Caracas Chronicles

Well, thanks to Virginia I now have the text of the People’s Trade Agreement Venezuela, Cuba and Bolivia signed last month, and the thing is so amateur hour it’s unreal.

Just for starters, the thing assumes you can just decree non-tariff barriers away – without the complex process of regulatory harmonization the process entails in the real world. For another, it just has no rules of origin. At all. All it says is “The governments of the Bolivarian Republic of Venezuela and the Republic of Cuba will immediately proceed to remove tariffs and other non-tariff barriers that apply to all imports within the tariff universe of Cuba and Venezuela whenever they apply to products originating in the Republic of Bolivia.” It simply fails to address the question of what products, specifically, count as “originating in the Republic of Bolivia.”

This is a dicier issue than you may think. Say Venezuela has a 30% tariff on widgets. Goods “originating” in Bolivia are now excempt from that tariff in the Venezuelan market. Now say Bolivia has only a 1% tariff on widgets. What’s keeping an Argentine widget producer from exporting its widgets to Bolivia, paying the 1% tariff, and then selling on the widgets to Venezuela tariff free?

Nothing at all in this agreement, since the drafters just olympically skipped the definition of “originating in” – which is one of the most basic negotiating points in a Free Trade Agreement these days.

(For a taste of what a contemporary Rules of Origin agreement can look like, click here.)

If you sign a free trade agreement with no mechanisms at all to prevent transshipment, you’re effectively handing over control of your tariff policies to your trade agreement partner: whenever his tariff is lower than yours, importers will just ship the goods into your partner’s territory, pay the lower duty, then transship the stuff into your country duty-free.

This is really Trade Diplomacy 101 – it’s staggering how they just “missed” this little detail.

(On the other hand, there will be some handsome arbitrage opportunities out there for importers who figure out how to exploit this latest chambonada.)