The Washington Diplomat / August 2011
By Larry Luxner
Lawmakers and business executives in Bogotá, Panama City and Seoul are nervously watching what happens in a fourth capital — Washington — as Congress wrangles over a series of long-delayed free trade agreements whose passage seemed tantalizingly close at times but has yet to be realized.
“Two of the agreements were signed four years ago. The other agreement is coming up on its fifth anniversary. All three of the agreements promise nothing but economic growth, more jobs, and deepening friendships with democratic allies,” Sen. Orrin Hatch (R-Utah) complained in remarks to the American Enterprise Institute on June 30. “So what is the holdup?”
The holdup has been years of debate, foot-dragging, broken promises and supposed breakthroughs, tough economic reality, political posturing and finger-pointing — as well as deep soul searching over how to best help American workers. The hope was to finally overcome these obstacles and approve the long-delayed agreements with South Korea, Panama and Colombia by a de facto deadline of July 1, or at least before Congress adjourns for the August recess — the reasoning being that after the summer break, election-year politics will make the three FTAs untouchable.
As of mid-June, the Obama administration and skeptical Republicans were “within striking distance of a deal,” according to Thomas J. Donohue, president of the U.S. Chamber of Commerce, an ardent supporter of the deals. The sticking point du jour: renewal of the controversial $1 billion annual Trade Adjustment Assistance (TAA) program, which helps American workers displaced by outsourcing or increased imports with job training and health care. On May 16, Obama, in a bid to placate Democrats and leery American workers, said he wouldn’t submit the trio of free trade accords to Congress unless lawmakers reauthorized TAA, which Republicans lambasted as a stalling tactic, deriding the program as a taxpayer giveaway to big labor.
Despite the impasse, Donohue said he was still “optimistic” the FTAs could be in place by July 1, the date a separate accord between South Korea and the 27-member European Union takes effect. Similarly, Colombia (which already has a deal with the EU) is set to have a trade agreement with Canada take effect Aug. 15.
With the pressure on, technical discussions at the congressional level have made headway in recent months. But July 1 quickly came and went, with free trade hopes frustrated yet again.
But the saga isn’t over yet. The Obama administration has said it still hopes to send all three pending deals to Congress before it recesses in August, but that timeframe seems as unlikely as the July 1 target given that lawmakers will be consumed with the battle over raising the debt ceiling, which could plunge the already-tenuous economy into a tailspin.
It’s a tall order that’s thrown a wrench into negotiations — which perhaps is the point — but it’s also just the latest maneuver in a bipartisan game of brinkmanship. Republicans have been criticized for their all-or-none ultimatum of bundling all three pacts together, instead of passing each FTA on its own merits, which may have bolstered South Korea’s chances because it carries the most economic weight. The GOP tactic of blocking confirmation of Obama’s trade-related nominees until there was movement on the FTAs also hasn’t panned out.
More recently, Republicans hitched more than two dozen health amendments to the Korea FTA that had nothing to do with the agreement, but served to chip away at Obama’s health reform law by repealing the insurance requirement or changing how much ambulatory surgical centers get paid.
The political showmanship became sadly comical on June 30, when Republicans boycotted a panel hearing on the FTAs in part to protest their linkage with Trade Adjustment Assistance but also to complain that Democrats scheduled the markup late in the afternoon right before a holiday weekend — not enough time to consider the nearly 100 amendments that have been attached to the trade pacts. For their part, Democrats bristled at the absence as they stared at empty chairs and effusively praised the virtues of free trade — all while they’ve been busy thwarting the agreements for years.
And just as Republicans accuse Democrats of trying to jam through a “shotgun markup,” in the words of Sen. Hatch, Democrats blame Republicans for trying to ram through a raw deal. “While Republicans have been sitting on the sidelines willing to accept seriously flawed trade agreements, Democrats have been working to fix trade agreements negotiated by the Bush administration,” Rep. Sander Levin (D-Mich.), the ranking Democrat on the House Ways and Means Committee, recently told Politico’s Richard E. Cohen. “When each is fixed and considered separately on its merits, there will be a broader base of Democratic support.”
Christopher Sabatini, senior director of policy at the New York-based Council of the Americas, told The Diplomat he’s optimistic that all three FTAs will eventually sail through Congress.
“The points of convergence are now better than ever,” he said. “Basically, it’s been sidelined because of the debt ceiling negotiations, but it’s there, both sides are publicly committed to it, and there’s no way to walk back from it.”
Sabatini explained his optimism by pointing out that “before, what held it up were elements of the Democratic Party like labor and those who don’t have any interest in free trade at all. They decided they wanted to pick on Colombia because it was low-hanging fruit. Obama has already demonstrated that that’s not the issue. Now it’s people who are in favor of free trade who are holding it up.”
He added: “It’s ironic and sad that Republicans are holding this up over TAA. All told, these three agreements represent about $13 billion in annual exports. I don’t think the Republicans are going to hold up $13 billion in annual exports for $1 billion in TAA expenditures.”
On July 7, the Senate Finance Committee held a mock markup on the bill, which passed by a vote of 18-6. But because of the Republican impasse over the TAA provisions, it’s unclear whether the FTA actually has a chance of becoming law anytime soon.
“There’s mixed opinions on that, but you can say supporters are still hopeful and there is momentum, but that can only last so long,” said a congressional aide who asked not to be identified. “We’re almost there, and I would hope people wouldn’t want to just give up on that.”
All three nations have offered concessions to soothe American worries. Panama, for instance, passed legislation that increased tax transparency, while Colombia pledged to crack down on violence against labor union members, more than 3,000 of whom have been killed over the last three decades. Meanwhile, South Korea’s government, along with U.S. Trade Representative Ron Kirk, reworked their agreement to address concerns over auto and beef imports.
It’s been a long journey for three accords that were originally thought to be shoe-ins after they were first signed back in 2006 and 2007 during the height of the economic boom, when the Bush administration passed a rash of FTAs with countries such as Australia, Bahrain, Chile, Oman, Peru and Singapore.
But then the economy tanked and the three FTAs encountered fierce resistance, languishing in Congress mostly because of Democratic concerns that they would kill American jobs.
Indeed, the lack of progress ultimately boils down to a simple calculus: Free trade comes at a heavy political cost at a time of high unemployment domestically, and Democrats — and a few Republicans — won’t stick their necks out for Colombian flower-pickers when American voters can’t find work.
Free trade proponents counter that the agreements create jobs, spur economic growth and allow the United States to compete globally with nations that already enjoy tariff-free trade with one another. However, after the economic crash of 2008 and stubborn unemployment, those widely touted benefits have come under greater scrutiny. Critics say free trade with nations that have less stringent labor and environmental protections has steadily eroded the American middle class, outsourcing blue- and white-collar jobs while depressing wages back home.
In the middle of the debate — and in a current no-man’s land on Capitol Hill — lie South Korea, Panama and Colombia, whose ambassadors have been acting more like salespeople lately trying to get Americans to buy their free trade pitch — perhaps none more so than South Korean Ambassador Han Duk-soo, who’s crisscrossed the country to promote the so-called KORUS-FTA, venturing into the very places such as Michigan, Ohio and Alabama that feel directly threatened by the pact.
Most recently, Han visited Boston to participate in an event hosted by the Associated Industries of Massachusetts, the U.S. Chamber of Commerce and State Street Corp., officially marking the end of his nationwide tour that’s taken him to dozens of U.S. cities to meet with autoworkers, business leaders and local officials <(also see “South Korean Envoy Stumps for FTA” in the Sept. 10, 2010, news column of the Diplomatic Pouch online). “Time is running out and the stakes are high,” the ambassador warned June 28, days before the July 1 deadline passed.
Of the three countries seeking FTAs with the United States, South Korea is by far the most economically significant. Its population of 49 million and national economy of nearly $1 trillion translates into annual per-capita GDP of just over $20,000. The South Korean economy grew by 6.1 percent last year and is projected to expand by another 4.5 percent this year, according to the IMF.
By comparison, Colombia has 46 million inhabitants, total GDP of $435 billion and annual per-capita income of $9,500. Neighboring Panama has only 3.2 million people, but its service-based economy is thriving and last year jumped by 7.5 percent. This year, it’s projected to expand by 8.5 percent, according to the United Nations, making it Latin America’s fastest-growing economy. Panama’s $44.8 billion GDP translates into annual per-capita income of $12,700 — the highest in Central America.
The so-called KORUS FTA would be America’s most significant trade pact since the North American Free Trade Agreement (NAFTA) of 1994. Signed June 30, 2007, KORUS must still be ratified by the legislatures of both countries, although it has the support of both Obama and South Korean President Lee Myung-bak, whose party holds a majority in the National Assembly. If ratified, nearly 95 percent of bilateral trade in consumer and industrial products would become duty free within three years of the deal entering into force — removing tariffs in a wide range of sectors, from pharmaceuticals to financial services.
But it’s the agricultural and automotive sectors that have received the most attention. The FTA would phase out a 40 percent tariff on U.S. beef — South Korea is already the fifth-largest market for U.S. farm products, importing about $5 billion worth in 2010 — and eventually eliminate an 8 percent Korean tariff on U.S. vehicles, while the United States would cut its tariff on Korean exports by 2.5 percent. Although the percentages seem to favor U.S. automakers, South Korea imports only a tiny fraction of American cars compared to what the United States already buys from Seoul.
That’s partly why labor unions are so bitterly opposed to the KORUS FTA. Despite a reworking of the deal last year to better protect U.S. automakers, they still worry it will limit U.S. auto exports to Korea’s notoriously closed-off market while opening up the floodgates for cheap Korean car exports to the United States.
Rep. Mike Michaud (D-Maine) calls the deal a “fundamentally flawed trade agreement that will cost us jobs in the United States.” Rep. Brad Sherman (D-Calif.) says “the war on the middle class continues. Its greatest battle of 2011 will be the U.S.-Korea free-trade agreement.” Just the opposite, says the country’s ambassador in Washington, as he tries to dispel fears that the FTA will displace American factory workers.
The agreement “will actually make things better, not worse, for the auto industry and its workers,” Han told a group of business leaders late last year in Detroit, during a trip that included meetings with senior executives from Ford and Chrysler.
And during a visit to Denver, he told Colorado officials that “agriculture will be one of the best beneficiaries of the Korea-U.S. agreement. It’s urgent for us to implement this agreement as soon as possible.”
All the more urgent, supporters say, because the European Union is stepping in to fill the U.S. void. The EU’s pact with Korea, which took years to negotiate and was finally signed in Brussels last October, will remove nearly all tariffs between the two economies, as well as many non-tariff barriers. The European Commission predicts the FTA — the EU’s first with an Asian country — will generate up to 19 billion euro (about $25 billion) in new trade for EU exporters.
The Obama administration says the KORUS FTA would boost America’s GDP by $10 billion annually and support 70,000 jobs — all the more reason, Republicans argue, why the president shouldn’t dawdle while Europeans gain access to Seoul’s increasingly affluent market.
But many Democrats and unions dispute those figures. Organized labor cites a report from the Economic Policy Institute showing that the pact could actually increase the U.S. trade deficit by $16.7 billion and cost up to 159,000 jobs over the course of its first seven years.
Among other things, opponents also say KORUS gives foreign investors the right to enforce FTA privileges by suing the U.S. government in foreign tribunals for violations of FTA rights; opens up U.S. environmental, health, zoning and other policies to challenge by foreign investors in foreign courts; and requires that foreign-based companies in South Korea — like those in all FTA nations — have the same access to state and federal government contracts as that of U.S.-based companies.
The negative sentiment is not only on the American side, critics also point out. “The Korean Embassy misrepresents Korean public opinion,” said Public Citizen, noting that a May 2008 poll showed 55 percent of Koreans opposed the trade pact, while only 29 percent supported it. According to the New York Times, a deal related to KORUS “provoked the biggest anti-government demonstrations since the end of military dictatorship in the late 1980s” and almost brought down the Lee administration.
The U.S.-Colombia pact is equally controversial, though for different reasons. Like his Korean counterpart, Colombian Ambassador Gabriel Silva has been touting the FTA’s benefits (also see cover profile), saying it’ll pump $2.5 billion into the U.S. economy and increase yearly U.S. exports to South America’s second-largest country from the current $12 billion to just over $13 billion.
Silva warned that delays in the FTA and the recent expiration of preferences under the Andean Trade Promotion and Drug Eradication Act (ATPDEA) have already cost jobs in both countries.
“For the many Colombian exporters that have been negatively impacted by a new wave of damaging floods, the renewal of preferences is critically important. We hope that the forward movement of the FTA also leads to the extension of ATPDEA preferences as soon as possible,” said the ambassador, who served as defense minister under former President Álvaro Uribe and once headed the Colombian Coffee Growers Federation.
Silva also praised the White House’s recent acknowledgement of Colombia’s completion of a so-called “action plan” on labor rights, which had been a main bone of contention between the two countries. He told us in June that the plan, agreed to on April 22, will make consideration of the FTA by Congress a “reality” in the near term.
“Colombia believes wholeheartedly in the steps outlined in the action plan and is committed to continuing to achieve each of the objectives it sets forth because they are in line with President [Juan Manuel] Santos’s vision for Colombia and our unwavering commitment to improve labor rights and standards, and ensure the safety and protection of all of our citizens.”
Yet some Democrats and human rights NGOs aren’t impressed. They acknowledge that the Santos government has committed to expand protection programs for trade unionists and designate 100 labor inspectors to address workplace abuse, but they say the “action plan” doesn’t go far enough.
“The last six months have seen an increase in attacks and threats against community leaders and human rights defenders,” said Gimena Sánchez-Garzoli, senior associate at the Washington Office on Latin America (WOLA), which staunchly opposes the proposed FTA. “We find it incomprehensible that the plan fails to address steps to dismantle the paramilitaries and successor armed groups that are the source of so much of this brutal violence.”
Last year, according to WOLA, 51 trade unions were killed in Colombia, making it still the world leader in anti-union violence.
Added Kelly Nicholls, executive director of the U.S. Office on Colombia: “We have yet to see any plan from either the U.S. or Colombian governments that spells out how they intend to mitigate the potentially devastating impacts on poor farmers who cannot compete with large-scale, subsidized U.S. farm exports. If this is not addressed, these farmers could be pushed into the illegal market.”
The Washington-based Center for International Policy (CIP), saying it “won’t stand for this FTA,” warns there’s little time to waste.
“In Colombia, human rights defenders, Afro-Colombians, indigenous communities, trade unionists, millions of displaced people, struggling small-scale farmers and many others are relying on us to protect them from the devastation this trade agreement would bring to their lives and their country,” CIP told its supporters in a May 13 email blitz. “Administration officials have indicated that they would like to approve the FTA by this summer. If we have any chance of stopping them, we have to act now to make it clear that this is both a bad political and moral decision.”
Of the three countries still holding out hope for an FTA with the United States this summer, probably Panama’s bid is the least controversial. Mario E. Jaramillo, Panama’s recently appointed ambassador in Washington, says he believes the pacts will be approved.
“All three FTAs will be passed, but Panama will get the most votes by far,” Jaramillo confidently told The Diplomat during an interview back in May. “That’s because we’re such a small country, we don’t manufacture anything, there’s no risk of the U.S. losing jobs to us, and we’ve always had a great relationship with the United States. We’ve never had labor issues. And more than 80 percent of congressmen and senators have had some relationship to Panama. We’re going to get at least 300 votes, and we don’t even have a lobbyist.”
In late April, Panama — in an attempt to silence critics who have accused it of being a haven for laundered drug money — signed a Tax Information Exchange Agreement (TIEA) with Washington that allows U.S. authorities to go after Americans with bank accounts in Panama who are suspected of evading taxes.
But the TIEA also has an added benefit: It makes Panama far more attractive as an incentive-travel destination.
“When U.S. companies hold a convention in Panama, all their expenses related to that convention can be deducted from their taxes. It wasn’t like that before,” explained Jaramillo. “Since Panama didn’t have that, it wasn’t certified as a convention center and was losing out to Mexico and Caribbean destinations. But now, conventions held in Panama are tax-deductible under U.S. law.”
The ambassador says that could significantly boost convention business in Panama, which currently has 20,000 hotel rooms but is in the process of adding another 8,000.
Efforts to push through the FTA coincide with a lucrative $5.3 billion expansion of the aging Panama Canal to accommodate larger and larger ships.
“This is the first time Panama has ever been run by a businessman,” said the country’s president, Ricardo Martinelli, a self-made millionaire and chairman of Panama’s Super 99 grocery chain. “Usually in Latin America, the politicians become businessman after they leave office, but this was the other way around.”
Speaking to a packed crowd at Washington’s Woodrow Wilson Center the day after meeting with Obama at the White House, Martinelli boasted that his government has cracked down on price-fixing, illegal kickbacks, tax fraud and corruption within Panama’s police force — a problem that seems to have grown with the arrival of thousands of foreign workers taking advantage of Panama’s rapidly expanding economy.
“We regularized a lot of illegal immigrants that were here,” he said. “They were using our schools, our hospitals and our roads but were paying no taxes. That was also a big source of corruption. Every time they were stopped in the streets and asked for IDs, they bribed the officers.”
Martinelli, whose five-year term of office expires in mid-2014, said Panama now ranks as the second-most competitive economy in Latin America after Chile, and is one of the few countries in the region with investment-grade bond ratings.
As such, expanding Panama’s service-based economy is a top priority for his administration — and the planned canal expansion will pump tens of billions of dollars into the country in coming decades.
“The canal represents 8 percent of our GDP, and this year, the Colón Free Zone will do $27 billion in business,” he explained. “And regarding the canal’s expansion, more money is being spent in the United States than in Panama, because all U.S. ports will have to increase their draught in order to accommodate the world’s largest ships. In Port Elizabeth, N.J., a bridge worth over $1 billion has to be built to accommodate post-Panamax ships.
The East Coast of the U.S. will greatly appreciate the expansion because it’s very difficult to get merchandise from China, put it on a truck. It costs money and pollutes the environment instead of going through the canal.”
All of which makes it easier for U.S. lawmakers to support a free trade agreement with Panama. Martinelli, calling the FTA a “no-brainer,” said he foresees the treaty sailing through Congress in the next 60 to 90 days.
“We don’t expect any difficulty at all getting it approved,” he said — in May. “I don’t see how little Panama can hurt the U.S. job market. On the contrary, it will create more jobs for the U.S. economy.”