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Venezuela: Replacing Colombia Not That Easy

Can Venezuela replace its imports from Colombia? Four experts share their insights.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

In the midst of a diplomatic spat with Colombia, Venezuelan President Hugo Chavez has promised to reduce his country's dependence on Colombian imports, and last week signed a billion dollar deal with Argentina to boost trade between the two nations. Can Venezuela replace Colombian goods with imports from other countries in the region? What would be the impact on Colombia's economy? More broadly, do you think tensions in South America have the potential to significantly affect intraregional trade flows?

Gustavo Roosen, chairman of Envases Venezolanos and former president of CANTV: The balance of trade between Venezuela and Colombia has grown consistently during the last 10 years, reaching $7.1 billion in 2008. Trade has largely favored Colombia, which placed $6.4 billion in Venezuelan markets, while Venezuelan exports declined to $600 million in 2008. If the Venezuelan government finally closes off trade between the two countries, the effect will be severe for Colombian manufacturing companies, which currently export value-added products in the food, pharmaceutical, garment and automotive industries. In fact, Colombia estimates that exports to Venezuela generate 900,000 jobs in Colombia. One sensitive issue is the export of natural gas to the Zulia state area to generate electricity. In Venezuela, the effect would be felt by consumers who have grown accustomed to Colombian brands. However, excluding natural gas, such Venezuelan imports may be replaced by third countries albeit at a higher landed cost. For Colombia, replacing exports to the Venezuelan market will be a significantly more difficult endeavor. Since the Venezuelan government has made these types of threats in the past, Colombia has been actively pursuing the Mexican and Central American markets as an alternative. The growing relationship of the private sector of both countries will make it difficult for the Venezuelan government to carry out the political threats of the latest attacks on the Colombian ideological and business model.

Jon Huenemann, member of the Advisor board and principal at Miller & Chevalier: President Chavez has brought much greater state control to the economy. He could also order policies that violate trade agreements and discriminate against imports from Colombia. In addition, he could have his government undertake policies designed to boost trade with countries at the expense of Colombia, as he is attempting to do. It is also important to recall that Venezuela is Colombia's second largest market (but half the value of the United States at only 17 percent of Colombia's merchandise exports), while Colombia ranks only fourth—at just 8 percent of merchandise imports by value—as a source of Venezuelan imports. All this said, absent extraordinary measures, including actions in violation of trade agreements, it is difficult to radically shift trade flows. In spite of increasing state control of the economy in Venezuela, the business relationships between these two trading partners are, one suspects, not that easily abrogated. Furthermore, others within the region are not enamored with radical initiatives to diminish intra-South American trade for what are viewed as less then compelling political reasons. If anything, rational South American integration premised on flexible economies has been impeded for decades and this is a source of frustration in the region. The latest Venezuelan efforts are a reflection of an all too often self-defeating regional history that inhibits growth conditions and thus sadly development for the many.

Luis Kolster, assistant general counsel and a director of public policy at General Motors: Since Colombia decided to open its borders by negotiating and signing multiple foreign trade agreements with third countries, and Venezuela decided to withdraw from the Andean Community for political reasons in April 2006, the once highly promising Andean auto industry, which together represented a market of more than 800,000 vehicles a year, started to fall apart. Now, the three nations (Colombia, Ecuador and Venezuela) have taken different directions with respect to their automotive businesses affecting the intraregional trade flows and local economies. Ecuador decided to close its borders by implementing a balance of payment safeguard. Colombia is looking at the very difficult task, derived from low volumes and economies of scale, of replacing its two natural Andean export markets. Venezuela is looking south to Argentina and Brazil to replace those vehicles once imported from Colombia, smothering its national industry with a rigid foreign exchange system as well. The recent license agreement signed between Venezuela and Argentina provides an opportunity for the Argentine manufacturers to export 10,000 new vehicles to Venezuela before Dec. 31, with the possibility to increase this number of vehicles depending on the actual Argentine manufacturing capacity. However, there are several issues still to be measured in this new relationship. Most of the Argentine production capacity is dedicated to cover the Brazilian and domestic markets. Products produced in Argentina and Venezuela may compete directly rather than complement themselves, while technical specifications of the Argentine products may not be compatible with the Venezuelan market conditions. In addition, the cost of export from Argentina to Venezuela plays a major role in any business case.

Carlos Alberto Molina, associate professor and finance department chairman at IESA Business School in Caracas: When Venezuela says it can substitute imports from Colombia without problems, it is ignoring several facts. First, shipment costs from Colombia are much cheaper than from other countries, especially if we consider that shipments can come by ground, avoiding a nightmare at Venezuelan ports. After arriving in a Venezuelan port, a shipment can spend several days, months in some cases, to clear customs. Second, most of the products that Venezuela imports from Colombia are essential goods, such as food and medicine, difficult to substitute in the short term. Third, a large part of Venezuelan imports from Colombia come from multinational companies that decided to move their production to Colombia, outside President Chavez's influence, his anti-business policies and rhetoric. They are not likely to switch production to another country for the toothpaste and cars they are currently producing in Colombia to satisfy the Venezuelan market, and if they do, it will not happen quickly. Fourth, some Colombian companies are already preparing a triangulation to export to Venezuela through a third country, which will only make imports more expensive. So, yes, Venezuela can substitute imports from Colombia, but will pay higher prices and face shortages of some goods. Who will pay for the political decision to restrict trade between Venezuela and Colombia? Venezuela's people, as goods become more expensive and unavailable, and Colombia's economy, while it adjusts to the new reality. These trade restrictions are not likely to last long, as they are inconvenient for Venezuela and Colombia, and even for President Chavez himself.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

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