Second only to the NAFTA in economic strength in the Hemisphere is the Common Market of the South (MERCOSUR in Spanish), which initially brought together the four countries of Eastern South America—Brazil, Argentina, Paraguay, and Uruguay. Venezuela is a recent adherent, although its basis for switching from the Andean pact has more to do with populist politics than economic considerations, a motivation that also describes Bolivia’s renewed attention to MERCOSUR. With the exception of certain products, in 1995 the treaty created a customs union—an FTA with a common external tariff—and the parties have made progress in harmonization of a number of further economic integration and environmental protection matters.
MERCOSUR is the earliest example of the change in economic philosophy from protectionist to free trade. Its objective was not to encourage industrial development behind high tariff walls, known as import substitution industrialization, but to promote the concept of comparative advantage by encouraging each party to specialize in—and export—those goods that it could produce most efficiently. For this reason, MERCOSUR requires that parties keep their external tariffs—duties charged to non-parties—low so that the output of MERCOSUR countries will remain internationally competitive. As a result, we could not easily name an industry in which Brazil, Argentina, and, to a lesser extent, Paraguay and Uruguay did not have one or more of the leading companies. Brazil since 1994 has been the Latin American powerhouse on the other side of the table with the United States and Mexico determining Hemispheric trade policy.
In 1992 the northwestern states of South America—Venezuela, Colombia, Ecuador, Peru, and Bolivia—formed the free trade area now known as the Andean Community of Nations (CAN in Spanish), which is well on its way to becoming a customs union. There have been some false starts, and some setbacks, most notably Peru’s suspension from the pact for three years when it slid back into military rule, but the Andean Commission now is responsible for an increasing array of economic functions of the parties, including a judicial function for trade matters that has had a unifying effect. The recent bolting from the CAN of Venezuela under Hugo Chávez, and Bolivia’s threats to do the same following the election of Evo Morales, initially suggested a crumbling of the bloc. Chile’s quick movement to fill some of the gaps, the continuation of most business ventures that previously existed, and new trade ties with the United States by the remaining Andean states, however, support confidence in the continued strength of the CAN, even as Chávez transforms Venezuela from a democratic to an authoritarian populist state.
The Central American nations of Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, and Panama signed the treaty creating the Central American Common Market (MCCA in Spanish) in 1991. Panama has yet formally to ratify the pact, but the other MCCA parties nonetheless extend to Panama the reduced tariff benefits. The MCCA has been a model of the new economics underpinning Latin American trade agreements, because the FTA has increased significantly both trade flows among the parties and the region’s exports to the rest of the world.
(D) Regional Negotiating Blocs
Another phenomenon has multiplied the economic and political impacts of these regional trade arrangements. Once these basic FTAs were completed, the parties often negotiated as a unit in other free trade forums, both bilaterally and with other blocs, thus creating a dizzying array of interlocking economic structures, some more important than others. Mexico, Canada, and the United States, on the other hand, despite the commonality of their membership in the NAFTA, always negotiate as separate countries, never as part of a NAFTA bloc, which illustrates a major difference between the NAFTA and these other major Hemispheric agreements. The NAFTA parties seek no greater economic integration than reduction of trading barriers among themselves on all products and services. While this is an ambitious goal, to be sure, it is nonetheless substantially unlike the objective of full economic—and deeper—integration sought by the other FTAs in the Hemisphere.
For example, MCCA seeks the free movement of labor and a monetary union, both forbidden subjects in the North. Before we discuss the most ambitious regional negotiation of them all, we should examine the Hemispheric free trade loners. Chile, despite its negotiation of FTAs with the three parties to the NAFTA, did so one country at a time. Since withdrawing from the CAN in 1976, Chile has negotiated alone, despite its small size, a result of a very early opening of its markets and its reliance on trade as the engine of its impressive economic growth. Chile does not burn bridges, however, and has partially filled the chasm created by Venezuela’s apparent transfer under Hugo Chávez to MERCOSUR.21 In 2006 it accepted associate membership in the CAN, complementing its similar status in MERCOSUR that is shared by MERCOSUR’s other neighbors in the CAN.
(E) Cuba, the Noncountry
Then there is Cuba. Cuba exports many products successfully, such as sugar, cigars, rum, and citrus, but because of its long reliance for subsidies first on the United States until 1959 (sugar) and then the Soviet Union until 1993 (oil) and its unwillingness to embrace democratic principles along with the rest of the Americas (see chapter 13 on democracy), it has remained isolated economically. President Nestor Kirchner’s longtime relationship with Fidel Castro resulted in the signing of a modest FTA with Argentina, and Canada and Mexico have taken advantage of the vacuum created by the fifty-year economic embargo imposed by the United States (see section 14.6) by investing nearly two billion dollars there in recent years. The real story has been Venezuela’s enormous economic assistance under President Hugo Chávez in the form of subsidized oil, which Cuba then can resell for foreign exchange. Cuba thus has regained the lucrative trade in oil that it lost in 1991 when the Soviet Union stopped similar shipments, except that today the price of oil has skyrocketed to record heights.22
The powerful economic and political influence of the United States on Cuba that began with active U.S. engagement in Cuban affairs under the Monroe Doctrine in 1823 abruptly ended with Castro’s revolution in 1959. In fact, since the day in 1961 when the United States tossed the Monroe Doctrine into the Bay of Pigs, that relationship worsened with each new Castro undertaking. First, the United States eliminated Cuba’s sugar quotas and Castro responded by nationalizing agricultural property in his initial land reforms. The United States then refused to refine Russian crude after Castro tightened economic ties with the Soviet Union in the 1960s. The Helms-Burton law in 1996 initiated a virtual economic war as foreign investors started to take advantage of nationalized property once owned by Americans. Five facts seem to us incontrovertible.
First, despite Venezuela’s recent rescue efforts, Cuba is today in dire economic straits, and while the extent to which the U.S. embargo has contributed is unclear, we believe that normal trade relations with the United States would substantially help Cuba rebuild its economy and alleviate the suffering of its people. Second, insofar as the purpose of the embargo was to destabilize the Castro regime, it has failed. Third, its trading partners have never fully supported the tough policy of the United States toward Cuba. While the United States at one time garnered support from the Organization of American States (OAS), even that sympathetic nod ended nearly thirty years ago and for the last decade annual UN resolutions condemning the embargo have become the norm, with even the Vatican joining the chorus in 1998. Fourth, the rest of the world indeed is investing in Cuba. The total foreign direct investment anticipated as of 1997 was over $6 billion. Ironically, NAFTA partners Canada and Mexico plan the largest investments at over $1.8 billion apiece. Finally, the reasons espoused by the United States to justify the embargo gradually have lost credibility over time. Without downplaying the risk from terrorists, while the security threat of a Cuba-Soviet alliance was real, it is harder to argue today that any country should consider the debilitated Cuban government a danger. With the peaceful passing of the ruling baton in 2006 from Fidel to his brother and “enforcer,” Raúl Castro, the United States has even less reason to suppose that a continued embargo will accomplish any purpose but further the suffering of the Cuban people.23
Even the human rights justification often given by the U.S. government has lost some of its grip on the high ground in light of U.S. support for nondemocratic and oppressive—but anticommunist—regimes throughout Latin America and Asia, not to mention