The Andean Community has set itself the target of having a Common Market in place by the year 2005. This is quite an ambitious goal --some would say utopic— considering only the trade aspects involved. It is still an "imperfect customs union" of three of its members 30 years after its formation, for Peru is not a participant and Bolivia has no binding commitment.

Furthermore, the figures for intraregional trade have not yet reached significant levels, despite the fact that the trade is mostly intraindustrial, consisting of non-traditional exports with a large value added, as compared with the Andean countries’ global trade.

ARE WE MOVING TOWARD THE COMMON MARKET?

The region’s tariff structure is closely attuned to those of Colombia and Venezuela, while the exceptions applicable to Ecuador and Bolivia, combined with the Andean agricultural price band, and the agreement on motor vehicles, create gaps that can extend to 50% of the tariff headings. Countries like Peru are hard hit by this situation and the loss of its competitiveness has created a trade deficit with its Andean partners.

Whether or not the Customs Union can be consolidated in light of recent failures to comply with the tariff phase-out is a question that has touched off considerable discussion. One of the key elements involved here is Peru’s position. Initially, the country defended a flat tariff, but it is highly unlikely that its trading partners will adjust their existing tariff structures to this mechanism. Pressure in Peru has been placed on adopting the Common External Tariff particularly for the industrial sectors. In fact, the topic has once again come to official attention, defended by some Ministers or government officials.

The goal of liberalizing services by 2005 is also ambitious, but the provisions the Andean Community has adopted in that regard are among the hemisphere’s most advanced, even going beyond those of the FTAA. This sector is extremely important to the Andean countries, not only because of its impact on the GNP and employment, but also because it accounts for large flows of foreign direct investment. All of the countries have boosted liberalization and privatization processes and some (Peru) have regimes that are fully liberal.

The unhampered movement of factors and persons poses another formidable challenge. In the case of capital mobility, the Peruvian and Bolivian regimes are more liberal than those of their partners. The recent international crisis made it necessary to coordinate the supervisory systems more closely and for national standards to maintain a certain degree of harmony.

Foreign direct investment should receive the same treatment. While important steps were taken toward conciliation in the provisions that replaced Decision 24, a common position must still be defined to reduce the possibility for unilateral action on the part of any of the Community members.

The free movement of persons is a far more complex issue and the advances that have been made in this area are limited for the most part to declarations and communiqués. The internal crises and conflicts (non-economic) that have affected or that continue to influence the Andean countries make substantial progress impossible. By way of example despite Venezuela’s repeated calls for deepening and hastening integration, it is the only country to require its partners to obtain entry visas.

Simultaneous goals

A notable feature of the Andean integration process is the series of integration goals set for 2005: culmination of the Customs Union, full liberalization of services, and liberalization of the factors markets, all of which are necessary for the construction of a Common Market.

The world’s most advanced integration experience –that of Europe— was built up stage-by-stage, from the agreement on coal and steel and the customs union to the monetary union through the construction of the European social model and a Europe of European citizens.

The Andean case is without precedent, for the Community plans to deepen the scheme to attain a common market without having reached previous stages. It is indeed a formidable challenge for such a short time frame.

An agreement is expected between two customs unions (seeking to become common markets) in South America, together with other undertakings on the Andean Community’s foreign agenda. Even if these goals are not achieved in their entirety, Andean integration at the very least must be more fully developed than that of the other blocs with which it is negotiating.

POLITICAL PROBLEMS

The political situation has created a series of challenges for most of the countries in the region. Only when these have been met successfully will conditions be ripe for advancing integration. In this context, the cancellation of the Andean Presidential Summit promoted by President Chavez for the first week of December says much about the discouraging conditions for speeding up integration.

The agenda proposed for that summit was effectively to analyze the future of Andean Community political integration, evaluate and coordinate foreign policy actions, follow up the Andean social agenda, and address the problem of volatile capital. All of these are basically political issues, of course, but the conditions were not favorable for holding that meeting.

Opposing economic interests have been the usual stumbling blocs to the progress of integration. The failure to hold the summit shows just how far the existing differences have prevailed or how little priority has been given to Andean integration by the member countries because of the complex internal conflicts they have all been facing.

OPEN REGIONALISM

Each and every one of the Andean countries is presently engaged in complicated negotiations in different international forums simultaneously. These have led them to formulate guidelines for common action that have made themselves felt in a single spokesmanship in the FTAA and the search for a common position in WTO negotiations.

On the other hand, unilateral actions on the part of member countries are placing the common position agreed upon at Andean summits in jeopardy. The effort by different sectors in Colombia to establish a direct relationship with NAFTA and the FTAA as a priority will obviously weaken the negotiating position of the regional countries and will slow the pace of Andean integration.

In a return to the discussion touched off by the formation of the Group of 3 with Venezuela and Mexico, and Bolivia’s association with the Mercosur several years ago, Venezuela has expressed its intention of seeking integration with the Mercosur, in particular, a strategic alliance with Brazil, --unilaterally, if necessary.

All of these actions could weaken the effort to form the South American Free Trade Area by 2002, the keystone for joint negotiation in the FTAA under Brazilian leadership. A change in agenda priorities on the part of Colombia or Ecuador due to the dollarization process or participation in the Colombia Plan could bring the process into question.

There are those in Peru, also, who favor northward-looking integration more favorably than integration with their southern neighbors. The outcome will depend upon the new government that takes office in April 2001. As indicated above, it is not a question of an anti-Andean position, but the fact is that the priorities of a strategy of open regionalism have their degrees.

A political decision by any of the countries seeking a special relationship with the United States, even if not formally embodied in a free trade area, would be the most disruptive. An example could be Chile’s behavior and Brazil’s reaction. Chile, after repeated failures of its attempts to reach an agreement with the United States (the blame was laid on the fast-track negotiation), gave more attention to its relationship with the Mercosur. It became associated with that market and in recent months announced its intention to seek full membership, even if important questions still remain to be answered.

Even so, it also renewed its negotiations with the United States and an important agreement was announced. Brazil’s furious response is to bring Chile’s negotiations with the Mercosur to a stop or to establish trade advantages that would ensure equal market access for Mercosur.

A similar association of a member country with the United States can accordingly be expected to weaken both regional integration efforts and the consolidation of a South American free trade area.

Brazil’s political decision to negotiate unilaterally with the Andean countries has broken the stalemate of CAN-MERCOSUR negotiations, leading Argentina to follow a similar course. All that remains to be done is to regularize the situation with Paraguay and Uruguay where no problems of the size that have been overcome are to be expected.

Conditions are favorable, then, for continuing with negotiations on a bloc-by-bloc basis and moving ahead toward the formation of the South American Free Trade Area. It may take a little longer than scheduled, but a consolidated agreement should exist before the FTAA negotiations conclude in 2005.

The various positions taken may actually be consolidated in a comprehensive and differentiated strategy. The Andean countries export their manufactures to the region, they do not suffer from the biases present in other integration agreements, and the service and other liberalization that are mandated may lead to progressive integration, even if the Common Market is not reached by the year 2005.

Attainment of the South American Free Trade Area would improve their negotiating position, regional physical and border integration would be boosted, and bioceanic corridors would be constructed, allowing the region to arrive at a projection that is qualitatively superior to that of the Asia Pacific region. The level of integration thus achieved would still be inferior to that existing in the Andean agreement.

Even so, the United States is the main trading partner of the Andean countries, they enjoy preferential agreements like the FTAA, and, clearly, they are interested in hemispheric integration with the world’s foremost economy. The decision lies only in whether unilateral agreement or an agreement from the vantage point of the South American Free Trade Area is to be preferred. The agreements within the FTAA should also be deeper than those the countries can attain in the WTO. Otherwise, all that would be needed is conciliation of national trade policy with WTO standards.

To sum up, the FTAA should be more than a WTO agreement. The South American Free Trade Area (ALCSA) should be more than an FTAA agreement. Otherwise, it would lose all of its attraction and hemispheric integration would be enough. The challenge for the Andean countries is to reach goals that go beyond ALCSA; conditions are favorable for this, but everything depends upon the political decisions that are taken.

At heart, the issue is whether the Andean countries will seek a multipolar world, or whether they will be satisfied with strengthening the existing virtual uniformity. Beyond official declarations, both positions are being taken in the countries and the scenario that is finally consolidated will depend upon the hegemony that is attained.

Irrespective of the resulting scenario, the Andean countries have an enormous institutional challenge ahead of them to address such a complex external agenda (economic and political). Joining efforts to strengthen common positions and interests appears to be the most reasonable course in this situation.