Topic: International Economics and Development

Is the FTA Responsible for the Plight of Colombian Farmers?

Colombian farmers have staged widespread and sometimes violent protests over the past week demanding a change in economic policies. One of their main complaints is over the Free Trade Agreement with the United States.

The farmers complain that cheap imports from the United States are crippling their sector. In particular, they complain about three specific products: poultry, dairy and potatoes. Is it the case that freer trade with the United States is responsible for the difficulties of Colombian farmers?

The U.S.-Colombia Free Trade Agreement went into effect on May 15, 2012, which means its prerogatives have been in place for over a year. As in the case with all the other agreements negotiated in the last decade, the FTA with Colombia got rid of most—but not all—tariffs immediately. In the case of some “sensitive” products there is a phasing out of tariffs that can take up to almost 20 years. Let’s take a look at the tariff elimination schedule of the three specific products that draw the loudest complains from Colombian farmers:

Potatoes: Prior to the FTA, Colombia applied tariffs on U.S. potatoes that ranged from 5 to 20 percent. Upon implementation of the agreement, those duties were abolished. According to data from the International Trade Comission, U.S. potato exports to Colombia did increase in 2012 by approximately 25 percent. However, in 2011 (when there was no FTA) potato exports went up by 77 percent. Still, U.S. potato exports to Colombia totaled just $5.6 million in 2012. As a comparison, Panamá (also a potato producer with 1/13th of the population of Colombia) imported more potatoes from the United States in 2012 (almost $7 million).

Poultry: Unlike the case of potatoes, Colombian tariffs on U.S. poultry imports (which range from 5 to over 160 percent) will be phased out over an 18-year period. Moreover, there is a 6-year grace period after the implementation of the FTA. That is, there will be no tariff reduction in poultry products until 2018.

The United States did secure a 27,040-ton quota at zero duties for chicken leg quarters which will increase 4 percent every year. However, that quota only represents 2.5 percent of Colombia’s annual chicken consumption. That’s hardly a massive flood of cheap U.S. chicken imports.

Dairy: As in the case with poultry, most diary imports from the United States will still face tariffs in the early years of the FTA. Some diary products will enjoy tariff protection until 2027. However, several duty-free quotas were secured. One of those is a 5,500-ton quota for milk powder that will increase by 10 percent every year. For 2013 that quota would represent less than 230 grams of powdered milk for every Colombian (that is 1.7 liters of milk). According to the local Federation of Livestock Farmers, each Colombian drinks on average 141 liters of milk every year, which means that duty-free milk powder imports from the United States represent just 1.2 percent of milk consumption in Colombia.

The impact of U.S. milk imports might be even lower given the fact that powdered milk is commonly used as an input for the processed food industry rather than a final consumption product.   

As we can see, the FTA is not responsible for the troubles of Colombian farmers. The amount of duty free imports due to the agreement is still quite small. However, it is a fact that U.S. agricultural imports will increase once remaining tariffs barriers are effectively removed and U.S. farmers realize the potential of Latin America’s third largest market. Colombian farmers will then face stiff competition if they don’t adjust. Colombian consumers, 32.7 percent of whom still remain in poverty, would greatly benefit from cheaper food. Ironically, Colombian farmers themselves realize the benefits of free trade since one of their demands is to eliminate tariffs on fertilizers.

If Colombian farmers are hurting, it is not because of freer trade with the United States.

Troubled Currencies Project Update: Syria, Iran, and Egypt

Syria Since August 26,  when U.S. Secretary of State John Kerry began laying the groundwork for military intervention in Syria, the Syrian pound (SYP) has taken a beating on the black market. Indeed, the SYP has lost 24.07 percent of its value against the U.S. dollar (USD) in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88 percent. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term. 

IranThe initial weeks of the Rouhani presidency have seen renewed economic confidence, as reflected by the Iranian rial’s (IRR) black-market exchange rate. The new central bank governor, Valiollah Seif, has stated that his primary concerns are to rein in inflation and boost economic stability. Over the past few weeks, the rial has strengthened on the black-market, and inflation has moderated somewhat. That said, recent international saber-rattling over Syria clearly has spooked the Iranian public. In the two days since Secretary Kerry first made his case for intervention in Syria, the value of the Iranian rial has dropped 4.74 percent on the black market, to 32,700 IRR/USD. This yields an implied annual inflation rate of 52.10 percent, up from 44.89 percent, prior to Kerry’s announcement.

EgyptSince the fall of the Morsi government, public confidence and support for the military regime has boosted the value of the Egyptian pound (EGP). Prior to the military takeover, the black-market exchange rate sat at 7.6 EGP/USD. Since Morsi’s ouster, the pound has appreciated by 7.34 percent, to 7.08 EGP/USD. This yields a current implied annual inflation rate of 18.62 percent, down from 27.85 percent in the final days of the Morsi government. In recent weeks, the Central Bank has been auctioning off up to $40 million in foreign exchange, three times per week. This rather modest sum has adequately met the demand for foreign exchange at rates close to the official exchange rate of 6.99 EGP/USD.


For more information on troubled currencies in these countries and others, see The Troubled Currencies Project.

More Evidence that Foreign Aid Throws Dollars Away for Nothing

The Obama administration celebrated its “leverage” from foreign aid to Egypt, and then demonstrated Washington’s complete political impotence. Now the United Nations’ Millennium Development Goals have been found to have no effect on economic development.

Nations are poor because of bad policies, not inadequate cash balances. This makes economic reform, not foreign aid, the key to growth. Unfortunately, politicians continue to take money from poor people in rich countries and give it to rich people in poor countries in the name of development.

In 2000, the usual assemblage of global leaders adopted the United Nations Millennium Declaration. The Millennium Development Goals were supposed to reduce extreme poverty by 2015.

Alas, the record of more than six decades of government-to-government transfers is failure. Foreign “aid” turned into foreign hindrance, creating long-term dependency while reinforcing self-defeating collectivist economic strategies and subsidizing authoritarian political systems.  

Aid agencies eventually claimed to have developed new, smarter approaches to uplift the poor. Since 2000, total assistance from industrialized states alone has more than doubled, going from $53.9 to $125.6 billion last year. The results, explained the UN, indicated “unprecedented progress” and “remarkable achievements.”

Nevertheless, the UN does not believe its work will finish in 2015.  Last year, the UN established a 27-member “High-Level Panel of Eminent Persons on the Post-2015 Development Agenda.”  

Bondholders Should Think Twice about Argentina’s Debt Swap Offer

The video below shows interim-Argentine president Adolfo Rodríguez Saá (he was president for a week) announcing before Congress in late December 2001 that Argentina would default on its debt—the largest sovereign default in history. Rodríguez was interrupted by a standing ovation and chants of “Argentina! Argentina!”

Fast forward 10 years to May 2012 when Argentina’s congress voted overwhelmingly to seize (without compensation so far) Yacimientos Petrolíferos Fiscales (YPF), the country’s largest oil company whose controlling stake belonged to Spain’s Repsol. When the 207-32 vote was announced, the chamber erupted in a wild celebration, with deputies hugging each other and singing:

This is just a taste of Argentina’s flimsy rule of law.

More Compelling Evidence that America’s Corporate Tax System Is Pointlessly Destructive

It’s probably not an exaggeration to say that the United States has the world’s worst corporate tax system.

We definitely have the highest corporate tax rate in the developed world, and we may have the highest corporate tax rate in the entire world depending on how one chooses to classify the tax regime in an obscure oil Sheikdom.

But America’s bad policy goes far beyond the rate structure. We also have a very punitive policy of “worldwide taxation” that forces American firms to pay an extra layer of tax when competing for market share in other nations.

And then we have rampant double taxation of both dividends and capital gains, which discourages business investment.

No wonder a couple of German economists ranked America 94 out of 100 nations when measuring the overall treatment of business income.

So if you’re an American company, how do you deal with all this bad policy?

Well, one solution is to engage in a lot of clever tax planning to minimize your taxable income. Although that’s probably not a successful long-term strategy because the Obama Administration is supporting a plan by European politicians to create further disadvantages for American-based companies.

Mexico’s Timid Energy Reform

After weeks of speculation, yesterday Mexican president Enrique Peña Nieto unveiled his proposal to reform the country’s sclerotic energy sector. The move has been heralded by the media as Mexico’s boldest economic overhaul since the signing of NAFTA in 1994. However, even though the reform aims at relaxing the grip of the country’s state-owned monopoly on oil production, it falls short of significantly opening the sector to much needed private investment.

The reason for so much caution is well-known: The government’s monopoly on oil production is the third rail of Mexican politics. Ever since President Lázaro Cárdenas nationalized the sector in 1938, Mexicans commemorate the event every March 18. School textbooks mention the nationalization as a defining moment of Mexico’s history. It is no wonder previous attempts to break up the monopoly of Petróleos Mexicanos (Pemex) have so far failed.

This, of course, is the result of decades of propaganda by Mexico’s long-running governing party, the PRI (to which Mr. Cárdenas belonged). It skillfully embedded a nationalist attachment to the oil industry in the population’s psyche while using Pemex to extract and distribute jobs, rents, and power. However, the party is rapidly coming to an end.

Due to lack of investment and a highly politicized and inefficient corporate structure, Pemex’s oil production has fallen by a quarter in the last decade. The government uses Pemex as a milk cow to finance almost a third of its spending. That leaves little money to invest in the exploration and drilling of the huge reserves of deep water oil that Mexico has in the Gulf of Mexico. Thus, Mexico imports gasoline despite having Latin America’s third largest reserve of oil.

More Americans Going Galt

President Obama promised he would unite the world…and he’s right.

Representatives from all parts of the globe have bitterly complained about an awful piece of legislation, called the Foreign Account Tax Compliance Act (FATCA), that was enacted back in 2010.

Michael Ramirez/Investor's Business Daily(Michael Ramirez/Investors Business Daily)

They despise this unjust law because it extends the power of the IRS into the domestic affairs of other nations. That’s an understandable source of conflict, which should be easy to understand. Wouldn’t all of us get upset, after all, if the French government or Russian government wanted to impose their laws on things that take place within our borders?

But it’s not just foreign governments that are irked. The law is so bad that it is causing a big uptick in the number of Americans who are giving up their citizenship.

Here are some details from a Bloomberg report.

Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier… Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Register figures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008. The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside.

I’m glad that the article mentions that American law is so out of whack with the rest of the world.