Order Code RS20864
Updated May 14, 2003
CRS Report for Congress
Received through the CRS Web
A Free Trade Area of the Americas: Status of
Negotiations and Major Policy Issues
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
At the second Summit of the Americas in Santiago, Chile (April 1998), 34 Western
Hemisphere nations agreed to initiate formal negotiations to create a Free Trade Area
of the Americas (FTAA) by 2005. The process so far has led to two draft texts, the
second completed for the November 1, 2002 trade ministerial in Quito, Ecuador. A year
later, the third draft is expected at the eighth trade ministerial scheduled for November
17-21, 2003 in Miami. Although implementing legislation is not anticipated until the
next Congress, for an FTAA to be signed in January 2005, the 108th Congress will play
a crucial role during this last phase of the negotiations given its expanded consultative
and oversight authority as defined in the Trade Promotion Authority (TPA) provisions
of the Trade Act of 2002 (P.L. 107-210). This report will be updated periodically.
Background and Status of Negotiations
Over the past two decades, trade liberalization and broader economic policy reform
in Latin America have raised the prospect of a previously unlikely idea – a Free Trade
Area of the Americas (FTAA) involving 34 nations of the Western Hemisphere. Latin
America’s approach to freer trade, referred to as “open regionalism,” has involved the
creation of sub-regional agreements, some of which are open to new members and whose
members remain free to pursue other agreements. Examples include: the North American
Free Trade Agreement (NAFTA); the Southern Common Market (Mercado Comun del
Sur – Mercosur); the Andean Community (AC); and the Central America Common
Market (CACM). These arrangements, along with numerous bilateral agreements and
unilateral trade liberalization decisions, have reduced average tariff rates in Latin America
from over 40% in the mid-1980s to under 12% by 2000, and doubled trade openness, as
measured by imports rising from 10% to 20% of gross domestic product (GDP).1
1 Inter-American Development Bank. Integration and Trade in the Americas. Washington, D.C.
December 2000, pp. 7 and 10.
Congressional Research Service ˜ The Library of Congress

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Many see the FTAA as the next important step for Latin American trade opening and
an essential element of an export-led development strategy. Trade-related development,
however, requires more than simple export growth. It is through access to larger export
markets, higher quality, lower-priced capital goods, and foreign capital investment that
economies can develop manufacturing bases to diversify export earnings away from
dependence on price-volatile commodity trade. For example, Latin America’s trade has
grown faster than the world average over the last decade, yet these countries have been
slow to diversify their export base into manufactured goods, particularly to markets
outside the region. The exceptions are Mexico and Central America, which have
experienced export-diversifying trade creation by participating in closer trade and
investment arrangements with the United States. The United States also is Brazil’s largest
market for value-added manufactured products. FTAA advocates argue that broader and
deeper regional integration that includes the U.S. market could spur diversified export
development in many other Latin American countries, as well.2
Despite the benefits of Latin America’s trade liberalization, the multitude of free
trade agreements (FTAs) that “open regionalism” has spawned can also lead to inefficient
and discriminatory trade. The impetus to correct this situation, combined with the
conviction that trade liberalization is a cornerstone for reform and development, has
generated widespread official support for the FTAA, although skeptical attitudes prevail
as well. This includes the United States, which acknowledges its growing trade
relationship with Latin America, and the potential for the FTAA to support broader U.S.
goals in the region such as promoting democracy, regional security, and drug interdiction
efforts. But, these goals must be reconciled with interests of import competing industries,
as well as those of labor and environment groups. Still, an FTAA is expected to reduce
barriers to trade region wide, allowing all countries to trade and invest more with each
other under the same rules. Defining those “rules,” however, is no small task.
Writing the FTAA agreement falls to nine negotiating groups responsible for: market
access; agriculture; investment; services; government procurement; intellectual property
rights; subsidies, antidumping, and countervailing duties; competition policy; and dispute
settlement. Each group is chaired by a different country and the overall process is
directed by the Trade Negotiations Committee (TNC). The TNC chair has rotated every
18 months or following a trade ministerial meeting, as have chairs of the various
negotiating groups. In addition, there is a consultative group on smaller economies, a
committee on civil society to provide input from non-government parties (labor,
academia, environmental groups), a technical committee on institutional issues, and a
joint government-private sector committee of experts on electronic commerce. Draft
FTAA texts reflect the input of all countries, and in some cases groups of countries such
as Mercosur, with “bracketed text” reflecting areas of disagreement. In an unprecedented
nod to transparency in the trade negotiating process, the draft texts are being released
upon completion in all four official languages.3
Since 1994, there have been three summits and seven trade ministerial meetings.
Trade ministers approved the first draft of the FTAA at the April 5-7, 2001 ministerial in
2 Ibid., pp. 12-15 and Weintraub, Sidney. Development and Democracy in the Southern Cone.
Center for Strategic and International Studies, Washington, D.C., February 2000. pp. 12-13.
3 See: [http://www.ustr.gov/regions/whemisphere/ftaa.shtml] and [http://www.ftaa-alca.org].

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Buenos Aires and it was adopted by the countries at the Quebec City Summit three weeks
later.4 Additional goals were achieved at the Quito ministerial in November 2002: 1) the
second draft of the FTAA agreement was approved and released; 2) Brazil and the United
States became co-chairs of the TNC and will guide the negotiating process through its
final phase to expected completion in January 2005; 3) a new Hemispheric Cooperation
Program (HCP) was established to develop resources to help small countries “strengthen
their capacity to implement and participate fully in the FTAA;” 4) a time line was
established for the critical market access negotiations; and 5) the final rotation of chairs
for the various negotiating groups was completed. The eighth FTAA ministerial meeting
will convene on November 17-21 2003 in Miami, Florida, where a third draft text of the
agreement is expected to be presented.
The most important recent milestone, reiterated at the April 2003 TNC meeting, was
the initiation of detailed market access negotiations involving five separate negotiating
groups: market access; agriculture; services; investment; and government procurement.
They were given instructions to coordinate their efforts in developing guidelines and
chapter revisions, and final revised offers for all market access issues are due by July 15,
2003. The ministerial declaration also formally affirmed that discussions on agriculture,
a critical and sensitive topic for most countries, will have to be done with an eye on
parallel discussions being undertaken by the World Trade Organization (WTO). The
WTO deadline for agriculture negotiations is also set for January 2005.
Major Policy Issues
The FTAA involves a commitment by 34 countries to consider a broad trade policy
agenda, and although there is much work to be done, major milestones were achieved in
2002. First, when the U.S. Congress passed trade promotion authority (TPA) as part of
the Trade Act of 2002 (P.L. 107-210), it removed one major barrier to the FTAA’s
completion, particularly from the Latin American perspective. This provided the Bush
Administration with guidance on trade negotiations, which if followed, should improve
chances that a final agreement will win congressional approval under expedited
procedures. To begin fulfilling the new congressional consultation requirements defined
in the TPA statute, the USTR’s office formally notified Congress on October 4, 2002 of
the Bush Administration’s FTAA negotiation objectives.
Second, the election of Luiz Inacio Lula da Silva as President of Brazil settled
another important political question given that Brazil will be a key player on many of the
issues that must be resolved. Third, the FTAA negotiations entered their final phase after
the Quito Ministerial. Much still lies ahead, however, and if an agreement is to be
reached by 2005, which is still uncertain in the minds of many representing some of the
smaller Caribbean countries as well as Brazil, the most difficult challenges will have to
be addressed during the 108th Congress. The major policy issues are outlined below.
4 Summits of the Americas took place in Miami (1994), Santiago (1998), and Quebec City
(2001). Trade ministerial meetings were hosted in Denver (1995), Cartagena (1996), Belo
Horizonte (1997), San Jose (1998), Toronto (1999), Buenos Aires (2001), Quito (2002), and will
be followed by Miami (November 17-21, 2003).

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Market Access and Trade Remedy Issues. The negotiating committee on
market access faces one of the most difficult challenges, particularly given that the two
largest regional economies, Brazil and the United States, have different priorities. The
United States, along with Canada, has the lowest average tariff rate in the Western
Hemisphere of 4.5%.5 But Brazil and other countries argue that many of their exports are
subject to U.S. tariff rate quotas (TRQs) and their related high peak tariffs, as well as
countervailing duty and antidumping actions. Brazil, by contrast, has much lower peak
tariff rates, but has the second highest average regional tariff rate of 14.3% and relies on
other trade barriers, as well. The United States has focused its negotiation position on
reducing overall tariff rates as the primary goal in market access discussion.
Latin American countries, by contrast, are pressing to address U.S. trade remedy
laws, domestic support for farmers, and peak tariff rates, with Brazil specifically focused
on opening the U.S. market further to its agricultural, steel, and textile exports. This
raises at least two questions. First, will Brazil and others agree to resolve issues strictly
related to market access negotiations independently of trade remedy issues? Second, is
there a willingness, especially by the United States, to negotiate trade remedy provisions
beyond WTO guidelines, or even consider curtailing application under existing laws?
Although viewed as trade and production distorting from an economic perspective, trade
remedies are well entrenched and widely supported public policies. In March 2002, the
Bush Administration tested both domestic and international sensibilities to this issue
when it increased quotas on various steel imports.
In addition to the market access group, specific instructions were given in Quito to
the agriculture negotiating group. For many Latin American countries, agricultural
exporting is critical for their economic well being and they consider tackling U.S.
agricultural trade policies, particularly subsidies, central to any discussion on market
access. Many agricultural interest groups in the United States have made clear, however,
that they are uninterested in negotiating an agricultural agreement that does not include
Europe and Japan, hence the importance of the parallel negotiation with the WTO. Brazil
and other countries have cautioned that although WTO agricultural negotiations may be
a positive step, the FTAA should not be constrained by the WTO process.6 The
agricultural issues could prove to be major stumbling blocks to the January 2005
completion date if they bog down in either the FTAA or WTO negotiations.
The schedule for market access is another issue currently being debated. This
touches on two issues. The first is dealing with so-called sensitive products, or those a
country may wish to protect as long as possible by reducing tariffs over a longer period
of time. In NAFTA, for example, many agricultural products fell into the longest (15-
year) tariff phase-out schedule. Second, the FTAA negotiators have agreed to allow for
“differentiated access” or different schedules for countries based on their level of
economic development. This is intended to help smaller economies by giving them
quicker access to the U.S. market and allowing them more time to phase out their own
tariffs. Brazil, with a relatively large and developed economy, has raised concerns that
5 1999 unweighted average Most Favored Nation (MFN) applied tariff rates reported in: Inter-
American Development Bank, Integration and Trade in the Americas, December 2000, p. 125.
6 For details on agricultural issues, see: CRS Report RL30935, Agricultural Trade in the Free
Trade Area of the Americas, by Remy Jurenas.

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such a process may effectively make it the last country to have full access to the U.S.
market. U.S. negotiators have responded that the time frame is under Brazil’s control
based on its specific market access offers.
Other Trade Barrier Issues. Services trade is another vital issue for the United
States given its competitive strength in such areas as financial services, transportation,
engineering, and technology consulting. Beyond market access, there are issues critical
to the United States that will eventually take center stage, if the recently completed U.S.-
Chile FTA negotiation is any indication. Intellectual property rights (IPR), government
procurement, and competition policy are among the most important. Intellectual property
rights violations have hurt U.S. producers throughout the world and few countries have
laws protecting intellectual property to the extent the United States does. Copyright
issues and protection of digital products are among the more important issues to resolve.
This proved difficult with the Chile bilateral agreement and may also require extensive
discussion to change laws in over 30 other countries. Competition policy is another
difficult area because of the need to standardize approaches regulating domestic economic
activity, although it may prove more easily reconcilable than IPR disagreements.
Labor and Environment Provisions. Another contentious issue is language
covering labor and environment provisions. Developing countries have often resisted
these provisions, arguing that they should be left to domestic governing authorities or the
relevant international organization, may be difficult for developing countries to meet, and
can be used for protectionist purposes. Concern from the developed world, on the other
hand, is that different standards among trading countries may provide competitive
advantages or disadvantages (lower or higher costs to produce). Specifically, the concern
goes to ensuring that lower environmental or labor standards in developing countries not
become a basis for exploitive, lower-cost exporting, or serve to attract foreign capital
investment, and that higher standards, as in the United States, not be challenged as
disguised barriers to trade. Environmental advocates also point to the social impact of
failure to enforce pollution abatement and resource management laws.
NAFTA set a precedent for including labor and environment provisions in trade side
agreements, an approach also adopted in the 1997 Canada-Chile FTA. Since then, the
debate has intensified and has turned on where the language should be placed in the
agreement, the specificity of the provisions, and how dispute resolution will be handled.
A key reference point is the U.S.-Jordan FTA, which incorporated labor and environment
provisions into the text of the agreement and provided for a single dispute resolution
mechanism for both commercial and social issues. The wording emphasizes that each
country will be held accountable for enforcing its own laws, will reaffirm its
commitments to basic United Nations International Labor Organization (ILO) labor
standards, and not diminish its standards as a way to pursue trade and investment
opportunities. Trade sanctions, although not expressly called for, are also not excluded
as a possible form of dispute resolution in the Jordan agreement.
For many in the United States and Latin America, these provisions were too strict.
The precise location of labor and environment language in the FTAA is less controversial
than other aspects. By contrast, staunch resistence arose over the use of trade sanctions
as a possible remedy for noncompliance with labor or environment provisions. In the
U.S.-Chile FTA, language calls for fines or “monetary assessments” to address
noncompliance, with a recourse to loss of trade benefits as a way to collect unpaid fines.

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Labor advocates have expressed dissatisfaction with the U.S.-Chile FTA, however,
because it steps back from the U.S.-Jordan agreement by having dispute resolution
expressly apply only to language upholding domestic labor laws, leaving reaffirmation of
ILO standards and “non-derogation” from domestic standards uncovered. This issue,
however, hinges on one’s interpretation of congressional intent of negotiating objectives,
as written in the TPA provisions. The monetary assessment is also questioned as a
“meaningful deterrent.”7 Given the continuing debate over labor and environment
language, the issue appears to remain open with respect to the FTAA.
Outlook
An FTAA would be a ambitious undertaking under the best of circumstances, but the
current economic conditions in Latin America are far from supportive. Latin America is
coming off one of its worst years since the early 1980s, with economic growth declining
by 1.1% for the region as a whole in 2002, and 2003 promising a modest recovery at best.
Further, adjusting to the changes inherent in adopting broad-based trade liberalization will
require even deeper reform efforts, both political and economic, which are particularly
difficult to achieve when economies are struggling. Certain countries face immense
challenges. Argentina heads the list, recovering from a deep and lengthy economic
depression. High debt levels and a record setting financial bailout of Brazil by the
International Monetary Fund (IMF) in 2002 also reinforces lingering doubt over the
financial situation in the region’s largest economy. Continued unrest in Colombia over
guerrilla and drug activity has created tension both within the country and with its
neighbors. Protests and strikes against the Hugo Chavez regime in Venezuela also invited
concern over the short-term future of regional cooperation and the prospects for an FTAA.
With Brazil and the United States chairing the trade negotiating committee,
determining how the process will proceed (what, how, and when issues will be
negotiated) may be as important as the negotiation issues themselves. Both countries will
push for moving their agenda forward. Negotiating difficulty is compounded by the
breadth of social policies attached to the agreement. In addition, in virtually all countries,
the politics of trade continue to resuscitate industry and sectoral protectionist arguments,
with the United States and Latin American countries having significantly different
priorities in some cases. Resolving these differences will likely require a demonstrable
concern for addressing adjustment costs through a combination of tough bargaining and
strategic compromise, not only at the negotiating table, but in the U.S. Congress and
throughout the Western Hemisphere.
Finally, in the United States, a major barrier was removed with passage of TPA, but
many Latin Americans still express doubt over the U.S. commitment to a region-wide
FTA given decisions to expand steel quotas, increase domestic agricultural subsidies, and
delay (it appears) the signing of the U.S.-Chile FTA over Chile’s perceived lack of
support for U.S. policy in Iraq. Therefore, despite a sense of general support for the
FTAA concept, there is still the challenge of gaining timely, broad political acceptance
in the United States (and throughout the hemisphere) for a specific agreement.
7 Report of the Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC). The
U.S.-Chile and U.S-Singapore Free Trade Agreements. February 28, 2003. pp. 5-9.

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