The Pacific Alliance 2.0

Based on a new study by the authors

Just a few years ago, the Pacific Alliance, then a new pact between Chile, Colombia, Mexico and Peru, was considered “the most important alliance you’ve never heard of.”[i]

That anonymity was short-lived.

Riding momentum described in the Bertelsmann Foundation’s 2014 study The Pacific Pumas, the four countries have continued to work together in a broad effort to integrate into global economic and financial systems. Since it officially launched in 2011, the Alliance has eliminated tariffs on over 92 percent of goods, and member countries have integrated their national stock markets and they have removed intra-Alliance visa restrictions.

This pragmatic approach has caught the world’s attention: Forty-two countries across six continents have signed on as observers. Costa Rica and Panama are currently seeking to join what would be tantamount to one of the ten largest economies in the world. The pact is also part of a turning tide in Latin America. For example, in Argentina, President Mauricio Macri’s administration speaks openly of finding ways for Mercosur, a regional pact between mostly Atlantic South American countries[ii], to collaborate with the Alliance.

It’s a very good start. But the Pumas are interested in more than just a good start. Although it may seem unfair to refer to Alliance achievements as “low hanging fruit”, their early success has positioned the quartet to achieve deeper–and potentially more rewarding–levels of integration.

As the presidents of Chile, Colombia, Mexico and Peru prepare for their eleventh Presidential Summit scheduled for July in Puerto Varas, Chile, here are some of the areas where the Alliance could take integration to the next level, or as we call it, Pacific Alliance, 2.0.

Financial Integration – MILA & Beyond

Although opportunities to deepen trade ties certainly exist, the largest gains may be accessed through financial integration. The financial markets of Colombia, Peru, and Chile may individually seem shallow, but their integration together, combined with a larger market such as Mexico, could create dynamic and complementary opportunities.

For example, consider MILA, the Alliance’s shared stock market. With the 2014 addition of Mexico, MILA now represents the largest bourse in Latin America in terms of capitalization ($1.1 trillion), and the second largest in terms of the number of companies listed.  MILA has the potential to convert mostly overlooked and often illiquid markets into a bourse of global relevance.

Yet, while MILA may be the most well-known opportunity for financial integration, it is certainly not the only one. Cross-border infrastructure investment, pension fund integration and the removal of intra-alliance capital controls are additional examples of financial integration that could spark mid- and long-term growth.

Energy: Untapped Potential

At a time of consistently low oil prices, the Pacific Alliance has an opportunity to rethink how to fulfill its energy needs, as well as to define its role in the new energy economy. Hydrocarbon-rich Mexico continues its ambitious energy reform. Chile, a country facing energy scarcity, is working to unify its multiple electricity systems, an effort made all the more urgent by the 193 percent rise in electricity costs over the past ten years. Colombia and Peru are energy-rich countries boasting large hydrocarbon reserves. These conditions set the perfect scenario to pursue a more integrated approach that interconnects countries and their economies.

However, options such as the interconnection of electrical energy grids and the establishment of common markets require significant investment. New sources of funding—and not just public funding—are imperative for member governments’ energy integration agenda. The private sector represents a critical source of capital, but so far, business has remained relatively disengaged from public-private partnerships in cross-border energy projects within the Pacific Alliance. The energy sector’s future development depends on the ability of member countries to engage a wide range of stakeholders.

Trade: Sparking a Chain Reaction

The commercial agenda begins with the elimination of tariff barriers on 92 percent of all products. However, given the low level of intra-bloc trade, this is just a starting point.  The real advantage for the Alliance is its unique position to integrate commercial relationships across value chains and with the broader global economy. Here, the Asia-Pacific region is uniquely positioned to broaden trade ties. More than just seeking to increase exports, huge potential exists for member countries to more deeply embed in regional and global supply chains, through actions such as the harmonization of rules of origin and the creation of a single digital window.

One challenge across the Pacific Alliance is that primary exports still account for a majority of its trade portfolio. Mid-level technology products, such as vehicles, are also part of this portfolio, though to a lesser extent. More deeply connected supply chains could greatly boost trade integration in the Pacific Alliance by creating more backward linkages.

The Pacific Alliance and the World

The strategies outlined here, and discussed in greater depth in our new study are not simple – they require time, money and patience; three things in short order these days.

But if the Alliance can harness its momentum it can emerge as a global player.  The Pacific Alliance countries stand out as role models for regional countries drawn to a market-oriented, politically centrist strategy – and now major Mercosur countries are looking to collaborate. The Pacific Pumas are positioned to run with the Asian Tigers; the challenge for the Alliance will be to find a niche in the emerging web of trans-Pacific trade, and not be overrun by it.

Ultimately, it will be up to the governments, private sectors, and citizens of Chile, Colombia, Mexico and Peru to take the Pacific Alliance to the next level. But next month in Chile, the leaders of the quartet can take important steps to set the blueprint for the Pacific Alliance, 2.0.

This blogpost was coauthored by Jason Marczak, the Director of the Latin America Economic Growth Initiative at the Atlantic Council’s Adrienne Arsht Latin America Center.

[i] http://www.theatlantic.com/international/archive/2014/02/the-most-important-alliance-youve-never-heard-of/283877/.

[ii] Core members of Mercosur are Argentina, Brazil, Paraguay, Uruguay and Venezuela.