Andean-U.S. Free-Trade Agreement Negotiations
Released: 2006-03-14T00:00:00

Background

The Andean-U.S. free trade agreement (FTA) negotiations began in May 2004, when theUnited States, Colombia, Peru, and Ecuador participated in the first round of talks, with Boliviaparticipating as an observer. After thirteen rounds of talks, however, negotiators failed to reach anagreement. Peru decided to continue negotiating alone with the United States and concluded abilateral agreement in December 2005. On January 6, 2006, President Bush notified the Congressof his intention to enter into a free trade agreement with Peru. Colombia later continued negotiationswith the United States and this agreement was concluded on February 27, 2006. Negotiations withEcuador are stalemated. This report discusses the Andean-U.S. FTA negotiation process and theevolution from the concept of a single FTA into more than one bilateral agreements. The report alsodiscusses U.S.-Andean trade relations and the major trade issues in the negotiations. Given that theprospects of a single Andean-U.S. FTA now appear low, this report will not be updated.

The Negotiations

Developments Prior to the Negotiations

At a meeting with President George W. Bush on April 28, 2003, in Washington, ColombianPresident Alvaro Uribe sought a free-trade agreement (FTA) with the United States as a means toimprove Colombia's economy, provide employment, and offer an attractive alternative to drugactivity in his country. President Bush was reluctant to agree to free-trade talks, however, becausehe wanted to achieve broader market opening through the hemispheric Free Trade Agreement of theAmericas (FTAA). (1) Because the FTAA talks appeared to be stalled, President Bush reportedly offered at the meeting tosend then-U.S. Trade Representative (USTR) Robert Zoellick to Colombia to discuss bilateral tradebetween the two countries.

At the time, some Members of Congress supported free-trade talks with Colombia. On June11, 2003, Senator Max Baucus, Ranking Member of the Senate Finance Committee, and threeDemocratic Members on the House Ways and Means Committee urged USTR Zoellick to give"significant weight" to market size in selecting countries for FTAs and included Colombia in a listof possible FTA partners. (2) On August 1, 2003, Senator Charles Grassley, Chairman of the Finance Committee, and a bipartisangroup of four other Senators on the Senate Finance Committee sent the USTR a letter asking for"serious consideration of initiating [FTA] negotiations with Colombia...." (3)

The USTR traveled to Bogota and met with Colombia's President and others on August 8,2003. The purpose of his trip, according to the USTR, was "...to clearly lay out the scope and depthof such a possible negotiation, what it would involve, and to listen and learn from Colombians abouttheir goals and expectations." (4) Peru and Ecuador also expressed interest in FTA negotiations withthe United States.

On November 18, 2003, USTR Zoellick formally notified Congress of the Administration'sintent to begin FTA negotiations with Colombia, Peru, Ecuador, and Bolivia. A press release thataccompanied the notification said that the Administration planned negotiations to begin the secondquarter of 2004, initially with Colombia and Peru, and that the United States would work withEcuador and Bolivia "with a view to including them in the agreement as well." (5)

The USTR's letter of notification to Congress identified economic reasons for thenegotiations. It said that an FTA would help U.S. interests "...by reducing and eliminating barriersto trade and investment between the Andean countries and the United States. The FTA will alsoenable us to address impediments to trade and investment in the Andean countries...." The combinedmarkets for the four Andean countries, according to the USTR, have a gross domestic product (ona purchasing power parity basis) of $463 billion and a combined population of 93 millionpeople. (6) The letter ofnotification also stated that an Andean FTA would add momentum to the broader negotiations onan FTAA. Those negotiations were still stalled, primarily because of differences between the UnitedStates and Brazil.

The notification identified political reasons for the talks as well. It said that an FTA "...willalso enhance our efforts to strengthen democracy and support for fundamental values in the region." It said that one reason for negotiating with all four countries was that a regional strategy would helpin combating narcotrafficking. (7) It also pointed out several issues of concern to the United States: protection of worker rights in Ecuador; disputes involving U.S. investors in Peru; violence againsttrade unionists and disputes with U.S. investors in Colombia; and the need to work with Bolivia andthe other Andean countries on capacity building.

On March 23, 2004, the USTR issued a press release announcing that the United States andColombia would begin FTA negotiations between the two countries, and possibly other Andeancountries, on May 18-19, 2004. (8) The naming of only Colombia made it clear that there were stillconcerns with Peru and Ecuador that had not been addressed. The press release mentionedoutstanding disputes between U.S. investors and the Peruvian government and concerns aboutprotection of worker rights and investor disputes in Ecuador. According to the press release, "We[the U.S. government] hope that in the coming weeks these countries will take the follow-on stepsthat will enable us to include them at the negotiating table, along with Colombia, at the start of thenegotiations. We look forward to including Bolivia at a later stage, and are working with them toincrease their readiness." On May 3, 2004, the USTR announced that issues with respect to Peru andEcuador had been addressed, and those two countries would join with Colombia in the first roundof the negotiations. (9)

Negotiation Process and Outcome

During the first round of FTA negotiations in Cartagena, Colombia in May 2004, negotiatorsagreed on a schedule that, according to chief U.S. negotiator Regina Vargo, would probably involveseven rounds by early 2005 -- one round every five to seven weeks. (10) Fourteen working groupswere established during that first round. On the day that negotiations began, students, unionmembers, farmers, and others in Cartagena held a one-day protest against the negotiations becauseof feared job loss in the agriculture sector. (11)

By November 2005, thirteen rounds of negotiations for the U.S.-Andean FTA were held withno successful conclusion: Cartagena (May 18-19, 2004); Atlanta (June 18, 2004); Lima, Peru (July26-30, 2004); San Juan (September 13-17, 2004); Guayaquil, Ecuador (October 25-29, 2004);Tucson (November 20-December 4, 2004); Cartegena (February 7-11, 2005); Washington (March14-18, 2005); Lima (April 18-22, 2005); Guayaquil (June 6-10, 2005); Miami (July 18-22, 2005);Cartagena (September 19-23, 2005); and Washington (November 14-22, 2005).

Bolivia attended the negotiating sessions as an observer, but was not expected to be a partyto an agreement. The USTR said, "We want to maintain the door being open....but we also have torecognize realities," and noted that Bolivia's government had "'some basic stability issues.'" (12) In mid-June 2005, theBolivian president resigned amid widespread opposition to foreign participation in the naturalresource sectors and other policies, and an interim president took office. In the December 2005elections, Bolivians elected Evo Morales as their president. When Morales was inaugurated onJanuary 22, 2006, he started a five-year term as Bolivia's fourth president since August 2002. Ecuador experienced political change as well during the negotiations. On April 20, 2005, during theninth round of FTA negotiations, the Congress in Ecuador impeached Ecuador's president LucioGutierrez and replaced him with the vice president, Alfredo Palacio, a physician and politicalindependent. Palacio is the country's seventh president in nine years.

The thirteenth round of negotiations in Washington was expected to be the last, butnegotiators failed to conclude the talks over disagreements in intellectual property rights andagriculture. Colombian and Ecuadorian negotiators said they pulled out because they could notaccept U.S. demands for stricter patent protections and reductions in agricultural barriers, whilePeruvian negotiators appeared to be more flexible. The Peruvian negotiators decided that they wouldcontinue talks with the United States without the other countries. The two countries arrived at anagreement in the first week of December 2005. (13)

On December 7, 2005, U.S. Trade Representative Rob Portman and Peru's Minister ofForeign Trade and Tourism, Alfredo Ferrero Diez Canesco, announced a successful conclusion tothe U.S.-Peru free trade agreement negotiations. The agreement would eliminate tariffs and otherbarriers to goods and services. (14) Ambassador Portman stated that "An agreement with Peru is akey building block in our strategy to advance free trade within our hemisphere, which we hope tolater bring in the other Andean countries including Colombia and Ecuador." (15) Afterwards, Colombia andEcuador both announced that they would also like to see a successful conclusion to theirnegotiations.

On February 27, 2006, U.S. Ambassador Portman and Colombia's Minister of Trade,Industry, and Tourism, Jorge Humberto Botero, announced that the United States and Colombia hadconcluded their work on a free trade agreement. Ambassador Portman announced that the agreementis an essential component of the U.S. regional trade strategy and that it would "...generate exportopportunities for U.S. agriculture, industry, and service providers and help create jobs in the UnitedStates". He also stated that the agreement would "...help foster economic development in Colombia,and contribute to efforts to counter narco-terrorism, which threatens democracy and regionalstability." (16)

The government of Ecuador has stated that it too would like to continue negotiations withthe United States and arrive at an agreement, but these talks have been postponed several times.

Andean Perspective

The Andean governments are pursuing FTAs with the United States to assure access to theimmense U.S. market. They have preferential access now under unilateral U.S. programs (seefollowing section), but that access is scheduled to expire at the end of December 2006. An FTAwould lock in those preferences and additional duty-free treatment. The Andean governments alsowant to attract foreign investment and see an FTA with the United States as a way to establish amore secure economic environment and increase foreign investment.

Within the Andean countries, however, there is broad grass-roots opposition to free tradewith the United States. Opponents argue that any economic benefits from increased trade under anFTA will be realized by only a small segment of the economy, worsening the separation of theclasses. They also argue that a large part of the Andean population is poor farmers, who areespecially vulnerable and cannot compete against increased agricultural imports from the UnitedStates, which some Andean officials claim are heavily subsidized. The Development Group forAlternative Policies states that one of the few remaining mechanisms protecting family farmers inthe Andean region is the Andean Community's "price band" system which, they argue, has servedto cushion farmers from the vagaries of international commodity prices. (17) A further argument is thatan FTA would mean reduced revenues for the Andean governments, and some opponents state thatrevenue losses will have to be replaced with regressive domestic taxes. (18)

The three Andean countries have faced considerable opposition in their countries over a tradeagreement with the United States. News accounts reported that during the Cartagena round inSeptember 2005, an estimated 7,000 anti-free trade activists gathered in Cartagena and Bogota, whileprotesters in Peru erected roadblocks. (19) These protests may have influenced the governments to delayentry into an agreement, but after the successful completion of Peru's agreement with the UnitedStates, there likely was more pressure for Colombia and Ecuador to continue negotiations. Ecuador'schief trade negotiator, Manuel Chiriboga, stated in January 2006 that if Colombia concluded anagreement, Ecuador "cannot fail to conclude" due to the risk that Ecuador would be left out of theagreement to be voted on in the U.S. Congress. (20)

Perspective of U.S. Industry and Other Groups

In the United States, much of the business community supported an Andean FTA. TheNational Association of Manufacturers (NAM), for example, states in its trade agenda that one ofits key objectives is the congressional approval of the Andean FTA and other FTAs now beingnegotiated. The NAM has written comments on its position in various aspects of the negotiationssome of which include the removal of tariff and non-tariff barriers, transparency and accountabilityin technical regulations, enforcement of national customs laws, protection of U.S. investment abroad,and strengthening and enforcement of intellectual property rights laws. (21) NAM's trade agendastates, "The NAM supports FTAs because U.S. manufacturers face much higher barriers in foreignmarkets than foreign producers face here."

A number of other groups, however, oppose an Andean FTA. A coalition of 51 labor,religious, and environmental groups wrote to the USTR on September 9, 2004, urging him tosuspend the negotiations. They argued that the negotiations have been conducted in secret, there hasbeen no meaningful dialogue with the public, and the Andean negotiations are modeled on failedtrade agreements. (22) Among the signatories were the AFL-CIO, American Friends Service Committee, and PublicCitizen.

U.S.-Andean Trade

The United States extends special duty treatment to imports from Bolivia, Colombia,Ecuador, and Peru under a regional trade preference program. This program accounted for over halfof all U.S. imports from the four countries in 2005.

The program began under the Andean Trade Preference Act (ATPA; title II of P.L. 102-182 ),enacted on December 4, 1991. ATPA authorized the President to grant duty-free treatment to certainproducts from the four Andean countries that met domestic content and other requirements. It wasintended to promote economic growth in the Andean region and to encourage a shift away fromdependence on illegal drugs by supporting legitimate economic activities. ATPA was originallyauthorized for 10 years and lapsed on December 4, 2001.

After ATPA had lapsed for months, the Andean Trade Promotion and Drug Eradication Act(ATPDEA; title XXXI of P.L. 107-210 ), was enacted on August 6, 2002. ATPDEA reauthorizedthe ATPA preference program and expanded trade preferences to include additional products thatwere excluded under ATPA. The additional products under ATPDEA included petroleum andpetroleum products, certain footwear, tuna in flexible containers, and certain watches and leatherproducts. ATPDEA also authorized the President to grant duty-free treatment to U.S. imports ofcertain apparel articles, if the articles met domestic content rules. Duty-free benefits under ATPDEAend on December 31, 2006.

In 2005, a considerable share (46%) of all U.S. imports from the four Andean countriesentered duty-free under ATPDEA, and a smaller share (11%) entered duty-free under ATPA. (23) A very small share (2%)entered duty-free under the U.S. Generalized System of Preferences, which applies to mostdeveloping countries throughout the world. Of the remaining 41% of imports, most entered duty-freeunder normal trade relations, which applies on a nondiscriminatory basis to almost all U.S. tradingpartners. Only 7% of the value of U.S. imports from the four countries was dutiable in 2005. Thus,compared to the status quo, only a relatively small share of U.S. imports would become duty-freeunder an FTA. That small share, however, might include products that are relativelyimport-sensitive in the United States or disproportionately important to the Andean countries.

In 2005, the United States imported $20.1 billion, or 1% of total U.S. imports, from the fourcountries. The same year, the United States exported $9.9 billion, or 1% of all U.S. exports, to thefour countries. Colombia accounted for 44% of those U.S. imports and 55% of the U.S. exports (see Table 1 ). Peru and Ecuador split nearly all of the other half of imports and exports, and Boliviaaccounted for a very small share.

The leading U.S. import from the region in 2005 (35% of imports) was petroleum oil,principally crude oil from Ecuador and Colombia. Other leading U.S. imports were jewelry, gold,coal, coffee, articles of copper, and cut flowers. Leading U.S. exports to the region were petroleumproducts, mining equipment, broadcasting equipment, and data processing machines.

Table 1. U.S. Trade with the ATPA Countries,2005

Source: USITC Interactive Tariff and Trade DataWeb at http://dataweb.usitc.gov . Data are forU.S. imports for consumption (Customs value) and domestic exports (Fas value). Regional sharesmay not add to 100% due to rounding.

Selected Issues in the Negotiations

The following highlights some of the more difficult issues in the Andean-U.S. FTAnegotiations. (24) Inaddition to the following, the negotiations also covered other issues such as services trade, electroniccommerce, and government procurement. Trade negotiators identified the difficulties in agricultureand intellectual property rights as the main obstacles in reaching agreement. Andean negotiatorsstated at the time that the United States needed to be more flexible in these areas. U.S. trade officialssaid that the United States was very interested in reaching agreement in these areas, but that it hadalso been clear in laying out its expectations before the negotiations began. (25)

Agriculture

U.S. negotiators refused to talk about rules for agricultural subsidies, saying that subsidiesshould be dealt with in the on-going multilateral trade negotiations in the World Trade Organization. Nevertheless, an important goal for the United States in the FTA talks was the elimination of apractice called the "price-band mechanism." Under this mechanism, a fluctuating tariff is imposedon an import for the purpose of keeping the import's price within a specific range. The bandaddresses changes in world commodity prices. Colombia and Ecuador have these variable dutieson over 150 items, including corn, rice, soybeans, and powdered milk. (26) Andean negotiators saidthat the price-band mechanism is necessary to protect their farmers, especially small farmers, againstsubsidized imports. A spokesperson for small farmers in Colombia said that there is a large ruralpopulation and high unemployment in Colombia, and without protected alternative crops, the peoplewill produce drugs. (27)

Some specific products were especially important to the trading partners. For example,access to the U.S. market is critical for Andean producers of cut flowers (Colombia and Ecuador)and asparagus (Peru). These products, however, have the largest potential displacement effects onU.S. producers under ATPDEA (28) , so they are worrisome to U.S. growers. Also, U.S. sugarproducers are concerned about increased imports from the Andean countries. Conversely, Andeanfarmers see some U.S. products, such as corn and chicken parts, as threatening.

Intellectual Property Rights (IPR)

A major area of disagreement was the so-called "data exclusivity." This term refers to anadditional period of patent protection that is given to test data, especially data on pharmaceuticalsand agricultural chemicals. The United States wanted rules on data exclusivity in an FTA to protectthe results of research by pharmaceutical companies for five years. (29) In related action, thePharmaceutical Research and Manufacturers of America (PhRMA) petitioned the U.S. governmentto withdraw ATPDEA benefits for Peru and Ecuador because they have no data exclusivitylaws. (30) Oxfam, adevelopment and relief organization, argued, "Guaranteeing exclusive rights over pharmaceuticaldata will result in delays and limit generic competition in cases where the patent has expired or acompulsory license has been granted." (31) The Andean countries opposed rules on data exclusivity, arguingthat the additional period keeps generic pharmaceuticals from entering the market and thus hurtspoor people.

Another IPR issue was the so-called "bio-piracy." Andean negotiators wanted IPR provisionsto go beyond those contained in the WTO. They wanted protection against the use of "traditionalknowledge" and "genetic resources" without fair compensation. The United States wanted "seconduse" protection, where a product gets additional protection if it is found to serve a use other than theoriginal one under the patent. It also wanted protection against parallel imports, which are productslegitimately made in one foreign country, but imported into another country without the approval ofthe IPR holder. The Andean countries opposed these U.S. positions.

Worker Protections and Human Rights

Some unions and labor rights groups protested against trade negotiations with Ecuador andColombia, because they claimed that these countries have unacceptable records on worker rights andpermit violence against trade unionists. For example, an official with the InternationalConfederation of Free Trade Unionists (ICFTU) criticized Colombia's president for negotiating withparamilitary forces, who are the killers of trade unionists according to the ICFTU official, and saidthat the more a union protests the president's economic policy, the more the union is persecuted. (32) The Colombiangovernment responded that through several programs it instituted, it "...clearly demonstrated itscommitment to the protection of human rights and has given special priority to the protection ofunion members." (33) TheU.S. State Department country report on human rights for Colombia identifies many legal rights forunions, but recognizes problems with protecting those rights. (34) For example, the reportstates that in Colombia, the Constitution provides a right for most workers to organize unions, butin practice, "...violence against union members and anti-union discrimination were obstacles tojoining unions and engaging in trade union activities...."

Another point of controversy was Ecuador's record on human rights. On February 1, 2005,38 House Members (37 Democrats, 1 Independent) wrote to the foreign trade minister of Ecuador,expressing concern with "...serious workers' rights violations in Ecuador and Ecuador's failure to liveup to commitments made to the U.S. government in October 2002, as part of a review of Ecuador'sbenefits under the [ATPDEA]." (35) They said that they would recommend the gradual withdrawalof Ecuador's ATPDEA benefits and that Ecuador's continued failure to observe the ATPDEAcommitments "...casts doubt on whether Ecuador will be able to follow through with obligations..."under an FTA. (36)

Textiles

A small but significant share of U.S. apparel imports from Andean countries still pay fullduty under ATPDEA. The Andean region is not considered a major supplier, but free trade couldcause some increase in imports. In addition, the rule of origin for textiles and apparel was animportant issue in the negotiations.

Investor/State Disputes

One of the most important issues in the negotiations was the unresolved disputes involvingU.S. investments in Andean countries. On October 6, 2004, the House Committee on InternationalRelations, Subcommittee on the Western Hemisphere, held a hearing on U.S. investment disputesin Peru and Ecuador. At the hearing, E. Anthony Wayne, Assistant Secretary of State for Economicand Business Affairs, testified, "Nearly every U.S. company doing business in Ecuador has facedproblems with Ecuadorian government entities, from regulatory bodies to the courts and the customsagency." He said that the situation in Peru was "...considerably better," although there still wereproblems. He stated that both countries had been cautioned that, "...left unresolved, these disputesare a stumbling block to achieving an FTA." A few months later in October 2004, Deputy USTRPeter Allgeier warned that Peru and Ecuador could be dropped from the FTA, if outstanding investordisputes were seen as endangering congressional approval of an FTA with Colombia. (37)

On April 13, 2005, the House Committee on International Relations, Subcommittee on theWestern Hemisphere, held a hearing on U.S. trade agreements with Latin America. At the hearing,John Murphy, Vice President for Western Hemisphere Affairs of the U.S. Chamber of Commerce,said that the situation regarding investment disputes with Peru and Ecuador was difficult and thatpersistent disputes could "...stand as a substantial obstacle that could block the participation of thesecountries [in an FTA]." These disputes were discussed at the negotiations. Since the beginning of2005, progress was made in resolving disputes with U.S. companies.

Visas

Andean countries, especially Colombia, wanted to have visa and immigration issues in thetalks. They said that heightened U.S. security made it hard for their business representatives to enterthe United States. U.S. negotiators insisted that immigration issues were not negotiable.

Environment

An important environmental issue concerned investment provisions. In a letter datedSeptember 13, 2004, a number of environmental groups, including Friends of the Earth, NaturalResources Defense Council, and Sierra Club, expressed concern about the possible inclusion in anAndean FTA of an investment chapter similar to Chapter 11 of the North American Free-TradeAgreement. (38) Thatchapter allowed private investors from one signatory country to seek binding arbitration against thegovernment of another signatory. Such provisions, environmental groups argued in their letter, couldallow "... foreign companies to completely bypass domestic courts to challenge public interestsafeguards." On the other hand, U.S. negotiators sought such provisions in trade agreements, sinceU.S. companies wanted such protections for their foreign investments.

Prospects

The last round of negotiations in which the United States and the three Andean countries allparticipated was held in Washington on November 14-22, 2005. Subsequently, Peru and Colombiaconcluded bilateral FTAs with the United States and talks with Ecuador have been postponed severaltimes due to a number of differences. The main outstanding issues are related to agriculture. Ecuadorian President Alfredo Palacio has said that he would like to see a trade agreement with theUnited States but would not sign a deal that is unfair to Ecuador. He is facing considerable pressurefrom indigenous groups not to enter into an agreement. Thousands of Ecuadorean Indians have beenprotesting the free trade talks saying that they cannot compete with farm products from the UnitedStates. They believe a trade agreement would put them at a disadvantage with U.S. farmers anddisrupt their ancestral culture. (39)

There has been some speculation that the United States will not renew the ATPDEA in theabsence of a PTPA. In September 2005, the House Ways and Means Committee released a reporton a bipartisan congressional trade mission to Colombia, Ecuador, and Peru. (40) The purpose of the tripwas to focus on the ongoing negotiations of the U.S.-Andean free trade agreement and to discussinvestment and security issues in the region. The report states that the current unilateral tradepreferences received by the Andean countries set to expire in December 2006 may not be renewed. It indicates that a "reciprocal, mutually beneficial arrangement must take the place of the unilateralaccess." (41)

A senior US trade official recently said that the U.S. trade agreements with Colombia andPeru are likely to be treated as separate agreements by the Congress, thereby narrowing thepossibility of a stand-alone Andean-U.S. FTA. (42) Under current deadlines in the Trade Promotion Authority Act(TPA), expedited legislative procedures apply to implementing bills for trade agreements, if, amongother requirements, the agreements are entered into by June 30, 2007. Given the TPA notificationprocedures, the free trade agreements with Colombia and Peru could be voted on by the Congresssometime this summer. It is not known if or when a U.S.-Ecuador FTA might be reached.

The narrow passage of CAFTA-DR ( P.L. 109-53 ) had been viewed as an indicator that anyU.S.-Andean FTA might also face considerable opposition. How the Bush Administration's decisionto negotiate and submit separate FTAs with Peru and Colombia may affect this calculation remainsuncertain. (43)