Vinod
Aggarwal and Ralph Espach
“The Strategic Dynamics of Latin American Trade”
April
7, 2003
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Graduate
student Ralph Espach (left) and Professor Vinod
Aggarwal spoke at the Center on April 7 about
the dynamics of Latin American trade.
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“The
Strategic Dynamics of Latin American Trade”
by Sebastian Karcher, Department of Political Science
The
trade policies of Latin American countries have led to very
different levels of success. While Chile is reaping large economic
gains from its international trade relations, other countries
such as Argentina have benefited to a far lesser extent from
external trade. Conventional wisdom holds that these different
outcomes are due to low state capacity to implement long-term
plans in the less successful countries. In a joint presentation
on April 7th at CLAS, Professor Vinod Aggarwal and doctoral
student Ralph Espach of the Department of Political Science
at UC Berkeley challenged this view. Presenting results from
a volume they edited with Joseph Tulchin, they argued that
the trade policies of Latin American countries are guided by
different strategies that yield varying political and economic
outcomes. They illustrated their argument with case studies
of Argentina, Brazil, Mexico and Chile.
Professor
Aggarwal introduced the theoretical framework for their analysis
of trade policy. He classified trade governance according to
product scope (few vs. many) and actor scope (uni-, bi-, mini-
and multi-lateral), generating a matrix with eight fields.
As the scope of actors varies, trade governance is expected
to have different advantages and disadvantages, both politically
and economically. Most Latin American countries engage in cross-sectoral
agreements, or agreements that cover many products. Among the
case studies, Mexico and Chile stand out with a very high number
of trade agreements, many of them bilateral. Based on their
trade strategy, the four countries were classified as follows:
• Argentina
is a “regional partner.” The focus of its trade
policy is minilateral, regional agreements.
• Brazil is a “regional leader.” While, like Argentina, it
emphasizes regional, minilateralism, it is also active in negotiations for multilateral
agreements.
• Chile is a “multilevel trader.” Its trade policy includes
unilateral liberalization, bilateral, geographically dispersed agreements and
multilateral activities.
• Mexico follows a “hub market strategy”. It focuses on bi-
and minilateral agreements, taking advantage of its position as the “entrance
door” to the U.S. market.
Espach
then presented the different outcomes of these four strategies.
Mexico’s hub strategy is centered on the North American
Free Trade Agreement (NAFTA). Its close ties to the U.S. have
led to high economic growth rates and dramatic increases in
exports and foreign direct investment. Furthermore, this strategy
has made Mexico into “a market that cannot fail” as
could be observed during the U.S.-led bailout package during
the 1995 Tequila Crisis. A third benefit that Mexico receives
from NAFTA is the institutional learning process that comes
from the close cooperation with U.S. institutions. The downside
of the strategy is the limits it sets to autonomous economic
and political action. Economically Mexico is highly dependent
on the U.S. business cycle. The recent downturn in the U.S.
economy slowed Mexico’s growth to 0 percent in 2002.
Politically, Mexico cannot risk a crisis in the relationship
with its major trading partner. If the U.S. economy remains
weak, these ties might form a threat to Mexico’s political
stability.
Argentina’s
strategy as a regional partner also brought economic gains
at the cost of political autonomy, but on a much smaller scale.
Its strategy was strongly centered on El Mercado Común
del Sur (MERCOSUR), so Argentina’s economy showed high
growth rates while Brazil’s economy thrived but was hit
extremely hard by the devaluation of the Brazilian real in
1997. This blow was exacerbated by the fact that the peso could
not devaluate because it was tied to the U.S. dollar. MERCOSUR
created regional security in the 1980’s and proved a
useful platform for further trade negotiations in the early
1990’s, but the Argentine government failed to extend
its trade ties during these good times. Moreover, trade negotiations
with outside partners (e.g. the EU or the Andean Pact) were
rendered difficult by Argentina’s membership in MERCOSUR.
According to Espach, Argentina’s overall trade policy
was guided by short-term considerations and a lack of long-term
strategy.
Brazil,
a regional leader, also centered its trade policy on MERCOSUR,
but projected a larger part of its policies outside the region.
Since trade plays a much less important role for Brazil than
for Argentina, both costs and benefits from its strategy were
very limited. Politically it fared considerably better than
its neighbor country. Due to its size and regional importance,
Brazil, like Mexico, “could not be allowed to fail” and
received benevolent treatment from lenders. Additionally it
managed to take a prominent position in international negotiations
like the WTO and the Kyoto protocol. Overall, Brazil’s
strategy can be described as a careful “hedging” of
both domestic costs and international risks. While successful
in minimizing risks, some opportunities, most notably expanding
ties within MERCOSUR, have been missed.
Chile
can be considered a multilevel trader. Starting in the 1970’s
it unilaterally liberalized much of its trade legislation.
Since then, the country has been engaging in bilateral trade
agreements around the world and has been very active in multilateral
negotiations. This strategy has resulted in large gains from
trade with a high degree of political flexibility. The professionalism
of Chile’s trade negotiators gives it an edge in multilateral
negotiations. Furthermore, many countries like South Korea
have used Chile to gain experience in bilateral economic agreements,
since any agreement with Chile bears little domestic cost.
This has helped Chile reach very beneficial terms. However,
Chile’s eclectic net of partners provide no strong political
bonds and might be a threat to security when international
tensions arise.
Aggarwal
and Espach provided a remarkably clear and well-structured
account of the different options and strategies for trade policy.
Their analytical framework proved very effective in shedding
light on the reasons for the varying outcomes of trade strategies.
Questions about the causes for different strategy choices and
evidence supporting the strategic nature of trade policy might
have merited closer attention. However, these questions are
discussed at more length in their book and, as Aggarwal noted
with a wink: “If we would tell you all this now, nobody
would buy the book”.
The
book The Strategic Dynamics of Latin American Trade,
edited by Vinod Aggarwal, Ralph Espach and Joseph Tulchin is
to be published at the end of 2003 by Stanford University Press.
