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Cablegate: Fta's Impact On Small and Medium Size Businesses

VZCZCXYZ2947
RR RUEHWEB

DE RUEHBO #0834/01 0652139
ZNR UUUUU ZZH
R 052139Z MAR 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 1680
INFO RUEHCV/AMEMBASSY CARACAS 0052
RUEHLP/AMEMBASSY LA PAZ MAR LIMA 5977
RUEHZP/AMEMBASSY PANAMA 1347
RUEHQT/AMEMBASSY QUITO 6628
RHEHAAA/WHITE HOUSE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS BOGOTA 000834

SIPDIS

SIPDIS

WHA FOR CSHAPIRO AND JSALAZAR; PASS TO USTR MCARILLO

E.O. 12958: N/A
TAGS: ETRD ECON CO
SUBJECT: FTA'S IMPACT ON SMALL AND MEDIUM SIZE BUSINESSES
IN COLOMBIA

REF: BOGOTA 540

1. (U) SUMMARY: Small and medium size enterprises (SME) in
Colombia expect to benefit from the U.S.-Colombian Trade
Promotion Agreement (CTPA) as it grows the overall economy
and increases domestic demand. SMEs will also benefit from
cheaper inputs and increased capital investment flows.
According to local experts, SMEs have minimal risk of being
harmed by increased competition because they primarily
operate in non-tradable industries. The Colombian Ministry
of Commerce, Industry and Tourism (MOCIT) has identified
several new products that have a high potential for
successful exportation to the U.S. and is developing
strategies for small businesses to access these markets.
Similarly, the U.S. Agency for International Development
(USAID) has fostered several initiatives to help small
businesses seize the opportunities of free trade. END
SUMMARY.

SME Profile
-----------

2. (U) Colombian law classifies SMEs as having fewer than
200 employees and $3.3 million in assets. According to the
MOCIT, SMEs represent 96% of all business establishments in
Colombia and generate 63% of all employment. They also
account for 43.5% of imports and 32% of non-traditional
exports. As of 2003, there were 47,750 SMEs registered
with the Chamber of Commerce.

Ample Opportunity, Minimal Risk
-------------------------------

3. (U) Colombia's business sector, including SMEs,
continues to boom thanks to reduced violence and economic
growth. A recent Cornell University study shows that the
survival rate of small ventures in Colombia has doubled
since 2001 as entrepreneurs have proven increasingly
willing to take risks in Colombia's stabilizing
environment. According to Guillermo Perry, director of
Fedesarollo and former chief economist for Latin America
and the Caribbean at the World Bank, Colombian SMEs
primarily operate in non-tradable industries (construction,
retail, transportation, etc.). He sees minimal risk that
international competition will harm SMEs, and predicts the
firms will likely benefit indirectly from the CTPA in the
following ways: 1) their ability to acquire lower cost
inputs, machinery and technology; 2) the increase in demand
for services provided by SMEs as trade liberalization grows
the overall economy; and 3) increase in demand for SME
inputs to larger exporters.

4. (U) The MOCIT has identified 590 products that have a
high potential for successful export to the U.S. These
products and industries come from all regions of Colombia.
The majority of products are in the following sectors:
machinery and electrical/mechanical equipment; common
metals and related products; agricultural products (sugar,
palm oil, tobacco, margarine, frozen fruit); clothing
(fabric and leather); plastics and rubber; and
transportation equipment. While most of the products are
produced by non-SME firms, many SMEs contribute inputs or
services for these sectors.

Inadequate Infrastructure and Credit Availability Chief
Bottlenecks
--------------------------------------------- ---------------
-------

5. (U) Perry suggests that Mexico's experience with NAFTA
can inform Colombia's preparation for the CTPA. He
explained that while the Mexican economy benefited greatly
from NAFTA, the lack of infrastructure and planning caused
some communities to be left out. Also, many SMEs failed
because they could not get the credit needed to make their
operations more competitive and flexible due to the Mexico
peso crisis that was not related to NAFTA.

6. (U) Both Perry and Norman Correa, President of the
Association of Micro, Small and Medium Size Businesses
(ACOPI), stress that the GOC needs to aggressively address
Colombia's poor infrastructure (e.g. ports, rail, roads and
airports) in a strategic manner so that the entire country

can benefit from trade integration. While the GOC has begun
this process (reftel), many local experts worry the long
time line needed to complete infrastructure improvements
and Colombia's clouded experience with infrastructure
development could impede full realization of CTPA benefits
for all sectors in the near term.

Smoothing the Transition
------------------------

7. (U) With U.S. assistance, the GOC has begun taking
steps to assist SMEs in receiving the training and access
to credit necessary to strengthen their operations and
enter the export market. Mr. Correa praised the GOC
strategy approved in 2007 (CONPES 3484) to overcome
weaknesses in businesses by marshaling public and private
sector resources to provide microfinance, training, market
information, and reduce costs of formalization.
Additionally, the Colombian government is reforming the
banking and microfinance systems to give small businesses
and farmers the transitional support they need to target
new markets and respond to market forces.

8. (U) The joint USG-GOC Trade Capacity Building Group
provides technical support and training activities to help
SMEs effectively transition to free trade. The group
provides training in international procurement
standards/requirements, integration into supply chains, and
compliance with critical technical norms/standards. The
group, with USAID assistance, also encourages small
businesses to attain economies of scale by forming trade
associations and alliances with large exporting
enterprises. From 2006 - 2010, USAID will spend $50
million on technical assistance programs to improve
competitiveness of small businesses and $10 million on
microfinance activities. These programs lay the technical
foundation for SMEs to participate in the international
marketplace once the CTPA is approved.

9. (U) Correa told EconOff that he was hesitant to predict
which industries would benefit most from the CTPA as it
would depend on how individual SMEs prepare for and take
advantage of opportunities. He stated that the pathway for
success would be for SMEs to identify niche markets,
improve operational efficiency, and cooperate with U.S.
partners to enter the supply chains of companies sourcing
products from Colombia.

Brownfield

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