Why the NAFTA-style Free Trade Agreement Will Fail to Benefit Colombia

October 21, 2011  |   Economics & Trade

Why the NAFTA-style Free Trade Agreement Will Fail to Benefit Colombia

Despite evidence of limited economic welfare benefits and significant social costs, Latin American countries have been signing and ratifying trade treaties with the United States since the early 1990s.  This week, the long-stalled treaties with Colombia and Panama were ratified by the U.S. congress and signed by the President.  Like other trade treaties,
these were based on the same template that has been the basis for U.S. trade policy since NAFTA.

In the case of the Colombia Free Trade Agreement (Colombia FTA), promises from the government of President Juan Manuel Santos to better protect trade unionists pressured enough reluctant Democrats to vote in favor of the agreement.  Over 4,000 trade unionists have been murdered in Colombia in the past 20 years, mostly by right-wing paramilitaries with links to the government, making Colombia the most dangerous country in the world to support collective bargaining rights. Colombian labor union leaders have rejected government claims that human rights and trade unionist protection has improved, denigrating symbolic gestures aimed at securing U.S. ratification of the  agreement, which they rightly claim will help multinational companies over Colombian workers.

In addition to doubts that the Colombian government will live up to its promises vis-à-vis the trade unionists, the gains from trade that Colombia can expect once the agreement is in force are ambiguous at best.  When the gains to some sectors (e.g. cut flowers, leather goods, seafood, textiles, certain services) are measured against the losses to other sectors (e.g. rice, corn, poultry, communications technology),  along with fiscal and regulatory costs associated with the treaty, the net benefits to Colombia come under serious question. The treaty may help to boost Colombian GDP by about 0.5%, but given the insecurity faced by trade unionists and the ownership and control structure of the economy (particularly in agriculture), there is no real hope that Colombian workers or small-scale farmers will benefit.

Besides harming workers and small-scale farmers, there are other costs to the Colombian economy that the multinational corporation-paid lobbyists do not discuss.  Under the agreement, Colombia will forego some $635 million in tariff revenue, will have to deregulate its financial sector, and reduce or eliminate programs that promote domestic-economy innovation and productive development.  In the global race to the bottom to attract these multinationals, who will make up that revenue loss to the Colombian government? Hint: it won’t be the multinationals benefiting from the deal.

So why do these countries sign these so-called “free trade” agreements? There are a number of factors.

Asymmetries in bargaining power are one reason Colombia, like other Latin American countries, sign up to do business with the U.S. Forty two percent of Colombia’s exports are currently destined for the U.S., and half of those exports come into the U.S. through special preference programs that were under threat if the government failed to agree to the treaty.  The U.S. boasts an economy 116 times larger than that of Colombia and an average income 17 times higher. Dependence on U.S. export markets, coupled with the threat of losing existing preferences if they balk, means that U.S. trade negotiators can make an offer that a country like Colombia cannot refuse.

Colombian trade negotiators also understand the time-critical nature of reaching a deal.  If Colombia fails to strike a deal covering, say, bananas, textiles, and tobacco, how long before one of its neighbors strikes a deal for those same products? The race is always on for access to U.S. markets. Under such circumstances, getting the best deal for long-term,
widely shared economic development is challenging.

But let’s be honest.  The Colombians didn’t want to refuse the deal put forward by the U.S. in the first place.  Like other Latin American countries that have signed trade treaties with
the U.S., there is a pervasiveness of neo-liberal economic thought throughout elite decision-making circles in Colombia. The deal was negotiated with right-wing political parties aligned with domestic exporters who share a commitment to neo-liberal economic policies, despite their poor record in the region. Negotiators may not have been able to refuse the deal, but they didn’t want to anyway.

These trade deals provide significant benefits to a highly concentrated handful of sectors, while the costs are borne by politically weak groups and/or dissipated across entire
populations and into the future.  That holds true both in the U.S., and in counterparty countries like Colombia. In the U.S., we’ve seen the negative effect of these deals on manufacturing and assembly, textiles, and other hard-hit sectors, while multinational and
financial elites have reaped enormous gains.  In Mexico, NAFTA devastated small-scale farmers unable to compete with subsidized agribusiness in corn and wheat that poured into Mexico from the U.S.  Many were driven from their land by loss of income, into cities and across the border in search of work.

NAFTA-style intellectual property rules make it impossible to put in place an innovation system for long-run development.  Many of the innovation policies that countries want the policy space to deploy are aimed at correcting for market failures so that firms and general welfare benefits can be created in the future. Thus, the beneficiaries of such policies are either weak or not yet in existence.

In case of any doubt that the U.S. has taken advantage of asymmetries in bargaining power and the triumph of neo-liberal orthodoxy among elite decision-makers in Colombia and elsewhere, one need only look to the failed negotiations for a Free Trade of the Americas deal.

Brazil, Latin America’s largest and most dynamic economy, enjoyed significantly greater
negotiating parity with the U.S. The center-left governments in Brazil have long been aligned with domestic industrialists and well-organized labor unions that depend on industrialization for jobs.  Brazil has long been less dependent on exports for economic growth, and never fully accepted the neo-liberal economic policies promoted from Washington.  Many in the economics profession and government hold what would be considered heterodox views. Consequently, Brazil broke off negotiations for a Free Trade Area of the Americas because leaders there understood that deregulating intellectual property, foreign investment, and financial services would significantly dampen growth prospects.

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