Perspectives of the Pacific Alliance

The way we evaluate how trade agreements affect our economies is based on the series
of facts we have on hand, on how we interpret the results and on the particular issues in
which we decide to focus our attention. We also have to take into consideration the direct
consequences they produce in our living standards, our access to opportunities and the
development of our skills.

In order to bring our perspective for the Pacific Alliance it is necessary to briefly review the
importance of Northamerican Free Trade Agreement (NAFTA), primarily because this
agreement, has propelled APEC and made possible the Uruguay Round that established
the World Trade Organization (WTO). NAFTA has also promoted a large number of
negotiations in Latin America. In regard to México, it is perhaps the most important
agreement not only because it was the first free trade agreement signed after Mexico’s
access to General Agreement on Tariffs and Trade (GATT) in 1986 but also because of its
impact to the country’s economy.

NAFTA was expected to contribute to promote Mexico’s economic development, by

strengthening and stabilizing growth through the increase of foreign trade and
investments. New industrialized procedures to maximize productivity and the creation of
more and better employment opportunities were also important goals. According to former
President Bill Clinton, “NAFTA would improve wages, create more jobs, raise health and
environmental standards and promote world peace”. It was said that NAFTA would reduce
migration from México to the United States as well. Former Mexican President Carlos
Salinas De Gortari stated: “We want to export goods, not people”. He also declared that
the agreement would increase producers’ economies of scale by making the most of their
comparative advantages.

What has happened over the course of 20 years.

If we measure NAFTA only as a trade agreement, the results can be seen as positive. Our
manufacturing sector has substantially expanded throughout the past 20 years. Exports
from Mexico went from about 60 billion dollars in 1994 (the year NAFTA went into effect) to
almost 400 billion dollars in 2013. Manufacturing products such as cars, phones and
refrigerators are some examples of what we sell abroad. The export of automobiles alone

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has maintained an average annual growth of 12.6%. (According to the National Institute of
Statistics and Geography (INEGI)). By 1993 there were only 13 assembly plants in
México. Today, we have over 30 and according to the Ministry of Economy next year we
expect the construction of two more. At the same time imported goods have increased
significantly during these years except for 1995, 1996 and 1997. The increment of these
imported goods has caused a persistent deficit in our balance of trade. Regardless of this
deficit, imports have allowed millions of Mexicans to be able to purchase products that in
the past were only accessible to the middle class. The stagnation of percapita income has
not stopped them from buying these products even though the income annual growth has
hardly duplicated in the past 20 years.

In the primary sector, the results have not been entirely positive. Although with NAFTA
Mexican government redefined the assistant structures and farm subsidies through a
program of direct stimulus to producer’s income on top of increasing subvention to inputs
such as electricity, fuels and water, the reality is that the support to agriculture in Mexico
represents only 0.7 percent of Gross Domestic Product (GDP), lower than the 0.9 percent
average of the OECD (Organization for Economic Co-operation and Development).
Regardless of these, the subsidy on some agricultural products has been reduced by more
than half. From 28 percent in 1991-1993 to 13 percent in 2010-2012. These measures
along with the subsidies United States applies to corn, sorghum and oilseeds, as well as
their higher average production levels, have resulted in the following situations:

 A persistent deficit in our food balance (that runs from 3 to 4 billion dollars per
year).
 4.9 million families of Mexican farmers displaced between 1991 and 2007.
 The increase of seasonal work by 3 million people in the agricultural export
industries. (Leading to a net loss of 1.9 million jobs).

However, NAFTA has allowed México to accommodate the overproduction of goods like
sugar that otherwise would have resulted in lower prices for industrial and cane producers
due to saturation of domestic market. Mexico has become the first provider to the U.S. and
Canadian markets in products such as avocado, cucumber, red tomato and it’s among the
top five exporter of other products (raspberries, strawberries).

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NAFTA has also meant gaining experience. The need to comply with the requirements of
the agreement such as international certifications to access other markets, has become an
advantage for many producers. NAFTA has also encourage an atmosphere for domestic
and foreign investment. It has become an incentive to undertake fundamental reforms and
has strengthen and helped us maintain macroeconomic stability.

Nonetheless, if some of the objectives of this agreement were to promote economic

growth, create more jobs, improve salaries and discourage migration to the United States,
the results are not as desirable. The poverty threshold, for example, has not changed
since then and it is still around 52.3% of the total population. Growth, throughout the
nineties and much of the past decade has been higher in other Latin American countries
that had no free trade agreements like ours, including Chile, Colombia and Perú.

Why some sectors consider that NAFTA has worked primarily in favor
of transnational corporations and not on behalf of the Mexican
industry?

One of the most frequent explanations is that we have probably mistaken the objectives
we pursued with free trade agreements, particularly with NAFTA. Rather than seeing them
as means to an end, we have seen them as an end themselves. The truth is that along
with this perception, we must accept that Mexico has many fundamental problems that
instead of being partially corrected with the help of free trade agreements they have
worsened. There cannot be a successful outer integration if there is not an inward
connection. In consequence it becomes a problem trying to develop what economists call
"backward linkages" (Connections with manufacturers that process inputs for assembly in
the next step of the supply chain). This situation has caused that in Mexico employment
and wages in the manufacturing sector have remained unchanged since NAFTA took
effect because most of our exported goods are made of imported inputs 75%. The
absence of these backward linkages comes from the reluctance of foreigners to provide
capital to the export’s industry supply chain. This is consequence of a fragile infrastructure,
low productivity and a limited domestic investment, both public and private although In the
automobile industry this has started to change.

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Another important circumstance to consider is that Mexico is formed by regions with very
different levels of development. From extremely poor rural zones, to modern urban ones,
usually surrounded by marginal areas.
Unfortunately NAFTA was not supplemented with complementary policies that could have
promoted a deeper regional integration, as there are included in the Pacific Alliance
agreement.

What should we expect from the Pacific Alliance?

(12)We must acknowledge that there will be pros and cons derived from this integration
process. A favorable aspect is the enlargement of markets that will eventually allow
positive externalities and economies of scale. Improving competitiveness and reallocation
of resources may be another result that can break the trend of scarcity.

Creating a suitable environment for the development of the private sector will encourage
the maximization and diversification of exports. This agreement can eventually help
prepare countries for a less traumatic insertion into globalization.

(13)As part of the Pacific Alliance, México expects to increase the ability of its members to
attract foreign investment as key for development due to access to technology.

Yet we can also address trade distortions. Such agreements could mean an improvement
in terms of trade for member countries at the expense of non-members.

The incentive that foreign investments represent in an integration process can lead to a
competition among the participant countries to make the most of tax breaks that will result
in a strong reduction in tax revenue. Foreign investments may be directed towards
regions that have signed a merger agreement at the expense of other non-member
countries with more efficient alternatives.

As it has happened to Mexico with NAFTA, the positive effects of a treaty sometimes are
not even, unequally benefiting some member countries.

Regarding the Pacific Alliance, one of the most important issues is to identify the context of
the countries that are part of it. In the first place, there is an almost unanimous opinion
according to the International Monetary Fund (IMF) that Latin America will be facing a

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weaker expansion in the future as a consequence of factors like the fall and correction in
the price of raw materials and the less dynamism of Chinese economy. The change in the
Federal Reserve’s policy which began to withdraw stimulus and the reduced inflow of
foreign capitals are other situations that have to be considered. Nevertheless the Pacific
Alliance’s members may be affected as well, they share certain characteristics that
differentiate them from other countries in the region.

(14)These four countries have been the most active in achieving FTAs and other economic
agreements with third countries and regions. They all have concluded FTAs with the USA
and the European Union. México, Perú and Chile are also participating in the Trans Pacific
Partnership negotiations (TPP) and they all have adopted liberal economic policies. The
Alliance includes two countries: México and Chile that are currently the only Latin
American members of the OECD and the only ones in the region which have not yet
participated in a regional integration mechanism. (15)

(16)In economic terms, the member states represent 36-38% of both the region´s
population and the combined production (2013). Almost 50% of its total exports and
nearly 45% of the total Foreign Direct Investment inflows to the area (2012).

A defining feature of the Pacific Alliance is certain ambiguity that can either boost or lessen
a deeper integration in certain areas in comparison to other blocs. This Alliance shares a
model similar to the Asian Pacific Economic Cooperation (APEC): flexible, pragmatic,
market driven and focusing on specific activities. At the same time it seeks to promote a
more ambitious integration for its measures on services, investment, intellectual property
rights and the free transit of people. Alliance representatives have assured that the group
is inclusive and open to the integration of more countries and highlighted its pragmatic and
uncomplicated character in contrast to the bureaucratic and institutional structures that
affect other blocs as well as the goals of increasing competitiveness and social
development.

The fact that this agreement does not pursue to adopt common external tariffs, markets or
custom unions, makes it flexible enough to be part of other FTAs or to become a member
of future ones. Another positive aspect is that the large number of agreements its
members have signed with other countries could be seen as complementary to the group’s
own integration process. Since it primarily aims to reinforce positions in third markets, the

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benefits of the bloc in terms of the free circulation of services and capital may be more
important than the growth of intra-regional trade goods. Nevertheless the situation each of
the countries have with their own bilateral FTA´s, specifically the stipulations of these
treaties, could lessen their ability to maneuver. It is important to emphasize that each
agreement represents an intricate and complex web of obligations, compensations,
safeguards and exclusions that at any given moment can turn into a difficult knot to untie.

It is also important to mention that the Pacific Alliance has not offered ambitious common
policies. Cooperation between members is purely intergovernmental, with no supra-
national elements, which translates into a more limited form of regional integration in some
aspects than with other groups in Latin America.

(17)Geographical distance is another important issue particularly between México and its
partners. Just between México’s most important Pacific port, Manzanillo and the port of
Valparaíso in Chile there is a distance of more than 6,700 kilometers. Along with
remoteness we have to add inadequate transportation infrastructures with elevated costs
as obstacles for competition and specialization. Both conditions could hinder to reach
increasing trade flows with more efficient supply chains and cross border value chains.

Certainly trade liberalization and reduction of non-tariff barriers are a good beginning.
Anyhow our major concerns have to do with making the Pacific Alliance a deeper regional
integration initiative that can really promote higher economic growth, competitiveness and
development for the member states. We also expect it to become a platform for worldwide
projection, particularly in Asia and the Pacific. (18)So besides the geographical element,
we have to consider cultural, social and economic aspects in order to define issues as
trade policy, migration, business and labor. Fortunately, the four countries share a vision of
integration backed by a series of common factors such as stable democracies, favorable
business environments and prudent macroeconomic management. (19)

There is evidence of the existence of production complementarities based on clear

comparative advantages that will help member reach other markets with more competitive
goods. At the same time this can encourage investment from outside the region, which will
be shared among the Pacific Alliance members.

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The World Economic Forum in collaboration with the Interamerican Development Bank
(and Bain & Company, January, 2014) released the results of a survey conducted by
them in collaboration with private sector associations from the four countries that focuses
on questions that can help policy makers to make decisions. The main priorities were
inland, border control and cold-chain infrastructures and public information on freight
(WEF).

This are some of the results of the survey: (20)

 For 39% of the companies land infrastructure in their countries is not satisfactory.

 About 26% indicate that border control infrastructure is a particularly problematic

obstacle.

 Almost 30% of the surveyed companies revealed that lack of public information on
freight is an important obstacle to trade.

 24% of the firms are concerned about frequent changes in regulation.

Therefore it is fundamental the improvement of transportation, ports, communications and

physical infrastructure. Simplification and automatization of customs and port procedures
including free zones and the pursuit of lower maritime and air transportation costs are also
necessary.

(21)Mexico’s National Infrastructure Plan 2014-2018 announced by president Peña Nieto

last month is intended to encourage competitiveness through the deeper functionality of
the country’s existing and new infrastructures.

In order to transform México into a logistic platform by 2018, the transport and
communications sector is projecting to strengthen a highway network that will interconnect
regions that are strategically located within the country and generate high commercial
value. Moreover, the cargo train system between ports will be improved to increase the
capacity of transportation to and from destination. Finally, two complementary port
networks with four state of the art ports will be updated. During this administration there
will be 46 additional highways to put into operation.

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With a well-developed infrastructure and efficient integration, the costs of connecting
regional, national and international markets will be reduced and distance between regions
will no longer be a constraint so the country will become more competitive in economic
terms.

Mexican government is optimistic about structural reforms, but corruption and inefficiency
are still issues that need to be resolved. Other problems to be confronted are crime,
government bureaucracy, labor market and access to credit. Higher instruction and
training are required to improve low levels of education..

(22)Regarding the Energy Reform, the proposed changes represent an important step in
favor of competitiveness. The modifications are expected to promote national and foreign
investment towards the modernization of the sector to make it more efficient. As a result
electricity, gas and gasoline prices may be reduced.

In the Financial Sector the objective of the reform is to promote competitive credit. The
absence of low interest rates is a problem that affects the possibility of development and
growth. In Mexico credit penetration is very low. Banks only lend 26.2% of GDP to
individuals while in Latin America the percentage is around 50 % and 100 % in Chile.

Credit is expensive. Mexican banks lend at rates of 2 digits. The total cost of credit for
credit card users a very important source of financing SMEs is between 42 % and 82%.

Unfortunately, according to the National Banking and Securities Commission, only 32% of
financial institutions offer loans. This is partly because most of the micro and small
enterprises are still part of the informal sector and they are not subject to credit.

(23)The Latin America Integrated Market (MILA) can eventually become the ideal support
of this reform and vice versa. Integration of stock exchange markets are expected to
encourage companies listed on them to have more funding opportunities. It is also
possible that integration may stimulate reluctant enterprises to join the stock market to
issue shares.
A larger market also implies a greater number of potential buyers and to be more attractive
to foreign investors. Despite the advantages there are also risks consequence of stock
volatility. Along with integration the market contagious phenomena increases and when a
world financial crisis occurs, local stock markets are affected not only by the fundamentals
of national economies but by those of the economies we are directly related to.

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It is said that the Pacific Alliance has left ideology behind to pursue other goals like
reduction of poverty and inequality. Regional competitiveness should be a key objective of
the Alliance. If the political economic and social strategies are the correct ones, the
productive sector of the member countries will be vast and strong. These policies will
incentive productive chains and technological development towards competitive
advantages in world market. However if the dependency on natural resources of these
countries continues, they will remain subject to commodity prices and in particular on the
progress of the Chinese economy. Therefore it will difficult to absorb the enormous flows
of direct foreign investments in a productive manner.

According to ECLAC (Economic Commission for Latin America) the region, with certain
exceptions possesses important strengths to address these challenges: high international
reserves, low external debt and low inflation levels. While these give some room for
monetary and fiscal policy to moderate temporary external shocks, a scenario of slow
global growth as visualized makes also necessary to take measures for a structural
change that will eventually increase the competitiveness and enhance the long-term
factors of growth.

It is important that along with the proposals agreed by the signatory countries to achieve
goals that go beyond the exchange of goods, services, capital and people, each member
works internally to overcome its own deficiencies. In my opinion the Pacific Alliance can
only be a succesful project if allows people to improve their living conditions and member
countries to be more competitive within the globalized world.

Ma. Guadalupe Guardiola Mayo, 2016.

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