Expansion of Mercosur: will CAN disappear?

Versión en castellano: http://www.elcolombiano.com/blogs/lacajaregistradora/?p=1181

Autor: Giovanny Cardona Montoya

Translator: Andrés Fernando Cardona Ramírez

What are we talking about?

Since the establishment in 1960 of LAFTA (ALALC), renamed LAIA (ALADI) in 1980, in this region there has been a plan to create a Latin American economic bloc, or at least South American. From the framework of LAIA emerged AC (CAN)  and Mercosur, two integration projects seeking, each in its own way, the consolidation of a sub-regional customs territory equivalent to a Customs Union (CU). Therefore, the agreement CAN-Mercosur could be understood as a bridge between two subgroups that were born to blend into one.

Is CAN crumbling?

However, the signing of the FTA between Colombia and the United States five years ago-and the political crisis by Paraguay in mid-2012, have been the detonators of a significant change in the structure of the two South American blocs. Venezuela’s withdrawal from the CAN, accompanied by their subsequent entry into Mercosur seems to be just the beginning of an expansion of this and the deterioration of the Andean bloc, since there is talk of adding Bolivia and Ecuador to the block that Brazil leads.

With the withdrawal of Venezuela from the CAN fell one of the most significant trade routes of the bloc: exports from Colombia to Venezuela. However, although intra-Andean trade represents only 7% of exports of the 4 countries of the bloc, it should be noted that almost ¾ of it are manufactured goods, and this is very significant for mono-export economies, which depend heavily on the mining markets.

According to official statistics, Venezuela came to represent more than 50% of intra-Andean purchases, being the world’s 2nd largest market for Colombian exports. In 2008, Venezuela imported to the CAN goods worth more than 8 billion dollars, while the rest of the bloc purchased just over seven. In 2011 – and without Venezuela-, Ecuador and Bolivia represents almost 40% of intra-bloc imports. Therefore, a possible entry into Mercosur by Bolivia and Ecuador is a very relevant issue for companies in Peru and Colombia, the Andean survivors.

 ANDEAN BLOC: Export of Merchandise according to Economic Zone, 2008-2011 (Millions of dollars)

 ECONOMIC ZONE     2008              2009            2010         2011

WORLD TOTAL         93,654           77,680           98,003     131,626

 ANDEAN                      7,005               5,774              7,810          9,187

Bolivia                              479                   535                 636             714

Colombia                      2,456                2,116              3,063       3,428

Ecuador                        2,491                 1,586              2,127        2,770

Peru                               1,579                  1,538             1,984        2,275

MERCOSUR               5,516                  3,578              5,517        7,462

Chile                               4,284                 2,328             3,187         5,130

Mexico                          1,037                     865             1,034        1,272

Venezuela                   8,080                  5,449             3,174       4,335

Rest of World          25,528                 23,791          30,394     41,489

Source: http://estadisticas.comunidadandina.org/eportal/contenidos/compendio2012.htm

 Will Mercosur be the future of Colombia?

If we reduce the subject to a customs matter, then, we must highlight some key issues:


– Mercosur protectionism is higher than that of CAN. Therefore, entering the Mercosur would increase our barriers, which would break an economic model that has positioned openness in trade policy in Colombia for the past couple of decades. Are we ready for it?

– Between 2006 and 2012, the average tariff in Colombia has dropped from 12% to 6.2%. However, most imports are taxed additionally with a VAT, and in the case of agricultural system an Andean Price Band is used.

– Colombia already has FTAs with the United States and the European Union, a fact that does not occur in any of the nations of Mercosur.

– All this leads us to conclude that neither Peru-which also has a model of economic opening-, or Colombia, could potentially be full members of Mercosur, should they so wish. The coherent and viable position would now have a trade agreement with Mercosur, without being full members of it. Something similar to the Chilean model.

But, if we take the issue beyond customs, then, are more questions than answers:

Not having a strong regional bloc (ex.  Andean Customs Union) weakens our ability to negotiate with countries in other regions. Such is the case of our less than active participation in scenarios WTO negotiation.

– The entry into Mercosur of Andean countries reduces the potential regional market for Colombian manufacturing. The loss of the Venezuelan market was notorious for Colombian trade in recent years, if so with Ecuador, the impact will also be significant. It is clear that Argentina and Brazil can take advantage of trade diversion impacts or preference erosion of Colombian Andean countries, moving as their main suppliers.

– Remember that the Chilean strategy of having agreements with everybody, but barely penetrating a bloc that restricts their autonomy customs policy, has been accompanied by economic development policies that have led to a great diversification of their markets: East Asia, North America, Latin America and Western Europe are major markets for exports of southern country. The Colombian case is very different, we have a large concentration of the export market in North America and the European Union, with mineral product sectors or low complexity technological merchandise.

Final thought: the most critical aspect of this situation is not that our neighbors seek shelter in Mercosur, the really serious problem is that Colombian trade policy is not being defined in our country, but will have to be a reaction to the active strategies of other nations.

The CAN and Mercosur has had an active rhetoric but a weak drive. Both projects have tried to create blocs with significant supranational level that does not materialize. However, while they are latent, can be a source of public goods to encourage domestic development and to strengthen the capacities of negotiation with industrialized countries and blocs of the world.

Does Colombia know where it is going in foreign trade? Are we clear about what our horizon looks like? I’m afraid not.

Colombian peace and political stability in Venezuela: good business

Traductor (translator) Andrés Fernando Cardona Ramírez

Ver versión en castellano: http://www.elcolombiano.com/blogs/lacajaregistradora/?p=1099

Colombia and Venezuela are living momentous political processes. The first ventures into a new attempt to cap the legendary conflict between the government and the FARC. Across the border, Venezuelans go to the polls to decide whether to continue with the political project called “XXI century socialism” or give a 180 * turn and allow the opposition to present an alternative to the nearly three decades of Chavez government.

Both the issue of war and peace, and the Venezuelan political climate are vital phenomena for stability, growth and development of the Colombian economy.

The end of the war: a motor for prosperous fields and more sustainable cities.

The first conclusions that have been raised against the armed conflict can be summarized in three points: military spending will not be reduced, peace involves decades of increased public spending to compensate victims but at the same time, contribute between 1% and 3% GDP growth. There will be no cuts to military spending partly because other destabilizing factors survive, like BACRIM and drug trafficking.

While the contribution to GDP (1-3%) can be considered a pretty solid argument to bet on the negotiation, it is necessary to review a little more to realize that the possible effects have to do with not only growth but, specially the socio-economic development. The war has brought many evils and one of them, transcendental due to our demographic structure has been the migration from the countryside to the city. This situation has led to the deterioration of our rural economy and the emergence and development of poverty belts in cities.

The end of the war must stop this wave of migration, raising the potential of the field as an economic sector, improving food supply, encouraging new industries to move into international markets, therefore improving the quality of life in cities, with adequate and financially sustainable urban planning.

The country in recent years has become a magnet for foreign capital, but funds have been especially directed towards the mining industry and to the financial services and telecommunications. The end of the conflict could reduce the level of risk; improve the skills of Colombia, creating a new appeal for foreign capital to finance the production of food, raw materials of plant and animal origin and biofuels. The comparative advantages of good climate, good soil and industrious workforce, could be the seed for creating competitive advantages from a field that is modernized, which and makes way for an export-oriented agribusiness.

Venezuela: (potential) strategic partner.

When it comes to economic matters, for decades, Venezuela has been instrumental in the Colombian economy. The crisis of commercial relationships that we are currently facing has been a blow to the economic development of our country. Although exports to the world have grown, despite the withdrawal of Venezuela from the Andean Community of Nations (AC), qualitatively speaking, the damage has not been compensated.

Why do we say that the damage has not been compensated? Because Venezuela was the largest importer of Colombian manufacturing-products with added value; while the growth of exports to the rest of the world has been mainly of mining commodities. Do not forget that before Venezuela left the AC, the country imported 80% of vehicles exported-equivalent to 20% of imports from Venezuela to Colombia, and 50% of the clothing we exported to World -16% of their total purchases from Colombia.

Venezuela was our second largest trading partner, aside from the U.S., in fact, to the border departments of Santander, Norte de Santander and Arauca, it was critical on many economic fronts and for other regions such as the Aburrá Valley it was an engine for commercial-industrial employment.

Similarly, Venezuela’s withdrawal from AC has weakened the bloc. The largest commercial center of this ambitious integration agreement was the exchange between Colombia and Venezuela, followed by Colombia and Ecuador. Peru has its sights set on global markets for mining products and Bolivia is very much dependent on Mercosur.

Perhaps the AC isnot a great accord of economic integration, although it aims to create a Customs Union. But many nations of the world today consolidated their position in the market through the blocks to which they belong. Keeping isolated weakens the bargaining power in forums such as the WTO. There, for example, an agricultural G-20 was developed to meet the interests of rural America and the European Union, and in that group is not Colombia.

Things with Venezuela, from an economic perspective, are not on the best course. But this neighbor is a strategic partner that we must recover. Independent of the results of the October 7 elections, social and political stability in the neighboring country suits our economy. Retaking the road to good relations is a key strategy for social and economic development of Colombia.

History tells us that in the past the Colombians migrated to Venezuela looking for “El Dorado” due to the lack of opportunities in our land. If In fact, long term migration enriches cultures, in the short and medium run it affects the strength of the development of cities and sometimes brings security problems. A social crisis in Venezuela could lead to a reverse migration wave, for which we are not prepared, as our current growth is not based on labor intensive sectors and the rise of underemployment may offset the demographic balance that could start generating if peace comes the Colombian countryside.