Journal of Undergraduate Research
Volume 8, Issue 6 - July / August 2007

The US-Colombia Free Trade Agreement: Blessing or Curse

Angelica Valencia

ABSTRACT 

The formation of economic trading blocs has been a dominant feature of the globalization process. All over the world we witness the formation of free-trade areas meant to assure a soft landing in the world economy for the participating countries and to maximize their possibilities of stable sustainable growth with equity. This study will present a short analysis of the US-Colombia free trade agreement, based on a diagnostic of the present situation, and a plausible estimate of its effects, including the positions on the agreement taken by organizations of stakeholders and opinion leaders.

INTRODUCTION

The formation of trading blocs has become the preferred strategy to develop international markets and to form pacts that consent in tariffs and trade agreements. The need to export competitively has become a major concern for those developing countries that do not want to be left out of the internationalization of markets, need to serve their external debt, reduce their dependence on imports, and need to increase their foreign exchange income (United Nations, 1992). Regionalization has been indicated as the vital strategy for the development and integration into the world economy for countries worldwide. The United States has been the protagonist of this strategy but it was rapidly adopted by more developing economies, eager to implement changes that would secure them a soft landing in the world economy, helping them compete at an international level while enjoying the advantages of free-trade areas (Carranza, 2000). The mantra was that this way all participants would be able to maximize their objectives of realizing sustainable growth with equity. Since the North American Free Trade Agreement (NAFTA) came into being in 1994, the United States has signed bilateral free trade agreements with ten Latin American countries, including Colombia.

Generally, free trade blocs are formed with the objective to lower tariffs internally while keeping the protective regulations with non-members in tact. Some of the trades include: Latin American Free Trade Association (LAFTA), the Central American Common Market (CACM), Caribbean Free Trade Association (CARIFTA), the Andean Pact, and MERCOSUR. Next to these trade blocs, bilateral agreements have been signed with a number of countries. The results of this wave of regionalization are being debated.

The purpose of this research is to explore how the Colombia-US Free Trade Agreement (FTA) would affect the Colombian economy that through the agreement would be linked to the most powerful economy in the world.

BACKGROUND

Colombia is a free market economy with the fifth largest GDP, and the third most populous country in Latin America. Located in the middle of the Western hemisphere it is considered the gateway to Latin America as shown in the map of figure 1.

Figure 1: Colombia’s Location (source: www.colombia.com)
Figure 1: Colombia’s Location (source: www.colombia.com)

In 1991, Colombia established a ten-year agreement with the United States designed to combat drug production and trafficking, to revitalize the economy, and to strengthen government institutions. The agreement, the Andean Trade Promotion and Drug Eradication Act (ATPDE), allowed most Colombian products exported to the US market to be duty-free, a policy that, at the time, provided a boost to Colombia’s economy. At the conclusion of the ten-year term, the agreement was extended for five more years granting agreed benefits until 2006.  The agreement covered an export value of over 4 billion US dollars in 2005 (Presidencia, 2006). The question is now whether it would be advisable to continue with the FTA or whether the costs to the Colombian economy would out-weigh the benefits (Cardenas & Garcia, 2004).

Between 1991 and 2001 Colombia experienced a significant improvement in its export position. The US appeared to be its main trade partner, followed by the European Union and Venezuela.

Figure 2. Columbian Imports and Exports by Trading Partner (source: Fedesarrollo based on DANE. 2001-2005)Figure 2. Columbian Imports and Exports by Trading Partner (source: Fedesarrollo based on DANE. 2001-2005)

In 2005, Colombia exported 40 percent of its production in goods and services to the United States, 30 percent of its imports came from that same country. Based on this evidence it is easy to conclude that the Free Trade Agreement had a strong impact in Colombia’s economy.  Some sectors most will likely benefit from the agreement while others may be negatively affected. The signing of the agreement by President George W. Bush and President Alvaro Uribe has opened market opportunities for both countries. However, the possibility for economic success is doubted by many. In practice, only those firms with an international competitive capacity may be able to take advantage of the free-trade and survive the challenge of competing with US imports. Realistically, at this moment few firms appear to be ready to enter the international market successfully. The others will face a long struggle while trying to build a competitive position in the international market and prevent to lose out definitively. The Mexican experience has shown this to be a tough process.

FREE TRADE AGREEMENTS FACTS AND EXPECTATIONS

The Colombian government has released projections of the FTA results when the agreement was signed. Some of the most important projections are the increase in exports of over 1.7 billion US dollars and at a global scale of over 3.5 billion, an economic increase of approximately 4.2 percent based on the research, and a formation of around 380,000 new positions in a period of 5 years. Additionally, according to a study conducted by the Banco de la Republica, between 2007 and 2010 around 2 billion dollars will be injected to the economy as a result of extra foreign investment (Presidencia, 2006).  

IMPORTANT FACTS

PRINCIPAL US NEGOTIATING OBJECTIVES

CHILE AND MEXICO: MIRRORS OF THE FUTURE

The US has been implementing a trade strategy to reach multiple markets in order to expand and integrate its role in the world’s economy. However, bilateral agreements have become more popular in recent years. Chile was the first South American country to sign such bilateral free trade agreement with the US. The US Trade Representative Robert B. Zoellic expressed his excitement about the: “this is a historic agreement that sets a high benchmark for future FTAs” (USTR, 2006).

This positive image of success has to be amended. The agreement will have winners and losers, the latter ones to be found among small and medium sized businesses. The economist Marcel Claude concludes that only the big economic conglomerates will be the beneficiaries of free trade agreements (Claude, 2006). The result will be an increasing unequal distribution of wealth and a growing unemployment (Claude, 2006).

Mexico also tried to work out a successful trade agreement with the US through  NAFTA (1994), and this way became the number one export economy in Latin America (Alvarez, 2004). However, according to ATTAC(2) the cost of the agreement in the first two years of its enactment were severe: an estimated 200,000 small and medium-sized enterprises folded under the impact of massive imports from the US. In addition, an estimated one million peasants were forced off the land under pressure of US agro imports. Large scale manufacturing appeared to be the winner and the agro sector the loser. However, doubts have arisen concerning the sustainability of the process. The Mexican economy has struggled in recent years: its external debt has been increasing in direct correlation with its increasing dependency on the US economy (Alvarez, 2004).

In both countries, Chile and Mexico, some economic gains were realized, such as the significant increase in the average wage of the working population and the rise in gross capital formation as a percentage of GDP.

Some predictions can be made for the US-Columbia FTA on the basis of the experiences from Mexico and Chile. However, it is important to understand that Colombia faces a different situation. One significant difference with Chile that concerns Colombia is its high initial import tariffs. Moreover, Colombia’s infrastructure is far less advanced than the ones in the other two countries. According to the Colombian Federation of Road Transportation (Federacion Colombiana de Transportes de Carga por Carretera), Chile and Mexico have approximately 900 kilometers of roads per million citizens, while Colombia has only 350 kilometers per million citizens. This big difference translates into a more expensive and complex system to deliver goods. Further, Mexico enjoys a proximity to the US and thus faces lower transportation costs. These differences affect the results of free-trade agreements.

POINTS OF VIEW

The research for this project discovered a complete absence of unanimity of opinion about the effects of the agreement. Some analysts had optimistic views, while others predicted that Colombia would crash its economy.  The public debate has divided the country into three large groups: the supporters, the opponents, and the apathetic. Among those Colombian citizens who reside in the US strong defenders of the agreement can be found, while doubts prevail among many commentators in the home country.

According to Joseph E. Stiglitz(3) in an article published by the New York Times, the Bush administration has been using bilateral agreements to satisfy US interests, instead of contributing to the economic growth of poorer trading partners. Mr. Stiglitz provides several supporting facts to his opinion, including the potential exposure of Chile’s economy to chaos and the real wages decline in Mexico ten years after the NAFTA was signed. As he stated in the article, “The good news is that the damage has been limited so far because we have been able to pressure only a few small countries to sign bilateral trade agreements. The bad news is that the enmity that we are earning through these pacts will only grow” (Stiglitz, 2004).

On the other hand, there are important business leaders who support the FTA and are convinced that the agreement is a great opportunity for Colombia. Luis Alberto Moreno, president of the Inter-American Development bank in Washington DC, has come out in support in his Bogota frente al TLC. He has welcomed the opportunity to do business with the US, because “it will allow the country to develop competitive strategies and create positions on the Anglo-market as well as on the Hispanic- market in the United States.”  This Hispanic market included 38 Million people in 2003 (Moreno, 2004).

Another perspective is given by Salomon Kalmanovitz , former president of Banco de la Republica in Bogota. He has expressed his anguish about the possible effects of the FTA. He bases his fears on recent studies calculating a loss of 80,000 jobs in the initial phase of the FTA. The increase in GDP would only be small:  .89 percent over a period of six years, exports are expected to increase by 1.9 percent, imports by 1.2 percent (Moreno, 2004), hardly a spectacular result.

Forecasts by expert leaders and financial analysts of free trade experiences in other countries cannot hide the fact that certainly on the short and medium term the effects of this type of agreement weigh heavily on the working class, making its everyday struggle to survive more difficult. The direct victims of the FTA are small and medium sized business owners. Some of them are well-educated and perceive the US-Colombia FTA as an opportunity to develop the necessary qualities to compete at an international level and to implement changes that would allow them to sell greater quantities of the product at a competitive price. Unfortunately, this will not apply to most small business owners, who are not well-educated and see themselves bombarded by contradictory FTA news. Most of them are terrified about the situation, because they either do not have a good understanding of what globalization and internationalization mean or, in case they do, they do not feel capable to handle the changes that they have to face.

CONCLUSION

The ultimate objective of the US-Colombia free trade agreement is to promote economic growth and sustainable development with equity. On paper, the agreement creates opportunities and could be seen as a stimulant to economic growth. However, in reality, the agreement does not guarantee prosperity, only opportunity to join a bigger market. To compete at an international level where goods and services are at low cost and high quality requires a big step and this may be a bridge too far for Colombia. The FTA will require much more of Colombia than of the US and fundamental changes in the governmental policies are going to be required in order to support the radical changes in the economy.

Past experiences in Chile and Mexico have shown that trade liberalizations generate winners and losers and Colombia is not going to be an exception. The challenge is going to be intense and complex and may require the sacrifice of one generation in order for the next one to succeed with the adequate tools. Globalization involves all Latin American nations and Colombia also will have to deal with this phenomenon at some point in time. The Free Trade Agreement will link Colombia to international markets. However, it does not guarantee success in terms of growth with equity, not even mentioning sustainable development, a point emphasized by AlbeiroValencia,(6) a representative of the small business sector. He referred to the FTA as an agreement that surely was going to have “winners” and “losers.”  According to him, the Colombian farming and agricultural sector generally  lacks a competitive edge in comparison with the United States and would be the first sector to lose out which would compound the endemic economic and political problems of the Colombian  rural sector. Further, Colombia does not posses enough of a developed infrastructure as to compete successfully at an international level. Most commentators  are nervous about how the US-Colombia Free Trade Agreement will unfold. Their only hope is that, after having taken the plunge in the international market, Colombia will be able to handle the consequences.

FOOTNOTES

  1. Data from World Bank 2006
  2. ATTAC: Asociacion para una tase a las transaccions financieras y la accion ciudadana de Chile
  3. Nobel Prize in Economics 2001, professor of Economics at Columbia University and former chief economist of the World Bank from 1997 to 2000.
  4. There were around 38.8 million Hispanics in the USA, according to the latest Census Bureau estimates released in July 1, 2003. The figures, as of July 1, show a 9.8% increase since the Census was taken in April 2000.
  5. Colombian economist highly specialized and formalized in the world of economics. Professor at the University Jorge Tadeo Lozano.
  6. Personal contact in Colombia

REFERENCES

  1. Alvarez Zarate, Jose Manuel. 2004. ALCA y TLC con Estados Unidos: La agenda de  negociacion, sus costos y beneficios frente a los interese nacionales. Colombia: Universidad Externado de Colombia.
  2. Cárdenas, Mauricio S., & Garcia, Camilo J., (2004). El modelo gravitacional y
  3. Carranza, Mario E. (2000). South American Free Trade or Free Trade Area of The Americas. Texas: Ashgate
  4. Claude, Marcel (2006). La Globalizacion Financiera. Retrieved January 03, 2007, http://www.attac.cl
  5. El TLC entre Colombia y Estados Unidos. Retrived December 15, 2006, ftp://ftp.fedesarrollo.org.co/pub/wp/WP27.pdf.
  6. Moreno-Piraquive, Alexandra. 2004. Una Mirada al TLC-Preparados o preocupados?. Bogota, DC-Colombia: Mira Movimiento Politico.
  7. Presidencia de la Republica (2006, January 30).El Pais. ABC del TLC. Corficolombiana
  8. Schott, Jeffrey J. (Ed.). 2006. Trade Relations  Between Colombia and the United Stated.Washington, DC: Institute for International Economics
  9. Stiglitz, Joseph E. (2004). New Trade Pacts Betray the Poorest Partners. The New York Times. Retrieved January 05, 2007, from http://www.nytimes.com/2004/07/10/opinion/10STIG.html?ex=1247198400&en=fb6a85cd639e724b&ei= 5090&partner=rssuserland
  10. Tratade de Libre Comercion Colombia y Estados Unidos-Resumen. 2006. Washington:DC
    United Nations. (1992). Trade Liberalization in Chile.  New York: US
  11. USTR-United Stated Trade Representative (2006). United States and Colombia Sign Trade Promotion Agreement.  Retrived November 28, 2006, from http://www.ustr.gov/

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