## wpiea2020239-print-pdf

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---

### COVID-19: hypothesized amplification of existing trends
- Prediction described as speculative given high uncertainty; hypothesis: COVID-19 will exacerbate effects identified in the analysis.
- Net effect: countries expected to benefit from China’s rebalancing will likely do even better; those set to lose will likely do even worse.
- Two amplifying channels:
  - Regionalization and diversification of global value chains: COVID-19 disrupted supply chains concentrated in China, prompting firms to diversify and regionalize production.
  - Decline in services involving a high degree of person-to-person interaction: lockdowns reduced demand for hospitality, brick-and-mortar retail, and personal grooming.
- Opportunity: remote/online services may see higher demand; Central America and the Caribbean with outsourcing capabilities may benefit, partly compensating declines in tourism.

### II. ASIA-LAC TRADE LINKAGES AND THE EMERGENCE OF CHINA — Big picture (1998–2017)
- Data: United Nation’s COMTRADE statistics for the period 1997-2017; analysis restricted to trade in goods.
- LAC exports to Asia:
  - After being less than 1 percent of LAC’s GDP at the beginning of the century, total exports of LAC to Asia reached around 3 percent of LAC’s GDP in 2017 (peaking at nearly 3½ percent of GDP in 2013).
- LAC imports from Asia:
  - Imports went from less than 2 percent to over 5 percent of GDP in the same period.
- Geographic shares (1998 to 2017):
  - Export shares:
    - Asia: rose from 6 percent in 1998 to almost 20 percent in 2017.
    - North America: declined from 55 percent to 47 percent in the same period.
    - Excluding Mexico: Asia’s share increases from 10 to 30 percent; North America’s share declines from 33 to 20 percent.
  - Import shares:
    - Asia: increased from 11 percent to 32 percent in 1998–2017.
    - North America: declined from 50 percent to 34 percent in the same period.
    - Excluding Mexico: Asia’s import share goes up from 12 to 30 percent; declines in import shares are more evenly distributed across North America, Europe, and LAC itself.
- China’s role:
  - Growth of LAC’s trade with Asia primarily driven by China as both an export destination (mainly for LAC’s commodities) and a source of imports (manufactures).
  - Implication: China’s progressive shift from an investment- to a consumption-led economy may decelerate demand for commodity-intensive mineral intermediate inputs; demand for soybeans and meat products may remain strong to support a growing urban population in China (Casanova et al, 2016).
  - Policy recommendation: to sustain linkages with China, LAC countries should diversify and increase the value added of their exports; policies supporting trade integration and reducing trade costs could facilitate this transition (see Section V).

### LAC’s exports to Asia — concentration, bilateral links, and dependency (2017)
- Geographic concentration:
  - 53 percent of total LAC exports to Asia went to China in 2017.
  - Japan accounted for 11 percent.
  - India accounted for 9 percent.
- Product concentration:
  - Exports of minerals, metals, and fuels comprised nearly half of total exports to Asia.
  - Exports of vegetables reached 20 percent.
- Bilateral linkages by product:
  - Iron ores: largely a Brazil–China connection, with Peru and Chile as origins and Japan and South Korea as destinations also playing roles.
  - Mineral fuels: origins include Venezuela, Brazil, Colombia, Mexico; destinations include China, India, South Korea, Japan, Singapore.
  - Soybeans and other oil seeds: primarily a Brazil–China connection; Argentina and Uruguay also as origins.
  - Copper: Chile and Peru as origins; China and South Korea as destinations.
- Evolution since 2002: China was not a dominant destination for ores, mineral fuels and meat in 2002; Ecuador and Argentina were significant sources in mineral fuels and soybeans markets, respectively.
- Export dependency increases:
  - Casanova et al (2016) findings for 2008–2014: LAC’s export dependency from China increased substantially across the board, with the highest dependency found for Costa Rica, Colombia, Uruguay, Venezuela, Brazil, Panama, Peru, Chile, Guyana, and Argentina.
  - For the largest exporters to China (Brazil, Argentina, Chile, Peru, Colombia, Venezuela), concentration was largely across four commodities: soy (soybeans, soybean oil), crude oil, copper (copper ore, copper cathodes, unrefined copper), and iron ore.

### LAC’s imports from Asia (key facts and shares, 2017)
- China was the main import origin in 2017: 57 percent.
- Other import-origin shares in 2017: Japan 10 percent, Korea 9 percent, India 5 percent.
- Mexico imported nearly half of LAC’s imports from Asia in 2017 while it accounted for just about 12 percent of LAC’s exports to Asia.
- Product concentration in imports: machines and electronics, transportation vehicles exhibit large shares.
- Japan’s notable roles in 2017 by product: vehicles and accessories (30 percent); Korea reaching 19 percent in vehicles and accessories.
- Japan and Korea also significant in iron and steel, optical equipment, and plastics.
- Historical shift: in 2002 the share of imports coming from China was below 30 percent in all categories; by 2017 China’s participation increased at the expense of Japan.

### Asia–LAC third‑market competition (North America)
- Method: calculate each region’s participation in exports to North America to assess competition; proximity to the 45-degree line indicates larger competition.
- Findings:
  - LAC’s export participation in North America dominated by fuels, minerals, vegetables, and food products.
  - Asia’s participation dominated by manufactured products.
  - Only two categories—animal products and transportation—show relatively similar shares for both regions; LAC’s participation in transportation is dominated by Mexico.
  - Implication: most U.S. competition between LAC and Asia occurs in animal products and transportation; other categories display high specialization.
- Note: China’s retreat from certain markets due to rebalancing could open opportunities for LAC exporters, but other countries, such as India, may fill the gap.

### China’s rebalancing: dimensions and modeling approach
- Two key developments associated with China’s structural transformation:
  - Domestic demand shifting away from investment and towards consumption.
  - On the production side, services outgrowing manufacturing.
- Modeling framework:
  - Multi-sector computable general equilibrium model developed by CFRT incorporating firm heterogeneity and cross-border input-output relationships.
  - Database: combined Eora global supply chain database and 2015 applied-tariff data from UNCTAD via WITS; combined input-output database with 17 sectors and 165 countries.
  - Table 1 sectors include: Agriculture; Extractive industries; Food; Textile; Wood and paper; Chemicals and oil derivatives; Metals; Electronics; Transport goods; Other manufacturing; Electricity; Construction; Wholesale and retail trade; Hotels and restaurants; Transport and communication; Financial services; Other services.
- Model limitations:
  - Focuses on trade channel only; excludes financial spillovers and other channels.
  - Does not account for investment or dynamics; abstracts from transition costs.
  - Static model with fixed overall trade balances; comparisons are across steady states.

### Scenario design: mapping rebalancing into shocks
- Rebalancing simulated as a combined shock: a “preference shock” + a “production shock”.
- Preference shock:
  - Calibrated by replacing China’s initial sectoral shares in final consumption with those of the U.S. in the base year.
  - Implied effect: reduction in the share of goods-producing sectors in final consumption by almost half.
  - Reduces shares of electronics and construction; increases shares of financial services and other services.
  - Appendix II: the “preference shock” is by far the most significant relative to the production shock.
- Production shock:
  - Calibrated by replacing the shares of each sector in the input structure of other sectors in China with those in the U.S. base year.
  - General effect: increase in the share of service-producing sectors (particularly financial services) in the production of other sectors; decrease in shares of goods-producing sectors.
- Combined shock: both shocks assumed to occur simultaneously; simulations are ceteris paribus and do not include policy responses.

### Long‑run simulation results for LAC — aggregate and sectoral effects
- Aggregate real GDP effects:
  - China’s rebalancing has a negligible impact on LAC’s real GDP in aggregate.
  - Effects are heterogeneous across LAC countries and involve significant sectoral reallocations.
  - Many LAC countries are negatively affected, showing declines in their real GDP relative to no rebalancing; particularly affected countries: Paraguay, Bolivia, and Colombia.
  - Exceptions with increases in real GDP: Mexico, Venezuela, and the Central American economies.
- Macro effects on LAC GDP and exports:
  - LAC’s real exports increase by 0.8 percent following China’s rebalancing shock.
  - Aggregate median impact for commodity exporters: median fall in overall GDP of -0.1 percent.
  - Non-commodity exporters: on median, benefit from the shock.
  - Some countries experience small declines in both goods and services exports (example: Brazil and Colombia).
- Heterogeneous country outcomes (examples):
  - Exports increase following the shock: Mexico, CAPDR, Ecuador, Paraguay, and the Southern Cone countries.
  - Exports decline following the shock: Peru, Bolivia, Colombia; to a lesser extent Brazil and Venezuela.
  - LA5 average response: mining production reduced by more than 20 percent; increases in metals, electronics and transport production.
  - Venezuela, Peru, Ecuador, Bolivia, Chile and Paraguay: large falls in terms-of-trade and large equilibrium wage adjustments; comparative advantage shifts toward services.
  - Mexico and Uruguay benefit in real exports due to reduced Chinese competition in electronics and textiles respectively.
- Sectoral reallocation:
  - In China, sectoral GDP of financial services, other services, and wholesale and retail trade more than double, while GDP of most goods-producing sectors declines.
  - Rebalancing channels:
    - China loses comparative advantage in many goods-producing sectors and becomes more competitive in services.
    - LAC countries either (a) fill gaps left by China in goods markets or (b) satisfy increased Chinese demand for services.
  - Final effects on services exports depend on:
    1. the overall decline in terms of trade in each country; and
    2. the initial comparative advantage in producing services.

### Adjustment costs and labor reallocation
- Some commodity-dependent countries see concentrated losses in mining and extraction that can contribute in some cases more than 1 percentage points to GDP change.
- Many commodity-dependent countries see close to a third of their economies contracting.
- Labor reallocation: more than 1 percent of initial labor force in some heavily affected countries need to exit contracting sectors.
- Because commodity sectors are usually less labor-intensive, labor reallocation losses tend to be smaller than GDP contraction losses in most countries.

### Trade competition: indices, main competitors, and trends (2000–2015)
- Index construction:
  - Value-Based Index (VBI) captures intensive margin of competition at HS four-digit level using HS six-digit lines.
  - Count-Based Index (CBI) captures extensive margin (number of overlapping six-digit lines).
- Data snapshots: indices measured at two snapshots, 2000 and 2015, using BACI World Trade Database (HS-6 level).
- Competitor findings (2015):
  - The U.S. and China are by far the most dominant competitors for LA6 countries.
  - Among advanced economies, Germany is among the top three competitors for all LA6 except Colombia.
  - Japan and South Korea are within the top 10 competitors for most LA6 countries.
  - Among emerging markets, China is the top competitor for Mexico, Brazil, Argentina and Colombia; not a significant competitor for Peru and Chile due to mineral-focused product space.
  - India is the second largest competitor for Brazil and Colombia among emerging markets, and the third for Chile and Peru.
- Product-space competition:
  - Fiercest competition occurs in manufacturing products: Mexico shows fierce competition across most major products; Brazil and Argentina in motor vehicles; Brazil in aircrafts.
  - Commodities show mixed competition intensity: low competition examples include Colombia — coffee, flowers, bananas; Chile — fish, grapes, wine; Peru — petroleum gases. High competition examples include petroleum, coal, gold (Colombia and Peru); Chile and Peru compete in copper; Argentina and Brazil compete in soya.
  - CBI competition tends to be higher than VBI competition across all export products, suggesting competitors sell many common HS-6-digit products but at lower value.
- Trends 2000 to 2015:
  - Count-based competition remained relatively stable or increased.
  - Value-based competition from China significantly increased between 2000 and 2015, often at the expense of the U.S., particularly for Mexico, Brazil, Argentina and Colombia.
  - Competition from emerging and developing countries has increased not only from China, but also from other countries, especially India.

### Reaping the benefits of China’s rebalancing — deeper integration and policy scenarios
- Constraints: high geographical and product concentration, weak participation in global value chains, LAC tariffs and non-tariff barriers remain higher than OECD and lag ASEAN.
- Policy levers: investment in new technology, more efficient trade infrastructure, advanced shipping methods, promoting consolidation in the exporting sector.
- Two modeled liberalization scenarios (after China rebalancing shock):
  1. LAC unilaterally liberalizes trade in goods and services within the region (goods: tariffs set to zero; services: non-tariff barriers reduced by 10 percent).
  2. LAC unilaterally liberalizes trade in goods and services with the rest of the world (same tariff/NTB assumptions).
- Baseline: tariffs configuration in effect at end-2015.
- Aggregate trade effects (full liberalization scenario):
  - World trade of goods increases by 2 percent.
  - World trade in services increases by 15 percent.
  - LAC exports of goods rise by 3 percent.
  - LAC exports of services rise by 7 percent.
- Macroeconomic impacts on LAC:
  - Real GDP would increase by 0.4 percent with goods and services liberalization within the region.
  - Real GDP would increase by 1.2 percent with full liberalization (LAC with the rest of the world).
  - Exports of goods and services increase for all countries under liberalization.
- Distributional note: China’s rebalancing alone is marginally positive on average for LAC GDP and exports but uneven across countries; full trade liberalization would unequivocally make all LAC countries better off by increasing exports (particularly services) and GDP.

### Other policies to maximize benefits
- Address supply-side constraints:
  - Close infrastructure gaps and improve basic services: electricity, water and sanitation, transportation.
  - Encourage FDI in utilities; China’s rebalancing could lead to further increases in China’s FDI in LAC.
- Boost productivity:
  - Improve human capital via stronger and more efficient investment in education and health.
  - Attract export-oriented foreign firms in high-tech and knowledge sectors (e.g., through Free Trade Zones) — example: Costa Rica.
- Maintain good macroeconomic policies to stabilize the economy and reduce exchange rate volatility to support exporters.
- Improve product quality in goods facing the strongest competition and invest in information and communications technology to reduce logistics costs.

*Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020239-print-pdf.pdf*

### Section VI discusses how the COVID-19 outbreak might affect these trends. While any

### Section VI discusses how the COVID-19 outbreak might affect these trends. While any

### COVID-19: hypothesized amplification of existing trends
- Prediction is described as speculative given high uncertainty, but hypothesis is that COVID-19 will exacerbate effects identified in the analysis.
- Net effect: countries expected to benefit from China’s rebalancing will likely do even better; those set to lose will likely do even worse.
- Two channels through which the pandemic may amplify the gap between winners and losers:
  - Regionalization and diversification of global value chains.
  - Decline in services involving a high degree of person-to-person interaction.

### II. ASIA-LAC TRADE LINKAGES AND THE EMERGENCE OF CHINA
- Trade between Asia and LAC gained relevance after World War II and unfolded in three waves:
  - First wave: rise of Japan as buyer of natural resources and source of investment and industrial goods.
  - Second wave: rise of the Asian tigers (Hong Kong SAR, South Korea, Singapore, Taiwan Province of China) in the 1970-80s.
  - Third (ongoing) wave: rapid expansion of China and India starting in the early 2000s, coupled with better macroeconomic performance of LAC.
- Analysis restricted to trade in goods due to data availability; dataset: United Nation’s COMTRADE statistics for the period 1997-2017.

### A. The Big Picture — magnitudes and trends (1998–2017)
- LAC exports to Asia:
  - After being less than 1 percent of LAC’s GDP at the beginning of the century, total exports of LAC to Asia reached around 3 percent of LAC’s GDP in 2017 (peaking at nearly 3½ percent of GDP in 2013).
- LAC imports from Asia:
  - Imports went from less than 2 percent to over 5 percent of GDP in the same period.
- Geographic shares (1998 to 2017):
  - Export shares:
    - Asia: rose from 6 percent in 1998 to almost 20 percent in 2017.
    - North America: declined from 55 percent to 47 percent in the same period.
    - Excluding Mexico: Asia’s share increases from 10 to 30 percent; North America’s share declines from 33 to 20 percent.
  - Import shares:
    - Asia: increased from 11 percent to 32 percent in 1998–2017.
    - North America: declined from 50 percent to 34 percent in the same period.
    - Excluding Mexico: Asia’s import share goes up from 12 to 30 percent; declines in import shares are more evenly distributed across North America, Europe, and LAC itself.
- The growth of LAC’s trade with Asia has been primarily driven by China as both an export destination (mainly for LAC’s commodities) and a source of imports (manufactures).
- Implication of China’s structural shift:
  - China’s progressive shift from an investment- to a consumption-led economy may decelerate demand for commodity-intensive mineral intermediate inputs.
  - Demand for soybeans and meat products may remain strong to support a growing urban population in China (Casanova et al, 2016).
  - Policy recommendation: to sustain linkages with China, LAC countries should diversify and increase the value added of their exports; policies supporting trade integration and reducing trade costs could facilitate this transition (see Section V).

### B. LAC’s exports to Asia — concentration, bilateral links, and dependency
- Geographic concentration (2017):
  - 53 percent of total LAC exports to Asia went to China in 2017.
  - Japan accounted for 11 percent.
  - India accounted for 9 percent.
- Product concentration (2017):
  - Exports of minerals, metals, and fuels comprised nearly half of total exports to Asia.
  - Exports of vegetables reached 20 percent.
- Bilateral linkages by product:
  - Iron ores: largely a Brazil–China connection, with Peru and Chile as origins and Japan and South Korea as destinations also playing roles.
  - Mineral fuels: origins include Venezuela, Brazil, Colombia, Mexico; destinations include China, India, South Korea, Japan, Singapore.
  - Soybeans and other oil seeds: primarily a Brazil–China connection; Argentina and Uruguay also as origins.
  - Copper: Chile and Peru as origins; China and South Korea as destinations.
- Evolution since 2002:
  - China was not a dominant destination for ores, mineral fuels and meat in 2002; Ecuador and Argentina were significant sources in mineral fuels and soybeans markets, respectively.
- Export dependency increases:
  - LAC’s export dependency from Asia increased, particularly for some of the largest economies in the region.
  - Casanova et al (2016) findings for 2008–2014:
    - LAC’s export dependency from China increased substantially across the board, with the highest dependency found for Costa Rica, Colombia, Uruguay, Venezuela, Brazil, Panama, Peru, Chile, Guyana, and Argentina.
    - For the largest exporters to China (Brazil, Argentina, Chile, Peru, Colombia, Venezuela), concentration was largely across four commodities: soy (soybeans, soybean oil), crude oil, copper (copper ore, copper cathodes, unrefined copper), and iron ore.

*Source: United Nation’s COMTRADE data and IMF staff calculations; dataset period 1997-2017. *

### Section III, countries with higher dependency from China will suffer the negative effects of

### Section III, countries with higher dependency from China will suffer the negative effects of

### LAC’s export dependency from Asia
- Export dependency defined as the share of LAC exports to Asia as percentage of total LAC exports to the world.
- Figures referenced for product composition and trends: 2017 and 2002 top-six export products to Asia by origin and destination; LAC’s Exports Dependency from Asia, 1997-2017.

### LAC’s imports from Asia (key facts and shares)
- China was the main import origin in 2017: 57 percent.
- Other import-origin shares in 2017: Japan 10 percent, Korea 9 percent, India 5 percent.
- Mexico imported nearly half of LAC’s imports from Asia in 2017 while it accounted for just about 12 percent of LAC’s exports to Asia.
- Product concentration in imports: machines and electronics, transportation vehicles exhibit large shares.
- Japan’s notable roles in 2017 by product: vehicles and accessories (30 percent), Korea reaching 19 percent in vehicles and accessories.
- Japan and Korea also significant in iron and steel, optical equipment, and plastics.
- In destination shares, Mexico was the main imports recipient in most key categories, with non-negligible participation by Brazil and Chile in some categories.
- Historical shift: in 2002 the share of imports coming from China was below 30 percent in all categories; by 2017 China’s participation increased at the expense of Japan, which in 2017 retained a prominent role mainly in vehicles and to a lesser extent in iron and steel.

### Asia–LAC third‑market competition (North America)
- Method: calculate each region’s participation in exports to North America to assess competition.
- Interpretation: proximity to the 45-degree line in the market-share scatter indicates larger competition between LAC and Asia in that North American market; distance implies specialization.
- Findings:
  - LAC’s export participation in North America dominated by fuels, minerals, vegetables, and food products.
  - Asia’s participation dominated by manufactured products.
  - Only two categories—animal products and transportation—show relatively similar shares for both regions; LAC’s participation in transportation is dominated by Mexico.
  - Implication: most U.S. competition between LAC and Asia occurs in animal products and transportation; other categories display high specialization.
- Additional note: China has emerged as one of the top competitors for some LAC export categories over the past 20 years. China’s retreat from certain markets due to rebalancing could open opportunities for LAC exporters, but other countries, such as India, may fill the gap and undermine LAC’s competitive advantage in some export markets.

### China’s rebalancing: dimensions and modeling approach
- Two key developments associated with China’s structural transformation:
  - Domestic demand shifting away from investment and towards consumption as households become wealthier and disposable income rises.
  - On the production side, services outgrowing manufacturing as production becomes more complex, integrated and higher-value added.
- Modeling framework:
  - Uses a multi-sector computable general equilibrium model developed by CFRT that incorporates firm heterogeneity and cross-border input-output relationships.
  - Database: combined Eora global supply chain database and 2015 applied-tariff data from UNCTAD via WITS, resulting in a combined input-output database with 17 sectors and 165 countries.
  - Table 1 sectors include (goods / services): Agriculture; Extractive industries; Food; Textile; Wood and paper; Chemicals and oil derivatives; Metals; Electronics; Transport goods; Other manufacturing; Electricity; Construction; Wholesale and retail trade; Hotels and restaurants; Transport and communication; Financial services; Other services.
- Model limitations (as stated):
  - Focuses on trade channel only; excludes financial spillovers and other channels.
  - Does not account for investment or dynamics; abstracts from transition costs.
  - Static model with fixed overall trade balances; comparisons are across steady states.

### Scenario design: mapping rebalancing into shocks
- Rebalancing simulated as a combined shock: a “preference shock” + a “production shock”.
- Preference shock:
  - Captures shift in domestic demand from investment to consumption.
  - Calibrated by replacing China’s initial sectoral shares in final consumption with those of the U.S. in the base year.
  - Implied effect: reduction in the share of goods-producing sectors in final consumption by almost half.
  - Sectoral implication: reduces shares of electronics and construction; increases shares of financial services and other services.
  - Appendix II: the “preference shock” is by far the most significant relative to the production shock (separate impacts shown in Appendix II).
- Production shock:
  - Captures transition from manufacturing to services in production.
  - Calibrated by replacing the shares of each sector in the input structure of other sectors in China with those in the U.S. base year.
  - General effect: increase in the share of service-producing sectors (particularly financial services) in the production of other sectors; decrease in shares of goods-producing sectors.
- Combined shock: both shocks assumed to occur simultaneously; simulations are ceteris paribus and do not include policy responses. The model does not study aggregate productivity shocks but compositional changes; size of Chinese economy affected in general equilibrium only through preferences and production technology.

### Long‑run simulation results for LAC
- Aggregate real GDP effects:
  - China’s rebalancing has a negligible impact on LAC’s real GDP in aggregate.
  - Effects are heterogeneous across LAC countries and involve significant sectoral reallocations.
  - Many LAC countries are negatively affected, showing declines in their real GDP relative to no rebalancing; particularly affected countries: Paraguay, Bolivia, and Colombia.
  - Exceptions with increases in real GDP: Mexico, Venezuela, and the Central American economies.
  - Overall, China’s rebalancing implies an increase in LAC’s real GDP by [text ends here in the source].
- Sectoral reallocation:
  - The model implies winners and losers across sectors within countries due to changing Chinese demand patterns and changing intermediate-input structures.
  - Significant sectoral reallocations driven mainly by the preference shock (shift in Chinese final consumption away from goods-producing sectors).

*Source: wpiea2020239-print-pdf - Section III, countries with higher dependency from China will suffer the negative effects of changing Chinese demand patterns, particularly with respect to minerals and metals.*

### 0.1 percent.

### wpiea2020239-print-pdf - 0.1 percent.

### Macro effects on LAC GDP and exports
- LAC’s real exports increase by 0.8 percent following China’s rebalancing shock.
- Aggregate median impact for commodity exporters: median fall in overall GDP of -0.1 percent.
- Non-commodity exporters: on median, benefit from the shock (no aggregate percent given beyond statement).
- Some countries experience small declines in both goods and services exports (example: Brazil and Colombia).

### Heterogeneous country outcomes (examples from text)
- Exports increase following the shock: Mexico, CAPDR, Ecuador, Paraguay, and the Southern Cone countries.
- Exports decline following the shock: Peru, Bolivia, Colombia; to a lesser extent Brazil and Venezuela.
- LA5 average response: mining production reduced by more than 20 percent; increases in metals, electronics and transport production.
- Venezuela, Peru, Ecuador, Bolivia, Chile and Paraguay: large falls in terms-of-trade and large equilibrium wage adjustments; comparative advantage shifts toward services.
- Mexico and Uruguay benefit in real exports in the rebalancing scenario due to reduced Chinese competition in electronics and textiles respectively.

### Sectoral reallocation in China and LAC
- In China, sectoral GDP of financial services, other services, and wholesale and retail trade more than double, while GDP of most goods-producing sectors declines.
- Rebalancing channels:
  - China loses comparative advantage in many goods-producing sectors and becomes more competitive in services.
  - LAC countries either (a) fill gaps left by China in goods markets or (b) satisfy increased Chinese demand for services.
- Final effects on services exports depend on:
  1. the overall decline in terms of trade in each country; and
  2. the initial comparative advantage in producing services.

### Adjustment costs and labor reallocation
- Some commodity-dependent countries see concentrated losses in mining and extraction that can contribute in some cases more than 1 percentage points to GDP change.
- Many commodity-dependent countries see close to a third of their economies contracting.
- Labor reallocation: more than 1 percent of initial labor force in some heavily affected countries need to exit contracting sectors.
- Because commodity sectors are usually less labor-intensive, labor reallocation losses tend to be smaller than GDP contraction losses in most countries.

### Trade competition: indices and main competitors
- Index construction:
  - Value-Based Index (VBI) captures intensive margin of competition at HS four-digit level using HS six-digit lines.
  - Count-Based Index (CBI) captures extensive margin (number of overlapping six-digit lines).
- Data snapshots: indices measured at two snapshots, 2000 and 2015, using BACI World Trade Database (HS-6 level).
- Product selection: products at HS-4-digit level whose share in total exports was up to 51 percent in 2015.
- Competitor sets: top ten exporters by value for each selected product; number of competitors ranges from 18 for Colombia to 52 for Brazil.

### VBI/CBI results (summary)
- In 2015, for VBI:
  - The U.S. and China are by far the most dominant competitors for LA6 countries.
  - Among advanced economies, Germany is among the top three competitors for all LA6 except Colombia; other European competitors include Italy, France, Spain and Netherlands.
  - Japan and South Korea are within the top 10 competitors for most LA6 countries.
- Among emerging markets in 2015:
  - China is the top competitor for Mexico, Brazil, Argentina and Colombia.
  - China is not a significant competitor for Peru and Chile due to their mineral-focused product space.
  - India is the second largest competitor for Brazil and Colombia among emerging markets, and the third for Chile and Peru.
  - Indonesia and Thailand are smaller emerging competitors but within the top 10 among emerging markets.
- Intra-LA6 competition exists:
  - Brazil and Argentina compete with Mexico; Brazil and Mexico are the top two competitors for Chile and Peru; Chile and Peru compete among themselves.
- Trends 2000 to 2015:
  - Count-based competition remained relatively stable or increased.
  - Value-based competition from China significantly increased between 2000 and 2015, often at the expense of the U.S., particularly for Mexico, Brazil, Argentina and Colombia.

### Methodological notes
- VBI formula aggregates HS six-digit contributions within HS four-digit products, weighting competitor market shares by the importance of six-digit lines in country i’s exports to destination j.
- CBI formula: ratio of number of six-digit lines exported by both competitor and country i to destination j over total six-digit lines exported by country i to destination j.
- Data source: BACI World Trade Database (UN COMTRADE origin), HS-6 level.

*Source: IMF staff calculations.*

### 2015. The points highlighted in orange correspond to competitors that displayed the largest

### wpiea2020239-print-pdf - 2015

### Competition trends for LA6 (2000–2015)
- Competition from emerging and developing countries has increased not only from China, but also from other countries, especially India.
- India: competition has increased for all LA6 countries except Colombia and Mexico.
- Argentina: India appears to be taking the space left by other LA6 countries, such as Brazil, from whom the competition has declined.
- Chile: competition with other LA6 countries (Brazil, Mexico and Peru) has declined, while competition from India and Poland has risen.
- Peru: rising competitors include India, Turkey, Vietnam and Malaysia.
- Projection: China’s rebalancing coupled with continued growth by India may lead to a consolidation of India as a strong competitor for LA6 countries.

### Product-space competition (VBI and CBI analysis)
- Method: product-level VBI and CBI computed by averaging across all destination countries and competitors for each HS4 product line; restricted to major export products (top 10 by export share).
- Coverage: the top 10 products account for up to 51 percent of merchandise exports in 2015.
- Main findings:
  - Fiercest competition occurs in manufacturing products:
    - Mexico: most major products show fierce competition.
    - Brazil and Argentina: motor vehicles.
    - Brazil: aircrafts.
    - Brazil and Chile: chemical wood pulp/soda/sulphate.
  - Commodities show mixed competition intensity:
    - Low competition examples: Colombia — coffee, flowers, bananas; Colombia and Brazil — cane sugar; Chile — fish, grapes, wine from fresh grapes; Peru — petroleum gases.
    - High competition examples: petroleum, coal, gold (Colombia and Peru face strong competition); Chile and Peru compete in copper; Argentina and Brazil compete in soya.
  - Comparison VBI vs CBI:
    - CBI competition tends to be higher than VBI competition across all export products, suggesting competitors sell many common HS-6-digit products but at lower value (possible lower quality).
- Dynamics over the past five years (top-product VBI evolution):
  - Argentina: competition increased in wheat, petroleum and gold.
  - Brazil: product-market competition relatively stable, small declines in cane sugar, chemical wood pulp/soda/sulphate and petroleum.
  - Mexico: stable competition broadly, but increases in petroleum and transmission apparatus.
  - Colombia: increased competition in petroleum, decreased in gold.
  - Chile: competition declined in fish, gold and unrefined copper; increased in copper ores and refined copper.
  - Peru: competition increased in most product categories except coffee, molybdenum ores and gold.
- Note: CBI results are broadly in line with VBI results, with some differences highlighted for Colombia, Brazil and Mexico.

### Reaping the benefits of China’s rebalancing — Deeper integration
- Context: LAC could benefit from further integration within the region and with the rest of the world. High geographical and product concentration, and weak participation in global value chains, limit connectivity.
- Trade barriers and openness:
  - LAC tariffs and non-tariff barriers have declined since World War II but remain higher than OECD and lag ASEAN on tariffs and non-tariff barriers.
  - LAC scores better than ASEAN on capital controls and free movement of capital and people.
  - SPS and TBT cover between 15 and 30 percent of trade respectively (UNCTAD, 2013).
- Policy levers to mitigate trade frictions: investment in new technology, more efficient trade infrastructure, advanced shipping methods, and promoting consolidation in the exporting sector.

i. Scenario definition (modeling)
- Two scenarios quantified after the China rebalancing shock:
  1. LAC unilaterally liberalizes trade in goods and services within the region.
  2. LAC unilaterally liberalizes trade in goods and services with the rest of the world.
- Liberalization specifics:
  - Goods: setting tariffs of goods to zero.
  - Services: reduction in non-tariff barriers by 10 percent.
- Baseline: tariffs configuration in effect at end-2015.
- All scenarios assume liberalization occurs after the China rebalancing shock materializes.

ii. Effects of LAC trade liberalization in the context of China’s rebalancing
- Aggregate trade effects (full liberalization scenario):
  - World trade of goods increases by 2 percent.
  - World trade in services increases by 15 percent.
  - LAC exports of goods rise by 3 percent.
  - LAC exports of services rise by 7 percent.
- Channels: larger intra-LAC goods flows and increased LAC–world services trade (particularly with China). Liberalization within LAC is positive but quantitatively smaller and mainly affects goods trade; services liberalization within LAC has limited effects due to services’ small export share.
- Macroeconomic impacts on LAC:
  - Real GDP would increase by 0.4 percent with goods and services liberalization within the region.
  - Real GDP would increase by 1.2 percent with full liberalization (LAC with the rest of the world).
  - Exports of goods and services increase for all countries under liberalization.
- Distributional note: China’s rebalancing alone is marginally positive on average for LAC GDP and exports but uneven across countries (winners and losers). Full trade liberalization would unequivocally make all LAC countries better off by increasing exports (particularly services) and GDP.

### Other policies to maximize benefits
- Address supply-side constraints:
  - Close infrastructure gaps and improve basic services: electricity, water and sanitation, transportation.
  - Encourage FDI in utilities; China’s rebalancing could lead to further increases in China’s FDI in LAC.
- Boost productivity:
  - Improve human capital via stronger and more efficient investment in education and health.
  - Attract export-oriented foreign firms in high-tech and knowledge sectors (e.g., through Free Trade Zones) — example: Costa Rica.
- Maintain good macroeconomic policies to stabilize the economy and reduce exchange rate volatility to support exporters.

### The amplifying effect of the COVID-19 pandemic
- Hypothesis: the COVID-19 shock will exacerbate effects identified pre-COVID — winners do better, losers do worse; pandemic amplifies the gap.
- Two amplifying channels:
  1. Diversification and regionalization of global value chains:
     - COVID-19 disrupted supply chains concentrated in China, prompting firms to diversify and regionalize production.
     - Regionalization may intensify China’s rebalancing effects, favoring countries already positioned to fill gaps, especially those with strategic location near major production hubs (US, Germany, Japan/Korea).
  2. Decline in person-to-person services:
     - Lockdowns reduced demand for hospitality, brick-and-mortar retail, personal grooming — sectors with high person-to-person interaction.
     - Countries forced to reallocate into such services could face both stronger competition from China (rebalancing toward services) and lower demand, worsening outcomes.
- Opportunity: remote/online services may see higher demand; countries in Central America and the Caribbean with outsourcing capabilities may benefit, partly compensating declines in tourism.

### Conclusions and policy recommendations
- Over the past 20 years, Asia and LAC have become increasingly connected; China is a major trading partner and a top competitor for LAC exports.
- China’s rebalancing may retreat from certain markets, creating opportunities for LAC, but other countries (notably India) are also competing to fill gaps.
- Recommended policy actions for LAC:
  - Deepen regional integration.
  - Improve infrastructure (including information and communications technology) and reduce logistics costs.
  - Improve the quality of products that face the strongest competition.

*Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020239-print-pdf.pdf*

### REFERENCES

### REFERENCES

### Bibliographic scope
- Extensive citations on China’s global economic impact, trade competition, and spillovers, including IMF Working Papers (e.g., WP/12/226, WP/12/267, WP/15/64, WP/16/170, WP/16/219, WP/19/143), World Bank working papers, NBER, and academic journals (Econometrica, American Economic Review, Review of World Economics, Journal of International Economics, World Economy, China Economic Review, Journal of Chinese Economic and Foreign Trade Studies, Economic Systems Research).
- Recurring themes in the references: China and emerging Asia; China’s rebalancing and slowdown; trade spillovers and welfare effects; trade competition in Latin America, Africa, and other regions; multi-region input-output databases (EORA); and measurement/estimation of trade and welfare effects.

### Representative cited topics and methods
- China’s trade integration, technological change, and productivity growth (e.g., Di Giovanni et al., 2014; Hsieh & Ossa, 2016).
- Quantifying spillovers from China’s slowdown and rebalancing using multi-sector models and Ricardian trade models (e.g., Ahuja & Myrvoda, 2012; Mano, 2016; Dizioli et al., 2016).
- Empirical assessments of China’s export effects on Latin America, Africa, and other Asian economies (e.g., Blázquez-Lidoy et al., 2006; Freund & Ӧzden, 2009; Giovanetti & Sanfilippo, 2009; Moreira, 2007).
- Trade policy, tariff reductions, entry, and welfare estimation (e.g., Caliendo & Parro, 2015; Caliendo et al., 2017).
- Use of high-resolution trade databases and gravity/CBI measures (e.g., BACI World Trade Database; Lenzen et al., 2013).

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### APPENDIX I: CALIBRATION OF THE SHOCKS USING BRAZIL AS BENCHMARK

- Exercise replicated using Brazil as an alternative benchmark; results are not significantly different from using the U.S. as benchmark.
- Finding:
  - Regardless of benchmark (U.S. or Brazil), most countries in LAC are hurt as a result of China’s rebalancing.
  - Exceptions reporting small increases in their real GDP, relative to the situation of no rebalancing: Mexico, Venezuela, Ecuador, and Central American countries.
- Figure I.1: shows change in real GDP in all countries following the combined shock using:
  - Panel A: Using U.S. as benchmark
  - Panel B: Using Brazil as benchmark
- Source of figures: IMF staff calculations.

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### APPENDIX II: LAC’S COMPETITIVE LANDSCAPE

### Table II.1. Top Exports of LA6 Countries (To determine competitors)
- Argentina 50.6
  - Soya oil cake 16.5
  - Soya beans 7.4
  - Soya-bean oil and its fractions 6.8
  - Maize  (corn) 5.7
  - Vehicles (transport of goods) 5.2
  - Gold (unwrought, semi-manufactured, powder) 3.9
  - Motor vehicles (transport of persons) 3.4
  - Wheat and meslin 1.8
- Brazil 49.7
  - Soya beans 10.8
  - Iron ores and concentrates 7.9
  - Petroleum oils (crude) 6.0
  - Cane or beet sugar (solid) 3.9
  - Meat and edible offal  of poultry 3.3
  - Chemical  wood pulp, soda or sulphate 3.0
  - Soya oil cake 3.0
  - Coffee 3.0
  - Maize  (corn) 2.6
  - Aircraft,  spacecraft 2.3
  - Meat of bovine animals (frozen) 2.0
  - Motor vehicles (transport of persons) 1.8
- Chile 50.6
  - Copper  (refined,  copper alloys) 22.7
  - Copper  ores and concentrates 20.2
  - Chemical  wood pulp, soda or sulphate 4.1
  - Copper  (unrefined,  copper anodes) 3.6
- Colombia 48.0
  - Petroleum oils (crude) 33.8
  - Coal 14.3
- Mexico 50.3
  - Motor vehicles (transport of persons) 8.8
  - Motor vehicles (parts and accessories) 6.5
  - Vehicles (transport of goods) 5.9
  - Automatic data processing machines 5.3
  - Petroleum oils (crude) 5.0
  - Line telephony or line  telegraphy apparatus 4.0
  - Television receivers 3.8
  - Insulated wire/cable/electric  conductors 3.0
  - Tractors 2.4
  - Instruments/appliances used in medical, surgical, dental or veterinary sciences 2.1
  - Seats 2.1
  - Refrigerators,  freezers 1.3
- Peru 48.4
  - Copper  ores and concentrates 19.1
  - Gold (unwrought, semi-manufactured, powder) 16.4
  - Petroleum oils (not crude) 4.8
  - Copper  (refined,  copper alloys) 4.5
  - Flours, meal and pellets of fish/aquatic invertebrates 3.6
- Source: BACI World  Trade Database and IMF staff calculations.

### Table II.2. Competitors for LA6 Exports
- The table lists competitor countries for each LA6 economy (Argentina, Brazil, Chile, Colombia, Mexico, Peru). Example entries (non-exhaustive list as presented):
  - Argentina competitors include: Australia; Belgium-Luxembourg; Bolivia; Brazil; Bulgaria; Canada; China; Czech Rep.; France; Germany; Hungary; India; Italy; Japan; Mexico; Netherlands; Poland; Rep. of Korea; Russia; Serbia; Singapore; Spain; Switzerland; Turkey; Ukraine; United Arab Emirates; United Kingdom; USA; Uruguay.
  - Brazil competitors include: Angola; Argentina; Australia; Belgium-Luxembourg; Bolivia; Canada; Chile; China; Colombia; Cuba; Ethiopia; Finland; France; Germany; Guatemala; Hong Kong SAR; Hungary; India; Indonesia; Iran; Iraq; Ireland; Italy; Japan; Mexico; Netherlands; New Zealand; Nigeria; Norway; Oman; Pakistan; Paraguay; Peru; Poland; Portugal; Romania; Russia; Saudi Arabia; Serbia; South Africa (SACU); Spain; Sweden; Thailand; United Arab Emirates; Ukraine; United Kingdom; USA; Venezuela.
  - Chile, Colombia, Mexico, and Peru have similarly extensive competitor lists covering advanced and emerging economies.
- Source: BACI World Trade  Database and IMF staff calculations.

### Figures and competition dynamics
- Figure II.1 to II.4 present:
  - Top 10 Competitors in 2015 (overall, among advanced economies, among emerging and developing economies).
  - Competition over time (Top 10 Competitors in 2000 vs 2015).
  - Competition in Top 10 Product Lines, based on CBI, using HS-6 level data.
- Note on Figure II.3:
  - The dotted line represents the 45-degree line. For a given LA6 country, if a competitor is located below the 45-degree line it means that competition has increased between 2000 and 2015.
- Source for figures: HS-6 level data from BACI World Trade Database and IMF staff calculations.

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### APPENDIX III: SEPARATING DEMAND AND PRODUCTION SHOCKS

- Key finding:
  - Figure III.1 shows that the absolute impacts are very close for the combined shock and the one where only the preference shock is considered.
  - Implication: the preference shock is by far the most significant component of the combined shock.
- Figure III.1 panels:
  - Panel A: Full effect considering Demand and Production Adjustments
  - Panel B: Using Only The “Preference Shock”
- Source of figures: IMF staff calculations.

*Source: wpiea2020239-print-pdf - REFERENCES (IMF staff content).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020239-print-pdf.pdf_