Order Code RS20864
Updated January 3, 2005
CRS Report for Congress
Received through the CRS Web
A Free Trade Area of the Americas: Major
Policy Issues and Status of Negotiations
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
In 1994, 34 Western Hemisphere nations met at the first Summit of the Americas,
envisioning a plan for completing a Free Trade Area of the Americas (FTAA) by
January 1, 2005. Nine years later, the third draft text of the agreement was presented at
the November 2003 Miami trade ministerial. The Ministerial Declaration, negotiated
largely by the two co-chairs, Brazil and the United States, took the FTAA in a new
direction, away from the comprehensive, single undertaking principle, toward a two-tier
framework comprising a set of “common rights and obligations” for all countries,
augmented by voluntary plurilateral arrangements with country benefits related to
commitments. A follow-up meeting in early 2004 in Puebla, Mexico was unable to
clarify this concept, highlighting the deep differences that remained between the United
States and Brazil. FTAA talks subsequently stalled and the original January 1, 2005
deadline was missed. In the meantime, both Brazil and the United States are pursuing
subregional trade pacts that may further complicate the negotiation process. Talks
between Brazil and the United States may resume in early 2005, but it is still unclear if
significant progress can be made on the FTAA this year. This report will be updated.
Background and Negotiation Process
In the aftermath of the 1980s debt crisis, much of Latin America embraced broad
economic policy reform that included major strides toward trade liberalization. This trend
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 reform has been
christened the “New Regionalism” to reflect the evolution from an “old” system of closed
subregional agreements that dominated in the post-war era, to one based on more open
and deeper commitments both within and outside the region. Examples include the North
American Free Trade Agreement (NAFTA), the Southern Common Market (Mercosur),
the Andean Community, the revitalized Central American Common Market (CACM), and
most recently, the South American Community of Nations, established in December 2004.
Combined with unilateral, bilateral, and multilateral efforts, these subregional agreements
Congressional Research Service ˜ The Library of Congress

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have fostered trade opening, with average tariff rates in Latin America falling from 40%
in the mid-1980s to under 12% by 2000.1
Despite the noted progress in Latin America’s trade liberalization, the multiple free
trade agreements (FTAs) that the “New Regionalism” cultivated also created inefficient
and discriminatory trading patterns. The impetus to simplify this situation, combined with
the conviction that trade liberalization is a cornerstone for reform and development, has
generated widespread support for an FTAA. The United States has led the FTAA effort
in expectation that it not only would open markets for U.S. goods and services, but would
provide benefits to the entire region by: 1) increasing Latin American trade with the large
U.S. market; 2) fostering reciprocal trade among Latin American countries; and 3)
encouraging more foreign direct investment in Latin America.2
After ten years, the negotiations stalled in 2004, missing the January 1, 2005
completion deadline and exposing, more clearly, the challenges to the negotiation process.
First, there are fundamental differences in the needs of developed and developing
countries that have proven difficult to reconcile. Second, import competing industries
have raised concerns in all countries, that together, have slowed progress. Third, social
issues, such as labor and environmental provisions, have yet to be tackled in detail.
Fourth, helping all countries, big and small, take advantage of an FTAA has raised
awareness that a comprehensive trade-related capacity building system will be needed.
The negotiation process is organized into nine working groups responsible for:
market access; agriculture; investment; services; government procurement; intellectual
property rights; subsidies, antidumping, and countervailing duties; competition policy;
and dispute settlement. The groups are directed by the Trade Negotiations Committee
(TNC) and each is chaired by a different country on a rotating basis. There is also a
consultative group on smaller economies, a committee on civil society to provide input
from non-government parties (e.g. labor, academia, and environmental groups), a
technical committee on institutional issues, and a joint government-private sector
committee of experts on electronic commerce. Draft FTAA texts are released in all four
official languages, with “bracketed text” reflecting areas of disagreement.3
Since 1994, there have been four summits and eight trade ministerial meetings. The
first draft of the FTAA was adopted at the Quebec City Summit in 2001 and a second
draft was completed at the Quito ministerial in November 2002. At that time, Brazil and
the United States became co-chairs of the TNC and were charged with guiding the
negotiating process to its completion. The third draft text was completed for the
November 20-21, 2003 FTAA ministerial in Miami.4
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.
2 Ibid., pp. 24-29.
3 See [http://www.ustr.gov/regions/whemisphere/ftaa.shtml] and [http://www.ftaa-alca.org].
4 Summits of the Americas took place in Miami (1994), Santiago (1998), Quebec City (2001),
and Monterrey (2004). Trade ministerial meetings were hosted in Denver (1995), Cartagena
(1996), Belo Horizonte (1997), San José (1998), Toronto (1999), Buenos Aires (2001), Quito
(2002), and Miami (2003). Brazil will host the next, still unscheduled, trade ministerial.

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Major Negotiation Issues
The FTAA began as a commitment by 34 countries to consider a comprehensive
trade agreement to be accepted as a single undertaking — all parties would have to agree
to it as a whole. This has proved to be a challenging task given that U.S. priorities differ
from those of key Latin American countries, making a balanced and mutually acceptable
agreement difficult to define, as a short review of the negotiating issues suggests.
Market Access and Trade Remedy Issues. Market access is one of the most
difficult challenges because the two largest regional economies, Brazil and the United
States, have different priorities. The United States, although having the lowest average
tariff rate in the Western Hemisphere of less than 4%, maintains high peak tariffs, uses
tariff rate quotas (TRQs), and heavily subsidizes many agricultural products. A
concentrated group of industrial products are subject to antidumping duties that affect
Latin American countries. By contrast, Brazil has much lower peak tariff rates, but the
second highest average regional tariff rate of 15% and relies on other trade barriers, as
well.5 The United States, therefore, has focused its attention on eliminating tariffs
broadly, whereas Brazil and other countries want to address peak tariffs and TRQs.
Latin American efforts to address U.S. trade remedy laws and domestic support
programs have focused specifically on opening the U.S. market further to its agricultural,
steel, and textile exports. Agriculture is the most protected sector in most economies and
for most Latin American countries, contributes significantly to economic output,
employment, income, and exports. Historically, it has proven to be the most difficult area
to liberalize, yet many Latin American countries consider tackling U.S. agricultural trade
policies central to any discussion on market access. The United States is open to
discussing many agricultural issues, but has also made clear that it will not negotiate
domestic agricultural subsidies in a regional pact because it would hurt U.S. exporters in
the Latin American market relative to other agricultural exporting countries that subsidize,
and diminish the U.S. multilateral bargaining position on subsidies in the broader World
Trade Organization (WTO) talks.6 Therefore, progress in the Doha Round on agriculture
issues could present an opportunity to accommodate a major sticking point in FTAA talks.
Other Trade Barrier Issues. The United States is also interested in non-goods
trade, areas in which it has a comparative advantage. Services trade, for example, is a
vital issue, including such important sectors as financial services, transportation,
engineering, and technology consulting. Intellectual property rights (IPR), government
procurement, and competition policy are also critical U.S. issues. Intellectual property
rights violations have hurt U.S. producers throughout much of Latin America and no
country has laws equal to the United States in protecting intellectual property. IPR rules,
however, have been criticized for increasing the financial burden on developing countries
and there are competing views as to whether greater IPR protection will increase or
diminish levels of technology transfer and foreign direct investment. Competition policy
is another difficult area because of the need to change regulatory regimes covering
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.
6 For details on agricultural trade issues, see CRS Report RL30935, Agricultural Trade in the
Free Trade Area of the Americas, by Remy Jurenas.

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domestic economic activity. In government procurement, many Latin American
countries, including Brazil, are reluctant to open up their systems, preferring instead to
support, if not protect, domestic industry participation.
Labor and Environment Provisions. The labor and environment issues are
critical for U.S. passage, but resisted by developing countries, who argue that they: 1)
should be left to domestic governing authorities or the relevant international organization;
2) may be difficult for developing countries to meet; and, 3) can be used for protectionist
purposes. Advocates for including these issues see lower standards as a way to provide
an exploitive and unfair competitive advantage (lower costs), which should not be a basis
for exporting nor for attracting foreign investment, and that higher U.S. standards should
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. In response to labor and environment advocacy groups, the United States set the
precedent of including relevant provisions in all its FTAs, but there is still considerable
disagreement over how strong the language should be, particularly in enforcing
International Labor Organization (ILO) basic principles, and in defining the dispute
settlement mechanism.7 The FTAA debate has yet to focus on this concern in detail, but
when market access issues are concluded, it will eventually become a core issue.
Status of Negotiations: A Two-Tier FTAA?
Over the past year, formal FTAA negotiations stalled. As the FTAA co-chairs,
Brazil and the United States continued to meet bilaterally to work on a framework for
moving ahead. Negotiators have faced a huge challenge in trying to meet the divergent
interests of 34 countries that vary in size, economic capability, and political interest.
When the FTAA negotiations began, they were predicated on the assumption that all
countries could gain from a comprehensive and inclusive agreement, one that addresses
everything from market access to trade remedies and rules-based issues. It now appears
that few countries may be ready to accept such deep obligations. The issues are
highlighted in the debate between Brazil and the United States and form the basis for a
compromise unveiled in the November 2003 Miami Ministerial Declaration.
Tension between the United States and Brazil heightened in May 2003 when Brazil
challenged three U.S. policy initiatives. First was U.S. pursuit of subregional trade
arrangements (NAFTA, the Andean Trade Preference Act (ATPA), the Caribbean Basin
Initiative (CBI), and bilateral deals), which Brazil suggested isolates Mercosur in the
context of the FTAA negotiations. Second, Brazil argued that U.S. refusal to address
agricultural subsidies and antidumping disciplines in the FTAA affected its key export
sectors. Third, the U.S. offer of “differentiated” market access gave Brazil the least
favorable treatment. Brazil responded with its “Three Track Proposal” requesting the
United States: 1) conduct separate market access discussions with Mercosur (the “4+1”
arrangement); 2) jettison investment, services, government procurement, and IPR issues
along with agricultural subsidies and antidumping (per U.S. wishes) to the Doha WTO
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].

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round; and 3) include some rules-based issues in the FTAA discussions. The United
States rejected this so-called “FTAA lite” proposal and continued to argue for a more
comprehensive agreement.
Brazil’s strategy rests on two negotiating pillars. Offensively, to support its growing
agricultural export sector, it wants to change agriculture market access rules and has
refused to consider many U.S. issues unless domestic subsidies are included in the talks.8
Equally important to understanding Brazil’s trade stand is its defensive position toward
opening its less competitive sectors of the economy to developed countries (services, IPR,
government procurement, and investment), while prioritizing Mercosur trade and
domestic market development. Brazil is also the least dependent of all the Latin
American countries on the U.S. market and has no regional U.S. preferential arrangement
at stake to protect (e.g. CBI), so it has resisted pressure to accept a deeper FTAA or to
diminish its expectations for greater U.S. agricultural market access.9
The U.S.-Brazil differences were the major factor that determined the outcome of
the 2003 jointly-authored Ministerial Declaration, which defined how the negotiations
would proceed. Although the ministerial declaration reaffirms the commitment to
complete a “comprehensive and balanced” agreement, it does so in the context of a rather
unorthodox compromise. The declaration states that “countries may assume different
levels of commitments...[with a] common set of rights and obligations applicable to all
countries...[and may also] choose, within the FTAA, to agree to additional obligations
and benefits.” The additional obligations may be defined in plurilateral negotiations, with
a country’s benefits being linked to the obligations it undertakes. The trade negotiating
committee (TNC) was instructed to clarify the differences.
At the Puebla TNC meeting held February 2-6, 2004, negotiators were unable to
agree on the core set of rights and obligations. Brazil’s position was unchanged and
called for all industrial and agricultural goods to be in the market access provisions, while
pressing for elimination of export subsidies and action on domestic price supports for
agricultural goods. It did not want to go beyond WTO commitments for services, IPR,
government procurement, or investment. The U.S. priorities were nearly the opposite,
calling for the inclusion of the last four topics and limiting market access language to
“substantially all” products. The United States agreed to the elimination of export
subsidies, but not domestic support for agriculture.
Outlook
Latin America’s New Regionalism is thriving, although it is not clear that this will
lead to an FTAA. Both Brazil and the United States are courting other countries for their
8 This despite evidence that ending agricultural subsidies would increase FTAA agricultural trade
very little compared to a far bigger gain that would come from eliminating tariffs, particularly
for Brazil. Salazar-Xirinachs, José M. Development Issues Posed by the FTAA. In Weintraub,
Sidney, Alan M. Rugman, and Gavin Boyd, eds. Free Trade in the Americas: Economic and
Political Issues for Governments and Firms. Cheltenham, Edward Elgar Publishing, Inc. 2004.
p. 238.
9 Lorenzo, Fernando and Rosa Osimani. Negotiations of the Mercosur with the FTAA and the
U.S. Red de Investigaciones Económicas del Mercosur. Montevideo, Uruguay. July 2003.

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support in the FTAA negotiations and as partners in bilateral or subregional agreements
(the de facto default approach to a stalled FTAA). Progress on the FTAA itself, including
setting a date for the next ministerial, still rests with Brazil and the United States agreeing
to a detailed framework on how to proceed with the negotiations. This goal remains
elusive, but meetings between their trade representatives are expected to begin anew in
early 2005.
In the meantime, the United States is pursuing bilateral FTAs with Central America,
the Dominican Republic, and three of the Andean countries. The USTR has formulated
a framework for negotiating these FTAs that relies on identical or similar language for
many of the chapters, with detailed market access and other schedules developed for each
country. This allows for considerable flexibility in addressing sensitive products and
disciplines within a comprehensive agreement that includes many of the critical U.S.
issues such as services trade, investment, government procurement, intellectual property
rights, labor, and environment concerns, but avoids any mention of domestic subsidies
and antidumping. As well as this approach has worked on a bilateral basis (opinions
differ on this, but FTAs are being implemented), the United States has so far not been able
to replicate it at the regional level.
Nor has Brazil stood still in the regional integration game. Mercosur (led by Brazil,
but which includes Argentina, Uruguay, and Paraguay) has added eight associate members
and succeeded in consummating a long-awaited political and economic pact with the
Andean Community in October 2004. Brazil pushed the integration effort one step further
on December 9, 2004, when twelve countries agreed to form the South American
Community of Nations, a goal Brazil hopes will increase South America’s bargaining
position in the FTAA. The South American Community is a loose agreement calling for
lowering tariffs and improving political dialogue, but entails far less of a commitment
than the FTAs that these countries are negotiating with the United States.
As the FTAA negotiations continue, the trade dynamics of the region are clearly
changing. Since nearly all the South American countries have entered into some type of
agreement with both Brazil and the United States, an interesting negotiation picture is
developing, with the possibility that dual commitments could further complicate FTAA
discussions. Negotiating leverage may depend on how successful these various
arrangements are perceived to be, which may raise the stakes on U.S. congressional action
on implementing legislation for the DR-CAFTA, Panama, and Andean agreements.
The FTAA was initially proposed to simplify trade relations with a balanced,
comprehensive, single undertaking in which all countries would be treated equally. This
proved to be too difficult, slowing progress and giving way to a host of subregional
agreements that will likely further complicate trade and investment decisions, if not the
FTAA negotiations themselves. It is not clear how much progress on agricultural issues
can be made in the WTO, but it would help move the FTAA along. Other divisive issues
exist that inspired a two-tier strategy. To work with this approach, Brazil and the United
States will have to come up with some creative solutions if the FTAA is to be a
meaningful improvement over the status quo, and also not run afoul of WTO rules on
FTAs. Few see a final agreement being reached in 2005, but getting the framework
settled would go a long way toward making it a real possibility sometime in the future.

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