THE LATIN AMERICAN FREE TRADE ASSOCIATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A004200070002-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 19, 2016
• Sequence Number: 2
• Content Type: REPORT

THE LATIN AMERICAN FREE TRADE ASSOCIATION
lease 2006109127. CIA-RDP79-00927A004200070002-9
AGENCY
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THE LATIN AMERICAN FREE TRADE ASSOCIATION
The Latin American Free Trade Association
(LAFTA) is currently in session to negotiate a
third annual round of tariff reductions on intra-
regional trade.. The LAFTA treaty envisages the
elimination of tariffs on "substantially all" in-
traregional commerce by 1972. The treaty indi-
cates that this will be a step toward the eventual
formation of a continental common market, although
LAFTA so far has made little progress in this di-
rection. The prospect of regional integration,
however, has not only stirred the imaginations of
economists and businessmen; it has sparked the in-
terest of political leaders, who perceive possi-
bilities of developing LAFTA as a vital force for
extending Latin American influence in world councils.
Economic Background
LAFTA is part of a wider
movement toward economic region-
alism. Like the visions which
gave rise to the European Eco-
nomic Community, the European
Free Trade Association, and
the Central American Common
Market, the concept of LAFTA
took root in the 1950s. The
rationale for LAFTA, as for the
other regional systems, was
that big industries on the Amer-
ican pattern could develop only
if the size of the market was
also on the American scale.
The case for a Latin
American economic region took
on urgency after the middle of
the decade, when the break in
prices of coffee and other key
commodities finally cracked
the postwar boom. Economic
projections indicated that for-
eign demand for coffee, copper,
tin, and other traditional ex-
ports would not sustain a sat-
isfactory rate of economic
growth in Latin America. The
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situation seemed to call for
new trade patterns based on the
establishment of new industries.
The two remedies--expan-
sion of intraregional trade and
creation of new industries--
logically went hand in hand.
Ecuador could hardly sell much
coffee to Brazil. In the absence
of new industries, the economies
of the different countries would
not be sufficiently complem^n-
tary, and the growth of intrare-
gional trade beyond a certain
point would take on the absurd
caricature of countries taking
in each other's washing. Never-
theless, it was not politically
possible to take more than one
cautious step toward economic
union; the LAFTA treaty signed
in Montevideo in February 1960
centered on the promotion of
intraregional trade, with only
peripheral attention to the
establishment of new industries.
The LAFTA Treaty
The Treaty of Montevideo
specifies a sequence of
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negotiations that will hopefully
lead, over a 12-year period, to
establishment of a free trade
area for most products. The
main characteristic of this
area will be the virtual elimina-
tion of tariffs and other import
restrictions against goods orig-
inating in any of the participat-
ing countries. The treaty does
not stipulate any steps toward
completing the customs union
by the establishment of a common
tariff wall. National tariffs
continue to govern against
imports from outside countries.
During the 12-year transi-,
ti.on period, the treaty allows
for variations among the LAFTA
countries in the items selected
for tariff reduction. The gov-
erning rule is that the average
duty collected by each LAFTA
member on intraregional trade
be a stipulated percentage lower
than the average of duties col-
lected on imports from third
countries. This differential,
set at 8 percent the first
year, is to widen by successive
8-.percent increments each year.
The tariff cuts are not auto-
matic at each stage, nor are
they across the board. They
are rather to be negotiated
item by item in annual LAFTA
conferences. There is no cer-
tainty that the negotiations
will be invariably successful.
It is not obvious at first
reading, but what the treaty
provisions come to is that the
signatories have to negotiate
tariff cuts only on items they
are already importing from
each other. The encouragement
to new industries is minimal,
since they have no assurance
of getting; the tariff prefer-
ences that would open up the
whole regional market.
LAFTA may take a shape more
substantial than the treaty pro-
visions outline. The first
round of tariff reductions in
1961 effected a differential
between intraregional and ex-
ternal tariffs well in excess
of the prescribed 8 percent.
The signatories also went be-
yond the treaty provisions in
extending tariff reductions to
items not yet included in intra-
regional trade.
These concessions may have
had a modest impact on trade
patterns. The 1962 trade sta-
tistics showed a decline in
LAFTA imports from outside
countries but a rise of 17 per-
cent in intraregional commerce.
Mexico made the most striking
gains. Mexican exports to the
rest of the region doubled;
Mexico's chemical exports to
the region went up more than
400 percent. However, over
nine tenths of LAFTA's foreign
commerce is still with nonmember
countries (see chart).
The second round of tariff
reductions in the summer of
1962 came harder, as the coun-
tries ran out of items on which
they felt they could make con-
cessions without jeopardizing
national :interests. The third
round, now being negotiated,
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.Fr% Nr
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may well be the acid test, in-
dicating whether or not LAFTA
is to develop into a truly re-
gional economic system. Even
after tariff concessions are
negotiated, there are escape
clauses, permitting signatories
to reimpose import restrictions
in the event of balance-of-pay-
ments disequilibrium or to
avert difficulties with such
important political elements
as domestic farm lobbies.
Appraisal
The treaty has been in
force since 1961, too short a
time for definitive appraisal.
LAFTA's present goals, limited
though they are, could prove to
be out of reach because of po-
litical instability. Chronic
inflation may impose another
restraint on economic coopera-
tion. The cost-of-living index
in Brazil, for example, went
up about 50 percent in the first
nine months of this year. Ris-
ing prices weaken the competi-
tive position of domestic pro-
ducers and bring greater pres-
sures against tariff reduction.
However, if the present limited
PRINCIPAL ORGANS OF I A F T A
Conference of the Contra ctin Pares: Supreme organ
of the Association. Composed of elegatitions from member countries,
meeting in regular session each year.
Permanent Executive Committee: The Association's standing
body, which supervises implementation of the treaty. It has no
decision-making or enforcement powers beyond those that may be
delegated by the Conference.
Executive Secretar : Elected by the Conference every
three years, he has no formal powers but heads a Secretariat of
technical and administrative personnel. He and the Secretariat
ore enjoined by the treaty to act as international civil servants,
neither seeking nor receiving instructions from the member governments.
tRADE QF .L.A FT A__COI_NtRIES
(IN IF&AANDS OF DOLLARS)
374.1
(6.8%)
357.8
(6.0%)
417.9
(7.0%)
goals of tariff liberalization
are realized, the LAFTA treaty
suggests that more ambitious
objectives of economic integra-
tion will be pursued. In the
meantime, the consultative
machinery has been set up for
a working regional system (see
inset).
Although trade promotion
is the main thrust of the Monte-
video Treaty, Article 16 pro-
vides for some encouragement
also to industrial development
on a regional basis. So-called
complementation agreements are
authorized among the member
countries to achieve industrial
complementarity, i.e., special-
ization in certain industries.
It is expected that most of
these agreements will ensure
tariff preferences for the in-
dustries affected. A few may
take on cartel-like arrangements.
The progress of industrial
complementarity depends in large
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part on how competitive new
Latin American industries can
be against traditional supply
sources. The treaty itself does
nothing to promote new rail-
roads and highways across the
mountains and jungles of Latin
America. As long as overland
transport costs are high, the
economies of ocean carriage
from the US and Europe may pre-
vail against the tariff pref-
erences and other advantages
accorded by the complementation
agreements.
Credit facilities constitute
another lack which the Montevideo
Treaty does nothing to overcome..
Terms of credit can be as crucial
to a Latin American buyer's
decision as price differentials..
The advantage here lies with the
US and West European manufacturer,
who can borrow and in turn extend
credit on comparatively liberal
terms. A Latin American regional
bank has been proposed which
would make comparable credit
facilities available to LAFTA
businessmen, but the bank is
still in the talking stage.
Beyond the problem of credit
facilities for private business-
men, there has been some discus-
sion of arrangements along the
lines of payments union for
clearing the debit and credit
balances among central banks
arising from intra-LAFTA trade.
Proposed arrangements include
stand-by credits to central banks
to carry them over periods of
deficit in their balance of pay-
ments. Here again the proposals
are not near the point of adoption.
Political Implications
The 'US, the principal
trading partner of the region,
is on record in favor of Latin
American programs for economic
integration. If these are suc-
cessful, the machinery require-
ments of new Latin American
industries and the elevation
of popular living standards
should have the effect of en-
larging US trade with the area
despite the considerable in-
crease in intra-LAFTA commerce.
At the same time, the US
will have to contend against
a certain Latin American in-
clination to maximize whatever
leverage LAFTA can muster against
foreign business interests. At
last year's LAFTA conference,
Mexico proposed. controls on
foreign investments with a view
to keeping ownership of new
industries in the hands of mem-
ber states. The Mexicans do
not seem to be out to exclude
American capital entirely.
They prefer to attract it on
terms that would in practice
require US businessmen to work
through Latin American prin
cipals, preferably Mexican.
The Mexican proposal re-
flects a widespread chauvinism
within LAFTA that views the
organization as a potentially
strong bargainer against the
US, the EEC, and other conti-
nental systems. The political
potential is considered to de-
pend on the organization's
geographic extent, which ulti-
mately is to encompass all the
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MEXICO
GUATEMA
EL SALVADOR
Members of the Latin American Free Trade Association
UTISH GUIANA
SURINAM
FRENCH GUIANA
CLASSIFIED MATERIAL ON REVERSE OF PAGE
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v d '~
CUBA DOMINICAN
ATLANTIC OCEAN
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Latin American countries from
the Rio Grande to Cape Horn.
So far, it includes nine of
these countries (see map). One
of the gaps is Central America,
where five countries have formed
their own common market. It
is now envisaged that the two
regional systems will proceed
toward economic integration at
their own pace, but that even-
tually Central America will link
up with LAFTA Panama, which
is at present not a member of
either system, is expected to
associate with the Central Amer-
ican Common Market.
On the South American con-
tinent, there are two holdouts,
Venezuela and Bolivia. Wage
levels in oil-rich Venezuela
are higher than in the other
countries, and Venezuelans have
been dubious about their ability
to compete without tariff safe-
guards. Still, the Venezuelans
are far from dismissing the idea
of eventual membership in LAFTA.
They attend LAFTA meetings as
observers and discuss the pos-
sibilities of specializing in
industries where labor costs
are not a high proportion of
total costs, e.g., plastics
and synthetic fibers. When the
presidents of Venezuela and
Colombia (a LAFTA member) met
at San Cristobal in early Au-
gust, they issued a communiqud
affirming the desirability of
gradual economic integration
between the two countries. It
was agreed that they would co-
ordinate their economic devel-
opment plans and would promote
studies on the possibilities
of closer association.
Bolivia's reservations
about joining LAFTA may also
dissolve with time. About a
fifth of Bolivia's imports
come from the LAFTA countries,
which take only 3 percent of
Bolivia's exports. Bolivians
are fearful that the balance-
of-payments disequilibrium would
be aggravated by any leveling
of tariffs. Sentiment in favor
of joining is nevertheless
widespread in La Paz. Like the
Venezuelans, the Bolivians have
attended LAFTA meetings as
observers.
Cuba would like to join.
Before the Castro takeover,
some 70 percent of Cuba's trade
was with the US; trade with
LAFTA countries was negligible.
Castro now sees opportunities
in LAFTA to develop new com-
merical links and to expand
his political prestige in the
area. The Cuban bid for member-
ship was voted down at the
LAFTA conference in Mexico City
last year, Brazil and Mexico
abstaining. A factor in the
voting was the general under-
standing that US assistance
through AID and the Inter-Amer-
ican Development Bank could not
be given to any regional program
that included Cuba.
The Cuban vote struck home
the fact that LAFTA is not just
an economic grouping but also
a system with an evolving po-
litical character. The foreign
minister of Uruguay, at a recent
US Embassy luncheon, indicated
his view that LAFTA was now too
important to be left to the
economic technicians. A three-man
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committee would be set up in
the foreign office, he said,
to give political direction to
Uruguay's LAFTA delegation.
Some Latin American lead-
ers have also urged that a coun-
cil of foreign ministers be or-
ganized in LAFTA to modify its
predominantly economic orienta-
tion. This interest in LAFTA's
political potentials draws on
the successes of the European
Economic Community and reflects
the widespread aspiration among
Latin Americans that they too
can win greater international
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stature on the basis of regional
cohesion. For the present,
however, LAFTA embodies mainly
this aspiration, not any record
of achievement approaching that
of the European Community.
If, as many observers expect,
the current round of tariff nego-
tiations in Montevideo yields un-
impressive results, LAFTA's im-
portance will continue to be a
derivative of its longer range
potential rather than any pres-
ent vitality as an economic and
political force in Latin America.
(CONFIDENTIAL)
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