Asian Opportunities and Diversification Strategies for Latin American Trade

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

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

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

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

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

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) 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.

Myth II: China has a negative impact on FDI flows to other emerging markets Source: J. Santiso (ed.). The Visible Hand of China in Latin America. OECD Development Centre Studies, 2008. Based on UNCTAD data.

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

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

Increased Asian exports have been met with apprehension in Latin America Source: TRAINS Database (World Integrated Trade Solution), Nomenclature STIC Revision 3, 2008. Note: Does not include NTB data. Source: Latinobarómetro survey. Santiago de Chile, 2007.

Export competition with China is relatively low, although Mexico is on the spot Export Competition with China for selected countries (2000-06) 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.

Regarding competition with India, Latin America has little to fear Export Competition with India for selected countries (2000-06) 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.

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. Trade complementarities with China remain unexplored today… Trade Opportunities with China for selected countries (2000-06)

Major economies in the region have a lot to win from increasing trade with Indian partners 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. Trade Opportunities with India for selected countries (2000-06)

In which sector is Latin America specialised? Let’s not forget intra-industry trade Source: OECD Development Centre, based on WITS Database, SITC Revision 3 (three-digit classification) 2008. n.e.s. = not elsewhere specified. Note: Positive values of the index reveals a comparative advantage, whereas a negative indicates a comparative disadvantage. 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

China and India’s increasing demand can have adverse effects Source: OECD Development Centre, based on WITS Database, 2008.

The rise of China and India is also a challenge against product specialisation Note : Herfindahl-Hirschmann index calculated as , where represents 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. Based on data from Comtrade, World Integrated Trade Database, 2008.

A commodity boom without diversification is a two-edged sword: the African case Source: African Economic Outlook 2008, OECD Development Centre. Based on data from Comtrade, PC-TAS and World Integrated Trade Database, 2008.

Latin America’s performance on trade infrastructure is poor Source: Doing Business Report. World Bank, 2007.

… 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.

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

Mexico: competition in third markets is more fierce Source: CEPAL (2006) and World Integraded Trade Solution.
Three key issues:
Infrastructure investment
Private participation
Regulation and transparency
Share of US imports by region

Opportunities have emerged as a result of Increased trade with China 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. High value-added niche to achieve global scale Products with high volatility and customization needs

Latin American companies have started to adapt to new value chains 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. Upstream value chain integration

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?

Thank you!
www.oecd.org

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

The Capacity to Generate Fiscal Surpluses… Following the Chinese example: can Latin America count on fiscal leverage? Source: OECD Development Centre (2008); Based on ECLAC and Statistical Yearbook for Asia and the Pacific 2008.

Intra-regional trade in both Asia and Latin America is low Source: COMTRADE .

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

Asian Opportunities and Diversification Strategies for Latin American Trade

by OECD Development Centre, Paris on Dec 23, 2008

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Asian Opportunities and Diversification Strategies for Latin American Trade — Presentation Transcript