Colombia: The Colombia-U.S. FTA Trade Promotion Agreement: New Perspectives To Enhance Trade

According to the most recent WTO figures, there are 174 Free Trade Agreements (FTAs) currently in force, part of a total of 297 regional trade agreements worldwide under the GATT MFN clause exception (Art. XIV GATT 1994). Over two-thirds of these FTAs have come into force in the past decade.¹ Nearly every country now has some sort of regional trade agreement with one or more other countries and many new negotiations are currently underway or being proposed, indicating that this trend is likely to continue as countries lower restrictions on trade. FTAs are a way to gain preferential access to the market of the state with whom the agreement is negotiated by leveling the playing field with the FTA partner's producers and securing a competitive edge over other exporters to the country. They are legal instruments to assure future investments and trade projects, create new jobs, and allow market access. However, trade agreements are not only created between countries for economic reasons—FTAs are also the result of social and political factors. Such agreements are often used to promote stability and development in a region or to strengthen diplomatic relations between allies. The increase in negotiation and implementation of FTAs in the past decade has created a domino effect—more agreements are being created involving more countries as they each strive to maintain market access and competitiveness.

The U.S.- Colombia Trade Promotion Agreement (CTPA), after being negotiated for four years, was signed by the parties on November 22, 2006. Colombia's Congress approved the CTPA and a protocol of amendment signed on June 28, 2007, and completed the country's obligatory constitutional review in 2008 of laws No. 1143 and 1166 of 2007. The agreement is still pending approval by the Senate in the United States, raising concerns from both sides as the failure to pass the agreement as well as the expiration of prior agreements between the two countries have resulted in a lack of trade protection for U.S. and Colombian exporters and importers alike.

Trade between Colombia and the U.S.

Colombia and the U.S. are intricately linked through their long-standing trade relations that continue growing over the years. The U.S. is the main destination for Colombian exports, which in 2010 comprised more than 42% of total Colombian exports. Nearly $17 million of total sales of the country went to the U.S., marking a 31% increase in exportations from 2009.² While the percentage of total Colombian exports going to the U.S. is larger than that of U.S. exports to Colombia, Colombia is still a major export destination for the U.S. in the southern hemisphere. Colombia is the second largest South American market for U.S. agricultural exports—in 2010, the U.S. exported $832 million of agricultural products to Colombia, consisting primarily of wheat, corn, cotton, soybeans and corn gluten feed.³ Since 2005, the U.S. has increased its exportation of petroleum and coal products to Colombia over 600%, making it the largest manufactured export category to Colombia. Nearly 12,000 companies export merchandise to Colombia, and 86% of these are small and medium-sized enterprises.⁴

Colombia and U.S. traders are at an all-time disadvantage at the time of this publication since they are not currently covered by any trade preference agreement. The World Trade Organization's Generalized System of Preference Program (GSP), through which the U.S. government provided preferred treatment of Colombian exports, expired on December 31, 2010 and the Andean Trade Preferences Act (ATPDEA) expired on February 12 of this year. The ATPDEA, which was deliberately not extended by Congress after its expiration, effectively eliminated export taxes on 6,300 goods from Colombian origin into the U.S. Since its expiration, a burden of nearly $50 billion USD from customs tariffs has been unloaded onto Colombian exporters, a number that will continue rising until an agreement is reached, or trade halts. These Colombian exporters are taking the hit directly, so as not to lose the significant American market for their products. They are hoping for an act to be passed retroactively to refund the customs tariffs paid and recuperate these huge losses; however, congressional partisanship in the U.S. raises questions of when and if this will happen. Colombian exporters will likely bear these costs until the ATPDEA is extended, the CTPA is passed or they are forced to sell their goods elsewhere.

Even if the ATPDEA is renewed, the temporality of the agreement limits long-term investment. If the CTPA were to be passed, it would markedly liberalize trade between the two countries in the long-term by immediately eliminating duties on almost 70 percent of U.S. farm exports, and other tariffs on U.S. farm exports within 15 years. It would also provide duty-free tariff rate quotes on products such as beef, chicken and dairy. Under the agreement, the U.S. would have equal or preferential treatment to third-party competitors on many important products.⁵ The elimination of tariffs and other barriers in Colombia will increase the U.S. GDP by an estimated $2.5 billion, according to the U.S. Department of Commerce International Trade Administration.⁶ For Colombia, the CTPA would not only provide duty-free access to the U.S. for nearly 100% of Colombian industrial exports, but also could aid in legitimizing their trade scheme, reducing some of the country's risk and cost of borrowing abroad. It would provide legal stability for investors, increase economic growth and allow Colombia access to purchases in the U.S. public sector. In addition, the CTPA would ease the access of professionals to provide services in the other country.

U.S. approval of the CTPA

There has been some speculation as to why the U.S. government is dragging its feet in approving a free trade agreement with Colombia. Some point a finger at factors external to the U.S., particularly Colombia's history with labor regulations to be modified and the lack of security for employees and union leaders in the country. Since 1986 there have been 2,800 reported killings of labor union members. Although under President Santos this number dropped to 36 in 2010,⁷ the U.S. Democratic party is still hesitant to liberalize trade with a country with such figures. In April of this year, the U.S. laid out a comprehensive Action Plan, in which Colombia was required to fulfill requests such as reorganize again the Labor Ministry to protect labor rights and modifying its criminal code to adequately punish crimes regarding labor leaders. Colombia quickly met all benchmarks that were required of it under the Plan, leading some to believe (notably U.S. Trade Representative Ron Kirk) that negotiations would begin in Congress, resulting in a vote on all three trade agreements currently awaiting Congress' approval—those of South Korea, Colombia and Panama. After May 7, 2011, when the administration notified Congress that it was ready to begin talks on the three trade agreements, hopes were high for discussions and their subsequent approval for debate programmed for July 7, 2011.

Another internal eco-political roadblock materialized on May 16, 2011 when the Obama administration refused to continue seeking Congressional approval until Republicans agreed to expand assistance for American workers who could lose their jobs as a result of the agreements. Trade Adjustment Assistance, or TAA, is a $2.1 billion federal program originally established in 1984 under the Reagan administration. Since its inception, the program's reach has waxed and waned over the years depending on the domestic economic climate. TAA has its supporters, who assert that it provides valuable benefits and services to workers who become unemployed when such international agreements take place, and then there are those who argue that the program does not effectively help a large enough fraction of laid-off workers and should not be expanded. This internal dispute is likely to put even further delays on the CTPA.

One last consideration that could result in delays of the passage of a bill is the view of the South Korea/Colombia/Panama agreements as a bundle deal. U.S. Senate Finance Committee Chairman Max Baucus has informed U.S. Trade Representative Kirk that none of the trade agreements will pass unless they are all packaged together either in one piece of legislation or in bills that are sent at the same time.⁸

Though the trade agreement is meeting resistance in Congress for the reasons above, it has wide support from American and Colombian business and agricultural communities. More than 1,200 U.S. businesses and agricultural organizations, the Latin American Trade Coalition, a group of companies that employ more than 10 million American workers and the Colombian American Chamber of Commerce (AMCHAM) all support the U.S.- Colombia agreement.⁹American workers and businesses support the agreement because it would open the Colombian market to American products by eliminating the customs tariffs on their products, would provide rules for investment and foreign trade projects and would create more jobs in the country.

Effect of the FTA on the Colombian and U.S. exporters, consumers and workers

Colombian exporters are supporting huge costs in order to stay in the U.S. market without the ATPDEA or any free trade agreement, especially considering that many other products originating from other countries are currently receiving preferential access to the U.S. market. U.S. exporters, sans a Colombia-U.S. agreement, are also missing out on a huge potential gain in the Colombian market. Colombia's former trade minister, Luis Guillermo Plata, said the delay is killing U.S. agricultural trade with Colombia. The U.S. market share of yellow corn imports dropped 53% from 2008-2009, wheat imports dropped 37% and soybean market shrunk 67%.¹⁰ This drop is largely due to a recently approved MERCOSUR Agreement that grants products from Argentina, Brazil and Uruguay preferential access to the Colombian market, effectively replacing U.S. suppliers. The U.S. International Trade Commission estimates that a free trade agreement such as the CTPA would increase U.S. Gross Domestic Product by close to $2.5 billion and U.S. merchandise exports would experience a gain of $1.1 billion. The CTPA would also open Colombia's $134 billion services market to highly competitive American companies, supporting jobs for American workers in sectors ranging from delivery and telecommunications services to education and health care services. C. Fred Bergsten, director of the Peterson Institute of International Economics, believes not having signed the South Korea and Colombian agreements has cost Americans an upwards of 300,000 jobs.¹¹

Though speculators say the CTPA could also create many jobs in Colombia due to increased exports, those in the agricultural sector may be negatively affected. If the CTPA comes into force, it will become the responsibility of Colombia to protect the small farmers in their country. U.S. farmers are largely protected by various farm bills: it is estimated that around $20 billion a year goes to farmers in direct subsidies,¹² and that for every dollar a U.S. farmer earns, 62 cents comes from some level of the U.S. government.¹³ To help mitigate the probable harmful impact on small-time Colombian farmers who would not be able to compete with these large, subsidized U.S. farm exports, the National Planning Department created an "Internal Agenda for Productivity and Competition," in 2005. This agenda aims to mitigate the effects of a free trade agreement on certain types of products by diversifying agricultural activity and providing direct subsidies to the vulnerable population but has yet to be detailed and implemented.¹⁴ Another program, the Agro Ingreso Seguro program (AIS) created by the Ministry of Agriculture to subsidize Colombian agriculture was discontinued in 2009 when word of corruption spread and investigations began to recuperate money allegedly awarded to some wealthy businessmen and families. Despite this, the government claimed the program subsidized more than 300,000 farmers. In order to have equivalent protection as the TAA provides to U.S. farmers, the government would need to create a program with transparency of fund allocation to ensure they are awarded only to the farmers directly adversely impacted by the result of the CTPA, and in need of such subsidies. Kelley Nicholls of the USOC is afraid that without a workable plan in Colombia, some of these small farmers could be pushed into the illegal market—cultivating illegal crops—which may demand international cooperation and internal support. On the other hand, the CTPA could actually help stem narco-trafficking and other illicit activity by urban and rural unemployed entrepreneurs, who would have new job opportunities as a result of increased export opportunities and emerging markets.

U.S. and Colombia relations

Prior to the Obama administration's announcement that no agreement would be approved without expansion of the TAA, there was optimism it would be passed mid-way through the year. Since this announcement, passage of the CTPA on this timeline, or at all, has become highly uncertain. The failure of Congress to pass the agreement—and with no clear end in sight—has been a cause for frustration from parties in both countries. After Colombian quick compliance with U.S. wishes via the Action Plan, it is nearing the point where diplomatic relations between the two countries may be threatened. Senator John McCain, in addressing Congress, asked his fellow leaders to consider an ATPDEA extension: "People have laid down their lives in the war against drugs. It's a sad, sad day for our dear friends in Colombia." Santos was certain an ATPDEA extension would be passed, also assuring Colombian exporters of its probable retroactivity when it passed, which would refund the imports tariffs accrued during the period since it had expired. However, his impatience has become apparent in his declaration that if the CTPA were not approved this year, Colombia would not continue to insist.

As the U.S. is taking its time in approving the agreement, Colombia is actively negotiating and signing trade agreements with other countries. Canada has completed domestic approval of its fair trade agreement with Colombia and is waiting for Colombia to complete the process to come in to force by August 15, 2011. "Many of the things that we buy from the U.S. we could buy from Canada and we could buy tariff-free," former Trade Minister Luis Guillermo Plata said in April 2010.¹⁵ A free trade agreement with Switzerland comes into force July 1 of 2011 under the European Free Trade Agreement (EFTA). Colombia is negotiating a free trade agreement with South Korea, Turkey and a there are talks of an agreement with Japan to follow. Colombia currently has agreements with Mexico, Chile, and Ecuador, Peru and Bolivia (under the Andean Agreement), MERCOSUR countries, ( Brasil, Argentina, Uruguay, Paraguay) and also with Caribbean Countries under ALADI. Colombia's current agreements with other countries and the completion of agreements in the negotiation would likely leave the U.S. behind and could hurt the competitiveness of its industries on an international scale.

There is some sentiment in the U.S. of a lack of incentive to pass the bill since the country would not lose much from the small piece of the pie that Colombia represents in the country's overall trade scheme. A spokesperson for the U.S. Business and Industry Council pointed out that in 2009, Colombia represented a total market slightly smaller than greater Miami and slightly smaller than Seattle, questioning how an agreement with Colombia would actually encourage noticeable growth and employment in the U.S. Perhaps more important than domestic economic concerns for the U.S., though, is maintaining friendly relations with one of its strongest allies in the southern hemisphere. Promoting free trade and helping the economies of Central and South American countries grow could strengthen freedom, democracy and friendship between the U.S. and its allies to the south. An agreement with Colombia is especially important to deepen the partnership between two countries that have been long-time defenders of a market-based democracy. Such an agreement would also provide a testament of how the U.S. is currently willing to interact with other developing countries outside of Central and South America. The U.S. should be worried about losing credibility in future negotiations if they fail to complete these deals or if they are reopened and renegotiated.

Each FTA is a small move in the right economic direction, as freeing trade has been shown to benefit all countries involved. The U.S. government should be careful not to let internal politics cause a disruption in the movement toward freeing trade with Colombia, which could cause not only economic but diplomatic injury, and could damper the exchange between two countries with a long-standing trade history.

Footnotes

1. World Trade Organization. Some Figures on Regional Trade Agreements notified to the GATT/WTO and in force. Accessed: http://rtais.wto.org/UI/publicsummarytable.aspx . Updated May 17, 2011.

2. Ministerio de Comercio, Industria y Turismo. Republica de Colombia. ProExport Colombia. Accessed: http://www.mincomercio.gov.co/eContent/NewsDetail.asp?ID=8712

3. U.S.-Colombia Trade Promotion Agreement: Expanding Markets for America's Farmers and Ranchers. U.S. Government. Accessed: www.whitehouse.gov/sites/.../IncreasingAgriculturalExportstoColombia.pdf

4. U.S. Exports to Colombia: A State Perspective. U.S. Department of Commerce International Trade Administration. Accessed: http://www.trade.gov/mas/ian/tradeagreements/fta/tg_ian_001983.asp

5. U.S.-Colombia Trade Promotion Agreement: Expanding Markets for America's Farmers and Ranchers. U.S. Government. Accessed: www.whitehouse.gov/sites/.../IncreasingAgriculturalExportstoColombia.pdf

6. U.S. Department of Commerce International Trade Administration. Accessed: http://www.trade.gov/fta/colombia/

7. Human Rights Watch. World Report 2011: Colombia. Accessed: http://www.hrw.org/en/world-report-2011/world-report-2011-colombia

8. Doug Palmer. Baucus Says Korea FTA Won't Pass Without Panama & Columbia Reuters. Washington, March 2011.

9. Office of the United States Trade Representative. U.S. Business and Agriculture Support the Colombia Free Trade Agreement. Accessed: http://www.ustr.gov/trade-agreements/free-trade-agreements/colombia-fta

10. Ministerio de Comercio, Industria y Turismo. Republica de Colombia. ProExport Colombia. Accessed: http://www.mincomercio.gov.co/eContent/NewsDetail.asp?ID=8712

11. U.S. Department of Commerce International Trade Administration. Accessed: http://www.trade.gov/fta/colombia/

12. .he Globe and Mail. Nov. 25 2010e Perspective. Administration. of these are small and medium-sized enterprises.it the largest m Farm Income and Costs: Farms Receiving Government Payments: USDA.

13. Barrie McKenna. For U.S. farmers, subsidies the best cash crop The Globe and Mail. Nov. 25, 2010

14. Santiago Montenegro Trujillo. Agenda Interna para la Productividad y la Competividad. Departamento Nacional de Planeación. Nov. 12, 2010. Accessed: www.mincomercio.gov.co/econtent/documentos/.../InsumosHuila.pdf

15. Canadian Lawmakers Approve Free Trade Agreement with Colombia. June 14, 2010. Accessed: http://www.businessweek.com/news/2010-06-14/canadian-lawmakers-approve-free-trade-agreement-with-colombia.html

16. Kevin G. Hall. Obama Administration Moves Forward on Trade Deals. Knox News. Accessed: http://www.knoxnews.com/news/2011/may/05/obama-administration-moves-forward-trade-deals/?partner=yahoo_feeds.

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