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In South America the two competing trade alliances are the Pacific Alliance and the UNASUR. What are the differences ?

Pacific Alliance

The Pacific Alliance

Two projects of regional association are facing off in South America: the Pacific Alliance and UNASUR. Both are incompatible, based on opposed geopolitical interests that present each of the countries of the region with a dilemma. There is no longer room for ingenuity or distractions.

There exists a certain tendency among our integrationist perspectives to inject considerable ideology into the discourse on the different sub-regional projects”, wrote Carlos Chacho Alvarez, general secretary of ALADI (Tiempo Argentino, June 2, 2013). Because of this he believes that to oppose the Pacific Alliance to an enlarged Mercosur “clearly represents a negative sign, if not a step backward”. In any event, Alvarez puts his stakes on UNASUR and CELAC “as the two most ambitious and integral projects in the region”, which by excluding the United States and Canada expose their ideological predilection (1).

“The Continent has been divided”, notes the Brazilian ex-president Henrique Cardoso with reference to the birth of the Pacific Alliance (Valor, November 30, 2012). “In some ways we are losing our political relevance in the Continent, which was unquestioned”, he added. Cardoso believes that the way out for his country is “an in depth negotiation with the United States,” of which we have “always been afraid.”

Skating over the two blocs, Peruvian President Ollanta Humala met with Luiz Inácio Lula da Silva, in the framework of the forum “Ten years of the strategic Alliance between Brazil and Peru, 2003-2013″ and pointed out that in ten years “we have made great progress in Peruvian-Brazilian integration and above all in the understanding that this is a natural alliance for creating a two-ocean Atlantic-Pacific bloc.” (The Voice of Russia, June 6, 2013).

In the same event Lula recalled that a decade ago he had been much criticized in his country for having signed an agreement of integration with Peru, since the Brazilian elites thought that development could be promoted only on the basis of commercial relations with the United States and Europe: “South America did not exist, neither did Latin America; Africa and the Arab countries did not exist. I thought that we could change the commercial and political geography of the world if we believed in ourselves, but it was not an easy discourse”, said the ex-president.

Lula supported his discourse with irrefutable data: bilateral commerce went from 650 million dollars in 2003 to 3,700 million in 2012. Private Brazilian investments in Peru amounted to 6 billion dollars and launched a major challenge: that of exporting industrial products with high technological content with the objective that both economies “could function in a complementary fashion”.  Thus he consciously approached the key point of any serious process of integration.

Free Trade Agreements patched together

The Pacific Alliance was born in April 2011 with the “Lima Declaration”, an initiative of then President Alan García, among four countries that had Free Trade Agreements with the United States: Mexico, Colombia, Peru and Chile. On June 6 2012 the “Framework Agreement of Antofagasta” was signed by presidents Sebastián Piñera, Juan Manuel Santos, Humala and Felipe Calderón. Panama and Costa Rica were the first observer members, which were to be joined by Spain, Australia, Canada, New Zealand and Uruguay, and in later summits were added Ecuador, El Salvador, France, Japan, Honduras, Paraguay, Portugal and the Dominican Republic.

The defenders of the Alliance claim that the four countries involved represent 200 million inhabitants, 55 per cent of Latin American exports and 40 per cent of the GDP in the region. Two outstanding economists of the region, Oscar Ugarteche and the Brazilian José Luis Fiori, analyze the regional processes as if they were a game of chess, in which the movement of one piece by one of the players should be accompanied by a response by the other that is adequate to the challenge received. When the “constitutional coup” removed Fernando Lugo from government, Paraguay was separated from Mercosur and this made the entrance of Venezuela possible. In the same way, one has to interpret the creation of the Pacific Alliance: as a response to the creation of UNASUR headed by Brazil.

When the Alliance was formed, Ugarteche maintained that: “The three South American governments of the group (Chile, Colombia and Peru) share in common that they have not signed the act constituting the Banco del Sur (Bank of the South), they do not at present have commercial agreements with Mercosur, where they are observers, they have Free Trade Agreements signed with the United States that involve zero customs duties, which prevents any agreement with Mercosur whose floor is five per cent, and they lack a significant national industrial sector” (Alai, April 26, 2011). His conclusion was that the Alliance is “a counterweight to Brazilian influence in South America”, that “serves not to compete but to block that influence.”

Nevertheless, in a recent article the economist maintains that in recent years “it is the Pacific Alliance that has made the major moves”, not so much by its own merits as because of a notable stagnation of Mercosur due to the strained relations between Buenos Aires and Brasilia (Alai, April 24, 2013). Among these moves is the approach made by Paraguay in the post-Lugo context. Even so, the Alliance faces a number of problems, among which stands out the opposition of sectors of the Colombian business community to an agreement that does not provide new opportunities but rather “works to the detriment of the trade balance and of job creation.”


Pacific Alliance


Difficulties with integration

The data on direct foreign investment (DFI) could be considered an x-ray of the region. The DFI has escalated exponentially in South America, moving from a little more than 30 billion dollars in the first years of the decade of 2000 to 143 billion in 2012.  This means it has quintupled, according to the latest report of CEPAL (2).

It is worth noting that the three Andean countries of the Pacific Alliance went from a DFI of 11 billion dollars at the beginning of this century to some 58 billion. This is the biggest growth in the region. But what reveals the character of the national economies is the sector to which this investment is directed.

Chile is the second country in volume of DFI, with 30 billion dollars in 2012, but half of this is in mining (49 per cent) and one-fifth in the financial sector. Colombia received DFI of 15.6 billion dollars, but more than half goes to petroleum and mining. In Peru, which received 12.2 billion, mining alone absorbs well over half of the investments (perhaps 70 per cent, although there are no data).

In Brazil the relationship is exactly the inverse: manufacturing absorbs something like 40 per cent of investments (falling from 47 to 38 per cent in recent years) while the extractive industries amount to hardly 13 per cent. This means that the greater part of the foreign investment that totals some 66 billion dollars (the fourth ranking in the world after the United States, China and Hong Kong) is directed to sectors that generate qualified work places and value-added production.

Argentina occupies a place between Brazil and the Andean countries. After a decade of strong retraction, the DFI to Argentina grew some 27 per cent in 2012 reaching around 12.5 billion dollars. At the end of 2011 the composition by sector of DFI in Argentina was concentrated in some 44 per cent in industry and 30 per cent in services.

The whole region suffers, it is true, from a process of deindustrialization as a consequence of Chinese competition. But the effects are unequal. In some cases the dependence on natural resources is overwhelming, making these countries absolutely dependent on commodity prices on the stock exchange, and in particular on the evolution of the Chinese market. It is possible that the mentioned surge of the Pacific Alliance may be little more than smoke that would dissipate when these prices fall.

Chile is not capable of absorbing the enormous flows of DFI in a productive manner, since 26 per cent of these are reinvested immediately outside the country by Chilean subsidiaries of foreign enterprises. CEPAL concludes that the Andean country, considered as a model to be followed by a number of economists in the region, is not much more than “a gate of entry for other Latin American markets.”

According to Fiori, the three South American countries of the Pacific Alliance “are small or middle-sized coastal economies given to exportation, with hardly any commercial relations among themselves, or with Mexico.” The only country with a temperate climate and productive lands, Chile, “is almost irrelevant to the South American economy, in addition to being one of the most isolated countries in the world”, said the Brazilian economist.

He believes that the Pacific Alliance does not have a promising future. Their exports are greater than those of Mercosur, but their intra-zone commerce is almost insignificant (2 per cent of the total exported compared to 13 per cent in Mercosur). Strictly speaking, it is a commercial alliance that has no interest in integration.

The problem is not so much that of the virtues of the Alliance as of the problems now faced by Mercosur. On the one hand, the four countries that established it (Argentina, Brazil, Paraguay and Uruguay) export the same products (basically soya and beef) to the same markets. With this structure of exports there is no possible integration, which demands a basis of productive complementarity. As Fieri notes, since the 2008 crisis and with Chinese expansion, the characteristics of South American economies that pose an obstacle to any project of integration have only deepened: that is, “they are an aggregation of parallel exporting economies oriented by external markets” (Pontes, February 2013).

In addition, and directly tied to the above, the permanent dispute between Brazil and Argentina over industrial exports (automobiles and domestic electric appliances) is bogging down the regional alliance. Each Argentine product that comes into Brazil loses jobs for Brazil, and vice versa. Existing commercial agreements and options for integration have not yet produced industries capable of complementing each other.

In their resumé of foreign investment in 2012, CEPAL leaves no room for doubts: “In South America (excluding Brazil) the pattern of distribution of DFI in which those sectors based on natural resources are clearly in the first place, has deepened”. Mining absorbs 51 per cent of the investments in the region, services 37 per cent and industry only 12 per cent.
Time to choose

“One may say without doubt that the ‘Pacific rift’ has more ideological than economic importance in Latin America and would be almost insignificant politically if it were not a small part of Obama’s project of creating a Transpacific Association (TPP for its English acronym), a central piece in his policy of reaffirming economic and military power in the Pacific region”, as Fiori notes (Pontes, February 2013).

This is perhaps the crux of the question. Mexico is already an inseparable piece in the US economy. After the crisis of 2008, which imposed serious budget restrictions, the strategy of the United States consists in “outsourcing” the administration of their global power, but taking care to prevent the build-up of any regional powers that could threaten their position and in particular their air and naval predominance. Through the financial system, Fiori argues, the superpower continues transferring its costs and its crisis to third countries, as happened with their principal ally, the European Union, maintaining all the while the “monopolistic control of technological innovation.”

Faced with this panorama, the options of other countries could be decisive, and above all the direction to be adopted by Brazil. Professor Ricardo Sennes, international analyst of the University of São Paulo, believes that economic growth after 2002 “deepened the divergence between economic strategies of various countries, and increased the asymmetry between Brazil and other countries of the region.” (3)

To this structural difficulty one must add that in Brazil the “preference for a model of regional relations based on the projection of Brazilian political capacity and not on a model of regional integration” prevails. The densification of business activity is not the same as a strategy of integration. In his opinion this is due to the fact that there exists a weak “internal coalition” in favour of integration and this gives rise to intensive diplomatic activism that contrasts with the low institutional levels of integration. In conclusion, “regionalization, an increase in regional relations that do not result from policy and agreements between states, has advanced more rapidly and more deeply than regional integration.”

This is manifest when one notes that the members of Mercosur have established more profound agreements with countries outside this alliance than they have among themselves. Sennes concludes that beyond the declarations, “the regional project of Brazil is not part of the central artery of their international strategy.”  This is a strong statement, but it is hardly unrealistic.  He summarizes it thus: preference for high-level meetings rather than institutional agreements; “superficial economic integration”, that is centered on bilateral commercial questions to the detriment of productive, financial and logistic integration; prioritizing domestic agencies of credit such as BNDES in place of regional institutions; and supporting private investment initiatives rather than regional agreements to promote investment.

Starting from this mound of difficulties, Fiori proposes a hard choice. That Brazil and the region become a “pampered periphery” of the big powers, as were Australia and Canada, with agreements of “preferential associates”, along the lines of Cardoso’s proposal, and those of the elites in every country, deeply rooted in the role of exporters of commodities. Or that they undertake an alternative route, centered on self-sufficiency in energy and in strategic natural resources, combining “an industry of high added value, as a high productivity sector producing food and commodities” that, without renouncing complementary and competitive position vis-à-vis the United States, “struggles to increase their capacity for autonomous strategic decision” (“Brasil e América do Sul: o desafío da inserção internacional soberana”, Brasilia, CEPAL/IPEA, 2011).

The elites have chosen their option and fight for it. The National Federation of Industry (CNI for its Portuguese acronym) and the Federation of Industries of the State of Sao Paulo have increasingly rejected Mercosur and do not even take Unasur into account. Aecio Neves, candidate for the Social Democratic Party which represents these sectors, speaks clearly: “We must have the courage to rethink and revise Mercosur. In this sense, the Pacific Alliance is an example of movement and dynamism.” (La Nación, June 9, 2013).

This clarity contrasts with the nebulous and contradictory positions of progressive sectors. In the present global panorama, there is no place for neutrality. “Those countries that consider themselves neutral are always irrelevant, or are countries that end up submitting”, Fiori concludes. Because of this he maintains that the region should establish itself as “a group of allied countries capable of saying no, when necessary, and capable of defending themselves when it is inevitable.”

(Translated by Jordan Bishop).

Raúl Zibechi, a Urugyayan journalist, writes in Brecha and La Jornada and is a collaborator of ALAI.

1) ALADI: Latin American Association for Integration. UNASUR: Union de South Amnerican Nations. CELAC:  Community of Latin American and Caribbean States.

2) “La Inversión Extranjera Directa en América Latina y el Caribe 2012”, Santiago, 2013.

3) Revista “Tempo do Mundo”, Vol. 3, No. 2, Brasilia, December 2012.

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