Latin America and the Caribbean needs to move aggressively towards a more integrated regional trade area to boost exports, protect from increasingly difficult global trading environment, and spur firms to become more productive and join global supply chains, a report by the Inter-American Development Bank (IDB) says.
The second part of the report Routes to Growth in a New Trade World was released at the beginning of April during the IDB’s Annual Meeting of its 48-member countries. The first part on macroeconomic challenges was released March 31.
The report argues that a Latin America and Caribbean Free Trade Area (LACFTA) is attainable if it avoids complex architectures or the inclusions of non-trade issues that have hamstrung similar efforts in the past.
“Efforts to achieve a common market in the past were laudable but in the end too ambitious,” said IDB Vice President for Sectors and Knowledge, Santiago Levy. “We are proposing a simpler, more flexible integration route, one that focuses on trade gains first and builds on a vast network of preferential trade agreements already in place. This is actually easier to do than many policymakers might envision.”
Trade integration with a light institutional touch is the preferred approach undertaken by the Pacific Alliance trade pact involving Chile, Peru, Colombia and Mexico, and could be a model for a regionwide deal, the study says. LACFTA would create a $5 trillion single market amounting to 7% of the world’s GDP.
A LACFTA that harmonizes a baffling array of 33 preferential free trade areas and 47 sets of product-specific rules of origin regulations would bring immediate gains. Exports of intermediate goods between member countries would rise by 9%, according to IDB calculations.
For some regions, bigger gains are likely. A typical exporter from the Southern Cone region would see its shipments of intermediate goods jump 12%, and a Central American and Mexican exporter to the Southern Cone would see a 15% jump.
These gains would be achieved by extending and filling the gaps in the rules-of-origin regulations contained in bilateral and multilateral preferential free trade agreements. Additional actions such as streamlining customs procedures and harmonizing regulatory frameworks would further scale up production to help firms become more competitive and join international supply chains.
The report recommends avoiding the creation of supranational institutions of a customs union. LACFTA should tackle trade of goods and services first. Chapters on intellectual property, labor and the environment may be considered later.
In addition, almost 80% of goods and services are already subject to zero tariffs under current agreements, so much of the painful adjustment process has already taken place, the report argues, but this patchwork is both complicated and vulnerable.
“The fact is, a more challenging global trade environment lies ahead,” said Antoni Estevadeordal, the manager of the IDB’s Integration and Trade Department. “This reality promises to be merciless to small agreements. Either they acquire critical economic mass or they risk becoming irrelevant.”
The report calculates that a scenario of acute international trade frictions – the equivalent of a 20-percentage point increase in global bilateral tariffs – would cut the region’s exports by 13%. With LACFTA in place, the reduction would be 8%.
The report urges the region’s leaders to launch the negotiating process at a high-level presidential summit, specifying goals and timetables. Report authors propose a three-step process leading up to LACFTA. First, the network of current preferential trade agreements would be broadened to integrate all LACFTA aspiring members. Brazil and Mexico, the study says, have the “gravitational pull” to kick-start this by bringing closer together Mercosur and the Pacific Alliance respectively.
A second step involves setting up a minimalist institutional infrastructure to manage negotiations, with a governance council headed by trade or trade-related ministers. A third phase would address market access issues, covering tariff phase-out, rules of origin and non-tariff barriers, with a goal of reaching zero tariffs for all products and relationships “in a time frame short enough to make a difference in the current challenging environment – and avoid going through different political cycles – but not too short to risk avoidable adjustment costs.”
Latin America and the Caribbean faces a new world with likely growing trade protectionism, higher interest rates and commodity prices below those of the previous decade. At projected growth rates living standards may not grow as citizens would wish, the study notes. Countries need to find ways to boost growth but also face fiscal constraints. Deeper integration within the region is a low hanging fruit and provides a low-cost mechanism to enhance economic prospects.