As the Southern African Customs Union (Sacu) begins trade talks with the United States, it can learn valuable lessons from the outcomes of US trade deals with Mexico and Chile.
The far-reaching North American Free Trade Agreement (Nafta), signed in 1993, established a free trade area from Canada in the north to Mexico in the south. Chile recently concluded a bilateral agreement with the US, which essentially brings it into Nafta, since it already has accords with Canada and Mexico.
While differences between Sacu and these countries are obvious, they are all resource-rich, have similar development levels and face the same global challenges. Mexico and Chile have developed into export-oriented economies, crucial for international integration and sustainable growth. This is Sacu’s strategy for South Africa. In force for 10 years, Nafta has provoked widespread criticism. It was concluded in record time, and critics insist Mexico was unable to analyse its overall impact, which excluded key sectors from benefits.
The integration of unequal partners created problems. The agreement did not consider special and differential treatment of certain industries, which, in hindsight, was a prerequisite for Mexican industries to be able to compete with their US and Canadian counterparts.
Agriculture would have benefited from special treatment. Mexican farmers could not compete with subsidised US products, and more than two million maize farmers have been displaced.
It is argued that Nafta’s benefits to the country have not cascaded to ordinary Mexicans. Per capita income has stagnated despite moderate economic growth rates, and unofficial jobless figures are soaring. Multinationals in Mexico prefer to use foreign rather than local suppliers, while Mexican labour is less competitive than that of Indonesia or China.
The maquiladoras, the Mexican assembly plants that employ low-cost, indigenous labour and produce finished goods for export to the US — a direct result of Nafta — have recently hit the doldrums. On the US-Mexican border, they constitute 3 500 of Mexico’s three million firms, absorbing 5% of employment.
The maquiladoras add only 3% of local content, while accounting for a massive 95% of exports. They are little more than assembly lines that do not contribute much to economic development.
Nevertheless, most analysts agree that Nafta has succeeded. General economic and trade figures support this, while the agreement helped stabilise the Mexican economy after the “Tequila” crisis in 1995.
Mexico is the US’s second-largest trade partner, after Canada, with trade growing by 150% since 1993. US manufacturing companies invested an average of $2,2-billion a year in factories from 1994 to 2001.
Trade and industrial diversification is another positive result of Nafta. In the early 1980s Mexico exported goods worth $20-billion a year, of which oil made up $14-billion.
Today Mexican exports amount to $160-billion, of which only $10-billion come from oil. Substantial progress has been made in building the textile, electronics and automotive sectors.
Since 1993 economic growth has averaged above 3% a year, and fundamentals such as inflation and the exchange rate have been stable.
Chile’s free-trade deal with the US, signed in June this year, is the US’s most comprehensive bilateral agreement to date, covering market access for goods and services, addressing investment, intellectual property and non-tariff barriers.
After three years, 95% of Chilean exports will enter the US duty-free. Reciprocal duty-free access for more sensitive products will be phased in over 12 years.
The US is Chile’s largest trading partner, with two-way trade amounting to about $9-billion in 2002 — comparable to Sacu-US trade figures. The agreement is expected to boost Chile’s US exports by 40% and increase US investments, already 45% of fixed direct investment.
Chile negotiated under the “negative list” system, where all sectors are immediately liberalised for trade with the US, unless otherwise specified.
However, little consideration was given to special treatment for certain sectors. The inclusion of the services sector is a hot potato because the US has a superior services sector that could put jobs in the Chilean sector under pressure. Sacu is likely to negotiate from a similar position.
Moreover, prominent export products, such as wine — one of Chile’s primary exports to the US — have been excluded from immediate liberalisation.
The dispute-settling mechanism for “unfair trade practice”, as specified by the US, is another bone of contention. It is so costly and time-consuming that it will obstruct Chilean exports to the US. However, Chileans are generally enthusiastic about the deal.
As with Mexico, the accord indicates a strong commitment by the world’s superpower and will generate confidence in Chile — something that is a rarity in Latin America today.
Nobody can deny that Mexico is better off than before the agreement, and prospects are good in Chile. A relationship with the US has been key to this.
Still, Sacu should look closely at the lack of special and differential treatment in Nafta, which hurt certain Mexican industries, and the issues of unfair trade practices and services in Chile’s negotiations.
Lyal White, senior researcher: Latin America at the South African Institute of International Affairs, was in Chile, Mexico and the US for research purposes.