The results of exports from Colombia to Canada after one year of signed the FTA are bad. Colombia exported US$614.1 million between august of 2011 and july 2012 where 43.4% was crude oil, we can export this product without FTA. If one takes out this crude oil, the annual growth of exports were negative in 2.2%, it means the FTA between Colombia and Canada has not came with benefits to Colombians. What is the government doing wrong?, one can point two facts: first, government is signing FTAs without targets to improve manufacturing production inclined to export; and the second fact is firms are not investing to reach economies of scale. This note shows two markets (articles of plastics and bakers’ wares) that can get benefits of this FTA if they improve their technology. At the moment, there is trade of these products between Colombia and Canada, if canadians do the first step in improving the technology, they will supply local market and Colombia will face a decreasing of local firms in about 1.000.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Colombia has been signed lot of Free Trade Agreements (FTAs) in the last years. Colombia-Canada FTA is one of most important due to Canada has a population of 35 million and a Gross Domestic Product per capita of US$41,100 under PPP in 2011, therefore this market is so valuable for colombian manufacturing sector. However, it appears that government and manufacturing sector in Colombia just are interesting in signing FTAs and they forgot that Colombia must be ready to be competitive in this global and integrated economy. To point out this fact, Colombia exports to Canada crude oil mainly (approximately 40%-50% of exports to Canada is crude oil), this product adds low value to the economy and we can export it without FTA. Moreover, since august of 2011 when this FTA was signed, exports without crude oil to Canada showed a negative annual growth rate of 2.2% (august to july period), in addition total exports included crude oil to Canada follows a decreasing adjusted seasonal path until point this exports are beneath of its long run trend as figure 1 shows (blue line is beneath red line).
Figure 1. Exports from Colombia to Canada
2005-2012*
(US$ thousand monthly seasonal adjusted)
Red line: long run trend through Hodrick–Prescott filter.
Blue line: monthly seasonally adjusted data.
Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), Trademap and own calculations.
How make a market integrated
i. Articles of plastic case (HS code: 392690)
These negative results for getting a market integrated are due to Colombia government did not think how to insert local manufacturing sector in this FTA. There are lot of firms which can enjoy benefits of Colombia-Canada FTA. For instance, those firms that produce Articles of Plastic (HS code: 392690) can enjoy FTA with Canada.
If one pays attention to the value exported of this product by local firms such those pointed on table 1, one realized that there is a potential demand, of course there are canadian firms which produce this product and they export this product to Colombia also, therefore pops up a market integration.
Table 1. Market integration: articles of plastic exported to Canada in 2011
(HS code: 392690)
Local firm
|
FOB exports US$
|
Share (%)
|
Plásticos Rimax
|
239,807
|
30.7
|
Ajover
|
519,699
|
66.6
|
Plastinovo
|
16,942
|
2.2
|
I.T. Hincapie Sportswear
|
3,116
|
0.4
|
Halliburton Latin America
|
889
|
0.1
|
Total
|
780,453
|
100.0
|
Market integration is a processes that requires improving technology in order to generate economies of scale, in other words as the volume of production increases the average cost goes down. Unfortunately there are approximately 388 firms which produce this type of plastics (HS code:392690) in Colombia and they do not show economies of scale as figure 2 shows, we must be aware of it. This figure shows the relation between real income growth and real cost growth (at 2005 prices) for firms that produce this plastic in Colombia. The econometric result is straight, as real cost increases in 1.0% the real income increases in approximately 0.959%, this results shows the use of diseconomies of scale, to say that this market shows economies of scale the real income growth should have been higher than 1.0%. In other words, the fact of articles of plastic is that as volume of production increase, then the average cost increase also. At the moment there are 4 firms and 1 international trading firm (I.T.) which export this product to Canada, if these firms and the other 384 do not pay attention to improving their technology, they will miss the market integration with Canada and they will be out of the market due to there are canadian firms which produce this product at lower cost.
Figure 2. Articles of plastic: Real income growth and real cost growth for 388 firms between 1995-2011* **
** Data fit by Fix Effects panel data model. Model significative under a significance level of 0.01 and Hausman test for Fix Efects.
Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), own calculations.
ii. Bakers’ wares case (HS code; 190590)
Articles of plastic is not the only product that shows a potential market integration, for instance baker’s wares is a product that can be exported to Canada and brings high welfare to colombia society evaluated in jobs and profits. The value exported of this product reached US$98 thousand in 2011 and just 4 firms export high volume of this product to Canada as table 2 shows, of course there are international trading firms from Colombia which export it also. However, there are at least 147 firms in Colombia which produce this bakers’ wares and they do not export this product to Canada. Moreover, there are canadian firms which export this product to Colombia, therefore there is a market integration issue. To sort out this issue in favor of Colombia, those local firms that produce this product must have economies of scale, the other way around these local firms will be out of market.
Table 2. Market integration: Bakers’wares exported to Canada in 2011
(HS code: 190590)
Local firm
|
FOB exports US$
|
Share (%)
|
North Fresh Colombia Ltda
|
19,000
|
19.4
|
Compañia de Galletas Noel S.A
|
15,000
|
15.3
|
I.T. Agrofrut S.A.
|
4,000
|
4.1
|
Dalijohn Ltda
|
4,000
|
4.1
|
Productos Alimenticios de la Finca S.A
|
4,000
|
4.1
|
I.T. Laymar Ltda
|
1,000
|
1.0
|
Others
|
51,000
|
52.0
|
Total
|
98,000
|
100.0
|
Bakers’ wares production as articles of plastic shows diseconomies of scale as figure 3 shows. For instance if there is an increasing in real costs of 1.0%, then the real income shows an increase of 0.986%. If there was a economy of scales the real income should have increased in more than 1.0% but it is not the case.
Figure 3. Bakers’ wares: Real income growth and real cost growth for 147 firms between 1995-2011* **
* Real income growth= -0.017 + 0.986(Real cost growth) + error term.
** Data fit by Random Effects panel data model. Model significative under a significance level of 0.01 and Hausman test for Random Effects.
Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), own calculations.
The conclusion is Colombia is signing lot of FTAs without pay attention to her manufacturing sector technology, most of firms in Colombia have diseconomies of scale and this fact is related to high cost of production under a global economy. Government, private firms, crude oil companies and main industries such as banana and sugar production in Colombia have to invest in different sectors to improve technology, for instance in articles of plastic and bakers’ wares.
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