Kurt W. Tong: “Trade Modernization as a Driver of Growth in Latin America”

Remarks by Principal Deputy Assistant Secretary of State Kurt W. Tong
at the AACCLA Business Future of the Americas Conference

Rio de Janeiro, Brazil
May 23, 2016

(As prepared for delivery)

Thank you for the kind introduction and for this opportunity to address the membership of the Association of American Chambers of Commerce in Latin America and the Caribbean – a very important organization with regional breadth and reach. The 24 American Chambers of Commerce represented here today play an increasingly important role as links between the private sector and the government throughout Latin America.

It is a particular honor to appear today with Secretary of Foreign Trade Godinho from Brazil, and Investment Promotion Agency Director Hamilton from Argentina, as well as my co-panelist Dr. Thorstensen from the Fundação Getúlio Vargas. Mr. Hamilton said as part of his hopeful and positive presentation that Argentina and the region have decided to “wake up and smell the roses” in terms of fostering outward-looking economic policies. In Washington we might instead reference Brazil and say “wake up and smell the coffee” – but regardless it is clear that Latin America is at a critical juncture, and moving in a positive direction that will help support growth and trade and investment in both South America and North America.

I would also like to extend congratulations on behalf of the U.S. Government to the American Chamber of Commerce of Rio de Janeiro for celebrating 100 years of leadership. This important milestone is a testament to the United States’ long-standing relationship with Brazil, and to the importance of our nations continuing and strengthening that relationship in the next century. It is especially appropriate that this meeting is taking place in Rio de Janeiro at this time. Brazil is facing important challenges, including economic headwinds, organizing the Olympics, and the Zika virus, but this gathering represents one more vote of U.S. confidence that Brazil will overcome all these challenges.

Time has proven that AmChams not only benefit the businesses they serve, they also benefit their communities. Time has also proven that the active participation of the private sector is absolutely critical to achieve sustainable, stable, and productive economies in Latin America and the Caribbean. This is why I encourage AmChams and the private sector to seek new ways to participate and continue the work you are doing to innovate, invest, and transform technology into employment and inclusive economic growth in your countries.

Indeed, the modern trade environment is evolving and we must all work to ensure that the Americas are not left behind. Countries in Latin America and the Caribbean need to continue building enabling environments that foster economies that can compete globally and that are flexible and nimble to respond to market driven changes. Companies need to integrate seamlessly into regional and global supply chains to capitalize on new opportunities, take advantage of economies of scale, and participate in global just-in-time production and distribution.

In order to achieve this, there are a number of factors that need to exist. Today I will discuss four key elements: 1) open trade; 2) effective transportation linkages; 3) free-flow of e-commerce; and 4) transparent and predictable rules and policies.

Open Trade

Trade is no longer just about one country trading its goods with another. While the same underlying principles apply – countries will specialize and produce according to their competitive advantage – globalization has led to supply chains that are integrated across borders, throughout regions, and around the globe.

Unfortunately, Latin America overall is lagging. One interesting new measure of this is the liner connectivity index developed by the United Nations Conference on Trade and Development. This index captures how well countries are connected to global container shipping networks, a proxy measure of sorts for how integrated countries are into global supply chains. The highest ranking Latin American country is Panama. But even it falls behind Vietnam, Morocco and Sri Lanka. That’s significant given maritime transport is the lifeblood of world trade, moving about 80 percent of total goods.

We also see Latin America lagging in its participation in cutting edge plurilateral trade agreements at the World Trade Organization. The Information Technology Agreement is one example. Expanded last year, the ITA covers over $1.3 trillion worth of annual trade and eliminates tariffs on over 200 high-tech products, providing a critical boost to competitiveness. Nine Latin American countries participated in the ITA negotiations.   The rest are missing out.

Another plurilateral agreement is the WTO Government Procurement Agreement to mutually open government procurement markets. The fundamental aim of the GPA is to mutually open government procurement markets among its parties. As a result of several rounds of negotiations, the GPA parties have opened procurement activities worth an estimated US$ 1.7 trillion annually to international competition. Some 45 WTO members have joined the GPA, but not a single one of those is from Latin America.

Similarly, take the Environmental Goods Agreement – a plurilateral agreement now under negotiation that will liberalize the trade in environmental goods and services. This is a market estimated at nearly $1 trillion annually and including such products as wind turbines, water treatment filters, solar panels, and solar water heaters. By cutting tariffs on environmental goods, we can improve access to the technologies that protect our environment and spur innovation in green technologies. Yet only one Latin American country is participating in those negotiations.

Outside of the WTO framework, the Trade in Services Agreement, or TiSA, is a plurilateral agreement that will encompass state-of-the-art trade rules aimed at promoting fair and open trade across the full spectrum of service sectors – from telecommunications and technology to distribution and delivery services and covers about 75% of the global services economy.  Of the 23 economies participating in these negotiations, six are from Latin America.

The fact that more Latin American countries are not participating in these plurilateral negotiations represents a real missed opportunity. This region needs to participate in these agreements in order to capitalize on the benefits of open trade.

Meanwhile, others are not standing still. Here I should mention first the Trans-Pacific Partnership, or TPP, that brings together the United States, Canada, Mexico, Chile and Peru with seven Asian countries in a highly ambitious 21st century free trade agreement. TPP will encompass 30 percent of global trade, 40 percent of global GDP, and 50 percent of projected global economic growth.

The TPP does not just lower tariffs; it includes strong and enforceable labor and environmental commitments, groundbreaking new rules on state-owned enterprises, a robust and balanced intellectual property rights framework, and commitments on transparency and regulatory cooperation to make it easier for small- and medium-sized businesses to operate.

Current TPP parties are focused now on taking the necessary domestic actions for the Agreement to enter into force. But it is important to note that the TPP has an open architecture, which allows for the possibility of welcoming new partners that are prepared to meet the TPP Agreement’s high standards.

Clearly, the fact that regional integration generates new opportunities, creates economies of scale, and attracts foreign direct investment is not lost on some governments in the region.

Regional economic integration is, in fact, one of the top U.S. priorities in Latin America and the Caribbean. Cooperative and constructive regional arrangements like the Pacific Alliance is an effective way to lower barriers to trade and investment, integrate financial markets, and strengthen economic ties with the Asia-Pacific region.

As one of the 42 official observer states, the United States supports the same values that underpin the Pacific Alliance, including commitments to expanding free markets, reducing inequality, opening trade, and welcoming foreign investment. The United States wants to help companies from the Alliance succeed.  In fact, we have created a business incubator partnership bringing select companies from each Pacific Alliance country to the United States to work with an incubator and seek new investment.

At the same time, we also welcome increased trade and investment with Mercosur countries and are willing to work with them to ease market access for our businesses. We remain interested in a substantive dialogue on trade and investment issues between our countries. Mercosur has enormous potential to spur greater economic growth and expand benefits to its member countries. Tapping that potential through reforms to increase competitiveness in the global economic context will open new markets and opportunities for Mercosur members. It is important that Mercosur, and the private sectors within Mercosur countries, are not left behind in the new global marketplace.

In that regard, it is encouraging to see that the trade agreement between Mercosur and the European Union is making progress. We are also happy to know about progress being made in the Brazil-Mexico free trade agreement. And we appreciate the good work of Chile and others in building economic and policy bridges between the Pacific Alliance and Mercosur.

Indeed, what the United States would like to see most is truly close cooperation and connections between the economies and institutions of the Pacific Alliance, Mercosur, and North America. We look forward to new developments in this area in the years ahead.

Making Trade Flow

Now, while it is critical that the trade rules of the 21st century – such as those in TPP – and regional integration facilitate 21st century supply chains, it is equally important that countries have the hard and soft infrastructure to move those supply chains.

Efficient land, air and maritime transportation links are prerequisites for efficient trade. Unfortunately, the region continues to face challenges in making trade flow as efficiently as possible.

The Economic Commission for Latin America and the Caribbean estimates that the infrastructure needs of the region for the 2012-2020 period at 6.2 percent of GDP, or some $320 billion. And according to UNCTAD, developing countries more generally pay 40 to 70 percent more on average for international transport of goods than developed countries because of infrastructure deficiencies – hard infrastructure – and inefficient customs clearance processes – soft infrastructure.

It is no surprise, then, that easing the bottlenecks associated with the movement of those goods across borders has an obvious impact for building competitive economies. UNCTAD estimates that the average customs transaction involves 20–30 different parties, 40 documents, and 200 data elements.

Analysts attribute the red tape at borders, not tariff barriers, as the main reason why small and medium-sized businesses, particularly in developing countries, are not participating in international trade. In many instances, the cost of complying with customs formalities exceeds the cost of duties to be paid. In the modern business environment of global supply chains and just-in-time production and delivery, these inefficiencies can keep developing-country economies from integrating into the global economy, damage export competitiveness, and impair the inflow of foreign direct investment.

The WTO Trade Facilitation Agreement (TFA) aims to address the red tape and increase transparency and predictability in moving goods across borders, and has the potential to increase global GDP by six percent. The good news is that eleven countries in the hemisphere have thus far ratified the TFA, including Brazil.  We continue to urge other governments to quickly ratify the TFA so that the agreement can enter into force and everyone can reap its benefits. The State Department and USAID are working to assist countries in implementation by supporting the Global Trade Facilitation Alliance, among other efforts.

In Washington, we are also focused on strengthening efficient air transportation links in the region. It has been our experience that the Open Skies framework is the best mechanism for accomplishing this. This market-oriented approach to air services has played a key role in the growth of the aviation sector in the Americas, and has clearly been a critical driver for connectivity as well an important driver of economic growth more broadly. Since 1992, the United States has concluded Open Skies agreements with nearly 120 partners, including more than 20 countries in the Americas. We would like to do more, especially in South America.

Digital Commerce

The United States is also actively engaged with the region in the newest frontier in modern global trade – the digital economy.

President Obama said recently that in the 21 century, countries cannot be successful unless their citizens have access to the Internet. Promoting continued global connectivity, with as little friction as possible injected into the transfer of ideas and information, holds the potential to help lift people out of poverty, formalize the informal economy around the world, increase the efficiency of supply chains, increase the productivity of workers, raise wages, and improve people’s lives. We deeply appreciate the cooperation of Latin American governments and leaders in striking the right balance between data protection and data freedom.

The United States is also supporting a digitally connected world through our Global Connect initiative, which aims to help bring an additional 1.5 billion people online by 2020. We are building a broad network of countries, institutions, and private stakeholders who will work together to promote and support global broadband connectivity because the United States is committed to expanding connectivity, keeping digital trade routes open, and creating policy environments that sustain growth and foster innovation. We look forward to more Latin American countries joining the Global Connect bandwagon, including Brazil.

A digitally connected world helps promote and protect human rights and the free flow of information and strengthens inclusiveness for all. But this cannot happen without the commitment and participation of the private sector. It also cannot happen without the right pro-competitive regulatory environment.

Transparent Rules and Policies

Indeed, as trade barriers come down, regulatory coherence and cooperation are taking on increasing importance, and not just in the digital realm. We discuss this issue in our high-level dialogues with countries across the region.

I don’t need to tell you all that how countries create regulations is often as important as what the regulations are. It is absolutely critical that regulations be developed in a transparent, accountable, and evidenced-based way. These good regulatory practices better inform stakeholders about new measures and enhance predictability – key factors in developing greater investor confidence and increasing cross-border trade.

Enhanced regulatory cooperation across the region allows regional partners to more effectively work together to align standards and regulations early on in the process or minimize differences whenever possible. Together, increased regulatory cooperation, greater regulatory coherence and good regulatory practices will significantly reduce the cost of moving goods throughout the region. This is particularly important for small and medium businesses that often feel the impacts of divergent policies the most acutely.

The role of American Chambers of Commerce in encouraging good policies and positive approaches to transparency in their host nations is absolutely critical. I hope that you will all continue to be aggressive in pursuing best practices in the region.

A Call to Action

Now, I’ve laid out an extensive agenda, and it is one that, frankly, cannot be accomplished without your active involvement.

There is much we can do together. We can encourage governments to create national regulatory and policy frameworks that enable business and industry to join the global marketplace and allow them to participate in global supply chains.

We can advocate for governments to ratify the WTO Trade Facilitation Agreement expeditiously, to adopt existing plurilateral agreements like the Information Technology Agreement and the Government Procurement Agreement, and to take an active interest in the other plurilateral agreements now under negotiation.

One other, very specific step you might take with regard to the Trade Facilitation Agreement is to press to be included in the national committees for trade facilitation called for in the TFA. Without Private Sector feedback it is impossible for governments to target the policies and actions that are needed to truly facilitate trade.

The private sector also has a central role in fighting corruption. The private sector suffers greatly from corruption, but can also bring its energy and innovative spirit to bear in finding solutions. We look forward to working with you in this fight. Anticorruption efforts are intensifying in many countries in the region, and we have seen Argentina, Brazil, Colombia, Mexico, Trinidad &Tobago, and others raise the profile of this issue even further through participating in high level meetings, including the recent UK Anticorruption Summit.

One of the key channels for effective partnership on many issues is, in my view, the Americas Business Dialogue, the region’s premier mechanism for public-private engagement. Many AmChams already participate in the ABD. I strongly encourage you to sign up, and participate actively. The U.S. government is bullish on the ABD, and we frequently engage with private sector ABD members on policy matters than can make the region more prosperous.

In fact, just last month, I participated in the ABD’s high-level event at the Inter-American Development Bank Annual Meeting in Nassau, and saw firsthand how governments can benefit from private sector insights.

So, in conclusion then, I urge you to continue to engage with your governments, as we simultaneously encourage governments to listen to the private sector. We in the United States will continue to remain steadfast in our commitment to seeing Latin America and the Caribbean expand the benefits of more open trade and regional integration throughout the hemisphere.

We are all Americans, North and South. All of us must continue to build the Americas into a shared, integrated platform for global economic success.