The United States may share a hemisphere with Latin America, but the region is far from the first thing on U.S. policymakers’ minds. In recent years, Washington’s policy towards the region has been reactive—ad hoc responses to what are perceived as problems, like financial panics, immigration, drugs and the Elián melodrama, rather than emerging from any strategic or neighborly vision. Nor has Latin America been much of a concern of electoral politics. That may change in coming years as the “Hispanic” share of the electorate continues to increase—which isn’t to say that such a varied population will think or vote as one. But for now, mainstream national politicians pay little public attention to the region beyond the headline issues of immigration and drugs. Of course, the business and political elite is hot to pursue further economic integration, but this is not a popular agenda, so it has to be pursued furtively, behind a mask of “democratization.”
This whole syndrome was evident in a major foreign policy address given this fall by Samuel “Sandy” Berger, Bill Clinton’s national security advisor. In a text of over 5,000 words, “Latin America” didn’t appear once, and the only countries mentioned by name were Mexico, Colombia and Cuba. Cuba was presented along with Iran and Iraq as a pariah state whose regime change will eventually have to be managed (and that it is perfectly natural for the United States to have a hand in the management is simply assumed). Colombia is mentioned as an “old democracy” at risk of failing. And Mexico appears in this rather surreal passage: “If the people of Mexico have built a multi-party system, is it because democracy is unstoppable in a ‘dot.com’ world? No, it is partly because NAFTA empowered Mexico’s reformers to open up their system, and because America’s support for Mexico during its financial crisis gave reforms time to prevail.”[1] That many Mexican “reformers” are no fans of NAFTA, and that many of NAFTA’s most enthusiastic proponents were the enemies of “reform,” is beside the point, since Berger, like any U.S. foreign policy specialist, is a man on a mission.
Berger’s analysis of Mexico is symptomatic of the fact that during the Clinton years, U.S. foreign policy has been driven more nakedly by economic interests than it was during the Cold War. The goal of opening up foreign product and financial markets is now pursued with the same missionary zeal that fighting Communism once was, and with similarly uplifting rhetoric about democracy. The economic integration of the hemisphere—essentially an extension of NAFTA to this half of the globe—was once a major part of that struggle. The first Summit of the Americas, held in late 1994 just before the Mexican peso crisis, was conceived as a high-profile promotional event on behalf of a proposed Free Trade Area of the Americas (FTAA).
Mexico’s peso crisis put that goal into disrepute. Remarkably, the view persists in Congress, as well as among opinion makers and the population in general, that the “bailout” of Mexico was an act of generosity—that the United States bore some real costs in the rescue of the Mexican economy. In fact, the U.S. government made money on the deal while taking little risk. Mexico paid interest to the U.S. Treasury on borrowed funds, pledged oil revenues as security for the loan, and embraced the austerity and market opening policies the Treasury loves—privatization legislation, liberalization of telecommunications, expanding the scope of private pension funds and strengthening the independence of the central bank. Mexico was thrown into a deep, long recession, while the economic fallout in the United States was barely measurable.
But that is not the way things were perceived by the U.S. public; the Mexico bailout was assimilated instead to a long tradition of U.S. imperial self-pity. The alleged cost of the rescue was combined with the growing political backlash against “globalization,” and so the Clinton Administration suffered a serious defeat when it failed to get fast-track trade negotiating authority through Congress in 1998.[2] Without that authority, the executive branch is severely hampered in negotiating grand deals like an FTAA. So it is unlikely that the next hemispheric summit, to be held in Canada in April 2001, will do much to promote the FTAA, since the President is unlikely to have fast track authority in his pocket—though there is some speculation that he might try to force it through Congress during his honeymoon period.
That Washington’s policy toward Latin America—particularly trade policy—is not exactly a partisan issue was underscored by the lack of real debate in this fall’s election campaign. Gore, who barely said a word about Latin America throughout his run for the presidency, was thought to be constrained by political debts to the unions that contributed $40 million to the Democratic Party during this election cycle—though similar debts did little to constrain Clinton’s enthusiasm for NAFTA and the FTAA. In fact, one can make the case that a Democratic president, with his party’s growing political debts to the business community, will always be better positioned to push “free-trade” deals through Congress than a Republican, because his party affiliation partly disarms the strongest opposition, like unions and mainstream environmentalists.
Bush, though not all members of his party are big fans of trade agreements—a reluctance born more out of xenophobia than concern for the working class—gave a major speech advocating increased trade with the region early in the campaign. The speech, however, is a fairly unremarkable document, full of passion for Venezuela’s oil, Brazil’s market, the broadening of NAFTA, the revival of Radio and TV Martí, tightening border controls, and support for the crackdown on the “vision of Marxism-Leninism [funded] with the profits of drugs” in Colombia.[3]
Should the President get fast-track authority, it seems likely that negotiations to bring Chile into NAFTA would be his first order of business—though the effects on both countries of a free-trade deal would not be too profound, since Chile’s economy is smaller than Mexico’s, and the country is a long way from the U.S. border, making extensive maquiladora-style trade unlikely.
Even if a grand FTAA is not in the cards yet, bilateral and regional liberalization deals are likely to continue, and they could serve as the building blocks of a de facto hemispheric free trade zone. Argentina might be a likely next candidate for a deal with Washington, but as John Sweeney, chief Latin American analyst for the Stratfor consultancy points out, this might cause trouble with Brazil, which is eager to promote itself as a regional hegemon, an alternative to U.S. dominance operating through Mercosur, the Southern common market.
Regional trade schemes like Mercosur are controversial in Washington, for both ideological and political reasons. Ideologically, there is a dispute over whether they encourage fresh trade or merely redirect trade that would have occurred anyway, though perhaps among different partners. For economists, trade-diverting agreements are inefficient, while trade-creating ones are desirable, since they are thought to maximize growth, and with it, human happiness—which, to your average economist, amount to the same thing. But of more compelling interest than this intellectual dispute to U.S. business and political elites is whether or not U.S. firms are part of the action. If Mercosur encourages regional trade at the expense of U.S. interests, and if it encourages Brazil’s political influence, also at the expense of the United States, then Washington would be very displeased and would try to horn in on the action.
One thing that seems unlikely, though, is that any new trade agreements would include reforms of the sort called for by Mexican President-elect Vicente Fox. Fox wants to rework NAFTA along the lines of the European Union—with serious amounts of development aid for Mexico, and the free movement of people across borders. These ideas have not been well received in Washington, and they’re not likely to be anytime in the imaginable future.
Along with the push for formalizing economic integration through trade agreements has come a deepening of U.S. trade with and investment in Latin America. I say “along with” because it is not easy to say which causes which—whether politically formalized integration is the cause or effect of economic facts on the ground.
U.S. trade with Latin America, in fact, grew very rapidly during the 1990s.[4] That rapid growth translated into a sharp increase in Latin America’s market share of U.S. trade. The region accounted for less than 14% of U.S. exports in 1991; that share rose to just over 20% in the first half of 2000. The import figures are somewhat less impressive, with Latin America’s share of U.S. imports rising from 12% in 1991 to almost 17% in the early months of 2000 (see Table 1).
Table 1: U.S. Trade, 1999
The table shows the percentage share of U.S. exports and imports accounted for by the country’s various trading partners. In 1999, for example, Canada was the destination of 23.94% of U.S. exports and the source of 19.39% of imports. Mexico appears as the second-largest national source of U.S. imports and the third-largest destination for exports. ASide from Mexico, the only Latin American countries accounting for more than 1% of U.S. trade are Brazil and Venezuela. The European Union appears as a single trading entity, and ranks just behind Canada as both a destination of exports and a source of imports. The two right-hand columns show the growth of U.S. trade with its various partners from 1991 to 1999.
U.S. Exports ($695.8 billion)
U.S. Imports ($1.024 trillion)
Growth, 1991-99
U.S. Trading Partners
Share
Rank
Share
Rank
U.S. Exports
U.S. Imports
Canada
23.94%
1
19.39%
1
95.7%
118.2%
European Union
21.82%
*
19.05%
*
39.8%
126.6%
Mexico
12.49%
2
10.71%
3
161.2%
252.5%
Japan
8.26%
3
12.77%
2
19.4%
43.0%
China
1.88%
12
7.98%
4
108.8%
331.2%
Argentina
0.71%
26
0.25%
43
142.0%
101.9%
Bolivia
0.04%
76
0.02%
92
55.6%
7.3%
Brazil
1.90%
11
1.10%
16
114.7%
68.4%
Chile
0.44%
32
0.29%
37
67.4%
126.8%
Colombia
0.51%
30
0.61%
27
82.4%
128.7%
Costa Rica
0.34%
37
0.39%
35
130.3%
243.9%
Cuba
0.00%
192
0.00%
198
246.2%
—
Dominican Republic
0.59%
28
0.42%
32
135.3%
113.5%
Ecuador
0.13%
53
0.18%
50
-4.0%
37.2%
El Salvador
0.22%
47
0.16%
54
184.7%
429.9%
Guatemala
0.26%
42
0.22%
45
91.8%
151.9%
Haiti
0.09%
59
0.03%
81
55.4%
5.9%
Honduras
0.34%
38
0.26%
41
279.4%
387.3%
Nicaragua
0.05%
68
0.05%
70
149.3%
732.3%
Panama
n.a.
43
0.04%
76
78.1%
35.6%
Paraguay
n.a.
63
0.00%
123
37.5%
11.6%
Peru
0.24%
45
0.19%
46
101.9%
148.6%
Uruguay
n.a.
66
0.02%
96
128.6%
-16.3%
Venezuela
0.77%
24
1.11%
15
15.0%
38.6%
Source: U.S. Bureau of Economic Analysis (www.bea.doc.gov)
* The European Union is unranked because official U.S. statistics rank each of its 15 member countries separately.
Looking at things from the other side of the border, Latin America as a whole has been growing more dependent on the U.S. market over the last two decades. In 1980, 34% of the region’s exports went to the United States; in 1991 it was 44%, and in 1999, 52%. For Mexico, the dependence is even greater, rising from 65% in 1980 to 80% in 1991 to 83% in 1999.[5]
All these trade figures tell a story of a deepening of economic integration in the hemisphere relative to the rest of the world. Still, at 20%, Latin America’s total share of U.S. exports lags behind those of Canada and the European Union. Take away Mexico, and only Brazil and Venezuela would squeeze their way onto the U.S. radar screen. The U.S. market means much more to Latin America than Latin America does to the United States.
Investment figures tell a similar story. It is widely believed that multinational corporations (MNCs) are racing to move production into low-wage countries, and that Latin America is one of their prime targets. While there is some truth to this, things are really a bit more complicated (see Table 2). Over half of all foreign investments by U.S.-based MNCs—known in the jargon as foreign direct investment (FDI)—are in Western Europe; 10% are in Canada; 8% are in the richer countries of Asia, and another 6% are in the “newly industrializing” countries of Asia. In other words, three-quarters of all U.S. FDI is in countries as rich as or richer than South Korea. Almost none is in the poorest countries of Africa, South Asia or the Caribbean. Yes, Latin America and the Caribbean are the sites of almost 20% of U.S. FDI, up from 14% in 1982, but over a third of this total is accounted for by the tax and regulatory shelters Bermuda and Panama. Brazil and Mexico make up much of the rest. Mexico’s share of the global total is up only slightly from the early 1980s, and Brazil’s is down.
Table 2: U.S. Foreign Direct Investment
This table shows the value of U.S. foreign direct investment (FDI)—the foreign operations of U.S.-based multinational corporations, as well as U.S. minority interests in foreign-owned firms—in various regions and countries, as well as the rates of return on those investments. The value of U.S. FDI in each region is shown as a percentage of the world total. In 1999, for example, U.S. multinationals had investments worth $1.133 trillion abroad, of which 9.9% was in Canada, and 19.7% in Latin America and the Caribbean. The seven largest Latin American/Caribbean sites of U.S. direct investment are shown in the order of their importance to U.S. investors in 1999. Those seven sites now account for about 80% of the Latin American/Caribbean total. Rates of return are the profits earned in the region or country divided by the value of the assets invested.
Value of Investment
Share of U.S. FDI
Rate of Return
Profit/Value
Sites of U.S. Investment
1982
1990
1999
1982
1990
1999
Canada
20.9%
16.1%
9.9%
6.7%
6.9%
9.9%
Rich Europe
44.4%
49.7%
50.5%
10.4%
15.2%
9.3%
Rich Asia
7.8%
9.5%
7.7%
7.9%
9.0%
7.9%
Asian NICs*
3.4%
3.8%
5.9%
22.4%
20.7%
12.2%
Latin America/Caribbean**
13.6%
16.6%
19.7%
16.2%
12.2%
8.3%
Rest of World
9.9%
4.2%
6.3%
n.a.
n.a.
n.a.
World
100.0%
100.0%
100.0%
12.0%
13.5%
9.3%
Total U.S. FDI
$207.8 billion
$430.5 billion
$1.133 trillion
Selected Latin American & Caribbean countries
Bermuda
5.5%
4.7%
4.1%
12.1%
10.2%
9.1%
Brazil
4.5%
3.3%
3.1%
10.0%
9.9%
4.6%
Mexico
2.4%
2.4%
3.0%
-1.0%
17.9%
13.8%
Panama
2.1%
2.2%
3.0%
12.8%
11.6%
6.2%
Argentina
1.4%
0.6%
1.3%
8.1%
16.0%
3.6%
Chile
0.1%
0.4%
0.9%
-21.2%
17.8%
9.5%
Venezuela
1.3%
0.3%
0.6%
12.15%
14.0%
7.9%
Source: U.S. Bureau of Economic Analysis (www.bea.doc.gov)
* Newly Industrialized Countries ** FDI in Latin America/Caribbean is artificially low in 1982 and 1990 due to tax losses generated in the Netherlands Antilles.
Of all countries in the region, only Mexico really fits the bill as a low-wage production platform in any major sense. Foreign investors in Brazil are mainly interested in selling to Brazilians, and the chronic troubles of the Brazilian economy are a major reason why the investment figures aren’t more impressive than they are.
Beyond real, on-the-ground investment lies the more infamous kind of cross-border capital movements: the ownership of foreign stocks, bonds and other financial instruments known as portfolio investment. Clearly, U.S. investors have shown considerable interest in plunging into Latin American stock markets (and considerable interest in selling quickly when things go sour), and would no doubt like to see the few remaining obstacles to easy in-and-out access lifted. But Latin America is only one of many destinations; the more developed markets of Western Europe and Asia are generally less volatile and therefore more attractive to U.S.-based portfolio managers than are Latin markets.
From a purely mercantilist point of view, the United States has little to show for its mission of opening up trade and investment in the hemisphere—or, indeed, the rest of the world. In its trade relations with almost every region of the world, U.S. imports have grown faster than its exports, and trade with Latin America is no exception. The overall U.S. trade deficit (imports minus exports) rose from 1.1% of GDP in 1991 to 3.5% in 1999. The U.S. trade deficit with Latin America was a mere $584 million in 1991, an almost microscopic number next to U.S. GDP; by 1999, the deficit had grown almost 50-fold, to $29 billion, or 0.3% of GDP. The largest share of the regional deficit is accounted for by Mexico, with the U.S. trade accounts going from $2 billion in the black in 1991 to almost $23 billion in the red in 1999. This was not the way the last decade’s trade policies were sold to the U.S. public.
These numbers are good news for Latin American exporters; the U.S. market has been a rich source of demand while much of the rest of the world has been afflicted with stagnation and panic. Not, of course, that exports translate all that well into improvements in human welfare. Average Mexicans have not benefited greatly from the explosion in maquiladora employment—though given the depressed condition of the Mexican labor market, it’s probably better than nothing. (The radical economist Joan Robinson once said that the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.)
But the situation for the United States is unsustainable. A country that runs a steady trade deficit is essentially living beyond its means—consuming more than it produces—and it has to borrow the difference. When the United States was a “developing” country in the nineteenth century, it borrowed heavily abroad, and was a net debtor in its international accounts. It frequently defaulted, too, having more leeway than today’s international debtors.[6] By the early twentieth century, though, the United States had matured as an industrial power, and was overtaking Britain as the global master state. The financial corollary of that political fact was the U.S. shift from debtor to creditor status in its international accounts. The United States became a creditor country in 1916, and remained one for decades. In 1980, the country’s net creditor position with the rest of the world was over 11% of GDP. But early in the Reagan years, the United States started borrowing heavily abroad; its creditor position eroded, and it sank into a net debtor position in 1986. In 1999, the U.S. owed foreigners over a trillion dollars more than they owed U.S. entities—a net debt of almost 11% of GDP.
If numbers like these were faced by any other country—such as Mexico in early 1994 or Thailand in early 1997—they would be cause for great worry. Pundits would be writing worried columns about growing risks, foreign exchange traders would be ganging up on the currency, and the International Monetary Fund (IMF) would be itchy to prescribe structural adjustment. Of course, the United States is no ordinary country, but it’s clear that at some point, foreign investors will become alarmed. At the mildest, the Federal Reserve will have to push up interest rates to attract foreign capital; the higher rates would provoke a recession, import demand would weaken, and the U.S. international accounts would swing back towards some kind of balance. A more serious version would be a panicked flight of capital from U.S. markets, a collapse in the dollar, a major spike in interest rates, and a deep slump.
Though this is rarely talked about in public, some form of U.S. structural adjustment, whether relatively mild and drawn out, or sudden and severe, will have to occur over the next several years. This is of great relevance to Latin America in several respects. Higher U.S. interest rates will almost certainly trickle down to Latin markets; Mexico’s 1994 peso crisis was a fairly predictable result of the doubling of U.S. interest rates over the previous year. A U.S. recession will almost certainly mean reduced demand for Latin exports. And, on an ideological plane, a U.S. crunch will tarnish the prestige of its economic model, which has been the dubious ideal according to which the hemisphere’s economies have been reconstructed since the debt crisis broke out in 1982.
While a U.S. recession may lessen the prestige of the country’s economic model, for now, Washington isn’t admitting even the slightest challenge to the so-called Washington Consensus on development policy. Just how limited the scope is for criticism of the standard package—budget cutbacks, opening to trade, privatization, dismantling of social protections, financial “liberalization,” the marketization of almost everything—was made clear by the departure over the last year of two economists from the World Bank, Joseph Stiglitz and Ravi Kanbur.
Stiglitz, who during his academic career was regarded as one of the stars of his field, and is a likely Nobelist sometime in the near future, was appointed chief economist of the Bank in 1996 after heading Bill Clinton’s Council of Economic Advisors. He almost immediately began making waves in papers, articles and public speeches. He denounced the Washington Consensus. He indiscreetly pointed out that the rapid growth seen in East Asia in the 1980s and 1990s, and with it, the sharp advance in social indicators like health and literacy, would have been impossible without the heavy state intervention forbidden elsewhere by the dominant international financial institutions—chiefly the IMF. He noted that the frequent financial crises of recent decades, which have thrown millions at a time into penury, were not accidents, but symptoms of underlying flaws in the system of free global capital flows and persistent bad decisions by private investors. He claimed that moderate inflation was harmless, that modest budget deficits were no danger and that privatization was no miracle cure. He claimed that the disastrous results of economic reform in Russia were “not just due to sound policies being poorly implemented,” but to “a misunderstanding of the foundations of a market economy.”[7] For these heresies, Stiglitz was forced out of his position by the U.S. Treasury Secretary, Lawrence Summers.
Kanbur is an academic economist who was brought in by Stiglitz to supervise the writing of the World Development Report, the Bank’s flagship annual document. Kanbur opened up the previously secretive process, posting a draft on the Web and soliciting public comment. The draft argued that growth was not enough to reduce poverty—that policy had to be tilted in favor of the poor. This spin offended Summers and the Clinton Administration. Kanbur was ordered to rewrite the document to be more in line with the prevailing orthodoxy that growth is enough in itself. He refused, and angrily resigned.[8]
Stiglitz and Kanbur are mainstream economists with distinguished CVs—liberal reformists, and not militant revolutionaries. Yet even their critiques were too extreme to be acceptable. Though after the Asian crisis of 1997 it looked for a few minutes as if the Washington Consensus was under intellectual and political siege, Washington fought back and, for the moment, still has the upper hand. How long this can continue, after the mass demonstrations against the Bank, the IMF and the World Trade Organization in Seattle, Washington, D.C. and Prague, is far from certain.
Finally, it is worth mentioning that Washington does have a number of traditional “stability” concerns in the hemisphere which, while not economic interests in the narrow sense, are crucial to the creation of an orderly hemisphere and the maintenance of that precious thing, investor confidence. One of those concerns is the chronic instability of the Andean region—Colombia, Venezuela, Ecuador, Peru and Bolivia. Another is the persistence of Fidel Castro. Andean instability is both cause and consequence of economic stagnation combined with the growing polarization between rich and poor. Growth can take some of the edge off the situation, as it has done elsewhere, but the polarization has not been seriously addressed by the Washington Consensus. To the contrary, IMF Deputy Director Stanley Fischer recently stated that having dollarized its economy, Ecuador can only expect “increasingly tight” discipline, which should only be met with greater “flexibility” in the domestic economy—which means greater freedom on the part of employers to cut wages and fire workers.[9]
Cuba, on the other hand, presents a different kind of challenge to U.S. policy. As Julia Sweig, the Cuba specialist at the Council on Foreign Relations, points out, the political environment has changed. With Jorge Mas Canosa dead, the Cold War over and U.S. farmers and other businesses eager to end the trade embargo, right-wing Miami Cubans are no longer defining policy. In 1999, Congress voted by large margins to ease restrictions on travel and on pharmaceutical exports—though diehard anti-Fidelistas will continue to slip noxiously restrictive clauses into larger bills in the hope of getting them passed by an otherwise unsympathetic body. Sweig, whose employer is the very embodiment of establishment thinking, has told me she would like to see the new U.S. President appoint a special envoy, on the model of George Mitchell’s Northern Ireland portfolio, to come up with a list of recommendations on how to go about normalizing diplomatic and commercial relations.
Which, it seems, is all that matters these days.
ABOUT THE AUTHOR
Doug Henwood edits Left Business Observer and is the author of Wall Street (Verso, 1997) and A New Economy? (Verso, 2001).
NOTES
1. Samuel R. Berger, “A Foreign Policy for the Global Age,” speech given at Georgetown University’s Intercultural Center, Washington, D.C., October 19, 2000, http://www.pub.whitehouse.gov/uri-res/I2R?urn:pdi://oma.eop.gov.us/2000/….
2. “Fast track” legislation delegates great power to the president to negotiate trade agreements, first granted to Richard Nixon in 1973. Congress consents to limit debate and prohibit any amendments to the treaty text. For an informative Q&A, see the Citizens Trade Watch website, http://www.tradewatch.org/FastTrack/ftqa.htm.
3. George W. Bush, “Century of the Americas,” speech delivered in Miami, Florida, August 25, 2000.
4. In these trade statistics, “Latin America” refers to what the U.S. Census Bureau, the keeper of the trade statistics, calls “Twenty Latin American Republics”: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.
5. Computed from IMF, Direction of Trade Statistics, various issues.
6. Despite frequent defaults, the United States always mannaged to borrow again. Private markets have short memories, which is one reason the IMF exists; it has a longer memory and more intellectual coherence than do commercial bankers and bond traders.
7. Joseph Stiglitz, “Whither Reform?: Ten Years of the Transition,” keynote address, World Bank Annual Bank Conference on Development Economics, Washington, D.C., April 1999, www.worldbank.org/research/abcde/washington_11/pdfs/stiglitz.pdf.
8. This sketch of the Stiglitz and Kanbur affairs was developed through extensive conversations with World Bank sources who wish to remain anonymous.
9. Stanley Fischer, speech given at the LACEA 2000 conference, Rio de Janeiro, October 12, 2000.
