Colombia's International Trade - Research Paper Example

Colombia's International Trade INTRODUCTION Colombia is a South American nation with a population of around 46.24 million as on July 2014, as per the latest recorded estimated data (CIA, “Colombia”). The poverty rate in the country has also been high owing to violence along with conflicts that lasted for around five decades in the recent past. The unemployment rate in the country has risen further owing to concentration of land ownership along with income inequality. However, recently, there have been developments witnessed in the economic conditions of the country owing to the developments in the field of international trade and improved business operations. Additionally, there are other factors responsible for the growth of the economic conditions, which include reduction of public debt, rigid government budgets, increased export activities and increased commodity prices. Contextually, improvements relating to security of business affairs and trade policies have been accountable for attracting greater Foreign Direct Investment (FDI) within its national markets, which is further expected to yield greater benefits to the economy in the long run through enriched international collaborations (Beittel, “Colombia: Background, U.S. Relations, and Congressional Interest”). Contextually, trade operations are determined to play an effective role in developing the economy on continuous basis over the long run rather than focusing merely on short run benefits. In this regard, the government has adopted important measures of performing international trade activities with other countries. Moreover, the government has also entered into free trade agreements with the US. Subsequently, the growth of trade operations is quite likely to facilitate in enhancing import along with export operations to a considerable extent. The country is also identified to acquire energy along with mineral resources in abundance to support its developmental needs in the near future (LTBS, “Focus on Colombia”). Prior to assessing Colombia’s economic indicators, it is essential to note that the country has been engaged in conflicts and dispute situations for a period of five decades in the recent past till the present scenario between Colombian government, the ‘National Liberation Army’ (ELN) and the ‘Revolutionary Armed Forces of Colombia’ (FARC) during 1950s (Lopez 6-20). The government of the country has also faced challenges in different aspects that include income inequality, unemployment and corruption, which altogether weakened it internally and disrupted its economic progress as compared to other neighboring countries during the mentioned period. There are also challenges in the field of healthcare, infrastructure and education prevailing within the national boundaries of Colombia. Understanding these lacunas, in the post conflict situation currently, the government has planned to develop control throughout the nation, so that economic, political along with social conditions can be stabilized to a certain extent. In this regard, the government has been observed to have adopted different measures that include expansionary economic policies, legal reformation strategies and trade liberalization ideologies to ensure better economic progress (Beittel, “Colombia: Background, U.S. Relations, and Congressional Interest”). The key economic indicators of Colombia are described illustratively below. Population. As mentioned above, according to the most recent forecasts, the aggregate population of Colombia is estimated to be around 46.25 million by July 2014 (CIA, “Colombia”). The demographic profile of Colombia is in a transition phase owing to its decline in several factors that include mortality, population growth rates and fertility. Additionally, the country is witnessed to have refugee flows as well as economic emigrations both in a legal as well as illegal manner significantly in the recent years, which has added to its increase in population along rise in the risks of unidentified health issues for the existing population. Moreover, the population growth rate of Colombia is estimated at 1.07% during the year 2014. The majority of the population of the country is identified to be under poverty line due to corruption, conflict situation and income inequality, which again makes the country in a less comparatively advanced position when compared within the international dimension (CIA, “Colombia”). GDP per Capita. In the recent years, the Colombian government has implemented efficient trade policies along with trade agreements, which has assisted the economy in performing its business and trade operations successfully, with its apparent effects on the country’s Gross Domestic Product (GDP) growth rate. In this respect, the GDP of the country has been over 4% from the period of 2012 to 2014 depicting improved economy growth (CIA, “Colombia”). Analysts have been of the view that the economic growth of the country has slowed down due to various reasons, which primarily include a decline in its private demand, private investment and household consumption. The private demand of the country reduced from 9.4% to 4.9% during the period 2011 as well as 2012. Additionally, during the periods 2011 and 2012 private investment reduced from 20.5% to 6.9%. Similarly, household consumption declined from 6.5% to 4.3% in the same fiscal years of 2011 and 2012. However, the slowed down pace of economic growth has assisted the economy in minimizing excessive influence of inflation along with financial imbalances in its recent performances (BBVA, “Economic Outlook”). Concerning the recent performances of Colombia, its GDP per capita can also be regarded as a major point of consideration. Conceptually, GDP per capita represents the GDP share for every individual residing within the nation and helps estimating the overall economic performance of a country (BBVA, “Economic Outlook”). In this regard, the GDP per capita of Colombia is identified to be around 2.6% for the period of 2013 as compared to 5.2% and 2.8% for the year 2011 and 2012 respectively (BBVA, “Economic Outlook”). Resources. Colombia is a country with rich natural resources, which certainly rewards it with significant comparative advantages in the international field. The country possesses adequate amount of resources in relation to energy along with minerals. The nation is also identified as one of the largest coal reserves in the regions of Latin America. The natural resources of Colombia comprises of metal, precious metal and oil. The country possesses significant amount of precious metals which include gold, platinum, silver, emeralds and oil in Latin America. Moreover, the country is also recognized to possess leading reserves of natural gas and coal minerals, which further positions it in a comparatively advantageous position within the currently ongoing global competition (CUORO, “Natural resources”). Level of Education. With its GDP and international trade prospects, the education system of the country has also improved in the recent years, due to effective government regulations and control with the intention of improvising the political, economic along with social conditions effectively within the national boundaries of Colombia. In this context, private along with public sectors have assisted in building the educational system of the nation to a substantial extent. The education system of the country is also based on unitary system, which implies that distinction will not be made in the area of higher professional along with academic education (Nuffic, “Colombia”). Altogether, these policies have contributed to the overall literacy rate of the country. Furthermore, the unemployment rate of the country is ascertained to have increased to around 11% on 2014 as compared to 8.44% during the period of 2013. The average percentage of unemployment in the nation is further estimated to be 12.24% from the period of 2001 to 2014 (Trading Economics, “Colombia Unemployment Rate”). The infrastructure of the country is also criticized to be inadequate to promote international trade at an extensive rate in the current scenario, principally owing to its location on the mountainous range of Andeas (Melendez and Harker, “Revisiting Economic Growth in Colombia - A Microeconomic Perspective). OVERVIEW OF COLOMBIA’s INTERNATIONAL TRADE RELATIONS Colombia is rich in its mineral and natural resources, which has imposed strong influences on its trade relations. The imports of the country were accounted at an average of around 1.416 USD billion from the period of 1980 to 2014 signifying an increase in trade operations. As apparent, the import operations of the country have augmented to a considerable extent owing to the reduction in import tariffs. In this respect, import duty of the country was reduced from around 12.2% to a margin of around 8.25% on an average basis during the year 2010 wherein the import duty was imposed on the basis of three tariff levels during the year 2010 (U.S. Department of Commerce, “Trade Regulations and Standards in Colombia”). Imports in Colombia have been made in a duty free manner based on its free trade agreements with various countries that majorly include the US, Canada, Chile and China among others involved in trade relations with Colombia (U.S. Department of Commerce, “Trade Regulations and Standards in Colombia”). The country has also developed particular Free Trade Zones (FTZs) that include Cali, Bogota, Medellin, Cartagena, Arauca and Palmaseca. In the FTZs, there are certain provisions, which include fiscal provisions, customs along with exchange regimes with the assistance of which, these regions are regulated. The FTZs are also developed in order to promote processing of industrial goods along with services with the intention of encouraged export. It is worth mentioning in this context that the Colombian government, with the assistance of FTZs, expansionary economic policies and advanced long-run oriented trade policies, has been able to ensure better import as well as export activities in its recent international trade performances (Caribbean Export, “Doing Business with Colombia”). IMPORT AND EXPORTS OF COLOMBIA TOP TRADING PARTNERS Source: (The Observatory of Economic Complexity, “Colombia”) THEORETICAL EXPLANATION TO THE CHANGES IN COLOMBIA’S IMPORT, EXPORT AND MAJOR TRADING PARTNERS In this section, the Ricardian model, the Specific Factors model and the Heckscher-Ohlin model has been applied with the expectation that these will assist in analyzing the trade relations Colombia with its major trading partners and help identifying the underlying factors that further tend to determine these relational aspects. Ricardian Model. The Richardian model has been developed with the intention of having a better understanding of the comparative advantages that exit amid two countries. The theory is based on certain assumptions which include perfect competition, two goods, two countries and one factor of production (Suranovic, “International Trade Theory and Policy”). Applying this theory, it can be assumed that Colombia, being associated with international trade, performs trading operations in order to gain continually augmenting returns through better exchange of goods and services. It is worth mentioning in this context that the principles of the Ricardian model grounds on the aspect of comparative advantage obtain by two countries associated as trading partners, when dealing in two products (Demidova and Krishna 435-441). Assessing the trade relation between Colombia and the US, these notions can be better explained to obtain a comprehensive understanding. Recent data in this regard revealed that these two nations have been major trading partners, where Colombia was recorded as one of the top rated suppliers to the US market and ranked 22nd in the field, while it was ranked the 20th largest buyer of US goods at the same time in 2013. As can be identified, in the year 2013, Colombia exported Mineral Fuel and Oil (crude) amounting to approximately $15.4 billion, while it imported $2.7 billion machineries. In this context, the theory of comparative advantage shall be applicable. For instance, provided that Colombia is rich in its natural resources and has the ability to produce Mineral Fuel and Oil (crude) at a larger volume, while the US has its resources to increase machinery production within its national periphery, the trade of these two products shall prove highly beneficial for the countries to gain comparative advantages. It is principally owing to the fact that such an initiative shall increase production quantity and export volume of both these products in their respective producing countries, making the other country a major market for the same good (Office of the United States Trade Representative, “Colombia”). However, as assessing the parity between the resources used by Colombia to produce one unit of Mineral Fuel and Oil (crude) and resources used by the US to manufacture one unit of machinery is subjected to various influences, the Ricardian theory of comparative advantage might not prove accurate in depicting the trade relation amid the two countries. Notably, statistical review of the trade transactions between these two nations depict that these nations are involved in importing and exporting one commodity, although at different phases, i.e. Mineral Fuel and Mineral Fuel and Oil (crude), which limits their ability to gain comparative advantage through the trade relation. For instance, in 2013, Colombia imported $5.5 billion of Mineral Fuel and Oil (crude) from the US and exported $15.4 billion of Mineral Fuel to the US. This in turn limits the comparative advantages likely to be derived by the two nations through their trade relations, incurring an opportunity cost, which could have been mitigated if either of the companies would have focused on trading in two different commodities (Office of the United States Trade Representative, “Colombia”). However to enhance its comparative advantages, Colombia and the US were identified to have signed ‘Free Trade Agreement’ during the year 2012. The trade agreement have facilitated the countries in performing trading operations with better investments, reduced trade barriers and expand trade operations (Bureau of Public Affairs, “U.S. Relations with Colombia”). In this respect, presently Colombia has developed a bilateral trade agreement with the US and Chile as its major trading partners, which enhanced import along with export operations with minimum tariff. The free trade agreement is recognized as an important aspect accountable for the growth of the trade operations amid Colombia and the US after the FTA (Melendez and Harker, “Revisiting Economic Growth in Colombia - A Microeconomic Perspective”). Nevertheless, a critical observation to the factors associated with comparative advantages gained by Colombia or likely to be obtained in its future trade relations with other countries, reveal the interplay of substantial number of variables including the underlying opportunity costs and the production function trends. Illustratively, when examining the trade relation between Colombia and the US, it can be observed that the US gain a comparative advantage on the grounds of its technological and labor force advancements in productive greater volume of Mineral Oil, while Columbia is able to obtain a degree of comparative advantage based on its better natural resource availability (i.e. land) (Karp, 2-3). Again, as revealed in Bombardini, Kurz & Morrow, the comparative advantages gained by the two trade partners might not be equally proportional (1-3). To be specific, if the one country acts to protect itself from the law of diminishing returns when producing one commodity, it is likely that even though the Ricardian model will illustrate a positive direct return to suffice comparative advantages for Columbia, it might not be as beneficial for its trade partner, whether US or Chile, resulting in a negative indirect influence on their industry performances. It is fundamentally owing to the fact that distribution of production factors differ from one country to another, which further distinguishes their degree of comparative advantages in producing and trading one particular commodity in exchange of the other (Bombardini, Kurz & Morrow, 1-3). Specific-Factors Model. Specific-Factors Model signifies the factors of production that are used in the production of certain specific products to be imported or exported as per the needs and demands of the partner countries involved in international trade relations. The model is identified to affect income distribution due to commencement of trade operations at a larger scale. The foremost assumption of this model implies that an economy is capable of producing two goods (Petsas, “Specific Factors and Income Distribution”). Correspondingly, in this regard, the trade operations in Colombia have been majorly based on the exchange of goods that the country is not efficient enough to produce for itself in abundance to suffice its national demands. In this regard, two goods are essential for the development of the economy, which include crude oil and machinery. The goods are produced with the assistance of three production factors. Crude oil is produced with the assistance of factors that include labor and land. On the other hand, machinery is produced with the assistance of labor along with capital. In this regard, it can be identified that the labor is the mobile factor of production used in the production process of the two goods (Goldberg and Pavcnik, 2-4). This further suffices the other assumption of the theory, which states that there are three factors of productions including labor, capital as well as land and are important for the production of any commodity within the economy. Accordingly, the third assumption in the model asserts that one good being trade by a country is produced with the assistance of capital as well as labor. Contextually, the factors that include land along with labor is efficient for the production of crude oil, the country i.e. Colombia possesses natural resources and mining sector considerably. On the other hand, the industry sector seems to lack knowledge-intensive labor due to illiteracy and appropriate education system. The investment decisions of the country are based on foreign investments. Subsequently, to increase production of machinery will require more investment and knowledge-intensive labor, which might increase the production costs more than income within the nation (Goldberg and Pavcnik, 2-4; Petsas, “Specific Factors and Income Distribution”). The fourth assumption depicts that other good being traded by the same country is produced with the assistance of land as well as capital. In this context, labor is determined as a mobile factor and on the other hand, capital along with land is recognized as specific factors, which is also observable in Colombia. However, as Colombia is observed to lack adequate knowledge-extensive labor, the country has been witnessing considerable drawbacks in the production of machinery to support the growth of its mining and other industrial sectors. Comparatively, the US lack natural resources, which lacked in the production of required amount of crude oil. Respectively, the FTA has facilitated the US and Colombia in exchanging goods they lacked in and in this regard, the countries have been benefitting from trade policies (Goldberg and Pavcnik, 2-4; Petsas, “Specific Factors and Income Distribution”). However, the fifth assumption considered in this model states that perfect competition exists in worldwide market segments, which is further influences the control of resource channelization within the trading economies could not be sufficed in the context of Columbia as the country faces many comparative disadvantages when it comes to the production factors of labor, technology and capital (Attanasio, Goldberg and Pavcnik, 1-4; Petsas, “Specific Factors and Income Distribution”). Heckscher-Ohlin Model.The Heckscher-Ohlin model is based on the concept that international trade operations amid countries are motivated mainly due to differences of production factors scattered in two distinct nations. In this respect, the differences in the production factors can be identified in terms of labor skills, capital and resources, when assessing Colombian trade relations (Attanasio, Goldberg and Pavcnik, 1-4). Applying the assumptions propagated in the theory, it can be observed that international trade in Colombia includes more than two countries, two goods, two factors of production, and mix of labor along with capital, which rejects the 2x2x2 hypothesis of the H-O model. Additionally, unlike assumed in the theory, supply is for capital as well as labor can also be observed as fluctuating within Columbia that further varies across countries during the trade event (Hernández, 1-3; Pearson Addison-Wesley, “Resources and Trade: The Heckscher-Ohlin Model”). In this respect, the example of Colombia and the US can be considered as involved in the production and trading of more than two goods that include crude oil and machineries as the prime but also includes imports of Electrical Machinery, Organic Chemicals, and Vehicles from the US and exports of Precious Stones (gold), Spices, Coffee, and Tea (mostly coffee), Live Trees and Plants (cut flowers), and Edible Fruit and Nuts (bananas) to the US, with the assistance of labor and land primitively (Office of the United States Trade Representative, “Colombia”). The supply of labor along with capital is also not constant within the nation as it varies between the countries. For instance, Colombia possesses labor-intensive human resources while the US acquires knowledge-intensive labor. Additionally, the countries, with the assistance of trade agreement are able to perform trade without restrictions but to a certain extent in order to preserve governance control on the allocation, distribution and utilization of the production factors (Hernández 1-4). Contextually, it was observed that Colombia produces crude oil with the assistance of labor-intensive forces and investment acquired from the US. On the other hand, the US produces machinery by utilizing knowledge-intensive forces and capital. As capital and labor required for the production of crude as well as machinery varies amid the countries, in absence of identical technology along with customer preferences deliver greater comparative advantages to the US compared to Colombia through the international trade relations. In this regard, it can be identified that labor-intensive goods are traded to knowledge-intensive countries and vice versa amid Colombia and the US. Nevertheless, the role of these trade operations has been evident in assisting the countries to develop their economic conditions in the global market (Pearson Addison-Wesley, “Resources and Trade: The Heckscher-Ohlin Model”). COLOMBIA’S TRADING POLICY Since the liberalization of Colombia during the period of 1991, the country has made modernized along with liberalized trade regimes with the intention of enhancing its trading operations on a continuous basis. With this particular aim, the country has developed a free trade zone with the assistance of ‘Andean Community of Nations (CAN). During the year 2009, the country entered into ‘Andean Trade Partnership and Drug Eradication Agreement (ATPDEA) in order to improve export operations with the US. The FTA was also signed between Colombia and the US during the year 2006. Moreover, a FTA was signed in the year 2006 between Colombia and Chile in 2006. Additionally, the country also signed FTAs with other countries that include ‘European Free Trade Association’ (EFTA) as well as Canada in the year 2008. The trade agreements also assisted the country in performing bilateral trade operations (The World Bank Group, “Colombia Trade Breif”). To be noted in this context, the agreements based on liberalization trade policies were performed by Colombia with the aim of reducing tariffs to a comparable extent as commonly identified amid members of the WTO. The bilateral trade pattern has certainly aided the country in improving its trade relationship with other nations, rejuvenating Colombia’s stance as an international trade partner. As revealed in the study of DeRosa, Grieco and Schott, the bilateral trade agreement has proved beneficial for Colombia, delivering it with increased advantages as compared to Equador, Peru and other Andean trade partners, especially when considering their relation with the US (16-17). This can be better observed with reference to the below represented diagrams. Comparison of Exports by Colombia and other Andean Major Trade Partners to the US in 2005 (millions of dollars) (DeRosa, Grieco and Schott, 16) Comparison of Imports by Colombia and other Andean Major Trade Partners to the US in 2005 (millions of dollars) (DeRosa, Grieco and Schott, 17) Observably, the country is identified to follow a trade pattern of exporting labor-intensive goods to countries, such as the US, which is comparatively scarce in terms of its natural resources along with labor. Few of the major products include agricultural products and crude oil (DeRosa, Grieco and Schott, 18). On the other hand, the country imports knowledge-intensive goods, capital along with qualified labor in the recent phenomenon such as chemical and plastic products, electric machinery and mechanical products among others (DeRosa, Grieco and Schott, 19). Subsequently, the country, with the assistance of trade agreements and liberalized trade patterns, has been able to develop its economic as well as social conditions to a considerable extent in its recent performances (Gracia & Zuleta, 13-15). In this respect, it can be ascertained that the trading partners of Colombia have changed after signing different trade agreements, as the trade agreements have facilitated Colombia in conducting trade operations on the basis of resources acquired and gain better comparative advantages. The trading partners of the country, before trade agreement, were Canada and European Unions among others. But, currently, the country has developed trade relationship with the US for better trade benefits (Perez-Rincon, “Colombian International Trade from a Physical Perspective: Towards an Ecological”). As can be observed from the above discussion, the trade agreements linking Colombia with other nations have been quite useful in rewarding it with greater comparative advantages as compared to other nations with almost equivalent resource capacity and factors of production facilities. CONCLUSION Colombia is a highly populated country in the region of Latin America. As I was able to observe, the country has faced conflicts for the last five decades during 1950s, a degree of which can be identified even in the current day context between Colombian government, ELN and FARC. Nevertheless, my observation revealed that undergoing continuous changes, the Colombian government has adopted effective regulatory measures with the aim of improving its control, especially on labor development aspects and its trade relations so that political, economic along with social conditions can improve for overall benefits. I was also able to observe that the government has been much inclined towards practicing regulatory policies, further stabilizing the political along with the security conditions of the country. This particular development has in turn assisted in improving the international business prospects and trade operations of the nation to a substantial extent. I also recognized that the economic profile of the country is improving after FTA agreements signed between Colombia and other countries positioning it at a better ranking amid the world trade partners, rewarding it a certain degree of enhanced comparative advantages as compared to other similar nations. The bilateral trade policies have additionally assisted the country in conducting import along with export operations in an enhanced manner. In this regard, from the trade theories comprising the Ricardian model, the Specific Factor model and the Heckscher-Ohlin model, I have identified that the country exports majorly consist of labor-intensive goods, as the country is rich in natural resources. On the other hand, the country imports knowledge-intensive goods due to the lack of qualified labor. This further exhibits a strong future for the country to control its production factors and take greater comparative advantages through international trade. I believe that Colombia with the assistance of trade agreements will be facilitated in conducting trade operations with better trade benefits in the coming years. Works Cited Attanasio, Orazio, Goldberg, Pinelopi K. and Nina Pavcnik. “Trade Reforms and Income Inequality in Colombia.” IMF Conference on Macroeconomic Policies and Poverty Reduction (2002): 1-16. Print. “Economic Outlook.” BBVA. 2013. Web. 23 Mar. 2014. Beittel, June S. Colombia: Background, U.S. Relations, and Congressional Interest. 2012. Web. 23 Mar. 2014. Bombardini, Matilde, Kurz, Christopher J. and Peter M. Morrow. “Ricardian Trade and The Impact of Domestic Competition on Export Performance.” National Bureau of Economic Research and the Canadian Institute for Advanced Research (2011): 1-37. Print. “U.S. Relations with Colombia.” Bureau of Public Affairs. 2013. Web. 23 Mar. 2014. “The World Factbook.” CIA. 2014. Web. 23 Mar. 2014. “Natural resources.” CUORO. N.d. Web. 23 Mar. 2014. Demidova, Stetlana and Kala Krishna. “Trade and Trade Policy with Differentiated Products: A Chamberlinian - Ricardian Model.” Journal of International Trade & Economic Development 16.3 (2007): 435-441. Print. DeRosa, Dean A., Grieco, Paul L. E. and Jeffrey J. Schott. “Bilateral Trade and Investment.” Institute of International Economics (2006): 15-41. Print. Gracia, Orlando and Hernando Zuleta. “The Free Trade Agreement between Colombia and USA: What can happen to Colombia?” Fenalce (2004): 1-50. Print. Goldberg, Pinelopi Koujianou and Nina Pavcnik. “Trade, Wages, and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms.” Dartmouth College (2004): 1-43. Print. Hernández, Gonzalo. “Terms of Trade and Output Fluctuations in Colombia.” Economics Department Working Paper Series (2011): 1-48. Print. Karp, L. “International Trade.” Berkeley University (2005): 1-18. Print. Lopez, Giselle. “The Colombian Civil War.” Policy Briefing 2.1 (2011): 6-20. “Focus on Colombia.” LTBS. 2004. Web. 23 Mar. 2014. Melendez, Marcela and Arturo Harker. Revisiting Economic Growth in Colombia - A Microeconomic Perspective. 2008. Web. 23 Mar. 2014. “Colombia.” Nuffic. 2012. Web. 23 Mar. 2014. Office of the United States Trade Representative. Colombia. 2014. Web. 11 Apr. 2014. “Resources and Trade: The Heckscher-Ohlin Model.” Pearson Addison-Wesley. 2012. Web. 23 Mar. 2014. Perez-Rincon, Mario Alejandro. Colombian International Trade from a Physical Perspective: Towards an Ecological. 2006. Web. 23 Mar. 2014. Petsas, Iordanis. Specific Factors and Income Distribution. 2003. Web. 23 Mar. 2014. Suranovic, Steven M. International Trade Theory and Policy. 2012. Web. 23 Mar. 2014. “Colombia.” The Observatory of Economic Complexity. N.d. Web. 23 Mar. 2014. “Colombia Unemployment Rate.” Trading Economics. 2014. Web. 23 Mar. 2014. “Colombia Trade Breif.” The World Bank Group. 2010. Web. 23 Mar. 2014. “Colombia.” United Nations. 2013. Web. 23 Mar. 2014. Read More