Puebla - Moment of Truth for FTAA

The most sensitive point in the FTAA negotiations, which get underway Monday in this Mexican city, is defining the timeline for the liberalization of the markets of the Americas.

MEXICO CITY - The final phase of negotiations to create the Free Trade Area of the Americas (FTAA) begin Mar 17 in the Mexican city of Puebla with the major issues of dissent still pending, despite hundreds of assessments, more than 600 days of commission meetings and two drafts of the trade treaty itself.

But although there is a long way to go to achieve consensus on key points, it is highly probably that the final agreement will be adjusted to the positions of the U.S. delegation, given the implicit bilateralism of the process, which since the beginning has promoted separate relations of each country with the United States.

Perhaps the most sensitive point on the Puebla agenda of negotiations, which are to last until the end of 2004 with the FTAA slated to enter into force in 2005, is the definition of the timeline for liberalizing tariffs throughout the western hemisphere.

The United States says there should be three phases (immediate, five and 10 years), with a substantial reduction in tariffs at the end of the first five years. Most countries of Latin America, however, are pushing for 10 years or more for the elimination of tariffs.

The disagreement is based on the difference between the average tariffs on U.S. imports (1.1 percent for imports from Latin America) and the 25 economies of Latin America and the Caribbean that are considered small, where tariffs average 10 percent and represent 20 to 60 percent of fiscal revenues.

Despite the risks of making Latin American industries vulnerable and of exacerbating fiscal imbalances in the region, the calendar will not vary much from the U.S. proposal.

The FTAA was designed in such a way that tariff liberalization is the essence of the project. It is also one of the top priorities of the United States.

An extended timeline would not be desirable because it would not offer many trade advantages over the agreements of the World Trade Organization (WTO), where global negotiations are occurring in parallel to the FTAA. And any advantages would quickly dissipate.

In the tension-filled agricultural chapter of the FTAA talks, dissent is concentrated in three themes: farm subsidies within the western hemisphere, the subsidized products of countries outside the region, and treatment of sensitive farm sectors.

The most important, undoubtedly, is the matter of farm subsidies. The United States (which spends 0.9 percent of its gross domestic product on subsidies) and Brazil (a leading exporter of the same products that the United States protects on its own market) maintain opposing stances on the issue.

Although Brazil and other countries have conditioned their participation in the FTAA on the eradication of subsidies, it is unlikely that they will be able to prevent the dispute from being passed on to the WTO, as the United States is asking, for various reasons.

First, because of the opposition of U.S. lobby groups, especially in the southern state of Florida, upset by the liberalization of U.S. agriculture in general.

Second, because of the global implications of the subsidies. Although the United States subsidizes 23 percent of its farm sector, the level in the European Union is 40 percent and in Japan 60 percent. Washington will not want to take to the WTO a concession on subsidies in the hemispheric arena until Europe does likewise.

And thirdly, because the negotiating capacity of Brazil -- which is important because of its enormous economy and its role in achieving consensus (it is co-chair with the United States of the final phase of the FTAA talks -- has an Achilles heel: Brazil's only option if the United States rejects the elimination of farm subsidies would be to walk out of the negotiations, paying high costs if it has to go it alone.

Another of the pending points in the FTAA process that requires a clear response from the Puebla round is the treatment of the region's smaller economies -- 25 of the 34 participating countries.

There is a proposal to create economic cooperation mechanisms aimed at leveling the playing field for implementing the hemispheric trade agreements.

Depending on its scope, volume and longevity as an instrument for cohesion, economic cooperation is irreplaceable for facilitating Latin America's adaptation to the U.S. price structure, as well as to new fiscal balances.

From the most optimistic standpoint, it could even prevent the gap between rich and poor countries in the Americas from widening, and ensure that the FTAA is not merely a facilitator for U.S. business, the route that we already seem to be following.

* Copyright IPS. Germán A. de la Reza is an expert on the FTAA and professor of economic integration in Mexico.