Despite general optimism at the opportunities provided by the new US-Colombia Free Trade Agreement, FSG clients have reported unwelcome delays and roadblocks in efforts to take advantage of the agreement, as noted in our recent Quarterly Market Review of Colombia.
On a recent visit to Colombia, I sat down with FSG Expert Advisor Juan David Barbosa to discuss the first 9 months of implementation of the accord. Juan David specializes in trade law at the Bogota law firm of Posse, Herrera, and Ruiz, and previously served as the Deputy Director of Trade Remedies at the Ministry of Commerce of Colombia. Juan David has advised numerous multinationals on trade and market entry in Colombia, and was the featured expert in last year’s FSG teleconference on the new agreement.
According to Juan David, the FTA’s would change the landscape for FSG clients, particularly those based in the United States or importing products to Colombia from the United States in the following ways:
- Import tariffs on 80% of U.S. exports to Colombia would drop to zero, including strategic industries such as agriculture, construction, auto and aviation parts, medical products, and IT.
- Legal and regulatory hurdles would fall as companies no longer needed local branches, suppliers were afforded more protection, and new rules made it easier to exit agreements with local companies.
- Many of the key provisions of the agreement would enter into force between September of 2012 and March of 2013.
Because of these sweeping changes, 90% of FSG clients expected the FTA to be a factor in increased investment for their companies in Colombia, and 54% of FSG’s expert advisors said the FTA would provide significant advantage for US companies over competitors from other countries without such an agreement.
According to Juan David, and in line with recent experiences of FSG clients, Colombia is lagging in implementation of a number of key provisions:
- Intellectual property rights protections
- Increased safeguards in agency agreements for multinationals
- New rules on taxes of alcoholic drinks
- Electronic certification of origin
- Rules on urgent shipping requests
- Implementation of sanitation codes equivalent to the United States
Accordingly, multinationals expecting the FTA to be a panacea for bureaucratic and logistical headaches are growing frustrated with delays of their products at customs and an unclear regulatory and compliance environment.
- Bureaucratic Entropy:
- The root of the problem, says Barbosa, is not with laws and regulations now on the books, but rather with the capacity and will of the institutions charged with enforcing and acting under them. Comprehension and processes to enact the new rules is lagging the actual implementation timelines. In short, Colombia’s bureaucracy has not kept pace with the rapid evolution in the rules of the game.
- Infrastructure Constraints:
- Likewise, the boom in trade with Colombia has created a parallel capacity constraint in logistics infrastructure. Ports and roads are clogged with an influx of goods. Construction and investment, while significant, has yet to catch up with the expansion in trade (see map below).
- Protectionist Backlash:
- Also concerning are recent import tariff hikes slapped on certain sectors of imported goods such as garments, textiles, footwear, agricultural goods, paper products, and some used machinery. While these don’t necessarily violate existing FTAs, they are indicative of political pushback from domestic manufactures threatened by the growth in imports. New free trade agreements, which have come into effect at the same time as a strong appreciation of the Colombia peso, have led to politically powerful domestic producers seeking relief in the form of protection and safeguards from the government.
The good news is that the Colombian government has recognized that it may have bitten off more than it can currently chew in regards to implementing multiple trade agreements over a short amount of time with limited bureaucratic resources. In response, the government has spaced out the implementation processes of current and upcoming agreements and will promulgate new guidelines by mid-May, 2013. This may buy U.S. based companies more time with a head start in Colombia as upcoming FTAs between Colombia and the EU and South Korean could take longer than anticipated to come into full effect.
Less promising is the outlook for short term improvements in infrastructure bottlenecks. Though the government is currently investing heavily in construction of fixed infrastructure assets, project cycles are long and payoff takes years. Even here, the pace of investment has been hampered by bureaucratic constraints, as the second half of 2012 saw construction spending stumble because of poor project planning and lack of capacity to execute on the ambitious agenda.
Fears of a broader protectionist backlash are probably overblown. Colombia has a strong political orientation towards free trade, and is eager to establish itself as one of Latin America’s most open economies. All politics are local, however, and local producers have shown they have the power to win temporary measures to shield themselves from competition in certain cases. Multinationals, no matter the industry or the country of origin, would be wise to monitor the local political winds to anticipate if their products could be on the wrong side of a tariff.
The Big Picture
Despite these early difficulties, Juan David remains optimistic; “The FTA will mature and offer excellent opportunities for U.S. corporations. Both for more established multinationals and newer entrants, Colombia remains an excellent investment destination. In fact, Colombia is an increasingly attractive place for U.S. companies to open their first emerging markets operation. For now, however, the FTA is less than a year old. It is still a newborn baby and has a lot of growing up to do”, stresses Juan David.
Juan David has more than 10 years of experience in customs and international trade proceedings and litigation, as well as in the development of import-export tax efficient strategies. Juan David has also worked in several international unfair trade practices (dumping) and safeguard investigations, as well as in the negotiation and implementation of free trade agreements. Before joining Posse Herrera & Ruiz, he worked in the Colombian Government as Deputy Director of Trade Remedies at the Ministry of Commerce, Industry and Tourism where he was responsible for all anti-dumping and safeguard investigations. He has a JD and a graduate degree in Taxation from Pontificia Universidad Javeriana and an LL.M. in International Business and Economic Law from Georgetown University.