Bush Plan for Trade Zone Has Potential, Analysts Say
Call to drop barriers takes on some of world's most closed economies
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IF Latin America was feeling left out in a world engrossed with economic and political changes in Eastern Europe, President Bush gave it a dramatic dose of attention this week. He pledged to ease part of the $12 billion debt Latin American nations owe the United States and proposed a $300-million annual fund to spur investment in the region. But his most striking proposal was a free-trade zone encompassing the entire Western hemisphere - from the Yukon to Tierra del Fuego, a group of islands at the tip of South America. (Brazil begins loosening trade restrictions, page 4.)Skip to next paragraph
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The proposition has tremendous economic potential for the region, according to economists, although the potential is five to 15 years away.
Almost as striking as Mr. Bush's proposals was his political timing. On Tuesday, he made a low-key, but explosive, statement that higher taxes would be necessary to deal with the budget.
``Clearly, this administration knows it's in deep political trouble on the tax announcement,'' says political analyst William Schneider of the American Enterprise Institute. ``The president clearly wants to talk about something else.''
The tax statement came while Nelson Mandela's visit was dominating the press. It was followed shortly with a politically popular announcement that he would not allow further oil drilling off the California and Florida coasts.
The Latin America proposal was months in the crafting, but the final package appeared to be hurriedly put together. Administration aides were getting outside advice on fundamental aspects of the plan the afternoon before Bush's speech on Wednesday.
The obstacles to the plan, many economists say, are considerable. Latin America has been opening up to the marketplace steadily during the past two years, but the nations retain some of the world's most closed economies.
William Cline, senior fellow at the Institute for International Economics says Bush recognizes it could be many years before a hemisphere-wide agreement is reached. The framework agreements, says Mr. Cline, will be ``embyronic,'' providing an ongoing forum for resolution of bilateral trade disputes.
Bush acknowledged that point. ``Some countries aren't yet ready to take that dramatic step to a full free-trade agreement,'' he said Wednesday, ``and that's why we're prepared to negotiate, with any interested nation in the region, bilateral framework agreements to open markets and develop closer trade ties.''
Bush stresses the biggest obstacles to US-Latin commercial relations are ``over-restrictive trade barriers that wall off economies.''
But economist Peter Hakim, director of the Inter-American Dialogue, attributes the fall-off in US-Latin trade to a recession in Latin America, where countries have had to generate trade surpluses to pay off their debt.
The region's debt is $420 billion, of which $260 billion is owed to commercial banks. The remaining $160 billion is debt owed to governments and multilateral creditors such as the World Bank, the International Monetary Fund, and the regional Inter-American Development Bank.
Mr. Hakim says successful liberalization means trade barriers, quotas, and licensing restrictions will transform into tariffs with the eventual reduction of such duties.
The protectionist character of the Latin American economies was set during the 1950s and 1960s. The growing foreign-debt burdens of the 1970s then forced a grinding austerity.
In the 1980s, Chile was first to move toward a more open, market economy, but Chile was an isolated case. Then Mexico moved decidedly toward privatization and open markets in 1988. Venezuela, Argentina, and Brazil followed, as well as many of the smaller countries of Central America and the Caribbean.
``One of the great problems is the question of confidence in Latin America. The locals are shipping their money overseas, and the foreigners shy away from investments,'' Hakim says.
He says that before Latin America will see increased foreign investment, economic reforms including some privatization and some deregulation must be instituted. The region's sagging economies are riddled with corruption, he says. The public treasuries are ``drained'' by poorly performing state-owned enterprises and many private companies that gain favors such as subsidies and tax breaks.
Paul Sacks, president of Multinational Strategies, Inc., says he expects Latin companies to restructure themselves. By the end of the decade, he says commercial banks will be back in Latin America. He is optimistic debt relief and debt reduction ``will become real and powerful during the 1990s, and by the end of the decade the debt problem will be gone.''
In addition, the political climate for luring foreign investment has improved, Cline says. ``The region has largely shifted away from military dictatorships to democracies,'' he says. He points to Mexico and Argentina where foreign investment laws are also changing.
US investors may find a free-trade agreement more attractive, but not US labor. ``Labor is already on record as opposing the US-Mexico free trade agreement,'' Cline says.
Resistance also is expected from the few-but-powerful capitalists who benefit from protected systems, says Otto J. Reich, former ambassador to Venezuela.
A trade bloc in the Americas could hold its own in a world increasingly dominated by similar blocs. ``The US needs some sort of a big region, to find a way of adopting the rest of the Americas,'' says Jorge Salazar-Carrillo, director of the Center for Economic Research at Florida International University.