The EU and the Pacific Alliance: Changing economic ties in an eastward-looking era
The Pacific Alliance members have long-standing ties with European countries. Yet, they chose the Asia-Pacific as a target region for their intensive international trade liberalisation efforts. This begs the question: What should be the EU’s appropriate response? A comparative analysis of the Alliance’s trade and investment flows carves out how the EU can strengthen its relationship with the bloc despite its eastward-oriented approach.
Few developments have shaped economies in Latin America and the Caribbean (LAC) in the past decades as decidedly as China’s economic growth and its explosive demand for commodities. The end of the ‘commodity boom’ thus presented LAC with an unmistakable reminder that effective strategies for sustained economic growth and international competitiveness are urgently needed.
The Pacific Alliance (PA), a bloc composed of Chile, Colombia, Mexico and Peru, founded in 2012, hopes to address these issues; first, by increasing its members’ ‘deep’ integration, and secondly, through trade liberalisation with a focus on the broader Asia-Pacific region. While many observers expect that this regional focus will affect the PA member countries’ relations with the European Union (EU), the concrete outcomes are still unclear.
We take this as a starting point and argue that the PA’s Asia-Pacific focus presents an opportunity for strongereconomic and political ties between the EU and the PA countries. Our analysis of the PA’s trade relations and Foreign Direct Investment (FDI) flows illustrates that it is mainly (potential) high-volume trade and global value chain integration that make Asia-Pacific an attractive target region. Against this backdrop, we suggest the EU should choose an alternative focus: Instead of striving for direct trade competition, its future relations with the PA should concentrate on (1) ensuring and expanding diversified trade and FDI and (2) the provision of expertise, both in trade regulation through institutional cooperation, and in technical cooperation, for instance through business partnerships in areas like renewable energy, information technology, and (agro-)industry. Thereby, the EU would offer a coherent strategy that supports the PA’s goals, enhances economic stability in LAC more broadly, and positions the EU as a long-term partner for innovation and sustainable growth.
To extrapolate sensible next steps for the EU in light of the PA’s Asia-Pacific focus, we analyse and compare the PA’s economic ties with the EU and Asia-Pacific emerging markets. We focus on economic factors, as they are the main cornerstones of the bloc’s strategy.
Free Trade Agreements (FTAs) are central to the PA’s trade liberalization strategy. Table 1 illustrates that all PA members have signed FTAs with the EU. In contrast, the number and timing of bilateral FTAs with Asia Pacific countries vary considerably.
Table 1: Free Trade Agreements of the PA with EU and Asia-Pacific markets
Source: SICE (2018)
The PA has yet to explore the opportunities for free trade with many – especially emerging – countries in the Asia-Pacific region. Its existing FTAs with the EU, however, also still offer room for improvement. For instance, the EU’s FTA with Mexico was recently modernised and their Agreement with Chile is currently being renegotiated to achieve modern trade standards. These renegotiations resulted from the European “better regulation agenda,” which aims to strengthen the EU’s regulatory framework with the help of relevant stakeholders, such as business organisations and trade unions.
This leads us to the volume and structure of the PA’s trade with its partners. When comparing overall trade values, it is evident that the PA has traded more with Asia-Pacific countries than with the EU in 2015, mainly thanks to China. Compared to 2005, the share of the EU in the PA’s total trade value remained stable at around 10%, while China’s share grew from 5% to 13%. The relevance of different Asian economies for the PA members, and that of the EU, however varies substantially (see Figures 1 & 2). These figures illustrate that emerging Asia-Pacific is attractive for the PA. Yet, the EU continues to be an important trade partner for the bloc due to its existing commitments, long-standing historical ties, and the more diversified exports compared to Asian economies.
Figure 1. Shares of total value of PA trade in goods (export and import) by partner (2005)
Source: ITC Trade Map; UN Comtrade (own elaboration)
Figure 2. Shares of total value of PA trade in goods (export and import) by partner (2015)
Source: ITC Trade Map; UN Comtrade (own elaboration)6
As illustrated in Figure 3, PA members tend to export commodities to countries outside the Alliance, such as copper products (Chile, Peru), coffee (Colombia, Peru), petroleum (Colombia), wine (Chile) and flours (Peru), while they import manufactured and high-technology goods from the EU and Asia-Pacific. Mexico is a notable exception to this tendency: 82% of its exports are manufactured goods, such as automobile-related products, electronics and clothing. It therefore competes with several Asian economies and focuses on exports to the US.
Figure 3: Export composition of PA, within (left) and outside (right) of the PA