New Direction for the Pacific Alliance

Last week Latin America’s newest trade bloc was doing what it does best and grabbing international headlines with yet another summit. The leaders of the Pacific Alliance met in Mexico for the bloc’s 9th leadership conference since forming in 2011. As usual they picked a lovely tourist spot for the meeting, and as usual there was plenty of staged photo opps of casually dressed, smiling presidents. Yet there were also a couple of important differences this time around. And given that Britain recently became an observer member of the Alliance – these differences could be important ones for UK companies.

“The Pacific Alliance was perceived badly in some quarters of Brazil, as an attempt to somehow join forces to oppose Brazil in the region…”

Bachelet is determined to shape the Pacific Alliance

The most obvious change this time around was the presence of Michelle Bachelet, Chile’s new president. Ever since her election there has been a lot of speculation that the left-wing Bachelet may prove less amenable to the free-trade alliance than her right-wing predecessor, Sebastian Piñera. As Carlos Fortin, a research associate at the Institute ofDevelopment Studies, noted at a Canning House Briefing back in November, “I think now with Bachelet, we will see that the relationship between Brazil and Chile grows stronger as she and Brazilian president Rouseff are close friends.” That has proved remarkably prescient as in her first Pacific Alliance meeting Bachelet called for closer integration with the rival Atlantic trade group, Mercosur, which consists of Brazil, Argentina, Uruguay Venezuela and Paraguay. “Beyond legitimate differences, it is perfectly possible to achieve levels of convergence betweenAlliance countries and Mercosur, between the Atlantic and the Pacific… Not only is it possible, it is also necessary.”

Given that until now part of the Pacific Alliance’s appeal is that it offers an alternative to Mercosur it is a marked change in direction. Of course talks between the two blocs, which are scheduled for later this year, are unlikely to yield concrete results, such as an FTA, anytime soon. Yet one positive impact of the move is that is makes the Pacific Alliance more sustainable. Many analysts had questioned how the Alliance would respond to a change in government in a member country and so far it appears to be adapting quite well. Moreover the relationship – or indeed perceived competition – with Mercosur had always been the elephant in the room. As Fortin notes, “it was perceived badly in some quarters of Brazil, as an attempt to somehow join forces to oppose Brazil in the region.” These talks will help to reinforce the message that the Alliance is focused on trade rather than regional power politics and help to remove some of the tension.

peru train
An infrastructure fund is just what the region needs

Another summit announcement that could also prove interesting for UK investors is the plan to free up the member’s large and growing pension funds to jointly fund infrastructure projects in the region. The pension funds in these countries are worth around $400billion in total and are growing fast. Until now their investment mandates have been strictly regulated, with a heavy emphasis on domestic opportunities. If more of their money could be diverted to regional projects they could help to finally kick-start the oft-talked about, but much delayed, infrastructure programmes that are so badly needed in the member countries.

Plenty of challenges lie ahead for the Alliance but so far it seems to be proving that the style is matched by the substance.

This article first appeared as a Canning House-LatAm INVESTOR newsletter. You can read more on the Pacific Alliance in the latest edition of LatAm INVESTOR’s quarterly magazine. To download the e-version and sign up to receive subsequent print editions for FREE click here