Thoughts on the Colombian FTA
I got drawn into a discussion on Twitter about the recent free trade agreement in Colombia, and the protests surrounding it. I thought I might expand on some of the relevant arguments here.
The vast majority of economists agree that free trade is a good thing. Opening to trade allows a country to specialize in what they are most efficient at producing. Excess goods are exported and traded for relatively cheaper imports. The prices of import-competing goods fall, and the increase in consumer surplus (what consumers gain from paying a lower price than the maximum they would have paid) outweighs the fall in profits to local producers, so overall welfare increases. Most models of trade imply this effect, especially for something like the agricultural market, where there are many producers, and a world price that is likely unaffected by any individual country’s production.
Thus, these basic economic principles imply that the Colombian Free Trade Agreement is a good thing. It would lower import prices for Colombian consumers, and so goods prices will not be kept artificially high. Following the proposals of the protesting farmers would inflate prices, shifting welfare from a large number of consumers to a small number of producers.
This is, admittedly, a simplistic view, one based on standard models of trade. One complicating factor is that the US subsidizes its agriculture, giving its firms an advantage beyond whatever natural advantages they already had. If American subsidies reduces the price of their agricultural products below the price of local Colombian products, then the FTA, by failing to ensure the removal of the American subsidies, thus places Colombian farmers at a disadvantage. This is known in trade parlance as “dumping,” and is one of the few scenarios where the World Trade Organization allows the establishment of tariffs, to counter dumping. However, if American agricultural products would always be cheaper than Colombian products, with or without the subsidy, then the farmers don’t really have a leg to stand on.
It is also possible, if not likely, that Bogota mishandled the removal of agricultural barriers. Colombian farmers will suffer from this trade agreement. That leads to a loss of tax revenue for the Colombian government, unemployment, and possible social discontent. In theory, the government can compensate losers from trade from the excess surplus. In practice, this rarely happens.
There are many other subtle arguments one could make for or against the Colombian FTA, but this is the paradigm that I (and most economists) would think about this issue. Protectionism is economically inefficient, with examples of beneficial trade protection remaining the exception, rather than the rule. But there are situations where limited trade barriers are justified. Colombia is probably not one of those situations, but the mass protests that have arisen may still be still indicative of mistakes that Bogota may have made.