element that is missing in globalization.

Q: How important is attracting new U.S. investment to El Salvador?
We have about $4 billion of U.S. investment in Central America. The U.S. is the primary investor in the region. A free-trade agreement will give additional perceived and real protection to U.S. investors and to those interested in investing in a region that has access to the U.S. market.... Chile, Mexico, and El Salvador currently have one of the strongest investor grades in the whole region.

Q: One of your largest exports is pharmaceuticals. Will U.S. demands for strengthening intellectual-property rights be a problem in that area?
We are true believers in intellectual-property protections. We understand that a formal and respectful business sector is the only sustainable sector. It's the only one that pays taxes at the end of the day. We want companies that are willing to respect intellectual-property rights. Now we understand that as you tighten the rules, it can become difficult politically. But we are committed.

Q: Do you also support the negotiations for a hemispheric free-trade agreement?
We think the free-trade agreement with Central America will give a significant boost to the hemispheric free-trade agreement. We want that to move faster. We need to have more people willing to dance to the free trade tune. Central America and Chile are willing to push for that. Once you have a FTA with Central America, you'll see more countries become interested in a hemispheric agreement. It's going to be a catalyst for the [hemispheric] free-trade agreement.

Q: But once you have a free-trade agreement with the U.S., would it be in your interest to see that extended to the rest of Latin America?
South America has one of the most closely held markets in the world and we're very interested in increased access to that market. If we have duty-free access to South America and the rest of the world doesn't, that would be a very attractive market for us. Our agreement with Chile came into place at the end of the past year. And we have been very successful competing there, now that we don't pay the duties there that the rest of the world pays.

Q: If you lower tariffs on imports, how does your government cover the lost revenues?
Our current tariffs are about 6%. Out of the $9 billion that Central America buys from the U.S. each year, about $7 billion comes in duty-free anyway. There will also be 5 to 10 years of transition, so we won't see the duties disappear overnight. Also, whenever you have reduction in tariffs, you have an increase in collections because there's no more reason for contraband and smuggling. And the economic growth in the region should more than compensate for the lost revenue.

Q: How important is the $47 million in aid for "capacity building" or economic development that the U.S. has promised as part of the deal?
Free trade and democracy and development are certainly linked. But it's very important for the private sector to be strengthened. We need development to reach not only large companies, but small ones too. The U.S. is wise to understand the reality.

When people question free trade, it's because they see difficulties. What we are doing is developing a system of support for small enterprises. People need access to the tools that allow them to take advantage of the new opportunities.

Q: Do you think you'll get this done by the unofficial deadline of next December?
[Meeting] that schedule will require a lot of time and resources, but we're confident and committed.

Edited by Patricia O'Connell