Tuesday, March 14, 2006

Trade Deficit between Colombia and Venezuela

Today the economic section of El Nacional (subscription only, sorry!) carried numbers from CAVECOL, the organization that promotes trade between Venezuela and Colombia. Those are very important, perhaps even essential numbers, since Venezuela and Colombia, due to their geographical situation, are almost obliged to become their mutually largest trading partners. Such is the case in other more famous duets such as Canada and the US or France and Germany.

Looking at these numbers is yet another way to look at chavismo’s dismal failure in international trade and general economic activity. But before I get into details, the graph. Since I did not like the presentation of El Nacional (it seems that I never like their numbers presentation nor much more those of El Universal) I preferred to do my own thing. The original graph showed the imports and exports from both sides since 1997 (no numbers from before were given but for the point I will try to make they are not really necessary). What I did is to take the differential from each year and add it to the total from preceding year. Thus each given number reflects how much Colombia or Venezuela have gained against the other party since 1997, the year arbitrarily chosen as the initial starting point. The graph below shows how progressively since Chavez came to office Venezuela has been losing the trade contest, and big time.

So, what does this all mean? Bad news for the future of the relationship between Venezuela and Colombia. In spite of a huge oil price bonus, Venezuela can find little to export to Colombia as this one keeps improving its energetic situation, thus rendering null any oil export advantage that Venezuela might have. At some point the accumulated Venezuelan debt towards Colombia will become a financial problem, even more so considering that CADIVI, the currency exchange control system is unable to help stem imports from Colombia.

How could this happen? Chavez from the start has been embroiled in stupid shipping wars. For example, early in his term he caved in to the Venezuelan trucking industry with a scheme that forced Colombian goods shipped to Venezuela to be transferred to Venezuelan trucks at the border, increasing of course delays and costs. But soon the Venezuelan own management problems came to play. Currency devaluations have plagued Venezuelan exporters as such devaluations far from favoring them played havoc with their finances, making it difficult to invest for retooling and improved productivity . The productivity of the Colombian economy seems to have increased during the Uribe years as business confidence returned. Now the Colombian Peso is above the Venezuela Bolivar and still the trade gap keeps increasing! And Venezuelan local business confidence, and thus investment, is near zero, the state being the only real investor.

But there was also a possible strategic decision from Chavez himself. Chavez has decided at some point to distance himself from the Andean Community and to look towards Mercosur (Uribe and Toledo being pro markets). That might not be bad policy by itself but in the current state of the Venezuelan production system a Mercosur bond might aggravate the Venezuelan situation: Venezuela has nothing to export to Mercosur but oil and derivatives whereas its agriculture could be devastated by much cheaper imports from Brazil. Not to mention the political decision to subsidize Cuba at great expense and seek business partners that really have little to offer Venezuela but trouble (e.g. Iran).

Meanwhile the Andean community countries are negotiating free trade agreements with the US, with Colombia singing a preliminary agreement last week. Why would Colombia deal with the US as it is making a killing on Venezuela? The basic reason is the future expansion of trade between Venezuela and Colombia will soon reach a plateau. Not only shipping costs will increase as more and more empty trucks will come back to Colombia, but the Venezuelan recent economical increase is fueled on consumption and commerce only, not on production. This is a consequence of the oil easy money and Chavez policy of subsidies to the lower class through MERCAL and other programs to shoulder his electoral base. Uribe and Colombia, with more vision than Chavez, are taking the painful steps to reach wider markets now, when the going is not too bad and when part of the cost can be paid by the huge trade advantage with Venezuela, which certainly generates precious earnings for the expected expenses in penetrating the US market. In other words, unwillingly Chavez will finance the Free Trade agreement between Colombia and the US (if this one is ratified by the US congress who would be a fool not to do so!)

What will this mean for Venezuela? Higher consumer prices, a more "landlocked" economy, further trade isolation. Economists have long discovered the advantages of close commercial ties with your immediate neighbors. Not only you can get goods cheaper by saving on shipping, but also you get peace and quiet. Today a conflict between the US and Canada, or between France and Germany, is unthinkable. But in 1812 Canada and the US were at war (even through the British intercession) and as late as the 1860ies, the Civil War US was looking apprehensively to the North. As for France and Germany I will not insult the reader intelligence.

In a not so distant future, with all the border problems between Venezuela and Colombia (from territorial disputes to constant crossing of Narco folks and FARC guerillas) a lack of mutual commercial interests could render relations very tense between the two countries. Meanwhile Chavez pursues stupid pipe dreams of ecologically disastrous natural gas pipelines to deliver prohibitively expensive gas to Argentina. We are back to the good old days of barter and the COMECON. Some people never learn. Or is that some people are unable to learn?

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