Welcome to: Business in Latin America

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Topics in International Trade
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Opening of LA

• Trade liberalization strategy is
• intellectually moribund (Taylor 1991).
• Debt crisis (1982) ? Protectionism
• Higher tariffs
• Many products with quotas or prohibition
• In the late 1980s the process of trade
  liberalization quickened its pace.

3
Why protectionism is bad?

• Anti-export bias
• Increased the cost of imported intermediate
  materials and capital goods.
• Overvaluation of the real exchange rate resulted
  in lack of competitiveness in international
  markets
• Inefficient manufacturing sector
• Unemployment

4
Successful trade liberalization policies

• Exports expand at a pace that exceeds the
  historical rate.
• Productivity growth increases at a fast pace.
• The trade balance does not exhibit unreasonable
  deficits.
• The overall level of unemployment stays at a
  relatively low level.
• Real wage increase.

5
Trade liberalization reforms

• LA and Caribbean trade reforms characteristics
• Reduction of the coverage of nontariff barriers
• Reduction of the average level of import tariffs
• Reduction of the degree of dispersion of the
  tariff structure
• Reduction or elimination of export taxes.

6
Change of maximum import tariffs (1980s-1990)
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Effects of trade liberalization

• Reduce the anti-export bias and encourage
  exports.
• Help increase the growth of total factor
  productivity through greater competition and
  efficiency.
• Increase consumer welfare by reducing the real
  prices of imported goods.

8
Exchange rate, capital inflows and trade reforms

• Real appreciations of LA currencies
• Use of exchange rate as an anti-inflationary tool
• Capital inflows
• Portfolio investments ? Demand for LA
• Nontradables ? Domestic inflation
• Solutions
• Colombia Bonds
• Mexico Widening band exchange rate system
• Chile A combination of techniques

9
Trade Agreements
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Trading blocs

• All over the world there is a strong trend toward
  trading blocs EEC, ASEAN, NAFTA, Mercosur.
• Also there is an increase of bilateral
  integration agreements
• Chile-Mexico 7.5 maximum tariff
• Intermediary step before bloc integration

11
Some LA trading blocs
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MERCOSUR (1991- )

• Groups the two largest South American countries
  (Brazil and Argentina) with two small countries
  (Paraguay and Uruguay)
• Chile and Bolivia have joined the agreement as
  associate members.
• Goal is to eliminate all tariffs for
  intraregional trade and a common external tariff
  system.

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MERCOSUR (cont)

• However, there are different interests and
  macroeconomic problems (i.e. exchange rate)
  between countries
• Accusations of extra-bloc distortion
• Main advantages Agrbusiness, mining, energy
• Created an opportunity for manufacturing plants
  (Dell).
• Efficiency driven production Portfolio of
  advantages

14
MERCOSUR (cont)

• The European Union is Mercosur's largest trading
  partner and largest source of foreign investment.
  
• EU countries are protecting their agricultural
  sector.

15
Andean Pact (1969 - )

• Objectives
• Regional free trade zone
• Agreement on the level and structure of the
  external tariffs system
• Liberalization of maritime and air transportation
• Facilitation of foreign investment and capital
  mobility

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Andean Pact (cont)

• Major problems
• Great heterogeneity among the countries in the
  pact
• Regulations
• Bad land transportation systems
• Free trade zone Bolivia, Colombia and Venezuela
• Perus problems

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Central American Common Market (1960 - )

• The renewed pacts three important features
• External tariffs ranged between 5 and 20
• New countries Panama and Honduras
• Export-promotion plans

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CARICOM (1991 - )

• Agreement signed by Caribbean countries
• Objectives
• Harmonization of monetary and fiscal policies
• Planning agencies for agricultural and industrial
  development.
• Common external tariff band (0-45)

19
NAFTA (1990- )

• Main objective is the creation of a free-trade
  area between Canada, US and Mexico
• Major negotiation hurdles between MX-US
• Rules of origin
• Rules for agricultural trade
• Automobiles
• Workers protection in Mexico
• Environmental rules

20
NAFTA (cont)

• Results
• No giant sucking sound
• Environmental issues were not a large problem
• Transportation issues not resolved
• Less bureaucratic hurdles

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GATT (1993 - )

• LAs opening was an unilateral act.
• LA exports to developed countries suffer high
  tariffs and non-tariffs obstacles
• Creation of the World Trade Organization
• Fosters interbloc cooperation
• Main agreement
• Industrial countries will reduce tariffs on
  exports from developing countries
• Developing countries will remove export subsidies

22
FTAA (? - )

• The Free Trade Area of the Americas is an US lead
  agreement that comprises 34 countries of America.
• The FTAA will be created by 2005
• Transition times will be different for each
  country.
• Main objective low tariffs (10?) and
  standardized custom procedures.
• Clinton failed to put in fast track the agreement.

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FTAA

• Nine chapters of a final FTAA market access pact
• Competition policy
• Reducing subsidies
• Dropping anti-dumping duties
• Protecting intellectual property
• Aiding government procurement
• Adding investment
• Agriculture
• Services
• Helping dispute settlements.