Economic Integration in South America: the laudable failure of LAFTA

In The (dis)United States of South America, I explained the recent news of Venezuela’s suspension from MERCOSUR and how strains within the common market were beginning to show. It is necessary to know the history of integration efforts in Latin America to understand the contemporary issues surrounding MERCOSUR and how the future may play out.

The title of my last post, The (dis)United States of South America, is an allusion to the pan-Americanism that was prominent among revolutionary leaders, such as Simon Bolivar, who believed that the liberated provinces should join together in a single political entity. The grand ambition of a united, independent federation in Hispanic South and Central America appear, on the face of it, similar to the experience in the United States just a few decades prior.

Institutional legacy of Spanish colonialism, geography, and strong personalities would ensure that a United States of South America or the Federal Republic of Central America would not be successful. However, pan-Americanism and dreams of a united territory continue to live on.

Latin American Free Trade Association

The period following World War II saw a surge in South American efforts change its economic status quo. This shift revolved around import substitution industrialization (ISI) policies. The goal of ISI was to develop domestic industries that could eventually produce products for global export through high, protectionist tariffs.

Unfortunately, the results were firms that were not globally competitive who nonetheless pressured their governments to maintain the high tariff levels to preserve their domestic monopoly. The Latin American Free Trade Association (LAFTA) was born during the height of ISI dominance in Latin America.

The LAFTA was the first post-WWII integration effort. The Montevideo Treaty created the LAFTA in 1960 between Argentina, Brazil, Mexico, Paraguay, Peru, and Uruguay, and by 1970 also included Bolivia, Colombia, Ecuador, and Venezuela. As Michael Gestrin and Alan Rugman argue,

“From the 1960s through to the late 1970s, regional trade groups in Latin America were not designed as an intermediate step towards freer overall trade (as the General Agreement on Tariffs and Trade intended) but were rather an extension of import substitution policies to the regional level.”

Several cracks in the Association emerged relatively early on, including a deceleration of trade and dissatisfaction with the gains from trade.

Tariffs between members were reduced, but high, protectionist tariffs for non-LAFTA countries remained in place. Furthermore, while intra-LAFTA trade increased rapidly from its starting point in 1960, nominally trade between these countries remained small relative to their respective economies. By the 1970s, increases in trade began to plateau.

While Article 32 of the Montevideo Treaty did allow for less developed members to reduce their tariffs at a slower pace, many of the poorer nations, such as Bolivia and Peru, did not believe that they were gaining as much as the larger, more advanced economies, such as Argentina and Brazil.

This perceived unfairness by the less developed countries directly led to the creation of the Andean Group in 1969 between Bolivia, Chile, Colombia, Ecuador, and Peru. The Andean Group sought to address what Diana Tussie described as: “The failure of inward oriented development strategies came under fire and so did the regional projects that had accompanied these.”

The Latin American Integration Association (LAIA) was born from the ashes of the LAFTA in 1980. The LAIA addressed two key of the issues of the LAFTA in particular: speed and scope.

The LAFTA’s framework for tariff reduction was 12 years and, other than the provision for less developed countries, was uniform across the association. The LAIA encourages tariff reduction between member states but does not mandate it. Furthermore, it provides a framework for individual member states to make trade liberalization agreements with other member states without providing the same benefits to all other member states.

The LAIA also has a narrower scope than the LAFTA. The LAIA does not provide a timetable to free trade between member states as the LAFTA did. This difference is a key reason why the LAIA still exists.

While it is accepted that the LAIA was successful in integrating members within subregions and to a lesser extent within the whole association, it would not be correct in describing the LAIA as a success. As Tussie notes “because its initial expectations had been so low, it did not give rise to much disappointment, passion or dispassion.”

Why it matters today

The goal of a closer knit, if not completely integrated, South America continued after the LAFTA and remains a policy objective today, as evidenced by Venezuela’s new name: the Bolivarian Republic of Venezuela.

The experience of the Latin American Free Trade Association and its successor, the Latin American Integration Association, directly affected contemporary regional economic integration efforts, such as the Common Market of the South (MERCOSUR) and the Andean Pact.

As I will discuss in the forthcoming articles on economic integration, the failure of the LAFTA would rise again in the form of the failed Free Trade Area of the Americas and the Trans-Pacific Partnership.

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