2004 Lombana Competitiveness and Trade Policy Problems

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Competitiveness and Trade Policy Problems in Agricultural Exports

Univ. Empresa, Bogot (Colombia) 2 (3, 4, 5): 46-62, mayo de 2004

Competitiveness and Trade PolicyProblems in Agricultural Exports:The Case of Colombia. DoctoralThesis Project

Jahir Enrique Lombana Coy*

Recibido: enero de 2004 - Aprobado: febrero de 2004

RESUMEN

Este estudio explora el estado actual y el potencial competitivo de las exportaciones agr-colas colombianas a los mercados de Estados Unidos y la Unin Europea. Los mercados deestos pases industrializados se constituyen en los ms importantes para Colombia, pero almismo tiempo tienen varias restricciones en el sector agrcola. Este estudio mostrar que lacompetitividad no es solamente una funcin de los impedimentos locales o internacionalestales como la pobreza institucional, la baja capacidad tecnolgica, la disponibilidad decapital, capital humano y mano de obra, sino tambin de impedimentos externos como elacceso a los mercados. Por lo tanto, ste es un importante objetivo del presente estudio conel objeto de proyectar posibles escenarios para el comercio colombiano, a fin de investigar la eliminacin de estas restricciones. En la parte emprica se enfatizar en los impactos delas restricciones externas en el sentido de un estudio economtrico, sin embargo, la in-fluencia de las restricciones internas ser discutida como tal.

La hiptesis central del trabajo sostiene que la eliminacin de las restricciones de mercadoen Estados Unidos y en la Unin Europea puede tener un importante impacto para lacompetitividad colombiana aunque esto no puede garantizar el crecimiento de las exporta-ciones nacionales sino se solucionan algunos problemas internos. Solamente la parte de las polticas comerciales de esta hiptesis puede ser evaluada en un estudio economtrico. El papel de los factores internos puede ser evaluado en el marco de un anlisis del ambiente

* Jahir Enrique Lombana Coy, economista de la Universidad Colegio Mayor de Nuestra Seora del Rosa-rio Bogot Colombia. Ha realizado estudios de especializacin en relaciones internacionales y demagster en estudios internacionales en el Instituto de Estudios Internacionales de la Universidad deChile. Ha colaborado en investigacin para proyectos en el Instituto Iberoamericano de InvestigacionesEconmicas Universidad de Goettingen (Goettingen Alemania) y en el Instituto de Relaciones Ibero-americanas (Hamburgo Alemania). Ha trabajado en la Direccin de Competitividad del Ministerio deComercio Exterior en Colombia y ha sido catedrtico de las facultades de Economa y de CienciasPolticas y Relaciones Internacionales de la Universidad del Rosario. Ahora es candidato a Ph.D. en laUniversidad de Goettingen en Alemania.

3. Jahir Lombana.p65 19/07/05, 11:20 p.m.46


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Jahir Enrique Lombana Coy


en el cual las exportaciones tienen lugar (informes macroeconmicos, estudios del Bancode la Repblica, exportaciones corporativas, instituciones de crdito, segmentos de merca-do, programas de asistencia tcnica y otros).

Una importante contribucin de este estudio consiste en la incorporacin ms comprensivae interdisciplinaria de las teoras para explicar el comercio internacional. La teora de lacompetitividad tiene un punto de vista multidimensional que analiza desde los nivelesmicroeconmicos a los macroeconmicos. Esto comprende factores internos y externos para explicar los cambios en los flujos comerciales.

Para el desarrollo de los pases, y especialmente para Colombia, las polticas del sector agrcola tienen implicaciones en aspectos econmicos, polticos y sociales. Este estudio se propone desarrollar fundamentos empricos y tericos de la competitividad como soportede las decisiones de polticas de mercado en los sectores pblico y privado.

Palabras clave: competitividad, restricciones de mercado, comercio internacional.

ABSTRA ABSTRA ABSTRA ABSTRA ABSTRA CTCTCTCTCT

This study will explore current and potential competitiveness of selected agricultural exports of Colombia to the markets of the United States and the European Union. The mar-kets of these industrialized countries constitute the most important markets for Colombia,but at the same time have very strict trade constraints in the agricultural sector. This studywill show that competitiveness is not only a function of domestic/internal impediments

such as poor institutions, low technological capability, availability of capital, humancapital and labor, but also of external impediments such as market access. Therefore, it isan important objective of this study to project the possible scenarios of Colombian trade,by investigating the elimination of those restrictions. In the empirical part emphasis will be laid on the impact of external restrictions by means of an econometric study, however

the influence of internal restrictions will be broadly discussed as well.

The central hypothesis of this work is that the elimination of trade restrictions in the USAand the EU might have an important impact on Colombian competitiveness even though, it cannot guarantee an increase of Colombian exports without curing some home-made prob-lems. Only the trade policy part of this hypothesis can be tested by means of an econo-metric study. The role played by home-made factors is to be evaluated by an analysis of theenvironment in which exports take place (macroeconomic reports, studies of the Central

Bank of Colombia, export corporations, credit institutions, marketing boards, technical assistance programs and the like).

An important contribution of this study consists in incorporating more comprehensive and interdisciplinary theories to explain international trade. Competitiveness theory takes on amultidimensional point of view that stretches from microeconomic to macroeconomic levels

of analysis. It also includes internal and external factors to explain changes in trade flows.

For developing countries and especially for Colombia, agricultural sector policies dohave implications in economics, politics and social aspects. This study expects to develop



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ANLISIS ESTRUCTURALDE SECTORESECONMICOS DESDEUNA PERSPECTIVA

ADMINISTRATIVA

La Universidad del Rosario, a tra-vs de la Facultad de Altos Estudiosen Administracin, est liderando lalnea de investigacin: Anlisis es-tructural de sectores econmicos des-de una perspectiva administrativa.Esta lnea de investigacin es unaaproximacin acadmica entre la dis-ciplina econmica y administrativaen torno a problemas comunes.

Una preocupacin reciente en el m- bito acadmico es la divergencia de

conceptos y la dismil utilizacin delos mismos en diferentes disciplinas.Por ejemplo, el concepto de compe-titividad se ha convertido en una ex- presin que algunos autores comoPaul Krugman1 denominan un trmi-no de moda (buzz-word). Para Krug-man, competitividad es tan slo unsinnimo de productividad. Para otroscomo Michael Porter 2 representa unadefinicin ms comprehensiva paraidentificar la ventaja relativa de unasnaciones frente a otras en sectores es-

pecficos, superando los restrictivossupuestos de la teora clsica de lasventajas comparativas.

El estudio que se presenta a continua-cin busca acercar el dilogo inter-disciplinario de la economa y laadministracin en torno al conceptode competitividad. Esta investigacinse realiza a travs del estudio de casodel sector agrcola colombiano, dadas

las repercusiones econmicas paranuestro pas y los problemas estruc-turales que le afectan tanto a nivel lo-cal como internacional. La lnea deinvestigacin se estructura en la tesisdoctoral titulada: Competitivenessand Trade Policy Problems inAgricultural Exports: The Case of Colombia. A partir de sta se buscaencontrar temas afines en los progra-mas de maestra, especializacin y pregrado de la FAEN con el objetivode enriquecer el dilogo acadmico.

RESEARCH OBJECTIVE

General Objectiveand Description of theProblem

This study will explore current and potential competitiveness of selected

1 Profesor de economa internacional en la Uni-versidad de Princeton.

2 Profesor de estrategia y negocios internaciona-les en la Universidad de Harvard.

the theoretical and empirical foundations of competitiveness for supporting decisions of policy makers in private and public sectors.

Key words: competitiveness, trade restrictions, international trade.



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agricultural exports of Colombia tothe markets of the United States andthe European Union. The markets of these industrialized countries consti-tute the most important markets for Colombia, but at the same time havevery strict trade constraints in theagricultural sector. This study willshow that competitiveness is not onlya function of domestic/internal impediments such as poor institutions,low technological capability, avail-ability of capital, human capital andlabor, but also of external impedi-ments such as market access. There-fore, it is an important objective of this study to project the possible sce-narios of Colombian trade, by inves-tigating the elimination of thoserestrictions. In the empirical partemphasis will be laid on the impactof external restrictions by means of an econometric study, however theinfluence of internal restrictions will be broadly discussed as well.

The traditional theories of interna-tional trade explaining trade flows(inter-industry trade) rely on the con-cept of comparative advantage. Theconcept of comparative advantagegoes back to David Ricardo andHeckscher-Ohlin and stresses the ideaof specialization. Countries exportgoods and services which guaranteea more efficient use of resources, andimport those goods and serviceswhich are more expensive due to the

higher resource cost. According totraditional trade theory, the main de-terminants of trade are the efficient

use of resources and/or availabilityof the factors of production. In thissense, comparative advantage is afirst and necessary approach to un-derstand the trade flows, but not theultimate one. Other determinants(such as trade policy and exchangerate policy) must be included to un-derstand the patterns of trade.

The concept of comparative advan-tage ceases to be useful when intra-industry trade is to be explained. Thedeterminants of intra-industry tradeflows are rather vague. Similar in-come levels and a taste for varietyare influential from the demand side point of view, whereas a monopolis-tic market structure, economies of scale and special production knowl-edge might be effective on the supply side. Competitive advantagedecides upon market success. How-ever, price competitiveness might not be so decisive for intra-industrytrade. Competitiveness with respectto quality, design and the like, might be more important.

Overall, success in trade (both inter-industry and intra-industry trade) isdetermined by competitive advantage.To be successful in the world marketone has to supply products that arecheaper (or of better quality, or of nicer design) than the products of competi-tors. The concept of competitive ad-vantage puts emphasis on asserting

oneself against many competitors.However, what are the determinantsor dimensions of competitive advan-



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tage? First, competitiveness can havea microeconomic and a macroeco-nomic level and as a consequence, thereare different units of analysis: nations,firms and/or sectors. Second, competi-tiveness can have a price and a qualityaspect. Then it could present differentways to be measured.3 Third, competi-tiveness can be directly and indirectlyinfluenced by external forces, such asthe trade policy of importing countries.Fourth, competitive advantage is especially a dynamic concept.

The explanations of trade flows un-der the concept of competitive advan-tage have moved away from purelyeconomic reasoning to both a morefirm-oriented and a more policy-ori-ented reasoning. Competitive advan-tage does not necessarily requirecomparative advantage or even abso-lute advantage in order to win thegame of the market, but can be shaped by business strategies and smart policy interventions such as exchangerate policy and (strategic) trade policy.These latter factors usually canchange in the course of time and pointto the relevance of a dynamic conceptof competitive advantage.

Michael Porter presents a competi-tiveness concept taking nation asthe unit of analysis, while he definescompetitiveness as productivity(value of the output produced by aunit of labor or capital).4 According

to Porter a nations set of institutions provides the environment for competitiveness, while there is the possi-

bility to reform the economy bymeans of improvement of the insti-tutions and infrastructure.5 To beexplicit Porters emphasis is on theeconomic environment rather than oneconomic policy measures, which isa second problem to be discussed inthe competitiveness concept.

Porters concept of competitivenessis enlarged in the World EconomicForum Report 2001-2002 by JeffreySachs, who advocates the analysis of Global Competitiveness at a macrolevel saying it is the set of institu-tions and economic policies support-ive of high rates of economic growthin the medium term.6

There are different perspectives oncompetitiveness from a firm level.Competitive advantage has becomea theory to explain factors that arenot directly included in the compara-

3 Fidelis Ezeala-Harrison. Theory and Policy of International Competitiveness. Praege EdWestport London 1999 p.41-42.

4 Michael E. Porter, The Competitive Advantageof Nations. Reprinted. - Hampshire [u.a.]:Macmillan, 1991 p.6,18-21.

5 Fidelis Ezeala-Harrison. Theory and Policy of International Competitiveness. Praege EdWestport London 1999 p.55

6 World Economic Forum. Report 2001-2002.Jeffrey D. Sachs, Center for InternationalDevelopment, Harvard University; Michael E.Porter, Institute for Strategy and Competitive-ness, Harvard Business School; John W.

McArthur, Center for International Develop-ment, Harvard University; The Executive Sum-mary: Competitiveness and Stages of EconomicDevelopment. 2002.



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tive advantage. According to Porter this theory takes into account four determinants:7 1) factors of produc-tion (already included in the comparative advantage theory) 2)strategy, structure & rivalry, 3) for-mation of clusters, and 4) demandconditions. These determinants areinfluenced by the governmental de-cisions and random factors (macro-economic and exogenous dimensionof competitiveness).8

Another concept for competitivenesson the firm level is the productivityand cost base approach. It defines thecompetitive advantage in terms of productivity and cost base of poten-tial competitors. From the point of view of productivity, there is a comprehensive analysis among produc-tivity of the factors of production,average level of unit costs, institu-tions and infrastructure that must becompared among potential competi-tors. A loss of market share indicatesa loss of competitiveness not only because of increasing productivity of foreign competitors.9

In synthesis, with those different per-spectives for explaining competitive-ness, the first important problem todeal with will be to select a compre-hensive and functional concept of competitiveness in both levels macroand micro. This concept will be theframework to understand the case

study for the Colombias agriculturalsector. As Krugman10 pointed it out,a misunderstanding of the concept

could result in a bad application of public policy, imposition of unnec-essary barriers or spending consid-erably big sums of money innon-important issues.

A first entry to understand theconcept would be to link between themicro and the macroeconomic levelof competitiveness, which can besummarized in Porters concept todefine national competitiveness:

A nations prosperity depends on its competitiveness, which is based on the pro-ductivity with which it produces goodsand services. Sound macroeconomic poli-cies and stable political and legal insti-

7 Michael E. Porter, The Competitive Advantageof Nations. Reprinted. - Hampshire [u.a.]:Macmillan, 1991 .1) Factor conditions are the presence of advancedand specialized factors of production which competitive industries tend to upgrade continuously.2) International competitiveness results from thecontext in which there is a presence of capable,committed and fierce rivalry among local firms.3) Competitiveness occurs when groups of supporting and related businesses compete, cooper-ate and collectively upgrading of their industry.4)Strong local demand conditions depend on thesophistication of the local customer-base whoexpects the latest innovations and the highestquality standards.

8 Michael E. Porter, The Competitive Advantageof Nations. Reprinted. - Hampshire [u.a.] :Macmillan, 1991

9 James R. Markusen Productivity, Competitive-ness, Trade Performance and Real Income. Canada1994. Cited on Fidelis Ezeala-Harrison. Theoryand Policy of International Competitiveness.Praege Ed Westport London 1999, pp. 49, 53.

10 Paul Krugman, Competitiveness: DangerousObsession. In: Foreign Affairs. Vol. 73, No.2.March-April. 1994. pp.41-44.



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tutions are necessary but not sufficientconditions to ensure a prosperouseconomy. Competitiveness is rooted in anations microeconomic fundamentals the sophistication of company operationsand strategies and the quality of the mi-croeconomic business environment inwhich companies compete. An under-standing of the microeconomic founda-tions of competitiveness is fundamentalto national economic policy.11

The Inter-American DevelopmentBank (Economic and Social Progressin Latin America, Report 2001: Com- petitiveness: The Business of Growth) also takes on a very broad perspective on competitiveness. Theauthors of this report stress the wealthof dimensions of competitiveness suchas the role of financial market devel-opment, the development of humancapital, the role of infrastructure, thecapacity to innovate and industrial andinvestment policies.

So far the internal/domestic dimen-sions of competitiveness have beenmentioned. However, competitivenessdoes have an external dimension, too.In many cases this external dimen-sion, i.e. the policies of the trading partners and their strategies to impedemarket access, is the only one stressed by developing countries. To be fair,one has to concede that trade impedi-ments still play an important role ininternational trade, especially for ag-ricultural exports, but it has to be keptin mind that developing countriesshould not neglect the internal dimen-sions of competitiveness.

The next step is to look at the exter-nal dimension of competitiveness,i.e. foreign buyers (importers) trade policy environment.

United States of America (U.S.A.) andthe European Union (E.U.) have ahighly protected agricultural sector.For the case of the U.S.A. a FarmBill renewal was approved in May2002. Defined in words of PresidentGeorge W. Bush: The farm bill willstrengthen the farm economy over thelong term. It helps farmers` indepen-dence, and preserves the farm way of life for generations. It helps Americasfarmers, and therefore it helpsAmerica.12 The first critics comingfrom the European Union are likelyto grab any excuse to avoid reformsof their own Common AgriculturalPolicy (C.A.P). It is a paradox thatU.S.A. in the last multilateral tradenegotiations in Doha insisted on put-ting freer trade in agriculture and nowrecede with the farm bill.13

The European Union in the Agenda2000, the last effort to reform theC.A.P., insisted in the reduction of the budget for the agricultural sector

11 Michael E. Porter, Harvard Business School, In-stitute for Strategy and Competitiveness.http://www.people.hbs.edu/mporter/econ-natlcomp.htm

12 Bush, George W. Intervention, Launching of theFarm Security and Rural Investment Act of 2002,Farm Bill 2002, May 13th, 2002.

13 The Economist. Global Agenda: What happenedto free trade? May 13th 2002.



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and also intended to reform the ac-cess of products from abroad theE.U.E U. Although important ad-vances have been achieved on paper,strong tariff and non-tariff restric-tions have remained highly sensitive(mainly agricultural products andtextiles). Only developing countriesthat are in special programs enjoyspecial preferences. If countries arenot in preferential programs they cannot compete under the same condi-tions as the European Union coun-tries and that is specially importantfor developing countries.

For the case of the preferencesgranted by the E.U., the Andean Gen-eralized System of Preferences(Andean - GSP) and by the USA, theAndean Trade Preferences Act(ATPA) according to recent studies by the Andean Community Secre-tariat resulted to be efficient in termsof diversifying and expanding exports of the Andean community.14The preferences granted to Colom- bia (and Andean Countries) fromdeveloped countries thanks to thefight against drug trafficking are notthe only warranty to market access.15Since the preferences are conditionedto a periodical evaluation they can be eliminated unilaterally whenever the outcome is considered inadequate.

Under the scenario of free trade, thereis a problem of being competitive

according to the productivity and cost base approach. Other countries withrestrictions and direct competitors

with Colombia do also have accessunder the same conditions. In thiscase the question is, whether the Co-lombian competitiveness is supported by the microeconomic and macroeco-nomic environment at home.

The perspectives to create a FreeTrade Area for the Americas (in-cluded U.S.A.) and the approachesfor the commercial cooperation withthe E.U., present new scenarios thatwould be able to change the currenttrade structure of uncertainty with preferences (by being unilateral char-acter) to one scenario of greater se-curity by the permanent character of a free trade agreement. In the sce-nario of free trade, there are still aspects to be negotiated, for example,the agricultural sector seems to bevery protected in developed countriessuch as the U.S.A. or the E.U.

Overall, Colombia as a developingcountry must build an equilibriumamong the internal (micro and mac-roeconomic foundations of competi-

14 Andean Community Secretariat. Evaluacin delImpacto Subregional SGP Andino Europeo: Es-tudio Econmico y Casos Exitosos. August 1999.Andean Community Secretariat. Resumen Esta-dstico para las Gestiones del ATPA. September 17th, 2001

15 Since the decade of the 80s, the problem of thedrug trafficking has presented evidence of its in-fluence in the social, political, and economic aspects. One of the alternatives of solution for this problem is the preferential access (no tariffs) of products that developed countries grant to thedeveloping countries such as Colombia, whofights against the drug trafficking.



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tiveness) and external dimensionsof competitiveness.

Specific Objectives

The specific objectives of this inves-tigation are: to discuss the different concepts,

critics and misunderstandings of competitiveness from the macroand microeconomic levels.

to review competitive advantagetheory and utilize it for explanationsof the trend of Colombian agricul-tural exports (taking into accountthe determinants of competitivenessfrom both macro and microecono-mic levels).

to analyze the effect of the trade policy of the U.S.A. and the E.U.on the market access of the agri-cultural and agro-industrial prod-ucts of Colombia, with specificemphasis on the special programs,

i.e. Andean Trade Preferences Act(US-ATPA) and Andean- Gener-alized System of Preferences (EU-Andean GSP) and project ascenario of free trade.

to select products for a casestudy according to the param-eters derived from a combinationof competitive advantage andtrade policy analysis of unilateral preferences, free trade and pro-tectionism (i.e. a product with preferential access and potential

of export in a free trade scenario,a product with strong restrictions but with comparative advantage

and a product with already rela-tive free market). to apply the analysis of determi-

nants of competitive advantageupon selected products; to deter-mine areas of weakness andstrength.

to evaluate the access conditionsof trade under free trade agree-ments in comparison with the sce-nario of preferences and itseconomic and political implica-tions.

to simulate the pattern of trade inthe scenarios of maintaining uni-lateral preferences or signing freetrade agreements with the U.S.A.and with the E.U in order to makesome recommendations for trade policy.

to explain the political factors(causes and effects) of facing dif-ferent scenarios of trade betweenColombia and its competitors inthe selected products.

It is expected to make some policysuggestions, starting from the Colom- bian pattern of trade and to forecastthe trend of the selected products ineach one of the described scenarios.This study should serve as a first steptowards better decision-making anda sounder formulation of macroeco-nomic and social policies.

JUSTIFICATION

In this study, I would like to focus onColombia as potential exporter of ag-



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ricultural products. Two aspects de-serve attention. First, how can Colom- bia strengthen the competitiveness of its agricultural exports and second,what would be the effect of better mar-ket access to the US and the EU.

The importance of (lacking) competitive advantage for Latin Americais highlighted in the Global Com- petitiveness Report 2001 by theWorld Economic Forum (WEF) andin the 2001 Report Competitive-ness: The Business of Growth bythe Inter-American DevelopmentBank (IDB). The WEF investigated75 countries with respect to competi-tiveness. 5 Latin American countriesoccupied 6 of the lowest ranks incompetitiveness (Bolivia was # 75,Honduras was # 74, Ecuador was #72, Nicaragua was # 71 and Para-guay was # 70). Colombia had rank # 56, Chile, the best Latin Ameri-can country, had rank # 29. In con-trast, Germany had rank # 4, theU.S.A. had rank # 2. Rank #1 wasoccupied by Finland. The WEF alsocompared the 75 countries with re-spect to their growth potential. Co-lombia even fared worse with rank 65, Chile fared better with rank 27,the USA and Finland kept their ranks. Germany deteriorated to rank 17. It is important to mention thatin Latin America and in general (theexception being Germany) competi-tiveness is positively correlated with

the growth potential. When we com- pare Chile and Colombia it is notquite understandable why Colombia

ranks much lower than Chile.Colombias resource endowment(natural resources and the develop-ment of human capital) are quite promising. Therefore, it has to bestated that Colombia has potentialand that it should take action andimprove its competitiveness.

This study will deal with the agricul-tural sector. Most of the studies oncomparative advantage and recentlyin competitiveness are dedicated to themanufacturing and services sectors.16Moreover the agricultural sector is notonly important for Colombianeconomy, but also for political andsocial issues. In fact there are a lot of political and social problems in ruralregions related to violence and socialdifferences. An analysis of the agri-cultural sector in Colombia wouldgive some sights to elaborate policiesto make this a more competitive, butalso a more prosperous sector.

The agricultural sector is related atfirst to internal policies that definethe general tendency of the produc-tion. Secondly, it depends on the so-cial and rural development. And last but not least, it depends on externalfactors that influence the whole sec-tor and play a great role. This would

16 Ian Goldin. Comparative Advantage: Theory andApplication to Developing Country Agriculture.Technical Papers No.16 OECD DevelopmentCentre. June 1990. Also see: J.E. Austin Associ-ates, Inc. Competitiveness Bibliography, January,2002.



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be then the main theme of this study.Policies of developed countries, asexternal factors, constrain exports of developing countries. Although Co-lombia enjoys trade preferences, itfails to have the necessary marketaccess in developed countries.

The U.S.A. and the European Unionmarket policies of imports will con-stitute the external factors. These arethe main markets for agriculturalColombian exports but at the sametime are the most protected in termsof tariffs and non tariffs measures.

The Free Trade Agreement of Ameri-cas (ALCA/FTAA), that includes theUSA, aims at completing the nego-tiations by January 2005 and atimplementing the agreement by De-cember 2005. This agreement willguarantee access of products that atthe moment have preference with theU.S.A. Probably, they would receivemore certainty of access and for other products the access would be ex- panded. However, Colombia will not be the only country in the area to benefit from this new access. Colom- bia will have to compete with other countries under new conditions.Competitiveness will depend on the potential for promoting the factorsunderlying competitive advantage.

The relation between the E.U. andColombia in the Andean Community

(CAN) framework, seems to be muchmore complicated. As a matter of factCAN does not appear in the European

Policy Agenda. Andean Communityis only included in special tariff pro-grams as those of trade preferences,as it is noted in the World TradeOrganizations Country AnalysisPolicy.17 That means that to prepareaccess for a free trade will be a mass project for the Andean countries evenColombia. A bit different is theMercosur-EU relation, because anagenda of negotiations in a Frame-work Agreement for Economic Coop-eration has been already established.18In this sense, the low profile of Andeanauthorities during the deepening of relations with the European Union isnot fully understood, keeping in mind,that the Colombian exports to theEuropean Union in the agriculturalsector, are characterized as being of greater value and diversity than theexports to the U.S.A. thanks to the preferential programs.19

Although both the USA and the EUhave strong and restrictive agricultural policies, the Andean preferences al-

17 World Trade Organization. Report by the Secre-tariat. Trade Policy Review Body. Trade PolicyReview The European Union. WT/TPR/S/72. 14June 2000. p. 28-38.

18 European Union. European Commission. TheEUs relations with Mercosur.http://europa.eu.int/comm/external_relations/mercosur/intro/index.htm

19 See also: Andean Community Secretariat.Evaluation of the Regional Impact of the Andean-SGP from E.U.: Economic Study and SuccessfulCases, August 14th 1999. Andean CommunitySecretariat. Statistical Synthesis for the ATPA Negotiation. September 17th 2001.



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low CAN greater access and competi-tiveness facing other countries. Some punctual cases are however excluded: banana, sugar, oil seeds etc.. The es-tablishment of a free trade zone wouldguarantee the preferences in a perma-nent way, whereas in the past those preferences were only accorded aslong as the Andean countries fulfilledsome requirements for fighting againstdrug traffic. Nevertheless it is possiblethat other countries without drugs problems and under a free trade agree-ment will take advantage from thisnew economic situation.

With the different perspectives of access for developing countries acomparative analysis between theU.S.A. and the E.U. policies will helpto understand the political implica-tions of economic decisions in aframework of political economy. Oth-erwise, an economic analysis wouldintend to: select the products whose pattern

of trade is relevant, classify them according to the

trend of exports (whether theyenjoy tariff preferences, they are potentially exportable but pro-tected, or they are already in arelative free trade scenario),

analyze the competitiveness withrespect to other countries

to explore the restrictions for those Colombian products thathave been restricted by the U.S.A.

and the E.U. to look for the political implica-tions of those measures.

In synthesis, there are different pointsof view about the benefits of freetrade. An evaluation of the effects of trade policies of developed countrieswill make it possible to understandand analyze the implications for Co-lombia to change preferences in freetrade agreements. Secondly, projec-tions of internal and external factorswould give a framework to comparetheStatus Quo and the possible newscenarios of trade. Finally recom-mendations of policy will depend notonly on conclusions derived fromworks like this one, but also on trialsand lobbying among policy makers,social groups and governmental au-thorities, particularly in countries likeColombia.

METHODOLOGY

The first chapter in this study will bethe theoretical framework of competi-

tiveness analyzing at the microeco-nomic and macroeconomic levels. Inthe introduction a discussion will dealwith the convenience of using a competitive advantage theory and its dif-ferent perspectives as a broader approach as that of comparative ad-vantage theory. Competitive advan-tage will explain the trade flows of aspecific sector the agricultural one and specific products such as thoseselected in the case study.

The first section of this chapter willdescribe the macroeconomic envi-ronment of competitiveness. It will



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explain the traditional approaches that look at the balanceof payments and exchange rates.A complementary sub-section willexplain the World Economic Fo-rum view of the macroeconomicenvironment headed by JeffreySachs. Finally, other macroeco-nomic perspectives of competitive-ness will be analyzed.

The second section will discussthe microeconomic level of competitiveness. This section is di-vided in two sub-sections. Thefirst one deals with the differentapproaches of competitivenessfrom a microeconomic point of view. The second one explains theselection criteria of the case study(according to the scenarios of thegeneral objective of this study): a product with preferential accessand export potential in a free tradescenario, a product with strongrestrictions but with comparativeadvantage and a product with al-ready relative free market.

Secondary sources for theoreticalaspects of comparative and competi-tive advantage theories are necessaryin this chapter. Studies of the WorldEconomic Forum, the Institute for Strategy and Competitiveness of Harvard Business School and theInternational Institute for Manage-ment Development are the referencesfor the micro and macroeconomiclevels of competitiveness analysis.

The main subject of the second chap-ter will be the analysis of the trade

policies of the E.U. and the U.S.A.in the agricultural sector. The first section is dedicated to a

general approach of the Americanand European agricultural policiesrelated with external trade.

In the second section, the specific policies for those products selectedin the study case will be presented.Special emphasis will lie on the products included in unilateral pro-grams of preferences such as theAndean Generalized System of Preferences (Andean-GSP) of the European Union and theAndean Trade Preferences Act(ATPA) of the United States andalso on those products which present some level of protection.

There is extensive literature evaluat-ing the influence of developed coun-tries policies on the products of developing countries. There is alsoinformation available provided byspecialized national agencies, theWTO and the OCDE.

In the third chapter, alternative sce-narios of trade policies for the selected products and possible political andeconomic implications will be pre-sented. An empirical analysis dividedin four sections will be thus made:

1. Analysis of macroeconomic deter-minants of competitiveness. It will be an analysis of relative prices20

20 Relative Price= (real exchange rate*world mar-ket price)/internal market price



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and real income for a representa-tive period of time.2. Analysis of microeconomic deter-

minants of competitiveness. It will be a descriptive analysis of theSta-tus Quo , weakness of internal poli-cies (promotion, marketing,finance, protection etc) and pro- posals to improve competitiveness.

3. Trade policy determinants of competitiveness. The resultingcoefficients of relative prices andreal income will make possible: to simulate changes in the de-

terminants of exports for eachone of the selected products,

to project the possible sce-narios of exports (increasing protection or free trade)

to analyze the results in termsof competitive advantage.

4. The selection of an adequatemodel to explain Colombiancompetitiveness, in the selected products, will depend on theanalysis of the three pointsabove. As a first approach a gen-eral model is intended to explainexports as a function of macro-economic determinants. The price elasticity of demand andincome elasticity are to be esti-mated. The aim is to study thevariations of trade as a reactionof changes in policies of devel-oped countries.

The data for this chapter will be based on secondary statisticalsources and extensive literature ex-ists for the evaluation of preferencesand free trade agreements. Thesources would be data of the WorldBanks World Development Indica-tors (for income indicators), Inter-national Monetary Funds FinancialStatistics (for exchange rates) andFAOs Statistical Databases (for production and index prices of ag-ricultural products). Information of trade barriers would be providedfrom the national trade agencies, theWTO, the UNCTAD, the OCDE,the Andean Community Secretariatand the Ministry of Foreign Tradeof Colombia. The trade literatureneeds to be studied in order to se-lect an explicative model of demandof agricultural exports.

Finally, derived from the analysis of the precedent chapters, the fourthchapter will be dedicated to give somerecommendations of policy and approaches to understand internationaltrade in the framework of competi-tiveness and trade policies. Comple-mentarily, the use of primary sourcessuch as speeches, institutional andgovernmental publications of trade policy and interviews with policy-makers to derive the final conclusionsis contemplated.



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APPENDIX

CONTENTS

Activity Share(%)

Devel opment and evaluation of the the sis projectResearch Contents

1. Compe ti ti veness and it s de te rmi nants: The comparative advantage theory asa first step to build a competitive advantage theory for the agricultural sector.1.1 Macroeconomic environment of competitiveness.

1.1.1 The t raditional approaches: Balance of Payment s, Foreign ExchangeRate Policies and Relative Prices.

1.1.2 Institutional Policy Approach (WEF).1.1.3 Other Macroeconomic Approaches.

10

1.2 Microeconomic environment of competit iveness1.2.1 Theoretical approaches t o competit ive advantage: microeconomic level- Competit iveness based on institutional and infrastructure qualities- Competit iveness based on productivity and strat egic trade policies.- Competit iveness based on productivity and cost base in front of

competitors.- Other relevant approaches to competitiveness1.2.2 Criteria for the selection of the case study.- Parameters of selection- Production and trade of the selected products: general approach

15

2 Effect of th e agri cultu ral trade poli cie s of the U.S.A. and the E.U. on theproducts exported by Colombia.2.1 General Approach to Trade Policies2.2 Application of Trade Policies to the Selected Products.

2.2.1 Patterns of protectionism.

2.2.2 Unilateral P references.2.2.3 Trade Patterns of Colombia and the competitiveness with respect toother countries.

25

3 Possibl e Scen arios of Trade3.1 Macroeconomic Determinants of Competitiveness.3.2 Microeconomic Determinants of Competitiveness.3.3 Influence of Trade Policies.3.4 Econometric Model and Projection of Trade.

3.4.1 Maintenance of unilateral t ariff preferences.3.4.2 From the unilateral tariff preferences to the Free Trade Agreement.

35

4 Recommendations of Trade Policie s and Conclusi ons 15TOTAL 100



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