CEPR Report: Big Increase in Trade is Transforming Colombian-Venezuelan Relations

Greatly increased commercial ties between Venezuela and Colombia are most likely the driving force in the recent reduction of diplomatic tensions between Venezuela and Colombia, a new paper from the Center for Economic and Policy Research argues.

The paper, “The Gains from Trade: South American Economic Integration and the Resolution of Conflict,” demonstrates that while Colombia’s exports to Venezuela more than doubled as a share of its total exports from 1999 to 2007, Colombian exports to Venezuela fell from 15.6 percent to just 3.6 percent during a period of profound diplomatic tension in 2009-2010, after Venezuela cut off Colombian imports in response to a planned military bases sharing arrangement with the United States.

“Peace and stability can be one of the most important gains from increasing trade and economic integration between neighboring countries,” said CEPR Co-Director and economist, and lead author of the paper, Mark Weisbrot. “This appears to be the case in the recent thawing of relations between Venezuela and Colombia.”

The paper shows the loss of Colombia’s exports to Venezuela in 2009-2010 after Venezuela cut off Colombian imports: $2.3 billion in trade, or 11.2 percent of Colombia’s total exports. More importantly, the loss comprised more than 20 percent of Colombia’s non-fuel exports.

“The tendency of cross-border commerce to provide incentives for better and more stable diplomatic relations is undoubtedly a major reason that South America has pursued regional economic integration in recent years,” Weisbrot added. “This has been the growing trend since the region rejected Washington’s ‘hub-and-spoke’ model of ‘free trade’ agreements, including the proposed Free Trade Area of the Americas,” Weisbrot said.

The losses to Colombia were concentrated in a few sectors. For livestock and related products the loss of $632.8 million in exports to Venezuela represented 83 percent of total exports in this sector, while textile exports suffered a loss of $286 million or 63 percent of Colombia’s textile exports. Replacements for these export markets were not easily found.

Trade and diplomatic relations between Colombia and Venezuela have warmed with the new administration of President Juan Manuel Santos, who took office on August 7. The two nations have established a cross-border security committee and reached agreement on the payment of some $800 million in outstanding debt owed to Colombia exporters, and the resumption of fuel shipments from Venezuela to Colombia. Meanwhile, the Colombian Supreme Court ruled that the U.S.-Colombia Defense Co-operation Agreement was unconstitutional as it would require congressional approval, and had not been passed by the legislature. The Santos administration has not sought congressional approval, and for now, the agreement appears to have been abandoned.

The paper is based on a presentation by Mark Weisbrot at the Fletcher Symposium on Colombian and Venezuelan Affairs, at the Fletcher School of Law and Dimplomacy, Tufts University, October 23, 2010.