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  El Cronista newspaper | February 5, 2010
Precariousness of the rules of play in regional integration


Article published in El Cronista newspaper, Buenos Aires, Argentina.

English translation: Isabel Romero Carranza

This month we commemorate the 50th Anniversary of the creation of the Latin American Free Trade Association (LAFTA). It was an initiative strongly promoted by the government of President Frondizi and came as an answer to the changes that had developed in the trade and exchange policies of Argentina and other countries that negotiated the agreement. However, it was also a reaction to the new international realities such as, among others, the enactment of the Treaty of Rome, which cleared the path for the creation of the current European Union and, before this, the General Agreement on Tariffs and Trade (GATT) to which our country also subscribed.

The initial objective, to create a Free Trade Zone in the term of twelve years, was never accomplished. In 1980, the LAFTA became the Latin American Integration Association (LAIA), which incorporated more flexibility to the initial commitments and was supposed to facilitate the creation of a Latin American Common Market. However, the fulfilment of this objective is still pending. Subsequently, our country and Brazil promoted within the LAIA the bilateral program of integration that later led to the creation of Mercosur. For their part, the Andean countries had initiated in 1969 their own sub-regional integration process, the Andean Group, which later turned into the Andean Community of Nations. Neither the Andean Community nor Mercosur have been able to accomplish their initial objectives.

Several factors can explain the persistent distance between what is agreed and what is achieved in terms of regional integration. One of them has been to set ambitious goals that clash with reality. There are other motives too, both political as well as economical. However, we would like to focus on one circumstance in particular that has been present since the inception of the LAFTA. This fact marks the difference with the European experience and with that of other regions such as, for example, North America with the initial free trade agreement signed between Canada and the U.S. and later with NAFTA, which incorporated Mexico as well.

We are referring to the precariousness of the legal commitments entered into, reflected by the idea that these are to be complied with in the measure that is possible and which are cast aside if the economic realities demand so. This factor weakens the essence of this type of agreements, which is to provide an insurance against any discretional protectionism that may be incurred by a partner when it considers that the circumstances call for it. This "insurance against protectionism" enables to translate what has been agreed into productive investments in terms of the enlarged markets.

One way of supporting such insurance is the mechanism for the solution of controversies that can be used as a resource by partners when they consider that a non-fulfilment has affected their interests. It has proven its efficiency within the World Trade Organization and NAFTA. It is available in Mercosur, though not frequently used by its members. Another possibility are the different safety valves that can be introduced into an agreement. These are non-existent in Mercosur, except for a version called the Competitive Adaptation Mechanism within the bilateral relation between Argentina and Brazil, currently not in use.

Since the time of the LAFTA, in the event of any non-fulfilment the partners have chosen to resort to a set of modalities that are indeed practical but that contribute to undermine the agreements. One consists of compensating non-fulfilments, the other of tolerating them when it is considered that they do not affect any specific interests.

The problem is that both approaches can dilute the assumed commitments and erode the economic effectiveness of the rules of play by creating two concrete problems. Firstly, they discourage productive investments in relation to the enlarged market. Secondly, they benefit the country with the largest relative economic dimension and make it more attractive for investors. This explains why Canada and Mexico have made of the insurance against protectionism from the United States a central issue in their strategy of regional integration.

Félix Peña Director of the Institute of International Trade at the ICBC Foundation. Director of the Masters Degree in International Trade Relations at Tres de Febrero National University (UNTREF). Member of the Executive Committee of the Argentine Council for International Relations (CARI). Member of the Evian Group Brains Trust. More information. |

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