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  Félix Peña

INTERNATIONAL TRADE RELATIONS NEWSLETTER
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009
CONNECTIVITY, COMPATIBILITY, CONVERGENCE, PREDICTABILITY
Conditions for productive integration in a regional space.

by Félix Peña
August 2015

English translation: Isabel Romero Carranza


 

It has been noted that at least three conditions are necessary to advance economic integration between countries that share a regional geographic space. They are also conditions to advance production linkages between companies from different countries in the same regional space. These conditions are connectivity, compatibility and convergence. They involve sequential steps which begin with physical connectivity, including communications and everything related to trade facilitation, followed by the compatibility of goals, perceptions and values and eventually concluding with the convergence of systems, policies and concrete actions.

In this perspective, we can understand the efforts made by the countries in the region or sub-regions within it, to generate institutional mechanisms and common ground rules for economic relations, not only as a means of increasing interactions and, therefore interdependence, but also to regulate conflicts and to strengthen the elements of cooperation in order to render such interdependence manageable, marking it with signs of cooperation. All these are behaviors that prove functional for the governance of a shared regional space.

However, there is a fourth condition, which is the predictability of the ground rules. It is essential for the sustainability of the integration agreements through time, as well as for the expectations that can be generated in business sectors, especially at the moment of making productive investment decisions.

It is in relation to this fourth condition, that the role of law and institutional mechanisms become more relevant in the development of regional interdependence in Latin America. This role is to help strengthen the centripetal forces in a common space that given its own dynamics, eventually could be characterized by the presence of powerful centrifugal forces. Common rules and institutions then acquire a historical and geopolitical sense, in the perspective of a strategy aimed at countering the natural tendencies towards conflict that are present in the relations between nations that share the same geographical area.


Latin American countries have gradually decreased the relative marginality that long characterized their mutual relations. Additionally, the international scenario, with the profound redistribution of relative power among nations and the new geography of global economic competition, contributes to a reassessment of the contiguous environment in the strategies for development and international insertion of the countries of the region. This explains why it is becoming increasingly difficult for these countries to be indifferent to what is happening in their regional space.

Both conceptually and in practical concrete actions, in recent years Latin American countries have recognized the existence of multiple means adapted to the purpose of strengthening their mutual relations and promoting cooperation and integration with their neighbors. These include those instruments characteristic of formal processes of economic integration as well as bilateral or multilateral ones, regional or partial (sectoral or sub regional), governmental or social, cooperative with third parties or intraregional. They include as well, multiple forms of joint ventures and partnerships between companies from two or more countries of the region (a subject previously addressed in the June issue of this Newsletter, of which this is a continuation, on http://www.felixpena.com.ar).

The economic and political importance of developing joint projects and undertakings involving two or more countries, often-contiguous ones, began to be perceived at the beginning of the experience initiated in the region in the late fifties with the signing of the first treaties that formally established integration objectives. This idea was linked to the sharing of space and resources, both for the construction of physical works or for the development of productive activities, which due to their nature and scope, required to be addressed in more than one country. A bridge, a railway, a dam, a road, an electrical interconnection, communications networks, the joint exploitation of natural resources, the joint development of contiguous or common maritime areas, industrial undertakings or servicing, have been typical cases. A very recent example, with a projection that transcends the region, is the joint airline created by LAN Chile and TAM of Brazil.

The different types of joint ventures are one of the most effective ways to generate "de-facto solidarity" -in the sense proposed by Jean Monnet, one of the founding fathers of European integration and inspirator of its existential and methodological dimension- between nations that share a common regional space. Of these result concatenation effects that may contribute to render permanent the economic and political ties that are generated. Hence, their value to support, over time, the efforts to facilitate the governance of a region, understood in the sense of the prevalence of peace and political stability in the relations between countries sharing a common geographical space.

Both in the construction of LAFTA (1960) first and the LAIA (1980) later and in the sub-regional experiences, such as those of the original Andean Group (1969), the Program for the Integration and Cooperation between Argentina and Brazil -PICE- (1986), and then Mercosur (1991), the idea of advancing through sectoral integration and joint ventures was present. It has also been so in Central America and the Caribbean. In the case of the Andean Group, it was reflected by Decision 46 about Andean multinational enterprises and, in particular by sectoral programs of industrial integration. In the case of the PICE and later Mercosur, it was reflected by the economic complementation agreements, for example, those related with the automotive sector, among others, and by Decision CMC 3/1991 regulating the seldom used instrument of sector agreements, provided for in Article 5 d of the Treaty of Asuncion.

In the original development of LAFTA, the instrument of industrial complementation agreements, provided for in Articles 16 and 17 of the Treaty of Montevideo of 1960, responded precisely to the idea of progressing through sectoral approaches in the construction of a space of Latin American integration. They had, indeed, a commercial purpose, but their underlying aim was to promote productive linkages with preferential trade measures designed to encourage investment. This figure may be perhaps the one which best reflected the original concept that led to the negotiation of what would become the LAFTA. It was external pressure that forced to insert that first regional agreement into the framework of a free trade area provided under Article XXIV of the GATT, altering the original ideas, in particular of Argentina and Brazil. This is the basis of the subsequent failure of the LAFTA and its transformation into the LAIA.

Already in the 1980 Montevideo Treaty, which created the LAIA, the figure of the agreement of partial scope takes center stage, defined and regulated in its different variants in Section Three of Chapter II and, with regard to economic complementation agreements, by Article 11. Resolution 2 of the LAFTA Council of Ministers, of 12 August 1980, regulated them (see its text on http://www.aladi.org/). They do not require the participation of all member countries. And in order to harmonize the approach of the new Treaty with GATT rules, and especially with Article XXIV, the countries of the region members of the GATT played a leading role in driving the adoption at the Tokyo Round (1979) of the so called "Enabling Clause". In the absence of such clause, at the moment of the creation of the LAFTA, it was not possible to reconcile the sectoral scope of the industrial complementation agreements with the abovementioned Article XXIV of the GATT (on the original scope of the LAFTA and, in particular, of the complementation agreements, refer to the responses by the member countries to the questionnaire that, at the time, was made by the GATT to the Contracting Parties and LAFTA members. For the questions go to https://www.wto.org/, and for the answers, to https://www.wto.org/. Additionally, see the excellent analysis made by Bernardo Sepulveda Amor, in his article on "The Regime of the most Favored Nation in GATT and LAFTA" on http://codex.colmex.mx:8991/, especially pages 351 et seq.).

In the current approaches of "convergence in diversity", especially between the countries of Mercosur and the Pacific Alliance, what was mentioned above may have much practical value. The main aim would be, precisely, to facilitate joint ventures and production linkages between companies in countries of the region and to take advantage of the increased demand for goods and differentiated services by urban consumers of middle class income, either in the region itself or in emerging countries from other regions such as Asia, Africa and the Middle East. There could be productive linkages that develop around specific projects, even including some countries involved in various sub-regional integration schemes, as may eventually be the case of agreements between countries that are members of Mercosur and others participating in the Pacific Alliance (see the paper entitled "Latin America, between convergence and fragmentation" on http://www.felixpena.com.ar/).

Other important elements, in relation with a strategy for productive articulation at the sectoral level, are those referred to the regimes of origin, technical standards and other regulatory frameworks. They can also be addressed with a regional scope within the institutional and regulatory framework of the LAIA.

It has been noted that at least three conditions are necessary to advance economic integration among countries that share a regional geographic space (they were raised, in due course, by Robert Erbes in an article included as recommended reading of this Newsletter). These conditions can also help promote the productive articulation between companies from different countries in the same regional space. Such conditions are: connectivity, compatibility and convergence. They involve sequential steps, beginning with the physical connectivity, including communications and everything related to trade facilitation; followed by the compatibility of goals, perceptions and values and eventually concluding with the convergence of systems, policies and actions.

In this perspective, we can understand the efforts made by countries of the region, to generate institutions and rules for their economic relations, as a means of increasing interdependence and to regulate conflicts, as well to strengthen elements of cooperation in order to render such interdependence manageable, through cooperation and solidarity. This means behaviors functional to the governance of a shared regional space.

But there is a fourth condition to consider. It is the predictability of the ground rules. It is essential for the sustainability of the integration agreements, as well as of the expectations that can be generated among businesses at the time of having to make productive investment decisions.

It is in relation to this fourth condition, that the role of the law and of the institutional mechanisms for the development of a system of regional interdependence in Latin America becomes most relevant. This helps strengthen the centripetal forces in a common space that could eventually be signed, given its own dynamics, by the presence of powerful centrifugal forces. Common rules and institutions acquire then a historical and geopolitical sense, in the context of a strategy aimed at countering the natural tendencies towards conflict in the relations between nations that share the same geographical area.

Indeed, the effectiveness of the results of the efforts to increase business participation in the cooperative relations and economic integration of Latin America has been limited by the effect of some factors. Among others, we can mention that businesses have not always been able to develop expectations of stability, especially with regard to the legal and economic conditions that have characterized the opening of markets negotiated in the framework of multilateral and bilateral integration and economic cooperation agreements. This is because these agreements have often been conceived by governments as instruments for the promotion of short-term trade, responding more to the idea of cyclical loan markets or of trade surpluses and shortages, than to the creation of real -and not just rhetorical- long-term conditions to induce investments and promote the expansion and modernization of productive activities.

The main factors of instability in the opening of markets that lead to a situation of unpredictability, usually affecting the behavior of businesses in intraregional trade, have been the legal precariousness of the preferences granted, since they are often easily altered by unilateral actions or behaviors from the granting country, or by the abrupt and erratic fluctuations in exchange rates. The atmosphere of instability can have the effect of discouraging businesses, often preventing them from making decisions that would justify the cost of undertaking commercial or investment agreements with long-term effects between companies in different countries of the region. As it has been rightly pointed out, this precariousness may become, in fact, the equivalent of a significant non-tariff restriction on regional trade.

A concrete business may be viable when imagined in terms of the expanded markets, as a result of the frameworks that are established by governments and developed at the administrative level and by daily management. Businesses will seriously consider such frameworks in their calculations only to the extent that they perceive them as relatively stable and effective. For example, would you as a Minister, run risks based on your own capital and savings by investing in a new plant, expanding the production capacity of the existing one, or incorporating new production or organization technologies in view of the market apparently opened up by a preferential or integration agreement signed with a colleague or colleagues from Latin American countries? This is a key question that political operators must answer when materializing, through agreements, their vision of the architecture of integration. If the answer were negative or doubtful, why should a positive response is expected from a local or foreign investor acting rationally? In order to make an investment or to decide the participation in a transnational production network, businesses will not only assess the seriousness of the design of the integration process and its economic and political rationality. They will also ask about its practical applicability when their products arrive at the customs border of the other country. They will also relate the promised opening of the market, with other internal and external economic factors of the exporting and importing countries, that may affect the calculation of the return of their investment in order to seize the business opportunity that are offered.


Recommended Reading:


  • Amstrong, Shiro, "The race to a risky Trans-Pacific Partnership deal", East Asia Forum, 26 July 2015, en http://www.eastasiaforum.org/.
  • Blom, Philipp, "Fracture. Life and Culture in the West, 1918-1938", Atlantic Books, London 2015.
  • Bryan Starr, John, "Understanding China. A guide to China's Economy, History, and Political Culture", Hill and Wang, New York 2010.
  • Cadot, Olivier; Yang Ing, Lili, "How restrictive are ASEAN's Rules of Origin", East Asia Forum, 1 August 2015, http://www.eastasiaforum.org/.
  • Caputo, Dante, "Un péndulo austral. Argentina entre el populismo y el establishment", Capital Intelectual, Buenos Aires 2015.
  • Cesar de Oliveira, Susan Elizabeth Martins, "Cadeias Globais de Valor e os Novos Padroes de Comercio Internacional. Estrategias de Insercao de Brasil e Canadá". Fundacäo Alexander Gusmäo, Brasilia 2015, http://funag.gov.br/.
  • Dobbs, Richard; Manyika, James; Woetzel, Jonathan, "No Ordinary Disruption. The Four Global Forces Breaking All The Trends", PublicAffairs, New York 2015.
  • Dongxiao, Chen, "China aims to set the regional cooperation agenda", East Asia Forum, 28 July 2015, http://www.eastasiaforum.org/.
  • Erbes, Robert, "Notes sur les trois conditions de l'intégration économique et plus particulièrement de l'intégration internationale ", Revue économique, Vol.16, n°4, 1965, pp. 592-614, http://www.persee.fr/.
  • Grandin, Greg, "Fordlandia. The Rise and Fall of Henry Ford's Forgotten Jungle City", Metropolitan Books, Henry Holt and Company, New York 2009.
  • Guadagni, Alieto Aldo; Boero, Francisco, "La educación argentina en el siglo XXI. Los desafíos que enfrentamos: calidad, deserción, inclusión", Editorial El Ateneo, Buenos Aires 2015.
  • Hoffman, Philip T., "Why Did Europe Conquer The World?", Princeton University Press, Princeton and Oxford 2015.
  • Ioia, María, "The New Rules of Competitive Intelligence", XLibris, Sidney 2014.
  • Maccoby, Michael, "Strategic Intelligence. Conceptual Tools for Leading Change", Oxford University Press, Oxford 2015.
  • McDowell, Don, "Strategic Intelligence. A Handbook for Practitioners, Managers, and Users", The Scarecrow Press, Langam - Toronto - Plymouth 2009.
  • Moïsé, Evdokia; Sorescu, Silvia, "Contribution of Trade Facilitation Measures to the Operation of Supply Chains", OECD TPP, n° 181, Paris 2015, http://www.oecd-ilibrary.org/.
  • Morin, Jean-Frédéric; Novotná, Tereza; Ponjaert, Frederik; Telo, Mario (editors), "The Politics of Transatlantic Trade Negotiations. TTIP in a Globalized World", Ashgate, Surrey - Burlington 2015.
  • Okano-Heijmans, Maaike; Lanting, Daniel, "Europe finds the China connection", East Asia Forum, 23 July 2015, http://www.eastasiaforum.org/.
  • Osnos, Evan, "Age of Ambition. Chasing Fortune, Truth and Faith in the New China", Random House, London 2014.
  • Peña, Félix, "Iniciativas que reclaman toda la atención", Suplemento del Comercio Exterior, Diario La Nación, Buenos Aires 28 July 2015, http://www.lanacion.com.ar/.
  • Rattanasevee, Pattharapong, "ASEAN yet to lay the foundations of the AEC", East Asia Forum, 30 July 2015, http://www.eastasiaforum.org/.
  • Song, Ligang; Garnaut, Ross; Fang, Cai; Johnston, Lauren (eds), "China's Domestic Transformation in a Global Context", Australian National University Press, Sidney 2015, e http://press.anu.edu.au.
  • Tallon, Carol, "Competitive Intelligence: The Key to Strategic Advantage", A Guide for Small Business Ownes, NuBooks, Cork, Ireland 2011.
  • Tse, Edward, "China's Disruptors. How Alibaba, Xiaomi, Tencent, and other companies are changing the rules of business", Portfolio-Penguin, New York 2015.
  • Villalobos, Ruy de, "El comercio agropecuario en el Mercosur. Veinte años después del Tratado de Asunción", BID-INTAL, Nota Técnica n° IDB-TN 809, June 2015, http://publications.iadb.org/.

Félix Peña Director of the Institute of International Trade at the ICBC Foundation. Director of the Masters Degree in International Trade Relations at Tres de Febrero National University (UNTREF). Member of the Executive Committee of the Argentine Council for International Relations (CARI). Member of the Evian Group Brains Trust. More information.

http://www.felixpena.com.ar | info@felixpena.com.ar


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