Colombia, Venezuela and Exports: Biggest Loser Edition

A Bloomberg article today touches on how the diplomatic dispute with Venezuela is affecting Colombia’s economy, as it has resulted in plummeting trade with their second most important trading partner. Maladjusted wrote awhile back about how a Mockus presidency could be good for business if it means a reopening of trade between Venezuela and Colombia. Well, it doesn’t look like Mockus has a snowball’s chance in hell to actually win this thing, but as updated numbers are out from Colombia’s DANE, it’s worth taking a look to see how continued diplomatic problems (almost assured with Santos) will continue to weigh on the economy. Already, as Bloomberg points out, Colombia has the second lowest growth forecast in the region, and the collapse in trade is at least part of the problem. So, lets run some numbers through Maladjusted Charts and see what we can find out, has Colombia found new markets for these goods? What sectors are the worst hit?

First off, lets get the basics down, just how much has trade with Venezuela collapsed, and who has picked up the slack?



Before the drop off from Venezuela, the US was still Colombia’s largest trading partner, but was followed by Venezuela (all alone in second place), Ecuador and of all places, Switzerland. But through the first 5 months of this year, the US has remained its dominant position, while China has catapulted from obscurity to accounting for nearly 8% of total exports, about double that of Venezuela or Ecuador, as the chart below shows.



So from the above, it does seem that Colombia has fared pretty well finding alternative markets for their exports to Venezuela, indeed total exports increased over the same period last year. Unfortunately for some, looking at the breakdown of goods reveals a slightly different picture. Some 23% of exports with Venezuela during the period of Jan.-April 2009 were animals and animal products, a sector that accounted for around 5% of Colombia’s total exports. This year, however, Venezuela has stopped buying these products, and the sector has taken an extreme hit, making up less than 1% of total exports so far this year. The chart below shows how while exports to the US have skyrocketed, none of it has come from animals and animal products.



So what has accounted for the rapid rise in exports to the US? Well, simply, oil. Colombia has increased their oil production this year, and coupled with a rise in prices from last year, exports of combustibles accounts for nearly the entire rise in total exports, with most of the surplus going to the US.



Another sector that seems to have taken a hit from the Venezuela dispute is textiles. Overall, despite being a smaller component of total exports, textiles accounted for the second largest drop from last year to this year after animals and animal products. Exports to Venezuela of textiles dropped by $125 million, while overall exports of textiles fell by $105 million. As the chart below clearly shows Colombia has been unable to replace the Venezuela market for textiles.



In the end, what this means is summed up nicely in a quote from the Bloomberg article referenced earlier, “Colombia is selling more oil to the U.S.,” said Sandy [an economist with Credit Suisse Group AG]. “For the industrial sector and food producers, more sales to the U.S. don’t do anything.”

So while total exports have increased over 2009, it’s really not saying much as 2009 was clearly not the best year. And although trade has increased greatly with China and with the US, there have been sectoral shifts more so than straight replacement. I would say that the increased trade with China is definitely a good thing for Colombia, since before the recent increase Colombia exported less to China as a percent of total exports than just about every other country in South America. On the other hand, increasing dependence on the US may not be the most desirable outcome here. I’m sure the US will be happy to buy up Colombian oil…especially over Venezuelan oil, but look at Mexico…do you really want to be that tied to the US economy? Not to say that being tied to Venezuela’s economy right now sounds very good either, but looking at the next few years up north is not very promising. The UCLA Anderson Forecast was just released and projects growth for the next three years below the 3% long-term nominal growth rate. And yes, unemployment is expected to still be over 8.5% by 2013. Not exactly a booming export market.

But more importantly, and certainly more importantly for those most affected in Colombia by the trade fall off, are the sectoral shifts that will occur over the medium term if exports to Venezuela don’t return, or if new markets for those products can’t be found. While the overall export picture doesn’t seem dire, the industries that have been most affected, animal farmers and textile producers have been severely hit. Farmers, while they account for a smaller percent of GDP, make up nearly 20% of the workforce and have been the worst hit by the dispute with Venezuela.

Well, I’m sure this is WAY more than you ever wanted to know about trade between Venezuela and Colombia, I think it may be more than I wanted to know, but there ya have it. Next time maybe we can see if Venezuela has found new markets to import all that food that they no longer get from Colombia….then again, it’s probably just rotting in a container somewhere anyhow…

Mockus good for business?

So maladjusted hasn't done any scientific study on this, but the guess is that most casual observers would think the Colombian business community will support Santos in the upcoming election. It's not like Mockus' rise in the polls is rattling the markets or anything like that, but business generally likes continuity (and right wingers), not newcomers who dress up in super hero costumes and dispatch mimes to ridicule traffic violators. That said, one thing businesses like even more are profits. Currently, exports to Venezuela have collapsed (due to some testy relations, we'll say) and while the US has graciously stepped in (see the graphs below), the fact remains that Venezuela is right next door and even though they are pushing an FTA with the US, does Colombia really want to be EVEN MORE dependent on the US (just look at Mexico).

According to Reuters, "Colombia says the trade conflict could trim around one percent off its economic growth this year." That ain't no joke, especially not when your coming off this past year. The article also mentions that Colombia has relatively few exports to China compared to the rest of the region. So maybe to the extent that China takes the place of Venezuela that could be a good thing, but it seems the US is picking up most of the slack.


So this is where Mockus' statements about Venezuela come into play. During the presidential debate the other night Mockus stressed the need to separate relations with Venezuela from those with the US. This would be a serious break from the Uribe years in Colombia, where it seemed like their privileged relationship with the US was always put before everything else. Given that Colombia's neighbors aren't too thrilled with Santos, it seems pretty clear that Mockus would be the candidate most likely to repair relations with Venezuela and Ecuador. And who stands to benefit the most from that? Colombian exporters...



So maybe I'm over estimating the effect this is having, and how important this is for Colombian businesses (in which case let me know). Regardless, from everything I've read Mockus' economic policies would not differ much from Santos, and in any case it would be hard to argue that better regional relations would be a BAD thing for business.

(all images courtesy of Colombia's DANE)

The Count: China edition

19.3...

...is the percentage of total Latin American and Caribbean exports that will go to China in the year 2020. And before you ask: no, maladjusted is NOT clairvoyant...... or at least not yet.

According to a study prepared by ECLAC the world's workshop will soon also surpass the European Union as the second largest destination for Latin America and the Caribbean's exports. The graph below shows the share of the region's exports that go to its top three markets. The key take away here is that over the last ten years the region is significantly less dependent on US markets than before and that China has rapidly become an important alternative destination for exports.

[Latin America and the Caribbean: top three export markets share of total 2000-2020 (percentages)]

Of course, the U.S. will continue to be the region's main export market but it's relative importance will have dropped tremendously, from 38.6 percent in 2009 to 28.4 by 2020. The EU's share will more or less stay the same while China's will continue its impressive increase, from 7.6 percent in 2009 to 19.3 in 2020.

Yes indeed, while the US and EU were stuck in a severe recession last year, China's economy still grew 8.7%. Also, while the value of exports to the US and EU plummeted 26 and 28 percent, respectively, the value of exports to China actually grew 5 percent.

Significantly, the assumptions underlying ECLAC's projections don't require Chinese demand for the region's products to continue growing at the same pace. As the report notes:

"If demand for our products in the United States, European Union and rest of the world continues to grow at its current pace, and assuming that Chinese demand only grows at half its current pace, China would surpass the European Union in 2014 and would become the second largest market for the region's exports."

As can be seen below, China already represents a key export market for many Latin American countries. 13% of Chile's exports go to China, followed by Peru, with 11% and Argentina, with 9%.

[Latin America and the Caribbean: Asia-Pacific country/regions average export shares 2006-2008]

But what's more, it attained this huge share of Latin American exports very, very, very quickly. Between, 2000 and 2008 it climbed from being Brazil's 12th largest export market to being number one. For Costa Rica it went from being 26th to second. Chile: from 5th to first. Colombia: 35th to fourth. Venezuela: 37th to third.

But there's a downside to this story. The pattern of trade between China and Latin America and the Caribbean is not very encouraging. With a few exceptions, the region is only exporting raw materials.

[Latin America and the Caribbean: technological content of exports to China, 1995-2008]

Not much of a clear trend in this one, except for that big blue space at the bottom. Yup, that shows the share of raw materials in total exports to China increasing.

So in the end, if these projections hold up, by 2020 Latin America and the Caribbean will be less dependent on US markets and much more dependent on Chinese ones. It would be nice if the moral of the story was that trade between developing countries meant a better pattern of trade for the region, but so far this doesn't seem to be the case. There are some exceptions though. For instance, virtually all of Costa Rica's exports to China are high-tech goods. Mexico also exports a large amount of high-tech manufacturing. But at the end of the day these are just exceptions.