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In the Nation's Interest

Trustee James Bacchus: The Pacific Alliance is quietly revolutionizing world trade

By James Bacchus

The most important trade initiative in the world may be the one that has been most ignored, at least outside the few countries currently and directly involved – the Pacific Alliance.

Almost all of the recent political, commercial and media focus on international trade initiatives has been on the much-trumpeted negotiations aimed at concluding “mega-deals” creating a Trans-Pacific Partnership and a Transatlantic Trade and Investment Partnership. The continuing negotiations on a “TPP” and “TTIP” have not lacked for attention. Starved for real progress on lowering the remaining barriers to trade and investment, the business community in particular has seized on these twin acronyms as a mantra for moving forward.

Lately, and rightly, there has been some renewed attention on the long labours of the World Trade Organization. Building on its recent success in Bali in concluding a global agreement to facilitate trade by eliminating the needless cost – almost US$ 1 trillion annually – of sticky red tape at the world’s borders, WTO members are now moving ahead with newfound confidence on negotiations over green goods, services, information technology and soon, they hope, a lot more.

But domestic opposition is rising, and the immediate political prospects for the proposed Trans-Pacific and Transatlantic trade deals are becoming increasingly iffy; the WTO, despite its boost from Bali, is still struggling to progress from a prolonged impasse towards a stronger WTO-based global trading system.

Meanwhile, going largely unnoticed by the wider world, Costa Rica is joining Mexico, Colombia, Peru and Chile as the fifth member of the Alianza del Pacifo – the Pacific Alliance. It looks like Panama will be the next to join. Other countries are queuing up to enlist. In the corner of the world’s eye, the Pacific Alliance is generating concrete commercial results in areas that remain, for now, unresolved items on the unfinished agendas of other, much more celebrated trade initiatives.

Founded in 2012, the alliance emerged from the failure to create a Free Trade Area of the Americas the previous decade. Although it has, so far, been largely overlooked outside the region, it is no small undertaking. The group already includes more than 200 million consumers in countries with a combined GDP of $3 trillion, which account for 35% of overall Latin American GDP and more than half of all Latin American trade. Current members have an average growth rate of more than 5% – double the world average.

This fast growth is largely because the member countries are democracies united by their shared commitment to free institutions, free markets and free trade. They aspire to be open societies with open economies. This shared commitment is a common thread that runs through all of the alliance’s undertakings, to date. Its political leaders, however, emphasize that economics, and not politics, is the glue that binds them together.

Speaking on a panel at the World Economic Forum’s 2014 Meeting in Davos, Mexico’s President Enrique Peña Nieto explained the Pacific Alliance in these terms: “We are not a political alliance, we are countries who believe in and have a shared vision on free trade, social inclusion and economic growth. This is an open alliance for those who are in favour of the same principles and convictions.”

Trade is the strongest adhesive in this economic bond. The stated objective of the alliance members is to integrate their economies to create more trade. Goals include lowering barriers to trade in goods and services, linking stock markets and establishing common ways of cushioning currency fluctuations.

A prerequisite to joining the Pacific Alliance is that a country must previously have concluded free trade agreements with all of the members of the alliance. The group has already reduced tariffs on more than 90% of all goods traded among member countries, and says it will remove the rest in the next few years. So this arrangement among WTO members clearly qualifies as a “free trade agreement”, entitled to an exception from the basic rule of non-discrimination in global trade that is otherwise required of all WTO members by the WTO treaty.  (This cannot be said so easily of either the TPP or the TTIP.)

While the alliance is accumulating commercial successes, what distinguishes it is the way its members negotiate their ongoing economic integration. This approach allows them to succeed where other initiatives struggle, and is the source of the group’s global significance.

The negotiating approach used in the WTO’s long-deadlocked Doha Round of global trade negotiations, and also used in the TPP and TTIP negotiations, is the so-called “single undertaking”. With this approach, nothing is agreed on any issue until everything is agreed by everyone on every issue. This worked in the past, when trade negotiations were smaller and simpler, but it hasn’t really worked for 20 years, since the Uruguay Round established the WTO.

By contrast, the negotiating approach of the Pacific Alliance is eminently practical. The countries involved do not wait for consensus before producing results. If they reach agreement on one issue, they go ahead and implement it. Then they go on to the next issue, and the next. This approach produces a stream of results on individual issues, which builds shared confidence and mounting momentum to reach agreement on additional issues. As Carlo Dade and Carl Meacham of the Centre for Strategic and International Studies have expressed it: “This strategy, coupled with the like-mindedness of the participants, has allowed the bloc to move with a rapidity that has surprised sceptics and supporters alike.”

The encouraging results so far? Many internal visa requirements have been scrapped. Alliance countries are sharing commercial and investment offices in some foreign countries (with shared embassies not far behind). And, in the most striking success so far, the stock markets of Chile, Peru and Colombia have been linked; and later this year Mexico is expected to join what will become the largest stock exchange in Latin America – with a total value of nearly US$ 800 billion. Meanwhile, negotiations continue on labour mobility, financial integration, energy coordination and much more, in addition to the ongoing talks aimed at eliminating the alliance’s few remaining internal tariffs.

Emboldened by these developments, Panama, Uruguay, Australia, Canada, Japan, Spain, New Zealand, Israel, Singapore and Finland are all among the growing list of more than 20 “observers” who may eventually become alliance members. (It is undecided whether a border on the Pacific Ocean is required for membership.) China has recently requested “observer” status.

Already among the official “observers” is the United States. The presence of the US on the margins of the Pacific Alliance has been little noted. But should the talks on the proposed Trans-Pacific and Transatlantic trade deals falter, look for America to press for early admittance as a fully fledged member. And look, too, for the Pacific Alliance to move towards the centre of the world-trade stage.

Author: James Bacchus chairs the global practice of the Greenberg Traurig law firm.  He is a former Chairman of the Appellate Body of the World Trade Organization and a former Member of the Congress of the United States.  He chairs the World Economic Forum’s Global Agenda Council on Governance for Sustainability.

Reposted with permission from James Bacchus.  Trustee blogs are the views of an individual trustee and not the official policy of CED.