The Big Bad Wolf?

By Diego Fonseca

While Central America is nervous about CAFTA, the Free Trade Area of the Americas (FTAA) has rattled countries with large economies, such as Brazil and Argentina. And although the most recent negotiations, in late 2003 and early 2004, didn’t produce agreement on major issues such as agricultural subsidies, government procurement and intellectual property rights, January 1, 2005, continues to be the apparent date for the birth of the FTAA, which may, like beer, come in a robust version or a “lite” version.

Meanwhile, the main union and business organizations in Brazil, from the industry and services sectors to the Association of Rural Producers (Associação de Produtores Rurais), have undertaken studies to gauge the impact on their areas of activity. In April 2003, Sebrae, the Brazilian Support Service for Micro and Small Enterprises, organized a roundtable to debate the impacts of the FTAA—positive and negative—on micro and small enterprises (MSEs).

Brazil is hoping to get exemptions and specific treatment for its MSEs under the FTAA. For now, it is fine-tuning its analysis of microenterprises to spell out who would be affected by these exemptions—and how—in the negotiating rounds. The country is even studying the laws, incentives, subsidies and other policies favoring MSEs in the United States, Canada, Mexico and select South American countries to establish its own standards for negotiation and may reserve the right to ask those countries for the same conditions in the many inter-regional trade agreements.

In so doing, Brazil is trying to prepare for the potential trade opening, gauging the impact that it may have on its MSEs. “In the case of market access, for example,” notes the document prepared by Sebrae at its roundtable in 2003, “if the FTAA is aimed at increasing exports from certain production chains, one can expect that the increased production of these exports will increase the demand for [MSEs’] products; the opposite would happen in those cases in which exports are expected to expand.”

With little information about the FTAA, MSEs in a 2002 survey by Sebrae São Paulo still revealed a certain optimism about it. Only 2 percent of the companies surveyed regularly export—to be expected, since most of them operate in retail and services, sectors for which there is no international trade. Yet 21 percent sell services and goods to companies that export, 7 percent compete with large multinational companies, and 36 percent regularly buy imported products.

Even in one of the most sophisticated cities in South America, MSEs are not prepared for the international competition that the FTAA will bring: 83 percent of them consider themselves hardly informed on the matter, and only 10 percent describe themselves as well informed. This may explain why more than 60 percent of MSEs in São Paulo think that the impact on their imports and exports will be negligible, neither harming nor benefiting them.

Some 14 percent of the MSEs think that the FTAA will benefit their enterprise, making it easier to import, and 12 percent say it will help their exports, with positive expectations winning out over negative ones for both exports and imports. Taken by sector, the MSEs that expect the greatest opportunities—both exporting and importing—are agricultural (49 percent think they will benefit from exports, 26 percent from imports), followed by the industrial sector (11 percent and 17 percent, respectively).

In Argentina, FUNDES Internacional notes, small businesses fear losing their position in both the Argentine market—Argentina’s exports still account for a small share of its GDP—and the markets of the Latin American Integration Association (ALADI).

Finally, FUNDES has been studying the impact of the FTAA and other scenarios on the exports of Argentine small and medium enterprises (SMEs). In a second stage it will focus on the SMEs in certain sectors and on productive chains to determine their microeconomic competitiveness. FUNDES says that such information is key to negotiating the opening of the markets, and for planning strategies to improve the sector’s competitive position. According to Virginia Moori Koenig, a director of FUNDES Argentina, it’s a question of; “maximizing opportunities and minimizing or managing the risks and dangers in the most realistic scenarios of liberalization.” Once FUNDES’ work is concluded in Argentina, FUNDES plans to take these studies to other countries in its network in Latin America.

The first part of its study, undertaken in the context of FUNDES Argentina’s Business Environment Program, draws on work done by both ALADI, in 2001, on the impact of U.S. exports in the region and the Center for International Economics of the Argentine foreign ministry. The results indicate that under the FTAA, Argentina would have the largest number of sectors—46—threatened with displacement by imports from the United States and Canada to the other ALADI countries. Brazil follows with 38 sectors; Uruguay, 32; and Colombia, 24. Food products account for almost 40 percent of the total exports threatened, followed by machinery and transportation equipment (25 percent) and fuels (20 percent). In these sectors, “the threatened exports explain all or almost all of their shipments to ALADI,” the study reports.

At the same time, Argentina would be hardest hit by U.S. competition in its exports to Brazil, according to the study, with 34 categories at risk, followed by Chile with 15. Competition from U.S. and Canadian products could slash by half exports from the threatened sectors to the ALADI countries, which could mean a drop of roughly 25 percent in Argentina’s total exports. Furthermore, products with the potential to increase shipments to the north account for about half of the country’s exports and are concentrated in food products, a sector currently subject to specific import duties, especially in the United States.

The debate about FTAA will heat up as the discussions continue and the date for concluding the negotiations approaches. If the positions are reconciled and an agreement is signed, on January 1, 2005, we’ll know whether the “big bad wolf” brings good opportunities, a big headache or is just a story that parents tell to scare their children.