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Free Trade Accords Boost Commerce

US trade with Latin America can grow even more if new free trade agreements are put in place, experts say.


As Panamanian President Martin Torrijos concluded a trip to the US capital last week, his goal was not only to meet President George W. Bush, but also get support for the Panama-US free trade agreement reached in December. His three-day visit also included meetings with Charles Rangel, a key Democrat in the U.S. Congress and John Sweeney, president of the AFL-CIO trade union, which expressed support for the treaty, according to a statement from Torrijos' office.

US lawmakers are expected to vote on the U.S. free trade agreement with Panama - as well as Colombia and Peru - before July. If approved, the FTAs will help boost the already fast-growing U.S. trade with Latin America, experts say.

"The free trade agreements the United States signed with the governments of Colombia, Panama, and Peru, when approved by our Congress, will instantly multiply opportunities for American exporters," says Carla Hills, chairman and CEO of Hills & Company and a former US Trade Representative.

Walter Bastian, a high-ranking US Commerce Department official, agrees.  "Our experience with all trade agreements have resulted in huge ...growth," says Bastian, deputy assistant secretary for the Western Hemisphere at the US Department of Commerce. "Trade with Chile went up 85 percent the first two years of the US-Chile FTA [and] we're getting to see increased trade with Central America. It's hugely beneficial to the United States."


The first major evidence of free trade potential was seen in Mexico, which in 1994 implemented the North American Free Trade Agreement (NAFTA) with the United States and Canada. Two-way trade went from $81.5 billion in 1993 to $100.3 billion in 1994, a 23.1 percent jump.

More recently, the FTA with Chile, implemented in January 2004, is seen as another major success. Last year, Chile was the fastest-growing US trading partner in Latin America, according to a Latin Business Chronicle analysis (See Record US-Latin Trade). And CAFTA, the US trade agreement with five Central American countries and the Dominican Republic, last year expanded its trade with the United States by 9.2 percent. Combined, CAFTA now trades more with the United States than the larger Andean Community (Bolivia, Colombia, Ecuador and Peru). CAFTA's trade last year was 8.8 percent higher than the Andean Community despite having a GDP that's 58.5 percent smaller, according to our analysis.

Although the FTAs with Colombia, Panama and Peru have yet to be approved by the U.S. Congress, they are already sparking increased interest in those countries. The U.S. Department of Commerce, for example, has been getting more requests for information from U.S. companies about those countries, according to Bastian. "We're getting more interest from US traders," he says. And the same happened before CAFTA was implemented in the different countries, he adds.

Colombia and Peru already enjoy duty-free access to the United States through the Andean Trade Promotion and Drug Eradication Act (ATPDEA), but set to expire in July after already being extended from its original deadline of December 31 last year. Panama benefits from the Caribbean Basin Initiative and the Generalized System of Preferences (GSP), which enable 95 percent of Panama's exports to enter the United States duty free, but is also subject to limited terms.


Colombian, Panamanian and Peruvian exporters therefore see the FTAs as helping to guarantee permanent access to the U.S. market. The FTAs also help Latin America diversify their export offerings and reduce their dependency on only one or a few commodity items that fluctuate in prices from year to year, Bastian says. Case in point: Venezuela, which has a booming trade with the United States, but no FTA nor plans to negotiate one. Only one product category - oil and gas - accounted for 77 percent of all Venezuelan exports to the United States and with oil prices falling, trade may decline this and next year.

For U.S. companies, the FTAs with Colombia, Panama and Peru will immediately change the equation, since they will be giving duty free access to 80 percent of U.S. consumer and industrial goods and to a long list of farm products - over 65 percent in the case of Peru and more than half in the case of Panama, Hills points out.  Service providers will also gain substantial new opportunity across a broad range of services including financial services, she adds. 

"Opening these markets will “level the playing field” as products from the three countries already enter the United States duty free," Hills says.


The increased trade with Latin America comes despite the lack of progress in creating a Free Trade Area of the Americas (FTAA), as 34 heads of states in 1994 agreed to have in place by 2005.  The process towards an FTAA appeared to stop completely when the Mercosur countries and Venezuela in 2005 openly opposed any further FTAA negotiations. 

"While we all hoped by now to have completed the Free Trade Area of the Americas (FTAA), the several bilateral and regional free trade agreements that we have entered with Latin American neighbors may over time help achieve a FTAA," Hills says. 

If and when the FTAs with Colombia, Panama and Peru are approved, 90 percent of US trade in the hemisphere (including Canada) will be covered by free trade agreements, according to Bastian. U.S. trade with Mexico, Chile, Colombia, Panama, Peru and CAFTA reached $414.8 billion last year, or nearly 75 percent of total trade with Latin America, according to Latin Business Chronicle research.


And the FTAs are not only helping boost two-way trade, but also growing investments into Latin America, Hills argues. Net private capital flows into Latin America reached $45.9 billion last year and is expected to grow by another 19.6 percent to $54.9 billion this year, according to a recent forecast from the Institute of International Finance (IIF), a Washington-based association of top banks worldwide.

"Beyond boosting trade, our regional ... and bilateral ... trade agreements raise investors’ confidence," Hills says.  "By encouraging rule of law, increasing transparency, and enhancing respect for property including intellectual property, investors are more willing to put their resources at risk in those countries which will help strengthen the nations that make up our neighborhood."

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