How trade‬ can boost growth in Latin America

If Latin America is to rely on trade to enhance economic growth, it must find the correct approach
Employee working on mobile phone assembly line in Manaus free-trade zone, Amazonas, Brazil.
As the recent period of relatively high growth fades into memory, Latin America and the Caribbean is haunted again by the region’s long history of failure to approach the living standards of high-income countries.
Indeed, income per capita in the region (hereafter called Latin America for sake of simplicity) has hovered at about 30 percent of that of the United States for more than a century. It is not surprising, therefore, that the challenge of boosting growth-with social equity-has moved to center stage in the region’s policy discussions. It has led policymakers to pay increasing attention to international trade as a potentially powerful source of growth and, in particular, to the role that regional trade integration can play. For example, an objective of the Pacific Alliance-the 2012 integration agreement between Chile, Colombia, Mexico, and Peru-was “driving further growth, development and competitiveness of the economies of its members.”

In many ways, that push toward regional integration has been influenced by the success story of the east Asia and Pacific region (hereafter east Asia), where there is a close and positive association between rising intraregional trade, growing exports to the rest of the world, and convergence toward the living standards of high-income countries.
But we have found that regional integration by itself is not the crucial ingredient in the east Asian growth potion. Instead it is the way these countries go about it. The link between intraregional trade and growth observed in east Asia reflects two important trade patterns: a high incidence of intra-industry trade, that is, trade flows within narrowly defined sectors or industries, such as electronics and heavy machinery; and a high participation in global value chains, in which trade is associated with multicountry production operations. For example, an auto company may manufacture transmissions in one country, chassis in another, and export these to another country where they are assembled into a vehicle.
We found that once endemic structural factors-such as geography, economic size, and natural resource abundance-are taken into account, Latin America fares relatively well compared with east Asia merely in terms of intraregional trade volume and connectivity among regional trade partners. Where Latin America differs markedly from east Asia is in those key features of trade-intra-industry trade and participation in global value chains. This suggests that policies aimed at simply boosting intraregional trade connections and volumes in Latin America are unlikely to do much to boost growth. Latin American authorities should design policies that favor a more vigorous participation in intra-industry trade and in global value chains.
East Asia’s integration
Latin America’s attention to the regional integration experience of east Asia is not surprising. Since the 1970s, the share of intraregional exports within the latter region has increased from about 35 to 55 percent, and total exports have skyrocketed. Alongside these achievements, east Asian living standards moved closer to those in the United States, suggesting that intraregional trade among Asian countries played an important role in their convergence (see Chart 1).