Trade and trade policy in Latin America and the Caribbean: recent trends, emerging challenges.

Author:Rosales, Osvaldo
Position:Development, Trade, and Inequality - Report

This article presents a brief characterization of Latin America and the Caribbean's foreign trade, as well as its trade integration efforts. The first section examines the region's recent trade performance in terms of share in world trade, trade openness, main partners, most dynamic sectors, and export concentration. Particular emphasis is placed on the dynamics of the region's foreign trade in the past decade, including the growing importance of trade with China and its implications. The second section focuses on the recent evolution of intra-regional trade and of regional economic integration initiatives. The third section deals with trade negotiations with extra-regional partners. The fourth and final section outlines some policy challenges the region faces to increase the contribution of trade to its development prospects.


Latin America and the Caribbean (LAC) accounted for nearly 12 percent of both world merchandise exports and imports in the aftermath of the Second World War. This share decreased steadily, reaching its lowest point in the late 1980s during the debt crisis. Since then the region's share has recovered, currently reaching 6 percent of both world merchandise exports and imports (see Chart 1). LAC's share in world merchandise exports in 2010 was nearly double that of Africa and similar to that of the Middle East, but much lower than developing Asia's share of 25 percent. (1)

LAC exports of goods are concentrated in a few countries. Mexico, the region's second-largest economy in terms of GDP size and its largest trader, alone accounts for one-third of the region's share in world merchandise exports. Brazil, LAC's largest economy and second largest trader, accounts for more than one-fifth of the region's total exports. Overall, LAC has a larger share of world exports in agriculture, mining, and fuels than it has for all products, whereas the opposite happens in manufactures (see Table I). This outlines the region's abundant endowment of natural resources, particularly in South America. The only exception to this pattern among the region's largest economies is Mexico, Latin America's top exporter of manufactures. Mexico's market share in this sector exceeds those in agriculture, fuels, and metals.


LAC accounted for only 3.4 percent of world exports of commercial services in 2010. Unlike in goods, the region has consistently registered a deficit in the trade of services during the last three decades (see Chart 2). (2) Brazil is the region's main exporter of services, with a share in world exports in 2011 of 0.9 percent, followed by Mexico with 0.4 percent. (3) Although services typically represent less than 15 percent of total exports for the region's largest economies, they constitute the most important export sector for some small LAC economies, mostly in the Caribbean. (4) Thus, in 2010, services represented 79 percent of Barbados' total exports, 68 percent of Cuba's, and 66 percent of Jamaica's. (5) In all these countries, tourism accounts for a large part of services exports, whereas financial services are also important for some Caribbean economies. Services also represent about one-third of total exports for some Central American countries such as Panama and Costa Rica. (6)


The degree of trade openness of LAC economies varies significantly. As a general rule the largest economies tend to be the least open, as measured by the ratio of exports plus imports of goods and services over GDP. Conversely, the most open economies are all small and mostly in Central America and the Caribbean. One important exception is Mexico, which is quite open considering its size (see Chart 3). This is mostly explained by its strong trade links with the United States and, in particular, by its participation in North American value chains, where Mexico imports intermediate goods, processes them, and exports them back as final products.

In 2011, total LAC merchandise exports reached $1.06 trillion, with imports of $1.01 trillion. (7) Since 2002, LAC as a whole has consistently registered a surplus in its merchandise trade with the rest of the world, with the exception of 2007. During that period, the region has always posted a trade surplus both with the United States and the European Union. By contrast, it has always shown a deficit with both Japan and the Republic of Korea. In the case of China, trade has, according to Chinese statistics, been mostly in equilibrium (see Chart 4). However, if official statistics from LAC countries are used, the results show that the region has recorded a persistently growing deficit with China since 2000, reaching $46.4 billion in 2011. Indeed, almost all LAC countries, except for Brazil, Chile, Peru, and Venezuela, recorded trade deficits with China in 2011, with Mexico's deficit equivalent to that of the rest of the region. This reflects the growing penetration of Chinese manufactures in LAC markets, a phenomenon that has increasingly given rise to calls for protection, especially in the region's most industrialized economies. (8)

When measured by value, the average annual growth rate of LAC exports remained pretty stable between the 1990s and the 2000s. However, important changes took place among product groups. Again, measuring by value, LAC exports of primary products (e.g., crude petroleum, gas, ore concentrates) and natural resource-based manufactures (e.g., wood products, vegetable oils, base metals, petroleum products) grew much faster in the past decade as compared to the 1990s. The opposite happened with the region's exports of other manufactures (see Table 2). This shift was heavily influenced by the high prices registered during most of the past decade by several commodities exported by the region. Thus, South America's total export value grew in the 2000s at nearly double the rate it did in the 1990s, reflecting the rich natural resource endowment of many South American countries. The opposite happened to Mexico, whose total exports--made up mostly of manufactures--showed a much less dynamic behavior in the 2000s compared to the 1990s.

As a result of the divergent paths followed by LAC exports of primary products and manufactures, the share of the former category in the region's total export value increased by more than ten percentage points during the last decade, reaching nearly 40 percent. If resource-based manufactures are added, their combined share in total LAC exports reaches 60 percent (see Chart 5).

The clear shift in LAC exports toward primary products during the last decade is directly related to the emergence of Asia--and China in particular--as a key trade partner for the region. As Table 3 shows, between 2000 and 2011, Asia's share in LAC exports more than tripled from 5 to 17 percent, whereas its share in the region's imports more than doubled from 11 to 27 percent. China alone represents half of the region's exports to, and imports from, Asia. Asia's gains have been mostly at the expense of the United States, which nevertheless continues to be the region's main individual trade partner.



Asia's economic dynamism has resulted in sustained demand and high prices for commodities such as copper, iron ore, crude oil, and soybeans, which are mostly exported by South American countries. Thus, China has become the top individual export destination for Brazil, Chile, Peru, and Venezuela, as well as the second most important for Argentina. The United States, by contrast, remains the most important export market for Mexico, all Central American countries, and almost all Caribbean countries as well as for Colombia and Ecuador in South America.


The different export patterns noted above are strongly influenced by geography. Mexico, Central America, and the Caribbean are generally poor in natural resources, with the exception of oil in Mexico and natural gas in Trinidad and Tobago, but are close to the United States and have relatively low labor costs. They have therefore tended to specialize in the production of labor-intensive manufactures (e.g., garments) for the U.S. market. These operations often take place in special export processing zones. Within this group Mexico has gone further...

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