By Maria F. Mata & Luis Rubio // Thursday, May 1, 2014
The Pacific Alliance was born more out of political necessity than economic need. However, once it began to take shape, the potential economic benefits that all its member nations could accrue became obvious. Hence, an interesting new development began to take shape. The Pacific Alliance is a work in progress but its anchors are stronger than one could surmise at first sight.
The context is important: Venezuela, with all the rhetorical capacity of its late leader Hugo Chavez and, needless to say, the financial backing of the country’s enormous oil reserves began prodding its neighbors to organize a common front against the American “threat”. The usual suspects quickly jumped on the Bolivarian Alliance for the Americas (ALBA) bandwagon: Nicaragua, Ecuador, Bolivia, Cuba and some Caribbean nations as well. Brazil and Argentina did not join but openly sympathized. Although there was little economic content to the alliance, other than Venezuelan subsidies in the form of cheap oil, the group picked up steam and forced others to react.
Mexico, Colombia, Peru and Chile began meeting. At the start, it appeared that their driving force was mostly political: becoming as much of a talking shop as ALBA was, but of economically liberal nations. However, as time went by, it became obvious that the Pacific Alliance had an enormous potential to serve the economic needs of its member countries by liberalizing their markets further and opening opportunities for all amongst themselves.
If one looks at the numbers, they tell the story of a relatively small enterprise: the Pacific Alliance represents a total trading volume of $555 billion in merchandise exports and $562 billion in imports, barely 48% of the total for the Latin American region. Although increasing trade among its member states was not the main factor behind the formation of the alliance (it was mainly created out of a necessity to counter Venezuela’s anti market liberalization initiatives in the region), it has evolved over time and now possesses a huge potential for becoming one of the world biggest free trade areas. Taken as a whole, the countries that integrate this network are equivalent to the eighth largest economy in the world and represent the seventh largest exporting entity in the world.
According to various reports, companies that operate in the region see the potential within the alliance to deliver enormous opportunities, primarily due to economies of scale: a car produced in Chile could sell in Mexico and be treated as if it were Mexican, and vice versa. Eliminating trade barriers, the oldest trick in the post-second world war economic toolbox, keeps creating opportunities.
Beyond the long-term opportunities that might hover, the really transcendent factor in this region today is less about the level of trade amongst these nations than about the amount of trade that each of these nations carries out with the U.S. Total trade within the Alliance plus the trade of the Alliance members with the U.S. constitutes 70% of Latin America’s total trade ($318 billion in exports to the U.S. and $260.4 billion in imports).
The creation of the Alliance, and the similarity in economic philosophy that inspires the countries that comprise it, is leading to the development of new trade patterns among their members. The key element at present is the “hub and spoke” phenomenon with the U.S., but anecdotal evidence suggests that joint ventures are beginning to take hold and could end up creating an extremely vital and active trading zone, even more so as the Trans-Pacific Partnership (TPP) advances. The TPP could further boost the Alliance’s potential, as it would create a much stronger and more efficient region in the American Hemisphere.
The Pacific Alliance is integrated by 4 of the 7 most dynamic Latin American economies: Mexico, Colombia, Chile, and Peru. As an economic block, they represent 36% of the Latin American population (216 million people) and 36% of the region’s GDP (about $2 trillion). All countries within the bloc have maintained high economic stability and also demonstrated their potential for market expansion.
The Alliance has competitive advantages and favorable business conditions for investment, particularly in the mining, energy, agriculture, automotive, fishing, and manufacturing sectors. It is composed of a group of countries with strong democratic institutional structures that can benefit from trade and foreign investment, particularly from the United States. In other words, the Alliance represents the political and economic shared interests between these countries and the United States. In 2012, the block represented 3/4 of the Latin American exports of goods to the U.S. One example of the Alliance’s trade potential is the unique comparative advantage of each member of the bloc. A great example of this would be Chilean vineyards utilizing Mexican fertilizer, bottling the wine in Colombian glass bottles, corking the bottles and labeling them in Peru. The Alliance provides the opportunity to take advantage of each country’s enormous economic potential to develop a more efficient productive system with less expensive goods.
In addition to the promotion of high economic growth based on free trade, the Alliance intends to foster social and educational development. Cooperation amongst these four countries encourages the free mobility of their nationals, the creation of scientific and academic networks, student exchange, and cultural promotion. An example of this initiative of free travel is the elimination of visa requirements for Colombians and Peruvians traveling to Mexico.
In addition to the macro-economic success and huge commercial potential of these four countries, their economic stability also represents an improvement of their citizens’ wellbeing. Mexico, Colombia, Peru and Chile have an increasing spending capacity and some of the lowest inflation rates in Latin America (3.2% average rate), which can help combat poverty and reduce inequality. These countries’ ability to attract one fourth of the foreign direct investment in the region and to create new sources of employment have contributed to a relatively low intra-bloc unemployment rate of 7.6%. In other words, the Trans-Pacific Alliance also has an enormous socio-economic development potential that may increase prosperity, social wellness, and help strengthen the capacity of democracy. More importantly, the Alliance might serve as an example of free trade and provide the initiative for an expanded regional trade area.
Maria F. Mata is a research assistant at the Woodrow Wilson International Center for Scholars and has extensive experience with U.S policies towards Latin America, immigration, and socio-demographic studies in the the region. Luis Rubio is Chairman of CIDAC (Center of Research for Development), an independent research institution devoted to the study of economic and political policy issues
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