Mexican shiftNorthern memberlooks to assert itsLatin AmericanrootsPage 2

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Mercosur drivenby politicsConflicting prioritieshamper rivalcoalitionPage 2

Puma partnersThe gang of four ismaking waves in aworld of ‘mega’trade pactsPage 3

Beyond just thecommercialColombia’spresident talks ofcloser political linksPage 4

Full of promiseGrouping has thepotential to pushtowards Asian TigerstatusPage 4

FT SPECIAL REPORT

New Trade Routes Pacific AllianceWednesday April 2 2014 www.ft.com/reports | @ftreports

So far this year, it has mostlybeen bad news from LatinAmerica, as it has frommany emerging markets.There have been riots and

galloping inflation in Venezuela;dwindling foreign reserves and aforced devaluation in Argentina; andanother year of slow growth forecastfor Brazil.

Yet this does not mean that the“decade of Latin America”,announced four years ago, is over. Forone, Chile, Colombia, Mexico andPeru this year took a major step byforming a trade pact, called thePacific Alliance, which through freertrade between members aims to givethe region an extended lease of eco-nomic life.

Although many might labour overthe words “trade agreement”, the

alliance has been breathlesslydescribed as “inspiring” (by CostaRica) and “the most exciting thinggoing on in Latin America at themoment” (by Felipe Larraín, Chile’sformer finance minister).

One reason for the excitement issize. If it were a single economy, thePacific Alliance would be among the10 largest in the world. Together, itsmembers represent 39 per cent ofLatin America’s $6tn economy and in2012 almost half of its $144bn of for-eign direct investment. As such, itprovides an alternative to the region’sdominant power, Brazil.

“The alliance is a highly sensitiveissue for Brazil, which has been try-ing to form its own South Americangroup,” says Antônio Sampaio of theInternational Institute for StrategicStudies in London.

There is also its attitude to com-merce. The alliance contains some ofthe region’s most business-friendly,best-run and fastest-growing econo-mies – and it is increasingly seen byinvestment bankers as a driver ofcross-border mergers and acquisitions.

But the biggest reason for the hulla-baloo is what the alliance aims toachieve. Its central idea is to generatecross-border economies of scale andindustrial linkages to help its mem-

bers take full advantage of the PacificRim – the Pacific coastal countries ofthe Americas and Asia which com-prise the fastest-growing region onthe planet. Productivity gains will inturn help members to continue grow-ing fast once the commodity boompasses and the easy days of ultra-loosewestern monetary policy ends.

“At the moment, Peruvian gas ismore likely to be exported to Mexicothan to Chile. Chile meanwhile buysliquefied natural gas from Trinidad,while Colombia has an energy surplusbut no energy interconnection,” saysAlfredo Moreno, Chile’s former for-eign minister.

“The Pacific Alliance’s approach isto boost trade by cutting intra-regional trade tariffs and not erectnew barriers to other countries.”

Trade integration, of course, is not a

novel Latin American aspiration. Astrade within the region is only 29 percent of the total – compared with 70per cent in Europe – the potentialgains from integration are large. Thesupply chains that China has with itsneighbours, or the US with Mexico,barely exist in South America.

Sadly, South America has a longhistory of promising trade pacts thatfail to reach their potential. Oneexample is Mercosur (Southern Com-mon Market), whose birth in 1991 gen-erated great enthusiasm.

Today, however, the Brazil-domi-nated group – which includes Argen-tina, Paraguay, Uruguay and socialistVenezuela – can often more resemblean anti-gringo talking shop than atrade pact.

Continued on Page 4

Pact takespragmaticapproach tointegrationThe economic initiative hasmade big strides intwo years despite obstacles of geography, politicsand infrastructure, writes John Paul Rathbone Alliance members aim to create cross-border economies of scale to help them take full advantage of the Pacific Rim Corbis

Limiting ambitions aboutthe movement of goods,capital and people makes itmore likely to achieve them

2 ★ FINANCIAL TIMES WEDNESDAY APRIL 2 2014

‘Cumulative rules of ori-gin” sounds like one ofthe drier concepts ininternational trade law.But for many Mexican

manufacturers, it is the key to whythe Pacific Alliance makes good busi-ness sense.

Take Mexican auto parts manufac-turing, a sector dominated by smalland medium-sized enterprises forwhom scrapping trade barriers hasbig potential benefits. They will nowbe able to export parts, say, to Colom-bia, for inclusion in cars made therethat are then exported to Chile –something that would not have beenpossible under the terms of those twocountries’ already existing free-tradeagreements.

“As a result of this alliance,

Mexican car parts exported to Colom-bia are in effect treated as if theywere Colombian. This is a very bigadvantage,” says Eduardo SolísSánchez, president of the MexicanAutomotive Industry Association.

It is hard to put a figure on how biga boost the Pacific Alliance withChile, Colombia and Peru will proveto manufacturing powerhouse Mexico.It is already the worlds’ biggest pro-ducer of flatscreen televisions and amajor mobile phone and car producerwith a fast-growing aerospace indus-try, and has aggressively flung openits economy, signing more than 40free-trade agreements worldwide inthe past two decades.

But a beaming Enrique Peña Nieto,Mexico’s president, in February hailedthe Pacific Alliance as “the most

innovative integration mechanismMexico has signed in recent yearssince the North American Free TradeAgreement” after its leaders agreed tosweep aside tariffs on 92 per cent ofgoods immediately.

Of the remainder, 7 per cent shouldbe gone in the medium term and thetrickiest 1 per cent, many relating tosensitive agricultural goods, should beeliminated within 15 years, saysVanessa Rubio, Mexico’s undersecre-tary for Latin America. “This allianceaims to ensure that Mexican productsgain more markets,” she says. Mex-ico’s exports to its three Pacific Alli-ance partners total about $9bn.

“Free trade has been one of the ten-ets of the modern Mexican economy,and it’s through competition and freetrade that we will continue to

advance,” says Ricardo Salinas Pliego,one of Mexico’s leading businessmen.His Grupo Salinas operates in bank-ing, media and retail across the regionand its strongest Latin American mar-ket outside Mexico is Peru.

But Carlos Serrano, chief economistat BBVA Bancomer in Mexico City,says Mexico’s long-time focus onNorth America will not evaporate.

“Nafta [North American TradeAgreement] will continue far andaway to be the most important treatyfor Mexico – it’s Mexico’s most impor-tant relationship and it will growmore important still,” he says, refer-ring to the 20-year-old trade pactwith the US and Canada and the pros-pect that Mexico’s historic energyreform will fuel the expansion ofindustrial sectors exporting to the US.

Nonetheless, Mexico’s manufacturingclout complements the more commod-ities-driven economies of its partners.

“This [the Pacific Alliance] is anadditional something that is good tohave. Mexico can export more tothe Pacific nations and that helpsdiversify its economy,” Mr Serranoadds, recalling how Mexican GDPplunged 6.2 per cent in 2009, far worsethan its peers, after the US-led finan-cial crisis.

Mexico and its partners in the alli-ance are both friends and competitorsin some sectors – Colombia alsomakes cars, and both Chile and Perualso export avocados, for instance –but “the greater good” prevailed after“very intense negotiations” on tariffelimination, Ms Rubio says.

“Strengthening ties with LatinAmerica and opening other markets isa question of global strategy,” saysGerardo Gutiérrez Candiani, presidentof Mexican business lobby, CCE,which noted that Mexico’s manufac-turing exports were higher than thoseof the rest of Latin America puttogether.

“Having a country like Mexico,which is highly competitive in manu-facturing, helps balance the weight ofBrazil. It’s a great, great opportunity,”he says.

One lesson from Nafta that could beapplied to the Pacific Alliance is thecreation of integrated productionchains, he adds.

Ms Rubio also sees the allianceboosting opportunities for companiesto take part in infrastructure tenderswithin the bloc.

Industry and trade aside, there isanother reason for Mexico’s interestin the Pacific Alliance: politics.

The bloc not only offers Latin Amer-ica’s second-biggest economy thechance to boost its international cloutby being in the driving seat of analliance that Mr Peña Nieto calls a“benchmark of global integration”.

It is also an opportunity to bolsterties with its backyard, which havetaken a back seat in the past 20 years,not only through trade but alsothrough education scholarships tostudy in each other’s countries andthe elimination of visas.

“This brings Mexico into SouthAmerica – that’s the extent of itsimportance,” says Michael Shifter,president of the Inter-American Dia-logue, a Washington think-tank.

“There’s a big perception that Mex-ico has been so focused on the US andNorth America that it hasn’t lookedsouth. It’s become a little isolated.Mexico wants to have more diversifiedrelations and be seen as a Latin Amer-ican country,” he says. “This makesgeopolitical sense.”

To the east of the Andes,the countries that stretchout towards South Amer-ica’s Atlantic coast – whichtogether form the regionalcoalition Mercosur – areobserving the emergence ofthe Pacific Alliance, itsrival, with unease.

Just as the Pacific Alli-ance is in the bloom of itsyouth, some fear that Mer-cosur – a customs unionformed in 1991 that todaycomprises Brazil, Argen-tina, Venezuela, Uruguayand Paraguay – may bestarting to wither.

The far more ambitiousintegration project has fal-tered in recent years thanksto conflicting prioritiesbetween its diverse mem-bers. Attempts to establisha trade liberalisation agree-ment with Europe havedragged on for 15 years,most recently runningaground because ofattempts by Argentina toprotect local industry.

Mercosur countries havestruggled against seriousbouts of instability and areseparated by challenginggeographical barriers. Bra-zil, Mercosur’s leader, has

often gained at the expenseof other members, with theinequalities and asym-metries causing smallercountries to complain theyare losing out.

Last year Danilo Astori,vice-president of Uruguay,which is Mercosur’s least-populated member andenjoys observer status inthe Pacific Alliance, said hehoped his country wouldbecome a full member ofthe new bloc “as soon aspossible”. He criticised the“inaction” of Mercosur.

Many analysts say thePacific Alliance, which ismore focused on promotingfreer trade than protectinglocal industry, is bettersuited to Uruguay’s needs.

But Dante Sica, an econo-mist at abeceb.com, a con-sultancy in Buenos Aires,insists “the Pacific Allianceis not a threat to Mercosur”and highlights the huge dif-ferences between the two.

While the goals of thepro-business Pacific Alli-ance are largely economic,Mercosur’s founders wereinspired by the example inEurope and aimed to go fur-ther. They intended it alsoto be a tool to strengthendemocracy as its membersrecovered from dictator-ships in the 1980s andhoped it would drive politi-cal and cultural integration.

The attitude to freer tradebetween the two groups isvery different: protectionist

Mercosur has preferentialtrade access to less than7 per cent of global mar-kets. The much more openeconomies of the PacificAlliance on average havetrade pacts with countriesrepresenting almost75 per cent of the worldeconomy, says abeceb.com.

Therefore, although thecombined gross domesticproduct of Mercosur coun-tries is much greater thanthat of the Pacific Alliance– $3.1tn compared with

$2.2tn – the total trade(exports plus imports) ofPacific Alliance countriesamounted to $1.1tn in 2012.This compared with just$653bn in Mercosur, accord-ing to abeceb.com.

Although many fear thePacific Alliance could be yetanother nail in the coffin ofthe idea of a united SouthAmerica, Matías Spektor,an international affairs spe-cialist at the Getulio VargasFoundation in Rio deJaneiro, suggests that itssuccess may put pressure

on the struggling Mercosureconomies to kick-startefforts to seal trade dealsnot just with the EU, butalso the US.

Flagging growth in Brazil,which sees a deal with theEU as key to exploiting itsnegotiating power with theUS, and a looming recessionin Argentina may act as anincentive for Mercosur tomove ahead in trade negoti-ations, says Mr Spektor.Venezuela’s economic crisiscould have a similar effect

“The Pacific Alliancemight actually be the sparkthat brings countries in theregion together,” he says,adding that “a lot willhinge” on Chile’s new presi-dent, Michelle Bachelet.

Many had feared the left-leaning Ms Bachelet mightturn away from the PacificAlliance, whose mostenthusiastic proponents areon the right, and strengthenties with closer ideologicalallies in Brazil and Argen-tina. Others say she can ill-afford to take risks as Chile’seconomy decelerates.

In a column in the Span-ish newspaper El País, Her-aldo Muñoz, Chile’s foreignminister, said the new gov-ernment valued the PacificAlliance as “an economicintegration scheme and atrade platform” although itsupported discussions toachieve “a convergence ofthe Pacific Alliance withMercosur”. If the two blocks

Politics acts as driving force for MercosurRival coalition

Conflicting prioritieshamper group, saysBenedict Mander

Mexicanpowerhousestrengthenssouthern ties

ManufacturingMembershipmay shiftgeopolitical perceptions of focus chief ly inclinedtowardsUS andCanada, writes JudeWebber

‘The Pacific Alliancemight be the sparkthat bringscountries in theregion together’

Auto parts makers in Mexico stand tomake large gains from the scrappingof trade barriers Corbis

‘Mexico wants to havemore diversified relationsand be seen as a LatinAmerican country’

New Trade Routes Pacific Alliance

John Paul RathboneLatin America editor

Jude WebberMexico correspondent

Benedict ManderSouthern Cone correspondent

Andres SchipaniAndes correspondent

Shawn DonnanWorld trade editor

Lucien ChauvinFT contributor

Samuel GeorgeBertelsmann Foundation

Peter ChapmanCommissioning editor

Chris LawsonPicture editor

Steven BirdDesigner

For advertising details,contact: Ximena Martinez,+1 (917) 551 5112,ximena.martinez@ft.com, oryour usual FT representative.

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Contributors »

Pacific Alliance/ Mercosur

Source: IMF

Average GDP growth rates(% change)

-6

-4

-2

0

2

4

6

8

2000 05 10 14 18

Mercosur Pacific Alliance

Investment(as % of GDP)

14

16

18

20

22

24

26

2000 05 10 14 18

Inflation(annual % change)

02468

10121416182022

2000 05 10 14 18

Fiscal deficit(as % of GDP)

-6

-5

-4

-3

-2

-1

0

1

2

3

2000 05 10 14 18

Current account deficit(as % of GDP)

-4

-2

0

2

4

6

2000 05 10 14 18Forecasts Forecasts Forecasts Forecasts Forecasts

fail to converge, and thereis success for plans to cre-ate the Trans Pacific Part-nership, which includesPacific Alliance countries,the US and various Asiancountries, that could pose a“geopolitical problem” forMercosur, says DanielKerner, a Latin Americaanalyst at Eurasia Group, apolitical risk consultancy.

He believes that “growingdisenchantment” and thedivergent priorities of Mer-cosur countries may be itsundoing. “We’re going tostart to see these countriestrying to find ways tobypass Mercosur so thatthey can have differenttrade agreements,” he says.

He explains that Uruguayhas long wanted a tradeagreement with the US,while Brazil may negotiatea bilateral trade deal withthe EU if Argentina contin-ues to cause problems. “Foreach country, Mercosur willjust become less relevant.These agreements neverdie, they always linger.”

Even so, unlike the pri-vate-sector-oriented PacificAlliance, Mercosur is notprimarily a trade bloc, saysMr Spektor. In terms of thepolitical integration it hasachieved between members,he says, it has been a “tre-mendous” success. “Is theMercosur model working?Clearly not. But who said itwas really about free tradein the first place?”

The alliance tends to haveless volatile growth thanMercosur. As the commodityboom wanes, faster growth isforecast for the alliance.

Alliance countries have higherinvestment and highergrowth. Mercosur countrieshave tended to prioritiseconsumption.

Inflation tends to be lower inthe alliance countries. At themargin, macroeconomiccertainty can encouragegreater investment.

One reason for lower inflationwithin the Pacific Allianceis tighter fiscal disciplinethan in Mercosur countries.

A point of vulnerability forthe alliance is its largercurrent account deficits,the flipside of larger foreigndirect investment inflows.

The two Latin Americas

Commoditiestouch raw nerve

The concentration of mineralresources in alliancecountries, especially in Chileand Peru, has led toconcerns that the trade bloccould become dependent oncommodity exports, giventhe strong demand in Asia.Some 80 per cent of

copper-rich Chile’s exports toAsia in the past decade weremetals and ores. They werejust a third of Chile’s salesto the rest of Latin America,with manufactured goodscomprising almost half itsregional exports.Therefore, some say more

trade within Latin America,which involves a morediversified and higher value-added basket of goods,would be more beneficial.If the Pacific Alliance

succeeds in strengtheningtrade within the region andopening opportunities for awider range of companies,especially small and medium-sized ones, reliance oncommodity exports coulddecrease. That could help todiversify trade with Asia.Views vary over whether

government may need tostimulate specific sectors.Huge distances between themembers of the alliance andpoor infrastructure linkingthem pose further problems.“If the Pacific Alliance

develops industries awayfrom commodities that’s fine,but it will not be because ofdecisions from politicians,but because it makes sense,”says Jorge Errázuriz, aChilean banker involved inpromoting the alliance.He argues that state-

directed industrial policieshave never worked.

Benedict Mander

Observers weightheir options

The alliance is attractingmany “observer nations” withsome aspiring to become fullmembers.Costa Rica is in the

pipeline to join and Panamais likely to follow suit afterthey have signed free tradeagreements with members.Guatemala announced lastyear it would eliminate visarequirements for somemember countries.Ecuador is an observer

and, according to someinsiders, has expressed itsintention to join. ObserversUruguay and Paraguay arealso part of the moreprotectionist Mercosur bloc.“This is a way of signallingthat they are prepared tohedge their bets with thefreer trade option, shouldMercosur falter,” explainsBarbara Kotschwar of thePeterson Institute forInternational Economics.Observer Canada is

considered an obviousalliance fit by some but theidea of free movement ofpeople seems to be aspoiler. That could also applyto the US, another observer.

Andres Schipani

Bourse tie-uphas way to go

Mexico was one of thefounding partners of thePacific Alliance, but haslagged behind when it comesto joining the stock-exchangetie-up between Colombia,Peru and Chile. Thislaunched in 2011 with highhopes of rivalling Brazil’smighty BM&FBovespa.Hobbled by the complexity

of harmonising regulatoryregimes and high operatingcosts, volume has struggledto take off. But Mexico’splans this year to join theMercado IntegradoLatinoamericano, or Mila,should help. Its combinedmarket capitalisation was$547bn in January with$6.2bn volume.“Mexico will represent

more than half of Mila,” saysJavier Artigas, country headin Mexico of BTG Pactual,the Brazilian investment bankand a former senior officialat Mexico’s stock exchange,the BMV. “As money ismoving to developedmarkets, the Latin Americanbloc may lose some liquidity.So joining together

achieves scale and createsmore liquidity.”Blue-chip Mexican stocks

such as América Móvil,Telmex and Televisa may fly.Chilean investors have shownhigh demand for Mexicanshares. But Mr Artigas saysthat Mila will “take a while togain traction”.Carlos Serrano, chief

economist at BBVABancomer in Mexico seesgreater synergies with theUS, Mexico’s top tradingpartner. “It’s going to taketime for Mila to translateinto much more activity.”

Jude Webber

News in Brief

Mining in copper-rich Chile

FINANCIAL TIMES WEDNESDAY APRIL 2 2014 ★ 3

New Trade Routes Pacific Alliance

Surrounded by cranes noisilyloading and unloading con-tainers at the bustling docksof the port of Buenaventura,Domingo Chinea expresses

high hopes for the burgeoning PacificAlliance trade bloc.

“The Pacific Alliance will open thedoor to more traffic,” says Mr Chinea,head of the body that administers themain Buenaventura port terminal.The port handles more than half ofColombia’s maritime cargo.

“There has always been traffic fromMexico, Peru and Chile, but it is grow-ing, especially from Chile,” he adds.He points out that, because of thebloc’s influence, annual activity at theport has been growing by 12.5 per centon average, compared with 9.5 percent growth in earlier times.

Despite being ravaged by violenceand poverty, Buenaventura is Colom-bia’s main gateway to the Pacific,receiving manufactured goods fromAsia as well as growing cargoes ofChilean wine and goods for its vibrantretail sector. Exports include Colom-bia’s premium grade of coffee boundfor Japan and a range of productsfrom the Nutresa group, the country’smain food manufacturer.

“Even if we already have operationsin the member countries, I believe thePacific Alliance will generate furtherbenefits not only for companies likeours, but also for consumers and themember countries in general,” saysCarlos Piedrahíta, chief executive ofNutresa.

The conglomerate operates through-out the alliance countries (it expandedinto Chile last year when it boughtTresmontes Lucchetti for $758m) andin Asia.

Despite the many advantages thatthe Pacific Alliance is expected tobring – such as increased investment,and removing barriers to the move-ment of people and the sharing ofresources – in strictly trade terms thebenefits may be more limited. This isnot only in Latin America but also inAsia, where the alliance is making

a special effort to strengthen ties.Cristian López, corporate export

director at Chile’s Concha y Toro,Latin America’s largest wine pro-ducer, says the company has reapedmost of the benefits of the trade pactsthat Chile signed long ago with coun-tries such as China, Japan and SouthKorea.

“The Pacific Alliance brings no bigpros or cons for the wine sector – the

free trade agreements that Chile hassigned have already had a positiveeffect on our business,” says MrLópez. He nevertheless believes Asia,and in particular China, remains amajor growth market, much more sothan Latin America and Europe.“Today our challenge is to build thebrand and conquer cultural barriers.”

Felipe Manterola, who heads theassociation representing Chile’s

salmon industry, one of the country’slargest export fields, says the sector ismore interested in the prospects forthe Trans Pacific Partnership. TheTPP is a much more ambitious tradeaccord which includes the USand various Asian countries.

Mr Manterola says the TPP couldhelp reduce trade barriers even fur-ther. This would especially be thecase with Japan, the destination of

about a quarter of Chile’s salmonexports.

Yet the Pacific Alliance is still seenas an important opportunity for well-established companies that do not yethave investments in other membercountries.

“The Pacific Alliance will be impor-tant for the future of productivity andcompetitiveness of our companies,”says José Alberto Vélez, chief execu-tive of Argos group, Colombia’s lead-ing cement maker, which also has bigoperations in the US, the Caribbeanand Central America.

“This is an interesting opportunityfor Colombia to keep growing interna-tionally, as well as having a sustaina-ble connection with the countriesalong the Pacific coast.”

One area where much work remainsto be done is in financial integration,although there has been progress. Notfully satisfied with the depth of theirlocal markets, fund managementgroups from Chile and Colombia haveset up pension administration compa-nies in neighbouring countries.

For example, Sura, one of Colom-bia’s largest financial groups, tookover the Dutch group ING’s pensionsand insurance assets in Mexico, Peru,Colombia and Chile for $3.6bn in 2011.It has spent almost $400m on pensionfunds in Peru since 2012.

“The Pacific Alliance is an opportu-nity for pension funds to diversifytheir investments in four differentlocal markets,” says David Bojanini,Sura’s chief executive, who seesadvantages in the bloc “as long as itprovides a more agile and flexible[investment] environment”.

Jorge Errázuriz, a prominent Chil-ean banker involved in promoting thePacific Alliance, admits that moreambitious plans to integrate the mem-ber countries’ stock exchanges haveso far been disappointing; the LatinAmerican integrated [stock] market(known as Mila from its initials inSpanish), he says, is “not working”.

“The integration of financial mar-kets is a big issue,” says Mr Errázuriz.“The only way to get there is one stepat a time. If you stop, you’ll never getto the top.”

Bloc opens doors for businesses in the regionCorporatePositivesteps in co-operationare beingmade, writeAndres Schipani andBenedictMander

The Pacific port of Buenaventurahandles more than half of Colombia’smaritime cargo AFP

‘It will generate benefits forcompanies, consumersand member countries’

Once upon a time, had fourLatin American countriessigned a deal to reduce tar-iffs, lower other trade barri-ers, integrate their econo-mies and cast a joint andhungry eye over the oceanit would have caused apolite round of applause inglobal capitals.

But these are very differ-ent times.

The move this year byChile, Colombia, Mexicoand Peru to increase theirlinks with each other – witha view to building economicbulk and engaging moreefficiently with a risingAsia – is part of a muchbigger dance. Those fourLatin American countriescould end up being a cruciallink in the global economybefore long.

We are living through theera of the “mega” tradeagreement. Fed up with thestalled and 12-year-old DohaRound of negotiations inthe World Trade Organisa-tion a growing number ofcountries eager on movingahead with trade liberalisa-tion are forging freshregional and sectoral alli-ances around the world.

From the Trans-PacificPartnership, which the USis trying to wrap up with 11other Pacific Rim countries,to negotiations under wayover an even bigger EU-USdeal and the Trade in Serv-ices Agreement talks tak-ing place in Geneva, bigand strategic is the nameof the game.

All are being dubbed“21st century” agree-ments packed with“ambitious” attemptsto tackle live issues inthe global economy.These range from therules for cross-borderdata flows to updatingintellectual property,environmental and evenlabour standards.

The key question for thePacific Alliance in the yearsto come will be: just howdoes it fit in with thosepacts?

The signs, so far, that thegrouping is at least part ofthe bigger conversation aregood.

Three of the four mem-bers of the alliance – Chile,Mexico and Peru – are partof the TPP talks. Moreover,Colombia is mentioned bymany trade experts as oneof the countries most likelyto join in the future. Allfour have their own bilat-eral trade agreements withthe US and with the EU.

Those important linksacross the Atlantic and thePacific oceans mean thatmany experts believe thatone day the Pacific Alliancemay formally accede toeither, or both, the TPP orthe EU-US pacts.

Such a move could be cru-cial in the years to come.Barbara Kotschwar, a tradeand Pacific Alliance expertat the Washington-basedPeterson Institute for Inter-national Economics, arguesthat the flurry of megatrade negotiations is likelyto result in one of twothings.

The first is a revival ofmultilateral negotiations.

The hope of many is thatbig developing economieslike Brazil, China and Indiawill be jolted into actionand push harder for therevival of the Doha talks inthe WTO, leading to a bad-ly-needed multilateralupdating of the rules of glo-bal commerce.

The second may be themore likely option. Themega deals would becomeproxies for a missing multi-lateral agreement and even-tually all be stitchedtogether, creating a behe-moth of a trading bloc thatbenefits only those who are

included.Either way, the

Pacific Alliance“view is not to

be left behind”,says Ms Kot-

schwar, and

“to keep up with whatis being crafted in these21st-century agreements”.

Problems are likely. AsSamuel George pointed outin a recent report for theBertelsmann Foundation onwhat he dubbed the “PacificPumas”, the members ofthe Pacific Alliance “do notexactly have compatibleexport portfolios”.

But Mr George alsoargues that, taken as a bloc,the members of the allianceought to have a crediblevoice in global trade.

Their combined tradewith the rest of the world of$1.04tn annually accounts,Mr George writes, for halfLatin America’s total. Werethe four countries ever tobecome one they would sup-plant Brazil as the globe’sfifth most populous countryand have a GDP of $2.22tn,enough to make them theworld’s ninth biggest econ-omy, he adds.

Such heft is alluringto the US and the EU asthey contemplate futuretrading alliances, MrGeorge says.

“For the US, the Pumasrepresent a potential partnerin the Americas,” he writes.“For the EU, the Pumas rep-resent access to highgrowth, investor-friendly(and Europe-friendly) mar-kets, with a window to EastAsia to boot.”

“Together, the US, EUand Pacific Pumas can setthe foundation for anenlarged transatlantic blocprepared to negotiate theopportunities and chal-lenges of a Pacific century.”

That all depends on onething: neither the TPP northe EU-US deals have beencompleted and still face sig-nificant hurdles before theybecome reality.

But if they ever do, andthe world of mega tradeagreements continues todevelop, the Pacific Alli-ance is surely in a goodplace to take advantage.

Pumas capture spirit of times inan era of ‘mega’ agreementsWorld tradeThe gang of four ismakingwaves, writes ShawnDonnan

‘Together, the US,EU and PacificPumas can setthe foundation foran enlargedtransatlantic bloc’

Barbara Kotschwarof the PetersonInstitute forInternationalEconomics

4 ★ FINANCIAL TIMES WEDNESDAY APRIL 2 2014

Like a bubble in assetprices, excitement over thePacific Alliance can seeminflated and liable to burst.

Depending on whom youtalk to, the pact is “themost exciting thing inLatin America” or “themost important allianceyou’ve never heard of”.

To the seasoned LatinAmericanist, perhapsnumbed by the steady dietof short-circuited regionalpacts, this excitement canseem disproportionate.

The four members –Chile, Colombia, Mexicoand Peru – were alreadyintertwined in a globalnetwork of trade deals.Each benefited frombilateral free-tradeagreements before formingtheir group and they allhad bilateral agreementswith the US, the EU andseveral East Asiancountries.

Moreover, the fouroriginal members are notbig trading partners ofeach other. As of 2012,neither Mexico, Chile norPeru counted an alliancemember as a top-fivetrading partner.

This is hardly surprising.Alliance members do nothave complementaryexports. Chile will not getfar exporting copper toPeru, a major producer.

Poor infrastructure andsheer distance do notportend efficient supplychains. Shipping acontainer from Bogotá toBarranquilla port is threetimes the cost of shippingit from Barranquilla toHong Kong.

Some consider the bloclittle more than a publicitystunt. Brazil’s foreignminister Antonio Patriotahas referred to it as a“marketing success”.

This is no bad thing forthe alliance. Lost amidheadlines from the drugwars and commodity tradepublications – and perhapsovershadowed by economicand political vicissitudes inVenezuela and Argentina –is the fact that alliancemembers have enjoyedstrong macroeconomicperformance, improvedgovernance and increasedglobal integration.

Alliance inflation hastracked developed-economyinflation since 2005.Reserves are up, while debtand deficit figures aregenerally within the EU’sMaastricht criteria. Withimproved institutions thathave facilitated changes ofpower, there is reason tobelieve Chile, Colombia,Mexico and Peru are ableto withstand emerging-market turbulence.

These individualadvances may be moreimportant than anythingthat comes out of thealliance. If the bloc cancapture global attentionand amplify members’voices in trade talks –while perhaps attractingsome FDI along the way,then the marketing is –well – a success.

But the true allianceimpact may not manifestitself in the real sector.Financial-sector integrationmay have the greatestimpact.

The Mercado IntegradoLatinoamericano (Mila), amultilateral effort tointegrate the Chilean,Colombian and Peruvianequity markets, is evidenceof the group’s potential tonegotiate barrier-breakingfinancial agreements.

Alliance members maybe growing, but beforeMila’s founding in 2010,their bourses were largelyoverlooked. Outside SãoPaulo and Mexico City,Latin American equitymarkets lack depth andbreadth. Few companieslist publicly andtransactions are infrequent.

Small and illiquid, thesemarkets can appear one-dimensional: Colombia inenergy and financials;Peru in mining; Chile inretail and services.Specialisation may attractboutique investors but isunder the radar of theglobal herd seeking the“next Brazil”.

Mila could change this.Even without Mexico, thetie-up’s $700bncapitalisation places thebourse second only toBrazil’s in market size inSouth America. With morethan 500 companies, Milaoffers the largest portfolioin Latin America.

The potential (andexpected) integration of theMexican bourse in 2014would render a market ofglobal proportions.

Mila is work in progress.The bourses have yet toestablish full integrationand nettlesome issues suchas taxation and currencytrading remain unsettled.

Though Mexico hasaddressed the legal reformsrequired to join, the BolsaMexicana de Valores’projected entry date ofearly-2014 seems optimistic.

Even so, the initiativehas a considerable upside.The momentum of thealliance indicates the

regional power accrued byits four members. The blocis emerging as a magnetfor smaller Latin Americancountries looking for analternative to, say, theMercosur model; eighthave observer status andCosta Rica is on the vergeof membership.

Alliance expansion raisesa host of concerns. Initialsuccess can be largelyascribed to the smallnumber of like-mindedparticipants. Faultlinescould emerge with theadmission of others. Canthe alliance safelyintegrate with Panama, ahaven for tax evasion? CanGuatemala and Honduras,embroiled in the war ondrugs, agree to waive visarequirements for Mexicansand Colombians?

Despite the challenges,the Pacific Alliance hasestablished itself as animportant regional voice. Ithas reintroduced Mexicointo the mix of LatinAmerica’s large leaders,provided brawn to Chileanbrains and given a voice toColombia and Peru, asthese countries continue todevelop internally.

Marketing success? To adegree. But the alliancehas the potential to pushmembers towards AsianTiger-style economies withcorrespondingly impressivegrowth.

Samuel George is a projectmanager with theBertelsmann Foundationand author of “The PacificPumas: An Emerging Modelfor Emerging Markets”.

Partners setsights onmorethanmarketingOpinionSAMUEL GEORGE

Pacific Alliancemembers haveenjoyed strongmacroeconomicperformance

Although there is alwaysthe danger of over-categori-sation, its economies tendto be slower growing andsuffer higher inflation thanthe Pacific Alliance.

“If Mercosur represents21st-century socialism, thePacific Alliance represents21st-century capitalism,”says Barbara Kotschwar, ofthe Peterson Institute forInternational Economics inWashington.

“It takes a pragmaticapproach toward develop-ment, incorporating ele-ments of social inclusion as

Continued from Page 1 well as liberal economicpolicies,” she says.

Such talk does not alwaysgo down well in the region.Some critics have called thealliance “only marketing” –no bad thing if the signal-ling exercise differentiates acountry from slower grow-ing and volatile neighbours.

Meanwhile Rafael Correa,president of Ecuador, hascalled it “more neoliberal-ism” – a loaded word –while Evo Morales, Bolivianpresident, has described itas a plot by Washington todivide the region.

The usual Pacific Allianceresponse is that it is not

against anybody. “We arean economic not a politicalinitiative,” says JuanManuel Santos, Colombia’spresident. Indeed, in manyways the Pacific Alliance isa return to the trade theo-ries of “open regionalism”that prevailed in the 1990s.These led to Mercosur andthe now largely defunctAndean Community unionand held that opening up toworld trade is more advan-tageous if combined withdeeper regional markets.

That return to oldeconomic theory may soundominous. Indeed the obsta-cles to the Pacific Alliance

succeeding are huge.Geographically, it is a

very long and thin pact thatruns 10,000km from toe totip – with several non-mem-bers in between. Talk iseasy, while actual imple-mentation is hard. Lack oftax harmonisation, forexample, has hampered thevaunted tie-up between theAlliance’s stock markets:Mila, their combined bourse,has a daily turnover that isa third of Brazil’s Bovespa,despite similar-sized marketcapitalisations.

National changes of polit-ical leadership couldalso slacken the pace of

integration. Michelle Bache-let, Chile’s new president,has already said she wantsto deepen ties with Argen-tina and Brazil – althoughthat does not necessarilymean abandoning thePacific Alliance process.

Lastly, there is the cru-cial question of developinginfrastructure given thatpoor transport links havelong stymied regional inte-gration. Two of the Alli-ance’s biggest ports –Colombia’s Buenaventura,and Mexico’s Lazaro Carde-nas – are also under vary-ing states of emergency dueto security problems.

Although the Alliancemay yet go the way of otherLatin American trade pacts,it has done more in twoyears than most ever do.Tariffs on 92 per cent ofproducts have been elimi-nated, the need for visasdropped, which will helppool human capital, and itsmembers have created jointtrade missions abroad.

One reason for this pro-gress is that goals are pur-posely limited. There are nogrand plans to establish acommon currency or a sec-retariat – indeed, trade dis-putes will be settled by theWorld Trade Organisation.

Nor does the Pacific Alli-ance have a “judicial iden-tity”, so it cannot signagreements on behalf ofmembers. Limiting ambi-tions to the free movementof goods, capital and peoplemakes it more likely toachieve them.

All of its countries arealso committed to freeingup trade, which they dem-onstrate by having pre-signed agreements withmembers. Keeping thealliance “a coalition of thewilling” is especially impor-tant given the long list ofpotential applicants, includ-ing Canada, Costa Rica,

Panama and Uruguay. “It iseasy to list the reasons whythe Pacific Alliance mightamount to nothing,”wroteMoises Naim, at the Carne-gie Endowment for Interna-tional Peace in Washington,recently. “But the list ofincentives these countrieshave to make it succeed arebigger still.”

What might be a sign ofpooled economic success?Ms Kotschwar suggests“when you can, say, drink‘Pacific-made’ pisco sours inThailand or China, insteadof just Peruvian pisco, willbe when you can say thealliance has really arrived”.

Pact takes a pragmatic approach to developing integration

Latin American leadershave long talked of the needfor countries to link energynetworks to provide theregion with a foundation foreconomic and physical inte-gration.

After decades of declara-tions and promises, thereare still very few intercon-nected systems. This maynow be changing, thanks tothe consolidation of thePacific Alliance, whichjoins Chile, Colombia, Mex-ico and Peru, and couldsoon add Central Americanmembers.

Luis Miguel Castilla,Peru’s economy minister,says energy interconnectionamong alliance countries isa logical step “pushing usbeyond just trade and finan-cial integration to physicalintegration. Energy is acritical sector for us to con-tinue to grow.”

Peru is, in many ways, atthe centre of the potentialintegration. It possessesvast scope for electricitygeneration, with the publicand private sectors estimat-ing hydroelectric potentialat 60,000MW. It has substan-tial reserves of natural gas.

Alvaro Rios, energy con-sultant and a former Boliv-ian energy minister, calcu-lates that Peru’s naturalgas reserves could top 50tncubic feet. It is the onlycountry on South America’sPacific coast with a facilityfor producing and exportingliquefied natural gas (LNG).

A foundation for intercon-nection already exists onthe private side of the equa-tion. Colombia’s state-controlled InterconexiónEléctrica, known as ISA, isthe principal power trans-mission company in Peru. Itis building a power linedown the southern coast tothe border with Chile.

Investment in projectsunder way in Peru hasreached more than $700m.ISA will soon be the secondlargest transmission com-pany in Chile. Chilean com-panies have invested inPeruvian electricity. Peru

LNG, the liquefied naturalgas export project operatedby US-based Hunt Oil, has acontract to sell nearly 70per cent of output to Mexicofor re-gasification and usein power production.

The governments of Peruand Ecuador announced inNovember that they wouldpush for the construction ofa 500kV electricity trans-mission line to link the twocountries. Ecuador andColombia comprise one ofthe few examples in theregion of an integratedsystem. The line from Peruwould effectively link itto Colombia, creating a tri-nation market.

A potentially criticalchange came in January atthe International Court ofJustice in The Hague. A rul-ing on a maritime disputebetween Peru and Chilesaw Chile keep rich coastalfishing grounds and Perureceive a vast area of oceanup to the 200-mile limit. Theverdict ends a dispute thatgoes back to a late-19th cen-tury war between the coun-tries and may pave the wayfor deeper integration.

Gonzalo Priale, head ofAfin, a Peruvian association

of private companies oper-ating in public services,says the court’s decisionand the signing of the alli-ance’s market access treatyin February should facili-tate additional integration.

“The obviously sound eco-nomic model of the PacificAlliance countries and theprogress already made indi-cate that we should move tothe next level,” he says.

“Everyone knows thatChile has an energy deficit,so it is eminently reasona-ble and commercially intel-ligent for us to exportenergy to Chile.”

The political will may begrowing, but infrastructurehas to match it. Peru doesnot have the power plantsor transmission lines toexport to Chile or otherneighbouring countries.

Mr Priale’s organisationestimates that Peru needsto invest $32.4bn in electric-ity generation and trans-mission by the end of thedecade.

Peru’s goal, he says,should be adding at least2,000MW annually to itscapacity in the second halfof this decade. It wouldguarantee local demand andmean surplus for export.

Robert Kartheiser, anattorney specialising inenergy projects at NewYork law firm Allen &Overy, says interconnectionof power grids sounds good,but will be hard to sell.

“What you find is talkabout interconnection, butthe first thing politicianswill say is that internaldemand must be fulfilled.Interconnections, wherethey exist, don’t changemarket dynamics in onecountry or another,” headds. “I don’t see an explo-sion of power interconnec-tion projects just yet.”

Mr Kartheiser says thereis a greater potential forintegration based on natu-ral gas.

“We are beginning to seea material shift in the

energy matrix with moregas processing plants,excess supply and the abil-ity to ship it via pipelinesor vessels.

“There will be significantinvestment in the gather-ing, processing and move-ment of gas, as well aspower generation withCCGTs (combined cycle gasturbines).”

On June 30, Peru plans toselect the company thatwill build a gas pipelinefrom the central jungle tothe southern coast. Theinvestment is calculated at$4bn. It could, conceivably,be a potential solution forthe unmet energy needs inChile’s mineral-rich, butenergy-poor north.

Colombia is working onLNG projects and Mexico’senergy reform could unlockhuge amounts of resources,including shale gas, whichhave gone untapped.

Mr Kartheiser says: “Themost fascinating develop-ment could be uncorkingshale gas in the region inthe next five to seven years,if regulatory regimes allow.

“We are already seeingexcitement among industryplayers for potential deals.”

Electric interconnection hints at added sparkEnergy

Increased powerlinks will fosterintegration, writesLucien Chauvin

The Casa de Huéspedes Ilus-tres, Colombia’s presidentialresidence on Cartagena’sbay, was abuzz as theevening sun faded over the

Caribbean. Waiters busy setting uptables in the elegant garden wavedaway a scattering of blue parrots as,behind the building, Colombian sail-ors in pristine white uniformsrehearsed their salutes and drill. Theywere marching before the flags ofChile, Mexico, and Peru and Colombiaitself, the founding members of thePacific Alliance.

The leaders of the four nations werescheduled to arrive shortly and raisetheir glasses to the trade agreementat a meeting convened by their host,Colombia’s President Juan ManuelSantos.

Earlier that day, during a presiden-tial summit just over a year ago, theyhad agreed to drop more than 90 percent of tariffs on goods and services ina move to unify the alliance, whichwas officially launched last June.

“I don’t think there has been anintegration process that has takendecisions as fast as the Pacific Alli-ance has done,” said Mr Santos,dressed in the kind of starched linenguayabera shirt that is suitable forthe sultry tropical weather of thispart of Colombia.

For him, the process of integrationwas natural, because the foundingmembers “have a common vision onhow to manage our economies, com-mon attitudes regarding foreigninvestment, the role of the market inthe economy and respect for privateproperty.”

That vision has helped them reach acombined GDP of more than $2tn – orapproximately 40 per cent of LatinAmerica’s combined total – earningthe Pacific Alliance a place among theworld’s 10 largest economies.

“We are generating synergies, gen-erating strengths,” says Mr Santos,

who is a former foreign trade minis-ter. This may suit Colombia well, asthe Andean country is also bidding toenter the OECD to stand with Chileand Mexico, who are already mem-bers.

“The only one missing will be Peru,and we are encouraging it to join aswell,” the president adds.

Even if Mr Santos believes thePacific Alliance to be “a process ofintegration that implies the easing of[restraints on] trade, investment andmovement between member nationsand a strengthening of global mar-kets,” he also stresses that they are“deepening integration”, a processthat “goes well beyond free trade”.

While the alliance is centred onopen markets, it seems foundingmembers are also wanting even closerties. Their aim resembles that ofEurope’s Maastricht treaty, whichpaved the way to closer political inte-gration for EU members, rather thansimply forming a trading area.

Colombia’s president notes, forexample, that they have alreadyestablished joint embassies and tradedelegations in Africa, Asia and theCaucasus. They have standardiseduniversity degrees and are allowinggreater movement of people betweenthe four nations.

“We plan to go as far as we can,”says Mr Santos, pointing to tourismflows between his country and Mex-ico. They are up 35 per cent since thelatter eliminated entry visas.

He says, the members are consider-ing creating a common fund to investin infrastructure. “We are also study-ing the possibility of standardising

the price of medicines across bor-ders,” as a further step towardsenhancing the lives of the citizens ofthe four countries.

Every agreement, however congen-ial, has its limits. There is no securityaccord in sight, despite a rangeof conflicts in three of the signatorystates. Mexico and Colombia are, todifferent extents, badly affected bydrug-fuelled violence. Peru is theworld’s top cocaine producing nation.

At the same time, Chile is in a morefortunate position and has “differentsecurity needs from those of Colombiaand Mexico”.

The president does not discountthat a security agreement between thefour countries could happen. It wouldbe another step towards further inte-gration, he says: “we are open to anypossibility.”

A recent visit to Washington by aColombian defence ministry delega-tion took with it a “proposal for ameeting” of defence ministers of thefour alliance members, plus CostaRica, which is in the throes of becom-ing a full member. The US and Can-ada are observer members of the bloc.

On the domestic security front, MrSantos has opened peace talks with

Marxist rebels that could draw a lineunder five decades of conflict.

Some analysts, meanwhile, thinkthe consolidation and expansion ofthe alliance could pit it against theregional coalition of Mercosur. Knownby some as the common market of thesouth, it is led by more protectionistcountries such as Argentina and Bra-zil. “That would be their problem, notours”, says Mr Santos, while empha-sising that the alliance is open to newmembers who aim to contribute toregional wellbeing.

“If Brazil does very well, then LatinAmerica does very well,” he pointsout. “If the Pacific Alliance does verywell, Brazil and Latin America doeven better. Our attitude is not toexclude or compete with anybody.”

Others believe that there could befrictions with the left-oriented Alba(Alianza Bolivariana para los Pueblosde Nuestra América) group of nations,led by Venezuela that includes Ecua-dor, which has observer status withthe Pacific Alliance. “We will wel-come those who want to board thetrain,” says President Santos.

“But they need to have a series ofvisions and ways of thinking similarto ours.”

Founders oftrade accordseek closerpolitical tiesInterviewColombia’s president tellsAndres Schipani that the path of partnershipreaches beyond commercial arrangements

‘We are beginningto see a shift in thematrix, with moreexcess supply andthe ability to ship it’

President JuanManuel Santos ofColombia AFP

‘Those who want to boardthe train need to thinkin ways similar to ours’

New Trade Routes Pacific Alliance