Trade Integration Reforms
Supporting Private Sector Competitivenessthrough Investment in Hardware and Software
Paolo Giordano
Principal EconomistIntegration and Trade Sector – INT
The 2013 High Level Caribbean Forum | Bahamas, September 19-20, 2013
Outline
Trade Integration: A Foundation for Growth and Private Sector Development
Constraints to Trade Integration in the Caribbean
Supporting Trade Integration through Hardware and Software Reforms
The Way Forward
Trade Integration: A Foundation for
Growth and Private Sector Development
Emerging markets, including LAC, have become a vibrant source of global demand.
South-South trade is growing faster than global trade, but there is uncertainty in the global outlook.
The expansion of the Panama Canal will radically change the regional trade geography.
Structural transformation of larger Spanish-speaking Caribbean islands can create large markets forregional exporters.
Proliferation of FTAs is likely to result in the erosion of trade preferences for Caribbean exports, withlosses concentrated in important export goods such as sugar and bananas.
Trade liberalization will magnify the relative costs of transport (hardware) and regulations (software).
The global trade architecture is changing
- 4 -Source: IMF World Economic Outlook – April 2013.
Growth performance has been lower after the crisis… . . . and debt is rising
While Caribbean growth and private sector performance remains weak
- 5 -Sources: World Economic Outlook; Ruprah (2013); staff calculations, based on US Census Bureau, WEO, WDI and Penn World Tables
0.00
0.50
1.00
1.50
2.00
2.50 ratio
CCB: OECS: ROSE: commodity
… and most countries have current account deficitsAggregate productivity is falling…
Trade integration can increase GDP and lower debt-to-GDP ratios.
The Caribbean is operating below its trade potential (25% - 68%).
Potential depends on trade agreements and regulations (software) and infrastructure (hardware).
0%
10%
20%
30%
40%
50%
60%
70%
80%
KNA ATG BRB DMA BHS GRD LCA VCT TTO SUR GUY JAM HTI
EP to WH EP to EU27 EP to EAP EP to ROW
- 6 -Source: Giordano (2012)
The Caribbean: Unrealized export potential (Gravity model simulations)
Greater participation in global and regional trade can help revert these trends
Constraints to Trade Integration in the Caribbean
Export Returns of FTAs (Average 1988-2006)
FTAs contribution to export growth has been high…
World LAC
29%
47%
18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
World Global Exports LAC Global Exports LAC Intra-regional Exports
Note: Global exports include intra- and extra-regional exports - 8 -Source: Giordano (2012)
Export Returns of FTAs(Annual, 1987-2000)
…but there are diminishing returns over time
FTAs - Global FTAs - LAC
FTAs – Intra- LAC
0%
10%
20%
30%
40%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
- 9 -Source: Giordano (2012)
- 10 -
The quality and coverage of Caribbean infrastructure are ranked higher than the LAC average (withstrong influence of Barbados), but remain much lower than the OECD average.
Hardware: Gaps remain in infrastructure coverage and quality
Source: World Economic Forum, The Global Competitiveness Report 2012-2013
Ad Valorem Freights and Tariffs(Intraregional Exports and Exports to the US, 2006)
Source: Moreira et. al. (2008)
Software: Logistics costs are a greater impediment than tariffs
Intra-regional trade is only 13%(just over 20% if exports to LatinAmerica are included).
Logistics costs represent 20percent of product costs(compared with the world averageof 10 percent).
- 11 -
Supporting Trade Integration through
Hardware and Software Reforms
0%
20%
40%
60%
80%
100%
120%
0 10 20 30 40 50 60 70 80 90 100
Más bajode ALC
Más altode ALC
Efectos comerciales de los TLCs mundiales
Efectos comerciales de los TLCs de ALC
Commercial effects of global trade agreements
Commercial effects of LAC trade agreements
LAC highest
LAC lowest
Hardware and Software complementarities can yield higher returns
Increase in Returns from Trade Agreements when Complemented by Investment in Infrastructure (%)
Stock of infrastructure (Telephone lines, millions)
Full trade integration within the Americas (software) and bridging the infrastructure gap (hardware) may increase intra-hemispheric trade by 77%
- 13 -Source: Giordano (2012)
What is being done to mitigate these challenges?
Strategic planning: Support to regional action plans in the Caribbean– CARICOM Aid for Trade Strategy– Regional Strategy on Freight Logistics, Maritime Transport and Trade Facilitation– Strategic Agenda on Integration
Operational interventions: Simultaneous support to hardware and software– First generation projects
• Support to the negotiation of trade agreements– Second generation projects
• Hardware: Building or rehabilitation of core infrastructure• Software: Support to trade facilitation reforms
– Third generation projects• Focus on the Caribbean’s comparative advantage in services beyond tourism (e.g. call centers,
animation)
The Way Forward
Opportunities for collective action
Step up the engagement in a Strategic Agenda on Integration and ensure theimplementation of regional action plans at the national level.
Build and rehabilitate hard infrastructure, to reduce production & transport costsand improve competitiveness (e.g. transportation, energy and ICT infrastructure).
Implement soft infrastructure reforms, to reduce to cost of doing business (e.g.mutual recognition of standards, customs modernization, authorized economicoperator, electronic single window).
Support the expansion of the service sector beyond tourism, to diversify exportsand reduce vulnerability to external shocks.
- 16 -
