The Andean Community (CAN), as this organization is currently known, is a regional integration agreement among Colombia, Ecuador, Peru, and Bolivia. The communitywas originally known as the Andean Pact and was created in 1969 to reverse the stagnation of the Latin American Association of Free Trade and address the integration and development needs of the Andean countries (Venezuela, Colombia, Chile, Ecuador, Peru, and Bolivia). Venezuela became part of the Andean Pact in 1973, and Chile withdrew from the pact in 1976 to pursue more liberal trade policies. Initially, the pact sought to harmonize policies, define a common external tariff, liberalize intraregional trade, regulate foreign direct investment in the region, and organize production across member Andean countries by encouraging the development of promising industries. Later on, the pact supported the agenda of becoming part of wider economic agreements such asMercosur a regional economic agreement among Argentina, Brazil, Paraguay, and Uruguay and the Free Trade Area of the Americas (FTAA) to be consistent with theGeneral Agreement onTariffs and Trade and the World Trade Organization principles.
The initial strategy of the Andean Pact was based on the import substitution, or closed regionalism, model that predominated in Latin America during the 1970s. According to thismodel, the government must coordinate economic policies and regional development plans in order to direct production toward the intraregional market. The consequence of this model is that protected rent activities (activities that generate rent because of government protection through tariffs or subsidies) develop, mainly in the industrial sector, which are financed in part by the revenues generated by primary-resource-intensive exports (agriculture, mining, and energy). Intraregional trade only increased from 1.7 percent of total exports in 1970 to 4.5 percent in 1979. This early stage of the Andean Pact failed for several reasons: many products were exempted from the tariff liberalization process; a clear consensus about the common external tariff was lacking due to significant differences in the level of protection of each Andean country; the production requirements established by the Andean Pact did not match the trade needs of each country, especially after the foreign debt crisis; the market was too small; and trade activity was directed mainly to the members of the Andean Pact. Therefore, theAndean countrieswere limited in their capacity to generate new foreign exchange, which became very important for paying the increasing foreign debt (Edwards 1993). The lack of coordination of macroeconomic policies led to exchange rate imbalances and to differences of protection among the Andean countries. (In 1980, about 25 percent of items included initially in the tariff list were exempted.)
These macroeconomic imbalances partially generated by the closed regionalism model contributed to the foreign debt crisis that exploded in the early 1980s. The adjustment policies applied to solve the crisis led to a contraction of the trade preferences among the Andean countries, thereby reducing the trade during the mid-1980s. By 1985 the Andean Pact was practically moribund. Intraregional trade did not follow the initial industrial planning, and only about a third of the investment programs (machine tools, petrochemical, and automobile sectors) were approved. Nevertheless, the Andean Pact was revivedwith theQuito Protocol,whichwas signed in 1987 and later modified over the course of several presidential meetings. The most important modification, the Trujillo Protocol of 1996, resulted in the name change from the Andean Pact to the Andean Community of Nations, a new structural organization, and a shift in emphasis from closed regionalism (inward integration) to open regionalism (outward integration with the rest of the world) (Reynolds 1997; and ECLAC 1994). The establishment of the Andean Free Trade Zone (AFTZ) in 1993, and the Andean customs union in the form of an Andean common external tariff in 1995, spurred private initiatives and innovative rent-seeking activities (instead of protected rent activities) aimed at achieving an efficient allocation of resources and exploiting the competitive advantages of the region. This increased efficiency and innovation is the main reason behind the shift toward the open regionalism model. The AFTZ was completed in 2006 with the full incorporation of Peru.
Using CAN as an example, Creamer (2003) demonstrated that economic integration by stages into wider regional agreements may lead to an improvement of intraregional trade and total trade, and not to a contraction of extraregional trade as during the period 1980 97. Taking a simple indicator, the trade balance of Andean Community exports minus imports with the rest of theworld increased fromU.S. $1.196 trillion in 1969 to U.S. $31.435 trillion in 2005 (Andean Community 2006). However, this growth is mostly explained by the significant improvement of the trade balance of Venezuela. Venezuela accounts for 90 percent of CAN’s trade surplus with the rest of the world. This trade balance may be substantially affected because of the withdrawal of Venezuela from CAN in 2006, although this effect may be partially compensated by the integration of Andean Community with Mercosur and the incorporation of Chile. The Andean Council of Foreign Affairs Ministers and the AndeanCommunity Commission accepted Chile as an associatemember in September 2006.
During the 1990s, CAN changed its emphasis from a trade-oriented agreement into a political, social, and economic integration agreement in the spirit of the European Union. This transformation required the creation of the Andean PresidentialCouncil and the conversion of the Cartagena Agreement into a General Secretariat in 1997. The set of all institutions that support the mission of Andean Community is the Andean Integration System (SAI). The political institutions that are part of SAI and have representatives of each member country are the Andean Presidential Council, composed of the presidents of member countries, which defines the strategic priorities of CAN; the Andean Council of Foreign Affairs Ministers, organized by the foreign affairs ministers of member countries, which is responsible for the foreign policy of CAN, agreements with third parties, and the election of the general secretary; the Andean Community Commission, in coordination with the Andean Council of Foreign Affairs Ministers, which is responsible for the intraregional policies of Andean Community; the Andean Community General Secretariat, which is the executive body of CAN; the Andean Community Court of Justice, which is the judicial body that interprets the Andean Community laws and solves internal disputes; the Andean Parliament, the legislative arm of CAN, which harmonizes member countries’ laws; and the Business and Labor Consultative councils, which represent business and labor organizations, respectively, and advise the AndeanCouncil of Foreign AffairsMinisters. Additionally, the Andean Development Corporation, which is responsible for promoting trade, investment, and economic growth in the region, and the Latin American Reserve Fund, which provides funds to the member countries to correct short-term macroeconomic imbalances and coordinatesmonetary and fiscal policies, also are part of the SAI. Finally, institutions of SAI responsible for social policies are the Simon Rodriguez Agreement, which coordinates social and labor policies; the Andean Health Organization Hipolito Unanue Agreement, which coordinates health policies; and the Simon Bolivar Andean University, which promotes academic activities that are relevant to the integration and development of Andean Community.
Most of CAN’s political institutions have not had a major impact on the internal policies of the Andean countries. These countries are still very much under the influence of the major financial multilateral organizations. Hence, CAN’s political integration has been very limited. The Andean Development Corporation, however, has become a major source of funds to support the development policy of Andean Community. This organization has also had an impact in social areas, providing funds for projects that generate employment, support microentrepreneurs, and improve the productivity of the region. The Simo´n Rodriguez Agreement has helped to integrate educational systems in the Andean countries, and the Simo´n Bolı´var Andean University has been invaluable in supporting the professional training of social scientists. However, major regional challenges include the development of human capital in technical areas and a significant increase in research and development investment to attract foreign capital and outsourcing opportunities to the region.
Andean Customs Union and Free Trade Zone
The Andean customs union, as it has functioned since 1995, establishes four basic tariff levels: 5 percent for raw material and industrial output, 10 percent for intermediate output, 15 percent for capital goods, and 20percent for final goods. There are some exceptions to this common external tariff. For agricultural products, price bands help protect Andean agricultural products from subsidies and price variations in the international market. In 1997, Peru decided to join the Andean customs union and started a program of tariff reduction with Columbia and Ecuador. The Andean common external tariff covers about 90 percent of imports. TheDeclaration of Santa Cruz of the Andean Community, signed in January 2002, introduced a new structure of the common external tariff that includes Peru.However, the new common external tariff had not been implemented and was still under review by a high level advisory group since August 2007.
CAN represented the Andean countries in the FTAA negotiations and lobbied the U.S. government for the extension of the Andean Trade Preference Act of 1991 into the Andean Trade Promotion and Drug Eradication Act of 2002. Also, Andean Community renewed the Generalized System of Preferences with the European Union for the period 2006 15 and at the time of this writing was negotiating a trade association agreement. In April 1998, CAN signed an agreement withMercosur to create a free trade zone. As a result of this agreement, 80 percent of the trade between Mercosur and Andean Community was freed in January 2005. The remaining 20 percent will be liberated during the next 14 years. Additionally, the members ofMercosur became associatemembers of CAN, and Mercosur reciprocally conferred associate membership on the members of CAN.
The withdrawal of Venezuela in 2006, the potential signing of free trade agreements between the United States and Columbia, Ecuador, and Peru, and the formation of a South American free trade zone as agreed during the South American presidential meeting of 2004 are signs of the difficulties facing CAN. As long as CAN maintains its own identity, free trade agreementswith theUnited States or with the other South American countries may indicate the success of the open regionalism process that has characterized the Andean Group since the 1990s. In fact, a South American free trade zone will open amarket of 377million inhabitantswith a gross domestic product ofU.S. $1.493 trillion and exports of U.S. $305.3 billion for 2005.
CAN offers significant advantages to itsmembers, especially once the Andean Common Market is established. Thismarketwill enable the freemovement of goods, services, capital, and people. Andean Community envisions that, in this way, it gradually will integrate itself into the world market, either through its participation as a subregion in a South American free trade zone or in a free trade agreement with the United States. See also customs unions; free trade area; Free Trade Area of the Americas (FTAA); import substitution industrialization; Mercosur; regionalism