From the Andean Trade Preference Act (ATPA) to Free Trade Agreement - Case Study Example

Type Your The unabbreviated and number From the Andean Trade Preference Act (ATPA) to Free Trade Agreement. The Latin American Experience. Introduction Nature, history and forces. Important Data Traded products Economic theory US-Colombian Relationships Other important factors Areas of concern and conflict Future developments Conclusion Works Cited Tables and figures Introduction International Trade is an important institution that has evolved during the past decades and transformed the relationships between nations; nowadays societies are integrated, technological transference and innovations are vital for countries to transcend, and frameworks are being established in order to become part of this global trend. Undeveloped countries are no exception, and their governments have made agreements with more developed countries, so that they have founded special regulations and policies that guide movement of goods and technologies. But International trade is no magic wand, and it has detractors standing up from various parties, associations, and organizations across the globe. Latin American free trade experience started in Mexico and spread out to Central and South America, and has included multiple negotiations between the United States and several countries. In this paper, I want to draw your attention into the United States-Colombia free trade agreement, its history, nature, and foundation. I will approach important data and the potential impact of this relationship; finally, I will explain different difficulties and areas of conflict that have emerged. Nature, history, and forces. An institution could be defined as rules, both formal and informal, that guide human activities within societies (North, Douglass 1990). An important institution is International Trade, which accelerates technological transference, competition, and productivity. The United States has put in place numerous trade agreements: the North American Free Trade Agreement (NAFTA), the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR), and various bilateral agreements (Australia, Chile, Israel, Jordan, Malaysia, etc). For years, Colombia has been an unconditional ally of the United States of America, and has exchanged various resources with its Northern partner. The Andean Trade Preference Act-ATPA was enacted in 1991, during Bush administration, to combat drug production and trafficking in 4 Andean countries: Bolivia, Colombia, Ecuador and Peru. It offered trade benefits to help these countries develop and strengthen legitimate industries (Office of the United States Trade Representative 2008). In 2002, the United States government extended trade preferences by a public law: the Andean Trade Promotion and Drug Eradication Act-ATPDEA, through which Latin American products and goods gained entrance without customs duties. According to the Office of the US Trade Representative, it “expanded trade benefits for developing countries by more than $1.2 billion”. In 2004, a Free Trade Agreement started its path between United States and South American countries and, after several debates, it was finally signed in February 27, 2006. Governments are willing to strengthen cooperation ties, and to articulate regional economies. The present agreement is founded on clear regulations, mutual benefits, legal and commercial principles, and is intended to stimulate innovation, offer new job positions and improve quality of life. (United States - Colombia TPA Final Texts 2006, p. 1). Another important point to disclose is that preferences included in ATPDEA encouraged one-way access to US markets, but the free trade agreement is broader, bilateral, and assures not only trade but investment strategies and commitments. Important Data The International Monetary Fund has shown that world trade volume increased by 7,2% in 2007: imports accounted for a 4,5% growth in advanced economies, compared to a 14,2% in emerging and developing economies; on the other hand, exports had a 5,9% increase in the former, and a 9,5% increase in the latter (October 2008, p. 274). From my point of view, it is essential for developing countries to become involved in international trade strategies, otherwise they will fall behind. Macroeconomic factors have an important role in assessing the value of specific international trade agreements. In 2007, according to the International Monetary Fund, Colombia, grouped as an emerging economy, increased its real gross domestic product-GDP by 7.7%, and inflation was 5.69%. By this term, the United States, an advanced economy, had a real GDP growth of 2.4% and inflation was 2.7% (October 2008, pp. 58, 67). The foreign investments in Colombia rose to $3.5 billion. Exportation growth is displayed in tables 1 and 2, comparing Colombian and Latin American data; the unemployment rate is shown in figure 1. With ATPDEA, more than 6000 Colombian products were favored, 70% of which were oil derivatives. The Free Trade Agreement Press Office (28 February 2008) suggests that between January and December 2007, preferences made provision of more than US$ 4,774 million in Colombia’s garment industry, flowers, ceramics, candies, shoes, leather, and tuna, among others. Despite the impact ATPDEA has had over various industries, the majority of goods and services are not covered. The present agreement will grant access to 99% of Colombian products, and more than 80% of U.S. goods and services will have the same treatment. Traded products The signed pact is consistent with both Colombian and US best interests: sustainable economic growth and new job opportunities. According to the Office of the US Trade Representative, “the farm exports to Colombia that will receive duty-free treatment include: high quality beef, cotton, wheat, soybeans, soybean meal; key fruits and vegetables including apples, pears, peaches, and cherries; and many processed food products including frozen French fries and cookies”. Moreover, all forms of investment are protected under the agreement, and textiles and apparel will be duty-free and quotas free immediately (June 2007, p. 1). Currently, the main agricultural products that Colombia imports from U.S are wheat, corn, and vegetable oils. As mentioned above, almost 99% of Colombian products will have access to the U.S market. Colombian exportations include multiple products: forestry, wood, fish, coal, oil, minerals, meat, milk and dairy products, sugar, coffee, cocoa, tobacco, cotton, wool, flowers, garment, leather, shoes, bottles, packaging materials, chemicals, cleaning substances, rubber, polymers, cement, and arts and crafts, among others. Economic theory Using economies of scale, each country concentrates its inputs and produces with the lowest costs, exploiting industries where it has particular advantages. Thereby, both partners will benefit and achieve a higher standard of living. In other words, nations increase productivity and efficiency by focusing on activities where they are better than their counterpart, and receive resources in which the other country has specialized. As Carbaugh mentions (2008, p.14) “both imports and exports are necessary for rising productivity. This conclusion contradicts the sometimes popular notion that exports are good and imports are bad”. In An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Adam Smith explains how a nation that uses less labor to produce the same output has an absolute advantage over the other. This advantageous economy could concentrate labor on that precise economic process, and exchange goods for which its counterpart is superior. Economic theories declare that international competition helps to improve national industries. Industries import new technologies, receive technical assistance from foreign countries, improve their productivity, and increase their competition in foreign markets. As most industries will also supply local markets, the upturn will also be reflected on domestic economies, having a great impact in local employment, social security, healthcare and education. With the evolution of investment and assistance from developed countries, producers have shifted from raw material to manufactured goods exportation; there is much more equipment and machinery availability, and modernization and improvements become more generous. In addition, manufactured goods partly originate in new knowledge incorporation, since labor forces are inserted in training programs. In order to achieve a sustainable economic growth, a key factor is competition expansion, which can be attained by increasing the efficiency of public institutions, macroeconomic and legal stability, and by supplying adequate production factors. The Presidency of Colombia has centered its economic policies on trade agreement negotiations, strengthening support instruments to potential exporters, and stimulating technological innovation (July 20 , 2005). Countries settle free trade areas, and remove barriers progressively. However, tariffs remain the same for countries outside the agreement. If regional trade alliances are made between the U.S and South American neighbors, the country that is not included will face competitive drawbacks. This is true for Andean agreements that have been approved in recent years: Peru, Panama, and Costa Rica. For instance, if Colombia is excluded, neighbors will have a competitive advantage, and the economic impact will be reflected. US-Colombian Relationships Politics are essential for establishing long term relationships. For a long period of time, Colombia and the U.S have been important allies; since 2002, when president Uribe arrived to the presidency, the relationships have tighten, on account of settled security policies and terrorism fight. Numbers and pointers show that the bilateral agreement is important for both countries. America’s two-way trade with Colombia reached $18 billion in 2007, making Colombia the fourth largest trading partner in Latin America and the largest export market for US agriculture products in South America. In 2007, total U.S. goods exports to Colombia reached $8.6 billion. The Executive Office of the President (2008, p. 4) claims that the newly signed agreement intends to “strengthen peace, democracy, freedom and reform”. Additionally, it will “promote economic growth and poverty reduction”. The United States still is the main commercial partner of Colombia; between 35 and 40% of Colombian total exportations are made to the U.S. For instance, in 1998, 30 % of Colombian agricultural exportations were made to the U.S; in 2003, this percentage was raised to more than 40%. Various estimates have shown that, with the new agreement, agricultural exports will grow 3.2%. The main agricultural products that Colombia sends are flowers, banana, coffee, and sugar, and the U.S is the primary destination for these products; regarding flowers, the 80% U.S importations come from Colombia. The preceding information helps us notice the important value of trade relationships between these two countries. Other important factors Colombian officials have declared that other benefits of the agreement will arise from spheres different from trade, as there will be an increase in foreign investment, less risk rating, and better resource allocation. Foreign investment is a great benefit and aids the poor. Carbaugh agrees with researchers at the World Bank and states “liberal economic policies such as open markets and monetary and fiscal stability raise incomes of the poor and everyone else in society proportionately” (2008, p.249). The economic growth needs efficiency in order to decrease poverty, but this depends upon income inequality at the time trade alliances are settled and the according to changes during the process of installation. Globalization plays an essential role: the last 30 years have been characterized by fast technological achievements, telecommunications have become fundamental on daily activities, financial systems are more integrated, and information flow is increasing among countries. In agreement with the mentioned issues, developing countries as Colombia could improve people’s quality of life, if these alliances are to be made with specific regulations and multilateral assistance. Knowledge is a new production factor that has evolved during the past years, and it must be added to the economic process by education and training strategies. If a given country is an innovator and the other country is a follower, the bilateral trade agreement should help both countries to act reciprocally; the former will transfer technology and assistance, educate and coach, support innovation and will act as a leader. The latter will incorporate new technologies, support its working force, and learn how to innovate; a few years later, the second country will become an innovator and apply this knowledge, increasing its productivity and welfare. Adding information and skills will have its own costs, but it is an important investment that has a rate of return. A good way to accelerate technological transfer is by bringing together the international economy, so that domestic industries can have access to cheaper and broader goods and inputs, which are available in international grounds. In some countries, Farm industry is a major opponent, claiming that protection should be preserved. Various arguments for this approach are listed in Dunn and Mutti (2004, pp. 140-163): fear of dependence, domestic unemployment, pauper labor available abroad, asymmetric income distribution, etc. Others argue that international trade is a lie, and “is likely to impoverish developing countries further” (Dunn & Mutti, 2004). Tariffs and other barriers are important issues that affect bilateral agreements. In 1995, General Agreement on Tariffs and Trade (GATT) was transformed into the World Trade Organization (WTO), responsible for governing the conduct of trade relations among its members (Carbaugh 2008, p. 188). A high proportion of WTO members are developing countries, so the organization has included provisions, giving least developed countries special rights and preferential treatment. WTO has also established various committees and legal advisers that assist developing countries (2008, pp. 93-97). As a result, most import tariffs are now quite low, particularly in developed countries. The U.S-Andean agreement requires that both parties establish a free trade zone, and uphold current trade rights and commitments. The FTA text (2006, pp. 1-5) states that parties can neither increase current tariffs, nor adopt new ones; it also implies that both countries will gradually remove trade barriers. Through WTO agreements, “each country receives guarantees that its exports will be treated fairly and consistently” (2008), and countries promise to do the same for imports into its own market. The system also gives developing countries some flexibility in implementing their commitment. Areas of concern and conflict A central concern is that there are circumstances where trade and the pursuit of trade liberalization may have harmful environmental effects (Carbaugh, 2008, p 193). At one end, as trade liberalization expands, developed countries will locate high polluting industries on the least developed ones; at the other, environmental commitment is reinforced by free trade agreements. The relative contribution of international trade to environmental degradation in developing countries is addressed elsewhere (Amitrajeet & Batabyal, 2001). Before establishing new trade strategies, it is important to settle specific environmental pacts and collaborative teamwork, honor previous undersigned agreements, and recognize environmental protection as a key issue; public audiences and community participation are essential. Unions in Colombia and the U.S have been unrelenting. According to the Labor Advisory Committee for Trade Negotiations and Trade Policy (October 2006, pp.3-4) “the Colombia FTA’s dispute settlement procedures completely exclude enforceable obligations for the government to meet international standards on workers’ rights”. Additionally, LAC states that “the Colombia FTA also contains no enforceable provisions preventing countries from waiving or weakening existing labor laws in order to increase trade”. There is particular concern about violence and union member’s safety, due to the fact that in the last 20 years there has been a raise in assassinations and kidnappings. However, Colombian current government has brought security, and violence has decreased dramatically. In Colombia, political opposition has used free trade as an excuse to attack the actual president. They have argued that union members are murdered and that homicide rates are increasing because of their union activism. In the 1980s, homicide rates were on the rampant and various union members were linked with leftist associations and guerrillas. Numbers indicate that homicides have declined and the few union members’ homicides are below the national rate. There is also concern with the fact that a weak economy will succumb, because of the disparities that exist between the U.S and Latin America. In order to display an example, Colombia will gradually stop receiving tributes from corn imports, and domestic producers will also be initially affected by duty-free corn imports. But the key word here is gradually, because there will be time for this producers to adapt their industries, to adopt new technologies, and become more competitive. As for the missed tribute income, it would be balanced by internal demand growth. The United States represents 25% of Colombia’s total imports. On the other hand, the U.S imports 0.5% of its products from Colombia; some argue this is an asymmetrical relationship. Excessively sensitive Colombian industries, that might be affected, are chicken, rice and corn. Chicken hindquarters have been a great deal of concern, since poultry men argue that they will not be able to compete with duty-free incoming American products. On the other hand, one should not reject a beneficial alliance on the basis of a few affected products, balancing advantages and disadvantages is needed, and governments must negotiate based on transparency. As mentioned, education is a major component when people will be faced with new technologies. Concerning educational systems, Latin American countries have fallen behind developed countries and Asia, and they must work hard to improve both educational access and quality, develop new partnerships and merge public education with the productive system, as knowledge has to be applied in the economic process. Other important fact is that during the economic crisis, highly educated individuals migrate to developed countries, seeking higher income. Dunn and Mutti (2004, pp. 205-206) state that labor migrates from low wage countries seeking higher returns. If trade is to increase job opportunities and quality, education will be worth the effort, as it is a stimulus for individuals. With regard to Technical Barriers to Trade, the TPA final text (2006, chap. 7) appointed initiatives and cooperation on regulatory issues, and also states topics related to technical regulations, conformity assessment, transparency, and information exchange. An important matter is transparency, as parties should allow reciprocal involvement in the generation of regulation and standard measures; committees and working groups need to be instituted as surveillance and assistance tools, and WTOs principles must be obeyed. Future developments The negotiation rounds concluded in 2006 and various trade agreements have been signed in the last two years. Despite U.S government support, the congress has not endorsed the trade agreement. U.S is now under political and economic changes that have obscured the various attempts of the Colombian government. The congress has also supported the antagonism of the local opposition. Probably, a couple of years will have to pass and a great deal of tenacity will be needed to see this agreement materialize. Another issue that must be addressed is South American multilateral economic integration: the United States is an important trade target, and this essay has tried to show and support various reasons, but European markets are also prominent and multiple exchanges can be made between the European Union and Andean countries. There are also regional agreements that must be reinforced and not overlooked: Brazil, Venezuela, Peru, Argentina, Ecuador and Central America. To cite an example, Venezuela is Colombia’s second main partner, but political and ideological confrontations have emerged during the last few years, and trade has been impaired. Every effort has to be made in order to actively maintain strong ties, diplomacy should prevail over ideological differences, and new agreements should be established among Andean countries. Conclusion International Trade has transformed the relationships between nations and he United States has put in place numerous agreements in the last 20 years, looking for technological innovation, sustainable economic growth and improving quality of life. Latin American free trade experience started in Mexico, and some Andean pacts have encouraged one-way access to US markets. The U.S-Colombian bilateral free trade agreement is broader and assures various commitments, and it is consistent with globalization trends and both Colombian and U.S best interests. Countries will gradually remove trade barriers, achieve mutual benefits, and exchange thousands of goods and services. Current concerns are the environmental effects, labor union’s opposition, and economic disparities. Finally, political struggle has interfered and the agreement has yet to be approved. Works Cited Amitrajeet, A & Batabyal, H / eds (2001). The economics of international trade and the environment, Lewis, London. Carbaugh, R. J. (2008). “International Competitiveness”, in International Economics, 11th edition, Thomson South-Western. “Developing countries: How the WTO deals with the special needs of an increasingly important group”. World Trade Organization, 2008. . [Online] Available at: http://www.wto.org/english/thewto_e/whatis_e/tif_e/utw_chap6_e.pdf. [Accessed October, 2008]. Dunn, R & Mutti, J (2004). International Economics, 6th edition, Routledge, London. “Extending ATPDEA for 10 more months”, Free Trade Agreement Press Office February 28, 2008. [Online] Available at: http://www.tlc.gov.co [Accessed October, 2008]. “Free Trade with Colombia: Brief Summary of the U.S. – Colombia Trade Promotion Agreement” , Office of the United States Trade Representative, June 2007. [Online] Available at: http://www.ustr.gov [Accessed October, 2008]. Labor Advisory Committee for Trade Negotiations and Trade Policy-LAC (2006). “The U.S.-Colombia Free Trade Agreement” October 4, 2006. [Online] Available at: http://www.aflcio.org/issues/jobseconomy/globaleconomy/upload/colombia_LAC_report.pdf. [Accessed October, 2008]. North, D (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press, New York. Presidency of Colombia (2005). Report to the Congress, Sinergia, Bogotá. Smith, A (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. [Online] Available at: http://www.udownloadbooks.com/ . [Accessed October, 2008]. “The World Trade Organization in Brief”. World Trade Organization 2008. [Online] Available at: http://www.wto.org/english/res_e/doload_e/inbr_e.pdf. [Accessed October, 2008]. "United States - Colombia TPA Final Texts, the United States-Colombia Trade Promotion Agreement”, Office of the United States Trade Representative November 22, 2006. [Online] Available at: http://www.ustr.gov/Trade_Agreements/Bilateral/Colombia_FTA/Final_Text/Section_Index.html. [Accessed October, 2008]. “United States – Colombia Free Trade Agreement Briefing Materials”, Office of the United States Trade Representative, Executive Office of the President. March 2008. [Online] Available at: http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2008/asset_upload_file854_14604.pdf. [Accessed October, 2008]. “World Economic Outlook: Financial Stress, Downturns, and Recoveries”, International Monetary Fund, October 2008. [Online] Available at: http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm. [Accessed October, 2008]. Table 1. Colombian Exportations. US millions 2005 2006 2007 2008* Total Exports 21.190 24.391 29.991 19.062 Traditional 10.366 11.810 14.207 10.497 Non traditional 10.825 12.581 15.784 8.565 Growth (%) 2005/2004 2006/2005 2007/2006 2008*/2007 Total Exports 26.7 15.1 23.0 42.4 Traditional 35.3 13.9 20.3 63.6 Non traditional 19.3 16.2 25.5 22.9 * July. Source: Colombian Presidency. Economic Council. Table 2. Latin American GDP growth. Source: Colombian Presidency. Economic Council. Figure 1. Unemployment Rate. Colombia. Source: Colombian Presidency. Economic Council. Read More