assessments

Sep 10, 2001 | 05:00 GMT

5 mins read

Venezuela: Building Trade Barriers

Summary

Venezuela's trade minister has threatened to impose a range of import quotas and tariffs to stem a rising tide of imports and stimulate domestic industry. The move may bolster President Hugo Chavez's waning domestic political support. But his increasing intervention in the economy will deter private investment and hinder economic growth while deepening Venezuela's international isolation.

Analysis

Venezuela's minister for trade and production, Luisa Romero, has announced a plan to reduce the country's import bill by 20 percent through a mixture of quotas, tariffs and subsidies, the Financial Times reported Aug. 22. Venezuelan industrial and labor groups reacted positively to the announced intervention.

With cheap imports flooding the country and his popularity waning, President Hugo Chavez is counting on the trade barriers to stimulate domestic industry and reinvigorate his political support. But the negative fallout from Chavez's increasing economic intervention, together with possible retaliatory measures by Venezuela's trading partners, will outweigh any positive economic impacts.

Large exporters to Venezuela, including Volkswagen, Nestle, Parmalat (an Italian dairy products manufacturer), Ford and General Motors, could be affected directly by the trade barriers. Raising prices on foreign exports will also further deteriorate Venezuela's relations with the United States, Europe and many of its South American neighbors.

Chavez's announcement comes as his populist "Bolivarian Revolution" is faltering. The president's popularity is steadily declining due to the stalling of promised government reforms, with only six minor laws passed in the new National Assembly, according to the Associated Press.

This total was far short of the 100 touted by pro-Chavez lawmakers when the legislature was changed to a one-house body last year. The legislative inefficiency has blocked agriculture, labor, tax and pension reforms meant to stimulate job creation, promote growth and fight corruption.

Concerns over Chavez's economic policies, which many investors view as antithetical to a free market, have intensified capital flight and put the brakes on foreign investment. The Economist Intelligence Unit (EIU) estimates that more than $6 billion in private capital fled the country last year. Meanwhile, the reliance on public spending to spur growth and the failure to reform the labor market strengthen the pressures that cause high inflation.

To counter the capital flight and persistent inflationary pressures, Caracas is staunchly defending its currency, the bolivar, which economists believe to be 40 percent to 50 percent overvalued. The government earmarked $2 billion this year to defend the bolivar and burned through $2 billion in foreign reserves through the first five months of 2001, according to an EIU report. Chavez as a result can point to moderate success in recently reducing inflation the lowest level in 14 years, according to the Financial Times.

But the strong bolivar policy has also made imports cheaper and exports more expensive, slowing domestic growth. Imports jumped 13 percent in 2000 and have risen by 64 percent since 1996 while average import prices dropped for five straight years between 1996 and 2000 by a cumulative 13.2 percent, according to the EIU. Independent economists cited by the Financial Times predict that total imports will rise from $16.1 billion in 2000 to more than $18 billion this year, attributable primarily to the overvalued bolivar.

Chavez's failure to create jobs and stimulate the economy through his economic reforms, combined with his waning popularity, has brought him back to an old bag of political and economic tricks: combining increasingly centralized control of the economy with growing protectionism.

Romero indicated tariffs, quotas and subsidies could be introduced on targeted products in areas such as agriculture, food and textile products. Some luxury goods, like Scotch whiskey and imported cars, could also be targeted, the Financial Times reported.

Such measures would quickly raise the price of imports, but the lack of competition in the market would also lead to an increase in the price of domestic goods. Inflation would begin creeping back up, which could in turn lead to price controls.

On the export side, Venezuela could encounter retaliatory measures not only from its South American neighbors, particularly Colombia and Brazil, but also from the European Union, Japan and the United States. Reciprocal tariffs would make Venezuelan exports less price-competitive, negating any potential economic benefits of the Venezuelan tariffs.

More damaging to Venezuela, however, will be its standing within the global economic community. Chavez's administration already suffers from the perception that its economic policies are held hostage to its political objectives. The use of outdated import-substitution policies and possible price controls will add to investor concerns that the Venezuelan economy is a risky investment. This will intensify capital flight, deter private investment and further erode the country's dwindling foreign currency reserves.

History has shown that, in most cases, protectionism and centralized control of the economy make for bad economic policy. If Chavez follows through with the proposed measures, Venezuela will be punished by the global economic community and will have nothing but oil revenues to fall back on. And when the price of oil falls, Chavez's administration could soon follow.



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