Nearshore Americas

Free Trade: A Boon for Sourcing

While the political footballs of free trade agreements (FTAs) with Colombia and Panama are being punted by the American Congress, some U.S. business leaders are loudly expressing frustration with the inaction of Congress and the Administration. “This country is under attack,” said Doug Oberhelman, Chairman and CEO of Caterpillar.

Kicking off Illinois Export Week in Chicago on Tuesday, he said, “a lot of foreign competitors want our jobs. But our government has been painfully slow to ratify free trade agreements which have been signed by Colombia, Panama and South Korea. Trade exports and jobs are too important to delay further.” The FTAs have been awaiting ratification by Congress for almost five years.

At the same time, President Obama’s goal of increasing US exports by 50% in 2015 looms as a large component of the Administration’s economic growth plans, but he has been reticent to put the full force of the White House behind gaining acceptance of the FTAs, which would immediately stimulate American exports to three major trading partners.

Reducing Cost of Goods

The US-Colombian Free Trade Promotion Agreement was negotiated in November 2006. It calls for Colombia to eliminate most of its tariffs on US exports immediately, with all tariffs phased out over time. Colombia’s Congress approved the agreement in June, 2007. The US-Panama agreement was signed by both governments in November, 2007, with similar objectives.

Both agreements, upon ratification by the US Congress, would effectively reduce the cost of American goods in the Latin American countries. Importantly, the continued delay is not holding back exports from Panama and Colombia to the US, since under the Caribbean Basin Initiative and other trade programs, most exports from those countries already enter the US duty-free.

Opponents of the agreements claim Panama and Colombia are not doing enough about what they say are persistent human rights abuses in the countries and anti-labor government policies. They also express concerns that the agreements will flood the United States with low cost exports from Colombia and Panama, as well as from South Korea, which signed an agreement with the US in late 2007 and a renegotiated version in December 2010.

Labor unions are divided. While some, including the AFL-CIO and Communications Workers of America (CWA) are lobbying Congress to block ratification of the FTAs because of the fear of losing American jobs to “cheap imports” and perceived anti-labor government policies, others, including the United Auto Workers (UAW) support the agreements.

Most major US exporters, as well as the US Chamber of Commerce and other major business organizations, support the FTAs as important instruments to increase US exports, expand economic growth, create jobs, and develop new investment opportunities for US companies.

“Don’t put our companies at a disadvantage when their competitors are knocking on the same doors without the same constraints.”  Oberhelman told the audience at the export conference. “There are going to be impacts of globalization on US workers and we must help people transition when they are displaced by free-trade.” He said he supports education and retraining benefits for displaced workers.

“The Chinese are already in Bogota and they say they will negotiate a trade agreement with Colombia in three weeks,” Oberhelman said. “For one of our Caterpillar front-loaders, made only a few miles from Chicago, tariffs create a $300,000 disadvantage on our product.” He stated that he felt that Caterpillar products were better than the Chinese machines, but acknowledged the price gaps were significant obstacles for his company.

He urged the audience to mobilize to support the free-trade ratification by Congress.  “We need to promote ratification at every level, federal, state, local, and company.  I don’t understand why they’re waiting,” he proclaimed. Labor opponents are launching a major campaign against ratification this week.

Referring to the North American Free Trade Agreement (NAFTA) inking the US with Canada and Mexico, he pointed out that “economists are pretty much in agreement that NAFTA was a boon for all involved.”

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Impact on Sourcing

As Latin American business grows, companies need services to support their business operations. A broad range of global companies have established captive shared services and outsourcing delivery centers in all areas of Latin America, meeting the needs of their growing businesses in Latin America, while, in some cases, also regionalizing operations in areas of lower cost operations.

Ratification of FTAs with Colombia and Panama will further stimulate US businesses in those fast-growing economies and is likely to lead to the creation of new opportunities for services providers and increased investment in new delivery centers in those countries and throughout the region.

Free trade and sourcing go hand in hand. Although it’s not immediately obvious, the delays in ratification of FTAs, in Panama, Colombia even South Korea are actually slowing the growth of sourcing in those countries as well as limiting productive jobs in the US.

Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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