Background

In Latin America and the Caribbean (LAC), it has been two decades since countries began to move away from the development model of import substitution industrialization (ISI) with its focus on protectionism and heavy state regulation of the economy. In its place, there has been a region-wide shift to a neo-liberal economic model calling for fiscal discipline, deregulation, and free trade. The verdict on the wisdom of these policies is mixed now, though, after experimentation with neo-liberalism in countries throughout the region has generated mixed results. In government circles, officials remain committed to the basic outlines of the "Washington Consensus", seeing no viable alternative. However, there is a growing sense of frustration among politicians and the public alike that these policies have not generated growth to satisfy basic demands for jobs, education, and personal security. While spurring economic growth in the early 1990s, per capita output and per capita growth in LAC have been stagnant since 1997. As of 2004, 43.2% of the population (224 million people) was living below the poverty line. Improved economic activity drove a slight rise in the employment rate through 2005, but regional unemployment remains over 10%.

In addition to unfulfilled economic expectations, there has been growing disillusionment with the quality of democratic institutions in the region. The closing decades of the twentieth century were a time of great hope in Latin America, as every authoritarian regime was replaced by a democracy—with the exception of Cuba. Yet, beyond holding elections that are reasonably free and fair, these new democracies have struggled to strengthen institutions that are central to democratic government. Citizens commonly describe legislatures as unrepresentative and unresponsive to popular demands. Justice systems continue to struggle with the needs for increased competence and independence. Many major cities in Latin America suffer from high levels of crime, a trend exacerbated by ineffective law enforcement. Human rights violations, such as illegal detentions and torture, persist in law enforcement, especially at the local level. Another common threat in LAC is the plague of money from the illegal drug trade that undermines the integrity of judges, the police, and the military.

Economic and political frustrations have led in recent years to a leftward drift in South American politics. More populist governments have come to power in a number of important countries, headed by leaders who are less likely to see eye-to-eye with the U.S. on issues of free trade, drug trafficking, and the environment. The first manifestation of this trend was the 1998 election of Hugo Chavez in Venezuela. This former coup plotter came to power promising to wrest power away from the country’s "oligarchic" ruling elite and to improve the lives of the poor. However, Chavez’s strident populist rhetoric and policies, as well as his close relations with Fidel Castro helped precipitate a short-lived coup (allegedly backed by the U.S.) in April 2002. Since then, the anti-Chavez opposition has led an effort to remove the President by referendum, adding to an atmosphere of political polarization and instability in this important oil-rich nation.  Deepening mistrust between the U.S. and Venezuela continues to threaten regional stability.

Argentina is another country that has experienced economic and political instability. In December 2001 its economy collapsed due to a poorly managed exchange rate policy and large public deficits. The ensuing economic depression sparked social unrest, which in turn led to a string of presidential resignations in 2002. By 2003, Argentina seemed to be on the road to recovery, as it struck a deal with the IMF for loan restructuring and continued credit. But public disgust with neo-liberal economic policies was, no doubt, a factor in the election of populist Néstor Kirchner to the presidency in April 2003.  Kirchner overturned many of the economic liberalization policies of the prior administrations, and Argentina’s economy has stabilized since 2003.

More left-leaning governments have also come to power in Brazil, Ecuador, and Uruguay…….

Despite dissatisfaction with neo-liberal policies among some segments of the population, a fairly broad consensus persists among the LAC political elite that expanding hemispheric trade is an important engine for economic growth. So the challenge for these leaders, just as it has been for leaders in the U.S., has been to pursue free trade in the face of vocal opposition. It has long been recognized that the FTAA would not materialize without strong leadership on the part of the United States. This leadership, however, has been inconsistent. Implementation of the North America Free Trade Agreement (NAFTA) in 1994 mobilized an [anti-trade coalition] in the U.S., consisting of environmentalists, labor activists, and agricultural and manufacturing interests that benefit from protectionism. The Clinton administration quietly laid the groundwork for the FTAA but was not committed to expending large amounts of political capital alienating opponents of NAFTA-like agreements in the Democratic Party’s base.

President George W. Bush has been a strong advocate of a pan-American trade vision, but his administration too has sent mixed signals. In the same year (2002) that Bush pushed for and received fast-track trade promotion authority from the Congress, his administration enacted a controversial tariff on steel from developing countries, raising doubts about the administration’s commitment to free trade when it conflicts with interests of electoral politics. Even more controversial with the LAC countries has been the Bush administration’s support for the 2002 U.S. farm bill, which included an extra $180 billion in agricultural subsides over the next ten years. LAC countries see U.S. agricultural subsides as the biggest obstacle to free trade, as they make it difficult for products from the LAC region to compete in export markets.  When the Bush administration agreed to delay the FTAA in favor of the smaller CAFTA agreement, many supporters of regional free trade felt betrayed.  It remains unclear to what degree the U.S. will prioritize the revival of the FTAA given other demands at home and abroad, leading many on both sides of the pact uncertain of how to proceed.

Negotiations

Three specific issues will be featured on the agenda of the Americas Simulation for Spring 2006: the future of economic integration in the region, drug trafficking and the future of the "war on drugs," and issues of sustainable development. What is unclear at this juncture is who—if anyone—will take the lead in pushing for a strong hemispheric trade agreement and increased multilateral cooperation in dealing with the threats of the illicit narcotics trade and environmental degradation.

Achievement of a single Americas region is dependent on the bridging of the gap between "north" and "south," an often bitter divide that characterizes the political history of the region. Indeed, suspicions that North Americans have treated them as less than equal partners permeate South American reactions to many of the initiatives in the economic, environmental, and narco-trafficking policy areas. The desire for a southern path has lent slow-building momentum to the growth of sub-regional trade groups, including [Mercosur], the [Andean Pact], and the [Group of Three] (Mexico, Colombia, and Venezuela). In turn, South American skepticism toward the FTAA has led the U.S. to forge ahead with bilateral and sub-regional trade pacts, signing agreements in 2003 with Chile and the Central American nations and to proceed with CAFTA in 2005.

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This simulation brings together many of the key players in the Americas for discussions on these important issues. They must decide whether progress on key issues will be sought on a hemispheric basis, thereby cementing the hemisphere as a key bloc in the international system; or whether they will pursue bilateral agreements and sub-regional integration as an alternative to this vision.

Economic Integration

At the 1994 Summit of the Americas, the 34 democratically elected heads of state in the Western Hemisphere came together in Miami and agreed to establish the world’s largest free trade zone, extending from the Yukon to Patagonia. This widening of the North American Free Trade Agreement (NAFTA) would be called the Free Trade Area of the Americas (FTAA). The parties agreed to bring the negotiations to a close by December 2004, with the goal of implementing the agreement in 2005. After a slow start, a series of ministerial meetings since 1998 produced a draft text of the FTAA.  However, as the 2005 deadline grew closer it became apparent that growing skepticism about free trade agreements would prevent final passage.

Despite progress in recent years, events in Fall 2003 called into serious question whether the FTAA, as originally conceived, will come to fruition. First, the World Trade Organization (WTO) meetings in Cancun, Mexico, collapsed in acrimony in September 2003. Delegates from Africa, Asia, Latin America, and the Caribbean walked out, accusing developed nations of failing to offer sufficient compromises on agricultural subsidies and other issues. The failure of the WTO talks had important implications for the FTAA.  In November of 2003, another setback came for the FTAA at the ministerial meeting in Miami.¹ This meeting ended with the trade ministers abandoning the goal of creating a single trade arrangement that would unite all 34 countries under a common set of rules and procedures. Instead, each FTAA nation would now have to accept only a minimal list of yet-to-be-established obligations. Moreover, each country would then be free to negotiate whatever arrangement it wishes with any other country or group of countries in the hemisphere. This scaled-down format is widely referred to as "FTAA-lite."

A sizable portion of blame for not achieving a more far-reaching agreement must be laid at the door of the United States. The Bush administration has been unwilling to cut agricultural subsidies, as agribusiness is a key political constituency. In the most recent FTAA negotiations, the U.S. team held to the administration’s policy that agricultural questions have to be resolved in the (now stalled) global WTO talks. Frustrated by the lack of progress on the issue most important to them, the Brazilian team responded by striking from the agenda issues important to the U.S., including intellectual property and restrictions on trade in services and government purchases.

While U.S. and Brazilian differences were central to the resulting watered-down agreement in Miami, the "FTAA-lite" option carries costs for both countries. For Brazil, if the U.S. succeeds in its plans to reach additional bilateral trade agreements, Brazil and its Mercosur partners will be sitting on the sidelines (along with Venezuela, Cuba and Haiti), while other Latin American nations secure preferential access to the U.S. Even if Mercosur negotiated its own deal with Washington, it would still leave the U.S. at the center of all trade and investment flows in the hemisphere. This "hub and spoke" arrangement would give Brazil far less influence on regional economic matters than would a unified free trade arrangement.  The 2005 CAFTA agreement between the U.S., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic represents a fairly small trade pact in terms of dollars, but is a strong signal that the U.S. is willing to accept a series of sub-regional pacts in the absence of hemispheric agreement on the FTAA.

However, this strategy is not without cost for the United States. By taking this approach, it will not gain important access to the Brazilian and Mercosur markets. More importantly, an "FTAA-lite" will do little to advance the U.S. agenda in inter-American relations, and will likely serve only to create new political and economic divisions within the hemisphere. ……

In the wake of the setback of FTAA, it is probable that Brazil will renew efforts to deepen regional trade ties. With South America’s largest economy, Brazil is the leader of Mercosur—a Spanish contraction of the Common Market of the South. Mercosur includes more than 240 million people, has a total annual output of $1 trillion, and is the world’s fourth- largest unified market. This trading bloc and customs union that includes Brazil, Argentina, Paraguay, and Uruguay, has proposed in the past the idea of a SAFTA, or South American Free Trade Area. In such a pact, Brazil would be the Southern Hemispheric counterweight to the United States in building a free trade area. Such a move would demonstrate the lack of confidence many have in the ability of the U.S. to lead economic integration.

Mercosur will also continue to pursue trade agreements with the European Union and with neighboring groups in Latin America. In fact, Mercosur and the Andean Group (a common market union involving Venezuela, Colombia, Peru, Ecuador, and Bolivia) began negotiations in September 1996 on the possibility of a merger, and though a full agreement has not yet been reached, the markets maintain bilateral agreements. In Central America and the Caribbean a similar process is under way, with countries in that area seeking bilateral trade agreements with Canada and Mexico, as well as with Mercosur.

Critics of economic integration have also raised some important points. Recent events in Argentina, for example, demonstrate once again that high levels of debt and structural adjustment policies have created very fragile economies in Latin America. The total collapse of Argentina’s economy, an economy once hailed as a model of proper free market development strategies by economists and bankers, has encouraged caution within the region about the market reforms that the FTAA would require. In addition, the experience of Mexico in the NAFTA agreement has also been used to illustrate the broader social effects that free trade pacts can have on developing economies. While Mexico has improved its balance of exports, wages have remained stagnant, and the migration of workers to free trade zones ([maquiladoras]) has created significant social problems, while environmental quality in and around the maquiladoras has plummeted according to critics. Without adequate protections for workers and the environment, [critics] contend that the effects of the FTAA will prove to be much more negative than positive. Finally, while aggregate GDP has increased, the poverty rate and the gap between rich and poor have skyrocketed.

^1. The text in the following five paragraphs borrows extensively from Peter Hakim, "America and Brazil both lost out in Miami." Financial Times (London), 25 November 2003.

The Environment

…………… (For security reasons, we only make a portion of the scenario available on the web.  For those seriously considering participation, please contact Dr. Jon Amastae (jamastae@utep.edu) for the complete scenario).  

Drug Trafficking in the Americas

…………… (For security reasons, we only make a portion of the scenario available on the web.  For those seriously considering participation, please contact Dr. Jon Amastae (jamastae@utep.edu) for the complete scenario).