Pacific Alliance Heats Up, Even as Obama Keeps Cool and Distant

Last month, the presidents of Mexico, Colombia, Chile and Peru signed an accord to eliminate 92% of tariffs between their countries, while “steadily” reducing tariffs on the remaining 8% of products traded among them. The announcement marks the latest success of the Pacific Alliance, an economic bloc planned by the four countries that has been gathering steam since 2011. Over the past two years, the Alliance members have been among the fastest-growing economies in Latin America, with annual GDP increases of 5%. That position of strength is buoyed by the fact that they lead the region in the World Bank’s Doing Business Index.

Additionally, the Pacific Alliance has made significant progress in the area of financial integration. Colombia, Chile, and Peru now share a joint-stock exchange, the Integrated Latin American Market, or MILA, which has a capitalization of $500 billion. But if Mexico joins MILA next year, as it is expected to do thanks to reforms undertaken by President Enrique Peña Nieto, capitalization will swell beyond $800 billion. This will push MILA past Brazil’s Bovespa as the largest stock market in Latin America.

In 2014, the group may expand to include Costa Rica as a full member; Panama and/or Guatemala probably won’t lag far behind.

Yet one sore spot is evident. Last week President Juan Manuel Santos of Colombia told talk show host Charlie Rose that Latin America simply needs “more attention” from the United States. Specifically, the Obama administration appears indifferent to the Pacific Alliance: while one trade official called the Pacific Alliance “intriguing,” there has been precious little indication of US interest in upgrading its “observer” status. For his part, President Obama mentioned every major region of the world except Latin America in his speech before the UN General Assembly on September 24. (Editor’s Note: Last week, Nearshore Americas attended a CEO reception in New York City, with three of the four heads of state from Pacific Alliance nations. We will be publishing several video reports from those sessions soon.) 

Keep the USA at Bay

But far from being a source of weakness, the Pacific Alliance probably benefits from America’s coolness – at least in this stage of the group’s development. First of all, each of the nations already has a bilateral free-trade agreement with the United States, so while trade flows with United States would undoubtedly increase as the Pacific Alliance gels, the scale of the increase may be small.

Second, talk of membership would almost inevitably bring pushback from unions and other groups traditionally opposed to free-trade deals in the United States, necessitating the creation of various safeguards and oversight procedures within the Pacific Alliance. As a result of this to-and-froing, the pace of integration within the Alliance could slow.

Third, there is a better chance of eventually pulling the likes of Nicaragua and Ecuador into the group’s orbit because the United States is not at the center of its solar system. Presidents Santos and Piñera have spoken of their economic philosophy as a “third way” for the region, an amalgamation of social welfare and economic goals. Based on the warm reaction from Peruvian President Ollanta Humala, this notion stands a good chance of resonating with former acolytes of Hugo Chavez. However, once US membership talks advance, Evo Morales’s criticism that the Pacific Alliance is a US-backed scheme could gain an audience outside of Bolivia.

The Asian Challenge

Still, while Pacific Alliance presidents fret over US apathy, a more immediate strategic challenge requires attention: how to deal with Asia. By opening up to Asia, the Pacific Alliance might join itself to the Trans-Pacific Partnership. Chile is a founding TPP member, and Peru and Mexico are in negotiations to join—as is the United States. After this round of TPP membership talks, the Pacific Alliance countries could be linked in a common market with a smattering of Pacific nations. Beyond promising increased exports to Asia, this would be a roundabout way of integrating further with the United States.

The problem is that the Pacific Alliance countries are already unduly reliant on exports to China. A vibrant TPP doesn’t guarantee that this vulnerability will be reduced, especially if the Asian TPP members realize their goal of becoming manufacturing hubs for Chinese consumers. In such a scenario, Pacific Alliance countries could reduce their reliance on China but be no more secure, because their reliance on trade with Asia would only spread out among the likes of Vietnam and Malaysia.

Success is not a sure thing for the Pacific Alliance, but the group has already addressed pitfalls that snagged other trade blocs. Its ability to balance expansion with depth warrants optimism.