Trade integration in Latin America and the Caribbean

TRADE INTEGRATION IN LATIN AMERICA AND THE CARIBBEAN

Trade has grown slowly, and openness remains low

Over the past two decades, growth in exports, imports, and GDP per capita in Latin American and Caribbean countries was generally lower than in comparator countries, though experiences varied.3 One possible explanation for the sluggish growth could be the region’s relatively low integration into international trade and GVCs (World Bank 2019) because trade growth is positively linked to increases in GDP per capita globally and in the selected sample of countries (Dollar and Kraay 2004; Harrison and Rodríguez-Clare 2009), as shown in figure 1.1.

Exports and imports enhance productivity and growth through several channels. In neoclassical trade theory, exports allow for specialization in a country’s comparative advantage and thus boost growth. An export orientation also includes dynamic efficiency gains engineered by greater competition, increased economies of scale, better capacity utilization, faster dissemination of knowledge and technological progress, and improved allocation of scarce resources throughout the economy (Grossman and Helpman 1991; Helpman and Krugman 1985).

Similarly, in endogenous growth theory, imported inputs are crucial for growth because they are a channel for the diffusion of global technology (Aghion and Howitt 1998; Romer 1987, 1990). Gains in productivity also arise from the increased input variety ensuing from the use of imported intermediate inputs in the presence of imperfect substitution in production by domestic or imported intermediate inputs (Ethier 1982). Importing inputs and capital goods is also necessary for firms and countries to integrate and upgrade in value chains. Higher backward GVC participation— the use of imported inputs in production for export—helps firms and countries absorb valuable foreign technology and know-how. It also offers opportunities for countries to promote structural transformation (Taglioni and Winkler 2016).

Both exports and imports have a positive relationship with income growth, reflecting that gross exports in a GVC world embody many imported inputs used for export production. Export growth for the average Latin American and Caribbean country was 4.0 percent over 2000–18, but it reached 7.6 percent for East Asia and the Pacific and 7.0 percent for Europe and Central Asia. Among the Latin American and Caribbean countries, trade and income growth have been highest in the Dominican Republic, Panama, and Peru and lowest in Argentina, Brazil, and Mexico (probably because of a 2014 domestic economic recession in Brazil and a scale effect for Argentina and Mexico).

The Latin America and Caribbean region is much less open to trade than its comparator regions. Average exports of goods and services across these countries made up only 28 percent of the region’s GDP in 2018, well below the more than 50 percent in East Asia and the Pacific and in Europe and Central Asia (figure 1.2, panel a).4