Hola free trade! The Pacific Alliance strengthens Latin American trade aspirations as the Trans-Pacific Partnership negotiations move forward

On 10 February 2014, the Presidents of Chile, Colombia, Mexico and Peru met in Colombia at the VIII Summit of the Pacific Alliance to sign the Additional Protocol of the Framework Agreement for the Pacific Alliance. The Additional Protocol eliminates 92 percent of tariffs between the members and will enter into effect after each of the members incorporates it into their domestic framework through the appropriate legislative channels. The remaining 8 percent of tariffs that have not been liberalized mainly relate to agricultural products and will be eliminated gradually over the next few years.

This is a very significant development not just for the countries involved but for the region as a whole and the rest of the world. These four countries represent nearly 40% of the Latin American GDP and have a total population of over 210 million people. Combined, the four countries represent the eighth largest economy in the word and the seventh largest exporter.

With the potential conclusion of the Trans-Pacific Partnership in the coming year, this significant step towards strengthening the trade bloc will further cement the channels of trade with Asia that these influential Latin American economies are seeking to deepen.

The Pacific Alliance

The Pacific Alliance, comprising Chile, Colombia, Mexico and Peru, was created in April 2011 with the Declaration of Lima, following which the Framework Agreement was signed in June 2012. The Alliance has made remarkable progress in the relatively short time since its inception, taking a pragmatic attitude to integration. Important objectives of the Alliance are to develop an economically integrated regional alliance and "to move gradually toward the free circulation of goods, services, capital and persons". In addition, the Pacific Alliance has promoted other ways of integrating the countries outside of trade-related approaches, such as visa-free travel, joint embassies abroad and a common stock exchange (an integrated Latin American Market – "MILA").

The Alliance will focus its trade efforts on developing stronger and more productive relationships with other countries, and in particular with Asian countries. The openness and dynamism of the leaders of the Pacific Alliance have been contrasted to the more protectionist and introverted approach taken by the leaders of Mercosur. Mercosur, which has been one of the principal trading blocs in South America so far, was created in 1991. Mercorsur's full members are Argentina, Brazil, Paraguay, Uruguay and Venezuela (albeit doubts remain over the legality of Venezuela's incorporation). However, following the suspension of Paraguay by other Mercosur members, the bloc has been criticized for its political frailties rather than a credible approach to free trade.

Other countries are also following the Alliance's movements closely, in particular Costa Rica which has applied to become a member of the Alliance. In order for Costa Rica to be accepted as a member, it will have to comply with certain requirements, such as having trade agreements with each of the existing member countries. Panama and Guatemala have also expressed an interest in joining the Alliance. In addition, some 30 countries have been accepted as Observer States, including European countries.

Asian trade channels: the Trans-Pacific Partnership moves closer to a reality

This move towards deeper regional integration is echoed in the advances being made towards the conclusion of the Trans-Pacific Partnership (TPP), a prospective free trade agreement encompassing twelve major economies around the Pacific Rim that has been under negotiation for the last four years. The TPP, involving the United States, Canada, Australia, New Zealand, Japan, Singapore, Malaysia, Vietnam, Mexico, Chile, Peru and Brunei, is intended to eliminate the majority of trade barriers throughout the Pacific region. However, the commitments anticipated to be included in the TPP go well beyond the liberalisation of market access regimes, with far-reaching obligations aimed at harmonising domestic regulation in relation to intellectual property, financial and environmental regulation, investment protection mechanisms, government procurement regimes and labour standards. Particular impacts are expected to be felt by the energy, agribusiness, TMT, consumer products and automotive sectors, as well as financial services through the harmonisation of rules related to the use of e-commerce.

The precise implications of the TPP for these Latin American states remain to be seen as the negotiations have entirely taken place behind closed doors. While the content of the TPP has not yet been published, the significance of the negotiating parties and the exceptionally broad scope of the agreement have made it the subject of great speculation. Four draft chapters of the TPP have been leaked through Wikileaks during the negotiations, fuelling heated debate about the scope of the commitments required by the parties.

If successfully concluded, the TPP is anticipated to have huge implications for global trade dynamics, creating a trade bloc constituting over 40% of global GDP and around 20% of global trade volume, which is second only to the European Union in its scale, and potentially a significant change for East-West trade relations. The opportunity for Chile, Peru and Mexico to be a part of this historic agreement, expected to have such a significant impact on global trade architecture, is a momentous step in further promoting the economic growth of these states. Participation in such an important trade forum, populated as it will be by such influential economies, may be a major stride in raising the economic profile of the region.

While it has significant impacts for a variety of regional relationships, the TPP is particularly designed around strengthening the trade channels between Latin America and Asia, both through the already established routes for commodities to the high volume manufacturing sectors in Asia and, ideally, through enhancing trade in a variety of other sectors.

The potential involvement of Colombia in the TPP remains an outstanding question. While Colombia has expressed an interest in joining the negotiations, it is not currently a party, which may inhibit the states of the Pacific Alliance from operating as a cohesive unit within the TPP. A complex web of other overlapping free trade areas already overlays the states participating in the TPP (not the least of which is the North American Free Trade Agreement). As such, while the relationship between the Pacific Alliance and the TPP is not yet clear, the Pacific Alliance is unlikely to be the only context in which any such challenges will be faced.

New kids on the bloc: the view ahead

The elimination of these tariffs adds significant weight to the Pacific Alliance as a regional trade grouping. With the TPP potentially heading towards a conclusion within the year, 2014 could mark the start of a new era of greater economic prominence for the influential economies of Latin America and the development of an even closer engagement with Asian markets.

Herbert Smith Freehills is monitoring the TPP negotiations closely. If you would like to discuss the potential impacts of these developments for your business, please contact Christian Leathley, Partner, Maria Martinez, Senior Associate, or Louise Barber, Associate.