Shortly after becoming president, George W. Bush embarked on a campaign to expand the North American Free Trade Area (NAFTA) to encompass 34 nations in the Western Hemisphere, spanning from Canada in the north to Argentina and Chile in the south. The new trade bloc--the Free Trade Area of the Americas (FTAA)--would include over 800 million consumers and a total economy of some $13 trillion. Bush repeatedly stated that the free trade area would strengthen democracy, promote economic integration and bring peace and prosperity to Latin America, all of which the President, speaking at the Third Summit of the Americas in April 2001 in Quebec City, described as vital to U.S. national interests.

Though grand plans of uniting the Americas have been around for some time (Si­mon Boli­var was the first to come up with the idea), negotiations always faltered on fears that stronger, more economically diverse nations would take control and subvert the sovereignty and national identity of smaller countries. This concern, the old core-periphery argument, was a standard part of all talks on integration issues and was generally invoked against the United States whenever Washington touched on the subject (as the elder President Bush did in 1990). Those countries in favor of free trade with the United States, like Chile, preferred tailored bilateral accords anyway and therefore had no pressing desire to advance regional pan-American integration.

After taking office, George W. Bush was able to allay these fears and rally support for the FTAA. At the Third Summit of the Americas, delegates from 34 countries (every Western Hemisphere country except Cuba) agreed to set January 2005 as the deadline for finalizing negotiations. Heralded as an unprecedented agreement, the FTAA was to be the answer to the region's economic woes. The free movement of goods, technology and labor was proposed as the solution to Latin America's increasing levels of poverty, unemployment and economic stagnation. And to sweeten the deal, the United States was offering up a bevy of substantial perks, including a promise to put on the table all issues, such as those U.S. policies that are viewed negatively in Latin America and the eventual elimination of all tariffs (though this would not have to take place until 2015). Even so, getting all 34 countries to agree, despite very vocal critics, was a miraculous feat.

So what happened? Since April 2001, talks have stalled, and the core-periphery arguments have returned in a new light and with a new slant--and returned with a vengeance. The old cries to close off trade avenues and implement import substitution policies have been left behind. The region today is rallying for free trade, but without relying on the United States to be the sponsor of such initiatives.

The defining moment in U.S.-Latin American relations came on September 11, 2001, after which the United States opted to devote all its energies to the Middle East while essentially turning its back on its closest neighbors. Though the state of affairs following the terrorist attacks could perhaps not have been anticipated, the effects of the U.S. response were eminently predictable. It pulled all attention away from Latin America and polarized the region rather than building a solid coalition grounded in a common purpose. Coupled with a series of unforgivable mistakes--the Treasury Department's diplomatic gaffes with regard to Argentina's economic crisis (which many insist only exacerbated Argentina's problems), the State Department's failure to condemn the coup that briefly ousted Hugo Chávez in Venezuela and the Bush Administration's disparaging remarks about Brazil's 2002 presidential elections--America's policy shift cast the United States in an increasingly negative light.

Spurned countries decided they did not need the United States to help them out of their troubles (Argentina and Brazil), nor did they need to support the United States in its overseas adventures (Chile and Mexico). The war in Iraq widened the divide in relations between the United States and its southern neighbors, and the fallout since the end of the war has only made matters worse. Latin Americans are ever more skeptical of the self-appointed U.S. role as the champion of democracy. Serious questions abound regarding the validity of the war--whether weapons of mass destruction ever existed and what U.S. intentions really were--and the perception of the Bush Administration as bordering on tyrannical has gained much more currency in the region.

Neglecting its once most-favored neighbors will ultimately have steep consequences for the Bush Administration. Politically, the United States will face more open dissension in the international arena. Economically, the United States may end up missing the biggest trade opportunity in its history.

Courting the Locals

Part of understanding the damage of the fall involves realizing what heights we had reached before it. The decision to create the FTAA was a major step in cementing U.S. influence in Latin America. President Bush highlighted his interest in strengthening ties by making direct overtures to regional leaders--his first official presidential trip was to visit Mexican President Vicente Fox at his ranch in Guanajuato, breaking the tradition of honoring Canada with a president's first visit. In addition to the usual promises to increase trade and improve ties across borders, the President touched on the one topic that had been taboo in U.S. politics for decades: legalizing the status of Mexican immigrants. Though most observers knew that an immigration accord would be difficult to pass through Congress--probably even impossible--the willingness of the Bush Administration to at least address the issue was heartening to Fox, the underdog who was able to break the PRI's 71-year monopoly on power and the darling of both domestic and international political analysts. The political outsider and savvy businessman was making moves for Mexico, becoming friendly with the United States and taking on issues that resonated with the average Mexican: jobs, immigration and social improvements.

Talks on immigration issues were decidedly over after the September 11 attacks. U.S. legislators, heeding the calls of their constituencies, formed a united front on such matters. Far from discussing amnesty for illegal immigrants, they discussed laws to increase vigilance on the border under the rubric of homeland security. The domestic price for Vicente Fox was steep. He and his advisors could no longer flaunt their close relationship with the Bush Administration when dealing with the Mexican legislature, as it had now been transformed into a liability. In the buildup to the war in Iraq, Fox became painfully aware that in order to salvage his domestic political bargaining power, he would have to make a bold break with Bush. Fox thus announced that Mexico would support a "compromise solution" and not a U.S.-sponsored invasion. The decision shocked the Bush Administration, which had counted on Mexican support in the UN Security Council. Instead, the Bush Administration saw its close neighbor and second-largest trading partner side with France, the embodiment of an ungrateful ally in the eyes of the United States. Newspaper editorials highlighting Mexico's allegiance with France frightened the Fox Administration and galvanized the feeling that the Fox-Bush friendship was, for all intents and purposes, over.

A similar situation occurred in U.S.-Chile relations. Having witnessed Chile's failure to secure free trade agreements with both the first Bush Administration in the early 1990s and the Clinton Administration several years later, skeptics were wary that any progress would be made with the second Bush Administration. After two years of negotiations, the skeptics were proven wrong, as U.S. Trade Representative Robert Zoellick announced in December 2002 that negotiations for the U.S.-Chile Free Trade Agreement were complete. Ratification and implementation, which were expected to take place quickly, instead stalled on Chile's decision not to support the war in Iraq at the UN Security Council.

Chile's ties to the United States put it between a rock and a hard place: choosing to seek a bilateral trade agreement with the United States had driven a wedge between Chile and its South American neighbors. Brazil and Argentina had long courted Chile to join the Southern Cone Common Market (known as MERCOSUR) in an attempt to form a united front--of sorts--in South America. Chile faced a difficult choice. On the one hand, it could ally with a trading bloc in which individual states always subverted agreed tariff limits by issuing decrees and granting preferential treatment to their domestic industry at the expense of their trading partners. On the other hand, it could follow a trade policy that would result in assured access to the holy grail of markets, the United States.

This was an unenviable position in which to be, but, ultimately, Chile's President Ricardo Lagos opted for the United States. It was a move that MERCOSUR members (Argentina, Brazil, Paraguay and Uruguay) would not soon forget. Chile gained notoriety in the region for having chosen not to join the MERCOSUR club, and when relations with the United States soured over Iraq, it paid dearly in the local media. The Lagos Administration opposed the war, as did most other Latin American nations, but its opposition was especially detrimental to the U.S. campaign for support because Chile, like Mexico, had a seat on the UN Security Council. Although President Lagos tried to reassure business interests that his opposition to the war would not negatively impact the trade agreement, it became obvious that it would. The treaty's ratification was inexplicably delayed, and MERCOSUR members secretly gloated.

Chile realized it would need some insurance if the United States decided to delay ratification indefinitely. Sensing that the tide was turning in Latin American politics because of the newfound success of left-leaning politicians in many countries, Lagos decided to be proactive. Visits to neighboring countries and favorable commentary in the local press were part of his campaign. Though Lagos will not be able to cobble together his own coalition, he will be able to garner enough good will to restart talks to join MERCOSUR, something that will further weaken America's bargaining power.

Changing of the Guard

An obvious leadership vacuum opened up when the United States turned its attention away from the region. Faced with a rapidly disintegrating trade scenario, several regional players decided to take matters into their own hands by beginning a discussion of regional integration. From Vicente Fox, principal U.S. trade partner, to Fidel Castro, principal U.S. irritator, the region's leaders all agree the time is ripe to begin a process of increased integration--even if they clearly disagree about its ultimate shape. In separate attempts to carve out their spheres of influence, Mexico and Brazil began negotiating new agreements and enhancing old ones to secure leadership roles in the emerging debate over regional economic integration. Their moves to fill the newly opened power vacuum have caused the United States to take notice. Furthermore, if the situation in the Middle East takes a significant turn for the worse, the United States will have to take action if it is to retain some negotiating power among its neighbors to the south.

Brazil has emerged as the most problematic actor with regard to U.S. influence in Latin America. After a tense electoral period in December 2002, Luiz Inicio da Silva, a left-leaning former labor leader known locally as Lula, secured the presidency with a substantial popular mandate. Immediately after, he set out on a tour of his country to visit and show concern for the poorest segment of the Brazilian population. His "Zero Hunger" program, which provides food subsidies, was launched with surprising bipartisan support, thus securing Lula's image as a concerned politician and social reformer. Following that triumph, he set out on a regional trip to rally support for increased economic integration and home-grown solutions to the region's social ills. His whistle-stop tour included visits to MERCOSUR partners Argentina, Uruguay and Paraguay, and to several members of the Andean Community (made up of Bolivia, Colombia, Ecuador, Peru and Venezuela), as well as to Chile. Lula's oft-repeated mantra of a stronger, united South America was very well received, but it conveniently left several actors out of the picture--NAFTA in general and the United States and Mexico in particular.

Lula's efforts to win support for a South American free trade area have centered on convincing his neighbors of the inequality inherent in U.S. trade policies. He has on several occasions voiced his opposition to U.S. policies that are detrimental to South America: namely, U.S. farm subsidies and the early 2002 imposition of steel tariffs. Despite U.S. promises that these issues will be addressed in the context of the FTAA, Lula remains unconvinced--particularly because of the powers of "fast track" authority, which were granted to President Bush by the U.S. Congress in 2001. Fast track authority allows the president to proceed rapidly with trade negotiations, eliminating much of the bureaucracy and facilitating talks. However, fast track authority also imposes harsh restrictions on the administration's ability to negotiate more open trade in certain product categories. Not surprisingly, these categories include textiles, steel and agriculture--the most heavily protected product areas in the United States and the areas in which Brazil and several other Latin American nations have substantial comparative advantages.

The recently passed 2002 Farm Bill is a perfect case in point. Though farm subsidies are limited under the terms of the Uruguay Round Trade Agreement, the powerful U.S. agricultural lobby, in a bid to reap the highest possible benefit for a small number of domestic producers, has expertly molded the legislation. Under this bill, U.S. farmers will receive subsidies averaging $19.53 billion annually for the 2002-07 period--a substantial increase from the $15.27 billion average annual payment in the previous Farm Bill (that covered the years 1996-2001). But perhaps the most disturbing aspect of the Farm Bill is how it directly flies in the face of previous agreements that were intended to "level the playing field" with the developing world. Since commodity production is a major part of the developing world's economy, such subsidies only create a more uneven playing field.

Steel tariffs are another example. The 30 percent tariff on steel imports imposed by Congress was intended to grant relief to America's ailing domestic steel industry. It effectively insulated domestic producers from their foreign competitors and disproportionately affected Brazilian steel exports. Prior to the imposition of steel tariffs, Brazil had a favorable balance of trade with the United States. Conditions now, however, are decidedly less favorable. The United States claims that these issues can be resolved once FTAA negotiations get underway, but Lula and many other leaders in Latin America would rather apply pressure now than wait until the FTAA is created. (The WTO ruled in July that the steel tariffs violate global trade rules. The United States is appealing the decision.)

Lula's strategy to combat U.S. protectionism focuses on expanding MERCOSUR to include Chile and Bolivia as full members, as well as including the rest of the Andean Community. His keen understanding of MERCOSUR's potential as an engine of unification was evident at the group's June 2003 meeting in Asuncion, Paraguay. The Brazilian contingent presented a comprehensive plan made up of five programs: the political, social and cultural program; the customs union program; the common market program; the new integration program; and the border integration program. Each program highlights the current situation and what steps MERCOSUR can take as an integrated body to redress issues and problems.

The goals include improving democratic institutions, limiting corruption and improving social conditions. (Lula has already become the champion of the poor in Brazil and wants to expand his constituency to include the poor of MERCOSUR as well.) In addition, the plan seeks to strengthen the customs union and expand the common market by including new partners and negotiating trade agreements with the European Union, India, South Africa and South Korea. The joint statement issued at the end of the meeting reiterated MERCOSUR's commitment to the development of democracy, the protection of human rights and a multilateral approach to international conflict through the United Nations and the Security Council--a not-so-subtle indication of the group's hesitancy regarding U.S.-led conflict resolution. In addition, the statement outlines that negotiations with the Andean Community will be completed by the end of 2003.

Before other countries can be included, however, the original members must iron out their difficulties and harden their commitment to the common market--with "common" being the operative word. Both Brazil and Argentina have often approached tariff policy with an eye toward protecting their own industrial sectors. When common policy did not suit their individual needs they issued domestic decrees that did, often at the expense of the trading bloc.

Without a resolution to this problem, a policy of South American economic integration would not be worth the paper on which it was printed. At the June MERCOSUR meeting, Lula deftly handled this issue of unilateral backsliding from common policy. For now, Argentina's cheap imports of capital goods will be tolerated, as will Brazil's imports of chemicals. But these waivers are to be eliminated in 2004. In an appeal to the smaller members, Uruguay and Paraguay, Lula stressed the need to have a directly-elected parliament in place by 2006 that will hold sway over common policies. A joint monetary institute that would work toward the creation of a common currency is also to be in place by 2006. In addition, the June resolution announced that bidders on government contracts would no longer receive special treatment from their home governments--something that had been on the table for some time but on which little consensus could be reached. These concessions produced one very positive effect: Uruguay committed itself to negotiating trade agreements solely as part of MERCOSUR, forgoing bilateral treaties. This proved a critical step towards greater integration, for Uruguay had often threatened economic unilateralism in response to such movements by Brazil and Argentina.

The trading bloc stands to gain greatly from including new members. Trade agreements between MERCOSUR and Peru are underway and should be completed by the end of this year. Venezuelan President Hugo Chávez attended the June meeting as a precursor to the start of negotiations with MERCOSUR, and that pact should also be completed by year-end. (Though Peru and Venezuela are both members of the Andean Community, they are interested in completing individual treaties with MERCOSUR as quickly as possible. These treaties would be similar to a larger treaty encompassing the entire Andean Community, but they would likely come into effect before a MERCOSUR-Andean Community treaty.)

Mexico has emerged as another regional leader willing to take the place of the United States in negotiating trade talks, but it is at a certain disadvantage (much more so than Brazil) because of its location and its historical allegiance to the United States. In the international sphere, Mexico's fortunes have been tied to the United States and not to the rest of Latin America because of NAFTA. Evidence of this can be seen in the fact that Mexico's recent bond issues have been successful, while other Latin American bond issues have been cancelled because of skyrocketing risk ratings. Mexico's links to the United States served it well when relations were good: It was able to place all sorts of issues on the international market, but this success was based solely on its relationship with the United States. Once it soured, Mexico, rather than drift alone, opted to return to its roots and re-establish links to Latin America for better or worse.

Originally one of the main proponents of the FTAA, Mexico has since turned to its much-neglected neighbors to the south in an effort to form its own coalition. After successfully completing negotiations with the Northern Triangle--the area made up of El Salvador, Guatemala and Honduras--Mexico is now negotiating a free trade agreement with all of Central America. President Fox has campaigned hard to gather a following for the Plan Puebla-Panama, the free trade area that would unite the region from Mexico in the north to Panama in the south. Fox hopes that a larger Mexican presence in the region will bring that country back into the Latin American fold after a long, self-imposed hiatus.

Trade talks are going well so far. The Northern Triangle agreement provides both Mexico and the Central American countries with substantial trade benefits. The best part of the agreement, however, is the message it sends: namely, that a free trade area can be achieved, with positive benefits, without U.S. sponsorship. The agreement includes provisions that spur infrastructure improvements for entire countries, such as an interconnected highway network and electricity grid, rather than improvements solely for areas in which international companies are situated. Though domestic opposition to some aspects of the trade agreements have been disruptive, the potential for sparking development and growth is great.

There is a danger that, in flexing its trade negotiation muscles, Mexico will run up against Brazil--and Brazil is a formidable power. The region's largest and most populous country is centrally located and has much to gain from being the directing force in the region. Mexico will continue to be held back by the impression, prevalent in Latin America, that Mexico has only turned to the south because it was spurned by the United States. And even Mexico's supposed partners in the trade game, the Central American countries, are hedging their bets. They have embarked on trade talks with the United States to create CAFTA (the Central American Free Trade Area), just in case things with Mexico don't pan out.

What's a Fading Giant to Do?

Latin American leaders have accepted that the positive effects of free trade outweigh the negative, but they are aware they cannot depend on the United States to take the lead in these matters. As the possibility of non-U.S.-centered regional trade areas become more of a reality, the United States will have to re-engage in talks or risk being left out of the loop. And in this regard, it appears that a slight shift in focus is taking place.

In a somewhat surprising move, the Bush Administration announced it would sign the U.S.-Chile free trade agreement in June 2003 despite numerous delays brought on by Chile's decision not to support the U.S. intervention in Iraq. U.S. Trade Representative Robert Zoellick signed the agreement in Miami with little fanfare. Generally, signing such agreements is cause for celebration and a visit to the White House, but not this time. Though the United States might not have really wanted to sign the trade agreement, officials realized that their position in the region was being compromised because of it. In an attempt to re-insert itself in regional trade circles, the administration consented to sign the agreement, but relations with Chile remain strained. The House of Representatives ratified it on July 23, and the Senate followed suit on July 31.

In addition to signing the agreement, Zoellick traveled to Argentina and Brazil on a goodwill mission. His goal was to convince Néstor Kirchner in Argentina and Lula in Brazil that the United States is still keen on creating the FTAA. He received a cool reception. No commitments were made, but the lines of communication have been re-opened. In late-June 2003, Lula traveled to Washington for a visit with President Bush, making him the first Latin American leader to do so since the Iraq war. The meeting went well, despite fears that the two leaders would find little common ground. Though Lula did state he was interested in re-starting FTAA talks, he did not, however, offer a specific date for doing so.

The U.S. absence has left a vacuum that others want to fill, and unless some moves are made quickly, America's leadership role in the region will be greatly diminished. The United States would be particularly wise to appease Brazil's concerns if it wishes to smooth relations between the two countries and continue its push for the FTAA. Putting agricultural subsidies and steel tariffs on the negotiating agenda, in earnest, would be the most obvious way to do so.

Another sticking point is Washington's proposal to impose stringent intellectual property rights that would far exceed requirements set by the World Trade Organization. U.S. negotiators are seeking to limit the ability of nations to issue compulsory licenses, which allow the local production of generic versions whether or not the patent-holder approves. Brazil, which successfully gained WTO approval to continue the practice, has long been a supporter of compulsory licensing for it provides cheaper versions of necessary medicines. Additionally, the United States should scale back calls for unlimited access to Latin American markets for services and make concessions on non-tariff barriers that the United States regularly imposes, such as phytosanitary controls.

Though domestic lobbies make it difficult to scale back on some unfair trade practices, the United States as a whole risks losing much more than these individual sectors gain. Though concessions will ultimately have to be granted by all sides, advancing a hemisphere-wide trade agreement should be a top priority for the Bush Administration. Losing markets--and allies--is far too costly in these uncertain times.