Economic Impacts of the Free Trade Agreement Between the European Union and Colombia

Abstract

The main purpose of this thesis is to develop a multidisciplinary assessment on the economic and social effects of the Free Trade Agreement (FTA) signed in 2012 by the European Union (EU) and Colombia. The EU - Colombia FTA is a multilateral and intra-regional trade agreement, where the developed region is represented by the EU-28 countries, and the developing region is represented by Colombia. Firstly, the theoretical framework includes a brief review of the evolution of free trade and free trade agreements theories since the 16th century, and also includes the most important critics of the trade doctrine developed by the well-known Dependency Theory, the Theory of Uneven Development and the arguments presented by John Maynard Keynes in favour of Protectionism. Secondly, this thesis incorporates a brief review of the historical evolution of the international integration process of the EU and Colombia, and also a description of the context, and structure of the FTA. Thirdly, the thesis is based on a multidisciplinary methodological approach that includes a horizontal depth analysis, a qualitative analysis of trade creation and trade diversion effects, and an analysis of two trade indicators such as the trade intensity index (TII) and the trade complementarity index (TCI). Finally, it includes a new multidimensional indicator called Development and Integration Perception Index (DIPI), which is a useful tool for identifying and assessing the countries’ profiles regarding their level of human development, international economic integration and democratic stability. Future research will create a rank and score based on the DIPI for most of the regions and countries around the world. Finally, the main conclusions show that: • Partial equilibrium models, gravity equation models and computable general equilibrium analysis are the most used models for assessing the impacts of FTAs on welfare and trade of signing economies and regions. These models include both ex-ante and ex-post liberalization trade analysis. Nevertheless, they models do not pay attention to the social impacts of an FTA, for example, the impacts on the human development, labour rights, and welfare systems, among others. • Despite the EU and Colombia FTA is a relatively high depth agreement, the legal enforceability of social provisions is quite weak in the agreement affecting the implementation of the labour provisions and the achievement of trade and social ambitions. The EU commitment in promoting human rights and improving labour conditions among its trade partners, in this case Colombia is very weak. • The data show that after the FTA entered into force the Colombian exports of goods to the EU decreased while the EU exports to Colombia increased. Regarding services, the data show that the Colombian exports of services to the EU grew significantly less than the EU exports of services to Colombia. The information by product shows that EU imports from Colombia are mainly commodities, while the main products imported by Colombia are specially industrialized goods. • The Vinerian qualitative analysis of the EU and Colombia FTA evidenced that the impact of tariff liberation derived from the EU-Colombia FTA is generating uneven trade creation and trade diversion effects for both the EU and Colombia. When the expected economic effects of the FTA implementation between developed and developing countries are uneven, it means that developing countries such as Colombia have less opportunities to exploit the benefits of an FTA. • The results of the new DIPI show that Colombia has serious development gaps in comparison with Germany, mainly in such areas as innovative and competitive development, human development and labour rights, democracy and corruption. The lack of productive jobs and competitive wages for men and women negatively affects the Colombian level of competitiveness, preventing a successful integration into the international economy. • The causes of the uneven performance of the balance of trade and distribution of the benefits of the EU-Colombia FTA, are explained by the asymmetrical interdependencies among the partners. In addition, Colombia has not been developing a thrusting environment, regulatory mechanisms and supply chain logistics which can help the country to export its products and services to the EU market in an efficient way. It is necessary to improve policies such as the removal of other quantitative restrictions, labour market regulations, reform of government administration, laws against corruption and tax laws.