FTAA: Dealing with inequality, disparity

The Free Trade Area of the Americas (FTAA) negotiations are expected to continue until 2005.  The process involves 34 countries with important differences in size, population, economic structure, economic performance, and stability and welfare. Negotiating countries also belong to different regional groupings — like CARICOM and SELA (Latin American Economic System) — with varying degrees of integration and external orientation. All countries do belong to the Americas (in the broadest sense of the term) and are dependent on the United States markets to varying extents, but share no other common denominator. Some inter-country comparisons can illustrate the disparities involved. The United States GNP is more than 8,000 times that of all other FTAA countries with the exception of Brazil. Similarly, the population size of the United States, Brazil, and Mexico is close to or above 100 million inhabitants, while that of 11 countries (Caribbean Islands) are below one million inhabitants. GDP growth rates also vary in terms of level and volatility.

A similar situation is reflected in the FTAA members’ GDP per capita levels. At one extreme of the FTAA grouping are such high income level countries as the United States, the Bahamas, Antigua Barbuda, and Canada, with GDP per capita levels above 12,000 US dollars. Countries such as Honduras, Guyana, Haiti and Nicaragua, whose GDP per capita are of the order of 500 or 600 US dollars are at the other extreme. Three of the lower income countries (Guyana, Haiti, and Nicaragua) are also categorised as Highly Indebted Poor Countries (HPIC). In between (at the lower end of the scale) are Organisation of Eastern Caribbean States (OECS) members and other Central American countries, which maintain a GDP level within the 2000-3000 US dollar range. 

Welfare indices such as the illiteracy rate and the primary school gross enrolment ratio (the total enrolment in a ‘specific level of education, regardless of age as a percentage of the official school-age population corresponding to the same level of education in a given school year’) do not show a significant narrowing of these disparities. The average primary gross enrolment ratio  (defined by UNCTAD as the total enrolment in a ‘specific level of education, regardless of age as a percentage of the official school-age population corresponding to the same level of education in a given school year’) for FTAA member countries is 113.3 and the standard of deviation is 16.6.  The mean illiteracy rate as a percentage of the population is 12.7% and the standard deviation is 11.8%. 

Member countries also differ in their economic structures and levels of industrialisation.  At one end of the spectrum, economies like the United States, Canada, Mexico, and Brazil are relatively highly industrialised with a low contribution of agriculture to output relative to manufacturing and services (5%, 30% and 65% for agriculture, industry and services, respectively). At the other end of the spectrum, in countries such as Belize, Bolivia, Guatemala, Guyana, Honduras, Nicaragua and Paraguay, agriculture contributes close to a third of GDP. Within this sub-group Guyana is the only country in which the contribution of agriculture is greater than those of industry and services (41%, 33% and 26% respectively). The FTAA grouping was founded on the principle that the final negotiated agreement should recognise and accommodate differences in both size and level of development among member countries.  In practice, however, FTAA negotiations recognise mainly differences in size. The issue is not, for example, whether the Bahamas has a GDP per capita that approaches that of the United States and therefore should be treated as closer to a developed country, but that it is smaller in size relative to most other non-English speaking Caribbean economies. In the same way, the issue is not whether Guyana or Nicaragua are at the lower end of the FTAA development scale relative to any other member country with the exception of Haiti, and are as a result deserving of asymmetric treatment. Rather, the issue is whether The Bahamas, Nicaragua and Guyana are smaller in size than other FTAA countries. It is a size variable — and not a development variable (as, say, education, literacy or poverty indicators) — that puts The Bahamas, Nicaragua and Guyana in the same special category in the FTAA and therefore entitled to the same benefits. 

Yet, surprisingly, the demarcation criterion between what constitutes a smaller and larger economy has not yet been defined or established. This is mostly because in a trade agreement that includes 34 countries with wide economic disparities the concept is relative. For example, Ecuador is a large economy in relation to Saint Lucia but a small economy in relation to Brazil. In turn, Brazil is a small economy compared to that of the United States. Ultimately, the implicit and explicit assumptions entertained by FTAA negotiating countries are two-fold. The first is that the FTAA is not a “stumbling block” but a building block for the deepening and development of the ultimate multilateral trade agreement, the WTO. Preferential trade arrangements are WTO compatible and even perhaps complementary. This belief reflects a reality. The majority of FTAA negotiating countries are members of the World Trade Organisation and are signatories to many other free trade agreements, involving free trade areas, customs unions and partial agreements. Indeed, this “spaghetti bowl” configuration of trade agreements — still in the making as Central America is currently negotiating a free trade agreement with the United States and CARICOM is about to sign a free trade agreement with Costa Rica — casts some doubt on the real commitment of countries of the American Hemisphere to a regional agreement such as the FTAA.

Second, recognition of existing disparities implies also that member countries believe that the initial inequality of conditions will not widen and indeed will narrow over time with the implementation of the FTAA. In other words, FTAA negotiating countries assume that with due attention paid to disparities in size and development, freer trade and greater market access are basic determinants of a more equal and mutually beneficial process of integration, and that they are, indeed, promoters of greater convergence. To summarise, negotiating countries believe that free trade agreements such as the FTAA will widen and solidify market access, as they allow countries to maintain their preferential market access while acting as a springboard for export development and promotion.  It is also assumed that these agreements will lead to greater foreign direct investment and that such investment is an essential source of economic growth.   Finally, countries expect that increased technical transfer and improved labour mobility will also follow.

The Free Trade Area of the Americas negotiation process is part of a global tendency towards the adoption of unilateral liberalisation policies.  Outward oriented policies will expose small economies’ productive sectors to external competition. A greater degree of external exposure accompanied by the appropriate regulation and legislation may enhance the productivity and efficiency of dynamic economic sectors; but it may also result in output and employment losses in other areas of economic activity. Moreover, small economies are seeing trade preferences erode as the extension of time periods to comply with multilateral trade rules are exhausted and trade restrictions are progressively phased out.  Such primary commodities as bananas, rum and rice, and textiles, are cases in point. At the same time, trade liberalisation can be viewed as an opportunity for trade expansion and economic growth once countries can reposition their productive potential to compete in the world economy.

This article reflects the views of its author and not necessarily those of the ECLAC Subregional Headquarters for the Caribbean