The Dynamics of Trade Integration and Fragmentation in LAC

IMF Working Papers, December 13, 2024

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Trade barriers and poor infrastructure play an important role in limiting trade integration in Latin America and the Caribbean (LAC).
Closing half of the infrastructure gap between LAC and advanced economies could lift exports by 30 percent.
LAC’s trade responsiveness to import tariff reductions is lower than in other EMDEs, particularly in the long run.

The region’s specialization in agricultural exports contributes to lower responsiveness because of inelastic demand.
Supply constraints cited include growing cycles and weather conditions, which limit the long-run adjustment of exports.

Under a mild trade fragmentation scenario—where trade barriers are erected only among large economies—LAC is well placed to withstand impacts.
In more extreme scenarios where the global economy splinters into competing economic blocs and LAC loses access to important markets, the region’s output losses could be sizable.
Boosting trade, including regional trade, is identified as a strategy to mitigate risks from global fragmentation while lifting growth.

Reduce import tariffs to boost trade, recognizing that the responsiveness in LAC is lower than in other EMDEs.
Invest in infrastructure to close gaps with advanced economies; a partial closure (half the gap) is associated with a 30 percent lift in exports.
Promote regional trade as a means to both increase growth and reduce vulnerability to global geoeconomic fragmentation.