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Colombia Trade Suffers

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Colombia suffers from the political entanglements of its key trade partners.

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Relations between Colombia and its main trading partners aren't what they are cracked up to be. Now a new friction -- caused by a bilateral agreement allowing U.S. troops to use up to seven military bases in Colombia -- sparked a heated debate among regional heads of state during the August 31 summit of the Union of South American Nations (or UNASUR) in Bariloche, Argentina.

For Colombia, the agreement has great significance after years of being plagued by "narcoterrorism," the phrase coined in the 1980s referring to the close collaboration between the country's drug traffickers and the Marxist-Leninist guerrillas of the Revolutionary Armed Forces of Colombia, or FARC. Colombian officials hope that the U.S.'s military presence will help it end narcoterrorism, while their American counterparts hope to stop illegal drugs from coming across its borders from southern neighbors like Colombia. But for countries such as Venezuela and Ecuador, the agreement is yet another act of U.S. interference in the region.

According to Rafael Pampillón, professor of economics at the IE Business School in Spain, the U.S. military presence will be a case of a "powerful army advanced in military strategy that can help strengthen the operational capacity of Colombian troops.” Meanwhile, Ramón Guacaneme Pineda, assistant dean of EDE, the business school at Colombia's Sergio Arboleda University, sees the military presence as largely an additional deterrent, which could help bring everyone involved in the conflict to the negotiating table. “Relying on the use of arms does not resolve any problems per se," he explains. "What it does, however, is force the two sides in the conflict to [see] that the way [they have been approaching the problem] is impossible [and that] they need to try other ways of doing things.”

The agreement between Bogotá and Washington, D.C., has been particularly vexing for Venezuela's president, Hugo Chávez, the leading anti-American voice among Latin American politicians who has won the support of Ecuador, Bolivia and Argentina. As Pampillón explains, Chávez would like nothing more than to extend his "Bolivarian revolution" to other parts of South America. Yet there's no avoiding the fact that Venezuela shares a border with Colombia, stoking his concerns of a military invasion by its neighbor and espionage by U.S. troops from bases in Colombia.

The sour relations have fuelled nationalism among locals in both countries, a factor that Venezuelan politicians have exploited during various election campaigns. “Add to this the fact that Chávez, in many respects, believes that he alone knows the entire truth and the permanent presence of U.S. troops is a clear obstacle for his expansionist political goals," says the Colombia-based professor. "This explains why the Venezuelan president takes this situation personally.”

Nevertheless, when it comes to this controversy, countries whose politics are far from Chavista (that is, pro-Chávez) -- such as Peru, Mexico, Brazil and Chile -- are leaning more toward the views of Venezuela and Ecuador than Colombia. In the cases of Brazil and Chile, Pampillón says their sympathy with Venezuela has more to do with "populist and electoral reasons," given that they both have referendums coming up soon. "Imperialism does not sell politically," he says. "These countries have asked [Colombia] to provide more explanations than they should, but when push comes to shove, no one does anything [against Colombia].”

According to observers, Chávez’s aim at the UNASUR summit was nothing short of an attempt to subject Colombia's president, Alvaro Uribe, to a political trial. Nevertheless, the meeting had a very different outcome. As Guacaneme explains, “Each party declared itself the victor, which shows that they have misinterpreted the goals of an organization like UNASUR. To the degree that objectivity exists, everyone both won and lost.”

That said, he believes the big winner in this round is Brazil. Pampillón agrees, noting, “Brazil has become the "arbiter of Latin America," with Argentina and Venezuela on one side, and Chile and Mexico on the other. "When all is said and done, [Brazil is] the largest economy in the region, [and] the most industrialized," he says, "and now it has petroleum,” referring to the enormous deposits discovered by the state-owned oil company, Petrobras.

THE NEW DIVIDE

For sure, the U.S.-Colombian agreement has opened a new divide between Colombia and Venezuela, the second-largest export destination for Colombian goods after the United States, with potentially major repercussions for trade and business for both neighbors.

Yet Pampillón says it's important to bear in mind the different nature of Colombia’s exports to the United States and Venezuela. The United States is a major destination for its low value-added products, like petroleum and its derivatives (53 percent), coal (11 percent), coffee (6 percent), flowers (9 percent) and gold (5 percent). In contrast, Colombia exports high value-added products to Venezuela: cars, car parts and components, food, drinks, chemical products, and apparel. Yet the United States accounts for 35 percent of Colombia’s exports, compared with Venezuela's 15 percent.

More importantly, predicts Guacaneme, Colombia could be the United States' largest trading partner if a free trade agreement (FTA) between the two countries is approved by the U.S. Congress next year.

Pampillón also reckons that Colombia is hoping that the military agreement will accelerate the current FTA process. Since the FTA's signing in 2006, "it has been frozen because under former President George W. Bush, Congress, as a Democratic majority, never gave it a stamp of approval to avoid tensions with [domestic] labor unions.”

Yet perhaps the FTA's slow implementation is simply a case of over-optimism among Colombians. According to Guacaneme, “many of its rules mean institutional adjustments, which will take at least two or three years to put in place. You have to start along the road toward implementation, but that isn’t something easy or fast." He estimates that the ball won't begin rolling until 2010 at the earliest, with adjustments in 2011 and 2012. "That means that the pact won’t start to provide any benefits until 2013 and 2014,” he says. Most Colombians don’t understand this timetable, he contends: “They imagine that the day after the FTA was approved by the U.S., trading conditions would change.”

Guacaneme adds that the FTA is not going to change the structural problems of Colombia's economy. Meanwhile, he says the volume of trade between Venezuela and Colombia will continue to contract because “beyond the willingness of business people to trade, there are concerns over how [the two countries] will manage their currencies.

As for Ecuador -- the second-largest destination of Colombian exports in the region -- Guacaneme forecasts that political relations between it and Colombia will recover, enabling their trade relations to stabilize. Yet starting in the second half of this year, Ecuador imposed tariffs on more than 1,000 products imported from Colombia. Though Ecuador's president, Rafael Correa, is an ally of Chávez, he justified the tariffs by insisting in 2008 that “new measures have to be taken to protect our foreign [trade] even more. It is the Achilles’ heel of our society, the product of the ‘dollarization’” in place since 2000, when the national currency was replaced by the U.S. dollar.

Correa has also stated that “Colombia can devalue its peso by 30 percent, and we can’t respond. We lose competitiveness if people start to import and they don’t export anything to Colombia, so we have imposed … safeguards against Colombia, which are permitted under the Andean Community of Nations [the trade club set up by Bolivia, Colombia, Ecuador and Peru].”

It's clear to Guacaneme that Colombia “must think deeply about diversifying its markets and realigning its products for another sort of consumer.” In July, CIECA, the University of Medellin’s center for research in economics, accounting and management, published a report echoing his view as part of an analysis of the contraction of internal demand and export volume in the country. The report states: “It’s not just demand from the U.S. that has contracted. Exports to Venezuela are also continuing to decline because of that country’s withdrawal from the Andean Community of Nations” in 2006, when it argued that an FTA between Peru and the U.S. violated the club's rules.

The United States, Venezuela and Ecuador -- Colombia’s three most important trading partners, which account for about 70 percent of its foreign trade -- "are distancing themselves [from Colombia], each for a different reason," asserts the report. More troubling is that Colombia is "not building alternative relationships with other countries. Instead, it is making unsuccessful attempts to restore the relationships that were built over more than three decades.”

BRIGHT SPOTS, DARK SHADOWS

Despite everything, Guacaneme is optimistic. While its main trading partners have their own political and economic problems, which could have an impact on Colombia's economy, he notes that previous forecasts expected economic indicators to be worse at this stage of the year than they have been. "This doesn’t mean that we have already overcome all of the stumbling blocks," he says. "But the impact has been less than people predicted.”

Pampillón is also optimistic about Colombia's economic performance. He says its economy will continue to contract this year by 1 percent but that in 2010, it will grow 2.5 percent. The region's other countries will also see the light at the end of the tunnel in 2010, apart from Venezuela, whose economy will contract by 2.7 percent .

Despite the political and diplomatic problems, Colombia's business community is also sanguine about the economy, according to another report by CIECA published in August. Nevertheless, the report notes that when it comes to foreign trade and the exchange rate, new worries are cropping up because the current currency revaluation does not reflect the health of the Colombian economy as it would have in the past, but its weakness. Put another way, the report says: “In this business environment, there is [only] moderate optimism since the situation continues to deteriorate for workers and unemployed.”

And that optimism will be chipped away. According to CIECA, the immediate consequence of the political crisis is the suspension of numerous exports to Venezuela. This has a "negative effect" for several sectors in Colombia, and the country is facing a shortage of basic products such as meat and eggs, which Colombia is the main provider of."

The Colombian business confidence in Venezuela could also take a knocking over short term because of the unstable trade relations, which hasn't been helped by their neighbor trying to divert trade further south to other countries, observes one analyst. He also believes that it will be several months before Ecuador's government dismantles its "safeguards," and he notes that at the beginning of the second quarter of this year, Ecuador's president hardened his position toward Colombia.

JUGGLING RELATIONS

While Colombia has not had good relations with other nations, what is happening now is that “other countries are looking only at part of what the Colombian government is doing -- its agreement involving U.S. military support," notes Guacaneme. But he says they are not paying attention to the [fundamental] cause [for that action]: A guerrilla war in Colombia, universally recognized as terrorist in nature, which continues because it is funded by drug trafficking. "Colombia has a war that is global in scope, which doesn’t just affect it. You can see how the phenomenon of Colombian drug trafficking has been replicated in countries such as Mexico,” whose government is waging a war against drug trafficking that has resulted in a trail of deaths.

What lies ahead for Colombia? In terms of its domestic political environment, Colombia’s House of Representatives recently approved a bill to pave the way for President Uribe's immediate re-election. The following text will be presented to Colombians in a referendum: “Whoever has been elected president of the Republic for two consecutive periods will be able to be re-elected for only one additional term.” This will occur if Uribe decides to run in 2010 and the referendum is approved by a constitutional court within 90 days.

In the meantime, the former defense minister, Juan Manuel Santos, could become the center-right candidate in the next election. This pleases Pampillón. Even if Uribe decided to take the constitutional route to reelection, or Santos gets elected instead, "the situation wouldn’t change all that much," says Pampillón. "There would be political continuity. Also, don’t forget that the left, in opposition, is very much divided.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

 

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