Colombia Free Trade Agreement
The U.S.-Colombia Free Trade Agreement (Colombia FTA) was negotiated by the George W. Bush administration between the United States and Colombia—a country that for decades has been the most dangerous place in the world to be a trade unionist. The announcement by the White House that Colombia has successfully implemented key elements of the Labor Action Plan and that the U.S.–Colombia Free Trade Agreement (FTA) will enter into force on May 15, 2012,“is deeply disappointing and troubling,” according to AFL-CIO President Richard Trumka. Leaders of national labor organizations in Colombia agree with Trumka and believe that the underlying trade agreement perpetuates a destructive economic model that expands the rights and privileges of big business and multinational corporations at the expense of workers, consumers, and the environment. According to Labor Unions on both sides, the agreement uses a model that has historically benefitted a small minority of business interests, while leaving workers, families, and communities behind. U.S. and Colombian union leaders say that rather than moving to implement the FTA, leaders in both countries should move toward a new trade model that creates jobs, boosts economic development, and increases standards of living in both countries.
Source: Excerpted from “Trumka: Colombia Trade Pact Puts Commercial Interests Over Workers’?” by Tula Connell, April 16, 2012, AFL-CIO Blog, www.aflcio.org/Blog/Global-Action/Trumka-Colombia-Trade-Pact-Puts-Commercial-Interests-Over-Workers. Reprinted with permission.
EXTENSIONS OF THE RICARDIAN MODEL
Let us explore the effect of relaxing three of the assumptions identified earlier in the simple comparative advantage model. Next, we relax the assumptions that resources move freely from the production of one good to another within a country, that there are constant returns to scale, and that trade does not change a country’s stock of resources or the efficiency with which those resources are utilized.
In our simple comparative model of Ghana and South Korea, we assumed that producers (farmers) could easily convert land from the production of cocoa to rice, and vice versa. While this assumption may hold for some agricultural products, resources do not always shift quite so easily from producing one good to another. A certain amount of friction is involved. For example, embracing a free trade regime for an advanced economy such as the United States often implies that the country will produce less of some labor-intensive goods, such as textiles, and more of some knowledge-intensive goods, such as computer software or biotechnology products. Although the country as a whole will gain from such a shift, textile producers will lose. A textile worker in South Carolina is probably not qualified to write software for Microsoft. Thus, the shift to free trade may mean that she becomes unemployed or has to accept another less attractive job, such as working at a fast-food restaurant.
Resources do not always move easily from one economic activity to another. The process creates friction and human suffering too. While the theory predicts that the benefits of free trade outweigh the costs by a significant margin, this is of cold comfort to those who bear the costs. Accordingly, political opposition to the adoption of a free trade regime typically comes from those whose jobs are most at risk. In the United States, for example, textile workers and their unions have long opposed the move toward free trade precisely because this group has much to lose from free trade. Governments often ease the transition toward free trade by helping to retrain those who lose their jobs as a result. The pain caused by the movement toward a free trade regime is a short-term phenomenon, while the gains from trade once the transition has been made are both significant and enduring.
The simple comparative advantage model developed above assumes constant returns to specialization. By constant returns to specialization we mean the units of resources required to produce a good (cocoa or rice) are assumed to remain constant no matter where one is on a country’s production possibility frontier (PPF). Thus, we assumed that it always took Ghana 10 units of resources to produce 1 ton of cocoa. However, it is more realistic to assume diminishing returns to specialization. Diminishing returns to specialization occurs when more units of resources are required to produce each additional unit. While 10 units of resources may be sufficient to increase Ghana’s output of cocoa from 12 tons to 13 tons, 11units of resources may be needed to increase output from 13 to 14 tons, 12 units of resources to increase output from 14 tons to 15 tons, and so on. Diminishing returns implies a convex PPF for Ghana (see Figure 6.3), rather than the straight line depicted in Figure 6.2.
Constant Returns to Specialization
The units of resources required to produce a good are assumed to remain constant no matter where one is on a country’s production possibility frontier.