Global Policy Forum

By Todd Tucker and Daniel McCarthy*

In May 2003, the U.S. Trade Representative's (USTR) Office launched negotiations with Colombia, Ecuador, and Peru to establish a U.S.-Andean Free Trade Agreement (AFTA). Bolivia is participating as an observer in the negotiations. At the press conference announcing the launch, the USTR claimed that t he deal would lock in these countries' access to U.S. markets and help them attract foreign investment.1

Unlike other trade agreements that have taken years and even decades to negotiate, the USTR has announced that it plans to conclude AFTA by the end of January 2005.2 The date coincides with the initiation of a new Bush or Kerry administration. It is also only a few months before the expiration of "fast track" negotiating authority--a big reason for the rush. "Fast track" authority allows the Executive Branch to negotiate most details of trade agreements with minimal input from Congress.3 The only Andean country not involved in AFTA is Venezuela. The Chávez government has been vocally skeptical of U.S.-sponsored trade agreements.4 The country's exclusion makes it less likely that the Andean Community will be able to forge a common negotiating position on future trade agreements, effectively reducing the leverage of developing countries opposed to these agreements.

Lost Decades, Lost Opportunities

The USTR's promises of increased foreign investment and market access are unlikely to materialize for the Andean countries, given the playing field at the moment. The past 25 years in Latin America have been an economic disaster marked by low rates of income growth and reduced progress on social indicators. While income per person in Latin America grew 80% from 1960 to 1979, it grew a paltry 11% in the subsequent twenty years. The first half-decade of the 21st century seems even worse, with income per person of about 1% for the whole five years.5 The vast majority of developing countries have done badly as measured by major social indicators. Progress on extending life expectancy, reducing infant mortality, and increasing literacy rates and education spending have slowed significantly for most of these countries since the 1970s.6

The story is particularly stark for the Andean countries. Bolivia, Colombia, and Ecuador have experienced slow or negative growth in each decade since the 1970s--for Peru, since the 1960s. The U.S. proposal for AFTA is unlikely to do much to improve this situation. Like most "free trade" agreements, the most economically important elements of the proposal have little to do with the exchange of goods. According to documents leaked to the Colombian media, some of its main provisions would extend the period of patent protection beyond current WTO requirements, and make it more difficult for governments to import generic drugs produced in third countries. 7 Both measures are in essence costly forms of protectionism.8 Public health expert Jamie Brielh predicts that poverty-related illnesses could well worsen if the agreement is signed, which would be the "the final blow of a neoliberal process that has led to the progressive deterioration of public health."9

Agriculture is also a major concern for these countries, given that it accounts for much of their employment and anywhere from a quarter to half of the value of their export earnings.10 AFTA offers few benefits for the Andean countries' agricultural sectors. Even Peru's internationally competitive sugar industry fears that the national market will be flooded by cheap and highly subsidized high fructose corn syrup from the United States. Indeed, U.S. sugar subsidies have been a major sticking point in U.S. trade negotiations with Mexico and the Dominican Republic in the past.11 So why then are the negotiators for the Andean countries continuing with these negotiations? Rodrigo Lasso, Ecuadorian milk baron and official negotiator in charge of market access, expressed the objective from his point of view: We will not bend or break. We will force the U.S. to negotiate down its lavish farm subsidies--because they, not us, are the inefficient producers. Then our products will flood their markets overnight!12

This, however, is an extremely unlikely scenario, given the power that big agribusiness has in these negotiations. The general feeling among small-holder groups is that their interests are not represented by large landowners like Lasso. As the Venezuelan trade negotiators, among the principal opponents to U.S. "free trade" agreements, emphasized in their official WTO position: Even if wealthy nations were to eliminate such [agricultural] subsidies and other aid to producers, the playing field would not be leveled. For this reason, it cannot be demanded that developing countries do the same.13 Moreover, the import market of the U.S. is expected to shrink over the coming decade by $90 to $375 billion.14 Countries wishing to increase their exports to the U.S. will, on average, have to displace other countries such as China or Mexico.

The Road Ahead

U.S. economic policy with respect to the Andean countries faces a number of roadblocks, including contradictions between different policy goals in the region. For example, Washington's desire to gain market access and investor rights in AFTA countries may be in conflict with (the) drug eradication goals of the more long-standing Plan Colombia.

This is evident in Washington's insistence that Colombia get rid of its practice of automatically raising tariffs when the international prices of corn and rice fall, a policy that affects 75% of U.S. agricultural exports to the country, according to Reuters. Nobel Prize Winner Joseph Stiglitz has argued that Colombian negotiators are right to defend their domestic producers with this policy. "These are poor farmers who do not have any savings. If their income from corn and rice and other legitimate crops goes down, they will switch to something else, and the most lucrative alternative is coca," he said. "So there will be more violence and the U.S. will have to spend more on coca eradication."15

Indeed, the contradictions within U.S.-Andean policy have not gone unnoticed by policymakers. In a letter to the U.S. Trade Representative, congressional Republican leaders expressed concern that the proposed AFTA might detract from the war on drugs or undermine the creation of new, non-narcotics-related jobs in the region. U.S. negotiators are also under pressure from the business sector to exclude Ecuador and Peru because of various outstanding investment disputes.16 Deputy U.S. Trade Representative Peter Allgeier responded immediately to these concerns, saying, "We will not endanger a free-trade package with Colombia by having countries attached to it that are going to detract from congressional approval rather than add to it."17

Labor and social movements have also expressed their concern, with the AFL-CIO and Latin American unions denouncing the Andean countries' failure to respect internationally recognized labor rights such as collective bargaining.18 Colombian unions even led a major general strike in October against the agreement.19 Indigenous and peasant organizations from throughout the region have also expressed their rejection of a trade agreement that does not take their concerns into account.20 Citizens' organizations in both Ecuador and Peru are gathering signatures to call for popular referendums on AFTA.

All this has put some pressure on governments not to cave in to U.S. demands. At the same time, these agreements have become increasingly unpopular within the United States itself, where they have caused considerable dislocation, contributed to declining wages, and generally failed to deliver the promised benefits. Even Sen. John Kerry, described by his campaign as a "staunch supporter of free trade for the last 20 years," promised to renegotiate AFTA and the Central American Free Trade Agreement to include more stringent labor and environmental standards.21 Despite Kerry's tough talk during the campaign season, it remains to be seen whether the majority of people in the Americas will have a voice in AFTA and future commercial agreements. Although some Andean negotiators may have been convinced by the rhetoric of the Bush administration, t he past quarter century of liberalization has yielded few benefits for the Andes , and this latest round seems likely to achieve even less.

About the Authors: Todd Tucker and Daniel McCarthy are policy analysts with the Center for Economic and Policy Research (online at www.cepr.net) and contributors to the IRC Americas Program (online at www.americaspolicy.org).

Endnotes

1. Vargo, Regina. "USTR Official Outlines Benefits of U.S.-Andean Trade Agreement; Vargo says accord will boost trade, democracy, and development." U.S. State Department. May 19, 2004.

2. Palmer, Doug. "Colombia Top Priority in Andean trade talks – US." Reuters. Sept. 29, 2004.

3. Under "fast track," Congress merely gets an up or down vote on the final proposal.

4. Milbank, Dana; and Paul Blustein. "Leaders Affirm Free Trade Zone; Only Venezuela Demurs on 2005 Deadline for Hemispheric Pact." The Washington Post. April 23, 2001.

5. Weisbrot, Mark; and David Rosnick. "Another Lost Decade?: Latin America's Growth Failure Continues Into the 21 st Century." Center for Economic and Policy Research. Nov. 2003. http://www.cepr.net/publications/another_lost_decade.pdf.

6. Weisbrot, Mark; Dean Baker, Egor Kraev and Judy Chen. "The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress". Center for Economic and Policy Research. July 2001. http://www.cepr.net/globalization/Scorecard.pdf.

7. The full patent proposal from the U.S. was published by Colombia's La República newspaper. Santamarí­a Daza , Ricardo. " Serias peticiones de Estados Unidos en patentes." La República. Sept. 1, 2004 . Available in Spanish at http://www.la-republica.com.co/noticia.php?id_notiweb=16964&id_subseccion=88&template=noticia&fecha=2004-09-01_11:59pm.

8. Although the phrase "protectionism" is often used by advocates of trade agreements to smear their opposition, it is often free-trade proponents who promote more costly forms of protectionism--defined as in economics textbooks as a government intervention that raises the price of commodities above their price in a freely traded market. In this case, AFTA advocates are promoting protectionism by requiring government intervention to protect the monopoly profits of patent holders, which would come at the expense of consumers and patients.

9. Dr. Breilh is head of Ecuador's Health Research and Advisory Center (CEAS).

10. UNCTAD, "Handbook of Statistics," Structure of International Trade by Product. Available at www.unctad.org.

11. " Peru fears US Trade Deal Could Sour Sugar Crop." Reuters. Oct. 12, 2004. Malkin, Elizabeth. "In Mexico, Sugar vs. U.S. Corn Syrup." New York Times. June 9, 2004.

12. Official presentation at the International Forum on Agriculture and Free Trade Agreements in Ibarra, Ecuador; Aug. 26-28, 2004.

13. "Position of the Government of the Bolivarian Republic of Venezuela in the Fifth Ministerial Meeting of the WTO." Ministry of Production and Commerce. Sept. 2003. Available at http://www.venezuelanalysis.com/docs.php?dno=1000. The central reason for not insisting on agricultural liberalization is because the projected benefits come primarily from poor countries opening up to cheap, rich-country products, not from increased export earnings. To put the problem in perspective: the World Bank, one of the world's most powerful advocates of removing most trade barriers, has estimated the gains from removing all the rich countries' remaining barriers to merchandise trade--manufacturing and agricultural products--and removing agricultural subsidies. The total estimated gain to low- and middle-income countries, when the changes are phased in by 2015, is a pitiful extra 0.6% of GDP. In other words, an African country with an annual income of $500 per person would have $503 as a result of removing these barriers and subsidies. (For more detail, see Baker, Dean, and Mark Weisbrot. "False Promises on Trade." Center for Economic and Policy Research. July 2003. Available at http://www.cepr.net/false_trade.htm.) For this reason, Venezuelan negotiators have wisely focused on the primacy of maintaining active public policy, rather than expecting windfall profits for developing countries from a "free market" in agriculture.

14. This is measured in non-dollar terms to reflect the value of these exports (to the U.S. market) to other countries. The reason for the projected shrinking of the U.S. import market is that the U.S. is now running an unsustainable trade and current account deficit, with the latter now at 5.7% of GDP. Economists are in agreement that the United States cannot continue to sell financial assets at this rate to the rest of the world for an indefinite period of time. The implication of the required adjustment is that the market for exports to the United States will shrink. For more information, see Baker, Dean; and Mark Weisbrot. "Fool's Gold: Projections of the U.S. Import Market." Center for Economic and Policy Research. Jan. 2004. Available at http://www.cepr.net/Import_Projections.pdf.

15. Bronstein, Hugh. "Colombia Must be firm in U.S. Trade Talks – Stiglitz." Reuters. Oct. 21, 2004.

16. Selsky, Andrew. " U.S. lawmakers see former Colombian paramilitaries as blueberry farmers, hog butchers." Associated Press. Oct. 7, 2004. " U.S. Trade Disputes in Peru, Ecuador." U.S. House of Representatives Subcommittee on the Western Hemisphere of the Committee on International Relations. Transcript available at http://wwwc.house.gov/international_relations/whhear108.htm. U.S. companies have disputes with the Government of Peru worth over $300 million, according to the testimony of John Murphy, Vice President of Western Hemisphere Affairs for the U.S. Chamber of Commerce.

17. Palmer, Doug. "Colombia Top Priority in Andean trade talks – US." Reuters. Sept. 29, 2004.

18. "Bolivia, Colombia, Ecuador, And Peru: Labor Rights And Child Labor Reports; Pursuant To The Trade Act Of 2002, Section 2102(c)(8)-(9)." AFL-CIO. Aug. 9, 2004. Available on file at CEPR.

19. "Uribe Enfrenta Paro Nacional." Associated Press. Oct. 15, 2004.
20. "Movimientos sociales de América rechazan el ALCA y el neoliberalismo." Agence France Presse. July 26, 2004.
21. "Trade Enforcement: Asleep at the Wheel." Kerry-Edwards 2004, Inc. Available at http://www.johnkerry.com/pdf/trade_enforcement.pdf "Kerry revisará TLC que EEUU negocia con paí­ses andinos, dice asesor." Agence France Presse. Oct. 16, 2004.