What Does the Pacific Alliance Mean for Canadian Trade and Investment?

Transcription

1 May, 2015 What Does the Pacific Alliance Mean for Canadian Trade and Investment? By Barbara Kotschwar 1

2 Table of Contents Executive Summary Introduction Basics of the Alliance What makes the Alliance different from other Latin American trade and integration initiatives? How does the Alliance fit into international trade trends? Canada s economic relationship with Alliance countries How does the Alliance agreement compare to Canada s FTAs with Alliance members? What are the benefits of the Alliance to Canada and Canadian business? Should Canada join the Alliance? What should Canada do?...14 References...15 List of Tables 1. Table 1. Alliance countries: economic indicators Table 2. Common external FTA partners of Alliance members (and date of implementation) Table 3. Participation in plurilateral agreements Table 4. Canada s top exports to Alliance members...10 List of Figures 1. Figure 1. Alliance Members and observers Figure 2. Canada s FDI in Latin America as a percent of total FDI Figure 3. Canada s exports to Latin America (in billions of $US) Figure 4. Comparison of coverage in bilateral FTAs versus Alliance

3 Executive Summary The Pacific Alliance (Alliance), a trade pact between Chile, Colombia, Mexico and Peru, aims to liberalize and harmonize the movement of labour and capital. The Alliance does not aim to invent the next generation of trade rules. Its main impact will be the creation of a more harmonized and simplified set of rules of origin, administrative procedures and rules on procurement and trade in services. The Alliance presents several benefits for Canadian business. Softening borders and lowering costs of doing business in the region can help Canadian firms capture a larger market and make more efficient use of their resources. Eliminating the barriers to the movement of labour, particularly educated young professionals, can enhance the pool of qualified talent available to Canadian companies. Combining capital markets into the Integrated Latin American Market (MILA) will bring efficiencies to the listed firms. It is unclear that joining the Alliance should be a priority for Canada. Even if Canada were disposed to join the Alliance, its current visa policies would cripple its entry. There are a number of measures other than joining the Alliance that Canada can take to advance the goals of the Alliance and Canadian interests. It should review its visa policies with Alliance countries. The current policies not only increase the cost to Canadian business and inhibit commerce but have also become a major irritant in the political relationship between Canada and the Alliance countries, particularly Mexico. Lifting the visa requirement for Chileans was a positive step. Canada can also negotiate to harmonize Canadian bilateral Free Trade Agreements (FTA) with the Alliance countries, provide technical assistance in trade policy, regulatory harmonization and legal structuring. 1. Introduction The Alliance has reignited the hope of free trade and economic integration advocates across the hemisphere. It is lauded for its innovations as well as the potential model it provides for the entire hemisphere. This paper presents the Canadian perspective on the Alliance with particular emphasis on implications for Canadian trade and investment in the Alliance region and the hemisphere. Trade policy among the countries of the hemisphere has generally been split following the unofficial death in 2005 of the Free Trade Area of the Americas (FTAA) initiative. Two policy camps then emerged. The open regionalist countries, clustered along the Pacific coast of the Americas, favour liberalizing regional trade policies. The restricted-regionalist countries have shown little interest in integrating into the global economy. The largest members of the Common Market of the South (MERCOSUR), Argentina, Brazil, and Venezuela, and soon-to-be member Bolivia, have all applied a greater degree of state intervention in their economies, exhibiting varying shades of twenty-first century socialism. Smaller members Paraguay and Uruguay have pursued less protective economic policies but their aspirations to pursue bilateral trade agreements are hamstrung by the customs-union doctrine of MERCOSUR, which forces them to follow Brazil and Argentina s lead on trade policy. 2 With the FTAA s demise, the restricted regionalist countries have increasingly focused on internal markets. The open regionalist countries, on the other hand, have responded by negotiating additional FTAs, both bilateral and multilateral. The most intriguing trade initiative that has emerged from this response is the Alliance, a group comprising the four founders Chile, Colombia, Mexico and Peru. Costa Rica 3 and Panama 4 are classified as candidates to join and Guatemala 5 has expressed an interest in becoming a member. 1 Barbara Kotschwar, a native of Yukon, is a Research Fellow at the Peterson Institute for International Economics in Washington, D.C., and Adjunct Professor at Georgetown University. The paper was edited by Kenneth Frankel and Marta Blackwell. The author and editors thank Laura Dawson, Ricardo Duarte Duarte, Eric Miller, John Price and Arturo Sarukhán for their insightful comments on an earlier version of the manuscript. 2 A customs union is a higher level of integration than a free trade area. In addition to liberalizing trade with each other, members also adopt a common external tariff (CET) and harmonize trade policies. This means that, strictly speaking, members are unable to pursue an independent trade policy or negotiate trade agreements with third parties without agreement of the group. NAFTA, on the other hand, is a free trade agreement, in which all parties are free to set their own tariffs vis-à-vis non-fta members and to formulate their trade policy. 3 Although Costa Rica signed the Declaración sobre el Proceso de Adhesión de la República de Costa Rica a la Alianza del Pacífico, declaring its intention to join in February 2014 under then-president Chinchilla, President Solís is reviewing whether Cost Rica will join. This document can be found at In addition, the FTA between Costa Rica and Colombia still requires legislative and judicial review in Colombia. 4 Panama has FTAs with Chile, Peru and Mexico. The Panama-Colombia FTA awaits final legislative approval in Panama and legislative approval and judicial review in Colombia. 5 At the Alliance s Summit in Cali in 2013, Guatemala eliminated visa requirements for citizens of Colombia and Peru as part of its efforts to become a candidate observer country, which would take it one step closer to becoming a member. In addition, the coming into force of the FTA between Guatemala and Peru is being held in abeyance because of a current trade dispute at the WTO. See WTO website at: 3

4 2. Basics of the Alliance The Alliance was formally launched in June 2012, when the four founders signed an agreement establishing a framework for a new trade and economic integration block. 6 The Alliance s objectives are to: 1. Build, in a participatory and consensual manner, an area of deep economic integration and to move gradually toward the free circulation of goods, services, capital and persons; 2. Promote the larger growth, development and competitiveness of the Parties economies, aiming at achieving greater welfare, overcoming socio-economic inequality and achieving greater social inclusion of their inhabitants; 3. Become a platform for political articulation and economic and trade integration, and to project these strengths to the rest of the world, with a special emphasis on the Asia-Pacific region. 7 The Alliance s legal framework consists of two documents: (1) the 2012 Framework Agreement, which sets out the principles and objectives of the Alliance; and (2) the Additional Protocol to the Framework Agreement, which sets out the conditions of the trade agreement. The Additional Protocol was signed by all four founders on February 10, The agreements are expected to come into force in mid-2015, once all of the countries have fulfilled their domestic legal requirements. 8 If the Alliance were a country, it would be the eighth largest economy in the world. As Table 1 illustrates the Alliance encompasses over 200 million consumers, just under 40 percent of Latin America s population and total GDP. The Alliance countries account for over half of Latin America s exports and imports and a third of its 2013 FDI inflows. Average GDP growth over the past five years has been close to 5 percent per year. The Alliance will have some but not an overwhelming impact on trade among its members. A condition for Alliance membership is that each country must already have in force a free trade agreement with each of the other members, so most trade barriers among them have already been liberalized. 9 The Alliance eliminates tariffs Table 1. Alliance countries: economic indicators Member GDP, 2014 (billions $US) Average GDP growth Per capita GDP 2014 ($US) Population 2014 (millions) Exports, 2013 (in billions $US) Imports, 2013 (in billions $US) FDI stock, 2013 (billions $US) FDI inflows, 2013 (billions $US) Chile Colombia Mexico Peru Alliance Costa Rica* Panama* Argentina Brazil Paraguay Uruguay Venezuela MERCOSUR LAC Alliance as % of LAC Source: Source: International Monetary Fund, World Economic Outlook Database, April 2015; COMTRADE data through WITS; UNCTAD World Investment Report *Alliance candidate member and not included in economic indicators of the Alliance or MERCOSUR. 6 For more on the origins and history of the Alliance, see Dade and Meacham. 7 See the Alliance website at: 8 Mexico ratified the agreement in November Chile and Peru ratified it in July The agreement was first passed by the Colombian Congress through Law 1628 of 2013 but the Constitutional Court declared it unconstitutional because it was approved without two articles of the Framework Agreement. The Framework was again passed by Congress through Law 1721 of June 24, 2014, updating Law 1628 of The Additional Protocol was passed by Congress through Law 1746 of December 26, Final constitutional revision of both laws is still pending in Colombia s Constitutional Court in order to complete internal approval procedures. The agreement will go into force 60 days from the day Colombia deposits the ratification instrument. 9 Colombia and Peru have a free trade agreement through their membership in the Andean Community customs union; the Chile -Mexico FTA has been in force since 1999; the Chile-Colombia and Chile-Peru FTAs have been in force since 2009; Colombia and Mexico signed the G-3 agreement with Venezuela, which came into force in (Venezuela subsequently left the agreement in 2006); the Mexico-Peru FTA has been in force since

5 on 92 per cent of goods and sets a schedule for getting rid of the remaining 8 per cent. This latter tranche consists mainly of agricultural goods (mainly rice, corn and beans) that were excluded or subject to long phase-out periods in the original bilateral FTAs, and which are now subject to a common phase-out schedule ranging from five to 17 years. 10 Sugar is the only product excluded from the agreement. The Alliance s main impact will be in the creation of a more harmonized and simplified set of rules of origin, administrative procedures and rules on procurement and trade in services. Alliance countries agree on the fundamental principles of liberal trade policy and are committed to forging trade links with their major trading partners. As Table 2 illustrates, they already enjoy a common set of external trade agreements. All member countries have a free trade agreement with the US, Canada, the EU and European Free Trade Association (EFTA) countries and a framework tariff elimination agreement with MERCOSUR. Additionally, Chile and Peru each boast a network of FTAs with important Asian trading partners, including China, Japan, Korea and Singapore. Colombia is negotiating an FTA with Japan. Table 2. Common external FTA partners of Alliance members (and date of implementation) Partner Chile Colombia Mexico Peru US A A A A Canada A A A A Partner Chile Colombia Mexico Peru EU A A A A EFTA A A A A Costa Rica A B*** A A El Salvador A A A C Guatemala A A A B* Honduras A A A C Nicaragua A A Panama A B*** A A MERCOSUR A A A# A Venezuela A A B** Ecuador A A A Bolivia A A A Turkey A C C C Israel C## B*** A A China A A Japan A C A A Korea A B*** D A Singapore A C A Malaysia A C C Thailand B*** A Vietnam A C C Australia A C C New Zealand A C C Brunei A C C Source: SICE Note: A=in force; B=signed, but not yet in force; C=under negotiation; D=exploratory talks. (See also footnotes 3 to 5 infra for more detail on approval process of FTAs between Alliance members and Costa Rica, Guatemala and Panama.) Italics denote framework agreement * signed in 2011; ** signed in 2012; *** signed in 2013; **** signed in 2014 # Mexico has a partial-scope agreement covering the auto sector with Brazil, implemented in 2003, and one with Argentina that was suspended in 2012 for three years; ## suspended in What makes the Alliance different from other Latin American trade and integration initiatives? Latin America has long been a laboratory for regional trade arrangements. 11 Latin American countries were among the earliest and the most intensive users of regional trade agreements (RTAs). From the customs unions of the 1960s and 1970s, which tried to bring together countries pursuing import substitution policies and protect them from competition with high regional tariff walls, to the spaghetti bowl of bilateral and plurilateral FTAs in the 1990s, the region has actively pursued both small- and large-scale regionalism. 10 See Perry (2014), Table 2, for an analysis of the phase-out periods in the additional protocol The Andean Pact, the Central American Common Market (CACM) and Caribbean Community and Common Market (CARICOM) of the 1960s and 1970s yielded to the open regionalism of the 1990s. Open regionalism brought NAFTA, MERCOSUR, the Andean Community and the numerous bilateral FTAs signed by Chile and Mexico that utilized NAFTA concepts throughout the region. 5

6 The Alliance differs from these previous trade initiatives in several key ways: 1. It advances liberalization by using a pragmatic approach. The Alliance is market-oriented but not tied to traditional approaches. For example, its trade negotiators abandoned the single undertaking principle that constrained the FTAA s progress by insisting that negotiators agree on an entire comprehensive package of disciplines. 12 Instead of waiting for the entire agreement to be completed and undertaken, the Alliance has moved forward where possible, harmonizing existing trade and investment commitments and common disciplines. It defers further liberalization in, for example, services and government procurement. Unlike MERCOSUR or the Andean Community, the Alliance does not aspire to harmonize trade policy or adopt a common external tariff an approach that has made these other integration initiatives complicated and inflexible. 13 Unlike the Trans- Pacific Partnership (TPP) mega-regional trade pact, the Alliance does not aim to invent the next generation of trade rules, but instead focuses on undertaking all steps currently possible to open markets. 2. Unlike the Andean Community, whose supranational institutions promulgate decisions that become part of members trade policy, or MERCOSUR, whose institutions include a Secretariat, trade-related decision-making bodies and a Parliament, the Alliance has at least for now kept its institutional structure light and focused on trade and investment. 3. The Alliance aims to liberalize and harmonize the movement of labour and capital in several ways by merging members stock exchanges, allowing freer movement of people, and sharing trade promotion resources. This far exceeds the level of liberalization that was envisioned by the FTAA. It goes further in some respects than trade agreements such as North American Free Trade Agreement (NAFTA) or even the recent US-Korea FTA, whose provisions are the basis of several of the negotiating positions of the US in the TPP process. a. The Alliance s members have eliminated visa requirements for nationals from other member countries to spur crossborder trade and investment and the development of commercial networks. One analyst estimates that requiring visas from nationals of a country s trading partner lowers bilateral trade and foreign direct investment by up to 19 and 25 per cent, respectively. 14 Even if this estimate is high, such findings suggest that eliminating visas is more than just a signal to investors of the region s commitment to open markets. And Alliance leaders are going beyond eliminating travel visas for an important portion of the workforce. At their June 2014 meeting, in Punta de Mita, Mexico, the member countries developed a working holiday visa program for young people, allowing citizens aged 18 to 30 to live and work within other member countries for up to a year. The program, scheduled to take effect in August 2015, could help the countries address the problem of youth unemployment, create a larger pool of trained talent and promote integration by creating a network of trained professionals attuned to the regional labour market. b. The Alliance has emerged in parallel with the MILA, a private sector initiative that combines into one regional stock exchange the exchanges of Chile, Colombia, Peru and, as of December 2014, Mexico. MILA boasts a market capitalization of about $1 trillion, representing 798 companies. This represents approximately 50 per cent of the domestic market capitalization of Latin America, slightly greater than Brazil s exchange (BOVESPA). The MILA includes over half of the companies listed on Latin American stock exchanges, including more than 85 per cent of the foreign 12 The single-undertaking approach is employed in the WTO and was used in the FTAA negotiations. Under this approach, countries agree on the set of disciplines that will be negotiated as part of an indivisible package, acceptance of which is contingent upon all participants accepting all of the parts of the package; countries cannot pick and choose to sign on to some parts of the agreement but opt out of others. 13 MERCOSUR members, for example, are not able to negotiate free trade agreements with third countries. They must wait until all members agree to do so, which helps explain MERCOSUR s thin record of trade agreements. 14 Eric Neumayer, On the detrimental impact of visa restrictions on bilateral trade and foreign direct investment, Applied Geography 31:

7 companies. While the MILA is a private-sector initiative, the Alliance countries are studying ways that they can harmonize factors around it, such as tax treatment. c. Member countries are sharing embassies and trade-promotion agencies Alliance members must have an existing free trade agreement with all of the current members and must accept all current and future Alliance obligations. 5. The Alliance includes a democracy clause (Article 2) that requires member countries to maintain democratic rule with the separation of powers and the protection, promotion and guarantee of human rights and fundamental liberties The Alliance is flexible in its membership, admitting new members if they meet its criteria. Unlike the TPP, which restricts participation to current Asia-Pacific Economic Cooperation (APEC) members, the Alliance has not set any additional geographic or other membership requirements For these reasons, the Alliance has attracted considerable international attention. Thirty-two countries have signed up thus far as observers. As Figure 1 demonstrates, the observer countries are drawn from all continents and include Canada, the US, China, India, most European countries and many Latin American neighbours. 18 The role of the observers has not yet been fully defined. At their summit in Mexico in June 2014, members began to define a cooperation agenda for the observer countries, prioritizing projects in education, trade, small- and medium-size businesses, innovation, science and technology, and infrastructure. 8. It promotes ongoing dialogue with the business community through the Pacific Alliance Business Council (CEAP), which provides input and promotes the implementation of Alliance goals The Council has thirteen priority areas, including financial integration, tax rules, standards, production chains, logistics, competitiveness and innovation. 9. It further distinguishes itself from non-alliance members in the region by sending a strong signal Figure 1. Alliance Members and observers Alliance Member Observer Country Candidate Member 15 So far, joint embassies have been established among the four countries in Ghana, by Chile and Colombia in Algeria and Morocco, and joint diplomatic representation to the OECD, by Chile, Colombia and Mexico in Azerbaijan and Singapore, and by Colombia and Peru in Vietnam. Colombia will share embassy space with Spain in countries in which neither country has diplomatic representation. (Spain, an Alliance observer country, has also offered to share diplomatic space with other Alliance countries in those countries where Alliance signatories do not have diplomatic representation. Kazakhstan and Ethiopia have been mentioned as examples.) 16 MERCOSUR contains a democracy clause, but its application has come under criticism in light of its suspension of Paraguay in 2012 following the impeachment of Paraguayan President Fernando Lugo. Unlike MERCOSUR, the Alliance emphasizes the importance of separation of powers. 17 See Kotschwar and Schott on the implications of APEC membership on the TPP and the Alliance. 18 Observer countries, as of May 7, 2015, are Australia, Belgium, Canada, China, Costa Rica (in the process of becoming a full member), Dominican Republic, Ecuador, El Salvador, Finland, France, Germany, Guatemala, Honduras, India, Israel, Italy, Japan, Morocco, Netherlands, New Zealand, Panama (in the process of becoming a full member), Paraguay, Portugal, Singapore, South Korea, Spain, Switzerland, Trinidad and Tobago, Turkey, United Kingdom, US, Uruguay; the Alliance has also initiated a dialogue with the Association of Southeast Asian Nations (ASEAN). The first meeting of ministers of the Alliance and ASEAN was held in New York in September 2014 to explore ways to promote trade, investment and cooperation between the two. 7

8 to foreign investors that Alliance countries are open-trade regimes and attractive investment destinations. It reinforces the fact that these countries consistently rank more favourably on doing business and competitiveness indicators. 4. How does the Alliance fit into international trade trends? The Alliance has emerged during a time of slow movement in the multilateral trading system and in which two mega-regional trade pacts are being negotiated: the TPP, which aims to unite twelve countries in the Asia-Pacific region, and the Transatlantic Trade and Investment Partnership (TTIP), a trade agreement between the US and the European Union. 19 The TPP and the TTIP aim to deepen trade and investment ties with partner countries, to set a precedent for broader multilateral negotiations and to create new trade rules in areas not yet covered by WTO obligations. Three Alliance members (Chile, Mexico and Peru) are negotiating in the TPP. Neither Colombia nor soon-to-be member Costa Rica is involved in the TPP negotiations because the process is limited to current APEC members. Colombia s 1995 request to join has been held up by APEC s decadeslong moratorium on new membership. Malaysia was the last country to join, in The Alliance therefore groups TPP members together with non-tpp members, creating a hybrid composition that will be extended further if Panama (a non- TPP member) is admitted. The APEC (hence TPP) members have gained improved access to external markets, while those that have been left out of APEC have pursued priorities that are somewhat different. To consolidate the Alliance s identity and purpose, the three nations that are members of both institutions will likely push to have Colombia and Costa Rica assuming it fully joins the Alliance invited into the TPP as its first non-apec members. Even if all Alliance members were to join the TPP, the Alliance s reason for being would not be diminished. Unlike the Alliance, the TPP does not envision, for example, free movement of labour, visa elimination, sharing of diplomatic resources, or stock-market harmonization. No Alliance members are included in the TTIP, the FTA being negotiated between the US and Europe, nor were they part of the Comprehensive Economic and Trade Agreement (CETA), Canada s agreement with the EU, which has been completed and signed but is not yet in force. Once enacted, both of these agreements will have an impact on the Alliance. As Table 2 indicates, all members have existing agreements with Canada, the US and the EU. A US or Canadian deal with the EU, particularly with respect to harmonizing standards in key areas, could either provide opportunities for non-party goods or serve as trade barriers to non-complying goods. It is also likely that for some goods these new EU FTAs will erode existing preferences. Alliance countries are also the most active Latin American countries at the multilateral level, taking part in the new plurilateral talks, particularly the Trade in Services and Information Technology Agreement (See Table 3). 20 These multilateral rules will set the standard for twenty-first century trade and could widen the gap even further between the Alliance and the rest of Latin America. Table 3. Participation in plurilateral agreements Information Technology Agreement (ITA) Alliance Colombia, Peru Other Western Hemisphere Canada, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Panama, US Trade in Services Agreement (TISA) Chile, Colombia, Mexico, Peru Canada, Chile, Costa Rica, Panama, Paraguay, Peru, US Agreement on Environmental Goods Canada, Costa Rica, US 19 The terms of this agreement could present issues for Canadian investors in the Alliance countries if (1) the US and the EU harmonize standards and the new standards are different from those used in Canada or the Alliance; and (2) Canadian investors in companies that export to the EU see some trade diversion to US companies. 20 The plurilateral agreements are negotiated by WTO members within the context of WTO negotiations, but without the participation of the full WTO membership. They are thus not part of the single undertaking of the WTO negotiations as set out in paragraph 47 of the Doha Declaration. The Information Technology Agreement (ITA), which provides for elimination of duties on IT products covered by the Agreement, was originally signed by 29 participants at the WTO Singapore Ministerial Conference in December As of March participants h ave signed on, covering 97 per cent of world trade in information technology products. Two new plurilateral negotiations have been launched by WTO members, but not yet as part of an official WTO negotiating process. Negotiations towards an Environmental Goods Agreement (EGA) was launched by a group of 14 WTO Members. The EGA, which builds upon the APEC List of Environmental Goods, aims at maximum global free trade in a wide range of environmental goods; it will become operational once a critical mass of WTO members join. The Trade in Services Agreement, which aims to liberalize trade in services, was launched in April The initial membership of 16 has grown to 23. 8

9 5. Canada s economic relationship with Alliance countries Canadian investment in the Alliance countries reached almost US$40 billion by the end of This represented five per cent of Canada s total investment in foreign countries. It has grown by more than 30 per cent per annum since 2006 and is especially dynamic compared to Canadian investment in the rest of Latin America. Over the same period, Canadian investment in MERCOSUR, which had a similar level of US$12.5 billion (2.7 per cent of Canadian FDI) in 2006, rose by only US$2.5 billion and, as a result, dropped to less than two per cent of the total Canadian FDI (see Figure 3). Canadian FDI in Brazil, the largest of the MERCOSUR markets, was US$11 billion in By comparison, Canadian FDI in China and India that year stood at just under US$5 billion and US$1 billion, respectively. The Alliance region represents a significant destination for FDI by some of Canada s most critical sectors mining, utilities (especially water and energy), chemicals, infrastructure, financial services, engineering and agri-food. Figure 2. Canada s FDI in Latin America as a percent of total FDI billions $US percent Alliance MERCOSUR Alliance share of FDI MERCOSUR share of FDI Source: Statistics Canada, Table As Figure 4 illustrates, Canada s trade with the member countries is relatively small but also growing. Canada s exports to the Alliance represent about 1.6 per cent of total exports while those to MERCOSUR are less than 1 per cent. Figure 3. Canada s exports to Latin America (in billions of $US) billions $US MERCOSUR Alliance Source: COMTRADE through WITS 9

10 Canada s top exports to the Alliance include agricultural and manufactured goods such as machinery, mineral ores, mineral fuels and oil, electrical and electronic machinery and equipment and fats and oils. Table 4 sets out the top 15 goods exported to the Alliance members, along with an indication of the percentage and value in total Canadian exports of the goods and weight of each of the member countries. These countries are an important market for a number of goods, including metal products, chemicals, machinery and auto parts. Canada s main trading partner in this grouping by far is Mexico, and disaggregated trade data demonstrates that Canada is tied to Mexico through the highly integrated North American auto supply chain. Table 4. Canada s top exports to Alliance members HS Code Commodity Alliance (millions $US) Alliance as % of total exports Alliance partner participation (% of Alliance market) Chile Colombia Mexico Peru Rape or colza seeds, whether or not broken Durum wheat, other Other vehicles, with spark-ignition internal combustion reciprocating piston engine Aluminum alloys Of machinery of heading No , or Other bars and rods, not further worked than hot-rolled, hot-drawn or extruded Mixed alkylbenzenes Lentils Copper ores and concentrates Other parts and accessories Other parts of airplanes or helicopters Coal, whether or not pulverized, but not agglomerated: Bituminous coal Polyethylene having a specific gravity of 0.94 or more Boneless beef, processed and other Polyethylene, other Source: author s calculations based on COMTRADE data accessed through WITS 6. How does the Alliance agreement compare to Canada s FTAs with Alliance members? Canada has existing FTAs with all Alliance members, as well as with some other common trade partners: the US, EFTA and, once the CETA enters into force, the EU. This leads to a network of common and, in some cases, overlapping trade disciplines. Canada s trade relationship with each of the Alliance members is already liberalized. NAFTA has been in force since 1994, giving rise to significant growth in trade, and the development of a strong North American supply chain. The Canada-Chile Free Trade Agreement (CCFTA) has been an evolving agreement: a government procurement agreement came into force in 2008, 11 years after the entry into force of the agreement; in 2013 a financial services chapter was added, and the chapters on government procurement, customs procedures, and dispute settlement were updated. The Canada- Peru FTA (2009) includes provisions to enhance market access for goods, services and investment as well as cooperation in increasing labour and environmental standards. The most recent agreement is with Colombia, which entered into force in Figure 5 shows how the coverage of the main issues in Canada s current bilateral FTAs with Alliance members compare to the coverage contained in the Alliance FTA. 10

11 Figure 4.. Comparison of coverage in bilateral FTAs versus Alliance 12 Financial markets 10 Cooperation 8 Labour mobility 6 Environment and Labour 4 2 Competition policies, monopolies, SOEs Dispute Settlement 0 Electronic Commerce NAFTA/Canada-Chile Canada-Colombia Canada-Mexico (NAFTA) Canada-Peru Alliance Maritime Services Services & Investment Government Procurement Market Access for Goods Source: Author s calculations, based on SICE data Note: Cooperation in Canada s bilateral FTAs refers to trade-related cooperation. This can include bilateral efforts to share information on technology and innovation, support activities of small and medium enterprises, and other activities to increase countries competitiveness. Cooperation in the Alliance includes customs cooperation as well as extra-fta cooperation activities such as sharing of trade promotion resources within embassies. Figure 5 compares the obligations set out in the four FTAs, based on a coding exercise where similar commitments receive an index score of 1.0 and additional commitments receive additional weights. As Figure 5 demonstrates, the core measures on market access to goods, services and investment are alike in scope. Canada already benefits from access to the markets of all of the Alliance partners. Tariffs on virtually all goods traded between Canada and Mexico have been eliminated through NAFTA, with the exception of Canadian dairy, poultry, egg and sugar sectors, which were exempt under NAFTA. Tariffs with Chile have been phased out under the Canada-Chile FTA. The Canada-Peru FTA phased out 97 per cent of the tariffs. The Canada-Colombia FTA eliminated over 96 per cent of tariffs upon entering into force in This market access has facilitated greater trade growth between Canada and its FTA partners. The more recent FTAs (with Colombia, for example) have allowed significant openings for Canadian companies, for example in the information and communications technology (ICT) sector, where all tariffs on ICT equipment will be phased out as of All of Canada s bilateral FTAs, as well as the Alliance, include chapters providing protections for investors and investments and liberalization in trade in services. These are important for Canadian mining, engineering and financial firms, which benefit from more predictable and equitable treatment in the markets of Colombia and Peru. These firms benefit from growing energy and service sectors and, particularly in Colombia, from the growing infrastructure investment that the region needs acutely. It is unclear whether Canada s joining the Alliance trade agreement would provide any additional protection to Canadian investors. The one area in which the Alliance provides a far greater amount of liberalization than Canada enjoys under any of its FTAs is labour mobility. Whereas all of the FTAs contain provisions for temporary entry of businesspersons, as noted above, the Alliance has made significant strides in facilitating the movement of people among its member countries. In addition to the provisions discussed above, the Alliance includes a Committee on the Movement of Business Persons and Facilitation of Migration. The Committee facilitates the free flow of businesspeople, consular cooperation, workstudy programs for students, and increased cooperation and information exchange on migration 11

12 flows. 21 This will prove useful to Canadian mining firms who often find themselves having to import technicians from other countries. Canadian businesspersons are currently subject to more limited provisions in the bilateral FTAs that grant them temporary preferential entry at their trade partners borders: 1. Mexico NAFTA facilitates temporary entry 22 for businesspersons who are citizens of the US, Mexico and Canada and who are involved in the trade of goods or services, or are investors in each other s countries, and for business visitors, professionals, intra-company transferees, and traders and investors Chile Like NAFTA, CCFTA does not provide an exhaustive list but illustrates the types of activities usually carried out by business visitors. No new activities additional to those covered in NAFTA were added and a few categories were removed. 24 A professional may seek entry as a salaried employee under a personal contract with a Canadian employer or through a contract with the professional s employer in his or her home country. 25 The CCFTA list of professionals is similar to NAFTA s. 26 No new profession was added to the Appendix of CCFTA. The requirements applicable to NAFTA professionals were retained and continue to apply for Chilean professionals Peru The Canada-Peru Free Trade Agreement (CPFTA) provisions on temporary entry of businesspersons goes beyond NAFTA by including permanent residents (not only citizens) of each. Proof of permanent resident status is listed as an accepted document for presentation in support of an application. The CPFTA also expands coverage for intra-company transferees to individuals who have been employed continuously by the sponsoring enterprise for six months within the threeyear period immediately preceding the date of application for admission (NAFTA requires one year). 4. Colombia The Canada-Colombia Free Trade Agreement (CCOFTA) extends a bit further than CPFTA by allowing the issuance of open work permits to spouses of traders and investors, intra-company transferees or professionals and technicians. NAFTA does not cover spouses. None of these bilateral trade provisions provide the free access to each other s labour markets offered to members in the Alliance. To join the Alliance, Canada would have to eliminate the visa requirements for nationals of all Alliance members. Canada currently requires visas for visitors from Colombia, Peru and Mexico. Chilean visitors have note required visas since November What are the benefits of the Alliance to Canada and Canadian business? The Alliance provides important strategic and financial opportunities for Canadian companies investing and trading with Latin America, by: 1. Softening borders and lowering costs of doing business in the region can help Canadian companies already working in more than one of the Alliance countries to capture a larger market and make more efficient use of their resources. 2. Eliminating the barriers to the movement of labour, particularly among educated youth, can enhance the pool of qualified talent available to Canadian companies. Foreign businesses in Latin America often cite shortages of qualified labour, particularly professional and technical, as impediments to doing business. Firms aiming to locate their back-office operations in Latin America, for example, may find it difficult to find an adequate number of bilingual ITtrained employees and managers. Pooling together the workforces of all of the member companies can help to overcome 21 SELA Permanent Secretariat, The Pacific Alliance in Latin American and Caribbean Integration, Table Temporary is defined as entry without the intent to establish permanent residence. 23 Chapter 16 of NAFTA. NAFTA also waives the requirement for a Labour Market Impact Assessment (LMIA) for all covered businesspersons as well as the work-permit requirement for business visitors. 24 Appendix K-03.I.1 of CCFTA. These include harvester owners, under Growth, Manufacture and Production; transportation operators, under Distribution; Canadian and American brokers performing brokerage duties, under Distribution; and tour-bus operators, under General Service (see Work in Canada: Business people, for more information). 25 Professionals are listed in Appendix K-03.IV.1 of CCFTA. 26 Appendix G (over 60 professional categories listed). 27 However, for a number of these (accountant, lawyer, librarian, social worker, dietitian, nutritionist, occupational therapist, physician, physiotherapist, registered nurse, veterinarian and geologist), Chilean minimum education requirements and alternative credentials are stipulated as alternative requirements, in order to reflect the Chilean educational system. 12

13 this barrier. 3. Combining capital markets into the MILA will bring efficiencies to the listed firms. The MILA will now serve as a one-stop shop for investors interested in securities of the four members. Canadian firms that may have been reluctant to undertake investment projects in the region due to the difficulties or cost of raising local currency will be able to increase and diversify their portfolios. Now that Mexico has fully joined, MILA matches the BOVESPA in size and outranks it in international participation, with about 90 per cent of the foreign stocks listed in Latin America. 4. Helping trading partners enhance ties to East Asia, particularly China, would help Canadian companies invested in Alliance countries access the Asian market. While growth has slowed in the past few years, East Asia continues to be the single largest external driver of growth, and enhancing trade and investment with the region has great potential to boost the economies of the Alliance countries. Creating a stronger, more competitive region should lead to a richer consumer base for Canadian exports of goods and services. Increasing trade ties with each other and with Asia can also help the region s economies weather economic volatility that has set the region back in the past. This will provide more stability for Canadian investors. 5. Spurring infrastructure development will not only make Alliance countries more competitive, but will also provide opportunities for Canadian infrastructure development firms. From a regional perspective, the Alliance offers significant potential. It is currently the most credible vehicle for integration, even if this integration does not take the form of a large multi-country negotiation. The member countries have already begun to harmonize overlapping and contradictory rules. Mexico has harmonized its FTAs with Central American counterparts, thereby eliminating the barriers posed by overlapping rules of origin requirements and administrative procedures. This increases the potential of deeper integration between the Alliance and Central America. A logical next step would be for the Alliance countries to approach their major common trading partners: Canada, the EU and the US and propose a consistent approach to their common agreements, likely beginning with the cumulation of rules of origin. 28 Canadian businesses could proactively evaluate the benefits of doing so. The Alliance has taken the initiative to engage MERCOSUR, a market that continues to resist negotiations with the north. The Alliance and MERCOSUR met in November 2014 to set a road map towards greater convergence. Greater links between the two could spell greater business opportunities for Canadian firms, particularly if this initiative leads Brazil and Argentina to reduce the cost of doing business in their economies. Chile is the prime mover in seeking to bridge the chasm between the two distinct approaches to integration. Some observers are concerned that engaging MERCOSUR could retard the pace of the Alliance s progress. Nonetheless, Chile s Economy Minister emphasizes the potential synergy: The two blocks are not contradictory or competing, they are consistent and that is why we are promoting a joint undertaking with the objective of an integration convergence. 29 It is too early to tell whether MERCOSUR has a serious interest in changing its divergent views on trade and investment treaties to accommodate the main pillars of the Alliance. 8. Should Canada join the Alliance? Consistent with its open regionalist approach to trade, Canada has taken observer status at the Alliance. Canada was an early and enthusiastic supporter of the FTAA and was often seen as playing a constructive moderating role. 30 Following the collapse of the FTAA talks, 28 Cumulation (or accumulation) of rules of origin allows countries to jointly comply with a set of rules of origin. A producer in one Alliance country would be able to use inputs from another Alliance country without losing the originating status under its FTA with Canada. Canada has been a proponent of this type of cross-cumulation as a solution to overlapping requirements in FTAs in international fora and already includes cross-cumulation in its FTAs with Colombia and Peru. 29 Minister Luis Felipe Céspedes, quoted in the article, Mercosur and Pacific Alliance are not contradictory competing blocks, MercoPress, March 31, During the FTAA negotiations, Canada was seen as an important leader in hemispheric trade. Canada chaired the first phase of the FTAA negotiations, culminating in the 1999 Toronto Trade Ministerial, whose theme was business facilitation measures. It hosted the third Summit of the Americas meeting in Québec in and chaired the negotiating group on government procurement, on dispute settlement, and the joint private sector committee of experts on electronic commerce. 13

14 Canada focused on bilateral free trade pacts, complementing its earlier agreements with Chile (1997) and Costa Rica (2002) with agreements with Peru (2009), Colombia (2011) and Panama (2013). Canada also has an FTA with another potential Alliance member, Honduras. (See Table 2.) Early rumours that Canada would join the Alliance have, however, been unfounded. Canada is not disposed to accepting the Alliance requirements regarding the free movement of persons among member countries. Canada currently requires visas for all Alliance members except Chile. Even in the unlikely case that the Alliance would bend one of its fundamental pillars and accommodate Canadian visa concerns, it is unclear that joining the Alliance should be a Canadian priority. Canada is currently engaged in the TPP negotiations which include 12 countries, including three Alliance countries. The TPP is widely seen as a vehicle to bring NAFTA up to twenty-first century standards in areas where this is seen as desirable, such as updating digital economy provisions, re-evaluating the energy provisions in the wake of Mexico s reforms and modernizing the list of professions eligible for the NAFTA visa. Joining the Alliance, to which the third NAFTA partner the US is not a party, would likely complicate more than clarify the rules for business, particularly those that treat North America as a unitary platform. 9. What should Canada do? Assuming that Canada does not become an Alliance member at this moment, there are still a number of measures that Canada can take to advance the goals of the Alliance and Canadian interests in one of the world s dynamic markets: 1. Review Canadian visa policies with Alliance countries. Each country presents unique circumstances requiring a separate analysis. With respect to Mexico, Canada s most important trading partner in Latin America, maintaining visa requirements (stricter than those used by the US for Mexico) increases the cost to Canadian business and inhibits commerce. It has also become a major irritant in the political relationship between the countries. The Canadian government has recognized that lifting the visa requirement for Chileans will lead to an increase in bilateral trade, investment and tourism. 31 Doing the same with the other Alliance countries, or at least working diligently with Alliance members to find greater flexibility and streamlining procedures while satisfying bona fide concerns, would have even greater affect. The flows of tourists, goods, services and investment with those countries, both inbound and outbound, are even larger than with Chile. Numerous proposals have been circulated to address the Mexican visa stalemate. One solution would have Canada recognize US visa holders from Mexico or holders of a trusted-traveler card as eligible for visa-free entry into Canada. The key is to understand the identity of the individual and to establish that she or he does not constitute a threat. Holding a US visa would not guarantee admissibility into Canada or the US, but the visa or trusted-traveller status would, however, be a good indicator of risk. A second potential solution would be to pick certain categories of people to start with. The first category could be elected officials, senior bureaucrats, and top executives from leading companies. An assessment could be conducted after a period of time, and if few problems are evident, then the program could be extended to another category of people. 2. Negotiate to harmonize Canadian bilateral FTAs with the Alliance members. This would be done ideally using NAFTA as a platform. Given that Canada and the US both have FTAs with all of the Alliance countries, a first step could be the adoption of cross-cumulation of rules of origin across the NAFTA-Alliance platform as well as enhanced trade-related cooperation, particularly in those areas such as energy, transport and IT infrastructure in which Canadian companies are heavily engaged. 3. Provide technical assistance in trade policy, regulatory harmonization and legal structuring by coordinating the formation of a formal network of trade policy experts and other stakeholders throughout Alliance 31 Citizenship and Immigration Canada, Notice - Canada lifts the visa requirement for visitors from Chile. Retrieved on November 22, 2014 from 14