Economic Integration in Latin America: a Reality or a Mith?

Economic Integration in LATAM: A Reality or a Myth Oscar R. Martinez Latin American International Relations 19 March 2013 Integration for Latin American (LATAM) states has been an overarching approach when discussing foreign relations in the western hemisphere. Much of the literature proposed in this class proposes the intentions of LATAM states to integrate at different levels. However, this paper will demonstrate that regional economic integration is formally happening. Yet, it remains weak and inconclusive.

Internal bureaucracy and the lack of commitment to these integration efforts overshadow the intentions for economic integration. This paper will examine the different strategic options for economic integration in LATAM, the reason why LATAM states seek for economic integration and most importantly the factors impeding and weakening regional integration in the western hemisphere. This analysis is based on the historical evidence of LATAM states’ behavior and trading trends. To grasp the ongoing economic liberalization policies in LATAM, we must first understand viable strategic options of economic integration for LATAM states.

After the Cold War, Latin America faced a prospect of marginalization. The distinctive economic disadvantages to compete in the world economics presented different strategic integration options that could provide the foundation for long-term development and growth. Peter H. Smith proposed four different economic integration options for Latin America at the beginning of the new millennium: unilateral liberalization, joining with the North, extra-hemispheric partnership, and regional integration.

These strategic models accentuated the different available options LATAM states could consider in order to the meet political and economic agendas. The first strategic option available is the unilateral liberalization of economic programs to strengthen commercial and financial ties with major power centers. This option allows countries to center on export-led development were internal policies focuses on the diversification of products and partners and continually seek foreign investments from multiple sources. Chile is an example of using this lucrative option.

Before Pinochet, Chile exercised protectionist trade policies that suffocated its trading opportunities throughout the globe. Pinochet’s economic reforms resembled this option advocating free trade and allowing Chile to develop commercial ties with Europe, Japan, and the United States without allowing dependence to any single trade partner. Chile has the most signed free trade agreements in South America. The second strategic option is joining economic grounds with the United States. This alternative seems beneficial for LATAM countries because it also integrates them with the world economy.

LATAM states understand the current economic position of the United States and its interdependence in the global economy; this assertion could incentivize other countries to meet their economic ambitions at a global scale. Countries view this option as an opportunity to integrate with the strongest world’s economy, which will enable them to gain prestige and trading opportunities in the global market. Mexico has followed this option, mostly because of its geographic proximity to the United States, benefitting from the free access to the U.

S. market—with NAFTA— and tormenting from its sole dependence. In 2011, nearly 80% of Mexico’s exports were tied to the United States. This can be referred as “putting most of your eggs in one basket. ” Nevertheless, the Mexican economy has significantly grown since NAFTA. The third strategic options is seeking extra-hemispheric partnership. LATAM leaders have the option to develop economic ties with extra-hemispheric trading blocs such as the European Union and the Asian-Pacific Region.

LATAM countries to offset the hegemonic position of the United States often use this option. Argentina, Brazil, Chile, Cuba, Peru, and Venezuela have made remarkable efforts in exercising this option in the past decade. Some countries and/or regional trading blocs see this as a feasible option due to the competition and intense bureaucratic limitations within their own region or subregion. Consequently, this option allows LATAM states to diversify their trading partnership. The fourth and final strategic option is the main focus for this paper.

The regional/subregional economic integration option affirms self-reliance. This alternative provides a realistic approach in changing economic configurations of international power. Therefore, we must further examine this option and explain why LATAM insist on integrating their economies. Regional economic integration agreements depend on the motivation, form, coverage and content. It is often that the major actors set the agenda not only with the view of constructing and retaining power at that regional level but also to establish global precedents.

According to Smith, “given the diversity of interests and economic structures, Latin American leaders have focused not only on continental unification but on subregional integration—projects for economic cooperation among groups of Latin American countries, rather than for the continent as a whole. ” The level of interest in regional integration depends on what cost/benefit (political and economical) analysis in the countries involved. We can argue that Latin America is not homogeneous block, therefore, the different intentions and needs from each country drive regional economic integration at different scales.

Nevertheless, LATAM countries insist in integrating their economies for more relevant factors. First, they wanted to keep their market open for trade (market liberalization). After the Cold War, developing countries in the region needed to increase their trade opportunities in order to level the economic blow caused by developed nations. Open markets increase economic development among partner countries and enhance interaction and cooperation between states and markets. Economic Integration is also a way to overcome the limitation of small domestic markets.

Second, countries want to compete with other regional integration options. Countries that feel limited to an outside regional trading bloc will try to form its own to level the plain field. The Andean Pact (1989) was the first economic integration effort in the western hemisphere. Others followed immediately after this economic block was established: Central American Common Market (CACM—1990), Southern Common Market (MERCOSUR—1991), and the North American Free Trade Agreement (NAFTA—1993). LATAM countries were pressured to compete as a bloc instead as single element.

Third, common norms and ideals spreading to the region encouraged economic integration between these countries. Former Venezuelan President Hugo Chavez led a common anti-US movement to contest different political and economic views. The Bolivarian Alternative for the Americas (ALBA) formed by President Chavez intended a regional cooperation of many LATAM countries based on the idea of the social, political and economic integration. The Bolivarianism movement is an effort to balance against the Washington consensus and liberal markets sponsored by the US.

These type economic integrations have more of a completion of economic, social and political ideals. Diana Tussie articulates, “Regionalism in Latin America is not just a single tidy entity but has given way to many coexisting and competing projects with fuzzy boundaries. ” Regional integration provides a variety of incentives for LATAM countries, however, not everything is as easy as it seems. LATAM effort for regional integration started in 1960 with the Latin American Free trade association (LAFTA), however, this and other regional integration projects failed due to the internal and external factor that limited or impeded its success.

Numerous internal and external factors impeding effective economic integration continue to weaken these regional efforts. Internal factors such as commodities-based economies and domestic policies influence the commitment and participation to these integration projects. External factors such other attractive international options also weakens the regional economic integration. Regional integration is constantly threatened by these factors and it is more evident in Latin America. Despite of the formal integration, the effectiveness of these regional institutions is directly affected by domestic elements.

The first internal factor affecting this regional integration endeavors is the number of commodities-based economies. The commodities for countries are not complimentary with each other. Competition for the open trade in the global market becomes fiercely competitive. Countries will ignore treaties to gain competitive advantage. The “commodity lottery” or the random allocation of natural resources endowments seems to be an influential factor when deciding trading partners. For example, Brazil and Argentina are both members of MERCOSUR, but both are competing for the right to export their agricultural and energy products outside the region.

Tussie reveals this issue by stating that “regional institutions remain feeble, honoured more in spirit than in letter, and intra-regional relations are frayed with competing development projects. ” The second internal factor is domestic policies. This factor impeding the effective economic integration is broken in two different elements: changes in regime and bureaucratic domestic pressures. The constant changes of political regimes affect the stability of a regional institution. Establishments of new political reforms will directly affect economic ambitions set in treaties by previous regimes.

An example of General Pinochet economic reform in Chile has isolated its regional neighbors. The drastic withdrawal of Chile from the Andean Pact and the sway of neo-liberalism generated major economic crises, antagonism to region-wide industrial planning, and a backlog of non-compliance decisions in the region. Hugo Chavez in Venezuela has also stirred the pot on the new endeavors for MERCOSUR, making this trading bloc more of a political instrument rather than an economic integration system. Other domestic pressures come from the legislative institutions blocking and making these trading initiatives almost impossible to achieve.

The bureaucratic process to ratify new or change current treaties—in particular Free Trade Agreements—seems to discourage any further economic integrations. Countries such as Colombia, Chile, Costa Rica would rather sign unilateral treaties than entering into a regional bloc. The final factor affecting the economic integration in Latin America is the recognition of a more attractive option outside their region to integrate their economies. Research shows that less than 28 percent of the overall trade in in Latin America is intra-regional.

This means that economic institutions in Latin America do not take advantage or effectively use their regional partners for trade. For most of the LATAM countries, their top five trading partners include the United States, China, and the European Union. Again, the “commodity lottery” plays a huge role in the influence of why these countries prefer other international states for economic integration. The United States is the most important trading partner for most of the LATAM countries. The economies of many of these LATAM countries depend on the import and export with the United States.

Their economic dependence influences some regional decisions. Nevertheless, these economic decisions could be used to balance against the United State, even though; this could also hurt their own economy. For example, Venezuela’s largest trading partner is the United States. Yet, Venezuela’s domestic and regional economic policies continue to challenge those economic practices it depends the most on. Another huge external factor is the emergence of China and its economic influence in Latin America. LATAM countries see China as a potential alternative from the northern hegemony.

Also, China’s manufacturing industry is highly competitive from those in Latin America. Many countries would prefer cheaper Chinese manufactured good than a more expensive one from their regional partners. China indeed affected the regional integration in Latin America. As expressed by Tussie, referring to regional economic institutions, “it has as an ‘epic’ status as a preferred tool for promoting social rather than mere market goals. ” Historically, regional integration has always been part of the LATAM culture. Whether for political or economic gains, the effort to form these institutions is relevant and somehow too optimistic.

This paper displays different economic options LATAM states have in regards to economic integration. It also defines regional or subregional integration and lists some of the reasons why LATAM states insist in regional integration. Finally, the evidence and examples shown of the internal and external factors that impede and/or weaken regional integration support the following conclusion. A pragmatic approach in the economic and trading decisions seem to dominate the foreign policies of most LATAM countries, affecting the strength, legitimacy, and relevance of these formal regional institutions. ------------------------------------------- [ 1 ]. Peter H. Smith, “Strategic Options for Latin America,” Latin America in the New World System, in Latin America in the New International System, ed. Joseph Tulchin and Ralph Espach (Boulder, Colorado: Lynne Rienner, 2001), 38. [ 2 ]. Ibid. , 35-36. [ 3 ]. Ibid. ,39. [ 4 ]. Ibid. , 39-41. [ 5 ]. “US Relations with Mexico,” Bureau of Western Hemisphere Affairs, US Department of State, accessed on March 15, 2013, http://www. state. gov/r/pa/ei/bgn/35749. htm. [ 6 ]. Smith, “Strategic Options Latin America,” 46-53. [ 7 ].

Diana Tussie, “Latin America: Contrasting Motivations for Regional Projects,” Review of International Studies 35, S1 (2009), 169-188, doi:10. 1017/S026021050900847X. [ 8 ]. Smith, “Strategic Options Latin America,” 46. [ 9 ]. Tussie, “Contrasting Motivations Regional,” 170. [ 10 ]. Ibid. [ 11 ]. Francisco E. Gonzalez, “Latin America in the Economic Equation—Winners and Losers: What can losers do? ” in China’s Expansion into the Western Hemisphere: Implications for Latin American and the United States, ed. Riordan Roett and Guadalupe Paz (Washington, D. C. :Brookings Institution Press, 2008), 151. [ 12 ].

Tussie, “Contrasting Motivations Regional,” 170. [ 13 ]. Ibid. , 174. [ 14 ]. “International Trade and Market Access Data,” World Trade Organization website, accessed on March 3, 2013, http://webservices. wto. org/resources/profiles/MT/TO/2011/WLD_e. pdf. [ 15 ]. “International Trade and Market Access Data,” World Trade Organization website, accessed on March 3, 2013, http://www. wto. org/english/res_e/statis_e/statis_bis_e. htm? solution=WTO&path=/Dashboards/MAPS&file= Map. wcdf&bookmarkState={%22impl%22:%22client%22,%22params%22:{%22langParam%22:%22en%22}}. [ 16 ]. Tussie, “Contrasting Motivations Regional,” 176.