FTAA in Perspective: North-South and South-South Agreements in the Western Hemispheric Countries

Over the last decade and a half, the countries in the Western Hemisphere have reactivated their regional agreements and created new sub-regional initiatives in the pursuit of economic and political gains and in an effort to increase competitiveness in a globalized economy. Today, the region faces a new set of challenges not only within the Hemisphere but also with extra-regional partners. This paper examines various trade arrangements involving Latin-American countries (LAC) in the context of North-South and South-South regional trade agreements, using a multi-region, multi-sector comparative static CGE model, with trade-linked externalities and scale economies benchmarked in 1997. The result shows that a FTA with the European Union generates greater gains than FTAA for MERCOSUR, but that the latter is a better option for other sub-regional blocs in the Hemisphere. In general, FTAA boosts the region’s manufactured exports through intra-industrial trade, while integration with the EU expands agriculture-related exports. A surprising result is the fact that South-South agreements can be superior to North-South ones in terms of specialization in high valued-added goods for the more advanced developing countries in the region. An interesting finding related to the “importance of LAC” in the FTAA shows that LAC absorbs nearly 50 percent of the total new exports to the FTAA market. When the southernmost regional partners are considered, this share rises to over 80 percent in several manufacturing industries. In particular, the presence of LAC increases the share of non-resource-based heavy manufactures for all South American countries.