Trade Liberalization: Western Hemisphere Trade Issues Confronting the
United States (Letter Report, 07/21/97, GAO/NSIAD-97-119).

Pursuant to a congressional request, GAO provided information on efforts
to liberalize trade among the countries of the Western Hemisphere,
focusing on: (1) the principal existing subregional trade arrangements
in the Western Hemisphere; (2) the current status of Free Trade Area of
the Americas (FTAA) discussions; and (3) certain recent developments in
regional trade liberalization outside the FTAA process since "fast
track" authority.

GAO noted that: (1) almost all countries in the region participate in at
least one subregional trade grouping; (2) there are now six major
subregional multilateral trade groupings among countries in the
hemisphere; (3) the two most significant trade blocs, the North American
Free Trade Agreement (NAFTA) and the Common Market of the South, known
as Mercosur, were both established during the 1990's; (4) NAFTA, the
only one of these arrangements to which the United States is a party,
created the world's largest free trade area and is the most
comprehensive trade agreement in the region; (5) Mercosur has followed a
different approach than NAFTA to economic integration through the
creation of a customs union; (6) in addition to the major multilateral
trade groupings, there are more than 20 smaller trade agreements in the
region, most of these have been concluded during the 1990's; (7) U.S.
Trade Representative (USTR), Organization of American States (OAS), and
Inter-American Development Bank (IDB) officials note that the FTAA
working groups have made significant progress to support the launching
of formal negotiations; (8) according to these observers, progress in
the FTAA process thus far exceeds what had been achieved during the
first 2 to 3 years of the Uruguay Round negotiations that led to the
establishment of the World Trade Organization (WTO); (9) substantial
agreement has been reached on several key issues; (10) disagreement
remains, however, regarding the pace and direction of negotiations; (11)
the United States and most other countries favor immediate negotiations
on all issues; (12) in contrast, Mercosur proposes that negotiations on
certain issues such as market access, which is a priority for the United
States, be delayed until 2003; (13) following the Miami Summit, the 1995
Mexican financial crisis raised concerns in the United States about
pursuing further regional trade liberalization efforts; (14) in the
meantime, other countries have moved forward with their own trade
liberalizations efforts; (15) Mercosur has strengthened its position,
concluding free trade arrangements with Chile and Bolivia, and is
beginning trade negotiations with Mexico and the European Union; (16)
these agreements have created disadvantages for some U.S. exporters'
access to markets in the region; and (17) representatives of several
countries in the region generally agree that their countries will conti*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-119
     TITLE:  Trade Liberalization: Western Hemisphere Trade Issues 
             Confronting the United States
      DATE:  07/21/97
   SUBJECT:  Foreign trade agreements
             International trade
             Exporting
             International economic relations
             Restrictive trade practices
             Tariffs
             Foreign trade policies
IDENTIFIER:  Canada
             Mexico
             North American Free Trade Agreement
             Chile
             Bolivia
             Argentina
             Brazil
             European Union
             NAFTA
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Trade, Committee on Ways and
Means, House of Representatives

July 1997

TRADE LIBERALIZATION - WESTERN
HEMISPHERE TRADE ISSUES
CONFRONTING THE UNITED STATES

GAO/NSIAD-97-119

Trade Liberalization

(711252)


Abbreviations
=============================================================== ABBREV

  EU - European Union
  FTAA - Free Trade Area of Americas
  GATT - General Agreement on Tariffs and Trade
  GDP - gross domestic product
  IDB - Inter-American Development Bank
  IMF - International Monetary Fund's
  IPR - intellectual property rights
  LAIA - Latin American Integration Association
  NAFTA - North Atlantic Free Trade Agreement
  OAS - Organization of American States
  USTR - United States Trade Representative
  WTO - World Trade Organization

Letter
=============================================================== LETTER


B-277248

July 21, 1997

The Honorable Philip M.  Crane
Chairman, Subcommittee on Trade
Committee on Ways and Means
House of Representatives

Dear Mr.  Chairman: 

As you requested, we are providing information on efforts to
liberalize trade among the countries of the Western Hemisphere.  The
United States and other Western Hemisphere countries have been moving
forward in various ways to liberalize trade.  Almost all countries in
the hemisphere, including the United States, are proceeding with
discussions aimed at creating a Free Trade Area of the Americas
(FTAA) while at the same time various subregional agreements and
arrangements have been formed. 

Specifically, this report (1) describes the principal existing
subregional trade arrangements in the Western Hemisphere; (2)
outlines the current status of FTAA discussions; and (3) identifies
certain recent developments in regional trade liberalization outside
the FTAA process since "fast track" authority\1

lapsed in December 1994, and possible implications of these
developments for the United States.  Executive branch officials have
indicated that the President will seek fast track authority this
fall, but the administration has not yet submitted a fast track
legislative proposal. 


--------------------
\1 In the past, the Congress has enacted fast track authority to
implement trade agreements with other countries.  Fast track
authority provides for a congressional vote within a limited period
of time to accept or reject the implementing legislation for a
negotiated agreement without making any changes to it. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The U.S.  economy has become increasingly oriented toward
international trade, with exports and imports together representing
about one-quarter of U.S.  gross domestic product (GDP) in 1996.  As
the largest regional market for U.S.  products, accounting for
approximately $242 billion or 40 percent of U.S.  exports in 1996,
the Western Hemisphere is of growing importance to U.S.  commercial
interests.  Canada and Mexico are by far the largest U.S.  trade
partners in the hemisphere, accounting for approximately two-thirds
of total U.S.  exports of goods to the region.  Countries in the
Western Hemisphere also constitute about 30 percent of total U.S. 
foreign direct investment. 

During the 1960s and 1970s, most countries in Latin America and the
Caribbean experimented with various arrangements to promote
subregional economic integration and free trade.  These initiatives
were generally frustrated by trade and investment restrictions
characteristic of these countries' protective economic development
strategies.  By the late 1980s, faced with stagnant economies and
mounting external debt, countries in the region began to move away
from these restrictive policies and initiated market-oriented reforms
to stimulate economic growth.  Although these reforms were primarily
intended to address domestic economic problems, they also facilitated
trade liberalization efforts.  Moreover, the U.S.-Canada Free Trade
Agreement in 1988 signaled a new commitment on the part of North
American countries to regional trade liberalization.  By the early
1990s, almost all countries in the hemisphere were engaged in
multilateral or bilateral efforts to liberalize trade.  After a
decade of economic decline, Latin American economies have rebounded
in the 1990s, and the region now represents the second fastest
growing area in the world after Southeast Asia. 

The 1994 Miami Summit of the Americas gave new impetus to trade
liberalization efforts in the region.  At Miami, the 34
democratically elected leaders of countries in the Western Hemisphere
agreed to conclude a free trade agreement no later than 2005, with
concrete progress by the turn of the century.\2 The summit
declaration committed participating governments to negotiate, among
other things, the elimination of barriers to trade in goods and
services as well as investment and to provide rules in such areas as
intellectual property rights and government procurement.  The plan of
action adopted at Miami called for two meetings of trade ministers
("ministerials") to reach agreement on the key principles upon which
to base the FTAA.  These two ministerials, held in Denver, Colorado
(1995), and Cartagena, Colombia (1996), established a series of
working groups to gather data and make recommendations to the
ministers in preparation for FTAA negotiations.  A third ministerial
took place in Belo Horizonte, Brazil, earlier this year. 


--------------------
\2 Since the Miami Summit was limited to democratically elected
governments in the Western Hemisphere, Cuba was the only country in
the region that did not participate. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Almost all countries in the region participate in at least one
subregional trade grouping.  There are now six major subregional
multilateral trade groupings among countries in the hemisphere.  The
two most significant trade blocs, the North American Free Trade
Agreement (NAFTA) and the Common Market of the South, known as
Mercosur, were both established during the 1990s.  NAFTA, the only
one of these arrangements to which the United States is a party,
created the world's largest free trade area and is the most
comprehensive trade agreement in the region.  Mercosur has followed a
different approach than NAFTA to economic integration through the
creation of a customs union.\3 In addition to the major multilateral
trade groupings, there are more than 20 smaller trade agreements in
the region; most of these have been concluded during the 1990s. 

U.S.  Trade Representative (USTR), Organization of American States
(OAS), and Inter-American Development Bank (IDB) officials note that
the FTAA working groups have made significant progress to support the
launching of formal negotiations.  According to these observers,
progress in the FTAA process thus far exceeds what had been achieved
during the first
2 to 3 years of the Uruguay Round negotiations that led to the
establishment of the World Trade Organization (WTO).\4 Substantial
agreement has been reached on several key issues.  For example, at
the latest ministerial meeting in Belo Horizonte in May 1997,
participating countries agreed on the right to negotiate
independently or, if members of subregional trade groupings, as a
unit.  They also agreed on the establishment of a Preparatory
Committee at the vice ministerial level to complete recommendations
on the FTAA negotiations.  At Belo Horizonte, the ministers further
agreed to recommend that formal FTAA negotiations be launched by the
Western Hemisphere leaders at their next summit scheduled to take
place in Santiago, Chile, in April 1998, and reiterated the
commitment to conclude a trade agreement encompassing the entire
hemisphere by 2005.  Disagreement remains, however, regarding the
pace and direction of negotiations.  The United States and most other
countries favor immediate negotiations on all issues.  In contrast,
Mercosur proposes that negotiations on certain issues such as market
access, which is a priority for the United States, be delayed until
2003. 

Following the Miami Summit, the 1995 Mexican financial crisis raised
concerns in the United States about pursuing further regional trade
liberalization efforts.  In the meantime, other countries have moved
forward with their own trade liberalization efforts.  For example,
Canada and Chile recently reached a free trade agreement.  Also,
Mercosur has strengthened its position, concluding free trade
arrangements with Chile and Bolivia, and is beginning trade
negotiations with Mexico and the European Union (EU).  These
agreements have created disadvantages for some U.S.  exporters'
access to markets in the region.  For example, the agreement between
Chile and Canada grants tariff preferences to Canadian exporters that
are not available to their U.S.  counterparts.  In fact, U.S. 
companies recently lost a bid for a telecommunications equipment
contract in Chile to a Canadian competitor due in part to the tariff
differential.  Similarly, Mercosur is in the process of adopting
product safety standards that may impair U.S.  firms' access to
markets in member countries.  Representatives of several countries in
the region generally agree that their countries will continue to
advance their own regional free trade initiatives regardless of
whether the United States participates in further regional trade
liberalization.  A complete understanding of the impact of these
initiatives on the United States requires a consideration of their
impact on U.S.  import-competing as well as export sectors. 


--------------------
\3 A free trade agreement, such as NAFTA, entails, among other
things, the elimination of tariffs among member countries.  A customs
union calls for not only the elimination of tariffs, but also the
establishment of a common external tariff; that is, a common tariff
applied to imports from third countries. 

\4 All countries involved in the FTAA process, except the Bahamas,
are members of WTO.  WTO, established by the 1994 Uruguay Round
agreements of the General Agreement on Tariffs and Trade (GATT), is a
multinational organization that serves as a forum for international
trade negotiations and oversees the administration of the Uruguay
Round agreements.  GATT, created in 1947, is the primary multilateral
agreement governing international trade in goods. 


   WESTERN HEMISPHERE TRADE
   ARRANGEMENTS
------------------------------------------------------------ Letter :3

The six major multilateral trading arrangements\5 among countries of
the Western Hemisphere are NAFTA, Mercosur, the Andean Community, the
Caribbean Community, the Central American Common Market, and the
Latin American Integration Association (LAIA).  (See figs.  1 and 2.)
The United States is a party only to NAFTA.  There are also over 20
smaller multilateral and bilateral free trade accords among countries
in the region. 

   Figure 1:  Members of NAFTA,
   Mercosur, the Andean Community,
   and LAIA

   (See figure in printed
   edition.)

   Sources:  GAO and OAS.

   (See figure in printed
   edition.)

   Figure 2:  Members of the
   Caribbean Community and the
   Central American Common Market

   (See figure in printed
   edition.)

   Sources:  GAO and OAS.

   (See figure in printed
   edition.)


--------------------
\5 The appendix provides a general profile of each of the major
Western Hemisphere trade arrangements, including membership,
population, and GDP figures. 


   NAFTA
------------------------------------------------------------ Letter :4

NAFTA, the most comprehensive trade arrangement in the region, was
concluded in 1992 by Canada, Mexico, and the United States and became
effective in January 1994.  NAFTA created the world's largest free
trade area, with a combined population of nearly 400 million and a
combined GDP of almost $8 trillion.  NAFTA provides for the gradual
elimination of tariff barriers on most goods over a 10-year period. 
It covers trade in services, provides protection for investment and
intellectual property rights, applies rules to government
procurement, and contains a dispute settlement system.  A distinct
feature of NAFTA is the two side agreements on labor and the
environment, designed to institutionalize efforts to (1) improve
working conditions and living standards in each country and (2)
address and resolve environmental issues that may arise between the
parties. 


      MERCOSUR
---------------------------------------------------------- Letter :4.1

Mercosur was created in March 1991 by Argentina, Brazil, Paraguay,
and Uruguay.  Comprising a population of approximately 200 million
and with a combined GDP of about $851 billion, Mercosur is the
world's third largest integrated multinational market, after NAFTA
and the EU.  Mercosur currently functions as a customs union,
providing not only for a free trade area but also for the
establishment of a common external tariff.\6 The external tariff
instituted in 1995 is not to exceed 20 percent for most imports. 
Today, approximately 85 percent of imports from outside the bloc
enter under the common external tariff, and about 90 percent of all
intra-Mercosur trade is duty free.  Mercosur includes a commitment by
member countries to coordinate more disciplined macroeconomic
policies.  Also, Mercosur countries are committed to agree on a
common foreign trade policy.  Unlike NAFTA, Mercosur lacks agreements
on intellectual property rights\7 and government procurement. 
Further, while Mercosur calls for coordination on trade in services,
the U.S.  International Trade Commission reports that there is no
fixed schedule for liberalization in this area. 


--------------------
\6 According to a USTR official, the WTO's Committee on Regional
Trade Agreements is currently reviewing Mercosur to ensure that it
conforms with article 24 of the GATT.  Article 24 lays out conditions
under which member countries may form preferential trading
arrangements, such as customs unions and free trade areas.  This
official noted, however, that without detailed information on
Mercosur's implementation and schedule for liberalization, it is
difficult to fully evaluate the agreement under the criteria set
forth by article 24. 

\7 An August 1995 protocol among Mercosur countries, however,
provides limited common terms of reference on intellectual property
rights. 


      OTHER MAJOR MULTILATERAL
      AGREEMENTS
---------------------------------------------------------- Letter :4.2

Besides NAFTA and Mercosur, there are four older subregional
multilateral trade groupings in the Western Hemisphere.  Three of
these groupings--the Andean Community, the Caribbean Community, and
the Central American Common Market--are customs unions at varying
stages of implementation.  They have all recently taken steps to
further liberalize trade and promote economic integration.  The
fourth subregional trade arrangement, LAIA, is a network of
agreements granting tariff preferences for certain product categories
to member countries. 


      SMALLER TRADE ARRANGEMENTS
      INVOLVING NAFTA PARTNERS
---------------------------------------------------------- Letter :4.3

In addition to the larger trade blocs previously discussed, there are
more than 20 smaller multilateral and bilateral trade accords among
the countries of the Western Hemisphere.  Many of these were
established during the 1990s.  Five of these arrangements involve our
NAFTA partners Canada and Mexico. 

  -- Mexico-Chile Free Trade Accord (1992).  This agreement calls for
     a phased tariff elimination between the parties.  It excludes
     many product categories such as agricultural commodities. 
     Mexico and Chile are currently in the process of renegotiating
     their 1992 agreement in an effort to broaden its scope. 

  -- Mexico-Costa Rica Free Trade Agreement (1995).  This agreement
     is generally modeled on NAFTA but excludes many agriculture and
     energy products. 

  -- Mexico-Bolivia Free Trade Agreement (1995).  This is similar to
     the Mexican agreement with Costa Rica. 

  -- Group of Three Agreement--Mexico, Colombia, and Venezuela
     (1995).  The Group of Three Agreement calls for the total
     elimination of tariffs over a 10-year period with some
     exceptions in the textile, petrochemical, and agricultural
     sectors.  In addition, the arrangement includes agreements on
     services, intellectual property rights, government procurement,
     and investment. 

  -- Canada-Chile Free Trade Agreement (1996).  The Canada-Chile Free
     Trade Agreement provides for tariff elimination and contains
     side agreements on labor and the environment.  However, it
     excludes, among other items, financial services and intellectual
     property rights. 


   STATUS OF FTAA DISCUSSIONS
------------------------------------------------------------ Letter :5

At the FTAA ministerial meetings in Denver, Cartagena, and Belo
Horizonte, 12 working groups were established for the purpose of
collecting information in preparation for FTAA negotiations.\8 At
Belo Horizonte, trade ministers issued a declaration calling for
formal FTAA negotiations to be launched by Western Hemisphere leaders
at their next summit in April 1998.  While the ministers agreed on
several other key issues, there is still disagreement among
participating countries on the approach formal negotiations should
follow. 


--------------------
\8 The FTAA working groups formed in Denver were (1) Market Access;
(2) Customs Procedures and Rules of Origin; (3) Investment; (4)
Standards and Technical Barriers to Trade; (5) Sanitary and
Phyto-sanitary Measures; (6) Subsidies, Antidumping, and
Countervailing Duties; and (7) Smaller Economies.  The following
groups were formed at the second ministerial in Cartagena:  (8)
Government Procurement, (9) Intellectual Property Rights, (10)
Services, and (11) Competition Policy.  At Belo Horizonte a group was
established to deal with (12) Dispute Settlement. 


      FTAA WORKING GROUPS
---------------------------------------------------------- Letter :5.1

The areas of responsibility assigned to the 12 FTAA working groups
reflect some of the priorities of the United States and other
countries in the hemisphere (see table 1).  For example, there are
working groups on intellectual property rights and government
procurement, issues of key interest to the United States; on
subsidies, antidumping, and countervailing duties, areas of special
concern to Argentina; and on smaller economies, a priority for
Caribbean countries.  The United States chairs the Working Group on
Government Procurement.  According to administration officials, there
are also some issues of particular U.S.  interest, such as labor and
the environment,\9

that are not fully addressed by any of the existing working groups. 
USTR officials noted that the United States has participated in all
of the meetings and other activities of each working group. 



                                     Table 1
                     
                               FTAA Working Groups

                                        Meetin
                                            gs
                                          held
                              Country       to
Working group                 chair       date      Work completed
----------------------------  --------  ------  --  ----------------------------
Market Access                 El             5      A comprehensive data base on
                              Salvador              market access barriers in
                                                    the Western Hemisphere has
                                                    not yet been fully completed

Customs Procedures & Rules    Bolivia        7      A "Guide to Customs
of Origin                                           Procedures in the Western
                                                    Hemisphere" is in draft form

Investment                    Costa          7      Published two inventories:
                              Rica                  (1) "Investment Agreements
                                                    in the Western Hemisphere"
                                                    and (2) "Investment Regimes
                                                    in the Americas: A
                                                    Compendium"

Standards & Technical         Canada         6      Published an inventory
Barriers to Trade (SPS)                             detailing national practices
                                                    on standards, technical
                                                    regulations, and conformity
                                                    assessment in the Western
                                                    Hemisphere

Sanitary & Phytosanitary      Mexico         4      A mandated inventory of all
Measures                                            SPS agreements in the
                                                    Western Hemisphere and other
                                                    technical work is
                                                    progressing but not yet
                                                    complete

Subsidies, Antidumping &      Argentin       6      Published the inventory
Countervailing Duties         a                     titled "A Compendium of
                                                    Antidumping and
                                                    Countervailing Duty Laws in
                                                    the Western Hemisphere"

Smaller Economies             Jamaica        6      Received paper presentations
                                                    from the Tripartite
                                                    Committee\a and the World
                                                    Bank on topics of importance
                                                    to smaller economies

Government Procurement        United         4      Published an inventory
                              States                titled "Government
                                                    Procurement Rules in
                                                    Integration Arrangements in
                                                    the Americas"

Intellectual Property Rights  Honduras       3      An inventory is in draft
(IPR)                                               form on all conventions and
                                                    agreements on IPR to which
                                                    Western Hemisphere countries
                                                    are a party, as well as the
                                                    main IPR provisions of these
                                                    trade arrangements

Services                      Chile          3      Published the report
                                                    "Provisions on Trade in
                                                    Services in Trade and
                                                    Integration Agreements in
                                                    the Western Hemisphere"

Competition Policy            Peru           3      Group meetings have
                                                    encouraged networking and
                                                    better understanding of
                                                    competition policy

Dispute Settlement            Uruguay        0      First meeting scheduled for
                                                    Montevideo (July 1997). OAS
                                                    has prepared a draft
                                                    compendium on regional
                                                    dispute settlement
                                                    mechanisms
--------------------------------------------------------------------------------
\a See following section for an explanation of the Tripartite
Committee. 

Sources:  GAO and OAS. 

The working groups were established to collect basic information on
key issues in preparation for FTAA negotiations.  U.S.  and OAS
officials explained that the working groups have been the mechanism
for accelerating progress on the priorities of participating
countries.  Progress in meeting the information mandates set forth at
the ministerials differs for each of the 12 working groups.\10 For
example, the Working Group on Investment is particularly advanced,
having prepared a comprehensive technical compendium on investment
treaties in the region.  This compendium was published at the Belo
Horizonte ministerial in May 1997.  According to both U.S.  and OAS
officials, the Working Group on Investment has also made considerable
progress, exchanging views on elements that could be included in a
FTAA investment chapter, including investor protection, national
treatment, and dispute settlement. 

Progress in other working groups has been more modest.  For example,
the Working Group on Market Access reported in February 1997 that
many countries had yet to submit the schedules and statistics
required to prepare a hemispheric data base on tariff structures and
nontariff measures.  Moreover, the Working Group on Dispute
Settlement, which was only established in May 1997, has not yet met. 

A Tripartite Committee, made up of the OAS, the IDB, and the United
Nations Economic Commission on Latin America and the Caribbean, was
formed after the first ministerial in Denver to provide analytical
support to the working groups as requested.  Each organization in the
Tripartite Committee is responsible for providing technical support
to the FTAA process through the working groups.  For example, the IDB
is collecting trade statistics to assist the Working Group on Market
Access, while the OAS has provided support to other groups on trade
policy issues, such as subsidies and competition policy.  At this
time, the Tripartite Committee's role in support of the FTAA is
anticipated to be transitory.  The countries are considering the
possibility of establishing a temporary FTAA secretariat during the
negotiations.  At the Belo Horizonte meeting, ministers directed the
Tripartite Committee to conduct a feasibility study based on the
agreed functions of a temporary secretariat.  This study is to be
reported to the vice ministers at their meeting scheduled to take
place in October 1997. 


--------------------
\9 The original Miami Summit declaration included commitments to
convene specific high-level meetings to address, among others, topics
such as labor and sustainable development--that is, the environment. 

\10 Generally, each working group was instructed to compile a basic
inventory of data and identify possible approaches to negotiations
for its area of responsibility.  However, there is disagreement among
countries involved in the FTAA process on whether working groups have
been empowered to make recommendations on the content of the FTAA in
their subject areas. 


      DIFFERENT STRATEGIES FOR
      PURSUING FTAA NEGOTIATIONS
---------------------------------------------------------- Letter :5.2

In preparation for the ministerial meeting in Belo Horizonte, various
countries and subregional blocs involved in the FTAA process
submitted proposals for the overall strategy they would like to see
pursued in formal FTAA negotiations.  At the ministerial, consensus
was reached on several key issues advanced in these proposals.  A
joint declaration issued at Belo Horizonte called for formal FTAA
negotiations to be launched by the next summit of Western Hemisphere
leaders scheduled to take place in Chile in April 1998.  In the
declaration, countries agreed that the FTAA would be consistent with
member countries' commitments under the WTO and the FTAA.  Moreover,
countries agreed that the FTAA would coexist with, rather than
supplant, existing subregional trade arrangements, such as NAFTA or
Mercosur, to the extent that rights and obligations under these
agreements are not covered or go beyond rights and obligations under
the FTAA.  The declaration also recognized the right of participating
countries to negotiate independently or as members of subregional
trade groupings,\11 and the need to establish a temporary
administrative secretariat to support future negotiations.  Finally,
the declaration reiterated the commitment of participating countries
to conclude a trade agreement encompassing the entire hemisphere by
2005 at the latest. 

At the Belo Horizonte ministerial, participating countries also
agreed to set up a Preparatory Committee at the vice ministerial
level that will make recommendations for FTAA negotiations.  The
establishment of a Preparatory Committee signals a new level in the
FTAA process.  It indicates participating countries expect concrete
results in preparing for negotiations.  The Preparatory Committee is
supposed to meet at least three times between May 1997 and February
1998, when the next FTAA ministerial is scheduled to take place in
San Jos, Costa Rica.  At the San Jos ministerial, trade ministers
are committed to reach agreement on the objectives, approaches,
structure, and location of the FTAA negotiations, based on the
recommendations of the Preparatory Committee. 

Still, there is disagreement among participating countries on the
pace and direction of formal negotiations.  Most countries, including
the United States, would prefer that formal FTAA negotiations on all
issues commence during the next summit of regional leaders in 1998
and conclude no later than 2005.  The members of Mercosur, however,
have proposed that negotiations proceed in three phases:  (1) in 1998
and 1999, countries would agree on and begin to implement "business
facilitation" measures, such as adopting common customs documents or
harmonized plant and animal health certificates; (2) from the year
2000 to 2002, work would begin on "standards and disciplines,"
including antidumping and countervailing duty rules, and market
access for services; and (3) from 2003 to 2005, other disciplines and
market access issues would be negotiated, including tariff
reductions, a key concern of the United States.  No other countries
appear to support Mercosur's phased approach to negotiations. 


--------------------
\11 According to USTR, it appears at this time that most countries
will negotiate individually, although Mercosur may negotiate as a
bloc. 


   RECENT DEVELOPMENTS IN REGIONAL
   TRADE LIBERALIZATION OUTSIDE
   THE FTAA PROCESS
------------------------------------------------------------ Letter :6

Adverse economic developments in Mexico in the months immediately
following the 1994 Miami Summit raised U.S.  concerns about pursuing
further free trade initiatives in the region.  While U.S.  officials
were debating the future course of U.S.  involvement in regional
trade efforts, other countries in the hemisphere began pursuing their
own agenda, both deepening commitments under existing trade blocs and
establishing new bilateral agreements.  In principle, these efforts
may be consistent with U.S.  goals to promote free trade.  In
practical terms, lack of U.S.  participation in shaping these
agreements has created disadvantages for some U.S.  exporters' access
to markets in the region.  These disadvantages are beginning to be
felt in various sectors, including agriculture, telecommunications,
pharmaceuticals, and the automotive industry.  According to
representatives of several Western Hemisphere countries, regardless
of whether the United States resumes a more active role in shaping
regional trade liberalization efforts, their countries will continue
their own initiatives toward free trade and economic integration,
even if these efforts do not coincide with U.S.  interests. 
Moreover, these officials noted that it is essential for the U.S. 
administration to obtain fast track authority in order to make
meaningful progress toward achieving the FTAA. 


      U.S.  RECONSIDERS FURTHER
      REGIONAL TRADE
      LIBERALIZATION
---------------------------------------------------------- Letter :6.1

In launching the FTAA at the Miami Summit, the United States was
building on the momentum for free trade generated by the passage of
NAFTA a year earlier.  NAFTA was more comprehensive than any other
agreement in the Western Hemisphere.  It not only covered traditional
tariff and nontariff issues but also placed important obligations on
member countries in matters such as investment, government
procurement practices, customs procedures, and trade in services.  At
the time, NAFTA was generally regarded as a blueprint for further
trade liberalization in the region.  Moreover, U.S.  leadership was
evident in its support of negotiations on Chile's accession to NAFTA. 
Only days after the summit, however, Mexico was hit by a serious
financial crisis, with spillover effects in other Latin American
economies.  The commitment by the U.S.  government of significant
resources to stem and resolve the crisis raised concerns in the
United States about further regional trade liberalization efforts. 
In the intervening period, fast track authority lapsed.  Although
U.S.  participation in the FTAA preparatory process continued, the
executive branch has been constrained from pursuing other tariff
liberalization negotiations in the region.  Formal negotiations on
Chilean accession to NAFTA, for example, were suspended in 1995. 


      OTHER COUNTRIES HAVE MOVED
      FORWARD WITH THEIR OWN TRADE
      INITIATIVES
---------------------------------------------------------- Letter :6.2

While debate continues in the United States regarding further
regional trade liberalization efforts, other countries in the region
have proceeded to negotiate new trade agreements and deepen their
participation in existing arrangements.  Chile has been at the
forefront of this trend; it has negotiated a network of free trade
agreements with several countries in the region, including Venezuela
and Colombia.  In 1996, Chile also concluded a free trade arrangement
with Mercosur, becoming in effect an associate member of that trade
bloc.  Under this arrangement, Chile and the Mercosur countries will
phase out tariffs on products traded among them, but Chile will not
adopt Mercosur's common external tariff. 

Chile's pursuit of free trade is not limited to South America.  The
Canada-Chile Free Trade Agreement, which became effective on July 1,
1997, is modeled on NAFTA and is intended as a provisional agreement
to facilitate Chilean accession to NAFTA.  Nevertheless, as noted
earlier, there are some differences between this bilateral agreement
and NAFTA, reflecting some of the areas where Chilean and Canadian
interests differ significantly from those of the United States.  For
example, under their bilateral agreement, Chile and Canada are
committed to forgo imposing antidumping and countervailing duties
within 6 years after the agreement goes into effect.  NAFTA, on the
other hand, does not affect member countries' ability to unilaterally
impose antidumping measures and countervailing duties.  In addition
to its trade negotiations with Canada, Chile has cultivated close
commercial relations with Mexico, our other NAFTA partner. 
Currently, Chile and Mexico are renegotiating their 1992 free trade
agreement to make it more compatible with NAFTA. 

Mexico, in turn, has been extending its own web of bilateral trade
agreements throughout the hemisphere.  As noted earlier, Mexico has
concluded bilateral free trade agreements with Costa Rica and Bolivia
and has a trilateral arrangement with Colombia and Venezuela.  Mexico
is also negotiating free trade agreements with Ecuador, El Salvador,
Guatemala, Honduras, Panama, and Peru.  In addition, Mexico plans to
negotiate a transitional agreement with Mercosur that will cover key
areas, such as market access, government procurement, intellectual
property rights, and investment. 

Mercosur has been another focus of subregional trade initiatives
since the Miami Summit.  In addition to the arrangement with Chile,
Mercosur has concluded a free trade agreement with Bolivia and is
engaged in negotiations to widen its reach to other Andean Group
countries.  Mercosur and Mexico are also scheduled to begin trade
negotiations later this year.  Beyond the Western Hemisphere,
Mercosur has concluded a framework agreement on trade with the EU and
there are discussions aimed at establishing a free trade area
encompassing the two trade blocs (see fig.  3). 

   Figure 3:  Countries Engaged in
   Trade Negotiations With
   Mercosur

   (See figure in printed
   edition.)

   Source:  GAO and Governments of
   Brazil and Mexico.

   (See figure in printed
   edition.)

Mercosur has not only been broadening its network of agreements with
other countries, it has also been deepening the level of economic
integration among the four original member countries.  As noted
earlier, in 1995 Mercosur countries instituted the common external
tariff, which is currently applied to about 85 percent of imports
from outside the bloc.  Trade among Mercosur member countries has
almost tripled, from approximately $5 billion in 1991 to $14.5
billion in 1995--the last year for which figures were available. 


      SOME U.S.  SECTORS FEEL
      IMPACT OF OTHER SUBREGIONAL
      TRADE AGREEMENTS
---------------------------------------------------------- Letter :6.3

Lack of U.S.  participation in shaping emerging Western Hemisphere
trade agreements has created disadvantages for some U.S.  exporters'
access to these markets.\12 By lowering or eliminating tariffs among
participating countries, subregional free trade agreements that
exclude the United States result in comparatively higher duties for
U.S.  exports.  For example, Chile's network of bilateral trade
agreements has given Chilean agricultural products an edge over U.S. 
exports in South America.  Thus, while Chilean apples enter many
South American markets duty free, Washington State apples face 10 to
25 percent tariffs.  In recent years, Washington growers have seen
their share of these markets dwindle as Chile capitalizes on its
tariff preferences. 

Like Chile's arrangements with other South American countries, the
Canada-Chile agreement has already yielded benefits for Canadian
firms not enjoyed by U.S.  companies.  Recently, Canada's Northern
Telecom won a nearly $200-million telecommunications equipment
contract in Chile.  According to the State Department, the choice of
Northern Telecom over U.S.  companies was at least in part due to the
fact that buying from a U.S.  producer would have meant an additional
$20 million cost in duties relative to purchasing from Canada. 

While U.S.  exports to Mercosur countries have been growing, U.S. 
exporters will likely face increasing difficulties in penetrating
markets in Mercosur countries as commitment to common bloc trade
policies deepens.  For example, a USTR official noted that Mercosur
is currently considering adopting product safety standards that are
quite different from U.S.  standards.  This official explained that
if these standards are adopted, U.S.  auto manufacturers could be at
a disadvantage in accessing the growing markets of Mercosur member
countries. 

Mercosur's position on the recent WTO Information Technology
Agreement also provides an indication of how the bloc's common
foreign trade policy will complicate U.S.  efforts to promote its
economic interests in the region.  The Information Technology
Agreement, which was signed by 28 WTO members in Singapore in
December 1996, provides important tariff concessions in an industry
in which the United States enjoys a considerable competitive
advantage.  Brazil did not join in the Information Technology
Agreement, seeking to protect its own emerging information
technologies industry.  Brazil's position on the agreement has now
been adopted as an element of Mercosur's common external trade
policy, while other partners like Argentina, if acting individually,
might have taken a different position. 

The difficulties faced by the U.S.  pharmaceutical industry in the
Argentine market also illustrate some of the drawbacks encountered by
U.S.  firms as countries in the region drift away from the
long-standing U.S.  concern regarding intellectual property
protection.  In a recent statement before the Trade Subcommittee of
the House Ways and Means Committee,\13 the President of the
Pharmaceutical Research and Manufacturers of America estimated that
annual losses by member companies due to patent infringement in
Argentina amount to several hundred million dollars.  He noted that
NAFTA has the strongest safeguards for intellectual property rights
of any trade agreement, and concluded that if Argentina had been
brought into NAFTA, that government would have had to seek to curtail
patent infringement more decisively than it does now.  It is worth
noting that Argentina's former Finance Minister favored joining NAFTA
rather than integrating further within Mercosur.  However, after
NAFTA negotiations with Chile were suspended, it became clear that
prospects for Argentine accession to NAFTA were rather distant, and
Argentina proceeded to cement its position within Mercosur. 


--------------------
\12 These examples of select sectors illustrate cases where U.S. 
export opportunities have been adversely affected by subregional
trade agreements.  A broader evaluation of the costs and benefits of
increased trade and specific trade agreements requires a
consideration of both U.S.  export and import-competing sectors. 
While trade liberalization has historically created net benefits to
the aggregate economy through improvements in efficiency, it creates
costs that fall more directly on certain sectors of the economy and
labor force. 

\13 March 18, 1997. 


      REGIONAL TRADE
      LIBERALIZATION LIKELY TO
      CONTINUE REGARDLESS OF U.S. 
      PARTICIPATION
---------------------------------------------------------- Letter :6.4

Western Hemisphere leaders have indicated their countries will
continue their own initiatives toward free trade and economic
integration.  For example, in statements during his recent visit to
the United States, the President of Chile said that his country
shares the U.S.  interest in promoting free trade.  Elaborating on
his President's remarks, a Chilean government spokesman on trade
issues explained that, like the United States, Chile would like to
see the widest and most comprehensive agreement possible on free
trade for the Western Hemisphere.  According to this official,
whether through NAFTA or the FTAA, with or without the United States,
Chile intends to continue to pursue trade liberalization because it
is seen as furthering Chile's own interests.  Chile still wants to
join NAFTA, but NAFTA is now less critical to Chile than it was in
1995. 

Like Chile, Canadian interests in regional trade liberalization
generally coincide with those of the United States.  However, the
recent Canada-Chile free trade agreement demonstrates that Canada is
pursuing its commercial interests in the region.  Indeed, the
Canadian Minister of International Trade recently indicated that his
government is considering negotiating a trade agreement with
Mercosur.  According to a Canadian government spokesman on trade
policy, Canada's free trade agreement with Chile was not only meant
to expedite Chilean accession to NAFTA, but it was also intended to
keep alive the momentum for free trade in anticipation of FTAA
negotiations.  Canada would like to see decisive U.S.  participation
in FTAA negotiations because the two countries share many interests
with regard to trade.  This official explained that it would be
unfortunate if the United States lacked fast track authority by the
time of the 1998 Santiago Summit, as it would be at a distinct
disadvantage in shaping the FTAA. 

It would appear that Mexico's interests in regional trade
liberalization parallel those of Chile and Canada.  However, some
observers suggest that Mexico may be reluctant to surrender the
current advantage it enjoys in terms of access to North American
markets.  Nevertheless, according to Mexican government trade
officials, all of Mexico's agreements and negotiations with other
countries in the hemisphere have sought to encourage the adoption of
trade disciplines consistent with NAFTA.  These officials explained
that Mexico has actively supported Chilean accession to NAFTA and the
concept of a free trade agreement that would encompass the entire
hemisphere.  Moreover, they noted that Mexico is committed to the
principles of free trade and will continue to pursue free trade
arrangements with other countries in the hemisphere and other
regions. 

In contrast to the NAFTA partners and Chile, the Mercosur countries'
vision of the FTAA differs significantly from that of the United
States.  As the largest member of Mercosur, Brazil has sought to
shape the FTAA process to make it consistent with its distinct trade
priorities.  Since the FTAA would entail broadening Brazil's ongoing
market-opening efforts, Brazil favors a slower managed approach to
hemispheric trade liberalization.  This would give its industries
more time to adjust to foreign competition.\14 Thus, Brazil has
proposed that FTAA negotiations on market access be deferred until
2003, while the United States would like to see this matter addressed
as soon as negotiations begin in 1998.  A Brazilian government
spokesman noted that if U.S.  negotiators lack fast track authority
in 1998, FTAA negotiations would still be able to reach agreement on
business facilitation measures.  These include items such as common
customs documents, which would not require legislative approval.  In
this case, discussions on market access would be deferred, as favored
by Mercosur in general and by Brazil in particular. 


--------------------
\14 Beginning in the 1990s, Brazil initiated a unilateral process of
opening its markets to foreign competition.  Subsequently, it has
opened its markets further within the context of Mercosur.  This
process has put great pressure on Brazilian domestic producers, and
the country has amassed sizable trade deficits in recent years. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

In preparing this report, we relied on our past and ongoing work on
Western Hemisphere trade issues.\15 Our description of existing
subregional and bilateral trade arrangements is based primarily on a
review of documents on these arrangements from academic and technical
publications.  For our discussion on the status of FTAA negotiations
and recent trade developments in the region outside the FTAA process,
we interviewed officials from the OAS, IDB, USTR, the U.S. 
International Trade Commission, and the U.S.  Department of State;
representatives from five other Western Hemisphere nations at the
forefront of regional trade negotiations; and academicians and other
experts on the process of regional economic integration. 

We also reviewed documents on the FTAA prepared by the OAS Trade Unit
and the FTAA working groups; declarations and supporting
documentation from the Miami Summit and the three FTAA ministerial
meetings that have taken place thus far; and reports from USTR, the
U.S.  Department of Commerce, the U.S.  International Trade
Commission and the Congressional Research Service.  In addition, we
attended several conferences and congressional hearings dealing with
various aspects of the FTAA process. 

In order to provide some indication of the relative size of markets
in the region, we prepared tables on the principal Western Hemisphere
trade groupings presented in the appendix.  These tables are based on
data for individual countries in the region from the International
Monetary Fund's Publications International Financial Statistics and
Direction of Trade Statistics.  We used 1994 figures for these tables
because that is the latest year for which information was available
for most countries in the region.  For certain countries we used 1993
data, when 1994 data were not available. 

We conducted our review from February to June 1997 in accordance with
generally accepted government auditing standards. 


--------------------
\15 See the list of GAO reports related to this subject at the end of
this report. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

USTR provided technical comments on a draft of this report, and we
have incorporated them in the text where appropriate.  USTR did not
provide any evaluation of the overall thrust of the report. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to USTR, the Secretaries of
Commerce and State, and interested congressional committees.  We will
make copies available to others on request. 

Please call me at (202) 512-8984 if you have any questions concerning
this report.  Major contributors to this report were Elizabeth
Sirois, Assistant Director; Juan Gobel, Evaluator-in-Charge; Emil
Friberg, Senior Economist; and Patricia Cazares, Evaluator. 

Sincerely yours,

JayEtta Z.  Hecker, Associate Director
International Relations and Trade Issues


PRINCIPAL ECONOMIC INDICATORS BY
TRADING BLOC, 1994
=========================================================== Appendix I

Currently, there are six major multilateral trading blocs in the
Western Hemisphere.  Following is a general profile of each of these
blocs, including information on membership, gross domestic product
(GDP), per capita gross domestic product, and the bloc's total
exports, using data from 1994, except as noted. 


   ANDEAN COMMUNITY
--------------------------------------------------------- Appendix I:1

Established in 1969 (formerly Andean Pact or Andean Group). 

Members:  Bolivia, Colombia, Ecuador, Peru, Venezuela
Population:  75 million\1
Combined GDP:  $149 billion
Per capita GDP:  $1,987
Total imports:  $26 billion
Imports from the United States:  $10 billion
Total exports:  $31 billion
Exports to the United States:  $14 billion


--------------------
\1 Calculated using 1993 population data for Bolivia. 


   CARIBBEAN COMMUNITY
--------------------------------------------------------- Appendix I:2

Established in 1973 as successor to the Caribbean Free Trade
Association (CARIFTA, established in 1967). 

Members:  Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica,
Grenada, Guyana, Jamaica, Montserrat,\2 St.  Kitts & Nevis, St. 
Lucia, St.  Vincent & the Grenadines, Suriname, Trinidad & Tobago
Population:  6 million\3
Combined GDP:  $20 billion\4
Per capita GDP:  $3,237
Total imports:  $9 billion
Imports from the United States:  $3 billion
Total exports:  $6 billion
Exports to the United States:  $2 billion



--------------------
\2 No data were available for Montserrat. 

\3 Calculated using 1993 population data for Antigua & Barbuda and
Suriname. 

\4 GDP data were not available for the Bahamas and St.  Vincent & the
Grenadines. 


   CENTRAL AMERICAN COMMON MARKET
--------------------------------------------------------- Appendix I:3

Established in 1961. 

Members:  Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
Population:  29 million
Combined GDP:  $34 billion
Per capita GDP:  $1,174
Total imports:  $11 billion
Imports from the United States:  $5 billion
Total exports:  $7 billion
Exports to the United States:  $3 billion


   COMMON MARKET OF THE SOUTH
   (MERCOSUR)
--------------------------------------------------------- Appendix I:4

Established in 1991. 

Members:  Argentina, Brazil, Paraguay, Uruguay
Population:  196 million
Combined GDP:  $852 billion
Per capita GDP:  $4,346
Total imports:  $61 billion
Imports from the United States:  $12 billion
Total exports:  $63 billion
Exports to the United States:$11 billion


   LATIN AMERICAN INTEGRATION
   ASSOCIATION
--------------------------------------------------------- Appendix I:5

Established in 1980 as a successor to the Latin American Free Trade
Association (LAFTA, established in 1960). 

Members:  Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador,
Mexico, Paraguay, Peru, Uruguay, Venezuela
Population:  401 million\5
Combined GDP:  $1.5 trillion
Per capita GDP:  $3,801
Total imports:  $183 billion
Imports from the United States:  $83 billion
Total exports:  $171 billion
Exports to the United States:  $79 billion



--------------------
\5 Calculated using 1993 population data for Bolivia. 


   NORTH AMERICAN FREE TRADE
   AGREEMENT
--------------------------------------------------------- Appendix I:6

Established in 1994. 

Members:  Canada, Mexico, United States
Population:  383 million
Combined GDP:  $7.9 trillion
Per capita GDP:  $20,643
Total imports:  $920 billion
Canadian & Mexican imports from the United States:  $157 billion
Total exports:  $735 billion
Canadian & Mexican exports to the United States:  $185 billion

Sources:  International Monetary Fund (IMF) International Financial
Statistics, March 1997, for population, GDP, and per capita GDP data;
IMF Direction of Trade Statistics, April 1997, for import and export
data. 

RELATED GAO PRODUCTS

Budget Issues:  Privatization Practices in Argentina (GAO/AIMD-96-55;
Mar.  19, 1996). 

Mexico's Financial Crisis:  Origins, Awareness, Assistance, and
Efforts to Recover (GAO/GGD-96-56; Feb.  23, 1996). 

NAFTA:  Structure and Status of Implementing Organizations
(GAO/GGD-95-10BR; Oct.  7, 1994). 

U.S.-Chilean Trade:  Pesticide Standards and Concerns Regarding
Chilean Sanitary Rules (GAO/GGD-94-198; Sept.  28, 1994). 

North American Free Trade Agreement:  Assessment of Major Issues
(GAO/GGD-93-137; Sept.  9, 1993; 2 vols.). 

U.S.-Chilean Trade:  Developments in the Agriculture, Fisheries, and
Forestry Sectors (GAO/GGD-93-88; Apr.  1, 1993). 

CFTA/NAFTA:  Agricultural Safeguards (GAO/GGD-93-14R; Mar.  18,
1993). 

*** End of document. ***