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Laissez faire and international trade: a critique of the proposed United States Colombia free trade agreement.

ECONOMIC RELEVANCE OF FREE TRADE AGREEMENTS (FTA)

FTAs provide partner nations with reciprocal duty-free access to each others' markets, effectively creating a common market, thereby facilitating trade flows and increasing economic efficiencies. The increase in scope and speed of market access results in faster turnover and creation of investible domestic surpluses. FTAs normally provide better and cheaper goods and services through increased competition, which leads to consumer surpluses for all partners. Economic welfare gains from a FTA may be viewed as the total of increases in consumer and producer surpluses net of the changes in revenue from customs tariffs. There are also other spillover benefits of FTAs including higher levels of innovation and investment that can contribute to economic recovery, growth and distribution (Hoekman and Schiff, 2002).

Over 200 regional FTAs now account for about one-third of global trade. While these generally promote economic growth in member nations, they can also create obstacles for multilateralism. There is speculation whether a large number of FTAs will threaten the health of the worldwide free trade system (Newfarmer, 2005).

THE UNITED STATES--COLOMBIA FTA

The United States-Colombia Trade Promotion Agreement (CTPA) is the proposed FTA, which is a bilateral commercial treaty for eliminating obstacles to trade and favoring private investment between the United States and Colombia. This agreement emerged from failed multilateral negotiations between the United States, Colombia, Peru, and Ecuador. The United States concluded negotiations with Peru in December 2005 while negotiations with Ecuador are continuing. The first bilateral trade negotiations between United States and Colombia were initiated in May 2004, and the US-Colombia FTA (will be henceforth called the CTPA) was signed in November 2006. The agreement was renegotiated to include more rigorous environmental and labor standards via a Protocol of Amendment that was signed in June 2007 which was presented by both countries to their respective congresses.

The proposed CTPA is a comprehensive FTA that will address issues relating to trade commerce, customs administration and trade facilitation, and remove technical barriers to trade, while safeguarding intellectual property rights, and labor and environmental standards. It will additionally include government procurement, investment, telecommunications and electronic commerce. Under this agreement, Colombia will eliminate most of its tariffs on US exports, and US companies will have greater access to Colombia's services sectors than other World Trade Organization (WTO) members. US companies will gain an advantage in Colombian markets by the elimination of tariffs on 80 percent of US consumer, industrial and agricultural goods. An additional 7 percent of US exports will be covered under the duty-free umbrella within five years of implementation, while the remaining tariffs will be eliminated ten years after implementation of the CTPA (Eslava, Haltinwanger and Kugler, 2004).

On the Columbian side, after the CTPA was signed it was submitted to the Colombian Congress in November 2006 and was approved in June 2007 and became a public law, Ley 143, in July 2007. The Amendment was subsequently approved by Columbian Senate and House and became public Law, Ley 1116, in November 2007. The Colombia's Constitutional Court completed its review in July 2008 and concluded that the Agreement conforms to Colombia's Constitution.

The CTPA is still languishing in the US Congress. It was not approved before the change of administration in January 2009, because it failed to garner bipartisan support. The current administration will reportedly favor the free trade initiative, provided Colombia can demonstrate adequate protection of human and labor rights. But there is no declared timetable yet, to implement the CTPA, given the looming controversy over the safety of Colombian labor leaders.

This is, however, not the best terms of trade for the US. Currently, 90% of Colombian products enjoy unilateral free access to US under the Most Favored Nation tariff rates or the Andean Trade Preference and Drug Eradication Act (ATPDEA) signed in 2002. On the other hand, US exporters currently pay tariffs as high as 35 percent to enter the Colombian market. The CTPA will establish bilateral access and provide similar benefits to US exporters, thus creating economic opportunities for US manufacturers, workers, farmers and resource suppliers related to export businesses. It will generate better incomes for US Companies and could potentially increase US exports by 13.7 percent or $1.1 billion annually, contributing $2.5 billion to US GDP, according to the forecast from the US International Trade Commission (USTR, 2009).

According to the Latin America Trade Coalition's Colombia Tariff Ticker, the cost of the delay is real because US companies have paid $2.3 billion in unnecessary duties to the Colombian Treasury in the 3 years since the FTA was signed. The amount of $2.3 billion leads to higher prices in Colombia for US goods and services and reduced profits and jobs for US companies. Hence the CTPA can contribute positively towards the recovery from a long recession since it can offer US companies better access to Colombia's growing and dynamic market.

Colombia has the potential to be a strong trading partner, since there are already more than 10,000 US operating exporters, including 8,500 small and medium-sized companies.

US EXPERIENCE WITH ANOTHER FTA

The North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico was initiated in 1994 creating the world's largest free trade area in geographic terms (Agama and McDaniel, 2002). Duties and quotas were phased out and have been eliminated for all trade in NAFTA since 2008. The US-NAFTA trade has crossed the $1 trillion mark in recent years, as shown in Table 1, and US exports to NAFTA has almost doubled from $217 billion in pre-NAFTA 1993.

US foreign direct investment (FDI) in NAFTA Countries (stock) was $348.7 billion, while NAFTA's FDI in the United States was $219.2 billion in 2007. While the expectations in the mid-1990s was that the NAFTA would improve the US trade balance and result in job gains in the United States, the US-NAFTA trade deficit has grown recently. The US goods account trade deficit with NAFTA was $116 billion in 2007 and $143 billion in 2008, while this was only $9 billion in pre-NAFTA 1993. The US services account however shows a surplus with NAFTA of $26.5 billion in 2007. Critics claim that the growing current account deficit with NAFTA may have cost 1 million jobs US-wide (Fernandez-Kelly and Massey, 2007). However this is only a part of the story, since the pattern of the job losses by geographic location and economic sector is unclear. It is probable that low skill / low wage jobs were substituted by high skill / high wage jobs, which is the norm for international trade related employment and also consistent with the increase in the service account surpluses.

COLOMBIA'S EXPERIENCE WITH OTHER REGIONAL TRADE ASSOCIATIONS

Colombia joined the general agreement on Tariffs and Trades (GATT) in 1981 and the country was an active member of this organization. Later, the Congress of Colombia approved the entry into the WTO, which replaced the GATT in 1994. Colombia became a party to all the agreements that are listed by the WTO. Other agreements currently implemented are (Fernandez, 2003):

* Andean Community

* The Group of Three (G-3)

* Colombia- Chile Agreement

* Andean countries and Mercosur agreement

* Colombia- Caricom Agreement

* Colombia - Panama Agreement

* Colombia and Central America countries

Colombia is a commercially significant market with functioning FTAs as well as some that are currently being negotiated.

The Andean Trade Preference Act (ATPA) /ATPDEA agreement started in December 1991 between the United States and four Andean countries (Bolivia, Colombia, Ecuador and Peru). The purpose of the agreement is to support the Andean countries in their fight against drug production and trafficking by expanding their economics alternatives. This agreement was renewed and amended by The Andean Trade Promotion and Drug Eradication Act (ATPDEA) enacted in August 6, 2002. The ATPDEA provides duty-free treatment for certain products previously excluded under the ATPA. Although this agreement is a one-way preference program, it has had a positive impact on two- way trade between Colombia and the United States. Both US imports and exports to and from Colombia grew by an average of 8 percent per year between 1991 and 2007. Consequently, it created thousands of jobs in both countries. In addition, Colombia has been the largest market for US exports at $8.6 billion, which represents 54 percent of US exports to ATPA members (Colombia, Bolivia, Ecuador and Peru).

FTAs being negotiated are:

1. The Colombia-Canada FTA which is in final negotiations and it could be implemented next year. Colombia closed the negotiations of a free trade agreement with Canada in June 7, 2008. This agreement will benefit both countries; it will provide market access, investment, rules for trade goods and services. Bilateral trade between Colombia and Canada accounted $915 million.

2. The Colombia-European FTA (EFTA) Colombia initiated free trade agreement with EFTA members--Iceland, Norway, Switzerland and Liechtenstein - in June 2007.

3. Colombia-European Union Agreement The purpose of this agreement is to intensify and improve co-operation and enhance and facilitate bi-regional trade and investments.

US-COLOMBIA TRADE PROFILE

Colombia's total exports increased from $12 US billion in 2001 to $30 US billion in 2007, at a compounded annual growth rate of 16.5%, while total imports have increased from $13 US billion to $33 US billions, at a compounded annual growth rate of 16.8%, during the same period.

United States is the largest trading partner of Colombia in both exports and imports, as shown in Figures 1 and 2. The US was the source of over one-fourth of Colombia total imports in 2007. In 2007, the United States exported a record $1.2 billion of agricultural products to Colombia. The top products were beef, pork, poultry, dairy products, vegetables, fruits and tree nuts, wheat, barley, rice, soybean, sugar and sweeteners, processed products, tobacco and cotton.

In the same year, the US accounted for over one-third of all Columbian exports. Colombia is the third largest trading partner of United States in the Western Hemisphere outside NAFTA. Colombia represents a large market with significant import potential. It has the third largest population (47 million in 2007) and the fifth largest GPD ($171 billion in 2007) in Latin America. It is also the largest export market for agricultural products in South America (Consulate of Columbia at Atlanta, 2008).

[FIGURE 2 OMITTED]

The total value of trade in goods and services between US and Colombia was $18 billion in 2007. As shown in Table 2, Colombia is the third largest and the fastest growing export market for the US in South America.

In 2007, US exports represent $8.6 billion, amounting to nearly 30 percent growth over the previous year. US exports to Colombia have almost doubled as Colombia's economy recovered from a recession in 2000-2001. Bilateral trade agreement between Colombia and the United States has expanded by 70% over the past decade as shown in Figure 3.

Exports are critical to the stability and growth of US economy. In 2007, US exports contributed to about 30 percent of economic growth. Trade with Colombia provides an expanded economic opportunity in a growing and dynamic business climate.

The CTPA will provide benefits for many farm products that will receive duty- free treatment in Colombia. These include beef, pork, poultry, cotton, wheat corn, rice, and soybean meal, fruits and vegetables, including apples, pears, peaches and cherries, as well as processed food products like frozen french fries, cookies and dairy products.

[GRAPHIC 3 OMITTED]

SOCIO-ECONOMIC BENEFITS OF TRADE FOR COLOMBIA

Economic progress in Colombia has helped to promote social development, reduce violence and curb the activities of drug cartels. Colombia is now more stable and prosperous but illegal elements and violence remain just below the surface. The CTPA has the potential to provide viable alternatives to violence and trafficking, through rapid economic growth, job creation and foreign investments. Colombia has been fighting corruption and illegal activities, and the approval of the CTPA can transform it into a reliable partner for the US in the region. This is borne out by some recent economic indicators, as stated below and depicted in Figures 4 and 5.

* Unemployment rate has fallen from 16.1 percent in 2001 to 12.4 percent in Jan 2008

* GDP has increased from 1.66 percent in 2001 to 7.62 percent in 2007

* Total imports have increased from $13 US billion to $33 US billions

* Total exports have increased from $12 US billion to $30 US billion

MUTUAL GAINS FROM THE CTPA

[FIGURE 4 OMITTED]

The CTPA will provide US businesses, farmers, ranchers, etc. more cost effective access to the Colombian market, since over 80 percent of US consumer and industrial goods will enter Colombia duty-free. After the implementation of the CTPA, Colombia will eliminate its price band system, making a variety of US goods and services more price competitive. It will also eliminate barriers to US services, provide a secure legal framework for investors, protect intellectual property and improve the environment. Some key elements of the agreement are:

* Uniform market access, for example no agricultural products are excluded.

* Phased tariff elimination within 15 years, starting with immediate zero-duty for about 80% of US exports.

* SPS measures have been resolved for agricultural trade (SPS signifies Sanitary and PhytoSanitary measures set out in the WTO guidelines, on how governments can apply food safety and animal and plant health measures within trade agreements).

* Exports subsidies have been precluded by mutual agreement for products shipped into each others' markets.

The United States and Colombia have been working in tandem to combat regional terrorism and the illicit trade of narcotics. As a result, Colombia is more peaceful and prosperous than it was six years ago, suggesting that economic growth may help to alleviate crime and other societal maladies. The implementation of the CTPA will provide a boost for these efforts by serving to validate US endorsement of Colombia's recent aggressive efforts against crime, besides contributing to its overall development.

The CTPA enjoys overwhelming (65.5% in a sample of 950) support of the Colombian people, according to a survey conducted by the consulate of Colombia in Atlanta. Colombians also feel that stronger ties with the United States will help the country become more secure, stable and prosperous, as demonstrated by over 500 responses in 3 months, to a request for public comment on the CTPA made by US Ambassador Ronald Kirk. There also appears to be strong support for the CTPA from US businesses, as evidenced by a spate of opinion pieces in the Business Week and the Wall Street Journal during 2009.

The CTPA is particularly lucrative for US agriculture, since Colombia is the largest agricultural market in South America. The American Farm Bureau and over 40 other agricultural industry and farm associations recognize the advantages and strongly support the CTPA since it will provide US products exported to Colombia with the same duty-free access already granted to Colombian products imported into the US. For example, producers of corn, which currently attracts a tariff of 68 percent, will have immediate duty free access to Colombia's market of 2.1 million metric tons, under the CTPA. Similarly, US horticultural exports like apples, pears and cherries that currently face a tariff rate of 15 percent, will attract zero tariff upon the enactment of the CTPA.

Agricultural imports from Colombia were valued at over $1.8 billion in 2008, with the top products being coffee and coffee products ($847 million), fresh cut flowers ($370 million) and fresh fruits--mainly bananas ($208 million). Colombia does not pose an import threat to the US farm sector and there are no current Sanitary and Phytosanitary barriers preventing the export of US products to Colombia.

PROSPECTIVE RESOLUTION OF OUTSTANDING ISSUES

The main reason for the US opposition to the CTPA is the violence against union workers by the paramilitary organizations, and the continuing presence of drug cartels. Although the overall level of crime in Colombia has been subsiding, US congressional members insist on concrete evidence of sustained results in reducing the violence and impunity, before ratifying the CTPA.

Colombia has a poor track record of prosecuting cartels that threaten, abduct and often assassinate union leaders. There is a history of labor leaders being assassinated consistently, but scant attempt by the state to apprehend and prosecute the criminals (Gracia and Zuleta, 2004). While some 4000 trade unionists were murdered since 1986, only five perpetrators have been convicted. Opponents also point out that there are continual violation of the rights of Colombian workers by corporations and paramilitary organizations.

However, recent statistics show a sustained downward trend in crime, suggesting that the Colombian administration is committed to curb paramilitary violence, hostility towards union members and judicial impunity. The Colombian government established a Protection Program in 1997 to improve the safety of vulnerable segments of society. Between 2002 and 2007, the funding for this program increased by 141 percent, with union members as its core target segment. The protection program has had a great impact and contributed to the reduction of assassinations of trade union members in Colombia. While murders in the country overall decreased by 40 percent, assassinations of union members have dropped consistently by 80 percent between 2002 and 2007, as shown in Figure 6.

The Colombian government appears to be committed to employ significant resources to apprehend and prosecute the perpetrators of violent acts against union members. A culture of social dialogue has been accepted and enhanced through the creation of new mechanisms and the renewal of others including the Tripartite Agreement that consists of three parties - workers, employers and government--that work cooperatively to protect labor rights.

The United Nation's International Labor Organization (ILO) removed Colombia from its labor watch list after 20 years. The Tripartite Agreement provides the mandate for the work of a new ILO office in Colombia that the Government authorized in 2006.

The actions to fight impunity include a constitutional reform that transformed the Colombian judicial system in 2004, with the support of the US Department of Justice. A new accusatory system will replace the old inquisitor system. The office of the Prosecutor General created a special sub-unit within the Unit of Human Rights, to investigate and prosecute violence against union members. Over 1200 criminal cases have been registered with a focus on 187 priority cases as determined by the unions, within one year of the advent of this subunit in February 2007. Specialized judges have also been assigned exclusively to cases of violence against union members. The resources allocated to the judicial branch and the office of the Prosecutor General have increased every year since 2002. The budget increased by over 70 percent, growing from US$346 million in 2002 to US$598 million in 2008. During the same period, the budget of the Judiciary also increased by almost 50 percent. This has helped the new judicial system to drastically reduce processing time for cases, for example, the time for homicide cases has dropped by 75 percent and for drug trafficking by 90 percent (Griswold and Hidalgo, 2008).

In 2005, the Colombian Congress enacted the Justice & Peace Law and Decree 128, to demobilize violent guerrilla and paramilitary groups, through economic and social incentives, including de facto amnesties. The government has also extended permanent police presence to all municipalities of the country in 2007, which was absent in 168 municipalities even in 2002.

Colombia has a robust legal framework to protect the rights of workers, which includes the core labor standards defined by the ILO, namely:

* Freedom of Association and the Effective Right to Collective Bargaining

* Prohibition of Forced Labor

* Effective Abolition of Child Labor

* Non-Discrimination in Employment

Colombia has close to one million unionized workers in Colombia, and over 7,650 unions registered with Ministry of Social Protection. New resolutions have expedited the labor union registration process. Workers are allowed the right to form unions and the right to strike under the Constitution of Colombia. Colombia continues to reform its labor laws to achieve consistency with ILO standards. For example, in 2003, the Constitutional Court annulled various provisions limiting the rights of industrial unions to collective bargaining (Attanasio, Goldberg and Pavcnik, 2003).

PROGNOSIS

While member nations do derive economic benefits from regional FTAs, they can be trade restrictive in the global context, simply because more remote nations do not have the same ease of access to the large US or the EU markets. Another negative for a developing nation could be the amount of resources they spend in negotiating FTAs, for instance in attaining compliance with standards set by the richer nation. In the short run, these redirected resources may imply loss of alternate domestic investment opportunities (Burfisher, Robinson and Thierfelder, 2001). So, in view of better long term prospects of an FTA signed between a developed and a developing nation, the higher income nation needs to safeguard the developmental goals of the lower income nation. These may take the form of inclusions of agriculture, which generate gains in rural areas, or lessening the stringencies in investment and intellectual property laws to lower enforcement costs, or the simple provision of trade-related technical assistance. The CTPA appears to be well grounded in these principles.

Although the CTPA is still pending ratification by the US Congress, it can evidently generate economies of scale and scope for both countries. In the US, it can potentially create thousands of jobs, which is vital in a period of economic recession, and considering that US unemployment rates (over 10 percent) are at historical highs.

The CTPA will benefit Colombia by opening its market to more import competition, which will provide its consumers with better quality products at lower costs. It can also promote foreign direct investment and strengthen its socioeconomic relations with the largest economy in the world. A recent study by the University of Antioquia shows that not implementing the CTPA would decrease investment by 4.5 percent and GDP by 4.5 percent, while unemployment will increase by 1.8 percent and poverty levels will rise by 1.4 points.

The approval of the FTA would seal a deeper partnership between two nations that have been long-time friends and great defenders of market-based democracy. US will be a reliable partner in turbulent times and support a region where liberal values are under attack. Colombia has made significant progress in the areas of labor rights and protection for union members, since 2002. The government has strengthened the judicial framework of the nation, and improved the legal rights for trade unions. In addition, the government has reduced violence against union members, increased funding of the protection program and intensified the prosecution of violence against union members. The new challenge for Colombia is to build on the progress that has been made. The CTPA can provide the economic engine to sustain this momentum.

REFERENCES

Agama, Laurie-Ann and Christine A. McDaniel (2002). The NAFTA Preference and US-Mexico Trade. Office of Economics Working Paper 2002-10-A, US International Trade Commission.

Attanasio, O., P.K. Goldberg and N. Pavcnik (2003). Trade Reforms and Wage Inequality in Colombia. NBER Working Paper No. w9830.

Burfisher, Mary E., Sherman Robinson and Karen Thierfelder (2001). The Impact of NAFTA on the United States. The Journal of Economic Perspectives, Volume 15, No. 1, 125-144.

Consulate of Columbia at Atlanta (2008). Accomplishments in creating a secure, prosperous Colombia. http://www.consuladodecolombiaatlanta.com/index.php?option=com_poll&id=15: apoyo-el-tlc-colombiausa

Consulate of Columbia at Atlanta (2008). An update on Actions to Strengthen the Rights and Protections for Trade Unions. http://www.consuladodecolombiaatlanta.com/index.php?option=com_poll&id= 15:apoyo-el-tlccolombia-usa Eslava, M.J., A. Haltinwanger and M. Kugler (2004). The Effect of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia. Journal of Development Economics, Volume 75, No. 2, 333-371.

Fernandez-Kelly, Patricia and Douglas S. Massey (2007). Borders for Whom? The Role of NAFTA in Mexico-US Migration. The ANNALS of the American Academy of Political and Social Science, Volume 610, 98-118. Fernandes, A.M. (2003). Trade Policy, Trade Volumes and Plant-Level Productivity in Colombian Manufacturing Industries. Policy Research Paper Series 3064, The World Bank.

Gracia, O. and H. Zuleta (2004). The Free Trade Agreement between Colombia and USA: What can happen to Colombia? Journal of Development Economics, Volume 74, No 2, 331-366.

Griswold, D. and J. Hidalgo (2008). A US -Colombia Free Trade Agreement: Strengthening Democracy and Progress in Latin America. Free Trade Bulletin No. 32.

Hoekman, Bernard, and Maurice Schiff (2002). Benefiting from Regional Integration. In Development, Trade and the WTO: A Handbook, ed. Bernard Hoekman, Aaditya Mattoo, and Philip English. World Bank, Washington, D.C.

Newfarmer, Richard (2005). Regional Trade Agreements: Designs for Development. In Trade, Doha, and Development: A Window into the Issues, Ed. Richard Newfarmer, 247-258. World Bank, Washington, D.C.

Office of the United States Representative (USTR, last update Oct 2009). Colombia FTA. http://www.ustr.gov/trade-agreements/free-trade-agreements/colombia-fta

Clint W. Relyea,

Sandra Liliana Tejada,

Kelly E. Fish,

Gauri-Shankar Guha

Clint W. Relyea, Arkansas State University

Sandra Liliana Tejada, Arkansas State University

Kelly E. Fish, Arkansas State University

Gauri-Shankar Guha, Arkansas State University
Table 1: US--NAFTA trade in billions of current US$

        Export   Import   Total

2007:    452      568      1020
2008:    412      555      967

Table 2 US Exports to Trading Partners in Latin America

Country              2006 US$ billion   2007 US$ billion

Brazil                     19.2               24.6
Venezuela                  9.0                10.2
Colombia                   6.7                8.6
Chile                      6.8                8.3
Dominican Republic         5.3                6.1
Argentina                  4.7                5.8

Figure 1. Colombian Imports by Country in 2007

All others   23%
China        10%
Mexico        9%
Japan         4%
Brazil        7%
Venezuela     4%
NICs          4%
EU           13%
US           26%

Note: Table made from pie chart

Figure 2. Colombian Exports by Country in 2007

Ecuador                    4%
Other European Countries   4%
Peru                       3%
Central America            2%
Mexico                     2%
China                      3%
Caricom                    2%
All others                15%
Venezuela                 17%
US                        34%
EU                        14%

Note: Table made from pie chart

Figure 5. Columbia's Recent GDP Growth (Percent)

2001  1.66%
2002  2.26%
2003  4.1%
2004  4.96%
2005  4.74%
2006  6.96%
2007  7.62%

Note: Table made from line graph.

Figure 6. Declining Number of Assassinations of Union Members
2001-2007

2001   205
2002   196
2003   101
2004    89
2005    40
2006    60
2007    26

Note: Table made from bar graph.
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Title Annotation:Andean Trade Preference and Drug Eradication Act
Author:Relyea, Clint W.; Tejada, Sandra Liliana; Fish, Kelly E.; Guha, Gauri-Shankar
Publication:Journal of International Business Research
Geographic Code:1USA
Date:Mar 1, 2011
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