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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
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
OECD Development Centre
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
OECD Development Centre
The combined contribution of China and India to global growth is substantial
Source: Own calculation based on the IMF World Economic Outlook Database, 2008.
OECD Development Centre
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
OECD Development Centre
Myth I: The main source of China’s competitive advantage is cheap labour
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10
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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
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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.
OECD Development Centre
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.
OECD Development Centre
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.
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
OECD Development Centre
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
OECD Development Centre
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.
OECD Development Centre
Export competition with China is relatively low, although Mexico is on the spot
0.0
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igh
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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.
OECD Development Centre
Regarding competition with India, Latin America has little to fear
0.0
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0.2
0.3
0.4
0.5
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0.8
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ompe
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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).
Source: OECD Development Centre, based on WITS Database, 2008.
OECD Development Centre
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0.3
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Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).
Source: OECD Development Centre, based on WITS Database, 2008.
Trade complementarities with China remain unexplored today…
Trade Opportunities with China for selected countries (2000‐06)
OECD Development Centre
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Colo
mbi
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Vene
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Indo
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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).
Source: OECD Development Centre, based on WITS Database, 2008.
Trade Opportunities with India for selected countries (2000‐06)
OECD Development Centre
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)
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
OECD Development Centre
China and India’s increasing demand can have adverse effects
Source: OECD Development Centre, based on WITS Database, 2008.
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)
OECD Development Centre
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.
OECD Development Centre
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.
OECD Development Centre
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
OECD Development Centre
…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.
OECD Development Centre
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:
OECD Development Centre
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
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
OECD Development Centre
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
OECD Development Centre
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
OECD Development Centre
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?
OECD Development Centre
Thank you!www.oecd.org/dev
Asian Opportunities and Diversification Strategies:
An Outlook for Latin American Trade
OECD Development Centre
WWW.OECD.ORG/DEV
OECD Development Centre
ANNEX
OECD Development Centre
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
OECD Development Centre
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 .
OECD Development Centre
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
OECD Development Centre
WWW.OECD.ORG/DEV