Opinion, by Michael Kalavritinos
RIO DE JANEIRO, BRAZIL – While the results of the Florida Republican primary may be pivotal to deciding the nomination, last week’s Republican CNN debate was revealing as it related the Latino vote with its significant Cuban and Puerto Rican constituencies which strongly backed Romney but also he was the only candidate who championed free trade and the implementation of the Panama and Colombia FTAs. U.S. interest in the region has waxed and waned in recent years as the US has been focused on the war on terror in the Middle East. There is a realization that the U.S. needs to become more active in Latin America, a region whose influence it has historically dominated with the decline of the Spanish and Portuguese monarchs only more recently to be challenged by commodity hungry China and Venezuela’s petrodollar populism.
The U.S.’s admirable pursuit of a Free Trade Agreement of the Americas has been forced to compromise with a myriad of Free Trade Agreements (FTAs) with Peru, Colombia, and Panama. These agreements have been preceded and often complemented by Double Taxation Agreements (DTAs) whose objective it is to promote cross-border investment by the avoidance of double-taxation in both countries. The U.S.-Chile DTA, currently pending approval in both Congresses would facilitate investment by Chilean pension funds into the U.S. The reality is that today they invest 36 percent of their total assets in non-U.S. mutual funds. Lowering the withholding tax rate from thirty to fifteen percent would provide this catalyst. In a similar fashion, the Tax Information Exchange Agreement (TIEA) with Panama had the positive effect of removing it from the OECD’s tax haven grey list, providing greater flows into Panamanian banks and guaranteeing access to U.S. financial, telecommunications, computer and other firms.
The case of Brazil and the U.S. is more complex. While the U.S. and Brazil have yet to conclude an FTA due to varied interests and agricultural disputes, much has improved over the past two U.S. administrations, including allowing the U.S. subsidy on ethanol to recently expire. A TIEA is pending approval in the Brazilian Senate. With Brazil vaulting past the U.K. to become the world’s sixth largest economy, the next administration should continue to build upon the progress of recent years and push for a Free Trade Agreement, particularly to benefit the often neglected services sector, key to an economy that is consumer based, much like the U.S. With Brazilian interest rates continuing to fall and looking over a three to five year horizon, little known working groups of Anbima (Brazil Financial and Capital Markets Association) and FIAFIN (Ibero-American Federation of Investment Funds) are laboring to promote cross-border investment in anticipation of Brazilian investor diversification. Today, only a tenth percent of the $316 billion pension fund industry invests outside of Brazil, and that amount is invested in Brazil global bonds. In addition, while the Brazilian Central Bank holds about $200 billion in U.S. government securities, it represents only a mere four percent!
The importance of free trade and investment is key towards growing the U.S.-Brazilian relationship and something actively espoused by the Romney team in contrast with his competition. The U.S.-Brazil CEO Forum which includes among others, Citibank, Anadarko, Cargill, Safra, and Camargo Correa actively supports this. Although the U.S. remains the largest direct investor in Brazil, the flows are not reciprocal and much more must be done to facilitate further bilateral flows, especially into the U.S. As the election rhetoric heats up, it remains to be seen what relevance U.S.-Latin America trade relations are afforded. It is encouraging that at least one candidate already gets it.
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Michael Kalavritinos is a Managing Director at The Bank of New York Mellon based in Rio de Janeiro. The views expressed are his own and no not reflect the views of The Bank of New York Mellon.