Low Intra-Regional Trade Shows Region's Lack of Dynamism

By Claudio Loser
Published in the Dialogue’s Latin America Advisor, August 22, 2008

Low Intra-Regional Trade Shows Region's Lack of Dynamism

Originally published in Claudio Loser’s monthly “By the Numbers” column for the Dialogue's daily Latin America Advisor

WASHINGTON, DC—It is by now a boring truism to say that trade and investment have exploded in the world—more so in the developing world. The rapid rise of Asia, together with a healthy recovery of Latin America and others, has brought new possibilities for the majority of emerging countries. However, developments have not been homogeneous: Asia has been engaged in a revolutionary transformation; Latin America has pursued integration efforts for a long  time, but with considerably poorer results; and Africa is only now starting the process.

From 1980 to 2007, export volumes of Emerging Asia, including Korea, Singapore, and Taiwan, grew at an annual rate of 9 percent. Latin America followed with a respectable rate of almost 5 percent a year, in line with Eastern Europe. These rates were well in excess of the increase of 4 percent for the industrial world. Most interesting, about one half of total trade for Developing Asia takes place within the region, compared with 10 percent of intra-regional trade in Africa, and 20 percent within Latin America  and the Caribbean. The share of intra-Latin American trade today remains at about the same level as in 1980. Rather disappointing for a region that has claimed to have started its process of integration earlier than most regions of the world. This suggests that there have been only limited efforts to develop the process of integration.

Despite the development of complex formal trade agreements, the region remains highly dependent on commodities in their international trade, with the exception of Mexico after it joined NAFTA. Trade blocs like Mercosur, the Andean Group, and the Central American Common Market have provided the opportunity to integrate these economies, but trade has developed more with Asia and the US. The adjacent chart illustrates in more detail the changes in intra- and inter-regional trade. The general trend is a decline in the trade volume of Latin America with the European Union and with Japan. Trade with the US has grown in importance because of increased commerce with Mexico under NAFTA, and an increasing number of bilateral deals with other countries in the region, like Chile, Peru, and Central America. The largest change in the trade landscape is the sharp jump in trade with Developing Asia, mostly China.

What explains the dynamism of Asia's trade? The Asian process has not been the result of a major institutional effort, even though governments have intervened to support certain areas, usually with adverse effects.  The effort has been market driven, helped but not explained by the emergence of China. It is my impression that it was the reduced government intervention in China and East Asia that started the process after a long period of stagnation and inward-looking orientation. While Latin America has tended to follow these steps, it is hesitant and remains far behind. The region will need to look into the lessons from Asia to unleash its true, and certainly great, potential.

Claudio Loser is a Senior Fellow at the Inter-American Dialogue and former Head of the Western Hemisphere Department at the International Monetary Fund.