Asian Opportunities Diversification Strategies

Asian Opportunities and Diversification Strategies: An Outlook for Latin American Trade Javier Santiso Rolando Avendano OECD Development Centre WWW.OECD.ORG/DEV Conference on China and Latin America: Growing Economic Relations and Commonalities in Policy Issues 1st December 2008 – Hong Kong, China

I Introduction: Recent trends and myths on China‐Latin America II Trade competition: Evidence of a potential draw III Export Diversification and Infrastructure IV Adaptation strategies towards Chinese competition OECD Development Centre

Integration of the Asian Drivers into the world economy has shaped primary commodity markets 1. Global output growth Commodity prices procyclical with growth (≈1.5% for each point of growth) 2. Barter terms of trade Rise if industrial world growth > 4% 3. Lower US interest rates Higher output prospects / low storage costs 4. Weakening of US dollar Denomination of raw material prices OECD Development Centre

The combined contribution of China and India to global growth is substantial Source: Own calculation based on the IMF World Economic Outlook Database, 2008. OECD Development Centre

Emerging economies have become major actors in mobilising capital Note: Emerging countries refer to Latin American and Asian only. Source: OECD Development Centre 2008, based on Thomson Datastream (Economist Intelligence Unit). OECD Development Centre

Myth I: The main source of China’s competitive advantage is cheap labour Fixed Capital Investments in China as % of GDP and Return to Capital (1980-2006) Investment in China Return to Capital before and after taxes 60 Investment in Fixed Assets 60 Base case 50 Excluding urban residential housing, including inventories, before taxes Gross fixed capital formation 50 Excluding urban residential housing, including inventories, after taxes 40 Percent of GDP 40 Percent a year 30 30 20 20 10 10 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Bai, Chong‐En. C. Hsieh and Y. Qian. “The Return to Capital in China”. NBER Working Paper 12775. National Bureau of Economic Research. December 2006. Based on China Statistical Yearbook. OECD Development Centre

Myth II: China has a negative impact on FDI flows to other emerging markets Inward FDI Flows Outward FDI Flows USD Millions USD Millions China China 60000 Latin America 1400000 Latin America Africa Africa 50000 Developing countries (right axis) 1200000 100000 Developing countries (right axis) 400000 90000 1000000 350000 40000 80000 300000 800000 70000 250000 30000 60000 600000 50000 200000 20000 40000 150000 400000 30000 100000 10000 20000 200000 10000 50000 0 0 0 0 Avg. 1990‐ 2003 2004 2005 2006 Avg. 1990‐ 2003 2004 2005 2006 2000 2000 Source: J. Santiso (ed.). The Visible Hand of China in Latin America. OECD Development Centre Studies, 2008. Based on UNCTAD data. OECD Development Centre

Myth III: China’s rise benefits commodity exporters and adversely affects light manufacturing ones Natural Resources as a percentage of Latin American Exports Commodities Oil 100 Agriculture & other 90 80 % of country's exports 70 60 50 40 30 20 10 0 Venezuela Chile Peru Argentina Colombia Brazil Latin Mexico America Source: OECD Development Centre, 2008. Based on: National Balance of Payments, 2006. OECD Development Centre

The rise of China concerns all the region Descriptive Statistics on Trade for Selected Countries Share in Share of Exports Trade Latin Exports to Goods- Restrictiveness Country America Asian Drivers Main Exports Services Index GDP (%) (Avg. 2000- as % of GDP (WB-OTRI 2005) 2006 in PPP 2006) Animal feed, fixed veg. Argentina 12.8 23.6 9.7 22.8 oils/fats, soft, heavy petrol, oil crude, oil seeds Iron ore, oil seeds, meat, Brazil 34.1 14.5 6.8 30.1 passenger cars, petrol/bitum., sugar Copper, metal ore, fish, Chile 4.0 39.6 11.5 14.2 fruit/nuts, pulp, wood Petrol, coal, coffee, heavy Colombia 7.7 21.1 0.9 25.3 petrol, crude materials, iron Petrol, passenger cars, Mexico 23.2 29.7 0.7 32.0 telecomms. equipment, computer equipment Metal ore, copper, heavy Peru 3.7 21.4 9.9 21.0 petrol, animal feed, silver Venezuela 4.0 32.9 0.2 21.8 Petrol, iron, aluminium Source: Economist Intelligence Unit. OECD Development Centre

Increased Asian exports have been met with apprehension in Latin America Latin American tariffs to China and the rest of the World Manufactured goods (SITC 6) World 19.00 China 17.00 15.00 % 13.00 11.00 9.00 7.00 5.00 2000 2001 2002 2003 2004 2005 2006 Note: Does not include NTB data. Source: Latinobarómetro survey. Santiago de Chile, 2007. Source: TRAINS Database (World Integrated Trade Solution), Nomenclature STIC Revision 3, 2008. OECD Development Centre

Export competition with China is relatively low, although Mexico is on the spot Export Competition with China for selected countries (2000-06) 0.8 High compet. 0.7 0.6 0.5 0.4 0.3 Low compet. 0.2 0.1 0.0 Czech… Slovak… Russian… Thailand Malaysia Chile Hungary Korea, Rep. Bolivia Croatia Colombia Honduras Singapore Romania Bulgaria Spain Uruguay Poland Panama Mexico Indonesia Philippines Japan India Pakistan Brazil El Salvador Guatemala Argentina Peru Venezuela Paraguay United States Turkey Costa Rica Note: CS and CC coefficients calculated with exports of country i and exports of country j (China, India). Source: OECD Development Centre, based on WITS Database, 2008. OECD Development Centre

Regarding competition with India, Latin America has little to fear Export Competition with India for selected countries (2000-06) High compet. 0.8 0.7 0.6 0.5 0.4 0.3 Low compet. 0.2 0.1 0.0 Russian… Slovak Republic Bulgaria Thailand Colombia Singapore Chile Romania Poland Malaysia Bolivia Pakistan Croatia Spain Korea, Rep. Hungary Panama Japan Brazil Czech Republic Mexico Guatemala Philippines Turkey Costa Rica Peru Paraguay Honduras Indonesia El Salvador Argentina Uruguay Venezuela United States Note: CS and CC coefficients calculated with exports of country i and exports of country j (China, India). Source: OECD Development Centre, based on WITS Database, 2008. OECD Development Centre

Trade complementarities with China remain unexplored today… Trade Opportunities with China for selected countries (2000‐06) High compet. 0.8 0.7 0.6 0.5 0.4 0.3 Low compet. 0.2 0.1 0.0 Korea, Rep. Chile Thailand China Romania Bulgaria India Uruguay Bolivia Malaysia Panama Japan Philippines Indonesia Hungary Spain Poland Croatia Mexico Czech Republic Argentina Slovak Republic Turkey Peru Pakistan Brazil Colombia Honduras United States Singapore Venezuela Guatemala El Salvador Paraguay Costa Rica Russian Federation Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India). Source: OECD Development Centre, based on WITS Database, 2008. OECD Development Centre

Major economies in the region have a lot to win from increasing trade with Indian partners Trade Opportunities with India for selected countries (2000‐06) 0.8 High compet. 0.7 0.6 0.5 0.4 0.3 Low compet. 0.2 0.1 0.0 China Thailand Chile Malaysia Korea, Rep. Bolivia Hungary Croatia Slovak Republic Uruguay Brazil Colombia Singapore Bulgaria Romania Honduras Argentina Japan Poland Spain Philippines Venezuela Indonesia Mexico Peru Guatemala Czech Republic Panama Turkey Costa Rica El Salvador Pakistan Paraguay United States Russian Federation Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India). Source: OECD Development Centre, based on WITS Database, 2008. OECD Development Centre

In which sector is Latin America specialised? Let’s not forget intra‐industry trade Vollrath's Relative Comparative Advantage Index Latin America (2005-2006) Good Product Name Argentina Brazil Chile Colombia Mexico Peru Venezuela Average LAC 0 Food & live animals 3.12 1.80 1.24 0.92 -0.16 0.61 -3.32 0.98 1 Beverages and tobacco 1.93 1.73 2.40 0.03 1.69 -1.48 -2.03 1.16 2 Crude mater.ex food/fuel 0.96 1.92 2.53 0.85 -0.63 2.65 -1.01 1.40 3 Mineral fuel/lubricants 1.57 -1.02 -2.30 3.43 1.36 -0.63 7.15 1.21 4 Animal/veg oil/fat/wax 4.28 1.40 -1.08 -0.34 -2.32 -0.51 -5.40 0.90 5 Chemicals/products n.e.s -0.98 -1.33 -0.81 -1.04 -1.19 -2.04 -2.14 -1.17 6 Manufactured goods -0.41 0.61 1.38 -0.40 -0.81 0.27 -0.90 -0.22 7 Machinery/transp equipmt -2.06 -0.64 -3.57 -2.44 0.13 -3.93 -4.34 -0.71 8 Miscellaneous manuf arts -1.27 -0.40 -2.52 0.07 0.27 0.21 -4.00 -0.21 9 Commodities nes 0.63 8.91 1.74 1.26 -1.21 9.78 2.04 0.81 n.e.s. = not elsewhere specified. Note: Positive values of the index reveals a comparative advantage, whereas a negative indicates a comparative disadvantage. Source: OECD Development Centre, based on WITS Database, SITC Revision 3 (three‐digit classification) 2008. OECD Development Centre

China and India’s increasing demand can have adverse effects Increasing commodities prices Rise in mineral exports from Latin America (1900‐2005) (1998‐2005) 2000 Aluminium Coffee Petroleum and products (left) 120 000 Copper ores/concentrates (right) 10 000 Copper Petroleum $ millions . Price index (1970=100) 1600 Nickel ores/concs/etc (right) 100 000 8 000 $ millions . 1200 80 000 6 000 60 000 800 4 000 40 000 400 2 000 20 000 0 0 0 1998 1999 2000 2001 2002 2003 2004 2005 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Source: OECD Development Centre, based on WITS Database, 2008. OECD Development Centre

The rise of China and India is also a challenge against product specialisation Export Concentration in Products for Latin America Herfindahl Hirschman Index 0.9 2001 2006 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 ru M xico y hile G na V ne la E dor s na a bia ra y ua m la Costa ica olivia B zil rugua ondura Pa m Pa gua e zue Pe G te a ra uya olom R cua C e B U H C ⎛ n 2 1⎞ ⎜∑ p j − ⎟ ⎜ n⎟ Note: Herfindahl-Hirschmann index calculated as HH = ⎝ ⎠ j =1 1 1− n , where p j = x ij / X irepresents the market share of country j on the exports of country i in its total exports . Source: Latin American Economic Outlook 2008, OECD Development Centre. OECD Development Centre Based on data from Comtrade, World Integrated Trade Database, 2008.

A commodity boom without diversification is a two‐edged sword: the African case Export Concentration in Products for Africa Herfindahl Hirschman Index 1.0 0.9 2000 2005 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 o cco u frica Ke ya A g la C m ro n hd ô d ire Z bb e o m iq e o g lg ria Gaa ig r ig ria G m ia m ia ngl N m ia u isia M li Se e a Ne Cno im a w Ca a e o M za b u hn a no a b Za b a ib n A e C te 'Ivo Ne M ro Tn So th A Source: African Economic Outlook 2008, OECD Development Centre. Based on data from Comtrade, PC‐TAS and World Integrated Trade Database, 2008. OECD Development Centre

Latin America’s performance on trade infrastructure is poor Time for exports Cost to exports 2000 40 $ per container 35 1600 30 25 1200 Days 20 800 15 10 400 5 0 0 India China Peru Argentina Mexico Venezuela Colombia Chile Brazil Average LAC India China Venezuela Peru Colombia Chile Mexico Argentina Average LAC Brazil Source: Doing Business Report. World Bank, 2007. OECD Development Centre

…and most of its competitors score better on infrastructure Source: Avendano, R. Santiso, J. “The Impact of China and India on Latin America”. Global Insights: The Emerging States. Centre d’études et de recherches Internationales (CERI). 2008. OECD Development Centre

A wake up for reforms: The proximity to export markets Mexico benefits from its geographic proximity to its major export markets: • Lower transport and communication costs 11,700 Km • Access to FTA 24 Days 4 Days 160 Km • Just‐in‐time delivery Shipping time OECD Development Centre

Mexico: competition in third markets is more fierce Share of US imports by region Mexico China Three key issues: 25 Japan EU • Infrastructure investment 20 % of total imports • Private participation 15 • Regulation and transparency 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: CEPAL (2006) and World Integraded Trade Solution. OECD Development Centre

Opportunities have emerged as a result of Increased trade with China High value‐added niche to achieve global scale Products with high volatility and customization needs Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. April 2008. OECD Development Centre

Latin American companies have started to adapt to new value chains Upstream value chain integration Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. April 2008. OECD Development Centre

Final Remarks • Excessive complementarity between Chinese and Latin American goods is a risk, but there is room for trade opportunities. • Prospective demand of Asian Drivers From mineral to agricultural A positive potential effect • Tumbling raw material prices today may reignite old concerns about resource curse, but countries have shown higher fiscal responsibility during booms. • The imperative of product diversification • Beyond diversification: Adaptation to the Chinese model? OECD Development Centre

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Asian Opportunities and Diversification Strategies: An Outlook for Latin American Trade OECD Development Centre WWW.OECD.ORG/DEV

ANNEX OECD Development Centre

Following the Chinese example: can Latin America count on fiscal leverage? The Capacity to Generate Fiscal Surpluses… 11 9 1995 2000 2006 7 5 % of GDP 3 1 ‐1 ‐3 ‐5 China Colombia Ecuador Peru Argentina Brazil Chile Mexico Uruguay Venezuela Source: OECD Development Centre (2008); Based on ECLAC and Statistical Yearbook for Asia and the Pacific 2008. OECD Development Centre

Intra‐regional trade in both Asia and Latin America is low Intra regional Exports as a share of Total Exports By region 30.0% Eastern Europe East Asia and Pacific Africa Latin America 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: COMTRADE . OECD Development Centre

Methodology matters when exploring export structures 1. CS/CC do not capture importance of each product on world markets 2. Focus on exports overlooks the growing intra‐industry trade Alternative methods: 1. Relative Comparative Advantage index: • Balassa • Vollart’s 2. Herfindahl Hirschmann index OECD Development Centre

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Asian Opportunities Diversification Strategies

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