The Mercosur example illustrates
how rules are often tailored in response to sectoral pressures as producers adapt to foreign competition.
Rules of origin also may serve a political and economic function: they facilitate an adjustment process to foreign
competition that results from greater
commercial openness. This is particularly the case in key or sensitive
sectors like textiles, autos and agricultural products like poultry or beef.
As countries adapt to freer trade
and lower trade barriers, they should,
in theory, have greater incentives to
standardize the FTAs’ rules of origin. In Latin America, about 89 percent of foreign trade is covered by a
preferential or free-trade agreement,
while the average external tariff for
the remaining items hovers near 10
percent—down from over 40 percent
in the early 1980s. In addition, negotiating an F TA with a powerful trading
partner like the U. S. ought to provide
another strong incentive to converge
rules of origin.
But this has not happened. In more
than half of the FTAs concluded by
Mexico, Chile and Peru (all signato-ries to FTAs with the U.S.), the same
rules of origin apply for only slightly
more than 40 percent of traded products. Regionally, F TAs include a complex web of rules of origin involving
nearly 40 annexes of rules per product and 24 regulatory chapters. 6
Complicated or restrictive
rules of origin hinder the development of “cumulation
processes” in which producers in one FTA country
use inputs from another
FTA country to make
goods without affecting
the preferential status
of the finished product.
This runs contrary to one
of the basic premises of
free-trade agreements:
countries are likely to be
more attractive to foreign in-
vestors because preferential
market access and the possibility
of cumulation allows companies
issues of transparency and the busi-
ness environment. 7
These reforms, including competition policy, investment rules and
regulatory framework changes, supported the ambitious array of trade
negotiations both countries launched
in the 1990s.
But doing so requires a commitment of resources, both financial
and human, that may lie beyond the
means of many government budgets
and the capacity of technocrats. Concerns over these resources and commitments to full FTA implementation
have underpinned recent efforts in
support of trade facilitation, particularly in the Dominican Republic–
Central America–United States Free
Trade Agreement (DR-CAF TA) region.
In the same vein, the idea of linking or harmonizing the various Latin
American free-trade agreements is
gathering strength. Doing so would
also reduce the hub-and-spoke behavior of regional FTAs, where multiple countries possess an FTA with
a given country (the “hub”), but there
is no connection among the different
partners (the “spokes”).
In cases where there are similar
F TAs—both in terms of scope and ac-
tors involved—a convergence of all or
portions of these FTAs, especially rules
of origin, would dramatically reduce
the burdens of administration and
enforcement. That would apply, for
instance, to the FTAs concluded
by Mexico and Chile with Cen-
tral American countries, or to
the partial-scope agreements
concluded under the rubric
of the Latin American Inte-
gration Association.
Convergence would
also reduce the private
sector’s burden of com-
plying with competing or
overlapping rules and reg-
ulations, and thereby allow
businesses to improve pro-
ductivity. It would expand the
universe of cumulation sources,
thus reducing the transaction costs
of sourcing and eliminating possible
to build lean cross-country supply
chains and lower costs of production.
Successful examples of cross-border
production include textiles in Central
America and automobile production
in the Mercosur countries.
POLICY RESPONSES
Beyond just getting a trade agreement
in place, governments also have to
ensure its proper functioning and to
develop complementary agendas in
areas, such as trade facilitation and
customs efficiency, competitiveness
policies, and even workforce development. Governments sometimes
use the policy space created by FTA
implementation to pursue policies associated with, but not strictly belonging to, the concluded trade agreement.
This was the case in Peru. In the
wake of negotiating the F TA with the
U.S., President Alan García’s government submitted 99 legislative decrees
on a wide range of issues, including
the creation of a civil service, supposedly to comply with the U.S.–Peru
Trade Promotion Agreement.
For countries like Mexico and Chile,
implementation of F TAs has created
an opportunity to make necessary reforms both in the way trade policy is
formulated and in the overall policymaking environment, especially on
IN LATIN AMERICA,
ABOUT 89 PERCENT
OF FOREIGN TRADE
IS COVERED BY A
PREFERENTIAL
OR FREE-TRADE
AGREEMENT.
AMERICASQUARTERLY.ORG
Americas Quarterly SPRING 2012
27
