BCM Implications of the New US Free Trade Agreements with Colombia and Panama

Chloe Demrovsky

Free trade is a cornerstone of the neoliberal worldview and the pursuit of trade expansion is a pillar of United States foreign policy. According to the Office of the United States Trade Representative (USTR): “trade is critical to America’s prosperity – fueling economic growth, supporting good jobs at home, raising living standards and helping Americans provide for their families with affordable goods and services” . The USTR cites that the United States is the largest trading nation with exports amounting to roughly 1,474,000,000,000 USD [1.474(1012)] and a Gross Domestic
Product (GDP) of 14.582(1012) USD . The continuance of this trade is essential to keeping the businesses of the United States competitive in an era of globalization. On October 21, 2011, United States President Barack Obama signed into law three bilateral free trade agreements (FTAs) with Colombia, Panama and South Korea . Lauded by the business community, these agreements are expected to boost economic activity to help the United States economy out of a lingering slump following the recession that began in December 2007. How will the FTAs increase economic activity and benefit the business community? What are the implications for the management of your BCP program?

Colombia is the third largest economy in Latin America and the twenty-eighth largest market for American exports with a GDP of 288.189(109) USD . Colombia has been steadily liberalizing its economy. The nation already has free trade agreements in place with Mercosur (Brazil, Argentina, Paraguay, and Uruguay) and Canada, and it is currently negotiating agreements with Japan, South Korea and the European Union, but the United States is its leading trade partner . It was essential for the United States to reach an accord in order to maintain competitiveness as an exporter to this growing economy. The International Trade Commission expects the tariff reductions alone to boost the American economy by increasing GDP by an estimated 2.5(109) USD and expanding exports by 1.1(109) USD. Colombian imports to the United States are expected to increase by 487(106) USD . Prior to the passage of the FTA, there was significant tariff asymmetry, with American exports to Colombia facing average tariffs of 7.4% on autos to 14.6% on consumer goods, while Colombian exports to the United States were subject to little or no tariffs. Immediately upon implementation, United States exports to Colombia of agricultural products will be 77% duty free and industrial and textile products will be 76% duty free, with many other tariff lines being phased out over the next five to ten years. Colombian exports to the United States will be 89% duty free for agricultural products and 99% duty free for industrial and textile tariff lines . The reduction in tariffs will lead to lower prices on American products that will boost demand in Colombia and therefore generate growth for American industry.

A key component of the agreement deals with the agricultural sector, which is expected to be one of the biggest beneficiaries. Commodities including wheat and barley, soybeans, cotton, and corn contributed to 832(106) USD in exports to Colombia in 2010 . Once the tariffs are removed, this market share is expected to grow due to the reduction in price. Manufacturers are also expected to benefit, considering that technology and advanced machinery are one of the largest export markets to Colombia. The textile market is one in which there will be mutually beneficial results, because Colombian companies manufacture apparel using American textiles, which are then sold back in the United States as finished products. The FTA will provide American businesses with expanded access to service markets, with enhanced protection for intellectual property rights, fair government procurement, and greater protection against discrimination and during investment disputes.

The business community has eagerly expressed its support. A variety of industry leaders including IBM, GE, Cisco, Whirlpool, and Caterpillar submitted statements of support in a coordinated release on April 6, 2011. In all, forty-three unique statements representing a variety of sectors were published on the USTR site in support of the agreement. The letters feature endorsements from Chief Officers and information about how the agreement would benefit their sector and individual company.

The FTA with Panama has many similarities to the Colombian agreement. It will strengthen the United States’ relationship with one of the fastest growing economies in Latin America, which expanded 6.2% in 2010 and has a GDP of 26.777(109) USD . Industrial goods currently face an average tariff of 7% in Panama, up to 81%. Agricultural goods face an average tariff of 15%, up to 260%. Upon the signing of the FTA, over 87% of exports of industrial and consumer products and 56% of agricultural goods to Panama will become duty-free. The FTA opens up Panama’s 20.6(109) USD services market, including financial, telecommunications, computer distribution, and professional services. Panama’s strategic location as a major shipping route is a key factor in the importance of the FTA. Growth here may represent a threat to west coast ports, which is further aggravated by Panama’s plans to widen and deepen the canal to enable larger modern ships to travel through from Asia to the eastern seaboard. However, roughly two-thirds of all annual transits through the Panama Canal are bound to or from ports in the United States .

What does the passage of these new FTAs mean for BCP practitioners? Mostly, the impact will be positive. Legal barriers to trade will be dismantled, which will mean fewer compliance issues. It will be important to review the new rules and regulations to ensure compliance with any changes to existing relationships. There are also a few risk to increased trade, which are important to keep in mind. A closer trade relationship will necessitate a greater understanding of social, political, and environmental differences.  Management will need to understand and serve the needs of their diverse customers and employees in far- flung locations. Free trade increase both competition and communications between people with different  expertise and backgrounds, thereby motivating technological innovation. In the reality of a market economy, innovations and advances in technology and information will What does the passage of these new FTAs mean for BCP practitioners? Mostly, the impact will be positive. Legal barriers to trade will be dismantled, which will mean fewer compliance issues. It will be important to review the new rules and regulations to ensure compliance with any changes to existing relationships. compel companies to make adjustments that may include relocation to nations in which their production cost is lower. There will be a greater variety of governmental risks that may impact financial markets, sometimes only in one market or the other. In any case, strategies will need to be amended to ensure that they do not focus solely on local threats and opportunities.

Supporters confirm that FTAs will help the United States to pull out of the lingering slump following the recent recession, to increase its competitiveness in the growth market represented by Latin America, and to benefit from increased sector specialization. Colombia, Panama, and the United States are home to many complementary industries that will grow from increased exposure. Although the long delay caused lost revenues, the timing may be fortunate since it will t ties with a growing Latin American market at a time when the United States needs to distance itself from the troubled European market. The new FTAs will bring these neighboring economies into closer collaboration, presenting an opportunity for businesses in Latin America and the United States alike.

Bio: Chloe Demrovsky, ABCP, is the Director of Global Operations at DRI International. She is responsible for overseeing DRI International’s Global Network that conducts courses in over 50 countries on 6 continents. She is responsible for DRI International’s global education growth, which in 2009 resulted in DRI teaching more people outside the US than inside, and certification, which in 2011 increased by 72% outside the US. She created an international version of DRI’s audit course that encompasses both US and and International standards. As part of her role at DRI, she has presented at international BCM conferences on four continents. She is a summa cum laude graduate of Bard College at Simon’s Rock and a 2012 Master’s Candidates in International Business and Development at New York University where she serves as the External Relations Co-Chair for the Society of International Business and Development.

Bibliography
Cardenas, Jose R. “How Obama is Losing Colombia”.
Foreign Policy, April 25, 2011. http://shadow.foreignpolicy.
com/posts/2011/04/25/how_obama_is_losing_colombia

Colombia Trade Promotion Agreement. Final Text, October 21, 2011. http://ww.ustr.gov/trade-agreements/free-trade agreements/colombia-fta/final-text

The Economist. (2009) http://www.economist.com/
node/15014282

International Trade Commission (ITC). “U.S.-Colombia
Trade Promotion Agreement:

Potential Economy-wide and Selected Sectoral Effects”.
Investigation No. TA-2104-023. Publication 3826. December 2006.

Office of the US Trade Representative (USTR). “US-Colombia
Trade Agreement: Increasing American Competitiveness”. http://www.ustr.gov/uscolombiatpa

Runningen, Robert. “Obama Signs Trade Deals With South
Korea, Panama, Colombia Bloomberg, October 21, 2011.

Statistical Annex: Preliminary Outlook. OECD Economic Outlook,Volume 2011/12.

United States-Colombia Trade Promotion Agreement (CTPA):
Implementing Legislation and Supporting Documentation. http://www.ustr.gov/webfm_send/3077

USDA.gov. “Statement from Agriculture Secretary Tom Vilsack on Signing into Law of Korea, Colombia and Panama Trade Agreements and Trade Adjustment Assistance”. Release No. 0453.11. October 21, 2011.

Villarreal, Angeles M. “U.S.-Colombia Trade Promotion  Agreement”. CRS Report for Congress, September 21, 2006.

WTO Trade Profiles 2011. Published by the WTO Secretariat – 8228.08. World Trade Organization 2011. http://www.wto.
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