## cr1766

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### EXECUTIVE SUMMARY — Project scope and methodology
- Takes stock of and explores opportunities for trade integration in Latin America and the Caribbean (LAC).
- Draws on a set of 12 analytical studies that will be issued as working papers.
- Incorporates views of LAC country authorities based on responses to a survey conducted between late 2015 and mid-2016.
- Examines determinants of trade, potential to enhance LAC’s trade integration, and associated economic and social effects.

### Core findings on growth and inequality
- LAC can reap important growth benefits from further trade integration.
- Trade integration in LAC is below that of other regions, indicating scope to increase trade as an engine of growth.
- Enhanced trade integration can help offset the weaker economic outlook without adversely affecting overall income inequality in the region.
- Trade integration may entail adjustment costs for particular segments of society; strengthened social safety nets are needed to lessen adjustment costs and promote equitable distribution of gains.

### Trade openness and overall integration — key statistics
- LAC accounted for 5.1 percent of global exports of goods and services.
- In 2015, LAC’s trade (exports and imports) represented only 44 percent of regional GDP.
- Cross-country openness within LAC ranges from 25 to 125 percent of GDP.
- Intra-regional trade share fell to 14.7 percent in 2014, down from 16.7 percent in 2013.
- Intra-regional trade accounts for about 15 percent of LAC’s total exports, versus over 50 percent intra-regional in developed regions in Asia and Europe.
- Service exports represented about 13 percent of LAC’s total exports in 2015, compared with 16 percent four decades earlier; Central America and the Caribbean have service exports accounting for over 40 percent of total exports.

### Trade partners, networks, and participation in GVCs
- LAC trades in goods with about 70 percent of all countries (DOTS coverage).
- The U.S. and China are LAC’s two largest external markets.
- LAC’s participation in GVCs is limited relative to other regions:
  - Mexico and Central America participate downstream with higher foreign value added in gross exports.
  - South American countries participate more upstream with higher indirect domestic value added.

### Recent global and regional context
- World trade: volume of world trade in goods and services has grown by just over 3 percent since 2012, less than half the average historical rate.
- Collapse in 2015 value of global trade driven by sharp correction in the price of oil and the strength of the U.S. dollar.
- Concurrent slowdown in global economic activity, particularly in investment, accounts for up to three-fourths of the trade slowdown (IMF 2016b).
- Cumulative GDP growth for LAC over 2013 to 2016 was nil, versus 10 percent in the world.

### Structural impediments constraining trade expansion
- Low quality of infrastructure and transport services (roads, railways, ports, airports).
- Burdensome customs procedures relative to other emerging market regions.
- Limited availability and use of ICT.
- Barriers to small-firm participation in exports: fewer than 15 percent of small firms export in LAC versus 47 percent in Thailand and 55 percent in Malaysia.
- High protection on intermediate and capital goods in some economies (e.g., average MFN tariffs on machinery relatively high in Brazil and Argentina; Bolivia and Ecuador have high tariffs on intermediate goods such as wood, non-metal minerals, and paper).
- Rules of origin in LAC are often restrictive and not harmonized across agreements.
- Use of non-tariff barriers (NTBs) has risen globally, including in LAC; NTBs and TBT/SPS frequently cited as constraints by country authorities.

### Determinants of export composition and export complexity (selected empirical findings)
- Infrastructure, education, tariffs, and inequality shown as determinants in IV panel regressions (selected coefficient highlights):
  - Infrastructure: 4.869*** (0.000667); 8.017*** (5.85e-07); 3.137*** (0.000688); 4.301*** (5.90e-08).
  - Tariffs: -0.0622*** (1.33e-06) in one specification; other tariff coefficients mixed.
  - Education: 0.0227*** (9.94e-05); 0.0291*** (3.34e-08); 0.00625*** (8.94e-05); 0.00799*** (2.00e-08).
  - Gini Index: -0.0230*** (0.00239) in one specification; other Gini coefficients significant in multiple specifications.
  - Income per capita: 0.765*** (0) and other significant coefficients.
- Interpretation: better infrastructure quality, higher secondary school enrollment, lower average tariffs, and less income inequality are associated with higher export complexity and sophistication.

### Trade agreements and measured impacts
- Synthetic control estimates indicate trade agreements in LAC have generated substantial gains: average increase in exports of about 80 percent over 10 years (gains vary widely across countries and agreements).
- Major trade liberalizations are associated with immediate and persistent increases in growth and investment, rising FDI inflows, and a decline in economic volatility relative to world averages.

### Economic scenarios and quantitative impacts
- Trade connectivity (moving from 25th to 75th percentile) associated with positive increases in 5-year average real per capita growth in regression estimates.
- GVC participation scenario: bringing LAC’s participation in GVCs in line with Asia has potential to increase region’s average per capita growth by just under 1 percentage point.
- Intra-regional trade scenario: increasing intra-regional trade from about 15 percent of region’s exports to 55 percent (comparable to Asia) could enhance real per capita growth by 1.3 percentage points.
- Export diversification scenario: a reduction (increase) in export concentration by 25 percent has potential to increase real per capita growth by 1 percentage point.
- Infrastructure illustrative exercise: a 7.9 percent increase in the LPI of Latin America (raising infrastructure to MENA levels) estimated to increase export volumes in chemicals, motor vehicles, heavy manufacturing, and other higher value-added industries.

### Trade facilitation, NTBs, and welfare simulations
- Simulations for a set of LAC countries indicate reductions in NTBs generate welfare gains with minimal intra-regional trade diversion.
- A regional agreement that reduces NTBs could increase welfare for LAC countries.

### Social impacts, distributional effects, and adjustment costs
- Cross-country econometric evidence:
  - Trade openness does not systematically influence income inequality in a statistically significant way.
  - Financial openness and financial deepening are associated with rising inequality; financial deepening coefficients: 0.0342*** (0.0119); 0.0215** (0.00840); 0.0349*** (0.0125).
  - Increasing number of export markets and GVC participation associated with reductions in income inequality; concentration in high-skill manufactured exports tends to increase inequality.
- Event studies: newly-liberalizing countries did not experience larger increases in inequality than the world average; in some measures they experienced smaller increases in Gini than closed economies.
- Skill premium: no clear, consistent trend in skill premium around trade liberalization episodes for available country data (Argentina, Brazil, Panama, Uruguay, Venezuela).
- Peru district-level evidence (Annex III):
  - A one percentage point reduction in the district tariff led to:
    - a decrease of 0.68 percent in income,
    - an increase of 0.3 percentage points in headcount poverty,
    - an increase of 0.23 percentage points in the poverty gap.
- Policy implication: social safety nets and active labor-market policies are important to smooth adjustment (education and retraining, incentives for firm-provided training, labor intermediation, unemployment income smoothing, conditional cash transfers, and infrastructure to facilitate mobility).

### Country survey findings (Sept 2015–2016, about half of LAC countries)
- Strong regional commitment to trade integration.
- Key policy objectives: market and product diversification, increasing export sophistication, and SME participation.
- Trade agreements viewed as important tools to expand and diversify trade.
- Trade facilitation measures being pursued: risk-based inspections, electronic border systems, authorized economic operator programs, single window customs.
- Main constraints to export growth cited: infrastructure deficiency, NTMs (especially SPS and TBT), high production costs, lack of human capital, access to finance, lack of innovation, exchange rate, tariff barriers.
- Subregional emphases:
  - Central America and the Caribbean emphasize regional integration; Caribbean faces small size and high transport costs.
  - South America shows less consensus on regional integration priorities; focus often on bilateral agreements and connectivity projects.
  - Mexico and Central America emphasize NAFTA and the Pacific Alliance.

### Policy options and recommendations (regional and inter-regional)
- Intra-regional integration:
  - Near-term priorities: strengthen linkages between existing trading blocks (notably Mercosur and the Pacific Alliance); harmonize trade rules across existing FTAs; reduce intra-regional tariffs and NTMs (including unilaterally); eliminate redundant protection of products not produced in LAC.
  - Long-term objective: consider a LAC-wide regional trade agreement to replace complex system of bilateral and multilateral FTAs.
  - Facilitation and regulatory cooperation: harmonization of rules of origin and regulatory standards; interoperability of national customs systems; mutual recognition of economic operators; deeper agreements on investment rules and competition policy.
- Inter-regional integration:
  - Strategies: expand network of trade agreements; consider unilateral liberalization as a complement to agreements.
  - Participation in agreements covering frontier issues (services, electronic commerce, investment, procurement, SOEs, SMEs, intellectual property, labor and environment standards, competition policy).
  - Focus inter-regional engagement on Asia-Pacific given demand for commodity exports and potential to increase value-added.
- Participation in GVCs:
  - Policies: reduce tariffs on intermediate and capital goods (including unilaterally); address infrastructure and skills gaps; boost trade facilitation to support investment and GVC integration.
- Firm-level support and SME inclusion:
  - Reduce trading costs and support firms to meet technical standards required by importing countries.
  - Regional regulatory cooperation and mutual recognition agreements on SPS and TBT to facilitate intra-regional trade and access to third markets.
  - Support to integrate SMEs into export supply chains to broaden trade benefits.
- Social inclusion and adjustment:
  - Where fiscal space permits, implement complementary labor market policies and social safety nets to smooth adjustment for affected workers and industries.
  - Encourage SME participation in trade and promote labor mobility across regions and industries; remove barriers to geographical mobility; implement skills training programs.

### Comparative perspective and lessons from Asia
- Asia’s regional trade model was largely private-sector-driven with unilateral tariff liberalization creating de facto regional value chains and a hub-and-spokes structure.
- Constraints for LAC emulating Asia:
  - Lack of a dominant regional hub and less cross-country diversity of endowments.
  - Geographic/topographical barriers and production structure concentrated in commodities.
  - “Reluctant hegemons” and mixed results from politically driven integration efforts.
- Lessons relevant to LAC:
  - Importance of private-sector-driven integration, active policies to promote trade and investment, unilateral liberalization to attract investment, strengthen education systems, and reduce barriers to intermediate goods.

### Research agenda and report structure
- Report analyzes:
  - Recent trade developments globally and regionally.
  - Determinants of export growth and composition of exports.
  - Broader economic and social effects of trade and its characteristics.
  - Results from a country survey assessing alignment of country priorities with analytical recommendations.
- Concludes with concrete recommendations for LAC trade policy.

*International Monetary Fund — EXECUTIVE SUMMARY (cr1766)*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Project scope and methodology
- Takes stock of and explores opportunities for trade integration in Latin America and the Caribbean (LAC).
- Draws on a set of 12 analytical studies that will be issued as working papers.
- Incorporates views of LAC country authorities based on responses to a survey conducted between late 2015 and mid-2016.
- Examines determinants of trade, potential to enhance LAC’s trade integration, and associated economic and social effects.

### Core findings on growth and inequality
- LAC can reap important growth benefits from further trade integration.
- Trade integration in LAC is below that of other regions, indicating scope to increase trade as an engine of growth.
- Enhanced trade integration can help offset the weaker economic outlook without adversely affecting overall income inequality in the region.
- Trade integration may entail adjustment costs for particular segments of society; strengthened social safety nets are needed to lessen adjustment costs and promote equitable distribution of gains.

### Trade integration strategies and instruments
- Intra-regional integration:
  - Renewed political momentum within LAC could provide impetus to deepen intra-regional trade integration.
  - Regional trade integration could be promoted through:
    - A regional trade agreement going beyond tariffs to cover frontier trade-policy areas.
    - Convergence of trade rules and regulatory standards, with harmonization of rules of origin highlighted.
    - Measures to support trade facilitation.
- Inter-regional integration:
  - Strategies could center on unilateral liberalization as a complement to expanding LAC’s network of trade agreements.
  - Participation in agreements covering frontier issues (services, electronic commerce, investment, procurement, SOEs, SMEs, intellectual property, labor and environment standards, competition policy) is part of current regional engagement.

### Complementary policies
- Continued regional efforts to strengthen infrastructure and human capital are important for:
  - Broader growth strategy.
  - Enhancing trade integration and participation in global value chains (GVCs).
  - Diversifying and upgrading the complexity of LAC’s exports.
- Strengthened social safety nets are needed to ensure a more equal distribution of gains from trade and to manage adjustment costs.

### Context: global trade and recent shocks
- The value of global trade collapsed in 2015 with the sharp correction in the price of oil and the strength of the U.S. dollar.
- On average, the volume of world trade in goods and services has grown by just over 3 percent since 2012, less than half the average historical rate.
- The concurrent slowdown in global economic activity, particularly in investment, accounts for up to three-fourths of the trade slowdown (IMF 2016b).
- The slowdown in world trade coincided with the end of the commodity super cycle, producing sizeable terms of trade shocks for many commodity-exporting countries in LAC.
- Cumulative GDP growth over 2013 to 2016 was nil, in contrast to 10 percent in the world.

### Recent LAC trade developments (selected observations)
- LAC’s intraregional trade declined: share of intra-regional trade fell to 14.7 percent in 2014, down from 16.7 percent in 2013.
- Global and regional trade liberalization progress has stalled since the global financial crisis:
  - Weighted average tariffs have been broadly stable since 2008.
  - Use of non-tariff barriers (NTBs) has risen globally, including in LAC.
  - Levels of protection are particularly high on intermediate and capital goods, which may impede firms’ participation in GVCs.
- LAC’s trade agreements expanded significantly since the 1990s, but there are missing links in the region’s FTA network (e.g., Mercosur countries are not as well-linked via FTAs to the rest of LAC; Argentina and Brazil do not have FTAs with Mexico).
- Average MFN tariffs on machinery are relatively high in Brazil and Argentina; Bolivia and Ecuador have high tariffs on intermediate goods such as wood, non-metal minerals, and paper (IDB 2016).
- Rules of origin in LAC are often restrictive and not harmonized across agreements.
- Only a few FTAs and bilateral investment treaties among Latin American countries incorporate chapters on financial services; where present, they tend to contain standard provisions such as national treatment and the “prudential carve-out”.

### Comparative perspective and lessons
- Asia’s regional trade model differed: regional trade in emerging Asia was largely driven by private sector interests and unilateral tariff liberalization, leading to regional value chains and de facto regional integration.
- Differences between LAC and emerging Asia include lack of an obvious hub and less economic diversity in LAC, which may limit direct emulation of the Asian experience.
- Lessons from Asia relevant to LAC include the importance of private-sector-driven integration, active policies to promote trade and investment, and the role unilateral liberalization can play in promoting integration (Annex II).

### Research agenda and report structure
- Report analyzes:
  - Recent trade developments globally and regionally.
  - Determinants of export growth and composition of exports.
  - Broader economic and social effects of trade and its characteristics.
  - Results from a country survey to assess alignment of country priorities with analytical recommendations.
- Concludes with concrete recommendations for LAC trade policy.

*International Monetary Fund — EXECUTIVE SUMMARY (cr1766)*

### 5.1 percent of global exports of goods and services. LAC’s trade openness, the most widely used

### cr1766 - 5.1 percent of global exports of goods and services. LAC’s trade openness, the most widely used

### Trade openness and overall integration
- LAC accounted for 5.1 percent of global exports of goods and services.
- In 2015, LAC’s trade (exports and imports) represented only 44 percent of regional GDP.
- Trade openness in LAC has remained relatively stable since the beginning of the 2000s after liberalization in the late 1980s and early 1990s.
- Cross-country openness within LAC ranges from 25 to 125 percent of GDP, with large South American economies least open and Central American and Caribbean economies much more open (partly due to small domestic markets).
- LAC trades in goods with about 70 percent of all countries (DOTS coverage); only Europe and MENA have higher median numbers of trading partners.

### Trade partners, networks, and regional patterns
- LAC’s bilateral trading relationships are diversified but constrained by distance; larger LA countries (Argentina, Brazil, Chile, Colombia, Peru) occupy relatively central roles in the world trade network, while Mexico and Panama are relatively less central.
- Intra-regional trade accounts for about 15 percent of LAC’s total exports, well below developed regions in Asia and Europe (over 50 percent intra-regional).
- LAC’s intra-regional trade is more heavily oriented toward final goods; other developing regions have intra-regional trade concentrated in intermediate goods.
- The U.S. and China are LAC’s two largest external markets; recent growth in Asia-bound commodity exports increased inter-regional trade with Asia.
- LAC lacks a single dominant regional trading hub comparable to China in Asia or Germany in Europe; the U.S. is a much more pronounced hub for the region.

### Participation in global value chains (GVCs) and export composition
- LAC’s participation in GVCs is limited compared to other regions; participation measured as foreign value added in gross exports and indirect domestic value added.
- Heterogeneity by country and stage:
  - Mexico and Central America participate downstream/final stages with higher foreign value added in gross exports.
  - South American countries participate more upstream with higher indirect domestic value added.
- LAC’s export structure historically shows revealed comparative advantage (RCA) in mineral fuels and primary commodities; progress into skill- and technology-intensive manufactures was interrupted by the commodity boom in the 2000s.
- Service exports represented about 13 percent of LAC’s total exports in 2015, compared with 16 percent four decades earlier; Central America and the Caribbean have service exports accounting for over 40 percent of total exports.
- Product proximity analysis suggests future moves away from mineral fuels and primary commodities toward resource-intensive, low- and high-skill manufactured goods, but movement into high-skill exports faces skill, technology, and infrastructure constraints.

### Determinants of trade and policy levers
- Gravity-model estimates imply LAC countries are under-trading relative to fundamentals (size, language, contiguity, colonial ties, distance, landlocked status).
- Historical drivers of export accelerations include: lower macroeconomic uncertainty, higher trade openness, real exchange rate depreciations, improved institutional quality, agricultural reforms, and GVC participation.
- Structural impediments constraining trade expansion:
  - Low quality of infrastructure and transport services (roads, railways, ports, airports).
  - Burdensome customs procedures relative to other emerging market regions.
  - Limited availability and use of ICT.
  - Barriers to small-firm participation in exports (fewer than 15 percent of small firms export in LAC vs 47 percent in Thailand and 55 percent in Malaysia).
- Infrastructure and trade:
  - An upgrade of LAC’s transportation infrastructure (measured by LPI) to the level of the next highest region (MENA) is estimated to produce significant export growth concentrated in chemicals, motor vehicles, heavy manufacturing, and other higher value-added industries.
  - The illustrative exercise referenced a 7.9 percent increase in the LPI of Latin America raising infrastructure to MENA levels and increasing export volumes in target industries.
- Investment, tariffs, and FDI:
  - Investment and trade flows have been closely linked in LAC; FDI presence correlates with higher GVC participation.
  - About 1/3 of the expected growth pickup in LAC between 2016 and 2021 is projected to come from stronger fixed capital formation.
  - Lowering tariffs on imported capital goods could stimulate domestic investment; some LAC countries can still reduce capital goods tariffs to align with other regions.
- Trade agreements:
  - Synthetic control method estimates indicate trade agreements in LAC have generated substantial gains, with an average increase in exports of about 80 percent over 10 years.
  - Export gains vary widely across countries and agreements; gains especially important for emerging markets and agreements between emerging and advanced economies.
- Export complexity determinants:
  - Better infrastructure quality, higher secondary school enrollment, lower average tariffs, and less income inequality are associated with higher export complexity.
  - Lower tariffs are associated with more diversified and sophisticated export portfolios.

### Economic benefits, scenarios, and quantitative impacts
- Trade openness tends to improve economic growth; growth benefits of trade vary with development level and complementary policies.
- Trade connectivity effects (moving from 25th to 75th percentile):
  - Expanding number of trading partners and increasing centrality in the world trade network are associated with positive increases in 5-year average real per capita growth (percentile-change impacts shown in regressions).
- GVC participation:
  - Bringing LAC’s participation in GVCs in line with Asia has the potential to increase the region’s average per capita growth by just under 1 percentage point.
- Intra-regional trade scenario:
  - Increasing intra-regional trade in LAC from about 15 percent of the region’s exports to 55 percent (comparable to Asia) could enhance real per capita growth in the region by 1.3 percentage points.
- Export diversification and concentration:
  - A reduction (increase) in export concentration by 25 percent has the potential to increase the region’s real per capita growth by 1 percentage point.
- Trade liberalization episodes (event studies):
  - Major trade liberalizations are associated with immediate and persistent increases in growth and investment, rising FDI inflows, and a decline in economic volatility relative to world averages.
- Trade facilitation and NTBs:
  - Simulations for a set of LAC countries indicate reductions in non-tariff barriers (NTBs) generate welfare gains with minimal intra-regional trade diversion; a regional agreement that reduces NTBs could increase welfare for LAC countries.

### Social impact, distributional effects, and adjustment
- Cross-country econometric evidence:
  - Trade openness does not systematically influence income inequality in a statistically significant way; financial openness and financial deepening are associated with rising inequality.
  - Increasing the number of export markets and GVC participation are associated with reductions in income inequality; concentration in high-skill manufactured exports tends to increase inequality.
- Event studies around liberalization episodes:
  - Newly-liberalizing countries did not experience larger increases in inequality than the world average; in some measures they experienced smaller increases in Gini than closed economies.
- Skill premium:
  - No clear, consistent trend in the skill premium around trade liberalization episodes in LAC; for available country data (Argentina, Brazil, Panama, Uruguay, Venezuela) skill premium measures varied and showed almost no increase after liberalization.
- Sectoral adjustments:
  - Trade liberalization is associated with a secular decline in the importance of agriculture and an increase in the tertiary sector; structural change can create winners and losers requiring policy support.
  - Household consumption effects depend on reform specifics and price changes; international evidence is mixed on whether trade favors poorer households via consumption channels.
- Country-level evidence (Peru):
  - Districts facing greater import competition due to tariff cuts experienced lower expenditure growth and less poverty reduction than other districts; labor mobility was insufficient for full adjustment.
- Policy implications for inclusion and adjustment:
  - Social safety nets and policies to smooth adjustment are important: education and retraining, incentives for firm-provided training, labor intermediation, unemployment income smoothing, conditional cash transfers, and infrastructure improvements to facilitate mobility and relocation.
  - Support to integrate SMEs into export supply chains is highlighted as a priority to broaden trade benefits.

### Country views and stated priorities (survey findings)
- Survey (about half of LAC countries, Sept 2015–2016) highlights:
  - Strong regional commitment to trade integration.
  - Market and product diversification, and increasing export sophistication and SME participation, are key policy objectives.
  - Trade agreements are viewed as important tools to expand and diversify trade; some countries seek new strategic agreements, others wish to deepen/modernize existing ones.
  - Trade facilitation measures (risk-based inspections, electronic border systems, authorized economic operator programs, single window customs) are being pursued.
  - Infrastructure deficiencies (roads, railways, ports, airports) and lack of human capital/specialized skills are cited as primary impediments to export growth.
  - NTMs, especially sanitary and phytosanitary standards (SPS) and technical barriers to trade (TBTs), are frequently cited constraints; rules of origin and subsidies also noted.
  - Regional perspectives:
    - Central America and the Caribbean place particular emphasis on regional integration; small size and high transport costs pose obstacles in the Caribbean.
    - South America shows less consensus on regional integration priorities; focus often on bilateral agreements and sectoral/regional infrastructure and connectivity projects.
    - Mexico and Central America emphasize NAFTA and the Pacific Alliance; Mexico sees the Pacific Alliance as promoting free movement of goods, services, capital and people.

*International Monetary Fund staff summary based on "TRADE INTEGRATION IN LATIN AMERICA AND THE CARIBBEAN" (chapter content).*

### CONCLUSIONS

### CONCLUSIONS

### Trade integration and growth dividends
- Further trade integration can yield important growth dividends for LAC.
- Integration in LAC remains below that of other regions, leaving scope to enhance integration.
- Incipient signs of renewed political momentum among LAC countries for more integration, despite rising trade protectionism in advanced economies, is promising.
- At the aggregate level, evidence suggests that integration can promote economic growth without adversely affecting overall income inequality, although there may be adjustment costs for particular segments of society.
- Policy implication: complement renewed focus on trade integration with enhanced support for those affected in the adjustment process to help ensure an equitable distribution of gains from trade.

### Scope for expanding integration with the world
- Inter-regional focus has been on strengthening ties with the expanding Asia-Pacific market, appropriate given demand for LAC’s commodity exports and potential to gradually increase the value-added of those exports.
- Trade with advanced economies may offer greater potential for knowledge and technology spillovers and productivity enhancement, but rising protectionist sentiment in these economies limits prospects for further integration at this time.
- LAC’s strategy to focus inter-regional trade integration on emerging economies, the Asia-Pacific region in particular, may offer the greatest opportunity currently.
- Complementary approaches: leverage current agreements more effectively, deepen agreements beyond traditional trade issues, and consider unilateral liberalization of tariffs and NTBs.

### Regional integration in LAC: current status and potential gains
- LAC’s regional integration framework is fragmented despite a multitude of trade agreements; LAC remains relatively less regionally-integrated compared to other regions.
- Structural factors contributing to lower regional integration: significant geographical/topographical barriers and a production structure concentrated in the commodities sector.
- Empirical finding: if LAC could enhance its intra-regional trade from 15 percent of exports to 55 percent, a level comparable to the highly-integrated Asia-Pacific region, it could increase real per capita growth by 1.3 percentage points.
- Given rising obstacles to global trade and renewed regional commitment to integration, now is an opportune time to re-orient strategy toward enhancing regional integration.

### Policy options to promote regional integration
- Long-term objective: consider a LAC-wide regional trade agreement to replace the complex system of bilateral and multilateral FTAs with distinct rules.
- Near-term priorities:
  - Strengthen linkages between existing trading blocks, most importantly Mercosur and the Pacific Alliance.
  - Harmonize trade rules across existing FTAs.
- The TPP framework could serve as a model for a future regional free trade agreement, as it includes frontier trade-policy areas beyond tariffs and NTMs.

### Beyond FTAs: regulatory cooperation, facilitation, and connectivity
- Priorities to facilitate intra-regional trade:
  - Harmonization of rules of origin and regulatory standards.
  - Interoperability of national customs systems.
  - Mutual recognition of economic operators (examples: initiatives by the Pacific Alliance).
- Deeper agreements addressing investment rules and competition policy would facilitate cross-border investment and production chains.
- Reduce intra-regional tariffs and NTMs, including on a unilateral basis, and eliminate redundant protection of products not produced in LAC.
- Expected benefits: increased intra-industry trade, formation of regional value chains, and enhanced growth opportunities.

### Reducing trade costs and supporting firms
- Reducing trading costs is key to enhancing competitiveness.
- Support to firms in meeting technical standards required by importing countries is important, especially for SMEs.
- Regional regulatory cooperation—including mutual recognition agreements on SPS and TBT—would facilitate intra-regional trade and help countries meet standards in third markets.
- Country authorities highlighted difficulties in meeting sanitary and phytosanitary standards and technical barriers to trade in the survey.

### Participation in global value chains (GVCs)
- GVCs create technological spillovers and broaden participation of smaller firms in trade.
- LAC has significant scope for further joining GVCs and adding value downstream in agricultural products and mineral resources.
- Geographic advantage: proximity of Central America and Mexico to U.S. and Canadian markets gives these countries some advantages over Asian countries.
- Empirical finding: bringing LAC’s participation in GVCs in line with that of Asia has the potential to increase per capita growth in LAC by about 1 percentage point.
- Constraints to participation: infrastructure and skills deficits; tariffs on intermediate and capital goods in some economies; high transportation and trade facilitation costs.
- Policy implications: reduce tariffs on intermediate and capital goods (including unilaterally), address infrastructure and skills gaps, and boost trade facilitation to support investment and GVC integration.
- Survey finding: a degree of complacency among LAC authorities on tariffs and non-tariff barriers, with few countries mentioning plans to revisit tariff schedules or reduce NTBs.

### Export composition, diversification, and structural change
- Effective strategies to change export composition should build on current comparative advantages and proceed incrementally.
- Many LAC countries maintain a comparative advantage in commodity exports, implying higher exposure to external shocks such as global commodity prices.
- The slowdown in global trade and depressed commodity prices present an opportunity for greater export diversification.
- Diversification tends to proceed through intermediate stages involving products close to existing export portfolios.
- Policies required: enhance infrastructure quality, address education and technical skills gaps (areas where LAC lags Asia), and explore fiscal space to accommodate reforms.

### Ensuring equitable distribution of trade gains
- Trade can provide growth dividends without adverse effects on aggregate income inequality, but trade liberalization may produce important intra-economy distributional effects across regions or industries.
- The recent period of trade liberalization coincided with strong domestic activity and a commodity price boom, which may have masked intra-economy distributional effects.
- In the context of weak economic activity, future distributional effects from trade liberalization may be more apparent.
- Policy recommendations to distribute gains more widely:
  - Encourage SME participation in trade (following successful approaches in Asia).
  - Where fiscal space permits, implement complementary labor market policies and social safety nets to smooth adjustment for affected workers and industries.
  - Promote labor mobility across regions and industries; remove barriers to geographical mobility; implement skills training programs for workers.

*International Monetary Fund — CONCLUSIONS from "TRADE INTEGRATION IN LATIN AMERICA AND THE CARIBBEAN"*

### References

### cr1766 - References

### Major literature and working papers cited
- Extensive references on trade, globalization, and regional integration, including empirical and theoretical contributions by Alvaredo and Gasparini (2015); Baier and Bergstrand (2007, 2009); Balassa (1965); Baldwin (2006); Baldwin and Yan (2014); Blyde (ed) (2014); Costinot and Rodriguez-Clare (2014); Dabla‑Norris et al. (2015); Frankel and Romer (1999); Goldberg and Pavcnik (2007); Hausmann et al. (2014); Koopman et al. (2010, 2014); Rodrik (2015); Sachs and Warner (1995); Stolper and Samuelson (1941); Wacziarg and Welch (2003, 2008); and numerous IMF Working Papers and Regional Economic Outlook chapters.

### Figure 1 — The slowdown in world trade: implications for LAC
- World trade decelerated significantly in recent years, with import volume and import value diverging from GDP growth across 2000–2015 (chart range shown from -25 to 25 on vertical axis for annual percentage change).
- Gross income elasticity of trade shown for periods 1998-2001, 2002-2006, 2007-2011, 2012-2015 by region (World, Advanced Economies, Emerging and Developing Economies).
- Participation in world exports (1990–2012) reported by export type: Gross Exports, Gross Final Exports, Gross Intermediate Exports, Value Added Exports.
- Latin America and the Caribbean: Export Growth (annual percentage change, 1998–2015) plotted for Volume and Value.
- Commodity Price Indices (2005=100) for Energy, Food and Beverage, Metals (1995–2015) show commodity export values affected by declines in commodity prices.
- LAC economic activity and imports (annual percentage change) plotted over 2000–2015, illustrating links between GDP Growth and Import Volume/Value.

### Figure 2 — Regional trade integration in LAC
- LAC is relatively less regionally integrated compared to advanced countries in North America and Europe, but comparable to emerging and developing regions in Asia and Europe.
- Share of intraregional gross exports shown for 1990–2014.
- Substantial heterogeneity across countries in intra-regional export shares (2015): country-level bars for SUR, DOM, MEX, VEN, BLZ, GUY, PER, CHL, BRA, ECU, PAN, CRI, NIC, COL, HND, ARG, GTM, URY, SLV, PRY, BOL.
- Ratio of intraregional intermediate to final gross exports provided for 1990–2012.
- Inter-regional export shares (2015) show dominance of the U.S. and, to a lesser extent, China among LAC’s inter-regional partners.
- Note: Mexico included in Latin America and excluded from North America.

### Figure 3 — Trade agreements and global trade barriers
- Regional Trade Agreements (RTAs) cumulative and annual counts plotted 1958–2015 (global) and 1961–2015 (LAC).
- Weighted average tariff (Effectively Applied Weighted Average tariff, percent) shown over time with region comparisons; LAC tariffs noted as elevated relative to other regions but declining over time.
- Non-tariff measures shown by type (Quantitative Restrictions, Sanitary and Phytosanitary, Technical Barriers to Trade) with counts over time (1995–2015 and 1997–2014), indicating rising importance of NTBs globally and in LAC.
- For LAC, non-tariff measures counts plotted 1995–2015 alongside tariff series.

### Figure 4 — Composition of LAC’s exports: goods vs. services
- Exports of goods dominated exports of services globally and in LAC in 1975 and 2015.
- Regional/service shares in 1975 (in percent of total exports): Middle East and North Africa — Goods 92% / Services 8%; Sub-Saharan Africa — Goods 87% / Services 13%; Emerging and Developing Asia — Goods 84% / Services 16%; LAC — Goods 82% / Services 18%; Advanced Economies — Goods 81% / Services 19%; Emerging and Developing Europe — Goods 82% / Services 18%.
- Regional/service shares in 2015 (in percent of total exports): Middle East and North Africa — Goods 87% / Services 13%; Sub-Saharan Africa — Goods 84% / Services 16%; Emerging and Developing Asia — Goods 84% / Services 16%; LAC — Goods 87% / Services 13%; Advanced Economies — Goods 74% / Services 26%; Emerging and Developing Europe — Goods 79% / Services 21%.
- Subregional composition in 1975 and 2015 (in percent of total exports): South America, LA6, Central America, The Caribbean. Notable: Central America and the Caribbean show increased importance of services by 2015 (Central America and The Caribbean reported as 56% goods / 44% services in 2015).

### Figure 5 — Survey of country authorities on trade policy
- Most common trade policy objective in the region: Diversification.
- Key strategies identified: regional integration, trade agreements, export promotion, trade facilitation.
- Regional and global initiatives viewed as very important by respondents.
- Main constraints to export growth cited: infrastructure weakness, non-tariff barriers (NTBs), high production costs, lack of human capital, access to finance, lack of innovation, exchange rate, tariff barriers.
- Survey breakdowns presented by subregion (Central America & Mexico, South America, Caribbean) for objectives, strategies, most important initiatives, and constraints (number of countries on 0–9 or 0–12 scales).

### Table 1 — Determinants of the composition of trade (selected IV panel regression coefficients)
- Source: Ding and Hadzi-Vaskov (forthcoming). Instrumented variables: infrastructure, tariffs, education, Gini index (instrumented by first two lags). Infrastructure measured by railway network density; tariffs from WITS; education by secondary enrollment and tertiary share; income inequality measured by net Gini from SWIID.
- Selected coefficient estimates (with p-values in parentheses). Columns correspond to dependent variables: concentration, sophistication, RCA in high-skill products, share of high-skill products, complexity (ten columns across two panel specifications: Observations 688/708; R-squared listed per column).
  - Infrastructure: 4.869*** (0.000667); 8.017*** (5.85e-07); 0.174 (0.405); 0.113 (0.559); 0.186 (0.306); 0.401** (0.0457); 3.137*** (0.000688); 4.301*** (5.90e-08); 0.811*** (0.00138); 1.127*** (1.90e-07).
  - Tariffs: 0.0105 (0.246); -0.0622*** (1.33e-06); 0.00381 (0.100); 0.00549** (0.0152); 0.00172 (0.369); -0.00491*** (0.000981); 0.0121 (0.188); -0.00153 (0.862); 0.00312 (0.224); -0.000592 (0.808).
  - Education: 0.00525** (0.0251); -0.00165 (0.581); -0.000320 (0.408); -0.000197 (0.565); 0.000584* (0.0864); 7.32e-05 (0.844); 0.0227*** (9.94e-05); 0.0291*** (3.34e-08); 0.00625*** (8.94e-05); 0.00799*** (2.00e-08).
  - Gini Index: -0.00952 (0.107); -0.0230*** (0.00239); -0.00160* (0.0921); -0.00137 (0.160); -0.00122 (0.180); -0.00263** (0.0121); 0.0175*** (0.000716); 0.0161*** (0.000967); 0.00486*** (0.000602); 0.00446*** (0.000850).
  - Income per capita: 0.765*** (0); -0.0192 (0.158); 0.0656*** (5.04e-11); 0.206*** (0.00160); 0.0563*** (0.00262).
  - Constants and model statistics reported (e.g., Observations 688/708; R-squared range from 0.083 to 0.696). Significance notation: *** p<0.01, ** p<0.05, * p<0.1.

### Table 2 — International trade and economic growth (system GMM, 5-year panels, 1960–2015)
- Regression of growth in real GDP per capita on trade openness and controls using system GMM. Robust standard errors in parentheses. All regressions include time and country fixed effects. Summary for four model specifications (columns 1–4):
  - Initial GDP per capita: -3.816*** (0.759); -8.825*** (2.961); -3.713*** (0.718); -4.187*** (0.907).
  - Public Infrastructure: 1.674*** (0.407); 5.094*** (1.813); 1.895*** (0.394); 0.643 (1.019).
  - Trade openness: 2.045*** (0.574); -0.0408 (1.494); 1.658*** (0.574); 0.426 (1.298).
  - FDI (percent of GDP): 0.274 (0.238); 0.430 (0.533); 0.362* (0.217); 0.399 (0.266).
  - Advanced economy dummy and interactions reported in alternative specifications: Advanced economy (dummy) -38.05* (22.07); Advanced economy (dummy)*Trade Openness 10.97** (5.551).
  - Latin America and the Caribbean (dummy): -2.196*** (0.814); Latin America and the Caribbean (dummy)*Trade Openness 6.723** (2.968).
  - Observations: 1,041 in each column; Number of ISO: 135; AR(1), AR(2), Hansen test statistics reported (e.g., AR(1) 0.0190 to 0.0299; AR(2) 0.244 to 0.309; Hansen 0.00694 to 0.901).

### Table 3 — Trade and inequality (panel fixed effects, five-year panels, 1980–2015)
- Dependent variables: Market Gini and Net Gini across six specifications (columns 1–6). Robust standard errors clustered at country level. Selected coefficients:
  - Trade Openness: -0.0205 (0.0177); -0.00851 (0.0141); -0.0413* (0.0244); -0.0216 (0.0207); -0.0220 (0.0224); -0.00796 (0.0177).
  - Financial Openness: 0.000985 (0.000677); 0.000638 (0.000417); 0.000456 (0.000765); 0.000305 (0.000392); 0.001010 (0.000749); 0.000629 (0.000479).
  - Financial Deepening: 0.0342*** (0.0119); 0.0215** (0.00840); 0.0349*** (0.0125); 0.0219** (0.00866); 0.0343*** (0.0120); 0.0215** (0.00848).
  - Education: -0.0884 (0.450); -0.254 (0.350); -0.0905 (0.442); -0.255 (0.346); -0.0759 (0.465); -0.259 (0.355).
  - Government Spending: 0.183 (0.262); 0.267 (0.198); 0.186 (0.266); 0.270 (0.199); 0.181 (0.261); 0.268 (0.197).
  - Agriculture Employment Share: -0.199 (0.133); -0.191 (0.122); -0.214 (0.136); -0.200 (0.124); -0.201 (0.136); -0.190 (0.123).
  - Industry Employment Share: -0.05000 (0.0830); 0.00941 (0.0627); -0.03010 (0.0870); 0.0219 (0.0668); -0.05150 (0.0797); 0.00995 (0.0601).
  - Constant terms: 48.74*** (5.037); 39.67*** (4.091); 48.12*** (5.069); 39.28*** (4.118); 48.80*** (5.006); 39.65*** (4.084).
  - Observations: 562 in each column; R-squared range: 0.120–0.143; Number of ISO: 118.
- Notes: Financial openness measured as sum of foreign assets and liabilities relative to GDP; financial deepening captured by private credit to GDP; education from Barro-Lee; government spending index from Fraser Institute. Estimation details available in Beaton, Cebotari and Komaromi (forthcoming).

*International Monetary Fund — “References” section and associated figures/tables from the PDF content unit.*

### Annex I. Selected Regional Trade and Integration Agreements

### Annex I. Selected Regional Trade and Integration Agreements in Latin America and the Caribbean

### Andean Community
- Formed as the Andean Pact in 1969 with the aim to liberalize intraregional integration.
- Currently a customs union that comprises Bolivia, Colombia, Ecuador, and Peru.
- Member countries have reached full tariff liberalization of intraregional trade since 1993 and agreed to adopt a common external tariff since 1994.
- Note: Peru left the Andean Community in 1992 and rejoined in 1997. Chile was a founding member, but withdrew in 1976. Venezuela joined the Andean Community in 1973 and withdrew in 2006.

### Caribbean Community (CARICOM) Single Market and Economy (CSME)
- Established by the Revised Treaty of Chaguaramas in 2002 to create a single market and economy and facilitate insertion into the global trading and economic system.
- Now includes 12 members: Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago.
- Progress toward the single market and economy stalled in the aftermath of the global financial crisis.
- Note: Haiti is a full member of CARICOM and a partial participant in CSME.

### Central American Common Market
- Origins in the early 1950s; treaty in 1960 aimed to create a customs union within a decade.
- Political turmoil in the 1970s and 1980s left the treaty ineffective; revived in the early 1990s.
- Important features: free intra-regional trade, introduction of a common external tariff for third-country imports, and efforts to reduce nontariff barriers at borders.
- Membership includes Costa Rica, Guatemala, El Salvador, Honduras, and Nicaragua.

### Dominican Republic–Central America Free Trade Agreement (CAFTA-DR)
- Signed in 2004 and in effect since 2006.
- First free trade agreement between the United States and the economies from Central America and the Dominican Republic aiming to expand trade in goods and services, increase investment opportunities and promote intellectual property rights.
- Members include Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic.
- Note: CAFTA-DR entered into force in 2006 for the US, El Salvador, Honduras, Nicaragua, and Guatemala; in 2007 for the Dominican Republic; and in 2009 for Costa Rica.

### Mercosur
- Formed in March 1991, with the goal of forming the Common Market of the South (MERCOSUR) by December 31, 1994.
- Membership includes Argentina, Brazil, Paraguay, Uruguay, and Venezuela.
- Facilitates the free movement of goods, services and factors of production; members set a common external tariff, adopted a common trade policy towards third parties and aim at tariff reductions and NTB elimination.
- Note: Venezuela’s membership has been suspended since December 2016 and Bolivia is an associate member currently following the adhesion process.

### North American Free Trade Agreement (NAFTA)
- Includes Canada, Mexico, and the U.S.
- Came into force on January 1, 1994, superseding the Canada-United States Free Trade Agreement.
- Goal: eliminate trade and investment barriers amongst signatory countries and protect intellectual property rights on traded products.
- Supplements: North American Agreement on Environmental Cooperation (NAAEC) and North American Agreement on Labor Cooperation (NAALC).

### Group of Three
- Comprising Colombia, Mexico, and Venezuela; formed in 1990 to promote trade and eventually form a free trade area by January 1, 1995.
- Covered liberalization of trade plus investment, services, government purchases, regulations to fight unfair competition, and intellectual property rights.
- Note: Venezuela left the Group of Three in 2006.

### Pacific Alliance
- Established by Chile, Colombia, Mexico, and Peru in 2011.
- Aims to move progressively towards the free movement of goods, services, resources and people; promote economic growth, competitiveness, and social inclusion; and serve as a platform for further integration with emphasis on the Asia-Pacific region.
- Commonly seen as a pragmatic model for further trade integration that aims to build upon existing trade agreements.

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### Annex II. Can LAC Emulate Asia’s Export Growth Model?
- Observation: Trade and output growth in Asia has significantly outperformed that of LAC in recent decades; Asia also outperforms LAC in participation in GVCs and intra-regional trade.
- Emerging Asia’s manufacturing-export success relied on a “hub and spokes” approach:
  - Japan’s eroding comparative advantage led Japanese multinationals to offshore manufacturing processes to lower-wage locations within the region.
  - China more recently became a hub for Asian GVC participation.
  - Offshoring depended on significant differences in relative endowments across Asian countries, notably skilled and unskilled labor.
- Constraints for LAC:
  - Less cross-country diversity of endowments and no clear hub. Brazil has important trading relationships but is far from being a hub; Mexico is more integrated with the U.S. than with the rest of LAC (IMF, 2015).
  - “Reluctant hegemons”: LAC’s largest economies have less intense trade links with the rest of the region than smaller economies, weakening incentives to cede policy autonomy (Levy-Yeyati, 2012).
- Nature of regional integration:
  - Asia’s early integration was largely de facto through unilateral liberalization to attract investment (often via duty free zones), with regional and bilateral agreements emerging later.
  - LAC pursued more formal, often politically driven mechanisms of integration since the 1960s, with mixed results and instances of trade diversion; both regions now exhibit “spaghetti bowls” of overlapping agreements.
- Geography and location factors:
  - Asia benefits from many manufacturing export activities being near the coast and proximity to a large advanced economy (Japan) and a large, fast-growing economy (China).
  - LAC faces significant natural barriers and greater distances from comparable large markets.
- Role of FDI and technology:
  - Emerging Asia attracted more FDI to manufacturing, facilitating technology transfer and R&D; FDI to LAC has been more focused on natural resources.
- Likelihood of LAC following Asia’s path:
  - LAC is unlikely to replicate Asia’s experience due to lack of a dominant hub, geographic constraints, and “premature deindustrialization” pressures noted by Rodrik (2015).
  - Services may offer growth potential for LAC, but the high-skill nature of tradable services demands stronger human capital.
- Lessons from Asia for LAC:
  - Actively reduce barriers to trade and investment, including on intermediate goods.
  - Strengthen education systems to provide skills for emerging industries.
  - Focus regional integration on business needs rather than purely political motives.

- Chart note: High-technology exports 2015 (percent of manufacturing exports) — data points listed for numerous countries; specific data years: Honduras, Indonesia and Vietnam correspond to the year 2014 and Venezuela 2013.

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### Annex III. The Social Impact of Trade Liberalization in Peru
- Context: Recent trade liberalization in Peru in the 2000s provides data-rich setting (annual household surveys) to analyze impacts on domestic producers competing with liberalized imports (the expected losers).
- District-level analysis approach:
  - Builds a district-level tariff reflecting production structure and exposure to imports.
  - Uses regressions at the district level to relate changes in estimated district tariffs to changes in expenditure/poverty indicators.
- Empirical findings:
  - A one percentage point reduction in the district tariff led to:
    - a decrease of 0.68 percent in income,
    - an increase of 0.3 percentage points in headcount poverty,
    - an increase of 0.23 percentage points in the poverty gap.
- Policy implications and suggested measures to minimize adverse effects on losers from liberalization:
  1. Estimate district level tariffs to identify those likely affected by liberalization through the imports competition channel.
  2. Protect and facilitate adjustment especially in likely-to-be-affected districts by:
     - Strengthening social safety nets.
     - Implementing retraining and job search programs with an exceptional budget at least during the first years after liberalization.
     - Lowering costs of migration mainly by providing infrastructure (transport and telecommunications), as well as nationwide information (on jobs, housing).
     - Adopting gradual/longer liberalization schedule for socially/politically sensitive products.

*International Monetary Fund — Annex excerpts from the chapter on trade integration and its social and regional implications.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1766.pdf_