The Free Trade Agreement (FTA) will generate some immediate benefits, but its most important contribution is over the long term, improving the competitiveness of the Colombian economy and attracting new investment.
We know that the FTA places in sharper relief the challenges that the country and, more specifically, the business community face. For example, the country must modernize its phytosanitary and customs systems, strengthen its infrastructure and continue to improve the business climate. But we aso know that in an increasingly globalized world, isolated economies achieve less growth than those linked to international flows in goods and services. Colombia has clearly opted for the second strategy, participating actively in the World Trade Organization (WTO), implementing a policy of unilateral opening at the beginning of the 1990s, and negotiating numerous trade agreements.
In this context, business with the U.S. is important. The U.S. has been Colombia’s principal trade partner and its primary source of foreign direct investment. And as one of the world’s most important consumers, it boasts a diverse market with high purchasing power.
Free trade agreements level the playing field by establishing clear rules of the game that help improve the quality of decision-making for businesses and investors. The FTA will grant permanent preferential access to the U.S. market, establishing mechanisms to address problems related to health and safety measures, nondiscrimination requirements and guarantees for the protection of investments. This will create clear and important incentives for business growth between the two countries.
In contrast, the previous agreement that governed U.S.–Colombia trade relations, the Andean Trade Preferences Act or ATPDEA, only provided preferential access in terms of tariffs. It wasn’t permanent and it did not cover nontariff measures.
The FTA will allow Colombian businesses to achieve parity with companies in other countries that are direct competitors in the U.S. market and that already have an FTA. This is the case with Mexico, Chile, Peru, and Central America and the Dominican Republic (covered under CAFTA-DR).
The delay in approving the FTA in the U.S. undermined business confidence in Colombia and—in the short term, at least—diverted investments to other countries. One Colombian businessman recently remarked that the delay led him to invest in a Central American country and to reduce his activities in Colombia. However, following approval of the FTA, he decided to build a new plant in Colombia, investing more than $100 million and creating more than 200 jobs in a medium-size city.
One of the expected effects of the FTA is an increase in both domestic and foreign investment. The size of Colombia’s domestic market and the diversification of its production structure make the country attractive to invest in to enter the American market.
Models that measure the impact of Colombia’s FTA with the U.S. indicate that there will be positive effects on economic growth, well-being, employment, and tax revenues.
Studies have shown that the fall in revenue from tariffs will be offset by an increase in other tax revenue as a result of higher GDP. Models indicate that GDP growth will increase between 0.5 and 1 percentage points, well-being by more than 1 point, and employment by 300,000 to 500,000 jobs. In the case of finance, one scenario in a study by Patricia Martín and Juan Mauricio Ramírez (“The Economic Impact of a Partial Free-Trade Agreement Between Colombia and the United States”) predicts a $289 million loss in tariff revenue, but a net positive effect on the tax balance sheet of $414 million.
The treaty will bear immediate fruit. In the case of agricultural products, for example, under the ATPDEA, 52.6 percent of Colombian exports had tariff-free access to the U.S. market. The FTA added another 47.3 percent of Colombian exports to the tariff exemption, which practically ensures full access for all Colombian exports from the day the treaty goes into effect.
But domestically, some of Colombia’s agricultural producers still struggle to compete with farmers in the United States. The FTA attempts to address this in several ways. One of them is the elimination of U.S. export subsidies. Another is the gradual elimination of tariffs, granting protection in several cases for more than 10 years, giving Colombian agricultural producers enough time to close the competition gap.
At the same time, under the agreement Colombia obtained tariff-free access for 99.9 percent of industrial exports. There will be immediate tariff exemptions for 81.8 percent of Colombia’s imports from the U.S., and the remaining 18.2 percent will be exempted in stages over the course of five to 10 years. Of the portion with immediate tariff exemptions, about 80 percent corresponds to capital goods and raw materials that are not produced in the country, and 20 percent to goods that already compete in international markets.
This balance will be very important for Colombia in the global business environment in the coming years. The price boom in mining and energy products and the threat of global food shortages present opportunities and risks for the Colombian economy.
The government’s adoption of structural measures (such as those governing fiscal responsibility, fiscal rules and the linkage of savings funds and royalties) to cushion excessive reliance on lucrative primary product exports (such as oil, natural gas and key minerals) will be crucial to the diversification of products in the export basket.
Preferential access to the U.S. market complements this strategy. Eliminating tariffs and preventing discrimination in business will allow different goods—not just raw materials—to continue competing in the market. The reduction of tariffs and the elimination of nontariff barriers will help offset the risk of an appreciating exchange rate that often results from rising commodity exports.
Of course, there are challenges, including developing infrastructure, shrinking the informal business and labor sectors, streamlining customs services, and improving health and phytosanitary standards.
The government, business and academic sectors are working together within the framework of the National System for Competitiveness to close these gaps. But the micro-level changes and gaps remain the responsibility of businesses: to advance technology, improve internal and logistical processes, strengthen human resources, and proactively seek out international markets.