Increasing Latin America s Trade Presence in the World Economy Terms of Reference INTRODUCTION In the last twenty years world trade has expanded dramatically, growing at an average rate of 6%, twice the rate of world GDP. Developing countries have increased their role as world players, now representing approximately 1/3 of world trade. Trade among developing countries has also increased conspicuously: 40% of developing country exports now go to other developing countries. Furthermore, developing countries have progressively been moving out of resource-based exports and into manufactures and services. Another important aspect of the new international order is the growing role of regional trade agreements. According to the World Trade Organization, currently 170 free trade agreements are in force, it is predicted that by 2005 there might be up to 300. There is an ongoing debate about whether such agreements have helped or hindered world trade. Latin America has not been excluded from this process of increased globalization and in the eighties launched extensive trade policy reforms. As a consequence, openness (exports + imports over GDP) increased from approximately 25% in 1980 to almost 40% in 2000 and average tariff levels have decreased from an average of 30% in 1980 to approximately 10%. However, Latin America s performance, in particular with respect to growth and development, has not been comparable to that of other developing countries, in particular those of South East Asia. Although the region has made some improvements in its export composition (mainly due to Mexico), in relative terms Asian countries have increased their exports in more dynamic groups, especially in high-tech products. Is this something that the region can do to change this situation? How can this be done? Which policies can been implemented? Increased market access is often touted as the solution to Latin America s poor export performance. But it is important to note that notwithstanding important trade restrictions in industrial countries towards Latin American goods, protectionism between countries in the region continues to be high. Currently, average tariff levels in Latin America on other Latin American exports of non agricultural goods are 15.4%, approximately seven times the average tariff levels of industrial countries on the same group of goods. Presently Latin American countries are participating simultaneously in various integration processes: at the multilateral level, regional and sub-regional levels. Many of these have different trade patterns implications. Which is the best mixture of these different types integration processes? Is there an optimal sequencing path? Are these types of processes inclusive or does progress in some of them implies stagnation in others? Many researchers have attributed the success experimented by Asian countries to active government intervention and an environment of macroeconomic stability. Presently, the fragile fiscal situation in most Latin American countries imposes a serious limitation on the possibility of successful government intervention. In addition, the increasing frustration with the lack of significant positive results of the reforms made in the 90 s has left policymakers with very little political support for a new wave of reforms.
What has gone wrong, or what has been missing from the region s development strategy? How can this be fixed given the current circumstances in the region? The purpose of this book is to answer these questions (among others) and to look for an strategy that allows Latin American countries to increase its trade presence in the World Economy. Increasing Latin America s Trade Presence in the World Economy Questions: 1) Latin America in the global economy: what to sell, where to sell it, and how to get the job done? 2) What different approaches are there to increased presence in the world economy? 3) Who are the winners and losers in the process of trade liberalization, and what can be done about it? 1) Latin America in the global economy: what to sell, where to sell it, and how to get the job done? A) Comparative advantages and global markets trends A recent study by Chami Batista (2003) 1 examines how the countries of East Asia, China, and Mexico have become top world exporters in the past fifteen years. All these countries have benefited enormously from market share gains in the very dynamic groups of non-resource-based manufactured goods, especially in high-tech products. On the other hand, countries that have gained market share in resource-based goods, particularly in primary commodities or even agro-industrial products, have generally suffered from the slow expansion of world imports. The basic result of this paper is that exporter countries with a low share of resource-based products in total exports in general performed better in the last decade than those with high shares. This result can be seen in the following graph which shows that export growth-rates between 1990 and 2000 in Latin America and in East Asia were negatively related with the share of resource-based products in total exports between 1996 and 2000. Mexico and Costa Rica, the two best export performers in Latin America in the period, have the lowest shares. Brazil s export performance was disappointing, considering that it has a much lower share of resource-based products than countries that outperformed it, like Argentina and Chile. 1 Chami Batista, Jorge (2003), Latin American Export Specialization and Growth: an inquiry into the nature of product competition between different exporters Instituto de Economia Federal University of Rio de Janeiro
Growth-rates of Exports 1990/2000 20.0% 15.0% 10.0% 5.0% Mexico Pilippines China Korea Singapore Malaysia Thailand Costa Rica Argentina Indonesia Brazil Colombia Chile Venezuela 0.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Share of resource-based products 1996/2000 Source: Chami Batista (2003) Does the region need to change from exporter of resource-based manufactures in order to gain export share in the global markets?. Can countries instead add technological components to their resource-based manufactures to increase their presence in the global markets, or must countries drastically change their export composition? How did Mexico succeed in changing its export composition? What role did USA-Mexico trade play in this change? Can FTAA provide a similar type of impact for the rest of the region? B) The role of new players on developing countries exports: Are they a threat or an opportunity for Latin America? The key to Latin American success in a competitive global economy depends on the ability of the region to anticipate global trends and to understand major players actions. This is why the region must closely follow the activities of new players in the global arena. The region must view these countries not only as very tough competitors but also as potential markets for their exports, since most of them have been able to experience high and sustained growth for many decades which has provided the basis for sustained import growth. As an example we discuss the case of China which, together with India and the East Asian countries, has emerged as a key player in global markets. During the last three decades China has achieved an impressive growth performance with an average annual growth rate of 6.2% during the 70 s, 9.3% during the 80 s, 10% during the 90 s, and 8% during 2002. An important part of China s impressive growth performance is due to a strong external sector, reflected in sustained export growth. Chinese exports grew 17% during the 90 s, and by 2002 their export represented 5.1% of global exports. Although Latin America experienced some progress in this respect (with an export growth of 5.6 during the 90 s), the faster growth of Chinese exports is creating an important gap between the ability of Chinese products to supply world markets and the ability of Latin American goods.
Indice de Exportaciones (1990=100) 550 500 450 400 350 300 250 200 150 100 50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Evolución de las Exportaciones E. Asiático China India AL-México Andinos Source International Monetary Fund Although Chinese exports have penetrated many key markets, they have a limited presence in the Andean markets with a share of less than 7% of total imports. These imports have experienced an important growth between 1995 and 2002, especially in the case of Venezuela and Ecuador. Among the main products imported by the Andean countries from China are: shoes and textiles, toys and some manufactures. Is the rapid growth of Chinese exports to the region something of real concern? Can Chinese imports substitute local products in the future? Which sectors are most vulnerable? Thinking of China only as a threat is a mistake, the region must realize that China could represent a large and growing - export market for its products. China s main imports in the first months of 2003 were oil and its refined products (an average of US$ 2 billion monthly), iron and cooper (an average of US$ 1.7 billions monthly), plastic (an average of US$ 1.2 billion monthly), and soy beans (an average of US$ 400 millions monthly). Most of these goods are produced by the region and could imply an enormous opportunity for our products to be placed on the international markets. Can we take advantage of the enormous opportunities that a large and growing market like China offers to the region s products? Which sectors are most likely to succeed in exporting to China? Can we compete with other Asian countries in exporting to China? What type of changes have to be made in our countries in order to increase our competitiveness in this market? C) FDI, MNEs and Regional Linkages Foreign direct investment (FDI) to developing countries surged in the 80s and 90s, both in absolute terms and relative to official aid. This trend has been accompanied by an ever increasing role of multinational enterprises (MNEs): intra firm trade presently accounts for approximately one third of world trade. Latin America has historically been the major recipient of FDI among developing countries. Multinationals, once criticized for exploiting host countries, have been revalued after
the debt crisis of the 80s proved FDI to be a more stable alternative to volatile portfolio flows. According to orthodox economics, the free flow of capital across nations, like the free flow of goods, increases global efficiency. Capital, allowed to move freely, should flow to the countries with the highest rates of return, i.e. from developed economies to less developed, capital starved economies. But the significance of FDI for developing countries goes far beyond that of solving a situation of excess demand for capital. Boswell and Collins (1999) 2 find that an increase of a dollar in FDI inflows is associated with a dollar increase in domestic investment, highlighting the catalytic role of such flows. FDI not only contributes to capital formation, but more importantly allows technology transfers, promotes competition in the domestic input market, and contributes to human capital development. FDI flows have evolved in recent years, from the traditional strategies based on largely autonomous production by foreign affiliates, to complex integration strategies such as international production networks, that involve large MNEs producing a standardized set of goods in several location, or groups of small and medium sized firms linked through international subcontracting. Linking FDI to export strategy can prove a way to maximize the benefits of trade liberalization and achieve greater insertion in the world economy. The products that have performed most successfully in world markets (ex. components for electric and electronic goods, clothing and finished goods with high R&D content) are all products that have been involved in the globalization of production processes. For MNEs, exploiting locational assets in host countries human resources, infrastructure, and market access allows them complement their own strengths and improve their overall competitiveness. From the point of view of developing countries, FDI tied to production sharing could allow them to exploit their comparative advantage in the production of certain components - tied to scale economies or low labor costs or the availability of a natural resource. What role can FDI play in increasing Latin America s presence in the world economy? What can be done to maximize the benefits of FDI in host countries? How can production sharing and international production networks benefit the regions countries? 2) What different approaches are there to increased presence in the world economy? After more than two decades of trade liberalization and efforts at regional integration, Latin America finds itself at a crossroads: how to achieve greater insertion in the global economy. Latin America in fact still accounts for less than 6% of world trade (of which almost half is due to Mexico), while intra-regional trade accounts for less than 15% of total exports in the region. One can consider three distinct paths towards greater participation in the global economy: multilateralism, sub-regional integration, and hemispheric integration. These three channels are not necessarily mutually exclusive. There is an ongoing debate over whether regional and bilateral trade agreements contribute to or undermine free trade at the global level, i.e. whether they constitute 2 Bosworth, Barry and S. Collins, (1999), "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity:1, Brookings Institution, pp. 143-69.
building blocks or stumbling blocks to trade. Bhagwati and Panagariya (1996) 3 find that preferential trading agreements tend to cause substantial amounts of trade diversion. Krugman (1991) 4 warns that the non-cooperative nature of large trading blocks can diminish world welfare. Furthermore, there is the risk of attention diversion, if substantial time and resources are dedicated to regional agreements little is left over for multilateralism. The opposing view contends that regional agreements can serve as stepping stones to liberalization, especially in developing countries. Regional commitments lock in domestic reforms necessary for successive liberalizations and regional groups can give smaller countries greater voice in the international arena. Open regionalism has been seen as a way to reconcile the benefits of multilateral liberalization with regionalism for developing countries. For Latin America in particular open regionalism has been proposed as the optimum strategy by the ECLAC (Economic Commission for Latin America and the Caribbean). Open regionalism is defined (ECLAC 1994) 5 as a process of growing economic interdependence at the regional level and.. in so far as possible, constituting the building blocks for a more open and transparent international economy. What has the multilateral process accomplished for Latin America so far? Is this the best route for Latin America, or should it focus more on achieving bilateral and regional agreements? How important are the subregional groups for Latin American trade in the future? How much energy and resources should be dedicated to the deepening and widening of these processes? The multilateral system finds itself currently at an impasse, in particular after the failure of Cancun. It is unclear whether solutions will be found for some key issues, such as agricultural subsidies in developed countries. How important is an agriculture agreement for Latin America? How will such an agreement (or lack of) affect Latin American exports in the future? Given the importance of biodiversity in Latin America, what decision at the multilateral level will be most beneficial for the region s countries? What solutions for compromising biodiversity, trade and sustainable development? In the face of these difficulties at the multilateral level, countries have turned increasingly to bilateral trade negotiations. Latin America has been no exception. What can be achieved through bilateral trade negotiations? Are they a way of speeding up the liberalization process, or are the necessary concessions much greater than those usually approved in a multilateral negotiation? The FTAA: what lessons can be learnt from Europe and other bilateral/regional agreements? 3 Jagdish Bhagwati, and A. Panagariya, "Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes?" in J. Bhagwati and A. Panagariya eds., Free Trade Areas or Free Trade? The Economics of Preferential Trade Agreements, Washington D.C.: AEI Press, 1996. 4 Krugman, Paul (1991). Is Bilateralism Bad? in E.Helpman and A. Razin (eds.) (1991), International trade and trade policy. The MIT Press. 5 ECLAC (1994). Open Regionalism in Latin America and the Caribbean.
When analyzing the optimal choice with respect to the three paths of economic integration one must take into account asymmetries between the region s countries with respect not only to GDP per capita but also areas such as competitiveness, industrialization, market structure, etc. These asymmetries could generate different optimal paths for different countries depending on their particular characteristics. Some paths of trade liberalization take these elements (although only partially) into consideration, especially when considerations are made for differences in the levels of development and size of economies through clauses of special treatment. These asymmetries could also affect the incentives that countries have in taking any one particular route of trade negotiations. For a small developing countries it could be more beneficial to concentrate its efforts on bilateral agreements with developed countries that could bring FDI instead of multilateral negotiations. For middle size developing countries a mixture of trade agreements among themselves and with developed countries could provide a more success strategy. This is because the effects of the trade agreements on production, profits, and market access under the various alternatives will depend on the partners characteristics, which indicate that it is important to take into account not only the characteristic of the country but also of its potential partners. On the other hand, a recent work by Ibarra-Yunez (2003) 6 indicates that countries could intensify the used of some particular path of trade negotiation as part of their strategic trade policy. In the case of Mexico he argues that among the many reasons that could explain why this country has chosen to sign so many preferential trade agreements (PTAs) is the possibility of using them as part of an strategic trade policy, because it seems easier for the authorities and economic agents to seek new PTAs rather than trying to add new members to the existing ones. Can countries asymmetries be analyzed so as to have a better understanding of what trade policy options they have? Which are the most important characteristics of countries in determining their trade liberalization agenda? 3) Who are the winners and losers in the process of trade liberalization, and what can be done about it? Recently there has been an enormous increase in the application of political economy models to understand how the political process influences trade policy. This growing interest in the redistribution aspects of trade policy is mostly due to some puzzles that the traditional literature has failed to explain, since in many cases the policies practiced by countries are at odds with the prediction of these more basic models. For example, according to the traditional trade literature, the optimal tariff for a small country is zero. But rarely (if ever) is a small country completely open to international trade. The main lesson that this literature has provided is that economic policy usually has different impacts on the aggregate and on the individual. This type of consideration highlights the distributional implications of policy and how individuals will try to influence policymakers in order to maximize the net benefit that the implemented 6 Ibarra-Yunez, Alejandro (2003), Spaghetti Regionalism Or Strategic Foreign Trade: Some Evidence For Mexico, NBER Working Paper No. 9692.
policies will have on them. In the case of trade, it is clear that policy changes will affect relative prices, and the ensuing distributional effects will have political implications. The political economy literature of trade policy analyzes these considerations and asks how, when and which policy changes are implemented by countries. In this regard, Fernández and Rodrik s (1991) 7 basic argument can explain why a social welfareenhancing policy fails to be implemented or a welfare reducing trade policy reform could be implemented due to individual specific uncertainty. If the expected benefit of the trade reform is positive (negative) ex-ante the reform is (not) carried out although ex-post the reform results are harmful (beneficial) to the bulk of the population. Their argument establishes an asymmetry between social welfare improving and a social welfare reducing trade reform, in terms of how information is revealed, which leads to what they called status quo bias. Can we find credible channels of compensation to the ex-ante losers of the reform in order to make the policy political feasible? What are these instruments? How can we solve the intrinsic time-inconsistency problem associated with this type of compensation problem? Can policymakers create special transition funds in order to facilitate the reallocation of resources produced by the policy changes? How can this type of funds be created? Who will finance these funds? What is the role of multilateral organizations in the creation of these funds? Furthermore, we can ask how the effect of trade policy on different interest groups influences the formation of policy. In this regard Grossman and Helpman (1994 and 1995) 8 make the case that the effects that trade policy have on economic agents could bias the outcome of trade policy. They use a political economy model to show how interest groups can affect not only the level of protection of a country but also the likelihood of countries to form preferential trade agreements (PTA) among themselves. With respect to the formation of PTAs, their main result is that the political viability of the agreement may contradict its social desirability. The main lesson that can be derived from their work is that whenever a PTA gives rise to trade diversion, there will be interest groups that enjoy private gains, while cost will be shared by all consumers. To the extent that industry interests are better represented than are consumers in the government s objective function, trade diversion will enhance political viability while contributing to an inefficient allocation of resources, and a reduction in social welfare in the partners countries. Is trade policy adopted by countries always the one that maximizes social welfare? In those cases where welfare reducing policies are implemented by policymakers in order to favor special interest, can this type of problem be solved by increasing the transparency of the political process and the representation of voters interest in government s decisions? 7 Fernandez, R., and D. Rodrik (1991), Resistance to Reform: Status Quo Bias in the presence of Individual Specific Uncertainty, American Economic Review, December 81(5), pp. 1146-55. 8 Grossman, G., and E. Helpman (1994), Protection for Sale, American Economic Review, September 84(4), pp. 833-50. Grossman, G., and E. Helpman (1995), The Politics of Free-Trade Agreements, American Economic Review, September 85(4), pp. 667-90.
EXPECTED CONTRIBUTION The researcher will present a proposal that addresses the specific questions (highlighted in italics) raised in each of the sections of the previous introduction. ELIGIBILITY The program is intended primarily, but not exclusively, for researchers associated with Latin American universities, research institutes and other private or public institutions in Latin America. The invitation is also extended to assistant professors, researchers or post graduates from CAF 9 member countries working in US or European institutions with focus on topics related to Latin America. PROGRAM CONDITIONS CAF will pay US$ 6.000 to selected proposals. Additionally, it will pay travel (economy class) and lodging expenses for a seminar to be held in Caracas where final papers will be presented. CAF reserves the right to publish and distribute resulting works. Authors however are free to submit it to specialized journals or publications or to use it to fulfill academic requirements, provided that CAF sponsorship is acknowledged. HOW TO APPLY Proposals should not exceed 8 pages and must include the following Title Abstract Objectives and relevance for the region Research methodology Outline of research and timetable Bibliography Additionally, proposals must be accompanied by a Curriculum Vitae and a letter of support from the researchers institution or, in the case of graduate students, from their academic advisor. All material should be sent via e-mail to: CAF Research Papers Program desarollo@caf.com Corporación Andina Fomento Caracas, Venezuela Applications must be submitted by February 29, 2004. Early applications are encouraged. Final papers must be submitted by September 30, 2004. Seminars will take place starting October 2004. 9 CAF member countries are: Bolivia, Colombia, Ecuador, Peru, Venezuela, Argentina, Brazil, Chile, Costa Rica, Jamaica, Mexico, Panama, Paraguay, Spain, Uruguay and Trinidad & Tobago. Applications from non-member countries will also be considered as long as they focus on the problems faced by the region.
Proposals will be evaluated by a jury appointed by CAF and decisions will be made on the basis of the quality of the proposal and of its relevance to Latin America and the Andean region. A proposal for each topic will be selected and results will be announced by MARCH 31, 2004. For further information about the visiting scholars program, please contact Osmel Manzano Stefania Scandizzo Email: omanzano@caf.com Email: sscandiz@caf.com Tel: 0058-212-2092234 Tel: 0058-212-2092240 Further information about CAF and the program can be found at www.caf.com