The Pacific Alliance: a New Trade Bloc in the Area and the Two-Sided Sword Dimension of Domino?
The aim of this paper are; first, to analise the determining factors causes the establishment of the Pacific Alliance and second, to depict future prospect of the Pacific Alliance as a new trading bloc. The writer utilises Richard E. Baldwin Domino Theory of Regionalism in constructing main arguments of this paper, that the Pacific Alliance are product of Idiosyncratic Events and produces new Idiosyncratic Events as the aftermath. To conclude, the writer argues that Domino Theory of Regionalism has proving its two-sided sword dimensions, that is, became the determinant factors in forming the Pacific Alliance and forming the future of Pacific Alliance.
Keywords: Introduction, Domino Theory of Regionalism, Product of Idiosyncratic Events, Produces Idiosyncratic Event.
Introduction: a Shared Understanding of Foundings
“the Pacific Alliance is more of 21st Century capitalism, which is taking a more pragmatic approach toward economic development incorporating elements of social inclusion as well as liberal economic policies”
The Alianza del Pacífico or The Pacific Alliance is a new trading bloc in the America regionalism. Since its established in April 2011, Chile along with Colombia, Mexico and Peru has started to build intra-intergration among each other in terms of free capital, goods, services, and people movements. Social inclusivity among members of the Pacific Alliance became prominent strategic platforms and values in promoting free trade and dynamics economic growth (Alliance, 2013). But more importantly, the Pacific Alliance seeks to engage with global economy and in particular with the Asia-Pacific region.
At a glance, the Pacific Alliance has a strategic position to promote cooperation into a wider membership. The Four current members covers 35% of Latin America GDP or equal as US$ 1.7 Trillion (8th Largest in the world) and combined 36% of Carribean and Latin America’s total population or represents 215 Million people (Baumann, 2013). It shows that the Pacific Alliance has emerged as a new engine growth of the region and new market for exports – imports commodity and also market access.
In its first two years, the Pacific Alliance have made fast starts with convened six times of summit, made progress in removing tariffs and rules, and the Pacific Alliance has also formed it members financial sector through Integrated Latin American Market (Mercado Intergrado Latino Americano –MILA) (Ramirez, 2013). Its pragmatic and market-friendly approach are the key success of the Pacific Alliance fast starts in its first two years.
Beyond its fast starts, uniqueness of the Pacific Alliance shaped within the shared understanding among its foundings. If we traced the Pacific Alliance in pieces by each member states profile, we can see that the future of the Alliance looks very bright but have a deep tendency of liberalisation as shared understanding that led to the establishment of the Pacific Alliance.
Starts from Chile. Chile is a very well evaluated emerging economy in Latin America and the first of Latin America Nation incorporated with OECD in 2010. With 5.7% of Economic Growth annually in the past three years and low inflation rate of 1.5% (Government, Chile Country Brief, 2013), Chile depicts that sustainable economic growth are the need of Chilean people. Chile 5.7% Economic growth are driven from the liberal trade policy regime. The indicators of floating rates exchange, a rule-based counter cyclical fiscal-policy, inflation targeting shown that Chile is country with liberal economic policy.
Along with Chile there is Colombia. Colombia has emerged as one of Latin America emerging economy and economic power in the region with 5.9% Economic Growth and inflation rate of 3.1% (Government, Colombia Country Brief, 2013). Colombia economic growth are driven by huge foreign direct investment in their country, particularly to mining and oil production. As well as Chile, Colombia has made a liberal-based on its economic policy. The indicators are alike with Chile but have a deep concerned to increace levels of Foreign Direct Investment.
Mexico is the another success economic story. Since recover from the slipped in 2009, Mexico economic growth reach 3.8% in 2012 (Government, Mexico Country Brief, 2013). According to the IMF, Mexico is ranked 14th in the world and along with Chile incorporated to the OECD. Its economic performance centralised in trading with the US, estimated as 70% of Mexico total exports. In accordance with liberal economic policy regime, Mexico has also implemented liberal economic policy as the main preferences policy. It could be seen in the various numbers of Mexico Free Trade Agreement in which reach 12 free trade agreements.
The last is Peru. Peru has experienced impressive real economic growth of around 7% over the past eight years. Even in the last financial crisis at 2009, Peru economic growth has only failing to 6%. Peru also adopted liberal economic policy including inflation rate targetting policy, fiscal discipline, and managed exchange rate for the currency (Government, Peru Country Brief, 2013).
The all foundings of the Pacific Alliance have shown that liberalisation are the key factors in boosting their fast starts in its first two years. The Foundings has shared norms and indirectly sent a message that they are free-market and mainly fast-growing economies in which economic web ties them intra-region. The Pacific Alliance has strenghthen its desire to be an open regionalism by conducting several agreements.
On the last May 2013, the Alliance has signing tarriff elimination agreement on merchandise trade up to 90% (Economist, 2013). This agreements depicting commitments of the Foundings to assure that integration and free trade are the focus of the Alliance. These steps clearly sent a signal to region and world that the Pacific Alliance trying to build strong foundation of integration in a concrete implementation that takes it to higher level.
Build the Arguments: Domino Theory of Regionalism
The basic idea of Domino Theory of Regionalism is simple. That is, idiosyncratic incidents of regionalism triggered a multiplier effect that knocked down bilateral import barriers like a row of dominos (Baldwin, 1997, hal. 877). In simple means, resurgent of regionalism was caused by idiosyncratic events that were multiplied many times over by a domino effect (Baldwin, 1997, hal. 884).
Baldwin argues that the idiosyncratic events will lead to a new unprecedented phenomena in regionalism. Forming a preferential trade area, or deepening an existing one, produces trade and investment diversion are the cases of the idiosyncratic events aftermath. The diversion which occurred will generate new political economy forces in non-participating countries or called as ‘pressures for inclusion’ (Baldwin, 1997, hal. 878). The pressure increases with the size of the trade bloc, yet bloc size depends upon how many nations join. On the other words, a single incindence of regionalism will trigger several rounds of membership request from nations that were previously are non members.
Therefore, if the trade bloc is open to expansion (membership), regionalism will spread like wildfire. But, if the enlargement ‘burn-path’ is barred, the new political economy flames will find vent in preferential arrangements among non member countries (Baldwin, 1997, hal. 878). Clarifying the domino logic requires a bit of background. National trade policies are an edogenous factors. National trade policies of one countries applied to national attitudes toward regionalism. In particular, a countries stance on regional integration are pros membership or cons membership (Baldwin, 1997, hal. 879). Building an argument for endogenous explanations is simply understood as proposed trade policies that the market equalised by the demand and supply protection.
Baldwin utilise the case of the US – Mexico when conducting FTA. Mexico on the one hand have a preferential access to the US market and heavily dependent to the US market, thereby harming other country. On the other, Canada-Mexico is the first dominos to fall. Canada decided to lower it barriers to Mexico and US, and that had been a NAFTA. After that, more dominos would have also fallen. Chile, Brazil, Argentina, Uruguay and Paraguay which are not participating in preferential tarriff as well as Canada and Mexico conducted to US, requested to conduct a FTA with the US.
The essence of case study that Baldwin tried to explain is multiplier effect could be occurred when the preferential trade and investment have been made. Based on this theoritical approach, the writer will utilise the Baldwin Dominot Theory of Regionalism to depict the establishment of the Pacific Alliance as product of idiosyncratic events (dominos effect) from a dynamics regionalism that evolved in Latin America region. Also, the writer will utilise the theory to analise the Pacific Alliance aftermath or consequences in which produces an idiosyncratic events in the future.
The Pacific Alliance is a Product of Idiosyncratic Events
The Pacific Alliance is a product of Idionsyncratic Events, which the protectionism of NAFTA and Mercosur to Chile, Colombia, Mexico and Peru. The Foundings has a historical evidence that each made a bilateral free trade agreements caused by increasing trade barriers neither it is formed by NAFTA nor Mercosur.
The analysis of this section are appeared as a response that growing protectionism conducted by NAFTA and Mercosur will generate a ‘pressure for inclusion’ of non participating countries since they threathened with preferential tarrif and discrimination of trade policies from an existing regionalism. If they path to join the regionalism are barred and constrained, they will try to find other way.
On the one hand, we could not neglect the facts each members national policies, that some countries like Chile, Colombia and Peru (excluding Mexico, since Mexico was made FTA agreement to each) are dependent to NAFTA members Market. The US as one part of NAFTA caused a dependency in export and import to Chile, Colombia and Peru, because the US has almost remain as the largest trading partners of Chile, Colombia and Peru.
For Chile, exports to the US reach 11% of the Chilean total exports, while 20.1% of Chilean imports to the US conducted (CIA, 2013). Also for Colombia, the US remain as the largest exports and imports trading partners with exports shares 42% of Colombian total exports, while 29.2% counted as the Colombian total imports to the US (CIA, the world factbook, 2013). Along with Chile and Colombia, Peru has also depends on the exports and imports to the US. The US is the 2nd largest trading partners of Peruvian exports with 15.2% from total Peruvian exports (CIA, the world factbook, 2013). Conversely, the became the largest Peru trading partners in imports with total shares of 24.5% of Peruvian total imports.
Based on this facts, the three countries need to a more beneficial market access and preferential tarriff (even to eliminate tarriff and other barriers) while they are trading with the US. Take Mexico as a success example when got the market access to the US. After Mexico conducted FTA with the US, the preferential tarrifs and preferential market access of Mexican products to the US have made advantagous in Mexican exports and imports. Data clearly pointed iut that 83% of Mexico total trade has conducted with the US, while Canada is the 2nd largest after the US with almost 3% of Mexico total trade (Bridgat, 2013). A trade regionalism increasing ties between members. Therefore, rationality of proposed membership from Chile, Colombia and Peru as part of NAFTA is make sense. In spite of NAFTA was not in favor to enlarge it membership.
According to this, one of tenets that argues for the establishment of the Pacific Alliance as an idyiosyncratic events is caused by the needs of exports – imports and market access of the Pacific Alliance members (Particularly Chile, Colombia and Peru) to the NAFTA, in particular the US.
On the other hand, the establishment of the Pacific Alliance has also encouraged by the growing protectionism of Mercosur. Especially, with the accepted new members, Venezuela as part of Mercosur. Mercosur is highly protectionist custom unions regionalism in Latin America. Mercosur shared a very socialist ideological regionalism in spite of its goals to a cohesive regional integration.
As mentioned ealier in introduction of this paper, the Foundings of the Pacific Alliance background has have a shared understanding of each others. The Foundings are a liberal economic goverments policy-oriented with a pragmatic and market-friendly orientation to enhance its economies. While Mercosur have a very deep ideological barriers in socialism. Subsequently, Mercosur itself are often facing an internal problems that slow the trade itself, for instance that Argentina and Brazil even conducting protection among Mercosur members (UTC, Brazil warns Uruguay on Pacific Alliance plans: Mercosur can only act as a block, 2013) and Mercosur are often violate its law judically and politically (UTC, 2013).
Along with the problems of Mercosur ideological barriers, Venezuela acceptance in Mercosur has also stimulate the Pacific Alliance establishment. Venezuela high profile standings in exercising power in the region merely influenced by the anti-liberal policy while in fact, Venezuela trade depends also with liberal economic government policy oriented like Mexico (as Venezuela 8th largest trading partner), the US (in which heavily dependen in imports, as equal as 38.7% of Venezuelan total imports and also Venezuela is part of 5th largest of US exports) (Commerce, 2013), or Chile (by conducting a preferential trade agreements).
These events have made a significant change in the Foundings Pacific Alliance perception in the future of regionalism of Latin America. On the one hand, the membership of NAFTA has never been opened and on the other hand, Mercosur ideological barriers and growing protectionism has produce an uncertainty of the Foundings position toward Latin America regionalism.
The Pacific Alliance Produces Idiosyncratic Events
This section will discuss the aftermath or consequences of the establishment of Pacific Alliance to Latin America regionalism. As noted on the arguments building of Domino Theory of Regionalism from this paper section, that a regionalism will cause multiplier unintended consequences lika a row of dominos, here the writer will analise in which dominos have tend to be occured as an aftermath of the Pacific Alliance establishment. In simply logic, the Pacific Alliance produces another idiosyncratic events.
The first idiosyncratic events that Pacific Alliance will produce is the Pacific Alliance will attract the US to join to the Alliance. The endogenous factors of Baldwin’s theory will give a platform analysis that national trade policies of US will encourage itself to seek and join to a regionalism. The US will request for membership to the Pacific Alliance because its strategic position toward US national policy in which buttress and support for international trade liberalisation (Jalalighajar, 1984). The Pacific Alliance has proved that the U.S. are reciprocally to the Alliance is share a same norms and values, which the Pacific Alliance also promote democracy and respectfully human right trade regime (Oppenheimer, 2013). Therefore, it woud enhance competitiveness within the regionalism.
According to the facts, the US exports to the Foundings are quite reasonable if the US wanted to join the Alliance. Colombia and Chile along with Peru are the US major trading partners with 14.2% and 17.4% market shares, and conversely, several Pacific Alliance member candidate countries such Costa Rica, Australia and Panama or Japan are also the US major trading partners (U.S. Department of Commerce, 2012). It means that the future prospect for the Pacific Alliance will encourage US to join if those countries seriously applied themselves as members.
Hitherto, the US has conducted several FTA in particularly with the Foundings of Alliance, Chile, Colombia, Peru and Mexico. Therefore, it is a matter of time that US will request to be a part of the Pacific Alliance, since Canada, Japan, Australia and New Zealand already gains it status as observers. The US will also strengthen its alliance as noted in regard with the US strategic pivot (Clinton, 2011).
Moreover, the Pacific Alliance has a strategic dimension in terms of economy and politics while several talks regarding US Pivot to Asia-Pasific multilateral trade agreements such APEC and TPP are too slow to move, or in regard to the US attention of growing protectionism of Mercosur, ALBA, CAN or CELAC in the region. The writer argues that these proposition will be an impetus toward U.S. strategic goals to the Asia-Pacific, all at once to re-engage its western hemisphere while growing uncertainty that Washington so-called will lose its influence (Hakim, 2006).
Thus, despite of US national preferences policy will likely to engage with the Pacific Alliance, the main reason that would be an underlying cause to the US engagement with the Pacific Alliance is because the Pacific Alliance is the US bridge to Asia (Saher, 2013).
The second ideosyncratic events that the Pacific Alliance will produce is it will divide Mercosur unity, in which several Mercosur members will see the Pacific Alliance as their important trading partners. It will refers to Uruguay which are seeks to be observer in the Pacific Alliance Summit in Cali, last May (UTC, Brazil warns Uruguay on Pacific Alliance plans: Mercosur can only act as a block, 2013). Along with Uruguay, Paraguay seems likely to join the Pacific Alliance as an observer and also show its exasperated to Venezuela and Mercosur as could be seen on Paraguay claims that Venezuelan is not part of Mercosur (UTC, Venezuela is not part of Mercosur; it was not ratified by Paraguayan congress, 2013). It sends a clear signal in which Mercosur is facing with internal conflicts among its members.
The exasperating Brazil and Argentina growing protectionism has also increased Paraguay and Uruguay dissapointment to Mercosur. The more Argentina and Brazil conducts protection to their markets have made Paraguay and Uruguay hardfully come in to Argentina and Brazil markets. The Pacific Alliance being seen by Mercosur as a ‘marketing success’ not as a success story of regionalism or integration (UTC, Pacific Alliance in a “marketing success” and no concern for Mercosur, says Brazil, 2013). It shows that there was a growing pessimism of Mercosur that the presence of Pacific Alliance would threathen them in context of regionalism.
It is clearly understood that the presence of Pacific Alliance as a new regionalism in Latin America has stimulate major changes in several issue regarding to regionalism. This paper utilise the Baldwin’s domino theory of regionalism which help to seek and analyse a constitution of the Pacific Alliance and what Pacific Alliance also formed, or in Baldwin’s theoritical theory called as ideosyncratic events.
Growing protectionism in Latin America from NAFTA and Mercosur has formed the establishment of Pacific Alliance. This paper argues that the prevalent of regionalism is like a wildfire. If the path are barred and constrained, therefore the wildfire will find another vent to burn the spirit of regionalism (Baldwin, 1997, hal. 878). The case of establishment of Pacific Alliance is one of the product that Baldwin’s ideosyncratic events could tell us.
Baldwin’s ideosyncratic events also produces an unprecented events as an aftermath or consequences of the regionalism. This paper argues that the US will be attracted to this Alliance since this Alliance shared a same norms of liberalisation and rational beneficial to the US. Also, Mercosur. Mercosur will be divided caused by its internal conflicts among members (Particularly Paraguay and Venezuela) and emerging opportunity from the Pacific Alliance.
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 She is a Professor of Latin American Studies and Economy Georgetown University and a Research Fellow of Peterson Institute for Economics since 2007. The writer published her statements from American Society and Council of the Americas panel discussion at New York in May 2013.
 The writer returns to a notion of “Open Regionalism” in which the idea prevalent in Latin America in the 1990s, that the opening up of Latin America region to world trade would be more beneficial if combined with creating a deeper regional market, to reap economies of scales. To more discussion, see Bergsten, C. F., Open Regionalism: the World Economy (New Jersey: Wiley blackkwell, 1997) or Bergsten, C. F., Working Paper 97 -3: Open Regionalism (Massachusetts: Peterson Institute for International Economics, 2013)