The tricks of the trade agreements

The quiet signing of three long-disputed US free trade agreements as unions on edge, writes Martin Morris, but signals opportunities for a number of industries


After much political wrangling, US President Barack Obama finally signed into law in October 2011 three separate free trade agreements (FTAs) with South Korea, Colombia and Panama.

A signing ceremony announced for the White House Rose Garden was later switched to the Oval Office – critics claimed this was symptomatic of the unwillingness of US trade union officials to be seen sharing a platform with the President, given their long-running concerns about the various agreements.

Billed as the largest package of its type for 17 years, the administration claims the deals will support tens of thousands of American jobs, while Republican US House Speaker, John Boehner, says US companies will have increased opportunities to hire workers at home as they expand their markets abroad.

The US-Korea Free Trade Agreement (KORUS FTA) – originally negotiated by President George W Bush – was subsequently renegotiated by President Obama after criticism over bilateral trade in automobiles, as well as US beef exports.

Proposed agreements with Panama and Colombia were also revised – tax information exchange being incorporated into the Panamanian deal, and labour rights assurances inserted in the Colombian one.

Tribal suspicions
Despite these revisions, organised labour remains split. In the case of the KORUS FTA, the union umbrella organisation AFL-CIO claims it will destroy US jobs, while the United Auto Workers union, which has long lobbied lawmakers to accept the deal, believes it will benefit the beleaguered US auto industry.

Equally suspicious has been the head of the United Steelworkers Union, Leo Gerard, who in a letter to Congress said that because of NAFTA (the North American Free Trade Agreement) and subsequent trade agreements like it, “large US multinational companies cut their workforces in the US by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.”

Indeed, after NAFTA was passed in 1993, the US trade deficit with Mexico rose substantially and led to the loss of more than 500,000 American jobs over the following 10 years.

Gerard also released details of an emergency alert transmitted to US Secretary of State Hillary Clinton, disclosing heightened death threats against labour leaders in Colombia.

The threats had been confirmed to Gerard by the Confederation of Workers, Colombia’s largest labour federation, following a communiqué issued by the militant right-wing paramilitary group known as The Black Eagles. It said Colombian union leaders are now its “next military objective,” and it would bring “war, blood and fire to their doorstep.”

Also critical of the KORUS FTA has been the Washington-based liberal think-tank, the Economic Policy Institute. In July 2010 it dismissed out-of-hand the US International Trade Commission’s projection that the deal would have a small positive impact on the US trade balance, and “minimal or negligible” impact on US employment.

Claiming that history shows such trade deals lead to rapidly growing trade deficits and job losses in the United States, the think tank’s own calculations at the time indicated the deal would increase the US trade deficit with Korea by about $16.7bn, and displace approximately 159,000 jobs within the first seven years after taking effect.

This is all a numbers game of course, and may be subject to significant change following the subsequent revisions. That said, it still prompted Robert Scott, Economist and Director of Trade and Manufacturing Policy Research at the Economic Policy Institute, to remark after the three agreements were signed: “With 14 million unemployed, these deals will only further burden our domestic economy, which is already teetering on the brink of another recession.”

If one of the major aims of an FTA is to generate a level playing field, as tariffs are reduced, reaching that objective can be costly, and may take a significant amount of time. As the Office of the US Trade Representative notes, South Korea’s tariffs on imported agricultural goods average 54 percent, compared to the typical nine percent levied by the US on the same kind of imports.

Meanwhile, South Korea’s average tariff on non-agricultural goods is more than twice that of the US – 6.6 percent compared to 3.2 percent. “As tariffs are eliminated or reduced under the US-South Korea trade agreement, America’s farmers and manufacturers will become more competitive in the South Korean market, which should help them sell more – and grow more jobs here at home,” it says.

Critics have yet to be convinced just how beneficial these cuts will prove over the longer term, though.

US-Korea FTA
The US International Trade Commission estimates the US-Korea deal will, through the reduction of South Korean tariffs and tariff-rate quotas on goods alone, add an estimated $10-12bn to annual US GDP, and around $10bn to annual merchandise exports to South Korea.

Although these numbers are a matter for debate, what’s clear is that the agreement does call for almost 95 percent of bilateral trade in consumer and industrial products to become duty-free within five years of the agreement coming into force. Most remaining tariffs are set to be eliminated within 10 years.

Most of the headlines in this agreement had been taken up by the potential impact it would have on the US auto industry – long a source of tension between the two countries.

According to Congressional Budget Office data, in 2010 South Korea shipped 515,000 cars to the US, while US automakers exported fewer than 14,000 cars to South Korea. The US ran a $10bn trade deficit with South Korea in 2010, much of it due to the auto sector.

Under the original 2007 agreement, almost 90 percent of South Korea’s auto exports to the US would have received duty-free access. At present, the US auto tariff is 2.5 percent, compared to South Korea’s eight percent.

With the revised agreement, South Korea’s tariff will be reduced to four percent immediately and to zero in year five. Elimination of the duty on South Korean auto exports to the US will be delayed until year five, giving US automakers the time to build a brand and distribution presence – which should reverse decades of South Korean protectionism.

For agricultural products, the FTA will immediately eliminate or phase out tariffs and quotas on a broad range of products, with almost two-thirds (by value) of South Korea’s agriculture imports from the US becoming duty-free upon the agreement’s entry into force.

Excluded from the agreement is rice – South Korea in return pledging to reduce its 40 percent tariff on US beef over 15 years.

In the services sector the FTA will provide “meaningful market access commitments” extending across virtually all major segments, including greater and more secure access for international delivery services, and the opening up of the domestic market for foreign legal consulting and financial services.

While the US has ratified the agreement, which is due to take effect on January 1 2012, at the time of writing it remains stalled in Korea’s National Assembly.

US-Colombia FTA
Ratification of the US-Colombia FTA had long been held up by pressure from US-based human rights groups insisting that the Colombian government provide more protection for workers’ rights in that country. And while steps have been taken to address this through the FTA, Colombia remains one of the most dangerous places in the world for trade union officials. Some critics argue the delays have likely meant the US administration losing the initiative over the longer term.

Human Rights Watch, in a letter last year to Colombian Attorney General Viviane Morales, said a major reason for the ongoing violence has been the “chronic lack of accountability for cases of anti-union violence.” While noting convictions in 185 cases of unionists murdered, this represents less than 10 percent of recorded killings over the past 25 years.

On the economic front, the International Trade Commission estimates tariff reductions in the agreement will expand US exports by more than $1.1bn, support thousands of additional jobs, and boost GDP by $2.5bn.

The agreement, which should provide significant new access to Colombia’s estimated $134bn services market, will see over 80 percent of US exports of consumer and industrial products to Colombia become duty free immediately – the remaining tariffs will be phased out over 10 years. Average tariffs on US industrial exports currently range from 7.4 to 14.6 percent.

Sectors set to benefit from immediate duty-free access include almost all products in agriculture and construction equipment, aircraft and parts, auto parts, fertilisers and agro-chemicals, information technology equipment, medical and scientific equipment, and wood.

In the agricultural commodities sector, more than half of current US farm exports to Colombia will become duty-free immediately, with virtually all remaining tariffs to be eliminated within 15 years.

Duties on wheat, barley, soybeans, soybean meal and flour, high-quality beef, bacon, almost all fruit and vegetable products, wheat, peanuts, whey, cotton, and the vast majority of processed products will be removed immediately. There will also be duty-free tariff rate quotas on standard beef, chicken leg quarters, dairy products, corn, sorghum, animal feeds, rice, and soybean oil.

Curiously – and many would say opportunistically – the FTA for no specific reason includes a clause removing a tax exemption for travellers from Canada, Mexico and the Caribbean entering the US by air or sea. From now on they will have to pay a $5.50 fee each time they visit. The fee, which according to the Congressional Budget Office will raise $1bn over the next 10 years, doesn’t apply to travellers arriving by bus or car.

Canada and Mexico had been exempt from the fee since 1997 under NAFTA, but US politicians, needing fresh cash for government coffers, have resurrected it.

The US stance is that the elimination of this exemption was necessitated by the budget situation and will treat US citizens and foreign nationals alike, just as Canadians and foreigners pay fees at Canadian airports.

Ironically, the return of the tariff comes just as Canada and the US are supposed to be finalising the details of their own ‘Beyond Borders’ deal, aimed at boosting both trade and security.

Expectations are the agreement will come into effect within the next 12 months.

US-Panama FTA
If the Korean and Colombian FTAs have been beset by criticism over exaggerated job creation claims and workers’ rights issues respectively, the US-Panama FTA has courted less controversy, having enjoyed broad support from the Democrats regarding greater transparency for Panama’s tax regime.

Panama has long been a notorious tax haven, but now, for the first time, the US government will be able to obtain information from the Panamanian government on those US taxpayers with Panamanian assets or income.

Not everyone is happy though: some critics have argued that the deal is too much like NAFTA, and that it will have similar implications for jobs destruction in the US.

Roughly 87 percent of US exports of consumer and industrial products will become duty-free immediately, with remaining tariffs phased out over 10 years. The main beneficiaries from immediate duty-free access include information technology equipment, agricultural and construction equipment, aircraft and parts, medical and scientific equipment, environmental products, pharmaceuticals, fertilisers, and agro-chemicals.

Taken as a whole, almost 56 percent of current trade will receive immediate duty-free treatment, with most of the remaining tariffs to be eliminated within 15 years.

Panama will also immediately eliminate duties on high-quality beef, frozen turkeys, sorghum, soybeans, soybean meal, crude soybean and corn oil, almost all fruit and fruit products, wheat, peanuts, whey, cotton, and many processed products.

There will also be duty-free access for specified volumes of standard-grade beef cuts, chicken leg quarters, pork, corn, rice, and dairy products through tariff rate quotas.

US industrial goods currently face an average tariff of seven percent in Panama, with some as high as 81 percent. US agricultural goods face an average tariff of 15 percent, with some as high as 260 percent.

Beyond this, the Panamanian government says it has identified almost $10bn in “other significant infrastructure projects,” in addition to the ongoing $5.25bn Panama Canal expansion project. Construction equipment and infrastructure machinery used in such projects accounted for $280m in US exports to Panama in 2010 and are likely to increase. Tariffs for this sector average five percent, with almost all being eliminated when the agreement comes into force.

The agreement also provides for improved standards for the protection and enforcement of a broad range of intellectual property rights, including state-of-the-art protections for digital products such as software, music, text and videos; and stronger protections for patents, trademarks and test data, including an electronic system for the registration and maintenance of trademarks.

Panama has also pledged to revise its telecommunications regulatory framework, allowing US telcos access on “reasonable and non-discriminatory terms.” This includes the right of US telcos to interconnect with Panamanian dominant carriers’ fixed networks at non-discriminatory and cost-based rates.