Latin American trade with the United States - History of Business in the U.S.
Significance: Historically linked by their geographical proximity and their shared histories of being created by European colonialism, the United States and the many nations of Latin America have long been important trading partners. The late twentieth century rise in globalization has pushed these nations’ economic development closer together and prompted the creation of new treaty relationships that are moving the entire Western Hemisphere toward a single free trade zone.
As former colonies of European nations that won their independence during the same era, around the turn of the nineteenth century, the United States and the nations of Latin America in Central and South America and the Caribbean share similar histories. Efforts of Great Britain’s North American colonies to conduct trade with the Latin American colonies were resisted by imperial Spain and Portugal. However, after most of the Western Hemisphere’s nations were independent, U.S. trade with Latin America began to grow. Differences among the countries in climate, topography, and raw materials ensured that they would produce many products that their trading partners could not produce for themselves, and their physical proximity to one another encouraged their trade.
The decades surrounding the turn of the twentyfirst century have seen a new impetus in regional trade that produced new treaty arrangements fostering free trade. The success of the majority of these agreements indicates that their emphasis has been on the reduction or elimination of tariff rates and duties, serving to stimulate trade among the signatories. Other issues that the agreements address are the climate for private investment by foreigners and their potential effect on the standard of living of the poorer segments of the nations involved.
North American Free Trade Agreement
A major stimulus to U.S.-Latin American trade has been the North American Free Trade Agreement (NAFTA), which the United States, Mexico, and Canada signed in 1994. That agreement transformed the three North American nations into something like a free trade zone, greatly increasing trade among those nations. By 2006, Mexico accounted for 11.5 percent of U.S. trade, as measured by value, and accounted for 60 percent of all of U.S. trade with Latin America. The United States exported goods valued at $134 billion to Mexico in 2006. In turn, the Mexicans shipped $198 billion worth of goods to the United States during the same period.
The North American Free Trade Agreement treaty did not discontinue all tariffs and duties immediately but began phasing them out over a fourteen-year period. This staggered approach was adopted so as to soften the effect that cheaper prices of imported goods would have on existing domestic markets. Even so, many Mexican peasant farmers found themselves unable to compete with some imported American agricultural products. The main challenge the farmers faced was the difficulty of shipping their own products over poor roads and through inadequate railroad service. NAFTA officials have sought to aid the farmers by investing in a series of improvements designed to support their marketing capabilities. Nevertheless, many Mexican farmers have continued to oppose the treaty. Despite this problem and several minor disputes, North American Free Trade Agreement is generally regarded as an outstanding success as a trade stimulus. It has been one of the world’s most successful trade agreements in terms of the combined gross domestic product produced for all three parties. The positive results achieved have given rise to the development of other agreements of a similar nature.
Central American Free Trade Agreement
In 2004, the success of NAFTA led to the formulation of the similar Central American Free Trade Agreement (CAFTA), involving the United States and the Central American nations of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Shortly afterward, the Caribbean island nation of the Dominican Republic joined the agreement, which became known as DR-CAFTA.
The goal of DR-CAFTA has been to create a free trade area similar to that of the NAFTA agreement. It has been designed to remove upward of 80 percent of the tariffs imposed on U.S. imports entering the Central American nations and the Dominican Republic. When the agreement was signed, most exports from those nations to the United States were already duty-free because of the U.S. government’s existing Caribbean Basin Initiative. The new agreement created an export market for the United States second only in size to that of NAFTA.
By 2008, two-way trade within the DR-CAFTA nations amounted to $32 billion annually. The plan was designed to help modernize the economies of the six smaller countries, improve their labor laws, raise their environmental standards, and encourage private investment in all the nations. One concern expressed by some economists in the small Latin American countries was the possible harmfrom the U.S. mass producers of competing goods to the fledgling industries within their own borders.
DR-CAFTA and other agreements similar to it are considered by many free trade advocates as steps in the direction toward the ultimate goal of many—a Free Trade Area of the Americas (FTAA) that will encompass North, Central, and South America and the island nations of the Caribbean. Most economists regard free trade as largely positive because it reduces the need for domestic subsidies, encourages formation of capital investment, and helps promote full employment for the parties involved as well. An obvious advantage in the adoption of a hemisphere-wide FTAA would be in the reduction in rules governing each separate agreement. The adoption of such a plan would make trade activity easier to manage by all the parties concerned.
Other Free Trade Agreements
In 2004, a free trade agreement between the United States and Chile went into effect. This bilateral treaty soon resulted in a 154 percent increase in the value of trade between the two countries. By 2008, the United States was Chile’s primary trading partner for both imports and exports. The United States sends Chile electronic goods, motor vehicles, roadbuilding equipment, fertilizers, tractors, and petroleum oil. Chile ships the United States copper, wine, cheeses, and a wide variety of fruits and vegetables and wood products. As a Southern Hemisphere exporter of agricultural products, Chile is a particularly valuable trading partner of the United States because it grows summer crops during the Northern Hemisphere’s winter.
The United States entered similar trade agreements with Peru in 2005 and Colombia in 2006 and has negotiated a trade agreement with the Central American nation of Panama. In these new agreements, both the U.S. and Latin American representatives have addressed an additional challenge— the problems arising from gross disparities in income distribution in the Latin American nations. The business sector believes that increased trade will increase job opportunities for the poorest sectors of their respective economies. Representatives of the International Labor Organization have argued that the agreements should spell out the labor sector’s rights, such as provisions against the exploitation of child labor.
United States Trade with Selected Latin American Countries, 2007, in Millions of Dollars
Source: Data from U.S. Census Bureau, Foreign Trade Division, Data Dissemination Branch, Washington, D.C. 20233
Note: Trade figures are from the U.S. perspective.
The United States does not have an exclusive prerogative to form trade agreements throughout the Western Hemisphere. Other countries in the region have also recognized the necessity to inaugurate free trade programs to help them meet the challenges of economic globalization. As early as 1991, four countries in South America’s so-called Southern Cone—Brazil, Argentina, Uruguay, and Paraguay— initiated a treaty designed to increase economic cooperation and to expedite trade within the group, which is known as Mercosur (Mercado Común del Sur) or Mercosul (Mercado Comun do Sul). In 2006, Venezuela became the fifth member of the group, which has steadily reduced tariffs on imports and exports traded among the members of the group. The original assessment of the group’s trading potential has proven to be correct, as the volume of trade among the five nations has increased markedly since the inauguration of the treaty. Although competition within the group in some products has continued, the overall trade balances among them produces a positive flow of commerce.
Since Mercosur’s founding, Bolivia, Chile, Colombia, Ecuador, and Peru have become associate members. By 2008, Mercosur had announced its goal to make all South and Central American nations members. However, Mercosur’s quest to expand its membership may present long-range problems to an overall trade program for the Western Hemisphere. For example, Brazil, a Mercosur leader, and the United States have shown little willingness to move closer to each other on a number of trade issues. Both Brazil and Argentina have continued to maintain strong restrictions on their trade with the United States. Venezuelan president Hugo Chávez has openly expressed his opposition to any expansion of U.S. influence in Latin American affairs. However, Chávez is more concerned with American political influence than he is with economic relationships with the United States. Meanwhile, the United States has continued to buy large quantities of Venezuelan petroleum, and Venezuelan imports of American products have continued to increase. Meanwhile, increasing government control of industry in Bolivia and Ecuador has tended to inhibit the growth of commerce between these two South American nations and the United States.
Trade continues to be a major consideration in U.S.-Latin American relations. It is one of the areas in economic policy that is subject to a great deal of wrangling and debate among traders on all sides. Mexico has remained the leading Latin American trading partner of the United States. Mexico’s imports from the United States increased by 11.5 percent in 2006 alone, but trade between the United States and many other Latin American countries has also generally increased. U.S. trade has even increased with Venezuela, despite growing political friction between the two nations.
Bognanno, Mario, and Kathryn J. Ready, eds. The North American Free Trade Agreement: Labor, Industry, and Government Perspectives. Westport, Conn.: Quorum Books, 1993. Report on a 1991 conference in Minneapolis at which representatives of labor, industry and government from all three countries participating in the North American Free Trade Agreement discussed a wide range of issues dividing them.
Irwin, Douglas A. Free Trade Under Fire. Princeton, N.J.: Princeton University Press, 2005. Douglas discusses two major threats to the global expansion of free trade—programs of protectionism adopted by individual countries to defend their domestic economies and the actions of so-called public interest groups that seek to block free trade progress.
Machinea, Jose Luis, and Guillermo Rozenwurcel. Macroeconomic Coordination in Latin America: Does It Have a Future? Santiago, Chile: United Nations Publications, 2005. Obstacles and opportunities in global financial markets.
Roett, Riordan, ed. Mercosur Regional Integration, World Markets. Boulder, Colo.: Lynne Rienner Publishers, 1999. A discussion of Mercosur connections with other trade associations and countries.
Von Bertrab, Hermann. Negotiating NAFTA. A Mexican Envoy’s Account. Westport, Conn.: Praeger, 1997. A banker, Von Bertrab joined the Mexican government to help plan the NAFTA agreement in Washington, D.C., from 1990 to 1994. He headed up the Mexican office there, coordinating all government and public relations activities.
Weintraub, Sidney. Development and Democracy in the Southern Cone: Imperatives for U.S. Policy in South America. Washington, D.C.: Center for Strategic and International Studies, 2000. Discussion of future possibilities in the trade relationships between the United States and Argentina, Brazil, Chile, and Paraguay.
See also: Asian trade with the United States; Canadian trade with the United States; Chinese trade with the United States; Drug trafficking; European trade with the United States; General Agreement on Tariffs and Trade; immigration; International economics and trade; Japanese trade with the United States; Mexican trade with the United States.