HEMISPHERIC TRADE ALIGNMENTS AND THE TRADE OPTIONS FOR POST-TRANSITION CUBA[1]

Joseph M. Perry, Louis A. Woods, Jeffrey W. Steagall

Department of Economics and Geography University of North Florida

I-INTRODUCTION

International trade relationships have changed significantly during the past decade. While almost all of the trade liberalization during the preceding forty years occurred in a multilateral framework, usually under the auspices of the General Agreement on Tariffs and Trade (GATT), negotiations during the late 1980s and early 1990s focussed on bilateral, trilateral, and other limited trade arrangements.

This trend results, in part, from the increasing difficulty of conducting multilateral trade negotiations (MTNs). As more countries join the GATT accord, its membership becomes more diverse. While the increased diversity generates wider opportunities for mutual gains from trade, the practical realities of negotiation have simultaneously become more complex. Narrow interest groups have much more power now, as the charter members of GATT are less able to focus on a successful conclusion to a round of negotiations. For example, environmentalists in the most-developed nations want to restrict the economic expansion of developing nations, whose leaders correctly point out that they cannot be overly concerned with environmental issues while their industries die and their people go hungry. Similarly, the producers of intellectual material, such as computer software, books, patented inventions, and entertainment items, want increased protection against copyright- and patent-infringement. Governments in developing countries sympathize, but want access to free tools and ideas in order to modernize their economies as rapidly as possible. Clearly, the addition of more nations, mostly underdeveloped, to the world trading system will only increase the difficulty of negotiating so-called North-South issues.

In addition, the global expansion of nationalism resulting from German reunification, the breakup of the former Soviet Union, and the world-wide recession, have decreased popular support for multilateral accords. In the United States, this decline has been intensified by news media emphasis on the trade deficit, which has led to "buy-American" campaigns and "fair trade" legislation, such as Section 301. In such a xenophobic environment, political realities require that multilateral negotiations be slowed.

Finally, the United States, once the champion of freer global trade through multilateral negotiations, has drastically reduced its commitment to the MTN framework. In addition to the aforementioned issues, the United States and the European Community have clashed in the agricultural-subsidies debate. The U.S. has demanded cuts in European agricultural subsidies that are apparently politically infeasible for countries like France. The Bush administration's all-or-nothing approach to the GATT's Uruguay Round was yet another symptom of the need to "win" unconditionally in order for multilateral accords to be considered successful by the populace. Since the Clinton Administration appears to be less free-trade oriented, it is likely to take an even harder line, arguing that there is less to lose if a round of negotiations fails.

On the positive side of this trend, the fervor for regional trade pacts has increased markedly during the last ten years, kindled by the European Community's ambitious plan to form a fully integrated market. The consummation of the Maastricht treaty has been almost assured by the recent positive ratification vote in Great Britain. Many of its components have already been implemented. Some other countries reacted to the original "EC 1992" proclamations by expressing fear of a "fortress Europe." The United States reacted in typical fashion by forming a competing trading bloc with Canada and Mexico in the form of the North American Free Trade Agreement (NAFTA).

In addition to NAFTA, the United States implemented a number of programs designed to help the smaller Latin American and Caribbean countries. These programs include the Caribbean Basin Initiative (CBI) and the Enterprise for the Americas Initiative (EAI). The European Community has long assisted its former colonies with treaties such as Lomé.

While the smaller Latin American nations have a history of offering lip service to the concept of free trade areas such as the Caribbean Community (CARICOM), the Central American Common Market (CACM), the Andean Pact (AP) and the Latin American Integration Association (LAIA), such organizations have historically been ineffective in promoting economic linkages and freeing trade, especially in the 1980s.

Only recently have serious attempts at regional integration taken place in Latin America. Chile will apparently be the next target for a bilateral U.S. free trade agreement. That country already has a bilateral accord with Mexico. Chile is also negotiating trilateral free trade agreements with Colombia and Venezuela and with Mexico and Venezuela. Mexico and Venezuela have also been active in moving toward (separate) conventions with the Spanish-speaking Central American nations. Venezuela signed a pact with CACM early on. In October, 1992, Venezuela signed an additional accord to be implemented in 1993 with CARICOM.

In short, the new international economic environment in the Western Hemisphere consists of a complex structure of trade treaties, regional markets, and economic alliances. Historical relationships are changing rapidly, and will continue to evolve for the foreseeable future. Both the countries directly involved and the non-participant countries will be forced to formulate policies in reaction.

This dynamic trade environment poses special policy problems for Cuba, during and after the transition to a market economy. For many decades, Cuba enjoyed a special trade relationship with the United States. This relationship was destroyed by the Cuban Revolution, and was replaced by an embargo that has persisted for 32 years. Cuba looked instead to Europe and the Orient for support, forming alliances with the former Communist countries and with China.

The combined stresses of an enhanced trade embargo and the loss of economic support from Europe are forcing critical decisions by the Castro government. During the last session of the Cuban Assembly, Fidel Castro recommended the legalization of the U. S. dollar as currency throughout the island economy.[2] Such a policy would have been unthinkable only a year ago. As the Cuban economy declines further, and rationing intensifies, the transition to a democratic government and a market economy looms closer on the horizon.[3]

When the transition arrives, among the major policy decisions that the new government must make are trade alignments. Given the large number of regional free trade areas, and the two common markets in the hemisphere, the options open to a free Cuba appear extensive. But any trade alignment must have approval from both sides of the market. There are legitimate doubts that Cuba will be accepted as an additional member of some regional trade groupings, such as CACM or CARICOM.

It is also possible that actions such as the "dollarization" of the Cuban economy may postpone the ultimate transition. In that event, the Cuban government may consider hemispheric trade alignments as a supporting policy. The continuation of the United States trade embargo will be a potent factor, probably limiting this option. Probably the most common assumption made by analysts is that Cuba will remain severely limited in its trade options until the transition. After the transition, it is argued, the most feasible option will be the negotiation of preferential trade arrangements with the United States. Additional hemispheric alignments may then follow.

This paper assesses the current state of regional trade integration and regional trade policy in the Western Hemisphere, delineates the most reasonable options for trade alignment open to a free Cuba, and suggests some of the limitations that the Cuban government may face in re-entering hemispheric markets. The question of initial post-transition negotiations with the United States is explicitly addressed.

II. APPROACHES TO ECONOMIC INTEGRATION

Economic integration can be achieved through a variety of structures and contractual arrangements, ranging from very informal agreements to complex structures based on a nexus of treaties. Such arrangements can also cover large, small, contiguous, or separated geographic areas. The options open to Cuba are thus varied. El-Agraa delineates the basic integration structures as follows, arrayed in order of increasing unification and complexity.

Free Trade Areas. The concept of a free trade area is both simple and appealing. Participating nations agree to remove most or all trade impediments among themselves, permitting the natural flow of trade to shift jobs and resources as the market dictates. The members of a free trade area retain the ability to establish their own trade relations with nations outside the area, and to formulate their own individual external trade policies. Examples of this form of integration are the European Free Trade Association (EFTA) and the Latin American Free Trade Area (LAFTA). The United States currently participates in several free trade arrangements, including bilateral free trade with Israel, the Canadian-United States Free Trade Area (CAFTA), and NAFTA.

Customs Unions. A customs union builds on the base of a free trade area, but goes one step further in establishing a common external trade posture toward the rest of the world. Common external tariffs are the usual expression of this centralized policy. The European Community (EC) is a customs union, among its other organizational attributes.

Common Markets. Common markets are customs unions that permit the free flow of productive factors across the political boundaries of member nations. Capital and labor ideally move without hindrance within the confines of a common market, and entrepreneurs are free to exercise their abilities in any member country. The now-dead East African Community (EAC) was intended to be a common market, as is the European Community. Note that the EC still has not achieved complete factor mobility among its member nations. Historically, the most successful common market has been the one established by the United States constitution in 1789. It is probably the longest-lived viable common market on earth. It is noteworthy that successful common markets have invariably generated high levels of economic growth and material prosperity.

Complete Economic Unions. A complete economic union (usually shortened to "economic union") is a common market that centralizes monetary and fiscal policies for the member countries, and usually unifies the monetary system. The member nations are, in effect, regions of one country defined by the boundaries of the union. The European Community is moving toward this goal with the "EC 1992" program, and with the earlier adoption of the European Currency Unit (ECU) as a common monetary unit.

Complete Political Integration. This state of affairs exists when the member nations give up all political autonomy to one central government, in effect making the union a sovereign state. This is the kind of union that was created in 1789 when the thirteen independent states came together to form the United States.[4]

Tinbergen points out that the first two structures, free trade areas and customs unions, may be easily established through what he calls "negative integration," the reduction of trade impediments among the participating countries. As a simple extension of national trade policy, the creation of these arrangements can be accomplished without significant internal political or economic change. It is true that the economic impacts of a free trade area or customs union may be substantial, once the arrangement is in operation. Transition periods are often established to permit the participating countries to adjust gradually to the new trade patterns. For example, the North American Free Trade Area (NAFTA) is being established with a fifteen-year transition period, during which major trade barriers will be gradually eliminated.

More complex arrangements, such as common markets and complete economic unions, may be achieved only through "positive integration," defined by Tinbergen as "the creation of all the institutions required by the welfare optimum which have to be handled in a centralized way." Such arrangements require extensive international cooperation, the surrender of some national sovereignty to a supranational organization, and a policy attitude that recognizes the interrelatedness of economic life. For this reason, common markets and economic unions both require a longer period of time to establish, and tend to enjoy a longer life than more easily-established arrangements.[5]

Given these constraints, it is clear that the short-term options open to the Cuban government are limited to free trade areas and perhaps customs unions. More extensive integration, into a common market or economic union, will necessarily involve internal structural change.

III - TRADE ARRANGEMENTS IN THE WESTERN HEMISPHERE AND EUROPE

The economic crises of the 1980s forced many governments in the western hemisphere to reassess their roles and policies. In addition to an extensive privatization movement, encouraged by the Caribbean Basin Initiative, a strong movement toward economic integration emerged. More recently, this movement was strengthened by the North American Free Trade Agreement and the Enterprise for the Americas Initiative (EAI). The following sections describe the current trade arrangements in this hemisphere, as well as the European Community and its connections to former colonies.

A. COMMON MARKETS

The Caribbean Community and Common Market. The Caribbean Community and Common Market (CARICOM) was established in 1973 to encourage economic, political, and cultural cooperation among the English-speaking Caribbean countries (Commonwealth countries).[6] It replaced the Caribbean Free Trade Association (CARIFTA). Thirteen countries now are members: Antigua/Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-Nevis, St. Lucia, St. Vincent/the Grenadines, and Trinidad and Tobago (see Table 1). Seven of the smaller CARICOM countries have joined in the East Caribbean Common Market, now a part of the Organization of East Caribbean States. CARICOM meetings in 1990 resulted in a complex of noteworthy agreements, including a common external tariff (adopted by all member states except Montserrat, St. Kitts-Nevis, St. Lucia, and Antigua/Barbuda), common rules of origin, and the first steps in establishing a regional stock exchange. At their latest meetings, negotiators also moved toward what is described as "hassle-free" tourist travel among CARICOM countries, and the establishment of a supranational Assembly of Caribbean Community Parliamentarians. A controversial technical cooperation agreement with Cuba also emerged from the meetings.[7]

Because of the English-language orientation of CARICOM, its members have generally been excluded from pacts among the Spanish-speaking nations of Latin America. Spanish-speaking countries have likewise not found a home in CARICOM. This exclusion could be remedied through a policy of membership expansion. Both Haiti and the Dominican Republic have long-standing applications for membership. Venezuela applied for membership in 1991, tying its application to the offer of a five-year phase-out of trade restrictions. In order to reap the economies of scale and scope that come with larger markets, however, CARICOM must also turn north to the U.S. and Canada, or east to Europe. Initial moves in this direction include the signing of a Trade and Investment Framework Agreement with the United States, under the rubric of the Enterprise for the Americas initiative, in July, 1991.[8]

The Central American Common Market. The Central American Common Market (CACM) was set up by the Managua Treaty of 1960 to establish a free-trade zone among participating countries. Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua were the original members. Honduras withdrew in 1967, establishing bilateral trade agreements with the other four countries. The hostilities between Honduras and El Salvador in 1969 effectively destroyed the original arrangement. At a meeting in mid-July, 1991, the presidents of the member countries moved to reestablish a viable trade mechanism, and voted to add Panama to the group, leaving only Belize unaligned with it. Since Panama has not traditionally considered itself a part of Central America, this move reflects a basic change in policy by its government. The goals of the new agreement include free regional trade in 95 percent of all commodities traded in the region, and a common external tariff. At the latest summit (the so-called "CA-4"), the presidents of the memebr countries reiterated their support for economic integration, and agreed to work toward an open-border policy.[9]

Recent political and social unrest in the region have continued to hamper the working of CACM. The August, 1987, meeting of the presidents of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, that generated a landmark peace agreement for the region, raised international hopes for a quick rebirth of regional cooperation.[10] Subsequent political changes, continuing guerrilla warfare, and the U. S. invasion of Panama have diminished those hopes.

The CACM nations have now revived the commitment to enhance their trade agreements with their neighbors. A key issue will be whether they can keep their commitment to more open economies, in order to benefit from a vastly increased market. Fortunately for CACM, increased market access can come from both the U.S. EAI program and from cooperation with the more developed Latin American countries like Mexico and Venezuela.

The New European Community. Winston Churchill first gave voice to the dream in 1946 when he urged, "We must build a United States of Europe." The establishment of the European Coal and Steel Community in 1951 was a practical first step. But when Luxembourg, France, Belgium, Holland, Italy, and West Germany signed the Treaty of Rome in 1957, formally establishing the European Community, a true, fully-integrated, Europe-wide common market was still just a distant possibility.[11]

The dream appeared almost attainable in 1986, when a twelve-member European Community signed the Single European Act, effectively defining "Europe" as including only themselves. The Act was based upon recommendations made in an EC Commission White Paper, entitled "Completing the Internal Market". The White Paper presented more than 300 directives that, if realized, would eliminate the existing barriers to the movement of capital, services, and people among the EC countries. Barriers included internal border controls, technical trade barriers, limited government procurement policies, discriminatory policies regarding professional qualifications, widely differing indirect taxes, and strongly constrained capital movements.[12]

Currently, at least half of the directives have been approved, and are apparently being implemented. The original target date of 1992 for establishment of the new "Europe" has gradually been pushed forward to 1993 or 1994. The geographic scope of the new union has also subtly changed. Sweden, for example, was encouraged to apply for membership, and did so. Of even greater interest is the agreement signed May 2, 1992, by ministers of EFTA and EC to establish a European Economic Area (EEA), including all nineteen countries in a broad free trade area that will approach a customs union in its complexity. Serious discussions concerning the union will probably begin after the ratification of the Maastricht Treaty. Internal dissension caused by a newly-unified Germany has also crystallized the positions of France and Great Britain about the future inclusion of East European countries -- France opposing and Great Britain favoring the expansion.[13]

Clearly, the twelve players are still performing as sovereign states, and do not seem ready to yield that sovereignty fully to a common market governing body. Critical decisions still have to be made, for example, about the design and implementation of monetary policy, one of the key sticking points in negotiations.[14] Jack L. Hervey sums up the situation succinctly:

The next major, and perhaps the most difficult, stage in the process will require the giving up of big chunks of national sovereignty by submitting national economies to an increasingly powerful supranational authority. In an environment now lacking the external prod of the Soviet bloc and facing the structural changes taking place in Eastern and Central Europe and Germany, the early rush to EC monetary union was faster than could reasonably be sustained. Progress toward that end will surely be more cautious during the next few years.[15]

A shifting internal political and economic balance of power may alter attitudes of EC members toward less-developed trading partners, particularly the ACP countries. The latest version of the Lomé Convention (see below) could well expire close upon the attainment of full integration in the EC, perhaps as early as 2000, suggesting a full review of trade policy. The results are unpredictable. Indeed, most analysts in the United States admit their inability to predict how "EC 1992" will affect the current largest common market on earth -- the 50 United States.

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