Risk & Compliance / Economic Development

New Opportunities in Exporting

October 9, 2012
Trans

To further the goal of increasing U.S. exports, the Obama Administration renegotiated three free trade agreements (FTAs) that had been finalized under President George W. Bush. Two of the three FTAs (with Colombia and South Korea) have gone into effect and the third (Panama) has become law in the United States, but implementation is pending.

A recent survey conducted by Zepol, a leading provider of online international-trade tools, found both importing and non-importing companies surveyed viewed the FTAs positively. The report, Breaking Barriers: An analysis of U.S. Free Trade Agreements with South Korea, Colombia and Panama, examines those companies’ response to these agreements in more detail.

 

Colombia

While 40 percent of respondents were unsure if their company would make use of the U.S.-Colombia FTA, 16 percent were definite that their companies would.

The U.S.-Colombia FTA (formally known as the Colombia Trade Promotion Agreement) had a rocky beginning. In the early stages of the discussion, Colombia’s record on labor and human rights came into play as the U.S. Congress debated the agreement. U.S. and Colombian officials signed the agreement in November 2006, starting a process of review by the legislative bodies of both countries.

The Colombian review was completed fairly quickly (by 2007) and the Colombian court found the agreement conforms to the Colombian constitution, clearing the way in 2008 for U.S. approval and implementation of the agreement.

Lingering concerns over Colombia’s record of political violence and human rights abuses delayed implementation by the United States. These concerns were also expressed by some survey respondents.

After renegotiating parts of the agreement to address these and other issues, Colombia met requirements under an agreed action plan on labor rights. It has also made commitments to enforce environmental protection laws. The agreement was then passed by the U.S. House of Representatives and the U.S. Senate in October 2011. From that point, Zepol notes, there is a marked drop in the dutiable value of U.S. imports from Colombia.

The agreement, which was implemented on May 15, 2012, eliminates duties on 80 percent of U.S. exports with an additional seven percent of U.S. goods receiving duty-free treatment within five years (2017), and all tariffs would be removed by 2022.

Colombia is the third largest economy in South America and the International Trade Commission (ITC) has estimated the tariff reductions will expand exports of U.S. goods by more than $1.1 billion. The ITC also projected the agreement will increase U.S. GDP by $2.5 billion.

In addition to goods, the agreement would open access to Colombia’s $166 billion service market – opening new opportunities for U.S. service companies.

Prior to the agreement, tariffs on U.S. industrial goods ranged from 7.4 to 14.6 percent.

But in addition to eliminating and phasing out tariffs, the agreement provides for improved standards for the protection and enforcement of a broad range of intellectual property rights. These protections are consistent with U.S. standards of protection and enforcement and with developing international standards.

Among the protections for intellectual property rights are copyright and software piracy protections. The agreement also calls for robust patent and test data protection that respects the Doha Declaration on TRIPS and Public Health; and state-of-the-art protection for U.S. trademarks, according to the office of the U.S. Trade Representative (USTR).

U.S. exports to Colombia in 2010 totaled $12,069 million, rising by 18.7 percent to $14,320 million in 2011. U.S. imports from Colombia were $15,659 million in 2010, rising by 47.6 percent to $23,113 million in 2011.

Before the agreement had taken full effect, FedEx Corp. was already establishing direct service between the United States and Colombia. More recently, Crowley Maritime Corp. expanded its logistics services to include less-than-container (LCL) ocean and air cargo lifts along with customs brokerage services to Cartagena, Colombia from several points within the United States. These included the company’s Miami; San Juan, Puerto Rico, and Colon, Panama, distribution centers. The company’s Houston-based, freight forwarding and export-packing subsidiary, Jarvis International Freight, also serves the Colombia trade lane from its Gulf Coast location. Cargo arriving in Cartagena can be trucked under Crowley’s coordination to Medellin, Cali and Bogota.

As Crowley introduced the services just two and a half months after the FTA went into effect, Carlos Rice, Crowley’s vice president, logistics said, “There is ample cargo moving between Colombia, Panama, the U.S., and Caribbean and we are glad to be entering the market with a suite of services and a reputation that shippers have long since relied on from our company.”

 

South Korea

South Korea trade has also been on the rise. In 2010, U.S. exports to South Korea were $38,846 million, increasing by 11.8 percent to $43,415 million n 2011. Imports were $48,875 million in 2010, rising by 15.9 percent to $56,661 million in 2011.

The higher level of existing trade with South Korea may account for a greater comfort level among survey respondents. Nearly one third (32 percent) said their companies would take advantage of the FTA with Korea. Only 29 percent said they would not.

The FTA with South Korea (the Republic of Korea) took just over a year for initial negotiations to conclude (February 2006 to April 2007) and it was signed in June 2007. A renegotiated version was signed at the end of 2010 and passed by the U.S. Congress in October 2011 and ratified by the National Assembly of South Korea the next month.

The agreement, also known as KORUS FTA, went into effect March 15, 2012. Under KORUS FTA, 95 percent of the tariffs on goods of both countries will be eliminated within five years. The office of USTR calls KORUS FTA “the United States’ most commercially significant free trade agreement in almost two decades.”

The USTR estimates the reduction of Korean tariffs and tariff-rate quotas on goods alone will add $10 billion to $12 billion to annual U.S. Gross Domestic Product and around $10 billion to annual merchandise exports to Korea.

When the agreement went into effect in March, 80 percent of U.S. exports to Korea of consumer and industrial products became duty free. Within five years, 95 percent of bilateral trade in consumer and industrial products will become duty free and most remaining tariffs will be eliminated within 10 years.

U.S. suppliers also gain greater access to the government procurement market.

One of the controversial issues with the initial KORUS FTA was U.S. access to the Korean automotive market. The renegotiated agreement provides U.S. automakers with greater opportunities to increase sales in Korea before tariffs on imports of Korean cars come down.

According to the White House, Korean automotive safety standards operated as a non-tariff barrier to U.S. exports to Korea. The renegotiated agreement allows dealers selling 25,000 or fewer U.S.-made autos to import cars meeting U.S. federal safety standards rather than certifying them under Korean safety standards. This was nearly four times as high as the original agreement.

In an interesting development, the French-Japanese collaboration between Renault and Nissan is investing in production facilities that will make Nissan automobiles for the U.S. market, using the U.S.-Korea agreement to advantage on its exports.

 

Panama

The Panama FTA has a similar time line to the other agreements. It was signed and approved in 2007 and became law in the United States in 2011, but its implementation is still pending.

However, on April 18, 2011, a Tax Information Exchange Agreement (TIEA) went into effect between the United States and Panama. This agreement will permit both countries to improve their tax information exchange transparency networks globally. The USTR also reports the government of Panama has also taken a series of legislative and administrative actions to strengthen its labor laws and enforcement. According to the USTR, “The completion of action on transparency and labor clears the way for the Obama Administration to begin discussions with Members of Congress about the draft implementing bill for the agreement.”

While recent headlines have been dominated by the expansion of the Panama Canal, Panama is one of the fastest growing economies in Latin America. Its economy expanded by 6.2 percent in 2010, with similar annual growth forecasts through 2015. U.S. exports to Panama have grown significantly as the agreement went through its process of approval. From 2007 to 2011, reports Zepol, U.S. exports to Panama rose from below $4 billion to over $8 billion.

Prior to the agreement going into effect, U.S. industrial goods exports to Panama face tariffs averaging seven percent, but as high as 81 percent. Agricultural goods face tariffs averaging 15 percent but running as high as 260 percent.

Under the agreement, over 87 percent of U.S. exports of consumer and industrial products will become duty free, with the remainder phased out over 10 years. U.S. products that will gain immediate duty-free access include information technology equipment; agricultural and construction equipment; aircraft and parts; medical and scientific equipment; environmental products; pharmaceuticals; fertilizers; and agro-chemicals.

 

The Bottom Line

As Zepol observes, “Whether you are a direct importer or exporter, a transportation company or a government entity, these free trade agreements may have big impacts on your bottom line.” While a number of survey respondents took a neutral “wait and see” attitude about these FTAs, a minority were already moving quickly to find advantages in export and/or import opportunities.

The United States has other FTAs in effect. Best known among these is NAFTA, between the United States, Canada, and Mexico. But the United States also has a regional FTA, the Dominican Republic-Central America-United States Free Trade Agreement, known as CAFTA. This agreement covers Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua.

Other countries covered by FTAs include Australia, Bahrain, Chile, Israel, Jordan, Morocco, Oman and Peru.

Expanding the opportunities even further, the United States is engaged in negotiations between Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam under the Trans-Pacific Partnership. Canada and Mexico also recently joined those negotiations.

New options are clearly opening up as the United States expands its FTAs. Much of the focus is on achieving the goal of increasing exports, but the FTAs can also facilitate imports through lower tariffs and barriers. For export help, the U.S. government is encouraging companies to seek information and assistance through its www.export.gov Web site and to locate and become involved with U.S. export assistance centers which are located across the country. wt

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