Latin American and Caribbean Trade Agreements

Latin American and Caribbean Trade Agreements Latin American and Caribbean Trade Agreements: Keys to a Prosperous Com...

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Latin American and Caribbean Trade Agreements

Latin American and Caribbean Trade Agreements: Keys to a Prosperous Community of the Americas

Thomas Andrew O’Keefe

2009

Library of Congress Cataloging-in-Publication Data O’Keefe, Thomas Andrew, 1961– Latin American and Caribbean trade agreement : keys to a prosperous community of the American / Thomas Andrew O’Keefe. p. cm. Includes bibliographical references and index. ISBN 978-90-04-16488-8 1. Foreign trade regulation—American. 2. American—Commercial treaties. 3. Free trade—American. 4. American—Economic conditions. I. Title. KDZ944.O34 2009 343'.087—dc22

Copyright © 2009 Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Hotei Publishing, IDC Publishers, Martinus Nijhoff Publishers, and VSP. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Brill provided that the appropriate fees are paid directly to the Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. printed in the netherlands

In memory of my father, Thomas (1933–2000) and my maternal grandmother, Clemencia Ferrari León de la Barra, who lived to the ripe old age of 100.

TABLE OF CONTENTS Acknowledgments................................................................................................. xvii About the Author....................................................................................................xix List of Abbreviations and Acronyms.........................................................................xx Introduction ........................................................................................................xxv Chapter 1: Early Attempts at Latin American and Caribbean Economic Integration..................................................................................................1 I. Overview of the Theory of Economic Integration.............................................1

II. Central American Common Market...................................................... 3 III. Latin American Free Trade Area........................................................... 5 IV. Andean Pact............................................................................................ 7 V. Caribbean Free Trade Area and Caribbean Community and Common Market........................................................................... 10 VI. New Climate for Latin American and Caribbean Economic Integration in the 1990s....................................................................... 12 VII. Regional Economic Integration and the World Trade Organization......................................................................................... 13 Chapter 2: Latin American Integration Association........................................ 19 I. Latin American Integration Association and Its Relevance to Intra-Regional Trade............................................................................. 19 A. Introduction.................................................................................... 19 B. Latin American Integration Association Today............................ 20 II. Institutional Framework of the Latin American Integration Association............................................................................................. 22 A. Decision-Making Bodies................................................................. 22 B. Central Clearing House Mechanism for Intra-Latin American Integration Association Trade....................................... 23 III. Rule of Origin Requirements............................................................... 25 IV. Safeguard Measures.............................................................................. 27 V. Agreements Under the Latin American Integration Association Framework......................................................................... 28 VI. Agreements Between Latin American Integration Association Countries and Non-Member States in Central America and the Caribbean................................................................. 34 A. Colombia-Venezuela and Central American Agreement............. 34 B. Caribbean Common Market and Community Preferential Market Access Agreements with Colombia and Venezuela.......... 34 vii

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VII. Latin American Integration Association Economic Complementation Agreements............................................................ 37 A. Chile-Mexico Free Trade Agreement............................................ 37 B. Chile-Venezuela Free Trade Agreement........................................ 44 C. Chile-Colombia Free Trade Agreement........................................ 45 D. Bolivia-Mexico Free Trade Agreement.......................................... 47 E. Chile-Ecuador Free Trade Agreement........................................... 51 F. G-3 Accord Between Colombia, Mexico, and Venezuela............. 53 1. Introduction............................................................................. 53 2. Free Trade in Goods................................................................ 55 3. Rule of Origin Requirements.................................................. 57 4. Safeguard Measures................................................................. 58 5. Unfair Trade Practice Remedies............................................. 58 6. Technical Norms...................................................................... 59 7. Sanitary and Phytosanitary Measures...................................... 59 8. Services..................................................................................... 60 9. Government Procurement...................................................... 62 10. Investment Protection............................................................. 64 11. Intellectual Property Rights Protection.................................. 66 12. Dispute Resolution................................................................... 67 13. Institutional Framework.......................................................... 68 14. Transparency............................................................................ 69 15. Temporary Entry of Businesspeople....................................... 69 G. Chile-Peru Free Trade Agreement................................................. 70 H. Mexico-Uruguay Free Trade Agreement....................................... 70 1. Introduction............................................................................ 70 2. Free Trade in Goods............................................................... 71 3. Rule of Origin Requirements................................................. 71 4. Safeguard Measures................................................................ 73 5. Unfair Trade Practice Remedies............................................ 74 6. Technical Norms, Sanitary and Phytosanitary Measures.................................................................................. 75 7. Services.................................................................................... 75 8. Investment Protection............................................................. 76 9. Temporary Entry of Businesspeople, Professionals, and Investors........................................................................... 77 10. Intellectual Property Rights Protection................................. 78 11. Dispute Resolution.................................................................. 79 12. Conclusion............................................................................... 80 Chapter 3: Origins, Current Status, and Future of MERCOSUR..................... 81 I. Introduction........................................................................................... 81 II. Argentine-Brazilian Integration and Economic Cooperation Program of 1986.................................................................................... 82 III. Overview of MERCOSUR from Its Inception...................................... 84 A. Introduction.................................................................................... 84 B. Trade Creation vs. Trade Diversion............................................... 85

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C. Political Considerations.................................................................. 96 D. Full Membership by Venezuela and Bolivia in MERCOSUR.................................................................................... 99 E. Reaching Out to the Rest of the World....................................... 100 IV. Chile-MERCOSUR Free Trade Agreement....................................... 104 A. Introduction.................................................................................. 104 B. Free Trade in Goods..................................................................... 105 C. Rule of Origin Requirements....................................................... 106 D. Unfair Trade Practice Remedies.................................................. 107 E. Safeguard Measures...................................................................... 107 F. Dispute Resolution....................................................................... 107 G. Integration of Physical Infrastructure......................................... 108 H. Services.......................................................................................... 109 I. Other Measures............................................................................. 109 V. Bolivia-MERCOSUR Free Trade Agreement..................................... 110 A. Introduction.................................................................................. 110 B. Administrative Commission......................................................... 111 C. Free Trade in Goods..................................................................... 111 D. Rule of Origin Requirements....................................................... 112 E. Unfair Trade Practice Remedies.................................................. 114 F. Safeguard Measures...................................................................... 114 G. Dispute Resolution....................................................................... 115 H. Other Measures............................................................................. 116 VI. MERCOSUR-Peru Free Trade Agreement........................................ 117 A. Introduction.................................................................................. 117 B. Free Trade in Goods..................................................................... 118 C. Rule of Origin Requirements....................................................... 120 D. Unfair Trade Practice Remedies.................................................. 121 E. Safeguard Measures...................................................................... 122 F. Technical Norms, Sanitary and Phytosanitary Measures............ 122 G. Dispute Resolution....................................................................... 123 H. Administrative Commission......................................................... 124 I. Conclusion.................................................................................... 125 VII. Andean Community-MERCOSUR Free Trade Agreement.............. 125 A. Introduction.................................................................................. 125 B. Free Trade in Goods..................................................................... 126 C. Rule of Origin Requirements....................................................... 127 D. Unfair Trade Practice Remedies.................................................. 129 E. Safeguard Measures...................................................................... 130 F. Technical Norms........................................................................... 131 G. Sanitary and Phytosanitary Measures.......................................... 131 H. Dispute Resolution....................................................................... 132 I. Transportation and Infrastructure............................................... 134 J. Administrative Commission......................................................... 134 K. Conclusion.................................................................................... 134

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Chapter 4: Institutional Framework of MERCOSUR and How the MERCOSUR Economic Integration Process Functions.......................... 137 I. Introduction...................................................................................... 137 II. Institutional Framework................................................................... 137 A. Common Market Council.......................................................... 139 B. Common Market Group............................................................ 140 C. MERCOSUR Trade Commission............................................... 141 D. Socio-Economic Advisory Forum.............................................. 142 E. MERCOSUR Secretariat............................................................ 143 F. Commission of Permanent Representatives............................. 143 G. Advisory Forum of Municipalities, Federal States, Provinces, and Departments...................................................... 144 H. MERCOSUR Parliament............................................................ 144 I. Special Funds to Strengthen the Economic Integration Process........................................................................................ 146 J. Program for the Integration of Production in MERCOSUR .............................................................................. 147 III. Dispute Resolution System............................................................... 148 A. Disputes Arising Among the State Parties................................ 149 B. Disputes Involving Private Parties and a State Party(ies)......... 152 C. Implementing Regulations for the Protocol of Olivos............ 153 D. Decisions Arising Under the Protocol of Olivos...................... 155 1. Dispute Between Uruguay and Argentina Arising from the Prohibition on the Importation of Remolded Tires (October 25, 2005).................................................... 155 2. Complaint Brought by Uruguay Against Argentina for Failure to Adopt Appropriate Measures to Prevent and/or Halt Interruptions to Free Movement Over the International Bridges of General San Martin and General Artigas that Link the Argentine Republic with the Eastern Republic of Uruguay (June 21, 2006)................................................................... 158 3. Request for an Advisory Opinion from the Court of First Instance in Civil and Commercial Matters (First Division) of Asuncion, Paraguay re: Norte S.A. Imp. Exp. c/ Laboratorios Northia Sociedad Anónima, Comercial, Industrial, Financiera, Inmobilaria y Agropecuaria s/ Indeminzación de Daños y Perjuicios y Lucro Cesante (April 3, 2007)..................................................................... 160 IV. Intra-Regional Free Trade Program................................................ 161 V. Rule of Origin Requirements.......................................................... 164 VI. Certificates of Origin........................................................................ 166 VII. Common External Tariff.................................................................. 168 VIII. Other Import Regulations............................................................... 172 A. Customs Valuation..................................................................... 172 B. Special Taxes and Licensing Requirements............................. 173

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1. Argentina.......................................................................... 174 2. Brazil.................................................................................. 175 3. Paraguay............................................................................ 175 4. Uruguay............................................................................. 176 IX. MERCOSUR Automobile Regime................................................. 176 X. Technical Norms............................................................................. 181 XI. Sanitary and Phytosanitary Measures............................................ 183 XII. Free Trade/Export Processing Zones and Special Customs Areas................................................................................. 183 XIII. Temporary Admission and Duty Drawback................................... 184 XIV. Safeguard Measures........................................................................ 185 XV. Unfair Trade Practice Remedies.................................................... 189 XVI. Trade in Services............................................................................. 191 XVII. Government Procurement............................................................. 193 Chapter 5: Foreign Investment Climate Within MERCOSUR and Business Opportunities............................................................................. 195 I. Legal Regime for Foreign Investment........................................... 195 II. Intellectual Property Rights Protection......................................... 197 III. Free Movement of Labor................................................................ 199 IV. Environmental Protection.............................................................. 201 V. Trends in Foreign Direct Investment in the MERCOSUR Region during the 1990s................................................................ 204 VI. Examples of Companies that Incorporated MERCOSUR into Their Strategic Business Plans for the Southern Cone of South America................................................................................ 208 A. Automobiles............................................................................ 209 B. Auto Parts................................................................................ 213 C. Beverages................................................................................. 214 D. Computers and Informatics................................................... 215 E. Consumer Goods.................................................................... 216 F. Electronic Appliances and Mobile Telephony...................... 216 G. Forestry and Paper Products.................................................. 218 H. Lactate Industry....................................................................... 219 I. Other Manufactured Goods................................................... 220 J. Petrochemicals........................................................................ 222 K. Pharmaceuticals...................................................................... 224 L. Processed Foodstuffs............................................................... 225 M. Services.................................................................................... 227 N. Steel.......................................................................................... 228 O. Textiles/Apparel and Footwear.............................................. 229 P. Transportation......................................................................... 230 VII. Investment Trends in the MERCOSUR Region Following the Argentine Economic Implosion of 2001–02................................. 231 VIII. Argentine Energy Crisis and Its Impact on Foreign Direct Investment and Regional Energy Integration............................... 233

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A. Natural Gas............................................................................... 234 B. Electricity................................................................................... 236 C. Potential Role for MERCOSUR?............................................. 238

Chapter 6: Institutional Framework of the Andean Community and How the Andean Economic Integration Process Functions.................... 243 I. Current Status of the Andean Community.................................... 243 II. Institutional Framework.................................................................. 247 A. Andean Presidential Council and Andean Council of Ministers of Foreign Relations................................................. 247 B. Andean Commission................................................................ 248 C. General Secretariat of the Andean Community..................... 248 D. Andean Labor Advisory Council and Andean Business Advisory Council....................................................................... 249 E. Tribunal of Justice of the Andean Community....................... 250 F. Andean Development Corporation......................................... 251 G. Latin American Reserve Fund................................................. 254 H. Andean Parliament................................................................... 254 III. Intra-Regional Free Trade Program............................................... 255 IV. Rule of Origin Requirements......................................................... 255 V. Common External Tariff................................................................. 257 VI. Other Import Regulations.............................................................. 259 A. Customs Valuation.................................................................... 259 B. Customs Procedures................................................................. 260 C. Special Taxes and Licensing Requirements............................ 261 1. Bolivia................................................................................. 262 2. Colombia............................................................................ 262 3. Ecuador.............................................................................. 263 4. Peru.................................................................................... 263 5. Venezuela........................................................................... 264 VII. Technical Norms.............................................................................. 265 VIII. Sanitary and Phytosanitary Measures............................................. 266 IX. Safeguard Measures......................................................................... 267 X. Unfair Trade Practice Remedies..................................................... 270 XI. Services............................................................................................. 271 Chapter 7: Foreign Investment Climate Within the Andean Community and Business Opportunities...................................................................... 275 I. Legal Regime for Foreign Investment............................................ 275 II. Intellectual Property Rights Protection.......................................... 276 III. Free Movement of Labor................................................................. 279 IV. Environmental Protection............................................................... 282 V. Competition Policy.......................................................................... 284 VI. Opportunities for Foreign Direct Investors................................... 290 A. Andean Trade Promotion Act.................................................. 291 B. Andean Trade Promotion and Drug Eradication Act............ 293

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VII. Opportunities in the Transportation Infrastructure Sector......... 294 A. Andean Community Decisions on Transportation Issues...... 295 B. Specific Transportation Infrastructure Improvement Projects...................................................................................... 298 VIII. Energy Integration.......................................................................... 298 IX. Initiative for the Integration of Regional Infrastructure in South America................................................................................. 299 Chapter 8: Central American Integration System.......................................... 303 I. Revival of the Central American Economic Integration Process................................................................................................. 303 II. Institutional Framework..................................................................... 305 A. Decision-Making Bodies........................................................... 305 B. General Secretariat and Other Specialized Bodies................ 306 C. Central American Bank for Economic Integration................ 306 III. Dispute Resolution System............................................................. 308 IV. Intra-Regional Free Trade Program............................................... 312 V. Rule of Origin Requirements......................................................... 313 VI. Common External Tariff................................................................. 315 VII. Other Import Regulations.............................................................. 316 A. Customs Valuation.................................................................... 316 B. Customs Regulations................................................................ 317 C. Special Taxes and Licensing Requirements........................... 317 1. Costa Rica.......................................................................... 318 2. El Salvador........................................................................ 318 3. Guatemala......................................................................... 318 4. Honduras.......................................................................... 319 5. Nicaragua.......................................................................... 319 VIII. Safeguard Measures.......................................................................... 320 IX. Unfair Trade Practice Remedies.................................................... 321 X. Technical Norms............................................................................. 323 XI. Sanitary and Phytosanitary Measures............................................. 324 XII. Investment Protection and Cross-Border Trade in Services......... 324 XIII. Intellectual Property Rights Protection......................................... 329 XIV. Environmental Protection.............................................................. 330 XV. Opportunities for Foreign Direct Investors................................... 334 A. Plan Puebla-Panamá................................................................. 336 B. Electricity Integration of Central America............................. 337 XVI. Trade Agreements Between Central America and Other Nations in the Western Hemisphere....................................... 338 A. Association of Caribbean States.............................................. 338 B. Costa Rica-Mexico Free Trade Agreement............................. 340 C. Nicaragua-Mexico Free Trade Agreement.............................. 341 D. Central America-Dominican Republic Free Trade Agreement................................................................................ 342 E. Central America-Chile Free Trade Agreement....................... 344

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F. Mexico-Northern Triangle of Central America Free Trade Agreement..................................................................... 347 G. U.S.-Central America and Dominican Republic Free Trade Agreement..................................................................... 349 1. Introduction...................................................................... 349 2. Free Trade in Goods......................................................... 350 3. Rule of Origin Requirements........................................... 351 4. Origin Verification Procedures........................................ 353 5. Temporary Admission, Duty Drawback, and Free Trade Zones....................................................................... 354 6. Customs Administration and Trade Facilitation............. 354 7. Sanitary and Phytosanitary Measures and Technical Norms................................................................................ 354 8. Subsidies............................................................................ 355 9. Unfair Trade Practice Remedies and Safeguards .......... 355 10. Government Procurement............................................... 356 11. Investment ........................................................................ 357 12. Services.............................................................................. 358 13. Electronic Commerce....................................................... 359 14. Intellectual Property Rights Protection........................... 359 15. Labor Rights...................................................................... 360 16. Environmental Protection................................................ 362 17. Free Trade Commission and Other Administrative Issues.................................................................................. 363 18. Dispute Resolution............................................................ 363 Chapter 9: The Caribbean Common Market and Community and the Organization of Eastern Caribbean States......................................... 365 I. Introduction.................................................................................... 365 II. Institutional Framework................................................................. 366 III. Dispute Settlement and the Role of the Caribbean Court of Justice.............................................................................................. 368 IV. Intra-Regional Free Trade Program.............................................. 370 V. Rule of Origin Requirements......................................................... 370 VI. Common External Tariff................................................................ 371 VII. Safeguard Measures........................................................................ 372 VIII. Unfair Trade Practice Remedies.................................................... 373 IX. Services............................................................................................ 374 X. Free Movement of Labor................................................................ 375 XI. Free Movement of Capital.............................................................. 375 XII. Competition Policy......................................................................... 376 XIII. Opportunities for Foreign Investors.............................................. 377 A. Caribbean Basin Economic Recovery Act and U.S. Caribbean Basin Trade Partnership Act................................. 378 B. From Lomé I to the European Union-Africa, the Caribbean, and the Pacific Economic Partnership Agreements.............. 382

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C. Caribbean-Canada Program.................................................... 385 D. CARICOM-Dominican Republic Free Trade Agreement...... 385 E. CARICOM-Costa Rica Free Trade Agreement....................... 387 XIV. Organization of Eastern Caribbean States.................................... 389 A. Inter-Relationship Between CARICOM and the Organization of Eastern Caribbean States.............................. 389 B. Achievements of the Organization of Eastern Caribbean States......................................................................................... 390 C. Has the Organization of Eastern Caribbean States Become an Impediment to Deeper CARICOM Integration?.............. 391 XV. Test Case for the Organization of Eastern Caribbean States: Proposal to Convert Antigua and Barbuda into a Free Port.......................................................................................... 393 A. Competitive Productive Sectors for Antigua and Barbuda.... 393 1. Agriculture......................................................................... 393 2. Manufacturing................................................................... 394 3. Services............................................................................... 396 B. Does St. Maarten Provide an Appropriate Free Port Model for Antigua and Barbuda?............................................ 398 1. Overview of the Free Port Concept.................................. 398 2. St. Maarten......................................................................... 399 C. Feasibility of Turning Antigua and Barbuda into a Free Port................................................................................... 403 1. Importance of All the Organization of Eastern Caribbean States Countries Moving to Free-Port Status Within the Context of CARICOM.......................... 403 2. Impact of Lost Tax Revenue from Imports...................... 404 3. Gains to the Local Economy............................................. 405 Chapter 10: Rise and Fall of the Free Trade Area of the Americas.............................409

I. From the First to the Second Summit of the Americas (December 1994–April 1998)......................................................... 409 II. From the Second to the Third Summit of the Americas (April 1998–April 2001).................................................................. 416 III. From the Third to the Special Summit of the Americas in Monterrey, Mexico (April 2001–January 2004)............................. 421 IV. From the Special Summit of the Americas in Monterrey, Mexico, to the Fourth Summit of the Americas (January 2004–November 2005).................................................... 430 V. Why the Bolivarian Alternative for the Peoples of Our America Is Not a Viable Alternative to the Free Trade Area of the Americas....................................................................... 433 Chapter 11: Creating a Prosperous Community of the Americas................. 437 I. Introduction.................................................................................... 437 II. Energy as the Linchpin for the Community of the Americas...... 438

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III. IV. V. VI. VII. VIII.

Leveraging the Precedent Set on Energy by the North American Free Trade Agreement and the North American Security Prosperity Partnership..................................................... 442 Bringing MERCOSUR and CARICOM on Board........................ 444 Using Current Regional Economic Integration Projects as the Building Blocks for the Community of the Americas.................. 447 Effective Enforcement of Legislation to Protect Basic Labor Rights and the Environment.............................................. 449 Cross-Border Migration................................................................. 455 Conclusion...................................................................................... 456

Table of Instruments............................................................................................. 461 Bibliography......................................................................................................... 477 Index................................................................................................................... 485

ACKNOWLEDGMENTS I want to express my deepest appreciation to all my colleagues in academia and in public institutions throughout the Western Hemisphere who, over the course of nearly two decades, have generously shared with me their knowledge and experiences with respect to regional economic integration. Many of their written works are cited in this volume, which represents an expression of esteem and respect for their contributions to the struggle to create more equitable societies and provide genuine economic opportunities for a majority of the inhabitants of North and South America. I would be remiss if I did not make particular mention of Luis Castillo, Guillermo Devoto, Adriana Dreyzin de Klor, Marcos Simão Figueiras, Daniel Hargain, Robin King, Barbara Kotschwar, Karen Monaghan, Maryse Robert, Sherry Stephenson, and Carol Wise. Years of fruitful exchange of ideas and encouragement have contributed to the writing of this volume. I am also grateful to my student intern Ana Sheila Victorino for assisting me in pulling together the Table of Contents and Bibliography.

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ABOUT THE AUTHOR Thomas Andrew O’Keefe is the president of Mercosur Consulting Group, Ltd. (http://www.mercosurconsulting.net), a legal and economic consulting firm that assists companies with their strategic business planning for South America and advises Latin American firms exporting to the United States. The firm was founded in New York in 1993 and moved to Washington, DC in 1996. Mr. O’Keefe is a dual national of the United States and Chile. He is bilingual in English and Spanish, and he is fluent in French and Portuguese. He did his undergraduate work at Columbia University, and received his J.D. from the Villanova University School of Law. In 1986, he worked for the legal departments of the Chilean Human Rights Commission and the Vicaría de la Solidaridad (the human rights office of the Archdiocese of Santiago). He also worked as an associate at the Wall Street law firm of Carter, Ledyard & Milburn and the Boston-based Gadsby & Hannah before returning to study at the University of Oxford, where he received an M.Phil. in Latin American Studies (History and Economics) in 1992. He has taught courses on Western Hemisphere economic integration and the Political Economy of the Southern Cone countries of South America at Johns Hopkins University’s School of Advanced International Studies, The George Washington University’s Elliott School of International Affairs, George Mason University, and Stanford University. He was chair of the Brazil and Southern Cone course at the Foreign Service Institute between September and December 2005. Mr. O’Keefe is the author of numerous articles on Latin American economic integration and globalization and has lectured extensively on the topic in the United States and abroad. He has been a frequent guest on television programs on the subject. He has also been invited to brief U.S. government officials and testify before the U.S. Congress on developments within MERCOSUR and the Free Trade Area of the Americas project. He is the former managing editor of Focus Americas, an analytical review of business and legal developments throughout the Western Hemisphere. His book, Latin American Trade Agreements, is the only comprehensive publication in English that discusses the major Latin American economic integration projects from a practical perspective and addresses related topics such as laws affecting foreign investment and intellectual property rights. He was also a major contributing editor to FTAA Executive Briefing published by Orbis Publications, L.L.C. in 1998. In 1999, Mr. O’Keefe prepared a report entitled Lessons From the MERCOSUR Experience that Are Relevant for the Negotiations to Create a SADC Free Trade Area under a U.S. AID/R.C.S.A. funded Southern African Development Community (SADC) Protocol on Trade Project. He also oversaw the preparation of a report under the same project analyzing the costs and benefits to Mozambique in ratifying xix

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the SADC Protocol on Trade. In 2001, he participated in the U.S. AID/RAPID project as an African Growth and Opportunity Act (AGOA) trade specialist based in Gaborone, Botswana. In 2005, he received a Fulbright Scholars Award to lecture on international trade topics at the National Universities of Córdoba and Rosario in Argentina and conduct research on the Argentine energy sector for a chapter in a book published by the Center for Strategic and International Studies (CSIS) in 2007. Between October 2005 and October 2006, Mr. O’Keefe was the Legal and Economic Integration Specialist for the U.S. AID funded Caribbean Open Trade and Support Program based in Antigua that provided trade capacity-building and competitiveness assistance to the governments and private sectors in Antigua and Barbuda as well as Dominica.

LIST OF ABBREVIATIONS AND ACRONYMS ACE ACP ACS AGOA ALADI ALALC ALBA ALIDES AMN APEC ATPA ATPDEA BNDES BOAC BWIA CAAAM CABEI CACM CAF CAFTA-DR CARIBCAN CARICOM CARIFORUM CARIFTA CAUCA CAUCE

Economic Complementation Agreement or Acuerdo de Complementación Económica Africa, the Caribbean, and the Pacific Association of Caribbean States African Growth and Opportunity Act Latin American Integration Association or Asociación Latinoamericana de Integración Latin American Free Trade Area or Área Latinoamericana de Libre Comercio Bolivarian Alternative for the Peoples of Our America or Alternativa Bolivariana para los Pueblos de Nuestra America Central American Alliance for Sustainable Development MERCOSUR Standardization Association or Asociación MERCOSUR de Normalización Asia-Pacific Economic Cooperation Andean Trade Promotion Act Andean Trade Preference and Drug Eradication Act Brazilian National Development Bank British Overseas Airways Corporation British West Indian Airlines Andean Committee of Environmental Authorities Central American Bank for Economic Integration Central American Common Market Andean Development Corporation or Corporación Andina de Fomento Central America-Dominican Republic and United States Free Trade Agreement Caribbean-Canada Program Caribbean Common Market and Community Caribbean Forum Caribbean Free Trade Area Uniform Central American Customs Code or Código Aduanero Uniforme Centroamericano Argentine-Uruguyan Economic Complementation Agreement or Convenio Argentino-Uruguayo de Complementación Económica xxi

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CBERA CBN CBTPA CCAD CCCC CCJ CDM CECC CET CICAD CIF CIRI CMC COFAP COTED CRAS CRNM CRRH CSME CSIS ECLAC EEC EPA EU FOB FOCEM FTA FTAA GATS GATT GSP HTS IADB ICSID ICSID Convention

Caribbean Basin Economic Recovery Act Committee on Bilateral Negotiations United States-Caribbean Basin Trade Partnership Act Central American Commission on the Environment and Development Central American Council on Climate Change Caribbean Court of Justice Clean Development Mechanism Central American Education and Culture Coordinating Commission Common External Tariff Central America Inter-Parliamentary Commission on the Environment and Natural Resources Cost, Insurance, and Freight Regional Integration Committee on Inputs Common Market Council (MERCOSUR) Council of Finance and Planning Council of Trade and Economic Development Regional Commission on Social Affairs (SICA) Caribbean Regional Negotiating Machinery Regional Committee on Water Resources of the Central American Isthmus Caribbean Single Market and Economy Center for Strategic and International Studies UN Economic Commission for Latin America and the Caribbean European Economic Community Economic Partnership Agreement European Union Freight on Board Fund for Structural Convergence in MERCOSUR Free Trade Agreement Free Trade Area of the Americas WTO General Agreement on Trade in Services WTO General Agreement on Tariffs and Trade General System of Preferences Harmonized Tariff Schedule Inter-American Development Bank International Center for the Settlement of Investment Disputes Convention on the Settlement of Investment Disputes between States and Nationals of Other States

List of Abbreviations and Acronyms • xxiii

IIRSA Integration of Regional Infrastructure in South America or Iniciativa para la Infraestructura Regional de Sur América ILO International Labor Organization IMF International Monetary Fund INTAL Institute for the Integration of Latin America and the Caribbean (IADB) MERCOSUR/MERCOSUL Common Market of the South or Mercado Comun de �� Sur/Mercado Comum do Sul MFN Most-Favored Nation MOU Memorandum of Understanding NAFTA North American Free Trade Agreement NALADISA ALADI tariff classification system NCM MERCOSUR harmonized tariff classification system OAS Organization of American States ODECA Organizational Letter of the Organization of Central American States of 1962 OECS Organization of Eastern Caribbean States PARLACEN Central American Parliament PEC Trade Expansion Protocol (Brazil-Uruguay) or Protocolo de Expansión Comercial PICAB Argentine-Brazilian Program for Integration and Economic Cooperation or Programa de Integración y Cooperación Argentino-Brasileño PTO U.S. Patent and Trademark Office SAC Central American Harmonized Tariff Schedule or Sistema Arancelario Centroamericano SACU South African Customs Union SADC Southern African Development Community SCA Secretariat of the Central American Agricultural Council SICA Central American Economic Integration System or Sistema de la Integración Centroamericana SPP Security and Prosperity Partnership (North America) SICAP Central American System of Protected Areas SIECA Old Permanent Secretariat of the General Treaty on Central American Economic Integration SITCA Secretariat for Central American Integration of Tourism SPS Agreement WTO Agreement on the Application of Sanitary and Phytosanitary Measures SEMCA Executive Secretariat of the Central American Monetary Council

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TBT Agreement TCP TRIMs TRIPs TRQ UK UN UNASUR UNCITRAL US USAID USTR UWI VAT WIPO WTO

WTO Agreement on Technical Barriers to Trade Peoples’ Trade Treaty or Tratado de Comercio de los Pueblos WTO Trade-Related Investment Measures WTO Agreement on Trade-Related Aspects of Intellectual Property Rights tariff rate quota United Kingdom United Nations Union of South American Nations UN Commission on International Trade Law United States US Agency for International Development US Trade Representative University of the West Indies value added tax World Intellectual Property Organization World Trade Organization

INTRODUCTION Latin American and Caribbean Trade Agreements: Keys to a Prosperous Community of the Americas has two purposes: (1) to fill the void in academic texts that can be used to teach courses on economic integration in the Western Hemisphere and (2) to provide a road map for the new administration that moves into the White House in January 2009 to complete the Free Trade Area of the Americas (FTAA) project. Launched in the 1990s with the enthusiastic support of all the elected leaders of the Western Hemisphere, the FTAA has been a victim of the same neglect that has characterized overall U.S. policy to the region under the Bush administration. As this book makes clear, however, a free trade agreement will not be enough. A bolder and more ambitious project that also seeks to redress many of the deep-seated problems that have long plagued Latin America and the Caribbean is required. The Community of the Americas that is proposed in this book and rests upon important pillars such as energy security, migration, economic, and political reform provides a new and cohesive U.S. policy for Latin America and the Caribbean. Latin American and Caribbean Trade Agreements: Keys to a Prosperous Community of the Americas is intended to complement Latin American Trade Agreements that was first published by this author in 1997 and has been periodically updated since then. Whereas the earlier book provides more detailed information for exporters to and investors in Latin America and contains hard-to-find or non-existent English translations of the major treaties and trade regulations, companies trading with Latin America and the Caribbean or wishing to use a country in the region as an export platform for neighboring countries or globally will also find the current work an extremely useful reference guide.

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CHAPTER 1

EARLY ATTEMPTS AT LATIN AMERICAN AND CARIBBEAN ECONOMIC INTEGRATION I. Overview of the Theory of Economic Integration Since the late 1950s, there have been several attempts at economic integration in Latin America and the Caribbean. Until the 1990s, the results achieved by all these previous efforts were disappointing and fell short of the lofty goals initially laid out for them. The economic integration projects, which were revived or have appeared since the 1990s, have been much more successful in terms of fomenting significant increases in intra-regional trade. One important explanation for this phenomenon has been the market-oriented economic policies that were adopted in one degree or another in each of the Latin American countries that better complimented the overall goals sought through economic integration. Before the 1990s, the rhetorical goal of bigger markets and the corresponding economies of scale often collided with protectionist trade policies being pursued at the national level. Before examining the exact reasons why past attempts at economic integration in Latin America and the Caribbean stagnated or collapsed, it is important to define exactly what is meant by the term economic integration. Economic integration projects have traditionally been divided into one of five categories. The first and least complicated form of economic integration is a free trade area. In a free trade area, tariffs and quantitative restrictions are eliminated on goods traded among the member states. Each participating country, however, retains its own individual external tariff structure as against non-member states. The second form is a customs union and consists of a free trade area coupled with a common external tariff (CET) that is applied by all the member states on imports from outside the union. The third form of integration, a common market, includes all the features of a customs union but adds the free movement of factors of production (i.e., labor and capital) between the member states. An economic union, the fourth form of integration, combines a common market with some degree of harmonization of each member state’s macroeconomic policies. It has been argued that, for a common market to be truly successful, it must be an economic union. This view eventually prevailed in Europe, when the European Economic Community (EEC)—a common market—became the European Union (EU) in 1992 following the creation of the European Central Bank and eventually the establishment of a See, e.g., B. Balassa, The Theory of Economic Integration 2 (1962).


single currency. Finally, total economic integration, the fifth form, involves the unification of monetary, fiscal, and social policies, and the establishment of a supranational authority whose decisions are binding on all the member states. Total economic integration is synonymous with the creation of a federal entity such Brazil, Canada, or the United States of America. Under traditional economic integration theory, the justification for joining a customs union or common market depended upon whether the union would lead to the creation of new trade flows or whether it would simply divert trade flows to inefficient producers within the newly established bloc. A union that increased overall trade was considered the ideal, if the most efficient producer in the international arena became the chief supplier of the new customs union or common market. Trade creation was said to be more likely to occur in a proposed economic bloc where the member states had previously traded heavily among themselves and where trade had been competitive but potentially complementary. Developing countries generally conduct very little trade among themselves, and they are usually not very industrialized. Under traditional economic integration theory, it was thought that a customs union or common market was unlikely to be successful under such circumstances. For example, the imposition of high tariff walls around a union of developing countries would only divert trade away from more efficient producers in the developed world to inefficient producers operating within the new bloc. Despite this, a group of economists from the now discredited import-substitution or dependista school of economics argued that while a customs union or common market among developing countries might initially result in trade diversion, the larger market created would provide economies of scale and decrease production costs, encouraging industrial growth. Over the long run, this new industrial growth would contribute to a modern and diverse productive structure. Among the major proponents of this line of thought were economists associated with the UN Economic Commission for Latin America based in Santiago, Chile. Implicit in the dependista perspective was the understanding that the high CET used to protect the nascent industrial sector would be temporary in nature until the new industries had gained sufficient strength in order to effectively compete on the international market. Unfortunately, this assumption was never put into practice. Accordingly, whatever positive gains might have initially been obtained from the initial high tariff barriers dissipated as they were retained indefinitely. Not only did this long-term protectionism encourage high inefficiency, low productivity, and technological obsolescence, it also contributed to a heavy foreign debt burden as money had to be borrowed abroad to finance the importation of capital goods and inputs to sustain many uncompetitive manufacturing activities.

J. Viner, The Customs Union Issue 44 (1950). A.M. El-Agraa, International Economic Integration 24 (1982). J. Grunwald, Latin American Economic Integration and the United States 31 (1972). 2

Early Attempts at Economic Integration •

II. Central American Common Market The idea for the Central American Common Market (CACM) originated in the Mexico City office of the UN Economic Commission for Latin America. CACM sought to diversify the economies of the five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) away from their dependency on agriculture toward increased industrialization, by expanding import substitution policies from the national to the regional level. The thought was that there would be less inefficiency if infant industries were protected on a regional level by high tariff barriers as opposed to a national one. El Salvador, Guatemala, Honduras, and Nicaragua signed the General Treaty of Central American Economic Integration (General Treaty) in Managua on October 13, 1960, which set the formal ground rules for establishing CACM. Costa Rica signed the General Treaty in 1962. Although called a common market, CACM was really a customs union since it never called for the free movement of at least one important factor of production: workers. Pursuant to the General Treaty, the signatory states began reducing import duties and eliminating quotas on all primary and manufactured goods traded among them. The General Treaty provided that this process would be completed by 1967. The General Treaty also required the Central American nations to endorse an earlier agreement that committed them to building factories in the less developed countries or in those best suited for the task. These factories would produce goods not already made in Central America and be protected from outside competition by a high CET. Rules for determining the origin of a product and whether it qualified for intra-regional free trade treatment were left for subsequent negotiations. Future negotiations would also establish a more gradual liberalization program for a special list of goods that were initially exempt from CACM’s free trade provisions. In conjunction with the General Treaty, the Central American states signed an agreement establishing a Central American Bank for Economic Integration to be headquartered in Tegucigalpa, Honduras. The bank was intended to promote regional integration and balanced economic development by investing in, inter alia, infrastructure projects and new factories, as well as technologies to enhance the efficiency and output capabilities of already existing industries. A subsequent agreement established the Chamber of Central American Compensation. The Chamber provided a clearinghouse mechanism through which the Central American countries could funnel intra-regional trade transactions and only have to use hard currency to cancel outstanding debits on a periodic basis. By 1966, more than 90 percent of intra-Central America trade was exempt from customs duties, and the member countries had started to implement a CET. It is interesting to note, however, that a 1960 Treaty of Economic Association between El Salvador, Guatemala, and Honduras contemplated the free movement of persons, goods, and capital among the three signatory states. G. Mace, Regional Integration in Latin America: A Long and Winding Road, 43 Int’l J. 413 (Summer 1988).


Exports by member countries to their CACM partners increased from 7 percent of total global exports in 1960 to 25 percent by 1968. In addition, about 85 percent of these intra-regional exports consisted of manufactured consumer goods and construction material. CACM was also responsible for initiating several successful infrastructure improvements including the expansion of ports and the creation of the Inter-American Highway that, for the first time, linked all the region’s major cities with paved roads. Despite the increased trade and infrastructure improvements it sparked, CACM began experiencing problems by the late 1960s. The member states could not agree on where to place the new factories that would produce goods not already manufactured in the region. In addition, the region’s major aid donor, the United States, refused to provide money for a scheme it labeled “monopolistic,” and this led to a severe shortage of investment capital to build the new factories.10 More problems surfaced when industrialists in the less-developed CACM countries faced bankruptcy at the hands of their more efficient regional competitors. These industrialists then pressured their respective governments, already unhappy at the loss in revenues traditionally obtained from import duties levied on intra-regional trade, to unilaterally restrict imports from their more developed neighbors. The General Treaty’s failure to include safeguard clauses to deal with sudden import surges, which threatened to cause grave economic disruption, permitted these unilateral restrictions to continue indefinitely. In 1969 Honduras withdrew from CACM following a territorial dispute with El Salvador that led to the so-called Soccer War. Perhaps not coincidentally, Honduras was also the country that benefited least from CACM, and repeated Honduran requests for preferential treatment in view of its low level of development was rebuffed by the other member states.11 Honduras’s withdrawal was soon followed by a rapid increase in the prices of Central America’s traditional primary commodity exports, especially coffee, which dampened interest in regional integration and refocused the attention of local businesspersons to meeting the international market.12 The rapid increase in petroleum prices in 1979–80 and the international recession that followed caused CACM to enter into a period of stagnation from which it would not recover until the 1990s. During the 1980s, Central American countries saw their export sales plummet, while interest rates on their Grunwald, supra note 4, at 45. División de Comercio Internacional y Desarollo (Cepal), La Evolución Reciente de los Procesos de Integración en América Latina y el Caribe 27–28 (1991). G. Fonseca, Integración Económica: El Caso Centro Americano 357–60 (1987). 10 Id. at 365. See also P.C. Schmitter, Central American Integration: Spillover, Spill-around or Encapsulation. 9 J. Common Mkt. Stud. 11 (Sept. 1970). 11 Fonseca, supra note 9, at 375. 12 V. Bulmer-Thomas, The Central American Common Market, in International Economic Integration 251–52 (1982). Central America’s traditional exports include coffee, banana, sugar, meat, cotton, and cacao.


outstanding debt increased. Private sector international lending came to a halt as a result of difficulty in servicing already existing foreign debt, coupled with armed conflicts that engulfed most of the countries of the Central American isthmus throughout the decade.13 In a bid to boost exports and obtain revenues to service their foreign debt obligations, the Central American countries responded with uncoordinated currency devaluations. These measures, coupled with war-induced disruptions, had a serious detrimental impact on intra-regional trade, causing it to drop from a high of 25 percent of global exports in 1980 to 10 percent by 1986.14 III. Latin American Free Trade Area As with the CACM, the idea for the Latin American Free Trade Association (ALALC; its better known Spanish and Portuguese acronym) originated with the UN Economic Commission for Latin America. The UN Commission’s main office in Santiago, Chile, proposed a Latin American common market as a way of revitalizing import substitution on a regional level so as to overcome the limitations imposed by small domestic markets that prevented the formation of consumer-durable and capital goods industries.15 Of Latin America’s big industrial players, however, only Mexico welcomed the common market plan put forward by the UN Economic Commission for Latin America.16 The others (i.e., Argentina, Brazil, Chile, and Uruguay) sought a more modest mechanism designed to end the balance of payments crisis they faced as a result of the post-Korean War drop in their primary commodity exports.17 Accordingly, the more modest free trade area goal was pursued rather than the common market concept originally advocated by the UN Economic Commission. ALALC was born on February 18, 1960, when Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay signed the Treaty of Montevideo. Colombia and Ecuador joined the following year, and Bolivia and Venezuela became members in 1966 and 1967, respectively. The Treaty of Montevideo envisioned a 12-year transition period during which the signatory states would negotiate what goods would be traded among them free of tariffs and quantitative restrictions. So-called National Lists would be negotiated annually between any two member states and extended to the other ALALC members through a most-favored nation (MFN) clause found in Article 18 of the Treaty of 13 F. Ballestero & E. Rodriguez, Centroamérica Hacia Un Área Económica Armonizada, 1 Revista Integracón Y Comercio 8 (Jan.-Apr. 1997). 14 Id. at 8. The uncoordinated currency devaluations also helped to destroy the informal monetary union that, along with relatively similar inflation rates, had previously characterized Central America during the 1960s and 1970s. 15 M.H.J. Finch, The Latin American Free Trade Association, in International Economic Integration 207–08 (1982). Another factor, no doubt, was the formation of the EEC in 1958 and the perceived threat a Fortress Europe posed to Latin American exports to the continent. 16 E. Haas & P.C. Schmitter, Economics and Differential Patterns of Political Integration: Projections About Unity in Latin America, 18 Intl Org. 708 (Autumn 1964). 17 Emb. R.A. Barbosa, A Evolução do Processo de Integração na América do Sul, in Série Política Internacional 2, at 2 (1991).


Montevideo.18 “Common Lists,” by contrast, would involve negotiations among many member countries and would be conducted once every three years. Like CACM, the Treaty of Montevideo did not contain rules for determining the origin of goods that could benefit from its free trade provisions, but the treaty left this important subject open for subsequent negotiations. Unlike CACM, however, the Treaty of Montevideo did include a safeguard clause by which a state could restrict the continued importation from another ALALC member of an item included on the National Lists (but not the Common Lists) so as to avoid “significant and grave detrimental effects” to its economy. ALALC was also different from CACM in that it did not provide for a CET, nor did it create financial institutions to fund development projects in the lesserdeveloped member states.19 While the Treaty of Montevideo did encourage industrial complementation agreements to promote the production of goods not already produced in Latin America, no supranational bodies were created to coordinate or oversee these projects. This was a serious omission given that the industrial complementation agreements were supposed to foment manufacturing by dividing the production of a good not already produced within the region among various member states. The ALALC states signed the Convention of Reciprocal Credit in 1965, which created a central clearinghouse mechanism for intra-regional trade deals similar to the one in CACM. As a result of this clearinghouse system, the immediate use of hard currency was avoided, as U.S. dollars were only required to cancel outstanding debits arising from intra-ALALC trade at the end of every four-month period. Although ALALC did spark a modest increase in intra-regional trade among member states from U.S.$488 million in 1961 (6.7 percent of the region’s global exports) to U.S.$850 million in 1967 (8.5 percent of total exports), most of this increase was in traditional primary products, and very little came from the hoped for manufacturing sector.20 The few industrial products that were traded within ALALC were largely Argentine or Brazilian in origin. By 1965, the ALALC process had become hopelessly stagnant. Only one Common List had been agreed upon. The National Lists proved ineffective because few ALALC members agreed to extend the MFN treatment in their 18 Under an MFN clause, a country promises to automatically extend to other countries whatever trade benefits it has given to third nations. 19 This omission can partially be explained by the fact that the International Monetary Fund (IMF) and the World Bank refused to extend loans to create a system to finance intra-regional trade. C. López Dawson, Les Problémes Politique du Pacte Andin: Pour Une Sociologie Politique de l’Intégration Économique 213 (1979) (unpublished Ph.D. thesis, Institut d’Etudes Politiques de Paris). In fact, the United States, Latin America’s major supplier of aid and funding during this period, was initially very hostile to ALALC and only relented when it realized it could be used as an effective bulwark against the spread of Castroite influence in the region. Finch, supra note 15, at 213. 20 Finch, supra note 15, at 213.


bilateral agreements to other countries. Although 16 industrial complementation agreements had been signed and ratified by 1970, most were at the behest of foreign multinationals already operating within the region before ALALC’s creation, and did not represent new or regionally based investments.21 The primary reason for ALALC’s stagnation lay in the fact that it sought to integrate some 11 countries with widely different levels of economic development. These countries also had different and usually conflicting reasons for joining ALALC. For example, Argentina and Brazil viewed ALALC as a way of selling their excess industrial production to a captive market. They therefore had little interest in sponsoring the type of industrial development programs favored by the smaller countries that would have undermined Argentine and Brazilian manufacturing predominance. ALALC’s requirements that all new rules and changes to existing ones required a unanimous vote by all the member states contributed to insurmountable deadlocks in ALALC’s main institutional bodies. IV. Andean Pact Frustration with ALALC’s shortcomings led Bolivia, Chile, Colombia, Ecuador, and Peru to sign the Cartagena Agreement on May 29, 1969. This agreement, which Venezuela signed in 1973, led to the establishment of the Andean Pact. Although the Andean Pact was initially viewed as a subgroup operating within the ALALC framework, it soon developed into an independent entity. The Andean Pact countries continued to utilize ALALC’s central clearinghouse mechanism, however, for intra-pact trade. The Cartagena Agreement called for the gradual elimination of all tariff barriers and quantitative restrictions on all goods traded between the Andean states, so as to be completely eliminated by December 21, 1980. Bolivia and Ecuador were given more time to eliminate intra-regional trade barriers in recognition of their lesser-developed status. The Cartagena Agreement further called for the establishment of a CET by December 31, 1980, on all goods imported from all non-Andean countries that did not enjoy a pre-existing preferential tariff treatment under ALALC. As was true of ALALC and CACM, the Cartagena Agreement left rules for determining the origin of products that could take advantage of the Andean free trade area to future negotiations. The Andean Pact also adopted ALALC’s rather lax safeguard clause permitting the imposition of import duties and quota restrictions to counteract serious trade imbalances that threatened to cause grave harm to the economy of the country using the safeguard. The Andean Pact differed from ALALC in that decisions made by its highest governing bodies (e.g., the Andean Commission) normally only required a two-thirds majority vote for approval of new norms. In May 1979 a treaty was signed calling for the creation of an Andean Tribunal of Justice so as to provide uniform interpretations of the provisions of the Cartagena Agreement and its protocols, and to determine the legal validity of the Andean Commission Grunwald, supra note 4, at 53.

21


decisions as well as resolutions of the Junta del Acuerdo de Cartagena. The tribunal was also given authority to resolve disputes between member states arising from a country’s non-compliance with obligations imposed by the Cartagena Agreement. The Andean Pact differed most dramatically from ALALC, however, in that it called for the establishment of a CET and sought to create a customs union. In addition, the Cartagena Agreement contemplated so-called sectoral industrial development programs. Under these programs, various member states would be involved in producing different components for a manufactured good not already produced within the Andean Pact countries that would then be traded among them duty-free or exported outside of the Andean region. Goods not specifically reserved for the sectoral industrial development programs would, instead, be made in new factories that were to be built in less-developed Bolivia and Ecuador and then traded within the Andean Pact duty free. Both of these industrial development programs had the overtly political aim of garnering more support for the integration process among populations in the various Andean states.22 The intent was to promote balanced regional growth rather than permitting market forces (as had been the case with ALALC) to decide where the new industries would be located. By far the most controversial aspect of the Andean Pact was the adoption of Decision 24, which sought to control the perceived pernicious effects of foreign investment. Decision 24 forbade foreigners from investing in activities, which would compete with those already being carried out by Andean enterprises, and prohibited foreigners from purchasing the stock of Andean companies. Absent a rule by an individual member state permitting a higher amount, Decision 24 set 20 percent as the maximum amount of annual profits a foreign corporation could remit abroad. Decision 24 also required any foreign company not already operating within the Andean subregion before January 1, 1974, to sell at least 51 percent of its shares to Andean Pact nationals before the company could partake of the pact’s intra-regional free trade scheme. Finally, in an attempt to prevent foreign controlled monopolies and restrictions on technology transfer, Decision 24 prohibited member states from granting licensing contracts to foreign companies that contained restrictive non-competition clauses. The first years of the Andean Pact’s existence saw intra-regional trade increase at an average annual rate of 28.2 percent, and, in sharp contrast to the situation in ALALC, this regional trade was heavily weighed in favor of manufactured goods.23 Sectoral industrial development projects in metal working and petrochemicals were also implemented. A minimal CET was in place in Colombia, Peru, and Venezuela by December 31, 1975, with an average duty rate of 27 percent.

22 W.P Avery & J.D. Cochrane, Innovation in Latin American Regionalism: The Andean Common Market 27 Intl Org. 193 (Spring 1973). 23 Mace, supra note 6, at 417. See also,S. Peñaherrera, The Andean Pact: Problems and Perspectives, in Regional Integration: The Latin American Experience 178 (1985).


The Andean Pact experienced its first visible crisis when Chile withdrew in 1976 over opposition to Decision 24. The dictatorship of General Augusto Pinochet decided to aggressively pursue a free market style economic model that clashed with the protectionist, state-led industrial development philosophy underpinning the Andean Pact scheme. More problems followed when the remaining member states, bowing to domestic pressure groups unhappy with the differences in short-term costs and benefits flowing from the integration process, failed to observe, or even incorporate into national law, all the provisions of the Cartagena Agreement.24 Unresolved political and territorial disputes between the member states, particularly the armed conflict between Peru and Ecuador in 1977, only compounded this problem. The final blow to the Andean integration process, however, was set off by the 1979 oil price increase, which affected the remaining Andean Pact members differently and caused them to adopt conflicting macroeconomic policies. Oil-producing Venezuela and Ecuador, for example, benefited from the sharp rise in international petroleum prices. The other Andean countries attempted to get the foreign currency needed to pay for higher-priced oil imports by sharply devaluating their national currencies in the hope that this would increase exports. By devaluating, they made imports from Venezuela and Ecuador more expensive (thereby creating an indirect tariff barrier), while at the same time their own exports to both these countries became so cheap that they threatened to bankrupt the Venezuelan and Ecuadorian manufacturing sectors. In response to this situation, Venezuelan and Ecuadorian industrialists pressured their respective governments to reimpose tariffs on imports from their three Andean neighbors. The cumulative effect of all these measures was to wreak havoc on intra-regional trade flows. The sharp rise in international interest rates in 1982, which ignited the infamous Latin American debt crisis and halted foreign lending to the region, only exacerbated the problem. Under those circumstances, it became impossible to temporarily “fund” trade imbalances. The end result was that, by 1983, intra-regional trade among the Andean Pact countries was not only stagnant, but it was actually contracting in real terms.25 In an attempt to revitalize the regional integration process, the presidents of the remaining five Andean Pact countries signed the Quito Protocol in May 1987. The Quito Protocol eliminated the strict time deadlines for establishing an intra-regional free trade area and a CET, abolished the sectoral industrial development programs, and focused efforts on encouraging member states to achieve bilateral free trade accords (since the original goal of a regional free trade area had proved unsuccessful). In conjunction with the adoption of the R. Vargas-Hidalgo, The Crisis of the Andean Pact: Lessons for Development Among Developing Countries 17 J. Common Mkt. Stud. 219 (Mar. 1979). 25 The first oil crisis of 1973/74 did not produce the same negative effects because it coincided with a price increase in traditional Andean primary product exports, resulted in only a short-lived recession in the developed countries, and petro-dollars soon made themselves available at very low interest rates to “subsidize“ any intra-regional trade imbalances. A. Fuentes & J. Villanueva, Economía Mundial e Integración de América Latina 124–25 (1989). 24

10 • Latin American and Caribbean Trade Agreements

Quito Protocol, the Andean Commission also repealed controversial Decision 24 and substituted it with Decision 220. This decision dropped prohibitions on foreign purchases of the stock of Andean companies and ended limits on repatriation of profits (although it retained the rule requiring 51 percent ownership by Andean nationals before the companies could participate in the intra-regional free trade scheme). Despite the changes introduced by the Quito Protocol, the Andean economic integration process could not be revived. A revival would have to wait until the beginning of the 1990s when the entire philosophical underpinnings of the original Andean Pact concept were reformulated, and each member state began adopting market-oriented economic policies. V. Caribbean Free Trade Area and Caribbean Community and Common Market The Caribbean Common Market and Community (CARICOM) has its roots in the West Indies Federation (1958–1962), and the Caribbean Free Trade Area (CARIFTA) founded in 1965. The rationale behind the West Indies Federation was that the former British colonies in the Caribbean were too small to be viable economic entities on their own.26 It therefore sought to move them to independence as a political union. The capital was established in Trinidad and Tobago (a decision that, in itself, was controversial). Unfortunately, this experiment in political federation proved short lived, as the two largest territories, Jamaica and Trinidad and Tobago, jostled with each other to achieve political preeminence in the new West Indies Federation. In 1961 a plebiscite was held in Jamaica, and a majority of that country’s citizens favored withdrawal from the West Indies Federation. Shortly after the collapse of the West Indies Federation in 1962, initiatives were taken by the United Kingdom, Canada, and the United States to explore the possibility of some form of integration of the small islands of the Eastern Caribbean and Barbados.27 These initiatives led to the creation of the Caribbean Central Bank. In 1965 the governments of Antigua and Barbuda, Barbados, British Guiana, and Trinidad and Tobago signed the Dickenson Bay Agreement to Establish a Caribbean Free Trade Association or CARIFTA.28 This agreement was amended in 1968 to include other governments (some now independent from the United Kingdom) in the Caribbean (i.e., Dominica, Grenada, Jamaica, Montserrat, St. Kitts-Nevis The West Indies Federation was made up of ten territories: Antigua and Barbuda, Barbados, Dominica, Grenada, Jamaica, Montserrat, St. Kitts-Nevis-Anguilla, St. Lucia, St. Vincent, and Trinidad and Tobago. 27 D. Pollard, The Caricom System: Basic Instruments 49 (2003). Despite its ultimate collapse, the West Indies Federation was successful in establishing the West Indies Shipping Service in 1962, which provided frequent service up and down the Caribbean with two ships donated by the Canadian government and the purchase of British West Indian Airlines (BWIA) from the British Overseas Airways Corporation (BOAC). The University College of the West Indies, which was established in 1948 with one campus in Jamaica, became the University of the West Indies (UWI), with a second campus opened in Trinidad and Tobago in 1960. 28 A full copy of the text of the Dickenson Bay Agreement and subsequent amendments is available at Pollard, supra note 27, at 51–95. 26

Early Attempts at Economic Integration • 11

Anguilla, St. Lucia, and St. Vincent, and the Grenadines in 1968, and British Honduras in 1971). As outlined in Article 2 of the agreement, the objectives of CARIFTA were to: 1. promote the expansion and diversification of trade; 2. ensure that trade took place between the member states in conditions of fair competition; 3. encourage the progressive development of the member economies; and 4. foster the harmonious development of Caribbean trade and its liberalization by the removal of barriers. Other objectives of CARIFTA included promoting the industrial development of the least developed member states as well as the development of a coconut oils industry in those same countries. There was also an agricultural marketing project to rationalize agricultural production among the least developed countries. The Treaty of Chaguaramas was signed in 1973 to establish CARICOM. Interestingly, it was the Common Market Annex to the Treaty of Chaguaramas that actually replaced CARIFTA the following year with what purported to be a common market but, except for some hortatory expressions about free movement of the factors of production, was more focused on building a customs union. The development model, upon which the original Treaty of Chaguaramas of 1973 was based, was an inward-looking, protectionist, import-substitution process that was buttressed by regional industrial programming, ownership and control of regional natural resources, and regional self-reliance.29 The hybrid situation of a common market operating within the Caribbean Community allowed a country to become a member of CARICOM without participating in the regional economic integration project. The Guyanese capital, Georgetown, was selected as the headquarters for the CARICOM Secretariat as a way of encouraging movement to the southern portions of the Caribbean region and to facilitate exploitation of the abundant natural resources of Guyana.30 During the period from when the Treaty of Chaguaramas was signed in 1973 through 1980, intra-regional trade increased some 26.5 percent.31 Because the 1970s was marked by an increase in international commodity prices, the CARICOM countries tended to focus their attention on serving foreign regional markets. This meant that exports to the subregion never exceeded 10 percent of global exports. Beginning in the early 1980s, most of the CARICOM countries were detrimentally impacted by the global recession. In order to reduce budgetary deficits and to cut back on foreign exchange outflows, Jamaica and Guyana both used Article 28 of the Common Market Annex to Pollard, supra note 27,at 25. Id. at 7. 31 A.M. El-Agraa, Economic Integration Worldwide 284 (1997). 29 30


the Treaty of Chaguaramas to impose quotas on CARICOM imports.32 Other CARICOM countries soon followed with unilateral restrictions, contributing to a significant contraction in intra-regional trade flows. An additional blow to CARICOM was the failure of many member states to implement the CET by the outside target date of 1981. Additional revisions to the CET occurred throughout the 1980s, but these were also not uniformly carried out in all the member nations.33 Exacerbating the overall loss of interest in the CARICOM market during the 1980s was the collapse of the CARICOM Multilateral Clearing Facility designed to encourage intra-regional trade flows without expending hard currency reserves. VI. New Climate for Latin American and Caribbean Economic Integration in the 1990s The collapse of the Soviet bloc in the early 1990s sparked concerns throughout Latin America and the Caribbean that investors in the developed world would focus their attention on the many new markets returning to the capitalist fold in Eastern Europe and Central Asia. Under these circumstances, there was a fear that Latin America and the Caribbean would lose out in the race to attract foreign direct investment if countries did not reform their underperforming economies. Accordingly, the 1990s witnessed widespread adoption of neoliberal, market-oriented economic policies throughout Latin America and many Caribbean nations. The precise reforms and the pace at which they were adopted varied from country to country. The overall effect, however, was the adoption of policies that complemented rather than undermined the goals sought through economic integration. Another important incentive for the revival of efforts to economically integrate countries in Latin America and the Caribbean in the 1990s was the appearance of new trading blocs around the globe, including the European Union and the North American Free Trade Area. Although not inherently protectionist, there was a perception that these new blocs might favor imports from within the region at the expense of outside suppliers and increase their bargaining power at multilateral fora such as the new World Trade Organization (WTO). As a result, countries in Latin America and the Caribbean could not afford to risk becoming marginal in this new world order by not forming their own economic blocs. The change in international and domestic economic factors coincided with another phenomenon that strongly favored the revival of Latin American economic integration projects, in particular, during the 1990s. The end of military rule in many Latin American countries during the 1980s allowed the new, democratically elected governments to resolve long-standing border disputes and not view their neighbors as potential military threats. As a result, the integration programs of the 1990s acquired important geo-political

Id. at 287. Id. at 282.

32 33


dimensions that went beyond purely commercial concerns.34 Unlike the older forms of Latin American and Caribbean economic integration, which often sought to extend the import-substitution model regionally after its exhaustion on the national level, the new efforts at economic integration are premised on the concept of “open regionalism.” The central features of this new type of regionalism include an opening to world markets, promotion of private sector initiative, and the withdrawal of the state from direct economic activity.35 The new regionalism is therefore strongly connected to the structural reform process that all countries in Latin America and the Caribbean underwent at the beginning of the 1990s (or in some cases, such as Chile, much earlier), which were designed to make their respective economies more competitive in the global market. The new regionalism is also designed to attract foreign investment, not restrict or control it like the old Andean Commission Decision 24.36 Open regionalism encourages duty-free trade among neighbors as a stepping stone to prepare them for eventual integration with the international economy. By focusing first on the regional market, there is less political resistance to trade liberalization, given that it takes place within a limited and familiar market space that reflects more symmetric competition than is found in the international arena.37 One of the most dramatic features accompanying open regionalism has been the shift from the traditional intra-regional focus of “South-South” preferential trade integration to a growing interest in interregional “North-South” agreements, which commercially link Latin American and Caribbean economies with industrialized countries in reciprocal free trade often in conjunction with ambitious functional cooperation agreements.38 VII. Regional Economic Integration and the World Trade Organization Any discussion of regional economic integration, whether in Latin America and the Caribbean or anywhere else in the world, cannot ignore the connection with the WTO. This is particularly true when discussing Latin America and the Caribbean, given that all the countries in the region (but for the Bahamas) are now WTO members. This means the Latin American and Caribbean countries must ensure that the rules for their respective economic integration projects conform to their obligations at the multilateral level. For the most part, WTO rules serve as the base upon which the regional integration programs are built. For many disciplines, the rules of the regional integration projects are identical O. Stahringer de Caramuti, El MERCOSUR en un Mundo de Bloques, in El MERCOSUR en Nuevo Orden Mundial 101–02 (1996). 35 R. Devlin & A. Estevadeordal, What’s New in the New Regionalism in the Americas? 6 (2001). 36 Id. at 21. 37 Id. at 7. Regional integration can also be more politically popular because increased trade among neighboring states may reduce historical tensions of a military or geo-political nature. This has certainly been true of MERCOSUR, especially in terms of Argentine-Brazilian relations. 38 P.Giordano, The External Dimension of MERCOSUR: Prospects for North-South Integration With the European Union 5 (2003). 34

el


with those at the multilateral level. In most cases, subregional integration creates new disciplines or offers greater liberalization than is available through the WTO. The WTO is the result of the Uruguay Round negotiations that began in 1986 to achieve further multilateral trade liberalization. The Uruguay Round was preceded by seven other negotiating rounds conducted under the auspices of the General Agreement on Tariffs and Trade (GATT) that was signed in 1947 by 23 founding member states. The purpose of GATT is to prevent a recurrence of the collapse of international trade that occurred between World War I and World War II, when countries unilaterally imposed high tariffs and retaliatory trade measures that devastated world trade flows and contributed significantly to the Great Depression of the 1930s.39 GATT prohibits unilateral tariff action by binding all member countries to maximum tariff levels on most goods and provides the means for the progressive reduction of tariff barriers through periodic multilateral negotiations.40 The decision to create the WTO was a desire by the participating countries to provide a solid institutional structure that would oversee the international trading order. Prior to this time, whatever institutions existed that grew out of GATT, were ad hoc in nature. The WTO and its institutional framework came into formal existence on January 1, 1995. There are now some 150 countries who are members of the WTO. Among the major countries that remain outside the WTO are Algeria, Iran, Russia, and many of the new states that emerged following the collapse of the Soviet Union and Yugoslavia. The governing rules of the WTO are found in the Agreement Establishing the World Trade Organization of 1994 and its annexes. Annex 1A includes 13 multilateral agreements that deal with some aspect of trade in goods. The first is GATT 1994, which carries forward, with some modifications, the principles established by GATT 1947.41 This is followed by the: (1) Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement), (2) Agreement on Technical Barriers to Trade (TBT Agreement), (3) Agreement on Implementation of Article VI of GATT (Antidumping Agreement), (4) Agreement on the Implementation of Article VII of GATT (Valuation Agreement), (5) Agreement on Pre-shipment Inspection, (6) Agreement on Rules of Origin, (7) Agreement on Import Licensing Procedures, (8) Agreement on Subsidies and Countervailing Measures, and (9) Agreement on Safeguards. The Uruguay Round added the: (1) Agreement on Agriculture, (2) Agreement on Textiles and Clothing, and (3) Agreement on Trade-Related Investment Measures. The Uruguay Round also added two separate agreements included in individual annexes: (1) the General Agreement on Trade in Services (GATS) and (2) the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The WTO also has two plurilateral agreements, which are still in effect, that deal with trade in civil aircraft and government procurement, J. Johnson, International Trade Law 1 (1998). Id. at 1. 41 Id. at 22. 39 40


and they are binding only on those WTO members that have actually acceded to them. To date, no country in Latin America and the Caribbean has signed on to either plurilateral agreement. The WTO is based on two fundamental principles: 1. MFN treatment, which requires that a WTO member unconditionally extend the same preferential tariff treatment and application of importation rules and formalities to goods that it may extend to one or more countries (regardless if they are WTO members), to all goods from all WTO member states; and 2. National treatment, which requires that, once goods enter a country from a fellow WTO member state, they must be treated no less favorably than domestic goods. As can be gathered from the above discussion, the whole concept of regional economic integration flies in the face of the WTO principle of MFN treatment, as the participants in an economic integration process do not extend the same preferential market access treatment accorded each other to the remaining WTO members. On the contrary, they engage in the type of discrimination that is generally prohibited by the WTO. Article 24 of GATT, however, creates an exception that allows countries participating in a regional trading arrangement, like a free trade area or a customs union, to treat each other more favorably. A similar provision found in Article 5 of GATS permits such countries to treat each other more favorably with respect to the cross-border trade in services. In the particular case of Article 24 of GATT, countries participating in a free trade area must ensure that the elimination of tariffs and non-tariff barriers among themselves covers “substantially all trade” and “the duties and regulations of commerce” applied by them to other, non-participating WTO members “shall not be higher or more restrictive” than was the case before the formation of the free trade area. In the case of a customs union, the same caveat with respect to “substantially all [intra-regional] trade” exists, and the new CET and common regulations of commerce applied to imports from non-participating WTO members “shall not on the whole be higher or more restrictive” than what existed previously.42 Article 24 also requires that the countries participating in a regional economic integration project implement their free trade area or customs union within a “reasonable length of time.” Finally, Article 24 requires that the participating countries notify the WTO 42 The difference in the obligations between a free trade area and customs union is based on the fact that the latter involves elimination of each party’s individual schedule of duties and other regulations of commerce and substitution of a regime of duties and other regulations common to all. Unless the parties to a [customs union] have identical tariff schedules to begin with, the harmonization of their schedules inevitably will mean that the rates for each of the [regional trading agreement] parties will go up for some products and down for other products. Article XXIV:5 indicates that the common regime resulting from this harmonization may not ‘on the whole’ impose higher duties or more restrictive regulations of commerce on third countries. R.E. Hudec & J.D. Southwick, Regionalism and WTO Rules: Problems in the Fine Art of Discriminating Fairly, in Trade Rules in the Making: Chalenges in Regional and Multilateral Negotiations 50 (1999).


Committee on Regional Trade Agreements so that a working group can review the proposed accord to ensure compatibility with WTO obligations. Differences of opinion among WTO members on whether Article 24 has been complied with can be referred to the WTO’s dispute resolution system.43 Over the years, a number of issues have arisen with respect to the provisions of Article 24. For example, what is meant by “substantially all trade”? To date, the WTO has been unable to reach a consensus as to whether this term means that countries participating in a regional economic integration program can exclude an entire sector of the economy, such as agriculture.44 Similarly, no consensus has been achieved on fixing a set percentage of trade flows (whether based on value or volume) to define what constitutes “substantially all trade.” On the other hand, there is now a consensus that the “reasonable length of time” for implementing a free trade area or customs union “should exceed 10 years only in exceptional cases.”45 Another matter that has generated much debate over the years concerns the methodology used to determine if new duties and import regulations are not “on the whole” higher or more restrictive after the formation of a customs union. Since 1995, a consensus has emerged that the CET is evaluated based upon an overall assessment of weighted average tariff rates applied by participating states to individual tariff schedule lines (broken down by values and quantities) for a representative period prior to the customs union’s formation.46 This means that the impact of new duties is examined on a product-by-product basis, and an increase in one sector (e.g., automobile manufacturing) cannot be offset by a decrease in another (e.g., agriculture). Furthermore, the calculation is based 43 Id. at 52. Interestingly, the dispute resolution system was among the most important innovations that came out of the Uruguay Round. It resulted in a three-step mechanism divided into an initial consultation phase, referral to an arbitration panel (if the consultations are unsuccessful), and then the possibility of review by an appellate body. More significantly, it changed the rules on submitting a complaint to an arbitration panel and how panel decisions are adopted. Under the old system, requests for the formation of a panel could be blocked by one member state and arbitral decisions were adopted only with the consensus of all GATT signatories. Today, the right to request a panel (following unsuccessful consultations) is automatic, and panel decisions can be enforced without a full consensus of all WTO member states. The possibility now also exists to appeal a panel decision. 44 Id. at 61–62. It is important to point out that Article 24 allows member states participating in a regional economic integration project to apply tariffs and non-tariffs barriers to intra-regional trade “where necessary” as permitted by GATT Articles 11 (to support a domestic supply management regime such as a price support program), 12 (to respond to balance of payments emergencies), 13 (to apply quotas where still allowed by the WTO, such as agriculture, on a non-discriminatory basis), 14 (to apply discriminatory quotas for balance of payments reasons), 15 (to fulfill commitments made to the IMF), and 20 (to protect human, animal, or plant life or health, the environment, support law enforcement, etc.). Id. at 63. Interestingly, safeguards found in GATT Article 19 are excluded from the specific restrictive measures that participants in a regional trading arrangement can impose “when necessary” on each other’s imports. Id. at 67–68. 45 See, Paragraph 3 of the Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994, available at http://www.wto.org/english/ docs_e/10-24_e.htm. 46 Hudick & Southwick, supra note 42, at 53–54.


on applied tariffs (i.e., the customs duty that is actually levied on imported goods) and not the bound rate that a country reports to the WTO as the highest tariff it will theoretically levy on imports from other WTO members.47 On the other hand, no agreement has been reached as to whether rules of origin are even “regulations of commerce” that must not become more restrictive upon the formation of a free trade area.48 As a result of an “Enabling Clause” that was added to GATT in 1979, Article 24 does not apply to economic integration projects that exclusively involve developing countries. Under the Enabling Clause, the notification requirement is still mandatory, but there is much more flexibility on how much trade must be covered by the tariff reductions and elimination of non-tariff barriers among the participating countries. There is also greater flexibility in terms of the time required for full implementation, although any new tariffs and non-tariff measures (as would result from the creation of a customs union, for example) should “not raise barriers to or create undue difficulties for the trade of any other” WTO member.49 Although most countries in Latin America and the Caribbean are deemed to be developing countries, this designation has been challenged, particularly in the case of MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese). During the mid-1990s Argentina enjoyed a per capita income that should have made it ineligible in some countries, such as the United States, for the General System of Preferences (GSP) preferential market access benefits given by the developed nations to the developing world.50 Accordingly, an argument was made that because MERCOSUR included Argentina, it was subject to Article 24 requirements and not the more permissive Enabling Clause. In 1993 the WTO Committee on Trade and Development (which has jurisdiction to review economic integration projects that are exclusively made up of developing countries) accepted a compromise position and established a working group to examine MERCOSUR “in the light of the relevant provisions of the Enabling Clause and of the General Agreement [GATT], including Article XXIV.”51 Id. at 54. Id. at 54–56. Strict rules of origin can cause manufacturers to shift the sourcing of inputs from extra-regional suppliers in favor of those from within the free trade area in order to ensure that the final product qualifies for preferential tariff treatment under the regional trading arrangement. It should be noted that while not normally the case, the WTO recognizes that a customs union may have rules of origin as well. This will often arise in situations where a customs union has not fully implemented its CET. This is currently the situation with MERCOSUR. 49 See Paragraph 3(a) of the Decision of November 28, 1979 (L/4903) establishing the Enabling Clause, available at http://www.wro.org/english/docs_e/legal_e/enabling1979_e.htm. 50 The Enabling Clause also allows developed countries to grant unilateral preferential duty reductions to developing countries. This can be done under GSP or, alternatively, it can be done through unilateral preferential tariff access agreements granted by a developed country to a small group of developing countries for a specified period of time. However, this latter alternative requires a waiver by all WTO member states to the temporary program. By the mid-1990s, Argentina’s per capita gross national product (GNP) exceeded the U.S.$ 8,000 threshold that, at the time, made it a “high-income country” and therefore should have triggered its graduation from the U.S. GSP program. 51 Note on Proceedings of the Seventy-fourth Session of the Committee on Trade and 47 48


As previously mentioned, Article 5 of GATS provides the exception to the underlying non-discrimination principle that allows members of a regional economic integration project to treat trade in services among themselves more favorably than the treatment accorded to non-participating WTO members. First, the regional agreement must substantially eliminate barriers to intraregional trade in services “in the sense of [national treatment].” In particular, the regional agreement must have “substantial sectoral coverage” and this is to be “understood in terms of numbers of sectors, volume of trade affected, and modes of supply.”52 Unlike the vague “substantially all trade” in Article 24 of GATT, Article 5 of GATS makes it clear that all sectors need not be included.53 Secondly, the services agreement may not create new barriers to non-participating WTO members. Where developing countries are party to a subregional services agreement, the two conditions of “substantial sectoral coverage” and “absence or elimination of substantially all discrimination” are to be interpreted with flexibility “in accordance with the level of development of the countries concerned, both overall and in individual sectors and sub-sectors.”54 Furthermore, if all the signatories to a regional services agreement are exclusively developing countries, Article 5(3)(b) of GATS states that “more favourable treatment may be granted to juridical persons [i.e., corporations] owned or controlled by natural persons of the parties to such an agreement.”

Development (May 28, 1993), available at http://www.wto.org/gatt_docs/english/sulpdf/ 91720099.pdf. 52 Hudec & Southwick, supra note 42, at 75. It should be pointed out that GATS Article 5 allows countries participating in a regional trading arrangement to exclude service sectors for reasons outlined in GATS Articles 11 (in response to mandates imposed by the IMF). Article 12 (to respond to balance of payments crises), Article 14 (to protect human, animal, or plant life or health, the environment, support law enforcement, etc.), and Article 14 bis (to protect national security). 53 Id. at 75. On the other hand, Article 5 offers little or no guidance in judging how many sectoral exclusions may be allowed before an agreement no longer has “substantial sectoral coverage.” Id. at 76. 54 See M.E. Footer & C. George, The General Agreement on Trade in Services, in 1 The World Trade Oprganization: Legal, Economic and Political Analysis 835 (P.F. Macrory, A.E. Appleton & M.G. Plummer eds., 2005).

CHAPTER 2

LATIN AMERICAN INTEGRATION ASSOCIATION I. Latin American Integration Association and Its Relevance to Intra-Regional Trade A. Introduction With the Latin American Free Trade Area (ALALC; see Chapter 1, Section III) moribund and the Andean Pact (see Chapter 1, Section IV) struggling to survive by the end of the 1970s, the Spanish-speaking countries of South America, Brazil, and Mexico met in the Uruguayan capital in 1980 to try to reinvigorate the Latin American economic integration process. As a result of their efforts, a new Treaty of Montevideo was signed creating the Latin American Integration Association (or, as it is better known by its Spanish and Portuguese acronym, ALADI). ALADI sought to avoid some of the major problems the ALALC encountered, due to its multilateral character, by focusing on more modest bilateral trade agreements. The National and Common Lists of the old ALALC were therefore abandoned in favor of so-called agreements of partial reach in which two member states would agree to reduce or eliminate tariff barriers and quantitative restrictions on specified products traded amongst them. The treaty creating ALADI also provided for Economic Complementation Agreements or Acuerdos de Complementación Económica (ACEs). These agreements could be either bilateral or multilateral in scope and were intended to stimulate more extensive forms of economic cooperation among the signatory states beyond preferential tariff arrangements on a limited group of products. Although the Treaty of Montevideo of 1980 established no supranational oversight bodies or financial institutions to fund development projects, it did retain and strengthen the central clearing house mechanism established within the ALALC framework in 1965. In addition, Article 35 provided for the establishment of various new institutional bodies including a Committee of Representatives that was given the task of, among other things, resolving disputes arising among the member states. In addition, most decisions of the institutional bodies now required only a two-thirds majority in order to be approved (thereby replacing the unworkable unanimous voting arrangements of the old ALALC). Despite the reforms introduced by the new Treaty of Montevideo, it failed to immediately revive the movement toward greater Latin American economic integration. For one thing, the reform effort coincided with the sharp rise in 19


international oil prices that affected the Latin American countries differently and the type of economic policies they pursued. The economies of the net petroleum producers boomed, leading to an increased demand in imports that was further boosted by a rise in the value of their currencies. This situation was soon followed by the Mexican debt default, which halted all bank lending to the region that could have helped those non-oil-producing Latin American countries to finance (over the short term at least) higher energy costs. Instead, they responded to the credit squeeze by devaluating their currencies in an effort to increase exports and therefore revenue. These devaluations led to suddenly cheaper goods flooding the markets of the oil-producing countries that threatened to undermine their national production, while most of their exports to the regional market became that much more uncompetitive. The oil producers responded with safeguards and non-tariff measures, throwing their non-oil-producing ALADI partners further into recession. The end result was that whereas total intra-ALADI trade had reached an historical high of almost U.S.$12 billion in 1981, by 1983 total intra-ALADI had dropped to around U.S.$7 billion. Intra-ALADI trade thereafter remained stagnant until the beginning of the 1990s. B. Latin American Integration Association Today The current membership of ALADI consists of Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela. ALADI is the organization that oversees the bilateral trade agreements that any of these 12 countries may have with each other or with countries in Central America and the Caribbean. All the recent multilateral economic integration programs in South America, such as MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) and the G-3 Accord, also fall under the institutional and legal framework of ALADI. Even the Andean Community, although technically not falling under the ALADI umbrella, for many years adhered to many ALADI norms, including Resolution 78 (eventually superseded by Resolution 252), which dealt with rule of origin requirements. In actual practice, however, the newer trade agreements under ALADI have strayed, sometimes dramatically, from the norms established under ALADI. For example, neither MERCOSUR nor the G-3 Accord adhere to ALADI’s rule of origin requirements. The Council of Ministers of Foreign Affairs, ALADI’s highest institutional body, met in Mexico City in April 1990 with the goal of introducing modifications that would better facilitate ALADI’s ability to handle the renewed increases in intra-regional trade flows. One of the important technical reforms adopted two months later was the setting of a minimal, across-the-board preferential tariff schedule under which goods would be traded among the member states that were not already subject to other, pre-negotiated duties. In addition, the list of items exempt from the general preferential tariff schedule (and also not subject to any specifically pre-negotiated duty rate), was set at: 1,920 products in the case of Bolivia, Ecuador, and Paraguay; 960 products in the case of Colombia, Chile, Peru, Uruguay, and Venezuela; and 480 goods in the case of Argentina, Brazil, and Mexico.

Latin American Integration Association • 21

With Mexico’s ratification of the North American Free Trade Agreement (NAFTA) in 1993, the other ALADI countries demanded that Mexico extend to them the same preferential tariff arrangements it had granted the United States and Canada. Such a result was required by the most-favored nation (MFN) clause found in Article 44 of the Treaty of Montevideo of 1980. At a meeting of the Council of Ministers of Foreign Affairs held in Cartagena, Colombia, in June 1994, a protocol to the Treaty of Montevideo was signed which was intended to resolve the issue of the applicability of Article 44. Pursuant to the June 1994 protocol, any ALADI member state may petition the ALADI Committee of Representatives (i.e., ALADI’s permanent institutional body, which sits in Montevideo, Uruguay) to temporarily suspend its MFN obligations under Article 44 of the Treaty of Montevideo of 1980. In order for this suspension to become effective, however, the petitioning state must first conduct bilateral negotiations with each member state so as to insure that trade flows generated by previously negotiated ALADI agreements are not detrimentally affected by the suspension. These negotiations should ideally not exceed 24 months (unless a longer extension is granted by the Committee of Representatives). The petitioning state should also negotiate the question of eliminating the same non-tariff barriers on imports from ALADI members as it granted to non-ALADI countries in another trade agreement. The petitioning state is under a further obligation to negotiate the same rules of origin with ALADI members as it has with third countries (in the event these are more liberal). The temporary suspension of the MFN obligations found in Article 44 can be made long term (i.e., potentially up to ten years) upon a two-thirds affirmative vote of the Committee of Representatives if the petitioning country fulfills its negotiating obligations, and the detrimentally affected ALADI countries feel that they have been satisfactorily compensated. On the other hand, if the detrimentally affected ALADI countries feel they have not been satisfactorily compensated, a Special Group of the Committee of Representatives is formed (made up of either three or five members, but in no case consisting of nationals of the detrimentally affected countries) to determine what would be a “just compensation.” The Special Group’s determination is binding. If the Special Group’s determination is accepted by the petitioning country, the suspension of Article 44 is made “permanent” for five years, subject to renewal for another five. By the same token, any detrimentally affected ALADI country can suspend preferential tariff arrangements with the petitioning country to the extent they are not compensated for the greater tariff preference accorded the nonmember state(s). Negotiations to determine the exact nature of Mexico’s compensation to its fellow ALADI members as a result of Mexico’s membership in NAFTA have Article 44 of the Treaty of Montevideo of 1980 states in relevant part that the advantages, favors, special tariff rates, immunities, and privileges which the member states apply to products originating in or destined to another member or non-member state, as a result of decisions or agreements which are not in keeping with this Treaty or the Cartagena Agreement, will be immediately and unconditionally extended to the other member states.


dragged on for years without full resolution. �� One of the explanations was that since all the ALADI countries were negotiating a Free Trade Area of the Americas (FTAA), whilch would have extended to them similar if not more generous access to the Mexican market than Mexico granted Canada and the United States under NAFTA, there was no need to press the issue. Furthermore, the matter was resolved at least with those ALADI countries with which Mexico has negotiatd free trade agreements (i.e., Bolivia, Chile, Colombia, Uruguay, and at one point Venezuela). A MERCOSUR-Mexico Free Trade Agreement has been proposed since the late 1990s, although the discussions have dragged on inconclusively for over a decade. On the other hand, Chile did extend to the MERCOSUR countries the same preferential market access it offered Canada for a number of tariff lines under its 1996 bilateral free trade agreement with that country. II. Institutional Framework of the Latin American Integration Association A. Decision-Making Bodies ALADI’s institutional framework consists of: (1) the Council of Ministers of Foreign Affairs, (2) the Evaluation and Convergence Conference, (3) the Committee of Representatives, and (4) the Secretariat. The Council of Ministers of Foreign Affairs is the highest institutional body within ALADI. Among its duties are to issue general norms intended to strengthen the ALADI integration process and to adopt amendments and additions to the Treaty of Montevideo of 1980, including approving the accession of new members. The Council is made up of the Ministers of Foreign Affairs of each member state, or a minister who is specifically given the task of overseeing integration matters in a particular country. The Council meets when convened by the Committee of Representatives and makes decisions when all the member states are present. Most decisions made by the Council of Foreign Ministers require an affirmative vote of two thirds of the member states. Important decisions of the Council, such as amendments to the Treaty of Montevideo, accession of new member states, or adoption of norms designed to strengthen the regional integration process, require a two-thirds affirmative vote and the absence of any negative votes. Abstentions do not count as negative votes. The Evaluation and Convergence Conference is entrusted with the task of making sure that the bilateral agreements of partial reach are made multilateral. It also oversees negotiations designed to deepen the regional preferential tariff arrangements. The Conference meets at least once every three years at the request of the Committee of Representatives and is made up of special ministers from each country duly appointed for this purpose. Any measures adopted by the Evaluation and Convergence Conference require a two-thirds affirmative vote in favor (with important decisions requiring the absence of any negative vote as well). The Committee of Representatives is the permanent body of ALADI and is headquartered in Montevideo. It holds meetings with the representatives of each member state’s government at least once a year and encourages the member


states to execute regional economic integration agreements. The committee’s other functions include the adoption of all measures necessary to implement the Treaty of Montevideo, the submission of recommendations to the Council of Foreign Ministers and the Evaluation and Convergence Conference on ways to strengthen the integration process (including proposing solutions to resolve situations in which certain members do not comply with their ALADI obligations), and requesting the Secretariat to carry out needed technical studies. The committee is made up of one permanent representative and one alternate from each member country. Each country is entitled to one vote in the Committee of Representatives. Any resolutions adopted by the committee require the affirmative votes of two thirds of the member states. As is true of the Council on Foreign Relations and the Evaluation and Convergence Conference, any resolutions that affect ALADI’s fundamental legal underpinnings also require the absence of any negative votes. The Secretariat is composed of a technical and administrative staff that assists ALADI’s other institutional bodies to carry out their tasks, including furnishing the necessary technical reports and trade data. The Secretariat is located in Montevideo and is headed by a Secretary General who is appointed by the Council of Foreign Affairs for an initial term of three years, with the possibility of reelection. B. Central Clearing House Mechanism for Intra-Latin American Integration Association Trade In 1982 representatives from the Central Banks of the ALADI countries plus the Dominican Republic met in Montego Bay, Jamaica, to modify the Agreement on Reciprocal Payments and Credits and the Regulation on the Multilateral Compensation System of Balances that had been created in the 1960s in the context of the old ALALC. A new Convention on Reciprocal Payments and Credit emerged from this meeting. Under the Convention on Reciprocal Payments and Credit, the Central Bank of each signatory state establishes credit lines in U.S. dollars to cover transactions between persons or entities resident in their respective countries. The credit lines vary according to anticipated transactional levels based on past patterns of trade flows between the respective states. The transactions are run through a central clearing house mechanism headquartered at the Central Reserve Bank of Peru in Lima. This system permits goods (so long as they originate in an ALADI country and the Dominican Republic) to be traded between signatory states without the need to immediately exchange U.S. dollars for purposes of payment. The exporter simply goes to its country’s Central Bank or other expressly authorized financial institution and presents the proper documentation reflecting the proposed transaction. The Central Bank (or authorized financial institution that works through the respective Central This documentation can include payment orders, drafts in the name of a particular payee, letters of credit, documentary credit, drafts connected with trade operations and guaranteed by an authorized bank, promissory notes arising out of trade operations that are either issued or guaranteed by an authorized institution, and ordinary promissory notes or promissory notes issued at a discount based on instruments involving another transaction.


Bank) then forwards this documentation to its respective counterpart in the importing country. When the importer has received and paid for the goods in its local currency, the exporter’s Central Bank is notified, and the Central Bank debits the dollar account of the importing country. The exporter is then paid in local currency by its country’s Central Bank through an authorized financial institution. On the last day of April, August, and December of each year, the debits for the preceding four months of each country are reconciled with the credits, and each Central Bank is obligated to pay to its counterparts’ (in U.S. dollars) outstanding debits (plus interest). The obligation to pay an outstanding debit is automatic, and no part of it can be challenged in the event the Central Bank of the importing country subsequently learns that the underlying commercial transaction it purported to represent was fraudulent. Needless to say, such an obligation has been abused by unscrupulous financial institutions, particularly after 1992 when the Convention’s system was opened to so-called triangular trade, in which the debit one Central Bank owes to country A is, in turn, used by country A to cancel a debit it owes to country B (with the corresponding exchange of negotiable instruments). In 1994 a Protocol for the Resolution of Controversies between Participating Central Banks to the Convention on Reciprocal Payments and Credits of ALADI was opened for ratification by each country participating in the central clearing house mechanism. The Convention seeks to, inter alia, resolve disputes that may arise when a Central Bank questions the validity of the underlying commercial transaction (a problem that arose in May 1996, for example, when Argentina refused to recognize debits recorded against it by Uruguay’s Central Bank because of allegations that the underlying trade deals were fraudulent). By 1997, the Central Banks of all the ALADI countries had ratified the protocol. In 1995 approximately U.S.$14 billion in intra-regional trade was run through ALADI’s central clearing house mechanism; 56 percent represented canceled debits (thereby avoiding the use of hard currency reserves). The countries funneling the largest number of trade transactions through the central clearing house in 1995 were (in descending order): Brazil, Argentina, Venezuela, Uruguay, and Chile. The countries that best managed to avoid the use of hard currency payments, with over 50 percent of their trade transactions resulting in canceled debits, were Chile, Colombia, and Venezuela. After 1995, use of the central clearing house mechanism dropped steadily until it reached a low point of only U.S.$700 million by 2003. At that point, there began a slow recovery, although only U.S.$6 billion in trade was funneled through the central clearing house mechanism in 2006 (still less than half of what was recorded in 1995). In addition, the mechanism today handles only a small There are currently some 560 financial institutions (excluding branch offices) participating in the ALADI central clearing house mechanism. Brazil and Ecuador have the most private sector banks participating in the system. El Sistema de Pagos de la ALADI en 1995, 2 Estadisticas y Comercio 27–28 (Feb.–Apr. 1996). This figure of 56 percent actually represents a drop from the historical average of 73 percent. Id. at 29. Id. at 29. Id. at 30.


percentage of total intra-regional trade transactions (i.e., 6.5 percent in 2006) as compared with 1989, for example, when over 90 percent of intra-regional trade was funneled through the ALADI central clearinghouse mechanism. Venezuela is currently the largest user of the ALADI central clearing house. III. Rule of Origin Requirements Resolution 252, which was issued by the ALADI Committee of Representatives in August 1999 to replace Resolution 78, contains the current rule of origin requirements. In theory, all products must meet these requirements in order to take advantage of the various preferential tariff arrangements and trade agreements that exist under the ALADI umbrella. The reality, however, is that this has often not been the case, as trade agreements such as MERCOSUR, the G-3 Accord, and the Bolivia-Mexico Free Trade Agreement have their own rule of origin requirements that may significantly digress from those found in Article 252. Accordingly, it is wiser to refer to the particular agreement in question than rely on the provisions of Resolution 252 for guidance in this area. Pursuant to Resolution 252, in order to enjoy intra-regional preferential tariff treatment, a good must be: 1. Entirely made with inputs that originate exclusively in the territory (including free trade zones) of one or more of the ALADI countries; or 2. Originate in the territory (including free trade zones) of one or more of the ALADI countries whether it be a mineral, vegetable, or animal product, including those goods specifically listed in Annex 1 to Resolution 252 (e.g., books, newspapers, and music manuscripts). Products obtained from outside territorial waters will also be considered to originate within ALADI if taken by a vessel bearing the flag of one of the ALADI states or rented by a company legally established in an ALADI country; or 3. Made with inputs from outside ALADI so long as the good is transformed in such a manner as to achieve a new tariff classification heading under the ALADI nomenclature or tariff classification system (NALADISA). Goods that are merely assembled, packaged, marked, sorted, or otherwise do not undergo a substantial transformation within one of the ALADI countries are specifically excluded from consideration; or 4. Made with foreign inputs and assembled in one of the ALADI countries, so long as no more than 50 percent of the freight on board (FOB) value of the final product reflects the cost, insurance, and freight (CIF) costs of the foreign input(s). In addition, goods that are made in the ALADI countries but do not change tariff classification heading under the NALADISA can benefit from intra-regional tariff preferential arrangements if they meet this 50 percent regional content requirement; or If the particular trade agreement does not exclusively encompass ALADI countries, the origin rules of Resolution 252 are supposed to be applicable to the goods sourced in an ALADI country.


5. Made or processed in non-ALADI countries with ALADI inputs that are equal or exceed 50 percent of the final product’s FOB value, so long as a special waiver has been obtained from the ALADI Committee of Representatives. Annex 2 to Resolution 252 contains an additional set of products that must include the specified content(s) outlined in detail in the annex before the products will be considered as originating within ALADI and allowed to partake of preferential market access provided under ALADI trade agreements. For example, condensed milk is considered as originating in an ALADI country only if it is made from milk and sugar produced within a member state. Wine is considered to originate within ALADI if it is only made with grapes that originate within an ALADI country. Finally, marmalades and preserves must be made with fruit and sugar that originate in an ALADI country for them to be considered eligible for preferential treatment under an ALADI trade agreement. Article 3 to Resolution 252 permits the least-developed countries within ALADI (i.e., Bolivia, Ecuador, and Paraguay) a 40 percent regional content requirement for goods made with non-ALADI inputs and then exported to a more-developed member state under an ALADI trade agreement. In addition, Article 6 to Resolution 252 allows all the member states to agree to different rules of origin for specific products as part of their so-called partial reach agreements. These rules must not be more liberal than the minimum 50 percent regional content requirement (except in the case of goods made in the least-developed ALADI countries). In order for a good to receive preferential tariff treatment, Article 4 of Resolution 252 requires that the good be shipped directly from the territory of one ALADI member state to that of the other. It is permissible to ship goods through a non-ALADI country only if the goods remain under the supervision of the customs authority in the transit county(ies) and: 1. Such transit is justified by geographic reasons or because the chosen mode of transport provides no other alternative; 2. The goods will not be sold or in any way be used in the transit country(ies); and 3. The goods are handled in the transit country(ies) only in ways compatible with facilitating the transfer of cargo. All goods shipped between ALADI countries desiring to take advantage of an ALADI preferential tariff arrangement must be accompanied by the requisite ALADI-approved certificate declaring compliance with the relevant rules of origin. The statement of compliance should be made by the final producer of the good or the exporter under penalty of perjury. The certificate of origin is obtained from the entity designated by the government of the country of export for this task. The certificate of origin is valid for a period of up to 180 days from its date of issue. The certificate of origin should normally bear the same date as the commercial invoice or be issued within 60 days thereafter. Any importing country that feels that a certificate of origin is invalid may complain to the other country’s government and can even require the posting of a bond


to cover the potential duty on the challenged good, but it cannot refuse entry of that good into its territory. IV. Safeguard Measures The general rules for the use of safeguard measures within the ALADI context are found in ALADI Resolution 70. It is important to point out, however, that Article 49 of the Treaty of Montevideo of 1980 authorizes member states to supplement these measures with their own safeguard clauses in whatever trade agreements they may negotiate among themselves on a bilateral or multilateral level. This right is also specifically permitted by Article 9(g) of the Treaty of Montevideo in the context of so-called agreements of partial scope and by Article 17 in the context of agreements with the less-developed ALADI member states. Accordingly, most trade agreements under the ALADI umbrella have their own safeguard clauses that, while they generally follow the basic framework set down in Resolution 70, may also differ in some crucial respects. Resolution 70 allows countries to impose temporary safeguard measures on the continued importation of goods from a fellow ALADI state so long as they are not imposed in a discriminatory manner. Safeguard measures can only be imposed: 1. to counteract imbalances created by general balance of payments problems (although a safeguard cannot be utilized for this motive against the imports of Bolivia, Ecuador, and Paraguay); 2. when the importation of one or more goods from another ALADI country(ies) occurs in such quantities or in such a manner that it causes or threatens to cause grave harm to the national producers of similar or directly competitive products; or 3. when authorized by the Committee of Representatives to overcome chronic deficits arising from implementation of a preferential tariff agreement under the ALADI umbrella. When the decision to impose a safeguard measure is made, the relevant government should communicate this fact within seven working days to its fellow ALADI members through the Committee of Representatives so as to reach some sort of understanding that will limit any unnecessary prejudicial effects on intraregional trade flows. Safeguard measures should not be imposed for longer than one year and can be renewed for up to another year following notification and consultations within the Committee of Representatives. Safeguards can take the form of quotas (that can restrict importation of a product based on volume or value). In the case of a safeguard imposed for reasons other than to a balance of payment crisis, the preferential tariff arrangement should be preserved for the quantity imported within the quota limit. In the specific case of imports from the least-developed ALADI countries (i.e., Bolivia, Ecuador, and Paraguay), safeguards may only be imposed against their exports to the extent that there has been a determination that they are fundamentally responsible for actual harm to national production. If the decision is made to impose a safeguard against a culpable least-developed country, it cannot reduce the level habitually imported from that country.


V. Agreements Under the Latin American Integration Association Framework Article 4 of the Treaty of Montevideo of 1980 established three categories of agreements that were designed to be stepping stones to the eventual creation of a Latin American common market. These three categories of agreements are: 1. regional tariff preference agreements (which is the general tariff preference scheme agreed upon by all ALADI member states in Acuerdo Regional No. 4 and covers almost all the items found in the NALADISA); 2. regional accords (which require the participation of all the ALADI member states as per Article 6 of the Treaty of Montevideo); and 3. partial reach agreements (which are adhered to by less than the full membership of ALADI and are usually bilateral in nature). In addition to Acuerdo Regional No. 4, the general preferential tariff agreement that is valid for the entire ALADI membership, there are currently six other types of agreements included under the rubric of Regional Accords. These include three agreements in which the more-developed member states grant greater market access to each of the three least-developed members of ALADI (i.e., Bolivia, Ecuador, and Paraguay). There is also a Regional ALADI Agreement on Scientific and Technological Cooperation, a Regional Agreement on Cooperation and Exchange of Cultural, Educational and Scientific Material, and a Framework Agreement to Promote Trade through the Elimination of Technical Barriers to Trade. Included under the rubric of partial reach agreements are the ACEs, which are designed to systematically reduce tariffs across the board so as to eventually culminate in a free trade area among participating ALADI member states. In addition to the ACE, other partial reach agreements include: 1. the agreements that renegotiated the preferential tariff arrangements that had been previously set under the old ALALC of the 1960s (see Table 2.1); 2. commercial agreements designed to encourage the regional integration of specific industrial sectors and, in doing so, greater intraregional trade of the inputs used in these sectors10; Article 11 of the Treaty of Montevideo viewed ACEs as trade agreements that would “promote maximum utilization of factors of production, stimulate economic complementation, insure equitable conditions of competition, facilitate the launching of products into the international market, and provide incentives for equitable and harmonious development among the member states.” As previously pointed out, one of the tasks of ALADI’s Evaluation and Convergence Conference is to ensure that those ACE that are bilateral or involve a small number of countries eventually encompass all the ALADI member states. It is important to point out that many of the ALALC agreements were subsequently supplanted by new ACEs. 10 Article 10 of the Treaty of Montevideo called for the creation of commercial agreements between two or more ALADI members that are designed to encourage intra-regional trade in specific industrial sectors, especially with respect to inputs used in those industries. Out of the 27 that were signed during the 1980s, none are still in effect.


3. agreements designed to promote intra-ALADI trade by eliminating non-tariff barriers, harmonizing technical norms and rules with respect to the imposition of antidumping and countervailing duties, and facilitating the transport of goods (see Table 2.2); 4. agreements designed to encourage and streamline intra-ALADI trade in agro-industrial goods11; 5. non-commercial agreements intended to encourage regional cooperation on transportation issues, tourism, environmental protection, culture, communication, science and technology (see Table 2.3); and 6. trade agreements with non-ALADI countries of Latin America and the Caribbean. Table 2.1. Renegotiated ALALC Agreements Still in Effect Agreement No.

Signatories

Effective Date

Protocols

9

Brazil Mexico

April 30, 1983

Yes (2)

18

Colombia Paraguay

April 30, 1983

No

20

Paraguay Peru

April 30, 1983

No

21

Paraguay Venezuela

April 30, 1983

No

23

Colombia Uruguay

April 30, 1983

No

25

Uruguay Venezuela

Dec. 31, 1981

No

29

Ecuador Mexico

April 30, 1983

Yes (3)

33

Peru Uruguay

April 30, 1983

No

38

Mexico Paraguay

April 30, 1983

Yes (10)

11 Only three agreements survive under this category, pursuant to Article 12 of the Treaty of Montevideo. One is a 1984 agro-industrial agreement between Argentina and Uruguay. The other concerns the liberalization and expansion of intra-regional trade in seeds, signed by all the ALADI countries except Mexico. The third agreement establishes an Agro-Industrial Council of the South and was signed by the MERCOSUR countries plus Bolivia and Chile.


Table 2.2. Agreements to Promote Intra-ALADI Trade Currently in Effect Agreement

Signatories

Date of Execution

Protocols

Provision of Gas

Argentina Uruguay

January 31, 1992

No

Provision of Natural Gas

Bolivia Brazil

August 17, 1992

No

Recife Agreement on Integrated Border Control Measures

Argentina Brazil Paraguay Uruguay

May 18, 1994

Yes (3)

Intra-MERCOSUR Transport of Hazardous Cargo


December 30, 1994

Yes (1)

Multi-Modal Transportation Contracts


December 30, 1994

No

Energy Cooperation

Paraguay Uruguay

April 12, 1996

No

Energy Integration

Argentina Bolivia

February 16, 1998

Yes (1)

Framework Agreement to Overcome Technical Barriers to Trade

All ALADI Member States

December 8, 1997

No

Energy Cooperation

Argentina Peru

August 12, 1998

No

Phytosanitary Measures

Argentina Peru

August 12, 1998

No

Cooperation on Vegetable Sanitation & Quarantine

Argentina Peru

August 12, 1998

No


Table 2.2. Agreements to Promote Intra-ALADI Trade Currently in Effect (continued) Agreement

Signatories

Date of Execution

Protocols

Mutual Recognition of Technical Norm Certificates

Argentina Ecuador

September 7, 2001

No

Provision of Natural Gas

Bolivia Paraguay

March 15, 1994

No

Promotion of Bilateral Trade and Investment

Argentina Bolivia

April 21, 2004

Yes (3)

Customs Cooperation

Chile Peru

December 17, 2003

No

Framework Agreement on Regional Energy Cooperation

Argentina Brazil Chile Colombia Ecuador Paraguay Uruguay Venezuela

December 9, 2005

No


Table 2.3. Non-commercial Agreeements to Encourage Regional Cooperation Currently in Effect Agreement

Signatories

Date of Execution

Protocols

Tourism Promotion

Bolivia Uruguay

September 29, 1986

No

Exchange of Cultural, Educational, & Scientific Goods

All ALADI Members

October 27, 1988

Yes (1)

Uniform Rules on International Surface Transport

Argentina Bolivia Brazil Chile Paraguay Peru Uruguay

January 1, 1990

Yes (4)

Joint Actions to Promote South America as a Tourist Destination

Argentina Bolivia Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela

August 30, 1990

Yes (1)

Legal Framework for Use of Paraguay-Parana River Network

Argentina Bolivia Brazil Paraguay Uruguay

June 26, 1992 (Entered into Force on February 13, 1995)

Yes (7)

Cooperation & Exchange of Goods to Protect the Environment

Argentina Brazil Uruguay

June 27, 1992

Yes (1)

Latin American Common Market for Books

Brazil Uruguay

December 30, 1992

No

Uniform Framework of Rules for International Vehicle Transit

Argentina Bolivia Brazil Chile Paraguay Peru Uruguay

September 29, 1992

No


Table 2.3. Non-commercial Agreeements to Encourage Regional Cooperation Currently in Effect (continued) Agreement

Signatories

Date of Execution

Protocols

Assignment & Use of TV Generating and Transmission Stations


May 25, 1995

No

Surface Transport of Cargo Contracts & Civil Responsibility

Bolivia Brazil Chile Paraguay Peru Uruguay

August 16, 1995

No

Framework Agreement for a Free Trade Area Between MERCOSUR and the Andean Community

Argentina Bolivia Brazil Colombia Ecuador Paraguay Peru Uruguay Venezuela

April 16, 1998

No

Framework Agreement on Trade & Investment Between MERCOSUR and Central America Common Market

Argentina Brazil Costa Rica El Salvador Guatemala Honduras Nicaragua Paraguay Uruguay

April 18, 1998

No

Mining Cooperation

Argentina Ecuador

June 2, 1999

Yes (1)

Mining Cooperation & Integration

Argentina Peru

October 29, 1999

No

Surface Transport for Cargo & Passengers

Brazil Venezuela

July 4, 1995

No

Mining Cooperation

Chile Ecuador

August 26, 1999

No


VI. Agreements Between Latin American Integration Association Countries and Non-Member States in Central America and the Caribbean Article 25 of the Treaty of Montevideo of 1980 encourages ALADI countries to enter into trade agreements with non-member states (including economic blocs) in Central America and the Caribbean (including Guyana and Suriname in northern South America). As is true of the commercial agreements to permit trade in specific sectors (see Table 2.2), any preferential tariff arrangement that may be extended by a member state to a non-ALADI country is automatically extended to the three least-developed ALADI countries (i.e., Bolivia, Ecuador, and Paraguay) as well. Table 2.4 lists the current Article 25 agreements, including participating countries, the date the agreements came into force, and whether any protocols to the original agreements have been executed since their initial effective date. Interestingly, none of the free trade agreements that Chile and Mexico have signed with the Central American countries since the mid-1990s has ever been registered with the ALADI Secretariat, even though the free trade agreements technically should fall under Article 25. A. Colombia-Venezuela and Central American Agreement In February 1993 Colombia and Venezuela jointly signed an Agreement on Trade and Investment with the five Central American countries (i.e., Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua). In doing so, Colombia and Venezuela sought to replace their original limited preferential market access agreements with the Central American states from the 1980s with a more ambitious free trade agreement. In addition, the new agreement also sought to establish common rules to promote and protect investments among the signatory states. All the signatories to the agreement were supposed to have established a three-category tariff reduction program by June 30, 1993, which would be phased in so as to eliminate all duties on so-called category one goods imported into Colombia and Venezuela and originating in Central America by 1996. The Central Americans would eliminate all duties on Colombian and Venezuelan category one products by 1998. For category two products, the tariff reduction schedule would be phased in over five years on the part of Colombia and Venezuela and ten years by the Central American states. A third group of products (mostly agricultural goods) would be included in a tariff reduction schedule that would be implemented over an even longer period of time. Unfortunately, the negotiations to decide what goods would be included in what categories collapsed. Accordingly, only those portions of the agreement dealing with investment promotion and protection ever came into force. B. Caribbean Common Market and Community Preferential Market Access Agreements with Colombia and Venezuela Venezuela and the Caribbean Common Market and Community (CARICOM) signed a preferential tariff agreement on October 13, 1992, pursuant to Article 25 of the Treaty of Montevideo of 1980. As a result of this agreement, Venezuela granted immediate duty-free access to those products included in Annex I (i.e., mostly plants, foodstuffs, natural gas and petroleum derivatives, and consumer


Table 2.4. Commercial Trade Agreements Between ALADI Members and Central America/Caribbean Currently in Effect Agreement No. 5 6 7 8 9 14 16 20 22 23 24 25 26 27 29 31 36 37 38 41

Signatories Colombia Guatemala Colombia Nicaragua Colombia Costa Rica Colombia El Salvador Colombia Honduras Mexico Panama Venezuela Honduras Venezuela Trinidad & Tobago Venezuela Guyana Venezuela Guatemala Venezuela CARICOM Venezuela Nicaragua Venezuela Costa Rica Venezuela El Salvador Colombia Panama Colombia CARICOM Cuba Guatemala Mexico Guatemala Brazil Guyana Brazil Suriname

Effective Date March 1, 1984

Protocols Yes (1)

March 2, 1984

No

March 2, 1984

No

May 24, 1984

No

May 30, 1984

Yes (2)

May 22, 1985

Yes (1)

February 20, 1986

Yes (1)

August 4, 1989

Yes (1)

October 27, 1990

No

October 30, 1985

Yes (1)

October 13, 1992

No

August 15, 1986

Yes (1)

March 21, 1986

Yes (1)

March 10, 1986

Yes (2)

July 9, 1993

Yes (2)

July 24, 1994

Yes (1)

April 12, 2000

No

March 19, 2001

Yes (1)

July 8, 2004

Yes (4)

September 6, 2006

No


items) that originated in CARICOM. Goods found in Annex II (i.e., mostly seafood, vegetables, and certain meats and processed foodstuffs, jewelry, certain types of furniture, garments, machinery, as well as steel and iron products) would be subject to an annual 25 percent reduction in Venezuela’s tariff rates beginning on January 1, 1993, and culminating in zero by January 1, l996. Finally, Venezuela agreed to levy a MFN duty on CARICOM goods listed in Annex III. The only obligation on the CARICOM countries was to levy the MFN rate on all Venezuelan imports and ensure that they would never be subject to quota restrictions. On July 24, 1994, Colombia and CARICOM signed their own preferential tariff agreement pursuant to Article 25 of the Treaty of Montevideo. Colombia agreed to eliminate tariffs on products found in Annex I that originated in CARICOM as soon as the agreement came into force. Tariffs on goods listed in Annex II were to be reduced annually over a three-year period to eventually reach zero. Finally, yet another list of products found in Annex III were to receive preferential tariff treatment only after negotiations were concluded between CARICOM and Colombia sometime before the end of 1998. In recognition of CARICOM’s less-developed status, only Barbados, Guyana, Jamaica, and Trinidad and Tobago were required to begin eliminating tariffs on all goods imported from Colombia, but this obligation would not begin until 1998. With the exception of a significant increase in Venezuelan petroleum exports to CARICOM, neither the Colombian nor the Venezuelan agreements with CARICOM have, to date, produced significant increases in trade originating in either the Caribbean or in the two South American countries. In the particular case of Venezuela, its non-petroleum exports to CARICOM presently include small amounts of cement, steel, iron, paper and plastic products, and some foodstuffs (including beer). Venezuelan imports from CARICOM consist mostly of scrap and corrugated paper, spices, and pleasure boats. One of the biggest obstacles to increasing trade flows between the CARICOM countries and both Colombia and Venezuela is the current poor state of transportation links. Few shipping lines maintain regular service between either Colombia or Venezuela and most of the Caribbean islands. This is because the small size of many Caribbean markets makes it unprofitable for shipping lines to either launch direct services from South America to the Caribbean or to undertake regular calls at Caribbean ports on established routes between South and North America or South America and Europe. The limited, special services that do exist make shipping goods to and from the Caribbean very expensive. In addition, the small volumes of cargo do not justify container services (thereby increasing the possibility that goods will arrive at their final destination damaged). In late 1997, Colombia and Venezuela proposed that the bilateral preferential tariff arrangements with CARICOM be replaced by a more comprehensive free trade agreement with reciprocal obligations that would also include the remaining countries of the Andean Community. Although the negotiations for this new trade agreement were scheduled to begin by the end of 1998, this never happened.


VII. Latin American Integration Association Economic Complementation Agreements During the 1990s, the most noticeable phenomenon among the ALADI member states was the movement away from bilateral partial reach agreements— which only liberalized trade in a small number of goods—to more ambitious ACEs (see Table 2.5) that universally liberalized trade in goods and included additional disciplines such as cross-border trade in services. In addition, many of the new ACEs involved more than two countries. Concurrent with the adoption of these new type of ACE was a tendency to abandon ALADI’s standardized legal norms with respect to rules of origin and safeguard measures in favor of ones unique to the particular circumstances of the new trade agreements. This was true of ACE No. 14, the original MERCOSUR agreement between Argentina and Brazil, and the subsequent ACE No. 18, which added Paraguay and Uruguay to MERCOSUR. It has also been true of ACE No. 31 (i.e., the Bolivia-Mexico Free Trade Agreement), as well as ACE No. 33 (i.e., the G-3 Accord between Colombia, Mexico, and Venezuela). One feature that has been retained in the new ACE, however, is the standard ALADI accession clause, which opens possible future accession to any other ALADI member state. Perhaps the country that has been most aggressive in its use of ACEs to pursue free trade agreements with all of its ALADI partners is Chile. Chile has bilateral ACEs with Bolivia, Colombia, Ecuador, Mexico, Peru, and Venezuela. Although Chile has long proposed replacing it with a free trade agreement, ACE No. 22 with Bolivia only contains a limited number of products that can be traded at preferential tariff rates. Chile also has an ACE with MERCOSUR, which was preceded by a bilateral ACE that Chile and Argentina signed in 1991 (i.e., ACE No. 16). ACE No. 16 served as a catalyst for an explosion in Argentine-Chilean trade, which went from a mere U.S.$500 million in 1989 to over U.S.$2 billion by 1995. A significant portion of Chile’s exports to Argentina consisted of value-added products such as computer software and furniture. The main focus of the 1991 Argentine-Chilean ALADI agreement was, however, to encourage the private sector in each country to invest in the other and to promote infrastructural integration between the two neighbors. For example, by 1995 Argentina was the recipient of U.S.$5.5 billion worth of Chilean investments. Chilean holdings included two electricity distributors (Central Costanera and Central de Buenos Aires), a natural gas company (Enagas), Banco Transandino, supermarkets, and department stores. A. Chile-Mexico Free Trade Agreement The first Chile-Mexico Free Trade Agreement or ACE No. 17 was signed in Santiago in 1991. Beginning on January 1, 1992, the tariff levied on the majority of each country’s products was gradually reduced so that by January 1, 1996, most Chilean-Mexican trade was duty free. Non-tariff barriers were supposed to have been eliminated as of January 1, 1992, but this goal was slower to achieve. In February 1994, for example, Mexico imposed compensatory quotas on Chile’s significant fish meal exports. These were only removed in October of that year. A select group of products found in Annex 1 to ACE No.


Table 2.5. ACE Agreements Currently in Effect ACE No.

Signatories

Effective Date

Protocols

2

Brazil Uruguay

December 20, 1982

Yes (68)

6

Argentina Mexico

October 24, 1986

Yes (15)

8

Mexico Peru

March 25, 1987

Yes (9)

13

Argentina Paraguay

November 28, 1989

Yes (1)

14

Argentina Brazil

December 20, 1990

Yes (38)

15

Bolivia Uruguay

April 12, 1991

No

16

Argentina Chile

August 2, 1991

Yes (27)

18


November 29, 1991

Yes (67)

19

Argentina Bolivia

April 28, 1992

No

22

Bolivia Chile

April 6, 1993

Yes (16)

23

Chile Venezuela

April 2, 1993

Yes (3)

24

Chile Colombia

January 1, 1994

Yes (8)

26

Bolivia Brazil

January 27, 1994

No

27

Brazil Venezuela

July 15, 1994

Yes (4)

28

Ecuador Uruguay

May 1, 1994

No

29

Bolivia Paraguay

March 15, 1994

No


Table 2.5. ACE Agreements Currently in Effect (continued) ACE No.

Signatories

Effective Date

Protocols

30

Ecuador Paraguay

September 15, 1994

No

31

Bolivia Mexico

September 10, 1994

No

32

Chile Ecuador

January 1, 1995

Yes (5)

33

Colombia Mexico Venezuela

June 13, 1994

Yes (7)

35

MERCOSUR Chile

September 30, 1996

Yes (51)

36

MERCOSUR Bolivia

February 28, 1997

Yes (25)

38

Chile Peru

July 1, 1998

Yes (2)

39

Brazil Colombia Ecuador Peru Venezuela

August 12, 1998

No

40

Cuba Venezuela

July 28, 2001

Yes (3)

41

Chile Mexico

April 17, 1998

No

42

Chile Cuba

December 20, 1999

Yes (1)

43

Brazil Cuba

December 22, 1999

No

44

Cuba Uruguay

December 22, 1999

Yes (2)

45

Argentina Cuba

December 21, 1999

Yes (8)

46

Cuba Ecuador

May 10, 2000

Yes (1)

47

Bolivia Cuba

May 8, 2000

Yes



Signatories

Effective Date

Protocols

48

Argentina Colombia Ecuador Peru Venezuela

June 29, 2000

No

49

Colombia Cuba

September 15, 2000

Yes (2)

50

Cuba Peru

October 5, 2000

No

51

Cuba Mexico

October 10, 2000

Yes (2)

52

Cuba Paraguay

November 20, 2000

No

53

Brazil Mexico

May 2, 2003

Yes (3)

54

Argentina Brazil Mexico Paraguay Uruguay

January 5, 2006

No

55

Argentina Brazil Mexico Paraguay Uruguay

January 1, 2003

Yes (6)

56

Argentina Bolivia Brazil Colombia Ecuador Paraguay Peru Uruguay Venezuela

N/A

No

57

Argentina Uruguay

May 1, 2003

Yes (2)



Signatories

Effective Date

Protocols

58

Argentina Brazil Paraguay Peru Uruguay

December 12, 2005 through February 6, 2006

Yes (4)

59

Argentina Brazil Colombia Ecuador Paraguay Uruguay Venezuela

January 5, 2005 through April 19, 2005

Yes (7)

60

Mexico Uruguay

July 15, 2004

No

62

Argentina Brazil Cuba Paraguay Uruguay

January 15, 2007 through August 8, 2007 For Paraguay & Uruguay: N/A

No

63

Uruguay Venezuela

No

17, including chemicals, glass, ceramics, textiles, wood, and poultry were not scheduled to receive complete free trade treatment until January 1, 1998. By January 1, 1996, ACE No. 17 had eliminated all duties and non-tariff restrictions on the bilateral trade of passenger cars, vans, and trucks made in either Chile or Mexico and traded between them. By January 1, 1998, some 80 percent of all goods exchanged between Mexico and Chile were traded free of all tariff barriers and non-tariff restrictions. Of the 20 percent of goods that did not receive free trade treatment, the most significant were Chilean seafood, tobacco, and certain petroleum products such as gasoline and natural gas. For their part, the Chileans continued to impose tariffs on certain types of petroleum products imported from Mexico. In April 1998 the Chilean and Mexican governments signed a new, more expansive free trade agreement during the II Summit of the Americas in Santiago. The new Chile-Mexico Free Trade Agreement was incorporated into the ALADI framework as ACE No. 41 and superseded ACE No. 17 to the extent there were any discrepancies between the two treaties. Otherwise, the provisions and obligations of the earlier ACE remained in effect. The new bilateral agreement was very similar to NAFTA, including the fact that its text was divided into some


20 chapters. Unlike NAFTA, however, ACE No. 41 initially did not have any chapters covering financial services and government procurement. A chapter on government procurement was not added until August 2007. Another major difference from NAFTA was that within a year after their new bilateral free trade agreement came into force, the Chilean and Mexican governments were supposed to negotiate an end to using antidumping duties on their reciprocal trade (something that has yet to occur, although not for lack of trying on the part of the Chileans). When ACE No. 41 came into force, any products not already subject to bilateral free trade were accorded immediate duty-free treatment. The exceptions to this general rule were few and included apples (which were subject to quotas and gradually decreasing tariffs until 2006), certain Mexican seafood, grapes, vegetable-based oil, petroleum, and natural gas, as well as Chilean powdered milk, cheese, flour, gasoline, and natural gas. In addition, both countries continued to prohibit the importation of used vehicles, and Mexico could restrict the importation of used machinery and computer equipment until 2004. The rule of origin requirements in ACE No. 41 contain the same level of complexity as found in NAFTA and incorporate the concepts of transaction value and net cost methodologies in determining the regional content value of goods, as well as de minimis exceptions. There are also specific rules of origin for certain products. As soon as their latest agreement came into force on August 1, 1999, all goods traded between Chile and Mexico had to be accompanied by a new declaration and certificate of origin opposed to the standard ALADI form. During a product’s transition to free trade, safeguard measures could be imposed that included the suspension of a tariff reduction schedule as well as increases in duties to the levels in effect before the agreement’s entry into force. Chapters 7 and 8 of ACE No. 41 cover the rules for establishing and enforcing sanitary and phytosanitary measures as well as technical norms. In general, sanitary and phytosanitary measures should be based on scientific principle and should not be used as a disguised form of protectionism. Chile and Mexico should also, to the extent possible, mutually accept the equivalency of their respective sanitary and phytosanitary norms. As a general rule, technical norms should conform to international standards and should not create a greater barrier to trade than is necessary to fulfill a legitimate objective. Chile and Mexico made a commitment to collaborate in ensuring the compatibility of their technical standards. Chapter 9 of ACE No. 41 covers the rules affecting investment by the nationals of one country in the territory of the other, including issues related to expropriation and the resolution of disputes that may arise between a private sector investor and a government. As was true of the 1996 Canada-Chile Free Trade Agreement, the Chileans were able to maintain requirements that Mexican (as well as other foreign) investors had to keep their initial investment capital in Chile for at least one year before they could repatriate it, as well as a withholding rule that required that 30 percent of any loan made to a


Chilean entity by a Mexican (or other foreign bank for that matter) had to be deposited with the Central Bank of Chile. The requirement on keeping investment capital in Chile for up to a year was suspended in 2000, while the withholding rule was suspended in 1998. Chapter 10 contains the specific rules for the offering of services by the nationals of one country in the territory of the other. Among the restrictions retained was one that only allowed Chilean lawyers to perform legal services in Chile and another that required the owners and directors of a Chilean-based newspaper, magazine, or newsletter to be Chilean nationals actually domiciled in the country. For their part, the Mexicans maintained restrictions by Chileans on the ownership of agricultural land and property within 100 kilometers of a border or 50 kilometers in from the sea, as well as ownership of television and radio broadcasting firms. In addition, various activities were reserved for the state in both countries (e.g., offering postal services), and the Mexican state also retained the exclusive right to exploit, transport, store, distribute, and sell crude oil, artificial gas, and basic petrochemicals and to generate, distribute, and sell electricity, as well as to print money. Chapter 11 of ACE No. 41 codifies within the body of the treaty itself the bilateral Convention on Air Transport that Chile and Mexico signed on January 14, 1997. Chapter 12 of ACE No. 41 contains the rules for opening up access to the public telecommunication networks and services, the offering of value added services (such as cable or Internet access), and the harmonization of technical norms in the telecommunications sector. Chapter 13 governs the temporary entry of businessmen of one country into the territory of the other, while Chapter 14 covers the rules that state entities and monopolies should follow so as not to impose unfair restraints on trade. Chapter 15 of ACE No. 41 contains the minimal obligations that Chile and Mexico must provide in order to offer an adequate and effective protection of intellectual property rights (which the parties are free to make more stringent in the future). Among the specific requirements is that each country treat computer programs as literary works protected under their respective copyright laws, that infringement of program carrying satellite signals be punished with civil penalties, and that Chile revamp its trademark law within five years after the trade agreement’s entry into force. In Chapter 16 of ACE No. 41, Chile and Mexico obligated themselves to establish an information center and undertake various initiatives to make the contents of the agreement known to their respective nationals. Chapter 17 creates various institutions and subcommittees to oversee the proper implementation of the provisions and objectives of the Chile-Mexico Free Trade Agreement. In general, disputes that may arise between Chile and Mexico over different interpretations of the provisions and obligations arising under ACE No. 41 are to be resolved by the dispute resolution mechanism found in Chapter 18. For its part, Chapter 19 contains specific reservations each government retained, including the right to restrict the future transfers of capital abroad in the


event of a serious balance of payment crisis and following notification to the International Monetary Fund (IMF). B. Chile-Venezuela Free Trade Agreement The Chile-Venezuela Free Trade Agreement or ACE No. 21 was signed in April 1993. The agreement took effect on July 1, 1993. On that date all non-tariff barriers were supposed to have been eliminated, and the first of five annual reductions in tariffs occurred, which culminated in the elimination of all tariffs on January 1, 1997. There was a slower tariff reduction plan for approximately 300 items found in Annex 1 to ACE No. 21, which included pork, poultry, agricultural staples like rice and beans, tobacco, paper products, and steel. Tariffs on these items were not fully eliminated until January 1, 1999. Among the more significant goods permanently excluded from the bilateral free trade scheme of ACE No. 21 were Chilean lactate products, wheat, vegetable-based oils, sugar, tobacco, petroleum products including gasoline, and certain types of wood. Special permission also had to be sought from the relevant Venezuelan government ministry before such Chilean goods could enter Venezuela, even upon payment of the relevant tariff. With the exception of the automotive sector (which has its own rules of origin), the rules found in ALADI Resolution 78 (and later replaced by Resolution 252) are applicable to ACE No. 21. Nothing prevents new rules of origin different from the ALADI rules being formulated for specific products or sectors. Unlike the first Chile-Mexico Free Trade Agreement (see Section VII.A), which required a four-year waiting period, the Chile-Venezuela accord granted immediate free trade treatment to passenger cars, vans, and trucks effective July 1, 1993. In order to partake of the bilateral free trade arrangement, no more than 65 percent of the FOB price of the finished Venezuelan- or Chileanmade vehicle can reflect the CIF value of foreign inputs. Auto parts, on the other hand, follow the general tariff reduction schedule and must meet the ALADI rules of origin now found in Resolution 252. The safeguard mechanisms in ACE No. 21 are similar to those set out in ALADI Resolution 70. As is true of the Chile-Mexico Free Trade Agreement, Chapter VI of ACE No. 21 allows Chile and Venezuela to use their own internal domestic legislation in response to dumping or other unfair trading practices such as subsidized exports. Chile and Venezuela also agree not to adopt socalled public pricing practices and policies that can distort trade. The Chile-Venezuela accord required that an Administrative Commission address issues such as the implementation of uniform rules on access to government procurement opportunities, uniform rules on technical norms, mutual promotion of trade and investment among each country’s nationals in the other country’s economy, and the opening up of the services industry to bilateral competition. Both countries also pledged to open up their maritime and air transport sectors to bilateral competition. As of mid-2008, however, there has been no progress on these issues. Interestingly, Article 36 of ACE No. 21 called for the gradual implementation of rules affecting the free movement


of labor between Chile and Venezuela, particularly in the services sector. No timetable was set for implementing this provision, however, and there has been no further discussion of the issue since the agreement was signed in 1993. Article 31 to ACE No. 21 establishes a dispute resolution mechanism to resolve differences in the interpretation of provisions of the Chile-Venezuela Free Trade Agreement as well as non-compliance with its obligations. Disputes should first be resolved by the corresponding agencies of each country entrusted with this task, and if no resolution can be reached within 15 days, the matter should be referred to the Administrative Commission. If a decision cannot be made by the Commission within 30 days, the matter is referred to a three-person arbitration panel made up of one expert from each country and a presiding arbitrator from a neutral, third country. The arbitration panel has 30 days (which can be extended for another 30 days) to make a final decision that cannot be appealed. C. Chile-Colombia Free Trade Agreement The Chile-Colombia Free Trade Agreement or ACE No. 24 was signed in December 1993. When it took effect on January 1, 1994, each country began to gradually reduce its tariffs on bilateral trade. By January 1, 1997, duties and non-tariff restrictions were removed on the majority of goods traded between Chile and Colombia. A second group of products included in Annex No. 1 to ACE No. 24 did not receive free trade treatment until January 1, 1999. These goods included certain agricultural products, poultry, petrochemicals, most paper products, most types of wire, and textiles. Among the more important items found in Annex No. 3 of ACE No. 24, which the Colombians originally excluded from free trade treatment, were Chilean copper, flour, lactate products, turkeys, and wheat. For their part, the Chileans permanently barred certain types of Colombian textiles, rice, sugar, and tobacco products from duty-free treatment. In August 1997 Chile and Colombia signed a protocol to ACE No. 24, which gradually phased out the duties on the goods included in the Annex 3 list of exceptions. ALADI Resolution 78 (since replaced by Resolution 252) provides the rule of origin requirements for goods (except for the automotive sector) that can benefit from the Chile-Colombia Free Trade Agreement. The Administrative Commission established to oversee implementation of ACE No. 24 is also given the authority to create new rules of origin different from the ALADI rules. All goods from countries wishing to partake of the bilateral free trade regime must be accompanied by a certificate of origin that the final producer or exporter obtains from a government-authorized entity. Chilean- or Colombian-made vehicles for the transport of passengers and cargo have been traded between the two countries free of duties and nontariff barriers since January 1, 1994, so long as no more than 60 percent of the finished vehicle’s FOB price reflects the CIF value of inputs not produced in either Chile or Colombia. Chilean- and Colombian-made auto parts are also subject to bilateral free trade treatment as long as they meet the general rule of origin requirements found in ALADI Resolution 252.


The safeguard mechanisms in ACE No. 24 are the same as those set out in ALADI Resolution 70. Chapter VI of ACE No. 24 allows each country to resort to its own internal domestic legislation in response to dumping or other unfair trading practices such as subsidized exports. Chile and Colombia also agree not to adopt so-called public pricing practices and policies that can distort trade. As is true of the other Chilean bilateral free trade accords under ALADI, ACE No. 24 requires that the signatory states establish open, transparent, equitable, and competitive rules with respect to government procurement opportunities, and each country agrees to promote trade and investment opportunities by their respective nationals in the other’s economy. In particular, Article 22 requires that each government ensure that its foreign direct investment laws provide for national or MFN treatment to investments originating from the other country. Chile and Colombia also commit themselves to adopt an open air and seas transport policy, which will benefit companies from both countries, and to harmonize their respective economic policies. Furthermore, both governments commit to making any changes that may be necessary to their respective national legislation in order to adequately protect intellectual property rights. An Administrative Commission set up under ACE No. 24 is authorized to harmonize technical norms that exist in Chile and Colombia so that they do not become unnecessary impediments to bilateral free trade. The Administrative Commission was also entrusted with the task of devising rules to facilitate the offering of services by their respective nationals in the territory of the other and with establishing new rules affecting access to government procurement opportunities. The Administrative Commission is headed by the Chilean Minister of Foreign Relations and the Colombian Minister of Foreign Trade. One interesting item included as Annex 6 to ACE No. 24 is a Convention on Cooperation and Coordination in Matters Affecting Agro-industrial Sanitary Codes. The idea behind the convention is to prevent the use of sanitary and phytosanitary rules from being unfairly used to create new, artificial barriers to free trade. In particular, the treaty seeks to harmonize the testing and inspection of animals, plants, and derivative products, and promote the exchange of information and personnel. It also enhances Chilean-Colombian cooperation to prevent the spread of pestilence and plague. Any sanitary or phytosanitary measure adopted must be on the basis of scientific principle and an evaluation of the risks. Article 32 to ACE No. 24 establishes a dispute resolution mechanism to resolve differences in the interpretation or application of provisions of the ChileColombia Free Trade Agreement as well as non-fulfillment of its obligations. Conflicts arising from the imposition of unfair trade practice remedies cannot, however, be referred to the dispute resolution system. The governments are required as a first step to resolve any disputes through negotiations. If no resolution can be reached within 20 days, the matter should be referred to the Administrative Commission. If a decision cannot be made by the Administrative Commission within 30 days, the matter is referred to a three-person arbitration


panel made up of one expert from each country and a presiding arbitrator from a neutral, third country. The arbitration panel has 30 days (which can be extended for another 30 days) to make a final decision, which cannot be appealed. In October 2006 the governments of Chile and Colombia initiated negotiations to substitute ACE No. 24 with a more comprehensive free trade agreement that will include detailed provisions on cross-border trade in services, government procurement, investment, environmental protection, and effective enforcement of intellectual property rights. D. Bolivia-Mexico Free Trade Agreement The Bolivia-Mexico Free Trade Agreement or ACE No. 31 came into force on September 10, 1994. The agreement bears a remarkable similarity to NAFTA in terms of the type and scope of disciplines included that went well beyond a traditional ACE. Given the fact that trade between Bolivia and Mexico was negligible prior to the signing of their free trade agreement, and remains so even today, it appears that it was signed primarily for political reasons. One humorous anecdote connected to the agreement serves to further underscore this point. In the mid-1990s, representatives of the U.S. Patent and Trademark Office (PTO) visited their counterparts in La Paz to discuss what the Americans considered shortcomings in Bolivia’s intellectual property laws. When the Bolivians objected to suggestions by the PTO that they make certain changes to their legislation, the Bolivians claimed this could not be done because it would violate Bolivia’s commitments to the Andean Community. The Bolivian intellectual property personnel, when it was pointed out to them by their American counterparts, were then shocked to discover that their government had already agreed to do precisely what the PTO was suggesting in ACE No. 31! The bulk of non-agricultural tariff lines (i.e., 75 percent of Bolivian tariff lines into Mexico, 67 percent of Mexican tariff lines into Bolivia) received immediate duty-free treatment when ACE No. 31 came into force. The remainder of products reached zero within three to nine years thereafter, while a very small number (mostly pharmaceuticals) did not reach zero until 11 years after ACE No. 31 came into effect. Although most agricultural goods were subject to an annual tariff reduction schedule that would culminate at zero by January 1, 2004, Mexico was allowed to permanently exclude just under 200 tariff lines while Bolivia could do the same for approximately 140 agricultural tariff lines found in the Annex to Article 4-04. While ACE No. 31 called for future negotiations to eliminate these exemptions, as of mid-2008 this had not happened yet. Bolivia also retained the right to apply the Andean price band mechanism on some 150 basic foodstuffs. The rules of origin give preference in ACE No. 31 to a change in tariff classification heading for third country inputs over the local content requirement option. The local content is calculated at 50 percent, in the event the transaction value methodology is used, or 41.66 percent, if net cost is utilized. Net cost is limited to calculating the origin of automobiles, intra-company sales, or when


the value cannot otherwise be adequately determined if the transaction value method is employed. There are also special rules of origin for certain products that require specific inputs to be sourced in either Bolivia or Mexico, regardless whether there is a substantial transformation or the local content percentage is met. In addition, the textiles for most clothing must be cut or knit to shape in either Bolivia or Mexico, and the yarn to make the textiles must be spun in either Bolivia or Mexico. There is, however, a 7 percent de minimis exclusion for non-originating fiber and thread. All goods from countries wishing to partake of duty-free treatment must be accompanied by a certificate of origin that the exporter or final producer was required (at least until 2000) to validate with the entity approved by the exporting country. Safeguard measures can be used on bilateral trade only during the transition period to free trade of a particular product and only in response to actual or threatened grave harm to national production of the same or a similar product that is directly competitive. Safeguards may remain in place for a maximum of one year and can be extended for another year only. Safeguards are limited to tariffs and cannot be higher than MFN duties levied on third-country exports or those levied on the partner’s exports prior to when ACE No. 31 took effect (which is lower). There is also the requirement that the government imposing the safeguard offer the other country some type of mutually agreed upon compensation in terms of increased market access for another product. With ACE No. 31’s entry into force, a general prohibition was imposed on exporting subsidized goods to the other partner (including agricultural exports). On the other hand, Bolivia and Mexico were allowed to continue any domestic agricultural support payment programs, so long as these complied with World Trade Organization (WTO) obligations. In addition, no prohibition was imposed on the use of antidumping or countervailing duties on bilateral trade, so long as their imposition complied with relevant WTO obligations. However, an option was offered for both governments to reach a mutually acceptable compromise prior to the initiation of a formal investigation into allegations of dumping or subsidized exports. ACE No. 31 allowed either government to request consultations with the other in the event complications arise with respect to the enforcement of sanitary or phytosanitary measures. Disputes can also eventually be referred to the general dispute resolution mechanism. The adoption of new sanitary and phytosanitrary measures requires 60 days’ advance notice for review and comment by the other government. The enactment of new sanitary and phytosanitary measures must be based on scientific principles and following an appropriate evaluation of the potential risks and benefits. There are advance notice requirements for the adoption of new, or the modification of existing, technical norms. There is also a national treatment obligation with respect to technical norms affecting packaging, grading, quality, and measurements. As a general rule, technical standards should be based on international norms, should be rigorously evaluated to ensure they respond to a precise risk, and both governments should make a commitment


to harmonize and/or mutually recognize technical norms and evaluation conformity procedures. The only services that Bolivian firms may not offer in Mexico and vice versa are those related to the provision of air transportation and those left to government prerogative. There is a separate chapter on access to public telecommunication networks by service providers from the other country who wish to offer value-added services. In this regard, Article 10-06 prohibits either government from abusing the state monopoly ownership of telecommunication services and networks to interfere with the ability of private sector companies or individuals from the other country to sell telecommunication equipment or offer value added services such as cable TV, the Internet, or mobile telephony. There is also a separate chapter in ACE No. 31, which deals exclusively with financial services. The number of service providers from the other country that could offer their services in the territory of the other was to be negotiated in biannual rounds (although as of mid-2008 there is no indication that this ever happened). There are rules on the temporary entry of businesspeople (broadly defined as service providers, investors, and employees of crossborder service providers) into the territory of the other. There is a general prohibition on local presence requirements for cross-border service providers, as well as nationality or residency requirements as a prerequisite to obtaining a professional license. Bolivian firms must be allowed to participate in Mexican government procurement bids at the federal and state level that involve purchases of goods and services in excess of U.S.$50,000 or construction projects in excess of U.S.$6.5 million. If the goods or services are being purchased by a state enterprise, the minimal amount is U.S.$250,000. Similarly, Mexican firms can participate in government bidding contests for goods and service at the national and departmental level in Bolivia, although the threshold amounts are initially higher. In addition, Bolivia reserved the right to set aside 5 percent of government procurement opportunities for goods or services to Bolivian firms. Bolivian investments in Mexico and vice versa are subject to the principles of national and MFN treatment. The definition of an investment includes the cross-border transfer of capital for purposes of making a profit as well as participation in or outright ownership of a business (but not capital and interest on short-term financing loans or on money lent to state enterprises). Article 15-05 prohibits conditioning acceptance of cross-border investment on compliance with export performance criteria, mandated use of domestic inputs, local purchase of services, technology, or personnel transfer, or exclusivity arrangements. Article 15-06 prohibits requiring that management of the foreign firm be nationals of the country wherein it is operating. Article 1508 requires unhindered transfer abroad of all investment related movements of capital, including profits, dividends, interest, technical assistance fees, and royalty payments in the currency of choice. Temporary exchange controls are only permitted in response to a balance of payment crisis. Article 15-09 contains detailed rules on expropriation and just compensation. Investor-state disputes are resolved through consultations, as a first step, and then binding


arbitration using rules established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention; done at Washington, DC, on March 18, 1965),12 the United Nations Commission on International Trade Law (UNCITRAL) Rules on International Commercial Arbitration and Conciliation,13 or the Inter-American Convention on International Commercial Arbitration (signed in Panama on January 30, 1975).14 Article 15-14(2) prohibits Bolivia or Mexico from eliminating or exempting investors from compliance with environmental laws as a way to attract foreign investment. There is also a commitment by both countries to adhere to the recommendations of the United Nations and provisions found in international environmental treaties to which they are signatories. Bolivia and Mexico are required to ratify a number of international intellectual property treaties (if they have not already done so) or at least adhere to their substantive provisions. Copyrights must be protected for the life of the author plus 50 years. Software and data compilation must be protected as well. Marks are broadly defined to include service and collective marks, and ACE No. 31 provides protection for so-called well known marks. A service or product with a mark registered in both Bolivia and Mexico cannot be exported from one to the other, unless the mark holder specifically authorizes such a transaction. Protection of geographical name indicators is recognized as are industrial or business secrets as well as test data, which must be revealed in order to obtain approval to sell a pharmaceutical or agro-chemical product. Bolivia specifically commits itself not to permit the domestic sale of alcoholic beverages denominated “tequila” or “mescal” unless it is made in Mexico. Article 16-07 allows the Bolivian and Mexican governments to consider the negative impact on free competition that may result from an intellectual property rights licensing agreement. Pursuant to Article 16-32, the Bolivian or Mexican governments can override patent protection in response to a national emergency or for the public good but only if the patent holder has unreasonably refused to grant a license. Article 16-40 includes a detailed list of civil and administrative procedures for enforcing intellectual property rights, including payment of adequate compensation that may include attorneys’ fees. Article 16-41 contains a list of preliminary measures that government authorities can take to prevent the infringement of intellectual property rights, while Article 16-43 details the types of border measures that may be utilized to enforce the protection of intellectual property rights. Article 16-43(15) contemplates cases where a government may order its customs service to suspend the entry process of goods suspected of infringing on intellectual property rights. Article 16-42 contains criminal procedures and sanctions for violations of intellectual property rights (including the destruction of infringing goods). 12 ICSID is the International Center for the Settlement of Investment Disputes. The full text of the ICSID Convention is available at http://icsid.worldbank.org/ICSID/ICSID/ RulesMain.jsp. 13 The full text of UNCITRAL’s Rules on Commercial Arbitration and Conciliation is available at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration.html. 14 The full text of the Inter-American Convention on International Commercial Arbitration is available at http://www.sice.oas.org/dispute.comarb/iacac/iacac2e.asp.


Any disputes arising from “the application or interpretation” of the provisions of ACE No. 31 or when one government feels the other has implemented measures that are incompatible with its obligations or otherwise undermines benefits established under ACE No. 31, can be referred to the agreement’s dispute resolution system. The three-level state-to-state dispute resolution system consists of initial consultations, followed by referral to the Administrative Commission created to oversee implementation of the free trade agreement, and finally arbitration. If the dispute cannot be resolved within 45 days after consultations are initiated, the matter must be referred to the Administrative Commission, which is authorized to convene a panel of technicians or experts to assist it in formulating a recommendation to resolve the dispute. If it too cannot resolve the dispute, it will be referred to a five-person panel of arbitrators who must be specialists or experienced “in law, international trade, other matters related to this Treaty, or in the resolution of disputes arising under international trade agreements.” The panel should ideally issue a set of initial recommendations within 90 days. This should allow for a month of discussions with the parties to the dispute, and then issuance of a final decision. Failure to adhere to a final decision allows the aggrieved party to impose retaliatory measures that are equivalent to the harm suffered. The panel plays no subsequent role once it issues its final decision, however, in terms of determining whether the retaliatory measures are commensurate with the damage inflicted. E. Chile-Ecuador Free Trade Agreement The Chile-Ecuador Free Trade Agreement or ACE No. 32 became effective on January 1, 1995. On that day, goods found in Annex 1 to ACE No. 32 could henceforth be traded among both countries free of all tariff and non-tariff barriers. These were goods that had already been subject to a previous ALADI preferential tariff arrangement between Chile and Ecuador. Among the items subject to immediate duty-free treatment were seafood, fruits, wine, tobacco, and film. The tariffs on most of the other products (e.g., the vast majority of agricultural tariff lines) traded between Chile and Ecuador were gradually reduced on an annual basis so as to be completely eliminated by January 1, 1998. A limited amount of goods, found in Annex 2 to ACE No. 32, were accorded a more gradual reduction in duty rates and did not reach the 0 percent level until January 1, 2000. These goods included soluble coffee, certain chemicals, and shoes. Finally, some 238 tariff lines were completely excluded from the bilateral free trade scheme (i.e., certain kinds of meat, poultry, lactate products, corn, rice, seeds, vegetable oils, as well as petroleum products). In 2004 oil was removed from this list of exceptions. The rules of origin for determining what goods can be traded between Ecuador and Chile duty free are found in ALADI Resolution 78 (since replaced by Resolution 252). Both countries also gave the Administrative Commission overseeing implementation of ACE No. 32 the right to modify or set new rules of origin for specific products or services as the need may arise. All goods from countries that wish to partake of free trade must be accompanied by a certificate of origin, which it is the responsibility of the final producer and/or exporter to obtain from government-authorized entities.


The automotive and auto parts sector is subject to its own set of requisites with respect to the gradual elimination of tariffs. Automobiles also have their own rules of origin. Auto parts are subject to the general ALADI rules of origin regime. As of January 1, 1997, there has been complete free trade in passenger cars, buses and trucks, and auto parts traded between Chile and Ecuador. In order for automobiles and trucks to be traded between the two countries dutyfree, however, no more than 65 percent of a vehicle’s final FOB price can reflect the CIF price of third-country inputs. The ALADI safeguard clause found in Resolution 70 is applicable to ACE No. 32. Chapter VI of ACE No. 32 allows Chile and Ecuador to use their respective domestic legislation in response to dumping or other unfair trading practices such as subsidized exports. There is a requirement that both governments must consult with each other prior to initiating an unfair trade practice investigation. Antidumping or countervailing duties cannot be imposed without first conducting an investigation that establishes significant prejudicial effect or an important threat of harm to local production. Any additional duty imposed should not exceed the difference between the accepted market price and the alleged dumping price or the paid subsidy and, in general, should conform to WTO obligations. Chile and Ecuador also agree not to adopt socalled public pricing practices and policies that can distort trade. Chile and Ecuador also pledge to mutually encourage trade and investment by their respective nationals in the other’s economy. An Administrative Commission is established pursuant to Article 33 of ACE No. 32 and is authorized to oversee implementation of the agreement. Among the Administrative Commission’s specific functions is the obligation to insure that the technical norms of Chile and Ecuador do not serve as non-tariff barriers to free trade and to draft a protocol regarding the opening up of the services sector to bilateral free trade and another on government procurement. As of mid-2008, neither protocol had yet been formulated. Pursuant to Article 23 of ACE No. 32, Chile and Ecuador commit themselves not to use sanitary and phytosanitary regulations as non-tariff barriers to free trade and, for this purpose, both countries signed the Convention on Cooperation and Coordination in Matters Related to Agro-Industrial Health (which was incorporated as a protocol to ACE No. 32). The treaty commits both governments to exchange information and personnel involved in formulating sanitary and phytosanitary rules. There are also commitments to harmonize and/or mutually recognize sanitary and phytosanitary measures. Pursuant to Article 27 of ACE No. 32, Chile and Ecuador agree to adopt an “open skies” and an “open seas” policy for each other’s firms. In particular, Ecuador grants Chilean shipping lines the same rights of exclusivity to transport petroleum that Ecuador may have granted to other countries or blocs of countries (such as the Andean Community). Under Article 29, Chile and Ecuador agree to increase cooperation in the scientific and technology fields, expanding on the Basic Convention on Scientific and Technological Cooperation both countries signed in 1993. Finally, Article 37 requires that both


countries implement domestic legislation that adequately protects intellectual property rights. Article 32 of ACE No. 32 establishes a dispute resolution mechanism to resolve differences in interpretation or application of the provisions of the Chile-Ecuador Free Trade Agreement as well as non-fulfillment of obligations. Conflicts over the imposition of antidumping and countervailing duties, however, cannot be referred to the dispute resolution system. The disputes should first be resolved by the corresponding agencies of each country entrusted with this task. If no resolution can be reached within 20 days, the matter should be referred to the Administrative Commission. If a decision cannot be made by the Commission within 30 days, the matter is referred to a three-person arbitration panel made up of one expert from each country and a presiding arbitrator from a neutral, third country. The arbitration panel has 30 days (which can be extended for another 30 days) to make a final decision. This decision cannot be appealed. F. G-3 Accord Between Colombia, Mexico, and Venezuela 1. Introduction The Group of Three or G-3 Accord was an outgrowth of the Contadora Peace Process of the mid-1980s. At that time, Colombia, Mexico, and Venezuela, joined by Costa Rica, sought to bring an end to the civil wars then raging in El Salvador, Guatemala, and Nicaragua. The first suggestion of establishing a free trade area among Colombia, Mexico, and Venezuela came up at a regional presidential summit held in Tuxtla Gutierrez, Mexico, in 1989.15 In 1992 the three countries agreed to establish a tripartite free trade area that would take effect on January 1, 1993. After a number of delays occasioned by, among other things, the forced resignation of President Carlos Andres Perez in Venezuela in 1993 and the severe economic crisis his successor Rafael Caldera had to confront shortly after his inauguration in 1994, the starting date for the G-3 Accord was delayed until January 1, 1995. Of the many economic integration projects that appeared in Latin America in the 1990s, the G-3 Accord, along with the Bolivia-Mexico Free Trade Agreement, were among the first that were most compatible with NAFTA. In fact, many of the provisions of the G-3 Accord are almost identical to those found in NAFTA. The explanation for this was not merely coincidental, but rather an intentional strategy devised by the Colombians and Venezuelans to facilitate their eventual incorporation into NAFTA. This intention is underscored by the fact that Article 23-05 of the G-3 Accord states that the agreement has a maximum life of three years. Only at the end of that time period would the treaty become indefinite in duration, if it had not already been superseded or rendered superfluous (as would be the case if Colombia and Venezuela were to be incorporated into NAFTA). In discussing the G-3 Accord, it is important to keep in mind that when it was signed, Colombia and Venezuela were already members of the Andean Unidad de Comercio International (CEPAL), Desenvolvimiento de Los Procesos de InAmérica Latinay el Caribe 43 (1995)

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Community. Accordingly, trade in goods between Colombia and Venezuela was governed by Andean Community rules. The Andean Community’s rules of origin, safeguard measures, and regulations on unfair trading practices were also controlling in terms of Colombian-Venezuelan trade. Accordingly, the G-3 Accord primarily governed the trade of goods between Colombia and Venezuela, on the one hand, and among those countries and Mexico, on the other. To the extent that the G-3 Accord added provisions not contemplated at the time in the Andean Community integration process, such as the opening up of cross-border trade in services, these new obligations were binding as between Colombia and Venezuela. It should also be noted that because the G-3 Accord falls under the umbrella of ALADI as ACE No. 33, Article 23-07 permits accession to the tripartite agreement by other ALADI member states as well as by the countries of Central America and the Caribbean. In a May 31, 2006, press release, the Ministry of Foreign Relations announced that the Bolivarian Republic of Venezuela was withdrawing from the G-3 Accord because, according to Venezuelan President Hugo Chavez, the agreement was based on a neo-liberal conception of capitalism. According to the text that accompanied the Venezuelan withdrawal decision, “far from representing a complementation agreement,” in the G-3 Accord “we find a Free Trade Agreement, conceived during the years when in our country, as in the rest of the world, a neo-liberal vision predominated which only looked at commercial interests, without giving any priority, as should be the case, to the fate of our peoples.” The statement from the Venezuelan Foreign Ministry went on to point out that under “the new orientation that is being defined not only in Venezuela but in other brother countries, issues of integration are based more on criteria of complementation, cooperation, and solidarity rather than on competition among our nations, as well as on respect for sovereignty.” By leaving the G-3 Accord, the statement noted that Venezuela will be able to focus its efforts on integrating with MERCOSUR “based on the principles of gradualness, differential treatment, flexibility and complementation.” The response of the Venezuelan private sector, as exemplified in a press statement issued by The Federación de Camaras de Comercio y Asociaciones de Comercio y Producción de Venezuela or the Venezuelan Federation of Chambers of Commerce (FEDECÁMARAS; a major opponent of Hugo Chavez), was to warn the Chavez government not to sabotage Venezuela’s natural export markets in favor of a short term and narrow political agenda. Although the G-3 Accord is now really the G-2 Accord, the following discussion continues to include Venezuela as if it were still a beneficiary, in the expectation that Venezuela’s mercurial president may eventually recognize the wisdom of retaining a free trade agreement with Mexico and therefore retract his government’s 2006 notice of withdrawal. In any event, it is interesting to note that in 2004 the Panamanian government requested its inclusion into the G-3 Accord. If that ever comes to pass, it would once again give logic to retaining the name “G-3 Accord,” even if Venezuela remains absent.


2. Free Trade in Goods While many goods traded by Colombia and Venezuela with Mexico and vice versa received immediate duty-free treatment as soon as the G-3 Accord came into force, most were subject to ten proportional reductions in the tariffs to zero that began on January 1, 1995. The second reduction came on July 1, 1996, and was followed by eight more on an annual basis until all duties were completely eliminated by July 1, 2004 (although for some of these items, Mexico and Venezuela eventually accelerated the process, so that complete duty-free trade was achieved even earlier). A limited number of products, designated Code B goods, were given faster preferential tariff treatment and reached the 0 percent level by July 1, 1999. On the other hand, certain textile, clothing, and shoes were permanently excluded from intra-regional free trade until the governments determined otherwise. The automotive sector had its own tariff reduction schedule found in Article 4-04 of the G-3 Accord, while the agricultural sector is governed by the provisions contained in Chapter 5.16 In addition to calling for the eventual elimination of all tariff barriers, Chapter 3 of the G-3 Accord also called on the member states to gradually eliminate non-tariff barriers, except those specifically permitted by Article XI of the General Agreement on Tariffs and Trade (GATT), and not to impose new service charges levied by customs on goods that meet the G-3 rule of origin requirements and are traded among them. In general, the G-3 countries were also required to eliminate export taxes on products traded among them, except those imposed on items deemed to be of primary necessity (i.e., basic foodstuffs such as rice, bean, and lactates). The governments were also under an obligation to eliminate export subsidies on manufactured goods. Despite the goal of eventual universal free trade, Mexico reserved the right to permanently restrict importation of petroleum products—a right also retained by Venezuela—and large vehicles, while Colombia could restrict exports and imports of energy resources in conformity with its Constitution. Furthermore, Colombia retained the right to reserve production of liquor and other alcoholic beverages to specific departments within the country, as well as to permit those departments to levy internal taxes on liquor. Pursuant to Article 4-04(1) of the G-3 Accord, tariffs on trucks and buses produced in and traded among Colombia, Mexico, and Venezuela, were to be eliminated in 11 annual and proportional reductions that began on January 1, 1997, and were to culminate at 0 percent on January 1, 2007 (subsequently extended to January 1, 2009, in the case of Mexico, and January 1, 2011, in the case of Colombia and Venezuela). Tariffs on auto parts were originally supposed to have been completely eliminated by 2007, but the deadline for many parts was also subsequently extended to either January 1, 2009, or January 1, 2010. 16 Venezuela also excluded textiles and clothing from the general tariff reduction program, while Colombia and Venezuela both excluded polystyrene. See G. Capriles, El Tratado de Libre Comercio del Grupo de los Tres 4 (Sept. 6, 1994) (unpublished manuscript, available from the author’s law firm, Bentata Hoet & Asociados in Caracas, Venezuela). In addition, all three countries reserved the right to prohibit or restrict the importation into their territory of used goods (including used auto parts as per Article 4-07).


Article 4-03 of the G-3 Accord established a Committee on the Automobile Sector with private sector input. The goal of the committee was to devise a managed trade (as opposed to complete free trade) regime for exchanging automobiles and auto parts among the three countries. In December 2004, for example, the three countries executed ACE No. 61, which established a regime for trading vehicles among them in effect from January 1 to December 31, 2005. Colombia and Venezuela each allowed up to 3,000 automobiles made in Mexico to enter their territory upon payment of a 10 percent duty. Meanwhile, up to 6,000 vehicles made in Colombia and another 6,000 made in Venezuela could enter Mexico upon payment of a 7 percent duty during the same time period. A separate protocol to ACE No. 33 established a timetable gradually increasing these quotas on an annual basis after 2005 and reducing the import duty on an annual basis so as to reach zero by January 1, 2008 (in the case of Mexico) or January 1, 2010 (in the case of Colombia and Venezuela). Chapter Five of the G-3 Accord contains not only the rules that govern trade in agro-industrial products among the member states, but it also contains rules concerning the imposition of sanitary and phytosanitary measures. In general, the G-3 countries were under an obligation to reduce or eliminate trade barriers that impeded trilateral trade in agro-industrial products. Export subsidies on agricultural goods traded among the three would also have to be gradually phased out, as these goods were included in the G-3’s free trade program. While each member state reserved the right to decide which agricultural goods would enter its territory under an open market approach, once these goods were selected, all import duties levied on them had to be reduced to zero over a ten-year period. A very limited number of agricultural tariff lines either received immediate duty-free treatment or were subject to a 15-year phase out of tariffs to zero. Annex 2 to Article 5-04 of the G-3 Accord specifically gave Colombia the right to require that an importer first seek a license from the appropriate Colombian government agency before it can import various agro-industrial products such as chicken and duck parts or lactate products from the other two G-3 countries. For its part, Mexico can require that an importer seek prior authorization from the government before it can import agro-industrial goods such as cheese, eggs, beans, sugar cane, and tobacco products from the other signatory states. All three countries retained the right to impose tariffs and/or quotas indefinitely as safeguard measures on a wide range of agro-industrial products. While all three countries were allowed to continue paying price supports to local producers, these had to be done in such a way that they had a minimal impact on trade or production and conformed to WTO principles. Article 5-10 calls for the creation of a Committee on Agro-Industrial Trade,which is entrusted with overseeing and recommending ways to facilitate the liberalization of intraregional trade in the agricultural sector. Under Article 5-09, a Working Group on Technical Norms and Agro-Industrial Commercialization was also created to devise solutions to problems created by a lack of harmonization in technical norms and packaging requirements. Pursuant to Annex 3 to Article 5-04, a special committee was established to review the feasibility of incorporating


sugar (which was originally excluded) into the G-3 free trade scheme. Although Colombia and Venezuela did eventually open up their respective markets to Mexican sugar in 2002, sugar was subject to the Andean Community’s price band mechanism (along with about another 150 agricultural items). 3. Rule of Origin Requirements The rules for determining the origin of a product that qualifies for free trade treatment among the G-3 countries are found in Chapter Six of the G-3 Accord. Those rules are strikingly similar to the complex and detailed rules of origin found in NAFTA. In order to receive free trade treatment, a good must be wholly obtained from or entirely produced within the territory of one or more of the G-3 countries, or the good must be produced with foreign inputs but undergo a substantial transformation within the G-3 so as to change tariff classification heading and/or meet minimal regional content requirements. One significant difference between the G-3 and NAFTA rule of origin requirements, however, is that the minimal regional content of most goods that can be traded among the G-3 countries tariff free must be 55 percent (and it was only 50 percent until January 1, 2000). By contrast, NAFTA has a general 60 percent rule when the transaction value method is used to calculate regional content value (the only method that is permitted under the G-3 Accord). Furthermore, various types of metals and goods made from them, as well various chemical products and pharmaceuticals, enjoy even lower regional content percentages in recognition of the difficulty in obtaining inputs within the G-3 countries to make them. For example, under Article 6-18 of the G-3 Accord, the regional content requirement for metals such as steel, nickel, and tin, and any goods produced with these materials, is 50 percent (and was even lower before January 1, 2000). The regional content requirement for chemical products, fertilizers, photographic material, and pharmaceuticals is set at 50 percent. A working group on the rules of origin was created under Article 6-17 of the G-3 Accord to investigate ways to facilitate the implementation of the rules of origin and insure their uniform application. Article 6-20 created a Regional Integration Committee on Inputs (CIRI). CIRI investigates difficulties in complying with the rules of origin in the chemical, plastic, textile, copper, and aluminum sectors because of scarcities of regional inputs. CIRI is authorized to recommend temporary waivers of the general requirements on regional content when appropriate. Agricultural products are subject to specific rule of origin requirements found in the Annex to Article 6-03, Section B. Normally, the minimal content requirement is set at 50 percent, but certain items must comply with additional requirements (e.g., all fruit sold in cans must originate in one or more of the G3 countries). Like agriculture, the automotive sector has its own special rules of origin requirements that were based on those found in ALADI Resolution 78 but were subsequently revised, in part, by the Committee on the Automobile Sector (whose creation, was in turn, authorized by Article 4-03 of the G-3 Accord). The regulations concerning declarations and certificates of origin, which must be produced at border crossings or other ports of entry, are found in


Chapter 7 to the G-3 Accord. The origin verification procedures are similar to those in the Andean Community. Obtaining a certificate of origin is the responsibility of the producer or the exporter. A working group is established to insure compliance with the rules affecting certificates of origin. Valuation of goods as a way of determining their origin and whether they benefits from the G-3 Accord is based exclusively on the WTO Customs Valuation Code. 4. Safeguard Measures Chapter 8 of the G-3 Accord contains safeguard measures pursuant to which a signatory can temporarily raise tariffs on goods imported from one of the other G-3 countries in order to prevent serious injury to one of its domestic industries. Safeguard measures can either be applied on a bilateral or multilateral basis (with the latter subject to the norms established under the WTO). Although similar to the safeguard provisions found in NAFTA, the G-3 Accord allows protective tariffs to be used for up to five years beyond the end of the transition period on July 1, 2004. In NAFTA, bilateral safeguard measures can only be used during the transition period. Despite the longer time frame permitted in the G-3 context, Article 8-03 of the G-3 Accord limits the initial imposition of a tariff increase as a safeguard for up to one year (with a single one-year extension permitted thereafter), whereas Article 801(2)(c)(i) of NAFTA allows a tariff increase for similar reasons for an initial three-year period. 5. Unfair Trade Practice Remedies Chapter 9 of the G-3 Accord addresses matters related to unfair trading practices such as dumping and subsidized exports. Pursuant to Article 9-02, the G-3 countries commit themselves to eliminate all types of export subsidies on industrial exports destined to the other member states. Subsidies on agricultural exports are governed by the provisions established in Chapter 5. The rest of Chapter 9 is primarily devoted to establishing procedures for denouncing and investigating allegations of dumping or subsidized exports and imposing antidumping and countervailing duties as a means of redress. As a general principle, the imposition of antidumping or countervailing duties must adhere to WTO obligations. It is interesting to note that the G-3 Accord incorporates the concept of de minimis violations, something that did not exist at that time in the Andean Community’s antidumping or subsidized export legislation.17 Generally, a dumping margin of less than 2 percent, or a subsidy representing less than 1 percent of the product’s ad valorem value, is considered minimal and not worthy of an investigation. Similarly, if the alleged dumped or subsidized import makes up less than 1 percent of domestic market share of 17 Id. at 5. With the adoption of Andean Community Decisions 456 and 457 in 1999, an antidumping or countervailing duty will not be imposed in the event the country that is the target of the measure is responsible for less than 6 percent of all the dumped or subsidized goods, or the dumping margin is less than 5 percent or the subsidy represents less than 3 percent of the product’s value.


all like or similar goods, the authorities should not even launch an unfair trade practice investigation. 6. Technical Norms The procedures governing the use of technical norms so as to prevent them from being abused as non-tariff barriers to trade are found in Chapter 14 of the G-3 Accord. The provisions in Chapter 14 are nearly identical to those found in Chapter 9 of NAFTA. In general, the signatories are under an obligation not to develop, adopt, maintain, or apply technical rules that create unnecessary obstacles to trilateral trade. Rules with respect to the protection of human, animal, and floral and vegetable health, the environment, and consumer protection laws are usually exempt from this overall obligation. Whatever rules that are applied in these specific areas, however, should be applicable to both domestically produced and all imported products from the region. For the most part, the norms established by international treaties are the base rules for those existing in the G-3 countries. Article 14-07 further obligates the signatories to make their different technical norms compatible, without reducing levels of legitimate and higher protection. Article 14-10 obligates each G-3 member state to set up an “information center” to provide data on all technical norms it applies within its territory. Pursuant to Article 14-17, a Committee on Technical Norms was created in order to facilitate the coordination and harmonization of technical norms among the three countries and to promote the exchange of information and ideas. A Subcommittee on Health Related Norms was also established to focus on issues related to the health sector. Any doubts that may arise with respect to the interpretation or application of obligations arising under Chapter 14 should be referred for clarification to the Committee on Technical Norms and, when resolution of the problem is not forthcoming, the matter can then be referred to the arbitration mechanism established under Chapter 19. 7. Sanitary and Phytosanitary Measures The G-3 countries are under an obligation to provide advanced notice of the adoption of new, or the modification of existing, sanitary and phytosanitary standards and to allow the right of interested parties to submit comments. Pursuant to Article 5-15, the adoption, enforcement, and maintenance of any sanitary and phytosanitary norm must be based on “scientific principles” and on a “risk evaluation appropriate to the circumstances that inspired it.” A Committee on Plant and Animal Health was established under the G-3 Accord to, inter alia, facilitate expeditious consultations among the relevant agencies from the three countries on specific sanitary and phytosanitary norms and to encourage the adoption of international standards as well as the recognition of the equivalency of different domestic sanitary and phytosanitary standards. There is no express prohibition to referring disputes arising from the application of sanitary and phytosanitary measures to the general dispute resolution mechanism.


8. Services Chapter 10 of the G-3 Accord establishes the general principles for trade in services among the three member states. For the most part, they follow the rules laid down in NAFTA’s Chapter 12. These general principles include a requirement of transparency in legal regulations, as well as national treatment, MFN treatment, and the elimination of residency requirements for service providers. As a result of the transparency requirements imposed by Article 1003, the signatories obligated themselves to publish new laws and regulations affecting the services sector before they become law, to inform the other governments of changes in their domestic law that could affect the cross-border trade in services, and to respond to all requests for information from the other two governments. In the specific case of professionals offering services, Article 10-14 required that each G-3 country had until 1996 to eliminate any nationality or permanent residency requirements as a prerequisite for obtaining a license, certificate, or title by a national of another member state in order to practice a profession. A working subgroup made up of education authorities was also created pursuant to Annex No. 1 to Article 10-02 to investigate ways of simplifying the revalidation and recognition of university degrees issued in one country in the other two. In terms of transportation services, airline services were excluded from intra-regional liberalization pursuant to Annex No. 2 to Article 10-02 (although certain services associated with the airline industry, such as maintenance and computer reservations, were not). Cabotage restrictions were eliminated so as to allow any goods shipped by boat between the three member states to be carried by any of the country’s national flag carriers. As with NAFTA, the G-3 Accord also contains special chapters dealing with the liberalization of services in telecommunications (i.e., Chapter 11) and financial services (i.e., Chapter 12). The inclusion of a special chapter on the telecommunications sector was not necessary in the G-3 context because Article 10-02(1)(d) specifically included access to and use of public telecommunications networks among the services subject to the general liberalization scheme of Chapter 10. Undoubtedly, one reason for the inclusion of a special chapter on telecommunications was to highlight that Colombia and Venezuela were ready for quick accession into NAFTA (given the perceived importance Canadian and U.S. negotiators would attach to this sector). Chapter 11 of the G-3 Accord opens up access to public telecommunications networks by providers of so-called value added services (i.e., cellular telephony but not necessarily cable TV) from the other two countries. Any licensing, permit, registration, or notification procedures must be transparent and nondiscriminatory, and technical standards cannot be used as non-tariff barriers. Not included in this liberalization of the telecommunications sector are basic telecommunications services such as land line telephones. Although a public telecommunications transport network may be owned by a state entity that enjoys a monopoly, Article 11-07 requires that each country ensure that any monopoly situation is not abused so as to impede the provision of other


types of services that depend on access to public telecommunication transport networks. Chapter 12 of the G-3 Accord allows financial service providers from any member state to establish themselves and provide the same type of services in any other G-3 country that a domestic or third-country company is allowed to provide. This includes the establishment, acquisition, expansion, administration, conducting of business, operation and sale, or other operation associated with financial institutions and investments. While Article 12-05 prohibits the G-3 governments from imposing restrictions on the ability of their nationals to utilize the financial services offered by firms located in another G-3 country, they can restrict the advertising and solicitation of business by these off-shore companies within their national territory. Pursuant to Article 12-09, the G-3 countries may take reasonable financial measures to protect policy holders and their beneficiaries, bank depositors, creditors, and fiduciaries, and otherwise ensure the integrity and stability of the domestic financial system and the institutions themselves. Article 12-14 specifically prohibits a G-3 country from requiring that financial institutions operating within its territory have a specified number of their own nationals occupying managerial or high administrative positions. A special dispute resolution procedure is established to resolve disputes that may arise between two state parties (Article 12-19) or an investor and a state party (article 12-20) as a result of a failure to adhere to the obligations created by Chapter 12. In situations involving disputes between state parties, the procedure established under the general dispute resolution system found in Chapter 19 is followed, except that the arbitrators are chosen from a 15person list drawn up by the Committee on Financial Services and made up of five individuals from each member state that enjoy special financial skills. In situations where the dispute arises between a private party and a state party, the procedure found in Section B of Chapter 17 is followed. In those cases where a state party has exerted an Article 12-09 exception to the general liberalization scheme of Chapter 12, the arbitral panel must refer the matter to the Committee on Financial Services. One of the major differences between the G-3 Accord and NAFTA with respect to cross-border trade in the telecommunications and financial services sectors is found in a similarly worded clause that is included in both Chapters 11 and 12 of the G-3 Accord. Specifically, Article 11-11 of the G-3 Accord permits a state party to prevent a company from another member state from providing telecommunications services within its territory when it can be established that the services and facilities connected with the provision of these services are actually installed and emanate from a country that is not a member of the G-3, or it is determined that the property or the person providing the telecommunication services is ultimately controlled by a company that is not from a G-3 member state. For its part, Article 12-16 of the G-3 Accord allows a state party to prohibit a financial services company from another member state from offering services within its territory if the company has no significant activity in that other member state, or the property or the activities of the company is controlled by an entity from outside the G-3. The idea behind


both these similarly worded provisions is to keep outsiders, including U.S. and Canadian telecommunications and financial services companies, from establishing a “paper presence” in Mexico, for example, and then trying to penetrate the Colombian and Venezuelan markets from there. Chapter 12 of the G-3 Accord also adds two further provisions that are not found in NAFTA with respect to financial services but are designed to reflect certain economic realities in the G-3 region. In particular, Article 12-17 of the G-3 Accord guarantees that each country permit, without delay and restrictions, all types of cross-border transfers related to financial investments in whatever form, including profits, dividends, interest payments, administrative costs, and royalties. However, in recognition of Venezuela’s imposition of currency exchange controls in 1994 (which were not lifted until April 1996), Article 12-18 also permits a country to adopt measures suspending, for a reasonable period of time, the guarantees on unhindered transferability in order to address grave economic and financial upheaval, or because the country faces a serious balance-of-payments crisis. 9. Government Procurement Chapter 15 of the G-3 Accord contains the provisions relating to the ability of private firms from any of the three countries to bid on government procurement contracts in Colombia, Mexico, or Venezuela. These rules affect government purchases of goods and services not only by the central or federal government branches, but also procurement by certain government-owned companies and certain state or provincial governments as specified in the protocol to Chapter 15. In addition, Chapter 15 applies only to those procurement contracts that exceed certain minimal thresholds. In the case of contracts for the purchase of goods and services by a federal or central government agency, the threshold level is U.S.$50,000. If the services involve construction, the threshold is a much heftier U.S.$6.5 million. In the case of goods and services purchased by governmentowned entities, the threshold is U.S.$250,000 (or U.S.$8 million in the case of construction services). Different threshold amounts are established with respect to purchases of goods or services by entities at the state or provincial levels. In general, each country is required to allow nationals of the other two the right to participate in procurement bids on a level that is no less favorable than that offered to its own nationals or to persons or entities from third countries. Elaborate rules exist with respect to: the qualifications of bidders (Article 15-10); the procedure for soliciting bids (Article 15-11); the procedure for choosing so-called selective bids (Article 15-12); time limits for preparing and accepting bids (Article 15-13); information that must be included in a bid or tender offer (Article 15-14); methods of presenting bids or tender offers (Article 15-15); and the procedures for participating in so-called restricted or limited bid offerings (Article 15-16). Section C to Chapter 15 establishes a procedure for challenging the awarding of bids deemed by a losing party to have been done in contravention of the rules and obligations established under Chapter 15, as well as for the


resolution of these disputes. The actual procedural rules are found in the Annex to Article 15-17. Any dispute that may arise among two or more of the G3 countries with respect to Chapter 15 are resolved pursuant to the procedure established in the general dispute resolution system found in Chapter 19 (albeit the time limits are modified). A special committee was created pursuant to Article 15-22, which is designed to encourage small and medium sized enterprises from the G-3 countries to actively participate in bidding for government procurement contracts that are appropriate to their size. Although the overall provisions of Chapter 15 to the G-3 Accord are very similar to NAFTA’s Chapter 10 on government procurement, the annexes to Chapter 15 in the G-3 Accord contain various exemptions taken by Colombia and Venezuela. In particular, Colombia and Venezuela exempted themselves from various aspects of Article 15-10 (qualifications of suppliers), as well as Articles 15-11 (procedures for inviting bids), 15-12 (selective tendering procedures), 15-13(2) and (3) (time limits for tendering and delivery of bids), 15-14 (tender documentation), 15-15 (submission, receipt and opening of tenders and awarding of contracts), 15-16 (limited bidding procedures), 15-17 (procedures for challenging bid awards), and 15-20(4) (provision of information to interested parties). The fact that both Colombia and Venezuela did not adhere to these G-3 provisions did not mean that there were no rules applicable to them in this area. As substitutes, both countries provided for generally less complicated procedures. The only area where this was not true related to restricted or limited tendering procedures, which Colombia and Venezuela do not recognize since they consider it a contradiction to the overall goal of free and fair bidding procedures that Chapter 15 seeks to establish. Finally, it should be noted that all three G-3 countries restricted participation in government procurement opportunities when it came to the provision of arms, explosives, airplane parts, and embarkation devises used for maritime transport to their own nationals (see Annex No. 3 to Article 15-02). In addition, procurement of services required by each country’s respective armed forces or Ministry of Defense was also limited to their own nationals. Colombia and Venezuela also restricted participation in procurement opportunities offered by their respective state-owned petroleum and energy monopolies, although each country was under an obligation to gradually phase out these restrictions (see Annex 7 to Article 15-02). Interestingly, Chapter 15 of the G-3 Accord is followed by Chapter 16, which deals with the relation of state-owned entities vis-à-vis private sector companies from the other member states. Article 16-02 requires that the G-3 countries ensure that their state-owned companies do not discriminate against private sector individuals or companies from the other member states. In addition, state-owned monopolies are under an obligation not to use their position in any unfair commercial manner that does not reflect respect for market rules when dealing with their regional, private sector competitors.


10. Investment Protection Chapter 17 contains the rules affecting cross-border investments by nationals of one of the G-3 countries in the territory of the others. Chapter 17 of the G-3 Accord has many provisions that parrot Chapter 11 in NAFTA. For example, Article 17-01 defines an investment very broadly and includes the transfer of all types of resources, as well as reinvestment of those resources in the same country. Investments can take many forms, including the purchase of corporate stock, although credit or debt transactions are explicitly excluded.18 The G-3 definition of what constitutes an investment is more expansive than that found in Andean Commission Decision 291 with respect to foreign investment.19 Pursuant to Article 17-03, each country accords an investor from another G-3 country treatment that is no less favorable than that accorded to its own nationals or those from third countries. The major exceptions to most MFN treatment are special tax arrangements resulting from treaties to prevent double taxation. In addition, Article 17-04 generally prohibits any laws requiring that a foreign investor purchase or use the products made in the host country as part of its investment activity, as well as laws that limit the amount of foreign inputs that can be used in domestic production (except with respect to fulfilling rule of origin requirements), or laws which put limits on the volume of what can be exported. There is no express prohibition on governments requiring technology transfer, however, as part of the bargain for permitting investment from the other country. Some important differences exist between the G-3 Accord and NAFTA with respect to foreign investment. To begin with, Article 17-05 of the G-3 Accord permits limitations on the numbers of foreigners (regardless if they are from another G-3 member state) who can work in enterprises in any capacity, including managerial positions (so long as such a rule does not interfere with the ability of an investor to control his or her investment). By contrast, while Article 1107 in NAFTA does allow domestic laws, which require that a majority on a company’s Board of Directors (or any committee thereof) be of a certain nationality, NAFTA expressly prohibits nationality restrictions for senior management positions. In addition, Article 17-07(6) of the G-3 Accord deviates from the general rule on unhindered repatriation of capital and profits found in NAFTA by allowing G-3 member states to impose temporary and nondiscriminatory restrictions on transfers in the event of exceptional difficulties or severe balance-of-payment problems. Pursuant to the Annex to Article 17-08 of the G-3 Accord, the provisions affecting expropriation and compensation (that were based on NAFTA) did not apply to Colombian investments in Mexico or Venezuela, or to Mexican and Venezuelan investments in Colombia. Despite this anomaly, which were made necessary as a result of provisions in Colombia’s Constitution when the 18 The latter exclusion was apparently a concession to Colombian currency exchange and foreign investment regulations in force at the time the G-3 was negotiated. Id. at 14. 19 Id. at 13. On the other hand, there are less areas in the Colombian and Venezuelan economy that are closed to foreign investment as a result of Andean Commission Decision 291 than is the case with Mexico. Id. at 15.


G-3 Accord was negotiated, Colombia did make a commitment that it would not establish new laws or regulations that were more permissive with respect to nationalizations or more restrictive with respect to compensation than those already in effect on January 1, 1995.20 As for the other two countries, Article 17-08 required that any partial or full nationalization or expropriation had to be done for reasons of public utility, could only be based upon the principle of non-discrimination, had to be carried out under color of law, and any compensation had to reflect the fair market value of the investment just prior to its confiscation. In addition, any compensation had to be promptly paid for in liquid and freely transferable funds. Interestingly, Article 17-12 of the G-3 Accord specifically prohibited any of the three governments from using an investment made by one of its nationals in another member state in which the investment is organized (e.g., through a foreign subsidiary) as a means of exerting extra-territorial jurisdiction, thereby creating obstacles to trade among the signatories or with a third country not a signatory to the G-3 Accord. Pursuant to Article 17-13, no government is allowed to eliminate or fail to enforce domestic rules with respect to health, national security, or environmental protection as a way of attracting or retaining foreign direct investment. Section B to Chapter 17 contains the procedure for resolving disputes that may arise between a government and an investor from one of the other two G-3 countries. Pursuant to Article 17-17, any private party damaged by the failure of a host government to adhere to its investment obligations under the G-3 Accord may submit its dispute to the national court systems or to arbitration. Any claim must be brought within three years after the investor first learned or should have learned of the damage-inducing violation. If an investor elected to first submit its claim to regular judicial channels, however, it is barred from later seeking arbitration, and vice versa. An investor pursuing arbitration is required to give its adversary 90 days’ notice and wait for a period of at least six months after the damage was inflicted before requesting arbitration. The arbitration proceedings are conducted pursuant to the rules found in the ICSID Convention and its Complementary Procedural Rules or to the UNCITRAL Rules on International Commercial Arbitration and Conciliation. The actual rules of procedure for G-3 arbitration hearings are found in the Annex to Article 17-16 of the G-3 Accord. Arbitration awards are enforced through the mechanisms established under the ICSID Convention (which only Mexico, of the three G-3 countries, had ratified at the time the G-3 Accord was signed); the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a.k.a., the New York Convention, which had only been ratified by Colombia and Mexico at the time the G-3 Accord was signed)21; or the Inter-American Convention on International Commercial Arbitration (ratified by all three countries). 20 Id. at 16–7. Pursuant to language in Article 58 to the Colombian Constitution, expropriations can be legislated by the Colombian Congress without the payment of compensation if the expropriation is for the public good. 21 The full text of the New York Convention (1958) is available at http://www.uncitral. org/uncitral/en/uncitral_texts/arbitration/NYConvention.html.


11. Intellectual Property Rights Protection It is important to emphasize with respect to intellectual property rights, that Colombia and Venezuela, as members of the Andean Community, were both bound by the various Andean Commission decisions on the subject matter. Chapter 18 of the G-3 Accord both complements those Andean Community obligations and fills in some of the gaps in order to be more compatible with NAFTA (although there are certain notable exceptions where this is not true). The most significant difference between Chapter 18 of the G-3 Accord and its counterpart chapter in NAFTA concerning intellectual property rights and procedures is that the G-3 countries do not commit themselves to ratify the Geneva Convention of 1971 on the Protection of Producers of Phonograms Against Unauthorized Duplication, the 1971 revisions to the Berne Convention for the Protection of Literary and Artistic Works, and the 1978 and 1991 versions of the International Convention for the Protection of New Varieties of Plants. The G-3 countries only committed themselves to ratify (if they had not already done so) the Paris Convention for the Protection of Industrial Property (1883).22 As for the other international intellectual property treaties (including some not specifically mentioned in NAFTA), the G-3 countries agree only to adhere to the principles they espouse and to incorporate them into their domestic legislation. Another significant difference between the G-3 Accord and NAFTA is that under Article 18-25 of the G-3 Accord, the signatories do not obligate themselves to implement special judicial systems and/or new procedures (as Article 1714 requires in the NAFTA context) in order to insure proper observance and enforcement of intellectual property rights. Under Article 18-26, however, the G-3 countries agree to work together to insure that the procedures for enforcing intellectual property rights within their existing judicial systems are fair, are not unnecessarily complicated or costly, and do not include unreasonable time limits or result in unwarranted delays. Article 18-27 specifically lists the minimal procedural guarantees that should be provided by each country’s legal system in order to ensure an adequate and effective method for enforcing intellectual property rights. The intellectual property protection offered under the G-3 Accord covers trademarks and service marks, copyrights (including computer software and radio signals), so-called origin or geographical name designations, industrial secrets (including undisclosed test data for pharmaceutical and agro-chemical products that must be divulged to government authorities for compliance with registration requirements), new plant varieties, and technology transfer. One thing that the rules do not specifically protect is patents and industrial designs. The reason for this is that at the time the G-3 Accord was negotiated, there were considerable differences between Mexican law on patent protection and those offered under Andean Decision 313 (which covered patent protection in the Andean Community prior to the enactment of Decision 344 in 1994 which, in turn, was replaced by Decision 486 in 2000).23 22 The full text of the Paris Convention (1883) is available at http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html. 23 Capriles, supra note 16, at 24.


Another important difference affecting intellectual property rights between the then-existing Andean Community norms and those found in the G-3 Accord was that, under the G-3 Accord, the right to registered trademark protection based on prior so-called notorious use was explicitly recognized even though the trademark may not have been previously registered. Furthermore, trademarks under the G-3 Accord are protected for up to ten years (subject to renewal) from the date the application for registration is made (in the case of Mexico) or ten years (subject to renewal) from the date the registration is approved (in the case of Colombia and Venezuela). Pursuant to Article 18-13, trademark protection may be lost if not utilized within three years from the date granted. With respect to so-called origin or geographical name designations and new plant varieties, the G-3 Accord gives precedence to the legislation in effect in each member state. Once again, this situation was the result of the fact that Colombia and Venezuela were subject to very detailed Andean communitarian norms in this area, while Mexico’s intellectual property norms incorporated rules from various international conventions.24 One of the important contributions made by the G-3 Accord to the legal regime for the protection of intellectual property norms in all three signatory states is the incorporation of the right of a party alleging trademark or copyright infringement to petition the relevant administrative or judicial authorities to have customs authorities seize the infringing goods at the border.25 12. Dispute Resolution Chapter 19 of the G-3 Accord contains the provisions for the resolution of state-to-state disputes, which may arise with respect to the interpretation and application of rights and obligations created by the treaty, or when one country feels that a measure has been adopted by the other(s), which is incompatible with obligations assumed under the G-3 Accord (i.e., it is either contradictory or undermines granted rights). Disputes arising between Colombia and Venezuela over obligations created exclusively under the G-3 Accord and/or involving Mexico are required to utilize the procedures and institutions established by Chapter 19. An option also exists to refer the dispute to the WTO, so long as it has subject matter jurisdiction. As previously indicated, a separate dispute resolution system exists for handling problems arising with respect to the cross-border provision of financial services that is found in Chapter 12 to the G-3 Accord. Furthermore, a separate dispute resolution mechanism found in Chapter 17 handles disputes arising between a state party and an investor from one of the other G-3 countries concerning cross border investments. As is true of the general dispute resolution system in NAFTA, any disputes that may arise among any of the signatories to the G-3 Accord should first be Id. at 26–27. Id. at 29. See also arts. 18–28, 18–32, and 18–34 of the G-3 Accord.

24 25


resolved through a negotiated settlement.26 When such an agreement is not possible, the aggrieved party or parties can then request a meeting of the Administrative Commission, in writing, pursuant to Article 19-06. The Administrative Commission must meet within ten days after a written demand has been filed. If the Administrative Commission is unable to make a determination within 45 days after its first meetings (or longer if all the parties so agree), the aggrieved party(ies) can request the formation of an arbitration panel. Under Article 19-09 of the G-3 Accord, when there are only two parties to a dispute, the arbitration panel shall consist of five members (who are chosen from a predetermined list of 30 individuals kept on file with the Administrative Commission). Arbitrators should be persons with “knowledge or experience in law, international trade, and other matters related to this Treaty, or in dispute resolution involving international trade agreements.” The arbitration panel is headed by a president who cannot be a national of any of the disputing parties. The president is selected by either mutual consent or, if this is not possible, by the party that wins a lottery to determine which side shall designate the president. Within 15 days of the president’s selection, each side chooses two arbitrators who are nationals of the opposing country. The procedure for selecting the arbitration panel was similar when all three countries were involved, although the method for selecting the president was different in the event there was no mutual consent. The arbitration panel should normally issue a preliminary decision within 90 days after the last arbitrator has been chosen to sit on the arbitral panel. The preliminary decision contains the findings and suggestions of the arbitration panel, and the parties to the dispute are then allowed to submit their observations (if any) within 14 days after the preliminary decision is issued. Within 30 days after the preliminary decision is issued, the arbitration panel then informs the Administrative Commission of its final decision, which is then, in turn, made public. Under Article 19-15(2), the identity of how the individual arbitrators voted remains a secret. Arbitration awards cannot be appealed and must be fully complied with. Failure to comply permits the detrimentally affected parties to suspend benefits granted under the G-3 Accord that are to be commensurate with the damage inflicted by the non-compliance. 13. Institutional Framework The G-3 Accord created an Administrative Commission to insure the smooth implementation of the agreement, supervise the work of the various committees and working groups established under the G-3 Accord, and authorized it to make recommendations to the three governments on measures it felt could strengthen the integration process. Article 20-02 called for the creation of National Sections of the Administrative Commission in each member state so as to oversee the agreement’s full implementation in that country. In the In the specific case of unilateral increases in import taxes, Article 19-02(2) of the G-3 Accord permits the affected state parties to negotiate an appropriate compensatory measure without resorting to the formal dispute resolution mechanism. 26


case of Colombia, the National Section of the Administrative Commission falls within the jurisdiction of the Ministry of Foreign Trade (or any other substitute body it many designate). In the case of Mexico, the task falls on the Secretariat of Trade and Industrial Development (or any other agency it may designate), while in Venezuela it was the responsibility of the Foreign Trade Institute. When the G-3 Accord came into effect there were some nine committees,27 one Subcommittee on the Harmonization of Health-Related Measures, and five working groups28 operating under the Administrative Commission. 14. Transparency Chapter 21 of the G-3 Accord requires each country to keep the others and their nationals abreast of developments affecting the G-3 integration process. For example, Article 21-01 specifically called for the creation of a central clearinghouse to facilitate communication between the three governments and disseminate information on the progress of the G-3 Accord’s implementation. Each government is also under an obligation to publish and make readily available all laws, regulations, administrative procedures, and resolutions related to implementation of the G-3 Accord. 15. Temporary Entry of Businesspeople Chapter 13 of the G-3 Accord calls for the member states to facilitate, on a reciprocal basis, the temporary entry of businesspeople who otherwise comply with standard immigration rules with respect to health, public order, and national security. The annex to Article 13-04 defines businesspeople as business visitors (including salespeople, designers, supervisors, market analysts, and technical service representatives), investors, intra-company personnel transferees, and professionals. In general, the signatory governments cannot impose quotas on the number of temporary entry authorizations. Entry authorizations may be denied, however, when the temporary entry of a businessperson would have a negative impact on the resolution of a local labor dispute. Article 13-04 called for the creation of a database of regional companies doing business in all three countries, so as to facilitate the temporary, crossborder transfer of their employees. A special Working Group on Temporary Entry on Businesspeople and Intra-Company Employee Transfer was created pursuant to Article 13-06 so as to examine additional ways to facilitate the crossborder movement of businesspeople. Generally, a denial of a temporary entry business visa cannot be referred to the general dispute resolution mechanism established under Article 19.

27 These nine committees consisted of: (1) the Automobile Sector; (2) Agro-Industrial Trade; (3) Sanitary and Phytosanitary Measures; (4) the Sugar Industry; (5) Financial Services; (6) Rule-Making; (7) Public Sector Purchases; (8) Competition Policy; and (9) Practices by State-Owned Enterprises. 28 The five working groups consisted of: (1) Technical Norms and Agro-Industrial Trade; (2) Rules of Origin; (3) Customs Procedures; (4) Professional Services; and (5) Temporary Entry of Businesspeople and Intra-Company Employee Transfers.


G. Chile-Peru Free Trade Agreement In June 1998 Chile and Peru signed a free trade agreement that was incorporated into the ALADI framework as ACE No. 38. The agreement established five different tariff reduction schedules (i.e., immediate reduction to zero upon entry into force of the agreement on July 1, 1998, or 0 percent after five, ten, 15, or 18 years, respectively) that were differentiated by the type of product and covered almost the entire universe of goods traded between the two countries. The textile and apparel industry had its own special tariff reduction schedule that was scheduled to culminate at zero for all items in 2006. Furthermore, Chile retained the right to use a price band mechanism for a select group of basic agricultural commodities, while Peru kept its special surcharge system for similar products. In February 2005 Chile and Peru signed an agreement to immediately reduce the tariffs to zero on a whole range of so-called sensitive products (e.g., cigarettes, paper, pens, tobacco, and washbasins) that had previously been subject to longer phase-out periods. The ALADI rules of origin (including its comparatively liberal 50 percent regional content requirement) apply to ACE No. 38. Special rules of origin that are generally stricter than the ALADI rules also exist for textiles, copper products, pharmaceuticals, agro-chemicals, and fruit juices. Goods made or assembled in “walled off” free trade zones such as Iquique in Chile and Tacna in Peru are specifically excluded from the bilateral free trade program. So too are used goods. Safeguard measures consisting of the temporary suspension of a tariff reduction schedule or even an increase of duties can be imposed to counteract sudden increases in the importation of goods that cause or threaten to cause grave harm to a national producer of the same or like product. A dispute resolution mechanism is created that, as a final step, can result in binding arbitration. In August 2006 Chile and Peru signed a new, much more comprehensive free trade agreement that includes chapters on investment (including procedures for resolving state-investor disputes), cross-border trade in services, and the temporary entry of businesspersons, and will replace ACE No. 38 when it comes into force (something that as of mid-2008 had not yet occurred). The new agreement will also provide a more sophisticated dispute resolution mechanism that, inter alia, allows state-to-state disputes to be referred to the WTO (when jurisdiction exists) or to utilize the system established under the agreement itself. One of the explanations for the emphasis on investment and services in the new agreement was that by 2005, Chile had become the seventh largest foreign direct investor in Peru, with about a third of those investments concentrated in services. Almost half of Chilean investments in Peru are concentrated in the energy sector, particularly in utilities providing electricity services. Left for future negotiations, however, were provisions on cross-border trade in financial services and participation in government procurement opportunities. H. Mexico-Uruguay Free Trade Agreement 1. Introduction In November 2003 the governments of Mexico and Uruguay signed a free trade agreement that came into force on July 15, 2004. The agreement was


incorporated into the ALADI framework as ACE No. 60. ACE No. 60 does not apply to the petroleum sector. It also does not cover most trade in the automotive sector, which is subject to a previous ALADI agreement (i.e., ACE No. 55) that was signed in 2002 between Mexico, on the one hand, and the MERCOSUR bloc, on the other. ACE No. 60 must be seen in the light of a long and frustrating effort to conclude a Mexico-MERCOSUR Free Trade Agreement since 1996, when the ALADI preferential tariff agreements that Mexico had with each of the MERCOSUR countries should have expired. These bilateral ALADI agreements were regularly extended for 180-day periods in anticipation of an imminent Mexico-MERCOSUR Free Trade Agreement. When this accord never materialized by late 1997, Brazil stopped offering Mexico 180-day extensions and then signed a preferential market access agreement with Mexico in March 2002 (i.e., ACE No. 53) without consulting any of its other three MERCOSUR partners. Accordingly, it was difficult for Uruguay’s largest neighbor to object when Montevideo decided to sign a more ambitious free trade agreement with Mexico that went beyond the scope of its former ALADI preferential tariff access agreement on a limited number of goods to one that encompassed more tariff lines and added commitments on cross-border investment, protection of intellectual property rights, and trade in services. 2. Free Trade in Goods As previously mentioned, almost all trade in vehicles and auto parts is subject to the provisions of the previously negotiated ACE No. 55 between Mexico and MERCOSUR. The general rule is that if an item is not included in Annexes 3-03 (3) or 303 (4) to ACE No. 60, the product received immediate duty-free treatment when the agreement entered into force on July 15, 2004. Most industrial products of a non-agricultural origin were accorded immediate duty-free treatment as of mid-2004. On the other hand, a significant number of products found in both annexes are subject to either product-specific tariff reduction schedules that do not necessarily achieve complete free trade but only a higher tariff preference over imports from third countries (e.g., cow meat, certain fruits, and rice) or are subject to graduated levels of preferential tariff treatment eventually culminating at zero (e.g., shoes and a whole range of primary commodities from Uruguay). In addition, there are goods (such as cheeses as well as textiles and clothing imported from Uruguay) that are subject to tariff rate quotas or can only be imported at a preferential duty during certain times of the year. Other items such as sugar, tobacco, and certain types of clothing are permanently excluded from receiving any type of tariff preference. With the exception of basic foodstuffs exported from Mexico, Mexico and Uruguay both agreed not to levy export taxes on products traded among them. 3. Rule of Origin Requirements Only those products that satisfy the applicable rules of origin can be traded between Mexico and Uruguay duty free or at a preferential tariff rate. It should


be pointed out that the vast majority of automotive products are subject to separate rules of origin found in ACE No. 55. To be eligible for duty-free treatment, the good must either be: 1. obtained or made exclusively with inputs from either Mexico or Uruguay or both; 2. made with inputs from outside of either Mexico or Uruguay, so long as the final product undergoes a transformation in either or both countries as reflected by a change in tariff classification heading; 3. made with inputs from outside of either Mexico or Uruguay, so long as the final product undergoes a change in tariff classification heading as well as satisfies a regional content requirement; or 4. made with inputs from outside either Mexico or Uruguay that satisfy a regional content requirement. In order to determine the regional content of a product, either the transaction value method or the net cost methodology may be used. The same formula used in NAFTA to determine the transaction value of a good is also used for the Mexico-Uruguay Free Trade Agreement:

Regional Content Value =

FOB Price of the Good – Value of Non-Originating Inputs FOB Price of the Good

× 100

Similarly, the identical formula used in NAFTA to obtain the net cost value of a product is also applicable to ACE No. 60: Regional Content Value =

Net Cost of the Good – Value of Non-Originating Inputs Net Cost of the Good

× 100

The net cost method must be used when there is no transaction value because the input was not the subject of an arm’s-length sale (e.g., an intracompany sale) or there exists some other impediment to determining its actual value. Otherwise, the decision as to which of the two methodologies to use is left to the discretion of the exporter or the producer (unlike NAFTA, which limits use of the net cost method to the automotive sector). As a general rule, regional content when the transaction value method is utilized must be at least 50 percent in order for a product to receive the benefits of ACE No. 60 while the corresponding regional content requirement under the net cost methodology is at least 40 percent. ACE No. 60 includes a de minimis rule that allows inputs that do not exceed 8 percent of the final product’s value and do not undergo a required change in tariff classification heading to be disregarded in determining a final product’s origin. Annex 4-03 to ACE No. 60 contains specific rules of origin for certain


products. For the most part, these product-specific rules mandate what type of shift in tariff classification heading must occur in order to make the final product eligible for preferential duty treatment and, in some cases, what additional regional content requirement must be fulfilled. This represents a change from product-specific rules of origin in traditional Latin American trade agreements that mandated that certain national inputs had to be used in the elaboration of a final product (e.g., cheese or yogurt made with nationally produced milk). Exporters are required to fill out a certificate of origin for all goods (except those reflecting a transaction less than U.S.$1,000) from countries that wish to receive preferential tariff treatment under ACE No. 60. Certificates of origin are valid for up to two years after they have been issued by a qualified government authority or designated agent. The certificates of origin can cover the exportation of one or more goods, or can cover continuous exports of identical products for a period of up to 12 months. Unlike traditional ALADI agreements, however, the certificate of origin does not have to be physically presented to the customs authorities upon entry of the good unless customs specifically requests to see it. Otherwise a simple statement in the entry documents that the product meets the relevant origin requirements is sufficient. The complete rules on procedures for challenging the authenticity of certificates of origin and applicable penalties for making a fraudulent claim of compliance are found in Chapter 5 to ACE No. 60. Interestingly, Chapter 5 allows the customs’ authorities in each country to issue preliminary determinations as to whether a good qualifies as originating in either Mexico or Uruguay and is therefore able to take advantage of ACE No. 60. 4. Safeguard Measures Safeguard measures can be imposed on goods subject to the tariff reduction schedules in ACE No. 60 whenever there is a sudden surge in their importation that causes actual or threatened harm to a segment of national production representing no less than 50 percent of all domestic producers of a similar or directly competitive item. The safeguard measures are limited to suspension in whole or in part of the preferential tariff treatment for a level of imports that exceeds the average amount imported during the preceding three years. Safeguard measures are generally imposed for a year (but can, when justified, be extended for a subsequent one-year period). Safeguard measures can only be imposed following an investigation that is “equitable, transparent and efficient” and allows input from all interested parties at a public hearing that must also guarantee, where appropriate, the confidentiality of any disclosed information. Any investigation must be preceded by a ten-day opportunity for consultations among the two governments. Emergency safeguard measures based on a preliminary showing of actual or threatened grave harm can be imposed for up to 200 days. Any monies collected as a result of an emergency safeguard tariff must be returned, however, if it is subsequently determined, following a full-fledged investigation, that there is no evidence of harm.


Any country that imposes a safeguard measure must offer some type of mutually agreed upon and equivalent level of compensation that may include increased preferential market access for another product or service into the country that has applied the safeguard measure. If the governments cannot reach a mutually satisfactory arrangement as to what this compensation should be, the country against which a safeguard has been imposed may respond with a retaliatory measure of equivalent commercial impact for up to 60 days (presumably to force an agreement). Whenever either Mexico or Uruguay wants to impose an across-the-board “global” safeguard, it can only include imports from the other partner if they “represent a substantial part of the total [global] imports and contribute in an important manner to the grave harm or threat of grave harm” to national production. To be deemed to represent a “substantial” part of total imports, the partner must be among the five largest providers within the immediate previous three years and must have contributed to the sudden surge in imports of a like or similar good. 5. Unfair Trade Practice Remedies Mexico and Uruguay agree to cooperate and coordinate efforts to prevent uncompetitive practices that may undermine the full functioning of ACE No. 60. In those areas of the economies where state enterprises maintain a monopoly, both countries commit themselves to prevent abuse of that position through a myriad of potential practices, including the failure to issue import or export licenses, manipulate prices, or restrict the sale of goods and services to firms or individuals from the other state party. From the moment ACE No. 60 came into force in July 2004 Mexico and Uruguay have agreed not to subsidize the export of any type of agricultural product that is traded among them. At the same time, if either country feels that its exports to the other are being harmed through the latter’s importation from third countries of agricultural products that received some type of export subsidy, it can request that the other government impose measures to counteract that negative impact. Pursuant to Chapter 7 of ACE No. 60, Mexico and Uruguay have the right to impose antidumping or countervailing duties on imports from the other whenever an investigation carried out by the relevant national authority determines that there is evidence of dumping or that the imported goods benefited from some type of subsidy, and that either practice harms or threatens to harm a segment of national production of identical or similar goods or significantly retards its development. Before an antidumping or countervailing duty investigation can commence, however, the governments are required to engage in consultations. Although the procedures for antidumping and subsidized exports are carried out according to the national legislation in force in each country, there are certain notification, publication, and other requirements (such as mandatory public hearings and how to handle confidential information) that


must be fulfilled. Furthermore, any interested party can make a request that the decision to impose an antidumping or countervailing duty be reviewed at the end of each year. In no case may antidumping or countervailing duties be in place for more than five years. Article 7-19 allows new exporters who are not affiliated with existing firms to request either a complete exemption or an individualized dumping margin or countervailing duty. Pursuant to Article 720, a country may request consultations of the other if it feels that dumped or subsidized goods are being imported from third countries and undermining its ability to compete in that market. The main objective of these consultations is to encourage the other government to impose antidumping or countervailing duties vis-à-vis the third-country imports. 6. Technical Norms, Sanitary and Phytosanitary Measures As a general rule, the use of technical norms by Mexico and Uruguay is governed by the WTO’s Agreement on Technical Barriers to Trade. This includes an obligation not to apply technical norms to imports from the other country in a fashion different than that accorded to national or third-country producers. In addition, both countries commit themselves to promoting the compatibility of their respective technical norms and procedures for evaluating compliance so as to facilitate recognition of the equivalency of their respective technical norms. In general, both governments are required to keep each other appraised of any proposed adoption of new technical norms or any modification of existing ones, as well as to provide sufficient opportunity for feedback and commentary. Mexico and Uruguay are only allowed to impose sanitary and phytosanitary measures that protect the health and well-being of their respective citizens, as well as that of agricultural and forestry products and fisheries, so long as they can be scientifically justified. Each country is also required to accept the equivalency of their respective sanitary and phytosanitary norms, even if they differ, so long as it can be shown that they provide a comparable level of protection. In addition, both countries must facilitate the entry of inspectors from the other country carrying out testing and other relevant activities. If the parties are unable to reach a consensus on the applicability of a sanitary or phytosanitary measure, the matter may be referred to the dispute resolution mechanism found in Chapter 18 of ACE No. 60. 7. Services The airline industry (although not support services such as aircraft maintenance and repair operations) and the financial services sectors are specifically excluded from the category of services otherwise liberalized by ACE No. 60. In addition, the rules governing the telecommunications sector are subject to a separate chapter. As a general rule, each country is required to accord any service provider from the other country the same treatment it accords its own nationals or (where relevant) to third-country nationals. In addition, no government may require that a service provider from the other country establish or maintain any office


or subsidiary corporation within its territory or that it otherwise be resident in the country as a pre-condition for offering its services within its territory. Each government is also required to ensure that any licensing or certification requirements for service providers are based on “objective and transparent” criteria that seek to ensure capability and aptitude and are not unnecessarily onerous or veiled attempts at protectionism. Interestingly, there is no automatic requirement of mutual recognition of degrees and education, unless Mexico and Uruguay actually enter into such an agreement. An annex to Chapter 10 does, however, provide regulations that harmonize the procedure for mutual recognition of the degrees of professional service providers. Unless the two countries otherwise agree, there is also no automatic requirement that the governments must remove nationality or permanent residency requirements as a pre-condition for receiving licenses or certificates to offer specific services within its territory. Finally, a government may (after prior notification and consultation with the other government) strip the right of a service provider to offer services within its territory if it can establish that the firm does not conduct significant commercial activities in either Mexico or Uruguay and is owned or controlled by persons who are not from either country. A number of annexes are included in Chapter 10 in addition to the previously mentioned one dealing with professional services. In particular, Annex I lists services that are exempt from the ACE No. 60’s liberalization program, while Annex II contains Non-Discriminatory Quantitative Restrictions. Annex III lists exceptions to the MFN clause where either Mexico or Uruguay list services that they may permit third-country service providers to offer within their respective territories but not to those from their ACE No. 60 partner. Finally, Annex IV lists service activities reserved for the government. As previously mentioned, the rules governing the provision of services in the telecommunications sector are found in a separate chapter in ACE No. 60. The type of telecommunication services that are opened to service providers from the other country in a “reasonable and non-discriminatory” fashion are those dealing with access to or use of public telecommunication networks (such as by Pay TV or Internet service providers) as well as so-called value added services (such as cellular telephony). 8. Investment Protection Investors from either Mexico or Uruguay are to be treated in the other country in the same manner as if they were a national of that country. Similarly, under a MFN clause, they are to be treated in a no less favorable manner than investors from third countries. This treatment shall, at a minimum, be “fair and equitable” and provide adequate protection of an investment. Export performance targets, requirements that products bear a certain level of national content, or that national service or goods providers be utilized as a condition for permitting any investment project are strictly forbidden. So too are requirements that restrict domestic sales, make access to foreign exchange contingent on the level of imported inputs or exports of final products, or that mandate the transfer of certain skilled personnel or technology. Furthermore,


neither country can require that a certain percentage of the executives of a firm investing within its territory consists of its own nationals (although it is possible to have nationality or residency requirements with respect to the firm’s board of directors). As a general rule, both countries must permit the timely cross-border transfer of funds associated with any investment (including dividend and interest payments, royalties, etc.) in a fully convertible currency. Notwithstanding this general rule, Mexico and Uruguay are authorized to impose temporary restrictions on the free transfer of capital whenever either faces a balance-ofpayment crisis. Property representing an investment cannot be expropriated unless it is for public use, and the decision adheres to the principle of non-discrimination, occurs under the full color of law, and an indemnification is paid based on the fair market value of the investment just prior to its expropriation. The protections accorded to cross-border investment can be denied to firms that are owned or controlled by third-country individuals that have no substantive presence in the country that is being offered preferential access under ACE No. 60. Disputes arising over the interpretation and enforcement of the investment chapter can be referred to a special dispute resolution mechanism that is separate and apart from the general system found in Chapter 18 of ACE No. 60. The complaining party also has the option to use the national court system, but once one of the two options is exercised, the individual or firm is bound by that choice. As a precursor to the use of the arbitration option, the individual or firm is required to first attempt to settle its dispute with the government through consultations. If the matter cannot be resolved, the dispute can be referred to a three-person (unless the parties agree to a different number) arbitration panel organized under the ICSID Convention or that adheres to the rules of arbitration of UNCITRAL. The actual rules of procedure that must be followed in the arbitration proceedings are either those of ICSID, the New York Convention of 1958, or the Inter-American Convention on International Commercial Arbitration. The arbitration panel, whether on its own initiative or at the request of one of the parties, can seek the opinions of outside experts and can also issue temporary injunctive relief. Arbitration awards are final and, if the complaint was filed by Mexico, can be published. 9. Temporary Entry of Businesspeople, Professionals, and Investors In order to facilitate the temporary entry of individuals who are either involved in the cross-border provision of goods or services or who seek to establish and manage their investments in the other country, Chapter 12 of the free trade agreement commits both countries to apply their respective immigration laws in an “expeditious manner so as to avoid delays and unnecessary prejudice.” There are no provisions requiring the creation of special visas, however, or exemption from the payment of consular processing fees. Instead, the focus of Chapter 12 is to make immigration requirements fully transparent and easily


accessible to interested parties. Disputes arising over application of Chapter 12 can be referred to the general dispute resolution system found in Chapter 18 only if the practice that is being complained about is recurrent, and all administrative procedures under domestic law have already been exhausted. In order to obtain temporary entry for businesspersons and those offering the type of professional services listed in an Annex to Chapter 12 as well as for investment purposes, the interested party must submit some type of documentation that supports this claim as well as proof of the international character of the business activity. The purpose of this requirement is to show that the individual seeking entry will not join the local work force. Accordingly, evidence of this can include an employment contract in which the salary is paid by an entity that carries out the bulk of its business overseas. Furthermore, the crossborder activity should either be “sustainable” or represent an “important sum of capital.” The facilitation of temporary entry extends to all executives, managers, and employees with specialized skills from legally constituted companies that are involved in cross-border business or investment activities. Mexico and Uruguay can require, however, that an individual has been employed by a firm for at least three years. Neither country can place limits on the number of persons who can be temporarily admitted as businesspersons or investors, nor can they demand that they first obtain a work permit or comply with other labor procedures as a pre-condition for gaining temporary entry status. 10. Intellectual Property Rights Protection Pursuant to Chapter 15 of ACE No. 60, Mexico and Uruguay are required to enforce the provisions of: the Paris Convention for the Protection of Industrial Property (as modified by the 1967 Stockholm Act); the Berne Convention for the Protection of Literary and Artistic Works (as modified by the Paris Act of 1971); the 1961 Rome Convention for the Protection of Actual or Interpretive Artistic Works, Phonograms, and Radio Broadcasts; the 1971 Geneva Convention for the Protection of the Producers of Phonograms Against Unauthorized Duplication; and the 1961 Convention for the Protection of New Plant Varieties (as revised in Geneva in 1972 and modified in accordance with the 1978 Act).29 Similarly, both governments must enforce Article 16.3 of the WTO TRIPs Agreement. Both countries also agree “to do everything possible” to ratify (if they have not already done so) the World Intellectual Property Organization (WIPO) Copyright Treaty of 1996 and the WIPO Performances and Phonogram Treaty of 1996.30 The copyright protections of the Berne Convention are expressly extended to include all types of computer software programs. Furthermore, both Mexico and Uruguay agree to protect so-called notorious marks, utility models, industrial designs, trade secrets, as well as origin or geographical name 29 The full texts of all these treaties and agreements (but for the Convention for the Protection of New Varieties of Plants) are available at the Web site of WIPO, at http://www. wipo.int/treaties/en. The full text of the various Acts of the 1961 International Convention for the Protection of New Varieties of Plants, as revised at Geneva (1972, 1978, and 1991) are available at http://www.upov.int/en/publications/conventions. 30 The full texts for both these treaties are available at the Web site of WIPO, at http:// www.wipo.int/treaties/en.


designations. With respect to the latter, Uruguay expressly recognizes that the terms “tequila” or “mezcal” can only refer to products originating in Mexico. Mexico and Uruguay reserve the right to prevent intellectual property rights from being used in such a way that unjustifiably limits trade or undermines the transfer of technology or are otherwise uncompetitive or perpetuate a monopoly. Within five years after the ACE No. 60 came into force (i.e., by July 2009), Article 15-11 obligates both countries to impose civil fines on anyone who manufactures, imports, sells, or rents devices intended to capture satellite transmission of programs without authorization of the rightful owners. As a general rule, Mexico and Uruguay are required to establish legal procedures to effectively protect intellectual property rights. These include the ability of judges to issue preliminary injunctions, order the seizure and destruction of infringing goods, and require customs officials to prevent the importation of infringing goods from entering the local market. Judges are also allowed to impose legal fees as part of any damage award in a civil case. Furthermore, both countries must establish criminal penalties (including incarceration) for serious cases of trademark falsification and copyright pirating on a widespread commercial level. There is no obligation to establish any type of special judicial system to enforce intellectual property rights, however. 11 Dispute Resolution Chapter 18 of ACE No. 60 contains the general system for resolving disputes among Mexico and Uruguay that may arise over the “interpretation, application, or failure to comply with the provisions” of their free trade agreement as well as “the application of measures that are incompatible with the obligations” or that annul or undermine the provisions of ACE No. 60. As previously noted, a special dispute resolution mechanism exists to handle investment disputes that may arise between a government and an investor from the other country. Interestingly, Chapter 18 gives either government the option of using the WTO dispute resolution system as well whenever it has subject matter jurisdiction. Once either of the two options is exercised, however, the parties are bound by that decision. Prior to the submission of the dispute to either system, the parties are required to engage in consultations to settle the matter, and these discussions should not extend beyond 30 days. If a matter cannot be resolved amicably within 30 days, and the decision is made to use the system created under Chapter 18, the matter is sent to binding arbitration. Pursuant to Article 18-05, an arbitration panel is made up of three-person (unless the parties agree to a different number) panel. Each country designates its own panelist from a pre-established list of arbitrators, and the third should ideally be chosen by mutual consent and should not be a national or resident of either country to the dispute. The remuneration for the arbitrators is borne by each side in an equal amount. As part of the deliberative process, the arbitrators are permitted to evaluate the provisions of ACE No. 60, any additional legal instruments and treaties that are connected


to it, all information submitted by the parties, and to utilize the standards of interpretation commonly accepted under public international law. The arbitrators are also allowed to seek the assistance of outside experts in making a final interpretation but must first inform the state parties of their intention to do so. The arbitration panel should normally issue an award within 90 days after it has been seated. Articles 18-11 and 18-12 contemplate that the Administrative Commission created under Chapter 17 to oversee implementation of ACE No. 60 play a role in ensuring implementation of an arbitration panel’s decision through the recommendations it issues to the parties following the issuance of an award. If the Administrative Commission, for whatever reason, decides not to intervene and issue recommendations, the parties are obliged to comply with the arbitration panel’s decision. If a government fails to comply with an arbitration award within 60 days after it has been issued, the other country can retaliate through the suspension of benefits arising under ACE No. 60 of an equivalent nature. Claims that the retaliatory measures imposed are excessive are referred to the Administrative Commission, which has the authority to recall the same arbitration panel that issued the original award (or to seat a new, special panel if this is not possible) to make such a determination. 12. Conclusion In order to ensure the smooth functioning of their free trade agreement, Mexico and Uruguay committed themselves to publishing all their laws, regulations, and procedures, and making them freely available to all interested parties from both countries. Similarly, each country committed itself to keeping the other government abreast of all proposed changes in the law that might impact on ACE No. 60 in order to facilitate the exchange of appropriate feedback. Mexico and Uruguay left open for future negotiations the inclusion of a chapter to ACE No. 60 dealing with government procurement. Similarly, they also committed themselves to negotiate a chapter on cross-border liberalization of their respective financial services sectors. As of mid-2008, however, neither of these two chapters had been negotiated (despite a mid-2006 deadline for both). The fact that neither chapter has been negotiated is not surprising. The reality is that bilateral trade and cross-border investment between Mexico and Uruguay is insignificant, and ACE No. 60 has done little to dramatically change this. ACE No. 60 was as much a political statement on the part of the Uruguayan government led by then President Jorge Batlle to let its two larger MERCOSUR partners know that Uruguay was unhappy with their bilateral deals and trade arrangements and that it too could pursue other trade options including negotiating an accord that perforated MERCOSUR’s common external tariff.

CHAPTER 3

ORIGINS, CURRENT STATUS, AND FUTURE OF MERCOSUR I. Introduction On July 6, 1990, Presidents Carlos Menem of Argentina and Fernando Collor de Mello of Brazil signed the Act of Buenos Aires calling for the creation of a common market between their two countries by 1995. The date was specifically chosen to coincide with the end of both presidents’ respective terms in office and therefore emphasize the personal importance both men attached to the project. The broad, general guidelines for the establishment of this common market to be known as the Common Market of the South (MERCOSUR, or MERCOSUL in Portuguese) were included in the Latin American Integration Association (ALADI) Economic Complementation Agreement or Acuerdo de Complementación Económica (ACE) No. 14, signed in December 1990. Paraguayan and Uruguayan fears that they would be shut out of a common market between two of their largest trading partners caused both countries to ask to be included in the MERCOSUR process. This request resulted in the Treaty of Asuncion, which was signed by Argentina, Brazil, Paraguay, and Uruguay in the Paraguayan capital on March 26, 1991. The Treaty of Asuncion was later incorporated into the ALADI framework as ACE No. 18 in November 1991, following the treaty’s near unanimous ratification in the legislatures of all four member states. The Treaty of Asuncion, besides including two new countries in the MERCOSUR project, also expanded on ACE No. 14 by filling in some of the legal and institutional gaps found in the earlier document. The decision to bring the MERCOSUR process within the ALADI framework was reputedly done as a way to avoid the reporting requirements under the General Agreement on Tariffs and Trade (GATT), since ALADI had already been reported under the Enabling Clause. Regardless, the WTO Committee on International Trade and Development established a working group in 1993 to review MERCOSUR under both Article 24 of the GATT and the Enabling Clause. According to figures supplied by the ALADI Secretariat in Montevideo, by 1990 nearly a third of Paraguay’s exports and approximately 30 percent of Uruguay’s exports went to Brazil. Together, Brazil and Argentina supplied almost 40 percent of Uruguay’s total imports and just under 30 percent of Paraguay’s imports. Among the innovations of ACE No. 18 over ACE No. 14 were better defined rules of origin as well as a more effective dispute resolution mechanism. For its part, the provisions in ACE No. 18 were almost identical to those found in the Treaty of Asuncion, albeit the language in ACE No. 18 detailed with greater precision any exceptions to the general free trade scheme during the transition period.

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The original intention of MERCOSUR was to encourage each member state to specialize in producing those inputs in which it enjoyed a competitive advantage. The final good would then be exported outside the region as a product made in MERCOSUR. The Treaty of Asuncion mandates that the MERCOSUR common external tariff (CET) has to be at such a level so as to ensure that the final output of the member states is internationally competitive. II. Argentine-Brazilian Integration and Economic Cooperation Program of 1986 The idea of creating a common market between Argentina and Brazil was not the brainchild of either Presidents Menem or Collor de Mello. Previously, in November 1988, then Presidents Raul Alfonsin of Argentina and José Sarney of Brazil had signed the Treaty of Integration and Economic Cooperation. This agreement sought to transform Argentina and Brazil into a customs union by 1999. After 1999 both countries would begin taking further steps to transform the proposed customs union into a full-fledged common market. The 1988 Treaty on Integration and Economic Cooperation was, in turn, an outgrowth of the Argentine-Brazilian Program for Integration and Economic Cooperation (PICAB), begun by Presidents Sarney and Alfonsin in 1986. The primary motive behind PICAB was to gradually open ever more sectors of Argentine-Brazilian trade to complete free trade and thereby improve each country’s respective economy through the concept of comparative advantages. The sectors that were particularly targeted included wheat, agro-industrial (including basic foodstuffs), capital goods, steel, automobile, aeronautics, communications, energy, surface and maritime transport, biotechnology, and nuclear power. The hope was that steady economic growth in a complementary fashion would help insure political stability for both nations as they emerged from years of harsh military rule and pent-up social demands. Although PICAB brought neither economic nor political stability to Argentina or Brazil, it did initiate the steady rise in total Argentine-Brazilian bilateral trade that continues to the present (albeit with a temporary contraction at the start of the 21st century). In addition, PICAB included a number of programs that supported the subsequent adoption of market-oriented economic policies in Argentina and Brazil during the 1990s. For example, PICAB insured Brazil of a steady supply of agro-industrial products, particularly grain imports, which allowed the country to begin dismantling its expensive agricultural subsidies program to wheat farmers in southern Brazil.

This is acknowledged in the Treaty of Asuncion itself. The preamble states that one of the main reasons the MERCOSUR countries are trying to create a single, integrated market is that they wish to establish a more effective negotiating position to help ensure that their products will have better access into the markets of other trade blocs such as the European Union. M. Hirst, El Programa de Integración Argentina-Brazil: Concepción Original y Ajustes Recientes 22 (1990).

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PICAB also incorporated an important program designed to improve surface transport between Argentina, Brazil, and Uruguay (i.e., Protocol No. 18). Among the concrete results of this program was that Argentina and Brazil established single sanitary inspections for agricultural products at border crossings. In addition, since January 1988 goods shipped from São Paulo to Buenos Aires or vice versa only need be inspected by customs officials at the point of embarkation rather than at the actual border posts. Another measure adopted under this PICAB program included increasing tonnage limits at Argentine-Brazilian border crossings to correspond with the maximum permitted on each country’s highway system, thereby ending the previous time-consuming and costly transshipment of goods at the border. The cumulative effect of all these measures led to reduced rates for cargo shipped by truck and helped make Argentine exports to Brazil cost competitive despite an Argentine peso which was overvalued during most of the 1990s vis-à-vis the Brazilian currency. Finally, the inclusion in PICAB of programs designed to encourage cooperation in the nuclear energy and aeronautics fields contributed to a sharp reduction in the tensions that had traditionally characterized Argentine-Brazilian relations since colonial times. Undoubtedly, this was the PICAB’s most important contribution. It finally put an end to the intense military rivalry between Argentina and Brazil that, as recently as the 1970s, had the two countries locked in a bitter nuclear arms race.10 Absent the resolution of this intense rivalry, no economic integration project in the Southern Cone could have had any realistic chance of success. The end of this traditional rivalry also allowed both governments to redirect scarce resources from bloated military defense budgets to human capital resource development. Despite the creative debt it owes to PICAB and the 1988 Treaty on Integration and Economic Cooperation, MERCOSUR abandoned the PICAB’s more gradualist approach. It sought universal free trade within a short period of time. That MERCOSUR adopted a more aggressive free trade stance is not surprising since this coincided with the wide-ranging market-oriented economic policies that were being pursued by all four MERCOSUR countries during the 1990s.11 As a result of Uruguay’s inclusion, this was the only program in PICAB that was trilateral in nature. While Uruguay was never invited to participate in the full PICAB program, it enjoyed preexisting bilateral trade agreements with Argentina under the CAUCE (Argentine-Uruguayan Economic Complementation Agreement) of 1974 and with Brazil under the PEC (Trade Expansion Protocol) of 1975. N. Huici, Primeros Pasos de la Integración: Argentina-Brasil-Uruguay 179 (1989). Id. at 179–80. Id. at 180–81. 10 A retired Brazilian vice-admiral attending a Buenos Aires symposium sponsored by the general staffs of the Argentine and Brazilian Armed Forces in April 1987 credited PICAB with giving each country’s military a new horizon and replacing the historical theory of inevitable conflict between the two countries. Military Affairs: Proposals for Closer Ties with Argentina, Latin Am. Wkly. Rep., Apr. 23, 1987, at 9. A binational venture was proposed at this same conference for the construction of a nuclear submarine. 11 It is interesting to point out, however, that while the PICAB initially opened comparatively few sectors of the economy to bilateral free trade, the elimination of tariffs, when


Given the dislocations that this “each country for itself” approach engendered, however, the wisdom of the PICAB’s gradualist and more cooperative program has taken on a more attractive hue in hindsight. Former Argentine Economics Minister and 2007 presidential candidate Roberto Lavagna, who was also one of the architects of PICAB, emphasizes that the difference between the earlier PICAB and the subsequent MERCOSUR process is not that both did not share universal free trade as an ultimate goal, but rather that the PICAB’s methodology for achieving that goal permitted a joint restructuring of key industries. During an interview in 1996 Lavagna pointed out that the automobile accord developed under PICAB and which continued into the 21st century, permitted Argentina and Brazil to work together to restructure, modernize, and make their automobile industries internationally competitive rather than engage in a zero sum game that would ultimately have been lost by Argentina (given the smaller size of its economy and reduced economies of scale).12 III. Overview of MERCOSUR from Its Inception A. Introduction Almost from the day it was launched on March 26, 1991, skeptics predicted MERCOSUR’s imminent collapse, while some economists fretted about the project’s supposed protectionist designs to create a trade fortress. The most notorious example of the latter was a 1996 report written by a World Bank economist that relied on out-of-date trade statistics and attributed to MERCOSUR certain policies that were actually premised on pre-existing national automotive regimes.13 Subsequent tirades tried to blame Argentina’s economic melt down at the start of the twenty-first century on membership in MERCOSUR.14 A wellknown economist from a New York City investment bank even went as far as to proclaim MERCOSUR dead in 2001.15 All of these negative predictions and assessments proved to be intemperate, as MERCOSUR continues to facilitate increases in intra-regional trade flows and plays a central role in the foreign it came, was immediate and not phased during a transition period as in the MERCOSUR project. 12 Interview with Dr. Roberto Lavagna, President, Ecolatina, in Buenos Aires, Argentina, May 14, 1996. 13 See, A.J. Yeats, Does Mercosur’s [sic] Trade Performance Justify Concerns about the Global Welfare-Reducing Effects of Regional Trading Arrangements? Yes! (1996) (unpublished manuscript, World Bank, Washington, DC). Yeats’s report led to bombastic newspaper headlines in the U.S. media. See, e.g., South American Trade Pact Is Under Fire, Wall St. J., Oct. 23, 1996, at A3; MERCOSUR Under Siege, J. COM., Oct. 30, 1996, at 6A. 14 S. Edwards, This Argentine Scheme, Fin. Times, Jan. 21, 2002, at 15. See also M.A. O’Grady, Waiting for a Trade Deal Has Cost Latin States Dearly, Wall St. J., June 28, 2002, at A9. 15 The economist was Arturo C. Porzecanski, who was a managing director at the time at ABN-AMRO Securities in New York City. Members’ Policies Spell MERCOSUR’s Demise, STRATFOR (2001), available at http://www.stratfor.com/latinamerica/commentary/0110101600. htm. He repeated that assertion at a conference attended by this author in New York City and sponsored by the Brazilian-American Chamber of Commerce on August 13, 2002, even though the reason for his initial statement in 2001 was Argentina’s then “incompatible” trade and fixed exchange rate regimes (something that the January 2002 devaluation of the Argentina peso resolved).


trade policy of all its member states.16 That is not to deny, however, that the original common market goal of MERCOSUR now appears ephemeral and the project has lately been utilized as a way to attain short-term, geopolitical aims that could well undermine its long-term economic mission. Since its launch, MERCOSUR has been a catalyst for hundreds of crossborder investments, a phenomenon virtually unknown in the Southern Cone prior to the 1990s, and one that needs to be further encouraged as part of a strategy that facilitates the creation of internationally competitive subregional firms. With the return of economic growth to the Southern Cone following the recessions at the beginning of the 21st century, the dramatic annual increases in intra-regional trade flows that MERCOSUR experienced prior to 1998 have also returned. This has been facilitated by the fact that all four core member states now enjoy similar currency regimes. After January 1999, for example, Argentine exports to Brazil were handicapped by a highly overvalued currency, following Brazil’s decision to devalue the already weaker real, and a rough parity in exchange rates was not restored until the sharp devaluation of the Argentine peso in January 2002. B. Trade Creation vs. Trade Diversion Argentina and Brazil are jointly responsible for some 80 percent of total intra-MERCOSUR trade flows. In 1991 MERCOSUR’s first year in existence, bilateral trade between the two countries totaled U.S.$3 billion, with a slight surplus in favor of Argentina. The next two years saw steady increases in bilateral trade as MERCOSUR’s automatic annual tariff reduction schedule was implemented. During that time, the trade surplus was in Brazil’s favor as a result of the 1991 adoption of the Convertibility Plan in Argentina that tied the Argentine peso one-to-one with the U.S. dollar. Convertibility served not only to restore economic stability and growth to Argentina, thus creating a greater demand for Brazilian goods, but also made Brazilian goods cheaper given the policy of sharp currency devaluation Brazil pursued at the time. Even with the disadvantage of an overvalued currency vis-à-vis Brazil, however, the Argentines were still able to annually increase the quantity of exports going to Brazil in

See, e.g., A. Hurrell, The Politics of Regional Integration in MERCOSUR, in Regional InteLatin America and the Caribbean: The Political Economy of Open Regionalism 210 (V. Bulmer-Thomas ed., 2001). Hurrell points out that Brazil, for example, has a number of important reasons for supporting MERCOSUR as a key component of its economic and foreign policy. First, the direct costs of any reversion to rivalry with Argentina would be very high. Second, a prolonged souring of relations would undermine the strategic objective of regional integration—integration as a means of taking forward a national industrial project under new global conditions, increasing international bargaining power, and attracting foreign capital and direct foreign investment. Third, MERCOSUR is critical to Brazil’s relations with Europe, which continue to rely very heavily on the continued development of the ‘region-region’/EU.-MERCOSUR ties. Fourth, MERCOSUR provides the political and economic framework for Brazil’s broader policy in South America. Finally, and most importantly, MERCOSUR is central to Brazilian relations with the United States. The idea of MERCOSUR as a counterweight, as a negotiating instrument with the United States, has never been far beneath the surface. Id. at 210. 16

gration in


1992, 1993, and 1994.17 Dramatic growth in bilateral trade continued through 1997, although by 1995 the surplus had switched in favor of Argentina. The explanation for this reversal was, in part, the adoption of the real plan which, temporarily at least, left the new Brazilian currency worth more than the U.S. dollar (and hence the Argentine peso). Despite the significant stagnation in Argentine-Brazilian trade flows between 1998 and 2004, total trade between the two countries in 2002 (the year of sharpest contraction) still represented a higher than threefold increase from the U.S.$2.1 billion total recorded in 1990 (the year before MERCOSUR came into existence). Secondly, Argentina managed to retain its trade surplus with Brazil, despite the January 1999 maxi-devaluation of the Brazilian real that left Argentine exporters at a competitive disadvantage because of an overvalued currency. Widely reported fears that Argentina would suffer a mass invasion of Brazilian imports into Argentina never materialized. For one thing, the prolonged Argentine recession that began in 1998 proved more effective in quelling demand for Brazilian imports than threatened safeguards (that, for the most part, were never actually imposed). The most interesting development with respect to MERCOSUR is that the feared trade diversion away from more efficient sources of final goods and inputs from other parts of the world never materialized.18 Until 1999 the importance of the subregional market as a destination for MERCOSUR exports increased, in some cases at a higher percentage than globally. What is most noteworthy is that this increase in the importance of the subregional market did not come at the expense of exports destined for outside MERCOSUR, which also grew. After 2002 the percentage of MERCOSUR exports destined for the subregional market decreased dramatically as a percentage of global exports, but this was primarily a result of the explosion in Asian demand for Southern Cone primary commodities such as grains, soy, vegetable oils, and minerals. The fact is that trade within MERCOSUR has fully recovered from its nadir in 2002 and has expanded significantly beyond the peaks achieved during the 1990s, but this has been masked by the fact that the international prices of raw materials 17 This fact should have given pause to those who, as it turns out, wrongly argued that MERCOSUR would disintegrate in the face of a maxi-devaluation of the Brazilian real in January 1999. Despite its overvalued currency, Argentina still managed to increase overall exports to Brazil during these three years. Undoubtedly the economic stability that Argentina enjoyed at the time was also a factor, in that it allowed Argentine exporters to further reduce profit margins so as to remain competitive in the Brazilian market. 18 The truth is that this concern was overblown given that levels of protectionism fell sharply in the MERCOSUR countries during the late 1980s and 1990s due to implementation of unilateral tariff reduction programs. The simple average most-favored nation (MFN) tariff for MERCOSUR fell from 41 percent in 1986 to 12 percent by 1996. Furthermore, the preferential tariff reductions within MERCOSUR were smaller than the World Trade Organizatin (WTO) MFN reductions and, as a result, there was a substantial reduction in the average level of protectionism to external countries as well as within MERCOSUR. These reductions in external tariffs coupled with economic growth both served to encourage trade between MERCOSUR countries and the rest of the world throughout the 1990s. A. Bartholomew, MERCOSUR and the Rest of the World, in Regional Integration in Latin America and the Caribbean: The Political Economy of Open Regionalism 253 (V. Bulmer-Thomas ed., 2001).


(which dominate global exports) have risen faster than prices of manufactured goods (which are more significant in intra-MERCOSUR trade).19 Import data reveal even more clearly that MERCOSUR never contributed to trade diversion. Since MERCOSUR’s founding in 1991, imports sourced from within the subregion have remained fairly steady at 20 percent (give or take a couple of percentage points above or below in a given year) of MERCOSUR’s total imports from all sources in the world. Accordingly, MERCOSUR never produced any significant trade diversion. Instead, it has augmented new trade opportunities within the subregion, as MERCOSUR’s four core member states have also sought to diversify exports to markets in other parts of the world.20 Despite the overall contraction of the importance of the subregional market for the four member states after 2002, MERCOSUR remains the most important export market for Argentina, Paraguay, and Uruguay. This is less so in the case of Brazil, where MERCOSUR hovers between third or fourth place after the United States, the European Union, and sometimes China. However, MERCOSUR was responsible for the most important change of the 1990s in the pattern of Brazil’s foreign trade, favoring goods with a higher degree of technological intensity and encouraging small- and medium-sized firms in Brazil to export for the first time.21 MERCOSUR also served as a catalyst for increased Brazilian foreign investment in the subregion, thereby playing an important role in the internationalization of Brazilian firms.22 A review of the composition of Argentine-Brazilian trade provides further cause for optimism about the future viability of MERCOSUR. When the first attempts were made by Argentina and Brazil in 1986 to open up specific sectors of their economies to free trade under PICAB, many Argentines feared that their country’s industrial sector would be wiped out and the country reduced to being a net exporter of agro-industrial goods to Brazil. In 1986 manufactured goods represented 34 percent of Argentine exports to Brazil in value terms, while foodstuffs (primarily agro-industrial in nature) accounted for 60 percent of Argentine exports. By 1992 the proportion of manufactured exports had increased to 39 percent, and foodstuffs had actually decreased to 52 percent. Data for 2000 19 Inter-American Development Bank-Intal, Mercosur Rep. No. 12, at 20 (2008). The dynamism of MERCOSUR trade with China in recent years is truly impressive. While China was the destination of 1 percent of MERCOSUR exports in 1991, it took 6.4 percent of the bloc’s exports in 2006. At the same time, while 0.6 percent of MERCOSUR imports came from China in 1991, that number was 8.3 percent in 2006. Id. at 23. 20 This conclusion is further buttressed by the research findings conducted by Ann Bartholomew of the University of Oxford. Bartholomew notes that during the period 1990 through 1999 while intra-MERCOSUR trade increased at a greater pace then trade with the rest of the world, nonetheless, in terms of total trade, MERCOSUR still had a greater volume of trade with the rest of the world. This indicates that the MERCOSUR not only did not discourage trade with the rest of the world, but a trade augmentation effect may well have resulted, due to the fact that external trade barriers fell during the 1990s as well as barriers to intra-MERCOSUR trade. Bartholomew, supra note 18 at 240. 21 P. da Motta Veiga, Brazil in Mercosur: Reciprocal Influence, in MERCOSUR: Regional Integration, World Markets 30–31 (R. Roett ed., 2001). 22 Id. at 31.


indicate this trend continued, with manufactured goods accounting for 46 percent of Argentine exports to Brazil that year in value terms and foodstuffs shrinking to 28 percent. Argentine exports to Brazil measured in volume terms for the year 2000 underscore the beneficial significance of this phenomenon. Although foodstuffs (despite their noticeable decline in value share) dominate Argentine exports to Brazil in volume terms in 2000, manufactured exports represent a mere 6 percent of Argentine exports in volume terms. This underscores that Argentine manufactured exports with significant value added have been the greatest beneficiaries of the opening to Brazil. See Figures 3.1 to 3.7.

0

50

100

150

200

250

91

19

45.9 11.3%

92

19

50.4 14.5%

93

19

54.1 18.7%

94

19

62.1 19.3%

95

19

69.8 20.6%

96

19

74.3 23%

97

19

82.2 25.1%

Source: Secretaria del MERCOSUR (Montevideo) & ALADI (Montevideo).

(In billions of u.s.$

98 19

80.5 25.3%

99 19

73.3 20.7%

00 20

83.1 21.3%

01 20

86.2 17.5%

02 20

87.5 11.7%

03 20

104.5 12.2%

04 20

133.7 12.9%

05 20

161.1 13.1%

Figure 3.1. Total MERCOSUR Global Exports & Percentage Bound for Intra-MERCOSUR Trade 1991–2007

06 20

186.5 13.8%

07 20

219.2 14.7%


0

20

40

60

80

100

120

140

160

180

200

19

91

34.2 15.5%

92 19

40.7 18.7%

93 19

47.9 19.6%

94 19

59.6 19.6%

95

19

78.8 18.1%

96

19

86.8 20.3%

97

19

100.5 20.7%

Source: Secretaria del MERCOSUR (Montevideo) & ALADI (Montevideo).

(In Billions of U.S.$)

98 19

99 21.1%

99 19

82.4 19.2%

00 20

86.4 20.1%

01 20

84 18.8%

02 20

62.3 17.2%

03 20

68.9 19.3%

04 20

94.6 18.9%

05 20

113.5 19.1%

Figure 3.2. Total MERCOSUR Global Imports & Percentage Originating Within MERCOSUR 1991–2007

06 20

140.3 18.6%

07 20

181.4 17.9%


0

5

10

15

20

25

19

91

1.5

1.5

3

92 19

3

1.7

4.7

Source: ALADI (Montevideo).

(In Billions of U.S.$)

30

93 19

3.7

2.8

6.5

94 19

4.1

3.7

7.8

95

19

4

5.5

9.5

97

19

6.8

8.1

98 19

6.7

8

14.7

99 19

5.4

5.7

11.1

Brazilian Exports to Argentina

96

19

5.2

6.6

11.8

14.9

00 20

6.2

7

13.2

01 20

5

6.2

11.2

03 20

4.5

4.7

04 20

7.4

5.6

1.3

05 20

9.9

6.3

16.2

Argentine Exports to Brazil

02 20

2.3

4.9

7.2

9.3

Figure 3.3. Total ARGENTINE–Brazilian Bilateral Trade for 1991–2007

06 20

11.7

8.1

19.8

07 20

14.4

10.5

24.9


1986

Source:BID-INTAL (BUENOS AIRES)..

Foodstuffs 60%

Minerals & Metal 2% Fuels 3%

Minerals & Metal 2%

Manufactured 46%

Minerals & Metal 2%

Manufactured 34%

2000

Fuels 22%

Foodstuffs 28%

Primary Agriculture 2%

Minerals & Metal 1% Fuels 7%

Figure 3.4. Composition of Argentine Exports to Brazil by Value

Foodstuffs 52%

1992


Manufactured 39%


Source: BID-INTAL (Buenos Aires).


Foodstuffs 17%

Fuels 0%

1986


Foodstuffs 7%

Manufactured 59%

Minerals & Metal 20%

Fuels 1%

2000

Manufactured 82%

Minerals & Metal 9%

Manufactured 70%

Figure 3.5. Composition of Brazilian Exports to Argentina by Value


Fuels 1%

Primary Agriculture 8% Foodstuffs 8%

1992


Source: BID-INTAL (BUENOS AIRES)..

Fuels 34%

Minerals & Metal 2%

Manufactured 6%

2000


Figure 3.6. Composition of Argentine Exports to Brazil by Volume 2000

Foodstuffs 57%


Source: BID-INTAL (BUENOS AIRES)..

Manufactured 24%


Foodstuffs 4%

2000

Fuels 3%

Figure 3.7. Composition of Brazilian Exports to Argentina by Volume 2000




C. Political Considerations From the beginning, the MERCOSUR project has had important political dimensions, whether in serving as a means of supporting democracy in the subregion or increasing the Southern Cone’s geopolitical profile in the international arena. These political interests have often given MERCOSUR momentum and compensated for shortcomings on the trade liberalization front. As one commentator has noted “MERCOSUR was always intended not as a static, one-off bargain but as an on-going process of regional co-operation.”23 For example, regional infrastructure initiatives, cooperative agendas in education and culture, and heightened interaction among political actors of member states have widened the scope and deepened the level of intraMERCOSUR relations.24 In June 1996 the presidents of the MERCOSUR countries issued a Declaration on the Commitment to Democracy in MERCOSUR that required them to consult and apply punitive measures to any member state wherein democratic rule was threatened or abolished. The measure was in response to a threat by General Lino Oviedo to take power through a coup d’etat in Paraguay in April of that year. These principles were further developed and made binding in 1998 in the Protocol of Ushuaia on the Commitment to Democracy in MERCOSUR, Bolivia and Chile. The crisis provoked by the collapse of the Argentine financial system in January 2002 underscored that Argentina’s real friends in its hour of need were its MERCOSUR partners. The policy of “carnal” relations that the Menem administration pursued with the United States, and Argentina’s much vaunted status as a special extra-NATO ally, brought it no special favors from the United States and the International Monetary Fund when the country sought fresh loans to stave off collapse of its monetary regime. The spreading contagion from Argentina’s economic mess cemented the sense of mutualism between Argentina and Brazil that first appeared after the Mexican peso crisis at the end of 1994 when political leaders in both countries realized their nations were too vulnerable to erratic global financial movements and needed to act together to better withstand them.25 In sharp contrast to the perceived callous indifference of the United States to Argentina’s plight, Brazil announced in February 2002 that it would open its market to Argentine exports by immediately eliminating any remaining tariff and non-tariff barriers (but for phytosanitary requirements to prevent the spread of hoof and mouth disease).26 Following the June 2002 meeting of Hurrell, supra note 16, at 202. M. Hirst, Mercosur’s Complex Political Agenda, in MERCOSUR: Regonal Integration, World Markets 43 (R. Roett ed., 1999). Hirst points out that besides these initiatives at the local and federal levels, cross-border interaction has been intense among business sectors, social organizations, and political elites, and inter-provincial networking is a reality between the southern states of Brazil and the northern provinces of Argentina. 25 Id. at 39. 26 C. Bay-Smith, Brasil Deroga Aranceles a Bienes Argentinos, El Mercurio, Feb. 9, 2002, at C1. 23 24


MERCOSUR’s Common Market Council, the Brazilians also announced that they would permit the Argentine automotive industry to export the equivalent of two U.S. dollars worth of goods for every one U.S. dollar exported by Brazil to Argentina under their bilateral managed trade regime for the automotive sector. This marked a change in a previous version of their managed trade agreement, in effect through 2006, where the exchange was fixed roughly at a one-to-one parity. Furthermore, the Brazilian president announced plans in August 2002 to send to Congress a bill exempting the subsidiaries of Brazilian firms who invest in Argentina, Paraguay, or Uruguay from paying corporate income tax in Brazil. These firms would be further eligible for loans from the Brazilian National Development Bank (BNDES), even if the investment projects outside Brazil were joint ventures with local firms.27 In recent years, Paraguay and Uruguay have expressed increasing dissatisfaction with the way Argentina and Brazil appear to overlook or disregard their concerns with respect to the Southern Cone economic integration process. Paraguay believes its status as a landlocked country means that it will always be prejudiced by policies that do not permit an equitable distribution of the revenues collected by the MERCOSUR CET, as most of its imports enter through ports in Argentina, Brazil, or Uruguay. The full implementation of rules designed to eliminate multiple collections of the CET on third-country imports that are reexported within MERCOSUR will only aggravate Paraguay’s shortfall in collecting revenue raised through the CET. Although it is true that many goods destined for Paraguay arrive at free ports in neighboring countries, and the CET is therefore only collected when it actually reaches Paraguayan territory, the country is still at a competitive disadvantage because of the high shipping costs associated in transporting items from these free ports overland to Paraguay. Successive Uruguayan governments have been frustrated by the continuing failure of Argentina and Brazil to abide by their MERCOSUR obligations, by either imposing new non-tariff barriers to Uruguayan exports or pushing off the implementation of universal free trade ever further into the distant future. Uruguay is also troubled by the refusal of the larger countries to fully comply with many of the arbitration awards handed down by MERCOSUR’s dispute resolution system. A failure to respect the rules and obligations of MERCOSUR and an inability to enforce them has created a climate of legal insecurity that prejudices Uruguay’s ability to retain and attract direct investment. This scenario is further aggravated by the continuation of policies at the national, state/provincial, or local level in Argentina and Brazil to attract foreign investment by offering fiscal and other types of incentives that puts the two smaller MERCOSUR countries (with less resources and means of generating revenue) at a particular disadvantage. 27 L. Linn & J.C. Raffo, Brasil Acepta Pagar el Precio del Liderazgo Regional, El ObservaAug. 22, 2002, at 1. In January 2002 the Brazilian Agriculture Minister, Marcus Vinicius Pratini de Moraes, proposed that BNDES guarantee payments for a set period and up to a specified limit to Brazilian firms for their exports to Argentina, on the understanding that Argentina would later repay Brazil for the financing. See Brazil Minister Eyes Funding Exports to Argentina, Am. J. Transp., Jan. 14, 2002, at 1.

dor,


At the beginning of 2006 the Uruguayan government of President Tabaré Vasquez announced his country’s desire to negotiate a bilateral free trade agreement with the United States. This was immediately rejected by Brazil, which argued that the bilateral free trade agreement that Uruguay signed with Mexico in 2003 had been different because it fell under the ALADI umbrella, and it could therefore be deemed to be a precursor to a free trade accord that all four MERCOSUR countries and Mexico have, since 2002, formally committed themselves to achieving. A bilateral free trade agreement with the United States, on the other hand, would seriously undermine the MERCOSUR customs union scheme. Brazil also claimed that it would violate an implicit understanding contained in MERCOSUR Common Market Council Decision 8/01 issued in June 2001 requiring participation of the entire MERCOSUR bloc in any type of trade negotiations with the United States. Paraguayan President Nicanor Duarte Frutos also began voicing interest in negotiating a bilateral free trade agreement with the United States within months of the Uruguayan announcement. The Paraguayan and Uruguayan threats to undermine MERCOSUR solidarity by signing free trade agreements with the United States have to be seen as ploys to garner greater concessions from the two larger trading partners, Argentina and Brazil. This is a reflection of the weak bargaining power Paraguay and Uruguay have within the Southern Cone economic integration scheme. These threats seem to have had their desired impact to the extent that Brazil wishes to preserve the image of it being at the helm of an economically integrated and politically united Southern Cone. Accordingly, it is not surprising to learn that the Fund for Structural Convergence in MERCOSUR (FOCEM) announced special programs in mid-2006 to provide financial assistance to Paraguay and Uruguay. Many of FOCEM’s projects are concentrated on improving the physical infrastructure within Paraguay and facilitating linkages to neighboring countries. In addition, the Common Market Council meeting in Brasilia in December 2006 adopted a new plan of action designed to overcome internal asymmetries among the MERCOSUR countries that have proven to be especially detrimental for Paraguay and Uruguay. The plan calls for providing assistance to Paraguay and Uruguay to make their economies more competitive, facilitate access by their producers to both the regional and international markets, and reform MERCOSUR’s institutional framework to better incorporate the interests of the smaller member states. This was followed in 2008 by the creation of a MERCOSUR Fund to Support Small and Medium Sized Enterprises and the establishment of a Program for the Productive Integration of MERCOSUR. Paraguayan exports within MERCOSUR are also now subject to more liberal rule of origin requirements, and Paraguay and Uruguay both enjoy more flexibility in terms of exempting themselves from the CET and setting their own import duties. Paraguay, in particular, will likely be a major beneficiary of monies from the Fund to Finance the MERCOSUR Education Sector created in 2004 as well as programs arising under the new MERCOSUR Social Institute, the MERCOSUR Training Institute, and the MERCOSUR Democracy Observatory.


D. Full Membership by Venezuela and Bolivia in MERCOSUR In December 2005 during a meeting of the Common Market Council in Montevideo, the Bolivarian Republic of Venezuela formally sought to be incorporated into MERCOSUR as a full member. This request was accepted by the four core MERCOSUR countries and, until an agreement reflecting this reality could be drafted and executed, Venezuela was granted the right to fully participate in the deliberations of all of MERCOSUR’s institutional bodies, albeit without voting rights. On July 4, 2006, the Protocol of Adhesion of the Bolivarian Republic of Venezuela to MERCOSUR was executed in Caracas. The coincidence of the date with Independence Day in the United States was probably not coincidental as it served to highlight Venezuelan hostility to any economic integration project that emanates out of Washington, DC instead of South America. The protocol contemplates it will enter into force once it is ratified by all five signatory states. Although the Protocol of Adhesion was quickly ratified by the Venezuelan Congress in August 2006, as of January 2009 it had still not been approved by the legislatures in Brazil and Paraguay. Once the protocol does take effect, Venezuela will have at least four years to adopt the full panoply of MERCOSUR norms, including the CET. Immediate incorporation is also stymied by the fact that Venezuela, despite its formal withdrawal from the Andean Community in 2006, is still subject to the Andean intra-regional liberalization program until at least 2011. Interestingly, incorporation of Venezuela into the MERCOSUR free trade area under the Protocol of Adhesion establishes more ambitious parameters than are found in ALADI ACE No. 59, the existing free trade agreement that Venezuela has with each of the MERCOSUR countries. For example, the many tariff reduction schedules under ACE No. 59 are not expected to be fully implemented until January 1, 2018, and there are even products permanently excluded from free trade. By contrast, under the Protocol of Adhesion, Argentina and Brazil will—as a general rule—eliminate tariffs on all imports from Venezuela by January 1, 2010; Paraguay and Uruguay will eliminate them by January 1, 2013; and Venezuela will remove all tariffs on the MERCOSUR imports by January 1, 2012. For a number of important Paraguayan and Uruguayan exports, Venezuela agreed to open up its market immediately following entry into force of the Protocol of Adhesion. The protocol also includes a provision that allows for a longer phase-out period ending on January 1, 2014, for so-called sensitive products (mostly agricultural in nature). Venezuela’s decision to join MERCOSUR as a full member is eminently political. Venezuela is currently not a significant export market for the MERCOSUR countries. Brazil and, to a lesser extent, Argentina, export some value-added manufactured goods to Venezuela (mostly auto parts) as well as small amounts of agricultural goods and foodstuffs. Perhaps surprisingly, Venezuela also does not export much to the MERCOSUR countries. At the present time, only Brazil imports large amounts of oil from Venezuela, but these exports are currently miniscule in comparison to Venezuela’s global petroleum exports.


On the MERCOSUR side, the decision to admit Venezuela as a full member serves short- and medium-term economic interests. The Argentines are interested in having PDVSA, the Venezuelan state petroleum company, provide investment capital to develop off-shore oil and natural gas fields in the Patagonia and Tierra del Fuego. Meanwhile, the Brazilian state petroleum company, Petrobras, is interested in joint ventures with its Venezuelan counterpart to explore and develop new wells to extract heavy oil in Venezuela’s Orinoco River Valley that can then be exported to northeastern Brazil. Both companies have already built a U.S.$ 2.5 billion heavy oil refinery in the northeastern Brazilian state of Pernambuco. The Uruguayan state petroleum company also has a joint venture with PDVSA to develop heavy oil wells in the Orinoco and expand an oil refinery in Uruguay to process that heavy crude. Furthermore, Venezuela is contributing money to build a natural gas pipeline from Bolivia to Paraguay and Uruguay. Finally, all the MERCOSUR countries would also like to see Venezuelan President Hugo Chavez make good on his promise to build a natural gas pipeline from Venezuela to the Southern Cone (however unfeasible that may be given the huge costs entailed, not to mention serious environmental concerns). In agreeing to accept Venezuela as a full member, the MERCOSUR governments appear to have overlooked the long-term strategic downside. As a full member, Venezuela will have the right to participate with the rest of the MERCOSUR bloc in future trade negotiations with third countries. This risks complicating already difficult negotiations between MERCOSUR and the European Union to establish a transatlantic free trade area. Unlike the MERCOSUR countries, which tend to have a highly competitive agricultural sector that is willing to fully liberalize in exchange for duty-free access to the EU market, Venezuela has a heavily protected and uncompetitive agricultural sector. Opposition by Venezuelan President Hugo Chavez to negotiate any type of free trade agreement with the United States is also well known. The diplomatic spat that erupted between Brazil and Venezuela in mid-2007 over statements made by President Chavez about Brazil being subservient to Bush administration designs for South America stalled the ratification process of full Venezuelan membership in MERCOSUR in the Brazilian Congress. It is possible that this situation may cause leaders in MERCOSUR to reassess the wisdom of admitting Venezuela as a full member. In addition to the already mentioned negative impact on trade policy, full Venezuelan membership risks converting MERCOSUR from a regional economic integration project designed to facilitate the subregion’s participation in the international economy into a political counterforce hostile to the United States. In response to a request by Bolivian President Evo Morales in December 2006 that his country become a full member of MERCOSUR, a special working group was created by the Common Market Council in January 2007 to look into the issue. E. Reaching Out to the Rest of the World In 1992 the European Union agreed to provide MERCOSUR’s Common Market Council and Common Market Group with technical support. This was followed by the signing of a framework agreement between the European Union


and MERCOSUR on December 15, 1995, which called for periodic meetings between representatives of the two blocs to exchange ideas on commercial and economic matters. In addition, the framework agreement sought to facilitate trade between the European Union and MERCOSUR by enhancing cooperation between the respective customs bureaus, harmonizing quality standards for manufacturing and agricultural products, improving methodologies for statistical collection, and encouraging investment by facilitating linkages between European small- and medium-sized enterprises with their counterparts in the Southern Cone. Although there was vague language calling for a future interregional trade accord between the European Union and MERCOSUR, there was no explicit mention of establishing a trans-Atlantic free trade area nor was any date provided for when this was to occur. A Cooperation Council made up of representatives from the EU Council and Commission as well as MERCOSUR’s Common Market Group and Common Market Council was established to oversee implementation of the framework agreement. The council was assisted on technical matters by a Joint Commission on Cooperation and on trade-related issues by a Joint Subcommission on Trade. In July 1998 the EU Commission authorized the launch of negotiations for a free trade agreement between the European Union and MERCOSUR plus Chile. The fact that the European Union would want to sign a free trade agreement with MERCOSUR and Chile was logical, given that by the late 1990s the Europeans had replaced the Americans as the largest foreign investors in South America’s Southern Cone. In addition, the largest foreign trading partner for the MERCOSUR countries both in terms of exports and imports was the European Union. Furthermore, progress in the negotiations to establish a Free Trade Area of the Americas (FTAA) posed a risk to European companies of being put in the same disadvantageous position they found themselves in Mexico after the North American Free Trade Agreement (NAFTA) was signed. The actual negotiations for a trans-Atlantic free trade agreement did not commence until April 2000, however. By that time the Chileans had decided to negotiate with the European Union separately from MERCOSUR as they did not want the agriculture issue, which was much more sensitive for the MERCOSUR countries than for Chile, to delay concluding the negotiations for a free trade area with the European Union. The Chileans eventually signed a free trade agreement with the European Union in 2002. The EU-MERCOSUR negotiations were carried out under the auspices of a Committee on Bilateral Negotiations (CBN), which included representatives from the EU Council and Commission as well as MERCOSUR’s Common Market Group and Common Market Council. Under the CBN were three working groups as well as a MERCOSUR-EU Business Forum (representing private sector interests). Working Group No. 1 dealt with market access issues, including tariffs and non-tariff barriers, rules of origin, agriculture, technical norms, and unfair trade practice remedies. The second working group examined issues related to services, intellectual property rights, investment, and capital flows. Finally, Working Group No. 3 had jurisdiction over matters related to government procurement, competition policy, and dispute resolution. At a


summit of EU-MERCOSUR heads of state in Madrid in May 2002, a package of 35 trade facilitation measures (related to customs, technical norms, Ecommerce, sanitary and phytosanitary measures) were approved for immediate implementation. The EU-MERCOSUR talks for an EU-MERCOSUR free trade area, however, collapsed in late 2004. The reasons why the EU-MERCOSUR negotiations to establish a transAtlantic free trade area stagnated are similar to why the negotiations for the FTAA also collapsed. The MERCOSUR countries (particularly Brazil) were reluctant to liberalize access to services, investment, and government procurement and accept intellectual property disciplines that went beyond the World Trade Organization’s (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) agreement if the European Union was not willing to fully open its market to the MERCOSUR agricultural exports. At one point in April 2004 it appeared that the MERCOSUR countries might accept higher quota access to the European Union instead of demanding the complete elimination of EU tariff rate quotas on targeted MERCOSUR exports as well as the elimination of agricultural export subsidies. But that possibility was soon mooted by Brazil when it recognized it as an EU ploy to destroy the G-20 coalition of developing countries in the WTO talks. Until the agricultural market access and subsidies issues are resolved at the WTO level, it is unlikely that the EU-MERCOSUR negotiations can be revived. On the other hand, a collapse of the multilateral Doha Round and the revival of the FTAA or the creation of a Community of the Americas would provide the European Union with an important incentive to restart their own talks with MERCOSUR. In July 1998 the then President of the Republic of South Africa, Nelson Mandela, was invited to attend a meeting of MERCOSUR’s Common Market Council held in Ushuaia, Argentina, which also counted with the presence of the heads of state of the four MERCOSUR countries plus associate members Bolivia and Chile. This was the same session that produced the Protocol of Ushuaia on the Commitment to Democracy within MERCOSUR, Bolivia, and Chile. For the MERCOSUR countries, the presence of Nelson Mandela was intended to underscore the fact that their regional economic integration process was not intended to seal off the Southern Cone behind protectionist walls but to serve as a step towards global integration. In December 2000 South African President Thabo Mbeki was invited to participate in yet another session of the MERCOSUR Common Market Council, this time in Florianopolis, Brazil. At this session, President Mbeki signed a framework agreement for the creation of a free trade area between MERCOSUR and the Republic of South Africa. In 2002 the remaining members of the South African Customs Union (SACU); i.e., Botswana, Lesotho, Namibia, and Swaziland) were included in the negotiations. The MERCOSUR-SACU relationship is primarily motivated by politics and driven by the affinity between South Africa and Brazil as the economic and political hubs of their respective regions—particularly evident in the multilateral arena where both countries have sought to shape the WTO agenda to better suit


the developing world.28 The presence of President Mbeki at the inauguration of Brazilian President Luiz Inácio Lula da Silva in January 2003 further underscored this close political affinity. So too did the inclusion of South Africa in the G-20 alliance led by Brazil that scuttled an effort led by the European Union and the United States at the WTO Trade Ministerial in Cancun in September 2003 to force through acceptance of minimal reductions to prejudicial agricultural subsidies. Despite the commonality of interests at the multilateral level, negotiations for a free trade area between MERCOSUR and SACU dragged on inconclusively for years. One explanation was that despite the fact the Brazilian automotive sector was especially interested in seeing a conclusion to the talks, their counterparts in South Africa remained fearful that they could adequately compete in a liberalized trade environment.29 Finally, MERCOSUR and SACU signed a preferential trade agreement on December 16, 2004, although it has yet to enter into force. MERCOSUR granted preferential tariff treatment at 10, 25, 50 and even 100 percent over normal tariff rates as reflected in the CET on just under 1,000 tariff lines. SACU’s offer to MERCOSUR was similar. On the positive side, a majority of these tariff lines were subject to a 100 percent preference by both MERCOSUR and SACU. Given that most of these items already entered both blocs at very low duties anyway, however, it is doubtful that this agreement in its current form will ever lead to dramatic increases in trade flows between MERCOSUR and SACU (particularly given that the important automotive sector was excluded from coverage). Perhaps cognizant of this fact, representatives from MERCOSUR and SACU countries have met at least twice since 2004 to include additional tariff lines in their preferential market access agreement. At the last session in August 2006, a proposal was formally tabled to include the automotive sector. In 2003 the MERCOSUR countries signed a framework agreement with India to negotiate a free trade agreement. As a first step in this process, the signatories were supposed to provide preferential access for a limited number of products. In January 2004 MERCOSUR and India did sign a preferential tariff agreement, although the annexes that included the products that would benefit from reduced tariff (usually only 10 or 20 percent preference over the normal duty) or, in an extremely limited number of items, duty-free trade, were not approved until March 2005. On the MERCOSUR side, the opening consisted of a meager 452 tariff lines, while on the Indian side, it was limited to 450 tariff lines. As is true of the agreement with SACU, MERCOSUR’s agreement with India seems to be driven primarily by politics and solidifying its participation in the G-20 alliance at the WTO Doha Round. In December 2007 Israel and MERCOSUR signed a free trade agreement 28 L. White, It’s a Long Road to MERCOSUR, 18 Univ. S. Afr. Latin Am. Rep. 27 (2002). Trade flows between SACU and MERCOSUR are negligible and even began to dwindle following the 2000 signing of the framework agreement as it coincided with the onset of a severe recession throughout the Southern Cone. Id. at 25, 28. 29 See, e.g., L. White, Driving SACU-MERCOSUR: Transatlantic Cooperation in the Automotive Industry, S. Afr. Inst. Int’l. Aff. Rep. No. 34 (2003). In an effort to facilitate conclusion of the negotiations, SACU and MERCOSUR have pursued a sector-by-sector preferential market access agreement instead of an across-the-board free trade agreement. Id. at 3.


that encompasses almost all tariff lines that receive either immediate duty-free treatment or on which duties are gradually phased out over a four-, eight- or ten-year period. The rules of origin include two options for incorporating thirdcountry inputs that will still allow the product to be traded duty free between Israel and MERCOSUR. The first option is if the non-originating material undergoes sufficient working or processing in Israel and/or MERCOSUR resulting in a change in tariff classification heading at the four-digit level. The second option is if the non-originating materials used to make the final product do not exceed 50 percent of its price at the factory door (or 40 percent in the case of goods originating in Paraguay). There is also a de minimis rule that is only applicable on bilateral Israel-Paraguay and Israel-Uruguay trade in which up to 10 percent of non-originating material that does not undergo a change in tariff classification heading will be disregarded. The de minimis rule does not apply to textiles and clothing, however. Although trade in services was not included in the agreement, this possibility is left open for future negotiations. As of mid-2008, MERCOSUR has signed framework agreements that establish the parameters for negotiating a free trade agreement with Egypt (2004), Morocco (2004), Pakistan (2006), Turkey (2008), and Jordan (2008). If all these negotiations eventually lead to the type of minimal tariff reductions on a relatively small number of items that characterize the India-MERCOSUR or current MERCOSUR-SACU agreement, such a development will underscore that they are political accords designed to solidify geopolitical alliances and have little commercial significance. IV. Chile-MERCOSUR Free Trade Agreement A. Introduction The Chile-MERCOSUR Free Trade Agreement was incorporated into the ALADI framework as Economic Complementation Agreement or ACE No. 35. It is important to emphasize that Chile’s relationship with MERCOSUR is that of only an associate member. This means that Chile only participates in MERCOSUR’s intra-regional free trade scheme, but it is not part of the customs union. The Chileans had no interest in dropping their own across-the-board external tariff, which was 11 percent when ACE No. 35 was signed in June 1996 (and since dropped to 6 percent) and adopt MERCOSUR’s CET system (which at the time ACE No. 35 came into force on October 1, 1996, averaged at around 14 percent). In December 1997 the Common Market Council approved Decision 12/97 permitting Chile to participate as an observer in the various MERCOSUR institutional bodies, including the working groups of the Common Market Group when they discuss matters affecting Chilean-MERCOSUR relations. Chile has no voting privileges within any of these institutional bodies, however. Chile’s inability to shape the MERCOSUR agenda and play a direct role in formulating new rules and regulations that affect its trade relations with MERCOSUR is one very important inducement to eventually becoming a full member of MERCOSUR. An effort to do so at the start of then Chilean


President Ricardo Lagos’s term in 2000 ended in frustration when MERCOSUR made clear its reluctance to reduce the MERCOSUR CET so as to harmonize it with lower Chilean import duties. At the same time, the Chileans became increasingly reluctant to give up the freedom to independently negotiate trade agreements with any country they chose. Accordingly, by the end of 2000, Chile suspended the negotiations for full membership in MERCOSUR, even as then Brazilian President Fernando Henrique Cardoso indicated a willingness to explore reductions to the MERCOSUR CET in order to accommodate Chilean anxieties. B. Free Trade in Goods On October 1, 1996, the first in a series of gradual reductions in tariff barriers began so as to culminate in complete free trade for a majority of products traded between Chile and MERCOSUR by January 1, 2004. It is important to point out, however, that some goods already enjoyed duty-free treatment even before ACE No. 35 took effect, as a result of older ALADI agreements that Chile had with each of the MERCOSUR member states. For items such as beef, poultry, chocolate, furs and cured hides, glass, laminated iron or steel products, and certain household appliances found in Annex 2 to ACE No. 35, the tariff reductions did not begin until January 1, 2000, so as to culminate at zero on January 1, 2006. The same was true of goods found in Annex 3 (consisting mostly of textiles and shoes), as well as Annex 5. On the other hand, for products, such as beef, rice, temperate climate fruits, vegetable oils, soy, wine, jeeps and special use vehicles, and wooden furniture included in Annex 6, the tariff reduction process did not begin until January 1, 2006, and will culminate at zero on January 1, 2011. Meanwhile, for sugar, tariff reductions did not begin until January 1, 2007, and will reach zero only on January 1, 2016. In addition to the tariff reduction timetables discussed above, there are yet other rules that apply to certain countries and/or products. For example, auto parts traded between Chile and Paraguay remained subject to a preexisting ALADI agreement until December 31, 1999. Goods included in Annex 7 to ACE No. 35 had until 2011 to receive duty-free treatment, while the few items found in Annex 10 (mostly fruit or preserves) could theoretically be subject to duties indefinitely. Furthermore, tariffs charged by the MERCOSUR countries for goods imported from Chile may vary from the general rules, depending upon whether one of the MERCOSUR countries has included these goods on its list of items temporarily exempt from intra-MERCOSUR free trade. Finally, the Administrative Commission, which oversees the implementation of the agreement, was supposed to formulate before 2003 a tariff reduction schedule for wheat and mixed grains, and flour made from either, so that these products could be traded free of all tariff barriers by January 1, 2014. One of the things the Chileans were successful in obtaining from Argentina in the negotiations culminating in ACE No. 35 was a pledge to exempt Chilean imports from the 3 percent Argentine statistical tax (which eventually was reduced to 0.5 percent in response to complaints lodged with the WTO that it


was an illegal tariff). In addition, the Argentines agreed to eliminate special, additional duties that were levied in 1996 on imported textiles and footwear from outside MERCOSUR. C. Rule of Origin Requirements Annex 13 to ACE No. 35 contains the rules of origin that must be complied with in order for goods to be traded at a preferential tariff rate between Chile and MERCOSUR. The rules are more complicated than those found within MERCOSUR, for example, because Chile applies its own external tariff schedule that, in most cases, is lower than the MERCOSUR CET. Accordingly, the MERCOSUR countries wanted stringent rule of origin regulations in order to prevent Chile from becoming a backdoor conduit for importing goods into MERCOSUR from third countries and thereby undermining the CET. Goods that are native to or made wholly from products that originate in Chile or MERCOSUR are entitled to free trade treatment. So too are goods that, although not originating within Chile or MERCOSUR, are sufficiently transformed within the subregion so as to achieve a new identity under the ALADI tariff classification system (NALADISA). Certain products such as vegetable oils, textiles, and kitchen appliances are required to not only undergo a change in tariff classification heading, but must also comply with the regional content requirement. Regional content provides yet another alternative in its own right to fulfill the rules of origin for exporting duty free. Under this option, no more than 40 percent of a final product’s freight on board (FOB) price may reflect the cost, insurance, and freight (CIF) value of non-regional inputs. In addition to complying with regional content requirements, certain inputs used in specific products must originate in either Chile and/or MERCOSUR. For example, the milk used in lactate products (e.g., butter, cheese, and ice cream) must originate in the Southern Cone. Similarly, the wheat or mixed grains, barley, malt, and palm oil used in certain products (e.g., bread and soaps) must also originate within the subregion. All insecticides or herbicides must be made with active agents that were produced in Chile and/or MERCOSUR. Specific components used in a number of other items including x-ray film, glass, and paper must be produced in the Southern Cone. Clothing items such as coats, dresses, shirts, and sweaters must be made with thread and/or fibers produced in the subregion. Petrochemical and chemical products must undergo a molecular transformation within the Southern Cone that creates a new chemical identity before they will be granted intra-regional free trade privileges. For a whole series of items, such as wire, tubes, cable, screws, needles, and fillings, which contain processed iron, the processing must be carried out in Chile and/ or MERCOSUR. Goods that have only undergone packaging or assembly operations within the Southern Cone are explicitly excluded from intraregional free trade treatment, as are goods that have been “transformed” only as a result of a filtering or dilution process. Used goods are also not entitled to intra-regional free trade privileges. All goods traded between Chile and MERCOSUR must be accompanied by a certificate of origin certified under oath by the final producer or exporter.


The requirements for these certificates are very similar to those found in ALADI Resolution 252. D. Unfair Trade Practice Remedies The imposition of antidumping or countervailing duties are handled in the same manner that is permitted by the WTO. Interestingly, if one signatory state to ACE No. 35 feels that another is importing goods from third countries at below-market prices, or that these goods were purchased at subsidized prices, it can request high-level consultations among all the parties to address the issue. This clause is designed to prevent traditional sources of final products or inputs from within the Southern Cone being displaced by outsiders as a result of unfair trading practices. Goods that include inputs that benefit from duty drawback schemes may be traded between Chile and MERCOSUR duty free through January 1, 2011, so long as the final good complies with the relevant rule of origin requirements. E. Safeguard Measures ACE No. 35 permits the use of safeguard measures on trade between Chile and MERCOSUR. The actual rules on the use of safeguard measures did not come into force until January 2000, however. Safeguards can only be imposed in response to a sudden surge in importation of a product, either in absolute terms or with respect to domestic national production that actually causes or threatens to cause grave harm to the national production of similar or directly competing goods. The safeguard measure is limited to either suspending the tariff reduction schedule or reducing or suspending the preferential tariff that has been accorded that item. In theory, safeguards should normally not be imposed on goods that are already subject to free trade. On the MERCOSUR side, safeguards can be imposed by all the countries in the bloc or only those directly impacted by the sudden surge. Safeguards can remain in force for up to two years and can only be renewed once, for up to one year. The use of a safeguard also requires that the country that imposes it offer the other party a mutually agreed upon compensatory measure consisting of a tariff reduction on another product. F. Dispute Resolution The original system for resolving disputes that may arise between Chile and the MERCOSUR countries concerning the interpretation, application, or noncompliance with obligations arising under ACE No. 35 was found in Annex 14. As Article 22 to ACE No. 35 mandated, however, this mechanism had to be replaced by 1999. Accordingly, at the end of that year, the MERCOSUR countries and Chile agreed to a new system found in the Protocol on Dispute Resolution Procedures attached to Common Market Group Resolution 61/99. Article 2 to that protocol now specifically gives either Chile or the MERCOSUR countries the option to refer any trade-related disputes that may arise among them either to the WTO (so long as it has subject matter jurisdiction) or to the system established under the protocol.


Under the procedure established in the Protocol on Dispute Resolution Procedures, disputes that may arise among the signatory states should first be resolved through negotiations. If the matter cannot be resolved within 30 days (or 45 days if the parties agree to such an extension), the dispute is referred to the Administrative Commission. The Administrative Commission must meet within 30 days after a petition is submitted to it and normally has another 30 days to issue its recommendations for resolving the problem. The Administrative Commission is specifically authorized to seek the advice of a group of experts that are selected from a list of ten persons (four of these experts cannot be nationals of any of the signatory states) that each country previously submitted to the ALADI General Secretariat. If the Administrative Commission decides to seek the advice of experts (or one of the countries to the dispute demands it), each side chooses one expert and a third, who cannot be a national of Chile or the MERCOSUR countries, is chosen by mutual consent. The process for putting together the group of experts should be completed within ten days. The experts then have 30 days to issue a report to the Administrative Commission that, in turn, has 15 days to issue its final recommendations based on the conclusions of the experts. As a result of subsequent modifications to the Protocol on Dispute Resolution Procedures, if Chile and the MERCOSUR country(ies) cannot resolve a dispute following the experts’ report and the recommendations made by the Administrative Commission within a 15-day time period, the matter may be referred to binding arbitration. The arbitration panel will be made up of three members, one (plus a substitute) chosen by each side to the dispute, and the third (plus a substitute) picked by mutual consent. If there is no consensus on the third arbitrator, then he or she is selected through a lottery conducted by the Secretary General of ALADI. The third arbitrator should not be a national of Chile or the MERCOSUR countries. The arbitrators are chosen from a list of 12 persons each country previously submits to the ALADI General Secretariat (although four cannot be nationals of any of the signatories to ACE No. 35). The arbitration panel is specifically authorized to issue preliminary measures in order to prevent grave and irreparable damage. The arbitrators normally have 60 days to make a decision, although this can be extended for another 30 days. Their decision can be based on equity, and it is adopted by majority vote (with information as to how the arbitrators voted kept secret). The loosing side generally has 30 days within which to fully comply with a decision. If it does not, the other side can retaliate with appropriate compensatory measures. The same arbitral panel (at the request of a state party to the original dispute) can be recalled to decide if any compensatory measures adopted are appropriate. G. Integration of Physical Infrastructure One of the major reasons why the MERCOSUR countries were especially interested in having Chile move closer to their integration process was to facilitate access to Chile’s Pacific coast ports and, from there, the booming markets of East Asia and the Pacific Rim. This concern is reflected in Chapters XII and XIV to ACE No. 35, which obligate the signatories to execute a Protocol on Physical Integration. ACE No. 35 also requires that Chile and the MERCOSUR


countries cooperate in improving their domestic transportation infrastructure systems (i.e., surface, river, ocean, and air) so as to create a seamless bioceanic corridor running from the Atlantic to the Pacific. Article 39 to ACE No. 35 mandates that none of the signatories can impose any restrictions on the transport of goods within their respective territories (barring some recognized sanitary or phytosanitary concerns) that are made in either Chile or within MERCOSUR and are destined for third countries. In the Protocol on Physical Integration signed in conjunction with ACE No. 35, Chile and MERCOSUR agree to facilitate transport and the flow of trade through their territories and into third countries whether by land, river, water, or air. In addition, Argentina and Chile agree to undertake the investments needed to improve and/or construct 12 Andean passes connecting Chile with Argentina and the rest of MERCOSUR. The Administrative Commission will then decide which of these passes can feasibly be incorporated into bioceanic corridors and receive priority investment in terms of building highways and making other infrastructure improvements. H. Services Although not part of their original free trade agreement signed in 1996, Chile and MERCOSUR signed a Protocol on Trade in Services on June 20, 2008, that will be formally included under the umbrella of ACE No. 35. All four modes of service provision found in the WTO General Agreement on Trade in Services are liberalized. The only sector excluded is financial services. The list of what services have been liberalized is found in bilateral lists negotiated between Chile and each of the four MERCOSUR countries. In the case of ArgentinaChile, the services liberalized include: advertising, computer, construction, distribution, engineering, mail, professional, publishing, telecommunication, and tourism. In the case of Brazil-Chile, the services liberalized include: aircraft maintenance and repair, architecture, audiovisual, computers, construction, education, engineering, manufacturing, mining, and tourism. In terms of ChileParaguay, the services liberalized include: computer, distribution, education, franchises, and tourism. In terms of Chile-Uruguay, the services liberalized include: aircraft maintenance, advertising, computer, distribution, health, professional, manufacturing, mining, and tourism. I. Other Measures In terms of customs valuation of products, technical norms, sanitary and phytosanitary measures, export incentives, liberalization of trade in services, and protection of intellectual property rights, Chile and the MERCOSUR countries obligate themselves to adhere to the WTO rules. Any agreements for the protection and promotion of investments that Chile may have with the individual MERCOSUR member states remain in effect. In addition, in an attempt to further promote mutual investment, the signatories to ACE No. 35 agreed to investigate the possibility of executing a treaty to prevent double taxation. The signatories also agreed to encourage joint efforts at scientific and technological research based on preexisting agreements on


Sectoral, Scientific, and Technological Cooperation negotiated within the ALADI framework. Article 52 to ACE No. 35 contains the provisions that a signatory state must follow if it extends any sort of tariff reduction or other favorable trade arrangement to a non-signatory state that is not contemplated by the Treaty of Montevideo of 1980 that created ALADI. The signatory state entering into such an arrangement must contact the other signatories within 15 days after it does so and announce its pre-disposition to negotiate the extension of the same privileges and favors to them. If such an extension cannot be granted within the next 90 days, the parties have an additional 90 days to negotiate some type of compensatory measures. If no agreement can be reached at the end of those 90 days, the matter can be referred to the general dispute resolution mechanism. Article 52 was specifically included in ACE No. 35 to resolve the procedural void under ALADI rules when NAFTA came into force in 1994, and Mexico did not extend the same tariff concessions it granted Canada and the United States to the other ALADI member states as it was required to do so by the most-favored nation (MFN) clause in Article 44 of the Treaty of Montevideo of 1980. ACE No. 35 creates an Administrative Commission designed to oversee implementation of the free trade accord between Chile and MERCOSUR. It also plays an important role in the dispute resolution system. The Administrative Commission is made up of a representative from the Chilean Foreign Ministry’s General Directorate on International Economic Relations and the MERCOSUR Common Market Group. One of the specific tasks given to the Administrative Commission was to design a special agreement for the automotive sector in order to improve trade in motor vehicles and auto parts between Chile and MERCOSUR. Although this agreement never materialized, trade in the automotive sector has been liberalized on a bilateral level between Chile and specific countries in MERCOSUR. It is important to note that the Administrative Commission has the right to quicken the pace of trade liberalization, something that has occurred on a number of occasions since ACE No. 35 was signed in 1996. V. Bolivia-MERCOSUR Free Trade Agreement A. Introduction After a delay of two months occasioned mainly by last minute misgivings of Bolivia’s private sector over the prospect of increased competition from their bigger and better financed competitors in Argentina and Brazil, the BoliviaMERCOSUR Free Trade Agreement entered into force on February 28, 1997, as ACE No. 36. Bolivia had been actively seeking full membership in MERCOSUR since at least 1992. Membership was initially rebuffed, however, with the argument that Article 20 of the Treaty of Asuncion restricted accession to MERCOSUR to any ALADI country that was already a member of another subregional grouping until after 1996. Bolivia has, of course, been a member of the Andean Pact since its founding in 1969. Despite this fact, Bolivian membership in MERCOSUR has


always made more sense than membership in the Andean Community given that Bolivia’s trade with the MERCOSUR countries, particularly in terms of imports, is considerably greater. For example, in 1996 Bolivia exported U.S.$132 million in products to Argentina, while it exported only U.S.$127 million to fellow Andean Community member Peru, a country to which Bolivia enjoyed almost complete duty-free access. In addition, Bolivia is heavily dependent on Brazil for imports of capital goods, telecommunication equipment, agricultural machinery, textiles, and shoes. The trade accord Bolivia finally signed with MERCOSUR in December 1996 fell short of the full membership status it originally sought, but it is similar to the associate status the Chileans had earlier negotiated with MERCOSUR. Like Chile, Bolivia currently only participates in the intra-regional free trade aspects of the MERCOSUR integration program. Bolivia retains it own external duty system on goods imported from any country with which it does not already have a free trade arrangement. In addition, Bolivia does not have voting privileges in any of MERCOSUR’s decision-making bodies such as the Common Market Council or Group and the MERCOSUR Trade Commission. B. Administrative Commission Oversight over the administration and implementation of ACE No. 36 and any additional protocols that may be negotiated under it is entrusted to an Administrative Commission made up of MERCOSUR’s Common Market Group, on the one hand, and a National Commission consisting of the Bolivian Ministry of Foreign Relation’s National Secretariat on International Economic Relations, on the other hand. The Commission must meet at least once a year, and its decisions are adopted by unanimous consensus. The Commission may, inter alia, make modifications to the rule of origin requirements. ACE No. 36 also calls for the creation of a Business Advisory Committee made up of representatives of the major business associations in each signatory state who are supposed to offer the Administrative Commission their insights and suggestions. The Administrative Commission plays an important role in the dispute resolution mechanism found in Annex 11 to ACE No. 36. C. Free Trade in Goods Beginning on February 28, 1997, most products traded between Bolivia and MERCOSUR were subject to increasing preferential tariff rates that were phased in annually so that 90 percent of the tariff lines on ALADI’s NALADISA achieved duty-free status by January 1, 2006. The tariff reduction schedule for items found in Annex 5 to ACE No. 36 (i.e., sugar cane, carton boxes, telecommunications equipment, and more bulky household domestic items imported by MERCOSUR, and chicken, flour of various types, and processed fruit products imported by Bolivia) did not commence until January 1, 2005, and will not reach zero until January 1, 2011. On the other hand, products such as soy derivatives and refined sugar included in Annex No. 6, have an even longer phase-in period that begins in 2005 but does not conclude until January 1, 2014. On the other hand, products included in Annex No. 7 and consisting


of flowers, musical instruments, and books imported into MERCOSUR, as well as certain chemicals and capital goods imported into Bolivia, received immediate duty-free treatment when ACE No. 36 came into effect on the last day of February 1997. It should be noted that Bolivia can utilize the Andean Community’s price band mechanism on approximately 150 basic foodstuffs (subject to approval from the Administrative Commission). Article 3 of ACE No. 36 allows the signatory states to accelerate the agreedupon tariff reduction timetables found in the annexes. Article 4 of ACE No. 36 also includes a provision whereby the MERCOSUR countries may import from Bolivia goods at preexisting preferential tariff rates granted in previous ALADI agreements. These rates would be lower than the duty levels that must be charged for goods included in Annex 8 (i.e., goods that have still not even achieved full duty-free treatment within MERCOSUR). This provision, as well as another permitting the importation of a limited number of Bolivian-made goods into MERCOSUR with a regional content requirement as low as 40 percent until 2002, is the only special and differential treatment granted by the MERCOSUR countries to Bolivia in recognition of the country’s special less-developed country status in the ALADI context. Except for these two exceptions, ACE No. 36 otherwise maintains MERCOSUR’s position during the 1990s that no country seeking membership or associate status with the Southern Cone trade bloc could expect to receive special treatment as a result of its less-developed economic status. While the signatories to ACE No. 36 are required to eliminate all non-tariff barriers to intra-regional free trade, certain measures were retained when the agreement entered into force. The Administrative Commission was, however, supposed to review and convince the signatory states to eventually phase out as many of these non-tariff barriers whenever it was feasible. One measure that was immediately eliminated for Bolivian goods imported into Argentina on the day ACE No. 36 entered into force was the 3 percent statistical tax levied by Argentine customs authorities at the time on all imports (except those originating within MERCOSUR and Chile). Goods imported from free trade or export processing zones located within the borders of any of the signatory states to ACE No. 36 shall be properly labeled as such and will be charged the applicable external tariff levied on third-country imports. Finally, all goods imported into the territory of one signatory from another signatory state shall not be treated differently than domestic goods produced under similar circumstances for purposes of national taxes. D. Rule of Origin Requirements In order for goods to be traded between Bolivia and MERCOSUR duty free, all products must comply with the requisite rule of origin requirements found in Annex 9 to ACE No. 36. Goods that originate or are made with inputs originating within one or more of the signatory states, or are caught or otherwise found outside the territorial waters of the signatory states by a boat or company from one of them, or (as a provision for the twenty-first century) are found in outer space, may enjoy complete intra-regional free trade status.


Goods made with inputs from outside the signatory states may also be traded among them duty free if they are substantially transformed within Bolivia and/ or the MERCOSUR countries so as to achieve a new tariff classification heading under NALADISA. If no shift in tariff classification heading occurs, a good can also be traded duty free if no more than 40 percent of the final product’s FOB price reflects the CIF value of the third-country input(s). Goods made in Bolivia were allowed to comply with a more generous 50 percent regional content (or even 40 percent in the case of some items), but it was expected that even Bolivian-made items would eventually have to comply with the 60 percent regional content rule no later than January 1, 2002. Additional rule of origin requirements exist for specified products and must be complied with before these goods can be traded among the signatory states duty free. For example, lactates such as concentrated milk, yogurt, butter, cheese, and cream must be made from milk wholly produced in one or more of the signatory states. Until 2001 a whole series of agro-industrial products, including mineral water, had to be packaged with material made in Bolivia and/or the MERCOSUR countries. Various natural oils, tapes, materials found in bathrooms, stationery, toys, and most textiles bearing third-country inputs not only have to comply with the regional content requirement, but they must also undergo a shift in tariff classification heading. Certain clothing requires that it be wholly made with materials produced within MERCOSUR and/or Bolivia. A whole range of steel products must be made with iron forged or smelted within MERCOSUR and/or Bolivia. Certain telecommunications and computer equipment requires that certain inputs be made and/or assembled within the subregion. Products made exclusively with inputs that are imported from third countries and that merely undergo simple assemblage (including from knockdown kits), packaging, or processing (such as the addition of water or even the mixing of fungibles in some cases) will not be considered eligible for intraregional free trade treatment, even if they may undergo a tariff classification heading in Bolivia and/or MERCOSUR. On the other hand, more substantial assembly operations may enjoy intra-regional duty-free treatment so long as the regional content requirement can be fulfilled. In recognition of Bolivia’s membership in the Andean Community’s free trade area and MERCOSUR’s free trade agreement with Chile, the signatories to ACE No. 36 reserve the right to include inputs originating within one of the Andean Community’s member states or Chile for purposes of satisfying the regional content requirement for intra-regional free trade between Bolivia and MERCOSUR. In order to take advantage of the preferential tariff treatment accorded under ACE No. 36, all goods must be accompanied by a certificate of origin verified under oath. The requisites for the type of information these certificates must include and the organizations authorized to issue them are similar to those that exist in the intra-MERCOSUR context. So too is the procedure that must be followed if the customs authorities in the importing country suspect


fraud or other unfair play in the issuance of certificates of origin. Certificates are valid for 180 days after issuance and, if the identical type of product for which the certificate of origin was issued is being exported on a regular basis within those 180 days, it can be used for more than one export transaction. The final producer or exporter of a good is responsible for obtaining a certificate of origin from an entity authorized by the national government (e.g., chambers of commerce, etc.). E. Unfair Trade Practice Remedies Article 16 of ACE No. 36 gives one signatory state the right to complain and demand consultations of another signatory state that is allegedly receiving dumped or subsidized imports from third countries. This provision is designed to eliminate the possibility that the complainant’s exports will be replaced by the dumped or subsidized imports from a non-signatory country. Article 15 obligates a signatory state to inform the others of any antidumping or countervailing duty measure it has enacted against third-country imports. All measures adopted to combat unfair trading practices from third parties should conform to WTO mandates. Article 19 of ACE No. 36 calls for the eventual elimination of temporary entry or duty drawback regimes wherein inputs are imported from third countries into Bolivia or the MERCOSUR states, and the duty that was paid on them is reimbursed when the final good is reexported. It was originally anticipated that the final goods for which the third-country inputs received temporary entry or duty drawback privileges could not be traded duty free between Bolivia and the MERCOSUR countries after January 1, 2002. Given the difficulty in eliminating their use with respect to intra-MERCOSUR trade, however, this deadline has subsequently been extended until January 1, 2011. F. Safeguard Measures Annex 10 to ACE No. 36 includes safeguard measures that the signatory states are allowed to adopt under exceptional circumstances. Until the transition period formally comes to an end in 2014, the signatory states are permitted to either suspend the timetable for gradually eliminating tariffs or restore the original tariff rate for quantities of a particular product in excess of the average imported during the preceding three years. Safeguard measures may only be adopted when imports from another signatory country have increased in such a fashion so as to cause or threaten to cause significant harm to the domestic production of a similar or directly competing good. Article 5(b) in Annex 10 emphasizes that a “threat of grave harm” must clearly be imminent and must be based on concrete facts and not simply on the basis of allegations, conjecture, or remote possibilities. Before a government can impose a safeguard measure on goods originating in one of the other signatory states, it must notify all the other signatory states that it will carry out an investigation to determine whether there is sufficient cause to impose such measures. The signatory states should meet within 30 days following notification so as to offer their recommendations. If no agreement


can be reached, any country that feels that it will be detrimentally affected by the proposed safeguard measure may petition for convening an extraordinary session of the Administrative Commission. Safeguard measures cannot be imposed for longer than two years, but they can be extended for a total period that should not exceed four years. A country can impose a safeguard measure unilaterally if it faces a critical threat under which any delay would produce irreparable prejudicial harm. In such a situation, any type of safeguard measure that is adopted can only last for 180 days, and all the other signatory parties to ACE No. 36 must be informed within five days after it is adopted. If the other signatory states determine that the unilateral measure was unjustified, the country that unilaterally suspended or reduced the preferential tariff margin or restored the original duty must reimburse the affected parties. If the signatory states cannot resolve a problem arising from the initial application or extension of a safeguard measure, the matter can be referred to the dispute resolution mechanism found in Annex 11 to ACE No. 36. G. Dispute Resolution Annex 11 to ACE No. 36 contains the procedure for resolving all disputes that may arise as a result of controversies over the interpretation, application, or non-compliance with provisions of ACE No. 36 or any subsequently negotiated instruments or protocols. The parties to a dispute should first try to resolve the matter though consultations and direct negotiations. Notification of the commencement of such negotiations shall be made to the Administrative Commission. Those negotiations should be completed within 30 days after notice is given to the Administrative Commission, although an additional extension of up to 30 days is permitted if the parties so agree. If no resolution is forthcoming within the allotted time period, any of the parties to the dispute may request, in writing, the intervention of the Administrative Commission. The Administrative Commission should meet within 15 days following receipt of the request for its intervention and should conclude its deliberations within 45 days thereafter (unless the parties agree to a longer time period). The parties to a dispute are allowed to present all the material and arguments supporting their position. If the Administrative Commission feels it cannot issue a decision on its own, it can call for assistance from an ad hoc Group of Experts. The ad hoc Group of Experts shall consist of three individuals who should be convened within ten days after a solicitation from the Administrative Commission. Each side to the dispute shall designate one expert (as well as an alternate) from a pre-selected list of experts. The third expert (and an alternate), who presides over the group’s meetings and cannot be a national of any of the countries to the dispute, shall be chosen by mutual consent. He or she does not necessarily have to be picked from the pre-selected list of experts filed by each government with the Administrative Commission. If the parties cannot agree on the third expert or fail to select their own expert within the


ten-day period allowed for the Group of Expert’s formation, he or she shall be chosen by the Administrative Commission through a lottery. The costs of the experts shall be borne by the party that chose them, and the third expert’s costs shall be split among the disputing nations in equal amounts. Each country is entitled to nominate eight people for inclusion in it’s Group of Experts who are competent to resolve trade and other related matters, as well as eight people for the list of competent third-country experts. The Group of Experts will make their recommendations based on the previsions of ACE No. 36, the additional protocols and other instruments signed under its auspices, and the information provided by the disputing parties. The Group of Experts will adopt its own rules of procedure for each matter it reviews within five days after its formation, and those rules should guarantee that each side has ample opportunity to be heard in an expeditious manner. The Group of Experts must submit its findings to the Administrative Commission within 30 days after its creation. The Administrative Commission, in turn, has 15 days after receipt of the Group of Experts’ findings to issue its recommendations to the parties with respect to the dispute and to insure that they are implemented. The dispute resolution system found in Annex 11 of ACE No. 36 was modified in 2001 with the addition of a third level open to the state parties if the Administrative Commission advised by the Group of Experts is unable to resolve the dispute. This third level consists of an arbitration panel made up of “jurists of recognized competence in the matters that can be the subject matter of a dispute.” The arbitrators are authorized to issue preliminary injunctions as well as provide equitable relief. The arbitration panel retains jurisdiction to oversee implementation of its original decision, including differences of opinion as to whether retaliatory measures adopted in response to non-compliance with an arbitral decision are excessive. H. Other Measures The customs valuation system used by the signatories to ACE No. 36 is the same as that mandated by the WTO Customs Valuation Agreement. The signatories agree not to adopt technical norms, sanitary and phytosanitary rules, environmental regulations, and related measures to create unnecessary obstacles to trade. The imposition of technical norms, sanitary and phytosanitary measures shall be governed by the WTO Agreement on Technical Obstacles to Trade and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures. The signatory states also agree to facilitate and encourage joint ventures in the scientific and technological fields, including joint investigations. Chapter XI of ACE No. 36 encourages the signatory states to complement their public and private sector’s productive capabilities and encourage transnational joint ventures in the production of goods and in the provision of services. Article 33 of ACE No. 36 specifically requires that each signatory implement measures designed to facilitate the cross-border provision of services. In order to further facilitate cross-border business transactions, the parties agreed to examine the possibility of signing an agreement on the promotion and protection of foreign investment and treaties avoiding double taxation.


In conjunction with the execution of ACE No. 36, an Additional Protocol on Physical Integration was signed by Bolivia and MERCOSUR that calls for the establishment of bioceanic corridors through Bolivia and the improvement of road, river, rail, and air connections between Bolivia and the MERCOSUR countries. Article 42 to ACE No. 36 allows those provisions found in previous ALADI bilateral agreements Bolivia enjoyed with each of the MERCOSUR countries to remain in effect so long as they do not contradict or otherwise conflict with the provisions of ACE No. 36. Pursuant to Article 43 of ACE No. 36, if any signatory state enters into a type of agreement not contemplated in the Treaty of Montevideo of 1980 (e.g., a free trade agreement with a non-ALADI country), that country has 15 days to inform the other ALADI states of its actions, and, within 90 days thereafter, it must negotiate and offer the same or similar concessions to the other ALADI members. If these concessions cannot be granted, the signatories shall have an additional 90 days to negotiate some sort of equivalent compensation and, failing this, the matter can then be turned over to the general dispute resolution mechanism. VI. MERCOSUR-Peru Free Trade Agreement A. Introduction On August 25, 2003, representatives of the governments of Peru and the four MERCOSUR countries, in the presence of Presidents Alejandro Toledo of Peru and Luiz Inacio Lula da Silva of Brazil, signed an agreement that makes Peru an associate member of MERCOSUR. In addition to gradually establishing a free trade area of goods between Peru, on the one hand, and MERCOSUR, on the other, the agreement seeks to improve infrastructure links in order to expand intra-regional trade and international exports. The agreement also promotes complementation and cooperation in the energy field, cooperation in scientific and technical research and development, and the promotion of cross-border investment through, inter alia, the eventual signing of treaties to avoid double taxation. There is a general obligation for the signatories to adhere to the TRIPs Agreement and the Convention on Biological Diversity, and to “develop norms and disciplines to protect traditional knowledge.” Although it was originally intended that the Peru-MERCOSUR agreement would enter into effect by November 1, 2003, as ALADI ACE No. 58, it did not actually do so until December 2005 (and not until February 2006 in the case of Paraguay). One explanation for the long delay was a last-minute disagreement between Peru and Uruguay over certain items included in their respective list of sensitive products subject to a longer phase-out period of duties. It also did not help that crucial Annexes to ACE No. 58 (including the tariff reduction schedules) had not even been negotiated when it was signed in August 2003. Interestingly, while ACE No. 58 is designed to replace any previous ALADI agreements that may have existed between Peru and the four MERCOSUR countries, certain provisions in these older agreements remain in effect so long


as they do not contradict provisions found in the newer agreement. This means that it is still necessary to refer to these older agreements (including ACE No. 39 and 48 as well as Renegotiated ALALC Agreements No. 20 and 33) in order to determine what provisions may still be in effect. Article 39 to ACE No. 58 contains a specific provision in the event any of the signatories enters into a trade agreement with a non-ALADI country. Its terms will be applicable to Peru as it signed a bilateral free trade agreement with the United States that is now expected to come into force in 2009. In the future, this provision can also be used by Peru if MERCOSUR ever completes its long-standing negotiations with the European Union to establish a transAtlantic free trade area. Pursuant to Article 39, any country that enters into a non-ALADI trade agreement has 15 days to inform the others thereafter. The country then has 90 days to extend the same, more favorable concessions made to non-ALADI country(ies), or to negotiate a mutually satisfactory and equivalent level of compensation. If the matter cannot be resolved through negotiations, the issue of what is an equivalent measure of compensation can be referred to the general dispute resolution mechanism. B. Free Trade in Goods The general tariff reduction schedule is laid out in Annex II to ACE No. 58 and is divided into at least three major schedules: one for trade between Argentina and Brazil, on the one hand, and Peru, on the other; a second schedule for bilateral trade between Paraguay and Peru; and a third schedule for trade between Peru and Uruguay. Each of those three major schedules is, in turn, broken down into separate tracks depending upon the particular tariff classification heading of the product or the specific country involved (including bilateral differences between Argentina-Peru and Brazil-Peru). It is also important to note that a not insignificant group of products received immediate duty-free treatment as soon as ACE No. 58 came into effect. The general preferential tariff margin granted by Argentina and Brazil to PeruUntil (over the normalBeginning tariff rates on file Beginning with the WTO in Geneva) as follows: Beginning Beginning Beginning Beginning isBeginning 12/31/04

1/1/05

1/1/06

1/1/07

1/1/08

1/1/09

1/1/10

1/1/11

30%

40%

50%

60%

70%

80%

90%

100%

The general preferential tariff margin granted by Argentina and Brazil to Peru is above, while below is Peru to Argentina and Brazil. Until Beginning Beginning Beginning Beginning Beginning Beginning Beginning Beginning Beginning 12/31/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13 15%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Depending on the product, additional tariff reduction schedules are established that, on the Argentine and Brazilian side, began on January 1, 2006,


and run through January 1, 2015. On the Peruvian side, the tariff reductions began before January 1, 2006, but run as late as 2015 or 2018. In addition, for a small set of agricultural products deemed to be extra sensitive, the tariff reduction schedule did not begin until January 1, 2008, and will teach zero in 2018. In the two and a half or so years between the time ACE No. 58 was signed and when it actually came into force, Argentina added quota restrictions on certain Peruvian imports, including adhesive tape, textiles, and clothing. Likewise, Peru reserved the right to impose quotas on the importation of meat from Argentina. Hidden in the appendices to Annex II is the fact that Argentina, Brazil, and Peru have excluded sugar and ethyl alcohol from receiving any type of preferential tariff access into their respective markets. The general preferential tariff margin granted by Paraguay to Peru, and vice versa, began on December 31, 2005, and culminates with a 100 percent preference on January 1, 2012. The actual preferential tariff margin charged during any of those intervening years, however, varies by country. Meanwhile, Peru and Uruguay have two general preferential tariff margins that are identical in terms of the annual preference each country offers the other. Both schedules began before December 31, 2005, but one is phased in over a fiveyear period and culminates at zero on January 1, 2009, while the second is for seven years and reaches zero duties as of January 1, 2011. For all three countries, additional tariff reduction schedules began before December 31, 2005, but do not culminate in a 100 percent preferential tariff margin until January 1, 2017. There are also instances in which a tariff reduction schedule for a particular product does not commence until some years after ACE No. 58 came into force (usually either in 2008 or 2010). A whole range of textile and apparel goods traded between Paraguay and Peru as well as between Peru and Uruguay are excluded from any type of preferential tariff treatment, as are certain steel products traded between Peru and Uruguay, until specific rules of origin can be negotiated for these items. Peru has also imposed quotas on yellow hard corn imported from Paraguay and has reserved the right to do so on imports of Paraguayan beef. Furthermore, Peru and Paraguay mutually excluded sugar and ethyl alcohol from receiving any type of preferential tariff treatment. For its part, Uruguay reserved the right to impose quotas on certain Peruvian textile items made from alpaca wool. Peru, in turn, imposes quotas on the importation of Uruguayan tractors and trucks (a rather bizarre restriction given that Uruguay currently manufactures neither). Peru and Uruguay have also agreed to mutually exclude sugar and ethyl alcohol from preferential tariff treatment. It should be pointed out that any preference granted for certain lactate and agricultural products such as rice is based on specific tariff rates found in Annex I to ACE No. 58. These are frozen and not subject to subsequent tariff reductions. Because Peru had preexisting ALADI agreements with all four countries of MERCOSUR on a bilateral basis prior to the entry into effect of ACE No.


58, these goods received duty-free treatment over a wide-ranging period that began at the end of 2004 and extend through January 1, 2013. The agreement between Peru and MERCOSUR requires that all taxes be removed from the bilateral exchange of new and unused products, including the tax Brazil levies on goods imported by ship to support its Merchant Marine as well as Argentina’s statistical tax. The only exceptions to the tax elimination rule are those fiscal measures specifically included in Annex III to ACE No. 58. Annex III also includes specific legislative requirements that are not waived as a result of the entry into force of ACE No. 58 (including the need to present Customs with technical compliance and consumer quality certificates, prohibitions on the importation of certain chemicals, drugs, etc.). Finally, the signatories also agree not to levy any new taxes on exports destined to each other as of the date the agreement comes into effect, except for those export taxes that were already being levied before 2005 and are listed in Annex IV to ACE No. 58. C. Rule of Origin Requirements Annex V to ACE No. 58 contains the rules of origins that all products traded between the MERCOSUR countries, on the one hand, and Peru on the other, must fulfill in order to enjoy the benefits of bilateral free trade. In general, in order to receive duty-free treatment: 1. Goods must originate wholly within the territory of one of the signatories (including fish caught outside of territorial waters by the duly registered ships of companies incorporated in one of the signatory states); 2. Goods must be made within a signatory with inputs from any of the five signatory states; 3. Goods must be made within a signatory with third-country inputs, so long as each input is sufficiently transformed within the territory of a signatory so as to acquire a new tariff classification heading; or 4. Goods must be made within a signatory with third-country inputs, so long as the CIF value of the foreign inputs do not exceed 50 percent of the product’s FOB value in the first three years after ACE No. 58 comes into effect, 45 percent in the fourth, fifth, and sixth years, and 40 percent from the seventh year forward. This can even include goods that are merely assembled (such as automobiles). For purposes of accumulation of regional value, Bolivia is deemed to be a signatory to ACE No. 58 (given that both Peru and MERCOSUR have preexisting free trade agreements with that country) as well as the other three members of the Andean Community (Colombia, Ecuador, and Venezuela) that signed a free trade agreement with MERCOSUR in October 2004. Annex V to ACE No. 58 also includes special rules of origin for certain products regardless if they meet the criteria listed above. For example, cheese must be made with milk produced in one of the signatory states. In addition,


there are appendices to Annex V that include special rules of origin that only apply to goods traded by Argentina and Brazil with Peru, Paraguay with Peru, and Uruguay with Peru. All goods traded between Peru and the MERCOSUR countries must be accompanied by a certificate of origin in order to take advantage of the preferential tariff arrangement created by ACE No. 58. The certificates of origin issued by the relevant, authorized entities under the oath of the exporter and/ or producer should follow the format established in ALADI Resolution 252. Certificates of origin should be issued within five days after a request is made and are normally valid for a single shipment for up to 180 days thereafter. Any doubts by a Customs Service about the authenticity or validity of a certificate of origin should normally be handled by allowing the good to enter, upon payment of the normal tariff rate or upon the posting of a bond by the importer. The Customs Service can then follow up with the relevant authorities in the country of origin to exchange information in order to make a final determination as to the validity of any certificate of origin. An elaborate procedure is established for carrying out investigations whenever the mutual exchange of information is insufficient to establish the validity of a certificate of origin. As part of this investigation process, the authorities in the importing country may make on-site inspections of any relevant production facilities in the country of export. Depending upon the seriousness of the offense, any intentional misuse of certificates of origin can be punished by suspending the culpable producer and/or exporter from cross-border trade for 18 to 24 months (or longer). It can also lead to permanent suspension in cases of recidivism. Furthermore, sanctions can be imposed on issuers that are negligent or have engaged in intentional wrongful behavior, as well as against importers. D. Unfair Trade Practice Remedies Unlike the situation that is eventually contemplated for intra-MERCOSUR trade, ACE No. 58 permits the continued use of antidumping and countervailing duties on bilateral trade flows between Peru and MERCOSUR, so long as any decision to impose them is in compliance with WTO obligations. In the event a signatory decides to impose an antidumping or countervailing duty on goods coming from a third country that is not a signatory to ACE No. 58, that government must inform all the other signatories. The signatories to ACE No. 58 are also required to notify each other of any changes made to their own domestic antidumping and countervailing duty legislation. All the signatories to ACE No. 58 agree not to provide their domestic agricultural producers with any type of export subsidies earmarked for bilateral trade. They also agree not to provide any type of subsidies for industrial goods that are directed to bilateral trade, in compliance with their general WTO obligations. Subsidized goods are specifically excluded from bilateral free trade. In addition, any country that feels that another signatory to ACE No. 58 is subsidizing the export of any of its products has the right to demand detailed


information. This information must be provided within a 15-day time frame. Once this information is received, the affected countries are required to engage in consultations within a 30-day time frame. If these consultations determine that a product or group of products has benefited from illegal subsidies, the detrimentally affected country(ies) has the right to suspend any preferential tariff treatment otherwise granted to those goods by ACE No. 58. E. Safeguard Measures The safeguard measures that can be used on bilateral trade flows between MERCOSUR and Peru are outlined in Annex VI to ACE No. 58. These measures are in addition to those permitted by Article XIX to the GATT and the WTO Agreement on Safeguards. Safeguard measures can be requested by one or more countries of MERCOSUR and can be imposed on imports from Peru so long as they can establish actual grave harm or threat of grave harm. On the other hand, Peru can only impose a safeguard measure against imports from the member state responsible for the harm or threat of harm and not on the entire MERCOSUR bloc. Before a safeguard measure is imposed, there must be an investigation, which is initiated after the filing of a petition by a sufficiently significant domestic producer of like or similar products. Safeguard measures can consist of either the suspension of a tariff reduction schedule or the reimposition of previously lifted tariffs in whole or in part. Any suspension or increase in tariffs will generally not be applicable to a level of imports equivalent to the average amount of the particular product imported for the three years immediately preceding the sudden surge. Safeguard measures can be imposed for a maximum of two years, with a single one-year extension. Normally an entire year must elapse before a safeguard measure can be reimposed on the same product. Preliminary safeguard measures can also be imposed under exigent circumstances, but only for a 180-day period. Any preliminary safeguard that is subsequently determined to be unjustified will result in the immediate refund of any higher tariffs that may have been paid. Any disputes arising over the imposition of a safeguard measure shall first be handled by the Administrative Commission that oversees implementation of ACE No. 58. Any disputes it cannot resolve shall, in turn, be referred to the general dispute resolution system. Annex X to ACE No. 58 permits Argentina, Brazil, and Peru to impose a special safeguard regime on a small group of mostly foodstuffs (i.e., meat, lactate products, fruit, rice, vegetable oils, sugar, etc.) traded between Argentina-Peru or Brazil-Peru as they become subject to increasing preferential tariff margins. F. Technical Norms, Sanitary and Phytosanitary Measures Annex VIII to ACE No. 58 contains the general rules for preventing technical norms and regulations, as well as the mechanisms for ensuring compliance with these norms, from becoming unnecessary barriers to free trade. Among one of the specific commitments is not to apply more rigorous


technical obligations on imports from other signatories than those imposed on domestic producers (i.e., national treatment). The signatories are encouraged to enter into agreements that mutually recognize compliance certifications issued by one of their respective national bodies with respect to technical norms. Disputes on whether the enforcement of a technical norm is causing an unnecessary barrier to trade should be handled through direct consultations among the affected governments and, failing that, through the general dispute resolution system. The signatories are also obligated to exchange information on proposed changes to current legislation and provide an adequate time for discussion and review (i.e., normally 60 days). The rules for imposing sanitary and phytosanitary measures on bilateral trade are found in Annex IX to ACE No. 58. As a general rule, the state parties are bound by the rules of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures. In addition, any sanitary or phytosanitary norm must be based on scientific principles and evidentiary support. The signatories are encouraged to reach agreements that recognize the equivalency of different national sanitary and phytosanitary standards. A country is required to provide all the signatories with at least a 60-day notice of any intention to issue new national sanitary and phytosanitary standards. Disputes between signatories regarding their obligations under Annex IX can either be resolved through direct consultations or by referral to the general dispute resolution mechanism. G. Dispute Resolution Annex VII to ACE No. 58 contained the original procedure for resolving any disputes that might arise between one or more members of MERCOSUR, on the one hand, and Peru, on the other hand, over the “interpretation, application and non-compliance with the provisions contained within . . . [ACE No. 58] and the instruments and protocols that are executed or that may be signed within its scope.” Annex VII was modified by a subsequent protocol executed by MERCOSUR and Peru. Under the current dispute resolution system, Peru and the MERCOSUR countries have the option to refer any dispute that may also fall within the WTO’s purview to the WTO dispute resolution system or to the system established under ACE No. 58. Once a choice of forum is made, however, the parties are bound by that decision. As a first step in the system established by the Protocol on Dispute Resolution, the parties are required to resolve their controversy through direct negotiations. These negotiations should take no longer than 30 days (unless the parties agree to extend them for another 15 days). If the negotiations prove fruitless (or the matter can only be resolved in part), either side can request in writing a meeting of the Administrative Commission. The Administrative Commission has within 30 days after the filing of this request to convene in order to discuss the dispute. The Administrative Commission shall allow both sides to present their positions and should issue its recommendations within 30 days after its first meeting. Whenever deemed necessary, the Administrative Commission can request the formation of an ad hoc Group of Experts to advise it in drafting its recommendations on how to best resolve the dispute.


If one of the sides to the dispute fails to adopt the recommendations made by the Administrative Commission, or if the time periods for meeting or issuing recommendations are not met by the Administrative Commission, either side can request that the matter be referred to a panel made up of three arbitrators. Each side to the dispute gets to select one arbitrator and an alternate from a list of ten arbitrators it has previously filed with the ALADI General Secretariat in Montevideo. The arbitrators should be jurists of recognized competence. The third arbitrator is picked by mutual agreement and cannot be a national of either side to the controversy. If the 15-day time limit for designating an arbitrator is not met and/or the two sides cannot agree on the third arbitrator, then the selection is made through a lottery by the ALADI General Secretariat. The arbitrators have the authority to issue preliminary injunctive relief in order to prevent grave and irreparable harm. The arbitrators shall base their final decisions on the provisions of ACE No. 58, other legal instruments signed within its framework, and relevant principles and provisions of applicable international law. The arbitrators can also issue an award based on equity if both sides to the dispute so agree. The arbitrators have 60 days (extendable for an additional 30-day period) following formation of the panel to issue their decision. Arbitration awards are by majority vote and shall be in writing and cannot include a dissenting opinion. How each arbitrator actually votes remains secret. Arbitration decisions are final and cannot be appealed and have the effect of res judicata. An arbitration award must be complied with within 60 days after its issuance, unless the panel of arbitrators specifies otherwise. Any party to the dispute has 15 days following the issuance of an arbitration award to request clarification or guidance as to how it should be implemented. The arbitration panel then has an additional 15 days to respond. If one of the sides fails to comply with an award or does so only partially, the complaining party can notify the recalcitrant party in writing of the benefits equivalent to the harm inflicted that it intends to temporarily suspend, in order to force compliance. If the non-compliant side feels that the proposed suspension of benefits is excessive, it can request that an arbitration panel (ideally the one that made the original award) issue its opinion as to the appropriateness of the benefits proposed for suspension. The arbitration panel has 30 days following its first meeting to issue its findings. H. Administrative Commission Implementation of ACE No. 58 is overseen by an Administrative Commission made up of the Common Market Group for MERCOSUR, and the Peruvian Vice-Minister of International Trade. The Administrative Commission is required to meet at least once a year, and all decisions require the consensus of all the signatories of ACE No. 58. Among the specific tasks of the Administrative Commission is to make any revisions or modifications to the rule of origin requirements. As previously noted, the Administrative Commission also plays an important role in the dispute resolution system.


I. Conclusion Despite language found in the preamble of ACE No. 58 indicating it covered the free trade of services between Peru and MERCOSUR, no commitments were actually made in the body of the text with respect to the liberalization of specific services. In addition, ACE No. 58 left for future discussion how to treat goods that originate in a free trade or export processing zone (something that Brazil and Peru finally reached an agreement on in late 2005, but no one else yet). These omissions can be attributed to the rush to sign a MERCOSUR-Peru Free Trade Agreement for political reasons. On the one hand, then President Toledo of Peru was desperately looking for initiatives in 2003 that might improve his rock bottom popularity ratings in the single digits among Peruvians, while President Lula da Silva of Brazil wanted to solidify MERCOSUR’s negotiating position in the FTAA negotiations and underscore the priority his new government attached to improving Brazilian relations with Latin America. VII. Andean Community-MERCOSUR Free Trade Agreement A. Introduction After several years of seemingly endless negotiations and premature announcements that an agreement was imminent, the remaining three members of the Andean Community finally followed Bolivia and Peru in signing a free trade agreement with MERCOSUR on October 18, 2004. In this way Colombia, Ecuador, and Venezuela also became associate members of MERCOSUR. It is important to point out, however, that the actual tariff reduction schedules and rule of origin requirements for goods are the result of separate, bilateral agreements between Colombia, Ecuador, and Venezuela with each of the four MERCOSUR countries. This is partially the result of the fact that the CET in both the Andean Community and MERCOSUR have still not been fully consolidated, and so neither bloc was in a position to make a single offer binding on all their members. To add further confusion to this scenario, the date the 12 bilateral free trade agreements actually entered into force was not uniform and ranged anywhere from January 5, 2005, through April 19, 2005. Interestingly, provisions of older bilateral ALADI agreements among the seven signatory states remain in effect so long as they are not replaced or do not contradict current obligations arising under the subsequent Andean Community-MERCOSUR agreement. The Andean Community-MERCOSUR Free Trade Agreement, also known as ALADI ACE No. 59, has been criticized by some trade specialists as a victory of political expediency that does little to facilitate new opportunities for the private sector. The administration of Brazilian President Luiz Inácio Lula da Silva seemed especially anxious to close a deal that would enhance MERCOSUR’s position (and, ipso facto, that of its largest member) in the international trading arena. Accordingly, the Brazilian negotiators were even willing to make changes in MERCOSUR’s own internal rules of origin so as to secure a deal.30 The end 30 The MERCOSUR countries acknowledged as much in Common Market Council Decision 41/03, which notes that the rules of origin being negotiated in the Andean Community-


result is a trade agreement of Byzantine complexity that undermines rather than enhances transparency and facilitates new opportunities for the private sector. B. Free Trade in Goods As part of their obligations to reduce and eliminate tariff barriers, Argentina exempted Colombian, Ecuadorian, and Venezuelan imports from paying its statistical tax, while Brazil exempted the three Andean countries with payment of its hefty tax on imports to support its Merchant Marine. All the signatories to ACE No. 59 were required to exchange lists of non-tariff measures such as non-automatic licenses and outright import bans or registration requirements that can serve as impediments to free trade within six months after ACE No. 59 came into force. There are up to six general tariff reduction schedules for Colombian and Venezuelan exports to Argentina, Brazil, Paraguay, Uruguay and vice versa as well as a seventh general tariff reduction schedule for some Argentine products imported from Colombia and Venezuela. Similarly, there are up to seven general tariff reduction schedules for Ecuadorian exports to Argentina, Brazil, Paraguay, and Uruguay as well as six general schedules for imports from Argentina, Brazil, and Uruguay (seven from Paraguay) into Ecuador. Tariffs were reduced to zero for some products immediately after ACE No. 59 came into force, while the majority of products reach zero at different dates that can be as late as January 1, 2018, and are usually implemented in fairly linear fashion. The latest tariff phase-out is for a small group of “sensitive” agricultural products (i.e., in the case of the Andean countries, the150 or so agricultural tariff lines subject to the Andean Community’s price band mechanism). While preferential tariff treatment for the majority of goods begins from the moment ACE No. 59 comes into force, there are a significant number of products for which the tariff reduction schedule did not begin until later. Because these commencement dates are exceptions to the six or seven general tariff reduction schedules, it is essential to examine the precise treatment accorded specific tariff lines in each of the seven countries. In general, tariff reduction schedules reach zero at a faster pace for Argentina and Brazil than for the other five countries. This difference (also evident with respect to the rules of origin) marks an acceptance by Brazil of the concept of “special and differential treatment” for smaller economies. Ironically this was a concept Brazil traditionally resisted, both in terms of MERCOSUR and in the context of the FTAA negotiations. In reviewing the specific treatment afforded a particular tariff line in each of the seven countries, one is also able to uncover many examples of MERCOSUR Free Trade Agreement will be more liberal than those within the MERCOSUR. Accordingly, Article 1 of Decision 41/03 allows the MERCOSUR countries to apply the same origin rules to intra-MERCOSUR trade as that offered to third countries. In addition, Article 2 indicates that for purposes of determining local content, the inputs of the Andean Community and the MERCOSUR are to be deemed fungible once ACE No. 59 comes into force.


hidden protectionism that riddle ACE No. 59. For example, sugar is currently exempt in most of the countries from preferential tariff treatment until future negotiations. For still other products, an initial preference may be granted, but further reductions in the tariff to zero are subject to future negotiations such as establishing new rules of origin for that particular good. This is the case for most auto parts, clothing, steel products, and textiles. Tariff rate quotas (TRQs), a rarity in traditional Latin American trade agreements, also apply for a significant number of agricultural products. This means that the Andean countries, for example, offer meat and lactate products imported from the MERCOSUR countries at either fixed or increasing preferential tariff treatment below a certain cap. Anything imported above the cap receives a reduced preferential tariff or is simply charged the general MFN duty. While the quantitative limits are normally fixed, there are instances where the cap is gradually raised over time. In the case of Ecuador and Venezuela, the quotas are assigned to each of the four MERCOSUR countries. Colombia, on the other hand, imposes the quota on meat for the entire MERCOSUR as a group and lets them negotiate among themselves as to how they will divide up that quota. Colombia also imposes TRQs on Argentine and Brazilian candy. Although TRQs are generally not used by the MERCOSUR countries on imports from the Andean countries, Argentina has imposed them on Colombian auto parts, candy, and fruit jams. Among the tariff lines subject to immediate duty-free trade upon ACE No. 59’s entry into force are Colombian asparagus, cacao butter, graphic art, flowers, and shrimp imported by Argentina; Colombian bedding, cement, children’s books, coal, films, flowers, fuel oil, salt, tires, toys, and vaccines imported into Brazil; some Colombian petrochemicals imported into Paraguay; and certain Colombian auto parts, machinery, medical equipment, paper products, and pharmaceuticals imported into Uruguay. On the other hand, Colombia grants immediate duty-free treatment to Brazilian artwork and recordings, shrimp, and seeds; Paraguayan barbecues and lamps; and Uruguayan seafood. Meanwhile, Ecuador provides immediate duty-free entry to Argentine petrochemicals and Paraguayan auto parts, while Argentina grants similar treatment to Ecuadorian tropical fruit pulp and seeds, and Uruguay does so for Ecuadorian cookies. Venezuela grants immediate duty-free entry upon ACE No. 59’s entry into force to a wide variety of Argentine, Paraguayan, and Uruguayan fruits, seeds, and vegetables, while Argentina does the same for Venezuelan seeds and tropical fruit pulp. C. Rule of Origin Requirements The rules of origin are found in Annex IV to ACE No. 59. Goods that originate wholly within the territory of one or more of the seven signatory states (plus Bolivia and Peru) are eligible for duty-free treatment. So too are goods made with foreign inputs, so long as they undergo a substantial transformation within the territory of one or more of the seven signatory states (plus Bolivia and Peru) as reflected in a complete shift in tariff classification heading at the initial four number level. Goods containing foreign inputs that do not meet the substantial transformation test (including products that are merely assembled)


may still qualify if the CIF price of the foreign inputs does not exceed a certain percentage of the final product’s FOB price. In the case of goods originating in Argentina and Brazil, the CIF value of the foreign input(s) cannot exceed 40 percent of the final product’s FOB value. In the case of goods originating in Colombia, Venezuela, and Uruguay, the CIF value of foreign inputs cannot represent more than 50 percent of the final product’s FOB price until the seventh year after the entry into force of ACE No. 59. From the seventh year forward, the CIF value of the foreign inputs should not exceed 45 percent of the product’s FOB price, and the three countries are required to examine the possibility of reducing this to 40 percent. In the case of goods originating in Ecuador and Paraguay, the CIF value of foreign inputs can represent up to 60 percent of the final product’s FOB value, but this percentage must drop to 55 percent in the sixth year after the agreement’s entry into force and to 50 percent in the tenth year.31 After the tenth year, Ecuador and Paraguay are required to consider dropping the foreign content requirement to 40 percent. ACE No. 59 also contains specific rules of origin for particular products that take precedence over the general rules. This is most notorious in the automotive sector where passenger automobiles and trucks made in Argentina and Brazil must fulfill a 60 percent regional content requirement, and those made in Paraguay and Uruguay must fulfill a 50 percent regional content requirement. In the case of passenger automobiles and trucks produced in Colombia and Venezuela, however, the regional content requirement started at 30.4 percent in 2005 and increases annually until it reaches 36.5 percent in 2011. For Ecuador, the corresponding percentages were 21.4 percent in 2005 and increasing annually to 25.5 percent by 2011. After 2012, Colombia and Venezuela are required to consider raising the regional content requirement to eventually reach 50 percent by 2017, while Ecuador should attempt to fulfill a target of 37.5 percent. Even more liberal percentages incorporating higher foreign content exist for truck or bus chasses and new models. Auto parts that cannot meet the wholly produced or substantial transformation rules can still be traded duty free if, in the case of imports into the four MERCOSUR countries, no more than 55 percent of the final product’s FOB price represents the CIF cost of the foreign inputs. For Colombia and Venezuela, the corresponding percentages vary depending on the exact product and ranges from 50 or 55 percent through 2011 (and 50 or 45 percent, respectively, thereafter), while for Ecuador it ranges from 55 to 60 percent. Other specific rules of origin are particular to the two countries involved and may include requirements that all cheese be made with milk produced in one of the two countries (regardless if it meets the substantial transformation or general regional content requirements) or a yarn-forward rule for textile and apparel products. Interestingly, there are even products (e.g., some chemicals and textiles) that had no defined rule of origin when ACE No. 59 came into effect. Instead, the Administrative Commission was supposed to define the rule 31 Given Paraguay’s status as a landlocked country, the CIF value is calculated at the first port within the territory of one of the seven signatory states where the goods are offloaded.


by January 1, 2006 (or even later). This meant that there was no preferential treatment for this product until a particular rule of origin was drafted. In still other cases, an initial tariff preference was accorded a product, but this could be frozen or even dropped if the countries could not agree in the future to devise a new rule of origin for that good. All products that seek to take advantage of the free trade program of ACE No. 59 must be accompanied by a certificate of origin issued by a government body or its designated agent and should normally be shipped directly from the country of export to the country of destination. The certificate is issued upon a sworn statement of compliance with the rules of origin made by the producer and/or exporter. The certificate of origin is valid for 180 days after issuance and cannot pre-date the drafting of the underlying Invoice. Doubts over the authenticity of a certificate of origin or the validity of the information contained therein, cannot be resolved by prohibiting the importation of the good. The good must be admitted, albeit upon the posting of a bond. Annex VI does provide, however, for consultations among the relevant customs authorities and a procedure for investigating challenged certificates of origin that can include on-site inspection of the relevant production site. If the certificate of origin or any information found therein is determined to be fraudulent, then the exporter and/or producer may be barred from exporting for a period ranging from six to 24 months. A second violation doubles the suspension period, while a third violation will result in being permanently barred from exporting. A certification authority can also be suspended from issuing certificates for a period of time ranging from 12 months or higher (or even permanently) if it negligently or intentionally issues fraudulent certificates of origin. Importers may also be suspended from using the preferences granted under ACE No. 59 for a period of up to one year and even permanently barred if they are deemed to have adulterated or falsified a certificate of origin. D. Unfair Trade Practice Remedies The signatory states agree to comply with WTO mandates and not subsidize industrial products traded among them. In addition, they also agree not to subsidize agricultural exports. For those countries that do subsidize national agricultural production, Article 18 to ACE No. 59 requires that they insure that these subsidy programs are WTO compliant and have little or no distortional effect on trade and production in the other countries. If the subsidies do produce trade distortions, such subsidized products are excluded from preferential tariff treatment. Furthermore, Article 18 creates a consultation mechanism for countries to utilize if they feel detrimentally impacted by another country’s domestic agricultural subsidy programs. Pursuant to Article 14 of ACE No. 59, the signatory states are permitted to impose antidumping and countervailing duties on reciprocal trade as per their respective national legislations so long as these comply with WTO mandates. If any government imposes an antidumping or countervailing duty on a third country’s imports, it has an obligation under Article 15 to inform the other signatory states. The signatories are also under an obligation to give each


other at least 15 days’ advance notice of any modifications or changes to their respective antidumping and countervailing duty legislation. E. Safeguard Measures Annex V to ACE No. 59 contains highly elaborate rules on the use of safeguards and the detailed procedures that must be followed before a safeguard measure can be imposed. Safeguards are normally limited to the suspension of the tariff reduction schedule or a partial or complete reversal of already granted preferential tariff treatment for quantities of the item exceeding the average imported during the preceding 36 months. Safeguards can only be used while a product is subject to a tariff reduction schedule and, normally, for an additional four years thereafter. Before a safeguard can be imposed, there must be an investigation that determines that a surge in imports is causing actual, or threatens to cause grave, harm to a branch of national production that is similar or directly competes with the import. Any safeguard lasting longer than one year (which includes the time limit granted for emergency safeguards) requires that the affected national industry draw up an acceptable restructuring plan designed to achieve competitiveness. Safeguards may not be imposed for a period longer than two years and can only be extended once for up to one year. Petitions to impose a safeguard may be filed by either the detrimentally affected companies or, in the case of large numbers of small enterprises, by the relevant government authority. A waiting period of one year must pass before a new petition can be filed on a product previously protected by a safeguard. Emergency safeguards may be imposed upon an objective showing that any delay could irreparably harm or threaten to cause grave harm to national production. The emergency safeguard can be imposed for up to 180 days only and shall consist of the suspension or the annulment in whole or in part of the preferential tariff for an amount that exceeds the average imported during the preceding 36 months. Immediately after the safeguard is imposed, the exporting countries must be notified. If the subsequent investigation finds no justification for imposition of the emergency measure, any bond or additional tariffs shall be promptly refunded and the measure immediately lifted. A special safeguard regime found in Annex IX to ACE No. 59 can be used by Colombia, Ecuador, and Venezuela on certain agricultural imports from Argentina and Brazil and vice versa during the product’s transition to free trade (and for another four years thereafter).32 The safeguards can be imposed whenever there is an increase in imports of the particular product over the last 12 months that is equal to or exceeds 20 percent of the average amount imported during the previous 36 months. There is also an alternative calculation mechanism based on a specified percentage drop in the price of the imported agricultural product. While there is a requirement to review the imposition of such safeguards at the end of every 90 days to determine if they 32 At the time ACE No. 59 came into effect, Ecuador, Paraguay, and Uruguay had still not made a decision on whether to apply this special safeguards regime in their respective reciprocal agricultural trade.


are still required, the longest time period such a measure may be imposed is for two years, subject to a single one-year renewal. F. Technical Norms In Article 1 of Annex VII to ACE No. 59, the signatory states reaffirm their rights and obligations arising out of the WTO Agreement on Technical Barriers to Trade as well as a similar ALADI agreement on technical barriers. There are also many other references to the WTO agreement in Annex VII with respect to formulating new technical norms, negotiating mutual recognition agreements, providing advance notification of changes to legislation, as well as cooperating and providing technical assistance with respect to their implementation. There is also an overall obligation not to impose more onerous evaluation procedures on imports than those required of national producers. Pursuant to Article 6 in Annex VII, if a country believes that another signatory state has adopted a technical norm or established an evaluation procedure that creates an unnecessary obstacle to trade, it can request consultations with that government. If the matter cannot be resolved within a period of 60 calendar days, it can be referred to the general dispute resolution system. Pursuant to Article 7, the signatories commit to giving each other up to 60 days’ advanced notice of proposed changes to technical norms, evaluation procedures, and related measures to permit adequate feedback. Any proposed technical standard should normally not enter into force until at least six months following its publication in an official government bulletin. Technical norms, evaluation procedures, or other relevant measures may be immediately adopted without advance warning in response to an emergency but only on a non-discriminatory basis and upon immediate subsequent notification to the other countries (which then have an opportunity to challenge its adoption). Pursuant to Article 10 of Annex VII, the signatory states are required to adopt mechanisms to facilitate the exchange of information affecting technical norms and evaluation procedures that may impact on cross-border trade. G. Sanitary and Phytosanitary Measures Pursuant to Article 1 in Annex VIII to ACE No. 59, the adoption and enforcement of sanitary and phytosanitary measures among the signatory states is subject to the WTO Agreement on the Application of Sanitary and Phytosanitary Measures as well as provisions established in Annex VIII itself. Article 1 also makes reference to the fact that definitions found in the WTO agreement control terms used in Annex VIII. Pursuant to Article 2, sanitary and phytosanitary measures can only be imposed when necessary to protect the health and the life of persons, animals, or to preserve plant life and must be “based on scientific principles and cannot be maintained without sufficient scientific evidence.” Article 3 further mandates that sanitary and phytosanitary measures cannot used as disguised restrictions on trade. Although the signatory states are not required to harmonize their sanitary and phytosanitary measures, there is a commitment to adopt the regulations,


directives, and recommendations developed by international organizations recognized in the WTO agreement or by subregional bodies such as the Andean Commission. Article 7 to Annex VIII encourages the parties to establish agreements recognizing the equivalency of sanitary and phytosanitary measures. Pursuant to Article 12, the adoption and enforcement of sanitary and phytosanitary measures shall be based upon an adequate evaluation of the risks and should normally not result in any impediments to trade during the evaluation period. Emergency measures may be imposed, but Article 15 mandates that trade partners be notified within three days of their adoption, and justification must be provided. Emergency measures can only be left in place while the reason that gave rise to their use persists. Annex VIII contains procedures for the recognition among trading partners of zones or regions free of pests and illness. Article 22 to Annex VIII requires that the parties keep each other appraised of changes in their domestic sanitary and phytosanitary legislation and offer their trading partners the opportunity to make observations and engage in consultations. There is also an obligation for each country to make its respective sanitary and phytosanitary legislation available to the public free of charge through the Internet. In order to further encourage transparency, Article 26 provides for a counternotification mechanism that allows for a quick exchange of information by relevant government agencies on sanitary and phytosanitary measures imposed on imports. Article 27 also contains a commitment by countries with more sophisticated systems to provide technical assistance to those with lessdeveloped legislation and enforcement mechanisms. Any disputes arising among the signatory states from the failure to adhere to the obligations and time limits established in Annex VIII to ACE No. 59 should be resolved through consultations involving the interested governments and, if this is not possible, the matter can be directed to the general dispute resolution system. H. Dispute Resolution Article 20 to ACE No. 59 requires the seven signatory countries to sign a separate protocol that will become the agreement’s permanent dispute resolution system. Although drafted, this protocol will not come into force until all seven countries ratify it. As of mid-2008, this protocol had still not been ratified by Argentina and Brazil. In the interim, the dispute resolution system found in Annex VI is controlling. Annex VI contains the temporary three-step dispute resolution system that has fairly quick turnaround times (i.e., generally a maximum of 30, 45, and 55 days, respectively). Under the third stage of the temporary dispute resolution system, matters are referred to a three-person Group of Experts who are “persons of recognized competence in trade matters and of any other nature that could be the subject of a dispute” arising from ACE No. 59. Failure to comply with recommendations of the experts allows a complaining party to return to them and request suitable retaliatory measures that may be undertaken to force


compliance and may include the total or partial suspension or withdrawal of concessions equivalent to the harm caused. Under the permanent dispute resolution system found in the protocol, all disputes that arise from obligations incurred under ACE No. 59 or that are regulated by the WTO, can be resolved by referral to either system as appropriate. Once a choice has been made, however, it excludes subsequent use of the other forum. The first step in the system established under the protocol involves direct negotiations to reach a mutually acceptable resolution. The negotiations are conducted on behalf of the MERCOSUR countries by the president pro tempore of MERCOSUR or each country’s National Coordinator for the Common Market Group. The Andean countries are represented by individuals designated by each national government for that purpose with the support of the General Secretariat of the Andean Community in Lima. Negotiations should commence within ten days after a notice requesting consultations has been served on the appropriate representatives. These negotiations should normally be concluded within 30 days thereafter (although they can be extended for another 15 days upon mutual consent). If direct negotiations prove unsuccessful, the parties can refer the matter to the Administrative Commission that oversees implementation of ACE No. 59 or proceed directly to binding arbitration. The Administrative Commission must meet within 30 days after it has been referred a dispute. If it cannot, the parties proceed directly to binding arbitration. When the Administrative Commission does meet, and after it has offered both sides to the dispute an opportunity to appear and present supporting evidence, it then has 30 days (extendable for another 15 days if it calls experts) to issue its recommendations. If no recommendations are issued, or if the parties do not adopt those that are made (or adopt them only partially), either side can then request binding arbitration. Arbitration panels consist of three members, one chosen by each side to the dispute, and a third, who cannot be a national of either side and is selected by mutual consent. The arbitrators should normally come from a previously drafted list of individuals (ten for the Andean Community and ten for MERCOSUR). Two of the individuals on each list should not be nationals of either the Andean Community or MERCOSUR. The arbitrators (and their alternates) should be selected within 15 days after a request to establish a panel is made. If the third arbitrator cannot be agreed upon, then the ALADI General Secretariat in Montevideo uses a lottery to make that designation. The arbitration panel is required to collect testimony and evidence both orally and in written form. Hearings are normally not open to the public, and certain information can be submitted confidentially only for viewing by the arbitrators. The arbitrators are authorized to issue preliminary injunctions to prevent grave and irreparable harm and can call on outside experts for technical assistance. Arbitration panels should issue their decisions in writing within 60 days (extendable for another 30 days), measured from the date


the last arbitrator was selected. Decisions should be based on the provisions of ACE No. 59 and additional legal instruments that arise within the scope of the agreement as well as relevant principles of international law. Decisions are by majority vote, with the actual votes kept secret and dissenting opinions forbidden. Arbitration decisions, which have the force of res judicata and cannot be appealed, should normally be implemented by the parties within 60 days after they are made. Each side to the dispute can request that a panel clarify its decision within 15 days after its issuance. If the winning side is unhappy with the measures undertaken to implement the decision, it can refer the matter back to the same arbitration panel for guidance. Failure to implement a decision in whole or in part can lead to retaliation through the suspension of benefits obtained through ACE No. 59. All measures adopted by the retaliating party must be communicated to the Administrative Commission. If a government feels that the retaliatory measures adopted are excessive, it can request guidance from the same arbitration panel that issued the original decision. I. Transportation and Infrastructure In recognition of the traditional geographical barriers that have made it difficult to transport goods and build infrastructure linking the Andean countries with those nations on the Atlantic seaboard, ACE No. 59 calls for the promotion of initiatives and cooperation mechanisms that will permit the development, extension, and modernization of infrastructure. The intention here is to complement efforts under the Integration of Regional Infrastructure in South America or Iniciativa para la Infraestructura Regional de Sur América (IIRSA), a set of ambitious infrastructure projects designed to create bioceanic corridors that was announced by the South American presidents meeting in Brazil in September 2000. ACE No. 59 also calls for extending existing transportation liberalization and facilitation agreements within the Andean Community or MERCOSUR to encompass all seven of the signatory states as well as encourages them to sign new ones. J. Administrative Commission ACE No. 59 establishes an Administrative Commission made up of representatives of MERCOSUR’s Common Market Group and those individuals who represent Colombia, Ecuador, and Venezuela on the Andean Community Commission. The Administrative Commission is required to, inter alia, oversee implementation of ACE No. 59, participate in the dispute resolution system (as well as set the honorariums for the arbitrators), and modify existing, or formulate new, rules of origin as the circumstances may require. All decisions of the Administrative Commission are adopted by consensus. K. Conclusion Given their importance for manufacturing activities in many of the signatory states, it is remarkable that ACE No. 59 contains no provisions on the treatment of goods originating in free trade and export processing zones.


This oversight underscores the political pressure that existed to sign off on the Andean Community-MERCOSUR Free Trade Agreement, even if key issues had not yet been resolved. ACE No. 59 also contains no provisions for the liberalization of trade in services, although there is a hortatory commitment to promote the cross-border offering of services. Similarly, there are no specific provisions on investment protection other than a statement that the state parties shall endeavor to encourage cross-border investment and examine the possibilities (if they do not already exist) of signing bilateral investment as well as double taxation treaties. In terms of intellectual property, there is a very general statement that the state parties agree to be bound by the terms of the TRIPs Agreement under the WTO and the l992 Convention on Biological Diversity. Opening up government procurement bids to providers of goods and services from the other signatory states is not even broached. In recognition of the fact that Colombia and Ecuador were negotiating a free trade agreement with the United States at the time ACE No. 59 was signed, Article 43 of ACE No. 59 mandates that any country that enters into a free trade agreement with a country outside the ALADI framework has 15 days to notify the other signatory states. It then has 90 days to negotiate an extension of the favorable concessions or equivalent alternatives to the other signatories to ACE No. 59, which may have been granted to the non-ALADI country.

CHAPTER 4

INSTITUTIONAL FRAMEWORK OF MERCOSUR AND HOW THE MERCOSUR ECONOMIC INTEGRATION PROCESS FUNCTIONS I. Introduction The original goal of MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) was the creation of a common market between Argentina, Brazil, Paraguay, and Uruguay by January 1, 1995. Despite the stated goals of the Treaty of Asuncion (the document that set the outlines for establishing that common market), what actually appeared in the Southern Cone on New Year’s Day in 1995 was a very imperfect customs union. The common external tariff (CET) was applied to only about 85 percent of the tariff lines found in the MERCOSUR nomenclature or harmonized tariff classification system (NCM). The actual duty charged depended on the particular item, although during the mid-1990’s the weighted average of the CET was approximately 14 percent. In addition, about 10 percent of the tariff lines found in the NCM originating within and traded among the MERCOSUR countries was still subject to tariffs or non-tariff barriers such as quotas or outright import restrictions. II. Institutional Framework The Treaty of Asuncion provided for three institutional bodies that were to be replaced by January 1, 1995. In particular, Article 9 of the treaty established the Common Market Council and the Common Market Group to oversee the administration and implementation of the MERCOSUR process during the socalled transition period that officially began in November 1991 and ended on December 31, 1994. In addition, Article 15 of the Treaty of Asuncion set up an Administrative Secretariat in Montevideo to coordinate meetings, issue press releases, and handle public relations. The Protocol of Ouro Preto, which was signed by the four MERCOSUR countries in December 1994 and came into full force and effect on December 15, 1995, instituted a new institutional framework for MERCOSUR. The Protocol retained the three original institutional bodies and added three new ones as well, including the MERCOSUR Trade Commission. The Protocol of Ouro Preto is also important because it gave MERCOSUR a juridical personality

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under international law, thereby allowing MERCOSUR to negotiate agreements with other countries, trade blocs, and international organizations. One of the biggest shortcomings of MERCOSUR’s institutional framework is that none of the bodies enjoys supranational authority. This means that all decisions, resolutions, or directives (but for those affecting the daily operations of MERCOSUR’s institutional bodies) must either be ratified by each member state’s respective legislature or incorporated into domestic law by executive decree before they have any legal effect within each country’s territory. There is no concept of “direct effect” as in the European Union where regulations issued by the EU Council, for example, are directly applicable in each member state without the need for national measures to implement them. Although each MERCOSUR country is under an obligation to incorporate all MERCOSURissued decisions, resolutions, and directives into its respective domestic legislation, this procedure is time consuming and prevents quick resolution of the many asymmetries that currently exist among the MERCOSUR countries. Furthermore, the legislation is not enforceable on a regional level until all four member states have ratified it (although there are instances where a decision or resolution only requires that it be ratified by two or three out of the four member states before it comes into force on a regional level). Another potential problem with MERCOSUR’s institutional bodies is that any measures must be adopted with the consensus of all four member states. This procedure has worked reasonably well up until now, but if MERCOSUR ever becomes the type of deep economic integration process similar to the European Union (as was contemplated when the project was launched in the early 1990s), the current voting system may become unfeasible. Under the current system, for example, tiny Paraguay (population 6 million) and Uruguay (population 3.5 million) have a vote that is equal to Argentina (population 34 million) and Brazil (population 186 million). Even in 1995 the four MERCOSUR governments recognized some of the shortcomings of MERCOSUR’s current institutional framework. This is the reason why Article 47 to the Protocol of Ouro Preto reserved the right to convene a diplomatic conference in the future to revise MERCOSUR’s institutional structure. Although the current associate members of MERCOSUR do not have the right to vote in any matters before MERCOSUR’s institutional bodies, they are allowed a limited presence. For example, Common Market Council Decision (CMC) 12/97 authorizes Chile to participate in meetings of the Common Market Council and to attend meetings of the Common Market Group when this is deemed convenient by both Chile and MERCOSUR. The Chilean As a result of 1994 amendments to the Argentine Constitution and subsequent holdings by the Argentine Supreme Court, norms that flow out of a binding international legal treaty (such as the Treaty of Asuncion) may take precedence over conflicting domestic legislation or fill in for voids in the national legal framework. It is important to point out that the affirmative vote of all countries is not required to achieve a “consensus.” A country may abstain and not destroy the requirement of consensus.

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government is also allowed to participate in Common Market Group working groups and other specialized or ad hoc MERCOSUR bodies, particularly when matters related to the Chile-MERCOSUR Free Trade Agreement are under discussion. In terms of foreign relations, Chile and MERCOSUR are expected to regularly coordinate negotiating positions when deemed of mutual interest. Similar rights and obligations have been extended to Bolivia through CMC Decision 38/03 and to Peru as a result CMC Decision 39/03. A. Common Market Council The Common Market Council is the highest body in the MERCOSUR institutional framework and issues decisions to insure that the objectives laid out in the Treaty of Asuncion are complied with. The council is made up of the ministers of foreign relations and the ministers of economy (or their equivalent) from each of the four MERCOSUR member states. Ministers representing other government departments may also be invited to attend council sessions when a particular subject matter over which they have jurisdiction is being discussed. The presidency of the council is rotated among the chief representatives of each MERCOSUR country (in alphabetical order beginning with Argentina) for a six-month period. The council meets as often as is necessary but at least once during each six-month period. At least once during the six-month period, the presidents of each of the four MERCOSUR countries should also attend. Among the specific functions of the council are to: 1. oversee compliance with the Treaty of Asuncion and any protocols and agreements that may flow out of that treaty, 2. undertake the necessary actions to establish a common market, 3. negotiate and sign agreements with other countries and international bodies on behalf of MERCOSUR, 4. decide on proposals referred to it by the Common Market Group, 5. create new institutional bodies as may be needed, 6. designate the director of the MERCOSUR Administrative Secretariat, and 7. issue all decisions of a financial nature. Beginning in 2004 specialized meetings involving only particular ministries from the four member states (e.g., Agriculture, Culture, Education, Environment, Health, Interior, Justice, Social Development, and Tourism) have convened under the auspices of the Common Market Council to discuss matters of mutual concern or propose new communitarian norms and agreements that touch upon those subject areas falling within their particular areas of jurisdiction. Special groups have also been appointed over the years to look at particular matters deemed of high importance to the Common Market Council and to propose appropriate solutions. These special groups are usually ad hoc in nature and dissolve once their work is completed. Recent examples include the High Level Strategic Groups on the Common External Tariff, Institutional Reform, Job Growth, Overcoming Asymmetries, and South-South Cooperation, as well as special working groups looking into the incorporation of Bolivia and Venezuela as full members of MERCOSUR.


B. Common Market Group The Common Market Group is the second most important institution within MERCOSUR and fulfills the role of an executive body. It is made up of four permanent representatives (as well as four alternates) from each member state representing each country’s Ministry of Foreign Relations, Ministry of Economy (or its equivalent), and Central Bank. The fourth representative will come from the most appropriate government agency that has jurisdiction over the particular subject matter that is being discussed at a particular session of the Common Market Group (e.g., a discussion on sanitary and phytosanitary measures would include a representative from each country’s Ministry of Agriculture). The Common Market Group meets as often as is required and the Ministry of Foreign Relations in each country coordinates the meetings. Among the Common Market Group’s specific functions is to: 1. propose measures to be adopted by the Common Market Council, 2. ensure that Common Market Council decisions are implemented, 3. create working subgroups to assist in efforts to fulfill the goals of MERCOSUR, including the eventual implementation of a common market, 4. negotiate with third countries or international organizations when the right to do so has been delegated to the group by the Common Market Council, 5. organize meetings of the Common Market Council and prepare all the necessary reports and studies that the council may order, and 6. supervise the activities of the MERCOSUR Secretariat. The Common Market Group issues resolutions that should be implemented by the member states. The Common Market Group currently has 14 working subgroups that provide it with expert input and assistance in the following areas: 1. communications; 2. institutional matters; 3. technical norms and evaluation with conformity; 4. financial matters; 5. transportation; 6. environment; 7. industry; 8. agriculture; 9. energy; 10. labor matters, employment, and social security; 11. health; 12. investment; 13. electronic commerce; and 14. mining. In 1999 the Common Market Group issued Resolution 15/99 that formally creates a MERCOSUR Social-Labor Commission. The MERCOSUR


Social-Labor Commission is designed to assist the Common Market Group in implementing the policy objectives and regulatory commitments included in a Social-Labor Declaration issued by the MERCOSUR presidents in Rio de Janeiro on December 10, 1998. The declaration reaffirms a number of core labor rights found in various international agreements (including those of the International Labor Organization) and creates a mechanism to insure their implementation and enforcement in the four core MERCOSUR countries. In particular, the declaration forbids discrimination in the workplace based on race, national origin, color, sex, sexual orientation, age, religion, political opinion, union membership, ideology, economic position, or whatever other social or familial conditions. It also promotes the inclusion of mentally or physically incapacitated persons into the workforce and guarantees equality of treatment and opportunity for men and women. There also exist provisions related to the treatment of migrant workers, forced labor, and work by infants and minors. The declaration further recognizes the right of workers to form unions, bargain collectively, strike, and receive adequate social security benefits. Special groups or committees have been formed over the years to assist the Common Market Group in drafting appropriate communitarian norms and overseeing their implementation. Usually these are ad hoc in nature and exist for as long as the circumstances require. Examples include the Ad Hoc Group of Experts on the Fund for Structural Convergence in MERCOSUR (FOCEM), the Ad Hoc Group on a MERCOSUR Customs Code, the Automotive Committee, the Group on Government Procurement, the MERCOSUR Committee on Technical Cooperation, and the Services Group. As a result of CMC Decision 12/08, the Special Group on the Integration of Production within MERCOSUR was created in June 2008 to oversee implementation of a new program by the same name that is designed to create regional chains of production that include small- and medium-sized enterprises. The new special group, which has a representative from each of the MERCOSUR countries, falls under the jurisdiction of the Common Market Group. It has an obligation, however, to regularly report on its activities to both the Common Market Council and the Common Market Group. The Special Group on Productive Integration is also authorized to invite the private sector to participate in its deliberations as well as representatives from relevant government agencies. C. MERCOSUR Trade Commission The MERCOSUR Trade Commission is a creation of the Protocol of Ouro Preto. The Trade Commission assists the Common Market Group, particularly in proposing and overseeing the implementation of regulations that will permit the smooth functioning of the MERCOSUR customs union. It also proposes common trade policies for the four member nations vis-à-vis non-member states and international organizations. The MERCOSUR Trade Commission is made up of four permanent representatives (and four alternates) from each MERCOSUR country under the coordination of their respective Ministries of Foreign Relations. The Trade


Commission meets at least once a month (and more frequently when deemed necessary by the Common Market Group or the respective governments), and its specific functions include: 1. issuing recommendations on any modifications proposed by member states or claims of non-compliance with respect to the CET and other instruments of common trade policy; 2. ensuring that MERCOSUR trade regulations are implemented by the member states; 3. analyzing current MERCOSUR trade and customs norms and, when deemed necessary, 4. proposing modifications or new rules to be adopted by the Common Market Group; 5. creating and supervising the work of technical committees designed to investigate specific aspects of customs and trade policies; and 6. carrying out any tasks related to common trade policy that may be requested of it by the Common Market Group. The MERCOSUR Trade Commission issues directives, which should be implemented by all the MERCOSUR countries (but these directives, as is true of Common Market Council decisions and Common Market Group resolutions, are not directly applicable within the legal framework of each member state but must be ratified by them to come into force). The Trade Commission currently has seven technical committees of experts to assist it in its work. There is also a specialized Committee on Defensive Trade Measures and Safeguards. The MERCOSUR Trade Commission also plays an important role in helping to resolve disputes that may arise within MERCOSUR. These disputes may arise over the interpretation or method of application as well as non-compliance by governments of their obligations under the Treaty of Asuncion and subsidiary documents as well as the rules issued by MERCOSUR’s institutional bodies. These complaints are first presented to the respective National Sections of the MERCOSUR Trade Commission by either government entities or private parties (whether individuals or corporations) that are domiciled within that country. If the National Sections cannot resolve the problem, it is then referred to the full MERCOSUR Trade Commission. A more complete description of the role of the Trade Commission within the context of MERCOSUR’s dispute resolution system follows later in this chapter (see Section III). D. Socio-Economic Advisory Forum The Socio-Economic Advisory Forum is a creation of the Protocol of Ouro Preto. The forum is designed to represent private sector views emanating from both industry and other sectors in society (e.g., labor and academia) with These seven technical committees are: (1) Tariffs, Nomenclature & Product Classification; (2) Customs Matters; (3) Trade Norms; (4) Public Policies that Distort Competition; (5) Defense of Competition; (6) Foreign Trade Statistics of MERCOSUR; and (7) Consumer Protection.


respect to the integration process. From its unique vantage point, the forum makes recommendations to the Common Market Group on how to improve shortcomings and strengthen the integration process. Each country has an equal number of representatives on the Socio-Economic Advisory Forum. E. MERCOSUR Secretariat The Protocol of Ouro Preto retained the MERCOSUR Administrative Secretariat based in Montevideo, which was originally established during the transition period. In December 2002 the Common Market Council issued Decision 30/02, which called for the gradual transformation of the Administrative Secretariat into a Technical Secretariat. The thought was that a Technical Secretariat was needed to overcome a shortcoming in the original MERCOSUR institutional framework where no one was authorized to provide objective input on MERCOSUR developments from a broader, regional perspective that went above partisan, national interests. As a first step in this transformation, the Secretariat was authorized to hire, effective May 1, 2003, four professionals from each of the member states (i.e., two lawyers and two economists) to provide assistance to the different MERCOSUR institutional bodies on technical issues. These professionals are chosen after a rigorous and transparent selection process for an initial three-year term, with the possibility of reappointment. The failure to reappoint the first two lawyers was viewed by many observers in the region as a repudiation of the genuinely independent stance they took, pointing out repeated failures by the member governments to take the integration process seriously and fulfill their MERCOSUR obligations. Both lawyers were also critical of the MERCOSUR institutional framework’s overall lack of transparency, where critical analyses, internal minutes, or even annexes to crucial decisions are not made public. As of mid-2008, there is still no easy way for the public to even determine what Common Market decisions or Common Market Group resolutions are in force, as this information is not posted on MERCOSUR’s official Web site. Part of the problem, is a recurring failure on the part of the respective governments to inform the Secretariat as to what decisions and resolutions have actually been incorporated into their domestic legal frameworks. The MERCOSUR Secretariat serves as the official depository of MERCOSUR archives, edits the Boletín Oficial del MERCOSUR, which contains all the legal norms adopted by MERCOSUR’s institutional bodies; provides logistical support for the meetings of all of MERCOSUR’s institutional bodies; and serves as a clearing house for information on legislation adopted by each member state with respect to their incorporation of MERCOSUR-issued decisions, resolutions, and directives into their domestic legal systems. The Secretariat is headed by a director from one of the MERCOSUR countries who, in turn, is selected by the Common Market Group for one two-year term. F. Commission of Permanent Representatives In October 2003 the Common Market Council—at the behest of Argentina— authorized the creation of a Commission of Permanent Representatives from


each of the member states that is permanently based in Montevideo and primarily serves as an advisory body to the Common Market Council. The Commission of Permanent Representatives is headed by a president who is appointed for a twoyear term (renewable for an additional one-year period), who is also based in Montevideo. The president of the Commission of Permanent Representatives is supposed to be the face of MERCOSUR before the international community, although anyone who holds the position is unable to legally bind MERCOSUR or any of its member countries. The first president of the Commission of Permanent Representatives was Eduardo Duhalde, Argentina’s president by default between January 2002 and May 2003 (after four of his predecessors resigned the office during a two-week period, and he was selected by Congress). More cynical observers view the presidency of the Commission of Permanent Representatives as a convenient dumping ground for former Argentine presidents and vice presidents that the administration in power at the time in Buenos Aires finds inconvenient to have present in the country. Duhalde, after all, was succeeded by Chacho Alvarez, former vice president of Argentina between December 1999 and October 2000 who had prematurely resigned from the administration of President Fernando de la Rua in protest over a government corruption scandal (De la Rua himself prematurely resigned his office in December 2001). Recent initiatives of the Commission of Permanent Representatives include: (1) the MERCOSUR Social Institute based in Asuncion that was established through CMC Decision 3/07 and will, inter alia, maintain a data bank of regional social indicators, provide technical assistance in formulating regional social policy, and support initiatives to overcome asymmetries in development that exist within and among the MERCOSUR countries; (2) the MERCOSUR Training Institute based in Montevideo and established through CMC Decision 4/07, which will train public servants from the MERCOSUR countries on topics related to regional integration; and (3) the MERCOSUR Democracy Observatory established through CMC Decision 5/07, which is designed to provide election observers at the request of countries that are signatories to the Protocol of Ushuaia on the Commitment to Democracy in the MERCOSUR, Bolivia, and Chile (and that now also includes Colombia, Ecuador, Peru, and Venezuela as associate members states of MERCOSUR). G. Advisory Forum of Municipalities, Federal States, Provinces, and Departments In December 2004 the Common Market Council approved the creation of an Advisory Forum of Municipalities, Federal States, Provinces, and Departments in order to obtain their cooperation in fully implementing MERCOSUR obligations. The forum is also intended to facilitate the coordination of policies among the member states that aim to improve the well-being of their respective citizens. The forum is made up of representatives from the different government entities at the subnational level, but these are selected by the respective central governments. H. MERCOSUR Parliament In December 2005 the four MERCOSUR countries, through CMC Decision 23/05, issued the Protocol to Establish a MERCOSUR Parliament. The Parliament


met for the first time on December 6, 2006, with members initially chosen for four-year terms by the legislatures of each country. By 2010, members of the Parliament from each country should be elected for a four-year term based on direct elections in their home countries. As a result of the first meeting of the Parliament, the Joint Parliamentary Commission, established under the Protocol of Ouro Preto in 1995 to ensure that representatives of the legislative branches of the four MERCOSUR countries were kept informed of developments within the subregional economic integration process, ceased to exist. The idea for a MERCOSUR Parliament had been around for many years, and in 2003 a specialized working group was established by the Joint Parliamentary Commission to look into the matter and make concrete recommendations. Brazilian President Luiz Inácio Lula da Silva was a strong proponent of the MERCOSUR Parliament, believing that it would instill a deeper integrationist spirit among the general populations of all the MERCOSUR member states. The MERCOSUR Parliament is expected to carry out, among other things, the following functions that are more advisory than deliberative in nature: 1. oversee compliance with MERCOSUR norms; 2. draft an annual report on the human rights situation in each of the MERCOSUR countries; 3. request information and opinions from the rule making and consultative bodies established under the Protocol of Ouro Preto related to the integration process; 4. invite representatives of the different MERCOSUR bodies to appear before the Parliament to present information, exchange opinions, and discuss matters that are either being implemented or are being considered; 5. carry out meetings once a semester with the Socio-Economic Advisory Council in order to exchange information and opinions on developments within MERCOSUR; 6. organize public meetings with civil society groups and those representing producers to keep them abreast of developments affecting the integration process; 7. review and pass on to the relevant MERCOSUR institutional bodies petitions made by any member of the public related to the acts and omissions of these same institutions; 8. issue declarations, recommendations, or reports related to the integration process; 9. suggest new rules that the Common Market Council should adopt, as well as propose national legislation that will contribute to harmonizing the laws of the different member states; and 10. facilitate and speed up the process for adopting MERCOSUR rules in the legislatures of each of the member states through the use of advisory reports and public hearings issued in conjunction with each new norm that requires such ratification. The MERCOSUR Parliament is authorized to request advisory opinions from the Permanent Tribunal of Review that sits in Asuncion. The Parliament


currently has ten commissions that look at various issues including: (1) Legal and Institutional Matters; 2) Economic, Financial, Trade, Tax, and Monetary Matters; (2) International and Inter-Regional Affairs and Strategic Planning; (3) Education, Culture, Science, Technology, and Sport; (4) Citizenship and Human Rights; and (5) Infrastructure, Transportation, Energy Resources, Agriculture, Livestock, and Fishing. The MERCOSUR Parliament is based in Montevideo and is required to meet at least once a month in ordinary sessions and more frequently in extraordinary sessions at the request of either the Common Market Council or on the initiative of the Parliament itself. Decisions of the Parliament, depending on perceived importance of the matter at hand, can be adopted by simple majority or absolute majority (i.e., more than half the body present at a session or the actual members of Parliament, respectively), by special majority (i.e., two thirds of the actual members of Parliament representing each member state), and by qualified majority (i.e., more than half the actual members of each country’s respective delegation). Each member of the MERCOSUR Parliament is entitled to one vote. Each country currently has 18 members in the Parliament. It is expected that by 2010, however, representation in the Parliament will be modified according to a formula devised by a qualified majority of the Parliament and formally adopted through a Common Market Council decision. The modification will better reflect the principle of citizen representation by basing the number of members of Parliament on a country’s population. The MERCOSUR Parliament is authorized to invite representatives of the national legislatures of the associated states of MERCOSUR as non-voting observers. I. Special Funds to Strengthen the Economic Integration Process In December 2004 the MERCOSUR countries announced the creation of FOCEM, which designed to promote the structural convergence, competitive development, and social cohesion within and among the MERCOSUR countries as well as strengthen MERCOSUR’s institutional framework. The inspiration for FOCEM comes from the structural funds the European Union has historically used to facilitate the incorporation of new member states in order to minimize asymmetries in development between new and existing members. FOCEM’s total proposed budget of U.S.$125 million is supposed to be funded with contributions from each member state of MERCOSUR as well as money from third countries and international organizations. There is a formula under which the smaller MERCOSUR countries contribute the least to FOCEM but at the same time receive a considerably larger proportion of Interestingly, a proposal put forward by the special working group, which was not adopted by the Common Market Council when it authorized the creation of the MERCOSUR Parliament, had recommended giving each country an equal number of representatives and then a number based on a percentage of its population not to exceed a cap (so as to prevent the Parliament from being swamped with representatives from Brazil). See F. Farinella, Las Instituciones del MERCOSUR: La Creación del Parlamento del Mercado Común, 10 Revista de Derecho Internacional y Del Mercosur 70–71 (Feb. 2006).


the funds. CMC Decision 17/06 lists an ambitious set of 12 pilot projects to be funded by FOCEM in the coming years, including eight for Paraguay that range from assistance in eliminating hoof and mouth disease in cattle, paving major access roads, strengthening a bio-security laboratory, and technical assistance for micro-enterprises. The rest of the projects are focused on providing the MERCOSUR Secretariat in Montevideo with assistance that includes improving its statistical data bank collections. In December 2004 the Common Market Council also approved the creation of a Fund to Finance the Education Sector in MERCOSUR that will earmark money to schools and universities for courses and research projects that advance the regional integration process. In addition to the four core member states, these monies can also be used to fund projects in the associate MERCOSUR nations that make the required contributions. The Education Fund is expected to be capitalized with money donated by foreign donor agencies and the private sector as well as annual payments from each MERCOSUR and associate member state government that began with a minimum annual contribution of U.S.$30,000. CMC Decision 24/08 added that the Education Fund would be capitalized through 2010 with an annual payment from each MERCOSUR country and associate member state of U.S.$30,000 plus an additional U.S.$2,200 multiplied for each 1 million inhabitants of that country who are between the ages of five and 24 years old. The Education Fund is administered by a body of specialists selected by the ministers of education from each participating country. The decision as to where to earmark the fund’s monies is left to the ministers of education and is based on pre-determined plans of action. In June 2008 Common Market Council 13/08 approved the creation of the MERCOSUR Fund for Support to Small- and Medium-Sized Enterprises to initially serve as a guarantee mechanism for projects arising under the new Program for the Integration of Production in MERCOSUR. There were no indications in the decision that created this new fund, however, as to how it would be capitalized. J. Program for the Integration of Production in MERCOSUR CMC Decision 12/08 approved a Program for the Integration of Production in MERCOSUR, whose implementation will be the responsibility of a new Group on Productive Integration that will fall under the jurisdiction of the Common Market Group. The program seeks to strengthen the complementary production capabilities among businesses in the MERCOSUR countries, particularly small- and medium-sized enterprises, by facilitating specialization and enhancing the global competitiveness of their output. There is a political objective behind this new program as well, based on an appreciation that by assisting those economic actors that have traditionally not utilized the market opening opportunities provided by MERCOSUR, support for the overall regional economic integration process will deepen. One of the primary goals of the Program for the Integration of Production in MERCOSUR is to create chains of production that encompass all four countries and actively seek out and incorporate smaller firms. In order for this


to happen, there is an understanding that the market on its own or government decrees will not make this happen. Instead, programs are needed to ensure that smaller firms and/or those based in the less-developed countries have the administrative, technical, and production capacity to reliably provide quality inputs in the quantities that are required. In addition, there is an urgent need to remove non-tariff barriers to intra-MERCOSUR trade, eliminate difficulties to accessing adequate financing, and overcome the traditional aversion of MERCOSUR-based firms to work together to mutual benefit and to form strategic alliances. Although the Program for the Integration of Production in MERCOSUR cannot resolve all these market failures, it does concentrate on eliminating those for which the public sector is responsible either directly or indirectly. Accordingly, there is an emphasis on improving education, offering different types of financial and incentive programs, and providing a political, legal, and institutional framework that facilitates the regional integration of competitive chains of production. The Program for the Integration of Production in MERCOSUR acknowledges the importance of the private sector in identifying where reforms and new programs are needed and seeks to work with large and successful firms to serve as a nucleus around which smaller firms can work as suppliers of goods and services. One concrete proposal is to harmonize regional quality standards by establishing a “MERCOSUR Seal of Quality.” Another involves linking up all the different national agencies that already exist in each MERCOSUR country to provide assistance to small- and medium-sized enterprises so that they all collaborate in efforts to insert such firms into sector specific regional chains of production. Yet another involves linking the different bodies that already provide technical support to businesses at the national level. It is anticipated that at least some of the money to fund program activities will come from FOCEM, the MERCOSUR Fund for Support of Small- and MediumEnterprises, as well as institutions such as the Inter-American Development Bank, the Andean Development Corporation, and Hugo Chavez’s Banco del Sur. One of the chains of production that may be folded into the program is an already existing initiative with wood and furniture that was launched under MERCOSUR’s Forum of Competitiveness Program in 2002. Other previous MERCOSUR programs that can be folded under the umbrella of the Program for the Integration of Production in MERCOSUR include those developing new suppliers for the gas and oil industry, the automotive sector, tourism along designated routes, the audiovisual industry, and the maritime industry. III. Dispute Resolution System On February 18, 2002, the presidents and foreign ministers of the four MERCOSUR countries signed the Protocol of Olivos, which contains the new dispute resolution mechanism for MERCOSUR. It replaces the 1991 Protocol of Brasilia (and its implementing regulations found in CMC Decision 17/98), although not the innovations to MERCOSUR’s dispute resolution system introduced by the 1994 Protocol of Ouro Preto. The Protocol of Olivos entered into force on January 1, 2004. At its December 2003 meeting in Montevideo, the Common Market Council had already issued Decision 37/03, which contains


the implementing regulations for the Protocol of Olivos. It is important to emphasize that the Protocol of Olivos is only transitional in character and that it, too, as happened with the system established under the Protocol of Brasilia, will someday be replaced with a permanent dispute resolution system for MERCOSUR. The Protocol of Olivos was designed to address some of the criticisms lodged against the MERCOSUR dispute resolution system under the Protocol of Brasilia. For example, the Protocol of Olivos establishes a Permanent Tribunal of Review that is designed to “guarantee the correct interpretation, application and fulfillment of the fundamental instruments of the integration process” and MERCOSUR norms “in a consistent and systematic manner.” In this regard, the highest national courts of the MERCOSUR countries may seek an advisory opinion from the Permanent Tribunal on MERCOSUR obligations. The Protocol of Olivos also gives the arbitral panels greater oversight capabilities to help ensure compliance with past decisions they have issued. In addition, it provides governments with a faster route to the final stage of the dispute resolution system: binding arbitration. A. Disputes Arising Among the State Parties One of the interesting things about the Protocol of Olivos is that pursuant to Article 1, the governments have the option, when appropriate, of using either MERCOSUR or the World Trade Organization (WTO) system for resolving disputes that may arise among them concerning: the interpretation, application or non-compliance with the Treaty of Asuncion, the Protocol of Ouro Preto, or the protocols and agreements celebrated within the framework of the Treaty of Asuncion, the Decisions of the Common Market Council, the Resolutions of the Common Market Group, and the Directives of the MERCOSUR Trade Commission. Once the choice has been made, however, the parties are barred from beginning another proceeding in the other forum involving the same dispute. Furthermore, Article 2 of the Protocol of Olivos authorizes the Common Market Council to establish an expedited procedure for resolving differences in opinion that may arise among the four governments on technical matters pertaining to common trade policies (for example, the imposition of antidumping duties). As was true of the system established under the Protocol of Brasilia, the governments should first attempt to resolve their disputes through direct diplomatic negotiations. If the dispute cannot be wholly resolved within a 15day time period, the matter can be referred to the Common Market Group This rule is designed to avoid a repeat of what happened in 2001 when Brazil, unhappy with the arbitral award made in the fourth dispute resolved under the Protocol of Brasilia (In re Application of Anti-Dumping Measures Against the Exportation of Whole Chickens from Brazil), submitted the same matter to the WTO dispute resolution system. For a discussion of that case, see T.A. O’keefe, Latin American Trade Agreements 7-20 and 7-21 (2007).


(as was the case under the Protocol of Brasilia) or proceed directly to binding arbitration by the Permanent Tribunal of Review. Under the Protocol of Olivos, the involvement of the Common Market Group is no longer obligatory in matters involving state-to-state disputes, and a dispute will only be forwarded to the Common Market Group if all the parties so agree. Interestingly, a country not involved in a dispute can also now request referral of a dispute to the Common Market Group (although this will not necessarily delay use of the binding arbitration option chosen by at least one the parties to the controversy). In the event a dispute is directed to the Common Market Group, this body should attempt to resolve any dispute within 30 days after it first meets in regular session following the date the complaint was lodged. The Common Market Group is authorized to seek technical advice from experts found on a list kept by the MERCOSUR Secretariat in Montevideo. In addition, the parties to the dispute are also afforded an opportunity to present their side of the controversy before the Common Market Group. Any party unhappy with the recommendations made by the Common Market Group can then seek binding arbitration. As was true under the Protocol of Brasilia, the ad hoc arbitration panel is still made up of three members. Each side to a dispute chooses one arbitrator (and a substitute) from a list of names with 12 individuals for each country that was previously filed with the MERCOSUR Secretariat in Montevideo. The third member becomes the president of the panel and is chosen by common agreement from a list of four individuals for each country also kept on file with the Secretariat. The third arbitrator (and substitute) cannot be a national of any country to the dispute (hence the explanation why each country’s four-person list must include one non-MERCOSUR national). If the two sides cannot agree on the third arbitrator, the MERCOSUR Secretariat will make the selection by lottery. As was also true of the Protocol of Brasilia, an ad hoc arbitration panel is authorized to issue preliminary injunctive relief if a well-founded presumption exists that continuing the situation may result in serious or irreparable damages to one of the disputing parties. In general, an ad hoc arbitral panel must issue its decision within 60 days (subject to an additional 30-day extension) after the arbitrators are empanelled. Chapter VII to the Protocol of Olivos contains the provisions for the establishment of a Permanent Tribunal of Review to sit in Asuncion, Paraguay (although the tribunal can also meet in other cities of MERCOSUR for wellfounded, exceptional reasons). The Tribunal of Review is made up of five judges, with each MERCOSUR country choosing one judge (and a substitute) for a two-year period subject to renewal for up to two consecutive terms. The fifth judge, who becomes the president of the tribunal and must be a MERCOSUR national, is chosen for a three-year term with the consensus of all four member The Protocol of Ouro Preto also allows a dispute in which the state parties are unable to resolve through consultations to be referred to the MERCOSUR Trade Commission, which presumably can now be bypassed as well.


states. If a consensus is not possible, the director of the MERCOSUR Secretariat in Montevideo selects the fifth judge by lottery from a pre-determined list of eight candidates. When a dispute only involves two countries, the Permanent Tribunal of Review is limited to three judges (with one judge from each country to the dispute and the third, a non-national, chosen to be the president of the tribunal by lottery conducted by the director of the MERCOSUR Secretariat). Governments may request review of a dispute by the Permanent Tribunal of Review that falls within its subject matter jurisdiction if they are unable to fully resolve the matter on their own. A government has within 15 days to respond to the filing of a petition of review made to the tribunal, and the tribunal must, in general, issue a decision on whether it will accept the petition within 30 days thereafter (although one 15-day extension is permitted). Article 22 of the Protocol of Olivos gives the Permanent Tribunal of Review the power to “confirm, modify or revoke the legal basis and decisions” of an ad hoc arbitral panel, and the tribunal’s decisions take precedence over those of the ad hoc body. The decisions of both the ad hoc arbitration panels and the Permanent Tribunal of Review are adopted by majority vote. The actual votes are kept secret, and no dissenting opinions are permitted. Decisions of the ad hoc panels and the Permanent Tribunal of Review have the force of res judicata. While ad hoc arbitral awards can be reviewed by the Permanent Tribunal of Review, the decisions of the tribunal are final and cannot be appealed. Governments can always request clarification of decisions emanating from either body, however. All decisions must be carried out and implemented within the time frame included in the decision or (if none is mentioned), within 30 days from the date of its issue. A country ordered to comply with a decision must normally inform the winning state(s) of how it intends to do so within 15 days after receipt of the award (or seek clarification or, when permissible, review). As was true under the Protocol of Brasilia, the awards of the ad hoc arbitration panels may still be based on equity, and these are the only type of decisions that cannot be appealed to the Permanent Tribunal of Review. If a country feels that the measures undertaken by another state to comply with an award by an ad hoc panel or (in the case such an award was appealed) a decision by the Permanent Tribunal of Review are insufficient, it has 30 days from the date the measures were implemented to refer the matter back to the body that issued it. That body must, in turn, issue its recommendations within 30 days thereafter. If a country feels that another state has not fulfilled its obligations under an award or decision in full or in part, it is also authorized to impose—within a one-year period after the date for compliance passed— temporary compensatory measures. These compensatory measures may include the suspension of concessions or obligations granted in the same or even in other sectors and are independent of any obligation to refer the matter back to the body that issued the original decision. Any country subject to compensatory In reviewing ad hoc arbitral awards, the role of the Permanent Tribunal of Review is limited to insuring a consistent interpretation of the law applied by the arbitration panel as developed by the tribunal itself and in previous ad hoc arbitral awards.


measures can, however, refer the matter back to the respective body that issued the original decision in order to determine if the compensatory measures imposed are excessive or otherwise unwarranted. This new oversight power is designed to overcome situations where Brazil, for example, never got rid of the non-automatic licensing requirements it was ordered by an arbitration panel formed under the old Protocol of Brasilia to eliminate on intra-MERCOSUR trade back in 1999. B. Disputes Involving Private Parties and a State Party(ies) Article 39 of the Protocol of Olivos permits complaints by private parties (whether individuals or corporations) by reason of the approval or application, by whichever of the State Parties, of legal or administrative measures of a restrictive, discriminatory, or an unfair competitive effect, in violation of the Treaty of Asuncion, the Protocol of Ouro Preto, the protocols and agreements celebrated within the framework of the Treaty of Asuncion, of the Decisions of the Common Market Council, of the Resolutions of the Common Market Group, and the Directives of the MERCOSUR Trade Commission. As was true under the Protocol of Brasilia, private party complaints are still limited to affirmative acts of the governments and not for their sins of omission (such as the failure to implement a MERCOSUR norm). There is also no right to challenge the legality of actions carried out by MERCOSUR’s institutional bodies. Private parties are required to file their complaints with the National Section of the Common Market Group of the country wherein they regularly reside or are headquartered. This is in addition to the procedure established under the Protocol of Ouro Preto that permits a complaint to be filed with the National Section of the MERCOSUR Trade Commission. A private party complaint should contain sufficient elements to support a claim and establish actual or threatened prejudice. Once a National Section of the Common Market Group accepts a complaint, it consults with its counterpart(s) in the country(ies) that is the object of the complaint in an attempt to resolve the matter. Unless the respective National Sections agree otherwise, these discussions must result in a resolution within 15 days after they begin, or the matter will be referred to the full Common Market Group. Pursuant to the Protocol of Ouro Preto, if a private party uses the option to file its complaint with the National Section of the MERCOSUR Trade Commission, the National Section will place the complaint on the agenda of the next meeting of the full MERCOSUR Trade Commission. If the matter cannot be resolved at this meeting, it will be referred to one of the seven technical committees operating under the Trade Commission that has the most expertise in the matter. The selected technical committee has 30 days (which can be extended) to make its recommendations (which can include dissenting opinions) on how to resolve


the dispute. If, after receiving those recommendations, the MERCOSUR Trade Commission is unable to resolve the matter successfully, the dispute will be referred to the Common Market Group for resolution (which now follows the procedure established by the Protocol of Olivos). In those cases that were initially filed with the National Section of the Common Market Group, the Protocol of Olivos requires that the Common Market Group accept a complaint referred to it from the respective National Section only if it contains the necessary elements to support a claim. Any decision to reject a complaint requires the consensus of all four MERCOSUR countries. If the complaint is accepted, the Common Market Group convenes a panel of three experts to try to resolve the matter within 30 days thereafter. The experts are selected from a list of 24 individuals whose names are kept on file with the MERCOSUR Secretariat in Montevideo. The parties to a dispute have a right to jointly appear before these experts and present their respective positions. The experts can make unanimous recommendations (including suggesting dismissal of the complaint as baseless). If there is no unanimity of opinion among the three experts, their different conclusions will be forwarded to the Common Market Group for it to resolve the matter as best it can. Once the Common Market Group has made a determination, however, there is no further recourse by the private sector party unless a government adopts the private party’s complaint as its own and initiates diplomatic negotiations or proceeds directly to binding arbitration. C. Implementing Regulations for the Protocol of Olivos The implementing regulations for the Protocol of Olivos found in CMC Decision 37/03 introduce some important clarifications on matters dealing with notification requirements as well as new rules of procedure for MERCOSUR’s current dispute resolution system. For one thing, the decision on whether to use the MERCOSUR system or refer a matter to the WTO dispute resolution mechanism must be made before the governments even begin negotiations as a first step at dispute resolution under the procedure established by the Protocol of Olivos. Chapter II of the implementing regulations details the procedure for requesting an advisory opinion from the Permanent Tribunal of Review and the scope of such an opinion. Petitions requesting an advisory opinion can be made only: 1. at the request of all four state parties acting together; 2. by MERCOSUR’s three decision-making bodies (i.e., the Common Market Council, the Common Market Group, or the MERCOSUR Trade Commission); or The ability of MERCOSUR’s three major institutional bodies to request an advisory opinion is a significant development since it strips the Common Market Council of the exclusive authority it had under the Protocol of Ouro Preto to interpret the scope and reach of its decisions. N. Susani, El Alcance del Procedimiento de Opiniones Consultivas Establecido por el Reglamento del Protocolo de Olivos. 8 Revista de Derecho Internacional y Del Mercosur 73 (Mar. 2004). This means that all three rule-making bodies in MERCOSUR can request an advisory opinion from the Permanent Tribunal on proposed norms before they are actually issued,


3. by any of the member states’ highest courts. Advisory opinions require the participation of all five judges of the Permanent Tribunal of Review. Advisory opinions should normally be issued within 45 days of the request being filed with the tribunal and (unlike those of the Andean Tribunal of Justice, for example) are not binding on the court system that made the request. Interestingly, written dissenting opinions are permitted (in sharp contrast to the prohibition on dissenting opinions by ad hoc arbitration panels). Article 19 of the implementing regulations to the Protocol of Olivos lists several grounds that can disqualify someone from serving as an arbitrator on an ad hoc panel. These include persons who have acted as a representative of one of the governments at some previous stage of the same dispute now being arbitrated, persons who have some type of vested interest in the dispute or its outcome, or persons who currently, or in the past, have represented any individual or company with a direct interest in the dispute or its outcome during the preceding three years. Challenges to an arbitrator must be made within seven working days following notification of his or her appointment. In response to some of the problems that arose in 2002 and 2003 during an arbitration proceeding brought by Argentina against Uruguay under the now superseded Protocol of Brasilia concerning an export subsidy program for wool products, Article 28 of the implementing regulations outlines the consequences for failing to adhere to procedural deadlines. An ad hoc arbitration panel can terminate the proceedings if the party that requested arbitration fails to submit a written complaint on time or, without justification, fails to comply with other procedural requirements. Any party to the dispute that fails to submit a response on time will be barred from doing so at a later date, and the matter will proceed accordingly (although the recalcitrant party’s responses at earlier stages of the dispute resolution system will be considered in making any final determination). Similarly, the failure of a party to show up at a hearing will also not prevent the proceedings from continuing based on the record already established. Article 35 of the implementing regulations to the Protocol of Olivos establishes a Secretariat that assists the Permanent Tribunal of Review in its endeavors. Pursuant to Article 36(1), petitions for review should be filed in writing with both the MERCOSUR Secretariat in Montevideo and the Permanent Tribunal of Review Secretariat in Asuncion (the effective date for and each can challenge the legality of any norm issued by any of the other rule making bodies. Id. at 67. The official excuse for making advisory opinions non-binding is that, unlike the situation in the Andean Community, none of MERCOSUR’s institutional bodies enjoys supranational authority. In addition, making advisory opinions binding might clash with a common interpretation of Brazilian constitutional law, for example, whereby decisions issued outside the constitutionally recognized hierarchical court structure are not enforceable within Brazilian national territory. Whatever the precise explanation, making advisory opinions nonbinding seriously undermines the ability of the Permanent Tribunal of Review to become the ultimate interpreter of MERCOSUR law. Id. at 78.


the filing begins to run from the date of first submission with any of these two entities). Article 39(2) of the implementing regulations requires that all five judges of the Permanent Tribunal of Review must sit in cases where both sides to the dispute decide to use the option found in Article 23 to the Protocol of Olivos and proceed directly to the Permanent Tribunal of Review as the sole fora for resolving their dispute, thereby bypassing both the Common Market Group (or the MERCOSUR Trade Commission for that matter) and an ad hoc arbitration panel. Article 43 of the implementing regulations to the Protocol of Olivos does not permit a government to unilaterally impose additional compensatory measures if an ad hoc arbitration panel has already determined that the measures being pursued by a state ordered to do something, is sufficiently fulfilling the terms of the original decision. Article 52 of the implementing regulations to the Protocol of Olivos details the procedures that must be followed by the panel of experts that assists the Common Market Group in resolving a dispute filed by a private sector party. The experts can meet as many times as they choose, in whatever city in MERCOSUR that they deem most convenient. The experts may call a hearing if they so decide and invite the two sides as well as interested private sector representatives from those same countries to appear before them to discuss the matter at hand. In December 2005 the Common Market Council issued Decision 30/05, which contains the internal rules of procedure for the Permanent Tribunal of Review. D. Decisions Arising Under the Protocol of Olivos 1. Dispute Between Uruguay and Argentina Arising from the Prohibition on the Importation of Remolded Tires (October 25, 2005) The complaint was brought by Uruguay alleging that an Argentine law (i.e., Law No. 25.626 of 2002), which prohibited the importation of remolded tires, violated MERCOSUR provisions that mandate the free movement of goods among the member states. Previous Argentine legislation had only prohibited the importation of used tires, but made no mention of remolded tires. Remolded tires from Uruguay had therefore been imported by Argentina prior to 2002 without any restrictions. With passage of the new law, however, Uruguayan producers of remolded tires found themselves blocked from selling their product in the Argentine market. In support of their complaint, the Uruguayan government argued that the 2002 Argentine law imposed a new trade barrier that could not be justified by a public policy argument that the measure was needed to protect the health and well being of Argentine citizens or the country’s environment. For one thing, Uruguay claimed that Argentina continued to import remolded tires from


other parts of the world, even as it prohibited their importation from Uruguay. In addition, the Uruguayans pointed out that there were some 70 factories in Argentina producing remolded tires that were already sold domestically. The Argentine response noted, among other things, that the law prohibiting the importation of remolded tires was part of legislation designed to promote safety on Argentine roads as well as the Argentine environment. Accordingly, it was expressly permitted under the public safety clause found, inter alia, in Article 50 of the Treaty of Montevideo of 1980 that created the Latin American Integration Association (ALADI; the umbrella organization that includes the MERCOSUR process under its jurisdiction) and is specifically referred to in Annex I to the Treaty of Asuncion as binding on intra-MERCOSUR trade. In a two-to-one decision, the ad hoc arbitration panel found in favor of Argentina, concluding that the law prohibiting the importation of remolded tires was permissible as a measure designed to protect the Argentine environment. The majority of the arbitrators accepted Argentine arguments that the level of remolded tires it had imported from countries other than Uruguay since 2001 was “insignificant” and “exclusively for the purposes of experiments and analysis.” The panel also found it irrelevant that Argentina was itself producing remolded tires for domestic sales. Although the arbitrators acknowledged the Uruguayan argument that remolded tires were safe and actually allowed double use of a tire that would otherwise be discarded and thereby contribute to environmental degradation, the majority still found that Argentina was entitled to remold it own discarded tires and not have to accept those from other countries. The majority also disregarded the precedent set in the case brought by Uruguay against Brazil in 2002 within the MERCOSUR dispute resolution system under the Protocol of Brasilia. In that case, based on a similar fact pattern, the arbitration panel had found that the Brazilian prohibition on imported remolded tires from Uruguay was an impermissible impediment to intra-MERCOSUR free trade. As justification for disregarding the earlier case, the majority in the Argentina-Uruguay matter emphasized that the strong environmental argument in favor of prohibiting the importation of remolded tires was never even considered or addressed in the 2002 case brought by Uruguay against Brazil. Since the Uruguayan complaint against Argentina was filed under the new Protocol of Olivos, an appeal on issues of law was permissible and duly filed by the Uruguayan government before the newly created Permanent Tribunal of Review. The Permanent Tribunal reversed the decision of the ad hoc arbitration panel, finding that it was based on errors in law and, on December 20, 2005, by a two-to-one vote, reversed in favor of Uruguay. The majority of the judges determined that the Argentine law of 2002 prohibiting the importation of foreign remolded tires violated the country’s free trade obligations under MERCOSUR and that it could not be justified by reference to Article 50 of the Treaty of Montevideo of 1980. It ordered Argentina to revoke the law within 120 days and prohibited it from adopting any new legislation of a similar nature to the extent it was applicable to imports from its MERCOSUR partners.


In reaching its decision, the majority on the Permanent Tribunal of Review found that Argentina had failed to show that its prohibition on imported remolded tires was enacted to principally preserve the health and well-being of its citizens or the Argentine environment. The Permanent Tribunal noted that the legislative history of the law underscored that it was enacted as much to “protect the national industry that produced such products” than for any other reason. In addition, anything beneficial that might have been sought through such a measure was not proportional to the far greater harm that was being inflicted on the free movement of goods among the MERCOSUR countries and the concept of national treatment. For one thing, any environmental “damage” that might be inflicted in allowing the importation of remolded tires from other MERCOSUR countries was not “grave and irreversible” and did not address the underlying environmental problem of how to discard of old tires (whether remolded or otherwise). In response to a subsequent request by Argentina for clarification of its December 20, 2005, decision in favor of Uruguay, the Permanent Tribunal of Review noted that a request for clarification is limited to: (1) correcting a material error, (2) clarifying obscure expressions without altering the substance of the decision, or (3) calling attention to an omission by the Permanent Tribunal to a matter that was raised and discussed during the course of the litigation. Argentina presented 31 points on which it sought clarification. The Permanent Tribunal dismissed all of them as either lacking any merit or falling outside the narrow grounds of a proper request for clarification. In fact, the Permanent Tribunal of Review scolded Argentina for inappropriately attempting to use a request for clarification as a means to again raise issues that had already been litigated and decided. In May 2007 Argentina requested that the Permanent Tribunal of Review consider whether the compensatory measures adopted by Uruguay on April 17, 2007, in response to Argentina’s failure to follow the 2005 decision of the Permanent Tribunal and permit the importation of remolded tires from other MERCOSUR countries, was excessive. In particular, the Uruguayans had imposed a 16 percent retaliatory duty on all tires imported from Argentina. The Permanent Tribunal noted that the proper formula for determining the proportionality of a compensatory measure was both economic and institutional damage. In the case at bar, the Uruguayan tariff was more symbolic given that Argentina’s failure to permit the duty-free importation of remolded tires had a much greater negative impact on the small Uruguayan economy (including loss of jobs) than any loss of market share Argentine producers suffered as a result of Uruguay’s imposition of a duty on tires. In a two-to-one decision issued on June 8, 2007, the Permanent Tribunal of Review held that the Uruguayan compensatory measure was proportional and not excessive. In early 2008 Uruguay petitioned the Permanent Tribunal of Review to issue a pronouncement as to whether Argentina was in compliance or not with the Permanent Tribunal’s 2005 decision as a result of new legislation passed by the Argentine Congress in December 2007. Under the new law, Argentina permitted the importation of remolded tires from only those countries to which


it can export the same quantity of its used tires. In an April 25, 2008, decision, a two-to-one majority on the Permanent Tribunal of Review found that despite the passage of the new law, Argentina was still in violation of the Permanent Tribunal’s 2005 decision that required Argentina to lift the prohibition on imported remolded tires from other MERCOSUR countries. The new law had the effect of preserving the original prohibition on importing remolded tires (even if it was now technically a conditional prohibition). The new law was also discriminatory because it did not prohibit the production and subsequent sale of domestically remolded tires within Argentina. Furthermore, there was still no pressing health or environmental reason that justified prohibiting the importation of foreign remolded tires and overcame the stronger MERCOSUR presumption in favor of intra-regional free trade. 2. Complaint Brought by Uruguay Against Argentina for Failure to Adopt Appropriate Measures to Prevent and/or Halt Interruptions to Free Movement Over the International Bridges of General San Martin and General Artigas that Link the Argentine Republic with the Eastern Republic of Uruguay (June 21, 2006) In September 2006 the Uruguayan government filed a complaint against Argentina after it was unable to convince then Argentine President, Nestor Kirchner, to forcibly dislodge large groups of environmentalists who for several months had blocked access roads within Argentina to two major bridges (i.e., General San Martin and General Artigas) that link Argentina with Uruguay. The blockades were ostensibly erected to force the Uruguayan government to rescind its authorization to allow two foreign multinationals to construct paper mills along the Uruguay River (which forms part of the border separating Argentina and Uruguay).10 The protestors alleged that both mills would severely contaminate the river and air on both sides of the border and that the Uruguayan government had failed to adhere to a bilateral ArgentineUruguayan treaty signed in 1975 on use of the Uruguay River.11 As a result of the blockades, the Uruguayan government alleged that the country suffered major economic losses as Argentine tourists, who are the most significant contributors to the country’s important tourism sector, were unable to 10 The emphasis is on “ostensible” given that allowing the environmental protests to continue unabated was also a way for the politicians in neighboring Argentine provinces to express their displeasure at the decision of the Finnish and Spanish foreign investors building the pulp plants to choose Uruguay over Argentina. That decision appears to have been rooted, in part, by discomfort on the part of the foreign investors at being solicited to make forced contributions to individual politicians in these Argentine provinces if they wanted approval of their projects. 11 Uruguay’s alleged failure to adhere to the provisions of this 1975 treaty was the subject of a complaint filed by Argentina against Uruguay in the International Court of Justice in The Hague in May 2006 (Pulp Mills on the River Uruguay (Argentina v. Uruguay)). Argentina eventually lost that case when it was dismissed for failure to state an actual cause of action since no damage had actually occurred as a result of the Uruguayan action to permit the construction of the pulp plants on its territory and there was no evidence of future damage either.


reach the country by land at the height of the peak tourist season. The blockades were also said to have had a severe negative impact on the country’s exporters, merchants, and transport companies. Accordingly, these blockades violated Argentina’s MERCOSUR obligations to ensure the free movement of goods, services, and factors of production among the member states. Interestingly, the Uruguayan delegation cited a European Court of Justice decision that had inculpated the French government for its failure to dislodge protestors from interrupting traffic on major highways in France that served as links between different European countries. Among the specific remedies sought by Uruguay was an order from the arbitration panel directing that Argentina adopt the necessary measures to prevent and/or cease any future blockades. The Argentine response, inter alia, pointed out that the complaint was moot as the roads in question were no longer being blocked, and any request for future actions was inappropriate as there was no way to predict what actions, if any, the Argentine government might take in response to actions by nongovernmental agents in the future. Furthermore, it questioned the severity of the economic damage that Uruguay may have suffered as a result of the blockades, given that alternate routes and means of reaching Uruguay from Argentina (and vice versa) were available. The Argentine government also cited a European Court of Justice decision that held that the right to free expression outweighed the right to the free movement of goods when the latter was being affected by a road blockade carried out by environmentalists. In a unanimous ruling, the arbitrators found that whatever legitimate free speech rights the protestors may have been trying to exercise through their blockade of the access roads to the Argentine-Uruguayan bridges, this concern was outweighed by the length and extent of the interruptions to the free movement of goods, services, and persons among the MERCOSUR countries. Although the arbitrators acknowledged the blockades were carried out by individuals presumably not linked to the federal government in Buenos Aires or any provincial authority, the failure of the Argentine government to undertake more effective measures to dislodge or dissuade the protestors was incompatible with its obligations to ensure the free flow of goods and services among the MERCOSUR countries. Despite this declaration, the arbitrators noted that under MERCOSUR’s dispute resolution system, they had no legal authority to award Uruguay any damages suffered as a result of past blockades, nor were they authorized to grant the requested injunctive relief and order Argentina to undertake specific actions in the event of future blockades.12

12 As has been noted by some commentators, the inability of the arbitrators to issue anything more than a declaration reflects the fact that the dispute resolution system within MERCOSUR was intended to handle disputes that were predominantly economic or trade related in nature. The Argentine-Uruguayan dispute arising from the construction of the paper mills on the banks of the Uruguay River deals with other important issues, such as those related to sovereignty and the proper use of a river under at least two international treaties. See, e.g., H. Masnatta, Papeleras: El Tribunal Permanente del MERCOSUR No Es Competente, 10 Revista de Derecho Internacional y Del Mercosur 124–25 (Feb. 2006).


Following the convening of the ad hoc arbitration panel, but before its ruling had even been issued, Argentina had already filed an interlocutory appeal to the Permanent Tribunal of Review to determine if the arbitrators should have been empanelled in the first place. The Argentine government also requested that its interlocutory appeal be heard by all five members of the full Permanent Tribunal of Review, instead of three. Although all five members of the Permanent Tribunal did meet to review Argentina’s interlocutory appeal, their decision underscored that only three judges were actually required under the Protocol of Olivos, which explicitly limits the use of the full five-member bench to disputes involving more than two states or that bypass the Common Market Group and an ad hoc arbitration panel (which was not the case here). The Permanent Tribunal of Revision went on to deny Argentina’s request for an interlocutory review as something not permitted by the Protocol of Olivos. Furthermore, the type of review that the Permanent Tribunal of Revision can conduct of an ad hoc arbitration panel’s final decision is limited to questions of law and faulty legal reasoning. An empanelment order lacks any legal issue or determinations of law for the Permanent Tribunal to resolve. Interestingly, in denying Argentina’s request, the Permanent Tribunal of Revision also ordered the Argentine government to bear the full costs of its ultimately unsuccessful interlocutory appeal (including any legal costs that may have been incurred by Uruguay). 3. Request for an Advisory Opinion from the Court of First Instance in Civil and Commercial Matters (First Division) of Asuncion, Paraguay re: Norte S.A. Imp. Exp. c/ Laboratorios Northia Sociedad Anónima, Comercial, Industrial, Financiera, Inmobiliaria y Agropecuaria s/ Indemnización de Daños y Perjuicios y Lucro Cesante (April 3, 2007) A lower court judge sitting in Asuncion, Paraguay, handling a commercial litigation matter involving a Paraguayan company suing an Argentine firm for breach of a distribution contract requested an advisory opinion from the Permanent Tribunal of Review. The request was formally referred to the Permanent Tribunal by the Supreme Court of Paraguay. The Argentine defendant claimed that under the Protocol of Buenos Aires on International Jurisdiction in Contractual Matters that was issued by MERCOSUR’s Common Market Council in 1994 through Decision 1/94 and ratified by all four MERCOSUR governments, a court sitting in any MERCOSUR member state had to recognize the choice of forum and law included in a contract involving nationals domiciled or headquartered in different MERCOSUR countries. Since the contract specified that the forum for resolving any dispute arising from the distribution contract was the regular courts of the city of Buenos Aires, and the choice of law selected was that of Argentina, the defendant claimed that the Paraguayan court had no jurisdiction over the matter. The actual question posed to the Permanent Tribunal of Review was whether the choice of forum and law included in the distribution contract could be overridden by the Protocol of Santa Maria on Consumer Relations adopted in 1996 by the Common Market Council through Decision 10/96. That protocol recognizes the primacy of a Paraguayan consumer protection law that governs the relationship


between foreign manufacturers or firms and persons or companies domiciled in Paraguay and grants exclusive jurisdiction to Paraguayan courts to enforce its provisions. In addition, the Protocol of Buenos Aires on International Jurisdiction in Contractual Matters itself acknowledges that it is not applicable to consumer sales contracts, recognizing that the parties to such contracts are not on an equal footing. In issuing its advisory opinion, the Permanent Tribunal of Review lamented the fact that, unlike the situation involving the communitarian courts in the Andean Community, the Caribbean Common Market and Community (CARICOM), the Central American Integration System, and the European Union, its determinations are not binding. This, in the opinion of the judges, undermined the Permanent Tribunal’s ability to fulfill the role assigned to it under the Protocol of Olivos to “guarantee the correct interpretation, application and fulfillment of the fundamental instruments of the integration process” and MERCOSUR norms “in a consistent and systematic manner.” In reaching its determination, the Permanent Tribunal of Review pointed out that none of the MERCOSUR countries had yet ratified the Protocol of Santa Maria on Consumer Relations, and it was therefore inapplicable. Even if it were in force, that protocol’s provisions would still not be applicable given that the contract at bar did not involve a consumer sales contract, as the Paraguayan plaintiff was not purchasing a product for its own personal or familial use. Accordingly, the Protocol of Buenos Aires on International Jurisdiction in Contractual Matters was controlling, and the trial court in Asuncion was therefore under an obligation to determine if there were other legal factors that could allow it to disregard the contract’s choice of forum and law clauses. One of the noteworthy aspects of its first advisory opinion was that the Permanent Tribunal of Review recommended that the Common Market Council revise the rule established in Decision 2/07 (and reiterated in Common Market Group Resolution 2/07), which requires that the costs for an advisory opinion be borne solely by the government of the country that requested it. Given that advisory opinions are of benefit to the judicial systems of all the MERCOSUR member states, their costs should be divided among all four on an equitable basis. IV. Intra-regional Free Trade Program Since January 1, 1995, the vast majority of goods that meet MERCOSUR’s rule of origin requirements have been traded among the four member states tariff free. Until January 1, 1999, in the case of Argentina and Brazil, and the following year in the case of Paraguay and Uruguay, the MERCOSUR countries continued to levy duties on a small group of regionally produced goods. The amount of duty that was charged on these exempt items was reduced annually by increments of 25 percent. The purpose of temporarily exempting these items from intra-regional free trade was to give their producers sufficient time to readjust to the new competitive realities that a liberalized trade regime would inevitably bring. In addition to these selected products, it is important to note that the entire automotive sector and sugar were (and continue to this day) to


be excluded from MERCOSUR’s intra-regional free trade regime. Among the products included in the initial lists of items temporarily exempt from full intra-MERCOSUR free trade during the transition period were the following:13 •

• •

•

Argentina: Cast iron and steel and goods manufactured from such products; clothing adornments and other accessories; furniture; latex and products manufactured with latex; machinery, mechanical artifacts and equipment; paper and carton; plastic and products manufactured from plastic; prepared foodstuffs; and shoes. Brazil: Alcohol and alcoholic beverages; latex and products manufactured with latex; prepared vegetables; wool and fine and industrial hairs; and yarn as well as knitwear made of mane hair. Paraguay: Cast iron and steel; electrical machinery and equipment; cotton and goods manufactured with cotton; clothing adornments and other accessories; fresh vegetables; furniture; furs; lactate products; mate; meat; paper and carton; prepared foodstuffs made with cereals and flour; processed vegetables; shoes; vegetable and animal oils; and wood. Uruguay: Alcohol and alcoholic beverages; aluminum and products manufactured from aluminum; automobiles; cast iron and steel and products manufactured from them; cement; ceramic goods; clothing adornments and other accessories; cocoa and products made from cocoa; cotton; dies and leather tanning materials; electrical machinery and equipment; furniture; flour, grains, and other mill products; fresh vegetables and fruits; glass; knitwear; lactate products; inorganic chemical products; machinery, mechanical artifacts and equipment; manufactured stone products; plaster; sugar and candy; paper and carton; pharmaceutical products; plastic and products made from plastic; prepared foodstuffs; prepared foodstuffs made from cereal and flour; processed vegetables; products made of albuminoid; rugs; shoes; soaps; synthetic fibers; toys; vegetable and animal oils; and wood as well as products made from wood.

It should come as no surprise to learn that many of the products that have been the targets since the transition period formally ended of unilateral nontariff barriers as well as special duties imposed by one MERCOSUR country on imports from the other member states are often the same items included in the original list of exempt items formulated in 1995. For example, in July 2001 Paraguay imposed a 10 percent duty on 352 products imported from the other MERCOSUR countries that were almost identical to its list of products it had exempted from intra-regional free trade through 2000. This new tariff remained in effect for two years and was in response to the Brazilian maxidevaluation of the real in January 1999 that was said to put Paraguayan producers 13 The author is grateful to Adriana Najuk of Ecolatina S.A., an economic consulting firm based in Buenos Aires, Argentina, for putting together the national lists of items exempt from intra-regional free trade during the transition period.


of these goods at a competitive disadvantage. In addition, it was in retaliation for a measure adopted by the Argentine government in June 2001 that allowed Argentine exporters to exchange the dollars they received from foreign sales at a more favorable rate of exchange than importers had access to in order to buy foreign goods (a measure designed to encourage exports and discourage imports). The Paraguayan tariff hike was followed by Uruguay imposing a statistical tax in July 2001 ranging from 1.5 to 3 percent on a large number of items imported from the other MERCOSUR countries through March 31, 2002. The Uruguayan government claimed the measure was necessary to combat the negative impact caused to the Uruguayan economy by the continuing devaluation of the Brazilian real after January 1999 and the same Argentine exchange rate manipulation scheme adopted in June 2001 that the Paraguayans were upset about. In March 2002 the Uruguayan government imposed “temporary” import duties on a wide range of products imported from Argentina in an effort to contain expected import surges arising from Argentina’s chaotic sharp devaluation of the peso following the collapse of the Convertibility Plan that had previously pegged the peso at parity with the U.S. dollar since 1991. In more recent years, intra-MERCOSUR trade has been subject to a myriad of non-tariff barriers that include state and provincial norms that discriminate against foreign imports even if they originate in a MERCOSUR country; rules issued by Central Banks that discriminate against imports that benefit from any type of foreign financing arrangements; non-automatic import license requirements; compulsory testing at Brazilian ports of entry for wheat flour imported from Argentina; delays in the issuance of Brazilian import licenses on “sensitive” products originating in Argentina; and, delays in processing product registration. CMC Decision 27/07 calls on Argentina and Brazil to definitively eliminate any non-tariff barriers and restrictions they may impose on imports originating from other MERCOSUR countries no later than December 31, 2010, while Paraguay and Uruguay are required to do so no later than December 31, 2012. In an effort to at least reduce the financial costs incurred in cross-border trade and thereby stimulate increased intra-regional trade flows, the Common Market Council adopted Decision 38/06 at the end of 2006 that authorizes Argentina and Brazil to conduct a pilot program to allow their respective national currencies to pay for bilateral imports instead of U.S. dollars. This program is in addition to the ALADI central clearing house mechanism that allows ALADI members and the Dominican Republic to avoid using hard currency reserves on intra-regional trade. As a result of CMC Decision 25/07, this pilot program between Argentina and Brazil was made permanent and extended to encompass trade between all the MERCOSUR countries so that local currency can now be utilized for all commercial transactions conducted among businesses and individuals from the four member states. The measure is expected to be an incentive for small- and medium-sized enterprises to participate more actively in intra-regional trade transactions, by eliminating the need to purchase dollars and pay hefty commission fees to banks and currency


brokers. It will come into effect as the Central Banks in each country execute the relevant bilateral agreements. V. Rule of Origin Requirements One important thing to emphasize when discussing the rules of origin requirements within MERCOSUR is that they are transitional in character. Once the MERCOSUR customs union is in full operation, which at this point appears will not be until after the CET becomes fully implemented in 2015, there will be no need for any rules of origin. Accordingly, any good coming in from outside MERCOSUR will be levied the requisite tariff and then be allowed to circulate among MERCOSUR as if it originated there. Unfortunately, that day appears increasingly distant as the date for fully establishing the customs union is continuously pushed into the future every time the previously established deadline set by the Common Market Council approaches. The Common Market Council did issue Decision 54/04, however, that at some point in the near future will end the practice of charging the CET more than once when a third-country import is reexported within MERCOSUR.14 The original rules of origin for MERCOSUR are found in Annex II to the Treaty of Asuncion. In general they parroted the rules of origin found in ALADI Resolution 78. These were substituted by a new set of rules of origin adopted in August 1994 by the Common Market Council and issued through Decision 6/94. In May 2004 the Common Market Council issued Decision 1/04 to which is annexed in one document all the many modifications made to the rules of origin since Decision 6/94 was issued a decade earlier. The following goods will be considered to originate within MERCOSUR and are therefore eligible for intra-regional duty-free treatment: 1. products made entirely within MERCOSUR and exclusively with materials originating within any of the member states; 2. minerals and other natural resources, vegetable products, and live animals extracted, obtained, born and raised in one of the MERCOSUR countries and its territorial waters; 3. fish, crustaceans, and other marine species obtained outside the territorial waters and the exclusive economic zones of a MERCOSUR country by ships registered in one of the member states, or by boats rented or leased to companies established in a member state; 4. products obtained from outer space, so long as they are obtained by someone from a MERCOSUR country; 5. products made with non-MERCOSUR inputs that are sufficiently 14 One reason this issue has taken such a long time to resolve is that unlike the European Union, for example, there is no supranational institution within the MERCOSUR framework authorized to collect the CET and distribute it equitably among the member states. Without such a redistribution mechanism, landlocked Paraguay, for example, is always going to be at a disadvantage since almost all of its imports from outside MERCOSUR are transshipped from elsewhere within the Southern Cone (albeit often times from free trade zones in Brazil and Uruguay where no import tariff is paid).


transformed within MERCOSUR so as to achieve a new tariff classification heading under the NCM; or 6. products that do not undergo a substantial transformation that results in a change in tariff classification heading at the first fourdigit level if the cost, insurance, and freight (CIF) value of nonMERCOSUR inputs does not exceed 40 percent of the final good’s freight on board (FOB) value (this 60 percent regional content requirement is also applicable to products assembled or mounted in a MERCOSUR county that utilize third-country inputs). A limited number of goods are subject to specific rules of origin that are listed in Annex I to Decision 1/04. These rules require the specific inclusion of regionally made products or the carrying out of operations within the MERCOSUR region. For example, all butter as well as creams must be made with milk wholly sourced within MERCOSUR. Specifically excluded from intra-regional free trade treatment are goods that exclusively use materials or inputs from outside MERCOSUR and merely undergo a process of mounting or assembly, packaging, division into lots or volumes, selection, classification, marking, composition of components of products, or simple dilution in water or other substances that do not alter the essence of the original product. The MERCOSUR Trade Commission has the authority to make revisions or to establish new rule of origin requirements as the circumstances may require although, as a general rule, this should be done only in particularly exceptional circumstances. The MERCOSUR Trade Commission may also grant requests from member governments to create or revise a specific rule of origin in exceptional circumstances when there are problems of supply, availability, technical specifications, or delivery time and price. Goods should normally be shipped directly from one MERCOSUR country to another in order for them to be in compliance with the rules of origin. Exceptions are permitted because of geographical reasons or transport requirements, so long as nothing is done in the non-MERCOSUR transit country(ies) beyond activities normally associated with cargo handling and temporary storage. CMC Decision 4/01 requires that all goods imported into Uruguay from the Manaus Free Trade Zone in Brazil and Tierra del Fuego in Argentina, as well as goods imported into Argentina from Manaus or into Brazil from Tierra del Fuego must comply with MERCOSUR’s rule of origin requirements if they are to receive duty-free entry. As a result of the Andean Community-MERCOSUR Free Trade Agreement or ALADI Economic Complementation Agreement or Acuerdo de Complementa- ción Económica (ACE) No. 59 that created more liberal rules of origin for the trade between countries of both blocs than had previously existed internally within MERCOSUR, Common Market Group Resolution 37/04 temporarily modifies the regional content requirements that are applicable for intra-MERCOSUR trade to reflect this reality. As a first rule, Argentina and Brazil continue to


apply the original 60 percent regional content requirement. At the same time, Brazilian exports to Paraguay and Uruguay and Argentine exports to Paraguay are also subject to the original 60 percent regional content requirement. This then leaves Uruguayan exports to Paraguay and Argentine-Uruguayan trade subject to the general 50 percent regional content required for duty-free trade between the Andean Community countries and MERCOSUR.15 In 2012 this percentage will increase to 55 percent, and it could subsequently reach the MERCOSUR standard regional content requirement of 60 percent (if the Andean countries so decide). It is important to note that these temporary modifications to the intra-MERCOSUR rules of origin regime only apply to those goods that utilize the regional content percentage option of the rules of origin. Common Market Group Resolution 37/04 also contains rules for the intra-MERCOSUR trade of final products that use inputs imported from an Andean Community country at a preferential tariff. So long as the inputs fulfill the relevant Andean Community-MERCOSUR rules of origin, were imported duty free, and were not subject to any type of quota restriction, they can be used to make final goods in a MERCOSUR country and can be traded among the four MERCOSUR member states duty free. Further modifications to the rules of origin were made in 2007 as a result of complaints from Paraguay and Uruguay that their exports should be entitled to some type of compensatory measures to overcome the economic asymmetries that exist with Argentina and Brazil and often put their exports at a competitive disadvantage in those markets. In response, CMC Decision 16/07 now permits up to 10 percent of the CIF value of all third-country inputs that do not undergo substantial transformation in one or more of the MERCOSUR countries to be deemed de minimis and therefore disregarded when determining if the final product meets MERCOSUR’s rule of origin based on substantial transformation as reflected by a change in tariff classification heading. In addition, products made in Paraguay need only comply with a 40 percent regional content requirement and can still be exported to the other three MERCOSUR countries duty free through December 31, 2022. Finally, the exports of Paraguay and Uruguay to Argentina and Brazil cannot be subject to rules of origin that may be more onerous than those extended by their two larger MERCOSUR partners to third-country imports. VI. Certificates of Origin Goods traded among the MERCOSUR countries must be accompanied by a certificate of origin issued by the relevant national government agencies or other entities to which the task has officially been delegated. The certificates of origin should be in the format found in Annex II to CMC Decision 1/04. Applications for a certificate of origin should be filled out by the final producer of a good, who is required to make a sworn statement as to, inter alia, 15 As a result of CMC Decision 29/03, Paraguayan exports only require a 40 percent regional content requirement in order to be exported duty free to the rest of the MERCOSUR countries. This was supposed to have ended in 2008, but CMC Decision 16/07 has now extended this privilege until December 31, 2022.


the characteristics and components of the product and the processes for its manufacture, including information as to the origin of the various materials, components, and/or parts of the product. The declaration to support the issuance of a certificate of origin is valid for up to 180 days after it is made and can be utilized for all like products exported within that time period. A certificate of origin should normally be issued only when the corresponding commercial invoice has been issued, or within 60 days thereafter. At border crossings, customs officials may require that an issuing authority in the exporting country supply it with additional information if there are well-founded doubts as to the authenticity of the certificate of origin and the veracity of the information included therein. Although customs officials in the importing country may require the posting of a bond on goods connected to the suspicious certificate of origin, they are not allowed to prevent entry of the goods into their national territory. The amount of the bond should not exceed a value equivalent to the normal tariff rate on file with the WTO. The authority in the exporting country that issued a suspicious certificate of origin has 30 working days within which to respond to a request for additional information made by the customs officials of the importing country. When the issuing authority does not respond or does so in an unsatisfactory manner, the customs authorities in the importing country can open an investigation into the matter that can include on-site inspections in the territory of the exporting country (and in the presence of that country’s officials). This investigation should normally take no longer than 75 days from the date the original request for additional information was made. During the time this investigation is being carried out, the customs authorities may not halt further importations from the same exporter but may require the posting of a bond. If the investigation concludes that the content of the challenged certificate of origin can be verified, any posted guarantees must be refunded to the importer. On the other hand, if the origin of the imported product is other than what was certified, the regular duty must be paid as well as any fines or penalties called for in the importing country’s national legislation. Future importation of goods from the same producer(s) will be levied the regular tariff until it can prove that it has changed its production to comply with the MERCOSUR rules of origin. CMC Decision 1/04 allows a MERCOSUR country to request that another member state investigate the validity of the certificate of origin for goods imported from a third MERCOSUR country whenever it has a well-founded suspicion that its exports are being detrimentally impacted by possible noncompliance with the MERCOSUR rules of origin from that third member state into another MERCOSUR country. Within 60 days after the conclusion of an investigation by an importing country and a determination of disqualification of origin, the exporter’s government can request that the MERCOSUR Trade Commission review whether the importing state followed MERCOSUR regulations in fashioning an appropriate remedy and/or make its own technical determination as to


whether the challenged goods actually fulfill MERCOSUR’s rule of origin requirements. For purposes of the technical determination, the MERCOSUR Trade Commission can call on the services of a technical expert selected by the two governments (or chosen by the MERCOSUR Secretariat in Montevideo through a lottery when there is no mutual consent). As an alternative to the MERCOSUR Trade Commission using an expert, the countries involved in a dispute over the validity of a certificate of origin can also can also refer the dispute to a three-person panel of experts (each side having the right to select one expert and the third chosen upon mutual consent or by lottery by the MERCOSUR Secretariat when there is no mutual agreement). Both sides to the dispute are allowed to submit the technical justifications for their respective positions to the panel of three experts. The findings of the three-expert panel are deemed to be those of the MERCOSUR Trade Commission, unless all four representatives from each member state reject those findings. In lieu of referring the matter to the MERCOSUR Trade Commission or a group of three experts (or subsequent to a finding being made if one side is unhappy with it), the governments retain the option to refer their dispute to MERCOSUR’s dispute resolution system. When it is conclusively determined that a certificate of origin has been incorrectly issued, or was issued based on false information or forged, both the producer that solicited the faulty certificate of origin as well as the issuing authority can be liable for civil penalties. The issuing entity’s liability can be excused when it can be shown it issued the certificate of origin based on false information supplied by the applicant, which it is beyond its usual control practices to verify. Any party using false information to obtain a certificate of origin can be suspended from participating in the intra-regional free trade area for a period of up to 18 months and may be criminally liable as well. For their part, culpable issuing authorities may find their authority to issue certificates of origin suspended for a period of 12 months. Repeated violations by producers can lead to permanent exclusion from participating in the intra-regional free trade area, and the culpable issuing authority can be permanently suspended from issuing new certificates of origin. The same penalty can be applied to final producers and/or exporters in cases involving forged certificates of origin. VII. Common External Tariff When first implemented in 1995, the MERCOSUR CET ranged from 0 to 20 percent and was imposed on the vast majority of tariff lines found in the NCM. Among the 15 percent of tariff lines excluded from the CET were some important big-ticket items such as capital goods, computers and related software, telecommunications equipment, textiles, and automobiles. In the particular case of capital goods, each MERCOSUR country was allowed to charge its own tariff rate of up to 35 percent. However, tariff rates were supposed to converge at 14 percent by January 1, 2001. Paraguay and Uruguay had until January 1, 2006, to achieve this 14 percent level. In the case of computers, software, and telecommunications equipment, each country was allowed to charge its


own individual duty rates, but they were all supposed to have converged at 16 percent by the year 2006. In addition to capital goods and the computer and telecommunications sectors, each MERCOSUR country was also permitted to exempt 300 items from the CET until January 1, 2001 (except Paraguay, which was allowed to exempt up to 399 products through January 1, 2006). The following products were included in the original lists presented by each country of items that would be exempt from the CET until January 1, 2001 (or January 1, 2006, in the case of Paraguay).16 •

•

•

•

Argentina: aluminum and goods manufactured with aluminum; copper and goods manufactured with copper; electrical devices, parts, and machines; furniture; inorganic chemical products; latex and goods manufactured with latex; lead and goods manufactured with lead; manufactured plastic materials; materials used in the production of books and magazines; mechanical devices and parts; mixed iron and steel and products made thereof; processed vegetables and fruits; resins; rubber; and toys. Brazil: alcoholic beverages and liquors; aluminum and goods manufactured with aluminum; animal and vegetable oils; cement; cereals; copper and goods manufactured with copper; fertilizers; furs and hides; goods manufactured with stones, plaster, cement, or glass; inorganic chemical products; latex and goods manufactured with latex; malt; milk and lactate products; natural fragrances and resins; natural fuels and oils; organic chemical products; paper and cardboard; photographic and optical instruments and devices; plastics and plastic manufactured goods; soaps; textiles; and wood as well as goods manufactured from wood. Paraguay: adornments and clothing accessories; copper and goods manufactured from copper; cotton; cotton plantings; cured or dyed products; electrical devices, parts, and machines; fertilizers; goods manufactured with common metals; goods manufactured of stones, plaster; glass and products made of glass; inorganic chemical products; knitwear; mechanical devices and parts; mixed iron and steel and goods manufactured thereof; natural fragrances and resins; needlework; organic agents; organic chemical products; paper and cardboard; pharmaceuticals; photography equipment; photographic and optical instruments and devices; plastics and plastic manufactured goods; processed foodstuffs; seeds and fragrant fruits; shoes; sugar; synthetic or artificial filaments; synthetic or artificial fibers; textiles made of natural fibers; tobacco; toys; various chemical products; and watches. Uruguay: agro-industrial byproducts and leftovers; albuminoids; chemical products, cured and dyed products; dyed knitwear; elec-

16 The author is grateful to Adriana Najuk of Ecolatina S.A., an economic consulting firm based in Buenos Aires, Argentina, for putting together the original lists of items exempt from the CET.


trical devices, parts, and machines; fertilizers; inorganic chemical products; latex and goods manufactured of latex; mechanical devices and parts; milk and lactate products; mixed iron and steel and products made thereof; natural fragrances and resins; organic chemical products; pharmaceuticals; photographic and optical instruments and devices; plastics and plastic manufactured goods; soap and waxes; synthetic or artificial fibers; tobacco; and vegetable and animal oils. In the years following 1995, there were numerous attempts by the member states to revise the list of products subject to or exempt from the CET as well as to extend the timetables for full implementation of the CET. There were also times when the actual CET rates were temporarily raised or lowered. Many times these modifications responded to efforts by governments to bring their current account deficits under control (as was the case of Brazil in 1997) or reactivate economic activity (as was the case with Argentina in 2001) or to respond to shortages in regional supplies of a particular good or input. In more recent years, modifications to the CET have been made to accommodate Paraguayan and Uruguayan dissatisfaction with MERCOSUR and prevent them from bolting in favor of bilateral free trade agreements with the United States. Accordingly, to say MERCOSUR has a CET is an exaggeration. There have been so many exceptions made by each country over the years that it is still necessary to look at the individual tariff rate schedules of each MERCOSUR country to determine the exact tariff that will be levied on an imported good upon entry into the customs territory of one of the member states from abroad. As if the continuing national exceptions to the CET were not enough to cause headaches to businesses exporting goods to the Southern Cone, the MERCOSUR countries never respected the fact that the CET may have already been paid when it entered the territory of one member state and then was reexported to another MERCOSUR member state. The only country that did initially was Argentina, which exempted importers from paying the CET again if the requisite documentation could be produced. When Argentina’s MERCOSUR partners failed to reciprocate, the government in Buenos Aires quickly ended this practice. There have always been ways around this anomaly, including entry of the product into a free trade zone for warehousing and subsequent reexport when required, but this should not have been necessary in a fully functioning customs union. One of the stumbling blocks to resolving the multiple charge problem was devising a mechanism to ensure a fair distribution of the funds collected from the CET by the customs service in each member state.17 As a result of CMC Decision 37/05, all goods that are exempt from payment of any duty in all four countries and are identified in a list periodically 17 Devising an acceptable mechanism is particularly important for land-locked Paraguay given that it is the country that most depends on the revenue generated from import duties (i.e., approximately 20 percent versus 5 percent for Uruguay, 3 percent for Argentina, and 2 percent for Brazil). Instituto para la Integración de América Latina y el Caribe, Informe Mercosul No. 11, 48 (2006).


updated by the MERCOSUR Trade Commission can, as of January 1, 2006, circulate duty free among the four MERCOSUR countries. For those goods that actually pay the CET, CMC Decision 54/04 contemplates that they will not have to pay the CET more than once following full implementation of the MERCOSUR Customs Code, the interconnection of the electronic customs entry systems of all four countries, and the establishment of a mechanism that ensures an equitable means of sharing the import duty revenue collected by the different customs agencies through enforcement of the CET. The goal of CMC Decision 54/04 is to ensure that once either the CET or a preferential tariff offered by all the member states or an additional tariff imposed as a result of a MERCOSUR unfair trade practice remedy is paid, the imported item will be allowed to circulate duty free within MERCOSUR as if it originated within the subregion. All that will need to be shown is a receipt from the respective customs authority indicating initial payment of the relevant import duty. CMC Decision 54/04 originally contemplated that the practice of levying the CET more than once would be ended sometime in 2008, but as of the end of 2008, this target deadline had not been met as the MERCOSUR Customs Code had yet to be adopted. On the other hand, the electronic customs entry systems of all four MERCOSUR countries are now linked. In terms of the current situation affecting actual application of the CET by each MECOSUR country, importers need to take heed of the following decisions of the Common Market Council: 1. CMC Decision 31/03 authorizes Paraguay and Uruguay to exempt 250 and 225 tariff lines, respectively, from the CET through 2010. In addition, Paraguay can now exempt until 2010 the 399 items it was originally authorized to exempt from the CET between 1995 through the end of 2005. After 2010 Paraguay and Uruguay can exempt up to 100 tariff lines from the CET through December 31, 2015 (as per CMC Decision 69/07). Furthermore, they can switch up to 20 percent of these tariff lines every six months and substitute them with new items; 2. CMC Decision 32/03 authorizes Paraguay to charge a special 2 percent duty on certain imported raw materials through December 31, 2010; 3. CMC Decision 34/03 authorizes Paraguay and Uruguay to charge a 2 percent duty on capital goods (not already levied a 0 percent duty because the capital good is not produced in MERCOSUR) through December 31, 2010. This modification revokes the 2006 deadline by which each country should have converged their national tariffs to the 14 percent MERCOSUR CET for capital goods; 4. CMC Decision 36/03 allows not-for-profit entities to import into the MERCOSUR duty free almost any type of good (including live animals, primary products, machinery, parts and accessories) required for scientific investigation or research and the development of new technologies. The only goods specifically excluded


from this privilege are new or used automobiles. This privilege is limited to entities that are recognized by the laws of their respective nations as being a scientific or research and development facility, and are properly registered as such; 5. CMC Decision 3/06 permits a limited number of items (listed in an annex to the same decision and including things such as rare art work, personal belongings of diplomats, specially designed automobiles for the handicapped, etc.) to remain duty free indefinitely because of their limited economic impact or because they satisfy non-commercial ends. Only the MERCOSUR Trade Commission is authorized to make modifications to the list of items that are permanently duty-free in each country; 6. CMC Decision 27/06 allows Paraguay and Uruguay to charge a 2 percent duty on informatics and telecommunication equipment through December 31, 2012. This extends the original 2006 deadline when both countries were supposed to have implemented the 16 percent MERCOSUR CET on such imports; 7. CMC Decision 37/07 increased the CET for most textile products or clothing to either 26 or 35 percent, and for a significant number of footwear tariff lines to 35 percent, until at least the end of 2010. Paraguay and Uruguay have the option to opt out of applying these higher tariffs on textiles and clothing (but not footwear) if they so choose. There is recognition, however, that this may cause problems on the export of Uruguayan and Paraguayan clothing made with third-country textiles if that clothing is exported to either Argentina or Brazil. 8. CMC Decision 59/07 allows Argentina and Brazil the right to exempt up to 100 items each from the CET until January 1, 2009. Thereafter, the number of exempt items is gradually reduced so as to be completely eliminated by December 31, 2010. Argentina and Brazil have the right to individually choose what those exempt items will be and to substitute up to 20 percent of them every six months; 9. CMC Decision 61/07 allows Argentina and Brazil to charge a 0 percent duty on imported informatics and telecommunication equipment not produced within MERCOSUR through December 31, 2008. This privilege is granted to Paraguay and Uruguay through December 31, 2015; 10. CMC Decision 27/08 allows Paraguay and Uruguay to charge their own individual duties on various tariff lines related to footwear through the end of 2010. VIII. Other Import Regulations A. Customs Valuation As a result of CMC Decision 13/07, the MERCOSUR countries formally adopted the provisions of the WTO Customs Valuation Agreement as a


communitarian norm and approved a new set of regulations for its application that was to take effect on July 1, 2008. In doing so, the MERCOSUR Customs Valuation Code found in CMC Decision 17/94 was abrogated. Ad valorem import duties are levied on the customs value of an imported item. The customs value of a product includes transport costs as well as cargo, unloading, and handling charges until the port or place of importation plus the cost of insuring the merchandise. It generally does not include post-importation costs associated with construction, assembly, maintenance, technical assistance, or transportation, nor import duties and taxes. Furthermore, interest arising from financing arrangements obtained by the buyer so as to purchase the imported merchandise are normally not included as part of its custom value. Until a MERCOSUR Customs Code is adopted, the port or place of entry is the point where the merchandise is first introduced into the customs territory of one of the MERCOSUR countries. Unless the MERCOSUR governments agree otherwise, the determination of the customs value of a product are left to those authorities under each member state’s administrative framework that have been entrusted with this task. Those governments that require verification of declared value upon the initial shipping of the merchandise can carry out a preliminary examination or a summary analysis upon entry of the good into its custom territory. During this preliminary examination, adequate evidence (i.e., samples for lab analyses) can be collected so as to allow a subsequent, final determination of customs value. The final determination should normally occur within 60 days after the importer first presents the paper work that establishes the value of an import. Shipments that are not subject to a valuation examination at the time of entry can undergo an examination of the type and within the time period mandated by the domestic legislation of each MERCOSUR country. Similarly, appeals of initial decisions are handled by the procedures established under each country’s domestic legislation. Documents and other information (including correspondence) that establish the value of a product should be retained for possible review by the customs service of the country of import for a time period mandated by the law of each MERCOSUR state. The decision as to when to demand the submission of a Declaration of Customs Value is left to the discretion of each member government. B. Special Taxes and Licensing Requirements In addition to tariffs, some of the individual MERCOSUR countries also levy a number of fees and taxes on imports as well as require compliance with certain licensing requirements. Imports from the MERCOSUR countries as well as associate member states may be exempt from these additional fees (e.g., the Argentine statistical tax) and even some licensing requirements. The following sections provide a description of additional fees and import regulations that exporters to the MERCOSUR countries must comply with that are still set at the national level.


1. Argentina In addition to the relevant ad-valorem import duty, a 0.5 percent statistical tax is charged on the CIF value of all imports, except capital goods, printed material, and products originating in the MERCOSUR countries and associate member states. The statistical tax is theoretically levied to cover the costs incurred by customs official in processing forms and handling related paperwork. In the case of some textile and clothing, footwear, and toys, a specific duty may be levied instead of an ad valorem tariff. All imports are also required to pay the 21 percent value added tax (VAT; which in limited cases can be 10.5 percent), that is levied over the CIF value of the product plus the relevant import duty and statistical tax. An additional 10 percent advance VAT (or 5.5 percent in the case of infrequent importers) must be paid by the importer (although this payment is deductible on the importer’s income tax return) if the product is intended for resale. Consumer goods sold directly in the Argentine market are also subject to a 3 percent so-called anticipated profits tax on the same VAT base amount (which is also deductible from the payer’s income tax obligation). Excise taxes are charged on alcohol, consumer electronics such as TVs, soft drinks, syrups, and tobacco. In an effort to combat underinvoicing of imports, the Argentine government maintains a controversial reference price mechanism that appears to be in violation of the WTO Customs Valuation Agreement. The declared value is compared with a list of minimum import prices. If the declared value falls below the reference price, the importer is required to pay for the difference in duty between the declared value and the reference price. The money should be returned if Customs makes a final determination that the declared value was correct. The Argentine government also requires that certain types of imports that directly compete with domestic production and are deemed “sensitive,” such as electrical machinery, shoes, textiles, and watches, must be processed at certain points of entry. In addition, the invoices for imports from countries that are chronically under invoiced (e.g., China) must be validated by that country’s customs service and notarized at an Argentine consulate. Imports require presentation of a license from the Secretariat of Industry, Commerce, and Small- and Medium-Sized Enterprises for purposes of customs clearance, although in the vast majority of cases these licenses are issued automatically within 48 hours of request. Registration with the relevant ministry is required prior to the importation of cosmetics, foodstuffs, insecticides, medical devises, pharmaceuticals, and veterinary products. Imported foodstuffs must comply with special labeling and packaging requirements. Detailed labeling requirements also exist for a range of other products that will be sold in the country, including chemical products, clothing, footwear, and medical devises. Temporary quotas or special license requirements have, from time to time, been imposed in recent years on imported footwear, organic chemicals, paper products, and wood pulp. Absolute prohibitions exist on the importation of used consumer goods such as clothing, tires, medical equipment, and vehicles, as well as certain tropical plants and all types of hazardous waste. Companies


wishing to import products into Argentina must be registered with the National Registry of Importers and Exporters. 2. Brazil Importers are required to obtain an import license from the Secretariat for Foreign Trade (SECEX) for the vast majority of goods imported into the country. Import license requests are handled electronically through the computerized SISCOMEX system. In most cases, import licenses are issued automatically. Non-automatic permits for such things as imports from countries that wish to partake in the duty drawback system, goods that may be subject to quotas, or used materials, may take three to five days. Imports of used consumer goods and used automobiles are prohibited, while authorization for the importation of other types of used goods not normally produced in Brazil must be obtained from the National Foreign Trade Department (DECEX). All agricultural products, beverages and foodstuffs, cosmetics, household cleaning fluids, measuring devices, medicines, medical devices, pesticides, and any type of manufactured good that may potentially pose a physical danger to consumers’ health must be registered with and inspected by either the Federal Ministry of Health, the National Institute of Metrology, Standardization, and Industrial Quality (INMETRO), or the Federal Ministry of Agriculture before the product can be imported, sold, or distributed within Brazil. Labeling requirements exist for a wide range of consumer products. In addition to the import duty levied on the CIF value of an imported product, the federal Manufactured Products Tax (IPI) must be paid on the CIF value of the good plus the relevant customs duty at the time an importer files an electronic Import Declaration with SECEX. The IPI ranges anywhere from 0 to 365 percent depending on the product (capital goods and a wide range of industrial inputs are usually exempt). Furthermore, a state-administered Merchandise Circulation Tax (ICMS; on average 18 percent) will also be charged over the CIF value of all goods, plus the import duty and the IPI. If the actual ICMS tax in the state of final destination of the good is lower then the 18 percent average, a refund is due the importer. If the rate is higher, the difference must be paid directly to that state. Other charges associated with importing goods include the 1.65 percent Programa de Integração Social (PIS) and 7.6 percent Contribuição para o Financiamento da Seguridade Social (COFINS) Brazilian federal social security taxes, and a 25 percent Merchant Marine Tax on all ocean freight charges originating in nonMERCOSUR or associate member states. Furthermore, port costs for warehousing and other expenditures associated with customs clearance (i.e., brokerage fees, handling charges, and admission commissions) can average around 7 percent of the imported product’s CIF value. The port unions also collect a 2.2 percent fee over the CIF value of all imports. Finally, there is the equivalent of a U.S.$30 fee for use of the SISCOMEX system. 3. Paraguay All documentation associated with the importation of a good must be certified by a Paraguayan consulate in the country of origin. The country of


origin must be labeled on all imported products. There are special labeling requirements for alcohol, cigarettes, clothing, footwear, and medical devices. Import licenses are required for the importation of ammunition and weapons. No industrial or toxic waste, used clothing, or used vehicles over ten years old can be imported into the country. A 10 percent VAT is levied over the CIF value of all imports plus the relevant customs duty. There is an excise tax on alcohol, cigarettes, perfumes, certain appliances, and gasoline. A source fee of 1 percent is paid for products imported by air, or between 0.75 and 3 percent for imports processed by the Ports Administration. 4. Uruguay There are no import licensing requirements except for a limited group of items that include certain agricultural products, clothing, fertilizers, firearms, insecticides, and pharmaceuticals. Used vehicles may not be imported into the country. Most imported consumer products must comply with labeling requirements. A 22 percent VAT is applied over the CIF value of most goods plus the relevant import duty and a one percent consular tax. The IMESI (an excise tax) is levied on imported alcoholic and non-alcoholic beverages, tobacco products, lubricants, perfume, fuels, and automobiles. IX. MERCOSUR Automobile Regime One important industry left completely out of the MERCOSUR intraregional free trade scheme and with its own special CET is the automotive sector. Since the MERCOSUR project began in 1991 the automotive sector has been subject to a managed trade program begun by Argentina and Brazil in 1986 and even earlier Argentine-Uruguayan and Brazilian-Uruguayan accords. In the particular case of Argentina and Brazil, the automobile industry was targeted for gradual bilateral opening as a result of the Argentine-Brazilian Program for Integration and Economic Cooperation (PICAB), which called for annual increases in the number of vehicles that could be traded between the two countries duty free. In the case of Argentina-Uruguay and Brazil-Uruguay, trade in the automotive sector was governed by arrangements developed under the umbrella of ALADI preferential tariff agreements negotiated in the 1970s. At the end of 1994 the Common Market Council issued Decision 29/94, calling for a common automobile regime among the MERCOSUR countries no later than January 1, 2000. This decision, at a minimum, contemplated complete intra-regional free trade for products in the automotive sector, a CET with respect to similar products coming in from the outside world, and the elimination of all types of national incentives that can distort genuine free market competition. An ad hoc technical committee was created to put together and present to the MERCOSUR Trade Commission the broad outlines of this new automobile regime by June 1, 1995, and come up with definitive rules by December 31, 1997. Among the other things that the new automobile regime was expected to encompass were common rules on the importation of auto parts and vehicles, regional content requirements, environmental regulations on emissions and standard safety requirements, and a special transition


program that would be valid from December 31, 1997, until January 1, 2000. CMC Decision 29/94 also required the MERCOSUR countries not to adopt any unilateral restrictive measures on intra-regional trade in the automotive sector between the time it was issued and June 1, 1995, and mandated that the member states would begin liberalizing their existing bilateral automobile agreements in order to increase trade flows after that date. In June 1995 Brazil appeared to violate CMC Decision 29/94 when it issued a decree severely limiting all foreign automobile imports, regardless of origin, in the second half of 1996 to 150,000 vehicles. A serious rift with Argentina was averted only after President Fernando Henrique Cardoso of Brazil personally assured Argentine President Carlos Menem that the MERCOSUR countries were exempt from the decree (even though the decree’s language indicated otherwise). In October 1995 Brazil quietly dropped the quotas on imported vehicles after the WTO in Geneva rejected Brazil’s proffered justification for the measure (i.e., that it was intended to address a serious balance of payments crisis). In December 1995 Brazil moved to make itself more attractive to international automobile manufacturers than Argentina by slashing import tariffs on capital goods and other inputs used in the automobile industry to levels as low as 2 percent from previous rates that were as high as 30 percent. Prior to this time Argentina, with its lower import duties and tax rates, had been attracting more foreign companies to invest in new plants in Argentina intended to serve the entire MERCOSUR market. In December 1996 a new dispute arose between Argentina and Brazil over President Cardoso’s signing of Provisional Measure No. 1562, which gave favorable tax advantages to foreign automobile manufacturers who agreed to build new plants in the Northeast of Brazil before March 1, 1997. These new investors were given the right to import their foreign produced vehicles into Brazil at a 35 percent duty (i.e., half the normal tariff), while they would receive a 50 percent reduction in the corporate tax for profits accrued in Brazil, an exemption from paying the IPI, a reduction in the duties levied on imported inputs and capital goods. The Argentines charged that the measure would unfairly draw international investment away from Argentina to Brazil. The Argentines were particularly incensed over the fact that some of the proffered fiscal incentives extended beyond 2000, the year when a common MERCOSUR automotive policy eliminating all national incentive programs was supposed to take effect. Tensions reached a boiling point in 1999 when Ford actually accepted the Brazilian government’s fiscal package and decided to begin construction of a new plant in the northern state of Bahia. The squabbles generated between Argentina and Brazil over the latter’s measures to attract foreign investment to its automotive sector eventually caused both countries in 1998 to agree to postpone implementation of a definitive MERCOSUR automobile regime until 2004. Although the original 2000 deadline established in CMC Decision 29/94 for achieving a common automobile regime was pushed back by four years, the individual MERCOSUR countries were still under an obligation to implement the WTO Trade Related


Investment Measures (TRIMs) no later than January 1, 2000. TRIMs prohibits the use of investment incentives tied to export performance requirements, restricting imports to the level of exports within a specific sector or industry, and/or setting minimum national content requirements for the production of goods. Accordingly, the need to comply with TRIMs still required that Argentina and Brazil replace their national automobile policies by January 1, 2000. Unable to reach a definitive MERCOSUR-wide automobile policy, TRIMs created an incentive for Argentina and Brazil to attempt to negotiate a bilateral transitional agreement. The January 1999 maxi-devaluation of the Brazilian real had a particularly negative impact on the Argentine-Brazilian negotiations to come up with a bilateral transitional regime that would replace their national automobile policies. While government negotiators sought to iron out a bilateral automobile pact, firms with plants in both Argentina and Brazil began shifting whole production lines to Brazil in order to take advantage of the much cheaper production costs there as a result of a devalued currency (while the Argentine peso remained pegged to the U.S. dollar). The actions of the terminals were followed by auto parts suppliers such as Delphi, which began closing plants in Argentina and shifting production to Brazil. As 1999 drew to a close and the January 1, 2000 deadline for the TRIMs compliance loomed, the Argentine negotiators suggested to their Brazilian counterparts that their current national automobile regimes be extended for two months beyond the new year. The big fear among producers in both countries was that absent such an extension, their intra-regional exports would be levied the standard import duty charged on imports from outside MERCOSUR. The Brazilians acquiesced to the Argentine request and to subsequent extensions as well. On March 23, 2000, Argentine and Brazilian negotiators claimed that they had finally reached agreement on a transitional “common MERCOSUR automobile policy” that would remain in effect through December 31, 2005. One major problem with this announcement, however, was that Paraguay and Uruguay had not participated in the negotiations, and there was no guarantee that both countries would ratify it. Within days, the Paraguayan and Uruguayan governments made their objections to the proposed “common MERCOSUR automobile policy” manifestly clear. Both countries objected to the proposed 35 percent CET on imported cars, trucks, and buses as being too high. Uruguay also opposed raising the regional content requirement to 60 percent from the 50 percent rule found in its older bilateral ALADI trade agreements with Argentina and Brazil, respectively. Paraguay, a country with no automobile industry, not only wanted a lower CET that would be closer to its 12 percent duty on imported cars, but it also wanted to retain the right to import used cars from outside of the MERCOSUR region. The proposed common automobile policy would also undermine Maquila Law 1064/97, a 1997 Paraguayan law designed to encourage new auto assembly plants in the country by offering ten-year exemptions from the payment of import duties on capital goods, raw materials, and auto parts, and a 50 percent tariff preference on vehicles imported by companies with a local production presence.


Strong opposition to the proposed Argentine-Brazilian agreement from Paraguay and Uruguay eventually scuttled the original plans to have the March 23 accord take effect on July 1, 2000. Efforts by Argentina and Brazil to secure the acquiescence of the two smaller MERCOSUR countries continued without success throughout the month of July. Finally, on August 1, 2000, Argentina went ahead and issued Executive Decree No. 660, which contained the new Argentine-Brazilian bilateral agreement for the automotive sector. Brazil declared the agreement “suspended” and refused to issue any domestic implementing legislation or submit it for deposit to ALADI, however, when it learned that the Argentine implementing decree had calculated the regional content requirement differently from the way interpreted by Brazil. In effect, Argentina created a “super local content” requirement that mandated that more than half the 60 percent regional content for vehicles made in Argentina had to be sourced locally. Brazil eventually acquiesced to a modified version of Argentina’s “super local content” calculation and finally permitted a modified version of the original March 23 automotive accord to be submitted as a protocol to ALADI ACE No. 14 (i.e., the agreement to establish a common market between Argentina and Brazil that preceded the 1991 Treaty of Asuncion that subsequently incorporated Paraguay and Uruguay). At the meeting of the Common Market Council in Florianopolis, Brazil, in December 2000, Argentina, Brazil, and Uruguay agreed to enact a transitional common automobile regime for MERCOSUR. Paraguay refused to sign on, rejecting the proposed CET on automobiles as too high. In reality, the new trilateral agreement simply added Uruguay to the previous bilateral ArgentineBrazilian managed trade accord that was already in force as of August 1, 2000. The trilateral agreement was incorporated into the ALADI framework as a protocol to ACE No. 18 (i.e., the legal instrument that formally bought the 1991 Treaty of Asuncion into force). Although it took effect on February 1, 2001, and was to remain in force until December 31, 2006, Argentina and Brazil were still subject to the December 31, 2005, expiration date of their earlier bilateral arrangement. In June 2001 the Common Market Council meeting in Asuncion approved Decision 4/01, which, inter alia, formally brought Paraguay into the transitional common automobile regime for MERCOSUR. The addition of Paraguay was included in yet another separate protocol to ALADI ACE No. 18. It took effect on October 10, 2001, and was to remain in force through December 31, 2006. Although it was originally contemplated that there would be bilateral free trade on all vehicles and auto parts originating within Argentina and Brazil and traded between them after January 1, 2006, this never happened. At first, Argentina and Brazil extended their 2000 bilateral managed trade agreement for six months. Finally, in June 2006 the Argentine and Brazilian governments announced a new bilateral automobile policy that would take effect as of July 1, 2006, and remain in force through June 30, 2008. This new bilateral agreement was incorporated as a Protocol to ALADI ACE No. 14 (i.e., the original 1990 agreement to establish an Argentine-Brazilian common market). At the present time, yet another protocol has been added to ALADI ACE No.


14, which currently governs Argentine-Brazilian trade in the automotive sector and remains in effect through June 30, 2014. Under the latest Argentine-Brazilian automotive accord, the CET on vehicles imported from outside MERCOSUR is 35 percent for vehicles and 14 percent for tractors and farm equipment. The import duties for auto parts can be 14, 16, or 18 percent (depending on the particular item). Imports of auto parts not already produced within MERCOSUR and used to manufacture automobiles within the subregion only pay a 2 percent import duty. This special rate can increase to 8 percent for auto parts for tractors and farm construction equipment. The importation of used vehicles and auto parts is generally prohibited. Although no tariffs are charged on automobiles that originate in either Argentina or Brazil and are traded among them, they are still subject to a managed trade regime. In general, Argentina will allow Brazil to export up to U.S.$1.95 worth of automobiles, buses, trucks, and auto parts for every U.S.$1 of these products it exports to Brazil. On the other hand, Brazil will allow Argentina to export up to U.S.$2.50 worth of automobiles, buses, trucks, and auto parts for every U.S.$1 it exports to Argentina. Any of these vehicles or auto parts exported in excess of these caps trigger an obligation to pay an import duty that is anywhere from 25 to 30 percent less than the CET. As was true of the 2000 and 2006 bilateral agreements, any vehicles or auto parts produced in a factory that has received federal, state, provincial, or local investment incentives are treated as if they were non-MERCOSUR in origin and levied the relevant CET. Similarly, the use of tax rebates or other types of export incentive schemes is expressly prohibited. On the other hand, the use of duty-drawback schemes remains subject to MERCOSUR’s general rules on duty drawback (i.e., currently permitted in very limited circumstances through December 31, 2010). The general rule of origin for vehicles and auto parts is a 60 percent regional content requirement. In the case of new vehicle models, the minimum regional content requirement is 40 percent during the model’s first year on the market, 50 percent for new vehicles produced in the second year, and the standard 60 percent at the start of model’s third year being offered in the market. In compensation for the elimination of Argentina’s “super local content requirement,” the Brazilian National Development Bank (BNDES) is authorized to extend credit lines to Brazilian auto parts manufacturers that invest in the Argentine auto parts industry, either through outright acquisitions or joint ventures. Following the expiration of the relevant Protocols to ACE No. 18 in December 31, 2006, the rules governing trade in vehicles and auto parts between Argentina-Paraguay, Argentina-Uruguay, Brazil-Paraguay, and Brazil-Uruguay, as well as between Paraguay and Uruguay has now reverted to strictly bilateral arrangements outside the MERCOSUR framework. Paraguay and Uruguay are also not bound to the CET that Argentina and Brazil levy on vehicles imported from third countries, but they are free to apply their own national import duties. On the other hand, both countries generally apply the MERCOSUR


CET on auto parts imported from third countries. In the latest protocol to ALADI ACE No. 2, Brazil’s preferential market access agreement with Uruguay signed in 1982, the rules for importing vehicles and auto parts duty free from Uruguay into Brazil are similar to those found in the Argentine-Brazilian managed trade regime. The Brazilian-Uruguayan arrangement remains in effect through June 30, 2014 (or until replaced by a MERCOSUR automotive regime). Although greater leniency exists with respect to compliance with the 60 percent regional content requirement for vehicles and auto parts made in Uruguay, quotas are imposed on the number of vehicles utilizing this option that can annually be imported into Brazil duty free. For example, there is an annual ceiling of 20,000 Uruguayan-made automobiles or 2,500 Uruguayan-made trucks that can be imported into Brazil that only satisfy a 50 percent regional content requirement.18 Up to U.S.$100 million worth of Uruguayan-made auto parts that comply with a 50 percent regional content requirement can be imported into Brazil duty free on an annual basis. In response to these limitations, Uruguay has imposed a cap of 6,500 Brazilianmade vehicles or up to U.S.$85 million worth of Brazilian auto parts that can enter Uruguay duty free in 2008, all of which must fulfill a 60 regional content requirement. These ceilings will gradually increase on an annual basis, however, through 2014. Argentina and Uruguay have incorporated the latest version of their bilateral managed trade regime in ALADI ACE No. 57, which remains in effect until such time as it is replaced by a definitive common automobile policy for MERCOSUR. Vehicles and auto parts made in Uruguay, which meet a 60 regional content requirement, can be imported into Argentina duty free. On the other hand, there is an annual ceiling of 20,000 Uruguayan-made automobiles, for example, or up to U.S.$60 million worth of Uruguayan-made auto parts that can be imported duty free into Argentina that only fulfill a 50 percent regional content requirement.19 Uruguay imposes a ceiling of 8,000 Argentine-made vehicles that can be imported into Uruguay duty free that must fulfill a 60 percent regional content requirement. Anything in excess is levied a gradually increasing import duty that is still less than the tariff Uruguay charges on vehicles from outside MERCOSUR or countries with which it does not have a free trade agreement. There are no limits on the number of Argentine-made auto parts that can be exported into Uruguay duty free, however, so long as they satisfy the 60 regional content requirement. X. Technical Norms The MERCOSUR Standardization Association or Asociación MERCOSUR de Normalización (AMN) was created in 2000 and has its origins in the MERCOSUR 18 In the case of new automobile models produced in Uruguay, the more lenient regional content requirements are 30 percent in the first year, 35 percent in the second, 40 percent in the third, 45 percent in the fourth, and 50 percent in the fifth year. 19 In the case of new automobile models produced in Uruguay, the more lenient regional content requirements are 30 percent in the first year, 35 percent in the second, 40 percent in the third, 45 percent in the fourth, and 50 percent in the fifth year.


Committee on Standardization that was established in 1991. Headquartered in São Paulo, Brazil, the AMN is a not-for-profit and non-governmental organization made up of the private sector standard-setting bodies from all four MERCOSUR countries. Voluntary standards for use in each of the four member states are developed by some 25 technical committees broken down by industry or service sector. To date, the AMN has approved some 550 voluntary norms with respect to the technical requirements and presentational characteristics that products and services must fulfill in order to be sold within MERCOSUR. The WTO Agreement on Technical Barriers to Trade was formally incorporated into the MERCOSUR framework in 2000 as a result of CMC Decision 58/00. The Common Market Group is the body that actually issues mandatory technical requirements and norms for products that are imported into MERCOSUR from third countries as well as from each other. These mandatory technical requirements and norms establish the characteristics of a product or the process and methods for its production and may also include requirements related to its packaging and labeling. Common Market Group Resolution 56/02 establishes guidelines for the development and revision of MERCOSUR technical regulations as well as procedures for evaluating conformity with such regulations. As a general rule, the MERCOSUR countries use existing international standards as the foundation upon which to develop and revise MERCOSUR technical norms and evaluation procedures. In addition, MERCOSUR technical norms should be limited to what is most essential for protecting the health and well-being of citizens, the environment, and providing adequate consumer protection against fraudulent practices. Any government or the AMN may propose the adoption of a mandatory MERCOSUR technical norm to the working subgroup of the Common Market Group with jurisdiction over the subject matter. At the same time, any government can propose the revision or the abrogation of an existing technical standard. For many years, the most significant problem with respect to the establishment of mandatory technical requirements and norms for the entire MERCOSUR has been the failure of the member governments to implement them in an expeditious fashion. For example, Common Market Group Resolution 23/95 dealing with technical requirements that must be met for the mutual recognition of pharmaceutical products registered in one MERCOSUR country in all the other member states was not adopted by Brazil until 2002. Brazil took just as long to implement two Common Market Group Resolutions (i.e., 52/96 and 54/96) establishing the type of information and documentation required that would permit such recognition. Common Market Group Resolution 37/96, which sought to create a harmonized registry for medical products among the MERCOSUR countries, had to be revoked and replaced by another in July 2000 when all four member states failed to ratify the earlier resolution. CMC Decision 20/02 issued in 2002 attempts to reduce delays in implementation by requiring that before any MERCOSUR body issues a communitarian technical requirement or norm, it must be submitted as a proposal to the governments of the member states for internal consultation. These consultations should normally take no longer than 60 days. The idea


is that governments will have been sufficiently consulted and had time to make modifications to the proposed technical standard so that it can quickly be incorporated into the domestic legal framework once it is issued by the Common Market Group. XI. Sanitary and Phytosanitary Measures As a result of CMC Decision 6/96, the WTO Agreement on the Application of Sanitary and Phytosanitary Measures provides the regulatory framework for the application of sanitary and phytosanitary measures by the MERCOSUR countries. The Common Market Group has the authority to issue sanitary and phytosanitary norms for products that are imported into the MERCOSUR countries from third countries or from each other. CMC Decision 20/02 requires that before any MERCOSUR body issues a sanitary or phytosanitary norm, it must be submitted as a proposal to the governments of the member states for internal consultation. These consultations should normally take no longer than 60 days. XII. Free Trade/Export Processing Zones and Special Customs Areas In order to prevent unnecessary trade distortions, the four countries of MERCOSUR decided to harmonize their laws with respect to free trade zones, export processing zones, and special customs areas. In August 1994 the Common Market Council issued Decision 8/94, which establishes that: 1. Each member state will apply the CET or (in the event the product is still included on a list of exceptions) the relevant national duty on all products that originate in a free trade or export processing zone, or a special customs area, without modifying the current legal norms of each of the member states with respect to the entry into their own territory of products originating from these zones that are located within their own domestic borders; 2. The use of any safeguard measures shall be limited to those recognized under the WTO whenever any product originating in one of the zones or special customs areas results in a sudden surge of imports which damage or threaten to damage a like or similar domestic producer; 3. Any incentives that may be offered by a country to encourage production within a free trade or export processing zone or special customs area located within its national borders must comply with those permitted under the WTO;. 4. All free trade and export processing zones and special customs areas that were already in existence and established subject to already existing law, or were the subject of legislative branch discussion at the time of the signing of Decision 8/94, can operate within MERCOSUR, subject to the legal framework already agreed to and established by the Common Market Council; and 5. The already existing special customs areas at Manaus in Brazil and at Tierra del Fuego in Argentina are permitted to continue func-


tioning until 2013. In addition, Argentina and Brazil are authorized to reach an agreement as to what goods each will allow to enter its national territories duty-free from either Manaus or Tierra del Fuego, respectively. Negotiations between Argentina and Brazil finally led to the Bilateral Agreement Manaus-Tierra del Fuego signed in June 1996 in which both countries drew up a list of products manufactured in Manaus or Tierra del Fuego that could enter the national territory of the other duty free. Quantitative restrictions were also imposed that, if exceeded, meant that the regular duty levied on nonMERCOSUR imports would have to be paid. In addition, the products were required to comply with MERCOSUR’s rule of origin requirements. In 2001 the Common Market Council issued Decision 9/01, which authorized Uruguay to import a limited number of products manufactured in Manaus duty free in exchange for goods that Brazil imported duty free made in the Uruguayan free zone in Colonia. CMC Decision 67/07 authorizes Brazil to export a number of additional products made in Manaus (e.g., computer chips, copiers, fax machines, lap tops, motorcycles, pens, and shavers) in exchange for a handful of products (e.g., acidic coloring, essential oils, ingredients used for making beer) made in the free zones of Colonia and Nueva Palmira through December 31, 2012. These are products that were originally provided dutyfree access under the original ALADI preferential market access agreement between Brazil and Uruguay called the Trade Expansion Protocol of 1975. CMC Decision 1/03 authorizes Argentina to import certain inputs used to make beverages from the free trade zone in Colonia duty-free, in exchange for Uruguay annually importing up to U.S.$20 million worth of goods manufactured in Tierra del Fuego. XIII. Temporary Admission and Duty Drawback In August 1994 the Common Market Council issued Decision 10/94 with respect to the use of special export incentive programs, including temporary admission or duty drawback, by the MERCOSUR countries. CMC Decision 10/94 covers the use of these incentive programs on exports destined for destinations both within the subregion and to countries outside MERCOSUR. The first obligation is to ensure that all incentive programs are WTO consistent and that any new incentive programs after 1995 must be approved by all four MERCOSUR member states. Duty drawback or other types of temporary admission programs where manufacturers are allowed to temporarily import inputs that are included in final products for export are permitted in the context of intra-MERCOSUR trade after 1995 only if the import was still exempt from the CET. The widespread disregard for the prohibition on the use of temporary admission and duty drawback on intra-MERCOSUR trade after 1995 eventually caused the Common Market Council to issue Decision 21/98 in December 1998. This Decision, inter alia, suspended the earlier prohibition on intraMERCOSUR use of export incentive programs, including duty drawback and temporary admission on products already subject to the CET, through December 30, 2000.


In December 2000 the Common Market Council issued Decision 69/00 regulating the use of temporary admission and duty drawback programs within MERCOSUR. The MERCOSUR countries are prohibited from adopting new temporary admission programs as of June 30, 2000. All existing temporary admission and duty drawback programs, which permitted the importation of an input without full or upon partial payment of a duty so as to be incorporated into a final product for export within the subregion, had to be completely eliminated by January 1, 2006 (subsequently extended until December 31, 2010, as a result of CMC Decision 32/03). Specifically exempt from this rule are products made in special custom areas, such as free trade or export processing zones that are subject to CMC Decision 8/94 and its progeny of subsequent regulations. CMC Decision 69/00 further restricts each country to a maximum of 25 items that can incorporate inputs imported under a temporary admission program and be reexported as part of a final product within MERCOSUR through December 31, 2006 (extended to December 31, 2010, as a result of CMC Decision 32/03). The list of 25 items for each country is registered with the MERCOSUR Trade Commission. In order for the final product to circulate duty free within MERCOSUR, however, it must still comply with the rule of origin requirements. Any country that feels prejudiced by the continuation of a temporary admission program in another member state has the right to request, through the intercession of the Common Market Group, that modifications be made to that existing program. XIV. Safeguard Measures At its meeting in Fortaleza, Brazil, in December 1996, the Common Market Council adopted a Common Regulation on the Application of Safeguard Measures on Imports from Non-MERCOSUR Members that it annexed to Decision 17/96. The regulations apply to safeguards that may be imposed on all imported goods from outside MERCOSUR, except for agricultural products as well as textiles and apparel that are subject to special WTO rules. Under the Common Regulation, the MERCOSUR countries are allowed to jointly impose safeguard measures against a surge in imports from third countries that gravely harm or threaten to harm the domestic production of the same or a like product manufactured in MERCOSUR. Safeguard measures may also be imposed by individual MERCOSUR countries to address actual grave or threatened harm to an individual member’s production. Any claims of threatened harm must be based on objective evidence and not on mere allegations, conjecture, or remote possibilities. Enforcement of the Common Regulation and any investigation conducted to determine actual grave or threatened harm is entrusted to a Committee on Trade Regulation and Safeguards, although the MERCOSUR Trade Commission has oversight authority to order an investigation and either approve or deny the imposition of a safeguard measure. A petition requesting the imposition of a safeguard measure on a regional basis must be filed with the relevant National Section of the Committee on Trade


Regulation and Safeguards wherein the affected company(ies) are located. If the petition is limited to protecting production in a single state, the written petition must be filed with the relevant technical body created by a government for this purpose. Preliminary safeguard measures limited to tariff increases may be adopted to address emergency situations for a period not to exceed 200 days. The WTO Committee on Safeguards must be kept informed of any investigations and decisions regarding the imposition or extension of a safeguard measure. Safeguard measures may be adopted either in the form of tariff increases and/ or quantitative restrictions. If a quota is imposed, the restriction on the amount of a good that can be imported must not exceed the average amount imported over the preceding three-year period. Safeguard measures may be imposed for as long as they are required to address the underlying situation or to allow an adjustment of a country’s production capabilities, but they normally should not exceed four years. Even with approved extensions, however, a safeguard measure can never extend beyond the ten-year cap set by Article 9 of the WTO Agreement on Safeguards for developing countries. During MERCOSUR’s transition period to a free trade area, which officially ended on December 31, 1994 (although from a practical perspective continued for an additional five years), Annex No. IV to the Treaty of Asuncion permitted a member state to impose a quantitative restriction on the continued importation of a good from another MERCOSUR country when a sudden surge in imports substantially harmed or threatened to harm an industry or sector of the importing country’s economy. Incredibly, safeguards could not be imposed after the end of the so-called transition period, even though sugar and the entire automotive sector were still excluded from intra-MERCOSUR free trade. Perhaps not surprisingly, the MERCOSUR countries responded to the uncoordinated currency exchange devaluations and import surges during the late 1990s and early in the 21st century by imposing unilateral safeguard measures that included both quantitative restrictions (if not outright import bans on certain products) and new tariff measures. In October 2003 the Argentine and Brazilian governments created a special Bilateral Commission to Monitor Trade so as to minimize trade disputes between the two nations by facilitating voluntary export restraint and managed trade agreements by the private sectors in both countries. The Bilateral Commission’s creation was in response to long-standing refusals by Brazil to permit the use of safeguards on intra-MERCOSUR trade that, under the most liberal interpretation, ended on December 31, 1999. Since its inception, the Bilateral Commission has been responsible for facilitating voluntary restraints, establishing floor prices, and setting quotas in the export of primarily Brazilian household consumer items, paper, shoes, and textiles to Argentina. In July 2004 following the collapse of talks that were being facilitated by the Bilateral Commission, the Argentine government announced that henceforth the importation of refrigerators, stoves, and washing machines (so-called white goods) from Brazil would be subject to non-automatic import licenses. In addition, a 21 percent duty was slapped on Brazilian television sets made in the Manaus Free Trade Zone. These measures were adopted to limit the sudden,


large influx of Brazilian white goods that threatened to put Argentine producers out of business and increase the country’s already high unemployment rate. The unilateral announcement eventually forced Brazilian firms to “voluntarily” limit the number of white goods exported to Argentina. As an outgrowth of the Bilateral Commission to Monitor Trade, the Argentine and Brazilian governments signed a Protocol on Competitive Adaptation, Productive Integration, and the Equitable and Dynamic Expansion of Trade in February 2006. The protocol is annexed to ALADI ACE No. 14, the original ArgentineBrazilian agreement to create a common market. The protocol creates what is, in effect, a safeguard regime, but it is limited to Argentina and Brazil.20 It does, however, hold open the possibility that it can be replaced by a mechanism that incorporates all four MERCOSUR countries. The protocol allows Argentina and Brazil to establish “Adaptive Competitive Measures” in response to sudden surges of imported items that cause actual or threaten important harm to a branch of national production of a like or directly competitive product. In addition, the Protocol calls for the creation of “Programs for Competitive Adaptation” designed to make the branch of national production that is being harmed or threatened by imports from the other country more competitive and better integrated into regional chains of production. Implementation of the Protocol on Competitive Adaptation, Productive Integration, and Equitable and Dynamic Expansion is entrusted to the Bilateral Commission to Monitor Trade. So-called National Authorities are authorized to accept and analyze petitions filed by a representative sample of producers (i.e., defined as firms that are responsible for 35 percent or more of national production) who claim that they are suffering actual or threatened important damage from imports originating in the other country. If the National Authority believes there is merit to the petition, it will forward it along with a report to the Bilateral Commission to Monitor Trade. The Bilateral Commission then invites representatives from both the importing and exporting countries to enter into consultations that should last up to 30 days (subject to one 30-day extension) so as to reach a mutually satisfactory agreement that may include either a plan to better integrate the harmed or threatened industry into a regional chain of production, the imposition of an import duty that still offers some level of preference over extra-regional imports, or the implementation of alternative measures designed to eliminate or reduce the negative impact.21 These agreements are valid for up to one year and can subsequently be renewed in whole or in part upon mutual consent indefinitely. 20 The fact that Paraguay and Uruguay were excluded sparked a barrage of protest in both countries that the protocol was yet another example of Argentina and Brazil completely disregarding the interests of their smaller MERCOSUR partners. Not coincidentally, these outbursts were accompanied by announcements that the Paraguayan and Uruguayan governments were interested in negotiating bilateral free trade agreements with the United States and other countries, regardless if this would undermine the MERCOSUR CET. 21 No doubt one important reason why the protocol is so nebulous in providing details as to what type of alternative measures are permissible is that voluntary export restraint programs, at least when they have the imprimatur of a government, are now illegal under the WTO Agreement on Safeguard Measures.


When the private sector parties cannot reach a consensus within the 60day maximum time limit, the National Authority of the importing state can unilaterally adopt measures following an economic impact analysis investigation that resembles that conducted prior to the imposition of a safeguard or an unfair trade practice remedy. The entire investigation should take no more than a maximum of 150 days from the date notice is published in the respective official gazette. If, within a month following the conclusion of this investigation period, the private sector competitors can still not reach a mutually acceptable agreement, the National Authority of the importing country can impose an import duty that, in general, should still afford some level of regional preference. These tariffs can be imposed for up to three years (subject to an additional oneyear renewal), and the exporting country has the right to demand—through the Bilateral Commission to Monitor Trade—that the decision be reviewed by a three-person panel of pre-selected experts.22 The National Authority is also authorized to issue preliminary injunctive relief authorizing tariff increases in emergency cases (e.g., the company in the importing country faces immediate bankruptcy). Once a tariff is imposed by a National Authority, it then has 90 days to establish a Program for Competitive Adaptation that should involve the input of both the public and private sectors in both countries. Interestingly, a Program for Competitive Adaptation should include commitments from the government of the importing country to, inter alia, provide financial support for restructuring purposes. In addition, the firm or firms that benefit from the protective measures are also required to put up money in order to restructure the company or industry, provide employee training, and incorporate scientifictechnological innovations. The system created by the Protocol on Competitive Adaptation, Productive Integration, and Equitable and Dynamic Expansion of Trade has been the target of much criticism.23 These include the absence of any obligation on the part of the National Authority to seek the input of exporters from the other country during the investigation period or any requirement to release the technical report justifying the imposition of an import tariff to the private sector parties in order to facilitate a last-minute alternative solution. Finally, while a Program for Competitive Adaptation must be drawn up whenever a National Authority imposes a safeguard tariff, there is no such obligation when the private sector parties have been able to develop their own mechanism to resolve the situation. It would appear that the beneficial impact of having a restructuring plan is equally as valid whether the “safeguard” is imposed or achieved voluntarily. Despite these valid critiques, the system developed under the protocol may finally put an end to the unilateral protectionist measures adopted by governments to restrict intraMERCOSUR trade since the end of the official transition period to free trade. These unilateral protectionist measures that violate obligations assumed under 22 The experts are selected by the Bilateral Commission from lists of qualified persons whose names have been previously submitted by each country and who come from that respective country or third countries. Unfortunately the review by the experts can only take place once the protective measure is in force and has already disrupted intra-regional trade flows. 23 See, e.g., Informe Mercosul No. 11, supra note 17, at 54–60.


MERCOSUR have only served to undermine public credibility about the entire Southern Cone integration process. XV. Unfair Trade Practice Remedies In December 1996 the Common Market Council approved Decision 18/96, which contains MERCOSUR’s Protocol for the Defense of Competition. Although the protocol focuses on issues related to eliminating government and private sector practices within MERCOSUR that restrict competition, the protocol also allowed each member state to continue using its own domestic antidumping and countervailing duty legislation with respect to intra-MERCOSUR trade through December 31, 2000. It was originally expected that the full implementation of a subregional free trade area by that date would permit accusations of unfair trade practices committed by a fellow MERCOSUR country to be handled by the Protocol for the Defense of Competition. To date, the protocol has only been ratified by Brazil and Paraguay. The annex to the protocol found in CMC Decision 2/97 has only been ratified by Brazil. Even if the failure to ratify the protocol were not an impediment to the enforcement of its provisions with respect to intra-MERCOSUR trade, there is still no fully functioning free trade area as sugar and the entire automotive sector remain excluded. Having failed to achieve a full free trade area by the end of 2000 and with no enforceable communitarian Competition Policy in place, the Common Market Council ordered the Common Market Group to devise a procedure for the investigation and application of antidumping and countervailing duties with respect to intra-MERCOSUR trade. It also ordered the Common Market Group to come up with a means of gradually eliminating the entire use of antidumping and countervailing measures on intra-MERCOSUR trade. The rules devised by the Common Market Group were incorporated in CMC Decision 64/00. Unfortunately CMC Decision 64/00 was never implemented as a result of rising tensions between Argentina and Brazil throughout 2001 over the future direction of the MERCOSUR project. Eventually in 2002 the MERCOSUR countries incorporated the provisions of the WTO Agreement on Implementation of Article VI of the GATT (Antidumping Agreement) and the WTO Agreement on Subsidies and Countervailing Measures into the communitarian legal framework as a temporary system to handle intra-regional accusations of dumping and subsidized exports. At its meeting in Brasilia in December 2002, the Common Market Council issued Decision 22/02 which formally abrogated its earlier Decision 64/00 and devised new rules to supplement the WTO Antidumping Agreement and the WTO Agreement on Subsidies and Countervailing Measures that would be applicable to intra-MERCOSUR trade.24 Before any government initiates an investigation into the merits of an unfair trade practice petition, 24 The WTO Antidumping Agreement was formally incorporated into the MERCOSUR system through CMC Decision 13/02, while the WTO Agreement on Subsidies and Countervailing Measures was incorporated through CMC Decision 14/02. As a result of this incorporation, disputes over their application can either be resolved by the WTO dispute resolution system or the MERCOSUR system.


it should immediately notify the government of the exporting MERCOSUR country and provide time for review of a non-confidential copy of the petition and allow consultations to take place in order to resolve the matter before initiating a formal investigation. Time limits are established within which these consultations and any requests for further information must occur. If an investigation is opened, the time period reviewed to find evidence of the existence of dumping or subsidized exports should be a 12-month period preceding the initiation of the investigation (or six months in exceptional circumstances), although the investigation can go as far back as three years in order to establish damages. Decision 22/02 contains detailed procedures that must be followed and evidence that must be submitted in order to prove dumping or subsidized exports. These include the solicitation of information through questionnaires that are sent to the exporters alleged to have engaged in an unfair trade practice. Once an investigation is opened, the affected governments may still consult with each other and exchange information in order to resolve the problem before a preliminary or final determination. In general, an antidumping or subsidy margin should only be directed against those specific firms that were identified as culpable of engaging in either type of unfair trade practice. If it is not possible to make such individual determinations, the margin is applicable to all imports of the same product from the exporting country. In the event that there is a preliminary determination of dumping or subsidized exports, the investigating authority should attempt to reach a settlement with the producer(s) and/or exporter(s) in the culpable country. In dumping cases, an offer by the culpable parties to voluntarily reduce the number of dumped products that are exported can never be the basis of an acceptable settlement. Even if the initial settlement talks are unsuccessful and antidumping or countervailing duties have been already imposed, yet another attempt to reach a compromise can still be made. When a duty is finally imposed, it should be at a level sufficient to counteract the negative effect produced by the unfair trade practice. The duty margin should reflect the difference between the price of the domestically produced good and the price of the imported product in its home market. Additional rules exist for determining the duty margin when domestic prices are kept artificially low due to unfair competition coming from foreign dumped or subsidized exports. The maximum time limit for allowing an antidumping or a countervailing duty to be levied is for a period of up to three years. The rules contained in CMC Decision 22/02 require that any government that initiates an investigation to determine the existence of dumping or subsidized exports from a fellow MERCOSUR country must notify and keep the MERCOSUR Trade Commission duly informed of the investigation and final determination. In June 2000 the Common Market Council issued Decision 28/00, which directed the Common Market Group to develop Common Regulations to Defend against Dumping and Subsidies on Products Originating in Non-


MERCOSUR Countries. As part of the package, the Common Market Group was also instructed to propose institutions as well as common procedural rules. In doing so, the Common Market Group was supposed to refer to CMC Decision 11/97, which contained the Legal Framework for Common Regulations to Combat Dumping of Goods Originating in Non-MERCOSUR Countries, as well as CMC Decision 29/00, which contained the Legal Framework for Common Regulations to Combat Subsidized Exports Originating in Non-MERCOSUR Countries. The Common Market Group completed its task by the December 15, 2000, deadline and forwarded its recommendations to the Common Market Council. The council, in turn, issued CMC Decision 66/00 ordering the newly created Special Committee on MERCOSUR Institutional Aspects to submit an analysis of the legal and institutional impact of the proposed common regulations no later than June 30, 2001. For its part, the MERCOSUR Trade Commission was given until December 15, 2001, to formulate its suggestions and comments on the proposed Common Regulations. All these deadlines have subsequently been continuously extended. In addition, neither CMC Decision 11/97 nor CMC Decision 29/00 ever came into force (in fact, the only country that ever bothered to ratify both decisions was Argentina). The end result is that as of mid-2008 there still is no common regime for handling complaints of dumping or subsidized exports from countries outside MERCOSUR. Accordingly, each member state uses its own domestic legislation, which should adhere to the WTO Antidumping Agreement and the WTO Agreement on Subsidies and Countervailing Measures. XVI. Trade in Services In December 1997 the Common Market Council approved Decision 13/97 to which is annexed the Protocol of Montevideo on the Trade in Services within MERCOSUR. The protocol covers the offering, receipt, purchase, and use of any type of service (except those reserved for the government) offered by a service provider from a MERCOSUR country, so long as the service is offered to someone within any of the member states. Under the Protocol of Montevideo, all four MERCOSUR countries are under an obligation to ensure that service providers from the other three member states are accorded the same treatment given to national service providers or that may be extended to service providers from third countries. In addition, the MERCOSUR countries cannot limit the number of service providers operating within their territories, the number of employees a service provider can hire, or impose restrictions on how much income a service provider is allowed to earn within its national territory. Before any specific service in one country can be opened up to competition from providers based in the other three, however, the MERCOSUR countries were required by the Protocol of Montevideo to negotiate their offers in annual rounds to be conducted over a ten-year period. The Common Market Group was authorized to oversee the annual negotiations (subsequently delegated as a result of Common Market Group Resolution 31/98 to a special Services Group), although the MERCOSUR Trade Commission was given jurisdiction to ensure actual implementation of the commitments made at the annual negotiating rounds.


In September 1998 the Common Market Council approved Decision 9/98 containing the annexes listing all the services offered in each MERCOSUR country that might be the subject of future liberalization in the annual negotiating rounds that were broken down into four sectors: 1. 2. 3. 4.

Individuals Providing Services, Financial Services, Surface and Water Transport, and Air Transport Services.

In general, the services included in the annexes to CMC Decision 9/98 follow WTO commitments made by each MERCOSUR country (although Brazil has been more generous in the subregional arena with respect to the informatics sector). In June 2000 the Common Market Council through Decision 1/00 approved the results of the delayed first round of negotiations. In that round, Argentina agreed to open up construction and engineering services and its insurance industry to MERCOSUR-wide competition. Brazil committed itself to doing the same, while Paraguay and Uruguay offered to liberalize certain valueadded telecommunication services such as paging and trunk calling. In December 2005 the Protocol of Montevideo on the Trade of Services within MERCOSUR finally came into force for Argentina, Brazil, and Uruguay. This now opens up the possibility that those activities included in the previously negotiated positive lists of services can be offered by service providers from each of these countries within the territory of at least the other two. However, it is important to point out that the process of full liberalization of the regional services market is not immediate but will be implemented over a ten-year period. As of mid-2008 there have been seven rounds of negotiations that had produced positive lists of services that identified those that can eventually be offered cross-border. One of the things complicating the negotiating rounds (and also responsible, in part, for the long delay in bringing the Protocol of Montevideo into force) is the fact that the four MERCOSUR countries have made different commitments within the context of the General Agreement on Trade in Services (GATS) at the WTO level. Among the four countries, Argentina is the MERCOSUR country that has gone the furthest in liberalizing its services sectors at the multilateral level, while Brazil has tended to be the laggard. A report submitted by the ad hoc Group on Services to the Common Market Group in late 2006 (and included as an Annex to CMC Decision 33/06) underscores a number of bottlenecks that have to be addressed in order to make liberalization of the services market within MERCOSUR a reality. Of utmost priority is the need to harmonize the regulatory frameworks among the four countries and develop pertinent regulations in those countries where they do not even exist yet. In terms of the free movement of service providers, the report notes that the MERCOSUR countries have yet to incorporate into their respective domestic legal frameworks CMC Decision 16/03 (which establishes common rules for the temporary movement of service providers),25 25 CMC Decision 16/03 calls for the establishment of a MERCOSUR multientry visa that will be valid for two years (and renewable up to four) and will allow managers, executives,


CMC Decision 25/03 (which creates a mechanism to facilitate the cross-border exercise of professional activities, including the issuance of temporary licenses and the mutual recognition of degrees, licenses, or certificates), and CMC Decision 32/04 (which facilitates cross-border direct investment activities such as the establishment of a new business). XVII.

Government Procurement

In December 2004 the Common Market Council issued a Protocol on Government Procurement for MERCOSUR annexed to Decision 27/04. The text for this protocol was substituted with a new one issued two years later through CMC Decision 23/06. The protocol will come into force when at least two of the four signatory states ratify it, but it will only be effective for those states that actually do so. The implementing regulations for the protocol are found in CMC Decision 55/04. The basic rule is that service and goods providers from any of the four member states are to be afforded the same treatment as that given to national firms or, when applicable, that offered to individuals or firms from third countries under a most-favored nation (MFN) principle. This rule even extends to services or goods provided by private sector firms that may be affiliates of non-MERCOSUR companies so long as the firm itself is legally established in a MERCOSUR country. On the other hand, Article 7 of the protocol makes clear that a government may deny national or MFN treatment to any firm when it is able to show that the company has no established links or conducts no substantial business activities in any of the MERCOSUR countries. Interestingly, Argentina has reserved the right to not comply with the national treatment provisions for a period of up to five years after the protocol comes into force. The Protocol on Government Procurement is applicable to the acquisition of goods and services by all government entities as well as public works bids at the federal and subfederal levels, except that Argentina and Brazil have left open for future negotiations what subfederal entities will be included. In addition, Paraguay will not allow Argentine and Brazilian companies the right to participate in government procurement bids until both countries permit Paraguayan firms to bid on contracts in those provinces or states that border Paraguay. Annex I to the Protocol on Government Procurement lists the particular government ministries and institutions (including state supported universities and utilities) in each country to which entities from any MERCOSUR country may compete to offer their goods or services. As a general rule, the Protocol on Government Procurement does not apply to government contracts related to security or national defense. Certain goods found in Annex II to the protocol are also excluded from being offered by non-national providers including pharmaceutical products, paper, books, administrators, directors, agents, scientists, researchers, professors, artists, sportspersons, journalists, highly qualified technicians or specialists, and high-level professionals from any MERCOSUR country the right to temporarily offer their services under a contract in any of the others. Issuance of the visa will not be subject to labor certification requirements, and no numerical restrictions can be placed on the number of visas that can be issued.


certain clothing, and automobiles in Argentina. Similarly, Uruguay excludes a handful of products (including petroleum) originating in Argentina as well as petroleum and derivatives from Brazil. Services that a provider from any MERCOSUR country can offer are detailed in Annex III to the protocol and adhere to the positive lists of service sectors negotiated under the Protocol of Montevideo on the Trade of Services within MERCOSUR. Annex IV to the Protocol on Government Procurement lists public works projects that individuals or firms from the MERCOSUR countries may bid on (although Brazil is the only country that has opened this sector up to participation by firms from the other three countries). The protocol is not applicable to public contracts whose value is less than that outlined in Annex V to the protocol (although these limits can always be revised by the Common Market Council). In the case of Argentina, contracts for goods and services below U.S.$150,000 are currently excluded, while the corresponding figures are U.S.$75,000 for Brazil, and U.S.$200,000 for Paraguay and Uruguay. There is currently a U.S.$3 million minimum threshold for bidding on public works projects in Brazil (but none exists for the other three countries as they have yet to liberalize this area for bidders from other MERCOSUR countries). The awarding of a bid is to be carried out pursuant to the national law of each signatory state. However, each country is required to publish and easily make available all its laws, administrative and general regulations, as well as specific procedures related to government procurement, including (when feasible) over the Internet. Each country is also required to maintain or establish judicial, arbitral, or administrative procedures designed to resolve disputes that may arise from the awarding of a bid. The bidding process should be fully transparent, and technical rules for solicitation must not be crafted in such a way as to unfairly benefit one party over another. Closed bidding is permissible under very limited conditions as outlined in Article 18 of the protocol so as to prevent undue favoritism or discrimination. Article 19 to the Protocol on Government Procurement lists what types of qualifications may be required of goods and service providers. Expressly prohibited are requirements that bidders must have already offered their goods or services in the country beforehand. Article 22 contains requirements for disseminating announcements of government procurement opportunities, while Article 23 lists what basic information should be included in such announcements as well as the basic rules for evaluating proposals. For its part, Article 24 contains the prerequisites for presenting bid proposals, while Article 25 contains minimal rules for awarding bids (including options for overcoming ties). If a country does decide to restrict access to any sector that it has already included in the annexes as open to goods and service providers from the other MERCOSUR countries, it must first notify the MERCOSUR Trade Commission and negotiate some type of compensation to the affected state(s). Governments are also free to negotiate the inclusion of new services or goods that may be offered by providers from any of the four countries.

CHAPTER 5

FOREIGN INVESTMENT CLIMATE WITHIN MERCOSUR AND BUSINESS OPPORTUNITIES I. Legal Regime for Foreign Investment The Protocol of Colonia for the Promotion and Reciprocal Protection of Investments within MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) was signed by the four member states on January 17, 1994. As of mid-2008 it still had not been ratified by any of the four countries, and there are proposals to substitute it with a new document. The Protocol of Colonia covers direct and indirect investments made by nationals of or persons or entities permanently domiciled in one MERCOSUR country in the territory of any other member state. Investments are defined as real and personal property (including in rem property such as mortgages, sureties, and collateral rights), stocks, credit instruments, loans directly related to a specific investment, intellectual property rights, and economic concessions granted by law. In general, each member state is required to treat investors from the other MERCOSUR country in a manner no less favorable than that accorded to its own nationals or those from third countries. In addition, pursuant to Article 3(4) of the protocol, none of the member states can require that an investor from another MERCOSUR country be required to export so much of its production or mandate that a certain percentage of inputs or services be sourced locally as a pre-condition for authorizing that investment within its territory. Pursuant to Article 4, a foreign investment may not be nationalized or expropriated unless for reasons of public utility. Furthermore, expropriations can only be carried out on the basis of non-discrimination and under due process of law. If any property is expropriated, the owner must be promptly compensated and receive an amount equivalent to the property’s market value just prior to the public announcement of the nationalization or expropriation measure. Pursuant to Article 5 of the Protocol of Colonia, foreign investors are guaranteed the right to freely repatriate or transfer aboard their initial investment capital, and any profits, dividends, interest payments, loan proceeds, royalties, sales proceeds, indemnity payments, and employee remuneration. Transfers shall not be unduly delayed and must occur in the convertible currency of choice at the prevailing market exchange rate. Any disputes that may arise among the signatory parties concerning the interpretation or application of the Protocol of Colonia are to be handled under the dispute resolution procedure established by the Protocol of Brasilia 195


(or any substitute system). On the other hand, Article 9 to the protocol governs the procedure for resolving disputes between a private party and a signatory state. An attempt should first be made to resolve the dispute in an amicable manner. If a dispute cannot be resolved within six months after it was first raised, the investor can request that the matter be either: (1) turned over to the relevant courts within the country where the investment was located or (2) submitted to international arbitration before the International Center for the Settlement of Investment Related Disputes (ICSID; created by the Convention on the Settlement of Investment Disputes Between States and Nationals of other States signed at Washington, DC on March 18, 1965), or an ad hoc arbitration panel established under the UN Commission on International Trade Law rules or any dispute resolution system for private parties that may be established within the context of the Treaty of Asuncion. Arbitral awards are final and must be carried out by the parties to the dispute. The annex to the Protocol of Colonia contains the reservations made by each signatory state to the obligations otherwise guaranteed to foreign investors under the protocol. The MERCOSUR countries are under an obligation to eliminate these reservations as quickly as possible. At the time the protocol was signed, Argentina reserved the right to limit investment in the following sectors to its own nationals: real property near border areas; air transportation services; the naval industry; nuclear power plants; uranium mining; insurance; and the fishing industry. Brazil reserved the right to restrict investment to its own nationals with respect to: prospecting and mining of minerals; operation of hydroelectric facilities; health services; sonar radio and other telecommunications services; the purchase and leasing of rural property; participation in the intermediary financial services; insurance; arms production; and internal maritime and river shipping. Paraguay reserved the right to restrict investment to its own nationals in: real property near border areas; the media and press; air, land, and maritime transport; electricity, water, and telephone services; petroleum and strategic mineral exploration; the importation and refining of petroleum derived products; and postal services. For its part, Uruguay reserved the right to restrict investment to its own nationals in: the provision of electricity and petroleum; production of basic petrochemicals; atomic energy; strategic mineral exploration; intermediary financial services; railroads; telecommunication services; radio and TV transmissions; as well as printing and audiovisual production. In addition, Brazil, in conformity with Article 171(2) of its Constitution of 1988, reserved the right to restrict government procurement opportunities to its own nationals. Argentina and Brazil also reserved the right to require foreign investors in the automobile industry to export a certain amount of automobiles, or purchase a minimal level of local inputs or services. In August 1994 the Common Market Council issued Decision 11/94, which contains the Protocol for the Promotion and Reciprocal Protection of Investments from outside the MERCOSUR. As of mid-2008, the only country Interestingly, Brazil is not a signatory to the ICSID Convention.

Foreign Investment Climate • 197

that still has not ratified it was Brazil. The types of obligations and guarantees offered foreign investors from non-member states are similar to those found in the Protocol of Colonia, although there are also some differences. For one thing, the MERCOSUR countries are not required to extend to investors from third countries the same preferences and privileges they offer to investors from a fellow MERCOSUR country. Decision 11/94 is also not as explicit as the Protocol of Colonia when it comes to the methodology for determining the value of nationalized or expropriated property for purposes of compensation. In addition, Decision 11/94 does not require that the private investor(s) and a state party wait up to six months to resolve their dispute through negotiations before referring the matter to binding arbitration or filing an action in court. Instead, only a “reasonable time” must elapse. Furthermore, the private investor is not restricted to using the ICSID, but can use any international arbitration fora or rules to resolve state-investor disputes. Interestingly, no reference is made in Decision 11/94 to any reservations by the signatory parties as is the case with the Protocol of Colonia. Common Market Council (CMC) Decision 8/93 also has an impact on foreign investment in the MERCOSUR as it contains regulations for the operation of capital markets within the subregion. In particular, Decision 8/93 establishes minimal rules for registering and obtaining government authorization to offer stock, establish a mutual fund, operate a stock exchange (including intermediary services), and the type of information these entities must share with the public. Decision 8/93 also includes rules on the type of information that must be included in stock certificates, the procedures for conducting audits, and outlines the basic rights of stockholders. Furthermore, it establishes a system of compensation, liquidation, and trusteeship. II. Intellectual Property Rights Protection Only two communitarian norms dealing with intellectual property that MERCOSUR has issued to date include the Protocol for the Harmonization of Intellectual Property Norms in MERCOSUR with Respect to Trademarks and Indications or Determinations of Origin. This protocol appeared in August 1995 as CMC Decision 8/95 and came into force in April 2001 following ratification by Paraguay and Uruguay. The protocol establishes minimal rules for the effective protection of trademarks and indications or determinations of origin. The signatory states can supplement the protocol’s minimal rules with more strict domestic legislation. A Protocol on the Harmonization of Norms with respect to Industrial Designs was issued in 1998 through CMC Decision 16/98, but it has never been ratified by any of the MERCOSUR governments. Under the Protocol on Trademarks and Indications or Determinations of Origin, registered trademarks are protected for ten years from the date the application was approved, and registration can be renewed for successive ten-year periods. Interestingly, owners of trademarks are given a six-month grace period beyond the expiration date in order to renew their registration. Registration is handled by the competent national authorities of each MERCOSUR country. The first party to register a trademark has priority, unless another party has


been openly using the same trademark in any MERCOSUR country within the preceding six months and files an application of registration in conjunction with its claim of prior use. The Protocol on Trademarks and Indications or Determinations of Origin further provides that the same documentation used to support an application in one MERCOSUR country can be used in the others (so long as it is in either Spanish or Portuguese) without any need for the material to be legalized again or translated under oath. Trademarks not used in MERCOSUR within five years of the filing of a petition of cancellation may be cancelled. The signatory states to the protocol obligate themselves to adopt (if they have not already done so) the trademark classification system established under the 1957 Nice Agreement. Finally, in a move that has nothing to do with trademarks, the protocol obligates all the MERCOSUR countries that have not already done so to adopt rules recognizing patents for new varieties of plants. As members of the World Trade Organization (WTO), the MERCOSUR countries are bound by the Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement; and, as developing nations, they had until January 1, 2000, to fully adhere to TRIPs. The MERCOSUR countries are parties to the following international conventions: (1) the Paris Convention for the Protection of Industrial Property (i.e., patents and trademarks); (2) the Berne Convention for the Protection of Literary and Artistic Works (i.e., copyrights); (3) the Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of their Phonograms; and (4) the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations. Argentina, Paraguay, and Uruguay have also ratified the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty. Argentina and Brazil are signatories to the Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite. Furthermore, Argentina and Brazil have ratified the Treaty on the International Registration of Audiovisual Works. Brazil is one of the original signatories of the Madrid Agreement for the Repression of False or Deceptive Indications of Source of Goods. Only Brazil has signed the Patent Law Treaty or ratified the Patent Cooperation Treaty (Argentina has signed the latter, but it awaits ratification by its Congress). Only Uruguay has signed the Trademark Law Treaty. No MERCOSUR country has yet signed the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure, the Hague Agreement Concerning the International Registration of Industrial Designs, the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration, or the Madrid Agreement Concerning the International Registration of Marks and its Protocol. On the other hand, all the MERCOSUR countries are parties to the International Convention for the Protection of New Varieties of Plants. The full texts of all these treaties and agreements (but for the Convention for the Protection of New Varieties of Plants) are available at the Web site of the World Intellectual Property Organization (WIPO), http://www.wipo.int/treaties/en. The full text of the various acts of the International Convention for the Protection of


III. Free Movement of Labor Article 1 of the Treaty of Asuncion called for the creation of a common market as of January 1, 1995, that among other things would include “the free circulation of . . . factors of production” among the four member states. Economists generally define factors of production to include both capital and labor. Despite its inclusion as one of the primary goals of MERCOSUR, the free movement of labor has taken a back seat to efforts to insure the free flow of goods. It was not until the end of 2002 that the issue even received significant attention, with the discussion now extended to include the two associate MERCOSUR members: Bolivia and Chile. Despite the general inattention to labor issues during the first decade of MERCOSUR’s existence, in December 1997 the Common Market Council had already approved a Multilateral Agreement on Social Security for the Common Market of the South attached to Decision 19/97. Oversight over that agreement’s implementation was given to a specially created Permanent Multilateral Commission made up of three representatives from each MERCOSUR country. The Multilateral Agreement on Social Security came into force in June 2005. Pursuant to the Multilateral Agreement on Social Security, workers from a MERCOSUR country (as well as their families and dependents) that legally offer their services in any of the other three member states have the same obligations and are entitled to the same rights as if they were nationals of that country. Obligations include making the required contributions to the relevant pension funds (whether public or private) and health care plans. The only workers exempt from making contributions to local pension plans (and eventually receiving benefits) are those workers defined as temporary (i.e., generally hired for less than a year) and classified as professional, scientific, technical, managerial, or research, as well as transport sector employees and diplomats. On the other hand, all workers regardless of their employment status, as well as their families and dependents, are entitled to use the state-run health care facilities free of charge in any MERCOSUR country in which they may find themselves residing. As a general rule, paying into the social security system of any of the four MERCOSUR countries for a period greater than 12 months shall count towards the vesting of pensions, disability, or survivor death benefits in any of the other three countries. The actual years required for that vesting to occur, however, is still dependent on the country where one will eventually receive the payment. The Multilateral Agreement on Social Security is retroactive in scope, so that time spent working in another country before it came into effect counts towards recognition of prior payments for purposes of vesting. Monies paid into private pension plans in one country can also be recognized in the other three for purposes of vesting, although this will require a new agreement to permit transfers among funds. New Varieties of Plants, as revised at Geneva (1972, 1978, and 1991) is available at http:// www.upov.int/en/publications/conventions.


As a result of the Multilateral Agreement on Social Security, the relevant institutions in the four MERCOSUR countries were obligated to establish mechanisms for transferring funds among them to pay beneficiaries residing in a country other then where their pension vested. Obligations are paid in the local currency and cannot be adjusted to reflect the local cost of living. The agreement also mandates that any legal documents reflecting social security eligibility are to be recognized by all four governments without the need of official translations or consular legalization. In addition, the relevant social security entities of all four countries must accept and process legal papers and documents of any MERCOSUR national as if all four agencies were a single, unified intake center. In December 2002 the MERCOSUR countries signed two agreements dealing with migratory flows within MERCOSUR as well as two additional agreements that extend similar privileges to Bolivia and Chile. The main goal of these agreements is to decrease the levels of illegal immigrants who, because of their status, are easy prey for exploitive and unscrupulous employers. Under the Agreement on the Regularization of Internal Migration of MERCOSUR Citizens, the nationals of any MERCOSUR country that find themselves in one of the other three member states are allowed to change their status in that country without the need to return home or to a third country. This change of status can be for purposes of seeking temporary or permanent residency. A companion agreement signed the same day incorporated Bolivia and Chile into this scheme. Under the Agreement on Residency for Nationals of the MERCOSR States signed on December 6, 2002, a national of any MERCOSUR country has the right to seek legal residency in any of the other three member states. This request for legal residency may be made at the relevant consulate in the country of origin or with the relevant national authorities where they are actually residing. In the latter case, applications for legal residency shall be processed regardless of the actual immigration status in that country of the applicant. In addition, the applicant shall not be required to pay any fine or other type of legal sanction. As a first step, temporary residency will be granted for up to two years upon representation of the proper documents. The individual can then convert his or her status into permanent residency upon the filing of an application and the required supporting documentation at least 90 days before the expiration of temporary residency status. Family members of persons who obtain temporary or permanent residency status but who are not nationals of any MERCOSUR country are entitled to be granted the same status granted to the MERCOSUR national. In general, temporary or permanent residency status gives the holder the right to apply for the same type of jobs and benefits available to a national. Immigrants are entitled to receive pay equal to that given to nationals and also have the right to transfer their earnings and savings in the amount they wish to their country of origin. The children of immigrants are entitled to full access to the public education system regardless of the legal status of their parents. In an attempt to discourage illegal immigration, the Agreement on Residency


for Nationals of the MERCOSUR States calls on the signatory governments to cooperate in the exchange of information, impose effective sanctions on employers who hire illegal immigrants, and detect as well as break up immigrant smuggling rings. A companion agreement signed by the presidents of the four MERCOSUR countries and associate members Bolivia and Chile on December 6, 2002, extended the same rights and protections to Bolivian and Chilean nationals in the MERCOSUR countries as offered to their own respective nationals under the Agreement on Residency of Nationals of the MERCOSUR States. It also required that the Bolivian and Chilean governments provide the same to nationals from the four MERCOSUR countries living in Bolivia or Chile. In December 2003 the Common Market Council issued Decision 16/03, which approves the creation of a MERCOSUR visa to facilitate the crossborder movement of service providers who are nationals of any of the four MERCOSUR countries. The visa is intended to complement implementation of the Protocol of Montevideo on Trade in Services. The MERCOSUR visa covers, inter alia, corporate executives, administrators, directors, lawyers, scientists, researchers, academics, artists, athletes, journalists, and highly trained technicians and specialists. The multiple entry visa gives the holder the right to provide temporary services under a contract in any MERCOSUR country for up to two years, which can be extended for a maximum of four years. In order to obtain such a visa, the applicant’s sponsor is not required to show economic need or obtain any type of certification from the local Ministry of Labor. The inclusion of this latter provision was what prevented its approval for many years as a result of strong objections from Brazil’s Ministry of Labor. It is ironic that President Luiz Inácio Lula da Silva of the Workers Party (and himself a former union leader) was the one who eventually was able to overcome the Ministry of Labor’s opposition and get the MERCOSUR visa approved. In any event, the granting of a MERCOSUR visa does not exempt the holder from complying with registration and professional licensing requirements where the service will be offered, as well as local social security and tax laws, and labor codes. In June 2008 the Common Market Council issued Decision 18/08, which allows nationals and permanent residents from all four core MERCOSUR countries and its six associate members to travel among them and only show some type of national identity card as opposed to a passport. IV. Environmental Protection While the Treaty of Asuncion does not specifically address the issue of environmental protection, in 1992 the Common Market Group did create a special Committee on the Environment designed to analyze current legislation in each of the MERCOSUR countries and to propose action on a subregional level to protect the environment. Interestingly, the framework agreement that was signed between MERCOSUR and the European Union in December 1995 encouraged efforts at environmental protection on the part of both blocs and for the rational use of natural resources. The agreement also called for the exchange of information on the environmental front, training and education


programs, technical and institutional assistance, and possible joint research projects. In 1994 the Common Market Group issued Resolution 10/94. This resolution contains basic guidelines for the MERCOSUR countries to follow in terms of environmental policy so as to, inter alia, ensure the harmonization of the four member’s environmental legislation and thereby avoid unfair competition arising from differing production costs based on different environmental obligations. Resolution 10/94 was followed by a long-term program issued by the Common Market Council in 1995 called MERCOSUR 2000 that calls for the protection of the environment as a means of better integrating the four member states. The adoption of regulations and technical norms is recognized as a legitimate contribution to protecting the public health and environment of the MERCOSUR countries, so long as they do not become arbitrary and discriminatory impediments to free trade. A permanent working subgroup to the Common Market Group (i.e., No. 6: The Environment) was also created in 1995 to propose guidelines concerning environmental protection on a regional level. The working subgroup on the environment has as among its mandates: the assessment and harmonization of environmentally related nontariff barriers; the establishment of adequate competitive conditions between the member states and with third countries; the application of ISO 14,000 (i.e., environmental management) standards as a competitive factor for products originating in the MERCOSUR region; oversight over the application of environmental rules in various sectors of the economy such as energy, industry, and agriculture; the development of an environmental information system; and the definition of a MERCOSUR-wide label indicating compliance with environmental standards. On a communitarian level, MERCOSUR has been most active in setting regulations on the transport of hazardous materials. In 1994 the Common Market Council issued Decision 2/94 (Agreement on the Transport of Hazardous Waste within the MERCOSUR) and Decision 14/94 (Transport of Dangerous Products) that have been ratified and incorporated into the domestic legal framework of all four member states. These were followed in 1997 by CMC Decision 8/97, which creates a regulatory framework for punishing violations of the Agreement on the Transport of Hazardous Waste within the MERCOSUR. The Common Market Group has also been active on this front, issuing Resolution 1/94, which deals with how to handle vehicles transporting hazardous materials at border crossings, Resolution 6/98, which creates a uniform procedure for the transport of hazardous material, and Resolution 10/00, which establishes a uniform system for registering hazardous waste transporters within MERCOSUR. CMC Decision 32/07 revises the 1994 Agreement on the Transport of Hazardous Wastes in the MERCOSUR so as to make it conform to the UN Model Regulation on this subject matter. In particular, CMC Decision 32/07 simplifies the procedure for handling information requests from users, shippers, and transport companies, and enhances security for the surface transport of hazardous material. In 1994 the Common Market Group issued Resolution 102/94, which establishes maximum limits on contamination by inorganic materials. This was


followed by Resolution 128/96, which creates technical regulations with respect to maximum limits on polluting gas emissions and noise by automobiles. In 2001 the Common Market Council, through Decision 2/01, approved a Framework Agreement on the Environment within the MERCOSUR. The framework agreement is intended to encourage sustainable development in the MERCOSUR countries through the cooperative actions of all four member states. The MERCOSUR countries also agree to execute new regional agreements that incorporate the principles of the Declaration of Rio de Janeiro on the Environment and Development of 1992 not already the subject matter of existing international conventions. Among the different activities the MERCOSUR countries intend to carry out under the new framework agreement, which also contemplates the inclusion of civil society organizations, are: 1. joint cooperation in complying with international environmental agreements to which the MERCOSUR countries are or may become signatories to, including the adoption of common environmental protection policies and the adoption of common positions in international environmental fora; 2. exchange of information on environmental laws, regulations, procedures, and policy matters, especially those that can impact on regional trade and competitiveness; 3. harmonization of national environmental legislation and the development of specific sector policies required to implement the objectives of the framework agreement; 4. identification of sources of funding to develop the requisite capacity to implement the obligations engendered by the framework agreement; 5. promotion of environmentally healthy and secure workplaces; 6. ensuring that the institutional bodies of MERCOSUR take relevant environmental concerns into consideration when formulating decisions or establishing new policies; 7. promotion and/or adoption of policies, production processes, and services that do not degrade the environment; 8. encouragement of scientific research leading to the development of clean technologies; and 9. exchange of information on national environmental disasters and emergencies that could impact the other member states and, when feasible, offer technical and logistical support to contain them. In 2004 the Common Market Council issued Decision 14/04, which contains the Protocol on Matters Related to Cooperation and Assistance in the Face of Environmental Emergencies. This new legal instrument buttresses the Framework Agreement on the Environment within the MERCOSUR that was issued in 2001. The main objective of the protocol found in CMC Decision 14/04 is to provide the legal basis for cross-border cooperation in order to prevent, mitigate, and provide a rapid response to environmental emergencies. An environmental emergency may be the result of either natural or man-made phenomena that pose a grave threat to the environment or to ecosystems and require immediate redress.


Each MERCOSUR country has designated a particular government agency to be its focal point of contact and communication in the event of an environmental emergency. The MERCOSUR governments have an obligation to, inter alia, keep each other informed through the designated focal points of situations that may produce an environmental emergency or may require joint preventive measures. The protocol also mandates the creation of an Environmental Databank for MERCOSUR to store statistics on environmental emergencies in each of the member countries as well as a registry of environmental experts. When an environmental emergency arises in a particular country, its focal point is required to immediately inform its counterparts in the other country or countries that could potentially be affected, and a Committee of Specialists made up of pre-identified experts can be convened to recommend technical solutions designed to minimize harmful effects. A government (through its focal point representatives or directly from response teams on the ground) can make a request for immediate non-governmental-related assistance from the other MERCOSUR countries in order to respond to an environmental emergency whenever it feels its own capabilities have become severely strained or are overwhelmed. Unless otherwise agreed to, it is the responsibility of the requesting country to pay for any cross border assistance. In 2007 the Common Market Council issued Decision 26/07, which establishes policy guidelines to promote and facilitate cooperation in sustainable production and consumption within MERCOSUR. It is expected that this policy will guide all programs designed to integrate chains of production among the MERCOSUR countries. An emphasis is placed on incorporating micro-, small- and medium-sized enterprises into programs designed to encourage sustainable production and consumption through, inter alia, the substitution of materials with those that contaminate less, the use of preventive environmental methodologies and technologies, and the development of new products and services that generate less of a detrimental environmental impact. V. Trends in Foreign Direct Investment in the MERCOSUR Region during the 1990s The free market economic policies adopted by the four core MERCOSUR countries (i.e., Argentina, Brazil, Paraguay, and Uruguay) in the 1990s meant liberalized foreign investment regimes, deregulation, and the privatization of state-owned enterprises that contributed to making the subregion a magnet for foreign direct investment. MERCOSUR provided an additional important incentive, since it held out the possibility that companies new to the region as well as those already established could focus new investment in manufacturing and service facilities in the country that provided them with the most competitive advantages and use it as a springboard from which to serve all the rest. Between In the particular case of Uruguay, the existence of MERCOSUR is said to have been responsible for up to 40 percent of the foreign direct investment flows the country received throughout the 1990s. This investment was centered on efforts to exploit Uruguay’s natural resource base and sell a derivative or service (in the case of tourism) to the regional market. See G. Bittencourt & R. Domingo, El Caso Uruguayo, in El Boom de Inversión Extranjera Directa en el MERCOSUR 294 (D. Chudnovsky ed., 2001). Many Chilean firms, in particular,


1997 and 1999 alone, an estimated U.S.$40 billion is said to have flowed into the MERCOSUR countries or 6 percent of all global foreign direct investment flows (up from 1.4 percent during the 1980s). At the start of the 1990s, most foreign capital that flowed into the MERCOSUR region was in response to the privatization of state-owned enterprises. In Brazil, this process did not commence until the middle of the decade, when the MERCOSUR countries as a whole also experienced an increase in investment earmarked for the construction of new factories. By the end of the 1990s, foreign direct investment flowing into the bigger MERCOSUR countries was heavily directed to mergers and/or the acquisition of private sector firms, particularly of service providers serving the local or regional markets. This intense merger and acquisition activity changed the origin of the foreign direct investment capital. Whereas North American firms figured prominently in the investment drive into the Southern Cone during the early 1990s, the Europeans accounted for a larger percentage of foreign investment capital flows into the MERCOSUR region by the end of the decade. Interestingly, the Japanese were noticeably absent from the foreign investment boom in the Southern Cone throughout the 1990s. In Argentina, foreign investment during the 1990s was heavily concentrated in the automobile industry, mining (including petroleum and natural gas drilling activities), the foodstuffs sector, real estate, services (including banks and new hotels), petrochemicals, and distribution-related activities (namely gas and electricity). For the most part, Uruguay also saw foreign direct investment in similar areas, albeit on a more reduced scale. In addition, Uruguay experienced heavy foreign investment in forestry activities (including cellulose and paper production). In Paraguay, foreign direct investment tended to focus on commercial and agro-industrial pursuits, particularly soy production. Beginning in the late 1990s, Paraguay also experienced a sharp increase in set up operations in Uruguay with the express intention of serving the greater MERCOSUR market. Id. at 308. Chilean and Uruguayan investment in Paraguay, an unknown phenomenon prior to the 1990s, is also said to have been the direct result of MERCOSUR. F. Masi, El Caso Paraguayo, in El Boom de Inversión Extranjera Directa en el MERCOSUR 294 (D. Chudnovsky ed., 2001). In the specific case of Brazil and Paraguay, there was a noticeable tendency for foreign companies to enter into joint ventures (albeit for different motives) rather than make outright acquisitions. See, e.g., D. Chudnovsky & A. López, La Inversion Extranjera Directa en el MERCOSUR: Un Análisis Comparativo, in El Boom de Inversión Extranjera Directa en el MERCOSUR 294 (D. Chudnovsky ed., 2001). From the perspective of the buyer, the acquisition of an already existing enterprise is the easiest way to enter into an expanding market since it eliminates a potential competitor, and allows one to take over an already existing local market position and distribution channel as well as providing important knowledge on things such as local consumer tastes. In the Paraguayan case, the explanation offered was the high risk associated with operating as an independent company in the country’s non-transparent business environment. One exception to this trend was in the Chilean mining sector. Throughout the 1990s, Japanese investors were involved in major copper, gold, and other mineral mining ventures, although often as joint venture partners with Australian, British, or U.S. firms. See Economic Commission for Latin America and the Caribbean, Foreign Investment In Latin America and the Caribbean 2000, 102–03 (2001).


foreign investment flows directed towards the telecommunications sector (e.g., cellular telephony and cable TV). Brazil, which enjoys the Southern Cone’s most diverse industrial base and largest internal market, attracted foreign direct investment in a wide assortment of activities that ranged from the automotive sector, pharmaceutical production, as well as certain agricultural activities. After the mid-1990s, as the Brazilian government sold off numerous assets and liberalized rules on foreign participation in the economy, foreign direct investment in Brazil became more focused on services. Overall, with the exception of the services sector, investment patterns in each MERCOSUR country tended to focus on those areas where the country had a perceived international or regional competitive advantage based on such factors as access to natural resources, tax rates, labor supply and wages, as well as production costs. There is no doubt, however, that in the manufacturing sector (particularly the automotive industry), the protection afforded by MERCOSUR’s common external tariff (CET) or individual country import duties may have provided some of the incentive for foreign investment capital being used to restructure and modernize production facilities targeting the local and wider subregional market. One of the most exiting phenomena associated with the MERCOSUR process during the 1990s was the explosion in cross-border investment by regionally owned companies. A study prepared by the Instituto de Pesquisa Económica Aplicada (IPEA) in Brazil and the UN Economic Commission for Latin America and the Caribbean (ECLAC) found that the period from 1990 to 1998 saw the creation of over 240 Argentine-Brazilian joint ventures. Although the amount of cross-border foreign direct investment remained modest in comparison with that coming in from Europe or the United States, it marked a significant development because prior to the 1990s it was practically non-existent. Much of this crossborder investment reflected a restructuring by national economic groups as they sought to specialize in certain core activities and reduce risk levels by diversifying their holdings geographically. In the specific case of Uruguay, cross-border direct investment from within the Southern Cone was responsible for 25 percent of the country’s foreign direct investment flows between 1990 and 1998, while it reached 50 percent in Paraguay. During the 1990s, almost 360 Brazilian firms invested an estimated U.S.$2 billion in Argentina in the form of either joint ventures, construction of new factories, or the creation of subsidiaries. For every four dollars that Brazilian companies invested in other countries within MERCOSUR, at least three of those dollars went to Argentina. The bulk of Brazilian investment in Argentina during the 1990s was concentrated in the automobile industry, metallurgy, foodstuffs and beverages, chemicals, and services. One explanation offered for this increase in cross-border investment was that many Brazilian companies viewed the sophisticated and affluent Argentine market as a testing ground before going global. According to the Grupo Brasil, a trade association made up of some 200 medium- and large-sized Brazilian firms operating in Argentina, about 67 percent of Brazilian investment in Argentina during the See Chudnovsky & López, supra note 5, at 10.


1990s was earmarked for the manufacturing sector. For their part, some 80 Argentine firms invested in Brazil during the 1990s, concentrated primarily in the agro-industrial sector (in particular, the foodstuffs and beverage sector), construction, and industrial machinery production. By the end of the 1990s Argentine investment shifted its focus to the Brazilian energy sector, especially the building of pipelines and electric transmission lines. In the case of Paraguay, much of the investment from the other MERCOSUR countries during the 1990s was concentrated in the agro-industrial sectors and in the manufacture of shoes, textiles, and apparel. There was also noticeable Brazilian investment in the Paraguayan financial services sector. The implementation of Paraguay’s Maquila Law 1064/97 in 1997 sparked a sudden influx of U.S.$45 million in investment capital from Brazil (for a new petrochemical complex), U.S.$5.2 million from Argentina (i.e., for factories producing plastic containers, rubber products, and apparel), and U.S.$4.2 million from Uruguay (i.e., for factories producing apparel, recycled plastics, insecticides, and dentistry equipment). In Uruguay, investment from Argentina and Brazil during the 1990s was concentrated in agro-industry, minerals, biotechnology, software, and forestry. Although only an associate member of MERCOSUR, Chile was often utilized by companies in the 1990s as a springboard into MERCOSUR. For example, transnational service corporations identified the acquisition of Chilean firms as an excellent way to position themselves as global players and as a stepping stone to other Latin American service markets. In addition, Chilean investors themselves were active investors in the MERCOSUR countries. During the 1990s, Chilean firms invested over U.S.$5 billion in Argentina (more than the Brazilians), making that country the largest destination for Chilean foreign direct investment in the world. Much of the initial Chilean investment in Argentina during the early 1990s was in response to Argentine privatization efforts, particularly in the area of basic services. The Chileans were especially active in the purchase of small- and medium-sized utility companies that were overlooked by U.S. and European companies. After the mid-1990s the Chileans expanded their investment reach into other areas of the Argentine economy, including the retail sector, banking, mining, pharmaceuticals, and agro-industrial pursuits. With the adoption of the Real Plan in 1994 and the The UN’s ECLAC attributes this to the fact that “[f]irst, Chilean firms [we]re already accustomed to operating in a competitive environment, as a result of the early reforms implemented by the authorities at the beginning of the 1970’s. Second, the majority of the leading firms in these sectors [we]re financially solvent and ha[d] access to international capital markets. Third, they ha[d] acquired valuable know-how and experience in their own spheres of operation. Fourth—and perhaps most significantly—they conducted an ambitious strategy of international expansion in Latin America in the mid-1990s by using their experience in the industry to acquire stakes in recently privatized companies.” See Foreign Investment in Latin America and the Caribbean 2000, supra note 6, at 114. For example, the main Chilean electricity companies, privatized in the 1980s and owned by Chilean conglomerates, were the major players in the electricity privatizations of several countries in the Southern Cone and Central America and came to control major assets in Argentina, Brazil, Colombia, and Peru by the end of the 1990s. Id. at 117.


ensuing economic stability and increased market liberalization in Brazil, the Chileans became very active in the Brazilian market as well. Chilean investors participated heavily in the privatization of Brazil’s energy sector and by the end of the 1990s were focusing on industrial pursuits (particularly in the cellulose and paper industry). Since 2000 Chilean foreign direct investment in MERCOSUR has been almost evenly divided between the creation and expansion of new subsidiaries (e.g., the creation of LAN Argentina) as of the merger or acquisition of existing entities (especially in the retail sector). One of the criticisms leveled at the wave of foreign direct investment that flooded into the MERCOSUR region during the 1990s was that it focused on the acquisition of already existing service companies and did not contribute to creating new sources of production and capital formation. In addition, this type of foreign direct investment led to high current account deficits when these foreign companies sought to repatriate their investment capital and profits abroad. In 2000, for example, the Brazilian Society for the Study of Transnational Firms (SOBEET) found that repatriated “profits and dividends” was mostly responsible for Brazil’s U.S.$3.3 billion current account deficit. Exacerbating the balance of payment problems was that many foreign direct investors involved in manufacturing activities tended to purchase capital and intermediate goods as well as inputs from abroad, particularly expensive hightechnology equipment. In addition, they often imported more costly, high-end product lines from outside the region in order to complement the more basic items produced and sold in the local market.10 This latter phenomenon also meant that the region attracted little efficiency-seeking investment that could enhance the international competitiveness of the region and generate more employment in high-technology industries.11 VI. Examples of Companies that Incorporated MERCOSUR into Their Strategic Business Plans for the Southern Cone of South America The prospect of a seamless and integrated market promised by MERCOSUR encouraged many local as well as foreign companies to restructure how they traditionally did business in South America’s Southern Cone. MERCOSUR Chudnovsky & López, supra note 5, at 33. This critique overlooks the fact that even this type of foreign investment can improve the quality of the services being offered—particularly when there is a transfer of a public utility to the private sector—and this, in turn, favors the ability of local producers to become more competitive on the international market. There is also a strong link between increased foreign direct investment and enhanced productivity. 10 Id. at 34–35. A noticeable exception to this trend was in the food and beverages as well as the paper industries, which rely heavily on local inputs. While these industries were the target of much foreign direct investment flows into the MERCOSUR region in the 1990s, they were also notorious for focusing on meeting the needs of the domestic or subregional markets and did not encourage significant global export activity. 11 See, e.g., Economic Commission for Latin America and the Caribbean, Foreign Investment in Latin America and the Caribbean 2004, 19 (2005). The ECLAC report further notes “that the technological superiority of many of the [transnational corporations] present in Brazil did not have the effect of upgrading the quality of employment or improving international competitiveness, except, to some extent, in the automotive and telecommunications equipment industries.” Id. at 19.


offered the prospect of streamlining manufacturing and service operations in the country offering the most comparative advantages and using it as a springboard to access all the other markets. If MERCOSUR had functioned the way it was intended, the biggest beneficiaries should have been the smaller member states, particularly Uruguay, given its attractive tax incentives, absence of currency exchange controls, educated workforce, political stability, reliable infrastructure, and well-deserved reputation for transparency. In fact, MERCOSUR would have forced the laggards to improve their business climates or lose out in the race to attract foreign direct investment. Although MERCOSUR did eventually achieve free trade for the vast majority of the goods traded among the four member states, the important automotive sector continues to remain an exception. In addition, in the face of domestic economic turmoil, the MERCOSUR countries—particularly its two larger members—did not hesitate to impose non-tariff restrictions on imports from the other member states. Despite its shortcomings, outlined in more detail in Chapters 3 and 4 of this book, MERCOSUR was and continues to be incorporated into the strategic business planning of many companies operating in the region. What follows is an overview of examples broken down by different sectors. A. Automobiles The automobile industry, dominated by foreign multinationals, was at the forefront in restructuring its Southern Cone strategy in anticipation of the regional free trade area promised by MERCOSUR. Prior to this time, the automotive industry had already utilized the protocols affecting the automotive sector under the Argentine-Brazilian Program on Economic Cooperation (PICAB) of 1986. The best example was the Autolatina venture that lasted until 1995 between Ford in Argentina and Volkswagen in Brazil to exchange vehicles and auto parts under PICAB’s managed trade arrangements. Similarly, Saab-Scania used PICAB to rationalize its manufacturing operations for trucks and buses in the Southern Cone by avoiding duplication of production and concentrating it in the location that offered the most comparative advantages. As a result, transmissions were produced in the Tucumán plant in northern Argentina, window panes were made in Uruguay, and the actual vehicles utilizing the Argentine and Uruguayan inputs were assembled in Brazil for distribution throughout the entire Southern Cone. Between 1995 and 2000 multinational automobile companies invested an estimated U.S.$26 billion in the MERCOSUR region. This massive influx of foreign capital transformed the automotive sector in South America’s Southern Cone “from an obsolete and inefficient production base—surviving on outmoded model lines with a poor reputation for quality and competitiveness— into a modern production base, manufacturing contemporary models and, in a growing number of cases, world quality products.”12 During the 1990s the automotive sector was responsible for at least a quarter of all intra-MERCOSUR trade flows and the tremendous increases

ter

12 The Economist Intelligence Unit, E.I.U. Motor Business International (Second Quar1998) 87 (1998).


in intra-regional trade volumes. The maxi-devaluation of the Brazilian real in January 1999 caused major upheavals for the regional automotive sector. Domestic sales of vehicles in Brazil plummeted, and Argentine manufacturers, already at a competitive disadvantage because of their overvalued currency pegged one-to-one to the U.S. dollar, saw their largest export market disappear. In truth, the maxi-devaluation of the Brazilian real only exacerbated a problem that was increasingly apparent after the mid-1990s, namely Argentina’s higher production costs over those in Brazil. This explains why truck and bus production in Argentina had been steadily falling since 1994, despite increases in local demand, and entire lines of heavy commercial vehicles and farm equipment were being shifted to Brazil well before 1999. Production in Argentina tended to be limited to a few, higher-quality models that were sold domestically or exported mostly to Brazil in exchange for a much wider variety of models, often made by the same firm’s Brazilian subsidiary. With the end of the Convertibility Plan in early 2002, producing automobiles and auto parts in Argentina suddenly became much cheaper than in Brazil. This was helped by the fact that the government imposed a freeze on energy costs that indirectly subsidized manufacturing at least through 2004. Since 2005 the Argentine Central Bank’s intervention in artificially boosting the value of the U.S. dollar to encourage exports has further helped to make automotive production cheaper in Argentina than Brazil. As a result, Argentine automobile production now exceeds the peaks recorded in the mid-1990s, and about half the output is exported, primarily to Brazil, Mexico, Chile, Central America, and Europe. Uruguay had a small automobile assembly industry that survived until the economic implosion in neighboring Argentina in 2002. It produced justin-time specialized models with extra features that required a high level of qualified manual labor and were exported primarily to Argentina and, to a lesser extent, Brazil. Uruguay’s comparatively lower labor costs at the time made this type of niche production regionally competitive. The ability of the Uruguayan automotive industry to grow significantly, however, was always limited by MERCOSUR’s failure to fully enact free trade in the automotive sector. Instead, Argentina and Brazil both imposed low ceiling quotas on how many vehicles Uruguay could export to both, in order to prevent Uruguay from becoming a major regional assembly center for Asian manufacturers. Despite this, in 2008 Chinese auto manufacturer Chery Automobile began construction of a plant in Uruguay to build an SUV model for sale throughout MERCOSUR. The fact that the Argentine based Grupo Socma is an investment partner in the new plant provides some level of comfort that Chery’s vehicles will at least be allowed greater access into the Argentine market. Since 2003 automobile production in MERCOSUR has seen a steady recovery from its nadir at the turn of the century and now exceeds the levels recorded during the boom days of the 1990s. Part of the explanation was the development of new export markets in Africa, China, Europe, and Mexico. In 2007 Brazilian-based manufacturers produced some 2.4 million passenger vehicles and over half a million jeeps, trucks, and buses. Meanwhile, the


output of automobiles and utility vans in Argentina for 2007 was just over half a million vehicles, up from a paltry 150,000 made in 2002. Argentina also produced some 31,000 trucks in 2007 (over an output of 6000 in 2002). Brazil’s increasingly strong currency vis-à-vis the U.S. dollar and the Argentine peso is, however, putting a crimp on Brazilian exports of automobiles. At the same time, Brazilian-made models increasingly have had to compete with imported high-end models, including some made by companies without a Brazilian manufacturing base. For example, Ford is importing larger Nissan passenger car models made in Mexico to sell in the Brazilian market, while Chrysler plans to produce a version of its Versa model in alliance with Nissan’s Mexico plant and export it to Brazil.13 Despite the increasing costs of producing in Brazil, this did not prevent Hyundai of Korea from opening an assembly facility in Brazil in April 2007 as part of a joint venture with local investors. Furthermore, increased global concerns about carbon emissions and high oil prices, may soon lead to an export boom in Brazilian-made automobiles given the industry’s decadeslong experience producing cars in Brazil that run on biofuels, including the development of the flex-fuel engine. In 1996 Toyota opened a U.S.$150 million factory in Zaraté, Argentina, to build the Hi-Lux pick-up truck for sale throughout MERCOSUR. When it became apparent by the late 1990s that complete free trade in the automobile sector would be delayed and that the PICAB’s managed trade regime would continue, Toyota opened a new Brazilian factory in Indaiatuba in the state of São Paulo in September 1998 to produce its Corolla passenger car model for sale throughout MERCOSUR. In the particular context of ArgentineBrazilian trade, Hi-Lux pick-ups made in Zaraté and exported to Brazil would be compensated by exports of Brazilian made Corollas. Following the 2002 devaluation of the Argentine peso, Toyota embarked on a U.S.$200 million investment in its Zaraté facility designed to triple its production of light utility vehicles for export throughout Latin America. In 2007 Toyota announced plans to build a new pick-up model in Argentina for sale throughout Latin America. During the 1990s Renault adopted an aggressive MERCOSUR strategy to make up for its stagnant, traditional markets in Europe. In 1997 Renault ended its licensing agreement with an Argentine firm and began producing passenger cars and utility vans on its own in Córdoba that were exported throughout the Southern Cone. When it became apparent in 2000 that free trade for the automotive sector in MERCOSUR would be delayed, it accepted generous tax incentives and donated land to open a U.S.$1 billion plant in São Jose dos Pinhais in the state of Paraná in Brazil to build small and low-cost passenger cars for the Brazilian market and to export some to Argentina in compensation for the more expensive models and utility vans made there and exported to Brazil. In 2007 Renault introduced a new passenger car model called the Sendero made in its Brazilian plant for sale throughout MERCOSUR.

13 Hot Wheels, 43 Bus. Latin Am. 2–3 (Jan. 28, 2008). One advantage Brazilian-made automobiles have over imports, however, is that most are now fitted with flex-fuel engines that allow consumers to use locally produced and cheaper ethanol or gasoline.


In 1998 PSA Peugeot-Citroen took over a facility on the outskirts of Buenos Aires that had been used by its licensee to assemble passenger cars. PSA Peugeot-Citroen soon added a new line of SUV and utility vans, which were sold domestically and exported to Brazil in exchange for luxury sedans produced at a factory the company opened in Resende in the state of Rio de Janeiro in 2001. Interestingly, PSA Peugeot-Citroen, like its French compatriot firm Renault, made Brazil its headquarters for all its MERCOSUR operations, despite the longer presence of both companies in Argentina. With the recovery of the Southern Cone automotive market in recent years, PSA Peugeot-Citroen announced plans in October 2008 to invest an additional U.S.$500 million through 2010 to boost capacity at its Argentine and Brazilian plants and introduce 12 regional made models.14 This comes on the heels of a U.S.$83 million investment PSA Peugeot-Citroen made in its Argentine facility in 2006 to start production of a new family version of its Peugeot 307 series, and another U.S.$69 million to produce the Citroen C4, primarily for export. In 1996 FIAT terminated its license agreement with an Argentine firm and built a U.S.$642 million facility in Córdoba that exclusively produced a sedan model sold in Argentina and the rest of MERCOSUR. Gearboxes and engines were also made in Córdoba for sale throughout MERCOSUR. With the maxidevaluation of the Brazilian real in January 1999 FIAT found it increasingly difficult to remain competitive producing anything in Argentina. It therefore shifted almost all its production to its two Brazilian plants in the state of Minas Gerais. FIAT’s truck making division, IVECO, was so negatively impacted by the maxi-devaluation of the real that in 2000 it opened a facility in Brazil to make light trucks and delivery vans that were sold domestically or exported to Argentina, in compensation for the decreasing number of medium and large sized trucks still made in Córdoba and exported to Brazil. In 2007 FIAT announced plans to reactivate its mothballed automobile assembly plant in Córdoba to produce a delivery van as part of a joint venture with Indian-based TATA. This was followed by an announcement in 2008 that FIAT would invest U.S.$200 million to build engines and gear boxes in Córdoba for export, as well as another U.S.$100 million to restart its Argentine automobile assembly operations it had abandoned in favor of Brazil. In 1997 the U.S.-based Case Corporation announced construction of a factory in Sorocaba in the state of São Paulo to build tractors and harvesters for sale to the entire MERCOSUR. In 1997 Honda opened a U.S.$200 million plant in Sumaré in the state of São Paulo to produce its Civic model for export not only to the rest of MERCOSUR, but to those Latin American Integration Association (ALADI) countries it could access at a preferential tariff rate. Honda also built a motorcycle plant in Argentina in 2006 to supply the entire South American market. DaimlerChrysler began producing its Mercedes-Benz Class A at a plant it 14 PSA’s Revved Up Strategy, 42 Bus. Latin Am. 4–5 (Oct. 1, 2007). PSA Peugeot-Citroen planned to add a third work shift in both Argentina and Brazil and 1,700 new staff by the end of 2007 so as to try to double its regional sales to 300,000 vehicles by 2010.


opened in Juiz da Fora in the state of Minas Gerais, Brazil, at the end of the 1990s for sale throughout the MERCOSUR region. Following the shut down of a factory in Córdoba in 2001, DaimlerChrysler’s sole remaining Argentine factory in suburban Buenos Aires focused on producing vans and pick-ups that were primarily sold domestically or exported to Brazil to compensate for a wide assortment of vehicles produced at its Brazilian plants that were imported duty free into Argentina under the managed trade scheme. In acknowledgment of the more globally competitive environment Argentina provided following the sharp devaluation of the peso in 2002, DaimlerChrysler announced plans in 2005 to invest some U.S.$50 million to produce a utility van that would be exported to markets outside of Latin America. In 1998 General Motors opened a state-of-the-art facility in Rosario, Argentina, to produce the Chevy Corsa for sale throughout MERCOSUR. The economic downturn that affected the Southern Cone soon after it opened its factory, however, eventually forced the company to seek markets outside of South America, including South Africa. In 2000 GM began producing the Gran Vitara SUV in Rosario under license from Suzuki, primarily for the Brazilian market. In return, GM imported into Argentina luxury models, heavy-duty trucks, and pick-ups made in one of its four factories in Brazil (including a plant it opened in 2000 at Gravatí in the strategically located southern state of Rio Grande do Sul). The devaluation of the Argentine peso in 2002, coupled with frozen energy prices, suddenly made GM’s Rosario plant globally competitive. For many years thereafter, the Rosario plant was operating on three shifts in order to keep up with orders. Ford followed a MERCOSUR strategy similar to GM, exporting an Argentinemade passenger car, pick-up, and truck model to compensate for the importation of a larger variety of vehicles produced in one of its three Brazilian factories, including smaller-sized passenger cars. When the Argentine market collapsed following the economic implosion of 2001–02, Ford’s Brazilian factories also began exporting cars to Mexico. Volkswagen has preferred to distribute production of vehicles for the MERCOSUR market among its four Brazilian plants. Until 2006 Volkswagen’s factory in suburban Buenos Aires made only two passenger models (including the top selling Gol) and one pick-up. The factory it bought from Chrysler in Córdoba in 1980 focused on making gearboxes, motors, and auto parts that were used as inputs for Volkswagen’s MERCOSUR operations and also exported to Europe, Mexico, and South Africa. In 2006 Volkswagen introduced a new economy class model called the Suran, which is made exclusively in Argentina and is sold not only in the MERCOSUR region, but exported to other Latin American countries, Africa, and Europe. B. Auto Parts In December 1999 U.S. auto-parts manufacturer Delphi announced plans to close its factory in Córdoba, Argentina, and concentrate all its production of electrical cable systems for automobiles manufactured by FIAT, GM, and PSA Peugeot-Citroen in the Southern Cone from one of seven factories in Brazil.


Delphi has been present in Brazil since the late 1980s when it arrived at the invitation of GM (to which it was originally affiliated). All of its Latin American operations (including Mexico) are overseen from Brazil. Following the sharp devaluation of the Brazilian real in January 1999, Delphi actively sought out local companies from which to source inputs and even went as far as putting on training workshops for potential local suppliers. Delphi also encouraged its foreign suppliers to establish factories in Brazil, including Mexican cable manufacturer Cabelena, U.S.-based Gibbs, and the Italian manufacturer of aluminum components, Raco. Despite its earlier pull out from Argentina, Delphi announced in May 2000 a U.S.$12 million joint venture with Argentine-based Famar to manufacture motor control modules, radios, and other electronic components for the automobile industry. The equipment would be assembled in Famar’s factory in Tierra del Fuego. In 2007 Yazaki of Japan opened a plant in Uruguay to produce wiring harnesses for automobile electrical systems that are exported to vehicle manufacturers throughout MERCOSUR. C. Beverages In the mid-1990s a joint venture between PepsiCo of the United States and Baesa of Argentina led to the construction of a U.S.$20 million plant in Uruguay to produce plastic bottles that would be used to supply all of PepsiCo’s bottling operations in that country and Brazil.15 One company that took full advantage of MERCOSUR in the 1990s to boost its revenues was Brazilian based Brahma. In early 1994 it opened a U.S.$120 million plant in Luján, Argentina, to take advantage of that country’s growing taste for beer. When the Real Plan was introduced in July 1994, Brahma suddenly found that it was cheaper to produce beer in Argentina than Brazil. So it temporarily increased production in Luján to serve not only the Argentine but the southern Brazilian market, until the Argentine and Brazilian currencies achieved parity.16 In 1998 Companhia Antártica Paulista merged with Brahma to form AmBev, the largest brewery in Latin America and the third largest in the world. In 2002 AmBev announced a strategic alliance with Quilmes, the largest beer manufacturer in Argentina, Bolivia, Paraguay, and Uruguay. In 2004 AmBev merged with Interbrew of Belgium to create the world’s largest beer producer called Interbev. Interbev, in turn, acquired Quilmes outright in 2006 and its extensive network of breweries and distribution networks in MERCOSUR. In August 1999 the Mexican juice maker Jugos del Valle opened a U.S.$20 million plant in Americana in the state of São Paulo to produce juices it had previously been exporting from Mexico to Brazil since 1995. The reason Jugos del Valle began exporting to Brazil in the first place was in response J. Rebella, Uruguay/Mercosur: High Hopes, 31 Bus. Latin Am. 5 (Apr. 8, 1996). I. Perrone & N. Tello, La Guerra de las Cervezas, 4 MERCOSUL: Revista de Negócios 58 (Dec. 1995). 15 16


to the Mexican peso devaluation in December 1994, which plunged Mexico into recession. The company therefore actively sought markets outside its traditional home base. Jugos del Valle decided to open a plant in Brazil after the ALADI preferential tariff agreement expired between Brazil and Mexico in 1998 (see Chapter 2). The maxi-devaluation of the real a year later also made it cost prohibitive to continue importing juices and other inputs from Mexico. The new factory in Americana initially sourced about 60 percent of its raw materials (namely concentrated fruit juice) within the MERCOSUR region, but the company gradually increased that percentage over time, relying primarily on Brazilian suppliers. One of the reasons for setting up the new factory in the state of São Paulo was its proximity to many fruit farms in addition to being close the country’s largest urban markets. Output from the Brazilian plant was sold not only domestically but also exported to the rest of MERCOSUR (hence the reason the decision was made early on to put all the labeling in both Spanish and Portuguese) as well as to Africa. In November 2007 Jugos del Valle was purchased by a joint venture between Coca Cola and its Mexican bottler Femsa. At the end of 2000 the Baggio Group from Argentina announced plans to invest U.S.$4.1 million to build a factory to make fruit juice in Fray Bentos, Uruguay. Operating through a local affiliate called Jugos del Uruguay SA, the Baggio Group intended to use its Uruguayan plant to not only serve the local market, but also to export its fruit juices to Brazil and Paraguay. D. Computers and Informatics In November 2000 Dell opened its first manufacturing plant in South America in Porto Alegre in the southern Brazilian state of Rio Grande do Sul. Dell chose Porto Alegre because it is about half way between Buenos Aires and São Paulo, the continent’s two largest cities. Because Dell uses enough regional inputs to satisfy MERCOSUR’s rule of origin, it can take advantage of Porto Alegre’s good transportation infrastructure to access other MERCOSUR countries duty free. Soon after opening its plant, Dell announced an additional U.S.$70 million investment plan spread over four years to expand its factory in Porto Alegre and boost production. In March 2001 Hewlett-Packard announced that it would invest U.S.$100 million in its Brazilian subsidiary. Approximately 40 percent of that money was expected to go towards building a new manufacturing facility to make computer servers. Prior to 2001 Hewlett-Packard had been importing servers for sale in the South American market from its facilities in Mexico, causing a 30-day delay from the time of order to delivery. The purpose of the new Brazilian factory was to dramatically reduce delivery times within the Southern Cone. In part because of the presence of highly skilled workers that could be hired at very competitive salaries following the sharp devaluation of the Argentine peso in January 2002, Oracle Corporation announced in mid-2002 that it would set up an international customer support center in Buenos Aires that would handle issues related to programming, analysis, applications, and databases.


E. Consumer Goods In late 1996 Anglo-Dutch Unilever’s Argentine subsidiary opened a U.S.$30 million soap factory in Villa Gobernador Gálvez outside Rosario, Argentina, to produce soap and hygiene products for the entire MERCOSUR market as well as for Bolivia, Chile, and Peru. Unilever then proceeded to invest an additional U.S.$25 million to fully automate its Rosario factory, a process it completed in early 2001. Unilever currently has four production facilities in Argentina. Its toothpaste, Close-Up, is produced in Vinhedo in the state of São Paulo and is sold in Brazil and exported to markets throughout the Southern Cone using bilingual Spanish and Portuguese labeled packaging. In 1997 Chilean-based Industrial Mimosa invested U.S.$24 million to build a factory in Montevideo manufacturing disposable diapers and feminine hygienic products for sale in Uruguay and other MERCOSUR countries. Natura’s roots lie in a small store it opened in São Paulo in 1969 selling organic cosmetics for women. From those humble beginnings, Natura grew to enjoy a 15 percent share of the competitive Brazilian cosmetics market by 2000. The company’s appeal is that it incorporates Brazil’s rich and exotic natural biodiversity into its 400-product line that include shampoos, soap, as well as baby products and tanning lotions. All its packaging is reputed to be biodegradable as well. Most of the company’s output is sold directly in Brazil through an extensive network of 260,000 sales consultants. Natura’s Argentine, Bolivian, Chilean, and Peruvian subsidiaries also use the same sales technique. Almost everything sold by the company both domestically and outside of Brazil is made at Natura’s factory in Cajamar in the state of São Paulo and exported to the other Southern Cone countries duty free either under MERCOSUR or the free trade agreements MERCOSUR has with Bolivia, Chile, and Peru. The only exceptions are malt-based products, which are made in and exported duty free from an affiliate in Argentina. F. Electronic Appliances and Mobile Telephony In January 1996 the largest European manufacturer of household electronic goods, Swedish based Electrolux, paid U.S.$50 million to buy a controlling interest in Brazilian Refrigeracões Paraná SA or Refripar, the second largest Brazilian manufacturer of household consumer appliances such as refrigerators, washing machines, and dryers. The president of Electrolux’s Brazilian subsidiary was quite explicit in attributing his company’s decision to acquire Refripar as part of a strategy to increase sales throughout MERCOSUR and overcome what had, until then, been timid South American sales outside of Brazil.17 The Electrolux deal followed an earlier joint venture in 1994 between Brasmotor and U.S.-based Whirlpool Corporation. Whirlpool (which has its Latin American headquarters in Brazil) planned to use its Argentine factory to produce high-tech refrigerators and freezers for the entire MERCOSUR, while Brasmotor would concentrate on making washing machines and low-end Sotaque na Linha Branca, 5 MERCOSUL: Revista de Negócios 59 (Mar. 1996).

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appliances for the MERCOSUR market. Both companies would benefit from the others established distribution networks. In 1996 Lucent Technologies set up a factory in Campinas in the state of São Paulo to make cellular telephones. The decision was premised, in part, on the fact that the MERCOSUR countries had indicated that the new CET on telecommunications equipment that Lucent imported from the United States would range from 32 to 35 percent. The improving economic conditions in Brazil following the adoption of the Real Plan plus low telephone ownership density also indicated Brazil was a market with tremendous growth potential. Yet another factor influencing Lucent’s decision was the preferential-tariff access offered to other markets in South America through either MERCOSUR or ALADI. Finally, the company already had a joint manufacturing venture with a local firm based in Curitiba, in the state of Paraná. Lucent settled on Campinas, as opposed to other sites in Brazil, because it had easy access to major highways and was close to Viracopos International Airport, which is used primarily for air cargo (thereby facilitating the importation of components into its product line that might be needed on an emergency basis). In addition, Campinas lies within metropolitan São Paulo and its 20 million plus inhabitants. The Campinas factory was expanded in 2000 so as to produce fiber optic cables. About a quarter of the output from Lucent’s Campinas factory is exported, primarily to the rest of the MERCOSUR countries and to Venezuela. After 2000 Lucent opened two other plants in Brazil, one in Belo Horizonte and the second in Valinhos as well as a research center in Brazil. In 1997 Korean multinational Samsung announced its intention to invest nearly U.S.$1 billion over a four-year period in order to expand its factory in the free trade zone of Manaus in Brazil so as to produce televisions, videocassette recorders, and microwave ovens for export throughout South America. Samsung also announced plans to add a new factory wing that would produce components for use in television sets. The Brazilian plant was one of five major Samsung production centers outside Korea that included China, Great Britain, Mexico, and Vietnam.18 Samsung was followed by another Korean electronics firm, LG Electronics, which opened a factory in Manaus in 1997 to produce air conditioning units, microwave ovens, television sets, and video recorders, while a second plant in Taubaté in the state of São Paulo would make video monitors. The January 1999 maxi-devaluation of the real forced the company to speed up the use of domestically sourced inputs and to expand exports to the rest of the MERCOSUR countries in order to make up for flat sales in Brazil. In fact, LG Electronics began exporting all its monitors sold in Argentina from Brazil instead of shipping them in from South Korea as it had been accustomed to do prior to 1999. In the late 1990s Canadian Nortel opened a training center and factory in Campinas in the state of São Paulo from where it manufactured telecommunications equipment for the entire MERCOSUR market. The company was encouraged F. Viana, Garras Afiadas, 5 MERCOSUL: Revista de Negócios 18 (May 1996).

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to set up a factory in Campinas because of the highly skilled local workforce as well as generous government incentives that included a complete exemption from paying various federal, state, and social contribution taxes on exports, a streamlined duty-drawback program, the creation of a special “fast track” customs system, and reduced tariffs for imported components, as well as tariff-free access to the other MERCOSUR countries for goods that complied with its rule of origin requirements. At the beginning of 2000 Motorola announced that its factory in Jaguariúna in the state of São Paulo would be the company’s exclusive producer of compact radio base stations of cellular telephone signals intended for sale throughout the world. The announcement was coupled with a decision to invest an additional U.S.$2 million in the plant to boost production capabilities. The Jaguariúna plant is one of four that Motorola has in Brazil (the only ones in Latin America apart from one in Mexico), which primarily serve the South American market. Jaguariúna is also the site for Motorola’s semiconductor research facility and a regional training facility for employees, clients, and suppliers. The Norwegian company Nera began constructing a factory in Sorocaba (state of São Paulo) in 2000 as part of a U.S.$5 million investment to manufacture radio digital equipment used to support fixed and mobile telephone networks. The company expected to sell about 60 percent of its Brazilian production domestically, mostly in rural areas, and to export the remainder to the other MERCOSUR countries. G. Forestry and Paper Products In late 1996 a Chilean firm, Celulosa Arauco y Constitution S.A., purchased a 95 percent share of Alto Paraná, Argentina’s leading pulp manufacturer, for U.S.$470 million. Much of Alto Paraná’s output was exported, especially to neighboring Brazil, only 60 miles from the company’s plant in Misiones province. Another Chilean pulp firm, Compañía Manufacturera de Papeles y Carton (CMPC), also moved into Argentina and Uruguay in the 1990s, but focused its efforts on producing tissue-paper products for the local and regional markets and then added disposable diapers. Igaras Papéis e Embalagens S.A., a joint venture between Riverwood International Corporation of Atlanta, Georgia, and Brazilian Companhia Suzano de Papéis e Celulose, began making specialized packing boxes at its plant in Otacílio Costa in the state of Santa Catarina in the mid-1990s. Packaging and specialized paper products were made in two other plants in the state of São Paulo and at a second plant in Santa Catarina. Although the output was sold primarily in Brazil, Argentina was also an important market. In October 2000 the Uruguayan company Fanapel purchased 82 percent of the shares of the paper company Celulosa Argentina SA from a Citibank subsidiary CIC (i.e., Corporación Inversora de Capitales). Fanapel was founded in 1898 and is primarily a forestry company that is also involved in the production of cellulose, paper, and notebooks as well as the distribution of paper products. Fanapel exports its products primarily to Argentina, Brazil,


Chile, and Paraguay in addition to serving its home market in Uruguay. The purchase of a controlling interest in Celulosa Argentina SA in 2000 marked an unusual turn of events since, up until then, it was generally the norm for foreign firms to purchase a controlling interest in a Uruguayan firm rather than the other way around. At the end of April 2001 the Chilean company Maderas y Sintéticos SA or Masisa (owned by the Chilean investment group Pathfinder) opened a factory in Ponta Grossa in the Brazilian state of Paraná at a cost of U.S.$140 million to manufacture medium-density fiberboard used to make furniture and buildings. By 2002 Masisa became the first company based in Brazil to produce a highly resistant and more rigid strand board. Prior to opening its factory in Brazil, Masisa had been exporting its products to the country from four already existing factories in Chile and one plant in Argentina. Masisa arrived in Argentina in 1992 when it created a local subsidiary and built a manufacturing facility in Concordia in the northern Argentine province of Entre Ríos. The capital to build that facility came from the sale of Masisa American depository receipts (ADRs) on the New York Stock Exchange. One of the primary motivations behind Masisa opening a plant in southern Brazil was to be close to its growing customer base, given the high cost of transport costs for wooden boards. In addition, it settled on Paraná because the state’s plantations are renowned for producing quality wood products. By 2000 Brazil was already responsible for 15 percent of the company’s revenues (versus 45 percent in Chile and 27 percent in Argentina), and demand was expected to grow tremendously. In 2005 Masisa became the leading particleboard producer in South America when it merged with the multinational forestry company Terranova. H. Lactate Industry The lactate industry in Argentina and Uruguay was among those most positively affected by the market opening opportunities provided by MERCOSUR, as producers in both countries began exporting a large percentage of their output—namely cheese and powdered milk—to Brazil. Paraguay also became an important market for Argentine powdered milk. Although among the most cost competitive producers in the world, the Argentine and Uruguayan lactate industries focused their export efforts on Brazil, since the lactate markets of the more developed countries in North America and Europe are heavily subsidized and protected by an arsenal of non-tariff barriers that include quotas and price controls. Subsidized U.S. and EU exports of lactate products to Africa and the Caribbean also make it difficult for MERCOSUR companies to effectively export to those markets. The Italian lactate multinational Parmalat entered the Argentine market in 1992 and eventually grew to have three production units in Buenos Aires, Córdoba, and Rio Negro. Parmalat exports long-life and powdered milk from Argentina to Brazil as well as milk-based desserts to Uruguay. Parmalat also has a plant in Paraguay and purchased 18 small milk producers in Brazil during the course of the 1990s to become that country’s second largest milk producer. In the mid-1990s Uruguay was selected by Parmalat as the site of two new


factories worth U.S.$8 million to primarily supply Brazil with powdered milk and processed baby fluid. In the mid-1990s Nestlé earmarked U.S.$40 million for a new ice cream production facility on the outskirts of Buenos Aires from which to serve the entire MERCOSUR market. In late 1999 Nestlé shifted part of its ice-creammaking operations from Argentina to Brazil as a result of increased production costs that made output from the Argentine plant uncompetitive in Brazil. Nestlé continued to use its Argentine plant, however, to sell instant coffee and milk in the greater MERCOSUR market, while the company’s Brazilian factories primarily supplied the region with whole bean coffee and chocolate. In November 2000 Argentine-based SanCor signed an agreement with the third largest lactate producer in Argentina, the Cooperativa Asociación Unión Tamberos or Milkaut, to merge their respective distribution networks throughout the Southern Cone. SanCor was especially interested in utilizing Milkaut’s extensive distribution network in southern Brazil that was, in turn, the result of Milkaut’s acquisition of the Brazilian firm Ivotí in 1998. In May 2001 SanCor and Milkaut announced their intention to create SanCor Milkaut S.A., a multimillion dollar operation that would have 25 factories in Argentina, one factory in Brazil, and a distribution center in São Paulo. The giant Uruguayan lactate cooperative Conaprole has also been active in Brazil where it has an affiliate (i.e., Leben) in charge of distributing its milk and other lactate products throughout southern Brazil. Conaprole controls over 80 percent of the milk-processing operations in Uruguay and is responsible for approximately 85 percent of Uruguayan lactate exports. In the late 1990s Conaprole entered into a joint venture with the French Bongrain company that led to the modernization of Canaprole’s cheese processing facilities so as to increase cheese exports throughout South America’s Southern Cone and beyond. In August 2007 Brazil’s Laticinios Bom Gosto announced plans to build a U.S.$30 million plant to produce long-life milk in Uruguay for sale throughout MERCOSUR. I. Other Manufactured Goods Fademac SA, the most important Brazilian producer of vinyl floor tiles and a joint venture between the Belgian group Etex and UK-based Marley Company, benefited tremendously from the creation of MERCOSUR. Between 1992 and 1996, sales of its Brazilian-made tiles and carpets to Argentina, Paraguay, and Uruguay increased by 370 percent.19 In 1994 Owens-Corning Corporation from the United States entered into a joint venture with the Argentine company Supercemento to produce giant cement tubes reinforced with fiberglass to be used in public works projects throughout MERCOSUR as well as by the regional chemical, paper, and cellulose industries.20 Caminho Amliado, 5 MERCOSUL: Revista de Negócios 58 (May 1996). Fibras em Expansão, 5 MERCOSUL: Revista de Negócios 60 (Jan./Feb. 1996).

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Xerox invested U.S.$10 million in 1995 to enhance production capabilities at its plant in Aratú in the northern Brazilian state of Bahia to better supply the growing MERCOSUR demand for toner and other copier products.21 In 1995 the Italian company Polti earmarked some U.S.$8 million needed to construct a factory in Araras in the state of São Paulo to make the vaporetto, a household cleaning devise that uses high-pressed steam to remove heavy stains on furniture and walls. Soon thereafter, the company began making commercialsized vaporetti and coffee makers that it sold throughout MERCOSUR. At the end of 1995 what was then the most important Brazilian exporter of lathes and mechanized tool-making machinery, Romi, entered into a joint venture with the much smaller Argentine firm Fresar in order to complement their respective production lines. Under the joint venture, Fresar began producing a conventional lathe model for sale in Brazil that Romi had ceased making and had previously exported to Argentina. Fresar thereby became the exclusive purveyor of this conventional lathe in Argentina and was able to use Romi’s extensive distribution network in Brazil to sell its products in that market as well. For its part, Romi was able to use Fresar’s extensive distribution network in Argentina to sell sophisticated computerized lathes it made in Brazil. In 1997 Deca Piazza, a Brazilian manufacturer of porcelain bathroom fixtures and a subsidiary of the Duratex Group, finished construction of a U.S.$10 million factory in Pilar (60 kilometers from Buenos Aires) after it saw exports of these products to Argentina increase dramatically over the course of three years. The company first entered Argentina in 1995 when it acquired an Argentine firm, Piazza & Hermanos, beset with financial difficulties. From its Argentine and Brazilian plants, Deca Piazza serves the entire Southern Cone market. In September 1998 Detroit-based Guardian de Brasil Vidrios Planos Ltda. opened a U.S.$125 million factory in Porto Real in the state of Rio de Janeiro to produce mirrors for the Brazilian market. The company was so pleased with its sales volume in Brazil that it opened a second factory in 2001 in the south of Brazil, so as to be able to better serve the other MERCOSUR countries as well. A Portuguese owned firm, Vista Alegre, was created in June 1998 when a group of Portuguese investors acquired Porcelana Rener, a manufacturer of household porcelain items. Since then, the Portuguese buyers have invested U.S.$8 million to update the plant, located in Porto Alegre in the state of Rio Grande do Sul, and establish a modern distribution system. The decision to acquire a company based in southern Brazil was part of a long-term strategy by Vista Alegre’s owners to export to the rest of South America’s Southern Cone. Although Vista Alegre was only sending 5 percent of its output to Argentina and Uruguay in the late 1990s, the expectation was to eventually increase export to about a third of total production. Another Portuguese company that found success in Brazil was Neoplástica América. In the mid-1990s Neoplástica opened a factory in the outskirts of Curitiba, capital of the state of Paraná, from where it supplies the entire MERCOSUR market with plastic packaging material. Sucesso Original, 4 MERCOSUL: Revista de Negócios 61 (Aug. 1995).

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In May 1999 the Portuguese cement maker Cimpor announced plans to invest U.S.$130 million to expand output at its factory in Campo Formoso in the northeastern Brazilian state of Bahia. The company not only sells its cement domestically, but also exports it from Brazil to the other MERCOSUR countries. Cimpor arrived in Brazil in 1997 when it acquired a local company, Companhia de Cimento do São Francisco in the state of Bahia, while searching for opportunities outside of the over saturated cement market in Europe. The huge demand for housing in the Southern Cone and the pressing need to overcome severe infrastructure deficiencies (from roads to provision of sanitary water) insures a steady demand for cement. Cimpor subsequently acquired three other factories (one in the state of São Paulo and two in Rio Grande do Sul). In 1999 it purchased yet another three factories for U.S.$50 million from the Brennand Group and began building a new U.S.$70 million factory next to its first acquisition in Campo Formoso. The largest cement producer in the world, however, is French-owned LaFarge, which also has a significant MERCOSUR presence. Revenue from its Latin American factories in Argentina and Uruguay (where it operates through a subsidiary Avellaneda), Brazil (where it has seven factories), Chile (where it acquired the British firm Blue Circle in the late 1990s), Honduras, Mexico, and Venezuela, represents nearly 20 percent of LaFarge’s total global earnings. J. Petrochemicals In the mid-1990s the Brazilian subsidiary of U.S.-based FMC Corporation constructed a U.S.$10 million factory in Uberaba in the state of Minas Gerais, to produce a new herbicide that would be sold in the Spanish-speaking countries of the Southern Cone as Capaz, while in Brazil it would be marketed as Boral.22 Dow Chemical Company has been in Argentina since the 1950s and has long been one of the largest foreign investors in the Argentine industrial sector. In 1995 Dow dramatically increased its presence in Argentina when it purchased a controlling interest in privatized Petroquímica Bahia Blanca located in the southern part of the province of Buenos Aires. One year later, it jointly acquired with the recently privatized Argentine petroleum giant Yacimentos Petrolíferos del Estado (YPF) another Argentine petrochemical company called Polisur SA. In 2000 Dow was involved in another joint venture with Repsol-YPF and Petrobrás called Compañía Mega to refine natural gas in Neuquén and send it to the port of Bahia Blanca through a 600 kilometer pipeline. The Mega project was intended to produce four products: (1) two types of components used in liquefied petroleum gas (exported to Brazil), (2) an input used in petrochemicals (also exported to Brazil), and (3) ethane (which is used by Dow in Argentina to make ethylene). In January 2001 Dow opened a fourth factory in Bahia Blanca to produce the polyethylene that is used to make plastic packaging materials. The company also announced plans to invest some U.S.$80 million to upgrade its already existing three polyethylene factories at Bahia Blanca and build a U.S.$315 million factory at its Bahia Blanca complex to make ethylene (the primary material that is, in turn, used to make polyethylene). The ethylene Adeus às �� Pragas, 5 MERCOSUL: Revista de Negócios 61 (Jan./Feb. 1996).

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and polyethylene produced at Bahia Blanca is sold domestically and exported to those Latin American markets where Argentine-made products can enter duty free. Dow’s heavy investments in Argentina, however, have been put at risk by increasing shortages of natural gas since 2004, given that ethylene and polyethylene production relies heavily on natural gas. Fortunately, Dow also has operations in Brazil, where it has four industrial complexes, a research facility, and two joint ventures with Brazilian companies in northeastern Brazil and in the southern state of Rio Grande do Sul. About a third of the output from its Brazilian operations is exported to the other MERCOSUR countries. In 1997 Monsanto Corporation announced that it was building a U.S.$136 million plant in Zaraté, north of Buenos Aires, to produce its “Roundup” weed killer for sale throughout MERCOSUR. In 1999 Monsanto announced plans to invest an additional U.S.$80 million in Argentina to expand its facilities in Zaraté so as to make a new chemical substance. At the same time, it announced that it would also begin producing “Roundup” in a new U.S.$350 million plant in Camacarí in Northeastern Brazil. For its part, Eastman Chemicals built a U.S.$110 million factory in Zaraté in May 1998. The factory makes polyethylene pellets for the entire MERCOSUR market that are then used to manufacture plastic soft drink and bottled-water containers. In 1999 the Belgian firm Solvay invested U.S.$121 million to expand its PVC factory in Bahia Blanca, Argentina. Another U.S.$84 million was directed to increase PVC production in Santo André in the Brazilian state of São Paulo. Solvay’s investments in the MERCOSUR region were based on the growing local demand for its petrochemical products and the fact that the high costs associated with transporting them created a major financial incentive to supply that demand from local factories. Solvay distributed its plants between Argentina and Brazil based on where it had easier access to required inputs and where production costs for the final good was lowest. Interestingly, Solvay executives claimed that MERCOSUR and the duty-free access it provided to the big Brazilian market made large-scale production in Argentina cost effective. No doubt another important consideration was that in the 1990s, Argentina had access to abundant supplies of inexpensive natural gas to generate electricity, an important consideration for the energy intensive petrochemical industry, not to mention the heavy use of petroleum based inputs that could be sourced locally. For the French-based petrochemical company Rhodia, Latin America was responsible for 14 percent of its total global earnings by the late 1990s. Most of that revenue came from Brazil, where the company has seven factories. Rhodia also has one factory each in Argentina and Chile, primarily making resins and polyester fibers used by the textile industry as well as packaging materials. The company’s Brazilian operations benefited from the maxi-devaluation of the real in January 1999 when Rhodia became a competitive supplier of inputs for the country’s textile industry that had previously been imported from abroad. In 1999 the Argentine energy conglomerate Pérez Companc, through its subsidiary PASA, invested some U.S.$280 million in southern Brazil to build a petrochemical complex at Triunfo in the state of Rio Grande do Sul


to manufacture styrene and polystyrene. The incentive for building the plant in Brazil was to obtain easier access to the inputs needed for production of the styrene and polystyrene. In January 2000 Pérez Companc threatened to transfer its entire PASA subsidiary to Brazil if the Argentine Congress went ahead with plans to eliminate the tax exemption for fuels used in industrial production. PASA produces polystyrene, styrene, and synthetic rubber at its Argentine plants that it then sells in the local and regional market. K. Pharmaceuticals In 1994 CONIFARMA was formed to represent small- and medium-sized producers and distributors of medicine from the four MERCOSUR countries and Chile. The main goal of CONIFARMA is to improve foreign sales, quality, and technology transfer. The consortium has given participating laboratories a regional comparative advantage in the production of specific pharmaceuticals by facilitating specialization in their production and then having the output distributed by the other members in their respective countries. In the mid-1990s the UK-based pharmaceutical giant Glaxo Welcome built a facility in the Rio de Janeiro suburb of Jacarepaguá, which housed what was then the most modern laboratory in Latin America. The plant produced cough syrups, ointments, and pills for the entire MERCOSUR market as well as other ALADI countries.23 The Brazilian plant did not produce antibiotics, however, since Glaxo’s Argentine plant had a regional comparative advantage in this area,and production for MERCOSUR remained there.24 For its part, Glaxo competitor Johnson & Johnson focused production of the packaging for the pharmaceuticals it produced throughout MERCOSUR on a factory in Uruguay.25 Bayer AG, the German pharmaceuticals giant, announced at the end of 1997 that it would build a U.S.$40 million plant in Buenos Aires to make aspirin tablets for the entire MERCOSUR market, including associate members Bolivia and Chile. The plant finally came on line at the end of 1999. Bayer also owns a chemical plant in Zaraté in Argentina that exclusively produces a chemical used to treat leather (that was formerly made in both Argentina and Brazil) for all of Latin America. Bayer oversees all its South American operations from Brazil. In October 2000 the Belgian multinational Solvay purchased Sintofarma, a small Brazilian pharmaceutical company. Although present in Brazil for more than 50 years, Solvay was traditionally known in the country for manufacturing petrochemical products with industrial applications. The decision to expand into pharmaceuticals in Brazil, a sector it already had experience with in Asia, Europe, and the United States, was based on the fact that Brazil had become the eighth largest market in the world for pharmaceutical sales. Another attractive feature was the Patent Law that Brazil enacted in 1997, which provided stronger protection for pharmaceuticals than had previously been Opcão Pela Excelência, 5 MERCOSUL: Revista de Negócios 5 (Apr. 1996). Id. at 16. 25 Rebella, supra note 15, at 5. 23 24


the case. Solvay decided to acquire Sintofarma instead of building a new factory because of Sintofarma’s already established distribution network that covered all the Brazilian states. Solvay planed to invest U.S.$2 million over a two-year period to modernize Sintofarma’s former factory in São Paulo so as to expand production and export to other MERCOSUR countries. Faced with a dilemma at the end of the 1990s to either close its Brazilian operation in Rio de Janeiro or increase its market share and production capabilities, the French pharmaceutical firm Guerbet decided on the second option. Since then, production in Rio has doubled and Guerbet has established new markets in Argentina, Chile, Colombia, Mexico, Peru, Uruguay, and Venezuela. Exports to Argentina exploded in 2001 when the Argentine government temporarily imposed a 35 percent tariff on medicines imported from outside MERCOSUR. Guerbet also benefited from the decision made by French health authorities to allow the company to import into France certain pharmaceutical products made in Brazil. In May 2001 the U.S. pharmaceutical company R.P. Scherer (owned by Cardinal Heath) announced that it would use its Argentine manufacturing facility to expand exports throughout Latin America and the Caribbean. Brazil would continue to be served by the factory located there. Although Scherer had traditionally used its Argentine plant to export to neighboring countries such as Chile and Uruguay, the company began a concerted effort to capture new markets further away that traditionally were served from its U.S. facilities. In order to achieve that goal, the company invested U.S.$15 million to modernize its Buenos Aires facility. L. Processed Foodstuffs Brazilian-based Arisco Productos Alimenticios began exporting to the rest of the Southern Cone in the late 1980s. By 1993 exports accounted for such an important part of company revenue that all its packaging and labeling was made bilingual in both Portuguese and Spanish. In 1996 Arisco opened three factories in Mendoza and subsequently in San Juan and La Rioja, all in western Argentina. The deep recession in Argentina in the late 1990s plus an overvalued currency, however, eventually caused Arisco to pull out of Mendoza in 1999. The company initially tried to soften the blow to Brazilian consumers following the maxi-devaluation of the real in January 1999 of suddenly increased foodstuffs from Argentina by gradually increasing its prices on Argentine-made products and thereby reducing its profit margin. This hurt company revenues, however, and made Arisco vulnerable to a takeover by U.S.-based Bestfoods in February 2000. Another Brazilian foodstuffs company that tried to use MERCOSUR to its advantage was Sadia, strategically based in the southern state of Rio Grande do Sul. In 1992, MERCOSUR’s first full year in existence, Sadia exported some U.S.$22 million worth of products (i.e., industrial meats, pork, chicken, and turkey) to the other Southern Cone countries as opposed to the U.S.$1 million sold the year before.26 By 1995, however, Sadia was forced to build a packaging O Frango Sai do Alvo, 5 MERCOSUL: Revista de Negócios s 70 (Apr. 1996).

26


and distribution center in Buenos Aires in order to get around massive delays at what were then only a limited number of Argentine-Brazilian border crossings that also did not coordinate their hours of operation. These border delays meant that Sadia’s products often reached market shortly before their expiration date under Argentine sanitary codes. In addition, Sadia had to pay the Argentine value added tax at the border, while Argentine based producers “collected” it from the first purchaser in the line of distribution, thereby putting it at a competitive disadvantage. In 1995 SanCor, one of the 20 largest companies in Argentina and a leader in the production and export of lactate products, entered into a joint venture with Grupo Batavo, the dominant player in Brazil for poultry and pork sales. The joint venture called for Batavo to sell cheese made by SanCor under its trademark in Brazil, while SanCor would use its extensive distribution network in Argentina to sell Batavo ham under the SanCor name.27 In 1995 the French lactate giant Danone purchased 51 percent of Bagley, an old Argentine manufacturer of a wide assortment of foodstuffs as well as the country’s largest cookie maker. The following year, Danone entered into a joint venture with La Serenísima, one of Argentina’s most important lactate companies, and built a U.S.$130 million factory in suburban Buenos Aires to make cheeses and desserts. Danone executives made no secret of the fact that they hoped their Argentine acquisitions, coupled with complementary output from the company’s Brazilian subsidiaries, would allow Danone to dominate the foodstuffs sector within the entire MERCOSUR market.28 In April 2004 the Argentine candy giant Arcor, with production plants throughout Argentina, Brazil, Chile, Peru, and Mexico, entered into a strategic alliance with Danone in order to produce cookies and other snack products. In 1996 Basilar, a Brazilian pasta manufacturer, decided to enter into a joint venture with Argentine Canale Alimentos. Under their agreement, Basilar would use the Argentine company’s extensive distribution networks in Argentina, Paraguay, and Uruguay to sell its pasta products, while Canale Alimento’s diversified line of preserves, cookies, and candies would be distributed in Brazil using Basilar’s extensive network.29 The Brazilian subsidiary of the Japanese firm Ajinomoto opened a factory in 1998 in the state of São Paulo to produce lysine, a nutrient used in the preparation of pet food that would then be sold throughout the entire MERCOSUR. Until the plant’s opening, most lysine used in South America had been imported from Europe. In 1999 R.J.R. Nabisco announced that it was restructuring its operations in the MERCOSUR region and would close five factories in Argentina and one in Uruguay and transfer production formerly done in those plants to others in Brazil. In the particular case of Argentina, Nabisco decided to keep only 27 R. Homem de Mello, Misto Quente, 4 MERCOSUL: Revista de Negócios 60–61 (Sept. 1995). 28 Con Acento Francés, 5 MERCOSUL: Revista de Negócios 28 (June 1996). 29 Macarrão Com Molho Argentino, 5 MERCOSUL: Revista de Negócios 60 (March 1996).


one plant open in the province of Buenos Aires that would concentrate on producing cookies and pasta under the trademark name Vizzolini. Production of its entire line of desserts would be transferred from Argentina to its Brazilian plant at Piracicaba in the state of São Paulo. In Uruguay, Nabisco shut down one of its two factories (i.e., the one responsible for making yeast and so-called dry products) and left open only the plant dedicated to producing cookies. Company spokesmen attributed the restructuring to a worldwide effort to reduce excess production capacity and become more globally competitive. It is interesting to note, however, that the existence of MERCOSUR facilitated that restructuring by permitting Nabisco the opportunity to concentrate certain production lines in those Southern Cone countries perceived to enjoy a particular regional competitive advantage. At the end of 1999 CICA, a division of Unilever, closed its tomato paste factory in Mendoza province and shifted all production for the MERCOSUR market to its new plant in Jundiaí in the state of São Paulo. The decision to shut its Mendoza operation was based on the fact that Argentine products were too expensive to export to Brazil, its major market, following the maxi-devaluation of the Brazilian real the year before. Unilever also closed an ice cream plant in Rosario in 2000 that it had purchased from Phillip Morris three years earlier, in order to concentrate production for the regional market in Brazil. Unilever’s ice cream brand Kibon (which it purchased in 1997 from Kraft General Foods), which is made in one of its Brazilian plants, now dominates ice cream sales in Brazil and is also sold in Argentina. In late 2000 the British firm Tate and Lyle invested U.S.$60 million to triple its citric acid production at its plant in Santa Rosa de Viterbo in the Brazilian state of São Paulo. In 1998 Tate and Lyle had paid U.S.$250 million to the German firm Bayer AG to purchase Bayer’s Mercocítrico subsidiary that ran the citric acid production facility in Santa Rosa de Viterbo. Citric acid is obtained from the fermentation of sugar cane or corn and is widely used as a food additive as well as to give food aroma. Tate and Lyle executives intended to use the Brazilian facility as an export platform for the entire South American market. Tate and Lyle also owns Mercocítrico de Argentina S.A., which distributes the citric acid made in its Brazilian facility in Argentina. Tate and Lyle chose Brazil as its regional production center because of access to the raw material (e.g., sugar cane) needed for production. Tate and Lyle’s biggest competitor in citric acid production in South America is Cargill, which, in 1999, invested some U.S.$88 million to build a citric acid manufacturing facility in Brazil. In 2007 the Scandinavian firm AarhusKarshamm opened a U.S.$15 million plant in Uruguay that processes vegetable fat for export. U.S.-based General Mills announced plans in 2007 to build a factory in Uruguay that would be used to make a lactate-derived food additive for sale in both regional and global markets. M. Services Founded in Argentina in 1989 IMPSAT grew to become the most important South American firm providing private integrated voice telephone and data transmission network systems, as well as general access to the Internet. IMPSAT


was particularly active in Brazil after 2000, where it built an underground broadband cable connecting Buenos Aires with Curitiba, in the southern Brazilian state of Paraná. IMPSAT’s parent company IMPSA got its start in Mendoza as a capital goods manufacturer. In the 1980s IMPSA began to diversify and expand outside of Argentina as the demand for locally produced capital goods collapsed. Today IMPSA primarily produces equipment for hydroelectric dams, chemical factories, and port cranes. Interestingly, the company no longer manufactures any port cranes in Argentina (despite representing a large percentage of the company’s total revenues), but rather moved crane production to Brazil and Asia to take advantage of lower costs there. N. Steel In mid-2000 Belgo-Mineira Bakaert Arames, a joint venture of the Brazilianbased Belga-Mineira and the Belgian Bakeart Group, joined forces with Inchalan of Chile to build a U.S.$1.5 million wire distribution center in Buenos Aires. Most of the wire held in stock was to be imported from Brazil or Chile. The idea for setting up a distributor in Buenos Aires, however, was to improve client contact and delivery times and increase market share in Argentina. Inchalan specializes in wiring used in the fishing industry, while Belga-Mineira’s strength lies with wire products used in the mining industry. In November 2000 BelgoMineira acquired 20.5 percent of the stock of the Argentine steel company Acindar. The acquisition marked a strategic partnership that was expected to help cut transport and delivery costs for Acindar in Brazil and for Belga-Mineira in Argentina. The Portuguese firm Quintas and Quintas invested U.S.$70 million early in the 21st century to build a new factory to make electric wire. The factory was built in Sarzedo, about 20 kilometers outside the capital of the Brazilian state of Minas Gerais, Belo Horizonte. The goal of Quintas and Quintas was to export about 25 percent of the output from the Sarzedo factory to the rest of MERCOSUR as well as to Chile, Colombia, and Panama. The company also remodeled a factory in Belo Horizonte to manufacture electric transmission towers. In 1995 Quintas and Quintas had purchased a factory in João Pessoa in the northern Brazilian state of Paraíba to make steel rope for naval and agricultural purposes. In 2006 the Dutch-based Mittal Steel owned by Indian magnate Lakshmi Mittal acquired the Brazilian operations of Arcelor of Luxembourg in a bid to take advantage of Brazil’s low-cost production costs (including easy access to rich iron ore deposits) and use it as a base to supply not only the booming local market, but to export regionally as well as globally. The Brazilian steel manufacturer Gerdau began expanding beyond its traditional base in the southern state of Rio Grande do Sul in the 1990s by first exporting to MERCOSUR and then acquiring steel mills throughout the Southern Cone. In 1999 Gerdau acquired a majority interest in AmeriSteel in the United States and purchased Alabama-based Birmingham Southeast in 2001. In 2006 Gerdau focused its attention on Spain by acquiring a 40 percent interest in Sidenor (the country’s largest producer of forged, cast, and special long


steel) and purchasing GSB Aceros. This was followed by Gerdeau’s purchase of Mexico’s Siderúrgica Tultitlan in 2007 as well as Chapparal Steel and Quanex Corporation (a major supplier of specialized steel for the automotive industry) in the United States. By early 2007 Gerdau’s foreign sales accounted for 61 percent of its total sales, and the company had become the largest long steel producer in the Americas.30 O. Textiles/Apparel and Footwear In the mid-1990s U.S.-based DuPont Corporation entered into a joint venture with the Grupo Vicunha and invested approximately U.S.$170 million in order to modernize DuPont’s existing factory in Argentina and construct a new plant in Brazil.31 Utilizing the free trade opportunities provided by MERCOSUR, DuPont rationalized its Southern Cone operations by having the Argentine factory concentrate on producing special fibers to make nylon, while the Brazilian facility focused on the large scale production of filaments. It was anticipated that almost the entire production from both factories would be consumed within MERCOSUR.32 In 1995 Alpargatas-Santista Textil purchased 99.9 percent of the shares of Argentine Garfa for U.S.$26 million and thereby became the largest manufacturer of denim products in South America. Before the end of that same year, Alpargatas-Santista had earmarked another U.S.$15 million into modernizing Garfa’s factories in Tucumán and Santiago del Estero as well as improving the old Argentine company’s domestic sales and distribution system. By the end of the 1990s, Alpargatas’ Brazilian and Argentine operations were fully integrated, and only one sales catalogue was used in both countries. Output from the ex-Garfa plants was exported throughout MERCOSUR, Chile, Europe, and the United States (in contrast to 1995, when Garfa only supplied the domestic Argentine market). The recession that began in Argentina in 1998 plus an overvalued Argentine peso vis-à-vis the Brazilian real caused AlpargatasSantista to cease full lines of production for certain products (including sneakers and sports shoes) in Argentina in favor of its Brazilian plants. Some of this transferred production has gradually returned to Argentina after 2002, however, following the devaluation of the Argentine peso and cheaper production costs in Argentina over Brazil. Another company that moved its textile factory from Argentina to Brazil in the late 1990s, claiming that Brazil had a more competitive business climate following the maxi-devaluation of the real, was Hilos Cadena. In 1999 the Brazilian textile and apparel giant Hering announced that it would open ten new stores in Argentina and that it had signed a contract with Disney to sell the latter’s products in those outlets as well. By 2001 Hering had 12 of its own stores plus some 46 franchise operations throughout Argentina selling a wide variety of clothing that is made in and exported almost exclusively from its Brazilian factories in the state of Santa Catarina. Multilatinas, 42 Bus. Latin Am. 4–6 (Sept. 3, 2007). V. Silva, Mercado de Fibra, 5 MERCOSUL: Revista de Negócios 10 (June 1996). 32 Id. at 11. 30 31


After the maxi-devaluation of the Brazilian real in January 1999 Argentinebased Grimoldi shifted most of its shoe production from Argentina to Brazil, claiming it was much cheaper for it to produce shoes in Brazil and export them back to Argentina. In February 2001 Goodyear announced that it would begin construction of a plant to produce rubber soles outside of Montevideo in Uruguay on 15 hectares of land donated by the local municipality of San José. The plant’s output would be sold domestically and throughout MERCOSUR. Goodyear decided to establish the new plant in Uruguay over a competing location in São Paulo, Brazil, based on Uruguay’s location at the heart of MERCOSUR, its economic stability, and a better labor environment than Brazil. In 2008 Reebook International of the United Kingdom announced a joint venture with Brazilian shoemaker Vulcabras to utilize the latter firm’s established regional distribution network in Brazil and Paraguay to increase sales of Reebook footwear in both countries. P. Transportation In an attempt to give more options to intra-MERCOSUR shippers, a working group was created during MERCOSUR’s transition period (1991–95) to look into making water-based transport options more attractive by lowering costs and increasing the frequency of service. At the suggestion of this working group, all the MERCOSUR countries opened up shipping between them to the carriers of all four countries as of January 1, 1995. One Brazilian company, which immediately took advantage of this liberalization of cabotage restrictions, was Transroll Navegacão SA of Rio de Janeiro, which launched a new fleet of vessels in 1996 carrying roll-on, roll-off cargo containers and other cargo to ports in Argentina, Brazil, and Uruguay.33 In 1991 the Common Market Group issued Resolution 4/91, requiring all four MERCOSUR countries to use the International Cargo Manifest and Customs Transit Declaration form in an attempt to dramatically reduce delays at border crossings arising from duplicative paperwork. By using this form, cargo can be sealed at a special customs warehouse within the country of origin, waived through at the border following a perfunctory inspection, with the real customs inspection occurring at the final point of destination. In an effort to diversify transportation options available to intra-MERCOSUR shippers, the MERCOSUR countries issued a uniform inter-modal law in December 1994 based on a similar regulation adopted earlier by the Andean Community. Pursuant to CMC Decision 15/94, which was quickly ratified by all four MERCOSUR countries, a single contract could now be used for the transport of goods utilizing different modes of transport. Decision 15/94 details the obligations of each party to such a contract, the terms that must be included, assignment of liability, as well as how to determine which courts have jurisdiction and which country’s law is applicable to resolve disputes, and when 33 J. Fabey, Latin American Roll-On Carriers Rise Above Often Tricky Trade, J. com., July 15, 1996, at C2.


arbitration is permissible. Interestingly, unlike its inter-modal counterpart in the Andean Community, Decision 15/94 is limited to goods transported among the MERCOSUR countries and does not cover inter-modal contracts between the MERCOSUR member states and third countries. In December 1996 the four MERCOSUR countries, along with associate members Bolivia and Chile, signed Acuerdo sobre servicios aéreos subregionales entre los Gobiernos de la República Argentina, la República Federativa del Brasil, la República de Bolivia, la República de Chile, la República del Paraguay y la República Oriental del Uruguay, a treaty permitting the establishment of new air routes between cities not previously served in the six countries under older bilateral agreements. Not long after the ink on the agreement had dried, Aeroliñeas Argentinas and the Brazilian carrier Varig started a new passenger air service linking important provincial centers like Córdoba and Rosario in Argentina with Brazilian cities like Florianópolis, Curitiba, and Belo Horizonte. The new, direct services allowed passengers to save several hours by not having to change planes in Buenos Aires and São Paulo. One of the pioneers who took advantage of the dramatic growth in intra-MERCOSUR travel was Rolim Amaro, the founder and former President of TAM Airlines of Brazil (until he was killed in a tragic helicopter accident in 2001). Amaro founded a small domestic carrier in Paraguay in 1994 called ARPA. Three years later, TAM created a subsidiary called TAM MERCOSUR that became a major regional carrier in the Southern Cone and used the Paraguayan capital Asunción as its hub. In 1997 American Continental Barge Line, a subsidiary of the CSX Rail Corporation of the United States, began operating barges along the ParanáParaguay Rivers in order to take advantage of increased intra-MERCOSUR trade and shippers looking for alternatives to overloaded surface road transport networks in the region. The company established an office in Rosario, Argentina, and invested millions to upgrade its operations in the region, including installing new barge cranes at ports, opening a local training center, and setting up a floating repair shop. VII. Investment Trends in the MERCOSUR Region Following the Argentine Economic Implosion of 2001–02 The decision by the Brazilian government in January 1999 to allow the real to freely float led to an immediate devaluation of approximately 40 percent of the Brazilian currency vis-á-vis the U.S. dollar and set off a cascade of negative repercussions on the economies of its Southern Cone neighbors. For one thing, it exacerbated a recession in Argentina, which had begun in 1998, by limiting Argentine exports (given its overvalued currency) to its most important export market. Paraguay and Uruguay, both heavily dependent on exports to their two largest MECOSUR partners, saw their exports plummet as well. The recession in Argentina eventually made it increasingly difficult for the government to sustain the Convertibility Plan that tied the Argentine peso one-to-one with the U.S. dollar as it was premised on there being enough U.S. dollars held by the Central Bank of Argentina in reserve as there were pesos in circulation. By late 2001 the government of President Fernando de la Rua was unable to obtain any


more foreign loans that would allow it to replenish shrinking dollar reserves and prop up the currency peg. In a desperate move, severe restrictions were imposed on how much money Argentines could withdraw from their dollar accounts in December 2001. The measure caused an economy that rested upon a large informal sector, supported by cash-only transactions, to come to a standstill. Within weeks, de la Rua was forced to resign by rioting mobs. In early 2002 the new government of President Eduardo Duhalde repealed the Convertibility Plan, allowing the peso to sharply devalue and imposed a series of market interventions, including price controls and restrictions on foreign capital outflows, to confront the worst economic crisis in Argentine history since the Great Depression. The economic crisis in Argentina plunged the Paraguayan and Uruguayan economies into a severe recession. The difficult economic situation that held the MERCOSUR countries in its grip at the start of the 21st century had an important impact on foreign direct investment flows into the region. In the case of Argentina, it resulted in much of the country’s financial services, energy sector, and public utilities ending up back in the hands of the state or national companies and investment groups, as many foreign firms unloaded their assets and headed for the exits. This was the case of Scotiabank of Canada, whose assets were divided between local Bansud-Macro and Banco Comafi. France’s Credít Agricole sold its three banks in Argentina (i.e., Banco Bosel, Banco Suquía, and BERSA) to the state-owned Banco de la Nación Argentina. Meanwhile, the French/Italian owned Banco Sudameris Argentina SA sold its majority interest to Banco Patagonia. In 2004 Britain’s Lloyds Bank ended its century and a half presence in Argentina when it sold its assets to Banco Patagonia. These sales were followed by the water and sanitation companies Aguas de Barcelona (Spain) and Suez (France), which sold their interests in Aguas Argentinas back to the government, and Électricité de France (EDF), which sold its controlling stake in Edenor to an Argentine investment group well connected to the Kirchner administration. One noticeable trend following the Argentine economic implosion of 2001– 02 was the heightened presence of Brazilian investors hunting for bargains in their southern neighbor. For example, Petrobras purchased Pérez Companc in 2002, thereby making it the second largest oil company in Argentina after Repsol-YPF. The acquisition also allowed Petrobras to have a significant role in the generation, transmission, and distribution of electricity in Argentina. The Grupo Camargo Corrêa acquired Argentine cement giant Loma Negra in 2005, followed by the Ferrosur Roca railroad, and Argentine companies with a long history in the textile industry. Brazilian-based JBS SA acquired U.S.-based Swift Armour’s historic meatpacking operations in Argentina in 2005 (and then took over Swift’s global operations two years later to become the largest beef producer in the world). Argentina’s venerable Quilmes beer was purchased by the Belgian-Brazilian conglomerate Inbev in 2006 for a reported U.S.$1.25 billion. In 2007 Brazilian-based Mafrig Frigorificos e Comercio de Alimentos SA acquired Argentine meat processor Quickfood for U.S.$141 million. Mafrig also bought Mirab in Argentina, Quinto Quarto and Frigorífico Patagonia in Chile, and Establecimientos Colonia in Uruguay in an attempt to consolidate


its position as one of the world’s most important suppliers of beef and derivative products. Foreign direct investment in Latin America and the Caribbean exceeded U.S.$100 billion in 2007 and represented an increase of nearly 50 percent over 2006, with South America accounting for most of the increase.34 This figure represents the highest volume of foreign direct investment in the region since 1999 and the end of the Latin American privatization boom. The largest foreign direct investment recipients in South America for 2007 were Brazil, which received U.S.$34.6 billion, and Chile, which received U.S.$14.5 billion.35 In the case of Brazil, the surge in foreign investment was directed to a variety of sectors, including mining, metallurgy, financial, and management consulting services.36 Undoubtedly one of the reasons for the overall surge in investment has been steady economic growth that is connected to the high demand for South American commodities in the rapidly expanding Asian markets such as China and India. Accordingly, foreign companies have sought to profit from the recuperation in regional purchasing power that suffered a significant contraction at the start of the 2lst century. At the same time, the new inflows are also linked to the surge in Asian demand for South American commodities, as foreign multinationals acquire opportunities in the natural resource sector. The investment strategy in South America of Belgian-based Mittal, the world’s largest steel producer, reflects a combined desire to serve expanding local markets and also secure access to natural resources required for its global operations. Motivated largely by the revitalization of local motor vehicle production and construction as well as the continued growth of the hydrocarbon industry (especially in Brazil), Mittal acquired the shares of Arcelor Mittal’s minority shareholders in 2007, increased its holding in Acindar in Argentina to boost capacity for producing long steel products, upgraded its operations at Juiz da Fora in Brazil and other South American plants, and purchased Uruguayan stainless steel producer Cister.37 Arcelor Mittal also has a joint venture with Companhia Vale do Rio Doce (CVRD) to build four new steel mills along the Brazilian coast that will also give it access to CVRD’s vast iron ore mines.38 VIII. Argentine Energy Crisis and Its Impact on Foreign Direct Investment and Regional Energy Integration Argentina’s current energy crisis is primarily the result of internal political dynamics. In response to the fury of the Argentine people towards their entire political class following the implosion of the economy at the end of 2001 and the beginning of 2002, the transition governments that followed adopted populist measures and put the burden of “paying” for the collapse of the Convertibility 34 Economic Commission for Latin America and the Caribbean, Foreign Investment in Latin America and the Caribbean 2007, 15 (2008). 35 Id. at 22. 36 Id. at 22, n.4. In Chile’s case, the most recent foreign direct investment activity is focused on the acquisition of utility companies and in the mining sector. 37 Id. at 37, Box I.4. 38 Id. at 38, Box I.4.


Plan—that for a decade had tied the Argentine peso in a one-to-one parity with the U.S. dollar—on foreign investors. In May 2003 Néstor Kirchner assumed the presidency by default with only 22 percent of the vote after Carlos Menem, who knew he would be defeated in a landslide, pulled out of the second round. Kirchner’s initially weak position provided him with little maneuvering space to dismantle the antimarket policies in the energy sector that he inherited from his predecessors. The eventual recovery of the Argentine economy by 2004 finally gave Kirchner the opportunity to dismantle the antimarket measures that were by then producing bottlenecks in the entire energy sector. He chose not to. Instead, Kirchner preferred to prioritize his own personal ambitions by consolidating his political base and thereby facilitated the election of his wife to the presidency in October 2007. A. Natural Gas The state-owned Gas del Estado was established in 1946 to transport and distribute natural gas to end users. Natural gas production, on the other hand, was the monopoly of the state petroleum company YPF. In 1993 Gas del Estado was replaced by two private sector transport firms (i.e., Transportadores de Gas del Norte (TGN) and Transportadores de Gas del Sur (TGS)) and eight private sector regional distributors. YPF was also privatized in 1993, and concessions to explore and extract natural gas were opened up to private sector competition. Law 24.076 of May 1992 established the general regulatory framework for the transport and distribution of natural gas by private firms. Production of natural gas, however, remained subject to Argentina’s 1967 Hydrocarbons Law (i.e., Law 17.319). The Secretariat of Energy was given jurisdiction with respect to concessions related to the exploration and production of natural gas. The Secretariat of Energy also had jurisdiction to authorize the export or importation of natural gas. The Ente Nacional Regulador del Gas (ENARGAS) was entrusted with regulatory oversight over the transport and distribution of natural gas and to approve rate changes. Until 2002 end-user rates for natural gas in Argentina were based on wellhead market price as well as a fee for transport and distribution services. The charge for transport and distribution services was set by ENARGAS for five-year periods in U.S. dollars and adjusted every six months for inflation based on the U.S. Consumer Price Index (CPI). Any increases in federal, provincial, or municipal taxes were automatically passed on to the consumer. In addition, transport and distribution firms could petition ENARGAS for increases within five-year periods based on unforeseen circumstances. Increases in the market price of natural gas at the source could only be “passed through” to the end user if authorized by ENARGAS following a public hearing. In January 2002 the federal government used the recently approved Economic Emergency Law 25.561 to convert end-user rates for natural gas into Argentine pesos on a one-to-one basis (even though the real rate of exchange was closer to three pesos for every dollar) and froze them at 2001 levels. Legally the freeze did not cover the price of natural gas charged by producers, which could still be sold at market rates (albeit in pesos). The failure of ENARGAS to


approve any pass-through of price increases to end users, however, meant that natural gas prices for domestic sales (where the bulk of Argentine production was directed) became frozen as well. This situation created an important incentive to export, although this was soon tempered by a 20 percent export or retention tax introduced in 2002 (increased to 45 percent on exports to Chile in July 2006). Furthermore, in 2004 the Secretariat of Energy began restricting natural gas exports until national demand was satisfied. The impact of these restrictions has been particularly detrimental for Chile, where companies have been forced to shut down production. During the Southern Hemisphere winter in 2007, supplies to residential users in Chile were also affected for the first time. In mid-2004 the federal government negotiated a schedule of increases on the well-head price for natural gas sold to larger industrial and commercial end users in Argentina. As of July 2005 businesses have been paying the full market price for natural gas. The federal government is still negotiating increases in transport and distribution rates, however, for larger industrial and business customers. Negotiations have been complicated by government demands that the private sector firms first drop their international arbitration claims against Argentina for losses sustained from the 2002 conversion of rates into pesos and price freezes. Some see this negotiating stance as a ploy to force frustrated foreign firms to sell their assets to politically well-connected Argentine firms at bargain-basement prices. In mid-2005 and again in January 2007 the Kirchner administration imposed a hefty special tax over the transport rate for natural gas purchased by businesses in order to pay for pipeline improvements. Natural gas rates for larger residential users were only raised at the end of 2008. They reman frozen for smaller residential consumers as a populist measure. Given that the bulk of Argentine natural gas is consumed domestically, the federal government’s 2002 intervention in the market mechanism for determining prices undermined any incentive for producers to explore and expand natural gas reserves. It also destroyed any incentive for transporters to increase capacity, although constraints in transport capacity were already a problem during the 1990s. Furthermore, artificially low natural gas prices induced a surge in demand that eventually outstripped supply. All of these factors have contributed to severe gas shortages since 2004 and have required that the federal government restrict natural gas exports as well as import natural gas and substitute fuels to run power plants.39 The irony is that the federal 39 In October 2006 Argentine President Nestor Kirchner and Bolivian President Evo Morales signed a new agreement under which Bolivia guaranteed to provide Argentina with 22.7 million cubic meters of natural gas per day for the next 20 years. In return, Argentina agreed to pay a higher charge of five U.S. dollars per million BTU’s, although this price is to be adjusted every six months based on comparative prices for diesel and fuel oil. Since 2004 Argentina has also used Petróleos de Venezuela SA as a broker-financier to import fuel oil in order to operate older thermal plants in coastal Argentina or the newer dual combination thermal plants that can operate using either natural gas or fuel oil. Argentina has sometimes “paid” PDVSA with cows and foodstuffs instead of cash. In 2007 Bolivia sent about half the natural gas it had originally promised to supply Argentina with for that year as a result of


government has “subsidized” the purchase of these foreign fuel substitutes with general revenue collected from taxpayers while refusing to allow natural gas producers in Argentina to pass on the true cost of their fuel to these same group of Argentines. The federal government prefers to exercise control over this revenue flow rather than allow it go directly from consumers to the private sector producers. The federal government has also used tax revenue to overcome pipeline constraints and has developed an electronic spot market for natural gas allowing large end users to negotiate contracts directly with producers. It would be unfair to lay the entire blame for the current problems affecting Argentina’s natural gas sector solely on the 2002 intervention in market rates. Since the late 1990s, no new gas fields were developed in Argentina. This was, in part, the result of the recession that engulfed Argentina beginning in 1998. Some observers also attribute this lack of new investment to the 1999 sale of YPF (responsible for 60 percent of Argentine natural gas production) to the Spanish firm REPSOL. Soon after acquiring YPF, REPSOL was said to have been more interested in paying down the massive debt it incurred in purchasing YPF rather than investing in the exploration of new fields or in increasing yields from existing reserves through the use of expensive new technology. In addition, the company owned cheaper-to-operate gas fields in neighboring Bolivia. It was only after polls indicated Evo Morales was likely to become president of Bolivia in the December 2005 elections and make good on his promises to renationalize the Bolivian hydrocarbons sector (coupled with concurrent Argentine threats to revoke under-invested concessions) that REPSOL-YPF announced new investments in Argentina in late 2005. Little of these investments materialized, however, before REPSOL began divesting itself of its Argentine assets at end of 2007. B. Electricity In December 1991 the Argentine Congress ratified Law 24.065, which split the Argentine electricity sector into three separate components: (1) generation, (2) transmission, and (3) distribution. This law authorized the Secretariat of Energy to set overall electricity policy and establish rules on investment and network access. Approval of rate changes and the issuance and enforcement of regulations governing the transmission and distribution of electricity was the responsibility of the newly created Ente Nacional Regulador de la Electricidad (ENRE). Law 24.065 also established a not-for-profit entity, which later became the Compañía Administradora del Mercado Mayorista Eléctrico (CAMMESA), to oversee administration of a wholesale “spot” market for electricity sold to distributors or directly to large end users. Under the 1991 Argentine electricity legislation, generation (which involves the actual production of electricity from different energy sources) was completely deregulated and prices were based on actual production costs. domestic supply constraints, idling Argentine factories for weeks at a time during the winter months.


Electricity was generally sold through a competitive wholesale “spot” market administered by CAMMESA. The law, however, also recognized the right of large end users to enter into fixed-rate contracts directly with the owners of generators and to have non-discriminatory access to the transmission networks. Transmission and distribution companies were given a monopoly within designated territories and their prices were regulated by ENRE. Before January 2002 end-user rates for the transmission and distribution of electricity were based on ENRE-approved five-year tariff schedules in U.S. dollars. Within the five-year period, transmission and distribution rates were subject to automatic twice-a-year adjustments for inflation (based on the U.S. CPI) as well as any increases in federal, provincial, and municipal government taxes. In addition, unforeseen costs could also lead to higher end-user rates if authorized by ENRE following a public hearing. When the distributor bought electricity on the spot market, end users were sheltered from seasonal price gyrations by a CAMMESA Stabilization Fund. The basic concept behind this fund was that distributors would deposit the excess collected from end users when wholesale “spot” market charges fell below the tariff on file with ENRE. Conversely, distributors would be compensated for unexpected increases due to seasonal factors that could not be passed on to end users by taking money out of the Stabilization Fund. As occurred with the natural gas sector, the Argentine government used the Economic Emergency Law passed by Congress in January 2002 to convert enduser charges for electricity into Argentine pesos at a one-to-one parity that did not reflect the actual market rate of exchange of at least three pesos to one U.S. dollar. The same legislation also froze rates that transmission and distribution companies could charge end users at 2001 levels. Owners of generators were technically still allowed to charge market prices for producing electricity, albeit tempered by various formulas for calculating “real” costs. Rather than pass on any increases to end users, however, the federal government forced the CAMMESA Stabilization Fund to pay for them. Given its grossly expanded new mandate, the Stabilization Fund ran out of cash by mid-2003. After this point, CAMMESA began “paying” the privately owned generators with Argentine government bonds. In mid-2004 the federal government authorized a partial pass-through of higher generation costs to larger industrial and commercial users. Tariff hikes for transmission and distribution services, however, were delayed by the Kirchner administration’s insistence that the private firms first drop their international arbitration claims against Argentina. These claims are based on alleged breaches by the Argentine government of bilateral investment treaties when it forcibly converted utility tariffs into pesos at an artificial rate of exchange in 2002 and froze them. The long delay in approving rate increases for transmission and distribution services was also seen by some observers as a ploy to force frustrated foreign firms to sell their assets cheaply to Argentineowned companies or investment funds that enjoyed good political connections to the Kirchner administration. Meanwhile, electricity rates for all residential users—albeit not the taxes in their bills—remained frozen until mid-2008. A


price hike for residential users was approved in August, followed by a second in November 2008. The Kirchner administration initially claimed in mid-2004 that increased revenue collected from higher electricity generation prices paid by larger industrial and commercial users would replenish the CAMMESA Stabilization Fund and allow redemption of the bonds issued to generator owners. Despite this promise, the private generators have yet to see their outstanding bonds redeemed. Instead, the Secretariat of Energy in July 2004 came up with a new scheme that required generator owners to deposit 65 percent of their bonds in a trust fund called the Fondo de Inversión en el Mercado Eléctrico Mayorista (FONIVEMEM). The bonds are supposed to be redeemed for cash to build two new thermal plants in Buenos Aires and Rosario. In return for this forced investment, the generator owners will receive shares in the new plants. Because it was unclear at the time where the natural gas to supply the new plants was supposed to come from, many generator owners initially balked at handing over their CAMMESA bonds. In response, the Secretariat of Energy in February 2005 announced that it would forcibly require these recalcitrant firms to direct 100 percent of their bonds to FONIVEMEM or risk never being able to redeem them. The strong-arm tactics used to get private sector generator owners to contribute to FONIVEMEM illustrate the Kirchner administration’s antagonistic relationship with foreign utility firms. At the same time, they also indicate a grudging acknowledgment of the financial and technological constraints that prevent outright renationalization of the electricity sector and its return to the public sector. Instead, the Kirchner administration appears to be trying to establish a system whereby the discretionary powers of private firms are circumscribed, and the government assumes a preponderant role in directing investment decisions. Given that throughout the 1990s the reliance on natural gas to generate electricity in Argentina increased dramatically, it is no surprise that the electricity sector has also been negatively impacted by the increasing shortages of natural gas in the country since 2004. In addition to importing natural gas and substitute fuels, the Argentine government has also been forced to use the conversion plant located in Garabí (just over the Argentine border in the southern Brazilian state of Rio Grande do Sul), which connects the Argentine and Brazilian grids, to import electricity from Brazil. This is a particular ironic turn of events given that Garabí was built in 2000 primarily to support Brazil’s hydro-dependent electricity grid with what was then thought to be cheaper, abundant, and more reliable Argentine natural gas-generated electricity. C. Potential Role for MERCOSUR? In 1998 MERCOSUR’s highest institutional body, the Common Market Council, issued Decision 10/98, which contains a Memorandum of Understanding (MOU) Related to the Exchange and Integration of Electricity in the MERCOSUR. Under the MOU, Argentina, Brazil, Paraguay, and Uruguay commit to insure the existence of a competitive, transparent, and non-


discriminatory environment for the generation and intra-MERCOSUR trade of electricity. In particular, the four governments commit themselves, inter alia, to: (1) not provide subsidies or set rates that do not reflect true economic costs; (2) permit distributors, wholesalers, or large end users to freely enter into contracts to meet their electricity needs within any of their territories and not impose restrictions on the fulfillment of legally sound contracts; (3) establish a fully transparent on-line system that permits the rapid flow of real-time data and other information on the availability of electricity so as to facilitate cross-border sales; and (4) ensure free access, at pre-established rates and without regard to nationality or final destination, to the spare capacity for the transmission and distribution of electricity both domestically and through international interconnections. In 1999 the Common Market Council issued Decision 10/99, which contains an MOU with respect to the Exchange of Natural Gas and Integration of the Natural Gas Sector among the MERCOSUR Member States. This MOU on the natural gas sector prohibits the use of discriminatory policies that may favor buyers over sellers or vice versa, or practices such as subsidies that distort market prices for the transport, distribution, or warehousing of natural gas. There are also requirements that domestic regulations be drafted in such a way as to guarantee that natural gas can be freely imported as required, and that distributors, wholesalers, and large end users can freely contract to purchase the amount of natural gas needed. In addition, governments should respect executed cross-border sales contracts that comply with local law and not interfere with their fulfillment by adding new terms that would not otherwise be required if the transactions were among domestic parties. Furthermore, governments should not discriminate on the basis of nationality, public or private sector status of the firm, or the final destination of natural gas in granting access to excess pipeline capacity nor in what is charged for use of those pipelines. Governments should also promote transparent methods for communicating data on the natural gas markets, pipeline capacity, and past transaction history. Finally, there is an obligation to protect consumers from monopolies, oligopolies, or other abusive practices that may arise when a company dominates the local market, as well as from bad service. Unfortunately CMC Decisions 10/98 and 10/99 joined the huge backlog of decisions, resolutions, and directives issued by MERCOSUR’s institutional bodies over the years that have never been ratified by all four member states. Accordingly, neither of these two decisions are enforceable legal obligations. In any event, Argentina may already have been in violation of Decision 10/99 when it was signed, as YPF controlled at least 60 percent of natural gas production and 80 percent of natural gas sales when it was sold to REPSOL in 1999. A high level of reserves in the hands of one company can act as a barrier to the entry of potential competitors and prevent existing producers from increasing their share of sales by lowering prices because the dominant company can agree with large customers to meet the competition’s lower prices, a practice that YPF engaged in throughout the 1990s.40 40 D. Bonderovsky & D. Petrecolla, Agentina’s Natural Gas Markets: Antitrust and Regional Integration Issues,” in Competition Policy in Regulated Industries: Approaches for Emerging


Policies adopted by the Argentine government following the economic implosion of 2001–02 are clearly incompatible with the provisions contained in both MERCOSUR decisions on electricity and natural gas. Since 2004 Argentina has severely disrupted natural gas exports to Brazil, Chile, and Uruguay. Accordingly, plans to extend a pipeline built in 2000 from Argentina to a gas-powered thermal plant just over the border, which serves part of the southern Brazilian state of Rio Grande do Sul so as to reach the city of Porto Alegre, has been shelved. Similarly, Uruguay has been forced to mothball plans to move away from the country’s heavy dependence on hydro-power to greater use of natural gas-generated electricity. In March 2005 the Argentine government initially balked at a Brazilian request to purchase Argentine electricity that would be funneled through the conversion plants in Garabí (just over the Argentine border in Rio Grande do Sul). It was only after the Brazilian government reminded the Argentine authorities that they might adopt a similarly truculent attitude if Argentina needed electricity later in the year during its peak-demand winter season that caused Buenos Aires to relent. Although policies pursued by successive Argentine governments since 2002 have completely distorted both the domestic and regional markets for the sale and purchase of natural gas and electricity, CMC Decisions 10/98 and 10/99 provide a means for integrating the Southern Cone energy market when and if Argentina ever restores its previous market-led system. The reality is that there are plenty of conventional energy resources in South America to comfortably supply the four core MERCOSUR countries (i.e., Argentina, Brazil, Paraguay, and Uruguay) and the current six associate members (i.e., Bolivia, Chile, Colombia, Ecuador, Peru, and Venezuela) for the foreseeable future. What is currently lacking in some countries (namely Argentina, Bolivia, Peru, and Venezuela) is a rational, coherent, and long-term vision for utilizing energy resources in a way that enhances energy security for everyone in society. Once short-sighted, populist motivations are removed from policy making in the energy sector, there is no reason why MERCOSUR cannot follow the lead of the Andean Community and the Central American Integration System and serve as a vehicle for harmonizing regulatory and fiscal frameworks in member states and encourage inter-connection agreements that link up the different national electricity grids. Similarly, MERCOSUR can supply the necessary transnational rules and regulations and oversight capabilities required to ensure a reliable and fully integrated natural gas market in South America’s Southern Cone. At the insistence of Brazil, a MERCOSUR Action Plan for Cooperation in the Biofuels Sector was adopted at the end of 2007 as CMC Decision 49/07. Among the specific objectives and activities of this action plan is to evaluate the productive capacity of each MERCOSUR country to produce inputs required to make biodiesel and ethanol and identify zones where such inputs can be grown or raised. The action plan also calls, inter alia, for identifying research institutes and companies in MERCOSUR that can provide technical assistance in creating viable biofuel chains of production on a regional level; harmonizing Economies 110 and 114 (P. Beato & J.-J. Laffont eds., 2002).


environmental and health regulations among the four MERCOSUR countries with respect to the production and transport of biofuels; identifying appropriate investment mechanisms for expanding the biodiesel industry on a regional level; and coordinating negotiating positions on biofuels at international fora.

CHAPTER 6

INSTITUTIONAL FRAMEWORK OF THE ANDEAN COMMUNITY AND HOW THE ANDEAN ECONOMIC INTEGRATION PROCESS FUNCTIONS I. Current Status of the Andean Community Between May 1989 and December 1991, the presidents of the Andean countries met on six separate occasions in an attempt to revive the Andean Pact integration process. All but one of these meetings were followed by important announcements that made it clear that the Andean Pact was making a definitive break with a past defined by heavily protected markets and inward looking, centrally planned economies. In the future, market forces would be used to insure the insertion of the Andean countries into the global economy. At the fifth of these meetings held in Caracas, Venezuela, in May 1991, the five presidents agreed to establish an intra-regional free trade area by January 1, 1992. At the sixth meeting held in Cartagena, Colombia, in December 1991, a four-tiered common external tariff (CET) of 5, 10, 15 and 20 percent was announced that would be implemented by January 1, 1992 (with Bolivia permitted to maintain its two-tiered 5 and 10 percent external tariff system). In addition, all lists of goods temporarily exempt from the CET had to be abolished by January 1, 1993 (with Ecuador being given an additional year to comply). In conjunction with the announcements emanating from the various presidential summits, the Andean Commission also began issuing decisions reflective of the deregulated and market-oriented direction of the new Andean Pact. In 1991, for example, the Commission adopted Decision 291, which superseded earlier decisions regarding foreign investment. Henceforth, there would, in principle, be no legal difference between foreign or domestic capital; foreigners were generally free to repatriate investment capital and profits at will; any requirements of prior authorization or registration of foreign investments with the respective national governments were abolished; and foreign companies operating in the region could use the intra-regional free trade scheme without any requirements that a minimum number of their shareholders had to be from the Andean Pact. Despite the best intentions of the Andean presidents to have an intraregional free trade area in place by 1992 and a fully functioning customs union 243


by 1994, differences among the member states soon emerged which disrupted the implementation timetable. In April 1992 Peru’s membership in the Andean Pact was temporarily suspended following President Alberto Fujimori’s abrogation of his country’s Constitution, closing of the courts, and dissolution of Congress. Ecuador, for its part, resisted opening its entire market to intraregional free trade until 1993 and did not adopt the CET until 1994 (and only then with modifications). Isolated at the southern end of the Andes, Bolivia focused its attentions on seeking admission into the MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese), with whom it conducts most of its international trade. Only Colombia and Venezuela came close to meeting the deadlines for implementation of the intra-regional free trade area and the CET. On September 5, 1995, the Andean presidents met in Quito, Ecuador, and issued a plan of action to consolidate and further expand reform efforts within the Andean Pact. Among the specific proposals for institutional reforms was one calling for the restructuring of the Junta del Acuerdo de Cartagena into a General Secretariat under the leadership of a Secretary General (thereby avoiding some of the impasses created in the past when the three-member Junta was unable to unanimously reach agreement on how to implement the decisions of the Andean Commission). In addition, the highest political decision-making body of the Andean Pact would henceforth be the Andean Presidents Council and not the Commission (although the latter would retain its supranational authority to issue decisions involving integration matters). In addition, an Andean Council of Ministers of Foreign Relations was entrusted with authority to negotiate treaties and agreements with other countries and international organizations. In March 1996 the presidents of the five Andean countries met in Trujillo, Peru, and signed the Trujillo Protocol modifying the Cartagena Agreement and adopting many of the institutional reforms first proposed in Quito the previous September. Among the significant provisions in the protocol was the one that changed the Andean Pact’s name to the Andean Community. Another was found in Article 28 of the Trujillo Protocol, which stated that any member state that is four trimesters overdue in its dues payments will lose its right to vote in the Andean Presidential Council and the other Andean Community bodies. The clause is intended to force those countries that have been negligent in paying their contributions in the past to mend their ways (and thereby provide the Andean Community institutions with a more steady source of income). The Trujillo Protocol entered into force on August 1, 1997. On April 22, 2006, the Foreign Minister of the Bolivarian Republic of Venezuela directed a letter to the members of the Andean Commission announcing that Venezuela was withdrawing from the Andean Community. The Venezuelan government’s decision was based on its unhappiness with the fact that Colombia and Peru had negotiated bilateral free trade agreements with the United States. Venezuela claimed these actions fatally undermined the customs union goal of the Andean Community by perforating its CET. This objection was a bit puzzling, given that the Andean CET had always existed

Institutional Framework of the Andean Community • 245

more in name than reality. To begin with, up until that time, Bolivia had never applied the CET with the express authorization of all the other Andean Community governments. In addition, while Peru had made a commitment to eventually begin applying the CET in full after it pursued an independent import duty scheme throughout most of the 1990s, it still had not done so by April 2006. For its part, Ecuador had long applied its own exemptions to the Andean CET. The Venezuelan announcement was also surprising given that Decision 598 of the Council of Andean Foreign Ministers and the Andean Commission had expressly authorized individual countries of the Andean Community as far back as July 2004 to negotiate bilateral free trade agreements with third nations so long as: 1. The Andean legal framework among the member states was preserved; 2. Consideration was given to the trade sensibilities of other Andean nations when offering tariff concessions; and 3. There was an appropriate exchange of information and consultations on developments affecting the negotiations. Andean Commission Decision 641 approves the Memorandum of Understanding (MOU) dated August 9, 2006, between Venezuela and the remaining members of the Andean Community concerning its withdrawal from the Andean economic integration process. The MOU underscores that Article 135 of the Cartagena Agreement requires Venezuela to continue to adhere to the intra-Andean free trade program for another five years or April 21, 2011 (unless the Commission decides otherwise). This means that Venezuela must also continue to apply the Andean Community regime for safeguards, rules of origin, sanitary and phytosanitary measures, as well as technical norms, and continue to participate in the dispute resolution system (at least as far as traderelated disputes are concerned). The MOU also contains a commitment on the part of the Colombian and Ecuadorian governments, on the one hand, and Venezuela, on the other, to continue to apply the provisions of their automotive sector agreement negotiated within the context of the Andean Community. All the rest of Venezuela’s rights and obligations were terminated as of August 9, 2006, including participation in the institutional bodies of the Andean Community. While Venezuela was exiting the Andean Community, Chile applied to become an associate member. The request is an outgrowth of the December 2004 conference held in Cuzco, Peru, that proposed establishing a Union of One concrete example of what was contemplated by this language was for Colombia, Ecuador, and Peru to ensure that they would not undermine intra-Andean Community preferences provided to Bolivian soy when offering concessions to the United States as part of their respective free trade area negotiations. Interestingly, the concessions offered by Colombia and Peru to the U.S. soy industry in the context of their respective free trade areas indicate that both failed to comply with this commitment. This may further explain Venezuela’s pique at the Colombian and Peruvian decision to sign free trade agreements with the United States, given Venezuelan President Hugo Chavez’s alliance with the Bolivian government of Evo Morales.


South American Nations (UNASUR). Chile’s request to be become an associate member of the Andean Community was formally ratified by the Andean Council of Ministers of Foreign Relations and the Andean Commission in September 2006 through Decision 645, which noted that Chile already has trade agreements with all the Andean Community members (although the current one with Bolivia is a traditional Latin American Integration Association (ALADI) preferential market access agreement for a reduced number of products). Associate membership status allows Chile to be invited or to request to be allowed to participate in meetings of all the institutional bodies of the Andean Community on subject matters of common interest. Decision 645 was silent in terms of whether Chile’s role would be that of a mere observer or whether it would have the right to actively participate in discussions and be allowed to vote (a right it does not have as an associate member of the MERCOSUR). A mixed commission made up of representatives from Chile and the Andean Community was appointed, however, to “examine the institutional bodies, mechanisms and measures of the Cartagena Agreement in which the Republic of Chile will participate and define the scope of the association.” Decision 666 issued jointly by the Council of Andean Ministers of Foreign Relations and the Andean Commission in June 2007 establishes the level of Chilean participation in the institutions and proceedings of the Andean Community as well as the legal relationship between Chile, on the one hand, and the Andean Community on the other. Interestingly, the mixed commission originally created by Decision 645 is retained permanently to examine issues related to human development and social inclusion; support for small- and medium-sized enterprises; education; health; energy; trade and investment cooperation; coordination of positions vis-à-vis the Asia-Pacific Economic Cooperation (APEC) Forum and the European Union; environment and sustainable development; scientific and technological development; Internet access; socio-economic cooperation; and democracy and human rights. Chile must ratify the Protocol to the Cartagena Agreement on the Commitment to Democracy in the Andean Community and the Andean Letter on the Promotion and Protection of Human Rights. When expressly invited, Chile is allowed to participate and speak at the meetings of the various institutional bodies of the Andean Community. Argentina, Brazil, Paraguay, and Uruguay were admitted as associate members of the Andean Community in July 2005 following the entry into force of the MERCOSUR free trade agreements with Colombia, Ecuador, and Venezuela. Unlike the situation involving Chilean associate membership, however, no mixed commissions were created to examine what would be the exact level of participation in the Andean Community on the part of the four MERCOSUR countries. Decision 613 of the Council of Andean Ministers of Foreign Relations and the Andean Commission, which approved the associate member status of the four MERCOSUR countries, noted only that the Andean Community institutional bodies would meet twice: once with only the members of the Andean Community in attendance, and a second session, when required, with both the Andean and MERCOSUR countries present. That decision also stated


that the MERCOSUR countries would be required to ratify the Additional Protocol of the Cartagena Agreement on the Commitment of the Andean Community to Democracy and the Andean Charter on the Promotion and Protection of Human Rights. II. Institutional Framework One important aspect that distinguishes the Andean Community from other Latin American economic integration projects is the elaborate institutional framework that was created early in the integration process. Some of this can be attributed to the fact that the original Andean Pact was devised during a period of strong central planning and heavy state intervention in the economy. Since the Andean Pact sought to pursue these same economic policies on a wider scale, it is no surprise that it elevated a similar bureaucratic model to a regional level. Another important explanation lies in the fact that the Andean Pact sought to create a common market, and a complex governing structure similar to the one that existed in the European Economic Community was thought necessary. Despite some of the inconvenient baggage that the Andean Community may have inherited from the Andean Pact’s original institutional arrangements, the Andean Community’s strong institutional base gives it certain advantages over an integration program like MERCOSUR. For one thing, many of the Andean Community’s highest institutional bodies can issue new communitarian norms that do not need to be ratified by the legislatures or executive branches of each member state before they take effect. Financial institutions also exist within the Andean Community that permit funding the type of projects required to deepen economic integration as well as alleviate some of the dislocations that are almost inevitable in any integration process. A. Andean Presidential Council and Andean Council of Ministers of Foreign Relations Since the Protocol of Trujillo came into force in 1997, the highest institutional body of the Andean Community is now the Andean Presidential Council, made up of the elected heads of each member state. The Presidential Council sets the general agenda for the Andean Community, which is then carried out by the other institutional bodies. The Presidential Council is required to meet at least once a year. Under the Protocol of Trujillo, the next Andean Community institutional body in terms of hierarchical importance is the Andean Council of Ministers of Foreign Relations. The Council of Ministers formulates the foreign policy for the Andean Community member states, which is of regional interest. It also has the authority to execute treaties or agreements with third countries or international organizations that are binding on the Andean Community and its member states, and it coordinates common policy positions to be adopted by the member states in international fora or multilateral negotiations. The Council of Ministers of Foreign Relations is required to meet at least twice a year, and it adopts decisions based on mutual consensus. The council enjoys


supranational authority and, therefore, its decisions are directly applicable within the domestic legal framework of each member state. The Council of Ministers of Foreign Relations is required to meet in joint session with the Andean Commission at least once a year to discuss and examine topics of mutual interest. B. Andean Commission Before the Protocol of Trujillo took effect in 1997, the Andean Commission was the highest institutional body within the Andean Community. Despite losing its formerly preeminent position, the Commission continues to exert a predominant rule-making position within the Andean Community institutional framework. The Commission is made up of one representative (and one alternate) from each member state of the Andean Community who is entitled to one vote. The Commission normally meets in Lima, Peru at least three times a year, and issues rules and regulations in the form of Decisions designed to further the Andean Community’s integration objectives. In general, an absolute majority is needed to approve most Decisions (abstentions counting as affirmative votes). In some cases, the Decision must be approved with the favorable vote of an absolute majority and no negative votes. The decisions of the Commission, like those of the Council of Ministers of Foreign Relations, theoretically have “direct effect” and do not require ratification by each member state’s national legislature before they become the law of the land in that country. C. General Secretariat of the Andean Community The Protocol of Trujillo replaced the old Junta del Acuerdo de Cartagena with a new General Secretariat of the Andean Community. Until 1997, the Junta was the technical and administrative branch of the Andean Community and was made up of three members chosen by the Andean Commission for three-year terms. The members of the Junta could be nationals of any Latin American country and did not need to be from the Andean Community. The main function of the Junta, which was headquartered in Lima, was to ensure that Andean Commission decisions were implemented. In order to carry out that function, the Junta was authorized to issue resolutions upon a unanimous affirmative vote of all three members. In addition, the Junta was also entrusted with the task of overseeing the implementation of the CET, enforcement of the rules of origin, and the imposition of safeguard clauses. Although the resolutions issued by the Junta were theoretically binding upon all the member states, it

See, e.g., J.G. Andueza, La Aplicación Directa del Ordenamiento Jurídico del Acuerdo de Cartagena, in El Tribunal de Justicia del Acuerdo de Cartagena (L.C. Sáchica et al. eds., 1985). This concept of direct applicability is similar to the situation that exists with respect to regulations issued by the Council of the European Union. The big difference between the European Union and the Andean Community, however, is that direct applicability has been widely accepted in the European Union while it has historically been honored more in the breach than in practice in the Andean context.


did not enjoy supranational authority. The Junta also presented proposals to the Andean Commission that its members felt would facilitate or accelerate the objectives of the Andean economic integration process. Pursuant to the Protocol of Trujillo, the General Secretariat of the Andean Community is based in Lima and is housed in the same building that formerly housed the Junta. Among the functions of the General Secretariat are to make sure that Andean Community norms are followed, to suggest decisions that may be adopted by the Andean Council of Ministers of Foreign Relations or the Andean Commission, and to carry out studies requested by the Andean Community’s other institutional bodies. The General Secretariat is headed by a Secretary General who is chosen by the Council of Ministers of Foreign Relations for a five-year term and must be a national of one of the member states. The Secretary General, in turn, chooses the director generals who are in charge of particular sections within the Secretariat. These director generals must also be nationals of an Andean Community country. D. Andean Labor Advisory Council and Andean Business Advisory Council In 1983 the Andean Commission issued Decision 176 (partially modified later by Decision 188), outlining the functions of the Andean Labor Advisory Council that was originally created under Article 20 of the original Cartagena Agreement. The Labor Advisory Council was expected to offer the Andean Commission and the old Junta del Acuerdo de Cartagena the viewpoints of organized labor with respect to the programs or activities associated with the Andean economic integration process. Decision 175 created an Andean Business Advisory Council that was supposed to facilitate private sector input on the programs and activities of the Andean economic integration project. Andean Commission Decision 441 (subsequently modified by Decisions 464 and 494) incorporated new features to the Andean Labor Advisory Council so as to facilitate the labor movement’s participation in the effort to establish an Andean common market. The Advisory Council is made up of four representatives from each member state selected for a one-year term from among the directors of that country’s labor organizations that are deemed by each government to be “representative” of the organized labor movement. The Advisory Council on Labor is authorized to issue opinions to the institutional bodies of the Andean Community at their request or on its own initiative on labor or other matters of interest. Members of the Advisory Labor Council also have the right to attend and actively participate in all meetings of the Andean Council of Foreign Ministers and the Andean Commission as well as any meetings of government experts and working groups associated with the Andean economic integration process. Furthermore, they can propose ways to harmonize the social and labor laws of the Andean Community member states. Andean Commission Decision 442 (subsequently modified by Decision 464) revamped the Andean Business Advisory Council originally established by Decision 175 in 1983. It too is made up of four high-level representatives L.C. Sáchica, Introducción al Derecho Comunitario Andino 68 (1985).


from each of the Andean Community member states chosen by their respective governments from among those business organizations deemed to be most representative. The Business Advisory Council is authorized to issue its opinions to the Andean Council of Foreign Ministers, the Andean Commission, and the General Secretariat in Lima, and has the right to actively participate in the meetings of the first two as well as in all government working and expert groups that touch upon subject matters of interest. The Business Advisory Council is also supposed to encourage the inclusion of small- and medium-sized enterprises in the opportunities provided by the regional economic integration process. As is true of its labor counterpart, the Andean Business Advisory Council is supposed to meet at least twice a year and is housed in the headquarters of the General Secretariat of the Andean Community in Lima. E. Tribunal of Justice of the Andean Community In May 1979 a treaty creating the Tribunal of Justice of the Cartagena Agreement was signed and Quito designated to be the permanent seat of the court. The court, which did not actually begin to function until 1984, is made up one judge representing each of the Andean Community countries. The court has the authority to: 1. nullify decisions made by the Andean Commission or resolutions issued by the old Junta del Acuerdo de Cartagena because they are not in keeping with the general legal norms established under the Cartagena Agreement; 2. determine whether a member state is in compliance with its Andean Community obligations; 3. offer advisory opinions to the courts of the individual member states with respect to the interpretation of Andean Community norms so as to insure their uniform application in all the member states. Individuals or companies detrimentally affected by a decision that ran contrary to the norms of the Cartagena Agreement always had the right to bring an action in the Andean Tribunal of Justice on their own. Otherwise, actions complaining of non-compliance by a government could only be brought by another government prior to 1999. Judgments of the Tribunal of Justice are legally binding on the member states, and a refusal to adhere to the court’s holdings permits the complaining member states to take appropriate retaliatory measures such as restricting or suspending the preferential tariff treatment granted the non-cooperative state under the Cartagena Agreement. As a result of the entry into force of the Protocol of Cochabamba on August 25, 1999, various significant modifications were made to the original 1979 Treaty Creating the Tribunal of Justice of the Cartagena Agreement. For one thing, private individuals now have the right to bring an action in the tribunal against a member state for failure to implement or enforce an Andean Community norm to the extent they are detrimentally affected by that inaction. Prior to this reform, only a government or the old Junta had standing to bring an action See, e.g., F. Uribe Restrepo, El Derecho de la Integración en el Grupo Andino (1990).


against a member state for non-compliance with Andean Community norms. The Protocol of Cochabamba also created a new cause of action for omission or inactivity. Whenever the Andean Council of Ministers of Foreign Relations, Andean Commission, or the General Secretariat do not fulfill an obligation they are expressly required to carry out, the government of any member state, any other institutional body of the Andean Community, or an individual or private entity detrimentally affected by this inactivity, can bring an action in the Andean Tribunal of Justice asking it to compel either of the three bodies to act. Among the other innovations introduced by the Protocol of Cochabamba is one authorizing the Andean Tribunal of Justice to serve as an arbitration panel in order to resolve breach of contract or other business disputes between private parties. The tribunal may also act as an arbitration panel for disputes that may arise over the application or interpretation of contracts, treaties, or agreements between the institutional bodies of the Andean Community, or between those bodies and third parties (including governments). When acting as an arbitration panel, the Tribunal of Justice can issue an award based either on the law and/or equity, and its decision is binding and cannot be appealed. Furthermore, the award may be directly enforced in any of the Andean Community countries without any need for any type of ratification or legalization by the local judicial system. Finally, the Protocol of Cochabamba expressly authorizes the Andean Tribunal of Justice to resolve labor disputes that may arise within the institutional bodies of the Andean Community. Since 2000 the Andean Tribunal of Justice has issued many decisions for noncompliance with Andean Community norms and obligations. The majority of these actions have been filed against the governments of Ecuador and Venezuela and deal with the imposition of non-tariff barriers. F. Andean Development Corporation The Andean Pact countries (which included Chile at the time) signed the Convention Establishing the Andean Development Corporation or Corporación Andina de Fomento (CAF) on February 7, 1968. Operating under the CAF is the Andean System for Trade Financing or Sistema Andino de Financiamiento al Comercio (SAFICO), which was designed to extend loans to exporters and importers operating within the Andean region as well as other Latin American countries that are shareholders of the CAF. The Mechanism for the Confirmation of Letters of Credit and Import Financing (MECOFIN) was subsequently established to confirm letters of credit and finance the importation of primary, intermediate, or capital goods imported from outside the Andean Pact but intended for industries located within the member states. The headquarters for the CAF are in Caracas, Venezuela. The CAF is currently the most important multilateral lending agency for both the public and private sector in the Andean region of South America. In addition to the four current Andean Community member states, Argentina, Brazil, Chile, the Dominican Republic, Costa Rica, Jamaica, Mexico, Panama, Paraguay, Spain, Trinidad and Tobago, Uruguay, and Venezuela are all CAF


shareholders. A representative for some 15 private sector banks from the Andean region sits on the CAF Board of Directors. CAF financing and technical assistance is available to all governments or private, public, or mixed corporations domiciled in the Andean region or in shareholder countries. Entities from outside these countries can also partake of CAF financing and services if the transaction directly benefits one or more CAF shareholder states. The primary purpose of the CAF is to promote sustainable development and regional integration among the 17 shareholder countries. Among the objectives of the CAF are: to prepare studies identifying investment opportunities in the Andean countries; to provide direct and indirect technical assistance and the necessary financing for the preparation and execution of multilateral or complementation projects; to obtain credits both from within the region and abroad (including co-financing from other multilateral lending institutions); to issue bonds, debentures or other obligations that may be offered within the Andean region or abroad; to grant loans and provide pledges, endorsements and other guarantees; and to underwrite share subscription agreements. The CAF currently has a total of U.S.$10 billion in authorized capital. The CAF provides long-term (more than five years), medium-term (one to five years), and short-term term (less than one year) lending. CAF loans can be used for trade financing as well as for working capital and project finance. CAF will also take the lead role as the lender of record on syndicated loans or act as a full or partial guarantor. The CAF is able to provide financing for a wide range of projects that may include transportation, the telecommunications sector, energy generation and transmission, and water treatment. The CAF is particularly interested in financing projects that seek to expand and modernize the productive capacities of companies from the shareholder member countries and facilitate their insertion into the regional and global marketplaces. In the past, the CAF supported the efforts of member governments to sell off state-owned enterprises by participating in specialized investment funds that stimulate the development of new private energy companies, for example. These funds included the Scudder Latin American Trust for Independent Power (SLATIP) and the Latin American Energy and Electric Power Fund (FONDELEC) that invested in the expansion, modernization, and installation of new energy companies as well as the purchase of assets and companies from the public sector. FONDELEC, in particular, supported the development of privately owned private-generating companies as well as privatization efforts in the electricity sector. In recent years, CAF has acquired the stock of companies operating in those areas of the shareholder economies deemed to be “strategic,” so as to support their growth and development as well as participation in the local stock exchanges. CAF’s participation in the international capital markets began in April 1993 when it placed its first U.S.$1 million Eurobond issue. This was followed by other transactions including a major bond placement in the Japanese markets at the end of 1994. CAF’s activities in the international capital markets helped to supplement the institution’s traditional funding base, which included


shareholder contributions from the member countries and regional bond issues as well as loans and lines of credit provided by private financial institutions and a variety of multilateral lending agencies. The primary source of CAF’s funding now comes from bond issues offered in the European, Japanese, and U.S. markets. In 1993 the CAF established a Technical Assistance Fund (FAT), as well as a Special Fund for Bolivia and another Special Fund for Ecuador (both of which attend to the technical assistance needs of the Andean region’s poorest countries and include grants as well as loans). In 1995 CAF created the Fund for Human Development (FONDESHU), designed to promote sustainable human capital development among the poorest members of the Andean countries. FONDESHU began with U.S.$10 million at its disposal to invest and financially support projects for small and micro-businesses and educational programs designed to increase their productivity. Recipients can include private sector companies, cooperatives, small municipal governments, and other entities that have traditionally had limited access to conventional sources of credit. FONDESHU also provides monies to established micro-finance institutions. In 1999 the CAF created the Program to Support Competitiveness (PAC), which provides technical assistance and funding for a variety of initiatives to improve the competitiveness of the Andean region. In 2002 the CAF established a Support Program for Research in Development Topics (PAI) through which it provides funding to teams of researchers from throughout Latin America (although they do not have to be physically present there) working on projects that the CAF deems will promote development. Recent financial activities of the CAF include a U.S.$110 million loan to the Argentine government to construct roads along the Yacyretá hydroelectric dam on the Argentine-Paraguayan border; U.S.$29 million to the Municipality of Caxias do Sul and U.S.$75 million to the Municipality of Manaus in Brazil for infrastructure improvements that will lead to a healthier environment; U.S.$17 million to build new sewage pipes in Uruguay; and U.S.$60 million so that Costa Rica can complete its portion of the Atlantic Corridor under the Plan Puebla-Panamá. The CAF plays an important role in financing projects under the Initiative for the Integration of Regional Infrastructure in South America or Iniciativa para la Infraestructura Regional de Sur América (IIRSA). Despite extending more loans in recent years to Latin American countries outside the Andean region, the largest recipients of CAF funding remain the five Andean countries. In 2006, for example, a total of U.S.$397 million in loans was approved for Bolivia. The majority of this money was earmarked by the �� Bolivian government for �� transportation infrastructure projects, particularly those that are related to connecting all the departmental capitals and supporting Bolivia’s integration with regional markets. Some U.S.$15 million went for reconstruction purposes following the heavy flooding in the country of late 2005 and early 2006. Approximately U.S.$1 billion was approved for Colombia in 2006. About half that sum went to support financing schemes for smalland medium-sized enterprises that included working capital and trade-related


letters of credit. The CAF approved just over a billion U.S. dollars in lending to Ecuador in 2006, the majority of it for transportation infrastructure. About U.S.$200 million, however, went to social development and poverty reduction needs, including programs designed to provide universal minimal health care and improve basic public education. Another U.S.$181 million went to finance investment projects in Ecuador as well as to establish working capital and lines of credit for private sector business groups, smaller companies, and microfinance institutions. Peru received just under U.S.$1 billion from the CAF in 2006, the bulk of which was earmarked for improvements to the country’s roads, although U.S.$175 million was earmarked for supporting different financing options for small- and medium-sized enterprises. For 2006 the CAF approved U.S.$840 million for Venezuela, roughly half of which went to improve road infrastructure in major urban centers so as to reduce traffic bottlenecks, and the other half was earmarked primarily for social spending, including housing for the poor. G. Latin American Reserve Fund In 1976 the Andean Reserve Fund headquartered in Bogotá, Colombia, was formed to extend credit and guarantee loans to member states with balance of payment problems, and to contribute to the harmonization of monetary, exchange, and finance policies among the member states. In 1979 it was renamed the Latin American Reserve Fund (FLAR), and access to the fund was opened up to all ALADI member countries. Only the four Andean Community countries plus Costa Rica, Uruguay, and Venezuela remain members of the FLAR. Until 2002 the FLAR provided financing for export operations through credit lines extended to private banks. Today its activities are limited to providing credit and guaranteeing third-party loans for member states that face a balance of payments crisis. Bolivia and Ecuador are allowed access to more capital from the FLAR, even though their paid-in capital contribution is less. H. Andean Parliament An Andean Parliament was created in 1979 with the hopes of making the Andean integration process more relevant to the citizens in the individual member states. During its first ten years of existence, the Parliament was made up exclusively of delegations chosen by each of the five national legislatures from among sitting legislators. Despite attempts to give this institution more significance by, inter alia, permitting direct election of members to sit in the Parliament (such as occurred in Venezuela before it pulled out of the Andean Community in 2006), the Parliament remains a consultative body with little real impact on actual decision making within the Andean Community. Each country has five representatives in the Parliament, which is required to meet at least twice a year. An effort was made in the late 1990s to resolve the general ineffectiveness of the Parliament by requiring that its permanent venue should be in Bogotá, and that its members should be elected by direct popular vote in elections that were to be held in all the Andean countries by 2002. Ecuador and Peru are the


only countries that now have directly elected representatives in the Andean Parliament. The members from the other two remaining countries in the Andean Community (i.e., Bolivia and Colombia) are still selected from among national legislators by their respective national Congress. While the Protocol of Trujillo did not give the Parliament a legislative function, the Parliament does have the power to suggest specific communitarian norms for the Andean Council of Ministers of Foreign Relations and the Andean Commission to adopt that it deems necessary to strengthen the Andean Community. In addition, the Parliament is supposed to promote the harmonization of the conflicting national laws that impede deeper Andean economic integration. III. Intra-Regional Free Trade Program At the present time no duties are charged on goods that fulfill the Andean Community’s rule of origin requirements and are traded among Bolivia, Colombia, Ecuador, Peru,�� and Venezuela. It should be pointed out that it was only in 2006 that Peru was fully incorporated into this intra-regional free trade area. Its estrangement was initially due to then President Fujimori’s suspension of democratic guarantees in 1992 but subsequently because Peru pursued a more aggressive market-oriented economic policy than its neighbors. In theory, nontariff barriers have also been eliminated among the five countries. Venezuela’s decision to leave the Andean Community means that its participation in the intraregional free trade scheme is scheduled to cease as of April 21, 2011. Decision 330 issued by the Andean Commission in 1992 obligates the member states to eliminate subsidies and harmonize their regulations on export incentives for all products traded intra-regionally. These “subsidies” can take the form of special exchange rates for exporters; interest rates charged on loans that are more favorable than market rates; partial payments by government entities of the outstanding debt obligations owed by a private sector company; direct and indirect tax rebates and other incentives such as tax exemptions, deferments, and special pre-tax deductions; direct government aid including such things as mandated lower transport costs for international exporters; and more favorable customs policies such as lower tariff rates on imported inputs used in a final product which is intended for eventual export. IV. Rule of Origin Requirements In order to take advantage of the intra-Andean free trade system, a product must comply with the requisite rule of origin requirements of the Andean Community. In July 1997 the Andean Community issued new rule of origin requirements contained in Decision 416, thereby replacing Decision 293 issued in 1991, which was patterned on ALADI’s Resolution 78. Pursuant to Decision 416, the following products are considered as having their origin in the Andean region and can therefore be traded within the Andean Community free of tariff and non-tariff barriers: 1. Goods wholly produced within the territory of one of the Andean countries, including natural products or items that are completely manufactured from these products;


2. Goods wholly made from products originating in any of the member states of the Andean Community; 3. Goods that are made with inputs that do not wholly originate within the Andean Community may be traded duty-free among the member states if they undergo a substantial transformation within the Andean subregion as reflected by a change in tariff classification heading of the final product; 4. Goods that do not undergo a substantial transformation may still be traded duty-free within the Andean Community if the cost, insurance, and freight (CIF) value of the foreign inputs does not exceed 50 percent of the freight on board (FOB) value of the final product. In the specific case of Bolivia and Ecuador, the CIF value of the foreign inputs cannot exceed 60 percent of the final product’s FOB value of the extra-regional inputs; or 5. Goods that comply with the specific rules of origin that may be established for a given product by the Andean Commission and take precedence over the general rules listed above. Products from the mineral, vegetable, or animal world obtained within the territory of an Andean Community country, including territorial waters, are considered native to the Andean region. So too are fish taken from outside territorial waters by a ship bearing the flag of an Andean country or rented by a company legally incorporated in a member state of the Andean Community. Goods must generally be transported directly from one Andean country to another without passing through the territory of a non-Andean Community state in order to take advantage of the intra-regional free trade program. However, exceptions will be made if the goods have not been changed in any way while in transit (other than to accommodate normal cargo handling and shipping), and there exists no other reasonable alternative way to get the goods from one Andean country to the other without passing through non-Andean Community territory. Products that are simply repackaged, sorted, have a name placed on them, are mixed and do not become significantly different from the product they originally were, or are merely assembled in an Andean Community country from goods imported entirely from outside the Andean region, are not considered to have undergone a significant transformation in the Andean Community so as to qualify them for intra-regional duty-free treatment. In July 1997 the Andean Commission also issued Decision 417, which establishes a mechanism for creating new rules of origin for products whose origin cannot be adequately determined using the rules found in Decision 416. The General Secretariat in Lima is authorized on its own initiative or at the request of a member state to issue special rules of origin for specific products. When formulating these new rules of origin, the General In recognition of Bolivia’s status as a landlocked country, the CIF value of the foreign input is calculated at the first maritime port where the goods are offloaded, if they arrive by ship, or when they reach a Bolivian border post, if they are transported by land.


Secretariat is instructed to establish differential treatment for Bolivia. Until Peru fully adheres to the Andean Community CET, the General Secretariat is also authorized to establish special rules of origin for products that originate in Peru and are traded among the other Andean Community member states. Chapter 11 to Decision 416 contains the regulations for certifying compliance with the Andean Community’s rule of origin requirements. In general, compliance is evidenced by a properly signed certificate of origin issued by a government agency or duly designated entity in the country of origin. The certificate is issued following the submission of a sworn statement by the exporter and the producer, in the event they are not one and the same. A certificate of origin must always be accompanied by the underlying commercial invoice evidencing a transaction. If the invoice is issued by a third party not located in the country from where most of the goods are being exported, the exporter must indicate the name and relevant company information for this third party. Reexports within the Andean Community require the issuance of a new certificate of origin (plus a copy of the original certificate of origin). Certificates of origin are valid for up to 180 days following the date of issue. Whenever the customs authority in an Andean Community country doubts the authenticity of the information contained in a certificate of origin, or no certificate is produced within 15 days after the goods arrive at the port of entry, the officials can require that the importer put up a bond equivalent to the regular most-favored nation (MFN) duty as reported to the World Trade Organization (WTO). They may not, however, refuse entry of the goods or otherwise interfere with their importation. Challenges to the validity of a certificate of origin are forwarded to the designated agency in the country of export as well as the General Secretariat of the Andean Community in Lima. The agency in the exporting country then has 30 days to submit evidence of authenticity or otherwise clarify the matter. If it refuses to do so or its explanations are unsatisfactory, the matter is referred to the General Secretariat in Lima, which should make a determination as to what measures will have to be carried out in order resolve the issue. Any exporter or producer whose certificate of origin is determined to be fraudulent may be suspended from applying for new certificates for up to 18 months. In addition, the exporter or producer may also be subject to criminal and civil penalties that are called for by the exporting country’s laws. V. Common External Tariff In October 2002 the Andean Commission issued Decision 535, which contains the new CET for the Andean Community. Instead of the old four-tiered system, a new three-tiered system of 5, 10, and 20 percent was adopted in its place. The new CET is obligatory for Colombia, Ecuador, Peru, and Venezuela. Bolivia abandoned its old two-level tariff system and adopted the Andean Community CET in 2008. The Andean Community countries are allowed to charge no tariff on imported goods identified by the General Secretariat in Lima as not produced within the Andean subregion. Similarly, no tariff need be charged on imports of capital goods not produced within the Andean subregion


and listed in Annex II to Decision 535. Furthermore, the automotive sector regime that is applicable for Colombia, Ecuador, and Venezuela retains its own special tariff schedule as outlined in the Complementation Agreement for the Automotive Sector that came into effect on January 1, 2000. A 35 percent CET is levied on imported passenger vehicles, and a 15 percent tariff (reduced to 10 percent in the case of imports into Ecuador) is charged on buses and trucks imported from outside the Andean subregion. Pursuant to Andean Commission Decision 444, Colombia, Ecuador and Venezuela are allowed to charge up to a 5 percent duty on auto parts as well as imported complete knock down (CKD) kits of vehicles and motorcycles that are assembled in the subregion. Andean Commission Decision 535 contemplated that the new threetiered CET would come into effect by December 31, 2003. However, when it appeared that this deadline could not be met, Andean Commission Decision 577 extended the deadline for compliance until May 10, 2004. This deadline, in turn, was subsequently extended a number of times, the latest extension being found in Andean Commission Decision 695, which delayed full entry of the CET until October 30, 2009. Andean Commission Decision 535 specifically retained those provisions of the older Andean Decision Decision 370, which previously provided the rules for the Andean Community CET and that are not in conflict. Accordingly, still in effect is Article 5 of Decision 370, which permits a member state to derogate from its obligations to apply the CET on a specific product for a three-month period (renewable with permission from the General Secretariat in Lima) in response to an emergency. Although permission from the General Secretariat is necessary, a country may derogate unilaterally if the General Secretariat fails to make a determination within 15 days after a request is filed. Article 10 to Decision 370 also permits countries to apply import tariffs (if any) that are different from the CET if the goods are temporarily imported into an Andean Community country for processing and then re-exported to a non-member state. Whenever an Andean Community country feels that it has been prejudiced by a distortion caused by another member state’s failure to apply the CET, it can ask the General Secretariat for permission to apply corrective measures. The General Secretariat has 60 days to either approve or reject the request. The corrective measure can consist of either a compensatory tariff or the application of a specific rule of origin. Corrective measures will not be authorized, however, when the complaint of prejudice is premised on a 0 percent duty levied on inputs, as well as primary and capital goods not produced within the subregion, or when the member state that is the object of the complaint is Bolivia. Pursuant to Andean Commission Decision 371, the Andean Community maintains a variable tariff system for certain basic agricultural goods that are often subject to wide fluctuations in price on the international market. When the price of, for example, winter wheat, falls below the average international market price as measured over the preceding five years, the Andean Community countries will add an additional duty in order to bring the price up to the so-


called historical range. Similarly, a drop in the international price will allow the tariff to be reduced. This mechanism is designed to give Andean producers some level of predictability when making decisions on future production, and not be caught off guard by volatile swings in the costs of required inputs. Although the price band mechanism that reflects floor and ceiling prices is adjusted once a year, the actual tariffs may shift based on market price lists issued once every two weeks. Andean Commission Decision 669 issued in 2007 suspended mandatory application of the agricultural price band mechanism (no doubt in response to the commitments Colombia and Peru had made in conjunction with the free trade agreements both countries negotiated with the United States. VI. Other Import Regulations A. Customs �� Valuation The latest version of the Harmonized Tariff Schedule or Nomenclature (NANDINA) that is used by the Andean Community member states to designate, classify, and codify products is found in the Annex to Andean Commission Decision 653, which came into force on January 1, 2007. The NANDINA is based on the Harmonized Tariff Schedule (HTS) developed by the World Customs Organization headquartered in Brussels. Andean Commission Decision 571 came into force on January 1, 2004, and replaces Andean Commission Decisions Decisions 378 and 521, which previously established the methodology for calculating the value of goods imported into the Andean Community for customs purposes. Decision 571 underscores that for purposes of customs valuation, the Andean Community countries are bound by the Agreement Relative to the Application of Article VII of the GATT 1994, also known as the WTO Customs Valuation Agreement. There are six options that a customs service may use to establish the value of a product over which to levy the corresponding import duty and other relevant taxes. These six options (in descending order of application, although items 4 and 5 may be reversed at the request of the importer) are: 1. 2. 3. 4. 5. 6.

transaction value of the actual imported merchandise, transaction value of identical goods, transaction value of similar goods, deductive value, reconstructed value, or last recourse methodology.

As a general rule, costs incurred in unloading or engaging in any type of manipulation of the merchandise, once it reaches the customs territory of the country of importation, shall not be included in the good’s customs value. If the importer and/or buyer incurred no costs in the loading of the merchandise in the country of origin, its transport, or insurance, these will be calculated based on normal prices and included in the customs value of the merchandise. Any importer introducing merchandise into the customs territory of an Andean Community member state is normally required to submit either a hard


copy or electronic Andean Value Declaration (DAV) form, the latest facsimile of which is found in Resolution 1112 (as modified by Resolution 1137) issued by the General Secretariat in Lima in 2007. The DAV is completed and signed by the importer and/or buyer, although it can also be filled in and signed by an authorized legal representative (if national regulations so permit). The burden of proof for determining the actual value of a good, when there is a challenge to the declared value listed in the DAV and in supporting documentation, is on the importer and/or buyer or its authorized legal representative. Any determination as to whether a customs law has been broken and what the relevant sanction should be fall within the exclusive jurisdiction of the national customs legislation of the member state where the actual wrong was committed. Investigations of wrongdoing are also carried out by each member state’s customs service. Although the use of pre-shipment inspection services by private sector firms is permissible, these firms only have the authority to verify the price of a good in the country of origin but do not have the authority to make a binding determination as to the customs value of a good in the country of importation. While the Andean Community member states may create shared data banks that contain the prices of goods to facilitate studies or investigations, these cannot be used as binding reference prices that will result in the automatic rejection of an incompatible declared value for an item. These data banks can also be used to create a customs value based on the transaction value of identical or similar goods as the import, or based on reasonable criterion when no other established method of valuation is feasible (i.e., methodology of last recourse). The national customs services of the Andean Community countries are encouraged to exchange information and provide mutual assistance in order to, inter alia, combat fraud. Decision 571 creates an ad hoc Group of Government Experts on Customs Valuation under the jurisdiction of the Andean Committee on Customs Matters. Each Andean Community member state is entitled to one representative on the ad hoc group. B. Customs Procedures In 2007 the Andean Commission issued Decision 671 in an attempt to harmonize the customs regimes used by the four member states in view of the fact that none of them had yet adopted the World Customs Organization’s International Convention for the Simplification and Harmonization of Customs Regimes (also know as the Protocol of Amendment to the Kyoto Convention, as revised in 1999). Decision 671 covers all transactions and relationships that may arise between the customs service of each country and individuals or corporations involved in the permanent or temporary introduction, transfer, or export of goods to or from any Andean Community country. It specifically defines what is meant by “abandoned merchandise.” One of the things Decision 671 mandates is that the customs posts on either side of a common border should be open to conduct business at same time. All merchandise that arrives at an authorized customs post must be listed in the cargo manifest that the transport company or its representative is required


to submit (including electronically in advance). Weight errors of less than 5 percent will not be deemed to be an infraction. Physical inspection of shipments does not have to occur at the point of entry but may occur at the importer’s warehouse. Merchandise can be temporarily stored in authorized locations that can either be under the direct control of the customs service or privately owned for up to 30 days before the entry documents are formally submitted to customs. This is different from the regime that permits the warehousing of goods in an authorized public or privately owned customs deposit for at least one year. The new version of the Uniform Customs Document (DUA) found in Andean Commission Decision 670, along with supporting documents (such as a commercial invoice, Andean Declaration of Value, and a certificate of origin) must be filed either in hard copy or electronically as part of the entry process. Any physical inventory of merchandise must occur in the presence of the party that filed the DUA. The duty-free reimportation of goods is explicitly recognized by Andean Commission Decision 671 so long as certain conditions are met, including that the items have not undergone any type of transformation, manipulation, or repair while abroad, and any tax payments that should have been made if the item had not been exported are paid. The concept of temporary admission of merchandise duty-free for subsequent reexport in the same state is also recognized, although the particular customs service may require the posting of a bond. Similarly, the duty-free temporary entry of goods such as raw materials, inputs, parts, and even capital goods is permitted if they are intended for reexport after undergoing some type of transformation, modification or repair. The posting of a bond may also be required, however. Furthermore, replacement goods can be imported duty free. On the export side, goods may be sent temporarily abroad for improvement, assembly, or repair and then reimported upon payment of a partial tariff or duty free. The customs service is allowed to require the posting of a bond at the time the product is temporarily exported. C. Special Taxes and Licensing Requirements In addition to whatever import duty the Andean Community countries may charge over the ad valorem value of an imported product, each member state may also levy additional charges and taxes and require compliance with licensing and labeling requirements. Goods imported from fellow Andean Community member states may be exempt from these additional fees and licensing requirements. Andean Commission Decision 388 mandates that all goods exported within or from an Andean Community country are exempt from the payment of indirect taxes such as the value added tax (VAT) until they reach the country of final destination where they will actually be consumed. Accordingly, the Andean Community countries are required to have systems in place to reimburse indirect taxes that may have been paid on domestic or imported raw material, intermediate inputs, imported or domestic capital goods (if used exclusively to produce exports), and services used in the production, transport, or sale of an export product. Andean Commission Decision 599 and 600 (both modified by Decision 635) gave the Andean Community countries


until January 1, 2008, to harmonize their respective VAT and excise taxes with respect to scope of application and modalities of collection. 1. Bolivia Bolivia has a complicated set of charges that it levies on imported goods, which is partially attributable to the fact that, as a landlocked country, most imports must come in through other countries and be temporarily warehoused before they are inspected. Until 2008 Bolivia did not adhere to the Andean Community’s CET but had its own two-tiered external tariff system (with 0 percent for capital goods designated for industrial development). So-called luxury items such as cosmetics, expensive cars, liquor, and tobacco pay an additional excise tax. Imported insecticides must have sanitary certificates issued by the National Institute of Occupational Health, along with sales permits from the Vice Ministry of Rural Development, Agriculture, and Livestock as well as the Pest and Fertilizer Division of the National Service for Food Safety and Security. Import licenses are required for the importation of firearms, chemical products, and tobacco. Seeds and plants must have a certificate from the National Service for Food Safety and Security as well as a phytosanitary certificate issued in the country of origin and certified at a Bolivian consulate. Pharmaceutical products must be registered with the Ministry of Health. Labeling requirements for food products were established in 2003. Sanitary certificates from the country of origin are also required for imported food products. Used clothing, shoes, bedding, and rags may not be imported into Bolivia. An inspection fee equivalent to 1.92 percent of a product’s FOB value is levied at the port of entry. The relevant customs duty is then tacked onto the CIF value of the imported good. A customs warehouse fee that varies depending on volume, weight, and value of the imported good and how long it takes to remove the good must also be paid. A customs broker’s fee must be paid ranging from 2 percent above the CIF value for amounts under U.S.$10,000 to gradually decreasing percentages depending on the amount until a minimum of 0.5 percent on values over U.S.$100,000. The Bolivian customs service then adds a U.S.$50 to U.S.$60 charge per shipment to cover paperwork. Finally, the local Chamber of Commerce, Industry, and Construction levies a fee ranging anywhere from 0.03 percent to 0.04 percent over the product’s CIF value. Once all the fees have been added to the product’s original CIF value, the Bolivian government then charges its variable VAT, which currently averages around 13 percent. A special consumption tax is levied on so-called luxury items (e.g., automobiles (18 percent), cosmetics (30 percent), liquors (50 percent), and beer (60percent). 2. Colombia Licenses are required for the importation of most agricultural goods, poultry, used products (e.g., cars, clothing, and machinery), products that have a potential military application (e.g., firearms), chemicals that can be used to refine cocaine, and goods imported into the country by government agencies. Until June 1, 2004, all imports into Colombia had to first be registered with


Colombia’s Ministry of Commerce, Industry, and Tourism (MINCOMEX) prior to importation. Registration is now limited to a small group of items such as all agricultural products. A specified group of products the Colombian government has deemed to be “sensitive” (at last count some 272 subheadings found in NANDINA), must also be accompanied by an inspection certificate issued by a private sector international certification society (such as Veritas or Inchape) before they will be allowed entry into Colombia. Furthermore, certain goods imported into Colombia must also comply with technical and/or quality standards established by the Colombian Institute of Standards (INCOTEC) and require a certificate of conformity issued by the Superintendency of Industry and Commerce (a dependency of the Ministry of Economic Development) before MINCOMEX will approve an application for import registration. All pharmaceuticals, cosmetics, household insecticides, and processed food items must be registered and approved by the National Institute for the Surveillance of Food and Medicines (INVIMA). All goods imported into Colombia are levied the relevant Andean Community CET over their CIF value (unless they originate in countries with which Colombia has a free trade or other type of preferential market access agreement). Colombia’s VAT is then assessed on the CIF value of the good plus the relevant import duty. Since 2001 a customs service tax equaling 1.2 percent of an import’s declared FOB value is levied on all imports but for those goods originating in countries with which Colombia has a free trade agreement (which would include all the other Andean Community countries). 3. Ecuador All goods imported into Ecuador must be accompanied by an import license that can be obtained from the Exchange Department of the Central Bank. A certificate of conformity may also be required for certain products (e.g., automobiles, refrigerators, stoves, tires, etc.) indicating compliance with standards set by the Ecuadorian National Standards Institute (INEN) in order to obtain an import license number. A special import license is needed to import most agricultural products, processed foods, beverages, cosmetics, certain medical tools, electric generating sets, processed foods, telecommunication equipment, pharmaceutical products, and most forms of transport. Prior authorization from the Ministry of Defense is required to import weapons and related material. Used items such as clothing, tires, and vehicles may not be imported into Ecuador. All imports into Ecuador pay the relevant tariff that is levied against the CIF value of the particular merchandise plus a 0.5 percent tax for the Children’s Development Fund. There is also a 0.25 percent tax levied on the import’s FOB value for the Exports and Investment Promotion Corporation (CORPEI) plus an inspection fee up to 0.8 percent. Ecuador’s 12 percent VAT is charged against the CIF value of the imported item. Additional excise taxes are then tacked on for so-called luxury imports, cigarettes, alcohol, soft drinks, perfumes, as well as motor vehicles and aircraft.


4. Peru Import licenses have been abolished in Peru for almost all products, although they are still required for the importation of firearms and explosives, chemical precursors used in cocaine production, and ammonium nitrate fertilizer (which can be used to make bombs). Imported processed food products must be registered with the Food and Environmental Health Bureau (DIGESA), and animal and plant products must first receive a sanitary certificate from the Ministry of Agriculture before they can be imported into Peru. Peru issued a law in 2004 that requires that all products imported into Peru should bear a label in Spanish that includes the name of the product, country of origin, address of the exporter or importer or distributor, expiration date, conservation methods, weight in metrics, and hazards associated with use. Used clothing and shoes (unless donated), used tires, used cars more than five years old or buses and trucks more than two, and certain insecticides as well as toxic waste may not be imported into Peru. A special consumption tax ranging from 10 percent to 50 percent is added to the CIF value plus the relevant import duty for certain luxury imports. Peru’s 19 percent VAT then must be assessed against the product’s CIF value plus the relevant import duties and surcharges. There is also a customs valuation service fee of approximately U.S.$28 that must be paid. 5. Venezuela Advance approval from the Ministry of Health is required to import cosmetics, medical devices, and pharmaceuticals and can only be requested by the importer or local representative. Processed foodstuffs must first be registered with the Ministry of Health before they can be imported, and a license must be obtained from the Ministry of Food. Special certificates (including import licenses) from the appropriate ministry having jurisdiction are required for the importation of most agricultural products, firearms and explosives, and insecticides. Labeling in Spanish with specified information is mandatory for all imported food products as well as footwear, textile, and apparel products. Importation of used goods such as cars, tires, and second-hand clothing is prohibited. As of February 5, 2003, import currency certificates from the Exchange Administration Commission (CADIVI) are required for most imports and are granted to companies on a case-by-case basis only for products pre-approved by the Venezuelan government for import. On June 5, 2003, the Venezuelan government issued Decree 2444, which requires pre-shipment inspections for all imports by one of four authorized firms (i.e., Veritas, SGS, Cotecna, and Intertik). In Venezuela, the relevant import duty is calculated over the CIF value of the import. For the most part, Venezuela continues to adhere to the Andean Community’s CET structure, even though it withdrew from the Andean Community in 2006. In a limited number of cases, such as motor oil, Venezuela may impose a specific tax based on the weight of the product (including the


weight of the packaging). The Customs service then assesses a 1 percent fee on the CIF value of the products. Imports are also charged a 12 percent VAT. An additional 10 or 20 percent luxury tax (depending on the product) is assessed against the sum of the tariff, a 2 percent customs handling fee, and VAT tax on a wide range of imported goods. Items subject to the 10 percent luxury tax include liquor, tobacco products, jewelry, and vehicles valued at more than U.S.$22,000. The 20 percent luxury tax applies to vehicles over U.S.$44,000, pleasure boats, and furs. There is also a cumbersome customs clearance procedure that can serve as an effective non-tariff barrier because of its complicated nature. VII. Technical Norms In July 1997 the Andean Commission issued Decision 419, thereby deepening the process that began with Decision 376 in April 1995, which sought to create an Andean system for rule making, accreditation, demonstration, and certification of technical and measurement requirements. General guidelines are established for the adoption, harmonization, creation, publication, and diffusion of Andean norms throughout the entire Community. To date, some 88 Andean technical norms have been issued for various products as a result of a consensus reached by the national level organizations in each Andean Community country that are responsible for establishing technical norms. In addition, a network consisting of some 100 laboratories and certifying organizations has also been created throughout the Andean Community to assist in the evaluation of a product in order to ensure compliance with national technical standards. An Andean network of metrology has also been established. The purpose of Decision 419 is to eliminate unnecessary technical obstacles to intra-regional free trade as well as to encourage the improvement in the quality of the goods and services offered within the Andean Community. A procedure is established that allows countries to work towards eliminating technical barriers that are said to impede free trade. There is also an advance notification process whereby a government must inform its counterparts in the other member states of the adoption of any new technical norms and certification requirements in order to head off possible future impediments to intra-regional free trade. In June 2001 the Andean Commission issued Decision 506, which seeks to establish uniform rules for the recognition and acceptance of certificates that demonstrate compliance with technical standards for products sold within the Andean Community. Decision 506 is also intended to complement the harmonization process of the technical and measurement regulations of the Andean Community countries that was initiated by Decisions 376 and 419. Decision 506 simplifies means for evaluating compliance with technical norms and standards among the �� Andean Community member states. In particular, Decision 506 creates a data bank of technical norms that firms and individuals must comply with in order to sell their products in any member state of the Andean Community. The data bank (accessible through the Internet) also contains the names of the authorized organizations in each country from which the requisite certificates showing compliance with technical standards can be obtained. The idea (once technical norms are sufficiently harmonized) is that


eventually a certificate issued by one of these bodies should be automatically accepted throughout the Andean Community, thereby avoiding the need to repeat the certification process in each country where a product will be introduced. In June 2003 the Andean Commission issued Decision 562, which contains directives for the preparation, adoption, and application of technical regulations within the Andean Community that are compatible with the WTO Agreement on Technical Barriers to Trade. The purpose of the directives are to avoid technical regulations becoming an impediment to intra-regional free trade. As a general rule, technical norms should not restrict trade in excess of what is required to achieve a legitimate objective, and there should always be a preference to utilize those options that will have the least detrimental economic impact on users and on intra-regional trade. Technical norms should be based on the actual use of a product and not on its descriptive characteristics or design. New technical norms that are developed or adopted should ideally be based on actual or soon to be implemented international norms, unless these are deemed to be inefficient or inappropriate for achieving legitimate objectives because of climatic or geographical factors or technological limitations. Andean governments are required to provide each other, through the General Secretariat in Lima, at least 90 days’ advance notice of their intention to adopt a new technical norm in order to solicit feedback. Technical norms of an emergency nature may be adopted, but notice must be served on the General Secretariat in Lima within 24 hours thereafter. Feedback may still be offered by the other Andean governments. Emergency measures should only remain in effect for as long as required but, in no case, may exceed 18 months. Decision 562 requires that Andean governments must eliminate tecnical norms when the circumstances or goals that gave rise to them no longer exist, or those goals can be met through measures that have a less restrictive impact on trade. VIII. Sanitary and Phytosanitary Measures Andean Commission Decision 515 was issued in 2002 and modified as well as updated Decision 328, which appeared a decade earlier and sought to establish an Andean sanitary system for agro-industrial goods. The older decision had sought, among other things, to harmonize sanitary and phytosanitary regulations that affect trade in agricultural and food products among the Andean Community members states and develop a regional mechanism to coordinate responses to threats to animal and plant health as well as food safety. Decision 515 seeks to improve the competitiveness of the agro-industrial sector within the Andean Community so as to enhance its international competitiveness. It also seeks to ensure that the subregion’s sanitary and phytosanitary norms are consistent with rules established by international treaties and organizations such as the WTO and the Codex Alimentarius Commission. Decision 515 creates an Andean Agro-Industrial Sanitary Technical Committee (COTASA) that is responsible for issuing technical opinions on animal and plant health and advising the Andean Commission and the General Secretariat of the Andean Community in Lima on sanitary and phytosanitary issues.


Andean sanitary and phytosanitary measures are those issued by the Andean Commission or the General Secretariat, following consultation with COTASA. In addition, national norms are applicable to the cross-border trade of animals and plants to the extent they have been registered by the governments with the Andean Register of Sanitary and Phytosanitary Norms. National sanitary and phytosanitary measures that have not been registered may only be enforced temporarily in response to an emergency resulting from sudden outbreaks of plague or sickness. Any country utilizing a non-registered measure must inform the General Secretariat in Lima within three days after the publication of the emergency laws in the country’s official gazette. When notifying the General Secretariat, the government utilizing the emergency measures must include a preliminary technical report justifying their use. The General Secretariat then has 30 days within which to authorize use of emergency sanitary and phytosanitary measures or require a modification in how they are being applied or order immediate cesation of their use. Article 20 to Decision 515 requires that an importing member state of the Andean Community must accept the sanitary and phytosanitary tests, treatments, and procedures of another Andean Community or third country as the equivalent to its own regime, to the extent that the goverment in the other country can adequately demonstrate that its system provides an adequate level of protection. Similarly, Article 25 requires that any sanitary and phytosanitary certificates, permits, and documents issued pursuant to Andean Community regulations must be recognized as valid by all the Andean Community countries. Article 63 in Decision 515 suggests that any time the governments in the Andean region draft new sanitary or phytosanitary rules, they consult their respective private sectors. IX. Safeguard Measures Chapter IX of the Cartagena Agreement (as it was modified by the 1987 Protocol of Quito and the 1996 Protocol of Trujillo) contains the safeguard measures an Andean Community member can impose on imports originating in another member state. Interestingly, Chapter IX does not specify if these measures may consist of either temporary tariff hikes and/or quantitative restrictions. The implication is that both are acceptable. Under Article 78 of the Cartagena Agreement, the General Secretariat can approve the imposition of a temporary safeguard measure by one Andean Community country on goods from a fellow member state to redress a general balance of payments problem so long as the measure is non-discriminatory. Andean Commission Decision 389 establishes regulations for applying Article 78 safeguards and makes clear that they may only be imposed in conjunction with measures designed to confront a balance of payments crisis. When the safeguard is imposed without prior authorization to address an “emergency” situation, Article 78 requires that this action must immediately be reported to the General Secretariat, which can either ratify the measure, revoke, or otherwise modify it. If the balance of payments crisis goes on for more than one year, the General Secretariat can recommend to the Andean Commission that


it negotiate other appropriate remedies with the government in question so as to allow the removal of the safeguards. Safeguards cannot restrict imports to less than the average volume imported during the preceding three years. There is a preference that the actual safeguard measure be an import duty, unless the situation is so dire that quantitative restrictions are necessary. Pursuant to Article 79 to the Cartagena Agreement, if adherence to the Andean Community’s intra-regional free trade scheme is causing actual harm or threatens to cause serious harm to a significant sector of a country’s economy, the General Secretariat may approve imposition of a safeguard measure against imports from other Andean Community countries in a non-discriminatory fashion. The safeguard can never restrict imports, however, to an amount less than the average imported during the twelve months preceding the sudden surge in imports. In addition, safeguard measures against Bolivia and Ecuador can only be imposed for actual harm coming from those countries and only when the General Secretariat has actually made such a determination. Under Article 79A to the Cartagena Agreement, safeguard measures can be imposed without immediate General Secretariat authorization on imports from another Andean Community country(ies) so as to prevent a sudden disturbances to national production. These measures must be temporary and non-discriminatory in nature, and the General Secretariat must be informed within 60 days after they have been imposed. The General Secretariat reserves the authority to ratify, modify, or revoke these types of measures. In no event may a safeguard limit the amount of imports to a level that is less than the average amount imported during the three years prior to the sudden surge that threatens national production. Article 80 to the Cartagena Agreement permits the imposition of temporary safeguard measures as a result of sudden surges in imports caused by a currency devaluation in one Andean Community country, which creates a serious imbalance in customary trade patterns in the country seeking the measure, but only after approval has been given by the General Secretariat. The decision made by the General Secretariat can then be reviewed by the Andean Commission. The safeguard can last as long as the negative effects created by the currency devaluation persist. If the General Secretariat delays more than 30 days in making a determination after a petition has been filed, the government petitioning for the safeguard measure can impose it unilaterally subject to subsequent ratification, modification, or revocation by the General Secretariat. In no case should the safeguard restrict the importation of goods to a level that is below that which existed prior to the devaluation. Pursuant to Article 81 to the Cartagena Agreement, safeguard clauses are not applicable to imports of goods produced within the context of the sectoral industrial development programs. Safeguard measures that specifically concern imports of agro-industrial goods are found in Article 72 to the Cartagena Agreement and can be imposed in order to raise the price of imported items to a level that is equal to that


prevalent in the domestic market, so long as it does not interfere with domestic consumer demand. Andean Commission Decision 452 contains the procedure for the imposition of safeguard measures by at least two or more Andean Community countries on similar or directly competing imports originating outside the Andean Community that are actually harming or threaten to cause serious harm to an “important proportion” of a sector of production within the Andean Community. Safeguard measures can also be imposed in the event that the imported good poses actual or threatened serious harm to intra-Andean trade flows, and the petition to impose them is supported by producers representing at least 40 percent of the suppliers to the market of each country that desires to impose the safeguard (or 30 percent in the specific case of Bolivia). Those Andean countries that do not have their own domestic safeguard regime may use the procedures and remedies found in Decision 452. Petitions to impose safeguard measures pursuant to Andean Commission Decision 452 on imports from non-Andean Community countries are filed with the General Secretariat in Lima, which makes the initial determination of actual harm or threat of serious harm as a result of a sudden surge in imports. The General Secretariat is required to notify the WTO Committee on Safeguards and the relevant foreign governments as well of the initiation of an investigation into the merits of a petition. Safeguard measures can consist of either tariffs or quota restrictions, although there is a preference to use tariffs as against fellow WTO member states. Interestingly, the initial petition to request imposition of a safeguard must be accompanied, inter alia, by a restructuring plan on the part of the petitioners that is designed to improve the competitiveness of the sector or industry that is seeking temporary protection. Andean Commission Decision 452 contains different procedures for handling petitions depending upon whether the imports originate in a WTO member state and whether the import consists of textiles and apparel. The General Secretariat may authorize the provisional imposition of a safeguard in the event the petition establishes exigent circumstances and/or irreparable harm. Any importer of a product subject to a provisional measure may continue to import the item but upon posting of a bond to cover the increased tariff rate while the investigation continues and before a final determination is made. In cases involving imports from WTO member states, the General Secretariat is required to consult with them before imposing a safeguard. Andean Commission Decision 452 mandates that safeguard measures on imports from non-Andean Community countries cannot be imposed for longer than three years but can be renewed once for up to six years. Safeguard measures imposed for longer than a one-year period are subject to annual reviews and a possible reduction in the additional tariff that has been imposed as a safeguard or (where relevant) an increase in the import quota. As a general rule, safeguards cannot be reimposed on products within a time period that represents less than the total period they were in effect or a minimum of two years (whichever is greater). Safeguards will not be imposed on goods from


WTO members that are deemed to be developing countries if they contribute to less than 3 percent of the total imported into the Andean Community (and the total imported for that particular product, regardless of origin, represents less than nine percent of global imports). X. Unfair Trade Practice Remedies Andean Commission Decision 283 contains the norms for addressing dumping or subsidized exports originating outside the Andean Community that actually cause or threaten to cause significant harm to national production of a like or similar good intended for intra-regional export, or the antidumping or countervailing duty is to be applied by two or more Andean Community member states. It should be pointed out that the threat of significant harm can include significant delay in the initiation of national production. The General Secretariat in Lima carries out the investigation at the request of a government or companies with a “legitimate interest” and determines the dumping margin or level of subsidy. During the investigation stage, the General Secretariat may seek evidence and information from the relevant authorities in the country of export as well as directly from producers, exporters, importers, or consumers. In addition, these parties (including domestic importers and consumers) have the independent right to present information or allegations to the General Secretariat. The concept of confidential information is recognized. Investigations should normally last no longer than four months (or six months at the latest). The General Secretariat has the authority to partially or fully rescind an antidumping or countervailing duty on its own or at the request of the relevant entities or interested parties, if the reasons that gave rise to its imposition have been modified or ended. The General Secretariat can authorize a government to impose provisional antidumping and compensatory duties or require importers to post a bond or make a cash deposit in conjunction with the filing of the initial petition. Andean Commission Decision 456 contains the rules for preventing or correcting distortions to free trade created by the dumping of goods that originate within the Andean Community. It replaces the relevant provisions that were previously found in Decision 283 (that are now limited to handling dumping and subsidized exports originating outside the Andean Community). Any individual or company with a legitimate interest, as well as any Andean government, can petition the General Secretariat in Lima to impose an antidumping duty on imports from another Andean Community member state. The petitioners must submit evidence that the practice is actually causing or threatens to cause serious harm to a sector of national production that primarily serves either the domestic market or exports intra-regionally. The General Secretariat carries out both the initial investigation and then establishes the dumping margin upon which the punitive duty is based. The General Secretariat is authorized to dismiss any petition asking that an antidumping duty be imposed on a product that represents less than 6 percent of the total imported of like or similar items (or less than 15 percent, if the petitioners are from two or more countries). The company(ies) that files an antidumping petition must represent at least half of the producers of the same or like product within an


Andean Community country or contribute to at least half of the intra-regional trade of that same or similar product. The General Secretariat is authorized to accept offers of compromise from the exporters said to be engaged in dumping practices within the Andean Community and suspend the proceedings, so long as there has first been a preliminary determination of dumping and actual or threatened harm. Antidumping duties imposed under Andean Commission Decision 456 can remain in effect for as long as three years. The General Secretariat is authorized to dismiss, as de minimis, petitions in which the dumping margin is under 5 percent. At the same time, the General Secretariat has the discretion to impose an anti-umping duty that is less than the dumping margin, so long as the tariff that is levied is sufficient to counteract the actual or threatened damage to the producer(s) seeking protection. Andean Commission Decision 457 contains the rules and regulations to overcome distortions created to an Andean economy as a result of the importation of products originating from another Andean Community country that have been unfairly subsidized. As was true of its antidumping counterpart, Decision 457 replaces those provisions of Decision 283, which governed intra-Andean Community trade in subsidized exports (but retains them for subsidized imports originating in non-Andean Community countries). Petitions alleging subsidized exports that actually harm or threaten to harm a sector of national production or that impact on intra-regional trade flows are filed with the General Secretariat in Lima. The General Secretariat conducts both the initial investigation and then imposes an appropriate countervailing duty that can remain in effect for no longer than three years. If a subsidy represents less than 3 percent of a product’s ad valorem value, it is considered de minimis, and a countervailing duty will not be imposed. Similarly, a countervailing duty will not be imposed if the target country represents less than 6 percent of the total imported of that product (or, if more than one Andean country is being targeted for allegations of improper application subsidies, 15 percent). The firm(s) that file a petition alleging subsidized exports must represent at least half of the producers of the same or like product within an Andean Community country or contribute to at least half of the intra-regional trade of that same or similar product. Interestingly, subsidies related to transportation of goods originating from Bolivia may be overlooked given its geographical isolation. XI. Services In June 1998 the Andean Commission adopted Decision 439, thereby establishing a general framework of principles for gradually liberalizing the exchange of services among the member states of the Andean Community. Decision 439 seeks to eliminate legal restrictions that impeded the creation of a single Andean Common Market for all services but air transport or those whose provision is reserved by law for government agencies. In addition, Decision 439 excludes from coverage the acquisition of services by governmental bodies or public sector entities. Furthermore, special and differential treatment was extended to Bolivia and Ecuador, both of which had the option to temporarily


exempt themselves from obligations imposed on the other member states and/ or enjoy longer phase-in periods for the liberalization of services. Trade in services is defined as the supply of a service using any of the following modes: 1. from the territory of an Andean Community member state into the territory of another member state, 2. within the territory of a member state to a consumer from another Andean Community country, 3. through the establishment of a commercial presence by a service supplier of an Andean Community country in the territory of another member state, and 4. by individual service providers from one Andean Community country traveling to the territory of the other member states to offer their services. Unlike the situation in the WTO or MERCOSUR, the Andean Community adopted the North American Free Trade Agreement (NAFTA) approach whereby the ability to offer services within the Andean Community is liberalized except for those services specifically found in special lists of exceptions (or excluded up front within the body of Andean Commission Decision 439). These lists provided an inventory of services that negotiators from the Andean countries were under an obligation to gradually reduce in annual rounds coordinated by the General Secretariat in Lima. The thought was that by December 31, 2005, the bulk of the exempt services would have been eliminated from these lists so as to allow the implementation of cross-border trade in services within the Andean Community. This deadline for implementing the cross-border trade in services was subsequently extended until November 15, 2006. In order to facilitate the move to liberalization, Decision 439 required each member state that may have already opened up particular services to providers from any other country in the world to extend that same treatment on an MFN basis to service providers from any Andean country. Each Andean Community country is also required to recognize the licenses, certifications, professional degrees, and accreditation granted by another member state. Decision 439 further subjects the Andean Community countries to a standstill provision that prevented them from adding any new restrictions to service providers that may not have already been in existence when Decision 439 came into effect on June 18, 1998. The ability of a service provider to offer its services in another Andean Community country is limited to individuals who permanently reside within the territory of any Andean Community member state, or to corporations that are incorporated, authorized to do business, or domiciled within the territory of a member state and actually carry out significant activities therein or in the Andean Community. The General Secretariat is given the ultimate discretion to determine the origin of a service provider. There is a general obligation not to impose restrictions on cross-border payments and capital transfers,


except when authorized by the General Secretariat to respond to an actual or threatened serious balance of payment crisis. In 2001 the Andean Commission issued Decision 510, which contained an updated inventory of all measures that restricted the free trade of services among the Andean countries. The Andean Community governments were under an obligation to meet annually to gradually reduce and eventually eliminate most of these measures by December 31, 2005. Andean Commission Decision 634 subsequently extended this deadline until November 15, 2006, and gave Bolivia the right to request preferential treatment that might include longer phase-in periods or temporary exceptions than otherwise applicable for the other Andean Community states. Andean Commission Decision 659 issued in 2006 acknowledged that cross-border trade in financial services would be the subject of a special set of rules that would be the subject of future negotiations. Also left to future negotiations was the percentage of “national” programming for television that could be fulfilled by producers from other Andean Community countries. Decision 659 also acknowledged the need to create communitarian norms with respect to accreditation and recognition of licenses, certifications, and professional titles in order to effectively implement the cross-border offering of professional services within the Andean Community. Furthermore, it required that those member states that continued to impose nationality restrictions on the ownership of radio and television stations allow up to 40 percent of the shares to be held by investors from other Andean Community countries. In May 1999 the Andean Commission issued Decision 462, which contains the rules for liberalizing the offering of telecommunication services within the Andean Community. Decision 462 aims to eliminate national restrictions on the offering of telecommunication services by providers from anywhere within the Andean Community, including measures that affect access to public telecommunications transmissions networks and services. Decision 462 further contemplated that as of January 1, 2002, the Andean countries would have eliminated all measures restricting access to all telecommunication services, including basic local, national, and international long distance telephony and mobile phone services. Given their least-developed status, Bolivia and Ecuador are both allowed to temporarily exempt specific service sectors from the general liberalization scheme affecting the telecommunications sector. In order to take advantage of the liberalization of access to the public tele-communications transmission networks and services provided under Andean Commission Decision 462, suppliers must obtain an authorization certificate from the designated national authority wherein they desire to provide their services. These national authorities generally have up to 90 days to either approve or reject granting an authorization certificate (unless local law requires participation in tenders or special competitive bidding procedures). The decision-making process should be transparent and non-discriminatory. Governments are required to insure that suppliers receiving an authorization certificate do not engage in uncompetitive practices such as: crossed subsidy activities; using information obtained from competitors for uncompetitive


purposes; and not facilitating to other service suppliers the technical information about the essential installation and pertinent commercial intelligence they need in order to provide their services. In addition, public telecommunications service providers are obliged to inter-connect their networks with those of certified cross-border suppliers under timely and non-discriminatory conditions; with inter-connection fees that are transparent and reasonable as well as cost-oriented and take economic viability into consideration; and, if requested, at points additional to the network termination points (although subject to charges that reflect the cost of constructing required additional facilities). Andean Commission Decision 638 issued in 2006 establishes a framework of basic rights for consumers that utilize telecommunication services within the Andean Community that the member states are required to take into consideration when drafting national legislation. These include rights of privacy, access to telecommunication services at reasonable cost, freedom to chose carriers and not be required to purchase unwanted services as a condition of access to services, transparent billing practices, and free access to emergency and information services.

CHAPTER 7

FOREIGN INVESTMENT CLIMATE WITHIN THE ANDEAN COMMUNITY AND BUSINESS OPPORTUNITIES I. Legal Regime for Foreign Investment In March 1991 the Andean Commission adopted Decision 291, superseding earlier decisions regarding foreign investment. Decision 291 essentially leaves up to each member state the right to decide its own legal regime for foreign investment. At a minimum, however, Decision 291 mandates that: there should no longer be any legal difference between foreign or domestic capital (except for areas of national strategic importance as stipulated in each country’s legislation); foreigners are generally free to repatriate capital and remit profits at will; any laws requiring prior authorization or registration of foreign investments must be abolished; and the requirement that a certain percentage of a foreign company’s shares had to be held by Andean nationals is eliminated. The only significant requirements that Decision 291 retains from the previous Andean regimes for foreign investment is the registration of technology licenses and a prohibition that such licenses contain restrictions on the export of the goods manufactured under a license in a member state. As far back as 1971 the Andean Pact had a convention to avoid double taxation of individual or corporate income tax by persons or entities domiciled in any of the member states and authorized the execution of this type of agreement between member states and third countries. Andean Commission Decision 578 issued in 2004 updated these rules and added provisions designed to better prevent tax evasion by, inter alia, enhancing cooperation among the tax authorities of the different Andean Community member states. As a general rule, income tax is only paid in the Andean Community country that is the source of the gain. Real property taxes on gains are paid in the member state where the property is located. Transportation companies pay corporate income tax in the member country where they are domiciled. Royalty payments on such things as intellectual property are taxed in the member state where the right of use is actually utilized or is authorized. Interest payments are taxable in the country where the obligation arose and they were registered as paid. Profit taxes on dividends are paid in the Andean Community member state where the company that distributed them is domiciled.

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II. Intellectual Property Rights Protection The current legal norms for the protection of intellectual property rights in all four countries of the Andean Community are found in two decisions issued by the Andean Commission in the early 1990s and two subsequent decisions. In theory, decisions are directly applicable within each member state’s national legislation upon their publication in the Gaceta Oficial del Acuerdo de Cartagena (unless the particular decision itself provides for a later date). In the event of conflicting or non-existing domestic legislation, Andean Community law should take precedence without the need to resort to the national legislatures for enabling or corrective legislation. In practice, however, there have often been delays in the full implementation of decisions of the Andean Commission, and the area of intellectual property norms has not been an exception. It should also be pointed out that there is no central Andean Community registry for the filing of applications to protect intellectual property rights, nor is there a centralized enforcement authority. However, the databases of the national registries for intellectual property rights are now inter-connected electronically. Pursuant to Andean Commission Decision 345, any person or corporation that has created or otherwise obtained a new plant variety as a result of scientific research will enjoy the exclusive right to produce and commercialize said plant for a period of 20 to 25 years in the case of vines, forest trees, and fruit trees (including their rootstock), and 15 to 20 years for other species. In order to qualify as “new” the plant variety must be novel, homogenous, distinguishable, stable, and assigned a name that constitutes their generic designation. That individual or corporation shall be granted an obtainer’s certificate from the relevant government registry in the country where it is located. Priority rights will be recognized for up to 12 months for purposes of registration with the relevant agency in another Andean Community country. Andean Commission Decision 351 contains the rules governing copyright and related protection for books, records, movies, computer software, and other forms of literary, artistic, and scientific works (including radio, TV, and audiographic productions). Registration is not a pre-condition to enforcement of a copyright. Without prejudice to the author’s rights to a preexisting work and prior consent, translations, adaptations, transformations, or arrangements of other works are considered creative works distinct from the original. At a minimum, protection of copyrights is offered for the life of the author plus an additional 50 years following the author’s death. When the author is a corporation, the term of protection is 50 years from the making, disclosure, or publication of the work. Each Andean state may offer longer periods of protection, however, if they so choose. Reproduction of copyrighted works is permitted for educational purposes with no direct or indirect profit-making motive. Interestingly, so-called pipeline protection is offered to works expressed in writing and as compilations as well as computer software and databases created prior to the entry into force of Decision 351. Andean Commission Decision 391 establishes a Common Regime on Access to Genetic Resources, thereby regulating access to the richly diverse biological


and genetic resources of the Andean countries and any by-products derived from them. Human genetic resources and their by-products are expressly excluded from coverage. Decision 391 is rooted in the principle recognized by the Convention on Biological Diversity signed in Rio de Janeiro in June 1992 that all genetic resources and their by-products that originate in one of the Andean Community member states belongs to that country, and its government has the right to regulate access to those resources in a way that benefits society as a whole. Decision 391 contains procedures for obtaining access to genetic resources and their by-products, including uniform application rules, registry requirements, and provisions that must be included in any access contract to be signed with the relevant national authority. Anyone performing access activities without the respective authorization (including making use of by-products) can be punished with a fine, confiscation of material, or imprisonment, and the violator is also subject to a civil lawsuit and damages. The Andean Community countries will not recognize any rights, including intellectual property rights, over genetic resources, by-products, or synthesized products and associated intangible components that were obtained or developed through an access activity that violates the provisions of Decision 391. In December 2000 Andean Commission Decision 486 came into force, thereby replacing Decision 344 from the early 1990s that had previously contained the communitarian norms for the protection of industrial property rights such as patents, utility models, industrial designs and secrets, trademarks, and geographical name designations. Decision 486 was designed to make the Andean regime for the protection of industrial rights more compatible with the World Trade Organization (WTO) Trade Related Aspects of Intellectual Property Rights (TRIPs) agreement. In addition, by replacing Decision 344, the later Andean Commission decision removed what had been a major irritant in U.S.-Andean Community relations. Decision 486 adds new aspects of intellectual property that were not protected in the previous legislation from the early 1990s, such as layout designs for integrated circuits and provisions for controlling the importation of products bearing pirated trademarks. It also extended the protection afforded industrial designs from eight to ten years. In recognition of the Common Regime on Access to Genetic Resources found in Decision 391, Article 3 to Decision 486 emphasizes that the granting of patents on inventions that have been developed on the basis of material obtained from the biological and genetic heritage of the Andean region, together with the traditional knowledge of its indigenous, Afro-American, or local inhabitants, shall be subordinate to relevant international, Andean Community, or national law. In addition, any living thing as found in nature, natural biological processes, or biological material (including the genome or germ plasma of any living thing) cannot be patented, nor can plants, animals, and essential biological processes for the production of plants or animals (other than non-biological or microbiological processes). Patents are protected for 20 years counting from the filing date. Compulsory licenses may be granted to The full text of the Convention on Biological Diversity is available at http://www.cbd. int/convention/convention.shtml.


an interested party if a patent holder fails to have adequate justification for not exploiting it in an Andean Community country within three years after it was granted (or four following submission of an application for recognition). Remuneration for use of the license shall be set at an adequate level by the relevant national authority. Compulsory licenses can also be granted in the public interest (such as to correct anticompetitive practices), in response to an emergency, or for national security considerations. Protected trademarks under Decision 486 specifically include “sounds and smells” as well as the distinctive shape of product packaging or wrappings. Trademarks are protected for up to ten years from the date granted and may be subsequently renewed for successive ten-year periods. A mark holder may not prevent importation of a product that has been released into the stream of commerce in another country. Trademark registration can be cancelled at the request of an interested party if the holder has, without justification, failed to exploit it within three years of the filing of a petition for cancellation. The concept of well-known or notorious trademarks that are distinctive and do not require registration in order to be protected is recognized under Decision 486. Registered geographical name designations (which can also include expressions, images, or signs) that evoke a particular country, region, locality, or place are protected for up to ten years and may be renewed for successive ten-year periods. Decision 486 required that the Andean Community countries enact legislation (if it did not already exist) to punish trademark counterfeiting with criminal penalties in addition to any civil remedies. In terms of international treaties affecting intellectual property rights, all the Andean Community countries are members of the WTO and therefore subject to the TRIPs Agreement. Because all the Andean Community member states are deemed to be developing countries, their TRIPs obligations did not become effective until January 1, 2000. Furthermore, all the Andean Community countries have ratified the following international conventions: (1) Paris Convention for the Protection of Industrial Property (i.e., patents and trademarks); (2) the Berne Convention for the Protection of Literary and Artistic Works (i.e., copyrights); and (3) the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations. Colombia, Ecuador, and Peru have ratified the Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms, the World Intellectual Property Organization (WIPO) Copyright Treaty, and the WIPO Performances and Phonograms Treaty. Colombia and Ecuador are parties to the Patent Cooperation Treaty. Meanwhile, Colombia and Peru have ratified the Treaty on the International Registration of Audiovisual Works. Only Peru is a signatory to the Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite as well as the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration. No Andean The full text of all these treaties and agreements (but for the Convention for the Protection of New Varieties of Plants) can be accessed through the Web site of the World Intellectual Property Organization (WIPO) at http://www.wipo.int/treaties/en.


Community member state has yet signed the Patent Law Treaty, the Trademark Law Treaty, the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure, the Hague Agreement Concerning the International Registration of Industrial Designs, or the Madrid Agreement Concerning the International Registration of Marks and its protocol. Finally, Peru is the only one of the four remaining Andean Community member states that has still not signed the International Convention for the Protection of New Varieties of Plants. III. Free Movement of Labor In order to facilitate the movement of persons within the Andean Community, Andean Commission Decision 397 created a Uniform Andean Migration Form that is filled in every time an individual enters or leaves the territory of an Andean Community country. In June 2001 the Council of Andean Ministers of Foreign Relations issued Decision 503, which eliminated the need for tourists who are Andean nationals (including third-country residents) to use a passport or obtain a visa in order to travel within the Andean Community. Decision 503 lists alternative forms of identification that may be utilized in lieu of passports. Decision 503 also calls on the Andean Community governments to harmonize their immigration laws, particularly with respect to the entry of students, businesspeople, investors, and artists. A uniform passport model for all the Andean Community countries to adopt was issued through Council of Andean Ministers of Foreign Relations Decision 504. A number of decisions were issued beginning in 2003 that replaced earlier ones intended to facilitate the free flow of workers among the member states of the Andean Community. The new regulations were intended to support the goal first expressed at the XII Andean Presidential Council of June 2000 to turn the Andean Community into a fully functioning common market, something which remains an aspiration. Decision 545 of the Council of Andean Ministers of Foreign Relations creates a framework for gradually implementing the ability of workers in one Andean Community country to live and work in another. Excluded from its mandates are government workers. All workers (including seasonal migrant workers�� ) �� who find themselves working in an Andean Community member state for more than 180 days from the country they are normally domiciled are entitled to protection from discrimination based on nationality, race, sex, beliefs, social condition, or sexual orientation. They also have the right to form unions and bargain collectively and can freely transfer their earning to their country of origin and only be taxed once in the country where they actually worked. In order to receive these protections, workers must register with the respective Labor Migration Office in the country to which they have moved. In addition, all employment relationships must be evidenced by a contract. In The full text of the various Acts of the International Convention for the Protection of New Varieties of Plants, as revised at Geneva (1972, 1978, and 1991) is available at http:// www.upov.int/en/publications/conventions.


the case of migrant workers, this contract must provide adequate provisions for lodging and transportation costs. Council of Andean Ministers of Foreign Relations Decision 545 allows an Andean Community country to impose safeguard restrictions to impede workers from the other member states to enter its territory for a six-month period in response to employment problems in a given location of the country or sector of its economy. Venezuela was allowed to impose a safeguard restriction on cross-border migrants for up to one year (and the other countries could do the same for migrants from Venezuela). The withdrawal of Venezuela from the Andean Community in 2006, however, has now rendered this exception a moot point. Notice of the intention to impose a restriction on cross-border migration has to be filed with the General Secretariat of the Andean Community in Lima and sent to all the other national governments. The General Secretariat has the right to modify or suspend the restriction as well as authorize its extension for an additional six-month period. Since Council of Andean Ministers of Foreign Relations Decision 545 came into force in 2003, long-term workers from an Andean Community country have the unrestricted right to move to any other where they have a contract of employment. This right extends to seasonal migrant workers, for a maximum of 180 days, who are also not required to obtain any type of visa. Furthermore, the Andean Community governments are required to consider all nationals of the Andean Community as their own for purposes of fulfilling laws that mandate how much of a firm’s employees must be made up of nationals. Andean Community governments must also allow nationals of all the other member states that find themselves within their respective national territory the right to change their legal status there without the need to go home. Finally, Decision 545 requires that the Andean Community governments must allow all undocumented workers from anywhere within the Community that find themselves within their national territory the right to legalize their status. Decision 583 of the Council of Andean Ministers of Foreign Relations is designed to guarantee workers and their dependents from any Andean Community country temporarily living or working in another access to social security benefits and recognition of rights accrued under the social security system of any of them. These social security benefits include medical services, pensions, survivor death payments, and worker’s compensation. The only workers excluded are airline or ship personnel (who fall under the jurisdiction of the country wherein the employer is headquartered), diplomats, and other types of foreign government workers. The actual benefits that are provided, however, are those normally offered in the country where they are being given (and not those that might be offered in the country of origin). Any Andean Community country that provides medical attention to a migrant worker or the worker’s family has the right to seek reimbursement from the Andean country where that worker originates and has paid into the local social security system. For purposes of the vesting of pensions, Council of Andean Ministers of Foreign Relations Decision 583 mandates that any contributions paid into the


social security fund of any Andean Community country (or any other country that has a bilateral or multilateral social security agreement with an Andean state) by an Andean Community national are to be recognized by all the other governments. Governments are free to establish similar reciprocal recognition agreements in the case of private pensions or other social security plans. Andean Community governments are also required to establish mechanisms for transferring funds to pay social security benefits earned in one Andean Community country but paid out in another. All social security payments paid in a country, other than the one where contributions were made for purposes of vesting, are to be paid out in full in the local currency equivalent. Social security payments cannot be reduced based on the fact that the recipient is living in a country with a lower cost of living. The social security documentation valid in one Andean Community country is valid in all the others without the need to recur to consular legalization. Any disputes that may arise between a foreign worker or beneficiary and a national social security administrator shall be resolved under the administrative procedures established by the law in the country paying out the benefit. Complaints about the failure to apply the provisions of Decision 583 can be referred to the General Secretariat of the Andean Community in Lima. Decision 584 of the Council of Andean Ministers of Foreign Relations establishes a legal framework to protect the health and welfare of workers within the Andean Community. The end goal is to eventually harmonize the labor protection laws in all the Andean Community countries by starting with basic norms designed to reduce workplace hazards. Decision 584 encourages the Andean Community governments to develop and implement protective measures that include government, employer, and worker input. In particular, each workplace should collaboratively develop an integral safety plan with employee participation, and employers should pay for their workers’ periodic medical check ups. Decision 584 recognizes the right of workers to demand that the relevant government agencies carry out workplace inspections in their presence, as well as to stop working whenever they have a reasonable belief that they are at risk of imminent danger. A minimum working age of 18 is set for all employment activities deemed to be unhealthy or dangerous to the normal physical and mental development of a minor. Decision 548 of the Council of Andean Ministers of Foreign Relations establishes a formal mechanism of mutual cooperation in terms of consular assistance and protection for migrants by the diplomatic representatives of any Andean Community government no matter where they find themselves in the world. Decision 548 strengthens the provisions of a 1911 treaty that authorized the diplomatic representatives of any Andean country to extend assistance to nationals of another if that country did not have a local diplomatic presence in the particular foreign territory. This assistance includes providing information on local laws and legal counsel to defend an individual as well as his or her interests in that third country.


IV. Environmental Protection With an estimated 25 percent of the planet’s biodiversity, the Andean region has a particular interest in protecting the environment and encouraging the implementation of viable plans for sustainable development. As far back as 1983 the Andean Commission adopted Decision 182, thereby creating an Andean food security system that had an important environmental protection component. Decision 182 focused on securing access to basic foodstuffs through increased productivity and less reliance on imports. At the same time, Decision 182 recognized the need to preserve the environment through a more rational use of the soil, forests, flora, and fauna. It also heightened awareness of the need to protect water-collection basins, including through agreements involving two or more Andean Community nations. Finally, it established mechanisms for protecting the sea. In June 1998 the Andean Commission issued Decision 435, which creates an Andean Committee of Environmental Authorities (CAAAM). The idea behind the CAAAM is to ensure that environmental concerns are incorporated into the policies as well as the social and economic strategies of the Andean Community. The CAAAM is made up of one representative from the national authority in each Andean Community country that is responsible for environmental protection. Andean Commission Decision 435 requires that the CAAAM advise and support the General Secretariat of the Andean Community in Lima on all matters related to the creation of a uniform subregional policy on the environment, as well as oversee implementation and compliance with decisions issued by the Andean Commission and other communitarian norms related to the environment. In this regard, the CAAAM is authorized to formulate proposals for the sustainable use of natural resources; provide support to develop a subregional plan for environmental protection; help design a subregional structure to better protect the Andean region’s rich biodiversity; and recommend and promote ways member states can cooperate in the drafting of environmental protection laws. The CAAAM is also expected to, inter alia, promote full compliance by all the Andean Community countries with international environmental treaties they have ratified, as well as devise and promote strategies that result in the exchange of scientific and technological knowledge on sustainable development among the member states. Furthermore, the CAAAM is expected to exchange information with the Andean Committee on Genetic Resources created by Andean Commission Decision 391 and the Committee on Experts of Plant Varieties created through Andean Commission Decision 345. On July 3, 2001, in response to a request made at the XI Andean Presidential Council that met in Cartagena, Colombia, two years earlier, the CAAAM issued a Plan of Action on the Environment and Sustainable Development for the Andean Community. It was originally contemplated that the plan of action would be implemented over a five-year period and was divided into four major subject areas: 1. conservation and sustainable usage of the region’s biodiversity, 2. environmental quality,


3. the relationship between trade and the environment, and 4. the adoption of uniform Andean positions in international fora. The plan of action mandated the inclusion of environmental considerations when creating and implementing programs and activities associated with the Andean economic integration process as well as the development of a common Andean position at multilateral trade talks such as at the WTO or Free Trade Area of the Americas (FTAA). The latter was intended, in part, to avoid environmental considerations from being used as a veiled form of protectionism to impede trade flows from the Andean subregion. Under the plan of action, the Andean Community would develop a sustainable development policy for the mountainous regions within each member state and facilitate communication and coordination of policy between the environmental protection agencies in each country and their counterparts involved in intellectual property protection, common agricultural policies, science and technology, as well as border development. In July 2002 the Council of Andean Ministers of Foreign Relations issued Decision 523, thereby establishing a Regional Biodiversity Strategy for the Andean Tropical Countries based on the work carried out by the CAAAM throughout 2001 and involving 500 persons representing a broad cross-section of Andean civil society. The Council of Andean Ministers of Foreign Relations instructed CAAAM to develop a Plan of Action and a Portfolio of Projects in order to implement the Regional Biodiversity Strategy. The Regional Biodiversity Strategy is intended to facilitate joint actions among the member states, indigenous communities, the private sector, the scientific community, and civil society in terms of conservation and the sustainable use of biodiversity; provide guidance to multilateral lending agencies as to the priorities of the Andean Community; and strengthen the effectiveness of national biodiversity strategies. In 2004 the InterAmerican Development Bank approved grants for three pilot projects identified by the CAAAM as supporting the goals of the Regional Biodiversity Strategy and related to (1) agro-biodiversity, (2) bio-security and biotechnology, and (3) equitable distribution and enhanced appreciation of the benefits of biodiversity. In June 1998 the Andean Commission issued Decision 436, which has an important impact on efforts to protect the environment within the Andean Community. Decision 436 establishes harmonized requirements and procedures for registering and controlling the use of chemical pesticides intended for agricultural use so as to prevent and minimize health and environmental damages. The rules apply to all chemical pesticides and their active ingredients wherever they originate in the world. Excluded are natural or genetically modified biological agents used to control pest outbreaks such as parasitoids and natural predators. All manufacturers, developers, importers, exporters, packagers, and distributors of chemical pesticides used in the agricultural sector must be registered with the Ministry of Agriculture (or its specifically designated agent) in at least one Andean Community member state before the product can be introduced into that market. The only major exception is in response to a national


emergency, when non-registered chemical pesticides can be imported on a temporary basis. Once the product is registered nationally, the party can then attempt to secure Andean Community registration through that same national authority. The General Secretariat of the Andean Community in Lima is in charge of maintaining the subregional registry. If at least three governments accept registration of the chemical pesticide, it can be considered to have a subregional registration and can be sold in the countries that approved its registration. Andean Commission Decision 436 contains additional rules for the bottling and packaging of chemical pesticides, and it creates a centralized clearinghouse mechanism to facilitate the exchange of information on chemical pesticides among the Andean Community governments. Interestingly, Article 22 to Decision 436 creates an affirmative obligation on the part of chemical pesticide registrants to inform the national authorities in the Andean Community of any health or environmental-related prohibitions or limitations with respect to sales or importation that their registered product has been subject to in other parts of the world. V. Competition Policy Andean Commission Decision 284 contains the uniform rules for preventing or correcting distortions to competition in trade caused by export restrictions. Andean Community governments or firms located in an Andean Country with a “legitimate interest” in the matter can petition the General Secretariat in Lima to request that it investigate restrictions imposed on exports by another Andean Community country that causes actual or threatened damage to national production (or impedes its establishment) as well as interferes with its own export capabilities. Export restrictions can take the form of export duties and quotas. Restrictions are allowed, however, on the export of traditional products as permitted by international agreements as well as essential foodstuffs that are in short supply in the country imposing the measure. In most cases, the only remedy that the General Secretariat can provide the complaining party(ies) upon conclusion of an investigation that establishes actual or threatened damage is to order the removal of the export restriction. The Andean Commission issued Decision 608 in 2005, thereby replacing Andean Commission Decision 285 of 1991, which contained the previous rules for promoting and protecting free competition within the Andean Community. Decision 608 seeks to ensure an efficient regional marketplace for all economic actors and the protection of consumers. It rests upon the principles of nondiscrimination, transparency, and due process of law. Decision 608 is directed to conduct that occurs: 1. within the territory of one or more member states and that produces an impact in another member state(s), and 2. within the territory of a non-Andean Community country but that produces an impact in at least two or more member states. Any activities that do not fall within one of the two categories listed above (e.g., actions that occur within only one member states and only have an impact


therein) are subject to the domestic legislation of each country and its relevant law enforcement institutions. There is a three-year statute of limitations to make a complaint based on cross-border anticompetitive behavior. As a general rule, the following are deemed by Andean Commission Decision 608 to undermine free competition and therefore are prohibited: 1. agreements that fix direct or indirect prices or other sales conditions; 2. agreements that restrict the offer or curtail the demand for goods and services; 3. agreements that divide a market for goods and services; 4. agreements that impede or otherwise create obstacles for actual or potential competitors to access or remain in the market; or 5. agreements that establish or coordinate positions, abstentions, or result in public bidding contests and other competitions related to government procurement. Similarly, Decision 608 deems the following activities to be an abuse of a dominant position in the market and therefore, as a general rule, prohibited: 1. predatory price fixing; 2. the unjustified demand, imposition, or establishment of a requirement of exclusive distribution of goods and services; 3. the subordination of the execution of a contract to supplementary obligations that, by their nature or commercial use, bear no relation to the objective of the contract; 4. the adoption of unequal conditions in comparison to third parties in analogous situations, with respect to offerings and similar operations, thereby putting the party in a disadvantageous position; 5. unjustified denials to satisfy requests for purchase or acquisition, or to accept offers to sell or to make available goods or services; 6. inciting third parties not to accept the delivery of goods or services, to impede their being offered or acquired, or the refusal to sell primary material or inputs, or offer services, to others, and 7. any conduct that impedes or otherwise makes it difficult for actual or potential competitors to access or remain in the market for reasons other than economic efficiency. Decision 608 considers that one or more economic actors are deemed to have a dominant position in a market whenever they have the opportunity to substantially restrict, affect, or distort the conditions for supply or demand in that market, without the ability of other actual or potential competing economic actors or consumers to overcome that situation at that moment or in the future. The Andean Committee in Defense of Free Competition that forms part of the General Secretariat in Lima has the authority to carry out an investigation into accusations of anticompetitive behavior made by an appropriate competition policy or economic integration institutions at the national level, companies, individuals, consumer organizations, or other relevant bodies. The General


Secretariat can request the relevant administrative bodies at the national level with jurisdiction to enforce competition policy to provide assistance with the investigation. The competition law of the country wherein an investigation is being carried out provides guidance as to the procedures to follow, authorities from which to obtain warrants, and rules of evidence. Investigations should normally be completed within a 135-day period. An opportunity is afforded all the interested parties to respond to the initial findings of the General Secretariat, based on the initial investigation, in writing and at a public hearing. It is possible for the accused party to reach an understanding with the General Secretariat to remedy anticompetitive conduct during the course of the investigation. During the period of investigation, the General Secretariat may issue a preliminary injunction to avert imminent danger of irreparable harm or one difficult to rectify and, if thought necessary, may require the party seeking the injunction to post a bond. If the investigation reveals that a party or parties have engaged in uncompetitive conduct, the General Secretariat in Lima has the authority to order the immediate cessation of such behavior and may impose remedial measures and other appropriate sanctions (including fines). Actual enforcement of the measures or sanctions imposed by the General Secretariat is made by the government of the country wherein the company is domiciled, has its principal place of business in the Andean region, or where the negative impact was felt.

0

20

40

60

80

100

120

19

92

28.6 7.7%

93

19

29.7 9.8%

94

19

34.3 9.9%

95

19

37.9 12.7%

96

19

45.4 10.4%

Source: Secretaría de la Communidal Andina (Lima).

In Billions of U.S.$ F.O.B.

97

19

47.7 11.7%

99 19

43.2 9%

00 20

To Rest of the World

98

19

38.9 13.9%

57.4 9.1%

01 20

51 11.2%

03 20

55 8.9%

04 20

To Andean Community

02 20

49.7 10.7%

72.1 10.3%

05 20

100.9 9%

Figure 7.1. Global Andean Community Exports & Percentage Remaining Within the Andean Sub-Region 1992–2005


0

10

20

30

40

50

60

70

80

92

19

26.9 7.8%

93

19

28.8 9%

94

19

30.1 11%

95

19

37.7 13%

96

19

36.7 13.4%


In Billions of U.S.$ C.I.F.

97

19

43.7 13.5%

99 19

35.4 11.6%

00 20

39.8 13.8%

From Rest of the World

98 19

45.4 11.5%

01 20

44.8 13.2%

03 20

38.7 14.5%

04 20

From Andean Community

02 20

39.6 13.9%

53.6 15.9%

05 20

70.5 14.5%

Figure 7.2. Total Andean Community Imports & Percentage Originating Within the Andean Sub-Region 1992–2005


0

0.5

1

1.5

2

2.5

3

3.5

1.1

92 19

0.6

0.5

93 19

0.7

0.9

1.6

94 19

0.5

1.2

1.7

95

19

0.9

1.4

2.3

96

19

0.8

1.3

2.1


In Billions of U.S.$ F.O.B.

97

19

1

1.3

2.3

99 19

0.9

0.8

1.7

00

1.3

0.9

2.2

20

Colombian Exports

98 19

1.1

1.4

2.5

01 20

1.7

0.8

2.5

03 20

0.7

0.7

1.4

Venezuelan Exports

02 20

1.1

0.8

1.9

Figure 7.3. Bilateral Colombian–Venezuelan Trade 1992–2005

04 20

1.6

1

2.6

05 20

2.1

1.12.1

3.2



VI. Opportunities for Foreign Direct Investors The free trade area established under the Andean Community offers foreign companies the opportunity to set up their manufacturing or service operations in the country that provides them with the greatest competitive advantages in terms of such factors as fiscal incentives, access to raw materials, inputs, and energy, infrastructure development, labor rights, worker productivity, and use that country as a springboard into the markets of the other Andean Community countries. Among the first foreign multinationals to take advantage of the opportunities of the Andean Community’s free trade area was Ford. Beginning in 1993 Ford more than doubled its exports of Venezuelan-made vehicles to Colombia and also used its Venezuelan base to make inroads into the Ecuadorian market. General Motors and Toyota utilized their Venezuelan assembly plants to pursue similar strategies. A Venezuelan steel maker and auto-parts manufacturer also used the market opening provided by the Andean Community’s free trade area in the early 1990s to increase sales in Colombia and weather the recession and drop in demand in its home market. Warner-Lambert, a U.S. manufacturer of pharmaceuticals and confectionary products was another foreign firm that was among the first to take advantage of the Andean Community’s free trade area in order to streamline its Andean operations by closing manufacturing facilities in Peru, Ecuador, and Venezuela and utilizing its Colombian factory to serve the entire regional market. Other foreign multinationals that chose to make Colombia their base of operations for serving the other Andean Community countries during the 1990s were Siemens (the German electronics company), Merck (the New Jersey-based pharmaceuticals giant), Hoescht & Bayer (the German pharmaceuticals company), Schering-Plough (another important U.S. pharmaceuticals firm), Suzuki Motors of Japan, Hyundai of Korea, and Mercedes-Benz of Germany. At the start of 2008 the U.S.-based Kimberly-Clark announced plans to invest U.S.$60 million in a plant in Peru to make diapers and tissue paper that would be sold domestically and exported throughout South America. The new investment contemplated a substantial expansion of the company’s Peruvian workforce as well. The free trade agreements that all the Andean Community countries now have with MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) and that some have with Chile and Mexico, as well as the free trade agreement Peru has with Canada and the United States, allow these Andean countries to be used as springboards into those markets as well. At the same time, inputs can be imported into these Andean countries duty free to be incorporated in manufactured goods that can then be sold at lower J. Wade, Trade Pacts: Best Laid Plans, 30 Bus. Latin Am. 2 (Feb. 6, 1995). A. Thomson, Venezuela/Colombia: The Grass is Greener, 31 Bus. Latin Am. 2, 3 (July 1, 1996). K. Dermota & N. Maldonado, Colombia: A Base of Operations, 29 Bus. Latin Am. 5 (Aug. 22, 1994).


cost domestically or exported abroad. Similarly all types of capital goods can be imported duty free into these Andean countries. The Andean Trade Preference and Drug Eradication Act (ATPDEA) currently provides duty-free access into the U.S. market for most Bolivian, Colombian, and Ecuador exports. Although Colombia signed a free trade agreement with the United States in 2006, this agreement has yet to be ratified by the U.S. Congress. In June 2008 Canada and Colombia also concluded negotiations for a free trade agreement that also awaits ratification. The Andean Community countries also enjoy duty-free access for the vast majority of manufactured and some agricultural and fish products into the European Union under a special General System of Preferences (GSP) program for the five Andean countries (including Venezuela). Interestingly, the European Union was the most important source of foreign direct investment in the Andean Community during the 1990s. In order for goods that qualify under the GSP program for Andean countries to enter the European Union duty free, they must fulfill certain rules of origin requirements. The good must either originate in whole from the country of export, or any foreign primary product inputs must be substantially transformed there so as to change tariff classification heading. There is a 5 percent de minimis rule on foreign primary product inputs (although this is not applicable to textiles, apparel, and footwear). A third option, which is required for certain products even if they may otherwise fulfill the substantial transformation rule, is that of fulfilling a specified local content percentage. In general, inputs from another Andean country are deemed “local.” The Andean Community is currently involved in talks with the European Union to replace the unilateral GSP program with a bilateral Economic Association Agreement similar to what the European Union has with the Caribbean Common Market and Community (CARICOM) and is also negotiating with Central America. A third round in the negotiations was held in April 2008. The agreement seeks to strengthen the political dialogue between the European Union and the Andean Community, deepen efforts at cooperation to eliminate asymmetries between and within participating states, and establish a bilateral free trade area in goods and services. The two blocks are also negotiating rules that will impact on government procurement, intellectual property, competition policy, and cross-border investment flows. A. Andean Trade Promotion Act The Andean Trade Promotion Act (ATPA) was signed into law by then President George H.W. Bush in December 1991 and became operative on July 2, 1992, when Bolivia and Colombia were formally designated as ATPA beneficiaries. Ecuador was designated in April 1993, while Peru became an Institute for the Integration of Latin America and the Caribbean, Andean Report No. 2, 40 (2005). These large investment inflows from the European Union were primarily the result of the privatization of the telecommunications sector in Peru and the electricity sector in Colombia.


ATPA beneficiary in August of that year. ATPA arose out of U.S. concern over drug exports from the Andean countries and was designed to encourage alternatives to coca cultivation and production by offering broader access to the U.S. market. ATPA’s preferential tariff arrangement for the import of goods into the U.S. market from the four beneficiary countries was set to expire on December 4, 2001. Under ATPA, goods grown, produced, manufactured, or substantially transformed so as to achieve a new identity in one or more of the four beneficiary countries could enter the United States duty free so long as they were exported directly to the United States. Furthermore, as long as 35 percent of the U.S. Customs appraised value of a product reflected the direct cost of local materials and processing done in any one of the four ATPA countries or the 24 Caribbean Basin Economic Recovery Act (CBERA) plus Puerto Rico and the U.S. Virgin Islands, it was also able to enter the U.S. duty free. In addition, as much as 15 percent of the 35 percent threshold could be made up of inputs produced in the United States (other than Puerto Rico or the U.S. Virgin Islands). Goods that underwent minimal processing or were packaged in the ATPA countries for reexport to the United States were not accorded duty-free treatment under ATPA. In addition, among the goods specifically excluded from dutyfree entry into the United States were most textiles and apparel, canned tuna, certain types of petroleum and petroleum products (a major exclusion given the large petroleum reserves of most of the Andean countries), many kinds of leather products, watch parts, rum, and most types of footwear. While most leather products were not eligible for duty-free entry into the United States, items such as leather handbags, luggage, and clothing were subject to a 20 percent reduction in the regular most-favored nation (MFN) tariff. Interestingly, ATPA excluded from duty-free entry several types of products that are allowed under CBREA (namely rum and certain types of sugar, including syrups and molasses). However, ATPA beneficiaries did not need to submit a “Stable Food Production Plan” to export beef and allowable sugar, as is required from CBERA countries, to ensure that food production and the nutritional level of the population will not be adversely affected by export production.

The CBERA countries currently include: (1) Antigua & Barbuda, (2) Aruba, (3) the Bahamas, (4) Barbados, (5) Belize, (6) the British Virgin Islands, (7) Costa Rica, (8) Dominica, (9) Grenada, (10) Guyana, (11) Haiti, (12) Jamaica, (13) Montserrat, (14) the Netherlands Antilles, (15) Panama, (16) St. Kitts and Nevis, (17) St. Lucia, (18) St. Vincent and the Grenadines, and (19) Trinidad and Tobago. Costa Rica and Panama will leave once their respective free trade agreements with the United States come into force. United States International Trade Commission, Annual Report on the Impact of the Andean Trade Preference Act on U.S. Industries and Consumers and on Drug Crop Eradication and Crop Substitution (First Report) 9 (1994). ATPA countries were also not subject to restrictions on exports of ethyl alcohol from non-local feedstock as are the CBERA countries.


B. Andean Trade Promotion and Drug Eradication Act Although ATPA did lapse in December 2001, the U.S. Congress retroactively approved its benefits through the new ATPDEA that took effect in August 2002. That meant that importers who had paid the duty on goods entered after ATPA lapsed and before ATPDEA took effect were entitled to refunds. ATPDEA also added new categories of goods that were previously excluded under ATPA, including petroleum and its derivatives, watches and watch parts, and certain products made from leather (including handbags, luggage, flat goods, work gloves, and clothing). By far the most significant addition under ATPDEA, however, is the preferential access offered for certain textile and apparel goods. Still excluded from ATPDEA (as was true under the former ATPA) are rum and tafia, canned tuna, and above-quota imports of certain agricultural products such as sugar, syrups, and other sugar containing products. One goal that the Andean countries were unable to achieve with the ATPDEA, however, was the inclusion of Venezuela as a beneficiary. ATPA’s rules of origin were carried over into the ATPDEA. Although imports from the eligible Andean countries under the ATPDEA are exempt from the GSP competitive need and country-income restrictions, they are still subject to safeguards and measures designed to combat unfair trade practices (such as anti-dumping and countervailing duties).10 In addition, agricultural products remain subject to applicable food safety requirements such as sanitary and phytosanitary restrictions administered by the US Animal and Plant Health Inspection Service. In order for apparel products to be imported into the United States duty-free under ATPDEA, they must comply with special and fairly stringent rule of origin requirements in terms of the sourcing of the yarn, fabric, and where the assembly and sewing operations as well as stamping and dying are carried out. In general, the fabric must usually be sourced in the United States, although the actual sewing and assembly can take place in one or more eligible ATPDEA countries. However, if the fabric is made from llama, alpaca, or vicuña hairs, the fabric can be sourced in an Andean country. On the other hand, apparel assembled in one or more ATPDEA countries made from fabric sourced anywhere else in the world is also eligible so long as the fabric or yarn used to make it were deemed to be in “short supply” in the United States and eligible for duty-free entry under the North American Free Trade Agreement (NAFTA).11 Another alternative for using ATPDEA fabric is to petition the U.S. 10 Under the GSP program, products that surpass a specified level of imports into the United States, whether in absolute terms (U.S.$9 million in 1999) or constitute a certain percentage of overall imports into the United States (usually more than 50 percent), are said to have exceeded “competitive need” limits and are no longer eligible for preferential tariff treatment. In addition, countries whose per capita gross national product puts them in the category of a “high income country” as defined by the World Bank, will also lose eligibility under the GSP. 11 Yarns and/or fabrics, which are deemed by the U.S. Committee for the Implementation of Textile Agreements (CITA) to be in short supply, are posted on the Web site of the U.S. Commerce Department. When NAFTA came into effect, the list included fine-count


president to declare that the imported clothing made from it cannot be timely produced in sufficient quantities in the United States and that the amount imported will not exceed a specified annual ceiling.12 Special rules apply for women’s brassieres. In general, the only textiles that may be imported duty free into the United States from an ATPDEA country are those that are certified as traditional by a competent national authority, and the Office of the U.S. Trade Representative accepts that certification. This usually means hand-made or artisan loomed textile products (as well as qualifying apparel) that incorporate strictly traditional designs. There is also a special rule for textile luggage. ATPDEA added new criteria the president of the United States must annually take into account so as to allow a country to become and remain a beneficiary.13 ATPDEA was originally set to expire on December 31, 2006. This date was chosen on the understanding that the negotiations for the FTAA should have concluded by then and implementation of the pact already under way, thereby allowing the preferences granted under ATPDEA to be folded into the hemispheric free trade agreement. Given the collapse of the FTAA negotiations by the end of 2003 and the failure of the U.S. Congress to ratify free trade agreements that had been negotiated with Colombia and Peru (let alone the absence of any agreements with Bolivia and Ecuador) by ATPDEA’s original expiration date of December 31, 2006, a lame duck session of the Republican-controlled Congress approved a six-month extension through July 1, 2007. The new Democratic-controlled Congress extended that deadline, in turn, to February 2008. It was subsequently extended for another ten months until December 31, 2008. VII. Opportunities in the Transportation Infrastructure Sector One of the most significant impediments to economic integration in the Andean region has always been the poor transportation infrastructure systems that traditionally have linked the countries of the Andean Community. Part of the explanation for this lies in a mountainous terrain that not only isolates population centers between countries, but also isolates communities within national boundaries as well. The Andean Community has long been aware of the serious impediment to closer economic links and increased trade flows among cotton knitted fabrics for certain apparel (primarily underwear), linen, silk, cotton velveteen, fine male corduroy, Harris tweed, certain woven fabrics made with animal hairs, certain lightweight high-thread-count poly-cotton woven fabrics, and certain lightweight high-threadcount broad woven fabrics used in the production of men and boys’ shirts. 12 Beginning October 1, 2002, the ceiling for the first year was set at 2 percent of the total of apparel as measured in square meter equivalents that was imported from the entire world in the preceding 12-month period. That percentage will rise by one percentage point every year until it reaches 5 percent on October 1, 2006. 13 In addition to the old requirements of meeting the criteria for U.S. narcotics cooperation certification and providing protection of internationally recognized workers’ rights and intellectual property, the four Andean countries are now also required to demonstrate a commitment to undertake specific obligations under the WTO and participate in the FTAA process; take steps to become a party to and implement the Inter-American Convention Against Corruption (something the United States has not even ratified yet); ensure transparency in government procurement; and take steps to support U.S. efforts to combat global terrorism.


the member states posed by the region’s poor transportation infrastructure and has attempted to address the issue within the context of the regional economic integration process. A. Andean Community Decisions on Transportation Issues Andean Commission Decision 257, issued in 1989, was the first significant attempt to establish a communitarian norm for facilitating the transport of cargo by Andean transportation companies from one Andean Community country to another, or to and from an Andean country and a non-member state (while passing through an Andean country). Decision 257 was replaced by Andean Commission Decision 399 in 1997. Decision 399 requires that each Andean Community country recognize the drivers’ licenses issued by the other member states. The decision establishes uniform procedures under which a properly insured company legally established in one of the Andean Community states can seek authorization to transport cargo to and from as well as through the other member states. Decision 399 also details the rights and legal responsibilities of international transport firms and their employees as well as the shipper and recipient. A similar legal regime as that found in Decision 399 also exists for the surface transport of passengers from one Andean Community country to another as well as through the territory of any others and is included as part of Andean Commission Decision 398 (as modified by Andean Commission Decision 561 with respect to the technical condition and age of the equipment).14 Andean Commission Decision 467 lists what are considered infractions that may be committed by a company authorized to engage in the international surface transport of goods and appropriate sanctions that may be imposed by the relevant national authority where the infraction took place. Andean Commission Decision 290, issued in March 1991, established an Andean Insurance Policy for International Surface Transport whereby any transportation company authorized to transport persons or things between or through the Andean Community countries does so under an insurance policy that has regional coverage. Andean Commission Decision 288, issued in March 1991, opened up ocean and river shipping within the territorial waters of the Andean Community countries to carriers from both within the Andean region and even carriers from non-Andean Community member states. Andean Commission Decision 314 (subsequently modified by Andean Commission Decision 390) backtracked somewhat on this initial, seemingly very liberal policy affecting the maritime industry. In the later Decision 314, Ecuador reserved the right to restrict the transport of Ecuadorian petroleum products to its national carrier. Decision 314 also made clear that the Andean Community’s “open seas” policy did not 14 It is important to emphasize that the Andean Pact decisions regulating passenger and cargo surface transport do not authorize the pick up and drop off of passengers or cargo wholly within a member state. Any such right to provide domestic service by companies from another Andean country is contingent upon what that particular country’s domestic regulation provides. At present, most of the Andean countries restrict domestic service to national carriers.


override domestic cabotage requirements but was limited to traffic between the Andean Community countries or between the Andean countries and nonmember states. Furthermore, Decision 314 emphasized that any rights given to carriers from non-member countries was contingent on the principle of reciprocity (i.e., foreign carriers could freely transport goods to and from one Andean country to another member state, so long as the foreign shipping line’s country of origin or regional bloc afforded Andean shipping companies this same privilege). Interestingly, Decision 314 also called on the member states to make their domestic legislation more flexible with respect to registration of ships, including permitting the use of flags of convenience and so-called second registrations. In conjunction with the move to liberalize the crossborder trade in services within the Andean Community, Andean Commission Decision 659 of 2006 makes reference to the fact that cabotage restrictions on the maritime and fluvial transport of goods between ports within an Andean Community member state by shipping lines from any other member state are to be eliminated as of October 30, 2007. At the same time, Decision 659 points out that Ecuador retains its restrictions on the transport of petroleum products by boat to its national carrier. Andean Commission Decision 331 issued in March 1993 (and subsequently modified by Andean Commission Decision 393) governs contracts that contemplate the use of inter-modal forms of transport. Decision 331 recognizes the concept of contracting with an Inter-Modal Transport Operator who takes goods under its custody and ensures its final delivery using different forms of transportation. Decision 331 spells out the requirements (including liability disclaimers and limitations, jurisdictional clauses, and choice of law) that a Contract for Inter-Modal Transport involving cargo originating and/or destined for one of the Andean Community countries must contain. Such a contract may also be used for goods originating in or destined for a nonAndean Community country as well. Decision 331 provides basic rules of legal responsibility for inter-modal transport service providers. Any company wishing to be designated an Inter-Modal Transport Operator for any Andean country must register with the relevant national organization that has authority over inter-modal transportation services. Decision 331 also calls for the creation of a Council on Physical Integration, which is given authority to oversee the effective implementation of the decision. Andean Commission Decision 582 issued in 2004 replaces Andean Commission Decisions 297, 320, 360, and 362, which previously dealt with the provision of passenger, cargo, or mail air transportation services (including charters and scheduled flights) both within the Andean Community or between an Andean Community country and non-member state. The member states of the Andean Community recognize the right of air transportation companies incorporated and actually doing business in any Andean country to fly over their respective air spaces and to land at any airport within the Community.15 15 An airline company is deemed to be actually doing business in the country of incorporation when its administrative offices and its principal operations are conducted in that


In addition, they also recognize the right of regularly scheduled carriers to transport passengers, cargo, and/or mail from the country where they are incorporated and discharge them in any other Andean Community country and vice versa. Furthermore, regularly scheduled air carriers incorporated and actually doing business in any Andean Community may also pick up passengers, cargo, and/or mail in any other member state and transport them to any other Andean Community country (i.e., so-called fifth liberty rights). These latter three rights may also be extended to passenger charters so long as they serve cities not serviced by regularly scheduled flights, or they do not threaten the economic viability of the regularly scheduled service. The Andean Community member states are free to make up their own individual rules with respect to cargo and mail charters. The Andean governments are also free to negotiate the extension of “fifth liberty” rights to third countries. Andean Commission Decision 619 establishes a uniform set of basic rights and obligations of air transportation providers and consumers within as well as to and from the Andean Community. Andean Commission Decision 617 (as subsequently modified by Andean Commission Decision 636) replaces Andean Commission Decision 477, which first recognized the concept of international customs transit of goods irrespective of origin transported by air, water, and/or road from one member state of the Andean Community to another, or from one member state to a country outside the Andean Community (or vice versa) but passing through the territory of one or more Andean states. International customs transit also contemplates the concept of cargo going from one point to another within the same Andean country but passing through the territory of another member state. Any goods being transported through the territory of an Andean state accompanied by a declaration of international customs transit included in the Uniform Customs Document (DUA) shall be exempt from paying any duty or taxes by that country’s Customs Service. When cargo is shipped by surface transportation, the transport company must use highways that are part of the official Andean System of Roads or otherwise designated for international customs transit. In general, customs inspections at border crossings in intermediate countries should be limited to insuring that the identification numbers on containers or packaging match that in the accompanying paperwork, all the documentation is in order, and that there are no visible signs of forced opening. If there is any suspicion of irregularities, the cargo can be physically inspected. If an irregularity is proven, permission to continue will be denied, and sanctions will be imposed as per the laws of that country. Transport companies involved in international customs transit are required to post a bond or other financial guarantee to cover any possible duties or taxes that may be owed. B. Specific Transportation Infrastructure Improvement Projects The revival of the Andean Community’s free trade area in the early 1990s country, the crews are either licensed or their licenses have been explicitly recognized by that country, and the airline exercises actual operational and technical control over its fleet, and is not simply a lessee.


served as the catalyst for a number of important infrastructure projects. One of them was a new highway connecting the border towns of San Cristobal in Venezuela and Cucutá in Colombia to accommodate the doubling in bilateral Colombia-Venezuelan trade. Each country was required to build the portion of the road on its side of the border. About half the revenue to build the Venezuelan side came from the Andean Development Corporation or Corporación Andina de Fomento (CAF). Private investors supplied the remainder of the capital and, in return, became concessionaires with the right to charge tolls to recoup their initial investment and for future maintenance costs. Another transportation infrastructure project deemed a “high priority” for the Andean Community as part of the plan to create a fully inter-connected Andean trunk highway system, was the construction in the 1990s of an allweather paved road from the Bolivian border town of Desaguadero high in the altiplano to the Peruvian seaport of Ilo. The highway from La Paz to Desaguadero had earlier been funded with monies provided primarily by the Inter-American Development Bank. The Peruvians constructed their more extensive portion of the new highway from the Bolivian border to Ilo with loans from the CAF and other multilateral lending agencies. Since the launch of the Initiative for the Integration of Regional Infrastructure in South America or Iniciativa para la Infraestructura Regional de Sur América (IIRSA) in 2000, major cross-border transportation infrastructure projects in the Andean Community are now developed and implemented under the auspices of IIRSA. VIII. Energy Integration The Andean Commission issued Decision 536 in 2000 designed to establish a general framework for the inter-connection of the electrical grids of the Andean Community member states and the exchange of electricity. Decision 536 followed the Agreement for the Regional Interconnection of the Electrical Systems and Commercial Exchange of Electricity signed by Colombia, Ecuador, Peru, and Venezuela in 1999. That previous agreement committed the regulatory agencies in each of the signatory states to establish guidelines for harmonizing their respective regulatory frameworks on electricity transmission. Decision 536 rests on a number of fundamental principles that are applicable to Colombia, Ecuador, and Peru. As a result of Andean Commission Decision 639, these principles also encompass Bolivia since 2006. Those principles include: 1. a general prohibition on maintaining discriminatory prices for electricity destined for the domestic market and that directed to foreign markets, as well as engaging in any other type of discriminatory practice related to the demand or offer of electricity; 2. guaranteeing free access to international interconnection lines; 3. insuring that the physical use of inter-connections will based on a coordinated, market-oriented, and economically rational dispatch, which may be independent of commercial contracts for the purchase and sale of electricity; 4. insuring competitive conditions in the electricity market, with prices and rates that reflect efficient economic costs, avoiding dis-


criminatory practices and abuse of dominant market position; 5. allowing short-term international transactions for the sale or purchase of electricity; 6. promoting the participation of private investment in the development of the infrastructure for the transmission of electricity via international interconnections; and 7. a prohibition on granting any type of subsidy for the export and importation of electricity, as well as imposing any type of import tariff or specific restrictions on the importation or exportation of electricity among the countries to which Decision 536 is applicable. Andean Commission Decision 536 (as modified by Andean Commission Decision 639) also requires that Bolivia, Colombia, Ecuador, and Peru coordinate efforts to build electrical inter-connections between their respective national grids, establish a common methodology for calculating the cost for using these inter-connections and guaranteeing a fair price for access under short-term electricity contracts. The four countries are also expected to make the necessary changes to their domestic legal frameworks that will harmonize regulations related to the use of the inter-connections and commercial contracts for the purchase and sale of electricity. In order to facilitate the harmonization effort and oversee implementation of the other goals established under Decision 536, an Andean Committee of Regulatory and Legal Bodies for Electricity Services was established. Decision 557 issued by the Council of Andean Ministers of Foreign Relations in June 2003, establishes a Council of Ministers of Energy, Electricity, Hydrocarbons, and Mines of the Andean Community in order to ensure adequate institutional support for all those actions required to achieve the regional integration of the energy sector. IX. Initiative for the Integration of Regional Infrastructure in South America The IIRSA was launched in Brasilia on September 1, 2000, following a Summit hosted by then Brazilian President Fernando Henrique Cardoso that included his counterparts from 11 other South American countries (i.e., Argentina, Bolivia, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Surinam, Uruguay, and Venezuela). The presidents of the Inter-American Development Bank and the CAF also participated in the Summit. The primary goal of IIRSA is to expand and better integrate the physical infrastructure of the South American continent, including the establishment of seamless bioceanic corridors linking ports on the Atlantic and Pacific coasts.16 IIRSA coincides with a long-standing Brazilian 16 One interesting aspect of the declaration issued by the 12 South American presidents on September 1, 2000, was a statement emphasizing that the “effort to establish a Free Trade Area of the Americas is, also, based on the consolidation of sub-regional projects” in Latin America and the Caribbean. The full text of the declaration in Spanish is available at: http://www.iirsa.org. Another initiative that came out of the Brasilia summit was a promise by the Brazilian government to create a South American Fund to invest in activities promoting scientific and technological cooperation throughout South America.


strategy to facilitate reaching export markets in Asia through port cities that are found primarily in the Andean Community as well as northern Chile. The fact that the initiative was quickly endorsed by other South American leaders, however, is in recognition of the fact that the ability of the South American nations to insert themselves into regional and international value chains of production and enhance their overall global competitiveness is directly linked to the quality of their physical infrastructure. It is also important to point out that the IIRSA has always had a political agenda in that it seeks to strengthen representative democracy and avoid border conflicts (such as the one that broke out between Ecuador and Peru in 1998) and provided the foundation upon which to officially launch the Union of South American Nations (UNASUR) in May 2008. What distinguishes IIRSA from past efforts to improve the physical infrastructure within South America is that it provides the participating governments with a continental vision when proposing infrastructure projects, even when they do not necessarily cross a border.17 It also aims to facilitate the implementation of cross-border projects that, by definition, require intense transnational collaboration. This intense collaboration, in turn, is essential in order to give transnational infrastructure projects the necessary credibility required to attract non-public sector funding. In fact, the declaration issued by the 12 South American presidents in September 2000 acknowledged the need to provide incentives for the private sector (whether on its own or though public-private partnerships) and multilateral institutions such as the CAF, the Inter-American Development Bank, and the World Bank to provide the necessary investment capital for IIRSA’s infrastructure projects. The presidents also recognized the need to develop innovative financing instruments such as multinational guarantee funds for this purpose. At the 2000 Brasilia Summit, a number of energy (including hydrocarbons and electricity), transportation, and telecommunication infrastructure projects were identified that should ideally be concluded within a ten-year time frame. Many of these projects already enjoyed funding commitments from multilateral and regional financial institutions (such as the CAF and the Financial Fund for the Development of the River Plate Basin (FONPLATA), as well as some South American governments for their implementation. In addition, there was an explicit understanding that these projects had to be accompanied by the adoption of regulatory and administrative changes that would facilitate crossborder inter-connections. For example, improvements to air, ocean, river, or surface transportation infrastructure had to be complemented with reforms at the national level affecting customs, the incorporation of information technology, and the use of inter-modal logistics services. There was also recognition that 17 IIRSA “affords the possibility of exchanging information about investment programs and assessments conducted by individual countries on the most tangible benefits and costs. Consequently, it provides a mechanism that helps in the reduction of uncertainties and in the early detection of the type of externalities associated to each project.” R. Carciofi, Cooperation and Provision of Regional Public Goods: The IIRSA Case, 28 Integration & Trade J. 57 (Jan.-June 2008).


national criterion with respect to the technical design and evaluation of crossborder infrastructure projects as well as environmental impact assessments would have to be harmonized so as to avoid unnecessary bottlenecks. As a follow up to the Brasilia Summit, the Ministers of Transport, Telecommunications, and Energy of all the South American countries met in Montevideo in December 2000 and issued a Plan of Action that listed 12 already identified corridors and established criterion for deciding which ones to prioritize and/or replace with new ones. As a result of this initial work, the South American countries settled on the following ten integration and development corridors on which IIRSA would focus its efforts: 1. Andean Corridor (Venezuela-Colombia-Ecuador-Peru-Bolivia); 2. Southern Andean Corridor (Bolivia-Argentina-Chile); 3. Tropic of Capricorn Corridor (Southern Brazil, Northern Argentina, Southern Paraguay, Northern Chile); 4. Paraguay-Paraná River Hidrovía; 5. Amazon Multimodal Corridor (Brazil-Colombia-Ecuador-Peru); 6. Guayanés Escudo Corridor (Venezuela-Brazil-Guyana-Suriname); 7. Southern Corridor (Bahia Blanca/San Antonio Este, Argentina to Concepción/Puerto Montt, Chile); 8. Central Bi-Oceanic Corridor (Brazil-Paraguay-Bolivia-Southern Peru-Northern Chile). 9. MERCOSUR-Chile Corridor (Southern Brazil; Uruguay, Central Argentina; Central Chile); and 10. Southern Peru-Northern Bolivia-Northeastern Brazil Corridor. There are currently 506 IIRSA infrastructure projects that will cost an estimated U.S.$68 billion to implement. Of these, IIRSA’s Executive Standing Committee (made up of the Ministers of Planning or Infrastructure from each South American country) approved 31 high priority projects in November 2004 that should be completed by 2010 at a cost of approximately U.S.$6.9 billion. Among these projects are improvements to the highway in Uruguay that runs from the Brazilian border at Rio Branco through Montevideo and Colonia to the port of Nueva Palmira near Argentina, and the construction of new dual-carriage highway in southern Brazil. Improvements to the highway that connects the Chilean port city of Valparaiso with the Argentine-Chilean border are also in the process of being completed by a private sector concessionaire who will be compensated for its investment through the collection of toll fees. All these projects fall within the MERCOSUR-Chile Corridor. As a result of IIRSA, construction of a long delayed 600-kilometer stretch of road from Santa Cruz in Bolivia to the eastern town of Puerto Suarez on the border with Brazil has finally begun. Puerto Suarez is a river port connected to the Paraguay-Paraná River Hidrovía, an ambitious project designed to make better use of the rivers that flow up from the River Plate further upstream so as to end the isolation of southeastern Brazil as well as of Bolivia and Paraguay. On the other side of the Paraguay River from Puerto Suarez is a highway that eventually passes São Paulo on its way to the Atlantic port of Santos. When


completed in 2009, the new, paved road will eliminate the gap that has prevented the establishment of at least one branch of the proposed Central Bi-Oceanic Corridor. Two other IIRSA projects being implemented in association with this corridor are a new road from Oruro in Bolivia to the border with Chile that will connect with an existing road that is being rehabilitated and ends at the northern Chilean port of Iquique. Falling under IIRSA’s umbrella are also improvements to various roads in northern Peru (Paita-Tarapoto-Yurimaguas) that provide surface transport links along the Amazon Multimodal Corridor as well as to the actual port facilities at Paita, Iquitos, and Yurimaguas that are needed to facilitate the quick transfer of cargo and persons onto and off boats and barges. Further south, the Peruvian portions of a 2,586-kilometer road that will connect the states of Acre and Rondonia with the Peruvian ports of Ilo and Matarani on the Pacific are either being constructed new (e.g., Iñapari to Inambari) or being paved for the first time or resurfaced with new asphalt. The Peruvian government has provided the private sector companies investing in the road projects with 25-year concessions to recoup their initial investment through the collection of tolls. Already completed in 2006 is a bridge that crosses over the Acre River and now links the Peruvian border town of Iñapari with the city of Acre in Brazil and Highway BR-317, which flows into roads that connect to ports on the Atlantic. Near the border of Brazil and Guyana, a U.S.$10 million bridge is currently being constructed with money from the Brazilian Ministry of Transport that will cross the Takutu River and link the Brazilian city of Bonfim with the town of Lethem in Guyana.

CHAPTER 8

CENTRAL AMERICAN INTEGRATION SYSTEM I. Revival of the Central American Economic Integration Process Between June 1990 and December 1991 the presidents of Guatemala, Honduras, Nicaragua, and El Salvador met four times with a view towards reviving the Central American Common Market (CACM). At the last of these meetings held in Tegucigalpa, Honduras, on December 13, 1991, the four presidents and their counterparts from Costa Rica and Panama signed the Protocol of Tegucigalpa, thereby formally launching the Central American Economic Integration System or Sistema de la Integración Centroamericana (SICA). The protocol modifies the Organizational Letter of the Organization of Central American States (ODECA) of 1962 and establishes a new institutional framework. The Protocol of Tegucigalpa also gives SICA a juridical identity under international law, thereby authorizing it to enter into binding agreements with other countries or international organizations. In November 2000 Belize formally acceded to the Protocol of Tegucigalpa and thereby became a full member of SICA. The Dominican Republic formally became an associate member of SICA in September 2004. In October 1993 the heads of state of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama, met in Guatemala City and signed the Central American Economic Integration Protocol (the Guatemala Protocol) to the General Treaty on Central American Economic Integration that was signed in Managua in 1960. The Guatemala Protocol calls for the eventual creation of a Central American customs union with a common external tariff (CET) that is designed to encourage a more efficient productive sector. The Central American countries also agreed to establish a Common Customs Service and to eventually permit the free movement of labor and capital among the signatory states. The six countries also obligated themselves to harmonize their macroeconomic policies (particularly monetary and fiscal policies) so as to facilitate regional monetary and financial integration. Among the other policies the signatory states agreed to harmonize or work together on were: a regional tourism policy; a common agricultural policy; common rules to avoid unfair competition and the formation of monopolies; common technical norms; harmonization of consumer protection codes; a regional strategy on investment in infrastructure development; harmonization of banking, financial stock exchange, and insurance laws; harmonization of intellectual property norms and the mutual recognition of registration in one country as valid in all the rest; and the harmonization of laws that permit Central American university graduates to exercise their professions anywhere within Central America. 303


Costa Rica opted out of that part of the program established under the Guatemala Protocol that sought to create a monetary union and called for the free movement of labor among the signatory states. For its part, Panama never even ratified the Guatemala Protocol, although it entered into bilateral preferential market access agreements with at least four of its Central American neighbors to the north (i.e., Costa Rica, Guatemala, Honduras, and Nicaragua) and signed a free trade agreement with El Salvador in 2002. Given that Panama has never shown any interest to participate in the revived Central American Common Market and Belize, though a full member of the SICA, has never signed the Guatemala Protocol, it has become impossible to use membership in SICA as synonymous with participation in the Central American economic integration process. Hence the acronym CACM is used to designate the five countries (i.e., Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) that have ratified the Guatemala Protocol and, in some fashion, actually participate in the revived Central American Common Market. Since its revival at the start of the 1990s, the CACM has seen intra-regional trade flows steadily increase from U.S.$700 million in 1991 to a projected U.S.$5.2 billion for 2007. The countries that have most benefited from the CACM in terms of exports are Costa Rica, El Salvador and Guatemala. At the same time, Costa Rica is the country that buys the least from the rest of Central America as a percentage of its total imports. This helps to explain why the Costa Ricans have always been very interested to participate in the free trade area aspect of the CACM, while remaining aloof from the other parts of the Central American economic integration project. In recent years, Honduras and Nicaragua are the two countries that have experienced the biggest increases in exports destined for the subregional market. Between 2003 and 2007 Honduran exports to the rest of Central American increased by over 85 percent, while it nearly doubled for Nicaragua. This is a significant development, given that both countries benefited little from Central American economic integration in the 1960s and 1970s, and Honduras actually withdrew from the old CACM in 1969. Overall, intra-Central American trade now constitutes about 27 percent of the combined global exports of the five CACM countries. In fact, the subregional market is now the second most important market for Central American exports behind the United States (which absorbs about a third of global exports). This figure is higher than the 25 percent maximum reached in 1968 during the old Central American Common Market. It also represents a dramatic contrast with the mid-1980s when only about 10 percent of Central America’s global exports were traded within the sub-region. One of the more encouraging aspects of the increased trade flows within Central America is that they have been accompanied by steady growth in the region’s global exports. In addition, while the bulk of the region’s exports to The El Salvador- Panama Free Trade Agreement came into force on April 11, 2003. Although the other four Central American countries continue to utilize their bilateral preferential market access agreements from the 1970’s to trade with Panama, in 2006 they launched negotiations to replace them with a full fledged free trade agreement with Panama.

Central American Integration System • 305

the outside world during the 1990s were concentrated in agricultural products and foodstuffs, the principal products traded intra-regionally were chemical products and textiles. In recent years, the principal exports for the subregional market have been pharmaceuticals, processed food, consumer goods such as soap, and steel inputs made in Central America. This is an important development given the higher value added of manufactured goods and the fact that their prices do not diminish over time in real terms as quickly as primary products. The potential also exists for these manufactured goods to eventually be channeled to the international market. II. Institutional Framework A. Decision-Making Bodies The Protocol of Tegucigalpa signed in 1991 reformed the previous institutional framework that existed in the old Central American Common Market and established a new institutional order that came into effect on February 1, 1993. SICA’s highest institutional body is now the Central American Presidents’ Meeting, which meets at least two times a year. The presidents define and guide the Central American political and economic integration process and adopt all decisions based upon mutual consensus. They are assisted in their deliberations by a vice president’s meeting, which also meets at least twice a year. Following the Presidents’ Meeting, in order of hierarchical importance is the Council of Ministers representing the Ministry of Foreign Relations from each country and/or the ministry responsible for whatever particular issue is being discussed by the council. The Council of Ministers is charged with ensuring that the decisions emanating from the Presidents’ Meeting are implemented, and it can issue its own decisions as well. Each country is entitled to one vote in the council and decisions are adopted by simple majority, or by unanimous affirmative votes when the matter affects the fundamental direction or legal framework of SICA. The third most important institution in SICA is the Executive Committee, which is a body inherited from the old Central American Common Market and ODECA. The Executive Committee is made up of one representative from each member state designated by that country’s president. The Executive Committee usually meets once a week and insures that the decisions made at the Presidents’ Meetings are implemented and that the obligations created under the Protocol of Tegucigalpa and other compatible norms and agreements related to Central American economic integration are adhered to. It also has the power to recommend future courses of action for the Presidents’ Meeting and Council of Ministers to consider, which will enhance the Central American economic

F. Ballestero & E. Rodriguez, Central America: Towards a Harmonized Economic Area, 1 Inte& Trade J. 15 (Jan.-Apr. 1997). Institute for the Integration of Latin America and the Caribbean, Central American Report No. 3, 36 (2007).

gration


integration process. In addition, the Executive Committee proposes an annual budget for SICA and oversees the activities of the General Secretariat. The Protocol of Guatemala signed in 1993 further muddies SICA’s institutional framework by calling for the creation of a Council of Ministers of Economic Integration, which also includes the presidents of the Central Bank of each Central American country. The council is supposed to oversee the coordination, harmonization, convergence, or unification of economic policies among the countries participating in the revived CACM. B. General Secretariat and Other Specialized Bodies A new General Secretariat headed by a Secretary General was created under the Protocol of Tegucigalpa and is headquartered in San Salvador, El Salvador. One of the tasks of the General Secretariat is to oversee and coordinate the activities of the six specialized secretariats inherited from the old Central American Common Market and ODECA, as well as a plethora of at least 15 other commissions and councils that cover everything from tourism to electric power. The six specialized secretariats include: 1. SIECA (the old Permanent Secretariat of the General Treaty on Central American Economic Integration in Guatemala City, which now focuses only on economic issues related to the revived CACM); 2. SEMCA (Executive Secretariat of the Central American Monetary Council); 3. SCA (the Secretariat of the Central American Agricultural Council); 4. CRAS (Regional Commission on Social Affairs); 5. CECC (the Central American Education and Culture Coordinating Commission); and 6. CCAD (the Central American Commission on the Environment and Development). The Protocol of Tegucigalpa also created a Central American Parliament (or PARLACEN), a Central American Court of Justice, and a Consultative Committee made up of representatives from the private sector, labor, and academia who provide input to the General Secretariat on improving SICA and making it more effective. For its part, the Protocol of Guatemala calls on four specialized technical or administrative secretariats to provide support for the Central American economic integration process that include SIECA, SCA, SEMCA, and a new Secretariat for Central American Integration of Tourism (SITCA). At the end of 2007 the presidents of the five CACM countries agreed to establish an International Structural and Investment Fund to facilitate the sustainable development of the Central American countries. C. Central American Bank for Economic Integration In Article XVIII of the General Treaty on Central American Integration that was signed in Managua in 1960, the signatory states agreed to establish a


Central American Bank for Economic Integration (CABEI). CABEI would act as an instrument for the financing and promotion of a regionally balanced and integrated economy. CABEI was actually created, however, by the Agreement Establishing the Central American Bank of Economic Integration, that was signed the same day as the General Treaty, and Tegucigalpa, Honduras, was designated to be the site of its headquarters. In 1983 CABEI’s Board of Governors decided to open CABEI membership to the capital of non-regional countries, a move that did not become effective until the 1992 Protocol Reforming the Agreement Establishing the Central American Bank of Economic Integration permitting this was ratified by the required fifth Central American country. In addition, the authorized capital was increased to U.S.$2 billion, with 51 percent of the capital contributed by the five Central American countries and 49 percent by the non-regional countries. Currently Argentina, Colombia, the Dominican Republic, Mexico, Panama, Spain, and Taiwan are non-regional members of CABEI and are represented on its Board of Directors. In 2006 Belize became a new beneficiary country and contributor of paid-in share capital to CABEI. Over the years, CABEI has received donations from the U.S. Agency for International Development, to strengthen its financial and administrative capabilities, and from the European Union, to support loan programs aimed at encouraging small business development. CABEI also regularly floats bond issues in regional and international markets to increase its capital base. Until 1992 CABEI primarily financed infrastructure projects, especially regional highway and telecommunications networks and hydroelectric power generation projects. In the social sector, CABEI’s resources contributed to tackling housing problems, and special consideration was given to the construction of technical schools, as well as health and rural development projects. After 1992, CABEI gave more attention to supporting the private productive sector, principally through intermediate financing to promote export production, and pre- and post-shipment services for small- and mediumsized industry, as well as through co-financing activities to develop energy and tourism projects. In the public sector, greater emphasis was placed on projects that supported production, especially in the energy, telecommunications, and transport sectors. Social development programs were also promoted, mainly in education and strengthening the effectiveness of municipal government to provide basic services. In recent years CABEI is focused on reducing poverty through support for micro, small-, and medium-sized enterprises by facilitating access to microcredit through a network of 120 banking and non-banking institutions. In addition, CABEI is promoting an agricultural reinsurance program to help small farmers as well as funding technical training programs for young people. As a second priority area, CABEI supports regional integration by providing financial support to projects under the Plan Puebla-Panamá, strengthening the regional financial markets by, inter alia, paying the work required to harmonize domestic regulations, and developing regional programs for environmental protection. With respect to the latter focus, CABEI is the executing agency


for a UN Development Fund and Global Environment Facility project to provide microentrepreneurs with financial and technical assistance to develop biodiversity-friendly activities. Another important new strategic focus for CABEI lies in supporting the competitive insertion of the Central American countries into the global economy. CABEI does this through various programs, including a commercial invoice discounting scheme whereby it provides working capital to small producers participating in chains of production with larger firms that already export. CABEI also participates with the Inter-American Development Bank in a private equity investment fund that facilitates the financing of medium and large infrastructure projects in Central America through mezzanine debt instruments. As of 2006 CABEI had total assets of approximately U.S.$4.5 billion and an outstanding loan portfolio concentrated mainly in the public sector of U.S.$3.7 billion. CABEI is the main source of medium- and long-term financing in Central America. In 2006 Guatemala was the largest recipient of CABEI loans, followed by El Salvador and Costa Rica at an intermediate level, and then Honduras and Nicaragua. CABEI also manages a Special Fund for Social Transformation that was set up in 1999 to finance the social transformation initiatives of the five Central American countries through loans issued at low interest rates. Honduras and Nicaragua are the largest recipients of monies under this Special Fund. Monies from the Special Fund have been used by the Honduran government for sustainable rural development, water, and municipal market projects, while they have been earmarked by the Nicaraguan government for road building, child care, rural electrification, export oriented production, and citizen security projects III. Dispute Resolution System Article 12 of the Protocol of Tegucigalpa that created SICA called for the establishment of a Central American Court of Justice in order to “guarantee respect for the law, the interpretation and implementation of the present Protocol and its associated instruments or acts arising thereunder.” Article 35 of the protocol further required that any dispute concerning the application or interpretation of the provisions found in the Protocol of Tegucigalpa or any other bilateral or multilateral convention, agreement, and protocol affecting Central American economic integration, which has not been superseded by the protocol, had to be submitted to the Central American Court of Justice. The historical precedent for the current Central American Court of Justice lies in a Central American tribunal established in 1907, which functioned until 1918 and was the first international court in the world. The Statute of the Central American Court of Justice was signed by the presidents of all five CACM countries and Panama in 1992 but has, as of mid2008, only been ratified by El Salvador, Honduras, and Nicaragua. The Central American Court of Justice sits in Managua, and each state that has ratified the See, E. J. Chamorro Marín & R.E. Nájera, Origenes, Evolución y Perspectivas de la Integración Centroamericana, in La Integración como Instrumento de Desarrollo: Sus Perspectivas y Desafios para Centro america 41-43 (J.M. Alfaro �� et al. eds., 1996).


statute is entitled to have one permanent and one substitute judge sitting on the bench. The judges are elected for a ten-year term by the respective Supreme Court of each SICA country that has ratified the statute. The selected judges are expected to have the same qualifications required to exercise the highest judicial functions in each country. Article 22 to the Statute of the Central American Court of Justice lists the powers of the Court, including the power to: 1. resolve those disputes that may arise among the member states (except for territorial or border disputes, which can only be resolved if both parties agree) on which the respective Ministries of Foreign Affairs are unable to achieve resolution; 2. nullify decisions made by the SICA institutional bodies that are not in conformity with the treaties, agreements, and protocols related to SICA, as well as declare that an institutional body is not in compliance with those obligations; 3. determine whether a SICA member has issued norms, regulations, and administrative rulings that detrimentally affect SICA’s legal order and institutional decisions; 4. act as an arbitration panel in any matter that all parties to a dispute have requested the members of the Court to resolve; 5. offer advisory opinions to the Supreme Courts of the individual SICA member states on any matter, as well as issue advisory opinions to all other Central American courts on specific questions dealing with SICA, so as to ensure the uniform interpretation and application of all SICA obligations; 6. offer advisory opinions to the different SICA institutional bodies regarding the interpretation and application of the Protocol of Tegucigalpa and other legal instruments that are compatible with or derived from it; 7. resolve disputes that may arise among the different branches of government within a SICA country or whenever a national court’s decision is ignored by another institutional body within that country; 8. entertain complaints brought by persons affected by the actions of any SICA institution (including serving as the court of last resort with respect to administrative decisions undertaken by one of those bodies against an employee); 9. resolve disputes that may arise between a SICA country and a nonmember state if all the parties so agree; 10. carry out comparative studies of Central American legislation in order to harmonize and encourage uniformity in laws of the Central American states. Article 22(c) of the Statute of the Central American Court of Justice permits individuals the right to bring an action to the Court complaining of a Interestingly, Article 7 of the Statute of the Central American Court of Justice permits the court to hold sessions in the territory of any of the SICA member states if they agree to do so.


member government’s issuance of a legal norm that contradicts its overall SICA obligations. In addition, Article 60(b) of the Rules of Procedure of the Central American Court of Justice indicates that a private party directly prejudiced by the failure of a member government to comply with its SICA obligations, may bring an action seeking redress in the Central American Court of Justice. Pursuant to Article 36 of the Statute of the Central American Court of Justice, all the decisions of the Court must be adopted by majority vote, and dissenting opinions are permitted. Article 38 further provides that all decisions are final and binding and cannot be appealed, although requests for further clarification of judicial holdings are permissible. Although the Central American Court of Justice has been operating since 1994, its caseload has been light given that only three countries (i.e., El Salvador, Honduras, and Nicaragua) actively participate in the Court. Guatemala never ratified the Statute of the Central American Court of Justice. For its part, Costa Rica refused to do so because its Supreme Court ruled the statute unconstitutional in light of Article 22(f) of the statute that authorizes the Court to resolve internal disputes that may arise between different branches of government within a country. Unfortunately, Costa Rica cannot exempt itself from this specific provision, because Article 48 of the statute expressly forbids any reservations being made to the statute as a condition of ratification. In an attempt to get around the limitations of the Statute of the Central American Court of Justice that prevented Costa Rica from ratifying it as well as Guatemala’s continuing failure to ratify, a draft proposal for a Treaty on the Resolution of Trade Disputes within Central America was circulated among the member states in 1999. This supplemental dispute resolution system resembles the three-step MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) mechanism that existed prior to the entry into force of the Protocol of Olivos on January 1, 2004, as well as the general dispute resolution mechanism in the Canada-U.S. Free Trade Agreement of 1988. The proposed, alternative dispute resolution system was eventually adopted by the Central American countries through Resolutions 106 and 111 issued by the Council of Ministers of Economic Integration in 2003 (and subsequently modified by Resolution 170 and its annexes issued in 2006). Before it could be approved, however, it was necessary to amend the Protocol of Tegucigalpa. The Mechanism for the Resolution of Trade Disputes within Central America adopted in 2003 is limited to resolving trade disputes that may arise among the five governments over the application or interpretation of legal instruments related to the economic integration process or when one government feels that another has actually adopted or proposes to adopt measures that either violate its CACM obligations or that could annul or undermine the CACM benefits. It is important to point out that while the Central American governments also have the option to refer a complaint to the World Trade Organization (WTO) dispute resolution mechanism (if it should have jurisdiction), they are bound by that initial choice. CEPAL-BID, La Integración Centroamericana y la Institucionalidad Regional 48 (1998).


As a first step, the disputing governments should first try to resolve any CACMrelated trade controversy through direct negotiations. If the government(s) requesting consultations does not receive a response from the other country(ies) within ten days (five days in the case of perishable goods),or if the matter cannot be mutually resolved within 30 days (15 days in the case of perishable items), it will then be referred to the Council of Ministers of Economic Integration. As an alternative to a situation in which no response to a request for consultations is provided, the interested government may proceed directly to binding arbitration and bypass the Council of Ministers entirely (so long as the complaint does not concern a proposed measure). In order to resolve the dispute, the Council of Ministers of Economic Integration may utilize the technical assistance of outside experts, attempt to mediate, and/or issue a set of recommendations. If the council cannot resolve the matter that does not involve a proposed measure within a 30-day period, the dispute can be referred to a three-person arbitration panel. Similarly, if a government does not follow the recommendations made by the Council of Ministers within a one-month period, the matter need not be resubmitted to the council but can proceed directly to binding arbitration. Each side to the dispute names one arbitrator from pre-designated lists who cannot be a national of one of the countries involved in the dispute. Both sides must agree on the third arbitrator who can also not be from any country involved in the dispute. If the parties cannot agree on the third arbitrator, he or she is chosen in a lottery conducted by the SIECA Secretariat in Guatemala City. The arbitration selection process should normally be completed within a maximum of 15 days following a request for empanelment. The selected arbitrators then have a maximum of 90 days (unless the parties agree otherwise) to issue their award that is final and cannot be appealed. Before doing so, the arbitrators must offer the disputing parties at least one opportunity for a live hearing and are explicitly authorized to utilize the services of outside experts. Awards are made based on a two out of three majority. The votes of individual arbitrators are kept secret, as are any submitted documents and information deemed confidential. Failure to comply with an award within the mandated period (or within a maximum of six months) allows the winning party to retaliate by withdrawing equivalent benefits extended to the non-compliant state under the CACM. If the non-compliant party feels that the retaliatory measures adopted are excessive, it has the right to request that the SIECA Secretariat reconvene the original arbitration panel to review the matter. If that is not possible, the government can request the convening of a new panel of arbitrators. Since it began functioning in 2003 about a dozen matters have, as of mid2008, been referred to the Central American Mechanism for the Resolution of Trade Disputes, while only one, involving Guatemala and Costa Rica, has actually led to an award by an arbitration panel. IV. Intra-Regional Free Trade Program At the present time, the vast majority of goods produced in Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua that meet the CACM’s rule of


origin requirements are traded among them free of all duties and non-tariff restrictions. The CACM countries have also obligated themselves not to engage in dumping or to subsidize their exports destined for the Central American market. Among the important items that are exempt from the general rule on intra-regional free trade, however, are coffee and sugar, two major commodities produced in the subregion. In addition, individual Central American countries maintain a limited list of products that are currently exempt from the overall free trade scheme. For example, Costa Rica restricts the importation of roasted coffee from the other four CACM countries (as they do the same for Costa Rican roasted coffee), while El Salvador will not allow the importation of ethyl alcohol from Costa Rica or Honduras. Honduras and El Salvador mutually exclude the importation of petroleum derivatives and distilled alcoholic beverages from the other. There are also a few non-tariff barriers in place, such as El Salvador requiring that all oranges imported from Honduras must be fumigated, or Nicaragua not recognizing the sanitary certificates issued for a laboratory product produced in El Salvador. However, the Framework Agreement for the Establishment of the Central American Customs Union (2007 Framework Agreement), signed in Guatemala City on December 12, 2007, by all five CACM countries specifically obligates the member states to eliminate all non-tariff barriers such as permits, licenses, quota restrictions or equivalent measures that limit free trade among the five countries. Four of the five Central American countries now have a single border control post at their respective border crossings in order to speed up the processing of paperwork and reduce the possibility of bottlenecks forming at the border. The only country that does not participate in this process is Costa Rica because of issues of extraterritoriality that would require a change to the Constitution. In order to facilitate free trade among the CACM countries, all cargo transport companies from one Central American country are offered national treatment in the other four as a result of recognition by the governments of a communitarian operations card. In addition, there is a communitarian regulation that is designed to facilitate, harmonize, and simplify the procedures utilized in the cross -border surface transport of goods among or through the CACM member states as well as Panama to third countries. A uniform customs declaration is signed by a duly authorized representative of the transport company that is then utilized to process goods that are crossing one or more borders within the CACM and Panama. The declaration is first presented (along with other requisite documents such as invoices or a phytosanitary certificate) at the customs post in the first Central American country from which the goods leave. An electronic version can then be sent in advance to each of the border posts where the vehicle with the goods is scheduled to pass through on set days. It is possible to drop off or pick up cargo along the fixed route, so long as new declaration is completed for each of these new items. A physical inspection of goods will usually only be required at the discretion of the customs post in the first Central American country where the shipment originates (unless new goods are picked up along the way).


V. Rule of Origin Requirements In 1996 the CACM adopted new rule of origin requirements that were deemed to be more consistent with the WTO obligations of the Central American countries. The rules of origin were subsequently modified by Resolutions 156 and 181, both issued by the Council of Ministers of Economic Integration in 2006. Article 12 in the annex to Resolution 156 includes three alternative methodologies for determining the origin of fungible products. It is understood that once the customs union aspect of the CACM is fully implemented, and there are no more national exceptions to the CET, there will be no further need for rules of origin. Goods that wholly originate within or are made with inputs that wholly originate in Central America are generally entitled to intra-regional free trade treatment. Goods made with inputs from outside the CACM, but which are substantially transformed within the subregion so as to undergo a change in tariff classification heading under the Central American Harmonized Tariff Schedule or Sistema Arancelario Centroamericano (SAC) will be deemed to originate within Central America. However, this shift cannot be due to, inter alia, the mere adding of water or the mixing of inputs that do not change the essential characteristics of the original materials. Similarly, goods that are merely assembled, packaged, painted, washed, or divided into separate lots are also excluded from intraCACM free trade. Non-originating inputs that do not undergo a substantial transformation will be considered de minimis and disregarded if they make up less than 10 percent of the final product’s transaction value. The annex to Decision 181 issued by the Council of Ministers of Economic Integration lists specific rules of origin for various tariff lines, although these are generally premised on the concept of a change in tariff classification heading. As an alternative to the substantial transformation rule, there also exists a regional content option. If at least 30 percent of the final product’s transaction value represents the costs of Central American inputs, the final product can be traded among the Central American countries duty free. The transaction value is determined based on a similar formula found in the North American Free Trade Agreement (NAFTA):

Regional Content Value =

FOB Transaction Value – Foreign CIF Value of Inputs FOB Transaction Value

× 100

When the transaction value is not available or otherwise cannot be utilized, the value of the merchandise shall be determined in conformity with Articles 2 through 7 of the WTO’s Customs Valuation Agreement. In order for a product from one CACM country, which satisfies CACM’s rule of origin requirements, to enter into the customs territory of another member state duty free, the importer must produce a customs declaration form that should be accompanied by a certificate of origin executed by the exporter. The certificate of origin should be based on the declaration of origin


made by the producer (if the exporter and the producer are not one and the same). The certificate of origin is waived in the case of exports that are less than the equivalent of U.S.$1,000 in value. If an exporter has neglected to include required information in the certificate of origin or has incorrectly certified the origin of the merchandise, the Customs Service in the country of import must permit entry of the merchandise and allow 15 days for the presentation of a correct certificate. If a corrected certificate is not presented within 15 days, the customs authorities can impose the relevant import duties on the products and bill the importer accordingly. Whenever the Customs Service in an importing country has doubts as to the real origin of a product, it can initiate an investigation. Similarly, any interested party has the right to challenge the origin of merchandise with the Customs Service and provide the necessary evidentiary support requesting an investigation. The investigation is initiated by notifying the counterpart authority in the country of export, which then has ten days to notify the exporter or producer of the merchandise in question that its certification has been challenged. As part of its investigation, the Customs Service in the country of import can require that the exporter or producer respond to questionnaires and can also visit (with prior notification to both the Customs Service in the country of export and the producer or exporter) the premises of the exporter or producer and request to review its records. Questionnaires must be answered within 30 days after receipt (subject to one 30-day extension). If the questionnaires are not answered within the specified time period, import duties will be levied on the imported goods as if they were not Central American in origin. Similarly, any failure by a producer or exporter to respond affirmatively to an inspection request within 30 days will also lead to a denial of the CACM benefits. The producer or exporter can also respond and request a 60-day extension (or longer if the parties so agree) for the proposed on site inspection. The Customs Service in the importing country generally has up to one year to make a final determination as to the veracity of a certificate of origin. During the period of investigation, however, the Customs Service in the importing country may not prevent entry of the product into its customs territory. Any producer or exporter that has been found to have falsified the origin of goods more than once will automatically be levied duties on successive exports of the same goods as if they originated outside of the CACM. The burden is on that producer or exporter to prove to the customs authorities in the importing country that the goods actually do meet the rules of origin if the producer or exporter wants to avoid imposition of the relevant duty. Any party that feels that it has been negatively impacted by the final determination of the Customs Service in an importing country can present a petition of review according to the internal legislation of the country wherein it is filed. All goods that meet the CACM’s rules of origin must also comply with a marking requirement and bear the legend: Producto Centroamericano hecho (elaborado o impreso) en [country of origin] either on the product itself or, if this


is not feasible, on the packaging or packing containers. Unpackaged goods should note their Central American origin in the customs declaration form. Interestingly, Article 28 in the annex to Resolution 156 now authorizes interested parties to file requests for advanced rulings. This appears to be a modification adopted as a result of the U.S.-Central American and Dominican Republic Free Trade Agreement. VI. Common External Tariff Goods imported from outside Central America or that do not meet the CACM’s rule of origin requirements, must pay the CACM CET or the particular import duty that a particular Central American country may charge in lieu of the CET. The Central American Convention on Tariffs and Customs Regimes and annexes that came into force in September 1985 (and subsequently modified), regulates the CET. Pursuant to that convention, a Central American Tariff and Customs Council composed of the ministers from each country responsible for economic integration was given supranational authority to set regional import duties ranging from 1 to 100 percent without the need for ratification by each country’s legislature or executive branch. Using these powers, the council ordered the establishment of a CET ranging from 5 to 20 percent that would be in place by December 12, 1992, and would cover the vast majority of tariff lines in the SAC. On a second category of items, consisting primarily of footwear and textiles, a higher tariff of 25 percent could be charged until December 31, 1995. Finally, automobiles, auto parts, and products deemed to be “sensitive,” such as certain pharmaceuticals, grains, and alcohol, fell into a third category, and each country was permitted to charge whatever tariff they felt was most appropriate. In February 1995 El Salvador proposed reducing the CACM’s CET on the first category of goods over a five-year period beginning on January 1, 1996, to new levels ranging from one to 15 percent. By January 1, 2000, the import duties of all five Central American countries had converged at a new 0 to 15 percent range for the vast majority of tariff lines found in the SAC. Each Central American country, however, continued to charge whatever import duty it felt was most appropriate on automobiles and products deemed “sensitive” such as certain pharmaceutical and agricultural products. As of mid-2008, some 275 tariff lines found in the SAC are still exempt from the CET. It is also important to point out that the Council of Ministers of Economic Integration is authorized to grant additional temporary dispensations from applying the CET when justified. In the 2007 Framework Agreement signed by all five CACM nations, the govern-ments are authorized to eliminate intra-Central American border posts at their discretion. For this to occur, however, the CET would have to be fully in place and uniformly applied by all CACM countries without exception. Another area where the Central American countries have yet to reach a consensus is on how to share the revenues collected as a result of the CET. Currently, all revenue raised through the levying of an import duty stays with the country that


Table 8.1. Central American Common External Tariff Rate Table 0 Percent

5 Percent

10 Percent

15 Percent

Capital and Primary Goods Not Produced In Central America

Primary Goods Produced in Central America

Intermediate Goods Produced in Central America

Consumer Goods in Final Form

actually collected the tax. Yet another interesting anomaly affecting the CACM CET is that some of the Central American countries have negotiated free trade agreements with third countries, while others have not. Furthermore, they have different tariff rate quota (TRQ) levels for certain agricultural and textile products at the WTO level. VII. Other Import Regulations A. Customs Valuation Resolution 115 issued by the Council of Ministers of Economic Integration in 2004 contains the Central American Regulation on Customs Valuation (which is also included in the Uniform Central American Customs Code or Código Aduanero Uniforme Centroamericano (CAUCA) implementing regulations). In general, it follows the provisions of the WTO Customs Valuation Agreement. For example, the value of an item is determined by those elements found in paragraph 1 to Article 8 of the WTO Customs Valuation Agreement. However, Resolution 115 adds to the value the cost of transporting the imported merchandise to the port of entry; costs for shipping, unloading, and handling arising from the transport of the imported merchandise to the port of entry; and insurance costs. In those cases where there were no transport and/or insurance costs, these will be determined using standard rates kept on file by the relevant national customs service. The term “approximate moment” found in Articles 1, 2 and 3 of the WTO Customs Valuation Agreement are defined as 90 working days in Central America. Article 29 to Resolution 115 calls for the establishment of a constantly updated database to be housed in SIECA in Guatemala City for the customs service of each CACM country to cross-check the declared values of imported items.

The TRQ is 27 percent for Costa Rica, 11 percent for El Salvador, 22 percent for Guatemala, and 9 percent for Nicaragua, while Honduras did not negotiate TRQ’s at the WTO Uruguay Round. See Central American Report No. 3, supra note 3, at 59. Furthermore, the products to which TRQ’s are applicable are not uniform among the four countries that do apply them.


B. Customs Regulations CAUCA and its implementing regulations establish extensive customs legislation to be utilized in conjunction with all persons, merchandise, or transportation entities that enter the territory of any of the five countries that participate in the CACM. The latest version of CAUCA is annexed to Resolution 223 issued by the Council of Ministers of Economic Integration in 2008, while CAUCA’s most recent implementing regulations are found in the annex to Resolution 224. As a general rule, the Customs Service in each CACM country should utilize risk analysis methods for determining what imports to inspect (and is authorized to establish a regional database for this purpose). The Customs Service in each country is also authorized to conduct on-site inspections of stores, factories, and business premises in order to carry out an audit to verify the information found in a customs declaration for up to four years following entry of the product. Electronic signatures (for example, when using the ITC systems of a Customs Service) are recognized as legal as well as the electronic version of documents. All explosive, inflammable, radioactive, or otherwise dangerous materials require advance authorization before they will be admitted into the customs territory of a CACM country. If so ordered, the Customs Service is authorized to temporarily confiscate and eventually destroy any item that is found to infringe on intellectual property rights before it enters the customs territory of the country. Advance rulings (and inspections) are specifically recognized with respect to: tariff classification headings; criteria used to determine the customs valuation of an item; eligibility for a refund of previously paid duties; determining if an item is exempt from duty or enjoys preferential tariff treatment; ensuring the duty-free reentry of a product sent abroad for transformation, elaboration, or repair; country of origin markings; and applicable tariff rates. Disputes arising from a decision made by a national Customs Service that cannot be resolved on administrative appeal, can be referred to a five-member Customs Court that is created in each CACM country and must be separate and independent from the national Customs Service. C. Special Taxes and Licensing Requirements In addition to the import duties that may levied by the national customs services on goods imported from outside of Central America, the five CACM countries individually charge a number of additional fees and taxes and/or place non-tariff barriers on the importation of particular goods or services. Goods that originate within the CACM or are imported from countries that enjoy a free trade agreement with one or more of the CACM countries may be exempt from these additional requirements. 1. Costa Rica A 13 percent value added tax (VAT) is added to the sum of the cost, insurance, and freight (CIF) value of the import plus the corresponding duty and any relevant excise tax. The excise tax, known locally as a selective consumption tax, ranges from 5 to 75 percent and is added to items deemed to be non-essentials such as alcohol, new and used vehicles, and certain appliances


(e.g., refrigerators). A 1 percent surcharge is also levied on all imports except medicines and capital goods. Import licenses and permits were abolished in December 1994 for all products except arms and ammunition. On the other hand, sanitary and phytosanitary certificates are required for the importation of bulk grains, fresh horticultural products, and fresh or frozen meats. In addition, pharmaceuticals, toxic substances, cosmetics, chemical products, and biomedical equipment must first be registered with the Costa Rican Ministry of Health before they can be imported into the country. Packages of fertilizers require a seal of guarantee obtained from the Directorate General for Agriculture and Livestock. Food labeling regulations adhere to the Codex Alimentarius, and the information it mandates must be found on the label in Spanish. Special labeling requirements apply to pharmaceuticals, fertilizers, pesticides, hormones, vaccines, poisonous substances, and mouthwash. Costa Rica prohibits the importation of used tires without rims. 2. El Salvador The import duty is assessed against the CIF value of an import. A 13 percent VAT is then charged over this sum. Alcohol is levied an additional excise tax based on alcohol content as well as a 20 percent sales tax. Import licenses are required for the importation of firearms (the latter is obtained from the Ministry of Defense). Imports of basic grains must be accompanied by import licenses from the Ministry of Agriculture, while dairy products require import licenses from the Ministry of Public Health. In the case of fresh foods, vegetables, and live animals, sanitary certificates must be obtained from the Ministry of Agriculture and the Ministry of Public Health. Pharmaceutical products must first be registered with the National Health Public Council before they can be imported into El Salvador. In the past, the U.S. government has complained that sanitary regulations in El Salvador are used as a non-tariff barrier to keep out poultry and rice, since domestic production is not subject to these same sanitary requirements. Special labeling requirements exist for imported household consumer products, frozen and canned food, lighting equipment, pharmaceuticals, textiles, and tobacco. 3. Guatemala A 12 percent VAT is charged over the total sum of the CIF value of the import plus the relevant duty. In addition, special excise taxes are levied on petroleum, alcoholic and non-alcoholic beverages, and tobacco products. Certain agricultural commodity imports are subject to a TRQ. The importation of weapons is strictly controlled by the Ministry of Defense’s Department of Arms and Munitions Control (DECAM). Processed foodstuffs products require an import license from the Ministry of Health, while unprocessed food products require an import license from the Ministry of Agriculture. In addition, all imported food products require a sanitary certificate that may be issued by the relevant authorities in the country of


origin. Most chemical rodent killers, cosmetics, herbicides, fungicides, medical devices, pesticides, and pharmaceuticals must first be registered with the Ministry of Health before they can be imported into the country. Guatemala has special labeling requirements for distilled alcoholic beverages, foodstuffs, footwear, pesticides, and pharmaceuticals. 4. Honduras Once the relevant import duty tariff has been paid over the product’s CIF value, a 12 percent sales tax is then added to this total as well as a 0.5 percent administrative fee charged by the Customs Service. The sales tax is 15 percent in the case of alcohol and tobacco products. An additional 10 percent excise tax may be levied on goods deemed to be non-essential such as alcohol. A price band mechanism for corn, corn meal, rice, and sorghum can tack on an additional import duty ranging from 5 to 45 percent over the ad valorem value of the item. All processed food products must be registered with the Division of Food Control of the Ministry of Health and must be accompanied by a sanitary certificate issued by the Ministry of Health prior to importation. In addition, there are strict labeling requirements. Restrictions currently exist on the importation of firearms and ammunition, narcotics, pornographic material, toxic chemicals, and older vehicles (i.e., over seven years in the case of cars and over ten years in the case of buses). In the past, prohibitions on the importation of cement, poultry meat, rice, and sugar have also been enforced. 5. Nicaragua In addition to payment of the relevant import duty, some 600 items deemed to be luxury goods are charged a Selective Consumption Tax (ISC) that is assessed against the CIF value of the imported good. The ISC on imported automobiles can vary from between 10 to 30 percent depending on the size of the vehicle’s engine. A 15 percent VAT is charged over the CIF value of the imported good plus the relevant import duty (and ISC tax, if any). Basic food items are exempt from paying the VAT. The customs service also charges a small tax for its services on all imports. An import permit is required for all imported foodstuffs and beverages from the Food Inspection Office of the Ministry of Health, which will also provide instructions on labeling requirements. Imports of non-processed foodstuffs must be registered with the Ministry of Agriculture prior to their importation into Nicaragua. All agricultural products and medicines for veterinary purposes require an import permit from the Ministry of Agriculture. Import permits from the Ministry of Health are required for the importation of all pharmaceuticals and cosmetics, which must also be appropriately labeled in Spanish. Sugar can only be imported under license from the Ministry of Trade, Industry, and Development. Vehicles older than ten years may not be imported into Nicaragua (unless they are antiques or are donations to a public agency) nor can boneless meat from animals older than 30 months.


VIII. Safeguard Measures The Central American Regulation on Unfair Trading Practices and the Safeguard Clause came into effect on March 1, 1993. Most of its provisions were subsequently abrogated, but its provisions concerning safeguard measures to be imposed by the CACM governments on imports originating from other member states are still applicable. Safeguard measures can be imposed whenever there is a sudden surge in the importation of a product from another CACM country that is causing or threatens to cause serious damage to the national producer of an identical, similar, or directly competitive product. A petition to impose a safeguard measure is filed with the Office of Integration or equivalent body by a trade association or the firm or group of companies that represent at least 25 percent of local production directed to domestic consumption. Once the Office of Integration makes an initial, preliminary determination that continued importation of a good does, in fact, gravely damage or threaten imminent serious damage to local production, the affected country can impose a temporary safeguard measure (usually lasting no more than 30 days). These measures can consist of increasing the tariff and holding the additional money collected in trust until a definitive determination can be made. If a final determination is made indicating that there is a legitimate and grave danger to domestic production, the affected country can impose tariff and/or quotas for a period lasting no more than 30 days (subject to renewal if authorized by the Tariff and Customs Council of the SIECA Secretariat in Guatemala City). In the event a safeguard measure is imposed for more than one year (which can only be authorized by the SIECA Secretariat’s Tariff and Customs Council), provisions should be made to automatically reduce the import barriers pursuant to a pre-determined schedule. In the event tariffs are levied on intra-regional trade, they cannot be higher than those imposed on similar goods imported from outside CACM. Any country imposing a safeguard measure is required to inform the SIECA Secretariat’s Tariff and Customs Council, which has the ultimate authority to determine if a safeguard measure was properly imposed. In 1996 the Central American countries adopted new regulations for the imposition of safeguards on goods originating in non-CACM countries that were more compatible with WTO mandates. These regulations were, in turn, replaced by those found in Resolution 194 issued by the Council of Ministers of Economic Integration in 2007. Safeguard measures can be imposed whenever imports from outside the CACM have suddenly increased to such a level that they actually are causing or threaten to cause grave damage to a national industry producing similar or directly competitive products. In general, a group of producers that represents at least 25 percent of national production and feels detrimentally impacted by such an import surge should present a petition to the Office of Integration connected to the Ministry of Economy or equivalent Interestingly this petition must include steps the local company(ies) intend to take while any safeguard measure is in place in order to enhance the competitiveness of the product that benefits from the safeguard protection.


national body in its home country specifically designated to investigate the merits of a request to impose a safeguard. In exceptional cases, the Office of Integration can initiate an investigation on its own. In general, the Office of Integration is required to review the trade data from the preceding three years to examine the import pattern of the targeted product. Upon submission of a petition to impose a safeguard, the national Office of Integration normally has 30 days to either accept or reject the petition. If the Office of Integration rejects the petition, it may do so without prejudice for the party to resubmit the petition with new information. A decision to initiate an investigation requires that notification be served on all interested parties (including the producers in the country of export) and the WTO Safeguards Committee in Geneva. The interested parties are then given a maximum of 75 days (including extensions) to respond with any evidentiary material they feel is appropriate (including material that can be classified and will be kept confidential). The investigation should normally be concluded within a six-month period, although up to a year is allowed in exceptional cases. Preliminary safeguards consisting of higher tariffs may be authorized for up to 200 days when there is a determination of grave harm that would be difficult to remediate if not immediately redressed. The WTO Safeguards Committee should be notified before the preliminary measure is imposed, while the affected countries can be notified within ten days after imposition of the preliminary measure. During the investigation period, the national Office of Integration can request on-site inspections of facilities in foreign countries pending permission from the owners and approval from the relevant government. A public hearing is required to allow all the interested parties to present their positions to the Office of Integration. This is followed by written submissions within 15 days after the hearing. Once the investigation period is terminated, and the Office of Integration determines that imposing a safeguard is justified, the government must provide a 30-day period during which it must consult with those WTO member states that will be affected by the measure and discuss other compensatory options. Safeguards may consist of tariff hikes and cannot be imposed for a period longer than four years. Notice of the adoption of a safeguard should be served on the interested parties, the WTO Safeguards Committee, and the SIECA Secretariat in Guatemala City. IX. Unfair Trade Practice Remedies At the end of 1995 the Central American countries established new rules to combat unfair trade practices, such as dumping and subsidized exports, committed both by countries participating in the CACM as well as third countries. The new rules were designed to be more compatible with the WTO obligations of the Central American countries. In 2007 the Council of Ministers of Economic Integration replaced these rules with those found in Resolution 193. It should be pointed out that the 2007 Framework Agreement on the Central American customs union signed by all five CACM nations underscores that when the customs union is fully implemented, and there are no more exceptions to the CET, unfair trade practice remedies can no longer be imposed


on intra-CACM trade. Presumably this would be substituted, in part, by a new regional Competition Policy that the Central American countries agreed at the end of 2007 to begin formulating. A petition to investigate whether imports from non-CACM countries are being dumped or subsidized is conducted by the Office of Integration affiliated with the Ministry of Economy or other relevant national body of the home country where the detrimentally affected firms are domiciled. The national body has the authority to initiate an investigation on its own as well. The national Office of Integration must determine whether a product is being dumped or it has received subsidies that are in violation of the WTO and this practice is causing or threatens to cause significant damage or otherwise gravely prejudices a national industry (including retarding the creation of a new industry). If the Office of Integration decides to accept the petition, it must notify the government where the dumped or subsidized products originated prior to commencement of the investigatory period (thereby permitting consultations in the case of subsidized exports that may lead to a mutually satisfactory resolution other than imposing a countervailing duty). All the interested parties should be notified that an investigation has begun, and they have a right to make written submissions, including providing information deemed confidential that will not be revealed to the public. Investigations should normally be conducted within a one-year period but can be extended for another six months under exceptional circumstances. During the investigation period, provisional measures can be imposed for a maximum of four months, in the case of allegations of subsidized imports, or a maximum of nine months, in cases of alleged dumping. The Office of Integration may, as part of its investigation, undertake on-site inspections of facilities in foreign countries with the consent of the owners and the government. If the Office of Integration finds evidence of unfair trade practices that are causing or threatening to cause serious damage, the government can impose an antidumping or countervailing duty for a period that cannot exceed five years. Notification should be served on the interested parties and on the SIECA Secretariat in Guatemala City (the latter for transmission to the SICA Executive Committee). Interestingly, Article 41 to Council of Ministers of Economic Integration Resolution 193 permits an antidumping or countervailing duty to be imposed, when feasible, only against the products of a particular company or firms engaged in unfair trade practices and not all producers from that country. Disputes arising from the imposition of an antidumping or countervailing duty can be referred to the SICA or WTO dispute resolution systems. In situations involving allegations of unfair trade practices engaged in by a fellow CACM member, the initial procedure followed is similar to the one involving imports from non-CACM countries. The major difference is that the final determination and report of the national Office of Integration or equivalent national body must be reviewed and can either be approved, modified, or rejected by SICA’s Executive Committee based in San Salvador. In addition, whenever a CACM member government feels that the importation of a dumped or subsidized good in another CACM country is detrimentally affecting its own


national production (e.g., because it can no longer export its own goods of that kind to the other market), it can notify the SIECA Secretariat in Guatemala City. The Secretariat, if it finds there is merit to the complaint, will notify the recipient country of the need to initiate a dumping or countervailing duty investigation. If it fails to do so within eight days, the Secretariat is authorized to launch its own investigation. During that investigation it can recommend to the SICA Executive Committee that it issue preliminary antidumping or countervailing duties. At the conclusion of the investigation, the Secretariat forwards its findings and recommendations to the SICA Executive Committee to issue a final determination. X. Technical Norms The Council of Ministers of Economic Integration issued Resolution 37 in 1999, which contains two annexes. Annex I regulates the issuance of technical and measurement standards. Annex II regulates the issuance and enforcement of sanitary and phytosanitary measures, which was subsequently modified by Resolution 87 issued in 2002. In 2002 the Council of Ministers of Economic Integration issued Resolution 94, which establishes a common technical norm for wheat flour for El Salvador, Guatemala, Honduras, and Nicaragua. The Central American regulation on technical and measurement standards found in Annex I to Council of Ministers of Economic Integration Resolution 37 makes clear that its provisions are intended to be compatible with the WTO Agreement on Technical Barriers to Trade. In addition, it is applicable to both the type of technical and measurement norms that may be issued at the Central American level (of which there are currently communitarian technical norms affecting some petroleum and pharmaceutical products) as well as by the individual member governments that can in any way directly or indirectly affect trade in goods and services within the CACM. In general, technical norms should not create unnecessary barriers to trade, are subject to national treatment and most-favored nation (MFN) requirements, and should, when feasible, be in conformity with already existing or soon to be enacted international standards. Member states are encouraged to harmonize their technical standards or to enter into mutual recognition agreements. A Central American Committee on Technical Standards, Authorization Procedures, and Metrology is created that has authority to, inter alia, facilitate the harmonization of technical and measurements standards and seek international technical assistance. In general, there is a presumption that technical norms adopted by one member state in consultation with the others be recognized as being mutually equivalent. Each country is required to set up at least one information center to respond to the inquiries by another government or interested party concerning its technical or measurement standards. Each government is also required to notify the SIECA Secretariat in Guatemala City prior to the enactment of new technical and measurement standards or modifications to existing ones, so that it can inform all the CACM governments. Advance notification of proposed technical standards that are not in conformity with international norms and may have a significant impact on intra-regional trade should also be sent to the WTO.


Interested parties are provided with a minimum of 60 days to submit their comments and observations. The advance notice requirement can be waived in cases of national emergency. XI. Sanitary and Phytosanitary Measures Annex II to Resolution 37 of the Council of Ministers of Economic Integration contains the Central American Regulation on Sanitary and Phytosanitary Measures and Procedures in order to prevent unnecessary obstacles to intra-CACM trade. The regulations are intended to serve as a complement to the WTO Agreement on the Application of Sanitary and Phytosanitary Measures. As a general rule, sanitary and phytosanitary (SPS) measures should be based on scientific principles supported by sufficient evidence that utilizes risk analysis, should conform to international measures or recommendations, and the CACM member states should not impose retaliatory trade measures in response to the adoption of an SPS measure by another member state. The equivalency of SPS measures should be recognized among the CACM countries so long as it can be objectively shown with scientific information that they provide an adequate and identical level of sanitary and phytosanitary protection. A government planning to adopt a new or modify an existing SPS measure should provide at least 60 days’ advance notice to the other CACM member states. This advance notice requirement can be waived in response to an emergency situation required to protect food supplies as well as plant and animal health (although a government must still provide subsequent notice to permit consultations). There is a commitment that the CACM countries work towards harmonization of their SPS measures by maintaining transparent communication with respect to requirements for the importation of animal and vegetable products as well as inspection, evaluation, and control procedures. Furthermore, there is a commitment to harmonize procedures for the issuance of sanitary and phytosanitary certificates, registration, and methods for accrediting professionals and institutions. A Committee on Sanitary and Phytosanitary Measures is created to, inter alia, discuss regional responses designed to avoid the introduction of pests and illness, facilitate negotiations over SPS disputes that may arise among the CACM countries, seek out technical training for personnel in those countries that require it, and promote cooperation among the different national agencies in terms of sharing expertise. XII. Investment Protection and Cross-Border Trade in Services The governments of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed a Treaty on Investment and Trade in Services on March 24, 2002, which establishes a legal framework for the liberalization of trade in services and investment among their respective countries. The CACM governments are required to meet every two years to liberalize retained restrictions on crossborder investment as well as quantitative restrictions and exemptions to the cross-border trade of services.


The term investment is defined to include an interest in a company, shares, debt instruments, loans, tangible or intangible assets (including intellectual property rights), mortgages, building contracts, or performance-based contracts. Investors from one Central American country are entitled to national and MFN treatment with respect to their investments held in the territory of any of the other four CACM countries. In conformity with obligations arising under the WTO, no government can require that, as a condition to the establishment, acquisition, expansion, administration, conduct, or operation of any investment by a CACM national within its territory, the investor must: export a pre-determined type, level, or percentage of its goods or services; use a certain percentage of local inputs; acquire goods or services locally; invest a pre-determined sum of money locally; only sell locally based on export performance; transfer technology (unless it is required to protect health, the environment, or national security); or act as the exclusive purveyor of goods or service in a specific market. Furthermore, as a general rule, a government is prohibited from requiring that so much of a cross-border investor’s upper management be nationals of the host country (albeit a government can require that a majority of the administrative board be nationals of the host country). In addition, there should normally also be no impediments placed on the repatriation of capital and profits, except in response to balance of payment crises. Governments are prohibited from directly or indirectly nationalizing or expropriating investments except when done in a non-discriminatory fashion for a public purpose, when all guarantees of due process are respected, and when there is prompt payment of what was the market value of the property prior to the announcement of its confiscation. Interestingly, investor rights are subservient to the ability of governments to enforce their respective environmental laws. In the event that a dispute arises between a host government and an investor from another CACM country, the matter can be referred to binding arbitration utilizing International Centre for the Settlement of Investment Disputes (ICSID) or the UN Commission on International Trade Law (UNICITRAL) rules. As a first step, however, the parties should attempt to resolve the dispute through initial consultations. Furthermore, any party to the dispute can require that all administrative recourses be first exhausted as a pre-condition to arbitration, but these must be concluded within six months after the filing of the initial complaint. A decision to take the matter to a three-person arbitration panel means that the investor waives its right to file a complaint in national court. Any awards made by an arbitration panel are limited to pecuniary damages plus interest or an order that requires the government to return to the investor its property (with the option to pay pecuniary damages plus interest). Legal costs may also be awarded when permissible under the particular arbitration rules utilized. Cross-border trade in services is defined as the offering of services from one CACM country into the territory of another, the provision of services


within the territory of one CACM country to nationals from another, and the provision of a service by a CACM national within the territory of another CACM country. As a general rule, all services are included, except those related to air transport or those reserved to the governments (such as social security). Costa Rica also excludes its entire telecommunications sector. There is also a special set of rules for the financial services sector found in Chapter 6 to the Central American Treaty on Investment and Cross-Border Trade in Services of 2002. As is true of the rules related to investment, national and MFN treatment are also accorded to the cross-border trade of services. Governments may, however, provide more favorable treatment to local service providers located along borders that are providing locally sourced services that are utilized locally. Requirements that a service provider must have an office or reside in the country where it wants to offer its services are abolished. On the other hand, the benefits provided under the treaty can be denied to service providers that do not have a substantial commercial presence in a CACM country and are owned or controlled by entities from outside the CACM. There is an aspiration on the part of the five governments to harmonize their licensing requirements and procedures in order to facilitate the cross-border provision of professional services. Until that happens, however, mutual recognition of degrees must be negotiated on a bilateral basis. The obligations with respect to the telecommunication sector are focused primarily on providing non-discriminatory access to public telecommunication networks and services so as to offer value added telecommunication services such as the Internet or cellular telephony. The rules and procedures for obtaining licenses and permits should be transparent and carried out in a nondiscriminatory manner and should not impose unduly onerous technical or financial burdens such as limiting user charges to actual costs incurred by the value added telecommunications service provider. In those countries where one entity has a monopoly or is the principal telecommunications network provider and also offers value added services, the governments must ensure that this entity does not abuse its dominant position and engage in anticompetitive practices. As a general rule, all the CACM governments recognize the ability of investors from one CACM country to establish a financial institution in the territory of all the others, subject to those local laws and regulations that are also applicable to national financial institutions. They may not, however, impose nationality requirements on management positions or nationality and/or residency requirements for board or administrative council members. Although governments cannot prevent their own nationals from utilizing the services of a financial provider located in the territory of another CACM country, they can prevent that financial institution from advertising within its territory. Financial services are defined to include insurance, banking, and those that imply the role of a financial intermediary. The dispute resolution system that exists to decide disputes between financial service providers and a host government is the same as that for investors, except that a Committee on Financial Services


established under the treaty has the initial authority to review a dispute arising from an public security measure imposed by a host government before it can proceed to binding arbitration. Chapter 6 to the Central American Treaty on Investment and Cross-Border Trade in Services also recognizes the ability of the governments to refer disputes that may arise among them concerning obligations related to financial services to binding arbitration. Although rather superfluous given that most of the Central American countries already permit the cross-border movement of their nationals without visas, and some even grant them automatic residency and citizenship under their constitutions, Chapter 7 to the Central American Treaty on Investment and Cross-Border Trade in Services does provide a formal system for the temporary entry of businesspersons, investors, and service providers as well as the intracompany transfer of management or specialized personnel. This mechanism appears more directed to Costa Rica, which, given its higher standard of living, has historically been very cool to the concept of free movement of labor within Central America. In any event, the most notable aspect of Chapter 7 is that it prohibits countries from imposing numerical restrictions on entry or requiring that persons seeking temporary entry as businesspersons, investors, intra-company transferees or service providers first obtain some type of labor certification. In February 2007 the five CACM countries issued a protocol that made various modifications to their 2002 Central American Treaty on Investment and Cross-Border Trade in Services. These changes were occasioned as a result of the obligations assumed under the U.S.-Central America and Dominican Republic Free Trade Agreement (CAFTA-DR). The only country, to date, that has ratified the Protocol to the Treaty on Investment and Trade in Services is Guatemala. In any event, given that the provisions of CAFTA-DR on services are already binding on intra-CACM trade in services, their formal incorporation into the Central American integration system is more of a technicality. Among the modifications that are made to the original 2002 treaty are more explicit recognition and protection of confidential or privileged business information and a more expansive definition of what is an investment (which now explicitly includes futures, options, and other derivative instruments, concessionary interests, and licenses). The rules for investor-state disputes are also expanded, and the option that either party can demand that administrative remedies must first be exhausted before submitting a dispute to binding arbitration is eliminated. Interestingly, Section 3(d)(ii) to Annex 3.11 of the protocol states that “except in exceptional circumstances, regulatory acts by a State Party of a non-discriminatory nature do not constitute an indirect expropriation if they are designed or applied to protect the legitimate objectives of public well being such as public health, security, and the environment.” With respect to the cross-border trade in services, the 2007 Protocol to the Treaty on Investment and Trade in Services explicitly prohibits a government from imposing restrictions on the number of service providers that may have access to its local market, on the value or the number of transactions that a


service provider may engage in, on the number of persons it can employ, or the legal vehicle through which services must be offered (i.e., as a corporation, etc.). The most notable modification, however, is with respect to the fact that the provision on access to public telecommunication networks and services now includes Costa Rica. There are also more extensive obligations imposed on the governments to ensure that monopolies or major providers of public telecommunication services do not take unfair advantage of their dominant market position with respect to such things as inter-connections, resale of services, or access to underwater cables. This includes the creation of genuinely independent regulatory bodies for the telecommunication sector. In terms of financial services, the 2007 Protocol to the Treaty on Investment and Cross-Border Trade in Services is much more expansive in terms of what is deemed to be a financial service and now specifically encompasses participation in and services related to the issuance of shares, administration of investment and private pension funds, as well as investment advisory services. No restrictions can be placed on the number of financial institutions from one CACM country that can operate in another member state’s territory, nor can limitations be placed on the total value of the transactions, total number of operations, or total number of employees. Mandates on the type of legal entity through which a financial services provider can offer its services are also prohibited. At the same time, national exceptions to the general rules for liberalization of the cross-border trade in financial services or special domestic regulations are now much better delineated than was the case in the original 2002 Central American Treaty on Investment and Cross-Border Trade in Services. Services are liberalized within the Central American context under a “negative list” format. This means that all services are liberalized, except for those specifically included in lists of exceptions. This is in contrast to the “positive list” approach of the WTO or MERCOSUR, where only those sectors specifically negotiated and included on lists are subject to liberalization. The sectors that are excluded by each Central American country from the general intra-CACM trade in services and investment liberalization are found in countryspecific annexes that are almost identical to those included in CAFTA-DR. The Central American countries are under a general obligation to meet on a regular basis to discuss eliminating these exceptions. For example, only Costa Rican nationals or Costa Rican majority owned firms can presently obtain a radio or TV operators license; foreigners are not allowed to own land in the Department of Petén in Guatemala or to be a notary; foreign actors cannot perform in El Salvador without prior authorization from the Ministry of Governance and only Salvadoran nationals can teach national history or constitutional law; only Honduran nationals by birth can be customs agents, hold executive positions at newspapers, radios, or TV stations that operate within the country, or operate a casino; and all armed security guards and tourist guides in Nicaragua must be nationals of that country. The Central American governments also reserve to right to offer special set-aside programs to assist traditionally marginalized social and/or ethnic groups. In addition, El Salvador excludes foreign insurance companies from operating branches within its territory for up to the first three


years after the 2007 Protocol to the Treaty on Investment and Cross-Border Trade in Services comes into force, while Nicaraguans are not allowed to take out insurance policies with companies not duly authorized to do business in their country. XIII.

Intellectual Property Rights Protection

The Central American Convention for the Protection of Industrial Property was signed in 1968 by El Salvador, Guatemala, Nicaragua and Costa Rica and dealt with trademarks, trade names, and advertising slogans. A Protocol to the convention was signed in November 1994 (and subsequently modified in 1997 and 1998) that would have made the original convention compatible with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). It also removed a prohibition found in the original convention that prevented the signatory states from signing any other international trademark conventions unless there was a prior consensus among all four signatory states to do so. The Protocol to the Central American Convention for the Protection of Industrial Property required ratification by at least three of the four countries before it could come into force. By September 1999 only Nicaragua had actually ratified the protocol. As a result, the four signatory states to the original 1968 convention met in San Jose, Costa Rica, and formally abrogated the Central American Convention for the Protection of Industrial Property effective January 1, 2000. The 1968 convention did, however, remain in effect after that date for those countries that had still not implemented new domestic trademark legislation. El Salvador was the last to do so in June 2002. Although the four original signatories to the 1968 convention agreed to draft a new Central American treaty on intellectual property when they all had new national trademark laws in place, this has never happened. In the 2007 Framework Agreement on the Central American customs union signed by all five CACM countries, however, a commitment was made to develop a regional law for the protection of intellectual property. While there are currently no Central American norms on intellectual property, it is important to note that all the Central American countries are members of the WTO. Accordingly, they are all bound by the TRIPs Agreement that, because they are all developing countries, became effective for them on January 1, 2000. In terms of other international treaties affecting intellectual property rights, all five CACM countries have now ratified: (1) the Paris Convention for the Protection of Industrial Property (i.e., patents and trademarks); (2) the Berne Convention for the Protection of Literary and Artistic Works (i.e., copyrights); (3) the Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms; (4) the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations; (5) the Budapest Treaty on the International Recognition of the Deposit of Microorganisms The full texts of all these treaties and agreements (but for the Convention for the Protection of New Varieties of Plants) are available at the Web site of the World Intellectual Property Organization (WIPO) at http://www.wipo.int/treaties/en.


for the Purposes of Patent Procedure; and (6) the Patent Cooperation Treaty. All five CACM countries are also parties to the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty. The Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite has been ratified by Costa Rica, Honduras, and Nicaragua. Costa Rica and Nicaragua have ratified the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration. Only Honduras has so far adopted the Trademark Law Treaty done at Geneva in 1994. At the present time, only Nicaragua is a signatory to the International Convention for the Protection of New Varieties of Plants.10 No CACM country has yet signed the Patent Law Treaty or the Hague Agreement Concerning the International Registration of Industrial Designs. Similarly, no CACM country has yet signed the Madrid Agreement Concerning the International Registrations of Marks let alone its protocol. XIV. Environmental Protection The idea to create the CCAD was first proposed during a 1989 Summit of the presidents of the five CACM countries in Costa Rica. In July 1991 the presidents of the CACM states approved the accession of Belize and Panama to the CCAD. The CCAD is designed to, inter alia, support efforts of the national authorities in each of the seven signatory states to protect their natural resources and environment and to make their different domestic legislations compatible with efforts to develop a regional sustainable development policy. The CCAD is also supposed to serve as the intermediary between foreign donors and projects designed to protect Central America’s environment and promote sustainable development. In Mach 1991 the governments of the five CACM countries plus Belize and Panama approved the creation of a Central America Inter-Parliamentary Commission on the Environment and Natural Resources (CICAD). Each country is represented by the head of its respective Commission on the Environment and Natural Resources, which is, in turn, attached to its national legislature. CICAD is designed to encourage cooperation and periodic consultations between the legislatures of the Central American isthmus so as to better coordinate actions that need to be taken related to the environment. In particular, the goal of CICAD is to develop model environmental legislation and contribute in efforts to implement national and regional policies designed to improve legal systems so as to provide an effective means of enforcing existing environmental laws. In June 1992 the presidents of the five CACM countries and Panama met in Managua and approved the Convention for the Preservation of Biodiversity and the Protection of Priority Wildlife Areas in Central America. The objective of the convention is to preserve what is left of the biological diversity of the land and sea coasts of the Central American region. Interestingly, the convention acknowledges that certain traditional practices and innovations 10 The full text of the various Acts of the 1961 International Convention for the Protection of New Varieties of Plants, as revised at Geneva (1972, 1978, and 1991) is available at http://www.upov.int/en/publications/conventions.


of Central America’s indigenous peoples with respect to sustainable uses of biological resources are worthy of being widely disseminated and imitated by the population at large. Under the 1992 Convention for the Preservation of Biodiversity and Protection of Priority Wildlife Areas, the six signatory states agree—to the extent they are capable and to the degree it is compatible with national programs and priorities—to do everything possible to preserve and encourage sustainable use of Central America’s biodiversity and to cooperate on border projects that protect the region’s biodiversity. Among the specific measures the signatories agree to undertake is the adoption of legal and economic incentives that favor sustainable use and development of the region’s biodiversity, obtain new funds for programs destined to preserve biodiversity, support scientific research, and raise public awareness within each country of the need to preserve biodiversity. Each government is also encouraged to implement national laws for the preservation and sustainable use of everything that contributes to a country’s biodiversity and to establish new wildlife preserves and national parks (especially those that protect rain producing forests). Eleven natural reserves along borders are singled out for greater protection. These include the: 1. Mayan Biosphere Reserve, 2. Brotherhood or Trifinio Biosphere Reserve, 3. Gulf of Honduras, 4. Gulf of Fonseca, 5. Rio Coco or Solidaridad Reserve, 6. Miskito Key Islands, 7. International System of Areas Protected for Peace or SIAPAZ, 8. Salinas Bay Reserve, 9. Friendship (i.e., La Amistad) Biosphere Reserve, 10. Sixaola Reserve, and 11. Darién Region. The 1992 Convention for the Preservation of Biodiversity and the Protection of Priority Wildlife Areas gives the CCAD responsibility for creating and strengthening the Central American System of Protected Areas (SICAP) and authorizes it to solicit international support for biodiversity conservation projects. The convention also establishes the Central American Council on Protected Areas that is linked to the CCAD. Pursuant to the convention, the signatory governments commit themselves to developing plans for sustainable rural development, to control or eliminate the introduction of outside species that threaten natural ecosystems, and to ratify various international treaties if they have not already done so, including the: Convention on the International Trade of Endangered Species; Convention on the Preservation of Wetlands of International Importance and Sites for Migratory Birds; and UNESCO Convention on the Protection of the Natural and Cultural Patrimony of Mankind. Furthermore, the governments also agree to, inter alia, regulate trade in biological resources, evaluate the environmental impact of development projects, restore sites destroyed by war in an ecologically friendly manner, and


encourage greater use of environmentally friendly new technologies, especially in the agricultural sector, among their citizens. In December 1992 the presidents of the five CACM countries and Panama met in Panama City and approved a Regional Agreement on the Cross Border Movement of Hazardous Wastes. The agreement arose out of concerns that Central America was being used as a dumping ground for foreign hazardous waste as well as recognition of the dangers inherent in transporting such material within the isthmus itself. The agreement does not cover radioactive wastes (which are subject to international systems of control) or waste discharged from ships (also regulated by international agreements). The annexes to the Regional Agreement list whole categories of waste products deemed dangerous (e.g., medical wastes, PCBs, etc.) and what are the characteristics that make something hazardous (e.g., propensity to explode, flammability, toxicity, etc.). Pursuant to the Regional Agreement, the signatory states agree to undertake all appropriate measures to prohibit the importation and the transit of dangerous wastes into areas under their jurisdiction from outside Central America. Similarly, they obligate themselves to prevent the dumping of dangerous waste products within their territorial waters. Each government is also required to adopt and enforce laws preventing the release into the atmosphere of substances that can cause harm to humans and the environment, and to cooperate with the other Central American countries in achieving these goals. Furthermore, the governments must prohibit the export or transit of hazardous wastes that originate within their territory to or through another Central American country that bans its importation. If they do not already have them, the signatory states to the Regional Agreement must also adopt laws imposing criminal sanctions on anyone involved in the illegal transport of hazardous waste. Finally, each government is required to keep CCAD and other regional environmental agencies fully informed of all matters related to the transport of hazardous wastes that originate, pass through, or may end up within their national territory. On October 23, 1993, the Ministers of Foreign Affairs from the five CACM countries, plus their counterpart from Panama, met in Guatemala City and signed the Regional Convention on Climate Change whose primary objective is to protect the climate for current and future generations of Central Americans in an equitable way and within the capacity constraints of each country “so as to ensure that food production is not threatened and to allow the continued economic development of each signatory state.” Each government agrees—according to its capabilities and national priorities—to undertake all the necessary steps required to ensure climate preservation, develop appropriate mechanisms for doing so that fall within their jurisdiction, and to cooperate in developing regional efforts at climate preservation. Among the specific steps governments may undertake are providing incentives for researching the effects of climate change and fund programs to prevent it. In addition, governments are encouraged to, inter alia, enact laws promoting climate preservation, establish appropriate systems for measuring greenhouse gas emissions, promote the use of environmentally friendly technologies, and


appeal to the international community for the transfer of environmentally friendly technology and funds for priority projects related to climate change. The Regional Convention also called for the establishment of a Central American Council on Climate Change (CCCC) that works with the CCAD and the Regional Committee on Water Resources of the Central American Isthmus (CRRH). On the same day that the Regional Convention on Climate Change was signed, the five CACM countries and Panama also signed the Regional Convention for the Management and Conservation of the National Forest Ecosystems and the Development of Forest Plantations (Convention on Forestry). This Convention on Forestry seeks to promote national and regional efforts to prevent mass deforestation and recover lost forestland to develop into reserves. The Convention on Forestry also seeks to develop a uniform Central American soil classification system. The signatory states obligate themselves to, among other things, consolidate a national and regional system of protected wildlife areas, educate their citizens on the need to wisely manage forests and trees for future productive use, rehabilitate degraded forests, recover woodlands, and prevent the illegal trade of wood and wood products. The signatory states also obligated themselves to adopt action plans to protect tropical rain forests, create special environmental protection units for forest resources, enact laws that make environmental impact studies mandatory for all projects that can potentially damage forests, and hire sufficient personnel to protect national parks. To oversee implementation of the Convention on Forestry, a Central American Council on Forests is created that is linked to the CCAD and each country’s Administration of the Environment and Development unit. The members of the Central American Council on Forests come from each country’s forestry agency and/or entity responsible for the protection of tropical rain forests. CCAD is authorized to seek international financial aid to help implement programs called for under the Convention on Forestry. In October 1994 the presidents of the five CACM countries plus Belize and Panama, launched the Central American Alliance for Sustainable Development (ALIDES). ALIDES seeks to provide an integrated, regional strategy for sustainable development in Central America through short-, medium-, and long-term policy initiatives and programs. The environmental goals of ALIDES include the reduction of air, water, and soil pollution; enhancing capacity to regulate, oversee, and enforce environmental norms; reducing the pace of deforestation; safeguarding the region’s biodiversity; and harmonizing environmental management policies and systems. In order to facilitate implementation of ALIDES’s programs, a National Council for Sustainable Development was created in each of the seven signatory states. A Central American Council of Sustainable Development was also created, made up of the heads of state of the seven signatory countries. Those functions arising under ALIDES directly related to the environment, however, were later assumed by the CCAD. In order to incorporate input from organizations deemed to be representative of civil society, a Central American Forum for Civil Society on the Environment and Development was created.


Table 8.2. Ratification Status of Central American Environmental Agreements and Treaties Treaty

Costa Rica

El Salvador

Guatemala

Honduras

Nicaragua

Panama

Convention for the Preservation of Biodiversity & Protection of Wildlife Areas

Dec. 9, 1994

May 19, 1994

Oct. 22, 1993

Feb. 21, 1995

Jan. 12, 1996

May 26, 1995

Regional Agreement on Cross Border Movement of Hazardous Wastes

Nov. 9, 1995

Nov. 25, 1997 Aug. 10, 1995 July 20, 1994

Aug. 26, 1996 June 22, 1995

July 28, 1995

Nov. 19, 1992

Regional Convention on Climate Change Regional Convention for Management & Conservation of Natural Forests

Belize

July 14, 1994 Jan. 9, 1996

June 22, 1996 July 24, 1995

Mar. 20, 1996 July 29, 1995

Oct. 15, 1999

May 26, 1995

June 21, 1995

The Dominican Republic officially became an observer at meetings of the CCAD in 2005. In 2005 the CCAD also released a second five-year Plan of Action that focuses on three key areas: (1) prevention and control of environmental contamination, (2) conservation and sustainable use of the natural patrimony, and (3) strengthening of CCAD’s institutional framework in order to make it a more effective agency for interjecting environmental concerns onto the regional development agenda of the Central American Presidents’ Meeting. Among the specific goals of this latest Plan of Action is to harmonize the requirement for preparing environmental impact statements and water quality standards among all the SICA countries, improving the regulatory framework for managing access to genetic material and bio-security, and increase the number and territory of protected ecosystem zones. XV. Opportunities for Foreign Direct Investors Despite the encouraging figures for trade flows within Central America sparked by the revived CACM, the opportunities that the Central American economic integration process provides for foreign investors are not as broad as those provided by other Latin American economic integration programs. With


the notable exception of Costa Rica, the other four Central American countries have the unfortunate distinction of enjoying among Latin America’s lowest per capita incomes.11 Furthermore, wealth is concentrated in small, affluent elites that favor luxury items imported from outside the region. Accordingly, using one Central American country as a springboard to serve the rest of the Isthmus does not, in and of itself, provide the same lucrative opportunities that a similar strategy offers in the context of MERCOSUR or even the Andean Community in South America. Despite these limitations, there are companies that view Central America as a single market. Unilever, for example, began distributing ice cream regionally from El Salvador in the 1990s.12 While the revived CACM in and of itself may not be a major inducement for attracting new foreign investment to Central America, the network of free trade agreements that the five CACM countries have with Chile, the Dominican Republic, Mexico, and the United States help to make the region a very attractive place for certain types of foreign direct investors to locate their operations. In addition, Costa Rica has a free trade agreement with Canada and the Caribbean Common Market and Community (CARICOM). Furthermore, under the San José Dialogue with the European Union, a wide array of Central American agricultural and manufactured products (with Andean or Panamanian inputs as well) are allowed duty-free or preferential tariff entry into the European Union. The Agreements Arising Under the San José Dialogue initiated by the then European Economic Community in 1984 and renewed by the European Union in 1993 and 2003 will eventually be replaced by a separate Economic Partnership Agreement (EPA) that is currently being negotiated between the European Union, on the one hand, and the five Central American countries and Panama as a single bloc. It is expected that in addition to some type of free trade accord on goods, the EPA will also provide for bilateral commitments on trade in services and investment. In terms of Asian links, Guatemala’s free trade agreement with Taiwan came into force on July 1, 2006. Nicaragua signed a free trade agreement with Taiwan in June 2006, while El Salvador and Honduras did so in May 2007. In response to the country’s network of free trade agreements as well as its stable economy and political system, German auto part supplier Continental announced plans in late 2007 to begin constructing a U.S.$61.5 million dollar factory in Costa Rica to produce control units for engines and transmissions that would be exported to Canada, Mexico, and the United States. This is in keeping with the Costa Rican government’s strategy to encourage exportdriven investment in the country to produce automobile parts, sophisticated electronic equipment, and complex medical instruments. For its part, Proctor and Gamble has set up one of the largest of its worldwide shared-service centers in Costa Rica, where accounting, human resources, and other management 11 Data provided by the Inter-American Development Bank (http://www.iadb.org reveals that in 2006 per capita gross domestic product (GDP) in Costa Rica was U.S.$4,858, in El Salvador U.S.$2,619, in Guatemala U.S.$2,508, in Honduras U.S.$1,213, and in Nicaragua U.S.$908. 12 P. Hudson, Central America: Ahead of the Curve, 31 Bus. Latin Am. 4 (Dec. 2, 1996).


services are performed.13 Meanwhile, U.S. companies such as Alcoa, Lear, and Russell have chosen Honduras to assemble electrical automotive parts that are exported throughout North America. Chinese membership in the WTO and the expiration of the textile and apparel quota regime sanctioned by the WTO’s Agreement on Textiles and Clothing in 2005 have contributed to a steady decline in Central American clothing exports to the United States in recent years. CAFTA-DR may reverse this trend, particularly in the niche, higher value added “just in time” market that requires rapid responses to changing fashion and seasonal demand. Following ratification of CAFTA-DR, the Brazilian textile manufacturer Santista Textil invested heavily in Honduras to produce inputs for apparel products exported to the United States at preferential tariff rates. For its part, U.S.-based Parkdale Mills is constructing a yarn-making facility in Honduras to make textiles that are incorporated in apparel exported to the U.S. market. On the other hand, in an effort to diversify its free zone operations away from their traditional heavy dependence on the export oriented apparel industry, the Nicaraguan government inaugurated a U.S.$4.8 million call center facility in one Managua free zone in 2006. A. Plan Puebla-Panamá Another area where the revived CACM provides opportunities for foreign investors is in regional infrastructure projects. In July 2001 then Mexican President Vicente Fox convinced his counterparts from the SICA countries (including Belize) to launch the so-called Plan Puebla-Panamá (PPP). The PPP builds on previous efforts in nine southern Mexican states, on the one hand, and in Central America, on the other, to improve regional infrastructure (such as the effort to connect the electrical grids of all the Central American countries launched in the 1990s) and support efforts at sustainable development (such as the Mesoamerican Biological Corridor). The basic idea behind the PPP is to group under one umbrella a wide assortment of projects so as to ensure that they result in a genuine integration of the entire region and facilitate efforts to obtaining funding to ensure that they are implemented. Projects under the PPP can be financed by either the Inter-American Development Bank, CABEI, the Andean Development Corporation, and/or the Official Credit Institute of Spain, as well as private sector sources and governments. The PPP currently has guaranteed funding of some U.S.$4 billion to implement a portfolio of some 100 infrastructure projects. The PPP has an executive board that is based in the capital of El Salvador. Colombia has participated in the PPP since 2006. The PPP is currently focused on eight regional initiatives that deal with:

13 Economic Commission for Latin America and the Caribbean, Foreign Investment in Latin America and the Caribean 2004 58 (2005). With an initial investment of U.S.$60 million and 300 employees, Proctor & Gamble’s decision to invest in Costa Rica in 2000 was based on the country’s high quality labor force and flexible labor laws, in spite of the fact that labor costs are higher than in other Central American countries. Id. at 58.


1. 2. 3. 4. 5. 6. 7. 8.

energy, transportation, telecommunications, tourism, trade facilitation and enhancement of competitiveness, human development, sustainable development, and prevention and mitigation of natural disasters.

To date, the PPP has coordinated efforts to secure financing for the construction of a single electrical transmission line from Guatemala to Panama known as the Electrical Interconnection System of the Countries of Central America or Sistema de Interconexión Eléctrica para los Países de América Central (SIEPAC), as well as the construction of the new El Chaparral hydro-electrical dam in El Salvador. An electrical inter-connection that was completed in 2007 now links Mexico and Central America via Guatemala. Interestingly, there is a proposal to lay a fiber optic line in conjunction with the SIEPAC that would create a Mesoamerican Electronic Information Highway. The PPP has also overseen efforts to establish a “dry canal” that links the Caribbean and Pacific oceans by improving port and customs facilities in Acajutla in El Salvador and Santo Tomás de Castilla and Puerto Barrios in Guatemala, as well as enhancing highway links between them. Another inter-oceanic logistics corridor, to which Japan and Mexico have either donated or loaned money for road improvements, will link up the ports of Cutuco in El Salvador with Puerto Cortés in Honduras. Falling under the PPP is also a project to reduce by 300 kilometers the trip from Puebla to Panama by building new roads and bridges, while a second north-south corridor would link Puerto Cortes in Honduras with Coatzales in Mexico and facilitate access to major Mayan archeological sites. A third road project seeks to link Cancun in Mexico with coastal Guatemala and Honduras and passes through Belize. B. Electricity Integration of Central America During the 1990s the Inter-American Development Bank financed the inter-connection of the national energy grids of all five CACM countries and Panama at a cost of half a billion dollars. The completion of that interconnection effort improved the reliability of service and reduced consumer rates. One of the countries that most benefited from the inter-connection of the regional electrical grid was Honduras, which had previously been plagued by constant power outages that disrupted industrial production and reduced the country’s attractiveness as a locale for foreign investors to set up maquila type manufacturing facilities. As a result of the inter-connection of all the Central American electricity grids, a Regional Electricity Market or Mercado Eléctrico Regional (MER) was established following the entry into force of the Framework Treaty on the Electricity Market of Central America in January 1999. The Framework Treaty (and two subsequent protocols) opens the domestic markets of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama to operators from any


of these six Central American countries in terms of the generation, transmission, as well as the sale and purchase of electricity. The second protocol to the Framework Treaty establishes general regulations for the regional electricity market. Two institutions with supranational authority were also established to oversee this regional electricity market: (1) the Regional Commission on Electricity Interconnection or Comisión Regional de Interconexión Eléctrica (CRIE) and (2) the Regional Operating Authority or Ente Operador Regional (EOR). The CRIE is tasked with ensuring that the governments fulfill the commitments made in the Framework Treaty and subsequent regulations that arise out of it, while the EOR oversees actual operations of the electrical inter-connections and authorizes the exchange of surplus energy flows by directing them to where they are most needed. The Framework Treaty on the Electricity Market of Central America also permitted the establishment of a new company that could either be a wholly owned state entity or a mixed public-private sector enterprise that would be responsible for constructing and operating a single 1,800 kilometer transmission line stretching from Guatemala to Panama. This single transmission line would be called SIEPAC. The new company that is supposed to operate SIEPAC is the Empresa Propietaria de la Red (EPR). The basic idea behind SIEPAC is that a seamless transmission line operating at the same electrical current will enhance the reliability of electrical flows and be less prone to bottlenecks than the system operating since 1999, which relies on bilateral inter-connections at border crossings. There are already discussions about linking SIEPAC to the Colombia electricity grid (which, in turn, is already connected to the Ecuadorian and Peruvian electricity grids). Construction of SIEPAC began in April 2007, and the final projected cost is estimated to be U.S.$385 million. It is expected that SIEPAC should be completed and fully operational by 2009. XVI. Trade Agreements Between Central America and Other Nations in the Western Hemisphere A. Association of Caribbean States On July 24, 1994, in Cartagena, Colombia, the six SICA countries (i.e., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama) signed the Convention Establishing the Association of Caribbean States (ACS), which seeks to strengthen the regional cooperation and integration process, with the then 12 sovereign member states of CARICOM, as well as Colombia, Mexico, Venezuela, Cuba, the Dominican Republic, Haiti, and Suriname. The original goal of the ACS was to gradually lower trade and investment barriers among the participating countries, thereby creating a Greater Caribbean free trade area. The ACS Agreement established a Council of Ministers and a Secretariat as permanent institutions. The Council is made up of one representative from each ACS member state. Five special committees currently assist the Council of Ministers on matters that fall within their respective expertise. These include the Special Committees on:


1. 2. 3. 4. 5.

Trade Development and External Economic Relations, Sustainable Tourism, Transport, Natural Disasters, and Budget and Administration.

All decisions adopted by the Council of Ministers are by consensus, although procedural matters only need a two-thirds majority to be approved. The Council of Ministers has the final word on any disputes that may arise among the signatory states with respect to the interpretation or application of the ACS Agreement. The Secretariat, based in Trinidad and Tobago, is the principal administrative body of the ACS and is headed by a Secretary General chosen for one four-year term. Efforts by the Central American countries to reach out to CARICOM through the ACS coincided with efforts to include Belize as a full-fledged member of SICA. For example, Article 36 of the Protocol of Tegucigalpa specifically permits Belize to become a full member of SICA or otherwise establish some type of alternative associative relationship. Although technically part of Central America, Belize was traditionally excluded from efforts at Central American economic integration because of its English heritage and the fact that Guatemala historically claimed all of its territory as its own. In 1991, however, Belize participated with the other SICA countries and Panama in establishing the Central American Commission on the Environment and Development (CCAD). In addition, it signed and ratified the 1993 Regional Convention on Climate Change and participates in ALIDES, which was launched in October 1994. Belize became a full member of SICA in December 2000 (although it does not participate in the revived CACM intra-regional free trade program). Since its founding in 1994, the original goal of a Greater Caribbean free trade area has been pushed to the background as ACS has become more of a regional cooperation body to redress issues of concern to its 25 member states14 and four associate members.15 These include preserving the environmental integrity of the Caribbean Sea and promoting the sustainable development of the Caribbean Basin. The ACS has, however, been instrumental in identifying obstacles to trade and investment among member states and promoting trade facilitation.

14 The ACS’s current members include: (1) Antigua and Barbuda, (2) the Bahamas, (3) Barbados, (4) Belize, (5) Colombia, (6) Costa Rica, (7) Cuba, (8) Dominica, (9) the Dominican Republic, (10) El Salvador, (11) Grenada, (12) Guatemala, (13) Guyana, (14) Haiti, (15) Honduras, (16) Jamaica, (17) Mexico, (18) Nicaragua, (19) Panama, (20) St. Kitts and Nevis, (21) St. Lucia, (22) St. Vincent and the Grenadines, (23) Suriname, (24) Trinidad and Tobago, and (25) Venezuela. 15 Associate members of the ACS who have the right to intervene in discussions and vote on matters that directly affect them include: (1) Aruba; (2) France (on behalf of French Guiana, Guadeloupe, and Martinique); (3) the Netherlands Antilles; and (4) Turks and Caicos.


B. Costa Rica-Mexico Free Trade Agreement In April 1994 Costa Rica signed a free trade pact with Mexico that became effective on January 1, 1995. Although the vast majority of goods traded between both countries did so duty free as of January 1, 1995, those that did not were subject to a gradual reduction in tariffs that culminated at 0 percent by January 1, 2000. Sensitive agricultural products such as bananas, meat, poultry, and sugar were subject to an even longer transition period that did not result in the elimination of all duties until January 1, 2005. During the transition period both countries were also under an obligation to eliminate all non-tariff barriers to bilateral trade.16 In addition, both countries eliminated all export subsidies as of January 1, 1999, and agreed not to engage in any other type of unfair trade practices. In order to be able to take advantage of the bilateral free trade program between Costa Rica and Mexico, goods must comply with the requisite rule of origin requirements. Goods, which are wholly made within any of the two countries and contain inputs that originate in any of the two countries or inputs that are imported from third countries but are substantially transformed in either so as to achieve a new tariff classification heading and/or comply with the requisite minimal content requirement, are entitled to bilateral free trade treatment. In general, for a good to fulfill the regional content requirement, at least 50 percent of its value must represent inputs that originate in one or both of the two countries. The chemical, plastics, textile, steel, copper and aluminum industries have their own special rules of origin. Safeguard measures within the Costa Rica-Mexico Free Trade Agreement include all those permitted by Article 19 of the WTO’s General Agreement on Tariffs and Trade. Safeguard measures can be imposed to protect a particular facet of national production from sharp increases in imports only until January 1, 2010. These measures can consist of tariff increases or the non-implementation of an already agreed upon tariff reduction for a period of up to one year (renewable for one more year if the particular circumstances warrant it). Unlike traditional Latin American preferential market access agreements, the Costa Rica-Mexico Free Trade Agreement goes beyond purely trade-related issues and encompasses other sectors of the economy. To begin with, there are provisions that call for the opening up of each country’s services sector to nationals of the other. Specifically excluded from this general liberalization, however, are services traditionally rendered by the respective governments (for example, insurance in Costa Rica), as well as air transport and financial services. Any legal requirements that services can only be performed by an entity operating within the particular country are eliminated. In order to facilitate the liberalization in the offering of services, both countries obligate themselves to streamline visa requirements for businesspeople, investors, and employees, and permit companies to make a one-time request of entrance visas covering all intra-company transfers of personnel. 16 In order to insure that sanitary and phytosanitary rules would not become impediments to free trade, both countries were obligated to formulate and apply transparent rules.


With respect to the procurement of goods and services by government or state-owned enterprises (such as PEMEX, the state petroleum company in Mexico), both Costa Rica and Mexico obligate themselves to make bidding rules and procedures transparent and non-discriminatory to nationals of the other country. Contracts involving less than certain minimal amounts are excluded from this obligation (i.e., goods and services contracts worth less than U.S.$50,000, or public works projects worth less than U.S.$6.5 million in the case of a government entity or U.S.$8 million in the case of a mixed public-private enterprise). In addition, certain procurement contracts in Costa Rica can be excluded from the general liberalization program until 2005. Each country is also obligated to provide review bodies to respond to charges by a losing firm that a bid was unfairly granted. The Costa Rica-Mexico Free Trade Agreement contains provisions for the protection of investments by one country’s nationals in the other country. A special mechanism for the resolution of investment-related disputes between the investor and the host government is established. Under the Costa Rica-Mexico Free Trade Agreement, each country is required to provide effective methods for the adequate protection of all forms of intellectual property rights. The Costa Rica-Mexico Free Trade Agreement obligates both countries to work together to establish technical norms that are compatible, with the goal of harmonizing norms (in the event of incompatibility) that require the highest level of safety and protection. A Committee on Technical Norms oversees efforts to harmonize technical norms among the two countries and resolve any disputes that may arise among them concerning technical barriers. A three-step dispute resolution mechanism is established in the Costa RicaMexico Free Trade Agreement to resolve any general disputes that may arise with respect to the interpretation of provisions in the agreement or the failure to adhere to its provisions by one of the two governments. As a first step, the two countries agree to resolve disputes at the inter-governmental level through discussions. If this is not possible, the matter is referred to the Administrative Commission in charge of overseeing the agreement’s implementation. If the commission cannot successfully resolve the dispute, it is referred to an arbitral panel consisting of five members. Each side to the dispute picks two arbitrators who cannot be a national of that country. The fifth arbitrator is chosen by mutual consent. Any decision made by the arbitral panel is final, and a failure to adhere to a decision permits the state that won to suspend certain privileges given to the non-complying state under the agreement (so long as the privilege being withdrawn is a measured response to the damage suffered as a result of the non-compliance). C. Nicaragua-Mexico Free Trade Agreement Mexico and Nicaragua concluded years of negotiations and finally signed a bilateral free trade agreement on September 18, 1997. As soon as the agreement came into force on July 1, 1998, some 76 percent of Nicaragua’s


exports at the time began entering Mexico duty free (including important Nicaraguan exports such as beans, beef, cheese, and powdered milk). Tariffs on the remaining items were gradually reduced either over a five, ten or 15year time frame. The Nicaraguan phase-out of tariffs on Mexican goods did not begin until January 1, 2000, although a limited number of Mexican products did get immediate duty-free access to the Nicaraguan market as soon as the agreement took effect. In order to take advantage of the bilateral free trade program, goods must originate in either Mexico or Nicaragua or be made with inputs that do. As an alternative, goods made with foreign inputs that undergo a change in tariff classification heading in one or both countries qualify for bilateral free trade. Similarly, goods made with foreign inputs whose values do not exceed 50 percent of the final product’s value, will also be deemed as originating in Mexico and/or Nicaragua. As was true of Mexico’s earlier agreement with Costa Rica, the free trade accord with Nicaragua includes nearly identical provisions with respect to the liberalization of the services sector (including telecommunications and financial services), protection of intellectual property rights and cross-border investments, and non-discriminatory access to government procurement contracts. The Nicaragua-Mexico Free Trade Agreement also requires that technical norms, as well as sanitary and phytosanitary rules, and the imposition of safeguard measures and remedies to combat unfair trade practices all be compatible with WTO obligations. A general dispute resolution mechanism for resolving state-to-state disputes over non-compliance or conflicting interpretations of obligations is established that offers two options: either the WTO dispute resolution mechanism (assuming it has jurisdiction over the matter) or the agreement’s three-step system that can ultimately result in binding arbitration. A separate dispute resolution mechanism also exists for resolving disputes that may arise between private investors and a host government. Interestingly, the Nicaragua-Mexico Free Trade Agreement specifically allowed both countries to continue using export subsidies until 2007, so long as the subsidy did not exceed 7 percent of the benefited good’s freight on board (FOB) value. This measure represented a concession on the part of Nicaragua, as it was precisely Mexican export subsidies that had been the primary cause for the long delay in concluding not only the free trade agreement between Mexico and Nicaragua, but with the three Northern Triangle countries of Central America (i.e., El Salvador, Guatemala, and Honduras) as well. D. Central America-Dominican Republic Free Trade Agreement On April 16, 1998, the Presidents of the Dominican Republic as well as Costa Rica, El Salvador, Honduras, Nicaragua, and the Guatemalan Minister of the Economy met in Santo Domingo and signed an agreement to create a free trade area in goods and services between the five CACM countries and the Dominican Republic. The agreement was originally scheduled to come into force on January 1, 1999, based on an assumption that all six signatory governments would have ratified it by then. In point of fact, it came into force


piecemeal. In the case of Guatemala and El Salvador, the date was October 4, 2001; Honduras on December 19, 2001; Costa Rica on March 7, 2002; and, Nicaragua on September 3, 2002. Unless otherwise specified in special protocols to the treaty, tariffs were to be immediately lifted on all products traded between the five CACM countries and the Dominican Republic as soon as the agreement took effect between them. Costa Rica, El Salvador, Guatemala, and the Dominican Republic included special protocols the day they signed the treaty. These protocols included goods that were either permanently excluded from the free trade program (i.e., mostly foodstuffs, tobacco, and a limited number of textiles) or were subject to a gradual phasein to zero duties. Honduras and Nicaragua delayed submitting their respective protocols for over a year, claiming that Hurricane Mitch had created a “climate of uncertainty.” Honduras and Nicaragua finally did sign off on their special protocol, which excluded a substantial list of products that would not achieve duty-free treatment until at least 2004. At first glance the idea of a free trade agreement between the Central American countries and the Dominican Republic might seem inconsequential given their historically insignificant trade flows. The free trade agreement, however, represented an effort by the Dominican Republic to convert itself into a major transshipment center for products coming from Europe and elsewhere to Central America and the Caribbean as well as flowing in the opposite direction. This helps to explain why the agreement devotes a considerable number of pages discussing the intricacies for handling goods shipped in containers. There was also a generalized feeling that the free trade agreement would facilitate integration of the maquila type free zones in Central America and the Dominican Republic by permitting a freer flow of inputs, businesspeople, and services (including financial services) between the isthmus and the Caribbean island. One thing that was thought would facilitate greater Central AmericanDominican Republic trade was the fact that shipping rates between the CACM countries and the Dominican Republic were already less than intra-Central American shipping costs. The rules of origin that determine whether a good can be traded duty free between the CACM countries and the Dominican Republic are found in Chapter 4 of the agreement. Goods wholly originating within the territory of any of the six signatory countries qualify. In general, in order for a good made with foreign inputs to qualify, the extra-regional inputs must be substantially transformed within any of the signatory countries as reflected by a shift in tariff classification heading. There is a de minimis exception that allows up to 7 percent of the value of the final good to be made up of foreign inputs that do not undergo a substantial tariff classification heading and still qualify for duty-free treatment. Minimal transformation such as repackaging, dilution with water, and simple assembly operations will not be sufficient to confer origin. The transaction value method found in the NAFTA rules of origin are also used in the Central America-Dominican Republic Free Trade Agreement to determine the origin of goods made with foreign inputs that do not meet the substantial transformation test. The exact regional content percentages that are required


to confer origin are listed in annexes to the agreement and vary by product. In addition, specific rules of origin exist for a limited number of products where fulfillment of the substantial transformation test is still not sufficient to confer origin. All shipments of products seeking duty-free treatment with an invoice value greater than U.S.$1,000 must be accompanied by a certificate of origin. Chapter 5 of the Central America-Dominican Republic Free Trade Agreement deals with issues related to customs procedures; Chapter 6 deals with sanitary and phytosanitary measures; Chapter 7 deals with unfair trade practice remedies; Chapter 8 deals with safeguard measures; Chapter 9 deals with crossborder investment issues (including a special investor-state dispute resolution mechanism); and Chapter 10 deals with cross-border trade in services (with air transport and services restricted to governments excluded from the general liberalization scheme). Chapter 11 deals with issues related to the temporary entry of businesspeople; Chapter 12 deals with government procurement that extends down to the municipal level; and Chapter 13 deals with technical barriers to free trade. Chapter 14 includes the rules for intellectual property protection and contains a brief reference to the need of the signatory states to implement their WTO TRIPs obligations, while Chapter 15 briefly refers to the need of the signatory governments to prevent monopolistic business practices and develop a common competition policy. The governments have the option to use either the dispute resolution system found in Chapter 16 of the Central America-Dominican Republic Free Trade Agreement or the WTO dispute resolution mechanism (so long as the latter enjoys subject matter jurisdiction) that may arise from the failure to adhere to obligations arising under the free trade agreement or when a difference of opinion arises as to what those obligations entail. The dispute resolution system established in Chapter 16 provides for a three-step procedure: consultations among the two sides to the dispute; intervention by the Joint Administrative Council that oversees the treaty’s implementation (when consultations prove unsuccessful); and, finally, referral to a three-person ad hoc arbitration panel when the Joint Administrative Council is also unable to resolve the dispute. The arbitrators will issue a preliminary decision, which is open for discussion among the two sides to the controversy, before issuing a final and binding decision. Failure to adhere to the final decision, allows the winning party to pursue retaliatory measures that must be commensurate with the damage inflicted and related to the withdrawal of benefits granted the non-compliant party under the free trade agreement. E. Central America-Chile Free Trade Agreement On October 18, 1999, the presidents of Chile and the five CACM countries met in Guatemala City and signed an agreement to create a free trade area between Chile and each of the Central American countries. The treaty comes into effect for each of the five Central American countries as they ratify their respective bilateral agreement with Chile. Among the stated objectives of the agreements are to “promote, protect and substantially increase investments among the State Parties.” The fact that there is a heavy emphasis on cross-


border investment is not a surprise, as Chilean firms are among the most aggressive foreign direct investors in Latin America. In addition, the country’s private pension funds hold huge sums of potential investment capital that successive Chilean governments have allowed to be invested abroad in gradually increasing percentages. As of 2008 Chilean private pension funds can invest up to 45 percent of their capital abroad. Accordingly, a major reason for the free trade agreements signed with Chile was to make the Central American countries as attractive as possible for potential Chilean investment.17 The actual timetables for eliminating tariffs between each of the Central American countries and Chile to zero are included in separate protocols that each country signed with Chile. These protocols may also include additional obligations that are particular to it and involve special rules of origin for certain products, liberalization schedules for services, and rules on customs valuation. As of mid-2008 only the protocols between Chile-Costa Rica, Chile-El Salvador, and Chile-Honduras had been ratified. In the case of Chile and Costa Rica, some goods received immediate duty-free treatment the moment the treaty came into effect in February 2002. However, most goods (depending upon the category they fell under) had tariffs gradually reduced to zero as of January 1, 2004, or at the beginning of 2006, 2008, 2011, or even 2015 for sensitive agricultural products. In the case of Chile and El Salvador, their bilateral protocol came into force in June 2002. The protocol between Chile and Honduras came into force on July 18, 2008. Interestingly, the Central America-Chile Free Trade Agreement allows the signatory states to continue using price band mechanisms on agricultural products (used mainly by Chile and Honduras), something both Chile and the Central Americans were unable to retain in their respective free trade agreements with the United States. The signatory states are under a general obligation to eliminate non-tariff barriers to trade, and not to impose blanket prohibitions on the importation or exportation of goods among them. Chile may, however, continue to prohibit the importation of used vehicles, while Costa Rica is allowed to maintain a state monopoly on the importation, refinement, and distribution of petroleum and other fuels and can prevent the importation of a whole variety of used products. For its part, Nicaragua can adopt or maintain restrictions on the export of basic foodstuffs and prevent the importation of a myriad assortment of used goods. On the other hand, both Honduras and Nicaragua are under an obligation to phase out use of their respective statistical and/or customs service fees on Chilean imports. The general rules of origin for the Central America-Chile Free Trade Agreement are found in Chapter 4. Goods that can take advantage of the free trade program include those that are either wholly sourced or produced with inputs sourced exclusively within Chile and/or Central America. Goods with third country inputs will also qualify if they undergo a substantial change in Chile 17 It is interesting to point out that facilitating cross-border investment may also have been the primary motivation behind the free trade agreement that Chile signed with Panama in June 2006.


and/or Central America as reflected by a shift in tariff classification heading. There is a de minimis rule that allows up to 8 percent of the product’s final value to not undergo a shift in tariff classification heading and be disregarded in terms of fulfilling the substantial transformation test. As an alternative to substantial transformation, if the cost of the extra-regional inputs does not exceed 70 percent of a final product’s value, it will be deemed to originate in Chile and/or Central America. The regional content requirement is calculated similar to the transaction value methodology in NAFTA. Annex 4.03 contains specific rules of origin for particular products, although, as previously noted, there may be additional specific rules of origin found in the bilateral protocols. There are also special rules for determining the origin of fungible goods. Shipments reflecting an invoice value of more than U.S.$1,000 require a certificate of origin that is obtained by the exporter. Unlike the general practice in Latin America, however, the certificate need not accompany the paperwork that is presented to the Customs Service upon entry of the product into its territory. Instead, the NAFTA practice of being able to produce the certificate of origin only if requested by customs is utilized. In addition, the same certificate of origin can be used by exporters to cover identical goods shipped during a one-year period. Importers, who forget to request preferential tariff treatment at the time of entry, may request reimbursement for a period of up to one year thereafter. Chapter 6 to the Central America-Chile Free Trade Agreement contains provisions on the use of safeguard measures that can be utilized against products during their transition period to tariff-free trade plus an additional two years. There are also detailed procedural rules that the agencies responsible for imposing safeguard measures must follow. Interestingly, unlike Chile’s free trade agreements with Canada and Mexico, there is no mention in this agreement about eventually eliminating the use of dumping and countervailing duties (which are permitted so long as they comply with WTO regulations). In an effort to avoid sanitary and phytosanitary measures from becoming potential obstacles to trade, the signatory states agreed in Article 8.06 of the Central America-Chile Free Trade Agreement to accept the equivalency of each other’s norms (even if not identical) so long as they will ensure the health and life of humans, animals, and plants within their national territory and are premised upon sound scientific information and risk evaluation criteria. In Annex 10.01, the 1996 Promotion and Reciprocal Investment Treaty that Chile signed with each CACM country are incorporated into the Central America-Chile Free Trade Agreement. Chapter 11 of the Central America-Chile Free Trade Agreement contains obligations related to the services sector. Specifically excluded from coverage are domestic and international air transport services, which have their own special Chapter (i.e., 12) and are currently only applicable to Chile and Costa Rica. Also excluded from coverage are services reserved for government entities to provide, the provision of cross-border financial services, and participation in government procurement bids (which is covered by rules found in Chapter 16).


One important commitment undertaken by the signatory states with respect to services is the prohibition on local presence requirements for the offering of services by service providers from another signatory state. Chapter 13 deals primarily with access to public telecommunication services and networks by providers from each signatory state wishing to offer value added telecommunication services (such as the Internet or cellular telephony). Interestingly, the provisions of Chapter 13 did not apply to Costa Rica (an exemption the country was unable to retain in its subsequent free trade agreement with the United States and hence, under the MFN principle, can no longer exclude from its agreement with Chile once Costa Rica ratifies CAFTA-DR). The system for resolving disputes among the state parties over the application or interpretation of obligations created under the Central AmericaChile Free Trade Agreement (including the enactment or failure to rescind domestic laws that conflict with those obligations) is found in Chapter 19. The governments are also allowed the option to use the WTO dispute resolution mechanism when it provides a proper alternative forum (although a choice must be made to use one or the other, but not both). The conflict resolution system established under Chapter 19 calls for initial consultations between the parties to the dispute. If these prove unsuccessful, the matter can be referred to the Free Trade Commission that oversees the agreement’s implementation. If the Free Trade Commission is unable to resolve the dispute, it is forwarded to a three-person arbitration panel. This panel first issues a preliminary report that is forwarded to the parties for review and feedback before it makes its final determination. Failure to follow the panel’s final recommendations allows the winning party to suspend benefits granted to the non-compliant party under the free trade agreement. Interestingly, Chapter 19 also gives the Free Trade Commission the role of a Supreme Court of sorts, as it has the authority to issue interpretative rulings on what any provision in the Central America-Chile Free Trade Agreement means. F. Mexico-Northern Triangle of Central America Free Trade Agreement After 18 arduous rounds of negotiations, Mexico and the so-called Northern Triangle of Central America (i.e., El Salvador, Guatemala, and Honduras) finally signed a free trade agreement in June 2000 that came into force effective January 1, 2001, for Mexico, March 15, 2001, for Guatemala and Honduras, and June 1, 2001, for Honduras. Interestingly, among the companies that most closely followed the negotiations were U.S. corporations with operations in Mexico that were attracted to invest in that country by NAFTA. A free trade agreement with the Northern Triangle meant that they could use their Mexican operations to serve those three Central American markets as well. The majority of manufactured and some agricultural products (e.g., cotton, hard wheat, seeds, and soy) traded between Mexico and the three Central American countries received immediate duty-free treatment as soon as the agreement entered into force. All remaining items were subject to a gradual tariff reduction schedule ranging from two to as long as 12 years, depending upon the particular tariff line. The longest phase-in period is for agricultural


products, although Mexico agreed to open its market for these items earlier than the Central American countries. A special safeguard mechanism (independent of the general safeguard regime) also exists for the agricultural sector. It is important to note that bananas, beans, chicken, coffee, corn, lactate products, pork, rice, and tomatoes are completely excluded from the new intra-regional free trade regime (unless the countries, at a later date, agree otherwise). In order for a good to be traded duty free between Mexico and the Northern Triangle countries, they must comply with the requisite rules of origin. A good must either wholly originate or be made with inputs that wholly originate in any of the four signatory countries. Alternatively, imported goods that undergo a sufficient transformation in any of the four countries so as to achieve a new tariff classification heading will also qualify for intra-regional free trade treatment. Similarly, goods whose final value represents at least 50 percent of inputs originating among the four countries also qualify. Certificates of origin are required in order to demonstrate compliance with the rule of origin requirements. The four countries must also adopt a system that permits expedited advance rulings from their respective customs agencies. The Mexico-Northern Triangle Free Trade Agreement allows the signatory countries to impose safeguard measures on each other’s imports during a transition period that runs until 2013. In addition, the four governments can also utilize the safeguard measures permitted under the WTO. However, the imposition of a safeguard requires that the government using the measure offer some type of compensation to the country that is the target. If not, the targeted country can then retaliate with a trade measure that adequately compensates it for economic damages suffered from the imposition of the initial safeguard. The Mexico-Northern Triangle Free Trade Agreement contains detailed provisions mandating transparency in the development and use of technical standards as well as sanitary and phytosanitary norms. It also requires that the signatory states respect and adequately enforce intellectual property rights. A chapter on investment contains obligations that are almost identical to those found in NAFTA’s investment chapter and includes the same type of dispute resolution mechanism to resolve complaints by investors against a host government. This mechanism is independent of the general three-step dispute resolution system that is limited to state-to-state disputes involving allegations of non-compliance or conflicting interpretations of obligations arising out of the trade agreement. The services chapter called for future negotiating rounds to liberalize the cross-border offering of services beginning on January 10, 2001. The only sector explicitly excluded up front was the aviation industry. Similarly, the four governments committed themselves to negotiating opening up government procurement to providers of goods and services from all four by 2003. While these negotiations to establish obligations with respect to government procurement commenced in June 2002, they have still not concluded.


G. U.S.-Central America and Dominican Republic Free Trade Agreement 1. Introduction In December 2003 the United States and four of the Central American countries (i.e., El Salvador, Guatemala, Honduras, and Nicaragua) signed a free trade agreement. Costa Rica eventually became a signatory to this agreement in January 2004, after resolving legal conflicts arising from U.S. insistence that Costa Rica liberalize its telecommunications monopoly and allow foreign insurance companies into its market. Costa Rica also had to resolve contentious internal political issues related to market access for U.S. agricultural, textile, and apparel products, as well as professional services. Negotiations to allow the Dominican Republic to dock onto the agreement between the United States and the Central Americans commenced early in 2004. The free trade agreement that included all seven countries and is better known by its acronym CAFTA-DR was finally signed on August 5, 2004. Given that most products from Central America already entered the U.S. market duty free under the Caribbean Basin Economic Recovery Act (CBERA) or the U.S.Caribbean Basin Trade Partnership Act (CBTPA), the main focus of CAFTA-DR was to provide similar treatment for U.S. exports into Central America and the Dominican Republic. It also made the duty-free entry of Central American textile and apparel products into the U.S. market that was temporarily granted under the CPTBA permanent. In addition, the U.S. government was able to secure access to the services sector of the Central American countries and the Dominican Republic and secured guarantees that intellectual property rights of U.S. companies would receive enhanced protection. The long delay in submitting CAFTA-DR for ratification to the U.S. Congress was indicative of diminishing U.S. support for free trade initiatives. While CAFTA-DR passed the U.S. Senate comfortably, the margin in favor of the trade agreement was a mere two votes in the U.S. House of Representatives. The closeness of the vote in the lower house was remarkable given that President George Bush’s Republican Party enjoyed a clear majority.18 In Central America, CAFTA-DR was ratified by the Guatemalan Congress in March 2005 as mobs of angry protesters encircled the legislative palace and started a riot that resulted in two deaths. Similar violent protests accompanied the CAFTA-DR ratification process in the Dominican Republic, El Salvador, and Honduras. Meanwhile, the ratification process in Nicaragua was held hostage to infighting among the country’s political parties as they jockeyed for power and influence, thereby delaying ratification until October 2005. In Costa Rica, President Abel Pacheco withdrew consideration of CAFTA-DR supposedly as a tactic to first force through 18 An important explanation for the close vote was the strong opposition to the CAFTADR from southern Republicans representing textile- and sugar-producing states unhappy at the concessions made by U.S. negotiators to increase the quotas for Central American sugar imported into the United States and the allowance of certain third-country fabric to make apparel in Central America and then export it duty free to theUnited States. Although both concessions had the potential to result in miniscule increases in overall imports of either sugar or apparel into the U.S. market, the fear was that they established an uncomfortable precedent for future trade negotiations.


a contentious fiscal reform bill by the Costa Rican Congress. Strong opposition to the trade agreement from the country’s powerful labor movements and the Roman Catholic Church undoubtedly were also important factors. In October 2007 a national plebiscite was held in Costa Rica to determine if the government should send CAFTA-DR for ratification to the legislative branch. The vote was 51.6 percent in favor of ratification and 48.4 percent against. The CAFTA-DR came into force on March 1, 2006, for the United States and El Salvador following passage of the relevant implementing legislation in both countries. CAFTA-DR came into force for Honduras and Nicaragua on April 1, 2006, for Guatemala on June 30, 2006, and for the Dominican Republic on March 1, 2007. Costa Rica finally ratified CAFTA-DR in late 2008, and it entered into force on January 1, 2009. This long delay in ratification is particularly ironic given that it was Costa Rica that most pushed for free trade negotiations with the United States back in 2001. One of the most interesting aspects of CAFTA-DR is that it adds new products that can be traded duty free between the Central American countries and the Dominican Republic beyond what was allowed by their 1998 free trade agreement. It also modifies the rules of origin for that previous agreement as well as the rules of origin that are applicable on intra-CACM trade. In particular, goods that are made with inputs from the United States can now count toward fulfilling the origin of goods wholly sourced within Central America and the Dominican Republic or contribute to fulfilling regional content requirements. The CAFTA-DR also creates new intra-Central American obligations with respect to government procurement, intellectual property, investment, and cross-border trade in services, as well between the Central American countries and the Dominican Republic. While the Central American countries can provide more favorable tariff treatment to goods originating and traded among themselves pursuant to their regional integration project, they may only do so as long as these are “not inconsistent with” the provisions of CAFTA-DR. 2. Free Trade in Goods U.S. duties on most Central American and Dominican goods are eliminated as soon as CAFTA-DR comes into effect for that particular country, in recognition of the fact that most products already enjoyed duty-free access under CBERA/CBTPA. For some textile and apparel products, the tariff reductions are retroactive as of January 1, 2004 (thereby requiring—at least in theory— refunds for excess import duties already paid prior to the entry into force of the agreement). Duties on goods originating in Central America and the Dominican Republic not covered by CBERA/CBTPA are generally subject to a ten-year phase-out period. Tariffs on certain goods, especially so-called sensitive agricultural products, have even longer phase-out periods that may extend up to 20 years and/or may be subject to permanent TRQs. This means that imports of a particular agricultural product under a certain level or during a specific season may enter at a preferential tariff rate. Anything entered above the maximum level set by the quota or out-of-season will be levied higher tariffs.


For U.S. goods exported to Central America and the Dominican Republic, a large number of agricultural goods and most manufactured products are given immediate duty-free treatment as soon as CAFTA-DR enters into force. Those products that do enjoy immediate duty-free treatment are subject to some 21 different phase-out periods. The maximum tariff phase-out schedule runs for some 20 years after CAFTA-DR came into effect. It should be pointed out, however, that the signatory states to CAFTA-DR always retain the option of speeding up tariff phase-outs on products. CAFTA-DR includes a particularly convoluted system for allowing the importation into the United States of Central American and Dominican sugar and derivatives. The actual amount of sugar products subject to dutyfree treatment is based on the lesser of either: (1) the quantity established in the relevant TRQ or (2) the exporting country’s trade surplus (i.e., the amount exported to all foreign markets but for the United States) that exceeds imports of sugar and sweeteners (excluding high fructose corn syrup imported from the United States). The aggregate quantity of Central American and Dominican sugar allowed into the U.S. market preferentially under the TRQ is 107,000 metric tons in the first year, gradually rising to a maximum of 151,000 metric tons in year 15. There is also a 2,000 ton quota for Costa Rican specialty sugar products imported into the United States. In both cases, however, the United States retains the option to halt the preferential importation of Central American and Dominican sugar should it cause vaguely defined disruptions in the U.S. market, so long as the United States offers the detrimentally affected countries some sort of “equivalent compensation.” The Central Americans (but for Costa Rica) have a similar system of indefinite TRQs for the importation of white corn from the United States that permanently removes that product from ever entering Central America duty free. For its part, Costa Rica also has an indefinite TRQ for potatoes and fresh onions. 3. Rule of Origin Requirements The rules of origin are found in Chapter 4 and Annex 4.1 to CAFTADR. These rules are supplemented by specific rules for the textile and apparel sector included in Chapter 3. Under the general rules, in order for a product to receive preferential tariff treatment under CAFTA-DR, it must: 1. be wholly obtained or produced in the territory of one or more of the Central American countries, the Dominican Republic, or the United States; or 2. be produced with inputs that wholly originate in one or more of the signatory states; or 3. be manufactured or assembled from non-originating inputs that undergo a shift in tariff classification heading in one or more of the signatory states; or 4. fulfill a regional content requirement that may vary depending on the particular item and include the so-called build-up or build-


down methods as well as the net cost method for automotive products; and 5. meet all other specific requirements found in Chapter 4 and/or Annex 4.1. The CAFTA-DR has a de minimis rule that allows non-agricultural and nontextile goods that have inputs that do not undergo a shift in tariff classification heading to qualify for duty-free treatment so long as the value of these inputs do not contribute to more than 10 percent of the finished product’s overall, adjusted value. As previously noted, there are special origin related rules for textile and apparel products found in Chapter 3 of CAFTA-DR. As a general rule, only those textile and apparel products made from regional yarn and then spun into regional fabric that is cut and assembled in one or more signatory countries to CAFTA-DR (i.e., the yarn forward rule) can be traded among them duty free. There is a de minimis exception for non-originating fibers or yarns (except for elastomeric yarns) that will still allow duty-free entry of the finished textile or apparel product so long as these fibers or yarn do not constitute more than 10 percent of the product’s total weight. This is an increase from the 7 percent de minimis cap established under NAFTA. There is also a provision allowing for the duty-free entry of textile or apparel products into the United States that include otherwise non-qualifying fabrics, fibers,or yarns that are unavailable in sufficient commercial quantities in the CAFTA-DR signatory states19 as well as products that use certain nylon filament yarn. Finally, there is a special rule for the treatment of sets as well as special waivers from the “yarn forward rule” for certain wool apparel goods assembled in Costa Rica and apparel made in Nicaragua. Appendix 4.1-B to CAFTA-DR provides that, for purposes of determining the origin of woven apparel (i.e., Chapter 62 of the Harmonized Tariff Schedule (HTS)), inputs from Canada or Mexico will be deemed to originate in Central America or the Dominican Republic only if: (1) Canada or Mexico provide reciprocal treatment for U.S.-produced inputs under their respective free trade agreements with the Central American states and the Dominican Republic20 and (2) Canada or Mexico agrees with the United States to adopt textile verification procedures that are substantially similar to the procedures established in CAFTA-DR. Even if all these conditions are met, however, woven apparel made with Canadian or Mexican inputs will still be subject to specified quantitative limits. The CAFTA-DR includes special rules for textile and apparel products that the importing and exporting country mutually agree with the importing government are “hand-loomed fabrics, hand-made, or traditional folkloric 19 A list of fabrics, yarns, and fibers not available in commercial quantities in a timely manner when the CAFTA-DR was signed are found in Annex 3.25 to the CAFTA-DR. This list is flexible and can either be expanded or existing items removed after the Office of Textile and Apparel (OTEXA) at the U.S. Commerce Department determines that a particular item is or is not available in the United States in sufficient commercial quantities. 20 There is an understanding that this may require amendments to existing free trade agreements such as the ones Mexico has with various Central American countries.


handicraft goods.” In addition, for the first two years after CAFTA-DR comes into effect, the United States will charge half the normal trade relations/mostfavored nation (NTR/MFN) duty on a limited quantity of tailored wool apparel assembled in Costa Rica regardless of the country of origin of the fabric. Similarly, for the first ten years after CAFTA-DR’s entry into force, the United States will provide preferential tariff treatment to otherwise non-originating cotton and man-made fiber apparel assembled in Nicaragua. The United States also agreed that when imposing an NTR/MFN duty on goods assembled in any of the Central American countries or the Dominican Republic with nonoriginating inputs, it would deduct the value of U.S. components made with U.S. thread. 4. Origin Verification Procedures Interestingly, unlike the situation in most Latin American economic integration programs (including CACM), CAFTA-DR does not require that all exports claiming preferential treatment be accompanied by a certificate of origin from the producer and/or exporter. Instead, the burden is on the importer to present written or electronic certification of origin made by it, the exporter, or the producer when requested by the customs authority in the importing country. Otherwise, a declaration in the entry documents that a good complies with the applicable rules of origin will suffice. Records and other documents indicating origin must be maintained for at least five years from the date of certification. If a government wishes to verify that a product imported into its territory is an originating good, it may conduct verification by means of written requests (including questionnaires) directed to the importer, exporter, or producer as well as send inspectors to visit the facilities of the exporter or producer in the other country. A country may also deny preferential tariff treatment to shipments by importers, exporters, or producers that fail to respond to written requests for information or refuse to permit on-site inspections. Similarly, a country may deny preferential treatment to all future shipments of identical goods by importers, producers, or exporters who exhibit a pattern of fraudulent declarations and/or certifications. Article 3.24 of CAFTA-DR provides for an additional verification system for the textile and apparel sector beyond that which is called for in Chapter 4. It is, however, only applicable between the United States and the Central American countries plus the Dominican Republic and the United States. In particular, the customs authority of an importing country can request its counterpart in the country of export to carry out a verification inspection of production sites to determine if claims of origin for textile or apparel goods are accurate and that the exporter or producer is complying with applicable customs laws, regulations, and procedures. Such verification may include on-site visits to the premises of the producer by representatives from both the importing and exporting governments. If the information provided is deemed to be inadequate or incorrect, the importing country can respond by prohibiting future entry into its customs territory of all products made by that same producer.


5. Temporary Admission, Duty Drawback, and Free Trade Zones Given the importance of temporary admission programs that allow the duty-free importation of inputs into the Central American countries and the Dominican Republic to be incorporated into finished products that are subsequently exported to the United States, CAFTA-DR gives Costa Rica, the Dominican Republic, El Salvador, and Guatemala the right to waive import duties on inputs in fulfillment of a performance requirement through January 1, 2010. For their part, Honduras and Nicaragua are permitted to maintain such measures for a longer period of time. For the United States, the practice ends as soon as CAFTA-DR enters into force. On the other hand, there are no restrictions on the use of duty-drawback. While the signatory states can deny preferential duty treatment for goods produced in a free trade zone in another CAFTA-DR country, it can only do so if it does not permit the duty-free or preferential tariff entry of such goods produced in those free trade zones found within its own national customs territory. Otherwise, it must accord the item a similar preferential tariff treatment. 6. Customs Administration and Trade Facilitation Pursuant to Chapter 5 of CAFTA-DR, each signatory state is, inter alia, required to publish (including on the Internet) its customs norms as well as to solicit public input before adopting new or amending existing regulations. The customs authority in each country must also now provide advance rulings with respect to tariff classification, origin, and other customs matters as well as guarantee access to administrative and judicial review of customs decisions. There are also obligations to ensure expeditious release of express shipments, release within 48 hours of other types of shipments, as well as facilitate the sharing of information in cases of suspected origin fraud or other unlawful activity. Article 3.8 (6) of CAFTA-DR prohibits the Central American countries and the Dominican Republic from requiring that an exporter from another signatory state must first establish or maintain a contractual or similar relationship with a dealer in the importing country’s territory. For its part, the United States is required to eliminate its merchandise processing fee on imports from the other signatory states. 7. Sanitary and Phytosanitary Measures and Technical Norms Chapter 6 of CAFTA-DR establishes a Committee on Sanitary and Phytosanitary Matters made up of representatives from each country’s agencies and ministries with jurisdiction over the subject matter. It has, as one of its objectives, the provision of mutual assistance in the implementation of the WTO Sanitary and Phytosanitary (SPS) Agreement. In addition, it is designed to enhance mutual understanding and consultation on the different SPS measures in force in each country with a view to ensuring they do not become unnecessary barriers to trade. Disputes arising from enforcement of SPS measures cannot be handled by the CAFTA-DR’s dispute resolution mechanism but rather must be referred to the WTO system.


Chapter 7 of CAFTA-DR creates a Committee on Technical Barriers to Trade that is designed to, inter alia, enhance cooperation in the development and improvement of standards, technical regulations, and the mutual recognition of conformity assessment procedures. The committee is made up of representatives from each signatory state’s ministry or agency involved in establishing technical rules. Matters that cannot be resolved by the committee may be referred to the Free Trade Commission set up to oversee implementation of CAFTA-DR. Chapter 7 also requires that interested persons from other signatory states be allowed to participate in the domestic development of technical regulations, standards, and conformity assessment procedures on a non-discriminatory basis. 8. Subsidies Although CAFTA-DR contains no obligations on the part of the signatory states to reduce domestic agricultural support payments, there is an obligation to eliminate so-called export subsidies for agricultural goods destined for the territory of another signatory state. Examples of the latter include offering loans at favorable interest rates and/or terms to facilitate the importation of agricultural goods. However, this prohibition is applicable only if the importing state is not receiving subsidized agricultural products from third countries. If it is, the exporting country may demand consultations with the importing state to adopt measures to counteract the negative impact of such subsidies on its agricultural exports. The primary culprit in the massive use of all kinds of agricultural subsidies in the Western Hemisphere is, of course, the United States. The United States was reluctant, however, to agree to a complete ban on the use of agricultural export subsidies unless the Central American states and the Dominican Republic ensured they were not importing the same product subsidized by U.S. competitors in, for example, Canada or the European Union. 9. Unfair Trade Practice Remedies and Safeguards As might have been expected given the strong pressure from the U.S. Congress in recent years against reforming U.S. antidumping and countervailing duty laws that are often abused for blatantly protectionist ends, CAFTA-DR does not restrict their use. The only concession the United States was willing to make was a minor one already afforded the Central American states under CBERA by which the U.S. International Trade Commission, in making antidumping or countervailing duty determinations, does not cumulate the imports of CBERA countries with those of non-beneficiary states. Chapter 3 of CAFTA-DR contains a special safeguard regime for so-called sensitive agricultural products (e.g., beans, beef, cheese, chicken legs, milk powder, pork, rice, vegetable oils, etc.) imported during the transition period to complete free trade. The Central American countries, the Dominican Republic, and the United States may impose an additional duty if imports of such products from another signatory state exceed the so-called trigger level as set out for each country in Annex 3.15. The additional duty can only be collected, however, through the end of the calendar year in which it was imposed.


Chapter 3 of CAFTA-DR also includes a transitional safeguard measure for textile and apparel products that remains in effect only during the transition period to zero duties. If an importing country can establish that the importation of a textile or apparel product from another CAFTA-DR signatory state or states is causing or threatens to cause serious damage to its national industry, it may raise the tariff on that item back to the NTR/MFN rate in effect at that time or when CAFTA-DR came into force (whichever is higher). A safeguard measure can only be imposed once for each product and may not remain in place for longer than three years. In addition, the country imposing the safeguard must offer some type of mutually agreed upon concession to the exporting country such as increasing other textile or apparel imports that compensate for the losses in exports on the product subject to the safeguards. If the respective governments cannot agree on adequate compensation, the aggrieved exporting country can retaliate by raising tariffs on any good originating in the other country in an amount that has “substantially equivalent value” to the losses incurred as a result of the safeguard duties. The general safeguard mechanism for all non-agricultural or non-textile/ apparel goods that are transitioning to duty-free treatment is found in Chapter 8 of CAFTA-DR. These measures are in addition to any that can be utilized under the WTO Agreement on Safeguards (although a country must make a choice on which one of the two regimes to use). During the transition period, a country may impose a safeguard measure once on specific imports from all the CAFTA-DR states (except from those countries that, in general, contribute to less than 3 percent of the total imports for that product) whenever there is a sudden surge that causes or threatens to cause serious injury to a domestic industry producing a “like” or “directly competitive” good. Safeguards may consist of either an increase to the NTR/MFN duty or the temporary suspension of the tariff reduction schedule. A safeguard measure cannot be imposed for longer than four years or until the end of the transition period (whichever comes first). When the duration of a safeguard is for over one year, the measure must be progressively liberalized at regular intervals. Any country imposing a safeguard measure must provide some type of mutually agreed upon trade liberalizing compensation to the other countries affected by it. If the parties cannot agree to the amount or nature of that compensation, the affected countries may suspend “substantially equivalent” trade concessions granted to the country imposing the safeguard. 10. Government Procurement The purchase of goods or services by the central or federal government in each of the CAFTA-DR signatory states valued at or above U.S.$58,550, or construction services valued at or above U.S.$6,725,000, are opened to providers from all the others on a non-discriminatory manner as if they were domestic firms. The threshold amount for purchases of goods or services by municipal, state, or provincial government entities are set at U.S.$447,000. The Central American countries and the Dominican Republic are granted a transition period that gradually adjusts the thresholds to the set levels over


a three-year time frame after the agreement comes into force for them. In addition, thresholds may be adjusted for inflation every two years. As a general obligation, each signatory state shall treat the suppliers of goods and services from the other signatory states no different from how it treats its own nationals. Each signatory state is required to publish its laws and regulations on government procurement as well as notices of upcoming bidding announcements. Chapter 9 of CAFTA-DR also contains extensive rules for, inter alia, setting deadlines for bidding, the criteria used for selection, conditions under which limited tenders may be utilized, and the procedure for challenging awards. 11. Investment Chapter 10 of CAFTA-DR contains the rules for protecting the rights of investors from all the signatory states within the territory of any other. The term investments includes portfolio and direct investment, as well as debt instruments, licenses, and contracts. The obligations created under Chapter 10 include non-discriminatory treatment as between domestic investors and those from the other signatory states as well as MFN treatment “with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” Chapter 10 also imposes limitations on the use of expropriation or nationalization as well as performance requirements, such as establishing a percentage of production that must be devoted to exports; prohibits restrictions on capital transfer or repatriation; and forbids requirements that a specified number of key managerial personnel in a company be nationals. While countries may require that a majority on the board of directors of a domestic firm be of a particular nationality, they may not do so if this would prevent a foreign investor from controlling its investment. Listed in annexes to CAFTA-DR are country-specific exemptions of sectors that are not subject to its liberalization requirements (e.g., only Dominican nationals may perform activities within the country related to the disposal of toxic, hazardous, or dangerous radioactive waste produced outside the Dominican Republic, or only Guatemalans by birth and enterprises 100 percent owned by native Guatemalans may own or posses real property located within 15 kilometers of Guatemala’s borders). Chapter 10 of CAFTA-DR contains a mechanism for resolving investorgovernment disputes that first requires consultation and negotiation and, if this is unsuccessful, binding arbitration. In a radical departure from traditional arbitration rules, the hearings in an investor-state arbitration proceeding under CAFTA-DR should normally be open to the public, and a panel is authorized to receive amicus curiae submissions from the public. The signatory parties are also supposed to establish a negotiating group to create an appellate body to review arbitration awards made by panels. In an effort to head off criticism leveled in the past at NAFTA’s investor-state dispute provisions by environmental groups and civil rights organizations, Annex 10-C states that “except in rare circumstances, nondiscriminatory regulatory actions . . . designed and applied


to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations” that are actionable. 12. Services Under Chapter 11 of CAFTA-DR, non-governmental service providers based in one signatory state are entitled to the same rights and obligations that are afforded domestic providers or those from third countries. There is a specific prohibition on governments requiring that any cross-border service provider establish a local presence as a prerequisite to doing business within its territory. Furthermore, certain types of market access restrictions are prohibited that, for example, limit the number of suppliers of a particular service or require certain legal structures as a perquisite to doing business within its territory. Pursuant to CAFTA-DR, the Central American countries (except for Nicaragua) and the Dominican Republic all agreed to liberalize their “dealer protection” laws that tie parent companies to exclusive distributor arrangements. Chapter 12 of CAFTA-DR specifically covers cross-border investment and trade in financial services (which includes all insurance and insurance-related services). The same national treatment and MFN obligations found in Chapter 11 are also applicable to the financial services sector. While each signatory state is required to allow its nationals to purchase financial services from suppliers located in the territory of the other signatory states, it may impose restrictions on such suppliers soliciting business within its national territory. In general, more restrictive practices are permitted for the financial services sector for “prudential reasons”21 than are otherwise allowed under Chapter 11. As between the Central American countries and the Dominican Republic, obligations created under Chapter 12 with respect to banking services do not apply until two years after CAFTA-DR’s entry into force. A similar exemption is created for all Chapter 12 obligations as between Guatemala and the Dominican Republic. Limitations on the type of cross-border financial services that may be offered within the territory of each signatory state as well as other country-specific commitments are found in annexes to Chapter 12. Among the commitments made was a domestically sensitive one by Costa Rica to gradually open up its state controlled insurance market to service providers from the other signatory states. Chapter 13 of CAFTA-DR creates obligations specifically directed to trade and investment in the telecommunications sector (including voice and data transmission services). The main objective is to ensure that service providers from any one of the CAFTA-DR signatory states have non-discriminatory access to and use of public telecommunications networks in the territories of the other countries. The chapter also identifies, for purposes of eventual elimination, any regulations that may create barriers to trade and investment in the offering of telecommunication services. 21 CAFTA-DR Article 12.10(1), note 3, states that “[i[t is understood that the term ‘prudential reasons’ includes the maintenance of the safety, soundness, integrity, or financial responsibility of individual financial institutions or cross-border financial service suppliers.”


The most important exclusion not subject to CAFTA-DR’s liberalizing provisions on services is related to domestic and international air transportation (albeit not specialty air services or aircraft repair and maintenance). There are also other important country-specific exceptions found in annexes to the services chapters in CAFTA-DR (e.g., only Costa Rican nationals or Costa Rican majority owned enterprises may supply motorized transportation services between two points within Costa Rica, or only Salvadoran nationals may work as public accountants in El Salvador). 13. Electronic Commerce Pursuant to Chapter 14, the signatory governments to CAFTA-DR must apply the principles of national and MFN treatment to trade in electronically transmitted digital products. In general, the governments are prohibited from applying discriminatory regulations to the electronic trade of digitally encoded products such as computer software programs, videos, images, and sound recordings. In addition, the signatory states are prohibited from charging import duties, fees, or other charges on digital products transmitted electronically or brought into the country in a carrier medium (although the physical carrier medium itself may be taxed). 14. Intellectual Property Rights Protection Chapter 15 requires that all signatory states to CAFTA-DR must have already ratified the WIPO’s Copyright Treaty of 1996 and the WIPO Performances and Phonograms Treaty of 1996 before the agreement enters into force. In addition, the signatory states must ratify by January 1, 2006 (if they have not already done so) the Patent Cooperation Treaty of 1970 (as revised and amended), and the Budapest Treaty on International Recognition of the Deposit of Microorganisms for Purposes of Patent Procedure of 1980. By January 1, 2008, all CAFTA-DR countries should have ratified the Brussels Convention on the Distribution of Programme-Carrying Signals Transmitted by Satellite of 1974, and the Trademark Law Treaty of 1994. Furthermore, different countries are given different deadlines by which to ratify the International Convention for the Protection of New Varieties of Plants of 1991, which range from January 1, 2006 through January 1, 2010. In addition, the signatory states are required to “make all reasonable efforts to ratify or accede to” the Patent Law Treaty of 2000, The Hague Convention Concerning the International Registration of Industrial Designs of 1999, and the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks of 1989. Pursuant to Article 15.2 of CAFTA-DR, the signatory states are required to legally recognize as trademarks “collective, certification, and sound marks, and may include geographical designations and scent marks.” Among the specific geographical designations that all the parties must enforce, is one that requires that Bourbon and Tennessee Whiskey be recognized as “distinctive products” of the United States and cannot be sold in either the Central American or Dominican markets unless made in the United States.


In order to set a proper example, all government agencies are required to use legitimate computer software that has not been copied in violation of copyright law. The CAFTA-DR includes regulations dealing with the liability of Internet service providers in connection with copyright infringements that take place over their networks. The signatory governments are also obligated to protect encrypted-carrying satellite signals, and any content contained in the signals. Article 15.10 of CAFTA-DR contains a particularly controversial provision concerning the use of test data by a third party to support an application for marketing approval of generic medications and agricultural chemicals. Unless the original entity that submitted the data concerning safety or efficacy consents, a third party cannot use that same clinical trial data following expiration of the patent in order to gain approval to sell a generic version in any CAFTADR country. This prohibition remains in effect for up to five years after a pharmaceutical patent expires and ten years in the case of agricultural chemicals. The practical effect of this provision is that it can be used to delay bringing onto the market cheap, locally produced generic medicines to fight HIV/AIDS and other life threatening diseases that afflict millions of poor Central Americans. Furthermore, Article 15.19 requires governments to extend patent protection beyond the usual 20 years to compensate for delays of more than five years to approve a patent application (or three years after a request for examination of the application has been made). In recognition of the problems posed by both these provisions, the Central American countries, the Dominican Republic, and the United States signed a side letter of understanding in August 2004 in which “[t]he obligations of Chapter Fifteen do not affect a Party’s ability to take necessary measures to protect the public health by promoting access to medicines for all.”22 Given that one of the biggest problems in Central America and the Dominican Republic has traditionally concerned enforcement of intellectual property rights, Chapter 15 of CAFTA-DR is full of provisions that require the signatory states to empower their law enforcement agencies to, inter alia, seize suspected pirated and counterfeit goods and the equipment used to make them, as well as confiscate suspected counterfeit or pirated goods at border crossings on their own initiative. Furthermore, counterfeiting and piracy (including enduser piracy) on a commercial scale must be punished with criminal penalties and not just civil ones. Although most of the obligations in Chapter 15 took effect upon CAFTA-DR’s entry into force, the Central American countries and the Dominican Republic have anywhere from six months to four years thereafter to enact some of their intellectual property obligations. 15. Labor Rights Much of the opposition in the United States to CAFTA-DR was centered on concerns that some of the Central American countries are incapable or unwilling to enforce their labor laws. The fear is that this will create an incentive 22 Available at http://www.ustr.gov/.


for unscrupulous firms to close up their businesses in the United States and move south to take advantage of cheaper wages and lax enforcement of labor laws while still enjoying duty-free access to the U.S. market. Chapter 16 of CAFTA-DR tries to address some of these concerns by obligating the signatory states to effectively enforce their national labor laws as well as “strive to ensure” that International Labor Organization (ILO) principles are respected. The state parties shall also “strive to ensure” that they will not waive or reduce the protections afforded in their domestic labor laws as a way to encourage trade or investment. Chapter 16 of CAFTA-DR calls for the creation of a Labor Affairs Council made up of representatives from each signatory state’s labor ministry to provide a forum on consultations and cooperation on labor matters. A government can formally request consultations with another signatory state that it feels is not effectively enforcing its national or federal labor laws. If the matter cannot be resolved through consultations, a government can request that the Labor Affairs Council be convened to take up the matter. If a resolution cannot be achieved in the council within 60 days of the original request for consultations, and the matter concerns core labor rights, the complainant can request a meeting of the Free Trade Commission that oversees implementation of CAFTA-DR. If the commission, in turn, is also unable to resolve the matter, it can be referred to a dispute resolution panel made up of three arbitrators selected from a predesignated rooster of experts “in labor law or its enforcement, international trade, or the resolution of disputes arising under international agreements.” Core labor rights are defined as: 1. 2. 3. 4.

the right of association; the right to organize and bargain collectively; a ban on forced or compulsory labor; a minimum age for child employment and the elimination of the worst forms of child labor; and 5. acceptable conditions of work with respect to wages, hours of work, and occupational safety and health. Chapter 16 of CAFTA-DR also calls for the creation of a Labor Cooperation and Capacity Building Mechanism whose activities are overseen by the Labor Affairs Council. The mechanism is intended to develop model legislation and strengthen each country’s institutional capacity in terms of labor protection, including strengthening labor inspection systems and labor courts. The CAFTA-DR makes provisions for the imposition of monetary fines, as did the North American Agreement on Labor Cooperation in the NAFTA context, for failure to fully implement an action plan recommended by an arbitral panel or mutually agreed upon by the countries involved in the complaint. The fact that CAFTA-DR replaces CBERA/CBTPA, however, means that the United States can no longer unilaterally suspend duty-free access into its lucrative domestic market in order to force the Central American countries and the Dominican Republic to enforce core labor standards. In order to secure votes for passage of CAFTA-DR, the Bush administration did pledge


to provide U.S.$20 million for labor and environment enforcement capacity building, and pledged an additional U.S.$40 million in 2006 and similar support through 2009. The money is to be administered by the U.S. Labor Department’s Bureau of International Labor Affairs and the U.S. Agency for International Development. Among the specific projects that will be funded are those for training judges, clerks, and lawyers on national and international labor standards; strengthening the ability of labor ministries to enforce domestic labor laws; supporting public awareness campaigns and training labor inspectors to combat sexual harassment; and assisting the ILO to monitor and issue biannual reports on labor conditions in Central America and the Dominican Republic. 16. Environmental Protection Chapter 17 of CAFTA-DR is an attempt to overcome some of the same concerns in the environmental arena that existed with the ability of Central American governments to enforce basic labor standards. Once again the fear is that companies may move from the United States to take advantage of nonexistent or lax enforcement of environmental regulations south of the border. Chapter 17 obligates the signatory states to “ensure that its laws and policies provide for and encourage high levels of environmental protection” and that they “strive to continue to improve those laws and policies.” The signatories commit to effectively enforce their respective environmental laws and “shall strive to ensure” that they do not weaken or reduce protections afforded in their domestic environmental laws as a way to encourage trade and investment. Chapter 17 of CAFTA-DR creates an Environmental Affairs Council made up of representatives from each country’s ministry responsible for environmental protection. Chapter 17 also calls for the creation of an environmental unit to be housed at SIECA in Guatemala City, which will receive public submissions from anyone in a CAFTA-DR signatory state who believes that a Central American country or the Dominican Republic has failed to effectively enforce its respective environmental laws. In the case of a complaint against the United States, the individual files its submission with the Secretariat established under the NAFTAaffiliated North American Agreement on Environmental Cooperation. Either the environmental unit housed in SIECA or the North American Environmental Secretariat will review the submission and can, in appropriate cases, recommend to the Environmental Affairs Council that a factual record be established. If at least one member of the council is in agreement, the unit or Secretariat will be entrusted with establishing that record. The full council will then consider the record and make it public if at least one member votes in favor of doing so. When it feels this is appropriate, the Environmental Affairs Council can provide recommendations to an Environmental Cooperation Commission created under an Environmental Cooperation Agreement signed by all the CAFTADR signatory states. The Environmental Cooperation Agreement is intended to, inter alia, strengthen each country’s environmental management systems (including enforcement and administrative capabilities), develop flexible and voluntary mechanisms for promoting environmental protection, foster privatepublic partnerships, and facilitate technology transfer.


If a government believes that another signatory state is failing to adequately enforce its national or federal environmental laws, it must first request consultations with that country. If the consultations fail to resolve the situation, the unhappy government can request that the Environment Affairs Council be convened to take up the matter. If the matter cannot be resolved by the council within 60 days after the initial request for consultation was made, and the matter involves a country’s failure to effectively enforce its environmental laws in a sustained or recurring manner, the complaint can be referred to the Free Trade Commission (that has general oversight over CAFTA-DR’s implementation). If the commission, in turn, cannot resolve the matter, it will then be referred to a dispute resolution panel made up of three arbitrators selected from a pre-designated roster of experts “in environmental law or its enforcement, international trade, or the resolution of disputes arising under international trade or environmental agreements.”23 The CAFTA-DR makes provisions for the imposition of fines, as did the North American Agreement on Environmental Cooperation in the NAFTA context, for failure to fully implement an action plan recommended by an arbitral panel or mutually agreed upon by the countries involved in the complaint. 17. Free Trade Commission and Other Administrative Issues A Free Trade Commission made up of the Ministers of Trade or Economy from each of the signatory states is created to oversee implementation of CAFTADR as well as issue interpretations of its provisions. The commission meets at least once a year, reaches decisions by consensus, and can agree to accelerate tariff reduction schedules on particular products as well as modify the rules of origin. A Committee on Trade Capacity Building is also created to coordinate assistance projects designed to assist the Central American countries and the Dominican Republic in implementing CAFTA-DR and adopting the necessary reforms so as to take better advantage of the opportunities it provides. As a general requirement, Chapter 18 of CAFTA-DR requires that each signatory state promptly publish all current laws, regulations, procedures, and administrative rulings of general application that impact on the different provisions covered by CAFTA-DR, as well as strive to publish proposed measures and provide interested parties a reasonable opportunity to comment on them. Chapter 18 also obligates the signatory states to provide for independent review and appeal of final administrative actions regarding matters covered by CAFTADR. Finally, Chapter 18 requires the signatory states to pass laws (if they do not already exist) that make it a criminal offense to offer or accept a bribe in exchange for favorable government action in matters affecting international trade and investment. 18. Dispute Resolution The signatories to CAFTA-DR have the option of using either the dispute resolution system established under that agreement or, when appropriate, the CAFTA-DR art. 17.11(2)(a).

23


WTO. Once a choice is made, however, the parties are limited to that particular forum. Under the CAFTA-DR system, the parties are required to consult with each other over disputes regarding the interpretation or application of rights and obligations created by the trade accord. If the parties are unable to resolve the matter through consultations within 60 days (or 15 days in the case of perishable agricultural or fish products), the dispute is referred to the Free Trade Commission. The Free Trade Commission, for its part, has 30 days to resolve the dispute. If it cannot do so, the matter is then referred to a threeperson panel of arbitrators selected from a pre-designated roster of individuals with “expertise or experience in law, international trade, other matters covered by [CAFTA-DR], or the resolution of disputes arising under international trade agreements.”24 Each side to the dispute selects one panelist, while the third is chosen by mutual agreement. If the parties cannot agree on the third arbitrator, who acts as chair of the panel, he or she shall be selected by lottery from among the roster members who are not nationals of any of the countries involved in the dispute. The arbitration panel normally has up to 120 days (although this can be extended for an additional 60 days if the parties so agree) following selection of the last panelist to issue an initial report containing findings of fact, determinations, and any recommendations. Interestingly, panelists may furnish anonymous separate opinions on matters for which there was no unanimous agreement. The parties to the dispute may then provide written comments to the panel’s initial report. Within 30 days following the release of the initial report, the panel should normally issue its final report to the parties and will release it to the public (subject to the protection of confidential information) 15 days after the respective governments have received it. The parties to a dispute are then required to use the findings and recommendations included in the final report to negotiate a mutually agreeable resolution to the conflict. If the disputing parties cannot achieve a mutually agreeable resolution to a dispute based on an arbitration panel’s final report, the party not in compliance must offer some sort of mutually acceptable compensation to the complainant. If the parties cannot agree on what is appropriate compensation, or if the complainant believes the other party (ies) has failed to implement a mutually acceptable resolution, the complaining country (ies) can suspend trade benefits in an amount equivalent to the damages actually incurred, or that may arise, as a result of the failure to comply. Any party that feels the retaliatory measures adopted are “manifestly excessive” or that they are unwarranted, may request that the original panel of experts reconvene and decide the matter. A complainant is normally allowed to suspend trade benefits up to the level set by the panel. The complainant cannot suspend benefits, however, if the party (ies) at fault offers to pay an annual monetary assessment.

CAFTA-DR art. 20.7(2)(a).

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CHAPTER 9

THE CARIBBEAN COMMON MARKET AND COMMUNITY AND THE ORGANIZATION OF EASTERN CARIBBEAN STATES I. Introduction The Caribbean Common Market and Community (CARICOM) was formally launched in July 1973 when Barbados, Guyana, Jamaica, as well as Trinidad and Tobago signed the Treaty of Chaguaramas in the resort town of that same name in northwestern Trinidad. The Treaty of Chaguaramas set the ground rules for establishing a Caribbean Community in order to coordinate the foreign policy of each member state and facilitate cross-border cooperation in matters of mutual interest. The economic integration aspect of CARICOM was actually found in the Common Market Annex, a separate legal document that was eventually attached to the Treaty of Chaguaramas. Accordingly, it is possible to be a member of CARICOM but not participate in its economic integration program (although the reverse is not possible). This is akin to the situation that currently exists in the Central American Integration System (SICA), although the original intention was that membership in SICA would be synonymous with participation in the revived Central American Common Market. Until 1995 membership in CARICOM was made up exclusively of 13 English-speaking Caribbean nations (i.e., Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago). Dutch-speaking Suriname was admitted as a member in 1995, followed by Creole-speaking Haiti in 1997. With the addition of Haiti in 1997 CARICOM’s total population more than doubled from about 7 million to approximately 14 million people. Haiti’s membership in CARICOM is similar to that of the Bahamas, however, in that neither country participates in the economic integration process. Montserrat’s full participation is limited by the fact that it is still a colony of the United Kingdom, and the island has been depopulated by recurring volcanic eruptions that began at the end of the 1990s. Given the revival that economic integration received in the rest of the Western Hemisphere at the start of the 1990s, it is not surprising that a similar effort occurred in the Caribbean. Between 1993 and 2000, an inter-governmental task force with representatives from all the member states worked to revise the original 1973 Treaty of Chaguaramas and its Common Market Annex. The result was the Revised Treaty of Chaguaramas Establishing the Caribbean Community, 365


including the Caribbean Single Market and Economy (CSME). Since it was opened for ratification in 2000, additional protocols have been added. As of 2008, the Revised Treaty had been ratified by all 15 CARICOM member states except the Bahamas, Haiti, and Montserrat. The Revised Treaty of Chaguaramas represents “a fundamental transformation and restructuring of the Caribbean Community from a conservative, inward-looking protectionist, functionally constrained organization to an open, liberalized, efficient, internationally competitive, outward-looking and deliberatively flexible institution.” Trade among the CARICOM countries has remained fairly steady since the mid-1990s, averaging 20 percent of the region’s total global exports. Trinidad and Tobago dominates total exports sent into the CARICOM stream of trade, which primarily consist of petroleum products as well as beverages, cement, foodstuffs and steel products. As a percentage of their overall exports, the CARICOM market is most important for Barbados, Dominica, St. Lucia, as well as St. Vincent and the Grenadines. On the other hand, Barbados and Guyana, as well as many of the small Eastern Caribbean countries (but for Antigua and Barbuda) are most likely to source a greater percentage of their imports from within CARICOM. II. Institutional Framework CARICOM’s highest institutional body is the Conference of Heads of Government which, as its name implies, consists of the prime ministers or presidents of each of the member states. The conference provides general policy direction for CARICOM and has the authority to execute binding international treaties on behalf of CARICOM. It can also intervene and attempt to resolve disputes among member states. Decisions of the conference normally require a unanimous affirmative vote for approval. Abstentions will not impede approval of a decision, so long as it is approved with the affirmative vote of at least threequarters of the member states. CARICOM’s second highest institutional body in hierarchical importance is the Community Council of Ministers. It is made up of the ministers from each member state that specifically has jurisdiction over matters related to CARICOM. Pursuant to Article 13 of the Revised Treaty of Chaguaramas, the council has “primary responsibility for the development of Community strategic planning and co-ordination in areas of economic integration, functional cooperation and external relations.” It also has the important oversight duty of making sure that the member states implement CARICOM decisions, and it approves CARICOM’s annual budget. The Conference of Heads of Government and the Community Council of Ministers are assisted in their work by four specialized councils made up of ministers with jurisdiction over the particular issues they focus on (and reporting directly to the Community Council of Ministers):

D. Pollard, The Caricom System 459 (2003).

CARICOM and OECS • 367

1. Finance and Planning (COFAP; responsible for economic policy coordination and financial and monetary integration among CARICOM member states); 2. Trade and Economic Development (COTED; oversees operation of the CSME, including temporary exemptions to intra-regional free trade for less-developed countries or common external tariff (CET) waivers, as well as the imposition of safeguard measures, countervailing, and antidumping duties); 3. Foreign and Community Relations (COFCOR); and 4. Human and Social Development (COHSOD). Decisions in the Community Council of Ministers and the specialized councils are generally approved by an affirmative vote of at least three quarters of the member states, unless deemed of “critical importance to the national well being.” In that case, they require the affirmative vote of all the member states (although what is deemed of “critical importance” only requires two-thirds’ majority support). Internal procedural matters, on the other hand, only require a simply majority. CARICOM also has a Legal Affairs Committee (made up of the attorney generals and/or ministers of justice from each member state to provide advice on treaties or international legal issues), a Budget Committee, and a Committee of Central Bank Governors (which provides recommendations with respect to monetary cooperation and eventual union, free movement of capital, and integration of capital markets). There are also several other regional entities that are recognized as CARICOM institutions. The general rule is that the member states are entitled to one vote in any of CARICOM’s institutional bodies. A country’s failure to pay its contributions to CARICOM for more than two years, however, will disqualify it from voting on matters related to anything but the CSME. None of CARICOM’s institutional bodies enjoy supranational authority; hence all norms and regulations must be ratified by each of the national governments before they have any legal effect in that jurisdiction. Consequently, the speed of the integration of CARICOM is dictated by the pace of the slowest member nation in enacting and securing compliance with relevant determinations. CARICOM’s principal administrative body is the Secretariat, which is located in Georgetown, Guyana. The Secretariat serves as the repository for CARICOM’s archives and provides logistical support for the meetings of its These regional entities include: (1) Caribbean Disaster Emergency Response Agency (CDERA), (2) Caribbean Meteorological Institute (CMI), (3) Caribbean Meteorological Organization (CMO), (4) Caribbean Environmental Health Institute (CEHI), (5) Caribbean Agricultural Research and Development Institute (CARDI), (6) Caribbean Regional Centre for the Education and Training of Animal Health and Veterinary Public Health Assistant (REPAHA), (7) Assembly of Caribbean Community Parliamentarians (ACCP), (8) Caribbean Centre for Developmental Administration (CARICAD), and (9) Caribbean Food and Nutrition Institute (CFNI).

Pollard, supra note 1, at 461.


different institutional bodies. It is also authorized to provide technical assistance to member governments in terms of implementing CARICOM obligations. In view of the difficulty in reaching Georgetown by plane, communicating by telephone or e-mail, and Guyana’s high crime rate, much of the Secretariat’s work is currently carried out of its Bridgetown, Barbados, office (which is officially in charge of overseeing implementation of the CSME). The Secretariat is headed by a Secretary General who is appointed by the Conference of the Heads of State for a five-year term (subject to reappointment) and is supposed to be someone above parochial, national interests. Although it is not formally part of CARICOM’s institutional framework, it is important to point out that there is a Caribbean Development Bank (CDB) based in Barbados that funds both public and private sector projects designed to enhance economic development and promote economic integration within the Caribbean region. Membership in the CDB is open to all the countries and territories of the Caribbean Basin as well as non-regional members, so long as they are members of the United Nations. Current non-regional members include Canada, China, Germany, Italy, and the United Kingdom. III. Dispute Settlement and the Role of the Caribbean Court of Justice Any dispute arising from the interpretation and application of the Revised Treaty of Chaguaramas and subsequent affiliated protocols are to be resolved under the mechanism established in Chapter 9 of that treaty. In particular, the disputes to which Chapter 9 are applicable include: 1. allegations that an actual or proposed measure of another member state is or would be inconsistent with CARICOM objectives; 2. allegations of actual or threatened injury, serious prejudice, nullification, or impairment of benefits under the CSME; 3. accusations that one of the CARICOM bodies has acted beyond the scope of its powers or jurisdiction; or 4. allegations that the purposes or objectives of the Revised Treaty of Chaguaramas are being frustrated. As a first step, disputes among member states can be resolved using the “good offices” of the CARICOM Secretary General or another third party. As an alternative, a dispute can also be referred to mediation, with the mediator being chosen either by the parties or the Secretary General from a pre-determined list of conciliators. Interestingly, “good offices” or mediation can continue during later stages when the dispute has already been referred to arbitration or adjudication. The third alternative is for the governments on either side of the dispute to engage in consultations. If one side refuses to engage in consultation within 14 days (or three days if it involves perishable goods) after receipt of a request, or the matter cannot be resolved within 45 days (seven days in the event of perishable goods), the aggrieved government can proceed to the Regional members include all the CARICOM member states (except Suriname) as well as Anguilla, the British Virgin Islands, the Cayman Islands, Colombia, Mexico, the Turks and Caicos Islands, and Venezuela.


second step of the dispute resolution mechanism. Under the second step, a government has the option to either seek resolution of the dispute through conciliation, binding arbitration, or proceed directly to the seven-member Caribbean Court of Justice (CCJ). Under the conciliation alternative, each side to the dispute chooses one conciliator that can be a national from a pre-determined list kept by the Secretary General. The third conciliator is chosen by mutual consent or, if this is not possible, by the CARICOM Secretary General. The conciliation commission normally has three months to issue a report with conclusions or recommendations that are not binding on the parties. The arbitration alternative is similar to the procedure for establishing a conciliation commission, except that the arbitrators should normally not be nationals of any of the parties to the dispute. Awards made by an arbitration panel are taken by majority vote, are final, and are binding on the parties to the dispute. As noted previously, the third alternative is to refer the matter to the CCJ that sits in Port of Spain, the capital of Trinidad and Tobago. The CCJ has compulsory and exclusive jurisdiction to hear: 1. disputes between signatory states to the Revised Treaty of Chaguaramas and affiliated protocols; 2. disputes between the CARICOM member states and their institutional bodies; 3. referrals from the national courts (including the Eastern Caribbean Supreme Court), at whatever level, for a definitive opinion concerning the interpretation and application of provisions found in the Revised Treaty of Chaguaramas and affiliated protocols; 4. applications from individuals or private companies who have been prejudiced from enjoying a right or benefit directly granted to them under the Revised Treaty of Chaguaramas. The CCJ can also issue advisory opinions on CARICOM obligations at the request of a member government or a CARICOM institutional body. Any disputes over whether the CCJ even has jurisdiction to handle a matter are resolved by the CCJ itself. The CCJ has the power to issue injunctive relief and can also premise its decisions on equitable grounds (so long as the parties to the dispute are in agreement). Judgments of the CCJ have the power of stare decisis and therefore constitute legally binding precedents. It is important to point out that, in addition to the role it plays in resolving disputes over the interpretation and application of CARICOM obligations, the CCJ also has another important function. The CCJ serves as the court of last resort or a highest court of appeal for the entire Caribbean for both civil and criminal matters. It is this second function that has delayed ratification of the Agreement Establishing the Caribbean Court of Justice and acceptance of its jurisdiction. The Organization of Eastern Caribbean States (OECS) countries, in particular, have preferred to retain the Judicial Committee of the Privy Council in London as their highest court of law. In addition, the Bahamas, Haiti, and Montserrat do not recognize the jurisdiction of the CCJ at all (and Suriname, as a civil law country, only


recognizes the jurisdiction of the CCJ as ultimate interpreter of CARICOM obligations). IV. Intra-Regional Free Trade Program Most goods that meet CARICOM´s rule of origin requirements are traded among its member states duty free. A number of CARICOM states, however, continue to impose an assortment of special Customs Service fees that can range from 2 to as high as 15 percent. Some CARICOM countries also impose special taxes such as stamp duties or an environmental tax on plastic bottled beverages, as well as excise taxes on alcoholic beverages, fuel, tobacco, and socalled luxury goods that include automobiles. In addition, Article 160 of the Revised Treaty of Chaguaramas allows the smaller and less-developed members of CARICOM (i.e., Antigua and Barbuda, Belize, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines) the right to petition COTED to impose duties on certain goods originating anywhere among the CSME participating countries when it is suffering or will likely suffer significant revenue loss. Alternatively, Article 164 authorizes a lesser-developed country to petition COTED so that all seven can impose a tariff on a good originating in any of the four more-developed CARICOM countries (i.e., Barbados, Guyana, Jamaica, and Trinidad and Tobago). The rationale behind this exemption, which can last up to five years, is that it will offer the protected industry an opportunity to restructure itself and become more competitive in the lesser developed country. Most non-tariff barriers on intra-CARICOM trade have by now been removed, although a few persist. For example, Antigua and Barbuda still requires import licenses for agricultural goods coming from other CARICOM countries. Guyana is specifically authorized by Article 155 of the Revised Treaty of Chaguaramas to impose quantitative restrictions on the importation of wheat flour. Schedule IV to the Revised Treaty also allows Guyana to impose quantitative restrictions on petroleum-based imports from elsewhere within CARICOM in order to facilitate the establishment of a petroleum refining industry. Quantitative restrictions may be imposed on unrefined cane sugar originating within CARICOM by countries that also produce it. Finally, CARICOM maintains a reference price on copra and coconut oils traded within the subregion, and may also set conditions for the intra-regional trade of other vegetable-based oils and fats. V. Rule of Origin Requirements Goods from countries wishing to take advantage of CARICOM’s free trade program among participating member states, must meet CARICOM’s rule of origin requirements. A product is deemed to meet the rules of origin if it: 1. has been produced wholly within CARICOM, or 2. has been produced within CARICOM wholly or partly from materials imported from outside CARICOM through a process that results in a substantial transformation as evidenced by a change in tariff classification heading.


Those goods listed in Schedule I to the Revised Treaty of Chaguaramas are required to comply with product-specific rules of origin. For example, molasses must be made from the extraction or refining of sugar that is wholly produced within CARICOM. As an alternative, a certain percentage of the final product’s value must reflect inputs that originate within CARICOM. Interestingly, these specific rules of origin differ depending upon whether the country is classified as a more-developed country (i.e., Barbados, Guyana, Jamaica, or Trinidad and Tobago) or a less-developed country (all the remaining CARICOM member states). For example, dyed or printed fabrics originating in the more-developed countries cannot contain extra-regional materials that exceed 30 percent of the final product’s export price. On the other hand, the same product produced in a less-developed country can have up to 40 percent extra-regional materials. Interestingly, whenever a regional producer cannot obtain regional inputs in the quantity or quality that is desired, it may petition COTED for authorization to import the needed items from outside CARICOM and allow the final good to be circulated duty free within the CSME as if it were wholly produced with sub-regional material. All goods from countries that wish to partake of CARICOM’s intra-regional free trade scheme must have documentary evidence that includes a certificate of origin issued by a governmental authority or authorized body. The certificate is based on a declaration made by the final producer, together with a declaration completed by the exporter. Whenever the Customs Service in an importing country questions the veracity of a declaration supporting a certificate of origin, it may only request further information from the exporting country. It cannot interfere with the importer taking delivery of the challenged goods. It can, however, require the importer to post a security deposit for any duty or charge that may become due following termination of the inquiry process as if the item originated outside of CARICOM. VI. Common External Tariff In 1992 CARICOM adopted a six-tiered CET system for imports from the outside world that ranged from 5 to 45 percent. Implementation of the CET began in 1993, but most countries never met the original 1995 deadline for full implementation. Modifications in the late 1990s set the new CET at rates ranging from 0 to 20 percent. Competing agricultural products were levied a 40 percent duty. As of mid-2008, not all the CSME participating countries had fully implemented this modified CET yet. COTED can grant exemptions to imposition of the CET whenever: 1. A product is not being produced within CARICOM; 2. The quantity of the product being produced within CARICOM is unable to satisfy local demand; or 3. The quality of the product being produced within CARICOM is below standards. In anticipation that Belize, given its geographical location, may wish to participate in the Central American economic integration process, Article


80(5) to the Revised Treaty of Chaguaramas authorizes Belize to do so. Belize must, however, extend any more favorable treatment it may grant the Central American countries to the rest of CARICOM under a most-favored nation (MFN) provision and must “make adequate provision to guard against the deflection of trade into the rest of CARICOM” from Central America through Belize. In addition to the CET, it is important to point out that many CARICOM countries impose additional fiscal measures on imports that may include stamp taxes, customs surcharges, environmental taxes on plastic bottled beverages, and excise taxes on luxury imports. Many of the smaller CARICOM countries grant state trading companies the exclusive monopoly to import basic commodities such as flour, onions, poultry, powdered milk, and rice. Furthermore, the OECS countries continue to apply import licensing regimes that have not been reported to the World Trade Organization (WTO). These licensing requirements tend to affect agricultural and agro-industrial products. One recurrent problem that imports into the CARICOM region face, particularly among the OECS states, is a divergence in customs valuation practices, despite the fact that all of the CARICOM countries are signatories to the WTO Customs Valuation Agreement. For example, in Antigua and Barbuda as well as Dominica, declared values may be checked against reference prices when there are doubts about a declaration. VII. Safeguard Measures Article 92 to the Revised Treaty of Chaguaramas allows any CARICOM country the right to request permission from COTED to impose a safeguard measure on goods imported from another CARICOM state that causes or threatens to cause serious injury to its domestic producers of a like or directly competitive product. The importation of the product in question must be directly linked to a substantial decrease in the demand for a like or directly competing product produced domestically. A temporary quota, which should not restrict imports to less than the average imported over the preceding year, may be imposed while COTED makes its final determination, so long as COTED is notified. COTED may also authorize undertaking other measures. Any government imposing the temporary safeguard must establish a program of measures to assist its domestic producers to alleviate the difficulties they face. Safeguard measures (consisting of either a tariff hike or quota) can normally be imposed for a period of up to three years, unless otherwise ordered by COTED. A safeguard will not be authorized if the complained about product represents less than 20 percent of the market share of that good imported into the complaining country. Interestingly, there is no common CARICOM regime for the imposition of safeguards on imports that originate in countries that do not participate in the CSME. Pursuant to Article 151 to the Revised Treaty of Chaguaramas, a country participating in the CSME may seek COTED authorization to suspend preferential access into its market from fellow participating states when the imports disadvantage a sensitive industry. An industry is considered sensitive


if it has a “vulnerable nature,” contributes significantly to a country’s GDP, its employment, and/or foreign exchange earnings, and is designated vital as per that country’s industrial policy. VIII. Unfair Trade Practice Remedies A CARICOM member state can impose a countervailing measure against imports from a fellow CSME participating state that has benefited from a prohibited subsidy or a company- or sector-specific subsidy that causes injury or serious adverse effects to a domestic industry, nullifies or impairs CSME benefits, or seriously prejudices its national interests. The prejudiced industry (generally representing no less than 25 percent of domestic producers) files a complaint with the relevant authority in the country where it is located. The authority initiates a preliminary investigation and, when it makes an affirmative determination, consults with the government that has provided the subsidies. If these consultations are unsuccessful, the matter is referred to COTED to conduct its own investigation that, normally, should not exceed anywhere from 90 to 120 days (depending on the precise kind of subsidy). If COTED makes a definitive determination of the existence of subsidies that are prohibited, cause injury or serious adverse effects, nullify benefits, or seriously prejudice national interests, it will authorize the detrimentally impacted country to impose countervailing duties at a rate equivalent to the amount of subsidization or other measures authorized under its national legislation. In the case of subsidies other than prohibited subsidies, a grace period of six months is offered to the government granting the subsidy to remedy its negative effects. Temporary countermeasures may be imposed by the aggrieved government while COTED conducts its own investigation. It should be noted that, as a general rule, CARICOM does permit agricultural subsidies that encourage agricultural or rural development, promote investments in the agricultural sector, and assist low-income or resource-poor producers, so long as these subsidies are WTO compliant and do not distort intra-regional trade. Interestingly, there are no communitarian norms for countering subsidized imports sourced from outside CARICOM. CARICOM’s antidumping regulations apply to imports from fellow CSME participating states as well as all third countries that cause or threaten to cause a material injury to a domestic industry, or materially retard the establishment of such an industry. In the specific case of allegations of intra-CARICOM dumping, any industry (representing no less than 25 percent of total producers of a like product), trade association representing that industry, or its employees may present a petition to the relevant national authority to initiate an investigation to Pursuant to Article 96 of the Revised Treaty of Chaguaramas, subsidies include: (1) direct transfer of funds (e.g., grants, loans, and equity infusions) or potential transfers (e.g., loan guarantees) by a government; (2) government forgoing or not collecting revenue (e.g., fiscal incentives such as tax credits); and (3) any form of income or price support. For its part, Article 99(2) defines prohibited subsidies as subsidies that are contingent upon export performance or the use of domestic versus imported inputs. Interestingly, countries with a per capita gross national product of less than U.S.$1,000 can offer subsidies contingent on export performance.


determine if goods are being dumped. In the event a preliminary investigation finds sufficient evidence of dumping and injury to a domestic industry, the aggrieved government can request consultations with the fellow CSME participating country engaging in the practice. If the aggrieved government feels the consultations have not produced satisfactory results, it must refer the matter to COTED. In those cases involving allegations of dumped goods originating in countries that do not participate in the CSME (which would include all nonCARICOM countries), a petition for an investigation is filed by or on behalf of the affected industry directly with COTED. COTED has up to 18 months to investigate the matter. While COTED is investigating, the aggrieved country can impose a provisional antidumping measure (in the form of a duty or a security deposit or bond equivalent to the estimated dumping margin). Interestingly, COTED will not authorize a country to impose an antidumping duty when the dumping margin is less than two percent or, in general, if the volume of the dumped imports from a particular country represents less than 3 percent of total imports of the like product. In addition, Article 133(3)(g) of the Revised Treaty of Chaguaramas authorizes a government to accept a voluntary price guarantee from an exporter engaging in dumping “to raise the price of the export sufficiently to forestall a serious threat of injury or to eliminate injury.” IX. Services Following the four modes of cross-border trade in services recognized in the WTO General Agreement on Trade in Services, the CSME initiative recognizes four ways services can be provided: (1) offered from one territory into another, (2) travel by a consumer from one country into the territory of another to obtain a service there, (3) establishment by a national from one country of its business in another territory so as to offer its services there, and (4) temporary movement of the service provider from one country to offer its services in another. Any CARICOM national, which includes both an individual or a legally constituted entity that carries on substantial activity within CARICOM and is substantially owned and effectively controlled by nationals, that has ratified the Single Market portion of the CSME, is now entitled to move to any other ratifying state to offer its services of a commercial, industrial, agricultural, professional, or artisan nature, including the right to establish and manage an economic enterprise producing or trading goods, and/or providing services. In order to qualify, a service provider must receive remuneration other than in the form of wages. Article 148 of the Revised Treaty of Chaguaramas authorizes COTED to make temporary exemptions from the general national treatment obligations on cross-border trade in services for the six OECS countries plus Belize, as well as provide other types of special and differential treatment A company or other legal entity is “substantially owned” if more than 50 percent of the equity interest is beneficially owned by a citizen(s) of a CSME state or an individuals(s) who is a resident of a CSME state for the purposes of its immigration laws. A company or other legal entity is “effectively controlled” if a citizen(s) of a CSME state or an individual(s) who is a resident of a CSME state for the purposes of its immigration laws, has the power to name a majority of its directors or otherwise legally to direct its actions.


with respect to removing those restrictions. For its part, Article 149 authorizes COTED to temporarily exempt certain activities from the general national treatment obligations with respect to the right of establishment in the six OECS countries plus Belize, as well as provide other types of special and differential treatment in removing restrictions on the right to establishment. X. Free Movement of Labor As a first step in the direction of free movement of workers among the CARICOM countries, the following skilled workers are allowed to move and seek employment within any of the countries that have ratified the Single Market component of the CSME: 1. university graduates (persons who have obtained at least a Bachelor’s degree), 2. media workers, 3. sportspersons, 4. artists, and 5. musicians. In order to qualify as a skilled worker in one of the five recognized categories, the individual must apply for and receive a certificate from the Ministry of Labor or other proper accreditation authority in his or her home country that recognizes his or her status. Once that is obtained, the individual has the right to move to any other CSME state to work and does not require a visa or a work permit. Article 47 to the Revised Treaty of Chaguaramas does permit a CSME country to impose what amounts to a safeguard clause on the free movement of skilled workers whenever “it creates serious difficulties in any sector of the economy.” However, it must first request authorization from COTED (or, when relevant, COFAP) to impose this safeguard and must also submit a program setting out the measures it intends to undertake in order to resolve the difficulties or to alleviate the hardships in conjunction with its request. An intra-CARICOM Double Taxation Agreement in force among nine of the 15 CARICOM member states protects self-employed individuals from paying taxes twice on the same earnings. Under the CARICOM Agreement on Social Security, workers who have contributed to social security systems in the different CARICOM countries where they have worked (but for Suriname) will have the accumulation of their contributions recognized for purposes of vesting. Workers are entitled to receive the same benefits applicable to nationals of the host government where they happen to reside and request such benefits. If they reside in a country different from the one where they earned the right to obtain social security benefits, they can only receive the same amount as if they were still residing in the country of vesting. XI. Free Movement of Capital Article 39 of the Revised Treaty of Chaguaramas requires that the countries participating in the CSME not impose any new restrictions on the movement


of capital than those that already existed when the particular government ratified the Revised Treaty of Chaguaramas. For most countries, that was some time in 2004 or 2005. In order to ensure the proper functioning of the CSME, participating governments are to begin removing cross-border restrictions on the movement of capital payments and all current payments, including payments for goods and services and other current transfers. Capital and related payments and transfers include: 1. 2. 3. 4. 5. 6.

equity and portfolio investments, short-term bank and credit transactions, payment of interest on loans and amortization, dividends and other income on investments after taxes, repatriation of proceeds from the sale of assets,and other transfers and payments relating to investment flows.

Article 43 to the Revised Treaty of Chaguaramas does permit governments to adopt or maintain temporary (i.e., no longer than 18 months) restrictions to the free flow of capital and payments in the event of serious balance-ofpayments and external financial crises. It should be emphasized that CARICOM’s provisions on the free movement of capital are hampered by the fact that the CARICOM countries do not yet have harmonized monetary exchange regimes or rules on the free market convertibility of foreign currency. XII. Competition Policy CARICOM has a Competition Policy to ensure that the benefits provided by the CSME are not thwarted by anticompetitive business practices that prevent, restrict, or distort competition, or that constitute an abuse of a dominant market position. In addition, CARICOM’s Competition Policy is also designed to support efforts at the national level to protect consumers. A Competition Commission made up of seven members appointed by the Regional Judicial and Legal Services Commission as well a commissioner appointed for a five year term (subject to renewal) was created to oversee implementation and enforcement of CARICOM’s Competition Policy. Among the specific powers of the commission is to apply the rules of competition in terms of anticompetitive cross-border business conduct. In particular, Article 174(2)(a) of the Revised Treaty of Chaguaramas authorizes the Competition Commission, “in respect of cross-border transactions or transactions with cross-border effects, [to] monitor, investigate, detect, make determinations or take action to inhibit and penalize enterprises whose business conduct prejudices trade or prevents, restricts or distorts competition within the CSME.” To the extent necessary to remedy or penalize anticompetitive business conduct, the commission may: 1. order the termination or nullification of agreements, conducts, activities, or decisions, 2. direct a company to cease and desist from anticompetitive conduct and take steps to overcome the effects of abuse of its dominant market position,


3. order payment of compensation to injured persons, and 4. impose fines for breaches of the rules of competition. Requests for an investigation by the Competition Commission to determine anticompetitive business conduct by a firm located in any CSME country are filed by a government participating in the CSME or by COTED. Investigations should normally be completed within 120 days after a request is filed. It is important to emphasize, that the CARICOM Competition Commission does not supplant the obligation of member states to establish (if they do not already have them) or maintain national competition authorities for the purpose of enforcing domestic and CARICOM competition rules. The commission can also request that these national authorities undertake a preliminary investigation of any business that falls within its jurisdiction whenever the commission believes that business is engaging in conduct that prejudices trade and prevents, restricts, or otherwise distorts competition within the CSME and has cross-border effects. XIII. Opportunities for Foreign Investors With the exception of Guyana, Jamaica, Suriname, and Trinidad and Tobago (which have significant mineral reserves and/or petroleum reserves) and Belize (with extensive arable land and forest resources), the other CARICOM countries are heavily dependent on services (primarily tourism and some banking and insurance) and decreasing levels of export agriculture. Much of the foreign direct investment that has flowed into the CARICOM region in recent years has tended to focus on building up an infrastructure system that caters to the important tourism sector or on mineral and petroleum extraction. The largest recipients of foreign direct investment have been the Bahamas, Jamaica, and Trinidad and Tobago. Given the region’s comparatively high education levels and the fact that English is its primary language, CARICOM should be a natural recipient of foreign direct investment in the services sector beyond just tourism. One country in particular, Barbados, made the most of this advantage and, coupled with advances in the telecommunications sector and time zone alignment with North America, has become an important call center for inquiries originating in the United States. Although the industry initially focused on handling hotel and car rental reservation requests, it has now diversified to include technical assistance. During the 1980s and 1990s, a Barbados-based firm handled the data processing operations for American Airlines, AT&T, and Blue Cross/Blue Shield. In recent years, some of the CARICOM countries have attempted to expand into medical tourism, particularly alcohol and drug rehabilitation. There has also been a major effort to develop a wide range of financial services (i.e., asset management, offshore banking, trust management), and both Barbados and the Bahamas have had much success in this regard. The comparative advantage of the CARICOM countries in offering offshore banking services, however, has been buffeted by the campaign against “un-cooperative” tax havens first launched by the Organization on Economic Cooperation and Development in 1998. More recently, Trinidad and Tobago-based RBTT has engaged in


an aggressive expansion campaign so as to serve the entire CARICOM retail banking market. Although CARICOM has the potential to attract companies, including manufacturers of consumer goods, that wish to serve the entire regional market from one base within CARICOM, a number of factors explain why this phenomenon has failed to materialize on any significant scale. For one thing, many of the CARICOM countries lag behind their Latin American counterparts in removing excessive restrictions on foreign direct investment. Labor costs are also comparatively high, labor regulations burdensome, and productivity is less than optimal. Furthermore, intra-CARICOM transport costs tend to be significantly higher than those for similar distances covered in Latin America or other parts of the developing world. Energy and telecommunication costs in the Caribbean are also very high, despite such recent occurrences as the de-monopolization of cellular telephony and Internet services in the region. Despite these constraints, a number of preferential market access programs to the developed world help make CARICOM an attractive base for some types of manufacturing activities. In the future, the new Economic Partnership Agreement with the European Union and a successful completion of the WTO Doha Round and a Free Trade Area of the Americas (FTAA), coupled with internal reforms, have the potential to make the Caribbean region very attractive in terms of the international provision of services. A. Caribbean Basin Economic Recovery Act and U.S.-Caribbean Basin Trade Partnership Act The Caribbean Basin Economic Recovery Act (CBERA) was enacted by the U.S. Congress in August 1983 and is based on the Caribbean Basin Initiative first proposed by the Reagan Administration in 1982 to combat the economic and political crises that gripped the region at the time. CBERA came into effect on January 1, 1984, and was initially supposed to expire on September 30, 1995, but it was extended indefinitely by an enhanced version signed into law on August 20, 1990. Under CBERA, most products manufactured or grown in beneficiary countries are eligible for duty-free or preferential tariff entry into the United States. In order for goods to be deemed eligible for CBERA benefits, they must The indefinite quality of CBERA is tempered by the fact that it is contingent on securing a waiver from the WTO. The last WTO waiver for CBERA expired on December 31, 2005, and a new one has not been granted, primarily due to Paraguay’s refusal to grant one until it too receives some type of unilateral, preferential market access into the world’s more-developed markets. This helps to explain the bizarre U.S. proposal in 2007 to include Paraguay as an Andean Trade Preference and Drug Eradication Act (ATPDEA) beneficiary. As of mid-2008, current CBERA beneficiary countries or territories included: (1) Antigua and Barbuda, (2) Aruba, (3) the Bahamas, (4) Barbados, (5) Belize, (6) the British Virgin Islands, (7) Costa Rica, (8) Dominica, (9) Grenada, (10) Guyana, (11) Haiti, (12) Jamaica, (13) Montserrat, (14) the Netherlands Antilles, (15) Panama, (16) St. Kitts and Nevis, (17) St Lucia, (18) St. Vincent and the Grenadines, and (19) Trinidad and Tobago. Participation in CBERA by the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua was replaced by their free trade agreement (i.e., the U.S.-Central America and Dominican Republic Free Trade Agreement (CAFTA-DR)) with the United States. Costa Rican


be imported directly from a beneficiary country into the United States and must be goods that are wholly grown or manufactured in that country. or, if nonCBERA inputs are utilized, the final product must be substantially transformed within the CBREA countries into a new or different product. In addition, if at least 35 percent of the appraised customs value of a product reflects the cost or value of the materials produced plus the direct cost of processing operations performed in one or more CBERA countries (including Puerto Rico and the U.S. Virgin Islands), it too will be accorded duty-free access into the United States. The rule of origin provisions allow CBERA countries to pool their resources to meet local content requirements and also permit inputs from the signatories to the U.S.-Central America and Dominican Republic Free Trade Agreement (CAFTA-DR), Puerto Rico, and the U.S. Virgin Islands to count toward the 35 percent value threshold.10 As a result of the 1990 amendments, at least 15 percent of the 35 percent threshold value can be attributable to U.S. (i.e., non-Puerto Rican and U.S. Virgin Island) inputs. In addition, most goods assembled or processed in the CBERA countries wholly with inputs originating in the United States are likewise permitted duty-free entry into the United States. Goods that are specifically excluded by CBERA from duty-free access into the United States include most textiles and apparel, canned tuna, petroleum and petroleum derivatives, most types of footwear (except if made wholly of U.S. inputs), certain types of watches and watch parts, and many kinds of leather goods. The 1990 amendments to CBERA, however, permitted a 20 percent tariff reduction on excluded leather goods (e.g., handbags, luggage, wallets, and clothing) to be phased in gradually in equal increments over a five-year period that began on January 1, 1992.11 Unlike the Andean Trade Preference and Drug Eradication Act (ATPDEA), rum products are not excluded from duty-free treatment into the United States. For certain products that CBERA does not specifically exclude, duty-free entry may still be subject to certain restrictions. For example, sugar (including syrups and molasses), and beef are eligible for duty-free entry only if the CBERA country submits a “Stable Food Production Plan” to the United States assuring that its agricultural exports do not interfere with its domestic food supply and with land use and ownership.12 Furthermore, CBERA provides safeguards to U.S. industries in the event that increased exports from the CBERA countries cause or threaten to cause serious economic harm to them.13 and Panamanian participation in CBERA will also be supplanted once their respective free trade agreements with the United States come into force. 10 United States International Trade Commission, The First Ten Years of CBERA 6 (1994). 11 Id. at 5. 12 Id. at 6. Imports of sugar and beef may also be subject to applicable tariff rate quotas (TRQs) if they exceed the global or individual country allocations as well as U.S. sanitary and phytosanitary requirements. 13 Interestingly though, CBERA country imports that are the subject of an investigation under U.S. antidumping or countervailing duty laws are exempt from the general cumulative rule and will not be included with imports from those of non-CBERA countries for purposes of determining whether a U.S. industry is injured.


Ethyl alcohol produced from agricultural feedstock such as sugar grown in a CBERA country can be admitted duty free into the U.S. market. There are limits on the amount of ethyl alcohol used as a fuel additive that can enter duty free, however, if the dehydrated alcohol or mixtures is made from nonCBERA agricultural feedstock. If the dehydrated alcohol or mixtures is made from non-CBERA sugar, for example, there is a cap of 60 million gallons (227.1 million liters) or 7 percent of the U.S. ethanol market, whichever is greater, that can enter the United States duty free in any given year.14 An additional 35 million gallons can enter free of duty if at least 30 percent of the dehydrated alcohol or mixture is produced from local feedstock. On the other hand, an unlimited amount of ethyl alcohol can enter duty free if at least 50 percent of the dehydrated alcohol or mixture is produced from local feedstock.15 In January 2000 the U.S. Congress passed the U.S.-Caribbean Basin Trade Partnership Act (CBTPA) and thereby extended duty-free treatment to many previously excluded textile and apparel products under CBERA. It also extended preferential market access for certain tuna, petroleum and related products, certain footwear, and certain watches and watch parts. Additional modifications were made to the CBPTA as a result of the Trade Act of 2002. At the present time only Barbados, Belize, Guyana, Haiti. Jamaica, St. Lucia, and Trinidad and Tobago are eligible for the textile and apparel provisions of the CBTPA as well as its preferential tariff treatment regime for certain previously excluded products under CBERA. In December 2006 the U.S .Congress approved the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, which provides for more liberal rules of origin for certain apparel made in Haiti than is otherwise available under CBPTA. Apparel assembled in one or more eligible CBPTA eligible countries from fabric wholly formed and cut in the United States that, in turn, is made from yarns wholly spun in the United States and classified under Harmonized Tariff Schedule (HTS) subheading 9802.00.08 or, in special circumstances, under HTS Chapters 61 or 62, can enter the U.S. market duty free.In addition, dutyfree treatment is also offered to apparel cut in one or more eligible CBPTA countries from fabric wholly formed in the United States that, in turn, is made from yarn wholly spun in the United States (including certain fabrics not formed from yarns), so long as the apparel is also assembled in or more CBPTA countries with thread formed in the United States. The Trade Act of 2002 now mandates that U.S. fabrics, whether cut in the United States or in a CBPTA country, must be dyed, printed, and finished in the United States. CBTPA also provides duty-free treatment for textile luggage made with U.S. inputs, some knit-to-shape and knit apparel articles, as well as apparel classifiable under HTS subheading 6212.10 within defined quota limits. United States International Trade Commission, The Impact of the Caribbean Basin EcoRecovery Act: Eighteenth Report 2005–2006 1–6, n.27 (2007). 15 Id. at 1–6, n.27. CAFTA-DR countries are counted as CBERA countries in determining the quantity of non-local feedstock ethanol they can export to the United States duty free. El Salvador has a preferential access level that is subtracted from the total to determine what can be exported from other CBERA/CAFTA-DR countries. 14

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Furthermore, CBTPA eligible countries are now allowed to produce apparel from third-country fabrics or yarn deemed to be in short supply in the United States and to export it to the United States without paying import duties. There is also a special rule for the tariff-free entry of products deemed to be hand loomed, handmade, or folkloric items (and certified as such). CBTPA is designed to offer eligible Caribbean Basin states the same type of duty- and quota-free market access into the United States that Mexico received under the North American Free Trade Agreement (NAFTA). This is the reason why the same type of preferential tariff treatment accorded to Mexican goods by NAFTA is also extended to the CBPTA countries with respect to certain types of footwear, certain tuna, certain watches and watch parts, as well petroleum and petroleum derivatives. The more stringent NAFTA rules of origin apply for these products, however. The CBPTA preferences are a temporary benefit scheduled to expire whenever the FTAA comes into effect or on September 30, 2010 (whichever comes first). In recent years, fuels and related chemical products have surpassed apparel as the dominant items exported from the Caribbean Basin countries to the United States under CBERA/CBTPA.16 Trinidad and Tobago provides the bulk of that fuel as well as organic and inorganic chemical exports. In fact, the country is the world’s principal supplier of Liquefied Natural Gas (LNG) to the United States and is also an exporter of light crude oil, refined petroleum products, and natural gas derivatives such as anhydrous ammonia and methanol. Interestingly, since 2006 fuel grade ethanol made from sugar has become Jamaica’s largest CBERA eligible export to the United States.17 Since CBERA was enacted in the 1980s, the Dominican Republic was traditionally one of the leading suppliers of products (i.e., raw sugar, leather footwear uppers, higherpriced cigars, jewelry, and, more recently, automatic circuit breakers) imported from the Caribbean Basin duty free.18 Following the enactment of the CBTPA and before CAFTA-DR came into force, the Dominican Republican was also a major supplier of the eligible apparel that entered the United States duty free. During the 1980s, CBERA encouraged investment in non-traditional products, thereby diversifying the range of Caribbean exports to the United States. This included electrical wire-wound variable resistors from Barbados, surgical and dental equipment from Grenada, plywood from Guyana, and assembly parts for clocks from Antigua and St. Kitts and Nevis. This diversification was short lived, however, as high energy, transportation, and labor costs eventually reduced the attractiveness of the Caribbean in favor of China and other low-cost manufacturers with more efficient work forces. On the other hand, CBERA preferences have been essential to the growth and development of the methanol industry in Trinidad and Tobago19 and have contributed to the growth of the citrus juice industry in Belize.20 Similarly, CBERA has played a Id. at 2–3. Id. at 3–21. 18 Id. at 2–18 19 Id. at 3–25. 20 United States International Trade Commission, Caribbean Region: Review of Economic 16 17


significant role in making polystyrene production in the Bahamas viable. Haiti has been the country that has most taken advantage of the textile and apparel provisions under the CBPTA. Largely in response to higher ethanol prices in the United States, several investment projects have been announced in recent years that call for new or expanded ethanol dehydration and ethanol distillery plants in Jamaica to increase ethanol production and ethanol exports to the United States.21 In particular, these investments encompass facilities to either process hydrous raw material imported from Brazil and converted into ethanol in Jamaica or distilleries that produce ethanol in the country from Jamaican sugar cane that is then dehydrated in the country for export to the United States as a fuel additive. B. From Lomé I to the European Union-Africa, the Caribbean, and the Pacific Economic Partnership Agreements Pursuant to the original Lomé Agreement (first signed in 1975 and followed by an additional four versions) and the subsequent Cotonou Agreement of 2000, the European Union offered duty-free access to its market for imports from the former colonies of some of the EU member states in Africa, the Caribbean, and the Pacific (ACP). In addition, specific protocols under Cotonou covered preferential tariff arrangements for the importation of rum, bananas, and sugar (i.e., all important CARICOM exports). In the late 1990s a series of rulings handed down by WTO dispute resolution panels declared that the banana regime established under Cotonou violated the WTO obligations of the EU countries by unfairly discriminating against banana imports from Latin America and therefore had to be phased out immediately. These rulings had a particularly negative impact on the economies of Dominica, St. Lucia, and St. Vincent and the Grenadines. In anticipation of the expiration of the non-reciprocal trade preferences under the Cotonou Agreement on December 31, 2007,22 the European Union proposed replacing them with a so-called Economic Partnership Agreement (EPA). Unlike the previous unilateral preferential market access programs, the EPA required that the ACP countries had to provide access to their markets for EU firms and individuals. This access would not be limited to trade in goods, but would also include trade in services and address issues related to crossborder investment and development assistance. In addition, the EU required that the EPA negotiations be negotiated with blocs of developing countries and not individual nations. In the Caribbean context, Caribbean Forum Growth and Development 3–11 (2008). The report highlights that under CBERA, Belize received duty-free treatment for citrus juices, thereby creating a substantial preference over larger citrus juice exporters such as Brazil and contributing to an expansion of Belizean citrus juice exports from U.S.$8 million in 1993 to U.S.$41 million in 2006. 21 The Impact of the Caribbean Basin Economic Recovery Act: Eighteenth Report 2005– 2006, supra note 14, at 3–22. 22 The explanation for this deadline was that the WTO waiver for the EU’s unilateral preferential market access program for the ACP countries was set to expire on that day. The EU’s less generous General System of Preferences program that excludes more products from duty-free treatment was still an alternative, however.


(CARIFORUM) was chosen to be the interlocutor for not only the 14 sovereign CARICOM member states but also the Dominican Republic. In the specific case of the CARICOM states, the negotiations were handled collectively by the Caribbean Regional Negotiating Machinery based in Barbados.23 The EU negotiations with CARIFORUM dragged on inconclusively for long periods of time after the first discussions were initiated in Brussels in late 2002. With many issues still not resolved as the December 31, 2007, deadline approached, the European Union made clear that it would not extend Cotonou’s tariff preferences and risk reprobation at the WTO. Although this threat created unhappiness in the Caribbean, it did finally force the issue as the European Union and CARIFORUM concluded the negotiations for the CARIFORUM-EU EPA on December 16, 2007. Under the EPA with CARICOM and the Dominican Republic, the European Union does not levy any tariff or quantitative restrictions on products imported from the Caribbean nations.24 On the other hand, a number of EU products are permanently excluded from duty-free treatment by the Caribbean countries.25 Tariffs on most other European goods are phased out over a 15year period (following an initial three-year moratorium). There are also socalled sensitive products imported from Europe that will not receive complete duty-free treatment for up to 25 years. The European Union is under an obligation to eliminate export subsidies on all agricultural items exported to the Caribbean. The European Union also agreed to provide funding to improve the overall competitiveness of the Caribbean’s agricultural and fishery sector, enhance export marketing capabilities as well as compliance with technical, health and quality standards, and promote private investment and publicprivate partnerships. The rules of origin for determining what goods qualify for preferential tariff treatment under the EPA are almost identical to those found in the Cotonou Agreement and are premised on outside inputs having undergone sufficient working or processing in one or more eligible countries as reflected by a change in tariff classification heading.26

23 The Caribbean Regional Negotiating Machinery (CRNM) was created in 1997 to develop, coordinate, and execute an overall negotiating strategy for the various regional and multilateral trade negotiations in which the CARICOM countries were engaged, including the FTAA. The CRNM assists the CARICOM governments in: (1) providing advice, (2) facilitating the formulation of national positions, (3) coordinating the formulation of a cohesive negotiating strategy, and (4) leading negotiations (where authorized). 24 There are some agricultural items, such as rice and sugar, where the lifting of all quotas is phased in over a two-year period from when the EPA took effect. 25 Excluded items include alcohol, live animals, fresh fruits and vegetables, lactate products, chemicals, and all the items excluded by the OECS and Belize from intra-CARICOM free trade pursuant to Article 164 of the Revised Treaty of Chaguaramas. 26 Annex II to Protocol 1 found in Annex V to the Cotonou Agreement contains the precise “working or processing” of non-originating materials that must occur so that the final manufactured product can achieve originating status. As can be expected, there are exceptions to the general “change in tariff classification heading” rule. These include special rules of origin for apparel and certain foodstuffs, which require that certain inputs or a percentage of inputs must be sourced within the territory of the eligible countries.


The EPA opens up numerous sectors (i.e., agriculture, forestry, manufacturing, mining, and non-public services) to cross-border investor access, although the Caribbean countries maintain more exceptions, particularly as affects sectors dominated by small- and medium-sized enterprises. The concepts of national treatment and MFN are fully recognized in terms of cross-border investment and the provision of services in the tourism, e-commerce, courier, telecommunication, financial, and maritime transport sectors. In terms of professional services, there are provisions for the mutual recognition of qualifications as well as EU technical assistance for the Caribbean tourism sector (including training for service suppliers and support for training institutions). In general, the European Union has liberalized access to more of its services and manufacturing sector and at a faster pace than have the Caribbean countries. For example, there is more limited temporary entry provided for EU firms or individuals to offer their services inside individual Caribbean countries than is the case for Caribbean service providers enjoying access to the EU markets. A Caribbean service provider can enter the EU once a year and remain there for up to six months. In addition, the EU will allow the temporary entry of professionals or self employed persons in 11 sectors (albeit some of the EU member states may impose an economic needs test as a pre-condition to authorizing such entry within their territory). Interestingly, the vast majority of EU member states opened their respective entertainment sectors to actors, artists, dancers, musicians, and writers from the Caribbean. In this regard, a Protocol on Cultural Cooperation allows Caribbean audiovisual producers to access EU funding for creative projects. Furthermore, audiovisual products and services co-produced by EU and Caribbean teams will qualify as European works and meet the cultural content rules in all EU states. The EPA with the Caribbean also contains provisions on ensuring fair competition, supporting the development of Caribbean intellectual property (particularly geographical name indicators and the protection of traditional knowledge), requiring transparency in government procurement (but not creating any right of access to participate in bids), conducting trade in a manner that promotes environmental protection and preservation, enforcing core International Labor Organization labor standards, and establishing personal data protection regimes. There is a dispute settlement procedure that employs consultation among the affected state parties and, if that is not successful, referral to an ad hoc arbitration panel (with an intermediate option of mediation also available). Four institutions are created to oversee and/or support implementation of the EPA and include: (1) the Joint CARIFORUMEU Council, (2) the CARIFORUM-EU Trade Development Committee, (3) the CARIFORUM-EU Parliamentary Committee, and (4) the CARIFORUM-EU Consultative Committee. One interesting provision in the CARIFORUM-EU EPA is a unilateral commitment on the part of the European Union not to impose safeguards on imports from the Caribbean and to refrain from imposing antidumping or countervailing duties until alternative unfair trade practice remedies have been exhausted, including government-to-government consultations. There is also a


commitment on the part of all the signatory states not to lower environmental and social standards in order to attract foreign investment or to permit investors from engaging in corrupt practices in order to obtain special favors or consideration from government officials. C. Caribbean-Canada Program The Caribbean-Canada Program (CARIBCAN) was started in 1986 and provides duty-free access to the Canadian market for most goods exported by the English-speaking CARICOM countries, except for textiles and apparel, footwear, most leather goods, lubricating oils, and methanol. In contrast to CBERA, the Canadian program has a much stricter 60 percent regional content requirement (although the origin of the product or its inputs can originate either in the Caribbean and/or Canada). About two thirds of CARICOM´s exports to Canada enter that country duty free, either as a result of CARIBCAN or Canada’s MFN obligations under the WTO. The WTO waiver granted to Canada under Article IX, Section 3 of the General Agreement on Tariffs and Trade (GATT) 1994 to permit unilateral, preferential market access into Canada for the Caribbean countries expires on December 31, 2011. Efforts to negotiate a Canada-CARICOM free trade agreement have, to date, proven inconclusive. D. CARICOM-Dominican Republic Free Trade Agreement The framework for a free trade agreement was signed by the Dominican Republic and CARICOM on behalf of 13 member states in August 1998. Haiti and the Bahamas were excluded. The actual protocol to implement a free trade area between CARICOM and the Dominican Republic was not signed until May 2000, however. To date, the protocol has only come into force for the following countries: Barbados (December 1, 2001), the Dominican Republic (February 4, 2002), Guyana (October 6, 2004), Jamaica (December 1, 2001), Suriname (August 1, 2005),and Trinidad and Tobago (December 1, 2001). Mineral fuels represent the main CARICOM export to the Dominican Republic, while the Dominican Republic exports mostly fertilizers, furniture, plastics, processed vegetables, steel products, and soaps to the CARICOM countries. Bilateral free trade is limited to the Dominican Republic and the moredeveloped countries of CARICOM (i.e., Barbados, Guyana, Jamaica, Suriname, and Trinidad and Tobago). The Dominican Republic unilaterally opens it market to the six mini-states of the OECS and Belize, although there was an understanding that the OECS and Belize would open their respective markets for imports from the Dominican Republic in 2005. The latter has yet to happen. Unless the product is included in Annex I, in which case it is subject to an annual tariff reduction of 25 percent, all other goods received immediate duty-free treatment as soon as the agreement entered into force. Those items subject to the four-part tariff reduction schedule include cardboard boxes, coffee, cookies, jams, mattresses, pasta, perfumes, plastic or rubber footwear, and plastic tableware. Goods completely excluded from bilateral free trade treatment include beans, beer, cement, citrus fruit juices, milk, rice, sugar, wheat flour, and any product made in a free trade zone or export


processing zone. Soaps and detergents are excluded because of the Oils and Fats Agreement, which prevents free trade of these products internally within CARICOM. Furthermore, Dominica has a Colgate plant that produces many of these items that would likely go out of business if forced to compete with cheaper and higher-quality imports from outside CARICOM. Ironically, despite the tariffs imposed on soap from the Dominican Republic, it still manages to be one of its main exports to CARICOM. Finally, there are a significant number of agricultural products that are excluded from free trade during those times of the year when there is an excess of domestic production. In order to receive the benefits of bilateral free trade, goods must either be wholly produced in the Dominican Republic and/or CARICOM, or can be made with third country inputs that undergo substantial transformation within the Dominican Republic and/or CARICOM as reflected by a change in their six-digit level tariff classification heading. If the imported inputs that do not undergo a change in tariff classification heading represent no more than 7 percent of the transaction value of the final good on a freight on board (FOB) basis, they will be disregarded as de minimis and will not impede the final product from being deemed as originating in the Dominican Republic and/or CARICOM. A significant number of goods are also subject to specific rules of origin. All countries with goods that form part of a consignment in excess of U.S.$1,000 that want to partake of bilateral free trade must be accompanied by a certificate of origin that an exporter or final producer obtains from a designated certifying authority in the country of final production. Safeguard measures may be imposed on bilateral trade as well as antidumping and countervailing duties permitted under the relevant WTO agreements. The CARICOM-Dominican Republic Free Trade Agreement includes general provisions to liberalize cross-border trade in services, including the abolishment of local presence requirements. However negotiations to liberalize specific service sectors were left for future discussions. The agreement also provides general rules to encourage and promote cross-border investment but is remarkably silent on the issue of a mechanism for resolving any investor-state disputes. There are, however, provisions for the temporary entry of businesspersons (including investors and intra-company transferees) without the need to obtain an employment authorization or work certificate. The Joint Council consisting of government representatives from the Dominican Republic and CARICOM, which is established under the free trade agreement to supervise its implementation and administration, also provides one option for resolving any state-to-state dispute that may arise concerning the interpretation, execution, or non-compliance with the agreement. E. CARICOM-Costa Rica Free Trade Agreement Negotiations for a CARICOM-Costa Rica Free Trade Agreement were launched in 2002 and the actual agreement was signed by CARICOM on behalf of 12 of the member states and Costa Rica on March 9, 2004. The Bahamas and Haiti, which do not participate in CARICOM’s own economic integration


process, were excluded. Tiny Montserrat was also not included as it is still a possession of the United Kingdom and, furthermore, the island was effectively depopulated following large volcanic explosions in the late 1990s. As of mid2008, the free trade agreement has only come into force for Costa Rica and Trinidad and Tobago (November 15, 2005), for Costa Rica and Guyana (April 30, 2006), and for Costa Rica and Barbados (August 1, 2006). The free trade agreement needs to be ratified by each country’s government before it becomes operational as between Costa Rica and that particular CARICOM country. While Costa Rica primarily exports glass bottles, foodstuffs, and pharmaceutical products to CARICOM, Costa Rica’s largest import from CARICOM is liquefied natural gas from Trinidad and Tobago. The general rule is that all goods not included in Annex III.04.2 receive immediate duty free treatment once the free trade agreement comes into force. In addition, Costa Rica unilaterally grants immediate duty-free treatment to all goods originating in the less-developed countries of CARICOM (i.e., Antigua and Barbuda, Belize, Dominica, Grenada, St. Lucia, St. Kitts and Nevis, and St. Vincent and the Grenadines) unless specifically found in one of four lists of exceptions. On the other hand, the less-developed countries of CARICOM are not required to offer any preferential tariff treatment to goods originating in Costa Rica except under an MFN basis if preferential treatment is granted to third countries. Costa Rica also had to accept exclusion of oils, fats, and soaps from bilateral free trade pursuant to CARICOM’s traditional demands for “special and differential treatment” premised on the fact that these items are still excluded from free trade treatment within CARICOM itself. While some agricultural products are permanently excluded from bilateral free trade (e.g., bananas, citric fruit, coffee, milk, pineapples, rice, and sugar) those that are not (e.g., ground nuts, peppers, potatoes, sweet corn, tomatoes), are generally only provided duty-free entry into the markets of the larger CARICOM countries and Costa Rica when out of season in the country of importation. Also excluded from bilateral free trade are aluminum doors and sidings, beer, cement, certain types of seafood, chocolate, cigars, glass bottles, paint, pork meat, rum, solar water heaters, toilet paper, toothpaste, and wood furniture. For those goods that are subject to the tariff reduction schedule, tariffs are reduced by 25 percent when the agreement comes into force and an additional 25 percent for each year thereafter to eventually reach zero. The bigger CARICOM countries (i.e., Barbados, Guyana, Jamaica, Suriname, and Trinidad and Tobago) have different products subject to varying phase-out periods for tariffs (i.e., immediate duty-free access upon entry into force, phase-out according to the schedule, or permanent exclusion). The rules of origin that determine what goods are eligible for bilateral free trade include those goods wholly obtained or produced in one or more of the signatory countries or goods made with non-originating materials so long as each input undergoes a change in tariff classification heading as a result of production occurring entirely in one or more signatory states. If the imported inputs that do not undergo a change in tariff classification heading represent


no more than 7 percent of the transaction value of the final good on an FOB basis, they will be disregarded as de minimis and will not impede the final product from being deemed as originating in Costa Rica and/or CARICOM. There is also a de minimis rule for non-originating fibers and yarns that do not exceed 10 percent of the total weight of a textile or apparel product. Furthermore, there are an extensive number of special rules of origin for a wide range of products. If a non-originating good is exported from either a CARICOM state or Costa Rica to the other for repair, renovation, or improvement, the good can reenter duty free so long as the value of the non-originating materials used in the repair, renovation, or improvement does not exceed 65 percent of the cost of repair, renovation, or improvement, and the essential character of the good is not altered. Interestingly, originating goods produced in free trade zones in either Costa Rica or a CARICOM country are subject to MFN status. This is in addition to five tariff headings listed in Annex III.04.06 that are made in a free trade zone in one country and allowed to enter the territory of the participating states duty free. Accordingly, if a country does not accept importation of goods made in free trade zones in third countries, and it is not one of the items listed in Annex III.04.6, it does not have to allow duty-free entry under the CARICOM-Costa Rica free trade agreement. On the other hand, if it does, it must apply the same privilege here. All countries with goods that form part of a consignment in excess of U.S.$1,000 that want to partake of bilateral free trade must be accompanied by a certificate of origin that an exporter obtains from a designated certifying authority. The use of antidumping and countervailing duty measures on bilateral trade as well as negotiated export quotas and the imposition of customs user fees are permitted but not consular fees on imports or most types of export taxes.27 Safeguard measures may be imposed on bilateral trade as permitted by Article XIX of the GATT 1994. Although there are references to encouraging the cross-border offering of services and investment, there are few concrete obligations. For example, Article IX.2(3)(a) of the CARICOM-Costa Rica Free Trade Agreement requires only that the signatories shall “encourage bodies responsible for the regulation of professional services” to “ensure that measures relating to the licensing or certification of nationals of the other Party are based on objective and transparent criteria” and “cooperate with the view to developing mutually acceptable standards and criteria for licensing and certification of professional service providers.” The focus of the investment obligations is on ensuring that any expropriation is done under due process of law for the public good and is appropriately compensated without undue delay. Interestingly, a signatory is Costa Rica is allowed to continue imposing export taxes on bananas, coffee, and meat.

27


not required to extend to investors from the other countries advantages that may arise from existing or future association or participation in a free trade area or any other type of economic integration process. Investor-state disputes that cannot first be resolved amicably can be referred to the competent courts of the country where the investment is located or to international arbitration using ICSID or UNCITRAL rules. Among the options for resolving state-to-state disputes that may arise regarding the interpretation or application of the agreement or when an actual or proposed measure is deemed to be inconsistent or otherwise nullifies and impairs obligations arising under the agreement are referral to the WTO (should it have subject matter jurisdiction). If the parties cannot resolve the dispute amicably, a second option is referral to a three-person arbitration panel. The parties may also agree to have recourse to alternative methods of dispute resolution, including good offices, conciliation, or mediation. In a blow to a more intense engagement of the private sector in deepening the bilateral free trade relationship, Article XIII.18 of the CARICOM-Costa Rica Free Trade Agreement forbids any country from providing “for a right of action under its domestic law against the other Party on the ground that a measure of the other Party is inconsistent with this Agreement.” XIV. Organization of Eastern Caribbean States

A. Inter-Relationship Between CARICOM and the Organization of Eastern Caribbean States In 1981 the mini-states of the Eastern Caribbean signed the Treaty of Basseterre, which created the OECS. The OECS consists of six independent countries (i.e., Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines) and three English colonies (i.e., Anguilla, Montserrat, and the British Virgin Islands). The original goal of the OECS was to coordinate and harmonize the foreign policy of the member states as well as to promote a common market (something that had already been attempted in 1968 with the launch of the Eastern Caribbean Common Market) and monetary union. What has actually happened, however, is that trade arrangements among the OECS member states have been handled almost exclusively within the CARICOM context. This may change once the new treaty signed in 2006 to convert the OECS into an economic union comes into force. Pursuant to Article 56 of the Common Market Annex to the Treaty of Chaguaramas of 1973, the smaller and less-developed members of CARICOM (which includes all six independent member states of CARICOM plus Belize) have the right to exempt certain products originating within CARICOM from free trade treatment. In particular, an less-developed country can petition fellow less-developed countries to temporarily impose a tariff or quota on like or similar goods that originate in one of the four larger CARICOM countries (i.e., Barbados, Guyana, Jamaica, and Trinidad and Tobago). In addition, the petition must be supported by the votes of at least two of the larger CARICOM


countries in COTED. The rationale behind this temporary exclusion is that it will offer the protected industry an opportunity to restructure itself and become more competitive. A report prepared by the British Commonwealth Secretariat in 1997, however, found that Article 56 had not contributed to the development of sustainable industries in the OECS and Belize. On the contrary, it had only served to encourage and protect inefficiency. Furthermore, the protectionist measures were neither limited nor temporary in nature and had done nothing to encourage investment so as to enhance the competitiveness of the protected industries. The report found that those most harmed by the protectionist measures were the consumers of the OECS countries and Belize, particularly those with lower incomes, who were forced to pay higher prices for goods that in many cases were of inferior quality. The report recommended eliminating Article 56 no later than 2003. The Revised Treaty of Chaguaramas includes Article 164, which is very similar in content to the old Article 56. The only significant difference is that protection is now limited to tariffs and does not include quotas as an option (in keeping with WTO mandates). Furthermore, the decision to impose a tariff must be reviewed by COTED at the end of every five years. Among the products currently excluded from intra-CARICOM free trade under Article 164 are many of the same goods that were protected, in some cases for decades, under the former Article 56 of the older Treaty of Chaguaramas. B. Achievements of the Organization of Eastern Caribbean States The most successful achievement of the OECS to date has been to establish a stable and functioning monetary union. All the independent members of the OECS plus two English colonies (i.e., Anguilla and Montserrat) have one Central Bank that is headquartered in St. Kitts, and they all share the same monetary unit (i.e., the Eastern Caribbean dollar). The six independent member states also cooperate on foreign affairs and generally share the same embassies or diplomatic offices in the few countries where they maintain such outposts. In 2000 five of the six independent states (the exception was Antigua and Barbuda) signed a treaty that created a single authority to regulate the telecommunications sector. In doing so, they broke the monopoly of an English company, Cable and Wireless, which had forced the inhabitants of the OECS countries to pay among the most expensive telephone rates in the world. There is also an Eastern Caribbean Civil Aviation Authority based in Antigua. In June 2006 the sovereign states and English colonies that make up the membership of the OECS signed an agreement to replace the Treaty of Basseterre in order to establish an economic union. This move will require the establishment of institutions with supranational authority, especially those given jurisdiction to develop and implement macroeconomic policies in order to facilitate, among other things, the free movement of capital. It is expected that the new treaty on economic union will enter into force sometime after 2008, following a period of consultation with the citizenry and ratification by the legislative bodies of each country or territory. It should be emphasized that


two institutions already exist at the subregional level that already enjoy the power to make decisions that are binding on the governments of the OECS: the Eastern Caribbean Central Bank and the Eastern Caribbean Supreme Court.28

Table 9.1. Major Socio-Economic Data for the OECS for 2006 Country

Population

Gross Domestic Production (In Millions of U.S.$)

Per Capita Gross National Income (Atlas) (U.S.$)

Antigua and Barbuda

84,000

998

11,5000.00

Dominica

72,368

319

4,160.00

Grenada

108,000

525

4,650.00

Montserrat

9,638*

29*

3,400.00*

St. Kitts and Nevis

48,393

477

8,460.00

St. Lucia

166,000

899

5,060.00

St. Vincent and the Grenadines

120,000

423

3,320.00

* Estimates Source: World Bank and CIA World Fact Book C. Has the Organization of Eastern Caribbean States Become an Impediment to Deeper CARICOM Integration? Despite its many internal achievements as a regional economic integration project, the OECS has also manifested a tendency in recent years to serve as an obstacle to deeper economic integration at the wider CARICOM level. For example, in February 2006 the OECS countries refused to sign the agreement that would bring the Single Market component of the CSME into force within 28 The judicial system of the OECS countries is, in general, regional in character. The lower or trial court is called the High Court and has judges resident in each of the six independent countries and the three English colonies. The intermediate appellate court is the Eastern Caribbean Supreme Court. Although based in St. Lucia, its judges travel to the different islands to hear appeals when they arise. At the present time, the highest court of appeals is the Privy Council, which sits in London. There is an expectation, however, that the Privy Council will eventually be replaced as the court of last resort by the new CCJ that sits in Trinidad and Tobago.


their territories. This delay was, in part, caused by the failure of the OECS countries to have the necessary legislation in place that would allow the free movement of skilled workers and investors. Despite having had more than a decade of advance warning, many of the OECS countries had still not modified their internal laws to accredit education obtained in other countries, eliminate work license requirements for CARICOM nationals, and to accept contributions made to other Caribbean social security systems for vesting purposes in their own schemes. In addition, the OECS governments insisted that Barbados, Jamaica, and Trinidad and Tobago had to first put money into a development fund that would compensate them for the negative impact they claimed they would inevitably suffer by competing with the larger economies. The big dilemma confronting the OECS today is how to best integrate into the international economy and at the same time promote sustainable development. There is an appreciation at the intellectual level that the tiny size of their populations and economies require deeper economic and even political integration at the subregional and CARICOM level. The problem is how to convert this imperative into a reality when the OECS countries are governed by political actors who have shorter-term interests and want to preserve their power. Up until now, the OECS governments have contented themselves with asking for “special and differential treatment” whenever they deal with bigger and more developed nations. This implies offering a minimum of concessions to bigger states while at the same time expecting greater preferential access into those larger markets. The special exemption from free trade granted to the OECS and Belize by Article 164 of the Revised Treaty of Chaguaramas is just one manifestation of this type of non-reciprocal preferential treatment in the CARICOM context. One of the most troubling aspects of this non-reciprocal preferential treatment is that it does nothing to encourage the type of restructuring of the economy required to enhance global competitiveness. These types of preferences actually do the opposite by creating a mentality of entitlement and privileges that are difficult to eliminate the longer they are in place. This is most evident with respect to the regime originally permitted by Article 56 of the old Treaty of Chaguaramas and extended by Article 164 in the Revised Treaty of Chaguaramas. Many of the same products that were exempt from intra-CARICOM free trade for some three decades continue to receive that protection even though the beneficiary industries have done nothing to transform themselves into more efficient and competitive businesses. Another problem with unilateral preferential treatment programs is that they prolong dependency on the export of a small group of primary products and do nothing to encourage diversification. This phenomenon has been most evident in some Eastern Caribbean countries such as Dominica and St. Vincent and the Grenadines that, for years, depended excessively on the preferential access offered into the European markets for their bananas and found themselves with few alternatives when this regime collapsed after a successful complaint filed in the WTO.


The CARICOM development fund that the OECS countries demand money from in order to fully implement the CSME also presents a series of troubling questions. It is expected that this money will be used to restructure the industries and other sectors of the OECS economies in order to make them more competitive with their counterparts based in the larger CARICOM countries. Unfortunately, if similar type programs of the past are any indication of how things will go with the new development fund, much of this money will likely end up being used to pay the salaries of public sector employees instead of assisting efforts at economic and structural reform. In any event, even steering money to restructure industries that will never be efficient because they cannot achieve economies of scale is a waste of resources. In the end, the only thing these monies facilitate is to hide the fact that these tiny economies are not viable, and the only solution is deeper regional economic integration. It also allows the local political elites to evade the responsibility of undertaking painful decisions needed to convert these mini-states into a political union and provide the only long term hope of liberating them from an endless cycle of dependency. XV. Test Case for the Organization of Eastern Caribbean States: Proposal to Convert Antigua and Barbuda into a Free Port A. Competitive Productive Sectors for Antigua and Barbuda 1. Agriculture Following the collapse of the sugar industry some three decades ago, Antigua and Barbuda’s once dominant agricultural sector has steadily shrunk in importance. By the early 1990s agriculture employed only 4 percent of the population.29 Today, the percentage of Antiguans and Barbudans employed in agriculture is by far the lowest among all the OECS countries.30 Agriculture currently contributes to less than 4 percent of the country’s gross domestic product (GDP). Part of the explanation for agriculture’s shrinking importance is that Antigua and Barbuda is less suited to agricultural production than other lower-cost producers, even within the region. For one thing, the country does not have abundant rainfall or natural water supplies. The inability of the Central Marketing Corporation to effectively channel the produce of small-scale farmers to major purchasers such as the hotels and restaurants and a generalized failure to utilize the latest predictive analyses models31 also dampens enthusiasm for increasing yields and productivity. The end result is a small agricultural sector that erratically produces very expensive produce that is not always of the best quality. 29 World Bank, Organization of Eastern Caribbean States: Towards a New Agenda for Growth 8 (2005). 30 Id. at 8. 31 As used here, predictive analyses models take a particular agricultural item such as a fruit or vegetable and incorporate all the factors associated with a plot of land (i.e., quantity under production, quality of the soil, water resources, etc.) to make predictions about crop yield and output.


Unfortunately, consumers in Antigua and Barbuda are forced to pay significantly higher prices for their fruits and vegetables because of current government policy that heavily protects the country’s inefficient agricultural sector with tariff barriers and import licenses. The import duties on many fruits and vegetables are an astronomical 40 percent. The Central Marketing Corporation compounds the problem by enjoying a virtual monopoly on the importation of cabbage, carrots, eggs, green peppers, onions, and tomatoes when domestic supplies are low. Instead of passing the lower costs it pays for these foreign vegetables and eggs on to retailers, it sells them at the higher prices normally charged within the heavily protected domestic market. Ultimately these higher prices are paid for by Antiguan consumers. While the country’s poor shoulder the heaviest burden as a result of Antigua and Barbuda’s high prices for agricultural produce, these high prices also have a negative ripple effect throughout the local economy. High prices for produce increase costs for Antigua and Barbuda’s agro-industrial processors and contribute, for example, to making the country’s hot sauces the highest in the OECS. It also undermines the overall competitiveness of the country’s important tourism sector, as expensive food increases the cost of the tourism product. Opening up Antigua and Barbuda’s agricultural sector to free trade would actually be a boon for the country’s small agricultural sector. For one thing, it would give farmers hassle-free access to less expensive pesticides and other inputs including farm equipment. It would also create a strong incentive to focus production on those agricultural products that really do enjoy a competitive niche advantage in both the domestic and regional market. One major advantage that Antiguan farmers will always enjoy over foreign competition is that local wholesalers and other large purchasers prefer to see what they are buying before they purchase it and verify that it is fresh. By contrast, produce imported from overseas is bought sight unseen and may arrive in Antigua weeks after sitting in cold storage or in the hull of a ship. 2. Manufacturing Despite the generous corporate tax and duty concessions on raw materials and capital goods granted to new manufacturers and the existence of a free trade zone since 1998, Antigua and Barbuda has had a difficult time developing any type of manufacturing base. The manufacturing sector accounts for only about 2.5 percent of domestic GDP. Little of what is made in Antigua and Barbuda is exported. The inability to establish a dynamic manufacturing industry arises from Antigua and Barbuda’s high labor wages, which surpass those of other Eastern Caribbean states and are among the highest in a recent survey of 92 countries carried out by the Commonwealth Secretariat.32 Electricity prices in 32 Organization of Eastern Caribbean States: Towards a New Agenda for Growth, supra note 29, at 67–68. The World Bank report includes a table that presents data on wage rates for a range of positions compiled by the Commonwealth Secretariat across 92 countries. In almost all the positions, with the exception of kitchen porters, average OECS wages are higher than the comparators. The table also reveals that Antigua and Barbuda tops the list of wage earners in the OECS for most job categories.


Antigua and Barbuda are also high and have risen rapidly in the last few years due to increasing oil costs in the international market. For example, the baseline electricity rate for commercial users is 17 U.S. cents per kilowatt in Antigua and Barbuda, versus approximately 3 U.S. cents in Trinidad and Tobago, or under 10 U.S. cents in Haiti and the Dominican Republic.33 Furthermore, the electricity supply can be unreliable and is prone to interruptions in service. High maritime transportation costs are another factor that undermines the export competitiveness of the local manufacturing sector. Cargo rates, especially for intra-regional shipping, are expensive and schedules erratic, in part, because of the low volumes of goods being shipped from one island to another. Unreliable shipping options and an inefficient Customs Division requires firms to keep larger stocks of inventory or inputs on hand, something that needlessly ties up working capital and drives up costs in order to pay for secure warehousing. Furthermore, a 2005 World Bank report notes that “[c]ompounding the more intractable problem of high freight costs are the notoriously high cost ports in the OECS. The main contributors are excessive cargo handling charges caused by antiquated work rules and strong union opposition to reform.”34 Irrespective of the above-mentioned limitations, there is some manufacturing in Antigua and Barbuda, mostly of an enclave-assembly nature, that supplies paints, garments, furniture, bedding, and galvanized iron sheets primarily for the domestic market. Almost without exception, the raw materials for these products must be imported from external sources. Some manufacturers will readily admit that much of the production that occurs in Antigua and Barbuda is only competitive because of expensive and erratic shipping schedules, coupled with the inefficiency of the country’s Customs Division and government owned and operated port that can delay imports of competing goods from being processed for weeks.35 This provides a significant level of protection for local manufacturing, in addition to what may be provided by import duties, so long as a sufficient back up stock of imported inputs is maintained. The more visionary manufacturers believe that some niche and just-in-time or customized manufacturing could survive in Antigua, even if the country were to eliminate all import duties, if shipping costs were lowered, and/or the Customs Division and port were made more efficient. They believe that if such moves were 33 Id. at 99–100. Among the OECS countries, Dominica, Nevis, and St. Vincent and the Grenadines have higher baseline electricity rates for commercial users than Antigua and Barbuda, whose rates are on par with St. Lucia and only a cent above rates in Grenada and St. Kitts. The World Bank report also notes that there are significant shortages in capacity in Antigua and Barbuda resulting in periodic power cuts and brown outs. Id. at 99. 34 Id. at 105. The port in St. John’s is operated on the public service model in which the port authority owns, maintains and operates all assets. 35 These significant delays are borne out in the latest Doing Business Survey results of the World Bank for Antigua and Barbuda, which notes that customs clearance and technical control can average three days and the ports and terminal handling can average eight days. The survey results can be accessed through the Internet at http://www.doingbusiness.org As for intra-regional shipping delays, one manufacturer interviewed by this author stated that it can take three to four weeks for an order to reach Antigua by boat from Trinidad.


coupled with elimination of the 10 percent Customs Service Tax, the costs of inputs, spare parts, and new technology would be reduced so as to make some of their locally produced goods less expensive and more competitive in both the local and even some regional markets. At the same time, encouraging the use and development of alternative sources of energy such as wind and solar power through tax credits, could lower energy costs. 3. Services The services sector is estimated to contribute up to 85 percent of the annual GDP of Antigua and Barbuda. The vast majority of these services are concentrated in the tourism sector, which also employs, either directly or indirectly, more than half of the country’s workforce. Antigua and Barbuda is a net exporter of services, primarily in the form of tourism services offered to foreign tourists.36 Overall, Antigua and Barbuda is one of the most tourismintensive countries in the world as measured by tourist arrivals per capita, by tourism receipts as a percentage of exports, or as a percentage of GDP. These statistics underscore that the tourism sector is the “goose that lays the golden egg” for the economy of Antigua and Barbuda. Unfortunately, current government policies, particularly those related to foreign trade, rather than encouraging this sector’s expansion and diversification, do just the opposite. Much of the tourism in Antigua and Barbuda is of the “sun, sea, and sand” variety, precisely the category that is projected to have the slowest growth in the future.37 Beyond its beaches, Antigua and Barbuda has not fully developed significant scenic wonders or venues for alternative tourism such as nature, hiking, and cultural or heritage tourism. This omission has also meant that less money is left on island by the significant numbers of cruise ship passengers who visit Antigua and Barbuda each year. In recent years, the tourism industry in Antigua and Barbuda is being increasingly squeezed into a slow-growth, middle-market position by high and rising wage and energy costs, and prices capped by competition from lowercost destinations, especially in the Spanish-speaking Caribbean.38 Antigua’s beaches, weather, and location are no longer enough to justify its high food and accommodation charges against the offerings of its competitors. One alternative is to move up-market. This will require extensive private investment in better facilities and significant staff training in customer service, quality control, as well as improved application of health, environment, and safety standards. Even 36 Travel services exports (i.e., tourism) account for roughly 70 percent of total service exports for Antigua and Barbuda. See C. Vignoles, An Assessment of Trade Performance and Competitiveness of OECS Countries 4 (Oct. 28, 2005), prepared for the Caribbean Regional Negotiating Machinery, available at http://www.crnm.org under “Studies & Technical Papers.” 37 See, Organization of Eastern Caribbean States: Towards a New Agenda For Growth, supra note 29, at 113, which also provides a table of comparative costs and prices. 38 The OECS countries are among the least price competitive within the Caribbean, which itself is much less competitive in terms of prices than other regions of the world. Id. at 113. In addition, with the decline in transportation costs worldwide, long-haul destinations have become increasingly attractive, as evidenced by the rising share of tourists worldwide traveling to Africa, Asia, and the Middle East.


so, there is evidence that despite such upgrades, the tourism product will still not be that much different from lower-priced Caribbean destinations therefore also making it necessary to adopt policies that reduce cost structures.39 One important area where cost structures can be reduced is through changes to Antigua and Barbuda’s current trade policy. The tourism sector is highly dependent on imported inputs that are frequently subject to the highest levels of protection (via tariff and non-tariff barriers) from both CARICOM and extraregional competitors. For example, Antigua and Barbuda imposes a 35 percent tax import duty plus a 10 percent Customs Service Fee on non-CARICOM beer and levies an environmental surcharge on bottled beer originating in other CARICOM countries. In addition, many fruits and vegetables are subject to a 40 percent import duty. The importation of some foodstuffs is further stymied by an inefficient import licensing scheme. Permanently eliminating import duties and the Customs Service Fee—as would occur in a free port—and facilitating the importation of food and other inputs used in the hotel industry (i.e., bed linens, furniture, toilet paper, towels, etc.) could significantly reduce the costs of hoteliers and restaurants in Antigua and Barbuda and provide a competitive edge over other English-speaking Caribbean islands. In recent years, the financial services and insurance sectors in Antigua and Barbuda have been buffeted by restrictions on off shore banking activities imposed by the more-developed countries of the Organization of Economic Cooperation and Development as well as increases in natural disasters that have increased payouts on claims and reduced corporate profit margins. The refusal by the United States to implement a WTO decision and permit firms based in Antigua and Barbuda to offer offshore Internet gambling services to Americans has, until new markets can be found, put a damper on a once thriving activity that employed many young and skilled workers for good pay. Interestingly, the competitiveness of the local Internet gaming industry has been further undermined by the Customs Division of Antigua and Barbuda because of frequent delays in processing servers and IT equipment that can last several weeks.40 In order to expand the services sector beyond tourism, Antigua and Barbuda needs to provide economies of scale for local service providers by aggressively pursuing the creation of a seamless market for free trade in services within the OECS and CARICOM. Absent such a move, Antigua and Barbuda simply does not have a sufficiently large internal market to support a wide range of sophisticated financial, business support, and legal services. Antigua and Barbuda also needs to expand the local pool of skilled workers by quickly implementing all the CSME mandated provisions for the free movement of skilled workers and service providers.

Vignoles, supra note 36, at 10 and 16. Organization of Eastern Caribbean States: Towards a New Agenda For Growth, supra

39 40

note 29, at 129.


B. Does St. Maarten Provide an Appropriate Free Port Model for Antigua and Barbuda? 1. Overview of the Free Port Concept Undoubtedly Hong Kong was the most famous example of a free port encompassing an entire territory from the time it became a British Crown Colony in 1842 until its return to China in 1997. During its heyday, Hong Kong refrained from offering investors tax holidays and subsidies, but attracted them instead with an absence of restrictions, including freedom from import and export duties and no exchange controls.41 Customs duties were only levied on five categories of goods: (1) alcoholic beverages, (2) tobacco and tobacco products, (3) hydrocarbon oil, (4) toilet preparations, and (5) medicines.42 Nearby Macau, a Portuguese colony since 1557 until its return to China in 1999, also functioned as a free port. No import tariffs or quantitative restrictions were imposed on imports. Even up to 80 percent of the value of imported fuel came in duty free. Although imports were subject to a consumption tax, a total exemption was granted to manufacturers for raw materials used in industrial production, ancillary machinery, and spare parts for assembly or alteration of equipment and expansion of industries.43 The economic advantages provided by a free port can only be fully realized if it offers “sufficient infrastructural conditions and favorable traffic relations with sales areas and supply markets, besides an advantageous transportgeographic location” that would include being near a major world shipping route or near principal resource and/or consumption centers.”44 Economic benefits arising from a free port include: 1. 2. 3. 4. 5. 6. 7. 8. 9.

increase in entrepôt and transshipment trade, large infrastructure and other investment, increase in export competitiveness, increased banking and insurance business, employment generation, training of domestic labor in new skills, transfer of management know-how, technology transfer, and added port and transport revenues.45

41 C. Schulze, International Tax Free Trade Zones and Free Ports: A Comparative Study Their Principles and Practices with Three Case Studies 87 (1997). Another incentive provided by Hong Kong was the unrestricted remittance of capital, profits, and other income. 42 W.H. Diamond & D.B. Diamond, Tax-Free Zones of the World, 1 [Hong Kong] (1977). The government of the Crown Colony of Hong Kong prided itself on a minimum of bureaucratic interference with commercial activity. Id. at 8 [Hong Kong]. 43 Schulze, supra note 41 at 20. Macau also did not impose exchange controls and exempted industrial premises from paying property taxes for periods ranging from five to ten years. 44 F. Trampus, Free Ports of the World, 57 and 64–65 (1999). The success of a free port is influenced by its accessibility to all necessary inputs (be they in the form of transportation and communications infrastructure, labor, services, etc.) and its competitive position relative to other free port in terms of the price and quality of its services. 45 Id. at 57–58.

of


Free ports are especially advantageous for companies involved in the handling and processing of sea-borne trade. Transportation costs are reduced by the shorter layover times due to reduced administrative interference and those firms engaged in the processing or refining of goods profit from the absence of Customs regulations.46 2. St. Maarten The island of St. Maarten is roughly the size of Barbuda and has a total population that is also similar to that of Antigua and Barbuda. A little over half of the island (i.e., St. Martin) is currently administered from Guadalupe as an overseas department of France. The smaller portion of the island, St. Maarten, forms part of the Netherlands Antilles. Although both the French and Dutch sides of the island are a free port, this report will focus on the Dutch side, St. Maarten, since it is the more dynamic of the two economies and is less likely to be distorted by foreign subsidies. As part of the Netherlands Antilles, St. Maarten is subject to central or federal government rule based in Curacao, which has jurisdiction over matters dealing with security, communications, most taxes, public health, education, the financial services sector, labor legislation, and business incorporation as well as licensing. By contrast, the local government in St. Maarten has jurisdiction mainly over infrastructure issues. Although a part of the Kingdom of the Netherlands, the Netherlands Antilles were granted a substantial level of autonomy over all domestic matters in 1954 and The Hague is only responsible for defense and foreign affairs. In addition, the highest court of appeal in the Netherlands Antilles judicial system is the Supreme Court of the Kingdom of the Netherlands that sits in The Hague. With the exception of generous grants earmarked for the education system, the Dutch government provides little material support to its Caribbean colonies in the nature of subsidies. Whatever aid is offered is usually in the form of technical assistance projects that are similar to those offered to Antigua and Barbuda by the U.S. Agency for International Development (USAID), the European Union, and other international donor agencies. Officially St. Maarten’s currency is the Netherlands Antilles (NA) guilder that is issued by the Central Bank of the Netherlands Antilles in Curacao. The exchange rate for the NA guilder has been pegged to the U.S. dollar since 1971 and is set at 1.8 NA guilders to 1 U.S. dollar. The U.S. dollar circulates widely in St. Maarten, however, and most cash transactions are carried out in that currency. The federal government administers a Profit (or corporate income) Tax that is currently set at 34.5 percent. There is also a personal income tax, a wage tax that is paid monthly by the employee on earned income, and a social security tax (i.e., AOV/AWW) as well as a medical insurance tax (AVBZ) paid jointly by both the employer and employee. In 1998 the federal government introduced a 3 percent turnover tax that is paid monthly and is levied on all transactions involving the sale of goods or services. The tax is cumulative and is charged Id. at 59.

46


over the total sales price without any credit being given if it was previously paid (as would be the case with a value added tax). Although the turnover tax is not charged upon an imported product’s entry into the Netherlands Antilles, it is paid when it is sold by the importer to the wholesaler and all the way up the transactional chain until purchased by the final consumer. Almost everything that is consumed in St. Maarten is imported. There is no agricultural sector to speak of. The only type of “manufacturing” performed on island is simple assembly of knockdown kits for furniture, for example, or the mixing of imported inputs with water to make bulkier products that would otherwise be more expensive to transport whole (e.g., soap). Well over 95 percent of the GDP of St. Maarten is based on tourism and related services. No import duties or excise taxes are charged on any product that is imported into St. Maarten. The Customs Service plays a very limited police function to ensure that whatever is imported is not illegal (such as narcotics or unauthorized immigrants). The Customs Service will only conduct spot checks of imported cargo at the port itself using criteria similar to that established by the U.S. Customs Service. Because invoices are not even examined, it is difficult to obtain accurate figures as to the value of what is actually being imported into St. Maarten. The port authorities check only for the number of containers or bulk items and their respective weight given that port charges are based on these indicators.47 There is currently no Consumer Protection Code and no Bureau of Standards in St. Maarten. The Port Authority of St. Maarten is a government-owned for-profit company that has private sector shareholders. The legal structure is similar to that for the company that operates the Queen Juliana International Airport. The Port Authority plays the role of a landlord and leases space in the port to private sector companies that provide stevedoring and related services. The private sector firms pay a concession fee to the Port Authority to offer these services. The crane to unload containers is owned in equal parts by the three largest stevedoring companies and the Port Authority, and it is operated by a private sector concessionaire. Port fees for piloting services and harbor master services are statutorily set. The last modification was made in 2001 to finance the expansion of the port in Phillipsburg, and the fees were reportedly higher than most other ports in the Caribbean at the time. These rates have since become more equalized. The stevedore workers in the port are hired on an asneeded basis and are not unionized. Turnaround times from when a ship arrives in port to unload or load cargo and leaves again are said to be very quick in St. Maarten, averaging several hours in a day for a large load. Containers are offloaded directly onto trucks and immediately transported from the port area (unless subject to a spot check by Customs). The port at Phillipsburg handles primarily imports, including half of all imports for the French side (despite the fact that it has its own small port facilities at Marigot). The only things that St. Maarten “exports” are empty beer 47 This has led to charges by the larger, mainstream stevedoring companies that they are put at a competitive disadvantage with smaller, less scrupulous operators or importing firms that handle their own stevedoring services that underinvoice so as to hide profits to lower their corporate tax payments.


bottles to be refilled abroad, empty containers, and the personal household items of persons moving from the island. Because the port levies no storage fees for empty containers, the port at Phillipsburg is also used by many shipping companies operating in the Caribbean to warehouse their containers in St. Maarten until they are needed elsewhere. Increasingly, St. Maarten is becoming a transshipment point for cargo destined to all the other Leeward Islands. St. Maarten has evolved into a shopping emporium for the entire Caribbean region. It also has a vibrant financial and professional support services sector. There are an estimated 500 eating establishments on the island serving a wide variety of cuisines to satisfy every palate. The success of the port is attributed to the economic development model of St. Maarten that includes new hotel and condominium projects managed by the most important names in the international hospitality industry. In addition, St. Maarten has built an entire sector servicing luxury yachts that sail up and down the Caribbean. A whole support industry made up of mechanics and technicians has grown up on the island around the luxury yacht business. One of the key explanations for this is the country’s free port status that allows overnight delivery of duty-free food, beverages, and spare parts. The end result is an island that attracts nearly twice

Number of Cruise Ships

Tourism (Stop Over) Arrivals

700

500,000

600

450,000 400,000

500 Antigua & Bartbuda

400

350,000 300,000

St. Maarten 250,000

300

200,000 200

150,000 100,000

100

50,000 0

0 2004

2005

Source: Antigua Port Authority & St. Maarten Ports Authority NV.

2004

2005

2006*

* January–July Source: Caribbean Tourism Organization


as many tourists and handles almost twice the number of cruise ships on an annual basis as does Antigua and Barbuda. The contrasts between the dynamism of the port of Phillipsburg in St. Maarten and St. John’s in Antigua and Barbuda are striking. Even accounting for the fact that St. Maarten handles half the import traffic destined for the French side of the island, Phillipsburg still receives more than double the container traffic than does St. John’s, even though Antigua and Barbuda has a significantly larger permanent population than Dutch St. Maarten. Statistics from the St. Maarten Port Authority also reveal that a significant percentage of the containers handled at Phillipsburg are transshipments bound for other Caribbean destinations. There were no reported transshipments in St. John’s in 2005 (and an insignificant number in 2004).

Total Number of Container Ships*

Total Containers Handled (Measured in T.E. Units)

800

60,000

700 50,000

600 500

40,000 Antigua & Barbuda

400

St. Maarten

30,000

300 20,000 200 10,000

100

0

0 2005

* Amount for A&B Reflects International Vessels Only Source: Antigua Port Authority & St. Maarten Ports Authority NV.

2005


C. Feasibility of Turning Antigua and Barbuda into a Free Port 1. Importance of All the Organization of Eastern Caribbean States Countries Moving to Free-Port Status Within the Context of CARICOM The decision of whether Antigua and Barbuda should become a free port is ultimately one for the government to make in full exercise of its sovereignty. The decision should be based on what is in the best long-term interests of the people and economy of Antigua and Barbuda. Ideally the decision to move to a free-port status should be undertaken by all the sovereign member states of the OECS. The announcement in June 2006 by the heads of government of all the OECS countries that they would move to establish a full economic union is welcome news in this regard. It reflects recognition of the success of the Eastern Caribbean Central Bank in providing a stable macroeconomic environment throughout the OECS. It is also recognition of the fact that given their tiny populations, it is imperative that the OECS member countries pool scarce financial and human resources to create common institutions that will better promote social and economic development in their respective nations. Accordingly, it would better serve the long-term interests of Antigua and Barbuda if it became a free port within the context of the OECS and exercised a leadership role in convincing the other member states to move in the same direction. If the entire OECS bloc was to become a free port, this would also enhance the likelihood that the decision would be accepted by CARICOM and would be viewed as enhancing rather than undermining this important regional economic integration process. Chapter 7 of the Revised Treaty of Chaguaramas establishes a special regime for the disadvantaged or less-developed CARICOM countries that encompasses all the OECS member states. Article 142 of the Revised Treaty of Chaguaramas states that the objective of this special regime is to assist disadvantaged countries “towards becoming economically viable and competitive by appropriate interventions,” which may include measures to attract investment and industries as well as to assist industries in becoming efficient and competitive. This regime allows the less-developed countries to be afforded special and differential treatment as concerns full compliance with the rules of origin (Article 161) and the CET (Article 163). These are precisely the two areas that would be affected by any decision to become a free port since it would entail non-application of the entire CARICOM CET. In addition, it would require allowing final goods made with extra-regional inputs on which the CET was not paid to be deemed of Community origin and therefore afforded the privilege of circulating tarifffree within CARICOM. Strictly speaking, any good manufactured in any of the OECS countries with extra-regional inputs that are imported duty free as a result of a country’s free-port status but that are able to meet the “substantial transformation” test of Article 84 should be treated as being of CARICOM origin.48 In addition, duty 48 As defined in Article 84(b) of the Revised Treaty of Chaguaramas, substantial transformation is characterized: (1) by the goods being classified in a tariff heading different from that in which any of those materials are classified; or (2) in the case of the goods set out in the List to Schedule I of the treaty, only by satisfying the conditions therefore specified.


drawback provisions that would deny CARICOM origin to goods made in a free port are inapplicable. This is because Article 89(6)(a) clearly defines an export drawback as “any arrangement for the refund or remission, wholly or in part, of import duties applicable to imported materials: provided that the arrangement, expressly or in effect, allows refund or remission if certain goods or materials are exported, but not if they are retained for home use.” Accordingly, if the entire country is a free port, there is no discrimination between duty refunds or remissions on inputs used to make goods for export and those intended for the home market. 2. Impact of Lost Tax Revenue from Imports Historically, Antigua and Barbuda was heavily dependent on import duties to provide the bulk of government revenue. As recently as the late 1990s, some 55 percent of government revenue came solely from the collection of tariffs and related taxes on imports, making it among the most highly dependent on trade taxes in the entire Western Hemisphere. This heavy dependence on import duties has thankfully begun to change, in part because of the introduction of new forms of taxation that permit the government to more efficiently and effectively capture higher revenue flows and thereby offer greater flexibility to pursue a new trade policy. In 2005 14 percent of the government’s total revenue intake came from import duties. Another 13 percent came from the so-called Customs Service Tax, which, in theory, is charged for services rendered by the Customs Division in processing imports. In reality, the Customs Service Tax is another tax on imports that takes in far more revenue than is needed to run the Customs Division. In total, only 27 percent of government revenue in 2005 was the result of taxes imposed on imported goods. For the year 2006 it is projected that the contribution of import duties to total government revenue will drop to 12 percent while the contribution provided by the Customs Service Tax will remain steady. The new Antigua and Barbuda Sales Tax that was implemented at the end of 2006 was expected to generate an estimated 22 percent of government revenue in 2007 (thereby roughly replacing the percentage of revenue contributed by the soon to be eliminated Consumption Tax). The introduction of an excise tax on a specified group of goods,49 coupled with effective enforcement of the personal income tax and the Antigua and Barbuda Sales Tax, offers the government of Antigua and Barbuda a fiscally responsible way for transitioning the country to a full free port over the next decade. Even if the government chooses not to turn the country into a free port, these new sources of revenue collection will allow the country to abolish the Customs Service Tax whose legality is questionable under the WTO rules. In the past, Customs Service Taxes charged by other countries have been successfully challenged by their trading partners as violating WTO tariff commitments.50 49 Excise taxes are traditionally levied on goods that are deemed to have a deleterious impact on society (e.g., cigarettes) and are immune to small changes in price in terms of demand. 50 A recent example is provided by Argentina’s 3 percent Statistical Tax on all imports


It is not that far fetched to contemplate that as a result of the increased dynamism to the national economy that would result from turning Antigua and Barbuda into a free port, the Inland Revenue Department might eventually collect more revenue from the newer forms of taxation than it could ever have hoped to collect in import duties or from the Customs Service Tax. 3. Gains to the Local Economy As many merchants in Antigua and Barbuda are quick to point out, the country already is a free port in many respects, although one that is highly unfair in its application. They note that many of the duty-free shops selling imported wares such as jewelry in Heritage Quay do not have to pay the import duties and other taxes that are levied on items imported by Antiguan merchants with shops that may be operating just blocks away in St. John’s. Although, technically, goods sold in the shops in Heritage Quay can only be purchased by foreign visitors to the country, this law is not strictly enforced. The result is a disadvantage for shopkeepers operating businesses outside Heritage Quay that, according to some observers, contributes to the ramshackle and run down appearance of downtown St. John’s. Turning Antigua and Barbuda into a free port therefore levels the playing field for those who have shops outside of designated duty-free zones such as Heritage Quay. Transforming Antigua and Barbuda into a free port allows the country to get rid of its bureaucratic and non-WTO compliant import license system.51 Similarly, it permits dismantling the country’s cumbersome concessions scheme as it relates to taxes on imports. The concessions have been the target of criticism not only in the way they are granted but also because of the added human and financial resources that are consumed in enforcing them. In particular, the Cabinet-approved concessions—in which the Cabinet has the right to exempt any type of duties or taxes for new investment projects—are discretionary, non-transparent, and perceived as not being a fair practice by the local business community.52 The Cabinet-approved concessions also add a originating anywhere in the world (except from fellow MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) member states). The Argentine government, which levied the tax over the CIF value of the import, claimed the tax went to support the services rendered by Customs in processing imports. Because the amount actually collected by the Argentines varied dramatically depending on the good’s value, the tax was challenged as an additional tariff measure that violated Argentina’s WTO commitments on bound tariffs. A WTO panel ruled against Argentina. In the case of Antigua and Barbuda, the situation is even more egregious not only because the tax rate charged is considerably higher, but it is levied over the CIF price of the import plus the relevant import tariff. 51 The import license system is not WTO compliant because it makes no distinction between licenses issued for statistical purposes or to enforce quotas. Furthermore, most quotas are now prohibited under the WTO. See The Investor Roadmap of Antigua and Barbuda: Final Report 148 (July 27, 2004), prepared under the USAID funded C-TRADECOM Project and kept on file with AECOM International Development (formerly TSG, Inc.) in Arlington, Virginia. The report further notes that statistics are not documented and quota restrictions are applied on an ad hoc basis. 52 Id. at 150. A total of 41 Customs Procedures Codes are designated for the different types of duty exceptions that are available in Antigua and Barbuda. Exemptions may be ei-


further layer of work for the Customs Division, which must check documents and archive files manually.53 The biggest beneficiaries of turning Antigua and Barbuda into a free port will be the country’s consumers, particularly lower-income families. There is now ample evidence across many countries demonstrating that greater trade opening and the resulting exposure to foreign competition reduces the ability of a country’s firms to charge high markups above production costs. Pressures for lower prices arise from the direct impact of cuts in trade barriers being passed through to cuts in prices. They also arise from the impact of raising market contestability.54 By reducing costs on basic foodstuffs and other necessities, a free port will give residents of Antigua and Barbuda greater discretionary spending power. That will undoubtedly lead to an increase in imports that, in turn, may well result in more competitive shipping options and lowering prices further. Transforming Antigua and Barbuda into a free port will have both a positive and negative impact on the country’s agricultural sector. Initially such a move may well put less efficient farmers out of business, but ultimately it will create a strong incentive for the agricultural sector to focus on producing things that enjoy a competitive advantage in the local and perhaps even some international markets. It will also give them easier access to inputs and equipment without paying the Customs Service Tax or dealing with time consuming duty waiver requests. Antigua and Barbuda’s small manufacturing sector will also benefit if the country is transformed into a free port, and the Customs Division is streamlined into a leaner unit focused on keeping illegal goods out and making greater use of risk management principles.55 By getting rid of the current bottlenecks that prevent quick access to inputs and technology at lower prices (including spare parts for machinery which currently pay heavy duties), manufacturers will have a better chance to compete in regional markets as well as a more dynamic domestic market. This will be especially true if, as a result of its free-port status, ther Legislative Duty Exemptions or Cabinet-Approved Concessions. The latter requires the creation of a file at the Customs Division for each firm receiving a concession that includes a book to record all importing activities. Id. at 145–46. 53 Id. at 150. The report further points out that manual processing is not accurate, it is time consuming, and it is not conducive to effective data collection and makes records archiving difficult and laborious. Without such data, the government is hampered in its ability to formulate appropriate fiscal and trade policies. 54 Council of Economic Advisers, Economic Report of the President 155 (2006). Research shows that people living in countries that are more open to trade attain higher incomes and achieve higher living standards than citizens of countries that are relatively closed. See, e.g., D.J. Ikenson, Leading the Way: How U.S. Trade Policy Can Overcome Doha’s Failings, Trade Policy Analysis No. 31 (June 19, 2006) citing various studies. 55 The U.S. Customs Service applies risk management principles to limit physical cargo inspections and has developed a four-step model to establish its risk management system. This includes: (1) Collect data and information (data is systematically collected to understand the risk universe, gain a historical perspective of the identified risk, and establish a risk baseline); (2) analyze and assess the risk (analytical tools are used to determine the areas of greatest risk, and the scope of the problem in those areas); (3) prescribe actions (initiate the design of a course of action and assign appropriate resources to address the determined risk); and (4) track and report (results are compiled for monitoring and future action).


Antigua and Barbuda experiences an increase in shipping activities, leading to greater competition and lower freight costs as well as more reliable schedules. Although not all the manufacturing activities that currently occur on Antigua and Barbuda will be able to survive, those that remain will do so because they are genuinely competitive and offer customers an added value. The sector that will reap the greatest benefits from turning Antigua and Barbuda into a free port is the tourism industry, responsible for an estimated 85 percent of the country’s economy and its most important employer. By being able to import food and other necessary inputs duty free, the competitiveness of the local tourism industry will be enhanced through a reduction in the cost structure. This, in turn, should lead to more investment and employment opportunities. Antigua and Barbuda will also be able to develop an important year-round industry servicing luxury yachts. At present, Antigua and Barbuda is not competitive in this area because of the high duties charged on spare parts and other inputs and significant delays in processing imports. In fact, there is currently a financial disincentive to use overnight courier delivery services, because import related taxes are charged over the CIF value of the imported good. With increased trade and tourist arrivals, the new economic activity is likely to have a positive aspect on the rest of Antigua and Barbuda’s services sector, particularly banking. Finally, transforming Antigua and Barbuda into a free port will allow the government to rededicate monies that are presently allocated to the Customs Division for more effective ends, including a more efficient Bureau of Standards as well as a Statistics Division.

CHAPTER 10

RISE AND FALL OF THE FREE TRADE AREA OF THE AMERICAS I. From the First to the Second Summit of the Americas (December 1994–April 1998) At the First Summit of the Americas celebrated in Miami in December 1994, the elected heads of state of all the countries in the Western Hemisphere but for Cuba met to discuss issues of mutual concern. It was the first gathering of hemispheric leaders since a conference in Punta del Este, Uruguay, in 1967. The Miami gathering produced numerous statements on a variety of subjects, including the need to respect human rights, improve educational systems, and protect the environment. Without a doubt, the topic that drew the most attention, however, was the issue of free trade. At the conclusion of the Summit, all 34 leaders pledged to have an agreement to create a Free Trade Area of the Americas (FTAA) ready for signature by 2005. The First Summit of the Americas in December 1994 was followed by four other meetings of the trade ministers from each of the 34 countries present in Miami. The first so-called Trade Ministerial was held in Denver in June 1995, while the second one took place in Cartagena, Colombia, in March 1996, and a third one was held in Belo Horizonte, Brazil, in May 1997. The fourth Trade Ministerial took place in San José, Costa Rica, in mid-March 1998. At the Denver Ministerial, it was agreed that all the countries participating in the FTAA process would be required to accept all of its obligations, and no country could opt out of certain provisions (although it was also agreed to take into consideration the adjustment concerns of the smaller economies). In addition, the FTAA would have to be compatible with obligations created under the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). In particular, duties could not be raised to higher levels than existed prior to the creation of the FTAA, and new, non-tariff barriers could not be imposed vis-à-vis other WTO member states not participating in the FTAA. Seven working groups were created in Denver to look into the current norms and legal frameworks that existed among the participating countries with respect to: (1) market access; (2) customs procedures and rules The full text of all the declarations emanating from a Summit of the Americas session are found in the official FTAA Web site, at http://www.ftaa-alca.org under the link “Summits of the Americas.” The full text of all trade ministerial declarations are at the same Web site under the link “Ministerial Declarations.”

409


of origin; (3) investment; (4) standards and technical barriers; (5) subsidies, antidumping, and countervailing duties; and (6) sanitary and phytosanitary measures. The seventh working group was created to focus on issues affecting the smaller economies and was expected to make recommendations designed to facilitate their incorporation into an eventual FTAA. In the Cartagena Trade Ministerial held in March 1996, the trade ministers agreed to establish four more working subgroups on: (1) government procurement, (2) intellectual property rights, (3) services, and (4) competition policy. The trade ministers also received recommendations on 13 topics developed by the Americas Business Forum, a group representing mostly largeand medium-sized business interests that met in conjunction with each Trade Ministerial since Cartagena, and they issued policy recommendations as well as provided private sector input into the FTAA process. The third Trade Ministerial held in Belo Horizonte in May 1997 ended without what was supposed to have been a definitive agreement for how and when to begin formal negotiations to create the FTAA. While the United States and Canada advocated that negotiations begin on all issues right after the Second Summit of the Americas scheduled for Santiago, Chile, in April 1998, the MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) block, led by Brazil, favored a three-staged approach in which certain topics would be negotiated at different times over the next eight years. In particular, between 1998 and 1999, negotiations would focus on business facilitation measures designed to reduce the private sectors’ costs when importing or exporting goods, including simplification of customs documentation and certificates of origin, and mutual recognition of sanitary and phytosanitary certificates. Between 2000 and 2002, the MERCOSUR countries proposed that negotiations would center on harmonizing technical regulations and customs administrative procedures, eliminating “unjustified” non-tariff restrictions, and establishing a mechanism for the resolution of disputes. Only in 2003 would negotiations begin on market access issues such as actual commitments for reducing and eventually eliminating tariffs on intrahemispheric trade, liberalizing the services sector and opening up government procurement opportunities, and providing for an effective and adequate protection of intellectual property rights, investment, and competition. Although the Belo Horizonte meeting did not resolve the issue of how and when an FTAA would be negotiated, the trade ministers did issue a statement that they would recommend to their respective governments that negotiations to create an FTAA begin following the Second Summit of the Americas scheduled for Santiago, Chile, in April 1998. The meeting also resulted in the creation of a 12th working group authorized to look into the issue of dispute resolution. In October 1997 Mexico proposed that the 12 working groups be converted into negotiating groups for the FTAA. The United States, for its part, proposed, that only nine negotiating groups be created, some of which would be based on the existing 12 working groups. These separate negotiating groups would focus on issues related to market access, subsidies, foreign investment, services,

Free Trade Area of the Americas • 411

government procurement, competition policy, intellectual property rights, antidumping and countervailing duties, and dispute settlement. Under market access, the United States would address issues previously handled in separate FTAA working groups on standards, customs procedures, rules of origin, and sanitary/phytosanitary measures. The United States also expressed a desire to see two additional groups set up to study the linkage between trade and labor as well as trade and the environment. The latter proposal was opposed by Mexico. In contrast to the U.S. and Mexican positions, the MERCOSUR countries proposed creating only five negotiating groups focusing on agriculture, market access regulations, intellectual property, services and investment, and dispute settlement. Under the MERCOSUR proposal, the agricultural group would look into issues such as tariff cuts, removal of non-tariff barriers, standards and other technical barriers, domestic support programs, and sanitary/phytosanitary regulations. Canada, backed by Chile, proposed organizing the FTAA negotiations into three principal negotiating groups, the first on goods (covering tariffs, rules of origin, customs procedures, non-tariff barriers, agriculture, and safeguard measures), a second on services, investment, and intellectual property, while the third group would handle government procurement, subsidies, antidumping, and countervailing duties, competition policy, standards and technical barriers, and sanitary/phytosanitary rules. Under the Canadian plan, the three principal negotiating groups, plus an advisory group on Smaller Economies and another on Dispute Settlement and Institutional Issues, would have reported directly to a Trade Negotiations Committee (TNC) made up of the trade ministers from each of the 34 negotiating countries. The fourth and final Trade Ministerial before the Second Summit of the Americas was held in San José, Costa Rica, on March 19, 1998. The meeting produced a definitive negotiating framework for the FTAA, and specific dates and venues were set for launching key aspects of the negotiations. It was also agreed that decisions in the FTAA negotiating process would be based on consensus. In addition, the San José meeting produced a declaration of understanding that the various subregional economic integration projects would not disappear or be subsumed into the FTAA, but would continue to coexist with the FTAA so long as their rules and regulations did not conflict with FTAA obligations or went beyond and provided for a deeper form of integration than required by the FTAA. In addition, it was acknowledged that countries could negotiate and accept the obligations of the FTAA individually or as members of a subregional bloc. This marked a major concession on the part of the United States, which for a long time visualized the FTAA as the steady expansion southwards of the North American Free Trade Agreement (NAFTA), as individual countries would accede to the North American agreement. One important area where no consensus was reached, however, was on the “stand still” issue of at what point during the negotiations would the participating countries be prohibited from imposing any new trade restrictions. The United States advocated that the “stand still” date should start on the day negotiations


were actually launched, while other countries argued it should come at the end of the negotiating process. In a victory for the North American position of the FTAA being a “WTO plus” agreement, however, all 34 countries at the San José meeting agreed that the FTAA should improve upon WTO rules and disciplines whenever possible. It was also agreed in San José that for the following 18 months, the chair of the overall FTAA process, which oversees both the Trade Ministerial Meetings and the TNC, would be Canada. After that the chairmanship would go to Argentina (November 1, 1999–April 30, 2001), and Ecuador (May 1, 2001– October 31, 2002), with the United States and Brazil serving as co-chairs for the last two years of the negotiations. The country chairing the FTAA process would also be the host of the Trade Ministerial Meetings and would chair the TNC. Both the Trade Ministerial Meetings and TNC (made up of the vice ministers from the 34 participating countries) were given the authority to provide overall direction and management to the FTAA negotiations. In particular, the TNC had the responsibility to guide the work of the negotiating groups and decide on the overall architecture of the agreement and institutional issues. The TNC also identified and developed appropriate procedures to ensure timely and effective coordination between the negotiating groups on inter-related issues. The trade ministers were required to meet every 18 months. The TNC was supposed to meet as often as was required (but not less than twice a year), and its first meeting was to take place no later than June 30, l998. A Consultative Group on Smaller Economies was also approved to review the concerns and interests of the smaller economies in the FTAA process and alert the TNC to issues of concern and make recommendations on how best to resolve them. Nine initial negotiating groups were established and chairs selected from specific countries who were supposed to be replaced every 18 months. These nine groups (including the country initially chairing the negotiating group) consisted of: (1) market access (Colombia); (2) investment (Costa Rica); (3) services (El Salvador); (4) government procurement (United States); (5) dispute settlement (Chile); (6) agriculture (Argentina); (7) intellectual property rights (Venezuela); (8) subsidies, antidumping, and countervailing duties (Brazil); and (9) competition policy (Peru). The negotiating groups were required to hold their first meeting no later than September 30, 1998. The fact that a ninth negotiating group on agriculture was accepted at the 11th hour represented a major concession to MERCOSUR on the part of the United States. In the weeks leading up to the San José Ministerial, the Office of the United States Trade Representative (USTR) had insisted that such a committee was unnecessary and that the issues that would be discussed therein were proper to the market access group. The MERCOSUR countries, led by Brazil, argued in favor of the creation of a separate negotiating group given the importance of agricultural exports to their economies and the high tariff and non-tariff barriers (including those created indirectly by generous subsidy programs) their exporters face in penetrating the U.S. market. At the end of the day, the U.S. delegation, debilitated by the absence of fast track authority, was forced to accept the agriculture negotiating committee.


A roving Administrative Secretariat was established to be located in the sites where the actual negotiations by the nine working groups would also be taking place. The Administrative Secretariat was given the task of providing logistical support for the negotiating groups, translating documents, and disseminating as well as serving as a repository of official documents. For the first three years (i.e., through February 28, 2001), the Secretariat was housed in Miami, then for two years in Panama City, with Puebla, Mexico, serving as the final site from March 1, 2003, until the negotiations were scheduled to conclude in 2005. A special Committee of Government Representatives on the Participation of Civil Society was created to accept recommendations and suggestions from a broad range of interest groups from throughout the Western Hemisphere including the business sector, labor unions, environmental groups, consumer associations, and academics. The committee was supposed to evaluate the recommendations and refer those (if any) deemed particularly worthy to the trade ministers of 34 participating countries. The creation of this new committee was intended to phase out the Americas Business Forum, which had been held in conjunction with every Trade Ministerial up to and including San José. Although business groups were not particularly happy with this outcome, since they now had to share the stage with other interest groups, they claimed to have alternative ways of better influencing the process through domestic channels with their respective governments. The creation of the Committee of Government Representatives on the Participation of Civil Society was an alternative to the two study groups the United States had originally proposed to investigate the link between trade and labor as well as trade and the environment. The Trade Ministerial in Costa Rica in March 1998 further agreed to achieve substantive business facilitation measures that were supposed to be in place by the 2005 deadline for ending the FTAA negotiations. These measures included such things as harmonizing customs valuation codes and making greater use of electronic filing systems. Resolving these issues would be no small feat given that a 1994 UN study had concluded that 4 to 8 percent of the cost of goods sold in the international market reflected expenditures associated only with complying with customs documentation requirements. Even so, these measures fall far short of the “early harvest” interim type agreements the U.S. private sector had hoped to achieve by 2000 on things such as an early adoption of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), liberalization of certain sectors of the economy, and transparency in the awarding of government procurement contracts. Finally, the trade ministers in San José approved the creation of a special joint government-industry committee of experts on electronic commerce to report back to the trade ministers on the implications of electronic commerce for international trade. Table 10.1 lists the primary objectives established by the trade ministers for each of the 12 working groups that were created between the first Summit of the Americas in Miami and the second one in Santiago, and the actual results achieved by those working groups by April �� 1998.


Table 10.1. Primary Objective and Actual Achievements of the 12 Working Groups Goals or Objectives

Actual Achievements

The working group on market access looked at issues related to progressive elimination of tariffs and non-tariff barriers in accordance with WTO obligations.

The group was still preparing a database on tariff and non-tariff measures throughout the Western Hemisphere covering all industrial and agricultural products.

The working group on customs issues was authorized to make recommendations for establishing efficient and transparent rules of origin for an FTAA as well as creating a harmonized tariff system and certificates of origin, in order to facilitate the exchange of goods. In addition, it examined issues related to the simplification of customs procedures, and the design of effective methods to combat fraud.

The group prepared a document entitled “Main Characteristics of Rules of Origin in the Americas” in coordination with the Inter-American Development Bank and the Latin American Integration Association (ALADI), as well as a second study entitled “Hemispheric Guide to Customs Procedures.” The group proposed different options for establishing rule of origin requirements for the FTAA

The working group on investment sought to establish a fair and transparent legal framework to provide a stable and predictable environment for investors, their investments, and related trade flows, as well as devise ways of stimulating new investment opportunities in different countries in the Western Hemisphere.

The group produced “Investment Agreements in the Western Hemisphere: A Compendium of Investment Agreements and Treaties Existing In the Americas.” The group identified at least 12 substantive issues for the FTAA negotiations: (1) basic definitions, (2) scope of application, (3) national treatment and sectoral reservations, (4) most-favored nation (MFN) treatment and sectoral reservations, (5) fair and equitable treatment, (6) expropriation and compensation, (7) compensation for losses, (8) managerial personnel, (9) intracompany transfers, (10) performance requirements, (11) general exceptions, and (12) dispute settlement.

The working group on standards and technical barriers to trade sought to prevent technical norms from becoming new trade barriers, while also ensuring that any rules that were adopted in the FTAA context were consistent with the WTO Agreement on Standards and Technical Barriers to Trade.

The group produced “National Practices in Standards, Technical Regulations, and Conformity Assessment in the Western Hemisphere” and “Provisions on Standards and Conformity Assessment in Trade and Integration Arrangements of the Western Hemisphere.” The group identified the main issues affecting standards and technical barriers to trade as outlined in a Common Objectives Paper, and identified 12 negotiating options in the area of standards and technical barriers.


Table 10.1. Primary Objective and Actual Achievements of the 12 Working Groups (continued) Goals or Objectives

Actual Achievements

The working group on subsidies, antidumping, and countervailing duties sought to eliminate agricultural export subsidies affecting trade and identify other practices that generally distort trade flows. It sought to enhance compliance with the WTO Agreement on Subsidies and Countervailing Measures, and improve the rules and procedures affecting the operation and application of trade remedy laws in order to ensure greater transparency and due process in their use.

The group produced a “Compendium of Antidumping and Countervailing Duty Laws in the Western Hemisphere.” It also issued recommendations for the FTAA negotiations on these two issues, but was unable to achieve consensus on possible initiatives that could be discussed at the hemispheric level as a result, in part, of the U.S. refusal to consider substantive negotiations aimed at improving the operation and application of domestic laws to combat alleged unfair trade practices.

The working group on sanitary and phytosanitary measures sought to develop proposals promoting the mutual recognition of sanitary and phytosanitary certificates among the countries of the Western Hemisphere and advocated for the full implementation of the WTO Agreement on Sanitary and Phytosanitary Measures.

The group produced an inventory of all the agreements in the hemisphere affecting the use of sanitary and phytosanitary measures The group submitted proposals designed to serve as the technical bases for conducting negotiations in this area in the FTAA context. It also suggested creating an electronic data exchange system to facilitate access to information among the FTAA countries regarding plant, animal health, and food safety.

The working group on smaller economies sought to ensure the effective participation of the smaller economies in the FTAA process and to maximize opportunities for them that a FTAA might generate.

The group issued policy recommendations which included measures that should be adopted and issues that should be taken into account in the negotiations for an FTAA, including the need for technical assistance.

The working subgroup on government procurement investigated the creation of a normative framework that would ensure openness, transparency, and nondiscrimination in the government procurement processes, without necessarily implying the adoption of the same system in each country. It also recommended a dispute resolution mechanism to handle the complaints of suppliers.

The group produced “Government Procurement Rules in Integration Arrangements in the Americas.” It also issued recommendations of different subjects to negotiate in the FTAA. A split of opinion developed primarily between the NAFTA countries, which were interested in negotiating a transparency accord on government procurement, and the MERCOSUR, which favored a transparency agreement only in conjunction with expanded access to government procurement opportunities and the creation of a statistical data base


Table 10.1. Primary Objective and Actual Achievements of the 12 Working Groups (continued) Goals or Objectives

Actual Achievements

The working group on intellectual property rights sought to promote and ensure the adequate and effective protection of intellectual property rights, including adherence to the WTO TRIPs agreement.

The group produced a 1,000-page inventory on the different intellectual property laws and regulations in each country or subregional grouping in the Western Hemisphere.

The working group on services sought to establish an agreement containing disciplines for trade in services that are certain and transparent and consistent with the WTO General Agreement on Trade in Services (GATS).

The group produced “Provisions on Trade and Services in Trade and Integration Agreements in the Western Hemisphere.” The group identified six issues on which there was a general consensus throughout the Hemisphere: (1) sectoral coverage of obligations, (2) MFN treatment, (3) access to markets, (4) national treatment, (5) rules governing denial of benefits, and (6) transparency.

The working group on competition policy sought to establish juridical and other kinds of institutions at the national, regional, and subregional levels to prohibit anticompetitive business practices, and to develop mechanisms that facilitate and promote competition policy and guarantee enforcement of regulations on free competition.

The group produced an “Inventory of Domestic Laws and Regulations Relating to Competition Policy in the Western Hemisphere,” an “Inventory of the Competition Policy Agreements, Treaties, and other Arrangements Existing in the Western Hemisphere,” and a “Report on Developments and Enforcement of Competition Policy and Laws in the Western Hemisphere.”

The working group on dispute resolution sought to identify areas of commonality and divergence among dispute settlement systems then in use in the Western Hemisphere, so as to recommend a dispute resolution mechanism for the FTAA that conformed to the WTO.

The group compiled an inventory of dispute settlement mechanisms in existing economic integration programs and agreements throughout the Western Hemisphere.

II. From the Second to the Third Summit of the Americas (April 1998– April 2001) As had been widely expected, the 34 heads of state from the Western Hemisphere meeting in Santiago, Chile, on April 18–19, 1998, officially launched the FTAA negotiations and reaffirmed their determination to conclude them


no later than 2005. They also agreed to make concrete progress by the end of the century in reaching agreement on specific business facilitation measures. In addition, they agreed to ensure that the negotiating process would be transparent and take into account the different levels of development and size of the economies in the Americas. Interestingly, the issue that emerged as a centerpiece of the Second Summit of the Americas was education and not trade. Part of the reason for this was that the U.S. president appeared at the Santiago Summit bereft of fast track authority. Accordingly, the United States was not interested in focusing attention on trade given its inability to begin serious negotiations on a trade agreement. The emphasis on education, however, was also based on a realization by many governments that the human capacity skills of their citizens needed significant improvements in order for them to take full advantage of the opportunities that an economically integrated hemisphere offered. In an attempt to achieve this goal, the heads of state meeting in Santiago reaffirmed three goals already agreed to in Miami in 1994: • • •

to provide for universal access to and completion of a quality primary education for all children by the year 2010, to provide access to quality secondary education for at least 75 percent of young people by the year 2010, and to assume responsibility for providing the general population with opportunities for life-long learning.

What was different about the Santiago Summit’s emphasis on education over Miami was that 34 governments committed themselves to also implement 11 specific tasks that included establishing or strengthening systems for evaluating education, developing programs to improve and increase the level of professionalism among teachers, promoting better forms of community and family involvement (including decentralization), and promoting access to and use of the most effective information and technologies within educational systems. In addition, the World Bank, InterAmerican Development Bank (IADB), and the U.S. Agency for International Development (USAID) pledged some U.S.$8 billion over a three-year period to facilitate implementation of these reforms. The Organization of American States (OAS) and the UN Commission for Latin America and the Caribbean (ECLAC) were also instructed to provide logistical support for these efforts. In addition to setting down educational goals for implementation, the leaders of the Western Hemisphere gathered in Santiago also called for the creation of a Special Rapporteur on Freedom of Expression who would be affiliated with the Inter-American Human Rights Commission of the OAS. On November 2, 1998, the commission appointed Alejandro Canton, an Argentine lawyer as the Special Rapporteur for Freedom of Expression. Among the other issues that the leaders meeting in Santiago emphasized was the need to strengthen the national entities involved in the study of the administration of justice and to establish a hemispheric center to prepare studies on this subject matter; to make special efforts to guarantee the rights of migrant workers and their families; to provide greater support for micro


and small enterprises; to promote core labor standards recognized by the International Labor Organization; to use new technologies to improve the health conditions of every family in the Americas; to fight corruption by, inter alia, ratifying the 1996 Inter-American Convention Against Corruption; and to prevent the use of and trafficking in illegal narcotics. The Fifth Trade Ministerial was held in Toronto, Canada, on November 3 and 4, 1999. The event was rather low key since the attention of most governments was on the WTO meeting scheduled for later that month in Seattle, which was supposed to have launched the so-called Millennium Round of multilateral trade negotiations. Even the Americas Business Forum that was held in conjunction with the Toronto Trade Ministerial was poorly attended. Despite the low level of public attention, the trade ministers meeting in Toronto instructed the nine negotiating groups to prepare a draft of their respective chapters for the proposed FTAA so as to have it ready at least 12 weeks before the next Trade Ministerial meeting scheduled for Buenos Aires, Argentina, in April 2001. The draft agreement would then be reviewed by the TNC. The fact that the trade ministers even managed to reach agreement on ordering the preparation of a draft agreement by 2001 indicated progress, since the MERCOSUR countries initially opposed developing a draft text on the pretext that it would be a meaningless exercise given the U.S. president’s continued lack of “fast track” negotiating authority. The trade ministers in Toronto also agreed that eight specific business facilitation measures should be implemented by all 34 participating countries by January 1, 2000. These eight measures dealt exclusively with customs issues and included: 1. establishing new or streamlining existing customs procedures for the entry of and the suspension of duties on promotional documents and other goods related to business travel, whether or not the goods accompany the business traveler; 2. developing and implementing procedures to expedite express shipments, taking into consideration the World Customs Organization’s Guidelines for Express Consignments Clearance and the Cancun Memorandum, while maintaining appropriate control on customs selection; 3. establishing simplified, streamlined, and expedited procedures for low value shipment transactions while maintaining appropriate customs control and selection; 4. establishing compatible electronic data interchange (EDI) systems between traders and customs administrations that foster expedited clearance procedures, developing a core set of data elements required for the administration of national customs regulations and requirements associated with the customs clearance of goods, encouraging the establishment of compatible EDI systems between different national customs administrations so as to foster increased cooperation and information exchange, and developing parameters for the bilateral or plurilateral exchange of information re-


lated to compliance with customs regulations and requirements; 5. applying the 1996 Harmonized Commodity Description and Coding System at the six digit level; 6. disseminating widely and in the most user-friendly manner, basic up-to-date information on customs procedures, laws, regulations, guidelines, and administrative rulings, taking into account the Hemispheric Guide on Customs Procedures prepared by the Working Group on Customs Procedures and Rules of Origin; 7. elaborating and implementing national codes of conduct applicable to customs officials, taking into account the Arusha Declaration; and 8. encouraging risk management systems used as criteria for required verification activities, while respecting the confidentiality of information, by focusing customs enforcement activities on high-risk goods and travelers, while facilitating clearance and movement of low-risk goods. The trade ministers meeting in Toronto also appointed new country chairs and vice chairs of the nine negotiating groups for the next 18 months: FTAA Negotiating Group

Chair

Vice Chair

Market Access

Chile

Barbados

Agriculture

Brazil

Ecuador


Canada

Chile

Investment

Trinidad and Tobago

Colombia

Competition Policy

Colombia

Canada

Intellectual Property Rights

Mexico

Paraguay

Services

USA

Peru

Dispute Settlement

Costa Rica

Peru

Subsidies, Antidumping and Countervailing Duties

Venezuela

Uruguay

In view of the WTO meeting that was scheduled for Seattle later that same month, the trade ministers meeting in Toronto endorsed a common hemispheric policy calling for the permanent elimination of all subsidies on agricultural exports and for prompt compliance with the agricultural accords arising from the Uruguay Round negotiations that, inter alia, created the WTO. Finally, the trade ministers meeting in Toronto also agreed to a series of


measures to make the FTAA process more transparent and accessible to the public, including providing on the FTAA home page (http://www.ftaa-alca. org) various reports prepared by the former working groups, statistical data compiled by ECLAC, and information on government regulations, procedures, and agency contacts in those subject areas handled by each of the nine negotiating groups. By the end of 2000 the nine negotiating groups that had been diligently meeting in periodic negotiating sessions in Miami since September 1998 finally completed a draft text of the proposed FTAA. On those issues where agreement could not be achieved, the different proposals were included in brackets and left for future negotiations after the next Trade Ministerial, scheduled for early April 2001 in Buenos Aires. Although their work went mostly unnoticed by the general public and media, many of the negotiating groups achieved consensus on a large number of issues. One proposal that was suggested for the heads of governments to consider at the Third Summit of the Americas scheduled for Quebec City, Canada, in late April 2001 was the inclusion of a democracy clause. The clause would limit participation in the hemispheric free trade area to countries with democratically elected governments. Although already implicit with the exclusion of Cuba from the FTAA negotiations, the only country in the Americas not participating because of its totalitarian form of government and incompatible economic system, the democracy clause was intended to discourage the type of political instability that plagued Ecuador and Peru in 2000. The proposed clause would be similar to that contained in the “Presidential Declaration on the Commitment to Democracy in the MERCOSUR” issued by the presidents of the MERCOSUR countries in July 1996 stating that any interruption in the democratic order would mean the immediate suspension of membership in MERCOSUR. The declaration came in response to an attempt by General Lino Oviedo to overthrow the then Paraguayan elected head of state, Juan Carlos Wasmosy, earlier that year. In July 1998 the presidents of the four core MERCOSUR countries plus the two associate members Bolivia and Chile signed the Protocol of Ushuaia on the Commitment to Democracy in the MERCOSUR, the Republic of Chile, and the Republic of Bolivia. The protocol outlines a series of procedures to follow in the event of a break in the democratic order in any of the signatory states. Article 5 of the protocol indicates that a break in the democratic order can result in measures ranging from the suspension of the right to participate in the different institutional bodies of the various integration arrangements to the suspension of the rights and obligations arising under those same agreements. The sixth Trade Ministerial was held in Buenos Aires on April 7, 2001. Among the most important acts of the trade ministers was to approve the first draft of the FTAA agreement. The 34 countries represented at the Trade Ministerial meeting also committed themselves to begin market access negotiations in agricultural and non-agricultural goods, services, investment, and government procurement no later than May 15, 2002. Furthermore, the TNC, with input from the Consultative Group on Smaller Economies and the Tripartite Committee made up of ECLAC, the IADB, and the OAS Trade Unit, were instructed to


formulate guidelines or directives by November 21, 2001, on ways to handle the differences in levels of development and size of the economies that would make up the future FTAA. Finally, at the conclusion of the Trade Ministerial, Argentina formally handed over chairmanship of the FTAA negotiations to Ecuador for the next 18-month period. The following countries assumed the chairs and vice chairs of the FTAA Negotiating Groups in Buenos Aires until the next Trade Ministerial scheduled for Quito, Ecuador, in October 2002:

FTAA Negotiating Group

Chair

Vice Chair

Market Access

Argentina

Colombia

Agriculture

Guatemala

Uruguay


Costa Rica

Colombia

Investment

Mexico

Bolivia

Competition Policy

Colombia

Peru


USA

Dominican Republic

Services

CARICOM

Venezuela

Dispute Settlement

Paraguay

Chile


Peru

CARICOM

In addition to the above appointments to the negotiating groups, Bolivia became the new chair of the Consultative Group on Smaller Economies; Canada assumed a similar role for the Joint Government-Private Sector Committee of Experts on Electronic Commerce; and the Dominican Republic became chair of the Committee of Government Representatives on the Participation of Civil Society. Finally, Brazil was given the chairmanship of the newly created Technical Committee on Institutional Issues that was created to, inter alia, devise ways to meet the costs of implementing the FTAA and recommending permanent institutions. III. From the Third to the Special Summit of the Americas in Monterrey, Mexico (April 2001–January 2004) The Third Summit of the Americas was held in Quebec City on April 20–22, 2001. As was expected, the summit focused heavily on maintaining and strengthening the rule of law and the democratic system throughout the Western Hemisphere. As a result, the heads of state gathered in Canada


issued a strongly worded declaration that “any unconstitutional alteration or interruption of the democratic order in a state of the Hemisphere constitutes an insurmountable obstacle to the participation of that state’s government in the Summit of the Americas process.” In addition, the foreign ministers of the 34 countries negotiating the FTAA were instructed to prepare within the OAS framework an Inter-American Democratic Charter to actively defend against threats to representative democracy. Although a remarkable display of hemispheric consensus, the action taken in Quebec City fell short of an original proposal that would have explicitly conditioned participation in the FTAA and continued access to its benefits on having a democratically elected form of government. Interestingly the Democratic Charter itself was finally approved at a special meeting of the OAS in Lima, Peru, on September 11, 2001. That event was overshadowed, however, by a terrorist incident involving Islamic extremists that occurred in the northeastern United States that same day. The Quebec City Summit resulted in a consensus to have the heavily bracketed draft text of the FTAA in its four official languages (i.e., English, French, Portuguese, and Spanish), which had been approved two weeks earlier in Buenos Aires by the trade ministers, posted on the official FTAA Web site (http://www.ftaa-alca.org). This development had initially been proposed by Canada in response to complaints from some non-governmental organizations and civil society groups that the FTAA negotiation process lacked transparency and failed to take into consideration the concerns of the full spectrum of civil society. The heads of state meeting in Quebec also made a firm commitment to conclude the FTAA negotiations no later than January 2005 and to make all efforts to have it ratified so that it could enter into force by the end of that year. Venezuela, however, made an explicit reservation not to be bound by the 2005 deadline. The fact that all the other 33 countries made this commitment meant that a controversial proposal first put forward by the U.S. government to push forward the conclusion date of the FTAA negotiations to 2003 was finally rejected. Finally, at the insistence of the Caribbean Common Market and Community (CARICOM), Central America, and the Andean Community, it was agreed that the final FTAA agreement had to take into consideration “differences in the size and levels of development in participating economies.” At a July 2001 meeting of the FTAA negotiating group on subsidies, antidumping, and countervailing duties, the United States retabled a proposal to eliminate a separate chapter in the FTAA text on unfair trade remedy laws and replace it with a simple statement that each country to the agreement retained the right to apply current domestic antidumping and countervailing There is another irony with this date, as well, since it marked the 28th anniversary of the coup d’etat in Chile that overthrew the democratically elected government of Salvador Allende. As revealed during the hearings chaired by Senator Frank Church of Idaho in the U.S. Senate during the mid-1970s and documents released by the National Security Archives during the last years of the Clinton presidency, the Nixon administration was heavily involved in efforts to first prevent Allende’s inauguration and, when those efforts backfired, destabilize his government, thereby contributing to the intense polarization that eventually resulted in the collapse of Chilean democracy in 1973. See, e.g., P. Kornbluh, The Pinochet Files: A Declassified Dossier on Atrocity and Accountability (2004).


duty laws. The U.S. proposal was strongly opposed by Chile and the MERCOSUR countries who argued that it represented a breach of the instructions that came out of the April 2001 Buenos Aires Trade Ministerial. The U.S. proposal appeared to be in response to strong criticism in that country’s Congress led by senior Senator Robert Byrd of West Virginia and certain U.S. industry groups (especially the steel and semiconductor industries) who criticized bracketed text in the first draft of FTAA agreement because it sought to place limitations on the use of national antidumping and countervailing duty laws against other FTAA members. In January 2002 the Office of the USTR announced the Bush administration’s intention to begin negotiating a free trade agreement with Central America. This marked a reversal of the originally cool reception the idea received from Washington, DC, when it was first proposed by the Central Americans, led by Costa Rica, in September 2001. Actual negotiations for a U.S.-Central America Free Trade Agreement (CAFTA) did not get under way, however, until January 2003. In the meantime, negotiations for a free trade agreement between the United States and Chile (which had begun in the final days of the Clinton administration) ended in December 2002. That bilateral agreement came into effect on January 1, 2004, following its ratification in the United States and then the Chilean Congress. In August 2002 U.S. President George W. Bush was finally able to obtain Trade Promotion Authority (TPA), previously known as “fast track” authority, from the U.S. Congress. As a result of TPA, the legislative branch cedes to the executive its authority to amend or modify any trade agreement that has been negotiated by the Office of the USTR. With TPA, Congress is limited to voting to approve or reject a trade agreement within a 90-day period. This authority had long been denied to the Clinton administration by the Republican-controlled Congress after it had expired at the end of 1994. The fact that President Bush had it meant that countries negotiating trade agreements with the United States could rest assured that they would not have to negotiate twice, once with the executive branch and the second time with Congress. Although approval of TPA reenergized the FTAA negotiations, this was partially undermined by the compromises the White House was forced to make in order to obtain TPA. This raised concerns in a number of countries as to how committed the See, FTAA Countries Fight US Over Position on Antidumping Laws, 19 Inside U.S. Trade 1 (Aug. 10, 2001). In particular, the Chileans and MERCOSUR argued that the U.S. proposal violated an instruction from the trade ministers that “proposed texts already submitted and future texts should not render ineffective the obligations to be assumed by countries in relation to those substantive issues or areas on the FTAA negotiations agenda.” The original grant of TPA was valid through July 1, 2005, although it could be extended through July 1, 2007, if the White House requested an extension from Congress and certified that all the conditions included in the initial authorization were met. TPA passed the U.S. Senate on August 1, 2002, by a 64–34 bipartisan vote. It had been previously approved in the U.S. House of Representatives on July 27, 2002, by a 215–212 vote heavily split along Republican-Democratic party lines. In the TPA bill were a number of Trade Adjustment Assistance initiatives, including a tax credit for the purchase of health insurance by workers loosing their jobs as a result of increased imports or factories moving abroad and an increase in Labor Department cash assistance and job retraining benefits.


United States really was to the free trade agenda. The Brazilian government, in particular, expressed apprehension over language in the TPA that required the White House to consult with Congress on tariff negotiations affecting import sensitive products. At the seventh Trade Ministerial held in Quito, Ecuador, on November 1, 2002, a second draft of the still heavily bracketed FTAA agreement was approved and immediately posted on the FTAA’s official Web site. The ministers also established a timetable for the exchange of offers in services, investment, agriculture, government procurement, and non-agricultural market access. It was anticipated that initial market access offers would be submitted between December 15, 2002, and February 15, 2003, with revised offers due by July 15, 2003. The trade ministers endorsed an earlier agreement to have tariff reduction negotiations be based on actual applied duty rates rather than the generally higher tariff rate ceilings that are bound at the WTO. Earlier intransigence over this issue from the CARICOM countries eventually resulted in a compromise in which smaller economies could use WTO bound rates as the starting off point for tariff cuts on certain predominately agricultural products deemed “sensitive.” Among other results of the Quito Trade Ministerial was a strongly worded declaration rejecting the abuse of environmental and labor standards for See, Brazil Says Fast Track Bill’s Consultation Provisions Too Restrictive, 20 Inside U.S. Trade 1 (Aug. 9, 2002). The attempt by U.S. Senators Larry Craig (R-ID) and Mark Dayton (D-MN) to add an amendment to TPA also caused great consternation. The measure would have allowed any senator to object to provisions in any future trade agreements sent to Congress under TPA that made changes to existing U.S. trade remedy laws, including antidumping, countervailing duty, and safeguard measures (as well as some national security provisions used to keep products out of the U.S. market). Despite enjoying significant bipartisan support in both the Senate and House of Representatives, the amendment was eventually dropped when President Bush threatened not to sign any trade bill if it were included. This issue was the subject of a dispute that first emerged at the TNC meeting in Panama on May 14, 2002, and prevented tariff reduction negotiations on agricultural and non-agricultural goods in the market access group from beginning immediately as agreed to at the Buenos Aires Trade Ministerial the previous year. The tariff reduction negotiations were rescheduled until December 2002, in part, to allow the Andean Community and MERCOSUR to adjust their applied rates as their respective common external tariff (CET) structures were revamped. CARICOM, in an attempt to win concessions in recognition of its members’ status as small and disadvantaged economies, refused in principle to use applied tariff rates as the starting point for tariff negotiations, insisting on using WTO bound rates. See FTAA Countries Set Negotiating Schedule But Split on Modalities, 20 Inside U.S. Trade 1 (May 17, 2002). One important issue that was not resolved at the Quito Ministerial was whether countries could present different market access offers to different countries according to their level of development. The United States favored such an approach during the tariff phaseout period, while MERCOSUR insisted that market offers should (with limited exceptions for CARICOM) be made to all countries on an equal MFN basis. See Gaps on Modalities Persist as FTAA Countries Head into Negotiations, 20 Inside U.S. Trade 23 (Nov. 8, 2002). In addition, no consensus was reached on whether liberalization in the services sector would use the “positive list” approach of the WTO (i.e., only what is included in the list is liberalized) or the “negative list” approach of the NAFTA (i.e., everything is liberalized, except that which is specifically listed). On government procurement, no consensus was achieved on whether obligations went beyond the federal or national government levels.


protectionist purposes whether as a pre-condition for participating in the FTAA or as the basis for imposing trade restrictions or sanctions in the event of noncompliance with internationally recognized labor and environmental standards. Perhaps the most significant innovation coming out of Quito, however, was the announcement of a Hemispheric Cooperation Program (HPC) designed to assist less-developed and smaller economies to actively participate in the FTAA negotiating process, implement any obligations assumed under the FTAA, and make the necessary economic adjustments so as to optimally benefit from free trade. As a proposal put forward by the United States, money to fund the HPC was expected to come, in part, from USAID as well as the IADB. The private sector, academic institutions, and foundations were also expected to provide additional resources and propose specific activities under the HPC. Among the proposed activities was the training of government officials, programs to foster trade policy coordination among different government agencies within a country, programs to establish or improve statistical and analytical institutions, identifying new market opportunities for small- and medium-sized enterprises, and programs to assist governments with regulatory reform. Following the conclusion of the Quito Trade Ministerial, Brazil and the United States became co-chairs of the FTAA negotiating process through its anticipated conclusion by January 2005. New chairs and vice chairs for the negotiating groups were appointed as follows: FTAA Negotiating Group

Chair

Vice Chair

Market Access

Colombia

Dominican Republic

Agriculture

Uruguay

Mexico


Costa Rica

Paraguay

Investment

Panama

Nicaragua

Competition Policy

Peru

CARICOM


Dominican Republic

Venezuela

Services

CARICOM

Ecuador

Dispute Settlement

Canada

Chile


Argentina

Canada

In addition, Ecuador became the chair of the Consultative Group on Smaller Economies, Bolivia took over the chairmanship of the Committee of Government Representatives on the Participation of Civil Society, and Chile was chosen to chair the Technical Committee on Institutional Issues. It was also


decided that the activities of the Joint Government-Private Sector Committee of Experts on Electronic Commerce would be temporarily suspended. In January 2003 Brazil announced that it would delay tabling offers in services, investment, and government procurement beyond the February 15, 2003, deadline agreed to in Quito. The official excuse was that the government needed time to put together an offer in view of the recent New Year’s Day inauguration of President Luiz Inácio Lula da Silva in Brasilia. Perhaps not coincidentally, consensus had still not yet been reached among the countries negotiating the FTAA as to the modalities or bases from which offers in these sectors would commence (i.e., negative vs. positive lists with respect to services, etc.). By the April 2003 TNC meeting in Puebla, Mexico, neither Argentina, Brazil, the Bahamas, or Haiti had submitted offers in services, investment, and government procurement. Following a visit of the USTR Robert Zoellick to Brasilia on May 27, 2003, the Brazilian and U.S. governments announced that a mini-ministerial would be held at the Wye River Conference Center in Maryland on June 12–13, 2003, for a limited number of FTAA countries. In addition to Brazil and the United States, the other countries attending the mini-ministerial would be Argentina, Canada, Chile, Colombia, the Dominican Republic, El Salvador, Jamaica, Mexico, Panama, Peru, Trinidad and Tobago, and Uruguay. Although invited, Costa Rica did not attend. As initially reported in the press, the objective of the meeting was to explore ways to reduce the ambitious scope of the FTAA in order to make the January 2005 deadline. In particular, Brazilian officials indicated that the mini-ministerial would decide which issues would remain in the FTAA and which would be relegated to the WTO or to bilateral negotiations. The actual discussion at Wye River, however, centered more on exploring the possibility of negotiating lesser obligations in sensitive sectors so as to meet the January 2005 target. By the July 7–11, 2003, TNC meeting in San Salvador, the Argentine, Brazilian, and Haitian governments had still did not tabled their offers on services, investment, and government procurement. The failure of Argentina and Brazil to submit offers was attributed to their pique at the continuing inability to achieve a consensus among all the participating states as to the exact scope of the FTAA.10 Progress was further hampered in the services negotiating group by failure to settle on whether a positive as opposed to a negative list approach would be utilized. In San Salvador, MERCOSUR formally submitted a See, e.g., US, Brazil Begin Process that Could Scale Back Scope of the FTAA, 21 Inside U.S. Trade 1 (May 30, 2003); and US, Brazilian Decisions Emerge Over Agenda at FTAA Mini-Ministerial, 21 Inside U.S. Trade 1 (June 6, 2003). See, FTAA Countries Explore Lesser Commitments As Option to Scaling Back, 21 Inside U.S. Trade 6 (June 20, 2003). Examples of lesser obligations would include limiting the chapter on government procurement to cover disciplines on transparency, but not what government contracts are open to foreign bidders, or limiting the investment chapter to address only post-establishment issues once a foreign company is already present in the country (but not the rules as to who can come in). 10 See FTAA TNC Makes No Headway on Scope of Agreement, Offers Still Missing, 21 Inside U.S. Trade 11 (July 25, 2003).


three-track proposal for resolving certain issues it deemed contentious by leaving some to be negotiated within the FTAA, relegating others to the WTO, and leaving any remaining issues for direct negotiations with the United States. The collapse of the WTO Ministerial in Cancun, Mexico, on September 14, 2003, impacted the FTAA negotiations as well since it undercut the feasibility of relegating certain contentious issues within the FTAA context to the multilateral arena for resolution. Since at least 2001 the United States had been suggesting that agricultural support payments to U.S. farmers and antidumping could only be resolved at the WTO. On the agricultural subsidies issues, the United States argued that if it were to concede to disciplines on agriculture in the FTAA, it would spend the only negotiating capital it had to pressure the European Union and Japan at the WTO to make reductions in their respective subsidy programs. The U.S. position on antidumping was less logical, given that competition policy was being negotiated in the FTAA, and it can be argued that competition laws are a partial substitute for antidumping legislation. In response to the U.S. position on subsidies and antidumping, the MERCOSUR countries proposed in May 2003 to relegate government procurement, intellectual property, investment, and services to the WTO as well. The rationale was that if the United States did not want to include politically sensitive issues on which the MERCOSUR governments needed concessions in order to sell the hemispheric trade pact to skeptical publics at home, then MERCOSUR should be able to do the same. Not surprisingly, this hardening of positions led to a TNC meeting in Port of Spain, Trinidad, on September 30–October 2, 2003, which, by all accounts, achieved nothing of substance. The acrimony that developed between the United States and Brazil following Cancun, as each tried to blame the other for the collapse of the WTO talks, did not bode well for the eighth FTAA Trade Ministerial scheduled for Miami on November 20–21, 2003. In order to prevent the Trade Ministerial from degenerating into another round of finger pointing and possibly supplying the FTAA with a fatal death blow, the Bush administration was eager to punt any contentious issues over to the next TNC scheduled for Puebla, Mexico, in February 2004. As a result, several weeks after the Trade Ministerial, representatives from different governments were still arguing over what precisely had been agreed to in Miami. At first glance, the long accepted principle of a “single undertaking” appeared to have been replaced by the recognition that “countries may assume different levels of commitments.” US negotiators denied this and pointed out that the ability to assume different levels of commitment was qualified by the language immediately before of “[t]aking into account and acknowledging existing mandates.” The ambiguously worded declaration that emerged from the Miami Trade Ministerial appeared to endorse the concept of a two-tiered “FTAA Light” by the original target date of January 2005. Although all 34 participating countries would be bound to “a common set of rights and obligations” within each of the nine negotiating categories established in San José in March 1998, countries were also free to negotiate within the FTAA context “additional obligations and benefits” on a plurilateral basis. For the U.S. negotiators, language in the Miami


Trade Ministerial Declaration that “countries [will] reap the benefits of their respective commitments” meant that market access would be contingent on the level of overall liberalization undertaken within the FTAA context. Brazil, on the other hand, argued that other language in the same Declaration recognizing, inter alia, “that negotiations must aim at a balanced agreement that addresses the issue of differences in the levels of development and size of economies” meant that there could not be penalties for opting out of the presumably more demanding plurilateral commitments. In addition, the Brazilians pointed out that the MFN clause in either the WTO’s GATT or the future FTAA agreement itself would eventually obligate all the FTAA countries to extend to everyone else the same generous market access concessions that had been provided to one set of countries under a plurilateral agreement. Among other commitments included in the Miami Ministerial declaration was one to conclude the negotiations on market access by September 30, 2004. Establishing the “common set of rights and obligations” for market access (as well as the eight other negotiating sectors) was left for the scheduled February 2004 TNC in Puebla to resolve. The trade ministers also approved posting the third draft of the FTAA text on the official Web site, but in light of the new mandates that emerged from Miami, this would require extensive, subsequent edits. The new chairs and vice chairs of the negotiating groups approved in Miami included:

FTAA Negotiating Group

Chair

Vice Chair

Market Access

Colombia

Dominican Republic

Agriculture

Uruguay

Mexico


Costa Rica

Paraguay

Investment

Panama

Nicaragua

Competition Policy

Peru

CARICOM


Dominican Republic

Venezuela

Services

CARICOM

Ecuador

Dispute Settlement

Canada

Chile


Argentina

Mexico

CARICOM also assumed the chairmanship of the Consultative Group on Smaller Economies, Chile was selected to head the Committee of Government Representatives on the Participation of Civil Society, while Mexico became the new chair of the Technical Committee on Institutional Issues.


In a move reflecting U.S. frustration to overcome MERCOSUR’s tough negotiating stance, the Office of the USTR announced at the conclusion of the Miami Trade Ministerial plans to negotiate free trade agreements with four of the five members of the Andean Community (i.e., Bolivia, Colombia, Ecuador, and Peru) as well as Panama. The announcement appeared to be part of a strategy to pressure the MERCOSUR governments into concluding the FTAA on U.S. terms or risk being the only countries in the Western Hemisphere (along with Cuba and Venezuela) not to enjoy preferential access into the U.S. market. U.S. negotiators also seemed to hope that this strategy might undermine internal MERCOSUR solidarity and entice the smaller states to seek a free trade agreement with the United States and thereby isolate Brazil. Whatever the precise motivations, Brazil remain unfazed, confident that its huge and potentially lucrative internal market would eventually cause the U.S. private sector to lobby their government to conclude a more balanced FTAA. For a variety of different factors, the other MERCOSUR countries followed Brazil’s lead and stood their ground. In the case of Argentina, the inability to resolve the agricultural subsidies issue would make any bilateral deal with the United Sttaes not only economically, but also politically unpalatable. Paraguay, mired in economic and political instability, feared alienating Argentina and Brazil (its two largest trading partners) if it pursued a bilateral deal with the United States. Only Uruguay appeared ready to take the leap, but the eventual election of the leftist Frente Amplio government the following year made a bilateral free trade deal with the United States ideologically unacceptable. On January 12–13, 2004, the elected heads of state of all the countries in the Western Hemisphere (but for Cuba; Guatemala, Dominica, and Guyana only sent special representatives) met in Monterrey, Mexico, for a Special Summit of the Americas. This was actually the second time that such a Special Summit had been held; the first one was in 1996 in Santa Cruz, Bolivia, on Sustainable Development. The idea for a second Special Summit was originally proposed in July 2002 by then President Fernando Henrique Cardoso of Brazil, who wanted it to focus on job creation. The Canadian government then made a strong push for a Special Summit in early 2004, arguing that the Hemisphere had gone through a number of crises, and new leaders had been elected since the Quebec Summit of April 2001. It therefore felt that too long a time would lapse by the time the next scheduled summit was held in Argentina in late 2005. Although trade did not figure prominently on the agenda of the Special Summit of the Americas in Monterrey, reference for “concluding the negotiations for the FTAA in the established timetable” was included in the declaration issued by the Hemisphere’s leaders. Prior to the Summit, Brazil had demanded that trade not be included at all on the Special Summit’s agenda and initially refused to allow any mention to the FTAA in the declaration. In the end, though, the only dissenting voice in the declaration with respect to the FTAA came from Venezuelan President Hugo Chavez.11 11 The language included by President Chavez in the Declaration of Nuevo León notes “Venezuela enters a reservation with respect to the paragraph on the Free Trade Area of the Americas (FTAA) because of questions of principle and profound differences regarding the concept and philosophy of the proposed model and because of the manner in which specific


Among the other commitments made by the heads of state in Monterrey was one “to simplify the procedures and significantly reduce the time and cost of establishing businesses in each country” and to strengthen property rights (including expanding the use of property as collateral) by the next summit in Argentina in 2005. In recognition of the growing importance of remittances as a source of potential investment capital in many Latin American and Caribbean nations, the leaders agreed to reduce “by at least half the regional average cost of transfers no later than 2008.” Finally, in an effort to fight corruption, a commitment was made to “deny safe haven to corrupt officials, to those who corrupt them, and their assets; and to cooperate in their extradition as well as in the recovery and return of the proceeds of corruption to their legitimate owners.” Interestingly, while the president of Panama was making this commitment in Monterrey, her government had reportedly just granted political asylum to an ex-finance minister from Ecuador accused of embezzlement. IV. From the Special Summit of the Americas in Monterrey, Mexico, to the Fourth Summit of the Americas (January 2004–November 2005) As had been widely expected, the TNC meeting held in Puebla, Mexico, on February 2–6, 2004, was unable to come up with negotiating modalities for the two-tiered approach to the FTAA that was proposed at the November 2003 Trade Ministerial in Miami. That proposal had moved the FTAA away from being a comprehensive trade agreement whose disciplines would be obligatory for all the signatory states, to one in which all 34 countries would agree to a set of core obligations, while other disciplines would be the subject of plurilateral agreements involving a smaller group of interested countries. The major stumbling block that developed at Puebla was an inability to decide what should be included among the core obligations and the procedures for negotiating the voluntary plurilateral agreements. The MERCOSUR countries insisted that no industrial or agricultural goods could be excluded from the market access provisions of any FTAA (which meant eventually reducing to zero even “sensitive” goods currently subject to U.S. tariff rate quotas (TRQs)).12 The MERCOSUR countries also pressed for including the elimination of export subsidies in the core obligations as well as the trade distorting effects of state-trading enterprises, food aid, and domestic price support systems for agricultural products. On the other hand, the MERCOSUR countries refused to go beyond WTO commitments on government procurement, intellectual property, investment, and trade in services, and advocated relegating further aspects and established timeframes are addressed. We ratify our commitment to the consolidation of a regional fair trade bloc as a basis for strengthening levels of integration. This process must consider each country’s particular cultural, social, and political characteristics; sovereignty and constitutionality; and the level and size of its economy, in order to guarantee fair treatment.” 12 The MERCOSUR countries appeared particularly irked at a U.S. proposal that the elimination of all tariffs on every industrial and agricultural good would be dependent on the participation of countries in the plurilateral agreements and the level of concessions they offered in those negotiations. See, US, MERCOSUR Fight Over Agriculture Stalls FTAA Negotiations,” 22 Inside U.S. Trade 1 (Feb. 13, 2004).


concessions in those areas for the plurilateral agreements. While the United States did reiterate a previously made commitment to eliminate the use of agricultural export subsidies within the Western Hemisphere, it claimed that domestic agricultural support payments could only be handled at the WTO.13 The United States also insisted that government procurement, intellectual property, investment and services had to be included within the set of core obligations applicable for all 34 countries. A series of bilateral talks between the co-chairs of the FTAA process, Brazil and the United States, throughout 2004 and early 2005 failed to produce a consensus on what to include in the set of common obligations under the twotiered “FTAA Light” approach. The inability of the G-20 group of developing countries led by Brazil, China, and India to make any headway in the WTO Doha Development Round and obtain meaningful concessions, particularly from the European Union, on agricultural subsidies, also had a negative impact on the FTAA negotiations as well. Perhaps not surprisingly, the January 1, 2005, date for concluding the FTAA negotiations came and went. An effort in August 2005 by Mexico and CARICOM to push for a new TNC meeting before the next scheduled Summit of the Americas in November 2005 was rebuffed by Brazil and the United States. There had been no formal FTAA meetings since the last TNC in Puebla had collapsed in February 2004. The Fourth Summit of the Americas was held in the seaside resort city of Mar del Plata, Argentina, on November 4–5, 2005. In the months leading up to the summit there had been speculation that U.S. President George W. Bush would not even bother to show up given the inability of the United States to offer any concessions to the MERCOSUR countries on agricultural subsidies and the use of antidumping and countervailing duties that would make it politically palatable for them to continue pursuing the FTAA negotiations. In the end, President Bush did make an appearance and became the focal point of mass demonstrations protesting not only against the FTAA, but also U.S. foreign policy in general. An alternative “People’s Summit of the Americas” was held in a huge soccer stadium in Mar del Plata and was attended by Venezuelan President Hugo Chavez who delighted the crowds with fiery denunciations of the FTAA as a project designed to make Latin America and the Caribbean economic vassals of U.S. imperialism ripe for exploitation. By the end of the summit in Mar del Plata, it was clear that the FTAA process was in deep freeze if not already dead and buried. Although 28 of the 34 countries in the Western Hemisphere supported a U.S. proposal to reinitiate the 13 U.S. reluctance to negotiate domestic agricultural price support schemes in the FTAA is based on the argument that: (1) it would hurt U.S. exporters in the Latin American and Caribbean markets relative to other agricultural exporting countries that subsidize their agricultural production and (2) it would diminish the U.S. bargaining position on subsidies in the broader WTO talks by removing an incentive to extract concessions from the European Union, Japan, and other developed countries that heavily subsidize their agricultural production (something that is also, by the way, in the interest of most Latin American countries to see eliminated). See, e.g., J.F. Hornbeck, A Free Trade Area of the Americas: Major Policy Issues and Status of the Negotiations 3 (Aug. 2, 2006).


FTAA negotiations in early 2006, the four MERCOSUR countries and Venezuela refused stating that “the necessary conditions are not yet in place for achieving a balanced and equitable free trade agreement.” The Declaration of the Heads of State that emerged from the Fourth Summit of the Americas, entitled “Creating Jobs to Fight Poverty and Strengthen Democratic Governance,” underscored this division by including two conflicting statements on the FTAA process. The only thing all 34 countries could agree to include in the declaration was a statement “to explore both positions in light of the outcomes of the next World Trade Organization ministerial meeting.” Furthermore, the government of Colombia was entrusted with hosting a meeting of all 34 countries to examine the outcome of the WTO negotiations, something that never happened given that as of mid-2008 the WTO talks continue to drag on inconclusively. About the only other concrete thing that could be agreed upon in Mar del Plata with respect to the FTAA was for the IADB to continue funding the FTAA Secretariat in Puebla, Mexico, beyond December 2005. In marked contrast to declining interest in the FTAA process, the Bush administration appeared more enthusiastic in pursuing bilateral free trade agreements with those countries willing to accept U.S.conditions. A PeruU.S. Free Trade Agreement was signed in April 2006. In November 2006 the Colombia-U.S. Free Trade Agreement was signed. In December 2006 the Office of the USTR announced that it had concluded a bilateral free trade agreement with Panama, although it acknowledged there might be a need for further negotiations on labor issues. The latter statement reflected recognition of the November 7, 2006, mid-term election results in which the Democrats won control of both the Senate and the House of Representatives. In the past, congressional Democrats have raised a number of objections to Panama’s labor laws concerning the right to organize and bargain collectively. Shortly after their victory, the new Democratic leadership in Congress also made clear that the labor provisions in the U.S. agreements with Colombia and Peru would have to be renegotiated.14 The Peru-U.S. Free Trade Agreement was eventually ratified by the U.S. House of Representatives in November 2007 and the following month by the U.S. Senate following a compromise reached with the White House in May 2007 and concessions made by the Peruvian government. In particular, the U.S. government agreed to work with the Peruvians to address illegal logging, and the Peruvians agreed to make changes to their national legislation, where necessary, to facilitate enforcement of five basic internationally recognized labor principles plus acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.15 14 Acknowledging that this renegotiation could prove time consuming, congressional Democrats indicated they were amenable to extending the June 2007 expiration date for the Andean Trade Preference and Drug Eradication Act (ATPDEA) beyond the six-month extension granted by a Republican-controlled lame duck session in December 2006. Additional extensions have been granted since then. 15 These five basic labor rights are found in the International Labor Organization Declaration on Fundamental Principles and Rights of Work and include: (1) freedom of association, (2) effective recognition of the right to collective bargaining, (3) elimination of all forms of forced or compulsory labor, (4) effective abolition of child labor and a prohibition


V. Why the Bolivarian Alternative for the Peoples of Our America Is Not a Viable Alternative to the Free Trade Area of the Americas In April 2006 the presidents of Bolivia, the Bolivarian Republic of Venezuela, and Cuba met in Havana to sign what they denominated an Agreement to Implement the Bolivarian Alternative for the Peoples of Our America and Peoples’ Trade Treaty.16 This agreement is an outgrowth of a declaration issued by Cuban President Fidel Castro and his Venezuelan counterpart Hugo Chavez in December 2004, which sought to create a Bolivarian Alternative for the Peoples of Our America or Alternativa Bolivariana para los Pueblos de Nuestra America (ALBA) in opposition to an FTAA they viewed as a project designed to consolidate U.S. economic and political hegemony in the Western Hemisphere. ALBA emphasizes the need to fight against social exclusion and poverty, while the FTAA is depicted as a process that prioritizes the interests of international capital and will not improve the lives of the average Latin American. ALBA’s proponents claim that they seek to encourage “endogenous” economic development and promise to provide compensatory or structural readjustment funds to overcome asymmetries in economic development among participating countries. Although the April 2006 trilateral agreement includes a program designed to encourage trade among Bolivia, Cuba, and Venezuela, the commitments are either limited to bartered trade arrangements or provide a unilateral opening by Cuba and Venezuela for Bolivian exports that are unlikely to create many new jobs or dramatically expand economic opportunities. That may explain why no other government in the Americas has expressed any interest in signing the Peoples’ Trade Treaty, even if it may be a relatively effortless way to score political points with those on the left of their respective domestic polities. Included under ALBA’s umbrella are also other agreements that deal with establishing an ALBA Bank that was only signed by Bolivia, Cuba, Nicaragua, and Venezuela, and has very amorphous goals related to economic and social development; energy accords in which Venezuela agrees to supply a number of CARICOM countries (i.e., through PETROCARIBE) as well as Bolivia, Haiti, and Nicaragua with certain levels of petroleum based upon generous lending terms (which may include an option to repay with other goods and not necessarily cash); and a Memorandum of Understanding to broadcast programming in Nicaragua produced by the Venezuelan state channel TELESUR. There are also bartered trade arrangements by which Argentina exports buses in exchange for Venezuelan fuel oil (or at least fuel oil purchased by Venezuela on the open market), as well as energy cooperation agreements between Venezuela, on the one hand, and Brazil and Uruguay, on the other.

on the worst forms of child labor, and (5) elimination of discrimination in respect of employment or occupation. In 2007 Peru established a National Commission to Fight against Forced Labor with representatives from 13 ministries and organizations. 16 The full text in English of the Agreement to Implement the Bolivarian Alternative for the Peoples of Our America and Peoples’ Trade Treaty can be found as Appendix 44 in T.A. O’Keefe, Latin American Trade Agreements (2007).


In the April 2006 trilateral “trade” agreement, Cuba commits itself to provide free and quality ophthalmology care for poor Bolivians by sending Cuban doctors to Bolivia and building new eye clinics in major population centers in Bolivia. Cuba also will provide up to 5,000 scholarships over a twoyear period for Bolivians wishing to study medicine in Cuba. Furthermore, the Cuban government agrees to provide educational materials to support Aymara, Quechua, Guaraní, and Spanish literacy programs in Bolivia. Cuba also offers to open up its domestic air market to competition from Bolivian air carriers.17 Finally, any goods that Bolivia sources from Cuba can be paid for in bartered Bolivian products, Bolivian pesos, or in another mutually convenient currency. In the April 2006 trilateral agreement, Venezuela agrees to provide Bolivia with technical assistance to strengthen the government ministries and agencies involved in hydrocarbons production as well as supply Bolivia with all the crude oil, refined products, liquefied propane gas, and asphalt it may require. The Bolivians can pay for the proffered energy products with Bolivian products. Venezuela also establishes a U.S.$100 million fund to finance projects to improve infrastructure and the petrochemical, steel-making, and industrial chemical sectors. An additional U.S.$30 million of Venezuelan money can be used by the Bolivian government at its discretion for social and productive needs. Furthermore, Venezuela agrees to donate an asphalt plant that can be used to maintain existing as well as build new roads in Bolivia. In addition, Venezuela offers 5,000 scholarships for Bolivians to study in Venezuelan universities and the use of Venezuelan downstream facilities for Bolivian state or mixed petroleum companies. In the April 2006 trilateral agreement, Cuba and Venezuela promise to eliminate all tariffs and non-tariff barriers on all goods imported from Bolivia. No rules of origin are provided, however, to determine what qualifies as a Bolivian good. In addition, both Caribbean Basin countries agree to purchase all the excess vegetable-based oil and other agricultural and industrial products that Bolivia may not be able to export to other Andean Community countries as a result of free trade agreements that they may enter into with the United States or the European Union. This provision is primarily in response to fears that Bolivian soy exports to other Andean countries will be undermined once the Andean Community common external tariff (CET) is perforated, and these markets are inundated with more efficiently produced and/or subsidized soy 17 Venezuela makes a similar commitment for “Bolivian flag air carriers,” albeit hedged by the language “within the limits permitted by its legislation.” See Ninth Activity to be Developed by Venezuela in its Relations with Bolivia within the Framework of the ALBA and the TCP. Interestingly, the Cuban and Venezuelan governments also seem to believe that Bolivia’s current two major carriers LAB and AeroSur, given the heavy participation of foreign investors, are not sufficiently Bolivian enough to enjoy the privileges of domestic cabotage that they are offering. Hence, in the Third Joint Activity to be Developed by Cuba and Venezuela in Their Relations with Bolivia within the Framework of the ALBA and the TCP, both Cuba and Venezuela offer “financial, technical and human resource collaboration to Bolivia in order to develop a Bolivian state airline that is genuinely national.” See T.A. O’Keefe, Latin American Trade Agreements App. 44 (2007).


products from the United States. Although Colombia and Peru are the only two countries that eventually signed free trade agreements with the United States, and both were under an Andean Community mandate to ensure that, in doing so, consideration was given to the “trade sensibilities” of other Andean countries, that did not happen with respect to U.S. soy, which gets quick dutyfree access into the Colombian and Peruvian markets once their respective free trade agreements with the United States take effect. The Cuban and Venezuelan offer is misguided, however. A more rationale approach would be to invest in working at dismantling the administrative and infrastructure barriers that currently make Bolivian soy exports so uncompetitive and ensuring that existing Andean Community norms are effectively used to keep out subsidized U.S. soy exports. Finally, under their April 2006 trilateral trade agreement, Bolivia agrees to supply Cuba and Venezuela with products both may need, including excess hydrocarbon production (the latter now impossible as the country is barely able to supply its own internal demand let alone meet contractual obligations with Argentina and Brazil). Bolivia also commits to sharing its experiences in the study of indigenous peoples and the recovery of ancestral knowledge of natural medicines. Despite all its shortcomings on the trade front, ALBA does underscore the need to engage the people of the Americas in a project that will allow most to share in the prosperity that increased trade can generate. Market forces alone will not do that, as the experience of a decade and a half with NAFTA has shown. A free trade agreement involving both developing and developed countries must include a strong financial commitment on the part of the richer participating states to build infrastructure, overcome institutional limitations at the national level, and invest in building effective human capacity skills in the general population. In that respect, ALBA provides a wake-up call to other leaders in the Western Hemisphere that any economic integration project that does not empower all of its citizens will never be able to achieve its full potential. In fact, the experience throughout much of Latin America during the past two decades with neo-liberal, market-oriented reforms underscores that halfhearted efforts eventually produce angry and frustrated populaces that can set back the entire trade reform agenda, no matter how desperately needed.

CHAPTER 11

CREATING A PROSPEROUS COMMUNITY OF THE AMERICAS I. Introduction The ambitious project to create a Free Trade Area of the Americas (FTAA) that once elicited so much enthusiasm among hemispheric governments is now moribund. The void has been filled by Venezuelan President Hugo Chavez’s attacks on market-oriented economics coupled with generous cash transfers to reduce foreign debt obligations and fund social programs that assist the poor. In the Caribbean, Chavez has used financial incentives to successfully convince most governments to shift their petroleum imports away from Trinidad and Tobago in favor of Venezuela. In many Latin American countries, politicians have adopted populist rhetoric to win power and have begun chipping away at the trade liberalization and privatization reforms of the 1990s. Although the pendulum may have swung against free trade in some Latin American and Caribbean countries—and even among important constituency groups in the United States—growing global food shortages, climate change, and volatile energy prices combine to underscore the need to genuinely liberalize markets throughout the entire Western Hemisphere. A call to revive the FTAA negotiations, however, is unlikely to gain much traction. This is true whether or not the World Trade Organization (WTO) Doha Round results in a new multilateral trade agreement or is eventually abandoned. What is required is a bold new initiative that excites the imagination of the bulk of the region’s population. The construction of a Community of the Americas that contemplates not only a genuine hemispheric free trade area but also regulates cross-border migration and offers EU style funding to improve infrastructure and enhance human resource capabilities throughout the Americas provides just such an initiative. One of the pillars supporting this new Community of the Americas must be energy security. Another pillar should be a program that commits governments to dismantle the administrative barriers that have marginalized most Latin Americans to the informal sector and discouraged any type of significant entrepreneurship from taking root. Facilitating the creation of a Community of the Americas is the fact that much of the groundwork has already been forged by the different subregional economic integration efforts throughout the Western Hemisphere.

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II. Energy as the Linchpin for the Community of the Americas The Western Hemisphere is blessed with abundant resources required to produce energy, whether of a more traditional nature like fossil fuels, hydro-, and nuclear power, or new alternative energies such as biofuels, wind, solar, sea waves, and geo-thermal power. For example, the United States is among the world’s largest repositories of natural gas, coal, and uranium. Venezuela’s deposits of heavy crude deposits in the Orinoco River Valley may actually surpass the oil reserves of Saudi Arabia. Overall, Latin America currently accounts for just over 13 percent of world oil production but only about 8 percent of consumption. For its part, Brazil can comfortably supply the Americas with sugar-based ethanol that does not contribute to the price inflation of basic foodstuffs, is far less damaging to the environment, and actually results in a significant reduction in carbon emissions. The great diversity and abundance of energy resources throughout the Americas may lead to false expectations that if markets in the Western Hemisphere were only integrated, the region could become energy independent and significantly reduce greenhouse gas emissions. This is an illusion, however. Unless there are major breakthroughs with respect to fusion or hydrogen, fossil fuels for the short and even medium term will continue to be the most important sources of energy, particularly for the transportation sector. Under such circumstances, total self-sufficiency in hydrocarbons cannot be achieved absent drastic conservation measures that most citizens and their elected officials would reject as unacceptable in terms of convenience, prices, and environmental integrity. Furthermore, because of the efficiency of the world oil industry and of world oil markets, any disruption of oil supply in one region is immediately transmitted on the world market through decisive and proportionate price increases. The most that an integrated energy market in the Western Hemisphere can therefore provide is enhanced energy security. As for significant reductions in greenhouse gas emissions, this is better redressed in the near future through enhanced fuel efficiency. The United States also has one of the world’s largest deposits of mineral-rich monazite sand that contains thorium, a silvery metal that has similar radioactive properties to uranium and is currently being tested as a new nuclear fuel. In addition to producing a more efficient fuel than uranium, its proponents claim that the inclusion of thorium “produces 70 percent less waste by weight (50 percent by volume) and 85 percent less plutonium than standard light water reactors, none of which is viable for making a weapon.” Fuel’s Gold, Fin. Times, May 31–June 1, 2008, at 2 (Life & Arts). Energy and Development in South America, Noticias 10 (Woodrow Wilson Int’l Center for Scholars, Spring 2008). J.M. Dukert, North America, in Energy Cooperation In The Western Hemisphere: Benefits And Impediments 143 (S. Weintraub ed., 2007). C.F. Doran, International Energy Security and North America, in Requiem or Revival?: The Promise of North American Integration 233 (I. Studer & C. Wise eds., 2007). The International Energy Agency believes that greater efficiency could cut greenhouse emissions by two thirds, while the McKinsey Global Institute believes that energy efficiency could get the world half way towards the goal, espoused by many scientists, of keeping the concentration of greenhouse gases in the atmosphere below 550 parts per million. The Elusive Negawatt, Economist, May 10, 2008, at 78.

Creating a Prosperous Community of the Americas • 439

At the present time, the prospects for a fully integrated hemispheric energy market are complicated by the fact that not all the major fossil fuel producers are utilizing market mechanisms to set prices. In addition, some governments also impose restrictions on exports. For example, successive governments in Argentina have artificially frozen energy prices since 2002 and discouraged exports through so-called retention taxes in an attempt to contain inflation and shore up political popularity at home with low energy costs. For its part, Peru has decided to use its natural gas resources to satisfy domestic needs and put a freeze on export related projects. The resurgence of hydrocarbon nationalism in Bolivia and Venezuela, and the inability to shed that legacy in Mexico, engenders further complications. At times, Ecuador appears tempted to follow these three countries down the same path. In the particular case of Bolivia, creeping nationalization has created a climate of legal insecurity that has led to a precipitous decline in natural gas production and meant that the country is barely able to satisfy internal demand let alone fulfill export contracts. Mexico faces the prospect of exhausting its current oil stocks within a decade if PEMEX (Mexico’s state-owned oil company) cannot secure investment capital or the country’s hydrocarbons sector is not opened up to the private sector to develop new offshore reserves. As a counterbalance to the grim scenario provided by some Latin American countries, there are nations in the Western Hemisphere that permit private firm participation in the exploration and production of hydrocarbon resources. Perhaps not coincidentally, they are enjoying a boom in the discovery of new reserves and have benefited from the revenue generated by high export sales. This includes Brazil as well as Trinidad and Tobago (which is now the largest supplier of liquified natural gas to the United States). Colombia may soon follow them, particularly now that the central government has restored order to large parts of the country that were formerly under the de facto control of guerilla groups. Canada’s province of Alberta is at the center of an expanding oil sands industry that is expected to make a major contribution to meeting North American energy needs. The hope is that these success stories may influence governments pursuing more nationalistic policies to reconsider as their reserves and revenue intake continues to plummet. Another cause for optimism is that shortsighted market interventions may finally have run their course. In the case of Argentina, the current severe energy crisis gripping the country now makes it almost inevitable that the old market mechanism for setting energy prices will have to be restored, a move that is facilitated by the fact that much of the country’s energy sector remains in private hands. Major new discoveries of natural gas in Peru would also diminish rather than accentuate the government’s current bias against exports. Given its huge reserves, Venezuela would appear to be immune to any influence to change its current nationalistic course, so long as global petroleum prices remain high over the long term. But given the fact that full risk contract opportunities for private oil companies are shrinking throughout the world, the private international petroleum firms may have not other choice but to live with this reality and work with the Venezuelan government. For example, in the 1970s private multinationals controlled 85 percent of the world’s oil reserves, while today a similar percentage is now in the hands of state-owned oil firms. S. McNulty, Oil’s Quest to Find Tomorrow’s Fuels, Fin. Times, Apr. 24, 2008, at 12.


One important reality that undoubtedly facilitates creating an integrated energy market under the umbrella of the Community of the Americas is the fact that the preparatory groundwork has already been laid within the context of subregional economic integration. This is particularly true of the Central American Integration System and the Andean Community. Both integration projects have legislation in place that seek to harmonize the different regulatory frameworks for electrical transmission, rely on market mechanisms to determine prices for the cross-border trade of electricity, guarantee access to international electrical interconnections, and ensure competitive conditions in each country’s electricity market. The Central American legislation, in particular, goes even further and establishes a regional market for electricity and creates two institutions with supranational authority to oversee smooth operation of the regional energy grid. For their part, the four MERCOSUR (Common Market of the South in English or MERCOSUL in Portuguese) countries established rules in the late 1990s to ensure a competitive and transparent environment for the generation and cross-border trade of electricity and natural gas. Full implementation of these rules was thwarted by the Argentine economic implosion in 2001–02. Once the market mechanism for determining energy prices is fully restored in Argentina, however, these regulations can finally be implemented in the Southern Cone. The fact that Bolivia and Venezuela are associate members of MERCOSUR provides further hope that both can eventually be incorporated into this framework as well. For its part, the Caribbean Common Market and Community (CARICOM) is establishing a common energy policy in conjunction with a proposed pipeline that will transport natural gas northwards from Trinidad and Tobago to Barbados, St. Lucia, Martinique, Dominica, and Guadalupe. In North America, the Security and Prosperity Partnership (SPP) calls for the design of a common policy framework for energy issues among Canada, Mexico, and the United States. Although a continental agreement to deregulate markets and freely permit the cross-border trade of energy resources is not imminent, the SPP does provide a framework to make that a reality should political conditions in Mexico change. A fully integrated hemispheric energy market under the umbrella of the Community of the Americas will facilitate inter-fuel substitution, thereby minimizing disruptions from droughts, for example, that may negatively impact hydrogenerated electricity and otherwise destabilize local energy prices. Furthermore, an integrated energy market with a common set of standards and harmonized regulations will permit access to a diversified range of resources found throughout the Western Hemisphere and establish opportunities for alternative energies by creating new economies of scale. One potential new input for biodiesel is the oil obtained from the seed of the jatropha curcas plant, which is native to Central and South America and the larger islands of the Caribbean. Jatropha curcas is a perennial that requires only moderate rainfall, adapts to a variety of soil types, including those low in nutrients, prevents erosion, and is less likely to compete


with agricultural lands for food production. Another source of biodiesel that is potentially abundant in tropical areas of the Americas is the oil produced from the nuts of palm trees. Although it requires more water and competes with land used in food production, palm nuts yield almost double the oil obtained from the jatropha curcas seed and have a lower energy input-higher output ratio balance than even sugar. An integrated Western Hemisphere energy market provides the United States the opportunity to dismantle its ruinous corn-based ethanol program that will cost U.S. taxpayers an estimated U.S.$9.2 to 11 billion in 2008 in subsidy programs. Ironically, the corn ethanol industry produces almost as much harmful carbon emissions than its inclusion as an additive to fuel was intended to reduce. It has also contributed to a jump in global food prices and led to riots in Haiti and Mexico, as well crowded out soybean production in the United States and pushed more of it to Brazil. This phenomenon, in turn, has led to more grazing land in Brazil being given over to soybean production, pushing cattle ranchers deeper into the Brazilian Amazon and resulting in further deforestation and a depletion of natural means to take carbon out of the atmosphere. Eliminating the complicated mix of subsidies, high tariffs of 2.5 percent ad valorem duty plus a surcharge of 14.7 cents per liter, and restrictive volume caps that currently protect the inefficient U.S. cornbased ethanol industry, will give U.S. consumers access to less costly and more efficiently produced sugar-based ethanol from Brazil.10 Central America and the Caribbean also have the potential to competitively produce sugar-based ethanol as well. The elimination of protectionist policies for corn-based ethanol in the United States will also enhance incentives to quickly develop more eco D. Koplow, Biofuels—At What Cost?: Government Support for Ethanol and Biodiesel United States 1 (Oct. 2007). Carbon emissions for the production of corn-based ethanol are particularly high because the harvesting of corn is heavily mechanized, whereas sugar and other inputs harvested for biodiesel in the developing world are still labor intensive. Corn also requires a larger amount of fertilizer made from petrochemicals and more carbon-generated energy is required to convert corn starch into a sucrose that can then be fermented into ethyl alcohol. By contrast, sugar requires less energy intensive steps to convert it into ethyl alcohol, and the energy expended for this conversion in Brazil is all renewable biomass (i.e., discarded sugar stalks, etc.). Furthermore, the amount of liters of ethanol generated by an acre of land planted with sugar is more than twice the volume generated from an acre planted with corn. See, e.g., J. Von Braun, The World Food Situation: New Driving Forces and Required Actions 6–9 (2007). The supply of corn increased 24 percent in the northern United States during 2007, primarily because of higher corn acreage (the highest since 1933). S. James, Food Fight, 31 Free Tade Bull. 2 (Jan. 31, 2008). As U.S. farmers have shifted production to meet a surging artificially induced demand for corn-based ethanol, the acreage devoted to soybeans has decreased by 16 percent respectively. Id. at 2. For 2008 preliminary forecasts indicated that one third of the U.S. corn crop is to be turned into vehicle fuel while the world’s poor are reeling from spiraling food prices, including a 78 percent rise in corn prices between August 2007 and May 2008. S. Johnson, Enthusiasm for Biofuels is Questioned, Fin. Times, May 5, 2008, at 18. 10 A liter of Brazilian ethanol made from sugar cane currently costs almost half the “real” cost to produce a liter of corn-based ethanol. In addition, corn-based ethanol yields about the same amount of energy as the fossil fuel needed to produce it. By contrast, in the case of sugar, the input-to-output ratio is about one to eight.

in the


friendly biofuels such as second-generation cellulosic ethanol made from grass that can grow on land unfit for food crops. Finally, an integrated energy market in the Western Hemisphere offers the possibility of establishing an effective “cap and trade” mechanism for reducing global greenhouse emissions that is less subject to abuse and fraud. Under the current Clean Development Mechanism (CDM) established under the Kyoto Protocol, credits can be issued to a developed country or its companies for financing projects in the developing world (e.g., building a more expensive thermal plant fueled by natural gas or a hydrodam to generate electricity instead of a cheaper coal powered plant) that reduces global greenhouse gas emissions and would not have been constructed but for the funding emanating from the rich country donor. The credits received through the CDM can then be used to offset mandated emission reduction targets at home. Research by two Stanford University Law professors in 2008, however, found that a large fraction of the credits generated under the UN-administered CDM did not, in fact, represent genuine reductions in emissions. Their report found that many reductions funneled through the CDM could have been accomplished at a far lower price through outright grants and/or that the issued credits did not result in a genuine reduction in emissions because they would have been built anyway.11 Although the United States never ratified the Kyoto Protocol that expires in 2012, both the Democratic and Republican candidates for the U.S. presidency in the November 2008 elections favored participation in a carbon “cap and trade” program that would include a CDM-like mechanism. This mechanism could be administered more effectively at the hemispheric level under the framework of a Community of the Americas. III. Leveraging the Precedent Set on Energy by the North American Free Trade Agreement and the North American Security and Prosperity Partnership The North America Free Trade Agreement (NAFTA) has had a direct impact on the energy sector by extending commitments made in the 1988 Canada-U.S. Free Trade Agreement prohibiting discriminatory export prices and export taxes on energy goods (including oil and natural gas) to include Mexico.12 11 See M. Wara & D.G. Victor, A Realistic Policy on International Carbon Offsets, (Apr. 2008) (Program on Energy and Sustainable Development Working Paper # 74), available at http://fsi.stanford.edu/publications/a_realistic_policy_on_international_carbon_offsets/. Another finding is that the CDM has perversely drawn developing countries into engaging in activities that result in greater emissions as a way of generating valuable CDM credits that can be offered to desperate firms from the developed world looking to obtain them for offset purposes. 12 See, e.g., J.R. Johnson, The North American Free Trade Agreement: A Comprehensive Guide 201 & 204–05 (1994). Following the 1973–74 OPEC oil embargo, the Canadian government established a domestic price for oil that was substantially below world market prices. Canadian oil exported to the United States, however, was sold at the international market rate. In addition, the Canadian government levied a tax on oil exported to the United States that was used to import oil from Venezuela at international prices but to sell it at a lower, subsidized cost in Quebec and Canada’s Maritime provinces. Id. at 200. Under NAFTA, these types of practices are strictly prohibited.


Canada and the United States are also required to maintain energy shipments to each other at the same proportion vis-à-vis domestic sales as during the preceding three years regardless of any global energy crisis that might otherwise interrupt international supplies.13 Furthermore, NAFTA Section 606(2) obligates the federal governments in Canada, Mexico, and the United States to “seek to ensure” that regulatory bodies within their national territory avoid disrupting contractual relationships when applying energy measures. Mexico specifically exempted itself from NAFTA provisions, otherwise applicable to Canada and the United States, which allow private or foreign participation in the exploration, production, and refining of oil and natural gas. On the other hand, Mexico permits limited participation in the transport and distribution of natural gas as well as in the generation, cross-border transmission, and sale of electricity by investors from Canada or the United States.14 In doing so, investors from Canada and the United States are protected by NAFTA’s investment provisions (including its separate dispute resolution mechanism). Similarly, the Multi-Service Contracts used by PEMEX since the late 1990s to attract private participation in its hydrocarbon industry, by paying private firms a set fee for defined exploration and drilling work, are subject to NAFTA’s government procurement provisions when the private firms are from Canada or the United States. Building on the precedent for trilateral cooperation established by NAFTA and its provisions affecting the energy sector, a North American Energy Working Group (NAEWG) was established in 2001 with mid-level officials (as opposed to cabinet-level representatives) from Canada, Mexico, and the United States. An ad hoc subgroup of experts was also established to advise the NAEWG on matters directly related to electricity, energy efficiency, and hydrocarbons in general, natural gas trade and inter-connections, nuclear power, oil sands, energy regulation, science and technology, and to collect statistics. The primary goal of the NAEWG was to enhance the sharing of information among the three governments so as to improve cross-border trade in energy. Although the NAEWG established agreements on conservation programs and efficiency targets for a variety of equipment and appliances, some observers feel that its effectiveness was undermined by excessive secrecy and a generalized failure to reach out to include the input of private sector companies.15 13 Id at 114–15 and 206. From 1973 to 1980 Canadian exports of crude oil to the United States were significantly reduced without any domestic cutbacks. Id. at 206. As a result of NAFTA, Canada would only be allowed to reduce shipments to the United States in proportion to domestic cutbacks. Accordingly, while the proportionality obligation ensures some level of access to cross-border energy resources, it does not guarantee an uninterrupted level of supply. Mexico specifically exempted itself in NAFTA from even making a proportionality commitment with respect to trade in energy and basic petrochemical goods with either Canada or the United States. 14 Id. at 312–13. In general, the generation of electricity by foreign investors must be for their own use (with any excess sold to the Mexican state electricity monopoly (CFE)), as part of a co-generation arrangement with CFE, or strictly for export. Interestingly, the exploitation of radioactive minerals and the generation of nuclear energy in Mexico are reserved for the state. Id. at 312. 15 Dukert, supra note 3, at 134 and 152.


In 2005 the heads of state of Canada, Mexico and the United States met in Waco, Texas, and launched the SPP. The NAEWG was folded into the SPP as its working group on energy issues and is now headed by senior-level officials with responsibility for their nation’s energy portfolio. Other working groups under the SPP handle issues related to business facilitation, electronic commerce, the environment, financial services, food and agriculture, manufactured goods, rules of origin, and transportation. In response to the criticism leveled at the old NAEWG, the working groups under the SPP are required to regularly consult “stakeholders” that include state and provincial government officials, the private sector, and non-governmental organizations. To date, the NAEWG operating under the SPP umbrella, has been most successful in developing an adequate system of receiving facilities for Liquefied Natural Gas (LNG) and supporting infrastructure for LNG distribution in regasified form, and harmonizing rules for licensing, issuance of permits, and oversight in the energy sector.16 The SPP mandate for designing a common policy framework for energy issues in North America is, however, currently blocked by internal political constraints in Mexico that have prevented the federal government from opening its hydrocarbons sector to private enterprise or eliminating price controls that subsidize consumer petroleum purchases.17 IV. Bringing MERCOSUR and CARICOM on Board MERCOSUR’s largest member, Brazil, has been perceived by some in the United Stares as the key impediment to the creation of an FTAA. The reality, however, is that Brazil has always sought to obtain two key concessions from the United States in the FTAA that has eluded it in the multilateral context. One goal involves getting the United States to reduce and eventually eliminate domestic agricultural support payments and subsidized agricultural exports as well as to restrict the use of tariff peaks. A second goal has been to eliminate the ability of the United States to apply antidumping duties on competitive Brazilian exports. The U.S. government’s insistence that both issues can only be negotiated at the WTO contributed to the stagnation of the FTAA process after 2003 and focused Brazilian attention on obtaining these concessions in the Doha Round. A Doha Round that concludes with a multilateral trade agreement that initiates the process of dismantling the complex and expensive agricultural subsidy programs used primarily by the developed world should permit a revival of talks aimed at establishing a hemispheric free trade area. Although an agreement at the WTO on severely restricting the use of antidumping Id. at 152–53. Recent Mexican presidents have not been able to amend Mexico’s Constitution, which puts ownership of the country’s hydrocarbons exclusively in the Mexican nation since the petroleum industry was nationalized in 1938. To pass a constitutional amendment requires two thirds of the votes of the federal Congress as well as a two-thirds vote in each of the state legislatures. I. Morales, The Politics of Energy Markets in North America, in Requiem or Revival?, supra note 4, at 226. Efforts to get around constitutional restrictions by permitting joint ventures or strategic alliances with private sector companies have been systematically blocked as well. 16 17


remedies is implausible, it is doubtful this issue will remain as contentious as it previously was in the FTAA negotiations. This is because Brazilian industries that historically were most negatively affected by U.S. antidumping tariffs have simply acquired U.S. subsidiaries in recent years and now supply the U.S. market from within the country.18 Accordingly, Brasilia is likely compromise on the antidumping issue by accepting a procedure similar to one that now exists within MERCOSUR and requires government-to-government consultations before an unfair trade investigation is initiated but does not place a blanket prohibition on the use of antidumping duties. A collapse of the Doha Round without any agreement (including on the crucial agricultural subsidy issue) also provides a strong incentive to restart talks for a hemispheric free trade area. Brazil is unlikely to sabotage a free trade agreement that includes the United States by insisting that it receive substantial concessions on agricultural subsidies, so long as the United States carries through on its long-stated willingness to curtail its agricultural export subsidy programs within the context of an FTAA. Although Brazil often appears as the chief proponent for eliminating agricultural subsidies at both the multilateral and hemispheric level, the reality is that this issue is more of an imperative for its MERCOSUR partner, Argentina, which historically had little but agricultural commodities to offer the international market on a genuinely competitive basis. Up to now, Brasilia has spearheaded the issue because it is also in its interest, and it provides a way of preserving MERCOSUR unity and appearing as a regional leader on the international stage. However, the Lula administration has repeatedly shown itself to be pragmatic and will not let agricultural subsidies sacrifice an agreement that will allow Brazil to expand non-traditional, manufactured exports to North American markets and obtain new inflows of foreign direct investment. In addition, the explosion in Chinese and Indian demand for Brazilian agricultural products over the last few years diminishes the detrimental impact of U.S. agricultural subsidies and tariff peaks. Brazil now has alternative markets for its output beyond Europe and North America, and this trend does not appear in danger of being reversed. Finally, MERCOSUR unity is enhanced by any Brazilian decision to negotiate a hemispheric free trade agreement as part of the Southern Cone bloc, given that Paraguay and Uruguay would strongly support such an accord. The government in Buenos Aires may also find it worthwhile to support such an agreement, even without any concessions on agricultural subsidies. The huge growth in Argentine agro-based exports to Asia has defused the subsidies issue for Buenos 18 For example, the 1996 purchase by Brazilian based Cutrale, the world’s largest producer of orange concentrate, of two Minute Maid facilities in Florida and the 1999 acquisition of Ameristeel by the Brazilian steel manufacturer Gerdau S.A. Gerdau’s buying spree in the United States has continued, including Chaparral Steel and Quanex Corporation in 2007. In 2008, Gerdau-Ameristeel increased its stake in Pacific Coast Steel to 84 percent. Another Brazilian steel firm, Companhia Siderúgica Nacional (CSN), has acquired small- and medium-sized .US. companies in order to process and distribute its steel products locally. Meanwhile Brazil’s JBS, the world’s biggest beef producer, acquired U.S.-based Smithfield Beef Group and National Beef Packing Company in 2008 to become the largest beef producer in the U.S. market.


Aires as well, and the sharp devaluation of the Argentine peso in 2002 has made certain service providers based in Argentina (particularly call centers) more competitive internationally. Accordingly, the latter will undoubtedly emerge as an important new domestic constituency group in Argentina advocating for a hemispheric free trade agreement. During the course of the FTAA negotiations, CARICOM emerged as a strong advocate of “special and differential treatment” to overcome perceived vulnerabilities arising from the particularly small size of the economies of many of its member states and susceptibility to natural disasters. By the time the FTAA negotiations collapsed at the end of 2003, it became clear that “special and differential treatment” was defined by many CARICOM governments as permanent, non-reciprocal exceptions to obligations otherwise imposed on the other negotiating countries. Since then the tiny mini-states of the Eastern Caribbean have repeatedly expressed opposition to any type of bilateral free trade agreement between CARICOM and the United States or Canada as an alternative to the FTAA. Despite already enjoying duty-free access to the Canadian and U.S. markets, the bigger CARICOM states are amenable to a hemispheric free trade agreement that includes the cross-border movement of skilled persons and service providers. Many Caribbean nations have an excess of professionals and skilled workers that they can temporarily “export” to Canada and the United States in order to ensure a steady return flow of remittances. Liberalization of the services sector would also enhance the ability of Caribbean countries to attract foreign direct investment so as to offer cross-border educational and medical services. The technical assistance Brazil currently provides to St. Kitts and Nevis offers the possibility of allowing the Eastern Caribbean to participate in the potentially lucrative export trade in sugar-based ethanol.19 Another practical way to deal with the potential obstructionism of Eastern Caribbean states to a hemispheric free trade area would be to exempt them from compliance with certain obligations otherwise incumbent on the bigger CARICOM countries.20

19 In March 2007 the United States and Brazil signed a Memorandum of Understanding to Advance Cooperation on Biofuels that, inter alia, calls for both governments to work jointly to bring the benefits of biofuels to select countries in the Caribbean and Central America by providing technical assistance aimed at stimulating private sector investment in the local production of biofuels. The United States and Brazil selected the Dominican Republic, El Salvador, Haiti, and St. Kitts and Nevis as the first countries to receive support for establishing sustainable sugar based ethanol programs. 20 Such a strategy will also be required to convince the Bahamas to participate in a hemispheric free trade area. Most Bahamians have always been highly skeptical of the benefits their country could achieve through any hemispheric free trade accord. More than 80 percent of the country’s imports (i.e., nearly all its food and manufactured goods) come from the United States, and the government is highly dependent on import duties for revenue. While an income and sales tax are alternatives to import duties, their implementation is strongly resisted by most Bahamians. In addition, there are concerns that a hemispheric free trade agreement will impose more stringent transparency standards on the country’s lucrative offshore banking and insurance sectors.


V. Using Current Regional Economic Integration Projects as the Building Blocks for the Community of the Americas Current regional economic integration projects throughout the Western Hemisphere provide a solid foundation upon which to rest the energy security pillar of the proposed Community of the Americas. In addition, there is a more realistic chance that the underlying premise of the SPP with respect to energy (currently limited to the NAFTA countries) will achieve its goals if it is extended to encompass the entire Western Hemisphere. Although some of the same bottlenecks that exist in Mexico are currently found in a few South American countries (namely Argentina, Bolivia, and Venezuela), there are many other countries that would be receptive to the type of energy security that Canada and the United States envision for the SPP. This is true of Brazil, Colombia, Trinidad and Tobago, and potentially Peru. Argentina and Ecuador could eventually be drawn into an integrated hemispheric energy policy framework for lack of a credible alternative. Certainly the majority of the remaining nonfossil fuel producers in Central America, the Caribbean, plus Chile, Paraguay, and Uruguay—some of which can potentially become significant suppliers of alternative energy inputs—would be receptive to a strategy that seeks to establish market-based incentives for developing conventional and non-conventional sources of energy and a common regulatory framework to make that regional energy market function smoothly. In addition to energy, economic integration projects throughout the Western Hemisphere have also advanced the work needed to establish a hemispheric free trade area in goods and services, the free movement of investment capital and service providers, the protection of intellectual property rights, and government procurement. Activating the most-favored nation (MFN) clause in each of the existing subregional economic integration projects and thereby mutually extending the same preferential market access provisions to all 35 countries in the Western Hemisphere, will create a de facto hemispheric free trade area. For that to have practical effect, however, it will also be necessary to harmonize the requirements that exist in each of these existing subregional projects in crucial areas such as rules of origin, technical norms, as well as the use of sanitary and phytosanitary measures. Furthermore, it will be necessary to harmonize conflicting rules that may exist with respect to competition policy, cross-border trade in services, government procurement, intellectual property rights, and investment. In addition, an institutional framework will have to be set up to oversee implementation of a hemispheric free trade area, including the creation of an effective system for dispute resolution. One thing that will greatly facilitate the previously discussed harmonization effort is the fact that Bolivia, Canada, Central America, Chile, Colombia, the Dominican Republic, Mexico, and Peru have already negotiated free trade agreements that contain key provisions resembling the NAFTA template. In addition, many of the subregional integration projects such as the Andean Community, CARICOM, and MERCOSUR have, since the FTAA negotiations were formally launched in 1998, adopted common disciplines on trade


in services and government procurement that did not exist a decade ago. Furthermore, CARICOM has already adopted a mechanism for the free movement of skilled workers and service providers among member states. For their part, the Southern Cone countries have developed practical solutions for legalizing the presence of undocumented workers and their dependents. MERCOSUR also has a network of programs to improve education and ensure that smaller enterprises and historically marginalized regions are better able to partake of the opportunities provided by regional economic integration. In terms of energy, transportation, and telecommunications infrastructure that will need to be implemented in order to insure that a wide cross-section of the population throughout the Americas are able to benefit from a Western Hemisphere free trade area, the South American countries have already identified over 500 projects under the Initiative for the Integration of Regional Infrastructure in South America (IIRSA) that was launched in 2000. At least 31 projects at a total cost of U.S.$6.9 billion are already finished or are in the process of being completed before a 2010 deadline. The Plan Puebla-Panamá fulfills a similar role in Central America and is already responsible for a fully integrated electricity grid that runs along the entire length of the Central American isthmus. The Union of South American Nations (UNASUR) that was formally launched in May 2008 has the potential to play a crucial role in facilitating the establishment of a Community of the Americas. UNASUR seeks to integrate the entire South American continent at the political, social, cultural, economic, financial, environmental, and infrastructure level. In many ways, it is a response to the overly commercial emphasis of the FTAA and offers a uniquely South American approach to integration that can overcome current differences in the types of political and economic policies being pursued in individual countries. One notable achievement about UNASUR is that it incorporates Guyana and Suriname, which historically were excluded from previous efforts at continental integration and cooperation. If UNASUR succeeds in genuinely integrating the South American continent, it will have created the fifth largest economic power in the world. Among South America’s many other attributes are its huge hydrocarbon reserves that can comfortably supply its current energy needs for the rest of this century, its huge fresh water supplies (i.e., 27 percent of the world’s fresh water supplies), and the fact that it produces and exports more foodstuffs than any other part of the world. UNASUR was first proposed at a meeting of the South American heads of state in Cuzco in December 2004. UNASUR’s intellectual author is Brazil, which was also the primary promoter of the IIRSA and has lobbied for a South American Free Trade Area (SAFTA) as far back as the mid-1990s. Since 2005 the Secretariats of the Latin American Integration Association (ALADI), MERCOSUR, the Andean Community, and CARICOM have been examining ways to create a South American free trade agreement through convergence of existing subregional free trade agreements and bilateral preferential market access accords. UNASUR is closely linked with the IIRSA initiative and is keen on enhanced energy security. One concrete result of UNASUR has been the


elimination of the use of passports and visa requirements for nationals of one South American country to travel to any other. Quick implementation of this proposal was facilitated by the fact that nationals of countries participating in the various regional economic integration processes such as the Andean Community and MERCOSUR have long been allowed to travel among the participating states with only a national identification card. Although UNASUR can be characterized, up to now, as more of a “talk shop,” it does provide a means of achieving continental consensus on potentially contentious issues that will be necessary for a more ambitious effort to economically integrate the entire Western Hemisphere. The fact that two CARICOM countries are also involved means that UNASUR can serve as a way to incorporate the Caribbean nations into that continental consensus as well. There are two concrete examples where UNASUR has already played an important role in forging a continental consensus. One was in terms of relations with the Middle East (i.e., Summit of South America and Arab countries held in Brasilia in April 2005) and the second with Africa (i.e., South America-Africa Summit held in Nigeria in November 2006). There is no reason why UNASUR cannot be used to forge a continental consensus with respect to North America in the context of creating a Community of the Americas. VI. Effective Enforcement of Legislation to Protect Basic Labor Rights and the Environment The protection offered workers and the environment in most Latin American countries is found at both the national and regional level. For example, the Andean Community has extensive legislation that requires member governments to protect the rights of workers and their dependents of another Andean country that may find themselves within their territory. There are also Andean Community norms that regulate the importation and use of chemical pesticides within the territory of all the member states. There are currently four Central American conventions in force that are designed to protect the environment of the six countries on the isthmus. MERCOSUR has extensive legislation regulating the cross-border movement of hazardous wastes and a mechanism for facilitating regional cooperation in response to environmental emergencies. In many ways, the legal protections—on paper at least—afforded to workers in Latin America and the Caribbean are much more extensive than those provided to workers in the United States at both the federal and state level. The main problem in Latin America with respect to protection of labor rights has historically been in terms of enforcement. By contrast, the situation with respect to the environment in both Latin America and the Caribbean is as much an absence of legislation as inadequate enforcement. The two side agreements to NAFTA on labor and the environment attempted to overcome the shortcomings in enforcement and/or lack of legislation in the signatory states by finely balancing respect for national sovereignty and pressuring governments to effectively enforce their own labor and environmental legislation. As implied by their respective names, the North American Agreement


on Labor Cooperation and the North American Agreement on Environmental Cooperation put a strong emphasis on facilitating the exchange of information so as to forge mutually acceptable means of ensuring adequate enforcement of labor and environmental laws in Canada, Mexico, and the United States. The North American Agreement on Labor Cooperation called for the establishment of national administrative offices attached to the labor ministries or departments in each country to process complaints of non-enforcement of each country’s labor laws. These offices are required to jointly review and discuss a complaint, conduct joint hearings and investigations when there is a basis to a complaint, and publish a joint report making recommendations to resolve problems. If a complaint cannot be resolved at this stage, it will be forwarded to a second level that consists of a council made up of the labor minister or secretary from each country that issues a set of recommendations based on consensus. Apart from its dispute resolution function, the council also promotes the collection of data on labor markets, standards, and enforcement as well tri-lateral cooperation to improve occupational health and safety standards, and protect the rights of migrant workers. At the fourth level of the dispute resolution mechanism, which involves arbitration, the arbitrators only issue a plan of action with recommendations to resolve the problem and not a binding decision. This again allows the countries to mutually fashion a means for resolving the matter that can wholly or partially include elements of the recommendations made by the arbitrators. For its part, the supplementary North American Agreement on Environmental Cooperation to NAFTA established a Commission for Environmental Cooperation comprised of a Secretariat, a Council, and a 15-member Joint Public Advisory Committee attached to the council.21 The Council is made up of cabinet-level representatives from each country responsible for environmental matters. The Secretariat, which has branches in each of the three countries, reviews the initial complaints of non-compliance with domestic environmental laws to determine if there is any merit to the allegation(s). If the Secretariat determines there is and a majority on the Council assent, the Secretariat will then prepare a factual record. Once the factual record is established, the Council decides by consensus whether to order the publication of the Secretariat’s report and release it to the public. Independent of its dispute resolution functions, the Council promotes the exchange of information on criteria and methodology used to establish environmental standards and encourages the harmonization of environmental technical regulations, standards, and conformity assessment procedures. The arbitration panel that represents the third level for handling a complaint 21 In conjunction with the Side Agreement on the Environment, a North American Development Bank (NADBank) was created to invest in environmental infrastructure along the heavily polluted Mexican-U.S. border. Unfortunately, the NADBank has been woefully under funded since its inception and is plagued by a policy that it loan money at non-competitive interest rates. To date, the NADBank only has U.S.$450 million in capital, compared with World Bank estimates that a U.S.$25 billion infusion is required annually over a ten-year period for Mexico to modernize its sagging infrastructure. Studer, Obstacles to Integration: NAFTA’s Institutional Weakness, in Requiem or Revival?, supra note 4, at 62. This has caused some observers to label it the NADA (Spanish for nothing) Bank.


arising from a continuing pattern of non-enforcement of environmental laws not resolved at an earlier stage can only recommend a plan of action that the disputing countries are free to accept or modify. Under both the labor and environmental side agreements to NAFTA the right of a government to impose a monetary fine based on a percentage of the total traded with the non-complying country is limited to situations where that country refuses to implement a consensually forged plan of action to address shortcomings in enforcement of domestic legislation. A failure to pay that fine then allows the complaining government(s) to suspend NAFTA benefits, but only to the extent of the value of the fine. In response to critics who charged that the NAFTA side agreements on labor and the environment were ineffective, the U.S.-Central America and Dominican Republic Free Trade Agreement (CAFTA-DR) brought the issue of labor and the environment into the text of the treaty itself. In the specific case of labor, CAFTA-DR also established a Labor Cooperation and Capacity Building Mechanism to develop model legislation and fortify each country’s institutional capacity to protect labor rights, including the strengthening of labor inspection systems and labor courts. An Environmental Cooperation Agreement was also signed in conjunction with CAFTA-DR to develop joint activities to protect the environment. In a major departure from the NAFTA approach, Article 16.6(7) of CAFTA-DR permits recourse to the regular dispute resolution system whenever a government fails to effectively enforce five internationally recognized labor rights in a sustained or recurring manner that affects trade flows.22 However, as a pre-condition, Article 16.6(8) requires that the relevant governments first try to resolve the dispute using the consultative process established in Chapter 16. A similar procedure permitting recourse to the regular dispute resolution system is authorized under Chapter 17 of CAFTA-DR whenever a government fails to effectively enforce its environmental laws in a sustained or recurring manner that affects trade flows. Failure to reach a mutual agreement on implementing the recommendations made by an arbitration panel under the regular dispute resolution mechanism or failure to implement a mutually agreed upon action plan allows the complaining party(ies) to request that an annual monetary assessment be imposed on the recalcitrant government. The money collected by the complaining government(s) should then be used to fund a program to resolve the deficiencies in the recalcitrant country. Only if the fine is not paid, can the complaining government(s) take other appropriate steps to secure compliance such as suspending tariff benefits granted under CAFTA-DR. As a result of the Democrats gaining control of both the U.S. Senate and the House of Representatives following the November 2006 elections, the Bush administration was forced by the Democratic-controlled Congress to 22 These five labor obligations are defined in Article 16.8 of CAFTA-DR to include: (1) the right to association, (2) the right to organize and bargain collectively, (3) a prohibition on the use of any form of forced or compulsory labor (4) a minimum age for the employment of children and the prohibition and elimination of the worst forms of child labor, and (5) acceptable conditions of work with respect to payment of minimum wages, hours of work, and occupational safety and health.


establish new ground rules in order to obtain support for ratification of the Panama-U.S. and Peru-U.S. Free Trade Agreements. Among the innovations in the labor area, governments will now be required to implement and enforce five International Labor Organization (ILO) standards listed in the 1998 Declaration of Fundamental Principles and Rights at Work23 and cannot excuse lack of enforcement because of resource limitations or decisions to prioritize other labor enforcement activities.24 Disputes arising from the failure to persistently enforce the five ILO labor standards as well as acceptable conditions of work with respect to payment of minimum wages, hours of work, and occupational health and safety in a manner affecting trade and investment flows, can eventually be referred to the regular dispute resolution system. As for the environmental sector, all governments must now implement (if they have not already done so) and enforce seven multilateral environmental agreements (and any other conventions the governments may mutually agree to add in the future).25 There is also an obligation on the part of governments not to undermine the provisions of any of these environmental agreements by utilizing other provisions in the free trade agreement itself as justification. Disputes arising from the failure to effectively enforce environmental legislation can be referred to the normal dispute resolution mechanism. The new trade principles established by the U.S. Congress and the White House in May 2007 required the Office of the United States Trade Representative to renegotiate with its Peruvian counterparts elements of the Peru-U.S. Free Trade Agreement that was originally signed by both countries in April 2006. Anxious to get the trade pact ratified by the U.S. Congress as quickly as possible, the newly elected president of Peru, Alan Garcia, acquiesced by, inter alia, enacting changes to Peru’s labor code through executive decrees and also addressing intellectual property concerns.26 In addition, Peru is required to 23 The five core ILO standards include: (1) freedom of association, (2) the effective recognition of the right to collective bargaining, (3) the elimination of all forms of forced or compulsory labor, (4) the effective abolition of child labor and a prohibition on the worst forms of child labor, and (5) the elimination of discrimination in respect of employment and occupation. The first four are the same labor rights whose persistent failure to enforce them can, if they impact trade flows, eventually lead to the imposition of a fine in the context of CAFTA-DR. The only real innovation over what already existed in CAFTA-DR is the addition of the elimination of discrimination in respect of employment and occupation. Furthermore, a complaining government can suspend equivalent benefits granted under the Peru-U.S. Free Trade Agreement if another government refuses to abide by a mutually agreed upon plan of action recommended by an arbitration panel, and is not initially limited to imposing a fine (as in CAFTA-DR). 24 By contrast, pursuant to Article 16.2(b) of CAFTA-DR, each signatory government retained “the right to exercise discretion with respect to investigatory, prosecutorial, regulatory and compliance matters and to make decisions regarding the allocation of resources to enforcement” with respect to other labor matters determined to have higher priorities.” 25 The seven multilateral environment agreements include the: (1) Convention on International Trade in Endangered Species; (2) Montreal Protocol on Ozone Depleting Substances; (3) International Convention for the Prevention of Pollution from Ships and the Protocol of 1978; (4) Inter-American Tropical Tuna Convention; (5) Ramsar Convention on the Wetlands; (6) International Convention for the Regulation of Whaling; and (7) Convention on Conservation of Antarctic Marine Living Resources. 26 The changes demanded by the Democratic majority in Congress with respect to intel-


take major specific steps within 18 months after the free trade agreement enters into force to crack down on all illegal logging, including increasing the number and effectiveness of enforcement personnel, providing for criminal and civil liability at an adequate deterrent level, conducting a comprehensive inventory of tree species listed in an appendix of the Convention on International Trade in Endangered Species of Wild Fauna and Flora,27 and establishing an annual export quota for big leaf mahogany. Furthermore, Peru is required to conduct periodic audits of producers and exporters of timber products shipped to the United States, including special audits of specific producers or exporters as per the request of the United States. The U.S. government can ask to have its personnel accompany Peruvian government officials making on-site visits to a specific producer or exporter in order to verify compliance with applicable Peruvian laws and regulations governing the harvest and trade in timber products. If Peru turns down that request, the United States may deny entry to any shipment from a producer and/or exporter that is the subject of a verification request. The United States may also prevent entry into its territory of a shipment made by a producer and/or exporter that is undergoing a verification audit until the procedure is completed and a final determination has been made. Although originally ratified by the Peruvian Congress in June 2006, the revisions to the original text of the Peru-U.S. Free Trade Agreement was approved by the Peruvian Congress in June 2007. The U.S. House of Representatives ratified the free trade agreement with Peru in November 2007, followed by the U.S. Senate a month later. Governments in Latin America and the Caribbean have repeatedly raised concerns about including provisions for the enforcement of labor and environmental laws within the text of a trade agreement because any alleged failure to comply with these obligations could result in the imposition of sanctions on their exports. The fear is that these sanctions could be misused for protectionist ends that have little to do with a genuine concern in protecting labor rights and the environment. Given how U.S. unfair trade practice laws have long been abused by obsolete industries to protect themselves from legitimate foreign competition, this worry is not unwarranted. Furthermore, countries in Latin America and the Caribbean have a long experience with U.S. intervention in their internal affairs (including repeated invasions and the loss of national territory in some cases)—hence the reason governments in the region have a heightened concern for the protection of national sovereignty. The side agreements on labor and the environment in NAFTA respected those sensitivities by not forcing the signatory governments to harmonize labor and lectual property included reducing the period of time in which a generic manufacturer may not use clinical test data of the manufacturer who held the original pharmaceutical patent in order to allow generics to enter the market more quickly; eliminating the requirement that a drug regulatory agency withhold approval of a generic until it can certify that no patent would be violated if the generic were marketed; and, eliminating a requirement that a government must extend the term of a patent on pharmaceutical products for delays in the original patent and regulatory approval process. 27 Convention on International Trade in Endangered Species of Wild Fauna and Flora, available at http://www.cites.org.


environmental laws or permitting the imposition of trade sanctions in direct response to a failure to enforce that legislation. The free trade agreements that the United States has negotiated with Latin American countries since NAFTA have gone further in attempting to highlight the importance attached to the effective enforcement of domestic labor and environmental laws. The PeruU.S. Free Trade Agreement actually requires that the signatory states adhere to particular international labor and environmental standards, and make the necessary changes to domestic law. In many ways this is simply putting labor and environmental protection on the same level as intellectual property rights. Beginning with NAFTA, all free trade agreements that the United States has signed include requirements that signatory governments adopt and effectively enforce certain international intellectual property conventions and make changes in domestic law and procedures to enforce intellectual property rights (including by customs officials at border posts). One thing that the most recent free trade agreements that the United States has signed with Latin American countries have not done is to permit the use of trade sanctions in direct response to a finding that a country has failed to adequately enforce its environmental and labor laws. While suspending benefits granted under the trade agreements is the ultimate sanction that can eventually be used by a complaining government, it is restricted to situations where a government blatantly refuses to implement an action plan that it has had a hand in crafting and after it has been afforded an opportunity to correct its non-compliance. The recent agreements have also emphasized that labor and environmental provisions are not intended to violate or undermine national sovereignty. For example, Article 17.3(2) of the Peru-U.S. Free Trade Agreement states that “[n]othing in this Chapter shall be construed to empower a Party’s authorities to undertake labor law enforcement activities in the territory of another Party.” A similar provision is found in Article 18.3(5) with respect to environmental law enforcement activities. Furthermore, as per Article 17.6(1), the Labor Cooperation and Capacity Building Mechanism (an institutional devise borrowed from the CAFTA-DR) must “operate in a manner that respects each Party’s law and sovereignty.” Accordingly, legitimate Latin American concerns about respecting national sovereignty have, for the most part, been preserved.28 Despite the fact that protecting labor and environmental rights have now been given the same importance as previously existed for the protection of intellectual property rights in NAFTA, the continued opposition to free trade accords by some U.S. labor rights advocates and environmentalists is perplexing 28 An erosion of the sovereignty principle is most evident, however, in the requirement found in the Peru-U.S. Free Trade Agreement that allows the United States to prevent the importation of Peruvian timber products when Lima has turned down a U.S. government request to have its personnel accompany Peruvian officials on an inspection visit for verification purposes within Peru. Likewise, stripping governments of prosecutorial discretion on what labor laws to prioritize in terms of enforcement activities based on resource constraints—as found in the Peru-U.S. Free Trade Agreement—opens the door to foreign interference in what is fundamentally a domestic matter.


given that these agreements often provide the most effective way to ensure compliance with what these activists seek. For example, Section 5 of Annex 16.5 to CAFTA-DR states that with respect to the Labor Cooperation and Capacity Building Mechanism, “in identifying areas for labor cooperation and capacity building, and in carrying out cooperative activities, [the governments] shall consider the views of its workers and employer representatives, as well as those of other members of the public.” For its part, Article 17.4(1)(a)(i) of CAFTADR encourages governments to use mechanisms that facilitate voluntary action to protect and enhance the environment, including “partnerships involving businesses, local communities, non-governmental organizations, government agencies, or scientific organizations.” Accordingly, in both the labor and environmental arenas, an opportunity has been offered for meaningful input and participation from organized labor and environmental non-governmental organizations. VII. Cross-Border Migration Mexico’s effort to include the topic of cross-border migration in NAFTA was firmly rebuffed by the United States. With the exception of a new visa category created for a limited number of Mexican businesspersons, service providers and their employees, NAFTA ignored the immigration issue. Subsequent free trade agreements that the United States has negotiated with other countries in the Western Hemisphere have followed a similar pattern. The Chile-U.S. Free Trade Agreement, for example, also offers a category of visas with a numerical cap for Chilean businesspeople, service providers, and their employees to temporarily enter the United States. Even this type of limited opening is omitted in CAFTA-DR and the free trade agreements the United States negotiated with Colombia, Panama, and Peru. Although regulating the cross-border movement of workers should be an intricate part of any effort to economically integrate the economies of different countries, the political leadership in the United States has consistently preferred to avoid the potential domestic controversy associated with cross-border migration and pretend the matter will just disappear or resolve itself without government regulation. The presence of an estimated 12 million undocumented workers and their families in the United States, most of them from the Western Hemisphere, belies that this approach has been an abject failure. In this regard, the establishment of a Community of the Americas provides an appropriate vehicle for devising an enlightened system to regulate the cross-border movement of workers within the Western Hemisphere. As already indicated, CARICOM is the regional economic integration process that has gone the furthest in actually implementing a mechanism that permits skilled workers and university graduates who are CARICOM nationals to freely move and seek employment in any member state. There is also a Double Taxation Agreement that prevents self-employed professionals from having to pay income tax more than once to different CARICOM jurisdictions and another on mutual recognition of social security payments within CARICOM for purposes of vesting and the collection of social security benefits.


Since 2001, the Andean Community countries have been obligated to harmonize their respective immigration laws as a way to facilitate the cross-border movement of their respective nationals within the Andean region. There are also mandates to liberalize the movement of workers among the different member states and to guarantee respect for certain basic human and labor rights, including the right to form labor unions and bargain collectively. Furthermore, the Andean governments must provide a mechanism for legalizing the presence within their territory of any undocumented worker from another member country. All Andean workers and their dependents that find themselves in the territory of any member state not their own are entitled to access locally available social security benefits. Payments into a social security fund in one Andean country will be recognized for purposes of vesting by the system that ultimately pays out the benefits. MERCOSUR has had a multilateral agreement on social security since 1997 (although it did not come into force until 2005). As a result of this accord, most workers and their dependents from any MERCOSUR country that legally find themselves in the territory of another have the same rights and obligations as if they were nationals. This includes making mandatory contributions to the local social security fund and having those payments recognized for the subsequent vesting of pensions, disability, or survivor death benefits. A national from any MERCOSUR country can also access those vested benefits in any country within the bloc where they may happen to reside. Furthermore, MERCOSUR and its associate members Bolivia and Chile have developed practical solutions for legalizing the presence of undocumented workers and their dependents from any of the six countries that may find themselves within their respective territories. In particular, a national from one of the six countries residing or who desires to live in the territory of any other has the right to seek legal residency in that country. If an individual desiring to change his or her residency status is already in the other country, they may do so there without the need to return home or travel to a third nation. These rights even extend to family members who may not even be nationals of the four MERCOUR countries, Bolivia, or Chile. VIII. Conclusion When the FTAA negotiations were formally launched in the 1990s, there was a widespread view among political elites throughout the Western Hemisphere that the elimination of tariffs and non-tariff barriers on cross-border trade in goods and services would automatically lead to economic development. Reflective of this type of thinking was the statement in the Declaration of Principles issued by the heads of state of the 34 countries attending the first Summit of the Americas in Miami in December 1994 that asserted “[f]ree trade and increased economic integration are key factors for raising standards of living, improving the working conditions of people in the Americas, and better protecting the environment.”29 Successive U.S. administrations have 29 The full text of the Declaration of Principles Signed by the Heads of State and Government Participating in the First Summit of the Americas, Miami, Florida, December 9–11, 1994, is available through the official Web site of the Free Trade Area of the Americas, at http://www.summit-americas.org/miamidec.htm.


used the catch phrase “trade not aid” to peddle free trade agreements as a quick and easy route to boosting economic growth in developing countries and downplayed more traditional forms of long-term development assistance that target improvements in human capital capacity and physical infrastructure. That facile view is no longer persuasive as the decade and half experience of NAFTA itself amply demonstrates. Although NAFTA did encourage an expansion in export-oriented manufacturing and in labor-intensive horticulture in Mexico, it also devastated the traditional agricultural sector.30 This devastation was a result of Mexican government failure to improve agricultural efficiency or adequately protect its vulnerable corn producers against unfair competition from subsidized U.S. production. The negative impact on traditional agriculture, when coupled with repeated failures on the part of the Mexican government to adopt muchneeded education, energy, labor, and tax reforms, and streamline bureaucratic procedures for establishing new businesses, has meant that new job growth has not kept up with the number of Mexicans annually entering the labor force. More troubling, real wages in Mexico are lower today than when NAFTA took effect.31 Successive Mexican governments have also shown a remarkable reluctance to enforce antitrust laws that foster genuine competition. In Chile, the country often held up as a paragon of free trade for other developing countries to emulate, income inequality has expanded dramatically in recent decades so that it now ranks not far behind world champions Brazil and Guatemala in terms of inequitable distribution of national wealth.32 Unlike Brazil or Guatemala, however, it is difficult to point the finger at a bloated bureaucracy, corruption, excessive government red tape, ineffectual public

30 See, e.g., S. Polaski, Jobs, Wages, and Household Income, in NAFTA’S Promise and Reality: Lessons from Mexico for the Hemisphere 11–26 (J. Audley et al. eds., 2004). The overall reality during the NAFTA years has been one of strong growth in the volume of manufactured exports but very disappointing growth in manufactured employment. One factor that may partially explain this phenomenon is that export manufacturing in Mexico is increasingly based on a production model in which inputs are imported for assembly or processing and reexported, limiting the spillover effects on the broader economy and the local labor market. Id. at 16. Between 1993 and 2002, Mexico experienced a loss of 1.3 million jobs in the agricultural sector. Id. at 17 and 20. 31 Id. at 24. This decrease is the result of the sharp devaluation of the Mexican peso in 1994, rather than NAFTA, as the cost of imported goods and the rate of inflation shot up, while wages were constrained by the government’s monetary and wage-setting policies. While NAFTA did not cause the setbacks in Mexican wages, “it is striking that a free-trade agreement that dramatically increased exports and foreign direct investment has not done more to increase wages and living standards for average Mexican workers—or even for workers in most export firms—relative to pre-NAFTA levels.” Id. at 24. 32 Latin America and the Caribbean is the region with the most unequal income distribution in the world. This income inequality is linked to the unequal distribution of human and physical assets and differential access to key markets and services. Inter-American Development Bank, Outsiders?:The Changing Pattern of Exclusion in Latin America and the Caribbean 15 (2007). The greatest excesses in income inequality are found in Brazil, Chile, Guatemala, Ecuador, Mexico, Panama, and Paraguay. See Inter-American Development Bank, Facing Up to Inequality in Latin America 13 (1999).


institutions, or inefficient tax and labor laws.33 Instead, a major culprit appears to be a faulty public education system that does not equip students with the type of skills required by a globalized economy (a deficiency that plagues many other countries in the Western Hemisphere as well). Since 2006 public high school students in Chile have led repeated protests and strikes that enjoy the widespread support of Chileans of all ages and seek an equitable distribution of educational funds and a rigorous curriculum that better prepares graduates for getting into elite universities and/or the labor market. To their credit, officials from the governments negotiating the FTAA did recognize that the market in and of itself would not be enough to lift all boats, but that there needed to be a parallel effort to improve levels of education, remove administrative barriers to freer trade, and promote intense structural reform. For example, education was a focus of discussion at the II Summit of the Americas held in Santiago, Chile, in April 1998. At the Toronto Trade Ministerial in November 1999, the 34 governments agreed to implement eight business facilitation measures affecting customs procedures by January 1, 2000. A Hemispheric Cooperation Program (HPC) was launched following the Quito Trade Ministerial in November 2002 that was designed to assist less-developed and smaller economies to actively participate in the FTAA process, implement their commitments, and undertake necessary structural re-adjustments. The problem with all these initiatives, however, was that they never reached the level of prominence given to free trade so that the general public understood them to be critical components of the FTAA process. In addition, they were woefully underfunded. The much ballyhooed HPC, for example, was expected to receive much of its funding from the private sector, academia, and foundations (something that failed to materialize). What the experiences of the last decade and a half with free trade agreements underscores is that free trade alone cannot bring about equitable economic growth. Free trade is merely a tool, albeit a very important one, to expand an economy by increasing and diversifying a country’s export opportunities. Free trade also offers a country’s consumers greater access to cheaper goods while providing national producers the opportunity to purchase less expensive and higher quality inputs, capital goods, and technology. Furthermore, entering into a free trade agreement can provide an important incentive for governments to enact effective reform programs. If the implementation of a free trade 33 The annual Doing Business survey conducted by the World Bank compares various indicators among 178 countries such as the procedures, time, and costs in launching a business, obtaining licenses, employing workers, registering property, obtaining credit, complying with tax obligations, engaging in foreign trade, etc. For 2008, Chile has an overall ranking of 33 out of 178 countries in terms of the overall ease in doing business, versus 122 for Brazil and 114 for Guatemala. Interestingly, Chile ranks first among sovereign countries in Latin America and the Caribbean in terms of overall ease in doing business. Full results are available at http://www.doingbusiness.org. In Transparency International’s Corruption Perceptions Index for 2007 Chile is ranked 22 out of 179 countries in terms of perceived levels of transparency (just behind the United States and Belgium), while Brazil is ranked 72, and Guatemala is ranked a dismal 111. The full index is available at http://www.transparency. org/policy_research/surveys_indices/cpi/2007.


agreement, however, is not accompanied by a simultaneous effort to enhance educational skills across the board, improve infrastructure, and eliminate those bureaucratic and administrative barriers that relegate huge numbers of a country’s economic actors to the informal sector, it will not result in equitable economic growth. In fact, without such reforms, a free trade agreement may well aggravate income inequality and further concentrate national wealth in the hands of a small elite that already enjoys access to credit, power, technology, and top-notch educational opportunities. The governments responsible for creating today’s European Union understood this early on and, hence, made huge economic investments and adopted at least some important reforms to create their affluent and remarkably equitable single market and economy. Although the proposal to create a Community of the Americas includes free trade as an important pillar, it is different from the FTAA because it emphasizes that the creation of a hemispheric free trade area must be accompanied by a simultaneous and well-funded effort to improve education, infrastructure, and reform national business environments. A Community of the Americas, premised on an ambitious reform program that puts sustainable and inclusive development at the forefront, will be supported by a wide cross-section of actors representing the entire political spectrum. Highlighting the energy security aspects of the project, particularly in terms of eco-friendly alternative energy, and including a mechanism to oversee a more effective carbon capand-trade program, will also garner support from constituency groups that have traditionally opposed or viewed free trade agreements with suspicion. This support will be enhanced if adequate financial and technical resources are made available to ensure that all governments in the Western Hemisphere are able to adequately enforce basic labor rights and protect biodiversity and the environment.

TABLE OF INSTRUMENTS

Agreement

Date

Available at

Agreement among CARICOM States for Avoidance of Double Taxation

July 6, 1994

http://www.caricomlaw.org/docs/ agreement-doubletaxation.htm

Agreement between CARICOM and Venezuela on Trade and Investment

Oct. 13, 1992 T.A. O’Keefe, Latin American Trade Agreements (1997–)

Agreement Establishing the Caribbean Court of Justice

July 23, 2003 http://www.caricomlaw.org/docs/agreement _ccj.pdf

Agreement Establishing the Central Dec. 13, 1960 455 U.N.T.S. 203 (1963) American Bank of Economic Integration Agreement Establishing the World Trade Organization

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/04-wto.pdf

Agreement for the Application of the Apr. 29, 2006 T.A. O’Keefe, Latin American Trade Bolivarian Alternative for the Peoples of Agreements (1997–) Our America and Peoples’ Trade Treaties Agreement Legalizing the Internal Migration of Nationals of the MERCOSUR, Bolivia and Chile.

Dec. 6, 2002

http://www.mercosur.int/msweb/ portal%20intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Tratados y Protocolos.”

Agreement on Residency for the Nationals of the MERCOSUR, Bolivia, and Chile

Dec. 6, 2002

http://www.minterior.gov.ar/migraciones /Inter_pdf/AcuerdoResidenciaPara NacionalesEstadosParteAsociados.pdf (Spanish)

Agreement on Sub-regional Air Services between the Governments of Argentina, Brazil, Bolivia, Chile, Paraguay and Uruguay

Dec. 17, 1996 http://www.mercosur.int/msweb/portal%20 intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Tratados y Protocolos.”

461


Agreement (continued)

Date

Agreement on Trade and Investment Between Colombia-Venezuela and Central America

Feb. 12, 1993 T.A. O’Keefe, Latin American Trade Agreements (1997–)

Argentine-Brazilian Program for Integration and Economic Integration (PICAB)

July 29, 1986 27 I.L.M. 905 (July 1988)

Canada-Costa Rica Free Trade Agreement

Nov. 1, 2002

http://.sice.oas.org/Trade/cancr/ English/text_e.asp

Canada-US Free Trade Agreement

Jan. 1, 1989

http://wehner.tamu.edu/mgmt.www /nafta/Fta/21.htm

CARICOM Agreement on Social Security

Apr. 1, 1997

http://www.caricomlaw.org/docs/ agreement-socialsecurity.htm

CARICOM-Costa Rica Free Trade Agreement

Mar. 9, 2004

http://ctrc.sice.oas.org/trade/crcrcom_ e/crcrcomind_e.asp

CARICOM-Dominican Republic Free Trade Agreement

Aug. 22, 1998 http://ctrc.sice.oas.org/Trade/Ccdr/Ccdr_ in.asp

CARIFORUM-EU Economic Partnership Agreement

Dec. 16, 2008 The full text, protocols, and Annexes are available at http://www.crnm.org

Cartagena Agreement (Incorporating the Quito Protocol of 1987)

May 29, 1969 T.A. O’Keefe, Latin American Trade Agreements (1997–)

Central America-Chile Free Trade Agreement

Oct. 18, 1999 http://www.sice.oas.org/trade/chicam/ chicamin.asp

Central America-Dominican Republic Free Trade Agreement

Apr. 16, 1998 http://www.sice.oas.org/trade/camdrep/ CARdo_2s.asp

Central America-Dominican Republic and United States Free Trade Agreement (CAFTA-DR)

Aug. 5, 2004 http://www.ustr.gov/Trade_Agreements/ Regional/CAFTA/CAFTA-DR_Final_ Texts/Section_Index.html

Chile-US Free Trade Agreement

Jan. 1, 2004

Colombia-US Free Trade Agreement

Nov. 22, 2006 http://www.ustr.gov/Trade_Agreements/ Bilateral/ Colombia_FTA/Final_Text/ Section_Index.html

Complementation Agreement for the Jan. 1, 2000 Automotive Sector (Andean Community)

Available at

http://www.ustr.gov/Trade_Agreements/ Bilateral/Chile_FTA/Final_Texts/Section_ Index.html

http://www.comunidadandina.org/ingles/ normativa/agreement.htm

Table of Instruments • 463


Date

Available at

Constitutive Agreement of the Central Feb. 6, 2003 American Bank for Economic Integration (including 1992 Protocol of Amendment and 1998 Amendments)

http://www.bcie.org/english/bcie/ convenio-c.php

Costa Rica-Mexico Free Trade Agreement

Jan. 1, 1995

http://www.sice.oas.org/trade/Mexcr_s/ mcrind.asp

Cotonou Agreement

June 23, 2000 http://www.acpsec.org/en/conventions/ cotonou/accord1.htm

EEC-Central America Cooperation Agreement (Arising out of the San José Dialogue)

Nov. 11, 1985 1508 U.N.T.S. 292

EEC-Central America Framework Cooperation Agreement (Arising out of the San José Dialogue)

Feb. 22, 1993 http://eur-lex.europa.eu/LexUriServ/ LexUriSer.do?uri=CELEX:21999A0312 (01):EN:HTML

Egypt-MERCOSUR Framework Agreement

July 7, 2004

http://www.mercosur.int/msweb/portal% 20intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Tratados y Protocolos.”

El Salvador and Honduras Free Trade Agreement with Taiwan

May 7, 2007

http://www.sice.oas.org/TRADE/SLV-HND _TWN_FTA_s/Index_s.asp (Spanish)

Environmental Cooperation Agreement Between Central America-Dominican Republic and the USA

Feb. 18, 2005 http://www.ustr.gov/assets/Trade_ Agreements/Regional/CAFTA/asset_ upload_file80_7287.pdf?ht=

EU-Central America Political Dialogue and Cooperation Agreement (Arising under San José Dialogue)

Oct. 2, 2003

Framework Agreement for the Establishment of the Central American Customs Union

Dec. 12, 2007 http://www.sieca.org.gt (Spanish) Hit “Integración Económica Centroamericana,” then“ Unión Aduanera.”

Framework Agreement for the Establishment of a Free Trade Area Between MERCOSUR and Turkey

June 30, 2008 http://www.mercosur.int/msweb/portal% 20intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Decisiones,” then CMC Decision 29/08

http://ec.europa.eu/external_relations/ ca/pol/pdca_12_03_en.pdf

Framework Agreement on Inter-regional Dec. 15, 1995 http://www.mercosur.int/msweb/portal%20 Cooperation between the European intermediario/es/index.htm (Spanish) Community and the MERCOSUR Hit “Documentos Oficiales,” then “Normativa,” then “Tratados y Protocolos.”



Date

Available at

General Agreement on Tariffs and Trade (GATT) (as amended)

Jan. 1, 1948

http://www.wto.org/english/docs_e/legal_ e/gatt47_01e.htm

General Agreement on Trade in Services (GATS)

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/26-gats.pdf

Guatemala-Taiwan Free Trade Agreement

July 1, 2006

http://www.sice.oas.org/TRADE/GTM _TW/Index_s.asp

Hague Agreement Concerning the International Registration of Industrial Designs

June 2, 1934 http://www.wipo.int/treaties/en/registration Nov. 28, 1960 /hague/index.html July 2, 1999

Israel-MERCOSUR Free Trade Agreement

Dec. 18, 2007 http://www.tamas.gov.il/NR/exeres/ F898B2EF-E863-448C-A4D86B2ECA6C814D.htm

Jordan-MERCOSUR Framework Agreement

June 30, 2008 http://www.mercosur.int/msweb/portal% 20intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Decisiones,” then CMC Decision 28/08.

Lisbon Agreement for the Protection of Appellations of Origin and their International Registration

Oct. 31, 1958 http://www.wipo.int/lisbon/en/legal_texts/ lisbon_agreement.htm

Madrid Agreement Concerning the International Registrations of Marks

Apr. 14, 1891 http://www.wipo.int/madrid/en/legal_texts/ trtdocs_wo015.html

MERCOSUR-Morocco Framework Agreement

Nov. 26, 2004 http://www.mercosur.int/msweb/portal%20 intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Tratados y Protocolos.”

MERCOSUR-Pakistan Framework Agreement on Trade

June 20, 2006 http://www.mercosur.int/msweb/portal%20 intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Decisiones,” then CMC Decision 7/06.

Mexico-Nicaragua Free Trade Agreement

July 1, 1998

http://www.sice.oas.org/trade/menifta/ indice.asp

Mexico-Northern Triangle of Central America Free Trade Agreement

Mar. 15– http://www.sice.oas.org/Trade/mextnorte/ June 1, 2001 indice.asp



Date

Available at

Nicaragua-Taiwan Free Trade Agreement

June 16, 2006 http://www.sice.oas.org/TPD/NIC_TWN/D raftText_s/Index_s.asp (Spanish)

Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks

June 15, 1957 http://www.wipo.int/treaties/en/ classification/nice/trtdocs_wo019.html

North American Agreement on Environmental Cooperation

Jan. 1, 1994

http://www.cec.org/pubs_info_resources/ law_treat_agree/naaec/index.cfm? varlan=English

North American Agreement on Labor Cooperation

Jan. 1, 1994

J.R. Holbein & D.J. Musch, NAFTA: Final Text, Summary, Legislative History & Implementation Directory (1994).

North American Free Trade Agreement (NAFTA)

Jan. 1, 1994

J.R. Holbein & D.J. Musch, NAFTA: Final Text, Summary, Legislative History & Implementation Directory (1994).

Panama-US Free Trade Agreement

June 28, 2007 http://www.ustr.gov/Trade_Agreements/ Bilateral/ Panama_FTA/Final_Text/Section _Index.html

Peru-US Free Trade Agreement

Apr. 12, 2006 http://www.ustr.gov/Trade_Agreements/ Bilateral/ Peru_TPA/Final_Texts/Section_ Index.html

Preferential Trade Agreement between MERCOSUR and India

Jan. 25, 2004 http://www.sice.oas.org/Trade/MRCSR India/index_e.asp

Preferential Trade Agreement between MERCOSUR and the Southern Africa Customs Union

Dec.16, 2004 http://www.mercosur.int/msweb/portal%20 intermediario/es/index.htm (Spanish) Hit “Documentos Oficiales,” then “Normativa,” then “Tratados y Protocolos.”

Regional Agreement on Cross Border Movement of Hazardous Waste (SICA)

De. 11, 1992

http://www.sica.int/ccad/marco_j.aspx ?IdEnt=2 (Spanish)

WTO Agreement on Agriculture

Jan. 1, 1995

http://www.wto.org/english/docs_ e/legal_e/14-ag.pdf

WTO Agreement on Implementation of Article VI of the GATT (Antidumping Agreement)

Jan. 1, 1995

http://www.wto.org/english/docs_ e/legal_e/19-adp.pdf



Date

Available at

WTO Agreement on Implementation of Article VII of the GATT (Customs Valuation Agreement)

Jan 1, 1995

http://www.wto.org/english/docs_e/legal h_e/20-val.pdf

WTO Agreement on Import Licensing Procedures

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/23-lic.pdf

WTO Agreement on Pre-shipment Inspection

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/21-psi.pdf

WTO Agreement on Rules of Origin

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/22-roo.pdf

WTO Agreement on Safeguards

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/25-safeg.pdf

WTO Agreement on Subsidies and Countervailing Measures

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/24-scm.pdf

WTO Agreement on Technical Barriers to Trade

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/17-tbt.pdf

WTO Agreement on Textiles and Clothing

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/16-tex.pdf

WTO Agreement on the Application of Sanitary and Phytosanitary Measures

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/15-sps.pdf

WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)

Jan 1, 1995

http://www.wto.org/english/docs_e/legal _e/27-trips.pdf

WTO Agreement on Trade-Related Investment Measures (TRIMs)

Jan. 1, 1995

http://www.wto.org/english/docs_e/legal _e/18-trims.pdf

WTO Plurilateral Agreement on Civil Aircraft

Apr. 12, 1979 http://www.wto.org/english/docs_e/legal _e/air-79_e.pdf

WTO Plurilatreral Agreement on Government Procurement

Apr. 15, 1994 http://www.wto.org/english/docs_e/legal _e/gpr-94.pdf


Convention

Date

Available at

Berne Convention for the Protection of Literary and Artistic Works

Sept. 9, 1886 http://www.wipo.int/treaties/en/ip/berne/ trtdocs_wo001.html

Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite

May 21, 1974 http://www.wipo.int/export/sites/www/ treaties/en/ip/brussels/pdf/trtdocs_ wo025.pdf

Central American Convention for the Protection of Industrial Property

June 1, 1968 979 U.N.T.S. 50

Central American Convention on Tariffs and Customs Regimes (as amended)

Dec. 14, 1984 http://www.sieca.org.gt (Spanish) Hit “Integración Económica Centroamericana,” then “Marco Legal,” then “Tratados, Protocolos y Acuerdos.”

Convention Establishing the Andean Development Corporation

Feb. 7, 1968

http://www.caf.com/attach/17/default/ ConvenioConstitutivoingles.pdf

Convention Establishing the Association July 24, 1994 T.A. O’Keefe, Latin American Trade of Caribbean States Agreements (1997–) Convention for the Establishment of an Inter-American Tropical Tuna Commission

May 31, 1949 http://www.iattc.org/IATTCConvention Eng.htm

Convention for the Preservation of June 5, 1992 http://www.sica.int/ccad/marco_j.asp Biodiversity and the Protection of x?IdEnt=2 (Spanish) Priority Wildlife Areas in Central America Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of Their Phonograms

Oct. 29, 1971 http://www.wipo.int/treaties/en/ ip/phonograms/trtdocs_wo023.html

Convention on Biological Diversity (Rio de Janeiro)

June 13, 1992 http://www.cbd.int/convention/ convention.shtml

Convention on the Conservation of Antarctic Marine Living Resources

May 20, 1980 T. Hohmann ed., Basic Documents of International Environmental Law, Vol. 3 (1992)

Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES)

Mar. 3, 1973

http://www.cites.org/eng/disc/text.shtml


Convention (continued)

Date

Convention on Payment and Reciprocal Oct. 1, 1998 Credit and Implementing Regulations (ALADI)

Available at http://www.aladi.org (Spanish)

Convention on Scientific and Technological Cooperation (Chile-Ecuador)

Jan. 24, 2001 http://www.aladi.org (Spanish) Found in Annex to Third Protocol to ALADI ACE No. 32

Convention on the Preservation of Wetlands of International Importance, Especially as Waterfowl Habitat (Ramsar)

Feb. 2, 1971

Convention on the Settlement of Investment Disputes between States and Nationals of Other States

Mar. 18, 1965 http://icsid.worldbank.org/ICSID/ICSID/ RulesMain.jsp

Inter-American Convention Against Corruption

Mar. 29, 1996 http://www.osec.doc.gov/ogc/occic/ corrupt.html#1

International Convention for the Prevention of Pollution from Ships and the Protocol of 1978

Nov. 2, 1973, T. Hohmann ed., Basic Documents of Feb. 17, 1978 International Environmental Law, Vol. 2 (1992)

International Convention for the Protection of New Varieties of Plants

Dec. 2, 1961, http://www.upov.int/en/publications/ Nov. 10, 1972, conventions/index.html Oct. 31, 1978, Mar. 19, 1991

International Convention for the Regulation of Whaling

Dec. 2, 1946

T. Hohmann ed., Basic Documents of International Environmental Law, Vol. 3 (1992)

Lomé Convention I through IV

1975–2000

http://www.acpsec.org/en/treaties.htm

Paris Convention for the Protection of Industrial Property

Mar. 20, 1883 http://www.wipo.int/treaties/en/ip/paris/

T. Hohmann ed., Basic Documents of International Environmental Law, Vol. 3 (1992)

Regional Convention for the ManageOct. 29, 1993 http://www.sica.int/ccad/marco_j.aspx ment and Conservation of the National ?IdEnt=2 (Spanish) Forest Ecosystems and the Development of Forest Plantations (Central America) Regional Convention on Climate Change (SICA)

Oct. 29, 1993 http://www.sica.int/ccad/marco_j.aspx? IdEnt=2 (Spanish)


Convention (continued)

Date

Available at

Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organization

Oct. 26, 1961 http://www.wipo.int/treaties/en/ip/rome/ pdf/trtdoes_wo024.pdf

UNESCO Convention Concerning the Protection of the World Cultural and Natural Heritage

Nov. 16, 1972 T. Hohmann ed, Basic Documents of International Environmental Law, Vol. 3 (1992)

Protocols

Date

Additional Protocol of the Cartagena Agreement on the Commitment of the Andean Community to Democracy

June 10, 2000 http://www.comunidadandina.org/ ingles/normativa/democracy.htm

Kyoto Protocol to the United Nations Framework Convention on Climate Change

Dec. 11, 1997 P. Sands & P. Galizzi, Documents in International Environmental Law, Second Edition (2004)

Montreal Protocol on Substances that Deplete the Ozone Layer

Sept. 16, 1987

P. Sands & P. Galizzi, Documents in International Environmental Law (2d ed. 2004)

Protocol of Adhesion of the Bolivarian Republic of Venezuela to the MERCOSUR

July 4, 2006

http://www.mercosur.int/msweb/portal% 20intermediario/es/index.htm (Spanish)

Available at

Protocol of Amendment to the Kyoto June 26, 1999 http://www.wcoomd.org/kybodyprotocol. Convention on the Simplification of and htm Harmonization of Customs Procedure Protocol of Brasilia for the Solution of Controversies (MERCOSUR)

Dec. 17, 1991 T.A. O’Keefe, Latin American Trade Agreements (1997–)

Protocol of Cochabamba Modifying the Treaty Creating the Tribunal of Justice of the Andean Community

Aug. 25, 1999 T.A. O’Keefe, Latin American Trade Agreements (1997–)

Protocol of Colonia for the Promotion and Reciprocal Protection of Investments within the MERCOSUR

Jan. 17, 1994 http://www.cvm.gov.br/ingl/inter/ mercosul/coloni-e.asp

Protocol of Guatemala to the General Treaty on Central American Economic Integration



Protocol (continued)

Date

Available at

Protocol of Olivos for the Resolution of Disputes in the MERCOSUR

Jan. 1, 2004

T.A. O’Keefe, Latin American Trade Agreements (1997–)

Protocol of Ouro Preto (MERCOSUR)


Protocol of Tegucigalpa to the Charter July 23, 1992 T.A. O’Keefe, Latin American Trade of the Organization of Central American Agreements (1997–) States Protocol of Trujillo Modifying the Cartagena Agreement

Aug. 1, 1997


Protocol of Ushuaia on the Commitment July 24, 1998 T.A. O’Keefe, Latin American Trade to Democracy in the MERCOSUR, Agreements (1997–) Bolivia, and Chile Protocol to the Framework Treaty for the Central America Electricity Market

July 11, 1997 2030 U.N.T.S. 511

Protocol Relating to the Madrid June 27, 1989 http://www.wipo.int/madrid/en/legal_ Agreement Concerning the International texts/trtdocs_wo016.html Registration of Marks Protocol to the Treaty on Investment and Trade in Services Between Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua

Feb. 22, 2007 http://www.sieca.org.gt (Spanish) Hit “Integración Económica Centroamericana,” then “Marco Legal,” then “Tratados, Protocolos y Acuerdos,” then “Instrumentos Recientes en Proceso de Ratificación.”

Treaty

Date

Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure

Apr. 28, 1977 http://www.wipo.int/treaties/en/ registration/budapest/trtdocs_wo002.html

Framework Treaty on the Electricity Market of Central America

Dec. 30, 1996 2025 U.N.T.S. 3

General Treaty on Central American Economic Integration

June 3, 1961 T.A. O’Keefe, Latin American Trade Agreements (1997–)

Available at


Treaty (continued)

Date

Available at

Patent Cooperation Treaty

June 19, 1970 http://www.wipo.int/pct/en/texts/ articles/atoc.htm

Patent Law Treaty

June 1, 2000 http://www.wipo.int/treaties/en/ip/ plt/trtdocs_wo038.html

Revised Treaty of Chaguaramas Establishing the Caribbean Community including the CARICOM Single Market and Economy

July 5, 2001

Trademark Law Treaty

Oct. 27, 1994 http://www.wipo.int/treaties/en/ip/tlt/ trtdocs_wo027.html

Treaty Creating the Tribunal of Justice of the Cartagena Agreement

May 28, 1979 18 I.L.M. 1203 (Sept. 1979)

Treaty of Asuncion (MERCOSUR)

Mar. 26, 1991 T.A. O’Keefe, Latin American Trade Agreements (1997–)

Treaty of Basseterre Establishing the Organization of Eastern Caribbean States (OECS)

June 18, 1981 http://www.oecs.org/Documents/treaties/ oecs_treat.pdf

Treaty of Chaguaramas Establishing the Caribbean Community (with Common Market Annex)

July 4, 1973

Treaty of Integration, Cooperation and Development (Argentina-Brazil)

Nov. 29, 1988 http://www.iadb.org/Intal/instrumentos/ picab2.htm (Spanish)

Treaty of Montevideo of 1960

Feb. 18, 1960 1484 U.N.T.S. 262

Treaty of Montevideo of 1980


Treaty on Investment and Trade in Services Between Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua

Mar. 24, 2002 http://www.sieca.org.gt (Spanish) Hit “Integración Económica Centroamericana,” then “Marco Legal,” then “Tratados, Protocolos y Acuerdos.”

Treaty on the International Registration of Audiovisual Works

Apr. 20, 1989 http://www.wipo.int/treaties/en/ip/frt/ trtdocs_wo004.html

WIPO Copyright Treaty wct/trtdocs_wo033.html

Dec. 20, 1996 http://www.wipo.int/treaties/en/ip/

WIPO Performances and Phonograms Treaty

Dec. 20, 1996 http://www.wipo.int/treaties/en/ip/wppt/ trtdocs_wo034.html

http://www.caricomlaw.org/docs/ revisedtreaty.pdf

http://www.caricomlaw.org/docs/treatycaricom.htm


Law

Date

Available at

Act of Buenos Aires

July 6, 1990

http://www.iadb.org/INTAL/instrumentos/ picab3.htm (Spanish)

Andean Charter on the Promotion and Protection of Human Rights

July 26, 2002 http://www.comunidadandina.org/ingles/ documentos/ documents/Andean_ charter.htm

Andean Trade Preference and Drug Eradication Act (US)

Oct. 31, 2002 Public Law 107-210, Title XXXI; 19 U.S.C. 3201 et seq.

Andean Trade Preference Act (US)

July 22, 1992 Public Law 102-182, Title II; 105 Stat. –Aug. 30, 1236, 19 U.S.C. 3201 et seq. 1993

Caribbean Basin Economic Recovery Act (US)

Jan. 1, 1984

Public Law 98-67, Title II; 97 Stat. 384, 19 U.S.C. 2701 et seq.

Caribbean Basin Trade Partnership Act Oct. 2, 2000, Public Law 106-200, Title II, as amended (US), as amended by Trade Act of 2002 as amended by Public Law 107-210; 19 U.S.C. 2701 Aug. 6, 2002 et seq. Decree 2444 (Venezuela)

June 5, 2003 http://www.natlaw.com/interam/ve/cu/rg/ rgvecu00002.htm

Executive Decree No. 660 (Argentina)

Aug. 2, 2000

Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act (US)

Dec. 20, 2006, Pub. Law 109-432, Sec. 5001 et seq.; amended on amended by Public Law 110-246; June 18, 19 U.S.C. 2701 et seq. 2008

Law 17.319 (Argentina)

June 30, 1967 http://www.infoleg.gov.ar (Spanish)


Jan. 16, 1992 http://www.infoleg.gov.ar (Spanish)


June 12, 1992 http://www.infoleg.gov.ar (Spanish)


Jan. 7, 2002

http://www.infoleg.gov.ar (Spanish)


Aug. 9, 2002


Maquila Law 1064/97 (Paraguay)

May 13, 1997 http://www.mic.gov.py/templates/mic/ desc/leyes/1997ley1064.pdf (Spanish)

Law 9279/96 (Brazilian Patent Law)

May 14, 1996 http://www.inpi.gov.br/menu-esquerdo/ patente/ pasta_legislacao/lei_9279_ ingles_html

Provisional Measure No. 1562 (Brazil)

Dec. 19, 1996 http://br.vlex.com/vid/34317275 (Portuguese)

Statute of the Central American Court of Justice

Dec. 10, 1992 1821 U.N.T.S. 291


Table of Instruments • 473 ALADI The texts of all ALADI Agreements, including Economic Complementation Agreements (ACEs) and Protocols can be accessed in Spanish at http://www.aladi.org. Translations in English of the following ACEs can be accessed at: NAME

DATE

AVAILABLE AT

17 (Chile-Mexico)

Sept. 22, 1991 T.A. O’Keefe, Latin American Trade Agreements (1997–)

18 (Argentina-Brazil-Paraguay-Uruguay) Mar. 26, 1991 T.A. O’Keefe, Latin American Trade Agreements (1997–) Resolution 70

Apr. 27, 1987 http://www.sice.oas.org/Trade/Montev_tr/ recr70s.asp (Spanish)

78

Nov. 24, 1987 T.A. O’Keefe, Latin American Trade Agreements (1997–)

252

Aug. 4, 1999

http://www.sice.oas.org/trade/Montev_tr/ recr252s.asp (Spanish)

Andean Community Decisions of the Andean Presidential Council, Andean Council of Ministers of Foreign Relations, and the Andean Commission as well as Resolutions of the General Secretariat are available in Spanish at http://www.comunidadandina.org. Translations in English for the following decisions can be found at: Decision

Date

Available at

24 (as amended)

Nov. 30, 1976 16 I.L.M. 138 (Jan. 1979)

283


284


285


291


293



Andean Community (continued) Decision

Date

Available at

331

Mar. 4, 1993


344


345


351


378


391

July 2, 1996

439


462

May 25, 1999 T.A. O’Keefe, Latin American Trade Agreements (1997–)

486

Sept. 14,

T.A. O’Keefe, Latin American Trade Agreements (1997–


MERCOSUR Decisions of the MERCOSUR Common Market Council, Resolutions of the Common Market Group, Directives of the MERCOSUR Trade Commission, and Declarations of the MERCOSUR Presidents can be accessed in Spanish or Portuguese at http://www.mercosur.int. Translations in English for the following Common Market Council Decisions can be found at: Decision

Date

Available at

05/92


01/94

Aug. 5, 1994

04/94


11/94

Aug. 5, 1994

T.A. O’Keefe, Latin American Trade Agreements 1997–)



MERCOSUR (continued) Decision

Date

Available at

05/92


01/94

Aug. 5, 1994

04/94


11/94

Aug. 5, 1994

27/94

Apr. 13, 1997 T.A. O’Keefe, Latin American Trade Agreements (1997–)

07/95

July 28, 1997 T.A. O’Keefe, Latin American Trade Agreements (1997–)

02/96

Jan. 8, 2000

09/96


11/96


01/04

Jan. 2004





SICA Regulations related to the economic integration aspects of the Central American Integration System as well as Resolutions of the Council of Ministers of Economic Integration (COMEICO) and other bodies associated with the Central American economic integration process can be obtained in Spanish at http://www.sieca.org.gt.

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INDEX

Act of Buenos Aires, 81. ALADI. See Latin American Integration Association. ALALC. See Latin American Integration Association. Agricultural Subsidies, 56, 58, 82, 102–3, 121, 129, 355, 373, 383, 419, 427, 429–31,441, 445. Agreement on Sub-regional Air Services between the Governments of Argentina, Brazil, Bolivia, Chile, Paraguay and Uruguay, 231. Alfonsin, Raul, 82. Alvarez, Chaco, 144. Americas Business Forum, 410, 413, 418. Andean Community: Andean Reserve Fund, 254; Andean System for Trade Financing (SAFICO), 251; Additional Protocol of the Cartagena Agreement on the Commitment of the Andean Community to Democracy, 246–7; Andean Charter on the Promotion and Protection of Human Rights, 247; Cartagena Agreement, 7–9, 21, 244–7, 249, 250, 267–8; Complementation Agreement for the Automotive Sector, 245, 258; Decision 24, 8–10, 13; Junta del Acuerdo de Cartagena, 8, 244, 248–9, 250; Mechanism for the Confirmation of Letters of Credit (MECOFIN), 251; Protocol of Cochabamba, 250–1; Protocol of Quito, 9–10, 267; Protocol of Trujillo, 244, 247–9, 255, 267; Social Security, 280–1, 456. Andean Pact. See Andean Community. Anti-dumping, 14, 29, 42, 48, 52–3, 58, 74–5, 107, 114, 121, 129–30, 149, 189–91, 243, 270–71, 322–23,355, 367, 373–4, 379, 384, 386, 388, 410–2, 415, 422–4, 427, 431, 444–5.

Asia-Pacific Economic Cooperation (APEC), 246. Basic Convention on Scientific and Technological Cooperation (Chile-Ecuador), 53. Batlle, Jorge, 80. Biofuels, 211, 240–1, 438, 442, 446 fn. 19; Biodiesel, 240–1, 440–1; Ethanol, 211 fn. 13, 240, 380–2, 438, 441–2, 446. Bush, George H.W., 291. Bush, George W., 100, 349, 361, 423–4, 427, 431–2, 451. Byrd, Robert, 423. Cabotage Restrictions, 60, 230, 296, 434 fn. 17. Canada-Chile Free Trade Agreement, 22, 42, 346. Canada-Colombia Free Trade Agreement, 291. Canada-Costa Rica Free Trade Agreement, 335, 352. Canada-Peru Free Trade Agreement, 290. Canada-US Free Trade Agreement, 310, 442. Caldera, Rafael, 53. Cardoso, Fernando Henrique, 105, 177, 299, 429. Caribbean Common Market and Community. See CARICOM. Caribbean Regional Negotiating Machinery (CRNM), 383. CARICOM: Agreement among CARICOM States for Avoidance of Double Taxation, 375, 455; Agreement on Social Security, 375, 392, 455; Caribbean Single Market and Economy (CSME), 366–8, 370–7, 391, 393, 397; Common Market Annex, 11, 365, 389; Multilateral Clearing Facility, 12;

485

486 • Latin American and Caribbean Trade Agreements CARICOM (continued) Oils and Fats Agreement, 370, 386–7; Revised Treaty of Chaguaramas, 366, 368–76, 383, 389–90, 392, 403; Treaty of Chaguaramas, 11–2, 365, 390, 392. Central American Common Market. See Central American Integration System. Central American Integration System (SICA): Central American Convention on Tariffs and Customs Regimes, 315; Chamber of Central American Compensation, 3; Framework Agreement for the Establishment of the Central American Customs Union, 312, 315, 321, 329; Framework Treaty on the Electricity Market of Central America, 337–8; General Treaty of Central American Economic Integration, 3–4, 306–7; Protocol of Guatemala to the General Treaty on Central American Economic Integration, 303–4, 306; Protocol of Tegucigalpa to the Charter of the Organization of Central American States, 303, 305–6, 308–10, 339; Regional Agreement on Cross Border Movement of Hazardous Waste (SICA), 332, 334; Regional Convention for the Management and Conservation of the National Forest Ecosystems and the Development of Forest Plantations (SICA), 333–4; Regional Convention on Climate Change (SICA), 332–4, 339; Statute of the Central American Court of Justice, 308–10. Chavez, Hugo, 54, 100, 148, 245, 429, 431, 433, 437. Chile-Panama Free Trade Agreement, 345 fn. 17. Chile-US Free Trade Agreement, 423, 455. Clinton, Bill, 422–3. Codex Alimentarius, 266, 318. Colombia-US Free Trade Agreement, 244–5, 291, 294, 432, 435, 455. Collor de Mello, Fernando, 81–2. Consumer Rights, 274. Convertibility Plan (Argentina), 85, 163, 210, 231–4. de la Rua, Fernando, 144, 231–2.

Double Taxation, 64, 109, 116, 117, 135, 275, 375, 455. Duhalde, Eduardo, 144, 232. Duarte Frutos, Nicanor, 98. ECLAC. See United Nations Economic Commission for Latin America and the Caribbean. Education, 28, 96, 98, 109, 146-8, 200, 246, 253–4, 306–7, 367 fn. 2, 392, 409, 417, 434, 446, 448, 457–9. El Salvador-Taiwan Free Trade Agreement, 335. Energy: 382; Agreement for the Regional Interconnection of the Electrical Systems and Commercial Exchange of Electricity, 298; Electrical Interconnection System of the Countries of Central America (SIEPAC), 337-8; Framework Treaty on the Electricity Market of Central America, 337–8; Memorandum of Understanding Related to the Exchange and Integration of Electricity in the MERCOSUR, 238–40; Memorandum of Understanding with Respect to the Exchange of Natural Gas and Integration of the Natural Gas Sector among the MERCOSUR Member States, 239–40; MERCOSUR Action Plan for Cooperation in the Biofuels Sector, 240; North American Energy Working Group (NAEWG), 443–4. Environment, 29, 47, 50, 59, 65, 100, 116, 140, 176, 182, 201–4, 241, 246, 282–4, 301, 306–8, 325, 327, 330–4, 339, 357–8, 362–3, 367 fn. 2, 384–5, 409, 411, 413, 424–5,438, 444, 448–56, 459; Convention for the Establishment of an Inter-American Tropical Tuna Commission, 452 fn. 25; Convention for the Preservation of Biodiversity and the Protection of Priority Wildlife Areas in Central America, 330–1, 334; Convention on Biological Diversity (Rio de Janeiro), 117, 135, 277; Convention on the Conservation of Antarctic Marine Living Resources, 452 fn. 25; Convention on International Trade in Endangered Species of

Index • 487 Wild Fauna and Flora (CITES), 453; Convention on the Preservation of Wetlands of International Importance, Especially as Waterfowl Habitat (Ramsar), 452 fn. 25; Environmental Cooperation Agreement between Central America-Dominican Republic and the USA, 451; International Convention for the Prevention of Pollution from Ships and the Protocol of 1978, 452, fn. 25; International Convention for the Regulation of Whaling, 452 fn. 25; Kyoto Protocol to the United Nations Framework Convention on Climate Change, 442; Montreal Protocol on Substances that Deplete the Ozone Layer; 452 fn. 25; North American Agreement on Environmental Cooperation, 362–3, 450; Regional Agreement on Cross Border Movement of Hazardous Waste (SICA), 332, 334; Regional Convention for the Management and Conservation of the National Forest Ecosystems and the Development of Forest Plantations (SICA), 333–4; Regional Convention on Climate Change (SICA), 332–4, 339; UNESCO Convention Concerning the Protection of the World Cultural and Natural Heritage, 331. European Economic Community. See European Union. European Union, 1, 12, 82 fn. 4, 87, 103, 138, 146, 161, 164 fn. 14, 246, 248 fn. 2, 291, 307, 355, 399, 427, 431, 434, 459; CARIFORUM-EU Economic Partnership Agreement, 378, 382–4; Chile-European Union Free Trade Agreement, 101; Cotonou Agreement, 382–3; EEC-Central America Cooperation Agreement, 335; EEC-Central America Framework Cooperation Agreement, 335; EUCentral America Political Dialogue and Cooperation Agreement; 335; Framework Agreement on Interregional Cooperation between the European Community and the MERCOSUR, 100-2, 118, 201; Lomé Convention I through IV, 382.

Fast Track Authority. See Trade Promotion Authority. Fujimori, Alberto, 244, 255. Garcia, Alan, 452. General Agreement on Tariffs and Trade or GATT. See World Trade Organization. General Agreement on Trade in Services or GATS. See World Trade Organization. General System of Preferences (GSP), 17, 291, 293, 382 fn. 22. Guatemala-Taiwan Free Trade Agreement, 335. Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, 380. Hemispheric Cooperation Program (HPC), 425, 458. Honduras-Taiwan Free Trade Agreement, 335. Human Rights, 146, 246–7, 409, 417. Immigration. See Migration. Intellectual Property: Berne Convention for the Protection of Literary and Artistic Works, 66, 78, 198, 278, 329; Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite, 198, 278, 330, 359; Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure, 198, 279, 329, 359; Central American Convention for the Protection of Industrial Property, 329; Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of Their Phonograms, 66, 78, 198, 278, 329; Hague Agreement Concerning the International Registration of Industrial Designs, 198, 279, 330, 359; International Convention for the Protection of New Varieties of Plants, 66, 78, 198, 279, 330, 359; Lisbon Agreement for the Protection of Appellations of Origin and their International Registration, 198, 278, 330; Madrid Agreement

488 • Latin American and Caribbean Trade Agreements Intellectual Property (continued) Concerning the International Registrations of Marks, 198, 279, 330; Madrid Agreement for the Repression of False or Deceptive Indications of Sources of Goods, 198; Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks, 198; Paris Convention for the Protection of Industrial Property, 66, 78, 198, 278, 329; Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, 198, 279, 330, 359; Patent Cooperation Treaty, 198, 278, 330, 359; Patent Law Treaty, 198, 279, 330, 359; Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, 78, 198, 278, 329; Trademark Law Treaty, 198, 279, 330, 359; Treaty on the International Registration of Audiovisual Works, 198, 278; WIPO Copyright Treaty, 78, 198, 278, 330, 359; WIPO Performances and Phonograms Treaty, 78, 198, 278, 330, 359. Inter-American Convention against Corruption, 294 fn. 13, 418. Inter-American Democratic Charter, 422. Inter-American Development Bank (IADB), 148, 283, 298–9, 300, 308, 336–7, 414, 417, 420, 425, 432. Inter-modal Legislation, 230–1, 296, 300. International Convention for the Simplification and Harmonization of Customs Regimes, 260. International Labor Organization (ILO), 141, 361–2, 384, 418, 432, 452. Investment: Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), 50, 65, 77, 196-7, 325, 389; InterAmerican Convention on International Commercial Arbitration, 50, 65, 77; United Nations Commission on International Trade Law (UNCITRAL) Rules on International Commercial Arbitration and Conciliation, 50, 65,

77, 389; United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), 65, 77. Judicial Committee of the Privy Council, 369, 392 fn. 28. Kirchner, Nestor, 158, 232, 234–5, 237–8. Labor, 140–2, 199, 201, 249, 251, 279, 281, 303–4, 306, 327, 360–2, 375, 384, 411, 413, 418, 424–5, 432, 449–56, 458–9. Lagos, Ricardo, 105. Latin American Free Trade Agreement. See Latin American Integration Association. Latin American Integration Association (ALADI): Convention of Reciprocal Payments and Credit, 23–4; Treaty of Montevideo of 1960, 5–6; Treaty of Montevideo of 1980, �� 19, 21�� –�� 3, 27�� –�� 9, 34, 36, 110, 117, 124, 156. Lavanga, Roberto, 84. Lula da Silva, Luiz Inácio, 103, 117, 125, 145, 201, 426, 445. Mandela, Nelson, 102. Mbeki, Thabo, 102�� –�� 3. Menem, Carlos Saul, 81�� –�� 2, 96, 177, 234. MERCOSUR: Agreement Legalizing the Internal Migration of Nationals of the MERCOSUR, Bolivia and Chile, 200; Agreement on Residency for the Nationals of the MERCOSUR, Bolivia, and Chile, 200–1, 456; EgyptMERCOSUR Framework Agreement, 104; Framework Agreement on Inter-regional Cooperation between the European Community and the MERCOSUR, 100–2, 118, 201; IsraelMERCOSUR Free Trade Agreement, 103–4; Jordan-MERCOSUR Framework Agreement, 104; Memorandum of Understanding Related to the Exchange and Integration of Electricity in the MERCOSUR, 238–40; Memorandum of Understanding with Respect to the Exchange of Natural Gas and Integration of the Natural

Index • 489 Gas Sector among the MERCOSUR Member States, 239–40; MERCOSUR Action Plan for Cooperation in the Biofuels Sector, 240; MERCOSURMorocco Framework Agreement, 104; MERCOSUR-Pakistan Framework Agreement on Trade, 104; Multilateral Agreement on Social Security, 199–201, 456; Preferential Trade Agreement between MERCOSUR and India, 103–4; Preferential Trade Agreement between MERCOSUR and the Southern Africa Customs Union, 102–3; Protocol of Buenos Aires on International Jurisdiction in Contractual Matters, 160–1; Protocol of Brasilia for the Solution of Controversies, 148–52, 154, 156, 195; Protocol of Olivos, 148-56, 160–1, 310, Protocol of Ouro Preto, 137–8, 141–3, 145, 148–9, 152; Protocol of Ushuaia on the Commitment to Democracy in the MERCOSUR, Bolivia, and Chile, 96, 102, 144, 420; Treaty of Asuncion, 81-2, 110, 137-9, 142, 144–5, 149, 152, 156, 164, 179, 186, 196, 199, 201. Migration, 45, 69, 77, 279-80, 375, 417, 437, 455–6; Agreement Regularizing the Internal Migration of Nationals of the MERCOSUR, Bolivia and Chile, 200; Agreement on Residency for the Nationals of the MERCOSUR, Bolivia, and Chile, 201. Morales, Evo, 100, 235–6, 245 fn. 1. NAFTA. See North American Free Trade Agreement. Nicaragua-Taiwan Free Trade Agreement, 335. North American Free Trade Agreement (NAFTA), 21–2, 41–2, 47, 53, 57–64, 66–7, 72, 101, 272, 293, 313, 343, 346–8, 352, 357, 361–3, 381, 411, 415, 424, 435, 442–3, 447, 449–51, 453–5, 457; North American Agreement on Environmental Cooperation, 362–3, 450; North American Agreement on Labor Cooperation, 361, 450; North American Energy Working Group (NAEWG), 443–4.

Open Regionalism, 13. Organization on Economic Cooperation and Development (OECD), 377, 397. Oviedo, Lino, 96, 420. Pacheco, Abel, 349. Panama-US Free Trade Agreement, 429, 432, 452, 455. People’s Summit of the Americas, 431. Perez, Carlos Andres, 53. Peru-US Free Trade Agreement, 118, 245 fn. 1, 259, 290, 294, 429, 432, 435, 447, 452–5. Protocol of Amendment to the Kyoto Convention. See International Convention for the Simplification and Harmonization of Customs Procedure. Real Plan (Brazil), 85–6, 162–3, 178, 207, 210, 212, 214–5, 217, 223, 225, 227, 229–30, 231. Sarney, José, 82. SICA. See Central American Integration System. Small and Medium Sized Businesses (SME’s), 63, 87, 98, 101, 130, 141, 147–8, 163, 204, 224, 246, 250, 253–4, 307–8, 384, 417–8, 425, 448. Social Security, 140–1, 199–201, 280–1, 375, 392, 455–6. Toledo, Alejandro, 117, 125. Trade Creation, 2, 85. Trade Diversion, 2, 85–7. Trade Promotion Authority (TPA), 412, 417–8, 423. Treaty of Integration, Cooperation and Development (Argentina-Brazil). See Treaty on Integration and Economic Cooperation. Treaty on Integration and Economic Cooperation (Argentina-Brazil), 82–3. United Nations Development Fund and Global Environment Facility, 308. Union of South American Nations (UNASUR), 246, 300, 448–9. United Nations Economic Commission for Latin America and the Caribbean (ECLAC), 2–3, 5, 206–8, 417, 420.

490 • Latin American and Caribbean Trade Agreements United States Agency for International Development (USAID), 307, 362, 399, 417, 425. Vazquez, Tabaré, 98. West Indies Federation, 10. World Trade Organization (WTO), 12–8, 56, 67, 70, 79, 81, 86 fn. 18, 102–3, 105, 107,109, 123, 133, 153, 167, 177, 182, 184, 257, 283, 294 fn. 13, 310, 313, 316, 342, 347, 364, 372, 378 fn. 8, 382–3, 385, 389, 390, 392, 397, 404–5, 409, 412, 414, 418–9, 424, 426–8, 430–2, 444; Agreement on Implementation of Article VI of the GATT (Antidumping Agreement), 14, 48, 52, 107, 114, 121, 129, 149, 189, 191, 321–2, 346, 386; Agreement on Implementation of Article VII of the GATT (Customs Valuation Agreement), 58, 116, 172, 174, 259, 313, 316, 372; Agreement on Safeguards, 14, 16 fn. 44, 58, 122, 182, 185–6, 269, 320–1, 340, 348, 356, 386; Agreement on Subsidies and

Countervailing Measures, 14, 121, 129, 149, 189, 191, 322, 373, 386, 415; Agreement on Technical Barriers to Trade, 14, 75, 116, 131, 182, 266, 323, 414; Agreement on Textiles and Clothing, 14, 336; Agreement on the Application of Sanitary and Phytosanitary Measures, 14, 116, 123, 131–2, 183, 266, 324, 354, 415; Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), 14, 78, 102, 117, 135, 198, 277–8, 329, 344, 413, 416; Agreement on TradeRelated Investment Measures (TRIMs), 14, 177–8, 325; Article 5 of GATS, 15, 18; Article 24 of GATT, 15–8, 81 fn. 1; Doha Round, 102–3, 378, 431, 437, 444–5; Enabling Clause, 17, 81 fn. 1; General Agreement on Tariffs and Trade (GATT), 14–8, 55, 122, 189, 259, 385, 388, 409, 428; General Agreement on Trade in Services (GATS), 14–8,109, 192, 272, 328, 374, 416; Uruguay Round, 14, 16 fn. 43, 316 fn. 7, 419. Zoellick, Robert, 426.

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