metadata: authors: 0: author: Mendez, Jose A.
count: Colombia
docna: 0: docna: The development of the Colombian cut flower industry
docty: Policy Research Working Paper
subtopic: Trade Policy,Disease Control & Prevention,International Trade and Trade Rules,Rules of Origin,Transport Services,Trade and Multilateral Issues
teratopic: Water Resources
abstracts: cdata!: The Colombian cut flower industry is one
            of the major development success stories of the last 20
            years, growing from small beginnings in 1966 to the
            world's second largest exporter of cut flowers in 1980.
            This rapid development has made the cut flower industry a
            major contributor to the Colombian economy. Cut flowers are
            now the nation's leading nontraditional export and
            fourth largest earner of foreign exchange after coffee,
            petroleum, and bananas. The industry has also become a major
            employer of low-skill, largely female labor drawn from the
            low-income areas surrounding Bogota. In 1989, the industry
            employed more than 70,000 workers and generated another
            50,000 jobs in such ancillary industries as packaging and
            transportation. Evolution of the Colombian cut flower
            industry illustrates how the market system enables a society
            to coordinate its economic activities in the most effective
            way. Historically, cut flower production moved from the
            eastern United States to the western and southern states and
            then to Colombia. In both cases, development of air
            transportation made markets accessible within hours from
            anywhere in the world. This freed growers to shift
            production to areas with favorable land and labor costs as
            well as good growing climate. The U.S. economy has also
            benefited from the employment opportunities created by the
            necessity to handle and care for the increased volume of
            flowers at the wholesale and retail level.
geo_reg_key: 119228,517191
repnme: repnme: The development of the Colombian cut flower industry
display_title: The development of the Colombian cut
            flower industry
listing_relative_url: /research/1991/05/699967/development-colombian-cut-flower-industry
topicv3: Transport m1326661 135,Trade m1326924 698,Trade Policy and Integration m1327407 775,Injury m1327524 1428,Trade Policy m1327640 776
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Water Resources
origu: Policy, Research & Ect Affairs
no_of_pages: 40
model_extractions: **Policy, Research, and External Affalrsj**

<!-- Start of picture text --> Trade Policy]<br><!-- End of picture text --> WPS 660 This paper-a product of the Trade Policy Division, Country Economics Department-is part of a larger effort in PRE to understand the economics of the emergence of "fairness" as a standard for regulating international trade, its implications for the continued openness of the international trading system, and its continued functioning as an important vehicle for development. Copies are available free from the World Bank, 1818 HStreetNW, Washington, DC20433. Please contact NellieT. _A_ rtis, room N10-013, extension 37947 _(35_ pages, with tables).

The Colombian cut flower industry is one of the major development success stories of the last 20 years. The industry scarcely existed in 1966 but developed rapidly.

By 1980, Colombia was the world's second largest exporter of cut flowers after the Netherlands, accounting for 8 percent of . world export supply of cut flowers, and it continues to hold that position.

This rapid development has made the cut flower industry a major contributor to the Colombian economy. Cut flowers are now the nation's leading nontraditional export and fourth largest earner of foreign exchange after coffee, petroleum, and bananas.

The industry also has become a major employer of low-skill, largely female labor drawn from the low-income areas surrounding Bogota. In 1989, the industry employed more than 70,000 workers and generated another 50,000 jobs in such ancillary industries as packaging and transportation.

Evolution of the Colombian cut flower industry illustrates how the market system enables a society to coordinate its economic activities in the most effective way. Historically, cut flower production moved from the eastem United States to the westem and southern states and then to Colombia.

In both cases, development of air transportation made markets accessible within hours from anywhere in the world. This freed growers to shift production to areas with favorable land and labor costs as well as a good giowing climate.

In the United States, consumers have benefited from the greater variety, lower prices, and wider availability of flowers. The U.S. economy also has benefited from the employment opportunities created by the necessity to handle and care for the increased volume of flowers at the wholesale and retail level.

The PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy, Research, and Extermal Affairs Complex. Anobjectiveof theseries is to getthesefmdings outquickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Produced by the PRE Dissemination Center
# TABLE OF CONTENTS

|||Page|
|---|---|---|
|I.|Int|roduction<br>1|
|II.|Evo|lution of the U.S. Cut Flowers Industry<br>3|
||A.|Dominance of Eastern growers<br>3|
||B.|The rise of Western andSouthern<br>growers in the<br>5<br>United States|
|III.|The|Rise of Colombian Growers<br>6|
||A.|The right combination of factors<br>6|
||B.|Overcoming obstacles<br>9|
||C.|Recent developments<br>12|
||D.F|uture Problems<br>13|
|IV.|The|Ulp-and-Down<br>Colombian Government Policies<br>13|
||A.|The undoing of a bad policy<br>14|
||B.|The return of a bad policy<br>15|
||C.|Another attempt to undo a bad policy<br>16|
||D.|Policies specific to the cut flowers industry<br>16|
||E.|Implications for Colombian policy<br>17|
|V.|U.S|. Growers' Efforts to Limit Cut Flower Imports<br>18|
||A.|Summary of trade actions<br>18|
||B.|No winners<br>21|
||C.|Closing comment on the antidumping law<br>24|
|VI.|Con|clusion<br>24|
|Refe|rence|s<br>26|
|Endn|otes|<br>27|
|Tabl|es|29|
# Introduction

The Colombian cut flowers industry is one of the major development success stories of the last two decades. Although the industry scarcely existed in 1966, it soon developed into a world class producer and highly successful exporter. By 1980 Colombia was the world's second largest exporter of cut flowers after the Netherlands, accounting for 8 percent of the world export supply of cut flowers. Today, ten years later, it continues to hold that position.

With its export success, the Colombian cut flowers industry has become a leading contributor to Colombian economic development. Cut flowers are now Colombia's leading nontraditional export and fourth largest earner of foreign exchange behind coffee, petroleum, and bananas. The industry has also become a major employer of low-skill, largely female labor derived from the lowincome areas surrounding Bogota. In 1989, the industry employed over 70,000 workers (70 percent of which were women) and was respinsible for another 50,000 jobs in ancillary industries such as packaging and transportation. This employment effect, concentrated in a small area, has made a major contribution to the standard of living of the urban poor. The industry also has symbolic importance to Colombians. It is mostly owned by Colombians, and its success is the result of private entrepreneurship turning the advantages offered by Colombia's climate and labor market into a commercial success.

The Colombian cut flowers industry's success has also made it the target of protectionist efforts in the United States, its primary market. U.S. growers have tried to obtain limits on cut flowers imports since the early 1970s and their efforts have escalated rapidly during the 1980s. After twice failing to get escape clause protection, U.S. growers have concentrated their efforts on obtaining import relief under the U.S. unfair trade laws. They have filed petitions under every major provision of the unfair trade statute. However, to date, no one appears to have been the winner in these trade actic.ns. U.S. growers are unhappy because the actual protection they received 1
was modest and much less than<sup>expected. Colombians are unhappy even though</sup> the modest size of the protection<sup>is a victory of sorts. They note that it</sup> has come at a sizeable cost.<sup>They argue that the $1 million spent in legal</sup> fees through July 1989 (an<sup>amount similar to that of U.S. growers) could have</sup> been used to promote U.S. flower<sup>consumption to the benefit of all growers.</sup> A major theme that emerges from<sup>this study is that the development of</sup> the Colombian cut flowers industry<sup>is a textbook story of how a market economy</sup> works. Entrepreneurs, both<sup>Colombian and American, saw the opportunities</sup> offered by changing economic<sup>circumstances and wore willing to take the risk</sup> of developing the new business<sup>opportunities. By doing so, they provided</sup> consumers, particularly those<sup>in the United States, with greater variety,</sup> lower prices and much greater<sup>availability of floral decorations. This</sup> process began, however, in North<sup>America during the early 1950. as the locus</sup> of production of the cut flowers<sup>industry shifted from the Eastern United</sup> States to Western and Southern<sup>states, and then to Colombia; the development</sup> of the cut flowers in Colombia<sup>is simply an extension of this process.</sup> The study proceeds as follows.<sup>Section II describes the evolution of</sup> the cut flowers industry in the United<sup>States beginning in the 1950.. Section</sup> III outlines the factors that made<sup>Colombia an attractive location for cut</sup> flower production and the role<sup>played by American and Colombian entrepreneurs</sup> in making the industry a successful<sup>exporter. The broad historical and</sup> geographic sweep of sections<sup>II and III serves to highlight the similarity in</sup> the two processes. Section IV<sup>examines the role of Colombian government</sup> policy. The story begins<sup>in 1967 when the Colombian government introduced a</sup> series of reforms designed to<sup>offset the disincentives</sup> to exporting. The implications of Colombia's entry<sup>into the U.S. market are outlined in section</sup> V. This section reviews the history<sup>of U.S. growers' efforts to limit imports</sup> of cut flowers.

2
# Evolution **of the U.S. cut flowers industry**

In the 1950o, U.S. cut flowers production moved from the Eastern United States to Florida and California.<sup>Two decades</sup> later, cut flowers production shifted to Colombia. The forces<sup>that led to both movements</sup> were the same. In both cases, the development of reliable air transportation freed cut flowers production from areas close to major consuming markets, but with high land and labor costs. Entrepreneurs saw the possibilities offered by these changes and accepted the risks of developing new business opportunities. Both stories are textbook examples of how a market economy works.

# _A. Dominance of Eastern growers_

Once cut from the plant, flowers are highly perishable. :fter cutting, roses last 3 to 5 days, carnations 7 to 10 days, standard chrysanthemums 7 to 12 days, and pompon chrysanthemums 10 to 14 days. Prior to 1950, this high perishability was the principal determinant of the location of cut flower production in the U.S. Since it was important to minimize the time between the cutting of the flower and delivery to consumers, the first cut flowers producers in the United States were located in the major consuming areas in the Northeast, i.e. Boston, Philadelphia, New York (Nelson 1981).

Tte concentration of cut flower production in the North is illustrated by the data in table 1. In 1949, 12,427<sup>establishments</sup> were engaged in the production for sale of cut flowers and flowering plants.I Of these, 70 percent were located in the Northern United States, with Pennsylvania and New York having the largest number of<sup>producers. Establishments</sup> in the North also tended to be smaller, family-owned operations. Their average sales per establishment (see column three) were below the average for all regions, as well as for the United States.

The only advantage in locating in the Northeast was proximity; in terms of production costs, it was the least desirable area for producing flowers in the United States. Costs were higher for<sup>a number of reasons.</sup> 3
First, most commercial quality cut flowers are grown in greenhouses because they require _sal growing ccnditions: long days of sunshine, high light intens2.y, and mild temperatures.2 The less ideal the external environment, the greater the cost of the greenhouse since it must be more airtight, and the higher its operating expenses. Airtight greenhouses must be constructed of sturdier materials, metal frames and glass rather than wood and cloth (or plastic film). However, the Northeast has shorter days, lower light intensity, and harsher winters, particularly during the peak production periods. This means that Northern growers have more expensive greenhouses and higher heating and other fuel costs.

Second, cut flowers production is one of the most labor-intensive agricultural activities. Labor is required it nearly every aspect of its production and very few activities are adaptable to mechanization. In 1949, labor costs were 45 percent of total costs. (See table 1.) Yet labor has traditionally been most expensive in the Northeast.

Finally, like all agricultural activities, cut flowers production requires land. However, land values in the North we-e higher due to their proximity to major urban -enters.

Production costs for growers in each region are also listed in table 1. In almost every instance, Northern growers' labor, land, and fuel cost shares were higher than those in other parts of the c -ntry. The fuel cost share for Northern growers (9.3 percent) was forty-six times that of Florida growers, three times that of Southern growers, and two times that of Western growers. In addition, the value of land, structures, and equipment per square foot was highest in the North.

Despite these higher production costs, Northern producers could continue to remain in operation by charging a premium for their flowers. Consumers were willing to pay this premium since the flowers were fresher and had a longer shelf life. The premium compensated Northern growers for higher production costs, much like a production subsidy.

4
B. The r.se of Western and Sc"thern growers in the United States The development of regularly scheduled commercial air flights during<sup>the</sup> 1950s eliminated Eastern grower's ability to charge a<sup>premium for freshness.</sup> Air transportation made it possib.e for flowers to be ut and then transported to any location in the United States within hours. Th's meant<sup>that producers</sup> could choose to locate in areas with lower production costs. These low-cost areas were largely in the West and South, where labor and land was more abundant and where the climate was more favorable. Eastern<sup>markets thus</sup> opened up to Western growers. Commercial airlines also encouraged<sup>western</sup> growers to sell flowers in the East (Nelson, 1981). In the 1950s, most air cargo headed westward and planes were often empty on their return eastward. To encourage eastward traffic, the airlines offered lower air<sup>freight rates on</sup> eastbound cargo.

The competitive position of Northern growers deteriorated. Already pressured by rising land and labor costs due to their proximity to urban areas, they now had to confront the price depressing effects from a greater availability of low-cost Western flowers. The effect on the U.S. cut flowers industry was dramatic.

U.S. production of cut flowers began to shift away from the high-cost growing areas in the East towards lower-cost growing arepe in the West<sup>and</sup> South. The data in table 2 illustrates the shift in proauction location.' Carnations and chrysanthemums, the more durable and relatively inexpensive flowers, were the first to shift production location. Carnations shifted first to California and Colorado, while chrysanthemums moved to California and Florida. Production of roses shifted more slowly.' The other major changes during this period were in the size of establishments and in the concentration of industry output. The amount of output per establishment increased, particularly in areas outside the North. The industry also became more concentrated. In 1975, a few firms accounted for the majority of output. For instance, the U.S. Department of Agriculture reported that 25 percent of the growers accounted for nearly 75 of the 5
production of cut flowers in 1975, the last year concantration data were reported. Thus, from the 19509 through the mid-1970s, a few large establishments, particular.y in California, increasingly displaced the small, family-operated establishments in the North.

It is useful to note that the changes in the U.S. cut flowers industry from the 1950. to the early 1970s occurred prior to the emergence of any import competition. The first imports occurred in 1966, but by 1970 their share of the U.S. market was only 1.1 percent. We now turn to the emergence of import competition.

The rise of Colombian growers<sup>5</sup> During the late-1960s, cut flower production shifted location to Colombia. The shift was an extension of the regional shifts that had occurred in the U.S. The development of commercial air transportation opened up Colombia's attractive environmental and labor conditions to flower growing. The shifts were so related that one of the first Colombian cut flower enterprises was started by four Americans, one of which was a California grower concerned with rising land and fuel costs in the United States. Even the order in which flower types were introduced into Colombia was the same. Carnations and chrysanthemum, flowers which are sturdier and technically less demanding to produce, were introduced first and later followed by roses, which are more fragile and more complex to produce.

# _A. The right combination of factors_

Colombia was an ideal location for the growing of cut flowers. It had near perfect environmental conditions and an abundance of le.nd and unskilled labor. The climate in the plateau region surrounding Bogota (Savana de Bogota) has year-round moderate and unvarying temperatures, 12-nour days, and high light intensity. As a result, high quality flowers can be grown yearround without expensive greenhouses and without incurring costs for heating, 6
cooling and artificial lighting. For instance, high-quality flowers are grown year-round in the Bogota area in simple structures of wood and plastic. In the Medellin area, the same structures are used only to protect flowers from disease and heavy rainfall during the rainy season.

The ability to produce commercial-quality flowere year-round also mears that Colombian growers can continue to prod"_e during the winter months in the United States. These are the months during which demand in the United States is greatest (due to the large number of holidays), while environmental conditions ere least favovable for both home gardens and commercial growers.6 Two other factors made Colombia an ideal location for growing flowers. The country is abundantly endowed with naturally fertile land, which during the early 1970s was being used in low-value activities (Shypula 1981). More importantly, Colombia also had an abundance of low-skilled, largely female labor. This abundance meant that wage rates in Colombia were significantly lower than comparable rates in the U.S. This is illustrated by the data listed below.

||AVERAGE DAILY WAGE<br>Colombia|FOR PRODUCTION<br>Unite|WORKERS<br>d States|
|---|---|---|---|
||Agriculture|Horticulture<br>services|Private Non-<br>agricultural|
|1966|<br>$.82|$16.03|$19.80|
|1970|<br>.82|21.25|23.97|

Source: Urrutia (1985, 10), USDOL and CEA.

This wage difference translated into a sizeable cost advantage for Colombian growers. Using the cost data in table 1, the 1970 wage differential meant that Colvmbian production costs were 4! percent lower than U.S. costs. If the fuel cost savings are included, then Colombian production costs were 49 percent lower than U.S. costs. Moreover, the labor end fuel cost advantages were not offset by the high cost of sh.ipping flowers to the United States. Even after factoring in shipping costs, Colombian production costa were still 31 percent lower than U.S. costs.

Not surprisingly, these sizeable cost advantages meant that the profitability of selling Colombian flowers in the U.S. market at U.S. prices 7
was enormously high. A 1971 Colombian government study estimated that a cut flower grower could expect to earn a profit amounting to 57 percent of the sales value or a 600 percent return per year on the initial investment.' Another source notes that "the cost of a carnation in Colombia could be as lo,w as one cent and the grower could sell it to the wholesaler in the US for 5 cents." (Riemer 1982, 44-45). Still another source notes that some margins were reportedly 100 percent (Morrow 1989).

Although the development of reliable air transportation opened up Colombia's potential as a flower growing area, it was the cow<sup>4</sup> .nation of two additional factors, occurring simultaneously, that led to its development as a major exporter of the cut flowers. The two key elements were the entrepreneurial efforts of a team of four Americans and a major shift in Colombian government policy in 1967. This team of Americans prcvided the right combination of skills to overcome the many obstacles to exporting, while the government's policy shift (consistilng of the removal of government-created burdens) provided an environment in which their efforts would be rewarded. The role played by the Colombian government's policy is outlined later in a separate section.

In 1969, Thomas Kehler, an American businessman, put together a team of entrepreneurs to determine if a flower export business would be feasible. The team consisted of Harmon Brown, the California flower grower concerned with rising land and fuel prices in the United States; Bill Mott, an econotist; and, David Cheever, who as a university student had used computer simulations to identify the Savanah de Bogota as ideally suited for the growing of flowers. Following a feasibility study, each invested $25,000 and formed a company called Floramerica.

The company was a major success. W- 'in a short period of time, it became one of the world's major exporters. By 1986, the company had $50 million in annual sales (Rhee and Belot 1989).

Although Floramerica's success was dramatic, its effect on the Colombian cut flowers industry was even more so. In 1970, Floramerica accounted for 8
nearly all of Colombia's cut flowers exports.<sup>However, by 1986, the share</sup> held by other Colombian firms had r..sen to over 67 percent, primarily because of the demonattatioa effect of Floramerica's<sup>success and due to the diffusion</sup> of technological know-how from Floramerica to<sup>other Colombian firms. Many</sup> Colombian companies copied their production<sup>and marketing me.!iods,</sup> and often hired members of Floramerica's staff. David<sup>Cheever, for instance, left</sup> Floramerica after two years in order to<sup>establish a consulting firm to help</sup> new flower companies, and two members<sup>of Sunburst Farms, Floramerica's</sup> brokerage off'ice in Miami, left to set up their own brokerage<sup>firm. This new</sup> firm, called Colombia Floral Exchange, is<sup>now the second largest importer of</sup> flowers behind Sunburst Farms. In sum, Floramerica<sup>was directly responsible</sup> for the development of the Colombian cut flowers<sup>industry (Rhee and Belot</sup> 1989).

# _B. Overcoming obstacles_

Despite the significant advantages of growing<sup>flowers in Colombia,</sup> serious obstacles stJll remained to be overcome<sup>before the flowers could be</sup> exported profitably. The most important problem<sup>dealt with the handling and</sup> ..ransport of the flowers. Growers had to ftad<sup>a way to efficiently handle and</sup> transport them from Colombia to the U.S.

Many early shipments of cut flowers<sup>were destroyed in the heat while</sup> waiting to 5)e loaded onto planes or to be inspected<sup>by customs officisls.</sup> Avianca, the major carrier, behaved as<sup>a monopolist unconcerned with being</sup> responsive to cut flowers growers. It<sup>refused to make special provisions for</sup> handling the flowers. It considered them secondary<sup>to the trarLzport</sup> of passengers, and shipped them in regularly<sup>scheduled passenger flights stored</sup> with the passengers' luggage. To solve<sup>this problem, Floramerica and another</sup> company, Jardines de los Andes, encouraged<sup>other airlines to enter into the</sup> business of shipping cut flowers. The first<sup>company to do so, Aerocosta</sup> failed, and Floramerica and Jardines de los Andes<sup>were left were left</sup> scrambling for a carrier for months since Avianca<sup>refused to carry their</sup> 9
flowers. Later, growers did convince Avianca to handle flowers at night and to purchase several freighters to transport them. Other companies also entered into the business of shipping cut flowers.

Colombian growers were also instrumental in the development of sophisticated receiv .ag and distribution facilities in Miami. Through their association (ASOCOLFLORES), Colombian growers helped form a common handling company in Miami. This company, called Transcold, would unload the flowers into refrigerated storage areas and have them ready for customs inspections prior to their shipment to wholesalers.

Another major step taken by Colombian growers, such as Floramerica, was to establish wtiolly owned importer-distributor companies in Miami and later in Europe. This allowed them to eliminate third party brokerage houses and to control the marketing of their products. It also made it easier to stay abreast of market developments. Today, there are more than 100 importersdistributors of cut flowers in Miami. In 1988, the industry had more than 2,000 employees and, in 1987, had a payroll of about $28 million.8 These facilities handle over 90 percent of the imports entering the United States from Latin America.

Colombian growers faced virtually nc problems with distributing flowers throughout the United States, particularly in the eastern states. Growers tapped into an already established system. A trucking company, Armellini, had originally handled the shipping of Florida-produced chrysanthemums to major consuming markets in the Northeast. Armellini guaranteed delivery to Eastern markets within two days. The existence of this distribution system, combined with the greater density and purchases of buyers along the shipping routes, meant that the transportation costs of selling Colombian flowers in Eastern markets was below that of flowers shipped from the West coast (Morrow 1989).

Once the impediments to shipping cut flowers from Colombia were overcome, Colombia's exports grew dramatically. Exports to its primary market, the United States, grew at a phenomenal rate; for instance, in 1973, 10
they grew 374 percent. (See table 3, column 7.) By 1980, the industry had become the world's second largest exporter of cut flowers.

Equally as impressive was the short time it took the industry to become the United States' leading supplier of foreign cut flowers. In 1974, Colombian growers accounted for over 83 percent of all U.S. imports of cut flowers and its share of U.S. imports was even larger for certain flower typess 93 percent of imported carnations and pompon chrysanthemums came from Colombia. Later, the industry also captured a large share of the U.S. market. Measured in dollars, Colombia accounted fo- 25 percent of the U.S. cut flowers market in 1988. However, measured in units, Colombians accounted for 67 percent of all carnations, 65 percent of all pompon chrysanthemums, and 25 percent of all roses sold in the U.S.

Colombia's entry into the U.S. cut flowers market has turned into a major source of benefits for U.S. consumers. These benefits have come in the forr of lower prices, increased variety, greater year-round availability, and increased access through nontraditional outlets.

The greater year-round availability of foreign cut flowers has been especially beneficial to U.S. consumers because of the nature of U.S. demand. Imports of cut flowers have helped limit the sharp increases in prices that result during the peak demand-low domestic supply periods. These lower prices have in turn fueled U.S. consumers' demand for cut flowers.

Low-price imports have also benefited U.S. consumers by transforming the marketing of cut flowers in the United States. The increased year-round availability of low-cost cut flowers has reduced the costs and risks associated with holding large inventories of flowers. This in turn has made it practical for flowers to be sold by nontraditional or non-florist outlets such as supermarkets and street vendors. Krogers, for example, one of the first high-volume sales outlets to sell flowers, only opened its first flower department in 1978. But, by 1986, 760 of its 1,351 stores were selling cut flowers. Moreover, other major chains had followed its lead. For instance, in 1986, all of Safeway's 1,351 stores had a self-service floral department.

11
Thus, while only 13 percent of U.S.<sup>supermarkets</sup> had handled flowers in 1977 (Morrow 1989), that number had risen<sup>to 86 percentin1986.9</sup> These marketing changes have further<sup>fueled consumer demand. They have</sup> done so not only by making inexpensive<sup>cut flowers more readily available, but</sup> also by creating a greater awareness<sup>of cut flowers among consumers and by</sup> changing consumers' perception<sup>that flowers are a luxury good available only</sup> in high-cost specialty stores. Yet,<sup>even traditional outlets, such as florist</sup> shops, have benefited from the increased<sup>availability of low-cost imports and</sup> the accompanying expansion in consumer<sup>demand. Although their share of retail</sup> sales has declined over the last<sup>two decades, the surge in consumer demand has</sup> led to an increase in their number.<sup>In 1963, there were 20,000 flower shops.</sup> By 1988, that number had grown to<sup>36,200.</sup> In addition to providing benefits<sup>to U.S. consumers, low-cost flower</sup> imports have created employment opportunities<sup>in the U.S. economy,</sup> particularly at the retail and wholesale<sup>level. At the retail level, grocery</sup> stores have increased the demand<sup>for workers to care for and stock the new</sup> floral departments. At the wholesale<sup>level, there has been an increased</sup> demand for workers to handle the<sup>increased volume of flowers. These</sup> employment gains are in addition<sup>to those gains noted among Miami importer-</sup> distributors.

# _C. Recent developments_

Colombian exporters have developed<sup>into a world class, largely Colombian</sup> owned industry. Over 400 firms have<sup>an estimated 3,571 hectares under</sup> cultivation. As it did in the beginning,<sup>the industry continues to export the</sup> majority of its output (between 90 and<sup>95 percent), with the United States</sup> accounting for 80 to 85 percent of<sup>total sales. However, it has lessened its</sup> dependence on carnations and now<sup>produces more than 30 varieties of cut</sup> flowers.'° Roses are its fastest growing<sup>export.</sup> Like the U.S. cut flowers industry,<sup>there are several large, efficient</sup> firms. However, concentration is low<sup>and the market is competitive due to the</sup> 12
ease of entry into the industry.<sup>According to Morrow (1989), in 1981, the 10</sup> largest companies held 50 percent<sup>of the land in cut flower production, which</sup> is a low concentration ratio.<sup>By 1990, preliminary data shows this share had</sup> fallen to less than 42 percent.

The industry is also a major employer<sup>of low and semi-skilled labor,</sup> particularly female labor<sup>from the low-income areas surrounding Bogota. It is</sup> estimated that the industry<sup>employs 70,000 directly and 50,000 in ancillary</sup> activities.

# _D. Future Problems_

Colombian growers should continue<sup>to maintain a dominant position in the</sup> U.S. market." However, they do<sup>face three uncertainties. First,</sup> competition in the U.S. market<sup>is likely to become even stiffer. Rising land</sup> and labor costs within Colombia<sup>are eroding Colombian growers' cost advantage</sup> relative to flower producers<sup>in other developing countries in Latin America</sup> (Shypula 1981). The other two<sup>major concerns for the industry are the up-and-</sup> down Colombian government policies<sup>and protectionist efforts in the United</sup> States. These issues are the subject<sup>of the next two sections.</sup>

# The up-and-down Colombian government<sup>**policies**</sup>

No specially tailored Colombian<sup>government program contributed to the</sup> success of Colombian growers.<sup>Indeed, growers rejected the government's</sup> attempt to have an active role in<sup>assisting the industry (Ceballos 1977).</sup> However, the Colombian government's up-and-down policies have affected<sup>the</sup> industry's performance. Colombian<sup>growers benefited in the early years when</sup> the government took steps to undo<sup>policies that were unfavorable to business</sup> activity. However, the government<sup>later returned to these unfavorable</sup> policies, and the Colombian<sup>cut flowers industry survived despite the</sup> government. The ups and downs<sup>of Colombian government policy are described</sup> 13
below in sections A through C. Section<sup>D describes policies that were</sup> specific to the Colombian cut flowers<sup>industry.</sup>

# _A. The undoing of a bad policy_

In 1967, the Colombian government took<sup>steps to undo the negative</sup> effects of a three-decade old anti-trade<sup>policy. Like other Latin American</sup> countries, Colombia had followed an<sup>Import-Substitution-Industrialization</sup> strategy. The strategy was implemented<sup>by a reotrictive import policy, which</sup> resulted in a consistently overvalued<sup>peso. Both the import policy and the</sup> overvalued peso discouraged exporters.<sup>The restrictive trade policy made it</sup> more profitable to produce for the home<sup>market than to export, whereas the</sup> overvalued peso hurt exporters by making<sup>Colombian products more expensive</sup> abroad.

The government first took steps to provide<sup>a business climate that did</sup> not discriminate against exporters. First,<sup>it reduced the profitability of</sup> producing for the home market. Beginning<sup>in 1967 and through the end of 1973,</sup> the government relaxed import restrictions."2 Second, and most importantly, the government was permitted to devalue the peso periodically to prevent it from becoming overvalued. This effectively established a crawling peg. The peso-dollar real exchange rate index is<sup>listed in column 4 in table 4. It</sup> shows that from 1967 to 1970, the government used the crawling peg to successfully devalue the peso. The real exchange rate was then maintained reasonably constant up until 1972. The significance of this action cannot be overstated. This was the first time<sup>since 1957-58 that the exchange rate had</sup> depreciated in two consecutive years<sup>(Hutcheson and Schydlowsky 1982, 126).</sup> This was the most important of the changes<sup>made by the government to eliminate</sup> the discrimination against exports.

Although the government lowered import barriers,<sup>import protection</sup> continued to remain (and still does in<sup>1990) at high le7els. To undo the</sup> negative effects of this policy on<sup>exports, the government also implemented</sup> several export promotion measures.<sup>First, the government replaced an existing</sup> 14
tax credit certificate for nontraditional exporters (those exporting products other than coffee, bananas, petroleum and cattle hides) with the Certificado de Abon3 Tributario (CAT). Unlike the previous certificate, the CAT could used to pay most taxes and was not limited to income tax liability." Table 4 lists the various rates for the CAT, which was initially set at 15 percent of the fob (free-on-board) export value. Second, the government created an export promotion agency and fund, both referred to as PROEXPO (Fondo de Promocion de Exportaciones). PROEXPO provided promotional services (trade fairs, market studies, etc.) and subsidized export credits. The credits consisted of short-term loans for working capital, and, to a lesser extent, medium- and long-term loans for capital assets. Data on PROEXPO subsidies is less readily available, but Thoumi (1981, 148) notes that the subsidy was raised to 20 percent fob export value in 1972. Lastly, the government relaxed the restrictions on the use of the Plan Vallejo, which allowed the duty-free import of inputs used in exported products.

The government's removal of the bias against exports led to dramatic results." Nontraditional exports experienced an 'export boom' between 1967 and 1974. Their average annual growth rate during this period was over three times that of traditional exports (28.6 percent versus 8.6 percent). Their value (in current prices) increased over 500 percent, from $113 million in 1967 to $678 million in 1974. The value of traditional exports, on the other hand, increased only 86 percent over the same period, rising from $397 million to $738 million.'5 Exports of cut flowers also increased dramatically.

# _B. The return of a bad policy_

In a series of actions from 1973 to 1982, the Colombian government began to back away from its efforts to undo the policies that had discriminated against exports. The policy reversal occurred as the government attempted to address other economic problems. To begin with, the rates of devaluation were reduced and the peso allowed to increased in value in order to stem inflation. As a consequence, the real exchange rate appreciated continuously from 1975 to 15
1981. By 1978, it had fallen below the 1967 levell (See table 4.) Similarly, the CAT program was altered and the rates reduced in response to budgetary problems. The completion of the unraveling of the policy occurred in 1982, when import restraints were tightened sharply."' The government increased import restrictions in order to address a current account imbalance caused in part by mismanaged macroeconomic policies.

Not surprisingly, the results were disastrous for nontraditional exports. After growing 5 percent a year in real terms during 1970-75, their annual growth fell to only 2 percent during 1975-82 (Thomas 1982, 33). There was even a decline in the exports of products in which Colombia had a comparative advantage. The rate of growth of cut flower exports also declined sharply during this period (see column 8 in table 3).

# _C. Another attempt to undo a bad policy_

In 1984, the Colombian government once again took steps to undo its discriminatory policy against exporters. It recognized that to restore the international competitiveness of its exports, it would have to lower the value of the peso, which had increased steadily for seven-years. Table 4 shows that the government sharply devalued the exchange rate beginning in 1984. Relative to its 1983 value, the nominal exchange rate was devalued over 279 percent, while the real exchange rate was devalued 66 percent. The government also reduced import restrictions.

Although exports responded favorably, problems remain. The import regime has become only slightly less protectionist and remains "more closed than before ... [the 1982-83 period]." (Laird and Nogues 1989). Without more substantial trade liberalization, the economy is expected to have less than stellar economic growth rates for many years to come.

# _D. Policies speciflc to the cut flowers industry_

Like other nontraditional exporters, cut flower growers have been affected ty the Colombian government's broad economic policies: the removal of 16
obstacles in 1967 contributed to their success, while the policy reversals of the mid-1970s and early 1980s have hindered them. However, cut flower growers' experience does differ in one major respect. Beginning in the mid1970s and particularly during the 1980s, they have received little or no ben-fits from the CAT, PROEXPO subsidies and the Plan Vallejo.

Table 4 lists the CAT (or CERT) rates for the cut flowers industry from 1967 to 1988. Since the mid-1970s, the CAT rate has been insufficient to compensate for the high value of the peso. It has been set at zero percent or at a modest level. During the 1980s, the cut flowers industry received meager levels of support from PROEXPO. This is supported by the small gross subsidy estimates developed by the U.S. Department of Commerce (DOC) in two countervailing duty (CVD) investigations conduzted during this period." The DOC determined that subsidized interest rates on short- and long-term loans had conferred, respectively, gross subsidies of .436 percent ad valorem and .219 percent ad valorem (51 PR 37934). The DOC also found that Colombian producers of miniature carnations had used the Plan Vallejo to exempt duties on imports of machinery used to sort carnations. The DOC estimate of the gross benefits was .439 percent ad valorem.as In both of these CVD cases, the U.S. governent did not impose countervailing duties, because Colombian growers quickly surrendered the benefits from the programs.

# _E. Implications for Colombian policy_

This review of the Colombian government's general economic policies shows that their up-and-down nature has affected Colombia's cut flowers industry. The industry did benefit in the early years from the government's efforts to undo policies that burdened exporters. However, the government later returned to these unfavorable policies. Overall, the government's general economic policies have been a barden on cut flower growers. They have survived despite the government.

Colombian cut flower growers have also been burdened by the government's use of export-promotion measures (the CAT, PROEXPO subsidies, and the Plan 17
Vallejo). These measures were designed to give back what other policies take away. Although Colombian cut flower growers have received minimal benefits from these pLograms, particularly in the 1980s, the existe-..e of these programs has served as the basis for U.S. growers' use of the CVD laws to limit imports of Colombian cut flowers. The next section describes these and other trade actions initiated by U.S. growers against Colombian cut flower growers.

# U.S. growers _efforts_ to limit cut flower imports

The entry of Colombian flowers into the U.S. market in the early 19709 intensified the adjustment process that had begun in the 19509 and also altered its character. Earlier, Western and Southern growers had pressured Eastern growers. Now, it was Colombians who were pressuring Eastern growers and challenging Western and Southern growers for the Eastern market. The emergence of this competition could not have come at a worse time for U.S. growers. The oil-crisis of 1973-74 had caused a sharp rise in U.S. growers' operating costs. At the same time, Western and Southern growers were beginning to experience some of the same pressures that Eastern growers had begun to face earliers rising land costs due to urbanization. Faced with these pressures, U.S. growers responded by seeking import protection. The next two sections review the efforts to limit imports and describe their effects on Colombian exporters.

# _A. Summary of trade actions_

The trade actions against U.S. imports of cut flowers are summarized in table 5. These actions fall into two broad periods. The first durir.g the 1970s and the second during the 19809.

During the first period, U.S. growers were primarily concerned with limiting all imports, regardless of whether or not they were fairly or unfairly traded." The domestic industry filed two escape petitions, the 18
first in 1977 directed at all cut flower imports and the second in 1979 limited to rose imports. Although escape clause cases do not target specific countries, the trade action was effectively directed at Colombian exports since they accouated for over 89 percent of total imports in 1976 and 77 percent of rose imports in 1979.

Both escape clause cases failed. In the first case, the ITC found that U.S. growers' difficulties stemmed from problems created by the oil-price increase of 1973-74. The subsequent rise in energy prices hurt domestic growers by causing shal: 'ncreases in their operating costs. At the same time, the 1974-75 recession, also caused by the oil crisis, led to a collapse in cut flower demand. In the second case, the ITC concluded that the industry was healthy and that imports were not causing serious injury to the domestic industry.

The second period begins early in the 1980s and includes the vast majority of individual trade actions. Motivated by their failure to obtain escape clause protection during the 19709, domestic growers turned to the use of the unfair trade laws as their vehicle for obtaining protection. They requested investigations under all the major provisions of the unfair trade mechanism: antisub tdy (CVD), antidumping (AD), end unfair trade practices. Like the earlier p-iod, the majority (90 percent) of the imports targeted by unfair trade petitions, were Colombian.

From 1980 to 1985, U.S. growers were cpncerned with limiting imports of roses, largely Colombian. Their efforts met with limited success. The only important success was a CVD case against Colombian exporters of all cut flowers, except miniature carnations. The DOC detesmined that Colombian exporters were receiving benefits of 4 to 5 percent ad valorem under a new CAT program. But, as in 1974, no countervailing duties were applied since Colombian growers agreed not to use the program. Based on 1985 trade flows, the agreement covered over 96 percent of Colombian exports or 57 percent of total U.S. imports.

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From May 1986 to the present, domestic growers switched strategy. Given their limited success in obtaining protection for rose growers, they turned their efforts to seeking protection for those segments of the industry in which import competition was more intense. In 1986, they made a mass filing of AD and CVD petitions. They filed against ten countries (Canada, Chile, Colombia, Costa Rica, Ecuador, Israel, Kenya, Mexico, the Netherlands, and Peru), and their exports to the U.S. of seven flower types (standard and miniature carnations, standard and pompon chrysanthemums, alstroemeria, gerberas, and gypsophila). The petitions covered over 98 percent of the imports of these flowers; all together, they represented 45 percent of total 20 1985 cut flower imports. The sweeping nature of these filings -- targeting all suppliers of a particular flower -- indicates that domestic growers were, as in the 1970s, still seeking relief from import competition in general.

The mass filing of petitions was generally a success. The DOC determined that all seven flower types had been dumped or subsidized. However, what was more important was that the ITC made favorable injury decisions. It concluded that imports of standard and miniature carnations, and standard and pompon chrysanthemums, which represented the bulk of targeted imports, had caused injury to the domestic industry.

What accounts for the favorable injury decisions? A key element was the ITC majority's use of a narrow industry definition. Experience shows that the narrower the industry is defined, the greater the chance of an affirmative injury decision. It is easier for a segment of the industry to show injury even though the entire industry is healthy.

Table 6 shows data on four performance indicators for the domestic industry, which are generally good predictors of the ITC's injury decision. All three indicators fell for standard carnations and standard chrysanthemums. Two of the three fell for pompon chrysanthemums. Only one indicator fell for miniature carnations, and it (a measure of profits) remained at a high level. Based in part on these data, the ITC majority determined that all producers, except those of miniature carnations, had been injured. Had the ITC adopted a 20
broad definition of the industry, then<sup>their decision, like that of the ITC</sup> minority, would have been based on the aggregate<sup>data listed in the bottom of</sup> the table. The first three indicators trended<sup>upwards for the industry as a</sup> whole, and while the fourth trended downwards,<sup>members of the ITC minority</sup> argued that this was due to the inclusion<sup>of increased expenditures for</sup> capital and research and development<sup>within the financial data. Thus, the use</sup> of a broad industry definition would<sup>have led the ITC to conclude that the</sup> industry was healthy and not injured by<sup>unfair imports.</sup> Have these affirmative decisions translated<sup>into actual protection for</sup> U.S. growers? No. The protective effect<sup>of the mass filings has been modest,</sup> despite the imposition of dumping and<sup>countervailing</sup> duties. Consider the case of Colombia which accounts for<sup>nearly all of the imports affected by CVD</sup> and AD rulings. In the CVD case,<sup>the DOC ruled that a 1.09 percent ad valorem</sup> duty be applied to imports of miniature<sup>carnations from Colombia. (Miniature</sup> carnations had been excluded from the<sup>earlier CVD case filed against roses and</sup> other cut flowers.) However, like all<sup>previous CVD cases, Colombian growers</sup> quickly surrendered any benefits and<sup>the U.S. government did not apply</sup> countervailing duties. In the AD cases, Colombian<sup>imports of carnations and</sup> chrysanthemums were assessed dumping duties of 3.53<sup>percent ad valorem. These</sup> duties, while troublesome, are not<sup>onerous. They also do not support U.S.</sup> growers' claims that Colombia's market<sup>dominance is based on unfair trade,</sup> particularly since the DOC's methodology biases dumping margin<sup>calculations</sup> upwards.

# B. No winners

No one appears to have been the winner in these<sup>trade actions. Although</sup> U.S. growers used the unfair trade laws<sup>until they obtained affirmative injury</sup> decisions, the actual protection they received<sup>was modest and certainly much</sup> less than they expected. Similarly, even though<sup>the trade sanctions imposed</sup> on Colombians were modest, the litigation and<sup>other unmeasurable costs have</sup> been significant.

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Domestic growers have given several indications that they are dissatisfied with the results of the unfair trade cases. Domestic rose growers were successful in having a provision included in the Omnibus Trade Act of 1988, requesting that the ITC conduct a study on the international competitiveness of the domestic rose industry. These studies are often used like 'fishing expeditions' to determine if the industry can lav the basis for filing a trade petition or pressuring the administration to negotiate voluntary restraint agreements.

Domestic growers have also begun to argue that the industry is still threatened by imports and that quotas are required. In commenting on the DOC's recalculation of the dumping duties, the president of the Floral Trade Council, Arne Thirup, stated: This indicates there is still an oversupply of cut flowers being shipped to the U.S. markets and althougn tnis is a new victory for fresh cut flower growers in the United States, it is obvious we need additional answers... Too many American growers have been forced out of business by these illegal tactics. We in the industry feel we must have some kind of quota on imported cut flowers to allow us to compete on a level playing field.

(Florists' Review, March 1990.) Like U.S. groweros Colombians are also unhappy with the results of this process. They note that, even as measured by the DOC, the dumping and subsidy rates have been modest.21 Yet, the litigation and other unmeasurable costs borne by Colombians have been substantial. These c-sts, coupled with the dumping duties, have caused Colombians to lose profits and sales in the U.S. market. Supply and demand conditions limit their ability to pass on the dumping duties to U.S. consumers. On the supply side, the price is set competitively due to the large number of competing producers. Even though Colombia is the world's second largest exporter, its world export share is only 8 percent. On the demand side, price increases are limited by U.S. consumer's high sensitivity to price changes. U.S. consumers are highly likely to substitute other flower types in arrangements or to postpone purchases in response to price increases.

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The uncertainty generated among importers<sup>and wholesalers of Colombian</sup> cut flowers is less easily quantified,<sup>but is also a source of lost sales.</sup> These buyers are generally reluctant<sup>to purchase a product under investigation</sup> since the investigation generates uncertainty<sup>over i.s likely availability and</sup> price. This cost should not be dismissed<sup>since over 98 percent of Colombian</sup> exports to the U.S. have been subjected<sup>to this type of uncertainty.</sup> U.S. antidumping laws may also have<sup>caused Colombians to lose sales in</sup> the European market. It is argued<sup>that Colombians are limiting their exports</sup> to Europe (under 5 percent of<sup>their total export sales) in order to avoid</sup> 2 having the prices of those sales<sup>used in calculating dumping margins.</sup> a According to U.S. trade law, dumping<sup>margins may be calculated by comparing</sup> U.S. sales prices with the prices of<sup>sales in markets accounting for over 5</sup> percent of total exports.

In addition to lost sales, growers<sup>point to other types of costs</sup> incurred due to the unfair trade cases.<sup>They note that one estimate of the</sup> litigation costs through July 1989<sup>placed them at $1 million for Colombian</sup> growers (an amount similar to that<sup>of U.S. growers).</sup> 23 Growers also complain that they must devote countless man-hours<sup>to the trade cases and to meeting</sup> the demands for data by the DOC.<sup>This is time spent away from the business.</sup> Finally, Colombian growers note<sup>with some irony that U.S. growers'</sup> efforts to restrict imports may<sup>have had the unintended consequence of</sup> encouraging the spread of cut<sup>flower production to even more countries,</sup> thereby increasing the number<sup>of potential competitors. As noted earlier, it</sup> appears that the cut flowers industry<sup>is now extending beyond Colombia. Like</sup> the production shifts in the United<sup>States, rising land and labor costs within</sup> Colombia are causing a shift<sup>in flower production to other developing</sup> countries in Latin America. U.S.<sup>protectionist efforts may have increased the</sup> rate at which the cut flower production<sup>spreads to these other countries.</sup> Many of the new farms established<sup>in these countries are owned by Colombian</sup> growers or are the product of Colombian<sup>technical expertise that has lien sold</sup> to local entrepreneurs. Colombian<sup>growers have indicated that one reason for</sup> 23
shifting their investment from Colombia to these new areas is the desire to export from production sites that are not under the shadow of the unfair trade mechanism.24

# _C. Closing comment on the antidumping law_

Economists have long pointed out that antidumping laws often penalize actions that are economically efficient and which benefit consumers by promoting greater competition. Their application to producers in markets, like cut flowers, which are characterized by demand peaks provides another example.2' Economic analysis shows that producers in there types of markets should engage in what is called peak-load pricing: prices should be set below full cost during slack periods and above cost during the high demand periods. By doing so, firms earn just enough profits to stay in business. This increases competition and leads to lower consumer prices over the long-run. However, the antidumping laws discourage this type of pricing behavior.

# Conclusion

This study has reviewed the origins of cut flower production in Colombia. It has shown that the industry's development is a product of the same forces that led to the movement of cut flower production from the Eastern United States to the Western and Southern United States. In both cases, tue development of air transportation made markets accessible within hours from anywhere in the world. This freed growers to shift production to areas with more favorable climate and land and labor coats. Production moved first to the Western and Southern United States and then to Colombia.

The shift of production to Colombia has spread benefits all around. In Colombia, the industry has become the primary employer of the poor, low-skill workers who live in the slum areas surrounding Bogota. In America, consumers have benefited from the greater variety, lower prices and much greater availability of floral decorations. They have also benefited from a dramatic 24
transformation in the marketing of cut flowers. Flowers are now widely available in supermarkets and other nontraditional outlets. This has led to a greater awareness of flowers among U.S. consumers and to a change in the perception that flowers are a luxury good available only in high-cost specialty stores. The U.S. economy has also benefited from the employment opportunities created by the necessity of handling and caring for the increased volume of flowers both at the wholesale and retail level. The story is an outstanding example of what is good about the market system -- an illustration of why the market system is the most effective way for a society to coordinate its economic activities.

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