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EIU: Andean FTA talks near conclusion

Economist Intelligence Unit, London

Latin America: Politics: News analysis
20 Sep 2005

Latin America politics: Andean FTA talks near conclusion


Peru, Colombia and Ecuador hope to sign a free-trade agreement (FTA) with the US by the end of 2005, bringing to an end more than a year of talks. But the exact timing of this event and prospects for ratification — particularly by the US Congress — are uncertain. If the FTA is not ratified and implemented, these countries risk losing important existing trade preferences that are due to expire soon.

The three countries are currently beneficiaries, along with Bolivia, of the Andean Trade Preferences and Drug Eradication Act (ATPDEA), under which the US grants tariff-free access to a wide range of exports in an attempt to stimulate legal alternatives to cocaine production and trafficking. The agreement has been in place since September 2002 and expires at the end of 2006. It was built on a previous agreement, the ATPA (Andean Trade Preferences Act) approved in 1991.

These arrangements are credited with raising the proportion of exports from these countries going to the US — in the case of Colombia from 40.5% to 42.2% of total exports and in Peru’s case from 20.3% to 29% between 1992 and 2004. A number of export industries have been built up on the basis of preferential access: cut flowers in Colombia and Ecuador, and woollen clothing in Peru. The Peruvian government claims that by 2004, the ATPA and ATPDEA had been responsible for creating one million jobs.

But the trade pact is a unilateral set of concessions, which can be withdrawn at any time. The FTA, by contrast, would be a binding and permanent treaty. As talks draw to a close, the US has made it clear that it will not extend the ATPDEA, leaving the FTA as the only way for the Andean countries to maintain the current preferential access to the US market after 2006.

Andean cuts

The majority of the tariff liberalisation included in the deal will take place on the Andean side, as most of the tariff cuts on the US side contemplated under the FTA have already taken place. The Andean countries will progress towards zero tariffs, either immediately, or over five or ten years, depending on the product. Agricultural tariffs will be lowered more slowly than those for manufactured goods, and a few items will be excluded. The agreement aims to liberalise not just goods trade but also trade in services and government procurement.

South American signatories will also have to tighten regulations on the protection of intellectual property. Investment guarantees will be reinforced, offering greater security to US investors. US investment in the region has lagged investment from the EU for some time, but it could start to catch up if the treaty is signed.

Sensitive topics

The next round of negotiations takes place in Cartagena is taking place September 19th-23rd, with a final meeting scheduled in October in Washington. Negotiators now gathered hope to complete talks on industrial goods. The areas where most progress has been achieved include competition policy, cross-border services, e-commerce and customs procedures. Phyto-sanitary regulations are proving a thorny topic, while the other tricky area is intellectual property.

The US is calling for the extension of the protection on data from clinical trials of drugs and agro-chemicals by five years, which would delay the arrival of generic copies on the domestic market (and perhaps end the production of some generics already made in the region). The Andean countries, for their part, want foreign drug companies to recognise the source of any molecules they discover by exploiting plants or traditional knowledge in the region. These sensitive topics are likely to be left for more discussion in October.

Protests on both sides

The proposed FTA has aroused opposition on both sides. In the Andean countries critics claim that opening the door to imports of subsidised US grain will destroy the local agricultural sector. As even defenders of the treaty admit, farmers producing staple crops for the domestic market will be the main losers. Opponents also worry that opening trade in services will extend the reach of US corporations in the region to the detriment of local firms.

As for the benefits offered by the agreement, critics add that the Andean countries have not taken advantage of market access already offered, because they cannot produce competitively many of the 5,700 goods on which US tariffs have been lifted. A study conducted by Colombia’s Departamento Nacional de Planeación (DNP) in 2003 showed that only 20% of Colombia’s exports to the US were actually covered by the treaty, while 80% of those were accounted for by just 14 goods. Critics also point to the existence of non-tariff barriers, in the form of health and safety requirements and quotas, on many of the goods in which the Andean region has a comparative advantage.

With time pressures mounting on the Andean governments to sign the treaty, some have called on them to ask the US to extend the ATPDEA instead of rushing into an agreement. By contrast, owners of export industries that are set to benefit, such as agriculture and textiles, or manufacturers who rely on imported inputs on which tariffs would be lifted, have lobbied governments to stick to the current timetable.

On the US side, there are concerns about environmental and labour standards — sometimes, but not always, cloaking simple protectionism. On the other hand, US food industry lobby groups such as the Grocery Manufacturers of America (GMA) are hopeful that the average tariff levied on processed food products in the region, of 20%, can be cut, thereby boosting their exports.

Political hurdles

Assuming trade negotiators reach a deal, political considerations could still hold up ratification by lawmakers. The US government’s long battle to secure the US Congress’s approval for DR-CAFTA (the free-trade agreement with Central America and the Dominican Republic) illustrated the kind of obstacles that the Andean FTA could face. The treaty was narrowly approved in late July, after months of delays. Since then, the executive’s authority has waned, and lawmakers’ focus has shifted elsewhere.

President George Bush faces the challenge of repairing the damage caused by Hurricane Katrina at the end of August and of rebuilding his political capital following the federal government’s inadequate response to the disaster. He must also focus his efforts on lobbying Congress to approve his preferred candidates to fill two vacancies on the Supreme Court. The prospects for bipartisan co-operation in Congress, and legislators’ receptiveness to free-trade proposals, will decline as the House of Representatives prepares for the mid-term election in November 2006. In mid-2007, Mr Bush’s fast-track negotiating authority runs out; without it the Andean FTA could be doomed.

All three Andean countries will hold presidential and congressional elections in 2006 (Peru in April, Colombia in May and Ecuador in October). The timetable for the FTA was designed to give national congresses time to ratify the treaty before electoral campaigning got in the way, but that was when negotiations were expected to finish in mid-2005. It should become clearer over the next two months whether this ratification schedule is still viable — which would require that negotiations end around October.

It still appears likely that talks will be completed then, and that all three countries will ratify the pact in 2006. If the negotiations were held up, or ratification delayed, the US would be under pressure to temporarily extend the ATPDEA, which could prove politically awkward. By delaying until 2007, the window of opportunity in the Andean region could also be lost. Colombia’s Alvaro Uribe and Peru’s Alejandro Toledo, who have both made achieving an FTA a main aim of their presidencies, might be replaced by less committed successors.

To persuade their countries, Andean leaders will still have to spell out how they will compensate the losers from the FTA, and promote its advantages. The FTA should lead to higher growth by open opportunities to export industries and enhancing consumers’ purchasing power. Ensuring that the benefits reach all sectors will be the main challenge.

US as trading partner

 % share of total exports  % share of total imports
Colombia 42.2 29.6
Ecuador 55.7 23.3
Peru 29.0 28.7

Source: EIU Country Risk Service.

 source: EIU ViewsWire