Colombia is losing its appetite for free trade agreements. Over the past decade, the country has been a leading advocate of free trade in South America, signing more than a dozen bilateral or multilateral free trade deals. But with trade and current account deficits on the rise, and with manufacturers and other key members of the economy increasingly complaining that the agreements have failed to live up to their billing, Colombia is pondering a change of pace. While it is unlikely that Colombia will embrace protectionism, it will slow its sprint toward more free trade agreements.
U.S. threats to disrupt international trade deals have caused Latin American countries to seek new free trade agreements. However, Colombia's growing trade and current account deficits are putting pressure on the country's presidential candidates to agree to slow the pace of trade liberalization.
Colombian presidential elections are scheduled for May 27. Each of the major presidential candidates — Ivan Duque, Gustavo Petro, German Vargas Lleras, Sergio Fajardo and Humberto de la Calle — has come out against signing new free trade agreements, expressing a growing consensus across ideological camps that the agreements Colombia already has signed haven't produced the expected results. But the political consensus against the deals does not mean the candidates agree on what to do about them.
Center-right candidates Duque and Vargas Lleras, for example, agree with their leftist opponents that Colombia shouldn't embark on a new round of free-trade agreements, but they are against reviewing the country's existing agreements. They are not advocating trade protectionism; instead, they argue that before embarking on any additional free trade deals, Colombia should first invest in infrastructure and reduce tax and labor costs. Their opponents, however, not only are against signing new free trade deals, but they also want to renegotiate the ones Colombia had signed over the past decade or so. These include pacts with the United States, the European Union, Canada, South Korea, Mexico, Chile and Peru.
Growing Trade Deficits
The free trade agreement Colombia signed with the United States in 2006, which took effect in May 2012, has set the tone for its trade policy ever since. Bogota previously had a trade preference agreement with the United States, but that was subject to annual revisions. Because the United States traditionally has been Colombia's biggest trading partner, Bogota pursued a free trade deal so its trade interests in the United States would be less vulnerable to change. Colombia also hoped that a deal with the United States could boost its exports beyond volatile commodities such as oil, coal and coffee.
Six years later, Colombia's key exports to the United States remain oil, coal and coffee. To boot, the value of Colombia's exports to the United States fell from $22 billion in 2012, the year the deal took effect, to $10.9 billion in 2017. During the same period, its imports from the United States went from $14 billion to $12 billion, meaning that in the six years under the free trade deal, its U.S. trade surplus became a deficit.
Venezuela, historically one of Colombia's main trade partners, poses another problem for Colombian trade. As Venezuela's economy has crumbled, its trade importance to Colombia has significantly declined. Colombian exports to Venezuela, which topped $6 billion in 2008, fell to just over $300 million in 2017. Most of those exports were centered around agriculture (beyond coffee, meat once was one of Colombia's main exports) and manufacturing products, two sectors of the Colombian economy that have had a harder time taking advantage of international trade.
Colombia also has struggled to take advantage of its free trade agreements with Mexico and South Korea. Imports from both countries create significant competition for Colombian manufacturers, and Colombia has been running trade deficits with both over the past decade. In fact, Colombia's overall trade deficit, which was $1 billion in 2013, hit $9 billion last year, while its current account deficit has reached 3.3 percent of GDP.
Around a decade ago, Colombia's agricultural sector was the main opponent of the shift toward trade liberalization. Rice, poultry and dairy producers, for example, blockaded roads to protest the government's decision to lower import tariffs. Over the last couple of years, however, Colombia's manufacturing sector has become more vocal against trade liberalization.
The National Association of Business of Colombia released a study last year evaluating the state of the country's manufacturing sector. The study concluded that the government was naive to believe that entering into free trade agreements would boost the country's exports. Not only did manufacturing exports fail to increase in a meaningful way, but domestically produced goods faced greater competition from imports. Fabricato, Colombia's largest textile producer, suspended production for a few weeks last year, illustrating the difficulties facing the country's manufacturing sector.
At the moment, the political consensus seems to be that Colombia did not prepare itself properly before lowering its import tariffs. There were other factors, such as a corruption probe that halted many key infrastructure projects, including efforts to improve the navigability of the Magdalena River. Additionally, the government imposed a tax hike to make up for the revenue lost when oil prices dropped.
The business group seems to echo some of the proposals made by Colombia's center-right presidential candidates, calling on the government to reduce the cost of doing business before signing any more free trade agreements. Its proposals include reducing taxes and moving forward with infrastructure improvements. The Andes, which divide Colombia into three parts, and other geographic features help make transportation difficult and expensive. That's why projects such as the Magdalena River improvements, which could help better connect cities in central Colombia with the Caribbean, are key to making Colombian producers more competitive in the international market.
What Deals Could Be Affected?
Colombia is currently negotiating free trade agreements with several countries, including Singapore, Australia and New Zealand. But its talks with Turkey and Japan remain the ones most likely to be affected, no matter who wins Colombia's presidential election. Those countries' trade proposals, especially in regard to agricultural products, remain far from what Colombia seeks.
The results of Colombia's presidential election will determine how far the country's trade policy will shift. The major contenders do seem to agree that before embarking on a new round of free trade agreements, the country should first focus on policies reducing the cost of doing business. There are, however, some major differences in the approaches outlined by Duque and Petro, the two leading candidates,.
While Duque says he will slow the pace of trade liberalization, he does not favor pursuing a protectionist path. Petro, on the other hand, wants to revise existing free trade agreements, including the one with the United States. That could prompt resistance even from some of the sectors, such as manufacturing, that are demanding reduced trade liberalization. A renegotiation of any free trade deal would take time and be subject to major roadblocks in Congress. Despite these challenges, if he's elected, Petro could try to raise selective import tariffs.
Colombia's growing trade and current account deficits are forcing its presidential candidates, whatever their policy and ideological differences, to take a more defensive position toward trade liberalization. Colombia will not necessarily become more protectionist once a new president assumes office in August, but the pace of current free trade negotiations is likely to slow.