Trade has been a contentious issue in U.S. politics for a very long while. In recent times, free trade agreements have been promoted as essential by the cheerleaders of globalization, and as a threat to good jobs with decent wages and benefits by those who are skeptical about the advantages of the global economy. President Obama, a man of broad views, seems to represent both opinions. On February 12, 2008, candidate Obama made the following argument on this issue:
“It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart. That’s what happens when the American worker doesn’t have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that’s why we need a President who will listen to Main Street—not just Wall Street; a President who will stand with workers not just when it’s easy, but when it’s hard.”1
The previous year, Senator Obama had opposed trade deals with Colombia, Panama, and South Korea, while favoring one with Peru. Facing several critics, even before he won the nomination, Obama clarified that he did not intend to unilaterally revise NAFTA, but would be favorable to having a dialogue about the costs of free trade agreements (FTAs). Once in office, however, Obama seems to have made a 180-degree turn.
After his April 6 meeting with Colombian president Juan Manuel Santos, Obama said the FTA with Colombia should be presented to Congress before the end of the summer. The agreement, he said, would boost U.S. exports to Colombia and lead to the creation of thousands of new U.S. jobs. The administration hopes to pass the agreement along with FTAs with Panama and South Korea. The reasons for that are not entirely clear, and it might simply be a strategy to make congressional approval more likely.
The most contentious issue in the negotiations over the FTA has been Colombia’s long record of violence against organized labor. More than 3,000 Colombian unionists have been killed since the 1980s, according to The New York Times.2 Mounting evidence suggests that the affiliates of U.S. corporations, including Chiquita, Occidental Petroleum, and the coal-mining company Drummond, have also been involved. Lawsuits against these corporations accusing them of complicity in, or support for, the murder and torture of hundreds of Colombian trade unionists have been filed since 2001 by the Washington-based International Rights Advocates. The group has also supported the Colombian labor union SINALTRAINAL in its suit against Coca-Cola for the same reason.
In order to secure the agreement, the Colombian government has promised to crack down on the violence and make it easier for unions to organize. Although these promises have satisfied the Obama administration, the AFL-CIO and other U.S. critics of the FTA have continued their denunciations, seeing these promises as untrustworthy and likely empty. Ensuring the continued profitability of Colombian investments for U.S. corporations, however, is not the only aspect of the FTA.
If both the Colombia and Panama FTAs are approved, the United States will have established a string of treaties that extend from Canada all the way to Chile, with only Ecuador as a free-trade gap on the Pacific coast. The result is that the U.S. push for a multilateral free trade area for the whole continent, the defunct Free Trade Area of the Americas project, has been revived by a string of bilateral trade agreements. From a geopolitical point of view, the U.S. policy seems aimed at isolating the alternative integration arrangements established by the left-of-center governments in Argentina, Bolivia, Brazil, Cuba, Ecuador, and particularly Hugo Chávez’s Venezuela.
In particular, the Colombia FTA serves as an instrument for strengthening relations with a strategic ally of the United States in the region, a stalwart against Chavismo, and the biggest recipient of U.S. aid funds in the hemisphere since the implementation of Plan Colombia, the multi-billion-dollar aid package that began in 2000. This geostrategic aspect of the FTA might be seen as one of its most crucial aspects, since Santos, the former defense minister in Álvaro Uribe’s very pro-U.S. administration, has made surprising openings to Chávez in recent months.
If the political reasons for the Colombia FTA are not completely clear, the economic reasons are tied to well-known theories and to particular interests. Economists, for example, have been considerably less divided in their support for FTAs than the rest of the population. The profession’s favorable position is partly the result of a firm belief in the concept of “comparative advantage,” which suggests that countries should specialize in producing those goods and services that they have a relative advantage in. Trade, according to this theory, allows access to the more productive technologies of other countries, and it would be a waste for countries not to specialize, taking full advantage of their various technological and natural capabilities.
The track record of the United States’ FTAs in Latin America and the Caribbean is not very encouraging on this score. They have promoted a specialization pattern that emphasizes commodity exports, maquila-manufactured goods, and income generated by migrants—mostly undocumented workers who send home remittances. Under the FTA, if it is approved, Colombian exports of extractive commodities like oil, coal, and nickel, as well as agricultural products like coffee, may fare well in U.S. markets. Colombian corn, wheat, and beans may lose space in the market, hurting mostly peasants and favoring corporations, including U.S. ones, that have significantly increased foreign direct investment in these sectors in Colombia.
Meanwhile, U.S. exports of consumer goods like telephones, automobiles, and military equipment may improve, but will still receive competition from Asian countries, mainly China and South Korea. The direct losses to U.S. workers might not be significant—in the case of declining U.S. manufacturing jobs, the entry of China into the World Trade Organization in 2001 seems to have had the most recent impact. In the long term, real wages in the United States have been stationary since the early 1970s; declining union membership, macroeconomic policies, and the ascendancy of the conservative movement seem more important to explaining wage stagnation than the FTAs with Latin American countries.
If anyone can be counted as a winner in the Colombia FTA, it is U.S. corporations. The losers, on the other hand, will be Colombian workers. Economists neglect to mention that comparative advantage models assume that workers displaced by foreign imports will be able to find new jobs. If they cannot, it is because they lack adequate skills for their new jobs. In other words, workers must adapt to the shift in available jobs wrought by trade, just as they must adjust to technological change. But in practice, trade sometimes destroys more jobs than it creates, and even if workers acquire the necessary skills, they are often only able to find poorer-quality jobs—with lower pay, fewer or no benefits, insufficient hours—if any.
One of the least-understood problems with FTAs—not only the one proposed for Colombia but all of them—is their role in opening up a countries’ financial accounts, with deleterious consequences for their economic stability.
The investment rules in the U.S.-Colombia FTA would effectively force the Colombian government to almost totally liberalize its finances; it would not, for example, be able to control flows of foreign investment. Movements of financial assets in and out of the country would effectively be deregulated, and capital controls would be forbidden even in the case of a crisis—at a time when financial deregulation has clearly failed on a global scale.
Colombia has had extensive experience with capital controls since 1993, when the government instituted a Tobin tax, which is meant to dampen short-term, speculative capital inflows by taxing them according to how long they remain in a given country. The Colombian tax was levied at a relatively high rate—13.6% and 6.4%, respectively, for 12- and 36-month inflows. According to a report released in 1999 by the Economic Commission for Latin America, these regulations were effective in Colombia, “both in terms of reducing the volume of flows and in improving the term structure of external borrowing.”3 As a result, capital controls seem to have curbed speculation by reducing the volatility of capital inflows and of the exchange rate.
By restricting the Colombian government’s ability to use capital controls, the FTA will basically reduce the space for domestic macroeconomic policies to pursue the goals of full employment, higher growth, and better income distribution. Macroeconomic policy will tend to be more subservient to the needs of financial markets, meaning price stability, at the expense of broader macro-economic goals. This basically favors U.S. corporations, which may want to invest in Colombia but will send their profits back to the parent company, financial houses, and speculators, as well as the local elites.
Rather than a “free trade” agreement, the plan that will be sent to Congress should be understood as a corporate and financial liberalization agreement. Workers, in Colombia and the United States, have little to gain from it.
Matías Vernengo is Associate Professor of Economics at the University of Utah.
1. “Barack Obama’s Feb. 12 Speech,” transcript, The New York Times, February 12, 2008.
2. Figure cited in Helene Cooper and Steven Greenhouse, “U.S. and Colombia Near Trade Pact,” The New York Times, April 6, 2011.
3. José Antonio Ocampo and Camilo Ernesto Tovar, Price-Based Capital Account Regulations: The Colombian Experience, Economic Commission for Latin America “Financiamiento de Desarrollo” series no. 87 (Santiago, Chile: United Nations, October 1999).