Three's a Crowd: Latin America's Multilateral Trade Agreements (2 of 2)

In the first blog entry of this series, we spent some time covering trade agreements that exist between two countries. But these bilateral agreements only tell part of the trade story. In order to obtain a comprehensive understanding of international trade, one must also understand the nuanced agreements that exist between more than two countries. In this post we will consider multilateral trade agreements in the Americas and their impact on regional agriculture.

Simply put, multilateral trade agreements are those that govern trade and commerce between more than two countries. Given that there are more parties to the negotiation, all with their unique interests and preferences, it can be very difficult to successfully achieve a multilateral trade agreement. However, by the same logic, once completed they can be exponentially more impactful. Multilateral trade agreements can take many forms, and may group together countries with common geographies or economic interests.

It is impossible to talk about multilateral trade agreements without talking about the World Trade Organization, or WTO. According to their website, the WTO “deals with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as possible.” The WTO facilitates trade negotiations that define tariffs and other trade barriers that countries have in place. They also provide support for implementation, a forum for dispute settlement, and serve as a body for monitoring trade policy.

The WTO and its efficacy is highly controversial. Many people are critical that larger, wealthier countries exert disproportionate amounts of influence over the WTO, at the expense of poorer countries that actually require more support. Agriculture is a particularly contentious topic given its critical role in a country’s well being and development opportunities. Furthermore, given that such an agreement deals with the trade needs of so many different countries, the task of finding unilaterally acceptable solutions is near impossible.

The WTO manages its trade negotiations in different ‘rounds’. The current round is the Doha round, named for the city in Qatar where the round was launched in 2001. The intention was to make agriculture a central focus of the negotiations with an emphasis on reducing subsidies in developed countries which undermine the development of robust agricultural sectors in the developing world. Over 15 years later, the negotiations are at a standstill with little hope for progress. The state of the Doha round means that the results of the prior Uruguay round are still in effect. The Uruguay round was launched in 1986 and concluded in 1994.

Apart from the ambitious scope of the WTO , more focused multilateral trade agreements exist, including several that are of key importance to the Americas, and in particular to the agricultural sectors.

Perhaps the most familiar to North Americans is NAFTA or the North American Free Trade Agreement. NAFTA governs trade between Mexico, Canada, and the United States of America. The NAFTA agreement entered into effect on January 4, 1994 and was a major step forward for the liberalization of trade within the region. Of course, the agreement was not without its controversy, especially in the area of agriculture. Interestingly, due to a failure to reach a mutual agreement between the three countries on the topic of agriculture, three individual agreements were signed – one between Canada and Mexico and one between Mexico and the US. The US and Canada agreement was carried over from the preexisting FTA.

A 2015 report from the Congressional Research Service estimates that the overall effect of NAFTA on the US was small, mostly due to the limited impact of Mexican and Canadian trade on the US GDP. The report estimates that US GDP growth from the agreement ‘was probably no more than a few billion dollars.’ The CRS report goes on to say that the majority of this growth was probably from expanded trade with Mexico, given that trade with Canada was already quite developed by the time the agreement was put in place.

In general, NAFTA removed trade barriers related to agriculture with some exceptions. Canada was able to keep their supply management system largely in tact ,although they were obliged/required to allow some additional imports of agricultural products. Tariffs were largely phased out over 15 years, although the most protected industries, namely sugar and corn, were given longer transition periods. Perhaps the biggest criticism of NAFTA is the impact it had on Mexico’s agricultural sector, where it is estimated that job loss was widespread due to the availability of crops from their new trading partners.

Another important multilateral agreement for the region is the Dominican Republic – Central America Free Trade Agreement, or CAFTA-DR. This agreement includes the United States, Dominican Republic, Costa Rica, El Salvador, Guatemala, Nicaragua, and Honduras. Approval of the agreement across the many involved countries was drawn out, and while negotiations began in 2002, the agreement did not take full effect until 2009.

The objectives of CAFTA-DR were to reduce typical trade barriers as well as to provide a framework for international dealings between the countries related to foreign investment, the protection of intellectual property, and transparency. Agriculture formed part of the agreement. According to the US Trade Representative’s website, more than half of US agricultural exports secured tariff free market access when the agreement was signed in each country. The other half of agricultural products will see their tariffs gradually reduced until all are eliminated by 2021.

South America has their own multilateral trade bloc known as Mercosur, short for Mercado Común del Sur. Mercosur was established in 1991, with the intention of promoting the free movement of people, products, and investment between the leading economies of South America. The bloc is made up of six full members:  Argentina, Brazil, Uruguay, Venezuela, Paraguay, and most recently Bolivia. There are also four associate members – Chile, Colombia, Peru, and Ecuador – which receive only some of the tariff benefits of the bloc, but do not have to comply with all the requirements. There are also two ‘observer’ countries, New Zealand and Mexico.

A chief objective of the Mercosur arrangement was to achieve zero tariff trade, including agriculture, between member nations. Though most tariff reduction happened immediately, members are able to petition for a more gradual transition in the case of a particularly sensitive industry. What is more interesting than the agricultural trade dynamics within the bloc itself is the power it may wield as a negotiating party in other international negotiations. Over a decade ago, for example, Mercosur began negotiating for a trade deal with the EU, a bloc with highly protectionist agriculture policies. Though the agreement has not yet been successful, it is not hard to imagine the impact that the agriculturally rich countries of Mercosur may have if their terms take effect.

One agreement that is currently receiving a lot of attention is the Trans Pacific Partnership, or TPP. This agreement was signed on February 4, 2016 but must be ratified by the individual members within two years, or at least by six different countries representing 85% of the GDP included in the agreement. Signatories to the TPP include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The US has not yet ratified the agreement.

Like other trade agreements, the TPP intends to promote international commerce through the elimination of trade barriers and other mechanisms. However, the TPP is unique in that it covers a broad geographical distance and countries with very diverse products and economic profiles. This has made it especially difficult to arrive at an agreement regarding agriculture. The dairy industry, in particular, has come under scrutiny as several dairy powerhouses such as Australia, New Zealand, and the US are included, as well as Canada which is known for its controversial supply management system. The terms have countries such as Mexico and Chile worried that free trade with industry giants will undermine their own fledgling industries.

While the TPP has many important implications for international trade it will likely be many years before the agreement is enacted. It will be important for each country involved to develop thoughtful strategies to smooth the transition for their own industries.

Trade is an important tool for global commerce and multilateral trade agreements can be important strategies for different countries to achieve more advantageous outcomes than they would have been able to achieve individually. However, international trade is complex and agreements may have detrimental effects on certain industries, particularly those that are not competitive globally. In no case is this more evident than in agriculture. Not only does agriculture provide food and a means of survival but it also plays an important role in development. Therefore, it is critical that stakeholders of global agriculture have a strong understanding of trade dynamics so that we can develop beneficial solutions that contribute to a thriving industry across the globe