Wednesday, June 06, 2012

The Potential Benefits and Costs of the New Colombia-U.S. Free Trade Agreement

On May 15, 2012, Colombia and the United States (U.S.) launched a free trade agreement (FTA)—an agreement that eliminates tariffs (taxes on imports or exports) and quotas (limits on quantities imported) on goods and services traded between member countries. The FTA immediately eliminated a majority of tariffs and quotas between the two countries. However, Colombia and the U.S. will phase out the remaining tariffs and quotas over the next ten to nineteen years. The remaining tariffs and quotas are for protected industries—for instance, a country will protect its young domestic industry by imposing tariffs on imports from foreign countries with mature and efficient industries to give the young domestic industry a chance to compete. An example of a protected industry in the U.S. is agricultural products. The concern for protecting domestic industries like agriculture explains why the two governments will phase out the remaining tariffs rather than eliminating them at once.

The Colombia-U.S. FTA provides benefits for both nations. First, the U.S. International Trade Commission expects the FTA to increase Colombia’s exports to the U.S. by $487 million as well as the U.S.’s exports to Colombia by $1.1 billion. Second, U.S. investors will be more willing to invest in Colombian infrastructure as the passing of the FTA increases investor confidence. The FTA improves certainty for investors by making Colombia-U.S. interactions more predictable through the assurance of a long-term relationship between the two nations. The interactions between these two countries are also more predictable greatly due to the establishment of formal dispute resolution procedures by the FTA. These formal procedures enhance investor confidence as they enable the U.S. and Colombia to efficiently solve the investors’ issues through established well-known procedures, rather than through the current slow informal channels found in Colombia. Third, the Colombian population has better access to education and health care services, which is especially important because the growing Colombian middle class will demand more of these services in the near future.

The Colombia-U.S. FTA also has potential costs. Opponents of the FTA argue that Colombia is not yet developed enough to compete with the United States. For example, Oxfam International—a charity organization who strives to eliminate poverty and injustice—stated that the FTA would put small Colombian farmers out of business and increase poverty in Colombia’s rural regions. Oxfam argued that Colombian farmers will struggle to compete with U.S. farmers because the U.S. government heavily subsidizes U.S. farmers—an agriculture subsidy is a type of government assistance used to compensate farmers in exchange for a reduction in prices of certain goods or services. Colombia does not subsidize its farmers like the U.S. Therefore, Colombian farmers will struggle to compete with U.S. farmers because U.S. subsidies give U.S. goods lower prices than Colombian goods, which makes U.S. goods more competitive than Colombian goods.

Other costs include job losses in the U.S. and violence against union leaders in Colombia. U.S. unions worry that the FTA will encourage domestic companies to outsource—sending jobs to foreign countries to decrease costs through cheaper foreign labor. Also, both Colombian and U.S. unions worry that the FTA will increase violence against union leaders in Colombia. Currently, some U.S. companies that outsource to Colombia have ties to Colombian paramilitary forces (unofficial state military forces), which intimidate union leaders through violence and other tactics. These U.S. companies encourage violence against Colombian union leaders to maintain low worker wages and weak worker rights. Since the FTA encourages U.S. companies to outsource more labor, U.S. companies will invest more in Colombian labor in the future. Thus, U.S. companies will likely encourage even more violence against Colombian union leaders to preserve low wages and weak worker rights for their growing outsourced labor force.

Both the U.S. and Colombia stand to gain from the FTA. However, the FTA also comes with potential costs for Colombian development and worker rights. Both the U.S. and Colombian governments must address these costs to ensure a thriving long-term relationship under the FTA.

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