asian opportunities and diversification strategies for latin american trade

Conference on China and Latin America: Growing Economic Relations and

Commonalities in Policy Issues

1st December 2008 – Hong Kong, China

Asian Opportunities and Diversification

Strategies: An Outlook for Latin American Trade

Javier SantisoRolando Avendano

OECD Development Centre


I Introduction: Recent trends and myths on China-Latin America

II Trade competition: Evidence of a potential draw

III Export Diversification and Infrastructure

IV Adaptation strategies towards Chinese competition


Integration of the Asian Drivers into the world economy has shaped primary commodity markets

1. Global output growth Commodity prices procyclical with growth (≈1.5% for each point of growth)

2. Barter terms of trade Rise if industrial world growth > 4%

3. Lower US interest rates Higher output prospects / low storage costs

4. Weakening of US dollar Denomination of raw material prices


The combined contribution of China and India to global growth is substantial

Source: Own calculation based on the IMF World Economic Outlook Database, 2008.


Source: OECD Development Centre 2008, based on Thomson Datastream (Economist Intelligence Unit).

Note: Emerging countries refer to Latin American and Asian only.

Emerging economies have become major actors in mobilising capital


Myth I: The main source of China’s competitive advantage is cheap labour

Fixed Capital Investments in China as % of GDP and Return to Capital (1980-2006)

Source: Bai, Chong-En. C. Hsieh and Y. Qian. “The Return to Capital in China”. NBER Working Paper 12775. National Bureau of Economic Research. December 2006. Based on China Statistical Yearbook.


Myth II: China has a negative impact on FDI flowsto other emerging markets

Source: J. Santiso (ed.). The Visible Hand of China in Latin America. OECD Development Centre Studies, 2008. Based on UNCTAD data.


Myth III: China’s rise benefits commodity exporters and adversely affects light manufacturing ones

Natural Resources as a percentage of Latin American Exports

0102030405060708090

100

Venezuela Chile Peru Argentina Colombia Brazil LatinAmerica

Mexico

% o

f cou

ntry

's ex

ports

Commodities

Oil

Agriculture & other

Source: OECD Development Centre, 2008. Based on: National Balance of Payments, 2006.


The rise of China concerns all the region

Source: Economist Intelligence Unit.

Descriptive Statistics on Trade for Selected Countries

Country

Share in Latin

America GDP (%) 2006 in

PPP

Exports Goods-

Servicesas % of

GDP

Share of Exports to

Asian Drivers (Avg. 2000-2006)

Trade Restrictivenes

s Index(WB-OTRI

2005)

Main Exports

Argentina 12.8 23.6 9.7 22.8Animal feed, fixed veg. oils/fats, soft, heavy petrol, oil crude, oil seeds

Brazil 34.1 14.5 6.8 30.1Iron ore, oil seeds, meat, passenger cars, petrol/bitum., sugar

Chile 4.0 39.6 11.5 14.2 Copper, metal ore, fish, fruit/nuts, pulp, wood

Colombia 7.7 21.1 0.9 25.3Petrol, coal, coffee, heavy petrol, crude materials, iron

Mexico 23.2 29.7 0.7 32.0Petrol, passenger cars, telecomms. equipment, computer equipment

Peru 3.7 21.4 9.9 21.0Metal ore, copper, heavy petrol, animal feed, silver

Venezuela 4.0 32.9 0.2 21.8 Petrol, iron, aluminium


Increased Asian exports have been met with apprehension in Latin America

Source: TRAINS Database (World Integrated Trade Solution), Nomenclature STIC Revision 3, 2008.

Note: Does not include NTB data.

Source: Latinobarómetro survey. Santiago de Chile, 2007.


Export competition with China is relatively low, although Mexico is on the spot

Export Competition with China for selected countries (2000-06)

Note: CS and CC coefficients calculated with exports of country i and exports of country j (China, India).

Source: OECD Development Centre, based on WITS Database, 2008.


Regarding competition with India, Latin America has little to fear

Export Competition with India for selected countries (2000-06)

Note: CS and CC coefficients calculated with exports of country i and exports of country j (China, India).



Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).


Trade complementarities with China remain unexplored today…

Trade Opportunities with China for selected countries (2000-06)


Major economies in the region have a lot to win from increasing trade with Indian partners

Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).


Trade Opportunities with India for selected countries (2000-06)


In which sector is Latin America specialised? Let’s not forget intra-industry trade

Source: OECD Development Centre, based on WITS Database, SITC Revision 3 (three-digit classification) 2008.

n.e.s. = not elsewhere specified.

Good Product Name Argentina Brazil Chile Colombia Mexico Peru Venezuela Average LAC

0 Food & live animals 3.12 1.80 1.24 0.92 -0.16 0.61 -3.32 0.98

1 Beverages and tobacco 1.93 1.73 2.40 0.03 1.69 -1.48 -2.03 1.16

2 Crude mater.ex food/fuel 0.96 1.92 2.53 0.85 -0.63 2.65 -1.01 1.40

3 Mineral fuel/lubricants 1.57 -1.02 -2.30 3.43 1.36 -0.63 7.15 1.21

4 Animal/veg oil/fat/wax 4.28 1.40 -1.08 -0.34 -2.32 -0.51 -5.40 0.90

5 Chemicals/products n.e.s -0.98 -1.33 -0.81 -1.04 -1.19 -2.04 -2.14 -1.17

6 Manufactured goods -0.41 0.61 1.38 -0.40 -0.81 0.27 -0.90 -0.22

7Machinery/transp equipmt -2.06 -0.64 -3.57 -2.44 0.13 -3.93 -4.34 -0.71

8Miscellaneous manuf arts -1.27 -0.40 -2.52 0.07 0.27 0.21 -4.00 -0.21

9 Commodities nes 0.63 8.91 1.74 1.26 -1.21 9.78 2.04 0.81

Note: Positive values of the index reveals a comparative advantage, whereas a negative indicates a comparative disadvantage.

Vollrath's Relative Comparative Advantage Index Latin America (2005-2006)


China and India’s increasing demand can have adverse effects



The rise of China and India is also a challenge against product specialisation

n

np

HH

n

jj

11

11

2

Note: Herfindahl-Hirschmann index calculated as , where represents the market share of country j on the

exports of country i in its total exports .

iijj Xxp /

Export Concentration in Products for Latin AmericaHerfindahl Hirschman Index

0.00.10.20.30.4

0.50.60.70.80.9

Vene

zuela

Ecua

dor

Chile

Pana

ma

Boliv

ia

Peru

Para

guay

Hond

uras

Guya

na

Urug

uay

Colo

mbi

a

Costa

Rica

Mex

ico

Guat

emala

Braz

il

2001 2006

Source: Latin American Economic Outlook 2008, OECD Development Centre. Based on data from Comtrade, World Integrated Trade Database, 2008.


A commodity boom without diversification is a two-edged sword: the African case

Export Concentration in Products for AfricaHerfindahl Hirschman Index

0.00.10.20.30.40.50.60.70.80.91.0

Ango

la

Chad

Nige

ria

Cong

o

Mali

Nige

r

Moz

ambi

que

Alge

ria

Zam

bia

Cam

eroo

n

Ghan

a

Gam

bia

Nam

ibia

Côte

d'Iv

oire

Sene

gal

Zimba

bwe

Keny

a

Sout

h Af

rica

Tuni

sia

Mor

occo

2000 2005

Source: African Economic Outlook 2008, OECD Development Centre. Based on data from Comtrade, PC-TAS and World Integrated Trade Database, 2008.


Latin America’s performance on trade infrastructure is poor

Source: Doing Business Report. World Bank, 2007.


…and most of its competitors score better on infrastructure

Source: Avendano, R. Santiso, J. “The Impact of China and India on Latin America”. Global Insights: The Emerging States. Centre d’ études et de recherches Internationales (CERI). 2008.


11,700 Km

Shipping time

24 Days160 Km

4 Days

A wake up for reforms: The proximity to export markets

• Lower transport and communication costs • Access to FTA

• Just-in-time delivery

Mexico benefits from its geographic proximity to its major export markets:


Mexico: competition in third markets is more fierce

Source: CEPAL (2006) and World Integraded Trade Solution.

Three key issues:

• Infrastructure investment

• Private participation

• Regulation and transparency

Share of US imports by region


Opportunities have emerged as a result of Increased trade with China

Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. April 2008.

High value-added niche to achieve global scale Products with high volatility and customization needs


Latin American companies have started to adapt to new value chains

Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. April 2008.

Upstream value chain integration


Final Remarks

• Excessive complementarity between Chinese and Latin American goods is a risk, but there is room for trade opportunities.

• Prospective demand of Asian Drivers From mineral to agricultural A positive potential effect

• Tumbling raw material prices today may reignite old concerns about resource curse, but countries have shown higher fiscal responsibility during booms.

• The imperative of product diversification

• Beyond diversification: Adaptation to the Chinese model?


Thank you!www.oecd.org

Conference on China and Latin America: Growing Economic Relations and

Commonalities in Policy Issues

1st December 2008 – Hong Kong, China

Asian Opportunities and Diversification

Strategies: An Outlook for Latin American Trade

Javier SantisoRolando Avendano



ANNEX


The Capacity to Generate Fiscal Surpluses…

Following the Chinese example: can Latin America count on fiscal leverage?

Source: OECD Development Centre (2008); Based on ECLAC and Statistical Yearbook for Asia and the Pacific 2008.


Intra-regional trade in both Asia and Latin America is low

Source: COMTRADE .


Methodology matters when exploring export structures

1. CS/CC do not capture importance of each product on world markets

2. Focus on exports overlooks the growing intra-industry trade

Alternative methods:

1. Relative Comparative Advantage index:• Balassa• Vollart’s

2. Herfindahl Hirschmann index

asian opportunities and diversification strategies for latin american trade

Documents

chinalatin america

rise of china

china asian opportunities

trade competition

combined contribution

visible hand of china

china statistical yearbook

substantial source