The Potential of the Pacific Alliance: Will It Rise to the Challenges Ahead?

Last month, we at CSIS had the pleasure of hosting a roundtable on one of the most dynamic and innovative coalitions in the Western Hemisphere: The Pacific Alliance. At a time when the old vanguards of free trade are retreating into more protectionist policies, this Alliance—composed of Mexico, Colombia, Chile, and Peru—is ascending as a pioneer in the future of market integration, international cooperation, and treaty innovation. This partnership has remarkable potential: the four countries are responsible for approximately 33 percent of Latin America’s total gross domestic product, 50 percent of Latin American exports, and 40 percent of the total foreign direct investment capitalized in the region. But key policy challenges remain ahead.

The Alliance was originally conceived as a free trade area oriented to allow its members to compete more effectively in the Asian economy. The quartet has not only managed to maintain its unity in its first six years of existence, but has expanded its impact, scope, and reach immensely. It has evolved from four states focused on free trade to a partnership with four new associate members (Australia, Canada, New Zealand, and Singapore) and 49 observer states focused on expanding financial and economic integration as an instrument of economic development. These efforts come at a time of headwinds for trade, as many of the traditional leaders of free trade are stepping back from their roles in the area. What does the future of the Pacific Alliance hold in a world with an emerging protectionist streak?

Five Years of Progress

The Pacific Alliance has done immense work in five years. Some of its most significant achievements include:

  • Elimination of over 92 percent of all tariffs among the four founding members;
  • Reduction or elimination of visa requirements for member citizens;
  • Creation of a formal educational interchange using scholarships and interuniversity cooperation;
  • Establishment of joint embassies in multiple countries around the world to deepen joint diplomatic goals, cut costs, and amplify the Alliance’s voice;
  • Inauguration of the Mercado Integrado Latinoamericano, an integrated stock market, which when fully unified will be the largest equities market in the region;
  • Participation in the Trans-Pacific Partnership (TPP)—the “gold standard” of multilateral agreements—by three of the four Alliance signatories;
  • Establishment of the concept of “associate member”; New Zealand, Singapore, Canada, and Australia were granted this status just last month;
  • An initiative to establish a single passport for member nations.

The Alliance wants to keep this momentum going. The just-concluded June 2017 Cali summit was dedicated to devising new methods and policies needed to further integration, the expansion of more integrative relationships with the rest of the world, and the facilitation of economic development. With the consultation of the private sector and other outside actors, many worthwhile ideas emerged:

  • Strengthen cooperation and integration of Pacific Alliance members with the Association of Southeast Asian Nations (ASEAN) and Mercosur;
  • Speed up financial, governmental, and technological interoperability;
  • Push for further educational integration through the mutual recognition of educational credentials;
  • Speed up integration of taxation, rule making, and patent processes;
  • Strengthen commitment to incorporating stronger gender equality within each member state.

The progress made to date by the Pacific Alliance is commendable, especially in the short amount of time the Alliance has been functioning. There are, however, issues that need to be resolved in order to maintain the Alliance’s momentum.

Challenges Ahead: Issues for the Alliance to Address

The Pacific Alliance still has weak points that must be addressed. Many of the original initiatives, such as the stock market integration (plagued by a low trading volume), the elimination of all tariffs (which have been stuck at 92 percent for some time), and the push toward joint diplomatic posts (there are only six in the world), have all lost momentum the past couple years.

Meanwhile, trade relationships among Pacific Alliance members is still weak; intratrade among Pacific Alliance members is billions of dollars less than members’ trade with other states. The stark reality is that no Pacific Alliance member is even within the top five trading partners of other Pacific Alliance members. To put this into numbers, the United States, China, Germany, Japan, and Canada import over $270 billion more in goods and services from the Pacific Alliance than Pacific Alliance countries import from one another. The mechanisms are in place for this to change; the Alliance should enact the measures necessary to encourage more trade and development among them.

Furthermore, many of the new initiatives have been unclear and vague. Even though there has been much excitement over the announced associate state status of New Zealand, Canada, Singapore, and Australia, there have been no details provided as to what this new signatory status means. Are these states on the way to become full members? Where do they stand in comparison with Costa Rica and Panama, states in the process of Pacific Alliance accession?

Additionally, there is still much room to grow for this nascent trade bloc in energy cooperation. There are immense possibilities that have not been tapped in this sector. Even though all four members have endorsed the Paris Climate Change Agreement, there is no initiative within the Alliance to push for innovation in climate change and integration of energy rules or possessions. Mexico, Colombia, Chile, and Peru have all been blessed with impressive reserves of energy and natural resources. When combined, the Alliance is the 16th-largest oil producer, the 26th-largest natural gas producer, and the 9th-largest renewable energy producer in the world. There is massive potential in this sector for innovation, development, and integration that the Alliance should take initiative in.

Finally, for an organization with a stated orientation toward Asia, the Alliance until now has not used its experience in the Trans-Pacific Partnership to further expand and encourage cross-Pacific trade. Involvement by all Alliance members (except Colombia) in the TPP negotiations allowed Alliance member states to be exposed to the so-called gold standard of multilateral negotiations. It allowed member states to learn the most advanced trade mechanisms in diplomacy with the Asian states to which the Alliance wants to orient itself as partners. Where and how will the Pacific Alliance use these lessons learned? While there have been overtures by Alliance members to continue the TPP without the United States, there have been no clear steps or initiatives on what to do next. Will they proceed with the agreement without the United States? Will they include China instead? The Alliance has a golden opportunity to further advance its goal of greater trade with Asia; what is it waiting for? The Pacific Alliance needs to be more assertive in its leadership and intent to trade with Asia. It possesses a golden opportunity to fulfill its founding goal; all it needs to do is act on it.

A Brighter Future Through Cooperation

We have reached the end of a free trade cycle in the global sphere. Agreements today will be radically different than those signed a decade ago, as new technologies, markets, and ideas shape our world. While this new cycle begins, a vacuum of leadership in integration and international cooperation has emerged since late 2016. There is great uncertainty causing many of us in development and trade to ask, what’s next? Digital goods are rapidly becoming one of the most traded commodities on international markets today; international trade stakeholders need to create the regulatory innovations required to facilitate growth, innovation, and international norms for these new cargoes. Who will emerge as the new global leader? Will it be TPP11 sans the United States? Will the European Union minus Britain take the initiative? Will a new player, such as China, emerge to grab the torch?

We believe the Pacific Alliance will be the bloc that leads the world in this new era; its dynamic modernization of trade has already created many followers and expectations. The fact that it has 49 observer states, 2 states in the process of becoming full members, and 4 new associate members after only six years of existence serves as a testament to its leadership potential. The Alliance countries have vowed to build on the work they have done to continue their growth and encourage integration despite the global headwinds on the matter. They possess a strong purpose and robust political will; daring to push integration beyond regular trade issues and toward the more complicated social and legal consolidation needed to facilitate regional innovation, jurisdiction, and collaboration. These are the required leadership qualities currently missing in the international arena in the push toward solutions to modern transnational challenges like digitization, cybersecurity, automation, and climate change. Although many questions need to be answered, the Alliance is approaching its difficulties with the kind of pragmatism and cooperative spirit needed to ensure continued stability and progress in multilateral cooperation. The Alliance, with its deep commitment to digital integration, social interchange, and cooperative economic development, can be the modern global leader on multilateral partnership and innovation. Will it rise to the challenge?

Michael A. Matera is a senior fellow and director of the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. David Bahamon is a research intern with the CSIS Americas Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2017 by the Center for Strategic and International Studies. All rights reserved.
Photo credit: LUIS ROBAYO/AFP/Getty Images

David Bahamon

Research Intern, Americas Program

Michael A. Matera