Andean Free Trade Deal

Back to the drawing board

24 April 2007 Hits: 356

On 22 November Colombia announced that it was ending negotiations for an Andean free trade agreement with the US. Ecuador simultaneously said that it was breaking off talks but hoped to restart talks at the end of January. On 23 November Peru added that it was joining its neighbours and suspending negotiations over the FTA. Both Colombia and Peru subsequently said that they hoped to clinch a deal before the end of 2005.

Colombia's unhappiness at the tough US line in the negotiations has been festering for the past six months. The deal should have been completed by the end of November: the original deadline for the talks which began in May 2004 was January 2005. As all three Andean countries have elections in 2006, the US may have lost its opportunity. Colombia clearly felt that its unswerving support for controversial US anti-drug policies should be rewarded in the FTA. The decision to break off the talks with the US involved the president, Alvaro Uribe. Colombia has not definitively given up on an eventual deal on a FTA. Uribe emphasised on the evening of 22 November that Colombia needs a FTA with the US, but on fair terms. Uribe said that when this round of negotiations, which started on 15 November, ran into problems on 22 November, he rang Rob Portman the US Trade Representative, to try to clear obstacles. This call did not produce results. Colombia may now be switching tack and do a bilateral deal with the US, possibly on the same terms as Peru.

If there is no pan-Andean FTA, the US will be left with FTAs in the region with Mexico, Chile, Central America, and the Dominican Republic. The US would like a FTA with Colombia and Peru, but it is clearly none too bothered about the rest of the Andean countries. In September 2005, the US agreed that the Andean Trade Promotion and Drug Eradication Act (ATPDEA), which offers trade incentives to Andean countries, should be renewed and extended for Bolivia, Colombia and Peru. The US said that it hoped that Ecuador would join this programme in the near future. The US embassy in La Paz has said that the US will be willing to discuss a FTA with Bolivia when the new government takes office. Whether the US will receive a favourable response depends on the character of the new government: Evo Morales, the leftwing presidential candidate, has come out against a FTA.

The problem for the Colombians is that the US offer on agriculture, in particular, does not go far enough. The Colombians want the US to allow Colombian agricultural products easier access to the US. Intellectual property is another tricky issue for both Colombia and the US. The US wants to insist on the right to patent plants and restrict the share of (locally made) generic pharmaceuticals in Andean markets. A third source of tension is the US offer on textiles. The Colombian textile industry claims that the US offer in the FTA is not as good as the terms the industry currently enjoys under the ATPDEA, which expires at the end of 2005. To be fair, the US does appear to have given some ground to the Colombians in the latest round of negotiations over phytosanitary issues. It agreed to set up a joint monitoring committee to settle phytosanitary disputes, provided the Andean countries end their ban on US beef imports, over fears of mad cow disease. Such a committee would be an almost unprecedented sovereignty concession by the US.

The chief Ecuadorean trade negotiator, Manuel Chiriboga, claimed that the US had underestimated the complexity of the issues involved in negotiating an FTA with the Andean countries. Although Ecuador claims that 16 of the 19 chapters of an eventual agreement have been sorted out, the US seems in no hurry to deal with the remaining three chapters.

Economic overview

24 April 2007 Hits: 194

President Eduardo Rodríguez asked congress, on 15 November, to clarify a paragraph in the controversial hydrocarbons law. Rodríguez criticised the drafting of Article Five, which compels international oil companies to convert their agreements into new ones, set out by the government, within 180 days of the law being passed. The law was passed on 19 May, so the deadline expired on 15 November.

There has, however, been no agreement with the oil companies, though they are paying taxes and royalties according to the new law. The oil companies immediately seized on the president's comments to call for another six months to draw up new terms. Eight of them have also notified the government that they will call on the International Center for the Settlement of Investment Disputes to uphold their rights, under the previous contracts, under Bilateral Investment Treaties.

The hydrocarbons law is important because Bolivia has the second biggest reserves of natural gas in the western hemisphere: over 50 trillion cubic feet. The opinion poll front runner, Evo Morales, from the Movimiento al Socialismo, would like to tear up both the new hydrocarbons law and the previous one, under which the foreign companies made the investments that discovered the huge natural gas fields in Tarija. The new hydrocarbons law has transformed the country's fiscal position. It has increased fiscal revenues by US$417m. The extra money has allowed the government to maintain its spending without increasing its deficit. The deficit, in terms of GDP, is likely to fall from 5.2% in 2004 to 3.5% in 2005.

Economic overview

24 April 2007 Hits: 215

The interior minister, Galo Chiriboga, denied that there was any chance of a constituent assembly ending dollarisation. The country dollarised in 2000 but the initiative has not completely slain inflation, though it has brought it down from the hyperinflationary levels of the late 1990s. In 2004 inflation was 6.5%, well above the US rate. It's hard to see how, if an all-powerful constituent assembly were called, the government could prevent it from discussing dollarisation. In September inflation rose by 0.65%. In October the rate accelerated again. As US inflation also rose in those months, driven by higher oil prices, Ecuador did nOt lose competitiveness. Ecuador's oil prices are pegged so the inflation drivers came from elsewhere in the economy.

Rising prices show that demand is strong in the economy and so the growth of the first two quarters certainly extended into the third quarter and, judging by the inflation rate in October, the fourth as well. One indicator of this is the steadiness in the value of consumer goods imports. These are running at over US$200m a month or about 25% up on 2004. Imports of raw materials and semi-finished goods are also strong, up by over 30% year on year at about US$250m a month. Another sign of economic confidence is the strength of the demand for credit. In September loan demand increased by 2.7% compared with August.

Inflation: In October the rate was 0.79%, up on September's 0.65%. The October figure brought the 12 month rate to 3.63%.

Oil windfall: The government reckons that its oil export earnings this year will be US$2.1bn or US$826m more than it had budgeted. The overwhelming bulk of this money will be used to pay for imports of fuel, whose prices have also risen. The government calculates that US$$622m will go on this. In the first 10 months of 2005, oil exports came to US$1.85bn. The average export price was US$42.75 a barrel. The export volume is running at 147,280 bpd.

Economic overview

24 April 2007 Hits: 198

The central bank increased its forecast for growth in 2005 on 11 November to between 4.5% and 4.7%. Previously the bank had been forecasting growth of just 4%. The bank said that it was raising its forecast because of the decent state of the world economy and the positive outlook domestically. The bank is particularly pleased that inflation fell back again, and came back into the target zone, after surging slightly in September. The October inflation rate was almost half the September rate.

The main positive external factor is the sustained growth in Venezuela. This growth helps Colombia's manufactured exports. The recovery in coffee prices and the surge in oil prices has also helped Colombia's commodity exports. So far, non-traditional exports do not appear to have been priced out of export markets by the strong appreciation of the peso this year.

Investment is also picking up. The central bank reckons that this year it is running at 22% of GDP. If this rate is achieved it will be the highest since 1995, the average rate of investment is around 18% of GDP.

Inflation: Inflation in October was 0.23%. This brought the rate for the past 12 months to 5.27%. The government set an inflation target of between 4.5% and 5.5% for 2005. In 2004 inflation was 6.5%.

Oil windfall: The state oil company, Ecopetrol, believes that its oil revenues will be 50% (or US$1.45bn) higher than it budgeted. The government will swipe the bulk of this windfall to cover its deficit.

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