If you are involved in global food and agriculture, chances are that you probably already have a good understanding of the profound impact that trade can have on the industry. You have probably also heard a lot of rhetoric surrounding specific trade agreements and how they will influence international commerce. But when we begin to drill into the subject of trade, it can feel a bit like alphabet soup. Today’s blog is the first of a two-part series to help us decipher the jargon and achieve a common understanding of the trade agreements in Latin America and their relevance to agriculture.
Given the majority of our readership, we will assume a largely US perspective, but clearly this information is critical for people across the globe. After all, every trade deal has implications outside of the countries directly party to the agreement. In this entry we will focus on bilateral trade agreements before moving on to multilateral agreements later in the month. To get started, let’s be sure we are speaking a common language by considering the definition of a bilateral trade agreement as brought to us by Investopedia:
“Bilateral trade agreements give preference to certain countries in commercial relationships, facilitating trade and investment between the home country and the foreign country by reducing or eliminating tariffs, import quotas, export restraints and other trade barriers”
Essentially, bilateral trade agreements are a tool used by two countries to give commercial privilege to one another. These agreements are critical for agriculture because they can secure market access for food and fiber products abroad. However, they can also raise sensitive issues like the decimation of a local, developing agricultural economy at the hand of low priced imports. Bilaterals.org also claims that especially in the case of agriculture, bilateral trade agreements are used to circumvent agreements made in previous trade negotiations.
Now that we understand what a bilateral trade agreement is, let’s understand better the forms that they may take. The first and most well known is the FTA or the Free Trade Agreement. A lesser known alternative is the TPA or Trade Promotion Authority. According to the Congressional Research Service, the TPA gives Congress the means to “fast track” trade legislation if the agreement meets several requirements including: that negotiations were completed in a given time frame; that certain notification procedures were followed; and that that the agreement advances specified objectives. For example, the proposed 2015 TPA includes additional agricultural objectives related to SPS (sanitary and phytosanitary) measures, TRQs (Tariff Rate Quotas), and GIs (Geographical Indicators). TPAs and FTAs are essentially equal – they just provide different ways of achieving the legislation’s passage.
In addition to FTAs and TPAs, specialized international commerce may be enabled by TIFAs and BITs that specifically deal with foreign investment. TIFAs, or Trade and Investment Framework Agreements, between two countries deal with the structure of trade and investment, and are largely forward looking. In Latin America, the United States has a TIFA with Uruguay. Somewhat similarly, the BIT or Bilateral Investment Treaty program was designed to promote the adoption of measures and procedures that protect private investors abroad and promote market based policies in partner economies. In Central and South America the United States has BITs in place with Argentina, Bolivia, Honduras, Jamaica, Panama, and Uruguay.
Trade agreements are prevalent across the Americas though every country has its own attitudes toward trade liberalization. The United States alone, for example, has trade agreements in place with 20 countries. Chile is also very progressive when it comes to trade, boasting 18 bilateral trade agreements and 5 multilateral agreements. Costa Rica has 14 bilateral agreements and 3 multilaterals agreements while Mexico has 8 bilateral agreements, 4 multilateral agreements, and 7 partial preferential agreements. Panama, Peru, and the Caribbean Community (CARICOM) have also had busy trade agendas.
Within this context, let’s talk individually about the FTAs (or TPAs) that the United States has with Latin American countries and what they mean for agriculture in the respective nations.
The free trade agreement between Chile and the United States took effect on January 1, 2004 and by January 1, 2015 all US exports were entering Chile tariff free. In addition to the removal of tariff barriers, the agreement focused on improved transparency between the countries specifically related to customs, regulatory issues, and anti-corruption.
The FTA gave US agricultural producers access to the Chilean market at the same or better rates than producers in Europe and Canada, who already had agreements in place. By 2013 agricultural exports to Chile totaled $891 million and were specifically focused on wheat, feed, poultry and beef. Dairy also saw tremendous export growth since implementation of the FTA. According to the US Dairy Export Council, dairy exports from the United States to Chile grew from $2.6 million in 2003 to $60.2 million in 2014, mostly in the cheese category. Nevertheless, some non tariff barriers remain. SPS requirements have blocked some US exports and specifically in the case of dairy, some plant registration requirements have also prevented the entry of product into Chile.
The agreement also eliminated US export subsidies on agricultural products though it does allow the US to react if other countries use subsidies to displace US products in the Chilean market. Since the enactment of the agreement Chile has grown exports of a number of agricultural products to the US, especially fruits. The table below characterizes the top 10 Chilean agricultural exports to the US and their annual growth rate from 2004 – 2013, as reported by the FAO.
The agreement between Colombia and the US is much newer, having entered into effect on May 15, 2012. Upon implementation, 80% of US exports became tariff free (70% of agricultural exports) with the remainder to be phased out over the coming 15 years. In addition to tariffs, the trade agreement also dealt with procedural transparency, customs administration, and protections for investors, labor, intellectual property, and the environment. The International Trade Commission estimates that the US-Colombia agreement will increase US exports by $1.1 billion and that the US GDP will grow $2.5 billion as a result of the TPA.
When the agreement came into effect, Colombia immediately eliminated tariffs on some agricultural goods and applied TRQs to a number of others. Colombia was already an important export destination for US agricultural products, especially wheat, corn, cotton, soybeans, and corn gluten feed. One particular success story is that of US beef exports which grew to be worth $14.4 million in 2014, up 260% from pre-TPA levels of $4 million. In January, the USDA and USTR announced that an agreement had been reached to further promote US beef exports by making beef inspected at all USDA plants eligible for export to Colombia. Previously, only beef processed at plants under the AMS Export Verified Program were eligible.
Critics of the agreement say that Colombian farmers had little to gain from the TPA. They claim that most of Colombia’s agriculture exports already enjoyed tariff free access into the United States and that the only industry that could have benefited, sugar, was excluded from the agreement.
The Trade Promotion Authority between the United States and Panama went into effect on October 31, 2012. The agreement is comprehensive and covers a variety of topics broader than just tariff elimination, including administration, transparency, and investment. Particularly key to the agreement is industrial equipment used in important infrastructure projects in the fast-growing economy. The TPA puts the US on comparable footing with Canada and the EU, both of which have approved agreements that have not yet entered into force.
Upon introduction of the TPA nearly 56% of US agricultural exports entered Panama tariff free, with the remaining tariff barriers scheduled be phased out over the following 15 years. As a point of comparison, industrial and consumer exports were 87% tariff free following the agreement’s implementation with the remainder phased out over ten years. Tariff free products include high quality beef, turkey, soybeans and derivatives, whey, wheat, cotton, and peanuts, among others. Simultaneously, under TRQs, limited amounts of dairy, rice, pork, corn, and specific beef and chicken cuts can enter Panama duty free.
The Peru TPA was implemented on February 1, 2009 and was influential in nearly doubling the value of US exports to the country from less than $9 billion in 2009 to more than $16 billion in 2013. In addition to the typical tariff reductions, the TPA between the United States and Peru was monumental because it included landmark provisions that covered labor and environmental treatment. It also introduced investor and intellectual property protections, as well as provided a standardized legal framework.
Upon implementation, more than two thirds of US agricultural products qualified for tariff free export to Peru with the remaining tariffs scheduled to be eliminated by 2026. According to Farm Futures, agricultural exports to Peru have grown 110% since implementation of the TPA in 2009. Key exports are wheat, corn, and rice though beef is another industry that has taken advantage of the agreement to rapidly expand exports.
With so many dynamics at play it behooves us to understand the active trade agreements that give certain countries preferential treatment over others. However, the bilateral agreements that we have considered here are only part of the story. Don’t forget to check back soon for part 2 of this series that will cover multilateral trade agreements and their implications for the global agriculture industry.