The Colombian Government has expressed its intention to make adjustments to the treaty that was signed in 2006. It is a complex process that can take several years.
He President Gustavo Petro has announced the “renegotiation” of the free trade agreement (FTA) with the United States, signed in 2006 and in force since 2012. This process is long, since it involves denouncing the current agreement and then renegotiating it. Leaving an agreement does not It is immediate, it takes several years due to certain rules. If there is a renegotiation, it will likely occur after this deadline passes, possibly not during the current administration. Furthermore, both the denunciation of the treaty and its new negotiation must be approved by the legislatures of both countries, with no guarantee of a new agreement. The United States ambassador warned of powerful partisan groups in his country that do not support free trade agreements.
Not having an agreement would be detrimental for Colombia, despite the trade deficit with the United States. Many export products need tariff reductions to compete, since competitors from other Central and South American countries do have preferences in the US market. Losing these sales would be like closing the main export market for clothing, metalworking products and agricultural products, among others.
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It is crucial to abandon the “mercantilist” belief that trade agreements seek to generate surpluses. Their main objective is to improve the conditions to build a solid and diversified export base. This includes facilitating the import of inputs at competitive prices, encouraging foreign investment so that more companies produce and export from Colombia, and allow national companies to learn to compete in foreign markets. Creating a lasting export base takes years and can imply trade imbalances with countries with which trade agreements have been signed. Therefore, the success of a trade agreement should not be judged solely by the criterion of surplus.
Colombia’s trade deficits with the United States are not exclusively due to the FTA. Although there have been deficits since the treaty came into force, The main cause has not been the treaty itself, but the behavior of oil sales, the main export product to the United States that does not have tariff reductions. In recent years, starting in 2020, despite the high price of oil, deficits have remained due to the reduction in crude oil production capacity since the pandemic.
To understand the advantages of taking advantage of a treaty, we can analyze the example of Mexico, which has been able to capitalize on the conditions of the FTA with the United States. Under the same rules of the agreement that governs Colombia and the United States, Mexico exported more in 2021 than it imported, generating a considerable trade surplus that is not related to the oil trade. These flows are made up of more than 80 percent manufactured products. In 1994, when the treaty began to operate, Mexico had a negative trade deficit with the United States, mostly explained by the behavior of crude oil flows.
Why has Colombia not achieved a transformation of trade with the United States in more than 10 years of the treaty being in force like Mexico did? The simplest reason is the geographical and commercial proximity between these two nations that was strengthened with the treaty. But, looking in greater depth, it cannot be ignored that less favorable conditions also affect export-oriented production in our country compared to Mexico. Transportation costs from Colombia are higher, as are labor and input costs, in part because our economy is highly protected with tariffs and non-tariff measures that cover many inputs. Mexico has a much more open economy than Colombia, not only due to NAFTA (North American Free Trade Agreement) with the United States, but also because it has more trade agreements that facilitate the import of inputs and final products, many of them from China. Mexican producers not only have lower costs, but they know how to compete with other countries in their market and in the United States. The relative cost between Colombia and Mexico of public services and tax burdens that do not favor us must also be considered.
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This does not mean that the proposals to “review” the FTAs with these countries in which we have an unfavorable trade balance are not advisable. It is just that we must be clear that These measures will not be enough to reverse the country’s trade imbalance with any of the candidates to review the treaties. But, as mentioned before, these reviews must be carried out within the frameworks and rules of the game established in the current agreements to avoid the possibility of being left in a worse situation, that is, without a treaty. Furthermore, it is crucial to be careful that the review does not lead to the closure of the economy or its isolation by imposing additional restrictions on investment. All of these measures would go against the purpose of supporting the construction of a sustainable export base in Colombia.
It is true that, by revising the treaty, more environmental requirements will surely be imposed for trade and investment between Colombia and the United States. This review approach has already been announced by the Ministry of Industry, Commerce and Tourism, when issuing its trade policy that will now be in line with global trends to counteract climate change. It is expected that the adjustments will be made adequately and gradually so as not to scare away foreign direct investment and avoid unnecessary costs in the inevitable energy transition.
Although the Government could be right in requesting the review of this and other aspects of the NAFTA, Colombia will not impose its agenda and rather it will be the United States that will be guided by the review it has already made of the NAFTA or NAFTA treaty (North America Free Trade Agreement today TMEC, Mexico-United States-Canada Treaty) in the Trump government in 2018. During this review, five main themes were addressed: tariffs and rules of origin, certification and verification of origin, customs and trade facilitation, trade and customs law enforcement, and trade in digital goods. In addition, changes in intellectual property and a modifying protocol to the TMEC treaty were incorporated.
Among the most important aspects that Mexico improved is the reorientation of the operation of United States customs. Now, when dealing with products from Mexico, these will be based more strongly on risk management principles, thus reducing the need for merchandise reviews. This will be complemented by allowing simultaneous inspections by authorities when necessary. All of the above could be especially beneficial for Colombian agricultural and agroindustrial exports, which usually face delays at US customs, harming their marketing in that market. Within these customs processes, joint resources and instances could be established to strengthen the fight against commercial fraud and smuggling.
(Also read here: Renegotiating the FTA with the US ‘is not an easy or productive path’: Ambassador Palmieri)
Another improvement from the NAFTA revision was obtained in the trade of digital goods, an aspect that is not very developed in the free trade agreements signed in the nineties or in the first years of this century. This review allowed the strengthening of information protection in commercial operations, ensuring the flow of information and neutrality in the treatment of technologies. It also limited requirements on where information must be located, granting exemptions from tariffs and commissions on the sale of digital products and facilitating cooperation on cybersecurity. Now, by virtue of the revised treaty, a developer of software solutions in Mexico has greater certainty about the tariff and non-tariff benefits of their product or service when entering the United States market. A Colombian software producer could benefit from the same if Colombia’s FTA with the United States will be reviewed.
(Also read here: ‘If everything goes well’, FTA with Singapore would be ready in March: Mincomercio of that country)
The NAFTA review also strengthened the protection of intellectual property rights, especially with respect to geographical indications and expanded the scope of validity of trademarks. In general, the revised USMCA treaty incorporated modifications in aspects as diverse as the rules of origin, provisions on labor matters, dispute settlement and environmental protection. Of course, not all of them were new advantages for the United States, which was the country that advocated for the review of the treaty. As in any business negotiation, all parties obtained benefits. Just as Colombia could obtain them if it sought a revision of the FTA. For example, a particular interest of our country is to obtain greater flexibility of the rules of origin in the chapter of textiles and clothing, in such a way that new countries of origin are included for inputs that allow benefiting from tariff reductions.
In conclusion, it would not be convenient for the country to begin a “renegotiation” of the FTA with the United States. Instead, Yes, it can seek to review it and thus improve the conditions of access to the US market. However, it is unlikely that this review will soon reverse the trade deficit with the northern country. For that to happen, other aspects that explain our country’s low export competitiveness would have to change. In any case, it is important to keep in mind that although a revision of the treaty may provide advantages, it is not without risks. The first is that, during the review process, by obtaining advantages for our country, it will also be necessary to give in other aspects, granting advantages to the United States. A characteristic of the FTA is that the partners negotiate on equal terms and our country cannot aspire to be given more favorable treatment because it is less developed. The second risk is that even after a review, the final result must be approved by the congresses of both countries and it could be the case that opponents of the treaties in the United States oppose the revised thing. In summary, Even a revision of the FTA implies opening a door whose final result we cannot fully foresee.
*INSILAB: Situational Intelligence Laboratory, directed by Pedro Medellín Torres.
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