importing region, 2015

Figure 5.10 Simple average AVE trade costs in Latin America and the Caribbean, by sector and importing region, 2015

Average AVE trade cost (%) 2,500

2,000

1,500

1,000

500

0 East Asia and PacificEurope andCentral AsiaLatin America andthe CaribbeanMiddle East andNorth AfricaNorth America South AsiaSub-SaharanAfrica

Goods Services Source: Eora global supply chain database (https://worldmrio.com/), using methodology of Novy 2013. Note: AVE = ad valorem equivalent.

What would GVC integration in the region look like if all Latin American and Caribbean countries reduced trade costs in services sectors by a proportion equal to the average observed effect of a services PTA (scenario 1)? Using a standard gravity model, Borchert and Di Ubaldo (2021) found that a two-year lagged impact of a services PTA was equal to a trade increase of 19.7 percent, on average. Both their model and the one used here have the same structural relationship between trade costs and trade flows, so mapping trade-flow impacts to trade-cost impacts is straightforward. Concretely, a 19.7 percent increase in the value of trade implies a decrease in trade costs of around 5 percent.3

Considering this change in a policy context shows the role of sectoral characteristics in determining the degree of liberalization. In maritime transportation, a 5 percent reduction in trade costs implies a reduction in a country’s Organisation for Economic Co-operation and Development (OECD) Services Trade Restrictiveness Index (STRI) score of 0.04 points, relative to a sectoral baseline of 0.33 for Brazil, 0.20 for Chile, 0.27 for Costa Rica, and 0.27 for Mexico, based on estimates by Shepherd (2020). In telecommunications, by contrast, the same change would bring a much larger STRI reduction in relative terms—a reduction of 0.16 points, starting from a sectoral baseline of 0.28 in Brazil, 0.23 in Chile, 0.22 in Costa Rica, and 0.20 in Mexico. And in financial services, the needed reduction would be 0.04 points, starting from a sectoral baseline of 0.47 in Brazil, 0.21 in Chile, 0.21 in Costa Rica, and 0.37 in Mexico.