Peru-Honduras FTA Enters into Force, Falls Short on Free Movement of People

The bilateral free trade agreement (FTA) between Peru and Honduras entered into force on January 1, 2017; the parties launched negotiations in November 2010, and signed the agreement in May 2015. While the bilateral FTA goes beyond the parties’ existing World Trade Organization (WTO) obligations, it reflects the shortcomings of most other modern trade agreements in that it allows for the largely unobstructed movement of goods, services and capital across borders, but not for the free movement of all labor classes, a key element to a truly free market.

A Boilerplate WTO-plus FTA

As with most modern trade agreements, the Peru-Honduras FTA is consistent with and builds upon signatories’ obligations under WTO Agreements. Upon entry into force, the bilateral FTA immediately eliminated the import duties Honduras levied on Peru-origin goods falling under approximately 81 percent of tariff lines, with all but a handful of the remaining tariffs lines to undergo gradual liberalization over periods of 5, 10 or 15 years, ostensibly corresponding to sensitive national industries spread across the agricultural and industrial sectors; similarly, Peru’s tariff schedule under this FTA contemplates 5-, 10- and 15-year liberalization periods, with few exempt categories the import duties for which will remain at most favored nation (MFN) levels.

In addition to goods market access, the FTA includes chapters on Rules of Origin (ROO) and Origin Procedures, Trade Facilitation and Customs Procedures, Cooperation and Mutual Assistant on Customs Matters, Sanitary and Phytosanitary Measures (SPS), Technical Barriers to Trade (TBT), Trade Defense, e.g., safeguards and antidumping and countervailing duties (AD/CVD), Intellectual Property Rights (IPR), Government Procurement, Competition Policy, Cross-border Trade in Services and Investment, Dispute Settlement, and Transparency. The Peru-Honduras FTA also includes a chapter on Temporary Entry of Business Persons, an area commonly covered under modern trade agreements, establishing rights and obligations in regard to the entry to and presence in the territory of one party of business visitors, traders, investors, intra-company transferees and so-called “professionals” of the other party.

A White Collar Bias

An oft-cited criticism of modern trade agreements is that, while they aggressively liberalize the free movement of goods, services and capital, they rarely provide for the free movement of all people; rather, these agreements usually establish rights and obligations exclusively with respect to the movement of the so-called “white-collared” or professional class, e.g., business visitors, traders, investors and intra-company transferees, leaving largely untouched the rules governing the free movement of unskilled or non-professional labor. Additionally, by simple virtue of the chapter’s title, the Peru-Honduras FTA asserts the “Temporary” nature of any provision relating to the movement of people, and the chapter’s text stresses the “need to […] protect the [parties’] domestic work force[s]”, reaffirming the right of parties to apply their respective immigration statutes, e.g., visa requirements, etc. In light of the foregoing, members of the non-professional or unskilled labor force find little to no direct benefit to them in most FTA’s Temporary Entry chapters, given that economic migrants usually seek permanent—or at least longer-term—residency with work privileges.

It would not be fair to point a finger only at Peru and Honduras for having fallen short on the free movement of all people under their bilateral FTA, particularly given the low number of non-professional Peruvians and Hondurans that would choose to move to and work in the territory of the other party. For example, the United States-Singapore FTA also falls short in this regard (see Chapter 11), and the Pacific Alliance, an agreement between Mexico, Colombia, Peru and Chile this blog has discussed in a previous entry, sought to liberalize the free movement of goods, services and capital, in addition to people, but as of yet has only achieved the removal of visa requirements for non-remunerated activities.

That the bilateral Peru-Honduras FTA does not allow for the free movement of all labor classes likely reflects the customary practice of employing a standardized WTO-plus FTA template, whereby countries negotiate at the margin of previous FTAs that rarely establish immigration benefits, much less for non-professional labor; however, it also reflects the politics of the moment in Peru, Honduras and many countries around the world in regard to immigration. In modern democracies, governments must sell the virtues of free trade to their constituencies by touting the positive impacts a trade agreement will have on industry, consumers and, of particular political importance, job creation; workers of voting age often take a zero-sum approach to immigration, viewing immigrants as competition instead of job creators, particularly in blue collar trades, a belief economists eschew but politicians seldom contest.

Even in the European Union (EU), within which EU citizens may move across borders, and reside and work in other EU or European Economic Area (EEA) countries, there is pushback against this free movement of people, as evidenced by the June 2016 vote in the United Kingdom for it to leave the European Union, in part attributable to misgivings among UK voters about the presence of foreign EU workers in the UK. Similar immigration-skeptic sentiment is observable in such other EU countries as France, the Netherlands and Germany, and skepticism toward immigration was a principal factor that catapulted Donald Trump to win the November 2016 US presidential elections.

Immigration: Good for Business among Other Things

There exist myriad reasons to liberalize immigration worldwide, not the least of which flow from humanitarian concerns (see: Syrian refugee crisis, unaccompanied Central American minors in US immigration detention centers, etc.). Immigrants contribute to the societies that receive them in many ways we cannot measure in purely economic terms, but even if we were to purely focus on bottom-line arguments, we could point to decades of data that prove that immigrant labor keeps industrial costs down and consumer prices low, and show that immigrants often start businesses that, in turn, create jobs; immigration is simply not a zero-sum game.

That the Peru-Honduras FTA does not provide for the free movement across borders of all labor classes for the purpose of performing remunerated activities alone is perhaps a minor issue, as few non-professional Peruvians and Hondurans would choose to move to and work in the territory of the other party. Nonetheless, it does serve as a golden example of global trade policy over the last several decades not viewing the free movement of all labor classes, both professional and not, as a source of economic value and/or a key step toward achieving a truly free market. The anti-immigrant rhetoric currently prevalent in US and European electoral politics suggest that this trend is unlikely to change course in the short term. Given this, might countries of the “Global South” take the lead in this regard in the years ahead?

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Mercosur Continues Cozying to Pacific Alliance

Chilean President Michelle Bachelet and Argentina President Mauricio Macri announced in mid-December 2016 that work toward an agreement to further liberalize bilateral trade would commence in the first quarter of 2017. The announcement is consistent with recent indications that Mercosur, to which Argentina is party, is eager to more actively engage the Pacific Alliance, of which Chile, Mexico, Colombia and Peru are member states.

A Chilean International Economic Relations General Directorate (DIRECON) press release indicates that negotiations to deepen Argentina-Chile trade ties will cover trade facilitation, government procurement, regulatory aspects, competition policy, cross-border investment and trade in services, e-commerce, and small- and medium-sized enterprises (SME). The agreement will also reportedly include a chapter on cooperation, to cover such topics as environment, global value chains, and gender.

Economic Complementation Agreement (ACE) No. 35 between Mercosur member states and Chile, in effect since 1996, currently governs Argentina-Chile trade relations. Although ACE No. 35 provides WTO-plus preferential tariff treatment for goods traded between the parties, in general, the Agreement merely affirms WTO commitments in such areas as trade remedies (e.g., antidumping and countervailing duties (AD/CVD) and safeguards), customs valuation, technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures, export incentives, cross-border trade in services, and intellectual property; additionally, the Agreement simply reaffirms the validity of extant bilateral investment promotion and protection treaties.

ACE No. 35 took effect in 1996; as such, many of the provisions thereunder now appear dated and not reflective of concepts found in more modern trade agreements, a situation Presidents Macri and Bachelet appear eager to revert. For example, future Chile-Argentina negotiations on trade facilitation are likely to reflect the December 2013 WTO Trade Facilitation Agreement (see: Bali Package), which includes provisions for expediting the movement, release and clearance of goods, including goods in transit. Also, whereas ACE No. 35 either does not encompass or includes merely hortatory language on government procurement, competition policy, e-commerce and SME, these constitute subject matter areas in which Chile has undertaken binding—and often WTO-plus—commitments in more recent free trade agreements (FTAs), e.g., US-Chile FTA, Trans-Pacific Partnership (TPP) and Pacific Alliance. The trade skepticism that reigned supreme until relatively recently in Argentina and Brazil, a topic this blog discusses in a previous entry, made difficult forward movement within Mercosur trade policy on these modern, 21st-century trade issues; that Argentina now appears keen to make such forward movement is consistent with the free trade-friendly tone President Mauricio Macri has set since he took office in December 2015, following the trade-skeptic Cristina Fernández de Kirchner Administration.

Although Mercosur rules bind Argentina to negotiate certain trade agreements en bloc with its fellow Mercosur member states, this announcement on a possible future agreement to deepen Argentina-Chile bilateral trade ties does not appear to run afoul of these rules. Mercosur Resolution No. 32/00 prohibits an individual Mercosur member state from negotiating with third countries bilateral agreements that afford preferential tariff treatment; the future Argentina-Chile agreement to which the DIRECON press release refers does not appear to seek further preferential tariff treatment between the two countries but, rather, improve bilateral economic relations by addressing non-tariff-related matters, e.g., trade facilitation, government procurement, regulatory aspects, competition policy, cross-border investment and trade in services, e-commerce, and SME. Additionally, there is precedent for an individual Mercosur member state negotiating an agreement of this nature bilaterally with Chile (see: Uruguay-Chile FTA).

Argentina is an observer state to the Pacific Alliance, a regional integration initiative to promote the free movement of goods, services, capital and people across Mexico, Colombia, Peru and Chile, often regarded as among the most trade-friendly countries in the Western Hemisphere over the past decade. While observer status does not afford Argentina preferential market access under the Pacific Alliance, that Chile holds the Alliance’s Pro Tempore Presidency and Argentina that of Mercosur has stoked optimism of meaningful convergence between the two trading blocs. While it remains unclear to what extent Argentina and the greater Mercosur will converge with the Pacific Alliance over the long term, Presidents Macri and Bachelet have agreed to take steps toward this end over the short term by studying the impact of “cumulation”, a concept that essentially widens the definition of originating goods eligible for preferential tariff treatment under a trade agreement, a move that would certainly deepen supply chain linkages between Pacific Alliance and Mercosur member states without any modification to tariffs applied to goods traded amongst them.

Uruguay Appears to Buck Mercosur on Trade with China; Latin America Hedges against a Trump Trade Policy

General Director for International Economic Affairs of the Uruguayan Foreign Ministry, Ambassador Ricardo Nario, affirmed on December 13, 2016 that Uruguay would not say “no” to or step back from China in regard to the negotiation of a bilateral China-Uruguay free trade agreement (FTA), a noteworthy position in light of Uruguay’s membership in Mercosur, the rules of which prohibit individual member states from entering into trade agreements with third countries, allowing exclusively for Mercosur to negotiate such agreements en bloc. Additionally, Uruguay’s interest in cementing trade and investment ties with China is consistent with an ever greater pessimism in the Latin American region toward strengthening such economic ties with the United States in the context of a forthcoming, trade-skeptic Trump presidency.

Uruguay Gives the Appearance  of Going It Alone

Uruguayan President Tabaré Vázquez and Chinese President Xi Jinping agreed in mid-October 2016 to commence negotiations toward a bilateral FTA as soon as possible, and Uruguayan Foreign Minister Rodolfo Nin Novoa has since held internal consultations with other ministries to study and quantify the economic impact, by sector, an FTA with China would have. The Vázquez Administration had originally wished to negotiate such FTA alongside its fellow Mercosur member states (i.e., Brazil, Argentina, Paraguay and Venezuela), as prescribed under Mercosur Resolution No. 32/00; however, Ambassador Nario’s mid-December 2016 remarks pointed to several factors that would make difficult negotiating en bloc, including (i) Paraguay not having diplomatic relations with China but, instead, with Taiwan; (ii) Brazil and Argentina not having adopted a “One China Policy”; and (iii) Brazil and Argentina not recognizing China as a market economy, a position with implications for the proper calculation and application of trade remedies (e.g., antidumping and countervailing duties (AD/CVD)). Also, Venezuela’s Mercosur membership has been in suspension since early December 2016 due to alleged violations of adhesion protocols, which only complicates negotiating trade deals en bloc, at least in a political sense.

Although several press reports indicate that Uruguay has since assured its fellow Mercosur member states that it will not seek a bilateral Uruguay-China FTA, there is precedent to support the Vázquez Administration’s doubt that Mercosur, as a whole, could negotiate and successfully conclude an FTA with China: until recently, due to political pressure the Brazilian and Argentine agricultural and industrial sectors exerted on Mercosur negotiators, trade talks toward a comprehensive European Union-Mercosur trade agreement floundered, a topic this blog has discussed in a previous entry. However, as compared to former Argentine President Cristina Fernández de Kirchner and former Brazilian President Dilma Rousseff, the current Argentine and Brazilian Presidents Mauricio Macri and Michel Temer, respectively, are ostensibly less trade skeptic and more amenable to open markets, which has given new momentum to the ongoing EU-Mercosur trade discussions. Nonetheless, Ambassador Nario hinted at the opportunity cost Uruguay would incur by not having preferential access to the Chinese market through an FTA, asserting that there will be an additional 350 million middle-class Chinese within the next four years, and these are potential consumers of goods in which Uruguay is already export-competitive, e.g., beef and grains; he also noted that Australia and New Zealand already have preferential access to the Chinese market under extant FTAs, and that these two countries export many of the same goods as Uruguay, a fact that will likely increase support within Uruguay’s agricultural sector for a China-Uruguay FTA.

Latin America Side Eyes Trade with the United States under Trump

The Vázquez Administration’s overtures toward China on strengthening bilateral trade and investment ties also reflects a trend that is occurring in many Latin American countries to hedge against uncertainty in regard to future trade with the United States under a Trump presidency. Citing job losses in the United States he attributes to, inter alia, the offshoring of US factors of production (e.g., manufacturing plants), US President-elect Trump has levied harsh criticism at FTAs into which the United States has entered, including a threat to withdraw the United States from the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP)—as of yet not ratified by the US Congress, and to seek high punitive tariffs on goods imported into the United States from Mexico and China; prospects also appear gloomy for successfully completing negotiations toward a Transatlantic Trade and Investment Partnership (TTIP), between the United States and the European Union, given this trade-skeptic posture on the part of the incoming Trump Administration, another topic this blog has discussed in a previous entry. It is then perhaps not coincidental that, against this backdrop of President-elect Trump’s rhetoric on trade, many public and private sector leaders across Latin America are pivoting toward increased economic ties with China.

As recently as March 2016, the Vázquez Administration expressed a positive disposition toward negotiating a Mercosur-United States FTA, an idea for which the Administration of Argentine President Mauricio Macri expressed support in October 2016. A Mercosur-United States FTA is now unlikely, at least in the near term; President Barack Obama, who appears acquiescent toward the Agreement, will leave office on January 20, 2017, and the incoming Trump Administration is unlikely to pursue such FTA given the foregoing trade-skeptic rhetoric.

While the incoming Trump Administration appears poised to withdraw the United States from TPP, of which Mexico, Peru and Chile constitute three of the twelve members, China has offered an alternative path for Asia-Pacific regional economic integration—without the United States. At the November 2016 Asia-Pacific Economic Cooperation Summit in Peru, Chinese President Jinping reportedly received a standing ovation from Latin American business leaders upon expressing China’s vehement support for free trade and cross-border investment in the Pacific Basin. In this vein, and as an alternative to the US-inclusive TPP, President Jinping is pushing the Free Trade Area of the Asia-Pacific (FTAAP), a potential trade agreement between the ten members of the Association of Southeast Asian Nations (ASEAN), and Australia, China, India, Japan, New Zealand, South Korea, Canada, Mexico, Peru and Chile.

Even though the United States already has FTAs in place with Canada, Mexico, Peru and Chile, in addition to Singapore, Australia and South Korea, TPP would (i) set a unified goods trade regime (e.g., tariff treatment, customs procedures and rules of origin) among these countries, increasing the ability of member state producers and exporters to establish efficient, cost-effective regional supply chains, and (ii) create the rules for cross-border investment and trade in services in the Asia-Pacific region. FTAAP would accomplish many of the same things, but with more countries—except the United States—and governed by rules largely reflecting the wishes of FTAAP’s hegemon: China.

An Outlook for the Western Hemisphere

Were it to pull away from free trade, the United States would risk losing ground in the Western Hemisphere not only on the economic front but, also, in regard to geopolitical relevancy. Uruguay’s recent move to strengthen ties with China is entirely consistent with the tone other Latin American countries have taken, particularly since Donald Trump won the November 2016 US presidential elections. China has taken note of the potential void the United States could leave in the Western Hemisphere under a trade-skeptic Trump Administration, and press reports suggest that it is moving aggressively to fill it. Whether the United States indeed leaves this void now depends on whether President-elect Trump, upon assuming office, fulfills his campaign promises to raise protectionist trade measures and turn the country inward, or whether this was simply campaign rhetoric aimed at riling an electoral base with deep misgivings about the virtues of globalization. Starting on January 20, 2017, we shall see.

With a Trump Trade Policy on the Horizon, Mercosur Moves forward with Europe

Out of an early-December 2016 meeting in Brasilia between Argentine Foreign Minister Susana Malcorra, and Brazilian Minister of Foreign Relations José Serra and President Michel Temer comes news that Argentina and Brazil will accelerate negotiations toward a European Union-Mercosur trade agreement. Minister Malcorra suggested in an official press release that US President-elect Donald Trump’s likely opposition to the yet unfinished Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union opens an opportunity for Mercosur to fill the commercial void the United States would leave were the incoming Trump Administration to pump the brakes with or withdraw the United States entirely from TTIP negotiations. Minister Malcorra’s bearishness on a President-elect Trump’s expected trade policy also reflects the decreasing likelihood of a US-Mercosur FTA, at least in the near term, an idea that did not appear outlandish in the months immediately prior to the November 2016 US presidential elections.

Argentina and Brazil Seek to Turn over a New Leaf on Trade with the European Union

Since May 2010, the European Union and Mercosur, of which Argentina and Brazil are two of five member states, have been negotiating a comprehensive trade agreement, covering trade in industrial and agricultural goods, in addition to investment and cross-border trade in services, government procurement, intellectual property (IP), customs and trade facilitation, and non-tariff barriers to trade (TBTs/NTBs). EU-Mercosur trade talks advanced in fits and spurts over the course of many years largely due to trade-skeptic political pressure the Argentine and Brazilian industrial and agricultural sectors exerted on Mercosur trade negotiators; however, as compared to former Argentine President Cristina Kirchner and former Brazilian President Dilma Rousseff, the current Argentine and Brazilian Presidents Mauricio Macri and Michel Temer, respectively, are ostensibly less trade skeptic and more amenable to open markets. While this market-friendly position on the part of the current Argentine and Brazilian Administrations has planted concern within those two countries’ industrial and agricultural sectors in light of the possible future removal of extant protectionist measures, this trade-friendly rhetoric out of Buenos Aires and Brasilia has given new momentum to the ongoing EU-Mercosur trade discussions.

An Inward-looking United States under President(-elect) Trump?

In contrast to current Obama Administration trade policy, US President-elect Trump continues to levy harsh criticism at free trade agreements (FTAs) into which the United States has entered, including a threat to withdraw from the North American Free Trade Agreement (NAFTA) due to job losses in the United States he alleges have resulted thereof, particularly in the manufacturing sector. He alleges in similar fashion that the Trans-Pacific Partnership (TPP), the implementing language for which the US Congress has yet to ratify, is bad for US workers, and would lead to a rise in US unemployment. Additionally, President-elect Trump’s assertion of his willingness to seek high punitive tariffs on goods imported into the United States from Mexico and China—and possibly others—suggests that a Trump Administration trade policy might only selectively observe the global, rules-based trading system, as embodied in the World Trade Organization (WTO) agreements and current US FTAs adhering thereto.

Given President-elect Trump’s opposition to US FTAs in effect and to TPP, it is not unreasonable to expect ongoing US-EU TTIP negotiations to slow considerably or even stall entirely under a Trump Administration, and for such commercial competitors as Mercosur to view a US retreat from TTIP as an opportunity to seize EU market share. The United States is a major exporter of industrial goods to the European Union, with top export categories in 2015 being (i) aircraft at USD 34.8 billion, (ii) machinery at USD 30.7 billion, (iii) pharmaceutical products at USD 26.4 billion, (iv) optic and medical instruments at USD 26.2 billion, and (v) electrical machinery at USD 20.9 billion; US agricultural exports to the European Union over the same period reached USD 12.1 billion. Mercosur is a major producer of many of these same industrial and agricultural goods, e.g., aircraft, machinery, soybeans.

An Outlook for US Trade with the European Union (and Mercosur)

Tariffs levied on most goods the United States and the European Union trade are already low, i.e., usually under 3 percent, such that increasing US-EU trade flows rests largely on tackling NTBs, e.g., burdensome customs procedures, behind-the-border regulatory restrictions relating to security or consumer protection, etc. Given this challenge, a US retreat from TTIP—and Argentina and Brazil redoubling efforts to finalize a comprehensive EU-Mercosur trade agreement—could lead the United States to eventually face a commercial disadvantage in the EU market relative to Mercosur, particularly should any future EU-Mercosur trade agreement not only lift tariffs but, also, effectively tackle NTBs.

TTIP also covers cross-border trade in services, IP and the importation of consumer goods and industrial inputs, proven drivers of job creation in the United States. In this regard, were the United States to retreat from TTIP under the Trump Administration, US trade policy would turn against the exact issue on which President-elect Trump so effectively campaigned, i.e., jobs. Meanwhile, Argentina, Brazil and the rest of Mercosur appear to be forging ahead on trade with Europe; nonetheless, several factors still hold the potential to derail EU-Mercosur trade talks, including the manner in which Brexit evolves, the resignation of Italian Prime Minister Matteo Renzi following the failure of a constitutional reform he championed, uncertainty surrounding forthcoming elections in France and Germany and/or the apparent desire of Uruguay to negotiate trade deals separately from its fellow Mercosur member states, a topic this blog has discussed in a separate post.

Also, as recently as October 2016, the Macri Administration expressed a positive disposition toward negotiating a Mercosur-United States FTA, a topic this blog discusses in a separate entry. A Mercosur-United States FTA is now unlikely, at least in the near term; President Barack Obama, who appears acquiescent toward the Agreement, will leave office on January 20, 2017, and the incoming Trump Administration is unlikely to pursue such FTA given the ongoing trade-skeptic rhetoric emanating from the Trump transition team.