The State of Play on Trade

Trade deals with Colombia, Korea, and Panama, all rife with political import, are stalled in Congress. In the meantime, some U.S. exports lag

by Avi Salzman

In its Decatur (Ill.) factory, Caterpillar (CAT) assembles a line of the heaviest-duty off-highway trucks, behemoths specialized for use in mining, quarry, and construction operations. One model, the $1.2 million, 163,089-lb. 777F truck, can hit a top speed of 40 mph even while carrying 100 tons of dirt, enough to fill 350 wheelbarrows. Caterpillar has seen a robust market in recent years for these monster trucks, but is worried that companies in other countries will start to eat away at that business. That's because Caterpillar's customers are saddled with an extra cost every time they buy one of the machines. When Caterpillar ships the truck to Colombia, a $180,000 tariff is assessed, even though nearly every product made in Colombia enters the U.S. duty-free.

A trade deal the Bush Administration negotiated with Colombia could change all that, eliminating tariffs on virtually all U.S. products. But the Colombia deal, as well as major agreements with Korea and Panama, has stalled in Congress. These agreements have become a potent issue in the Presidential campaign. Senator John McCain (R-Ariz.) traveled to Colombia two weeks ago and expressed his support for the Colombia deal, while Senator Barack Obama (D-Ill.) has said he wants to reevaluate various trade deals, including the North American Free Trade Agreement, to increase protections for U.S. workers.

Caterpillar lobbyist Bill Lane says delays for deals like the one with Colombia will mean a loss of market share for U.S. companies. "Having a time-out on trade, it means ceding our competitive advantages," Lane says. "We don't want to find ourselves in a situation where Canadian goods get duty-free treatment but ours don't."

Pending Approval

The Bush Administration and its backers in Congress have made a special point to push the agreement with Colombia because it is the only pending trade agreement that has already been sent to Congress for a ratification vote. If it doesn't get voted on during this session, which is expected to end in September, barring a lame-duck session, the whole agreement might have to be scrapped. The other two deals could also face problems if they do not receive a vote, depending on whether the next President and Congress still like the terms the Bush Administration worked out.

While politicians debate the merits and shortfalls of free trade, businesses are dealing with the on-the-ground reality of the costs and quirks of the trade system as it exists now. As the case of the Colombian mining trucks shows, billions of dollars hang in the balance. Manufacturers like Caterpillar that make equipment used in large-scale mining desperately want better access to Colombia's growing economy.

"Every day that goes by, we lose the opportunity to export manufactured goods," says Doug Goudie, the director of international trade policy for the National Association of Manufacturers. Goudie says he is concerned Colombia will ink deals with the European Union and Canada while the U.S. continues to hold back.

Benefits, Support, and Opposition

Supporters of the deal expect it could prove as lucrative as the 2004 free-trade agreement with Chile, which more than doubled trade with that country in less than four years. The Colombia deal would immediately make more than 80% of consumer and industrial goods exported by the U.S. duty-free. Right now, U.S. exporters pay 14% tariffs on goods sent to Colombia, on average, Goudie says.

Agriculture would also benefit. Colombian farmers already enjoy open access to U.S. markets—99.9% of their products, such as coffee and flowers, enter the U.S. duty-free, according to the U.S. Agriculture Dept. Yet all U.S. agricultural exports to Colombia pay tariffs—apples, for instance, are charged a 15% rate. If the deal is passed, 52% of U.S. farm goods will become duty-free immediately and the remaining tariffs will be phased out over 15 years. The American Farm Bureau Federation estimates the deal could be worth $910 million to U.S. agricultural businesses. In return, Colombia's current duty-free treatment under the Andean Trade Preference Act would become permanent.

On July 1, McCain, the presumptive Republican Presidential nominee, released a campaign ad urging passage and talked up the deal with Colombia during a visit to that country. His presumed opponent, Obama, opposes the agreement, citing the Colombian government's failures to check violence against trade unions. Labor groups say Colombia has failed to protect union leaders from right-wing paramilitary groups and should not be rewarded with a lucrative trade deal. In the first six months of 2008, 31 unionists were murdered, says Thea Lee, policy director for the AFL-CIO. Of the more than 2,500 union workers slain between 1986 and 2007, just 3% of the killers have been successfully tried, according to the Colombian labor rights group Escuela Nacional Sindical. "There is a climate of fear and it's a pervasive problem," says Lee.

The Office of the U.S. Trade Representative, however, contends that President Alvaro Uribe has made progress fighting crime, and has made a special point to protect union leaders. During his tenure, the number of homicides of union members has decreased from its heights during the mid-1990s and early-2000s, according to figures from Escuela Nacional Sindical.

Affecting the Auto Industry

A deal to expand trade with South Korea has also received criticism from unions, but for different reasons than the Colombia agreement. The United Auto Workers and companies including Ford Motor (F) and Chrysler oppose the deal because they expect it will hurt the U.S. auto industry and cost workers their jobs. General Motors (GM), which has a stake in Daewoo and manufactures cars with the automaker in a joint venture in Korea, has not entered the fight. GM did not offer a comment.

The car companies are concerned that the U.S. gave up too much without dealing with the significant trade imbalances between the two countries' auto industries. Korea exported nearly 700,000 vehicles to the U.S. in 2006, while U.S. companies sent just 5,000 vehicles in the opposite direction. Ford sells fewer than 1,700 vehicles per year there, even fewer than it did a decade ago, said Stephen Biegun, Ford's vice-president for international governmental affairs, in testimony before the U.S. International Trade Commission. U.S. automakers blame the trade disparities on Korean tariffs and environmental and safety regulations that U.S. cars can't easily meet. Biegun noted that Ford had supported every free-trade agreement since 1965 until this one.

Obama, speaking in Flint, Mich., on June 16, also made an issue of the trade imbalance in automobiles: "I don't think an agreement that allows South Korea to import hundreds of thousands of cars into the U.S., but continues to restrict U.S. car exports into South Korea to a few thousand, is a smart deal."