The Andean Pact relaunched: implications for the United States – Treaty of Cartagena
Herbert A. Lindow
The Andean Pact Relaunched: Implications for the United States
In May 1987, the Andean Pact nations (Bolivia, Colombia, Ecuador, Peru, and Venezuela) agreed on important changes in the Treaty of Cartagena that, when implemented, will ensure greater flexibility in the rules affecting traders and investors in the Andean region. Broadly, the changes took the form of a protocol, a transition program, and the modification of a series of decisions, including Decision 24, which set the rules affecting foreign investors. The changes are both symbolically important and vital to the survival of the Pact, which has been largely inoperative in recent years due to member noncompliance with rules, the adverse effects of the international recession, debt problems, and conflicting national interests. Thus, the Pact nations hope to “relaunch’ their programs, which aim ultimately at economic integration of the five Andean nations. For the immediate future, however, each Pact member will seek maximum flexibility in implementing its own economic policies within the framework of the Pact’s broad integration objectives.
The modifying protocol, which must be ratified by the legislatures of all countries (Ecuador has already done so, and Colombia has by government decree), calls for:
immediate elimination of intra-Andean tariffs by Colombia, Peru, and Venezuela (in Bolivia and Ecuador tariffs are to be consecutively reduced by 5 percent three times a year over a one-year period beginning on the Dec. 31 a year after the protocol goes into effect; the process will then be reviewed);
a common external tariff at a future time to be determined;
flexible industrial programming so that national programs are complementary;
agricultural and agro-industrial cooperative programs;
full participation in decision-making processes by private business and labor councils; and
incorporation of the Andean parliament and the Andean court as main agencies of the Andean Pact.
In the interim, a transition program is in effect. Although full details are not available, it calls for:
escape clause provisions for certain listed goods;
no additional trade restrictions;
removal of restrictions applied in 1981-85 to traded and non-traded goods;
efforts to shift imports from third countries to Pact countries;
special preferences for Bolivia’s exports as set forth in a “Memorandum of Understanding’;
negotiation of lists of products under “Administrative Trade or Bilateral Quotas and Lists of Exceptions’ (Bolivia is excluded); and
products to be reserved for industrial programming.
Foreign Investment Rules Liberalized
The decision to replace Decision 24 affecting foreign investors was probably the most significant measure adopted. By means of Decision 220, each nation now has broader latitude to regulate foreign investment in accordance with its own laws and regulations. (Critics of the Pact may observe that in many instances each nation has for some time been doing just that; thus, Decision 220 merely validates a preexisting condition.)
The most important provisions of Decision 220 are the following:
transformation from foreign to mixed or national ownership is no longer required, except for investors wishing to benefit from intra-Andean tariff and other trade benefits; even in these cases, the transformation period has been expanded from 15 to 30 years (37 years in Bolivia and Ecuador);
annual earnings remittances will no longer necessarily be limited to 20 percent of net registered capital, as individual countries may authorize higher percentages at their discretion;
reinvestments no longer require prior authorization regardless of the amount reinvested (previously, authorization usually was required when annual reinvested earnings exceeded 7 percent of a firm’s capital);
interest rates on loans from abroad to foreign firms are no longer subject to a limit of 3 percent over prime or LIBOR (the London Inter Bank Offer Rate); interest rates are left to individual countries’ discretion;
expanded access to local credit markets for foreign investors;
shares in local companies may be sold to foreign investors, subject to local approval;
prohibitions on investments in certain sectors are still in force; each government must determine which sectors will be restricted in accordance with Article 3 of Decision 220, which provides: “The member countries will not authorize direct foreign investment in activities considered properly managed by local existing companies.’
restrictions on international arbitration of investment disputes are left to the discretion of individual countries; and
Decision 220 continues controls and certain prohibitions relating to technology transfer and licensing. However, it has eliminated the prohibition on royalty payments between branches and their head offices or affiliates.
It remains to be seen what rules individual countries will apply in practice. In many instances liberal treatment is already or soon may be available to investors. Bolivia is preparing a draft of a new investment law aimed at encouraging foreign investment. The Colombian government has recently liberalized the investment rules for most sectors except banking and has introduced legislation in that area as well. Ecuador seeks foreign investment in priority development sectors, e.g., petroleum, mining, and those sectors not served by national companies. The Peruvian government has stated its desire to improve its foreign investment regulations. And, in the case of Venezuela, a significant new decree was enacted to liberalize foreign investment rules in mid-1986.
The reasons for liberalization relate to numerous factors. Heavily indebted to foreign bank creditors, and seeking to modernize their industries and expand exports, the Pact nations have come to realize that foreign investment is increasingly important as other forms of capital inflows–commercial lending and development assistance–are reduced.
To be sure, despite improvements in the regulatory climate, foreign investors continue to face major challenges and problems in the region. For example, despite Venezuela’s liberalization of its rules, foreign investors continue to face a disincentive to investment in the form of Venezuela’s exchange rate regulations. Investors are required to use the official rate of Bs14.50 per U.S. dollar for conversion of incoming capital. This differs markedly from the free rate, which is currently about Bs32.00 per dollar. Investors are also concerned about the nationalization of Peru’s banking system and its implications for access to local credit markets. In the case of Colombia, foreign investors now find good economic growth together with new opportunities. Yet, guerrillas and narcotics-related activities continue to be security concerns. In Ecuador, foreign investors are likely to take a wait-and-see attitude prior to the upcoming elections. A new President is to take office in August 1988, and it is unclear whether changes in current liberal investment policies will be affected.
Despite problems, the full and effective liberalization of investment rules, if implemented, should, along with gradually improving economic conditions, give impetus to a renewal of U.S. investor interest in the region. The enhanced role given to the private sector as reflected by the establishment of business and labor councils in the Pact’s decision-making process provides the American private sector with an opportunity to develop a closer relationship with its Andean counterparts. Developing stronger ties with the Andean private sector may be one way to make the integration effort work to our mutual benefit.
The Andean Pact’s Junta recently published data indicating that all the Andean nations except Ecuador (because of a severe earthquake) are likely to register good economic growth this year: Bolivia, 2.5 percent; Colombia, 5 percent; Peru, 6 percent; Venezuela, 3 percent; and Ecuador, -3.2 percent. With respect to international trade, the United Nations Economic Commission for Latin America has published data showing the five nations again had trade surpluses in 1986 (total exports of $17.6 billion and total imports of $15.9 billion for a surplus of $1.7 billion). U.S. exports to the area amounted to $5.8 billion, while imports were $10.0 billion. The Andean trade surpluses were fully utilized to meet foreign debt payments. U.S. direct investment in the region amounted to $5.5 billion (not including Bolivia) by year-end 1986.
Photo: Linking Andean Nations–A traditional reed boat crosses bow of modern hydrofoil on the Bolivian side of Lake Titicaca. The hydrofoil ferries tourists between Bolivia and Peru.
COPYRIGHT 1987 U.S. Government Printing Office
COPYRIGHT 2004 Gale Group
