asian opportunities diversification strategies

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 forLatin American Trade

Javier SantisoRolando Avendano

OECD Development Centre

WWW.OECD.ORG/DEV


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

0

10

20

30

40

50

60

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Percen

t of G

DP

Investment in China

Investment in Fixed Assets

Gross fixed capital formation

0

10

20

30

40

50

60

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Percen

t a year

Return to Capital before and after taxes

Base case

Excluding urban residential housing, including inventories, before taxes

Excluding urban residential housing, including inventories, after taxes

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

0

50000

100000

150000

200000

250000

300000

350000

400000

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Avg. 1990‐2000

2003 2004 2005 2006

Inward FDI Flows USD Millions

ChinaLatin AmericaAfricaDeveloping countries (right axis)

0

200000

400000

600000

800000

1000000

1200000

1400000

0

10000

20000

30000

40000

50000

60000

Avg. 1990‐2000

2003 2004 2005 2006

Outward FDI Flows USD Millions

ChinaLatin AmericaAfricaDeveloping countries (right axis)

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-Services

as % of GDP

Share of Exports to

Asian Drivers (Avg. 2000-

2006)

Trade Restrictiveness

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 25.3 Petrol, 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 21.0 Metal 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.

5.00

7.00

9.00

11.00

13.00

15.00

17.00

19.00

2000 2001 2002 2003 2004 2005 2006

%

Latin American tariffs to China and the rest of the World

Manufactured goods (SITC 6)

World

China

Source: Latinobarómetro survey. Santiago de Chile, 2007.


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

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0.1

0.2

0.3

0.4

0.5

0.6

0.7

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pet.

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

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0.2

0.3

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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).



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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)


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

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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

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

8 Miscellaneous 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


0

400

800

1200

1600

2000

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Price inde

x (197

0=10

0)

Increasing commodities prices(1900‐2005)

Aluminium Coffee

Copper Petroleum

0

2 000

4 000

6 000

8 000

10 000

0

20 000

40 000

60 000

80 000

100 000

120 000

1998

1999

2000

2001

2002

2003

2004

2005

$ millions .

$ millions

.

Rise in mineral exports from Latin America (1998‐2005)

Petroleum and products (left)

Copper ores/concentrates (right)

Nickel ores/concs/etc (right)


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

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Venezuela

Ecuador

Chile

Panama

Bolivia

Peru

Paraguay

Honduras

Guyana

Uruguay

Colombia

Costa Rica

Mexico

Guatemala

Brazil

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

Angola

Chad

Nigeria

Congo

Mali

Niger

Mozambique

Algeria

Zambia

Cameroon

Ghana

Gambia

Namibia

Côte d'Ivoire

Senegal

Zimbabwe

Kenya

South Africa

Tunisia

Morocco

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.

0

5

10

15

20

25

30

35

40

Col

ombi

a

Ven

ezue

la

Indi

a

Peru

Ave

rage

LA

C

Chi

le

Chi

na

Bra

zil

Mex

ico

Arg

entin

a

Day

s

Time for exports

0

400

800

1200

1600

2000

Col

ombi

a

Arg

entin

a

Ave

rage

LA

C

Mex

ico

Bra

zil

Indi

a

Peru

Ven

ezue

la

Chi

le

Chi

na

$ pe

r co

ntai

ner

Cost to exports


…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 recherchesInternationales (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

0

5

10

15

20

25

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

% o

f tot

al im

port

s

Mexico China

Japan EU

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/dev

Asian Opportunities and Diversification Strategies:

An Outlook for Latin American Trade


WWW.OECD.ORG/DEV


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.

‐5

‐3

‐1

1

3

5

7

9

11

China Colombia Ecuador Peru Argentina Brazil Chile Mexico Uruguay Venezuela

% of G

DP

1995 2000 2006


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

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%19

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Intra regional Exports as a share of Total ExportsBy region

Eastern Europe East Asia and Pacific Africa Latin America

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


WWW.OECD.ORG/DEV