Trading Out of Trouble in Latin America
IMF Blog, November 4, 2015
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Bibliographic details
- Authors: Natalija Novta, Fabiano Rodrigues Bastos
- Published: November 4, 2015
Context and overview
- Authors: Natalija Novta, Fabiano Rodrigues Bastos
- Publication date: November 4, 2015
- Versions available: Español and Português
- Central finding: Most countries in Latin America and the Caribbean “undertrade” relative to predictions from standard models, an entrenched problem over almost a quarter of a century driven in part by geography and a legacy of protectionist policies.
- Policy implication: Greater trade — both within the region and with the rest of the world — could help revitalize growth, but trade integration and agreements are not magic bullets; complementary reforms to raise competitiveness are essential.
Weak trade: methodology and main findings
- Method: Identified trade intensity gaps (export gaps) for the period 1990–2013 by comparing actual exports to predicted exports from a model using variables such as geographic distance, economic size, and historical or cultural features. The unexplained difference is the export “gap.”
- Key findings:
- On average, Latin American countries are undertrading compared with the rest of the world.
- South American countries show especially pronounced undertrading.
- Latin America has not improved its measured export performance over the past two decades, in stark contrast with emerging and developing Asia.
- Findings apply to both gross exports and value-added exports.
- Asia overtrades in both gross exports and value-added exports, indicating its strong gross export performance is not driven solely by foreign content of exports.
Regional differences in export performance
- Mexico:
- Overtrades in gross exports.
- Shows much weaker performance in value-added exports.
- Results driven overwhelmingly by bilateral flows with the United States and strengthening supply chain linkages (for example, in the auto industry).
- Chile:
- Strong trade performer.
- Performance heavily influenced by links with China; Japan and Korea also important destinations.
- Has been able to increase the volume of exports despite a narrow export base, unlike other commodity exporters in the region.
- Argentina, Brazil, Colombia:
- Display the weakest trade performance in Latin America.
- Argentina and Brazil: weak exports to major advanced economies, particularly the United States, are key contributors.
- Colombia: weak exports to Mexico and Brazil play an important role.
- Venezuela:
- Identified as an “overtrading” country in value-added terms because it exports more oil, which has high domestic content, than predicted by fundamentals.
- Other countries:
- Display small deviations from export performance predicted by fundamentals.
Global value chains and trade agreements: impacts and limitations
- Global value chains:
- Stronger country-level integration into global value chains leads to improved bilateral performance in both gross and value-added exports.
- The direct short-term impact is economically small.
- Long-term gains require leveraging GVC trade for knowledge spillovers and innovation to achieve sustained productivity growth.
- Trade agreements:
- Results are mixed; benefits hinge on design and implementation characteristics of accompanying reforms and the agreements themselves.
- Comprehensive agreements that reduce tariffs and non-tariff barriers, harmonize regulatory frameworks, and involve large advanced and emerging economies are more likely to have positive medium-term effects.
- Regionally-protected trade blocks appear less promising.
Policy recommendations and avenues for improvement
- Prioritize efforts to penetrate large markets, particularly in advanced economies, to increase market share in competitive environments.
- Pursue bolder structural reforms to increase export competitiveness and allow firms to penetrate large markets.
- Seek greater integration into global value chains but focus on translating integration into sustained productivity growth via learning spillovers and greater intra-industry trade.
- Approach trade agreements strategically:
- Favor comprehensive, multi-regional agreements that reduce tariffs and non-tariff barriers and harmonize regulation.
- Guard against the risk of being excluded from multi-regional deals as the world trade landscape changes rapidly.
- Remain realistic about the potential for significant improvements given geographic constraints and historical legacies; policy design and implementation matter critically.
Source: Trading Out of Trouble in Latin America (IMF blog), November 4, 2015
Content in this bundle
- O comércio internacional pode virar o jogo na América Latina
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015