During the latter half of the 20th century, developed countries across the globe opened their borders to trade and, largely, enjoyed significant periods of economic gains and increases in quality of life. Latin America sat on the bench as agreements were being hashed out, while other countries developed competitive markets and purchasing power increased.
The benefits of free trade didn’t go completely unnoticed in the region, though, as Mexico, as part of NAFTA, signed one of the largest free trade agreements ever in the 90s. Many other countries south of Mexico, including Colombia, got the memo and have been pursuing bilateral agreements as well as regional trade blocs around the world.
For its part, Colombia has been in active dialogue with major trading partners, having voted and accepted a free trade agreement with the US in 2007 that would have allowed 80% of US goods to enter duty-free and 100% within 10 years. Given the US role as Colombia’s leading trading partner, it’s a strong sign that Colombia is willing to open its borders. However, the tax system on imports is still burdensome for foreign producers and more importantly on the very citizens and industries it’s intended to protect.
Currently, Colombia applies a tiered tariff system to all imports not governed by a trade agreement. Duties start at 5% for raw materials used in production to 20% for finished goods to potentially over 35% for cars.
The basis for protectionist policies made sense decades ago when global trade wasn’t as well understood and leaders looked to ensure the stability of local industries and the jobs that went along with them. The results have told us a different story, however.
Chile is a great example close to home.
Chile’s trade liberalization got off to it’s current path starting in the mid-70’s and was stabilized in the early 90’s with a uniformly low import rate across all goods for countries where a trade agreement didn’t exist. Much to the dismay of those that advocate protectionism, Chile has enjoyed higher GDP grow than most Latin American nations and is still a net exporter of good and services.
The trade liberalization in Chile that led national producers to become more competitive at home and across the world hasn’t been achieved uniformly in Latin American, including Colombia. In fact, the Inter-American Development Bank reported that since 1960 Chile’s growth in productivity has outpaced the US, and if Latin America’s productivity as a whole had kept up with the rest of the world since 1960, real incomes would be 47% higher.
Growth in productivity isn’t the only benefit. As the Colombian export sector has dealt with relatively more expensive products across the globe due to the strength of the Peso, lower import duties would serve to dampen the rise in the currency. While I can’t pinpoint the exact effects on exchange rates any better than a meteorologist can pinpoint the weather a year from now, common sense would tell us goods that immediately became 10-20% cheaper would create more buyers or existing buyers purchasing more. It would nicely augment the $25 million daily expenditures by the central bank to suppress the rise of the Peso.
Furthermore, Colombia still has a significant poor population that might not mind their hard earned pesos buying more goods or being able to save for a home or car. It’s the lower and middle classes that may be the most punished by import duties. These families are on the verge of building a better life, yet are faced with paying more for their first car or even ordinary items than citizens in the developed world.
Simply waiting for bilateral agreements between each nation is not going to be effective enough in spurring Colombia to develop into the thriving economy we all know it can be. I’ll happily take a 20% discount at the register, and if I have a choice between equals, I’ll still purchase the Colombian produced good.