Doing Business in Colombia 2012

An Expert's View about Business Environment in Colombia

Posted on: 24 May 2012

Market Overview
The Republic of Colombia is the fifth largest economy in Latin America with the third largest population of approximately 46 million inhabitants. It is the only country in South America with two sea coasts (Pacific and Caribbean) providing tactical shipping advantages in today’s global market. Aided by major security improvements, steady economic growth and moderate inflation, Colombia has become a free market economy with major commercial and investment ties to the United States, Europe, Asia and Latin America. Colombia is the third largest market for U.S. exports in Latin America.
In the eyes of U.S. exporters, Colombia may suffer more from the perceptions of the past than the realities of the present. The past 10 years have brought extraordinary change to the country in terms of economic development and improvements in the national safety and security situation. The political stability, growing middle class, and improved security has created an economic boom in Colombia that, coupled with the conservative lending practices by Colombia’s financial institutions, lessened the impact of the global economic crisis. Key economic indicators demonstrating the positive long-term effect of Colombia’s political and economic policies include: GDP growth of 5.5 percent in 2011, (expected to remain between 5 and 6 percent for 2012); foreign direct investment of USD 14.8 billion in 2011, which represents a 56 percent increase over 2010, 80 percent of the 2011 amount was attributable to the extractive industries; and a rise in industrial production of 5.1 percent in 2011over 2010 figures. These are all signs of a strong and growing economy.
Due to Colombia’s close ties to the United States and Colombians’ realization of the quality and reliability of U.S products, consumers in Colombia often favor U.S. products and services over those of our foreign competitors. The United States is Colombia’s largest trading partner and Colombia is the 22nd largest market for U.S. exports in 2011. U.S. exports to Colombia in 2011 topped USD 14 billion, an increase of more than 15 percent over 2010.
Colombia is unique in that there are five bona fide commercial hubs in the country: Bogota, Medellin, Barranquilla, Cali, and Cartagena. As opposed to the majority of Latin American countries that have one or two major cities, Colombia offers U.S exporters access through multiple commercial hubs, each of which has its own American Chamber of Commerce. While these cities, and many other secondary cities, offer unique market opportunities, they are close enough via air routes that is common to have one partner (agent, distributer, or representative) to cover the whole country.
Regarding foreign direct investment, coal mining and oil and gas exploration/production are the principal areas of U.S. investment, followed by the consumer goods, high tech and tourism/franchising sectors. A sample of the major U.S. companies in Colombia include: Drummond, Chicago Bridge and Iron, General Electric, General Motors, Occidental Petroleum, ChevronTexaco, ExxonMobil, Microsoft, Unisys, Kimberly Clark, Johnson and Johnson, Goodyear, Kraft, 3M, Marriott, and Sonesta Collection Hotels.
2012 will bring greater investment in infrastructure projects ranging from roads (USD 26 billion allocated over the next 4 years), airport modernizations, port construction, and railway projects. New FDI will begin to reflect major hotel (Hilton and Hyatt) and infrastructure (highway, mass transportation, ports and airport) projects.
The Colombian government has implemented trade agreements with Guatemala, El Salvador, Honduras, Chile, Canada, Switzerland; signed a trade accord with) the European Union (to enter into force in 2012), EFTA nations (Norway, Liechtenstein, Iceland- to enter into force by 2012); and expanded its trade accord with Mexico. Colombia has an ambitious trade agenda and initiated FTA negotiations with South Korea, Panama, Japan, and Turkey.
Given the tremendous opportunities for U.S. exporters in Colombia, it is appropriate that on October 21, 2011, President Obama signed the United States-Colombia bilateral trade agreement (U.S.-CTPA) following its approval by the U.S. Congress. Currently, the governments of Colombia and the United States are working out the technical details of implementation. Once implemented, 80 percent of U.S. exports of consumer and industrial products to Colombia will be duty-free immediately upon entry into force, with remaining tariffs phased out over ten years. Other provisions include strong protection for U.S. investors (legal stability), expanded access to service markets, greater intellectual property rights protection, market access for remanufactured goods, increased transparency and improved dispute settlement mechanisms (arbitration).

Market Challenges

As with any market, there are numerous challenges to doing business in Colombia (some of which will be eliminated with implementation of the Free Trade Agreement):
• Colombia has struggled with the requirements of the existing government procurement framework, which calls for open bidding in public tenders. As such there can be a lack of transparency, fairness, and truly competitive bidding conditions in many tenders.
• Only firms licensed under Colombian law may provide legal services. Foreign law firms can operate in Colombia by forming a joint venture with a Colombian law firm and operating under the licenses of the Colombian lawyers in the firm.
• Economic needs tests are required when foreign providers of professional services operate temporarily; and residency requirements restrict trans-border trade of certain professional services, such as accounting, bookkeeping, auditing, architecture, engineering, urban planning, and medical and dental services.
• A commercial presence is required to provide information processing services or to bid on Colombian government contracts.
• Telecommunications barriers to entry include cross subsidies, the requirement for a commercial presence in Colombia, and an economic needs tests.
• For firms with more than ten employees, no more than 10 percent of the general workforce and 20 percent of specialists may be foreign nationals.
• International banking institutions are required to maintain a commercial presence in Colombia through subsidiary offices.
• Insurance companies are restricted from offering policies to underwrite risk on government sponsored infrastructure projects due to Colombian regulations that do not recognize insurance policies as equivalent to bank guarantees.
• Colombia has been on the Special 301 “Watch List” every year since 1991, reflecting ongoing challenges in the enforcement of intellectual property rights.
• Customs duties have been consolidated into four tariff levels: 0 to 5 percent on capital goods, industrial goods and raw materials not produced in Colombia, 10 percent on manufactured goods with some exemptions, and 15 to 20 percent on consumer and “sensitive” goods. Exceptions include automobiles, which are subject to a 35 percent duty. A group of agricultural products is protected by a price band mechanism that offers variable duties as high as 100 percent.

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Posted: 24 May 2012

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