In Latin America and the Caribbean (LAC), expanded trade is essential to improving living standards by increasing exports, investment and jobs – especially if countries complement their trade agreements with a comprehensive development agenda. Progress on Trade Liberalization Latin America and the Caribbean (LAC) has liberalized its trade extensively since the early 1980s. Tariffs have been reduced by about two-thirds. Protectionist policies such as licensing requirements, prohibitions, quotas, tariff quotas and administered pricing have been scrapped. In fact, the region has led the way in a global trend to reduce protectionism, especially non-tariff barriers. As a result, the region’s share of world trade has increased and net inflows of FDI as a percent of GDP have climbed steadily. Despite regional and unilateral trade liberalization, the extent of liberalization has not been the same across countries or sectors. The LAC region still lags behind other regions in the liberalization of trade in financial and other services and agriculture. Some countries, too, have been hesitant in opening themselves to trade, and retain low trade-to-GDP ratios. Overall, LAC’s average trade is low. This is partly due to geography and high transport costs, but also antidumping laws, which have been used by some governments to restrict trade. Cross-country studies show that trade openness contributes to income growth. With the movement in LAC toward diversified exports — probably due to reduced import barriers and the anti-export bias they carried with them — the region is well-positioned to make gains from its trade openness. Barriers to Expanded Trade Despite the progress made on trade liberalization, many barriers to expanded trade persist in LAC. These include: Inequities in the international trade system. For example, subsidies and tariffs applied by industrialized nations depress farm income in Latin America by at least 12 percent, and as much as 20 percent in Argentina and 40 percent in Brazil.
Barriers to trade among middle-income countries. For instance, Latin American exporters of manufactured goods face tariffs in neighboring Latin American markets that are six times higher than in industrial countries.
Domestic policies that hinder export growth. LAC countries’ productivity levels will not converge with those in rich countries as long as their labor skills lag behind. The same applies to other factors that impair a country’s capacity to adopt new technologies and innovate, such as weaknesses in infrastructure, domestic institutions, and research and development expenditures and policies.
Regional Trade Agreements LAC countries are party to more regional trade agreements (RTAs) than any other developing region. Thirty-five of 39 LAC countries belong to at least one RTA and the average LAC country has signed nearly eight of them. These include: NAFTA (the North American Free Trade Agreement) signed in 1994 between Canada, the U.S. and Mexico, Mercosur, also signed in 1994, between Brazil, Argentina, Paraguay and Uruguay, DR-CAFTA (Dominican Republic-Central America Free Trade Agreement) signed in 2005 between Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic and the U.S.
RTAs have had some positive effects: NAFTA has led to some liberalization in services and new provisions in investment and intellectual property, as well as increased regional environmental cooperation.
Mercosur triggered progress on simplification, harmonization and integration of customs clearance, transport facilitation and agreement on common standards.
NAFTA spawned interest among LAC countries in using RTAs to secure market access. Mexico established arrangements with Costa Rica, Bolivia, Nicaragua, the EU, EFTA, and Japan. Chile established agreements with Mercosur, Canada, Peru, Mexico, Central America, the U.S., the EU, and the European Free Trade Association (EFTA). Free trade is not a panacea, however. In order to maximize the benefits of trade for increasing growth and reducing poverty, Latin American countries need to make progress in their own development agenda. They need to complement their trade agreements with investments and reforms in education, trade infrastructure -- better ports, roads and customs-- as well as governance, and to ensure that the poor have the means to take full advantage of the new opportunities arising out of greater and better trade. The outcome of the Doha Round of multilateral trade talks will also be important for LAC countries. The Bank estimates that a good, pro-poor deal could stimulate worldwide increases in income and lift an estimated 144 million people around the world out of poverty.
World Bank Support on Trade Issues The Bank is supporting trade facilitation in LAC in four ways: Research: to provide countries with all the information they need to make the policy decisions in this area that are right for them. Bank studies include:
Financing: both for trade facilitation projects and for projects that pertain to complementary reforms, such as education and infrastructure. For example, the Bank has provided $1.14 billion in loans to Central American countries to bolster investments and reforms related to DR-CAFTA’s complementary agenda. This includes financing for infrastructure development (roads, ports and electricity), improvements in the investment climate (customs modernization, reductions in costs of doing business), investments in rural development and in strengthening governance and institutions.
Advocacy work: the Bank advocates trade reform at both the global and individual country level to help developing countries take advantage of new markets, as part of its wider poverty-reduction strategy. For instance, the Bank is exerting pressure on the developed countries to reform protectionist policies which hurt poor countries.
Advisory work: the Bank advises developing countries during their trade negotiations with developed countries. For example, the Bank helped the Central American countries identify critical areas in their negotiations with the U.S..
Project Achievements Countries in Latin America and the Caribbean are achieving progress on trade facilitation with support from the World Bank. Recent examples include: El Salvador
New legislation, including on competition, investment, and free trade zones, has been passed and a National Investment Office set up. The time to register a business has been reduced from 3-6 months to 7-10 days for foreign firms. Policies to attract increased foreign investment have enabled 35,000 direct jobs and 60,000 indirect jobs to be created over a four-year period. (Competitiveness Enhancement Technical Assistance Project) Ecuador
Micro- and small- and medium-size enterprises (MSME) exports increased by 36 percent, 44 percent introduced new export products, 70 percent found new export buyers, 37 percent exported to a new country, and MSME employment increased by 22 percent. 500 firms completed learning and innovation programs, and 2,000 small firms completed grassroots growth programs. (International Trade and Integration Project) Updated: December 2005 |
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