Colombia Gets a U.S. Trade Treaty It May No Longer Need

The Latin American country has teamed up with the Chinese and courted the Canadians

The Colombia that finally won a free-trade agreement with the U.S. on Oct. 21 is vastly different from the one that entered negotiations seven years ago. Back then the besieged government was grappling with powerful drug cartels and launching an offensive against leftist guerrillas who had been encroaching on the capital. With U.S. military aid, Colombia experienced an economic renaissance. Yet Colombia’s revival is benefiting U.S. economic and political rivals as much as or more than the U.S. itself.

The long delay in signing the treaty allowed Latin America’s fourth-largest economy to strengthen ties with China. It also damaged U.S. credibility in the region, says Eric Farnsworth, vice-president of the Council of the Americas in Washington. “The delay in passing this called into question the United States’ reliability as a partner,” Farnsworth says. “There’s a strategic component to this. It’s not just about economics and trade.” In response, the U.S. feels considerable advantages remain. Says Nkenge Harmon, a spokeswoman for the U.S. Trade Representative, “Now that the Congress has passed and President Obama has signed the trade agreements [with Panama and Korea as well], we are intent on getting this phase right.”

The free trade deal, expected to increase U.S. exports to Colombia by about $1.1 billion a year, won the approval of the U.S. only after Colombia’s government pledged to strengthen protections for unions. Most Democrats in the House and Senate still opposed the treaty’s passage because Colombia remains the world’s deadliest nation for unionists.

These social ills are less of a deterrent to China. It’s attracted to Colombia’s ample oil reserves and coal production, which exceeds that of other South American nations. “The last time I was down there [a year ago], the hotel I was in was full of delegations from Asia,” says John G. Murphy, vice-president for international affairs at the U.S. Chamber of Commerce. “There was a sense the ground had moved.”

As talks between the U.S. and Colombia dragged on, Colombia and China forged plans for a rail link between the Pacific and Caribbean that could draw freight away from the Panama Canal. Colombian President Juan Manuel Santos aims for a trade deal with South Korea. To tighten his connections to high-growth Asia, he’s also seeking membership in the Asia-Pacific Economic Cooperation group. “While Washington was debating whether the accord with Colombia was opportune, we advanced in our foreign policy strategy,” says Trade Minister Sergio Diaz-Granados.

Santos has cooperated more with his South American neighbors, organizing a meeting of finance ministers to discuss ways to protect their currencies and economies from the debt crisis in the U.S. and Europe. He supports a stock trading platform with Colombia, Chile, and Peru and wants to bring Mexico and Panama on board. Exports to Brazil have surged tenfold. While the U.S. remains Colombia’s biggest export market, with $16.8 billion in 2010 sales, up 30 percent from a year earlier, sales to China more than doubled last year, to $1.2 billion. Sales to the European Union are also rising, to $5.4 billion this year through August, more than in all of 2010. An EU trade accord could come next year.

The government has reduced cocaine cultivation 37 percent and halved the number of insurgents to about 8,000. Improved security has spurred enough growth to win an investment-grade credit rating from Standard & Poor’s as well as investment from billionaires. Colombia’s victories over the guerrillas opened up swathes of countryside to exploration for oil, gold, and coal. Mexican billionaire Carlos Slim’s push into crude has helped fuel foreign investment that the government says may reach a record $12 billion this year. The economy grew 5.2 percent in the second quarter.

The U.S. faces more competition from Colombia’s neighbors and Canada. In 2010, U.S. agricultural exports to Colombia fell more than 50 percent from 2008, to $827 million, as Argentina’s more than doubled, to $1 billion, according to a report by Senator Richard Lugar’s staff. Diaz-Granados attributes the U.S. setback to the delay in the free-trade agreement.

An August accord reduces or ends Colombian tariffs on Canadian wheat, paper, and machinery. Bank of Nova Scotia, Canada’s third-largest lender, agreed in October to buy 51 percent of Banco Colpatria Red Multibanca Colpatria for about $1 billion—Scotiabank’s largest international takeover. “This is not the Colombia of old,” says Brian J. Porter, group head of international banking for Scotiabank. “The more we looked at Colombia, the more excited we got about the economic potential.”

Before it's here, it's on the Bloomberg Terminal.