OECD-ECLAC-PSE EU-LAC Forum

1. Latin American regional integration:
State of play and main challenges
Osvaldo Rosales
Chief, Division of International Trade and Integration
ECLAC
2nd Europe – Latin America Economic Forum
ECLAC, OCDE, Ecole d’Economie de Paris.
Paris, 20 May 2014

2. Outline
 The region’s external economic environment
 The evolving architecture and dynamics of
regional (economic) integration in LAC
 Why is regional integration important for LAC?
 Stocktaking and suggestions for the way
forward
2

3. A very favorable international cycle is
ending for LAC
• GDP growth decelerated since 2012, reaching 2.5% in
2013 ( 2.7% en 2014?)
– Compared to an average 4.8% in 2003-07 and 4.1% in 2010-13
• Exports slowed sharply in 2012 and stagnated in 2013
• Increasing external vulnerability, reflected in a
deterioration of the region’s current account position
• Lower commodity prices worsen LAC terms of trade
• Withdrawal of monetary stimulus in the US reduces
available liquidity
• In the coming years, greater emphasis will have to be
placed on the regional market as a source of growth

4. Regional exports slowed sharply
in 2012 and 2013
LATIN AMERICA: ANNUAL GROWTH OF THE VALUE OF EXPORTS, 2000-2013
(Percentages)
Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures .

5. The region’s terms of trade are declining
LATIN AMERICA: ESTIMATED RATE OF VARIATION IN THE TERMS OF TRADE, 2011-2013a
(Percentages)
Source: Economic Commission for Latin America and the Caribbean (ECLAC) on the basis of official figures
a The figures relating to 2013 are projections.

6. Very modest growth is predicted for the region
for the remainder of the decade
DEVELOPING REGIONS: PROJECTED ANNUAL GDP VARIATION, 2014-2019
(Percentages)
Source: International Monetary Fund, World Economic Outlook database, April 2014.

7. Main trends in the global context
Rapid technological
change
• Information
technology, cloud
computing, cyber-servicies,
“smart
cities”
• 3-D printing,
robotics, remote-controlled
vehicles
• Biology,
nanosciences and
information
sciences interface
• Energy, water and
natural resources
complex
Emergence of the
developing countries
• In growth,
trade, FDI, rise
of the middle
class, patents,
new
technologies
• This process is
highly
concentrated
in China/Asia
• LAC lags
behind
Value chains
• Three major
factories:
• North
America
• Europe
• East Asia
Mega-regional
trade agreements
• TPP
• TTIP
• EU-Japan
• ASEAN+6
(Regional
Comprehensive
Economic
Partnership)
Need to address climate change and ensure that growth is environmentally sustainable
Need to address the drastic increase in inequality worldwide

8. LAC’s main strengths and weaknesses in the
global economy
• Attractive and growing consumer
market; expansion of the middle
class
• Abundance of renewable and
non-renewable natural resources
Strengths
• Limited involvement in
the knowledge economy, low and
heterogeneous productivity
• Strong concentration of exports:
(i) in raw materials and assembly
manufactures; and (ii) in a small
number of large companies
Weaknesses

9. The architecture of LAC economic integration in
the early 2000s was (relatively) simple…
Dominican
Republic
9
Andean
Community
(1969)
Mexico
MERCOSUR
(1991)
Central American
Common Market
(1960)
CARICOM
Panama (1973)
Chile
NAFTA
(1994)
Cuba
ALADI
(1980)

10. …That architecture has become much more
complex in 2014
Central
American
Common
Market
Panama CARICOM
Andean
Community
Mexico MERCOSUR
Chile
NAFTA
Cuba
Dominican
Republic
ALADI
Pacific
Alliance
(2012)
ALBA (2006)
Plus:
- UNASUR (2007, All 12 SA countries)
- CELAC (2010, All 33 LAC countries)

11. The dynamics and emphasis of LAC regional
integration have greatly changed in the last decade
• Several governments have a critical view of “the primacy of
trade” in LAC regional integration during the 1990s
• Greater primacy is given now to the political and social
dimensions, along with production integration (mainly rhetorical)
• New initiatives (CELAC, UNASUR, ALBA, Pacific Alliance); crisis in
several traditional integration bodies; overlapping memberships
• These trends have been more marked in South America than in
Mexico, Central America and the Caribbean
• Traditional shortcomings (ex. low intra-regional trade and
production integration) coexist with increasing “de facto”
integration (migration, tourism, FDI, etc.)

12. The regional market plays a key development role
for LAC countries
For the large majority of Latin American and Caribbean countries,
intraregional trade is qualitatively superior to exporting
to other markets:
It is the most
conducive to
export
diversification
as it absorbs
the greatest
number of
export
products
It is the main
outlet for
manufacturing
exports
It is the main
market for
most export
companies,
especially
SMEs
The region is
the natural
platform for
the expansion
of Translatin
companies and
for the
creation of
RVCs

13. The regional market is the most conducive to
export diversification
NUMBER OF PRODUCTS EXPORTED BY LATIN AMERICAN COUNTRIES TO SELECTED MARKETS, 2012
Latin America
and the
Caribbean
United States European Union China Japan
Argentina 3 591 1 465 1 712 407 388
Brazil 3 929 2 762 2 991 1 389 1 247
Chile 3 014 1 275 1 296 362 313
Colombia 3 239 1 708 1 250 253 201
Costa Rica 2 821 1 792 1 095 260 188
El Salvador 2 522 1 004 396 45 35
Guatemala 3 274 1 321 721 142 155
Jamaica 607 888 467 73 44
Mexico 3 857 4 164 2 803 1 367 1 272
Peru 3 037 1 796 1 602 266 575
Source: ECLAC, on the basis of COMTRADE.

14. Excluding Mexico, the regional market is the main outlet
for manufactures exported from LAC
LATIN AMERICA AND THE CARIBBEAN: SHARE OF MEDIUM- AND HIGH-TECHNOLOGY MANUFACTURES
EXPORTED WITHIN THE REGION, 2012 a
(Percentages)
Source: ECLAC, on the basis of information from the United Nations Commodity Trade Database (COMTRADE).
a The figures for the Bolivarian Republic of Venezuela, Panama and Suriname are from 2011.

15. However, Latin America trades little with itself
when compared to other regions
Selected groupings: Share of intra-group exports in total merchandise exports, 2008-2012
(In percentages)
Region or grouping 2008 2009 2010 2011 2012 Average
2008-2012
Latin America 19,5 19,9 19,7 19,4 18,5 19,4
Latin America (excluding Mexico) 25,6 26,6 26,3 24,9 24,1 25,5
Intra-Andean Community 7,4 7,4 8,0 7,0 7,5 7,5
Intra-MERCOSUR 14,9 15,1 15,7 15,2 14,4 15,1
Intra-Central America 29,5 26,6 26,7 26,2 23,0 26,4
Intra EU 66,3 65,9 64,4 63,4 62,2 64,4
Intra NAFTA 49,3 47,6 48,3 48,0 48,4 48,3
Intra ASEAN+5 (*) 47,0 48,4 49,4 49,7 50,5 49,0
Fuente: CEPAL, sobre la base de COMTRADE y estadísticas oficiales de los países de América Latina.
(*) Incluye a ASEAN (10), China, Japón, la República de Corea, la Región Administrativa Especial china de Hong Kong y la Provincia china de
Taiwán.

16. Intermediate goods account for a small share of
intraregional trade in LAC, a sign of limited production
integration
SELECTED GROUPINGS: PARTS AND COMPONENTS AS A SHARE OF INTRA-GROUP EXPORTS, 2000-2012
(Percentages)
Source: ECLAC, on the basis of COMTRADE.
a North American Free Trade Agreement.
b Includes China, Japan, the Republic of Korea, the 10 member countries of the Association of Southeast Asian Nations (ASEAN),
Hong Kong Special Administrative Region of China and Taiwan Province of China.

17. LAC’s infrastructure bottlenecks constrain growth,
competitiveness and equity
LATIN AMERICA (SELECTED COUNTRIES): SECTORAL INVESTMENT IN INFRASTRUCTURE
(Percentages of GDP)
Source: ECLAC and Perrotti, Daniel, and Ricardo J. Sánchez (2011), “La brecha de infraestructura en América Latina y el
Caribe”, Series Recursos Naturales e Infraestructura No. 153.
The region would need to spend 7.9% of annual GDP on infrastructure to close by 2020
the infrastructure gap measured in the region in 2005 compared with a group of growing
economies in East Asia (Republic of Korea, Malaysia, Singapore and Hong Kong SAR).

18. Regional economic integration: Taking stock
Strengths
• Substantial progress in
reducing tariff barriers to
intraregional trade
• Some regional cooperation in
infrastructure (roads, energy,
internet access, etc.)
• Some progress on easing
people mobility
• Some financial cooperation
(Latin American Reserve
Fund, integration of stock
exchanges of Chile, Colombia
and Peru)
Shortcomings/challenges
• Insufficient regulatory
harmonization: investment,
services, technical standards,
public procurement, trade
facilitation, IPRs
• Weak dispute settlement
mechanisms
• Missing trade links, notably a
Mexico-Mercosur FTA
• Complex integration
architecture, membership
overlaps

19. LAC trade integration: Taking stock (2)
• Geography and factor endowment also limit intra-regional trade:
– Mexico, Central America & Caribbean gravitate towards the US market
– Resource-rich South America increasingly gravitates towards Asia
• Lags in infrastructure, red tape are a tax on intraregional trade
• Policies aimed at export diversification, SME internationalization
have proved insufficient
– A few large firms, mostly in energy & mining, account for the bulk of LAC
exports
– Those firms export mostly outside the region
• The region remains mostly out of value chain trade
– Exceptions: Mexico, Central America with US; Argentina-Brazil auto trade
• Mega regional trade agreements may reinforce this situation
– South America in particular may become further entrenched in commodity
exports

20. Which way forward?
 LAC needs to maximize the benefits of intraregional trade, as it is:
 The most conducive to the creation of high-quality employment
 The most SME-friendly
 And thus the most conducive to structural change, socially cohesive growth
 Start by not doing harm: respect the agreed rules
 Be pragmatic: small, incremental steps in areas of common interest
often deliver more than grand projects with no follow-up
 Further trade liberalization remains controversial within the region,
but there is much that can be done in other areas:
 Regional cooperation in infrastructure, energy, trade facilitation, joint export
promotion
 Promoting production integration through cumulation of origin,
harmonization or mutual recognition of technical & SPS standards
 Ensuring adequate financing for intraregional trade, especially for SMEs

21. The centrality of industrial policy
• LAC needs a modern industrial policy that fosters:
– Participation in regional and global value chains
– Moving up the VC hierarchy, transitioning to more sophisticated activities
in goods and services
• The promotion of regional value chains opens up scope for
industrial policy with plurinational components, for example:
– Programs that help SMEs to meet the requirements of their potential
buyers (quality, safety, sustainability, etc.)
– Joint programs for the development of specialized human resources
– Joint research, development of technology hubs in areas of shared
interest (renewable energy, biotechnology applied to agriculture and
mining, etc.)
• None of this means “leaving natural resources behind”
– On the contrary, it means adding knowledge and value to them, and
strengthening their linkages with the rest of the economy

22. Due to their economic size, the Pacific Alliance and
MERCOSUR are the two key players for the future
convergence of LAC integration efforts
Pacific Alliance, MERCOSUR and LAC: Selected indicators (2012)
Grouping GDP
(US$ trillion)
Population
(Millions)
Exports
(US$ billion)
FDI inflows
(US$ billion)
Pacific Alliance (PA) 2,0 209 554 71
MERCOSUR 3,3 278 436 84
PA + MERCOSUR 5,3 487 990 155
Latin America and
Caribbean
5,8 596 1.092 173
Share of PA+MERCOSUR 91% 82% 91% 90%
Source: ECLAC (exports and FDI), IMF, World Economic Outlook Database (GDP and population).
Therefore, they need to reach out to each other and begin exploring areas for cooperation
and possible convergence

23. Thank you – Gracias - Merci