The Welfare Effects of Trade Liberalization in Colombia: Evidence from the Car Industry

Trade liberalization as part of the globalization process was encouraged in many Latin American countries during the eighties and nineties. Colombia joined this process in 1991. Using product level data, I examine the effect of trade liberalization in the Colombian automobile industry. The discrete choice methodology that I use allows me to estimate consumer welfare and evaluate firms’ performance. Car prices declined on average 7.6% per year after the economic reforms were implemented. Imported cars had prohibitively high prices and were essentially unavailable before the tariff reduction (200% on average before, 35% after the reforms). I find the gains in consumers’ welfare to be, as a consequence of declining prices and increased variety, around three thousand dollars per purchaser. On the supply side I find that as the industry reorganized in the second half of the eighties, price costs margins dropped from 33% to 24% even before the reforms took place. After the reforms, margins increased because of the associated lower costs, but then again started to fall, reaching a low 23% for domestic cars. Domestic competition prior to the reforms, the associated decrease in costs and the relatively unchanged market structure seem to explain the price cost margins behavior.