Central America's China Trade: Too Little, Too Late?

Central America's China Trade: Too Little, Too Late? Rolando Avendaño, OECD Development Centre Jeff Dayton-Johnson, Monterey Institute of International Studies April 213 1. China's Opportunity for Latin American Trade: Dichotomies There is a view, perhaps oversimplified, of the implications of China's rapid growth and industrialization for Latin America and the Caribbean. In this view, the countries of the region fall into two categories. On the one hand, there are the commodity-exporting South American countries, whose export performance weathered the Great Recession beginning in 28 thanks to vigorous Chinese demand for their exports. Indeed, it was in large part due to this demand that Latin America had enjoyed so spectacular an economic bonanza during the pre-crisis years 23-28. 1 On the other, there are countries whose export basked resembles that of China, and increasingly suffer from Chinese competition in third-country markets. This second group of countries, moreover, depends critically on the United States market for their exports, so battered by the financial crisis. (Additionally, the second group of countries competes with China for foreign direct investment.) This second group of countries has had to cope with a much higher level of competition, affecting their productive capacity and in the long run excluding these economies from global value chains and productive upgrading. Brazil and Chile are good examples of the first group; Mexico of the second (see fig. 1 below for evidence on manufactured exports). Others see the dichotomy differently. The economies buoyed by Chinese demand for primary products are foolhardily postponing a necessary diversification of their productive structure and their export basket. 2 The manufactures exporters nearer to the United States, meanwhile, despite 1 Latin America's experience during the financial crisis beginning in 28 is analyzed in OECD (29). 2 This is a view most consistent with a long series of publications by the U.N. Economic Commission for Latin America and the Caribbean. Avendaño & Dayton-Johnson - 1

Manufactures exports (% of merchandise exports) their troubles during the recession, have chosen the better long-term strategy. Where do Central American countries fit in these dichotomies? The question is not frequently posed, but the answer could be important to policy makers in the countries of the isthmus. In particular, if breakneck Chinese growth, and its associated demand for commodity exports, can serve as a motor for economic growth elsewhere in the developing world, few parts of Latin America stand in greater need of such a motor than the largely poor Central American economies. On the other hand, if a dependence upon primary-product exports condemns an economy to perpetual underdevelopment, then perhaps Central American policy makers should look askance at this putative opportunity. Figure 1. Share of manufacturing exports and GDP per capita 8 7 SLV MEX 6 5 CRI LAC 4 3 HND GTM BRA PAN 2 1 NIC 2 4 6 8 1 12 14 16 GDP per capita, PPP (constant 25 international $) Note: Average values, 29-211. Source: World Development Indicators, World Bank. CHL Central American countries are poorer and rely more on commodity exports than the average Latin American country (fig. 1). That is, Central American countries have, in general, per-capita income levels below the Latin American average, though Costa Rica and Panama are exceptions. And Central American countries' export baskets have lower shares of manufactured goods than Avendaño & Dayton-Johnson - 2

the Latin American average, though here El Salvador and (again) Costa Rica are exceptions. This chapter explores the trade relationship between China and the Central American countries (which, for the purpose of this chapter, includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama). These economies, with the exception of Costa Rica and Panama, are among the very poorest in the Latin American region. A quantitative assessment of trade patterns is followed by a discussion of public policies and development strategies that could help leverage those opportunities and minimize the threats posed by China. Does Central America have the worst of both worlds: namely, a heavy reliance on primary product exports without a vigorous Chinese demand? The answer, it turns out, is almost but not quite. Moreover, we discuss whether Central America's feeble Chinese trade has been depressed by the sub-region's role in the diplomatic rivalry between mainland China and Taiwan: all Central American countries, until Costa Rica broke from the pack in 27, officially recognized and maintained diplomatic relations with only Taiwan. Given that the cross-straits relationship has also changed significantly since the election of a KMT administration in Taiwan in 28, we also address the prospects for change in the diplomatic relationship between Central American countries and the People's Republic, insofar as it is linked to the future of trade. Finally, the chapter also explores the implications of rapid Chinese growth for development strategies and public policy in Central American countries. 2. Central American Trade and China: A Descriptive Analysis In this section we situate Central American countries in the Latin American-Chinese trade dichotomies mentioned above: fast-growing exporters of primary products to China, or slow- Avendaño & Dayton-Johnson - 3

growing manufactures, competing with China? 3 Both types of economies certainly exist in the wider region but the evidence for Central American countries paints a fairly heterogeneous portrait. 3 There are by now many analyses of the economic relationship between China and Latin America, to which this volume seeks to contribute new perspectives. Earlier publications include Santiso (27), Fung and García Herrero (211), Gallagher (212), Hearn and León-Manríquez (211). Avendaño & Dayton-Johnson - 4

Figure 2. Average Rate of per Capita GDP growth in Latin America: 23-28 and 29-212 (e) 12. Average 23-8 Average 29-212(e) 12. Average 23-8 Average 29-212(e) 1. 1. 8. 8. 6. 6. 4. 4. 2. 2.. Argentina Brazil Chile Colombia Mexico Peru Venezuela. Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Source: Based on National accounts, 212. Economic growth rates in Central American countries during the pre-crisis period were relatively high compared with the seven largest economies of Latin America (fig. 2). Rates of per-capita income growth in Panama, Honduras and Costa Rica between 23 and 28 exceeded 4% (and nearly reached 1% in the case of Panama). Most of the LAC-7 countries similarly experienced growth rates of GDP per capita above 6%. On the contrary, the post-crisis years have proven more difficult for several economies in Central America. Guatemala, Honduras and Nicaragua were the most affected, with growth rates in GDP per capita below 2%. Among LAC-7 countries, only Venezuela has experienced similarly depressed growth after 29. The cyclical component of Central America s growth -- its response to the global crisis -- has nevertheless differed little from the remainder of Latin America, or from other developing economies. Avendaño & Dayton-Johnson - 5

Figure 3. Exports of Goods and Services in Central America 2-211 Percentage of GDP 9 8 7 6 5 4 3 2 1 Costa Rica El Salvador Guatemala Honduras Nicaragua Panama LAC7 2 21 22 23 24 25 26 27 28 29 21 211 Source: UN Comtrade, 212. In contrast with the average Latin American economy, the share of exports of Central American countries is higher (fig. 3). Since the beginning of the 2s, total exports in Latin America have represented about 2-25% of the total output. In the case of Costa Rica (47%), Honduras (6%) and Panama (79%), this share has been more important, illustrating one important difference with other economies in the region: small economies in Central America are more open, and therefore more vulnerable to trade shocks. The export share of Latin American economies -- Central American countries among them -- has moreover not grown much in the first decade of the new century. But the composition and destination of exports has changed substantially for some countries in the region. Avendaño & Dayton-Johnson - 6

Figure 4. Exports to China as Percentage of Total Exports, 2 and 21 3 2 25 21 3 2 25 21 25 25 2 2 15 15 1 1 5 5 Argen na Brazil Chile Colombia Mexico Peru Venezuela Costa Rica Guatemala Honduras Nicaragua Panama El Salvador Source: UN Comtrade, 212. While the effect of China s increasing demand for Latin American goods has not dramatically modified the contribution of exports to GDP in Central America, it is illustrative to compare the exports to China as a share of total exports across different countries (fig. 4). Chile, Peru and Brazil have tightened their trade bonds with China, with a much higher contribution of Chinese imports in their total exports. Currently, more than of 5% of Chilean copper is destined to satisfy China s demand for this metal for infrastructure development, construction, industrial equipment and transportation. In contrast, the export profile of Central America s core economies makes that the share of exports to China minuscule: only Costa Rica, and to some extent Panama, have increased their exports to China, though these shares hardly reaching 5% of total exports. Avendaño & Dayton-Johnson - 7

Figure 5a. Main exported products as share of total exports in Central America 2-211 25. 2. Costa Rica 2 211 7. 6. 5. El Salvador 2 211 25. 2. Guatemala 2 211 15. 4. 15. 1. 3. 1. 5. 2. 1. 5.. Manuf. goods Non-trad. agricultural Bananas Coffee. Non Traditional Maquila Coffee Sugar. Coffee Sugar Bananas Oil 4. 35. 3. 25. 2. 15. 1. 5.. Honduras 2 211 Coffee Bananas Seafood Gold Source: UN Comtrade, 212. Nomenclature SITC Revision 3. 6. 5. 4. 3. 2. 1.. Manuf. products Nicaragua Agr. produce Minerals Fishing produce 2 211 2. 18. 16. 14. 12. 1. 8. 6. 4. 2.. Panama 2 211 Bananas Shrimp Sugar Coffee.12.1.8.6.4.2 Figure 5b. Disaggregated information on exports in Central America, 211 Costa Rica.1.9.8.7.6.5.4.3.2.1 Guatemala Sugar Coffee Women/g blouses Precious metal ore Banana.25.2.15.1.5 Coffee Printed matter Honduras Banana Gold Palm oil.2.18.16.14.12.1.8.6.4.2 Nicaragua Coffee Beef Gold Crustaceans, frozen Sugar.12.1.8.6.4.2 Panama.2.18.16.14.12.1.8.6.4.2 El Salvador Source: UN Comtrade, 212. Nomenclature SITC Revision 3. Just as Central American exports have grown little (as a share of GDP) over the last decade, so too the composition of export baskets has remained fairly stagnant (fig. 5a). For all six countries, the four main exports by country remained the same between 2 and 211. Coffee exports maintain a similar share of exports for coffee-exporting countries (Guatemala, Honduras, El Salvador). More interestingly, the share of manufactured goods has increased in Costa Rica and Avendaño & Dayton-Johnson - 8

Venezuela Bolivia Chile Paraguay Colombia Philippines Panama Singapore Peru El Salvador India Malaysia Brazil Indonesia Argentina Korea, Rep. Mexico Hungary Guatemala Japan Croatia Bulgaria Czech Republic China Spain Romania Thailand Poland Turkey United States Costa Rica Low concentr. High concentr. Nicaragua, while maquila exports in El Salvador have fallen. This composition illustrates the heterogeneity of Central American countries vis-à-vis Chinese competition. Whereas Guatemala, Honduras and Panama can be certainly considered commodity exporters, the export profile of Costa Rica, El Salvador and Nicaragua is more diverse, including both commodities and manufactured goods. Product-level information regarding the leading exports confirms the importance of primary products even in the more manufacturing-oriented economies of the region (fig. 5b). Figure 6..6.5.4.3.2.1 Latin America Herfindahl-Hirschmann Index by Product 2 vs 21 2 21 Note: The Herfindahl-Hirschman index is estimated as the squared sum of market shares of exports of country i to country j on all 4- digit levels of goods, corrected by the number of exported goods. Nomenclature SITC Revision 3, 212. Source: OECD Development Centre, based on UN Comtrade. How dependent are countries in the region on a single export, or a small number of exported goods? A more detailed estimation of export concentration provides the level of product concentration (or specialization) that characterizes Central American economies (fig. 6). In this regard, most countries in the region have maintained low levels of concentration: that is to say, a more diversified basket of commodities (as is the case for El Salvador, Guatemala and Honduras) compared with oil/mineral exporters (Venezuela, Chile). As we will see below, a low level of Avendaño & Dayton-Johnson - 9

product concentration in exports is desirable, but not sufficient, for economic development. Figure 7. Main destination of Central American exports 2-21 6. 5. 4. 3. 2. 1.. Costa Rica US Netherlands Panama China 7. 6. 5. 4. 3. 2. 1.. El Salvador US Guatemala Honduras Costa Rica 45. 4. 35. 3. 25. 2. 15. 1. 5.. Guatemala US El Salvador Honduras Mexico 45. 4. 35. 3. 25. 2. 15. 1. 5.. Honduras US Guatemala Germany UK 7. 6. 5. 4. 3. 2. 1.. Nicaragua US El Salvador Canada Venezuela 5. 45. 4. 35. 3. 25. 2. 15. 1. 5.. Panama US Honduras Japan South Korea Source: UN Comtrade, 212. Nomenclature SITC Revision 3. Data for Costa Rica corresponds to 2 and 29. A second question regarding exports concentration refers to diversification of trading partners. The dominant role of the U.S. as the main importer of Central American goods (fig. 7) has not diminished during the last decade. 4 Indeed, the U.S. has become even more important as an export destination for Nicaragua and, to a lesser extent, Guatemala. Costa Rica, El Salvador and Panama, meanwhile, have increased export shares to other partners: neighboring countries, Europe (Netherlands, Germany) and, marginally, China. In contrast to this, for most LAC-7 economies China has become a strategic destination of their exports (fig. 4). 4 Bulmer Thomas (1987) provides a historical overview of the development of Central America's commodity-based export structure, and of the role of the U.S. as its principal export destination. Avendaño & Dayton-Johnson - 1

Mexico Venezuela Honduras Guatemala Ecuador Panama LAC average Costa Rica Colombia Bolivia Nicaragua Paraguay Peru Guyana Uruguay Chile Argentina Brazil Figure 8. Main destination of Central American exports, 2 and 21.9.8.7.6.5.4.3.2.1. Latin America Herfindahl-Hirschmann Index by Destination 2 vs 21 2 21 Note: Herfindahl-Hirschman index is estimated as the squared sum of market shares of exports of country i to country j on all 4-digit levels of goods, corrected by the number of exported goods. Nomenclature SITC Revision 3, 212. Source: OECD Development Centre, based on UN Comtrade. The low concentration of trade partners for Central American countries is also captured in the Herfindahl-Hirschmann index, computed by export destination (fig. 8). This indicator gives us an estimation of the number and distribution of exports among trade partners with each country. Whereas Mexico is highly concentrated, in terms of destination, with more of its exports targeting the U.S., Honduras, Guatemala, Panama and Nicaragua exhibit much lower levels of dependence on a single trade partner, in a a range similar to that of the average Latin America economy. In fact, export concentration (by destination) decreased between 2 and 21 for Latin America as a whole. Avendaño & Dayton-Johnson - 11

Thailand Hungary Korea, Rep. Mexico Malaysia United States Czech Republic Singapore Romania Indonesia Turkey Poland Philippines Bulgaria Croatia Japan India Slovak Republic Spain Costa Rica Pakistan Brazil El Salvador Colombia Guatemala Argentina Peru Uruguay Honduras Russian Panama Chile Bolivia Venezuela Paraguay Low compet. High compet. Figure 1. Evolution of Export competition with China for Central American countries, 2-29.8.7.6.5.4.3.2.1. Note: CS and CC coefficients calculated with exports of country i and exports of country j (China). The coefficient of specialization (CS) and coefficient of conformity (CC) are measures of the level of trade competition between two economies. The competition level is determined by the similarity of export baskets between these countries, with competition being high (tends to 1) when export structures are similar, and competition being low (tends to ) when export structures are complementary. Source: OECD Development Centre, based on WITS Database, 212 A closer look at the trade competition patterns between Central America and China is provided by comparing their trade structures at a disaggregated level. That is, how similar are countries' export baskets to that of China? Average trade competition of Central American countries with China is relatively low: Costa Rica, El Salvador, Guatemala, Honduras and Panama all show more complementarities than competition with China s exports basket (fig. 1). (More recent indicators for trade competition from 21 (fig. 11), illustrate this same result: in comparison with other emerging regions -- notably Central Europe and East Asia -- competition for Central American countries with China is low). 5 5 More detailed analysis of Latin America's comparative export structure, using the CC and CS indexes, can be found in OECD (27), ch. 4. Avendaño & Dayton-Johnson - 12

Czech Republic Romania Slovak Republic Korea, Rep. Poland Japan Hungary Thailand Mexico Philippines Malaysia Croatia Turkey Spain Singapore United States Costa Rica Bulgaria India El Salvador Pakistan Indonesia Brazil Argentina Guatemala Chile Peru Colombia Russian Bolivia Panama Paraguay Venezuela Low compet. High compet. Figure 11. Export Competition with China for selected countries (21) 1.9.8.7.6.5.4.3.2.1 Note: CS and CC coefficients calculated with exports of country i and exports of country j (China). The coefficient of specialization (CS) and coefficient of conformity (CC) are measures of the level of trade competition between two economies. The competition level is determined by the similarity of export baskets between these countries, with competition being high (tends to 1) when export structures are similar, and competition being low (tends to ) when export structures are complementary. Source: OECD Development Centre, based on WITS Database, 212 Central America and China have complementary export baskets; several of the Central American countries are primarily commodity exporters. Could Central American economies benefit from China s rapidly increasing demand for goods? This requires an explicit analysis of the compatibility of Chinese imports and Central America s main exports. The picture that emerges is not very encouraging. 6 Honduras, Panama and Costa Rica export goods substantially different from those imported by China. There are few potential complementarities to be exploited for these countries by targeting Chinese markets (fig. 12). 6 The estimation is a modified version of CS and CC coefficients, taking into account the imports of the Chinese economy, and comparing the similarity with Central American exports. Avendaño & Dayton-Johnson - 13

Figure 12. Trade opportunities with China (2-5) An additional dimension, not considered in the previous estimations, is the level of intra-industry trade in Central American economies. Intra-industry trade refers to the volume of exchange of products belonging to the same industry. The level or potential level of this kind of exchanges is not captured by the CS and CC indexes analyzed above. Moreover, CS and CC indexes do not necessarily reflect the differences in size when comparing two economies, certainly relevant in the consideration of China and any Central American country. The Vollrath index is a measure of comparative advantages taking into account intra-industry trade. It measures each country s exports and imports relative to global exports and imports in each sector. Values above 1 indicate a comparative advantage for the country in that specific sector. Table 1 summarizes these results, highlighting in red the sectors when comparative advantage is higher. Avendaño & Dayton-Johnson - 14

Table 1. Vollrath index of comparative advantage in selected Latin American countries 2 21 2 Product code Argentina Brazil Chile Colombia Mexico Peru Venezuela Costa Rica Guatemala Nicaragua Panama El Salvador Food and live animals 2.45 1.32 1.46.95 -.68 7.56-3.38 1.99 2.47 3.86 7.74 11.74 Beverages and tobacco 1.39 1.74 2.45 -.68.54-1.87-1.65-1.1 1.25.25 1.41 -.7 Crude materials excluding food/ Fuels 1.4 1.87 3.25.38.79 2.26-1.42.57 1.19.8.6-1.42 Mineral fuels/lubricants 1 1.77-2.8-2.64 3.6.25 -.13 4.29-2.52 -.6 -.55 1.19 -.78 Animal/vegetable oils/fats/waxes 3.41.78-2.4-1. -.9 1.19-2.1 1.41 -.2-1.46 -.6 -.31 Chemicals/products -.68 -.77 -.62 -.5 -.89-2.58-2.41 -.8 -.5-3.43-1.26-2.2 Manufactured goods. 1.3 1.44 -.2 -.28.52 -.91 -.63 -.14-1.86 -.84 -.39 Machinery/transport equipment -.78.24-2.27-1.74.87-3.92-3.92.82-2.34-4.55-6.2-3.25 Miscellaneous manufacturing -1.15.27-1.69.12.88.74-2.72.43.25 -.69.2.71 Other commodities.96 8.69 1.52-1.6-3.33 2.2-3.5-1.44.35-4.81 4.29 21 Product code Argentina Brazil Chile Colombia Mexico Peru Venezuela Costa Rica Guatemala Nicaragua Panama El Salvador Food and live animals 8. 3.36 9.11 11.9 3.56 4.74-3.42 3.71 2.68 4.43 6.77 5.28 Beverages and tobacco 1.72 1.2 1.4-2.2.55-2.65-2.83 -.76.43.49 1..3 Crude materials excluding food/ Fuels 2.66 3.52 3.49 1.38.39 3.59 -.8.57 1.59.7.53 -.65 Mineral fuels/lubricants 1.14.7-1.77 3.34.91.51 5.88-2.22.17 -.44-1.5 -.46 Animal/vegetable oils/fats/waxes 4.21 1.29 -.78 1.48-1.15 1.4-3.6 2.23 2.23 1.79 3.35.15 Chemicals/products 1.43 -.1 -.16 -.95 -.65-2.8-3.13.61 -.7-3.39.16-1.5 Manufactured goods -.67 -.21 2. -.61 -.31.14-1.81 -.34 -.37-2.25-1.1.14 Machinery/transport equipment -.92 -.85-2.78-3.12.92-4.17-4.9 -.43-2.99-4.11-7.41-2.45 Miscellaneous manufacturing -1.68 -.98-1.59 -.56.3 -.24-3.93 1.27 1.67 -.42-1.97 3.24 Other commodities -.32-1.94-1.86 -.4-1.3 1.44-5.48-3.32-4.75.51 -.76 -.45 Source: Authors calculation, based on Comtrade (213). Table 1 illustrates and confirms the specialization pattern that countries like Chile, Colombia, Peru and Venezuela have developed over the last decade. In the case of Central American countries, there is a high comparative advantage in food and animals products. Manufacturing does not exhibit high levels of comparative advantage computed in this way (see the low indexes for all Central American countries). Central America's China trade is certainly complicated by the diplomatic rivalry between China and Taiwan. Only 22 countries now maintain diplomatic relations with Taiwan, and fully twelve of those are countries in Latin America and the Caribbean. More to the point, all of these save Paraguay are small to very small economies in Central America and the Caribbean. 7 Of the six countries covered in this chapter, only Costa Rica has established relations with Beijing, and broken relations with Taipei, and only since June 27 (a free trade agreement with China followed in April 21). For decades, the smaller economies of the region may have judged their bet on Taiwan a good 7 Haro Navejas (211), Aguilera Peralta (21) and Rodríguez (212) sketch the diplomatic history of Taiwan's relationship with Central American countries. Avendaño & Dayton-Johnson - 15

one, as Taipei rewarded their diplomatic loyalty with development assistance (including foreign aid and technical assistance) and other economic links: that is, they benefited from Taiwan's socalled "checkbook diplomacy." But with the election of the Kuomintang administration to the national government in 28, checkbook diplomacy more or less came to an end. Overtures to Beijing from countries in Taipei's camp have been reportedly rebuffed for now. The country most frequently mentioned as next in line for normalization of relations with Beijing is Panama: certainly Chinese firms are interested in improvements to Panama's canal, just as Panama recognizes the looming importance of Chinese demand for much of the goods that transit through the canal. But despite sporadic high-level contacts over several years -- including a Spring 24 visit by the Chinese Vice-Minister for Foreign Affairs to China -- Panama and China have not advanced to formal diplomatic relations. In light of the economic analysis of the structure of Central America's foreign trade presented here, it is difficult to see how normalized relations between Beijing and the Central American republics would have fundamentally changed the stakes for Chinese-Central American trade. Indeed, most Central American countries' trade with China, though small, nevertheless amply exceeds their trade with Taiwan. Would formal relations, and perhaps free trade agreements, have increased flows all that much? Given the poor complementarity between Central American supply and Chinese demand, and the small scale of Central American markets for Chinese sellers, it does not appear that diplomatic constraints were particularly binding on trade flows. 3. China and Central American Development Strategies How should Central American trade policy makers respond to China s consolidation as a global driver of growth? Can trade with China be marshaled in support of productive transformation -- the capacity of an economy to engage in structural change and higher productivity activities? Few Avendaño & Dayton-Johnson - 16

Latin American economies have achieved this. Productivity levels in the region have remained stagnant for years, and they explain to great extent the low income of the region relative to industrialized economies (Daude and Fernández-Arias 21). Recent research has explored the relationship between export structure and productive transformation. The "product space" literature (Hausmann et al. 27, Hidalgo et al. 27, Jankowska et al. 212) has focused on the "aggregrate value" of exports as a way of categorizing relationships between export industries, in order to evaluate the export profile of a specific country over time. These researchers find that two dimensions in particular provide an informative perspective the country s positioning in world trade. The degree of sophistication of a country s export basket 8 (EXPY in fig. 13) indicates the complexity of the goods the country exports. The second, capability (Hidalgo and Haussmann, 29), measures the variability of goods produced by a country, taking into account how frequently these goods are produced in other countries. In other words, the capability measure combines a measure of product diversification (how many goods are exported) with a measure of uniqueness (how different is the country s export basket from the rest of the world). Both measures have been demonstrated to be statistically accurate predictors of GDP growth in this empirical literature. 8 For details in the estimation of the indexes, see Hausmann et al. (27), Jankowska et al. (212). We can include an annex explaning the different indexes, no? Avendaño & Dayton-Johnson - 17

Capabilities Figure 13. Export sophistication and capacity, various countries, 1965-29 2.5 LAC/OECD Central America USA8 2 SGP9 1.5 USA65 USA7 USA75 USA95 USA USA85 KOR5 KOR9 SGP USA9 USA5SGP5 USA9 ESP9 KOR ESP85 ESP95 1 PRT65 PAN65 MEX5 PRT7 ESP8 ESP75 SGP95 MEX9 KOR75 ESP MEX75 ESP7 SGP9 KOR8 KOR65 MEX PAN7 PRT8 MEX8 ESP5 PRT75 KOR85 MEX9 ESP9 SGP65 CRI65 MEX85 KOR7 BRA95 PRT85.5 KOR9 MEX95KOR95 CRI7 SGP75 ESP65 SGP85 PRT9BRA BRA5 PRT5 PRT SGP8 PAN75 ARG95 PRT9 MEX7 TUR85 BRA9 TUR9 GTM7 MEX65 SGP7 PRT95 BRA85 PAN8 CRI75 TUR5 CRI8 CHL65 BRA8 CHL95 ARG75 GTM75NIC7 COL95 COL9 PAN85 GTM65 CHL75 ARG9 BRA9 CHL7 CHL8 ARG COL65 COL75 GTM8 PER85 TUR9 PAN9 TUR -3 2 7 ARG5 12 17 22 PER9 CHL85 TUR95 COL85 CHL9 CRI5 BRA75 PER8 CHL ARG85 ARG8 NIC75 PER95 ARG7 COL CRI9 ARG9 COL9 GTM COL5 PAN95 TUR75 CRI85 CHL5 ARG65 COL7 NIC8 -.5 TUR8 GTM5 PER75 PAN CRI CRI9 NIC65COL8 PER TUR7 PER65 PER5 GTM9 CHL9 PER7 BRA65 BRA7 CRI95 GTM85 TUR65 NIC95NIC PER9 PAN5 PAN9 NIC5-1 GTM9 NIC9 GTM95 NIC9 NIC85-1.5 EXPY (value of exports) Note: Definitions of the variables provided in the text. Source: Jankowska et al. 212. Figure 13 depicts the relationship between EXPY (sophistication of exports) and the capabilities index (capacity to produce new products) for a number of selected economies between 1965 and 29. The U.S. has particularly high values of both variables over many years; South Korea and Singapore have high values of both in recent years, after substantial increases in both dimensions over time. The results for Central American countries are striking. Most countries of the region are concentrated in low-sophistication goods. However, the trajectories differ from country to country. In Costa Rica, and to some extent Guatemala, the level of sophistication of exports has Avendaño & Dayton-Johnson - 18

increased between 1965 and 29, with a concurrent fall in the capability index. Panama, on the other hand, experienced an increase in the sophistication of exports up to 2, which decreased thereafter, together with its capability index (indeed, Panama in 1965 had higher values of both dimensions than any other Central American country-year observation in fig. 13). In the case of Nicaragua the increase in sophistication has not been accompanied by higher capabilities. The picture emerging from the product space methodology is that Central American countries have marginally increased the sophistication levels of their exports, but their capabilities remain low. This suggests that their capacity for upgrading towards high value-added goods is still constrained, even if the basket of goods they export is more diversified (fig. 6). In the area of international trade, Central American countries face many of the same challenges today that they did before China's rise in the early 199s, many of them more acute today perhaps than in the past: i) high levels of specialization and for some countries, increased competition; ii) low value-added and sophistication in their exports, and iii) ever slimmer prospects for upgrading. Policy makers have focused on horizontal policies, such as infrastructure and innovation, to tackle some of the challenges posed by the China effect. Better infrastructure, in particular, could contribute to the strengthening of Latin American countries' competitive trade position. Investment in infrastructure in most countries remains low, which undermines competitiveness (OECD 27, 212). The state of trade-related infrastructure is likely to be most important for countries that compete with China in third markets. In this connection, the Latin American business press regularly reports that it takes longer or costs more (or both) to ship a container from some Latin American port to the U.S. than it does from China, because of poor quality infrastructure. The Logistics Performance Index (LPI) provides a snapshot of weak and strong points for countries in trade logistics, based on a survey of operators (global freight forwarders and express carriers). Most Central American countries score poorly in terms of Avendaño & Dayton-Johnson - 19

Logistics Performance Index competitiveness/logistics, and lag behind East Asian economies like Vietnam, Thailand or Malaysia (fig. 14). Figure 14. Logistics Performance Index, 212 4 3.5 3 2.5 2 1.5 1.5 Korea, Rep. Malaysia Thailand Philippines Vietnam Indonesia Guatemala Costa Rica Panama El Salvador Honduras Source: World Bank (213) Avendaño & Dayton-Johnson - 2

4. Summary and Conclusions In the current debate surrounding China's impact on Latin American development, Central America seems doubly cursed: largely trapped in a trade structure of primary product export dominance, with relatively low value added, like the booming South American commodity exporters; but at the same time not profiting from vigorous Chinese demand for its exports -- unlike the South American countries -- and perhaps suffering from Chinese competition, like Mexico. Our systematic assessment of Central America's trade, in the larger context of changing Latin American patterns of trade, uncovers a truth that is somewhat more nuanced than that pessimistic interpretation, but largely confirms that there is little in China's rise likely to benefit Central American countries at present. Among the nuances in the story is the heterogeneity of Central American countries. In fact, the larger Latin American dichotomy of booming economies selling primary products to China on the one hand, and struggling manufactures exporters competing with China on the other, is partially reproduced in miniature among the countries of the isthmus. Only partially, though. There is a group of primary product exporters: coffee, sugar and bananas all dominate the exports of Guatemala, Honduras, Panama. Unlike the case of many of their South American counterparts, however, these exports are not in demand in China the way that certain minerals or extensively farmed crops are. Whether changing consumption patterns in the Chinese middle class, for example, will drive up demand for these Central American commodity exports in the mediurm to longer term remains to be seen. There is also a group of mixed manufactures exporters: Costa Rica, El Salvador, Nicaragua. All of these countries also export primary products but have substantial industrial exports as well. Avendaño & Dayton-Johnson - 21

Compared with Mexico, however (the textbook case of a country that suffers from competition with Chinese trade), the figures reported in this chapter suggest that competition with China is not particularly acute (except for Guatemala and El Salvador). 9 China's booming growth certainly presents opportunities for some Central American businesses and some Central American investment projects, and there will be even more such opportunities in the future. But in the aggregate, Central America has largely remained on the sidelines of the explosion of Chinese-Latin American trade and investment, and it is quite likely to remain relegated to the sidelines. Changes in cross-straits tensions between Taipei and Beijing could, if anything, be bad news for Central American countries as Taipei's willingness to underwrite development projects is likely to flag even as Beijing's is cool to diplomatic advances from Central America. There remains, perhaps, one sphere of economic influence, more diffuse and more difficult to detect, that could have an impact on Central America' prospects. That is the increasing success of the Chinese development model in the marketplace of ideas, even supplanting the long-standing supremacy of the liberal "Washington Consensus" with (several competing versions of) a "Beijing Consensus." 1 More than a few policy makers and opinion leaders in Latin America have been emboldened by China's success to promote new development strategies in their own countries: these include a variety of measures, among them a more activist industrial policy and more generous social transfers. If these debates encourage Central American policy makers to consider productive and efficient alternatives to the low-value-added export-drive development model, that would be a beneficial -- though quite indirect -- consequence of China's rise. 9 Competition with China may be more pronounced than the statistics suggest: it could be that commodity prices, unusually high at present, obscure the degree of competition in other sectors such as textiles, in the computation of the various indices considered in Section 2. 1 John Williamson, who coined the term "Washington Consensus," considers the new policy prescriptions in a 212 paper in Asia Policy. Avendaño & Dayton-Johnson - 22

In the meantime, though, the critical tasks for Central American development strategies are not fundamentally changed by the China factor. In terms of trade, lowering the cost of trade via infrastructure investments could stimulate existing trade relationships. More generally, the overarching economic policy priorities of all Latin American countries in the two-thousand-teens are most certainly those of Central America as well: reducing economic inequality and its associated disastrous consequences, and raising productivity. Avendaño & Dayton-Johnson - 23

5. References Aguilera Peralta, Gabriel, (21), "Central America Between Two Dragons: Relations with the Two Chinas," in Alex E. Fernández Jilberto and Barbara Hogenboom, eds., Latin America Facing China: South-South Relations beyond the Washington Consensus, Centre for Latin American Research and Documentation (CEDLA), Amsterdam, and Berghahn Books, New York and Oxford. Avendaño, Rolando, and Javier Santiso, (211), "Asian Opportunities and Diversification Strategies: An Outlook for Latin American Trade," in K.C. Fung and Alicia García Herrero, eds., (211). Avendaño, Rolando, Helmut Reisen and Javier Santiso, (28), "The Macro Management of Commodity Booms: Africa and Latin America's Response to Asian Demand," OECD Development Centre Working Paper No. 27, Organization for Economic Cooperation and Development, Paris. Bulmer Thomas, Victor, (1987), The Political Economy of Central America Since 192, Cambridge University Press. Daude, Christian, and Eduardo Fernández-Arias, (21), "On the Role of Productivity and Factor Accumulation in Economic Development in Latin America and the Caribbean," OECD Development Centre Working Papers 29. Fung, K.C., and Alicia García Herrero, eds., (211), Sino-Latin American Economic Relations, Routledge, London. Gallagher, Kevin P., (212), "A Catalyst For Hope: China's Opportunity for Latin America," in Javier Santiso and Jeff Dayton-Johnson, eds., Oxford Handbook of Latin American Political Economy, Oxford University Press, Oxford and New York. Haro Navejas, Francisco Javier, (211), "China's Relations with Central America and the Caribbean States: Reshaping the Region," in Adrian H. Hearn and José Luis León-Manríquez, eds., China Engages Latin America: Tracing the Trajectory, Lynne Rienner, Boulder and London. Hausmann, R., J. Hwang and D. Rodrik (27), "What You Export Matters", Journal of Economic Growth, 12(1), 1-25. Hearn, Adrian H., and José Luis León-Manríquez, eds., (211), China Engages Latin America: Tracing the Trajectory, Lynne Rienner, Boulder, CO. Hidalgo, A. C. and R. Hausmann (29), "The building blocks of economic complexity", Proceedings of the National Academy of Sciences, 16(26), 157 1575. Hidalgo, C. A., B. Klinger, A.L. Barabasi and R. Hausmann (27), "The Product Space Conditions the Development of Nations", Science, 317(5837), 482 487. Jankowska, Anna, Arne Nagengast and José Ramón Perea, (212), "The Product Space and the Middle-Income Trap: Comparing Asian and Latin American Experiences," OECD Development Centre Working Paper No. 311, Organization for Economic Cooperation and Development, Paris. Avendaño & Dayton-Johnson - 24

OECD (27), Latin American Economic Outlook 28, OECD Development Centre, Organization for Economic Cooperation and Development, Paris. OECD (29), Latin American Economic Outlook 21, OECD Development Centre, Organization for Economic Cooperation and Development, Paris. Rodríguez, Mario Esteban, (212), "Batalla diplomática entre China y Taiwán: las paradojas de Costa Rica y Nicaragua," paper presented at the conference China, América latina y el Caribe: condiciones y retos en el siglo XXI, Facultad de Economía, UNAM, Mexico, May 212. Santiso, Javier, ed., (27), The Visible Hand of China in Latin America, OECD Development Centre, Organization for Economic Cooperation and Development, Paris. Williamson, John, (212), "Is the Beijing Consensus Now Dominant?" Asia Policy 13. Avendaño & Dayton-Johnson - 25