Colombia signed many Free Trade Agreements (FTAs) in the last years, for instance the FTAs with Mexico, Chile, Canada and The United States. Local government broadcast the potential benefits from these FTAs as the economic theory pointed, the government speech is Colombia will increase her exports in those products that show competitive advantage such as textiles, fruits, meat and other low added value goods. But public authorities do not broadcast the FTAs costs. As everybody knows, when a country faces FTAs, she has to be ready for employees migration from those low productive economic sectors to those high productive sectors that can be competitive in this global economy. This transition will take time and its cost can be measured in people under unemployment state. Through econometric model called Vector Autoregression (VAR) one can forecast the cost of FTAs in about 4,000 unemployed in the next 4 years that means a total unemployment of 2.3 million in the next 4 years. To make this transition soft, Colombia can invest in no tradable goods such as infrastructure and public transport such as underground for main cities while manufacture sector fix their cost through investing in technology to be competitive in this global economy.
Author: Humberto Bernal,
Economist
e-mail: zhumber@gmail.com
Colombia has signed many Free Trade Agreements (FTA) in the last years, some of them are with European Free Trade Associations (EFTA) enforced in 2011, North Triangle Countries enforced 2009-2010, Canada enforced in 2011, Chile enforced in 2009, Mexico enforced in 1995 to 2006 and The United States enforced in 2012. The colombian exports' value to these countries was US$27.1 million in 2011 that meant 48.7% of total exports, moreover exports to The United Estates was US$21.9 million that meant 38.5% of colombian exports. Colombian imports from these countries reached US$29.5 million in 2011 that meant 54% of total colombian imports, therefore Colombia showed a trade deficit with her main trade partners in 2011.
Main goods exported, imported and imports cycle
As it was pointed above, Colombia imported more than she exported in 2011 from her main trade partners. Through the FTAs Colombia will export crude oil, coal, minerals, coffee, plastics (mainly polymers), flowers, sugar and fruits (mainly bananas), these goods show a competitive advantage due to low local cost of production, high volume of mineral resources and geographical location, moreover the value of these products reached 83.8% of total colombian exports in 2011 where crude oil, coal and other minerals shared with 71.2% of total colombian exports. On the other hand, Colombia will import through FTAs computers, cars, machines, mineral processed, aircrafts, plastics and organic chemicals, these goods shared with 55.2% of total colombian imports in 2011. As one can see Colombia exports low added value goods while she imports high valued goods.
Figure 1 shows the colombian imports cycle and the main dates according to economic crisis, as one can see Colombia increases her imports after economic crisis and these imports showed a higher pick as time pass. The main conclusion is Colombia does not take crisis time to improve her industrial sector as it has to be, the point is business men and entrepreneurs have to invest in new technology while economic crisis is and they have to take advantage of the learned process while economic boom is.
Figure 1. Colombia imports cycle 1977-2012
(quarterly data)
FTAs and short run unemployment
Colombia faces a chronic (long run) unemployment issue as figure 2 shows, the blue line is the unemployment rate and the red line is its trend, as one can see Colombia has faced an unemployment rate between 6.9% and 20.5% since 1977 (quarterly data), therefore there is an economic policy issue to sort out through infrastructure investment and social programs investment such as education, health and better technology for basic services as water, thought these investments the chronic unemployment rate can be face a decline.
Figure 2. Colombia unemployment rate and its trend 1977-2012
( % quarterly data)
Now, if one pays attention to short run unemployment rate issue, it means unemployment rate reached by economic crisis and economic openness (FTAs), one realizes that colombian unemployment rate will increases in the next 4 years due to economic openness in about 0.07% and 0.18%, it means the economic openness will bring a cost between 1,500 and 4,000 people in unemployment state as figure 3 shows, the total unemployed (long run plus short run unemployed) will be around 2.3 million of people in the next 4 years. After this 4 years colombian unemployment rate will come back to her long run trend that is between 7.8% and 10.0%.
Figure 3. Response on unemployment rate cycle due to imports’ shock*
(% quarterly data, 50 periods forward)
*Impulse: Imports cycle. Response: Unemployment rate cycle.
VAR model with Unemployment rate cycle; PIB cycle; and imports cycle as endogenous and exogenous variables. Six lags are taken in the model.
Source: Stata 12.1 own calculations.
The conclusions are Colombia produces primary goods and imports high added value goods, moreover this country shows a trade deficit with her main trade partners and the FTAs signed in the last years will cost about 4,000 people in unemployment state. To mitigate this cost, high investments in infrastructure sector that promotes trade can be done.
