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Talking Trade blog

The Pacific alliance at year 6

Published 05 July 2017

The Pacific Alliance, a regional integration initiative which brought together the economics of Mexico, Colombia, Peru and Chile, has garnered a surprising amount of attention from around the world after only six years since its creation; more than 50 countries have flocked to become observers. To understand the sudden interest one has to look at the member’s ability to establish themselves as a credible and ambitious body with incredible potential to increase investment and trade opportunities in the region. Nevertheless and despite the relative success that the PA has had to date, there remain large obstacles it must overcome to achieve its ambitious goals.

The Pacific Alliance’s XII summit, which brought different kinds of representatives from the member and observer countries, concluded this past Friday. The summit served as a platform to showcase the achievements of the PA to date, which include the implementation of the PA’s Commercial Protocol, which dropped 92% of tariffs on products to zero. The heads of state restated their commitment to free trade and democracy, applauded the speed at which they have moved towards deep economic integration and introduced four associate states—Australia, New Zealand, Canada and Singapore—who will be able to negotiate and establish commercial agreements with the alliance.

But the agreement does not stop at tariff reductions. It is also implemented innovative Rules of Origin (ROOs) that promote the creation of value chains within the Alliance through accumulation, established common standards for sanitary and phytosanitary measures, telecommunications, e-commerce, and professional, financial and maritime services.

Another notable feature is the pooling of activities designed to reflect deep integration across members. It has put forward a tax agreement for the pension funds in member countries and established the Latin American Market (MILA), which brings together the stock markets of member countries. In addition, members have created a number of shared diplomatic missions that include a trade office in Turkey and shared embassies in places like Ghana, Vietnam and Singapore.

So why it important is that PA members take such bold steps towards integration? Besides the potential benefits of interconnecting with global value and supply chains, the agreement could tackle the geopolitical and economic challenges faced by the region. External shocks like the drop on prices for basic commodities and political and monetary uncertainty within the US, have led to a decline in the economic growth of the region since 2015. Furthermore, a lack of logistical and transportation infrastructure and a highly fragmented regional market have made the region’s levels of integration, intraregional trade and foreign added value to world exports some of the lowest.

In this context, better regional and economic integration could increase productivity and strengthen commercial ties within the region and attract investment, especially from Asia, where businesses could plug into already active value chains and develop new linkages.

The PA’s potential to address these gaps and its outward oriented focus separate it from other regional initiatives like MERCOSUR and have made it attractive within the region. Argentina, Ecuador and Uruguay are observers and Costa Rica and Panama have formally requested membership.  MERCOSUR has even agreed to advance topics of common interest that promote cooperation and regional integration like the facilitation of trade, customs cooperation, commercial promotion and SMEs.

However, even with the agreement in place, reaching these grand ambitions will be difficult in the near term. To reach free movement of goods and services requires a host of complementary policies that have yet not been implemented. For instance, remaining unnecessary bureaucratic procedures and differentiated tax regimes and regulations hinder the potential of initiatives like MILA.

In addition, the weak institutional structure of the Alliance makes the development and implementation of such policies harder. Currently, leaders largely direct the Alliance from the top while the different technical groups composed by members of agencies from the four countries focus on specific work areas.

However, it is still hard to get serious about implementation without an institution of some sort of institution like a permanent secretariat to pay attention to the details that are critical for a successful integration. The existence of a yearly pro tempo presidency as the only mechanism of coordination within the alliance, the existence of multiple technical groups, councils and observers can get rapidly unwieldy.

Still, the PA has made attempts to address these potential roadblocks and instructional limitations. Ministries and agencies from member countries have continued to develop through the work of more than 20 technical groups, action plans, agendas, forums and events that look to increase intra-alliance trade and investment.

Other measures have contributed towards the free movement of capital services and people, like the elimination of visa requirements for permanent residents of all four countries, the implementation of a student academic mobility program that has given over 1400 scholarships and the development of an Action Plan to reach an MRA by the end of this year.

Despite the PA’s relative success to date and regardless of the large internal and commitment, there remain large limitations that make it incredibly difficult to develop internal production chains and seriously advance the economic integration of the region. First, intra alliance trade remains incredibly low; in the single digits. And second, the remaining relative lack of infrastructure to connect the markets of members and the sheer geographical distances involved suggest that even completely open markets might not lead to extensive inter PA trade.

Therefore, at the moment the PA’s potential rests not on developing strong internal markets and deep economic integration, but on building stronger linkages with external partners, especially in Asia. This would encourage creation of value chains between members and other countries in the Asia-Pacific and increasing investment and commercial opportunities for the region.

As the PA heads towards its second year since the agreement took effect and despite obvious institutional and logistical challenges, the future looks bright. The establishment of bilateral trade agreements with other countries in the region and the development of annual meetings with both the Association of South East Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation (APEC) reflect a deep level of commitment from members and outside partners.

Such hunger for improved economic growth, development and competitiveness is further reinforced by the promises made in the TPP, of which Chile, Peru and Mexico are members and which despite US withdrawal will more likely be negotiated. This means that government will be focused on implementing the kinds of rules and regulatory changes needed to foster the development of value chains for goods and services across the region.

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Sebastian is an international trade and development adviser with extensive hand-on experience working across business, government and academia in the design and implementation of trade strategies and policies.

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