Free Trade Agreements Between Peru, Colombia, and the United States

• Author: Monica P. Lombana
• DOI: http://doi.org/10.1111/ajes.12312
• Published date: 01 January 2020
• Date: 01 January 2020

Free Trade Agreements Between Peru,

Colombia, and the United States

By Monica P. LoMbana*

abstract. This article evaluates the process of negotiating and

implementing the U.S.-Peru and U.S.-Colombia free trade agreements

(FTAs) and analyzes the impact of these agreements on foreign direct

investment (FDI) and export diversification in Peru and Colombia.

The main finding is that institutional elements in each country

uniquely impacted the process of negotiation, implementation, and

the outcomes of these FTAs. Colombia benefited from the initial

advantage of better institutional capacity and negotiating expertise,

while Peru benefited from stronger political leadership and commit-

ment to a bilateral trade agreement with the United States. Both Peru

and Colombia have benefited from structured consultation mecha-

nisms with the private sector and non-government agents, continuity

in trade policies throughout different political administrations, and

strong political commitment to develop the institutional capacity

needed to take full advantage of these FTAs. Furthermore, the imple-

mentation of these FTAs has coincided with an expansion of non-

traditional exports from Peru and Colombia, and an increase in FDI

into sectors other than commodities such as oil, natural gas, and

minerals.

Introduction

Free trade agreements (FTAs) are important tools for economic devel-

opment, often helping to stimulate economic growth by increasing

trade and investment. Furthermore, through the regulations imposed

on developing nations, FTAs can improve national security and

promote higher labor and environmental standards. For emerging

American Journal of Economics and Sociology, Vol. 79, No. 1 (January, 2020).

DOI: 10.1111/ajes.12312

© 2020 American Journal of Economics and Sociology, Inc

*Expert on international relations, focusing on international political economy and

developing world issues, particularly concerned with Latin American matters. Originally

from Colombia, she resides in the Seattle area where she teaches at Northwest University

in Kirkland. Email: monica.lombana@northwestu.edu.

200 The American Journal of Economics and Sociology

countries, FTAs have the potential to stimulate profound institutional

changes to remove barriers to economic growth beyond the removal

of tariffs, thereby enhancing national productivity and prosperity.

However, reaching agreements that actually fulfill these potentials has

proven extremely difficult for many developing countries.

The FTAs between the United States and Colombia and between

the United States and Peru are two of the most recent FTAs signed by

the United States with Latin American countries. These FTAs became

effective February 2009 (between the United States and Peru) and

May 2012 (between the United States and Colombia). More impor-

tantly, considering that Colombia and Peru were already receiving

substantial benefits from their trade with the United States—largely

as a result of the Andean trade preferences established to support

the fight against illegal drug production and trafficking—these FTAs

helped make these benefits permanent. The similarities in origin and

motivation between Peru and Colombia, however, allow for a compar-

ison in priorities, strategies, and dynamics between the two processes,

making it possible to pinpoint institutional differences that may be

important for other countries in similar circumstances.

History and Motivation

As previously mentioned, Colombia and Peru desired to make perma-

nent the trade benefits that they had been receiving from the United

States on a temporary basis. Before entering negotiations for free

trade agreements, both benefited from the Andean Trade Preference

Act of 1991 (ATPA), which granted duty-free access in the U.S. mar-

ket to a wide range of their products. The purpose of the ATPA was

to assist Bolivia, Colombia, Ecuador, and Peru in their fight against

illegal drug production and trafficking by multiplying and diversify-

ing their economic possibilities. The ATPA was renewed in 2002 as

the Andean Trade Promotion and Drug Eradication Act (ATPDEA).

When the ATPDEA was about to expire for a third time in 2008, the

United States decided to negotiate FTAs with these countries. Only

Bolivia decided not to negotiate an FTA, while Ecuador later pulled

out of the negotiations as its government priorities changed, including

processes of nationalization of some foreign investments.

201Effects of FTAs: U.S.-Peru & U.S.- Colombia

There is one main timeline difference in both processes. The agree-

ment with Peru was formally signed in April 2006 and ratified by the

Peruvian Congress that June. The Colombian agreement was signed in

November 2006 and ratified by the Colombian Congress in June 2007.

The United States had largely agreed upon the terms of these FTAs

by July 2007, during the Bush administration, but only the Peruvian

agreement was ratified by the United States on those terms. For

Colombia, the process lingered, and the Obama administration chose

to wait until a politically acceptable moment for ratification. The op-

position from indigenous people, human rights activists, labor unions,

and environmentalists to these FTAs stemmed from a firm belief that

they would encourage reckless exploitation of natural resources and

standardize lower wages, worker-safety requirements, and regulation

of agro-industry in these countries.

At the time of the FTA negotiations, the need for paramilitary drug

interdiction in Peru had substantially subsided. By contrast, problems

grew worse in Colombia, which had endured many years of guerrilla

warfare and drug trafficking to the detriment of potential foreign in-

vestment. According to Jeffrey Schott (2004), the United States wanted

to show strong support for Colombia’s effort in the fight against illegal

drug production and trafficking. At that time, most narcotics produc-

tion had shifted from Peru and Bolivia to Colombia. However, Peru

was still the main producer of coca leaves in the world. Peru’s stron-

ger connection with its indigenous roots limited options not only to

restrict coca production but also to promote foreign investment and

institutional change. Peru was set to benefit the most from an institu-

tional reform catapulted from the outside.

This background explains why Colombia and Peru were eager to

reach trade and investment agreements with the United States, both for

the potential economic benefits, and as a way to affirm an alliance that

ensured continued U.S. support. Moreover, the move toward bilateral

FTAs with industrialized countries was a final step in reversing several

decades of development strategy based on import substitution in both

Colombia and Peru. The United States, on the other hand, had increas-

ingly turned to bilateral FTAs since the inception of the North American

Free Trade Agreement (NAFTA) and the failed attempts to create a

common free trade agreement for all of the Americas.