The Pacific Alliance: the New Star among Integration Groupings

The Pacific Alliance project has attracted close attention from governments and economists worldwide. Assessments of its orientation and activities are quite ambiguous. A number of politicians and public figures in Latin America (LA) have taken the news of the establishment of the Alliance with caution, seeing it as an avenue for the promotion of US policy in the region and an antagonist to Mercosur. How correct are these views? What are the opportunities for the development of trade and economic relations between Russia and the Alliance?

The Pacific Alliance project has attracted close attention from governments and economists worldwide. Assessments of its orientation and activities are quite ambiguous. A number of politicians and public figures in Latin America (LA) have taken the news of the establishment of the Alliance with caution, seeing it as an avenue for the promotion of US policy in the region and an antagonist to Mercosur. How correct are these views? What are the opportunities for the development of trade and economic relations between Russia and the Alliance?

Objectives and Potential

The Pacific Alliance is the most recent sub-regional economic union established in Latin America, whose members have proposed a new model of integration. It is aimed at jointly capturing the fastest growing markets of the Asia-Pacific region (APR) through the Alliance members’ profound integration and their geographical location on the Pacific coast [1]. This is the first integration association created specifically for the development of trade and economic relations with one of the areas of the world. Its appearance is due to the special role that APR countries have adopted over the last decade in the global economy and the external sector of Latin America. Country-members of the Pacific Alliance, realizing the export model of their economies, seek to develop their external relations in every possible way and to conquer the maximum number of markets for their goods. However, closer links with the Asia-Pacific region is their main priority.

The goal of the new alliance, created in June 2012 by Mexico, Colombia, Peru and Chile (Costa Rica and Panama were granted observer status) is to ensure the free movement of capital, goods, services and people, something that no other integration association in the region has yet managed to do. The profound integration of the member-countries is facilitated by the similarities in their economic policies and legislation. All of the countries are linked by free trade agreements that accelerate their trade integration. They are also united by free trade agreements with the US and the EU.

The Pacific Alliance is already one of the major trade blocs in Latin America and the world and has very good prospects for expansion. The population of the four countries is 216 million people (226 million people including Panama and Costa Rica), and the total GDP is $2.2 trillion or 37 per cent of the region's GDP. In terms of these parameters, the new alliance is inferior to Mercosur, but the total foreign trade turnover of the former (1.13 trillion dollars in 2013) makes up half of the region’s total and significantly exceeds the turnover of the five Mercosur members, whose economies are more closed [2].

The average annual per capita income of the Alliance exceeds 10 thousand dollars and 14 thousand dollars in terms of the purchasing power parity. That's a pretty large market for foreign investors and exporters. Pacific Alliance member-countries enjoy the highest rates of economic growth in Latin America. In 2010-2013, the average annual GDP growth in Peru was 6 per cent, in Chile and Colombia – about 5 per cent, while in Panama and Costa Rica (both countries are in the process of becoming full members) – 9 and 5 per cent, respectively. Mexico, due to its great dependence on the US economy, has developed in recent years at a lower rate (3 per cent) [3]. The four member-countries have significant natural, mineral, water, land, and forest resources as well as diversified agriculture. Their industrial and energy sectors are developing at a fast rate, their financial systems are quite healthy, and inflation is low (about 3 per cent in 2014) [4]. It is not surprising that the Pacific Alliance is quite attractive for foreign investment, which amounted to 85.5 billion dollars in 2013 (more than the five Mercosur countries, namely Brazil, Argentina, Venezuela, Uruguay and Paraguay) [5].

(Pragmatic) Nature of the Union

www.mincit.gov.co
Trade and Economic Importance of the Pacific
Alliance

The creation of the Pacific Alliance, led by Mexico, elicited quite the controversy in Latin America. The leftist press, as well as the presidents of Bolivia and Ecuador, accused its ideologists of reviving the failed project of an America-wide free trade zone under the auspices of Washington and of undermining the regional groupings of UNASUR and Mercosur. It appears that the anxiety caused by the suspected political nature of the Alliance is somewhat exaggerated, although not entirely groundless.

One cannot deny the existence of close economic ties and an ideological affinity of the Pacific Alliance member-states with its northern neighbor, but they united in a group, above all, due to their common desires to establish closer relations with the Asia-Pacific region, to diversify their foreign economic relations, and to reduce their dependence on the US and the EU. This is especially true for Mexico, since 80 per cent of its exports go to the US, making its economy extremely vulnerable [6]. Pragmatic economic considerations and the goals of the Pacific Alliance prevail over political and ideological ones.

The member-countries are conducting a fairly moderate and pragmatic policy aimed at strengthening ties inside Latin America. They participate in other projects (the Andean Community, UNASUR, and CELAC) but cannot solve the problem of profound integration within their framework, as the goals pursued by the members of the latter associations differ too much.

As for relations with Mercosur, from the very first days of the existence of the Pacific Alliance, its model of integration was intended to counter the protectionism of Brazil and Argentina, as well as Mexico’s and Brazil’s rivalry for leadership in the Latin American region. Nevertheless, all members of the Alliance, including Mexico, seek to strengthen economic and political ties with Brazil and promote their presence in the latter’s market. After coming to power in March 2014, Chilean President Michelle Bachelet began to carry out a policy of strengthening Latin American unity and raised the question of the two unions’ merger at the Pacific Alliance summit in June 2014. (www.prensapresidencia.cl/discurso, 20 de junio de 2014) This idea was supported by the governments of all of the member-countries of the Pacific Alliance and Mercosur, as well as by other regional organizations. Given the differing integration models, it has been assumed that the process of rapprochement would take a long time. However, this testifies to the essential progress being made in smoothing over differences between the Pacific Alliance and Mercosur and to the emergence of trends of strengthening cooperation.

Achievements and Challenges

The Pacific Alliance is improving on its activities fairly quickly and is expanding its number of members. At the VII Pacific Alliance Summit in May 2013, Costa Riva received approval for full membership from all of the founding members after signing free trade agreements with them [7]. While the formal process of ratification is underway, Costa Rica is still considered an observer, just as Panama is. The Alliance is expanding by admitting interested observers to its membership. Observer status is being used very widely. In January 2015, there were 32 observers. Apart from Costa Rica and Panama, which are in the process of becoming full members, they are Guatemala, Honduras, the Dominican Republic, Uruguay, Paraguay, Trinidad and Tobago, Ecuador, the United States, Canada, China, India, Australia, New Zealand, the UK, Spain, Italy, the Netherlands, Portugal, France, Germany, Finland, Switzerland, India, Israel, Turkey, South Korea, Singapore, Morocco, and Japan.

By the beginning of 2014, the mutual trade of the Pacific Alliance member-states was already exempt from customs duties by 92 per cent [8]. Over the next 10 years, customs barriers within the Alliance are expected to be lifted completely. Technical and sanitary standards have been unified to a large extent.

Vladimir Davydov
Russia's Policy in Latin America: Prospects for
Cooperation with Mexico and the Pacific Alliance

Other forms of economic cooperation include the merger of business organizations of the four countries and joint actions by national agencies responsible for export promotion, such as holding forums, trade fairs and negotiations with businessmen and government officials around the world. These agencies have opened joint offices in Istanbul and Casablanca [9].

The integrated stock exchange of the four founding nations is another innovation. In terms of market capitalization and issuers, it is second in Latin America only to the Brazilian stock exchange Bovespa. The development of scientific exchanges, the granting of scholarships to students of member-countries and the creation of a network of research organizations studying the effects of climate change are also worth noting.

The development of cooperation in the diplomatic sphere and establishment of joint diplomatic and trade missions are of particular interest. The first experience of this kind was the opening of the Embassy of Colombia in Ghana, which provides the infrastructure for use by Chile and Mexico under the agreement signed by these countries in September 2012. As of November 2014, joint missions of the Pacific Alliance were operating in Algeria, Morocco, Vietnam, Singapore, Paris (at the OECD), and Azerbaijan [10]. This form of cooperation allows for a reduction in the expenses of representation and has good prospects for further development, especially in Asia and Africa, where the presence of the member-countries is still limited. Cooperation is developing in the field of providing consular assistance to nationals of the Pacific Alliance member-states in third countries.

Despite the apparent success of the Pacific Alliance during the short period of its existence, the achievements in the main sphere of its development, that is integration with Asia-Pacific countries, can be still considered as relatively modest. Trade relations of the Alliance with the region are developing for the most part on a bilateral basis, although certain initiatives are quite promising.

APEC and the Trans-Pacific Partnership (TPP) matter much for the rapprochement with the Asia-Pacific countries, at least for Mexico, Peru and Chile, which are members of these associations. The TPP project, which includes 12 countries (the USA, 3 countries of the Pacific Alliance, Australia, Brunei, Vietnam, Canada, Malaysia, New Zealand, Singapore, and Japan) is still in the process of negotiations, which are nearing completion. The US is playing the dominant role, striving to occupy the leading position in the integration process of the Asia-Pacific countries and push China aside. Other participants of negotiations would like to retain partner relations with China, but the TPP is attracting them as the largest world market, accounting for about 40 per cent of the world GDP [11]. When this market is created, it will surely become the main platform of profound integration in the Asia-Pacific region, and the Pacific Alliance members will be part of it. The negotiations are expected to be completed by the end of 2015, but the process of ratifying the agreement may take a number of years due to the complex approval procedures of such agreements in parliaments of member-countries, particularly in the US Congress.

Another integration project in the Asia-Pacific region, namely the creation of a free trade area of the APEC countries, was initiated by China at the last Summit of the organization in 2014. Since the Pacific Alliance countries promote the concept of free trade, they supported this initiative together with other APEC members. APEC unites 21 Pacific Rim nations, including Russia, China, USA, Mexico, Chile and Peru. Colombia, Costa Rica and Panama have requested membership in APEC, but the organization stopped accepting new members in the late 90s. Within the framework of APEC, representatives from Mexico, Chile and Peru participate in the annual summits and sectoral ministerial meetings of the working and expert groups on international trade, investment, finance, energy, transport, fisheries, and interact with Russia.

Opportunities for Extending Ties with Russia

The Pacific Alliance: History, Goals, Relations
with Observer States, Achievements

As the only regional organization of which Russia is a member, APEC provides a good platform for developing mutual economic relations. It is particularly convenient for Pacific Alliance cooperation with the Russian Far East. The prospects of such cooperation were enhanced by the Strategy of Socio-economic Development of the Far East and the Baikal region up to 2025, adopted by the Government of the Russian Federation on December 28, 2009 [12]. This is mainly due to the resolution of the primary task of the Strategy, namely maintaining the improved living standards in the eastern regions of Russia. The Pacific Alliance countries are traditional suppliers of food products (meat, fruit, juices, vegetables, coffee, wine, etc.). At the same time they import Russian chemical fertilizers, the production of which is planned in the Far East. Other areas of cooperation could be tourism, biofuel production, biotechnology, pharmaceutics, development and support of academic and student exchanges, which both the Pacific Alliance and Russia identify as priorities.

The development of economic relations between Russia and the countries of the Pacific Alliance is promising not only for the eastern regions of Russia. Bilateral trade has expanded significantly in recent years. In 2010-2013, trade turnover with the Alliance has more than doubled from 1,705 to 3,527 million dollars, of which the total with Mexico grew from 769 to 1,903 million dollars and with Chile – from 357 to 744 million dollars [13]. Russia imports mainly coffee, other products of tropical agriculture, flowers, vegetable oil, meat, fish, fish flour, drinks, and clothing from the Pacific Alliance countries. Russia exports primarily manufactured goods, namely fertilizers and chemicals, metal-rolls, and pipes; the supply of high-tech products is gaining momentum, in particular, the sale of Sukhoi Superjet-100 aircraft to Mexico. This nature of commodity exchange makes the Pacific Alliance countries very attractive partners for the Russian Federation, although the latter does face the problem of trade balance deficits. In 2013, the negative balance of trade amounted to 457 million dollars due to the trade deficit with Mexico and Chile, our main partners in the Pacific Alliance [14].

There are good opportunities for expanding economic relations between Russia and the Pacific Alliance in trade, particularly in investment cooperation, especially in energy, oil and gas industry of all the four countries, communications, transport infrastructure, as well as science and technology. Russia is interested in closer cooperation with Peru and Chile in the first place, up to and including the conclusion of free trade agreements, as was emphasized by Russian Foreign Minister Sergey Lavrov during his visit to these countries in April 2014. (www.mid.ru, 30.04.2014) In December 2014, Minister of Industry and Trade Denis Manturov, speaking to Latin American reporters, said that Russia was interested in developing cooperation with a wide range of countries in the region, naming Peru, Colombia, Chile and Mexico as the most promising in this regard. (http://www.caracol.com.co Colombia, 09.20.2014)

The Pacific Alliance countries have also expressed interest in extending ties with Russia. This is evidenced by the fact that in March 2014, Russia was included in the list of 18 countries with which the foreign trade organizations of the Pacific Alliance were intended to develop cooperation in the first place. (www.alianzapacifico.net/entidades-dr-promocion 14.03.2014) It is indicative that the Pacific Alliance countries did not impose economic sanctions against Russia, while Peru and Chile expressed a readiness to expand food exports to Russia, ignoring the displeasure of the US and EU.

Relations with the Pacific Alliance countries could be developed on a bilateral as well as regional level by establishing links with the organization as a whole through the Eurasian Economic Union. Colombia, Peru and Chile have expressed interest in cooperating with the EEU. Russia's possible accession to the Pacific Alliance as an observer some time in the future cannot be ruled out. At the moment, however, gaining this status appears untimely because of possible political difficulties in connection with the Ukrainian crisis. The interaction of business organizations in Russia with the Pacific Alliance Business Council, responsible for the economic cooperation of the Alliance member with third-party countries, as well as the Chambers of Commerce associations, appears to be the most realistic and effective way to extend ties with the organization.

Bilateral interaction should first of all concentrate on developing an institutional framework for cooperation, which leaves much to be desired. The Russian Federation has yet not concluded preferential trade agreements with the Pacific Alliance member-countries, which hinders the development of mutual trade. Agreements on customs cooperation, sanitary and phytosanitary standards, investment cooperation, student and academic exchanges have not been concluded with all of them.

***

The Pacific Alliance is a very dynamic and promising union that practices new and effective forms of cooperation. Its members have created a common economic space, which is already one of the largest in the world and can significantly expand in the near future due to the accession of new countries. Although the economic growth of all Latin American countries may slow down in 2015 due to the unfavorable global market environment, the economies of the Alliance members are viable and healthy. They have the best current and prospective macroeconomic indicators. (According to the IMF and the UN ECLAC, in 2015-2016, GDP growth is expected at a rate of 3-4 per cent for Mexico and Chile, and 5 per cent for Colombia and Peru against 2.2 per cent for Latin America as a whole.

This union is attracting worldwide attention, which is evidenced by the rapidly increasing number of observer countries. It is also of interest to investors, including Russian ones, not only because of its own potential, but also since it acts a platform for accessing the rich markets of the US and Canada. Although a promotion of closer cooperation with the major economic spaces, integrated on the basis of Trans-Pacific and Trans-Atlantic (US and EU) projects, as well as with Latin American neighbors, seems to be the main future vector of the Pacific Alliance development, its member-countries will maintain an interest in Russia. This interest is based on the desire to conquer new markets and attract foreign investment, which are the main drivers of the export model of development. This makes it possible to find areas of common interest for signing preferential trade agreements, development of customs, financial, and investment cooperation.

1. Declaracion de Lima 28 abril de 2011, www.alianzapacifico.net/documentos

2. CEPAL. Estudio Economico de America Latina y el Caribe 2014. Santiago de Chile, 2014, p. 94 WWW.alianzapacifico.net/chile-colombia-mexico-peru-mejor-juntos. Septiembre 22, 2014).

3. Calculated on the data of CEPAL. Balance preliminar de las economias de America Latina y el Caribe 2013, Santiago de Chile, diciembre de 2013

4. CEPAL. Balance preliminar de las economias de America Latina y el Caribe 2014, Santiago de Chile, diciembre de 2014.

5. CEPAL. La inversion extranjera directa en America Latina y el Caribe 2013, Santiago de Chile, agosto de 2014, p.58.

6. CEPAL. Estudio Economico de America Latina y el Caribe 2014. Santiago de Chile, 2014, p. 94

7. Negocios. Edicion especial: Alianza del Pacifico, Mexico, mayo de 2014,p.19

8. Pacific Alliance: Integration, Growth and Opportunities, 2014, p.10 www.alianzapacifico.net/publicaciones

9. Ibid.

10. Ibid.

11. CEPAL. Panorama de la Insercion Internacional de America Latina y el Caribe 2013, Santiago de Chile, 2013, p. 61

12. Strategy of the Socio-economic Development of the Far East and the Baikal region up to 2025 www.DFO.gov.ru/index.phpid==80

13. Calculated on the data of the Customs Statistics of the Russian Federation for 2011-2013.

14. Ibid.