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

Part II

FREE TRADE ARRANGEMENTS IN THE WESTERN HEMISPHERE

The North American Free Trade Agreement (NAFTA). The North American Free Trade Agreement builds on the Canada-United States Free Trade Agreement, or CAFTA, which was established on January 1, 1989. NAFTA has the explicit purpose of creating a continent-long free trade area, including Canada, the United States, and Mexico. This three-country market will have a combined population of over 360 million people, and an aggregate GDP of well over $6 trillion.[16] Initial estimates suggest that NAFTA will bring net growth benefits to all three member countries, but at the expense of substantial movements of jobs and resources across international boundaries.

The economic impact of NAFTA is expected to be so significant that it has been accorded a transition period of fifteen years. During that period of time, tariffs and other trade barriers will be dropped or eliminated on a wide variety of goods, and freer access to cross-border markets will be possible. As is true with every major trade treaty, the United States has designated certain politically sensitive or strategically important goods for protection through a system of "safeguards".

The treaty now lies before the United States Congress. While portions of NAFTA are strongly opposed by specific interest groups, among them labor unions and farmer organizations, the Clinton Administration has pledged its support to the successful initiation of the program early in 1994. When a hemispheric point of view is taken, NAFTA itself becomes part of a larger vision of free trade that was initiated three years ago.

The Enterprise for the Americas Initiative. President George Bush promulgated the Enterprise for the Americas Initiative (EAI) on June 27, 1990. The EAI envisions a hemispheric free trade system, beginning with the North American Free Trade Agreement (NAFTA) among Canada, Mexico, and the United States, and gradually expanding to include all of Central and South America. As enunciated by President Bush, EAI should ultimately bring a free trade area that stretches from Alaska to Tierra del Fuego. The initiative focusses on the three critical policy areas of trade, investment, and debt, offering substantial aid to hemispheric countries.[17]

Negotiations have already been extensive. Framework agreements on trade and investment are now in place with virtually all Latin American countries, with the four member countries of the Southern Cone Common Market (MERCOSUR), and with CARICOM. Typically, the framework agreements establish Trade and Investment Councils with oversight and counsel capabilities.

Investment opportunities are being supported by a new sector lending program of the Inter-American Development Bank (IDB), with prospects of a $1.5 billion multi-country Multilateral Investment Fund being set up in the near future, including contributions from Europe and Japan. Debt restructuring and reduction are being addressed through a complex of support procedures for internal economic reform.[18]

Continued progress under EAI depended, to some extent, on the successful conclusion of the Uruguay Round of trade negotiations. Since those negotiations are now at an impasse, some uncertainty exists as to the next policy steps that will be taken by the United States. The was, however, no uncertainty about the desire and intent of the Bush administration to move toward freer hemispheric trade -- or, put differently, toward hemispheric regional integration. The Clinton Administration has basically placed EAI on the back burner for the moment. The future of this initiative is therefore uncertain.

The Latin American Integration Association. The Latin American Integration Association (LAIA, or ALADI in Spanish) was established in 1980 as a replacement for the Latin American Free Trade Association (LAFTA), which was set up under the auspices of the Montevideo Treaty of 1960. Both the earlier and the later organizations were designed to promote economic integration and economic development in those countries not belonging to the CACM or CARICOM. In addition, free trade among member countries was not a primary goal. LAIA spans a wide geographic area, including Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.[19] Among the South American countries, only Guyana and Surinam are not members. While trade liberalization was not an initial goal of LAIA, member countries agreed in 1990 to reduce tariff barriers inside the group by 50 percent.[20]

The Southern Cone Common Market. The four South American countries of Argentina, Brazil, Paraguay, and Uruguay, are completing negotiations to form the Southern Cone Common Market (MERCOSUR). The Treaty of Asunción, signed March 26, 1991, is the enabling document. The countries share common borders, and two of the countries, Paraguay and Brazil, have developed a common hydroelectricity project at Itaipú, on the Paraná River, with the possibility that the energy generated by the project may later be routed throughout MERCOSUR.[21] The roots of MERCOSUR extend back to 1986 agreements between Argentina and Brazil to liberalize bilateral trade.

At last report, plans were still in effect for MERCOSUR to take effect for Argentina and Brazil by the end of 1994, and for Uruguay and Paraguay by the end of 1995--four to five years earlier than originally planned. Major provisions of the treaty include the ultimate elimination of tariffs, customs restrictions, and hindrances to the movement of workers among the four countries. Note that the four signatories are also members of ALADI. Chile was originally involved in the discussions, but is not a final signatory.

MERCOSUR will ultimately offer the largest market in Latin America, about twice the size of the Canadian market. The combined countries have a population of 194 million persons and a GDP of $467.5 billion. Exports among the member countries now total $4.1 billion.[22]

The Andean Pact. The Andean Pact was formalized in the Cartagena Agreement of 1969, bringing Bolivia, Colombia, Chile, Ecuador, and Peru together in a combination to eliminate trade barriers, to form a customs union, to develop joint industrial programs, and to coordinate economic policies. Venezuela joined the Pact in 1974, but Chile withdrew in 1976.[23]

Major goals established by the Pact included the coordination of trade and investment policies, the ultimate establishment of a common external tariff, and agreements on investment and intellectual property rights. Unfortunately, there was little progress until 1990. At that point, each country was engaged in trade and investment liberalization programs. The announcement of the Enterprise for the Americas Initiative in June, 1990, brought renewed action. Meetings in La Paz, Bolivia, during November, 1990, yielded an agreement among the five Andean presidents for an Andean Common Market, with a target implementation date of 1996. A year later, the Acta de Barahona, coming from the Cartagena meetings of the presidents, established a free trade area among Venezuela, Colombia, and Bolivia. Peru and Ecuador were brought into the arrangement in mid-1992. Additional talks have resulted in initial agreements about a common external tariff.[24]

Intra-Market Agreements. The formation of MERCOSUR qualifies as an agreement among nations that are also members of a larger trade organization. El Salvador and Guatemala also recently agreed to draft a proposal to create a bilateral free trade zone, this within CACM.[25] Chile has trade agreements with Mexico, Venezuela, and Argentina. A tri-country pact among Mexico, Venezuela, and Colombia (the so-called Group of Three, or G-3) has a target date of 1994. Chile has expressed interest in joining the group. And hopes still persist that the Andean Pact countries will resolve the differences generated by disparate economic size and power, and initiate a market among themselves. Clearly, the movement to change trade alliances and lower trade barriers is not a unilateral action on the part of the United States, although United States policies probably precipitated many of the current moves toward trade liberalization.

Other Trade Policies and Arrangements

The Caribbean Basin Initiative. The Caribbean Basin Initiative (CBI) began operation on January 1, 1984, with an anticipated 12-year initial life span. Its basic purpose was "to promote private sector-led economic growth, stability, and diversification in the CBI region . . . through the provision of duty-free access to the large and lucrative U. S. market".[26] CBI represented the response of the U. S. government to deteriorating economic conditions in the Caribbean Basin, recently worsened by the effects of the 1981-1982 recession.

Currently, 23 countries qualify under CBI for exemptions from U. S. customs duties, Belize among them. Four other countries are eligible, but have chosen not to participate at this time. Panama was suspended from the program in April, 1988, and was reinstated on March 17, 1990.[27] Table 1 summarizes membership of hemispheric countries in major trade arrangements.

Reconsideration of CBI by Congress led to passage of the Caribbean Basin Economic Recovery Expansion Act of 1990 (CBI II). This revision of the 1983 legislation made CBI a permanent program of the U. S. Government, with no termination date; it also targeted some developing countries for special efforts to encourage wider use of CBI preferences.[28]

CBI does not provide blanket access to U. S. markets. The law specifically excludes a variety of items from duty-free entry, including most textiles and apparel, canned tuna, petroleum and petroleum products, most footwear and gloves, some leather goods, and watches and watch parts originating in communist countries. In addition, any goods entering the United States from CBI countries must meet all relevant laws and regulations for consumer safety and protection. Two specific screening requirements are that the imported goods must show at least 35 percent value added by the producing country (prohibiting a simple "pass-through"), and that goods produced from materials originating outside the CBI must show a "substantial transformation" in the CBI manufacturing process.[29]

The United States Sugar Program. The United States has maintained some kind of border control over sugar flows for almost 200 years. Import duties on raw sugar were an early revenue source for the Federal government. The first legislation specifically intended to encourage domestic sugar production was passed in 1890. Since that time, a formal sugar program has been almost continuously maintained.[30]

From 1934 to 1975, sugar production and import policies were determined by a series of legislative acts that had these common characteristics: (1) the forecasting of domestic sugar consumption, and the division of this market among domestic and foreign producers; (2) benefit payments to domestic growers; (3) acreage restrictions; (4) an excise tax on sugar; (5) minimum wage rates for field workers; and (6) child labor restrictions. The impacts of these acts varied over time, but generally served to subsidize inefficient U. S. sugar production, and to raise the retail price of sugar to U. S. consumers.[31]

The 1975 and 1976 sugar crops were not covered by a support program, but falling world sugar prices stimulated new legislation in 1977. The Food and Agriculture Act of 1977 set the tone for succeeding legislation. Domestic sugar prices were to be maintained at or above loan prices through a system of import duties and fees. When sugar prices dropped again in 1982, a system of country import quotas was imposed, based upon each country's share of U. S. sugar imports during the 1975-1981 period. That quota system is still in effect, as an integral part of later legislation.

Since import quotas are keyed to U. S. sugar consumption (or market demand), the recent decline in domestic sugar consumption has forced reductions in import quotas. Market analyses suggest either a leveling off of demand, or a future decline. Either outcome suggests problems for foreign sugar producers, especially in light of higher-productivity technology that some U. S. sugar producers are now adopting.[32]

Apart from the costs of the sugar program to American consumers (some $3 billion per year), its economic impact on foreign producers has been substantial. The countries most adversely affected have apparently been the Philippines and the sugar-exporting countries of the Caribbean Basin. The Caribbean sugar industry is the region's largest employer, producing the region's third largest export.

Analysts point out that the Caribbean Basin countries have had to implement emergency support and aid programs to maintain their sagging sugar industries, and to reduce worker unrest. In addition, efforts have been made either to introduce alternative cash crops, or to move toward cane derivatives, such as ethanol. The downsizing has been very painful, especially in Belize, Barbados, the Dominican Republic, and St. Kitts-Nevis, where sugar has been the dominant export commodity.

Alternative preferential markets apparently do not provide much relief. While some of the CBI countries receive a preferential price for their sugar in the European Community under the Lomé Convention (this being the world's second largest market), sales of excess sugar there have not offset the loss of U. S. foreign exchange. In short, the U. S. sugar program has proved to be damaging both at home and abroad. Given current politics and sugar consumption patterns, it is unlikely that the program will either change substantially or be liberalized in the foreseeable future.[33]

The Generalized System of Preferences. Under the sponsorship of UNCTAD, developed countries established preference programs during the 1970's to favor goods exported from developing countries. The original intent of the program was to establish a uniform system in all of the industrial countries, hence the name, "Generalized System of Preferences" (GSP). In practice, most countries have established policies that reflect their own national interests. Japan and the Western European countries set up their preference schemes in 1971-1972. Canada and the United States did so on January 1, 1976. The United States GSP began as a ten-year program. It was extended in 1985 for another 8.5 years.[34]

The GSP gives 140 countries duty-free entry for approximately 3,000 products. United States products with heavy import competition are excluded, as are politically sensitive goods. As a result, the range of preferential exports has been narrowed considerably, favoring the more advanced developing countries. In 1987, for example, 79 percent of the duty-free imports under GSP came from Taiwan, Hong Kong, Mexico, Brazil, Israel, and Singapore. In 1989, Taiwan, South Korea, Singapore, and Hong Kong were "graduated" from the program, removing their preferential status. At the same time, in an attempt to encourage participation, special benefits were awarded to 41 nations classified as least developed.[35]

The Lomé Convention. The Lomé Convention was signed in Lomé, Togo, in 1975, by representatives of the European Economic Community (EEC) and some 50 low-income countries in Africa, the Caribbean, and Oceania (ACP). It replaced and broadened a prior preferential treaty between France, Belgium, and 18 former African colonies. Following the provisions established by the General Agreement on Tariffs and Trade (GATT), the EEC provided indirect aid to the low-income countries through lower tariffs for specified trade commodities.[36]

The Convention has been renewed three times since its inception. Lomé IV currently provides free entry into EEC countries for manufactured goods and some agricultural products from the more than 60 ACP members, and the entry of primary commodities at stable prices. The EEC also provides development assistance and food aid to ACP countries.

IV - TRADE OPTIONS OPEN TO CUBA

The economic characteristics of Cuba in 1990 reflect both the advances of the Castro government during the flush times of Soviet support and its more recent failures under the stress of the Communist breakdown and the United States embargo. 1990 is chosen as a base year for comparison because of the availability of data for other countries and because the Cuban economy had not then begun its most precipitous fall. Cuba's 1990 population was estimated to be 10.8 million, up from only 7 million in 1960. Out of that total population, 3.6 million persons made up the island's labor force. Employment was distributed as follows: 30 percent in government and services, 22 percent in industry, 20 percent in agriculture, 11 percent in commerce, 10 percent in construction, and 7 percent in transportation and communications. CIA estimates suggest an "economically active" population of at least 4.8 million. The Gross Social Product (not directly comparable with GDP or GNP) was approximately $27 billion at that time. Per capita income was $2,644. Both of these measures fell deeply in 1991 and 1992. It is estimated that overall economic activity in Cuba has dropped by about 50 percent since 1990.[37]

1989 trade estimates show exports from Cuba of $5.4 billion, or 20 percent of GSP, including sugar, nickel, shellfish, citrus products, tobacco, and coffee. About 67 percent of the exports went to the former USSR, 6 percent to the former German Democratic Republic, and 4 percent to the People's Republic of China. Imports were a healthy $8.1 billion, and included capital goods, industrial raw materials, food, and petroleum. The former USSR provided 71 percent of the imports, with other Communist nations supplying another 15 percent.[38] The visible trade deficit ($2.8 billion for 1989) will likely worsen when markets are opened, without continuing support from other "fraternal" states.

Cuban industrial production accounted for about 45 percent of its 1990 total product. Major industries included sugar milling, petroleum refining, food and tobacco processing, textiles, chemicals, paper and wood products, metals (especially nickel), cement, fertilizers, consumer goods, and agricultural machinery. Agricultural output contributed another 11 percent of total product. The major commercial crops were sugarcane, tobacco, and citrus fruits. Other important commodities included coffee, rice, potatoes, meat, and beans.[39]

This mix of industries and agricultural enterprises suggests a diversified economic structure, supported by an equally diversified resource base. Under free market conditions, such would certainly be the case. The economic base would not change significantly in that event, but the country's institutional arrangements would be different, as it accessed new markets and established new trading relationships.

These figures can only reflect the basic outlines of the Cuban system. They cannot show the increasing strain placed upon the Cuban economy by a totalitarian regime in conflict with its nearest neighbors. The data also do not reflect the $18.5 billion in economic and military aid provided Cuba by Communist countries between 1970 and 1989, and the $710 million coming from other countries and agencies over the same time period, excluding the United States. Such support underscores the inefficiency of a command economy, in which prices rarely reflect value.

Cuba is the largest country in the Caribbean. It was once an economic colossus. Even in recent years, it was the world's foremost exporter of sugar, and a major player in the world citrus market. When the transition finally occurs, and the island economy is open to hemispheric markets, it will have the opportunity once again to acquire that level of economic ascendancy. How it does so is a matter of critical importance. The choice of trade alliances and trade arrangements is one extremely important decision.

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