Trade Networks in Latin America

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TRADE NETWORKS

IN LATIN AMERICA

PROJECT FILE

SUBMITTED TO: BY:

PROF. AJAI PRAKASH MOHD REHAN

DEPT. OF BUSS. ADMIN. MBA-IInd SEM.

UNIVERSITY OF LUCKNOW SEC -A

ROLL NO.-28

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ACKNOWLEDGEMENT

The present project has been prepared by expressing the detailson the topic of Trade Networks in Latin America.

Lots of efforts have been made in order to expressthe details in lucid manner, the subject matter has been addedwith pictures and charts for making the matter more interestingand easy to understand.

I would like to acknowledge and extend my heartfelt gratitude tomy teacher Mr.Ajai Prakash for his valuable suggestions and

guidance in completion of this project. Also, a very special thanksto my brother and my father for their help and without whom this

project would not have been possible.

Thank YouMohd Rehan

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CONTENTS

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INTRODUCTION

The growth of regional trade blocs has been one of the majordevelopments in international relations in recent years. Virtuallyall countries are members of a bloc, and many belong to morethan one. Over a third of world trade takes place within suchagreementsnearly two-thirds, if Asia-Pacific EconomicCooperation (APEC) is included. Regional agreements vary widely,

but all have the objective of reducing barriers to trade betweenmember countrieswhich implies discrimination against tradewith other countries. At their simplest, these agreements merelyremove tariffs on intrabloc trade in goods, but many go beyondthat to cover nontariff barriers and to extendliberalization to investment and other policies. At their deepest,they have the goal of economic union and involve theconstruction of shared executive, judicial, and legislativeinstitutions.

Latin America is no exception to it and it also has various tradenetworks.Regional trade agreements have had a significantpresence in the design of international and productive policies inLatin American countries since the early 1950s.Some of the important regional trade networks within LatinAmetica are LAIA, MERCOSUR, ANCOM, UNASUR.

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Economic Integration

Economic integrationis the unification of economic policiesbetween different states through the partial or full abolition oftariff and non-tariff restrictions on trade taking place among themprior to their integration. This is meant in turn to lead to lowerprices for distributors and consumers with the goal of increasingthe combined economic productivity of the states.

There are economic and well as political reasons why nations

pursue economic integration. The economic rationale for theincrease of trade between member states of economic unions thatit is meant to lead to higherproductivity.This is one of the

reasons for the global scale development of economic integration.There are four basic types of regional economic integration-

Free trade area

A free-trade area is atrade blocwhose member countries

have signed a free-trade agreement(FTA), whicheliminatestariffs,import quotas,and preferences on most (ifnot all)goodsand services traded between them. If peopleare also free to move between the countries, in addition toFTA, it would also be considered anopen border. It can beconsidered the second stage ofeconomic integration.Countries choose this kind of economic integration if theireconomical structures are complementary. If theireconomical structures are competitive, it is likely there will

be no incentive for a FTA, or only selected areas of goodsand services will be covered to fulfill the economicinterestsbetween the twosignatoriesof FTA.

Customs union

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A customs unionis a type oftrade blocwhich is composedof afree trade areawith acommon external tariff. Theparticipant countries set up commonexternal tradepolicy,but in some cases they use different importquotas.

Purposes for establishing a customs union normally includeincreasingeconomic efficiencyand establishing closerpolitical and cultural ties between the member countries.

Common market

A Common marketis a type oftrade blocwhich iscomposed of afree trade area(forgoods) with commonpolicies on product regulation, andfreedom of movementof

thefactors of production(capitalandlabour) andof enterpriseandservices.The goal is that the movement ofcapital, labour, goods, and services between the members is aseasy as within them.[1]The physical (borders), technical(standards) and fiscal (taxes) barriers among the memberstates are removed to the maximum extent possible. Thesebarriers obstruct the freedom of movement of the four factorsof production.

Economic unionAn economic unionis a type oftrade blocwhich is

composed of acommon marketwith acustoms union.Theparticipant countries have both common policies on productregulation,freedom of movementofgoods,servicesandthefactors of production(capitalandlabour) and acommon external tradepolicy.The countries often share acommon currency.

Purposes for establishing an economic union normally includeincreasingeconomic efficiencyand establishing closer political andcultural ties between the member countries.

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History of Latin American Trade

The backbone of Latin America basic economy in the 1700'swas its part in the Atlantic Slave Trade and Triangular Trade,African slaves

Between 1700 and 1800 was the highest import of Africanslaves. The Triangular/Atlantic slave trade was where Africanslaves were exported to Latin America, where the rawmaterials and crops produced would be exported, throughSpain, to the world, and finished luxury products would beexported from Europe to Latin America. Seven million

African slaves arrived in Latin America. Brought by theEuropeans in exchange for crops, these innocent andseverely abused people were forced to work in agriculturefor the most part. This cycle would last all the way into themid 1800s.

Latin Americas trade and economy grew very slowly. Earlydiscoveries of gold and silver production created the firstbasis of its economy. Mining of raw materials, metals, andespecially silver would remain a huge source of Latin

Americas trade and exports. The mines were usually startedby private investors and companies, but backed bygovernments, primarily Spain. Mexico and Peru were thesites of huge silver mines which would continue to flow foryears and years to come. The influx and import of so muchsilver would lead to higher prices and inflation in first Spainand later all of Europe. Silver mining/exports would make upmore than 2/3 of Latin Americas economy, trade, andincome.

Sugar and cacao were two of the biggest major cropsexported, but sugar was the ultimate largest. Sugarplantations would be and were set up from the verybeginning of foreign investing, exploration, and discovery inLatin America. Sugar would also continue to be the majortrade crop and economic booster and boom for Latin

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American nations and would continue to be a huge part,even into present day.

They came completely dependent on others trading themresources because they could not industrialize. But with an

extreme demand for Latin American products around theworld, they were able to survive. The U.S. though set up the Monroe Doctrine stating that no

other countries could intrude in Latin American affairs or tryany colonization. The U.S. was trying to cut off LatinAmerica from the rest of the world and leaving LatinAmericas resources, goods, and markets to them.Foreigners wanted the resources, though, and beganinvestments, which helped Latin America immensely. Latin

American economies were expanding due to exports. Eachcountry seemed to have specialties. For example, bananasand coffee from Central America, tobacco and sugar fromCuba, and rubber and coffee from Brazil.

Because of the rapidly expanding economy and trade, therewas a large interest from foreign investors from the majorpowers, the British, French, German, and U.S. Theseinvestors helped the Latin American economy, but werelessening their independence. Much of Latin America began

to industrialize. Foreign investments were encouraged andpolicies were changed to help promote investments as well.

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Regional networks present in

Latin America

Various regional trade networks in Latin America are-:

LAIA Latin American Integration Association MERCOSUR Andean Community of Nations (ANCOM) Bolivarian Alternative to Latin America and the

Caribbean (known by its Spanish acronym ALBA) /Peoples Trade Agreement

UNASUR -The Union of South-American Nations The G-3

ALADI/LAIA(Latin American IntegrationAssociation)

Members- Argentina, Bolivia,Brazil, Chile, Colombia, Cuba,Ecuador, Mexico,Nicargua,Panama,Paraguay, Peru,Uruguay and Venezuela.

Secretary General-Carlos lvarez

Established-Treaty ofMontevideo(12 August 1980)

The failure of LAFTA led most leaders in Latin America (especiallyin Brazil and Argentina) to start pushing for a reformulation oftheir regional integration strategies.This led to the negotiation ofa new Treaty of Montevideo in 1980. The outcome was the

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creation of the Latin American Integration Agreement (LAIA). Thenew agreement was believed to be more flexible and pragmatic interms of regional integration instruments.

(LAIA), organization formed in 1980 by Argentina, Bolivia,

Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru,Uruguay, and Venezuela, taking over the duties of the LatinAmerican Free Trade Association (LAFTA), which had beencreated in 1960 to establish a common market for itsmember nations through progressive tariff reductions untilthe elimination of tariff barriers by 1973. In 1969 thedeadline was extended until 1980, at which time the planwas scrapped and the new organization, LAIA, created bythe Treaty of Montevideo. It has the more limited goal of

encouraging free trade, with no deadline for the institutionof a common market. LAIA created the Free Trade Space,aiming at facilitating market access, the adoption ofcommon norms and disciplines, and provide support to lessdeveloped member-countries. Economic hardship inArgentina, Brazil, and many other member nations hasmade LAIAs task difficult. The associations headquartersare in Montevideo, Uruguay.

Working of LAIA/ALADIThe ALADI promotes the creation of an area of economicpreferences in the region, aiming at a Latin American commonmarket, through three mechanisms:

Regional tariff preference granted to products originating in themember countries, based on the tariffs in force for thirdcountries

Regional scope agreement, among member countries Partial scope agreements, between two or more countries of

the area

Either regional or partial scope agreements may cover tariff reliefand trade promotion; economic complementation; agriculturaltrade; financial, fiscal, customs and health cooperation;

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environmental conservation; scientific and technologicalcooperation; tourism promotion; technical standards and manyother fields. As the Montevideo Treaty is aframework treaty, bysubscribing to it, the governments of the member countries

authorize their representatives to legislate through agreementson the economic issues of greatest importance to each country.

A system of preferences which consists of market opening lists,special cooperation programs (business rounds, preinvestment,financing, technological support) and countervailing measures onbehalf of the landlocked countries has been granted to thecountries deemed to be less developed (Bolivia, Ecuador andParaguay), to favour their full participation in the integration

process. As the institutional and normativeumbrellaof regionalintegration that shelters these agreements as well as thesubregional ones (Andean Community,MERCOSUR,G-3 FreeTrade Agreement,Bolivarian Alternative for the Americas, etc.)the Association aims to support every effort to create a commoneconomic area.

WHY LAFTA FAILED

The reasons for the failure of LAFTA were:-

LAFTA was not accepted with great enthusiasm by smallercountries, such as Colombia and Chile, which claimed that LAFTAmainly benefited the BigThree (Mexico, Argentina and Brazil).

The lack of interest in a larger, competitive market among thelargest industrial groups in Argentina, Mexico and Brazil.10Characteristically, while representatives of the private sector fromthese countries were sent to negotiate the creation of a commonprivate sector, at the same time, ironically, their government

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were engaged in strong competition among themselves to attractForeign Direct Investments (FDI) from Europe and USA.

Internal conflicts existed. Economic and political instability was

actually a significant disadvantage for the promotion of a possibleregional cooperation. The democratic gap that pre-existed andwas increased by the establishment of military dictatorshipsthroughout the continent during the 1970s was, in fact, a poorpartner in promoting regional integration, considering at thesame time the overlapping interests of Latin American countries.The outcome was that the objective of a free trade area nevermaterialized. It was partly defeated by extremely awkward andunfruitful tariff reduction negotiations. Economic stagnation due

to demands of exceptions in combination with continuedprotectionism against third countries was the main characteristicof Latin America.

MERCOSUR(Common Market of

the South)

Members-Argentina, Brazil, Paraguay,Uruguay,Venezuela.Established-Treaty of Asuncin(26 March 1991)Presidency-Uruguay

On 26 March 1991, Argentina, Brazil, Paraguay and Uruguaysigned the Treaty of Asuncion, establishing Mercosur, anddeclaring the aim of constituting a commonmarket by 31December 1994 (Article I). At that time, most Latin Americancountries were engaged in switching development strategies from

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import substitution to export orientation. Within the Treaty, fourspecial goals were outlined, setting the framework of theinitiative:a) establishing the free circulation of goods, services and factors

of productionb) adopting a common tariff and trade policyc) coordinating macroeconomic and sectoral policies andd) harmonising domestic legislation.

Mercosur has opted for remaining an inter-governmentalexercise, instead of creating a supranational structure, as in theEuropean Union and in other integration exercises in the region.This has, of course, costs and benefits. Among the former, the

low degree of implementation of the common rules in Mercosur isoften related to the lack of supranational entities that mightimpose higher degree of discipline. The benefits of the inter-governmental model, on the other hand, stem from its relativeflexibility: in several critical situations this lack of institutionalrigidity has allowed for changes in the negotiating process.MERCOSUR has signed some 17 agreements, most of them in theperiod 2004-06. Not all of these agreements comprise tradepreferences. Some are only base-agreements with generic

objectives and common purposes. But the total number ofagreements mirrors the global trader perspective adopted byMERCOSUR since its early days.

Associate Members Chile Bolivia Colombia Ecuador Peru

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MERCOSUR Trade

Intra-Mercosur merchandise trade (excluding Venezuela)grew from US$10 billion at the inception of the trade bloc in

1991 to US$88 billion in 2010; Brazil and Argentina eachaccounted for 43% of this total. The trade balance within thebloc has historically been tilted toward Brazil, whichrecorded an intra-Mercosur balance of over US$5 billion in2010. Trade within Mercosur amounted to only 16% of thefour countries' total merchandise trade in 2010, however;trade with theEuropean Union(20%),China(14%), and

theUnited States(11%) was of comparableimportanceExports from the bloc are highly diversified, andinclude a variety of agricultural, industrial, and energygoods. Merchandise trade with the rest of the world in 2010resulted in a surplus for Mercosur of nearly US$7

billion;trade in services,however, was in deficit by overUS$28 billion. The EU and China maintained a nearlybalanced merchandise trade with Mercosur in 2010, whilethe United States reaped a surplus of over US$14 billion;Mercosur, in turn, earned significant surpluses (over US$4billion each in 2010) in its trade withChileandVenezuela. The latter became a full member in 2012.

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Andean Community of

Nations (CAN)

Members-Bolivia, Colombia, Ecuadorand Peru.

Associate members-Chile,Argentina,Brazil, Paraguay and Uruguay.Established-as the Andean Pact(1969)

Secretary General-A. ContrerasBaspineiro

The Andean Communityis a customsunion comprising theSouthAmericancountriesof Bolivia,Colombia,EcuadorandPeru.The trade bloc was calledthe Andean Pactuntil 1996 and came into existence with the

signing of the Cartagena Agreementin 1969. Its headquartersare located inLima,Peru.

The Andean Community has 98 million inhabitants living in anarea of 4,700,000 square kilometers, whoseGross DomesticProductamounted to US$745.3 billion in 2005, includingVenezuela, (who was a member at that time). Its estimated GDPPPP for 2011 amounts to US$902.86 billion, excluding Venezuela.

Objectives

Promote the Member Countries balanced and harmonious

development under equitable conditions through integrationand economic and social cooperation.

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Step-up their growth and job creation Facilitate their participation in the regional integration

process, with a view to the gradual formation of a LatinAmerican common market.

Reinforce subregional solidarity and reduce differences in

development among the Member Countries. Seek the continuing improvement of the living standards of

the subregions inhabitants.

Areas of action

Social and Political area: The objective is to contribute tonational efforts to overcome poverty, exclusion, inequality andasymmetries by promoting civil society participation and boostingactions to deepen political cooperation, among others. Itsprograms are: Social Development, Food Security and RegionalDevelopment, Migration and Labor, Civil Society, Communicationand Culture and Political Affairs.

Environment area:An Andean Environmental Agenda

comprising subregional actions to promote sustainabledevelopment is being implemented as a way of respondingeffectively to global threats to the environment. Programs:Climate Change, Biodiversity, Water and Disasters

External Relations: The CANs joint external projection withinthe framework of its Common Foreign Policy (CFP) reinforces theMember Countriesnegotiating capacity and is conducive to theirplaying a more important role within the dynamic international

context. Its programs are: Latin America and the Caribbean,European Union and Other Countries and Organizations

Economic and Trade Area: The aim is to consolidate theenlarged market in order to guarantee the unhampered flow ofgoods and services within the subregion and to contribute to jobcreation. Its programs are: Goods, Macroeconomics, Small and

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Medium Enterprises (SMEs), Services, Investment andIntellectual Property

Institucional Area: The purpose is to achieve an efficient

management of the integration process by means of programsthat address the General Secretariats other work areas. Itsprograms are: Legal Counseling, Andean Integration System,Statistics, Technical Cooperation, Administration, InformationTechnology, Institutional Services.

Intraregional Trade (Exports + Imports/GDP), 2000-2010

Source: ECLAC (2012).

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Bolivarian Alternative to

Latin America and the

Caribbean(ALBA)

Members-Cuba, Venezuela, Bolivia, Ecuador,Nicaragua, Dominica, St Vincent and the Grenadines, Antigua andBarbuda.

Established-CubaVenezuela Agreement(14 December 2004)

The Bolivarian Alternative is an initiative led by Venezuela andCuba, as an alternative to the FTAA negotiations. In December2004 these two countries signed a bilateral agreement. In April2006 Bolivia joined in the Peoples Trade Agreement, and inJanuary 2007 Nicaragua joined in.Observer members are: Antigua & Barbuda, Dominica, Ecuador,Haiti, Honduras, St Kitt & Nevis, St Vincent & Grenadines andUruguay.The Peoples Trade Agreement comprises trade facilities and

complementarities in the energy sector. In January 2008 theALBA Bank was created, adding a new dimension to the initiative.

From January 2010, member nations also agreed use a newcurrency dubbed the sucre for trade among themselves.

Although no sucres will be printed or coined, the virtual currencywill be used as a common currency for electronic transactions tomanage debts between governments while reducing reliance onthe US dollar and on Washington in general.

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Union of South

American Nations

(UNASUR)

Members-Argentina,Bolivia,Brazil,Chile,Colombia,Ecuador,Guyana,PeruParaguay,Suriname,Uruguay, and Venezuela.

Established-Cusco Declaration(8 December 2004)

President-Ollanta HumalaSecretary General-Al Rodrguez Araque

MERCOSUR and the Andean Community signed in 2004 a freetrade agreement which, together with Chile, Guyana andSuriname shall lead to the formation of a South-American Unionof Nations . It was originally (until 2007) called South-AmericanCommunity of Nations (CASA in its acronym in both Spanish andPortuguese). Its members are Argentina, Bolivia, Brazil, Chile,Colombia, Ecuador, Guyana, Suriname, Paraguay, Peru, Uruguayand Venezuela. Headquarters are to be located in Quito, Ecuadorand the Unasur Treaty is to be initiated by June, 2008.

The goal is to gradually form a free trade area in South America,as well as to provide economic complementarities amongcountries in the region. UNASUR represents a new model ofregionalism, not focused predominantly on trade issues. Itsagenda comprises other issues, such as energy integration andinfrastructure, as well as social and cultural themes. Togetherwith LAIA, these are the two integration schemes that compriseall South American countries.

Current work in progress

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Electoral monitors- UNASUR has also initiated the creationof electoral monitor teamsthat could replace the monitorsfrom the OAS.

Single market-One of the initiatives of UNASUR is thecreation of asingle market,beginning with the elimination oftariffs for non-sensitive products by 2014, and for sensitiveproducts by 2019.

Economic development- Presidents of the seven foundingcountries (Argentina, Bolivia, Brazil, Ecuador, Paraguay,Venezuela and Uruguay) officially launched the SouthAmerican Bank in Buenos Aires in December 2007. Thecapital will be US$7b, with Venezuela responsible for US$3band Brazil US$2b. TheBank of the Southwill finance

economic development projects to improve localcompetitiveness and to promote the scientific andtechnological development of the member states.

Infrastructure cooperation-UNASUR started plans ofintegration through infrastructure cooperation with theconstruction of theInteroceanic Highway,a road thatintends to more firmly link the Pacific Coast countries,especiallyChileandPeruwith Brazil andArgentinaby

extending highways through the continent, allowing betterconnections to ports from Bolivia and the inner parts ofArgentina, Peru, and Brazil. The first corridor, between Peruand Brazil, began construction in September 2005, financed60% by Brazil and 40% by Peru, was expected to be readyby the end of 2009.

Free movement of peoples-Citizens of any Mercosurcountries will have a simplified process in temporaryresidence visa of up to 2 years in any other membercountries, with the requirements of a validpassport,birthcertificate,and no criminal record. Temporary residence canbecome permanent if a licit means of living can be verified.

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The G-3

Members- Colombia,Mexico,

andVenezuela

The G-3 is afree tradeagreement betweenColombia,Mexico,andVenezuelathat came into effect on January 1, 1995, whichcreated an extended market of 149 million consumers with acombined GDP (Gross domestic product) ofUS$486.5 billion.The agreement states a ten percenttariffreduction over tenyears (starting in 1995) for the trade of goods and services

among its members. The agreement is a third generation one,not limited to liberalizing trade, but includes issues such asinvestment,services,government purchases, regulations tofight unfair competition, andintellectual propertyrights.The relative importance of the group has never been tooremarkable: by 2003 intra-regional exports in relation to totalexports corresponded to some 28% in Colombia (basically itsbilateral trade with Venezuela), 3% for Mexico and 13% forVenezuela. Venezuela decided to abandon the group on the

second semester of 2006, at the same time of its withdrawalfrom ANCOM, so the group was dismantled.

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Benefits of Regional networks in Latin America

the strengthening oftradeintegration in the region the creation of an appropriate enabling environment

for private sectordevelopment the development ofinfrastructureprogrammes in support

of economic growthand regional integration the development of strongpublic sectorinstitutions

andgood governance; the reduction ofsocial exclusionand the development of an

inclusivecivil society contribution to peace and security in the region the building ofenvironmentprogrammes at the regional

level the strengthening of the regions interaction with other

regions of the world.

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CONCLUSION

Latin America is witnessing an exponential growth with rise inregional integration of business houses. The resource-rich natureof most Latin American economies has led to an inwardconcentration of investment, which makes it an extremelyinteresting prospect for investors across the globe.

But still there are certain problem that are existing in LatinAmerica such as there is a lack of clarity in many countries with

regard to what can be expected from regional integration, asdifferent from alternative negotiations.

The potential of economic growth for Latin America is enormousbut it need to sort out its mutual problems and conflicts betweenthe countries in order to realize the goal of economic prosperityand to have a dominant position in the world economy.

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BIBLIOGRAPHY

BOOKS

Daniels,JD., International Business Environments and

OperationsSecond Edition

LINKS AND WEBSITES

http://www.comunidadandina.org

www.google.com

wikipedia

www.eclac.cl

http://www.iadb.org

www.mercosur.int