FTA with the European Union: more exporters, but stagnant trade and little diversification

The FTA with the European Union has been the subject of intense debate with bittersweet results since its signing in 2012 and its provisional implementation in 2013.

The FTA with the European Union has not met the objectives of diversification and strengthening of the Colombian economy, and has contributed to dependence on exports of primary products and deindustrialization, according to the most recent report by the Center for Labor Studies (Cedetrabajo).

New European regulations pose additional challenges, and a more effective strategy is required to renegotiate the agreement and foster greater diversification and competitiveness in the international market.

Among the positive effects, Analdex highlights that during this period the number of exporting companies and the amount of tariff items exported to Europe have increased.

However, according to the Ministry of Commerce, Industry and Tourism (Mincit), the FTA with the European Union has not had a significant impact on total employment in the country and has reduced Colombia’s commercial competitiveness.

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Expansion of export companies and new products

According to Analdex, the FTA with the European Union has allowed close to 2,000 Colombian companies to export to the European Union. In 2012, before the entry into force of the FTA with the European Union, 1,606 exporting companies were registered; by 2023, the number increased to 3,593 companies, reflecting an increase of 1,987 new companies.

In addition, 119 new Colombian products have entered the European market since the implementation of the FTA with the European Union.

Exports and trade balance before and after the FTA with the European Union

The trade relationship between Colombia and the European Union has been characterized by a structure concentrated in primary products, as shown in Cedetrabajo’s report.

During the period from 1991 to 2010, exports of mining and energy products to the European Union increased significantly, while agricultural and manufacturing exports decreased or remained unchanged.

Between 1991 and 2010, the trade balance with the European Union went from a surplus of USD $995 million in 1991 to a deficit of USD $416 million in 2010.

This pattern continued during the second period of the FTA with the European Union, between 2011 and 2016, when Colombia temporarily benefited from the commodity super cycle, but suffered a notable drop in exports when commodity prices fell.

In the most recent stage, from 2017 to 2023, the trade balance with the EU has shown a significant accumulated deficit, with an export supply that remains concentrated in a few commodities such as coal, coffee, bananas, oil, palm oil and ferronickel.

According to the Cedetrabajo report, between 2011 and 2014, Colombia’s exports to the EU reached an annual average of USD $8 billion and an accumulated surplus of USD $4.457 billion. 71% of exports were coal (36.7%) and oil (34.4%), followed by coffee sales, which contributed 7.4%, bananas and plantains with 5.3% and ferronickel with 2.84%.

Subsequently, in 2015 exports to the European Union fell by 35.4% annually and by 15.7% annually in 2016, closing that year at USD $4,532. In these years the share of oil and coal exports fell to 50.9% and an accumulated deficit of USD $3,180 million was generated.

Subsequently, between 2017 and 2023, exports remained at around USD $5,218 million and the accumulated deficit reached USD $16,400 million.

During this period, exports of coal (32.8%), coffee (13.4%), bananas and plantains (10.7%), gold (7.6%), oil (7.2%), palm oil (3.9%) and ferronickel (2.4%), contributed 78% of exports to the European Union. This shows that the export offer has not been diversified.

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Challenges of the European Green Pact

In the short term, the European Green Pact represents an additional challenge for Colombian agricultural exports, imposing new environmental, social and labor standards that increase production costs and act as non-tariff barriers.

The Colombian government has chosen to adapt to these regulations rather than oppose them, seeking to negotiate extended deadlines to facilitate a gradual transition to more sustainable practices.

The Green Pact covers initiatives in “Biodiversity, Deforestation, Due Diligence and Farm to Fork”, which will directly affect Colombian exports of agricultural and agro-industrial products.

Exporters will have to adapt and comply with new environmental, social and labor standards imposed by the EU, including organic farming, nutritional and sustainable labeling, traceability, sustainable agricultural practices, due diligence, pesticide use reduction and maximum residue limits.

In spite of this, leaders of the Colombian export sector, such as Gustavo Gómez, president of the National Association of Colombian Coffee Exporters (Asoexport), emphasizes that the FTA with the European Union has consolidated Europe as the second most important market for Colombian coffee. However, challenges such as ensuring the admissibility of the product under the new regulations of the Green Pact are also highlighted.

Foreign Direct Investment

In terms of Foreign Direct Investment (FDI), the EU is the second largest source of FDI in Colombia, with a 20.8% share, reaching USD $3,637 million. However, as Cedetrabajo’s report indicates, EU investment in Colombia has not shown significant growth since the entry into force of the FTA with the European Union.

While EU FDI in Colombia has remained between USD $3 billion and $4 billion, Colombia’s investments in the EU have shown a decreasing trend between 2015 and 2023, according to the same report.

Investment has been mainly concentrated in the mining-energy sector, contributing to the Dutch disease phenomenon, which has affected the country during the boom in commodity prices. The appreciation of the real exchange rate has exacerbated its negative impact on the tradable sector, further weakening the competitiveness of domestic industry.

Recent drop in exports

Between January and May 2024, Colombia’s exports to the European Union fell by 42.7%, from USD 3,438 million to USD 1,974 million, mainly due to the decrease in coal and ferronickel sales. The main export destinations in Europe are the Netherlands, Italy and Spain.

The experience of the FTA with the European Union highlights the need for a more effective strategy to insert the economy into international markets, diversify the export offer and promote greater competitiveness.

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