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

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."

U.S. tariffs on South Korean cars, currently at 2.5%, would disappear when the agreement is approved, and a 25% tariff on light trucks would be gradually phased out. That might allow Korea to take market share from U.S. companies or encourage Japanese automakers to shift production to the nearby nation, opponents say. Even while giving Korean automakers more access to the U.S. market, the agreement leaves various nontariff barriers in place for the U.S. auto industry, including higher taxes for cars with large engines and various other government regulations that favor Korean cars, says Lee of the AFL-CIO.

But supporters say the agreement does much to level the playing field in the auto industry and it's unrealistic to think a trade deal can make imports and exports balance out entirely. "There isn't a trade agreement that can guarantee a fixed, equal number sold in both directions," says John Murphy, the vice-president for international affairs at the U.S. Chamber of Commerce.

Where's the Beef?

The deal has also been sidetracked by a raging controversy in South Korea over beef imports. That country was the third-largest export market for U.S. beef, but stopped imports in 2003 after mad cow disease was diagnosed in an animal from Washington State. In April, Korea agreed to begin taking U.S. beef again. But that sparked mass marches in the streets of Seoul that threatened to overturn the South Korean government. Korean importers subsequently got U.S. meat companies to agree to ship meat only from cattle that are less than 30 months old, which are considered to have a lesser risk of carrying mad cow disease.

Nonetheless, congressional negotiators continue to push Korea to accept U.S. beef without conditions. A staffer for Senator Max Baucus (D-Mont.), the chairman of the Senate Finance Committee, which oversees trade agreements, says the beef issue "very much affects congressional consideration" of the bill. Otherwise, the Korea deal has broad industry support, and no wonder: It would eliminate 95% of tariffs currently in place on U.S. goods within three years. Among the biggest backers are financial-services companies such as Citigroup (C) and insurance providers such as Ace Group (ACE). The agreement would allow U.S. companies to set up financial-services businesses in South Korea and open insurance offices that could compete on a level playing field with government-run insurers and Korean businesses.

Bill Rhodes, the senior vice-chairman of Citi and chairman of Citibank, called the deal "the best set of commitments negotiated by the U.S. so far in any [free-trade agreement] with regard to financial services."

Politics of Panama Trade

The Panama deal has received far less attention than the other two and the main sticking point appears to be less, well, sticky. After three years of negotiations with the U.S., the Panama talks hit an unusual glitch. Pedro Miguel González-Pinzón, who was elected last year to lead Panama's National Assembly, was indicted on first-degree murder charges in the U.S. He is accused of killing U.S. Army Sergeant Zak Hernández-Laporte and attempting to kill Sergeant Ronald Marshall, who survived, in 1992 the day before President George H.W. Bush arrived for a visit.

Hernández-Laporte and Marshall were riding in a Humvee that was attacked by gun-wielding assailants near the Panama Canal. It had been just three years since U.S. forces had invaded Panama to overthrow Manuel Noriega, and Hernández-Laporte's murder was considered by some to be part of a political protest. Although González-Pinzón was acquitted of the charges by a Panamanian jury, he is still wanted in the U.S. Key members of Congress have refused to sign off on the agreement as long as González-Pinzón remains in office. An Obama spokesman said the Democratic candidate would not support the trade agreement "until that situation is resolved." González-Pinzón told a newspaper in Panama he will not run for reelection this year, but his departure in late August could come too late for Congress to vote on the agreement during this session. Panamanian officials did not respond to requests for comment.

Opportunities in Panama

Although Panama's market is not as big as Korea's or Colombia's, it is growing rapidly and U.S. companies are opening offices there, preparing for business. Between 2006 and 2007, U.S. exports to Panama jumped 38% to more than $3.7 billion. Procter & Gamble (PG) decided about a year ago to open a regional hub in Panama City to develop product and pricing strategies for the region, and eventually plans to have about 250 people working there, says German Saenz, a spokesman for P&G in Latin America. The country's central location made it particularly appealing, Saenz says. "It's a good platform to access other countries, rather than a huge market" in itself, he says.

P&G is working with the Panamanian government to increase foreign investment. Businesses also see opportunities from Panama's decision two years ago to expand the Panama Canal. The expansion is expected to cost $5.25 billion and be completed in 2014. Heavy-duty equipment will be in high demand when construction on new locks for the canal starts next year; a release from Caterpillar gushed that, in Panama, "the land is crawling with Caterpillars."

That development, plus the pending departure of González-Pinzón, has the business community optimistic about passing a trade agreement in the U.S. Congress. As the Chamber's Murphy sees it, such a vote is "just a question of scheduling."


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