It was a swift reaction. After the Colombian government accused Venezuela of harboring terrorists last week, Venezuelan President Hugo Chavez broke off relations with his neighbor.

This is at least the third time in as many years the relations between Venezuela and Colombia have been strained.

Last year Chavez froze relations when Colombia signed a military agreement with the United States and also in 2008 when Colombia conducted a raid against leftist guerrillas into Ecuadorian territory.

"That's why I feel obligated to break off relations with the Colombian government," Venezuelan President Hugo Chavez said when making the announcement, "for dignity."

Dignity may be a price too big to pay. Conflicts between the two countries have already been costly. The trade between the two nations rose to a record $7.3 billion in 2008, according to the Venezuela-Colombia Integration Chamber, but it has been falling ever since tensions started rising.

In 2009, trade fell to only $4.6 million, an almost 37 percent decrease. Until the end of May of this year, trade between the two South American countries was a paltry $770 million. Optimistic projections of $1.85 billion in trade for this year are all but impossible now that relations have broken off.

"To us, this goes against common sense," says Luis Alberto Russian, Executive President of the Venezuela-Colombia Integration Chamber (CAVECOL). "Economic integration has helped to improve the quality of life of our countries and our hope was that this would help avoid conflicts like the one we're going through right now."

Colombia and Venezuela share a 1,375-mile border (2,300 kilometers) and it is one of the busiest in Latin America. The economies of border towns like Cúcuta in the province of Santander, Colombia and San Antonio, in Táchira, Venezuela, are practically integrated.

It's estimated that as many as 40,000 people cross this border region every day. Russian calls these towns "binational cities." "People go to school in one town and to the doctor in the other," says Russian. "Families live on both sides of the border. We've always had a special relationship."

In fact, CAVECOL estimates that trade with Colombia represents about 70 percent of the gross domestic product (GDP) in the Venezuelan border province of Táchira. Raúl Darío Rivera, the Colombian owner of a ceramic tiles factory in Cucuta says that 80 percent of his production used to go to Venezuela. "That percentage has fallen to only 20 percent. We have lost 3,000 jobs out of 7,500 in the region," says Rivera.

Colombia imports from Venezuela metals like iron, steel, and aluminum as well as petrochemicals, medicines, and chemical products. Venezuela imports from Colombia paper products, containers, plastics, and fuels as well as food products like dairy and meats. Colombian textiles have also been traditionally sold in Venezuela in great amounts.

Because of tensions with Venezuela, Colombia started an aggressive campaign to diversify markets for its products. Now they're selling to Chile and Peru as well as the Central America and the Caribbean region. The problem is that farther markets mean higher transportation costs and less revenue for both Colombian and Venezuelan companies. Venezuela used to import most of its meat from Colombia. According to CAVECOL, not a single pound of meat has been imported so far this year.

The governments of Cristina Fernandez de Kirchner in Argentina and Luiz Inacio Lula da Silva in Brazil, allies of Venezuelan President Chavez, are now filling the gap.

There's still hope in both the Colombian and Venezuelan business sectors. CAVECOL's Luis Alberto Russian says that relations between producers and buyers in both countries have historically been good. "This break-up hasn't happened because of economic problems; it's a decision based on political differences we have nothing to do with," says Russian.

But uncertainty does not help businesses, and in the current climate, companies in Venezuela and Colombia seem to even prefer the costly certainty of a faraway market like China over their neighbor.

Source: CNN Business