Opening up: A raft of free trade agreements are steering the country toward an increasingly globalised economy

Since the turn of the millennium, and in particular over the past few years, a number of bilateral free trade and investment promotion agreements have resulted in an increasingly globalised Colombian economy. Moreover, the establishment of regional trade blocs such as the Andean Community ( Comunidad Andina, CAN) and the Pacific Alliance have also furthered integration with nearer neighbours.

Colombia’s exports broke the $60bn mark in 2012, registering $60.2bn for the year – though its yearon-year (y-o-y) increase of 5.8% was down dramatically from that in 2011 – while imports grew 7.2% in 2012 to reach $58.6bn.

TRADE DESTINATIONS: In 2012, 58% of all exports were destined for countries with which Colombia has active free trade agreements (FTAs), while the implementation of the Colombia-EU FTA on August 1, 2013 should see that figure rise significantly.

The US remained Colombia’s top export destination, receiving 36.5% of the total. Rounding out the top 10 were the EU (15%), China (5.6%), Panama (4.7%), Venezuela (4.2%), Chile (3.6%), Ecuador (3.2%), Peru (2.6%), India (2.3%) and Brazil (2.1%), according to the Ministry of Commerce, Industry and Tourism (Ministerio de Comercio, Industria y Turism, MCIT). In terms of drivers, China contributed the largest share to growth, being the source of 2.4% of the total expansion, with exports to that country up some 68.1% y-o-y. Venezuela (53.8%) and Panama (32.3%) were the next-largest drivers of export growth in 2012, contributing 1.5% and 1.2%, respectively.

IN THE CAN: The CAN was born out of the Cartagena Agreement in 1969, at which point it was referred to as the Andean Pact. Consisting of Peru, Bolivia, Ecuador and Colombia, the CAN is South America’s second-largest trading bloc after Mercosur, The group has developed over the years, with the addition of a harmonised Andean passport in 2001 and the removal of visa requirements for citizens of member states in 2005. Other efforts have been made to converge macroeconomic policies and harmonise fiscal and tax-related issues.

The CAN is Colombia’s third-largest trading partner after the US and the EU, with over 6% ($3.62bn) of total exports shipped to CAN destinations in 2012, according to the MCIT. Additionally, over 85% of exports destined within the CAN are industrial goods, indicating the community provides a large source of demand for the domestic production of manufactured goods with high added value. In March 2013 a meeting of the Commission of the CAN resulted in the adoption of seven new measures to increase integration among member states, particularly in the fields of health care, commerce and statistics.

PACIFIC ALLIANCE: Despite the existence of the CAN and Mercosur in 2012, another trade bloc was added to the mix with the establishment of the Pacific Alliance, which was signed by Colombia, Chile ( formerly a member of the CAN), Mexico and Peru.

With the Atlantic coastal countries of Argentina and Brazil heavily influencing cross-Atlantic trade within Mercosur, the Pacific Alliance was created to provide a counterbalance by allying the major Pacific coastal countries in a bid to strengthen crossPacific trade flows. The four nations in the Pacific Alliance were responsible for $71bn of trade with Asia in 2011 and saw trade with Asian countries rise by an annual average of 13% from 2007 to 2011.

While the trade bloc has a clear Asian focus, the ultimate goal of the alliance is to establish zero-tariff entry for more than 90% of traded goods within the bloc. At time of press negotiations are ongoing.

UNION OF SOUTH AMERICAN NATIONS: Even when just two major trading blocs existed in South America, calls for integrating the continent to form a single market emerged. Though discussions had already taken place over the potential creation of a South American FTA based on the North American model, in 2004 Mercosur and the CAN signed a letter of intent to merge through the development of a Union of South American Nations (UNASUR), modelled on the EU. UNASUR remains an elusive goal, however.

The establishment of the Pacific Alliance might have never occurred had sufficient progress been made in establishing a unified regional trade bloc. Basic political and economic differences are the root of the problem. Protectionist trade policies in Mercosur countries, such as Argentina, Venezuela and to an extent Brazil, are at odds with the more open economies of Colombia and Peru. Venezuela, a former CAN member, left the bloc following the signing of FTAs between the US and Colombia and Peru.

Yet despite the expectedly slow progress made with regards to negotiating a tariff-free South America, UNASUR has also been used as a mechanism for regional integration in other areas, including the connectivity of regional transport networks and energy infrastructure. Much of the consideration about whether UNASUR can become the regional trade bloc it aspires to be rests on the shoulders of Brazil, whose exports, as a percentage of GDP, are significantly lower than the regional average, while it boasts roughly 60% of regional GDP.

RECENT AGREEMENTS: After nearly six years of waiting for implementation following its signing, primarily due to Washington lobbyists playing politics, the Colombia-US FTA entered into effect on May 15, 2012, providing exports with tariff-free entry to the country’s largest trading partner.

Another FTA with Colombia’s second-largest trading partner, the EU, was also approved in December 2012 and implemented on August 1, 2013. The Colombia-EU FTA was signed in June 2012, simultaneously with that of Peru. The agreement is expected to have a particularly strong immediate impact on agricultural products such as sugar, bananas and shrimp. The European Commission has forecast Colombia’s exports to the EU will rise by 10%, GDP growth will increase by 1.3% and employment will expand by 2% as a result of the FTA with the EU.

Prior to the implementation of these two landmark agreements, several other FTAs had also been signed in recent years. One of the first was the ColombiaCARICOM (the regional association of 12 Caribbean nations) agreement, which came into effect in 1998. Colombia and Mexico have also had an agreement since 1995, though it took a full decade for all tariff reductions to be implemented.

The EU FTA was the second European deal for Colombia, which already had a trade agreement signed in 2008 and approved in 2010 with several European countries that make up the European Free Trade Association (Switzerland, Liechtenstein, Norway and Iceland). Colombia’s FTA with the Northern Triangle of Central America (El Salvador, Guatemala and Honduras) was signed in August 2007 and went into effect in Guatemala in 2009, with Honduras and El Salvador following in 2010. Colombia’s FTA with Chile was signed in 2006 and went into effect in 2009.

Lastly, the Colombia-Canada FTA went into effect in August 2011. However, Proexport, a government agency in charge of promoting Colombian non-traditional exports, expects this agreement to have limited impact, increasing GDP by just 0.06% and exports by 0.2%. Colombia has also been very active in the first half of 2013, signing trade deals with South Korea in February, Costa Rica in May, and Panama and Israel in June, and is in negotiations with several other countries, including Turkey and Japan.

CHALLENGES: While FTAs may provide Colombian exporters with advantages over its international rivals, such agreements, being bilateral in nature, could decrease the economy’s competitiveness.

Two sectors, industrial manufacturing and agriculture – which are, paradoxically, heavily reliant on exporting to international markets – will also be exposed to increased competition amidst a rising peso. Both had a difficult 2012, with agriculture expanding by 2.6% while industrial manufacturing contracted by 0.7%. Colombian agricultural products will now have the added pressure of competing with a more efficient, subsidised US agricultural industry. The industrial manufacturing sector is also becoming subject to increased competition, and adoption of modern technological processes will be key if it is to continue to remain competitive on the international market.

Along with Peru, Colombia has embarked on a progressive and open agenda with regards to foreign trade over the past decade, in contrast to more protectionist regimes in regional neighbours such as Argentina and Venezuela. The country now has FTAs with its three largest trading partners, the US, the EU and the CAN. The impact of such agreements, in terms of scale and direction, will vary from sector to sector, largely depending on their ability to adopt modern processes and technologies.

Overall, improved competition should have a positive effect on the economy in the long term, even if certain industries and businesses may struggle to compete in a global marketplace in the short term.

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The Report: Colombia 2013

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