Order Code RS20864
Updated August 15, 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, with a
third draft expected to be completed for the eighth trade ministerial scheduled for
November 17-21, 2003 in Miami. Currently there are serious differences between Brazil
and the United States, the co-chairs of the trade negotiating committee, which will need
to be resolved by then. 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 Negotiation Process
For two decades, growing trade liberalization in Latin America has raised the
prospect of a previously unrealized idea – a Free Trade Area of the Americas (FTAA)
involving 34 nations of the region. Latin America’s trade development, now christened
the “New Regionalism,” refers to changes made from the “old” system of closed
subregional agreements that dominated in the early postwar era, to one based on more
open and deeper commitments both within and outside the region, and all part of broader
policy reform efforts that emerged in the aftermath of the 1980s debt crisis. Examples
include the North American Free Trade Agreement (NAFTA), the Southern Cone
Common Market (Mercado Común del Sur), and the Central American Common Market
(CACM) as revitalized in the 1990s. Combined with unilateral, bilateral, and multilateral
efforts, these subregional agreements have fostered trade opening, with average tariff rates
in Latin America having fallen from 40% in the mid-1980s to under 12% by 2000.1
1 Inter-American Development Bank, Beyond Borders: The New Regionalism in Latin America,
Economic and Social Progress Report, Washington, D.C. 2002, pp. 25, 32-33, and 62.
Congressional Research Service ˜ The Library of Congress

---

CRS-2
Many see the FTAA as the next important step for Latin American trade opening and
an essential element of an export-led development strategy. There are two important
aspects to this: increased trade with large markets like the United States and increased
trade within the Latin American region. Intraregional trade has grown precipitously and
is recognized as a key factor in output and productivity growth for the region. Latin
America’s trade has grown faster than the world average over the last decade, in part due
to growth in traditional exports such as agriculture and other commodities. Increasingly,
as in cases such as Mexico and Central America, diversification into light manufacturing
has been a direct result of closer trade and investment ties with the large industrial U.S.
market. Therefore, the FTAA raises expectations that it will lead to growth in traditional
exports as well as promote trade diversification.2
Despite the noted progress in Latin America’s trade liberalization, the multitude of
free trade agreements (FTAs) that the “New 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. The 34 countries made an important commitment to accept all parts of the
agreement in the end, known as the single undertaking provision. 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
Buenos Aires and it was adopted by the countries at the Quebec City Summit three weeks
2 Ibid., pp. 24-29 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].

---

CRS-3
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 now guide the negotiating process to its
completion; 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;” and 4) a time line was established for the critical market
access negotiations. The eighth FTAA ministerial meeting will convene on November
17-21 2003 in Miami, Florida to unveil a third draft text of the agreement.
The most important recent milestone 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. Final revised
offers for all market access issues were due by July 15, 2003, but not all countries reached
this goal.
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 Negotiation Issues
The FTAA involves a commitment by 34 countries to consider a broad trade policy
agenda, the difficulty of which has become increasingly clear of late. Essentially, the
United States has many different priorities than some key Latin American countries,
making a balanced and mutually acceptable agreement difficult to define, as seen in a
short review of the negotiating issues.
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%. 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 15% and relies on
other trade barriers, as well.5 The United States has focused its negotiation position on
reducing overall tariff rates as the primary goal in market access discussion, but its
specific offer differs significantly from what Brazil proposes (see next section).
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. Specific
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).
5 2000 unweighted average Most Favored Nation (MFN) applied tariff rates reported in: Inter-
American Development Bank, The New Regionalism in Latin America, p. 62.

---

CRS-4
instructions were also given in Quito to the agriculture negotiating group. Agriculture is
the most protected sector in most economies and for many Latin American countries,
agricultural exporting is critical for their economic well being. It has historically proven
to be among the most difficult areas in which to negotiate liberalization, yet the Latin
American countries 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 subsidies agreement that does not include Europe and Japan. Therefore,
the outcome of the current WTO agricultural negotiations will influence greatly the course
of the FTAA.6
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 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 to resolve in 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
6 For details on agricultural trade issues, see CRS Report RL30935, Agricultural Trade in the
Free Trade Area of the Americas, by Remy Jurenas.

---

CRS-5
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.
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, which the USTR argues it has met in the Chile agreement. The
monetary assessment is also questioned as a “meaningful deterrent” for various reasons,
which is also disputed by the USTR.7 Given the continuing debate over labor and
environment language, the issue appears to remain open with respect to the FTAA.
Outlook: The U.S.-Brazil Nexus
The FTAA negotiations are at a crossroads, with Brazil and the United States at odds
over how to proceed. As the two largest regional economies with perhaps the most
divergent perspectives on the FTAA, resolving their differences will be crucial for
meeting the January 2005 deadline. Although both countries reiterated their commitment
to meeting this deadline in a mini-ministerial conducted on June 13, 2003, and at a
meeting between Presidents Bush and Lula one week later, there appears to be
considerable difference in what they expect to accomplish. In fact, the two countries may
be contemplating significantly different notions of an FTAA.
Brazil has taken a firm stand against three U.S. trade policy initiatives. The first is
the U.S. strategy of pursuing subregional trade arrangements. In particular, Brazil sees
NAFTA, the Andean Trade Promotion Act (ATPA), the Caribbean Basin Initiative (CBI),
and bilateral agreements under consideration with Chile and Central America as having
an isolating effect on the Mercosur countries, and especially Brazil. Second, the United
States has said it cannot deal with agricultural subsidies in the FTAA, insisting instead
on negotiating them in the Doha Round of the WTO in order to include other major
subsidizing countries (the European Union and Japan, among others). An identical stand
has also been taken with respect to antidumping, in part because of congressional
opposition. Brazil considers this position to be in conflict with the FTAA’s single
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 and USTR
Response to the Labor Advisory Committee (LAC) report on the proposed FTAs with Singapore
and Chile. Undated. See [http://www.USTR.gov].

---

CRS-6
undertaking provision.8 Third, the United States is insisting on a “differentiated access”
approach to market access.
The USTR market access offer calls for 65% of imports from Latin America to be
given duty free treatment immediately, but there would be different tariff elimination
timetables “to reflect different sizes and levels of development of the economies.” With
respect to U.S. consumer and industrial imports, immediate duty-free treatment would
apply to the following percentages of goods based on their subregion of origin: 1)
Caricom–91%; 2) Central America–66%; 3) Andean–61%; and 4) Mercosur-58%. A
similar schedule is offered for agricultural products. Brazil in this case would qualify for
the least preferential schedule, although it would still represent improved market access.
Brazil considers the U.S. strategy discriminatory and responded with its own
approach, referred to as the “Three Track Proposal.” The Brazilian offer would: 1) have
the United States conduct market access discussions with the Mercosur countries, known
at the “4+1" arrangement; 2) allow investment, government procurement, and IPR issues
to join agricultural subsidies and antidumping at the Doha WTO round; and 3) include the
remaining rules-based issues in the FTAA discussions. This would include rules of
origin, some disciplines on investment, competition policy, and other issues not dealt with
elsewhere. Brazil considers its offer as mirroring a United States trade policy strategy that
Brazil characterizes as selectively using the FTAA to negotiate its best deal. The United
States has not agreed to such a proposal, arguing that it effectively amounts to an
alternative negotiation to the FTAA process.
Brazil is far less trade dependent on the United States than other Latin American
countries. In fact, it has been estimated that the effect on Brazilian export growth would
be greater in an FTA with the European Union than the FTAA.9 Brazil also has received
support for its position from the other Mercosur countries. Given Brazilian intransigence
toward U.S. positions and its relatively significant bargaining leverage, there may be
serious pressure on the U.S. to find a compromise on a number of issues. It is not clear
if such a compromise will entail moving toward a so-called “FTAA light” that is far less
of an inclusive arrangement, or staying with a deeper agreement as originally envisioned
that reflects a more balanced position among the 34 countries. President Lula’s visit with
President Bush on June 20, 2003 resulted in an apparent mutual understanding reaffirming
that the FTAA would be completed by January 2005, and that a number of special
bilateral consultative committees would be formed to address critical issues, such as
agriculture. In any case, bridging the gap in U.S.-Brazil positions by the November 2003
trade ministerial in Miami seems necessary if the FTAA is to achieve its January 2005
completion deadline.
8 The USTR, in its summary of the “most important” FTAA negotiating principles in its Trade
Policy Agenda and Annual Report, has always emphasized two points: improving upon WTO
rules and disciplines, and the outcome being a single undertaking. Interestingly, the single
undertaking language was dropped in the 2003 report.
9 Inter-American Development Bank, The New Regionalism in Latin America, p. 52.

---