LAC’s Trade: Crisis and Prospects

Mauricio Mesquita Moreira.Economista PrincipalVPS/INT

XXX Meeting of the Latin American Network of Central Banks and Finance Ministries

October 21-23, 2009Room CR2 Enrique V. Iglesias Conference Center1330 New York Avenue, N.W., Washington, DC

Advanced economies’ falling demand and the sudden stop in trade finance have hit global trade hard, including LAC’s exports…

Source: Integration and Trade Sector, IDB based on US Census Bureau

U.S. Imports, Change in Total Imports Over Corresponding Month from the Previous Year (%)

-60%

-40%

-20%

0%

20%

40%

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-08

Ju

n-0

8

Ju

l-0

8

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8

Dec

-08

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-09

Ju

n-0

9

Ju

l-0

9

Au

g-0

9

EU-15 China World LAC

All subregions suffered, but some more than others

Source: Integration and Trade Sector, IDB based on US Census Bureau

U.S. Imports, Change in Total Imports Over Corresponding Month from the Previous Year (%)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Jan

-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-09

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Central America CARICOM MERCOSUR ANDEAN Mexico

Global and LAC trade slowed sharply as of 4Q ’08. Trade plunged even further in the 1Q ’09. The figures for the 2Q suggest that the trade collapse has stopped worsening

Change in Total Exports Over Corresponding Month from the Previous Year (%)

Sources: Integration and Trade Sector, IDB based on country’s statistical offices and IMF

-60%

-40%

-20%

0%

20%

40%

60%

80%

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Cha

nge

in T

otal

Exp

orts

from

Sam

e M

onth

in P

revi

ous

Yea

r (%

)

Argentina Brazil Chile Colombia Peru Mexico Costa Rica

Both volumes and prices contribute to the world’s trade collapse with volumes contributing slightly more in the advanced economies while prices relatively more in the emerging economies

Change in Total Exports, 2Q ’09 Over Corresponding Quarter from the Previous Year (%)

Sources: Integration and Trade Sector, IDB based on CBP Netherlands Bureau of Economic Analysis, “World Trade Monitor”

• For the overall region’s exports to the U.S. both prices and volume have been falling for manufacturing goods, whereas for non-manufacturing goods, prices have been the driving the fall.

-40

-20

020

40

manufacturing non-manufacturing

10/08 11/08 12/08 01/09 10/08 11/08 12/08 01/09

Source:IDB Integration and Trade Sector based on Bureau of Labor Statistics

Price, volume and value. 12 month percentage changeChange in Latin American Exports to the U.S.

price volume

value (US$)

Commodity Prices in the Medium Run(indexes, 2005=100)

0

50

100

150

200

250

30020

00M

1

2000

M3

2000

M5

2000

M7

2000

M9

2000

M11

2001

M1

2001

M3

2001

M5

2001

M7

2001

M9

2001

M11

2002

M1

2002

M3

2002

M5

2002

M7

2002

M9

2002

M11

2003

M1

2003

M3

2003

M5

2003

M7

2003

M9

2003

M11

2004

M1

2004

M3

2004

M5

2004

M7

2004

M9

2004

M11

2005

M1

2005

M3

2005

M5

2005

M7

2005

M9

2005

M11

2006

M1

2006

M3

2006

M5

2006

M7

2006

M9

2006

M11

2007

M1

2007

M3

2007

M5

2007

M7

2007

M9

2007

M11

2008

M1

2008

M3

2008

M5

2008

M7

2008

M9

2008

M11

2009

M1

2009

M3

2009

M5

2009

M7

2009

M9

Source: IMF

Metal

Oil

Food

China’s “decoupling” is engineering a big shift in the region’s direction of trade, notably in the Southern cone

Change in LAC’s Exports, 1st Semester ’09 over Corresponding Semester from the Previous Year (%)

Sources: Integration and Trade Sector, IDB based on US Census Bureau, Eurostat and ECLAC

Looking ahead: Will trade rebound? When and How?

• As in previous crisis, trade is likely to rebound quickly (income elasticity >3, Freund 2009) as soon as the world economy resumes growth. Yet, a slow recovery is expected for 2010 (slow or no growth in the US and the Euro Area). Demand from Asia, and particularly China, will continue to be much stronger

Source: Integration and Trade Sector, IDB, based on IMF (WEO)

Business as Usual for LAC?

Challenges ahead

the protectionist and activist threat

a shift to Asia

finding comparatives advantages in a congested manufacturing market

The Protectionist and Activist Threat

Source: Simon Evenett. “What can be learned from crisis-era protectionism: an initial assessment.” CEPR Discussion Paper 7494. October 2009.

A Shift to Asia

For South America the challenge is to diversify beyond basic commodities.

For Mexico, the Caribbean and Central America, the challenge is to find opportunities to export, where complementarity is not obvious. Promoting inflows of Asian FDI might be a strategy to benefit.

ARG

BOL

BRA

BRB

CHL

COL

CRI

ECU

GTM

GUY

HND

JAM

LAC

MEXNIC

PER

PRY

SLV

URY

VEN

Diagonal

02

46

81

01

21

42

008

0 2 4 62000

Source: COMTRADE

Note: For Chile, Honduras and Nicaragua the latest data is for 2007.

China's Share of LAC's Exports: 2000 and 2008 (%)

Facing ever tough competition in manufacturing Crisis likely to

intensify the competitive pressure from Asia (China & India), with comparative advantages being boosted by activist measures (subsidies, exch. rates, SEZs, etc..)

Safe heavens? Resource-intensive and “transport-intensive” goods are the best bets (endowments + proximity to the regional and U.S. markets)

CHN

IND

BRA

MEX

C. America

*

510

1520

25

CH

N a

nd M

EX

Sha

res

(%)

.81

1.2

1.4

1.6

1.8

BR

A,

IND

and

C.

Am

eric

a S

har

es (

%)

1996 1998 2000 2002 2004 2006 2008

* Jan-Nov.

Source: USITC

U.S. Market.1996-2008*

China, Mexico

IND

CHN

BRA

MEX

C. America

05

1015

CH

N a

nd M

EX

sh

ares

(%

)

.2.4

.6.8

1

BR

A,

IND

and

C.

Am

eric

a S

har

e (%

)

1996 1998 2000 2002 2004 2006

Manufacturing is SITC 5 to 8 minus 68 Source: COMTRADE

World Market. 1996-2007

India, China and Selected LAC Exporters, 1996-2008.

Figure 34. Share of the U.S. and World Manufacturing Exports

Police agenda range from addressing non-traditional trade costs to more activist supply-side policies