NEW FRONTIERS NEXT DOOR: GROWING ECONOMIC LINKS

UNCLAS BOGOTA 002046

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN CO BR
SUBJECT: NEW FRONTIERS NEXT DOOR: GROWING ECONOMIC LINKS
BETWEEN COLOMBIA AND BRAZIL


1. SUMMARY: The U.S. accounts for 70% of Colombia's export
market, and the Andean region, especially Venezuela, accounts
for almost all of the remaining 30%. With a marked drop in
U.S. consumer demand and increased difficulty in receiving
payment for exports to Venezuela, Colombia is looking to
diversify its economic links world-wide. Brazil is at the
center of its regional trade and investment ambitions.
Despite Colombia's negative trade balance with Brazil and the
fact that the two countries produce many of the same goods,
Colombia is focused on increasing exports to Brazil in
certain niche markets like auto parts and specialty clothing,
and attracting Brazilian direct investment. Because of its
established trade links north-ward, Colombia hopes to attract
Brazilian companies who see Colombia as a platform for
distribution to the U.S. and world-wide. Oft timid about
reaching beyond markets where they are comfortable and
established, Colombian business should not miss the
opportunities presented by the huge market next door. END
SUMMARY.

Existing Agreements and Current Trade Imbalance
-------------- --


2. In 2008 Colombia's negative trade balance with Brazil
stood at USD $1.6 billion, up from USD $369 million ten years
earlier. As part of the Latin American Integration
Association (ALADI),until recently Colombia and Brazil had
only half-heartedly promoted bilateral trade and investment,
preferring to focus on U.S. and European markets. The two
countries signed a Complementation Agreement in 2004
(CAN-Mercosur Number 59),which further smoothed their
commercial ties. In 2007 they penned a memorandum of
understanding (MOU) to promote Colombian exports to Brazil.
The result of these efforts, along with domestic policy
changes to loosen protectionist policies, has been a surge in
cross-border trade. From 2006 to 2008, imports from Brazil
increased by almost 25% (up from USD 1.8 billion in 2006 to
USD 2.2 billion in 2008),and exports to Brazil were up 250%
(from USD 185 million in 2006 to USD 641 million in 2008).
Brazilian direct investment in Colombia increased 5-fold over
the same two year period. Petrochemicals and palm oil stand
out as Colombia's largest exports to Brazil (totaling almost
USD 270 million in 2008),while machinery, iron and steel
(USD $515 million in 2008 and USD $211 million in 2008,
respectively) are Colombia's largest imports from Brazil.
Brazil NOW stands as Colombia's fourth largest trading
partner, behind the U.S., Venezuela and China.


Focus on Niche Markets, FDI and Exchange of Expertise
-------------- --------------


3. The fact that both countries produce many of the same
goods for export has historically blunted Colombia's interest
in the Brazilian market. Since Colombia cannot compete in
terms of quantity, the focus is on quality. Carlos Rivera of
ANALDEX (Export Association) highlighted niche markets in
auto parts, specialty textiles, clothing, paper products,
tobacco products and specialty food products as the most
promising. Francisco Solano, Director of the
Colombo-Brazilian Chamber of Commerce told us that Colombian
companies have also expressed interest in tapping the
Brazilian market in sectors like dairy products and
pharmaceuticals. He cited several Colombian companies that
have already begun operating in Brazil, including ISA
(Interconexion Electrica S.A),which operates electrical
distribution in Sao Paolo, Manuelita Sugar and Carvajal Paper
Products.


4. Attracting Brazilian FDI is a priority and growth area for
Colombia. Solano believes Colombia can learn from Brazil's
experience in building its infrastructure and in developing
industries like agriculture, energy and biofuels. He cited
investment by PetroBras, Vale do Rio Doce (coal),and Diaco
(iron and steel) as examples of Brazilian companies importing
technology and expertise though investment. Bernardo Naranjo
of the National Business Association (ANDI) referenced
intra-company cooperation by multi-nationals, citing Michelin
Colombia and Michelin Brazil's exchanges of goods and
employees. Although no formal investment treaty exists
between the countries (the Ministry of Trade claimed the
Brazilian government would not allow such a treaty),Yaylee
Rangel, who handles Mercosur issues at the Ministry, told us
Colombia is hopeful about Brazilian companies using its
shores as a platform for exports to the U.S. and elsewhere,

especially in the Colombia-U.S. FTA is approved. With a
stronger link to the U.S. market, goods like shoes and other
textiles could be produced by Brazilian companies in Colombia
for export to the U.S.


Buy Latin-American, Tentatively
--------------

4. With the great majority of its export eggs in the U.S.
and Venezuelan baskets, Colombia has been scrambling to
diversify trade links. Brazil, a substantial market in
Colombia's neighborhood, is a logical place to start. Edith
Andrade, Brazil desk officer at the Ministry of Foreign
Affairs pointed to increased Brazilian imports from Colombia
as part of President Lula's efforts to "buy Latin American."
Issues such as relatively high transport costs (despite the
physical proximity) and an obvious language barrier still
hinder trade between the two countries, but improving
transport links appears to be on Brazil's radar. In June,
2008, President Lula announced plans to invest USD 650
million on a railroad to transport 10 million tons of coal a
year from the coal mining region of Boyaca to the Caribbean
coast. While this project is not on Colombia's current list
of critical infrastructure projects for the short term, it
shows Brazil's long-term interest in trade and investment
with Colombia.


5. Comment: The Colombian business community has been
regularly criticized for its conservative approach to
expanding markets; Colombians tend to flock to where they
traditionally have been successful, e.g. the U.S. and Andean
neighbors, and are fearful of new territories (e.g. China,
Russia, Brazil) where long-standing ties are lacking. But the
economic crisis in the U.S. and changing political climate in
Venezuela have revealed vulnerabilities in concentrating
their export base, and the GOC has made concerted efforts to
open new markets. Brazil, so near physically but very far in
other respects, is a logical target market, one which
Colombia is just NOW beginning to explore effectively. End
Comment.






Brownfield