A pulse check on the Pacific Alliance

Policy shifts and upcoming elections in countries that form the Pacific Alliance (a trade bloc comprising Chile, Colombia, Mexico and Peru) are likely to generate inertia, hampering governments’ ability to bring their economies closer together, negotiate trade agreements and capitalise on economic complementarity.

The inauguration of the Peruvian president, Pedro Castillo, raises questions about the free-trade bloc, given his more aggressive stance against free-trade agreements (FTAs) and statist leanings. However, we do not believe that Peru’s exit from the group is on the cards, as he would need Congress to agree to withdraw. Even so, Mr Castillo’s stance is likely to undermine plans to make member economies more integrated and disrupt co-ordination on trade policy.

Meanwhile, although the Chilean and Colombian governments have not suggested changes in their trade policies, elections in those countries in November 2021 and May 2022 respectively are generating uncertainty about future governments’ policy leanings. Upcoming changes in Chile—given the composition of its constituent assembly and the forthcoming elections—suggest that the policy landscape will be increasingly difficult to predict; leftist political parties, deeply sceptical of free trade, dominate the assembly. Changes in Colombia are less likely, as the country’s traditional parties and independent political groups have continued to support free trade despite growing opposition from left‑wing political groups and protesters who have demanded changes to the economy.

Just as forces that would slow integration within the bloc mount, there have been signs that Ecuador may join soon. Its GDP is about half that of Peru (the alliance’s smallest member). In July Mexico’s foreign minister agreed to support Ecuador’s bid to join the bloc; Mexico is the only Pacific Alliance country with which Ecuador does not have an FTA, although we expect one to be signed within the next year, granting Ecuador associate status. 

Ecuador’s potential accession to the group does not imply an appetite for greater expansion and integration. Simmering social tensions across the region suggest growing dissatisfaction with inequality, political representation and the economy. This, in turn, generates a less stable and predictable policy environment that is likely to erode trust from investors and trade partners, dissuade new trade agreements from being negotiated and imperil corporate strategies to spread out production chains among Pacific Alliance countries.

Despite the scope for greater integration and expansion, the current backdrop reinforces our view that there will be a lack of impetus within the Pacific Alliance to forge stronger ties.