The stock exchange integration between Chile, Peru and Colombia may be a prelude to closer cooperation in trade issues between the three countries. President Juan Manuel Santos has already proposed a free trade deal, including the free movement of people. Although this is a medium term goal, the formation of a bloc to deal with China will benefit all countries, especially Colombia, provided it learns lessons from its neighbors in the region.
Colombia has lagged behind Chile and Peru in exploiting the commodity export boom promoted by China, and in diversifying its export markets.
Colombia has not benefited from the commodity boom driven by China’s growth. In 2009, China absorbed approximately 16% of Chile’s and Peru’s total exports. In contrast, Colombia’s exports to China were less than 2% of its total exports. In 2009 Chile and Peru had trade surpluses with China amounting to approximately $6.7 billion and $1 billion respectively, while Colombia had a trade deficit that reached $2.5 billion.
However, Chile’s and Peru’s impressive trade balances with China were the result of the over-reliance on commodity exports. For instance, in 2007, 98% of Chile’s exports to China were from nine primary-product sectors. In the case of Peru three products (copper, fishmeal and iron ore) accounted for more than 85% of its exports to China.
Even though Colombia’s commodities exports to China have potential, some caution is needed. While in 2005 minerals represented 30% of Colombia’s total exports, this figure jumped to 42% in 2009. This unfortunately affected other sectors. In 2005, exports of agricultural and industrial goods represented 8% and 60% of total exports respectively. In 2009, however, these figures decreased to 6% and 51%.
Over-reliance on the mining sector negatively affects sustainable economic development. Natural-resource-exporting countries often become dependent on extractive industries, which discourages the diversification of the economy. Such exports also cause the appreciation of the local currency, which renders industries uncompetitive. Although other industries can cheaply import capital goods (to produce other goods), this increases unemployment. Furthermore, profits from exploiting natural resources largely stay in the pockets of foreign-owned companies.
These negative effects have been evident in Colombia, where emphasis on commodity exports has resulted in relatively high GDP growth, but high unemployment. For instance, for the years 2005 to 2007, the period with highest economic growth, GDP increased from 5.7 to 7.5%, yet unemployment only decreased from 11.8 to 11.2%.
Colombia’s over-reliance on one export market is also problematic. In 2008, before the financial crisis hit the global economy, Colombia’s percentage of total exports to its main export market surpassed Chile’s or Peru’s exports to their top two markets. Chile shipped 14.8 and 11.8% of its exports to China and the U.S. respectively; while Peru sent 17.7% and 13.5% of exports to the U.S. and China respectively. Colombia, however, delivered 38.2% of its exports to the U.S.
Colombia has made some attempts to diversify its markets, but this requires a renewed strategy. The global financial crisis and recurrent diplomatic spats with Venezuela forced Colombia to seek other markets. For instance, this year Colombia exported coal for the first time to China. Colombia’s exports to China now stand at $1.7 billion, or 6.2% of total exports.
A close cooperation with Chile and Peru to lure the Asian market would benefit Colombia considerably. China’s non-trade tariffs (protocols, phytosanitary regulations, etc.), however, have limited Latin American exports virtually to commodities alone. The problem with these negotiations lies in China’s use of its size and economic might as negotiating tools to obtain more beneficial terms or protection for its economy. A close regional cooperation between Chile, Peru and Colombia would therefore improve these countries’ negotiating leverage.
Nevertheless, it is imperative for Colombia to diversify and promote new industries. Over-reliance on exporting commodities will negatively affect other industries where Colombia has comparative advantages, such as the agricultural sector. But most importantly the government needs to offer incentives to industrial sectors positioned in the upper part of the added value chain, which would place Colombia on the path of sustainable economic development.
Without these measures, Colombia risks losing out on the benefits that close cooperation with countries in the region may bring.