Order Code RS20864
Updated November 8, 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, at the November 2003 Miami trade ministerial, the
United States and Brazil, the FTAA co-chairs, brokered a compromise. It moved the
FTAA away from the comprehensive, single undertaking principle, toward a two-tier
framework comprising a set of “common rights and obligations” for all countries,
combined with voluntary plurilateral arrangements with country benefits related to
commitments. So far, defining this concept has proven elusive, causing the FTAA talks
to stall and the January 1, 2005 deadline to be missed. At the fourth Summit of the
Americas, held in Mar del Plata, Argentina, on November 4-5, 2005, Brazil, Argentina,
Uruguay, Paraguay, and Venezuela blocked an effort to restart negotiations in 2006,
which now appear to rely, at a minimum, on the resolution of agricultural issues in the
WTO Doha Round before they can resume. 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), the
South American Community of Nations, established in December 2004, and most
recently, the Dominican Republic-Central America-United States Free Trade Agreement
(DR-CAFTA). Combined with unilateral, bilateral, and multilateral efforts, these
subregional agreements have fostered trade opening, with average applied tariff rates of
Congressional Research Service ˜ The Library of Congress

---

CRS-2
the major Latin American countries falling from 40% in the mid-1980s to under 10% by
2002.1
Despite noted progress in Latin America’s trade liberalization, the multiple free trade
agreements (FTAs) that this “New Regionalism” cultivated also created complicated rules
and discriminatory trading patterns. The impetus to simplify this situation, combined with
the conviction that trade liberalization is a cornerstone for reform and development,
initially 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
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 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 accepted at the November 2003 FTAA
ministerial in Miami. Soon thereafter the negotiations stalled and the January 1, 2005
completion deadline was missed, exposing more clearly the challenges to the negotiation
process, especially the need to resolve differences between the United States and Brazil
if the FTAA is to move forward.
The breadth of an emerging resistence to the FTAA became clearer at the fourth
Summit of the Americas held on November 4-5, 2005, in Mar del Plata, Argentina.
Amidst dramatic and sometimes violent protests against President George W. Bush and
the FTAA, which was not scheduled as the major topic of this summit, it was evident that
Latin America was divided over how to proceed. A total of 29 countries supported
renewing negotiations, and the United States pushed to set a specific date in 2006. Brazil,
Argentina, Uruguay, and Paraguay (the Mercosur countries) rejected this idea, arguing
that the conditions for achieving a balanced and equitable agreement did not yet exist.
Venezuela lobbied to end any further effort on the FTAA and for a unified resistence
1 Inter-American Development Bank. Beyond Borders: The New Regionalism in Latin America.
Economic and Social Progress Report. 2002, pp. 25, 32-33, and 62, and private communication.
2 Ibid., pp. 24-29.
3 See [http://www.ustr.gov/regions/whemisphere/ftaa.shtml] and [http://www.ftaa-alca.org].

---

CRS-3
against U.S. policies and presence in Latin America. The Summit declaration called for
a time to explore problems in the FTAA process, while awaiting the outcome of the
upcoming World Trade Organization (WTO) ministerial, indicating that at this juncture,
there is no unified vision on how to proceed with the proposed FTAA.
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 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 two of the largest regional economies, Brazil and the United
States, have different priorities. The United States has the lowest average tariff rate in the
Western Hemisphere of 4.3% (8.5% for agriculture and 3.7% for industrial goods), but
maintains high peak tariffs related to tariff rate quotas (TRQs). It also subsidizes many
agricultural products and has applied antidumping duties to a concentrated group of
industrial products that Latin American countries export. By contrast, Brazil has much
lower peak tariff rates, but a much higher average tariff rate of 10.9% (10.2% for
agriculture and 11.0% for industrial goods) and relies on other trade barriers, as well.4
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 agricultural,
steel, and textile exports. Agriculture is a protected sector in many economies and in
Latin America, it 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 made clear that it will not negotiate domestic agricultural subsidies in a
regional pact because: 1) it would hurt U.S. exporters in the Latin American market
relative to other agricultural exporting countries that subsidize, and 2) it would diminish
the U.S. multilateral bargaining position on subsidies in the broader WTO talks.5 The
Summit declaration addressed this issue, indicating that progress on agricultural issues
in the Doha Round appears necessary to resolve this major sticking point in the FTAA.
Other Trade Barrier Issues. The United States is also interested in non-goods
trade, areas in which it is very competitive. Services trade, for example, is a vital issue,
including such important sectors as financial services, transportation, engineering, and
professional services. Intellectual property rights (IPR), government procurement, and
competition policy are also critical U.S. issues. IPR violations have hurt U.S. producers
4 2004 simple average Most Favored Nation (MFN) tariff rates as calculated by the Inter-
American Development Bank.
5 For details on agricultural trade issues, see CRS Report RL30935, Agricultural Trade in the
Free Trade Area of the Americas, by Remy Jurenas.

---

CRS-4
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 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. Discussion of labor and environment
issues is key for U.S. support of trade agreements, but resisted by developing countries.
Advocates for including these issues argue that lower standards provide an exploitive and
unfair competitive advantage (lower costs) for exporting and 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. 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) fundamental principles, and in defining the
dispute settlement mechanism. The FTAA debate has yet to focus on this concern in
detail, but it will eventually need to be addressed.
Status of Negotiations: A Two-Tier FTAA?
Two years ago, formal FTAA negotiations stalled. As the TNC co-chairs, Brazil and
the United States continued to meet to define the details of a framework for moving
ahead, but negotiators have faced a huge challenge in trying to reconcile their divergent
priorities. When the FTAA negotiations began, they were predicated on the assumption
that all countries could gain from a comprehensive and inclusive agreement, one that
would address everything from market access to trade remedies and rules-based issues.
It now appears that few countries may be ready to accept such broad obligations. The
issues are highlighted in the debate between Brazil and the United States and form the
basis for a compromise unveiled at the November 2003 Miami Ministerial.
Brazil’s leadership role among developing countries is a cornerstone of its foreign
policy, which for its trade strategy means acting as a counterweight to U.S. influence in
the region. 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 and
bilateral trade arrangements, 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 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.

---

CRS-5
Brazil’s tactics include an offensively focused effort to support its growing
agricultural export sector by insisting on prioritizing market access and subsidy issues.6
Equally important 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.
Although the private sector may be more open to engagement with the United States,
Brazil is one of the less dependent Latin American countries on the U.S. market and has
no regional U.S. preferential arrangement at stake to protect (e.g. CBI), so as a matter of
public policy has resisted pressure to accept a deeper FTAA, and in its stead has
expressed a preference for U.S.-Mercosur (4+1) market access talks.7
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 reaffirmed 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, which has not been possible.
At the Puebla TNC meeting held February 2-6, 2004, negotiators could not 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, which is also being discussed in the WTO.
Outlook
The fourth Summit of the Americas at Mar del Plata in November 2005 was
punctuated by violent protests against President Bush and U.S. policy in general, as well
as a failure to set a date for restarting FTAA talks. Some interpreted this as a sign of
diminished U.S. influence in the region, which could bode poorly for any hope of
resurrecting the FTAA in the near future. The United States remains committed to the
two-tier framework crafted at the Miami Ministerial, but currently does not have the
leverage to see the project through.
6 This despite evidence that ending agricultural subsidies would increase FTAA agricultural trade
little compared to a far bigger gain 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.
7 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.

---

CRS-6
In the meantime, Latin America’s New Regionalism is thriving in the form of a
growing number of bilateral and plurilateral trade deals, many anchored to the economies
of Brazil and the United States, which may be seen as the de facto default approach to a
stalled FTAA. Progress on the FTAA itself, including setting a date for resuming
negotiations, still seems to rest with Brazil and the United States agreeing to the details
of a framework on how to proceed. The United States has repeatedly rejected Brazil’s
main initiative to begin “4+1” market access talks.
The United States has now enacted the DR-CAFTA and is pursuing bilateral FTAs
with Panama and three of the Andean countries. The USTR has formulated a framework
for negotiating these FTAs that relies on 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
environmental 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 help South America’s bargaining position
with the United States. 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 many of these countries are negotiating with the United States.
As the FTAA negotiations flounder, the political trade dynamics of the region appear
to be changing. President Hugh Chávez of Venezuela has for years railed against the
United States and is calling for a new socialism to replace the market-oriented policies
supported by the United States. Chávez received considerable attention at the Summit of
the Americas, but it is unclear how much of a lasting regional influence this will have.
Nearly all the South American countries are negotiating for or have entered into some
type of agreement with both Brazil and the United States, recognizing that they do not
have the luxury that oil-rich Venezuela may have to adopt a full blown independent
economic stand. The fact that Brazil and the United States have so many potential
agreements that will overlap countries also suggests that resolving U.S.-Brazil differences
will be critical for an FTAA to be realized.
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. The lack of movement has opened a hole for anti-FTAA
forces, at least for now. Getting the FTAA back on track in 2006 seems like a significant
challenge, even if something approaching a “successful” Doha round is concluded.

---