Greener Pastures Abroad: The Effect of Free Trade Agreements on Foreign Direct Investment and Sustainability

"American automakers, farmers, ranchers and manufacturers, including many small businesses, will be able to compete and win in new markets." -- President Barack Obama

It came as a bit of a surprise. Even as Washington has been incapacitated by bipartisan discord over how to boost a flagging economy, Congress on Wednesday passed three free trade agreements with Colombia, Panama and South Korea, the first such legislation passed since the historic election of Rep. Nancy Pelosi (D-Calif.) as America's first female speaker of the House in 2007, when Democrats took control of both legislative chambers after 12 years of nearly continuous Republican rule. The bills have been characterized by its supporters as "the biggest opening of markets for American companies in almost two decades."

On Friday, President Obama and President Lee Myung-bak of South Korea visited the General Motors Orion assembly plant in Michigan, which was slated for closure at the beginning of Obama's term. But because of the auto industry bailout, the plant currently employes over 1,700 full- and part-time employees who are producing the new 35-mpg Chevy Sonic, the first subcompact car to be built in America since GM's Chevette, which was produced from 1975 through 1987 (1988 in Colombia).

INCREASING AMERICAN EXPORTS, CREATING AMERICAN JOBS

"I know, folks, that some of you here may think that with the implementation of the KORUS FTA, that somehow your jobs may be exported or go somewhere else," President Lee, who wore a Detroit Tigers baseball cap, told to the plant's workers. "But let me tell you one thing: That is not true. I am here with President Obama today because I want to give this promise to you, and that is that the KORUS FTA will not take away any of your jobs. Rather, it will create more jobs for you and your family, and it is going to protect your job. And that is the pledge that I give you today."

The South Korea accord, the biggest trade agreement since NAFTA, will increase American merchandise exports between USD 9.7-10.9 billion and Korean imports between USD 6.4-6.9 billion in the first year of full implementation and create 70,000 American jobs, according to the US International Trade Commission (ITC).

The ITC estimates that exports to Colombia will increase by approximately USD 1.1. billion and increase US GDP by USD 2.5 billion. And while 90 percent of Panamanian imports are already duty-free, the agreement with that nation will eliminate the tariffs that have been imposed on exported American products. The ITC estimates that US exports to Panama will increase from 9 percent (for turkey and certain machinery, like HVAC equipment and household appliances) to 145 percent (for rice) because of tariff and quota elimination.

THE EFFECT OF FTAs on FDI

"The single greatest influence RTA’s have on FDI is through their effects on market size and on GDP," according to a report by the USDA Economic Research Service. "RTA’s, through trade liberalization, combine fragmented markets into a single large one and they generally increase the growth rate of member countries' GDP.

But GDP growth doesn't always means job growth. In 2008, for example, Minnesota, New Mexico, Washington, Iowa, West Virginia and Colorado experienced a 2 percent or greater growth in GDP, but negative job growth. Conversely, Alaska's GDP slumped by 2 percent, but the state had a 1.5 percent growth in jobs.

In April, US Department of Commerce Chief Economist Mark Doms explained that the main reason that there is a weak relationship between GDP and jobs is "simply that quarterly changes in employment and GDP are volatile...that's why economists emphasize longer-term averages that smooth out this volatility." Doms also notes that work hours vary more than employment as employers adjust the hours of their employees before adjusting headcount, and that companies have been able to produce more with fewer workers. "That's not great for labor demand in the short run, but it is good for our competitiveness in the longer run."

THE SUSTAINABILITY QUOTIENT: LOOKING ABROAD FOR GREENER PASTURES

Increased FDI could be good for GDP and job growth, but for the money flows to support sustainable investments and sustainable development, the ESG (environmental, social, corporate governance) dimension must be considered. Particular attention must be given to Section 2102 of the Trade Act of 2002, which aims to "strengthen enforcement of core labor standards and environmental laws; reduce or eliminate government practices or policies that unduly threaten sustainable development."

The Colombia FTA, for example, states, "The parties agree to pursue cooperative environmental activities...A separate mechanism on disputes dealing with environmental claims could result in an annual assessment of up to $15 million, payable into a fund jointly administered by the two governments for 'appropriate environmental initiatives.' The parties recognize the importance of conservation and sustainable use of biological diversity, and the preservation of traditional knowledge and practices that contribute to this objective."

GOOD FDI, BAD FDI: IT'S NOT JUST BUSINESSES THAT MUST COMPETE

PepsiCo (PEP, 62.24, -0.12, -0.19%) is a good example of an American multinational that is exporting green technologies abroad, in addition to its products. The company runs a green factory in Funza, a town in central Colombia with some 54,000 residents. With an ISO 14.001 certification -- which provides the requirements for an environmental management system, or EMS -- the Funza plant features solar-powered lighting in all of its production facilities and a high-efficiency water treatment system that not only recycles 100 percent of all water used in production, but leaves drinkable water at the completion of the production process. But this is just one example, and a positive one. On the other side of the spectrum is the case of Chevron dumping more than 18 billion gallons of toxic waste into the Ecuadorean rainforest.

How these landmark FTAs will affect long-term sustainability in the countries involved is a big question. Enforcing the environmental goals of FTAs is one problem. And of course, with increased investments come the potential of increased corruption and opportunities to lay waste to the land. As President Obama said, these agreements will help American businesses "compete and win in new markets." But with the coming rise of American firms in these countries, will the indigenous people, the animals and their habitats and all the ecosystems that will be affected by new factories be able to compete and win, too?

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NOTES

http://seoul.usembassy.gov/p_rok_fta_101211a.html
http://www.businessweek.com/news/2011-10-13/colombia-s-enka-rises-to-two-month-high-on-u-s-trade-accord.html
http://www.whitehouse.gov/blog/2011/10/14/president-obama-and-president-lee-republic-korea-speak-michigan
http://www.usitc.gov/publications/pub3949.pdf
http://www.usitc.gov/publications/332/pub3896.pdf
Ibid.
http://www.ers.usda.gov/Publications/AER771/
http://blogs.wsj.com/economics/2009/06/02/your-state-in-2008-gdp-and-jobs-dont-always-go-hand-in-hand/
http://www.esa.doc.gov/Blog/2011/04/26/jobs-and-gdp-not-what-you-think
http://www.ita.doc.gov/exportamerica/TechnicalAdvice/ta_tradeAct2002.pdf
Ibid., 5.
http://www.triplepundit.com/2010/05/pepsico-the-journey-of-sustainability/
http://chevrontoxico.com/

image: The Andean condor is a national symbol of Colombia. Native to the Andes mountains, it has the largest wingspan of any land bird. (credit: Nathan Rupert, Flickr Creative Commons)