Colombia: Looking for Alternative Partners in the East

By: Hernn Daro Barrero

Introduction In the current international context, Latin American countries LAC- are being affected by different factors, among which are the volatility of commodity prices, the constant appreciation of local currencies -loss of competitiveness- and the growing threat of protectionist policies among developed countries. This situation calls for an active role of LAC governments in order to prevent the possible impacts of the recent financial crises, not only in the short term but in the medium and long run. In some LAC countries, trade dependency of certain foreign markets has been a constant during the last years; however, and regarding the threats and hazards mentioned before, this marked dependency can contribute to increase the negative effects of the crisis in the region. In that sense, exploring and reaching alternative new markets, with high economic growth and high demand, can be a good way to avoid these negative effects. In the specific case of Colombia, the major trade partner has been historically USA, who in 2010 received 42,1% of total exports, followed by Ecuador (4,58%), Venezuela (3,57%) and Peru (2,84%). At the same time, Colombian imports in 2010 came mainly from USA, representing 26,8% of the total imports, followed by China (13,46%), Mexico (9,48%) and Brazil (5,82%)1. It is remarkable that trade relations with Asian countries have been relatively weak, except with China on the imports side and Japan on the exports side, however, when compared with other LAC countries, Colombian relations with the Asian continent seem to be very weak. At this respect, Colombia must look for alternative trade partners in order to prevent, on one hand the negative impacts of the international financial crisis and its threats, and on the other the adverse costs of being trade-dependent of one country.

Source: Departamento Nacional de Estadstica-DANE

This paper presents a review of the trade relations of Colombia during the last years in comparison with other Latin American countries, reflecting the relatively poor performance of Colombian-Asian trade relations, and looks forward to identify if there are opportunities to foster links between South Korea and Colombia taking into account their economies characteristics. The first part presents a general description of the new scenario of international trade, where Asia is playing an active and outstanding role; the second part presents an overview of the macroeconomic situation of South Korea and Colombia, the third part deals with the economic relations of both countries, taking into account the trade of goods and services and bilateral investments; and the fourth part presents the conclusion and the opportunities and challenges for the future.

I.

A new scenario of international trade

During the last decade, trade relations of LAC (Latin America and the Caribbean) countries with it major partners have changed dramatically. The share of trade with Asia has been increasing notably, while trade with EU (Europe Union) and especially with the United States has decreased outstandingly. Even though United States continue to be the major trading partner for the region, its share on the exports of the LAC region fell from 58% in 2000 to 40% in 2010, while LAC imports from US fell from 49% to 32% in the same period. On the other side, trade with the EU remained almost unchanged during the last decade, accounting in 2010 around 14% of the total exports of LAC countries and 14% of it imports.2 In contrast, trade with Asian countries, has been gaining ground during the last years. In 2009 the share of the total exports of the region stood at 22% of, with an increase of almost 16% since 2000. This trend clearly shows the importance of the Asian region as a partner for LAC countries, and indeed, the urgent need of strengthen political and economic relations. Nevertheless, trade relations with Asia vary from country to country. Figure 1 (see annex), shows total exports and imports of the biggest economies of the region (measured by 2010 GDP: Brazil, Mexico, Venezuela, Argentina, Colombia, Chile and Peru). We can see that Colombia and Mexico (with a share of 9% and 3% respectively of the total exports directed to East Asia and South East
2

La Repblica Popular de China y Amrica Latina y el Caribe: hacia una relacin estratgica. CEPAL, 2010.

Asia) in 2010 were the countries with the lowest share of exports directed to that Asian region. Curiously, these two countries are the most dependent on the United States market, with a share of 42% and 80% of the total exports. We cannot deny the political and economic importance of Asia for LAC. The trend shows that the biggest economies in the region have realized that the Asian market has important strengths. A big market, with an increasing demand is being exploited by countries like Brazil, Chile, Argentina and Peru, while countries like Colombia and Mexico keep on depending on a weakened economy. In a context of international crises, with high volatility of commodity prices, the constant appreciation of the Colombian peso and the growing threat of protectionist policies among developed countries, the main objective of the Colombian trade policy should be to explore and reach alternative new markets, with high economic growth and high demand.

II.

Colombia and South Korea in the World

As we have seen, one priority for Latin American countries and especially for Colombia, must be the strengthening of economic and political relations with unexplored economies. In that sense, and taking into account the current negotiation of a Free Trade Agreement between Colombia and South Korea, I would like to point out the opportunities and challenges involved in this relation. Let us start with a general overview of the two economies and a brief summary of it relationship during the last decades. a. Overview of South Korea Almost six decades ago, Korea was one of the poorest countries in the world, with a GNI per cpita of around USD 50. However, after an efficient and effective use of foreign aid and a successful export oriented policy, the country has become the 13th economic power, reaching an estimated GNI per capita in 2010 of USD 18.890 (current USD)3. During the last two decades Korea has been consolidating its role as a donor and now is actively contributing to the international development goals, through both bilateral aid (grants and loans) and
3

data.worldbank.org

multilateral aid (Contributions to UN system and other Multilateral Institutions and Subscriptions to International Financial Institutions). In that sense, Official Development Assistance - ODA coming from Korea shows an increasing trend since the nineties, reaching in 2010 a disbursements estimate of USD 1.17 billion and representing a 0.12% of the countrys GNI. Korean economy has demonstrated to be strong during the last years. After the Asian Financial crisis in 1997-1998, the economy showed a rapid recovery, in part because of a number of economic reforms, including greater openness to foreign investment and imports.4 In that sense, South Korean economy grew during 1999-2007 at an average rate of 6%, overpassing all the negative effects of the previous crisis. However, in 2008 and due to the international financial crisis started in United States, the economy slowed to 2% and in 2009 registered an almost null growth (0,2%). Nevertheless, in late 2009 the economy began to recover, supported in the growth of exports, low interest rates, and an expansionary fiscal policy. Thus, growth exceeded 6% in 2010 (Figure 2). Nowadays, the South Korean economy's long term challenges include a rapidly aging population, inflexible labor market, and overdependence on manufacturing exports to drive economic growth.5 Figure 2

South Korea's GDP Growth

10% 5% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -5% -10% Source: databank.worldbank.org

As it was mentioned before, the great success of the Korean economy is attributed in large part to its export oriented policies for growth. In 2009, exports stood at 49,8% of the total GDP, while imports accounted for 45,9% (Figure 3).

4 5

https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html South Koreas Report, World Fact Book, CIA.

Figure 3

Korea Exports and Imports Share in GDP (% of GDP)

60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2005 2006 2007 2008 2009 Exports of Goods and Services Source: databank.worldbank.org Imports of Goods and Services

As for Goods, Koreas exports have experienced an important growth during the last years (from current USD 289.891 million in 2005 to USD 464.300 million in 2010), which has contributed to maintain a surplus in its current account and to accumulate an important amount of international reserves. The main exporting products of Korea in 2010 were Machinery and Transport equipment which accounted 57% of the total exports, followed by Manufactures with 23% and Chemical and related products with 10%. On the other side, the main products imported were Machinery and Transport equipment with a share of 29% of the total imports; Mineral Fuels, Lubricants and related materials with a share of 28%; Manufactures with 21% and Chemical and related products with a 9% of the total imports.6 As for Services, total exports stood at USD 81.570 million in 2010, while imports registered a total of USD 92.978 million, creating a deficit of USD 11.408 million. The main exporting sectors were Transportation which accounted 46,6%, followed by Other commercial services with a share of 41,4% and Travel services with 12%. On the other hand, imports of services behaved similar, with shares of 31%, 50% and 19% on Transportation, Other Commercial Services and Travel.7

6 7

Data from the Korea International Trade Agency. 2010 Trade Profile of Korea. www.stat.wto.org

b. Overview of Colombia As most of the Latin American countries, Colombias economy has shown a moderate growth during the last decades. During the 1960s and until beginning of the 80s, the Import Substitution Model implemented by the government allowed an average growth rate of 5%. During the 80s, the so called lost decade of the Latin American countries and the debt crisis, slightly affected the economy and the average growth stood at 4%. Nonetheless, the effects of the different international financial crises during the 90s and the outbreak of the local real estate bubble in 1998 had severely effects on the Colombian economy leading to a negative growth of -4,2% in 1999. During the last decade, several reforms regarding pro-market policies, trade openness, fiscal performance, foreign investment and security, among others, allowed the economy to recover and to have a sustained rate of growth during 2001-2007, reaching in that year a growth of almost 8%. However, due to the global financial crisis and the weakening demand for Colombian products, the economy grew 2,7% and 0,8% in 2008 and 2009 respectively (Figure 4). Fortunately, the prudent fiscal policies and local stable financial system permitted a moderate recovery and in 2010 the GDP grew 4,4%. Nowadays, the current administration of President Juan Manuel Santos has based the strategy to stimulate economic growth in five pillars: extractive industries, agriculture, infrastructure, housing, and innovation. Several reforms, among which are the new legislation to better distribute extractive industry royalties, pro-business and market policies, and improvements of domestic security, as a continue of former President Uribes policies, are intended to keep on stimulating growth and Foreign Direct Investment. Nevertheless; inequality, underemployment, and the lack of an adequate infrastructure remain substantial challenges to achieve economic growth and poverty reduction. Figure 4

Colombia GDP growth

10% 5% 0%

1969

1983

1961

1963

1965

1967

1971

1973

1975

1977

1979

1981

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

-5%

Source: databank.worldbank.org

2009

In terms of external commerce, during the last years Colombia has experienced surpluses in its trade balance reaching in 2010 a total of USD 1.468 million and up to September 2011 a total of USD 3.236 million. However, as a share of the total GDP total exports accounted only 13,9% and imports only 13,4% in 2010 (Figure 5). Figure 5

Colombia Trade Balance (USD millions)

50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 0.0 -10,000.0

Trade Balance

Exports

Imports

Source: Departamento Nacional de Estadstica de Colombia. DANE

Colombian exports have experienced an important growth during the last years, from USD 12.330 million in 2001 to USD 39.820 million in 2010, with an average growth rate of 14,77%. This has contributed to accumulate an important amount of international reserves. Thus, the main exporting products of Colombia in 2010 were Oil and its Derivatives, Coal, Coffee and Ferroniquel, and they accounted 63,3% of the total exports. On the other side, the main products imported were Machinery and Transport equipment with a share of 12,1% of the total imports, followed by diverse capital goods and raw materials for the industrial sector. As for Services, total exports stood at USD 4.373 million in 2010, while imports registered a total of USD 7.841 million, creating a deficit of USD 3.470 million. The main service exporting sectors were Travel, which accounted 47,6%, followed by Transportation with a share of 27,6% and Other commercial services with 24,8%. On the other hand, the main services imported were Transportation with a share of 35,9% and Travel with 23,3%.

c. Trade and Investment Relations between Korea and Colombia The Republic of Korea established diplomatic relations with the Republic of Colombia in 1962, after being the only Latin American country supporting South Korea in the Korean War (1953) and participating in it. Since that time, both countries have experienced an amicable relationship, based on different agreements related with cultural, science and technology cooperation and trade issues. During the last years, Colombia and Korea have been devoted to promote their relations, with economic and technical cooperation. There has been an increasing trend on bilateral trade flows, which stood in 2010 at approximately USD 1,8 billions, as well as an important increase of investment. Due to this trend of strengthening ties between both countries, Colombian and Korean governments have had different meetings, both political and economic, looking forward to consolidate the current relationship. In this regard, the most important issue nowadays is the Free Trade Agreement (FTA), which is currently being negotiated. It is expected that with the sign and implementation of the Agreement great benefits for both countries will be achieved. As it was mentioned before, exports and imports of Korea and Colombia has increased during the last years. However, trade balance between both countries shows a deficit for Colombia over recent years. In 2009, total exports of Colombia to Korea reached only USD 107 million, while imports stood at USD 620,8 million, creating an imbalance in trade of USD 514 million (Figure 6).8 Figure 6

Informe de Exportaciones, Inversin Extranjera y Turismo Repblica de Corea. Proexport Colombia, Febrero de 2010.

Out of the total exports from Colombia to Korea, 63% were traditional goods, mainly ore materials and concentrates, like nickel, copper and aluminum. As for non-traditional goods, the main products exported were those related with the metallurgic sector, chemical sector and derivatives of coffee. On the other hand, the most imported products from Korea were those related with machinery and transport equipment and high technology intensive products, such as motor vehicles and telephone sets. As for non-traditional imports, the main imported products were vehicles, plastics and industrial machinery. When compared trade relations of other Latin American countries with Korea, we can see that Colombia is far behind from the others. For instance, in 2007, Chile imported around USD 4.184 million and Brazil imported USD 2.794 million. Colombia imported only USD 834 million. If we look at the exports side, the scenario is worse. Colombia is one of the countries of Latin America with less trade relation with Korea.9 Lets take a look at the investment side. Koreas FDI has shown an upward trend over the last years, with two high peaks in 2007 and 2008. In that sense, Koreas FDI passed from USD 4.999 million in 2000 to USD 15.620 million in 2007 and is estimated to reach USD 7.949 million in 2011.10 Regarding Greenland projects (totally new projects in an area where little or no physical infrastructure or facilities exists), Korean FDI is concentrated in the metals sector, semiconductors and vehicle assembling. In terms of recipients countries, China is the major beneficiary, with a participation of 27,7% during 2003 and 2009, followed by the United States with a 10%, India with an another 10% and Vietnam with an 8%.11 Along with the general rise of FDI outflow from Korea to the world as a whole, Koreas investment in the Latin American region has maintained a continuous increase as well. Koreas FDI in Latin America increased from US$ 121.6 million in 2001 to US$ 1616.9 million in 2008. The absolute amount has increased, but, due to the worldwide financial crisis, the growth rate for investment in 2 008 slowed from that of the previous year.12 (Figure 2)

Ibid. Ibid. 11 Ibid. 12 Graduate School of International Studies, Seoul National University, Colombia-Korea FTA Feasibility Study, Pg 50, 2009.
10

Figure 2

The main sectors where Korean FDI is directed are Metals with a share of 41,9%, Electronics with a share of 22,6% and Vehicle Assembling with 12,9% (Open, ongoing and announced projects). However, Colombia is lagging again. The main recipient country in Latin America is Brazil, with a share of 55% of the total FDI to the region. After that, Mexico participates with a share of 30%, followed by Dominican Republic with 5%, Venezuela with 3% and Colombia with 3%. In the specific case of Colombia, Koreas FDI is mainly directed to commerce (Automobiles and Electronic Components) with a share of 97,4%. As we have seen, trade and investment relations between Colombia and Korea are weak, when compared to the world, and especially with Latin American region. Countries like Brazil, Mexico, Chile and Peru are taking advantage of new markets and partners all around the world, and conversely, Colombia continues being highly dependent in terms of trade and investment of the United States Market.

III.

Conclusion

Latin American countries has suffered the effects of the recent crises and the risk of further implications to it economies are still present. The slow growth in the United States and in the EU, along with the decreasing of the demand for commodities produced in the region presents a critical

outlook for LAC stability. In that sense, alternative partners around the world must be sought in order to diversify the risk inherent to international dynamics and avoid future impacts for the region. On the other hand, we can see how some countries like China, India Korea and South East Asias countries have shown interesting rates of growth and signs of an increasing demand of Latin American products. In that sense, countries like Brazil, Argentina, Chile, Peru and Venezuela have been working over the last years on the strengthening of trade, investment and political relations with Asian countries. However, Colombia is lagging behind. When we compare trade and investment flows of Colombia and other Latin American countries with Asia, it is not difficult to see that we are far behind from the main economies of the region. Colombias economy is high dependent on the United States, and perhaps this is the main reason why relations between Colombia and Asia have been so weak. The close political relationship of these countries and the convergence of ideologies have merged into the economic sector, and that explains why USA is the major partner of Colombia in terms of trade and investment. On the other hand, we cannot deny that cultural barriers have contributed to the fragile relations with Asia and issues like the language, manners and the time make it very difficult to build a solid relationship. However, the task is not impossible, and this has been proven for other Latin American economies. Asian countries have several strengths, and have shown to be a strategic partner for some Latin American economies. One of the countries with a stable economy, increasing demand and constant flows of FDI in that region is South Korea. In that way, and taking advantage of its historic relations with Colombia, the construction of a strong partnership between both countries can be the beginning to diversify commercial and political relations in the east. Korean economy has demonstrated to be strong during the last years. After the Asian Financial crisis in 1997-1998, the economy showed a rapid recovery, and grew during 1999-2007 at an average rate of 6%, overpassing all the negative effects of the previous crisis, and in 2010, after the slowdown of the world economy in the last three years, the economy grew at more than 6%. On the other hand, Colombias economy has also shown to be in the right way. From 2001 to 2007, the GDP grew at an average rate of 5%, and after the financial crisis (2008-2009) the growth rate stood at 4,4% in 2010. During the last decade, several reforms regarding pro-market policies, trade

openness, fiscal performance, foreign investment, pro-business and market policies and improvements of domestic security, make it possible to forecast a stable economy in the next years. Finally, and regarding economic, trade and investment situation of both countries we can point out certain aspects. First, Colombian economy is at risk because of it high dependency on United States market. Second, relations between both countries has increased over the last years, however, they might be far behind it real potential. Third, Colombian main imported goods are Machinery and Transport equipment, and Korean main exported goods are the same, Machinery and Transport equipment.13 On the other hand, Colombian main exporting products are Koreas main imported products: Natural Resources as oil, coal and nickel, and fourth, Colombia is becoming as an attractive destination for FDI. At the same time, Korea is intended to increase FDI all around the world and the characteristics of Colombian Natural Resources are very convenient for Korean investors. There might be several advantages for both economies if the strengthening of the relations is successful. However, both Colombia and South Korea need to realize the advantages of finding alternative partners in other regions than the traditional ones. The FTA currently under negotiations is the perfect scenario to enhance and consolidate economic and political affairs, and its outcome will determine the future partnership of both nations.

13

Ibid.

References

Statistical Yearbook for Latin America and the Caribbean, ECLAC, 2010. CEPALSTAT, Bases de Datos y Publicaciones Estadisticas, CEPAL., http://websie.eclac.cl/infest/ajax/cepalstat.asp?carpeta=publicaciones World Bank Database, www.data.worldbank.org BADECEL, Base de Datos de Comercio Exterior, CEPAL. La Repblica Popular de China y Amrica Latina y el Caribe: hacia una relacin estratgica. CEPAL, 2010. Korea International Trade Association, Statistics, global.kita.net World Trade Organization, stat.wto.org Departamento Administrativo Nacional de Estadstica de Colombia, www.dane.gov.co Proexport Banco de la Republica Informe de Exportaciones, Inversin Extranjera y Turismo Repblica de Corea. Proexport Colombia, Febrero de 2010. Graduate School of International Studies, Seoul National University, Colombia-Korea FTA Feasibility Study, 2009.

Annex Figure 1 (Source: BADECEL, ECLAC)

Argentina Imports by Origin

25,000,000.00 20,000,000.00 15,000,000.00 10,000,000.00 5,000,000.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East and South East Asia ALADI Europe Union United States Rest of the World

Argentina Exports by Destination

30,000,000.00 25,000,000.00 20,000,000.00 15,000,000.00 10,000,000.00 5,000,000.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East and South East Asia ALADI Europe Union United States Rest of the World

Brasil Imports by Origin

60,000,000.00 50,000,000.00 40,000,000.00 30,000,000.00 20,000,000.00 10,000,000.00 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007 2,008 2,009 2,010
East and South East Asia ALADI Europe Union United States Rest of the World

Brazil Exports by Destination

60,000,000.00 50,000,000.00 40,000,000.00 30,000,000.00 20,000,000.00 10,000,000.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East and South East Asia ALADI Europe Union United States Rest of the World

Chile Imports by Origin

20,000,000.00 15,000,000.00 10,000,000.00 5,000,000.00 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007 2,008 2,009 2,010
East and South East Asia ALADI Europe Union United States Rest of the World

Chile Exports by Destination

35,000,000.00 30,000,000.00 25,000,000.00 20,000,000.00 15,000,000.00 10,000,000.00 5,000,000.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East and South East Asia ALADI Europe Union United States Rest of the World

Colombia Imports by Origin

14,000,000.00 12,000,000.00 10,000,000.00 8,000,000.00 6,000,000.00 4,000,000.00 2,000,000.00 -

East and South East Asia

ALADI

Europe Union

United States

Rest of the World

Colombia Exports by Destination

18,000,000.00 16,000,000.00 14,000,000.00 12,000,000.00 10,000,000.00 8,000,000.00 6,000,000.00 4,000,000.00 2,000,000.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East and South East Asia ALADI Europe Union United States Rest of the World

Mexico Imports by Origin

160,000,000.00 140,000,000.00 120,000,000.00 100,000,000.00 80,000,000.00 60,000,000.00 40,000,000.00 20,000,000.00 -

East and South East Asia

ALADI

Europe Union

United States

Rest of the World

Mexico Exports by Destination

300,000,000.00 250,000,000.00 200,000,000.00 150,000,000.00 100,000,000.00 50,000,000.00 2000 2001 2002
ALADI

2003

2004

2005

2006

2007

2008

2009

2010

East and South East Asia

Europe Union

United States

Rest of the World

Peru Imports by Origin

12,000,000.00 10,000,000.00 8,000,000.00 6,000,000.00 4,000,000.00 2,000,000.00 -

East and South East Asia

ALADI

Europe Union

United States

Rest of the World

Peru Exports by Destination

10,000,000.00 8,000,000.00 6,000,000.00 4,000,000.00 2,000,000.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East and South East Asia ALADI Europe Union United States Rest of the World