Honourable members, good afternoon. My warmest thanks for giving me the opportunity to speak with you today about the Pacific Alliance.
My field of work at the North-South Institute is on international trade and investment, particularly on aspects that relate to Canada and Latin America. Before coming to Canada I worked as a researcher at the Latin American Trade Network in Argentina, where I provided policy advice and research to various Latin American governments particularly on economic integration issues.
My presentation is highly complementary to that of Professor Macdonald, but I would rather focus it more from an economic policy point of view. My presentation will focus on what it would mean for Canada to join the Pacific Alliance, emphasizing the main aspects of this initiative in the context of Latin American regionalism. I will draw my arguments from knowledge of how those topics are being discussed there today and what that might mean for Canada.
We know already that economic integration schemes follow a pattern of increasing levels of intensity. You choose different patterns. You go for free trade agreements, custom unions, or economic unions. The Pacific Alliance claims to move to the highest one, but in fact it has a discourse of something much less ambitious, even less than a free trade agreement, namely of being a negotiation platform to bargain better with Asian countries and even the largest Asian firms seeking to invest in those Latin American countries.
That discourse is important for Canada to listen to in order to decide whether to join the Pacific Alliance. In terms of the reasons that countries choose these different paths for economic integration, again, from the literature and what we know from practitioners, from economic trade negotiators, there are three grounds for why countries choose economic regionalized initiatives. One is signalling. Another is investment seeking. We are seeking more for indirect investment, or we are seeking to enlarge our markets.
First, let me go over signalling, which I think matches most closely what we have seen so far from the Pacific Alliance. These four countries are signalling that they want to continue liberalizing their trade with each other, unlike others in the region of Latin America. They're also determined to increase their relationship with Asia. They also see complementarities among the four of them to do that. They will not wait for others if a slower pace is preferred, as in the TPP.
This is an entirely accepted practice in Latin America. Countries follow simultaneously, or concurrently, different paths of integration. We actually have an expression for it, and it's sometimes used in other parts of the world. It's called “variable geometry”. Variable geometry means that one chooses different partners to do different things at the same time. They are in the Pacific Alliance; they are in the Andean Pact; they are in the Group of 3; they are negotiating in UNASUR and in CELAC, but they pursue different things in different agreements. It also means that they join with like-minded countries, depending on the issue, but in a very pragmatic manner. What counts the most is the signalling.
The second reason, which is relevant perhaps, is investment seeking. They are seeking more investment from Asia, but they're also aware that the investment could come from other parts of the world, even if the market for those exports would later be in Asia. The stated goals of the Pacific Alliance, such as labour mobility, education equivalency, integrated financial markets, and freer movement of capital among those four countries, are very clear indicators of that approach: investment seeking.
Market enlargement for their own domestic firms, in my view, is only a cursory interest for them. Since most of their largest firms are export-driven anyway, they are grounded on commodities, and there is not much of a market for commodities in each one of those four countries. The markets for them are in Asia and other parts of the world.
Now, let me mention something else. I have been reading the presentations made so far in front of this committee. Some of them mentioned that up to 90% of the trade inside the Pacific Alliance would be free of duties immediately, or very soon. In my view, today this is something of relative importance; it's not of great importance. Most tariffs around the world are already very low. In most emerging countries they're around 5%. In most developed countries they're around 3%. So when we say we're going to have duty-free trade, it doesn't really mean a big difference in prices for businesses or for customers.
In fact, for most goods except services and electronics, transportation and customs costs are about 10% to 15% of the final price, or even the intermediate price of inputs.
Fluctuations in currencies for commodity-exporting countries such as these, or even Canada, have represented increases in domestic prices, in U.S. dollars, of up to 30% in the last 10 years, so a reduction in tariffs of 3% to 5% is highly inconsequential.
However, I do understand that for certain industries there are very significant tariffs, as is the case of traditionally protected pockets, such as cereals in Chile and Peru, certain manufactures in Colombia and Mexico, and poultry and dairy industries in Canada. In most cases, those tariffs are within the lines that are exempted from trade liberalization and therefore are left alone.
It seems that the Pacific Alliance would do just that, because the four members have agreed to eliminate 90% of their tariff lines and others will be negotiated later.
In trade economics, when we hear those kinds of announcements from governments, we know that what they have managed to do is to group the relevant stuff into the 10% of the lines that will not be negotiated right now. We do understand politics and we understand the difficulties of reaching 100% free trade between any two countries.
If you wanted to increase trade with the Pacific Alliance—and that is what Asia really wants most—the work to be done is in trade facilitation, harmonization of standards, and liberalization of trade and services, particularly of professional services. Liberalization in the movement of people, as they are doing it, is another key element.
Those are the things that economists and policy-makers have more recently found to be of the most consequence when you are trying to liberalize trade and investment across countries, and now that tariffs are very far down, you have other issues such as currency misalignments.
I would like you to think very carefully about what Canada actually wants to do.
The Pacific Alliance has clearly said what they will be doing, which is harmonizing their production and health standards, establishing quick and easy systems for academic and professional equivalencies, and liberalizing movement of labour, which means migration.
These countries have roughly the same levels of income per capita when you adjust them for purchase parity. They have similar educational attainment levels and other relevant indicators, so that approach is most sensible for them. In my opinion, it would be an effective manner to increase economic integration among themselves, and from there to negotiate with Asia, but will Canada be ready to do the same?
As a recent immigrant to Canada, I have to respectfully share with you my skepticism. As someone who frequently travels to other provinces and speaks with Canadians trying to provide professional services across provincial borders, I am even more skeptical.
I am not saying that this approach to increase attractiveness to foreign investment, in this case from Asia, or to be more successful in trade with other countries, will not succeed for current Pacific Alliance members; it might well do so. It might even be very successful for Canada too, but will Canada do it now with the Pacific Alliance and for the goal of negotiating together with those countries in Asia? I am in doubt, but that is the real issue for you to decide.
Finally, I would like to give you an alternative perspective on the value of trade negotiations themselves.
Just like those negotiations which are done in business or even in domestic politics, international trade negotiations are more often than not left unfinished. They are not necessarily seen by practitioners, by negotiators, as a failure but as a way of learning about others, socializing internationally, and fixing other countries’ diplomatic assets in one’s own country for a certain period of time. In fact, there are many other reasons to negotiate other than to actually sign anything.
Many in Latin America believe that the U.S. is very clearly doing this with the TPP negotiations. It's not negotiating to sign, but to signal, to engage, and to lock their partners’ diplomatic assets on itself and to learn from what others are doing.
You should know that three of these four countries in the Pacific Alliance are just as experienced as the United States in negotiating and signing FTAs, except maybe in the case of Colombia. So the diplomats from Peru, Mexico, and Chile know exactly what they are doing when they are supposedly duplicating efforts from the TPP negotiations in this other initiative. In fact, they are creating their own platform to engage Asia.
Thank you very much.