Earlier this week, the Venezuelan government banned the exporting of items considered essential for Venezuelan consumption, including food and hygiene products. President Nicolas Maduro’s new decree not only limits trade, but also establishes a new Department of Export Control as its enforcement body for anyone caught exporting.
For businesses located in Venezuela, the reason for action and implications are clear. The government is attempting to stop smuggling of essential items outside of the country, primarily to neighboring Colombia. It has been no secret that this cross-border trade is a massive business and makes the Colombian border town of Cúcuta an important international commerce center.
Businesses located outside of or unfamiliar with Venezuela might be scratching their heads as to why the government would want to stop any export measures. After all, in most economies, outbound trade is usually seen as a positive. To understand why exporting is now illegal, one must dig deeper into Venezuelan’s currency system.
Venezuela’s Exchange Rate Complexities
To oversimplify a complicated subject, items billed by Venezuelan government as “essential use” use the official exchange rate of SICAD I at a rate of 10.8 percent for importation; however, the Venezuelan black market currency exchange, which is subject to outside economic forces, is around 80-85 percent. This means that a bar of soap on the shelf in Venezuela would be much less compared to market forces than when comparing the same bar of soap in another country, say the United States, in essence subsidizing these products for the Venezuelan population.
These controls keep prices artificially low and have spurred smuggling to neighboring Colombia. The bridge connecting the border towns of Cúcuta, Colombia and the Venezuelan city of San Cristóbal is bustling with this activity, so much so that the western Venezuelan state of Táchira estimates that 40 percent of food sent to the state ends up being smuggled into Colombia. The Economist, back in March, noted that “a kilo of corn flour, which is very popular for making arepa corn cakes, costs just 14 bolívares (about 20 cents) in Venezuelan shops. The same package fetches $1.25 in Colombia.” Even with additional mark ups, the prices of the smuggled items are still far less than Colombian market value.
How Venezuela is Cracking Down
The chronically bare shelves for basic food items have caused the country to act. Beyond this new decree and enforcement body, Maduro has even said that a mandatory fingerprinting system, such as what the country uses for voting, is needed to monitor people buying too much of one single item. There have been no further details about this system or when it would be implemented. Earlier this month, the country also began to close its border with Colombia at night to stop any diversions.
Which Items are Banned for Venezuelan Export?
Food: cooking oil (corn, soybean, sunflower and palm), food for animals, rice, beans, tuna, sardines, sugar, coffee, beef, cattle, flour (corn, soy, wheat, sunflower), milk, corn, butter, margarine, pasta, bread, eggs, mayonnaise, ketchup, bologna, salt, potatoes and tomatoes.
Personal hygiene: disposable diapers, toilet paper, sanitary napkins, shampoo, soap, toothpaste, washing soaps, detergents, cleaners, razors and hair dye.
Health: medicine, medical and surgical equipment, supplies, dental supplies and raw medical supply material.
Education and construction items: books, school uniforms, school supplies, cement blocks and rebar finishing products (aluminum, iron, steel, cardboard and paper).
Impact on International Trade
What makes the Venezuelan economy so interesting for so many international businesses is that a country of 30 million consumes a lot more than it should. Without the exchange rate explanation, it would seem that Venezuelans consume more than the average economy. The more subsidized products are smuggled, the more the country will continue to import. For businesses working with Venezuela at this time supplying basic use products, the trade volume is still high although the shelves are bare.