An empirical analysis of Colombia's trade liberalization process and its effect on the equilibrium of its structural trade deficit

• Published date: 01 May 2022
• Author: Carlos Abreo,Ricardo Bustillo,Carlos Rodriguez
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/rode.12860

736 

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       Rev Dev Econ. 2022;26:736–755.

wileyonlinelibrary.com/journal/rode

Received: 22 February 2021 

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  Revised: 22 November 2021 

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  Accepted: 5 January 2022

DOI: 10.1111/rode.12860  

REGULAR ARTICLE

An empirical analysis of Colombia's trade

liberalization process and its effect on the

equilibrium of its structural trade deficit

CarlosAbreo

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RicardoBustillo

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CarlosRodriguez

 University of the Basque Country UPV/

EHU, Bilbao, Spain

Correspondence

Carlos Abreo, University of the Basque 

Country UPV/EHU, Lehendakari 

Aguirre, 83, 48015 Bilbao, Spain.

Email: cabreo001@ikasle.ehu.eus

Funding information

Ministry of Science, Technology and 

Innovation of Colombia

Abstract

This  article  examines  the  extent  to  which  Colombia's 

trade liberalization, as a government strategy to boost its 

exports, has helped to balance its structural trade deficit. 

Based on the trade gravity model theory, we derive two- 

way specifications (Colombian  exports and imports)  in 

order  to  analyze  bilateral  trade  flows  (fuels  and  non- 

fuels) between  Colombia and  136 countries  from  2005 

to 2018.  Additionally, we  compare the  real export  per-

formance of  Colombia  with its  main partners  through 

the  trade  potential  index  (TPI),  to  assess  the  effect  of 

Colombia's openness on  bilateral trade. The economet-

ric  approach  indicates  that  the  free  trade  agreement 

(FTA) factor has a negative net effect on Colombia's ex-

ports and a  positive net impact  on Colombia's imports. 

Finally, the TPI analysis allows us to infer that although 

there  is  an  evolution  towards  the  intensification  of 

Colombian trade, this trend is greater in imports than in 

exports, which  suggests a  deepening of the  Colombian 

trade deficit.

KEYWORDS

Colombia, free trade agreement (FTA), international trade, trade 

balance, trade gravity model

This  is  an  open  access  article  under  the  terms of   the  Creative  Commons  Attribution  License,  which  permits  use,  distribution  and 

reproduction in any medium, provided the original work is properly cited.

© 2022 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

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INTRODUCTION

The past decade has  witnessed the rapid development of  trade liberalization as one of the most 

critical policies in enhancing  international trade around the world. In this  regard, empirical re-

search has explored the effects of the free trade agreement (FTA) factor on bilateral trade, show-

ing that FTAs improve bilateral trade among associated countries (Egger etal.,2011).

Colombia, as part of the Andean Community (AC) and one of the fastest- growing countries in 

the region, has developed a policy of trade openness in the last decades. This policy has been im-

plemented through the signing  of relevant trade agreements,  which have different trade scopes 

and follow global  trends in trade  liberalization. However, there is no  consensus about whether 

this process has had  the expected effect on Colombia's exports and  its trade balance, and there-

fore, on domestic production and welfare.

The purpose of  this paper is  to analyze the  effects of Colombia's trade  liberalization process 

and also to assess the impact of the signing of bilateral and regional trade agreements as an effec-

tive policy to reduce the Colombian trade deficit. Additionally, our study delves into the effect of 

FTAs on Colombia's trade in fuel and non- fuel- related goods, which allows us  to determine the 

individual influence of  FTAs on these types of  products, which is essential due  to the country's 

high dependence on its  fuel exports. Furthermore, this study  could be replicated in most of  the 

Latin American countries,  which are highly  dependent on  their commodity exports,  as well as 

those countries whose  exports depend particularly on fuels.1  Moreover, this study will allow us 

to analyze,  through an empirical  approach, the  performance of  the trade  balance of  a country 

which, on  the one hand,  largely depends  on its fuel  exports and, on  the other  hand, whose oil 

reserves are about to run out. As far as we know, this is the first study to explore the determinants 

of Colombia's international  trade (export and import  flow) in terms  of fuel and  non- fuel flows. 

Consequently, the results of the study will allow us to make some trade policy recommendations 

focused on improving the efficiency of Colombia's trade openness.

Furthermore, we applied the  trade gravity model to a  cross- sectional data  set of bilateral  ex-

ports to 136 countries from 2005 to 2018. Subsequently, this study sets out to assess the effects of 

a group of variables on  exports between the parties, where the FTA factor is a  relevant variable. 

Additionally, a robust estimation  of  bilateral trade  will allow  us to  compare the  actual  export 

performance of Colombia  and its partners with the  estimated export potential generated by the 

model  through  the  trade potential  index  (TPI).  This  comparison  will  permit  us  to  determine 

whether the signing of trade agreements by Colombian governments has had the expected effect 

on trade.  The research also  considers two  aspects of  recent empirical  analysis of  international 

trade. The first is the fact of the presence of many zeros in bilateral trade data and the need to esti-

mate the model with an approach more suitable than that of a traditional log- linear form; this ap-

proach is called the Poisson pseudo maximum likelihood (PPML; Santos Silva & Tenreyro,2006). 

The second is the application of fixed effects to capture unobservable determinants in trade flows 

(Gopinath et al.,2014; World Trade Organization  2012). Summing  up, the proposed  study will 

allow us to discern whether the Colombian trade liberalization process has helped to balance its 

trade deficit.

The paper is organized as follows. Section2 describes the evolution of Colombia's trade liber-

alization strategy in the  last few decades through the  international economic integration policy 

initially called Apertura Comercial.  Section3 describes our methodological approach. Section4 

is concerned with the specification and data used for this study. Section5 presents the findings of 

the research, focusing on the effects of the variables involved in bilateral trade and the results of 

the TPI. Section6 provides a discussion. Section7 concludes.