U.S. State Department Geographic Bureaus: Latin America Bureau

U.S. Department of State
95/10/25 Testimony: Alexander Watson on Trade in Latin America
Bureau of Inter-American Affairs

Statement of Alexander F. Watson
Assistant Secretary of State for Inter-American Affairs
before the Subcommittees on the Western Hemisphere
and International Economic Policy and Trade,
U.S. House of Representatives,
October 25, 1995

Trade Issues Regarding Chile and Other Latin American
Countries in Light of the NAFTA Experience

INTRODUCTION

This is a time of unparalleled progress and hope for our hemisphere. The emergence of Latin America and the Caribbean as solidly democratic and committed to market economics offers the United States unprecedented opportunities: to protect our national security, to pursue our economic interests, and to strengthen cooperation on a whole range of vital transnational interests -- like narcotics, immigration and the environment. These are issues which can have a profound impact on the day-to-day well-being of U.S. citizens.

Last December's Summit of the Americas consolidated the new convergence of values between the U.S. and Latin America, and set out an ambitious action plan. It is no accident that the commitment to negotiate a Free Trade Area of the Americas (FTAA) by the year 2005 was the centerpiece of the Summit. The FTAA caught the imagination of the hemisphere not only because it will bring its participants higher economic growth but also because it symbolizes the new common philosophy of the hemisphere -- of free enterprise, competition and efficiency; of decision-making by markets not governments; of growth and opportunity, rather than centralized government planning. It is also the philosophy which most powerfully supports the profound democratic and social transformations now underway in Latin America.

As President Clinton said when he hosted President Zedillo: "The stronger our trade, the greater the well-being of all of our people. The deeper our cooperation, the better we will be able to fight together our common problems."

LATIN AMERICAN TRADE: IMPORTANT TO U.S. INTERESTS

The U.S. has far more to gain than to lose from a mutual opening of markets in the hemisphere.

Latin America and the Caribbean is already a huge market for the U.S., to which we export almost as much as to the European Union ($89 vs. $96 billion).

It's a fast-growing market. From 1990-1994, U.S. exports to the region increased by $36 billion. During that same period, our exports to the European Union increased by $3 billion, to Japan by $5 billion, to China by $4 billion.

It's a good partner. The commitment to market-based economic reforms remains strong throughout the hemisphere, as shown by the region's reactions to the Mexican peso crisis, which were to deepen reforms, not abandon them. The region's economic fundamentals are growing stronger, with a solid growth outlook, declining inflation, and far greater ability to service debt. More than any other region of the world, it is oriented toward the U.S., buying over 40% of its imports from us. Economic growth and trade liberalization clearly benefit the commercial interests of the U.S.

It has moved far toward open markets, with potential for more. Whereas tariffs of the major Latin American countries averaged close to 50% in 1985, they are now in the teens. Despite this dramatic liberalization, Latin American tariffs are still about four times higher than our own. We clearly have a major interest in moving the liberalization process further.

TRADE LIBERALIZATION: GOOD FOR THE HEMISPHERE

For all of the points noted above, the Administration remains convinced that seeking closer economic ties not only with Mexico, but throughout the hemisphere is in our deepest national interest.

The movement to freer trade is now at a point which requires our active engagement. Latin America has unilaterally lowered its trade barriers to roughly a quarter of what they were ten years ago. Further liberalization, however, almost certainly will take place primarily through international negotiation, rather than by unilateral government decisions.

Latin American and Caribbean countries are moving quickly in forming sub-regional integration arrangements, which now cover virtually every country in the hemisphere. These arrangements generally provide for free trade among their participants, with a common external tariff (typically ranging between 5-20%) to non-participants. Thus, moving toward the larger goal of hemisphere-wide free trade would help to reduce tariffs in Latin American and Caribbean markets.

Remember too, that we are not the only actors in the drama. In addition to the momentum of sub-regional integration, Latin America is forming links outside the hemisphere, with APEC (Asian-Pacific Economic Cooperation) and with the European Union. For example, the EU last month initialed a framework agreement on trade with MERCOSUR, scheduled to be signed before the end of the year. Absent U.S. leadership in structuring a liberalization process, the balance of interest and commitment in Latin America may well start to shift away from us.

NAFTA: IT'S WORKING FOR MEXICO AND FOR THE U.S.

The negotiation of NAFTA marked an important milestone in our relationship with Mexico. It locked in Mexico's commitment to liberal economic reform, increased levels of environmental protection, and ensured that open markets would promote economic growth and employment throughout North America.

Despite continued criticism by some, NAFTA has already proven its worth during Mexico's current economic difficulties. Our overall level of exports is still above pre-NAFTA levels, with every expectation of renewed growth as the Mexican economy rebounds further. U.S. exporters have actually increased their share of the Mexican import market this year from 70% to 73%.

Exports of U.S. goods and services have unparalleled access to Mexico despite Mexico's current recession. Indeed, U.S. exporters' privileged position in the Mexican market has strengthened as Mexico raised tariffs on some imports from third countries. That position will continue to strengthen as Mexico's barriers to its NAFTA partners are phased out in accordance with NAFTA's schedule.

Some have argued that Mexico's current economic problems are the result of NAFTA. That is patently untrue. Mexico's difficulties resulted from a series of political events and its government's macroeconomic policy decisions last year -- not from NAFTA. In fact, the restructuring of the Mexican economy along market-oriented lines, which was reinforced and consolidated by NAFTA, has made it easier for Mexico to rebalance its international accounts and thus more quickly re- establish the conditions for a return to growth.

I know that there has been a lot of concern recently about our trade with Mexico. As Mexico returns to growth and continues to open its market in response to NAFTA, it is reasonable to assume that our exports to Mexico will rebound.

Nor is it reasonable to blame NAFTA for huge job losses in the U.S. economy. Since NAFTA was implemented, overall U.S. employment has increased 4.6 million, and U.S. wages have also increased in real terms.

In sum, NAFTA has been positive for both the U.S. and Mexico. NAFTA not only protects U.S. exporters but ensures continued improvement in their access to the Mexican market. The market-based reforms locked in by NAFTA are restoring investor confidence in Mexico and have already allowed Mexico to return to the financial markets in seven months, rather than the seven years it took to recover from the 1982 crisis. NAFTA is helping to rebuild the conditions for Mexico's growth, which is strongly in the interest of both Mexico and the U.S.

CHILEAN ACCESSION: GOOD FOR THE U.S. AND THE HEMISPHERE

Chile is an example of the rewards of democratic and market- oriented policies. It has one of the most open trading and investment regimes in the world. International investors have shown their confidence in Chile's prospects by their willingness to invest their money there. Its record of high growth and social innovation is admired and studied throughout the world. Its commitment to human rights is clear and strong.

It was President Bush who first committed the United States to negotiate free trade with Chile during President Aylwin's May 1992 state visit. President Clinton enthusiastically endorsed this policy because of Chile's success not only in economic policy but also in returning to democracy. At the Miami Summit last December President Clinton joined his NAFTA colleagues in formally inviting Chile to join NAFTA. The discussions among the "Four Amigos" to date have been promising. We have exchanged information about each other's trade and investment regimes and have begun to identify focal points for negotiation.

Although passage of fast-track legislation has been delayed, we and our NAFTA partners hope to continue discussions with Chile. Given the strong common beliefs between the U.S. and Chile on both economic and political issues, we expect to continue close cooperation both bilaterally and multilaterally.

Some have questioned why the U.S. should choose Chile as the next NAFTA member, given its relatively small size. First, let me note that while Chile is certainly not a huge market for the U.S., neither is it insignificant. Last year, we sold more to Chile's 14 million people than we did to India's 920 million.

Second, this is a country which is well prepared to enter into and fulfill the commitments of the NAFTA. Its twelve-year record of economic stability and unbroken high growth -- with low unemployment, low inflation, and decreasing poverty -- gives us confidence in its economic policy leadership. The prospect of long-term sustained growth is high given its remarkably high savings and investment rates, and its pioneering commitment to privatization, including its very successful privatization of the social security system.

Finally, in light of Chile's remarkable achievements, Chile's entry into NAFTA would not only demonstrate U.S. support for political and economic reform in the hemisphere, but would also encourage a higher level of trade discipline throughout the hemisphere. Chile is the logical next step as we pursue the Free Trade Area of the Americas.

CONCLUSION

As I noted previously, economic reform and growth in Latin America and the Caribbean are of major importance to the U.S. economy. We have a very broad spectrum of interests, ranging from democracy, to prosperity, to the environment. Almost every problem which confronts U.S. communities today -- crime, drugs, jobs, the environment, to name just a few -- has some transnational aspect. The question before us is not whether to cooperate with our neighbors, but how to structure that cooperation most effectively.

Trade is a crucial part of our relationship with Latin America and the Caribbean. The goal of hemispheric free trade has been accepted by the entire hemisphere, with the unique exception of Cuba. The reforming leaders of the hemisphere have promised their people a better future based on democratic political systems, market-oriented economies, and cooperation with the U.S. Credible movement by the U.S. toward the FTAA is needed to support the political and economic transformations underway in Latin America and the Caribbean. The FTAA will clearly benefit U.S. commercial interests. But it is far more than just a trade initiative. It symbolizes the new relationship between the U.S. and Latin America as equal partners with common values and practical means of cooperation to achieve common goals.

The vision sketched by our leaders in Miami last December was a hemisphere of peace, prosperity and cooperation. Let us move vigorously toward it.

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