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Colombia learns free trade can't fix everything

Friday, 13 Sep 2013 | 12:05 PM ET
A demonstration in Bogota supporting farmers
Gal Schweizer | LatinContent | Getty Images
A demonstration in Bogota supporting farmers

For Colombia, free trade has delivered on many promises. Consumers in the country now have access to a much greater variety of goods and merchandise. But some groups, especially farmers, are struggling to survive amid a flood of cheap imports.

The Latin American nation and close U.S. ally has been rocked by huge protests this month and last, with farmers using roadblocks to thwart the transport of goods into cities and truck drivers refusing to climb behind the wheel.

Farmers railed against high costs for fertilizer and low-priced food imports, while truck drivers were enraged by expensive fuel.

Not all those price fluctuations came as a result of free trade agreements. But Colombia's pacts with the U.S. and Europe have failed to improve things in some domestic sectors and appear to have worsened them in others. Colombia entered a free trade agreement with the U.S. more than a year ago and signed a similar agreement with the European Union this summer.

"The protests were an expression of a very large problem in the agrarian sector," said Colombian Sen. Jorge Robledo. Those problems are a result of years of bad decisions, he said, starting with the implementation of free trade policies in the 1990s.

"Colombia used to be self-sufficient in food production, but now it is importing around 10 million tons of food" a year, he said.

According to Cesar Pachon, a protest leader, imports are 40 percent cheaper than items produced locally.

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"We have to sell the harvest lower than the cost of production," he said. "The last three years were the worst, and the government is doing nothing to help us to recuperate the losses. We continue losing."

Colombia's ministry of agriculture did not respond to a CNBC request for comment.

James Robinson, a professor of government at Harvard University, pointed to the faulty structure of Colombia's farming sector, which he said restrains growth.

"I think there is not enough free trade," he said.

Robinson cited an "oligarchized" arrangement in the Colombian wholesale market as the source of the problem. Wholesale prices paid to farmers are low because of domestic monopolies, even though consumer prices are high, he said. In fact, he added, smugglers bring food from Ecuador and Venezuela to take advantage of Colombia's higher retail prices.

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Last week, protesters and the government reached an agreement to end the disruptions on the street. Pachon said farmers got around 25 percent to 30 percent of what they were asking for. He echoed Robinson, saying that the industry lacks planning and regulation of monopolies.

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But this year Colombians have had access to a larger variety of goods, which is a positive effect from the agreement, said Alfredo Coutino, a director at Moody's Analytics. Imports usually grow, and exports diminish, when countries join a free trade pact with the U.S.

Another effect is a spike in capital inflows—also seen with other countries entering similar pacts. Most of the inflows are portfolio funds invested in bonds and stocks, Coutino said, meaning that it's capital that can leave the country any time and as such does not add much to economic growth.

"It seems the trade agreement will produce benefits for the country, but it seems it will be lower than expected, and lower than what we have seen for other countries," he said.

Colombia is one of the latest countries to sign a free trade agreement with the United States. Mexico and Canada entered the North American Free Trade Agreement with the U.S. in 1994. Chile entered an agreement with the U.S. in 2004, and Peru in 2006.

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The government must make more structural economic reforms to expand growth, but there are doubts it can achieve them, Coutino said. The Colombian economy decelerated this year, and much depends on residential elections that will be held next year.

Colombia plans to enter free trade agreements with other countries in the region, he said, and that may help offset negative impact of the U.S. agreement on activities such as agriculture and mining.

"Someone has to lose, and in this case it is the less protected sectors in the country," he said.

By CNBC's Anna Andrianova. Follow her on Twitter @AndrianovaAnna