Photo taken at the Fourth summit of the Pacific Alliance. Via ESO, Wikimedia Commons.
Not so long ago, open markets and free trade were considered the recipe for greater prosperity and, yes, even greater political freedom. That vision, notwithstanding its arguable merits, seems to have passed. Canada penned its support for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership on October 29, 2018. The 16-nation commitment to the CPTPP goes on, although it is overshadowed by the now dirigiste stance of Joe Biden’s America and growing anxieties over security in relation to Xi Jinping’s China. Neither country is a CPTPP member. The Trump administration withdrew from the final negotiations and the Biden administration has stayed aloof. China, initially excluded from the project, has made a bid to join, but its motives are suspect and its adherence to past trade agreements is dubious.
The unwieldy title – “comprehensive and progressive” – was itself a sign of trouble, as though its signatories were, in the Shakespearean formulation, “protesting too much.” Certainly the “progressive” epithet was a concession to Canada, which in the opening years of the Justin Trudeau government was keen to show that trade agreements could accommodate environmental, labour and gender issues. The “comprehensive” part was to signal that the agreement, for the first time, incorporated such modern phenomena as e-commerce. Will these lofty goals generate, in 2023, any genuine effort among the 16 countries to realize the treaty’s potential? Or, instead, will they abandon open markets and seek to protect their domestic ones? The jury is out.
Running beside the CPTPP, a separate but related drama saw Chile, Colombia, Mexico and Peru forge closer economic ties in the pact known as the Pacific Alliance. As conceived, the Pacific Alliance seeks to build stronger trade and investment ties among the four Latin American countries, including the establishment of an integrated stock exchange, MILA (Mercado Integrado Latinoamericano). The Pacific Alliance is the latest in a string of hemispheric initiatives, all of which fell short of their early promise – whether Mercosur, whose members Argentina, Brazil, Uruguay and Paraguay form a largely protectionist customs union, or the grander Free Trade Agreement of the Americas, whose negotiations ground to a halt after a large antiglobalization protest at the 2001 Summit of the Americas in Quebec City. The Americas Partnership for Economic Prosperity (APEP) was added to this alphabet soup by President Biden at the 2022 Summit of the Americas and has won the adherence of Barbados, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru and Uruguay. But APEP’S focus on environmental sustainability and workers’ rights is, at this stage, more hortatory than substantive.
Putting money on the one horse that had a chance among these lame contenders, Canada made relations with the Pacific Alliance one of the larger planks in its Latin America policy. Canada identified the unified market as providing broader opportunities for two-way trade and investment. Its governments are also seen as natural allies for promoting democratic governance and strengthening human rights. It helped that Canada already had a bilateral free trade agreement with each of the member countries. Canada went so far as to obtain associate membership in the Alliance and began exploring greater cooperation, particularly in the area of education and skills training. The Canadian government’s confidence helped stimulate major private-sector initiatives. Scotiabank, which has had a significant presence in Latin America for years, supercharged its strategy by announcing that it would bring special focus to the countries of the Pacific Alliance. The Toronto Stock Exchange entered an agreement with Chile’s Santiago Stock Exchange to open double listings, meaning that TSX and MILA would gain access to each other’s capital markets.
Heady ambitions have been shaken by the abrupt shift away from the liberal international consensus toward a more protectionist and self-interested policy terrain. Canadian diplomats, who injected considerable energy into forging ties a few years ago, now believe that decay has set in. President Andrés Manuel López Obrador of Mexico has no fervent attachment to the Pacific Alliance’s liberalizing vision. Canadian International Trade Minister Mary Ng struggled to remind Mexico that preferential policies favouring Mexico’s oil and gas sector contravened commitments made under the Canada–United States–Mexico Free Trade Agreement (CUSMA), the successor to NAFTA.
Nor was former Peruvian President Pedro Castillo, chair of the Alliance summit last year but removed from office by Peru’s Congress, a natural free trade champion. Regional integration initiatives are on the back burner for Castillo’s replacement, Dina Boluarte, who is struggling to respond to violent uprisings in Peru’s hinterland. Similar disruptions had already afflicted Chile and Colombia. Between October 2019 and March 2020, Chile was rent by violent protests in the Estallido Social (Social Outburst). An unsuccessful constitutional reform process served as a shock absorber, as did the election of President Gabriel Boric, a onetime social activist.
In Colombia, protests were extensive but less violent than in Peru and Chile. They roiled the country from April 2021, focused on taxation and economic inequality. In 2022, Colombians elected Gustavo Petro, a former guerrilla leader and later mayor of Bogotá, the first leftist to occupy the presidency. One of Petro’s first actions on the trade front was to sign a bilateral investment treaty with Venezuela, casting a weak lifeline to a regime whose economic incompetence and political repression have drawn international condemnation and flooded Colombia with desperate refugees. None of these developments has served to put momentum into the Pacific Alliance. The political configuration of forces that brought the pact into being has changed fundamentally.
Pessimism reigns. Yet counterintuitively, the Pacific Alliance economies continue to grow, as do the average incomes of their people. World Bank statistics of per capita GDP by purchasing power parity in 2017 US dollars show that Chile stood at $25,400 USD in 2020, up from $21,200 in 2010. Comparable figures for Mexico are $19,100 vs. $18,000; Colombia $14,600 vs. $11,900 and Peru $12,500 vs. $10,000 (all USD). Similarly, income inequality as measured by the Gini coefficient has fallen over the last decade in all four countries, slightly in Colombia from 55.9 to 54.2 and significantly in Peru from 55.1 to 43.8. (Under the Gini coefficient, the equal distribution of all wealth registers as 0, while the complete concentration of wealth in one person’s hands would be 100.) The outbreak of public protests and the shift to more leftist administrations during a period of rising wealth and falling inequality runs against normal expectations.
In a major contribution to economic sociology, University of Colorado professor Andy Baker undertook a study of the link between policy reforms and economic behaviour in selected Latin American countries, the findings of which were published in his The Market and the Masses in Latin America in 2010.¹ What Baker discovered was a gradually richer population increasing their purchases of consumer goods, spurred not only by rising incomes but also by falling prices occasioned by cheaper imports. In line with their higher level of consumption, Latin Americans increasingly saw themselves not as defenders of jobs in protected national industries but as consumers eager to improve their material standard of living. In probing the discontents of the time, Baker found no resentment of trade policy, but rather objections to domestic privatization of services once considered public.
Although a decade has passed, his findings resonate with the timbre of more recent public protests. There was no greater underlying grievance in the Chilean protests than the perceived poor returns of the privately operated pension companies. In Peru, regional alienation of Andean people fuelled anger against the central government. Open markets and trade have not figured in as part of the discourse.
This is not to ignore very serious challenges that these countries face. American Markets Intelligence (AMI), a business-backed think tank which includes among its sponsors Scotiabank and ATCO, is candid about the business climate. Among the “threats” in a SWOT analysis (strengths, weaknesses, opportunities, threats), it identifies an exodus of affluent individuals from Chile, Peru and Colombia, spurred by the rising security risks associated with the social unrest. And improvements in the Gini coefficient notwithstanding, AMI considers that the bottom half of the income pyramid is still weak.
Yet the consumer market remains strong. The expansion of Scotiabank as a retail bank with consumer branches throughout the region is a testament to its confidence in future prospects for the populace at large. Scotiabank has the fifth largest retail bank in Chile, the sixth in Colombia and the third in Peru and Mexico. Shareholders seem convinced that the company has made a promising commercial gamble. The strength of the retail market in the Pacific Alliance countries is exemplified by the dominance of regional commercial chains in the market, the top five merchandisers being FEMSA Comercio (Mexico), Cencosud (Chile), Falabella (Chile), Grupo Coppel (Mexico) and Organización Soriana (Mexico), together generating $46.32 billion USD in annual sales. Symbolic of the power of this sector in the Pacific Alliance is the Cencosud-owned Costanera Tower, the second-highest building in Latin America. Set atop a large multistorey shopping centre, it punctuates the skyline of Santiago, Chile.
Since the Alliance is a Pacific organization, its relationship with China calls for examination, especially in the fractious atmosphere of the current United States–China relationship. Driven by the strength of their commodities, Chile and Peru maintain strong trade surpluses with China, their number one export market. Colombia and Mexico run large trade deficits, due to imports of office and consumer goods, machinery, vehicles and a variety of business and consumer products. For Colombia and Mexico, China is respectively their second and third export markets.
The trade relationships of Chile and Peru are matched by high levels of Chinese investment, $16 billion in the case of Chile, $30 billion for Peru. Comparable levels are much lower in the case of Mexico at $385 million and Colombia at $292 million (all USD). One of the largest of those investments is being made to build a large port facility in Chancay, Peru, one of the few major Belt and Road Initiative (BRI) projects within the Pacific Alliance countries. Indications following the recent meeting of the 20th National Congress of the Chinese Communist Party are that Xi Jinping envisions a reduction in Chinese infrastructure investment in the context of the Belt and Road Initiative. This implies a likely slowdown in offshore investment in Latin America. Among China’s concerns is the magnitude of its liability incurred around some of its BRI loans and investments – in the case of Latin America the $30 billion it has sunk in Peruvian projects. Withdrawal from the market could offer an opening for new initiatives from others.
Canada’s $47.3 billion USD investment in the Pacific Alliance countries slightly exceeds the Chinese total of $46.7 billion. Given the proportionate sizes of our respective economies, Canada’s presence in the Pacific Alliance market is an evident strength. This is a presence that enables considerable Canadian influence in the region and justifies Canada’s effort to make the relationship a priority.
While the political attention paid to the Pacific Alliance by its own governments may be waning for the moment, the economic climate may also be propelling their economies in positive directions. The existing openness of the markets and the commitments made over more than a decade to strengthen their integration have created a path dependency that may not quickly lose steam.
In an article in the Globe and Mail in March, Steve Verheul, recently retired as one of Canada’s top trade negotiators, made an appeal for a continued commitment to trade agreements despite negative headwinds.² Having been lead negotiator of the CUSMA in which Canada successfully parried the Trump administration’s efforts to eviscerate NAFTA, Verheul is not one to throw in the towel. In his view, the time is right to move forward on the “progressive” elements of the Trudeau government’s trade agenda in an earnest, not merely proclamatory, way: “We would serve ourselves well if we could bring concrete, workable ideas for new approaches to trade rules to the table.” Countries “tackling climate change and improving labour standards at potential cost,” he wrote, “should not have their competitiveness undermined by countries that are allowed to evade these … responsibilities.”
As unpromising as the situation looks currently, Canada should persist in its efforts regarding the Pacific Alliance. Persistence today could bring success tomorrow. Today’s governments sceptical of the benefits of openness may discover that their interest still lies in that direction. And other political actors may come to the fore in countries that, despite some dangers and doubts, are still democratic polities. After all, knocking on the door of the Pacific Alliance can be found Ecuador, whose new President, Guillermo Lasso, is an enthusiastic advocate of free trade principles. As Professor Baker pointed out in his 2010 sociological study, none of the left-leaning administrations of that era chose to close off the borders that gave their citizens access to an improved standard of living through open trade.
¹ Andy Baker, The Market and the Masses in Latin America: Policy Reform and Consumption in Liberalizing Economies (New York: Cambridge University Press, 2010).
² Steve Verheul, Amid Rising U.S. Protectionism, Here’s What Canadian Trade Leadership Can Look Like, Globe and Mail, March 22, 2023.