As well as their huge political implications for the U.S., last week’s midterm elections could have significant economic and social implications for Colombia.
As the Republican Party swept the House of Representatives, winning a large majority, the Democrats held on to a majority in the Senate by a very narrow margin. Both parties will still be able to threaten filibusters as neither party gained the key 60 seats needed for cloture.
These Republican gains could mean that, whether you agree with it or not, there is now a real possibility that the Colombian free trade agreement (CFTA) could be passed in the next two years.
According to a Congressional Research Service (CRS) report by M. Angeles Villareal published on April 16 of this year, the text of the agreement was finalized on July 8, 2006, and on August 24 of that same year former Republican President George W. Bush advised Congress of his intent to sign the legislation. It was signed by the two nations on November 22, 2006, and since then implementation has been stalled primarily by Democratic House leaders who claimed that President Bush had not fulfilled the requirements of the Trade Act of 2002.
Human rights issues and, more specifically, violence against labor union leaders have been the core topics at the center of the debate for those in the U.S. Congress who are against the CFTA. Democratic House leaders said in 2007 that, due to violence against trade unionists, Colombia is an “unfit free trade agreement partner for the United States.”
The CRS report states that former President Bush’s stance on the issue was that the Uribe administration had made significant advances in dealing with some of the issues that certain members of Congress were citing as reason to not implement the CFTA. The report states that data from the Colombian government showed that murders of labor union activists and teachers decreased by 87% from 2002 – 2007 under the Uribe administration.
Many argue that Democrats in the U.S. Congress are only against the agreement because they do not want to anger large, influential labor unions in the U.S. (important contributors to Democratic campaigns) who worry that implementation of the CFTA could lead to implementation of other free trade agreements that have been on the table with South Korea and Panama. Unionists allege that cheap imports from abroad would cost American jobs, thereby negatively affecting the U.S. economy.
In Colombia, many opponents to the CFTA cite large subsidies given to U.S. farmers allowing them to produce agricultural goods at artificially lower costs, which many Colombian farmers would not be able to compete with.
A number of Republicans in the U.S. as well as right-leaning Colombians have claimed that the CFTA is necessary to further strengthen economic ties between the two nations, as Colombia is a key ally in the region. They also claim that the CFTA would promote economic growth in Colombia and would serve as part of a broader plan to address the illegal drug issue in the region by giving new opportunities to those who make their money in those illicit industries such as coca farming and cocaine manufacturing.
The question is this: who stands to benefit from the CFTA and would it really help to address the drug issue?
The U.S. is Colombia’s leading trading partner, buying up nearly 40% of all Colombian exports in 2009, while 30% of all Colombian imports originated from the U.S. On the other hand, Colombia accounts for less than 1% of overall trade in the U.S., ranking 22nd among U.S. export markets and 27th as a source of U.S. imports.
The current tariff situation between the U.S. and Colombia is one-sided; about 90% of all imports to the U.S. from Colombia enter the country duty-free while U.S. imports to Colombia face tariffs as high as 20%. Nearly all agricultural goods coming from Colombia enter the U.S. duty-free. According to the CRS report, “The pending CFTA would make these [agricultural] trade preferences permanent.” The report goes on to say that the CFTA would, “provide duty-free access on 77% of all agricultural tariff lines, accounting for 52% of current U.S. exports to Colombia, upon implementation. Colombia would eliminate most other agricultural tariffs within 15 years.”
This is very worrisome to many Colombian farmers who note that the U.S. pays roughly $20 billion dollars per year in direct subsidies to its farmers while Colombian farmers receive much less.
Scores of Colombian farmers are struggling to get by under the current system and state that, if forced to compete with cheaper imports from the U.S., they simply would be put out of business. This could be a dangerous situation, as many of them might look towards another crop to provide the profits necessary to feed their families – coca.
But is it fair that the vast majority of Colombia products enter the U.S. duty-free? Should that special treatment not go both ways via a free trade agreement, regardless of the effects it might have on Colombian farmers?
Debate has raged about the effects of the CFTA on the Colombian economy ever since its conception and many fear that in Colombia the negative effects could outweigh the positive effects. Rural farmers who could no longer compete would almost certainly be interested in cultivating coca or marijuana in order to make a living while other industries might suffer, exacerbating Colombia’s chronically high unemployment rate.
Those Colombians who would stand to gain are exporters, as it is thought that their sales to the U.S. would increase upon full implementation of the agreement. The CRS report states that, if the CFTA were to be fully implemented, U.S. imports from Colombia would increase by 5.5%. This would be good for Colombian exporters but the report refrains from estimating job creation in Colombia as a direct result of the agreement.
The report also notes that, “Colombia would face certain structural adjustment issues with a displacement of low-skilled workers in some sectors, but that these workers would all be able to find job possibilities in the expanding sectors.” That is a bold statement and very likely naïve when considering that one of those expanding sectors could be the illicit drugs sector as farmers switch to illicit crops where they can better compete.
Overall, the effects of the CFTA on the U.S. economy would be marginal, at best. The Colombian economy is extremely small, equating to about 1.6% the size of the U.S. economy, and it is estimated that U.S. GDP would increase by less than one half of one percent due to the CFTA. Many reports claim that there would be overall welfare gains in both countries but estimates regarding the quantitative effect on the Colombian economy are conflicting and controversial.
Free trade has been a divisive topic for a long time and will continue to be in the coming decades. The idea of free trade makes sense. If one country has a comparative advantage in producing a particular good, it should specialize in the production of that good and sell it on world markets, by so doing increasing the disposable incomes of everyone who enjoys the new lower price. Who does not want to be able to spend less on the things that he/she buys frequently?
The problem is that governments, especially in Europe and the U.S., heavily subsidize certain industries (specifically agriculture) and then enter into free trade agreements, exporting products that were produced at an artificially low cost. This goes completely against the idea of free trade.
Free trade is about comparative advantage and low-cost leaders. It’s about specialization so that everyone wins because every nation will specialize in what they do best, resulting in lower-priced goods for all involved. When you add subsidies to the mix the whole equation is thrown out of equilibrium and you end up with unfair results.
The new Republican leadership in the House of Representatives must carefully consider all aspects of the CFTA. They probably are not aware of how their actions in Washington might result in a Colombian farmer pulling up his current crop in favor of another illicit one because his heavily-subsidized American counterpart is pricing him out of the market.
Author Matthew Helm is an American who moved to Colombia where he started the website relocationcolombia.com, specialized in information for potential expats and investors.
