Trade & Investments

The PA’s pragmatic and piecemeal approach to negotiations has seen it immediately eliminate 92% of trade tariffs and establish a harmonized rules of origin regime, which includes cumulative rules of origin provisions. In addition to this, PA members have also removed barriers to the movement of people by eliminating visa requirements within the bloc, and formed one of the few joint stock exchanges around the world, the Mercado Integrado Latinamericano.

Trade

The PA’s ambition is to use trade liberalization mechanisms to encourage the growth of regional value chains and benefit from economies of scale. With a particular eye on the Asia Pacific, member countries hope that increases in productivity will help increase their competitiveness in the world economy.
To encourage the free flow of goods and services among member countries, the PA has adopted multiple measures, including immediate elimination of 92% of tariffs and duties on goods (with the remaining 8% to be phased out incrementally), introduction of cumulative rules of origin, and harmonization of sanitary and phytosanitary standards.

The elimination of tariffs will help reduce the costs associated with intra-bloc trade, while cumulative rules of origin will further incentivize the exchange of goods and services by conferring origin status on member country inputs. This means that more goods will meet value-added requirements for preferential treatment in jurisdictions where a member has a Free Trade Agreement (FTA) in place.

A study by the Inter-American Development Bank outlines the potential for the agreement to help members harness production complementarities.6 Based on trade patterns, the report suggests that Mexico position itself in the final stages of supply chains, Chile and Colombia in the middle, and Peru in more upstream segments. It also identified numerous comparative advantages in member country inputs for production purposes. For example, Chilean wood has a comparative advantage in the manufacturing of furniture in Mexico and Peru; Mexican denim fabric for clothes in Chile, Colombia and Peru; Colombian polymers of propylene for plastic containers in Mexico and Peru; and Peruvian zinc and lead for wires and batteries in Chile, Colombia and Mexico.

Increasing intra-bloc trade will help to diversify the export portfolios of some members. Countries such as Chile and Peru have, in the past, relied on mineral exports when trading with Asia. In fact, 80% of Chile’s exports in the past ten years comprised of metals and ores.7 In contrast, minerals have constituted only a third of Chilean exports to Latin America, with manufactured goods representing 50% of exports.8 Greater volumes of regional trade will help these members diversify risk and benefit from the production of more value-added goods.

Some have questioned the extent to which these ambitions can be achieved since there are several barriers to trade that are not immediately addressed through the agreement. Intra-bloc trade is low, with no member country ranking within another’s top five trading partners. This is due, in part, to inadequate infrastructure and natural barriers that drastically increase the cost of trading with one another. As one commentator has pointed out, shipping a container from Bogota to Barranquilla (both ports in Colombia) is three times the cost of shipping it to Hong Kong.9

Most of the PA’s trade liberalization initiatives are outlined in the PA Additional Framework Agreement and the harvest approach means further negotiations will take place incrementally through the various organizational bodies.

Tariffs:

The Additional Protocol to the Framework Agreement sets out the bloc’s commitment to immediately eliminate 92% of tariffs on traded goods. This reduction largely built upon existing bilateral agreements between member countries, which had already effectively liberalized 92% of goods.

The remaining 8% of tariffs will be phased out over a longer period of time, and mostly apply to agricultural goods which are considered “sensitive products”. Under the terms of the Additional Protocol, tariffs associated with these products will be reduced over a period of between three and 17 years.

Sugar is the only good which has been excluded from tariff reduction negotiations.

Rule of Origin:

One of the major achievements of the PA so far has been changes to members’ rules of origin regimes. Under the Protocol, members will gradually standardise their minimum national value added requirements for consideration as domestic inputs.

The PA has also introduced “cumulative rules of origin”, which will confer origin status on inputs from other member nations, provided that the value added threshold is met. For example, a component for a plasma television produced in Mexico and imported into Chile for further construction and assembly will be considered a product of Chile for export purposes and therefore eligible for preferential treatment in jurisdictions where Chile has an existing trade agreement.

Cumulative rules of origin will help to facilitate the development of integrated regional supply chains and provide member countries with broader and deeper market access. Countries like Colombia, for example, which do not have existing trade agreements with China and Japan, will particularly stand to benefit.

The PA has also reduced the number of Certification of Origin documents to one, and is gradually moving towards use of an Electronic Certification of Origin platform.

Sanitary and Phytosanitary:

The Additional Protocol also sets out a chapter detailing efforts to eliminate sanitary and phytosanitary barriers to trade. The underlying principle of negotiations in this area is that member countries should rescind arbitrary standards which do not have a strong scientific basis, and strive towards recognising the certification rulings of other member countries.

These measures could potentially greatly enhance the ease with which businesses producing sanitary products can distribute goods within the bloc. For example, as it stands, a company producing diapers or wet wipes has to wait up to eight months for sanitary certification in Chile and Peru (and comply with two different sets of standards), while facing no delays in Mexico because these goods are not deemed to pose significant health risks.10

In 2013, the PA’s respective sanitary agencies reached a cooperation agreement to streamline the granting of registries for pharmaceuticals, significantly reducing regulatory barriers for the trade of medicines. As part of this process, Chile and Peru are seeking entry into the Pan-American Health Organisation, which will help create a common sanitary “standard” shared by the bloc and allow for the recognition of determinations by the sanitary agencies of member countries.

Technical Barriers to Trade:

The PA has established a Committee on Technical Barriers to Trade which will oversee negotiations to progressively reduce trade barriers through harmonization of standards and regulations, as well as through the development of common evaluation and accreditation procedures.

Given the sheer scope of regulatory harmonization required, the PA and the Committee will initially focus on removing arbitrary technical standards which stymie the free flow of cosmetics and pharmaceuticals. Special sub-committees have been established for both of these sectors.

Public Procurement:

Under the Additional Protocol, goods and services from member countries will enjoy the same treatment as domestic firms and products for the purposes of public procurement. While this clause already exists in most of the member countries’ bilateral agreements, Peru formerly had no such stipulation.

Trade Facilitation and Customs Cooperation:
Member countries will attempt to facilitate intra-bloc trade by reducing the amount of time goods are held for inspection by customs authorities. Goods will now be released within 48 hours, whereas previously were subject to average holding times of three and a half days.

Maritime Services:

The Additional Protocol states the PA’s commitment to facilitating regional maritime transport by strengthening competitiveness and extending equal treatment of service operators. Specifically, the chapter stipulates that vessels from member countries shall not receive discriminatory treatment and that the recognition of these vessels and their associated documents be standardised across the bloc.

The chapter also calls for the parties to develop joint strategies to improve competitiveness, identify areas of cooperation and further develop logistics chains. Even though no firm commitments have been made by member countries, this chapter is seen as particularly important as typical transportation costs within the bloc are high. Many believe that improving competition and reducing costs in the transport sector will be one of the biggest keys to improving trade within the PA bloc.

Telecommunications:

Chapter 14 of the Additional Protocol guarantees companies of member countries the right to provide telecommunication services in the bloc; the right to fair and equal treatment; access to critical infrastructure; and the impartiality of regulatory authorities. While this clause existed in most bilateral agreements with PA members, it did not apply to FTAs negotiated with Peru and Colombia.

Investment:

The PA has committed members to high levels of financial integration. This is primarily being pursued through the auspices of the Mercado Integrado Latinoamerica (MILA), a joint stock exchange founded in 2011 by Chile, Colombia and Peru. Combining the Bolsa de Valores de Lima (BVL), Bolsa de Comercio de Santiago (BCS) and the Bolsa de Valores de Colombia (BVC), MILA was created with the intention of establishing a more competitive and diverse equity market with greater financing options for businesses.

Through PA negotiations, Mexico joined MILA in January 2015, making it the second largest stock exchange in Latin America (behind Brazil’s BM&F Bovespa) with a market capitalisation in excess of $1 trillion. By providing a more liquid and diverse equity market with increased opportunities for risk diversification, MILA hopes to attract greater levels of foreign investment and remove barriers to intra-bloc investment. MILA will also help diversify the individual markets of member countries, which have been dominated by particular sectors. For example, 32% of BCS’s market capitalization is in retail and services, 78% of BVC’s is in financials and energy, and 53% of BVL’s is in mining.11

While there is a great deal of excitement about its prospects, MILA’s trading volumes have so far been small. Factors seen as inhibiting its potential include disparate tax regimes and regulations around capital gains, as well as the need to triangulate foreign currency transactions through US dollars.

Beyond MILA, Chapter 10 of the Additional Protocol sets out the PA’s intention to facilitate intra-bloc investment by harmonizing regulatory frameworks apropos investor protection, disclosure requirements and anti-money laundering laws. It also provides for the establishment of dispute resolution mechanisms, which will help mitigate the risk of unfavourable treatment and the expropriation of foreign investors from member countries.

One limitation to these clauses, however, is the fact that they do not supplant existing arrangements already agreed to by PA members. In instances where Protocol clauses cover the same ground as bilateral agreements between PA countries, there is no binding onus on members to adhere to the prescriptions of the PA framework. Members are instead free to negotiate these disparities on an ad hoc basis.

Other

The Pacific Alliance seeks a holistic approach to economic and social integration, and has made a number of advances in areas such as the movement of people, greater interaction with the private sector and shared embassies and promotional missions overseas.

Movement of People:

According to the Lima Declaration, the PA wishes to strive towards the “movement of business people and the facilitation of migration transit, including cooperation with immigration and consular police.”12

Major achievements are evidenced in the elimination of visa requirements for movement within the bloc. Additionally, in 2014 the bloc announced the introduction of a working holiday program, and more recent discussions have touched on the idea of creating a single entry visa to the bloc for foreign persons.

Business Council:

The Pacific Alliance Business Council (PABC) was formed in August 2012 and assists in the efforts to further private sector integration among member countries by providing the PA with recommendations on reforms in the commercial and financial sectors and opportunities in overseas markets.

Comprised of 14 businesspeople from member countries, specific issues the PABC is currently focusing on include public procurement, production linkages, tax harmonization, technical standards in the pharmaceutical and cosmetics sectors, entrepreneurship and innovation, and competitiveness and logistics. The Council is an important conduit linking the aspirations of the member governments to the private sector.

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