By Ambassador Roger F. Noriega, Visiting Fellow, American Enterprise Institute for Public Policy Research
The economic benefits of free trade among nations is very clear. Within the Western Hemisphere, freer trade and free market policies have helped pull 70 million people out of poverty and expanded the middle-class by 50 percent. However, it is clearer than ever that there is no substitute for national policies that promote free market growth and extend economic opportunity to people from all walks of life.
Those of us who are close to the free trade success story in North America are convinced by the data. Intra-NAFTA trade has more than tripled in 20 years, exceeding $1 trillion today. U.S.-Mexico two-way trade accounts for half of that, $530 billion—up from just $80 billion before NAFTA—which makes Mexico our third largest trade partner. Like most trade agreements, NAFTA also tilled the ground for direct investment. U.S. investment accounts for about half of all of Mexico’s foreign direct investment (FDI) in the last 15 years, and Mexico’s multinationals have interests in 40 of our 50 states.
The hope is that the new Trans Pacific Partnership (TPP) which is made up of countries that comprise 40 percent of the world’s economic output, will be the engine for continued global growth. In spite of the global financial crisis, we remain believers in a rules-based trading system; however, recent news from this hemisphere suggests that economies are losing momentum.
According to the Economic Commission for Latin America and the Caribbean (ECLAC) in 2015, the South American economy will contract by 0.4 per cent. Setting aside the impending collapse in Venezuela, economic growth has slowed in the giant economies of Brazil which will shrink by nearly 3 percent, and Mexico whose 2.4 percent growth is half what it was just five years ago. All of the Andean states, plus Chile, have slowed down appreciably in the last 18 months, with Ecuador slipping into a recession this year. In Central America, the economies of El Salvador, Guatemala and Honduras are foundering.
Of course, much of this bad economic news can be attributed to the steep decline in the demand by China for commodities and the accompanying precipitous drop in oil pri-
ces, but the over-dependence by Latin America on commodi-
ties prices underscores the other explanation for the economic downturn: the failure of regional policy makers to modernize their economies to make them more competitive and less dependent on China demand.
Trade policy makers in Wa-
shington are already saying that the Trans Pacific Partnership (TPP) will be the last such initiative for years to come. Instead, they urge national leaders to focus their energy on retooling their economies to make them more competitive and efficient.
Nine short years ago, we adopted the Central American Free Trade Agreement (CAFTA) to secure market access and fuel long-term economic growth. Unfortunately for our CAFTA partners, transnational organized crime has ruined these plans by corrupting their institutions and destabilizing their economies. Honduras and El Salvador are less competitive than they were before CAFTA. Most local businesses there are struggling to survive, so few have the luxury of tapping the potential benefits of international trade.
Mexico’s President Enrique Peña Nieto has been credited by foreign observers for emphasizing economic modernization of his country including in the energy sector but he let down his guard to organized crime that continues to overwhelm institutions and sow corruption in many parts of the country. As a result, his central reform—allowing private involvement in the energy sector—has lost some momentum, as doing business in Mexico is as complicated as ever.
Brazil slipped into recession nearly two years ago and it is not expected to recover for several years. The kickback scandal involving the state-owned oil company, Petrobras, is widely perceived as the proximate cause of the political crisis there; however, President Dilma Rousseff’s failing economic program is a contributing factor.
Rousseff relied on lavish social spending—even though it meant milking Petrobras of capital that it needed to sustain exploration, production and profitability. Even worse, Rousseff failed to adopt badly needed reforms, including improving government efficiency and accountability; taming costly public pensions; simplifying the labyrinthine federal and state tax systems; liberalizing the labor code; removing regulatory obstacles to doing business; and attracting foreign capital and technology into the promising energy sector.
These examples show that trade agreements and even trade itself are no substitute for internal reforms that protect and promote economic freedom; incentivize entrepreneurship; reduce taxes and regulation on the productive sectors of the economy; and empower job creators as well as workers. These domestic policies will help countries build more mature economies, create better jobs, increase productivity, and cultivate healthier internal markets.
So, as we ponder an economic agenda for this new century, there is simply no substitute for local leaders making the hard choices to modernize their economies and strengthen their institutions. Intelligent decisions by national leaders will make their people more capable of taking advantage of global trade but less vulnerable to external crises
