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The risks of partial integration

While virtually all Latin American and Caribbean governments have expressed qualified approval for the creation of a hemispheric free-trade zone, debate rages as to the near-term benefits that such an arrangement woutld have for individual countries.

In some countries, politicians argue that regional trade blocks like Mercosur or even a series of good bilateral agreements might be preferable to a hemispheric pact, at least in the short term. But most economists agree that the status quo--several regional trade zones crisscrossed by dozens of unique bilateral agreements--falls far short of what is needed to unlock the true benefits of liberalized trade.

To help clarify the debate, several economists supported by the IDB recently produced a model that calculates the costs and benefits, in terms of anticipated GDP growth, of 20 possible integration scenarios for economies in Latin America and the Caribbean.

The results of the model, presented in a report entitled "Convergence and Divergence between NAFTA, Chile and MERCOSUR: Overcoming Dilemmas of North and South Economic Integration," confirm what integration specialists have long believed. Of all possible trade integration scenarios, the one that would offer the most benefits to all participants is a uniform hemispheric free trade agreement.

But if such an agreement is not reached, the "second best" integration alternatives for individual countries vary greatly and tend to conflict with the second best option for neighboring countries. The second best option for Mercosur members Argentina and Brazil, for example, is exclusive access to NAFTA, an option that would of course be opposed by other Mercosur members.

The authors of the report consequently warn that if the region fails to reach a hemispheric trade accord, "each country is left to fend for itself in a high stakes and highly competitive environment which will tend to focus on more limited and conflictive short-term gains."

The challenge, the authors believe, is to improve the credibility of the negotiating process leading to a hemispheric agreement, so that politicians can have a reasonable assurance that an agreement will be reached and that its benefits will be tangible and fair. Only then will governments be willing to take on the considerable political and short-term social costs of joining a hemispheric free-trade zone.


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